BEEFING UP MARKET POSITION

•Approval on proposed acquisition

•Enhanced debt profile

•Valuation remains attractive

Addition of another quality asset

Cache Logistics Trust (CACHE) had received approval from unitholders pertaining to the proposed acquisition of Pandan Logistics Hub and the entry of a master lease agreement with CWT Limited. With the addition of this prime logistics property, CACHE will have 12 quality assets under management (eight with ramp-up features) and an enlarged GFA of ~4.83m sq ft (+7.3%). As a note, Pandan Logistics Hub is expected to contribute S$5.2m in rental income to the REIT in the first year, translating to an initial NPI yield of 7.6%. This is likely to add ~0.28 S cents to its DPU on an annualized basis, based on our estimates.

Refinancing on more favourable terms

CACHE also embarked on a capital management exercise to increase the amount and duration of its debt facility, consistent with our expectations communicated in our 11 Jun report. According to the May 2012 circular to unitholders, a new bank facility of S$375.0m will be used to retire its existing bank facility of S$203.0m and repay its S$40m unsecured loan, while an projected S$79.6m (including S$11.0m refinancing costs) is expected to be used to finance the Pandan Logistics Hub acquisition. Notably, the effective interest rate for the new bank facility is 2.8% plus SOR, which is at 30bps below its existing rate of 3.1% plus SOR. Hence, CACHE is likely to gain from interest savings going forward.

Retain BUY with higher fair value of S$1.18

We continue to like CACHE for its resilient portfolio (100% occupied; master lease arrangements), healthy financial position and attractive FY12F DPU yield of 7.9%. We now incorporate the acquisition of Pandan Logistics Hub into our model as the transaction is expected to complete by 9 Jul. We also tweak our estimates to reflect a marginally lower cost of debt. Accordingly, our fair value is raised from S$1.11 to S$1.18. Reiterate BUY on CACHE.

IN THE RIGHT DIRECTION

•On track to deliver solid results

•May benefit from lower interest costs

•Offers attractive FY12F DPU yield

Expecting sturdy FY12 performance

Cache Logistics Trust (CACHE) appears to be on track to deliver a sturdy set of results for FY12. In addition to strong and predictable income streams from its existing portfolio properties, the REIT had announced two new acquisitions YTD that are expected to contributive positively to its financial performance. We note that the acquisition of Pan Asia Logistics Centre, announced in Jan, was completed on 30 Apr and is expected to give an initial NPI yield of 7.7%. On 7 May, CACHE proposed a sizeable acquisition of Pandan Logistics Hub from its sponsor CWT Limited at S$66m (~8.5% of total asset valuation as at 31 Dec 2011). This property incorporates a 2.5% annual rental escalation and has an initial NPI yield of 7.6%, based on details on the master lease arrangement with CWT. As the implied portfolio NPI yield stood at 7.3% for FY11, both acquisitions are expected to be accretive to its earnings.

Possibility of lower borrowing costs

We also observe that CACHE had announced the redemption of its S$35m 3.5% fixed rate notes due 2016 on 31 May. This is somewhat unexpected in our view, as the date of maturity is still four years away and as CACHE clearly need the capital for growth. This leads us to believe that CACHE may be in the process of injecting new capital via borrowings at more favourable terms (equity issue is probably an unlikely scenario at this juncture given its comfortable aggregate leverage of 27.7% as at 31 Mar). Should this turn out to be true, we expect CACHE to benefit from interest savings.

Maintain BUY

We continue to like CACHE for its resilient portfolio (100% occupied; master lease arrangements), long WALE of 4.4 years and attractive FY12F DPU yield of 8.1%. We are currently holding off adjusting our estimates for the Pandan Logistics Hub acquisition as it is still subject to unitholders’ approval on 19 Jun. Maintain BUY with unchanged fair value of S$1.11.

Sound earnings, high yields

• Proposed acquisition of Pandan Logistics Hub for S$66m from sponsor CWT

• Widely anticipated and earnings accretive deal; gearing to head towards 31%

• Attractive 8.3-8.5% yields; Maintain BUY and S$1.11 TP

Tapping sponsor’s pipeline. Cache Logistics Trust (Cache) is proposing to acquire Pandan Logistics Hub from sponsor CWT for a total consideration of S$66.0m (all in cost of S$69.3m, inclusive of a 1% acquisition and professional fees). Pandan Logistics Hub is a 5-storey ramp up warehouse located at 49 Pandan Road, built by the sponsor, CWT Limited. The warehouse is relatively sizeable, with total GFA of 329,109 sf and typical floor plate sizes of 58,000 sf. Together with accessible mezzanine office space, we believe the building caters well to single-user end tenants to base their operations. The property has just recently achieved CSC status (Apr 12, TOP in Oct 11).

