• Cache Logistics Trust's 3Q18 DPU of 1.475 Scts largely in line. 
• Efforts in driving occupancy have been encouraging, but uptick in lease expiries ahead is a key concern. 
• DPU adjusted lower after tweaking rent and interest cost assumptions. 
• Maintain HOLD; Target Price cut to S$0.75. 

HOLD maintained after revising Target Price to S$0.75; offers prospective 8.3% yield.

• While 9M18 performance has panned out largely within expectations, we believe that potential portfolio occupancy pressures could continue to put stress on near-term DPU as a higher proportion of leases fall due in 2019.
• Refinancing efforts have been positive, but the increase in interest costs have run ahead of our initial projections, further weighing on DPU growth potential. 
• Maintain HOLD given limited upside to our revised Target Price of S$0.75.

Where We Differ: More conservative estimates.

• Looking ahead, the expiry of 25% of leases in FY19 could put further pressure on earnings, as negative rental reversionary trends persist.
• Despite decent 3Q18 performance, our DPU estimates are revised down by 1-6% to account for more conservative occupancy, rent and interest cost assumptions. Vacancy challenges should abate as replacement tenants are secured over the medium term.

Potential catalyst

• Delivering solid overseas strategy; strengthening its Singapore core operations. Cache has actively been looking to diversify away from Singapore, and Australia now accounts for c.30% of total assets (through acquisition of 16 industrial properties). This diversification strategy has lengthened the land lease expiry and improved earnings visibility given the longer leases signed in Australia. 
• Back home in Singapore, the back-filling of the space at Commodity Hub will help minimise the projected earnings vacuum in the interim.

Key Risks to Our View

• Non-accretive acquisitions. Given the high portfolio NPI yield of around 7%, it is unlikely that potential acquisitions can offer immediate yield accretion. The value-add will have to come strong cashflows and eventually higher capital values.

WHAT’S NEW - Cache’s 3Q18 Results

3Q18 DPU of 1.475 Scts largely in line.

• Gross revenue jumped 14.8% y-o-y to S$31.5m in 3Q18, leading to an 8.1% increase in NPI to S$23.1m. 
• The boost was largely driven by the acquisition of nine warehouse properties in Australia in Feb 2018, higher revenues from 51 Alps Ave and CWT Commodity Hub, which offset the absence of income from 40 Alps Ave post divestment. The contraction in NPI margins from 77.8% (3Q17) to 73.2% (3Q18) mainly reflects CWT Commodity Hub’s conversion from a master lease to multi-tenancy structure in Apr 2018.
• Distributable income fell 3.6% y-o-y to S$15.9m, resulting in a 4.3% drop in DPU – partly due to the enlarged share base and lower capital distributions compared to a year ago. 
• 9M18 DPU of 4.401 Scts formed > 73% of our FY18F estimates, which was largely in line.

Improvements in operational metrics encouraging.

• Portfolio occupancy nudged higher to 96.9% (vs 96.8% in 2Q18). Occupancies were stable at 95.4%, 99.2% and 100% for the Singapore, Australia and China markets, respectively. 
• The focus was mainly on CWT Commodity Hub, which continued to push through on the occupancy front to deliver higher occupancy of 94% in 3Q18 vs 86% post the expiry of its master lease in Apr’18 and 92.7% in 2Q18.
• Rental reversions (excluding CWT Commodity Hub) while still negative, remained stable at -4.6% for 9M18 (vs -4.8% for 1H18).

But uptick in lease expiries in 2019 is a key concern.

• While the oversupply situation is set to taper off from 2H18, demand (committed supply) is expected to lag supply of new warehouse space over the near-to-medium term.
• Looking ahead, we note that a higher proportion of Cache’s leases will fall due in the upcoming year - 25% of leases in FY19F vs 19% in FY18F. As such, the flight to quality could put further pressure on occupancy and earnings, as rental reversionary trends remain persistently weak.

Healthier debt profile.

• Gearing was stable at 35.6% in 3Q18. Post the refinancing of S$265m worth of loan facilities in Oct 2018, Cache’s weighted average debt to maturity was extended from 2.2 to 4.1 years – a positive move amid the rising rate environment. 
• The un-encumbering of its Singapore assets (which forms 88% of Cache’s asset portfolio), should also help drive operational flexibility for the Trust going forward.

Maintain HOLD with a lower Target Price of S$0.75.

• While 9M18 performance has panned out largely within expectations, we believe that potential portfolio occupancy pressures could continue to put stress on near-term DPU as a higher proportion of leases fall due in 2019.
• Refinancing efforts have been positive, but the increase in interest costs have run ahead of our initial projections, further weighing on DPU growth potential.
• Our DCF-based Target Price is lowered from S$0.88 to S$0.75 after assuming
  1. a more modest rent outlook, and
  2. 50 bps increase in interest costs vs current levels.
• Maintain HOLD given limited upside to our revised Target Price of S$0.75.
• Meanwhile, a prospective 8.3% yield is on offer.