Advance Residence Investment Corporation ($3269)

My name is Kudo, and I'm from ITOCHU REIT Management. Thank you very much for watching this video on the financial results of Advance Residence Investment Corporation. 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 for the fiscal period ended January 2026. Today, we will cover 6 themes in the following order: strategy and policy, financial highlights, property acquisitions and dispositions, internal growth, finance and sustainability. First, let's look at strategy and policy. Taking into account the current market environment, the Investment Corporation will continue its core policy of pursuing stable and sustainable distributions. To this end, the management policy consists of 3 main pillars: internal growth, external growth and financial and capital strategy. First is internal growth. We aim to achieve ongoing enhancements to the corporation's earnings power centered on rent growth. In addition to generating added value through remodeling projects in exclusive areas, we also promote asset value enhancement initiatives that incorporate ESG perspectives. Next is external growth. We promote selective acquisitions through asset replacement. Finally, let's look at the financial and capital strategy. We pursue management that balances both stability and flexibility. Next is introduction of a mid- to long-term core KPI and growth targets. As a new metric, we introduced the FFO per unit growth rate. The target is at least 2% growth per annum. We position rent growth as the primary driver supporting this growth. We believe background factors such as the continued inflow of people into urban areas and improved tenant affordability due to sustained wage increases will support rent growth going forward. Here, I will briefly explain the FFO. The FFO indicates how much cash is being generated by the Real Estate Leasing business. To calculate the FFO per unit, subtract the gains on property sales from net income, depreciation and amortization, then divide this amount by the number of units outstanding. Next is generating and returning gains on sales through asset replacements with a view to mid- to long-term earnings growth. Our basic approach to asset replacement is shown on the right. First, we will conduct sales after comprehensively considering factors such as capital efficiency, growth potential and investment efficiency. On the other hand, we will prioritize acquisitions with the potential for internal growth. Next, let's look at the dividend policy regarding gains on sales and retained earnings shown in the lower section. When a property is sold and generates gains on sales, we will distribute at least 25% thereof in the applicable fiscal period, with the remainder retained internally. This retained earnings will be used to ensure stable distributions of approximately JPY 100 per unit. Next, let's look at generation of gains on sales in the center. We will cover this in more detail later. But for the fiscal period ending July 2026, we plan to sell one property for which a contract has already been concluded and expect to record JPY 730 million in gains on sale. For the fiscal period ending January 2027, we do not currently expect to record any gains on sale. Now we will move on to financial highlights. First is analysis of earnings structure centered on FFO per unit. For the fiscal period ending July 2026, we project year-on-year growth of 2.7%. For the fiscal period ending January 2027, we project year-on-year growth of 2%. The occupancy rate underlying these assumptions is 95.8%, as shown at the bottom of the bar chart. For a breakdown of the factors causing the changes, please refer to the arrows indicating increases and decreases. We expect FFO per unit to increase as the growth in net operating income, NOI from existing properties indicated by the red upward arrow, exceeds the increase in financial costs indicated by the blue downward arrow. Next is NOI growth and cost absorption capacity. The upper left shows the NOI trend. NOI is projected to grow at an annual rate of 4.2%. Next, let's look at rental operating expenses, excluding depreciation in the center. For the fiscal period ended January 2026, this stood at 25.9% of rental income. As you can see in the graph in the upper right, the ratio of these rental operating expenses has remained stable. Both the level and the ratio of rental operating expenses have remained stable in comparison with the growth in NOI, and we believe that the earnings structure remains in sound condition. Next is actual and forecast DPU. First, let's look at FFO-based DPU. This represents distributions, excluding returns from gains on sales and similar items, and we expect to see a steady increase. On the other hand, the FFO payout ratio, distribution ratio is expected to decline as the additional utilization of negative goodwill decreases. We will cover this point on the next page. Please look at the navy blue bar graph on the left. Current results for the fiscal period ended January 2026 showed a DPU of JPY 3,220, consisting of an FFO based DPU of JPY 2,966 plus JPY 254 in returns from gains on sales and similar items. For the fiscal period ending July 2026, we forecast JPY 3,162, consisting of JPY 2,993, a 1.9% increase year-on-year, plus JPY 169. For the fiscal period ending January 2027, we forecast JPY 3,090, consisting of JPY 2,986, a 0.7% increase year-on-year, plus JPY 