Category: CLT
Industrial REITs – DMG
Change in game rule by JTC
Since the beginning of the year, JTC has indicated that property funds, such as REITs, have to pay land premium upfront for all industrial buildings acquisitions from sellers on JTC-leased sites, instead of paying in terms of a monthly land rental. Through this change in rule, REITs will have to set aside a sum of capital for the payment of upfront land premium; thus essentially raising the acquisition costs of industrial buildings. Having said that, we expect some of the REITs to counter this measure via i) lower acquisition price on the property to make up for the upfront land premium and/or ii) requesting the seller of the property to pay a higher leaseback rental to compensate for the land premium having been paid (i.e., a double net versus a triple net rental). Although the long term impact of this change in policy remains to be seen, we believe there will be pressure in the industrial property prices and rentals in the short term.
Minimal change expected to tenants expenditure. Before the change in policy, tenants of industrial properties have been paying the land rental through triple-net tenant agreements. We expect tenants that lease space in newly acquired industrial buildings will have to pay a higher rental rate to make up for the upfront land premium. However, on a net basis, there is little difference in the total amount of rental expenses incurred by tenants, as the amount previously paid for land rental in a triple-net tenant agreements forms part of the new double-net tenant agreements.
REITs may find it trickier to buy new properties. With the change in this policy, industrial REITs will be facing a hurdle in terms of future acquisitions as the capital involved in buying new properties rise. As REITs try to crawl back or offset a portion of these upfront charges (whether through lump sum pro rata basis or discount in acquisition price), there is a likelihood that building owners may choose to sell their buildings to industrialists since it is possible that they can sell the property at a higher price (given that industrialists can continue to pay a monthly land rental under the new policy). In our view, we believe this option to be limited to i) smaller buildings, as industrialists are unlikely to buy over a larger property than they require; ii) when owners of the buildings do not seek to sell and lease back the property for their own use.
Impact of change in policy may not be all bad. After the change in policy, REIT managers will have to factor in the additional capital expenditure into the IRR for any acquisitions. In our view, as long as the IRR can meet each REIT’s requirement, REITs will continue to acquire buildings; particularly on the back of low interest rate and relative ease in financing. In addition, although paying the land premium upfront may translate to a higher initial acquisition cost, this may prove to be cheaper in the long run as land rent paid on a monthly basis are subjected to a 5.5% annual escalation cap. Lastly, it is important to note that this change in policy do not affect BTS projects that some REITs plan to undertake this year.
CLT – OCBC
NEW RAMP-UP WAREHOUSE ADDITION
- Acquisition at attractive yield
- Stronger market position post acquisition
- Higher debt headroom with credit rating
Acquires ramp-up warehouse from third party
Cache Logistics Trust (CACHE) has signed an option agreement to acquire a three-storey fully ramp-up warehouse known as Precise Two from Precise Development Pte Ltd (PDPL) for S$55.2m, or S$194 psf GFA. The purchase price includes the upfront land premium amount of S$6.2m based on JTC posted land premium rate and adjusted for the duration of the remaining land lease. The transaction is expected to complete in Apr, subject to JTC approval. Upon completion, PDPL will enter into a master lease arrangement to lease the whole building for six years with an option to renew for another six years. A built-in rental escalation every two years is expected to be incorporated, but the quantum will be only disclosed after the deal is finalised.
Investment to be earnings accretive
Precise Two is strategically located in the Jurong Industrial Precinct at 15 Gul Way and has modern and attractive technical specifications such as heavy floor loading, making it attractive for end-users who require storage space for heavy products and equipment. The property has just received its TOP on 12 Dec 2012 (land lease tenure of 30 years starting from 1 Oct 2003). According to management, the initial NPI yield is ~8.7%, higher than CACHE’s FY12 implied portfolio yield of 7.1%. Hence, we expect the acquisition to be earnings accretive. The acquisition will increase its market share of ramp-up warehouses in Singapore (currently at 22.9%) and bring its portfolio asset value above S$1.0b.
Increased flexibility with new credit rating
CACHE also announced that it has received its maiden corporate family rating from Moody’s Investors Service (Baa3 with stable outlook). We have previously anticipated CACHE to fund any sizeable investment opportunities using debt and equity. However, with this development, we believe CACHE may finance the acquisition wholly by debt, since it is now able to exceed its previous regulatory debt ceiling of 35%. Based on our estimates, the new asset is likely to contribute 0.23 S cents (+2.7%) to its FY13 DPU. We raise our fair value to S$1.34 from S$1.32 after factoring in the investment. Maintain BUY.
CLT – AmFraser
Acquisition engine running on full steam
Flexing its muscles on acquisitions. Cache announced that it has entered into a call option agreement with industrial developer Precise Development (PDPL) to acquire Precise Two, a newly‐completed three‐storey fully ramp‐up warehouse with a gross GFA of approx. 284,381 sq ft. Purchase consideration for the property is around S$55.2mil. Subject to attaining regulatory approval from JTC Corporation, the acquisition is expected to be completed in April 2013.
