Ichigo Inc. (2337) Earnings Call Transcript & Summary

Hi, everybody. This is Scott Callon, Chairman of Ichigo. Thank you so much for joining us today for the FY '23/2, so the February 2023 full year corporate presentation. I am joined by Tet Fujita, our [indiscernible] director; and by Dan Morisaku, who is the senior member of Finance team and our Head of Global IR. So let's jump into it. Starting on Page 7. 14% EBITDA increase. Earnings exceeding our revised-up forecast and year-on-year earnings growth across all earnings metrics. Specifically, all-in operating profit is up 27% year-on-year. Cash net income up 18%, EPS up 48%, cash EPS up 20% and dividend increase supported by robust cash generation and the COVID recovery. Main earnings drivers and what's new and different are very strong hotel market recovery since we expect we'll continue. RevPAR was up 85% year-on-year. We sold an asset Ichigo Office at an extraordinary high valuation. It's spectacular. I received a performance fee on that asset sale. And so with the amount of cash coming in, we were able to fund 3 things, growth investments, about JPY 51 billion of asset acquisitions. That's plus 60% year-on-year. And that is a forward indicator of where our earnings are going to be going. We invest in assets, particularly this is -- majority of this is Ichigo Owners. As you know, had a turnover of greater than 100% every year. So average holding period of less than a year. So this is going to be very good for us. We did share buybacks at 3x year-on-year, and we began a new Office share acquisition, which is growing [indiscernible]. The Ichigo Office share acquisition is directly linked to our desire to be the best REIT operator in Japan. One of the things that we think is really important to deliver alignment with the REIT shareholders. We do that in a number of ways, including owning the shares themselves, so we can beat around [indiscernible]. Next page, the summary. Again, I'm going to go pretty quickly. There was a Japanese session before. There were some questions. So hopefully, we don't have a lot of questions in English, the language version is also available. One of the things that happens with the Japanese version is everyone is in the same time zone. And so there are more participants so a lot of people watching the English version on [indiscernible] Let's see if we've a couple of questions. As you know, the earnings model is very durable. We are effectively structurally profitable. We have stock earnings that are about double bucket expenses. Going to the right side of the page. Stock earnings don't move around that much unless there's a [indiscernible] event. That's the big arbiter. They're pretty structural. So small moves plus 6% sustainable real estate, SRE, minus 1% a bit flattish in Asset Management, and Clean Energy was up 5% year-on-year. Next page points to -- we try to be very clear on what we're doing. And we want to be clear about the metrics that are important to understanding whether it's succeeding or failing. And so we use all in disclosure and are aligned [indiscernible] remember the term trying to give a better sense of what are the drivers of the [indiscernible] Next page. And so on that point, the 2 major financial KPIs that you should be tracking us on are on OP and cash EPS. They were up 27% and 20% respectively year-on-year. So way of saying EPS was up 48%, and that looks like a much better number, but it's not really as relevant. The real number we should be looking at are how we're doing on our operating profitability and are we generating significant amounts of cash that we are firm; the focus has been on maximizing cash flow to shareholders long term. So good news is it was a good year, but you should be looking at the numbers look more like 20% as opposed to like 40%. If you look at the cash EPS number, JPY 33 million, again, let's say, call them JYP 283 million [indiscernible] about 8.5x earnings. Given that earnings will be pushed down still from COVID effects. We think the share represented very good value. That's why we bought a lot of them last year, and you should expect us to continue to act to the market going forward and buying on shares. Next page, please. The segment earnings details. A lot of stuff moving around. If you look at the all-in operating profit, big increase in Asset Management year-on-year, a big driver of that was the flow earnings contribution from that spectacular profitable sale of an asset in Ichigo Office. And just to kind of address that directly. One of the things that characterize Ichigo as a firm is real awareness, complex and making sure the right thing happens for not only our shareholders, the shareholders of this company, Ichigo Inc. 2337, but the shareholders of REITs that we manage. And this is a JV businesses and growing [indiscernible]. And so we have a majority independent board at Ichigo. We have fully independent boards, very unusual, in fact, across unique at REITs. We do not do transactions with the REITs unless [indiscernible] And in fact, we do transaction REITs typically at a discount to what the market price is because the ongoing Asset Management fees that come from that. So I mentioned this because the asset we sold when we actually put into the REIT as part of GE Capital's wind down of its global real estate business, we were a preferred buyer in our part. They wanted to have comfort that this transaction was going to close. We actually sold it to REIT from the parent company at only a 2% gross margin in a market that will normally take 10% to 15% to 20%. So it's a way