Ichigo Inc. (2337) Earnings Call Transcript & Summary

Hi everybody, thank you very much for joining today. I am Scott Callon, Chairman of Ichigo. We are here to discuss the FY '24, so the February 2024 full year corporate results. I am joined by Tet Fujita, who is our Lead Independent Director; and by Dan Morisaku, who is a senior member finance team and the Head of our Global IR. So let's jump into it. Starting with summary. There's a lot of information today. So I'm going to go relatively quickly and jump around. The [indiscernible] technical phrase, things are screamingly good. I'll go into more detail on this. Year-on-year earnings up across the board. We've got All-In OP. And the 2 most important numbers for us are All-In OP and cash EPS. So they were up 25% and 19%, respectively, year-on-year. Record stock earnings with very successful activity in our hotel business. This was a great business, which became a terrible business during COVID and has become a great business again. We're driving shareholder value via both growth investments and share buybacks. We -- asset acquisitions, which are a forward driver of profitability. We buy assets, we preserve and improve real estate and buy assets and add value to them and sell them on. So the fact that we're finding assets we find good to buy is very important with respect to our Forward Earnings OP. We did 2 share buybacks during the year. One of those is ongoing. We bought back 2.7% of our shares. We are canceling 60 million shares or 12% of our total outstanding shares, we do bought over the last 7 years. And we're in our third conservative dividend increase but we are not the company that is focused on dividend. We're a company focused on driving maximum returns for our shareholders. It is a case though that the amount of cash that we're generating allows us to drive higher dividend. And we have a domestic investor base, in particular that really likes dividends, so we're happy to give people dividends. But at the end of the day, Ichigo was about growing as much as possible, stable, sustainable EPS for our shareholders. We worked on growing value for Ichigo REIT's sponsor. We have a high quality asset pipeline. We provide financing. We've actually been buying REIT shares ourselves. We think they're both cheap and there's also a way to increase sponsor realignment. Here's a brief summary of what the high-level numbers look like. Our stock earnings relative to fixed expenses are over 200%. That's a way of saying we are structurally profitable. The total stock earnings as a percent or about 60% of our earnings are up 24% year-on-year, led by growth in sustainable real estate, asset management is up a little bit, clean energy was basically flat. Here's how the numbers break out. All-In OP, as I said, up 25% cash EPS, up 19% year-on-year. It's important to know that we are focused on maximizing long-term cash flows for shareholders. It means our cash earnings or economic earnings -- may exceed our accounting earnings. Specifically, cash EPS is 1.5x our EPS and our cash ROE is 17%. Here's the segment earnings details. Asset Management looks ugly. It's down 50% year-on-year. As you'll see we had -- our performance fees are down absolutely massively. We had an extraordinary year last year in terms of performance fees that was not to be repeated. But that business is in terms of its basic growth profile is going well. I'll talk about how it grows in the next year also. Sustainable real estate, both across Multi-Asset and Ichigo Owners, which is a much higher turnaround -- turnover business. Clean Energy was down a little bit. That was primarily from one-off maintenance activity, where we're going to shut some plants a little bit during this year. We had our second largest plant to come online in January. So that's in the final 2 months of the year, we'll have a full year earnings contribution from next year. I'll go through quickly this. There are certain elements of our business model, which are important. One is that we have a combination of both stock and flow earnings, meaning we have this super durable stock earnings base, which more than -- and it was double our fixed costs. But we also have flow earnings that are on top of it. The stock earnings were a record high this year. Here's on a breakout by segment. As you can see, one of -- we are primarily at this point still driving the returns of the firm out of our sustainable real estate business, SRE. But it's interesting to look at the page. We've done more in the hotel space. We actually bought a hotel operator a couple of years ago right in front of COVID that was disastrously bad. As you can see the light blue kind of what is -- it's a royal blue line that goes to negative 866 at the bottom in FY '22, that we got all that back this year. That business is a non-asset business. We think that's very positive on durable returns, and we expect to grow that going forward. Our Embedded Forward Earnings. We have called these kind of unrealized gains. And so these are third-party appraisals, which put our unrealized gains at JPY 72.5 billion. Total market cap is around JPY 200 