Forterra Trust (formerly: Treasury China Trust)

[Boon]

Maybe you can show me how you derived the property value using DCF for Forterra Trust? From my limited DCF calculation, either the valuation of properties within the portfolio is overstated or the assumption is overly optimistic. of course, when valuation, you can always choose to ignore all the cost no matter how real it is. So what's the income to be used? The gross income or the income after operating and finance cost? Is a property with 100 million gross income witout finance cost and operating cost worth the same as a property with 100 million gross income but with 50 million finance cost and another 50 million operating cost?

Capital gain is only real when it is transacted. Before that, it is only a number anyone can assume. Valuation is different, under proper and reasonable model, it is as real as any price in the market; however, capital gain is not.

Then again, maybe you can show how the trust generated a profit within the last 12 months?

The Sale Consideration of approximately US$266.73 million (equivalent to RMB1.67 billion) is a discount of RMB143.0 million (approximately 7.9%) to the Valuation.

If this is not considered as a loss on disposal, I don't know what it is. You can use accounting to mask it, it is as real a loss on disposal as any other transaction.

Frankly, I don't understand why anyone would bother risking their money betting on Forterra? If you need exposure to China malls or property, go for CMA, it's a safer buy anytime of the year & it's share price is cheaper than Forterra & CMA pays a decent dividend too & is not loss making.

In real estate investment, returns are generated in two ways:

Return = Rental Income Return + Capital Return (which is the increase or decrease in the value of the property)

For Reits, most of the returns are in the forms of recurring Rental Income. (Yield of around 4% to 8%)

For an Opportunistic Private Equity Real Estate funds (PERE Opportunistic Fund) like Asia Dragon Fund I of ARA, most returns are in the forms of Capital Returns (Target Returns, IRR = around 20%)

For a Core Private Equity Real Estate funds (PERE Funds – Core) like Calpers Special Account with ARA in Asia Dragon Fund II (CIP) - returns are more evenly spread between Rental Income Returns and Capital Returns (Target Returns, IRR = around 8% to 10%).

To some investors, it doesn’t matter if the Returns are in the form of Rental Income or Capital Returns (or a combination of both), even though the risk/return profiles are different, as long as they get their expected target returns at the end of the day. Whereas to others investors, it does matter a great deal.

So far, the Returns profile of Forterra Trust has resembled more to that of a PERE Opportunistic Fund – Investors who expect its payoff profile to be like that of a Reit would be disappointed and IMO should look elsewhere. That said, with the completion and stabilization of the HQ, its Return/Payoff profile would shift closer to that of a Reit and/or a PERE-Core-Fund.

There are certainly values (in terms of Capital Returns) to be unlocked in this counter, in a similar way to the disposal of Central Plaza - it all boils down to how willing the New Controlling Management is, in unlocking and sharing them with unit-holders.

PS. Freedom, interesting discussion, Property Valuation itself is a big topic, I will see what I can do – will get back later

(vested)

[freedom]

If there is not going to be good rental return, why would there be a capital gain to start with? A fool's game?

From the rental return of Forterra, I greatly doubt that the capital gain can be realized. Of course, it may, just like Central Plaza.

On the other thought, as I mentioned much earlier in this thread, where has the cash gone no matter the rental cash flow or the capital gain cash flow? The answer is to the banks and the management and more development and other cost, but nowhere near the investors since 2011. Barring the early distributions, there has not been much accrued to the investors except paper valuation.

Forterra is much worse than any local REIT. Yes, the local REITs pay more than it earns, but at least it earns and pays distribution. In the foreseen future, Forterra is unlikely to distribute any to its investors, even if there is a capital gain like Central Plaza.

[cif5000]

On 14 March 2011, Forterra issued a convertible bond (“Forum CB”) with a principal amount of S$59.7 million to finance the Group’s acquisition of Huai Hai Mall and Central Park Mall.

On 31 January 2013, the bondholder completed the transfer of three principal amounts of S$10.0 million each to three different transferees while retaining the principal balance of S$29.7 million.

1. Forum gave Forterra the investment $$ only in Jan 2013, more than a year after the bond was issued.
2. Only $30m out of the $59.7m was transferred to Forterra. Is Forum still retaining the $29.7m presently?
3. Before they gave the $30m, there was a concern where Forum would require Forterra to redeem the bond. Had that happened, does it mean Forterra had to pay interest on money which had never been borrowed?

I'm totally confused.

