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

My name is Masa Moritsu from KJR Management. We appreciate you taking the time to join this earnings presentation for Industrial & Infrastructure Fund Investment Corporation for the fiscal period ended January 2026. I will walk you through the materials over the next 20 minutes, followed by a Q&A session. The presentation materials were uploaded to our website yesterday, so please have them ready. Please turn to Page 3. Let me start with a summary of the results. First, looking at the top section. DPU for the 37th fiscal period came in at JPY 4,506, exceeding our initial forecast of JPY 4,310. This was mainly driven by improved performance at existing properties and contributions from newly acquired assets. For the 38th period, we initially forecast JPY 3,600. However, reflecting gains from the sale of leased land properties announced in December 2025, we have revised this upward to JPY 4,000. For the 39th period, which we are newly announcing today, we expect DPU of JPY 3,750. We, therefore, expect to maintain a DPU level above our target of JPY 3,600. Regarding the return of gains on sales, we plan to distribute a total of JPY 3.5 billion over the 38th and 39th fiscal periods, equivalent to JPY 1,390 per unit. In terms of internal growth, same-store NOI is expected to increase by 3.1% from the 37th to the 39th period. We also executed active asset recycling, selling 6 properties for JPY 26.6 billion and acquiring 3 properties for JPY 17.5 billion. Now looking at the bottom section, we highlight 3 key pillars: realization of unrealized gains, internal growth and external growth. First, on realization of gains. We plan to record total gains on sales of JPY 3.5 billion, including the sale of 4 leased land properties. Going forward, we will continue to enhance inflation resilience and return gains through asset recycling. In terms of internal growth, we have achieved rent increases at core assets such as Shonan Health Innovation Park and Haneda Airport Maintenance Center as well as at factory assets, including Shonan Technology Center and Yokosuka Technology Center, driving steady internal growth. At Shonan Health Innovation Park, NOI for the 39th fiscal period is expected to increase by approximately 23% compared to the 37th fiscal period. Regarding external growth, we have built a pipeline of approximately JPY 85 billion, all of which offer upside potential, including CPI-linked rent provisions. By utilizing bridge funds and carefully assessing capital market conditions and unit price levels, we will pursue external growth alongside asset recycling and where appropriate, equity offerings while advancing the transformation toward a more inflation-resilient portfolio and accelerating DPU growth. Please turn to Page 4. This slide shows the trend in DPU. For the 37th period, driven by proactive asset recycling and improved profitability of existing properties, actual DPU reached JPY 4,506, a 4.5% above the initial forecast of JPY 4,310, marking a new record high. For the 38th period and beyond, despite the impact of rising interest rates and the absence of income from disposed leased land properties, we have revised our 38th period DPU forecast upward by 11.1% from JPY 3,600 to JPY 4,000, driven by new asset acquisitions and internal growth. Furthermore, we are projecting JPY 3,750 for the 39th period. Despite the absence of income from disposed properties, further increases in interest rates and front-loaded repair costs, we expect to sustain the DPU, excluding gain on sale at JPY 3,180 through internal growth driven by higher NOI from existing properties. Going forward, we will continue to pursue internal growth with a strong focus on increasing DPU, excluding gain on sale. At the same time, we plan to continue realizing gains through asset recycling with the aim of reaching a DPU level, including gain on sales between JPY 3,600 and JPY 3,800. As for NAV per unit, despite the sale of properties with unrealized gains, it increased slightly from the previous period to JPY 142,746, driven by improved valuations of our existing portfolio. Please turn to Page 5. Over the past year, we have strongly focused on improving valuation and have proactively implemented initiatives to enhance unitholder value. In June, we acquired core logistics facilities operated by Alps Logistics through a bridge fund as a CRE carve-out deal from our sponsor. In July, we conducted our first-ever investment unit buyback simultaneously with an asset disposition. In September, we announced the disposition of Kamata R&D Center alongside our earnings release. In October, we transitioned Shonan Health Innovation Park from a master lease to a pass-through structure. In December, we established a joint fund with Jinushi and also acquired the land for under Proterial's core factories via a bridge fund through a proprietary CRE carve-out route. As a result, our unit price increased by approximately 30% compared to January 2025, outperforming the index by 10 percentage points. Although market conditions remain volatile due to interest rate trends and geopolitical factors, our valuation continues to trade at a premium to NAV. We will continue to enhance valuation through initiatives to increase unitholder value. Please turn to Page 6. In December 2025, we announced the establishment of a joint fund with Jinushi with a scale of approximately JPY 