Probably a dose of déjà vu, that is master leases, and capital management. The net asset value of EC World REIT as at end-2021 stood at 93 cents. Its unit price closed at 48 cents on June 30, 2022. That values EC World REIT at 0.51x NAV. The market capitalisation as at June 29 was $388 million based on units in issue of 809.49 million as stated in the 2021 annual report, The secured debt outstanding stood at $725 million as at Dec 31, 2021.
On June 29, the Singapore Exchange, questioned the REIT’s refinancing efforts following the latter’s announcements on June 1 and June 13. Why were the loan extensions for less than 12 months? Why are the lenders not financing beyond April 2023? Are there difficulties in obtaining onshore facilities?
Among the answers given, it turns out that the offshore lenders requested an undertaking when the manager was negotiating for the extension of the REIT’s offshore loans. “If at least 25% of the aggregate principal amount of the outstanding offshore fcilities is not repaid by 31 December 2022, EC World REIT faces an event of default which will trigger mandatory prepayment of the offshore facilities,” EC World REIT’s manager says.
The manager confirmed that event of default will trigger cross defaults across EC World REIT’s other existing facilities such as the onshore facilities and revolving loan facilities.
On June 13, EC World REIT’s manager signed and announced the entry into a non-binding Memorandum of Understanding (MOU) with the sponsor, to explore the potential divestment of two of EC World REIT’s assets - Beigang Stage 1 Logistics and Chongxian Port Logistics.
Valuation
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
In the IPO prospectus, the initial valuation of the properties did not take into account the master lease rents, but instead used underlying rental rates. The master leases were for a term of five years as the manager believed this would have been the optimal length of time required for the underlying rental rates of Chongxian Port Investment, the Stage 1 Properties of Bei Gang Logistics and Fu Heng Warehouse to reach the master lease rental level, the prospectus had said.
Yet, in FY2021, related party rents totalled $105.87 million, or 84% of revenue. This is marginally lower the FY2020’s related party rents of $93.92 million versus revenue of $109.72 million.
The REIT’s FY2021 annual report says that gross revenue of the portfolio was $125.5 million and the DPU for the full year was 6.263 Singapore cents. The projected revenue derived from market rent would have been $116.8 million and the corresponding DPU would have been 5.662 Singapore cents.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
As compared to the projected market rents, the master leases gross rent for Chongxian Port Investment, Bei Gang Logistics, Fu Heng Warehouse and Fuzhou E-Commerce are approximately RMB8.0 million, RMB24.4 million RMB2.4 million and RMB7.8 million higher respectively. The total difference of RMB42.6 million is 7.1% of the portfolio gross rent in 2021, the annual report states.
The difference in rents does not justify the P/NAV of 0.51x. The manager has blamed property market conditions in China for EC World REIT’s refinancing challenges. Investors are clearly nervous, given that so much of EC World REIT’s liquidity depends on the sponsor: rents, the valuation of the properties, and the undertaking to raise cash by divesting assets. As indicated in the annual report, $725 million of loans are secured, except for an inter-company loan of $426 million.
Analysts were sanguine about EC World REIT’s refinancing till June 29, when RHB Research started sounding a lot more cautious. Soochow CSSD Capital Markets says it is reviewing its recommendation. DBS Group Research was relatively upbeat following the June 1 refinancing announcement.
Now, with its loans at almost twice the value of EC World REIT’s market capitalisation, market watchers are likely to be a lot more concerned.
