SINGAPORE (Oct 9): The Excelsior, Hong Kong will close on March 31 2019 for redevelopment, says owner and operator Mandarin Oriental International.

The redevelopment is expected to take up to six years to complete and cost some US$650 million ($899 million).

Once completed, Mandarin Oriental International says the new building is expected to generate significantly higher, and more stable, cash flows with less ongoing capital expenditure compared to a renovated hotel. The redevelopment itself is also not expected to adversely impact the recent level of dividends paid.

The hotel is situated on a waterfront site in the Causeway Bay district of Hong Kong where the group has approval for the development of a mixed-use commercial building with a Gross Floor Area of some 63,500 sqm.

The decision to close the hotel, which opened in 1973, comes after having completed a review of the long-term strategic options for the site, announced by the Mandarin Oriental Group in June 2017.

Mandarin Oriental International is the Singapore-listed subsidiary of Mandarin Oriental Hotel Group which is part of the Jardine Group of companies.

“The decision reflects strong commercial property values in Hong Kong and the expected higher yield associated with a commercial building at a time when the hotel requires significant investment,” says Mandarin Oriental International.

The wholly-owned Excelsior hotel is a contributor to group earnings and cash flows and houses the group’s corporate office. Adjusting the group’s reported results for the first half of 2018 to exclude the contribution of The Excelsior, and include an estimated incremental head office rent cost, revenue would have dropped to US$660 million from US$700.2 million on a pro forma basis while underlying profit would have dropped to US$11.4 million from US$22.3 million on a pro forma basis.

Upon closure of the hotel, the group will be required to recognise a one-time accounting valuation gain associated with reclassifying the asset as a commercial investment property on its balance sheet. The group estimates that this reclassification of the asset to reflect its market value as a site for commercial redevelopment would lead to an accounting gain of some US$2.9 billion, net of closure costs.

Mandarin Oriental International says the redevelopment will be funded through a mix of external debt and cash reserves. Approximately US$15 million of costs related to the redevelopment are estimated to be incurred in 2019, which the group will fund from cash reserves. At June 30, the group had net debt of US$325 million, with gearing of 6%, measured as a percentage of net debt against adjusted shareholders’ funds.

Year to date, shares in Mandarin Oriental International are down 0.9% to US$1.98.