30 billion. IIF sold 4 leased land properties to this fund and also contributed 6 pipeline leased land properties to the fund. This transaction has 2 key points of significance. First, it promotes the enhancement of inflation resilience through asset recycling. Second, by partnering with Jinushi, a leading player in the leased land business, we have expanded our methods for acquiring and disposing of leased land assets, thereby improving liquidity. We are currently also exploring new acquisition and disposition strategies, including joint funds not limited to leased land properties with multiple external partners. Please turn to Page 7. The pie chart on this slide shows classification of rent revision methods across the entire IIF portfolio. In light of the current inflation and interest rate environment, IIF aims to shift toward a portfolio with higher internal growth potential. Since listing, IIF has prioritized stability and built a portfolio centered on long-term fixed lease contracts, which functioned well in a deflationary environment. However, in an environment of inflation and rising interest rates, we believe it is necessary to transition to a portfolio centered on assets with higher internal growth potential in order to sustainably enhance unitholder value. Looking at the right-hand side of the chart, we continue to shift toward a more inflation-resilient portfolio. For acquisitions, we focus on assets with CPI-linked rent provisions. For example, CPI-linked rent was incorporated into the recently acquired Higashi Hiroshima Manufacturing Center. For existing properties at Shonan Health Innovation Park, we shifted from a master lease to a pass-through structure, enabling us to capture upside potential. At Haneda Airport Maintenance Center, upon lease renewal, we introduced a clause to review and discuss rent adjustments based on CPI every 5 years. As a result, approximately 69% of our lease contracts are now inflation responsive, representing a 2.5 percentage point increase from the previous period. On the other hand, the left side of the chart includes properties with a remaining lease term of 5 years or more, particularly ultra-long-term leased land properties with fixed rents as well as assets with limited upside or aging properties with rising CapEx needs in the future. We will consider these as candidates for asset recycling as we formulate our future management strategies. At the same time, by acquiring assets with upside potential from our pipeline, we will continue transforming the portfolio into one with stronger cash flow growth potential. Next, we will turn to our growth strategy. Please turn to Page 9. We will advance 3 growth strategies: Internal growth, realization of unrealized gain and external growth. Through initiatives focused on improving DPU and strengthening inflation resilience, we aim to enhance valuation. For internal growth, we target approximately 3% NOI growth. For realization of unrealized gain, we aim for JPY 200 to JPY 400 per investment unit per period. Regarding external growth, in addition to asset recycling, we will pursue asset acquisitions with upside potential and strengthen our inflation resilience while also considering external growth through public offerings, subject to careful assessment of capital market conditions and the unit price level. Please turn to Page 10. Going forward, we will drive DPU growth through internal growth, asset recycling and external growth. Excluding gains on sales, we aim to achieve annual DPU growth of 3% plus alpha. At the same time, we intend to provide an ongoing return of gains on sales, targeting JPY 200 to JPY 400 per unit each period. Taking into account acquisitions and dispositions since the previous earnings announcement, we take the previous forecast for the 37th period as the starting point. From our previous forecast for the 37th fiscal period through to the 39th period, we have seen the impact of the loss of income due to asset sales and rising interest rates. However, we expect to achieve approximately 3% growth through internal growth and new property acquisitions. Looking ahead, by combining external growth with internal growth and asset recycling, we aim to achieve 3% plus alpha growth and realize our previously stated target of JPY 3,400 DPU, excluding gains on sales in the 2027 to 2028 period. Including gains on sales, we target a DPU level of JPY 3,600 to JPY 3,800 and expect to achieve in the 38th and 39th periods. Through increase in the properties with internal growth potential by continued acquisition of assets with upside potential, we aim to sustainably raise DPU levels over the long term. Please turn to Page 12. Next, let me turn to our internal growth strategy. First, in terms of the current situation, we expect NOI growth of 3.1% for our existing portfolio, which is expected to boost overall portfolio earnings. Please turn to Page 13. Based on Page 12, this slide shows the breakdown. In terms of impact, using the results of the 37th fiscal period as the baseline, the cumulative effect from the 38th through the 42nd period amounts to approximately JPY 300 per unit in DPU. From 2029 onward, assuming annual CPI growth of 1% to 2%, CPI-linked rent revisions are expected to contribute an additional JPY 110 to JPY 170 per unit. The main drivers of NOI growth are listed below. Shonan Health Innovation Park will be the largest contributor to internal