Ichigo Inc. (2337) Earnings Call Transcript & Summary

Hi. This is Scott Callon. Thank you, everybody, for joining today. It's an incredible difficult time in the world, so we're grateful for your time. And we hope that you and your families and your colleagues are all very well. So let me go off of the presentation we have put on the web, our FY '20/2 until February -- FY 2020 full year corporate earnings presentation. I'll start on Page 8, which is the summary page, and we'll touch upon some key features and key outcomes from this year. We continue to have a very durable earnings model with stock earnings substantially above our fixed expenses. Stock earnings, you'll see that we've started including depreciation in our stock earnings. I'll go into more detail on this, but for a couple of years, we've increasingly focused on trying to drive as much cash earning power from the business. That shows up in -- primarily in us taking assets and putting them into the fixed asset category in order for us to get the depreciation allowance. So we are a Japanese corporation paying a Japanese corporate tax in 30%. So for every $10 of depreciation that we can generate, we'll get $3 of cash available for us to use on behalf of you, our shareholders and investors. So because of that, because we're -- and because depreciation is a noncash cost typically overwhelmingly greater than the actual economic depreciation of the asset, this is a tax shield. It's a valuable one. It's an important one. We do take a hit to EPS and ROE. We think that's fine. We'd probably have to figure out a way with you and with the investors and shareholders going forward and kind of understanding that this is a choice we've made because the implication is that our reported earnings, which have always -- our economic earnings have always been below our accounting earnings, will continue to -- will have substantial higher economic earning power and cash earnings and will be shown in our GAAP financials. Strong flow earnings in the SRE, the Sustainable Real Estate segment. We did a buyback this last -- past year, average price of JPY 424. The stock closed at JPY 257 today. So as you can imagine, we think the stock is incredibly cheap. We're maintaining our progressive dividend policy. So we are maintaining our JPY 7 dividend despite the COVID-19 impact. The other thing that we did that's important is we did a write-down of our assets. We looked at every single asset on the balance sheet and wrote down those ones that have a significant COVID-19 impact, which have affected, for all intents and purposes, hotels and retail. So we took an extraordinary loss of JPY 8 billion. The goal is to maintain balance sheet integrity and lower our future balance sheet risk, and we think we've done so. Turning to Page 9. We would have had a record -- well, we did generate a record operating profit and recurring profit. This is a fiscal year that ended in February. So COVID really kind of comes into play in February. So it feels like we're talking about a different world because it is [ all along ] with pre-COVID-19. But we did generate record operating profit and recurring profit. We took the extraordinary loss on the COVID-19 write-down that I described. As a result, our net income came in at half of where we expected it to be and ROE on that basis of 8.2%. It would have been 16.3% if not for the write-down. And to be clear, it's noncash write-down we wanted to have in the balance sheet. Not the entirety of the balance sheet is marked well below economic value. Every single asset, we believe, should be marked at that level, and so that's what we did. We continue to have a very, very substantial unrealized gains in the balance sheet. And that's the whole goal and purpose, to have something that is truly, deeply trustworthy. Turning to Page 9 (sic) [ Page 10 ]. You can see what happened in the segments. OP in Asset Management is up 15% year-on-year. Sustainable Real Estate was up 6%. Clean Energy was down 7%. So Asset Management came in well above. You can see relative to our full year forecast, we came in plus 39%. That's primarily because we were active sellers of hotels in our hotel REIT over the last year. We thought there was a serious mispricing, not necessarily -- this is pre COVID-19, so not necessarily hotel assets of -- we had a very, very cheap hotel REIT share price that we thought substantially underplayed the actual value of the assets. So we were selling assets last year. Because we have a 15% carry in the hotel REIT on asset sales above book value, that was -- it was a significant generator of value for us in the past year. Sustainable Real Estate came in just pretty much bang on, and Clean Energy came in down 7% relative to the forecast. If you remember, it was not just poor weather last year, but there were 2 absolutely massive typhoons that were a negative impact on production during the last year. Let me turn to some of the key highlights of the business model, Page 12. We are a hybrid stock and flow earnings model. Let me apologize. We have a mistake on this page. It should say JPY million instead of JPY billion. They're a bunch of kind of relatively small numbers in this. So we normally just show billions, but this time we decided to show millions so you can see the smaller numbers. You can see how the depreciation expense has grown over time. That's the white box. As you know, this year, the year we're in right now, so FY '21/2, we will have depreciation expense up another 74%, so JPY 4.36 billion. Again, we're trying to drive as much cash as possible out of the business. We really do like the tax shield that comes from depreciation. Page 13 shows the embedded forward earnings. In fact, there's an earnings bank that we have. Again, these are appraisal value-based unrealized gains. You'll see on the next page we absolutely crush these numbers we have. We generate realized gains that are massively above what