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What Investors Need to Know About EC World Real Estate Investment Trust’s First Acquisition

EC World Real Estate Investment Trust (SGX: BWCU), or ECW for short, is the first REIT in Singapore that is focused on e-commerce and logistic assets in China. It currently owns six properties located in Hangzhou. Last month, ECW announced that it would be making its first acquisition since its listing in 2016. The proposed acquisition is for an e-commerce logistic asset located in Wuhan City in Hubei Province in China.

Details of the transaction

The property has a land tenure of 48 years, and a purchase consideration price of S$30.3 million or RMB 145 million. According to management, the purchase price is a 15.2% discount to the property valuation. Including the manager acquisition fee and other transaction fees, ECW will have to fork out around S$31 million for the property.

The property consists of three warehouse buildings, one 5-story auxiliary building, and 6-story dormitory. At the time of the announcement, it had an occupancy rate of 82.2%, and weighted average lease expiry (WALE) of 2.3 years by rental income. Based on a pro-forma basis, the property would have added S$1.4 million to net property income for 2017. ECW has proposed for the acquisition to be wholly funded by internal cash, thus maintaining the REIT’s low gearing ratio of 29.2%.

Impact on unitholders

Because the acquisition will be funded solely with existing cash, unitholders will stand to gain from the increased property income from the acquisition. In its presentation, ECW stated that the transaction would have increased distribution per unit (DPU) by 0.8% in 2017.

By maintaining its low gearing ratio, ECW will continue to have debt headroom for further acquisitions in the future.

The new property has a current net property income yield of 4.9%. This is slightly lower than its current portfolio yield of 6.2%. That said, the occupancy rate is also below that of its existing portfolio. If management is able to increase the occupancy rate to comparable levels, the yield on the new property should increase too.

Optimistic about growth

The property is anchored by two stable tenants in JD.com and DangDang. JD.com is one of the largest e-commerce companies in China. It is listed on Nasdaq and has a market cap of around US$70 billion. DangDang is a popular integrated online shopping platform in China, and has the largest maternal and baby products online platform.

There are also macroeconomic tailwinds within the city that bode well for the appeal of the new property. Wuhan city has seen its GDP grow by 12.1% compounded annually since 2011. Retail sales of consumer goods have grown at an even faster pace of an annualised growth rate of 13.1%.

Most of the current leases in the property also have built-in escalations of between 4.5% and 5%, giving the opportunity for positive rental reversions in the future.

The Foolish bottom line

The first acquisition by ECW looks like a prudent one that can benefit unitholders, without destabilising their balance sheet. However, as the acquisition is relatively small, it only has a minor impact on the overall distributions for unitholders. It will be interesting to see how ECW utilises its debt headroom to fuel further growth in the future.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of JD.com. Motley Fool Singapore contributor Jeremy Chia owns units in EC World Real Estate Investment Trust.