Cache Logistics Trust - RHB Invest 2017-07-24: Finely Balancing Risk Rewards

Cache Logistics Trust - RHB Invest 2017-07-24: Finely Balancing Risk Rewards CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - Finely Balancing Risk Rewards

  • Cache Logistics Trust’s (Cache) 2Q17 results were in line. No new updates on the 51AA leasing disputes, which continue to remain as an overhang.
  • We expect more divestments ahead and a potential equity fund raising to address its high gearing levels of 43.4%.
  • Management has been rebalancing its exposure to Australia amid challenging Singapore market conditions and we expect this trend to continue. 
  • While recent changes at the REIT manager level offers huge growth potential, the impact remains unclear at this juncture. 
  • Cache offers a relatively high yield of 7.6%, which should limit downside. Maintain NEUTRAL with a DDM-based SGD0.86 Target Price (9% downside).

2Q results in line. 

  • Cache Logistics Trust’s (Cache) 2Q17 DPU of 1.80 cents (-9.5% YoY, flat QoQ) accounted for 25% of our FY17F estimates. 
  • 2Q17 gross revenue and NPI were lower 0.7% YoY and 4% YoY respective mainly due to a lower contribution from 51 Alps Avenue Singapore (51AA) and conversion of master leases to a multi tenancy.

Rent reversions to remain negative. 

  • In 2Q17, Cache signed new leases of ~260,400 sq ft at an estimated average negative rent reversion of ~8-10%. Based on CBRE’s data, ~8.5m sq ft of warehouse supply is expected to come on stream in 2017, compared to a 3-year average net demand of 5.4m sq ft. This should continue to exert pressure on its upcoming lease renewals. 
  • Overall, we expect warehouse rental rates to continue to decline further by 3-7% this year.

Gearing – too close for comfort. 

  • With a portfolio gearing of 43.4% (maximum allowable limit for REITs – 45%), Cache remains one of the highly-geared S-REITs. We expect more divestments down the road to address gearing concerns. 
  • We also foresee potential equity fundraising, should there be accretive asset acquisition opportunities – particularly in Australia.

Australia remains the focus market for acquisitions. 

  • Amidst a challenging Singapore warehouse market, it has been steadily growing its presence in Australia (16% of portfolio value). Key reasons for rebalancing are better market fundamentals, longer weighted average lease to expiry (WALE), and freehold status with relatively high NPI yields.

No new updates on 51AA lease disputes. 

  • No further progress was made on the ongoing legal proceedings at Schenker Megahub (51AA). 
  • To recall, Cache is in a lease dispute with C&P Land Pte Ltd (master lessee) and Schenker (tenant) on master lease renewals for the property, which expired on Aug 2016. Cache, currently under a holding agreement pending the resolution of the court proceedings, is receiving SGD0.77 psf/month for the property – which is well below the market rates of SGD1.10-1.40 psf. 
  • In our model, we have factored in a potential resolution by the end of the year.

Changes at the REIT manager level offers growth potential. 

  • ARA Asset Management (ARA) and CWT currently hold 60% and 40% stakes in Cache’s REIT manager, and 40% and 60% stakes in the REIT’s property manager respectively. ARA has recently been successfully privatised by a consortium, which includes founder John Lim, Cheung Kong Property, Straits Trading Company, American private equity firm Warburg Pincus LLC and China’s AVIC Trust Co Ltd. 
  • On the other hand, HNA Group has launched a general offer to take CWT private. While these changes at the REIT manager level offer potential for future growth opportunities in terms of huge asset pipeline, the impact remains unclear at this juncture.

Maintain NEUTRAL and SGD0.86 TP (CoE: 8.8%, TG: 0%). 

  • Key concerns are a prolonged drag from the Schenker lease disputes and high gearing levels. However, Cache’s high forecast yields limit its downside. 
  • Key re-rating catalysts are a favourable resolution of the Schenker court case, the divestment of low-yielding assets and potential M&As among smaller industrial REITs.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-07-24
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 0.860 Same 0.860