NOMURA - Japan housing & real estate sector - Office demand down for third straight month

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Daisuke Fukushima
Vacancy rate continues to improve on multiple demolitions, rent upside strengthens

According to major real estate brokerage Miki Shoji, the office vacancy rate in Tokyo’s five central wards improved 4bp m-m to 3.90% in August 2016. Growth in advertised rents remained weak, up only 4.75% y-y, but this nevertheless represents a gradual improvement on 3.98% in January 2016, the weakest recent month. Office demand, a key indicator, fell 5,794 tsubo (3.3m²) m-m, thereby registering its third consecutive monthly decline. However, the vacancy rate improved because eight office buildings were demolished and therefore removed from the survey/statistics, which are now based on 2,591 office buildings, with the result that leasable office floor space fell 9,430 tsubo m-m to 7.28mn tsubo while vacant space fell 3,636 tsubo to 283,896 tsubo. While three straight months of falling demand for office space will warrant ongoing attention as it constitutes the first such move since end-2009/early 2010, the summer is not a particularly strong season for office demand to start with, and we therefore think it would be premature to say that demand has moved into a sustained downtrend along the lines of 2008, when the global financial crisis occurred. We think it would be prudent to maintain a wait-and-see attitude for now. We continue to recommend Mitsui Fudosan [8801] and Tokyo Tatemono [8804] for rising rents and low P/NAV ratios.

FBR - We Think 3Q16 Macro Trends Work to IBKC's Benefit: Raising PT to $73 and Reiterating OP

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As 3Q16 unfolds, we are raising our price target for IBKC to $73 from $70 and reiterating our Outperform rating. We believe broader macro trends are shaping up to provide a proverbial tailwind to IBKC’s earnings in the second half of 2016. More specifically, we think crude oil prices above $40/bbl are a positive for the energy provision outlook, we view strong nationwide mortgage loan origination volumes as a positive for mortgage banking income in 3Q16, and we do not think IBKC’s commercial real estate (CRE) exposure is likely to become a disproportionate overhang to its share price valuations relative to peers. Further, given that it is highly asset sensitive, we think IBKC’s share price is likely to benefit from any increased market anticipation of a rate rise by the Fed in 2H16.

Mortgage Market Continues to Shine; Raising our Origination Forecasts for 2016 to $1.9T; Setting 2017 at $1.75T

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With continued strength in the purchase mortgage market and a healthy boost to refis in light of the low interest rate environment throughout the year, we are raising our estimate for 2016 total mortgage industry originations to $1.9 trillion from $1.65 trillion. For some time now, we have articulated our belief that the normalized origination market in the U.S. shakes out at around $1.7 trillion with the purchase market representing somewhere in the range of $900 billion to $1 trillion and the refi market accounting for the delta. With that in mind, we think that the tailwinds from lower interest rates will boost production through that level in FY16, hence our $1.9 trillion estimate. Additionally, we are introducing our 2017 estimate of $1.75 trillion, which assumes continued positive momentum in the purchase market but a decline in refi volumes from 2016.

STIFEL: Rtl REIT - Retail REIT Comp Sheets 9/6/16

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Retail REIT Comp Sheets 9/6/16

REITs were up 1.53% last week. REITs were down 3.7% in August, but are up 14.7% YTD. Retail REITs are slightly underperforming the REIT index YTD, up 14.6%, as regional malls are up 12.9% and shopping centers are up 17.2%.
The REIT sector is trading at a 3.5% premium to NAV. Regional malls are attractively priced to the REIT sector, in our view, trading at a 9.6% discount to NAV while shopping centers are trading at a 6.3% premium to NAV.

• Real estate received its own Global Industry Classification Standard (GICS) by S&P and MSCI as of the close on August 31. Real estate was previously part of the financials and is now the 11th GICS sector. The changes will be implemented September 6. All equity REITs will go into the new sector while commercial finance REITs will remain with financials. There are 27 REITs in the S&P 500.

