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

My name is Kudo, and I am from ITOCHU REIT Management. Thank you very much for taking the time to watch this video. I would also like to take this opportunity to express our sincere gratitude to all of our investors and stakeholders. Thank you very much for your considerable and ongoing support. I will now report the financial results for Advance Residence Investment Corporation for the financial period that ended in January 2025. First, I will cover the financial highlights. Earnings per unit, EPU, excluding gain on sales of property came to JPY 5,104, up 0.2% from the previous financial period. Adjusted EPU came to JPY 5,532, up 1.2% from the previous period. Distributions per unit, DPU, came to JPY 5,975, up 0.8% from the previous period. The main indicators are listed along the bottom half of the screen. As you can see, operational results for the current financial period improved across the board. This is a review of business strategy in response to market fluctuations. As stated at the top, the basic approach is to maintain and improve EPU and DPU and to continue return of capital gains. To achieve these, our capital policy aims to optimize capital efficiency and expand shareholder returns by selling properties to earn unrealized profit and continuously securing profit from sales. The return of capital gains as distributions will be shifted to continuous distributions, revising the downsizing policy announced in the previous period. The utilization of funds from property sales will be considered for property replacement or the acquisition of our own investment units. We will continue to maintain and improve EPU through external and internal growth. In terms of financial strategy, we will flexibly manage financing while keeping within the threshold shown in the lower right by shortening loan maturities, increasing the share of floating rate loans and other measures in order to control the increase in financial costs. For our capital policy, as mentioned before, we revised our policy of reducing dividend distributions from sale proceeds. Dividends will continue to be distributed, but the amount may fluctuate based on factors such as the status of capital gains. Regarding utilization of proceeds from sales, we will make decisions and investments with respect to property replacement or the acquisition of our own investment units, taking into account the LTV level and other factors. First, please look at the top. This covers the acquisition of our own investment units. On March 17, 2025, we decided to acquire investment units to enhance EPU and increase the unit price. The maximum acquisition price is JPY 2 billion. We expect this to increase EPU by around JPY 13 per unit. If the price of investment units remains weak, we will continue to consider additional acquisitions. Next, please look at the bottom section. This covers the split of investment units. With February 1, 2025 as the effective date, we split each investment unit into 2, with the aim of further expanding the investor base and improving the liquidity of investment units. This shows DPU details for the current period. Please look at the bold black numbers in the middle at the top. DPU for the current period was determined at JPY 5,975, up JPY 50 from the previous period. Next, the adjusted EPU listed in the bold red numbers in the middle came to JPY 5,532, up JPY 64 from the previous period. This was mainly due to the internal growth of existing properties and external growth. Allow me to explain the adjusted EPU in more detail. It is calculated by taking into account additional reversals from the reserve for temporary difference adjustments to compensate for the temporary loss in operating income due to renovation work and the revised depreciation method. Please consider this as the operating profit, assuming this initiative had not been implemented. This shows the details of earnings forecast. Please look at the bar graph on the left. The results for the current period are presented under the assumption that the investment units have been split into 2 to allow for comparison with the earnings forecast figures. The DPU figures in the upper row are assumed to be JPY 3,005 for both the July 2025 and January 2026 periods, up JPY 17 over the JPY 2,988 for the current period. The bold red number in the middle of the middle column shows the adjusted EPU for the period ended in July 2025, which comes to JPY 2,782, up JPY 16 from the previous period. Meanwhile, for the period ending in January 2026, we're assuming JPY 2,769, down JPY 13 from the period ended in July 2025. The increase for the period ended in July 2025 is due to internal and external growth. For the period ending in January 2026, we are planning to pay extraordinary expenses, which is expected to result in a slight decrease compared to the previous period. As a result, we expect the adjusted EPU for the periods ended in January 2025 and January 2026 to remain at approximately the same level. The reduction in profits due to the payment of extraordinary expenses will be offset by tapping the gain on sales, internal reserves, and we expect the DPU for the periods ended in January 2025 and January 2026 to remain the same at JPY 3,005. In addition, the occupancy rate on which these calculations are based is expected to remain at 96%, the same as for the current period. This shows the target levels for DPU and EPU. This assumes that we will maintain and improve the EPU and adjusted EPU through internal and external growth. Our target for adjusted EPU is JPY 2,875, and we are aiming for a structure that achieves a DPU of JPY 3,000 or more, excluding distributions from retained earnings gain on sale. Next, I will cover remodeling work. As shown in the upper left, 308 units were remodeled in the current period. Of these, the contract rate as of the end of January 2025 was 68%. As of the end of February, we have received applications for roughly 90%, and things are progressing smoothly. We have conducted remodeling work for around 300 units per period, just as we had expected when launching this project. Moving forward, we plan to conduct remodeling work on a similar scale each period. Please look at the lower right. The rent increase is 24.4% and remains favorable. You can also see that the rate for second and subsequent new contracts is also high at an increase of 7.8%. This shows examples of remodeling work. The management company is directly involved in everything from planning the work through to selecting the equipment and specifications. In addition to replacing equipment, we also emphasize design and functionality in order to differentiate ourselves and create products with long-term competitiveness. This shows the projected profit and loss for the remodeling project. These estimates of future profit and loss are based on the assumption that the results of the period