The only China-based REIT in my long-term investment portfolio (you can check out a list of companies I have investments in here), EC World REIT (SGX:BWCU), have made available its financial results for the third quarter, as well as for the first 9 months of the financial year ended 30 September 2022 (i.e. Q3 & 9M FY2022) after market hours yesterday (09 November 2022.)

For those who are unfamiliar with the REIT, its portfolio comprises of properties used for e-commerce and port logistics. At the time of writing, it has a total of 7 properties, all located in China (particularly in the Yangtze River Delta, Hangzhou, as well as Wuhan.)

The REIT is also one of the few that has continued to report its full financial results on a quarterly basis (despite not mandated to do so), along with declaring a distribution payout to its unitholders in the same time freqency.

In this post, you’ll find a review of the REIT’s latest set of financial results, portfolio occupancy and debt profile, as well as distribution payout to its unitholders:

Financial Performance (Q3 FY2021 vs. Q3 FY2022, and 9M FY2021 vs. 9M FY2022)

In this section, you’ll find my review of EC World REIT’s financial performance both on a quarter-on-quarter (i.e. Q3 FY2021 vs. Q3 FY2022), as well as on a year-on-year (i.e. 9M FY2021 vs. 9M FY2022) basis:

Q3 FY2021Q3 FY2022% Variance
Gross Revenue
(S$’mil)
$31.6m$29.8m-5.5%
Property Operating
Expenses (S$’mil)
$3.0m$2.8m-6.1%
Net Property
Income (S$’mil)
$28.6m$27.1m-5.4%
Distributable Income
to Unitholders (S$’mil)
$13.4m$11.0m-17.8%

My Observation: On a quarter-on-quarter (q-o-q) basis, the REIT’s results is a weaker one, where the decline in its gross revenue (by 5.5% in SGD terms, and 3.1% in RMB terms) and net property income (by 5.4% in SGD terms, and 3.2% in RMB terms) were mainly due to a lower Late Fee income, absence of income from Fu Zhuo Industrial (as it has been compulsory expropriated by the Chinese Government), offset by organic rental escalations.

Along with higher finance costs (up 6% compared to Q3 FY2021) mainly due to higher interest rates, lower Late Fee income, absence of rental income from Fu Zhuo Industrial, and a payment of 100% of Management Fees in the form of cash as compared to 50% in the form of units in Q3 FY2021, its distributable income to unitholders fell by 17.8% to $11.0m.

9M FY2021 vs. 9M FY2022:

9M FY20219M FY2022% Variance
Gross Revenue
(S$’mil)
$93.5m$93.2m-0.4%
Property Operating
Expenses (S$’mil)
$9.3m$8.2m-12.5%
Net Property
Income (S$’mil)
$84.2m$85.0m+0.9%
Distributable Income
to Unitholders (S$’mil)
$38.2m$33.5m-12.3%

My Observations: The only bright spot in its year-on-year (y-o-y) result was the 0.9% increase in its net property income (due to lower operating expenses in its properties.) Apart from that, its financial results is a weaker one

The decline in gross revenue was due to the absence of rental income from Fu Zhuo Industrial and lower Late Fee income, offset by organic rental escalations. 

Finally, the 12.3% drop in its distributable income to unitholders can be attributed to the absence of rental income from Fu Zhuo Industrial, provision for Pre-Termination Compensation made to the third-party tenant at Fu Zhuo Industrial as a result of Compulsory Expropriation, payment of 100% of Management Fees in the form of cash as compared to 50% in the form of units in 9M FY2021, higher withholding tax paid for the repatriation of funds.

Portfolio Occupancy Profile (Q2 FY2022 vs. Q3 FY2022)

Next, let us take a look at the REIT’s portfolio occupancy profile – where I will be putting the stats reported for the current quarter under review (i.e. Q3 FY2022 ended 30 September 2022) and compare against that reported in the previous quarter 3 months ago (i.e. Q2 FY2022 ended 30 June 2022) to find out if it has continued to remain resilient (like in the previous quarters where occupancy rate has been around the 98-99% range) or showing signs of deterioration:

Q2 FY2022Q3 FY2022
Portfolio Occupancy
(%)
99.1%98.8%
Portfolio WALE (by
Gross Rental Income – years)
2.1 years1.8 years

My Observations: Just like its financial performance (both on a q-o-q as well as on a y-o-y basis), the China-based e-commerce and port logistics REIT’s portfolio occupancy have also weakened (compared to the previous quarter 3 months ago) as a result of a decline in occupancy rates in Wuhan Meiluote (down from 84.0% in Q2 FY2022 to 77.4% in Q3 FY2022), as well as in Chongxian Port Logistics (down from 99.7% in Q2 FY2022 to 96.5% in Q3 FY2022.) 

The REIT’s remaining properties (in Fu Heng, Fuzhou E-commerce, Stage 1 Properties of Bei Gang, Hengde Logistics, and Chongxian Port Investment) are 100.0% occupied.

