Advance Residence Investment Corporation (3269.T) Q2 FY2026 Earnings Call Transcript & Summary

My name is Kudo, and I'm from ITOCHU REIT Management. Thank you very much for taking time out of your busy schedules to watch this presentation. I would also like to take this opportunity to extend my sincere appreciation to our unitholders and all other stakeholders for your continued and invaluable support. With that, I will now present the financial results of Advance Residence Investment Corporation for the fiscal period ended July 2025. First, let's cover the financial highlights. In the top row from the left, we have earnings per unit, EPU, excluding gain on sales, up 2.6% year-on-year to JPY 2,619. Adjusted EPU up 1.9% to JPY 2,819; and distributions per unit, DPU, up 6.8% to JPY 3,192. The bottom row presents a number of key indicators. As shown, all indicators improved through this period's operations. Next is initiatives in light of the capital market environment. This section provides an update on the progress of initiatives presented in the March 2025 earnings announcement. Please look at the upper right. Under realization of unrealized gains, the company achieved property sales of JPY 5.4 billion in the July 2025 period and plans additional property sales of JPY 5.1 billion in the January 2026 period for a total of approximately JPY 10.5 billion. Please look at the lower left. As a result, the company expects to record approximately JPY 3.3 billion in gains on sales over the two periods and secure about JPY 6.9 billion in proceeds from sales. The distribution policy for these gains on sales is to distribute at least 25% in the fiscal period in which they are realized with the remainder retained internally. Under this policy, a distribution of JPY 150 per unit was paid for the fiscal period ended July 2025, and the same JPY 150 per unit distribution is planned for the fiscal period ending January 2026. The secured proceeds from sales will be used to make investment decisions grounded in rationality and appropriateness. Next, as shown in the lower right, the distribution policy for retained earnings is to continue providing a stable distribution of around JPY 100 per unit. Next is asset acquisitions and sales. Looking at the fiscal periods ended July 2025 and ending January 2026 combined, the company has decided to acquire three properties and sell eight properties. In addition, any property with the word new in the upper left of its photo represents a project undertaken after the March 2025 financial announcement. As shown in the red frame in the lower left, the company has decided to sell properties with a total book value of JPY 6.86 billion. A portion of the proceeds from these sales will be used to acquire properties totaling JPY 4.98 billion as indicated in the red frame above that. Next, let's take a close look at DPU details for the current period. Please look at the second bar graph from the right and focus on the bold black number in the upper section. DPU for the current period has been set at JPY 3,192, an increase of JPY 204 from the previous period, reflecting the addition of a JPY 150 distribution and return of gain on sales. Next, in the middle section, please see the adjusted EPU shown in bold red text. It rose by JPY 53 from the previous period to JPY 2,819. The main driver was the realization of internal growth that outpaced financial costs. Now, let's take a closer look at the adjusted EPU. It was calculated by including an additional reversal to offset the temporary negative impact on earnings caused by remodeling work and revisions to depreciation methods applied to EPU and current period profit, excluding gains on sales. Next, let's look at earnings forecast. Please look at the upper section of the central bar graph and focus on the bold black number indicating the DPU. For the fiscal period ending January 2026, although DPU is projected to see a decrease due to the impact of property transactions, an additional distribution of JPY 150 per unit will be made through the distribution of gains on sales as shown in the red box. As a result, DPU is forecast to be JPY 3,170, while DPU, excluding gain on sales is estimated at JPY 3,020. Next, please look at the bar graph on the right. For the fiscal period ending July 2026, we project a DPU of JPY 3,042, an increase of JPY 22 from the JPY 3,020 DPU, excluding gain on sales recorded in the fiscal period ending January 2026. Next, let's look at the adjusted EPU shown in bold red text in the middle section of each bar graph. The actual result for the fiscal period ended July 2025, shown on the left was JPY 2,819. To the right of that is the adjusted EPU of JPY 2,792, excluding property transactions. This figure reflects a JPY 27 drop due to property transactions. Internal growth is expected to drive an annual EPU increase of around 1% from this JPY 2,792 base, which excludes the impact of these property transactions. Accordingly, as shown in the middle of the central bar graph, we project a JPY 5 increase to JPY 2,797 for the period ending January 2026. And as shown in the middle of the right bar graph, a JPY 27 increase to JPY 2,819 for the period ending July 2026. The company will continue working to further raise DPU and