CLT – OCBC

Completion of Penjuru Lane asset

Completion of Penjuru Lane acquisition. Cache Logistics Trust (CACHE) announced on 12 May that it has completed the acquisition of 4 Penjuru Lane for S$8.9m. 4 Penjuru Lane is a 55,000 sq ft single-storey warehouse approved for chemical and dangerous goods storage with an extended 2-storey office annex. It is located within the established Jalan Buroh/Penjuru area, a key logistics hub that enjoys close proximity to the PSA Terminals, Jurong Port, Tuas checkpoint and at least half of the container yards in Singapore. The achieved plot ratio of 0.63, compared to the maximum allowable plot ratio of 2.5 under the zoning for the land, offers the potential to enhance and/or redevelop the premises to capture residual plot ratio in the future.

Lease Information. 4 Penjuru Lane will be leased back to Kim Heng for three years, with an option to extend for a further three years. The lease agreement provides for built-in rental escalation of 2% per annum. While this provides a 50bp stepup vis-à-vis the existing lease structures, we reiterate that it still pales in comparison with the Singapore’s 1Q11 CPI of 5.2% and MAS FY11 forecast of 3%-4%. The acquisition will be fully debt-funded. We have assumed a NPI yield on cost of 7.75% for this asset and it will propel CACHE’s gearing from 26.4% as at 31 Mar to approximately 28%.

Reiterate BUY. We applaud CACHE’s efforts to diversify away from its sponsor with yet another third-party acquisition. In our previous reports, we noted that previous CACHE’s properties are on long-term master-leases (at least 5-years) to its sponsor (CWT) and CWT’s parent (C&P), which manifests as a counterparty risk. The sale and leaseback arrangement with Kim Heng for 4 Penjuru Lane certainly helps to spread out the lessees. We also like the shorter lease expiry period (3 years), which will better position CACHE in a rising rental market. In addition, we noted that CACHE is actively seeking quality acquisitions in Asia Pacific. We look forward to more property additions ahead not only to diversify CACHE’s tenant base, but also to reduce its concentration risk on a single asset (CWT Hub which still account for 46.8% of FY11 gross revenue following the acquisition). Concentration and inflation risks remain our top concerns for the trust and we expect management to consciously address these as the REIT grows in asset size. Reiterate BUY with an increased fair value of S$1.05 (prev: S$1.04).