third-party appraisers say is there. You'd see in the footnote we did, as I said earlier, a COVID-19 write-down of our assets. Those assets, our appraisers -- third-party appraisers, believe it was JPY 3 billion of unrealized gains in those assets. We're treating them as 0 for the purposes of this disclosure. In other words, we're showing you something conservative which we always strive to be. Page 14 shows how -- the difference between what the appraisal value implied gains are going to be and the actual gains we generate through our value-add activities and our value-add sales. So on the past year, we generated gains 2.8x of what the appraisal value would imply. Again, the appraisal value is not on the balance sheet. So this is a way of saying that we, at this point, manifest good trading below NAV, probably something like 25% to 30% below NAV for a company that we think is pretty productive. And this speaks to that fact. Page 15 shows our focus on cash generation. Our economic operating cash flow exceeds our net income and exceeds it in a very big way. The write-down was a noncash write-down. So that's another reason why this year the economic operating cash flow was 3.6x our net income. Cash is king. Cash is real. We are focused on driving as much cash as possible through our business for our shareholders. 16 shows you where we are in terms of our financial position. Continuing to have very, very long-term debt, 10 years. We continue to have very cheap financing costs, all-in, 91 basis points came in again over the last year. I'm going to turn to some key elements of what's happened in the various segments now. As you see on Page 18, we -- it was a very, very strong sellers' market. We generated a gross profit margin on our asset sales of 28%. That's up from fiscal year '19. Ichigo Owners continues to be very active. It was 45% of our acquisition. You can see it's only 15% of its sales. Just to be clear, Ichigo Owners only does Central Tokyo brand-new, extraordinarily well-located residential. So it's very defensive. So we're happy with that. It's a higher turnover business. The average hold is less than a year. We said our sales are only 15% during the fiscal year. We have announced actually a transaction that we disclosed that has another JPY 13 billion in it. So in fact, Owners [ instead tips ] a little bit more in terms of its acquisitions than its going to -- than its sales based on contract basis. If you take a look at net acquisitions and sales by assets, you can see we were active sellers also of hotels off of our balance sheet. And we were net buyers of residential and logistics and relatively flat office and retail. That reflected a view on hotels. We did not predict COVID-19. We just understand it to be the most economically sensitive asset class. We have 23% of our assets in hotels right now. We have managed that number down from 30% to about 23%. We'll do some acquisitions this year, meaning we're bringing online some brand-new -- 2 brand-new assets in our boutique or lifestyle hotel business, THE KNOT in Hiroshima and in Sendai -- I'm sorry, in Sapporo up in Hokkaido. So we'll have about 1/4 of our assets in hotels. But the issue was and the reason why we've been selling them is because we thought market pricing was above what the risk was. This is all pre-COVID. And so those are proving to be pretty good sales. Page 19 shows you our 3 listed vehicles: 2 REITs and a YieldCo. In the past year we sold, in terms of the way we're operating and support each of our office REIT, we sold high-quality office asset, 2 of it, by the way. And you've heard me say this before: we do not tie our REIT to us and we don't tie ourselves to a REIT. So they were a competitor in the process. We're happy to sell assets to our REITs at a slight discount because they get the ongoing asset management fees so they have a desire to buy from us. But these are going in at the right prices for shareholders, both our shareholders and the REIT shareholders. The other thing that we've done quite a bit of, we continue to do value-add activity across the entire firm, including our REITs. We've rolled out a shared office product where -- called the Ichigo Lounge that has been generating an increase in rents of 30% to 60% in the locations we've done that. So that's been good. This is not a WeWork model. This is a, "Okay. All the tenants in the building and only the tenants in the building can use the shared lounge." But if you then take the rent uplift on that, it's 30% to 60% on the space. So it's been very, very productive, very popular. And we expect to continue to roll that up. Ichigo Hotel, I told you, was an asset seller over the past year. We sold a hotel in Kyoto. We sold a hotel in Okinawa. It bought 1 hotel in Kumamoto from us in a prime location. We also have tried to support the REIT by taking over a hotel in Tokyo with our proprietary hotel operator, Hakata Hotels. We think we can drive more value for the REIT by managing it as an operator. Ichigo Green, the primary thing we did is we dealt with the typhoons from the last year. I told you there were 2 absolutely massive ones plus a host of smaller ones. We got through the year with absolutely no issues in the Solar YieldCo. Page 19 (sic) [ Page 20 ] shows what's happening in the Clean Energy business. It continues to grow its production on a compounded basis, CAGR of about 20% per annum. Page 21 -- wait a minute. I've got a -- it looks like I've got a page number problem. It jumps from -- I think we have a mistake in the -- another mistake we just found in the presentation. On my -- on what I'm looking at, it says Page 19 on Scaling Rapidly In-Development Plants. So I'm at Page 21 on New Plants Driving Growth, so I'll start with that. On the New Plants Driving Growth page. And you can see that we brought online 5 new plants during the past year. And the plants that we brought on this year, primarily, as you can see at the