Cache Logistics Trust - 4Q16 Results Flash ~ Rental pressure to persist
- We reiterate our NEUTRAL rating on CACHE SP and maintain our earnings/dividend forecast and DDM-derived TP of SGD0.86.
- Cache Logistics Trust’s (Cache’s) 4Q/FY16 DPU declined 3.9%/9.1% respectively due to lower capital distribution, weak rentals and ongoing disputes at 51 Alps Avenue. The results were below our expectations accounting only for 91% of our FY16 forecast.
- Portfolio occupancy stood at 96.4% (FY15: 94.9%) with a weighted average lease expiry (WALE) of 3.9 years. Management completed 1.2m sq ft of lease renewal, forward and new leases in 2016, of which about 45% are forward renewals for 2018. Management noted that rent reversions were generally negative, which we estimate to be about 5-10% lower.
- Overall property valuation declined 5.5% YoY to SGD1.23bn as at end-2016. Impairments rose from Singapore properties with 51 Alps Avenue and CWT Commodity Hub accounting for bulk of impairments. NAV/unit declined 6% YoY to SGD0.78 as a result of lower portfolio value.
- There were no new updates about 51 Alps avenue, a property where Cache is in dispute with C&P and Schenker on master lease renewals. Cache is currently under a ‘holding agreement’ with C&P and is receiving monthly payment of SGD 0.77 psf per month for the property, which is well below market rents of about SGD1.20-1.40psf per month. The legal proceedings that are currently ongoing have been a drag on Cache's DPU and share price.
- In Dec 16, Cache announced the divestment of Cache Changi Districentre 3 for SGD25.5m, which was in line with the latest independent valuation. We expect bulk of the proceeds derived from this divestment to be used to repay debt as current debt levels of 43.1% (end FY16) seem unfavourable. A full repayment of debt would lower the gearing to 41.9%, which will still be among the highest for S-REITs.
- About 5.3%/21.6% of leases are due for renewal in 2017/2018. With weak demand and huge incoming supply we expect rental pressure to persist resulting in negative rent reversions ahead.
- On the debt side, no refinancing is needed until 2H18 providing some relief in a rising interest rate environment. About 63% of its borrowings are hedged.
- Management favours Australian market for acquisitions and is looking at recycling capital from its Singapore properties to fund future acquisitions.
- Despite our bearish outlook on Singapore warehouse logistics sector and Cache's ongoing rental disputes, we believe the stock’s high dividend yield of 9.5% acts should provide some share price support.
- Maintain NEUTRAL.