Message from Executive Director
| On behalf of TOKYU REIT, Inc. (TOKYU REIT), I would like to express my
sincere appreciation to all of our REIT unitholders for their continued support
and patient understanding. The following pages provide an overview of our operating environment and results for the thirteenth fiscal period, August 1, 2009 to January 31, 2010. |
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Cash Distribution of ¥79,446 per Unit |
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| For the thirteenth fiscal period, TOKYU REIT posted
¥25,359 million and ¥13,456 million in operating
revenues and net income, respectively. Severe conditions
continue for the domestic real estate leasing market and
revenues from property leasing declined ¥237 million
from the twelfth fiscal period. However, as a result of
posting revenues of ¥18,258 million from the sale of the
Resona Maruha Building and losses of ¥7,179 million
from the sale of the Ryoshin Harajuku Building, earnings
increased by ¥10,830 million from the twelfth fiscal
period. The net income figure is ¥160 million higher
than the revised forecast announced on December 24,
2009 together with the announcement of the sale of
the 2 properties. Consistent with its distribution policy, TOKYU REIT allocated 100% of its retained earnings for a cash distribution of ¥79,446 per unit. This was ¥63,941, or 412.4% above the twelfth fiscal period distribution of ¥15,505, while being ¥946, or 1.2%, above the distribution forecast. Net asset value per unit after deducting the per-unit cash distribution of ¥79,446 stood at ¥578,697. Accounting for unrealized gains (the difference between the total appraisal value of the portfolio at the end of the fiscal period and the book value), adjusted net asset value per unit declined ¥49,199 from the previous fiscal period to ¥638,789 due to a drop in the period-end portfolio appraisal value. |
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Leasing Performance for the Thirteenth Fiscal Period |
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| Fourteen of TOKYU REIT‘s 21 properties were fully
occupied as of January 31, 2010, and the occupancy
rate for the entire portfolio was 96.9%, down 1.7
percentage points from the previous fiscal period. In the
reporting period, TOKYU REIT had twelve tenants
who vacated or decreased their leasing space, including
Takihyo Co., Ltd., which had leased space in the TOKYU
REIT Toranomon Building. Meanwhile, TOKYU REIT
has accelerated its leasing activities for these newly
vacated spaces as well as for the other spaces that were
vacant as of July 31, 2009. Through these endeavors,
we have been able to raise the occupancy rate in the
Lexington Aoyama from 21.2% as of July 31, 2009 back
to 73.1%. More specifically, in terms of its entire
portfolio, TOKYU REIT had seven tenants who were
either new or seeking additional space. TOKYU REIT has also proactively worked to maintain rent levels. Consequently, as of the end of the thirteenth fiscal period, the drop in average rental rate for the existing property portfolio was contained at 1.93% compared with the end of the twelfth fiscal period. As a result of these efforts, our overall rental revenues edged down ¥359 million, or 5.6%, compared with the twelfth fiscal period. |
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Leasing Policy for the Fourteenth Fiscal Period |
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| The vacancy rate for TOKYU REIT‘s entire portfolio was
3.1% as of January 31, 2010. According to data
compiled by CB Richard Ellis Research Institute K.K., the
vacancy rates in Tokyo 23 wards and the five central
Tokyo wards were 6.5% and 6.6%, respectively, as of
December 31, 2009. The figure for TOKYU REIT is
staying steady at a comparatively lower rate. Nevertheless, TOKYU REIT has received advance notices from eleven tenants expressing their intention to leave the Setagaya Business Square, cocoti, the TOKYU REIT Kamata Building and other portfolio properties during the fourteenth fiscal period due to business relocation and operational integration. When these tenants vacate their leased space as notified, and TOKYU REIT fails to find replacement tenants, the vacancy rate of TOKYU REIT‘s entire portfolio for the end of the fourteenth and fifteenth fiscal periods will stand at 4.2% and 4.3%, respectively. With the foremost aim of improving the occupancy rate of its portfolio properties, TOKYU REIT is bolstering its leasing activities. |
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Return of Capital Gain from Sale of the Resona Maruha Building to Unitholders |
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| Maruha Nichiro Seafoods, Inc. is a tenant of the Resona
Maruha Building which occupies 6 floors out of 8 floors
owned by TOKYU REIT. Since they are planning to
vacate their leasing space, there is the possibility that in
or after the sixteenth period, TOKYU REIT‘s revenues will
significantly decrease. Furthermore, under the
Investment Trusts Law, REITs are not permitted to
undertake redevelopments of this size. Based on this
restriction, as we stated in the Semiannual Report
Eleventh Fiscal Period, we considered various strategies
in positioning this project as marking the beginning of
our second founding. As a result, we decided that
distributing the capital gain from sale of this property to
our unitholders was the best strategy to maximize value
