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Edited Transcript of 2337.T earnings conference call or presentation 11-Jul-19 10:59am GMT

Q1 2020 Ichigo Inc Earnings Call

Tokyo Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Ichigo Inc earnings conference call or presentation Thursday, July 11, 2019 at 10:59:00am GMT

TEXT version of Transcript


Corporate Participants


* Martin Fackler

* Scott Anderberg Callon

Ichigo Inc. - Chairman & Representative Statutory Executive Officer


Conference Call Participants


* William Montgomery;CLSA




Scott Anderberg Callon, Ichigo Inc. - Chairman & Representative Statutory Executive Officer [1]


This is Scott Callon. Thank you, everybody, very much for joining. We really appreciate your time. I'm working off of a presentation that we have on our website, the FY '22, so February 2020 Q1 corporate presentation.

So let's dive into it. You should know that I have joined with me on the call today Martin Fackler who is our Head of our Communications and Global IR.

Turning on the presentation to Page 7 where we show the highlights of the quarter, and must say we had a strong quarter and we'll go through the details of that. A very important element of the business model is that it's got durable, effectively, kind of structural profitability in it where our stock earnings, so those are the fixed earnings of the firm are well above our fixed expenses.

I'll touch in detail what's happened on the stock earnings growth, our SRE, so sustainable real estate is the new segment name that we're using for this year for the Value-Add segment. There's nothing wrong with Value-Add, it's at the heart of what we do. We just had felt it was fairly incomplete relative to kind of the mission that we see for ourselves, which is to create value for tenants and customers and communities on a sustainable basis. So that segment has been renamed sustainable real estate, SRE, from this year.

Strong flow earnings in that segment. We think our share has a good value. We announced a share buyback after the close today of 10 million shares, approximately 2% of shares outstanding. I'll touch also on a number of our new activities, one of them which is trying to bring together anime, Japanese automation and real estate in an interesting and powerful way, again, for our customers, tenants and the local communities.

Let's turn to Page 8, shows the financial results of the quarter: operating profit, OP, up 43%; net income, up 34%; EPS, up 37%. We did a buyback last year, so that helps to push up EPS slightly over the income. Needless to say, we're on track to achieving our full year forecast with a very strong quarter.

I think it's probably a case that given the things that have gone wrong at a number of kind of Japanese real estate operators that haven't kind of executed well, there's probably a misunderstanding of what's happening in the market, the market is very strong. If you're a good operator, there's an opportunity to deliver very strong results. So we think it's ongoing and we are focused on being a good operator.

Page 9 shows the segment details. To step through the 3, Asset Management and the focus kind of stock earnings, again, kind of the less volatile element of our earnings. Base asset management fees were up 9% year-on-year. In sustainable real estate, rental income is up 5%. The big blowout is gains on sale of our sustainable real estate assets were up 66% year-on-year. And in Clean Energy, we actually show a minus of 3%. To be clear, top line actually grew. We have kind of a tax -- definition of tax peculiarities, one of them which is that you actually pay taxes a year delay when it's was a local tax. We bought a very solar large power plant online 2 years ago, we pay more taxes -- this year, we pay full taxes on it, so that shows up.

On the OP line, Clean Energy is actually down 10%. That's primarily an internal allocation issue. Our SG&A costs are up as we invest for growth. We're allocating those costs to Clean Energy. So those poor guys show down 10% for the quarter. But in fact, it's going just fine.

I'll talk to the specifics of the growth in the Clean Energy business later in the presentation, but you should know, we expect the growth will be flat this year. Next year, with a bunch of new plants coming online at the very end of the year, we expect to see gross profit up 30% in the business.

Let's turn to Page 11. I'll go quickly through kind of the key elements of the business model. This is something that we talk about, so I won't spend too much time -- on a regular basis. I won't spend too much time here because I think most people who call are familiar with this. The business model is a hybrid of stock and flow in earnings. We have kind of the structural profitability that comes from our stock earnings. We also have in a diversified flow earnings that we think are very powerful and add returns for our shareholders. So in general, they're about half and half. Over time, we expect to grow the stock too. In our Ichigo 2030 vision, we have a 60%-plus in stock earnings, in 2030.

Page 12, points to another element of the business model, which we effectively have an earnings bank. We create all this value by working really, really hard, really just hyper-focused on serving tenants and customers. We actually don't realize those gains in the case when we add value to assets until we actually execute on the sales. So we have all these embedded gains that build up over time at our earnings bank for future periods.

Page 13 points to the fact that we have these gains that we point to on Page 12, but they're seriously estimate -- very systematically underestimate the amount of actual profitability in other words, in earnings bank for the future periods. In general, we generate returns that are 2x to 3x higher than what's implied by the third-party appraisals. In the first quarter, as you can see on the bottom right, we came in at 2.9x relative to what the appraisal value -- the third-party appraisal value suggested what our gains would be on the transactions that we did.