[GreedandFear]

On 14 March 2011, Forterra issued a convertible bond (“Forum CB”) with a principal amount of S$59.7 million to finance the Group’s acquisition of Huai Hai Mall and Central Park Mall.

On 31 January 2013, the bondholder completed the transfer of three principal amounts of S$10.0 million each to three different transferees while retaining the principal balance of S$29.7 million.

1. Forum gave Forterra the investment $$ only in Jan 2013, more than a year after the bond was issued.
2. Only $30m out of the $59.7m was transferred to Forterra. Is Forum still retaining the $29.7m presently?
3. Before they gave the $30m, there was a concern where Forum would require Forterra to redeem the bond. Had that happened, does it mean Forterra had to pay interest on money which had never been borrowed?

I'm totally confused.

The entire convertible bond was issued to Forum in 2011. In 2013, Forum on-sold $30mm (in three lots of $10mm) to other investors.

[Boon]

If there is not going to be good rental return, why would there be a capital gain to start with? A fool's game?

I think the more appropriate term is "good Rental Growth"
Capital Value appreciation is driven by rental growth
The Unrealized Revaluation Gains achieved over the years had been driven by good Rental Growth over the same period.

From the rental return of Forterra, I greatly doubt that the capital gain can be realized. Of course, it may, just like Central Plaza.

You had doubted on Central Plaza as well but see what happened - it was beautifully executed, substantial Capital Gain had been unlocked with a big BONUS - Reversal of Deferred Tax Liability of about SGD 73 million.

Ownership of all assets of Forterra have been structured in a similar way to that of Central Plaza.

BLP is next.

On the other thought, as I mentioned much earlier in this thread, where has the cash gone no matter the rental cash flow or the capital gain cash flow? The answer is to the banks and the management and more development and other cost, but nowhere near the investors since 2011. Barring the early distributions, there has not been much accrued to the investors except paper valuation.

Agreed – but the unrealised valuation gain on paper could be realized as in the case of Central Plaza
Rental cash flow and capital gain cash flow generated could be used to
- Fund more developments or grow assets
- Pay distributions to unit-holders
- To finance more borrowing to grow assets
- To repay loans

It is the timing issue of growing and or sharing the pie.

Forterra is much worse than any local REIT. Yes, the local REITs pay more than it earns, but at least it earns and pays distribution. In the foreseen future, Forterra is unlikely to distribute any to its investors, even if there is a capital gain like Central Plaza.

As I have mentioned earlier, if one expects a BT such as Forterra to behave like a Reit in terms of its payoff profile – one would be greatly disappointed and should look elsewhere.

You could be right that Nanfung, like the previous Management would not share the pie. But then again - you could also be completely wrong and be surprised – only time will tell.

(vested)

[freedom]

1. I am not talking about the gain on revaluation, but the valuation itself. So it does not matter whether there is rental growth or not, firstly, it has established its valuation. So right back to original question. How is the valuation derived in the first place.

2. Too much speculation on capital gain. I shall drop the point. There is simply to point to argue on something which no one can know. Just have to agree to disagree.

3. Even the realized gain did not go to the investors at all. Still what the investors get is merely paper wealth. Maybe the investors are happy with paper wealth, who knows. So in the future, even if there is more capital gain realized, will it go to the investors?

- Fund more developments or grow assets -> higher paper wealth for investors, more real fees for management
- Pay distributions to unit-holders -> none since 2011.
- To finance more borrowing to grow assets -> higher paper wealth for investors, and more real fees for management
- To repay loans -> to the banks.

4. I am not expecting return like REITs, but at least earns like REITs. Sadly, Forterra can't even show that it can "earn" income from its operation other than disposal for its investors. If talking about capital gain, then right back to point 1 again. Still without the rental income, the valuation model matters greatly.

[Boon]

(please see my reply in brackets)

1. I am not talking about the gain on revaluation, but the valuation itself. So it does not matter whether there is rental growth or not, firstly, it has established its valuation. So right back to original question. How is the valuation derived in the first place.

(A: “how is the valuation derived in the first place？” - Are you asking this question in general or in specific to Forterra?
B : If in specific, do you have doubts on its accuracy or reliability
C : Assuming you are an expert in real estate valuation and your appraised value is 20% to 30% lower – so what do you make of the fact that, relative to your appraised "lower" capital value, Central Plaza, had been sold at a "higher" premium ?)

