Moving Forward with its Plans
Intrinsic Value S$2.39
Prev Closing S$2.09
Following Nan Fung Group’s acquisition of 100% equity in Forterra Real Estate Pte. Ltd and Treasury Holdings Property Management Co., Ltd and 29.98% in Forterra Trust (Forterra) on 29 August 2013, the company announced several positive developments.
Forum Asian Realty Income III L.P (Forum) elected not to redeem its senior convertible bonds which shows their confidence in the new management. Forterra restructured its Qingdao investment and added new spaces in Huai Hai Mall. We expect the trust to begin developing these assets in 2014. Work for the retail podium of The HQ is progressing as per scheduled while The HQ Extension experienced some delay. We now expect the latter to be ready in mid-2014.
We adjusted our forecasts for 2014 due to The HQ Extension delay and the absence of rental guarantee for the Central Park Mall. Maintain Invest with an intrinsic value of S$2.39.
Results Summary: Revenue declined S$6.2m YoY to S$18.2m as a result of absence of contribution from Central Plaza (which was sold) and the retail segment of the existing HQ (which is undergoing revamp). The Forterra House, Beijing Logistic Park and Central Park Mall generated higher gross rental income. Property operating expenses fell 27.2% YoY to S$6.7m mainly due to the decline in gross revenue. There was a S$4.2m one-off gain this quarter thanks to the restructuring of the Qingdao investment. Aggregate borrowings and debt securities fell S$117m to S$809m mainly due to the sale of Central Plaza but slightly offset by higher borrowings for the development of The HQ Extension. Total debt/asset is around 30.2%.
Committed occupancy for the stabilized assets are more than 92% and 10 lease were renewed this quarter with a 5.88% increase over the expiring leases. We believe the increase is lower this quarter as most of them are from The HQ where the retail podium is undergoing some refurbishment now.
The HQ retail podium has secured pre-committed leases of more than 50% and we expect take up rate to speed up over the next six months.
Company Update: Following the change in control of Forterra, Forum Asian Realty Income III L.P (Forum) elected not to exercise its right to redeem its senior convertible bonds. We see this as evidence of Forum’s confidence in the new management. Nan Fung is an established private developer in Hong Kong with more than HK$71bn equity as of March 2013.
Forterra restructured its Qingdao investment with TRIO and the latter will exchange 1) the deferred payment of RMB78.5m for the acquisition of Central Park Mall and the RMB36m convertible notes issued by Forterra for 1) the rent guarantee for the Central Park Mall and 2) a single payment of RMB54.7m by Forterra. The entire restructuring leads to an outflow saving of approximately RMB18.6m. This arrangement helps to resolve the residual payment between the two parties and set the stage for the construction of phase two to four of Central Park Mall.
Thirdly, Forterra purchased a head lease over an additional 3,404sqm of retail space at Huai Hai Mall, which forms the levels four and five of the existing property. The enlarged property will allow the company to execute asset refurbishment projects and upgrade the asset’s rental income. The existing leases will be terminated by the end of 1Q 2014 and we expect the refurbishment plans to take place after that.
Lastly, the refurbishment of The HQ retail podium is progressing as scheduled and is currently substantially completed. We expect tenants to move in at the beginning of next year. Works of The HQ Extension has reached level 9, which is somewhat slower than expected. Forterra attributed the delay to record high temperatures which resulted in the cessation of all on-site construction works during certain daytime hours. We now expect the site to be completed sometime in mid-2014.
Forecast and Valuation: We are adjusting our forecasts for 2014 due to the delay in The HQ Extension and absence of rental guarantee for the Central Park Mall. That said, we continue to be optimistic in the company’s 2014 outlook mainly due to the contribution from the revamped HQ retail podium and The HQ Extension. The entry of Nan Fung will boost investor’s confidence in Forterra and bring about expansion plans and new capital, if necessary. Maintain Invest with an intrinsic value of S$2.39.
Publish date: 30/10/13