end of the year where February fiscal year ends, so we brought on 3 plants in January and February. So they will drive returns going forward. Turning to next page is the launch of Ichigo J.League Shareholder Program. We did that in the last year. It's been very, very successful. We are a J.League sponsor. Of course, corona, COVID-19 has meant that the J.League is doing nothing right now, which is really, really sad. So we haven't started a program of giving tickets to shareholders yet this year, but we will do so when J.League is up and running again. Next page, share buybacks. Of course, the purpose is to provide for our shareholders. So we did -- we bought back 1.4% of the shares outstanding. For the third year in a row, we've been buying our shares we think the cheapest. Page -- the following page shows, and I'm not going to use numbers because I'm not sure what numbers are in front of you, it's possible I have an old version of the presentation in front of me, and my apologies to you for that, shows the progressive dividend. We did this year -- for this year about as fiscal year '21/2, we have made our dividend pending. We fully expect to pay a dividend. The reason why we've put it into the pending is 2 things. One, it's very hard to know what's going to happen with COVID-19. We think we should probably understand that better. Hopefully, the world doesn't come to another collapse worse than what it is right now. And two, very fundamentally, we have a progressive dividend policy. It's our intent to keep that. Something -- but this is big. So one of the things we needed to strike the right balance on is, one, kind of being consistent; and two, not being dumb. And so if circumstances change, it's changing appropriately. So we do want to have a conversation with our shareholders about, okay, we've got a progressive dividend policy. We think the shares are very, very cheap. We're being prudent in trying to manage and maximize cash in case we end up in the zombie apocalypse. But one possibility is that we develop more money to buybacks and the dividend. We want to have a conversation with our shareholders about that. So anyway, we do have a progressive dividend policy. That has not changed. But that's the background for us leaving the dividend undetermined at this point. Page 25 shows some key feature -- begins the conversation of some of the key features of what we've done to try to make the company durable or adaptive in its growth strategy. So again, I'm sorry, instead of page number, I'm on page High-Integrity Balance Sheet. So what we did is we wrote down hotels and retail assets that we bought relatively recently, pretty much in the last year. And what the implication of that is they're relatively new, which means prices are relatively high. But more importantly, we haven't had time to do value-add on them. If you look at the total write-down, it's only 4% of the group of assets we reclassified to be fixed assets in order to take the depreciation allowance. And so that sounds relatively small. And that would be right. We have these massive unrealized gains because we bought assets, we added value to them. They are trading substantially above where they're being -- in other words, their value is substantially above where it's being marked on the balance sheet. The exception is a group of assets that we bought in the last year. And so those assets are wrote down. So the number of assets wrote down amounted to JPY 45 billion. And so we took an JPY 8 billion write-down. So what I'm telling you is the assets we bought effective last year, we've written down by 17%. That is below where the appraisers would put the assets, as I said earlier. There are scenarios out there where the world ends, where a nearly 20% write-down is not enough. If the world doesn't end, that will prove to be an incredibly, incredibly conservative mark and we'll get the money back because, again, this is a turnover business. But that's what we've done. We do not want to create any doubt. We think trust is something you need to earn, and you trust by -- you build trust by deserving trust, and having a balance sheet which is high-integrity is incredibly important. Next page speaks to what we've done in terms of the cash flow maximization. This is the point that I touched on earlier. We have moved assets over time into the fixed asset category. That's to get a depreciation allowance. It does change what -- how your profits show up. If you sell a fixed asset, you don't show revenues. You don't have to show operating profit. You show an extraordinary gain. And in return, you get the actual cash. So this is a conversation we're going to have to have with all of you, we're going to have to have with shareholders and investors going forward. But we have chosen to minimize accounting earnings in order to maximize economic earnings. And the fix that -- the changes in the way we're classifying fixed assets reflect that. And this has happened over time with a big move this year. Quite honestly, we wanted to move faster on this. And the nature of auditors where they say, "Well, why don't we move slowly and surely?" And so it's like, "Okay. But we would like to use this tax shield sooner rather than later." The only upside to COVID-19 is because the situation was so obvious a change in circumstances that they utterly seem to think that our desire to take more of the tax shield would allow them to move quicker because of COVID-19. So we're doing a bigger move this year. We are, in fact, done. We've moved the assets. And we need to move the bigger assets, and the tax shield is, we think, an appropriate size. Turning to the next page, which I, on my page -- on my presentation, it's Page 28. We are conservative in our financing. We have done a significant work over time to lower our borrowing costs. We've financed it less 1% to lengthen our loan maturities, which were averaged 10 years, to increase the amount of