Forterra Trust (formerly: Treasury China Trust)

[Boon]

One question, in the P&L there is a line in Income Tax of Deferred Tax Benefits S$60,275, a positive write-back. Can you explain what might have caused this (reduced NAV value implying less provision for tax on gains..?)

(vested)

Hi PekingDuck,

Yes, you are right - positive right back of DTL.

Look at page 9 of the 2Q results under DTL:

Deferred tax liabilities
The deferred tax liabilities in respect of the change in fair value of investment properties
are accounted for at the prevailing PRC corporate income tax rate of 25%. This is based on
the change in the carrying value of investment properties against their tax base, including
the change in fair value and depreciation charge made in accordance with the PRC tax
rules during the period.

Based on 01-Jan-2014 Valuation, provision for DTL of SGD 393.601 million has been allowed for.
Based on 30-June-2014 Valuation, provision for DTL of SGD 321.434 million has been allowed for.

393.601 – 321.434 = 72.167 = 58.878 + 13.289 = 58.618 + 0.260 + 13.289 = 60.275 (2Q) – 1.657 (1Q) + 0.260 + 13.289

(vested)

[PekingDuck]

Thanks Boon, for confirming.
I have to say I don't understand or agree with comments from FT relating to the significant downgrade of the portfolio's carried values (-11.6% YTD). They appear to be blaming 'market trends/cautious retailing environment/softening macro environment in China (!)' for this. Capitaretail China Trust (similar sized S$2.1bn portfolio) on 25/7 gave a completely opposite view on Chinese retailing for this year:

Increased shopper traffic and tenant sales suggest that recent concerns over the impact of e-commerce in China are overblown, CRCT chief executive Tony Tan said yesterday.
CRCT's portfolio enjoyed a 5.5 per cent year-on-year increase in shopper traffic in the second quarter and a 13.6 per cent growth in tenant sales. Rental reversion hit a robust 24.9 per cent in the second quarter, up from 23 per cent in the first quarter and 17.3 per cent in the second quarter of last year.
The ground sentiment in China, according to Mr Tan, is not as gloomy as what some industry players have painted - some shopping mall operators are consolidating while others are still expanding or merely relocating. A severe oversupply situation is not happening in places where CRCT's malls are located, he said.

The latter comment is even more pertinent to FT as The Place is in a city with few comepting malls. CRCT's portfolio actually rose by 3.7% in the 6 months to 30/6/14..!

Begs the question of significant overvaluation of the properties in 2013 to do the deal at an inflated price? Significant question marks surrounding the feees charged on this inflated AUM as a result.

(vested)

[Boon]

Closer Look at Write Down in Value of Investment Properties:

Huai Hai Mall (HHM) : Shanghai
No change in valuation.

Forterra House (FH) : Shanghai
CV (carrying value) = RMB 658 million (30-Jun-2014) vs RMB 720 million (31-Dec-2013)
Write Down = RMB 62 million ( - 8.6% )

Gross Rental (RMB million)
FY2012 = 35.0
FY2013 = 35.3
1Q2014 = 9.9 (=39.6 if annualized)
2Q2014 = 10.8 (= 43.2 if annualized)

Gross yield (before) = 43.2 / 720 = 6.0%
Gross Yield (after) = 43.2 / 658 = 6.6%

The Place (TP) - Shanghai
CV = RMB 7,707 million (30-Jun-2014) vs RMB 8,134 million (31-Dec-2013)
Write Down = RMB 427 million ( - 5.2 % )

Gross Rental – existing office portion of TP1 - (RMB million)
3Q2014 = 49.5
4Q2013 = 48.1
1Q2014 = 47.8
2Q2014 = 49.1

The Place is expected to realize an annualized gross revenue in EXCESS of RMB500 million.

Gross yield = 500 / 7,707 = 6.5%
Gross yield = 550 / 7,707 = 7.1%
Gross yield = 600 / 7,707 = 7.8%

Central Park Mall (CPM) - Qingdao
CV = RMB 1,527 million (30-Jun-2014) vs RMB 2,003 million (31-Dec-2013)
Write Down = RMB 476 million ( - 23.8 % )

Phase I : CV (after)= 520,000,000 / 66,160 = RMB 7,860 per sqm
Phase II – IV (Land) : CV (after) = 1,007,000,000 / 250,774 = RMB 4,105 per sqm of GFA (Land Only)

Comments:
1) HHM: No change in CV – location of this asset is superb.
2) FH: Gross rental is trending up but valuation is down 8.6% ?????????? -
3) TP : Gross Yield of 6.5 %, based on Gross Revenue of RMB 500 million
4) CPM: Massive write down – but I thought the extension of subway line to the site would enhance its value ??????????? – have to dig deeper into this.
5) Overall, write down in value of Shanghai assets are small in % terms ( – 8.3% ), rental should hold up pretty well to support values, IMO.

(vested)

[PekingDuck]

Thanks for this analysis Boon, very useful. I'll bring this up on my call tmrw.

