• Australia acquisition boosts completed portfolio GFA by 12%; fully funded by debt.
• Cache maintains its dominant position in the Industrial S-REITs sector with second highest occupancy (c. 98.5%) and edges up to longest WALE of 4.6 years.
• Upgrade to "Buy" rating, with higher DDM valuation of S$1.34. (Previous S$1.30)

What is the news?

Cache Logistics Trust ("Cache") made an announcement on 9 February, before trading hours on the acquisition of 3 warehousing properties in Australia. The properties are located in Sydney, Melbourne and Brisbane. This is Cache's first foray into Australia and the acquisition will increase existing completed Gross Floor Area (GFA) by 12% (from 5.12 million sq ft to 5.72 million sq ft).

Analyst briefing key takeaways

Circumstances surrounding the acquisition – The Manager opined that the 3 properties represented a right fit with Cache's objectives, and was priced at the right yield. The Manager had viewed other properties, but were at tighter cap rates compared to this acquisition. This acquisition was also an opportunity to establish a relationship with the vendors, McPhee Distribution Services and Linfox, who specialise in warehousing, logistics and distributions services.

Freehold land to balance out leasehold expiry – All 3 properties are on freehold land and will balance out the leasehold expiries present in the existing portfolio.

Look to Australia and China for inorganic growth – The Manager guided that there is no specific target portfolio that Cache is trying to achieve in terms of geographical diversification, but would still want to keep a predominantly Singapore portfolio. Australia and China are the two countries that the Manager is still looking at for acquisition opportunities.

Prepared to push gearing to 40% – Similar to what was said during the full year briefing held 2 weeks ago, the Manager re-iterated that it was prepared to go to 40% gearing.

How do we view this

Dominant position maintained – The Manager guided that post-acquisition occupancy will be "mid 98%" and weighted average lease expiry (WALE) of 4.6 years. Cache maintains its dominant position among the Industrial S-REITs sector with second highest occupancy and longest WALE.

3.0% to 3.5% in-built rental escalation for Australia is higher than Singapore – Rental escalation for Singapore properties in Cache's portfolio ranges from 1.0% to 2.5%. Combined with the long WALE of 9.7 years, this tilts the aggregate portfolio favourably for rental escalation.

Additional income will dilute the impact of upcoming supply facing the Singapore portfolio – Large upcoming supply of warehouse space in Singapore expected in 2015 and 2016. As of end of FY14, Cache's lease expiry was 11% and 16% respectively.

Gearing to reach almost 40% by the end of the year – Gearing was at 31% as of end of FY14. Unless more equity is raised, we see gearing to rise to almost 40% after debt is taken on for the acquisition of the 3 Australia warehouses, as well as the remaining debt for the final phase of DSC ARC.

Investment Actions

Attractive forecasted dividend yield of more than 7% and expect stable distributable income from high quality portfolio of properties.

Upgrade to "Buy" rating, with higher DDM valuation of S$1.34. (Previous S$1.30)

Source: Phillip Securities Research - 10 Feb 2015