Forterra Trust (formerly: Treasury China Trust)

[GreedandFear]

The successful “offshore sales” of both Central Plaza and BLP had demonstrated the ability of FT to realize the values of its properties at close to or above their BV (which is at fair value).
- Central Plaza was sold at 7.9% below BV
- BLP was sold at 25% above BV

{If the reversal of DTL (Deferred Tax Liability) were taken into consideration, Central Plaza could be deemed sold at above BV as well}. "Offshore transactions " seem to be the favor way to gain "ownership" of PRC asset by foreigners as compared to "direct transaction" which could be "deemed" as "activity involving speculation on RMB appreciation" by the Chinese authority.

Inclusive of the net cash proceed from the sale of BLP, I guess FT should have around SGD 150 million in cash now (most of which offshore).

How should FT make full use of the available cash? Here are my preferences in orders of descending priorities:

1) Redemption of Forum Bond in September this year (given current share price, there would not be conversion) – amount needed around SGD 83 million – this would get rid of the outrageous high borrowing cost burden of around SGD 10 million per year – very significant saving.
2) Set aside SGD 25.4 million towards dividend payment for 2015 - DPU of 5 cents each in 1H and 2H – Unit-holders deserved to be rewarded from realized capital gain in asset disposal - Recurring income from the completed HQ earn in 2015 could be used towards DPU in 2016.
3) Pay off Loan B (Interest: PBOC*123) and Loan D (Interest: PBOC*128)
4) Pay for development cost of HQ, instead of drawing down more loans (interest: PBOC)

With the stabilized HQ (which I expect at least 90% stablized, latest by end of 2015) + outrageously high interest cost of Forum Bond out of the way + any potential interest cost saving from loan refinancing = FT would be able to earn and pay like a "Reit"

That said, since
a) assets could be realized at close to BV (Fair Value)
b) current condition favor "offshore transactions", with reversal of DTL

to maximise returns to all stakeholders, including NF, the way forward is simply SELL, SELL and SELL
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Debt (Convertible Bond and Bank Loans) as at 31 Dec 2013

Forum Convertible Bond:
Principal: SGD 59.7 million
Cash Interest: 6%
Deferred Interest: 10.75% (about SGD 23 million)
Maturity: 14 March 2011 to 17 Sept 2014
(Redemption amount at maturity about SGD 83 million)

Loan A: (Huai Hai Mall)
Principal: USD 42.0 million (Equivalent SGD 52.8 million)
Interest: Libor + 3.5%
Maturity: 11 July 2014

Loan B: (Huai Hai Mall)
Principal: RMB 46.0 million (Equivalent SGD 9.6 million)
Interest: PBOC*123%
Maturity: 11 July 2014

Loan C: (Forterra House)
Principal: USD 47.8 million (Equivalent SGD 60.0 million)
Interest: Libor + 4.25%
Maturity: 11 June 2015

Loan D: (Forterra House)
Principal: RMB 47.0 million (Equivalent SGD 9.7 million)
Interest: PBOC*128%
Maturity: 11 June 2015

Loan E: (HQ Existing)
Principal: USD 260.0 million (Equivalent SGD 326.8 million)
Interest: Libor + 3.0%
Maturity: 26 July 2015

Loan F: (HQ Existing)
Principal: USD 23.5 million (Equivalent SGD 29.8 million)
Interest: Libor + 4.5%
Maturity: 02 June 2015

Loan G: (HQ Existing)
Principal: RMB 396.8 million (Equivalent SGD 81.7 million)
Interest: PBOC
Maturity: 02 June 2015

Loan H: (HQ Extension)
Principal: RMB 434.9 million (Equivalent SGD 89.6 million)
Interest: PBOC
Maturity: 17 Feb 2016

Loan I: (Central Park Mall)
Principal: RMB 230.0 million (Equivalent SGD 48.0 million)
Interest: PBOC
Maturity: 25 Sep 2020

(Vested)

There is no doubt that the real value in this stock would be in liquidating its assets given the significant discount to NAV and their ability (so far) to achieve prices at around NAV. It is still not clear to me what Nan Fung's end game is. The two asset disposals were either done by the previous Manager (Central Plaza) or initiated by the previous Manager (BLP) plus Forterra does need the money for capex and the potential redemption of the Forum CB (assuming it is put back to the company), so these asset disposals may not indicate anything about Nan Fung's long term plans. Sadly, given that Nan Fung limited itself to a 29.99% stake (to avoid a general offer), I suspect that they do want to keep this listed vehicle. From a shareholders' perspective, the problem with that is that Singapore investors in REITS and Business Trusts are primarily yield driven so, whereas I suspect that the discount to NAV can be significantly narrowed (post completion of the HQ as well as resumption of dividends), I don't see a catalyst for the share price to reach full NAV. I suspect that a 30% discount to NAV is probably as good as it gets. My biggest concern is whether Nan Fung will start to inject their China assets iinto Forterra and fund that through the issuance of more shares. I guess that scenario is mitigated by (1) currently there is little investor appetite for Forterra shares, (2) I am not sure whether a rights issue would be fully subscribed and (3) if Nan Fung sold its assets to Forterra in return for Forterra shares, that would, presumably, trigger a mandatory offer which I am not sure whether Nan Fung really wants. On the other hand, scenario 3 would allow Nan Fung to get hold of a a significant amount of Forterra shares at a large discount to NAV (if the shares were issued at today's price) and if the GO was not fully successful Nan Fung would then be left with a large share holding in Forterra at attractive prices compared to NAV which may suit them...
I don't know whether shifting Forterra's listing to HK or Shanghai (China has just approved domestic REITs) would be another way of narrowing the discount ?

Vested - patiently....