of saying the REIT of this asset is at a really good price. And then we managed it and where we sell it at a much, much higher price, which was very prudent to shareholders. Sustainable real estate, you can see it was up 20% year-on-year in all-in operating profit, big driver was Ichigo Owners in terms of it the increase year-on-year. Well, the asset, of course, had a very good year, the big increase came from Owners, a slightly increase in Clean Energy, where we've grown a little bit, not that much, but that's good to have some [indiscernible]. Next page, turning to Page 13, just to look through some of the characteristics of the business and the stock plus Flow earnings business. So we have this kind of baked-in profitability that comes from our stock earnings, and then we try to do things on a daily basis to grow earnings for all of our shareholders. And this is pretty durable. So to be clear, Walmart, Amazon, they have flow earnings and they're very durable because of building growth value. And we expect to do that ourselves. But there is a difference between the flow earnings because they tend to be lumpier in our case because they move around a little bit with 1% on asset, but it is a bold elements as part of our core business. Page 14 shows a breakdown in the stock earnings. It's primarily SREs, sustainable real estate business with many sections. Asset Management relatively flat over time again. So this is the stock. So that performance fee that we register on each office REITs not included in this, but that with regard to flow. And you can see the Clean Energy business doing actually [indiscernible]. Next page. Embedded forward earnings with another elements of the business model. We -- so this is the unrealized gain on Energy. So that about JPY 100 billion of shareholder equity, third-party operators. So not us, third-party CS is having about JPY 68 billion, so loss 70% against our shareholder equity in terms of unrealized gains. And it's growing, and that's what we do. We add value to assets and value grow over time. If you turn to the next page, you can see that not only do we have JPY 60 billion worth of unrealized gains, in fact, when we do exits when we monetize those gains with asset sales, we come in spectacularly higher than what the third-party agreements [indiscernible] so's they varies. So looking something like 2x. So on a 2x basis, it's something we have JPY 70 billion were unrealized gains on the balance sheet of JPY 140 billion. So it gives the firm extraordinary [indiscernible] that is not recognized anywhere in the accounting and financial statements. Next page. We also generate economic operating cash flow that exceeds net income. You can see it. This year is 1.1x, and we got a little bit and say, "How is it possible since we generate a lot more economic operating cash flow". And then we realize that we haven't updated this to show all-in operating profit, or in this case, all-in operating cash flow. So they used actually more correct number let's say, 2.4x for fiscal year '22 and for this year, it 1.5x. We will make an adjustment going forward. We'll be transparent about this is what we're doing. But this -- [ the signal ] we underestimates operating earnings that's what we do. We're not using all the number here to change our financials here. Next page, please. You can see what's happening in financing. There is a lot of turmoil in the world, and we're not experiencing any of it. So you can see our average financing is flat year-on-year at 89 basis points. In fact, the financing that we actually executed upon within the last year, we've done at 86 basis points. So where despite all the turmoil is going on, we are financially better off, more stable financing kind of at extraordinary levels. And this is what is so powerful about investing in Japan. If you deem the credit worthy by the gods of credit, you can effectively borrow kind of Elon Musk [indiscernible] money. We understand that it hurts with some cost of equity, cost of debt. We try to take advantage of this extraordinary stable, durable and cheap funding to grow value for all of the remarkable shareholders. Next page, please. We continue to do a lot of work on ESG because we believe in it. And the good news is Japan also believes in it, and financial institutions are very committed. In Japan, business is very strong [indiscernible] we've been trying to do the right thing. And so Ichigo is recognized by financial institutions for our principles and our actions will be out of private grids more sustainable world. And so we are increasingly doing sustainable finance, positive impact finance, ESG finance. The -- I mean the good news is not only is this utterly correct because we should all be working for a better world and a better planet, but it also means, in this case, the financial terms are more favorable [indiscernible] -- they tend to have no covenants, no collateralization, zero to a very little amortization and actually even lower financing rates. So we're delighted to be involved in this. Next page shows the summary of kind of the total sustainable and ESG loans. And you can see at this point, they're about 30% of our total loan book and we expect to go down. Next page, please. As you know, we are climate positive. We have a very substantial and that's in gray bar production of energy, solar and wind and the massively. It's actually 4x of our current consumption -- generation of CO2, and we will continue to work to expand both the green bar, push down on the balloon to expand our current contribution for a better planet. Next