billion. So that's a big number, and it continues to grow. What's really important to see, though, is that we think those third-party appraisals substantially underestimate the actual embedded gains that are in the balance sheet. As you can see, we generally realize about 2x, 2x the returns of the appraisers think we're going to generate. It's a way of saying -- we have about JPY 100 billion of shareholder equity. We've got JPY 75 billion of what the third-party appraisers say are unrealized gains. We doubled that which is JPY 150 billion. We're actually trading right now on that basis at about 0.85 NAV, it's a way of saying, both were cheap and to -- I -- and everyone else at the firm needs to work harder because we're trading a discount to our breakup barrier. So that is both a statement of valuation that we think is compelling about the company and to the point, again, we need to work harder. And so we're going to deliver more value for all of you as our shareholders. We are focused on, as I say, nonaccounting metrics, not things like net income, which is only accounting. We're focused on cash. So economic operating cash flow is super important to us, and that regularly tracks in at double our net income. Here's what our financing looks like. We actually put in a forecast for you because as you can see, we do the financing, the average tenor of remaining loan maturity dropped to a little bit above 5 years. So it looks like it's always going down. So we want to give you the guidance as to what's actually going on. We've got a bunch of refinancings that are occurring in the next 3 months. And so the Q1 forecast will show you what's going to happen with that we're going to be done back up. It's worth pointing out that you can see that our average cost of debt is going from 89 basis points, which is fantastically well to 105 basis points, which is also fantastically well. But it's doing that really, really quickly. So to explain what's going on there, there has been a big upward move in TIBOR. So our base rate for almost also what's going on there -- there's no change in our spread. When the Bank of Japan removed its negative interest rate policy last month, all of a sudden, TIBOR moved. And so there's been a move of TIBOR from 8 basis points to 26, so an 18 basis point move just in the last 6 weeks. That means our financing is going up, everyone's financing is going up. So welcome to a world of Japan where we go from extraordinary low interest rates to still extraordinarily low interest rates, but that's meaningful. So there's been a -- we expect to see a 16 basis point move in our financing costs. And we think that's going to go up. So the good news is the return opportunities in our real estate business has gone up much more than a small uptick in financing costs, but we think financing cost continue to go up, and we're going to continue to outdeliver against the financing cost increase. We are -- and I'll talk about it a little later, very well regarded for the strength of our sustainability activities. This means that we increasingly are using something that Japanese financial institutions really want to do, which is more sustainability in ESG linked loans. This is -- this point, it's about 1/4 of our loan book. These loans have better terms than our standard loans. This is a really great way for us to increase kind of the attractiveness of our financing, and we're doing so. Here's what buy-sell activity looks like in a sustainable real estate business. Probably the most important to see is that acquisitions and sales are almost identical. So we bought more this year. We sold more this year. There is -- the business -- we're increasingly turnover in business because we can and we should that drives higher returns for our shareholders. It's a very strong market. I'm sorry I'm not going to go in a lot of details because there are so many pages -- and we'll have a question and answer and I'm happy to get input there anyway, we run for turnover is increasing in a very strong up market below our value-add is increasingly [indiscernible]. This is what looks like breaking out the 2 kind of key businesses within sustainable real estate. We have the classic multi-asset business, which does kind of multiyear value add. And then we've got the Ichigo Owners business, which has got an average over less than a year, so much quicker. You can see there's kind of broadly equivalents between the buy and sell activity across that as it should be. We do not own assets forever. We buy assets, we improve them. We then recognize the value created via doing transactions with real estate -- new real estate owners who want those better assets that we have [ gripped ]. Our hotel earnings are going up also. As you can see on the bottom, you've got that devastating negative impact of COVID and the operator business. You can also see the plunge in the RevPAR that occurs as we go into COVID, and now we're back up to 1.4x pre-COVID -- things are very, very strong. Let me talk a little bit about our biggest asset. We bought a very large asset. It went really, really well into COVID. It was located in the Odaiba