uncollateralized loans we have. It's a process we began really just 2 years ago. Now 1/4 of our loans are uncollateralized. We have diversified our loan maturities so we have very little to do in the near-term and it's mostly long term. And it's worth looking at how we've changed over time. And I joined the firm in 2008 as part of a rescue because we were teetering on the brink, unfortunately. And there were some flaws in the way -- in the business model. There were some flaws in the way we ran ourselves from a financial or financing perspective. And you can see on Page 29 this huge shift. So -- and that's why things are totally different. In 2008, 2009, we were the distressed seller. We will not be today. The other potential silver lining, and it's very difficult to talk about silver linings because COVID-19 is so terrible for all of us all over the world, is that if there are distressed sellers, we are fully capable of being a counterparty of their assets if we want to buy. So our stock earnings and fixed expenses coverage ratio is up 3.1x. Our loan maturity is 3.7x. The number of 7 -- less than 3-year loans is down 79%. The average interest cost that we have is down 59%. That matters because if NOI comes in because the pressure on rents will lower your financing, and this is overall in my -- this is in majority fixed. The level of your financing cost is really important. So this is -- this is an environment that is, I think, unfortunately, appears to be heading towards a very -- a far more worse outcome globally than the GFC. And we have built ourselves a battleship to be ready for it. Let me speak to this year's full year forecast. On my page, it's Page 31. Given the COVID-19 uncertainty, we're using a range. We've never done a range before. Most Japanese companies are putting out no forecast. Our business is forecastable. It's forecastable and we have a huge range because the bottom of the range is truly utterly, utterly terrible. I didn't think I'd ever have a forecast on this business of net income as low as JPY 2 billion. And that's the world we're in, and I apologize to you for being in that situation. The upper end of the forecast of JPY 8 billion in net income we think is totally doable. And we could blow the doors off of this if we end up with something with COVID-19 kind of settling itself out relatively soon. But that's where we are. And again, I apologize to all of you. That's not where we want to be, but this is where we are. Page 32 shows you the change. And what we see in the 2 elements of the bottom of the range and the top of the range, you can see the growth in noncash depreciation expenses and the stock earnings. The big difference between the bottom of the range and the top of the range is capital gains on Sustainable Real Estate sales. So the market is relatively more open. We'll make money. We're not distressed at all. We have good assets. And the issue that happens with a situation like this is when you have a huge part of uncertainty, the bid-offer spread, it goes really, really wide. So yes, we can sell all of our assets today if we went to down 20%. But why would we do that? Again, if we end up in a more normalized world in 6 months, 12 months, 18 months, even 24 months, those will be transactions that we would not want to have done. So the bid-offer spread isn't blown out so much and particularly in hotel and retail. And look, we have 1/4 of the business is in hotels. That's feeling really, really awful right now because there's absolutely no earnings there. And it's the hotel operators who are tenants who are in real trouble. And trying to figure out how to help them through this is obviously super important. The office assets we have, the retail -- the residential assets we have -- we have retail, and by the way, retail is in a very different place than hotels. I mean hotels have just stopped. Travel has just stopped. Retail, we've got a mix of supermarkets and convenience stores and drug stores where they're having the best kind of sales activity of their corporate histories. And we have a bunch of Amazon-proof kind of restaurants and services that are in really, really, really difficult circumstances, not nearly as bad as hotels but pretty, pretty bad. By the way, Japan is in kind of -- mostly not locked down. Tokyo is in a kind of soft lockdown. The restaurants are still open. So just to be clear, retail is having a very, very different experience right now and hotels are just terrible. But office and logistics and residential is all doing fine. So if we do transactions this year, those markets -- and we're open in terms of -- the bid-offer spread is not blown out. If we do transactions this year, it will likely be in the asset category. But we're also willing to just hunker down. The other element, of course, is that the share -- I think our shares are incredibly cheap. We did not announce a buyback today. We spent a ton of time trying to think through whether we should. We decided to be prudent. Clearly, one possibility is we do asset sales to fund buybacks. So that is something that we'll try to be thoughtful about. Page 33 shows the forecast segment details. Big drop in Asset Management year-on-year. Again, that's primarily coming out of the hotel REIT. We had a bunch of performance fees. So that carry -- that came out of the hotel REIT last year. That goes away. We also have performance fees on the hotel linked to NOI, and the NOI is kind of unprecedentedly low because of the collapse in hotel activity. Sustainable Real Estate also will be a big drop. That's mostly on we don't expect to do much in terms of capital gains. NOI coming off of rental income is actually relatively secure. Clean Energy is going to be up about 50% year-on-year. It doesn't really have a COVID-19 nexus. So those are my prepared remarks. I'm happy to take any and all questions or comments from anybody. And again, thank you so much for joining us today.

