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Broker's take: OCBC Investment Research downgrades Mapletree Logistics Trust to 'hold'

OCBC Investment Research has downgraded its recommendation of Mapletree Logistics Trust (MLT) to "hold" and lowered its fair value on the real estate investment trust (Reit) from S$1.50 to S$1.45 on the uncertain longer-term outlook of CWT Pte Ltd - MLT's largest tenant.

That said, the research house is not expecting any near-term impact to MLT’s distribution per unit and is keeping its forecasts unchanged, for now. 

In the report, OCBC analyst Andy Wong noted that MLT's unit price took a hit on Tuesday after news that Hong Kong-listed CWT International Limited had failed to pay accrued interests and certain fees in relation to a HK$1.4 billion (S$241 million) loan facility. Its wholly owned Singapore unit - CWT Pte Ltd contributed to 9.1 per cent of the Reit's gross rental income in Q3 FY2019.

On Tuesday, MLT units slid 4 per cent but managed to recover 1.4 per cent on Wednesday. As at 11.27am, MLT units were trading one Singapore cent or 0.7 per cent down at S$1.43.

A rental default by CWT is the worst case scenario for MLT, OCBC said.

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Some 30 per cent of MLT’s gross rental income from CWT is contributed by third-party end users who have sub-lease agreements with CWT. In the event of a default, the Reit will be able to go directly to "the end users to negotiate fresh leases and mitigate any downtime".

Mr Wong said: "While this would mean a conversion from a master lease structure on a double-net basis (on net leasable area or NLA) to a multi-tenanted building structure, we believe 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 net property income margin will remain similar."

However, the more complex undertaking would be finding a replacement for CWT, which acts is a third-party lease (3PL) provider to end users under service agreements. The remaining 70 per cent of gross rental income from CWT is contributed through such arrangements.

"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," Mr Wong said.

"This could take a few months." 

However, he added that there is likely to be limited near-term impact as CWT has not defaulted on its rental payments and there are no arrears due. MLT also holds security deposits of six months of rental in relation to the leases with CWT.

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