Industrial & Infrastructure Fund Investment Corporation (3249.T) Earnings Call Transcript & Summary

Thank you very much for waiting. We will now begin the briefing session on KJRM's CRE carve-out strategy. Thank you today for joining with us out of your busy schedules. I will be moderating today's session, Kitaoka from the Capital Markets Department. It is a pleasure. Today's meeting is conducted via Zoom webcast with simultaneous interpretation in Japanese or English. If you are participating from a PC, to switch presentation slide language, from the top of your screen, please select either the Japanese or English tab. To switch audio language, at the bottom of the screen, the interpretation button is available to select Japanese, English or original audio. For participants joining via smartphones, to switch slide language, please use the screen share tab at the top. To switch audio, please select your language from the more button at the bottom. If you get disconnected or the video freezes during the session, please wait for a short while and reconnect to Zoom. If you experience any issues with the video or audio streaming, please watch the video scheduled for release at a later date on our company website or contact the IR department. The meeting is scheduled for about 60 minutes, including questions and answers. First of all is the introduction of today's speakers from KJR Management: Mr. Keita Araki, President and Representative Director; Mr. Takuya Machida, Executive Officer, Head of Metropolitan Division; and Mr. Hirofumi Hirano, Chairman of KJRM and Deputy Executive Chairman of KKR Asia Pacific and CEO of KKR Japan. We will proceed with the presentations from the 3 speakers for about 40 minutes and then have questions and answers. Later, we will explain to you how to ask questions during questions-and-answers when the time comes. The purpose of this briefing is to further investors' understanding of the CRE carve-out projects being advanced by KJRM, following the announcement of JMF's first CRE carve-out deal on August 27. First, Mr. Araki will explain KJRM's past initiatives and how our CRE carve-out strategy can significantly contribute to investor returns. Secondly, Mr. Machida will explain the key points of JMF's first carve-out deal. And finally, Mr. Hirano will explain how KJRM's CRE carve-outs, combining KKR's private equity investment platform and expertise with KJRM's real estate investment management capabilities and CRE execution capabilities, will enhance liquidization and maximize the value of corporate real estate in Japan. Now I invite Mr. Araki to present.

