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

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 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 July 2026. Today, we will cover 6 themes in the following order: strategy and financial highlights, cash allocation and distribution outlook, internal growth, property acquisitions and dispositions, finance and sustainability. First, let's look at strategy and financial highlights. There are no changes in management policy going forward. Through the 3 main pillars of internal growth, external growth and financial and capital strategy, the Investment Corporation will continue pursuing stable and sustainable distributions. First is internal growth. We aim to achieve ongoing enhancements to the Corporation's earnings power, primarily centered on rent growth. A key driver of this growth is the living room remodeling project. In addition to generating added value through remodeling, we also promote asset value enhancement initiatives that incorporate ESG perspectives. Next is external growth. We promote selective acquisitions through asset replacement. With an eye toward medium- to long-term growth, we will enhance the overall quality of the Corporation's portfolio through asset replacement while steadily returning value to unitholders through gains on sales. Now let's look at the financial and capital strategy. The Corporation will maintain a solid foundation by balancing financial stability and financing flexibility while containing increases in financial costs. We will also flexibly consider funding in response to changes in market conditions. This is the executive summary of financial results. The FFO per unit, FFOPU growth rate achieved the annual target of at least 2%, while distribution DPU increased for the 11th consecutive fiscal period. The key indicators are as follows: FFOPU, up 3% year-on-year, driven by growth in rental revenue. DPU, up 1%, supported by FFO growth. NAV per unit, up 4.5%, driven by an increase in asset value resulting from rent growth. As shown, all indicators demonstrate steady growth, resulting in positive financial results for this fiscal period as well. Next is the management strategy for sustainable growth in FFOPU. The assumptions underlying the growth drivers have been redefined with the aim of achieving an annual FFOPU growth rate of at least 2%. Rent growth is considered the primary driver supporting this growth with a target growth rate of 7% annually. The current rental housing market continues to enjoy a favorable environment. This is due to constraints on new supply against the backdrop of rising construction costs and other factors, coupled with firm demand driven by the inflow of people into urban areas. Furthermore, we recognize that continued wage growth is improving tenant affordability. By steadily capitalizing on these favorable conditions and proactively revising rents, the Investment Corporation will enhance the earnings power of its overall portfolio. When assessing the rental housing market going forward, particular attention will be paid to whether or not this wage growth continues. 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 gain or loss on property sales from net income and add depreciation and amortization, then divide this amount by the number of units outstanding. Next is operational initiatives to enhance earnings capacity. For the living room remodeling project shown on the left, our specialized department handles the entire process from project planning through selection of equipment and specifications. In addition, close collaboration with construction partners has enabled the formation of a stable construction framework. Through these initiatives, we will work to maintain long-term competitiveness and enhance asset value. Examples of other initiatives are shown on the right. By revising the operating format for the 3 properties shown here, the Investment Corporation expects to increase annual net operating income, NOI, by approximately JPY 18 million. Going forward, we will continue pursuing initiatives in line with the characteristics of each property and the market conditions. Next is analysis of earnings structure centered on FFO per unit. FFOPU is forecast to grow to JPY 4,055 for the fiscal period ending January 2027, up 2.7% year-on-year and JPY 4,098 for the fiscal period ending July 2027, up 2.0% year-on-year. The underlying occupancy rate is assumed to be in the high 95% range, as shown at the bottom of the graph. For the factors affecting earnings, please see the arrows in the center. The red upward arrow showing the increase in NOI is expected to outweigh the blue downward arrows showing the increases in financial costs and SG&A expenses, thereby driving steady growth in FFOPU. 