Supplementary Materials on Press Releases as of March 18, 2019 · 2019. 3. 18. · Press Releases...

Frontier Real Estate Investment Corporation

Supplementary Materials onPress Releases as of March 18, 2019

March 18, 2019

Mitsui Fudosan Frontier REIT Management Inc.

2

Summary

Key points

Sale of risk assets Acquisition of high-quality assets via the sponsor’s pipeline (total: ¥22,490 million)

Property replacement comprising the sale of risk assets and acquisition of high-quality assets

leveraging the sponsor’s pipeline

Sale Mitsui Shopping Park ALPARK (East Building)

FRI to sell the property to avoid the risk in the future in the present brisk real estate market, even if doing so would result in a loss on sale(Approximately ¥900 million)

Acquisitions Ikebukuro GLOBE, SAKAE GLOBE, and Shinsaibashi MG Building

Leveraging the sponsor’s pipeline to obtain relatively new, high-quality properties in high-end shopping districts in Japan’s three largest metropolitan areas

Planned Acquisition date: Mar. 22, 2019

Planned Acquisition price: ¥10,300 million

Completed Jan. 10, 2014

Planned Acquisition date: Mar. 22, 2019

Planned Acquisition price: ¥6,350 million

Completed July 12, 2017

Mitsui Shopping Park ALPARK

(East Building)

Planned Sale date: May 31, 2019

Planned Sale price: ¥3,800 million

Completed Apr. 10, 1990

Ikebukuro GLOBE

(50% co-ownership)

SAKAE GLOBE

(40% quasi co-ownership)

Shinsaibashi MG Building

(60% co-ownership)

Planned Acquisition date: Mar. 22, 2019

Planned Acquisition price: ¥5,840 million

Completed Oct. 4, 2018

1. Calculated based on 29th fiscal period property leasing income for ALPARK (East Building) and on property leasing operating income for the three properties to be acquired.

2. Calculated based on acquisition prices, excluding land interest properties. The figure of after sale & acquisitions is calculated based on the properties after sale & acquisitions.

ALPARK (East Building): -¥111mn/periodThree newly acquired properties:

+¥371mn/period↓

+¥259 mn/period

Boost to property leasing operating income１

(As of Dec. 31, 2018)12.3 years

↓(After sale & acquisitions)

11.2 years

Average building age2 down

Effects of these initiatives

At Dec. 31, 2018: 35 properties/¥304.7 bnAfter sale & acquisitions: 36 properties/¥321.8 bn

↓

+¥17.0 billion

Asset size expanded (acquisition price basis)

3

Details of the asset to be sold

Since FRI acquired the property, it has operated as one of Hiroshima City’s key retail facilities. However, FRI determined that selling it in the current, brisk real estate market would be preferable to continuing to hold it, as its future cash flows are likely to fall, given the following:

① The risk of cancellation of the property’s master lease agreement due to the decline in sales as a result of the development of new competing facilities

② Increasing repair and CAPEX costs associated with maintaining the competitiveness of the aging facility

1. The amount noted here excludes real property taxes, consumption taxes, etc.

2. The above value is approximate, as certain sale costs had yet to be determined at the time of this publication.

-20.0%

-10.0%

0.0%

10.0%

20.0%

2017/0

1

2017/0

2

2017/0

3

2017/0

4

2017/0

5

2017/0

6

2017/0

7

2017/0

8

2017/0

9

2017/1

0

2017/1

1

2017/1

2

2018/0

1

2018/0

2

2018/0

3

2018/0

4

2018/0

5

2018/0

6

2018/0

7

2018/0

8

2018/0

9

2018/1

0

2018/1

1

2018/1

2

三井不動産ML物件 アルパーク(東棟) 日本ショッピングセンター協会

1. Mitsui Shopping Park ALPARK (East Building) 2. Factors leading to sale

FRI decided that selling is the best option at present

■Year-on-year comparison of monthly sales

* Properties for which FRI has formed a master lease contract with Mitsui Fudosan (excluding ALPARK(East Building))

Lessee Mitsui Fudosan Co., Ltd.