This is Araki from KJR Management. Thank you very much for gathering here today for the CRE carve-out briefing. First, Japan Metropolitan Fund, JMF, has now completed the acquisition of 14 office properties held by the FUJISOFT Group valued at JPY 68.6 billion through a leaseback arrangement in collaboration with sponsor KKR on September 3. This marks JMF's first CRE carve-out transaction. Although this briefing is about a week later than the initial announcement, we decided to hold it today based on the judgment that it should take place after the September 3 deal close. I will now explain the overview of what a CRE carve-out is, why KJRM is capable of executing CRE carve-outs and how CRE carve-outs benefit our investors. Please move to Page 4. Our company has built a high-quality real estate portfolio over many years by acquiring corporate-owned properties one by one through CRE activities, primarily centered on IIF. Since the change of sponsor to KKR in 2022, we have been advancing property acquisitions through CRE carve-outs, which represent an evolution of our CRE strategy. Our CRE carve-outs involve making specialized proposals that address corporate funding needs and corporate value enhancement requirements. Based on the resulting asset-light needs, we execute real estate transactions. Compared to our previous CRE projects, these carve-outs tend to involve larger numbers of properties, broader geographic areas and higher total transaction values. Please see Page 5. Pressure for management reform on Japanese companies is increasing year-by-year. Due to corporate management mindful of the cost of capital demanded by the Tokyo Stock Exchange and furthermore, the recent active movements of activist investors, companies are being required to resolve PBR falling below 1x and set targets for ROE, ROIC. As a result, many companies have begun actively selling off their real estate holdings and pursuing asset-light strategies. Please see Page 6. Japan's total real estate market size is JPY 3,000 trillion. Of this, private companies hold JPY 524 trillion. Only JPY 66 trillion of this is securitized through REITs or private funds. This means approximately JPY 450 trillion worth of real estate held by private companies remains unsecuritized. This illustrates the enormous scale of privately held real estate that could be a target for CRE carve-outs. Please see Page 7. Next, I would like to explain why the KJRM Group can drive CRE carve-outs and its execution capabilities. In short, the KJRM Group's over 20 years of real estate management experience, combined with the advanced expertise of its sponsor, KKR, specifically expertise in private equity, private funds and fundraising has created the execution capability for CRE carve-outs. For example, CRE carve-outs -- carve-out deals tend to involve large asset sizes and require specialized expertise and rapid response capabilities. KJRM has AUM of JPY 2 trillion, giving it the capacity to handle large-scale deals and it possesses extensive CRE experience. We feel that the combination of the strength with the private equity expertise of sponsor KKR, which can address complex corporate financing and corporate restructuring needs is enhancing our execution capabilities for CRE carve-outs. Additionally, in CRE carve-outs, companies seek to sell properties to stable holders and the properties sold tend to be large bulk assets with diverse uses and profitability. The KJRM Group has managed the JMF IIF REITs for many years and can serve as a stable holder. Furthermore, even for diverse bulk real estate portfolios, the collaboration between the 2 REITs and private funds enhances acquisition feasibility. As a concrete example, in last year's CRE carve-out deal involving 32 logistics facilities from LOGISTEED valued at approximately JPY 200 billion, we addressed LOGISTEED's asset-light needs by acquiring the assets in a coordinated manner. Considering the scale and investment viability, IIF acquired 28 properties worth about JPY 100 billion, while a private fund with the participation of major domestic institutional investors acquired 4 properties worth about JPY 100 billion. Moving to Page 8. I will explain how the CRE carve-out, the most crucial point, directly contributes to enhancing investors' interests and total returns. The key point contributing to investor returns, as indicated in point 1, is the ability to newly establish clauses in the lease agreement that provides rental upside potential at the time of property acquisition. This is because CRE carve-outs are fundamentally sale and leaseback transactions. Existing lease agreements do not exist, and the transaction involves creating a new lease agreement from scratch. Specifically, the contract from selected is a fixed-term lease, allowing for renegotiation of the terms upon expiration. Furthermore, depending on the property characteristics, rent increase clauses linked to CPI or market rent are introduced to pursue upside in a manner acceptable to the tenant. This aspect is a major point for enhancing investor returns in CRE carve-outs. As shown in points 2 and 3, we believe that creating a unique opportunity to acquire high-quality unsecuritized flagship properties held by corporations is another key point contributing to investor benefits. Furthermore, as indicated in 4, we believe another key point is the opportunity to leverage our expertise as real estate management professionals to enhance property value. This is because we can add value to certain undervalued properties held by operating companies by applying our real estate management capabilities. This includes converting them to their highest and best use, increasing rents for extremely leased spaces and -- externally leased spaces and reducing costs. The final point, as indicated by #5, is the strong relationship with tenant companies. This is because maintaining a good, strong relationship with the company that sold us the property as a tenant enables contract stabilization, high occupancy rates and the ability to take diverse actions in collaboration with tenant companies to enhance property value. In addition to the above points, I would like to add one final important note. The CRE carve-out does not compel REITs to acquire real estate. REITs acquire only properties that meet their investment criteria based on their own judgment. If a property that does not meet the REIT's investment criteria is included in the consideration, we will first explore acquisition through a private fund, which has the function of attracting various investors. Should acquisition via a private fund prove difficult, KJRM will leverage its relationships to facilitate acquisition by an external buyer. By utilizing this comprehensive strength and solution capabilities, both JMF and IIF REITs selectively purchase only properties meeting their investment criteria. We believe this approach also contributes to maximizing investor returns. That concludes my explanation. Next, JMF Fund Manager Machida-san will provide details on the acquisition of the FUJISOFT Group property. Thank you.

