Advance Residence Investment Corporation (3269) Earnings Call Transcript & Summary

[Interpreted] I am Kudo of ITOCHU REIT Management. Thank you very much for taking time out of your busy schedule to view this video. I'd like to take this opportunity to express our sincere gratitude to our unitholders and stakeholders for your continued support. Thank you. Now I'd like to present the financial results summary of Advanced Residence Investment Corporation for the fiscal period ended July 2024. First, here are the financial highlights. Earnings per unit, EPU, excluding gain on sales, increased by 2.0% from the previous FP to JPY 5,092. Adjusted EPU was plus 2.4% to JPY 5,468. Distribution per unit, DPU, was plus 0.4% on to JPY 5,925. Main indicators are shown in the bottom row. NOI increased plus 1.5%. NAV per unit increased plus 1.0%. FFO per unit increased 1.6%. Annualized profit ratio was close unchanged at 58.8%. Distribution policy. We aim to continue to grow EPU and adjusted EPU through internal and external growth. On that basis, we want to increase DPU steadily while reducing distributions from retained earnings. Our target for the time being is adjusted EPU of JPY 5,750 or higher and DPU of JPY 6,000 or higher. We want to be able to realize a steady increase in DPU solely on the basis of EPU and adjusted EPU growth. Adjusted EPU is EPU plus the reversal of reserve drawn down to offset the temporary negative P&L impact resulting from the remodeling project and the revision of the depreciation method. So it is equivalent to the supposed EPU level that would have been achieved have these initiatives not been taken. The changes in dividends and earnings forecast. The red shaded column in the middle is the result for the FP ended July 2024. In bold in upper in upper row is DPU, the result was JPY 5,925. Forecast for the FP ending January 2025 is JPY 5,930 and is JPY 5,935 for the FP ending July 2025. The second line is distributions from retained earnings per unit. It was JPY 222 for the FP, but it will decrease to JPY 175 in the forecast for FP ending July 2025. The adjusted EPU in bold red in the middle row was JPY 5,468 for the FP. January 2025 FP forecast is JPY 5,488 and July 2025 FP forecast is JPY 5,52. The EPU, excluding gain on sales shown below in the black frame was JPY 5,920. Forecast for FP ending January 2025 decreased to JPY 5,046 because additional reversal of reserve will increase from JPY 376 to JPY 440. But for the following FP ending July 2025, the forecast is JPY 5,097, which is a slight increase compared to this FP ended July 2024. The assumed occupancy rates are noted in the fourth row from the bottom, which are 96.0% and 96.1%, respectively, relative to the actual rate in the FP ended July 2024 of 96.3%. Details are explained later. The reason why the occupancy rate assumption is lower than the past actuals is not due to changes in the leasing market environment, but because we considered the impact of the remodeling project. GPU details for FP ended July 2024. Adjusted EPU is described in red. The result for this FP was plus JPY 128 compared to the previous FP. The main reason for the difference was that in the previous FP, there was a temporary dilution caused by the public offering conducted in September 2023. All these FP properties acquired through the PO and other means contributed JPY 114 and internal growth increased JPY 31. Details of the GPU forecast. Here, the difference in adjusted EPU again described in red is plus JPY 20 for the January 2025 forecast versus this FP result. The main factors are plus JPY 44 from internal and external growth and minus JPY 25 for financial costs and others. Then the difference between July and January 2025 forecast is JPY 36. The main factors are plus JPY 95 from internal and external growth and minus JPY 57 for financial costs and others. Compared to the result of JPY 5,468 for this FP. The forecast for FP ending July 2025 is up 1% to JPY 5,524. Living room remodeling project. In the upper left part, marked in Red is the result for this FP. The number of units worked was 262 as of end of July 2024, the contract rate of the remodeled units was 55%, which progressed to 78% as of end of August, achieving rent increase of plus 26.1% and the assumed ROI rate of return is 12%, demonstrating solid results. The colored bars in the upper middle section shows the rent increase by unit type. All types achieved high rent increases. Future construction plan is described in the lower section. We plan to implement approximately 300 units per FP. On this page, we are showing some examples of the remodeled units. Our proprietary dedicated team within the asset management company handles everything from construction planning to selection of equipment and specifications. We don't just replace equipment and fixtures, but we focus on design and functionality looking for differentiation and developing products that are competitive over the long term projected profit and loss are for the remodeling project. The profit and loss projection assumes that the actual rent increase achieved during the FP ended July 2024 continues throughout the projection duration. The breakeven point will be reached in about 5 years. Compared to the actual EPU excluding gains on sales for the FP ended July 2024 is projected to increase by more than 3% in around year 10, and by more than 15% in around year 20. We believe that this initiative is not only necessary for the maintenance of equipment and fixtures of the living units, but also contributes to improving future profitability. Large-scale repairs and capital expenditures. The top half is track record of the large-scale repairs for common areas. During this FP, three properties completed the large-scale repair works as planned. The graph at the bottom is the CapEx trend. Remodeling projects large-scale repairs and other repair works are planned and carried out systematically within the amount of depreciation for the maintenance and management of the portfolio. Next, on Asset Management. Rental market is making good progress. In terms of outlook, increased demand due to continued population inflow to urban areas. Decrease in the supply of condominiums for sale due to high prices and cutting back on the number of units sold. Expectations of a virtual economic cycle with sustained wage increase and rising prices, et cetera. The combination of these various factors is having a positive impact on the current rental market, and we expect this trend to continue for the foreseeable future. The average occupancy rate shown on the upper left, was 96.3% for this FP, which is slightly below the level of the past. This is due to the remodeling project of 262 units which reduced the occupancy rate by about 0.4%. Excluding