area, which is going to be a major point for Olympics activity. As you know, the Olympics was first postponed and then canceled and an event with spectators can be involved. But more fundamentally, we had these massive COVID link departure or [ senate ] departures. So occupancy went from 100% to 50%, and it was devastating. And we spent the last couple of years going back from that. And again, we add value to our assets. We are absolutely tenacious trying to understand what tenants want. And so the good news is we have had the ability to address the situation, to solve problems for tenants and to offer them spaces and functionality that they want to -- it's a very good office. And so the occupancies [indiscernible]. Very specifically, we're doing things to make the tenant spaces more attractive. We have taken a building, and we've repositioned it away from very large tenants to smaller kind of startups and who want to spend more time with each other. We created open spaces. We've got cafe, we've got lounge, we've got meeting rooms. We've got kind of community events where they can meet each other. We are -- it's always been our view that was somebody fundamentally true about [ we work ] and its approach to people want more community. We just think that the massive part of the market is does not want necessary community within kind of a shared space, they want a community that can be available to them within private spaces and also in shared spaces. And so that's what we're doing with our assets and Odaiba is an example. Ichigo Owners continues to grow. You can see that we delivered JPY 5.4 billion of operating profit in the last year and the year going forward. We expect that to drop to JPY 4.5 billion. About -- we had about JPY 500 million of excess rental income, meaning that we actually tend to do owner sales kind of in the middle of the year. What happened is we actually didn't do the transaction -- a very large sale transaction at the end of the year, so we got additional rental income, which is great. We're happy with that. But we don't think we should look for monetizations are always happen at year-end. So we'll have a drop off from some rental income. We actually outperformed very substantially what we we're expecting in terms of the gross margin on some of these transactions. So we think JPY 4.5 billion is a more normalized level, and we'll see how much we can beat that by this year. The other thing that's important is the owner's business has really transformed itself. It started out as a kind of very small business focused on kind of cash rich individuals and business owners and businesses. That's what the JPY 2.6 billion number the small number looks like in fiscal year 2018. It then transformed itself into a [indiscernible] institutional investor business. We ended up finding out that, yes, you can sell kind of one asset at a time for $8 million or $12 million, but you can also sell 20 of them at once to a large institutional investor, which wants -- and by the way, just to remind you, owners does brand-new prime, Tokyo prime residence, it's like a bond. I mean these are very, very good assets. They offer kind of several hundred basis points pickup on a financing over JDBs, very attractive to investors. So it turned out that when we started, we thought it was going to be a small light institutional investment business. We realized there's a massive institutional investor demand for it. So -- but it's so we end up going as it 2 years. Last year, 75% was going to institutional investors. And what we've done since then is we're building out particularly the Ichigo Residence Tokens business, which now was 34% in the last year. And that is digital real estate securities on the blockchain backed by hard assets, specifically our real estate asset managed by us. This is a really interesting business. It offers kind of REIT like returns to individual investors, not within the REIT structure, but in the digital security token structure. What's interesting about that is a brand-new market segment. Are we investors scale towards people in the 50s and 60s and 70s with a lot of money in Japan -- what's interesting about the STO, security token business is this primarily -- it's much younger, 20s and 30s, keeps heavily demand, but it's a brand-new market opportunity. And we're delivering real value. I'm not going to -- hopefully, it's not a political statement about crypto, don't know. These are not asset-backed securities or kind of crypto assets. But in the case of these assets, they exist on blockchain, but they're real. This is, again, super prime, brand-new real estate is primarily what we're doing and very wrapped in a highly accessible real-time kind of do it on your phone, small lot possessing platform that is [indiscernible] very, very compelling for a much younger investor class. We continue to work on behalf of not just the shareholders of this company, Ichigo 2337, we work for all of our shareholders that includes the REITs, Ichigo Office, Ichigo Hotel and of course, our solar power infrastructure fund, which is called Ichigo Green. And what we do is we work on adding