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

Good afternoon, everyone. My name is [ Yokochi Shigekazu, ] Fudosan Frontier REIT Management, Inc. This summer has been unusually hot. I hope you are all doing well. First, I would like to take this opportunity to thank you for all of your ongoing support. Now I would like to explain Frontier Real Estate Investment Corporation's Financial Results for the Fiscal Period ended June 2025, the 42nd period. Please refer to Page 3 of the results presentation. I would like to reiterate our medium-term targets and initiatives, which were set at the time of our financial results briefing in February of this year. As a qualitative goal, we aim to increase unitholder value through stable growth of ordinary basis EPU. In doing so, we will strive to operate by being conscious of cost of capital. The initiatives to achieve this goal are as follows: Regarding external growth, we will primarily leverage sponsor pipeline and acquire prime properties being mindful of the yield after depreciation and implied capitalization rate. In terms of internal growth, we will incorporate sales-linked rent and rent revision terms in addition to long-term fixed rents, mainly for tenants whose leases are about to expire so as to realize future internal growth. We will also proactively engage in measures such as strategic tenant replacement that contributes to greater asset value. In terms of asset replacement, we will consider selling properties without prospects for future profitability or competitiveness and coordinate the timing and scale of dispositions to stabilize distributions. Regarding financial strategies, we will maintain a sound financial position through LTV control and ensure stability by leveling out repayment timing and amounts. Next, I will explain our quantitative targets using the graphs in the lower part of this page. The distribution per unit, DPU, for the fiscal period ended June 2025, the 42nd period is JPY 2,200. At the previous financial results announcement, we set JPY 2,200 as the minimum DPU, which includes the use of retained earnings and set the dividend target for the period ending June 2029, the 50th period at JPY 2,400 or more, which will be 4 years later. Due to the progress made in various initiatives, I would like to report that we now expect to achieve the target of JPY 2,200 on an EPU basis in the 47th period ending December 2027 at the latest, but we'll strive to achieve this goal earlier. Next, I will explain the summary of financial results for the 42nd period ended June 2025 and the forecast. Please refer to Page 8. DPU for the 42nd fiscal period is JPY 2,200. EPU was JPY 2,174, an increase of JPY 34 compared to the forecast. DPU for the 43rd and 44th periods have been forecasted at JPY 2,200, respectively, the same amount as the period under review. We plan to reverse the reserve for reduction entry and will continue aiming for a DPU of JPY 2,400 or more in 4 years' time by continuing both internal and external growth. Next, regarding internal growth results that are shown here, 3 properties contributed to earnings in the 42nd fiscal period. Upcoming contributions are Belltown Tambaguchi Eki-Mae Store in the 43rd period, Takeshita-dori Square in the 44th period and VIORO in the 47th. Next, in terms of external growth, LaLaport AICHI TOGO acquired in March is shown here. It contributed by about 3 months in the 42nd period and will fully contribute from the 43rd period. Lastly, regarding key financial indicators, LTV as of end of June 2025 was 46.3% on a book value basis and 35.3% on an appraisal basis. The interest-bearing debt to total assets ratio used by many J-REITs for LTV control was 40.2%, an extremely low level. Next, please refer to Page 9, where we show the overview of the financial results for the 42nd period ended June 2025. The top part of the green column in the table on the left shows operating revenue, which was JPY 11.728 billion, down by JPY 559 million period-on-period. Please see the right side of the page for the main factors in changes. Operating revenues increased JPY 179 million due to the acquisition of LaLaport AICHI TOGO, JPY 23 million due to an increase in sales length rent at Mitsui Outlet Park IRUMA and Lalaport IWATA and decreased by JPY 732 million due to the absence of the gain on the sale of Queen's Isetan Suginami-Momoi. Please return to the table on the left for NOI, which was JPY 9.044 billion, an increase of JPY 179 million. Operating income was JPY 6.295 billion, a decrease of JPY 584 million. Ordinary income was JPY 5.882 billion, and net income was JPY 5.881 billion, both decreased by JPY 619 million, respectively, due to the absence of the gain on the sale of property. Current net income per unit was JPY 2,174, but the