Cache Logistics Trust: Schenker dispute resolved November 1, 2017

PSR Recommendation: NEUTRALStatus: MaintainedTarget Price: SGD0.82
  • Amicable resolution achieved, with discontinuation of legal proceedings
  • New single-net lease agreement with Schenker agreed upon
  • Lump-sum payment of $8,233,334 to Trustee as part of amicable resolution

What is the news?

Cache Logistics Trust has announced a favourable resolution to the 51 Alps Avenue rental dispute with its Tenant, Schenker Singapore Pte Ltd (“Schenker”). The $8.23 mn lump-sum payment will be used to make good associated costs, top-up to market rent the payment received “under protest” during the holding period arrangement (1 September 2016 to 31 October 2017) and to top-up to market rent the rental received for the new lease signed (1 November 2017 to 31 August 2021).

How do we view this?

Certain aspects of the disclosure remains confidential, such as the identity of the party that will be making the $8.23 mn lump-sum payment. Nonetheless, unitholders can take comfort knowing that the shortfall in DPU over the holding period will be made good; and 51 Alps Avenue will be income-producing at market rent.

 

The positives

  • Unitholders made good; one-off boost to 4Q17 DPU “likely”: There will be a one-off boost to DPU, to substantially offset the associated cost of the dispute and to top-up to market rent the payment received “under protest” during the 14-months holding period arrangement. No commitment was given on when the one-off distribution will be made, but the manager is “likely” to distribute it with the 4Q17 distribution.
  • Portfolio WALE extended from 3.3 years to 3.6 years, as at 30 September 2017: The new lease signed is for a period of 46-months and the property will be fully leased to Schenker on a single-net basis with the landlord paying the land rent and property tax. The long lease provides income visibility and stability for the property. There is no option to renew, but manager is open to Schenker renewing. The manager guided that the resolution of the dispute does not impact the property valuation.

 

The negatives

  • Rental level for the new lease is likely to be lower than the holding period: In light of the 4.9% YoY decline in warehouse rent for 3Q17 (Source: JTC), we believe that the market rent being negotiated for the new lease is lower than the market rent for the holding period.
  • Pro forma DPU suggests a signing market rent at the low end of guidance given: The manager guided that the signing rent ranges between $1.30 psf/month and $1.40 psf/month. The 9M17 pro forma DPU indicates an additional 0.313 cents DPU that corresponds to the top-up for the holding period, which translates to a top-up of ~$2.8 mn. Based on 439,956 sq ft NLA of the property, this works out to an effective top up of about $0.49 psf/month on the $0.77 psf/month payment received “under protest”.

 

Maintain Neutral; unchanged target price of $0.82

We now estimate a one-off payment of $2.8 mn in 4Q17, which translates to 0.31 cents DPU boost. Our previous assumption was for $4.5 mn top-up in FY18, mainly due to a higher rental assumption and 15-months holding period assumption (instead of 14-months actual). We had also previously assumed a higher rent post-resolution and this causes us to lower our revenue forecast from FY18e onwards. Our FY17e/FY18e revenue estimate is now +0.5%/-0.4% from previous, and DPU forecast +4.8%/-5.3% from previous.

The significant change in estimated DPU from previous is mainly due to the one-off payment being brought forward to 4Q17.

Our target price represents an implied FY17e P/NAV multiple of 1.09x.

 

Relative valuation

Cache Logistics Trust is slightly under-valued relative to logistics peers in terms of P/NAV multiple. We believe a reason for the lower relative valuation is due to Cache’s smaller portfolio (market capitalisation) and larger exposure to the Singapore market which is facing an over-supply situation into 2018.

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About the author

Profile photo of Richard Leow

Richard Leow
Research Analyst
Phillip Securities Research Pte Ltd

Richard covers the Transport Sector and Industrial REITs. He graduated with a Master of Science in Applied Finance from the Singapore Management University. He holds the CFTe and FRM certifications and is a CFA charterholder.

He was ranked #2 Top Stock Picker (Asia) for Real Estate Investment Trusts in the 2018 Thomson Reuters Analyst Awards, and ranked #2 Top Stock Picker (Singapore) for Resources & Infrastructure in the 2016 Thomson Reuters Analyst Awards.

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