Daiwa House Logistics Trust

Daiwa House Logistic Trust ("DHLT" or the 'REIT") launched its IPO on 19 Nov 2021, offering 244.438m units at S$0.80 each where 25m units will be for the public and the balance via placement. The IPO will close on 24 Nov 2021 at 12 noon and commence trading on 26 Nov 2021 at 2pm. 

Separate from the above offering, Cornerstone Investors subscribed for 336.062m units and investors include Bangkok Life Assurance, Credit Suisse, DBS Bank, DWS, Nomura and others. At the completion of the offering, there will be 675m outstanding units and using the IPO price of S$0.80, the market cap will be around $540m. 

I have blogged about my initial thoughts here and this is a more detailed write up.

Principal Business

DHLT is a REIT focused on logistics and industrial real estate assets located across Asia. The initial portfolio of DHLT will comprise 14 high quality modern logistics properties across Japan with an appraised value of JPY 80,750 million or S$952.9 million.

Daiwa House is the sponsor of DHLT

The Sponsor of DHLT is one of the largest construction and real estate development companies listed on the Tokyo Stock Exchange (ticker code 1925), with a market cap of S$26.68 billion as of last Friday. The sponsor has extensive experience in asset and fund management, having another listed REIT - Daiwa House REIT (ticker 8984) - listed on TSE as well.

Initial IPO Portfolio

The IPO portfolio will comprise 14 logistics assets in Japan. (see map below). The portfolio is strategically located close to transportation and shipping networks and a majority are green certified. 

Projected Yield

DHLT is projecting an annualised yield of 6.3% for FP2021 and 6.5% for 2022. 

The first distribution will be made in respect from the Listing Date to 30 June 2022 and be paid before 30 Sep 2022 and thereafter, be made on semi-annual basis. The distributions will be made in SGD.

DHLT mentioned that the cash flows have been resilient and none of the tenants of the IPO portfolio requested for any form of rental relief or rebates throughout the Covid period till 30 Sep 2021. This is probably due to the fact that the tenant base is blue-chip with more than 70% occupied by TSE-listed companies and affiliates. The yield will be stable given the the long WALE of 7.2 years and can also be easily hedged given the JPY is a major global currency. It will be more difficult to hedge against assets in South East Asia if the rental is in their local currencies. At this moment, we don't have that issue.

Ownership

Assuming the over-allotment was exercised in full, Daiwa will hold 10% of the REIT (not considering the Perps).  The Cornerstone Investors will hold around 49.8% of the REIT, followed by the public and institutional investors at 40.2%.

What I like about the REIT

• Favorable fundamentals for high quality, modern logistics facilities - With Covid 19, digitalisation and e-commerce converged and many businesses realised that  online presence is absolutely critical and that is not just by having a website or online platform. You need the entire suite of services, from ordering to manufacturing to warehousing to last mile fulfilment in order to make a happy customer return. In addition, the proliferation of e-commerce resulted in a boom for third party logistics and is driving strong demand for modern logistics facilities globally, including those in Japan 

• High quality and well-diversified Logistics IPO portfolio - I was watching the video on Netroadshow where they featured the various logistic properties. The properties are strategically located close to major transport and shipping hubs, looked new and modern and are built to high specifications. The assets were built with a strong commitment to ESG and majority of the IPO properties are green-certified. The assets are also diversified across Japan with high occupancy rate and long WALE of 7.2 years old, providing stability of cash flows 

• Attractive entry valuation and yield - Investors are acquiring the IPO portfolio at a discount to Appraised Value. According to the prospectus, the ability to offer tangible support for DHLT's IPO is possible as the Sponsor is a developer and has developed the IPO on greenfield sites. The attractive price given also highlights the Sponsor's strong commitment to DHLT and the IPO (Don't ask me how they managed to convince the board and their investors at the Sponsor level that they are selling at a discount to market value, probably for "strategic value" 😅). In other words, investors are acquiring these assets at 88 cents to the dollar (price to book) and yet enjoy a yield of 6.5%. The leverage will also drop to 33% by year end when the appraised value and post consumption tax rebate are taken into consideration.

According to page 164 of the prospectus, the NAV per unit is $0.76 whereas the IPO price is $0.80 and some readers ascribed a price to book of 1.05x. If you refer to Appendix C, you will note that the pro forma has actually been prepared using the purchased price of the properties and not the fair value. As such, once you fair value the properties, you will see that the price-to-book declining to around 0.93x (using my back of envelope calculation).

Source: C-11 (Appendix C) of the Prospectus

• Strong pipeline and growth trajectory through Right of First Refusal- The Sponsor has granted DHLT over the Sponsor's pipeline of assets in Southeast Asia and Japan and stands to benefit from the Sponsor's capabilities as one of the largest construction and real estate developers in Japan (again, don't ask me how they have managed the conflicts with the other Tokyo listed REIT). You can see the pipeline of assets below that this REIT can grow to more than 3x its size at listing, so having a reputable sponsor with strong pipeline is definitely beneficial

• Strong alignment of interest - The management fee structure is aligned with unitholders as it is incentivised to grow income and DPU for Unitholders instead of basing it on AUM or NPI. The Sponsor will subscribe for 14% of DHLT as well as JPY3 billion worth of perps, that carry an interest rate of 2.95% per annum.  The perps will not be redeemable at the option of the Sponsor and will carry no voting rights. The fact that the perps (quasi-equity) bears a lower return than the REITs and is cheaper than bank debt, signify strong alignment of interest 

• Experience Board and Management Team - The Board included experienced CEO from Japan as well as highly qualified independent directors from Singapore (ex DBS and ex Ascot and Ascendas) and the CFO, Anne Chua was formerly from CapitaLand Commercial Trust. Investors are in good hands.

Some of my concerns

• Future properties may not be as of high quality - Usually you include the best assets to make sure the IPO is off to a good start. We will need to assess the quality the properties that are injected in future. Some of the ROFR assets are listed on page 34 and 35.

• Assets in South East Asia may create volatility in cash flows - While the assets are in Japan and the rental income in JPY, the cost of hedging is cheaper and pretty cost efficient to hedge back to SGD given it is a major currency. Going forward, if some of the assets in Indonesia, Malaysia, Vietnam are injected, it may be more expensive to hedge those rental income into SGD and that might create some volatilities in cash flows. Less concerns about the credit risk as these are logistic real estate which the Sponsor has developed in partnership with existing Japanese tenants who are looking to expand internationally.

• Japanese corporate culture can be a black box - While investors here so far had pretty good experience with Croesus Retail Trust and Accordia Golf Trust, the Japanese corporate culture can be pretty stifling and unbearable. I am not sure how much of that will play out here but hopefully, it will not be as bad.

Peer Valuations

While Daiwa Logistics REIT seemed smaller than its peers, there is much room for growth given the strong ROFR pipeline. As such, I am taking the view that Daiwa wants to make this REIT a great success and inject more assets into the REIT over time.

Fair Valuation

Using the peer valuation and assuming a price to book of 1 to 1.1x, the fair value will be between 86 cents to 94 cents. Assuming a yield compression to 5.8% to 6.3%, the fair value range will be 82 to 90 cents.

Mr IPO Chilli Ratings

This IPO checks all the boxes which I have elaborated in details above - high quality portfolio, attractive valuation and yield, reputable Sponsor, strong pipeline for growth, alignment of interest. What more can you ask for ? I will give it a 3 chilli ratings.

I understand from DBS RM the demand was "hot" and I have yet to hear back on my application status...

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