adjusted EPU through additional internal growth and effective use of proceeds from sales. Furthermore, these projections are based on an expected occupancy rate of 95.8%. In response to changes in the market environment, the company is shifting its management approach from prioritizing occupancy rates to prioritizing rent growth rates with the aim of improving portfolio profitability in the future. Next is the target levels for DPU and EPU. There have been no changes to the targets. The immediate goal is to build a framework that delivers JPY 3,000 or more in distributions solely from adjusted EPU and fixed amount reversal of negative goodwill, excluding distributions from gains on sales and retained earnings. Please look at the elements composing the distributions on the right. Since the structure is somewhat complex, I will explain it in more in depth. Distributions are composed of five elements. First, the red box at the bottom represents the distribution from net income for the current period. Next, the light pink and gray boxes represent reversals of negative goodwill. The light pink box indicates additional reversal to offset the temporary negative impact on income. Please see this as an aspect of the company's strategic initiatives, including renovations aimed at improving portfolio profitability in the future. The gray box represents JPY 117 in fixed amount reversal of negative goodwill as stipulated under revised tax laws. Now please look at the red box at the very top. This represents the distribution from gains on sales. When a property is sold and gains on sales are realized, the policy is to distribute at least 25% in the fiscal period in which they are realized with the remainder retained internally. Distribution from gains on sales may vary depending on the level of gains realized. Lastly, the navy blue box represents distribution from retained earnings. The company will continue providing a stable distribution of around JPY 100 per fiscal period. Next, let's look at exclusive area remodeling project results. 305 units were remodeled in the fiscal period ended July 2025, with a replacement rent increase of 32.1%. The contract rate as of the end of July 2025 was 51%. By the end of August, applications had exceeded 80%, showing steady progress. Please refer to the lower right. You can see that the second and subsequent new contracts are also being concluded at an 11.1% higher rent rate. Next, let's look at some examples of remodeling projects. The asset management company itself handles everything from project planning through to determining equipment and specifications. Rather than simply replacing equipment, the company seeks to differentiate its properties to ensure long-term competitiveness. Next is the projected profit and loss for the remodeling project. This projection estimates future profit and loss on the assumption that the performance over the past 2 years will persist. According to this projection, the breakeven point is expected to be reached in 4.5 years, after which results are projected to turn positive. This project is considered essential for the maintenance and management of equipment and facilities, and the company is actively pursuing it with the expectation that it will make a significant contribution to improving profitability in the future. Next, let's look at large-scale repairs and capital expenditures. As shown in the upper left, large-scale repairs were carried out on three properties during the current period. The lower section presents the trend in capital expenditures. The company systematically carries out remodeling projects, large-scale repairs and other repair work within the scope of depreciation and makes every effort to appropriately maintain and manage properties. Next is asset management. First, let's look at occupancy status. The rental housing market remains very strong with occupancy rates stable at high levels and rents continuing to rise. As shown in the upper left, the average occupancy rate for the period was 96.1%. The lower left section shows the impact of the remodeling project on occupancy rates. Remodeling projects generally take longer to complete than regular restoration work. This means longer periods of vacancy, which temporarily has a negative impact on occupancy rates. Next is replacement rent increase trends. Please refer to the upper left. Solid line shows that the replacement rent rate increased 16.2%, marking a new record high. The dash line shows that even excluding remodeled units, the rate increased 13.1%, also a record high. Next is replacement rent increase by area and type. Across all areas and all unit types, replacement rent increases exceeded those of the same period in the previous year. In the upper left, the light blue line shows the trend for Tokyo's 23 wards. As you can see, the replacement rent rate increased 20%, which is a particularly strong performance. Next, let's look at rental markets by city. The red line shows occupancy rates. Occupancy rates have remained stably high with all cities maintaining levels above 95%. Next, the gray bars show the replacement rent change rates. In this fiscal period, all cities recorded positive rates. However, regional areas are more affected by seasonal fluctuations