SEMI-ANNUAL REPORT
Steadily Growing Dividends While Strengthening the Earnings Structure
Frontier Real Estate Investment Corporation ("FRI") is a REIT specializing in retail facilities and was listed on the Real Estate Investment Trust Market (the J-REIT market) of the Tokyo Stock Exchange in August 2004. Mitsui Fudosan has served as the sponsor of FRI since March 2008, when it replaced the previous sponsor, Japan Tobacco. FRI invests in diverse retail facilities in cities throughout Japan. Since FRI's listing, we have steadily built a solid management track record, aiming to secure stable earnings over the medium to long term.
Contents
2
Highlights
22
Financial Section
4
6
8
To Our Stakeholders / Topics Asset Size and Distributions Portfolio
23 38 58
Management's Discussion and Analysis
Audited Financial Statements
Independent Auditor's Report
10
12
Sustainability Initiatives Corporate Governance
61 62
FRI and the Asset Management Company Investor Information
15
FRI's Investment Policy / Distribution Policy
Disclaimer
All content presented in this semi-annual report is provided solely for informational purposes with regard to Frontier Real Estate Investment Corporation (FRI) and is not intended to serve as an inducement or solicitation to trade in any product offered by FRI. Investment units issued by FRI are subject to price fluctuations due to various factors, including: (1) volatile conditions in the J-REIT market, interest rates and the real estate market; (2) fluctuations in rental revenues from properties; and (3) the occurrence of unexpected losses due to natural disasters. Accordingly, investment in FRI entails the risk of incurring a loss. Investment decisions are made at the investors' discretion and are their responsibility as well as at their own risk. FRI disclaims any responsibility or liability for the consequences of investing in FRI.
Forward-Looking Statements
Except for historical information, matters discussed in this report are forward-looking statements and are based on management's estimates, assumptions, and projections. Forward-looking statements, such as business forecasts, should not be construed as commitments to or guarantees of future performance. They are based on judgments made using information obtained at the time of publication, and thus contain risks and uncertainties.
Please be advised that forward-looking statements provided herein may be subject to change without prior notice. Furthermore, FRI assumes no obligation to update any forward-looking statements in this semi-annual report as a result of new information or future events.
FRI Semi-Annual Report 39th period
Highlights
39th Period (July 1 to December 31, 2023) Financial Highlights
The distribution per unit for the 39th fiscal period was ¥10,549. During the 39th fiscal period, we acquired two properties developed by the sponsor, Mitsui Fudosan, thereby expanding the size of our asset holdings while promoting initiatives aimed at reinforcing our portfolio of existing properties. To ensure financial soundness, we maintained prudent financial operations through careful LTV control and continued to receive high ratings.
We forecast distributions per unit of ¥10,850 and ¥10,930, respectively, for the 40th and 41st fiscal periods.*
Loan-to-value (LTV) ratio | Appraisal-based LTV |
45.1% | 36.3% |
Average interest rate on borrowings | Average remaining maturity of borrowings |
0.49% | |
4.61 years | |
Net asset value per unit | |
¥467,644 | |
FRI Semi-Annual Report 39th period |
Ratings
AA- / Stable
Rating and Investment Information, Inc.
Issuer rating
AA / Stable A+ / Stable ; A-1 / Stable
Japan Credit Rating Agency, Ltd.
Long-term issuer rating
S&P Global Ratings Japan Inc. Long-term corporate credit; Short-term corporate credit
For the six month periods ended | June 30, 2023 (38th Period) | December 31, 2023 (39th Period) | June 30, 2024 (40th Period) Forecast* | December 31, 2024 (41st Period) Forecast* |
Operating revenue | ¥11,530 million | ¥11,032 million | ¥12,116 million | ¥12,214 million |
Net income | ¥6,146 million | ¥5,703 million | ¥6,315 million | ¥6,445 million |
Distribution per unit | ¥11,109 | ¥10,549 | ¥10,850** | ¥10,930*** |
* On March 15, 2024, we decided on the transfer and acquisition of certain assets. In conjunction with this decision, the forecast value announced in the "Summary of
Financial Results for the 39th Fiscal Period," dated February 15, 2024, has been revised.