value. So again, I'm not going to go into a lot of detail, but we've done a number of things to support the growth of REITs, and we'll continue to do so. We brought our second largest Ichigo solar power plant online just in the last few months. This is a business that we want to continue to grow. We've shifted from primarily fix to so Feed-In Tariff to non-FIT, as you can see we'll go to the next page, that we're going to see growth. And the FIT part of the business is going to be green biomass, where we're doing purely domestic biomass -- it actually is green which is to say, we take the view that most biomass is not green and it's truly not sustainable and you're like chopping down forest in the Southeast United States and shipping pellets all over the world. We don't understand how anyone thinks that's good for the planet. It is the case, however, in Japan, the Japanese forest could die. They literally are dying out because there's no ability to finance in a sustainable way to taking care of the forest transformation. So by going in and creating purely domestic green biomass problem, we actually can solve for the problem of dying forest. We can, therefore, increase oxygen generation and CO2 absorption that's really very fundamental to the biomass activity that is underway. And we're also moving at a non-FIT solar power. There is massive demand among -- if I could put it this way, right, thinking citizens and companies who understand that climate change is real. We need to do something different than fossil fuels. And so the ability to sell through long-term contracts is in our FIT contracts under Japanese regulatory framework. They're actually just private contracts with companies who want to buy renewable power, and that's something we expect to grow up very substantially. We have done 7 years straight of buybacks during the kind of -- even during the difficult period. We thought the stock was -- our shares are very cheap and continue to think so. The result is we brought in a huge amount of our stock at very good levels, and we're going to cancel 12% of them at the end of this month. We have no -- that EPS growth is real. Those shares are not coming back at you -- and again, this is what it looks like. We'll go to the next page. We have raised our dividend. We -- look, I mean it's -- we have a dividend. If the shares are undervalued, we think it's better idea to be buying back the stock, which is why you're seeing more activity in terms of share buybacks. Then again, there's something about having a robust and growing dividend. And so we think given the significant cash generation in the business we're able to do build. And as you know, we are a top sponsor of the J.League. It is -- and if you turn on any J.League match, you see Ichigo all over the stadium -- it's been very good for our brand. We've also -- it represents our values. We work for our shareholders, classically, companies when they get all these tickets because they're J.League top sponsor, they give them to, I don't know, they give them to the friends and neighbors and people in the company, we give these tickets to our shareholders. We work for you. This company belongs to our shareholders. And so we are the first company in Japan to do this sort of activity on behalf of our shareholders. As the previous slide said, we're working to protect our global environment. The climate change is real. Ichigo is climate positive and will be so substantially into the future. And this is what kind of shows in terms of the growth of our CO2 reduction activity, meaning we're switching off of -- fossil fuels as we build out our solar and wind power production and of course, we're reducing our total CO2 consumption by doing everything we can to reduce our energy consumption. At this point, 90% of our assets has switched over to renewable energy, and we expect to get to 100% over the next year or so. We ranked #1 in the Nikkei GX500 Ranking. So GX is -- stands for green transformation in 2 different categories: emissions management and reduction in information disclosure. The first one is obviously super, super important and the second one talks about our transparency in doing so, we think this is accurate. We are tenaciously focused on delivering the right thing not only for the shareholders, but for the world. We also recognized as CDP at a leadership level in multiple categories. This is a global assessment and Ichigo does as you can expect very well on this. We have done things on net zero energy buildings. And what's interesting about this is typically ZEB, this is like you build a brand-new building and you designed for it from the very beginning. It's actually much, much harder to take existing building and ZEB it. And that's something we've been working on. So this is one of our buildings that has qualified for the ZEB Oriented Certification. Let me talk about the forecast. Probably what's most important to speak to here is I can't remember the exact word I use something about spectacularly [ great ] or fantastically great [indiscernible] great is our current business environment. It's probably not as easy to