Forterra Trust (formerly: Treasury China Trust)

[Nick]

Central Plaza Refinance Completion of USD120 million Multi-Currency Loan Facility

http://info.sgx.com/webcoranncatth.nsf/V...8002EAF85/$file/Central_Plaza_Refinance_final_17_01_11.pdf?openelement

1) TCT has successfully refinanced all of its loans (and raising new ones for its development projects) over the past year. The earliest loan maturity will be on December 2012.

2) TCT cost of debt will be reduced from 7.2% in 2009 to 3.91% in 2011. The sharp drop in interest expense will increase the distributable income and its net profit.

TCT unit price dropped slightly to $1.88 today. I think it will take at least 2 years (the 2 current development projects will be ready) in order to judge the merits of its business model.

(Not Vested)

[mrEngineer]

The most interesting thing about this trust is that it is run by ang mohs. Haha

[freedom]

something interesting,

net property income 10,525
trust manager's fee 2,998
administritive expense 3,221

nearly 30% of trust manager's fee?

30+% of administrive fee?

financial cost 9,047

almost equals to the net property income.

what's left....

it is more like a financial company rather than a property trust... all gain arose from financial income, exchange gain...

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annualized net property income around 45 mil, asset value almost 2 billion, return 2.25%, given that half their asset not generating income, so return 5%.

commercial property lease in China should be 40 years, so what is the return exactly?

[Nick]

TCT doesn't acquire fully developed and refurbished assets from third parties. Instead, it seeks to acquire under-performing assets in key locations. It will then invest $$$ to refurbish the asset to be comparable with its peers in the area. As such, the bulk of these asset lease were signed prior the refurbishment hence the low income ie the rental rates are significantly below market rates. This is why in the recent lease extensions, the rental rates underwent significant increase to match the local rates - http://www.treasurychinatrust.com/Pics/T...esults.pdf (pg 2). By 2012/13, all of the previous rental leases will expire and the reversion back to normal rates will cause a huge increase in its revenue. This coupled with the completion of the Beijing Logistic Park and the City Centre Extension will double its revenue in 2013.

With the recent loan refinancing, interest expenses will drop from 7.22% to 3.91% in 2011. Chinese banks have a better appreciation of TCT assets than those of the West !

The management fees is the bit that deters me from initiating a position. I am not certain whether this is a fixed cost (based on asset value) and wouldn't be impacted when revenue increases in subsequent years.

(Not Vested)

[mrEngineer]

I think there is still an assumption that e rentals will get renewed effectively with higher rates. It is a newly listed and has yet to proven itself consistently. Even e old birds are not successful in the asset enhancements all the time. In times when property markets are being scrutinized and interest costs are expected to rise, investing in TCT sounds risky. Just my 2 cents.

One thing I learn about smaller non-volatile trading S-chips is to never buy into them when they are not extremely cheap because they almost never recover to peak price fast enough. Divested in Sinotel since last year and until now slightly above half of purchase price.

[freedom]

TCT doesn't acquire fully developed and refurbished assets from third parties. Instead, it seeks to acquire under-performing assets in key locations. It will then invest $$$ to refurbish the asset to be comparable with its peers in the area. As such, the bulk of these asset lease were signed prior the refurbishment hence the low income ie the rental rates are significantly below market rates. This is why in the recent lease extensions, the rental rates underwent significant increase to match the local rates - http://www.treasurychinatrust.com/Pics/T...esults.pdf (pg 2). By 2012/13, all of the previous rental leases will expire and the reversion back to normal rates will cause a huge increase in its revenue. This coupled with the completion of the Beijing Logistic Park and the City Centre Extension will double its revenue in 2013.

With the recent loan refinancing, interest expenses will drop from 7.22% to 3.91% in 2011. Chinese banks have a better appreciation of TCT assets than those of the West !

The management fees is the bit that deters me from initiating a position. I am not certain whether this is a fixed cost (based on asset value) and wouldn't be impacted when revenue increases in subsequent years.

(Not Vested)

there is no income from the property at all. read the detail from their financial statement.

all income were from the re-valuation of loans(not the property, loan). or any other form of exchange gains.

it looks to me like the shareholders get the asset and the managements get the cash flow.

