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Edited Transcript of 8953.T earnings conference call or presentation 16-Oct-19 10:59am GMT

Full Year 2019 Japan Retail Fund Investment Corp Earnings Presentation

Tokyo Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Japan Retail Fund Investment Corp earnings conference call or presentation Wednesday, October 16, 2019 at 10:59:00am GMT

TEXT version of Transcript


Corporate Participants


* Katsuji Okamoto

Japan Retail Fund Investment Corporation - President & CEO of Mitsubishi Corp.-UBS Realty Inc.

* Keita Araki

Japan Retail Fund Investment Corporation - Alternate Executive Director




Katsuji Okamoto, Japan Retail Fund Investment Corporation - President & CEO of Mitsubishi Corp.-UBS Realty Inc. [1]


Welcome to this presentation of JRF's Operating Results for the 35th period, the 6 months from March 1, 2019, to August 31, 2019.

Before I begin, I would first like to express my sincere condolences to those affected by the recent typhoon that ravaged a large part of the nation. Our thoughts are with you as we hope for a full and speedy recovery.

Turning now to the principal topic at hand. I direct you to the contents page. I will begin by commenting on the implementation of our growth strategy before passing the microphone to Mr. Araki, Head of the Asset Management Company's Retail Division, who'll comment on JRF's operating performance, financial results and forecasts.

Please turn to Page 3. Here on this page, we identify 3 highlights of JRF's 35th period. The first is distribution per unit or DPU growth. JRF's DPU has remained flat due to the impact of large-scale renewal work at KAWASAKI Le FRONT. This is, in turn, one factor behind the soft trend in JRF's investment unit price.

As this renewal work comes to an end, DPU is, again, expected to enter a period of growth. In specific terms, DPU in the 37th August 2020 period is projected to climb JPY 170 or roughly 4% compared with the 35th August 2019 period. Moreover, through contributions from new acquisitions and increases in revenue from existing properties, we'll work diligently to further improve DPU going forward.

Second, our efforts to enhance DPU stability. Plans are in place to reinforce the balance of JRF's reserves to around JPY 7.4 billion as of the 37th August 2020 period. In this manner, we are looking to establish a structure that is capable of significantly eliminating DPU downside risks.

Third, is the focus on improving profitability at KAWASAKI Le FRONT. Thanks largely to the results of steady leasing, net operating income or NOI is anticipated to reach JPY 2 billion on an annual basis. This is approximately JPY 0.1 billion higher than initially estimated. Contributions following the opening of the aquarium have not been factored into these figures.

Accordingly, we will aim for further improvements in NOI in line with the increase in sales base rent for the facility as a whole once the aquarium has commenced operations. As you can see from each of these highlights, JRF's immediate term performance is extremely bright.

Directing your attention to Pages 4 and 5, I would like to elaborate on the progress made under our asset replacement strategy. In line with its medium-term strategy, announced in autumn of last year, JRF is working to lift its current portfolio ratio of urban-type properties, which it has positioned as core assets. To this end, we are working diligently to replace sub-assets with core assets.

It is, once again, important to understand the objective of this asset replacement strategy. Retail properties continue to evolve beyond the simple sale of goods to service places for people together and spaces for a wide range of enjoyment. Against this backdrop, JRF is focusing on urban-type assets that allow it to harness its inherent strengths and the ability to attract people.

On this basis, the objective is to further stabilize its portfolio, while putting in place an asset structure with high growth potential. As indicated here on Page 5, JRF has set the goal of lifting the ratio of core assets to more than 80% of its portfolio as a whole under its asset replacement strategy. In order to achieve this goal, we are focusing mainly on eliminating our exposure in and holdings of general merchandise stores. With this in mind, we are undertaking the replacement of sub-assets with core assets to the tune of approximately JPY 100 billion.

As far as our performance to date is concerned, JRF acquired 3 core assets at an acquisition price of JPY 11.8 billion, while deciding to implement the sale of 4 sub-assets, totaling $46.2 million. As a result, the ratio of core assets is projected to come in at 75.8%, up 3.8 percentage points compared with the level prior to asset replacement strategy implementation.

