Mandarin Orchard could be sold
But here's why it's too early for investors to get excited to the potential impact to OUE.
On Sep 19, The Business Times reported the Mandarin Orchard Hotel (remaining lease of 44 years, 1,051 rooms), which was valued at S$1.18bn (S$1.12mn/key) at end-2011, could be sold to a JV between a US property fund and a Middle Eastern party.
OUE , which owns the asset, has since made the clarification that it has been approached by some potential buyers and has offered a potential buyer exclusivity to conduct preliminary due diligence on the asset.
Nomura Research however notes that it's too early yet to get excited as the potential deal is reminiscent of 71 Robinson Road.
Here's from Min Chow Sai, analyst at Nomura Research:
Before investors get too excited about what this could mean for hotel stocks’ valuations, we believe it is important to note the following:
A potential buyer has been granted exclusivity to conduct preliminary due diligence – i.e., no deal is concluded at this point, based on the owner’s statement.
Since the valuation of S$1.12mn/key for Mandarin Orchard is as of end-2011, this is hardly news to the market.
The S$277 average room rate at the Mandarin Orchard translates into a GOP yield of just around 3% on the S$1.12mn/key valuation, based on our estimates, i.e. the price that the reported potential buyer could be paying appears to be an aggressive one (if the deal is done at all).
This reminds us of the S$3,125psf that was paid for 71 Robinson Road in April 2008.
Simplistic extrapolation should be used with caution, though UOL’s SG hotel portfolio deserves to be re-rated
For the two stocks under our coverage that have significant exposure to the SG hotel market – UOL (UOL SP, Buy) and CDREIT (CDREIT SP, Neutral) – our estimates suggest the two stocks are currently trading at an implied EV of S$561,461/key and S$697,577/key, respectively, for their SG hotel portfolios, which is low compared to Mandarin Orchard’s S$1.12mn/key valuation [though in the case of CDREIT, the implied EV of S$697,577/key is more or less in line with FEHT’s (FEHTSP, Not Rated) average portfolio valuation of S$690,846/key on its book as of end-March 2012.
For argument’s sake, if we were to value the SG hotel portfolios of UOL and CDREIT at S$1.2mn/key, the bull-case NAV works out to S$8.63/share and S$3.32/unit, respectively.
The derivation of these numbers is obviously a simplistic extrapolation and investors should therefore use them with caution, in our view, taking into account qualitative differences in the portfolios, among other things. In this respect, we believe UOL’s SG hotel portfolio would compare favourably with that of Mandarin Orchard because its properties in Orchard are freehold and the three Marina Bay hotels match (if not exceed) Mandarin Orchard in quality.