MAINBOARD-LISTED property player Far East Orchard sank into the red in the first quarter, as the Covid-19 pandemic battered its hospitality business.

 

Net losses came to S$700,000 for the three months to March 31, reversing earnings of S$900,000 in the year-ago period, the group said in a business update on Thursday.

 

Its revenue sank by 29 per cent year on year, to S$27.6 million, which Far East Orchard blamed in part on lockdowns in Australia and low tourist arrivals in Singapore.

 

The decline came in spite of hotel openings during the quarter - such as The Clan Hotel in Singapore, the first overseas property under the group' s Quincy brand in Melbourne, and the launch of premium brand A by Adina through a joint venture in Canberra.

 

Far East Orchard, which owns and runs hospitality properties across Europe and the Asia-Pacific, noted that its year-on-year losses were compounded by the year-ago base. The impact of the pandemic did not kick in until end-March 2020, even as the group recognised contributions from a property joint venture in Woodlands in Q1 2020.

 

Still, the British purpose-built student accommodation (PBSA) business was highlighted as a bright spot, especially with contributions from a new acquisition in Bristol. The PBSA portfolio had occupancy of more than 80 per cent as at March 31, 2021. Demand is expected to be sustained, including pre bookings for the next academic year.

 

Far East Orchard group chief executive Alan Tang said that the industry " faces a long and challenging road to recovery" as international travel remains extremely limited. " Nonetheless, we are taking a long-term view on the situation, and continuing to deepen our presence in key markets for hospitality and PBSA," he added in a statement.

 

FAR East Orchard' s net profit for the financial year ended Dec 31, 2020 plunged about 94 per cent year-on-year to S$1.54 million as the pandemic impacted its hospitality business.

 

Revenue was 28.1 per cent lower at S$112.21 million while earnings per share worked out to 0.35 Singapore cent, down from 5.95 cents a year ago.

 

The decrease in revenue from its hospitality business was partly offset by higher revenue from the student accommodation properties in the United Kingdom, arising from full-year contributions from five purpose built student accommodation properties that were acquired in 2019.

 

The board is recommending a dividend of three Singapore cents per share, down from six cents a year ago.

 

Far East Orchard expects the group' s financial performance for FY21 to remain under pressure, since its hospitality business segment is the biggest contributor to recurring income. It highlighted that border closures remain largely in place to international travellers, with mass travel unlikely to take off in a big way this year.

Property group continues to shift focus away from development and build up its purpose-built student accommodation portfolio.

 

KING' s Square Studio sits opposite a graffiti-strewn wall in Bristol, UK. Clad in dusty red, the Georgian-styled building is unremarkable to passers-by. But to real estate firm Far East Orchard (FEOR), the 301-bed student accommodation property represents a safer, more stable home for investors' money.

 

This brick, glass and panelled block - which cost the company £ 39.3 million (S$70.5 million) - is the latest addition to a portfolio of 12 student residences located near British universities. FEOR' s portfolio now has 3,500 bedrooms across six cities in the United Kingdom. The company plans to have around 5,000 beds by the end of 2025, chief executive Alan Tang told The Business Times.

 

Building up its purpose-built student accommodation (PBSA) portfolio is a key part of the hotel operator and property developer' s strategy to generate sustainable, recurring income, said Mr Tang.

 

He hopes to offer shareholders a more stable dividend payout by diversifying beyond property development - which tends to produce " lumpy" earnings. Property development contributed 1 per cent of FEOR' s 2019 operating profit. Mr Tang said FEOR does not have any new projects in the pipeline.

 

The pandemic has weighed on hospitality-focused businesses like FEOR' s. The mainboard-listed company, a subsidiary of Far East Organization, reported a net loss of S$6.3 million for the nine months ended Sept 30, compared with a net profit of S$5.4 million in the year-ago period.

 

Sales declined 25.1 per cent, to S$84 million from S$112.1 million.

 

Mr Tang said: " Because of Covid-19, the hospitality front will naturally take a while to repair and recover, and this puts PBSA up very nicely as a diversifier . . . Considering that our PBSA portfolio is not very big at this point in time, we could grow it more meaningfully in the next few years."

 

Its PBSA portfolio had an occupancy rate of over 80 per cent, despite some early cancellations of tenancies due to the pandemic. Occupancy was previously over 90 per cent.