growth, but other properties will also contribute steadily. At Shonan Health Innovation Park, from 2027 onward, leasing of vacant space and pass-through of utility costs to tenants are expected to generate an additional JPY 160 to JPY 210 per unit between the 40th and 42nd periods. In logistics, factories and other asset types, we will aim for rent increases at renewal as well as generate upside from tenant replacement at 2 factory assets. For factory asset B, we are planning upside through tenant replacement and negotiations with a successor tenant are in the final stages. While earnings contribution will begin later due to the existing lease, we expect a positive impact of JPY 30 to JPY 50 per unit from 2029 onward. We will continue to enhance earnings from existing properties while building a portfolio where internal growth is continuously supported through the acquisition of CPI-linked assets. Please turn to Page 14. At Shonan Health Innovation Park, one of IIF's core assets, we transitioned from a master lease with Takeda Pharmaceutical to a pass-through structure in October 2025, enabling direct rent collection from end tenants. Together with the operating company, i-Park Institute, we are actively pursuing internal growth initiatives. The actual NOI for the 37th fiscal period significantly exceeded the previous forecast and reached JPY 1,356 million, supported by earlier-than-expected tenant occupancy and improved utility income. NOI is expected to grow significantly from the 38th to the 39th fiscal period, targeting JPY 1,670 million in the 39th period. This represents an increase of over 50% compared to the pre-pass-through level. Going forward, we will continue to pursue internal growth through 3 key drivers: Further leasing to improve occupancy, passing through utility costs to tenants and rent increases. Please turn to Page 15. Shonan Health Innovation Park is one of Japan's leading life science facilities and an operationally intensive asset where asset management capabilities are critical to enhancing value. Since acquiring the property in 2020 with a view to the transition to the pass-through implementation in 2025, we have been steadily building a track record by assigning one asset manager on site as a Board Director while also making preparations such as establishing iPark Institute in 2024 together with Takeda Pharmaceutical and Mitsubishi Corporation. Leveraging iPark Institute's strong operational capabilities, we are promoting the attraction of a wide range of tenants from industry, government and academia as well as the expansion and creation of pharmaceutical businesses, thereby contributing to the advancement of drug discovery in Japan. The bottom left chart shows the trend in rent levels of end tenants under the master lease. Rental income has steadily increased in line with the expansion of occupied space, reaching approximately JPY 6.1 billion on an annual basis in the most recent period. In addition, the average rent per square meter across all end tenants has also increased, rising by 11% over the past year to JPY 7,700 per square meter, equivalent to JPY 25,000 per tsubo. Meanwhile, the average rent for new tenants stands at approximately JPY 9,000 per square meter, equivalent to JPY 29,000 per tsubo, implying a rent gap of 17%. We intend to capture further upside going forward through new tenant leasing and lease renewals. Next, the latest topics on the right-hand side are as follows: In January 2026, Asahi Kasei Pharma Corporation leased approximately 6,000 square meters, relocating from an existing research facility with expectations to benefit from open innovation at this site. We believe that the trend among major pharmaceutical companies toward leasing rather than owning research facilities will continue. The bottom right section shows our renovation initiatives. Since the period when the facility was operated by Takeda Pharmaceuticals, there have been vacant spaces within the property. We have strategically undertaken renovation and leasing initiatives for these areas, redeveloping them into biochemical research facilities, thereby enhancing both the asset value and the overall competitiveness of the property. As part of a project selected under the Ministry of Health, Labor and Welfares Drug Discovery cluster campus development initiative, we will establish a new incubation facility, the graduation lab to support R&D by academia and early-stage start-ups. Utilizing government support, we will renovate the facility into a space where start-ups, academia and pharmaceutical companies can co-locate and engage in joint research, thereby contributing to the strengthening of Japan's drug discovery capabilities. The expected return on investment is approximately 16%. Please turn to Page 16. This shows the trend in the average rent change across the portfolio over the most recent 5 fiscal periods from the 33rd to the 37th. The rent change rate is plus 6.1%, indicating a continued upward trend in rents. From the 38th fiscal period onward, rent increases are expected at Kazo Logistics Center and Osaka Suminoe Logistics Center I and from the 39th fiscal period onward at Yokosuka Technology Center, Shonan Technology Center and Fukuoka Hakozaki Logistics Center II. Alongside core properties such as Shonan Health Innovation Park and Haneda Airport Maintenance Center, we have achieved rent growth across a broad range of asset classes, including