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I would rather invest in CapitaMall Asia.

at least CapitaMall Asia proved its track record with CapitaMall in Singapore and CapitaRetail China in China.

[psslo]

The management fees is the bit that deters me from initiating a position. I am not certain whether this is a fixed cost (based on asset value) and wouldn't be impacted when revenue increases in subsequent years.

(Not Vested)

From an article in the Edge on Jun28 last year, Richard David (CEO) was quoted as saying that the trustee manager's fee structure is tied to the portfolio's rental income (instead of NAV previously when listed in UK which meant huge fees whenever NAV was revalued upwards & RMB appreciated against the Sterling).

Fyi.

[Nick]

TCT doesn't acquire fully developed and refurbished assets from third parties. Instead, it seeks to acquire under-performing assets in key locations. It will then invest $$$ to refurbish the asset to be comparable with its peers in the area. As such, the bulk of these asset lease were signed prior the refurbishment hence the low income ie the rental rates are significantly below market rates. This is why in the recent lease extensions, the rental rates underwent significant increase to match the local rates - http://www.treasurychinatrust.com/Pics/T...esults.pdf (pg 2). By 2012/13, all of the previous rental leases will expire and the reversion back to normal rates will cause a huge increase in its revenue. This coupled with the completion of the Beijing Logistic Park and the City Centre Extension will double its revenue in 2013.

With the recent loan refinancing, interest expenses will drop from 7.22% to 3.91% in 2011. Chinese banks have a better appreciation of TCT assets than those of the West !

The management fees is the bit that deters me from initiating a position. I am not certain whether this is a fixed cost (based on asset value) and wouldn't be impacted when revenue increases in subsequent years.

(Not Vested)

there is no income from the property at all. read the detail from their financial statement.

all income were from the re-valuation of loans(not the property, loan). or any other form of exchange gains.

it looks to me like the shareholders get the asset and the managements get the cash flow.

---

I would rather invest in CapitaMall Asia.

at least CapitaMall Asia proved its track record with CapitaMall in Singapore and CapitaRetail China in China.

The 3 completed properties are generating revenue which doesn't reflect the current market rates. When the lease (signed pre 2008) expires over the next 2 years, we should see a huge increase in revenue being generated from this assets. This will be when it turns profitable. At the moment, the 3 assets are leased significantly below market rates.

At the moment, the distributions are being funded solely by the profits made from the sale of a previous development project.

The property development trust is a complicating business model. My interest in it is purely academic - I just want to see how it will perform and whether is such a model truly possible. It will be curious to see whether will TCT retain the logistic park after development or will it sell it.

[freedom]

assume the 3 properties can generate double NPI. It will be 20 million.

minus current trust management fee, administritive fee and finance cost, there won't be much left. I am sure that with more income, the trust manager will ask for more fee, so will be administritive fee.

if divestment gain is paid out as distribution, how could the business sustain? pure from shareholders and more debt? for 3Q2010, acturally divestment gain is also used to pay trust manager, administritive fee and finance cost.

and be realistic, gain from financial derivatives and exchange is difficult to be considered as recuring profit if it is not a financial firm.

[Nick]

assume the 3 properties can generate double NPI. It will be 20 million.

minus current trust management fee, administritive fee and finance cost, there won't be much left. I am sure that with more income, the trust manager will ask for more fee, so will be administritive fee.

if divestment gain is paid out as distribution, how could the business sustain? pure from shareholders and more debt? for 3Q2010, acturally divestment gain is also used to pay trust manager, administritive fee and finance cost.

and be realistic, gain from financial derivatives and exchange is difficult to be considered as recuring profit if it is not a financial firm.

TCT did provide a forecast for their 2011 earnings a few weeks ago - it expects NPI of $46 million - from its 3 fully developed properties. Interest expense should be around $25-30 million. In other words, 2/3 of the proposed $24 million distributions will be funded from their operating activities in 2011.

I expect this ratio to improve in 2012 with the possibility of dividend increment in 2013. Of course, this assumes that the Chinese retail and office property market remains strong over the next few years and that it can develop its assets without any hiccup.