between peak and off-peak periods, and the replacement rent rate tends to vary by city. A noteworthy point is that of Nagoya, which had previously shown negative replacement rent rates turned positive in this fiscal period. The company will continue to closely monitor these trends and ensure appropriate management. Next, let's look at the renewal rent increase. The company is also actively implementing rent increases at the time of renewal. Please refer to the upper left. The rent rate increased 3.1%, setting a new record high, just like the increase for replacement. Next, please look at the upper right. The negotiation rate for rent increases rose to 79.4%, which also reflects the progress of these initiatives. Next, let's look at the rent revision results. As a result of the rent revisions at the time of tenant replacement and contract renewal explained so far, the overall profitability of the portfolio rose 1.9%. The breakdown is as follows. The rent change rate at the time of replacement increased 16.2%, with the affected leases representing 8.4% of the total portfolio, contributing a 1.4% increase for the portfolio. The rent change rate at the time of renewal increased 3.1% with the affected leases representing 16.7% of the total portfolio, contributing a 0.5% increase for the portfolio. These results confirm that rent revisions at the time of renewal are also making a significant contribution to enhancing the portfolio's profitability. Next, let's cover finance. Please refer to the upper left. The funding interest rate for the current period was 1% and the paid interest rate rose. The lower section shows the loan-to-value LTV status. The total asset LTV at the end of the current period was 48.9%. It is projected to be 49.2% for the period ending January 2026 and 49.4% for the period ending July 2026. The borrowing capacity up to a total asset LTV of 50% as projected for the end of the January 2026 period is JPY 7.5 billion. Furthermore, the borrowing capacity up to a total asset LTV of 53% is JPY 39.7 billion. Next, let's look at financial indicators. Please look at the gray bar graph in the upper left. Over the past year, the funding interest rate has stayed above 1%. Meanwhile, the paid interest rates shown by the green diamonds in the lower section have dropped below recent performance. Accordingly, interest burdens are expected to rise in future refinancing. In response, the company is working to limit the rise in financial costs by shortening funding durations and increasing floating loan rate. As a result, the average remaining duration shown in the upper center is 4.5 years, and the fixed interest rate ratio shown in the upper right is 93%. Compared with the previous fiscal period, both the average remaining duration and the fixed interest rate ratio have declined slightly. The basic policy of long-term fixed rate and diversified financing remains unchanged, but the company will respond with a certain degree of flexibility in response to market conditions and other factors. Next, let's cover sustainability. This shows the status of external evaluations and certifications. The company's sustainability initiatives have received relatively high praise, thanks to the steady efforts made. Next, let's look at initiatives for sustainability. Please refer to the upper left. Our ongoing initiative to install LED lighting in common areas has reached an adoption rate of 57.7% and further efforts will be made moving forward. Electricity consumption measurement systems have been installed in all properties where installation was possible with the current installation rate reaching 93.7%. Lastly, let's cover changes in asset management fees and investment targets. These contents are subject to approval at the company's General Meeting of Unitholders scheduled for October 27, 2025. The first point is a revision to the asset management fee structure. The purpose of this change is to enhance alignment with unitholder interests. Left shows the fee structure before the change and the right shows the structure after the change. Allow me to provide an overview. The company will introduce a New Fee II linked to profit before tax and DPU. The existing fee structure tied to NOI and FFO per unit, which reflects underlying profitability will be consolidated into a New Fee I. The fee level during the initial period of application of the new fee structure is expected to be roughly the same as under the previous structure. The second point relates to changes in investment targets with an eye toward growth potential. As a basic premise, the residential focused strategy remains unchanged. Allow me to explain the changes. The company will be able to acquire multiple properties in bulk, including assets other than leased residential properties. However, for assets other than leased residential properties, the policy is to hold them temporarily with the intention of subsequent sale. The company will add overseas real estate, including properties in North America to its investment targets in order to capture medium- to long-term growth opportunities. This is added solely to expand future options, and there are no specific ongoing investment projects. This concludes my explanation. Thank you very much for your attention.