Forterra Trust (formerly: Treasury China Trust)

[Nick]

Don't think NAV means much here. They are not generating any distributable cash-flow at the moment. The revenue cannot cover the management + admin fees and interest expense in 1H 2012 ! The upside will be if they manage to divest their assets close to their NAV valuation and distributed the gain to unit-holders.

(Not Vested)

[Boon]

I do not agree with the above. The BLP does not generate any revenue / profits, as I am sure you know. The sale will release cash but it will only generate excess of cash of S$94mn to the company (assets for sales minus liabilities to be divested). This is a small dent in their $1.1bn in debt

I think there are two major and worrisome issues here:
* TCT on averages converts 27% of its sales into op cash flow. This is not a strong OCF conversion number. A great result under current conditions is S$10mn in OCF per quarter. With this level of OCF and OCF conversion ratio, TCT's debt load is massive. It can barely pay for its cash interest expense based on most recent results. Since Sept 2010, the company has only re-paid principal in 4 quarters (of 8), two of which were part of the 2010 balance sheet restructuring

* The lift from the Parkson rental has yet to emerge. It should happen over the next two quarters. if it doesn't or it comes in short, I think this leaves TCT equity as dead-in-the-water.

No way this counter can (or should) issue a dividend.

Matt

Hi Matt,

FYI, about a year ago Parkson opened a new store called Shanghai Tianshan Parkson which is situated roughly 300m away from the HQ Parkson. The lease of HQ Parkson is due to be expired at or before the end of this year and one can logically conclude that Parkson would not renew its lease at the HQ.

HQ Parkson has recently been taken off from Parkson's website:

http://www.parksongroup.com.cn/html_en/S...=9&shop=65

Will this leave TCT equity as dead-in-the water?

I don't think so. I will address this issue plus your other comments later.

[Boon]

Hi Matt,

Here is the follow up to my previous post.

Operating Cash Flow (OCF)
Please refer to attached excel file.

1H2012:
OCF available to Debt and Equity = SGD 15.245 m
Interest paid = SGD 20.097 m
OCF available to Equity = 15.245 – 20.097 = - SGD 5.73 m.
This means OCF generated by TCT’s underlying assets is insufficient to cover interest expense. Hence, there is no operating cash flow available to Equity - for dividend payment or funding of future growth. {Note:dividend payments in the past were funded from asset divestment. Investment in long term assets have been mainly funded by debt + equity (rights placement)}

To ease liquidity, one of the options that TCT has been considering is divestment of some assets – most of TCT's assets have made gains in capital value over the years.

Both the Central Plaza and Beijing Logistics Park (BLP) have been placed on the market for sale.

Sale of Central Plaza and BLP:
From the financial statement and the “restructure balance sheet” as at 1H2012:

Total Debt of TCT stood at SGD 931.5 m (inclusive of outstanding loans related to both - the Central Plaza and BLP) – this debt level is less than the figure of SGD 1.1 billion that you have quoted.

Assuming that both Central Plaza and BLP could be divested at valuation reported in the “restructure balance sheet”, then
Net cash proceed from divestment = Asset held for sale - liabilities held for sale
= 447.1 – 352.9 = SGD 94.2 m, which could be used in the following ways:

a) Resume dividend payment to unit-holders - say 5 cents per share for each FY 2013 and FY2014 - amount required = SGD 25.3 m

b) The remaining SGD 68.9 m could be used to fund the HQ Extension project – budgeted at RMB 883 m - which is scheduled to be completed in 3Q2013. Debt funding of RMB 800 m had been obtained for the project, of which RMB 190.5 m had been drawn down as at 30 June 2012.

c) Alternatively, the remaining SGD 68.9 m could be used towards payment of bond redemption or repayment of existing bank debt.

Please note that the SGD 352.9 m liabilities held for sale is inclusive of repayment of all outstanding loans related to the Central Plaza and BLP, totaling SGD 184.8 m.
Hence, total debt, after divestment, would be reduced by SGD 184.8 m - from SGD 931.5 m to SGD 746.7 m. This is equivalent to a 20% reduction in total debt or a reduction of interest expense by about SGD 8.3 m per year - assuming interest rate of 4.5% per year. (I hope there is no misconception here. This is my understanding)

Impacts on TCT’s cash flow brought about by the divestment of Central Plaza and BLP are:
- Cash inflow of SGD 94.2 m
- Saving of about SGD 8.3 m annually on interest expense.
- Lost in future OCF from Central Plaza - estimated at SGD 7.3 m annually.
- Lost in future OCF from BLP - estimated at SGD 1.9 m annually.
------------------------------------------------------------------------
The current cash flow problem confronting TCT would be eased if asset divestment program could be realized as planned. The cash flow situation would be further improved once the HQ extension project is completed and leased – as more OCF would be generated to support dividend payment/new investment. I have made some rough estimates on the OCF that could be generated by the HQ extension. I repeat, these "guesstimates" need to be fine tuned. Please refer to the attached excel file.