Please look at Page 11. This page shows the outline of this transaction. The first notable point is that the unrealized gain ratio exceeds 30%. If you can also refer to the separate press release regarding the asset acquisition disclosed on the same day, the cap rate applied to each property is at the same level as the cap rates used in the ongoing appraisals of J-REIT-owned properties in the surrounding area. The appraisal rents are not that different from the surrounding area rental market examples and are set at or below the median level in the rental market reports obtained by our company. Therefore, we judge that appraisal values to be very reasonable. Consideration of this transaction began in the latter half of 2022, which means about 3 years ago. Therefore, the cap rate applied for acquisition by JMF and the sale and leaseback rent and the rent revision clause were all determined during a period when the office market was soft. Given that pricing was set during this period, the assessment naturally factored in the possibility of future office market decline. The end result is that the office market is rapidly recovering right now, and we can expect further growth. And therefore, we are achieving this significant unrealized gains. Furthermore, FUJISOFT also has other large properties in Akihabara and also in Kinshicho, one large in Akihabara and one medium size in Kinshicho. And for Akihabara, we leveraged KJRM's private fund capabilities, and for Kinshicho, we utilized KJRM's network. By pursuing the highest possible price for each, we successfully increased the overall transaction value while also keeping JMF's acquisition price low. The ability to execute such an initiative is also a strength of KJRM Group. And next, regarding the NOI yield, the NOI yield based on the appraisal is NOI of 4.7%. And FUJISOFT had originally owned this building. Therefore, actual yield does not exist. And at the start, the NOI yield based on the starting initial sale and leaseback rent is approximately 4.4%. And this 0.3% difference translates to a rent gap of roughly 6%. As I will explain the details later, this sale and leaseback rent comes with a rent adjustment clause linked to the office market rent. And we believe the 6% rent gap can be fully resolved at the first rent adjustment 3 years later. Given the current inflationary environment and office leasing market conditions, after the second and third rent adjustments, we anticipate the NOI yield can potentially exceed 5%. Additionally, this office portfolio features a relatively young average building age of about 10 years. As you are aware, soaring construction costs and land prices have made new office supply difficult, except for super high-rise S-class offices. In this backdrop, this young office portfolio should continue to demonstrate its advantage over the long term. Please turn to Page 12. The sale and leaseback rent with FUJISOFT includes a clause for rent adjustment every 3 years linked to fluctuations in the office market rent, as I mentioned earlier. This office market rent uses rents in the market area of each property as published by multiple office brokerages for the area. And this is an indicator we will use over the long term. Therefore, we employ metrics disclosed by established office brokerage firms. For example, by using indicators for both subdivided areas like Minato Mirai and broader areas like Yokohama, we smooth out local fluctuations. And during inflationary periods, rather than CPI, the office market rent increases tend to be high. We see that from data and the materials. And using inflation, this rent structure enables us robust income growth. And looking back at the 1-year track record, rents in the office markets where these properties are located, the rent have risen by about 4%, demonstrating the potential for significant rent increases at future adjustment timings. Regarding the rent gap shown on Page 11, since rents are linked to market rates during the contract period, the rent increase resulting from the elimination of rent gap will materialize upon the expiration of the fixed-term lease. Page 13, please. FUJISOFT has system development and call center business. To enable immediate responses to clients across various locations, which is very important for them and also for employee recruitment purposes, FUJISOFT also own multiple offices and locations not typically considered prime office sites. Among such offices, we have carefully selected and acquired properties suitable for residential development, where the land value is promising, which is the portfolio to the right in green. For example, Monzennakacho office was acquired at just over JPY 1.5 billion, but its land value based on the premise of condominium development has the potential to exceed JPY 3 billion. Please turn to Page 14. With these acquisitions upcoming, we have been advancing the sales of assets with limited future upside potential in the 47th period. In the 47th period, we announced the sale of approximately JPY 50 billion worth of properties, generating capital gains of about JPY 7.7 billion. And a portion of these capital gains have been allocated to the reserve for reduction entry of property, which will be returned over 3 years or 6 periods. This achieved the policy announced at the time of the earnings release the continuous return of over JPY 2 billion in capital gains each period. Of course, this does not mark the end of asset sales. We will continue with these efforts striving to secure and return capital gains. Regarding office properties, we have also completed sales of 3 properties. Specifically Toyocho 02 and Jingumae 01 were sold at NOI yields in the low 2% range, while Akasaka 01 was sold at a yield in the high 1% range, demonstrating the exceptionally strong office sales market. Within this robust market, the acquisition of a relatively new office portfolio at a yield in the high 4% range through collaboration with the KKR Group represents a transaction that enhances JMF's unitholder value. Please turn to Page 15. So now I would like to briefly discuss exactly the key points regarding the acquired properties, first starting with Shiodome Office. This property was acquired by FUJISOFT Inc. through a land auction from the Tokyo metropolitan government and the building was constructed by the company itself. While the upper floors were originally constructed with the premise of being used as an urban-style data center, they are currently utilized as office space due to reduced demand for such urban-style data centers. The upper floors built to data center specifications feature exceptionally high standards, 4-meter ceilings and a floor load capacity of 1,600 kilograms per square meter. This makes them suitable for R&D or laboratory use, enabling them to command higher rents than standard office space. And you can actually aim for a higher rent. And as for the property's office market rent index is based on the rent data from Minato Ward from the Shimbashi 2 [indiscernible] area. While this area has been substantial supply and lags slightly behind the 3 central wards conversely, it offers significant potential future growth. It is an area where market rent increases are anticipated, making rent hikes at renewal times a realistic expectation. Next, regarding the headquarters building in Yokohama. This property is directly connected to Sakuragi-cho Station, the gateway to the Minato Mirai 21 area. This building was also constructed by FUJISOFT themselves. Similar to the Shiodome office, it features multiple floors with data center specifications. As it is a headquarters building, it includes several floors with specialized features like cafeterias and executive floors. However, under the agreement upon restoration standards, these floors can be restored to standard office space at no cost to the tenant, enabling operation as a multi-tenant office. The office market rent index for this property uses rent data from Minato Mirai and Yokohama areas. This area also has a large supply and feels somewhat behind the curve. So we believe there is significant potential for future market rent growth. Furthermore, while the lower floors of this property are retail spaces, they also hold considerable upside potential. Please refer to Pages 18 and 19. Both the new Nagoya and new Fukuoka buildings are newly constructed office buildings purchased by FUJISOFT from the land up and built by the company themselves. They are located near stations and feature multi-tenant specifications, giving them high competitiveness. Moving to Page 20. Regarding the Cyber Com Yokohama headquarters building, the fixed-term lease agreement has a 4-year term with an option for early termination. We understand Cyber Com is currently reviewing their office strategy, so we have shortened and made the contract term more flexible. Should Cyber Com wish to continue using this property, the rent will be reviewed based on market rent fluctuation rates from the start of the leaseback until a new contract is signed and a 10-year renewal option is also included. Furthermore, as this property was originally a rental office building and underwent a major renovation in 2017, it possesses high competitiveness as a multi-tenant building. Please move on to Page 21. Regarding the Omiya building, it is a multi-tenant office building with some sectors leased back to FUJISOFT. We have a contract with FUJISOFT for an initial 2-year period at a slightly lower rent with a step-up of approximately 30% if they continue their occupancy thereafter. Furthermore, as many other tenants are on a fixed-term lease with lower rents, the property has significant upside potential. Lastly, please turn to Page 22. Regarding the Nagoya building, which referred to as the former Nagoya building, FUJISOFT had been using it as their Nagoya branch until recently. However, with the completion of the new Nagoya building, they have relocated. Restoration work is currently underway on the vacated floors. Restoration work is scheduled for completion around the end of September. After which, we plan to carry out value enhancement work on the common areas. This is a market in the low to mid- JPY 10,000 range, representing the most sought-after rental price band for tenants, primarily small- and medium-sized enterprises. We, therefore, believe there is some achievable leasebacks. And now I would like to hand over to Chairman Hirano. Thank you.