**Distribution per unit for the fiscal period ending June 30, 2024 is calculated based on the assumption that we distribute an amount equivalent to net income for the period less ¥440 million (difference between reserve for reduction entry and the reversal of reserve for reduction entry).
***
Distribution per unit for the fiscal period ending December 31, 2024 is calculated based on the assumption that we distribute an amount equivalent to net income for the period less ¥530 million (difference between reserve for reduction entry and the reversal of reserve for reduction entry).
39th Period Portfolio Highlights | |
Asset size | Number of properties |
¥364.1 billion | 40 properties |
(Total acquisition price) | |
Appraisal value | Unrealized gain |
¥396.2 billion | ¥78.6 billion |
Occupancy rate | Green Building certified |
100.0% | 79.4% |
(Floor area basis) | |
FRI Semi-Annual Report 39th period |
To Our Stakeholders / Topics
To our stakeholders
The Investment Corporation's basic policy for property management is to secure stable revenue over the medium to long term. During the 39th fiscal period, we completed the acquisition of an 18.5% quasi co-ownership stake in LaLaport IZUMI- the third LaLaport facility included in the Investment Corporation's portfolio-as well as Shin-Kawasaki Square. The latter is a neighborhood shopping center situated in the vicinity of a large-scale condominium complex that is presently under construction on a site located alongside a train station. Both properties were developed by Mitsui Fudosan, our sponsor.
Furthermore, in February 2024 (during the 40th fiscal period), we entered into new fixed-term building lease contracts with tenants of You Me Town Hiroshima, a large-scale shopping center, after securing their consent regarding the cancellation of the existing contracts four years ahead of the initial termination date. The new contracts for this flagship property involve upward revisions in rent.
In addition, we have decided to allow Shinsaibashi Square, an urban retail facility, to be refashioned into a high-rise retail complex to ensure that this property is able to fully leverage the distinctive strengths arising from its favorable location within the Shinsaibashi area. Specifically, we will transfer ownership for the existing building portion of this property to
Topics: Strengthening the portfolio
Mitsui Shopping ParkLaLaport IZUMI
Shin-Kawasaki Square
[Izumi City, Osaka]
[Kawasaki City, Kanagawa]
(18.5% quasi co-ownership stake)
FRI's third LaLaport property
A medium-scale shopping center located extremely close to an urban train station
Lot area / Floor space Acquisition price2 Appraisal value3 Lessee
5,763m2 / 17,398m2
¥9,400 million
¥9,600 million
Type of contract Contract term
Mitsui Fudosan Co., Ltd. Pass-through master lease contracts
20 years (until December 21, 2043)
Annual rent (Appraisal NOI yield4)
¥575 million (4.5%)
Overview of property
Overview of property
• With the Hanwa Expressway running north-south and the Osaka Outer Loop Line (National Route 170) crossing the site from east to west, the site is well suited for attracting customers from a wide area.
• Roughly 57,000 people live within 3 km of the location and roughly 184,000 live within 5 km. Roughly 790,000 people live within a 30-minute driving range, providing it with an expansive business zone.
• There are about 17,000 people living within 500 m of the site and 55,000 people living within 1 km. These are very high numbers, and there is an especially large amount of condominiumdevelopment being conducted within a 500m radius of the site, so the facility's potential is expected to grow as the population increases.
1. Lot area, floor space, and annual rent figures are for the entire property.
2. The amount noted here excludes real property taxes, city planning taxes, consumption taxes, etc.
3. Figures are taken from the "Notice Concerning the Acquisition of Trust Beneficiary Interests in Real Estate in Japan and Real Estate in Japan press release issued on August 15, 2023.
4. Appraisal NOI yield: This is calculated by dividing the annual NOI that serves at the time of acquisition as the basis of the revenue figure obtained using the direct reduction approach indicated in the real estate appraisal by the acquisition price.
