Daiwa House and Digital Core: A tale of 2 Reit IPOs

AFTER a relatively quiet period, Singapore's equity capital market saw a burst of fundraising activity in the last quarter of the year. Notably, 2 fairly large real estate investment trusts (Reits) came to market. They have seen different fortunes since their listings, but both have several factors in their favour.

Logistics and industrial Reit Daiwa House Logistics Trust (DHLT) and pure-play data centre trust Digital Core Reit (DC Reit) made their trading debuts on the mainboard of the Singapore Exchange (SGX) within weeks of each other: on Nov 26 and Dec 6, respectively.

This brought the number of Singapore-listed real estate investment trusts (S-Reits) and property trusts on SGX to 44, with a combined market capitalisation of over S$110 billion.

On the face of it, DHLT and DC Reit share some common traits.

First, they both own real estate assets in the popular "new economy" space - a space that has held up well amid the pandemic.

Both are also backed by big-name overseas sponsors that have a healthy pipeline of properties, for which the newly listed Reits will have right of first refusal (ROFR).

DHLT's sponsor, Japan-based Daiwa House Industry Co (DHI), is a property developer and real estate fund manager listed on the Tokyo Stock Exchange (TSE).

As at end-September, DHI was managing real estate funds with aggregate assets under management (AUM) of 1.66 trillion yen (S$19.6 billion), including TSE-listed Daiwa House Reit Investment Corporation.

DHLT's initial portfolio comprises 14 logistics properties in Japan. The Reit will have ROFR from its sponsor to another 11 properties in Indonesia, Vietnam and Malaysia as well as a further 17 properties in Japan.

This adds up to a potential portfolio size of 42 assets with a gross floor area of over 1.5 million square metres - more than treble the initial portfolio.

DC Reit's sponsor, US-based Digital Realty Trust, is the largest owner and operator of data centre providers in the world.

The sponsor Digital Realty is itself listed as a Reit on the New York Stock Exchange (NYSE). Digital Realty is among the 10 largest publicly traded US Reits, with a market cap of US$48.4 billion as at Dec 27.

DC Reit's initial portfolio comprises 10 data centres in the United States and Canada. The sponsor is providing a global ROFR to the S-Reit, giving DC Reit a potential pipeline of over US$15 billion of assets both existing and under construction.

Diverging performance

Both Reits received healthy interest from investors in their respective IPOs.

The public offer in DHLT's IPO saw subscriptions for 9.5 times the number of units available, while interest in the international placement tranche was 4.9 times the number of units available.

DC Reit did even better. Its public offer to Singapore retail investors received subscriptions for 16.1 times the number of units available, while for the international placement tranche the rate was 19.6 times.

The difference in the level of interest has been reflected even more starkly in the difference in trading performance.

DHLT closed flat at its IPO price of S$0.80 cents on the day it made its trading debut, after opening 1.3 per cent higher at S$0.81. Since then, the counter has traded sideways, closing at S$0.805 on Dec 27.

This comes as a surprise to market watchers, as the logistics sector has been one of the outperformers amid the pandemic.

Meanwhile, investors seem to need no convincing of the merits of a data centre play - especially one that was the largest IPO in Singapore this year.

DC Reit jumped 14.8 per cent higher than its IPO price of US$0.88 to close at US$1.01 on its trading debut, after opening at US$1.

The counter closed at US$1.16 on Dec 27, giving it a market cap of US$1.31 billion.

Comparing valuations

The lacklustre interest in DHLT could in part be due to its relatively small size. Its market cap stood at S$543.4 million as at Dec 27. That ranks it at 34th position among the S-Reits.

But compared to some of its peers, DHLT also looks undervalued. It is currently trading at a 6 per cent premium to its net asset value (NAV) per unit of S$0.76.

By comparison, logistics peers ARA Logos Logistics Trust and Mapletree Logistics Trust (MLT) are trading at close to 30 per cent and 40 per cent premiums, respectively. ARA Logos has a market cap of S$1.29 billion while MLT has a market cap of S$8.99 billion.

Also, DHLT's NAV is based on the acquisition price of its portfolio - an 11.8 per cent discount to the appraised value of the properties. The Reit could enjoy an uplift in its NAV when the Reit manager does another valuation this month.

Meanwhile, DC Reit is trading at a 38 per cent premium to its NAV per unit of US$0.84.

That valuation is significantly better than DHLT's. But it is still below the valuation of its closest peer Keppel DC Reit, which is trading at twice its book value.

Mapletree Industrial Trust, which also has exposure to data centre assets, is trading at an over 40 per cent premium to NAV.

DC Reit has quickly won investors over. A day after it commenced trading, UOB Kay Hian initiated coverage on the counter with a "buy" recommendation and a target price of US$1.18.

"With 68.5 per cent of its base rental income derived from hyperscalers, DC Reit benefits from strong demand for hyperscale data centres expanding at a compound annual growth rate (CAGR) of 23 per cent in 2020 to 2024," said analyst Jonathan Koh, explaining that hyperscalers are tech giants such as Amazon, Facebook, Google, IBM and Microsoft, which dominate the cloud services industry.

"(DC Reit's) ability to scale up through acquisitions is supported by its low aggregate leverage of 27 per cent and its more competitive cost of debt of 1.0 per cent," he added.

It might be too early to say what the next chapter may bring for DHLT and DC Reit. But choosing to list amid the worst of times - in a pandemic - may yet prove to be the best of times for the 2 recent Reit IPOs.