Thank you very much. As introduced, I am Hirano from KKR. I also serve as Chairman in KJRM as well. But mainly, I work in KKR for private equity business investment. Now please open my first page, please. In 2006, KKR opened its office in Tokyo. That was when the media of the world looked at Japan in this manner. If you click once again, in TIME, Economist and such journals, picture Japan in the following manner. Would Japan recover, revive? In the 1980s and '90s, Japan was the rising sun. But at this time, it was said that the sun is setting. Would it be right for Japan when a company like private equity came to Japan? The founder, Henry Kravis said to me, initially, when opening an office in Tokyo, we said to the Board of KKR that Japan is the country that takes time. Therefore, please wait for 10 years. It will take time in Japan. Please wait for 10 years. That is what he said to the Board, I understand. In reality, carve-outs in Japan from a big conglomerate from a big company to a carve-out subsidiary was the investment theme from the beginning. In 2013, it was the first carve-out that we were able to implement, which is for the first 7 years since the opening of the office in 2006, there were no cases at all. But in 2013, from Panasonic, Panasonic Healthcare called PHC today and is listed, this company was carved out. That was our first case. And afterwards, thanks to you, large conglomerate electronics company, automobile company and multinational companies such as Walmart, we have worked for them for their carve-out deals. And thankfully, corporate governance and measures to enhance shareholder value has started taking root in Japan. But how is this linking with real estate? I would like to explain from my side. Next page, please. This is the stock market and the real estate market or real estate index -- price index. As you can see, the stock market in 1989 went up to JPY 38,900 and for about 30 years, never went past that period. But right now, we are seeing more than JPY 44,000, which means we surpassed -- we topped the bubble period. On the other hand, for real estate, compared to the bubble times, it also depends on the region, too, but at best, 60% back, which means we still have 40% room for growth to come back to the bubble peak price. This, we can say, on a theoretical basis. It's not that we are looking at all the real estate throughout whole of Japan. But as Mr. Araki mentioned earlier, corporates and especially listed companies' real estate, how much will their prices come back from JPY 400 trillion to JPY 500 trillion range? At these real estate values, can they come back to the stock market level as they did? This is one question we have. And in our view, we think that there is a lot of potential room for real estate prices to go up. For one, as a catalyst, many activists are coming into listed companies, and they are constantly looking at, inside the companies, what are the cash and deposits they have and what real estate they have. And companies with a lot of such assets are being targeted by activists. From this move, we can see that there is a lot of potential for real estate in Japan. And please look at the next slide. And this is a specific comparison with other countries. Japanese companies have very high rate of real estate holdings that we can see from the left-hand graph. And then to the right, you can see that companies in other areas have high ROEs and Japanese companies have very low ROEs compared to other countries. Low ROE means ROA is also low, which means companies need to make their cash and deposits and real estate less to reduce their denominator. And as a result, they need to raise their numerator to raise ROE and ROA, which means there will be more need for real estate carve-outs. Please turn to the next page. And then as we, private equity firm working with KJRM, what is the necessity of working with KJRM? I would like to talk about the necessity of utilizing KJRM. I will explain more in detail on the next page. But when there is a carve-out of noncore businesses from large Japanese companies, this invariably involves the sale of real estate. But KKR's main business is PE investment, which means to utilize real estate on a highly specialized solution basis, we ourselves did not have such know-hows. On the other hand, from the perspective of companies specializing on real estate, if you can see to the right, the strength of PE firms like KKR have not much know-how on hard assets such as real estate but have knowledge, abilities on soft side such as employees, operations and business units such as PMI, post-merger integration. On soft sides, PE firms have know-hows. So if we bring together the know-how from both sides, we can provide highly specialized solutions. On the other hand, just having real estate know-how alone or having the PE know-how alone would not allow maximum utilization of real estate potential. If you can look at the next page, I will explain more in detail further. What I have mentioned just now is listed to the left, 4 points. From the PE perspective compared to real estate specialist company, what we are able to offer is we can offer soft asset management as PE company. And secondly, what a PE company can offer is formulate a real estate strategy as a part of the company-wide management challenges and strategy. And third point is, as Machida-san talked about KJRM, KJRM can move real estate to REIT and other structures. And from the perspective of the people working in the company, operation can continue using sale and leaseback and other methodologies. Instead of selling to a third party, the people in the company can continue to work in the company and use REIT, a semi-perpetual vehicle owning the real estate. There will be no resell of real estate after a short time to someone else. There is no need for such a concern. And fourthly, this is also a very important point in my view. Just simply selling real estate will result in -- because the real