SINGAPORE (May 29): Phillip Capital is keeping its “buy” call on EC World REIT (ECW REIT) with a higher target price of 87.2 cents from 85 cents previously.
This came on the back of the REIT announcing that its 1Q19 earnings have increased by 2.2% y-o-y to 1.501 cents, while distribution to unitholders saw a 3.1% y-o-y increase to $11.9 million.
Gross revenue came in 0.3% lower y-o-y at $23.9 million, bringing net property income (NPI) to $21.2 million, 1.4% lower y-o-y. These were mainly due to exchange rate differences. In RMB terms, the gross revenue and NPI were 3.0% and 1.9% higher respectively compared to same quarter last year.
See: EC World REIT's positive 1Q earnings and accretive acquisition of Fuzhou E-Commerce keep it at 'buy'
The REIT’s weighted average lease expiry (WALE) by gross rental income (GRI) has extended from 1.8 years to 4.7 years due to extension of master leases. And 99.3% of shareholders have voted in favour of accepting the master leases on Chongxian Port, Beigang Stage 1 and Fuheng warehouse at the extraordinary general meeting (EGM) held on Apr 22.
Moreover, the REIT has the right of first refusal (ROFR) to acquire a yield-accretive asset with 5+5 year master leases. On a pro-forma basis, the 6.4% acquisition yield on Fuzhou e-commerce will lift NPI and DPU by 16.4% and 1.6% respectively.
In a May 14 report, Phillip Securities Research team says, “. However, the acquisition will push gearing from 31.3% to 41.1%, which is slightly above the 40% gearing targeted by management.”
The asset will be leased out to two master leases on a 5+5 year term, with built-in rent escalation of 2.25% per annum. The REIT is expected to complete the acquisition in 3Q19.
“Assuming full funding by debt, we expect FY19e/FY20e DPU to increase by 0.6%./6.17%,” says Phillip Securities.
On the other hand, the REIT will see 100% of debt maturing in July this year. The management has shared that they are in the final stages of concluding the refinancing of all loans.
“Refinancing this batch of loans will once again lead to a lumpy debt maturity profile,” says Phillip Securities.
On the outlook, the extended WALE and the committed portfolio occupancy of 99.97% provides much income visibility, which Phillip Securities believe that is important amid current global geopolitical tensions and economic uncertainty.
As at 11.30am, units in ECW REIT are trading at 79 cents with a FY19 distribution yield of 8.0%.
