Early this morning (24 July 2023), China-based e-commerce and port logistics REIT in EC World REIT (SGX:BWCU) held its annual general meeting (AGM) for the financial year ended 31 December 2022 (i.e., FY2022), where I have attended in-person as a unitholder.

Before and after the meeting, I had the pleasure of speaking with the Lead Independent Director presiding as Chairman Mr Chan Heng Wing, as well as the CEO Mr Goh Toh Sim, where we had a good brief discussion. Particularly, I was impressed with the CEO immediately recognising me and calling me out by my name, ‘Jun Yuan’, and I really appreciate that. He was open to answering any questions I had in the future, which I will continue to do so and provide any material updates in this blog of mine.

Throughout the entire meeting, I felt the management team was very patient in addressing questions raised by fellow AGM attendees, where a huge majority surrounded the REIT’s debt repayment – the entire question and answer segment went on for over an hour!

For the benefit of those who are not able to attend this morning’s meeting, in this post, you will find a summary of some of the key points to take note of during the CEO’s presentation, responses provided by the management team to questions raised by during the AGM, and results of the 3 resolutions put to vote.

Let’s begin:

Presentation by EC World REIT’s CEO, Goh Toh Sim

Macro Environment:

• 2022 was an eventful year for EC World REIT, where the unfavourable macroeconomic environment (led by geopolitical tensions, high inflationary environment and a series of aggressive interest rate hikes to bring it down) resulted in it facing difficulties in refinancing and divestment (where a separate EGM will be held to seek unitholders’ approval for the long-stop date to be extended to 31 October 2023, once it has obtained Singapore Exchange’s approval for the circular).
• The Chinese economy faced headwinds in the real estate sector, as investment in real estate development slumped by 7.9%. Additionally, the country’s GDP growth for the first half of 2023 was below expectations, despite government stimulus measures.
• For Singapore REITs, the 5-year Singapore FTSE ST All-Share REITs Index fell by 25% – from a high of 970.62 on 19 February 2020 to 727.25 on 21 January 2023.

FY2022 Key Highlights:

• Performance continues to be stable, with gross revenue and net property income declining by 3.1% (from S$125.5m in FY2021 to S$121.6m in FY2022) and 1.8% (from S$113.0m in FY2021 to S$111.0m in FY2022) respectively, mainly due to the weakening of the Chinese Renminbi against the Singapore Dollar, and expropriation of Fu Zhuo Industrial.
• The REIT have retained 10% of the total amount available for distribution in the 4th quarter for loan repayment, refinancing related costs, and general working capital purposes.
• Portfolio occupancy remains stable at 99.2%, supported by 4 master leases.

Updates on Proposed Divestment:

• The REIT has received strong support from its Sponsor, who have made a prepayment of RMB333.0m from December 2022 to date.
• RMB321.8m of margin deposit were utilised for the settlement of partial mandatory repayment, with the minimum mandatory prepayment amount reduced from RMB139.2m to RMB75.5m.

Status of Refinancing:

• EC World REIT has completed refinancing by 6 June 2023, with onshore facilities of RMB745.5m (comprising of term loan facilities totalling RMB702.0m expiring in April 2026, and term loan facility totalling RMB43.5m expiring in July 2029) and offshore facilities of SGD348.9m (comprising of 2 multi-currencies term loan facilities up to S$333.5m, SGD term loan up to S$15.4m, which will expire in April 2024 and subject to a 2-years extension option).
• This was on the condition of the divestment of the 2 properties, and outstanding minimum mandatory prepayment of S$75.5m to be completed and prepaid respectively by 31 October 2023 (or another date agreed by the lenders).

Responses to Questions Raised by AGM Attendees

The following are responses to 2 questions I have raised:

• Income contribution from the 2 properties to be divested were as follows: for Chongxian Port Logistics, one of the tenants in Hangzhou Fu Gang Supply Chain Co., Ltd. is a top contributor to the REIT’s gross revenue @ 36.9%; for Stage 1 of Bei Gang Logistics, it was master-leased to Forchn Holding Group Co., Ltd., is the second largest contributor @ 22.3%. Together, these 2 tenants contribute approximately 60% towards the REIT’s revenue. As such, I wanted to know post-divestment, how the REIT intends to cover this gap. In response, CFO Mr Wang Feng clarified that Hangzhou Fu Gang Supply Chain Co., Ltd. was also a master tenant of Chongxian Port Investment, which was not divested, and the revenue contribution was above 20%. Hence, the revenue impact with the loss of revenue from Stage 1 of Bei Gang Logistics was only about 20%. On the REIT’s plans post-divestment, Mr Goh said the REIT will continue to look at acquiring properties (with a focus on warehouse assets) either from its Sponsor or from third-parties, in China, or in other countries.
• On my second question regarding the possibility of discussions for lease renewals to commence earlier than a year before the lease is due, Mr Goh said it is the norm for master lease renewal talks to begin a year before the lease is due, as tenants are reluctant to engage in discussions in advance. He also added that with the current economic situation in China remaining weak, engaging in discussions earlier may not lead to better outcomes.

