Raising monies from investors are Daiwa House Logistics Trust (DHLT), Mapletree Logistics Trust (MLT) and Digital Core REIT (DCR). On Nov 22, DCR lodged its preliminary prospectus. On Nov 23, MLT announced the proposed acquisition comprising 17 properties for $1.4 billion including expenses. In the meantime, DHLT’s IPO offer closed on Nov 24.
Of course, REITs with wellknown sponsors are likely to command a premium with a lower cost of capital. Hence it will be interesting to see how DHLT debuts.
EC World REIT, which has port logistic and warehouse logistic assets in China in cities such as Hangzhou and Wuhan, is trading at around DPU yields of 8%. This is because 67% of the properties by gross rental income are master leased to the sponsor and its related parties. Hence, there is a discount for lack of transparency and a relatively unknown sponsor.
MLT’s manager announced the proposed acquisition of a portfolio of 16 logistics properties from sponsor Mapletree and a property in Japan from a third party. These comprised 13 properties located in China and three in Vietnam. The Chinese properties are priced at $870 million and the three Vietnamese properties will cost US$95.9 million ($131.03 million). The Japanese property is the most expensive at $416.3 million. The 16 properties from the sponsor are subject to unitholders’ approval in an EGM that has yet to be held.
Seven of the logistics properties in China are newly completed and still undergoing stabilisation. Thus, they operate below current market levels in terms of in-place rents and occupancy rates, according to Knight Frank’s and Beijing Colliers’ opinion letters dated Oct 31. As a result, sponsor Mapletree will provide income support of RMB20.9 million ($4.4 million) over the 12 months after the completion of the acquisition to ensure that the logistics properties in China provide net property income (NPI) of RMB196.5 million, the announcement adds.
Based on this income support, the blended NPI yield of the Chinese and Vietnamese properties is 5.1%. Analysts estimate that the Chinese properties are being acquired at around NPI yields of 4.7% assuming the Vietnamese properties are being acquired at 6% to 7%.
MLT says the Chinese properties are located in key logistics hubs and in close proximity to large population catchments. The acquisitions will deepen MLT’s presence in China, adding three new provinces to its geographical coverage and expanding its network to 43 assets in 29 cities. The enlarged portfolio allows MLT to offer tenants a multi-city network of warehouse facilities.
Greater Nagoya
MLT is acquiring a Japanese property in Greater Nagoya at an NPI yield of 4% based on 100% occupancy and a valuation of $416.3 million. The property’s current occupancy is 82.5% with a weighted average lease expiry (WALE) by NLA of 1.7 years. Analysts point out that this implies MLT is acquiring the property at an NPI yield of around 3.3% to 3.5%.
For its part, MLT sees the relatively low occupancy rate as a potential to raise NPI by leasing out the unleased space. In addition, the acquisition expands MLT’s presence with a third property in Greater Nagoya. The acquisition will deepen MLT’s network connectivity in Japan and complement its existing platform of 18 logistics facilities. Of course, Greater Nagoya is a logistics hub serving other major metropolitan areas in Japan such as Osaka and Tokyo.
Interestingly, DHLT has two logistics properties in Greater Nagoya. Based on the valuations at which DHLT plans to acquire these properties as reported in its 900-page prospectus and the reported NPI in FY2020, the properties are being acquired by DHLT at an NPI yield of 6.8%.
A major differentiation in favour of MLT of course is that its Greater Nagoya property is freehold while the smaller DHLT properties are of leasehold with land tenure expiring in 2065.
The DHLT properties are fairly new, with the multi-tenanted leasehold property, known as DPL Shinfuji, built in 2017. Shinfuji is 100% occupied as is D Kakegawa S, DHLT’s freehold logistics asset in Greater Nagoya.
Kakegawa is a build-to-suit (BTS) property, which was completed in 2019. It has a WALE of 12.8 years while Shinfuji’s WALE is 9.7 years.
Unlike MLT, DHLT has only 14 properties in its IPO portfolio compared to MLT’s 18 in Japan. However, DHLT’s sponsor, Daiwa House Industry Co (Daiwa House), is a large developer of logistics assets in Japan and Asia.
DHLT’s IPO portfolio
The initial portfolio of DHLT of 14 logistics properties in Japan will have a net lettable area (NLA) of 423,920 sq m and a total land area of approximately 420,393 sq m. Of the NLA of 423,920 sq m 39% is in Greater Tokyo, 37.2% in Hokkaido & Tohoku, 11.8% in Greater Nagoya, and 12% Chugoku & Kyushu.
Of the IPO properties, six are freehold, and eight are leasehold with average land tenure of 38.3 years. In terms of NLA, 48.3% is freehold and 51.7% leasehold.
The IPO portfolio has 26 tenants. The WALE of the single-tenanted BTS properties are 11.2 years and the WALE of multi-tenanted properties is 5.9 years, giving an average WALE of 7.2 years for the portfolio based on NLA. Multi-tenanted properties account for 75.2% of NLA, and BTS tenants account for 24.8%.