JRF is making steady progress in its acquisition activities as part of efforts to achieve its asset replacement strategy target. We have secured preferential negotiation rights over assets worth JPY 10 billion and are proceeding smoothly toward acquisition.

Moreover, we maintain a wealth of information with assets under consideration worth roughly JPY 150 billion. Moving forward, we will actively pursue the acquisition of properties that will allow us to enhance, both quality and profitability, through asset replacement.

While some of you may have concerns regarding the acquisition of assets, JRF is a leading player in the domestic retail property purchase market. In addition to a proven track record and top-class ability to gather information, we enjoy the support of our sponsor. We do not dismiss the current tight nature of the acquisition market.

Drawing on a wealth of information as well as our retail management capabilities and the ability to put forward a variety of structured proposals however we believe there remains ample room to acquire assets. Turning to the disposition of sub-assets, we estimate a remaining balance of approximately JPY 50 billion. We have already identified several candidate buyers and are engaged in specific negotiations. Looking ahead, we will undertake the disposition of assets based on our acquisition status.

Meanwhile, we intend to channel any gain on sales to the payment of distributions. This also reflects the pending conclusion of the reserve system. As we look to the future JRF will steadily undertake the replacement of assets while endeavoring to further enhance the quality of its portfolio.

Moving on, I would like to touch briefly on our new medium-term DPU target. Please turn to Page 6. After outlining plans during the previous presentation to achieve a DPU target of JPY 4,500 in the 36th February 2020 period, JRF set and publicly announced its new maximum medium-term target of JPY 5,000.

After excluding loss on sales and other factors in the 37th August 2020 period, earnings per unit, or EPU, is forecast to come in at JPY 4,262. Taking into account the normalized effect of renovations at KAWASAKI Le FRONT together with the partial impact of acquisitions that precede the replacement of assets, EPU is projected to move above JPY 4,600.

Based on the aforementioned, JRF maintains the ability to pay a DPU in excess of JPY 4,600, even without the incidence of a gain on sales. Looking further down the road, we expect a resolution to the rent gap over the next 3 years. This and the positive flow-in effect of the aquarium opening at KAWASAKI Le FRONT is anticipated to have a positive impact on DPU of between JPY 50 and JPY 120.

Leveraging our top-class ability to procure funds within the J-REIT sector, coupled with refinancing endeavors, we plan to reduce debt costs. This is in turn expected to boost DPU by JPY 80 to JPY 120. Moreover, we intend to utilize our free cash flow to fund the acquisition of new properties. With a balance in excess of JPY 10 billion as of the end of the 35th August 2019 period, it continues to grow. We estimate free cash and the acquisition of new properties will lift a DPU by JPY 90 to JPY 120.

Finally, the impact of other cost reductions, most notably, the decrease in depreciation expenses attributable to the termination of depreciation for properties held for more than a decade, is projected to push up DPU by between JPY 50 and JPY 70. Taking into account the cumulative effect of each of these factors, DPU is forecast to climb roughly JPY 300 to JPY 400.

Based on the aforementioned, we've added this JPY 300 to JPY 400 forecast to our medium-term DPU target. As such, we have set the new target of between JPY 4,900 and JPY 5,000. With a base of JPY 4,600, this translates to a maximum improvement in DPU of around 9%.

Compared with REITs that operate within other sectors and fields, the prospects of retail property REIT DPU growth are set to be limited. As indicated on this page, however, JRF maintains various sources of DPU growth. Looking ahead, we believe there is more than ample room for JRF to substantially lift its DPU.

Here on Page 7, we provide a summary of efforts aimed at improving our investment unit price. Currently, JRF's investment unit price is trending slightly above net asset value or NAV per unit levels. While exhibiting a robust performance over the most recent 1 month, JRF's investment unit price has significantly underperformed the Tokyo Stock Exchange Real Estate Investment Trust Index since the beginning of the year.