14 points to a new indicator that we introduced 3 months ago as part of our Ichigo 2030 vision, which is to be clear that the focus of the business is on generating not just kind of paper earnings but actual cash. And so we have tracked our economic operating cash flow over time and continue to do so. You'll see that one of the elements of the business model is a very robust and productive business in terms of its cash generation and with this amount, can generate far more cash than actually is -- shows them as an income, as we have seen that our income underestimates the cash generation in the business.

Page 15 points to what's happening in terms of our borrowing activity. We continue to borrow very long, about 10 years, 7.5 years in terms of the remaining loan maturity. We now have broken -- or we're below 100 basis points. We went from 97 basis points on average the last period. Period end this quarter, we're at 91 basis points in average for the borrowing. Japan is a truly wonderful place to be a borrower if you're creditworthy, and it demonstrated that over time and we clearly have reached that point.

Page 16 points to another key element of our financing strategy, which is to -- as I say, we like to borrow long term, we like to borrow fixed and we've also increasingly focus on borrowing on an uncollateralized basis. So we announced following on a new 10-year uncollateralized commitment line from Mizuho Bank last September. We have a new additional line. So at JPY 10 billion, about JPY 100 to $1, to make the math simple, $100 million of uncollateralized borrowing and a commitment line that we added to is about $200 million. What's nice about this is it gives us added flexibility to say, "Sweep on an asset; we're borrowing." It's just it gives the ability to close quickly in cases where there would be a good asset but a distressed seller.

I'll turn then to some of the key elements of what's happened in each of the segments in our new businesses, starting on Page 18. We're continuing to work to support the growth of our 2 TSE REITs in the YieldCo, Ichigo Green which is the solar YieldCo. We think they're all attractive. The dividend yield on our office REIT is 4.1%; on the hotel REIT is 4.8%; on the solar YieldCo, it's 5.7%. As you know, we work for all of our shareholders. We're never going to sacrifice the interests of the REIT and YieldCo shareholders, as is kind of unfortunately some of the sponsor abuse that has occurred in Japan. So kind of continuing to work hard in growing value for all those shareholders is an important part of our mission.

Page 19 shows the activity in sustainable real estate during the first quarter. It continues to be a strong market, no question about it for sellers. Our gross margin in the quarter was 29%. That's ticked up a little bit from 26% during the full year that closed in February 2019, so 3 months ago. You'll see that Ichigo Owners has increased in its percentage of the acquisitions, 43% of the total.

Sales out of Owners, so Owners is a higher turnover business with a lower gross margin. We expect to earn only about kind of typically 10% kind of gross margin on the Owners business. We're buying new assets in very good locations, empty. They're almost all residential. So as you can see, the residential acquisitions during the quarter, which are about half the total acquisitions, those are all Ichigo Owners acquisitions. You buy central Tokyo, brand-new resi and lease it up very quickly and then sell it on to cash-rich corporations, high net worth individuals who would like a good asset and a good location that's fully leased up by us. So that's the business model.

We bought about JPY 9 billion in Owners in the first quarter. We sold hardly anything. You should know that business clearly has seasonality into it. It is in a relatively short holding period. On average last year, it was 8 months. Something like that will happen this year where you end up having kind of $100 million to $200 million of assets which you sell typically in the final quarter of the year, and so we expect to see that happen again this year.

So as you can see, in terms of total activity, a slight -- net acquisitions, primarily in the residence followed by office, and we were -- we sold equivalent amounts of office. We sold more of hotels, we sold more of retail. We were net buyers of residential, as I say, within the Ichigo Owners vehicle.

Page 20 and 21 show some examples of some of the assets that we sold in the quarter in terms of within the SRE business, sustainable real estate business. Again, we're value-add owner/operators. We don't just buy an asset because we think that cap rates are compressing, meaning our prices are going up or that we can send our footprint to somebody is kind of there's an intense focus on creating enduring value because enduring value is enduring, and that's what we care about.

The particular asset on Page 20 that we sold at a gross margin of 52%, which is rather large, it's an interesting example. It is -- the reason why we were to buy it at such a good price is because it was unusual. And in general, unusual can be very hard in Japan. So it was an outstanding location right next to the Harajuku station which is one of the major entertainment areas in Tokyo. There's a road in Harajuku which is a main retail road called Takeshita Dori or Takeshita street or avenue, however you would translate into English.

This asset, as you look at it, about 100 meters away from it, like right there, right bang up next to the station and next to Takeshita Dori. The issue is it was on a curve and so when you're standing 100 yards, 100 meters away and you look in Takeshita Dori on this main retail avenue and you look to see the asset, it's just on the edge of the curve but you can't see the asset. And so it's there and it's convenient. I mean it's kind of like -- it's as if, if I can use an analogy, you own an asset 100 yards in Times Square that's in like a courtyard. So when you're standing in Times Square, you can't see it but you just walk 100 yards and the asset's there. And so because one of the potential uses for it is it's a major retail area was retail, and you had a tenant moving out. And one chief concern on the part of buyer is like what happens if we can't lease it up? And our perspective on it was great location, doesn't need to be just retail.