“Our in-place rent is within the range [of market rents] provided by the market report agent and similar to market rents for BTS assets. The tenant leasing contract [for BTS] tends to be longer so they don’t have automatic rent escalation and their rents may deviate from market rents,” explains Takeshi Fujita, CEO of DHLT’s manager.
Daiwa House is also sponsor to Daiwa REIT, listed on the Tokyo Stock Exchange. “Daiwa REIT is trading at a yield of mid-3%. We are aiming at mid-6% with Japanese properties,” Fujita says. “We believe metropolitan Tokyo is not the only destination. Logistics facilities in regional markets serve important distribution hubs. We believe these regional markets are highly attractive and overlooked. We can enjoy higher yields with these markets,” he adds.
In addition to having the logistics assets in regional markets, its leasehold assets have higher NPI yields than freehold assets. The blended net property income yield (based on FY2020) is likely to be 6.5% based on the IPO purchase price of $840.5 million, and 5.7% based on the appraised value of the properties.
“Our properties are in regional cities and leasehold. Because of that, our IPO portfolio has a higher yield. By investing in regional centres and leasehold properties, yield is higher, and supply and demand in regional cities is stable,” Fujita indicates. In addition, foreign players including foreign funds have a preference for logistics hubs nearer the metropolitan areas, with less competition for assets in regional centres.
“The market is growing and demand is strong from outside of Japan. The majority are aiming for metropolitan areas and are not able to develop in regional cities. So we develop in regional cities and we are in a good position to get potential sites,” Fujita says.
DLHT’s pipeline including the right of first refusal (ROFR) properties are mainly multi-tenanted, comprising 11 logistics properties with gross floor area (GFA) of 523,863 sq m from Vietnam, Indonesia and Malaysia, and 17 mainly freehold logistics properties with GFA of 583,527 sq m from Japan. While Southeast Asian markets are likely to have higher risk rates than Japan, Fujita points out that the tenants of the logistics properties in these markets are mainly Japanese companies and MNCs.
DHLT’s high gearing reduces in 2022
The aggregate leverage post listing could be as high as 43.8% but this is likely to ease to 36.9% after repayment of a short-term consumption tax loan. “We have taken a consumption tax loan of close to $66 million because of this acquisition,” explains Anne Chua, CFO of DHLT’s manager. The consumption tax — which is akin to GST — is $70 million. It is refundable and the refund is expected in 2Q2022. As such, aggregate leverage will fall to 36.9%.
In addition, if DHLT’s portfolio value reverts to the appraised value of $952.9 million at its next valuation, gearing would fall. “There is a discount to fair value as at June 30, 2021. Hence, aggregate leverage will fall to 33.1%, so we are at very comfortable levels. We want tohave aggregate leverage below 40% throughout property market cycles,” adds Chua.
Tax-efficient structure for DHLT
Based on DHLT’s structure, the TMK vehicles own the freehold assets, and GK vehicles own the leasehold properties. Based on this structure, DHLT is likely to pay minimal corporate tax. However, dividends paid from the TMK and GK units will attract withholding tax which is likely to be around 12.73% on a blended basis.
Fujita emphasises that Daiwa House’s S-REIT is not just an exit fund to purchase sponsor properties. DHLT is likely to be its Asian focused REIT with Southeast Asian assets in its pipeline. Based on information in DHLT’s prospectus, and information released by MLT, Asia needs more modern logistics assets. The ages of both DHLT’s portfolio and MLT’s portfolio are very young. The average age of DHLT’s portfolio is 3.7 years while MLT’s is less than two years old.
CFO Chua emphasises that DHLT’s NPI is ‘clean’ with no income support. Some market watchers point out that DHLT is able to list at a higher than normal NPI yield compared to the properties being acquired by MLT is because of its higher gearing. That is only partially true. DHLT is acquiring the assets at an 11% discount to their appraised value.
DPU accretive for MLT
MLT’s acquisition provides a 1.2% accretion to DPU including income support based on an issue of 370 million new units and a 60:40 equity-debt funding mix. Excluding income support, the acquisition is neutral to DPU based on FY2021’s DPU of 8.326 cents for the 12 months to March 31, 2021.
On Nov 24, MLT announced that it has issued 212.76 million units in a private placement priced at $1.88 per unit. It will issue a further 159.1 million units in a 37-for-100 preferential equity fundraising (EFR) at $1.84 per unit. Altogether, MLT will be raising $692.8 million comprising $400 million from the placement, and $292.8 million from the preferential EFR.
MLT’s size and pedigree enable it to access cheaper funding. Based on its placement price, its historic DPU yield is likely to be 4.4%. DLHT’s annualised DPU yield in 2021 is forecast to be around 6.3%, rising to 6.5% in 2022.
The IPO price is estimated at 80 cents, and net asset value is likely to be 76 cents. The number of units outstanding is estimated at 675 million, indicating a market capitalisation of $540 million at IPO, which will make it one of the smallest S-REITs.
Photo of Nagoya by Bloomberg
