PROPERTY: When Life Hands You a Lemon
Recent Western Cape Business News
ATTEMPTS to turn central Cape Town luxury leisure development 15-on-Orange into a viable project have taken a turn for the worse
At the time of writing banking giant Absa had called up the loans that Quantum Property Group (QPG), the developer and owner of 15-on-Orange – was relying on to keep operations turning over. Absa is owned some R580 million – which some real estate observers reckon is well in excess of the current value of the development.
Quantum has described 15-on-Orange as a landmark development in Cape Town. The property comprises the 15-on-Orange Hotel, a residential component of 12 luxury penthouses, a boutique retail centre, 1 500 square metre venue facility and four levels of parking.
QPG initially placed a value of nearly R900 million on 15-on-Orange, but last year wrote down the valuation by a hefty R226 million to R688 million.
The dramatic downward valuation is understandable since 15-on-Orange, to date, has shown no tangible evidence of being able to generate sufficient cash flow to cover its enormous debt load.
Suggestions that the development is a ‘lemon’ and worth considerably less than the official valuation is supported by figures reported in QPG’s 2011 annual report.
Revenue of R37 million did not even cover the interest bill of R41 million, a most vulnerable position for the development.
A breakdown of the revenue lines at 15-on-Orange makes rather scary reading, the bulk of revenue segments generating losses. The core hotel business generated revenue of R18.6 million, but lost R2.7 million at operating profit level. The sale of penthouses contributed a chunky R12 million, but these once-off endeavours cost the company R600 000 at operating profit level.
Only rentals and parking – which generated R5 million in revenue and R2.9 million in operating profits and R1 million in revenue and R750 000 in profits respectively - looked viable enterprises.
Despite the underwhelming financial performance Absa – at least according to the QPG annual report – agreed to renegotiate the loan facility to give the company breathing space. This also allowed QPG to complete the construction of a conference centre which directors believed would substantially boost revenues and drive traffic to the hotel. A deal with hotel operator Protea Hotels around the management contract – that cost Quantum R22 million – was also central to the loan agreement.
Why Absa did a sudden about turn is not yet clear. But it was a quick and devastating decision.
Last month QPG launched a business rescue application in a bid to stave off Absa’s decision to call up its loan. This was unsuccessful, which now leaves QPG in a quandary around how to settle up with Absa. Unless a white knight rides to the rescue, QPG will either have to sell the hotel or hand over the property to the bank.
Perhaps Absa’s decision was informed by Quantum’s interim performance to end February 2012 – of which details, at this stage, are still sketchy as QPG has not issued full results.
But a recent trading update showed that QPG – after incurring the additional expenses of buying out the Protea Hotel management contract and finishing the conference centre – was still trading deep in the red.
How the situation unfolds in the next few months – especially if Absa cannot introduce a new owner/operator for the hotel – will determine whether Cape Town is about to see the first casualty of the Soccer World Cup in 2010.
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