In fact, we ended up filling it half office and half retail, and we did the work on it. We're very experienced leasers in terms of our direct leasing. We can lease this up, we did. We spent about a year doing so. When I say that unusual is difficult, I mean things that could possibly make you look bad is also difficult. So buying an asset that's invisible but right there that's completely empty is something that could possibly bring some career risk for people, and we stepped into that. We see full value rather than kind of hide from kind of what happens if this goes wrong. We have a portfolio of assets. We understand what full value should be and how we can get there. But anyway, we acquired it, we fully leased it up, we executed 6 term leases with new tenants. It creates both flexibility, re-tenant over time. So in Japan, it's called the rent control. What it meant is when we sell on to a new owner, the owner has the ability to re-tenant if that owner would want to, but these were also long-term leases which is able to give the owner -- the new owner the opportunity to kind of have some security of return for a longer period of time.

Anyway, very strong transaction. We thought we'd bought an asset that had been kind of misunderstood and mispriced because it was misunderstood in a high-quality location and we think the results directly speaks to kind of that perspective that we brought to it.

Page 21 shows a hotel asset. This is in a sense, relatively more conventional. This was an asset that had been kind of under CapEx-ed. It was in a very good location. It didn't have the latest in terms of -- I mean things you wouldn't want to have for a good guest experience: it had kind of old air conditioning, HVAC; water systems wasn't kind of -- didn't look as nice as it should be. We'll put in a de minimis amount of CapEx and just fix all those problems. We also do -- we like to kill 2 birds with 1 stone. We installed LED lighting which is both a cost efficiency but also it's better for the planet. So we did all these things. The result is we were able to take up ADR 20%. And NOI growth because of cost cuts, we're up 31%. There are things like the LED lighting. By the way, electricity is very expensive in Japan. So if you're able to take electricity cost usage down, that's really, really valuable. The gain on sale was again substantially higher than the unrealized gains that were the thing the appraisers thought we were going to get on it, and the deal gross margin on this was 29%.

Page 22 shows some new initiatives within the sustainable real estate business. We are seeking to learn what we can, wherever we can. That's true in Japan, that's also true globally. So one of the things that we did and those of you who are familiar with us, Ichigo is always trying to get better, full stop, and we're very systematic about it. We do not make large kind of new initiatives. Large new initiatives are risky. Before you do something large and new, why don't you do something small and new? And so we do something small and new, and if we can demonstrate successfully, they will expand it sometimes very, very rapidly.

So it's an interesting question to us because we think we have the capability in Value-Add that is durable and demonstrated in Japan. And so we actually went to the U.S. to see what we could learn in the U.S. that were possibly additive. So are they doing things in the U.S. that are different from what we would do in Japan that we could learn from? We also wanted to see if okay, are they doing things in the U.S. that maybe that they're -- that we're -- are they not doing things in the U.S. that maybe we're doing in Japan that were possibly transportable there?

I think the conclusion is we didn't learn anything in particular. Okay, guys in there, there are Value-Add real estate guys in the U.S. they do the same sorts of things that we would want them to do. This wasn't -- we invested, we put actual real money into it, not a ton given the size of our balance sheet. The investment worked out very, very well. So the good news is they got -- we got a research gain on it, we also got an IRR on the investment of about 68%, so that worked out just fine. We still -- we have another investment, hotel investment. We did 2 of them, both $5 million each, so these are small investments, but we're trying to get paid to learn and we think we delivered on that with this.

We've also moved offshore in the self-storage business and we acquired a 29% holding in a storage business in Taiwan, again, to try to learn what's there and also possibly deliver. We think the opportunity to deliver what we do in Japan in the Taiwanese market is interesting. We think there are also some cross-border opportunities here. And so the point is that we're continuing to work to see if there are opportunities really for us to grow in a sensible way and doing our [Value-Add people] on U.S. hotels and Taiwan self-storage would be examples of that.

Page 23, turning to the Clean Energy business, I touched on this earlier. As you can see on the page, most of the plants will been coming online this year, this November, January, February; that means they're not going to contribute very much. You should know that the winter, both because of snow and because of typically higher cloud cover and less solar production, means that we don't get very much generated during those months. So there's seasonality in solar power production. The implication is that we expect to be relatively flat this year but we'll see a 30% increase in the gross profit in this business next year.

Page 24 shows the full development road map, which takes us up 94% from current production in fiscal year 2023, February, 2023.

Page 25, turning to some of the new things that we're doing to continue to expand our capabilities. We acquired a hotel operator in this quarter. We're up and running with 3 hotels. We expect it to be up to 7 hotels by August end. And this is something we're doing because we are a very active, very hands-on owner. We think it is actually cashable to have an operator as a test bed for us to implement things. One of the challenges we found out over time is that we may have, given the large -- and this is kind of the build experience we have in hotels, we work with a number of operators. In some cases, we have more experience than the operator and we think something is a good idea, but in order to convince them, we think we've come to understand that it might be actually better to have our own hotel operator where we can test things and demonstrate their success and kind of therefore just roll them out to our operator network. So we think there is both kind of profitability here that will be justified. This is a non-asset business, it's an operational business. We also think it's an opportunity for us to drive kind of best practices through the -- on total kind of operator network.

