China-based e-commerce and port logistics REIT in EC World REIT (SGX:BWCU) will be holding an Extraordinary General Meeting (EGM) on Friday, 16 December 2022, to seek unitholders’ approval on the divestment of 2 properties (Stage 1 of Bei Gang Logistics and Chongxian Port Logistics) to raise 25% of its total borrowings for repayment by 31 December (failure to do so will lead to the REIT falling into a ‘default.’) Additionally, following the divestment, unitholders will be eligible to a special distribution payout amounting to about 11.0 Singapore cents/unit.

Since the announcement in early-October (you can read the press release here, and full details of the proposed divestment here), I have been actively following up with the REIT’s investor relations with questions about the divestment.

In this post, you’ll read about all the questions I’ve raised. You’ll also find a list of questions that remains unanswered (even until today, which I intend to bring up in-person during the EGM – and I encourage fellow unitholders to attend and raise any concerns you may have), my request for assistance from Security Investors Association (Singapore) (SIAS), details of its upcoming EGM, and finally, my thoughts about this whole episode.

Let’s begin:

Initial Questions Following the Announcement of the Divestment on 03 October 2022 (Email Sent on 03 October 2022), along with the REIT’s Responses (Received on 12 October 2022)

The following are questions submitted to the REIT’s investors’ relations (preceded by ‘LJY’, which is my name, Lim Jun Yuan), along with responses by the REIT (preceded by ‘ECW’, representing EC World REIT):

LJY: How much are the 2 properties contributing to the REIT’s gross revenue in FY2021?

ECW: From our experience, we are of the view that the more relevant and reflective benchmark for evaluating the financial performance of the properties would be net property income ("NPI") instead of revenue. We are only able to provide a segment level revenue breakdown within our Portfolio in the annual reports.

For your kind reference, the pro-forma financial effects of the proposed divestment of the two assets to be divested (the "Divestment Properties" and the "Proposed Divestment") on ECW are shared in the announcement dated 3 October 2022 (the "Announcement").

We have also disclosed in the Announcement that the NPI attributable to the Divestment Properties in terms of relative percentage to the EC World REIT ("ECW")'s total NPI, was 28.1%, based on the audited accounts for FY2021.

LJY: From the announcement, it is claimed that one of the reasons for the divestment is to “preserve long-term value for unitholders” – having said that, following the proposed divestment, DPU will be reduced to 4.58 cents (from 6.41 cents before the divestment) – a decline of 28.5%. As such, I’d like to ask how is this coined as “preserving long-term value for unitholders” when DPU is going to drop by close to 30.0% thereafter?

ECW: As disclosed in the Announcement, the Manager believes that the Proposed Divestment will provide long-term value for Unitholders as the Divestment Properties have proven to be sub-optimal to the operations of EC World REIT in recent years. Should the Divestment Properties continue to form part of EC World REIT's portfolio, the long-term value to Unitholders would deteriorate due to the following reasons:

(i) Decline in asset valuations of Divestment Properties compared to IPO levels

(ii) Beigang Logistics Stage 1 is no longer as attractive to tenants, due to market trends

(iii) Unfeasible to overhaul and reposition the Divestment Properties to capture evolving e-commerce trends

(iv) Chongxian Port Logistics is an aging property with upcoming extensive repair required

In addition, driven by the current macroeconomic and real estate conditions in PRC, the lenders of both offshore and onshore bank loans had called on ECW to repay at least 25% of existing bank loans by 31 December 2022, and to proceed to refinance the remaining loans due 30 April 2023. The Manager, having carried out extensive engagements with the lending banks and having evaluated the Proposed Divestment, is of the view that there is a real risk of an imminent default of the repayment obligation due 31 December 2022 if the Proposed Divestment is not carried out.

In light of the foregoing, the Proposed Divestment presents an attractive option for EC World REIT to realise the value of the Divestment Properties.

Subject to the completion of the Proposed Divestment, the Manager intends to distribute to unitholders a special distribution as well.

LJY: Continuing on the REIT’s rationale of “preserving long-term value for unitholders”, may I ask if there is a list of properties to which the REIT has ROFR to from its Sponsor to replace the 2 divested properties, so as to to restore the DPU to 6.41 cents (the amount before the divestment)? And if there is, may I know if there is a timeframe in which the REIT is looking at to acquire the properties and restore the DPU?