All of TCT’s properties are good assets in good localities – assets well sought after by investors. Being asset rich and cash poor, it makes sense to dispose of some assets to help ease liquidity.

It remains to be seen what course of actions would the management ultimately adopt to improve the current liquidity difficuties .

(Not vested – on watchlist - under close scrutiny)

[Nick]

The underlying issue is the cost structure of this business trust.

Total Stabilized Asset: RMB 8.609 billion
Annualized 1H 12 NPI: RMB 0.326 billion
NPI Yield: 3.8%

The NPI yield is fair for commercial properties implying decent pricing power due to superior location and low acquisition cost. So it is surprising that they are unable to generate profitable income from these assets. Let's examine the major cost elements:

1H 2012
Net Property Income: $33.0 million
Net Interest Expense: ($26.0 million)
Administrative Fees: ($5.1 million)
Management Fees: ($8.4 million)
Distributable Income: ($6.5 million)

It is clear that the major cost element came from the Management fees ie $13.5 million which makes up 41% of the NPI. Its comparable - CRCT - administrative and management fee only compromised 9.6% of the NPI.

This is why I did not choose to invest in TCT despite the excellent assets and multiple drivers for revenue growth. I find the cost elements to be too high for my liking. However, this isn't an issue if TCT isn't interested in generating recurring income. Property trading is a lucrative business if executed correctly and if the Management do consistently pulls it off, obviously they deserve higher remuneration. I guess it really depends on their execution since till date, they have yet to divest any property. Alternatively, if they can increase the NPI by 50% without incurring substantial recurring cost, the boost in NPI yield may be sufficient in generating distributable income.

Please feel free to point out any errors in my computation or misconceptions with the Trust performance.

(Not Vested in any Chinese based property firms)

[freedom]

commercial properties' land use right normally are 40 - 50 years only in China.

I don't think 3.8% yield on commercial property is anywhere near reasonable. There is simply too much hype baked into the commercial property price in China, IMO.

[MattAtelier]

Thank you Boon for your work. I agree with your calcs, but strongly agree with Nick. The huge cost of operations means this company never reached economies of scale.

[Nick]

TCT comes clean

21/9/2012 - We go into the boardroom to see Treasury China Trust CEO Richard David answer the hot button questions asked by SIAS President David Gerald.

http://video.xin.msn.com/watch/video/tct...n/pfxj89d5 [Video]

(Not Vested)

[Boon]

Treasury China Trust: Governance Clouds Value

http://blogs.cfainstitute.org/marketinte...uds-value/

[freedom]

putting all governance noise aside, TCT still lacks an important exit strategy. It can't continue without a proper exit strategy.

to hold for long term, it is difficult as the NPI yield is too low to warrant current valuation. TCT will always trade huge discount to its NAV if it continues to hold its commercial properties. It will cause great dilution(placement or rights or both) to exist unit holders.

to sell? the market is very illiquid just like now. they tried to sell Central Plaza and Beijing Logistics Park, so far, nothing materialized.

So probably, there will always be chance to buy it cheap.

[yanziyang]

Can someone give an impact analysis on this announcement:
----------------------------------------------------
UPDATE ON THE PETITION BY KBC BANK
REGARDING THE WINDING UP OF TREASURY HOLDINGS

The Board of Treasury Holdings Real Estate Pte Ltd (“THRE”), trustee-manager (the “Trustee-Manager”) of Treasury China Trust (“TCT”), refers to the announcement of 29 August 2012 which mentioned that KBC Bank's petition to wind-up Treasury Holdings had been adjourned to 9 October 2012. Treasury Holdings was previously the indirect shareholder of THRE.

Treasury Holdings has informed the Board that on 5 October 2012 it formally advised the High Court of Ireland that it consented to the granting of the petition for its winding-up and that as a result Grant Thornton Ireland will be appointed as liquidator to Treasury Holdings (and certain related companies) on 9 October 2012.