DBS Group Research has noticed that EC World REIT demonstrated portfolio resilience by reporting improving earnings in 1QFY2022 ended March and stable occupancy rates.
See: EC World REIT reports 9.7% lower DPU of 1.383 cents in 1QFY2022
However, there are some concerns on the REIT as it has on Mar 9 entered into an expropriation and compensation agreement with the Chinese government in relation to the compulsory expropriation notice it received on Jan 6 on Fu Zhuo Industrial.
See: EC World REIT updates on compulsory expropriation of Fu Zhou Industrial
Fu Zhuo Industrial is a port property owned by Hangzhou Fu Zhuo Industrial, which in turn is wholly-owned by EC World REIT.
The property’s expropriation is for the development of the Grand Canal National Cultural Park in Hangzhou.
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As part of the terms of the expropriation agreement, the Chinese authorities will compensate the REIT a package amounting to RMB 108.5 million ($23.4 million), representing 92.8% of the valuation of Fu Zhuo Industrial as at Dec 31, 2020, and about 26.8% higher than the REIT’s initial purchase consideration.
However, due to the compulsory expropriation, income contribution from this property has ceased from Apr 1. Although built-in rental escalations from its master leases will more than offset the absence of income, EC World REIT is liable for a one-off pre- termination compensation of about $4.1 million to its tenant.
Analysts Dale Lai and Derek Tan say: “In our view, EC World REIT’s compensation to the tenant for pre-termination seems high and the compensation from the Chinese authorities does not seem adequate to account for this. The about $4.1 million will be an unwelcome surprise to our projections for EC World REIT, and will hit its earnings in FY2022.”
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With that, the research house is keeping its “buy” call on EC World REIT but with a lower target price of 70 cents from 85 cents previously.
Despite the unwelcome surprise from Fu Zhuo Industrial, the analysts expect earnings to remain robust and make up for the absence of contribution from Fu Zhuo Industrial, as the REIT’s portfolio caters to the fast-growing logistics and e-commerce sector – 50% of assets are e-commerce logistics and 25% each in port logistics and specialised logistics.
While earnings growth is expected, the analysts also foresee organic growth in the REIT’s portfolio, underpinned by master leases. With built-in rental escalations ranging from an average of 1.0% to 2.5% for its master leases, this ensures organic growth to the REIT’s earnings.
Moreover, its multi-tenanted assets that cater to the fast-growing logistics industry also have the potential deliver revenue growth.
“Despite the downward revision in our projections, EC World REIT’s FY2022 forward yield remains attractive at about 9.2% at its current share price,” says the analysts.
“Having already accounted for downside risks, we believe ECWREIT still remains attractive on a valuation perspective,” add the analysts. Some of the downside risks include economic uncertainties caused by prolonged lockdowns and downward revision in China’s GDP growth.
Units in EC World REIT closed on May 18 at 62 cents or 0.7x FY2022 NAV with a distribution yield of 9.2%.
Photo: The Edge Singapore/ Albert Chua