ended in January 2025 will continue. Profit and loss is currently expected to reach the breakeven point in roughly 5 years and then turn positive. We believe that this project is not only essential for the maintenance and management of equipment and facilities, but will also contribute to improving profitability in the future. This covers large-scale repairs and CapEx. The top shows the large-scale repairs carried out in the common areas of the 5 properties as planned. The bottom shows the trend in CapEx. We will strive to maintain and manage our properties by systematically conducting remodeling, large-scale repairs and other repairs within the scope of depreciation. Next, I will cover asset management. The rental residential market remains favorable. Looking ahead, demand is expected to increase due to the continued influx of people into urban areas. Supply is expected to decrease due to the rising prices of condominiums and the drop in the number of units sold. Wages are expected to continue to rise. This is due to various factors interacting in a complex manner, and we expect this trend to continue for the time being. As shown in the upper left, the average occupancy rate during the period was 96%. This is somewhat lower than past occupancy rates. However, it is due to remodeling, which pushed the occupancy rate down by around 0.6 points. Remodeling takes longer than normal restoration work. This increases the length of vacancies, which in turn negatively impacts the occupancy rate. This shows replacement rent increase trends. Please look at the upper left. The rate of rent increase at the time of replacement was up 10.5%, the highest on record. Next, please look at key money and leasing expenses in the lower right. The dark blue bar graph shows the status of key money received. For the current period, this has decreased to 0.52 months. This is because while we have set higher rents, particularly for single-type units within the 23 wards of Tokyo, we have also intentionally relaxed key money requirements for some units, and this is reflected in our leasing results. We will remain committed to improving portfolio earnings through rent increases. This covers the replacement rent increase by area and type. The rate of increase is higher year-on-year for all areas and all types. Please look at the blue dotted line at the bottom in the middle. The rate of increase in rent for single-type units in the 23 wards of Tokyo is up 11.6%. Next, please look at the light blue bar graph in the lower right. 0.05 months of key money was received. Here, you can see the results of our efforts to achieve high rent increases by relaxing key money requirements for single-type units in the 23 wards of Tokyo. This covers the rental residential market in each city. The occupancy rate remains stable in each area at over 95%, a high level. The rent increase rate is subject to seasonal fluctuations between busy and non-busy periods and rents also fluctuate in some areas. In Nagoya, the rent increase rate has not yet offset the deficit, and we will continue to prioritize occupancy rates. In Sendai and Sapporo, we will manage properties carefully as these areas are relatively more susceptible to seasonal fluctuations. On the other hand, Kyushu, Hakata is performing very well with a high rent increase rate. This covers rent increases at the time of renewal. We actively work to revise rents just as we do for replacements. Please look at the upper left. The rate of increase was up 2.6%, which is not only higher but the highest on record. Next, please look at the upper right. Negotiated rent increases also increased from 47.9% to 71% year-on-year, which shows the status of these efforts. This shows rent and revenue trends. Please look at the upper left. Rent revisions at the time of replacement and renewal resulted in the rent per tsubo increasing by 1.09%. As a result, the portfolio rent increase potential shown in the lower left will increase by 5.8% if all units are restored without remodeling. The rent cap shows the impact on the portfolio with respect to contracted rent level for the current period, assuming that all units are replaced. Next, I will cover asset acquisitions and sales. Including acquisitions scheduled for the period ended in July 2025, a total of 4 properties will be acquired with a total value of JPY 4.5 billion. With regard to sales, a portion of the land at RESIDIA Azabujuban II will be sold to the Tokyo Metropolitan Government for urban planning purposes with delivery scheduled for August 2025 or later. Next, I will cover the real estate market. The line graph in the upper left shows the yield from the appraisal value of the properties held. You can see that the yield stopped falling in 2024. On the other hand, we believe that transaction prices will remain high as the appetite for investing in rental housing remains strong. We will continue to closely monitor trends in real estate prices in response to changes in the real estate and financial markets. Next, I'll cover finance. Please look at the upper left. The financing interest rate for the current period was 1.15%, and the payment interest rate is on the rise. The bottom shows the LTV level. Total asset LTV at the end of the current period was 48.6%, and we are assuming an LTV of 49.4% for the period ending in January 2026. The borrowing capacity for an LTV of up to 50% is JPY 6.1 billion, and the borrowing capacity for up to 53% is JPY 37.7 billion. This covers financial indicators for the period ending in January 2025. The average remaining time to maturity is 4.6 years, as shown in the center, and the fixed ratio is 95.5%, as shown in the upper right. In addition, as shown in the bar graph at the bottom, we have also staggered repayments to avoid concentration in specific periods. On the other hand, the applied interest rate indicated by the green diamond is lower than 1.15%, the rate for the current period. And consequently, the burden of interest will increase upon refinancing. In response, we will work to mitigate the burden of rising financial costs by shortening loan maturities, increasing the share of floating rate loans and taking other measures flexibly. Next, I will cover sustainability. This shows the status of external evaluations and certifications. Please look at the upper left. We achieved a score of A, the highest available in the Carbon Disclosure Project, CDP Climate Change Program. This covers initiatives for sustainability. During this period, we launched a new initiative to switch emergency generators over to a next-generation biofuel. Please look at the lower left. As for ongoing initiatives, we have switched to LED lighting in 55.7% of all common areas and have completed installation of 93.6% of electric energy measurement systems. Moving forward, we will continue to steadily advance these initiatives. This concludes my explanation. Thank you very much for your attention.