Chairman and CEO's Message
Extracted from Annual Report 2017
On behalf of the Board of Directors of the Manager, we are pleased to present the Cache Logistics Trust Annual Report 2017 for the financial year ended 31 December 2017 ("FY2017").
SYNCHRONISED GLOBAL GROWTH, SINGAPORE AND AUSTRALIA ECONOMIES REMAIN STRONG
Despite the political uncertainties in 2017, global economies are expected to perform well this year. Along with the expectation of a synchronised global economic growth, the International Monetary Fund ("IMF") has upgraded its outlook for most economies, and global growth is forecast to rise to 3.9% in 2018. The upward revisions reflect increased global growth momentum and the expected impact of the recently approved U.S. tax policy changes1.
Closer to home, the Singapore economy grew by 3.6%2, largely due to strong growth in the manufacturing sector. The Purchasing Managers' Index ("PMI") also recorded 16 consecutive months of improvement in manufacturing activity and ended 2017 on a strong footing.
The Australian economy grew 2.8% on a seasonally adjusted basis through the year to September 20173, in line with the historical average Gross Domestic Product ("GDP") growth of 2.6% over the last decade. The Reserve Bank of Australia ("RBA") kept the cash rate unchanged at 1.5%.
STABLE FINANCIAL AND OPERATING PERFORMANCE
Cache delivered stable financial and operating performance in FY2017.
Gross Revenue increased by 0.6% to approximately S$112.0 million. This was mainly due to the higher contribution from the Australia portfolio, DHL Supply Chain Advanced Regional Centre and Cache Cold Centre as well as a rental top-up in respect of 51 Alps Ave. The Net Property Income ("NPI") fell marginally by 0.8% to S$87.3 million compared to the last financial year. The lower NPI was primarily due to a lower contribution from 40 Alps Ave and 51 Alps Ave which were converted from a triple-net master lease structure to multi-tenanted lease structure in a soft rental market, leading to higher property expenses. The FY2017 Income Available for Distribution and DPU was S$66.0 million and 6.583 cents4 respectively.
On the operations front, Cache maintained a robust operating performance. As at 31 December 2017, Cache's portfolio committed occupancy remained strong at 96.6% and the portfolio weighted average lease to expiry ("WALE") by NLA was 3.4 years. The Singapore portfolio achieved a high committed occupancy of 96.3%, which compares favourably to the average warehouse occupancy of 89.1% according to latest statistics5. Leases totalling approximately 852,730 square feet were signed in FY2017. The Australian portfolio was 97.1% occupied at year end. This is testament to the quality of the Cache portfolio and the Manager's proactive leasing strategy.
The appraised value of the investment properties was S$1,206.9 million as at 31 December 2017, down from S$1,236.4 million at end-2016. The portfolio experienced a downward valuation in some of the Singapore properties due to lower market rent assumptions and shorter land tenure for the leasehold properties. In contrast, our Australia portfolio, as a whole, recorded higher appraised valuations due to compressed capitalisation rates and higher market rents in Australia. The Manager will continue to identify means of enhancing portfolio value wherever possible.
As at 31 December 2017, the lease expiry profile was well staggered, with more than half of the leases committed till FY2020 and beyond. A majority of Cache's tenants/end-users are multi-national third-party logistics service providers and high-calibre companies from diverse business sectors ranging from industrial and consumer goods to food and cold storage, materials, engineering, construction, healthcare and e-commerce.
POSITIVE RESOLUTION ON THE 51 ALPS AVE MATTER
In relation to the lease at 51 Alps Ave, Singapore, the Manager announced on 31 October 2017 that it had reached an amicable resolution in respect of the lease dispute. Unitholders would be pleased with the positive outcome as Cache will receive market rental for the property commencing from the Holding Arrangement (1 September 2016 through 31 October 2017) to August 2021 under a new lease with Schenker.
PRUDENCE IN OUR CAPITAL MANAGEMENT STRUCTURE
During the year, Cache undertook a successful renounceable Rights Issue to raise gross proceeds of approximately S$102.7 million. The Rights Issue received overwhelming support from Unitholders and was oversubscribed at 187%. S$99.9 million of the Rights Issue proceeds were used to partially repay Cache's existing borrowings to reduce aggregate leverage and create additional debt headroom for future growth.
Cache's aggregate leverage stood at a healthy 36.3% as at 31 December 2017. The average all-in cost of financing for the full year was 3.56%, slightly lower than in 2016 due to cost savings from a refinancing exercise undertaken in December 2016.
Cache has hedged approximately 90.5% of its Singapore-dollar borrowings and half of its onshore Australian-dollar borrowings into fixed interest rates. In addition, about 94% of Cache's distributable income was hedged into or was derived in Singapore dollars, representing minimal exposure to foreign currency risk.
To further diversify its funding sources and to provide financial flexibility, Cache also established a S$1.0 billion multi-currency debt programme on 30 November 2017. Cache has since issued S$100.0 million of subordinated perpetual securities which was well received by investors, with orders over twice the principal amount and participation from over 20 high-quality accounts.
The Manager will continue to adopt a disciplined and prudent capital management approach and minimise the impact of interest rate volatility on Cache's earnings.
SUCCESS IN OUR PORTFOLIO REBALANCING AND GROWTH STRATEGY
The Manager continues to execute its portfolio rebalancing and growth strategy to prudently manage the Cache portfolio with a view to recycling capital into properties with positive investment attributes, further enabling Cache to deliver sustainable value and earnings over time.
