An “asset-right” model is the north star of OUE LJ3 , as the group manages multiple income streams across real estate and healthcare, says Brian Riady, deputy CEO and executive director of OUE.
“We are focused on improving capital efficiency to optimise investment returns and earnings quality while transitioning to an ‘asset-right’ model. Today, OUE actively manages a portfolio of $7.8 billion across OUE Commercial REIT TS0U (OUE C-REIT), First REIT and managed accounts,” Riady tells The Edge Singapore.
For a portfolio of that size, the approach requires a delicate balance. “Asset-heavy means you invest entirely from your balance sheet; asset-light means you don’t use your balance sheet at all and you’re purely an investment manager for third-party capital” he adds. “Our ‘asset-right’ approach is somewhere in between. I think at heart, we are still real estate investors, but we like to leverage our expertise and track record so that when we invest, we can find partners to co-invest alongside us. By doing that, we can be more efficient with our capital.”
As part of OUE’s “asset-right” strategy, the company divested $1.3 billion of non-core assets in 2019 and 2020, just before the Covid-19 pandemic. The divestments included US Bank Tower in downtown Los Angeles, equity stakes in Marina Mandarin and Marina Centre Holdings as well as the 268-key Oakwood Premier OUE Singapore.
Divestment proceeds were used to pare down debt, strengthen the balance sheet and embark on strategic growth and asset enhancement opportunities.
At the same time, OUE established new capital partnerships with real estate investors like Pimco Prime Real Estate and The National Pension Service of Korea, both of whom acquired minority stakes in OUE Bayfront, investing alongside OUE C-REIT. “The streamlining of our portfolio and the formation of new capital partnerships has helped OUE become more efficient with our capital and will help us deliver improved returns in the long run,” shares Riady.
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On the back of these activities, OUE delivered solid topline growth in 1HFY2023 ended June, driven also by the full reopening of Singapore’s borders, the full relaxation of pandemic restrictions and improved back-to-office trends that benefited the group’s main business segments.
Revenue for the real estate segment increased 46.0% y-o-y to $205 million in 1HFY2023, with all three divisions — investment properties, hospitality and development properties — contributing positively.
In particular, the hospitality division posted 1HFY2023 revenue of $95.8 million, nearly double y-o-y.
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Riady, who was appointed deputy CEO in December 2019 after more than a year leading OUE’s hospitality division, attributes this to the completed asset enhancement initiative (AEI) at Hilton Singapore Orchard (HSO), with the second-phase launch of the 446-room Orchard Wing in January bringing the hotel’s total inventory to 1,080 rooms.
As a result, revenue per available room (RevPAR) for both HSO and OUE’s Crowne Plaza Changi Airport (CPCA) have exceeded pre-pandemic levels, reaching $345 and $199 respectively in 3Q2023.
Riady thinks these rates are sustainable. “RevPARs have already moderated from 2022. In 2022, you had the perfect mix of pent-up demand coming back because of travel restrictions being lifted and a shortage of supply, because hotels were not adequately staffed and were taking the downtime to renovate, as we did. Since then, rates have eased, and we think they will be stable as we expect a full rebound in tourism in 2024.”
Meanwhile, revenue from OUE’s healthcare segment surged 79.1% y-o-y to $79.8 million in 1HFY2023 due to recent acquisitions.
In March 2022, First REIT completed the acquisition of a portfolio of 12 nursing homes in Japan from OUE Healthcare (OUEH), resulting in the consolidation of First REIT by OUE.
In June 2022, OUEH and OUE set up a joint venture (JV) with three renowned medical specialist groups in Singapore to form O2 Healthcare Group, a medical group focusing on respiratory care and cardiothoracic surgery.
Based on OUE’s returns to shareholders over three years, the group has emerged as a winner among real estate listed companies in The Edge Singapore’s Billion Dollar Club Awards 2023.
‘Seizing the opportunity’
The return on investment of the 23-month-long AEI at HSO has far exceeded management’s expectations, says Riady. “We embarked on the AEI shortly after Covid-19 hit and seized the opportunity to complete the rebranding exercise while continuing to keep the hotel operational. By doing this, there was very little opportunity cost for us.”
Together with OUE C-REIT, OUE reopened the 634-room Mandarin Wing in February 2022, before the 446-room Orchard Wing followed suit in January this year.
The decision to rebrand the hotel came after a strategic review of OUE’s hospitality operations, Riady shares. “Ultimately we decided to wind down our hospitality management business, Meritus, and rebrand Mandarin to Hilton to tap into Hilton’s global distribution network.”
The 1,080-room hotel is now Hilton’s flagship hotel in Singapore and its largest in the Asia-Pacific region.
“Whereas the old Mandarin was very popular with leisure guests from Indonesia, China and other regional Asian markets, the new Hilton now has a much more diversified business mix, including a large number of business and corporate travellers, as well as many guests from longer-haul source markets like the US and Europe,” adds Riady. “We’ve also seen a strong pick-up in the MICE sector, which contributed to HSO’s strong performance since the rebranding.”
The return of tourists should also bode well for CPCA, which is set to complete a $22 million AEI by the end of the year. Works include the addition of 12 guest rooms to a total room inventory of 575, a new and flexible 352 sq m function room and an extensive revamp of the all-day dining restaurant.