The following are the management’s responses to other questions raised by fellow meeting attendees:

• Responding to a question raised on why the requirement for the REIT to repay 25% of its borrowings when assets in its portfolio are of a high quality according to Mr Chan, Mr Goh said the decision was made by the banks based on their own assessment in view of the current macroeconomic situation.
• The same unitholder asked if the REIT has taken up loans from local banks in China instead, would it have been more favourable considering their familiarity with the home country’s assets. Mr. Goh explained that the terms would actually be worse because of the bad real estate situation in China, and as a result, the local banks in China becoming more cautious in approving loans and demanding in their terms.
• A unitholder noted refinancing of the REIT’s borrowings have been completed recently, and wanted to know an estimate of the all-in borrowing cost, citing concerns of the high interest rate environment and was worried that borrowings were refinanced at unfavourable terms. Mr Wang shared that the all-in borrowing cost for its offshore and onshore facilities came up to about 6-7%, as a result of the high benchmark rates. This was in addition to a fix percentage on top of the benchmark rates that borrowers had to pay.
• On the projected distribution per unit impact post-divestment, Mr Wang said it would be about 40%.
• Another unitholder pointed out that the average land tenure of the REIT’s properties was around 35 years, and wanted to know if the Chinese Government would take back the land, or if they could be renewed. On this, Mr Goh explained that the current practice of the Chinese Government is to automatically renew land leases at no additional costs. However, he cautioned that 35 years is a long time, and policies may change in the future.
• Responding to a question on whether divestment fees for the 2 properties can be waived, and form part of the special dividend payout to unitholders, Mr Goh said the proposal will be put up to the Board for consideration.
• On whether the 2 properties are being divested at a fair value, Mr Goh said that the REIT had to abide by a set of regulations when it comes to divesting properties. These regulations included the requirement that the properties could not be sold for less than what they were worth, to protect the interest of unitholders.
• In response to a unitholder’s concern about the independent auditor’s report highlighting a ‘material uncertainty related to going concern’ Mr. Goh clarified that the main reason for this uncertainty was the mandatory prepayment, which will be settled after it has been made.
• On the dip in the REIT’s Net Asset Value from S$0.93 to S$0.75, Mr Wang explained it was mainly attributed to the weaker Chinese Renminbi where the properties are being valued in, against the Singapore Dollar, which the financial statements are being reported in. On top of that, the properties also suffered from a 2% dip in valuations due to the difficult economic environment in China, along with headwinds associated with the country’s real estate sector.
• Responding to a unitholder’s question on whether Fu Zhuo Industrial was expropriated at a price that is above its valuations, and also if the REIT have received the compensation in full, Mr Wang shared that the property was expropriated by the Chinese government for RMB108m, lower than the property’s valuation of RMB170m, as the government does not consider future income when assessing a property’s value. On the compensation, Mr Wang updated that EC World REIT has received 70% of the compensation, and is requisition the remaining 30% to be paid as soon as possible.
• A unitholder asked why a rights issue was not called in the first place to raise the amount required for the mandatory repayment. Mr. Goh explained that the amount required was very large, so a very large rights issue would be needed to raise the funds. This would be very dilutive to unitholders, meaning that it would dilute the value of their shares. At the same time, a credible offer was made by a purchaser, which the REIT accepted.

Results of the 3 Resolutions Put to Vote during the Meeting

• Resolution 1, which is to receive and adopt the Report of the Trustee, the Statement by the Manager, and the Audited Financial Statements of EC World REIT for the financial year ended 31 December 2022 together with the Auditors’ Report thereon, was passed with 99.97% of the votes for, and 0.03% of the votes against.
• Resolution 2, which is to re-appoint PricewaterhouseCoopers LLP as Auditors of EC World REIT and to hold office until the conclusion of the next AGM and to authorise the Manager to fix their renumeration, was passed with 99.97% of the votes for, and 0.03% of the votes against.
• Resolution 3, which is to authorise the Manager to issue new Units and to make or grant convertible instruments, was passed with 99.72% of the votes for, and 0.28% of the votes against.

Related Documents

• AGM Presentation Slides
• Responses to Questions by SIAS

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

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