Cache Logistics Trust - Phillip Securities 2018-02-02: First Uplift After Strengthening Balance Sheet

Cache Logistics Trust - Phillip Securities 2018-02-02: First Uplift After Strengthening Balance Sheet CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - First Uplift After Strengthening Balance Sheet

  • Acquisition of a portfolio of nine properties in Australia for A$177.6mn (S$188.3mn).
  • Funded by debt and perpetual securities, making it DPU accretive to unitholders.
  • Maintain Accumulate; slightly higher target price of $0.93 (previously $0.92).

What Is The News?

  • Cache Logistics Trust has announced the proposed acquisition of a portfolio of nine logistics properties with a gross lettable area of 142,103 sqm on the eastern seaboard of Australia for A$177.6mn (S$188.3mn) at an initial net property income (NPI) yield of 6.4%.
  • The logistics properties are in Melbourne, Victoria (6 properties), Sydney, New South Wales (1 property) and Brisbane, Queensland (2 properties). 
  • The acquisition is expected to be 0.33 cents DPU accretive on a pro-forma basis over FY17's DPU, after factoring the divestment of 40 Alps Ave. (Proposed divestment of 40 Alps Ave was announced on 18 January.)

How Do We View This?

  • The choice of acquiring in Australia (instead of Singapore) does not come as a surprise, as the manager had repeatedly articulated its portfolio rebalancing strategy of acquiring in Australia. 
  • In our recent results report on 19 January, we had also opined that the manager is now in a better position to execute that strategy, following the recapitalisation of the balance sheet.

The Positives

  • ➕ Freehold lease in Australia, resulting in a more stable asset value. This is in contrast to Singapore, where industrial land leases are 30 years or less – which has the effect of declining property valuations as the remaining land lease shortens.
  • ➕ Improves diversification of income source by geography, tenant and properties.  Australia contributed 16% of gross rental income (GRI) in FY17. On a pro-forma basis, this will increase to 24% following the acquisition of the nine properties. The top 10 tenants contributed 80.4% of GRI and will be lowered to 68.5%. Overall portfolio value increases from S$1.21bn across 19 properties to S$1.40bn across 28 properties.
  • ➕ Extension of portfolio WALE. The nine properties have a weighted average lease expiry (WALE) of 5.0 years (by GRI), which extends Cache's existing portfolio WALE from 3.2 years to 3.4 years.
  • ➕ DPU accretive to unitholders. There will not be any new units created, as the acquisition will be funded by S$110mn term loan facility and S$100mn 5.5% p.a. perpetual security.

The Negatives

  • ➖ Only slight DPU accretion, despite portfolio value growing by 15.6%. NPI will receive a boost (~S$12.05mn), but income available for distribution to unitholders will face leakage of S$5.5mn p.a. due to the coupon of the perpetual security. Interest expense and manager's fees are also expected to be S$4.6mn higher, resulting in less than S$2mn actually flowing down to unitholders after withholding tax. 
  • Nonetheless, gearing remains manageable, as we estimate it at 35.8%, following this acquisition and proposed divestment of 40 Alps Ave. (Gearing as at end of FY17 was 36.3%.) We also estimate ~$96mn debt headroom (assuming 40% cap), which can be used to further grow the portfolio.

Maintain Accumulate; slightly higher target price of $0.93 (previously $0.92) 

  • We have raised our FY18e/FY19e revenue assumption by 10.8%/12.4%, and DPU assumption by 1.4%/1.7%. 
  • Our FY18e DPU assumption is still -6.8% y-o-y despite the acquisition, due to the combined effects of the larger unit base from the 18-for-100 Rights Issue in 4Q17, absence of income due to the divestment of 40 Alps Ave, conversion of CWT Commodity Hub to multi-tenancy lease, and negative reversions along the backdrop of ongoing softness in the Singapore rental market.

Richard Leow CFA Phillip Securities | 2018-02-02
Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 0.93 Up 0.920