Why would a Japanese property developer want to list a REIT on the local bourse?
Those interested in Logistic & Industrial REITs would have likely considered the IPO of Daiwa House Logistics Trust. Boasting a marvelous yield of 6.5% and a exceptionally long WALE of 7.2 years, the REIT seems like a promising counter especially for dividend investors.
Furthermore, the sponsor is a major developer with extensive experience in asset and fund management and growth. With Rights Of First Refusal (ROFR) granted to DHLU, we can see a clear pipeline for growth in the future.
However the REIT does have some shortcomings which we’ve identified while scrutinizing it’s prospectus. Potential investors should watch out for these factors in it’s upcoming financial reports before they become a major issue.
Daiwa House Logistics Trust or DHLU, is a Japan-based Logistics REIT with 14 properties in it’s IPO portfolio. It’s considered relatively small with a total Net Leasable Area of 423,920 square metres, and a market cap of about S$550m.
We know it’s properties cater mainly to a mix of 3rd party logistics, and E-commerce players. These entities make up 79% of it’s current tenant ratio. In addition, it has a equal mix of freehold and leasehold properties in it’s portfolio.
The portfolio was also acquired at a 11.8% discount to it’s appraised value. This translates into a future revaluation gain at the end of the year for it’s balance sheet. Investors can also expect the leverage ratio of the REIT to drop to a low 33.1%, once the refund for the consumption tax loan is returned in Q2 2022.
Daiwa House is a well-known developer in Japan, and has been managing their main Japan REIT, the Daiwa House REIT. This is a mega REIT with close to 230 properties across Japan.
Apart from properties in Japan, they also have a pipeline of logistics properties across Indonesia, Vietnam, and Malaysia which can be injected into the REIT in the future.
When we surveyed the performance of the Flagship Japan listed REIT we realized that while operating revenue & income has been growing, DPU & NAV per unit has been static for some time.
It’s likely that both organic & inorganic growth is facing more resistance due to the size of it’s portfolio. This could be one of the reasons why the sponsor decided to list in Singapore instead, to tap into local demand for logistic REITs.
I can only guess as to why they did not choose to list their SEA assets instead. Being a cynic, one possible reason could be that the sponsor knows that those assets are not attractive enough at the moment. Either that or those assets are still very attractive and meant for private funds.
Furthermore, the ROFR for DHLU for it’s Japan properties is subjected to a pre-existing right of first refusal granted by the Sponsor in favour of Daiwa House REIT, as well as a pre-existing commitment from the Sponsor to support two of its private real estate funds.
Moving forward, one can clearly see some conflicting interest between how high quality Japanese properties are to be allocated into both REITs and private funds. In the very worst case, Singaporean investors could be left picking the scraps.
“Long” WALE & Dividend Yield
Others might be attracted to the long WALE of 7.2 years and also the 6.5% dividend yield. While these metrics definitely look impressive, we decided to dig a bit deeper to see how it adds up.
It’s true that some of their properties have extremely long WALEs, but there are also a few that are contracted on shorter term WALEs.
Of note are the first two properties which have relatively short WALEs but constitute a combined 21.7% of the REIT’s net income. What’s more, the first property has a occupancy of 83.8%, compared to the second which has a occupancy of 100%.
There’s also the flagship property which has a WALE of 11.8 years, and net income of S$16m, nearly 22% of total income. This is DPL Kawasaki Yako, the one displayed on the first page of the prospectus.
It turns out that there’s quite a large deviation of WALEs within it’s portfolio. This is something investors need to recognize and watch out for in the future.
Should We Still Invest
For what it’s worth, the REIT still has the opportunity to shine despite it’s flaws. This is due to long term trends of demand for modern logistic facilities and a Management fee structure based on distributable income and DPU growth.
In addition, the sponsor plans to pursue opportunities more aggressively in logistic assets in SEA. If so, investors can expect to see more potential logistic gems being added into the REIT. DHLU’s current NAV is also relatively decent as compared to other logistics REITs.
As a due diligence we should continue to monitor the REIT’s developments, and also scrutinize it’s income growth and acquisitions. A necessary task, less we get caught off-guard by sudden WALE reductions or lower dividend yields.