Ichigo Inc. (2337) Earnings Call Transcript & Summary

Hi, everyone. This is Scott Callon. Thank you so much for joining us today. We're grateful for your time. I'm here with Ted Fujita, who is our Lead Independent Director; And Dan Morisaku, who is a senior member of our finance organization. I'm working off of the FY '21/2, so the February 2021 full year corporate presentation we've put on our website, let's go at it. Starting on Page 8, the year in summary. Incredibly difficult year for the world, incredibly difficult year for everybody on the phone, incredibly difficult year for Ichigo. We added severe COVID impact on our hotel earnings that came in both through kind of on balance sheet, hotel revenues being hit, I mean, at historic low levels. What was, and what we believe, will be a very -- continue to be a very profitable business went away, all profits disappeared. That showed up also in our asset management fees for the Ichigo Hotel REIT, which were severely impacted. We also had a severe COVID impact on gains on sales. As you know, we have a very robust sustainable real estate business, we add value. We sell assets once we add that value. This was, given the strength of our balance sheet, a period where we decided to hold off on monetizing the value add because of tightness and difficulties in most real estate asset classes. The one exception is residential, which continued to be very active during the year at good pricing. And so overwhelmingly, we focus our activity on residential assets. There was no -- so that's the 2 things that were -- that were really, really hard and COVID-related. So the good news is we expect, at some point, I am sure all of you do, too, that thanks to the miracles of vaccines, COVID will end. Or COVID will not end, but COVID impact on the planet will change in a very substantial way. On -- in terms of clean energy, there was no COVID impact, as you can imagine. There's a set of solar power plants, over 50 of them across Japan. Nothing about COVID is going to interfere with their ability to produce. We actually brought our first wind power plant online, that's actually in this fiscal year. So that's going to show up in last year's numbers, but I'll talk a little bit about how we expect to expand on clean energy. And finally, our view on COVID is that given that it appears that we will all work our way through it globally, that the hit to our earnings is temporary. We actually think there is absolutely no change to Ichigo's long-term growth outlook. It's really unfortunate that we're going to have lost probably 1.5 years to 2 years of earnings in our hotel area, which is where we've put a fair amount of resources. And we're comfortable with that decision. Japan has underparticipation and underdelivery in the hospitality sector. It is a place where we think we can add value and have added value, but it's been just a dead pool for -- since February 2020. Unfortunately, Japan appears to be about 6 months behind the U.S. and the U.K. in terms of vaccine rollout. We began vaccinating seniors last week. We apparently have done a deal at the government level to Pfizer to get vaccines for the entire population by September, but we're currently sitting in April, so there continues to be at least a 6-month or more path to us getting largely through this. And when it ends, we'll be back to being kind of what we think -- what we need to be a robust earner for all of you. Page 9 shows kind of some data on what the last year looked like. I've given you, I think, accurately a description of how COVID did very severely impact our business during this period. Having said that, it's a really durable, very profitable business. So despite kind of all the things going on, we continue to have stock earnings about double our expenses. We are structurally profitable. You can see that on the stock earnings on the right side of the page have dropped, it's almost entirely hotel related. The sustainable real estate came in because of a loss of hotel effectively -- completely disparate of rental income off of hotels. The drop in asset management is effectively entirely hotel-linked also, so our hotel impacts were substantial. And hotel is about 1/4 of our assets. More than that in terms of NOI because they are very profitable and run with slightly higher cap rates on them. But that impact, we took very, very directly. Clean Energy, I'll talk at more length, new ESG initiatives, we'll talk at more length, and share buybacks, I'll also talk in more length. Going to Page 10. As I said, it's a very, very hard year. OP down 65%, EPS down 38%. We did a fairly substantial write-down of assets last year in kind of -- in preparation for COVID. We want to have a balance sheet that's solid as a rock. We tend to be aggressive in writing things down. We wrote down some assets that we had owned for only a short period of time, less than a year, with hotel and retail exposure in preparation for COVID impact. So that's why the impact drops lower than OP does. Stock earnings were down 18%. Full earnings were down 68%, again, that's because we've largely paused, other than our residential asset sales, activity, putting assets in the market and we'll just -- we'll wait it out. There's been a move -- a big blowing out in spreads between good offers outside of kind of the really obvious places that have done well, which is the logistics and residential. Japan has done a very good job of protecting its citizenry, protecting wage income, and so residential assets have been very strongly performing, and so that's been a place where investors have been willing to put capital work at good prices. We've actually disclosed, for the first time, cash numbers. I've talked about this before. We made a decision a couple of years ago to be as proactive as possible to create a tax shield on our earnings by taking as much depreciation as we can and to protect taxable income, so make it nontaxable. And so the result of that is it pushes down our net income. It pushes down, of course, our EPS. And we thought we should begin disclosing what this looks like. And this is obviously a year where you're like, "Hey, it looks like your earnings have completely collapsed," and they come in quite a bit. You'll notice though that because of the significant kind of cash element that we have above and beyond our net income, that the cash EPS and the cash ROE far outperformed our accounting EPS. And we actually believe these guys is real. And this is aggressive kind of tax-based accounting and tax regimes that allow you to do accelerate depreciation, only greater than economic loss in our assets. So we believe the cash EPS number is -- more accurately reflects our true earnings. And quite honestly, even these cash-based numbers substantially underestimate the value creation and the actual true economic earnings because, as you know, one of the key elements of what we do is we add value to real estate. That value does show up in the real estate, but we never crystallize it from an accounting perspective until we sell the assets. So we have an ongoing under -- underestimate of true kind of earnings in our accounting segment. Anyway, so cash EPS gives you a slightly better view as to what economic earnings are, but it's truly incomplete, it's probably -- depends on what our value-add activity looks like, but it's probably 30% or more too low relative to economic crisis. Page 11 shows