 

Building a PBSA portfolio

 

Mr Tang said FEOR' s investment strategy is all about " location, location and location" .

 

For instance, King' s Square Studio is a 13-minute walk from one of Bristol' s top universities, and is also within walking distance of the city centre.

 

The company is on the hunt for similar properties with " good demand and supply fundamentals" , he added.

 

" Most of these universities we look at have a focus on research and a reputation for academic achievement, like those in the Russell Group."

 

Alongside the United States' Ivy League schools, the UK' s leading 24 universities, known as the Russell Group, dominate global rankings.

 

Competition is tough. In Bristol, for instance more than 15 student accommodation buildings surround the top university.

 

But Mr Tang said demand is expected to remain strong, pointing to the record number of applicants and acceptances for the 2020/2021 academic year. He is confident that the firm has a " strong foothold" and " deep understanding of the market to leverage on" , considering that FEOR has been in the PBSA scene for more than five years.

 

The boom in the PBSA market has been underpinned by the sheer number of students at UK higher education institutions. According to a report by real estate services firm Cushman and Wakefield, there were 1.84 million full-time students at UK universities in 2017/2018, a 10 per cent increase from the previous year. Around 60 per cent or 1.1 million students were studying outside their home region.

 

Full-time student numbers outweigh current PBSA bed spaces by a ratio of three to one, according to a Knight Frank report.

 

Mr Tang said FEOR' s " healthy cash balance" of S$276.1 million as at end-September would allow it to pursue acquisitions and development opportunities " well within (its) means" .

 

FEOR did not disclose its liabilities as at end-September. As at end-June, its total borrowings and debt securities stood at S$563.1 million while its cash balance was S$262.1 million.

 

Mr Tang said he watches the debt-to-equity ratio and intends to keep this below 0.6. As at end-June, FEOR' s debt-to-equity ratio was 0.462.

 

FEOR is " standing ready" for opportunities, such as distressed assets with good fundamentals, that might surface in the next 18 months.

 

" Going forward, the interest rate regime is probably going to be in the low territory for a while, and it bodes well for us to deploy capital when they are attractive assets," he added.

 

Growth in hospitality

 

FEOR also intends to expand its hospitality business, targeting to manage over 25,000 rooms by 2025. It currently has over 16,000 rooms in 100 properties across eight countries, with a pipeline of 2,800 more rooms over the next three years.

 

Countries where it hopes to expand include Japan, Indonesia, Vietnam, Australia and Germany, which have sizable domestic markets.

 

" For these countries, there will be some support (from the domestic market) to sustain some level of business," said Mr Tang. " It might not be as high, but it wouldn' t come to a situation like the one we have in Singapore now."

 

HOTEL operator and property developer Far East Orchard has fallen into the red with a S$853,000 net loss for the half year ended June 30, 2020, versus a net profit of S$5.8 million a year ago. (see amendment note)

 

Loss per share stood at 0.19 Singapore cent for the six months, down from the year-ago earnings per share of 1.33 cents.

 

Revenue for the half year decreased by 13.7 per cent to S$64.9 million, from S$75.3 million in the corresponding period last year.

 

The plunge in its hotels' occupancy level, due to the novel coronavirus pandemic, took a toll on the group' s hospitality business. 

 

This was partially offset by the demand for accommodation facilities for isolation purposes in Singapore and Australia, as well as demand from companies to house their foreign workers in Singapore, Far East Orchard said.

 

The drop in turnover was also partially offset by higher sales from the group' s student accommodation properties in the UK, given the full half-year contribution from the five purpose-built student accommodation (PBSA) assets acquired in 2019.

 

Far East Orchard on Thursday said that occupancy booking at its PBSA assets is behind the level recorded this time last year, but the group expects the rate of booking to increase towards the start of the 2020/2021 academic year as students finalise decisions on their universities and accommodation.

 

It noted that the Covid-19 pandemic has led to " short-term concerns" surrounding international student numbers and differing approaches such as online classes or a mix of online and face-to-face teaching. 

 

" While there remains higher risk around international student numbers, these short-term concerns will be allayed as the academic year stabilises with safe-distancing measures and no major resurgence of Covid-19," it said.

 

As for the property development business, Far East Orchard expects a slowdown in sales and leasing activities at its joint-venture development project Woods Square in Singapore amid uncertainty during the pandemic.

 

No dividend was recommended for the half year, the same as a year ago.