for our unitholders. Therefore, TOKYU REIT‘s accumulative distributions from the first to thirteenth fiscal periods amount to ¥258,670. For unitholders who purchased TOKYU REIT units at the time they were listed in September 2003 at an offer price of ¥530,000 and have held them until now, this would equate to a return of 48.8% on their initial investment. Going forward, TOKYU REIT will aim for stable cash distributions as well as capital gain when replacing properties and returning the gain to unitholders based on the longterm investment management strategy mentioned below. Moreover, please refer to page 4 for overviews and reasons for the sale of Resona Maruha Building and sale of the Ryoshin Harajuku Building. |
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Reflection on the Acquisition of the Ryoshin Harajuku Building |
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| TOKYU REIT acquired the Ryoshin Harajuku Building
in June 2008 and received positive evaluations from
many investors at the time. After acquiring said
property, we have poured effort in improving its value
through measures such as owning the entire property by
additionally acquiring minority interests. However,
possibility that impairment accounting may be applied
to the property rose with the decrease in appraisal
value. Should impairment accounting be applied, TOKYU REIT would be obliged to pay corporate taxes, which would in turn negatively affect unitholder value. To avoid such a situation, TOKYU REIT decided to sell the property after a year and a half of ownership. A point of reflection concerning this transaction is that the timing of the acquisition was too early because we could not foresee the sudden deterioration of the market along with what is known as the Lehman shock that occurred after acquisition. We would like to apologize to our unitholders for this incident. At the same time, to utilize what we have learned going forward, we have announced a long-term investment management strategy in the Financial Results Presentation released on September 2009, ahead of the sale of this property. |
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| 【 Our Initiatives in Line with the Real Estate Market Cycle 】 | |
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The above chart was posted in the Semiannual Report Tenth Fiscal Period and the Ryoshin Harajuku Building was acquired during the “phase of external growth” indicated here. However, in 2009 the appraisal value of the Ryoshin Harajuku Building fell significantly. | |
Long-Term Investment Management Strategy |
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| In view of the abovementioned experiences and
reflections, TOKYU REIT formulated a long-term
investment management strategy (Surf Plan) in the
desire to construct a strong balance sheet even in times
of a recession and to develop a portfolio with
permanent competitiveness. |
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A Strong Balance Sheet Even in Times of a Recession |
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| Under the long-term investment management strategy,
TOKYU REIT clearly hammered out a strategy to reexamine
the timing of acquiring or selling property so
that the risk of impairment accounting being applied
will not arise and implement contrarian investment
when real estate prices are low. In other words, this
strategy calls for achieving a return on investment by
selling rather than acquiring properties during a boom
period (high prices). This strategy was formulated by focusing on the observation that the real estate market and credit market do not grow constantly, but that they are cyclical. By dividing a single cycle of the real estate market into the acquisition phase, selling phase and preparation phase, TOKYU REIT will acquire properties during a market recession (low prices) and during a boom period (high prices), sell mainly properties that have been held for a long time and which are aging. By doing so, we will aim to achieve capital gain. However, TOKYU REIT does not plan to engage in short-term trading when selling properties. Furthermore, TOKYU REIT will separately consider the timing of selling properties scheduled for redevelopment. On the other hand, we will utilize a reduction method by making an exchange with low book value investment properties during a boom period since the liquidity of attractive investment properties is likely to rise then. This would enable us to prepare for the next market deterioration and help reduce various downside risks arising from price decreases. During the preparation phase, we will take effective steps to deal with market deterioration and make preparations for the next cycle. Through such activities, the portfolio size will not be continuously expanded, but it will shrink or expand depending on what market phase we are experiencing at the time. While loan-tovalue ratio (LTV) and earnings per share (EPS) may fluctuate, the result of these activities would be the further strengthening of our balance sheet (BS) and we will be enabled to make early preparations for the next credit market deterioration as well as the real estate market slowdown that accompanies it. If we deem a single cycle of the real estate market as the investment appraisal period and conduct investment from more of a long-term perspective, then we believe that adoption of a value-type contrary investment strategy like the above, would not only maximize unitholder value, but transform TOKYU REIT into a REIT that is resistant to credit market deterioration. |
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Portfolio with Permanent Competitiveness |
