Industrial REITs - DBS Research 2019-04-17: Business Exposure To CWT More Manageable Than Headline Numbers Suggest

AIMS AMP CAP INDUSTRIAL REIT (SGX:O5RU) CACHE LOGISTICS TRUST (SGX:K2LU) MAPLETREE LOGISTICS TRUST (SGX:M44U)

Industrial REITs - Business Exposure To CWT More Manageable Than Headline Numbers Suggest

CWT International failed to pay accrued interest and fees of HK63m, triggering a cross default.
Lenders to obtain possession of all charged assets if outstanding amounts are not repaid by 9am on 17 April 2019.
While a separate legal entity to the defaulting party, CWT Pte Ltd currently features among top 10 tenants of AIMS AMP CAP INDUSTRIAL REIT (SGX:O5RU), MAPLETREE LOGISTICS TRUST (SGX:M44U) and CACHE LOGISTICS TRUST (SGX:K2LU).
We do not anticipate major near-term earnings disruptions as security deposit limits downside risks.

It was reported that HNA’s CWT International failed to pay interest, triggering cross default to lenders under a HKS$1.4bn facility agreement, according to a statement made by the company to the HK Stock Exchange.
Lenders have made demands for payments relating to overdue sums amounting to HK$ 1.4bn and accrued interest, which are payable immediately.
If the amount are not repaid by 9am on 17 April 2019, lenders will have the right to enforce security and obtain possession of charged assets which include shareholdings in CWT Pte Ltd, investment properties in the UK, US, and golf courses in China.
Default has triggered cross a default under a term loan facility; outstanding amounts due under the facility is HK766m which comes on the back of a change in control of CWT Pte Ltd, if lenders proceed to take enforcement measures.

We note that the default is by the parent company, which is a separate legal entity from the existing tenant, CWT Pte Ltd, which is a major tenant of various logistics-focused industrial REITs detailed below –
Selected REITs that we have spoken to do not anticipate any major disruptions for now – REITs typically collect 6 months’ worth of security deposits, which shields them from near-term income disruptions while remarketing the space.
From a risk management perspective however, we observe that most of the affected REITs have been paring down their exposure to CWT in recent years to mitigate “over-exposure” to a single tenant.
Notably, CACHE LOGISTICS TRUST converted its master-leases across various warehouses to multi-tenancies, transacting directly with the underlying tenants instead. Meanwhile, AIMS AMP CAP INDUSTRIAL REIT has also been paring down its exposure to CWT by adopting a partial (as opposed to full) master-leased structure at selected assets as leases fall due.
In the event of a change in control of ownership for CWT Pte Ltd., most REITs do not anticipate any change in the operating side of the business for now as the warehouses remain fully leased with good demand for space.
No change in our recommendations for now. Our thoughts on the respective REITs with CWT featuring among their top 10 tenants are detailed below.

Properties: 20 Gul Way, 30 Tuas West Road.
% of GRI: 8.4% of 3Q19 GRI.
DBS Comments: AA REIT’s largest tenant in Singapore; 2nd largest tenant overall.

Properties: 5 properties in Singapore.
% of GRI: 9.5% of GRI.
DBS Comments:
- A master-tenant for 5 properties in Singapore, implied rents paid on the master lease are close to market levels on a multi-tenanted basis.
- That said, in the worst case scenario of the logistics arm for CWT getting into financial difficulties, the manager (MLT) will be happy to seek alternative vendors (i.e. DHL, Fedex) in replacement of the logistics operations that CWT provides to end tenants.
- There is 6 months’ deposit collected in SG.

Properties: CWT Commodity Hub (main property)
% of GRI: 20.6% of FY18 GRI.
DBS Comments: Cache’s largest tenant in 2018, though we believe current contributions going forward will likely to be even lower post conversion from master lease to multi-tenanted structure for CWT Commodity Hub in Apr 2018.

Derek TAN DBS Group Research | Carmen TAY DBS Research | https://www.dbsvickers.com/ 2019-04-17

SGX Stock Analyst Report BUY MAINTAIN BUY 1.500 SAME 1.500

HOLD MAINTAIN HOLD 0.750 SAME 0.750

BUY MAINTAIN BUY 1.500 SAME 1.500