Phillip Securities Research 2015-07-21: Cache Logistics Trust - Soft market underpinning a flat quarter. Maintain ACCUMULATE.

Soft market underpinning a flat quarter

  • 2.140 Cents DPU, down slightly by 0.3% y-o-y. 
  • High portfolio occupancy of 98.3%, with long WALE of 4.5 years. 
  • Risk to portfolio occupancy and rents as master-leases roll-off in an environment of over-supply in conjunction with JTC anchor-tenant subletting rules. 
  • Maintain at "Accumulate" rating, with slightly lower DDM valuation of S$1.270. (Previous: S$1.310) 

What is the news? 

  • Cache Logistics Trust ("Cache") announced its 2Q FY15 results on 20 July, after trading hours. 

Analyst Briefing key takeaways 

 Lower y-o-y NPI is due to conversion of master leases to multi-tenancies during 2Q15. 

  • This is a one-off for each building that gets converted, but will be repeated within the portfolio, as and when subsequent buildings are converted. 

 Master-leases that have been converted to multi-tenanted have healthy occupancies. 

  • Portfolio occupancy dipped only 0.8ppts q-o-q to 98.3% (1Q15: 99.1%). 
  • Minimal renewal risk of 2% portfolio NLA remains in 2015; but three more masterleases expiring in 2016. 
  • The three properties are Schenker Megahub (Aug 2016), HiSpeed Logistics Centre (Oct 2016) and Air Market Logistics Centre (Aug 2016). The three properties account for c.12% of portfolio NLA. 

 Prudent capital management. 

  • Gearing is at 38%, but there is no refinancing requirement until 2017. 

What we think 

  • Master-lease for Pandan Logistics Hub has already rolled-off to multi-tenanted in July, after the 2Q reporting period. Consequently, portfolio occupancy today is likely already lower than the reported 98.3%, and could remain so going into 3Q FY15. 
  • Anchor tenants will have some bargaining power in an environment of over-supply. Qualifying anchor tenants under the JTC 70:30 rule will be able to drive a hard bargain against landlords, compelling landlords to offer rent incentives. 

Investment Actions 

  • We accordingly adjust our forecasts for 2015 and 2016 (assuming 90% occupancy for buildings rolling-off to multi-tenancies). 
  • We maintain "Accumulate" rating on Cache, with slightly lower DDM valuation of S$1.270. (Previous: S$1.310). 

Relative valuation 

  • The closest peer to Cache is Mapletree Logistics Trust ("MLT"), which is the only other Industrial S-REIT that holds a portfolio of properties comprised exclusively of warehouses. 

Investment Merits for Cache 

  • Direct beneficiary to Singapore's Logistics Hub status. Cache holds a portfolio of warehouses with good locations (near to ports and airports) and superior design (modern ramp-up type vs. legacy cargo-lift type). 
  • Dominant positioning across Industrial S-REITs. Longest WALE of 4.5 years, giving income visibility and stability. 
  • Distinct competitive advantage: Managerial expertise through market leaders in asset management and logistics. REIT Manager and Property Manager are JVs between ARA Asset Management and CWT Limited. 
  • Attractive forward distribution yield. About 7.2%. 

Outlook for the sector 

Expectations for rents to soften due to supply-side, but occupancy to remain healthy. 

  • Singapore remains the Logistics Hub of the region, underpinned by consumer growth and e-commerce. 
  • While there is limited risk of oversupply as majority (>70%) of upcoming supply of warehouse space are pre-committed, but this is still likely to put pressure on rents. 

(Richard Leow, CFTe)

Source: http://www.poems.com.sg/