Cache Logistics Trust (CACHE SP) - Still Some Way to Go
Initiate at HOLD, TP SGD0.95
- Cache is a direct play into Singapore’s global hub ambitions, given its well-entrenched logistics portfolio, while an expansion into Australia in 2015 has diversified growth engines.
- Supply pressures in the Singapore warehousing market are intense and should drive near-term risks, while further inorganic growth opportunities could be constrained by a stretched balance sheet.
- Valuations should be supported by 8% yield, but the unresolved rent dispute at 51 Alps Avenue could remain an overhang.
Australian assets to cushion
- Singapore headwinds Cache’s 19 high-quality assets command a WALE of 4.0 years, with minimal expiries in 2017 (4.5% by NLA and 3.9% by gross rental income).
- An expansion into Australia in 2015 with the acquisition of six third-party logistics properties should help mitigate oversupply headwinds in the Singapore warehouse leasing market, while we see rising contribution from its SGD147.2m build-to-suit (BTS) for DHL’s Supply Chain Advanced Regional Centre to help support DPU growth.
Stretched balance sheet limits further acquisitions
- Cache has been proactive in portfolio and capital management, with 63% of interest cost hedged and minimal refinancing due in FY17.
- However, in spite of asset divestments (Kin Heng Warehouse, Changi Districentre 3 completed in Jan 2017), balance sheet remains stretched with gearing at 41.9%. This, coupled with 2016 devaluation losses on its Singapore assets, adds constraints to further near term inorganic growth initiatives.
Overhang may clear once Schenker dispute resolved
- A holding arrangement remains in place at 51 Alps Avenue, where the ongoing rent dispute between master-tenant C&P and sub-tenant Schenker dating from May 2016 is still unresolved.
- Cache’s downside is protected, with legal recourse to damages of double rent payable from C&P for the duration that Schenker stays. Management remains optimistic on tenant retention given the asset (purpose-built with fresh capital sunk in) is in a free trade zone and a scarcity of alternatives at the Airport Logistics Park.
- Earlier-than-expected pick-up in leasing demand driving improvement in occupancy.
- Better-than-anticipated rental reversion trend.
- Accretive acquisitions.
- Prolonged slowdown in economic activity could reduce demand for industrial space, resulting in lower occupancy and rental rates.
- Termination of long-term leases contributing to weaker portfolio tenant retention rate.
- Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.