Hey everyone, welcome back to ‘The Dividend Uncle’ where we break down REITs, dividend stocks, and the best income-generating investments for your portfolio. Today, we’re going to talk about how the recent shift in Japan’s interest rates could change everything about Daiwa House Logistics Trust, or DHLU.

Previously, I highlighted Daiwa House Logistics Trust as one of the most stable REITs, and recommended to all my friends and viewers to add to their portfolio, thanks to Japan’s long-standing 0% interest rate policy. But with Japan’s central bank now starting to raise rates, we need to revisit this. How will it affect Daiwa House Logistics Trust’s debt, its distributions, and of course, that all-important dividend yield? Spoiler alert: Daiwa House Logistics Trust is currently yielding an attractive 8.4%, but let’s see if that’s sustainable moving forward.

Before we dive in, I must let you know that this content is for informational and educational purposes only and does not constitute financial advice. The opinions expressed are based on publicly available information and personal analysis, and they are not tailored to your specific financial situation. The REITs and institutions mentioned are cited purely as examples. While I have no affiliations, sponsorships, or financial relationships with any of them, I may personally hold positions in some of the investments discussed. Before making any investment decisions, you are strongly encouraged to consult a licensed financial adviser.

Alright, let’s get into it!

Why Daiwa House Logistics Trust Was a Safe Bet During Rising Interest Rates Globally

Let’s start by looking at why Daiwa House Logistics Trust was such a solid pick during the period of global interest rate hikes. While central banks around the world, including the US and Europe, were raising rates to fight the inflation monster, Japan held firm at 0% for the longest of time. That meant Daiwa House Logistics Trust’s average interest rate on its debt stayed at constant 1% since IPO, with 100% of it being fixed.

For us as investors, this made Daiwa House Logistics Trust a rock-solid option. While other REITs were seeing their borrowing costs in other currencies shoot up, Daiwa House Logistics Trust was sailing smoothly with all Japanese Yen debt. On top of that, the dividend yield has always been attractive; it was more than 10% at one point, and right now, it’s still sitting at a very juicy 8.4%. But not everything was perfect…

The DPU Decline: The Yen’s Weakness Takes a Toll

So, what was the problem? Well, it wasn’t Daiwa House Logistics Trust’s debt management; it was the yen. The Japanese yen weakened by about 10% against the Singapore dollar year-to-year as at end-Q2 2024, and this hit Daiwa House Logistics Trust’s distributions pretty hard. As a result, their DPU dropped by 6.1%.

For us, that means even though the REIT itself was performing well, we were getting less in Singapore dollar terms. And if you were holding Daiwa House Logistics Trust for that stable, high dividend, it wasn’t exactly the best news.

The Big Shift: Japan’s Interest Rates Are Rising, What Does This Mean?

Now, here’s where things are changing. The Bank of Japan is finally starting to raise interest rates, with a 0.25% increase on 31 July, and the yen has already jumped by around 10.4% since then. The Bank of Japan is likely to increase rates at least once more by the end of the year.

What does this mean for Daiwa House Logistics Trust? A stronger yen could reverse some of the DPU decline we saw earlier, which is great for us SGD investors. If the yen keeps strengthening, we could see better returns moving forward, which will make that the high dividend yield even more attractive.

In addition, the Net Asset Value in SGD will be boosted. In 1H 2024, the net asset value per unit dropped from $0.74 to $0.66 due to the declining yen.

However, there is one thing to watch out for. While Daiwa House Logistics Trust’s capital management is excellent, with 100% of its debt on fixed rates, about 27% of that debt, roughly $84 million, is set to mature this year. If they refinance at higher interest rates, we could see a rise in interest expenses, which might put some pressure on future distributions. Already, after acquisition of the Vietnam property, the average interest rates would have increased from 1.00% to 1.16%. The super low interest rate of 1.00% that has characterised Daiwa House Logistics Trust will not be coming back. 

The Dividend Uncle’s Take

I’ve always liked this REIT for its strong fundamentals and disciplined capital management. With its exposure to Japan’s logistics sector and 100% fixed-rate debt, it’s been a reliable player, especially when global interest rates were rising.

Now, with Japan moving in a new direction, there’s both good and bad. With the stronger yen, we could see their DPU stabilize or even grow again. That’s a huge plus. But with some of their debt coming up for refinancing this year, we also have to be aware that higher interest costs could chip away at those returns.

The good news is that Daiwa House Logistics Trust has proven itself to be well-managed, and while there might be some bumps in the road, I don’t expect major issues. In addition, at an 8.4% dividend yield, Daiwa House Logistics Trust is still very attractive, and I believe it’s a good long-term holding, especially if the yen continues to strengthen. I’d definitely continue to keep a close eye on how they handle their upcoming debt refinancing, but overall, Daiwa House Logistics Trust is still a strong choice for me, as an income investor.

So, there you have it. Daiwa House Logistics Trust is still a strong REIT, but with Japan’s rising interest rates, we’ve got a few new factors to consider. As active dividend investors, we have to be alert to pivots in macro economic policies that can affect the thesis of our investments. At the end of the day, it’s about weighing those factors and deciding if that dividend yield is attractive compared to the risks, and whether the investment continues to fit into your portfolio.

Thanks for joining me today, and I’ll see you in the next one!