| This month (July) is the second anniversary of EC World REIT's listing on the Singapore Exchange. Its unit price, at 72 cents recently translates into an annualised yield of 8.4%. The unit price has touched the lowest point in two years -- but could this be the bottom?  The REIT's under-performance vis-a-vis its IPO price of 81 cents is not a rare event in the early experience of many REITs. Just look at Keppel DC REIT, a comparable in the sense that it too has assets that are specialised (data centres). Keppel DC REIT, which needed about a year and a half for investors to re-rate it strongly, now trades at 1.4X book value (see chart). |
EC World REIT CEO Goh Toh Sim speaking with about 150 investors last week. NextInsight photo.EC World has stepped up its investor education: In June alone, the management took to three events to share the REIT's story (see photos from EC World's Facebook page). 
L-R: Li Jinbo, Head of Investments, Asset Management and Investor Relations | Johnnie Tng, CFO | Goh Toh Sim, CEO | Gabriel Yap, chairman of GCP Global. Photo: GCP GlobalWe attended one organised recently by GCP Global.
EC World describes the majority of its asset portfolio as being specialised as it comprises a Hangzhou inland river port that handles steel for urbanisation projects and warehouses (also in China) that support the logistics of e-commerce players.
Unlike conventional warehouses that chiefly store boxes, EC World's warehouses are equipped to rapidly move inventory.
The customer's significant investment in the infrastructure lends a customer stickiness for the REIT. Similarly, for its port.
For an idea of what an e-commerce warehouse is about, watch this video of JD.com, which leases one of EC World's warehouses -->
REITs with specialised asset portfolios tend to trade at higher valuations, noted Li Jinbo, the REIT's Head of Investment, Asset Management and Investor Relations.
Three such REITs -- Keppel DC REIT, First REIT and Parkwaylife REIT -- had an average P/B value of 1.43 as at 19 June 2018.
It was only 0.77 for EC World, unfortunately, but Mr Li optimistically said: "There is potential for revaluation of our REIT once the market appreciates the differentiation in our assets."
L-R: Johnnie Tng, CFO | Goh Toh Sim, CEO | Li Jinbo, Head of Investments, Asset Management and Investor Relations. Photo: GCP Global There is a further positive about EC World: Its management fee is directly tied to the REIT’s performance and unitholders’ interest:
♦ Management fee: It is 10% of distributable income payable to unitholders. In contract, in a typical REIT, the management base fee is a percentage of the assets under management.
♦ Performance Fee: It is 25% of the year-on-year incremental distribution per unit (DPU), so if the DPU doesn't grow, neither does the performance fee.
In contrast, in a typical REIT, it is a percentage of net property income -- which is the figure before financing costs and other expenses.
| With a recent acquisition in Wuhan, EC World has got on the path to growing its DPU. (See: EC WORLD REIT: "Sponsor's asset ripe for injection into REIT," says analyst) It has a relatively low gearing of 28.9% which implies about S$220m of debt headroom (40% optimal gearing) for future acquisitions. These could be of assets of EC World's sponsor and/or logistics real estate assets of YCH Group totalling more than 280,000 sqm of GFA and an estimated value of S$400m. So, if Keppel DC REIT's unit price journey is any guide, EC World could well prove to be a bargain buy at the current level. And, compared to other yield instruments, EC World is looking attractive as the chart below shows.  |
Investor: Is the 8.4% dividend yield sustainable? I understand there is currently a 100% payout while other REITs pay out 90%.
Mr Li Jinbo: In Singapore, every REIT has paid out 100% in their first two years after IPO to reward unit holders. Normally, after that, REITs will withhold a couple of percent typically for capex to enhance the properties.
EC World's properties are generally new, so we are still paying out 100%. Don't rule out the possibility that we will pay between 90% and 100% some time in the future. But if we make earnings-accretive acquisitions, we will be able to generate more distributable income.
(For more info on the REIT, including the risks, read the SooChow CSSD Capital Markets initiation report)