In addition to the substantial headwinds encountered by the retail sector, we believe that the current low-growth potential on JRF's DPU is a major factor. To first address the substantial headwinds encountered by the retail sector, we are building a portfolio comprised largely of core assets in locations that attract people. Making the most of our unique capabilities to draw in substantial customer traffic, we are engaging in portfolio management that will allow us to coexist in an era of e-commerce expansion while securing growth potential.

As far as distributions are concerned, we are working to lift normalized DPU from JPY 4,600 to a maximum of JPY 5,000 by implementing a wide range of growth strategies. In addition, JRF maintained substantial reserves, totaling approximately JPY 7.4 billion. We will consider applying a portion of these reserves to eliminate DPU downside risks.

Naturally, we are far from set aside with our current investment unit price. As I have commented, we will make every effort to improve the quality of our portfolio, increase normalized DPU and further stabilize distribution levels. At the same time, we will endeavor to reinforce JRF's inherent growth potential and stability. Through these means, we will look to enhance our standing within the market and lift the performance of our investment unit price.

This then concludes my portion of the presentation. I would now like to hand the microphone to Mr. Araki, Head of the Asset Management Company's Retail Division.


Keita Araki, Japan Retail Fund Investment Corporation - Alternate Executive Director [2]


Thank you, Mr. Okamoto. In my capacity as Head of the Asset Management Company's Retail division, I would like to comment on JRF's operating and financial results as well as forecast.

Please turn to Page 11. First, we continue to make steady progress with efforts to replace assets totaling JPY 100 billion initiated from the previous period. As a part of efforts to dispose of sub-assets, focusing mainly on general merchandise stores, and after announcing details of the disposition of Narupark and Ito-Yokado Nishikicho during the current period, steps have been taken to finalize the sale of 4 properties, including the 8953 Osaka Shinsaibashi building and AEON Sendai Nakayama for a total disposition price of JPY 46.2 billion.

As a result, we have successfully realized a gain on sale of JPY 7.3 billion. From a core urban-type asset acquisition perspective, JRF completed the purchase of G-Bldg. Jingumae 09, a multi-tenant property located in the Omotesando Harajuku area, one of Japan's leading retail districts, for JPY 7 billion in the 35th period.

Utilizing the partial support of its sponsor, JRF also secured preferential negotiation rights over a property, totaling roughly JPY 10 billion with an average NOI yield after depreciation of between 3.5% and 3.9%.

JRF has completed approximately half of its plan to dispose of replacements of sub-assets totaling JPY 100 billion. We have already identified candidate buyers for the remaining JPY 500 billion or so and are engaging in specific negotiations. As the gap between the amounts of preceding dispositions and acquisitions narrows, we will consider the disposal of additional assets.

Commenting on the impact that asset replacement is having on DPU, we are currently progressing steadily with efforts to dispose of the full JPY 100 billion plan at the earliest possible opportunity. However, in the event of any downtime attributable to the prior disposition of assets, we will apply portions of the roughly JPY 7.4 billion held as reserves to offset a decline in DPU.

Next, I would like to elaborate further on the replacement of assets and, in particular, the acquisition of urban-type core assets. Please turn to Page 12. The goals of our asset replacement strategy are to enhance the quality of our portfolio while maintaining and increasing the level of normalized DPU. To these ends, we are aiming for the replacement of sub-assets with core assets that exhibit NOI yields after depreciation of more than 3.3%.

As indicated in the table at the bottom left of the page, we are looking to undertake the acquisition of urban-type core assets in each of the 3 categories to skillfully achieve a combined NOI yield after depreciation of more than 3.3%. In addition to NOI yield after depreciation, we'll also carefully consider NOI yield. In this regard, we will continue to acquire real estate at an appropriate value.

Turning to the acquisition status of properties under consideration. We are harnessing our position as the #1 retail property purchaser in Japan, while continuing together a wealth of property-related information. In specific terms, we are currently considering the acquisition of assets based on information held for properties located in prime, major station and residential station areas, amounting to roughly JPY 80 billion, JPY 60 billion and JPY 10 billion, respectively, for a total of approximately JPY 150 billion.