the segment earnings details. Asset management down very, very substantially. It's the one linked to the hotel REIT coming off. And we introduced, over the last 2 years, a performance-based fees -- pure performance-based fees in both our Ichigo Office REIT and our hotel REIT, and that gives us both the upside and downside. We eat our own cooking. As they sponsor these REITs and as it should be, we're aligned with our shareholders. It turns out that in a period of COVID where earnings were up substantially, your own cooking gets rather meager on the table. But again, when will the world return to normality, this is a very, very powerful non-asset business. We've got a 15% carry on all the assets within both those REITs. We expect this to be -- And the reason why we went and introduced these REITs -- and by the way, this was with 99% approval from all the shareholders who like the fact that we align with them, is we think it will be a very substantial. It's both good for shareholders and it's a good way of creating alignment that's good for our shareholders because we expect this to be a substantial driver of earnings, going forward. Sustainable real estate, down 73%. Again, that's over JPY 1 million on decrease in gains on sales and clean energy as we've touched on before, grew quite well. Turning to Page 13. I'll go through it quickly because this is -- we've just updated the materials relative to the key elements of our business model. We are a combination, a hybrid combination of both stock effectively fixed earnings and flow earnings, as you can see on Page 13, and it's the full earnings that have come in, in the month substantially. We are forecasting this year because we're still in COVID, and there's COVID uncertainty. And I'll talk about that later in a range. Page 14 shows embedded forward earnings. They continue to grow in the past year, so up to JPY 63.9 billion. Page 15 shows the data on -- again, this is -- actually speaks to the previous page where we think we have roughly $600 million of -- according to third-party appraisers of unrealized gains on our balance sheet. Page 15 speaks to the fact that, generally, we are 2 to 3x when we actually do a sale of what the appraiser is saying we're going to generate. So our realistic view is that we could have something close to current market cap on a pretax basis relative to -- of future our earnings bagged, unrealized gains on the balance sheet. The big drop-off this year from 2.8x or 2.5x down to 1.9x in terms of the gains on sales exceeding the appraisal values. We're primarily active and Ichigo's got onerous business, which is a high turnover, lower-margin business, which gives higher value to the client, as it should be, because we're involved less with the asset and doing less value add. But potentially, as a high-turnover business, it's actually on a cash-on-cash basis, a very, very good business. Page 16. Again, we are focused overwhelming on cash generation. We think cash is real, everything else is not. And so our economic operating cash flow very consistently exceeds our net income, and we expect to continue that, and the firm is designed for that to be the case. Page 17 shows what our capital structure looks like in terms -- on the debt side. We are on average for 10 years at less than 1%, which is one of the great things about being in Japan, you can borrow a large, large amounts of money for almost nothing. Going to Page 19 shows what we did in terms of acquisitions and sales this year. We were net sellers of about JPY 3 billion, so USD 30 million, relatively flat. You can see on -- the residential activity is overwhelming. What we did down at the bottom of the page, 64% of what we did this year on acquisitions, with Ichigo owners, which again, is that high turnover business with an average hold of kind of between 6, 7, 8 months, and sales was 74% of what we did. So a significant turnover in residential. The hotel assets, we bought 3 of them, 1 very small assets in Tokyo. The other are brand new, THE KNOT. We have -- we put up a brand-new boutique hotel in Sapporo, a brand-new boutique hotel in Hiroshima, then at Hiroshima, then at Sapporo, phenomenal economics to this. And I've talked at length kind of what our strategy looks like. Phenomenal, economically. Normally, terrible economics, and I'm already mapping on them. But that's what the hotel acquisition look great. Other than that, as you can see, it's primarily us moving assets to it -- assets in and out of the balance to our clients. Page 20 and 21 show kind of what the growth path was for Ichigo owners, is a business we set up 4 years ago, March 2017. We had not historically been involved in residential assets because they're classically not a good place to do value-add because Japan has got their rent control. We actually figured out though that because residential assets are such a durable generator of NOI, it's something that our clients were very, very interested in. And they were buying assets, residential assets from our competitors at prices that we thought were not reasonable, were not good for the customer. And as Jeff Bezos famously said, your margin is my opportunity. We realized we could enter this business, serve our customers with better pricing and better quality, with relatively new residential assets that Ichigo would stand up for in providing to clients. So that is the genesis of Ichigo Owners. And we've done quite a bit in the last 4 years, overwhelmingly prime locations, Central Tokyo, only one asset outside of Tokyo. Page 21 shows the growth in that business in terms of the buy and sell activity. We expect to do over JPY 30 billion in acquisitions this year. So our peak was JPY 28 billion in -- last year, we did JPY 24 billion in the year that I'm talking about today. We've done JPY 10 billion of acquisition in the first quarter, so we're quite confident we'll get the JPY 30 billion done. And this has proven to be a very nice business. Page 22 shows what's happening with the REITs in Ichigo Green. Office held in very well from an NOI perspective. Green, of course, which is the solar power producer, did also. Hotel business, the hotel rate was very substantially impacted. We were active in supporting it. We've put in some subordinated debt to make the banks happy so that we care in what we're going to stand up for as a sponsor for the REIT. We also took out the operation of 3 hotels as 3 operators went down during kind of the COVID crisis. And again, nice set of businesses, centrally located. Good hotels, and when COVID ends, this is probably, unfortunately, we think 6 to 12 months out, we'll just be back to where we were, we expect in the hotel business. Page 23 shows what's happening in Clean Energy, continues to grow very well. We have -- it's primarily a solar business, as I just indicated, you can see the 7.3 megawatts of wind just came on, and we're going to do something on biomass. But that's what things look like at the moment. We've got a plus 30% in the pipeline. Page 24 shows the first wind power plant, which is up and running. Our fiscal year starts on March 1, so it was up and running on the second day of the fiscal year. Page 25, we're going to enter green biomass. We think we're well on the way of that. We call it green biomass because the problem with biomass is that it's -- and I hope this is not too controversial, but I think it's accurate. Biomass is not good for the world