Beefing up its competitive position in the logistics space. Cache’s planned acquisition of Precise Two is, in our opinion, hugely complementary to its existing portfolio strengths. Boasting approx. 23% market share of Singapore’s ramp‐up logistics warehouses, Cache’s proposed acquisition of Precise Two distinctly accelerates its competitive edge. Given Precise Two’s quality technical specifications such as heavy floor loading of 50kn/m2 for the ground floor, strategic location in the Jurong Industrial Precinct as well as its proximity to major expressways PIE and AYE, the deal, should it go through successfully, would certainly be a major feather in its cap.
Harvesting diversification rewards. Upon completion of the acquisition, Cache and PDPL would enter into an agreement to which Precise Two would be leased back to PDPL. As the master lease agreement provides for a lease term of six years with a renewal option for an additional six years, the acquisition would strengthen Cache’s lease expiry profile and reduce its asset concentration risk on CWT Commodity Hub. CWT Commodity Hub’s revenue contribution is estimated to fall from 37.8% to 36.5% following the acquisition of Precise Two. Another plus for Cache would be a reduced reliance on master lessees CWT and C&P for rental income.
Yield‐accretive. We assume that the acquisition of Precise Two would be financed en
CLT – DBSV
Going on the offensive
- Acquisitions the key driver in 2013
- Portfolio to remain stable, with minimal renewals over the next 2 years
- Upgrade to BUY, TP S$1.40 based on DCF
Acquisitions the key driver in 2013. Armed with a Pan Asian mandate, the management team continues to see acquisition opportunities in the region but with a near term focus in deepening its Singapore exposure. Targeting yields of 7.0-7.5%, which is higher than current implied yield of 6.0%, acquisitions are likely to mean further accretion to distributions Given the strong visibility of available acquisitions; we have now doubled our acquisition forecasts to S$200m (vs S$100m previously) @ 7.25% initial yield. These are projected to be completed over 2013-14. Gearing level of 31% is comfortable and management is open to obtaining a credit rating (more gearing flexibility) if a large acquisition opportunity arises.
Portfolio with minimal earnings risks. 4Q12 results was in line with estimates, with a higher DPU of 2.139 Scts (+2.5%) owing due to an expanded portfolio. Looking ahead, Cache has minimal lease expiries (8% of income) over 2013-2014, which will shield the trust from any releasing risks given the large completing supply in the warehouse space over the same period. Moreover, given that underlying end-users are largely 3PLs, demand for its warehouse should remain firm.
Upgrade to BUY, TPS$1.40. Cache offers one of the strongest earnings visibility over the coming 2 years with potential upside if management undertakes a more aggressive acquisition stance against our forecasted S$200m. We estimate that an additional S$25m in acquisitions can raise our DPU estimates and TP further by c0.4% and 1 Sct respectively.
CLT – OCBC
STILL ROOM FOR UPSIDE
- 4Q12 performance in line
- Enhanced financial position
- Valuation remains attractive
4Q12 results met forecasts
Cache Logistics Trust (CACHE) turned in a consistent set of 4Q12 results after market close yesterday. NPI grew 13.9% YoY to S$18.3m, while distributable income rose 12.8% to S$15.2m on the back of contribution from its two acquisitions in 2012 and rental escalations within its portfolio. DPU for the quarter registered a 2.5% increase to 2.154 S cents, notwithstanding an enlarged unit base from the private placement in Mar 2012. For FY12, DPU totalled 8.365 S cents (+1.6%), matching our/consensus full-year DPU forecasts of 8.29/8.3 S cents. This translates to an attractive FY12 yield of 6.4%, higher than the S-REIT sector average yield of 5.8%.
Rock solid lease profile
CACHE’s portfolio occupancy as at 31 Dec 2012 remained at 100% as its leases are predominantly based on triple-net master lease structures. Weighted average lease to expiry also stood resilient at 3.9 years (4.1 years in prior quarter), with only 1.7% of GFA due for renewal in FY13. In addition, its built-in rental escalation for master leases was maintained at 1.25-2.5%. This should give CACHE good earnings visibility and healthy organic growth in our view.
Strong fundamentals triumph
With the major refinancing exercise in Jun 2012, CACHE had successfully increased its loan-to-value over its previous collateral (including an enlarged revolving credit facility), reduced its all-in financing costs by 37 basis points YoY to 3.52% and enhanced its debt expiry profile (no debt will mature until 2015). Aggregate leverage was also healthy at 31.7%, and represented a 0.9ppt improvement QoQ due largely to a S$26.2m revaluation gain on its portfolio assets (+2.8%). This provides CACHE with the financial resources and flexibility to drive its new business initiatives. We now factor in the results into our forecasts. As such, our fair value inches up from S$1.30 to S$1.32. Maintain BUY.