“We view AEI as a capital-efficient method to maximise the returns of our assets,” says Riady. “The AEIs of HSO and CPCA are both expected to be DPU-accretive to OUE C-REIT, and CPCA is expected to generate a stabilised return of investment of approximately 10%.”
Building a ‘Pan-Asian healthcare’ giant
For the healthcare segment, OUE plans to grow both organically and inorganically to expand its “Pan-Asian healthcare platform”.
Riady believes Asia’s healthcare sector is “highly attractive” owing to an ageing population that requires healthcare services, particularly in developed countries like Singapore, Japan and Australia; as well as “tremendous” rising demand in developing countries like China and Indonesia.
“Not that many businesses are both an emerging and a developed market play, but healthcare is certainly one of them,” he adds. “That’s why we like healthcare; it is a defensive business.”
As a group, OUE has expanded its healthcare portfolio to Japan, China, Indonesia and Myanmar. As of June 2023, OUE’s Catalist-listed subsidiary, OUEH has a portfolio consisting of 19 operational hospitals, with another hospital under development in China, 17 nursing homes, and several medical centres and clinics. OUEH is the sponsor and the largest unitholder of First REIT, whose manager is held via a 60:40 stake by OUE and OUEH respectively.
“In 2021, we announced our ‘First REIT 2.0’ growth strategy, which includes a pivot towards developed markets. Today, our portfolio is predominantly made up of Indonesia and Japan,” shares Riady.
In China, OUEH has a JV with China Merchants Group. The JV opened a 100-bed obstetrics and gynaecology hospital in Changshu, Suzhou in May. “We’ve got about 27 confinement suites and are in the midst of ramping up. When it matures, we hope that we will deliver close to 1,000 babies a year in that hospital,” says Riady.
Next, the JV will open a “high-end international hospital” in Shenzhen to serve the affluent Greater Bay Area, which is expected to open in the second half of 2024.
“That’s a bigger general hospital and where the headquarters of China Merchant Group is located. We expect that through their network and their business ecosystem, they will be able to drive quite a lot of business flow into that hospital as well,” adds Riady.
OUEH is now adding to its stable with its investment in Healthway Medical Corporation (HMC), which owns the largest primary care network in Singapore with over 100 GP and specialist clinics. HMC’s shareholders voted to delist the company at an Extraordinary General Meeting held on Sept 28. OUEH’s exit offer was concluded on Oct 26, with 26.24% out of 30.34% of minority shareholders accepting the exit offer. HMC is scheduled to be delisted in November.
“Our healthcare strategy is to anchor our regional operations on Singapore’s renowned centre of medical excellence, setting the best-in-class standards for healthcare operating expertise in the region and leveraging on the platform to capture healthcare tourism growth opportunities in the region. Our investment in HMC will accelerate our plans,” says Riady.
‘Stewarding the Environment’
In addition to growing its real estate and healthcare businesses, OUE is focused on “stewarding the environment” as one of its key sustainability strategies. “We recognise that the built environment industry represents more than a third of global GHG emissions, and so OUE is fully committed to reducing the environmental impact of our businesses,” says Riady.
OUE has implemented a range of initiatives, such as upgrading the fans of air-handling units (AHU) to optimise energy use and incorporating sensors to control lighting and temperature in select properties, among others.
Following materiality assessments, OUE has targeted to reduce water and energy use intensity by 25% by 2030 against a 2017 baseline. For commercial properties, intensity is measured per sq m of floor area, while hospitality properties are measured per occupied room.
In 2022, OUE reduced the energy intensity of its commercial assets by 18%. However, energy intensity at OUE’s hospitality properties increased last year against the baseline due to a high number of guestrooms being put out of inventory during AEI works at HSO.
Meanwhile, OUE has pledged to reduce Scope 2 emission intensity by 25% by 2030, or the emissions related to energy that is purchased and used; while “actively” pursuing opportunities in renewable energy use.
Last year, OUE lowered Scope 2 emission intensity by 13.2%. Finally, OUE is targeting to reduce non-hazardous waste intensity by 15% and increase the recycling rate to 12.5% by 2030 at commercial properties.
At its hospitality properties, OUE aims to reduce plastic and paper waste by 50% by 2030. Since 2022, OUE has completed $1.8 billion of sustainability-linked loans, increasing the Group’s sustainability-linked facilities to 63.6% of its total debt as at June.
“We have actively sought to align our Group’s sustainability objectives with our capital structure,” adds Riady, “so today the majority of our borrowings are linked to our sustainability initiatives, which will allow us to further improve our cost of capital over time.”
‘Well-positioned’ for the future
OUE was founded in 1964 and will celebrate its 60th anniversary next year. The group is “well-positioned for the future”, says Riady, with a healthy capital structure and low gearing.
As a result of its “asset-right” pivot, OUE’s net gearing (excluding listed subsidiaries) stands at 10.8% as at June.
OUE also boasts a “balanced business model”, with stable recurring income coming from its real estate activities and growth being driven by its more recent investments into healthcare.
“Real estate and healthcare will continue to be our twin-engines of growth for the foreseeable future,” says Riady.
Looking ahead, the group sees opportunities in the future with “lots of dry powder”, says Riady. “Despite global headwinds and challenges ahead, we continue to expand the business carefully while managing our capital structure prudently.”
