Results First Take: Maiden acquisition on the horizon with enlarged debt headroom
- 1Q22 DPU of 1.31 Scts. in line with our FY22 projections
- Key positives: i) portfolio occupancy improved to 98.6%, ii) reported positive rental reversions of c.2.0%, iii) consumption tax refund came in earlier than anticipated; leverage improved to 32.2%
- What we are watching out for: i) weaking of the JPY vs. SGD and how it will impact earnings projections in FY23, ii) cost of repair works for the 2 properties that sustained minor damages during earthquake on 16 March 2022
- Maintain BUY with TP of S$0.95
| Key operational data (S$’m) | 1Q22 | IPO Forecast | Variance |
| Gross Revenue | 16.8 | 16.9 | -0.8% |
| NPI | 13.3 | 13.2 | 1.4% |
| DI | 8.9 | 8.8 | 0.6% |
| DPU (Scts) | 1.31 | 1.30 | 0.8% |
| Portfolio occupancy | 98.6% | 96.3% | +2.3% |
| WALE (years) | 6.8 | 7.0 | -0.2 |
| Aggregate leverage | 32.2% | 37.7% | -5.5% |
| All-in borrowing cost | 0.9% | 0.9% | – |
(+) 1Q22 DPU of 1.31 Scts. in line with projections
- Revenues were slightly lower than forecast as market uncertainty led to slower-than-anticipated growth
- NPI was however c.1.4% higher than forecast as operating expenses were lower than forecasted
- DHLT took a more conservative approach in estimating operating costs in the IPO forecast
- 1Q22 DPU of 1.31 Scts. made up 25.1% of our FY22 estimates
(+) Portfolio occupancy improved by c.2.3%
- Portfolio occupancy increased to 98.6% in 1Q22
- 10 year lease signed at DPL Sapporo Higashi Kariki with rent review at the end of year 5
- Overall increase in rents for new leases and renewals
- +2.0% compared to expiring rents
- Only vacancy within the portfolio is at DPL Koriyama
(+) Consumption tax refunded ahead of expectations; leverage improved to 32.2%
- The S$62.2m consumption tax loan has been refunded; previously expected refund to only occur in end-June 2022
- Proceeds have been used to repay short-term loan
- Leverage will improve to 32.2% after consumption tax loan repaid in April 2022
- Debt headroom of more than S$134m (leverage up to 40%)
(-) Depreciation of JPY vs. SGD could impact DPU in the medium term
- We understand that DHLT has entered into forward FX hedges for income to be distributed
- Estimated 6-months to 12-months forward hedges
- However, with JPY having depreciated by more than 10% (vs. IPO forecast), there could be some impact to FY23 projections
Our thoughts
The increase in portfolio occupancies is a positive and the c.2.0% positive rental reversion will help drive organic income growth. Although marginal, the earlier than expected refund of the consumption tax will allow DHLT to experience some savings in borrowings. This however provides DHLT with the headroom to embark on acquisitions earlier than anticipated. We note that management has already engaged its Sponsor on potential acquisitions given their enlarged debt headroom.
Given the tight supply in the markets where DHLT operates in, and expectations of a healthy inflation in Japan, we anticipate further positive rent reversions as the remaining c.15.4% of leases are renewed throughout FY22. On the operational front, margins can be maintained as utility costs are all passed on to tenants, and borrowings are fully hedged.
We will be looking forward to DHLT embarking on their maiden acquisition with its enlarged debt headroom. We understand that the REIT will look to acquire a portfolio of asset, rather than individual properties, and this will likely come in the form of combining assets in Japan with those in other markets (ie. Malaysia, Indonesia, or Vietnam).
We will be maintaining our BUY recommendation with a TP of S$0.95.