Chairman and CEO's Message
Extracted from Annual Report 2016
We are pleased to present the Cache Logistics Trust Annual Report 2016 for the financial year ended 31 December 2016 ("FY2016").
STABLE FINANCIAL PERFORMANCE IN A SLOW, UNCERTAIN ECONOMY
The world's economic and political environment in 2016 was characterised by uncertainty. The year commenced with global equity markets erasing trillions of dollars in value due to fears about China's slowing economy and depreciating currency. At the same time, the Bank of Japan delivered another surprise when it embraced a negative interest rate policy. The UK's vote in favour of leaving the European Union ("Brexit") in mid-2016 also shocked financial markets. This was followed in November by the unanticipated victory by Donald Trump in the US presidential election.
Taking all the uncertainty into account, the IMF anticipates global growth to slow to 3.1% in 2016 before recovering to 3.4% in 2017. The forecast reflects a more subdued outlook for advanced economies following Brexit and weaker-than-expected growth in the United States1 .
The US Federal Reserve raised interest rates by 25 basis points to a range of 0.50% and 0.75% in December 2016, the second time since it hiked rates in December 2015. A rising interest rate environment and slowing global growth, coupled with geopolitical changes, are expected to contribute to greater uncertainty this year.
According to the Ministry of Trade & Industry, Singapore's economy expanded by 2.0% in 2016. Economic growth was underpinned by improvements in the manufacturing and services sectors. The full-year Gross Domestic Product ("GDP") growth of 2.0% was similar to the 1.9% growth in 20152 . The Purchasing Managers' Index ("PMI") recorded its fourth month of expansion, albeit rather muted, increasing from 50.2 in November 2016 to 50.6 in December 2016.
Cache delivered stable financial performance in FY2016 against the uncertain economic backdrop. Gross Revenue rose by 24.0% and Net Property Income ("NPI") increased by 15.6% to S$111.3 million and S$88.0 million respectively. The YoY growth in Gross Revenue and NPI was attributable to the incremental revenue from the Australian portfolio acquired over the course of FY2015, and DHL Supply Chain Advanced Regional Centre which was completed in July 2015. The topline growth was offset by lower income from 51 Alps Ave, Singapore which is currently undergoing legal proceedings. FY2016 Income Available for Distribution increased by 2.0% YoY to S$69.3 million. However, FY2016 DPU fell 9.1% YoY to 7.725 cents (FY2015 DPU: 8.500 cents). Part of the DPU fall was attributable to a smaller capital distribution from the sale proceeds of 4 Penjuru Lane, Singapore ("Kim Heng Warehouse"). On a like-for-like basis excluding capital distributions, the DPU would have dropped by 5.4% YoY.
HEALTHY OPERATING PERFORMANCE
Despite a challenging operating environment, we continue to maintain a healthy operating performance.
As at 31 December 2016, Cache achieved a strong portfolio committed occupancy of 96.4% which compares favourably to the average warehouse occupancy of 89.7% in Singapore according to the latest government statistics3 . The portfolio weighted average lease to expire ("WALE") at year-end was 3.9 years, longer than that of most industrial REITs in Singapore.
In the area of capital management, in 2016, we successfully refinanced an existing S$97.0 million 3.5-year secured term loan and revolving credit facility, previously drawn for the development of the DHL Supply Chain Advanced Regional Centre, by way of a new S$90 million 5-year unsecured term loan facility. The refinancing exercise achieved cost savings of approximately 0.9% per annum and extended Cache's weighted average debt maturity to 2.8 years as at 31 December 2016. There is no Singapore-dollar borrowing due for refinancing until the second half of 2018.
As at the end of the financial period, the aggregate leverage was 43.1%. The average all-in cost of financing for the full year was 3.6%. Approximately 70% of the Singapore-dollar borrowings and 50% of the onshore Australian-dollar borrowings were hedged into fixed rates.
In respect of our foreign exchange risk management, about 95.6% of Cache's distributable income was hedged into or was derived in Singapore dollars as at end- December 2016. This represents minimal exposure to foreign currency risk.
We endeavour to adopt a prudent capital management approach and maintain our vigilance on the interest rate environment.
The appraised value of our investment properties was S$1,236.4 million as at 31 December 2016, down approximately 5.5% compared to the same period last year. This was due to pressure on the valuation of some of our Singapore properties which were negatively affected by a subdued rental market, higher vacancy allowance and higher operating costs in the multi-tenanted properties, as well as the impact from shorter leasehold land tenure. In contrast, our Australian and China portfolios saw higher appraised valuations.
THE LOGISTICS REAL ESTATE SOLUTIONS PROVIDER OF CHOICE
Our asset management team was busy throughout the year executing our strategy of maintaining high occupancy in the portfolio, extending the WALE and reducing future vacancy risk. We signed over 1.2 million square feet of leases and forward renewals in FY2016. As such, the lease expiry profile is well-staggered, with only 5.3% of the portfolio's leases due for renewal in FY2017. About half of all of leases are committed till 2020 and beyond4.
Our well-located warehouses boast good specifications. Coupled with our proactive asset management approach, we achieved a high tenant/end-user retention rate of 82%. In addition, we have secured numerous international transport and logistics operators as new tenants within the portfolio. The team continues to not only focus on addressing this year's leasing exposure but also forward renewals for leases due to expire in FY2018 and beyond.