Within that, we are beginning -- we have begun to deploy Propera, which is our hotel AI-based hotel revenue management system. It's currently deployed at 15 of our hotels. Things are going very well. We are experiencing increased NOI, in other words, higher revenue generation from the hotels within the Propera network. And again, this is something that we expect to possibly roll out externally in order to drive a new -- a nonasset kind of business for ourselves.

So the concept is to take capabilities that we use ourselves. I mean I think everyone's favorite example of this is Amazon AWS. Amazon needed to have world-class computers. They figured out they could leverage that capability and build more scale for themselves and therefore, build economies of scale and better cost efficiencies for themselves by selling them externally. That's very specifically the way we think about Propera.

Turning to Page 26, a new -- another new business entry. This one is pretty unusual. Japan, it's got very specific elements of its entertainment culture called anime, animation, which is unique and interesting and important. And we think there's an opportunity for us to combine that with real estate. Very, very specifically -- and I'm sorry, on the page, it says Anime + Retail Synergies, it should have said anime and real estate synergies. The -- very specifically, we're working to go beyond the classic relationship between owners and tenants, which is classically tenants don't ever want to see the owner. And that makes sense if the owner is not going to do anything, be of any help and is just kind of in the way. We're trying to build some capability that we think is significant for our tenants in any way possible.

And so very specifically, we own an asset in Akihabara, which is kind of the heart of Japan's anime subculture called the Akiba Culture Zone. This is an entire building dedicated to anime. We think that the work we're doing on a new anime series with Mamoru Oshii, who is one of Japan's most famous anime directors, he's the director for Ghost in the Shell, which had extraordinary success globally, we think there is both an opportunity to monetize our involvement in animation production, but it's not going to end in that. We think there's ability to integrate this into the work we're doing in this kind of anime landmark in Akihabara, which is in Central Tokyo. So it -- that's already begun. So we -- the announcement was held there. We're beginning activities with tenants, talking about kind of character licensing. We're going beyond your classic hands-off kind of owner relationship with tenants, being highly collaborative with tenants and with neighborhoods.

And speaking of neighborhoods, turning to Page 27, another new initiative we have is we have become a key investor in a new real-world augmented reality game called TSUBASA+, which combines Japanese soccer manga. So effectively, kind of -- how do we describe manga? Comic books, Japanese comic books with, globally, avatars of world-class soccer. I'm American, you can probably tell from my accent. Football is -- we see almost everywhere else football players globally. We think -- I mean this is effectively a version similar to Pokémon GO, very, very interesting opportunities to -- both to make money on the game itself but to kind of drive activity around our real estate assets.

Again, we think this is an interesting way to go beyond kind of the classic. We have boxes, and here are the boxes. It's a way of building our capability, which is not just infrastructure hardware and infrastructure software in terms of serving the interests of people. So as you see on the page, we think this hits boxes including entertainment, sports, culture, tourism, other would be games.

Finally, on Page 28, we announced our buyback after the close today, JPY 3 billion, so approximately USD 30 million, 2% of shares outstanding. We did buybacks, 2 of them, JPY 1.5 billion in each, 2017. We did a buyback in 2018. We're following on that with a buyback that we announced today that we'll conduct over the next few months.

Page 29 -- from 30 to Page 33 talks about our commitment to ESG. And this has become relatively popular as people kind of -- they call it greenwash. I mean this is something that's been at the heart of the firm for years.

At the end of the day, we think you serve kind of citizens and communities first. And if you do that, you serve your shareholders. And so we have -- this is material which you've seen before, so I won't go through any detail, but we have ongoing commitments and deliverables, environmentally and socially and on a governance basis that we think are really important and will continue for all of you.

So those -- is the prepared presentation. I'm happy now to switch to Q&A. Any questions and/or input are very, very welcome. We work for you.


Questions and Answers


Scott Anderberg Callon, Ichigo Inc. - Chairman & Representative Statutory Executive Officer [1]


(Operator Instructions) We have a question from Will Montgomery of CLSA.


William Montgomery;CLSA, [2]


Yes. Can you hear me?


Scott Anderberg Callon, Ichigo Inc. - Chairman & Representative Statutory Executive Officer [3]




William Montgomery;CLSA, [4]


Scott, a pretty interesting presentation and a good set of numbers. I did listen to the Japanese. So this is sort of a confirmation of some of the things that were said there. If you could give 2 points. So just the big question about profitability. Going forward, if you increase Owners -- if you're buying more assets for the Owners business, if those profits are lower, so you can kind of address what you think -- this year looks pretty good. Obviously, we're still in a pretty strong market. But where this may be heading over the next year, just your opinion on that. And your plans are stated, typically, you try to buy JPY 70 billion to JPY 80 billion in new acquisitions each year. Is that the pace -- is that the right pace going forward, any comments on there? So just sort of on profitability and your acquisition plans in your core Value-Add business.

