EC World REIT (SGX:BWCU) is a China-based e-commerce and port logistics REIT where all of its properties are located in the country.

Before I continue, here’s an update of the current situation:

  • Trading of the units is still suspended (the REIT have requested for a voluntary trading suspension on 31 August 2023).
  • There are no announcements that the Sponsor have made payments for any lease obligations that were due.
  • As a result, the REIT had to draw on the onshore interest reserve to repay interest payments due in September 2023. The amount had to be topped up, but again, there are no further updates on this, other than discussions are still ‘ongoing’ with the onshore lenders.
  • Distribution for the 1st half of FY2023 (of 2.053 cents) was suspended as well, due to ‘insufficient funds’.
  • Sponsor was unable to raise funds necessary to complete the purchase of 2 properties (in Stage 1 Properties of Bei Gang Logistics and Chongxian Port Logistics) by 31 October 2023. Currently, the REIT is in the process of appointing at least 2 independent consultants to evaluate the possibility of divesting one or more properties that it owns (including but not limited to the 2 properties chosen for divestment earlier on) to 3rd parties via open market sale(s).
  • Just last week (on 31 October 2023), the REIT updated that one of its tenants, China Tobacco, have decided to discontinue the lease in Hengde Logistics (Hengde Phase 1) upon its expiry on 31 December 2023, and the REIT is exploring a new leasing strategy for the vacated space.

As a unitholder, I must say the non-payment of distribution was a huge disappointment, considering during the EGM in September 2023, Chairman Mr Zhang Guobiao gave his assurance that payout of distribution will not be disrupted – you can read my summary of the meeting in full here.

On the Sponsor being unable to raise funds necessary to complete the proposed divestment, I pretty much expected it, given the fact that the banks are always going to be more stringent in their approval to disperse money as news of it defaulting on its lease obligations probably dented its credit rating (putting myself in the shoes of the lenders, I will also be very careful in dispersing funds to such companies); second, its always going to be a tall order for a small company like Forchn to get funding approved, given the real estate crisis happening in China at the moment (that saw big companies like China Evergrande and Country Garden crumbled).

At this point in time, I can only say that I’m ‘lucky’ in a sense that the REIT only had a 5% weightage in my overall portfolio, so any dents to it is minimal. Of course, any loss is definitely hard to bear, but that’s part and parcel of life as a retail investor – there are bound to be bumps along the way.

I will continue to monitor the situation and provide material updates as and when they are made available. Meanwhile, here’s my review of its latest 3rd quarter and 9M FY2023 results published last evening (07 November) in terms of its financial results, portfolio occupancy, and debt profile.

Let’s begin…

Financial Results (Q3 FY2022 vs. Q3 FY2023, and 9M FY2022 vs. 9M FY2023)

In this section, I will first be looking at the REIT’s financial results for the third quarter (i.e., Q3 FY2022 vs. Q3 FY2023), followed by its results for the first 9-months of the year (i.e., 9M FY2022 vs. 9M FY2023):

Q3 FY2022 vs. Q3 FY2023:

Q3 FY2022Q3 FY2023% Variance
Gross Revenue
(S$’mil)
$29.8m$27.0m-9.5%
Property Operating
Expenses (S$’mil)
$2.8m$2.3m-18.9%
Net Property
Income (S$’mil)
$27.1m$24.7m-8.5%
Distributable Income
to Unitholders (S$’mil)
$11.0m$7.4m-32.9%

My Observations: In Singapore Dollar-terms, gross revenue and net property income were down by 9.5% and 8.5% respectively due to the weakening of the Chinese Renminbi (RMB) against the Singapore Dollar (SGD), and straight-line rental adjustment, partially offset by organic rental escalations and higher late fee. However, in RMB terms, its gross revenue and net property income were up by 0.3% (due to higher late fee and organic rental escalations) and 1.7% (due to lower operating expenses) respectively.

Coupled with a higher finance cost (which rose by 10.8%), its distributable payout to unitholders sunk by 32.9% to S$7.4m.

9M FY2022 vs. 9M FY2023:

9M FY20229M FY2023% Variance
Gross Revenue
(S$’mil)
$93.2m$82.7m-11.2%
Property Operating
Expenses (S$’mil)
$8.2m$6.2m-24.4%
Net Property
Income (S$’mil)
$85.0m$76.5m-9.9%
Distributable Income
to Unitholders (S$’mil)
$33.5m$24.0m-28.2%

My Observations: EC World REIT’s financial performance for the first 9 months of FY2023 (compared against the first 9 months of FY2022) was also a weaker one – with its gross revenue and net property income down by 11.2% and 9.9% respectively, mainly due to the weakening of RMB against SGD.

In RMB-terms, its gross revenue and net property incomer were down by 1.8% (mainly due to the cessation of income contribution from Fu Zhuo Industrial from 1 April 2022, lower rental income from Wuhan Meiluote as a result of lower occupancy rate and lower late fee income, offset by the impact of organic rental escalations and lower operating expenses at the properties) and 0.2% (due to lower operating expenses at the properties) respectively.

As a result of lower revenue, higher interest cost (which spiked by 12.9% mainly due to higher interest rates and extension fees incurred during the period), 10% retention of distributable income, and absence of pay out distribution previously retained in prior periods, its distributable income to unitholders fell by 28.2% to S$24.0m.