estate would have a lot of unrealized gains, will mean a lot of capital gains, and this means the taxation risk. But buying the whole company means -- this means corporate split methodology involving organizational restructuring. And this means we were able to introduce mechanisms legally without having to pay minimum taxes. We won't have to pay a lot of taxes. The funds obtained can be used for proactive investment purposes. That is what the benefit of the partnering of mutual side is. These were the 4 points for partnering on both sides. And to the right-hand side, what you can see is when we were unable yet to work together with KJRM, that is when we were working with KKR. Koki is -- Hitachi Koki's carve-out electric tools company, this company, Sawa factory, we alone were able to only sell to a third party, and PHC is Panasonic Healthcare, Panasonic Group's former Matsushita Kotobuki Company, Shikoku Saijo plant in Ehime Prefecture. At that time, we were not tying up with KJRM yet. Therefore, we ended up just selling to a third party. And finally, Pioneer, in those days, Pioneer's headquarters was in Kawasaki. In those days, there were not much that we could do, not much we could able to offer without understanding the price appropriateness or reasonableness so well. We sold to a third party. Therefore, PE fund alone cannot provide highly specialized solutions or provide such a long-term real estate holdings. We had a lot of regret as a result. But now having a partner, KJRM means more value for operating companies. Next page, please. And as I have been and we have been hearing some examples, in 2022, we invested in LOGISTEED, former Hitachi Logistics. There, the asset-light model brought in the first step to standardize the asset-light model. To the left-hand side, you can see logistics asset securitization. In Japan, they have about 33 warehouse properties, and we carved out the 33 properties, and we took private in about 1.5 years at JPY 222.7 billion sold to REIT and to private REIT. Why was this done? Because the logistics industry in Japan, as the practice in Japan had logistics service and warehouse business at the same time. But out in the world, logistics and warehouse businesses were separate. LOGISTEED is now taken private. But in about 5 years' time or so, they want to relist again. This is their thinking, which means they need a business model different compared to the past. And one key feature is to make the balance sheet lighter, make assets lighter and to shift to an asset-light model. And we have had the pleasure to implement this business model and the cash generated in order to minimize the capital gains tax, utilized the proceeds and spent as fund for growth investment. And the assets were brought under partially or sold partially to IIF held by KJRM, which means possible to hold stably for a long time. And the tax benefits can also be realized. And this is expressed to the right in the virtuous cycle. If I can start from the right, asset was securitized. In March 2024 LOGISTEED assets securitized sold at JPY 222.7 billion. Part of the proceeds were used to invest in the additional acquisition of Alps Logistics, another logistics company. And part of the warehouse held by Alps Logistics was also securitized. By continuing this, we want to create the virtuous cycle. Next page, please. And one more point. Why beneficial for PE firm to lead CRE carve-outs? Because KKR, a PE firm, is involved in developing the compensation structure of the executives to raise incentive. We have various programs available. Specifically, for company, when we invested in LOGISTEED, we invested in about JPY 200 billion in equity, out of which JPY 20 billion. So that the executives and employees can hold, we created a system that is 1/10 will be held by the employees. And if we own or if we were able to gain any returns, the employees will also benefit with the asset securitization. If the company becomes asset-light, then the returns will also be fed into employees. This is a strong tool. And the employees worked hard to negotiate with the tenants and prepared to become asset-light. This was a good incentive, and we think the incentive system is very important. And as you can see to the upper part, separate from the real estate carve-out, we have other programs implemented such as Bushu Pharma 1,300 individuals involved; and right-hand bottom, Yayoi software service company, about 1,000 individuals. We implemented the incentive programs. And left-hand bottom, in this sense, KKR has ownership program, which is, in addition to the usual stock ownership program, the employees in general can get on the same boat and row in the same direction. By having same alignment with shareholders, we can have good virtuous cycle running with more speed. Next page, please. And I showed you the LOGISTEED case earlier. And this might be a bit of an overstatement from our side, but since LOGISTEED, since then -- since this case we implemented, the whole logistics industry, we think, changed its direction. In 2022 to the very left, KKR acquired LOGISTEED. Then in 2024, LOGISTEED acquired Alps Logistics. Then after that, companies written here, Sagawa Seino, these companies, one after another, acquired companies in the same industry, and some have started taking action to become asset-light. And in a [indiscernible] KJRM and KKR, what we have been doing is and has been an epoch-making for the Japanese logistics industry. Last page, please. So through these CRE carve-out efforts, we try to liquidate real estate and the property itself and try to maximize the corporate value where KKR and KJRM work together so that we will be able to unlock the value and materialize the value. And that is something we can continue to materialize. And the target assets, as you can see at the bottom, will be about JPY 450 trillion worth of industrial companies' assets. So we do believe there is much potential. Thank you very much for your attention.

