Cache Logistics Trust - CIMB Research 2016-07-20: Structural change in lease-mix to depress NPI

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - Structural change in lease-mix to depress NPI

1H16 DPU of 4.03Scts (-7% yoy) was broadly within our expectation and consensus, forming 51% of our full-year forecast. 2Q16 DPU of 1.99 Sct at 26%.
2Q16 DPU growth would have been +2% yoy if we exclude the capital distribution from 2Q15. There were no capital distributions in 2Q16.
Portfolio occupancy improved 1.6% qoq to 95.8%. Hi-Speed Logistics Centre to be renewed, but we expect net property income (NPI) for the asset to come down.
No new update on the summons from Schenker. Ultimately, we expect Schenker to continue to occupy the property.

Although the stock offers 8.7% dividend yield, we retain Hold on earnings volatility.

2Q16 gross revenue increased 33% yoy thanks to contributions from the Australian acquisitions and DHL Supply Chain Advanced Regional Centre (DSC ARC).
NPI, however, rose at a slower pace of 22% due to higher property expenses from the conversion of single-tenanted buildings (STBs) to multi-tenanted buildings (MTBs).
Factoring in the higher borrowing costs (for the Australian acquisition), distributable income increased by 6% yoy.

2Q16 DPU growth would have been +2% yoy (instead of -7% yoy), if we exclude the capital distribution of 0.185Scts/unit from 2Q15’s DPU.
Unlike 1Q16, CACHE did not include any sale proceeds from the disposal of the Kim Heng warehouse to its 2Q16 distributable income.
The Manager could retain some of the proceeds for AEIs. In our model, we have assumed S$2m of capital distribution p.a. for both FY16 and FY17.

As at 1H16, portfolio occupancy improved 1.6% pts qoq to 95.8%.
125k sq ft of new leases (mostly from DSC ARC) and 103k sq ft in forward renewal leases were signed in 2Q16.
In addition, Hi-Speed Logistics Centre will be converted from a master lease to a MTB at the end of its lease expiry in Oct 16. Some 70% of the space would be taken up by the existing tenant, with the remainder pre-committed to another 3PL. However, we expect net property income (NPI) for the property to fall due to higher property costs.

Recall that Schenker is seeking to bind the anchor lease agreement between itself and C&P (master-lessee) to CACHE. In the worst-case scenario that the court rules in favour of Schenker, and that the pre-agreed rental is applied, our FY17 DPU could see a 6% downside.
Ultimately, we think that the Schenker property would be converted to a MTB, resulting in further NPI pressure.

The stark realisation that more than 70% of CACHE’s leases could be MTBs by 2018 (currently c.40%) lead us to factor in a declining NPI margin trend (previously modeled in an improving trend). This mainly results in our DPU and DDM-TP downgrades (from S$0.94 to S$0.88).
1H16 NPI margin was 80%, and we expect it to trend down to 78% by 2018, especially as we note that a significant lease in that year (forming 25% of NLA) could potentially be converted to a MTB.
We maintain our Hold rating.

YEO Zhi Bin CIMB Securities | LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2016-07-20

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.88 Down 0.94