Cache Logistics Trust - DBS Research 2019-04-26: Navigating Near-Term Hurdles

CACHE LOGISTICS TRUST (SGX:K2LU)

Cache Logistics Trust - Navigating Near-Term Hurdles

Cache Logistics Trust's 1Q19 DPU of 1.513 Scts slightly ahead of expectations.
Addressing CWT lease exposures will be a key factor in allaying investor concerns over time.
On the lookout for further overseas acquisition opportunities, to diversify and grow income and NAV.
Maintain HOLD; Target Price of S$0.75.

While 1Q19 distributions have tracked slightly ahead of our FY19F estimates, we are cognisant that c.16.5% of CACHE LOGISTICS TRUST (SGX:K2LU)’s GRI is attributable to CWT leases. Though potentially lower on a look-through basis, with buffers from three months of security deposits, it will likely remain a key concern in investors’ minds that has to be addressed over the immediate term.
Meanwhile, the successful resolution of its tax-related dispute for 51 Alps Ave will net proceeds of c.S$2.9m to be shared with unitholders in the upcoming 2Q, implying a temporary bump-up in yield to 8.4% for FY19F.
Maintain HOLD.

More conservative estimates as we believe that the higher proportion of lease renewals from the CWT Commodity Hub and Precise II properties, which have been facing higher vacancies, may put stress on near-term DPU.
With active negotiations and remarketing efforts underway, we believe that vacancy challenges should abate as replacement tenants are secured over the medium term.

Cache Logistics Trust has actively been looking to diversify away from Singapore, and Australia now accounts for c.29% of total assets post the acquisition of 16 industrial properties – soon to be 17. This diversification strategy has lengthened the land lease expiry and improved earnings visibility given fixed rental escalations and longer leases signed in Australia, while Singapore industrial rents bottom out.

We maintain HOLD with a DCF-based Target Price of S$0.75, which assumes WACC of 6.9%.
At the current Cache Logistics Trust share price, a prospective 8.4% yield for FY19F is on offer.

Non-accretive acquisitions. Given the high portfolio NPI yield of around 7%, potential acquisitions are unlikely to offer immediate yield accretion. The value-add will have to come from strong cashflows and eventually higher capital values.

The 6.2% y-o-y jump in gross revenue to S$30.8m was mainly driven by the acquisition of nine Australian warehouses in February 2018 and higher revenue from CWT Commodity Hub post its conversion to a multi-tenanted asset, which helped to offset the absence of income from the divestment of 40 Alps Ave and Jinshan Chemical Warehouse in 2018.
Property expenses also inched up due to higher property tax and operating costs under CWT Commodity Hub’s multi-tenancy but was partially offset by S$1.5m land rent that was excluded from the property expense line. As a result, NPI increased 4% y-o-y to S$23.8m, but NPI margins fell to 77.1% (1Q19) from 78.8% (1Q18).
Coupled with higher contributions from its Australian properties, this led to a firm 1.2% y-o-y growth in Distributable Income to S$16.3m.
Cache Logistics Trust's 1Q19 DPU of 1.513 Scts formed approximately 26% of our FY19F forecasts, tracking slightly ahead.

Portfolio occupancy remained relatively stable q-o-q at 94.8%, anchored mainly by the Australian assets.
Excluding short-term leases, we note that Cache Logistics Trust secured leases of 242,000 sqft in 1Q19, accounting for about 3.6% of total NLA.
Leasing momentum has been improving in recent quarters and continued to improve in 1Q19 as Cache delivered positive rental reversion of 1.3% from the renewal of two leases representing approximately 100,700 sqft of NLA.
While this compares favourably to average negative reversions of -4.4% and -6.6% registered in 4Q18 and 3Q18 respectively, it may not be representative of CWT’s overall leasing outlook which appears relatively mixed.

Gearing levels increased sequentially from 36.2% (4Q18) to 37.4% (1Q19). This includes funds for the 182-198 Maidstone Street acquisition, which is poised for completion at end-April 2019.
All-in financing cost was higher q-o-q at 3.87%, while the proportion of borrowings hedged into fixed rates declined slightly from 75.2% in 4Q18 to 71.6% in 1Q19.

CWT leases currently contribute c.16.5% of GRI, down from 31.7% in FY17 as Cache Logistics Trust made a conscious effort to gradually pare down its exposure over time.
According to the Manager, a broad spectrum of end-users, (rather than CWT itself) have taken up practically all of the referenced leased area, which suggests healthy underlying occupancy and demand.
We understand that Cache Logistics Trust has been actively negotiating with both underlying and prospective tenants alike prior to the recent episode – and has been gaining traction, with three months of security deposits still intact.
While this bodes well for Cache Logistics Trust’s ability to maintain occupancy and preserve continuity of rental income through direct contracting, we believe the risk of tenant relocations remain.
Additionally, we also anticipate rental pressures from upcoming renewals at Precise 2 as the asset undergoes conversion from a master-leased to multi-tenanted facility but is likely to be asset-specific.
Meanwhile, Australian properties should continue to deliver steady growth.

In addition to plans to take on selective asset enhancement and/or redevelopment opportunities, Cache Logistics Trust remains keen on expanding its overseas footprint, which will likely be supported by ongoing asset recycling efforts.
Leveraging on ARA’s platform, the Manager shared that Australia and Korea will be key markets of focus for now given similar yield and risk management profiles.

Carmen TAY DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-04-26

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.750 SAME 0.750