[Operator Instructions] So we are open mic night. [Operator Instructions]

Hello, can you hear me?

Yes, Greg. You're on. Thank you so much.

Two questions, Scott, if I may. One, could you give us a sense maybe of the rough location of the assets where you did the COVID-related write-down? And then second, vis-à-vis your guidance, obviously the part of the drop year-over-year for the Sustainable Real Estate would come from the change in depreciation. Could you give us a sense of how much that's contributing for the drop in cosmetic OP, so to speak?

So Greg, the write-down location of the assets, Osaka, Kyoto, Fukuoka. Did I address your question?

Yes.

And I'm so sorry. I admit I was sitting it out. I am so sorry I failed you. Tell me again the second question?

Yes. What portion of the lower operating income forecast for the Sustainable Real Estate business comes from the change in depreciation method moving to fixed assets?

Yes. So that's going to be -- let's try to find where it would be in the presentation. It's the final page where I show the breakdown on the segments, Page 32. You can see that there's an increase in the depreciation of JPY 1.8 billion. Most of that's going to be coming out of SRE. And so -- and you can just weigh that into the OP -- into the drop in the OP for the Sustainable Real Estate business. So about kind of, call it, JPY 1.5 billion or something like that. Post tax, it's going to be kind of about JPY 1 billion is a drop that's linked to -- so if you see at the net income level, we've got JPY 2 billion to JPY 8 billion. About -- we've got JPY 1.8 billion. Take 30% of it. So the actual -- I'm sorry, doing the math on the fly in front of you, the actual decrease on a net income basis is about JPY 0.6 billion. Did I that answer your question?

Yes. And maybe one quick follow-up, if I may. You alluded to, obviously, the uncertainty regarding the hotel situation. From where you guys are sitting, and I guess it's impossible to forecast the length, but do you see potentially credit issues not at Ichigo but with other operators, which means that the bid-offer spread that you referred to for the hotel market may stay wide for a long period of time as this kind of workout type situation or this negotiation on -- between operators and landlords kind of gets processed, if you will?

Yes. Look, this is really, really ugly. We are so clearly a stronger balance sheet and a stronger earner than most of -- than most people out there full stop, most real estate firms, most people involved in the hotel business. So if this continues for a while, it's going to be a real shakeup. The -- and it's going to be ugly for us in the hotel space, right, because we're earning nothing in this, 1/4 of our assets which are hotels right now. And again, the only -- I'm talking about -- the only thing I want to talk about is silver linings. But in reality, the longer this continues, the tougher it's going to be on us. We'll get through it because it's only 1/4 of our assets. But it probably implies a withdrawal of kind of capacity from the market. And meaning, kind of what doesn't look like the likely scenario is that hotels change operators. I mean there's going to be a certain amount of that. But kind of the problem is there's such a shortage of personnel. There is still a labor shortage in Japan that likely you're still going to have hotel shutdown and never reopen again. And that will actually be helpful from a supply demand perspective because there's an oversupply of our sales right now. And it's pre-COVID-19. So we -- it all depends on this. Is this a 3 months issue, a 6 months issue, 9-months issue? And I think we all understand, this is not linear. So 9 months is more than 3x worse. It's probably 10x to 15x worse. We're going to have people falling over 4 to 6 months into it. And then it's a question as to whether or not the Japanese government wants to do something to stop this from happening. But the challenge that hotels have is they're typically not too big to fail. I mean there are lots of them and they're small. So it's not like it should be, "Rescue 1 of the 2 national airlines." It's like, "Okay. Do we need to and want to actually try to rescue 5,000 hotels or 10,000 hotels?" So it's ugly. It's really ugly. We expect to get no variable rents this year. We'll see if we're at risk on the fixed rents. We can get through that. But it's really ugly. No one has experienced something like this. And for us, this is what has gone wrong from a risk management perspective. We have hotels that run -- have been running at greater than 90% occupancy. We thought we were prudent in not risk testing them at 70% or 60% or you're doing 50%. It was not in our risk scenario that hotels are going to be at 15%, 1-5. So this is just -- it's as ugly as it gets, and we're just going to have to ride it up. We have [ Richard ] now?

Just a question regarding discussions with tenants. So you hear a lot of market talk about like tenants that will get like rent holidays or other discussions on either lowering rents. Yes. Could you give me some color on discussions that are happening, things that you're seeing and hearing from either your REITs or yourself?

Yes. Okay. So why don't -- if you want, I have -- it's on my Page 50, Ichigo-Owned Real Estate Portfolio, shows the breakdown of our assets. So let me go through it by category. Office is the biggest at 26%. There is effectively no distress in office. We have like literally maybe 1 or 2 tenants who are in the travel agency business and like that, but office is doing just fine. No issues at all. Retail is 29%. That's bigger. That's a mixed bag. It's got -- there are some retail tenants who are clearly suffering badly from this. And so there's kind of discussions with some of them. But yes, retail is in pretty good shape. Hotels, 23%. Every single-tenant has got a problem. All of them. We're talking all of them. So that's -- we're going to see the biggest potential drop in NOI. Order of magnitude, we're talking about -- we're going to be down kind of JPY 1 billion to $10 million, this sort of thing year-on-year. These are not going to be huge shifts, we don't think. But yes, I mean, that's where it's going to come from, overall from hotels, to some extent, a little bit probably from retail. Residential, 16%, no issues at all. Logistics, ground lease and other are no issues at all. So it's really the hotel element of the portfolio which is in serious distress. The tenants are, not us, but the tenants are. And we're taking tenant credit risk. So we actually got how to get through this together. Did that answer your question?

