Backend-loaded contributions expected

• In line; maintain Outperform. 1Q11 DPU of 1.95 Scts met expectations, forming 21% of our FY11 estimate and 24% of the Street’s. This translates to an annualized DPU of 7.92 Scts for an 8.4% yield. We expect backend-loaded contributions with S$220m of debt-funded acquisitions assumed for FY11. No change to our DPU estimates or DDM-based target price of S$1.32 (discount rate 8.4%). We continue to like Cache for its quality portfolio and scalability. Balance sheet is one of the strongest among S-REITs, leaving it with debt headroom for accretive debt-funded acquisitions from sponsor CWT and third parties. Cache trades at 1.05x P/BV and offers a prospective FY11 DPU yield of 10%. We see catalysts from accretive acquisitions.

• 1Q11 DPU up 0.7% qoq. Cache’s portfolio remains fully leased, with a long WALE of 5.5 years. NPI was up 0.5% qoq in 1Q11 from rental step-ups though it missed management’s forecast by 1% due to timing differences for rental step-ups. Distributable income (+0.8% qoq) and DPU (+0.7% qoq), however, met management’s forecasts on lower financing costs.

• Maiden third-party acquisitions in 1Q11. Cache completed the acquisition of 6 Changi North Way on 31 Mar and is in the process of completing the acquisition of 4 Penjuru Lane. The latter comes with development potential with an un-maximised plot ratio of 0.63 (vs. maximum plot ratio of 2.5). We expect backend-loaded contributions from these two and look forward to more third-party acquisitions to expand its portfolio and dilute tenant concentration risks for sponsor, CWT.

• Acquisition catalysts. Asset leverage is expected to climb to 27.6% after the completion of the above two acquisitions, leaving Cache with debt headroom for S$84m before breaching its gearing cap of 35%. We continue to assume S$220m of acquisitions (inclusive of S$40m of acquisitions announced recently) for FY11, believing Cache will be able to obtain a rating to gear up to 60% on a full ramp-up of its acquisitions.

Awaiting the acquisition kicker

At a Glance

• 4Q10 DPU of 1.95 Scts accounted for 23% of FY estimates

• Completion of recent acquisitions to drive earnings growth in coming quarters

• BUY, TP maintained at S$1.11

Comment on Results

1Q11 results in line. DPU of 1.95 Scts formed 23% of our full year forecast. Cache Logistics Trust (“Cache”) reported topline and net property income (“NPI”) of S$14.8m and S$14.4m respectively, which were slightly below IPO forecasts due to timing differences in revenue recognition for the purchase of its initial properties and pro-rated monthly income. Distributable income of S$12.4m exceeded forecast by 0.2%, largely due to loans obtained at cheaper rates, translating to a DPU of 1.95 Scts (+0.6%).

Proactive asset management. New acquisitions yet to kick in. Management remains proactive in managing its properties – securing additional commitment from an existing tenant at Commodity Hub while embarking on AEI opportunities to boost rental income, albeit marginal increase in income. Recent acquisitions of 6 Changi North Way APC Districentre and 4 Penjuru Lane will underpin earnings growth in the coming quarters.

Lowly leveraged balance sheet; Cache has the firepower to execute on further acquisitions. At a modest 26.4%, Cache remains one of the lowest geared S-REITs. We continue to see acquisitions as potential catalysts given visible pipeline of properties from sponsors CWT and C&P on top of 3rd party opportunities regionally. We have moderated our estimates slightly as we adjusted contributions from new acquisitions to start only from end-2011.

Recommendation

BUY call, TP maintained at S$1.11. Cache remains attractive for its FY11-12F yield of 8.5-9.0%, which is 230-270 bps above peers’ average of 6.0% – 6.3%.

Cache posts $12.4m Q1 distributable income

DPU of 1.952 cents is 0.6% higher than document forecast

CACHE Logistics Trust, which listed in April last year, has posted distributable income of $12.4 million in its first quarter, only slightly pipping projections by 0.2 per cent.