104. While this is increasing on an FFO basis, the final DPU is expected to decline slightly from the fiscal period ended January 2026. The main factor is the difference in the additional distribution amount based on the dividend policy for gains on sales. Please look at the bar graph on the right. As a distribution from gains on sales, we returned JPY 150 per unit for the fiscal period ended January 2026. At present, we expect a distribution from gains on sales of JPY 64 per unit for the fiscal period ending July 2026. On the other hand, as we do not expect any gains on sales for the fiscal period in January 2027, we do not anticipate any distributions from such gains. Going forward, in addition to steady internal growth, we will strive to steadily increase DPU through returns from gains on sales generated through sales activities associated with our replacement strategy. Next is composition of distributions and additional utilization of negative goodwill. First, please look at the elements composing the distributions on the left. Since the structure is somewhat complex, I will explain it in steps. Distributions are composed of 5 elements. The red box at the bottom represents the amount of distribution from net income for the current period, excluding gains on sales. The light pink and gray boxes above represent the utilization of negative goodwill portion. The light pink represents the additional utilization portion, while the gray indicates the fixed amount utilization portion, JPY 117 based on tax law revisions. The total of these 3 components constitutes the FFO-based DPU. Next, the 2 boxes at the top represent distributions from gains on sales and retained earnings. At least 25% of gains on sales is distributed as dividends in the period in which they are recorded, while retained earnings are used to ensure stable distributions of approximately JPY 100 each period. Please note that the amount distributed for gains on sales may fluctuate depending on the sales situation. Next, on the right side are the details of additional utilization of negative goodwill. This strategic initiative aims to achieve long-term stable growth. We are currently leveling out distributions through the additional utilization of negative goodwill to offset the impact on profits and losses arising from initiatives such as promoting remodeling projects and reviewing depreciation methods. The amount of additional utilization is decreasing as the profitability of these initiatives improves. Specifically, it is expected to decrease from JPY 202 in the fiscal period ended January 2026 to JPY 177 in the fiscal period ending January 2027. This decrease in additional utilization of negative goodwill is the main factor behind the decline in the FFO payout ratio mentioned earlier. Next is the capital allocation framework based on AFFO. First, the graph in the upper left provides an overview of cash utilization. AFFO is calculated by deducting capital expenditures from FFO and serves as the indicator representing the source of distributions. While the AFFO payout ratio, distribution ratio may temporarily exceed 100% during certain periods, we will ensure that it remains at 100% or lower over the mid- to long term. The graph on the right shows the capital expenditures trend. The company systematically carries out remodeling projects, large-scale repairs and other repair work and makes every effort to appropriately maintain and manage properties. Next, let's look at property acquisitions and dispositions. This shows changes in portfolio composition. For fiscal periods ended January 2026 and ending July 2026, we have acquired and sold assets through various initiatives. As a result, we expect to secure gains on sales of JPY 2.4 billion with a gain on sales ratio of 57%. At the same time, we also reduced the average age of the asset portfolio overall. Next is acquired properties. The details of the properties are shown here. We acquired 4 properties for a total of JPY 10 billion with an emphasis on internal growth potential and an occasional competitiveness. Next is disposed properties. The details of the properties are shown here. We plan to sell a parcel of land and 4 properties for a total of JPY 6.7 billion, securing gains on sales of JPY 2.4 billion. Of these, RESIDA Bunkyo-Yushima II is scheduled to be sold on July 1, 2026, while the other properties have already been sold. Next, let's look at internal growth. First, let's look at exclusive area remodeling projects results. Please look at the number of units under construction on the left. Construction was carried out at 308 units in this period with a contract rate of 75% as of the end of January 2026. As of March 3, applications had exceeded 95%, showing steady progress. We plan to continue carrying out construction at approximately 300 units each period going forward. The replacement rent change rate shown in the center rose by 29.7%. On the right, you can see profitability and cost control. While the average construction cost has been gradually increasing, we are maintaining a high level of profitability with an estimated payback period of 7.9 years and a projected ROI of 12.6%. Here are some examples of remodeling. At our company, a specialized department handles everything from project planning through to determining equipment and specifications. We seek to differentiate our properties to ensure long-term competitiveness. Next is occupancy rate