In this regard, Cache successfully divested Cache Changi Districentre 3 in Singapore, with a relatively short remaining land lease of 17 years, for S$25.5 million in January 2017. Shortly after, the sale proceeds were reinvested into a A$22.25 million well-located freehold logistics warehouse in Laverton North, Victoria, Australia which is fully leased to Spotlight Pty Ltd. The site enjoys close proximity to the main east-west link freeways and is supported by an excellent local arterial road transport system.
Since its first entry into Australia in 2015, Cache has expanded further and, as at 31 December 2017, owns seven logistics warehouse properties in the major trade and distribution cities of Melbourne, Sydney, Brisbane and Adelaide. Australia remains an attractive investment market, offering the benefits of freehold land tenure and a longer weighted WALE of 4.9 years almost double that of the average Singapore portfolio WALE6.
On 18 January 2018, the Manager announced the proposed divestment of Hi-Speed Logistics Centre located at 40 Alps Ave, Singapore for a sale consideration of S$73.8 million. The sale price represents an approximately 7.0% gain over the valuation of the property as at 31 December 2017. The proposed divestment is in line with the Manager's portfolio rebalancing and growth strategy where the proceeds from the divestment will be used to repay borrowings and reinvest into higher value-adding assets to generate sustainable long-term earnings.
ACQUISITION OF A NINE-PROPERTY PORTFOLIO IN AUSTRALIA
In keeping with its portfolio rebalancing and growth strategy, on 31 January 2018, the Manager announced the acquisition of a nine-property logistics warehouse portfolio in Australia valued at A$177.6 million. The acquisition was completed on 15 February 2018. The sizable transaction represents Cache's largest acquisition in Australia to date and will increase Cache's portfolio valuation by approximately 15.6%. Post-completion, the assets in Australia make up approximately 28.1% of the total portfolio.
The portfolio comprises institutional-grade industrial logistics properties, all of which are located on freehold land in key established industrial precincts along the Eastern Seaboard of Australia and strategically located near excellent transport infrastructure.
Aside from the benefits of income and geographical diversification, the acquisition further enhances Cache's base of high-quality logistics tenants and end-users. Annual rental escalations of up to 3.5% also provide built-in organic income growth over time.
With this acquisition, the proportion of freehold properties within Cache's portfolio will increase from approximately 22.2% to 35.3%.
The Manager is proud to have been awarded the Gold Award at the Asia Pacific Best of the Breeds REITs AwardsTM 2017 under the Industrial REITs category. The award recognises companies and managers with the highest standards and performance in the Asia Pacific REITs sector. We are thankful for the support received from Unitholders, analysts, the media and the investment community, and will endeavour to work diligently to continue to manage Cache by upholding the highest standards of professionalism.
OUR COMMITMENT TO SUSTAINABILITY
Cache is committed to creating sustainable value for all stakeholders. The Board believes that a strong environmental, social and governance ("ESG") performance will bring about long-term benefits in driving operational performance excellence, managing risks and protecting the assets of Cache, while minimising the environmental footprint.
To achieve this, Cache seeks improvements in managing energy efficiency in our properties, which reduces carbon footprint and utilities costs resulting in higher returns for our investors. Cache promotes fairness and diversity within an inclusive workplace and builds an experienced and competent team, and believes in giving back to the community. Cache is committed to upholding high standards of corporate governance - crucial in gaining investors' trust and confidence - which lays the foundation for our sustainable success. More details will be available in the sustainability report which will be published online during the year.
With the recent upswing in global growth, the Singapore economy is expected to remain firm and expand between 1.5% and 3.5% in 2018, with growth likely to come in slightly above the middle of the forecast range7. This should bode well for the industrial sector as lagged demand picks up over time.
The Singapore industrial property sector continues to face an imbalance in demand and supply dynamics as well as an uncertain economic outlook as it has over the past several years. Of late, the volume of leasing transactions has noticeably increased with some market experts expecting stronger take-up with the aligned global growth and moderated industrial land release by JTC. These developments are expected to reduce excess supply and improve rental rates over time.
In Australia, a market fuelled by historically low interest rates and strong levels of infrastructure investment, the industrial property sector is expected to continue to attract strong investor demand. Australia's growth continues to be underpinned by low interest rates, consumption growth, infrastructure investment, employment growth and non-mining business investment going forward. New South Wales, Victoria and Queensland will see a record A$150 billion of combined infrastructure investment over the next four years8, which is positive for the logistics industry.
Going forward, in addition to its portfolio rebalancing and growth strategy, the Manager remains focused on proactive lease management to maintain high occupancy and optimise overall returns.
We would like to express our appreciation to the Board of Directors for their stewardship. We would also like to thank the management team for their dedication and commitment. Finally, we would like to express our gratitude to Unitholders, tenants, end-users and business associates for their continued support.
Lim How Teck
Chief Executive Officer
- IMF, World Economic Outlook Update, January 2018.
- Ministry of Trade and Industry, Press Release, 14 February 2018.
- Australian Bureau of Statistics, September 2017.
- To reflect the effect of the bonus element in the Rights Issue, the reported and recomputed FY2017 DPU was 6.583 cents. Unitholders received an actual DPU of 6.738 cents for the full year.
- Jurong Town Corporation (JTC), "Quarterly Market Report - Industrial Properties, Fourth Quarter 2017".
- As at 31 December 2017, by NLA.
- Ministry of Trade and Industry, Press Release, 14 February 2018.
- Colliers International, Research and Forecast Report - Industrial, First Half 2017.