as it is currently constituted. It's primarily burning -- I mean, when you think about it, you're burning trees and it's like, so why is it good? Why is this isn't [ senile ]? I mean it's like, well, okay, because you can plant trees, and then they grow up in 50 years and 60 years and 70 years from now, there are trees again. But the problem is, the initial process of cutting down the tree and removing the oxygen creation and then burning the tree is not good for the planet, and it pushes us towards a planetary crisis. So we made a decision a number of years ago that we would not do biomass even though it qualified is renewable under Japan's renewable energy laws because we think these policies are misplaced, that they're wrong, bad for the planet. So we're actually doing what's good for the planet, a biomass, which is why we call it green biomass, which is an entirely domestic cycle. So we will be sourcing the feedstock only in Japan. And the reason why that's important, again, it's like, well, okay, you're burning Japanese trees, why is that good for the planet? And the reason is We're taking this from managed cultivated forest. And because Japan had not afford to do proper forest management because there's been really no economics to justify it, japan's forests are dying. And because they are dying, we are losing the oxygen production and the CO2 absorption. And so it's absolutely critical that we manage the forest, that we clear the trees to allow the forests to continue to survive. And so that is what we're doing. And so this is genuinely good for the planet. It is generally good for our shareholders. At this point, we're well on the way. We expect in the next couple of months, hopefully, to get approval on the first project. We're using our relationships that we built through our solar and wind power activities because we've got 50 pretty small utility scale plants, but they're pretty small all over the country, without relationships, all over Japan, with local communities and governments, and they have the problem with their dying forest and what they can do about it, and so we're teaming up to try to address that problem. So this is a single couple of birds with a single stone. NOI, we think, looks like 10% to 11%. You should know that biomass has a fuel conversion of about 90% versus 15% for solar, so it's 6x higher. The FIT for biomass is JPY 40, so about twice of solar, so it's actually 12x more productive. And of course, you have the operating costs, so we end up with an NOI that is 10% to 11%. We would expect to put in about up to JPY 5 billion, so USD 50 million-ish, push it up to over time to about $300 million, so we would expect the contribution to be something like $30 million or normalized earnings before COVID, it were something like $150 million, and so we've got to put some tax into that, but it's an uplift at kind of 15% to 20% of our earnings through biomass if we get to where we can get with this business. We've done some more in terms of joining organizations. Ichigo has always been super green. It's just our values. So we -- but we have always sustainable index providers who want us to sign up for things. And that's fine, and it's good. I mean you're raising your hands saying, we believe in this, and we join the community of people who are working on behalf of the world. So we joined RE100. RE100 is a little bit ironic because it measures not whether or not you are a sustainable power producer. It gives you no credit for that. It wants to know if you're consuming sustainable power. So we get no credit for the fact that we produce all the sustainable power. And so we've put out a target of consuming power by -- to 100% by 2040. We'll get there just on our own current filler in wind and coming biomass operations. So the issue with RE100 perspective is since we're selling the renewable power to somebody else, we don't get the claim credit for it. So we don't call it for today. If you gave it credit for 100% renewable activity in terms of what we produce, we are currently at our target right now. Page 27, we joined the United Nations Global Compact. Again, look, these are the things we believe in, we do. And so it's -- these are commitments that we care about, and we've come to understand that our shareholders want to see us in a very visible way, committing to them, and so we've just [indiscernible]. Page 28 and 29 turn to activity -- other activity on the behalf of shareholders. We're doing another buyback right now. So it's the fifth year in a row we're doing buybacks. We do think this -- and it's probably easy to understand that we've given some guidance on what our cash EPS looks like. We're generating all this cash, and we have a profitability well above what was being on accounting statements. That cash is available for us to use to grow EPS. You grow an EPS fiber by investing to grow earnings or investing, I would put it to shrink share count and so this is good use of capital for our shareholders. Page 29 details our J.League chiller program. We have been a top sponsor of The Daily since -- for the last 2 years. And that's something we expect to continue. We get all these free goods as a result of that. I think most companies take the free goods and, I don't know, give them to management, and give them to employees and give them to, I guess, counterparties. We think this belongs to our shareholders, so we've done some things that are in unique in Japan and taking care of our shareholders. It's really exciting. It's really fun. COVID has been not a time we've really been able to give tickets to matches to shareholders very easily, but this is something that's also been coming back. Let me turn finally to the forecast on Page 31 and 32. We do have ongoing COVID uncertainty. Japan is, at this point, only vaccinated I think it's under 2% of its population, so it's well further to go. So we have forecast on the range. We think the bottom of the range is solid in the rock, so it's really a question of what we deliver above and beyond that. I would point out that we continue to use -- significantly to use appreciation to avoid showing taxable earnings. And so our cash EPS forecast is up going up 12% to 44% year-on-year. And our cash, even in this these -- these are not normalized numbers for us. These are very low earnings numbers. But even now, this is how durable and profitable the businesses are that we run. Despite this, our cash ROE is running between 11% and 14%. And finally, on Page 32, the segment details. Asset Management, we see going down, just a little bit on the private fund business, sustainable real estate is going to swing primarily on does the market return sooner rather than later for our asset sales. We already are seeing -- it's interesting. The markets are good at reading forward. We already are already seeing, for example, buyers coming to us on hotel assets, which haven't at all returned in Japan, but because global vaccination activity is accelerated people are seeing correctly that this -- that people will begin to travel again. And the clean energy business is going to be up again year-on-year. Again, that's got significant depreciation in that on a cash basis. So I kind of -- it's 14% on OP business, and it'll be up over 20% on a cash-on-cash basis. So that's -- this prepared presentation. Let me turn to Q&A or any and all feedback is also very, very welcome. [Operator Instructions]

