EC World REIT - DBS Research 2021-02-24: Wuhan Back In Business


EC World REIT - Wuhan Back In Business

  • EC World REIT's lower FY20 DPU of S$0.0536 mainly due to rental rebates and retention of 10% of distributable income.
  • Healthy backfilling of vacancies at Wuhan Meiluote, bringing portfolio occupancy up to 99.3%.
  • Projecting a ~12% rebound in FY21 DPU; implying an attractive forward yield of 8.3%.
  • Maintain BUY with a target price of S$0.80.

EC World REIT's FY20 Results

Higher occupancy led to a 4.1% q-o-q increase in 4Q20 NPI

  • EC World REIT (SGX:BWCU)'s 4Q20 portfolio occupancy was 99.3%, a 2.6% improvement q-o-q, due to higher occupancy at Wuhan Meiluote (86.5% vs 35.0%).
  • China Tobacco’s lease at Hengde Logistics has been renewed in October 2020 for three years. Lease renewed was for ~160,000 sqm. Although rental reversion was slightly negative (~-1.1%), occupancy rate at the property has been maintained at 100%. The negative rental reversions were mainly attributed to the non-renewal of service agreement.
  • Lease at Chongxian Port Logistics has also been renewed (~3.8% of portfolio GRI). Based on our estimates, renewal at Chongxian Port Logistics was also likely to be slightly negative.
  • EC World REIT's FY20 DPU of S$0.0536 was 11.4% lower y-o-y; mainly due to rental rebates and retention of income.
    • Rental rebates were given to tenants in April 2020 at the height of the COVID-19 outbreak in China.
    • EC World REIT retained 10% of distributable income in FY20 for prudence (S$4.1m retained in FY20).
    • Excluding income retention, decline in DPU would have been a marginal -0.1% y-o-y.

Improvement in gearing and all-in cost of debt

  • EC World REIT's FY20 gearing of 38.1% was a 0.6% y-o-y improvement.
  • All-in borrowing costs improved marginally from 4.5% (FY19) to 4.3% (FY20). Given the low interest rate environment, we expect further savings in borrowing costs. Significant savings in borrowing costs likely to only be seen in FY22 as one of the larger loans mature

Portfolio valuations declined 1.2%; offset by ~4.6% appreciation in RMB

  • EC World REIT's overall portfolio valuations shrunk by 1.2% mainly due to decline in valuations of Hengde Logistics and Bei Gang Logistics Phase 1, likely due to lower rents achieved during renewals.
  • Portfolio valuations in S$ was up 3.6% due to appreciation of RMB against S$. RMB appreciated ~4.6% against S$ during the year.

Only 15.8% of leases (by GRI) are due to expire in FY21

  • Only 15.8% of portfolio leases are due to expire in FY21.
    • ~4% or 78,000 sqm of leases expiring in FY21 will be from China Tobacco’s other lease at Hengde Logistics.
    • Remaining ~12% of expiring leases will be at Chongxian Port Logistics; only ~4% expiring in 1H21.
    • We expect rent renewals in FY21 to be relatively flat.
  • We understand that management will be aiming to sign short-term leases for renewals as market rents are relatively weak currently and do not reflect the true potential rents of the properties. Management will consider signing longer leases once market rents have stabilised
  • Organic portfolio growth to continue with built-in rental escalations for master leases.

Our thoughts

  • We continue to like EC World REIT given its exposure to the fast-growing e-commerce and logistics sector in China. Despite taking a slight hit in FY20 due to the COVID-19 pandemic and the voluntary rental rebates given to tenants, we believe that the worst is over. Moreover, ~75% of its portfolio leases are on master lease with built-in rental escalations that will support organic growth in the portfolio.
  • During the quarter, EC World REIT successfully backfilled vacancies at the Wuhan Meiluote property (86.5% vs 35.0%), and we believe that the REIT will be able to continue leasing out available space at the property and sustain its strong overall portfolio occupancy rate of 99.3%.
  • We do however note that EC World REIT’s payout ratio has fallen to 90% and it will likely continue to retain 10% of distributable income until the threat of COVID-19 is fully over. The lower payout ratio was the main cause for FY20 DPU to come in ~5% below our projections. We understand that retained income has not been allocated for any use so far and it is purely a prudent provision.
  • As we do not anticipate any further rent rebates arising from the COVID-19 pandemic too, the return to full income distribution and potentially the return of some of the earlier retained income will be a positive surprise to FY21 DPU. We are currently assuming a 95% payout ratio for FY21 (retention of 10% of income in 1H20, and no retention of income in 2H20).
  • See EC World REIT Share Price; EC World REIT Target Price; EC World REIT Analyst Reports; EC World REIT Dividend History; EC World REIT Announcements; EC World REIT Latest News.
  • We are maintaining our BUY recommendation on EC World REIT with a target price of S$0.80.

Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-02-24
SGX Stock Analyst Report BUY MAINTAIN BUY 0.800 SAME 0.800