page, please. This shows a slightly different metric, which is what percentage of our total consumption is done with renewable energy. Energy consumption is at 70%. We expect to get 80%, 85% this year with a target of getting to 100% in 2-year term. Turning to Page 24, what we did on acquisition and sales this year. Lots of acquisitions, I said earlier, that is bullish for forward profitability. Multi-asset has been doing things interestingly in office. As you know, we specialize in midsized office. It's firmly very, very durable. In COVID, it's a case that we primarily have SMEs as our tenants, they are using more attractive space to recruit talent in country with a very low employment rate and a shrinking labor force. And so that is actually interesting. One of my [indiscernible] that Japanese office was going to be stressed by population decline. It's turned out that population decline has been a driver of growth in office because exactly as I said, companies are using better office space and larger office space. In fact, a variable space for worker and as a way to attract talent. And Owners continue to be very, very active. We bought JPY 36 billion [indiscernible] in assets. It is expanding its sales channels. As you know, we did our first securitized token offerings. So this is digital, but real. I'm not going to make a comment about the crypto assets that are out there, but this is -- these are securitized versions of real estate with real NII attached to them. It turns out there is a very different set of buyers for this. So we have, for example, our REIT owners can skew upwards in age. The folks who have been buying securitized real estate tend to be younger, mid-30s, and so it's a brand-new market. And look, if inflation has come to Japan, trying to give savers a better return [indiscernible] very important to the society and to defend the lives and livelihoods of Japanese savers. So we're delighted to be able to be involved in expanding the ability for Japanese people on real estate backed by a strong asset management. On the sales side, it's JPY 55 billion, it's about up 20% year-on-year, gross product marketing and sales price, 21% and book value was 27%. So these were very profitable transactions. And they reflect the fact that -- now generally, the buyers are institutional investors, and they know the value of that. So this is not us leaning into the sales channel. This is us being very good at adding value to [indiscernible]. Next page, please. Let's see what's going on with Owners, continues to build, acquire and to sell forecast this year. There's a little bit of each thing. We view our earnings forecast as promises, as commitments to be hit with 100% certainty. And so if you can take a look at it, you can see that the Owners with an operating profit on the page. So we sold JPY 20 billion worth of assets. We generated [ JPY 3.5 billion ] operating profit during this period that we're talking about today has been descended. And so our forecast for next year is we're going to step with JPY 1 billion and something to JPY 4.2 billion. So the gross margin for this year was 14% in Owner, again, there's less on a 1-year hold, generating ROE that reflect 50% to 60%. Next year, we've consolidated a margin that's below 10%. Okay, fine, super, super relevant to hitting our targets, but I think it's actually -- it is a whole always to beat our numbers. I think it's substantially I think there may be see room in there. And without trying to accuse us of being kind of unduly cautious in this [indiscernible] world. Interest rates are really high. There's a war in Europe. There's uncertainty in what's going on geopolitically, but I expect earning something better than this during the next year. Next page shows owners business model. It's really rooted in what's being very, very good at understanding tenant needs and delivering assets that respond to tenant needs. And therefore, because we are very good at serving tenants having -- just to be clear -- I'm sorry, I should have said this. Owner specializes in residential assets in Tokyo, generally kind of prime, super prime locations. So these are very good assets. And they're designed to build well and they target the needs of tenants well and as a result, they have durable on returns for the new owners and what we do is we buy these assets. We do about 30 assets a year. We do about 1,500 leases a year, we do 50 tenants per asset, leasing up, and we sell them and on then we move on to the next year. So it's a very powerful, meaning it adds real value, add real value for the tenants, add real value to developers who have us as their counterparty and adds the ability to help them in their design and construction processes to do well and add real value for investors provided as from us and get a durable to [indiscernible] same return. This business we're going to grow, and that's very positive, I think we're all going forward. Page 27. Next page. We're doing the work to support growth in REITs and Ichigo Green. You see even despite everything going wrong in the world, COVID, Ichigo Hotel continues to pay actually a pretty good dividend. And that's to be very clear. I mean, the REITs are yield assets. In Japan, they're an opportunity for folks who can't get anything in the bank, who haven't got anything in the bank for more than a decade to [indiscernible] decent return and just we expect as well. Next page, please. So we've done a lot on -- and focused on Ichigo, it's our biggest REIT. We think that there was a lot to be done during COVID for Ichigo Hotel. I mean it was