distribution was set at JPY 2,200 by reversing the reserve for reduction entry by JPY 69 million. Please refer to Page 10 for the forecast for the period ending December 2025, the 43rd period and the period ending June 2026, the 44th period. Please refer to the green column in the table on the left, where you can see the forecast for the 43rd period. Operating revenue is expected to increase by JPY 351 million to JPY 12.080 billion. In comparison to the 42nd period results, I will add some comments following the major factors of increase or decrease on the right side. There are 2 columns of numbers, but please refer to the left one, B minus A. The full period operation of LaLaport AICHI TOGO is expected to have an impact of plus JPY 157 million. And at Mitsui Outlet Park IRUMA, due to seasonal factors, sales-linked rent is expected to decline with an impact of JPY 17 million. In terms of tenant replacement, et cetera, while Belltown Tambaguchi Eki-Mae store is expected to experience a large rent increase, downtime due to the re-tenanting of Takeshita-dori Square is expected to result in a negative net JPY 1 million impact. In addition, other income is expected to be plus JPY 160 million due to income from restoration expense revenue related to the replacement of tenants at Takeshita-dori Square, et cetera, but this is expected to be offset by an increase in repair and maintenance expenses in the leasing business. Please return to the table on the left for NOI. The NOI forecast is JPY 9.128 billion, an increase of JPY 84 million. Operating income is expected to be JPY 6.309 billion, and net income is expected to be JPY 5.808 billion. Please refer to the yellow green column in the table on the left for the forecast for the 44th period. Operating revenue is expected to decrease by JPY 396 million to JPY 11.683 billion. For comparison with the 43rd period forecast, please refer to the C minus B column on the right under Major Factors in changes. Details will be explained later, but minus JPY 352 million is expected due to the impact of downtime associated with renovation work at VIORO and plus JPY 134 million due to increased rent from Belltown Tambaguchi Eki-Mae Store and Takeshita-dori Square as a result of tenant replacement. The minus JPY 165 million under rent revenue other is expected to be offset in the form of the absence of restoration fee income from Takeshita-dori Square and a decrease in expenses. Current net income per unit is expected to be JPY 2,147 in the 43rd period and JPY 2,111 in the 44th period. In accordance with medium-term targets and initiatives, we will reverse the reserves for reduction entry and forecast DPU at JPY 2,200 for both the 43rd and 44th periods. Please refer to Page 11. Major factors affecting distribution starting from 41st period results up to the forecasted distribution for the 44th period are listed here by item. In the 42nd period, external growth through the acquisition of LaLaport AICHI TOGO was offset by the absence of gain on the sale of Queen's Isetan Suginami-Momoi, which was sold between the 40th and 41st periods, resulting in a DPU of JPY 2,200, which is the same level as the previous period. In the 43rd period, while LaLaport AICHI TOGO will be in operation for the full period and Belltown Tambaguchi Eki-Mae Store will experience internal growth, we expect an increase in interest costs associated with new borrowings and refinancing as well as downtime impact from Takeshita-dori Square, which will contribute to internal growth in the 44th period. In the 44th period, although internal growth of plus JPY 50 is expected from Takeshita-dori Square and Belltown Tambaguchi Eki-Mae Store, et cetera, external growth impact is expected to be minus JPY 18 due to fixed assets and city planning tax of LaLaport AICHI TOGO kicking in. And separately, there will also be the downtime impact of the renovation work of VIORO, which will contribute to internal growth in the 47th period. In any case, despite the temporary downtime, we will distribute JPY 2,200, the lower limit of DPU for the time being by firmly covering the cost increase due to the rise in interest rates, et cetera, with external and internal growth. From Page 13, I will explain the internal growth initiatives during the period under review. First, I'd like to report that we recently concluded a new master lease agreement for VIORO in Tenjin Fukuoka City, which will contribute to future internal growth. This initiative is summarized in the upper part of this page, where current issues and countermeasures are stated. Multiple flagship tenants of the property left due to the impact of COVID-19. In addition, due to the redevelopment of the Tenjin Big Bang surrounding area, the property's appeal had declined on a relative basis and tenant