Frontier Real Estate Investment Corporation (8964) Earnings Call Transcript & Summary

Hello, everyone. I am Ono of Mitsui Fudosan Frontier REIT management. Today, I would like to present to you the overview of Frontier Real Estate Investment Corporation's 35th-period financial results that ended in December 2021. Please turn to Page 11 of investors presentation, which gives you the summary of 35th period results. There are 4 boxes at the top side-by-side, presenting distributions. 35th period was also affected by COVID-19. The second from the left is DPU, distribution per unit for 35th period ended in December 2021, and it was JPY 10,972. Compared to the 34th period, it was up by JPY 225 and JPY 222 higher than JPY 10,750 of the forecast released in last August. Forecast for 36th and 37th periods are listed next to 35th DPU. The current period ending in June 2022 is expected to be JPY 10,970 and 37th period ended in December 2022 is to be JPY 10,990. Let's move on to the next box, initiatives to strengthen portfolio. Firstly, we acquired 3 properties developed by our sponsor in an attempt to enhance portfolio quality. Specifically, we acquired additional 34% of co-ownership stake of Mitsui Shopping Park LaLaport SHIN-MISATO, Ginza 5-chome GLOBE and Takeshita-dori Square. Next initiative will be realized in 36th period or later when we made our decisions to sell Ito-Yokado Higashi-Yamato. Details will follow later. The next box below is about financial operations. We executed 6 public offering in last July. We also issued our first green bond in October. As a result, LTV as of the end of 35th period stood at 45.3% on a book value basis and 36.7% on appraisal basis. The fourth box is about sustainability. We received 4 stars under the GRESB real estate assessment. And in last December, branch Hakata Papillon Garden received a CASBEE Certification of Rank A for building new construction. In addition, the asset management company declared its support for the TCFD recommendations last month. Up to here was the highlight. Now please turn to Page 12 of the presentation, which lays out DPUs from 34th period, result up to the forecast for the 37th period with major contributing factors. We are under the fourth state of emergency from July to September in 35th period, which affected businesses. However, they recovered towards the year-end once the state of emergency have lifted. And the sum of the suburban middle and the large-sized shopping centers came back even to the same level as pre pandemic. Considering such trends, we expect a reduction in temporary rent discounts due to COVID-19 will gradually decrease towards 37th period. I should also mention the impact attributed to sale of Ito-Yokado Higashi-Yamato and replacement of tenants, leading to DPU of JPY 10,970 for 36th period and JPY 10,990 for 37th period. I will give you more color on the following pages. Please turn to Page 13. This is the result of 35th period. Let me start with 35th profit and loss listed in the large box on the left. Compared to the previous period 34th, we achieved the increase both in operating revenue and income. The highlights include operating revenue of JPY 11,401 million, which is at the top of the green column, up by JPY 646 million from previous period. Major factors and changes are listed in the box on the right. Newly acquired 3 properties contributed to revenue increase by JPY 559 million, so did the reduction in temporary rent discounts by JPY 90 million. There are also major negative factors such as decrease of sales-linked rent by JPY 24 million and decrease of other rent revenues by JPY 27 million, including one-off income attributed to a tenant departure. The next is expenses related to rent business. Back to the box on the left, the second from the top is expenses related to rent business for 35th period was JPY 2,313 million, up by JPY 45 million from the previous period, excluding depreciation. Major factors and changes for the expenses are also listed on the right. The second box from the top shows increase of property management expenses by JPY 31 million, primarily attributed to newly acquired properties. As a result, NOI stood at JPY 9,088 million, up by JPY 600 million compared to the last period, which is the third line from the top and the left box. Next one is depreciation. We recognized JPY 2,122 million for 35th period, up by JPY 78 million compared to the previous period, mainly due to 3 properties we acquired that brought operating income to JPY 6,255 million, up by JPY 513 million from the previous period. Let's move on to nonoperating section. Please refer to nonoperating expenses, which is JPY 320 million, up by JPY 61 million from the previous period. Expenses of public offering in last July and increase of interest expenses are major contributors to the increase, which resulted in increase of ordinary income to JPY 5,936 million, as well as net income increased to JPY 5,935 million, up by JPY 446 million compared to the last period. Distribution per unit for 35th period was JPY 10,972. All in all, 35th period ended with increase in operating revenue, net income and DPU. Let's move to the forecasts. Please turn to Page 14. Here are the forecasts for 36th period from January to June 2022 and 37th period ended in December 2022. The top box on the left shows forecast in operating revenue for 36th period ending in June 2022. In the left green column, you can find operating revenue is expected to increase by JPY 88 million to JPY 11,490 million compared to the previous 35th period. The next slide below is operating income, which is expected to decrease by JPY 27 million to JPY 6,228 million. I will give you more details as referring to the major changes in impact on the right in the comparison with 35th period. Operating revenue is expected to increase by JPY 88 million. New contract at Kamiikedai becomes effective in this March, and it will increase rent revenue, which pushes our operating revenue by JPY 22 million. Sales-linked rent will contribute to the increase of operating revenue by JPY 33 million, so does a reduction in temporary rent discount due to the pandemic by JPY 14 million. We will sell 10% of quasi co-ownership of Ito-Yokado Higashi-Yamato in 36th period and yield gains on sale of JPY 10 million. Although tenant replacement at VIORO and others will push down rental revenue by JPY 74 million, other rent revenues, such as one-off income due to tenant