Looking beyond 2014

• 1Q14 DPU at 2.14 S cents
  
• Renewed one master lease
  
• Clinched first BTS development
  

Sturdy results consistent with expectations

Cache Logistics Trust (CACHE) turned in a firm set of 1Q14 results last evening. NPI climbed 8.2% YoY to S$19.6m, whereas distributable income rose 5.5% to S$16.7m. The positive performance was mainly attributable to contribution from acquisition of Precise Two in Apr 2013 and stepped-up rents within the portfolio. DPU for the quarter stood at 2.14 S cents, representing a YoY decline of 4.2%. However, this is expected as the unit base has risen by 10.5% due to the private placement in Mar 2013. 1Q14 DPU, we note, constitutes 24.6% of both ours and consensus full-year distribution forecasts.

Continued focus on lease and capital management

CACHE’s portfolio continued to exhibit strength, with occupancy holding steady at 100% and weighted average lease to expiry healthy at 2.9 years (3.1 years in 4Q13). Further to management guidance in last quarter that it was negotiating with relevant parties for lease renewals, CACHE announced that it has renewed its master lease at Kim Heng warehouse for another two years (only 2% of portfolio GFA left for renewal in 2014). Looking ahead, CACHE will continue to focus its efforts on addressing its lease expiries (34% of GFA expiring in 2015) and refinancing needs (59.9% of total debt expiring in 2015) for the next two years. We view this move positively given that the impending supply of warehouse space is relatively substantial and that the interest costs look set to trend upwards.

BTS development to enhance portfolio profile

As announced last week, CACHE has also secured an agreement with DHL Supply Chain to develop and lease a build-to-suit (BTS) ramp-up warehouse located at Tampines LogisPark. This marks CACHE’s foray into BTS development through collaboration with its sponsor CWT Limited. In our view, the contract will not only provide CACHE with quality recurring income, enhance its lease expiry profile, but also strengthen its market position in modern ramp-up warehouse in Singapore. Aggregate leverage is guided to increase from current 29.1% to 34.8% upon completion in 2H15, still within healthy levels. We maintain BUY with unchanged fair value of S$1.25 on CACHE.

No surprises in 1Q14 results

• 1Q14 results in line with our and consensus forecasts.
  
• Foray into build-to-suit development with DHL Supply Chain is positive. This asset will account for 12% of our total GAV.
  
• Reiterate HOLD with a DDM-derived TP of SGD1.15.
  

1Q14 results in line

CACHE’s 1Q14 revenue grew 8.2% YoY to SGD20.7m on the back of positive rental reversions and the acquisition of Precise Two last April. This underscores a 5.5% YoY increase in distributable income. Recently, its master lease at Kim Heng warehouse was renewed with the existing tenant for another two years. The weighted average lease term to expiry (WALE) of the portfolio is 2.9 years, with 65% of the leases due to expire in 2015-2016. The all-infinancing cost stayed unchanged QoQ at 3.48% with debt maturity of 1.6 years (4Q13: 1.9 years).

Positive on BTS logistics warehouse for DHL

We view CACHE’s foray into build-to-suit (BTS) development with DHL Supply Chain positively as the new asset will generate better yields, increase its total deposited property (by 8.6% to SGD1.17b), lengthen portfolio WALE and reduce the average portfolio building age. This will also reduce its tenant concentration risk on CWT/C&P (sponsor), whose master leases are expiring in 2015-2016, constituting ~65% of portfolio GFA. With the completion of the DHL warehouse (928k sq ft) in 2H15, this gets lowered to ~54% of overall GFA. We understand CACHE won the DHL bid from strong GLC contenders including the Mapletree group of companies, which

is highly commendable. The new BTS development is estimated to account for 12% of our total GAV. We reiterate our HOLD call as an oversupply of warehouse space could put pressure on occupancy rates and industrial rents, not to mention the prevailing costconscious attitude among the industrial players. We also keep our DDM-derived TP unchanged at SGD1.15.

Results within expectations. Cache’s 1Q14 revenue and net property income was within 0.14% and 1.0% of our forecasts, with DPU of 2.14c at 24.4% of our FY14 estimate. The distribution will be paid on 27 May 2014. The respective q‐on‐q 8.2% and 5.5% increases in NPI and distributable income were from rental contributions from Cache’s 2013 acquisitions, and built‐in rental escalations on masterleased properties.

Aggregate leverage of 29.1% to increase to 34.8% after DHL development. Cache’s aggregate leverage stood at 29.1% for 1Q14. However, in our 15 April note, we noted that Cache’s aggregate leverage will rise to an estimated 34.8% upon completion of the DHL build‐to‐suit logistics warehouse in 2H15. We reiterate our positive view on the development as it lengthens Cache’s weighted average lease expiry from 2.9 years in 1Q14 to 3.9 years, and increases Cache’s GFA by a sizeable 19.3%. Also, although Cache does not have any loans maturing until 2Q15, we note management has indicated they are exploring refinancing options to lengthen the debt maturity profile.

