Frontier Real Estate Investment Corporation (8964) Q2 FY2026 Earnings Call Transcript & Summary

Hello, everyone. My name is Yokochi from Mitsui Fudosan Frontier REIT Management. First, I would like to express my sincere appreciation for your continued support. Today, I will explain the financial results of Frontier Real Estate Investment Corporation for the fiscal period ended December 2025, the 43rd fiscal period. Thank you for your attention. Please turn to Page 3 of the presentation materials. Although this is our constant objective, we strive to increase investor value through stable EPU growth. Specifically, we have set targets of over JPY 2,200 in EPU for the 47th period ending December 2027 and over JPY 2,400 for the 50th period ending June 2029. To achieve this, we will pursue initiatives from 4 perspectives. For external growth, in addition to leveraging the sponsor pipeline, we will also invest selectively in properties other than sponsored properties by identifying cash flow growth potential and the likelihood of achieving potential while remaining mindful of yield after depreciation and the implied capitalization rate. For internal growth, we will focus on pursuing rent upside and incorporate sales-linked rent and rent revision deliberation terms and long-term leases to achieve future internal growth. For asset replacement, we will consider selling properties where profitability decline is a concern due to aging or uncertainty in the future and strategically replace them with properties that have higher profitability. For financial strategy, while using long-term fixed interest loans as a base, we will respond flexibly and strategically, including increasing the use of long-term variable rate loans, et cetera, in accordance with the interest rate environment. We will also consider utilizing our low LTV while maintaining a healthy financial structure and further expand our lender formation. Next, please refer to Page 4. I will refer to the graph to explain the EPU growth target. It has been exactly 1 year since we announced our medium-term targets at the financial results briefing for the 41st period ended December 2024. Since then, until today's financial results briefing, we have achieved external growth through the acquisition of 4 properties totaling JPY 32.3 billion and internal growth through an increase in annual rent of JPY 250 million. As a result, the forecast EPU for the 44th period ending June 2026 is JPY 2,190, representing 2.6% growth versus the 41st period ended December 2024 or 1.7% on an annualized basis. Also, at the previous financial results briefing, we stated that we had gained visibility to reach an EPU of JPY 2,200 in the 47th fiscal period ending December 2027. And this time, we have reset the target to over JPY 2,200. Regarding the EPU target of over JPY 2,400 for the 50th period ending June 2029, although there have been environmental changes, we have left it unchanged. Next, I will explain the overview of the financial results for the 43rd period ended December 2025 and the forecasts going forward. Please turn to Page 10. First, the DPU for the 43rd period will be JPY 2,200. EPU was JPY 2,183, which was plus JPY 36 compared with the forecast. In addition, the forecast DPU for the 44th and 45th periods are JPY 2,190 and JPY 2,180, respectively. And we have announced a DPU of JPY 2,200 for both periods, which is the same level as the current period. We plan to reverse the reserve for reduction entry in each period. But through continuous external growth and internal growth, we strive for a DPU of over JPY 2,200 in the 47th period ending December 27. As for external growth, in January this year, we additionally acquired a 71.5% quasi-co-ownership interest in LaLaport Izumi. As a result, our total ownership ratio for this property has become 90%. Moreover, in December last year, we executed contracts to acquire 2 properties located on Kokusai Dori and Naha, Okinawa, M Building Naha Kokusai Dori I and M Building Naha Kokusai Dori II, and we plan to acquire them in April this year. Through the acquisition of these properties totaling JPY 21.4 billion, our asset size is expected to become 44 properties, reaching JPY 397.1 billion. Next, regarding internal growth performance in the 43rd period, Belltown Tambaguchi Eki-Mae Store and Rakuhoku Hankyu Square contributed to earnings. In the 44th period, Takeshita Dori Square is expected to contribute in the 47th period bureau. And from the 48th period onward, Shinsaibashi Square and LaLaport IWATA are each expected to contribute to earnings. Finally, regarding key financial indicators, as of the end of the 43rd period, LTV was 40% on a book value basis and 30.5% on an appraisal basis. From this period, we have changed the definition of LTV from an indicator, including leasehold and security deposits to the interest-bearing debt to total assets ratio used by many J-REITs. This concludes the financial results summary part. Next, please turn to Page 11. This is the overview of the financial results for the 43rd period ended December 2025. At the top of