Portfolio Occupancy Profile (Q2 FY2023 vs. Q3 FY2023)

The following table is EC World REIT’s portfolio occupancy profile recorded for the 3rd quarter of FY2023 ended 30 September, compared against that recorded in the previous quarter 3 months ago (i.e., 2nd quarter of FY2023 ended 30 June), to find out its resiliency:

Q2 FY2023Q3 FY2023
Portfolio Occupancy
(%)
96.3%97.4%
Portfolio WALE (by Gross
Rental Income – years)
1.2 years1.0 years

My Observations: Apart from Fu Heng, Fuzhou E-Commerce, Stage 1 Properties of Bei Gang, and Chongxian Port Investment (which were fully occupied), the occupancy rates of Wuhan Meiluote, Hengde Logistics, and Chongxian Port Logistics were at 51.8%, 99.9%, and 99.3% respectively.

However, do note that the occupancy rate of Hengde Logistics will fall to 32.8% following the discontinuation of China Tobacco’s lease at the property after the existing lease terminates on 31 December 2023.

On lease expiries, 31.2% of the leases by net lettable area, and 17.6% of the leases by gross rental income will be due for renewal in the remaining quarter of FY2023, while a huge majority (66.7% by net lettable area and 81.9% by gross rental income) of the leases will be expiring in FY2024.

Debt Profile (Q2 FY2023 vs. Q3 FY2023)

Similar to how I have reviewed the REIT’s portfolio occupancy profile in the previous section, in the table below, you will find a comparison of its debt profile recorded for the current quarter under review (i.e., Q3 FY2023) against that recorded in the previous quarter (i.e., Q2 FY2023):

Q2 FY2023Q3 FY2023
Aggregate Leverage
(%)
36.2%36.9%
Average Term to
Debt Maturity (years)
1.45 years1.20 years
Average Cost of
Debt (%)
6.2%6.5%

My Observations: While its aggregate leverage is at a healthy level of 36.9%, but I understand there is a risk that it will increase materially due to a drop in valuation in its assets [as a result of the receivable collection status of its assets [where the overdue rent receivables owing to EC World REIT and its subsidiaries by Forchn Holdings Group Co., Ltd. and its subsidiaries have exceeded RMB171m] and the latest market conditions in China).

As at 30 September 2023, 52% of the interest rate risk of the offshore facility was hedged using floating to fixed interest rate swaps and cross currency swaps.

Comments and Outlook (from the REIT’s Press Release)

CEO Mr Goh Toh Sim’s Comments:

“While all efforts are concentrated towards the collection of rental receivables in order to fulfil the REIT’s various operating and financing obligations and to lift the unit trading suspension, other challenges derived from high interest rates and weak RMB against Singapore dollar and US dollar will continue to build up additional pressure for the business of ECW REIT. For the three quarters in 2023, due to accumulation of the outstanding rent receivables from the master lessees and other related parties within the Sponsor Group, and no repayment plan provided by the Sponsor Group to date, ECW Group faced challenges to maintain its operation and meet the financing obligations.”

Outlook Ahead:

“ECW and its subsidiaries are owed more than RMB 171 million in overdue receivables. The units trading has been suspended since 31 Aug 2023. Further, ECW deferred its first half FY2023 distribution payment to a future date when the REIT has sufficient free cash for the distribution. These may give rise to an event of default, amongst others, under group’s existing onshore and offshore facilities. With the high finance costs regime, the general decline in real estate market performance in terms of rental rates and occupancy rate, coupled with the challenges posed by the Mandatory Repayment requirements and delay in collection of the rental receivables from related parties including master lessees, ECW will continue to face serious financial and cash flow stress in the short to medium term.

China’s economy expanded by 4.9% y-on-y in the third quarter of 2023 and 1.3% quarter-on-quarter. According to NBS data, consumer spending has improved markedly with retail sales and industrial production activity reporting 5.5% and 4.5% growth respectively in September. Amongst which, online retail sales jumped 11.6% y- on-y to RMB 10.82 trillion.

Fixed asset investment increased 3.1% y-o-y in the first nine months of the year. The property sector remains a drag on the economy, with property investment tumbling 9.1% y-on-y in the first nine months of 2023.

Global economy is forecasted by IMF to grow 3% in 2023 and 2.9% in 2024. The tight policy stances needed to bring down inflation and to face the fallout from the recent deterioration in financial conditions, the ongoing war in Ukraine, possible escalation of the Israel-Hamas war poses a major risk to the global economy, driving up energy prices and disrupting key trade routes. As interest rates will only likely reduce toward their pre-pandemic levels once inflation rates are back to targets, higher interest rates will continue to prevail in the short term.”

Closing Thoughts

The situation, in my personal opinion, looks very bleak for the REIT. The lack of updates by the management (other than ‘discussions are still ongoing‘ and ‘any updates will be posted on SGXNET’) isn’t helping the situation, and feels very much like a ‘slap in the face’ to all unitholders who have shown their support to the REIT all these years.

Unless the REIT somehow manage to seek buyers for its properties and raise funds to repay the 25% of its borrowings soon enough, I will not be surprised to see it heading down the liquidation path (ne thing to point out in the REIT’s cash flow statement is that, its cash and cash equivalent at the end of Q3 FY2023 was just at S$3.9m, a 66.1% decline from its cash and cash equivalent of S$11.5m as at the end of Q3 FY2022), and unitholders end up having to ‘write off’ their investment in it – personally, there’s a real risk of this scenario playing out (I hope I am wrong, for I know there are a number of unitholders who have invested huge amounts of money in the REIT, and because of the voluntary trading suspension, they are now ‘stuck’) unless the overall economic situation in China improves drastically.

At this point in time, anything other than a ‘write off’ will be a bonus for me.

Related Documents

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

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