ECW: As disclosed in ECW IPO Prospectus, the Sponsor has granted a right of first refusal to EC World REIT (the "Sponsor ROFR") which provides EC World REIT with access to opportunities for the acquisition of income-producing e-commerce and logistics properties located in China. When such acquisition opportunities arise, the Manager will evaluate the merits according to its investment criteria.

LJY: Will the proposed divestment lead to any drop in the REIT’s aggregate leverage?

ECW: The proposed divestment will enable EC World REIT's to pare down its existing loans due 31 December 2022 by Relevant Mandatory Prepayment Amount (per defined in the Announcement). It is expected the gearing pre-completion and post-completion should remain stable. The actual effect of the leverage will be determined at the completion of the Proposed Divestment.

Followup Questions to Seek Further Clarifications on the REIT’s Initial Responses

Following the REIT’s response to my initial set of question, I posed 6 more questions (email sent on 12 October 2022) to seek clarification on their responses, and they are as follows:

Question #1: The reasons given by EC World REIT for the divestment of the 2 properties is that one is no longer attractive to tenants due to market trends (Beigang Logistics Stage 1), and the other is an ageing property with upcoming extensive repair required (Chongxian Port Logistics) – I am perfectly sure that concerns surrounding the 2 properties did not just come about overnight (the reason why I say this is because market trends do not just change overnight, and also, in terms of property ageing, again, properties do not just visibly age overnight as well) – that said, why did the REIT only reveal such concerns when they need to raise funds?

Question #2: I understand that “the lenders of both offshore and onshore bank loans had called on ECW to repay at least 25% of the existing bank loans by 31 December 2022”, and because of that, the REIT has proposed the divestment of 2 properties. May I know how much of existing bank loans will the REIT be able to repay with the proposed divestment? Is it just 25% or is the percentage a higher one?

Question #3: As far as the borrowings are concerned, I note that the remaining loans are due on 30 April 2023 – that being said, will we see a repeat of the same scenario where the REIT will end up having to repay more of the loans by a certain date, and because of that, more properties will have to be divested to raise the amount? The reason why I’m asking this question is because following the divestment, distribution per unit will drop by 30%, and unitholders will suffer. Should there be further divestments, unitholders will once again have to bear the brunt of it, and personally, I don’t think this is considered as “preserving long-term value for unitholders.”

Question #4: In the near-term (I’m talking about the next one year here), are there plans by the REIT to make ROFR acquisitions from the Sponsor to try to “cover the gap” caused by the divestment of the 2 properties? If the REIT’s management is serious about “preserving long-term value for unitholders”, then there should be some plan in place to cover the net property income gap caused by the absence of contributions from the 2 properties due to divestment. Furthermore, a dip in DPU by 30% is not a small amount, and this will lead to a sharp drop in the REIT’s unit price after the special distribution payout goes “ex-dividend”, and again, unitholders (especially those who have kept faith with the REIT over the years) will end up severely disadvantaged.

Question #5: From the REIT’s reply that “there is a real risk of an imminent default of the repayment obligation due 31 December 2022 if the Proposed Divestment is not carried out” it seems to me that divesting of the 2 properties is the only option on the table. That said, I’d like to ask why didn’t the REIT look into other options – such as equity fund raising, or engaging in discussions with the Sponsor to take a “leap of faith” by helping the REIT with the repayment, or even privatising the REIT (which in my opinion, is a fairer option for the unitholders.) If the REIT did explore the options (which I highlighted), may I know reasons why they weren’t chosen?

Question #6: If, in any case, the proposed divestment is voted against by unitholders, then the management as well as the Sponsor will let the REIT go into default? Is there any Plan B in place? Again, if there are no alternative plans, then may I know how the management is keeping to its words of “preserving long-term value for unitholders.”?

The response provided by the REIT (email received on 14 October 2022) is as follows:

Thank you for your follow-up queries following our responses to your earlier questions. As we have announced, the lenders of both offshore and onshore bank loans had called on ECW to repay at least 25% of existing bank loans by 31 December 2022, and to proceed to refinance the remaining loans due 30 April 2023.