a chaotic period just to keep it up and running. Certainly, operators tried to figure out how we can fill our hotel. So there's more activity nothing allowing signed. Now we had a rebound in hotels, you should expect to see us more doing in also. Things on what we're doing. And it comes down to what I said earlier, Japan continues to have a desperate shorter deal. REITs have gone up everywhere else in the world in a skyrocketing way. It does not happen to Japan. As you know, the BOJ has managed rates up a little bit. So the [indiscernible] fee target of sub-0 to 0 to 25 basis points, 50 basis points. As a hypothesis, we suspect that it goes something like 7,500 basis points. It's not clear that it's really going to end up showing very much in terms of yield for retail and institutions in Japan. So delivering kind of a robust yield without currency and risk, without the currency and political risk in Japan extraordinarily stable economically, politically and socially is something that we think is important for us, and we work for Japan on that basis. Next page, please. To build up American business, we have a little bit of a drop off this year because there's going to be some large scale maintenance and then it begins to grow into next year. We have permissions to do a lot more something [indiscernible] green biomass. It actually because good biomass runs 24 hours a day and has much higher as part of the bid process. Tariffs actually at very high returns to it. So that's 6.8 megawatts [indiscernible], but kind of a solar equivalent, but we expect to see much more activity on solar power at a minimum 15 megawatts and probably we want that going forward. Next page, please. Shows our share buyback activity. The shares have achieved for a long time, it is something we're actually very focused on, and we need to fix. It is our -- an opportunity for us to buy our shares then get very accurate price since we bought back over 10% of the shares in the last couple of years, and we would expect to continue to do so. Next page, please. We also focus on dividend. Having done the profile focused on buying back shares. [indiscernible] is like we kept the dividend at JPY 7 for 4 years. It's time to push it up. Obviously, firm is very, very cash generative, we're fully able to do so to increase it another [ 4% ]. Next page, please. As you probably know, we are a top sponsor of the J.League, Japanese Soccer League. That was tough during the COVID period since savings were shut down. We're now back to full on. Every time you go to a daily match, there is Ichigo stadium, it's on TV, very, very powerful from a branding perspective. We've made an unusual choice, anything right choice to take, so we get all these things in the data generally, what companies say is like, great, you have tickets to hand them out to like management or I don't know customers, something like that or to boys and that we think we work to show us and these belong to the shareholders. And so tickets go to our shareholders and to the REITs shareholders because, again, we work for our REIT shareholders in the same way we work for a shareholder of this company. And so we're the first company to offer shareholder program, shareholders -- for all of the shareholders or REITs. And what's interesting, I think you'll probably see us more involved at the front row. A lot of conversations going on that could involve must be the sponsored club is on, sponsor not the exact club level. Anyway, that's Tegevajaro Miyazaki. Turning to the forecast. We have all-in OP up 7% and cash EPS, up 3%. It's probably very conservative. But look, it is what it is. We expect to be good numbers. At this year's, cash EPS forecast is JPY 34.19 that puts us at 3.3x current year on these. I mean we think, given the durability of franchise that makes share very good and growth that we shared a very good value. Next page shows the segment breakdown, being push down in asset managements. That's part of that drop off a performance fee. Part of that is we sold some assets. It does push down or asset the management. And to be clear, those are our values. I mean we're not going to be a J-REIT like we're not going to sell assets because it pushes down our fees. We manage J-REITs on behalf of J-REIT shareholders. So that's the right thing to do, then we think we can do asset sales and AM drops or NOI perception drops, and that's what it is. Now having said that, we fully expect we have command of a premium valuation average of office and we'll continue to be going forward.to grow the asset manager business. What's happening this year is some drop up for those fees. So the created NOI, and we were the only J-REITs Ichigo Hotel and Ichigo Office 100% success fee, performance fee basis, so NOI drops that affects us. We also got some loss increased costs better than that. We've both been conservative about revenues and contribute to our costs. So I expect some flat earning up, but this is going in there. Clean Energy, hand goes up. I'm sorry. I think conversion on the page by JPY 20 a share. Clean Energy comes off and that's come to the large-scale maintenance that has increased the cost during this year and then now come back to next year. Finally, last page shows how cash earnings move. We're not back to pre-COVID levels for either stock or flow so we've got to get there and we're going to get there. So to get back to FY '22 is going to onboard of firm to smash those numbers in a [indiscernible]. Thank you very much, everyone, for your patient listening. And we're now happy to take any questions or comments.

