Cache Logistics Trust (OCBC)

Maiden foray into China

Maiden foray into China. Cache Logistics Trust (CACHE) announced on 1 Jun that it is acquiring a chemical warehouse facility in Shanghai (Jinshan Chemical Warehouse) from its sponsor, CWT Limited, via an acquisition and leaseback arrangement for a purchase consideration of S$13.5m. This asset falls under the right of first refusal (ROFR) granted to CACHE at the time of IPO in Apr 2010. CWT will lease back the facility for a period of three years with an option for a further three years. The lease is triple-net and rental will commence at RMB 1.30 psm/day for the first year and increased by 2% per annum thereafter. Any extension of the lease will be on the same lease terms, save for rental and associated increase which will be at fair market rates. This acquisition marks CACHE's first acquisition outside Singapore into China.

About the property. The property is located in Jinshan District within the successful Shanghai Chemical Industrial Park (SCIP), one of the largest petrochemical bases in Asia. SCIP is well-positioned and commands the interest of both local and multi-national end-users with an overall occupancy rate of around 90%. The property was developed by CWT and completed in 2007. The premises comprised of four single-storey chemical warehouse buildings, ancillary office space, loading bays and car parks. The facility is sited on a land area of 33,506 sqm, with a built-up gross floor area of about 13,547 sqm. CACHE intends to finance the acquisition by debt. Upon completion of the transaction, expected to be within Jun 2011, CACHE's gearing will rise from 27.9% to 29.2%.

Yield-accretive acquisition. The NPI yield of the new property is 8.6%. This is higher than CACHE's existing portfolio yield of 7.6%, making the acquisition yield-accretive. The average of the two valuations provided by CB Richard Ellis and Knight Frank Petty, who acted on behalf of the manager and trustee respectively, is approximately S$14.6m, higher than the purchase consideration. This acquisition will enable CACHE to capitalise on the economic growth in China and in particular the resilient chemical and commodity logistics businesses. Concurrently, by diversifying into a different market, CACHE is expected to benefit from risk diversification from the property and the economic cycles where CACHE's portfolio is located. CACHE stated that it is actively also looking to expand to other tier-one Chinese cities such as Tianjin, Beijing and Chengdu. We look forward to more property additions not only to diversify CACHE's tenant base, but also to reduce its concentration risk on a single asset (CWT Hub which still account for 46.3% of FY11 gross revenue). Factoring in contributions from the new acquisition, our fair value increased marginally from S$1.05 to S$1.06. Reiterate BUY. (Ong Kian Lin)