Investment Policy
- Q1.Regarding investment targets, is there a possibility for investment in properties other than commercial facilities?
- Frontier Real Estate Investment Corporation ("FRI" or the "Investment Corporation") specializes in targeting commercial facilities as investment properties. At present, FRI is not considering investment in properties other than commercial facilities, namely, offices or residential properties.
- Q2.What areas are targeted for investment?
- FRI targets investment properties located in urban centers throughout the country, with the aim of reducing risks related to regional economic conditions as well as risks of earthquakes and other disasters. Although we have not set investment target ratios for particular areas, investment properties must be highly competitive in terms of their location.
- Q3.Could you explain FRI's specific investment criteria?
- FRI is a commercial facility specified REIT. When selecting investment properties, the Investment Corporation takes due consideration of numerous factors including profitability, competitiveness of local conditions, potential of the area, future outlook, and the reliability of tenants. In principle, leasing periods shall be at least five years, and the minimum investment amount per property shall be more than one billion yen.
- Q4.What kind of support does Mitsui Fudosan Co., Ltd. offer?
- FRI aims to achieve external growth by utilizing the development capability and networks of Mitsui Fudosan Co., Ltd. ("Mitsui Fudosan"). Since its sponsor change on March 2008, FRI has acquired five properties (total acquisition price: ¥36.4 billion) from Mitsui Fudosan as well as from special-purpose companies invested by Mitsui Fudosan. In addition, FRI has acquired two properties (total acquisition price: ¥14.7 billion) from non-sponsoring third parties, with Mitsui Fudosan as an intermediate agent. FRI and Mitsui Fudosan has also concluded a basic agreement concerning SC management covering all properties (excluding land interest-only properties) that will enable the effective utilization of Mitsui Fudosan's expertise in operation and management of properties.
- Q5.What asset scale is FRI targeting?
- As FRI's current asset scale is not large enough from the viewpoint of risk diversification, we are aiming to expand our asset scale while enhancing the quality of the current portfolio. While we do not adopt an exclusive approach of focusing on asset expansion, we have set a target asset scale of ¥300 billion with emphasis on asset expansion backed up by the stringent selection of investing properties.
- Q6.What are the reasons for emphasizing long-term, fixed-rent master lease contracts? Could FRI introduce a system in which rent levels are set according to tenants' sales?
- FRI's contracts mainly consist of long-term (lasting 20 years on average) fixed-rent master lease contracts with emphasis on eliminating risks associated with midterm cancellation and rent decrease, and maintaining stability in mid- and long-terms. While we will maintain our focus on building up a portfolio that values stability, we have begun to adopt a rent system in which rent levels are set according to tenants' sales, so that we can enjoy upside impact during business upturn. While this rent system presupposes long-term, fixed-rent contracts, we can expect additional rent when the sales of a retail facility exceeds a certain pre-set level.
As we expect our asset scale to expand in the future, we plan to adopt more of such sales-linked rent systems. We also plan to invest in properties with such rent systems as pass-through rent systems, in which we can expect revenue growth through property management. With these strategies, we aim to build a well-balanced portfolio that is stable but has growth potential. - Q7.Are there any plans for investment in real estate overseas?
- Because of country risk and various risks associated with different real estate systems, FRI is not considering investment in real estate overseas at the present time.
Tenants
- Q1.What is the current trend in tenant demand?
- Although retail sector in general is flagging in the midst of income downturn, retail facilities under FRI's management are usually "best in town" with high consumer demand regardless of economic environment and are producing strong results.
- Q2.Are rent levels expected to increase going forward?
- For most of FRI's leasing contracts, rent levels are fixed until contract periods expire. However, for contracts that include stipulations regarding rent revisions, we are considering upwardly revising rent for retail stores if their sales are strong, taking into account the recovery of consumption among other factors.
- Q3.Could you explain the process for consigning security and guarantee deposits from tenants?
- Some of the commercial properties managed by FRI adopt a system known as "cooperative building fees." Under this system, tenants deposit construction cost to the property owner, and then the cost is divided between security and guarantee deposits. Security deposits are returned to tenants without interest upon the expiration of leasing contracts, while guarantee deposits are repaid in fixed amounts either monthly or annually (with interest for certain contracts). The Investment Corporation has received security and guarantee deposits of ¥40 billion from tenants, most of which are based on long-term lease contract and thus enables large amount of long-term financing.