And then second, this was also asked, and I think it's worth maybe getting your views on how you're going to monetize these IT investments. What types of monetization? What that profitability is going to potentially be? And also this wasn't asked. I'm just wondering what's the rough investment size, what kind of capital commitment are you making now? And how will that be in terms of cash flow over the next couple of years? Is it a little bit now test the waters and then it gets really big, or just sort of your thoughts on how that's going to pan out.


Scott Anderberg Callon, Ichigo Inc. - Chairman & Representative Statutory Executive Officer [5]


Okay. Thanks. So let me start with profitability and kind of our sustainable real estate business and what the acquisition pipeline looks like.

So thanks for joining the Japanese call and this call. So yes, so the point that was raised on the Japanese call with one of the analysts was, okay, so your gross margin, and so I'm on Page 19, is 29% and the Ichigo Owners business is a lower-margin business. So if you're doing more on Ichigo Owners, does that imply that your gross margin goes down? Yes. So that's the answer.

So let's sift through that though because I think there was probably some skepticism there that wasn't warranted. So the first point is that -- and I'm sorry, I didn't make this point and so this is probably worth doing. Things have gotten a little bit wobbly for weaker borrowers. So there's no question that banks are getting more selective as to who they want to loan to. They're worried. They don't want to go -- they don't want to lend to weaker borrowers if we're kind of end of cycle or top of cycle. And the implication of that is that in the Owners business where we typically buy brand-new residential -- Tokyo residential and central locations and great locations, is the developers for that are going to the banks. And developers don't have our business model, and they typically don't have our creditworthiness. And they don't have the stock earnings or the business model. So they have 100% pool of business model. And so the banks are like, well, okay, you're building this thing. It's -- you're going to deliver it to market in 18 months. Who's going to -- who's the buyer? And so developers want to lock in a buyer.

And so the result of that is that we're increasing, again, the developers saying, "Look, we'd like you to step in and effectively provide credit support." And it's like, well, okay, that's fine. But we just never get paid for that. So we think the gross margin in the Owners business is going up from kind of 10% to maybe 15% to 20% on the assets it's doing.

The good news is our end clients are getting the same good at-market price. Effectively, it's the developers who are having to eat margin in order to kind of -- to fulfill the projects. So just so you know, we think the Owners margins is going up.

Now stepping back to the bigger issue which is, okay, so this isn't a bad thing if you have a 30% gross margin business which is your -- the broader, longer-term, Value-Add, sustainable real estate business. You've got the sub-business called Ichigo Owners, which is maybe 15% margin but still half of the margin of the bigger business. Doesn't that imply profitability goes down? Well, it does if turnover stays the same.

In reality, the core sustainable real estate business is really kind of these days like a 3-year hold -- 3- or 5-year hold, with kind of a 30% to 50% gross margin. The Owners business is -- I'm telling you is effectively a 15% -- becoming a 15% gross margin business with an average 8-month hold. So if you run those numbers, you end up being more profitable. And of course, that's the point. We understand that total profitability is not gross margin, it's gross margin times turnover. And of course, the ROE formula is net margin times turnover times leverage. So we don't see any falloff in total profitability. It's a good thing, not a bad thing, that we're increasing turnover because it makes us more capital efficient. I mean I think you should feel good about kind of the underlying trends in our business.

Now having said that, look, we do not believe in predicting the future. And I probably said this 10 times here in this call. So we're going to be saying it a dozen times. Our view on this is: don't predict, prepare. So if the market falls out a bit, the market falls out a bit. We'll be ready for it. And in a sense, some things are already happening that other people aren't ready for. I mean as I say, the lending market has gotten more selective. It's beginning to impact other players in the market. It's not impacting us because we're ready for it in terms of our capital capabilities, in terms of our structural ability to deliver value-add, in terms of the strength -- the underlying strength of our business model, which is not totally dependent on full activity.

Is that okay on profitability? Anything that I missed here before I turn to the acquisition pipeline?


William Montgomery;CLSA, [6]


Yes. I guess the obvious kind of question is does this impact maybe some of the pricing and maybe other assets that are maybe buyers getting a little -- well, harder-to-find financing so they can't come up with such aggressive bids. And are sellers starting to notice that and maybe they're going to be a little bit more willing to sell at more reasonable cap rates? Are you still going to see this spread elsewhere?


Scott Anderberg Callon, Ichigo Inc. - Chairman & Representative Statutory Executive Officer [7]


Yes. I mean again, we're not in the prediction business. But let me tell you what's happening so that I don't have to predict it. If your business model is you buy bulk and sell it off to individuals, you're beginning the ride into rocks, right? Because it is -- and individuals are classic examples of being less-creditworthy borrowers. So this whole thing of kind of trying to sell apartments to the salary man, and it's -- that's a really, really tough business model. And look, we own good assets. We improve them.

