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Edited Transcript of 8952.T earnings conference call or presentation 18-Nov-19 10:59am GMT

Half Year 2020 Japan Real Estate Investment Corp Earnings Presentation

Tokyo Dec 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Japan Real Estate Investment Corp earnings conference call or presentation Monday, November 18, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Naoki Umeda

Japan Real Estate Investment Corporation - President & CEO at Japan Real Estate Asset Management Co., Ltd.

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Presentation

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Naoki Umeda, Japan Real Estate Investment Corporation - President & CEO at Japan Real Estate Asset Management Co., Ltd. [1]

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Hello. I'm Naoki Umeda. I am CEO of Japan Real Estate Asset Management. Thank you for coming. The office market remained strong. And generally speaking, it has been performing broadly in line with what I have said so far. High-quality office space is increasingly considered by the executive management to be one of the tools that help recruit and retain talent for companies. And I believe this to be a universal trend and not unique to Japan. Also, not only as a means to recruit and retain good people. Of course, one would think that those talented employees will be more positive, creative and productive working in a cosy, comfortable workspace. And I believe that kind of thinking resulted in this strong demand for high-quality, technologically advanced office buildings with prime accessibility. And that is, I think, the fundamental underpinning of this market. I said those things before, so that's nothing new.

But let me talk about what we have done as an asset management company. Just about 2 years ago, we moved into a new office space. We moved into Otemachi Park Building, where Mitsubishi estate also has its head office. Of course, we are on a different floor. We decided to move in this building because we thought we should experience the cutting-edge innovations of a modern office building ourselves, keep up with the trend, or more broadly, we should try new things to get a fresh perspective. And since we moved into a new space, we have been putting in place some new ways to promote communication among our employees. For example, we set up a café. It's something quite common these days. It's about creating a space where people get together. Also, we've created a lounge-like space in our office. There is also a space where you can relax and enjoy the excellent view of the Imperial Palace. And in one of the meeting rooms, you can play ping pong. So we've created those spaces for our employees.

We also embraced a free address workspace environment. A free address workspace is without assigned seating, meaning that employees can choose to work wherever they want within the office.

In our office, we have several options. There are several areas even without any chair. Those offer people who like to be standing for work. Well, there are areas by the windows where you can work while enjoying the view outside. Of course, we have some traditional settings with desks and chairs. There is also a space like a living room with a bar counter. So we are providing this free address environment and have told our employees to work wherever they want. We are doing this also because we want more interaction and communication among our employees, because we've realized that they were not interacting across different departments or having water cooler chats, if you will.

We also offer a flex time to our employees. After all, we are an asset management company, so the traditional 9-to-5 work schedule simply doesn't fit the way we work. We should be free of that kind of mindset. We are grownups and should be capable of managing our own work style in a disciplined manner. And that's the reason why we introduced a flex time work schedule. We are also going wireless and paperless. We are cutting back on the use of paper in our office.

So thanks to all these initiatives we've put in place over the past 2 years, we are seeing positive results. First of all, we reduced a lot of overtime. That's maybe because of the flex time, but I also think because we've successfully created a sort of hip and edgy workspace that is more conducive to productivity.

Also, with respect to communication and interaction among our employees, despite the lack of an accurate measurement, I can say we are seeing more of it and going in the right direction. Simply put, I believe we have a far better work-life balance.

As for going paperless, we dramatically reduced the use of paper in our office. Today, we are using half the amount of paper we did 2 years ago. So we are achieving the goals we set 2 years ago, and we've seen positive results in terms of efficiency and productivity. That's where we are today.

And probably more importantly, our employees got used to this current environment so much that it is pretty unlikely that we would go back to the kind of workplace that we had before. I certainly don't want to go back, and I assume many of us in the company feel likewise.

So the question is, what next? Of course, we can continue to improve efficiency and the productivity incrementally going forward in this workplace environment, but it is not going to last forever, and certainly not as dramatically as we've seen over the past 2 years. So I'm thinking about the next step right now.

In addition to the efforts to reduce overtime and improve overall productivity, what I think needs to be put in place is a workplace that will make people working there more creative. For lack of a better word, I'd like to focus more on the younger generation. I want to create a workplace that attracts young people, helps them take more leadership and allows them to challenge new things. That's what I think should be the next thing we have to do. We are clearly entering the second stage of our workplace evolution. And the fact that we are trying to achieve that kind of workplace and improve the overall environment in the company should also bring positive results to the performance of the asset management company and help us get one step ahead of the competition. And that's the kind of asset management style and corporate culture we want to live in our company.

We've been doing this so far, and we continue to do more going forward. That's what I've been thinking about into taking actions lately. So with this introduction of who we are and what we've been doing so far, let's begin the performance review.

Please go to Page 3. Again, my apologies for this lengthy preamble. Let's start with Page 3 on dividend per unit. For the period ended September 2019, the dividend per unit was JPY 10,197, up JPY 500 per unit from the period before and beat the forecast we announced 6 months before by JPY 367 per unit. As shown in the graph below, DPU has been rising consistently for the 11th consecutive period at the end of September 2019. And especially in the last 3 years, DPU has grown a little over 7% a year.