• WP Glimcher is now Washington Prime Group (WPG, $13.85, NC) following approval of its shareholders at its annual meeting last week. WPG also appointed Sheryl von Blucher to its Board of Directors, filling the vacancy created by the retirement of Marvin L. White. Ms. Von Blucher currently serves as partner and managing director for JMJS Group, a private equity partnership. Prior to JMJS, Ms. Von Blucher led international analysis, strategy and corporate affairs for Heritage Amoco of British Petroleum (BP Amoco).

• Macerich (MAC, $81.92, Hold) officially opened its expanded and redeveloped Broadway Plaza in Walnut Creek, CA. The phase I expansion added 235k sf of small-shop space, more than doubling the amount of small-shop square footage. The expansion is over 90% leased to well-known retailers, such as Arhaus, H&M, J. Crew, lululemon athletica, Madewell, Michael Kors, and Zara. MAC is adding over 50 new retailers to the center through expansion. The new space was created by the construction of a more efficient parking structure and the consolidation of the stand-alone Macy’s Men’s Store into a single larger Macy’s box. Phase I encompassed the demolition of 80k sf of existing retail space and construction of 240k sf of new retail space while phase II involves the demolition of the existing Macy’s Men’s building and 75k sf of new retail sf for a total of 235k sf.

• CBL & Associates (CBL, $40.62, Hold) and its JV partner, High Real Estate Group sold High Pointe Commons in Harrisburg, PA for $33.8 million. A Target and JC Penney anchored the 355k sf community center. CBL used the net sale proceeds of $8.2 million to reduce borrowings on their credit facilities.

Pricing as of 9/2/16 close.

DNB NEWS & RESEARCH for 9/6

RESEARCH:
STATOIL:       REIT BUY, PT NOK160 impressive cost-cutting efforts
HUSQVARNA:     REIT BUY, PT SEK75see room for double-digit EPS growth
GETINGE:       REIT SELL,PT SEK165 LT we believe that the roll-up story is over

JEFFERIES - SEGRO (SGRO LN, HOLD, PT: 425.00p)

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First View: Cash Box for Development Funding [Mike Prew, Andrew Gill]

SGRO 9.9% cash box placing of 74.8m new ords to raise c. £340m to fund near-term development and capture the pick-up in pre-leasing activity in core markets with £6m net rent signed since 30 June. Accompanying trading update reaffirms continuing pick-up in UK tenant demand post BREXIT vote. £456m of cap ex has been identified over the next 2yrs of which £199m is committed to the current pipeline and a further £140m on the potential pipeline which are either pre-let or agreed subject to planning approval.There are further speculative, urban warehouse development projects totaling £117m, of which management expects most to commence within the next 6 to 12mths subject to continuing favourable occupier markets. The shares have bounced to a -3% discount to NAV and yield 3.6% after the sector fillip on GICS reclassification of REITs as a separate S&P/MSCI sector (1/9/16). Should have been debt financed and confirms our suspicion that the sector is expensive post the BREXIT currency bounce.

JEFFERIES - UPCOMING US CORPORATE ACCESS

Detroit REIT Tour 10/30/2016

Denver REIT Tour 9/8/2016

STIFEL: KRC ($72.63, Buy) - Gold Rush in San Francisco; Target Price $80/sh; Maintain Buy

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FULL MODEL

Gold Rush in San Francisco; Target Price $80/sh; Maintain Buy

• We have chosen to run the numbers by hand and have come up with the following conclusion: selling a 44% interest in two assets for $508mm ($1.155B at 100%), a value over 2.7x the cost to acquire the assets, creates value and increases NAV.
• Kilroy acquired the two assets, 303 Second and 100 First Street, in 2010 for $354/SF. The just announced joint venture values these two assets at $963/SF and a quoted 'low 4%' cash cap rate.
• We think the transaction underscores the willingness of offshore global capital to pay very full prices for assets in barrier-to-entry markets and make major investments in Gateway City office REITs. We expect additional similar investments to occur selectively throughout our coverage.

• After adjusting our estimates for this transaction, we are increasing our target price to $80/sh. The new target price equates to 2017E FFO/FAD/sh multiples of 22.5x/35.4x, a 4.8% implied NOI cap rate and a TEV of $637/SF, versus our estimate of adjusted replacement cost of $538/SF.