Properties Acquired in the 39th Period
Large-scale
SC
Lot area1 / Floor space1 | 113,617m2 / 151,947m2 |
Acquisition price2 | ¥5,198 million |
Appraisal value3 | ¥5,235 million |
Lessee | Mitsui Fudosan Co., Ltd. |
Type of contract | Master lease contracts |
Contract term | 20 years (until March 23, 2040) |
Annual rent1 (Appraisal NOI yield4) | ¥1,902 million (5.3%) |
Medium-scale SC
Other Topics in the 40th Period
Large-scale
SC
You Me Town Hiroshima
Concluded a new fixed term building lease contract with an increased rent amount
Key points of the initiative
Floor Guide
Overview of property
Hiroshima City, Hiroshima February 2008 50,135.95m2 / 111,387.12m2
• Reached agreement to terminate existing agreement four years ahead of schedule and to increase rent from March 2024
• Added new terms stipulating that rent revisions would be deliberated every five years in order to deal with inflation
• Increased rent by 44.7 million yen/year (impact on distributions per unit: approx. 41 yen/fiscal period)
Mitsui Fudosan in March 2024 so that we may shift our ownership status to a land interest ownership with a fixed-term land lease contract. Moreover, the initiative described above is expected to yield substantially higher NOI from Shinsaibashi Square in 2028 and later, with the volume of distribution per unit expected to expand by approximately ¥1,000 compared with distribution per unit for the 39th fiscal period due to higher rent to be available in the future. Thus, the rebuilding of this property is likely to significantly contribute to the stable payment of ever higher distribution per unit going forward.
The Investment Corporation and the Asset Management Company are working in unison to strengthen initiatives for sustainability. For example, in 2023 we maintained our "4 Stars" rating under the GRESB Assessment, an annual benchmark of the environmental,
social and governance (ESG) performance of real estate companies and firms. Looking | Shintaro Ono |
ahead, we will strive for the realization of a sustainable society by working hand in hand | CEO and Representative Director |
Mitsui Fudosan Frontier REIT | |
with all stakeholders, including investors. | Management Inc. |
Shinsaibashi Square |
Urban retail facility
Leverage the development and leasing strengths of the Mitsui Fudosan Group to achieve internal growth that surpasses recent increases in interest rates
Key points of the initiative
Overall schedule (planned)
• Increase building height through rebuilding
Transfer building but continuing to hold the land interest
Improve annual NOI significantly, from 320 million yen (NOI yield: 3.8%) to 1,430 million yen (estimated NOI yield: approx. 17.2%)*
• Switch to land ownership
Avoid risks associated with real estate development and secure long-term cash flow
• Maintain level of post-depreciation income during building teardown and rebuilding stages
Use ground rent and internal reserves during new building construction to cover impact of downtime
* The post-rent increase NOI (annual NOI) is not guaranteed and actual NOI may differ from the estimate.
Overview of the building transfer
¥217 million
¥172 million (as of Dec. 31, 2023)
¥44 million
Mar. 29, 2024
Mitsui Fudosan Co., Ltd.
Overview of the land lease agreement
Fixed-term business-use land lease contract
1,002.66m2
Mitsui Fudosan Co., Ltd.
Approx. 25 years
(Mar. 29, 2024, to Nov. 30, 2048)Undisclosed4
Overview of property
1. The amount noted here excludes real property taxes, city planning taxes, consumption taxes, etc.
2. Figures are rounded down to the nearest million yen.
3. A reference figure calculated based on difference between the planned transfer price and the book value as of December 31, 2023. This may differ from actual gains or losses on the transfer of the Property.
4. Undisclosed as these items include information for which the lessee bears secrecy obligations to its business partners as well as a figure that could be used to calculate said information.
* The diagram presented above is designed to provide readers with an easy-to-understand illustration of the time frame pertaining to changes in rent income from the leasing of the Property, pre-change NOI and estimated post-change NOI from the Property, and the provisionally calculated impact of these changes on distribution per unit.
2 Shinsaibashisuji, Chuo-ku, Osaka City, Osaka
Sep. 2014 1,002.66m2
1,632.75m2
* Values are total values for North and South buildings.
