Dale Lai and Derek Tan of DBS Group Research have kept their "buy" call on Daiwa House Logistics Trust , but with a trimmed target price partly to take into account the yen that has remained weak.
For FY2023, the owner of a portfolio of logistics assets in Japan has reported a distribution per unit of 5.22 cents, 2.4% better than what the DBS analysts were expecting.
When denominated in yen, DLHT's revenue and net property income gained by 4.7% and 4.6% y-o-y, thanks to the full-year contributions from properties acquired in December 2022, but lower in Singdollar, the reporting currency.
Nonetheless, because of a weaker yen versus the Singdollar, distributable income increased by 3.1% y-o-y to $36.4 million, partly thanks to realised gains from hedging activities.
In the most recent 4QFY2023, DHLT was able to maintain a full occupancy rate, and it has maintained a weighted average lease expiry of 6.2 years.
The portfolio's valuation was up 2% in yen but down 6% in Singdollar.
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Its blended cap rate for its entire portfolio stands at around 5.2%- 5.3%, and Lai and Tan believe there will be room for further cap rate compressions in the coming year as more investors continue to compete for high-quality properties throughout Japan.
Just a week ago, Daiwa House REIT, which is DHLT’s sister REIT listed in Japan, acquired a logistics facility in the Chiba prefecture at an estimated cap rate of 3.5%, demonstrating continued cap rate compressions for quality logistics assets.
For now, gearing remained healthy at 35.2% in 4QYF023, a slight improvement from the 36.2% reported in the preceding 3QFY2023, due to higher portfolio valuations in JPY terms.
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"Overall, we remain upbeat about DHLT’s results and its DPU that has come in slightly above our estimates," state the analysts in their Feb 28 note.
"However, we remain slightly cautious about the 23.4% of leases that are expiring in FY2024," they add.
The analysts warn that although these two leases account for only a small proportion of DHLT’s overall portfolio, the backfilling of these properties may take time.
DHLT has two acquisitions of some $50.6 million generating 3% accretion that are pending completion, which will help defend its earnings against the rising borrowing costs and also the continued weakness in the yen.
"Despite some of the challenges highlighted above, we believe that DHLT’s portfolio will continue to deliver strong and stable earnings in the medium term through management’s various proactive initiatives, including the optimisation of debt headroom by tapping into accretive acquisitions from its sponsor," the DBS analysts state.
The sponsor, Daiwa House, has consistently demonstrated its support and commitment to DHLT, which Lai and Tan see as a "highly crucial plus-point" compared to some of its peers.
They see DHLT as trading at a "very attractive" forward yield of 8.2% and a price-to-NAV multiple of only 0.86x.
"At the same time, we are also cognisant that the weak yen continues to be an overhang for DHLT, but we believe the REIT will immediately trade back up to its intrinsic value once there are signs of the yen strengthening," the analysts add.
DHLT units closed at 64 cents on Marc 1, unchanged for the day and up 4.92% in the past 12 months.