The Manager is of the view that there is a real risk of an imminent default of the repayment obligation due 31 December 2022 if the Proposed Divestment is not carried out. As such, the Proposed Divestment presents an attractive option for EC World REIT to realise the value of the Divestment Properties while repaying part of the remaining loans.

In addition, the Divestment Properties have proven to be sub-optimal to the operations of EC World REIT in recent years. Should the Divestment Properties continue to form part of EC World REIT's portfolio, the long-term value to Unitholders would deteriorate per the reasons shared in our earlier announcement on 3 October 2022.

The relevant information on the proposed divestment have been shared in the SGXNET announcement and press release dated 3 October 2022. In accordance with the listing rules on corporate disclosures, the Manager is unable to provide responses to forward-looking questions or disclose additional information at this juncture.

As disclosed in the Announcement, the proposed divestment is subject to approval from Unitholders.

Thank you for your kind understanding in this matter.

In response, I have sent the following on 14 October 2022:

Thank you for your reply.

Correct me if I’m wrong, but from the responses, it seems like divestment of the 2 properties is the only option the REIT has to come up with the amount needed to repay the bank loans, and that the management will let the REIT go into default if the proposed divestment is rejected by unitholders.

Another thing I’d like to seek clarification on is, since it was identified in recent years that the 2 properties have proven to be sub-optimal to the operations of EC World REIT, why wasn’t this mentioned to unitholders in the annual report, or during the AGM?

Finally, one pertinent issue is that, following the divestment, the distribution per unit will tumble by close to 30% (which is not a small amount), and unit price of the REIT will definitely be negatively impacted as a result. That said, I have asked about the REIT’s plans moving forward to fill this gap in the near-term (within the next year or so) but it wasn’t responded to – I would greatly appreciate it if the REIT were to shed some light on its plans to resolve this issue.

As much as the REIT hopes that unitholders understand the issue and vote in favour of the proposed divestment in the EGM, but I hope that the REIT also understands the issues that unitholders have following the divestment (particularly, it is the huge drop in distribution payout) and provide more information about its action plans to fill this gap to fulfil its promise of “preserving long-term value for unitholders.”

Thank you, and I look forward to a favourable reply regarding the above.

The response provided by the REIT the following day (15 October 2022) was as follows:

Thank you, we acknowledge and respect your views on the Manager's Proposed Divestment.

We have likewise shared with you the Manager's position. After much deliberation, the Manager has proposed a divestment of assets as the best option to meet the requirement to repay at least 25% of existing bank loans by 31 December 2022 and to refinance the remaining loans due 30 April 2023. Given the decision to propose a divestment, the Manager has therefore also assessed the portfolio carefully and have selected Beigang and Chongxian Port Logistics ("Divestment Properties") as suitable divestment assets, based on reasons that have been set out in our Announcement dated 3 October 2022.

The Manager has conducted the due process of market testing to solicit interest in the Divestment Properties. In addition, the Manager has also conducted direct outreach to potential bidders, with the assistance of the Financial Advisor. This outreach exercise did not yield any other indications of interest for the Divestment Properties.

The decision to propose the divestment and seek the support of unitholders in order to avoid default of the mandatory repayment due 31 December 2022 was made after extensive engagements with the lending banks and after careful evaluation.

We recognise your concerns with regards to the Divestment Properties and "plans moving forward to fill this gap". At this juncture, the Manager is unable to provide additional information apart from what has already been communicated. We encourage all unitholders to refer to information in the upcoming circular for the proposed divestment, which will be sent to unitholders in due course. In accordance with disclosure rules, the Manager will address questions related to the resolution to be tabled for approval at the upcoming EGM.

Once again, thank you and we like to reiterate again that we acknowledge and respect your views, and will answer questions that you may still have at the EGM.

My reply to the above (on 17 October 2022) was as follows:

Many thanks for the reply, and appreciate the hard work you’ve put in (as I note that the reply was on Saturday, a non-working day.)

I can also understand the position you are in at the moment, as some of the information cannot be divulged to unitholders before there was any confirmation by the top management.

