Ichigo Inc. (2337) Earnings Call Transcript & Summary

I'm Scott Callon, Chairman of Ichigo. Thank you very much, everyone, for joining us today. We are speaking off of the FY '25 02, so the February 2025 full year corporate presentation, which we put on our website. I am joined by Ted Fujita, who is our Lead Independent Director; and by Dan Morisaku, who is a senior member of Finance team and the Global Head of IR for us. So again, thank you very much for joining. Let's jump into it. We had a good year. It is an extraordinary time in the world right now with a lot of uncertainty and that the business is extraordinarily profitable. In many ways, it's one of the best operating environments we've experienced, and I'll talk to that, driven by inflation in real estate and our ability to deliver higher value real estate at a lower cost, and so it makes us very competitive. It also means our balance sheet assets have become far more valuable because of real estate inflation. So looking at the top line, all in OP, up 17% year-on-year. Cash EPS up 12%. We had record cash earnings, record stock earnings, earnings are also up. We end up delivering an ROE of 14.1%. Our cash ROE, as you know, we are very focused on cash, 18%. Big driver is the hotel business, which was extraordinary profitable and then devastating during COVID and has become extraordinarily profitable again. So the hotel and hotel asset management cash earnings are up 38% year-on-year. We grew our Asset Management AUM 12% year-on-year to JPY 385 billion. And the cash generation is super strong. And so we don't have to make choices about do we want to finance growth activity. Again, we have a very capital-efficient low cash required for real estate business. So we can do asset acquisitions and we can do share buybacks, and we can do dividend increases. And so we've done all of those. So we bought back 3.3% of shares outstanding in the year that we're talking about. Today, we're in the midst of another new buyback right now. Asset acquisitions where they jumped over up 9% year-on-year, we bumped our dividend 17% year-on-year, bumped it again. DOE is 4.1%. We'll increase our dividend 10% in the new year. And we're buying back our stock because we think it's very, very cheap. So looking at what's happening with stock earnings, and this is a core element of the business model. We have -- we are structurally profitable. We have stock earnings, so those are contractually based earnings that are run at 210% of our fixed expenses. We have stock earnings. So there's a flow. Stock and flow hybrid business model, stock earnings were 59% of our total earnings contribution over the last year. We have introduced more detailed expanded segment reporting. We think it's important to be a company that people can understand. We need to deliver high-quality growth, and high-quality growth includes transparency. So what we've done is we've broken out the Sustainable Real Estate segment into three segments, Sustainable Real Estate. We'll carry on keeping the ongoing office and retail and logistics assets in it. We have a higher turnover, highly capital efficient business was primarily focused on resi, residential, which is Ichigo Owners, which we're breaking out. And we've done some breakout over time, as you know, but we're doing more of that. And we're spinning out Hotels as a segment just because it's an area we continue to -- it's similar to Sustainable Real Estate. We do a lot of work to increase the value of hotels, but it's an area which has a different kind of economics to it, different kind of flows to it. We think it's helpful for all of you to know how the Hotel segment is operating as an independent segment. So again, as I just touched on it, OP, all-in OP was up 70%, cash EPS is up 12%. We don't pick and choose our favorite KPIs, meaning you can say, hey, look, our OP was up 26%. Our net income was up 25%. EPS is up 30%. Those are all true. But the best way to understand us is our all-in operating profit and our cash EPS, and that's what those two look like on a year-on-year basis. Looking at the segment earnings details. At this point, it's pretty obvious. We have built a portfolio of businesses that are diversified, which all take advantage of our core capabilities and adding value to real estate. And that includes Clean Energy, which is a business which we went into because we thought there was an opportunity to do some interesting things that are good for the world and good for our shareholders in solar and wind power. As you can see, Asset Management, all-in OP, up 75%, Sustainable Real Estate is up 46%. Ichigo Owners is down 39%. Hotel is up 35%. Clean Energy is down 11%. So these things are -- they're moving as a diversified portfolio will do in a different way. And yet you get as an outcome, a plus 70% across the totality because it's just a robust set of businesses. Owners came in. It will come up this next year. I won't go on -- we've got a lot of information to you -- for you today. We have a very long deck as always. Look, we believe we're providing more information rather than less. So I won't drown you in detail, hopefully. But the bottom line is the business is all doing well. There's