Frontier Real Estate Investment Corporation

Code 8964

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Features and Investment Policy


Investment Policy

FRI's Investment Policy

1. Basic Policy

With the aim of securing stable earnings over the medium to long term, FRI shall primarily invest in real estate and other specified assets (the asset types described under "Investment Targets".)

2. Investment Stance

FRI adheres to the following investment stance in undertaking asset management.

(1) Primary Investment Targets

The real estate and underlying assets of the securities backed by real estate that FRI invests in shall primarily be those used as suburban retail facilities and urban retail buildings.

(2) Geographic Diversity

In order to reduce risks related to rental revenues associated with regional economic deterioration which may result from concentrating investment properties in specific areas, as well as risks related to earthquakes and other disasters, FRI shall conduct geographically diverse investment in an aim to stabilize cash flow. In other words, FRI will invest in real estate in various areas of Japan as well as in trust beneficiary interests in such types of real estate.

(3) Investment in Development Properties

In principle, investment target real estate and real estate associated with trust beneficiary interests are occupied leasing properties as of the time of purchase, and unoccupied properties shall not be considered as investment targets. However, investment may be carried out in unoccupied properties, properties planned for construction or properties under construction when stable earnings can be projected after the property is occupied or the building construction is completed.

(4) Investment Criteria

In principle, FRI shall consider as investment targets real estate that actually produces or that is projected to produce leasing business revenues or other similar revenues, and real estate associated with trust beneficiary interests. Furthermore, in selecting properties for investment, FRI shall conduct a comprehensive evaluation of current and future profitability, the potential and stability of the area where the property is located, the current state of physical repair, upgrades and other measures taken against obsolescence, tenant characteristics (composition of finances, business conditions, future prospects of the relevant industry, etc.), content of leasing contracts, and other factors. After thus having determined its investment value, FRI will decide whether to make an investment.

(5) Acquisition Prices

Acquisition prices are determined based on appraisal value as well as consideration of each property's characteristics and impact on the profitability of the overall portfolio. FRI shall not acquire properties at prices in excess of appraisal value from related parties.

3. Management Policy

In an aim to secure stable earnings over the medium to long term, FRI shall manage its assets with the goal of constructing a portfolio primarily composed of real estate that has a medium- to long-term leasing period and whose major tenants have a generally high creditworthiness, as well as trust beneficiary interests in such types of real estate (hereinafter, "assets producing stable earnings"). Furthermore, FRI will, in principle, manage assets producing stable earnings, but may include as investment targets real estate whose earnings and asset value can be raised by replacing tenants or through good operations, and trust beneficiary interests in such types of real estate.
The aforementioned portfolio shall be constructed by adhering to the following:

(1) Acquisition Criteria

In selecting individual real estate and real estate associated with trust beneficiary interests, FRI shall place a high priority on properties that demonstrate superiority and stable profitability over the medium to long term after sufficient consideration of planned acquisition price, projected earnings, characteristics of the property's area, the environment, future potential, scale of facilities, condition of the building and facilities, earthquake resistance, rights issues, creditworthiness of tenants, performance of shops, content of leasing contracts and status of building management, among others. In principle, the minimum investment amount (excluding taxes, acquisition costs, etc.) shall be one billion yen per investment property. However, this shall not apply to cases of investing in properties which come as incidental to other investment properties.

(2) Selection Procedure of Investment Properties

When selecting real estate and real estate associated with trust beneficiary interests, FRI shall exercise detailed due diligence for each individual property. After thus having determined the value of said property, FRI shall conduct a comprehensive evaluation of its impact on the entire portfolio, degree of contribution to increasing the portfolio's value, and decide whether to make an investment.
With regards to due diligence, FRI shall ask lawyers, certified public accountants, real estate appraisers, first-class architects, professionals at trade area research companies, and other specialists to conduct investigations. By doing so, FRI will conduct detailed investigations from multiple perspectives.

(3) Holding Period

FRI shall, in principle, acquire real estate and trust beneficiary interests in real estate on the assumption that these will be held for medium- to long-term periods and shall not acquire assets with the initial goal of selling them after a short while. Medium term means approximately five to ten years, and long term means more than ten years. Moreover, even after acquiring real estate or trust beneficiary interests in real estate, FRI will monitor the creditworthiness of tenants by executing credit checks and other measures, as needed.

