DBS Group Research believes that there is currently a unique opportunity to accumulate on EC World REIT, as analysts Dale Lai and Derek Tan have kept their “buy” recommendation on the stock with a target price of 70 cents.
A close to 40% ytd slide in share price owing to perceived refinancing issues has sprung up a unique opportunity. “We see planned balance sheet recapitalisation by end of 2022 to be positive with the proposed sale of two properties to sponsor which will potentially allow unitholders to crystalise net asset value (NAV) and receive a one-off dividend ranging between 10 cents to 18 cents, and reduce reliance on master-leases to sponsor to be overall positive,” they say, as they predict the REIT to still deliver yields of about 8% post-sale.
To recap, the rising debt levels and home prices in China have caused the local government to introduce a new policy in October 2020 to slow credit growth among property developers, limiting debt-to-equity, debt-to-cash, and debt-to-assets growth levels.
The new regulations resulted in a tightening of credit to property developers, and while EC World REIT is not in the residential property sector, lenders have become much more cautious in giving out property loans.
Earlier last year, EC World REIT was in discussions with its sponsor in relation to a potential transaction to divest its entire portfolio, but as the transaction did not materialise, the discussions ended on Dec 28, 2021. The REIT had only managed to begin loan renewal negotiations thereafter, and the tightening credit market surrounding property-related firms was also one of the likely reasons for the delay in refinancing its offshore loans that were due at the end of May this year.
It was only on June 1 that the REIT had managed to obtain an 11-month extension for its offshore loans, and the extension expires on Apr 30, 2023, together with its onshore loans. Subsequently on June 29, the REIT announced the extension of its onshore loans to Apr 30, 2023.
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As part of the loan extension, the sponsor took an undertaking to commence refinancing of both the offshore and onshore facilities immediately and to also ensure that at least 25% of the outstanding facilities are repaid by Dec 31.
Since then, the REIT is looking to divest Beigang Logistics Stage 1 and Chongxian Port Logistics. The bulk of the proceeds from the divestments would then be used to repay loans as stated in the loan extension undertaking.
However, the question is: Will the proposed divestment to sponsor pass the shareholder test?
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With the manager entering into a memorandum of understanding (MOU) with the sponsor for the sale of two assets totalling about $432.8 million (at last valuation), funds received by the REIT will be more than sufficient to pare down its loans (25% by end December) and pay a special dividend to unitholders, according to the analysts. Given that it’s an interested party transaction (IPT), they envision unitholders should only accept a deal that is close to its NAV.
“Based on our estimates, the minimum amount of loans to be repaid by Dec 31 is about $176.9 million (25% of total outstanding loans of $707.6 million),” says the analysts.
They add: “As the combined valuation of the two properties as at Dec 31, 2021 was aout $432.8 million, we expect the divestments to generate more than the required amount to pare down 25% of outstanding loans. After accounting for taxes and transaction costs for the divestments (assumed to be 25% of the value), EC World REIT would have excess funds of about $150m after repaying the loans as stipulated in the terms of the extension of the loan facilities.”
Meanwhile, the analysts are also positive on EC World REIT as its inherent organic growth in the portfolio is underpinned by master leases. With built-in rental escalations ranging from 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.
As at 4.00pm, units in EC World REIT are trading 7.3% higher at 52 cents or 0.5 times FY2022 P/NAV with a distribution yield of 11.8%.
