ARA LOGOS Logistics Trust

can you say this:

now the REIT gives 7% return annually
if the price drops by 20% next year, the yield would jump to 9.2%
if the year after that, the price drops by another 10%, the yield would become 10.5%
(all assume DPU stays at SGD 2.1 considering Cache has 100% occupancy rate, strong support from sponsor, etc.)

suppose we buy the REIT today, also the next year (when price has dropped by 20%) and again the year after that (when price has dropped by another 10%), we will get in total 26.7% yield (7+9.2+10.5) and an unrealized loss of 30%, so if we sell the REIT, we will still get a net return of -3.3% (30%-26.7%).... which is very defensive considering price has dropped by 30%

is this theory correct? thanks...

hi rickytj

your logic is correct but i think yr calculations is wrong.
the yield is based on the price u entered. so if the dpu is same, the yield would be same based on price u entered.
so u get total yield 21% (7+7+7) and unrealized loss of 30%.

(25-11-2013, 11:08 AM)rickytj Wrote: can you say this:

now the REIT gives 7% return annually
if the price drops by 20% next year, the yield would jump to 9.2%
if the year after that, the price drops by another 10%, the yield would become 10.5%
(all assume DPU stays at SGD 2.1 considering Cache has 100% occupancy rate, strong support from sponsor, etc.)

suppose we buy the REIT today, also the next year (when price has dropped by 20%) and again the year after that (when price has dropped by another 10%), we will get in total 26.7% yield (7+9.2+10.5) and an unrealized loss of 30%, so if we sell the REIT, we will still get a net return of -3.3% (30%-26.7%).... which is very defensive considering price has dropped by 30%

is this theory correct? thanks...

Hi rickytj, it doesn't really work this way. Calculation errors aside which I'm sure you can work out with a spreadsheet, more importantly there is the concept of the pricing of risks and opportunity costs in investments - variables which can change drastically in the event of a strained market.

Cache is exposed to 3 primary risks that any investor needs to take into account and not just simply assume DPU will not change based on a few cursory management selling points:

1) Counter party risks – Very high and concentrated tenancy risk from CWT. CWT is a decent regional mid-sized company, but it is far from being a gold standard credit grade company which one can safely assume to be close to risk free. Tenancy agreements while enforceable legally are still subject to the usual default risks just like any other credit terms. In times of distress, the creditors, of which Cache is one of them, will often enter into renegotiation on lesser terms if the counter party proves vulnerable and full default followed by claims for liquidated damages are an even less attractive prospect.

2) Interest risks – Do take note that interest risk premiums will likely surge when times are bad; this has the effect of raising interest expense substantially on any new or rolled over debt. Swap counterparties’ default risk will also rise substantially for existing interest rate derivative contracts. The NPI-Interest gap will narrow as a result and reduce DPU accordingly. Interest coverage ratios may also be breached, further placing pressure on managing the trust’s debt.

3) Capitalization rates – A surge in property capitalization rates will result in the decline in the fair value of existing properties. This will render the trust vulnerable to breaching leverage related debt covenants. The usual follow up action is for the trust to raise equity to par down the debts, this will be at a time which, yes the unit price has dropped drastically thereby increasing the Cost of Equity to the high single or even double digit percentage which you have described above in your hypothetical scenario as “yield would jump”. That usually means a massive dilution and contraction of DPU.

To put it in insurance parlance, the ~5% extra yield for Cache you are enjoying on top of what a long term government bond is paying, is in fact premiums you are getting to underwrite and absorb the 3 primary risks stated above. Now whether this premium is sufficient or a steal is a matter of individual opinion, but I just want to point out that the theory subtly encouraged by management that this is a very defensive investment that can make good returns in a normal market and yet largely insulate one from significant losses during hard times ain’t the full picture.

@mobo

thanks for the enlightenment

i have a couple of questions,
1) i noticed warehouse price in SG has skyrocketed since 2010, from SGD 500 to over SGD 800 per sqft, what happened during that time?
2) also the current median warehouse price is about SGD 400-500 per sqft... meanwhile the implied value of Cache's warehouse is only SGD 200 per sqft, and not only that, I calculated other industrial REITs warehouse value per sqft as well, and it turned out even lower: SGD 100-200 per sqft... why is it so low? does it mean these companies are cheap? their cap rate is normal: 7-8%

thanks again..

DHL breaks ground for $160m warehouse facility
Published on May 15, 2014 1:19 AM



By Chia Yan Min

LOGISTICS giant DHL broke ground for a $160 million warehouse facility at Tampines LogisPark yesterday. The 90,000 sq m complex is due to be completed by the second half of next year.

It is DHL's 21st facility in Singapore and will be its largest here, increasing its warehouse capacity by 40 per cent.

More than 300 employees will be added to DHL Supply Chain's headcount, which is now about 1,700. DHL plans to boost its staff strength in the region to 25,000 by next year - an increase of 65 per cent over last year.

The facility will also include an innovation centre focusing on research and development in the logistics industry - DHL's first such centre outside Germany.