(4) Structure of Support from Mitsui Fudosan

Mitsui Fudosan Frontier REIT Management Inc. (the "Asset Management Company") helps FRI maximize unitholder value by entering into advisory contracts related to real estate and other matters with Mitsui Fudosan and by providing the Mitsui Fudosan Group's expertise on the operation and management of retail facilities.
In addition, to build a portfolio with ample consideration given to both stability and growth potential, FRI shall actively utilize the Mitsui Fudosan Group's property acquisition expertise and network via such means as advisory contracts regarding real estate when further expanding its asset size.
In order to leverage the Mitsui Fudosan Group's expertise in operating and managing retail facilities, FRI enters into shopping center management contacts* for all properties it owns, except for properties in which it owns only the land interest.

* Mitsui Fudosan re-commissions certain shopping center management business operations to Frontier REIT SC Management Co., Ltd., a Mitsui Fudosan Group company that specializes in shopping center management.

(5) Insurance Policy for Protection against Damage
a. Property Insurance

In order to cover damage to buildings and other property as well as compensation for damages paid to third parties due to disasters, accidents or other reasons, FRI shall obtain fire insurance and liability insurance for owned real estate and real estate in trust associated with trust beneficiary interests. Moreover, in order to avoid a loss of income arising from disasters, accidents or similar events, FRI shall obtain income protection insurance.

b. Earthquake Insurance

FRI shall determine whether to obtain earthquake insurance by comparing and considering the impact from a disaster, the property insurance premium, and related variables based on the PML* for the entire portfolio due to an earthquake. Moreover, if there is a property whose PML exceeds 20 percent, FRI will consider obtaining earthquake insurance for the individual property.

* Probable maximum loss, the maximum loss expected due to an earthquake. PML is calculated for each property individually and for the portfolio as a whole. While there is no widely recognized standard definition of PML, in this report, PML indicates the expected damage from the assumed greatest earthquake that could occur (a major earthquake that occurs once in 475 years, with an approximately 10% chance of occurring in a given 50-year period) during a property's assumed period of use (50 years, a typical length of use for a building), expressed as the repair costs expected to be incurred due to said earthquake as a percentage of the property's replacement cost.

(6) Disposition Policy

In principle, FRI shall hold real estate and trust beneficiary interests in real estate on a medium- to long-term basis and shall not sell them in the short term. However, if FRI judges that the property must be sold based on a comprehensive perspective encompassing a property's projected revenue and expenditure going forward, the increase of expenditures caused by the building's deterioration, or its impact on the entire portfolio, FRI may consider selling real estate or trust beneficiary interests in real estate in the short term.

Investment Targets

Types of Assets that Fall under Investment Targets

(1) FRI shall primarily invest in the following types of real estate and other specified assets (Articles of Incorporation, Articles 28 and 30).
  1. Real estate
  2. Leasehold rights of real estate
  3. Surface rights
  4. Trust beneficiary interests in real estate, or solely in leasehold rights or surface rights of real estate
(2) In addition to real estate, FRI may also invest in the specified assets listed below. Real estate and the assets listed under a. through c., below, shall collectively be referred to as "real estate equivalents." Assets listed below under d. through g. shall collectively be referred to as "securities backed by real estate;" these shall be limited to securities that are set up to invest more than half of their underlying assets in real estate equivalents.
  1. Trust beneficiary interests for cash in trust set apart for management conducted by primarily investing in real estate, leasehold rights of real estate or surface rights as trust assets
  2. Equity interests in an investment pertaining to an agreement where one party makes a capital contribution for the management of real estate or assets mentioned under a. above by a counterparty, and where the counterparty manages said contribution primarily by investing it in said assets with a promise of distributing any profits earned by said management (hereinafter, "silent partnership interests pertaining to real estate")
  3. Trust beneficiary interests in cash set apart for management of trust assets as investments primarily in silent partnership interests pertaining to real estate
  4. Preferred securities (as defined in Article 2-9 of the Law on Securitization of Assets (Act No. 105 of 1998, including subsequent amendments; hereinafter, the "Asset Securitization Law"))
  5. Beneficiary securities (as defined in Article 2-7 of the Investment Trust Act)
  6. Investment securities (as defined in Article 2-15 of the Investment Trust Act)
  7. Beneficiary securities in a special purpose trust (as defined in Article 2-15 of the Asset Securitization Law, excluding assets which fall under (1) d. or (2) a. or c., above)
(3) In addition to the specified assets listed under (1) and (2), above, FRI may invest in the following specified assets.
  1. Deposits
  2. Call loans
  3. Certificates of deposit
  4. Marketable securities (as defined in Article 3-1 of the Enforcement Order for the Investment Trust and Investment Corporation Act (Cabinet Order No. 480 of 2000, including subsequent amendments; hereinafter, the "Investment Trust Enforcement Order"), excluding assets listed under (1), (2) and (3))
  5. Monetary claims (as defined in Article 3-7 of the Investment Trust Enforcement Order, excluding assets listed in a. through c. above)
  6. Renewable energy power generation facilities (as defined in Article 3-11 of the Investment Trust Enforcement Order)
  7. Trust beneficiary interests in cash set apart for management of trust assets as investments primarily in any of the assets raised under a. through f. above
  8. Rights pertaining to derivative transactions (as defined in Article 3-2 of the Investment Trust Enforcement Order)
(4) FRI may invest in the following assets if need be (limited to assets accompanying investment in real estate and equivalents).
  1. Trademark rights prescribed by Article 18-1 of the Trademark Act (Law No. 127 of 1959, including subsequent amendments), or their rights of exclusive use (as defined in Article 30-1 of the Trademark Act), or rights of ordinary use (as defined in Article 31-1 of the Trademark Act)
  2. Rights to use the source of a hot spring and facilities associated with said hot spring stipulated by Article 2-1 of the Hot Springs Law (Law No. 125 of 1948, including subsequent amendments)
  3. Carbon dioxide equivalent quotas based on the Act on Promotion of Global Warming Countermeasures (Law No. 117 of 1998, including subsequent amendments) and other similar items or emissions credits (including greenhouse gas emissions credits)
  4. Trust beneficiary interests in cash set apart for management of trust assets as investments primarily in assets raised under a. through c. above
  5. Other assets that must be acquired incidental to the investment in real estate equivalents
(5) When physical certificates indicating the rights of the security holder specified in Article 2-2 of the Financial Instruments and Exchange Law have not been issued, said rights are deemed to be securities and are subject to the provisions of (1) through (4), above.