some volatility within the businesses, and yet it's a super, super robust operating environment, was therefore, we were able to deliver the results of this year and continued growth into next year. So just going through some of the characteristics of the business. As I said, it's a stock and flow earnings model, record cash earnings, up 15% year-on-year. And the stock earnings are secure and become more secure. As we diversified our portfolio, you have, as I said, these diversification effects, which are positive. And we've got strength across the board, I would say, with the exception of Clean Energy, I'll touch on that later. That is a business that we should have grown more. I promise to you that we'll be super transparent about what we think we've done well and what we've done less well, and we expect to create an opportunity at this point -- and battery storage is there, but this is a business -- a set of businesses that are performing very, very well. We have embedded forward earnings, which is to say the balance sheet as we provide and kind of our accounting financials does not show these unrealized gains, which are third-party appraisals and they continue to grow over time. We actually think there's a lot more growth from last year into this year and yet the bump in the appraisals only went from 72.5% to 73.1%. We actually think the appraisers are behind, which happens quite a bit. In the down market, they're behind and up market is behind. What I just touched upon earlier is that real estate inflation has been extraordinary, construction inflation, I mean. And as a result, your existing assets have become far more valuable, and that's actually not reflected here. So all right, that's interesting. Well, we think the appraisers will catch up over time, and we'll demonstrate that through the earnings that we generate off of our assets. We do think this is an important pairing to the previous slide because what it shows is systematically, we outperform what the appraisers think of what we're going to deliver, meaning in the last year, we actually generated actual gains on sales of 1.5 what the third-party appraisal would have suggested. It's a way of saying that probably the NAV of the firm at this point looks like something 0.6, 0.7, given that we substantially -- when you start -- when you throw in both the third-party appraisal, unrealized gains and kind of a modest multiple on top of that to reflect the fact that we always outperform. Our economic operating cash flow systematically exceeds net income, meaning our cash-based profitability is higher than accounting profitability. You can see this year was -- it dropped to 1.3x. There's a little bit going on here where you have -- we've got some receivables that are going to come in the next period. And therefore, even though we have profits that we reported, the cash is not showing up until in the next few months, but we continue to robustly outperform and we'll do so on economic operating cash flow relative to net income. Interest rates have gone up. That's the most important thing to see here. We've got -- as of last year, our all-in interest rate was 89 basis points. It's gone up to 142. So that's an increase of 50 basis points, 53 to be exact. You should know that we're substantially hedged. So the actual increase in our borrowing cost looks about half to be half of that, about half -- we've got hedges on about half of our book. But rates have gone up. That is -- one of the things I say about Japan, if you allow me to go to this point, is that investing in Japan, people -- it's not that people have their facts wrong, it's that they have the wrong facts. And one of the things that's happened, I think, with real estate pricing for listed shares and including our shares, is people correctly understood that interest rates going up is bad for real estate owners like us. So they've got that one right. I mean that's -- it just turned out to be the wrong fact. The most important thing is this 50 basis point move is totally inconsequential relative to the huge opportunity created by having real estate inflation. And so as you know, generalized inflation in Japan has been about 3% over the last couple of years. Real estate inflation is probably going 3x that, more like 10% a year. There's a huge shortage of labor. It's skilled labor. It has not been able to substitute for the last 5 years. You probably have 50% to 70% construction cost inflation. The implication of that is for the first time in decades, unlike -- like every other country on the planet, you actually have inflation driving up replacement value, meaning that brand-new buildings have to come on at rents that are 30%, 40% higher in order to justify building them. And it means that we, as existing owners of real estate can raise our rents. It's an extraordinary, extraordinary positive situation and it is effectively brand new to the Japanese real estate industry over the last couple of years. And that is the single most crucial fact, which is going to continue to drive profitability. And so the Trump tariffs and this entire chaotic situation we're in, it has not changed the reality that there is a massive bid for assets because it's very