Mori Building sells debt to fund projects in run-up to Olympics

Bloomberg

Mori Building Co. sold its longest bond ever as Japan’s biggest closely held developer plans ¥1 trillion ($9.8 billion) in projects in the decade that will include the 2020 Tokyo Olympics.

The company, whose Roppongi Hills complex houses Goldman Sachs Group Inc. and Apple Inc., raised ¥13 billion in 10-year bonds on Friday. The notes offered three times the average yield premium for Japanese peers at 34 basis points over government debt. Global property companies pay 131, Bank of America Merrill Lynch indexes show.

Mori is boosting investments as occupancy rates for offices in Tokyo are at their highest in five years and the Olympics bid committee forecast an economic windfall of ¥3 trillion for the nation. The company, whose Toranomon Hills became the capital’s second-tallest building in June, plans to develop about 10 projects over the next decade in the city with partners, President Shingo Tsuji said in June.

“Mori’s strength lies in its ability to bring together large-scale developments and the quality of its core projects,” said Ryosuke Kaneko, a credit analyst in Tokyo at Mizuho Securities Co. “The environment surrounding Japanese developers is improving and that can be seen in falling office vacancy rates.”

Japan Credit Rating Agency Ltd. on July 22 raised Mori’s long-term credit rating one level to A, its sixth-highest investment grade. The ratings company said the company had a competitive edge in urban redevelopment projects and its “existing properties are regaining earnings power as market conditions” improve.

Mori reported record sales and operating profit for the full-year that ended March 31, with revenues climbing 7 percent to ¥265 billion and operating income rising 37 percent to ¥57.4 billion.

The 52-story Toranomon Hills, which opened on June 11, is Mori’s biggest project since the developer’s $2.2 billion Roppongi Hills in downtown Tokyo in 2003. The 247-meter (810-feet) tower, near the U.S. Embassy compound and government buildings, is the tallest after Mitsui Fudosan Co.’s Tokyo Midtown, according to Mori.

The project includes Hyatt Corp.’s first Japanese Andaz-branded luxury boutique hotel, a 20-meter pool overlooking the Imperial Palace and a rooftop bar on the 52nd floor with open-air seating.

The company decided on longer maturity bonds to lock in borrowing costs, Mori’s Tokyo-based spokesman, Moichi Watanabe, said in an e-mailed response to Bloomberg questions Monday. The company will use the funds to repay debt, he said.

Financial data on Mori are limited because it’s not a publicly traded company, and that contributes to higher spreads over rivals, according to Mizuho’s Kaneko. Investors demanded less than half the yield premium for comparable bonds of Mitsubishi Estate Co., Japan’s largest developer, which plans to spend as much as ¥700 billion for office developments in the next three years.

The quality of Mori’s projects, their cash flow and the gap in spreads with other listed developers means there is room for yield premiums to tighten further, said Toshihiro Uomoto, chief credit strategist at Nomura Holdings Inc. Despite risks such as increased competition for bluechip tenants and the potential for higher interest rates starting in 2016, the industry’s creditworthiness will improve slightly until the second half of next year helped by Prime Minister Shinzo Abe’s growth policies, said Uomoto.

The Bank of Japan’s unprecedented stimulus in support of Abe’s battle against deflation has reduced borrowing costs for Japanese developers to an 11-year low. The average yield dropped to 0.39 percent on Aug. 8, from as high as 3.1 percent in 2009, according to Bank of America Merrill Lynch data.

The benchmark 10-year sovereign bond yielded 0.51 percent Monday, down 22 1/2 basis points this year. A basis point is 0.01 percentage point.

Tokyo’s office vacancy rate declined for the past 13 months, falling to the lowest level since March 2009 at 6.2 percent in July, according to Miki Shoji, a closely held office brokerage. The gauge will probably reach about 5 percent by the end of the year, Hiroki Kawashima, an analyst at SMBC Nikko Securities Inc., said in a report last week.

“The market is still very strong, and rents will continue to go up,” for office space in Tokyo, said Christian Mancini, chief executive officer of North East Asia at brokerage Savills Asia Pacific Ltd. “There is still room for vacancy rates to tighten.”