- Q4.What is the likelihood of a tenant vacating during the term of their lease, and what are the repercussions in such cases?
- Lease contracts for most tenants are based on long-term, and thus the risk associated with midterm cancellation is very limited. Under lease contracts for certain tenants, however, midterm cancellation is possible if notification to vacate is provided before certain period in advance or rent is paid for certain period. While the risk associated with midterm cancellation does exist for such tenants, we consider this as highly unlikely, since most of FRI's properties are situated in highly competitive prime locations where tenants operate stores that generally experience robust sales conditions.
Negative impacts associated with midterm cancellation of lease contracts include: decrease in rent revenue, repayment of security and guarantee deposits to tenants (refinancing will be required), possible booking of impairment loss for aforementioned property, and so on.
Market-Related Issues
- Q1.What are your views on the current and future real estate sales market?
- Due to the credit crunch associated with the global financial crisis last year, real estate sales market has experienced stagnant inflow of funds and thus become almost dysfunctional. On the other hand, the government has introduced a support system for REITs that avoids bankruptcy, which is gradually bringing more REITs into real estate market. We hope that active transactions of real estate by REITs will stimulate the overall market in the future.
- Q2.What are your forecasts of the Japanese retail industry?
- Given the low birthrate and aging society, we anticipate major shifts in consumption patterns in the future. In response to such shifts in consumption patterns, prompt introduction of products as well as merchandising strategies that match consumer needs will become mandatory.
At the moment, income downturn has pressured consumptions, and husbandry has become much preferred. For example, outlet malls that match consumer needs have been producing strong results. We expect that the "law of the jungle" applies to retail facilities especially during difficult times. - Q3.How do you foresee the impact of general merchandise stores on commercial facilities?
- General merchandise stores are said to be struggling, but in fact the situation differs in each store. While some facilities that fail to promptly respond to the competitive environment and/or consumer needs are seriously damaged, others enjoy "best in town" status with continuous consumer support. We expect to see more flexible, profitability-based strategies among general merchandise stores ― closing unprofitable stores while additional investing on profitable stores.
Governance Structure
- Q1.Could you tell us about FRI's asset management company?
- The asset management company was established in August 2003 as a wholly owned subsidiary of JT. On March 24, 2008, all shares were transferred to Mitsui Fudosan Co., Ltd., and the company was renamed Mitsui Fudosan Frontier REIT Management Inc. ("MFF"). The organizational structure comprises the Compliance Department, Investment Management Department, Finance Department, and Planning Department.
- Q2.What systems are in place for compliance?
- MFF is establishing internal regulations concerning compliance, while adhering to all laws and regulations related to asset management and diligently protecting unitholders' interests.
- Q3.What about conflicts of interest?
- In the event of transactions with interested parties, FRI undertakes such activities in accordance with its "Rules Concerning Conflicts of Interest," which have been established internally.
- Q4.Please explain FRI's policy for selecting property managers, as well as its policy regarding oversight.
- Based on the Basic Agreement Concerning Shopping Center (SC) Management concluded with Mitsui Fudosan Co., Ltd. FRI will make effective use of Mitsui Fudosan's expertise in the operation and management of retail facilities.
SC management indicates comprehensive management of retail facilities provided by Mitsui Fudosan, including so-called property management along with other wide-ranging operations and expertise. FRI entered into the Basic Agreement Concerning SC Management for all properties excluding land interest-only properties. - Q5.What remuneration systems are in place?
- The Investment Corporation has adopted the following three remuneration systems: 1) total-assets-linked remuneration (maximum of 0.3% of previous period-end total assets); 2) profit-linked remuneration (maximum of 2.0% of previous period-end operating income before depreciation); and 3) acquisition/transfer remuneration (maximum of 0.5% of the value of an acquisition or transfer, or a maximum of 0.25% in the case of an interested-party transaction).
- Q6.What is FRI's approach to earthquake risk?
