Cache Logistics Trust - DBS Research 2016-05-31: Summoned by Schenker

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - Summoned by Schenker

Schenker seeks to extend the Anchor Lease Agreement (ALA) at 51 Alps Avenue which will expire on 30 August 2016, but C&P (master lease) argues that they have no legal right to do so
Cache contends that ALA is a commercial agreement signed between C&P and Schenker, and thus will not be binding on the REIT
Worst-case scenario; DPU to drop 7%, which is close to our forecasts

It was noted that Cache Logistics Trust (Cache) has announced that they have received summons from Schenker seeking the following:
1. Declaration that the Anchor Lease Agreement (ALA), which was signed between Schenker and C&P Holdings back in 2005 is binding on Cache, and
2. Order to seek consent from JTC corporation for the renewal of the master lease.

The subject property was part of the initial portfolio during Cache's IPO of which is master- leased to C&P. This master lease agreement expires on 31st August 2016.
Separately, an ALA was signed between Schenker and C&P, and was put in place when Schenker, as the end user, began paying rent to C&P for the use of the property. This ALA also expires on 31st August 2016.
Schenker is claiming that they will be exercising their option to renew the ALA, at a pre-agreed rental rate back in June 2005. However, Cache has been previously informed by C&P that there is no such valid option to renew.
Cache believes that the pre-agreed rental rate is below the current market price.

This news further revalidates our view that demand for Cache’s properties remains strong and 51 Alps Avenue, given its location in the Airport logistics hub, continues to see good demand despite the current oversupply situation in the warehouse space. We had previously revised our estimates down to account for a possible reduction in rent.
We believe that the negatives are priced in at current price (prospective FY16F yield of 9.2%, P/NAV of 0.9x) as the market was more concerned about a spike in vacancy rates upon the master lease's expiry given the weak operating fundamentals. This is now unlikely the case.
The worst-case scenario, where the ALA is binding on Cache, will mean a 7% reduction in DPU (from 2.08 to 1.89 Scts, assuming that the ALA is effective from 1Q16).
On an annualised basis (1.89 Scts x 4 = 7.56 Scts), this implies only a further 3% downside to our estimates. Hence, we believe that the bulk of the downside has been priced in.

Derek Tan DBS Vickers | Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2016-05-31

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