Daiwa House Logistics Trust's (DLHT) public offer will close on Wed Nov 24, 2021) at 12.00 pm. The REIT will commence trading on a “Ready” basis on Fri Nov 26, 2021 at 2.00 pm.
DLHT’s annualised distribution per unit 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. 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 acquistion,” 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, DHLT is acquiring its IPO portfolio at $840.5 million, a discount to the portfolio’s appraised value is $952.9 million. “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 to have aggregate leverage below 40% throughout property market cycles,” adds Chua - who was for many years CFO of CapitaLand Commercial Trust’s manager.
The initial portfolio of DHLT is likely to comprise 14 logistics properties in Japan with a net lettable area (NLA) of 423,920 sq m and a total land area of approximately 420,393 sq m. Of these, 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.
See: Daiwa House Logistics Trust lodges IPO prospectus
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The IPO portfolio has 26 tenants. The weighted average lease expiry of the single tenanted build-to-suit (BTS) properties are 11.2 years and WALE of multi-tenanted propertis is 5.9 years, giving an average WALE of 7.2 years 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 simialr 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 may deviate from market rents,” explains Takeshi Fujita, CEO of DHLT’s manager.
He adds that there are no break clauses. “There might be some constaints from the tenant. Even though the tenant terminates, he has to pay rent for the remaining period,” Fujita says. In addition, the REIT’s manager collects security deposits of six months on average.
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“Multi-tenanted leases tend to be two to five years in tenure. Even though the tenant doesn’t negotiate for rental escalation, upon expiry, we negotiate with the [new] tenant if market rents deviate from the current in-place rate,” Fujita says. Moreover he says that 70% of DHLT’s tenants are listed companies. “So we are confident about the quality of our tenants.”
Regional, leasehold assets account for higher yield
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. The Greater Tokyo area is a core suburban market, Fujita says. Daiwa House Industry Co 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 wih these markets,” he adds. In addition to having the logistics assets in regional markets, DHLT has 51.7% of its NLA in leasehold assets which have higher 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 higher yield. Daiwa REIT’s yield is mid-3% and their target is totally different from ours. 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.
“The market is growing and demand is strong from outside of Japan. The majority are aiming for metropolitan areas and 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.
For more stories about where money flows, click here for Capital Section
DLHT’s pipeline including 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 emerging markets are likely to have higher risk rates than Japan, Fujita points out that the tenants of the ROFR logistics properties in these markets are mainly Japanses companies and MNCs.
Tax-efficient structure
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 witholding tax which is likely to be around 12.73% on a blended basis.
“Historically, Daiwa House (DH) has been a company primarily focused on Japanese domestic market. In FY2020, net sales in overseas business was $3.8 billioin [equivalent], which was only 7.4% of net sales of Daiwa House Group," says Fujita.
"Now DH recognizes they must expand to overseas markets for future growth. For logistics business, DH identified especially the Asean region, as the most promising market. As DH has been achieving fast growth in Japan through establishing capital recycling model by setting up REIT and funds, DH intends to build another capital recycling model in Singapore,” he adds.
DH doesn’t see this S-REIT just as an exit fund to purchase sponsor properties. “Rather than that, DH expects S-REIT to be a key strategic infrastructure through which DH could accelerate development activities and asset management business in Asia, as well as expand investor base and access to the latest local information,” Fujita elaborates.
Although DHLT’s size is modest, investors are keen on the REIT. The placement issue of 219.4 million units is believed to be over-subscribed, and only 25 million units is being offered to retail investors via the ATMs. The sponsor is subscribing to 94.5 million units, or 14% of the units. In addition, the sponsor will be issued with perpetual securities amounting to 6% of DHLT’s equity capital.
For more stories about where the money flows, click here for our Capital section
A further 336 million units are being taken up by cornerstone investors. These are Bangkok Life Assurance Public Co, Credit Suisse, Singapore Branch and Credit Suisse, Hong Kong Branch on behalf of certain of their private banking clients, DBS Bank, DBS Bank (on behalf of certain wealth management clients), DBS Bank (Hong Kong) on behalf of certain wealth management clients), DWS Investments Australia, Kuang Ming Investments which belongs to Philip Ng, Nomura Singapore on behalf of certain wealth management clients, Hazelview Securities Inc, and Metro ARC Investments, a unit of Metro Holdings.
Photo credit DHLT