Lease type Master lease (ML) contract

Contract period 20 years (Feb. 2013–Feb. 2033)

Rent revision Not permitted for 10 years

Termination during the contract term

Not permitted for 5 years

■Lease contract

■Consideration process

・Risk of cancellation of ML contract due to continued decline in sales

・Increasing repair and CAPEX costs to maintain competitiveness

・Likely to significantly negatively impact net leasing income

Option 1. Continue to hold

・Brisk real estate sales market

・Eliminate future risk by selling early

Option 2. Sale

Futurerisk

＞

Japan Council of Shopping Centers

ALPARK(East Building)

Mitsui Fudosan ML properties*

Location2-26-1 Kusatsushinmachi, Nishi Ward, Hiroshima City, Hiroshima

Lot areaSite of building: 16,682.75 m2

Investment Corporation’s ownership: 15,033.90 m2

Floor areaBuilding total: 64,720.87 m2

Exclusive use portion: 60,383.72 m2

Acquisition date February 19, 2013

Acquisition price ¥5,400 million

Contract date / Planned Delivery date

March 18, 2019 / May 31, 2019

Planned Sale price1 ¥3,800 million

Book value ¥4,670 million (projected value at delivery)

Loss on sale2 Approximately ¥900 million

■ Overview of Appraisal value

Appraisal value

Direct-reduction method value

Operating income

Net income

Cap rate DCF valueDiscount

rateTerminal cap rate

As ofDecember 31, 2018

5,470 5,490 529 362 6.6％ 5,440 6.4％ 6.9％

As ofJanuary 31,

20193,470 3,480 529 362 10.4％ 3,460 10.3％ 10.8％

As for the appraisal value as of January 31, 2019, the drop of the appraisal value(¥2billion) is due to the revision of the cap rate and other figures in the property appraisal summarized below as a result of the new consideration of a risk of decline in profitability due to the cancellation of the property’s master lease agreement.

（unit: ¥million）

4

A major increase in retail floor due to the opening of several competing facilities has resulted in ALPARK (East Building)’s sales falling 27% from their peak

Competitive environment

Environment surrounding asset to be sold

OpenedStore floor

areaOperator

(East Building)April 1990 20,662 m2 Mitsui

Fudosan

HatsukaichiJune 2015 46,000 m2 Izumi

April 2017 38,980 m2 Izumi

③ THE OUTLETS HIROSHIMA

April 2018 43,500 m2 AEON Mall

ALPARK 2

3

1

LECT

THE OUTLETSHIROSHIMA

You Me Town Hatsukaichi

You Me Town Hiroshima

AEON MALLHiroshima Fuchu

3 km5 km10 km

■ALPARK (East Building) sales (12-month average, with January 2014 as 100)

60

70

80

90

100

110

120

You Me Town Hatsukaichi

opened

THE OUTLETSHIROSHIMA

opened

LECT opened

★ FRI properties

ALPARKrenovation

ALPARKrenovation ALPARK

renovation

Jan.

2014

Apr.

2014

July

2014

Oct.

2014

Jan.

2015

Apr.

2015

July

2015

Oct.

2015

Jan.

2016

Apr.

2016

July

2016

Oct.

2016

Jan.

2017

Apr.

2017

July

2017

Oct.

2017

Jan.

2018

Apr.

2018

July

2018

Oct.

2018

Jan.

