The Hour Glass

[pianist]

Coincidentally, last Friday bonvests announced purchasing 30 units of freehold commercial retail properties foaling similar sized gross area above 2xxx sqm along a similar kinda cbd street but is in Perth, for less than or around 20m. Is the price difference between Melbourne and Perth cities so glaringly big?

[weijian]

Paying $68M for a property that generates $0.8M earnings. Doesn't seem to be value investors. Unless the property has been under-earning its true earnings potential, the only way this transaction can be value-accretive is to have a bigger fool take the property off the hands off THG. And I consider that speculation, not investing.

From cap rates' perspective, it definitely doesn't make sense (<1.5%!). THG has another property on Collins Street (252 Collins Street) and it is valued at 21.5mil at 1345sqm (or 16k psm) compared to this purchase at ~27k psm.

THG's retail presence on this shopping strip is currently located at 252 and 257 Collins Street (252 is still under renovation from Google View). They are almost opposite one another and walking on either side of the street, you probably wouldn't miss seeing THG. From Google Maps, we see that 252/257 is surrounded by Coach and Burberry (sorry, that's all I know about luxury brands). Novotel Hotel is just beside the corner and it is a 4 star hotel. If we were to move strategically down the street and towards the lower postal numbering, at the intersection of Collins and Swanston St, several jewellers have strategically made their homes at this intersection, a place arguably with better visibility compared to 252/257.

This then brings us to 139 Collins Street, THG's latest buy. Google View shows LV and Gucci (sorry, that's all I know about luxury brands) opposite each other. There are 2 really cool church buildings opposite them and this completes the intersection between Collins and Russell St. Nested behind 139 is the towering 5 star Grand Hyatt Melbourne.

If we peer at the brands around, it might explain why 139 is selling for such a high price? And it is interesting to note the below statement from this news:

the building's upper levels are home to several law firms and financial outfits

https://www.afr.com/property/commercial/...111-p56dj7

My layman guess is that the upper levels will eventually be converted into a THG boutique (ie. it is not for sale to bigger fools). So imagine your brand name found together with LV and Gucci, it is probably what they want as an upscale boutique of sorts.

[Choon]

Paying $68M for a property that generates $0.8M earnings. Doesn't seem to be value investors. Unless the property has been under-earning its true earnings potential, the only way this transaction can be value-accretive is to have a bigger fool take the property off the hands off THG. And I consider that speculation, not investing.

From cap rates' perspective, it definitely doesn't make sense (<1.5%!). THG has another property on Collins Street (252 Collins Street) and it is valued at 21.5mil at 1345sqm (or 16k psm) compared to this purchase at ~27k psm.

THG's retail presence on this shopping strip is currently located at 252 and 257 Collins Street (252 is still under renovation from Google View). They are almost opposite one another and walking on either side of the street, you probably wouldn't miss seeing THG. From Google Maps, we see that 252/257 is surrounded by Coach and Burberry (sorry, that's all I know about luxury brands). Novotel Hotel is just beside the corner and it is a 4 star hotel. If we were to move strategically down the street and towards the lower postal numbering, at the intersection of Collins and Swanston St, several jewellers have strategically made their homes at this intersection, a place arguably with better visibility compared to 252/257.

This then brings us to 139 Collins Street, THG's latest buy. Google View shows LV and Gucci (sorry, that's all I know about luxury brands) opposite each other. There are 2 really cool church buildings opposite them and this completes the intersection between Collins and Russell St. Nested behind 139 is the towering 5 star Grand Hyatt Melbourne.

If we peer at the brands around, it might explain why 139 is selling for such a high price? And it is interesting to note the below statement from this news:

the building's upper levels are home to several law firms and financial outfits

https://www.afr.com/property/commercial/...111-p56dj7

My layman guess is that the upper levels will eventually be converted into a THG boutique (ie. it is not for sale to bigger fools). So imagine your brand name found together with LV and Gucci, it is probably what they want as an upscale boutique of sorts.