Greg. Do you want to go ahead?

My question was on the guidance for the sustainable real estate business. Can you give us maybe a little bit of color on how active you -- how is that guidance divided between office and hotels in particular? And do you have some kind of thinking in terms of asset sales on hotels being more skewed toward the second half. Maybe if you could explore a little bit what's in the guidance for the sustainable business.

Yes. Greg, to be honest, we're not sure yet, which is to say, we try very hard to max -- so for example, office versus hotels. The way we do this is we work, we add value to assets. And then we take them to market. And we look at pricing, and we think the pricing is attractive, then we'll sell. And if we think the pricing is not attractive, we won't. So you should expect us to be showing both office and hotel assets. And the pricing is what we like, craft the board, we'll do it all. And that will imply blowing through these numbers. And -- but the key question for us was still trying to understand where the market is going to price both of these asset classes. People are worried about office primarily because of work-from-home and what does that imply for ongoing demand for office space. People are worried of the hotel just because of massively not creating any value right now. And so how long do you have to hold this asset before it returns to generate actual NOI. It does appear to be the case, Greg, that hotels might be more likely to generate prices that we think makes sense, which is to say, we overwhelmingly own small and midsized office and the NOI performance has been robust. It continues to be robust. We're not seeing kind of [indiscernible] for large increase in vacancies. The market appears to be discounting future cash flows the office more than we think we would conserve and underwrite, too, based on understanding of our assets and where our tenants are. And we understand that there's going to be a shrink in demand for office per -- kind of a shrink in demand of employees going to office . The offset to that is that we're not actually hearing from our tenants that they necessarily want to shrink space. It's like, okay, we're going to only have, going forward, 70% of the people we thought we're going to have in the office or maybe 50%, but we're still going to keep the space. And part of the reason they feel that way is because the price for value equation that we offer in our offices is just so powerful. I mean you can be in a small floor play, and that's what we do small, medium floor play, typically at a discount to large floor pay of 30% to 40% on. And so it's a very good price for value. So we actually think that the asset class will show robust performance over the next couple of years. Two years out is probably enough for you to understand that and go, "Oh, okay, we were maybe we're wrong. Small midsized office has performed well." But if we can't get that kind of pricing, we'll just -- we feel comfortable holding assets until [indiscernible]. And again, this is a view in the future. We try to be careful. If we're proven to be wrong, we will mark ourselves to market on that. But we are -- we do have a differentiated view on what's happening with small and midsized office.

Understood. And maybe one follow-up on the buying side of things. You mentioned earlier, Scott, that you would be looking to buy -- that Ichigo would be looking to buy JPY 30 billion assets? Can you give us a bit of clarity? Are you going to be focusing predominantly, initially more on hotels? Or do you have any color on it?

