Late last year, two REITs, Daiwa House Logistics Trust (SGX: DHLU), or DHLT, and Digital Core REIT (SGX: DCRU), or DCR, made their debut on the exchange.
Both REIT IPOs raised a total of S$1.3 billion that saw strong interest from retail investors.
Being new, investors may wonder which REIT makes a more attractive investment candidate.
We decided to place both REITs side by side by comparing various attributes to determine the answer.
Portfolio composition
First, let’s take a look at the basics and assess each REIT’s portfolio of properties.
DHLT owns a portfolio of 14 logistics properties that are all located in Japan, while DCR’s portfolio contains 10 data centres located in the US and Canada.
For DHLT, a scarcity of high-quality and modern logistics facilities should continue to generate steady demand for the REIT’s properties.
Demand should also be supported in the medium-term by fast-growing sectors such as third-party logistics and e-commerce.
DCR’s portfolio of data centres should see sustained demand from digital industries such as social media, 5G, and cloud computing.
Both REITs’ portfolios should enjoy healthy tailwinds from digital transformation and a surge in online activity.
DCR, however, has one up over DHLT as its properties are spread out over two countries.
Winner: DCR
Portfolio attributes
Next, we take a look at each REIT’s portfolio attributes.
DHLT has a high occupancy rate of 96.3% and its weighted average lease expiry (WALE) is also longer than DCR’s at 7.2 years.
However, less than half of DHLT’s properties are on freehold tenure.
Although DCR has a slightly shorter WLE than DHLT, it enjoys full occupancy for all its properties, a rarity among REITs.
In addition, DCR’s data centre leases contain annual rental escalations of between 1% to 3%, providing organic growth to rental income in future years.
Winner: DCR
Gearing and cost of debt
DHLT launched its IPO with a high gearing ratio of 43.8%, but as its portfolio was acquitted at a discount to its appraised value, the aggregate leverage based on the value of its properties is 39.2%.
Along with an impending repayment of its consumption tax loan by the second quarter of 2022, the REIT estimates that gearing will fall to around 33.1%.
Assuming the above event comes to pass, DCR’s gearing of 27% is still lower than DHLT’s.
Both REITs have around the same cost of debt of around 1.1%.
Winner: DCR
Fee Structure
Both REITs’ fee structures are vastly different.
For DHLT, its base fee comprises 10% of its annual distributable income while its performance fee is computed based on 25% of the year on year increase in distribution per unit (DPU) from the preceding year multiplied by the weighted average units on issue on the current financial year.
DCR, on the other hand, pays its manager a base fee of 0.5% of the value of the deposited property and a performance fee of 3.5% of its net property income.
DHLT’s fee structure is more aligned with unitholders as it is tied to the increase in DPU, which is the key reason that income-driven investors invest in REITs.
Winner: DHLT
DPU and distribution yield
Finally, we look at the dividend yield offered by each REIT.
Based on their unit prices, DHLT’s projected yield of 6.4% is significantly higher than DCR’s 3.6% yield.
Winner: DHLT
Get Smart: Good attributes for both REITs
The above analysis provides a mixed picture of both REITs.
DCR has better portfolio attributes and lower gearing, opening the REIT up for more yield-accretive acquisition opportunities by tapping on debt.
However, DHLT has a more favourable fee structure and also sports a higher projected distribution yield.
Both REITs also have strong acquisition pipelines from their respective sponsors.
DHLT’s sponsor could potentially inject 28 more properties into the REIT, tripling its current number of properties.
DCR’s sponsor, Digital Realty Trust (NYSE: DLR), has a pipeline of around US$15 billion available for injection into the REIT.
Investors should, therefore, select the REIT that suits their investment objectives and preferences.
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Disclaimer: Royston Yang owns shares of Digital Core REIT.
