Yahoo Finance New REIT IPO Daiwa House Logistics Trust Offers a 6.5% Dividend Yield: Is It Sustainable?
It’s been a long wait, but Singapore is finally having its first REIT IPO this year.
Daiwa House Logistics Trust (DHLT) is offering 244.4 million shares at S$0.80 apiece to raise a total of S$575.5 million.
This IPO is a welcome move for Singapore Exchange Limited (SGX: S68) which has seen a dearth of listings this year as market sentiment remained weak.
The previously-touted UK commercial properties REIT by City Developments Limited (SGX: C09) has been pushed to early next year pending market conditions.
And Temasek-owned Mapletree Investments was also floating the idea of a REIT comprising student accommodation assets back in April, but there was no further news on this.
In this context, the new DHLT IPO is a welcome relief.
Income-focused investors now have yet another option when this new REIT debuts this week on the local bourse.
Here are five aspects you should know about this IPO and the sustainability of its projected distribution per unit (DPU) yield.
1. A Japan-focused logistics portfolio
DHLT’s initial portfolio comprises 14 logistics properties valued at S$952.9 million as of 30 June 2021.
Interestingly, the REIT will purchase these properties at an 11.8% discount to this appraised value, thus forking out just S$840.5 million.
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.
Around three-quarters of the portfolio is multi-tenanted while the remainder consists of build-to-suit facilities.
The total net lettable area (NLA) is around 424,000 square metres, and close to 80% of this NLA is occupied by reputable third-party logistics (3PL) and e-commerce players.
The top five tenants by net property income contribution for the fiscal year 2020 included Mitsubishi Shokuhin (TYO: 7451), Suntory Logistics, a unit of Suntory Beverages (TYO: 2587) and Nippon Express (TYO: 9062).
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, demonstrating their resilience in maintaining the REIT’s rental income flow.
As far as the portfolio goes, it is fairly well diversified and backed by a solid set of tenants.
2. A reputable developer
The sponsor of DHLT, Daiwa House Industry (TYO: 1925), is one of the largest construction and real estate companies in Japan with a market capitalisation of around S$29.5 billion as of 30 September 2021.
The real estate and construction firm was founded in 1955 and has a track record of developing 1.9 million residential units while completing close to 54,900 commercial projects as of 31 March 2021.
Daiwa House Asset Management, a wholly owned subsidiary of Daiwa House Industry, is an experienced REIT manager and established Tokyo-listed Daiwa House REIT (TYO: 8984) back in 2004 with assets under management (AUM) of around S$11 billion.
The asset management outfit also established two unlisted REITs in 2014 and runs multiple private funds with a total AUM of S$8.6 billion.
3. A healthy pipeline of assets
As Daiwa House is a major development of properties, it naturally has a ready pipeline of assets in Southeast Asia and Japan with which to inject into the REIT.
This fact is important for REIT investors who are looking at the potential growth of both the asset base of the REIT as well as future increases in distribution per unit (DPU).
A right-of-first-refusal (ROFR) has been granted to DHLT over this pipeline, 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 eventually 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.
4. Leverage starts high but should decline
DHLT’s aggregate leverage immediately post-listing is around 43.8%, which is fairly high considering the gearing ceiling set by Singapore’s central bank is at 50%.
However, two events should potentially lower this gearing level to a more palatable one.
First off, the REIT is targeting to pay off a consumption tax loan when the Japan National Tax Agency refunds consumption tax to the REIT by the second quarter of 2022.
Secondly, with the portfolio properties being acquired at a discount to their appraised value, there’s also room for upward revaluation come end-2021 that will increase the REIT’s asset value.
Both these events should reduce the REIT’s aggregate leverage down to 33.1%.
Also, the REIT’s interest coverage ratio is projected to remain healthy at 10.3 times for next year.
5. An attractive yield
DHLT is targeting a 6.5% distribution yield for its projection year 2022.
This is an attractive yield that’s anchored by logistics properties that remain high in demand along with a reputable sponsor.
To be sure, around 48.3% of its net lettable area (NLA) is leasehold where 7.8% has less than a 20 years lease, and another 7.4% with between 20 years and 40 years lease.
Distribution yields for leasehold properties tend to be higher as a result.
Get Smart: A stable REIT with strong attributes
It’s a breath of fresh air for REIT investors to know that another REIT is coming to market soon.
As a whole, DHLT’s assets are seeing strong demand for its logistics real estate because of the proliferation of 3PL and e-commerce.
The market size for 3PL and e-commerce sales has tripled and quadrupled in the last 13 years, respectively.
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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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
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