Good. Greg, thank you for that because it sounds like I explained it poorly. The JPY 30 billion is Ichigo Owners-only. So that will [indiscernible] Central Tokyo Prime residential. And of the JPY 30 billion, we're done with JPY 10 billion in the first quarter. Beyond that, Greg, we've got probably JPY 10 billion to JPY 20 billion, we think, is realistic. It could only -- it could -- other things, office. We're very opportunistic. We have been active across office, retail, logistics, hotels. Again, it's -- what I just said about the way we sell is also through what we buy. I mean, we sleep very, very hard, and we'll look at hundreds of assets and buy 5 of them. And so it could be anything within those asset types. The one thing that is consistent with what we do is we never buy an asset without the ability to add value. We are not market timers. We don't believe in it. In those areas, we're fully capable of adding value. So JPY 30 billion of resi would be the target for a Central Tokyo Prime resi, and then JPY 10 billion to JPY 20 billion of office hotel REITs. And some, possibly, logistics. John, we've opened the line to you.

This is John from [indiscernible]. Yes, my question is on the transaction market in Japan and Tokyo specifically. My understanding is that Tokyo is one of the cities, globally, that has been least impacted from the work-from-home trends. Therefore, it would be my expectation that the transaction market there would pick up much sooner than many other cities globally. Are you seeing signs of that happening at the moment? And if not, is the bid-to-ask spread the main impediment to that taking place? That would be my first question.

Thank you, John, and I appreciate you joining. So look, just can somebody confirm, I've got your question. I mean, you're absolutely correct. Japan never did a lockdown, and it did just kind of everyone be careful, lots of announcements from the government. And we're a country where we're all used -- and you can probably tell from my accent, I'm an American, but I spent most of my life in Japan. We're all used to kind of wearing masks and following orders. And so Japan has gone to a very different kind of -- still difficult, but different COVID experience. So it's a way thing. If you want to transact, the economy and society is open, so transactions can occur. So the only thing that gets in the way our transactions is, as you pointed out, the possibility of bid offer spread, which is clearly -- we get blown out very substantially for hotels. And it's beginning -- and retail is beginning to creep in. Has not happened as much as I just pointed out, with office, because people aren't worried about an immediate COVID effect so much for office of where are the people who are going to be eating at your restaurant or buying from your -- buying from your store or staying hotels. They're more worried about work-from-home, in the long term, impact of that. But yes, I mean transactions are occurring, can occur, will occur. And this is a question of whether or not we think the pricing is appropriate to kind of -- to our assets. Did I get at your question?

Yes. Yes, that covers it. And my second question is with regards to your asset for [indiscernible] Odaiba, I'm sorry if I'm pronouncing it [indiscernible]. But this is an investment which you would highlight in previous company presentations. And I was just wondering whether we could get an update with regarding to that investment and maybe a time line as to when we would be expecting to have the gains.

And you said Odaiba? There's a big -- that's the one big asset we have. And by the way, it's a one big office that we've had, and we've had vacancies there. So It is a reminder, it's about 10% of our assets. So it's not small, but it's a reminder of how much more defensive small and midsized are. The -- yes. What's going on with Odaiba right now is we had -- we underwrote it to 70% vacancy -- I'm sorry, 70% occupancy this year because we have contracts coming up. And it's, at this point, going to go as low as 44% during the middle of the year because we had 2 large IT firms move out and it's an interesting issue. And so we're thinking carefully about what we want to do about it. We've actually have preferred to lease to IT companies because they have really good profitability, and you don't have to worry about them kind of suddenly not being able to pay the rent. And they came to these 2 companies, they both decided that they would take advantage of COVID and it's a smart choice in their part, to do a fairly systematic. Everyone's going to work from home, and we're going to demonstrate that we can sell work-from-home solutions to all our customers and either on cooking by doing that ourselves. So the bad news on Odaiba is that it's in the middle of a year as well as 44% occupancy. The good news is it's a very good asset, priced at a very good price, meaning it was built as a headquarter, so it's super high spec. It's actually about 15 minutes out of Central City, but it's largely been filled at about JPY 18,000 per [indiscernible] and equivalent space in Central Tokyo would be literally kind of JPY 30,000 or more. And so we're going to have to make a decision as to how we want to fill it. If we want to fill it, we can fill it. And we probably have to take this COVID discount to fill it right now. And so we'll just kind of make a call on that. But the implication of that is we don't expect to sell it this year. I mean the other thing, just to be super transparent about it, that's just really unfortunate. This asset is right in the middle of what was going to be the Olympic venue. And so part of the reason we held on to it is because there's going to be this incredible amount of activity. All these people, can we rent the top place? Is that -- or top floor, the penthouse and all that sort of thing. And that going to be a bunch of focus on this area. We thought it was going to be better to sell it since we have largely done our value add [ post limits], [indiscernible] we added more costs. So that's where we are with the ups and down. Comfortable that we'll preserve the ongoing economics, comfortable that we made so much money on it in terms of the uplift in rent that will keep it, but really unfortunate in terms of what the sale transaction could have been relative to what happened. And Ultimately, I own that decision. So my apologies to all of you. I should have sold them before COVID, but we didn't. And now we have next, Garrett, please open the line.

