Excerpts from DBS report
Analysts: Dale LAI & Derek TAN
Divestments to pave the way for refinancing of loans
• Lower revenues in 3Q22 due to weaker RMB and lower fees received
• Revised projections to account for divestments and special distribution in FY22
• Maintain BUY, revised TP of S$0.55
A unique opportunity to accumulate, S$0.55 TP. Close to a 45% year-to-date (YTD) slide in the share price owing to perceived refinancing issues has sprung up a unique opportunity.
We see planned balance sheet recapitalisation by the end of 2022 to be positive, with the proposed sale of two properties (Beigang Logistics Stage 1 and Chongxian Port Logistics) to its sponsor, which will potentially allow unitholders to
(i) crystalise NAV and receive a one-off dividend ranging between c.10scts-12 scts and
(ii) reduce their reliance on master leases of the sponsor, which would be positive overall.
Post-sale, we see ECREIT still delivering yields of c.6%.
Will the proposed divestment to sponsor pass the shareholder test? With the manager entering into an MOU with the sponsor for the sale of two assets totalling about S$432.8m (at last valuation), funds received by the REIT will be more than sufficient to pare down its loans (25% by end-Dec 22) and pay a special dividend to unitholders.
Given that it’s an interested party transaction (IPT), we envision unitholders only accepting a deal that is valued close to NAV.
Inherent organic growth in the portfolio underpinned by master leases. Rental escalations ranging from 1.0% to 2.5% built into its master leases ensures organic growth in ECWREIT’s earnings.
Moreover, its multi-tenanted assets that cater to the fast-growing logistics industry also have the potential to deliver revenue growth.
Our TP of S$0.55 is based on DCF and assumes a discount rate of 8.1% (risk-free rate of 3.5%). This has taken into account the impending divestments.
Where we differ:
In addition to the one-off pre-termination compensation to be paid in FY22, we have also assumed a slight increase in all-in financing costs when maturing loans are refinanced during the year.
Key Risks to Our View:
Key risks include those that are sponsor-related such as failure to extend master lease agreements and challenges in maintaining occupancy.