Month: June 2011
CLT – OCBC
Maiden foray into China
Maiden foray into China. Cache Logistics Trust (CACHE) announced on 1 Jun that it is acquiring a chemical warehouse facility in Shanghai (Jinshan Chemical Warehouse) from its sponsor, CWT Limited, via an acquisition and leaseback arrangement for a purchase consideration of S$13.5m. This asset falls under the right of first refusal (ROFR) granted to CACHE at the time of IPO in Apr 2010. CWT will lease back the facility for a period of three years with an option for a further three years. The lease is triple-net and rental will commence at RMB 1.30 psm/day for the first year and increased by 2% per annum thereafter. Any extension of the lease will be on the same lease terms, save for rental and associated increase which will be at fair market rates. This acquisition marks CACHE’s first acquisition outside Singapore into China.
About the property. The property is located in Jinshan District within the successful Shanghai Chemical Industrial Park (SCIP), one of the largest petrochemical bases in Asia. SCIP is well-positioned and commands the interest of both local and multi-national end-users with an overall occupancy rate of around 90%. The property was developed by CWT and completed in 2007. The premises comprised of four single storey chemical warehouse buildings, ancillary office space, loading bays and car parks. The facility is sited on a land area of 33,506 sqm, with a built-up gross floor area of about 13,547 sqm. CACHE intends to finance the acquisition by debt. Upon completion of the transaction, expected to be within Jun 2011, CACHE’s gearing will rise from 27.9% to 29.2%.
Yield-accretive acquisition. The NPI yield of the new property is 8.6%. This is higher than CACHE’s existing portfolio yield of 7.6%, making the acquisition yield-accretive. The average of the two valuations provided by CB Richard Ellis and Knight Frank Petty, who acted on behalf of the manager and trustee respectively, is approximately S$14.6m, higher than the purchase consideration. This acquisition will enable CACHE to capitalise on the economic growth in China and in particular the resilient chemical and commodity logistics businesses. Concurrently, by diversifying into a different market, CACHE is expected to benefit from risk diversification from the property and the economic cycles where CACHE’s portfolio is located. CACHE stated that it is actively also looking to expand to other tier-one Chinese cities such as Tianjin, Beijing and Chengdu. We look forward to more property additions 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 46.3% of FY11 gross revenue). Factoring in contributions from the new acquisition, our fair value increased marginally from S$1.05 to S$1.06. Reiterate BUY.
MLT – OCBC
Spotlight is on South Korea
KPPC Pyeongtaek Centre. Mapletree Logistics Trust (MLT) recently announced that it has signed a conditional sale and purchase agreement with Korea Port Processing Co. Ltd (KPPC) for the acquisition of KPPC Pyeongtaek Centre at a purchase price of approximately S$85.9m. The property comprises two blocks of dry goods warehouses with a total GFA of about 100,900 sqm. There is also potential for organic growth as it has yet to maximise its permissible plot ratio, which will yield an additional GFA of close to 20,000 sqm. The property provides an initial NPI yield of 8.6%. The vendor, KPPC, will lease the entire property for a period of 5 years with an annual rental escalation of 3.0%. MLT has stated that this acquisition marks an important milestone to entrench the trust into the South Korea market. The acquisition is expected to be completed by 3Q11. Given the sizeable acquisition, the contribution of South Korea to the total portfolio’s gross revenue is expected to increase from 2.7% to 5.6%. Consequently, KPPC will be the first Korean customer in MLT’s list of top ten tenants; thus further diversifying its tenant base. Assuming that the purchase price and other acquisition costs of the property are fully funded by debt, MLT’s gearing level will increase to about 41% (after taking into account all acquisitions and divestments announced to date).
Capital recycle play in action. MLT also announced on 31 May that it has completed the divestment of 9 Tampines Street 92 for a total consideration of S$12.8m. Approximately S$11.2m will be redeployed to partially fund the acquisition of Jian Huang Building. Recall that 39 Tampines Street 92 is still in the midst of divestment for S$14.7m. MLT has previously cited that the two properties have building specifications that are now outdated and no longer ideal for modern logistics operations. Given its limited growth potential, it believes that divesting these assets would be the best option to maximize returns. MLT expects the disposal gain to result in a one-time increase in FY11 DPU by 0.07- 0.09 S cents.