Thanks largely to this wealth of information, we're also able to consider new and additional methods for property acquisition. This contributes greatly to efforts aimed at procuring properties.

Looking at concrete examples, this access to abundant information helps in the acquisition of new types of retail properties, investments in equity and mezzanine loans and active involvement in development projects. As a result, we are well positioned in our property acquisition and other activities.

As I'm sure you're all well aware, JRF's investments are geared heavily toward urban-type assets. Directing your attention to Page 13, I would like to, again, comment on the strengths and features of these urban-type core assets located in the 3 prime, major station and residential station areas.

First, and as you can see from the table at the left side of the page, the rates have increased of the highest rents for properties located in prime retail areas, including Ginza and Omotesando, have risen steadily between 2013 and 2018. This largely reflects the concentration of demand for multi-use rentable spaces.

At the same time, properties in this area continue to benefit from expanding inbound consumption. Properties located in and around major stations maintain a competitive advantage, thanks to an abundance of floating passengers, backed by the world's largest number of train station commuters.

The appeal of major stations is also attributable to the concentration of retail properties, underpinned by strong purchasing at brick-and-mortar stores due to a higher commercial convenience.

Finally, the residential station area is defined by its population concentration within 30 minutes of such major business districts as Tokyo and Osaka. Expectations are high that daily consumption needs will remain robust in residential station areas, owing to population growth over the long term.

Please turn to Page 14. Rents at urban-type core assets, the focus of JRF's investment, continue to increase steadily. Within these urban-type core assets, the rent gap between the market and properties currently held by JRF in prime and major station areas is 5.8%. Successful efforts to resolve this rent gap will have a positive impact on DPU of JPY 214.

The graph provided by CBRE Group, Inc., at the bottom right of the page, tracks trends in major commercial districts, where there is an incidence of substantial rent gap. As you can see, rent continues to increase in such areas as Shinjuku and Shibuya, while hovering at a high level in other commercial areas. Moreover, CBRE is projecting that rents along the main street in Ginza will, once again, enter a period of growth in 2019. Taking into consideration these rent trends in commercial areas, JRF continues to engage in favorable negotiations with tenants of urban-type core assets.

Turning to the status of rent revisions in specific terms, I direct your attention to the graph at the bottom left of the page. On an overall basis, rent revisions from the 32nd to 34th periods produced an average increase of 10%. The average for the 35th period came in at 3.4% and is expected to exceed 10% on an average basis in the 36th period.

As indicated at the left side of Page 15, JRF leveraged its numerous retail holdings throughout Omotesando and Oyama to elicit the relocation of popular tenants to 2 properties in the same area. In this manner, successful steps were taken to secure substantial increases in rent. At the same time, JRF is working to utilize its growing area expertise built on the back of ongoing dominant investment in such areas as Omotesando and Oyama as well as Shinsaibashi, Midosuji and other Kansai areas to boost its property and leasing management.

While as previously indicated, urban-type core assets in prime, as well as major station locations, are exhibiting notable increases in rent, concrete measures have been taken to improve rents through the collective replacement of tenants at mozo wonder city, Kamishin Plaza and other properties located in areas around residential stations as indicated at the right side of the page.

During the 35th period in particular, JRF revised the rents of 46 tenants. This included adjustments to the terms and conditions of 33 tenants at mozo wonder city. These initiatives have positively impacted DPU to the tune of JPY 18.

Meanwhile, revisions to secondary, core and sub-assets, for the most part, remained unchanged. Commenting briefly on the progress of renewal work at KAWASAKI Le FRONT, I ask that you turn to Page 16.

After 27 tenants progressively commenced operations, mainly on the second-floor food court from the end of April 2019, the LIFE Supermarket opened its doors on the first floor in August. Entering the final stages in the lead up to renewal work completion in summer next year, JRF is enjoying a higher-than-anticipated return on investment. Specifically, rent terms and conditions for several tenants have exceeded initial projections.