Greg, thank you so much. Go ahead.

Scott, can you hear me?

I certainly can. Thank you so much.

I have 3 questions. The first one is on hotels. Can you describe a little bit how the recovery was for RevPAR versus your expectations overall, especially second half of last year?

Yes. Do you want to take the question one by one?

Well, up to you, whatever you prefer.

You can tell me. I'll take -- I'll go for it.

Sure. The second question is with regard to Ichigo Owners. So as per your presentation, you're suggesting that gross profit margin is going to come down. Is that because of rising costs or more visitation on pricing from the point of view of the buyer? And also, I noticed on the slide that you are forecasting more sales than by this year. Is that reflecting a slightly different environment? That would be my second question. And then my third question would be if you are able to give us an update on the asset sales for JPY 15 billion? And would that be the reason behind the guidance?

I'm sorry. The asset sales for -- which page you on?

For the JPY 15 billion hotel sales that was canceled by Ichigo REITs in March.

All right. So hotels. We disclosed the RevPAR meeting. I think Greg, maybe for all 3 very, very good questions. Update 7.

Yes.

So I mean, one of the things that's interesting, and we should address this. These are very low RevPAR, right? JPY 6,000, current exchange rate. We're talking about it. And one of the things that's clearly happened in the Japanese market is that more expensive hotels have substantially upper one. It's both on a function of high net worth that we do relatively better in Japan as this case across the world and going through the economic shocks of COVID, then having more disposable income and savings and be able to lend public office up and say I'm going to go places and catch up for 2 years of loss light and cheaper yen getting weak instead of having more inbound activity. And so one of the things we think we had to fix is that our RevPAR is still actually at this point only running about 80% to pre-COVID levels. And when I say fixed, we should mean to be thoughtful about. So this has been -- we specialize in 2 kinds of hotel assets. One is budget and the second one is THE KNOT, which is a high boutique hotel one. And THE KNOT is clearly the place we should be going. It just -- the ability to have -- the ability and the willingness to pay on the part of Japanese [indiscernible] higher. So migrating a RevPAR up higher, it's a way of saying, these numbers are actually, we think, this point, the RevPAR should have grown more. And we think that we have to do some work as a company to get there in terms of thinking about our hotel performance. So less on the budget, more kind of a mid-tier U.S. dollar per night, USD 100, USD 150 a night is where we think it's going to be more growth going forward. And so you'll see hotel sales in our part that -- and if you see hotel activity on the purchasing side, although we're not super vicious on that right now given that we still have lower NOI, and/or you have higher NOIs for these assets that are more expensive than it's in what wonders about whether more like us, we're seeing the market opportunity at supply, we'll take away that. So we're not super excited to reach and start paying top value for hotels. But Greg, the answer to your question is great RevPAR recovery. We think we'll -- this year's numbers, we've been very conservative on. We think we'll see more RevPAR recovery. You'll see outperformance in hotels is here relative to what we penciled in for the forecast. But we will be migrating more of our activity towards things more like THE KNOT as opposed to classic regular hotels. Did that answer your question?

Yes.

