Daiwa House Logistics Trust (DHLT) is Singapore’s first REIT initial public offering (IPO) this year.
Here are five things that investors should know about this IPO before you invest.
1. A Japan focused logistics properties portfolio
DHLT’s initial portfolio comprises 14 logistics properties valued at approximately JPY80,570.0 million or S$952.9 million as of 30 June 2021. That said, the REIT will purchase these properties at an 11.8% discount to its appraised value, thus forking out just S$840.5 million.
The REIT has an aggregate net lettable area (NLA) of approximately 423,920 square metres, spread across Greater Tokyo (39.0%), Hokkaido and Tohoku (37.2%), Greater Nagoya (11.8%) and Chugoku & Kyushu (12.0%).
The REIT’s properties are closely interlinked with transportation and shipping networks. As at 1 October 2011, 79% of the REIT’s tenants comprise third-party logistics (3PL) and e-commerce players.
The occupancy rate as of 1 October 2021 stood at 96.3%, and the properties have a long weighted average lease expiry (WALE) of 7.2 years.
The REIT’s top five tenants contributed 49.1% of REIT’s net property income for the fiscal year 2020. These include Mitsubishi Shokuhin Co., Ltd, Suntory Logistics Ltd, Nippon Express Co., Ltd and Nitori Co., Ltd.
(Source: IPO prospectus)
Despite the high tenant concentration, the good news is that none of the tenants in the initial portfolio has requested any rental relief or abatement throughout the Covid-19 pandemic. This shows the REIT’s resilience in maintaining the rental income flow.
2. A strong developer sponsor
The Sponsor of DHLT, Daiwa House Industry (TYO:1925), is one of the largest construction and real estate companies in Japan. It is listed on the Tokyo Stock Exchange (TSE) with a market capitalization of around S$29.5 billion as of 30 September 2021.
Founded in 1955, the Sponsor has an extensive track record of developing 1.9 million residential units and completed around 54,900 commercial facility projects as at 31 March 2021.
In addition to its primary operations in Japan, the Sponsor is actively involved in other markets including ASEAN, East Asia, the U.S., Europe and Australia.
The Sponsor is also experienced in both asset and fund management. It is currently managing real estate funds with aggregate asset under management (AUM) of JPY1,655.1 billion or S$19.6 billion as at 30 September 2021, which includes TSE-listed Daiwa House REIT Investment Corporation (TYO: 8984) and two unlisted REITs as well as private funds.
3. Visible growth trajectory
DHLT stands to benefit from the Sponsor’s capabilities as one of the largest construction and real estate development companies in Japan.
The Sponsor has granted a right-of-first-refusal (ROFR) to DHLT over its pipeline of assets in Southeast Asia and Japan, which includes both completed properties and those under development.
There are 11 completed properties and 17 under development under the ROFR, making up a total of 28 properties.
When injected into DHLT, it will triple the size of its current portfolio to 42 properties with 1.5 million square metres of gross floor area.
(Source: IPO prospectus)
4. Conservative capital structure
DHLT’s aggregate leverage immediately post-listing is around 43.8%, which seems high considering the gearing ceiling set by Singapore’s central bank is at 50%. However, this gearing level may be lowered to a more conservative level following the two events below.
Firstly, the REIT is targeting to pay off a consumption tax loan when the refund of the proceeds of the consumption tax is received from the Japan National Tax Agency by the end of the second quarter of 2022.
Secondly, with the portfolio properties being acquired at a discount to their appraised value, there is also room for upward revaluation of the REIT’s asset value at the end of the year in 2021.
Both these events should reduce the REIT’s aggregate leverage down to 33.1%. Furthermore, the REIT’s interest coverage ratio is projected to remain healthy at 10.3 times for 2022.
A lower gearing ratio will provide Daiwa House Logistics Trust with the debt headroom for future acquisitions from its Sponsor.
5. Attractive distribution yields for unitholders
DHLT is targeting a 6.5% distribution yield for its projection year 2022. It intends to make distributions on a semi-annual basis.
This is an attractive yield and represents an attractive spread of 645 basis points (bps) compared to the 10-year Japan government bond yield of 0.05%.
DHLT’s assets are seeing strong demand for its logistics real estate because of the proliferation of 3PL and e-commerce. Based on its IPO prospectus, the market size for 3PL and e-commerce sales in Japan has tripled and quadrupled in the last 13 years, respectively.
With these tailwinds, investors should rest assured that the 6.5% distribution yield is sustainable and could even head higher should the REIT engage in yield-accretive acquisitions once listed.
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