Financing Policy

(1) Loans and Issuance of Investment Corporation Bonds
  1. FRI may procure loans and issue investment corporation bonds with the aim of ensuring stable earnings and achieving steady growth of assets under management. Moreover, it shall only procure loans from qualified institutional investors prescribed by Article 2-3-1 of the Financial Instruments and Exchange Law. These will further be limited to institutional investors prescribed by Article 67-15 of the Special Taxation Measures Law (hereinafter, "qualified institutional investors") (Articles of Incorporation, Article 35-1).
  2. Cash procured from loans and investment corporation bonds pursuant to a., above will be used for the acquisition of assets, repairs, payment of distributions, FRI's operation funds, debt repayment (including refunds of leasehold and security deposits, as well as the repayment of loans and investment corporation bonds), and similar purposes. Funds procured by issuing short-term investment corporation bonds may only be used for purposes permitted by law (Articles of Incorporation, Article 35-2).
  3. In the event of procuring loans pursuant to a., above, FRI may at times pledge assets under management as collateral (Articles of Incorporation, Article 35-3).
  4. The maximum amount of loans and issuance of investment corporation bonds shall be one trillion yen each and their total shall not exceed one trillion yen (Articles of Incorporation, Article 35-4).
  5. In the event of procuring loans pursuant to a., above, FRI shall determine the various conditions, including the term of the loan (long term or short term) and fixed or floating interest, after giving comprehensive consideration to its impact on the composition of FRI's capital and on investors while keeping an eye on the market environment, including interest rate trends.
  6. In an aim to flexibly procure funds necessary for additionally acquiring specified assets or for refunding leasehold and security deposits, FRI may establish preliminary loans frameworks such as agreements for established lines of credit, commitment line agreements, or may conclude preliminary contracts for loans, as needed.
  7. The total amount of loans, investment corporation bonds issued and outstanding, leasehold and security deposits that FRI has received from tenants and other such liabilities shall not comprise more than 60 percent of FRI's total assets (hereinafter, "LTV ratio"). However, the LTV ratio may temporarily exceed 60 percent in accordance with the acquisition of new specified assets and other developments.
(2) Additional Issuance of Investment Units
  1. For financing purposes, FRI may solicit investment unit recipients upon the approval of the Board of Directors.
  2. In the event of a solicitation of investment unit recipients, FRI shall give due consideration to dilution of investment units.

