SINGAPORE (Feb 19): Developers could undertake projects with ease during the period of quantitative easing (QE). Low or no interest rates in a low- or no-growth environment and ample liquidity was a godsend to small-cap developers looking for fast turnarounds in capital. Oxley Holdings came of age during this golden period and took full advantage of this backdrop. It made its name in shoebox units, which it could build and sell in record time.
Now, as the business cycle normalises and yields start to rise, and with quantitative tightening (QT) upon us, can Oxley pull off the same feat it did during QE?
Deputy CEO Eric Low certainly thinks so. When he sat down with journalists from The Edge Singapore and EdgeProp last month, he said: “I want to understand your major concern because your major concern is the market’s concern. And so, the concern is this: Does Oxley have the money to pay for the sites?”
Well, of course it has; otherwise, it wouldn’t have bought them. But, with gearing at 1.9 times (see Chart 1) and as interest rates creep up, it may not be able to obtain the easy funding terms that were within reach during the QE years.
Low maintains that, contrary to perception, the company is risk averse and cautious in its strategy. When Oxley fired the first salvo in the en bloc revival, it did so with partners. Its first en bloc acquisition was Rio Casa for $575 million (in which it has a 35% stake), followed by Serangoonville for $499 million (40%). The other residential acquisitions were relatively modest (see table) except for Mayfair Gardens, which Oxley bought for $311 million; and Vista Park for $418 million. Its largest acquisition is Chevron House for $660 million, on which Oxley is planning asset enhancement initiatives (AEI).
In our table, we have not factored in gross development costs for Vista Park and Mayfair Gardens because it will be some months before Oxley takes control of those acquisitions. Nor has Oxley announced the capital expenditure for Chevron House’s AEIs. However, we have factored in payment for the properties.
Cash inflow
Over the next 12 months, the estimated receipts from progress billings are likely to be $1.8 billion, with around 70% of this from Royal Wharf. This excludes potential sales from its en bloc purchases.
Low says: “Our future progress billings for overseas projects are $1.79 billion. We think $800 million to $1 billion will come in the next 12 months because of Royal Wharf and Cambodia. If Dublin Landing [is sold], [cash inflow] will be $1 billion, but if it isn’t, we will still have $800 million [of cash inflow].”
Low is looking to sell the office buildings in Dublin Landings and says he is close to selling at least one. Dublin Landings is a million sq ft development that comprises five office buildings, a boutique hotel, and 273 apartments. Presumably, the entire development is for sale. Oxley holds a 90% stake and its gross development value is estimated at $352 million, but if the company is successful in selling one building for the equivalent of $200 million, the development could provide much better cash inflow than the project’s GDV assumes.
Royal Wharf is seen as Oxley’s magnum opus. It was the largest project undertaken by the company and put it on the map in the UK, Ireland and Europe. It has yet to book future progress billings of $1.31 billion, having recognised only $1.03 billion from its total sales of $2.3 billion.
Low explains that Royal Wharf, which is around 90% sold, is being completed rapidly, and the units are being handed over to the buyers. Some 400 units will be handed over by June, and this should bring in an estimated £250 million, or $463.4 million. (Oxley’s year-end is June 30.)
As at Dec 31, Oxley had development properties carried at $1.8 billion on its balance sheet. Although its net debt-to-equity stands at 1.9 times, this is down from as high as 2.6 times in 2015.
Cash outflow
Over the next 12 months, Oxley will have to cough up monies of around $2 billion as it takes possession of its en bloc sites and Chevron House. With debt levels elevated and QT setting in, some market observers are questioning its ability to take on more debt.
Low reassures that Oxley is in a very comfortable position. “You must understand that Royal Wharf has no loan, and Cambodia has no loan, and Dublin Landing has a very small loan. That’s why we’re comfortable with our position, and that’s why banks are supporting us. So we have free cash flow [from our overseas projects],” he says. “In 2018, I have only $65 million of debt due.”
Developers such as Oxley have debt at corporate and project level, and debt secured against an asset.
Oxley is fairly comfortable for 2019, with only $270 million of debt due. By then, it would have taken on more debt. Since its stake in Serangoonville and Rio Casa is less than 50%, the debt for those projects will not be reflected on its balance sheet. By the end of calendar year 2018, it would have taken possession of Mayfair Gardens and Vista Park, which could cause a spike in gearing levels.
In 2020, some $1.2 billion (see Chart 2) matures. Low says $551 million of this is secured against its hotel development along Stevens Road, which includes the 254-room Novotel and 518-room Mercure. Oxley has a GDV of $980 million for this development, and Low is expecting property yields of 3% to 4%.
In sum, Oxley has roughly $2 billion of future progress billings against $3.6 billion to $4 billion in costs for new projects. It does have an ace up its sleeve, though. The hotel complex on Stevens Road can be sold, putting Oxley in a very comfortable cash position.
“We don’t have the risk appetite that the market thinks we have. The market thinks that just because you buy a lot, you’re a risk taker. But at the end of the day, it’s about what we buy and how we turn it around, and we make sure we have a cash buffer. We pay interest on our debt. The cash flow coming in is good insurance for the group,” Low says.
