MapletreeLog and Cache kept on 'hold' by OCBC in wake of CWT International default
SINGAPORE (Apr 18): OCBC is downgrading Mapletree Logistics Trust to ‘hold’ given there could be uncertainties over its longer-term outlook in the wake of the news that CWT International had defaulted on its loans.
Meanwhile, OCBC is maintaining Cache Logistics Trust at ‘hold’ saying although the REIT should be “okay for now”, the REIT could see some downsizing in its aftermath.
CWT International, a Hong Kong-listed unit of the HNA Group which is facing liquidity challenged, announced on Tuesday that it has defaulted on a HK$1.4 billion ($241.5 million) loan. Securities pledged to the loan facility include CWT Pte Ltd (CWT), which is a wholly owned subsidiary of CWT International.
See also: AA REIT, CacheLog and MapletreeLog say no default on rents so far by tenant CWT
See related: HNA to face $3.1 bil liquidity crunch this quarter
Since that disclosure, Mapletree Logistics Trust’s (MLT) share price has whipsawed as CWT is currently the largest tenant of MLT, contributing 9.1% of MLT’s gross revenue for 3Q19. Based on MLT, CWT has not defaulted on its rental payments and there are no arrears due from CWT.
“In our view, the worst case scenario would be a rental default by CWT. Approximately 30% of MLT’s gross revenue from CWT is contributed by third party end-users who have sub-lease agreements with CWT,” says lead analyst Andy Wong in a Thursday report.
But in the event of a default, Wong expects MLT to go directly to the end-users to negotiate fresh leases.
While this would mean a conversion from a master lease structure on a double-net basis (on NLA) to a multi-tenanted building (MTB) structure, Wong says MLT will be able to “gross up” the rentals (on NLA) to take into account the property taxes and maintenance expenses, “such that the overall NPI margin will remain similar”.
However, the trickier part would be the balance 70% contribution by CWT, whereby CWT acts as a 3PL provider to third party end-users under service agreements.
“If there is a rental default, MLT would have to find a replacement 3PL provider that matches the requirements and pricing of the end-users. This could take a few months,” says Wong.
The good news is that MLT currently holds security deposits of six months of rental in relation to the leases with CWT. In addition, the five ramp-up warehouses leased to CWT are modern with good specifications.
Hence, any impact is likely limited for now, in OCBC’s opinion.
“While we are not expecting any near-term impact to MLT’s DPU and keep our forecasts unchanged for now, we believe this situation has created an overhang over CWT’s longer-term outlook, and thus some uncertainties for MLT. As such, we raise our cost of equity assumption from 7.5% to 7.7%. Consequently, our fair value is lowered from $1.50 to $1.45,” says Wong.
Separately, Cache Logistics Trust (Cache) announced that CWT contributed 16.5% of its gross rental income as of mid-Apr 2019.
OCBC estimates that CWT currently leases around 60% of the multi-tenanted CWT Commodity Hub, which contributed $33.6 million of gross revenue in FY18, and around 70% of the anchor-tenanted Pandan Logistics Hub, which contributed $4.8 million of FY18 gross revenue.
OCBC says the weighted average lease to expiry on the CWT leases is less than one year. CWT has yet to default on its rental payments and there are currently no arrears for the two leases. The REIT also currently holds a security deposit that averages around three months. In addition, there are underlying end-users for the leases, which Cache can engage directly.
“While we believe that some of these factors mitigate the risk involved, we note that exposure to the CWT is sizeable,” says analyst Deborah Ong.
According to OCBC’s calculations and CWT International’s financial releases, the logistics business of CWT generated a positive EBITDA of HK$171 million in 2018, after annualising the rental costs for its leases with MLT.
“We believe that in the case of a liquidation and subsequent change in control for CWT, CWT will likely remain in operation and continue to rent from Cache. We do, however, forecast 15% downsizing post the expiry of the CWT leases,” says Deborah Ong.
As OCBC has applied a higher cost of equity of 8.7% vs 8.5%, Cache’s fair value falls from $0.76 to $0.70.
“While we believe it is most likely that there will be no CWT rental default, we have also conducted a sensitivity analysis for Cache’s fair value -- from 65 cents to 68.5 cents -- given different CWT rental default scenarios,” says Deborah Ong, “We maintain “hold” on Cache.”
As at 12.29pm, MLT is trading 1 cent lower at $1.43 while Cache is trading 0.5 cent lower at 71.5 cents.
