Before diving into today’s post, please note that trading of EC World REIT’s (SGX: BWCU) units remains suspended since 31 August 2023. The management has voluntarily suspended trading to ‘preserve its value’ after encountering cash flow problems caused by some tenants defaulting on their rental obligations. This default has led to the REIT being unable to meet its offshore interest payments. Distribution payouts to unitholders has also been suspended.

For those who have been keeping up with my posts about this REIT, you already know that I have written off my investment in it – anything beyond this point will be a ‘bonus’ for me.

With that out of the way, let’s get started.

EC World REIT is a China-based REIT focused on e-commerce and port logistics, with all its properties situated in China. Its current portfolio includes 4 properties dedicated to e-commerce logistics, 2 properties for port logistics, and 1 property for specialised logistics.

After market hours yesterday (07 August), the REIT has released its results for the 2nd quarter, as well as for the 1st half of the financial year ended 30 June. In this post, you will find my review of its financial performance, portfolio occupancy, as well as its debt profile:

Financial Performance (Q2 FY2023 vs. Q2 FY2024, and 1H FY2023 vs. 1H FY2024)

I will first be reviewing EC World REIT’s financial performance for the 2nd quarter, and then for the 1st half of the financial year:

Q2 FY2023 vs. Q2 FY2024:

My Observations: In Singapore-dollar terms, gross revenue and net property income were down by 6.0% and 7.1% respectively – however, in Chinese Renminbi-terms (RMB), the decline was lesser, by 4.5% and 5.7% respectively.

The decline was mainly due to the discontinuation of China Tobacco leases in Hengde Logistics Phase I, lower rental income from Chongxian Port Logistics, and higher operating expenses at the properties as a result of refund of land use tax recorded in April 2023, partially mitigated by organic rental escalations, and higher late fee income.

Distributable income to unitholders fell by 17.1% due to lower revenue and higher operating expenses.

1H FY2023 vs. 1H FY2024:

My Observations: In terms of the percentage decline of EC World REIT’s financial results for the 1st half of FY2024, it was similar to the 2nd quarter – where its gross revenue and net property income recorded a high-single digit percentage decline, while its distributable income to unitholders recorded a close to 20% drop.

For its gross revenue and net property income, if reported in RMB-terms, it would have been down by 5.6% and 6.5% respectively. The decline was mainly due to the discontinuation of China Tobacco leases in relation to Hengde Logistics Phase I, and lower rental income from Chongxian Port Logistics, and higher operating expenses at the properties as a result of a refund in land use tax in April 2023, partially mitigated by organic rental escalations, along with a higher late fee income.

Distributable income to unitholders fell by 18.6% to S$13.5m.

Portfolio Occupancy Profile (Q1 FY2024 vs. Q2 FY2024)

When it comes to reviewing a REIT’s portfolio occupancy profile, my preference is to compare the statistics reported in the current quarter under review against that reported in the previous quarter 3 months ago to find out whether it has continued to remain resilient, or it is showing signs of deteriorating.

In the table below, you will find my comparison of EC World REIT’s portfolio occupancy profile for the 2nd quarter of FY2024 ended 30 June, compared against the 1st quarter of FY2024 ended 31 March:

My Observations: Compared to the 1st quarter, portfolio occupancy improved by 8.9 percentage points (pp) to 80.2%, mainly due to a jump in committed occupancy in Hengde Logistics (up from 33.7% in Q1 FY2024 to 76.2% in Q2 FY2024), as well as in Chongxian Port Logistics (up from 91.3% in Q1 FY2024 to 92.9% in Q2 FY2024).

Additionally, novation has also been completed for 3 of its properties – Fu Heng Warehouse, Fuzhou E-Commerce, as well as Chongxian Port Investment. All 3 properties are under a master lease agreement structure.

In terms of lease expiries, 68.1% of the leases (by gross rental income) will be due for renewal in the 2nd half of FY2024, with another 20.1% of the leases (by gross rental income) due for renewal in FY2025. The remaining 11.8% of the leases (by gross rental income) will be due for renewal only in FY2026 or later.

Debt Profile (Q1 FY2024 vs. Q2 FY2024)

Just like how I have reviewed the REIT’s portfolio occupancy profile in the previous section, I will also be reviewing its debt profile for the current quarter under review (i.e., Q2 FY2024 ended 30 June) against that reported in the previous quarter (i.e., Q1 FY2024 ended 31 March), as follows:

My Observations: On 30 April 2024, approximately S$52.4m was repaid using the cash collaterals for the standby letter of credit (SBLC).

