Alert: Addressing the overhang on its balance sheet
- Proposed divestment of 2 properties that are a slight premium to its latest valuation
- Proceeds will be used to repay c.25% of its outstanding loans, paving the way to refinancing the rest of its loans
- Unitholders given the opportunity to realise value of the divestment through a S$0.1114 special distribution
- Keeping a close eye on the valuation on the rest of its portfolio and ECWREIT’s ability to return to growing its portfolio following this episode
Divestment of 2 properties that is above latest valuation
- The two properties will be divested for a total consideration of RMB 2,033m
- 2.9% premium to latest valuation on 30 June 2022
- c.18% premium to purchase consideration at IPO (December 2015)
- However, on a valuation basis, both property have seen a slight decline in valuation as compared to its valuation at IPO
- Beigang Logistics Stage 1 valuations declined c.4.5%
- Chongxian Port Logistics valuations declined c.6.6%
- Valuations of both assets have declined due to the ageing of the properties and changing market trends which may require major capex to reposition and overhaul the assets
- After the deduction of outstanding loans on the properties and transaction costs, net proceeds will be c.RMB 1,320m
Special distribution of S$0.1114 per unit
- RMB 862.6m will be used to repay existing Offshore loans
- Equivalent to c.S$172.6m which is c.25% of ECWREIT outstanding borrowings
- In connection with the extension of loan maturity earlier in the year, ECWREIT committed to repay at least 25% of its outstanding loans before 31 December 2022
- With the fulfilment of the mandatory loan repayment, this will enable ECWREIT to proceed with the refinancing of its remaining S$427.7m that are due to expire on 30 April 2023
- RMB 6.5m will be retained for contingent expenses and other potential obligations in relation to the divestment
- Equivalent to c.S$1.3m
- Remaining RMB 450.9m will be paid out as a special distribution to unitholders
- Equivalent to c.S$90.2m or S$0.1114 per unit
- The actual amount may vary depending on the exchange rate on the completion date
DPU expected to decline by c.28% after divestments
- Following the divestments, DPU is expected to decline by c.28% on a pro forma basis
- NAV is expected to decline by c.13.7% to 78.16 Scts
- Mainly due to the decline in asset valuation
- NAV will decline further to c.67.02 Scts after the special distribution
Our thoughts
Based on the latest valuation as at 30 June 2022, the agreed divestment consideration looks attractive especially given that ECWREIT expects significant capex for the two properties going forward. Moreover, the divestment is necessary for ECWREIT to meet its mandatory 25% loan repayment by the end of this year.
In line with our earlier projections, unitholders will get the opportunity to realise some value from the divestments through the special distribution of c.S$0.1114. As the EGM is expected to be held in early-December, the conclusion of any potential divestment will only happen in mid-December 2022.
For now, we will be keeping a close eye on ECWREIT’s portfolio valuation at the end of the year especially having seen some valuation declines over the past few years. It also remains to be seen how ECWREIT can grow its portfolio and embark on acquisitions again following the restructuring of its balance sheet. We will be reviewing our TP and recommendation on ECWREIT.