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| We believe that we are currently in the acquisition phase
of the above chart and so decided to acquire Kojimachi
Square on March 15, 2010 (Property overview and
reasons for the acquisition are found under page 5). As we stated in the Semiannual Report Twelfth Fiscal Period, if setting the premise of a going concern of an investment corporation, we must constantly replace properties and maintain competitiveness of the portfolio. Properties targeted for sale will mainly be properties which are aging, as mentioned above. Moreover, the two properties which we decided to sell in December 2009 are thirty-one years and twenty years of age, respectively. On the other hand, Kojimachi Square which was acquired on March 2010 is seven years of age. TOKYU REIT plans to carry out acquisition in line with the formerly-established investment policy, “Investment in Highly Competitive Properties in Areas with Strong Growth Potential.” Particularly, TOKYU REIT set as its main investment target areas the five central Tokyo wards and the Tokyu Areas, which refers to the areas serviced by the Tokyu rail network. Although the overall Japanese population in a declining trend, the population in the Tokyo Metropolitan Area is projected to increase until 2020, indicating that centralization of the Japanese economy in the area will continue for some time. Measures to enhance the function of the capital, such as expansion of the Haneda Airport, etc. will most likely encourage this trend. Furthermore, TOKYU REIT does not plan to invest in relatively high-risk properties, such as small sized properties that are valued at less than ¥4 billion. The return of such properties is certainly high in proportion to the greatness of risk, but we will not run after short-term gains. The liquidity of real estate is lower than other types of assets, but like the three properties that we sold in the past, our policy is only to invest in high quality properties that can be sold in the market at any time. For the time being, we plan to proactively conduct investment activities, but would like to make careful considerations during the decision making process and as we have done until now, place a priority on ensuring the quality of the portfolio rather than size. |
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Unitholder Return Index (Adjusted ROE) |
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| To show how much of the investment made by our
unitholders (Unitholders‘ capital) in the past has been
returned back to them, we have reported the return on
the weighted-average issue price. However, we would
like to now introduce the “Adjusted ROE” as an index
for measuring the results achieved by the long-term
investment management strategy in a way that is easier
to understand. The chart below shows changes in return
on unitholders‘ equity (ROE) and ROE after deduction of
capital gains/losses (Adjusted ROE) since TOKYU REIT‘s
public listing. With the implementation of TOKYU REIT‘s long-term investment management strategy, which involves the replacement of properties focusing on the cyclicality of real estate prices, cash distributions will vary to a certain extent by fiscal period depending on how much capital gain was obtained. By calculating adjusted ROE by reducing principal previously paid by unitholders based on the assumption that the capital gain portion was theoretically used to repay the unitholders‘ equity, performance can fairly be measured against previous or future fiscal periods or other REITs. Going forward, TOKYU REIT would like to capture capital gain by implementing contrarian investment in real estate when prices are low and replace properties, and realize a high quality portfolio (reduce the average age of buildings) and a higher adjusted ROE performance. | |
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Outlook |
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| As we announced in our Financial Report disclosed on
March 15, 2010, we revised our per-unit distribution
forecast for the fourteenth fiscal period to ¥11,000 and
announced our per-unit distribution forecast for the
fifteenth fiscal period as ¥10,000. These figures are based on currently effective contracts as of March 15, 2010 while factoring in the abovementioned advance notices of contract cancellations and certain risks that may result in rent reductions. These figures do not take into account possible upward rent revisions, attracting new tenants to fill vacancies and new property acquisitions. Furthermore, these forecasts are subject to change due to a variety of factors, including our investment management performance and interest rate movements. |
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Reduction of Investment Management Fees |
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| Held on April 15, 2009, the Fourth General Meeting of
Unitholders approved the time-limited reduction of
investment management fees by 2%, 4%, 6% and 8%
in the 12th, 13th, 14th and 15th fiscal periods,
respectively, over a two-year period commencing
February 1, 2009. During the thirteenth fiscal period, investment management fees were reduced by 4% and the reduced portion totaled ¥22 million. We forecast the reduction of 6% of projected investment management fees during the fourteenth fiscal period to equal a reduction of ¥27 million and the reduction of 8% during the fifteenth fiscal period to equal a reduction of ¥36 million. |
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| March 2010 | |
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