this impact, we believe that the actual occupancy rate is about the same level as before. Remodeling works require a longer construction period than normal restoration work, which results in a longer downtime and a negative impact on occupancy rates. In addition, going forward, we plan to implement about 300 units per FP. We, therefore, expect the impact on the occupancy rate to become slightly larger. Replacement rent trend. Please see top left. The rate of rent change was plus 9.8%, the highest increase recorded. The breakdown is no restoration units, which is the red dotted line, excluding remodeling, that was up 7.5%. And the remodeling units, which is the solid base line, was up 26.2%. Next, on the lower right are the leasing-related revenues and expenses. The red bar is the key money received, which decreased slightly to 0.65 months during this FP. This is due to the fact that in this FP, we focus more on realizing higher rents in our leasing operation, especially for the properties in the 23 wards of Tokyo. Against the backdrop, of the rise in interest rates and response to inflation. Therefore, in some cases, key money was deliberately relaxed while asking rent was set at a higher level. We will continue to work proactively to improve the future profitability of our portfolio. Rent change by area and type. Higher rent growth was achieved in all areas and all types. The upper line graph shows that the rent fluctuation rate for the 23 wards of Tokyo plotted in light blue was plus 12.4%. As stated in the upper right-hand corner, rent increase for restoration units, excluding remodeling, was plus 9.6%, which is the blue dotted line. And for remodeling units, rent increased by 25.9% as shown in the base solid line. Rental market transpect. Occupancy rates remained stable at high levels and the rate of rent change increased or improved in all cities compared to the previous FP. In Nagoya, the rate of negative rent change is decreasing. But the market in Nagoya is still being affected by the increase in supply. So we will continue to prioritize occupancy rates in our operations. Renewal rent change, please see upper left. We have been able to steadily increase renewal rents. We achieved plus 1.3% rent growth, the highest increase recorded. Please see lower left, which is the breakdown by area. On a rent revenue basis, 40% of the renewed tenants agreed to rent increase of an average of 3.2% plus achieving an overall rent growth of plus 1.3%. Rent trends, please see upper left. As a result of rent revisions at the time of replacement and renewal, the unit rent per [ turbo ] increased by 0.94%. As a result, the portfolio rent gap or rent increase potential as shown in the lower left-hand corner is if all units undergo just normal restoration work with no remodeling work implemented, the positive gap is 7.1%. If remodeling work is carried out on the planned number of units, the gap is 13.1%. The rent gap assumes the degree of portfolio impact if all units were to be replaced at the contracted rental level of this FP. Asset acquisition and sales. During the FP ended July 2024, we acquired 5 sponsor developed properties for JPY 14.2 billion. In FP ending January 2025, we plan to acquire RESIDIA Kunitachi for JPY 1.26 billion. This is also from sponsor pipeline. On the other hand, as for sales, RESIDIA Kitashinagawa was disposed in April as planned, and a gain on sales of approximately JPY 530 million was recorded. Gain on sales will be retained internally and used as a source of stable distribution in the future. The status of our sponsor pipeline. Currently, there are 20 properties and the estimated total size is more than JPY 40 billion. We will continue to seek external growth of the REIT through acquiring these properties. I'd like to explain the real estate transaction market. Investment appetite for rental housing remains strong. The dotted line graph is the appraisal yield of the portfolio over the years. Although the pace of contraction has somewhat moderated, transaction prices remain elevated due to strong investor appetite. We will continue to invest cautiously keeping a gross line trends in real estate prices due to the changes in the real estate market and the financial market environment. Finance. Please see summary at the top left. The interest rate on funding for this FP was 0.8%. The funding rate is rising. The lower section shows our total asset LTV. As a result of the public offering, LTV was lowered by 1 percentage point year-on-year to 48.5% for the FP ended July 2024. At 50% total asset LTV, which is our operational guideline for maximum leverage. Our borrowing capacity is JPY 15.1 billion. We were able to secure and increase our acquisition capacity for future earnings growth. Financial indicators. Our financial policy is to build a stable financial base with long-term fixed and diversified funding profile. As shown in the top middle chart, the average remaining duration is 4.8 years, and the fixed ratio is 96%, as shown in the top right chart. We're also diversifying and leveling repayments per period as shown in the bottom chart. As a result, our debt profile is well positioned to minimize the negative impact on earnings when interest rates rise. Meanwhile, the average interest rate for each period, plotted in green diamonds is lower than this FP's actual procurement rate of 0.8%. Therefore, while maintaining this financial base, we will be mindful of the impact of rising interest rates on our earnings in the future. We will flexibly introduce measures such as combining fixed and floating or slightly shorten the initial duration to a certain extent. Finally, on our sustainability initiatives. As for Green Building Energy Conservation Certification, shown on the bottom left, two newly acquired properties have been certified and the acquisition rate now stands at 32.8%, maintaining the rate above 30%. Next, please look at the bottom right initiatives for our properties. We're installing electricity metering system for each building to measure the total amount of electricity consumption for the entire leased area. The installation rate increased by 15.5 points to 77.3%. The installation of LED lighting in common areas increased by 2.1 points to 53.3%. In our efforts to reduce greenhouse gas emissions, in addition to scope 1 and 2 reductions, we are also working on Scope 3 calculations. We will continue to steadily promote sustainability initiatives. This concludes the presentation. We will continue to make diligent efforts to expand Advanced Residence Investment Corporation's earnings through internal and external growth. Thank you very much for watching this presentation. [Statements in English on this transcript were Spoken by an interpreter present on the live call.]