leasing had been a struggle. Under such circumstances, we took measures to improve occupancy rates such as changing master lessees, but the chance was that there was limited room for future growth. In order to address these issues, the contract type was changed to a fixed rent master lease contract that includes sales-linked rent, and we also decided to conduct a renovation, which will enable us to fully utilize the resources of JR Hakata City, the master lessee, by taking advantage of its geographical location. By having a fixed rent component that is defensive to economic trends as well as a sales-linked rent component that directly links sales increases to rental revenue, we will seek to improve NOI and rebuild the property's value. The schedule is shown in the middle of the right-hand column. Renovation work and tenant replacement will be carried out sequentially starting in January 2026 with completion of the renovation work scheduled for the fall of '27. As a result of the renovation, the NOI yield is expected to improve from the latest 12 months' 1.9% to 4.0%. For your reference, Page 14 provides an overview of Tenjin Big Bang. As shown in the overview on the upper left, Tenjin Big Bang started 10 years ago in 2015 and is approaching its climax with the completion of the One Fukuoka Building, the largest building in the area. The main economic benefits are shown in the upper right-hand column. In order to maximize the benefits of Tenjin Big Bang's economic effects and inbound demand, we have decided to enter into a new master lease agreement and go through a renewal. We intend to firmly increase the value of our property through this initiative. Next, please refer to Page 16 regarding internal growth of Takeshita-dori Square. At the time of the previous financial results briefing, I talked about realizing a 10% rent increase by replacing tenants. Details are provided here. From the 1st to 3rd floors, there will be a grand opening of a Sanrio directly managed store in winter this year, which will be a store with the largest floor area in Japan. In addition, on the basement floor, GiGO will open a store in collaboration with ASOBISYSTEM. We believe that the strong leasing support provided by Mitsui Fudosan, our sponsor, has led to a significant increase in the value of the property by attracting tenants that have stronger appeal to teens and inbound customers, who are the main targets of the Takeshita-dori area. Please refer to Page 17. This page shows the results of other internal growth initiatives in the 42nd period. We were able to realize a 6% rent increase for 1 service tenant space at TENJIN216 and an average 5% rent increase for 3 dining and service tenants at GINZA GLASSE. For Shin-Kawasaki Square, we renewed contracts for 12 spaces with dining and service tenants and 7 of the 12 lots achieved an average rent increase of 7%. As for Rakuhoku HANKYU SQUARE, although it is a traditional lease contract, we have recently decided to introduce a clause to adjust rents based on CPI and other factors every 3 years. The bottom row shows our future key initiatives, and we will continue to work on improving the value of properties whose leases are expiring as part of internal growth initiative. Please refer to Page 19. Regarding LaLaport AICHI TOGO, I explained our plans for its acquisition at the time of our previous financial results announcement. The acquisition was successfully completed on March 26th this year. As shown on Page 20, based on the master lease agreement with Mitsui Fudosan, sales-linked rent has been incurred for the portion of sales in excess of JPY 27.6 billion in fiscal 2023. We expect to earn further sales-linked rent through sales growth in the future. Lastly, please refer to Page 21 for an explanation of our financial situation. As shown in the upper left table, the total amount of loans and bonds as of the end of the 42nd period was JPY 137.7 billion. The LTV is 46.3% on a book value basis and 35.3% on an appraisal basis. The interest-bearing debt to total assets ratio, which is used by many J-REITs to calculate LTV is 40.2%, the lowest level amongst J-REITs. And we recognize that there is room for further consideration regarding the use of leverage. For your reference, at the bottom right is a simulation of the impact on DPU of applicable interest rates at the time of refinancing in light of recent interest rate fluctuations. We will continue to monitor the financial environment closely and maintain a strong financial structure while valuing good relationships with financial institutions. This is the end of my explanation of Frontier Real Estate Investment Corporation's financial results for the 42nd period ended June 2025. Thank you very much for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]