Cache Logistics Trust

Kim Eng on 8 Feb 2013

Proposed Acquisition of Precise Two: CACHE has announced that it has entered into a call option agreement with Precise Development Pte Ltd (PDPL) to acquire Precise Two, located at 15 Gul Way. Precise Two is a newly completed three-storey fully ramp-up warehouse with a GFA of 284,381 sqft (TOP on 12 Dec 2012). Precise Two is sited on a land area of 203,272 sqft with a land tenure of 30 yrs starting from 1 Oct 2003. The call option may be exercised only after JTC approves the application for assignment. PPDL will lease the whole of Precise Two for a term of six years with an option to renew for additional six years (locked-in rental escalation every 2 years). On commencement of the lease, PDPL shall provide a security deposit of 12 mths net rent. The initial NPI yield is approximately 8.7%. The acquisition is expected to complete in Apr 2013. The method of financing and the financial effects of the acquisition will be announced when the call option is exercised.

Upfront land premium. Knight Frank has valued the property at SGD55.15m (SGD194 psf), including the upfront land premium of SGD6.15m, based on JTC posted land premium rate and adjusted for the duration of the remaining lease. The total cost of the acquisition is ~SGD57.3m, including acquisition and professional fees. We noted that with effect from 1 Jan 2013, JTC has revised the payment scheme for new assignment contracts involving Industrial REITs to upfront land premium instead of monthly land rent basis. Industrial REITs will henceforth need to fork out a higher capital outlay (at the onset) in future for acquisition involving JTC land lease assignment, which they will recoup from tenants via higher gross rentals. This also means that sale & leaseback arrangements will incur double-net leases instead of triple-net moving forward. For this acquisition, the land premium works out to ~12.5% of the inherent property price (SGD49m). We think the overall impact is nonetheless marginal as (1) landlords will recoup the land premium via higher rentals (similiar to the existing pass-through mechanism for multitenanted buildings) (2) Industrial REITs based their  acquisition decisions on yield-accretive yardsticks.

Credit Rating from Moody's. We are also heartened that CACHE has, for the first time since IPO, obtained a corporate rating from Moody's (Baa3 with a stable outlook). This means that CACHE will be able to leverage up to 60% from the current restriction of 35% for REITs without a credit rating As of 31 Dec 2012, its gearing stands at 31.7% with SGD313m borrowings. It still has debt headroom of SGD136m before hitting 40% gearing. If 100% debt financed, gearing will inch up to 35.3%, but at 1.3x P/B, we think chances of equity fund raising cannot be ignored. Overall, we view this acquisition positively and upgrade our TP to SGD1.30. Reiterate HOLD.