Mandarin Oriental International said on Tuesday that The Excelsior hotel in Hong Kong will be closed at the end of 2019’s first quarter for redevelopment of the site into a mixed-use commercial building.
“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,” Mandarin Oriental said in a filing to SGX before the market open on Tuesday. “The hotel is situated on a prime commercial waterfront site in the Causeway Bay district of Hong Kong.”
The redevelopment is expected to take up to six years and cost around US$650 million, which will be funded via a mix of external debt and cash reserves, with the majority of the costs not expected until 2023, it said.
The hotel has been a material contributor to Mandarin Oriental’s earnings and cash flows, as well as housing its corporate office, it noted.
On a pro forma basis, the company’s revenue for the first half of this year, excluding the Excelsior’s contribution and including estimated head office rent, would have been US$660.0 million, compared with the reported revenue of US$700.2 million.
“While group earnings will be lower during the redevelopment period due to lost earnings from The Excelsior, the group’s results will soon benefit from the re-opening of its hotels in London and Madrid which are currently under renovation,” it noted, adding that the redevelopment wasn’t expected to hurt the dividend level.
After the hotel is closed, the company will have a one-time accounting valuation gain, estimated at around US$2.9 billion, from reclassifying the site as a commercial investment property, it said.
“Once completed, the new building is expected to generate significantly higher, and more stable, cash flows with less ongoing capital expenditure compared to a renovated hotel,” Mandarin Oriental said.
The company decided to close the hotel, which opened in 1973, after a detailed review of strategic options, which was announced in June 2017, it said.
James Riley, group CEO of Mandarin Oriental Hotel Group, said that many of the workers at the hotel would be offered positions in other Mandarin Oriental properties.
The group, which is under the Jardine Matheson umbrella, currently has 31 hotels and seven residences in 21 countries and territories, it said.