2019

AEON MALLHiroshima Gion

4

5

Assets to be acquired

Acquisitions that leverage the sponsor’s pipeline to obtain high-quality, relatively new assets in Japan’s three largest metropolitan areas(Tokyo, Nagoya, Osaka)

Located on Sunshine 60 Street in the Ikebukuro area, one of Japan’s top concentrated retail areas

New building, completed in January 2014

Opened as a large-scale store inspired by UNIQLO‘s popular flagship locations

Located on a corner lot on Otsu Avenue—Nagoya’s leading street of high-end brand retailers—in the Sakae area

Entire building leased by a globally popular fashion brand

With this acquisition, FRI will have a 100% stake

Located on the Shinsaibashi-suji shopping street, where a wide variety of stores are concentrated

Further expansion of nearby retail facilities is expected, including the rebuilding of the Daimaru Shinsaibashi main building to open in autumn 2019

Location expected to benefit from demand from foreign tourists

Ikebukuro GLOBE(50% co-ownership)

SAKAE GLOBE(40% quasi co-ownership)

Shinsaibashi MG Building(60% co-ownership)

Planned Acquisition date March 22, 2019

Planned Acquisition price ¥10,300 million

Appraisal value ¥10,500 million

NOI yield*/NOI yield after depreciation

4.0% / 3.3%

Planned Acquisition date March 22, 2019

Planned Acquisition price ¥6,350 million

Appraisal value ¥6,360 million

NOI yield*/NOI yield after depreciation

3.6% / 3.4%

Planned Acquisition date March 22, 2019

Planned Acquisition price ¥5,840 million

Appraisal value ¥5,920 million

NOI yield*/NOI yield after depreciation

3.4% / 3.2%

* Expected NOI divided by acquisition price

6

Distributions per unit

Factors affecting distributions per unit

Forecast for 30th fiscal period (ending June 2019) distribution per unit unchanged at ¥10,490

Measures toControlDistributions

FRI plans to keep the distribution per unit at the level forecast by using the effects of asset acquisitions and sales, drawing from internal reserves (approximately ¥180 million), paying distributions in excess of earnings, and other means → The impact on the previously published “Forecast of Results for the 30th Fiscal Period” is expected to be modest,

and FRI has not revised these forecasts

(yen)

To stabilize distributions against the sudden realization of operational risksObjective of paying distributions

in excess of earnings

0

* The above graph was prepared by the Asset Management Company to communicate the impact of the initiatives in question on the forecasts of the Investment Corporation’s per-unit distributions for the30th and 31st fiscal periods in an easy-to understand manner. The graph provides an overview of the main factors expected to impact per-unit distributions as a result of these initiatives and estimates oftheir respective amounts made at the date of this publication. However, these factors and estimates have been prepared based on certain assumptions and simplified for ease of understanding, and they arenot necessarily accurate representations of the actual factors and amounts that will arise. The Investment Corporation makes no guarantee or promise with regard to the amounts of distributions per unit,factors impacting distributions per unit, their respective amounts, or other information in the above graph.

10,490

10,000

0

9,060

1,430

11,000

30th 31th

30th period distribution

forecast published 2/15

Loss on sale and lack of rent from property

to be sold(1 month)

Revenue from 3 newlyacquired

properties

Measures to control

distributions

30th period distribution

forecast published 3/18

No loss on sale

Lack of rent at Papillon Plaza(3 months)

Lack of rent from property

to be sold(5 months)

Income from 3 properties to be acquired

Interest paid, etc.

31st(approximate distributionprojection)

7

¥10,000

¥11,000

Indicators

第8期

（08/6期）

第9期

（08/12期）

第10期

（09/6期）

第11期

（09/12期）

第12期

（10/6期）

第13期

（10/12期）

第14期

（11/6期）

第15期

（11/12期）

第16期

（12/6期）

第17期

（12/12期）

第18期

（13/6期）

第19期

（13/12期）

第20期

（14/6期）

第21期

（14/12期）

第22期

（15/6期）

第23期

（15/12期）

第24期

（16/6期）

第25期

（16/12期）

第26期

（17/6期）

第27期

（17/12期）

第28期

（18/6期）

第29期

（18/12期）

第30期

(予想)

（19/6期）

第30期

(予想)

