Chairman and CEO's Message
Extracted from Annual Report 2015
We are pleased to present the Cache Logistics Trust Annual Report 2015 for the financial year ended 31 December 2015.
As has been widely reported, the global economy remained uncertain throughout most of FY2015. Global growth slowed to its weakest pace since the financial crisis. A slowing economic growth in China and the unexpected devaluation of the renminbi in August 2015 sent markets tumbling. The Eurozone continues to be plagued by chronic debt woes and a migrant crisis. The interest rate "lift-off" by the US Federal Reserve towards the end of the year may also weigh down on future growth. Nevertheless, the advanced economies of Europe and Japan, led by the United States, are expected to grow modestly this year, supported by declining oil prices and accommodative monetary policies.
Given the openness and relative size of Singapore, its economy is susceptible to these global headwinds. The Singapore Purchasing Manager’s Index ("PMI"), which tracks manufacturing activity, has contracted for the sixth straight month in December 2015 due to lacklustre global demand. The Ministry of Trade & Industry has trimmed its growth outlook for Singapore to a modest 1% to 3% in 2016 1, a wide range that emphasises a lack of clear economic growth indicators.
Despite the market uncertainty, the long-term prospects for Singapore remain sound. Singapore is a trusted and reliable supply chain hub with a government that is committed to infrastructure investment and initiatives that support successful business operations. The development of the future Tuas mega port, expected to complete by 2030, will handle up to 65 million Twenty- Foot Equivalent Unit ("TEUs") per annum, more than twice the current capacity handled in 2015. Singapore also boasts one of the world’s busiest and wellconnected airports in Asia, with the third runway and the fourth passenger terminal under construction and terminal five already in the works.
STABLE FINANCIAL PERFORMANCE AND ROBUST BALANCE SHEET
Cache delivered stable financial performance in FY2015. Distribution Per Unit ("DPU") for FY2015 was 8.500 cents, a marginal drop of 0.9% over the preceding year (FY2014 DPU: 8.573 cents). This was primarily attributable to an enlarged issued units base.
Gross Revenue increased 8.3% to S$89.7 million while Net Property Income ("NPI") fell 2.4% to S$76.2 million. NPI was lower primarily due to the conversion of four properties from single-tenant master-leases to multi-tenancies, leading to a slight increase in vacancy and Cache assuming direct obligation for all property expenses, including land rent, property tax, maintenance and leasing expenses. This was offset by incremental revenue from our newly acquired properties in Australia.
The Cache balance sheet remains robust with a gearing level of 39.8% and an average all-in cost of borrowing of 3.25% for the financial year. We continue to mitigate the impact of interest rate volatility on the distributable income by hedging approximately 62% of Cache’s total borrowings into fixed rates. In particular, approximately 73% of the Singapore dollar borrowings is hedged. Cache has a weighted average tenure of debt outstanding of 3.1 years with no refinancing requirement until October 2017.
On the asset management side of the business, the appraised value of our properties increased to S$1,308.0 million from S$1,120.2 million last year, due to the addition of six new warehouses in Australia and the newly completed DHL Supply Chain Advanced Regional Centre ("DHL Supply Chain ARC"), and taking into account downward revaluations in some of our Singapore properties primarily due to lower market rentals and slower growth assumptions.
As at 31 December 2015, the portfolio WALE was approximately 4.4 years (by NLA) and 4.2 years (by Gross Rental Income), with more than 40%2 of the leases committed to FY2020 and beyond.
EXPANDING OUR FOOTPRINT INTO AUSTRALIA
In February 2015, Cache made its foray into the Australian warehouse market with the acquisitions of three logistics warehouses in the major trade and distribution cities of Sydney, Melbourne, and Brisbane.
Three additional warehouses were acquired during the year, making a total of six acquisitions worth approximately A$163.9 million in FY2015. The total Australian portfolio measures over 1.4 million square feet and currently makes up close to one fifth of Cache’s portfolio. The warehouses are fully leased to high quality tenants such as McPhee Distribution, Linfox, Western Star Trucks and Metcash Trading.
The Australian acquisitions, which offer freehold land tenure and a longer WALE of 6.8 years 2, provide a good balance to Cache’s predominantly Singapore-based portfolio.
Unitholders will benefit from geographical and income diversification with the Australian acquisitions. Approximately 7.9% of gross revenue in FY2015 was derived from our properties outside of Singapore.