hard to build brand-new assets at competitive prices, and everyone has come to understand this in the Japanese real estate space. And so everyone is trying to buy existing assets. We both own existing assets. As you know, we don't tear buildings down. We take existing assets and put in very low amounts of CapEx to make them better. And so we're super, super competitive in this environment. And we are doing ESG financing, and it continues to be a great way for us to drive attractive financing terms. Japan believes in caring for the world. It believes in ESG. The financial institutions believe in this. We believe in it. Climate change is real and the activities of the firm are not only good for shareholders, they are good for the planet. And this has been and continues to be a real positive for us. About 1/4 of our financing at this point is ESG linked in some way. We are selective on acquisitions and sales, have been forever. As you can see, we have a pretty balanced this year in terms of acquisitions and sales. We bought a little bit more on Ichigo Owners that will go out the door in the next couple of months. And so it's just kind of consistent across the board that we are active in our key assets, our office, retail, resi, residential and hotels. Pretty balanced across all of them with office having grown at this point to 31% of our total assets under management because office has become relatively more attractive. There was a period of time where people thought Japan was not going back to work. They're wrong. They are. The office rents are going up. It's been a very interesting and powerful asset class as is Hotels, except the difference with Hotels is they reprice daily. And so we manage ourselves to effectively 25% of assets for Hotels and no more than that, and that's exactly what the Hotels are right now. That is Hotel continues to be a super, super high-performing asset class for us. We're good at it. It's a harder asset to operate well and continues to drive higher than average profitability as it should. This breaks down the assets and -- acquisitions and sales across these three categories. And again, they're pretty balanced across the board. Sorry, I promised I wouldn't take this into the weeds. I think I'm probably talking too long. So I'll go quicker rather than shorter, and this breaks us out over a slightly more extended period for Ichigo Owners, which again focuses on super prime brand-new residential real estate overwhelmingly in Tokyo, and that's a business that is a high turnover business, super capital efficient. We actually -- we specify what we went built, what we actually don't develop ourselves. And so it's kind of a fabulous model, if you can put it that way, and works really, really well. And this is what Owners -- Ichigo Owners OP looks like, dropped in the last year, the year we just ended. It was basically a pushout of some sale activity into this year, and we'll hit this number. I mean we could do more. I mean the truth of the matter is we have a lot of flexibility as to which assets we sell when. We want to grow as fast as we can for all of you in a sensible way and Owners certainly is continuing on a growth path. One of the things we've been doing is Residence Tokens. So these are security tokens. We've actually pulled in our forecast for this business. It's mostly linked because it is both a financial asset and it's a real estate asset. And there's a bunch of stuff going in the world. I think we've all noticed this. Every day, we wake up and see what's happened. And so it is sold primarily through security brokers. A whole bunch of stuff is going on with the stock market. Again, I think you've noticed this. So we actually had JPY 100 billion as we thought what was going to be our AUM forecast for this year, we pulled it down. It appears to be on the margin that we probably want to sell these assets that are going into security tokens into other markets. As I said, there is a significant massive ongoing bid for physical real estate, but we'll see. So as I say, we pulled this number down, and we'll see kind of where we end up doing -- what we end up doing. Which is a way of saying the core capability of the firm is adding value to real estate. And then we take that real estate and we sell it, we optimize kind of the gains for all of you, our shareholders, by deciding which distribution channel and which buyers are the appropriate place to -- place the asset. And so the fact that we built out a broad set of sales channels is really powerful in terms of maximizing value for all of you. Pointed to this on the first summary slide, 38% growth year-on-year in Hotel and Hotel Asset Management cash earnings. RevPAR is going up, continue to go up in the first quarter of this year. So January to March, we're up about 15% over last year, OneFive. The inbound has not ended. Yen is kind of at 143. That's not super different from 150 in the grand order of things when the yen was, as you know, a couple of years ago at 100. Japan is fantastic. It's safe. It's secure. It's welcoming. So nothing has changed in terms of inbound activity at this point, and it continues to be a very robust asset class for us. We have a hotel