High Dividend Yield Battle: Daiwa House Logistics Trust Vs OUE Commercial REIT

Income investors in Singapore are a lucky bunch.

The local stock exchange has a wide variety of REITs and business trusts on offer that dole out dependable distributions to investors.

That said, it is important to pick and choose the right REIT that is not only in a growing sector but also has a good sponsor and track record.

There are five main REIT sub-segments – retail, healthcare, commercial, industrial, and hospitality.

Daiwa House Logistics Trust (SGX: DHLU), or DHLT, is a Japan-focused industrial REIT that owns a portfolio of modern logistics properties in the land of the rising sun.

OUE Commercial REIT (SGX: TS0U), or OUECR, on the other hand, owns a portfolio of commercial, retail, and hospitality assets in both Singapore and Shanghai.

We compare these two REITs in different sub-segments to see which makes the more attractive investment.

Portfolio composition

We start by looking at the portfolio composition for each of the REITs.

DHLT has a total of 16 logistics properties located in various regions of Japan such as Nagoya, Tokyo, Hokkaido, and Kyushu.

OUECR, on the other hand, owns six properties in Singapore and one in Shanghai, China.

The Singapore properties include commercial assets such as OUE Bayfront and One Raffles Place along with hospitality properties such as Hilton Singapore Orchard.

Its China asset is Lippo Plaza, a Grade A commercial building.

OUECR has a more diversified portfolio as its properties span retail, commercial, and hospitality.

They also cover two countries (versus just one for DHLT) and the portfolio value of S$6 billion is more than six times the value of DHLT’s portfolio.

Winner: OUECR

Financials

Moving on to each REIT’s latest fiscal 2023’s first half (1H 2023) financials.

DHLT saw both gross revenue and net property income (NPI) rise year-on-year in Japanese Yen (JPY) terms with contributions flowing in from acquisitions conducted in December 2022.

However, the weakness of the JPY against the Singapore dollar resulted in a year-on-year decline in gross revenue and NPI.

The bright spot was that distribution per unit (DPU) still managed to inch up slightly by 0.4% year on year.

As for OUECR, it was the opposite situation.

Both revenue and NPI grew year-on-year as Singapore’s tourism sector experienced a strong rebound.

However, DPU slipped by 2.8% year on year because of higher finance costs and the absence of income support for one of its properties – OUE Downtown Office.

Winner: DHLT

Debt metrics

Turning to each REIT’s debt metrics, DHLT sports an advantage with its properties located in Japan.

With all its borrowings denominated in JPY, the logistics REIT enjoys a very low cost of debt of just 0.99%.

In contrast, OUECR’s cost of debt is more than four times higher at 4.1%.

DHLT also boasts a much higher interest coverage ratio of 11.7 times compared with OUECR’s 2.4 times.

In addition, all of DHLT’s loans are pegged to fixed rates, insulating the REIT from further increases in finance costs should global interest rates rise further.

Winner: DHLT

Operating metrics

Both DHLT and OUECR sport high occupancy rates.

For OUECR, the REIT has broken down its committed occupancy rates based on the different types of properties it owns.

Its Singapore office portfolio has a committed occupancy of 96.1% while retail asset Mandarin Gallery’s committed occupancy stood at a high 98%.

However, for Shanghai’s Lippo Tower, the office component’s committed occupancy came in at 86.6% while the retail component sported a committed occupancy of 94.4%.

DHLT’s weighted average lease expiry (WALE) by gross rental income, at 6.6 years, was also more than double of OUECR’s 3.1 years.

Winner: DHLT

Distribution yield

Finally, we look at arguably the most important aspect of each REIT – its distribution yield.

DHLT is slightly ahead of OUECR as its distribution yield stood at 9% versus 8.7% for the commercial cum hospitality REIT.

Winner: DHLT

Get Smart: A peek into the future

If we total up the points, DHLT looks like a clear winner as it has stronger debt metrics, a better distribution yield, and has grown its DPU year on year.

However, investors should also consider other factors in deciding on which REIT to select.

One important aspect is to review each REIT’s growth plans.

DHLT has been granted a right of first refusal by its sponsor Daiwa House Industry Co Ltd (TYO: 1925) over a pipeline of income-producing logistics and industrial assets.

Apart from this pipeline, DHLT can also acquire properties from third parties.

For OUECR, it will rely on asset enhancement initiatives to create value and boost its portfolio’s returns.

The REIT is also eyeing potential acquisition opportunities in cities within countries such as Japan, Australia, and the UK.

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Disclosure: Royston Yang does not own shares in any of the companies mentioned.

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