As far as lease expiries are concerned, only 5.8% of the leases by net lettable area (NLA) and 6.6% by gross rental income (GRI) will be expiring in the final quarter of FY2022, 36.2% of the leases by NLA and 17.1% of the leases by GRI will be expiring in the coming financial year 2023, and more worryingly, a huge bulk of the leases (57.5% by NLA and 76.1% by GRI) will be expiring in FY2024 – I have raised questions about the renewal of these leases to the REIT’s investor relations but was told that the process of discussing lease renewals are normally only negotiated with the tenants closer to the expiry, and not so early in advance (something which I am not comfortable with even till today.)

Debt Profile (Q2 FY2022 vs. Q3 FY2022)

As far as its debt profile goes, for those of you who still are not aware, on 03 October 2022, the REIT’s management have announced the proposed divestment of 2 properties (in Stage 1 of Bei Gang Logistics, and Chongxian Port Logistics) to raise the amount which the REIT needed to repay (25% of the existing loan amount) by 31 December 2022, failing which the REIT will go into default.

Following the completion of the divestment, unitholders will receive a one-off special distribution payout of about 11 cents/unit (exact amount to be confirmed.) An EGM will be convened to seek unitholders’ approval regarding this proposed divestment. You can read the announcement in full here.

The following table is a comparison of the REIT’s debt profile recorded for the current quarter under review (i.e. Q3 FY2022 ended 30 September 2022) against that recorded in the previous quarter (i.e. Q2 FY2022 ended 30 June 2022):

Q2 FY2022Q3 FY2022
Aggregate Leverage
(%)
39.1%39.3%
Average Term to
Debt Maturity (years)
0.97 years0.70 years
Average Cost of
Debt (%)
4.3%4.8%

My Observations: No surprises here that the REIT’s debt profile for the current quarter under review is a weaker one compared to the previous quarter 3 months ago. 

However, for me, the bigger concern here is that, with 31 December 2022 drawing closer by the day, why hasn’t the EGM been called. And a bigger question should the EGM be called only in December is that, if the proposed divestment of the 2 properties was rejected by the unitholders, then there will be very little time for the REIT to come out with alternatives to raise the repayment amount necessary to avoid a default. 

Distribution Payout to Unitholders

As mentioned in the beginning of this article, the REIT’s management declares a distribution payout to its unitholders on a quarterly basis – hence for the current quarter under review, a distribution per unit of 13.64 cents was declared, a 17.9% decline from the payout of 1.662 cents/unit declared in the same time period last year (i.e. Q3 FY2021.)

If you are a unitholder of the REIT, do take note of the following dates about its distribution payout:

Ex-Date: 06 December 2022
Record Date: 07 December 2022
Payout Date: 29 December 2022

Finally, on a year-on-year basis, together with its distribution payout of 1.383 cents/unit in the first quarter and 1.387 cents/unit in the second quarter, its total distribution per unit over the first 9 months of the current financial year 2022 amounts to 4.134 cents/unit – compared to the distribution payout of 4.726 cents/unit declared in the same time period last year (i.e. 9M FY2021), its distribution payout have declined by 12.5%.

CEO Mr Goh Toh Sim’s Comments on the REIT’s Latest Results (from the REIT’s Press Release)

“We delivered a set of results consistent with the improving stability in China during the quarter. In view of the economic uncertainties ahead, and the impact of global inflationary pressures on demand, we have reviewed our strategic options, with the focus to strengthen our financial position and grow sustainably for the longer term. Divesting Beigang and Chongxian Port Logistics to realise value is therefore timely because of the premium to agreed property values, to enable us to pare down debts and enable a special distribution to Unitholders.

The intermittent lockdown of cities in China during the third quarter, did not have material impact on ECW’s portfolio of properties. The Manager will continue to closely monitor the developments and vigilantly manage emerging risks.”

Closing Thoughts

Personally, I felt that it was a disappointing set of results delivered by the REIT this time round. 

I personally do have huge concerns regarding the proposed divestment of the 2 properties (particularly on the continued returns to unitholders following the divestment – if approved by unitholders), along with why in such difficult circumstances, the REIT’s management opted to receive payment in 100% cash (for Q3 FY2022), instead of 50% in a form of units of the REIT (for Q3 FY2021) – currently, I am trying to gather more information, and at this point in time, I will reserve judgement. I will talk more about this at a time.

Finally, in case you’re wondering, I am still invested in EC World REIT – for now. Again, if I were to make any moves, I will keep my readers informed in posting.

With that, I have come to the end of my review on EC World REIT’s latest results for the third quarter, as well as for the first 9 months of FY2022. Do note that everything you’ve just read in this post are solely my own opinion which I am sharing for educational purposes only. They do not represent any buy or sell calls for the REIT’s units. As always, please do your own due diligence before you make any investment decisions.

Related Documents

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

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