Japan Real Estate Investment Corporation (8952) Earnings Call Transcript & Summary

Hello, everyone. I would like to present the financial results of Japan Real Estate Investment Corporation for the fiscal period ended September 2025. I am Kazuyuki Inoue, President and CEO of Japan Real Estate Asset Management. Let's get started. Please turn to Page 3. First, I will highlight the key points of the financial results for the period and the performance forecast. For the financial results for the fiscal period ended September 2025, rental revenues from existing properties exceeded both the previous fiscal period and the forecast made 6 months earlier, supported by a favorable leasing market. In addition, the full period contribution of revenues from CO MO RE YOTSUYA, which we acquired in the previous period, also helped drive results. As a result, EPU reached JPY 2,019, surpassing both the previous period and the forecast. Next, the forecast for the next 2 periods. For the current period ending March 2026, although there will be a negative impact from a major lease termination at Shinjuku Eastside, rental revenues from existing properties are expected to outweigh this by rent increases at other properties. Moreover, revenue contributions from Link Sapporo acquired in October will also support performance and EPU is projected to exceed the previous forecast reaching JPY 1,970. For the following fiscal period ending September 2026, we expect rental revenues to increase further as upward rent revisions accelerate. Please turn to Page 4. These are the financial results for the September 2025 period. During the period, we executed the first of the 6 tranches of the disposition of Akasaka Park, posting a gain on sale of approximately JPY 3.9 billion. As a result, operating revenues were JPY 41.1 billion and net profit was JPY 17.8 billion. On the right side, we have listed the main factors behind the increases and decreases. Compared with the previous period, rent and service charges from existing properties increased by 0.5% or about JPY 170 million, driven by tenant turnover and upward rent revisions. One-off revenues such as lease cancellation charges also increased by JPY 470 million. As for property-related expenses, repairing expenses decreased by JPY 550 million from the previous period, offsetting increases in other costs such as property and other taxes. Compared to the forecast, rent and service charges from existing properties slightly exceeded expectations. As a result, DPU shown in the leftmost section, third row from the bottom, reached JPY 2,019, up JPY 64 from the previous period, beating the forecast by JPY 33. Regarding DPU, we distributed the entire gain from Akasaka Park sale as dividends and additionally drew down internal reserves by about JPY 13 per unit, resulting in a DPU of JPY 2,511, up JPY 24 from the previous period. Next, please turn to Page 6. This section covers the forecast for the current period and the next period. First, for the current period, we completed the second disposition of Akasaka Park in October and acquired Link Sapporo in the same month. We expect to post approximately JPY 3.9 billion in gains on the sale of Akasaka Park, roughly the same level as in the previous period, resulting in operating revenues of JPY 40.7 billion and net profit of JPY 17.6 billion. On the right side, we show the main factors behind the increases and decreases. Compared with the previous period, we expect rent and service charges from existing properties to increase by 0.9% or JPY 290 million. Although the large-scale tenant departure at Shinjuku Eastside will have a significant negative impact this period, the amount of increase compared with the previous period is expected to expand. On the other hand, the lack of one-off revenue such as cancellation charges in the previous period will reduce revenue by about JPY 400 million. As a result, EPU is expected to go down by JPY 49 from the previous period to JPY 1,970. As shown at the bottom right, relative to the forecast from 6 months ago, EPU is expected to be JPY 11 higher due to positive contributions such as the acquisition of Link Sapporo. DPU is expected to be JPY 2,536, reflecting the full distribution of Akasaka Park gain on sale and the planned reversal of internal reserves equivalent to approximately JPY 85 per unit, representing an increase of JPY 25 from the previous period. Regarding the following period, at this stage, only the third disposition of Akasaka Park has been decided. Rent and service charges from existing properties is expected to rise by 1.8% or JPY 580 million, driven by an acceleration in rent increases. EPU is forecast to increase by JPY 10 to JPY 1,980 compared to the previous period. DPU is planned to be JPY 2,561, reflecting the full distribution of approximately JPY 4 billion in gains from the disposition of Akasaka Park and the reversal of internal reserves equivalent to around JPY 92 per unit, an increase of JPY 25 from the previous period. Please note that the planned reversals of internal reserves for the 2 forecasted periods may be replaced by gains on sale if additional property dispositions occur going forward. Next, please turn to Page 9. The graph on the left shows the trend in rent and service charges. For the September 2025 period, rent and service charges totaled JPY 32.7 billion, up about 1% from the previous period. For the current period and the next, although there will be another disposition of Akasaka Park, internal growth from the base properties and the contribution from Link Sapporo are expected to lift rent and service charges to JPY 33.3 billion in the September 2026 period, growing 2% a year over the 2 forecast periods. Depending on future external growth, further increases in rent revenues are also possible. The graph on the right compares the difference in rent and service charges for existing properties from the previous period. The green bars represent changes due to tenant turnover and other factors, while the orange bars represent changes due to rent revisions. Rent and service charges from existing properties is expected to continue growing each period. From the current period