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 5.7%. Next, let's look at rental operating expenses, excluding depreciation, in the center. For the fiscal period ended July 2026, this stood at 25.7% of rental income. As shown in the graph in the upper right, the ratio of these rental operating expenses has remained stable. The ratio of rental operating expenses has remained stable in the 25% range in comparison with the growth in NOI, and we believe that the earnings structure remains in sound condition. Next is cash allocation and distribution outlook. First, let's look at the allocation of cash generated during the fiscal period. Please look at the overview for the fiscal period ended July 2026 on the left. FFO totaled JPY 11.45 billion, including net income of JPY 7.7 billion, excluding gains on sales, and depreciation of JPY 3.75 billion. Of this, a total of JPY 8.56 billion will be allocated to unitholder distributions, comprising net income of JPY 7.7 billion and JPY 860 million through the utilization of negative goodwill. Of the remaining amount, JPY 2.86 billion will be allocated to capital expenditures relating to growth investments and life cycle costs, contributing to future earnings growth. The graph at the bottom shows the breakdown. By systematically allocating funds to living room remodeling, large-scale repairs and other initiatives, the Investment Corporation will work to maintain and enhance asset value. Next is allocation of disposition proceeds. Please look at the overview on the left, covering the fiscal period ended July 2026 and the period ending July 2027, as previously announced. Property sales totaling JPY 3.82 billion are expected to generate gains on sales of JPY 1.5 billion and together with a drawdown of retained earnings, a total of JPY 2.04 billion is expected to be returned to unitholders. As a result, the balance of retained earnings is expected to decrease from JPY 3.49 billion at the beginning of the period to JPY 2.95 billion at the end of the fiscal period ending July 2027. In addition, proceeds from sales and loans are also being allocated to new property acquisitions and growth investments. Going forward, funds will continue to be allocated flexibly while taking into account market conditions and investment opportunities. Next is distribution, DPU, Growth Outlook. Please also look at the right side of the graph. Supported by growth in FFOPU, DPU is forecast to increase 1.0% year-on-year to JPY 3,253 for the fiscal period ending January 2027 and 1.0% year-on-year to JPY 3,258 for the fiscal period ending July 2027, representing stable growth. This graph shows the trend since the fiscal period ended July 2021. Notably, in the fiscal period ended July 2025, DPU increased significantly by 7.7% year-on-year, raising DPU to a new level. Overall, the graph shows that DPU has continued to grow steadily over the long term. Going forward, the Investment Corporation will continue to achieve stable DPU growth through steady internal growth and the utilization of gains on sales generated through its asset replacement strategy. Next, let's look at internal growth. Let's look at the living room remodeling project results. Please look at the number of units under construction on the left. Construction was carried out at 292 units in this period with a contract rate of 65% as of the end of July 2026. Since then, applications have risen to approximately 85% as of the end of August, 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 36.2%. This continues to remain at a high level. On the right, you can see profitability and cost control. While the average construction cost has been on a gradual upward trend, the Corporation is maintaining a continuously high level of profitability with an estimated payback period of 6.5 years and a projected ROI of 15.4%. Next, let's look at specific examples of remodeling. Please take a look at these photos. These before and after photos show the results of the planning and specification selection process carried out by the specialized department mentioned earlier. Through close collaboration with construction partners, efforts go beyond simple repairs to maximize asset value by anticipating market needs. Next is occupancy rate trends. As shown in the upper left, the average occupancy rate for the current fiscal period was 95.9%. Occupancy continues to remain stable in the high 95% range. Going forward, the Investment Corporation expects to maintain occupancy in the high 95% range and will aim to steadily expand earnings by balancing proactive rent revisions with stable occupancy. 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 18.7%. The dashed line represents the replacement rent change rate for units restored to their original condition, excluding remodeled units, which stands at 15.1%. Both reached record highs. Next is replacement rent change rate by area and type. Record highs were also achieved across all areas and all types. Please look at the by area graph in the upper left. The 23 wards of Tokyo, shown by the light blue line, remained strong with a replacement rent change rate of plus 22.0%, while the other areas also continued to perform well. Next, let's look at rental markets by city. The red lines show the occupancy rates, while the gray bars show the replacement rent change rates. Areas outside the Tokyo 23 wards are significantly affected by seasonal fluctuations between the peak and off-peak periods, resulting in greater fluctuations in both occupancy rates and replacement rent change rates. By area, Kansai and Kyushu are performing well, and Sapporo also remained stable. Nagoya and Sendai are also showing signs of recovery, and we will continue to closely monitor these trends. Next is renewal rent trends. The company is also actively implementing