A couple of Chinese S-REITs — that is locally listed REITs with mainland Chinese assets — have encountered some headwinds. That is not the case with EC-World REIT, which with its port logistics assets and warehouses, should be having a fair tailwind. So far, so good.
Following the release of EC-World REIT’s 3QFY2021 results for the quarter on Sept 30, analysts covering it are hopeful of an asset sale. In May, ECWorld REIT’s unit price — which had been trading in the 71 cents to 75 cents range — was boosted by an announcement. Its manager announced it had been approached by Forchn International — the sponsor — in relation to a potential transaction involving ECWorld’s interests in all of its properties, which may or may not lead to the divestment of these properties. Since then and the boost to unit price, ECWorld REIT’s manager has not made any further announcements.
“The board and the potential buyer have not reached an agreement yet on the sale of ECWREIT’s assets (net asset value per share stands at $0.95 as of 3Q2021). Management will make an official announcement once the deal is confirmed. There remains an upside should this deal go through given unit price is now trading at 15% below book value, in our view. We note that investors are getting paid 8+% yield, while waiting for the outcome,” suggests a recent Soochow CSSD Capital Markets report.
“Earlier in May, the REIT manager announced that its sponsor Forchn International (44% stake), is leading discussion on behalf of a consortium of purchasers for acquiring the REIT assets. Management noted that these discussions are still ongoing,” notes an RHB Research update. “We believe that though recent Government regulations have lowered the probability, there is still a good potential, considering its attractive 8% yields. We think a potential privatisation offer would likely need to be at least 1 times price to book for it to be successful,” RHB adds.
Interestingly, as at June 30, EC-World REIT’s short term debt ballooned to $514.8 million, from $107 million as at March 31 and $91 million as at Dec 31, 2020. By Sept 30, short-term debt stood at $703.5 million. If EC-World REIT were to be an onshore Chinese developer, it would have crossed at least one of the three red lines, of cash-to-short-term debt ratio of more than 1 times.
In June 2019, various banks — coordinated by DBS Bank and United Overseas Bank (UOB) — arranged offshore loans of up to $424.5 million. These consist of a multicurrency term loan facility of up to $355.0 million, a Singapore dollar term loan of up to $22.5 million and a multicurrency term loan facility of up to $47 million.
At the same time, DBS Bank (China) and UOB (China) arranged onshore loans of up to RMB 1.095 billion ($232 million) consisting of RMB1.018 billion and RMB77 million. All the loans are for a tenure of three years, except the RMB77 million onshore facility which is a 10-year loan.
“Majority of the loans undertaken will be due in July 2021 (July 2019 being the drawdown date). Therefore, the short-term debt as at Sept 30 has risen correspondingly compared to as at June 30. The manager is in touch with its lenders for the refinancing process, and will update the market in due course. Management expected existing loans will be settled before their maturity,” says a spokeswoman for EC-World REIT’s manager.
Noticeably, all loans and other forms of debt are likely to have change of control covenants, as do EC-World REIT’s loans. A default for the offshore loan occurs if the manager ceases to be the manager of EC-World REIT, and Forchn Holdings Group ceases to hold at least 25% of EC-World REIT’s units. The loan and accrued interest has to be immediately payable. There are similar conditions for the onshore loan but the onshore loan’s conditions allow for the manager to be replaced by a new regulator-approved manager.
Singapore Exchange query
The reason that EC-World REIT’s short term debt levels are raising concerns in some quarters is, of course, a result of Dasin Retail Trust’s refinancing of its bank loans. The Singapore Exchange (SGX) queried Dasin Retail Trust twice this year, in April and in August, on why its short-term debt had risen so drastically.
It is for the same reason that EC-World REIT’s debt has risen. As loan tenor runs down, long-term debt is reclassified as current liabilities. While EC-World REIT’s spokeswoman says the loans were drawn down in July 2019, it is in June this year that $514 million was reclassified as current liabilities.
Similarly for mainboard-listed Dasin Retail Trust, its current liabilities as at June 30 are temporarily high due to the reclassification of a $422.65 million offshore and a RMB375.15 million onshore syndicated term loan which are due on Dec 19.
Once these are termed out, and Sino-Ocean Capital takes control of the trust itself, in addition to the manager, investors’ sentiment could improve. However, the route for the loans to be termed out has been a rocky one.
In April, as Dasin Retail Trust was being queried, its major unitholder and previous sponsor Zhang Zhencheng attempted to divest of a stake in the manager and the trust to ARA Asset Management. This did not go through because of ARA’s sale to ESR Cayman — which is focused on logistics, data centres and life science assets and not retail malls, which are Dasin Retail Trust’s main assets.
Eventually, in October, Zhang completed the sale of the 70% Dasin Retail Trust’s manager to a unit of Sino-Ocean Capital, a Chinese stateowned enterprise (SOE) for around $8.3 million.
