Idea of the Week: OUE Ltd: A well-diversified property developer that outshines its peers

For the full year ended 31 December 2021 (“FY21”), total revenue decreased by 43.3% year-on-year to SGD 300.8m, mainly due to lower contributions from its Real Estate segment as a result of the partial disposal of OUE Bayfront and divestment of the US Bank Tower. Its Hospitality segment posted a 32.7% decline in revenue to SGD 57.6m because of lower contributions from Mandarin Orchard Singapore following major asset enhancement works made to rebrand the hotel.

On the other hand, its Healthcare and Consumer segment helped to cushion the decline in revenues for FY21. OUE’s Healthcare segment recorded a slight increase in revenue from SGD 29.4m in 2020 to SGD 31.2m in 2021, while its Consumer segment saw a notable improvement of 40.5% in revenue from a year ago as new dining concepts were launched in the previous year to attract more customers.

Figure 1: Breakdown of total profit before interest and taxes

Rebranded Hospitality segment well-positioned to capitalize on travel recovery

Back in 2020, OUE Limited decided to rebrand Mandarin Orchard Singapore to Hilton Singapore Orchard during the weak hospitality operating environment by implementing major asset enhancement works and refurbishment. Towards the end of February 2022, Hilton Singapore Orchard debuted as Hilton’s flagship hotel in Singapore, and it is the largest Hilton hotel within the APAC region.

The rebranding and reopening of the hotel came at a timely moment, where most countries have started to ease travel restrictions and visitor arrivals in Singapore have improved significantly since the start of this year following the implementation of Vaccinated Travel Lanes. The addition of new income-generating spaces and facilities, coupled with Hilton’s strong brand recognition and distribution network, will help OUE Limited to capture the recovery of Singapore’s hospitality sector and drive future growth going forward.

Asset divestments at attractive valuations help to unlock capital for future acquisitions

OUE C-REIT divested 50% of OUE Bayfront back in March 2021 for a total consideration of SGD 1.27b. The agreed value represented a 26.1% premium over its purchase consideration back in 2014, which was a good opportunity for the Group to realize the value appreciation, improve its capital structure and shore up its liquidity position. The net divestment proceeds of SGD 262.6m provided greater financial flexibility for the Group as it managed to reduce its outstanding borrowings and convertible perpetual preferred units.

Notably, despite selling 50% interest in OUE Bayfront, the manager still retains full operational control over the property, and it continues to provide the Group with significant exposure to the Singapore office market. The divestment also offers the Group with more opportunities to redeploy its capital and invest in more accretive properties in the future to unlock value. On top of that, its investment properties have maintained a high committed occupancy of at least 86% across all of its major office and retail properties in Singapore and China, with only 13.3% of office and 3.4% of retail leases by gross rental income are due for renewal this year. As such, we believe that its Real Estate segment will remain resilient with strong earnings stability underpinned by its high-quality Grade A commercial assets.

Credit Discussion

Following the divestment of OUE Bayfront and US Bank Tower, the Group managed to pare down its borrowings from SGD 3.5b to SGD 2.8b, and consequently lower its interest expenses from SGD 122.9m in FY20 to SGD 97.4m in FY21. As a result, net gearing ratio improved from 0.52x in FY20 to 0.40x in FY21. We also note that both OUE C-REIT and First REIT were actively deleveraging in the past year so as to pursue future growth strategies within the commercial and healthcare sectors. Aggregate leverage of OUE C-REIT fell by 2.5 percentage points YoY to 38.7% in FY21, while the gearing ratio of First REIT improved from 49.0% in FY20 to 33.6% as at the end of last year.

Notably, ~57% of its borrowings are secured against its assets such as investment properties, bank deposits and property, plant and equipment. Excluding ~SGD 3.66b of pledged assets, we estimate OUE’s total unencumbered assets to be approximately SGD 5.37b, which brings its unencumbered asset coverage ratio (unencumbered assets/unsecured net debt) to be ~7.60x. As such, we think that its asset portfolio provides ample coverage against its debt in the event if the Group is unable to meet its borrowings. Nonetheless, looking at its healthy net gearing ratio of 0.40x and EBITDA coverage of 3.6x, we think that there is no need for the Group to monetise its unpledged assets to pay off its debt obligations and finance expenses in the near future.

In terms of its liquidity, cash and cash equivalents as of 31 December 2021 stood at SGD 518.9m, of which SGD 31.0m relates to pledged deposits against its credit facilities. Nonetheless, its unrestricted cash and cash equivalents of SGD 487.9m are more than sufficient to cover its short-term borrowings of SGD 418.8m. During the year, the Group also issued SGD 200m 3.5% notes due in 2026 so as to repay its SGD 200m 3.75% bond that matured in April 2022. As such, OUE Limited has been actively refinancing its short-term debt obligations to ensure that its liquidity position remains healthy.

Relative Valuation

Table 3: Relative valuation of comparable bonds

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