Ichigo Inc. ($2337)

Hi, everybody. I'm Scott Callon, Chairman of Ichigo. I'm joined today on my right by Tet Fujita, who is our Lead Independent Director; and on my left, Dan Morisaku, who is a senior member of our Finance team and the Head of Global IR for us. We're speaking against what's right in front of you, the FY '26/2, so the February 2026 full year corporate presentation. So let's jump into it. I think there's a summary page right before that. Here we go. And I say there's a summary page. I'm going to go relatively quickly through this presentation. Maybe I'm wrong, but we try to be consistent in the way that we present things. Maybe I'm wrong element of this. I feel like I say the same things every 3 months, which is probably better than not saying the same things every 3 months in terms of what our core business activity is and providing you the KPIs and our progress against KPIs. So I'll go relatively quickly through this and go through questions and any comments on our business. It is a very strong operating environment, and we're doing well. So we've generated record business profit, net income, cash earnings, stock earnings. We'll go through some of the details on this later. We've done both investments for growth and significant buyback activity. We think the shares are at historically low levels on this year's earnings, the year that I'm going to describe the forecast of FY '27/2 earnings, we're at 11x PE and 8x cash PE in an environment, and I'll talk about this also, where inflation is a strong driver of positive economics for the business model, which is unlike a lot of firms in the world. So it is an extraordinary time for us to deliver positive outcomes for our shareholders. Here are some of the details. Again, I'm not going to go into -- I'm going to try to choose which areas to focus on. One of the things that you should -- you would notice is that we were down year-on-year on cash net income relative to net income. So cash EPS is flat because we were buying back the stock. Just to explain that, on occasion, it's pretty rare, but on occasion, you have a mismatch between how you account for earnings from a tax basis. And if you account for on a tax basis, earnings, you have to pay taxes on it. And so there's a cash hit to you. And the accounting can be different. And so what happened is we sold a real estate subsidiary at the end of last year. It was accounted for on a tax basis, but it is being accounted for on an accounting basis. And this year, it's all I was saying that cash income because of a one-off tax effect is showing down when, in fact, it would have been up about also 10%. So nothing odd going on there. We are relentlessly focused on driving high cash flows for our shareholders. That's what we believe in, not accounting earnings, but actual cash earnings. This is also the reason why the multiple to accounting earnings is only 1.1 when it would have been something more like 1.3. Anyway, a one-off artifact, you're going to see a significant increase in cash earnings this year, and I will also point to that later and say, look, this is not totally real because this is the offset of the underreporting of our earnings from last period. One of the most important things to know is that we have a portfolio of businesses that move with different levels of activity. They are all rooted in our core capability and our core activity, a value add. But it does mean that within any fiscal period, any year, you're going to have stuff going up and stuff going down. And so this is just the same as it always is. On a total basis, we're up 13% on business profit. We've got Asset Management down a little bit. We've got Sustainable Real Estate up a lot. We've got hotel down a bit, Ichigo Owners up a bit and Clean Energy down a lot. The total generates a plus 13% year-on-year. I'm not going to go in too much detail on any of these. The -- hopefully, we designed these presentations to be relatively self-explanatory. It's probably worth pointing out that stock earnings were up in the Asset Management business, earnings were down a little bit, but none of these are particularly material numbers. SRE, Sustainable Real Estate continues to be the major driver of earnings. And let me just speak to the inflation element that I touched on earlier. It is not a good thing for the world for everything to become more expensive. The impact of the Iran war is proving to be very significant. There are global risks to this. There are country risks to this. There are company-specific risks to this as investors or companies are going to take significant higher input costs, and this is a negative for the world. It is a good thing for all of us that inflation actually is very positive for Ichigo. It shows up in 2 ways. It shows up in our balance sheet. We have already built assets on our balance sheet, about $2 billion worth, JPY 300 billion right now of real estate. it becomes more expensive to build new assets, and it means that our existing assets are already having kind of steel in the ground and buildings built means that when new builders come in at higher costs and they're going to be -- they're going up at kind of 10% per annum in Japan in terms of construction inflation, it means that our assets are extraordinarily competitive relative to any new assets that would compete with them. It means we can raise rents because it's -- your ability to price rents is all about replacement cost, what does it cost to replace the building and your asset as a competitive building. So that's one element. But it's less dynamic. It's a static element. We do have a balance sheet of assets that we have added value to. The dynamic element is when inflation goes up, raw development, which is the classic development model in Japan where