• FY17 gross revenue in line with our estimate
• FY17 DPU 5.6% lower than expected due to temporary retention of $1.9mn from 51 Alps Ave rental top-up, pending assessment for tax treatment
• 4Q17 DPU of 1.597 cents to be paid on Feb 27 (4Q16: 1.770 cents)
• Announced the divestment of 40 Alps Ave for $73.8mn, at 7% above valuation
• Upgrade to Accumulate; higher target price of $0.92 (previously $0.82)

The positives

• Occupancy as at end of FY17 remained stable at 96.6%. Average occupancy across the four quarters was 97.4%; occupancy a year ago at end of FY16 was 96.4%.
• Current aggregate leverage of 36.3% set to be lowered further. Current gearing is after the 18-for-100 Rights Issue that was used to repay borrowings; lower than 43.6% in 3Q17. Gearing will move lower as divestment proceeds from Hi-Speed Logistics Centre (40 Alps Ave) will be used to pare down debt (see overleaf).

The negatives

• $31.8mn fair value loss to investment properties, resulting in NAV per Unit drop QoQ from $0.77 to $0.72. Singapore cap rate assumption remained at 6.4% YoY, and revaluation losses were due to lower spot rent assumptions and shorter land tenure. Cap rate for Australia had tightened YoY from 7.2% to 6.9%; and the Australia portfolio had a modest 2.4% appreciation on a like for like basis. The overall portfolio value now stands at $1.14bn, excluding $69mn for Hi-Speed Logistics Centre (40 Alps Ave) which has been reclassified as asset held for sale.
• Operationally, reversions were negative in 4Q17 and FY17. Reversions were -3.7% and -6.7% for 4Q17 and FY17, respectively. The manager expects reversions to be negative in 2018.

Outlook

The outlook is stable. Rental market is expected to be soft, with oversupply of warehouse space in the market and negative reversions in 2018. All things held equal, expect to see two more quarters (1Q18 and 2Q18) of double-digit YoY lower DPU due to the Rights Issue in 4Q17. FY18e DPU also lower due to divestment of 40 Alps Ave. The main domestic hurdle that the manager has to overcome now is the master lease expiry of CWT Commodity Hub (see overleaf). The overarching positive for Cache now is the successful recapitalisation of its balance sheet.

Upgrade to Accumulate (from Neutral); higher target price of $0.92 (previously $0.82)

We estimate gearing to be lowered even further to 32.4%, and new headroom of almost $270mn (based on 45% limit) after the divestment proceeds from 40 Alps Ave is used to repay debt. The manager will be in a better position to execute its rebalancing strategy and acquire in Australia. We have raised our terminal growth assumption to 1.0% (from 0%) on account of the better financial position and ability to grow the portfolio inorganically.

Ongoing developments

• Proposed divestment of Hi-Speed Logistics Centre (40 Alps Ave). This was announced in conjunction with FY17 financial results. The property is currently 74% occupied. It was acquired in April 2010 (during the initial public offering) for $69.5mn. And was recently valued at $69.0mn as at end FY17. The proposed divestment is for $73.8mn, 7% above valuation. Divestment expected to be completed in 1Q18.
• Expiry of CWT Commodity Hub master lease in April 2018. The manager has been actively engaging the underlying tenants and has secured about two-thirds commitment. As such we do not expect a rental cliff, should the master Iease not be renewed. In the immediate term, the underlying tenants make up about 9% and 10% of portfolio NLA in 2018 and 2019.

Figure 1: Lease expiry profile

Source: Company FY17 results presentation, 18 January 2018

Relative valuation

Cache Logistics Trust is under-valued relative to logistics peers in terms of P/NAV multiple. Its above peer-average trailing yield suggests that there is room for yield to compress.