• We estimate that Kilroy Realty currently trades at very reasonable real estate valuation metrics: 1) 5.3%/4.5%/3.8% for Implied NOI, Cash Flow, and CF less G&A Cap Rates. TEV/SF of $584/SF is also reasonable relative to our estimates of $620/$538/SF for gross/adjusted replacement cost. Finally, KRC trades at a 16%/6% discount to our 4.5%-5.0% NAV range.

• This accentuates the pivotal question with REIT valuations -- does a discount to NAV and other attractive real estate valuations offset historically high FFO/FAD multiples?

• Please find our 2Q16 Office market fundamentals update here: Houston Free Fall. San Francisco and Boston Solid, Los Angeles Hype Not in Numbers. 2Q16 Office Fundamentals Update. While concerned about the Silicon Valley, the rest of the KRC markets are relatively solid.

• While clearly Net Asset Value accretive, the transaction will result in cash staying on the balance sheet until spent on development, and near term earnings dilution.

• We are adjusting 2016 FFO/FAD/sh estimates to $3.38/$2.19 from $3.40/$2.21 and our 2017 FFO/FAD/sh to $3.55/$2.26 from $3.57/$2.27. We estimate the normalized 2015-2017 FFO/FAD growth to be 5.0%/7.7%.

Target Price Methodology/Risks

• Our target price of $80/sh, equates to 22.5x/35.4x on our updated 2017 FFO/FAD/sh estimates of $3.55/$2.26 and an implied NOI cap rate of 4.8%.
• Risks to achieving our target price include development and lease-up risk, tech bubble fears, interest rate and general economic risk.

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.

STIFEL - Retail REIT Comp Sheets 8/29/16

FULL REPORT REITs were down 0.44% last week, but are up 12.9% YTD. Retail REITs are slightly outperforming the REIT index YTD, up 13.1%, as regional malls are up 11.6% and shopping centers are up 15.5%. The REIT sector is trading at a 1.8% premium to NAV. Regional malls are attractively priced to the REIT sector, in our view, trading at an 10.5% discount to NAV, while shopping centers are trading at a 5% premium to NAV.

Forest City Realty (FCEA, $23.41, Not Covered) announced the Board of Directors has authorized a process to review strategic alternatives for its retail portfolio, which consists of ownership interests in 14 regional malls throughout the country and 19 specialty retail centers located primarily in New York City. FCEA expects to conclude the review process by 1Q17. If FCEA does a retail portfolio transaction, it would redeploy the proceeds into their apartment and office assets that better align with their focus on urban, mixed-use assets. A few of the mall and shopping center REITs could be interested in some of the assets, but FCEA owns less than 100% in many of their retail centers and doesn’t manage some of the centers, which could make them less appealing to the public REITs.   Long-time Equity One (EQY, $30.88, Hold) President, Thomas Caputo, is departing the company on December 31, 2016 when his employment agreement expires. Mr. Caputo has entered into a consulting agreement with EQY for January 1, 2017 through December 31, 2017 to provide consulting services on acquisitions and other strategic opportunities. Members of EQY’s management team will assume Mr. Caputo’s responsibilities upon his departure.   Taubman Centers (TCO, $77.28, Not Covered) reopened International Market Place in Waikiki on August 25. The 345k sf open-air center is anchored by Hawaii’s first Saks Fifth Avenue. Nearly 50% of the retailers and restaurants at the center are unique to O’ahu. International Market Place was redeveloped through a partnership between TCO and CoastWood Capital Group in conjunction with the Queen Emma Land Company.   WP Glimcher (WPG, $13.55, Not Covered) completed the sale of Knoxville Center for $10.12 million. Knoxville Center was identified as a non-core asset and anchored by Belk, Dillard’s, JC Penney, Regal Cinema, Rush Fitness Center, and Sears. WPG received $3.85 million at closing and financed the remainder of the sale price with a $6.2 million loan secured by the property. The term of the loan is for one-year loan with one six-month extension option at an interest rate of 5.5%. WPG used the sale proceeds to reduce borrowings on its credit facility.   Performance is as of 8/26/16. Equity pricing is intraday, 8/30/16.