Forterra Trust (formerly: Treasury China Trust)

[HitandRun]

Q: Who is Nan Fung?
A: Nan Fung bailed out Ng Teng Fong

Article from SCMP in 1998 (Asia Financial Crisis started in 1997):

Nan Fung Development stunned the market yesterday by announcing it had accumulated more than 10 per cent of Sino Land.

The privately run property developer, controlled by Chen Din-hwa, informed the stock exchange it had increased its interest in Sino Land to 10.16 per cent on February 16.

The cash-rich property developer yesterday did not disclose how much it paid for the 312.08 million shares. The company said the shares were partly bought on the open market.

It is understood that a portion was bought from Sino's parent Tsim Sha Tsui Properties controlled by the family of chairman Robert Ng Chee Siong.

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The purchase came less than a month after TST Properties said it had sold down its stake in Sino to 53.5 per cent from 60 per cent.

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Shares in TST Properties and Sino plunged in January following speculation that the group was having difficulties meeting repayment.

Sino Land yesterday described Mr Chen as 'a good friend' welcoming Nan Fung's move to acquire the stock. At yesterday's close, Sino Land rose 10 cents to $3.425 each, while TST Properties eased 15 cents to $14.20.

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It has been suggested that Nan Fung acted as a financier for Sino Group.

[HitandRun]

Q: What happens when the South Beach Consortium "money no enough"?
A: Nan Fung to the rescue.

Article from BT in 2009:

HONG KONG developer Nan Fung group has emerged as an investor in Singapore's South Beach project.

It will subscribe to $205 million of five-year secured convertible notes under a refinancing exercise for a $1.2 billion loan on the 3.5-hectare site. The plot was sold for almost $1.69 billion in 2007 during the property bull run to South Beach Consortium - a joint venture company equally owned by subsidiaries of City Developments Ltd (CDL), El-Ad Group and Dubai World.

The $1.2 billion loan that matures later this month will be refinanced by a combination of an $800 million two-year secured bank loan and $400 million of secured convertible notes.

A fully owned unit of CDL will subscribe for $195 million of the notes, with entities associated with the Nan Fung group of companies taking the rest. The notes may be converted into equity in the joint venture company any time during their five-year duration, subject to conditions and terms that have not been disclosed.
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[valuebuddies]

Sometime I view it dangerous to run a partnership with someone who is super cash-rich, because anything bad happen to the partnership, the super cash-rich would "kindly" offer a rescue plan to swallow whole partnership.

[kbl]

Good evening HitandRun san and All.

Who is Nan Fung?-Now I know better-Thank you SIR

[Boon]

Hi Boon,

Based on the numbers above, both companies are generating 7% before tax recurring returns. Naturally, there is a key distinction - CRCT is delivering a 7% return currently while FT may deliver a 7% return if it manages to execute its development plans and stabilize its assets resulting in its NPI yield to increase by 150% to 5%. Alternatively (and perhaps more easier), it could aim to cut its cost substantially. So MOS and upside wise, I would prefer CRCT.

CRCT:

Admin Expense: 0.8 mil
Management Fee: 8.6 mil
Total Fees: 9.4 mil
AUM: 2,058 mil
Fees / AUM: 0.46%

FT:

Admin Expense: 12.2 mil
Management Fee: 16.1 mil
Total Fees: 28.3 mil
AUM: 2,514 mil
Fees / AUM: 1.13%

So basically there are 2 points I am try to raise - 1) Has the market already priced in FT's upside ie NPI yield improving to 5% and 2) Even if its NPI yield is raised, its high cost structure compared to CRCT would reduce unit-holders returns ie the property is better off held in CRCT vehicle.

Would value your inputs.

(Not Vested in Either Companies)

Hi Nick，

I need to go through more figures to answer your questions in more details. Anyway, here are some of my initial thoughts

1) Property Development (PD) and Property Management (PM) are completely two different ball games which involve different skill sets
2) PD is a much riskier undertaking than PM
3) Interest rates for development loans/construction loans are normally higher than investment loan for completed property.
4) Cost structure of Property Developers is higher.
5) If I am not wrong, CRCT is taking on little or no development risks - CMA is taking it – hence it pays to look at cost structure of CMA – may not be able to segregate China cost base as it operates in a few countries. (if I am not wrong, overall admin fee/ AUM = 1.6% for CMA)
6) Compare to CRCT, no doubt, financing cost of FT is MUCH higher , I do not know how much of it was due to development risks – in short, there are rooms for improvement – for every SGD 12.7 million reduction in interest saving, it translate into 5 cents per share
7) Trio convertible notes have been settled.
8) Cash and Differed interest of Forum Bond per annum is 3.58 million and 6.42 million respectively – these will be paid off come Sept 2014 if there is no conversion – another high cost item will be out of the way.
9) 78% of FT loans are due for refinancing in 2015 – Let’s see what NF can do.
10) Base management fees is high but not incentive fees
11) Will look into admin fees in more details – I suspect part of it is “development” related – but I could be wrong. .