the column surrounded in red in the table on the left, operating revenue was JPY 12.094 billion, an increase of JPY 365 million compared with the previous period. Regarding the main factors of increase and decrease, please see the right side of the page. The main factors for operating revenue were plus JPY 157 million from full period operation of LaLaport AICHI TOGO and the sales-linked rent decrease by JPY 14 million due to seasonal factors at Mitsui Outlet Park IRUMA. In addition, other revenue increased by JPY 160 million due to restoration income associated with tenant replacement at Takeshita-dori Square, but this was offset by an increase in repair expenses in the leasing business. Returning to the table on the left, NOI was JPY 9,183 billion, an increase of JPY 139 million. Operating income was JPY 6,390 billion, an increase of JPY 94 million. Ordinary income was JPY 5.908 billion, and net income was JPY 5,907 billion, each an increase of JPY 25 million. Net income per unit was JPY 2,183, but DPU is JPY 2,200 with JPY 43 million reversed from the reserve for reduction entry. Please turn to Page 12. I will explain the forecast for the 44th period ending June 2026 and the 45th period ending December 2026. Please refer to the green column in the table on the left. First is the forecast for the 44th period. Operating revenue is expected to be JPY 12.354 billion, an increase of JPY 260 million. For comparison with the 43rd period results, please refer to the right side under major factors in changes. There are 2 columns, but please refer to column B-A on the left. The acquisition of LaLaport IZUMI and the 2 M Building Naha Kokusai Dori properties is expected to contribute by plus JPY 659 million. And the downtime impact from the renewal construction of VRO will have an impact of minus JPY 364 million. Sales line strength at Mitsui Outlet Park IRUMA is expected to increase by JPY 18 million due to seasonal factors. Regarding tenant replacement effects, including re-tenanting at Takeshita-dori Square and new contracts at Belltown Tambaguchi Eki-mae store are expected to contribute on a full period basis at plus JPY 126 million. Other revenue will decline by JPY 149 million due to the absence of restoration income received in the previous period at Takeshita-dori Square. And likewise, repair and maintenance expenses in the leasing business will also be absent. Regarding expenses, we expect minus JPY 140 million impact due to the downtime of VIORO. Returning to the table on the left, NOI is expected to be JPY 9.626 million, an increase of JPY 442 million. Operating income is expected to be JPY 6.605 billion, an increase of JPY 215 million. Net income is expected to be JPY 5.924 billion, an increase of JPY 17 million. Next, for the forecast of the 45th period, please refer to the light green column in the table on the left. Operating revenue is expected to be JPY 12,432 billion, an increase of JPY 77 million. For comparison with the 44th period forecast, please refer to the column [ C-inusB ] on the right. Full period operation of LaLaport IZUMI. The 2 M building Naha Kokusai Dori Nahakokusaiidoryi properties are expected to contribute by plus JPY 76 million. Sales-linked rent at Mitsui Outlet Park IRUMA is expected to decrease by JPY 20 million due to seasonal factors. Other revenue is expected to decrease by JPY 26 million due to the absence of restoration income received in the 44th period associated with tenant replacement. Regarding leasing business expenses, we expect an increase of JPY 12 million in repairs and maintenance costs and the absence of tenant intermediate fees, among other factors. Returning to the table on the left, NOI is expected to be JPY 9.676 billion, an increase of JPY 49 million. Operating income is expected to be JPY 6.634 billion, an increase of JPY 27 million. Net income is expected to be JPY 5,897 million, a decrease of JPY 27 million. Net income per unit is expected to be JPY 2,190 in the 44th period and JPY 2,180 in the 45th period. But in accordance with the medium-term targets and initiatives, we will reverse the reserve for a reduction entry and have set the DPU at JPY 2,200 for both the 44th and 45th periods. Please turn to Page 13. On this page, we have listed main items affecting DPU from the actual DPU of the 42nd period to the forecasted 45th period DPU. In the 43rd period, while there was a full period operation of LaLaport AICHI TOGO and internal growth at Belltown Tambaguchi Eki-mae Store. Increases Tambaguchi Eki-Mae Store, increases in interest costs due to new borrowings and refinancing as well as the downtime impact of Takishhadori Square, which will contribute to internal growth in the 44th period, DPU turned out to be the same level as the previous period at JPY 2,200. In the 44th period, although there will be external growth from the additional acquisition of LaLaport IZUMI and the new acquisition of the 2 M Building Naha Kokusai Dori properties and internal growth from Takeshita-dori Square and Belltown Tambaguchi Eki-mae Store, increases in interest costs due to new borrowings