The divestment is expected to unlock value and reduce the REIT’s gearing.
The manager of EC World REIT (ECW) has proposed to divest its indirect interests in Stage 1 Properties of Bei Gang Logistics (Beigang) and Chongxian Port Logistics (CXPL) for a consideration of RMB1.37 billion ($276.0 million).
The divestment of the properties is expected to contribute to unlocking value and paring down of loans for the REIT.
The REIT, through its wholly-owned subsidiary, entered into an equity purchase agreement with Hangzhou Futou Beigang Enterprise Management Co. Ltd. (HFBEM) and Forchn International Pte. Ltd. (FIPL) on Sept 30 to divest the REIT’s indirect interests in the properties.
HFBEM and FIPL are wholly-owned subsidiaries of the REIT’s sponsor.
The properties have been valued by independent valuers Jones Lang LaSalle Corporate Appraisal and Advisory and Knight Frank Petty Limited. Based on the lower of the two independent valuations for each property as at June 30, Beigang has been valued at about RMB1.18 billion or approximately $ 235.7 million, and CXPL has been valued at about RMB797 million or approximately $159.5 million.
The agreed property value of each property was arrived at after arm’s length negotiations among the parties on a willing-buyer willing-seller basis, after taking into account, among others, the independent valuations.
According to the REIT, the agreed property value for Beigang is RMB1.21 billion, representing a premium of 2.9% to the appraised valuation, while the agreed property value for CXPL is RMB820.1 million, also representing a premium of 2.9% to the appraised valuation.
As such, the aggregate property value for both properties stands at RMB2.03 billion, which is a blended premium of 17.8% compared to the purchase considerations of Beigang and CXPL at ECW’s initial public offering (IPO) just over six years ago in July 2016.
If approved by the REIT’s unitholders, the proposed divestment will enable it to realise the value of its properties and direct the majority of the proceeds towards paring down at least 25% of the aggregate principal amount of the outstanding existing onshore and offshore loans which are due by Dec 31.
In addition, the properties have seen their average valuations drop by 4.5% and 6.6% for Beigang and CXPL respectively as at June 30, compared to their average valuations during the REIT’s IPO.
Beigang is also said to be no longer as attractive to its tenants due to market trends. The REIT manager adds that CXPL is an ageing property with upcoming extensive repairs required.
Furthermore, rising inflation and the ongoing war in Ukraine have continued to exert pressure on the Chinese economy despite a gradual resumption of domestic economic activities.
“To remain sustainable in this challenging environment, the manager has adopted an approach of exploring and reviewing strategic options such as asset divestments to stay agile, anticipating emerging risks and responding to suitable opportunities for the benefit of unitholders,” says the REIT manager in its Oct 3 statement.
“With economic conditions in China continuing to exert considerable pressure on tenancies and anticipated outlays in required major structural repairs, our assessment is that the Beigang and CXPL properties have reached the stage of the business cycle where it is timely for us to unlock their values,” says Goh Toh Sim, executive director and CEO of the manager.
“The property values are higher than the acquisition prices at ECW’s initial public offering (IPO) and divesting them now will enable us to enhance our liquidity, reduce our gearing, and give us the opportunity to offer cash distributions to our unitholders,” he adds.
Upon the completion of the divestment, the manager intends to distribute a special distribution of RMB450.9 million out of the net proceeds after the repayment of at least 25% of its existing loans.
The special distribution is intended to be distributed to unitholders within 40 business days from the completion of the proposed divestment.
As the proposed divestment constitutes an interested person transaction, the REIT manager will have to seek its unitholders’ approval at an extraordinary general meeting (EGM).
Units in ECW closed at 50 cents on Sept 30.