More acquisitions to come. Apart from Korea, MLT has also added that it is actively looking at acquiring a warehouse (60,000 sqm and 98% leased) in Malaysia from its sponsor. MLT should be able to complete the acquisition by this year. Going forward, its main acquisition focus continues to be in Singapore, Malaysia and South Korea. MLT has a proven track record of executing a virtuous cycle of accretive acquisitions and competitive fund-raising. It is also a favourable move to recycle proceeds into better-yielding assets. Factoring in contributions from the new acquisition, our fair value increased from S$1.00 to S$1.01. Reiterate BUY.
CLT – CIMB
Maiden acquisition overseas
First asset in China
Cache has acquired its first overseas asset, in China, through a sale-and-leaseback arrangement with sponsor CWT for Rmb71m (S$13.5m), 7-8% below valuation. We expect the deal to be DPU-accretive with NPI yields of 8.6% surpassing its current portfolio average of 7.6%. Nonetheless, we are neutral on the deal given limited DPU accretion of 0.03ct (+0.3%), increased risks in a new location and insufficient step-up increases to counter Chinese inflation. We keep our DPU estimates and DDM target price of S$1.32 (discount rate 8.4%) as we had factored in acquisition growth. Cache trades at 1x P/BV and offers a forward DPU yield of 10%. We see catalysts from more accretive acquisitions.
The news
Cache will be acquiring a chemical warehouse facility in Shanghai under rights of first refusal from its sponsor, CWT Ltd, through sale and leaseback for 3+3 years. The purchase price is Rmb71m or Rmb487psf (S$13.5m or S$93psf). A triple net rent of Rmb1.30 psm per day for the first year comes with a 2% annual step-up. The 13,547 sq m warehouse is located in Jinshan District in the Shanghai Chemical Industrial Park, an industrial zone in Shanghai specialising in the development of petrochemicals and fine chemicals. The park is also one of the largest and fully integrated petrochemical bases in Asia. Developed by CWT in 2007, the warehouse has high-quality specifications and caters to a variety of chemical warehousing classes.
Comments
Yield-accretive but concerns increase. The Rmb71m price is 7-8% below valuation. Acquired at an NPI yield of 8.6% vs. its current portfolio average of 7.6%, the acquisition is expected to add to yields. The acquisition will be fully debt-funded and management expects annualised DPU accretion of 0.03ct (0.3% of FY10’s annualized DPU). However, we are not too excited given the smaller spread between property yields and risk-free rates in China (estimated 300bp) relative to Singapore (estimated 500bp). The leaseback period of three years may also not be sufficient to mitigate risks from foreign exposure. Additionally, the small step-up increase of 2% is below Chinese inflation levels of about 5%, diminishing the advantage of a discounted purchase price.
Funding with S$ debt. We understand that the acquisition will be funded with a S$-denominated loan. With the yuan on the uptrend, management has no plans to hedge foreign-exchange exposure from this asset in the near term. We do not see much risk in the short term and also expect cost of borrowing to come in slightly below our forecast of 3.5%.
Asset leverage to rise marginally to 29% from 28% after the acquisition, still leaving debt headroom of about S$213m, assuming 45% gearing. Cache still has the right of first refusal to sponsor CWT’s warehouse in Tianjin. Locally, it remains on the lookout for third-party assets and has similar such rights to CWT’s assets in Singapore.
Valuation and recommendation
Maintain Outperform. Our positive view on this acquisition is tempered by increased risks in venturing overseas and insufficient step-up increases to counter Chinese inflation. No changes to our DPU estimates or DDM target price of S$1.32 (discount rate 8.4%) as we had factored in S$220m of acquisitions for 2011. Cache trades at 1x P/BV and a prospective forward yield of 10%. We see catalysts from more accretive acquisitions.