rent increases at the time of renewal. As shown in the graph in the upper right, we proposed rent increases to approximately 80% of tenants whose leases were up for renewal, focusing primarily on units with rent increase potential. As a result, as shown in the upper left, the renewal rent change rate was 4.4%, generating steady earnings growth similar to at the time of replacement. Lastly, 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 2.3%. Breaking this down, replacement rents increased 1.6%, while renewal rents increased 0.7%. Notably, rent revisions, both at the time of replacement and renewal, are steadily contributing to earnings improvement. Next, let's look at property acquisitions and dispositions. This shows changes in portfolio composition. Throughout the fiscal period ended July 2026 and the fiscal period ending January 2027, various initiatives have been undertaken to dispose of relatively older properties and selectively acquire relatively newer, highly competitive properties, primarily in the 23 wards of Tokyo. As a result, 7 properties totaling approximately JPY 10.9 billion on an acquisition price basis were acquired, while 3 properties totaling approximately JPY 2.6 billion were disposed of. These dispositions are expected to secure total gains on sales of JPY 1.5 billion, while the average building age has been reduced to 18.7 years, enhancing the portfolio's medium- to long-term competitiveness. Next is acquired properties. In the fiscal period ended July 2026, 4 properties totaling approximately JPY 6.9 billion were selectively acquired with an emphasis on internal growth potential and locational competitiveness. Please refer to the list on this page for details of the properties. Next is the status of acquisitions for the fiscal period ending January 2027. It has been decided that 3 properties totaling approximately JPY 3.9 billion will be acquired for the fiscal period ending January 2027. Going forward, properties will continue to be selected with the highest priority placed on internal growth potential. Of these, the acquisition of RESIDIA Sakura-shimmachi is scheduled to be completed on September 30, 2026, while the other 2 properties have already been acquired. Please refer to the list on this page for details of the properties. Next is disposed properties. It has been decided that 3 properties totaling approximately JPY 3.8 billion will be disposed of. In selecting these properties, factors such as capital efficiency, growth potential and competitiveness, and investment efficiency through remodeling were comprehensively considered. The proceeds generated through these property sales are being reinvested in properties with higher growth potential to advance portfolio replacement. Of these, the disposition of RESIDIA Tenjinbashi is scheduled to be completed on September 30, 2026, while the other 2 properties have already been disposed of. Please refer to the list on this page for details of the properties. Next, our initiatives to expand investment opportunities. In July 2026, the asset management company entered into a new pipeline support agreement with Sun Frontier Fudousan Company Limited. This is expected to broaden the range of options for investment opportunities in the real estate transaction market going forward and enhance the potential for medium- to long-term external growth. Now we will move on to finance. Next is finance. Please refer to the upper left. The funding interest rate for the current period was 2.12% with a borrowing term of 6.5 years 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 49.8%, and it is projected to be 50.2% for the period ending July 2027. The borrowing capacity up to a total asset LTV of 53% as projected at the end of the fiscal period ending July 2027 is JPY 29.9 billion. Next, let's look at financial indicators. Please look at the bar graph for financial costs in the upper left. As explained earlier, the most recent funding interest rate was 2.12%. On the other hand, please look at the graph on the diversification of repayment deadlines in the lower section. The paid interest rates shown by the diamonds have dropped below the most recent performance. Accordingly, financial costs are expected to rise in future refinancing. In light of this environment, the Corporation will maintain an average remaining term of 3 years or longer and a fixed rate ratio of at least 80% and balance financial stability and flexibility to curb increases in financial costs and maintain a solid financial foundation. Lastly, let's look at sustainability. This shows the status of external evaluations and certifications. Our sustainability initiatives, which continue to be led by our specialized departments have received relatively high praise from various external organizations. Next, let's cover the ESG report. We are also working to enhance sustainability-related disclosures. We plan to publish the ESG report 2026 in October 2026. This will be available on the Advance Residence Investment Corporation website on the Sustainability Policy and ESG Report page under Sustainability and ESG. We disclose detailed information on the Corporation's various initiatives, and we encourage you to also visit the website. This concludes my explanation. Thank you very much for your attention.