As a result, NOI is projected to increase JPY 0.1 billion on an annual basis compared with original expectations, with NOI yield forecast to improve from 6.2% to 6.5%. Moreover, the potential exists for a further upswing in sales-based rent on the back of an increase in visitors, following the opening of the aquarium scheduled for August next year.

In the event of this upswing in sales-based rent, NOI is projected to increase an additional JPY 0.1 billion on an annual basis. This is in turn, forecast to push up DPU by a maximum of JPY 39 for a normalized period compared with initial expectations.

Directing your attention to the graph at the top right of the page, we provide details of total facility sales compared with forecasts. As you can see, sales are robust, climbing roughly 5% after excluding the impact of such temporary factors as the prolonged rainy season and last-minute demand before the consumption tax rate hike.

As far as the composition of tenants is concerned and in addition to food and restaurant outlets as well as the e-commerce showroom, the ratio of tenants that provide services as opposed to products, such as the centerpiece aquarium, is increasing. In this manner, JRF is tailoring the management of the facility to changes in consumption trends.

Please turn to Page 17. Here on this page, I would like to provide another example of JRF's efforts to harness its management capabilities and to realize an increase in rent in urban-type core assets. With the aim of completing renewal work by the end of the year, full-scale renovations of the fourth-floor restaurant area, underway at GYRE, a flagship urban-type core retail property located in Omotesando.

In line with ongoing efforts to put in place a tenant profile that appeals to highly sensitive consumers, the distinguished architect, Tsuyoshi Tane, as well as renowned chefs and cooking specialists were invited to participate in the projected launch of a unique 1-floor concept restaurant space. Based on the aforementioned, rents for the fourth-floor restaurant area are forecast to climb approximately 30% on a normalized basis.

Turning to the right side of the page, we lay out ways in which we are utilizing IT to analyze, manage and attract both consumers and tenants. In this manner, we're working to build a foundation for future revenue growth. In concrete terms, we will employ the GPS locator installed in smartphones to identify and analyze the flow of people in specific areas and within the retail facility.

Among a host of other initiatives, we are considering the introduction of a unique mobile application that is common to all JRF facilities and the standardization of sales management systems of large-scale multi-type properties.

In particular, through the introduction of this unique mobile application, mainly at large-scale multi-type commercial properties, we expect to alleviate the burden of customers holding existing plastic membership cards. The application will also facilitate the analysis of visitor data and allow, among other things, the distribution of advertising and promotional information to customers. We anticipate this will then lead to an increase in the frequency of visits while strengthening branding endeavors.

Next, I would like to comment on JRF's financial strategy. Please turn to Page 18. Based on the credit standing of both the fund and the group, JRF continues to leverage its sector-leading debt procurement capabilities, while vigorously reducing debt costs. In June this year, JRF issued its second series of green bonds at an interest rate of 0.2%. Steps were also taken to procure bank borrowings for a fixed term of 10 years and an interest rate of 0.27% in September.

In each case, this is a historical low rate of interest for the J-REIT sector. Even on a conservative basis, the refinancing of debt at an interest rate of 0.6% over the 6 periods or 3 years from the February 2021 period is projected to increase DPU by JPY 104.

Please turn to Page 19. JRF continues to engage in management that focuses on the establishment of an ongoing and stable financial base. As you can see from the graph at the top left of the page, JRF maintains a stable loan-to-value or LTV ratio. At the same time, JRF continues to steadily reduce its average debt cost as indicated in the graph at the top right of the page.

Next, I would like to touch briefly on JRF's reserves and cash management. Please turn to Page 20. One of JRF's strengths is its abundant reserves. Owing to the disposition of Ito-Yokado Nishikicho of the 36th and 37th periods, JRF is expecting to post a substantial gain on sale and further increase its reserves. JRF is, of course, in the process of employing its reserves to implement its asset replacement strategy in an effort to further stabilize DPU.