Or perhaps a multi-floor like Malmaison or 252 Collins

"I can tell you one thing for sure, our Melbourne project coming up in 2019 will be an important flagship for the Group. ‘If our Sydney boutique is to be considered the beacon of specialist luxury watch retail, then our Melbourne project at 252 Collins Street will be the lighthouse’. In this lighthouse we will have 8 floors dedicated to the pursuit of speciality watch retail. It is a project that will set a new standard not just in the watch industry in Australia, but in Asia."
https://www.hoursandminutes.co/the-hour-...australia/

[Choon]

Paying $68M for a property that generates $0.8M earnings. Doesn't seem to be value investors. Unless the property has been under-earning its true earnings potential, the only way this transaction can be value-accretive is to have a bigger fool take the property off the hands off THG. And I consider that speculation, not investing.

From cap rates' perspective, it definitely doesn't make sense (<1.5%!). THG has another property on Collins Street (252 Collins Street) and it is valued at 21.5mil at 1345sqm (or 16k psm) compared to this purchase at ~27k psm.

THG's retail presence on this shopping strip is currently located at 252 and 257 Collins Street (252 is still under renovation from Google View). They are almost opposite one another and walking on either side of the street, you probably wouldn't miss seeing THG. From Google Maps, we see that 252/257 is surrounded by Coach and Burberry (sorry, that's all I know about luxury brands). Novotel Hotel is just beside the corner and it is a 4 star hotel. If we were to move strategically down the street and towards the lower postal numbering, at the intersection of Collins and Swanston St, several jewellers have strategically made their homes at this intersection, a place arguably with better visibility compared to 252/257.

This then brings us to 139 Collins Street, THG's latest buy. Google View shows LV and Gucci (sorry, that's all I know about luxury brands) opposite each other. There are 2 really cool church buildings opposite them and this completes the intersection between Collins and Russell St. Nested behind 139 is the towering 5 star Grand Hyatt Melbourne.

If we peer at the brands around, it might explain why 139 is selling for such a high price? And it is interesting to note the below statement from this news:

the building's upper levels are home to several law firms and financial outfits

https://www.afr.com/property/commercial/...111-p56dj7

My layman guess is that the upper levels will eventually be converted into a THG boutique (ie. it is not for sale to bigger fools). So imagine your brand name found together with LV and Gucci, it is probably what they want as an upscale boutique of sorts.

Or perhaps a multi-floor like Malmaison or 252 Collins

"I can tell you one thing for sure, our Melbourne project coming up in 2019 will be an important flagship for the Group. ‘If our Sydney boutique is to be considered the beacon of specialist luxury watch retail, then our Melbourne project at 252 Collins Street will be the lighthouse’. In this lighthouse we will have 8 floors dedicated to the pursuit of speciality watch retail. It is a project that will set a new standard not just in the watch industry in Australia, but in Asia."
https://www.hoursandminutes.co/the-hour-...australia/

I think $800,000 may be a depressed rental income for the year - could have included some COVID-19 base rent relief and/or lower revenue share. 

And thus it may not be a cap rate of <1.5%. To analyse more carefully:

Rental of $800K/year equates to:
$800,000 / 12 months / lettable area of 1661 square metres 
= S$40 psm per month.   

HKL as reference
Excluding the impact of rent relief, average net in 2019 for HK Retail Portfolio (Landmark) = 
- HK$236 psf per month; or
- HK$2540 psm per month; or
- SGD$437 psm per month.

Any other references?

[Corgitator]

Paying $68M for a property that generates $0.8M earnings. Doesn't seem to be value investors. Unless the property has been under-earning its true earnings potential, the only way this transaction can be value-accretive is to have a bigger fool take the property off the hands off THG. And I consider that speculation, not investing.

From cap rates' perspective, it definitely doesn't make sense (<1.5%!). THG has another property on Collins Street (252 Collins Street) and it is valued at 21.5mil at 1345sqm (or 16k psm) compared to this purchase at ~27k psm.