REJUVENATING THE PORTFOLIO
In July 2015, we completed our first build-to-suit warehouse for DHL Supply Chain Singapore within budget and expected timeline. The logistics facility, which measures over 989,200 square feet, is on a 10-year lease to DHL Supply Chain based on progressive occupation. We are honoured to be the first real estate investment trust to develop and own a property in the newly established and highly sought-after Tampines LogisPark. The facility houses DHL’s Asia Pacific regional office, the Singapore country office and its Asia Pacific Innovation Center, the first innovation centre for DHL outside Germany.
In addition, in line with our proactive asset management strategy to streamline the portfolio and unlock value for unitholders, we divested our warehouse at 4 Penjuru Lane (“Kim Heng Warehouse”). Kim Heng Warehouse, the smallest property in our portfolio, was sold for S$9.7 million. Part of the sale proceeds were returned to unitholders in the course of the year.
CONVERTING MASTER-LEASED PROPERTIES INTO MULTI-TENANTED ASSETS
Our asset management team has been hard at work throughout the year as we secured a total of 3.1 million square feet of new leases and renewals for leases that expired in FY2015. Four of our Singapore properties, namely Cache Cold Centre, Cache Changi Districentre 1, Cache Changi Districentre 2 and Pandan Logistics Hub were converted from single-tenant master-leases to multitenancies in the year. Our proactive lease management and marketing efforts paid off as we managed to achieve an overall high portfolio occupancy of close to 95% and a tenant/end-user retention rate of 86.6%.
During the year, our asset management endeavours also included investing in various asset enhancement and capital expenditure works, such as the transfer of nonproductive GFA to increase lettable area, converting underutilised ambient GFA to air-conditioned space, upgrading aircon systems and other green building initiatives. The works carried out are real estate solutions that value-add to the tenants’ operations, improve the competitiveness of our buildings and, in many cases, enabled Cache to sign longer leases on more favourable terms.
STRENGTHENING THE BOARD WITH MORE INDEPENDENT NON-EXECUTIVE DIRECTORS
With effect from 1 January 2016, we have bolstered the Board with the addition of two Independent Nonexecutive Directors and Audit Committee members, being Mr Lim Kong Puay and Mr Lim Lee Meng. With their introduction, half of the Board comprises Independent Non-executive Directors (“IDs”). The additional IDs enhance the independence of the Board and add to its diversity of skills and strategic experience that will drive Cache’s continued growth and success over time.
ENGAGING INVESTORS THROUGH GOOD INVESTOR RELATIONS
We recognise the importance of good investor relations in the competitive global capital markets and will continue to improve in this aspect.
In recognition of our relentless efforts in Investor Relations, Cache was awarded Best Investor Relations (Bronze) in the REITS & Business Trust category at the Singapore Corporate Awards 2015. We are thankful for the support from our unitholders, analysts, the media and the investment community and will continue to strive towards upholding our good corporate governance standards and investor relations practices.
The Singapore industrial property market will remain challenging over the next 12 months. The sector continues to be weighed down by an imbalance in the supply and demand of industrial space, slowing global growth and government regulations which place downward pressure on warehouse rental and occupancy rates over the short to medium term.
The Australian economy is improving, with growth currently at around 2.5% 3. The lower Australian dollar is seen as helping the non-mining sectors of the economy, particularly tourism and education. As with most economies, the outlook remains cautious in Australia due to, amongst others, uncertainty in commodity prices and a slowing Chinese economy. Nevertheless, the freehold land tenure and the relatively longer WALE for our Australian portfolio enable us to ride on the longterm growth in the country.
Notwithstanding the external challenges, Cache continues to be guided by our mission to deliver long-term growth and sustainable returns to unitholders.
We would like to express our appreciation to the members of the Board for their stewardship and contribution throughout the years. We would also like to thank our management and staff for their dedication and hard work.
Finally, we would like to thank our unitholders, tenants, end-users and business associates for their continued support.
Lim How Teck
Chief Executive Officer
- The Straits Times, 25 November 2015, “Singapore 2015 GDP growth forecast trimmed to ‘close to 2%’, 1-3% for 2016: MTI.”
- By NLA, as at 31 December 2015.
- JLL Australia, “Economic Outlook December 2015”.