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What Investors Should Know About EC World Real Estate Investment Trust’s Acquisition Proposal

EC World Real Estate Investment Trust (SGX: BWCU) announced its proposal to acquire another e-commerce property on 10 May 2019. The acquisition will be the trust’s second acquisition since its listing in 2017 and will bring its portfolio count to eight.

Here’s everything investors need to know about the acquisition.

Details of the property

The acquisition target is called Fuzhou E-Commerce, which is situated in Hangzhou, China. It is a fairly new property, completed in June 2017, and consists of a 3-storey warehouse building and two 14-storey office buildings. The land tenure expires in 2059.

EC World REIT has negotiated a conditional master lease agreement that will last for five years. The master lease agreement is dependent upon the completion of the proposed acquisition.

There is also an extension clause that allows the lessee to extend the master lease contract beyond the initial five years.

In addition, the built-in rental escalation for the master lease agreement is 2.25% per annum.

Acquisition price below book value

The property purchase price is RMB1.11 billion (S$223.6 million), which represents a 6.3% discount to the average valuation of two independent valuers if the property does not have the master lease agreement. Including the master lease agreement, the purchase price is a 7.5% discount to the average valuation.

The chart below summarises the difference between the purchase price and the property average valuation.

Source: EC World REIT Proposed acquisition announcement

Funding the purchase

The purchase consideration price is RM549.2 million (S$110.4 million), which is the property purchase price less the estimated borrowings of the vendor. This amount will be paid via a mix of debt and cash.

As of 31 March 2019, EC World had a gearing of 31.3%, which gives it the headroom to take on more debt to fund the purchase. EC World REIT also has S$143.4 million of cash on its books as of end-March, which could be put to use to fund part of the acquisition.

That said, supposing the acquisition is funded fully by debt, the gearing of the REIT would increase to around 40%, which is still a distance away from the 45% regulatory limit.

Master lease agreement

As mentioned earlier, the master lease agreement has an annual rental escalation which should provide the REIT with additional rental income down the road. In addition, based on Colliers and Knight Frank research, the rental income under the master lease agreements is sustainable beyond the five years. The table below shows the projected underlying rental income for the next six years compared with the existing master lease agreement.

Source: EC World REIT Proposed acquisition announcement

DPU and NAV per unit impact

Perhaps of most importance to existing unitholders is whether the acquisition would be accretive to distribution per unit and net asset value (NAV) per unit. As the acquisition price is below the property book value, NAV per unit is expected to rise by 1.4%.

Also supposing the acquisition is paid fully in cash and was made on 1 January 2018, the DPU would have increased by 1.6% on a proforma basis.

Source: EC World REIT acquisition proposal presentation

A Foolish Take

The proposed acquisition of the new property looks to be beneficial to existing unitholders. The purchase price is below the two independent valuers’ average valuation and also represents a decent property yield of around 7.7%.

On top of that, the NAV per unit and DPU of EC World REIT will both most likely improve after the acquisition based on the pro forma calculations. The master lease agreement also has a long weighted average lease expiry and step-up rental escalations, which should provide the REIT with visible organic rental income growth.

All things considered, I think the acquisition is great for the REIT, which can put its financial muscle to use for existing investors.

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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 contributor Jeremy Chia owns units of EC World Real Estate Investment Trust.