NOMURA: Japan REIT sector - Ongoing property sales by REITs

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Property sales constitute viable option even if pros and cons are not immediately apparent

On 31 August Sekisui House SI Residential Investment [8973] (Buy) announced the sale of b-town Minamiaoyama, an urban retail facility. It has been selling off commercial facilities since June 2014 in order to turn itself into a specialist residential REIT, and to date had sold six properties. It had hitherto decided not to sell b-town Minamiaoyama because it was carrying unrealized losses, with appraisal value of ¥1.17bn at end-16/3 versus book value of ¥1.49bn. However, it has now managed to sell it to a third party based in Japan that made an offer of ¥1.56bn, well above the property's appraisal value and also higher than its book value. Sekisui House SI Residential Investment said that it received an offer for the property in excess of its book value because the real estate market has been buoyant recently.

Japan REIT sector - REITs up despite ex-dividend date for 11 REITs

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Stocks should benefit from BOJ buying, REITs seem also to be in favor

TOPIX rose 2% on 29 August from the previous trading day. The main factor was likely the yen's retreat following the Fed chairwoman's lecture and comments by BOJ Governor Haruhiko Kuroda at the symposium at Jackson Hole, Wyoming, on 26 August. Amid these conditions the TSE REIT index rose 0.5% on 29 August despite it being the ex-dividend date for REITs with August-ending fiscal periods (ie, 11 of the 54 REITs). After nearly doubling its annual ETF buying target to roughly ¥6trn (from ¥3.3trn) at the 29 July Monetary Policy Meeting, the BOJ bought ¥71.9bn in ETFs on both 25 and 26 August, roughly double the daily amount of BOJ ETF buying up to 3 August. Even so, TOPIX continued to fall d-d on 25 and 26 August. On the other hand, the BOJ did not buy REITs on 25 or 26 August, but the TSE REIT index rose each day nonetheless. Judging from these market conditions, our view is that market participants feel safer in REITs than stocks.

NOMURA - Sanki Engineering (1961 JP) (Neutral) Effect of suspension not clear yet

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Real estate business also warrants attention

In Apr-Jun 2016, operating losses narrowed to ¥0.3bn, from ¥0.6bn the year earlier, although Apr-Jun results make only a small contribution to full-year results owing to seasonal factors. Losses narrowed owing to an increase in revenues in the machinery systems business, offsetting an increase in provisions against construction losses in the facilities construction business, which includes the HVAC systems for buildings business. As announced by the company on 23 June, the government suspended the company from participating in bids and contracts for 30 days, from 8 July to 6 August, in connection with antitrust law violations. We will be paying close attention to the effect of the suspension on earnings in Jul-Sep and beyond. Peers that were similarly suspended in 15/3 saw earnings adversely affected in cases where the companies also refrained from actively taking on work in the private sector. We make no change to our operating profit forecasts, but we lower our target price as we cut our target P/E to 11-12x, from 16-17x previously, to reflect trends in the benchmark P/E and other factors.

 

Japan construction and real estate market - Sekisui House trying housing-to-hotel shift

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Serviced apartments arrive in Otemachi too

Sekisui House [1928] has decided to develop long-term-stay serviced apartments targeting chiefly wealthy people from overseas in Akasaka 5-chome, with completion scheduled for 2020. The property is to have 223 guest rooms and will apparently involve a total investment of about ¥25bn including the cost of the land. Sekisui House is to handle the development and own the property, which is to be managed by Frasers Hospitality Pte Ltd, a member of the Singapore-headquartered Frasers Centerpoint Limited Group. In our view, the property could in the future be sold to an affiliated REIT. Sekisui House in June 2010 completed the Honmachi Garden City property in Osaka, which houses the St. Regis Osaka Hotel on its high-rise floors, and recently completed the redevelopment of the Hotel Fujita Kyoto acquired in 2006 from Fujita Kanko [9722], which opened a few years as the Ritz-Carlton Kyoto. We see an increasing possibility of the company expanding operations in the hotel field—something to watch for the future.

NOMURA: Japan REIT sector - Conditions at two hotel REITs

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Differing views on RevPAR growth, based on differences in exposure to Tokyo, pricing, formats

Invincible Investment [8963] (Buy) announced 16/6 results and 16/12 guidance on 23 August, followed on 24 August by Japan Hotel REIT Investment [8985] (Buy), which announced 16/12 H1 results and 16/12 full year guidance. Below, we summarize conditions at these two major hotel REITs, and the differences between them.

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. 

NOMURA - MCUBS MidCity (3227 JP) (Buy) 16/6 results

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Internal growth, lower funding costs ensure steady rise in DPU, potential for regular acquisitions?

Occupancy remained high at the two flagship properties in Osaka Business Park, up 0.4ppt from 97.6% at end-15/12 to 98.0% at end-16/6 at Twin 21, and flat at 97.1% over the same period at the Matsushita IMP Building. Elsewhere at office buildings in the Honmachi area, occupancy rose from 87% to 100% at the MID Midosujikawaramachi Building, and rose by 2.2–3.0ppt at other office buildings, with no declines in occupancy at any buildings. This reflected a decline in the amount of office stock as a result of older office buildings being redeveloped as hotels in addition to improved economic sentiment, and suggested that conditions on the Osaka office market may now have bottomed out, having hitherto given cause for concern. Guidance for 16/12 calls for rental income from properties in the Osaka Business Park to rise as rent-free periods come to an end, but for only a minimal impact from properties in the Honmachi area, which account for a smaller portion of rental income.