operator, OneFive. It continues to grow its hotel rooms under operation. Okay. I'll try to be shorter. Next page. We buy and improve assets. So there's a hotel. We're now doing a full-scale hotel renewal in Utsunomiya, which is slightly north of Tokyo. As you know, we've introduced the THE KNOT series, which is our boutique hotel brand that has been fabulously successful. Two examples we have on the page are THE KNOT Yokohama and THE KNOT TOKYO Shinjuku. We buy -- we do very substantial CapEx to make these assets much, much better in terms of guest comfort and functionality. And the result is a significant improvement in NOI. And actually, the kind of value creation outperforms that because what you get is you get not only increase in profitability, you get a much better asset, which deserves a lower cap rate, meaning a higher multiple to it. So a significant increase in value growth that helps explain why we continue to be active in this area. So we're going to introduce THE KNOT Utsunomiya. We'll also do one in Osaka and Fukuoka. So THE KNOT brand continues to grow. This is an example of some of our activity in the office space in terms of adding value to assets. To give you some sense of this, we had put about 20% increase in terms of CapEx on top of acquisition price, so 20% CapEx investment and 90% increase in NOI. These numbers really work folks. Tradepia Odaiba, this is the fabulous [ ex Fujitsu ], so the big trading company headquarters building, which was fabulous and then got absolutely crushed during COVID. And it was on the Olympic venue. And so the tenants that came in for that and they all vacated. And so this became, unfortunately, a problem asset and is back to being the fabulous asset it is. For better for worse, and it's both, we are massively outperforming everyone else in the area. So we're up to 88% tenancy. We see a path to getting back to 97%. We've done what we do. We work really, really hard for our tenants. The expansion by existing tenants, over half of the new lease-ups are by existing tenants. It tells you -- I mean, they're talking with their feet. They're really satisfied with what we've done with the building. We made it more beautiful. We made it more open. We've made it more flexible. We have events for the tenants. It's a really, really good outcome. And when I say for better for worse, I mean, we're at 90% heading towards 100% in terms of occupancy. Buildings around us, some of them are -- they're running at 50% to 60%. And so it tells you how much better we are doing this. And it also tells you that we do expect to monetize the asset that we're going to have to be very, very clear for the buyer as to what we've done and why it's so much better and why this has effectively become a trophy asset in its own kind of destination asset in the area because it is so much better. The -- I mean the alternative is we do more in the area, and we'll look at that. We would prefer to sell this, move on and possibly buy a building next door, do the exact same thing. You can look at the very top picture, and you can see the fabulous -- you see Tokyo Tower on the right side. I mean, the views are fantastic. I mean this is -- it's a fantastic location, spectacular views. I mean fantastic location. It's slightly outside the center of Tokyo, but has really good access, really good transport access and it's absolutely beautiful. So anyway, we've done very well with it. And when I say fantastic location, that's all about cost performance because it's -- our rents are about half the rents in Central Tokyo. So it's a very good cost performance. All right. I'll move on. Sorry, I talked a lot. Again, asset management. This is another example of us diversifying and taking our core capabilities and asset value add and doing new things. So the residence token and security token is an example of how we grow asset under management. We bought a private REIT company, we're growing that. And so this is an area we'll continue to grow. Harder to grow the listed J-REITs because we only grow them if it's good for the J-REIT shareholders. And the shares are clearly undervalued relative to what I described, extraordinary positive real estate market, but a lot of nervousness in the markets about how interest rate increases will affect things. But the more fundamental issue is, as I said, the replacement cost haven't gone up. So -- as a result, we think the shares are undervalued, and that does not call for us to do kind of new issuances and growing each of hotel or each of office. Instead, what we've done is we've done capital recycling in a way that serves our shareholders. Clean Energy, unfortunately, has not grown as much as we should have grown it. And so we've done a hard think about what we need to do -- what we could do more there. This is a business we really believe in. And we think what's going to happen here is likely to be -- I mean, we're looking at the green biomass and the non-FIT solar power. Those are not huge drivers of the business at this point. We think battery storage entry has become very interesting. The economics with the extraordinary pricing that is coming out of China now for batteries, and Japan is open to imports from China has made