DBS Group Research on Monday (Jan 24) initiated coverage on Daiwa House Logistics Trust (DHLT) DHLU : DHLU 0% with a "buy" call and a target price of S$0.95. It believes the pure play logistics real estate investment trust (Reit) has solid fundamentals and a visible timeline for lowering its leverage, which would allow it to embark on acquisitions.

The target price implies an upside of about 17 per cent from the counter's trading price of S$0.81 as at 11.55 am on Monday, as well as a dividend yield of 5.5 to 5.6 per cent. At that time, units of DHLT were trading down S$0.005 or 0.6 per cent.

The research team highlighted DHLT's portfolio of 14 modern logistics facilities in Japan, which are newly built and have an average age of only 3.7 years. As its logistics facilities are located in cities with limited supply, DBS noted that DHLT's portfolio enjoys high occupancy rates of 96.3 per cent and a long weighted average lease expiry (WALE) of 7.2 years.

DHLT's gearing is also expected to improve to about 33.3 per cent from an initial "seemingly high" leverage of 43.8 per cent by the end of H12022, making it conducive to tap into its sponsor's pipeline, DBS noted. This is after DHLT's consumption tax of about S$68 million is refunded and the temporary loan repaid.

The Singapore-listed Reit is currently backed by Japan-based leading real estate developer Daiwa House Industry Co (DHI). DHI has provided DHLT with a right of first refusal to a portfolio of 28 assets in Japan, Indonesia, Malaysia and Vietnam valued at more than S$1.5 billion.

In the research team's view, DHLT's lower gearing could grant it a debt headroom of more than S$200 million to embark on more debt-funded acquisitions. This will provide it with the "firepower" to tap into its sponsor's pipeline of assets, allowing it to potentially grow its portfolio by more than 2.5 times, it said.

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The first acquisition DHLT embarks on will set the stage for its growth ambitions, the team pointed out. "Given the stiff competition for modern logistics facilities and how cap rates have compressed, it will be crucial to see how DHLT is able to acquire accretively," it said.

Key risks to its view include a smaller than anticipated revaluation gain, as well as a delay in the refund of the consumption tax.

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