Asset Size and Distributions
Fiscal period
8th
9th
10th
11th
12th
13th
14th
15th
16th
17th
18th
19th 20th
21st
(June '08)
(Dec. '08)
(June '09)
(Dec. '09)
(June '10)
(Dec. '10)
(June '11)
(Dec. '11)
(June '12)
(Dec. '12)
(June '13)
(Dec. '13) (June '14)
(Dec. '14)
Properties
No. of properties
AEON STYLE Shinagawa Seaside: ¥20.1 billion
AEON MALL Ibaraki : ¥18.1 billionSummit Store Takinogawa Momiji-Bashi: ¥3.1 billion
BRANCH Hakata Papillon Garden: ¥7.9 billion
Home Center Kohnan Hiroshima Minami-Machi (land interest): ¥1.9 billion
Kamiikedai Tokyu Store: ¥1.4 billion
Frespo Tosu (land interest): ¥3.1 billion
Belltown Tambaguchi Eki-Mae Store: ¥2.1 billion
You Me Town Hiroshima: ¥23.2 billion
AEON MALL NAGOYADOME-Mae: ¥24.8 billion
12
17
30
29
Sponsors
Japan Tobacco Inc.
* **FRI implemented a two-for-one split of its investment units effective January 1, 2014. Distributions before the split have been divided by two.
Asset sizes (presented after each property name) reflect acquisition prices. The acquisition price of AEON MALL Ibaraki includes that for a portion of the property's land (area of 118.86 m2 and book value of ¥15 million) sold to Ibaraki City for ¥19 million on October 12, 2010. The acquisition price of Desigual Harajuku includes that for a portion of the property's land (area of 26.86 m2 and book value of ¥259 million) sold to the Tokyo Metropolitan Government for ¥333 million on July 30, 2012. The acquisition price of Home Center Kohnan Hiroshima Minami-Machi (land interest) includes that for the property's former building (acquisition price of ¥208 million) demolished as announced on December 2, 2016. Furthermore, all asset size figures are truncated after the first decimal place.
36th
22nd 23rd
24th
(June '15) (Dec. '15)
25th
(June '16)
26th
27th
28th
(Dec. '16)
29th
(June '17) (Dec. '17)
30th
(June '18)
31st
(Dec. '18)
32nd
(June '19)
33rd
(Dec. '19)
34th
(June '20)
35th
(Dec. '20)
37th
(June '21)
38th
(Dec. '21)
39th 40th*** 41st***
(June '22)
(Dec. '22)
(June '23)
(Dec. '23) ʢJune '24) (Dec. '24)
32
Shinsaibashi Square: ¥8.6 billion
Mitsui Shopping Park LaLaport SHIN-MISATO (16% co-ownership): ¥4.7 billion
Costco Wholesale Warehouse Shin-Misato (land interest):
32
¥3.8 billion
39
32
32
32 33
39
38
40
Mitsui Shopping Park LaLaport SHIN-MISATO (34% co-ownership): ¥10.3 billion
Ginza 5-chome GLOBE: ¥5.6 billion
Takeshita-dori Square: ¥6.1 billion
Mitsui Fudosan Co., Ltd.
*** Forecasts of distribution are as of March 15, 2024.
**** FRI has formed an agreement with the trustee and the lessee of Mitsui Shopping Park LaLaport SHIN-MISATO and Mitsui Shopping Park LaLaport SHIN-MISATO Annex to manage the two properties as one. Accordingly, from the 31st period, these properties are counted as one.
Portfolio
Medium-scaleSC
We strive to build a high-quality portfolio that is balanced and diversified in terms of area, property type, and tenants.
Large-scaleSC
Regional SCOutlet mall
A large-scale shopping center (SC) that houses multiple specialty storesA large-scale shopping center (SC) in which multiple outlet stores are concentrated
A medium-scale shopping center (SC) where the main tenants are a supermarket and specialty shops
A medium-scale shopping center (SC) where the main tenant is a retail outlet that sells mainly food products or other medium-scale shopping center
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Frontier Real Estate Investment Corporation published this content on 28 March 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 29 March 2024 04:49:03 UTC.