SINGAPORE (Oct 24): RHB Research likes EC World REIT for its strategic market positioning and favourable logistics outlook, post a recent visit to the REIT’s assets in Hangzhou that mainly cater to the e-commerce, logistics and supply-chain segments.
In an unrated report on Wednesday, analyst Vijay Natarajan highlights that the majority (80%) of EC World REIT’s tenants operate to service these sectors, which have been growing at a fast pace. The REIT’s seven assets in China – six in Hangzhou and one in Wuhan – are valued at $1.4 billion.
In particular, Natarajan notes that three of these assets are on master leases, while almost all leases have rent escalations ranging 1% and 12%, thus providing EC World REIT with organic growth.
EC World REIT’s low gearing of 29.5% is another plus point as it implies debt headroom of about $300 million for acquisitions – with YCH Group’s logistics assets and e-commerce properties in Fuzhou being potential targets, in the analyst’s view.
REIT sponsor Forchn Holdings Group owns the manager of the REIT as well as a 43.9% stake in the REIT itself. Forchn Holdings has an agreement with YCH Group, which allows EC World to buy 13 logistics properties in China, India and Southeast Asia from the Singapore-based supply chain firm.
Going forward, Natarajan also believes Forchn’s experienced board members and management and their credentials lends confidence to EC World REIT stakeholders in terms of corporate governance matters.
“EC World, currently the second-highest yielding S-REIT, is trading at an FY17 yield of 8.8%, a 210bps and 240bps spread above the industrial REIT and sector average. We believe the high yield is mainly on investor concerns over master lease expiries and trade war impact. There is scope for yield compression, as investors gain more clarity on the master leases and resilience of its assets,” says the analyst.
“Master lease assets (70% of 2Q18 NPI) are ramping up steadily, with the sponsor likely to extend master leases – this could help sustain dividend yields. The assets also cater mainly to local demand and, contrary to market expectations, may potentially benefit from current trade tensions. This is due to the Chinese Government’s push to boost its domestic consumption,” he adds.
As at 9:33am, units in EC World REIT are trading 0.72% higher at 70 cents or 0.77 times 1H18 book value.
