Earlier this morning (07 September 2023), EC World REIT (SGX:BWCU) held its extraordinary general meeting (EGM) to seek unitholders’ approval on the Supplementary Agreement in respect of the Proposed Divestment (including the Long-Stop Date) – which was required as the previous terms that were approved by unitholders during the EGM in December 2022 has lapsed.

EC World REIT’s EGM on 07 September 2023

I have attended the meeting in-person (for those of you who are interested to know if there are any ‘door gifts’, yes, they have given out a $10 NTUC voucher for all attendees – which was a surprise to me because in the previous meetings, they did not give out anything) and it’s good to see some familiar faces.

It was also good to see the Chairman of the REIT, Mr Zhang Guobiao, flying in from China to attend the meeting in-person – his sharing both during the meeting (which you will find in this post) as well as after it (which I will not share, as it was not part of the meeting proper) certainly instilled some confidence among unitholders.

Chairman of the REIT Mr Zhang Guobiao Presenting about the Outlook of China, and the Logistics Sector in the Country

Apart from a summary of the key pointers from Mr Zhang’s sharing, you will also find my summary of CEO Mr Goh Toh Sim’s presentation, responses to questions raised by fellow EGM attendees, and results of the resolution put to vote during the meeting.

Let’s begin:

Outlook by Chairman Mr Zhang Guobiao

• Macroeconomic conditions in China have been challenging. Despite China recording a GDP growth of 5.5% on a year-on-year basis for the 1st half of 2023, but it came from a low base last year (as China was still in a lockdown due to the pandemic).
• Looking at the 2nd half of 2023, Mr Zhang is of the opinion that the economic growth in China will continue to remain uneven, due to the weakening of the property market in the country (where weakness can be seen especially during the summer months of July and August), as well as a decline in consumer spending (as people become more prudent in light of the uncertain economic outlook ahead). He added that entire economic environment in the country is facing a harsh winter ahead.
• While EC World REIT was adversely impacted by the tough operating environment in China as a result of a weak demand, coupled with an increase in the supply of logistics properties in key cities in China, but Mr Zhang expressed his confidence in the REIT being able to steer through the headwinds, as its assets are located in the Yangtze River Delta in Hangzhou – which is among the most dynamic cities in China. He reassured unitholders that the REIT will be able to fulfil all the financial obligations, and continue to pay out distributions to unitholders.
• Finally, despite the challenges, but Mr Zhang opined that China has a huge population (of 1.4 billion) and as a result, a big domestic market. Also, the fundamentals of the country still remain resilient and competitive on the global stage. He added that the Chinese government have also announced stimulus policies to promote private investment.

Presentation by Mr Goh Toh Sim

• The average of the 2 independent valuations (by JLL and Colliers) as at 30 June 2023 were as follows: for Stage 1 of Bei Gang Logistics, it was at RMB1,202m, and for Chongxian Port Logistics, it was at RMB814.5m. The total average of the independent valuations of the 2 properties amount to RMB2,016.5m (a RMB6.5m from the value of RMB2,023.0m under the initial equity purchase agreement).
• However, the aggregated agreed property value in the supplementary agreement was at RMB2,041.8m, 2.0% more than the value of RMB2,032.7m under the initial equity purchase agreement.
• The equity consideration remains fixed at RMB1,370m. However, in SGD-terms, it was down slightly to S$265m (from S$274.1m) due to a weaker Chinese Renminbi.
• 3 key rationale for the supplementary agreement include: (i) meeting the REIT’s repayment obligations under its financing agreements; (ii) opportunity to realise value of the divestment properties (where the 2 properties are divested at a blended premium of 18.4% vs. the purchase considerations at IPO); and (iii) to realise the best interest of EC World REIT and its unitholders.
• On the intended use of divestment proceeds from the equity consideration, 58.9% will be used to repay existing bank loans and revolving facilities, 37.0% will be used for a special distribution of approximately 12.11 cents/unit (that said, Mr Goh cautioned that the final amount will be determined by the consent of lenders, and there may be a risk that the amount could be lower, or none at all), 3.7% will be used to cover transaction costs and contingent expenses, and the remaining 0.4% will be used for other expenses.
• Based on the financial numbers as at FY2022, the REIT’s net property income will be down to S$81.5m after the proposed divestment (from S$111.0m before). Accordingly, DPU will be down to 3.63 cents/unit (from 5.12 cents/unit). The REIT’s gearing ratio will be improved by 2.2% to 34.0% after meeting all the repayment obligations (from 36.2% before).
• Portfolio WALE by gross rental income after divestment will be at 1.1 years – which Mr Goh said it includes 5 master lease agreements that that the REIT has to execute by the end of the year.
• Finally, the Independent Financial Adviser’s (Provenance Capital Pte Ltd) recommendation is that independent unitholders vote in favour of the resolution to approve the supplementary agreement.