logistics facilities and manufacturing plants. Please turn to Page 17. This shows the timing of lease expirations, lease renewal and rent revision and end tenant expirations at Shonan Health Innovation Park over the next 5 years. From 2029 onward, properties with CPI-linked rent adjustments will enter their rent revision periods. Assuming CPI continues to rise at 1% to 2% per year, this would result in an estimated increase in DPU of approximately JPY 110 to JPY 170 per unit. The potential for DPU growth from CPI-linked adjustments has increased compared with the previous period. This is due to the introduction of CPI-linked rent at the newly acquired Higashi Hiroshima Manufacturing Center as well as for end tenants at Shonan Health Innovation Park. Going forward, we aim to further enhance upside potential by introducing CPI-linked rent to existing properties and by acquiring pipeline assets with CPI-linked features. Please turn to Page 19. Turning to external growth. We have built a pipeline by leveraging the trend toward improved capital efficiency and asset-light strategies among Japanese companies, leveraging both KJRM's proprietary sourcing and collaboration with our sponsor, KKR. CRE carve-out deals with our sponsor include 8 Alps Logistics properties that have already been bridged. In addition, through our CRE carve-out initiatives, KJRM's presence and recognition within the industry have significantly increased, leading to a growing number of deal opportunities being brought to us. As proprietary CRE carve-out transactions by KJRM, we have completed bridge investments in the land under the core factory of Proterial and the Saga Plant of i-PRO, a leading sensor camera manufacturer. Both assets include CPI-linked rent revision clauses and offer upside potential. As part of our new initiative through our CRE proposals, we are seeing cases where operating companies are considering relocating or consolidating their operations. In such cases, after verifying demand from potential successor tenants in advance, we explore opportunities to pursue upside through tenant replacement and renovation by leveraging our asset management capabilities within a scope that does not materially impact the portfolio. Furthermore, we continue to build a pipeline of assets with upside potential, including factories and logistics facilities with CPI-linked features. The total value of these pipeline assets amounts to approximately JPY 85 billion. These assets offer yields above our implied cap rate, offering strong returns as well as upside potential. As most are already in the bridge stage, we will carefully assess capital market conditions, unit price levels and asset sale environments, among other factors to determine the appropriate timing and method for acquisitions with the aim of enhancing unitholder value. Please turn to Page 20. Our disposition pipeline has accumulated to approximately JPY 60 billion. This includes properties with limited further revenue upside, properties exposed to the risk of cash flow decline due to higher CapEx and properties with large unrealized gains where substantial gains on sale are expected. We will continue to evaluate multiple asset recycling opportunities that contribute to strengthening inflation resilience and returning gains on sales. Please turn to Page 21. On the left is our track record of gains on sales. IIF has recorded gains on sales for 13 consecutive periods. Over the past 3 years, properties have been sold at prices more than 11% above appraisal value with total gains amounting to JPY 13.5 billion, a significant amount. We have a strong track record across multiple asset types, including logistics and research facilities. The right-hand side shows the trend in unrealized gains, which have expanded to JPY 128.1 billion for the overall portfolio. We will continue to realize and return gains through ongoing asset recycling. Please turn to Page 23. Finally, financials. Although borrowing costs are increasing, we will manage costs through flexible financial strategies by closely monitoring interest rate trends and maintaining a balanced approach that centers on fixed rate financing while also incorporating variable rate debt. In our earnings forecast, interest costs are conservatively estimated by applying an additional buffer over the base interest rate as of February 25 when the 10-year JGB yield stood at 2.154%. For the 38th and 39th fiscal periods, no impact is expected even if the base interest rate increases by 25 basis points from the current level. If the base interest rate rises by 50 basis points, the impact would be negative JPY 10 per unit for the 38th fiscal period and negative JPY 7 for the 39th fiscal period, which we believe to be relatively limited. For the 40th fiscal period and beyond, we estimate an impact of around negative JPY 30, which can be sufficiently offset by internal growth. Please turn to Page 25. Regarding LTV trend. As of the end of January 2026, LTV based on appraisal value is approximately 42.4% and 52% on a book value basis. Although LTV has risen slightly from the previous period due to front-loaded acquisitions in our asset recycling, we intend to reduce LTV going forward through debt repayment funded by disposition proceeds and public equity offerings and to maintain it at approximately 50% on a book value basis. This concludes my presentation. We will now move on to the Q&A session.