In July 2024, the Manager received a notice from the remaining revolving credit facility lender stating that the lender will proceed to settle outstanding sum using the cash collaterals for the SBLCs.

On 1st August 2024, the outstanding some of revolving credit facilities of S$20.1m was paid using short-term advance from an onshore SBLC issuer and subsequently will be settled using onshore cash collateral.

Despite being at a high level currently, the REIT’s average cost of debt will continue to increase due to a portion of offshore loans being unhedged.

CEO Mr Goh Toh Sim’s Comments & Outlook (from the REIT’s Press Release)

“On semi-annual basis, the revenue in RMB terms was 5.0% lower compared to 1HFY2023. ECW Group has insufficient funds to maintain operations due to delays in collecting related party rent receivables and the non-completion of the proposed divestment. The Manager is negotiating a Master Offset Agreement to address outstanding rental receivables and payables between ECW Group and the Sponsor Group. This agreement will offset receivables against payables to the Sponsor Group. As of 30 June 2024, the Manager had completed the novation process to take over underlying leases from the master leases and other related party leases. The Group's operating cash flows has improved in 1HFY2024 in conjunction with the completion of novation process.

In addition, the Manager continues to work on discharging of unauthorised mortgages imposed over Fuzhou E-Commerce and Fu Heng Warehouse through issuing more demand letters to the Sponsor and the Fuyang Finance Bureau to escalate the urgency of resolving the issue. The Manager concurrently instituted legal actions. The only unauthorised mortgages that has yet to be discharged is the mortgage imposed over Fuzhou E-Commerce.

The restructuring of the existing Onshore Facility has been completed on 16 July 2024. This allows the Group to defer part of the interest expense payments and principal instalment repayments to April 2026. The facility agent under Offshore Facility has issued a Pre-enforcement Notice to the Group and imposed certain conditions and milestones to be fulfilled within the time prescribed. The Manager is in active working with the lenders of the Offshore Facility to fulfil the conditions of the Pre enforcement Notice and is optimistic to receive the lender's support. As the date of this announcement, the Group has not received any notice of enforcement action. In the meantime, ECW Group continues to face challenges to maintain its operation and meet the financing obligations.

Due to the challenging market conditions, the valuation of the assets was further reduced by 9.5%. The on-going Master Offset Agreement with the Sponsor may have impact on the valuation. The Manager continues to work on improving the occupancy while aiming to entice quality tenants in order to improve the overall situation in the long run.”

Closing Thoughts

Multiple headwinds still remain for the REIT – particularly on rental defaults, discharging of unauthorised mortgage imposed over Fuzhou E-Commerce, as well as issues on its debt repayment front.

After studying through the related documents published by the REIT, I have submitted the following 5 questions for the investors’ relation:

Question 1: It has been observed that there are rental escalations and late fee income reported for the 2nd quarter and the 1st half of FY2024. Could the REIT clarify whether this income has been received, or if it is still owed by the tenants?

Question 2: Regarding the 15 new leases secured for Hengde Logistics Phase 1, could the REIT provide the duration of these leases?

Question 3: With 68.1% of leases (by gross rental income) up for renewal in the second half of FY2024, can I have an update on the current status of lease renewal discussions (are they still in discussion stage, or are they close to being finalised)? Additionally, what percentage of these leases are currently in default?

Question 4: As of 30 June 2024, what proportion of borrowings has been hedged to fixed rates?

Question 5: It is understood that the REIT may not be able to make distribution payouts to unitholders for FY2024. Is there a specific target or timeline the REIT is aiming for to resume these payouts?

I will update this post with the management’s reply when I receive them.

With that, I have come to the end of my review of EC World REIT’s latest results for the 2nd quarter, as well as for the 1st half of FY2024. I hope for those of you who are still holding onto units of the REIT, you will find the updates useful. As a unitholder, even though I am resigned to losing all of my invested capital, but I will continue to do my best to provide any material updates as and when I have them, so as to keep fellow unitholders abreast of the latest developments.

Related Documents

• Press Release
• Financial Statements
• CEO’s Presentation Slides

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

The post Evaluating EC World REIT's Results for Q2 and 1H FY2024 first appeared on The Singaporean Investor.