- In order to reduce the risk of earthquakes and other disasters, FRI targets investment in cities throughout Japan while maintaining properties in all regions of the country as a means to diversify its portfolio. Going forward, we will work to lower the portfolio PML when acquiring new properties. In the event that acquisitions of investment assets raise PML above 20%, we will treat such a situation with the utmost seriousness and consider the purchase of earthquake insurance. Among FRI's investment assets, only AEON Hadano Shopping Center's PML exceeds 20%. A certain portion of this property is insured for earthquakes.
Financial Policy
- Q1.What loan-to-value ratio does FRI target?
- With respect to its investments, FRI defines the loan-to-value (LTV) ratio as follows:
(Amount of loans + Security and guarantee deposits received in advance from tenants) / Amount of total assets ×100
Although the LTV ratio is capped at 60% under FRI's investment guidelines, the Investment Corporation aims for a more conservative level of 40%, in order to ensure a sound financial structure in accordance with its basic policy for ensuring stable earnings over the medium and long terms. However, the LTV ratio may temporarily exceed 60% depending on circumstances related to the acquisition of new properties. - Q2.What is FRI's approach to leveraged management?
- FRI has not set a high level of leveraged management. The Investment Corporation emphasizes cost control and financial stability, while maintaining a conservative LTV ratio of 40%.
- Q3.How will rising interest rates affect FRI?
- Bank borrowings are considered as interest-bearing debt of FRI, and their interest rates are fixed to some degree over the long term. Therefore, rising interest rates will have a limited effect on the Investment Corporation. Nevertheless, we are paying close attention to changes in the financial environment.
- Q4.How does FRI approach the issuance of additional investment units?
- The LTV ratio is not the only standard for determining whether to issue additional investment units; a combination of factors must be taken into account, including the amount of interest-bearing debt, the amount of reimbursed security and guarantee deposits, as well as financial conditions such as short- and long-term interest rates. Therefore, with respect to the timing of a public offering, we will consider the market environment and the dilution of the value of investment units.
- Q5.Could you tell us about FRI's distribution policy?
- By distributing more than 90% of its taxable income as cash distributions, FRI takes full advantage of the taxation benefits granted to J-REITs, specifically the treatment of cash distributions as expenses. In principle, the Investment Corporation shall target a cash distribution of 100% of its profit.
Other Matters
- Q1.What is the composition of FRI's unitholders?
- As of December 31, 2011, the composition of unitholders was as follows: investment trusts and individual investors, 47.1%; financial institutions, 28.3%; foreign corporations, 14.6%; and other domestic corporations, 10.0%.For further information, please refer to "Principal Unitholders" within this Web site.
- Q2.How would you describe FRI's strengths and weaknesses?
- Beginning with strengths, FRI is one of the relatively few J-REITs specializing in commercial facilities. Furthermore, the Investment Corporation can achieve external growth by utilizing the development capabilities and networks of Mitsui Fudosan, the Investment Corporation's sponsor. Speaking of internal growth, the Investment Corporation can benefit from Mitsui Fudosan's expertise in retail facilities management. In addition, the Investment Corporation owns many competitive, "best in town" stores and concludes medium- to long-term stable contracts with tenants. For more information regarding the Investment Corporation's distinctive features, please refer to "Features of FRI" within this Web site.
Turning to the obstacles we are facing, as some of the risks specific to the commercial marketplace, household purchasing power is weakening due to faltering income and employment conditions. Moreover, disparities in the profitability of comparable retail outlets have emerged, reflecting shifts in lifestyles and consumption patterns. - Q3.Has FRI considered conducting a stock split of investment units?
- The Investment Corporation will consider the increased market liquidity of investment units and the various costs associated with a stock split.
- Q4.When are General Meetings of Unitholders held?
- Certain matters (including revisions to agreements and the selection of executive and supervisory directors) related to the Investment Trust Law and other regulations governing the Investment Corporation are determined at the General Meeting of Unitholders. In accordance with these rules, the General Meeting of Unitholders is held at least once every two years. Details of the meetings are publicly announced in newspapers and on this Web site.
- Q5.How are requests to change names and addresses handled?
- There are procedures for using the hofuri (custody transfer system) when changing addresses, names and official seals. Those who do not possess investment unit certificates should contact their securities company; those who possess investment unit certificates should contact the Transfer Agent Department of the Mitsubishi UFJ Trust and Banking Corporation.
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