the economics of battery storage in Japan very powerful. And so you should expect to see an entry from us in this area. And we'll start small as we normally do, but we think this could scale quite rapidly. So that's an interesting new area that we're going to explore and try to do more in this area. We are active in buying back our stock. As I said, we think it is -- the markets have underappreciated. And when we show up with earnings like this, and we'll have more earnings to come and when we put out a forecast, and we expect to beat the forecast this year. When people see the robust kind of underlying earnings trend, our expectation is that the market will begin to appreciate that real estate is actually a very good place to be in Japan right now and particularly what we do, which is not from the ground development, which is a really, really hard business to be in. If you're trying to do greenfield right now with how high construction costs are, that is a real wind at your face for a lot of classic Japanese real estate players, but that's not what we do. We do value add. We take existing assets and we make them better. And so it's a very strong operating environment for us. As a result, we've had significant appetite and continue to have significant appetite to buy in our stock. It drives EPS as a long-term driver of value. We think it's -- to buy your stock for less than intrinsic value, we think, is a good way to allocate shareholder capital. And we've grow our dividend, and we'll continue to do so. We have a progressive dividend policy, which means we maintain or raise our dividend. We have a shareholder return KPI, DOE of more than 4% as we grow value and we end up with a growing dividend. We have -- this has been -- the [indiscernible] existed for years. We do have a very interesting J.League shareholder program. We're a top sponsor of J.League. The tickets go to our shareholders, not to us. So there's a lot of work we do on sustainability, and we continue to do it. We have been -- we continue to be recognized -- increasingly recognized for our efforts in the area, and that includes the CDP A-List recognition this year for both climate change and water security. We completed our renewable energy transition to 100%. We are -- our CO2 reduction activity through our own clean energy power plant production is over 8x our CO2 emissions. We are dramatically relentlessly and ever increasingly climate positive. And this shows a breakdown. Let me turn to the forecast. So we expect to be up all all-in OP this year, 14%. Cash EPS up 10%. Again, these are numbers we want to beat. ROE is flat. ROE and cash ROE are flat. Those are numbers we also want to increase, and we'll see if we can increase them this year also. Again, we have a portfolio. And so the portfolio is going to have some different movements in it. The one thing you should see is the asset management forecast. We don't put in any expectation of performance fees. So by definition, if you have performance fees in the previous year, you're going to have a downward -- I mean, we expect our base fees to go up. But since we haven't modeled anything in terms of performance fees for the forecast, the year-on-year projects to be down. We expect to see substantial growth in Sustainable Real Estate, substantial growth in Ichigo Owners. Hotel kind of blew the doors off this last year. We expect that to come in. Clean Energy, unfortunately, we think we'll be down. This is primarily in large-scale -- in maintenance project. We also kind of thought we're going to have some growth that would offset that maintenance downtime effect. But in fact, there have been power purchase suspensions that continue, so we're not going to get that growth. So it's down on the maintenance. And unfortunately, we're not getting the growth we had expected to offset that. Again, we expect record high cash earnings. And the next page shows we expect to have record stock earnings also. I think that's it. That's right. Thank you so much for joining us. It's -- again, it's a very interesting time. The world is deeply uncertain. We are aware, of course, of the uncertainty. We're managing ourselves. We're a company that survived the global financial crisis. So we understand what it takes. We manage our balance sheet. We manage our earnings streams. We manage our value add to make sure we are robust. If the wheels fall off, we are fully prepared to use that as an extraordinary opportunity. As an example of that, to grow value for our shareholders, as you know, we substantially increased our hedges, our interest rate hedges over the last week. There was a day when the market completely fell out of bed when everyone was deservedly panicking about what was going on in the world and interest rates came at a ton and used an opportunity to lock in 5-year interest rate hedges at really, really good levels for all of you. So we'll continue to be opportunistic and work to deliver value for all of you based on kind of our structural underpinning of a very robust balance sheet and a very robust earnings stream based on our value. All right. I think we're done. Thank you so much, everybody. We appreciate your time. Have a good day and evening.