Among a number of options available, we also plan to utilize reserves to offset any downtime attributable to the active replacement of tenants in order to secure an increase in rents. Directing your attention to the right side of the page, we highlight another inherent strength. JRF also leads the J-REIT sector in its ability to generate free cash. The balance of JRF's free cash already stood at roughly JPY 10 billion as of the end of the August 2019 period. Plans are in place to generate substantial free cash, totaling JPY 6 billion to JPY 7 billion annually, going forward.

To date, this free cash has largely been used for reinvestment in large-scale renewal plans at existing properties. On completion of renewal work at KAWASAKI Le FRONT, however, there are no plans to undertake large-scale renewal activities for the foreseeable future. As a result, JRF's free cash can be used to acquire new properties.

Application of free cash in this manner is projected to have a positive effect on DPU of JPY 36 per period. Depending on the pace at which new properties are acquired, the potential exists to establish a cumulative DPU growth effect each period.

Please turn to Page 21. In conjunction with our announcement of JRF's 35th period results the other day, we issued a press release in connection with plans to change the structure of our asset management fees. This change is conditional upon the approval of unitholders at the General Meeting, scheduled this November.

Currently, asset management fees are largely linked to gross asset value. In specific terms, gross asset value is multiplied by a specified rate. The main point of the proposed change is to link compensation to profits and, in particular, trends in DPU and to lower the rate of gross asset value compensation. In this manner, we hope to put in place an asset management fee structure that increases the level of same boat affinity with investors by ensuring that movements in asset management fees mirrors movements in DPU.

This, in turn, is expected to bolster the commitment to securing DPU growth. After adjusting on the basis of DPU results, asset management fees for the February 2019 and August 2019 periods decreased by around JPY 40 million, annually. Meanwhile, we also plan to introduce disposition as well as merger fees.

In the event of a capital loss on disposition, however, a disposition fee will not be paid. While JRF continues to undertake the flexible replacement of assets, the goal is to focus on sales that also benefit investors at the time of future disposition.

Here on Page 22, I would like to comment briefly on appraisal values and NAV per unit. JRF maintained one of the largest pools of unrealized gains among J-REITs of JPY 161.4 billion in the August 2019 period. This was JPY 4.4 billion higher than the previous period.

In addition, the cap rate for JRF's portfolio as a whole continues to decline. Based on the aforementioned, NAV per unit continues to increase, climbing 26% over the past 5 years.

Changing tack, I would like to comment on JRF's efforts to address environmental, social and governance or ESG concerns. Please turn to Page 23. JRF remains committed to vigorously engaging in ESG activities. Based on these wide-ranging activities, the investment corporation is held in high acclaim. As one of its principal initiatives, JRF is working diligently to ensure that each of its properties acquires environmental certification. As indicated at the bottom-right of the page, environmentally certified properties as a ratio of the portfolio as a whole came to 80.1% in the current period, allowing the investment corporation to achieve its target.

Meanwhile, JRF received the highest Global Real Estate Sustainability Benchmark, or GRESB, Green Star rating for a fifth consecutive year. The Investment Corporation also positioned second among J-REITs included in the MSCI Japan ESG Select Leaders Index and captured the top ranking among all J-REIT issues held by the Government Pension Investment Fund.

In June of this year, JRF issued a second series of green bonds. In addition to a redemption term of 5 years, these green bonds carry an interest rate of 0.2%. This is a historic low for the J-REIT sector.

Moving on, I would like to provide details of JRF's financial results and forecasts. Before commenting on the impact of Typhoon 19 on the other day, I would like to offer my heartfelt sympathy to the victims of this disaster. As Typhoon 19 made landfall on Saturday the 12th, multiple properties either temporarily closed or shuted their doors early.

As far as the properties in our portfolio are concerned, I am pleased to announce that there were no incidents that threatened people's lives. In overall terms, the damage was minor, with low levels of water leakage at several properties as well as damage to some signs and fences.

All of the facilities in our portfolio resumed operation on Sunday, the 13th. While some work will be undertaken to repair damages caused by, for example, water leakage, JRF is covered by both repair contingencies as well as insurance. As a result, the impact on operations for the 36th period will be limited.

Please turn to Page 26. Here on this page, we provide a summary of the Investment Corporation's DPU for the 35th period and forecast for the 36th and 37th periods.