With regard to that, I do appreciate it if you can highlight the following issues to them, as they are not exactly being addressed in our previous correspondences:

• The fact that Beigang is deemed “no longer attractive” to tenants, and Chongxian has aged and would require extensive repair is certainly not something that happened overnight. From our correspondences, I note that this has been an ongoing issue for a few years. However, when I asked about why this issue wasn’t brought up during the REIT’s AGM, it wasn’t responded to.
• Following the divestment, the REIT’s DPU will see a 30% drop. As the REIT’s management promises to “preserve long-term value for unitholders”, I asked about the REIT’s near-term plans (within the next 1 year) to restore the DPU, and I did not get a direct answer – as a unitholder, this is a huge concern as the huge dive in DPU will lead to the REIT’s unit price further tumble, and I think it is reasonable we know of the REIT’s plans in the next 1 year moving forward.
• Finally, I asked for any back up plans the REIT have if the proposed divestment ends up being rejected by unitholders in the upcoming EGM – but from the responses I get, it seems to me there are no ‘Plan B’ in place, with the management letting the REIT go into default if that is the case, and it’s certainly worrying.

I sincerely hope the top management can be made aware and issue an official response to the above 3 issues, as I feel they are something the REIT’s management is accountable to unitholders for, particularly if the REIT promises to “preserve long-term value for unitholders” – but from the recent actions by the REIT, it certainly doesn’t seem to be the case.

I look forward to a favourable response from the REIT regarding the above. Unfortunately, till date, this particular email was not responded to.

Request for Assistance from SIAS

Questions which I have asked repeatedly (and I have re-iterated them once again in my most recent email to them on 17 October 2022) wasn’t responded to – much to my disappointment.

As I felt those were pertinent questions, I decided to seek SIAS’ assistance on this – after all, they are “the voice” for minority shareholders, and one of the things they do was assisting investors to resolve issues.

With that in mind, I drafted the following to them on 20 October 2022, with email content as follows:

I’m Jun Yuan, a retail investor in Singapore-listed companies, as well as the founder of investment blog ‘The Singaporean Investor’ (TheSingaporeanInvestor.sg) – with my aim of setting up this blog to write about listed companies’ in layman terms so as to help fellow Singaporean investors (many of them working full time and do not have time to read annual reports or conduct extensive researches about companies) make sounder investment decisions.

I have also been a member of SIAS since January this year, and personally, I have benefited from the virtual information sessions held by SIAS and attended by the management of the listed companies and shareholders.

With that, I’d like to seek SIAS’ help on the announcement published by EC World REIT (a REIT I have am invested in since January 2020) on 03 October 2022 on the proposed divestment of 2 properties (in Stage 1 Properties of Bei Gang Logistics and Chongxian Port Logistics) to raise the 25% needed to repay the loans by 31 December 2022 and failure to do so will result in the REIT falling into default. Currently, the proposed divestment is pending approval by unitholders in an EGM.

Prior to contacting SIAS, I have already engaged in multiple email conversations with the REIT’s investor relations where I attempted to seek clarifications on the entire proposed divestment (and I have attached a copy of all the email correspondences I had with the REIT’s investor relations for your reference under the file name [Filename withheld for confidentiality].)

However, despite my repeated asking, 3 main concerns (which I think unitholders have the right to know) weren’t addressed, and they are:

1. From the email correspondences I have with the investor relations, I understood that the 2 properties were chosen because, for Bei Gang Logistics, it was noted that market trends have changed, and for Chongxian Port Logistics, it was noted that the property have aged and will require a significant amount of capital to refresh it – that being said, my question is that things like change in market trend and ageing of properties did not happen overnight, and as such, why such important concerns wasn’t brought up by the management during the AGMs conducted when they were being identified.

2. Following the divestment of the 2 properties (if it is given the ‘green’ light by unitholders during the upcoming EGM – which until now, the date of the EGM wasn’t announced and its very worrying to note considering the due date for repayment of the 25% of borrowings will be on 31 December 2022), the DPU will drop by a good 30% – with regard to that, I asked about the REIT’s plans over the next 1 year period to restore the distribution payout (personally, I felt it was a valid question to ask because the REIT’s unit price will definitely take a huge tumbling following the payout of special dividend going ex-dividend if there aren’t any plans to restore the payout), but unfortunately, the question wasn’t responded to despite my repeated asking.

3. From the email conversations I have with the REIT on whether or not there are any ‘Plan B’ in place if the proposed divestment was voted against by unitholders, it seems to me that the REIT management will let the REIT go into default should the proposed divestment be rejected by unitholders during the EGM – and this definitely is very worrying to note, and a potential red flag in my opinion.