One of the things that's happening in the Owners business that's reflecting that is we are beginning to shift in -- and Owners doesn't have -- it has -- so it's typically cash for its corporations and high net worth. So it's got very creditworthy clients. But Owners is shifting towards bigger institutions. What we're finding is the original business model for the business was we're going to deliver assets one by one to cash-rich companies and high net worth. And it turned out that that's the business model that's incredibly viable.

There's another business model that we didn't expect to find, but it is what we think is going to be the prime driver of earnings this year and was a big driver of earnings last year, which is actually there's still a wall of money. There is a huge hunger for high-quality, yield-delivering assets in Japan. JGBs are shrinking. There's negative rates. And big institutions, they don't want and they can't really afford to spend. I mean they want to be buying $5 million at a time. They want to be buying $50 million to $100 million at a minimum at a time. So we're kind of accumulating assets, and you should expect to see that this year. And then at the end of the year, we do -- we sell $100 million. That's what we did last year. We sold $200 million. 2 different transactions, for example.

So that -- clearly, we're seeing activity where parts of the market, buyers -- I shouldn't say parts of the market -- parts of the buyer market is getting distressed. Will, haven't seen any increase in cap rates. It's been -- they've been substituted for by a significant ongoing appetite from Japanese institutions, life insurers, anybody who wants a return. We're seeing a little bit of kind of -- we're seeing global money coming to Japan picking up again. Japan is increasingly seen as kind of stable in a world that feels less stable.

So at the moment, I think the right answer to your question is a decrease in the number of buyers but no decreasing in pricing because the creditworthy buyers are still very, very focused on accumulating assets. And the reasons are pretty obvious. I mean you can borrow 70% LTV, 10 years for almost nothing, for assets that deliver extraordinary returns available to do anything else. In terms of the yen yield, you can flip it into a global currency yield through a very liquid asset swap market if you want to take your end risk out of it. In a world where there's a shortage of yield, Japanese real estate is extraordinarily compelling value, nothing has changed. If it does change, we'll adjust to it.

But that -- nothing has changed at this point. Cap rates are not going up. But that's not a prediction. I mean they haven't gone up, meaning cap rates have not gone up. I suspect there probably is a misunderstanding of that because so much stuff is happening in the world right now. It feels confusing and anxiety creating, and it's confusing and anxiety creating for us also.

But in our core area of activity, you just have these very, very durable returns. Japan has record low unemployment. It has no inflation to speak of. It has economic stability; social stability; political stability; for better or for worse, price stability. The assets we own are very good assets in very good locations. People worry about population decline. That's a huge issue. In rural areas, it's not. We're primarily active in Tokyo. It's not an issue in Tokyo. Even kind of things like office space demand is going up, very substantially because of the increase in office space for workers. So the environment that we're operating right now is very strong. We're aware of it. We do not count on it, but there are currently no signs of anything nonfundamental occurring. Fundamentally strong and therefore, in reality, strong in terms of price activity and transaction activity.

Turning to acquisition pipeline. I mean look, we've bought about $200 million of assets in the quarter. You probably will get another $200 million of assets in the second quarter. And I mean we talk internally with our guys, go try to find in Mumbai $700 million to $800 million of assets this year. But to be very clear, that's because you want your asset acquisition guys to have kind of -- you want to have a stick to beat them with, right? And so you can't just say go buy however many assets you want to buy. You need to give them a goal. But at the end of the day, the goal is to go find assets so that the management team can decide if we want to buy them. And so there is never our goal is to buy $700 million, therefore, let's buy $700 million. In reality, the goal is to buy the greatest number of assets at the lowest possible price that we think we can add value to. And the good news is we're finding assets to buy, and that's coming in higher than expectations. So we think a forward kind of return pipeline.

And to be clear, the Owners pipeline, I told you, is really kind of an 8-month quota pipeline. So we have 8 months availability there. The Value-Add, the broader kind of core, sustainable real estate platform is kind of more 3 to 5 years, it's kind of do we have a view on profitability there. We have all these embedded gains, and we have assets that we're looking to sell that we think we can sell at good prices. So I mean it really comes to kind of like a 2-year view on profitability, not a 20-year view.

Now having said that, if you're running 7-Eleven or Walmart, you don't know if people are going to come to your stores tomorrow. They do because 7-Eleven and Walmart provide very good value, and people are going to stores, right? So we do have a longer ability to "predict" what profitability looks like and if I include prediction in quotes. But at the end of the day, we're going to have ongoing value as a company because we do have our ongoing value to our tenants and our customers. And so you should look very hard at our ability to do that. And that's the way we continue to invest in new ways to create value.

I'll move from there to your question about investment, but go ahead and tell me whether or not I've answered your question.


William Montgomery;CLSA, [8]


Yes. That's very good.


Scott Anderberg Callon, Ichigo Inc. - Chairman & Representative Statutory Executive Officer [9]


Okay. So look, I mean you actually mentioned IT. And I think you're also -- you're referring to the animation and gaming, that's the next 2, right?


William Montgomery;CLSA, [10]


Yes. Just broadly lump those together, yes.