Araki-san, Machida-san, Hirano-san, thank you. [Operator Instructions] And any financial results about JMF or IIF or about KKR and M&As, we will not be able to answer your question. Then Ohata-san from Mizuho Securities, please.

This is Ohata from Mizuho Securities. There are 3 questions. The first, it will be surrounding CRE carve-outs, the overarching idea as well as the framework. When it comes to real estate funds, including REITs compared to companies, the cost of capital is lower. So therefore, you want to shift real estate from higher cost of capital to lower cost of capital entities. Would that be the right understanding that I currently have? So I would like to ascertain whether my understanding is right. And when it comes to a real estate fund, I think JMF has separated with property acquisition with private placement funds. So I do believe the listed REITs, basically when it comes to the cost of capital as well as a required, I think return tends to be lower for private placement funds and REITs. So why did you decide to divide with listed REITs with private REIT? That's number one. And secondly, when it comes to the seller, the industrial companies, I would like to do a deep dive. So with the money that they actually sell the property, with sales back rent, I think the profitability should be exceeding that leaseback rent. And therefore, how do they do that? I wonder if that really can be materialized or not. Well, since there has been a very long quantitative easing and companies were able to borrow with a lower cost, but rather than paying a rent after leaseback, I think maybe they should pay interest with a borrowing. And I think that would be less of a burden for them but then to sell the property and then also to fund and then reinvestment did not proceed. So why did that not happen? So I would like to understand a little more in detail. So the examples that you showcased, including LOGISTEED with their sales proceeds, they made reinvestments and they decided to sell warehouses to REITs and they decided to focus specifically on the logistics side of the business. But was that more profitability than a leaseback rent and they were able to really enjoy a corporate value boost? Is that what happened? We would like to understand better. And the third question is, I think, in the latter half of 2022, FUJISOFT acquisition of the property started to happen. And in JMF's earnings call, I think it was about JPY 90 billion of real estate property sales that happened. I do believe in FUJISOFT's portfolio, was that included in that number or not? And then when it comes to private equity investments, I think it's going to be a very speedy move. So when it comes to potential pipelines, is it going to change quite significantly across the shorter term? That's another thing that I would like to learn. So that would be the 3 questions that I would like to pose.