CMT – DMG
More details on joint development
Joint venture to develop retail/office space at Jurong Gateway. Following the successful bidding of the 195,463 sqft (18,159.1sqm) site at Jurong Gateway (JG), CapitaMall Trust (CMT), CapitaMall Asia (CMA) and CapitaLand have revealed their plan to build a retail/office commercial centre at JG. The total development cost of the project will be ~S$1.5b for a total GFA of 960k sqft, implying ~S$1,560 psf development cost. The expected NPI yield on development cost is ~6%, which is favourable compared to CMT’s current 12-mth forward yield of 5.2%. We expect incremental DPU of ~0.5-0.6S¢ beginning FY14. After factoring the potential contributions from FY14 onwards, our TP is raised to S$2.02 based on DDM (COE: 8.0%; TGR: 2.0%). Maintain NEUTRAL.
CMT’s share of project is 30%. Under the joint tender agreement, CMT/CMA/CapitaLand will hold 30%/50%/20% stake in the development. The consortium has indicated that it intends to develop the site on a 60%/40% retail/office basis. The retail mall and office are slated to commence operations in Dec 2013 and Dec 2014 respectively. Given that this is a Greenfield site, there will be no DPU accretion to CMT in the next two years.
Strategic location comes at dearer price. The latest site to be awarded sits conveniently beside Jurong East MRT and bus interchanges. Although the land acquisition cost came in at S$1,012psf ppr, 56% premium to previous acquisition cost of land at Jurong Gateway Road in Jun 2010 (won by Lend Lease), the CMT/CMA/CapitaLand joint venture’s bid price was only 5.7% premium over second bidder’s tendered price. In addition, given that the MRT and bus interchange entrance/exit will be directly facing this newly acquired site at JG, we believe the price paid for this piece of land is reasonable. Based on pre-committed rents at JCube, we believe the retail/office rents at JG can hit S$16- 18/S$6-8 psf pm. Coupled with assumed NPI margin of 75-80%, the NPI yield of the commercial development at JG is ~5-6%.
TCT – OCBC
Diversification into China’s tier-2 cities
Betting on China. We recently visited TCT’s commercial assets in Shanghai and Qingdao, including the newly acquired Central Avenue Mall and pending Huai Hai Mall (midst of acquisition with settlement no later than 30 Jun). We observe that TCT has over time evolved its strategy in China, which used to focus on commercial assets and development projects in tier-1 cities such as Beijing and Shanghai . Recently, it has concentrated on regional expansion into tier-2 cities, including developing a large-scale retail property at the Laoshan district of Qingdao with the Trio group. TCT is also actively looking at deals in Xi’an in Shangxi province, forming a strategic partnership with the Ginwa Group to tap the emerging retail market in central and west China.
Three key advantages. We observed that TCT has three key advantages in China. First, TCT is listed as a business trust instead of a REIT, with the more flexible structure of 30% development cap and 45% gearing limit, as stipulated in its trust deed. The development component sets TCT apart from REITs which have little development exposure (10% deposited property max). TCT is thus better positioned to achieve accretive-yields due to cost savings from vertical integration. It is also not bounded by investment constraints, such as at least 75% of assets must be invested in income-producing properties. Secondly, TCT is upscaling its tenant mix from mostly low-mid tier to mid-high end retailers, which provide income uplift. Presently, some of its existing leases are well below prevailing market rates. For example, the anchor tenant Parkson, at City Centre, is paying only RMB1.73 psqm/day (average rate is RMB6 psqm/day). With the completion of the City Centre extension, Parkson will be vacating the property in 2012, while Marks and Spencer was roped in as the replacing tenant on a 10+5 years lease. On TCT’s debt portfolio, 85% is USD-denominated but 100% of its revenue is in RMB. TCT thus enjoys low borrowing costs, while the likely RMB appreciation in the mid to long term provides further forex upside.
Supply overhang remains. According to DTZ, there is an anticipated supply of new office space in Shanghai, amounting to about 100% of existing stock in 2011-2014. Likewise, highend retail space is expected to increase by another 50% from 2011 to 2013. The large new supply is expected to drag down overall occupancy rates and intensify the “winners/losers” divide among the Shanghai properties. Oversupply and inflation risks (dampening demand) remain our top concerns for the trust and we expect management to consciously address these as the trust grows in asset size. We do NOT have a rating for TCT presently.