THG's retail presence on this shopping strip is currently located at 252 and 257 Collins Street (252 is still under renovation from Google View). They are almost opposite one another and walking on either side of the street, you probably wouldn't miss seeing THG. From Google Maps, we see that 252/257 is surrounded by Coach and Burberry (sorry, that's all I know about luxury brands). Novotel Hotel is just beside the corner and it is a 4 star hotel. If we were to move strategically down the street and towards the lower postal numbering, at the intersection of Collins and Swanston St, several jewellers have strategically made their homes at this intersection, a place arguably with better visibility compared to 252/257.

This then brings us to 139 Collins Street, THG's latest buy. Google View shows LV and Gucci (sorry, that's all I know about luxury brands) opposite each other. There are 2 really cool church buildings opposite them and this completes the intersection between Collins and Russell St. Nested behind 139 is the towering 5 star Grand Hyatt Melbourne.

If we peer at the brands around, it might explain why 139 is selling for such a high price? And it is interesting to note the below statement from this news:

the building's upper levels are home to several law firms and financial outfits

https://www.afr.com/property/commercial/...111-p56dj7

My layman guess is that the upper levels will eventually be converted into a THG boutique (ie. it is not for sale to bigger fools). So imagine your brand name found together with LV and Gucci, it is probably what they want as an upscale boutique of sorts.

Or perhaps a multi-floor like Malmaison or 252 Collins

"I can tell you one thing for sure, our Melbourne project coming up in 2019 will be an important flagship for the Group. ‘If our Sydney boutique is to be considered the beacon of specialist luxury watch retail, then our Melbourne project at 252 Collins Street will be the lighthouse’. In this lighthouse we will have 8 floors dedicated to the pursuit of speciality watch retail. It is a project that will set a new standard not just in the watch industry in Australia, but in Asia."
https://www.hoursandminutes.co/the-hour-...australia/

I think $800,000 may be a depressed rental income for the year - could have included some COVID-19 base rent relief and/or lower revenue share. 

And thus it may not be a cap rate of <1.5%. To analyse more carefully:

Rental of $800K/year equates to:
$800,000 / 12 months / lettable area of 1661 square metres
= S$40 psm per month. 

HKL as reference
Excluding the impact of rent relief, average net in 2019 for HK Retail Portfolio (Landmark) = 
- HK$236 psf per month; or
- HK$2540 psm per month; or
- SGD$437 psm per month.

Any other references?

Choon: Pro-forma is for FY2020, and THG's financial year end is March. So the $800K incremental earnings has little impact from COVID (since it covers March 2019 to March 2020).

Weijian: On the brand angle, I agree that there's probably some intangible benefits to having a presence in that prime location. I tend to view things conservatively though, and don't usually ascribe much value to benefits that are not too concrete (brand enhancement, strategic position, possible higher than average comps etc) since everyone can tell a good story. But yeah, maybe THG's management ascribed a high premium because of those potential synergies and what not.

Overall, from my experience, I often see the good legacy businesses build up so much cash over the years. As their original business no longer has many growth opportunities, the cash pile goes uninvested. Instead of pro-actively returning capital back to shareholders, management seems to prefer spending the cash to buy investment properties at rather low rates of returns.

It's not a deal-breaker like poor corporate governance, but I am generally not very supportive of such behavior.

[Choon]

Paying $68M for a property that generates $0.8M earnings. Doesn't seem to be value investors. Unless the property has been under-earning its true earnings potential, the only way this transaction can be value-accretive is to have a bigger fool take the property off the hands off THG. And I consider that speculation, not investing.

From cap rates' perspective, it definitely doesn't make sense (<1.5%!). THG has another property on Collins Street (252 Collins Street) and it is valued at 21.5mil at 1345sqm (or 16k psm) compared to this purchase at ~27k psm.

THG's retail presence on this shopping strip is currently located at 252 and 257 Collins Street (252 is still under renovation from Google View). They are almost opposite one another and walking on either side of the street, you probably wouldn't miss seeing THG. From Google Maps, we see that 252/257 is surrounded by Coach and Burberry (sorry, that's all I know about luxury brands). Novotel Hotel is just beside the corner and it is a 4 star hotel. If we were to move strategically down the street and towards the lower postal numbering, at the intersection of Collins and Swanston St, several jewellers have strategically made their homes at this intersection, a place arguably with better visibility compared to 252/257.

