Daiwa House Logistics Trust - DBS Research 2022-08-04: Stellar Operations Overshadowed By Weak JPY

Daiwa House Logistics Trust's 1H22 revenues and NPI slightly below forecasts due to weaker JPY

• In JPY terms, revenues would have been ~0.4% higher than IPO forecasts. The higher revenues were due to higher utilities income recoverable from tenants, and other income. However, as the JPY has weakened against the S$, Daiwa House Logistics Trust (SGX:DHLU)'s revenues and NPI for 1H22 (26 Nov 2021 – 30 June 2022) were 3.6% and 4.5% lower than forecasts.
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• Despite the weaker JPY, Daiwa House Logistics Trust's distributable income and DPU were in line with forecasts due to some savings and higher capital returns. Finance expenses were lower than forecast due to Daiwa House Logistics Trust securing loans at lower costs, the slightly earlier than projected repayment of consumption tax loan, and the weaker JPY. Trust expenses were also lower than forecast due to lower Group operating expenses. This contributed to a total savings of more than S$0.9m in 1H22.
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• For all the leases renewed in 1H22, there were no rent reductions, and the average positive rental reversions were 3.1%. The average lease terms of leases that were signed and renewed in 1H22 was approximately four years. This has enabled Daiwa House Logistics Trust to maintain a healthy portfolio WALE of ~6.8 years.
• As reported in March 2022, the earthquake in northeast Japan led to some damages at DPL Sendai Port and DPL Koriyama. The sponsor has carried out restoration works to DPL Sendai Port at its own expense. However, there are additional repair works at both properties that will have to be borne by Daiwa House Logistics Trust. Such repair works are estimated to be JPY65m or ~S$0.7m, and are expected to be incurred over the coming three quarters.
• Daiwa House Logistics Trust's gearing inched up from 33.2% to 34.0% due to translation losses of its portfolio arising from the weaker JPY. All-in financing costs remained stable at 0.9% as 100% of its loans have been hedged to fixed rates. Daiwa House Logistics Trust’s first loan maturity will only begin in FY24.
• Based on an aggregate leverage of 40% and 45%, Daiwa House Logistics Trust has a debt headroom of ~S$90m and ~S$180m, respectively.
• Daiwa House Logistics Trust continues to systematically hedge distributable income on a one-year forward rolling basis. As such, we understand that its FY22 income has previously already been hedged at a more favourable exchange rate as compared to current spot rates of S$1: JPY96.7. However, we expect earnings to be increasingly exposed to the weaker JPY as Daiwa House Logistics Trust continues to forward hedge its earnings one-year ahead. We have revised our estimates to account for the impact of the weaker JPY on future earnings. Based on our revised estimates, there could be a potential ~8.9% downside to Daiwa House Logistics Trust's DPU in FY22 entirely due to the weaker JPY. The downside to DPU estimates will increase to more than 15.2% for FY23, before gradually reversing from FY24 onwards.
• In our estimates, we have assumed that Daiwa House Logistics Trust’s FY22 income has been hedged at an average of S$1: JPY90.0, based on the average exchange rates from its IPO (November 2022) until today. With the spot rates hitting a high of S$1: JPY97.6 in June 2022, and gradually improving to S$1: JPY96.7 currently, we have assumed an average exchange rate of S$1: JPY 95.0 for Daiwa House Logistics Trust’s hedges in FY23. For our earnings projections in FY24 and beyond, we have further assumed that the JPY will gradually revert to its historical average rate, leading to a rebound in DPU.
• As we do not take a view on FX rates, our assumptions are entirely based on an arithmetic averaging approach.

Our thoughts

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Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbs.com/insightsdirect/ 2022-08-04 SGinvestors.io

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