Responses to Questions Raised by AGM Attendees

• On concerns relating to the ability of the Sponsor to secure financing to complete the divestment, Mr Goh said that the Sponsor is doing all they can to secure funding and complete the divestment by 31 October 2023. He reiterated the Sponsor’s commitment to support the REIT in that, even before the divestment was completed, a sum of RMB333m have already been prepaid to pare down some of the repayment of borrowings.
• Responding to a separate question on whether the management have a ‘Plan B’ (such as auctioning, or liquidation of the properties) in place in case the Sponsor was unable to securing the funds required, Mr Goh said in an event where the Sponsor was unable to secure the funding required for the divestment, the management explore other options, including but not limited to looking for other buyers, or choosing other properties to divest. He shared that the REIT have also commenced discussions with the lenders on the possibility of extending the deadline of the repayment beyond October.
• On a separate announcement dated 04 September 2023 where the Manager have requested the facility agent under the offshore facilities to release part of the offshore interest reserve in order to allow EC World Group (comprising of EC World REIT and its subsidiaries) to repay the offshore interest expenses due 31 August 2023, and that pursuant to the terms of the offshore facilities, the offshore interest reserve must be topped up by EC World Group within 5 business days of its release (you can read the full announcement here), a unitholder wanted to know if the REIT have managed to top up the amount to avoid a default. To this, CFO Mr Wang Feng shared that the REIT is in discussion to extend the deadline, and will post any material updates on SGXNET. He added that the REIT have not received any intention that the lenders will trigger a default.
• Another unitholder wanted to know how the audit and risk committee ensures purchasers have the financials to complete the proposed transaction prior to issuing a recommendation that independent unitholders vote ‘in favour’ of the resolution. Mr Goh shared that while terms regarding financing obligation was not part of the agreement, the Sponsor have been working very hard to secure the required funding to complete the transaction, despite the very challenging economic situation in China.
• Addressing a question from a unitholder asking about Chairman’s take on the entire episode (where the REIT had to repeated delay the completion of the proposed divestment due the Sponsor having difficulties in securing financing, and subsequently, the Sponsor defaulting on its rental obligations), Mr Zhang explained that the default rose from the Sponsor experienced difficulties in collecting rental payments from the tenants, as many of the tenants are small to medium businesses and they too are faced with difficulties in their operations. He added that the Sponsor is trying to collect payment from the tenants so that distribution payouts will not be disrupted. On the proposed divestment, Mr Zhang expressed his confidence the Sponsor’s ability to secure the funding required, on the account that the properties for divestment are located in Tier-1 cities, and asked for patience.

Results of the Resolution Put to Vote during the EGM

• The only resolution put to vote, which was to approve the Supplementary Agreement in respect of the Proposed Divestment (including the Long-Stop Date), was passed with 99.48% of the votes for, and 0.52% of the votes against.

Closing Thoughts

All I can say is that, the current economic situation in China isn’t helping the REIT.

On the topping up of the amount which EC World REIT used from the offshore interest reserve to fulfil its interest expenses due 31 August, my feel is that deadline will be extended by the lenders for the REIT to raise the amount required for the top up.

On the completion of the proposed divestment, given the current economic situation in China at the moment, I’m of the opinion that they are unlikely secure the funding in time to complete the divestment, and hence we may see further delay on this front as well.

Finally, on concerns that I have relating to events that happened last week (where it was announced last Monday evening that the Sponsor defaulted on its rental obligations), I wasn’t able to raise question during the meeting, as Lead Independent Director of the REIT acting as Chairman for the meeting, Mr Chan Heng Wing, guided that questions raised had to be related to the agenda of the meeting, which was on the approval of the supplementary agreement.

However, I was able to speak with the management team regarding this after the EGM concluded. As those discussions were held outside of the meeting proper, I will not be sharing the contents. Neither will I address any questions about it in the comments or discussion forums in writing. Appreciate your understanding.

With that, I have come to the end of my summary of EC World REIT’s EGM held earlier this morning. As always, I hope you have found the contents presented in this post useful. Moving forward, I will continue to keep track of the latest developments on the rental front, as well as on the securing of funding for the divestment, and for the REIT to repay its borrowings, and provide material updates.

Related Documents

• CEO’s Presentation Slides

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

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