NOMURA - Nippon Building Fund (8951 JP) (Neutral) 16/6 results

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Occupancy higher than projected but unlikely to rise further, making rent revisions even more crucial

Guidance calls for real estate rental revenues to rise ¥0.78bn (2.4%) between 16/6 and 16/12, breaking down as ¥0.44bn from acquired properties and ¥0.34bn from existing properties. For the latter, the REIT has raised its average occupancy projection for 16/12 from 97.8% to 98.2% to reflect generally better-than-expected progress in attracting new tenants together with the full-term impact of new tenancies at NBF Toyosu Canal Front and Celestine Shiba Mitsui Building. Rent revisions involving existing tenants are also likely to remain positive, having turned so in 15/12 for the first time since 09/6. Meanwhile, the REIT has acquired four properties for a total of ¥29.5bn since 16/6, including the Ueno East Tower and the Toyocho Center Building, while at the same posting gains of ¥0.95bn on the sale of the NBF Sendai Honcho Building and the NBF Atsugi Building. We estimate the current LTV at 41.9%, giving the REIT ¥78bn to spend on properties before it hits its self-imposed ceiling of 46%. We use a fair-value dividend yield of 2.75% and fair-value cap rate of 3.5% to calculate our target price. We continue to value the REIT using discount rates that are 75bp lower than the weighted averages for the 38 REITs under our coverage.