Just as the US Federal Reserve announced a 75-basis-point hike in its Federal Funds Rate (FFR) to 3% to 3.25%, four S-REITs announced acquisitions and proposed acquisitions. Interestingly, three of the REITs’ acquisitions are in Japan, where the Bank of Japan has not followed the Fed, the European Central Bank, Bank of England and Reserve Bank of Australia in hiking policy rates. Hence, the acquisitions are likely to be DPU-accretive, even with hedging costs.
ParkwayLife REIT’s and First REIT’s acquisitions are modest and are funded by (cheap yen) debt. The acquisitions by Daiwa House Logistics Trust (DHLT) and Digital Core REIT (DigiCore) are more substantial, and may require equity fund raising (EFR).
On Sept 21, DHLT announced a proposed acquisition of three properties from its sponsor. The properties are DPL Iwakuni 1&2, D Project Matsuyama and a plot of freehold land. The agreed price for the three properties is JPY4,676 million ($47.7 million), which is 11.8% lower than the average appraised value of the target portfolio of JPY5,302 million. The total cost including fees and expenses is likely to be financed by a combination of bank borrowings, and subscription of DHLT units by sponsor Daiwa House amounting to JPY1.25 billion.
DHLT’s announcement says that the pass through conditional master lease agreements between the sponsor and REIT are similar to the pass-through master lease arrangements in place for DHLT’s multi-tenanted properties at the time of listing. At IPO, the master lease agreement of the multi-tenanted property stated that the rent of the master lessee to the REIT has to equal the total amount of rent from the end-tenants under the sub-lease agreements.
DPL Iwakuni 1&2 are multi-tenanted, and D Project Matsuyama is single-tenanted. The two properties are leased to quality tenants, which include listed companies. The tenants include one of the largest integrated logistics companies in Japan, as well as a leading integrated food trading company in Japan which also provides 3PL services.
DHLT model shows sponsor support
See also: Keppel DC REIT divesting Basis Bay Data Centre in Malaysia at 2.6% above valuation
The sponsor has committed to subscribe for some 16.56 million new units at the higher of $0.77 per unit or the 10-day VWAP (volume-weighted average price), to raise $12.8 million, with the rest of the $47.7 million funded by debt. The pro forma NAV is $0.77.
Based on the funding, the proposed acquisition is likely to be DPU-accretive to unitholders to the tune of 1.3%, while aggregate leverage creeps higher to 36.4%. The JPY-denominated borrowings with fixed interest rate that DHLT intends to enter into will provide a natural hedge for the capital, the manager says. Since the acquisition price represents 8.8% of DHLT’s latest NAV, the transaction is subject to unitholders’ approval as it is an interested-party transaction. In addition, unitholders will need to approve the proposed sponsor subscription of new units. The 1.3% accretion includes the amount used for the acquisition of the land which is not tenanted.
The blended NPI yield for the two assets excluding land is 6.5% based on purchase consideration, the spokesman says. Existing IPO portfolio yield is 6.1%, based on valuation as at Dec 31, 2021. Analysts point out that the three properties are being acquired at an 11.8% discount to valuation, which is probably why the freehold properties have higher yields than the IPO portfolio which included some leasehold properties.
See also: Digital Core REIT faces tenant exit for Northern Virginia property
DBS Group Research says the transaction shows strong sponsor support — with the sponsor divesting properties at a discount, and its offer to subscribe to new units at a premium to DHLT’s current market price of 69 cents.
DigiCore’s flexible maiden acquisition plans
DigiCore has announced a proposed, potential acquisition of two data centres. It will either acquire 89.9% of a Frankfurt data centre and 90% of a Dallas data centre from sponsor Digital Realty; or it will acquire only a 25% stake in the Frankfurt data centre.
The larger acquisition would cost US$757 million ($1,073 million) and require EFR. The smaller acquisition would cost just US$139.5 million and can be fully debt-funded.
John Stewart, CEO of DigiCore’s manager, says: “We’re acquiring very high-quality assets in top-tier, global data centre markets. These assets are primarily powered by renewable energy. We’re also 100% insulated from energy costs, because the structure of the contracts passes through the power costs to customers. And we have a relatively long WALE (weighted average lease expiry) with a seven-year weighted average remaining lease term.”
In terms of capitalisation rates, Stewart is looking at a stabilised rate of 4.9% for the Frankfurt property, up from its current NPI yield of 4.3%. This gives the acquisition portfolio a blended capitalisation rate of 4.9% as the Dallas property’s yield is at 5%. The two assets are fully-fitted data centres, compared to the mainly shell and core data centres in the IPO portfolio. “We had valued the IPO portfolio at 4.25%, for shell and core data centres which are priced tighter than other DCs because costs are borne by the customer. This portfolio is fully fitted, and cap rates are not as tight as the IPO portfolio,” Stewart explains.
Stewart says he prefers the larger acquisition (of US$757 million) because of the size and diversification that both the Frankfurt and Dallas assets provide in terms of geography and tenants. “The larger deal is also more accretive: it’s 3.1% accretive to DPU, whereas the debt-funded transaction is 2% accretive,” Stewart says.
For more stories about where money flows, click here for Capital Section
But since the larger deal involves EFR, a lot depends on the market. “If we can do it in a manner that doesn’t dilute unitholders by forcing us to issue equity at a discount, if we’re able to raise equity at an attractive valuation, the bigger deal does a lot for us,” Stewart continues. “We intend to remain disciplined. And if the markets don’t cooperate, if the equity markets aren’t there for us, then we’ll do the smaller deal,” he adds.
The EGM is scheduled for late November or early December, and the manager has negotiated a flexible completion date of some three months after the EGM.
Debt-funded Japanese nursing homes
First REIT announced it has entered into a silent partnership agreement to acquire two nursing homes for JPY2.6 billion, a 3.4% discount to independent valuation of JPY2.7 billion. The announcement by First REIT’s manager says the portfolio is expected to generate an NPI yield of 5.2% and expected to be DPU-accretive.
On Sept 20, PLife REIT’s manager announced the acquisition of two nursing homes in Japan for the equivalent of $29.4 million, or an 11% discount to valuation. According a statement by the manager, the acquisition is at an NPI yield of 5.2% and expected to be DPU-accretive. PLife REIT’s trading yield is below 3%, and its Japanese debt is below 1%, so anything it acquires is likely to be DPU-accretive.