DPU in the 35th period came in at JPY 4,430, in line with our earlier announcement. Our forecast for the 36th period is also unchanged from our previous announcement of JPY 4,500. As you can see from the graph on this page, we are forecasting for the first time, a DPU of JPY 4,600 for the 37th period.

Based on these actual and forecast results, JRF's DPU is projected to increase around 4% from the 35th period. Elaborating a little further on the reasons for movements in the Investment Corporation's distribution, results in the 35th period were negatively impacted by the downtime at KAWASAKI Le FRONT, owing mainly to large-scale renewal work as well as the incidence of construction-related expenses and, positively, by the gain on sale totaling JPY 3.5 billion in connection with the disposition of 4 sub-asset category properties.

Taking each of these factors into consideration, EPU for the 35th period came in at JPY 4,894, which is JPY 130 higher than our previous forecast. This improvement over the forecast mainly reflects the positive flow-in effects of JPY 35 attributable to such factors as an increase in initial revenue from the opening of a new tenant at KAWASAKI Le FRONT as well as JPY 71 from an upswing in revenue from several other existing properties.

Turning next to our EPU forecast of JPY 4,785 for the 36th period. There are several factors that we expect will contribute to the projected decrease of JPY 108 compared with the 35th period. While we anticipate EPU will be boosted by, for example, progress in the renovation of KAWASAKI Le FRONT, which is estimated to add JPY 629, certain other movements, including the decrease in revenue attributable to the disposition of properties in the previous period and the downturn in gains on sale of sub-assets, are forecast to negatively impact EPU by JPY 205 and JPY 583, respectively.

Looking further ahead to the 37th period, EPU is projected to reach JPY 4,914. We anticipate EPU will increase JPY 129 compared with the 36th period. In specific terms, this largely reflects positive contributions of JPY 125 from an increase in revenue at KAWASAKI Le FRONT as well as JPY 74 from upswings in revenue at several other existing properties and a negative impact of JPY 94 attributable to the loss on sale associated with the final 1/3 disposition of Ito-Yokado Nishikicho in March 2020.

As far as the 37th period is concerned, JRF has already reached its maximum limit under its reserve system. Should EPU exhibit any upside in the future over JPY 4,914, we are unable to increase the amount of reserves. Under this scenario, we anticipate a further increase in DPU.

As I'm sure you're all well aware, Japan's consumption tax rate increased on October 1, 2019. From the perspective of the Investment Corporation's rent revenue, roughly 97% of all lease contracts are executed on a long-term fixed-rent basis with an average remaining period of 5.3 years. As such, we consider our rent revenue to be extremely stable.

Turning to the status of sales at each property before and after the tax increase and perhaps as a result of the various relief measures implemented by the government, which were largely restricted to certain home appliances, furniture and consumer durables, the increase in activity attributable to last-minute demand prior to the tax rate hike was largely limited to a 1-month period in September.

For this reason, we believe that any correction and subsequent decrease in sales of tenants and properties owned by the Investment Corporation from October will be small. Having said this, we have incorporated a stress factor into a portion of our sales-based rent, which accounts for roughly 3% of the portfolio's total rent revenue for a limited number of months after the tax rate increase compared with the usual amount when putting in place our recently announced forecast.

With this in mind, a potential exists for an improvement of a forecast vis-à-vis the current status of operations. In closing, I would like to reiterate my thoughts on JRF's DPU growth potential. In managing the fund, our goal is to maximize returns for investors. Put another way, our mission is to continuously provide stable as well as sustainable DPU growth. We are, at this time, coming to the end of large-scale renewal work at KAWASAKI Le FRONT, which in turn, will allow us to enter a period of renewed DPU growth.

Moving forward, we will continue to engage in steady and proactive management in a bid to achieve our new medium-term DPU target of JPY 5,000 and to increase the performance of our investment unit price.

As we work towards achieving these goals, we ask for your continued support and understanding.

This then concludes the presentation. We thank you for your interest and attention.