Chairman Statement

Chairman Statement

"Despite the volatile global economic conditions, the Group managed to achieve another good set of results for the year... A net profit of S$113.0 million for FY2018, an increase of 28% over that of FY2017. We are conscious of the need to build sustainable growth and value for our shareholders. First Sponsor is considering to undertake a second equity fund raising exercise to further strengthen its balance sheet so as to arm the Group with the necessary financial resources to capitalise on expansion opportunities."

Dear Shareholders,

On behalf of the Board of Directors, I am pleased to report that the Group achieved a net profit of S$113.0 million for FY2018, an increase of 28% over that of FY2017. Despite the volatile global economic conditions, the Group managed to achieve another good set of results for the year. Therefore, in recognition of your continued support, the Board is recommending a final tax-exempt (one-tier) dividend of 1.30 Singapore cents per ordinary share, which is an increase of 8.3% from FY2017's final dividend. In absolute terms, the total proposed dividend payout amounts to an increase of 9.2% from that of FY2017. The Board aims to maintain a stable dividend payout with steady growth, subject to the successful implementation of the Group's business strategy and prevailing market conditions.

First Sponsor is currently considering undertaking a second renounceable rights issue to further strengthen its balance sheet so as to arm the Group with the necessary financial resources to capitalise on expansion opportunities, as well as a bonus issue to reward you for your continuous support. The structure and terms of such rights issue and bonus issue will be announced as soon as these are decided upon.

We are conscious of the need to build sustainable growth and value for our shareholders. While the pace of property acquisition slowed down in 2018 due to the increasing scarcity of good opportunities brought about by the influx of competitive capital which compressed yield returns, the Group maintained its prudent investment approach and will continue to exercise discipline in the deployment of its capital for growth.

Group Performance

The Group recorded revenue and net profit of S$277.4 million (FY2017: S$384.4 million) and S$113.0 million (FY2017: S$88.3 million) respectively for FY2018. Net profit for the Group increased due mainly to the significant revenue and gross profit growth of over 70% in its property financing business segment for FY2018 underpinned by the full year effect of loans disbursed in the prior year, new loans disbursed to associates for property acquisitions and the strong demand for credit in the PRC. This is also the first time since the Group's IPO that the property financing business segment has surpassed the property development business segment as the largest gross profit contributor, accounting for over 45% of FY2018's gross profit.

As at 31 December 2018, total shareholders' equity of the Group (inclusive of perpetual convertible capital securities of S$161.3 million) amounted to approximately S$1.3 billion. Consolidated gross borrowings increased to approximately S$695.7 million with a consolidated net gearing ratio of approximately 0.40 times as at the end of FY2018.

Foreign exchange risk continues to be one of the key risks that the Group faces. While the Group has funded its growing European investment portfolio over the years via a combination of Euro-denominated borrowings and financial derivatives which effectively hedged its Euro foreign exchange exposure, the Group remains exposed to RMB volatility in S$ terms. The Board will monitor the Group's overall foreign exchange exposure and take appropriate actions when necessary after considering the cost of hedging such risk. As at 31 December 2018, the Group had a cumulative translation gain of S$12.9 million (FY2017: S$37.0 million) arising mainly from the Group's exposure to RMB.

Property Development

In FY2018, the property development segment generated net revenue of S$139.4 million and a gross profit of S$65.7 million. The decline in both revenue and gross profit was due mainly to the lower number of residential units handed over for the Chengdu Millennium Waterfront project.

Millennium Waterfront Project, Chengdu, PRC

The Group has sold all 7,302 residential units in Plots A to D of the Chengdu Millennium Waterfront project and has recognised profit from the handover of approximately 6,400 residential units to date. Profits from the remaining 900 residential units are expected to be recognised in FY2019.

The construction of Plots E and F of the Chengdu Millennium Waterfront project commenced in the third quarter of 2018. The development of these two plots encompasses elderly care living quarters, a hospital and ancillary commercial facilities. The primary focus will be initially on the smaller Plot F which is expected to comprise approximately 770 elderly care units with approximately 25,000 sqm of retail and commercial spaces.

Star of East River Project, Dongguan, PRC

All 1,221 residential units of the Star of East River project were fully sold in the course of 2018. In January 2019, two of the six residential apartment blocks were handed over and the remaining four residential blocks are expected to be handed over in the second half of 2019. 1,528 units in the two blocks of SOHO apartments launched for pre-sale in late September 2018 are 60% sold. In addition, the sales permit for the 250-metre high office tower was obtained in late November 2018 and pre-sales performance had been encouraging. The retail mall which will be operational in late 2019 is currently 49% pre-leased.

Emerald of the Orient, Dongguan, PRC

In FY2018, the Group acquired a 20.4% stake in the Emerald of the Orient project in Dongguan via a partnership with Vanke and other experienced local PRC developers. This mixed development project consists of 168 villas and 1,076 residential apartments for sale and lease as well as approximately 89,500 sqm of office space, residential apartments, a kindergarten and other general amenities to be built for the municipal as per the land tender conditions. In December 2018, the first phase of 91 villas was launched for sale, with more than half sold in the same month. The residential apartments are expected to be launched for sale in phases from mid-2019.

