Saturday, November 29, 2014

OUE LTD - Divestment of Crowne Plaza Changi Airport & Extension

OUE Ltd has just announced a proposed divestment sale of their crown jewel in Crowne Plaza Changi Airport (CPCA) and the future extension of Crowne Plaza Changi Airport (CPEX) to OUE-HT for a sale consideration of $290 million and $205 million respectively.

Based on the assets valuation as of 31 Dec 2013, this would translate into a gain of $44.5 million for the divestment of CPCA and $71.6 million for divestment of CPEX, giving a total gain of $116.1 million for the sale.




Thoughts

This is not new information to us.

We know that OUE Ltd was going to divest these assets into their hospitality trust sooner or later but the timing of the announcement was quicker than expected. Many property management would develop and like to see their assets and occupancy stabilized before injecting them into the Reits. But not this management. It appears that the Riady family wasted no time in recycling its capital for higher growth and investment opportunities.

The trick to do that is through the leaseback agreement and providing income support for the first few number of years to ensure that it guarantees a minimum level of income and yield to satisfy investors. This is financial engineering expertise from the Riady family to quickly recycle capital.

If we take the latest occupancy rate of 88.4% and a revpar of $234.7, this would translate into an approximate Gross Revenue of $24,233,056 ($234.7 x 320 rooms x 88.4% x 365 days) and NPI of $21,809,750 (24,233,056 x 0.9). The capitalization rate in this case would be 7.42% ($21,809,750 / $290,000,000), which is a pretty high rate for a newly developed hotel. I think the location of the hotel near the Changi Airport played a part despite keen competition from the other hotels. The capitalization rate for Mandarin Orchard for comparison purpose was 5.68%.

CPEX would only be injected into the trust upon completion at the end of 2015. As the income from CPEX would not have stabilised at the point of divestment (since operations just commenced), there would be an income support of $7.5 million per quarter to stabilise the income. Annualized figure would come to about $30 million per year. Comparing against the above calculation, this income support is obviously a good deal for OUE-HT investors as this would assume a higher occupancy rate and higher revpar with lesser rooms compared to CPCA. As always, the trick is in the income support so that investors of OUE-HT would enjoy the "high" yield provided by these assets.

Pro-forma effect on the NTA upon divestment of both the CPCA and CPEX would increase from the current 4.11 to 4.29. The NTA is adjusted assuming OUE-HT is under the associate and OUE has a reflective equity stake of 33.5% in the trust. 


You can see that this does not have the impact of Mandarin Orchard when they were divested back then. Mandarin Orchard was held at cost since they bought them at land value many many years ago and the carrying value was $115 million. When it was divested into OUE-HT, the valuation surplus exceeded $1.1 billion and you can see why NTA jumped from 3.11 to 4.06.

CPCA was bought in 2011 at a cost of $229 million (after less depreciation). The valuation surplus to the current offer at $290 million is therefore less affluent as compared to the earlier.




I think this is a good move from OUE Ltd to recycle its assets given the optimism about the stock market. Given that there are leaseback program and they still hold a 1/3 equity stake in OUE-HT, they won't want to screw this up. With interest rates most likely to increase next year and given the pessimistic outlook on Reits and Trusts, it's better to seal the deal earlier.

Vested with OUE as of writing.

What do you think of this financial engineering move by OUE?

3 comments:

  1. Hi B,

    In their press release, OUEHT quoted that they are acquiring CPCA at an "annualised yield" of 4.5 per cent. This number caught my eye.

    It seems much smaller than the 7+ per cent cap rate you had calculated. Sadly, I haven't had time to dig deep, but it'd be interesting to know how they arrived at 4.5%.

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  2. Hi SRSI

    The annualised yield of 4.5% stated in the press release is the minimum yield based on the fixed + variable rent on the master lease agreement. These are the same yield offered back then when they divested the Mandarin Orchard and Gallery.

    7+% does look a little excessive. But if we do a comparison between the revpar for Crowne Plaza and Mandarin Orchard, they are actually not too far behind. $234.7 is huge. If I remember correctly, a lot of the hotels for Ascott and Fareast is only at the range of $190 - $210.

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  3. "be an income support of $7.5 million per quarter to stabilise the income. Annualized figure would come to about $30 million per year."

    This is incorrect. The press release (extracted below) says the income support is $7.5M over a 3-year period which is substantially below what you had in your analysis.

    "The valuation of S$205 million for CPEX takes into consideration the leaseback arrangement between OUEAH and OUE H-REIT and a three-year rental support of up to an aggregate amount of S$7.5 million."

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