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Edited Transcript of 3283.T earnings conference call or presentation 18-Jan-19 10:59am GMT

Full Year 2018 Nippon Prologis REIT Inc Earnings Presentation

Chiyoda-Ku, Tokyo Jan 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Nippon Prologis REIT Inc earnings conference call or presentation Friday, January 18, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Atsushi Toda

Nippon Prologis REIT, Inc. - CFO, Prologis REIT Management K.K.

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Presentation

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Atsushi Toda, Nippon Prologis REIT, Inc. - CFO, Prologis REIT Management K.K. [1]

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Welcome to the earnings presentation of Nippon Prologis REIT. I am Andy Toda, CFO for NPR. NPR delivered strong results in 2018. As we enter the new year, we are encouraged by the market outlook since the Japanese logistics real estate market is showing signs of steady improvement. Today, I will walk you through: number one, the highlights for the fiscal period ended November 2018 and the forecast for the next 2 fiscal periods; number two, the most recent status of Japanese logistics real estate market; number three, our strategy for future growth; and number four, our longstanding commitment to ESG.

We continue to maximize our investor value through steady growth of DPU and NAV per unit. Our operating performance was solid, and our accretion pipeline remains robust and we continue to maintain the strongest balance sheet.

Starting with NOI. Our NOI continued to grow by 6.2%. At JPY 15.5 billion for the period, NOI exceeded our forecast by 80 basis points. Our performance was driven by occupancy, which was above 98%, higher than our forecast.

Next, distribution per unit. Our DPU for the period was JPY 4,429, exceeding our forecast by 70 basis points. This also came from the higher-than-expected occupancy rate.

Next, our assets under management. With the accretion of 2 new properties, Prologis Park Koga 3 in October and Prologis Park Tsukuba 1-A in December, our AUM grew to JPY 578 billion.

Our operating performance remained strong. Our average occupancy rate for the period was 98.3%, the highest in the last 3 years. The weighted average rent growth for the lease renewals or retenanting during the period was modest at 50 basis points. For the next fiscal period, lease renewals are proceeding well and approximately 60% of expiring space is already reserved and the high occupancy rate of 98% is expected.

Importantly, our forecast for rent growth for May 2018 period was subsequently revised upward from 60 basis points to 80 basis points as a result of additional leasing. This improvement is due to both the excellent efforts of our team and the improving outlook for market conditions.

Our balance sheet remains one of the strongest among all J-REITs. Our loan-to-value ratio on a book value basis was 36.8% as of November 2018. When you factor in the property we acquired in December with debt, LTV is expected to be 37.6% at the end of May 2019.

We are proud of our financial position and the optionality we have built. If we were to increase our leverage to 50%, we would have additional borrowing capacity of JPY 140 billion. Our most recent appraisals indicated the portfolio average cap rate of 4.5%, in line with our 2017 valuations. On the market value basis, our balance sheet now contains unrealized gain over JPY 130 billion or 24% of real estate book value. This gives us significant additional financial strength.

For 2019, we continue to expect solid operating and financial growth even after we recognized the requirement of the property taxes for acquisitions in 2018 to be expensed. Our DPU will continue to be in the range of above JPY 4,400, reflecting expected stable occupancy. This forecast does not take into account acquisitions in 2019, and if we do acquire, we would expect further accretion.

Next, I'd like to brief you on the most updated status of Japanese logistics real estate market. Despite the recent increase in supply, the current base of modern logistics facilities accounts for just 4.5% of the entire warehouse space in Japan. This level is far below that of other developed countries; Europe is 15% and the U.S. is 30%.

For the past 2 years, the elevated level of supply has been absorbed by strong demand. Moreover, we are encouraged by the current forecast for supply in 2020, which appears to be moderating.

Within Tokyo Metropolitan area, the vacancy rate at the end of the third quarter of 2018 stayed at 6.1% for the entire market and only 2.3% for the facilities completed more than 12 months ago.

Within Osaka market, there was the largest supply in 2017, which once increased the vacancy rate to 21%. However, subsequently, the supply space has been gradually absorbed and the vacancy has been lowered to 15%. Since the supply is expected to decline this year, supply/demand will gradually become more in balance.

The large scale modern logistics facilities are being leased up faster than before. Despite the fact that there is historical high supply in Tokyo Metropolitan area, 53% of new space to be supplied in 2019 is already pre-leased. This number compares to 33% a year ago for the 2018 supply. Also, the average size of lease contracts being signed in 2018 and 2019 is approximately 60% larger than the historical average, which naturally accelerates lease-up pace of new facilities. Typically, a large scale multi-tenant facility is leased up over 12 to 18 months from the date of completion. Therefore, the current status is indicating significantly strong demand from customers who now desire to secure large-sized floor space for their fast-growing business.

