Industrial & Infrastructure Fund Investment (3249 JP) (Buy) 16/6: DPU maintained, REIT intends to lift it higher

Profit recovers, deadline disclosed for solving Shinonome problem

Regarding IIF Shinonome R&D Center, where the sole tenant is scheduled to depart at the end of September, the REIT (IIFI) appears to be in negotiations with a specific candidate tenant to keep the asset as a single-tenant property. However, consideration of selling the property is also under way in case agreement is not reached in negotiations. The REIT plans to determine course in September and have either a leasing agreement or sale contract signed by the end of 2016. IIFI's 16/12 guidance appears to assume the property remains vacant. Elsewhere, contracts have been signed to bring occupancy at the IIF Shinagawa IT Solutions Center to 100%, up from 76.1% at present. Moreover, expansion of IIF Nishinomiya Logistics Center will begin contributing to earnings from 16/12. Since the tenant at Shinonome decided to depart, the REIT has acquired five properties (excluding ownership increases). The high speed of investment has allowed the DPU level to be maintained and the REIT seems determined to improve DPU further. Currently about 20 properties (¥90bn) are being closely examined. That said, LTV has risen to 53%. The focus is therefore on not only the Shinonome outcome, but also capital-raising in combination with additional investment. We use a fair-value dividend yield of 3.0% and fair-value cap rate of 3.75% to calculate our target price. In February we changed to valuing IIFI using discount rates 25bp lower (previously 50bp lower) than respective weighted averages for the 38 REITs we cover. Given the clear deadline for dealing with Shinonome, the stable DPU, the commitment to improving DPU, and the high probability thereof, we return to valuing IIFI at discount rates 50bp lower than the 38-REIT averages.