Yes, yes. So basically, in hotels, it's about like JPY 1 billion inventory income at risk. Is it correct? Or...

Yes. I mean, that's what we target. We put it into the forecast already. So that's why -- that's the reason why the forecast is -- one reason why the forecast is down year-on-year. But the biggest swing factor, again, to the point, we would have done JPY 15 billion of net income this year. We did before the write-down. So swing from JPY 15 billion down to a range of JPY 2 billion to JPY 8 billion is overwhelmingly about -- we don't think we're going to be doing a lot of asset sales this year. We're going to wait for markets to clear unless we see opportunities to sell assets at relatively advantaged prices relative to where our shares are trading. And then you'll see us being more aggressive on asset selling right now. But we haven't actually kind of modeled that into our forecast right now. We've used also very conservative numbers on the asset sales themselves. We're assuming in the low scenario only a 10% gross margin. We've been doing nearly 30%. So the assumptions are very, very conservative and the numbers are low. So when you use very conservative numbers, you have low numbers. But there's not a lot of NOI risk built into our current scenario. Now we are assuming, and so this is important, that we begin to get some sort of recovery from COVID-19 in the fall. And so this ends up being not something that begins recovery in the fall but stretches out into kind of the current bouncing around current levels a year from now, then we're going to have to revisit these numbers. Having said that, okay, we've got lots of moving kind of parts going on, an upside coming and all that sort of things. And we feel very comfortable that we'll be within this range. And if we're out of the range, it's because we're through the top of it, not through the bottom.

And then a follow-up. So what happens if an operator of a hotel or a few hotels in the REIT -- in the Ichigo Hotel REIT sale? Yes. So will it be tough to find new tenants? But yes, so how would that work with the REIT itself? And would they be able to sell assets back to Ichigo Corp or Holdings?

Well, no. I mean, at the right price, we'll buy assets. But again, we're not tied to each other. Because Ichigo Hotel REIT did these asset sales last year, it's actually sitting on a bunch of cash. So it's actually very well-positioned for a downturn. It did do a hotel purchase, as I indicated earlier, but it's got a very strong balance sheet. That's one thought. The second is that the key issue is what do the banks do? And the SSA effectively created the iron law of you do not allow REITs to fail anymore after the problem they had in October of 2008 when a REIT called New City Residence went down. But the banks need to continue providing liquidity, and that's unchanged. So the banks are all going to refinance. And so there's going to be a period of time when you have a lack of NOI if we end up in the place which is what you're describing, where there's a significant hit to the hotel REIT's dividend. And again, if this last for years, then you can end up burning through cash and all that sort of thing. But it's, again, it's very advantaged relative to other hotel REITs and relative to other operators because it's sold at good prices and was cautious about buying, given what we thought was a gap between value with an oversupply of hotels. There's no victory lap to be run here, but we've tried to run our assets really, really well for our shareholders. That includes our REIT shareholders. We saw a lot of REITs are very kind of passive and/or they don't want to sell assets because they want to try to maximize their AIM and all that sort of thing. We were active sellers in the last year, and that's proven to be a strong choice for the REIT shareholders.

Okay. And then the cash you currently have in the hotel REIT, is there no need to pay that out? So you can keep it and you can use it as a dry powder or say, price group like 80% or so, you might be buying some...

Yes.

Okay. So how much is that?

And this is the point, Richard, though, we did pay out the profits. So the REIT shareholders got these big dividends and -- but the principal stayed in the REIT. And so we're sitting on cash. And not a small amount of cash. At the top of my head because I don't operate a REIT, but something in the order of magnitude of like maybe 20% cash. I mean it's like sitting off this cash. It's really, as I told you, it's really well positioned for this. So we'll see what happens. We're well positioned for it. I mean we're going into this market environment as Ichigo Inc. with a bunch of cash. Our office REIT, our hotel REIT are all sitting on cash, relatively low leverage. We're -- we'll see what happens. We're fully capable of buying from distressed sellers across the entire Ichigo complex.

Okay. And then will you have a preference for buying distressed assets over buying back shares in the REIT, the recent sales?

At the REIT? Yes. I mean I don't run the REITs. At Ichigo, we are independent with totally independent boards. But they're all part of the Ichigo value system. We work really, really hard for our shareholders. Yes. I mean, I suspect -- I mean, I don't know. I honestly don't know. But I mean we're just thinking out loud. You can do both, and it probably makes sense to do both, meaning if the shares are really cheap, you buy back some shares. And if you -- because the shares are cheap. And if assets are available, you buy assets too. As you know, at this company, we've done both over the years. Every year, we've been -- we're so cash productive where we've been both buying back our shares and investing for growth, so yes. Anyway, but it's not going to be decided by me. I mean just to be very, very clear. The REITs have independent directors and management teams, and they're going to make their own call on it. But I think you can count on them to do some -- make some smart choices.

