Is the New Daiwa House Logistics Trust a Buy?

Japan’s retail e-commerce market has grown fourfold since 2006, and reached JPY20 trillion in 2019. 

Demand for e-commerce has spurred third-party logistics players (3PL) to hit JPY18 trillion in 2018. 

It’s a booming market.

Today, Japan is the fourth biggest e-commerce market in the world — behind China, the U.S. and the UK. I’m not surprised. More and more consumers are shopping online than ever before.

That’s why many logistics landlords in Japan are turning their older warehouses to meet the new demands of modern logistics functions.

Even Singapore REITs are venturing into 3PL. But I’m not talking about our current Singapore REITs.

Daiwa House Logistics Trust (SGX:DHLU) is a new Singapore REIT IPO.

An IPO (initial public offering) allows a company to raise money from the public. Companies take this money to grow their business. 

I don’t like IPOs, because most of the time, the price at which companies sell their shares in to investors in IPO are expensive. That makes IPO a lousy investment.

Is Daiwa House Logistics Trust (DHLT) one of those lousy IPOs? 

Let’s take a look.

DHLT has 14 high quality modern logistics properties in Japan. These properties are worth at least S$952 million with over 423,000 sqm of leasing space.

The IPO was launched a few days back and shares are now trading at S$0.81 per unit.

Now, what struck me is this Singapore REIT’s…

High 6.5% Distribution Yield

DHLT’s 14 properties are projected to produce S$35.2 million of distributable income next year. And it will pay out all these income as dividends. At its IPO shares of S$0.80 per unit, that’s a 6.5% distribution yield in 2022.

Distributable income is rental income minus all operating expenses. It’s what’s left for shareholders. 

Distributable income is a good estimate for dividends paid out. Because a REIT has to pay out at least 90% of distributable income as dividends (to avoid paying more taxes).

Source: Daiwa House Logistics Trust prospectus

Here’s the thing: DHLT’s properties are still very new, barely passed 4 years old. Yet, their properties are already 96% occupied — with high-quality tenants — that on average have locked in a long-term lease of around 7 years.

Big tenants include Suntory Logistics, Mitsubishi Shokuhin, Nippo Express etc. These top 10 tenants contribute more than 70% of DHLT’s rental income.

Source: Daiwa House Logistics Trust prospectus

That’s some huge demand for modern logistics facilities in Japan. More importantly, this gives DHLT’s distribution yield much stability.

A closer look into this new IPO — DHLT has no income support from its sponsor.

Income support means at IPO, a sponsor will guarantee a fixed amount of rent income to the REIT for the first few years. Sometimes, a REIT gets income support because it has yet to hit full occupancy. And wants to maintain a high distribution yield to attract investors.

DHLT has none of that.

Low Gearing Gives More Room for Firepower

Despite its high 6.5% distribution yield, DHLT doesn’t look indebted after the IPO. 

You see, once DHLT collects all the IPO money, it takes the cash raised from investors to pay off a huge debt called the “Consumption Tax Rebate”. This lower gearing ratio from 43.8% to 36.9% (see below), which gives DHLT more firepower to grow its assets and distributable income.

Gearing ratio is simply taking the total debt divided by total assets. MAS limits all Singapore REIT to a cap of 50% gearing ratio to prevent Singapore REITs from overborrowing.  Singapore REITs, on average, have around 40% gearing ratio.

Source: Daiwa House Logistics Trust prospectus

Don’t forget: it’s much safer to use debt on high-quality properties. And what’s more crucial to DHLT is that borrowing money in Japan is cheap. 

That’s why DHLT saves up a lot on its borrowing costs.

Next year, DHLT only needs to pay a yearly interest of S$9.3 million. Its rental income covers this entire amount by more than 6x. That’s much higher than the average Singapore REIT.

This also means, even at a high distribution yield, DHLT can borrow more to grow its properties, without incurring a huge repayment risk.

And this is exactly what it plans to do in the future.

This brings me to my next point…

The Power of a Strong Sponsor

Daiwa House Industry is one of the biggest property developer and construction player in Japan. It’s listed on the Tokyo Stock Exchange with a market cap of S$30 billion. This major developer was founded in 1955 and has a strong record of completing 1.9 million housing units and 54,900 commercial facilities.

And Daiwa House Industry is the sponsor for DHLT. 

As a sponsor, Daiwa House Industry supports the REIT’s growth by injecting more properties into DHLT. You see, Daiwa House Industry plans to grow DHLT’s assets from 14 properties to 42 properties. That’s provides massive visibility to DHLT’s growth.

Source: Daiwa House Logistics Trust prospectus

So far, DHLT isn’t overpaying to buy over Daiwa House Industry’s properties. All 14 properties were bought at a modest valuation of 1x P/B ratio. Not too cheap, not too expensive.

Compared to other logistics REIT in Singapore, DHLT trades at a much higher yield than other Singapore logistics REIT.

What I like is that its rental cash flow is resilient during the COVID pandemic. None of its tenants have requested for rental reliefs during the pandemic.

If you ask me, DHLT is a worth a buy if you like to diversify away from retail and office REITs, whose rents are prone to the pandemic.

Sometimes investing can be simple.

Willie Keng, CFA

Founder, Dividend Titan

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