Cache Logistics Trust (SGX: K2LU) is a REIT which invests in income-producing industrial real estate used for logistics purposes and is managed by ARA Trust Management (Cache) Limited, a unit of ARA Asset Management Limited. Its portfolio consists of 27 logistics warehouse properties within logistics clusters in Singapore and Australia, with a total gross floor area of around 9 million square feet. The properties are valued at approximately S$1.3 billion as at 30 June 2019.
Cache has just reported another downbeat set of earnings for Q2 2019, with distribution per unit (DPU) declining by around 7% year-on-year. Both gross revenue and net property income also saw year-on-year declines of 7.4% and 5.4% respectively. The REIT’s outlook was not encouraging either, with industrial space demand expecting to remain soft and industrial rents continuing to face pressure.
Here are three major reasons why I am avoiding Cache.
1. Persistently declining DPU
Cache’s 5-year DPU history shows a steady and persistent decline in annual DPU, from 8.57 Singapore cents in 2014 to 5.94 Singapore cents in 2018. This represented a total decline of 30.7% in DPU over a period of 5 years and is both a reflection of the soft industrial market and the REIT manager’s inability to extract more value from its properties.
With 6-month 2019 DPU declining by 3.1% year-on-year, it looks as though this trend of falling DPU is set to continue further.
2. High gearing and cost of debt
Cache’s gearing level of 37.9% (as at 30 June 2019) is high and does not give the REIT much room for accretive acquisitions as the statutory debt headroom is 45%. Most REITs will try not to exceed 40% in order to provide some leeway for additional borrowings (e.g. bridging loans), and Cache’s gearing level is dangerously close to this level. In contrast, other industrial REITs such as Ascendas REIT (SGX: A17U) and Mapletree Industrial Trust (SGX: ME8U) have gearing levels of 36.3% and 33.4% respectively.
Cache’s cost of debt is also high compared to these other two REITs, at 3.86%. Ascendas REIT and Mapletree Industrial Trust both have a cost of debt at just 3%.
3. Risk of tenant default
In April this year, it was reported that CWT International (HKSE: 521), or CWTI, faces seizures after defaulting on a loan. CWT Pte Ltd is a Singapore company owned by CWTI and is a tenant of CWT Commodity Hub and Pandan Logistics Hub. Though CWT Pte Ltd is, to date, not in arrears and has not delayed payments in relation to their rental commitments, its contribution to gross rental income for the REIT stands at 14.8% as at 30 June 2019.
There exists a material risk of default by this tenant should CWTI face further pressure from its creditors. As this tenant takes up around 15% of total rental income, I feel that the effect of any default will be material for the REIT and represents a serious risk to future DPU.
Staying away unless trend reverses
Based on the three reasons above, Cache appears to be a poor investment candidate. Though the shares offer an annualised dividend yield of around 7.8% based on the last traded price of S$0.73, investors should note that total DPU may continue to fall due to the challenges the REIT is facing. Unless the trend of falling DPU reverses, I am avoiding it for now.
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