Also, take a look at the light green bars on the far right of the graph. I think you can see 2 of them, and they indicate that DPU will continue to rise for the periods ending March 2020 and September 2020 as well.

Please go to Page 4. Here's the summary of major developments during the period ended September 2019. With respect to internal growth, the monthly rent revenue due to rent revision continue to increase for the 9th period running and was up JPY 41 million compared to 6 months before. It was quite an increase. As for external growth, there was no new property acquisition during the last period, but we decided to dispose our ownership interest of Kawasaki Isago Building in 2 parts. We already disposed of 50% of our ownership interest of this building during the period ended September 2019, and we'll dispose the rest in the next period ending March 2020.

Please go to Page 7. I'm going to explain the details about our financial results for the period ended September 2019. As you can see, the actuals that are boxed with green lines, both revenues and profit went up significantly from the period before. The third line from the top, which says gain on sale of real estate property, includes the gain on the disposition of the 50% of our ownership interest of Kawasaki Isago Building. But even without that, we could have achieved the growth in both revenues and profit because we believe the biggest reason for the growth in both revenues and profit was extremely strong internal growth. For instance, the second line from the top, the property-related revenues, increased JPY 557 million from the period before. And because of that, our NOI rose JPY 500 million from 6 months before.

With respect to DPU, I want to mention that we applied a reduction entry to the total gain on sale of real estate property, JPY 1.580 billion, in accordance with the special provisions for taxation and reserved 80% of the gain. But as I said earlier, we could successfully raise DPU JPY 500 from the period before to JPY 10,197 per unit.

If we look at the table on the upper right side and take a little bit closer look at what are the main factors for the growth in revenues and profit, first of all, we saw a big increase in rent from our existing properties, up JPY 564 million from the period before. We can also notice the revenue contribution from the 2 properties we acquired during the period ended March 2019, the 2 buildings in Shinjuku and Niigata. That's JPY 188 million. So those are the main factors for the revenue increase.

Now with respect to expenses, if you take a look at land and building taxes, they were up JPY 234 million from the period before. And that is because the raise in land and building taxes due to the reassessment of the ratable value would only take effect in installments. So we are going to see the rise in those taxes in a few more periods.

As for repairing expenses, the actual amount has remained almost unchanged so far. But for this particular period, the repairing expenses came in slightly below what it cost in the previous period and down JPY 216 million. Those are our financial results compared with the period before.

If we compare our results with the forecast we announced 6 months before, take a look at the table just below. First, utilities went down quite significantly both in terms of revenue and expense. I think we all remember that the average temperatures in July 2019 happened to stay quite below normal. And that's why utilities figures came in below expectations. On net, this effect is on the upside in terms of profit. In addition to that, the gain on sale of real estate property and repairing expenses came in below our expectations, pushed DPU up JPY 367 per unit compared to the forecast we announced 6 months before.

Next, I want to talk about our forecast for the next 2 periods. Please take a look at Page 8. On the left side of the page, we are showing our financial forecast for the period ending March 2020. And as you can see, the overall picture is that both revenues and profit are expected to continue to grow. Please check the table at the top right for the major factors that will push up both revenues and profit. For instance, for the period ending March 2020, rent revenue is expected to increase at a healthy pace, up JPY 311 million compared to the period before. Also, because the period ending March 2020 is mostly winter, both utilities revenue and expenses will go down compared to the previous 6 months, which were summer, pushing up profit rather than pulling it down. In addition to that, interest expenses will continue to decrease, down JPY 91 million for the period ending March 2020. With all these factors considered, DPU is expected to go up JPY 103 per unit to JPY 10,300 for the period ending March 2020. And just so you know, the revenue from disposed properties included gain on the sale of 50% of our ownership interest of Kawasaki Isago Building. But as we did in the previous period, we apply reduction entry to it and reserved 80% of the gain.

Let's move on to talk about the forecast for the period ending September 2020. As you can see, the middle of the slide, for the period ending September 2020, there will be no gain on sale of real estate property. So if we exclude that, both revenues and profit will grow strongly. And if you take a look at the table at the bottom right of the slide, first of all, rent revenue from the existing properties is expected to go up JPY 430 million. On the other hand, utilities will be a factor that our net will pull down the (inaudible) because both revenue and expense will go up in summer time. Another big factor is, of course, the absence of gain on sale of real estate property, which we had in the period before. So that will be down JPY 1.590 billion and bring down both revenue and profit compared to the period before. As a result of these factors, as you can see on the slide, DPU is expected to increase JPY 100 per unit from the period before to JPY 10,400 per unit for the period ending September 2020.

And that brings to an end to the explanation of the financial results and forecasts.

Next, I'd like to move on to talk about external growth. Please take a look at Page 11. During the period ended September 2019, we disposed 50% of our ownership interest of Kawasaki Isago Building, and we will dispose the rest in the current period. Both combined, the total gain on the sale of this property will be JPY 3.1 billion. But as I mentioned earlier, we apply a reduction entry to the gain and reserved 80% of the gain.