So the real estate area will be answered by myself and sales-leaseback, whether it really does generate profitability or not will be responded by Hirano-san. When it comes to the cost of capital that you mentioned, as Ohata-san, you mentioned, it is true. So the real estate fund cost is less than the company's cost of capital. So that will be the biggest advantage. And secondly, when it comes to the private placement fund and JMF/IMF fund, the rationale of dividing the different assets. When it comes to JMF, I would like to limit my answer to JMF specifically. When it comes to acquisition, as you can see in the material that there's implied cap rate and a higher profitability that needs to be captured. So when it comes to the private fund, which is Akihabara, it's S class in the major 3 metropolitan wards. So NOI yield is something I cannot specifically mention, but cap rate was much lower than the standard. And rather than JMF, a private placement fund was something that we decided to choose. And lastly, the pipeline, I mentioned that it was JPY 90 billion in our earnings call, but then the JPY 70 billion that we acquired this time is inclusive in that number. So the starting time would be about JPY 20 billion. And going forward, as we did mention in the briefing, so when KKR acquired companies, until the property can be carved out, there will be some time that was required. Is it going to increase immediately after 6 months? No, it would require a little more time. Thank you.

Ohata-san, thank you very much. When it comes to the cost of capital question that you posed, allow me to elaborate. REIT has lower cost of capital, and that is true on the other hand. So that would be the numerator. But when we look at the -- that was a denominator that is. But when we think about the numerator, from our eyes, when companies manage property, I won't say all, but it's usually under managed. I wouldn't say all but usually under managed. So is a building being used for commercial facility? Or is it rented to an office facility? Is it a fair price or fair rent? Or is it the right traffic that they are able to actually gather with the right retailers? And when we think about the people movement traffic lines as well, is it really being properly managed or not? So now that I was able to actually observe many of the properties and highlighted by KJRM individuals who are professionals, I was able to understand how more creative we can be in managing these office -- these buildings and properties, and that's something that I myself learned. From that perspective, of course, you need to have specialized expertise how to actually maximize on the property value. People who have the expertise should be the owners. It's not just less cost of capital, but there will be more value that will be added if the property owners have that expertise. And when it comes to sales-leaseback, thereto we do need to think about the time horizon. But on the other hand, companies make investments or they make acquisitions. So they do need to generate cash in order to have these activities. So when they have borrowings, they have a bigger balance sheet. Would that be more preferable? Or are there different options? Is it going to be an equity financing? Or do they go for a sales-leaseback? So they have different options to how they could actually fund for their investments. Sales-leaseback is not necessarily always the right answer. That's not something we can say. But having said that, sales-leaseback method does make sense in many instances. Thank you.

Thank you, Ohata-san. And are there any others who have questions? Then, CLSA, Mochizuki-san please.

Mochizuki from CLSA. Just one question I have. That is private equity fund. When you make an investment and when the real estate is sold solidly and generate returns, that I understand. That part, I do understand. But the private equity investors in the world, how do they look at Japanese real estate? Earlier in the slide, you compared the real estate price has not risen yet compared to the stock price. That, you showed on the slide. But when I talk with overseas investors on a day-to-day basis, Japanese real estate is the price rising to start with. They are wondering, real estate in itself is an unattractive product. Is it okay to invest in such an unreal -- unattractive product? That question, I received. The global or Wall Street people, what is their view of the Japanese real estate, I would like to ask you.