Question one. Regarding DPU per unit, excluding gains on sales, there is a target to increase it from JPY 3,180 for the January 2027 period to around JPY 3,400 within 1 to 2 years. What is the assumed breakdown between external growth and internal growth? Answer one. Regarding DPU growth on Page 10, we are aiming for approximately 3% plus alpha growth in DPU, excluding gains on sales. At present, we are taking a somewhat conservative view on rising interest rates and plan to combine 3 drivers: internal growth, asset recycling and external growth. In terms of breakdown, internal growth, such as that from Shonan Health Innovation Park and other properties is expected to contribute around 2%, while asset recycling is expected to contribute about 1% external growth beyond that will constitute the plus alpha. By combining these 3 initiatives, we aim to reach the JPY 3,400 level. Question two: Regarding the JPY 60 billion disposal pipeline, what kind of buyers would acquire properties that are not resilient to inflation? Are there sufficient buyers? And how feasible are these transactions? Answer two: In terms of execution feasibility, we are currently working on multiple transactions. Within IIF's diverse asset types such as logistics facilities, factories and research facilities, there are various types of buyer demand. For example, in the case of the Kamata R&D center disposed in October 2025, the property was acquired by a developer for conversion to another use. In past cases where research facilities were sold, manufacturers have acquired them for their own operational needs. Going forward, there may also be demand from end users to acquire properties as research facilities or factories. Accordingly, we are carefully examining these opportunities, including initiatives such as the recent project with Jinushi, which we are currently progressing behind the scenes. Question three: Regarding the factors contributing to DPU increase at Shonan Health Innovation Park on Page 13, how much do leasing and the pass-through of utilities contribute? And what measures are expected to provide further upside? Answer three. As stated on Page 14, from July 2027 onward, we will focus on improving occupancy and further increasing the pass-through of utility costs to tenants. Question four: Regarding the DPU growth outlook, excluding gains on sales, the target is 3% plus alpha annually. It was explained that the plus alpha comes from external growth through public offering, but what level does this plus alpha represent? Also, how do you think about EPU accretion when deciding on future public offerings? Answer four. The plus alpha depends on market conditions and the scale of acquisitions. As indicated on Page 19, our current pipeline consists of relatively high-yield assets that exceed our implied cap rate. In terms of acquisition pace, we intend to continue acquiring assets at an annual pace of approximately JPY 50 billion. Naturally, we will carefully consider various factors such as capital market conditions, unit price levels and transaction market dynamics while ensuring that each acquisition is accretive. At the same time, we will closely monitor investor demand trends and proceed with a prudent approach. As for growth, we are aiming to achieve around 3% plus alpha. Question five: Regarding the JPY 85 billion acquisition pipeline, is it available for acquisition at any time? Also, since the disposal pipeline is JPY 60 billion, it appears dispositions could remain within the scope of asset replacement depending on the pace of sales. Could you explain the timing of acquisitions and disposals? Answer five: Not all of the JPY 85 billion acquisition pipeline has been acquired by bridge funds, but bridge assets can generally be acquired at appropriate timing. As mentioned earlier, we aim to acquire around JPY 50 billion per year. For disposals, the JPY 60 billion pipeline will also be executed continuously in parallel, and we expect to complete this over approximately 2 to 3 years. Question six: Regarding the JPY 85 billion acquisition pipeline, including KKR-related deals, there seem to be many logistics carve-out transactions. What types of assets are expected to increase going forward? Answer six: There are many off-market CRE carve-out opportunities being brought to us, and we believe our presence in this area is increasing significantly. The trend toward asset-light strategies and capital efficiency has progressed notably in the logistics sector, starting with our acquisition from LOGISTEED, and we believe logistics assets are increasing even behind the scenes. In addition, following the Bridge Fund acquisition in December last year, we are seeing expansion into manufacturing sectors such as Proterial. Going forward, we expect this trend to spread across various industries, including chemicals and pharmaceuticals. Question seven: Regarding internal growth, is the 17% rent gap at Shonan Health Innovation Park reasonable? And is there room to close this gap in the near term? Answer seven: As shown on Page 15, the rent gap represents the difference between rents paid by existing end tenants and those of new tenants. While the market itself is still developing, we are effectively creating the leasing market. Given the competitiveness of Shonan Health Innovation Park, tenant clustering and building specifications, we believe we are achieving very favorable leasing conditions. We intend to continue this trend going forward. Question eight: There appears to be increasing uncertainty in the private credit market recently. Could such changes indirectly impact your business? For example, the pace of external growth, including CRE carve-out deals with your sponsor KKR? Answer eight: We recognize that the market environment is currently quite volatile with various uncertainties, including rising interest rates. However, at present, we do not see any significant impact on our acquisition environment or our core strength in CRE transactions. While we will continue to monitor macroeconomic conditions carefully, we can confirm that there is currently no significant impact on our business. [Statements in English on this transcript were spoken by an interpreter present on the live call.]