Its distribution per unit (DPU) was 1.952 cents, about 0.6 per cent higher than the 1.94 cents forecast in its introductory document.

However, both gross revenue and net property income retreated about one per cent from what were projected. They stood at $14.8 million and $14.4 million, respectively.

ARA-CWT Trust Management, Cache’s manager, said the difference from the projections was ‘due to timing variance of rental step-ups’.

The real estate investment trust (Reit) has recently completed the acquisition of 6 Changi North Way, bringing its portfolio to a total of seven logistics properties in Singapore.

All of them are 100 per cent occupied, with tenants on triple-net master leases and multi-tenancy leases.

What stood out in its first-quarter results were ‘other trust expenses’, which more than doubled to $562,000 from $250,000.

The sharp rise was due to set-up costs in a multi- currency medium-term note programme under its subsidiary Cache-MTN that was not budgeted for in the introductory document.

Cache-MTN was incorporated on Feb 14 to provide treasury services to Cache.

However, these costs will not impact DPU as expenses are not tax-deductible. Cache’s net asset value per unit is currently 90 cents.

It said that it is actively seeking accretive acquisitions in the Asia-Pacific region to continue delivering sustainable distributions and growth to its unitholders. Its gearing stands at 26.4 per cent with about $208.3 million in borrowings as at March 31.

‘With a strong balance sheet and a conservative gearing ratio, Cache is on a strong footing to execute this strategy,’ said the Reit in its financial results yesterday.

Cache’s counter closed unchanged at 94.5 cents yesterday.

Maiden acquisitions; first step to diversify from sponsor

Maiden acquisitions. Cache Logistics Trust (CLT) recently announced its maiden acquisitions of two Singapore properties for S$39.8m [6 Changi North Way (S$30.9m) and 4 Penjuru Lane (S$8.9m)]. The combined NPI yield is 8%, compared to the existing portfolio yield of 7.7% as at 31 Dec 2010. With the new additions, CLT’s total assets under management will increase to S$783.9m. Nonetheless, CLT remains the smallest among the eight Industrial S-REITs, pacing behind AAREIT and Sabana REIT, whose investment properties exceed S$800m. The acquisitions will be fully funded by debt, increasing CLT’s aggregate leverage from 23.7% (as at 31 Dec 2010) to 27.6%. The transactions are expected to complete within 1H11.

Diversification from sponsor. We applaud CLT’s efforts to diversify away from its sponsor with these third-party acquisitions. In our previous report, we noted that all CLT’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 multi-tenanted base of 6 Changi North Way and the sale and leaseback arrangement (S&L) with Kim Heng for 4 Penjuru Lane certainly help to spread out the lessees. We also like the shorter lease expiry period (~3 years) for both properties, which will better position CLT in a rising rental market. Nonetheless, the two properties constitute only about 5.3% of total portfolio value and 3.7% of gross rental income, according to our estimates. There is still much to be done, not only to diversify CLT’s tenant base, but also to reduce its concentration risk on a single asset (CWT Hub which still account for 47% of FY11 gross revenue following the acquisition).

Inflation risk remains a concern. The lease agreement for 4 Penjuru Lane provides for built-in rental escalation of 2% per annum for the next three years, with an option to extend for a further three years. While this provides a 50bp step-up vis-àvis the existing lease structures, we reiterate that it still pales in comparison with Singapore’s FY10 annual inflation rate of 2.8% and MAS FY11 forecast of 4%. If inflation continues above 2% without moderation, CLT’s rental income looks set to be eroded by inflation in real terms for at least the next three years.

Maintain BUY. With a gearing of 27.6%, CLT has debt headroom of S$89m for additional acquisitions before reaching the stipulated 35% limit (without a credit rating). Concentration (CWT Hub), counterparty 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. Maintain BUY with an increased fair value estimate of S$1.04.