2. Too much speculation on capital gain. I shall drop the point. There is simply to point to argue on something which no one can know. Just have to agree to disagree.

( I understand your point - If you want to determine the true value and hence the real Capital Gain/loss of a real estate asset, the most accurate method is to sell the property and see how much it would fetch in the market – however, Accounting regulations called for “fair value” disclosure of investment properties – that's where the role of real estate valuer come in)

3. Even the realized gain did not go to the investors at all. Still what the investors get is merely paper wealth. Maybe the investors are happy with paper wealth, who knows. So in the future, even if there is more capital gain realized, will it go to the investors?
(the earlier distributions were from earlier realized gain)

- Fund more developments or grow assets -> higher paper wealth for investors, more real fees for management (so that more capital gains could be unlocked by selling more appreciated assets in the future )
- Pay distributions to unit-holders -> none since 2011 (does not implies none for the future)
- To finance more borrowing to grow assets -> higher paper wealth for investors, and more real fees for management (and more capital gains could be unlocked by selling more appreciated assets in the future )
- To repay loans -> to the banks

4. I am not expecting return like REITs, but at least earns like REITs. Sadly, Forterra can't even show that it can "earn" income from its operation other than disposal for its investors. If talking about capital gain, then right back to point 1 again. Still without the rental income, the valuation model matters greatly.
(You expect it to “earn like Reits but I expect it to earn more than Reits but in different ways – to earn like a PERE fund )

(Vested)

[constanty]

May I pick your brains fellow value investors? I like Forterra Trust a lot, it has new talented and experienced core holders with Nan Fung and Pacific Alliance, it benefits from a clear margin of safety (cash, current NAV) and also upside potential ceteris paribus; as the HQ is completed/refurbished/let/ its NAV should gradually show an increase towards S$5.50 (lets assume S$1 impact) So even if the current discount does not reduce,within 12 months we should see a increase in the share price.

[young_investor]

Personally I think the biggest risk to Forterra is refinancing and interest rates.. If China were to experience a financial crisis, there is a good chance a rights issue would have to be undertaken to shore up the balance sheet.. not to mention asset value impairment..

[Boon]

Maybe you can show me how you derived the property value using DCF for Forterra Trust? From my limited DCF calculation, either the valuation of properties within the portfolio is overstated or the assumption is overly optimistic. of course, when valuation, you can always choose to ignore all the cost no matter how real it is. So what's the income to be used? The gross income or the income after operating and finance cost? Is a property with 100 million gross income witout finance cost and operating cost worth the same as a property with 100 million gross income but with 50 million finance cost and another 50 million operating cost?

Capital gain is only real when it is transacted. Before that, it is only a number anyone can assume. Valuation is different, under proper and reasonable model, it is as real as any price in the market; however, capital gain is not.

(please see my replies in brackets)

Maybe you can show me how you derived the property value using DCF for Forterra Trust? From my limited DCF calculation, either the valuation of properties within the portfolio is overstated or the assumption is overly optimistic. of course, when valuation, you can always choose to ignore all the cost no matter how real it is. So what's the income to be used? The gross income or the income after operating and finance cost? Is a property with 100 million gross income witout finance cost and operating cost worth the same as a property with 100 million gross income but with 50 million finance cost and another 50 million operating cost?

(The Capital Value of each property was arrived at using Property Valuation methods by Licensed Property Valuers or Appraisers. These Capital Values "should" reflect Fair Market Value in compliance with accounting disclosure standards.

The value of real estate property should be the present value of the expected cash flows on the property. Cash flow should be on “unlevered or ungeared basis” (Gross income less "essential" operating expenses to run it, excluding financing costs. In essence, value is appraised based on the ability of the property to produce income. The ability of a property to produce income is independent of the “gearing or financing” of the owner who owns it – no doubt, it would affect the owner’s investment return)

Capital gain is only real when it is transacted. Before that, it is only a number anyone can assume. Valuation is different, under proper and reasonable model, it is as real as any price in the market; however, capital gain is not.

(True - Capital Gain is only real when it has been transacted.
True, under proper and reasonable model in property valuation, value should reflect as real as any price in the market – this is the basis on which property valuation is working on – call this “hypothetical real price”

If you believe in “hypothetical real price” as if the price is real, it would be contradictory or illogical not to believe in “hypothetical capital gain”,
After all, “hypothetical capital gain” = “hypothetical real price” – Cost paid to acquire the property (which is real) – transaction cost)

(vested)