Cache Logistics Trust - RHB Invest 2018-02-02: Scoops Up Nine Assets In Australia

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - Scoops Up Nine Assets In Australia

As anticipated, Cache Logistics Trust announced the acquisition of nine logistics assets from Blackstone for AUD178m (SGD188m). The acquisition is yield accretive and would help the company in achieving its stated portfolio rebalancing strategy to a favourable Australian market.
The deal would be partly funded by its maiden perpetual bond issuance, which would help in maintaining its post-transaction gearing at 36% levels.
We welcome the move which is likely to offset the DPU shortfall from its recent divestment and rights issue. However, with the SG logistics sector expected to bottom by end-2018, we would also like to see it acquiring SG assets, where it has good track record.

The nine freehold assets are located across the states of Victoria (66% of total value), New South Wales (19%) and Queensland (15%). The purchase consideration of AUD177.6m (SGD188.3m) is done at par with the latest valuation and would be accretive to pro-forma DPU (+1.2%).
The total acquisition cost including purchase expenses is AUD191m (SGD203m). The initial net property income (NPI) yield of the transaction is 6.4%, is slightly lower than its current portfolio NPI yield of 7.1%.
All except one of the property is fully occupied and comes with a reasonably long weighted average lease expiry (WALE) of five years. About six of the nine assets are single-tenanted.

The acquisition is in line with Cache Logistics Trust’s (Cache) ongoing portfolio rebalancing strategy of divesting mature and shorter land-lease Singapore (SG) assets and increasing exposure to the freehold Australian market.
While the NPI yields are slightly lower compared to SG properties, management highlighted the freehold nature, longer property WALE, and in-built rental escalations (2-3.5% pa) as the mitigating factors.
Post acquisition, Australia would account for about 28% of asset value (from 17%) with an overall portfolio WALE increasing to 3.4 years, from 3.2 years. The increased scale in the Australian market also allows it to reap market synergies and benefit from the improving Australian economy.

The transaction would be partly funded by a SGD100m non-call 5-year perpetual bond, which bears a coupon of 5.5%. The remaining SGD110m would be funded via a 5-year unsecured loan, which is likely to then be swapped to a AUD loan to mitigate forex risks.
Cache Logistics Trust would also hedge ~70% of the forecasted income from Australia to mitigate currency volatility.
As the perpetual bond is accounted as equity, the overall gearing post transaction would remain modest at 36%, providing Cache with a further debt-headroom of ~SGD100m (assuming 40% as a comfortable level) for future acquisitions.

We revise higher our FY18F-20F DPU by 2%-3% factoring in accretion from acquisition and taking into account the perpetual bond issuance.
Our DDM-derived SGD0.98 Target Price is based on a COE of 8% and TG of 1%.
Key risks are an unexpected slowdown in SG manufacturing sector growth and sharp spike in interest rates.
Cache offers a FY18F yield of 7.5%, significantly higher than S-REIT’s average 5.4%.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2018-02-02

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