you tear something down, you build it from nothing, is incredibly expensive. And our Sustainable Real Estate business, we will not -- we're in the business of not tearing down assets. We keep them, we improve them. And you're putting in several percent of CapEx relative to building costs in order to improve the asset. So the competition is facing inflation, which is against 100%, and we're facing inflation against only a small percentage point relative to the asset value. So it's a way of saying we become extraordinarily more competitive in our core Sustainable Real Estate business when there is high inflation. And this is playing out in very powerful economics, and we're forecasting for next year a significant amount of growth, and that is durable. Again, inflation, for an Ichigo shareholder, is our friend. Hotels are down. That's primarily -- as you can see, stock earnings were up year-on-year. That's primarily because we did less asset selling during the year. It's just part and parcel. The upcoming year, we're forecasting down a little bit again on hotels, which is fine. I mean there's going to be times when we generate a huge amount of profitability of the hotel business, there's times when it's going to coming less. The point is that we manage on a portfolio basis, and we make choices around, again, the core capability and the core activity adding value between different asset classes. SRE, Sustainable Real Estate is primarily about offices and retail. Hotels broken out in this category that's turned to owners, which is primarily residential. So in owners' case, business profit was up 13% year-on-year. It did, however, come in under forecast, as you can see, and that's because we pushed out some asset sales to the year that we're currently in fiscal year '27/2, February, the earnings environment remains very strong. There has been no backing off from a desire to own Japanese real estate assets. It's linked in part because Japan is recognized as being incredibly safe and secure in a world that feels not as safe and secure as we all want it to be. And it's because you still have the powerful economics despite Japanese interest rates have gone up of being able to fund below your cap rate, your NOI coming off an asset, and because inflation, as I just pointed out, is increasing replacement costs, meaning which is a fundamental driver of the ability to raise rents because new assets have to come in at higher rents. And so you now have a phenomenon where you're able to raise rents on an ongoing basis, and that makes, obviously, real estate more attractive. Clean Energy down just a little bit on some higher operating costs. So this is how it shapes out. As you can see, it's a relatively nice chart. Every year, earnings going up. That is not only our goal, it's believe what we need to deliver to all of you. And again, we're going to -- we see a lot of secure growth going forward, and I'll touch on that later. What's most important to us is that we are structurally profitable. That shows up in the left side pie graph. As you can see, our stock earnings, so these are contractually embedded earnings, are about twice our fixed expenses. That means this is a firm that almost went dead, but did survive the global financial crisis. One of the things we learned is that we need to be systematically and structurally profitable, and we are. Just going to touch on some elements of the business model. We have both stock and flow earnings. Our cash earnings that shows up in cash earnings. Again, we're focused on cash, not just accounting profit, but genuine cash in the door for all of us and our cash earnings hit a record high this year. Similarly, we have a record high on our stock earnings. You can see they're diversified among a number of categories. It is the case, and this is not something we should run away from and it's very, very powerful. Our Sustainable Real Estate business is just an extraordinary powerful growth and earnings engine. And there are elements of us diversifying around it, but certainly not away from it. This is a very, very, very powerful engine, as I just told you. One of the things that can go horribly wrong in the world for investors and consumers is inflation. I just told you, this model is anti-fragile in that sense. It gets stronger during an inflation environment. This is a very, very powerful business model. We're selling these assets that we add value to. We generate and monetize gains on them. And yet year after year, we'll continue to generate -- to create higher unrealized gains in our business, which effectively create forward earnings. And so at the current point in time, third-party appraisal values put our unrealized gains at about JPY 83 billion. Our total shareholder equity is only about JPY 100 billion. So it's -- the appraisers say that there's actually another 80% of value underpinning our balance sheet in terms of shareholder equity. And if you look at the reality, you can see what the multiple looks like, it is manifestly clear that the third-party appraisals underestimate the amount of actual value that we derive when we go ahead and monetize and sell assets. So this year was a big year. We generated 2.9x on actual gains on sales relative to appraisal value. We think that number is high. However, we think consistently, we've been -- as you can see, we generated about 2x. And so I just told you the appraisers think we have JPY 80 billion plus of unrealized gains on our balance sheet, meaning kind of equity value. In reality, it's probably twice that. So we have stated equity of JPY 100 billion. We actually probably have [indiscernible] equity of JPY 260 billion. That makes us less proud of what our ROE looks like. It goes both ways. But it tells you that this is a ton of embedded