Yes. And I would first like to commend the management team on excellent management and corporate governance of the company, over time. So I have a couple of questions. The first one is -- you mentioned perhaps an issue with hotel acquisitions is the bid-ask spread. It would seem like now may be a good time to sell some of the stabilized green energy assets that haven't been impacted and perhaps roll that into more distressed assets like hotels. Do you have a comment on that?

Yes. I mean, Maybe -- I mean, we can say everything we own is available for sale. And so I guess -- so let me walk through what our current thinking is on this, Garrett, and it's this. So I always told you we had our process to prove to be wrong or to buy it. Unfortunately, I'm intimately familiar with being wrong. What we think is going on, this is our hypothesis on clean energy and Japan. There's a massive shortage. I mean absolutely massive. There's absolutely no way Japan can get to the same energy targets that is put out for 2030 for 2050. It just can't. Huge pressure on Japanese manufacturers that's all over the world demonstrate that they're doing sustainable energy. And so we see this extraordinary demand that is just kind of visible and incredibly constricted supply. And -- but these commitments that people are making, we have to do it by 2023, we have to do it 2025. So as -- the supply, the massive shortage in supply has not come to bite yet, is our thinking on it. We don't think it's been priced in, but -- so we don't think it's priced in. I mean there's absolutely no way Japan can meet its commitment. So it's probably when you count hydro, I think we're paying around about 20% right now in terms of total renewable energy, and we're trying to get to 50% and the top -- wind -- you can't do enough wind onshore. There's not enough land for solar. Offshore wind is 7x more expensive than solar. By the way, to your point, we are putting a bunch of plants online literally in the next 30 days. And as soon as we get those plants up, there's going to be a major move on our part to see what we can do more, specific in solar, based on what I just told you. We have, up to this point, entirely built our renewable energy around the feed-in tariff. I mean because it's great, I mean you get these guaranteed take-or-pays for 20 years. The economics, you get the super normal returns because your economy is desperate to try to get to a higher level of renewable energy. We're going to look very, very hard at non-feed based opportunities because of this just enormous unmet demand for renewable energy. So I mean, in that context, if we could find -- we expect to do a lot more and we're certainly willing to sell the assets. But at the moment, we don't think there is a full realization of the premiums that should avail to these assets. I mean you're seeing in the market plus JPY 1 or something like that, so kind of at a 5% towards the premiums on renewal energy, it just doesn't look nearly enough relative to the demand that's out there.

Okay. That makes sense. And another question. How much of your cash balance or the company's cash balance do you view as cash you're willing to invest? And how much do you view as required for working capital needs or rainy day fund?

Rainy day fund is a good way of putting it. We do think there's option value to cash. I mean when everyone runs out of it, it suddenly becomes really, really valuable. Yes, we run the business with literally $3 million in the bank. Don't know that anybody really want to go there again. That was very, very tight. I think our preference would be to have kind of a minimum of JPY 15 billion to JPY 20 billion for option value. But we can run the business on -- it's super cash generative. We can run the business on, I don't know, I have to be careful. The CFO is actually in the room. I don't want him to jump out the window. But yes, I mean, can we run this on JPY 10 billion? Yes. But in order to do so, we want to have incredibly compelling opportunities, and we would try to return back to kind of a JPY 20 billion-plus balance again for the option value of having cash and stuff, things go bumped in the night. But this is -- because of the cash -- the fundamental cash generation of the business, which is going to grow very rapidly when we come out of COVID, we're able to run -- we're able to self-finance and run on lower levels of cash.

Got it. And then one more quick one, if I can. Is the target market for Propera all hotels in Japan? Or is it a subset of Japanese hotels?

So that's another good question. We actually think the target market is, not just hotels. So to prepare and to be clear, the pricing engine targeted out the hotel market to do optimization of hotel daily pricing. We are ambitious to take it into other market stadiums, karaoke boxes, museums. I mean, those are all smaller markets than hotels, but it has broad utility. Karaoke, actually, is reasonably big. It has broad utility. We have some ambitions possibly to go overseas with it, particularly in Asia. Again our current core capability with the kind of the competition engine, the machine learning, we've targeted that hotels, but it can go beyond hotels. Where we are on with that now, it is growing pretty rapidly off of a low base. So we had 5 -- we just had 5 customers last year, so that's 10x this year to JPY 50 million, and we'll see kind of how much we can grow on that. We actually -- we had a little bit of debate about whether or not we should offer guidance as we were going to -- how fast we're going to try to grow it, but we're trying to grow pretty quickly. And the economics of this is we get on the full package, and so we have 2 versions. We have something called Propera Light, which is kind of a user-friendly and tested out, which is an ongoing kind of subscription model. And the full package, so it's a little bit of a freemium model, but even free model looking free, the full package, we get 1% of gross revenues. So it's easy to kind of model economics on this, if we do well. But yes, the goal is it would be all hotels plus. Happy to take -- so we've cleared the queue. Greg, you can go back if you want or anybody else. Greg is back.