Yes, yes. So very good. The REITs are taking such a big discount to NAV now, both options. But there will be a lot of distressed selling, I guess, in the next...

It's very hard for the hotel REITs to buy hotel assets right now, though, because it's like -- look, I mean, who knows what's going to happen. The office REIT is in a very good situation. And we're paying the rent, it's all signed. The hotel REIT is, yes, it's facing deep uncertainty as is every hotel owner in the world. So that's where we are right now. Go ahead. Okay. Good. Thank you. We also have a question from [ Michael ]. [ Michael ] are you there?

Yes. Yes, can you hear me?

We are. We're getting like a buzz.

With regards to what [ Richard ] just alluded to and your comments with regarding to buying distressed assets, it seems that we're talking about nonlisted assets. But these stock prices have shifted accordingly. And I was wondering if you, this time around, might want to look at all the listed opportunities.

Yes. That also is something that could very well present itself as an opportunity. It's very unusual for Japanese companies to sell themselves unless they're in distress. And so the truth of the matter is we are heading to a period potentially of very severe distress. It depends on how long this lasts. And so there could very well be. And just to be clear, I don't ever comment yes or no because if I comment -- if I don't comment or I do comment, it's like they're looking at something, they're not looking at something. So I kind of go into no comment mode, but -- anything related to a public situation. But yes, I mean, so both are interested. It would require for something to have -- and to be very clear, we don't have real appetite for adding the hotels right now. Why would we do that? It's just got way too much uncertainty. So you're not likely to see us kind of signing up for more hotel exposure at this point. But with businesses, with ongoing better durability, meaning businesses with the wrong balance sheet but the right earnings structure, we'd be happy to work on assets that are more durable. We'd be happy -- office, residential, logistics, the right kind of retail. Retail is not nearly as over kind of overcrowded in Japan like it is in the U.S. than to some -- which is just kind of a debt zone. We have no interest in competing with Amazon. So when we are involved in retail, it tends to be services and restaurant-like. So that's, of course, the issue because those are really, really impacted right now by COVID-19 also. But to your point, there could very well be public situations that come available. And we, of course, would be interested and would likely be involved. And then we'll -- at the end of the day, we'll see if we end up being the best partner at the best price. We prefer to be the best partner rather than the best price for obvious reasons. We want to be a disciplined buyer and we will be. I think we have another question or comment. [ Ben ] are you there?

Yes, I'm here. Can you hear me?

Yes, yes. Thank you.

Good. And this sort of maybe just goes back to the prior question. But if you could maybe talk about the key things that you guys are talking about in the Board room in terms of doing that buyback or allocating capital and exactly what the things you are looking for? I know you don't try to time the market, but the key metrics or the key things you think about that there. And if there's any links to your lessons learned in terms of distressed assets in the 2008 time period, being on the opposite side, that would be helpful. And then second question would be the ability to repurpose assets. I mean, I guess, hotel would be the first thought. But -- and I doubt this will happen so much in terms of changes in Japan, but certainly globally, how people work going forward is really a question in how central urban assets are valued and placed and how you might think of opportunities here or any changes to strategy on the back of that.

Good. Okay. Thank you. Yes. I mean, one of the lessons from -- so to your first question about kind of what kind of discussions and how were you thinking about capital allocation, lessons learned -- I mean, one the lessons learned, [ Ben ], was that the asymmetric returns to having cash available when things really hit the wall are massive. And so having cash available is not merely a, "Let's be protected." But it's also if stuff really goes pear-shaped, then you can be the buyer. And we, unfortunately, were in the opposite case. We literally sold the assets in 2008 and 2009 because we were distressed. That were worth kind of 50% more 18 months later and probably literally 5x more, that would be a little high, 2x to 4x more 5 years later. So that's one lesson. Look, I think you can be -- I mean I'm hopeful we think very similarly on this. I think you can be comfortable that we do try to be thoughtful about what's the best way to deploy capital. We don't have any problem with shrinking the business. We're selling assets. And so we don't expect to be buyers in this market except that the stock is cheap, and therefore, the ability to monetize some of our assets and buy back the stock, we think, could be very attractive. Did I address your question? I mean it's a broad one. It's an important one. So there may be some threads that I missed on it. Anything else on that topic?

No. I think that's okay. I mean if there's any specific things that -- yes, I don't know how to gauge that in terms of you clearly chose not to do it today. I would probably think that's, given the level of uncertainty, a reasonable choice. It's sort of a question of -- and I faced it in my own job, is when you do start making those decisions and how you decide to make those decisions.

