In terms of providing strong dividends at low prices, S-REITs are proving themselves to be the gift that keeps on giving. Despite offering lower DPU in FY2020 ending September due to rental rebates and retention of 10% distributional income, EC World REIT is currently offering an 8.3% forward dividend yield at a P/NAV multiple of just 0.8 times in FY2021.
To be sure, EC World REIT has erred on the side of prudence by retaining 10% of distributable income in the face of the Covid-19 threat. But Dale Lai and Derek Tan of DBS Group Research believe that the REIT’s payout ratio for FY2021 will come in at 95% as it continues to retain distributional income till at least 2HFY2021. They have maintained a “buy” call on the counter for a target price of $0.80.
“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,” they share in a Feb 24 broker’s report. The counter’s 0.8 P/NAV ratio suggests that this strong yield is available at a bargain.
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But EC World REIT is not just the stuff of value investor’s dreams - it could potentially be a lucrative growth play too. The first specialised and e-commerce logistics REIT listed on the SGX, it owns a portfolio of quality real estate in China. These are based in one of the largest e-commerce clusters of Hangzhou in the Yangtze River Delta and Wuhan.
“We continue to like EC World REIT given its exposure to the fast-growing e-commerce and logistics sector in China,” says the DBS duo. Half of the REIT’s assets are e-commerce logistics; the other half is split almost equally between port logistics and specialised logistics.
Better yet, investors can rest easy about income stability. Around three-quarters of EC World REIT’s portfolio leases are on master lease with built-in rent escalation. These, say Lai and Tan, will support organic growth in its portfolio, despite it suffering a 1.2% valuation setback due to declining valuations of Hengde Logistics and Bei Gang Logistics Phase 1.
In terms of occupancy, the REIT reports a 4QFY2020 occupancy of 99.3% - a 2.6% q-o-q improvement despite the growing prevalence of remote working. The higher occupancy has seen 4QFY2020 net property income rising by 4.1% q-o-q. Only 15.8% of portfolio leases are due to expire in FY2021, even though rent renewals in FY2021 are seen to be relatively flat.
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“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,” say the DBS analysts. They note that EC World REIT intends to recommence signing longer leases when rents have stabilised.
EC World REIT’s balance sheets have improved on the back of low rates, with FY2020 gearing improving 0.6% y-o-y to 38.1%. All-in borrowing costs improved slightly from 4.5% in FY2019 to 4.3% in FY2020. Lai and Tan see further saving in borrowing costs ahead due to present low interest rates, with significant savings expected for FY2022 as one of the REIT’s larger loans mature.
As of 2.56pm, EC World REIT is trading flat at $0.72. It offers a 7.39% dividend yield and has a P/E of 12.26.