Not the end, but the beginning. Despite not being successful in its attempted acquisition of a major consumer/property conglomerate in Singapore recently, OUE still has grand plans waiting in the wings.

Serviced Apartments conversion in the pipeline:

OUE mentioned that it is in talks with authorities to convert one tower of Twin Peaks and DBS Tower One into serviced apartments, which can then be combined into a hospitality REIT. It expects minimal DC charges as the value derived from existing use is higher or equal to the value of the proposed development, if there is no change in GFA. There should also be minor structural alterations needed, such as escape stairways etc.

Twin Peaks is scheduled for TOP in 2015 and is presently 13% sold (62 out of 462 units). Pending URA’s approval, we think this is a good move to ease the slow-moving high-end sales and also relieve the QC (Qualifying Certificate) requirement to sell all units within two years after TOP; Developers are also not allowed to rent out unsold units. They pay 8%/16%/24% of the land purchase price ( pro-rated based on proportion of unsold units) for the 1st/2nd/3rd extra years respectively.

Unlocking value by floating a hospitality REIT:

OUE intends to REIT its hospitality assets in the coming months. It has always maintained that there is a valuation surplus of ~SGD1bn in its hotel assets, which is not incorporated into its book value (under “Property, plant and equipment” that is not marked-to market). Floating a REIT will help to unlock value for these assets.

According to our estimates, if only Mandarin Orchard Singapore and Mandarin Gallery are REITed, OUE will probably be looking at the market to raise ~SGD1bn (assume 40% gearing and no sponsor units) with a portfolio size of SGD1.8bn. If all hospitality assets are REITed, including the converted Twin Peaks and DBS Tower One serviced apartments, the portfolio size is likely to increase to SGD3.2bn with equity fund raising at SGD1.9bn.

If the hospitality REIT comes to fruition, OUE also stands to benefit from the recurring fees as the REIT manager and tax savings in millions from the tax-exemption granted to a REIT.

Overseas Expansion Plans:

OUE sees limited growth opportunities in Singapore in the next 2-3 years, especially with existing high property prices. Following the attempted acquisition, OUE has been receiving many acquisition offers from overseas.

It cited that land costs in some US cities are one-tenth in Singapore, and value of properties could double or triple in the coming years as the economy pick ups. OUE is also looking at assets in tier-3 cities in China for its next engine of growth. Australia and Europe are citied as countries that OUE probably will not be venturing into in the near term.

OUE also revealed that there is possibility of the Meritus brand expanding into Chonqing and Mandarin gallery venturing into Beijing.

OUE remains cautious on the Iskander development, opining that there will be winners and losers in the properties build-up, as not all landparcels are equally favorable. Those land tracts facing the water-front are more attractive, but their prices have since also escalated.

Miscellaneous:

OUE clarified that the SGD50m break-fee for the attempted acquisition of the consumer/property conglomerate is on a reimbursement basis capped at this amount, and thus it is not supposed to profit from it. OUE estimated that it has incurred ~SGD53m in expenses from its unsuccessful bid and will be capitalizing the net SGD3m and amortizing it over three years.

The asset enhancement at One Raffles Place will complete by end- 2013. OUE expects rentals to spike up to SGD16+ psf/mth from current SGD13+/mth levels.

DBS Shenton mall (retail at DBS Towers spanning some 170k sqft) will commence refurbishment soon and has secured H&M as one of its tenants. We see further upside from this new retail place, in view of the residential units (V on Shenton, One Shenton, Marina Bay Suites, Marina Bay Residences etc.) and hotel rooms (Sofitel Singapore-Ogilvy Centre, Westin SG Marina Bay@Asia Square Tower etc.) sprouting around the downtown core area (Shenton Way and Marina Bay) in the next few years.

The addition of 240+ rooms in the vacant land next to Crowne Plaza Changi Airport Hotel remains on track. However, it will now be positioned as an extension instead of the previously discussed Holiday Inn Express brand.

OUE is proposing a final dividend of 3 S-cts (FY11: 3 S-cts) and special dividend of 5 S-cts (FY 11: 8 S-cts) for FY12.

Source: Maybank Kim Eng Research - 05 Mar 2013