Forecasts amended for HQ delays
Forterra Trust, (LG2U.SI) has provided an update on the progress of construction of The HQ, its mixed retail and office scheme in Shanghai. This is Forterra Trust’s most important asset, as its value and potential revenue contribution outweighs the rest of the portfolio combined. The update confirmed that delayed development timing will shift rental contribution and earnings recovery into FY15. This was not unexpected as the reasons, if not the precise timing, had been set out in the Q313 results. NAV is not materially affected and the current substantial discount to the value of the underlying portfolio remains the primary attraction. We have adjusted our forecasts ahead of the FY13 results due at the end of this month.
Short term pivots on The HQ in Shanghai
Forterra’s portfolio comprises The HQ development – the focus of group finances – two rented office and logistics assets and two part-let properties held for future development. Construction, pre-letting and launch of The HQ are key and other development is likely to stay on hold until it is launched and rents stabilised. HQ pre-lets were unchanged according to the last update in Q313, at just over 50%. Of that, two-thirds is written confirmation of interest including leases under detailed negotiation and the rest is work in progress.
Sensitivities: Related to delivery of new development
Any delay in letting and launching The HQ is the most material source of sensitivity for forecasts, particularly construction timing and letting terms in a slower retail market. The effect of reported construction delays is in our forecasts. Nan Fung purchased 29.98% of Forterra, 100% of both the trustee and property managers in August. This removed uncertainty over ownership, but exits by key directors leave some uncertainty over strategy until the new team outlines its plans.
Valuation: NAV discount reflects development risk
The uncertainty inherent in completion of a major new asset contributes to a 60% discount to Q313 NAV/unit of S$4.79. Forterra has addressed concerns over finances and ownership, but timely launch of The HQ is key to the investment case. It is by far the largest component of the portfolio, and could potentially drive rental growth, stabilise finances and, in due course, fund resumed distributions.
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