Category: CLT
Industrial REITs – OCBC
STILL HOT ON PORTFOLIO MANAGEMENT ACTIVITIES
- Healthy debt maturity profile
- Increased investment activity
- Subsector yield remains attractive
Active capital management
Industrial landlords continue to be very engaged in their capital management activities. For 3Q to-date, we note that two industrial REITs, namely AIMS AMP Capital Industrial REIT and Mapletree Industrial REIT, had announced the issuance of fixed-rate notes, while Sabana REIT had entered into a financing agreement for S$258.6m additional Commodity Murabaha facilities. Based on our understanding, the proceeds from these issuances will be used to refinance part of their existing borrowings. This is in line with our view that the industrial REIT subsector’s debt maturity profile will remain healthy, with limited refinancing risks in the near term.
Pickup in acquisition activity
We also observe that there was a pickup in investment activity during the period. The most active REIT was Cambridge Industrial Trust, which announced the proposed acquisitions of Teban Gardens Crescent, 30 Marsiling Industrial Estate Road 8, and 11 Woodlands Walk for an aggregate consideration of S$97.3m. With just days to the close of 3Q, we estimate that the total subsector acquisition value for 3Q will be at S$182.9m. This significantly exceeds the S$66.0m acquisition size clocked in 2Q, albeit still lower than the S$678.2m value registered in 1Q. We are currently maintaining our view that the subsector acquisition activity is likely to be skewed more towards smaller REITs. We also believe that further acquisitions in the industrial space may possibly involve a combination of debt and equity, given that the subsector aggregate leverage is set to increase after funding committed acquisitions. In addition, some REITs (e.g. Ascendas REIT and Mapletree Logistics Trust) have also turned to capital recycling via divestments to enhance their portfolio returns, in line with our expectations.
Maintain OVERWEIGHT
We are retaining our OVERWEIGHT view on the industrial REIT subsector due to its high yields (7.0-7.1% for FY12-13F) and growth potential. Cache Logistics Trust remains our preferred pick, given its robust portfolio, healthy financial position and attractive forward DPU yield of 7.1%.
CLT – OCBC
ON STRONG FOOTING
- Resilient portfolio
- Sturdy income streams
- Better 2H12 performance
Demand for portfolio assets to stay strong
We continue to favour Cache Logistics Trust (CACHE) for its resilient portfolio. The REIT currently owns 12 logistics warehouse properties, of which eight of them have ramp-up features. Such warehouse space is limited in Singapore as specialized planning and design specifications are required for the development. Based on our understanding, CACHE holds a sizeable 22.9% market share of rampup warehouses in Singapore. Hence, we expect the demand for its properties to remain robust.
Strong and predictable income streams
CACHE’s portfolio has retained 100% occupancy rate since its listing in Apr 2010. In addition, the bulk of its leases are based on triple-net master lease structures with built-in annual rental escalation of 1.5-2.5%. This arrangement provides CACHE not only with high NPI margins of 95.0%-97.4% over the past eight quarters but also stable income streams and a long weighted average lease to expiry of 4.4 years (with less than 2% of GFA due for renewal in 2013).
Improved performance for 2H12
For the rest of FY12, we expect CACHE to turn in a better set of results. While its 2Q12 DPU eased 5.0% YoY, we note that it was due to an enlarged unit base arising from private placement to fund the acquisition of Pandan Logistics Hub, even though the property has yet to contribute to its income. When rental income from Pandan Logistics Hub starts to kick in from 2H12 onwards, we believe CACHE will see a lift in its DPU going forward. This is in addition to a potential gain from interest savings following the recent refinancing of its outstanding debts with a new S$375.0m bank facility (all-in financing cost is expected to improve to 3.44% from 4.38%).
Maintain BUY
As CACHE is approaching the end of its 3Q, we now roll our valuations to FY13. This in turns raises our fair value estimate from S$1.18 to S$1.26. We reiterate our BUY rating on CACHE.
CLT – AmFraser
A Juicy Yield Play
We initiate coverage on Cache Logistics Trust (Cache) with a BUY and a fair value of $1.291 based on DCF. Backed by a quality portfolio of logistics warehouse assets, Cache is well positioned to capture the growth opportunities presented by Singapore’s development as a global logistics hub. Built‐in rental escalation rates of 1.5‐2.5% and the long‐term nature of its triple‐net master lease agreements underpin earnings resilience even in the face of subdued macroeconomic conditions. A forward FY2012‐13 dividend yield of 7.0‐7.3% further accentuates Cache’s attractiveness.
INVESTMENT MERITS
Built‐in rental escalation rates and triple‐net lease structure offer protection against inflation. Cache’s master and multi‐tenanted leases are structured with built‐in rental escalation rates of 1.5% to 2.5%. This, along with its triple‐net master leases, allows Cache to pass on the bulk of its inflationary burden to its master lessees and end‐user tenants.
Backing of a strong sponsor. CWT has provided Cache with a strong pipeline of local and foreign acquisition assets by granting it a Rights of First Refusal (ROFR) on 13 properties, bolstering its inorganic growth plans.