and refinancing and the downtime impact from renewal construction at VIORO, which will contribute to internal growth in the 47th period are expected. In the 45th period, although there will be full period operations of the 3 properties acquired in the 44th period and a decrease in depreciation of existing properties, continued increases in interest costs are expected. In any case, we will cover cost increases associated with rising interest rates through external growth and internal growth and ensure steady EPU growth and distribute JPY 2,200, which is the lower limit for DPU for the time being. Please turn to Page 15. We completed the acquisition on January 13 of this year of an additional 71.5% quasi-co-ownership interest in LaLaport IZUMI at an acquisition price of JPY 18.97 billion with an appraisal NOI yield of around 5.8% -- following this acquisition, our ownership ratio in the property has increased to 90%, and we continue to hold preferential negotiation rights for the remaining 10% interest. Please turn to Page 16. In December last year, we signed agreements to acquire M Building Naha Kokusai Dori 1 and II with the acquisition scheduled for April this year. Both properties face Kokusai Street, one of Okinawa's finest high streets and are in an extremely busy retail area, attracting large numbers of domestic and international tourists. The appraisal NOI yield for both properties is expected to be 4.1% at acquisition, which exceeds Frontier's average NOI yield of 3.4% for urban retail facilities. On Page 17, I will first explain our recent achievements. At Summit Store Takinogawa Momiji-Bashi, we have already concluded a new lease agreement with existing tenant, Summit, starting in September this year. The new agreement introduces a CPI-linked rent revision clause every 3 years, which was not included in the old contract. In addition, regarding LaLaport IWATA, we have concluded a basic agreement with the master lessee, Mitsui Fudosan for the period after the lease expires in July 2030. The agreement includes a 3% fixed rent increase and the addition of a rent revision consultation clause every 5 years. Next, for the properties listed in the lower section under future initiatives for achieving internal growth, we will continue to make every effort to achieve internal growth by leveraging lease revisions and expirations. Please turn to Page 18. The bar chart on the left shows the changes in rent resulting from tenant replacements and lease renewals from the 41st to the 43rd fiscal period. In the 42nd period, prior to the renovation of VIORO due to the shortening of lease period with tenants, some tenants were replaced or renewed at reduced rent. However, for all other properties, replacements and renewals were achieved with rent increases. The bar chart on the right shows the distribution of leasing contract revisions and expiration timing up until 2030. We will continue to view lease contract revisions and expirations as opportunities to raise rent. Next, please turn to Page 21, where I will explain our financial position. As shown in the table at the upper left, at the end of the 43rd fiscal period, total borrowings and others amounted to JPY 137.7 billion. The LTV was 40% on a book value basis and 30.5% on an appraisal basis, and the average funding cost was 0.72%. The lower left section presents a simulation of the impact that refinancing interest rates amid recent interest rate fluctuations would have on DPU. We will continue to closely monitor interest rate trends while maintaining solid financials. Finally, please turn to Page 22. I will explain initiatives to broaden our investor base and strengthening relationships with stakeholders, including our investors. Subject to approval at the General Meeting of Unitholders scheduled for March 26 this year, we plan to change our trade name from Frontier Real Estate Investment Corporation to Mitsui Fudosan Retail Fund Investment Corporation. This initiative is intended to make it clearer that our sponsor is Mitsui Fudosan and that we are a REIT specialized in retail facilities investment. We would appreciate the understanding of our investors. Next, we plan to change the asset management fee structure. In addition to the existing asset-linked compensation and pre-amortization operating income linked compensation, we will newly introduce a management fee linked to EPU. The graph in the lower right illustrates the image of the fee structure after the revision. While increasing the proportion of performance-linked compensation, the overall fee level is designed to remain approximately the same before and after the change. By lowering the ratio of asset-linked compensation and raising the ratio of performance-linked compensation, the objective of this revision is to better align the interest of investors with those of the asset management company. This concludes my explanation of the financial results for the 43rd fiscal period ended December 2025 of Frontier Real Estate Investment Corporation. Thank you very much for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]