see. Remember, the key metrics for us are all in operating profit and cash EPS growth. And All-In OP is going to -- we're guiding up 13% year-on-year in cash EPS, up 7%. So okay, I mean it's okay. I mean it's super fantastic at all. But it's important to understand, we actually generated JPY 4 billion of one-off gains on selling our noncore self-storage business over the last year. So All-In OP, on an ongoing basis, last year was JPY 17 billion, not JPY 21 billion. And when that goes up to JPY 24 billion, what we're telling you is we expect this 40% growth in All-In OP this year. So the business environment is very strong. Our ability to deliver value in that environment is the best it's ever been. Things are really good. And so we -- we're a talk [indiscernible]. We expect to deliver on that for you this year and going forward. Segment breakdown. We have Asset Management up 17%, Sustainable Real Estate up 14%, again, that has -- that's even with the drop-off of the self-storage, which was within the sustainable real estate part of the business, and with Clean Energy up 8%. The SRE stock earnings, such as hotel growth, I think that's -- if I had to write that one again, it's both hotel and office growth. The Japan has a very different office environment than, for example, in the United States. I mean in Japan and Asia, the ability to get the work inexpensively. I mean we think there are structural reasons for that, which is a way of saying that the U.S. office market and to -- I'll just say the European office market, very different from Japan and Asia. There's been devastation in the U.S. and European markets. People are not going to work. They don't want to go to work. We think -- I'm not going to spend too much time on it, but some of these elements are structural. In Japan's case, you can get to work generally for something like $2 to $4. It's very inexpensive. People are not going in cars, there's no parking costs, transport because it's very efficient, very fast, is clean and safe. You're on your smartphone most of the time anyway, while you're doing, your average commute to 45 minutes, you're getting 30 minutes of work whatever you want to do as part of that process. So this is a very, very -- and Japanese homes are small, so the ability to go to work would be a much larger environment to get the small, you don't have -- you go to the office, you get very expensive incredibly -- there's a way of saying the costs are lower and the benefits are higher of going to work in Japan. That has resulted in an office market which is robust, very robust despite everything that's happened with COVID and in fact, ongoing expanded demand, and we've talked about this, secular demand for office space, as companies compete for talent and want to have more office space for work to keep that talent -- attract and keep that call it means that the office market is going very well. I think that was my final slide. No, I'm wrong. I think this may be the final slide. So we expect record stock earnings this year. We expect to have a very strong year and we'll see bringing these numbers. I wasn't totally wrong because we didn't talk about updated KPIs. So going to the KPI update summary, it's simple to the next page. We've introduced a few new KPIs. We're focused on high capital efficiency and high cash flow generation. When we put this together, these original KPIs in 2019. We did have a cash as a metric that we are measuring ourselves to do to -- we do now. So we expect ROE to be above 50%. We're below that right now. And we expect cash ROE to be up 18% same that also right now by just a little bit, we expect to get above that. We added a new KPI for earning stability. It's one we've been tracking for years. But again, we think we should be explicit about the KPI that you should measure us on stock earnings, fixed expense ratios as we expect to keep over 200%. In terms of shareholder distribution policy, it's about growth, durability and certainty. As you know, we have a progressive dividend policy. It means that we maintain and raise our dividend. We don't cut it. We don't have a dividend payout ratio, which is super-volatile or can be super-volatile based on what's happening with short-term earnings volatility -- companies, therefore, generally don't want to move the dividend around. And so you don't really don't know what's going to happen with the dividend. We think it's a much better idea to be transparent about what you're going to deliver. We've increased our payout ratio from 3% DOE, dividend on equity to 4%. Therefore, you see an increase in our dividend payout ratio, and we continue to use share buybacks. In terms of additional KPIs, we added KPIs with respect to sustainability, and it's what I touched upon earlier, Ichigo Climate Positive, RE100 and CDP leadership. And at this point, I actually think we are done with the presentation. Thank you very much. I will now turn to a question-and-answer or any comments or feedback. We certainly welcome that. We work for all of you. Any questions or comments from anybody. Well, do you have a question? Sorry, I took us a while to figure this went out.

