11 things to know about Daiwa House Logistics Trust that just got listed on the SGX

Here are eleven things you should know about the latest REIT, Daiwa House Logistics Trust, that just listed on the Singapore stock exchange.

Invested primarily in logistics and industrial real estate in Asia

Daiwa House Logistics Trust will be primarily investing in logistics and industrial real estate assets in Asia. There are already a number of REITs  on the SGX focused on this asset class, meaning the space is relatively crowded. Those REITs are ARA Logos logistics, EC World REIT, ESR REIT, Frasers Logistics and Commercial Trust, Mapletree Industrial, Mapletree Logistics and Sabana REIT. 

Portfolio details

The REIT will own 14 properties, with the majority (by net lettable area) in Greater Tokyo (39%), Hokkaido and Tohoku (37.2%), Chugoku and Kyushu (12%) and Greater Nagoy (11.8%).

At a portfolio valuation of S$952.9m upon IPO, Daiwa House Logistics Trust will be on the smaller end compared to it's competitors.

Daiwa house reit portfolio details

Pipeline of properties

The REIT has a pipeline of properties across Southeast Asia, so they are not just targeting Japanese properties.

The pipeline includes industrial and logistics assets in Indonesia, Vietnam and Malaysia.

Tenant base

The tenants in the REIT are mainly 3rd party logistics (3PL) and e-commerce tenants, which is a good sign considering the upsurge in e-commerce and online buying activity by consumers ever since the COVID-19 pandemic began.

Daiwa house logistics tenant concentration

The REIT holds a majority of assets that are freehold, ensuring that there will be little value destruction from other REITs that hold properties that are leasehold in nature. 

Mapletree industrial and ESR REIT for example hold leasehold properties so that could be a problem over time if the leases are not renewed or newer assets injected into the portfolio.

Daiwa house logistics REIT freehold leasehold breakdown

Most assets are young in age

92.2% of Daiwa House Logistics Trust assets are younger than 5 years old which is a plus point as they are newer and of higher specification that is probably still relevant to tenants.

One thing to note is that because requirements are changing so fast in the industry, young assets (in terms of when they were built) can become obsolete because tenants require mechanization or newer features added to the property.

Nevertheless, the age of the portfolio is positive for the REIT.

92% Daiwa house REIT property age less than 5 years

Balanced lease expiry for the portfolio

There are 2 types of assets in the portfolio - multi-tenanted assets where one property has many tenants in there, and another which is Built-to-Suit (BTS) mainly occupied by one tenant.

For multi-tenanted assets, the lease expiry profile is pretty normal, with an even split of expiries over the next 5 years (except FY2025). Having an even split of expiries allows renewal of the tenant base and the REIT to charge higher rents for newer tenants. This is positive for the REIT and unitholders.

However, if the market is in a tenant's favour when the leases expire, the REIT may suffer as they need to charge lower rentals to secure the tenants.

daiwa house logistics trust lease expiry profile by NLA

Balancing out the lease expiry of multi-tenanted assets in the REIT are BTS properties. There have been constructed specifically to one tenant's specifications and requirements, so the leases are usually for a very long term. In this case, there will be no expiries of tenants in BTS properties except in FY2024 and FY2026 (no disclosure as to what date that is).

This would mean stable income for the REIT from this group of tenants.

Daiwa House Logistics Trust lease expiry by NLA for BTS assets

Attractive yield and yield spreads

The REIT is expected to yield 6.5% in FY22, which is approximately in line with other logistics REITs trading on the SGX. 

Note that a high yield is not always representative of a good investment. For example, Mapletree Industrial and Mapletree Logistics REITs are yielding 5.0% and 4.5% respectively, as they are more stable, blue-chip and favoured by investors.

Nevertheless when looking at the spread the REIT has against 10 year Japanese government bond yields, the difference is very attractive. daiwa house logistics reit yield and spread

The spread of 4.8% to 10 year Singapore bond yields of about 1.7% is not as high, but would be a more relevant measure for Singapore based investors.

Gearing at the higher end during IPO

One thing that is not so attractive for this REIT is the gearing which is at the higher end of peer range upon IPO. At 39.2%, it is only just slightly below the psychological 40% mark that investors look at.

While the REIT's managers said the gearing will be reduced to 33.1% after the Consumption Tax Loan is paid by the Japan National Tax Agency at the end of 2Q2022, that is something in the future which is not confirmed yet. This is one point of risk to take note if the REIT does not receive the money, then the future growth potential will be somewhat curtailed.

daiwa house logistics reit leaverage and gearing

Green certified properties

The prospectus notes that 10 out of 14 properties in the IPO portfolio are installed with solar power panels on the roof tops, making it "green".

Additionally 95.7% of the portfolio by net lettable area have the DBJ Green Building Certification.

However I have a different take which is - installing solar panels do not necessarily make properties "green", nor does getting green certification. There needs to be much more done, but this is a good first step.

The litmus test on whether having green features or certifications is helping the REIT would be to quantitatively ascertain how much of the green features contribute to cost savings or higher revenue. 

Looking further into the prospectus show that 65.7% of net lettable area of the portfolio have a star rating of 3, 3.5% have a star rating of 2 and 26.5% have a star rating of 1. This is pretty normal considering that the highest star rating is 5, meaning that most of the REITs portfolio falls between satisfactory to highly superior, but not at the highest-end.

daiwa house logistics reit green certification

Minimal foreign exchange risk

I would not see foreign exchange risk as material for investors into this REIT, considering that there are many other SGX listed REITs that have non-Singapore properties in their portfolio.

Most REIT managers are savvy enough to hedge their liabilities, values and distributions to ensure there is stability in the payout to individual investors.

Furthermore, the CFO of Daiwa House Logistics Trust was previously from CapitaLand Commercial Trust, so she will have extensive experience managing forex risks.

Invest in Daiwa Logistics House Trust or not?

I would rate an investment in Daiwa Logistics House Trust as 3 stars upon 5, as neither too hot nor cold.

I would prefer to stay by the sidelines and watch how the price action plays out over the next few days

One of the negative points I have in mind is the high level of gearing and potential uncertainty on whether it will be reduced.

As of this writing, stock markets are taking a downturn because of the new Omricon virus variant, and that would suggest some weakness for the REITs prices in the near future based purely on stock market sentiment.

On the other hand, some of the positive points are it being the first Japan focused industrial/logistics REIT on the SGX (meaning more investors might want to buy it for exposure to Japan, pushing up its price, albeit to a certain point), tenants being in the 3PL/e-commerce sector and relatively stable lease expiry profile.

 

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