(vested)

[Boon]

Hi Boon,

Based on the numbers above, both companies are generating 7% before tax recurring returns. Naturally, there is a key distinction - CRCT is delivering a 7% return currently while FT may deliver a 7% return if it manages to execute its development plans and stabilize its assets resulting in its NPI yield to increase by 150% to 5%. Alternatively (and perhaps more easier), it could aim to cut its cost substantially. So MOS and upside wise, I would prefer CRCT.

CRCT:

Admin Expense: 0.8 mil
Management Fee: 8.6 mil
Total Fees: 9.4 mil
AUM: 2,058 mil
Fees / AUM: 0.46%

FT:

Admin Expense: 12.2 mil
Management Fee: 16.1 mil
Total Fees: 28.3 mil
AUM: 2,514 mil
Fees / AUM: 1.13%

So basically there are 2 points I am try to raise - 1) Has the market already priced in FT's upside ie NPI yield improving to 5% and 2) Even if its NPI yield is raised, its high cost structure compared to CRCT would reduce unit-holders returns ie the property is better off held in CRCT vehicle.

Would value your inputs.

(Not Vested in Either Companies)

Hi Nick，

I need to go through more figures to answer your questions in more details. Anyway, here are some of my initial thoughts

1) Property Development (PD) and Property Management (PM) are completely two different ball games which involve different skill sets
2) PD is a much riskier undertaking than PM
3) Interest rates for development loans/construction loans are normally higher than investment loan for completed property.
4) Cost structure of Property Developers is higher.
5) If I am not wrong, CRCT is taking on little or no development risks - CMA is taking it – hence it pays to look at cost structure of CMA – may not be able to segregate China cost base as it operates in a few countries. (if I am not wrong, overall admin fee/ AUM = 1.6% for CMA)
6) Compare to CRCT, no doubt, financing cost of FT is MUCH higher , I do not know how much of it was due to development risks – in short, there are rooms for improvement – for every SGD 12.7 million reduction in interest saving, it translate into 5 cents per share
7) Trio convertible notes have been settled.
8) Cash and Differed interest of Forum Bond per annum is 3.58 million and 6.42 million respectively – these will be paid off come Sept 2014 if there is no conversion – another high cost item will be out of the way.
9) 78% of FT loans are due for refinancing in 2015 – Let’s see what NF can do.
10) Base management fees is high but not incentive fees
11) Will look into admin fees in more details – I suspect part of it is “development” related – but I could be wrong. .

(vested)

FT: (Business Trust)
Base Management Fee = 0.5% of AUM
Performance Fee = 4.00% of NPI
Trustee Fee = 0.02% of AUM
Acquisition Fee = 1.0% of purchase value
Divestment Fee = 0.5% of divest value
Development management fee = 5.0% of the total costs of development (excluding cost of land, interest on capital cost or development loans during the development period and the cost
of money required to carry out the development)
AUM = 2,438 million
Trustee Manager’s Fee = SGD 16.1 million (= 0.66% of AUM)
Admin Fee = SGD 12.2 million (FY2013) (= 0.5 % of AUM )
Fees/AUM = 1.16%

PCRT : (Business Trust)
Base Management Fee = 0.35% of AUM ( = 0.30% for portion of AUM > SGD 10 billion)
Performance Fee = 4.50% of NPI
Trustee Fee = 0.03% of AUM
Acquisition Fee = 1.35 % of purchase value
Divestment Fee = 0.5% of divest value
Development management fee: 3.5% of the total costs of development (excluding cost of land, interest on capital cost or development loans during the development period and the cost of money required to carry out the development)
AUM = 1,500 million
Trustee Manager’s Fee = SGD 5.6 million ( = 0.373% of AUM )
Other Expenses = SGD 9.1 million ( = 0.607 % of AUM)
(Other expenses of PCRT included recurring trust expenses such as annual listing fees, valuation fees, legal fees, registry and depository charges, audit and tax advisor’s fees, investor relations costs and other miscellaneous expenses. It also included annual operating expenses of the subsidiaries of PCRT.)
Fees/AUM = 0.98%

CRCT: (Reit)
Base Management Fee = 0.25% of AUM
Performance Fee = 4.00% of NPI
Trustee Fee = 0.03% of AUM
Acquisition Fee = up to 1.50% of purchase value
Divestment Fee = 0.5% of divest value
Development management fee = ????????

Comments:
1) Fees/AUM of FT = 1.16%
2) Fees/AUM of PCRT = 0.98%
3) I think this basically explains the higher cost structure of a BT compared to a Reit – cost structure for PD is higher than PM.
4) FT’s fee is 0.18% ( SGD 4.4 million) higher than PCRT.
5) Do you think NF bought the Trustee Management company + 30% stake in FT just to to earn this amount of additional fees
6) it is "inappropriate" to "unrealistic" to expect a BT to have a cost structure similar to a Reit, IMO.