forward earnings, and we're beginning monetization process. You should know that by pushing out our sales of some of the Ichigo Owners' assets into this current year, the FY '27/2, we actually ended up the year with a slight increase in our balance sheet because we didn't do the sales that we expected, but we are actually going into balance sheet shrinkage. We will have a shrinkage in our balance sheet this -- we would have had it last year. We're going to have it more this year. The business is going to become more asset-light and more capital efficient. Our economic operating cash flow, again, we're focused on cash flow is systematically higher than net income. Again, we're a cash-driven firm. We have a very strong financial base, overwhelmingly long-term borrowings. As you can see, interest rates have gone up. That is a reality. And so we're up 43 basis points relative to where we were 2 years ago. As you can see on the bottom of the page, 61% of our borrowings are fixed. We use interest rate swaps and caps to hedge interest rate exposure. We generally borrow for about 10 years, very specifically, we borrow 10 years plus in SRE, Sustainable Real Estate and Hotel businesses. We tend to borrow 15 to 20 years in our Clean Energy business. We borrow generally about 7 years in the Owners business. We've had some coming in of the loan terms because we're doing increasing amounts of uncollateralized borrowing with no amortization. So it's really, really nice borrowing with no covenants, and that generally is like 3 to 5 years, but it's a very, very durable capital structure for the firm, both in terms of equity and debt. And we continue to work on behalf of the world. Global warming is real. The actions that we take, the core activity of the firm is deeply sustainable. We're not in the business of tearing down buildings and wasting assets and wasting value and wasting and creating environmental effects from it. Because we are significantly sustainable in our activity and Japanese financial institutions also believe in sustainability, it enables us to borrow through ESG as a sustainable loan activity at very, very good terms, and we continue to expand this activity. As you can see on the page, we had net acquisitions of about JPY 6 billion. We thought we were actually going to be net sellers for the year. Because, again, we pushed out Ichigo Owners activity and some sales into this current year that we're in right now, we end up being relatively flat for the year. You've got some buying and selling in various asset classes. The core activity of the firm is value add. We add value to assets. And when we add value to them, we sell them. This breaks out the activity among the various key groups. Owners is the highest turnover model. We generally have a hold of a year or so. That's extended just a little bit to give us some more opportunity. Rents are going up. We finance really, really well to optimize kind of the final cap rate when we sell the asset to a brand-new owner at the highest possible rent. But it's a very high turnover business. And so you generally have largely offset buying and selling within about a year. Hotel earnings were down year-on-year. That, as I said earlier, is not because of stock earnings, which continue to grow, as you can see, RevPAR, so revenue per available year was up -- per available room was up 12% year-on-year, but because we didn't do a large hotel sale in the year and some impact from hotel REIT performance fees, full earnings were down. We have very little China inbound exposure. So we're not seeing really any effect of that. We, of course, should all be concerned about what's happening in the Middle East right now, its impact on high airfares and how that affects things. On a positive, it probably makes Japan a better and easier destination. On the negative, airplane costs are going up, and so we are kind of modeling for some negative impact on our Hotel business this year. It's about 15% of our earnings. So okay, if something happens there, it's just going to be fine. But FY, this is something we're, of course, focused on. Owners continues to do well, and it has diversified its sales channels in order for it to be able to sell well, I think that's on the next page. No, on the next page was -- it shows us this business profit. We came in, in the last 2 years, we're going to see a significant piece of increase really actually a doubling year-on-year in this year. And look, we have high visibility on this already. So this is going to happen. This is a slide where we show the diversified sales channels, and that's super powerful. I mean the different segments and different parts of the market will have some cyclicality to them. We always want to sell at the highest possible price. We do. We work for our shareholders, which is to say, our buyers have alternatives. And because Ichigo is really, really good at delivering high-quality assets, we have an active bid from buyers, and we want to have the broadest set of buyers so that we can meet their needs and deliver the highest possible returns for our shareholders. AM Growth on diverse growth drivers, I say it's growth, but the truth of the matter is this year, we are down a little bit. That's kind of -- that was a one-off. Some of the Owners activity was expected to be security tokens, which will increase again. So we expect to have growth in our -- and you'll see it visibly in our Asset Management business. Clean Energy, we shifted towards battery storage. It is -- the economics have become very, very powerful. One of the -- there's a negative impact on our Solar business, which is there is effectively some overproduction right now relative to the ability for the grid to accommodate on the solar power production. This actually gets