Yes. I just wanted to follow up on your comment, Scott, about the renewable energy business. I think, as you pointed out, I think the stakes are very high. You -- and as part of the general policy, at least the very rough outline put forward by the government, they seem to do -- they seem to be putting forward the potential for offshore wind. But I've heard from other players that actually the profitability and the system in terms of contract bidding for offshore wind is not very favorable. And that, together with your comment that the cost is much higher than solar, does it mean that you guys will not get involved in offshore wind at all?

We have no plans to. We've -- we are so puzzled by this. We're doing more work to see if we've got something totally wrong. But we believe our current estimate is that offshore wind is 7x more expensive than solar. And I think -- and sorry, I don't have the exact number. I think we thought onshore wind is maybe 2 to 3x of solar. I mean solar is so clearly the best, cheapest form of renewable energy in Japan right now. So yes, we do not -- I mean there are a bunch of guys out there saying, we're going to do offshore wind, and it's -- we don't see how the numbers make sense.

Understood. And for solar, you mentioned you're going to be moving away from the FIT tariffs which has driven your business so far. So do you imply from that, that you're going to be building for lower cap rate in kind of more of a value-add model, if you will, to sell back to institutional players at 3%, 4% cap rates kind of thing or?

Yes. And sorry, let me step back. I mean, people have seen wind being so phenomenally successful in the U.S. and Europe. It's like, well, what's wrong with Japanese wind? I mean offshore wind, I mean, the promise that the Japanese -- and I'm sorry, Texas is onshore, but the Japanese shelf drops off so quickly that you can't actually put these wind turbines really into the water variously. It's -- the construction issues, the mechanics, I mean, the stresses are just so -- it's a very -- going to your -- back to your question, Greg. Look, I mean, at grid parity, right, that's when renewables become competitive with other -- and classically, fossil fuels, you don't need to fit. And so what I'm telling is we think we can earn economics that look like a current freight economics. So as you know, this has always been -- the beginning was kind of more of 11% NOI, maybe it was up to 12% because we're conservative on it. And at the bottom, we kind of took it as low as kind of 8.5% NOI business for us in the solar FIT business. We think we can generate kind of 8%, 9%, 10% without being dependent on the FIT. And when I say that, I mean, we've just begun doing a bunch of work on this. But it does appear that there's an opportunity there. And then the key question is we need to understand the unknown, which is kind of what premium may be available to you for people who absolutely need to buy renewable power. And that's something we underwrite to pretty conservatively. I mean our goal is going to be to beat fossil fuel, full stop, competitively with solar. And then hope that we can get some big premiums on it. As this -- I mean there's just a question. There's going to be massive shortage of supply. More people want to do renewable energy than is available. [indiscernible] is not even close. They needed 2.5x of renewable energy in the next 30 years. Offshore wind is everyone kind of throws the bed. You can do a lot there. Yes, you could do a lot there, right, at these prices that are just crushing. And so we're hopeful to do something interesting in solar at good economics. We're not going to sacrifice our economics.

Understood. No, I agree. I agree completely on the need for a lot more renewable in Japan for sure. And one last question on your -- what's your thinking, Scott, on the carbon pricing policy? How does Japan -- what kind of solution can Japan propose? And how do you guys benefit? How are you positioning to benefit?

No. I'm going to have to -- forgive me, I'm going to have to play the [indiscernible] on this. As you know, things haven't been put into place yet. And we do think using market-based tools to try to create the right sort of incentives and efficiency is smart. And Japan is behind the rest of world in moving on this. But I don't -- I mean, the good news is we regularly are consulted by the Japanese government on these issues and will be given -- and we look forward to the opportunity for our input. I mean, to be very clear, one of the reasons why it's important we give input, not just for Ichigo, but we think for Japan and for the world is there are a lot of kind of entrenched interests out there. You don't have the old view. It's not necessarily an entrepreneurial view. It's not necessarily a full competition view. It's not -- and so we tend to have a perspective that we think, hopefully, is a value and slightly differentiator. But we will -- we expect to be evolved in it.

But would you expect a scheme in place this year? Or is that too early?

I don't know, Greg. That sounds fast to me. As you know, if something is put in place, generally, they do is like we announce it this year, and it's going to take place next year or the following year or they'll do something very small scale and then they'll test it, which is smart. But I would be surprised. But speaking of it, behind a veil of ignorance though, if we had something this year. And in terms of implementation, although it's not certainly quite possible, given the pressures on Japan to move on this. And the political interest, just to be clear to everybody that are very supportive of renewable energy [indiscernible] to Japan wants to defend its manufacturing base, which increasingly has a -- and their exporters and they have global clients who want and demand from their suppliers, manufacturers, our renewable energy source production in Japan just doesn't have it. And so defending employment, not losing employment because people can't -- don't have renewable energy in Japan is an extremely important government priority. It's a conservative government, it's a pro-business government. And -- but as a result of that, in a good sense, it's a pro-Earth program, we need to do more renewable energy. We now have Bill. Thank you for joining Bill.