Redevelopment of Dreeftoren, Amsterdam Southeast, the Netherlands

Construction works to upgrade the office tower as well as to increase its net lettable floor area by approximately 28% are not expected to commence before September 2019. The delay is primarily due to the increasing difficulty in securing a main contractor within budget, and further mandatory design adjustments which resulted in delays to the building permit application. On the residential redevelopment front, the escalating cost of construction has impacted the financial feasibility of the project. The Group will manage the development of the Dreeftoren residential plan with its usual financial prudence.

Redevelopment of Oliphant, Amsterdam Southeast, the Netherlands

The refurbishment of the Oliphant office property was completed in 1Q2019. The net lettable floor area has increased in excess of 50% to over 21,000 sqm. In addition, the Group has achieved a record rental level for office properties in Amsterdam Southeast. Approximately 60% of the property was let to reputable tenants with long term leases. The Group is also in advanced discussions with other potential tenants and is hopeful that the property will be substantially leased by the end of FY2019. The Group continues to explore the feasibility of adding residential components to the site.

Property Holding

Revenue and gross profit from the Group's property holding business segment registered a significant growth of approximately 96% and 93% to S$55.7 million and S$22.0 million respectively over FY2017. This was due largely to the 11 months' profit contribution from the Hilton Rotterdam hotel which was leased by the Group with effect from 1 February 2018 and higher profit contributions from Crowne Plaza Chengdu Wenjiang Hotel and Holiday Inn Express Chengdu Wenjiang Hotspring Hotel. The Wenjiang hotspring operations recorded an operating loss of RMB4.6 million for FY2018 which triggered an impairment assessment which resulted in an impairment charge of RMB68.9 million taken to the profit and loss account in FY2018. Notwithstanding this, the Group is optimistic that the performance of the Wenjiang hotspring operations will improve over time.

As at 31 December 2018, the Dutch office portfolio and European leased hotels (excluding properties under redevelopment) had a lettable floor area of approximately 122,349 sqm, an occupancy of approximately 89% and a weighted average lease term of approximately 9.7 years. In FY2018, the Dutch office properties generated net property income of approximately S$20.0 million and the European hotel properties recorded an EBITDA of approximately S$40.1 million.

The Netherlands

The Group's 31.4%-owned Bilderberg Hotel Portfolio recorded a gross operating profit ("GOP") of €23.5 million for FY2018, a 4.3% growth from FY2017, having achieved a 9.6% GOP growth in FY2017 over FY2016. Further, in FY2018 and January 2019, Queens Bilderberg (Nederland) B.V. ("QBN") completed the disposal of five non-core Bilderberg hotels for an aggregate gross consideration of €23.6 million which represents a premium of more than 140% over the hotels' allocated cost. QBN expects to invest approximately €10.0 million in capital expenditure from 2019 to improve the quality of the remaining 11 Bilderberg hotels to further enhance its earnings potential.

The Hilton Rotterdam hotel managed to secure a higher market share while increasing the average room rate in FY2018. The hotel achieved a GOP of €4.8 million for FY2018 which translates to a growth of 14.9% over FY2017.

The development works in respect of the third floor up to and including the ninth floor of the Poortgebouw Hoog Catharijne into two hotels, namely a 128-room Crowne Plaza and a 192-room Hampton by Hilton, are expected to be completed in the course of 2019. Given that the hotels are strategically located within a large scale shopping mall situated next to the Utrecht Central Station, the Group is confident that the hotels will be able to capture a fair market share of the upbeat Utrecht hospitality market. The transfer of the hotel operations from the Borealis Hotel Group to the Group in February 2019 is expected to provide the Group with the opportunity to further capitalise on the upside potential of the hotels.

The Group completed the redevelopment of the Munthof office property located in the Amsterdam city centre in January 2019. The office component of the property (approximately 92% of the total lettable floor area of 3,355 sqm) is fully leased to a utility supplier in the Netherlands for 8 years. The office will house approximately 300 people. The rest of the property comprising retail units and car park lots are also substantially leased.

Germany

In February 2019, the Group entered into a sale and purchase agreement to acquire a 94.9% equity stake in a hotel in Dresden, Germany, namely the Westin Bellevue Dresden, valuing the hotel at approximately €49.5 million including estimated acquisition costs. The 340-room hotel is situated directly on the banks of the River Elbe and a short walk away from the city centre and attractions such as the Semper Opera House, Dresden Cathedral and the Church of our Lady. The hotel is well connected to public transport, approximately one kilometre away from Dresden-Neustadt Station, three kilometres away from the Dresden Central Station and 100 metres away from the Tram Stop "Neustädter Markt". It is also one of Dresden's landmark hotels, situated within a historic 17th-century building with two modern purpose built building wings. The acquisition is expected to be completed within the first half of 2019. This will be the second German hotel owned by the Group.

