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.

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.

Tapping sponsor’s pipeline

• Acquiring Chemical warehouse from sponsor, CWT Limited in Shanghai

• 8.6% yield is earnings accretive; long-term lease arrangement ensures strong earnings visibility

• BUY call, TP S$1.11 maintained

Acquire Chemical warehouse facility in Shanghai @ 8.6% NPI yield from CWT Limited. Cache Logistics Trust (“Cache”) announced that the trust would be acquiring a chemical warehouse facility in Jinshan district, Shanghai from its sponsor, CWT Limited for a total consideration of RMB 76m or S$14.6m (including attributable professional, acquisition fees). The property is located in Shanghai Chemical Industrial Park (“SCIP”), an established and also one of the largest petrochemical bases in Asia.

Accretive deal; strong earnings visibility from long-term lease arrangement. Initial yield of 8.6% is accretive and compares favourably against its implied trading yield of 7.2% and above recent transactions completed in Singapore (at 8.0% yield). Vendor CWT Limited will lease back the property at a net rent of RMB1.30/day for the next 3 years with an option to renew for an additional 3 years, with annual escalations of 2.0%, ensuring a stable step-up growth profile for Cache in the medium term. Cache is expected to fund the acquisition through debt and raise its gearing level slightly to 29.2% (from 27.9% previously).

BUY, TP S$1.11 maintained. We maintain our estimates as we have assumed acquisitions in our forecasts. The manager remains keen to grow its portfolio and continues to see acquisition possibilities in Singapore & Asia, on top of its pipeline of assets from sponsor CWT Limited. The stock remains attractive for its above consensus FY11-12F yield 8.6-9.2%, which is 260-590 bps above the peers.

Cache buys China warehouse for 71m yuan

CACHE Logistics Trust is buying a chemical warehouse facility in Shanghai for 71 million yuan (S$13.5 million), marking its entry into China.

The real estate investment trust (Reit) is purchasing the property from its sponsor CWT Ltd under an acquisition-and-leaseback arrangement. This is its first purchase of a CWT property since the trust’s listing in April last year.

CWT will leaseback the facility for a period of three years with an option for a further three years.

With a built-up gross floor area (GFA) of 13,547 square metres, the facility is located in the Jinshan District – which is situated within one of the largest petrochemical bases in Asia, the Shanghai Chemical Industrial Park (SCIP).

Risk and earnings diversifications were among reasons cited by Cache for the latest addition to its portfolio.

‘The acquisition will enable Cache to capitalise on the economic growth in the region 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,’ said Daniel Cerf, chief executive officer of Cache’s manager, ARA-CWT Trust Management Limited.

The management has guided that the transaction will be accretive at both net property income (NPI) and distribution per unit (DPU) levels.

The NPI yield of 8.6 per cent is one percentage point higher than Cache’s present portfolio yield of 7.6 per cent.

Likewise, after factoring in applicable taxes in China, FY2011 DPU is expected to see a boost of 0.03 cent per unit.

The Reit has guided that it will be keeping an ‘open eye’ for opportunistic acquisitions in the Asian region, with a special focus on China.

Mr Cerf said in an interview yesterday: ‘We believe wholeheartedly that the China market still has quite a lot of depth and good resilient growth especially on the logistics side.’

He added that cities of particular interest for Cache include tier-one types such as Beijing, Chengdu, Shanghai, and Tianjin, though he maintains that the Reit’s portfolio will likely continue to be predominantly Singapore- based.

Cache’s counter closed trading one cent higher at 94 cents yesterday.

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).