This then brings us to 139 Collins Street, THG's latest buy. Google View shows LV and Gucci (sorry, that's all I know about luxury brands) opposite each other. There are 2 really cool church buildings opposite them and this completes the intersection between Collins and Russell St. Nested behind 139 is the towering 5 star Grand Hyatt Melbourne.

If we peer at the brands around, it might explain why 139 is selling for such a high price? And it is interesting to note the below statement from this news:

the building's upper levels are home to several law firms and financial outfits

https://www.afr.com/property/commercial/...111-p56dj7

My layman guess is that the upper levels will eventually be converted into a THG boutique (ie. it is not for sale to bigger fools). So imagine your brand name found together with LV and Gucci, it is probably what they want as an upscale boutique of sorts.

Or perhaps a multi-floor like Malmaison or 252 Collins

"I can tell you one thing for sure, our Melbourne project coming up in 2019 will be an important flagship for the Group. ‘If our Sydney boutique is to be considered the beacon of specialist luxury watch retail, then our Melbourne project at 252 Collins Street will be the lighthouse’. In this lighthouse we will have 8 floors dedicated to the pursuit of speciality watch retail. It is a project that will set a new standard not just in the watch industry in Australia, but in Asia."
https://www.hoursandminutes.co/the-hour-...australia/

I think $800,000 may be a depressed rental income for the year - could have included some COVID-19 base rent relief and/or lower revenue share. 

And thus it may not be a cap rate of <1.5%. To analyse more carefully:

Rental of $800K/year equates to:
$800,000 / 12 months / lettable area of 1661 square metres
= S$40 psm per month. 

HKL as reference
Excluding the impact of rent relief, average net in 2019 for HK Retail Portfolio (Landmark) = 
- HK$236 psf per month; or
- HK$2540 psm per month; or
- SGD$437 psm per month.

Any other references?

Choon: Pro-forma is for FY2020, and THG's financial year end is March. So the $800K incremental earnings has little impact from COVID (since it covers March 2019 to March 2020).

Weijian: On the brand angle, I agree that there's probably some intangible benefits to having a presence in that prime location. I tend to view things conservatively though, and don't usually ascribe much value to benefits that are not too concrete (brand enhancement, strategic position, possible higher than average comps etc) since everyone can tell a good story. But yeah, maybe THG's management ascribed a high premium because of those potential synergies and what not.

Overall, from my experience, I often see the good legacy businesses build up so much cash over the years. As their original business no longer has many growth opportunities, the cash pile goes uninvested. Instead of pro-actively returning capital back to shareholders, management seems to prefer spending the cash to buy investment properties at rather low rates of returns.

It's not a deal-breaker like poor corporate governance, but I am generally not very supportive of such behavior.

But how then does one explain the great difference between the calculated rent/sqm of this property (S$40/psm/month) and HKL's Landmark (S$437/psm/month) in HK? 10X?

So I think the pro forma of $800K may not be representative of rental income, in that it could have taken into account other items (e.g. the rental income could be reflecting the latest COVID-rental situation of the property and/or interest expenses).

Rental of $800K/year equates to:

$800,000 / 12 months / lettable area of 1661 square metres 
= S$40 psm per month. 

HKL as reference:
Excluding the impact of rent relief, average net in 2019 for HK Retail Portfolio (Landmark) = 
- HK$236 psf per month; or
- HK$2540 psm per month; or
- SGD$437 psm per month.

[pianist]

Paying $68M for a property that generates $0.8M earnings. Doesn't seem to be value investors. Unless the property has been under-earning its true earnings potential, the only way this transaction can be value-accretive is to have a bigger fool take the property off the hands off THG. And I consider that speculation, not investing.