trends. The rental housing market continues to enjoy a very favorable environment. The average occupancy rate during the period shown in the upper left, remained high at 95.7%. However, it decreased by 0.4 points year-on-year. Please look at the bar graph in the lower right. This decline was the result of prioritizing proactive rent increases, which led to a slight drop in occupancy rates through the summer of 2025. Subsequently, occupancy rate adjustments were made from autumn onwards, and they recovered to 96.2% in January 2026. The occupancy rate is projected to be 95.8%, and we expect it to remain stable going forward even as we continue to pursue rent increases. Next is replacement rent trends. Please refer to the upper left. The solid line in the graph represents the replacement rent change rate across the entire portfolio, which stands at 14.9%. The dash line represents the rent increase rate for units restored to the original condition, which stands at 10.9%. Both have remained strong and continue to increase year-on-year. Although the level is slightly lower than the previous period, this reflects seasonal factors associated with the off-peak leasing season as well as adjustments made to occupancy rates. A similar trend can also be observed in rent increases by area and type as well as by city, which we explain later. Next is replacement rent change rate by area and type. All areas and all types have increased compared with the same period in the previous year. In the area-based graph in the upper left, you can see that the 23 wards of Tokyo shown by the light blue line have been performing particularly strongly. As with the portfolio overall, the level is slightly lower than the previous period. But as explained earlier, this is due to seasonal factors and adjustments to occupancy rates. Next, let's look at rental markets by city. The red lines show occupancy rates. The gray bars show the replacement rent change rates. Areas outside the 23 wards of Tokyo tend to be particularly susceptible to seasonal fluctuations between peak and off-peak leasing periods, and both occupancy rates and replacement rent change rates show relatively large fluctuations. Looking at the trends by area, Kansai and Kyushu are performing well and Sapporo remains stable. However, we believe it is necessary to continue closely monitoring the trends in Nagoya and Sendai. Next is renewal rent trends. The company is also actively implementing rent increases at the time of renewal. Please refer to the upper left. The rent increase rate rose by 4.9%, significantly exceeding the previous period's record high level of 3.1%. Please look at renewal rent change rate by area in the lower left. As with replacement rent increase trends, you can see that the 23 wards of Tokyo continue to perform strongly. 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 for the current period explained so far, the overall profitability of the portfolio rose 2%. The breakdown is as follows: replacement rent increased by 1.3%, renewal rent increased by 0.7%. As you can see, revisions at the time of renewal have also made a significant contribution to improved earnings. Now we will move on to finance. First, I will report on our financial position. Please refer to the upper left. The funding interest rate for the current period was 1.47% 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 49.2%, and it is projected to be 49.4% for the period ending January 2027. The borrowing capacity is JPY 6.3 billion, up to a total asset LTV of 50% and JPY 38.4 billion up to an LTV of 53% based on projections for the period ending January 2027. Next, let's look at financial indicators. Please look at the gray bar graph for financial costs in the upper left. As explained earlier, the most recent funding interest rate was 1.47%. Meanwhile, the paid interest rates shown by the diamonds in the graph on the diversification of repayment deadlines in the lower section have dropped below the most recent performance. Accordingly, financial costs are expected to rise in future refinancing. In light of this environment, we are working to curb increases in financial costs by maintaining an average remaining term of 3 years or longer and a fixed rate ratio of at least 80%, while also responding with a certain degree of flexibility in line with market conditions and other factors. As a result, the average remaining duration shown in the upper center is 4.3 years, and the fixed interest rate ratio shown in the upper right is 91.9%. Both figures have declined slightly compared with the previous period, but we consider that their levels have remained appropriate. The basic policy of long-term fixed rate and diversified financing remains unchanged. Lastly, let's look at sustainability. This shows the status of external evaluations and certifications. The company's sustainability initiatives led primarily by our specialized department have received relatively high praise for the steady efforts made. This covers publication of the ESG report 2025. We published the ESG report 2025 on October 31, 2025. The ESG report 2025 is available on the Advanced Residence Investment Corporation website on the Sustainability Policy and ESG Report page under sustainability and ESG. We disclose detailed information on our various initiatives, and we encourage you to also visit our website. This concludes my explanation. Thank you very much for your attention.