The formation of a strategic relationship between ARA and LOGOS is not only a catalyst for growth into the sector through the wide range of funds and development opportunities, it is a clear indication of ARA’s commitment to grow Cache by way of this transformational move. With its interest in LOGOS, ARA is firmly committed to be more aligned with Unitholders in paving the way for Cache’s future.
On behalf of the Board of Directors of the Manager, it is our pleasure to present Cache Logistics Trust Annual Report 2019 for the financial year ended 31 December 2019 (“FY2019”).
While we continue to experience various economic and global headwinds that have supressed growth altogether, our previous efforts to shore-up performance have cushioned the blow. Pressure on earnings remains bearing in mind the recent COVID-19 outbreak, particularly for those with exposure to supply chains most seriously affected by the disruption. That said, we are confident that the strength of our overall tenant base and the quality of the Cache portfolio will continue to support our performance.
In keeping with the ongoing execution of our Portfolio Rebalancing & Growth Strategy, we successfully recycled capital from the divestment of Hi-Speed Logistics Centre and Jinshan Chemical Warehouse in 2018 to acquire a warehouse in Altona, Victoria, Australia in 2Q FY2019. This is evidence of our continued focused efforts to strengthen and position the portfolio for sustainable and long-term growth.
In addition, Unitholders will have seen the exciting news that ARA has created a new platform focusing entirely on logistics. The formation of a strategic venture between ARA and LOGOS Group (“LOGOS”) is not only a catalyst for growth into the sector through the wide range of funds and development opportunities, it is a clear indication of ARA’s commitment to grow Cache by way of this transformational move. With its interest in LOGOS, ARA is firmly committed to be more aligned with Unitholders in paving the way for Cache’s future. The new platform offers significant synergies, particularly opportunities with which Cache can harvest the strengths of LOGOS' position within the sector. We have expanded on this exciting move within the report.
MODEST GLOBAL GROWTH IN 2019
As published data confirms, in 2019 we witnessed a synchronised slowdown in the global economy. Numerous factors impacted global economic activity in the year and it is quite clear the COVID-19 outbreak will exacerbate the market status in 2020.
The International Monetary Fund (“IMF”) forecasted global economic growth to experience a modest pickup from an estimated 2.9% in 2019 to 3.3% in 2020 and 3.4% in 2021, lower than the projections published in October’s World Economic Outlook report.1 This was mainly due to negative economic activity experienced in some emerging market economies such as India, which resulted in the reassessment of growth prospects for the next two years. The emergence of the COVID-19 virus in early 2020 caused an additional round of rethinking of growth forecasts globally.
In Singapore, the economy in 2019 grew 0.7%, considerably lower than 2018’s 3.4%, mainly due to a contraction experienced in the manufacturing sector.2 Singapore’s Purchasing Managers’ Index (“PMI”) was 50.1 in December 2019, rising above 50 for the first time since April, due to an expansion in factory activity.3 In February 2020 however, PMI fell to 48.7, 1.6 points lower than 50.3 in January 2020 on the back of the COVID-19 virus outbreak.
Australia also experienced a slower growth in 2019, dragged by factors such as drought, housing-related sentiment and lower confidence among consumers and businesses. However, tax cuts, lower interest rates and a lower Australian dollar as well as a rebound in housing prices contributed to growth.4 Gross Domestic Product (“GDP”) for 2019 was at 2.2%,5 on the back of factors such as the bushfires and the continuing COVID-19 virus impact, which will weigh-in on growth into early 2020. As a result, the Reserve Bank of Australia further lowered the cash rate to 0.25% in early March 2020.
Despite the challenging times that may lie ahead, we continue to embark on initiatives to enhance Cache’s fundamentals to generate sustainable, long-term returns for our Unitholders.
REVIEW OF CACHE’S FY2019 FINANCIAL PERFORMANCE
In FY2019, Gross Revenue was lower by 6.6% to S$113.6 million compared to S$121.5 million in the financial year ended 31 December 2018 (“FY2018”), mainly attributable to the conversion from the previous master lease to the present multi-tenancy structure at Commodity Hub and Cache Gul LogisCentre, transitory vacancy downtime between leases, lower signing rents for new leases compared to that previously signed, absence of contribution from 40 Alps Ave and Jinshan Chemical Warehouse (divested in 2018) and a weaker Australian dollar. This was partially offset by the additional rental contribution from 182 – 198 Maidstone, Altona, Victoria, Australia (acquired in April 2019) and the full-year contribution from the 9-property Australia portfolio acquired in February 2018.
Net Property Income (“NPI”) decreased by 5.6% to S$85.8 million from S$90.9 million in FY2018. This was due to lower gross revenue as explained and partially offset by the exclusion of land rent from the property expense line following the adoption of FRS 116 Leases effective 1 January 2019.