At the same time, Aqua Wealth — a company controlled by Zhang — has granted a call option to the Sino-Ocean Capital unit for one year after the completion of the sale in October to acquire the lower of the units owned by Aqua Wealth, or 26% of the total units outstanding. As a result of the agreement with Sino-Ocean Capital, around $500 million of Dasin Retail Trust, which matured on July 18, were extended to Dec 19.
Dasin Retail Trust’s seven malls are located in the greater bay area. In 1HFY2021 for the half year to June 30, it announced a net property income of net property income of $38.2 million, up 26.3% y-o-y, and distribution per unit (DPU) of 2.98 cents — up 55.2% y-o-y — giving a DPU yield of 13.8%.
Master leased to the sponsor
According to the FY2020 annual report, the four e-commerce assets of EC-World REIT, Fu Heng Warehouse, Bei Gang Logistics and Fuzhou E-commerce are on long master leases. Fu Heng Warehouse is master leased to Hangzhou Fuyang Yunton E-Commerce Co, an e-commerce logistics operator under the brand name “Ruyicang 如意仓”, which is wholly owned by Forchn Holdings. Meanwhile, Bei Gang Logistics is master leased directly to Forchn Holdings Group, a company related to the sponsor.
The warehouse component at Fuzhou E-commerce is master leased to Hangzhou Fuyang Yunton E-commerce Co, which is also related to Forchn Holdings, and the office and support buildings component at Fuzhou E-commerce is master leased to Zhejiang Yuntong E-commerce Co. The e-commerce asset, Wuhan Meiluote is a multi-tenanted property whereby JD.com is its major tenant.
The annual report indicates that Hangzhou Fu Gang Supply Chain accounts for 36.4% of EC-World REIT’s gross rental income (GRI), Forchn Holdings Group 22.5%, and Hangzhou Fuyang Yunton E-commerce, 8.4% of GRI. In total, Forchn Holdings and its affiliates pay EC-World REIT some 67% of its GRI.
While investors have had unfortunate experiences with a handful of REITs with master leases, (there have been four or five) it does not necessarily imply that there is anything wrong with EC-World REIT’s master leases. Master leases provide stable income.
But occasionally, when the sponsor is the master lessee, there are downsides — as investors of Lippo Mall Indonesia Retail Trust, First REIT, Eagle Hospitality Trust and Sabana REIT have found.
Most investors understand the risk associated with holding EC-World REIT, but, with a DPU of 1.662 cents in 3Q2021, and an annualised DPU yield of 7.9% to 8%, they reckon they get paid while they wait.
Besides, analysts sound upbeat. Soochow CSSD Capital Markets is positive about EC-World REIT’s operations. “Revenue from Port Logistics and E-Commerce Logistics have grown for six consecutive quarters. The step-up rents for the four master leases (contributed around 73% of revenue in FY20) within these two segments can deliver around 1.8% revenue growth per annum,” the Soochow CSSD Capital Markets report adds.
Other top performers
Sasseur REIT’s focus is on art and outlet malls with the REIT’s positioning on discretionary spending in a niche market. Still despite being in the outlet mall sector, this REIT has weathered Covid-19 remarkably well. DPU in 3QFY2021 for the three months to Sept 30, rose 3.8% y-o-y to 1.83 cents, while the 9M2021 DPU rose 12.9% y-o-y to 5.2 cents.
Unlike other REITs, Sasseur does not report NPI, but a metric called entrusted management agreement (EMA) income. This EMA income comprises a fixed portion — which has been RMB105.5 million for the past two quarters — and a variable income which is what gives the growth or lack thereof.
Cecilia Tan, the CEO of Sasseur REIT’s manager, is aware that sales were challenged q-o-q as the weather was unusually warm and shoppers did not stock up on winter clothes as they had done in the past. In addition, Tan is focusing on local brands because of a nationalistic sentiment. “We realise that demand for international brands has been dropping and there is more demand for domestic brands,” she said at a recent results briefing. She plans more factory outlets in the REIT’s four malls.
Sasseur REIT’s strategy is a little different from other REITs .Chairman of Sasseur Group and the REIT’s sponsor Vito Xu and his wife Sasseur Yang Xue, are creating their outlet malls with a “unique artistic approach”. The couple — and clearly Tan is on board with this model — focus on a unique art commerce DNA and “A × (1+N) × DT” business model that features emotional thinking, aesthetic thinking, scene thinking and capital thinking. Whatever the case, among the four Chinese S-REITs, Sasseur REIT has the most sound balance sheet.
Elsewhere, BHG Retail REIT’s short-term debt rose to $295.6 million as at June 30, up from $9.3 million as at Dec 31, 2020. However, BHG REIT’s sponsor is a unit of Beijing Hualian Group Investment Holding Co, one of China’s largest retail enterprises and a familiar name. With NAV of 89 cents, P/NAV of 0.57 times, and DPU yield of 8.8%, investors may want to sit tight on this REIT and get paid while they wait, given the discount to book, high yield, low volume and pedigree.