Dear Shareholders,
In last year's report, I forewarned of a global recession, with high interest rates. With this as a backdrop, it was a sound decision last February 2022 to shore up our financial resources through a rights issue raising net proceeds of S$238.9 million. I can now report that for the financial year ended 31 March 2023 ("FY2023"), in spite of a dismal first half net loss S$51.4 million, we had a robust second half net profit of S$174.8 million. We thus ended the financial year with a record net profit of S$123.4 million. Excluding the fair value loss in investment properties of S$75.5 million, which is non-cash in nature, profit for the financial year would have been S$198.9 million instead. This is commendable given the economic turmoil.
COVID-19 had a devastating impact on the hospitality industry worldwide, and we were not spared. Despite the circumstances, our hotels maintained their profitability over the past three years. This is in contrast with other global hotels which suffered unprecedented losses. Some of our hotels were used as quarantine hotels, and this was a temporary respite. However, with the cessation of the quarantine business, most hotels faced a slow return to normalcy. The situation was exacerbated by the exodus of workers from the industry during the pandemic which led to a significant shortage of human resources.
In the meantime, the political uncertainty in the United Kingdom in 2022 resulted in a short-lived government fiscal policy following missteps and subsequent backflips and reversals. The political turmoil caused the Sterling Pound to plummet and progressive interest rates hikes. This led to a higher capitalisation rate, which in turn resulted in asset value deflation and an immediate lack of investors' buying interest. Significantly, the combination of foreign exchange losses and fair value markdown of our assets tipped the first half of the financial year into a net loss of S$51.4 million. The valuation of our property in London will continue to be dependent on the interest rate environment.
Although the asset-light strategy in 2021 was called off as mentioned in the previous Annual Report, a consortium of local developers continued to show interest in Sir Stamford at Circular Quay ("SSCQ"), and this led to a divestment of the hotel on 19 January 2023 for A$210.5 million. We made a significant capital gain from the divestment, at a price which allowed the Group to reap outright the full development gains which normally would have stretched for as long as four years, and without the ensuing development risks. The Group will continue to operate the hotel post settlement for a period of 18 months at a nominal rent.
This will enable the Group to have a continuing revenue stream from the management of the hotel until the purchaser's redevelopment works are ready to commence.
In 2022, Stamford Plaza Auckland in New Zealand was sold for NZ$170 million. The divestment is the largest sale of a single hotel asset in New Zealand. The Board of Directors had decided that it was prudent to divest and lock in profits after operating the hotel for the past 27 years, during which time the Group had the hotel luxuriously refurbished as a market leader. During that period, the Group also added value and took profit by redeveloping and selling 149 units of high-end apartments within the site. The divestment of the hotel was completed on 6 December 2022.
Shareholders are aware that the net proceeds from the rights issue is to be used for (amongst other things) opportunistic real estate acquisitions, the asset enhancement of Stamford Plaza Adelaide ("SPA"), the asset enhancement of Stamford Grand Adelaide ("SGA") and/or Stamford Plaza Melbourne ("SPM"), as well as the redevelopment of Stamford Plaza Brisbane ("SPB"). I now wish to update shareholders on the status of these plans.
First, the economic environment in Brisbane has been dynamic and fluid. Since completing the rights issue, we have witnessed catastrophic flooding of immense proportions in Brisbane. As a result of the floods, SPB had to be temporarily closed in February 2022. Obviously, demand has become very uncertain. Furthermore, the on-going discussions with the State Government of Queensland to top up SPB's remaining lease at a viable cost has been both tedious and challenging. We are therefore unable to progress with the proposed redevelopment until the topping up of the lease is bedded down.
As for the asset enhancement of SPA, SGA and SPM, the works are currently on-going. In view of the spike in construction and labor costs in Australia as a whole, management has scaled back the extent of refurbishment of SGA and SPM to focus on delivering the best returns in terms of aesthetics, functionality and economics. Management has also decided to refurbish the lifts, lobby and food and beverage components of SPA. With the refurbishments, SPA will be better placed with new amenities to meet competition in the hospitality industry. We are also mindful of the need to carry out the refurbishment works with minimal impact on the revenue of the hotels. This would include scheduling the works during off-peak seasons, such as the winter months, when demand is not strong
For opportunistic acquisitions of real estate, savvy shareholders will appreciate that what may seem like compelling investment opportunities, can swiftly become unappealing in an era of higher capitalisation rates coupled with a larger number of sellers unmatched by motivated buyers. Clearly, such a scenario is signaling the prospects of more downward pressure and opportunities to acquire attractively priced distressed assets on the horizon. Hence, it makes good commercial sense to sit tight, in the interim, on high yielding cash deposits while waiting for clarity or for more attractive opportunities. Our management will not behave like a fund which benefits, fee-wise, only when investments are made, nor will we be pressured into unviable investments, particularly when such deals lack good commercial sense.
In view of the reduction in the intended amounts of net proceeds from the rights issue allocated to certain purposes, as described in the announcement released on SGXNet on 26 May 2023, we have re-designated the funds used to disburse a GBP85.3 million shareholder’s loan to a partially-owned subsidiary (Finsbury Circus (2019) Ltd), which was used to partially repay an outstanding loan from the subsidiary to Oversea-Chinese Banking Corporation Limited (the "OCBC Bank Loan"), to be from the net proceeds from the rights issue. The OCBC Bank Loan was repaid because the quotations received on the interest cost of a refinanced bank loan were higher than the time deposit interest rates. Amid an environment of monetary tightening measures, the Company is not confident that its cash balances can earn a return sufficient to cover the interest costs. Accordingly, the repayment of the OCBC Bank Loan will avoid negative carry and improve liquidity, which is beneficial to the Group given the current uncertain global economic climate.
The global economy is facing a recession of unprecedented proportions. In fact, it will deteriorate to an extent not witnessed before. Going forward, the Group is financially healthy with no gearing and is ready to tap into strategic investment opportunities, such as property development, hotel owning and management, as well as commercial offices, when the timing is right.
In view of the satisfactory results achieved in FY2023 mainly from the disposals of SSCQ and Stamford Plaza Auckland, I am pleased to announce that the Board of Directors has recommended a final dividend of 0.5 Singapore cent per ordinary share plus a special dividend of 1.0 Singapore cent per ordinary share.
Meantime, I am grateful and thankful to all valued clients, shareholders, staff and especially our Non-executive Directors for their unstinting support for yet another year of satisfactory financial results.