What is the news?
Cache Logistics Trust (“Cache”) announced the proposed acquisition of a warehouse in Melbourne, Australia for A$22.25 million (S$24.2 million). The single-storey warehouse with ancillary office space will be fully-leased to Spotlight Group, a leading retail chain selling fabric, craft and homeware items in Australia, New Zealand and Asia. The lease term is for another 4.5 years by net lettable area as at 31 December 2016, with two 6+6 years renewal options. The acquisition is expected to be completed by mid-March 2017.
How do we view this?
In line with the manager’s capital recycling strategy
This acquisition is in line the manager’s strategy of recycling capital through the divestment of lower yielding properties with a view on acquiring in Australia where property is on freehold land. The acquisition of the Spotlight warehouse diversifies the income stream in terms of tenant trade sector and shifts the gross revenue contribution from Australia to 15.5% for FY17e by our estimates, compared to 13.8% in FY16. As disclosed by the manager, the initial net property yield is approximately 7.4%.
Portfolio turnover incurs divestment/acquisition fees: slow erosion of Unitholders’ funds
Changi Districentre 3 was divested in January 2017 for S$25.5 million and the sales proceeds will substantially be depleted to fund the S$24.2 million purchase consideration for the Spotlight warehouse. As such, investors should not expect any meaningful additional distributable income from capital.
The REIT incurred c.$127,500 divestment fee for the sale of Changi Districentre 3 (based on 0.5% of the sale price); and now incurred another c.$242,000 acquisition fee for the acquisition of the Spotlight warehouse (based on 1% of the acquisition price), which is materially higher by 21%, than the S$0.2 million that has been disclosed by the manager.
Unchanged view that the high gearing remains the key idiosyncratic impediment to inorganic growth
Pro-forma guidance from the manager is that gearing will rise to 43.2% from 43.1%, upon completion of the acquisition. For any meaningful growth to the portfolio, it is inevitable that the manager will need to raise new equity, which would be dilutive in nature. Investors who want exposure to Australian warehouse/logistics properties can consider switching to Frasers Logistics & Industrial Trust (Not rated; 38.7% gearing) or Mapletree Logistics Trust (Not rated; 29.7% gearing) for a diversified regional exposure.
Maintain “Reduce” rating with DDM valuation of S$0.74 (previous: S$0.73)
Our new DPU forecast for FY17e/FY18e is 6.54/7.05 cents; higher than previous forecast of 6.44/6.91 cents. Our target price is an implied 0.96x FY17e P/NAV.