Scott Anderberg Callon, Ichigo Inc. - Chairman & Representative Statutory Executive Officer [11]


Okay. And we think of them as 3 different threads. So I think I said on the last call, if we succeed with our Ichigo 2030 vision, which is to become a sustainable infrastructure company, 10 years from now, we'll probably be thought of as a sustainable infrastructure IT company. There is a major thread that is now multiyears in the making. And Propera, our AI hotel system, would be an example of something we started a couple of years ago, which are now -- we developed. We succeeded. We're now in actual production with it. It's kind of a longer thread in terms of the IT spend. IT, I think we'll do about kind of -- and to be clear, this is -- we're Ichigo, right? Ichigo never spends a ton of money. We're so focused on earning as much as we can on the smallest possible investment. So think a couple of million dollars a year going granular into IT that we think we'll get very good value from that, and that will be ongoing. I have no reason to spend more because we think we have very high returns from it, we'll do that. For better or for worse, we're not WeWork or The We Company or Uber, meaning we're never going to put $1 billion into something because we think we could possibly turn profitable. It's just not who we are.

But what I think you can expect from us is a relentless focus on cash generation from delivering value to tenants and customers. And clearly, IT is a tool that we think is available to us. We think many of our competitors are not using it very well. And we're going to do this thing. So that's a broad umbrella.

With respect to animation and the game investments, I'm going to duck and cover on that because we have conversations with kind of our partners in it. They don't want us to talk about which amount we're putting into it, but these are not large amounts. So we -- this is classic Ichigo is doing an entry in a new area with relatively small amounts to figure out if something can be done. The game investment is relatively bigger because it's global, but these are not particularly big amounts.

Sorry, I'm doing a little bit of duck and cover on it, but you don't have to worry about us blowing a whole lot on anything, these are relatively small numbers.


William Montgomery;CLSA, [12]


And monetization, these are -- you're selling rights to these characters overseas and you're selling products. Some of your tenants are going to be selling some of the products in their facilities. These are sort of the practical ways to...


Scott Anderberg Callon, Ichigo Inc. - Chairman & Representative Statutory Executive Officer [13]


Yes. I mean let's divide this up. So the animation one is much more straightforward. I mean look, we've got a very -- we've got a valuable building in Akihabara, which is regarded within Japan as kind of a landmark for anime. But it's not known without -- kind of throughout the world. So all is about traffic, investing in that to make that kind of a clear kind of stellar source of animation, anime in Japan. It would be -- it's something that we'd like to do.

The -- so how does that tie into this new animation series? Well, the business model on that one is fairly straightforward. I mean the animation series itself, [Oshii Kanto], because the director, Mamoru Oshii, is developing a brand-new series. There is global demand for it. He -- and we think we're going to make a very good return on just selling it to Netflix, Amazon Prime, whoever, Tencent, we will sell global rights to this. So we think we'll get our money back at least on that, and then we are going to use it to -- we're already having events at our building in Akihabara. We've got kind of character sales and all sort of thing that are going on there. We've got all these tenants that are linked to anime and if you haven't been to the building, I think you'll find it interesting if you go there. Will we get -- we're a part of return on their sales.

So there's an experiment going on here with what can we do new and different that takes us beyond let's say the classic, we're the owner and you never want to see our face, to we have these -- developing these intimate relationships with our tenants. There's also -- that's one element where we think we're going to do reasonably well, but it's an experiment we'll find out together. So we think we get all our money back plus more and possibly, possibly a lot more. I mean that's kind of the very nature of -- if this ends up being -- if the animation series itself ends up being a big hit, we'll do very, very well on it but in a small way.

So if you take a look at the hotel investment we did in the U.S., that was a great investment, Page 22, but it delivers kind of $3.5 million. It doesn't change who we are. But you can do a small investment and have very high returns on it. And these are small investments. So -- but the business model on that one is you sell the animation products, you sell it globally, you get streamed, you get -- you sell the streaming rights and all sorts of things, you make money on that and you also link in to the real estate business. And then you see where you can take that. So it's an initial entry into that area.

The game. The game is similar in terms of the business model, you're selling kind of sponsorship rights and things like that. Hundreds of millions of dollars are spent by McDonald's, for example, for Pokémon GO to get the Pokémon to send people towards McDonald's. There were hundreds of millions of dollars were spent by Starbucks. We don't expect this is going to generate hundreds of millions of dollars, but there's an element of that to it. We're also putting -- there's branding. We're going to have Ichigo sites all over this game. We're going to put them -- people are going to be coming to our stadiums, to our assets all over Japan. They're asking us if we want to do this globally. So there are elements there that are kind of about branding, et cetera.

That business model is less clear, I mean which is to say it's possibly like a massive hit or it isn't. We just like the amount of money that needs to go into it, needs to be smaller. We'll all be very, very blessed if this ends up being Pokémon GO 2. Wouldn't count on it. That's deeply unrealistic. But there’s some option value on this, proving very, very interesting. But we will be driving traffic to our assets. And we'll see -- and so we're going to find out.