Then, I will answer, Mochizuki-san. Thank you very much for your question. That is a question very much to the point. That is why I brought this slide, the photos when -- on my first slide of when we opened the slide. When we first started private equity, it was not about real estate, but same question was raised about private equity. Private equity business in Japan, the same skepticism was there when we started business in Japan. It's not necessarily that the same will happen necessarily to real estate, but views on real estate to Japan may be mixed. And in KKR, we have the Asian real estate team. And when we raise funds for funds, we do fundraising. We talk with the investors worldwide, and what we mostly hear is that Japanese real estate has potential, is attractive. Why? Because as I said, the value is not achieved yet. And there are real estate not out in the market. Rather than the real estate sold in the market from left to right, rather the real estate owned by corporates. And if such real estate can be purchased or owned, very attractive, but they do not come out into the market. Therefore, by partnering with companies like PE and in an extreme case, take the entire company private or purchase the entire company and carve out the real estate part, then an investor would be very much interested in the real estate. That, I hear strong comments. And is it possible to produce a product? Just targeting that portion, we receive such feedback. Not just an angle from real estate but corporate and PE investors say such comments that are positive, which means, as Mochizuki-san said, overall, still a mixed situation. But people seeing from a different angle consider very attractive and starting to consider very attractive. I think that is the phase of Japanese real estate today.

I see. During deflationary time, real estate in Tokyo went up in pricing, which means during inflationary time, then prices will go up further and further. If KKR can say so, I appreciate.

Rise up further rather, I would say that in Japan, like we experienced from LOGISTEED and found out the rent, we had the rent to be linked to CPI as KJRM worked hard to realize that and LOGISTEED also worked hard to realize this. Initially, tenants said that they have not heard of something like that for a long, long time. But with a lot of work convincing the tenants in the logistics industry and the warehouse industry, this is now becoming the standard practice very quickly, which means we were in a deflationary environment for 30 years. Rise in the rent was forgotten by people. But gradually, we are seeing increases in the rents. I think this is similar to what you said, Mochizuki-san. Gradually, things are changing into the inflationary era.

I agree. I totally agree. For office building, this time, FUJISOFT, we have this rent structure, and tenants are now accepting inflation. The real estate owners consider that there are a lot of opportunities.

Now that we are pressed with time, we would like to ask Mr. Nomura -- Omura-san from Nomura Securities for a last question.

I have one question. This may be abstract. But within the context of an inflationary environment, when it comes to our private fund that has an end and with a listed REIT that has no end, is there a competitiveness that you can compare? The press release and also in the additional information, when it comes to REIT, when it comes to post depreciation, this is something you need to be mindful of. But when it comes to a private placement fund, there's IRR that you need to be mindful of. Deflationary REIT is very favorable. And that's something that's easy to understand. But in an inflationary environment, equity investments look for a target return, and they want a higher IRR that needs to be tended to. So as a real estate entity, there is a private placement fund as well as a REIT that you have. So if KKR is going to consider options for a private equity fund to be carving out, so are you going to be using more private placement funds as opposed to REIT? Please excuse me for being very abstract, but we would like to understand KKR's thinking if we may.

Thank you, Omura-san. So we did discuss in the slide, but first and foremost, when it comes to the target assets that we carve out and how we think about the management entity, it may be deviating to your question. However, the REIT is basically thinking about longer-term hold, and that is the strength. So the company that is looking for a carve-out is looking for a very stable holder of the property. So therefore, the company will be trusting the REITs. And that's one thing that we do need to discuss as a fundamental idea. When it comes to REITs, the total return for the investors as well as the threshold for investments will be disciplined. Therefore, it really meets many of the investors' eyes, and we are being selective in choosing the properties. And that is the fundamental thinking of REITs. So there will be properties that will be -- not be meeting the threshold of REITs. And then we will be considering whether that could be something that would be up for the private placement funds, and that would be the second step. Private placement funds for us can actually manage different asset categories, and we do have capabilities. And so the private placement fund can be different from a REIT in the sense of acquiring different types of properties, and we do have that capability. And therefore, a role is there for the private placement fund to play. So REIT as well as the private placement fund that we actually manage, we can have different roles that will be played by each of the different categories when we think about the overall carve-out category.

Omura-san, there is a difference in the time horizon. I think that will be quite different. When it comes to private placement funds, if it is a shorter span of investment, the IRR will be higher. But the longer the time frame, the REIT will be much more preferable. So we are looking at a 10-year fixed-term lease that we are looking at. Therefore, such, I think on property opportunities could be stronger with REITs. When it comes to office buildings acquired by private placement fund, it's not sales-leaseback, but it will be multi-office building. And therefore, to really increase the value in a short term and sell is something that we did want to consider. That's why we decided to use these different categories, the private placement fund as well as REITs, to see which one is more advantageous.

Thank you, Omura-san. With this, we Would like to conclude the briefing session for CRE carve-out strategy of KJRM. Thank you all very much for attending despite your very busy schedules. [Statements in English on this transcript were spoken by an interpreter present on the live call.]