Quick question. From your comments, I think I understand the conditions in office, and then thank you for that update on the Odaiba asset. So office understand, ready -- I think I understand, and hotels got a good view. I'm just wouldn't mind if you could give us a little bit more color on retail. Sort of maybe on a quarter-on-quarter basis, on a now versus pre-COVID basis, and then what the outlook might be over the next several quarters?

Sounds good. So the general situation on retail is it's been all over the place with the more kind of service-sensitive part of retail being negatively impacted. So obviously, kind of restaurants and movie theaters and all that sort of thing. And well, you know this, but forgive me, I think I'm probably telling you things you already know. So that's been very negative impact, those elements of retail. The Internet-linked stuff has been fine, community stores have been fine. Super markets have been great. And then the second element that's been impacted has been Central City. So suburban areas have done much, much better. And as the Central City's as people are not commuting in, you're having a flow of retail activity too that used to be a Central City becoming suburban. So how does that play out in our portfolio? A mix of both. And so for us, retail has just kind of been flattish, and we've had beneficiaries, and we've had kind of losers. I'll put you on mute for a second, because I'll check the accurate number to see if there's an update on it. But retail has been, again, there are winners and losers in a very substantial way, but across our portfolio, we've been largely stacked. Just one second, I'm going to confirm. So I just confirmed, we actually have a little bit of a drop-off in our retail NOI, but it's been through sales. We've actually sold assets. So we have had -- there's been no [indiscernible] effect on our retail NOI on [indiscernible] is there a retail asset same-store sales business [indiscernible].

Next question is these are just some clarifications of some comments, if that's okay. You said you'd start on biomass around JPY 5 billion in investment, that ultimately, eventually, might reach JPY 30 billion, $300 million? And that, that would be potentially, at that level, 15% to 20% accretion to EPS, is that correct?

I won't be very specific. I mean each biomass -- we're doing small-scale biomass [indiscernible]. And so JPY 5 billion implies us doing 5 of these. We have visibility in about 3 of them right now. And as you know, the way we operate is we don't do like huge plunges. So our goal is we do a couple of them and verify, similar to what we did solar, where we started small and like, okay, this is going very well as a big account. And then ultimately, a nationwide network would apply, we think, we put in on the ability to do JPY 30 billion. Yes, so those numbers are correct.

Okay. Second one, you mentioned the unrealized gain balance. When you're talking about the unrealized gains, unrealized gain balance, roughly the market cap of the company. Did I catch that right?

Yes, yes, yes. I mean -- so I mean, the simple math on that is if you take a look at Page 14, we currently have unrealized gains for -- third-party operations were about 63 -- JPY 64 billion, JPY 63.9 billion. And then you can see on the next page, generally, we put assets to work and we sell them.

Right. I see what you're saying. So multiply that by 3.

Yes. At 30% tax, you'll end up with something that's in the market cap, but it's pretty close.

Okay. All right. Got it. Next one, you also said you thought the hotel side, maybe a 6- to 12-month recovery. Is that based on something you're seeing specific? Or wishful thinking? Or you hope so? Just kind of maybe a little bit more color on that particular time frame.

Yes. I mean, so we're primarily domestic in terms of our hotel guests, it's a mix of both tourists and business persons. There's undeniably going to be some pent-up demand, but that will kind of feed its way through. We think it's safe to think that business travel take a permanent hit of some sort. I mean it's growing on a secular basis in Asia because Asia is growing and economies are growing, but we think that drops off. Now, of course, we've also had withdrawal of some capacity from sales going out of business. But we think there's a hit that happens to business that's probably sectoral. And maybe if I'm wrong, we're happy to be wrong. So 6 to 12 months for us is primarily -- I think it's probably 70%, 80%, let's call it, 70% domestic travelers and 30% inbound in our hotel portfolio. So we think the 70% happens sooner. Japan gets vaccinated, presumably, primarily over the next 6 to 8 months. And as more people get vaccinated, probably by fall, people are -- Japan, as you know, has very little in terms of the COVID kinds of fatalities that have happened overseas, and so people are probably back to normal. But we really want inbound again in some of our assets, like Shinjuku is 80%, 90%, THE KNOT Shinjuku has been incredibly successful with overseas tours. And to be very clear about the economics of this business, of course, supply and demand is absolutely critical. You reprice daily. So having the demand from inbound tourists to be able to drive up your ADRs and RevPAR is very important. And so when I say 6 to 12 months, and we don't think inbound truly recovers for -- I mean, take my hypothesis, for a year. I mean we -- I hope I'm wrong. I hope it happens somewhat sooner. We're probably a year away from getting back to where we were. We've actually run for a full hour. And so there's nobody in the queue, so I guess that means we will -- rather than calling for additional participants in the queue, I think we're going to call this an evening and morning and afternoon, for those of you in other parts of the world. Again, thank you so much for your time. We're grateful for the opportunity. It's still very tough out there, we know that. Take care, be safe. Hopefully, all COVID ends in the negative sense sooner rather later. Thank you, everybody.