Distributable Income in FY2019 was S$59.8 million, a decrease of S$3.6 million, or 5.7% as compared to FY2018. DPU for the full year was 5.523 cents, 6.4% lower than that for FY2018.
In 2019, we continued to successfully execute our proactive marketing and lease management efforts. Cache saw the expiry of several master leases since IPO, including Commodity Hub in April 2018 and Cache Gul LogisCentre (formerly Precise Two) in April 2019.
Despite a challenging operating environment such as a soft industrial demand backdrop in Singapore, Cache remains steadfast in its proactive asset management strategies and continued to make strides in its leasing momentum. Some of the initiatives undertaken included reaching out to end-users to secure early renewals and continued Asset Enhancement Initiatives (“AEIs”) to maintain the attractiveness and competitiveness of the portfolio. The success of our efforts is evidenced by way of the strong committed occupancy levels Cache continues to maintain each year, including closing at a strong 95.3% as at end 2019 amidst a challenging environment. Close to 1.5 million square feet of new and renewed leases were secured in FY2019, most of which were located in Singapore. Again, this is despite the soft industrial rental market in Singapore.
The achievements would not be as significant if not for the attractiveness and quality of the properties within the Cache portfolio. This is particularly the case bearing in mind the overall Singapore island-wide vacancy rate is approximately 12%.
Cache’s portfolio continues to be underpinned by a strong and diversified tenant base. Cache’s portfolio consists of good credit and well-established tenants/end-users. Tenants are largely multi-national third-party logistics service providers. The end-users serve diverse business sectors, from industrial and consumer goods to food and cold storage, materials, engineering, construction, healthcare and e-commerce.
The portfolio weighted average lease to expiry (“WALE”) by our net lettable area of the portfolio (“NLA”) was 3.0 years. The appraised value of Cache’s portfolio comprising of 27 investment properties was S$1,255.9 million as at 31 December 2019. The Singapore portfolio saw a lower year-on-year (“y-o-y”) valuation mainly due to the valuer’s assumptions pertaining to lower market rent, rental growth and taking in the shortening land lease tenure. Excluding the acquisition of 182 – 198 Maidstone, Altona, Victoria in April 2019, on a like-for-like basis, the valuation of Cache’s Australian portfolio increased by 2.6% y-o-y in Australian dollar terms, however ended up decreasing by approximately 1.0% in Singapore dollar terms due to a weaker Australian dollar.
PRUDENT AND PROACTIVE CAPITAL MANAGEMENT
While pursuing long-term sustainable growth by way of organic performance, the Manager remained disciplined and prudent in its capital management, striving to market volatility, diversify our funding sources and maintain a robust balance sheet.
As part of its proactive capital management strategy, the Manager constantly seeks opportunities to lower financing costs. In the year, the Manager took advantage of the lower interest rate environment to achieve cost savings where the average allin cost of financing during the year decreased from 3.87% in 1Q FY19 to 3.78% in 4Q FY19. All-in cost of financing for FY2019 was at 3.84%.
Meanwhile, aggregate leverage ratio stood at 40.1% as at 31 December 2019.
Of Cache’s total borrowings, 91% is currently unsecured and 91% of the portfolio is unencumbered, with the Singapore portfolio entirely unencumbered. The average debt to maturity stood at 3.3 years as at end-2019.
Cache continues to maintain a relatively strong hedging profile to mitigate the impact of interest rate volatility on its distributable income. As at end-2019, approximately 66.8% of Cache’s total borrowings were hedged into fixed rates. As for foreign exchange risk, Cache maintains a minimal exposure bearing in mind approximately 84.1% of Cache’s distributable income was hedged into or was derived in Singapore dollars at end-2019.
DEEPENING OUR PRESENCE AND INVESTING IN GROWTH
Since first embarking on acquisitions in Australia in 2015, we have steadily deepened our footprint within the country. In 2019, Cache continued the effort by completing the acquisition of 182 – 198 Maidstone Street, Altona, Victoria, Australia for A$41.2 million (S$39.7 million) in April, further extending Cache’s presence in Australia.
Cache has come a long way from only six Singapore properties at the time of the IPO portfolio to 27 properties across Singapore and Australia, having almost doubled the portfolio size in valueterms. As at end-2019, the Singapore properties constituted approximately 68% and Australia approximately 32% of the total value of Cache’s investment properties.
The new acquisition in Altona is further evidence of our efforts to rebalance and grow Cache over time where capital was recycled from divested properties into good quality, income-producing freehold assets in Australia to generate stable, long-term sustainable earnings for Unitholders. In the process, Management continues to prudently diversify Cache’s portfolio across geographies, tenant mix and lease tenure, providing Unitholders with more diversified and sustainable income streams.
COMMITMENT TO INTEGRATE SUSTAINABILITY IN CACHE’S BUSINESS
A strong environmental, social and governance (“ESG”) performance is integral to Cache’s business. This is not only a commitment to improving our energy savings, participating in community action or merely abiding by the latest corporate governance code. Cache made advances across the spectrum to further demonstrate our commitment and alignment with Cache Unitholders and all other stakeholders.
