EC World REIT (SGX:BWCU) – To Buy, Hold, or Sell?

EC World REIT (SGX:BWCU) – To Buy, Hold, or Sell?

There’s certainly no lack of events surrounding the REIT of late – all of which relating to its debt refinancing.

To recap, in my review of the REIT’s first quarter results released on 12 May 2022 (you can read my review in full here), I expressed my concerns about the REIT having a huge bulk of its borrowings due for refinancing in the current financial year (i.e. FY2022), in that, out of the S$706.5m of aggregated facilities outstanding, only RMB77.0m of onshore facility will be due in 2029, with the rest due in the current financial year.

This post was originally posted here. The writer, Lim Jun Yuan is a veteran community member and blogger on InvestingNote, with a username known as @ljunyuan and has close to 2,000 followers.

Subsequently, in separate announcements on 01 June 2022 (you can read it in full here), as well as on 06 June 2022 (you can read it in full here), the REIT have announced that they have successfully extended the maturity date of the outstanding onshore and offshore facilities to 30 April 2023 – a sigh of relief perhaps (to a certain extent), but on the other hand, the maturity date is just a little under a year from now.

Not only that, I have also noted that the REIT will need to repay 25.0% of the facilities by 31 December 2022 – and on 13 June 2022, it was announced that the REIT have entered into a non-binding memorandum of understanding with its Sponsor, Forchn International Pte. Ltd.) for the sale of 2 of its assets – Beijing Logistics Stage 1 and Chongxian Port Logistics. An EGM will be convened to seek unitholders’ approval on this proposed transaction. You can read the announcement in full here.

This piece of announcement is definitely of concern to me as a unitholder here – because if the proposed divestment were to go through, and together with another property of the REIT (in Fu Zhou Industrial) being expropriated by the Chinese Government, the REIT will be left with just 5 properties in its portfolio – as such, its financial performance, along with distribution to its unitholders will be severely impacted.

With that in mind, I have written an email last Friday (08 July 2022) to seek clarifications on the whole issue and you can find my questions, along with responses by the REIT’s investor relation, below (they were very prompt in responding to my queries, where I received a response from them within hours after sending out my email):

Question #1: I understand the proposed divestment of the 2 properties will require unitholders’ approval via an EGM – may I know if there is a timeline available on when offer documents will be made available for unitholders to review, and also when the meeting will be convened.

Response: The Manager is exploring various fund-raising options including potential divestments of non-core assets. The Sponsor has provided assurance to the Onshore and Offshore lenders through an understanding that it will ensure at least 25% of the outstanding facilities will be repaid by 31 December 2022, whether by acquisition of assets of EC World REIT and/or subsidiaries or otherwise.

The MOU announced on 13 June 2022, is non-binding in nature, and is intended for the purpose of facilitating negotiations between the parties.

Question #2: Still on the topic of proposed divestment of the 2 properties, is this corporate action “confirmed”, or is the REIT still in a midst of looking at other means of raising funds, such as through equity fund raising, seeking financial support from its Sponsor, or even exploring the opportunity to engage in a discussion with the Sponsor for them to take a “leap of faith” to take the REIT private?

Response: The Manager is exploring various fund-raising options. The REIT is open to all options to achieve the best interest for investors.

Question #3: If the divestment of the 2 properties were to go through, coupled with another property of the REIT (in Fu Zhou Industrial) being expropriated by the Chinese government, then at the end of it, the REIT will only be left with 5 properties – this will definitely see the REIT’s financial performance and distribution to unitholders severely impacted. That said, I’d like to ask what the management have in mind to fill this “gap” – because if nothing is being done and its financial performance and distributions declines, unitholders will suffer from a “double whammy” – in terms of receiving a lower distribution, and at the same time having to take a further capital loss, as the unit price is bound to plunge lower as a result.

Response: The MOU is non-binding in nature, and the REIT will make further announcements should there be any material updates. Should divestments be determined to be the most appropriate option, the financial effects of the divestments will be disclosed in the circular to Unitholders and presented to Unitholders at EGM for approval.

My Thoughts:

As a unitholder, it somehow offers some form of “comfort” in that the divestment of the 2 assets are still not “cast in stone” just yet (because I will be really concerned about the REIT’s ability to continue to provide sustainable returns to unitholders should the divestments proceed and the lack of revenue contribution from the properties will definitely impact its ability to maintain its current distribution payouts to unitholders), as they are still in the midst of exploring all possible options – including equity fund raising, seeking financial support from its Sponsor, or even the possibility of the Sponsor taking the REIT “private”.

Another thing is that, the REIT’s promptness in responding to my questions was an assuring one (at least for me.)

On top of that, in an announcement which the REIT have published on 04 July 2022, the CEO of the REIT, Mr Goh Toh Sim, have increased his unitholding – where he has invested another S$97,406.34 in 231,100 units of the REIT, bringing the total number of units owned to 1,052,675. You can read the announcement in full here – to a certain extent, this announcement instilled some confidence in the REIT, because in my opinion, nobody in the right frame of mind will be invest so much of his/her own money in a company if he/she has no confidence in its ability to sustain.

The above are reasons why I have decided to remain invested in the REIT (despite of all the events that have unfolded in the recent weeks) – reason being that I personally can see the REIT doing their very best to resolve the outstanding issues; as to whether or not this decision of mine is a right one, only time will tell (but I’m just happy that I did not succumb to the selling pressure when everyone’s frantically doing so sometime towards the end of June and the beginning of July, as its unit price have since bounced back up from a low of 40.0 cents to 50.5 cents (at the time of writing) – and this equates to a rebound up by slightly more than 25.0% in about a week plus.)

At the same time, I wanted to wait for more information on the proposed divestment of the 2 properties (if it does happen) to find out whether or not the properties are divested at a value that does not “shortchange” unitholders, how the management will continue to manage their debt, and also how they plan to continue to provide “sustainable returns” despite having 3 properties less following the expropriation (of 1 property by the Chinese government) and divestment (of 2 properties to its Sponsor.)

With that, I have come to the end of my sharing of my thoughts about EC World REIT. I will continue to monitor the situation and update accordingly should there be any material updates about its debt refinancing, or announcements relating to the divestment of properties.

Finally, do note that all the opinions that you’ve read about above are purely mine as a unitholder of the REIT. They certainly do not constitute any buy or sell calls for the REIT’s units. You should always do your own due diligence before you make any investment decisions.

Disclaimer: At the time of writing, I am a unitholder of EC World REIT.

$EC World Reit(BWCU.SI) $SGX(S68.SI)

Once again, this article is a guest post and was originally posted on Ljunyuan‘s profile on InvestingNote. 

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