de facto will add plus JPY 94 million. Operating income is expected to decrease by JPY 27 million. Despite decrease of depreciation and amortization, increase in property tax and a city planning tax for 3 properties recognized as expenses in selling, general and administrative expenses for asset management fee and others are attributed to the decrease. Back to the left box, the third line from the top is ordinary income of JPY 5,948 million. The next line is net income, which is JPY 5,947 million, up by JPY 11 million. Gain and sale of Ito-Yokado Higashi-Yamato will be retained as internal reserve for reduction entry which leads to forecast in DPU at JPY 10,970 for 36th period. Two columns away to the right is the forecast in 37th period ending in December 2022. We released a forecast in DPU at JPY 10,990, reflecting a full period contribution of rent increase at Kamiikedai and absence of other rental revenues such as rent increase due to elimination of downtime and tenant replacement. We presuppose a gain on sales of 20% of quasi coownership at Ito-Yokado Higashi-Yamato is recognized as internal reserve for reduction entry. That concludes my report on the financial results. Now please turn to Page 17. Here are management highlights, let us start on Page 17, which outlines property acquisition and a capital procurement during 35th period. As you can find in the middle section of the left, we acquired 3 properties for JPY 22.1 billion by leveraging stable sponsor support. In addition, capital for the acquisition was funded through a public offering in July in debt, which allowed us to raise JPY 14.9 billion and JPY 8 billion, respectively. Out of JPY 8 billion debt, JPY 2.5 billion was procured by Frontier's first green bond issuance. As a result, LTV dropped to 45.3% and NAV per unit rose to JPY 463,076 as of the end of December 2021. On Page 18 and 19, I would like to talk about 3 properties acquired on July 1, 2021. Page 18 covers Mitsui Shopping Park LaLaport SHIN-MISATO, where we had already acquired annex building and 66% of core ownership stake of main building of LaLaport SHIN-MISATO. An additional 34% acquisition allows us to own 100% of the facility operated by Mitsui Fudosan, who is our sponsor and master lessee of the facility. The line chart on the right shows the sales trend with the baseline set at January 2020 as pre-pandemic level last year and showed a recovery back to the same level of pre-pandemic. The property is also certified as Five Star under DBJ Green Building Certification and meets green eligibility criteria. The second property we acquired is Ginza 5-chome GLOBE, which is on the left on the Page 19. It's located on Miyuki Street, where numerous luxury brands have advanced into early on, just like Namiki Street in Ginza. There are U.S.-based bag brand TUMI and established Spanish restaurants in the property. The fab property we acquired in Takeshita-dori Square, which is on the right. It's located on Takeshita-dori and has been operated by Mitsukoshi Isetan LTD under the name of Harajuku ALTA since its completion of construction in 2015. There was a vacant space on the second floor at the time of the acquisition, but it's been leased up and is now operated with almost full occupancy. Now please turn to Page 20, which outlines sale of Ito-Yokado Higashi-Yamato we announced yesterday. This property has been managed as a mainstay commercial facility in Higashi-Yamato City since its acquisition in January 2009. Since the lease contract with the current lessee will expire in November 2023, we constantly scrutinize details of future management policy of the property for multiple aspects, including status of discussion on contract renewal, changes of the external environment around the property and the building age. The property location will remain competitive. However, given the fact that the sale would eliminate future uncertainty and we received a transferees consent on sales in stages over 3 periods in order to stabilize DPUs and higher planned sale price than appraisal value and book value, we came to the conclusion that sale of the property will contribute to further enhancement of unitholder value. The outline of sale is given to the left. The property will be sold to Hulic for JPY 9.5 billion over 3 periods. We'll first sell 10% of quasi co-ownership on June 24 this year, followed by 20% of sale on December 23 for the second time and 70% on June 23 next year for the last. Currently, we are planning to recognize a gain on property sale as internal reserves in order to keep DPU stable in the future. Next is the financing on debt, please turn over one page to Page 22. As you can find in the top left chart, average interest rate for the debt cost is 0.42% and average remaining years are 4.92 years as of the end of 35th period. The right side of the page outlines green finance. We drew out the green finance framework and issued 10-year and 15-year green bonds worth JPY 2.5 billion in last October. Lastly, I would like to share our initiatives and sustainability. Please turn to Page 23. In October, we issued our first ESG report where you can find our policy and sustainability and specific initiatives and details. The left part on Page 24 touches upon responding to climate change. The asset management company declared its support for TCFD, the task force on the climate-related financial disclosures, last month. As shown at the bottom left of the page, we disclosed the risk and opportunity in line with the TCFD recommendations based on the guidelines for addressing climate change established in August 2021. Also, we have been working on acquiring environmental certificates. As shown at the bottom right of the page, Branch Hakata Papillon Garden received a CASBEE certification for building new construction rank A in December 2021. That raised green building certified rate to 83.4% on a gross floor basis as of the end of 2021. At the top left of the Page 25, you can find GRESB assessment. We received 4 Stars for last year and seven straight year of green star recognition. We also acquired the highest A rating for GRESB disclosure assessment. We will continue to extend initiatives and sustainability through cooperation of stakeholders while properly disclosing them. That concludes my quick update on the financial result of the Frontier Real Estate Investment in corporation for 35th period ended in December 2021. Thank you for your kind attention.