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There’s No Turnaround in Sight for Forterra Trust in Its Latest Quarterly Results

Editor’s note: This article previously stated that Forterra owns six office and retail properties in Shanghai and Qingdao. This statement was made in error, and Forterra owns four, not six properties. The Motley Fool apologises and regrets the error.

Forterra Trust (SGX: LG2U) is a business trust that focuses on office and retail properties in China. According to the trust’s earnings presentation, it currently owns 4 properties in Shanghai and Qingdao with two of them currently still under development.

The trust announced its third-quarter results on 31 October 2014 after the market closed. So, let’s take a look at how it fared.

Faced with challenges on many fronts

For the quarter ended 30 September 2014, quarterly gross revenue had tumbled 29.5% year-on-year to S$12.9 million due to three critical factors:

1. Gross revenue from the trust’s Central Park Mall fell from RMB 17.7 million to RMB 5.6 million after the property’s rent guarantee was terminated in August 2013.

2. The trust had sold Beijing Logistics Park in April 2014, leading to an absence in revenue contribution from the asset in the third quarter. For some perspective, Beijing Logistics Park contributed RMB7.6 million in gross revenue in the third quarter of 2013.

3. There was zero occupancy at Huai Hai Mall due to a repositioning programme.

Consequently, Forterra Trust ended the quarter with a 54.4% plunge in its net property income to S$5.27 million. It is important for investors to note that despite a decrease in overall gross revenue, the trust’s “other property operating expenses” still increased 23.26% to S$4.9 million. This could be a sign of poor control of expenses on the part of Forterra Trust’s Manager.

With the slump in its top-line, the trust’s bottom-line also struggled as losses widened from S$2.34 million a year ago to S$19.7 million.  Besides lower revenue, the poor showing can also be attributed to the following reasons:

1. A reduction in “other gains” from S$4.2 to S$0.2 million (Forterra Trust’s management team did not highlight what this line item in the income statement is about).

2. Foreign exchange-related gains of S$955,000 in the third quarter of 2013 had become a loss of S$6.5 million in the third quarter this year.

The trust’s balance sheet had also weakened slightly. As at 30 September 2014, Forterra Trust had total cash holdings equivalent to S$104.8 million, a slight decrease from its cash hoard of S$108.2 million as at 31 December 2013. Its total borrowings meanwhile, rose slightly from S$823 million to S$825.1 million in the same timeframe.

Investors might also want to note that 82.3% of the trust’s S$603.8 million in borrowings for stabilized and transitional assets would also be coming due in 2015. If interest rates turn higher when the trust needs to refinance its borrowings, additional difficulties may be heaped onto the trust given the higher interest costs.

Outlook and valuation

With its malls all located in China, it would be vital to look at the macro-economic outlook there. As the company mentioned, China’s gross domestic product (GDP) growth and consumer price index (CPI) inflation had both been low. The third quarter of 2104 saw China’s GDP growth slow down to 7.3% year-on-year, the lowest it’s been since the first quarter of 2009. In the same quarter, CPI Inflation in China only averaged 2.0% year-on-year “as a result of relatively weak domestic demand.” If both trends (declining growth rates in CPI and GDP) don’t reverse, Forterra trust would be swimming against the tide.

To compound Forterra Trust’s potential difficulties, the trust is also facing declining occupancy rates for its assets and that would be an issue that really needs fixing.

Forterra Trust closed at S$1.60 per share on 31 October 2014 and ended the quarter with a net asset value of S$3.93 per share, down from S$4.68 on 31 December 2013. At its closing price last Friday, Forterra Trust is valued at just 0.4 times its book value and does not have any dividend yield to speak of as it has not been paying a dividend for a while.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.