Master lease arrangement with CWT. Upon completion of the purchase, CWT will leaseback the whole property on a triple net basis for 3 years. The first year rent is negotiated at S$5.2m (est. at S$1.32 psf pm, initial yield of 7.6%), with annual escalations of 2.5% which we believe fair given its master lease structure. Upon the expiry of the master lease after 3 years, CWT has signed an agreement to extend leases for the first and fifth storeys for an additional 2-4 years, bringing the total weighted average lease for this property to 4.3 years. This will then allow Cache to engage the end tenants occupying the other parts of the warehouse and actively manage the property to optimize yields. Given the size of the acquisition and it is an interested party transaction, the manager will be calling for an EGM to seek unitholders approval.

Earnings accretive. The purchase consideration implies a net property income yield of 7.6%, which is higher than its current implied yield of close to 7.0%, meaning that that the acquisition is expected to be accretive to the trust. The manager intends to fund the acquisition fully by debt, at an estimated interest cost of c4.0% (in line with its current debt facilities). Gearing is projected to head towards 31% post completion of this acquisition (assuming 100% debt).

BUY rating and S$1.11 TP maintained, no change to forecast. A widely anticipated and timely move, in our view , as we are looking for the manager to execute on acquisitions in order to maintain Cache’s upward distribution growth momentum. Minimal impact on our numbers as we have factored in S$60m acquisitions in our forward estimates. Maintain BUY and S$1.11 TP. Stock continues to offer an attractive FY12-FY13F distribution yields 8.3%-8.5%.

Much-awaited acquisition

Cache has announced itsmuch-awaited acquisition from sponsorCWT after its private placement in Mar. Pandan Logistics Hub marks Cache’s largest acquisition afterits IPO,andwill expand its AUM and YTD acquisitions to S$944m and S$101m,respectively.

We adjustDPUs factoring in Cache’s placement, partially offset by higher YTD acquisitions (S$101m) vs. our S$80m expectation and new acquisition assumption of S$80m next year. Our DDM-based target price (discount rate: 8.5%) drops marginally. Maintain Outperform.

What Happened

Cache has announced its acquisition of Pandan Logistics Hub, a newly developed five-storey ramp-up logistics warehouse (329,109sf GFA) from sponsorCWT Ltd. Purchase consideration of S$66m (S$201psf GFA) was at a marginal 0.4% discount to average valuation by independent valuers and will be funded fully by debt.

Asset will be master-leased to CWT Ltd for the first three years at NPI yield of 7.6%, andnet rents of S$1.32psf with annual rental escalation of 2.5-2.6%. Cache had also entered into lease with CWT for a further 2-4 years for the first and fifth storeys. Acquisition is subject to approval through EGM and we expect completion within two months.

What We Think

The acquisition was very muchanticipatedafter a somewhat unexpected S$59m placementby Cache in Mar.YTD acquisitions of S$101m surpassed our FY12 assumed acquisition of S$80m and would take Cache’s AUM to S$944m. Overall NPI yield of 7.6-7.7% for the two acquisitions areaccretive over funding cost (42:58debt-equity funding) and FY11 NPI yield of about 7.3%. Asset leverage is expected to rise to 32% post-acquisition and should still leave ample debt headroom for acquisitions if Cache obtains a credit rating.

What You Should Do

We factor in the higher-than-expected YTD acquisitions and new acquisition assumption of S$80m for FY2013. We continue to like Cache for its stable and resilient yieldsand pipeline from sponsor.Maintain Outperform.

Cache Reit to buy warehouse for $66m

Pandan Logistics Hub will give net property income yield of 7.6%

CACHE Logistics Trust is making its biggest buy to date in the form of a ramp-up logistics warehouse facility, for which it will shell out $66 million.

The real estate investment trust's manager, ARA-CWT Trust Management, said yesterday that Cache will purchase the Pandan Road located Pandan Logistics Hub from CWT Ltd under a sale and leaseback arrangement. CWT is a controlling shareholder of ARA-CWT – a joint-venture Reit management company between ARA Asset Management and CWT.

ARA-CWT said that the purchase was made at an arm's length, willing-buyer and willing-seller basis. The property is the second acquisition that Cache has made to date under the Rights of First Refusal (ROFR) arrangement with CWT as its sponsor.

Among the reasons that led to the purchase is the net property income yield of 7.6 per cent for Pandan Logistics Hub, said ARA-CWT. The acquisition also allows Cache to increase its market share of ramp-up warehouses in Singapore to 22.9 per cent from 21.2 per cent.