It is with the above concerns (along with me being unable to get any response from the investor relations or the management) that I’ve decided to approach SIAS’ assistance – if the association require further information, I can be reached via this email address ([personal email address censored]), or via mobile at [personal information censored].

Response from them was only received on 09 November 2022, after sending out a reminder email on 31 October, as follows:

We appreciate that you have alerted SIAS on this matter and noted your queries to ECW and your dissatisfaction with their responses to your queries. SIAS will monitor the financial results announcement today, after market close and will contact EC World Reit. Please allow us to work on it and reach out to you within a few working days.

I have sent another email (on 21 November 2022) to check on the status but, till date, I have yet to receive any responses from SIAS regarding this, much to my disappointment.

This whole episode exposes an issue which I feel needs urgent addressing – in the event where the investor relations of companies fail to provide responses to concerns which retail investors have, and at the same time, pleas to organisations like SIAS are ‘ignored’, then we’re at the ‘losing end’, but that’s something to talk about in another day.

Further Clarification Sought on Announcement Published on 23 November 2022

On 23 November 2022, the REIT provided an update on the financing obligations. Particularly, I note the following: “the Board of the Manager is of the view that the Sponsor has sufficient financial resources to meet its obligations under the Offshore Undertaking and the Onshore Undertaking by ensuring that the Mandatory Repayment is made by 31 December 2022.”

You can read the update in full here.

In response to the update, I have sent out another email the following day (24 November 2022) to seek for clarification:

Jun Yuan here again, and I would like seek clarification from the REIT regarding latest announcement posted on 23 November 2022, particularly the following in Page #2 of the document, and I quote:

“In respect of the obligation of the Sponsor to ensure that the Mandatory Repayment is made by 31 December 2022, the Board of the Manager (the "Board") is of the view that the Sponsor has sufficient financial resources to meet its obligations under the Offshore Undertaking and the Onshore Undertaking by ensuring that the Mandatory Repayment is made by 31 December 2022. This is based on the management's review of latest audited financial statements of the Sponsor and written confirmation from the Sponsor that the Sponsor is able to fulfil its undertakings to the existing lenders of ECW that the Sponsor will ensure ECW to repay Mandatory Repayment by 31 December 2022.”

With that, does it mean that the Sponsor has the financial resources to meet the debt obligations (to repay at least 25% of the borrowings by 31 December 2022) even without the divestment of the 2 properties? And if this is the case, would it be better to wait for better market conditions to return before divesting the properties?

Or is this Plan B by the REIT in the event where the divestment is rejected by unitholders or that the divestments cannot be completed by 31 December?

Appreciate your clarification on this above ASAP.

Till date (30 November 2022), I have not received any responses from the investor relations regarding this.

Details of EC World REIT’s Upcoming EGM

As mentioned in the beginning of this post, it will be holding its EGM on Friday, 16 December 2022, at 10.00am at the Amara Hotel (Ballroom 2, Level 3.) The meeting will be held in a wholly physical format with no option for unitholders to participate virtually.

I have also received a letter to notify me about the EGM in my mailbox (as the REIT is in my CDP account; for those who have invested n the REIT via a custodian brokerage, you should receive a message from them, and you’ll need to check with them on how you can attend the EGM) so you should get yours too.

However, there are no registration links available for unitholders to sign up – I suppose they’ll only verify your investment of the REIT when you attend on the day itself (I have sent out an email to its investor relation to seek clarification on this, and if there are any changes, I’ll update accordingly.)

Related documents are as follows:

• Notice of EGM
• Circular
• Despatch Announcement
• Proxy Form
• Request Form

Closing Thoughts

As a unitholder of the REIT, I have already done my utmost best to try to seek clarifications from its investor relations, and I hope by sharing all the correspondences I have had in this post, it can help give you a clearer picture on the entire episode.

Of course, there are still questions to be answered (I shan’t be repeating them), and will be seeking clarification in-person during the EGM itself – which I encourage fellow unitholders to attend and ask any questions you may have. As to whether I will be voting in favour or against the proposed divestment, I’m still undecided at this point of time.