Ichigo invests in new areas to try to do it in a way where we have a systematic, in terms of our hypothesis about what could work and what not, and we kind of test those hypotheses against the reality that emerges. Did I answer your question on the business models on those?


William Montgomery;CLSA, [14]


You did.


Martin Fackler, [15]


Can I add one thing, Will? This is Martin talking. If you look at the anime too, usually, in Japan, you have these production committees where you have, say, 10 or 12 investors in a committee and they share the rights. And it's often the case that one person gets the DVD rights or the CD rights or the toy rights or whatever. We're a single investor with this series with Mamoru Oshii. So essentially, all the rights are with us. We don't divide them amongst the members of a production committee.

Also if you talk with the folks in Ichigo animation, there's a huge demand for this stuff in Asia. They expect to make as much money in China as they do in Japan. North America, maybe half as much again. But the thing with the 12-part series is it really hits a sweet spot for like Netflix or a Crunchyroll or some of these streaming services that are interested in this kind of content in the U.S. A one-off movie is less interesting to them, but if you have a 12-part series, then they can make the first 2 episodes free, and then you have to charge for the next 10 episodes. And so there really is a lot of potential, we hope, with this one. I just wanted to throw that in there. Thanks.


Scott Anderberg Callon, Ichigo Inc. - Chairman & Representative Statutory Executive Officer [16]


We're happy to take a question or input from anybody. (Operator Instructions) [Paul] for [Martin Kirk].


Unidentified Analyst, [17]


Just got a question, and I'm just reading in the press and I'm sure you saw it, the H.I.S. looking to make a takeover on Unizo. It looks very cheap, and it looks like it's the kind of asset that you would like to pick up. And I'm not going to ask you on that deal per se, but do you see any opportunities as you have in the past to pick up novel businesses and really rip out the real estate part of it?


Scott Anderberg Callon, Ichigo Inc. - Chairman & Representative Statutory Executive Officer [18]


Okay. I'm not going to use the word rip out. Look, I mean yes, and that's a -- it's a good question, and it's the ongoing question. Everybody's favorite, including ours, is to be the white knight. It's just so much easier to do a friendly transaction. And look, we're always looking for ways to be helpful. And I mean to talk about something that's public and since it's out there, it's easy to talk about. So this animation series production, the guys in the Japanese anime business are sick and tired of having like animation by committee. It lowers the quality of the product. It slows everything down. It's an incredible pain in the neck. And so in a sense, we stepped in to deliver something that is unavailable in the market. We'll be a single buyer. We'll be reliable. We'll be trustworthy. We have this ability just to say -- to find some synergies we think in our real estate business. But there may be ongoing legs for this as an approach.

I mean if you think about Ichigo, because this is the way we think about ourselves, is you've got this core business which has continued to evolve and strengthen. And there's a series of small bets which have option value on, and we're very focused on going into nonreal estate cycle, nonasset, very high-return business as small initiatives on those areas. So going back to your question, do we want to do a bolt-on activity, yes. And are there opportunities available? That part, I'm going to go a little bit cagey on, you know what I mean? Maybe, hopefully. Yes, we'll see.


Unidentified Analyst, [19]


Okay. And can I ask one more question?


Scott Anderberg Callon, Ichigo Inc. - Chairman & Representative Statutory Executive Officer [20]


Yes. Of course, of course.


Unidentified Analyst, [21]


The Sakura REIT with the merger plan to -- with MIRAI Corporation, is there anything there that has -- it's been a long time since we've seen anything on REIT against REIT. Is there any opportunity for you in it going forward and to perhaps participate in some form? Or do you think that is going to be fallow ground?


Scott Anderberg Callon, Ichigo Inc. - Chairman & Representative Statutory Executive Officer [22]


Yes. It's funny, [Paul], I'm so sorry for this. I mean we actually had a conversation about this today, about are we going to talk about these things. And the answer was no because if we talk about them and then like let's imagine that we talk about this particular case, and then in the future, you ask me on a call what of this case and I go, "I can't talk about it," It's like, "Oh, Ichigo's involved." So we've gone for the radio silence approach on this one. So I'm going to stay very, very general.

But look, we actually were involved in a white knight in creating -- as a white knight both in creating the original Ichigo Office REIT and then absorbing -- 2008 and then absorbing the Fund Creation residential REIT in 2011. And so are we interested in doing activities like this? Yes.

Have we become -- and this has changed. This is powerful, and it's important. Have we become somebody that will get invited to these conversations? Absolutely yes. And that was not true 5 years ago. Those deals in 2008 and 2011 were effectively self-created by us. Now when stuff happens in the market, people do come to us. So you should know we have the ability to look at all these transactions, and we do. And I think that's basically all I can say on the topic. But yes, I mean there, they, hopefully, are things to be done.

Yes, I'm happy to take anything from anybody. (Operator Instructions) We may be done. Okay. Let's call ourselves done. Thank you, everybody. We're grateful for your time. And it's an honor and a privilege to work for all of you. Have a good day.