Italy

In January 2019, the Group expanded its footprint into the Italian hospitality market through the acquisition of a bare shell 65-room hotel located in the heart of one of Milan's busiest high streets, Corso Buenos Aires, for a total consideration of approximately €10.7 million including estimated acquisition costs. The Group will fully refurbish the hotel into a hostel to tap on the youth hospitality market. The hotel's central location of just 2.5 km (or 4 metro stops) from Milan's city centre and Duomo, the busiest tourist area, as well as its proximity to transportation infrastructure (two minute walk to the metro and ten minute walk to Milan's central train station) make it an attractive initial investment into a new market for the Group.

The two acquisitions will further expand the recurrent income base of the Group's property holding business segment and further diversify the Group's geographic exposure.

The PRC

Crowne Plaza Chengdu Wenjiang Hotel and Holiday Inn Express Chengdu Wenjiang Hotspring Hotel have achieved strong revenue growth in both room and F&B segments which underpin the significant growth in GOP of the Wenjiang hotels to RMB16.3 million in FY2018 as compared to a mere breakeven in FY2017.

The Group had entered into a sale and purchase agreement on 30 May 2018 and subsequent various supplemental agreements in relation to the disposal of certain parts of Chengdu Cityspring, including the 196-room M Hotel Chengdu, bare shell commercial spaces and basement car park lots, for a total cash consideration of approximately RMB465.0 million. To-date, the Group has collected RMB284.2 million in cash proceeds including RMB45.4 million in deposits, and another RMB10.8 million cash in liquidated damages. The disposal is to be completed in tranches, with the last tranche expected to be completed in May 2019. The disposal allows the Group to recycle its capital for deployment into other better yielding businesses.

Property Financing

The Group's property financing business segment registered significant revenue and gross profit growth of more than 70% in FY2018. Revenue and gross profit from the Group's property financing business segment amounted to S$82.3 million and S$73.8 million respectively in FY2018. The positive performance was underpinned by the full year effect of loans disbursed in the prior year, new loans disbursed to associates for property acquisitions and the strong demand for credit in the PRC. The average PRC property financing loan book has more than doubled for FY2018. The PRC property financing loan book stood at a record RMB2.8 billion as at 31 December 2018.

Capitalising on the tightening of banking credit in the Australian real estate market, the Group, via a 50-50 joint venture with Tai Tak, entered the Australian property financing market with the disbursement of a A$50 million loan, secured on a prime income producing property located on Collins Street, Melbourne. This expansion into the Australian property financing market marks another milestone achieved for the property financing business.

CORPORATE SOCIAL RESPONSIBILITY

Crowne Plaza Chengdu Wenjiang Hotel, Holiday Inn Express Chengdu Wenjiang Hotspring Hotel and the Hilton Rotterdam Hotel organised, hosted and initiated a series of corporate social activities in 2018.

The Wenjiang hotels teamed up with World of Art Brut Culture ("WABC") and invited 5 students with intellectual disabilities to participate in the "5.20 Name of Love" charity event hosted at Crowne Plaza Chengdu Wenjiang Hotel. The students showcased their individual artworks and painted a "graffiti" style art piece together. The artworks were put up for sale at the hotel and all proceeds from the sale of the artworks were donated to WABC. During the annual Lantern Festival period, the Wenjiang hotels also hosted a dinner for 26 sanitation workers and their families as a token of appreciation for their contribution to society.

Employees of the Hilton Rotterdam hotel organised a mini event to sell lost and found items and items donated by employees, to raise funds for various charity groups. Unsold items were donated to the Salvation Army. The team also started an initiative to donate leftover stationery from corporate events held at the hotel to schools in third world countries.

These events aim to foster the appreciation of those who contribute to society by taking up jobs that are generally perceived as undesirable, as well as to establish greater environmental awareness and promote community sharing.

FUTURE PROSPECTS

2019 appears to be a year with a number of economic uncertainties, with rising US-China trade tensions, Brexit and other volatilities in the European market. The Group continues to keep a watchful eye on the economic risks and opportunities that are developing worldwide, and to stay vigilant and responsive to the changing market trends in the PRC and in Europe. With the Group's proposed second equity fund raising exercise to further strengthen its balance sheet by arming the Group with the necessary financial resources to capitalise on any expansion opportunity, the Group will continue to be on the lookout for suitable growth opportunities in the Netherlands, the greater European region, PRC and other Asia Pacific regions.

APPRECIATION

First Sponsor has continued to grow from strength to strength over the years. As we embark on new journeys to create further value for our shareholders, we would like to thank you for your support and patience. We would also like to acknowledge the collective judgement, unwavering support and hard work of the Board, management team and staff in the past year. I would also like to personally thank Mr Tan Kian Seng, who has retired from the Board recently, for his contribution during his tenure of service. On behalf of the Board, I would also like to welcome Mr Kingston Kwek to the Board. As one, together with our shareholders, we look forward to another great year of success for First Sponsor.


Ho Han Leong Calvin
Chairman

19 March 2019