NOMURA - Frontier Real Estate Investment (8964 JP) (Neutral) 16/6: issues resolved, but retail environment in flux

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Continuing to renegotiate rents with general merchandisers, seek tenants for urban retail spots

In 16/6 Frontier Investment posted a loss of ¥470mn on the sale of Joyfutown Okayama, where the main tenant was Ito-Yokado. However, the REIT drew down ¥340mn in internal reserves and paid the same DPU as 15/12 (¥9,694). The Sport Club Renaissance Hiroshima property was vacated in July 2016, but vacancy has been avoided as a contract was signed with new tenant Kohnan Shoji [7516]. Frontier has been steadily resolving issues on the property management side, but has yet to reach agreement on rent renegotiation for Ito-Yokado Higashi Yamato. Looking further ahead, in October 2017 the Tsutaya Book Store Tenjin (Fukuoka) will lose its whole-building tenant and in the same month rent renegotiation time will arrive for Aeon Shinagawa Seaside. We are also focused on these outcomes. On the other hand, the REIT acquired a 50% stake in Mitsui Shopping Park LaLaport Shin-Misato in August for ¥15.1bn (appraisal NOI yield of 5.0%).We estimate the LTV ratio is currently 41.9%, leaving acquisition capacity of ¥12bn up to an LTV ratio of 45%. This likely puts the focus on what method will be used to fund additional investment. We use a target dividend yield of 3.25% and target cap rate of 4.0% to calculate our target price, continuing to value the REIT using discount rates that are around 25bp lower than the respective weighted averages for 38 REITs under our coverage.