Two properties for S$40m

Maintain Outperform. Cache Logistics has made its maiden acquisition of two thirdparty warehouses for S$39.8m, at 3-5% below valuation and a combined NPI yield of 8%, marginally above its portfolio yield of 7.9%. The deal should add to its DPU with full debt funding. We like the purchases for their shorter lease tenures of about three years that should better position Cache for a rising rental market. We also like the future development potential of the Penjuru property and the reduced dependence and tenant concentration risks for its sponsor, CWT. We keep our DPU estimates and DDM target price of S$1.32 (discount rate 8.4%) as we had factored in S$220m of acquisitions for 2011. We continue to like Cache for its quality portfolio and scalability, expecting more acquisition catalysts. Cache trades at 1.03x P/BV and offers a prospective dividend yield of 10%.

6 Changi North 1. Acquired from APG Distributors (part of Luxasia Group) for S$30.9m or S$175psf GFA (3% below valuation), this 2-storey ramp-up warehouse is located in an established logistics cluster in the Changi North International LogisPark. The property is 100% leased to three tenants which include the vendor APC, which will lease back one-third of the building and occupy an additional 27,00sf when this space becomes available. The other two tenants, a multinational electronics manufacturing service provider and a logistics service provider, will take up 50% and 16% of NLA for varying lease periods. Weighted average lease expiry is about 3.3 years, fairly short against Cache’s portfolio average of 6.4 years. We estimate passing rent of S$1.16psf/month, marginally below the S$1.20-1.40psf for Cache’s Changi Districentre.

4 Penjuru Lane. Acquired from Kim Heng Tubular Pte Ltd for S$8.9m or S$162psf on GFA (5% below valuation), this single-storey warehouse is approved for chemical and dangerous goods storage. It will be leased back to the vendor for three years, with an option for a further three years. An annual rent step-up of 2% has been structured in the lease. We estimate passing rent of S$1.08psf/month, fairly in line with Cache’s Commodity Hub in the same vicinity, at S$1.05psf.

Comments

We are positive on the acquisition for a number of reasons, including:

1) DPU accretion. The spread between NPI yields and cost of funding is slightly wider at 50bp above our projection. Accretion over last year’s annualised DPU is about 3%.

2) Development potential. We see development potential for the Penjuru asset which has an un-maximised plot ratio of 0.63. At the maximum plot ratio of 2.5, there could be an additional 163,000sf of NLA for extraction, quadrupling its current size. Nonetheless, we expect redevelopment work only in the medium term.

3) Shorter tenure to capture rising rental market. Unlike its IPO assets, the new acquisitions come with much shorter leases of about three years (portfolio average of 6.4 years). This would better position Cache for capturing a rising rental market, in our view.

4) Lower cost of debt. Management indicated a lower cost than the current 4.4% for its 3-year unsecured term loan. We anticipate interest cost of about 3%, below our forecast of 3.5%.

5) Third-party acquisitions, signalling the manager’s efforts to seek out deals independent from its sponsor. We note that the pricing of the two acquisitions on a unit-price basis is also lower than its IPO assets in the same vicinity.

6) Dilutes tenant concentration risks for CWT. Thus far, Cache is wholly dependent on its sponsor CWT for its rental income. With this acquisition, tenant concentration risks would be diluted, although overall contributions from these two third parties are still small at about 7% of NPI.

Valuation and recommendation

Asset leverage to rise to 27.6%. With full debt financing from a 3-year unsecured term loan, asset leverage should rise to about 28% from 23% after the acquisition. Cache’s asset leverage is capped at 35% without a credit rating. However, we believe it would not be difficult for Cache to obtain a credit when it needs to gear beyond this level. Portfolio size will increase 5% to S$784m after the transaction.

Maintain Outperform. Our positive view on this acquisition is tempered by the small quantum of the deal size. No changes to our DPU estimates and DDM target price of S$1.32 (discount rate 8.4%) as we had factored in S$220m of acquisitions for 2011. We anticipate further acquisition catalysts this year. Cache trades at 1.03x P/BV and a prospective forward yield of 10%.