[Boon]

Zooming in on write down in value of Central Park Mall (CPM) in Qingdao:

Central Park Mall (CPM) - Qingdao
CV = RMB 1,527 million (30-Jun-2014) vs RMB 2,003 million (31-Dec-2013)
Write Down = RMB 476 million ( - 23.8 % )

Consists of :

(Phase I) : Existing Mall
CV = RMB 520 million (30-Jun-2014) vs RMB 624 million (31-Dec-2013)
Write Down = RMB 104 million ( - 16.7 % )

CV (before) = 624,000,000 / 66,160 = RMB 9,432 per sqm
CV (after) = 520,000,000 / 66,160 = RMB 7,860 per sqm

(Phase II – IV) : Land Bank
CV = RMB 1,007 million (30-Jun-2014) vs RMB 1,379 million (31-Dec-2013)
Write Down = RMB 372 million (- 27.0 %)

CV (before) = 1,379,000,000 / 250,774 = RMB 5,499 per sqm og GFA (Land Only)
CV (after) = 1,007,000,000 / 250,774 = RMB 4,016 per sqm of GFA (Land Only)

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From the 30-August-2013 announcement:

http://infopub.sgx.com/Apps?A=COW_CorpAn...b2745e2027

Restructure and Settlement

“The origins of the restructure of this investment lie in the decision by the Qingdao government in early 2013 to construct a new rail line that will intersect Central Park Mall between Squares 1 and 2 with a metro station planned approximately 150m to the east. This has the potential to be a favorable outcome for the asset and the Trust's investment, bringing metro transport to its doorstep. This new rail line, advised by the Qingdao government to be complete in 2016, will bring advantage to the northern end of the Central Park Mall development, whilst the southern portion retains the highly attractive element of its proximity to the beach.

As a consequence of this favorable decision by the local government, construction of the metro line will commence later this year which will involve the closure of the major road thoroughfare providing the primary vehicular access to Square 1. Simultaneously with the metro line construction, the underground pedestrian access between Squares 1 and 2 will be constructed. These events will impact the trading capacity of Square 1 and therefore TRIO has requested Forterra to review the terms of the Rent Guarantee……………………………..”

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With the closure of main road/access during rail line construction, the trading capacity hence rental income would be greatly affected in short to medium term – if this was the basis for the write down in asset value to reflect the short to medium term reality of Phase 1 – it sounds reasonable.

in the LONG run, asset value would be enhanced with the completion of the new rail line - The write down on value of the land bank (Phase II – IV) is debatable, from valuation perspective, IMO.

That said, “under-valuation” is not a bad thing for unit-holders, from the perspective of cost saving in Trustee Manager’s Fees - which is tied to AUM.

(vested)

[PekingDuck]

Boon, what are your thoughts on the swap facility just announced? Appears to be an interest rate hedge on the outstanding loans to be re-financed next year. Any idea who the counterparty is...(another part of the Nan Fung group?) and what the swap terms might be.
Peking

[GreedandFear]

Boon, what are your thoughts on the swap facility just announced? Appears to be an interest rate hedge on the outstanding loans to be re-financed next year. Any idea who the counterparty is...(another part of the Nan Fung group?) and what the swap terms might be.
Peking

Based on the language in the announcement, it seems that Forterra has entered into one or more interest rate swap facilities (presumably paying fixed rate and receiving LiBOR) with one or more bank counter parties for an aggregate SGD notional amount of 676mm. As part of their credit risk management, these banks (or one bank) have inserted a termination clause in the swaps should Nan Fung cease to own the Trustee Manager and/or 25% of Forterra common shares. In other words, the banks take comfort from having Nan Fung in there and want to get out should Nan Fung exit. Upon a termination event, the mark to market of the swap would have to be paid by either Forterra or the banks.

[PekingDuck]

Thanks G&F. The S$676m covers all current loans plus the convertible. Why would they wish to hedge their interest rate risk on loans which are already at a fixed rate though (i.e. the recent re-fi of the loans for Huia Hai Mall). I can understand wanting to lock in some protection on the large tranche coming up for re-financing next year. And the cost to FT of this swap - must be deemed worthwhile but could also be an expensive waste of money.

[Boon]

1) I have no idea who the counter parties to the interest rate swap (IRS) facility are.
2) I don’t think the newly re-financed HHM loans are at fixed rate – still tied to LIBOR and PBOC.
3) Current total interest bearing borrowings, excluding Forum CB, is at about SGD 713 million – all are at variable rates I think.
4) Refer to page 129 to 132 of AR2013 for Group policy on interest rate risk management – Notional Principal Amount of IRS in 2013 was USD 135 million.
5) At SGD 676 million, it seems like the Management wants to lock in more protection – but as PekingDuck has pointed out – at what cost ? How to strike an appropriate balance?

(vested)

[PekingDuck]

Further details on this IRS. I have copied in replies from FT received this morning. No mention of costs for the facility but not likely to be as large as I first thought, given principal amount and US rates.

Our current bank borrowings are either linked to LIBOR (offshore loan denominated in USD) or PBOC rate (onshore loan denominated in RMB). The IRS is entered to minimize the Group’s exposure to adverse interest rate movements on its US$ denominated floating rate loans.
To minimize the Group’s exposure to adverse interest rate movements on its US$ denominated floating rate loans, the Group has entered into an interest rate swap for the notional principal amount of US$100m for 3 years. The swap is arranged at overall loan portfolio level and not designated to any specific loans. In fact, we have similar interest rate swap arrangement in the past, and the last one got expired in January this year.
The notional amount of the new IRS is US$100m. The S$676m is related to the existing loans which have cross default terms in their particular loan agreements. That said, in case we cannot meet the payment obligation of the IRS, it will trigger the cross default terms of other few existing loans amounted to be S$676m and the banks can call for early repayment.
The counterparty is a reputable financial institution in Singapore.
Your previous email was relayed to Executive Committee (Exco), including Mr Nelson Tang. He is happy to discuss more with you next week.