CLT – CIMB
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.
CMT – DMG
More details on joint development
Joint venture to develop retail/office space at Jurong Gateway. Following the successful bidding of the 195,463 sqft (18,159.1sqm) site at Jurong Gateway (JG), CapitaMall Trust (CMT), CapitaMall Asia (CMA) and CapitaLand have revealed their plan to build a retail/office commercial centre at JG. The total development cost of the project will be ~S$1.5b for a total GFA of 960k sqft, implying ~S$1,560 psf development cost. The expected NPI yield on development cost is ~6%, which is favourable compared to CMT’s current 12-mth forward yield of 5.2%. We expect incremental DPU of ~0.5-0.6S¢ beginning FY14. After factoring the potential contributions from FY14 onwards, our TP is raised to S$2.02 based on DDM (COE: 8.0%; TGR: 2.0%). Maintain NEUTRAL.
CMT’s share of project is 30%. Under the joint tender agreement, CMT/CMA/CapitaLand will hold 30%/50%/20% stake in the development. The consortium has indicated that it intends to develop the site on a 60%/40% retail/office basis. The retail mall and office are slated to commence operations in Dec 2013 and Dec 2014 respectively. Given that this is a Greenfield site, there will be no DPU accretion to CMT in the next two years.
Strategic location comes at dearer price. The latest site to be awarded sits conveniently beside Jurong East MRT and bus interchanges. Although the land acquisition cost came in at S$1,012psf ppr, 56% premium to previous acquisition cost of land at Jurong Gateway Road in Jun 2010 (won by Lend Lease), the CMT/CMA/CapitaLand joint venture’s bid price was only 5.7% premium over second bidder’s tendered price. In addition, given that the MRT and bus interchange entrance/exit will be directly facing this newly acquired site at JG, we believe the price paid for this piece of land is reasonable. Based on pre-committed rents at JCube, we believe the retail/office rents at JG can hit S$16- 18/S$6-8 psf pm. Coupled with assumed NPI margin of 75-80%, the NPI yield of the commercial development at JG is ~5-6%.
TCT – OCBC
Diversification into China’s tier-2 cities
Betting on China. We recently visited TCT’s commercial assets in Shanghai and Qingdao, including the newly acquired Central Avenue Mall and pending Huai Hai Mall (midst of acquisition with settlement no later than 30 Jun). We observe that TCT has over time evolved its strategy in China, which used to focus on commercial assets and development projects in tier-1 cities such as Beijing and Shanghai . Recently, it has concentrated on regional expansion into tier-2 cities, including developing a large-scale retail property at the Laoshan district of Qingdao with the Trio group. TCT is also actively looking at deals in Xi’an in Shangxi province, forming a strategic partnership with the Ginwa Group to tap the emerging retail market in central and west China.
Three key advantages. We observed that TCT has three key advantages in China. First, TCT is listed as a business trust instead of a REIT, with the more flexible structure of 30% development cap and 45% gearing limit, as stipulated in its trust deed. The development component sets TCT apart from REITs which have little development exposure (10% deposited property max). TCT is thus better positioned to achieve accretive-yields due to cost savings from vertical integration. It is also not bounded by investment constraints, such as at least 75% of assets must be invested in income-producing properties. Secondly, TCT is upscaling its tenant mix from mostly low-mid tier to mid-high end retailers, which provide income uplift. Presently, some of its existing leases are well below prevailing market rates. For example, the anchor tenant Parkson, at City Centre, is paying only RMB1.73 psqm/day (average rate is RMB6 psqm/day). With the completion of the City Centre extension, Parkson will be vacating the property in 2012, while Marks and Spencer was roped in as the replacing tenant on a 10+5 years lease. On TCT’s debt portfolio, 85% is USD-denominated but 100% of its revenue is in RMB. TCT thus enjoys low borrowing costs, while the likely RMB appreciation in the mid to long term provides further forex upside.
Supply overhang remains. According to DTZ, there is an anticipated supply of new office space in Shanghai, amounting to about 100% of existing stock in 2011-2014. Likewise, highend retail space is expected to increase by another 50% from 2011 to 2013. The large new supply is expected to drag down overall occupancy rates and intensify the “winners/losers” divide among the Shanghai properties. Oversupply and inflation risks (dampening demand) remain our top concerns for the trust and we expect management to consciously address these as the trust grows in asset size. We do NOT have a rating for TCT presently.
CLT – DBSV
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.
CLT – BT
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.