Daiwa House Logistics Trust: Stronger JPY; higher refinancing costs
- Revenues and NPI increased 1.5% and 2.8% y/y, but offset by the depreciation of the JPY against SGD
- Recently completed Japan and Vietnam acquisitions to partially offset weaker JPY and higher interest rates
- Recent BOJ rate hikes to lead to JPY appreciation, but also higher financing costs
- Maintain BUY with lower TP of SGD0.70, based on delay in Vietnam acquisition completion and weaker FX assumptions
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(+/-) Revenues and NPI were higher y/y in JPY terms, but lower in SGD
- Revenues and NPI were 1.5% and 2.8% higher y/y, but lower in SGD terms due to the weaker exchange rate
- Higher revenues driven by improvement in portfolio performance, as well as the acquisition of DPL Ibaraki Yuki
- DPL Ibaraki Yuki was acquired on 15 March 2024
- In SGD terms, revenues and NPI were 10.7% and 8.2% lower y/y
- Mainly due to weaker JPY/SGD rate
- JPY depreciated by c.10% y/y
(-) 1H24 DPU of 2.45 Scts was 6.1% lower y/y and h/h
- 1H24 distributable income was 5.7% lower y/y, mainly due to the weaker JPY against SGD
- 1H24 DPU was 6.1% lower y/y and h/h, also mainly due to weaker JPY
- DPU of 2.45scts only makes up c.47% of our FY24 projections
- We expect some improvement in 2H24 earnings with income contribution from recent acquisitions
- DPL Ibaraki Yuki completed on 15 March 2024
- D Project Tan Duc 2 completed on 5 July 2024
- Acquisitions estimated to generate a c.2% accretion to DPU on an annual basis
- Earnings to be partially offset by the weaker hedged JPY rate
(+) Occupancy rate of 96.6% healthy; expected to improve in the coming quarter
- Portfolio occupancy declined from 100% to 96.6% q/q due to two leases at DPL Koriyama and DPL Kawasaki Yako vacating
- Non-renewals were already highlighted in the previous quarter
- Tenant at DPL Koriyama returned approximately one-third of their space when renewing lease
- Portfolio occupancy is expected to improve to 97.5% as vacancy at DPL Kawasaki Yako was backfilled on 1 August 2024
- Space was backfilled by Mitsubishi Shokuhin, a leading retail group listed on the Tokyo Stock Exchange
- Mitsubishi Shokuhin remains the largest tenant for DHLT, making up c.21.1% of NPI
- The only built-to-suit lease to expire in FY24 (D Project Kuki S) was extended by a further 10 years
- A built-to-suit lease had their lease restructured to include a higher rent with annual rental escalations over the next five years although the lease still had a few years remaining
- Part of active negotiations with the tenant; they understood the need for rental increase due to inflation of costs
- The lease was renewed for 10 years, and annual rental escalations are in place for the first half of the lease (ie. five years)
- 6% increase in weighted average rents
- Contributed by both lease renewals and new lease
- Only five leases, or c.12.2% of portfolio (by NLA) will be expiring in 2H24
- Four of five tenants will be renewing their leases
- The remaining tenant will renew lease but downsize; tenant is a 3PL operator and one of their end-users will be returning their space
- Lease renewals expected to see some positive rental reversions
(+) Optimisation of leverage ratio and stable borrowing costs
- Gearing healthy at 36.8% despite the weaker JPY
- Inched up 1.6 ppt q/q mainly due to lower portfolio value caused by depreciation in the JPY against the SGD
- Weighted average cost of borrowings remained stable at 1.03% as loans are fully hedged to fixed rates
- Additional loans amounting to c.SGD26mn were taken on 1 August 2024 to fund the acquisition of D Project Tan Duc 2
- Gearing expected to inch up to c.38.7%, while average borrowing costs will increase to c.1.16%
- Additional loans were taken in JPY and estimated to have cost c.2.5% (fully hedged to fix rate)
- Average borrowing costs expected to inch up by a further 20-30 bps when a SGD84.3mn loan is refinanced in November 2024
- Based on current interest rates, refinancing will likely cost just under 2.5%
Our thoughts
Although JPY revenues and earnings were higher y/y, the JPY depreciation of c.10% over the past year led to revenue/earnings declines in SGD terms. However, DHLT has locked in an exchange rate at approximately SGD1:JPY105 as part of their 6-12 months forward hedging strategy, helping greatly mitigate the impact of weaker FX.
Over the last two weeks, the JPY appreciated by c.8% against the SGD as the BOJ raised its key interest rate by 25bps. Although this will put less pressure on translation losses for DHLT, the impact to earnings will only be felt in approximately 6-12 months’ time due to forward hedging. Consequently, the increase in Japan’s benchmark interest rate will have some impact on DHLT’s overall borrowing costs as c.25% of its loan book will be due for refinancing in November 2024. Looking ahead, a further c.25% of loans will be due for refinancing towards the end of FY25. In our projections, we have assumed a c.50 bps increase in DHLT’s average borrowing cost by year-end, as a result of the higher refinancing costs and the additional loans taken to fund the Vietnam acquisition.
Even though we had already factored in the higher financing costs, we revise our FX assumptions to factor in a weaker JPY against the SGD going forward. Previously, we had assumed an exchange rate of SGD1:JPY105 going forward. We have now revised it to SGD1:JPY110 from FY25 onwards. This has led to a c.5% reduction in forward earnings.
As the completion of the Vietnam acquisition (D Project Tan Duc 2) was delayed by slightly more than one quarter, we also lowered our projections for FY24. Nonetheless, we remain positive on DHLT as recent acquisitions and positive rental reversions are expected to support earnings growth despite the higher financing costs and lower exchange rate assumptions.
We maintain our BUY recommendation with a lower TP of SGD0.70. A further appreciation of the JPY would lead to upside to our future earnings estimates.
FY Dec | 1H2023 | 2H2023 | 1H2024 | % chg y/y | % chg h/h |
Gross revenue | 30.9 | 29.0 | 27.6 | (10.7) | (4.7) |
Property expenses | (7.8) | (6.8) | (6.4) | (18.3) | (6.1) |
Net Property Income | 23.1 | 22.2 | 21.2 | (8.2) | (4.3) |
Other Operating expenses | 0.0 | 0.0 | 0.0 | - | - |
Other Non Opg (Exp)/Inc | 0.0 | 0.0 | 0.0 | - | - |
Associates & JV Inc | 0.0 | 0.0 | 0.0 | - | - |
Net Interest (Exp)/Inc | (3.3) | (3.1) | (3.0) | 8.2 | 1.1 |
Exceptional Gain/(Loss) | 1.31 | (0.5) | 0.38 | -71.0 | - |
Net Income | 19.8 | 18.4 | 17.6 | (11.0) | (4.3) |
Tax | (2.3) | (4.1) | (2.2) | (7.1) | (46.8) |
Minority Interest | 0.0 | 0.0 | 0.0 | - | - |
Net Income after Tax | 17.0 | 13.9 | 15.0 | (11.5) | 8.2 |
Total Return | 15.5 | 0.83 | 13.7 | (11.4) | 1,554.7 |
Non-tax deductible Items | 2.63 | (8.7) | 3.37 | 28.1 | - |
Net Inc available for Dist. | 18.1 | (7.9) | 17.1 | (5.7) | - |
Ratio (%) |
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Net Prop Inc Margin | 74.9 | 76.7 | 77.0 |
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Dist. Payout Ratio | 100.0 | 100.0 | 99.9 |
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