Renewal of Kim Heng Warehouse master lease. We continue to view Cache’s rental prospects positively. The renewal of the Kim Heng Warehouse master lease for another two years is testament to the quality of Cache’s assets.

Attractive yield resilient despite moderating outlook. We expect Cache’s 7.3% yield to remain resilient despite the slight decline in 1Q14 rents in the prime conventional warehouse segment reported by Collierts International, and expectations of downward pressure on occupancy rates and rents from an increase in supply of industrial space. First, only 2% of Cache’s NLA remains to be renewed in FY14, and it is currently at 100% occupancy. Second, Cache’s triple‐net master leases lock in annual rental escalations of 1.25‐2.5%. We reiterate our DDM‐derived TP of $1.41, which offers a 20.5% upside from the last close price of S$1.175.

Clinches first BTS development

• BTS warehouse completion expected in 2H15
  
• Long-term lease with quality tenant
  
• Funded by debt and internal sources
  

Development of ramp-up warehouse

Cache Logistics Trust (CACHE) announced yesterday that it has entered into an agreement with DHL Supply Chain Singapore Pte Ltd to develop and lease a build-to-suit (BTS) ramp-up warehouse located at Greenwich Drive, Tampines LogisPark. The development comprises two blocks with a total GFA of ~989,200 sqft and NLA of ~928,100 sqft. The total cost of the project is estimated to be ~S$123.5m, including S$105.1m development costs and S$18.4m non-development expenses.

Arrangements relating to development

Development risk is minimised through a fixed price building works contract with Precise Development Pte Ltd, a qualified and well-established contractor founded in 1983. Recall that CACHE acquired a ramp-up warehouse from the contractor via a sale-and-leaseback arrangement in Apr 2013. In addition, CACHE’s sponsor, CWT Limited, will assist by providing strategic project management expertise. Temporary occupation permit is expected to be issued by 2H15. Upon completion, DHL Supply Chain will occupy 100% of Block 1 NLA, 50% of Block 2 NLA from year 3 onwards, and 100% of Block 2 NLA from year 5 onwards. All three lease terms will co-terminate at the end of the initial 10-year period, with an option for renewal. In our view, the lease with DHL Supply Chain (part of world’s leading logistics solution provider Deutsche Post DHL) will provide CACHE with quality long-term recurring income, while improving its portfolio’s average lease term from 3.1 years

to 4.1 years.

Maintain BUY; fair value raised

According to management, the stabilized NPI yield is expected to be comparable to CACHE’s existing properties in the vicinity, and annual rental escalations will apply throughout the first lease term. We also understand that CACHE has secured a loan facility of S$97.0m to finance the development (remaining costs to be funded by internal sources). We estimate a NPI yield-on-cost of 8.5% and rental escalation of 1.5%, with contribution to start in 2016. Our value fair is now raised from S$1.20 to S$1.25. Maintain BUY.

New BTS asset to lift DPU; up to HOLD

• Foray into build-to-suit development with DHL Supply Chain at a total cost of SGD123.5m. New asset to account for 12% of our total GAV.
  
• Yield-on-cost estimated at ~11% on a stabilised basis, with 1.1-8.6% boost to FY15E-16E DPU.
  
• Upgrade to HOLD with a higher DDM-derived TP of SGD1.15.
  

What’s New

CACHE has entered into an agreement with DHL Supply Chain Singapore to develop and lease a build-to-suit (BTS) warehouse (NLA: 928,100 sq ft) at Greenwich Drive in Tampines LogisPark. The development will comprise two blocks of ramp-up warehouses. JTC Corporation will grant CACHE a 30-year land lease starting from 16 Jun 2014 and CACHE has to complete the development within the next 15 months. The cost of development amounts to ~SGD105.1m, while non-development expenses will add another SGD18.4m.

What’s Our View

CACHE’s foray into BTS development is overall positive in our view as the new asset will generate better yields, increase its total deposited property (by 8.6% to SGD1.17b), lengthen its portfolio’s weighted average lease to expiry (to 4.1 years from 3.12) and reduce the average portfolio building age (to 4.9 years from 5.82). We factor in a yield-on-cost of ~11% on a stabilised basis (ie, full occupancy). Our FY15E-16E DPU would thus rise by 1.1-8.6% which is already incorporated into our forecasts. Post development, CACHE’s gearing will rise to a still comfortable 34.8% from 29.1% at end-2013. We note also that its sponsor, CWT, has seconded

strategic project management personnel to Cache Property Management to assist in quality control and on-time delivery. The new BTS development is estimated to account for 12% of our total GAV. As we are positive on this acquisition, we upgrade CACHE to HOLD from SELL with a higher DDM-derived TP of SGD1.15 (previously SGD1.05).