Earlier today (16 December 2022), China-based e-commerce and port logistics REIT in EC World REIT (SGX:BWCU) held its extraordinary general meeting (EGM) to seek unitholders approval on the proposed divestment of 2 properties (in Stage 1 of Beigang Logistics, and Chongxian Port Logistics) to raise the amount (at least 25% of its borrowings) needed for repayment by 31 December 2022 – failure to do so will see the REIT falling into a default.

This was the first time in more than 2 years since I attended a company’s meeting physically, and it was good to meet up with unitholders whom I personally know in-person. I also had a brief chat with the CEO, Mr Goh Toh Sim before [I was surprised he remembered who I was, and thanked me for all the questions I have submitted; he also added he read the posts on my blog as well!] as well as after the meeting [where he came down from the stage and thanked me for my support.] Even though our conversations were brief, but he certainly came across to me as a very sincere CEO.

In this post, I’ll be sharing a brief summary of Mr Goh’s presentation about the proposed transaction, questions that were brought up [both by myself (4 in total), as well as by fellow attendees], along with responses by the management, results of the resolution put to vote, and finally, my thoughts.

Let’s begin:

Summary of Presentation by Mr Goh Toh Sim, CEO of EC World REIT

• Rationale of the proposed transaction was to repay at least 25% of the borrowings (S$142.6m) by 31 December 2022. Among all the possible means to raise the amount, the management deemed that the divestment of the 2 properties (Stage 1 of Beigang Logistics, and Chongxian Port Logistics) was the most beneficial to unitholders, as the properties would be divested at a premium (2.9% above valuation), and unitholders would be able to receive a special distribution following the divestment.
• Mr Goh further explained the reasons why the 2 properties were selected – for the case of Stage 1 of Beigang Logistics, it was deemed to be no longer attractive to tenants due to market trends, and for the case of Chongxian Port Logistics, it was deemed to be an ageing property with upcoming extensive repair required.
• He also shared how proceeds from the divestment will be used: 63% will go towards the repayment of the offshore loans, 33% will go towards the special distribution to unitholders (which is estimated to be 11.14 cents/unit – with the final amount declared depending on foreign exchange, and refinancing exercise for the borrowings maturing in 30 April 2023), and the remaining 4% will be for relevant expenses, as well as for contingencies.
• Some of the key figures to take note following the divestment will be as follows:
  • Net Property Income will decline from S$113.0m to S$81.3m
  • Estimated distribution per unit will fall from 6.18 cents/unit to 4.58 cents/unit
  • Net Asset Value (NAV), based on the figures in 30 June 2022, will drop from S$731.1m to S$633m
  • Aggregate leverage will see a 3.2% improvement following the divestment and repayment – from 39.2% to 36.6%
  • With 5 properties in its portfolio following the divestment, the Weighted Average Lease Expiry (WALE) will improve from 1.8 years to 2.0 years; Mr Goh also added that e-commerce properties comprises about 50.0% of the total net lettable area (pretty much unchanged compared to pre-divestment)
• Finally, IFA recommendation by Provenance Capital Pte Ltd have recommended unitholders to vote in favour of the proposed transaction.

Questions Raised during the EGM, along with Responses by the Management

I have asked a total of 4 questions, and they are:

Question #1: The reasons given by the REIT for the proposed divestment of the 2 properties was that, for Beigang Logistics, it was deemed to be no longer attractive to tenants due to market trends, while for Chongxian Port Logistics, it was deemed to be an ageing property with extensive repair required in the coming years. That said, I asked about when concerns surrounding the 2 properties first surfaced, and why unitholders were not promptly updated.

Response: Mr Goh explained the reason for the proposed divestment was to raise the amount for repayment, and after evaluating all possible fund raising options, divestment was the best option – among the 7 properties in the REIT’s portfolio, Stage 1 of Beigang Logistics and Chongxian Port Logistics were chosen because major upgrades to these 2 properties would be needed in the future, and with that in mind, the management decided it was timely for divestment to be done at this juncture (especially since they still commanded a premium.)

Question #2: Following the divestment, the REIT’s DPU will see a 30% drop, and unit price is likely fall in tandem as a result. With that in mind, I asked about the management’s plans over the next 1 year to cover this “DPU gap”.

Response: Mr Goh said the REIT will continue to explore for suitable acquisition (in China, or otherwise) along divestment opportunities to maximise returns for unitholders. He added that the REIT is open to acquiring properties to which it has right of first refusal (ROFR) to from its Sponsor.

Question #3: This question was asked in response to the REIT’s reply to a fellow question submitted by a fellow unitholder prior to the EGM, where I note there is a possibility that a special distribution may not be declared depending on the outcome of the refinancing (of the borrowings maturing in April 2023.) I sought for the management’s clarification about this.

Response: Mr Goh clarified that the exact amount for the special distribution will depend on 2 main factors – whether or not the borrowings (maturing in April 2023) will be successfully refinanced (to which he shared that the REIT’s management is in the process of talking to the lenders on the refinancing of 5 properties), foreign exchange fluctuation upon the completion of divestment.

