NOMURA: Japan Hotel REIT Investment (8985 JP) (Buy) New guidance: RevPAR growth target is 8.7%

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With no pullback apparent in lodging demand, next portfolio target is ¥500bn

Japan Hotel REIT announced new 16/12 guidance on 24 August. Compared with February, rent income projections were raised for five of the six chains paying variable rent. The rent projection for the other is unchanged from February. The REIT's new overall projection for variable hotel rental income is ¥0.2bn higher than the most recent estimate (7 July). As of February, the RevPAR (average occupancy times average room rate) target for the three main chains (Hotel Management Japan, Accor, and The B) was +8.7% y-y. Concern about changing conditions in the hotel market has been rising in the stock market, but the business environment appears to be generally in line with what management expected at the start of 2016. Moreover, property acquisitions have been brisk. Since the start of 2016 the REIT has issued new shares twice and used the proceeds to acquire five properties (including Hilton Nagoya) for ¥61.1bn (5.1% weighted-average NOI yield). We use a fair-value dividend yield of 3.25% and fair-value cap rate of 4.0% to calculate our target price. Previously we valued Japan Hotel REIT 50bp lower than the weighted-average yield indicators of the 38 REITs we cover. We now change to 25bp lower based on the increased difficulty of forecasting conditions in the hotel market.