If you are keen on attending the EGM together, do drop me a message either on Telegram (via the handle @ljunyuan), or via emaill here.

Finally, in case you’re wondering, I’m still remaining invested in the REIT for now. I would like to attend the meeting and seek out what the management have to say about the proposed divestment, debt repayment, and also its plans for the REIT in the coming years before I make any decisions (and rest assured I will be keeping fellow readers updated on any investment decisions I may make about the REIT.)

With that, I have come to the end of my update on EC World REIT. I do hope you’ve found the contents presented above useful. Please take note that this post does not represent any buy or sell calls for the REIT’s units. You’re strongly encouraged to do your own due diligence before you make any investment decisions.

Disclaimer: At the time of writing, I am a unitholder of EC World REIT.

PS. In the REIT’s results update for the third quarter, as well as for the first 9 months of the financial year 2022 published on 09 November, I note that one of the reasons for the decline in distributable payout to unitholders can be attributed to the payment of 100% of Management Fees in the form of cash as compared to 50% in the form of units for Q3 FY2021.

In relation to this, I have sent the following email to the REIT’s investors’ relation:

I have just studied the REIT's latest financial results for the third quarter of FY2022 published yesterday evening (09 November 2022), and note that this time round, one of the reasons for the decline in distributable payout to unitholders can be attributed to the payment of 100% of Management Fees in the form of cash as compared to 50% in the form of units for Q3 FY2021 – if the REIT's Management is confident of the long-term future of the REIT, may I ask why such a decision was made? Particularly, in times like this, the REIT's Management should continue with the arrangement of receiving 50% of payment in the form of units instead, especially considering the REIT's Management's goal is to provide "long term sustainable returns to the unitholders."

Here’s the response provided:

In relation to your queries on management fees, kindly refer to our comments below:

1. as disclosed in ECW's IPO prospectus, the management fees payable to the Manager under the Trust Deed are structured to align the interests of the Manager and the Unitholders with the base and performance management fee structure based on Distributable Income (as defined herein) and DPU growth, respectively, instead of assets under management and property income, which incentivises the Manager to grow the DPU of EC World REIT. It comprises a base fee (10% per annum of distributable income), payable quarterly and a performance fee, which is payable yearly and computed based on the difference in DPU in current versus preceding financial year. The Manager may elect to receive the Base Fee and Performance Fee in cash or Units or a combination of cash and Units (as it may in its sole discretion determine).

2. it was also disclosed in ECW's IPO prospectus that the Manager shall receive 100.0% of the Base Fee and 100.0% of the Performance Fee in the form of Units for the period from the Listing Date to the end of Projection Year 2017 only. Nevertheless, in order to give unitholders additional cash distributions, REIT manager only gradually adjusted this ratio from 1Q 2020.

3. the Manager had on 23 February 2022 released the CONDENSED INTERIM FINANCIAL STATEMENTS for the twelve months ended 31 December 2021 in which included a statement: "The Manager has elected to receive 100% of its base fee in the form of cash for the period from 1 October 2021 to 31 December 2021, and 50% of its performance fee in the form of units for the period from 1 January 2021 to 31 December 2021." Hence, the decision to change the ratio of management fee was provided to the public during then, not at 3QFY2022. Subsequently, similar disclosures were made in the result announcements for the three quarters in FY2022 as well.

4. the unit price of EC World REIT had been trading within the range between S$0.415 to $$0.765 for the 9 months period ended 30 Sep 2022, which was lower than the NAV of the REIT of S$0.80 @ 30 Sep 2022. As the issue price of the base fees would be calculated based on the volume weighted average price ("VWAP") of EC World REIT units for the last 10 trading days of each quarter, it would represent significant discount to NAV if base fees were to be issued in units, resulting in the unfavourable dilution effect. This had been the case for the past 6 years which resulted the total unitholding of Sponsor (including its subsidiaries) increased from 41.5% in July 2016 to 43.8% as of today.

5. kindly understand that, to show its solidarity with the unitholders, the Manager and Sponsor have not disposed of any of their IPO units and additional units to market since IPO. This fact itself represents the confidence of the Manager and Sponsor in the REIT. Any other commercial factor to note is, like most of the REIT Managers of S-REITs, REIT Manager of ECW requires funds to operate and therefore has to collect cash for its operation as well from a certain time.