As an example of our sustainability efforts, in August 2019, Cache and Sembcorp Industries announced the successful implementation of a green energy campaign. The first phase of which involved installation and operation of an 8.0 megawattpeak rooftop solar farm across three of Cache’s warehouses in Singapore. The properties included in the initial programme included: Cache Commodity Hub, being one of Singapore’s largest rooftop solar facility to date, Pandan Logistics Hub and Cache DistriCentre 1. The total installation in the first phase is in excess of 21,000 panels which is expected to generate over 10,000 megawatt hours of green power annually - enough to power more than 2,000 four-room HDB flats in a single year. This will avoid over four million kilogrammes of carbon dioxide emissions a year, equivalent to taking almost 900 cars off the road or planting more than 50,000 trees.
This completion marks a significant milestone for Cache in our green initiatives and pursuit to grow our business sustainably. Cache remains committed to reducing our environmental impact through the responsible consumption of energy in our operations.
UPHOLDING GOOD CORPORATE GOVERNANCE AND SOCIAL PRACTICES
The Manager views social responsibility as integral to our corporate culture. We are committed to actively and regularly engaging staff in volunteering initiatives to create a positive impact in our community as well as contribute to the common good.
We are also committed to the high standards of corporate governance and transparency in the business and operations of the Manager, Cache and its respective subsidiaries so as to protect the interest of and enhance the long-term value of Unitholders’ investments in Cache.
Meanwhile, more details on Cache’s sustainability will be available in the sustainability report which will be published online during the year.
ARA’S NEW LOGISTICS PLATFORM
On 5 March 2020, ARA announced the completion of ARA’s acquisition of a majority stake in LOGOS, one of the leading logistics real estate specialist in Asia-Pacific. LOGOS is now part of ARA’s newly established global logistics platform. This platform was created to ride on the wave of the increasing reliance on the logistics market, which is underpinned by growth factors such as the vastly expanding e-commerce industry.
This new strategic venture combines ARA’s fund management capabilities with LOGOS’ extensive logistics property and development expertise to create a best-in-class logistics real estate platform. ARA will also continue to retain control of the Manager of Cache through its interest in LOGOS.
The combined scale of ARA and LOGOS, and with LOGOS operating as ARA’s global logistics real estate platform, will further springboard Cache’s position for growth as a leading logistics solutions provider within Asia Pacific.
The Manager is mindful of and will continue to closely monitor the evolving COVID-19 situation. Additional measures have also been undertaken in accordance with the relevant health authority’s guidelines as the safety and well-being of our stakeholders are of the utmost importance.
With factors such as the COVID-19 virus outbreak and slow global economic growth weighing in, a muted global outlook is expected ahead.
MTI has downgraded the GDP growth forecast for 2020 to “-0.5 to 1.5 per cent”, with growth expected to come in at around 0.5%, the mid-point of the forecast range. A modest pickup in global growth, along with a recovery in the global electronics cycle is expected to be seen in 2020. However, the COVID-19 outbreak is likely to soften growth prospects of China and other affected countries especially in Asia this year. The Australia economy is forecasted to see an improvement in GDP growth in 2020 and 2021, underpinned by a turnaround in mining investment and low interest rates that will benefit the housing market and household spending. Negative nearterm economic effects of the bushfires and the impact of COVID-19 on aggregate activity is likely to continue to put pressure on production and exports for a while.
Looking ahead, the Manager will continue its proactive asset management and prudent capital management to maintain high occupancy, and identify value-adding acquisition opportunities and assess selective development projects to optimise portfolio returns.
As announced on 5 March 2020, Mr Stephen Hawkins, Managing Director of LOGOS South East Asia Business, has been appointed as Non-Executive Director of the Board with effect from 5 March 2020. The Board welcomes Mr Hawkins and looks forward to working closely with him to propel Cache forward to greater heights.
We would like to express our sincere appreciation to the Board of Directors for their active participation in deliberations, their wise counsel and guidance. We would also like to thank the management team for their hard work and dedication. Finally, we would like to express our gratitude to Unitholders, tenants, end-users, the investment community at large as well as our business associates for their continued support. We look forward to an exciting journey ahead of opportunities and growth.
Lim How Teck
Chief Executive Officer
- IMF, World Economic Outlook Update, January 2020.
- Ministry of Trade and Industry (“MTI”), Press Release, “MTI Downgrades 2020 GDP Growth Forecast to “-0.5 to 1.5 Per Cent”, 17 February 2020.
- The Straits Times, Manufacturing shows signs of recovery, 4 January 2020.
- Deloitte Access Economics Business Outlook. 20 January 2020.
- Reserve Bank of Australia, Key Economic Indicators Snapshot, 4 March 2020.