The Positives
+ High income visibility due to portfolio occupancy of 99.1% (-0.8ppts QoQ), and WALE by GRI of 3.8 years. 74% of FY20e revenue is secured through 4 master leases to the Sponsor, with built-in rental escalations ranging 1% to 3% (commentary on master lease below). Hengde Logistics, the specialised logistics asset customised for and leased to a state-owned tobacco company, contributes c.13% to NPI. This brings the percentage of “stable” leases to 87%.
+ Running cost of interest fell QoQ from 4.4% to 4.3%. This is likely attributed to ECW increasing the interest rate hedge in 1Q20 from 72.2% to 100%, and the lower interest rates in FY20 versus FY19.
The Negatives
– Accretion from the acquisition of Fuzhou E-commerce wiped out. DPU fell 22.9% YoY in 1Q20 due to granting rental rebates of RMB23.7mn, unfavourable FX, higher finance expense and a 5% retention of distributable income (DI). Higher finance expense was due to the higher loan quantum from acquiring Fuzhou E-commerce (completed on 8 August 2019). Excluding rental rebates, DPU would have been 5.129 cents, 1.9% higher YoY.
Outlook
Commentary on Master Leases
Master leases to the Sponsor make up c.74% of ECW’s NPI. We note that c.S$3.2mn out of the S$4.6mn (70%) of the rental rebates offered to tenants went to the Sponsor for namely 2 assets, Chongxian Port Investments and Beigang. The rebates to the Sponsor are deemed equitable and in line with the Sponsor’s contribution to revenue. Trade receivables ballooned by S$18.8mn (roughly 51%) QoQ, indicating that 80% of 1Q20’s revenue of S$23.5mn has not been collected. While the spike in arrears understandable given that business disruption to tenants, we note that some of the arrears could be attributed to the leases to the Sponsor, given that he Sponsor was responsible for 73.6% of 1Q20’s revenues. As of 31 March 2020, no outstanding trade receivables are past 180 days due. There are security deposits of 9.9 months for Chongxian Port Logistics and 11.4 months for Beigang in place, while there is a corporate guarantee in place for the Fuzhou E-commerce asset.
Since the lifting of the lockdown in China, all tenants have resumed operations as at 31 March 2020. Tenants are in the process of ramping up operations and are back to 90% of pre-lockdown levels.
The 5% retention of distributable income in 4Q19 and 1Q20 amounts to c.S$1.1mn, retained for working capital purposes and buffer against unforeseen contingencies.
After the RMB23.7mn (c.S$4.6mn, approximately 0.5months) in tenant rebates were offered in 1Q20, the management has not received any material request for rental assistance or restructuring of leases.
In the previous quarter, the management received notifications of non-renewal of 24,929sqm of space up on a lease expiring in 2Q20 at Wuhan Meiluote. This represents 50% of Wuhan Meiluote’s NLA of 48,695sqm. Occupancy is expected to fall from 97.7% to 46.7%. This asset contributes 1.6% to gross rental income (GRI) and will not affect DPU materially. Muted leasing demand is expected in the near term.
15.7% of leases by GRI is up for renewal in FY20, half of which is for space at Hengde Logistics which is leased out to a state-owned tobacco company at below-market rentals. However, negotiations for a higher rental may be viewed as insensitive, as the country is in a state of flux, brought on by the Covid-19 outbreak. As such, the management is guiding for flattish rental reversions on all leases expiring in FY20. The rest of the expiring leases are attributed to the Wuhan Meiluote and Chongxian Port Logistics assets.
Key management personnel and the Directors of the Manager will be taking a 10% reduction in remuneration and fees for the 3-month period from April 2020 to June 2020. The manager has elected to receive 50% of base fees in the form of units (previously 100%) from the quarter ended 31 March 2020 onwards.
Maintain BUY with lower TP of S$0.77 (prev. S$0.83).
We trim our FY20e/FY21e DPU by 5.6% and 3.9% respectively to incorporate the rental rebate for FY20, lower rental reversion on expiring leases and the lower management fees that will be paid in units (from 100% to 50%). Additionally, we increase our cost of equity from 9.23% to 9.45% to reflect the higher market risk. Our TP is cut by 7.2% to $0.77, which translates to a FY20e and FY21e DPU yield of 9.0% and 9.6% respectively.
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