1) Is this Nanfung's real intention ? Sounds like it is, but .....who knows ?
2) Forterra will continue to drawdown bank loan facilities to complete the HQ + No redemption of the Forum CB = no dividend payout ? This makes no sense to me. What are they going to do with the pile of cash ? Share buy back ? Repayment of off-shore loans ?
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Nan Fung considers Forterra expansion
30 Sep 2013 by Christina Wang, The Asset
Nan Fung Group, one of the largest private companies in Hong Kong, is considering a future expansion of Forterra Trust, a Singapore-listed vehicle that it recently bought into, through multiple channels including new acquisitions of Chinese assets or injecting with some of its portfolios,
Eric Chung, managing director of Nan Fung Development told The Asset in an interview.
This follows Forterra's unitholders' expectations after the two companies announced the acquisition plan on July 22. That day, the trust's price rallied to S$2.2 (US$1.75), up 35% from the previous trading day.
Forterra Trust has its whole portfolio in China's commercial real estate, with the majority of its assets in Shanghai. Since entering into the mainland in 2005, the trust has always been holding quality assets, but its stock performance was severely held back by the legacy issues of its former sponsors Richard Barrett and John Ronan.
Barrett and Ronan were founders of Forterra's previous parent, the Irish leading property giant Treasury Holdings which fell into liquidation over unpaid debts last October.
The acquisition removes the fallout from the shareholder issue. According to a statement on August 29, Nan Fung has completed the S$226.73 million purchase of 29.98% shares of Forterra Trust from Barrett, Ronan and the trust's director Rory Williams. The Hong Kong developer has also spent an additional 17.47 million euros (US$23.57 million) to buy 100% interest in Oriental Management Services - the parent company of Forterra's trustee manager and property manager.
After the transactions, Barrett and Williams resigned from the board, while Nan Fung's Chung and Vincent Cheung joined as non-independent, non-executive directors.
For Forterra's unitholders, "now is a sense of relief and the future is a lot brighter," says Graham Sugden, chairman of Forterra Real Estate (FRE) - the trustee manager. "The new sponsor understands China and gets a strong financial background and is looking to turn things around," he adds.
Two-year stabilization
The injection, if realized, would be part of the plan to further expand Forterra's portfolio after the trust completes the development of its flagship The HQ and the refurbishment of the Huai Hai Mall projects in Shanghai.
Forterra now has five assets worth 12 billion yuan (US$1.96 billion) under management in China. The retail/office complex The HQ, the Huai Hai Mall (淮海商场) and the mixed-use Forterra House (财瑞大厦) in Shanghai, as well as the Beijing Logistics Park (北京物流园) and the Central Park Mall (中央公园购物广场) in Qingdao.
At this stage, Forterra is focussing on the completion of The HQ and Huai Hai Mall projects and looking to generate stable income from them. "So that we can start to pay dividends to unitholders no later than 2015. Once that is done, the expectation is to narrow the gap between NAV (net asset value) and trading price," says Richard David, chief executive officer of the trustee manager. The trust's basic NAV per unit was S$4.81 as of end-June.
"Once we get more efficient cost of capital, that will allow us to go back to the market and potentially have further capital transactions," David adds.
In the short term, the trust has sufficient liquidity for on-going developments since it sold Central Plaza in Shanghai to the Carlyle Group in May for US$266.73 million. In addition,
Forterra has existing loans from the Industrial and Commercial Bank of China, "we will continue to draw down that development loan to make the on-going cost of the HQ development," David says.
Way down the road, when unitholders get the distribution and be more satisfied with the trust, "then we can talk about the expansion and new acquisition," according to Chung.
Commercial real estate in tier-1 cities
Only like-minded entities can advance together and this holds true for Nan Fung and Forterra.
Initially starting as a local textile manufacturer, Nan Fung now has over 47 years' experience in real estate development in Hong Kong and 20 years in China, while the latter has accounted for about 30% of Nan Fung's property business in terms of invested capital.
As of March 31 this year, Nan Fung Group's GFA amounted to 10.5 million square feet in the mainland. In terms of usage, 26% were for commercial, 23% for residential and 21% for office.
Nan Fung's strategy in China is to extend into the commercial property sector in first tier cities, and that's why the developer "
sees the quality of Forterra's assets," Chung says.
"
This opportunity is quite rare for us because we can acquire a substantial stake in a listed platform," Chung continues. "So we will be able to expand further down the road and make new acquisitions. We can also do equity fundraising from listed platform."
On its focus on first tier cities, Forterra's David believes it comes down to its relevant merits. "One of the key advantages in commercial real estate is being able to execute professional management on completed projects. The more markets you move into, the more you don't know what is your actual biggest advantage - being able to create variable management for your tenants and your consumers," he says.
Chung agrees and adds, "the market is huge, so it's difficult for any developers to go to all fronts… Your experience in Shanghai may not be replicable in Xi'an, so why not just focus on a few markets."
Financial strength
The acquisition is also in line with Nan Fung's preference to buy assets on the private market side rather than via public auction for the China market. Because "It's always competitive to win land auctions in China as PRC competitors are more aggressive. The bidding price can sometimes, based on our own calculation, rise to like a multiple of what we are willing to pay," Chung says.
"We have strict discipline and would never chase. We do our own design and our own calculation before looking into acquiring a new site. Meanwhile, we have a financial model that calculates returns, so after a certain limit, we would not go further," Chung adds.
It's not saying that Nan Fung is short of cash. Rather,
the company sits on a strong liquidity position. As of end-March this year, it had HK$21.09 billion (US$2.72 billion) of investment properties, HK$13.52 billion of properties for sale, HK$17.75 billion of financial investment portfolio and HK$13.72 billion of cash and bank balances. Its total debt was just HK$14.19 billion.
Nan Fung has set up an MTN (medium-term note) programme in 2012 for bond issuance, and raised a total of US$1 billion bond funds last year. But they only spent a portion of that and
still have an additional US$1.5 billion quota to issue if they want to.
So "
we do have sufficient resources to fund our China business", Chung remarks.
http://www.theasset.com/article/25227.ht...z2gN1exC6O