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.

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.

American Homes 4 Rent (NYSE: AMH) - Secondary Public Offering.

AGOURA HILLS, Calif., Sept. 7, 2016 /PRNewswire/ -- American Homes 4 Rent (NYSE: AMH) (the "Company") today announced that Alaska Permanent Fund Corporation, a selling shareholder (the "selling shareholder"), has commenced an underwritten secondary public offering of 43,500,000 of the Company's Class A common shares of beneficial interest, $0.01 par value per share (the "Class A common shares"). The Company is not offering any Class A common shares in the offering and will not receive any of the proceeds from the sale of its Class A common shares by the selling shareholder. BofA Merrill Lynch will act as the sole book-running manager for the offering.

Webisode - S1E1 - Equity Multiple

The Closing Table - www.closing-table.com

Season 1 Episode 1 - Marious Sjulsen of EquityMultiple.com

Marious Sjulsen - President & Head of Real Estate www.equitymultiple.com

We had Marious Sjulsen, President & Head of Real Estate of Equity Multiple a crowdsourcing firm that brings diverse industry experience in capital markets, loan sales, private equity, law and technology.

EQUITYMULTIPLE’s team brings diverse industry experience in capital markets, loan sales, private equity, law and technology. They were brought together by a shared vision of technology transforming the real estate capital markets. They have a partnership with Mission Capital galvanizes an established, diversified, nationwide investor network and unites them with a broad network of experienced sponsors. Mission Capital is a leading national, diversified real estate capital markets solutions firm with offices in New York, California, Florida, Texas and Alabama. The firm delivers value to its clients through an integrated platform of advisory and transaction management services across commercial and residential loan sales; debt, mezzanine and JV equity advisory and placement; and loan portfolio valuation. It has closed more than $65 billion in real estate transactions since its inception, with over $40 billion since 2008 and prides itself on utilizing technology to fuel its growth.

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.

STIFEL: Office/Industrial REITs - Conference Call 9/7/16 - Value Creation or Destruction and Lease Economics Analysis. SLIDES ATTACHED. Dial-in Info Below.

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Conference Call 9/7/16 - Value Creation or Destruction and Lease Economics Analysis. SLIDES ATTACHED. Dial-in Info Below.

• We are hosting a conference call on Wednesday, September 7 at 11AM ET. Dial in numbers are as follows: (888) 267-2848 (Domestic); (973) 413-6103 (International); Conference ID: 987648;

• A replay of this conference call will be available through September 21, 2016 - Replay dial in numbers are as follows: (800) 332-6854 (Domestic); (973) 528-0005 (International); Conference ID: 987648

• We believe the best way to determine a company's ability to create (or destroy) value is to 1) review its Net Asset Value at a static cap rate, 2) adjust for dividends paid, 3) evaluate the lease economics and then 4) overlay projected property market conditions, portfolio expectations and development-driven value creation.

• The body of this report reviews each company under our coverage and its Net Asset Value plus dividends paid during (in most cases) 2006-1H2016. In our summary of each company, we also provided a projection given the current strategy, development pipeline and lease economics.

• Additionally, we have compared and contrasted the Lease Economics Analysis for the Office & Industrial REITs under coverage. We recently started this analysis to provide a forward look at expected portfolio performance based on the re-leasing spreads combined with the re-leasing costs. Evaluating one without the other is similar to a PB&J without either the PB or the J.

Pricing as of 9/6/16

• Our primary conclusions: 1) creating value without the benefit of cap rate compression is not easy, 2) asset re-cycling and portfolio re-positioning appear to be working, 3) the dividend is vital over the long term, 4) quality development worked, while commodity development, plus high land inventories, proved disastrous, 5) the 2009 re-equifications were painful, 6) prudent, proactive equity raises were helpful, 7) quality assets and submarkets usually ruled the day, 8) high re-leasing costs and marginal re-leasing spreads result in value erosion

METHODOLOGY -- No Cap Rate Geniuses

• Our methodology was to hold the cap rate fixed for the time period reviewed to determine share value creation or destruction absent cap rate fluctuations (no "cap rate geniuses" allowed), and add the dividend paid in order to determine portfolio value created or destroyed and total shareholder return.

• For some companies with major portfolio re-positioning strategies, we adjusted the underlying cap rate.

• This captures, from a valuation perspective, hard-to-detect nuances such as 1) excess capex and re-tenanting costs, 2) cash costs for balance sheet management, which were real costs in spite of being excluded from FFO, 3) real re-development returns, 4) the importance of the dividend in total return to shareholders, and 5) stock based compensation.

• Note that we usually annualized our NAV estimates as quarterly estimates have often been volatile historically.

Weekly Holla! Prisons Break (Again) [Omotayo Okusanya, George Hoglund, Jonathan Petersen]

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The RMZ was up (+1.5%) last week, outperforming the S&P 500 (+0.5%), as the 10 Year Treasury yield decreased 3 bps to 1.60%. Industrial (+2.7%) Office (+2.6%), and Infrastructure (+2.2%) outperformed. Prisons (-6.8%) underperformed on more negative sector news (see below). Lodging (-2.0%) and Retail - Malls (+1.1%) also underperformed.

FBR - 2Q16 Earnings Recap: Updating Investment Ratings, Price Targets, and Estimate Changes; Highlighting Main Takeaways

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With 2Q16 reporting now wrapped up for the REITs and special servicers, we are providing updated investment ratings, price targets, and estimate changes for our coverage. Additionally, we are highlighting our strongest picks and most noteworthy takeaways coming out of earnings season.

STIFEL: Triple-Net - Triple-Net REIT Comp Sheets 9/5/2016

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riple-Net REIT Comp Sheets 9/5/2016

• REITs Rally On Job Report, Sector Underperforms. The overall REIT sector gained 180 bps this past week and is +14.7% YTD. The triple-net sector underperformed, +130 bps for the week and is +32.8% YTD.

• Dividend Yield. Triple-net REITs are trading at 16.8x 2017E FFO as compared to equity REITs trading at 18.0x. The current dividend yield for the sector is 4.58% vs. the REIT sector dividend yield of 3.65%. The 93 bps spread is 70 bps below the long-term average spread of 163 bps.

• Real Estate Receives Its Own GICS Classification. As of the close on August 31, the real estate sector was separated from financials and became the 11th Global Industry Classification Standard (GICS) by S&P and MSCI. The changes will be implemented on September 16th.

• GPT Announces More Transactions. Gramercy Property Trust (GPT, $9.64, Buy) announced they have sold three more single-tenant office buildings in Princeton, New Jersey, Burlington, Massachusetts, and Bloomington, Minnesota as well as a single-tenant industrial property in Phoenix, Arizona for $206.7 million or a 7.4% forward cash cap rate. The properties had a weighted average lease term of 10.1 years. The company has $158.6 million of assets under contract with an additional $117.8 million being marketed. If those sales close, total dispositions would be $1.5 billion at a 6.8% cap rate, over 12 months ahead of the anticipated schedule. The company also announced two more acquisitions in the Chicago MSA for $60.2 million or a 6.6% cash cap rate with a weighted average lease term of 17.2 years. An additional $342.6 million of assets are under contract/LOI at a 6.75% cap rate with a weighted average lease term of 12.2 years. Total acquisitions are $905.5 million at a 7.0% cap rate with a 12.4 year weighted average lease term.

• STOR receives Investment Grade Credit Rating From S&P. Store Capital Corporation (STOR, $29.64, Buy) received a BBB- credit rating from S&P with a positive outlook. STOR already obtained an investment grade rating from Fitch last November.

Priced as of close 9-2-2016.

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.