South-east Asia's rapid urbanisation and the launch of the Asean Economic Community next year are expected to remove trade and investment barriers and boost competitiveness, said Mr Steve Walker, DHL Supply Chain's chief information officer for Asia-Pacific, Middle East and Africa.

The new warehouse will help the company take advantage of regional opportunities in industries such as aerospace, health care and technology, he added.

DHL will build the complex in partnership with the listed Cache Logistics Trust. Cache will put in $120 million of the costs, with DHL adding $40 million. It will be Cache's first development project; it had built its portfolio through acquisitions only.

Minister of State for Trade and Industry Teo Ser Luck said at yesterday's ceremony that the Government will continue to boost logistics infrastructure to aid Singapore's growth as an industry hub.

These efforts include the expansion of Pasir Panjang Terminal and Changi Airport. "These transformation initiatives will create conducive conditions for Singapore's logistics industry to rise to new heights," said Mr Teo, who was previously the country manager of DHL Express Singapore.

chiaym@sph.com.sg

(15-05-2014, 08:12 AM)greengiraffe Wrote: DHL breaks ground for $160m warehouse facility
Published on May 15, 2014 1:19 AM



By Chia Yan Min

LOGISTICS giant DHL broke ground for a $160 million warehouse facility at Tampines LogisPark yesterday. The 90,000 sq m complex is due to be completed by the second half of next year.

It is DHL's 21st facility in Singapore and will be its largest here, increasing its warehouse capacity by 40 per cent.

More than 300 employees will be added to DHL Supply Chain's headcount, which is now about 1,700. DHL plans to boost its staff strength in the region to 25,000 by next year - an increase of 65 per cent over last year.

The facility will also include an innovation centre focusing on research and development in the logistics industry - DHL's first such centre outside Germany.

South-east Asia's rapid urbanisation and the launch of the Asean Economic Community next year are expected to remove trade and investment barriers and boost competitiveness, said Mr Steve Walker, DHL Supply Chain's chief information officer for Asia-Pacific, Middle East and Africa.

The new warehouse will help the company take advantage of regional opportunities in industries such as aerospace, health care and technology, he added.

DHL will build the complex in partnership with the listed Cache Logistics Trust. Cache will put in $120 million of the costs, with DHL adding $40 million. It will be Cache's first development project; it had built its portfolio through acquisitions only.

Minister of State for Trade and Industry Teo Ser Luck said at yesterday's ceremony that the Government will continue to boost logistics infrastructure to aid Singapore's growth as an industry hub.

These efforts include the expansion of Pasir Panjang Terminal and Changi Airport. "These transformation initiatives will create conducive conditions for Singapore's logistics industry to rise to new heights," said Mr Teo, who was previously the country manager of DHL Express Singapore.

chiaym@sph.com.sg

The artist's impression of the facility looks good.

[Image: DHLSingaporeCenter2.jpeg]

(Vested)

From UOB Kayhian:

Positive rental reversions to drive organic growth. We estimate positive
reversions of 10-15% for Cache Logistics Trust (Cache) for the master-leases
coming due in 2015/16 (34%/ 32% of portfolio), based on current market rents.
This provides an organic growth catalyst as annual rents under the master-leases
have been growing at an annual rate of 1.5-2.0% p.a. over the four years from
listing, while rents for logistic facilities have risen 35-45% from three to
four years ago.

Underlying tenancies remain strong with most master-leased properties
underpinned by multi-national logistics companies, including DB Schenker,
Nippon Express and TNT Express. Also, for CWT Commodity Hub, only 20% of the
leased area is due for expiry in 2015, while separate lease agreements have
been entered with existing tenants to extend their underlying leases.

Maintain BUY with a higher target price of S$1.35 (from S$1.31), based on DDM
(required rate of return: 6.9%, terminal growth: 1.5%).

Cache Logistics Trust posted a 1.7 percent increase in gross revenue to $20.8 million in 2Q14. Property expenses expanded 38.7 percent to $1.2 million for the quarter as expenses in 2Q13 were lower due to a one-off reversal of expenses. Subsequently, net property income remained flat while income available for distribution rose 0.5 percent to $16.7 million and distribution per unit remained unchanged at $0.02147 in 2Q14.

From OCBC marketpulse:

Cache Logistics Trust: Appears fairly priced now

Cache Logistics Trust (CACHE) reported 2Q14 DPU of 2.147 S cents (flat YoY), which was within our expectations. Looking ahead, CACHE intends to transform the portfolio into a more multi-tenanted lease profile to reduce the concentration risk and capture the benefits of market cycles. However, we note that sponsor CWT Limited and C&P Group will remain as major tenants, occupying ~50% of the total NLA at the end of their respective master leases in Apr 2015. Over at C&P Changi Districentre, CACHE also disclosed that it has made good progress on its lease renewal, securing ~63.0% commitment ahead of its master lease expiry in 2015. This should limit any volatility in occupancy and income once the assets are converted into multi-tenancies. We keep our fair value intact at S$1.25, but downgrade CACHE from Buy to HOLD following its strong unit price performance. (Kevin Tan)

Its a very competitive market for industrial assets in Singapore. Other REITs in the ARA stable such as Suntec has ventured to Australia. Will Cache do the same?