solved with battery storage, not just by us, but broadly. And so we think that it's ratified because battery storage has become incredibly compelling in its economics. So our major activity you're going to see from us in the near term is going to be around that as opposed to kind of new activity in solar. And when we can pick that up again when the battery infrastructure is in place. We were a J.League top partner. So J.League is Japan's soccer league, as I say, I'm an American. We pronounce football, soccer, the Japanese football league, if you want to put it that way. For a number of years, we're effectively shifting our activity towards the club that we bought, Tegevajaro Miyazaki. We bought it in 2023. It was in J3. It got promoted last year. We just think that's a better place to build the brand and build kind of our activities in the sports area. This is not done as charitable enterprises. These are businesses. We have returns along with brand value creation coming from the sports activity, and that's going to continue to be the case. On the shareholder side, we actually announced a JPY 5 billion share buyback right at the end of the previous period, which began execution in the last year. So sort of that actually JPY 15 billion of buyback execution during the February 2026 period, of which we've got about JPY 10 billion done. The other JPY 5 billion is in execution right now. We bought a bunch of stock in. We think it was a very, very good use of capital for our shareholders. We're going to grow EPS, both through kind of bottom line growth and through shrinking the number of shares outstanding. Cash generation is significant. We can afford to do it. As I just told you, we're 11x earnings on an accounting basis. We're an 8x EPS earnings on a cash EPS basis. The shares are very, very good value. That's why we were buying them with a bucket. And we have raised our DOE target, and we might well raise it again, which is to say, if you look over the last 5 years, we've had double-digit dividend increases. We've shrunk shares outstanding. We want to continue to reward shareholders the ability to fund growth. We're very capital efficient and becoming more capital efficient. And so the ability to fund growth through growth investments and add a capital efficient way and also to increase our dividends and do buybacks is the highest it's ever been. And so we're reflecting that in a structural permanent dividend increase by raising our DOE target. So based on today's closing price, so we've got above a 3% yield on the stock. As I said earlier, global climate change is real, and we're focused on doing our best to assuage the effects of that. We've gone to 100% renewable energy at this point. The next page shows how we're climate positive. Our CO2 reduction activity is 9x our CO2 emissions. So turning to the forecast. This is meant to be a summary of it. Hopefully, it's relatively understandable. As you can see, business profit, so that's kind of the best measure of operating income in the firm is we're forecasting up 21% year-on-year. The other key metrics we're focused on are EPS, which we have up 13%. Cash EPS, which will be up 35%. And again, that's in part because we underreported cash earnings because of this one-off tax effects, tax and accounting mismatch during last year, but robust growth in our business that will deliver us a 15% ROE and a cash ROE of 20%. This is how it breaks down. I think I've already spoken to this. Let's go to the next page. So again, we have a portfolio of businesses. And so one of the things you should know is that every year, we announce like a terrible forecast for Asset Management. It's not because we expect to have a terrible year in Asset Management, it's that we just put in the stock asset management fees. Our primary Asset Management business is the REITs. We do get performance fees on when we generate value and gains on sales in that business. And of course, we do that systematically on an ongoing basis. But we're -- this is a decision that's going to be made by the REITs, not by us. There's a completely different shareholder set. There are completely different Boards. It's completely separate independent governance. So if there is value-add monetization activity in the REIT, we will earn performance fees, but we're not going to forecast them as us, as Ichigo, because in a sense it's not our right to do so, and we have no visibility on it. And so anyway, the number shows down year-on-year. We think we'll do a lot better than that. Sustainable Real Estate, we're forecasting up 42%, Hotel down 29%. That's again, we had some gains on sale. We're not forecasting for this year. Owners, we expect, as I said earlier, to be a double. Clean Energy, I just touched a little bit. We're having more power suspensions, meaning you have to turn off your delivery of power from solar power plants when there's too much power in the grid. And so we're going to have some impact from this year. We think that resolves itself over time. We have some SG&A increase also. This is how it breaks out in terms of the various segments and business profit, again, continuing growth, and we think this is durable and will be long lasting. And again, cash earnings, we expect to be a record -- business profit, of course, was a record also. I think the next slide is the last one, which shows what stock earnings looks like. A little bit, some balance sheet shrinkage will push down some of the stock earnings. But again, that's fine because that's balance sheet shrinkage, and we expect to have very high capital-efficient earnings for you over the next year. Thank you very much, everybody. It is an honor and a privilege to work for you. We look forward to delivering the strong results that you deserve. Thank you so much.