NOMORA JAPAN - Unizo Holdings (3258 JP) (Neutral) Factoring in dilution from capital increase

Aggressive investment in Washington, DC

REPORT

We have lowered our target price by 35% and retain our Neutral rating. The cut in the target price reflects the 20% increase in shares out resulting from the capital increase staged in July, as well as an increase in the cap rate we use to calculate NAV from 4.5% to 5.0%. This revision of the cap rate reflects increased uncertainty on financial and capital markets, for example from Brexit, a slowdown in office rent rises, and a slowdown in the pace of growth in hotel room rates on deteriorating corporate demand, although inbound demand is buoyant. We estimate that 80% of 17/3 NOI will come from office buildings and 20% from hotels, and we apply a cap rate of 5.0% to both property types. The revision to our cap rate is on the large side not only because of the difficulty in hiking rents on office buildings in Japan but also because of the company’s decision to spend a total of ¥50bn on purchasing three buildings in Washington, DC from July onwards, including 1100 First Street NE, which will likely result in US assets accounting for more than 30% of total property, plant & equipment as at end-17/3, and cap rates on US real estate are higher than on office buildings in the five central wards of Tokyo.