Yes. And I -- look, I don't mean to do too much ducking and covering. I mean the problem with buyback conversations is you end up being really vague because it's so clearly potentially immaterial that it's hard to give kind of that much more guidance. But clearly, progress on asset sales will be a positive driver of, "Hey, we should be buying back our stock." So that's something we'll be looking at. And I know that we can. I mean it is part of our publicly announced capital policy to be flexible and hopefully smart in doing buybacks on an ongoing basis. So we -- that is unchanged. And I think the issue is that when we look at almost every scenario, we could have done a buyback today. But if you go into the true Grim Reaper scenario, then it's like, "Ah, you may have regretted doing that buyback." And so we're a management team that survives the GFC. We're going to survive this. We're going to -- our commitment with you is we will survive everything. And so when you went into the really, really extreme scenarios, it's like, "Yes, we probably don't really want to go out there." So anyway, that's where we are. I hope that's okay. And then to your question on repurposing assets in central market -- central or urban assets and that sort of thing, I mean -- by the way, we had a Japanese call a few hours ago. And one of the questions that came directly out as well is, "Are you sure, if for example, your office assets are okay? Isn't there going to be decreased office demand?" And I answered that. And so just kind of to step into that element of it, it was like, "Hey, everyone understands that hotel is under stress and certain kinds of retailer too, clearly. But what about your office assets?" And the answer was actually our office assets are very well positioned. One, because they're low-cost. I mean people are making -- when you head into a very, very tough -- we're everyday low price. When you head into a tough operating environment, people go to our assets. Our Central Tokyo assets, which are really well-located and nice and small floor plate. But they're well-located and nice, have rents of under JPY 20,000 [ years ago ]. So far, that's the Japanese rent floor size, but anyway, versus kind of [ bottoming ], et cetera, these big assets where they're going at JPY 40,000 or JPY 50,000 or JPY 60,000. So we have very, very, very good price for value. And two, people are thinking about do they really want to have these big floor plates and maybe we should get smaller and maybe we should do more work from home. And all those things makes sense and that implies going to smaller floor plates. And that's what we have. So it's not at all clear that the market direction is moving away from us. And we'll all find it together. But there is both the downside scenario. And to be clear, what I'm not seeing is also an upside scenario. In terms of more generally asset repurposing, one of the things is -- part of the reason why I mentioned, I think, hotels go away as opposed to hotels stay. I mentioned the labor issue. It actually is relatively hard to do repurposing in Japan. I mean, we run all those numbers all the time. If you design to be a hotel, you need to be in such a way. I mean it's much easier to turn a hotel into kind of service apartment sort of thing, but there are lots of rules and regulations about what you're allowed to do with a building, what the building needs to be -- how it needs to be built. And so when we run the kind of the conversion analyses, it's strictly hard for us to make the math work. Now other guys have made the math work. We suspect they're willing to take lower returns on what they do than we are. Anyway, this is also a good question and a broad one. I'm not sure I hit everything on it. Is there anything I missed?

No. Well, clearly everything is in a great degree of flux right now. So I think that's about as well as it can be answered. So thank you, as always, for your time.

Understood. No, thank you. We don't have any questions right now. And we're running into an hour, but happy to stay longer. [Operator Instructions] Okay. [ Richard ], go ahead.

I am -- just a quick question regarding like buying distressed assets. So I guess, yes, you need financing for that. So have you talked with banks already, whether they are open to financing? So if you find something which is trading at like 80% discount to appraise a value like a year ago, would they be happy to fund it? Or do you -- yes?

Look, no one wants to lend against hotels. So yes. So that's another reason why. And we don't want to put equity in hotels. Debt providers don't want to put debt in hotels. So if it's -- the interesting question is how you get hotel transactions done. They're going to have to come at really big discounts. And yes, it's as simple as that. For our other assets, the markets are open. You should be aware though, that the banks are being overwhelmed with demand for financing. So Japan is more like Europe but not the U.S. Japan is significant indirect bank-led finance. The bankers are all working and trying to -- in Tokyo, they're trying to work from home. And the demand for, "Hey, we need emergency funding now out of the fivefold or tenfold or twentyfold or fiftyfold." It's really, really hard for them. So this comes into play with like, "Hey, we want to do a kind of a discretionary transaction. We think it's a really good asset. We'd like to buy it." The banks are like, "Get to the back of the line," unless it's a distressed seller that they have exposure to and then like, "Please come to the front of the line. We want to help get this thing done because we want to get rid of this thing." So that's the bank situation right now. I'm sure it's true everywhere in the world. I mean, look, the U.S. has got such a significant bond market that it's going to be -- it's the bond bankers who are falling over probably. But commercial bankers in Europe and Japan are really struggling with all these guys coming in who are distressed. So yes, I mean, the financing is open. The truth of the matter is it probably has been very good for banks. So I'm not talking about our company at this point, I'm talking about the banks, because they have an always -- they have these massive deposit bases and no ability to lend. And now suddenly, it's like they've gone to heaven. Everybody's coming to them. They will lend. They're getting pricing power, but they are currently just absolutely falling over trying to process the transactions. Okay. Thank you. Anything else? So we're going to bring it to a close. To end where I started on the call, this is an enormously difficult time in the world. We hope you and your families and friends and colleagues can all take care and all be safe. Let's shelter in place. Thank you, everybody. It's an honor and privilege to work for you. Have a good day.