The value of time is redefining the supply chain. With increasing frequency, more and more of our customers have requirements to be located closer into the major metropolitan areas. We see this evidence by: number one, e-commerce penetration, which is growing faster at more than 10% a year. This is largely due to fast-growing e-tailers and successful large scale brick-and-mortar type retailers who are adding or realigning their distribution channels through Internet; number two, the number of Japanese convenience stores and drug stores is significantly growing as well due to the changing lifestyle of Japanese senior and young generations. Since such stores are lacking onsite storage space, they require highly organized logistics systems. To meet such demand, a number of 3PL companies, as well as major food logistics companies, are now signing large-sized lease contracts near major metropolitan areas.

The shortage of labor is a primary concern of our customers in Japan. The wages of warehouse workers continue to rise rapidly and the number of truck drivers is declining because of the aging Japanese demography. Under such circumstances, consolidation of warehouse space is becoming indispensable to achieve operational efficiency, minimize operational expenses and attract young workforce. Also like our portfolio, the logistic facilities need to be located close to major transportation modes.

The labor shortage, as well as advanced computer technology, is accelerating the development and implementation of automation and robotic system. To accommodate such technology, our customers need to lease high-quality logistics space with large floor space and enhanced functionality. We are well positioned as all of our properties are relatively new state-of-the-art modern logistics facilities.

Additionally, our sponsor, Prologis, continues to take a leadership position, piloting various Internet of Things technologies to upgrade functions of Prologis development projects. Prologis is also providing cutting-edge services to our customers through technological logistics consulting. Additionally, Prologis has teamed up with our customers to provide sophisticated automation and robotic system to a broader pool of potential customers.

Now let me touch upon our growth strategies. Over the last 6 years, we have continued to grow our investor value, DPU and NAV per unit. Our strategy for growth remains unchanged and includes 2 components; external and internal or organic growth. For external growth, we expect to acquire approximately JPY 50 billion new properties per year from our sponsor, Prologis. We remain vigilant with respect to the timing and sources of funding by closely monitoring the status of the capital markets. As for organic growth, we expect to achieve higher rent growth when the supply/demand equation is more in balance.

Let me discuss each in more detail. First, our robust acquisition pipeline from our sponsor, Prologis. We have obtained exclusive negotiation rights for 3 new development properties in December. Additionally, our sponsor, Prologis, announced the commencement of 2 new development projects last year. As a result, we now have 14 pipeline properties, with a total estimated acquisition price of approximately JPY 210 billion. We are advantaged to acquire these assets at fair value, exclusive from our sponsor, without being exposed to steep market competition.

We continue to have the highest-quality portfolio with attractive 5.3% to 5.4% NOI yield, which compares to the current 4.5% market cap rate. We believe that such quality assets are in the best position to capture future upside.

We maintain close relationships with the blue chip group of customers. These repeat customers lease multiple properties in our portfolio, and we are honored by the high level of trust they place in us.

Our earnings base is very stable as we have a diverse portfolio in terms of the number of tenants, tenant credit exposure and well-staggered lease maturities. At the same time, we'll be able to capture future upside as lease contracts expire every year.

With one of the strongest balance sheets in the J-REIT industry, we are highly resilient and have the ability to grow across the cycle, provided acquisition opportunities meet our strict investment criteria.

We are now positioned the 7th globally as a public logistics real estate company in terms of the size of market cap. And we are included in all major stock indices. We believe that our -- such premium position will continue to attract investor interest globally.

Finally, let me talk about our ESG commitment. Prologis has been always committed to ESG and the benefit of all stakeholders. As a member of the Prologis group, we maintain the same philosophy. We are fully committed to contribute to the betterment of Japanese logistics industry, our local community, our customers, our investors and our employees.

We are highly rated by several third-party ESG agencies. We have been awarded the highest 5 Stars from GRESB for 4 years in a row and are included in MSCI Japan ESG Select Leaders Index with A rating, the highest as a J-REIT.

In August 2018, we issued our first green bonds in the amount of JPY 6 billion. It was well subscribed by Japanese quality investors, broadening the investor universe of NPR's J-REIT bonds and achieving attractive coupon. Please note that more than 87% of our portfolio comprises of green buildings. Therefore, we have significant capacity to continue to issue green bonds in the future.

Summarizing our presentation. Number one, we continue to deliver strong performance, both operationally and financially; number two, the Japanese logistics real estate market is showing a sign of moderating supply; number three, we continue to have strong growth strategies backed by our quality portfolio, operations, high customer loyalty and the strongest balance sheet; and number four, we remain fully committed to ESG.

Thank you for your trust and continued support.