Ichigo Owners, that would be page -- let me go on Ichigo Owners Page 25. So let me be very direct. You have asked totally appropriately. Why is this weak? And what would be the reasons for it to be weak? And it's not clear to me the reason for it being weak or anything other than we've [indiscernible] cost on the forecast. We've got -- my -- okay, we want to be -- we want to give numbers that we hit. There is -- there's a big enough activity here that impacts total earnings. We chose some numbers relatively conservative. But I don't see decreased demand. I don't see weakness in pricing. I mean, there's a little bit of wobbliness going on with global investors, but it's -- we have problems with the global PE funds and there's some shift of activity globally away from real estate. And as you can imagine, towards bonds because real estate financing has gone up. And I can see outlook looks bigger and bond paying a lot more, but that hasn't have demand. So my hypothesis, and I speak of hypothesis because I have hypothesis and tested against evidence that emerges well as our view. It's that the little bit of wobbliness in global demand is going to be met by continuing voracious appetite for a decent return in Japan. As you know, there's some repatriation at our real firm, the Japanese portfolio allocations overseas in part because you can finance your hedges on global lots, both in U.S. and Europe primarily and out for Japanese bond yields and cannot do that anymore. It's gone deeply negative. So when it comes down, it needs to return. You're not going get return on bonds. So we see substantial domestic activity coming towards Japanese real estate. So we're saying, my current hypothesis is that we actually did this number going to come in something that looks like what we did last year, looks more like 14%. And now on the asset flat sales, we think we'll get that done. So they're -- as you know, we're very hurtful, and it's all on us. We are going to do hotel reoperating. It was a miscalculation. It -- honestly, it does not appear to have been material with historic financials is not very big. But when you do make a public offering and trying to sell things to retail investments demand, you have to have abundance of caution, et cetera, et cetera, et cetera, so we canceled the deal. But we think that that's just -- and to be very clear, as I said earlier, we sell assets to our REITs at below market prices. So if the alternative is we go into the market and sell the assets at some of the higher price, so that's where we are now.

So you were saying that your strategy was to focus on THE KNOT. If I remember correctly, one of THE KNOT hotels was actually for sale as part of that batch of hotels. So when you take it back from the batch and keep it for yourself, so to speak, and that...

We don't intend to sell THE KNOT because it's an Ichigo franchise outside -- at this point, outside of Ichigo itself. So actually, nothing so far. So far, we're going to the hotel REIT. And so if we decide not to sell to the hotel REIT and we'll mix up our hotel asset, some kind of sale category but -- and I talked about it before. I mean, generally, what we do every year is we'll line up, like there are 10 assets that we can sell to hit our numbers, and we're going to sell process on 20 assets, literally because you do not want to just going to go for one corner shot on getting pure numbers. It is a way of saying that we also intend to have an abundant source of assets to sell because of the value-add activity. But yes, you're right. If we don't sell to THE KNOT hotel REIT, we will...

Then you keep it?

We will keep it.

But am I inferring correctly that the guidance look a bit conservative because of the uncertainty on the JPY 15 billion of sale of hotels to the REIT?

Yes, yes. I mean there is a number. Having said that, it is also the case that we try to be thoughtful about showing the actual segment level guidance also that we have numbers that make sense at the segment level. In general, we look for several ways to get the data numbers. And so that's not the only, but yes, there was a little bit of that in this year's forecast. So there is a question as to why we've increased the Ichigo Office stake to greater than 30%. And to be clear, that's primarily buying activity of Ichigo Trust, some major shareholder and ask ourselves. We did begin a Ichigo Office buyback earlier in the year, and that's ongoing. And that was directly linked to wanting to create very high levels of alignment with -- between ourselves and REIT shareholders. We think the REIT asset class is really productive, meaning that it is a great way for -- and one of the few ways outside of high-yield equities given the lack of yield in Japan for Japanese savers to earn a decent return. And the J-REIT market is not growing nearly enough. It's been plagued by concerns about sponsored complex. And so to try to do everything we can, we'll demonstrate structurally our values that we care and that we're aligned with our REIT shareholders is -- we think it will remain important. So that's what's going on the REIT of the Office, REIT is secondary. Thank you for your question. And the next question is, can you disclose the investor to Ichigo Trust? Well, the Ichigo Trust invests primarily for -- yes, by name, of course, -- and again, I'm here as Chairman of Ichigo, wants to talking with Ichigo Trust investor. Fair question. Primarily, charity auctions and foundations, mostly in the U.S., also in Europe, also good one. So very long term in its approach and something that Ichigo feels proud of that. And the major owner of this firm is primarily -- and now it's [indiscernible] so we try to make the world a better place. So for all of us to contribute to them, for all of us to take on those values and work for the world is something that we find meaningful. Thank you, everybody, for your time, and it's an honor for Ichigo. Take care. Have a good day.