And on Page 12, for your reference, I want to tell you about the completion of the new building in Shinjuku. The name of the building is LinkSquare Shinjuku, and it sits right next to Shinjuku Station on the land, part of which belongs to us. We have a preferred negotiation right to the portion of the building, which is about 37%, and that means an opportunity for us to acquire a part of this building in the future. It says it's located within 5-minute walk from Shinjuku Station, but it is directly connected through the deck if you walk from south exit of Shinjuku Station, so it's very close with excellent accessibility. And the building is fully occupied right now.

Next, I want to talk about internal growth. Please take a look at Page 14. As shown in the graph on the left, the occupancy rates remained at high levels at 99.3% as of the end of September 2019 and are projected to be at 99.7% by the end March next year. So the occupancy rates will continue to improve, and our buildings are expected to be almost fully occupied.

If you flip to the next page, Page 15, I want to explain about the top-left chart showing rent revisions. We have an increase and a decrease, but the overall picture is that we have been on the upside in terms of rent revisions for the ninth period in a row, meaning that our monthly rent has been going up, thanks to upward rent revisions. And as you can tell from the graph, the monthly rent revenue rose JPY 41.2 million in the period we just finished, September 2019 period. It's a growth stronger than ever before, and we see this momentum going forward.

The next page, Page 16, describes how much our monthly contract rent increases on net in 6 months. This is also a slide which we often use to explain to a foreign investor asking how much internal growth JRE achieves. To put it simply, tenant turnover has pushed the monthly contract rent by 0.2% on net because we have both rented and returned spaces. And if you take a look at the middle of this picture, you will see that rent revisions played a really big role in increasing the monthly contract rent for the period ended September 2019, up 0.8%. So when you combine these two, our monthly contract rent has gone up approximately 1%. And this is the growth over the 6 months. So on an annualized basis, we are growing about 2% a year. That's how we explain about our internal growth to a foreign investor. Once again, it is our revenue that grows 2% a year. So if the cost stays the same, our profit will grow probably at 4% or more annually. Of course, there are many contractual terms and conditions, like free rent that really complicate the actual calculations, so the numbers I just explained are not exact numbers, but I think this picture gives you ballpark figures that are accurate enough.

Next, please jump to Page 18. On the left side of the slide, you will see the market rent of our portfolio. And again, no property in our portfolio saw its market rent going down for the period ended September 2019. And you will also notice that the market rent rose for about 2/3 of our properties. So when the market rent goes up, the rent gap will usually become widened. But as you can see on the right side of the slide, the rent gap remains almost unchanged from the previous period at about JPY 300 million on a monthly basis. And that's partly because we've made good progress in rent revisions.

Let me also explain about our finance. Please take a look at Page 20. Interest expenses continue to shrink at a moderate pace, as you can see the middle chart on the upper half of the slide. The pace of decline remains moderate, but you can see this trend continue for the next couple of periods.

And if you flip to the next page, Page 21, you will see the chart showing our debt and LTV, which is at the end of the chart. LTV stands at 40.4% on a book value basis, inching down a fraction from the 6 months before. And on a market value basis, LTV becomes 32.4%. So we really feel that it has come down so much. With respect to our credit ratings, there is no change from the period before.

Next, let's jump to Page 25 and talk about the appraisal value of our portfolio. As you can see the table at the bottom, the appraisal value at the end of September 2019 was JPY 1.2027 trillion, which is the highest-ever number since the company got listed on the exchange and so are the amount of unrealized gain and the ratio of unrealized gain. The net asset value per unit, calculated based on the appraisal value, is JPY 567,928 per unit, as shown in the graph on the right, and has risen for the 15th straight period.

Next, I want to talk very briefly about what we are doing with regards to ESG. Please take a look at Page 28. One thing I really wanted to talk about is the new GRESB rating and that we've got 5 stars in the latest assessment that was published back in September. Of course, 5 stars is the highest rating, and we even added a balloon to emphasize that on the slide. We are #1 in the GRESB's Japan office sector, regardless of listed or private company status and including real estate companies and REITs.

Another thing I want to share with you is our efforts towards TCFD. As you can see at the bottom of the slide, we've signed to join and support TCFD. I said 6 months ago that I would focus on TCFD this year. I think many of you may not remember it, it's all 6 months ago, but anyway, we are the first official signatory to the TCFD as a J-REIT. And recently, we've opened up a new page on our website which talks about our efforts and actions against the climate change. These are the major topics with regards to ESG.

Last, but not least, please jump to Page 37. As always, we are showing a picture of golf to illustrate the latest business environment that we are in. We are playing golf in a competition called J-REIT Championship. Clear sky, no wind, it's perfect weather for playing golf. And if you take a look at the leaderboard, everybody continues to play well, posting excellent scores. This is basically because many J-REIT players, including ourselves, have achieved robust internal growth. We, too, continue to grow at a moderate pace based on solid internal growth at this moment.

So while keeping this momentum of internal growth going, we should, at the same time, seize opportunities for external growth, opportunities to acquire new property because that will certainly add to the growth momentum we currently enjoy and lead us to even bigger growth of our company.

So that's the message we want to get across through this picture. And that brings to an end of my presentation. Thank you very much.