A juicy yield play. The biggest attraction for us is its sustainable FY2012‐13 yield of 7.0‐7.3%. A portfolio of strategic assets, strong underlying occupancy rates and its long‐term triple‐net master lease structure all combine to underpin its earnings stability and thus ensuring the consistency of its attractive dividend yield.
Comfortable debt headroom. Should Cache obtain a credit rating, the company would be able to drive up its aggregate leverage to a maximum of 60%. Amid the current environment of strong liquidity and low interest rates, Cache could be motivated to take on a more aggressive stance on gearing to support its acquisition of desirable assets.
KEY RISKS
Over reliance on master lessees CWT and C&P for rental income. Should CWT Limited and C&P fail to meet their lease obligations, this would severely impact Cache’s bottom‐line and distribution income.
Asset concentration risk. Generating around 40% of its rental revenues from CWT Commodity Hub, Cache is largely exposed to risks that could adversely impact the operations or business of CWT Commodity Hub.
VALUATION
DCF Valuation. We derive a fair value of $1.291 based on a DCF model. Our model factors in a terminal growth rate of 1.5% and is based on the assumptions of a risk‐free rate of 1.38%, a beta of 0.8, and market risk premium of 9.2%.
Industrial REITs – OCBC
2Q12 RESULTS ROUNDUP
•Interim results matched projections
•Positive performance to carry on
•Good capital and lease management
Consistent set of results
Industrial landlords continued to deliver, meeting expectations for 2Q12. YoY growth in NPI ranging from 3.9-26.4% was seen among the REITs, bolstered by contribution from completed developments/ acquisitions, positive rental reversions and improved operational performances. Mapletree Industrial Trust was the top performer for the quarter, raking up 14.1% YoY increase in DPU. This was followed closely by Cambridge Industrial Trust and Ascendas REIT, with 13.9% and 10.3% growth respectively. Only AIMS AMP Capital Industrial REIT (AAREIT) and Cache Logistics Trust (CACHE) saw a sequential decline in DPU. However, this was due to the absence of distribution in retained income seen in 1Q by AAREIT. For CACHE, we note that it was attributable to an enlarged unit base arising from private placement to fund the acquisition of Pandan Logistics Hub, even though the property has yet to contribute to its income.
Positive outlook remains
Going forward, we believe that industrial REITs will likely maintain their financial performances. While most of the landlords acknowledge that the macroeconomic landscape has remained uncertain and volatile, they expect stable results from their portfolios, driven by contribution from recent investments and healthy leasing activities in the industrial space. A few industrial REITs also cited the possibility of further positive rental reversions, as current market rents are still above the passing rents at some of their assets.
Occupancy rate and gearing remained at healthy levels
Industrial REITs, we note, have also done well on their lease and capital management. The subsector average occupancy rate as at 30 Jun stood at 98.4%, representing a 60-bp improvement QoQ, while the weighted average lease to expiry held steady at 3.6 years. This reflects active portfolio management and continued strong demand for industrial property. In addition, the subsector aggregate leverage average was still comfortable at 33.5% (vs. 33.9% in 1Q). As such, we maintain our OVERWEIGHT rating on the industrial REIT subsector. Cache Logistics Trust remains our preferred pick, given its attractive FY12F DPU yield of 7.6% and robust portfolio.
CLT – CIMB
Resilience in current times
2Q12 was another steady quarter, reflective of a resilient portfolio. Its acquisition of assets in April and July was testament to management's ability to deliver acquisition-led growth. A Malaysian asset was added into the ROFR pipeline with Cache exploring options there as well.
2Q/1H12 DPU came in within expectations at 24%/48% of our FY12 (back-end loaded contributions), and consensus. We tweak estimates, lift acquisition assumption to S$100m in 2013, and lower risk premium on proven resilience in portfolio yields. We raise our DDM target price (disc rate: 8.1%). Maintain Outperform with accretive acquisitions as catalyst.
Steady quarters ahead
2Q12 NPI grew 8.1% yoy, led by acquisitions and rental step-ups. DPU declined by 5% yoy due to enlarged share base from the private placement in March. We estimate a moderate 4% yoy growth otherwise. Rents are likely back-end loaded with newly acquired Pandan Logistics Hub and Pan Asia Logistics Centre to fully contribute in 2H12. Organic growth continues to stem from the 1.5-2.5% step-up rental escalation structured into master leases. Management has already begun renewal of master leases due in FY15/16 at similar step-up rates.
What's next for growth?
Management remains committed to acquisition-led growth. Following the acquisition of a pipeline asset from CWT, ROFR to a Malaysian warehouse was secured in 2Q12, bringing assets in the pipeline back to 13 properties with c.3.5m sf GFA. The asset will be completed in 2012. Cache continues to explore the Malaysian market to gain familiarity, and stated preference for larger assets (for more discernable impact to the bottom line), albeit harder to come by.
Stability in current times
We like Cache for its resilient yields, backed by a 100% occupied portfolio and master leases with rental step-ups. Triple net leases (WALE: 4.4 years) further mitigate exposure to inflationary cost pressures. Management's prudence leaves us confident of accretive acquisitions: we factor in S$100m for 2013.