From cap rates' perspective, it definitely doesn't make sense (<1.5%!). THG has another property on Collins Street (252 Collins Street) and it is valued at 21.5mil at 1345sqm (or 16k psm) compared to this purchase at ~27k psm.

THG's retail presence on this shopping strip is currently located at 252 and 257 Collins Street (252 is still under renovation from Google View). They are almost opposite one another and walking on either side of the street, you probably wouldn't miss seeing THG. From Google Maps, we see that 252/257 is surrounded by Coach and Burberry (sorry, that's all I know about luxury brands). Novotel Hotel is just beside the corner and it is a 4 star hotel. If we were to move strategically down the street and towards the lower postal numbering, at the intersection of Collins and Swanston St, several jewellers have strategically made their homes at this intersection, a place arguably with better visibility compared to 252/257.

This then brings us to 139 Collins Street, THG's latest buy. Google View shows LV and Gucci (sorry, that's all I know about luxury brands) opposite each other. There are 2 really cool church buildings opposite them and this completes the intersection between Collins and Russell St. Nested behind 139 is the towering 5 star Grand Hyatt Melbourne.

If we peer at the brands around, it might explain why 139 is selling for such a high price? And it is interesting to note the below statement from this news:

the building's upper levels are home to several law firms and financial outfits

https://www.afr.com/property/commercial/...111-p56dj7

My layman guess is that the upper levels will eventually be converted into a THG boutique (ie. it is not for sale to bigger fools). So imagine your brand name found together with LV and Gucci, it is probably what they want as an upscale boutique of sorts.

i was at 257 collins street surveying both the hour glass shops earlier this year in March, nice walking streets bounded by rows of shophouses on both sides with trams running in the middle of the collins street, not a really crowded place like our orchard road
there is a crown casino nearby supporting luxury spending
and it's enjoyable to walk on the streets and walking from 139 to 257 collins street is almost effortless and stone throw away

[brattzz]

Just a observation on the momentum, there seems to be renewed buying interests in THG since last week, buyers have now brought the counter above NAV 90cts, whereabouts with small volume size, this is what i missed about not having quarterly reports made mandatory, as we now have guess that THG has a good 3Q amid COVID19 recovery, and looks forward the a good FY2020 report announcement! :O but these are all guessimation so don't quote me for it!

[weijian]

I am not privy to the 3Q20 results and actually don't really care too much about quarterly financial results (or share price movements).

But one interesting reflection I had:
At the start of the pandemic in Feb2020, our thoughts were on "2nd order effects". At least for me, most of the thinking was focused on the negative 2nd order effects. Since we were well-trained by GFC2008, we were thinking about customer defaults, bank failures etc as the 2nd order effects. But the thing that I failed to see was positive "2nd order effects". For this case, we saw that personal balance sheets were saved by unprecedented Government spending/stimulus, and since people couldn't spend on travel, they needed to spend somewhere (We are a consumer culture after all). One could still be staying put at home and ordering things from all over the world. And on hindsight, during the pandemic, alot of the money saved has instead been spent on tech gadgets and luxuries items.

Singapore own "Talented Boy" JJ has a super luxury watch:
https://mothership.sg/2021/03/jj-lin-watch/

[Big Toe]

Indeed.

While covid affected most businesses negatively, a minority benefited from the global lockdown. It is unlike the GFC where almost everyone was badly hit. In Singapore one clear and obvious winner is Sheng Shiong. As Sheng Shiong operated in HDB owned retail spaces, the rental rebates + Salary Subsidy + huge jump in demand helped it earn record profits.

As people stay home and had time to kill and more money to spend, businesses associated with permissible leisure activities/indoor activities/hobbies sky rocketed. From Pets to luxury watches.

But some of these businesses did not know that they will do well, which lead a massive cancellation of orders to the factories/producers at the beginning of 2020. But as the year progressed and the strong sales became apparent, these business loaded more orders than ever to cater to the demand and supplies were not coming in fast enough due to some countries in strict lock down. Couple the short supply with spike in demand and logistics challenges, you get a rapid increase of prices and a severe shortage.

The Toe knows....