Mitsubishi Estate REIT Boosts Profit 4.5% as Borrowing Costs Weigh on Returns

Japan Real Estate Investment Corporation logged stronger earnings for the six months to March as rental growth and property sales lifted income at Mitsubishi Estate’s flagship office REIT, but the trust warned that rising interest rates are beginning to squeeze returns.

Net profit for the fiscal half climbed 4.5 percent year-on-year to JPY 18.6 billion ($117 million), while operating revenue rose 3.3 percent to JPY 42.4 billion, JRE’s manager said in a filing. The Tokyo-listed trust forecasts a profit of JPY 19.1 billion for the six months to the end of September, with operating revenue projected at JPY 43.9 billion and dividend per unit expected to edge up to JPY 2,561 from the current JPY 2,536.

Despite the earnings increase, higher financing costs have emerged as a pressure point as the Bank of Japan’s rate tightening cycle pushes up borrowing expenses for leveraged property owners, according to the manager. Interest expense jumped 21 percent from the prior half to JPY 1.64 billion, while the REIT’s loan-to-value ratio climbed to 44.8 percent from 42.8 percent six months earlier after total interest-bearing debt rose by JPY 42 billion to reach JPY 503.2 billion.

“The company will keep a closer eye on the impact of interest rate hikes and continuing inflation,” the manager said, adding that JRE aims to maintain an LTV ratio in the 30 to 40 percent range while preserving a “sound and conservative financial profile” through staggered maturities and diversified lenders.

Sponsor Ties

Property giant Mitsubishi Estate remained JRE’s largest tenant during the period, contributing roughly JPY 4.6 billion in operating revenue, while the sponsor also served as the counterparty for the REIT’s staged disposal of the Akasaka Park Building, a prime office tower in Tokyo’s Minato ward.

During the six months to March, JRE sold a 16.66 percent interest in the Akasaka Park Building for JPY 13.4 billion as part of the second tranche of the disposal programme. The REIT also sold a 50 percent interest in the JRE Tenjin Crystal Building in Fukuoka for JPY 3.3 billion.

At the same time, the trust continued increasing stakes in existing core assets rather than pursuing large standalone acquisitions in Japan’s highly competitive office investment market.

JRE acquired an additional 9 percent stake in Shinjuku Eastside Square, a mixed-use office complex, for JPY 20.4 billion during the period, lifting its ownership interest to 48 percent, while also buying an extra 28.68 percent holding in the Kandabashi Park Building for JPY 2.15 billion.

Equity Raising

After the close of the reporting period, the REIT acquired an additional 7.1 percent ownership stake in CoMoRe Yotsuya, an office and retail complex in Shinjuku, for JPY 15.5 billion and completed an equity raising aimed partly at refinancing debt tied to the Shinjuku Eastside Square purchase.

JRE issued 169,260 new investment units in April through a public offering and third-party allotment that raised a combined JPY 19 billion, with proceeds earmarked for the CoMoRe Yotsuya acquisition and repayment of short-term borrowings.

The REIT said competition for high-quality Tokyo office properties remains intense despite higher Japanese interest rates, with domestic and overseas investors continuing to pursue acquisitions as rent growth and tightening vacancy support asset values.

JRE’s portfolio currently comprises 78 properties with a total acquisition value of JPY 1.2 trillion ($7.5 billion).