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As Singapore continues to rein in home prices, further unsettling developers and investors in the process, property group Far East Orchard Ltd is seeking steadier returns and better value for shareholders from abroad. Specifically, the group is preparing to expand into Australia, where it could become one of the continent’s leading hotel operators if it gets investors’ approval for its planned joint ventures with two existing players Down Under.
“We do not know when the next round of cooling measures is,” says Far East Orchard CEO Lucas Chow. Even after seven rounds of measures since 2009 to keep the residential market in check, home prices have yet to correct, with prices of private homes and public resale flats hitting new highs in second quarter of 2013 (2Q13), based on official data. Still, developers and property investors remain wary of more government intervention. On June 28, the central bank unveiled new rules forbidding banks from lending to anyone seeking to buy property if his total monthly debt obligations exceed 60% of his income.
Property development in Singapore typically generates up to 80% of the top line of Far East Orchard, formerly known as Orchard Parade Holdings Ltd. That could soon come down to about 60% as it looks overseas to bulk up its hospitality business, its other revenue driver.
The company’s existing 17 hotels and serviced residences in Singapore account for almost all its hospitality revenue, which is expected to get a boost once the proposed tie-ups with Mainboard-listed Straits Trading Co (STC) and privately held Toga Group of Australia proceed. The two partnerships were first announced late last year but details were fleshed out only recently. Far East Orchard has one serviced residence in Kuala Lumpur.
“It is imperative that we diversify our portfolio and expand beyond Singapore,” says Chow, noting also that the Singapore Tourism Board now expects slower growth in tourist arrivals to the city-state. Through the two joint ventures, he expects overseas contributions to account for more than 60% of the group’s annual hospitality revenue. Shareholders of Far East Orchard will vote on the proposed transactions at an EGM on July 9.
More than 13,000 rooms
The joint venture with STC will hold all of Far East Orchard’s existing hospitality assets and STC’s three wholly owned hotels in Australia and 13 hotel management contracts in Asia-Pacific, including New Zealand and China. Far East Orchard will own 70% of the joint venture, with STC holding the rest. The latter’s three Australian hotels and hotel management business are valued at S$177.4 million (RM444.2 million).
The tie-up with Toga involves Far East Orchard investing A$225 million (RM655.9 million) for a 50% stake in the Australian firm’s hospitality management business.
Toga operates more than 50 hotels and serviced residences in Australia, New Zealand, Germany and Denmark under four brands. According to Chow, Toga has been looking for a like-minded business partner to expand Down Under. Far East Orchard will use cash and/or bank loans to fund the investment. As at end 1Q13, it had S$482.6 million in cash.
The transactions will triple the number of hotel and serviced residence brands in Far East Orchard’s stable to nine and give it access to 85 properties with more than 13,000 rooms. Of these, 55 properties with more than 7,500 rooms are in Australia, which will be the biggest market for the company. Far East Orchard will join a growing number of Singapore-listed companies with a presence in the hospitality industry Down Under, where their properties are generally well regarded. These include CDL Hospitality Trusts, Ascendas Hospitality Trust, Ascott Residence Trust and Stamford Land.
Managing risks
While this will mean a much larger portfolio, it also increases the risk profile of the group as Far East Orchard will have to contend with foreign exchange fluctuations and country-specific risks. Investors will also be keeping a close eye on how the joint venture with STC fares, given that the hospitality business has been a major drag for years on the bottom line of the diversified business group, which is also involved in tin mining and smelting, property development and investment. STC’s hospitality division incurred a net loss of S$36.2 million last year.
Investors need not fret though, according to Chow. “We are not reckless,” he maintains. “Of course there are risks, but we have been very careful in choosing what we put into our portfolio so that we don’t expose ourselves to unnecessary risks.” The Australian market, he says, is “relatively transparent” and its hospitality industry has been stable for the last five to 10 years, with cities such as Sydney and Perth “consistently” enjoying high occupancy rates of more than 85%.
On STC’s loss-making hospitality business, Chow believes some of the problems it has been facing should not weigh on its future performance. “Some of the properties, over the last few years, have gone through renovation. The renovation obviously affected occupancy and revenue.” More importantly, some of STC’s onerous hotel management contracts have been taken care of by a S$11 million provision made last year, enabling the joint venture with Far East Orchard to take over a cleaner portfolio. Far East Orchard can also tap Toga’s expertise to turn around STC’s hotel business.
“There will be a number of revenue enhancement opportunities as all three partners will share their best practices,” says Arthur Kiong, who heads Far East Orchard’s hospitality division. “The enlarged portfolio will enjoy greater economies of scale in areas such as purchasing and supply relationships. We will also be able to organise shared resources and rationalise overheads so as to improve our margins.” Cross-selling initiatives across the various geographical markets and brands will also be introduced, he adds.
Far East Orchard will emerge as one of Australia’s top five hospitality operators by room count, according to Chow. “These properties will increase our recurring income and help drive earnings growth for years to come.” That said, Chow concedes that integrating the various brands and operations will be a key challenge.
“The integration part is always the most challenging because we come from different backgrounds. How do we derive the benefits that we expect from these transactions? This will be keeping us awake at night.”
Down the road, the group may consider injecting some of its overseas assets into a real estate investment trust, according to Vincent Yik, its chief financial officer. Far East Orchard and its parent, Far East Organization, are the sponsors of Far East Hospitality Trust, whose existing hotels and serviced residences are based entirely in Singapore.
Progress in Southeast Asia
In the meantime, Far East Orchard is venturing on its own into neighbouring markets. For a start, it has secured management contracts to run a hotel in Bali and another in Bintan under its lifestyle Quincy brand. In contrast to the Australian market, which is developed and offers stable returns, Southeast Asia is a riskier region but the returns are higher, notes Chow. “By combining our Southeast Asian presence with an Australian presence, we have a well-balanced portfolio.”
The company has ruled out getting into Myanmar, though, following a recent trip there by Chow. “Clearly, that market, in my opinion, will not be suitable for Far East Orchard today. It is a very cowboy town, in the sense that the laws are not exactly clear. I don’t think our appetite is for that kind of market.”
Even as it increasingly looks for business overseas, Far East Orchard has no plans to scale down in Singapore, despite increased labour costs and a potential glut of hotel rooms in the next few years as new hotels open for business. It has three hotels and a serviced residence that will be ready in the coming years.
“We are still fairly optimistic about the Singapore market. Singapore continues to enjoy high occupancy rates, in spite of the slower growth in tourist arrivals,” says Chow. That said, the company’s fortunes still hinge largely on property development, which he concedes is “a very lumpy business” and which most investors continue to regard with caution because of the government’s cooling measures.
The group’s 2012 revenue halved to S$140 million, although earnings increased 53% to S$190.8 million due to a one-off gain from the sale of its stake in beverage maker Yeo Hiap Seng following a corporate restructuring initiated last year by Far East Organization, which owns 59% of Far East Orchard and is now the controlling shareholder in Yeo Hiap Seng.
That group-wide restructuring, which investors saw as a way to unlock shareholder value, almost tripled Far East Orchard’s share price to S$2.20 at end-2012. Even so, the rally was accompanied by dismal volumes, with the stock still thinly traded even now. The counter lost 5.5% in 1H2013, compared with the Straits Times Index’s 0.5% dip over the same period. — The Edge Singapore
This article first appeared in The Edge Financial Daily, on July 09, 2013.