（19/6期）

Acquisitions from the sponsor

Acquisitions not from the sponsor

50.0%

40.0%

273.9

123.1

159.6174.3 178.0

206.8221.2

245.8

271.6

237.0

178.0

221.2

259.2 267.8 265.9283.1 283.1

304.73

289.0 289.0 293.4304.7

第8期 第9期 第10期 第11期 第12期 第13期 第14期 第15期 第16期 第17期 第18期 第19期 第20期 第21期 第22期 第23期 第24期 第25期 第26期 第27期 第28期 第29期 第30期 第30期

08/6月 08/12月 09/6月 09/12月 10/6月 10/12月 11/6月 11/12月 12/6月 12/12月 13/6月 13/12月 14/6月 14/12月 15/6月 15/12月 16/6月 16/12月 17/6月 17/12月 18/6月 18/12月 19/6月 19/6月

Distrib

utio

nper u

nit (y

en)1

Ass

et siz

e(b

illion y

en;

acquisitio

n p

rice b

asis)

LTV

304.7

Property sale

Stable distribution

growth

Sound, careful control of LTV

Further asset size growth321.84

Approx. 43%3

第31期以降

4

Property salesProperty

sale

Approx. 47%4

Reached asset size of

¥200.0 billion

Reached asset size of

¥300.0 billion

41.0% 41.0%

45.5% 46.2% 45.7%43.6%

46.8% 46.3%49.6%

42.5%41.0%

37.6%39.2% 38.0%

41.7% 41.2%39.1%

42.3% 41.6% 42.2%44.1% 43.8%

8,980 9,220 9,274 9,368 9,294

9,097 9,239 9,299

9,991

9,191 9,173 9,405

10,211

9,707 9,360

9,695 9,694 9,903

10,022 10,146 10,194 10,282 10,490 10,490

8th 9th 10th 11th 12th 13th 14th 15th 16th 17th 18th 19th 20th 21st 22nd 23rd 24th 25th 26th 27th 28th 29th 30th 30th 31st and after

Dec.‘08 Jun.‘13 Dec.‘14 Jun.‘15 Dec. ‘16

1. FRI implemented a two-for-one split of its investment units effective January 1, 2014. Distributions before the split have been divided by two and truncated to the nearest yen.

2. Forecast figures as presented in “Summary of Financial Results for the 29th Fiscal Period.”

3. Forecast figures as presented under “Pre-Conditions and Assumptions for Operating Forecasts for the 30th Fiscal Period (January 1, 2019 to June 30, 2019)” in “Summary of Financial Results for the 29th Fiscal Period.”

4. Forecast figures as of March 18, 2019.

2

8

FRI’s portfolio in graphs

Fixed rent99.0%

Sales-linked rent1.0%

Large-scale SCs41.4%

Land interests8.5%

Fixed rent99.0%

38.5%

6.4%

8.5%

11.2%

7.0%

PropertyType

Large-scale SCs45.0%

Medium-scaleSCs26.7%

Urban retailfacilities

19.6%

Land interests8.7%

As of December 31, 2018

After property sale and acquisitions

35.1%

6.3%

8.3%10.9%

6.9%

Neighborhood SCs

Regional SCs GMSs

Outlet malls Supermarkets/other

Inner ring

Neighborhood SCs

Regional SCs GMSs

Outlet malls Supermarkets/other

Inner ring

Building Age2

5 years or less6.5%

Over 20 years4.9%

10 to 20years67.0%

5 to 10years21.7％

Average building age:

12.3 years

Ratio of fixed rent and sales-linked rent

3

PropertyType

Ratio of fixed rent and sales-linked rent

3

5 years or less13.9%

5 to 10years20.4％

Over 20 years2.7%

10 to 20years63.0%

Average building age:

11.2 years

Building Age2

Tokyo MetropolitanArea51.1%

Chugoku10.8%

Chubu15.8%

Kyushu/Okinawa9.1%

AreaKansai13.2%

Chugoku8.0%

Chubu16.7%

Kansai14.0%

Tokyo MetropolitanArea52.4%

Kyushu/Okinawa8.9%

Sales-linked rent1.0%

Area

Urban retailfacilities

24.0%

Medium-scaleSCs26.1%

1. All figures for the portfolio as of December 31, 2018 are calculated based on the annualized fixed rent (excluding common area maintenance charges) of lease contracts valid as of December 31, 2018. Variable rent is not taken into account. Figures for after the property sale acquisitions are calculated based on the annualized fixed rent (excluding common area maintenance charges) of lease contracts valid as of December 31, 2018, excluding the property to be sold, and of lease contracts for the properties to be newly acquired.