(Vested)

[Boon]

Financing Costs :

CRCT ：
Average cost of interest bearing borrowing = 2.6% p.a. (as at 31-Dec-2013)
Interest bearing borrowing has increased from SGD 469 million (in 3Q2013) to SGD 712 million (4Q2013) – expect financing cost to increase to 18.5 million for 2014


PCRT: MTN Notes :
- maiden issuance on 21 September 2012 of its S$130.0 million 6.375% Fixed Rate Notes Due 2015
- second issuance on 26 July 2013 of its S$50.0 million 5.25% Fixed Rate Notes Due 2016 .
- Average cost of debt = ?? > 5%

FT :
- Average of cost = ? > 6%

Comments:
1) I would concur with Nick that for stabilized assets, it would be most cost effective to spin them off as Reit - low operating and financing cost.
2) Development loans cost more - reflect higher risks
3) It would be interesting to look at the cost structure of PREH, St******, Amara etc

(vested)

[Boon]

Let's try to do a valuation from a different perspective:

BLP is stabilized
Forterra House is stabilized
The HQ will be completed by end of the year.

Let’s try to Value all 3 properties on the basis of “As-If-Reit”

SGD (million)

BLP:
Capital Value = 70 mil
Gross Revenue = 6.32 mil

Forterra House:
Capital Value = 150 mil
Gross Revenue = 7.84 mil

The HQ：
Capital Value = 1,800 mil
Gross Revenue = 140 mil

Total Gross Revenue = 154 mil
Total Capital Value = 2,020 mil =AUM
Gross Revenue / AUM = 154/2,020 = 7.6%
Assuming NPI = 62.5% of Gross Revenue = 0.625 x 154 = 96.25 mil
NPI / AUM = 96.25 / 2,020 = 4.8 %

Management Fee = 0.5% of AUM = 0.005 x 2,020 = 10.1 mil
Debt = 800 mil @ 3.5 % interest
Gearing = 800 /2,020=40%
Financing cost = 28 million

Total DPU available = 96.25 – 10.1 – 28 = 58.15 million
DPU per unit = 58.15 / 254 = 23 cents per unit
Share Price (assuming yield of 7%) = 3.27 per share

"As- IF- Reit" Share Price = 3.27

What is left in FT is basically PD business:
Capital Value (Huai Hai Mall + Central Park Mall) = 400 mil = 1.57 per share
Debt = 0 (all debt transferred to Reits)

DTL = 393.6 million = 1.55 per share

V(FT) per share = V(As-If-Reit) + V(PD) + V(DTL) = 3.27 + 1.57 + 1.55 = 6.39

If 3.27 is not achievable, how about 3.00 , 2.50 , 2,00 , or 1.80

Assume V(PD) is 50% over-valued, one still get 0.78 per share.

If all 3 reit-able assets are “transferred” into “Reits” via “offshore” transaction sales, substantial DTL could be write back (it has value)

In short, plenty of upsides with abundant MOS.

(vested)

[Boon]

So without having to rely on any asset sales, not even BLP, FT could just “Reit” its “Reit-able” properties (BLP, Forterra House, and the HQ) and it would be able to earn like a Reit.

And there is no need for an IPO or sale of any Reit units to the public - each unit of FT would entitle to one unit of Reit.

Also, to achieve a yield of 7% (as CRCT) based on current FT share price of 1.80, HQ would only have to be 70% occupied – a much easier and quicker target to achieve – there is no need to increase NPI by 150%.

As the occupancy of the HQ rises above 70%, the upsides as expressed in share price of Reit are as follows:

HQ Occupancy Rate ( = Equivalent implied 7% yield share price, SGD)
100% (= 3.27)
90% (= 2.78)
80% (= 2.29)
75% (= 2.05)
70% (= 1.80)

It is interesting to note that SREITs’ average cost of debt fell to 2.7% in December 2013 from 3.0% a year ago – and I am using 3.5% in my valuation model.

https://research.standardchartered.com/c..._12_16.pdf (1st page)

This is easily executable.

(Vested)

[Boon]

Financing Costs :

CRCT ：
Average cost of interest bearing borrowing = 2.6% p.a. (as at 31-Dec-2013)
Interest bearing borrowing has increased from SGD 469 million (in 3Q2013) to SGD 712 million (4Q2013) – expect financing cost to increase to 18.5 million for 2014


PCRT: MTN Notes :
- maiden issuance on 21 September 2012 of its S$130.0 million 6.375% Fixed Rate Notes Due 2015
- second issuance on 26 July 2013 of its S$50.0 million 5.25% Fixed Rate Notes Due 2016 .
- Average cost of debt = ?? > 5%

FT :
- Average of cost = ? > 6%

Comments:
1) I would concur with Nick that for stabilized assets, it would be most cost effective to spin them off as Reit - low operating and financing cost.
2) Development loans cost more - reflect higher risks
3) It would be interesting to look at the cost structure of PREH, St******, Amara etc

(vested)

From page 32 of PCRT AR2013:

Weighted Average Interest Rate of PCRT = 4.3% (FY2013) and 4.6% (FY2012)