EC World REIT is offering 188,125,600 Units at S$0.81 per Unit where 7.5m units will be made available to the Public while the rest are placed out. In addition to the offering, EC World raised another S$194m through the issuance of Cornerstone Units to Bank of Communications, Fosun International and China Cinda Asset Management.
EC World can also over-allot another 31.1m of Units for this offering in the event of high demand.
The Sponsor is Forchn Holdings Group Co., Ltd and the IPO will close on 26 July 2016 at 12pm. The market cap based on the IPO price is $1,305.7 million.
EC World is established with the investment strategy of investing in income producing real estate used for e-commerce, supply chain management and logistics purposes with an initial focus in China (or more specifically Hangzhou).
The initial portfolio comprises 6 properties located in Hangzhou as set out below. It is a diversified portfolio of assets comprising port, warehouse and e-commerce infrastructure. All the assets have 100% occupancy except for Stage 1 Properties of Bei Gang Logistics (at 55.3%).
It is good to see that the purchase consideration is below the "fair value" prices provided by Savills and Colliers.
While there could be synergy effect as the assets are mainly in Hangzhou, it could also mean that it is overly concentrated in one location and a SARs or localized natural disaster can "wipe out" the Company.
Projections for FY2016 and FY2017
The pro forma NAV per unit is $0.88 cents versus its IPO price of $0.81. This means a price to book of 0.92x.
Use of Proceeds
The use of proceeds is summarized below.
EC World REIT is projecting a yield of 7.1% for FY2016 and 7.3% for FY2017. Without the "Master-Lease" arrangement, the yield for FY2016 will be 5.8% instead of 7.1%. The Master Lease arrangement will last for 5 years and the Sponsor believed the rental revisions thereafter will help breached the difference.
The distributions will be made every semi-annually to unit holders.
What I like about the EC World
- The Sponsor expected to hold 45% of the REIT (assuming over-allotment is not exercised), providing some alignment of interest
- Hangzhou is the "heart" of known e-companies such as Alibaba and Xiaomi and the business models evolved around efficient logistics and warehousing
- The acquisition of the portfolio at 80% of the appraised valuations and its NAV is higher than the IPO price
- The logistics and e-commerce sectors in China is expected to continue growing strongly
Some of my concerns
- Out of the 6 properties, only 3 have been operational for more than 3 financial years.
- Historical pro-forma was not provided for the last 3 financial years
- While i have not done any benchmarking, it seemed that fees are being layered everywhere with 10% p.a. of distributable Income as base management fee, performance fee of 25% of any uplift in DPU from prior year, "development management fee" of 3% of project costs incurred and property management fee of 1.5% per annum of the gross revenue of relevant property. I haven't even mentioned acquisition and divestment fees!
- Dilution from the issuance of units for Management Fee for FY2016 and FY2017
- Artificial yield support through "master lease" arrangement for certain properties for 5 years. The yield would have drop from 7.1% to 5.8% if there is no such arrangement or rental revisions therafter.
- The remaining lease of the properties ranged from 37 to 45 years is pretty short. Not sure what will happen when the lease expires
- The assets are concentrated in Hangzhou and will be tied to the economic health of that region too
Religare's view and Peer Valuation
Religare gave 5 reasons not to participate in this IPO. You can read it here.
(Source: Capital IQ)
EC World REIT is probably positioning itself for the tech and e-commerce angle but looking at the peers valuation, there are better options and they come without artificial financial support.
Investors who want "REIT" exposure can consider some of the REITs in the table above such as Mapletree Logistics or Mapletree Greater China Commercial Trust.
Mr IPO's ratings
Questions to ask yourself before you apply:
- Do you want to invest in another "logistics" REIT.
- Are you satisfied with the Yield from these investments?
- Do you want to have China exposure?
- Are there better comparables out there?
I will give it a zero Chilli rating - Avoid
I don't usually consider REITs for flipping, and will give it a miss for the concerns mentioned earlier - high fee structure, artificial yield support, low remaining leases (even though that is probably common in China) and better alternatives.
Ps - I originally gave it a one chilli rating prior to going to bed, but felt that one chilli is probably too generous when I woke up.... and amended it to zero as it is more reflective of my review. ^_^