Operation and Management Policy

FRI shall carry out the real estate operation and management business by adhering to the following policy:

(1) Asset Maintenance and Management Business

In an effort to carry out stable management over the medium to long term, FRI shall implement regular repairs and renovations of real estate it owns and real estate associated with trust beneficiary interests it owns and implement initiatives to renew said real estate, such as changing the construction to improve or expand the facilities. By doing so, FRI shall work to maintain or expand its asset value, competitiveness and earnings, aiming to increase its asset value over the medium to long term. When implementing said repairs or renovations, FRI shall strive to reduce not only initial expenses, but also expenses from a long-term and comprehensive perspective, giving due consideration to energy conservation measures, useful life and other aspects.

(2) Tenant Management Business

When revising rents with a lessee (excluding cases in which rent is fixed by a fixed-term lease contract), FRI shall strive to conduct negotiations with the lessee so that rents after the revision may be maintained or increased, taking into consideration such factors as the market rent for other properties of similar type and scale and for properties in the same area, the tenant's sales, the lessee's ability to bear additional rent, and the economic climate to determine a suitable level of rent. When renewing contracts, FRI shall conduct negotiations on the terms and conditions of the contract (contract period, rent, etc.) based on comprehensive consideration of the appropriate level of rent it has determined as well as the sustainability of the retail facility. Furthermore, FRI shall monitor the creditworthiness of lessees by executing credit checks and other measures as needed.

(3) Real Estate Operation and Management Business

Where permitted by law, real estate operation and management shall be conducted by the Asset Management Company or outsourced to another real estate operation and management company selected by FRI (hereinafter, "property management company").

(4) Real Estate Operation and Management Contractor Selection Policy

When selecting a property management company or other operation and management contractor, FRI will target professional companies with a proven track record in the market and with high creditworthiness, giving due consideration to track record and outsourcing fees. When outsourcing comprehensive management (encompassing asset maintenance / management and tenant management, in addition to real estate operation and management), the contractor's business execution capabilities, track record and outsourcing fees related to such management and similar considerations shall be comprehensively taken into account in addition to the abovementioned factors.

FRI shall periodically evaluate the quality of services provided and cost effectiveness of the real estate operation and management contractor and shall not renew contracts with contractors that receive a poor evaluation.

Disclosure Policy

(1) Asset Management

With regards to asset management, FRI shall strive to make expedient and accurate information disclosure in order to gain understanding from unitholders and investors.

(2) Information Disclosure

Information disclosure shall be conducted in accordance with the Investment Trust and Investment Corporation Act (the "Investment Trust Act"), Financial Instruments and Exchange Law, as well as the respective content and format requirements prescribed by the Tokyo Stock Exchange; the Investment Trusts Association, Japan; and similar bodies. At the same time, besides legally stipulated disclosure items, FRI shall strive to disclose other material and useful information to unitholders and investors.

(3) Transparency

In order to ensure the transparency of transactions involving related parties, FRI shall disclose transactions conducted with related parties.

Distribution Policy

FRI shall, in principle, make distributions based on the following policy (Articles of Incorporation, Article 37).

(1) Profit Distribution

a. Of the total cash distributions to be made to unitholders, the amount of profit stipulated by the Investment Trust Act shall be the balance sheet value of net assets less total unitholders' capital. This is calculated in accordance with generally accepted corporate accounting practices in Japan.

b. The distribution amount shall, in principle, be an amount determined by FRI that is greater than 90 percent of the distributable profit as prescribed by Article 67-15-1 of the Special Taxation Measures Law. (In cases where the calculation of this amount changes as a result of revisions to the law or other factors, the amount after the change is used. The same applies throughout the remainder of "Distribution Policy.")
Moreover, as necessary, FRI may accumulate, reserve, or otherwise dispose of funds as needed for such purposes as long-term repairs deemed necessary by FRI for maintaining or improving the value of assets under management, payment reserves, reserves for distributions, and other similar reserves or allowances.

(2) Cash Distribution Exceeding Profit

Should FRI deem it appropriate, including cases in which doing so will allow FRI to reduce its income tax burden or other expenses, FRI may distribute an amount it decides upon as cash exceeding profit.

(3) Distribution Method

Distributions shall be made in cash and, in principle, distributed within three months from the end of the applicable fiscal period. Distributions shall be made to unitholders who are recorded in the final unitholders' register of the applicable fiscal period, or to registered investment unit pledgees in accordance with the number of investment units held or pledged.

(4) Expiration Period for Distributions

If a unitholder fails to collect a distribution within three years following the date that payments commenced, FRI shall no longer be held responsible for paying said distribution. Moreover, no interest will be added to unpaid distributions.

(5) Other

FRI shall comply with the regulations stipulated by the Investment Trusts Association, Japan, and other relevant rules when making cash distributions.

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