NOMURA JAPAN DAILY SUMMARY & RESEARCH - REITS

FULL REPORT

Near-term earnings likely to depend on real estate sales and condo business 
Tokyu Fudosan Holdings has no major projects under development for long-term holding and rental until the planned completion of the Shibuya Dogenzaka 1-chome and Shibuya Nanpeidai projects in 20/3 and the Takeshiba and Shibuya Station Sakuragaoka Exit projects in 21/3. We expect the company to sell Yokohama Minatomirai 21-32, which is being developed near condominiums and slated for completion in 18/3. After completion, we expect a stable contribution to profit growth from the sale of the Higashi Ikebukuro 1-chome Cinema Complex, a project in which the company disclosed its involvement on 9 August 2016, as well as retail stores, restaurants, and business hotels in Futako Tamagawa, Ginza 1-chome, Shimbashi 3-chome, and Osaka Shinsaibashi 2-chome. Our views are unchanged, and we maintain our forecasts, target price, and Buy rating. Our target price is based on NAV calculated from a cap rate of 4.3%, and the shares look undervalued considering the implied cap rate of 5.3% based on the 8 September closing price.

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.

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.