Far East Orchard to buy Straits Trading's hotels as it eyes regional presence

LUCAS Chow, Far East Organisation's executive director, likes to think of the company as a large department store in the real estate business, one that he believes is well equipped to meet the needs and fancies of anyone or any company seeking property in Singapore.

"In real estate terms, we are actually an emporium. An emporium is a department store. From residential to commercial to industrial, and even hotels and medical suites, we have the breadth. That's in the Singapore market," he once told The Edge Singapore. "This experience can perhaps be applied to the region as well."

Indeed, Far East Organisation is doing just that as it makes plans to venture abroad, with Chow spearheading the move. Through its subsidiary Far East Orchard, previously known as Orchard Parade Holdings, the group has identified the hospitality market as its starting point. On Nov 26, Far East Orchard, of which Chow is CEO, said it had signed a non-binding memorandum of understanding with Straits Trading Co (STC), a diversified business group, to expand its hospitality business beyond Singapore.

Far East Orchard intends to buy STC's entire hospitality management business, which owns and operates 13 mid- to upscale hotels in Singapore, Australia, New Zealand and China under the "Rendezvous" brand. The properties are primarily targeted at business travellers. The hotels include three in Australia that are wholly owned by STC. Under the agreement, Far East Orchard has offered to buy a 50% stake in these three properties, two of which are in Perth and one in Melbourne.

Far East Orchard will also take over the running of STC's remaining hotels outside Singapore, located in Sydney, Brisbane, Adelaide, Port Douglas (Cairns), Auckland, Christchurch and Shanghai. Of these properties, STC operates three on behalf of other hotel owners through management contracts. It leases the remaining six properties. In addition, Far East Orchard is eyeing a 50% stake in a café business Down Under that STC partly owns. As part of the agreement, STC has the right to take a stake of up to 20% in Far East Orchard's enlarged hospitality management arm.

STC's sole hotel in Singapore, the 298-room Rendezvous Grand Hotel on Bras Basah Road, which it wholly owns, will not be part of Far East Orchard's direct portfolio. Instead, Far East Hospitality Trust (Far East H-Trust) has offered to acquire the 4½-star hotel and its three floors of retail space (see "Far East H-Trust unveils first acquisition after listing"). Far East Orchard has a 33% stake in the manager of Far East H-Trust.

Financial details of the proposed transactions have yet to be finalised, as Far East Orchard is carrying out due diligence on the assets, although it should have no problems with funding, given its cash hoard of more than S$200 million. Any definitive agreement will be signed only next year.

'Bite-size acquisition'
Goh Han Peng, an analyst at DMG & Partners, tells The Edge Singapore that Far East Orchard is likely to pay less than S$200 million for STC's assets. "Based on the assets' current earnings profile, Far East Orchard probably doesn't have to pay a lot. The hospitality management business is an asset-light business. This would be a bite-size acquisition."

Of STC's three core businesses — tin mining and smelting, hospitality, and property dinvestment — hospitality is the second-largest contributor to revenue, but it is also the biggest drag on the diversified business group's bottom line. Hospitality revenue rose 7.6% to S$157.8 million last year, accounting for 10.4% of STC's entire top line of S$1.5 billion. Yet, the division suffered a loss of S$8.5 million.

In fact, STC's hospitality arm has been losing money for a number of years, although last year's loss was smaller than the S$44.2 million loss in 2010. The company attributed the outcome last year to higher room rates and average occupancy rates, fair-value gains and lower costs.

"What is dragging down STC's hospitality business are the leased hotels, which come with a fixed charge that [STC] needs to pay every year," says DMG's Goh. "Some of the leases were signed at very high rates with the hotel owners. If the operating performance can't cover the fixed costs, they will incur losses. This is what has been dragging the group down."

Growing interest Down Under
How Far East Orchard manages this business will therefore be closely watched by the investment community. If it proceeds with the proposed acquisitions, it 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.

Stamford Land received an offer of AS$316 million (S$400 million) for three of its hotels in Australia in October last year from a party it did not identify. The figure was almost double the three assets' combined net book value of AS$167.3 million at that time. Stamford Land turned down the offer earlier this year, saying other parties had expressed interest in its Australian hotels.

Of the 13 hotels in STC's portfolio, its most recent investment is in Melbourne, where the group bought a historic property in July for AS$61 million. That hotel was built in 1912 and is run under the brand name Rendezvous Grand Hotel Melbourne.

If the proposed agreement with STC goes through, Far East Orchard's hospitality portfolio will swell to more than 30 hotels and serviced residences with more than 6,000 rooms across Asia-Pacific. The company now has eight hotels and nine serviced residences in Singapore, where it also owns medical suites and builds homes. Its only hospitality asset outside Singapore is a serviced residence in Kuala Lumpur.

"For the hotel business, you need scale," says Goh. "This is a good combination. Far East gets the scale and a regional platform, rather than have just a Singapore-centric business. For Straits Trading, it's a faster way to turn the division around. There are economies of scale if they combine their hospitality business."

Far East Orchard's current hospitality operation is run by Arthur Kiong, a veteran in the hotel industry. The former head of Banyan Tree Holdings' Asia-Pacific hotel operations and marketing functions was appointed CEO of Far East Hospitality, a unit of Far East Orchard, in September. Kiong, who reports to Chow, has also worked at The Ritz-Carlton, Hyatt International and Mandarin Oriental Hong Kong.

For Chow — who is relatively new in the property business, joining Far East Organsation only in June last year after long stints at several major companies, including Singapore Telecommunications and Hewlett-Packard — the collaboration with STC is likely to be the first of more overseas ventures he will take on for Far East Orchard.

Yet, as he once told The Edge Singapore, he is under no compulsion to make any deal work if conditions or circumstances are not in his company's favour. "If there are things in the external environment that I can't control, there's no need for me to worry about the deal. I just have to deal with it as it happens. We plan many scenarios, but most of the time, it's never one particular scenario that comes out. It's almost like striking 4D. Instead, some elements of the various scenarios will emerge. When that happens, we just take action accordingly because we have already planned for it."

This story first appeared in The Edge Singapore weekly edition of Dec 3-9, 2012.