The high committed occupancy was also achieved through our investments in various asset enhancement initiatives ("AEIs") such as upgrading under-utilised ambient warehouse space by installing air-conditioning, other infrastructure as well as incorporating green building initiatives. The AEI works are real estate solutions that value-add to our tenants' operational efficiency and contribute towards longer lease commitments.
Approximately three-quarters of Cache's tenants/ end-users are multi-national companies from diverse industry sectors ranging from industrial and consumer goods, food and cold storage, materials, engineering and construction, healthcare and e-commerce. The fastgrowing e-commerce market in Singapore is expected to be worth US$5.4 billion (S$7.46 billion) by 2025. To cite an example, robust demand from sectors such as e-commerce and biomedical clusters in turn fuelled demand and early take-up for space within Block 2 of DHL Supply Chain Advanced Regional Centre.
PORTFOLIO REBALANCING STRATEGY
Cache continued with its portfolio rebalancing strategy to prudently manage the Cache portfolio with a view of recycling capital into higher-performing assets. We successfully divested Cache Changi Districentre 3 in Singapore, with a relatively short remaining land lease of 17 years, for S$25.5 million. The sale was completed in January 2017.
In respect of our reinvestment strategy, efforts to expand Cache's presence in Australia continue. On 22 February 2017, Cache announced the proposed acquisition of its seventh warehouse in the established industrial precinct of Laverton North in Melbourne, Australia for A$22.25 million. The property is acquired with an existing tenancy where 100% of the lettable area is leased to Spotlight Pty Ltd, a leading retail chain selling fabric, craft and homeware items with some 130 outlets across Australia, New Zealand and Asia. With a WALE of 4.5 years and fixed annual escalations of 3.25%, the acquisition, when completed, will provide stable and growing income to our unitholders. The Australian industrial market continues to be attractive as the benefits of predominantly freehold land tenure and a longer WALE provide a good balance to Cache's Singapore-based portfolio based on leasehold land and a shorter WALE.
Including the latest acquisition, Cache's Australian portfolio accounts for approximately 22.3% of Cache's portfolio gross floor area and 16.2% in portfolio value. Besides the benefits of income and geographical diversification, the Australian portfolio also strengthens Cache's ability to generate stable, sustainable and predictable income streams over the long term.
51 ALPS AVE MATTER
Cache made several announcements in 2016 to keep unitholders abreast of the legal proceedings in respect of the lease at 51 Alps Ave, Singapore. In the announcement dated 26 September 2016, Cache indicated it has accepted, under protest, a holding arrangement which involves a payment of S$0.77 per square foot per month from Schenker Singapore Pte Ltd, pending the resolution of the legal proceedings. The Manager will continue to vigorously defend Cache in the interest of unitholders. We will keep the market informed by way of announcing progress as and when it is made.
FOSTERING GOOD INVESTOR RELATIONS
Cache was named the Bronze winner in 'Best Investor Relations (REITS & Business Trust category)' at the Singapore Corporate Awards 2016 for its outstanding efforts in investor relations and corporate disclosure. This is a strong endorsement of the support we receive from our unitholders, analysts, the media and the investment community. Cache places strong emphasis on providing timely and accurate information to allow investors to make informed decisions. We will continue to work hard to uphold good corporate governance standards and investor relations practices.
Market experts hold the view that the Singapore industrial property market will continue to face headwinds in 2017. In addition to tepid economic growth in Singapore in the near term, the warehouse sector continues to be weighed down by excess supply and global economic uncertainties, placing downward pressure on warehouse rentals and occupancy rates over the short to medium term.
According to the Reserve Bank of Australia, Australia's GDP growth forecast is within the 2.5% to 3.5% range throughout 2017 and 2018, rising to between 3.0% and 4.0% in late 2018. Growth will be underpinned by an increase in the employment statistics, a low interest environment, construction and infrastructure expenditure, as well as household consumption growth. In particular, strong levels of new infrastructure investment is expected to contribute greatly to Australia's competitiveness. Newly-completed infrastructure is expected to underpin growth in these industries and contribute towards maintaining market stability. New South Wales and Victoria will see a record A$110 billion of combined infrastructure investment over the next four years which will likely propel the industrial market forward. Market consultants also anticipate further cap rate compression due to strong capital flows and continued offshore and domestic demand for industrial assets.
Going forward, we will continue our efforts to optimise the performance and returns of our existing portfolio. Our focused asset management efforts combined with the portfolio rebalancing strategy remain the key focus for Cache. We will continue to proactively manage the portfolio with a view of maintaining healthy occupancy and improving operating performance while maintaining prudent capital management.
We would like to express our appreciation to the Board of Directors for their stewardship in guiding Cache forward. We would also like to thank Management and our staff for their dedication and relentless hard work. Finally, we would like to express our gratitude to our unitholders, tenants, end-users and business associates for their continued support.
Lim How Teck
Chief Executive Officer
- Ministry of Trade and Industry Singapore, MTI maintains 2017 GDP Growth Forecast at "1.0 to 3.0 per cent", 17 February 2017.
- Jurong Town Corporation (JTC), "Quarterly Market Report – Industrial Properties, Fourth Quarter 2016".
- As at 31 December 2016, by NLA.