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A Chat With EC World REIT’s Management

On 16 January 2018, I had a meeting with important executives of EC World Real Estate Investment Trust’s (SGX: BWCU) Manager. They are Alvin Cheng, the chief executive officer, and Li Jinbo, who heads the investor relations department.

My colleagues and I last met with EC World REIT’s Manager in September 2016. Back then, the management team was different. With Cheng having taken over the CEO role in May 2017, EC World REIT invited me for a meeting to update The Motley Fool Singapore about its business.

I thought a conversation like this will be interesting to investors. The REIT has exposure to modern logistics facilities that support e-commerce activity in China, and its properties are also based in Hangzhou, the birthplace of Chinese e-commerce juggernaut, Alibaba.

Here’s what I learnt about the REIT and the world of modern logistics facilities:

1. EC World REIT has a portfolio of six properties in Hangzhou, comprising three port logistics facilities, two properties that cater to e-commerce-related logistics, and one specialised logistics facility.

2. EC World REIT’s port logistics facilities deal largely with the shipment and the trading of steel and related products. The Chinese government is closing down smaller steel ports around the Hangzhou area, but steel demand in the country is still growing slowly but steadily. Cheng thus thinks that larger steel ports – such as those owned by EC World REIT – will gain market share. Right now, EC World REIT’s ports handle over 50% of steel imports to the Hangzhou region.

3. The REIT’s e-commerce-related logistics properties are considered to be modern logistics facilities and they serve more than e-commerce activity; in fact, the REIT’s modern logistics facilities are able to cater to O2O (offline-to-online, or online-to-offline) retail activity.

4. One of the differentiating factors between EC World REIT’s modern logistics facilities and traditional warehouses is that its properties are designed differently. For example, a modern logistics facility can allow the following: The inflow of big consignments; the mixing of the products within the consignments; the labelling of the products; the re-packaging of the products from the consignments; and the shipping out of the re-packaged products.

5. Ultimately, EC World REIT’s Manager sees the REIT as owning properties that cater to special segments of the Chinese economy. Its properties can store high-value products (such as tobacco leaves), and support the e-commerce and steel markets.

6. Cheng thinks that the REIT’s specialised assets, which come with specialised operators, results in tenant-stickiness. Even though the REIT’s current weighted average lease expiry is about three years (not short by any means but not exactly too long either), he believes that the REIT’s tenants will stay for the long-term.

7. On the point about specialised operators, EC World REIT has e-commerce logistics services provider RuYiCang (如意仓) as a master lessee on around 90,000 square metres of its lettable area. (The REIT’s portfolio has a total net lettable area of nearly 700,000 square metres.) RuYiCang is a company under the umbrella of Forchn Holdings Group, which is EC World REIT’s sponsor.

8. Forchn Holdings has a 20-plus year track record of operating logistics facilities in China, and owns approximately 42% of EC World REIT.

9. RuYiCang is also the operator of a property under the Forchn group that EC World REIT has right of first refusal (ROFR) on. This property has a gross floor area (GFA) of over 215,000 square metres. EC World REIT has the ROFR on another Forchn group e-commerce logistics property that has a GFA of more than 100,000 square metres.

10. When it comes to acquiring the two properties that it has the ROFR on, EC World REIT is watching for signs of greater stability in their operations before it would consider making a move. Conversations between EC World REIT and Forchn group regarding the acquisitions are also conducted on a two-way basis.

11. On RuYiCang’s master lease, there is a “4,3,2,1” built-in rental escalator, whereby the rent will increase 4% in the first year, 3% in the second year, and so on.

12. EC World REIT’s Manager has a fee structure that I think aligns with the interests of unitholders. The Manager’s fees are determined based on the REIT’s distributable income as well as distribution per unit. This compares with the traditional REIT fee structure which is based on asset size (assets under management, and net property income).

13. Going forward, Cheng said EC World REIT is unlikely to be acquiring more port or simple storage facilities. Instead, the investment focus will be on modern logistics facilities. The REIT’s not averse to investing in modern logistics facilities in other Asian countries – Cheng said that countries such as Indonesia, Malaysia, and Vietnam have fragmented markets for modern logistics facilities – but the need for skilful operators to run the facilities could be an issue. In China, EC World REIT has RuYiCang to hold the fort; if the REIT were to acquire modern logistics facilities outside of China, it would likely be looking to buy assets from good operators who would want to go the asset-light route, and then lease the property back to the operator.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing does not own shares in any companies mentioned.