Question #4: I sought for reassurance that the buyers of the properties (which the REIT have proposed to divest) will have the financial resources to complete the deal, considering that the timeline is a very tight one – where the deadline to repay the 25% of borrowings by 31 December is just a little more than 2 weeks time.

Response: The Chair of the EGM, Mr Chan Heng Wing, responded that the buyer have signed a legal undertaking on the sales and purchase agreement, and remains committed on completing the proposed transaction. He also shared the REIT is working hard to make sure that deal is completed, and repayment made by the deadline.

The following are some of the other questions raised by fellow EGM attendees, along with responses provided by the management:

• A fellow unitholder highlighted concerns about the REIT’s unit price plunging to 40.0+ cents (from a high of 70+ to 80+ cents range), along with a decline in the REIT’s DPU. This is in addition to the REIT trading at a price-to-book of under 1.0. Hence, he wanted to know of the management’s plans to restore the REIT to its former glory. In response, Mr Chan shared that geopolitical issues over the last 3 years had a negative bearing on the REIT. Additionally, interest rate hikes have also brought about headwinds on the funding front. That said, he reassured the unitholder that the REIT’s management remains committed to act with unitholders’ benefits in mind, and are working towards maintaining DPU constant at around 8%. He also acknowledged that the uncertainty on the financial situation and refinancing also led to the fluctuation of the REIT’s unit price, and was of the opinion that it should stabilise once issues surrounding refinancing has been settled.
• Another question raised pertained to the timeline of the proposed divestment (of the 2 properties.) To this, Mr Wang Feng, the CFO of the REIT, shared that while there are challenges to the timeline (due to China’s Covid surge, and also with the holiday season coming up) but he said the REIT is working on pushing for the transaction to be completed as soon as possible, and will provide updates as and when there are any material developments.
• Despite the REIT’s current aggregate level of 39% is well-within the MAS’ regulatory level of 50%, a unitholder wanted to know why the lenders pressed for 25% of the borrowings to be repaid. In response, Mr Goh said while he is not in the position to explain on the lenders’ position, his best guess is that it could be due to challenges of the property market in China, resulting in the banks taking a more conservative approach.
• Addressing concerns that the REIT will become smaller following the proposed divestment (where it will be left with just 5 properties in its portfolio), coupled with potential issues with refinancing in the future (given its size), Mr Chan said the REIT’s Board will continue to explore different opportunities available to maximise returns to unitholders, including any potential buyout offers.
• Another unitholder wanted to know about the chances of the exact same scenario (where the REIT will need to divest properties to make repayments on their loans) playing out again if the overall situation in China does not improve. On this, Mr Goh shared that to his understanding, the Chinese Government is trying to bring up the economy, particularly after the Congress, where China’s Xi Jinping secured his third term as the Communist Party’s leader. While the country is seeing a surge in the number of Covid cases currently, he is confident of the Chinese Government’s ability to overcome the challenges and bring stability to the country once again. That said, he hopeful that the current situation will not be repeated.
• A unitholder wanted to know whether the REIT’s management will consider any merger opportunities. To this, Mr Chan said that the Board is open to consider if it is one that is beneficial to unitholders. He also shared that there are ongoing discussions to look at such opportunities, but as they are still “work in progress”, he is unable to comment further.
• As the REIT’s properties are all in China, a unitholder asked why loans are not made with China banks instead, considering interest rates are on a decline (a decision made by People’s Bank of China to revive credit demand and support an economy hurt by Covid shocks.) Mr Goh said that while interest rates in China are on a decline, they are still higher compared to interest rates offered by the banks in Singapore.

Results of the Resolution Put to Vote during the EGM

There is only one resolution put to vote during the EGM, which is on the approval of the proposed divestment – it was passed with 97.52% of the votes for, and 2.48% of the votes against.

Closing Thoughts

Personally, I have a good impression of the management’s willingness to address all concerns highlighted by unitholders during the meeting. They were also very candid in their responses – in that they were also very forthcoming to discuss about the headwinds the REIT is currently facing, instead of trying to “beat around the bush.”

What impressed me the most was Mr Goh’s sincerity to mingle with unitholders before the meeting, and the fact that he could recall who I was (when I introduced myself as Jun Yuan, he immediately recalled my surname, addressed me as “Mr Lim”, thanked me for all the questions submitted [you can check out a separate post I’ve published on all the questions submitted to the REIT, along with their responses here], and saying that he reads my blog really stood out to me – I’m not very sure how many CEOs actually do all these.) I was also impressed by the fact that he still came down from the stage after the meeting was over to thank me for my questions raised during the meeting and support (in the proposed divestment) – again, I’m not very sure how many CEOs do such a thing.

For those of you who wanted to know how I voted, it was in favour with the proposed divestment. I remain confident with the management to navigate the REIT through the headwinds – personally, I am of the view that following the divestment, we could see a privatisation of the REIT in the near-future.

With that, I have come to the end of my summary of EC World REIT’s EGM this morning. As always, I hope you’ve found the contents above useful, and at the same time, note that this post is by no means a buy or sell recommendation for the REIT’s units. Please 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.