EC World REIT (SGX: BWCU) has a financial year ended 31 December 2023, and supposed to hold its AGM (Annual General Meeting) by end-April 2024.

However, just like in the previous financial year, they have once again sought an extension to how its AGM, due to delays in the divestments in the 2 assets (in Stage 1 of Bei Gang Logistics, and Chongxian Port Logistics). Trading for the China-based REIT continues to remain suspended.

Last Friday (12 July), EC World REIT have published its annual report, and you will find key highlights about it in this post, along with questions I have submitted to the management for their response, and details of its upcoming AGM.

Let’s begin:

Brief Introduction to EC World REIT

For the uninitiated, when EC World REIT was listed on the Singapore Exchange in July 2016, it was the first specialised and e-commerce REIT.

The REIT invests in properties in China used primarily for e-commerce, supply-chain management, and 3rd party logistics purposes, as well as real estate assets.

Currently, its portfolio comprises of 7 properties located within the largest e-commerce sectors of Hangzhou in the Yangtze Ricer Delta and Wuhan.

Summary of EC World REIT’s Annual Report

Massive Challenges faced by the REIT:

• Proposed divestment of Stage 1 of Bei Gang Logistics, and Chongxian Port Logistics failed to materialise as the Sponsor was unable to secure the necessary funding by the long-stop date of 31 October 2023.
• Sponsor’s inability to pay outstanding rent (currently, the REIT and its subsidiaries are owed more than RMB289.1 million, or S$53.7 million in overdue rent receivables by their Sponsor group) have also resulted in substantial rent arrears, which directly impacted EC World REIT’s cash flow. The long-term arrears from the master leases have necessitated the novation process (which as been completed on 30 June, and the REIT has taken over the master leases and other related party leases) as part of the remedial measure to address the rental arrears (this, along with deteriorating make conditions in China, resulted in a 43% decline in the REIT’s property valuations).
• As a result of an oversupply of logistics space in major cities like Hangzhou and Wuhan (where EC World REIT’s properties are located), a broader economic slowdown, together with the discontinuation of significant leases (such as with China Tobacco at Hengde Logistics Phase 1) contributed to EC World REIT having a portfolio occupancy of just 79.9% as of the end of 2023.
• Despite active marketing strategies to counter these trends, EC World REIT’s properties have struggled to attract and retain tenants, adversely affecting its rental income and overall financial health.
• Aggregate leverage ratio, as of 31 December 2023, was at 57.9%, as a result of a significant drop in portfolio valuations, and financial difficulties the REIT is facing at this juncture.

Navigating Through the Challenges:

• The REIT have formulated new leasing strategies to improve occupancy rates and lease terms, which helped to improve its occupancy rate to 80.2% as of 30 June 2024.
• The management is also actively seeking to divest one or more of its properties to 3rd parties through open market sales – where they have appointed Savills Property Services (Shanghai) Co Ltd, and Cushman & Wakefield (Hong Kong) Ltd as the REIT’s advisors to seek potential buyers.
• To address the REIT’s financial and operational difficulties, it has also appointed the services of KPMG Services Pte Ltd as the financial adviser to explore various strategic options available to EC World REIT – including the restructuring of its existing facilities, negotiating with lenders, and identifying opportunities for divestment.

Sustainability Progresses:

• In 2023, EC World REIT’s properties completed several environmental initiatives, including the installation of more LED bulbs and conducting feasibility studies for installing solar panels.
• The REIT has also conducted qualitative assessments of climate-related transition and physical risks for all its properties.

Portfolio Occupancy Update:

• A total of 15 new leases has been secured for Hengde Logistics Phase 1, which took up 65.2% of the occupancy rate. Tenants are from the medical logistics sector which is aligned with the marketing strategy to create a medical logistics hub in the property), with one of the tenants being ATM Cloud (which specialises in medical logistics) taking up 34.5% of the leased area.
• In terms of rental escalation in the tenants’ contracts in the REIT’s properties, it is as follows: For Fu Heng Warehouse, Fuzhou E-commerce and Hengde Logistics, leases come with a rent escalation of 5%; for Stage 1 of Bei Gang Logistics, it has a rental escalation of 1.0%; for Wuhan Meiluote, Chongxian Port Investment, and Chongxian Port Logistics, the current leases have no escalation.
• Comparing the occupancy rates of its properties between 31 December 2023 and 30 June 2024, Hengde Logistics saw its occupancy rate improving from 31.4% to 76.2%, and Stage 1 of Bei Gang Logistics remaining fully occupied. The other properties (in Chong Xian Port Investment, Fu Heng Warehouse, Wuhan Meiluote, Fuzhou E-commerce, and Chongxian Port Logistics) saw their portfolio occupancy rates recording a decline, with Wuhan Meiluote’s occupancy dipped the most (from 44.0% to just 33.8%, as a result of an influx of new warehouse supply and global and local economic slowdown in Wuhan).

Looking Ahead:

• Economic outlook for China’s real estate sector remains challenging.
• Despite potential in China’s e-commerce market, its growth rate may slow, and the market environment is expected to become more complex and volatile.
• The REIT management’s goal is to make steady progress in the coming year, gradually adopting to the economic rebound and returning to normalcy, ultimately providing sustainable value to all stakeholders.
• In light of the financial challenges present and ahead, it is highly likely that no distribution for the financial year 2024 will be declared too.

Details of EC World REIT’s Upcoming AGM

When? Monday, 29 July 2024
Where? Begonia Junior Ballroom 3011-2 & 3111-3 Level 3, Marina Bay Sands Expo and Convention Centre, 10 Bayfront Avenue Singapore 018956
Time? 10.00am

If your units of the REIT are held in your CDP account, no pre-registration is required. However, if your units are held in a custodian account, then you will need to get in touch with your brokerage to appoint you as a proxy to attend the meeting.

The upcoming AGM will be held in a wholly physical format, with no options available for unitholders to attend virtually.

In relation to the coming AGM, I have submitted the following questions to seek clarification from the management:

Question 1: On page 9 of the annual report, it is stated, “Our goal is to make steady progress in the coming year, gradually adapting to the economic rebound and returning to normalcy, ultimately providing sustainable value to all stakeholders.” Could the management provide further details on this, specifically regarding the key goals set for completion by the end of the financial year on 31 December 2024?

Question 2: On page 13 of the annual report, it is stated that the novation process, which involves taking over underlying leases from the master leases and other related party leases due to long overdue rent receivables, was completed on 30 June 2024. What are the subsequent actions planned by the REIT’s management following this completion, and are there any specific timeframes established for these actions?

Question 3: As a unitholder, I am happy to note that the REIT management has secured 15 new tenants for Hengde Logistics Phase 1. Could the management share the rental reversion of these leases?

Question 4: Given that distributions for unitholders have been suspended since FY2023 due to cash flow issues (which is quite disappointing, especially since it was stated during the AGM for FY2022 that unitholders should receive distributions for 1H FY2023), can the REIT’s management clarify whether the remuneration for the entire management and board of directors remains the same as in previous years, or if there has been a voluntary pay cut or suspension to align with unitholders? If not, could the management explain why this is the case?

Closing Thoughts

The China-based REIT continues to be faced with massive headwinds related to the inability to divest the 2 properties to repay borrowings. This is on top of the Sponsor’s inability to pay outstanding rent, which led to the REIT running into cash flow problems. Additionally, the oversupply of logistics properties in cities which EC World REIT has properties made matters worse, as they faced with difficulties to find new tenants to occupy the vacant property spaces.

In my opinion, for things to change, the overall situation in China have to improve – and its something I do not foresee to happen over the next 1-2 years, especially with the country currently engaged in a geopolitical tension between the United States and Europe, which, in my opinion, could impact its economic growth, as well as investors’ confidence.

And personally, as far as the REIT is concerned, I still maintain my opinion that it is heading towards liquidation, and my entire investment in it being written off. Any thing else I will consider as a ‘bonus’.

With that, I have come to the end of my summary of EC World REIT’s latest annual report, as well as my honest thoughts about it.

Related Documents

• Annual Report
• Notice of AGM
• Proxy Form
• Request Form

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

The post Key Highlights from EC World REIT's Annual Report for FY2023 first appeared on The Singaporean Investor.