2. Based on acquisition price, excluding properties operated as land interests.3. The ratio of fixed rent and sales-linked rent for the portfolio as of December 31, 2018 is that of the 29th fiscal period. The ratio for after the property acquisitions and sale is based on results for the 29th

fiscal period and the fixed rent (excluding common area maintenance charges) of lease contracts valid as of December 31, 2018, excluding the property to be sold, and of lease contracts for the properties to be newly acquired.

9

Working toward future growth

FRI’s operational strategy

Internal Growth

Secure a foundation for stable earnings based on long-term fixed rent

Adjust to changes in the environments surrounding properties, maintaining and enhancing competitiveness through such measures as additional investment and tenant replacement

Consider replacing properties that pose future uncertainties in order to further enhance portfolio quality

External Growth

Fully utilize the sponsor’s pipeline to continue acquiring excellent properties

Selectively invest in non-sponsor properties utilizing the Asset Management Company’s unique network, keeping a close eye on risk

Carefully select properties for investment, considering the certainty of cash flows and growth potential of the surrounding retail zone

Make acquisitions with an eye to maintaining the whole portfolio’s ratio of asset value to yield after depreciation

Maintaining and enhancing facility competitiveness through management

LaLaport SHIN-MISATO

AEON MALL Ibaraki

QANAT Rakuhoku

Asset disposition

ALPARK(East Building)

Buy

Run

Sell

Basic policy:

Secure stable earnings over the

medium to long term

Asset acquisitions

Ikebukuro GLOBE

SAKAE GLOBE ShinsaibashiMG Building

Average annual acquisitions from Mitsui Fudosan, the sponsor: ¥ 14,360 million

Cumulative assets acquired from Mitsui Fudosan, etc.*

(million yen; acquisition price basis)

26,060

142,660

3,100

28,800

10,000 8,800

20,400

3,930 17,170

15,100

9,300

22,490

2008年2009年2010年2011年 2012年2013年2014年 2015年2016年2017年2018年2019年2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

* The graph above shows the cumulative assets acquired from Mitsui Fudosan, etc. of the properties after the property acquisitions and sale.

10

Disclaimer

All content in this document is provided solely for informational purposes and is not intended to serve as an inducement or solicitationto trade in any product offered by FRI. Investment decisions are made at the investors’ discretion and risk. FRI disclaims anyresponsibility or liability for the consequences of investing in FRI.

Investment units issued by FRI are subject to price fluctuations due to various factors, including: (1) volatility in the J-REIT market,interest rates and the real estate market; (2) fluctuations in rental revenues from properties; and (3) the occurrence of unexpectedlosses due to natural disasters. Accordingly, investment in FRI entails the risk of incurring a loss. For more details, please also refer tothe section titled “Investment Risk” presented in the Securities Report issued by FRI.

Information provided in this document contains such forward-looking statements as business forecasts, which should not beconstrued as commitment to or guarantee of future performance.

The information provided in this document was originally published in Japanese language form and has been translated for referencepurposes only. FRI guarantees neither the completeness nor the accuracy of this English translation. Please be advised that allinformation provided herein may be subject to change without prior notice.

Duplication or reproduction of any content presented herein without the prior consent of FRI or its authorized representative is strictlyprohibited.

Asset management company: Mitsui Fudosan Frontier REIT Management Inc. (Financial Instruments Business Registration No. 395; issued by Director-General of the

Kanto Finance Bureau based on the Financial Instruments and Exchange Law)

Disclaimer

Asset Management Company