Can you hear me?

We can hear you great. Thanks for joining.

Yes. Likewise, thank you for the presentation. Yes, 2 quick ones. On the income statement, in the extraordinary losses, there's a JPY 1 billion provision for doubtful accounts -- that was a larger, about JPY 1 billion last year, it looks like it was 0.1 or so. So can you explain what that -- I don't -- what kind of receivable was that? Was that part of exiting one of your businesses? Or is that part of your ongoing divisions? And can you just give some color on that? And that's question one. And then question 2 is -- you may be explained this before, and I'm sorry if I've forgotten. But in your balance of unrealized gains, the JPY 72 billion -- does that include your -- the valuation of your energy business, your renewables?

No, it doesn't. So that would be another source of significant value [indiscernible] bring that out. So -- I'm sorry, I didn't mean to cut you off.

No, that's -- those are the first 2. I might have more, but let's go with those 2.

Yes. So the JPY 1 million which is what, about USD 7 million write-off -- was writing off. There was basically a flurry of activity on our part in relatively small scale. I think all in it was probably like $30 million to $40 million of investments in various kind of interesting new ventures that were not kind of central to our business, but we think would be additive and this one was in the agriculture space. And most of the business did not work out. It was a humbling and very powerful reminder to stick to your knitting. Now of course, part of the reason why we signed off on this activity as a board is like, okay, it's really interesting. Let's say if we can extend Ichigo into these new areas, for example, agriculture is a very big market. But it didn't work out. And so this was kind of, I think, actually the final last write-down of an agriculture related activity, and it's actually a relatively active institution that's out there. So I'm not going to use the name, but that we wrote down. So stick in the knitting, do what you do really, really well. That's what it is.

Okay. So it's noncore, and we don't expect that to happen in other businesses. Okay. And then if you had to guess what's the unrealized gain sort of versus book in your renewables business.

If I had to guess -- what we're caring about on this I need to look at -- forgive me -- I'm going to pull up...

And while you're thinking about that, and I know I've asked this and I know you've responded. So I don't expect any changes, but won't that -- if that is a considerable level or amount of value, wouldn't it make sense at some point to either drop down some more into the Ichigo Green REIT or sell to a third-party investor. And as part of your sustainable real estate asset sales business generate some of that from time to time. Any comment on that as well?

Yes. So look, the carrying value and then -- on the balance sheet for our clean energy assets. So this is a solar and wind. It's currently at about JPY 30 billion, so USD 200 million look and that's probably worth and we can kick around what that number is. But is it worth JPY 60 billion, is it worth JPY 90 billion. There's a lot of unrealized gains there. So mix, it's very variable. I don't think that rolling it into Ichigo Green the infrastructure fund is the right market. It doesn't seem to have kind of the pricing power and its current valuation to justify it. But look, I like your thinking. We -- this is a worthy debate and it is a debate, and your input and everybody's input is valuable and I've talked to our shareholders about this and I particularly do so all the time as to whether or not people find this business sitting within Ichigo 2337 as being more valuable and spinning it out. And it's something that we constantly look at. It's really or not where it should be. But yes, there is substantial value there. And if you include that, I told you we're at 0.85 NAV if you grew that, we're probably more than 0.70 or 0.65 NAV. So again, work harder. Greg, Thanks for joining.

Thanks for the presentation. I'm going to ask the usual question on Tradepia Odaiba. So you've managed to exceed your 80% occupancy forecast. So that's great. I was wondering, can you give us a bit of color on the rents you managed to achieve? And then the follow-up question to that is you've managed to repopulate the building, you've adapted it to more like SMEs kind of what's next, so to speak.

So we're taking rents down about 10% relative to where they were pre-COVID, which is fine. It was very important to fill the building. Look, I think the direction on this is the direction that we have with any asset. We're going to sell this at some point, right? It seemed like to be a bad idea to try to sell it at 50% occupancy or even 73%. But the good news is we've done a bunch of work to demonstrate the attractiveness of the asset. We are ramping up occupancy. And so that creates the conditions for us to move on. And I think we move on in the context of a general approach to slimming the balance sheet and also hard lesson learned. The thing about this asset, and it's big, it's book value is about JPY 30 billion. So it's, what, 15% of our total real estate assets is that we've learned that large buildings are just much more difficult, fewer tenants, concentration risk, it's just so striking how Odaiba -- Tradepia Odaiba occupancy half during COVID and our average kind of smaller, which we tend to do small, midsized office building like missing went from literally 99 to 95. I mean that's it. Much of that was kind of first floor retail tenant that was punched in the face by COVID. So the firm does experiment and do new things. I mean it doesn't do it in a reckless way. We tend to be careful about how we kind of -- about change in risk. And we looked at -- this is our one experiment on [ company ] something big. I'm very confident we will sell the asset more than what we paid for it. It will generate capital gains, but we are looking at what the endgame looks like on this probably, I don't know, next 24 months, something like that. Okay. I think we're done. Thank you, everybody. We really appreciate your time. We look for you. We will run forward, as I say, it's an extraordinary environment right now. The operating environment is great set of capabilities we have continue to be deeply relevant. And so we expect to deliver record earnings and hopefully, a record share price for you as we went forward. Thank you, everybody. Have a good day. Good morning, afternoon and evening.