Cache Logistics Trust - UOB Kay Hian 2016-09-07: Breaking Down The Rental Dispute

Cache Logistics Trust (CACHE SP) - UOB Kay Hian 2016-09-07: Breaking Down The Rental Dispute CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust (CACHE SP) - Breaking Down The Rental Dispute

  • The latest development in Cache Logistics’ rental dispute saw the REIT manager planning to file claims against C&P on its failure to return vacant possession of Schenker Megahub. This follows the earlier wrangle around rental rates which were agreed upon without Cache’s knowledge. 
  • Our burndown scenario of potentially protracted legal proceedings still implies a healthy 8.7% yield. 
  • Maintain BUY with a lower target price of S$1.12.


WHAT’S NEW


Intention to claim against C&P following master lease expiry at Schenker Megahub (51 ALPS Avenue). 

  • Master tenant C&P has allowed its tenancy with Cache Logistics Trust (Cache) to lapse with effect from 31 Aug 16. Accordingly, Cache intends to claim from C&P double the rental amount for the duration of the holding over period (1 Sep onwards) or damages resulting, as the underlying end-user DB Schenker Logistics (Schenker) has not vacated the property.

Background of legal dispute. 

  • On 30 May 16, Schenker issued a legal summons to Cache, calling upon the REIT manager to uphold Schenker’s agreement with master tenant C&P. The agreement included an option for Schenker to renew its anchor lease (expired 31 Aug 16) at a rental rate agreed upon by itself and C&P. 
  • Cache then announced that it would seek legal advice over the terms of the agreement, which it asserted was wholly between C&P and DB Schenker, and beyond its own masterlease agreement with C&P.

Legality of renewal option at pre-agreed rental rate between C&P and Schenker in question. 

  • When C&P sub-leased the building to Schenker, it also entered into an option to renew the lease at a pre-determined rate on 31 Aug 16 on commercial terms, unbeknownst to Cache. 
  • Thus, Cache is contesting the legality of the option extended to Schenker by C&P, asserting that it was previously informed by C&P that Schenker’s option to renew is not valid.

Substantially lower implied rental rate underpinning Cache’s vigorous legal defence. 

  • While the exact agreed upon rent has not been disclosed, 1Q16 pro-forma DPU would decline 7.3% to 1.89 S cents (previously 2.039 S cents) should the REIT manager have accepted the new rate. As Schenker Megahub contributed about 8.8% of 2015 gross revenue, the shortfall in rental implies substantial lower rates under the option agreement extended to Schenker by C&P.



STOCK IMPACT


Interim rental payment likely at the pre-determined rate. 

  • While resolution of the legal dispute is ongoing, we opine that Cache Logistics Trust could enter into a holding arrangement, likely at the pre-determined rental rates (under protest or without prejudice).
  • We have assumed that the legal wrangle could potentially be protracted, stretching over the next two years in our burn-down scenario. Thus, we lowered rental income contribution from Schenker Megahub by extrapolating from the company’s announced pro-forma decline in 1Q16 DPU.
  • Divestment gains from Kim Heng warehouse potentially used to shore up distributions. Cache sold its Kim Heng warehouse for a gain of S$9.7m in June last year.
  • After distributing a collective S$6.7m in divestment gains since then, we opine that the S$3m remaining proceeds could likely be utilised to shore up the shortfall in distributions.
  • We have accordingly factored about S$2m in gains to be paid out for 2H16, with the remainder divvied out in 2017.

Potential earnings uplift should claims against C&P succeed. 

  • As a result of failing to deliver vacant possession of the Schenker Megahub asset (still occupied by the end user), C&P could be liable to pay Cache double the rental rates, or damages arising from Schenker remaining in 51 ALPS, over the duration of the holding over period (from 1 Sep 16 onwards), under the terms of its master lease agreement. We have not factored this uplift in our earnings estimates due to the opacity in length of legal proceedings.
  • Terms of legal summons by Schenker: 
    1. A declaration that the Anchor Lease Agreement (ALA) between itself and C&P is binding upon the REIT Manager and the Trustee.
    2. That the REIT manager and Trustee (HSBC Institutional Trust) seek consent from JTC for the ALA renewal.
    3. Alternatively, that C&P, the Trustee, and the REIT manager jointly seek consent from JTC for the ALA renewal.


EARNINGS REVISION/RISK

  • We reduce our 2016, 2017 and 2018 DPU estimates by 2.1%, 7.7% and 8.3% respectively with the conservative assumption of a drawn-out legal process over the next two years.


VALUATION/RECOMMENDATION

  • Maintain BUY with a lowered target price of S$1.12 (previously S$1.21) based on DDM (required rate of return: 6.6%, terminal growth: 1.3%). Cache continues to trade a healthy forward DPU yield of 8.7%, above its 5-year mean of 7.93%.


SHARE PRICE CATALYST

  • Positive rental reversions.
  • Successful resolution of rental dispute with Schenker.




Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-09-07
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.12 Down 1.210


Advertisement




MOST TALKED ABOUT STOCKS / REITS OF THE WEEK



loading.......


ANALYSTS SAY


loading.......