through the 2 forecast periods, increases from both tenant turnover and rent revisions are expected to expand in a well-balanced and accelerating manner. The combined increase over the 2 forecast periods is projected to be 2.8%. Next, please turn to Page 10, which is about occupancy rates. In the September 2025 period, although a major tenant vacated Shinjuku Eastside, leasing activities for the other properties progressed smoothly and the occupancy rate finished at 97.4% as initially forecast. Going forward, the occupancy rate is expected to rise to above 98% by the end of the current fiscal period. This reflects strong leasing performance nationwide and the properties with particularly notable leasing progress are listed on the right side of the page. For Shinjuku Eastside, all backfilling following the major tenants departure is scheduled to be completed by the end of the current period, and the occupancy rate is projected to rise to 99.8% Excluding Link Sapporo, the occupancy rate as of March 2026 is expected to be 98.5% and thereafter, further increases are anticipated and the goal is to reach 99%. Next, please turn to Page 11 regarding rent revisions. In the graph on the left, the green bars show the proportion of lease contracts that came up for renewal in each period and had successful upward rent revisions. As you can see, there is a clear upward trend and especially from the previous period, this ratio rose significantly. We were able to reach rent increase agreements with approximately half of our tenants. Going forward, we aim to further raise this ratio and target an increase to 70% or more by the fiscal period ending March 2027. In addition, for the rent increases rate shown in the graph on the right, we are targeting 7% or higher by the same period. As you know, the leasing market continues to be strong. There is a sense of tight supply and rents are clearly trending upward. Moreover, we believe our portfolio has strong competitive advantages, so we will make every effort in our rent increase negotiations to achieve the targets I mentioned earlier. Please turn to Page 12. Regarding contract types, fixed-term leases account for more than 70%. In addition, as shown in the rent gap at the lower left, the gap has widened further from the previous period due to an increase in the market rents of our properties. We believe both of these factors support our efforts in rent increase negotiations. Also, the number of free rent months has fallen to below 3 months. And in the September 2025 period, it stands at 2.5 months. Next, please turn to Page 13, which covers external growth. We are currently executing our property replacement strategy to enhance the competitiveness of our portfolio and property acquisitions are being carried out mainly through properties from our sponsor. As you can see, the properties acquired from our sponsor, Mitsubishi Estate are all high-grade office buildings located in prime areas of Central Tokyo, relatively new and of high quality. In recent years, office needs have changed significantly. Tenants now seek better offices, those with excellent transportation access, high quality and comfortable working environments. We believe the properties acquired from our sponsor match these evolving tenant needs. At the lower left, we show the year-on-year increase in the market rents of our owned properties. As you can see, the rate of increase for sponsored properties significantly exceeds the overall average, demonstrating the strong leasing competitiveness of sponsored properties. On the lower right are examples of leasing agreements for sponsor properties from the current period onward. All of these cases involve rent increases and new contracts at levels exceeding the most recent market rents. By continuing to accumulate rent increases at these levels, we aim to deliver strong growth in rental revenues going forward. Please turn to Page 14. This page shows Mitsubishi Estate's recently completed properties as well as properties in the pipeline. These materials are reprinted with permission from the financial results disclosed by Mitsubishi Estate the other day. From this, I believe you can see that an attractive pipeline is in place both within Tokyo and in regional cities. At this stage, we're not engaging any specific discussions regarding these properties. However, the fact that such high-quality properties are expected to come on to the market in the future provides strong support for sustained external growth. Please turn to Page 15. This is the Link Sapporo, which we acquired last month in October. This property was sourced through our own property route. It is a relatively new building located in an excellent location, just a 3-minute walk from the north exit of Sapporo Station. With a standard floor area of 320 tsubo and the ability to be divided into 5 sections, it can flexibly accommodate a wide range of tenant needs, both large and small. At the time of acquisition, the occupancy rate was approximately 70%, but the marketing Sapporo is healthy, and we already have several highly prospective inquiries. We will seize this opportunity and aim for full occupancy as early as possible. Although new office supply continues in Sapporo, the leasing market remains solid, supported by robust office demand. In fact, the rents for newly constructed buildings are pushing up market rents in the surrounding area and market rents continue to trend upward. Based on this market outlook, we will implement an active leasing strategy and negotiate rent increases. Over the medium to long term, we aim to achieve profitability that exceeds the assumed yield shown in the middle of the page. By leveraging both strengths, the pipeline of properties from our sponsor, Mitsubishi Estate and our own property sourcing routes, we will generate acquisition opportunities. Combined with market conscious and appropriate financing, we will continue to drive strong external growth. Next, Page 16 covers our financial activities. Please refer to the table at the upper left. At the end of the September 2025 period, our book value LTV stood at 42.8%. The average interest rate was 0.62%. The average remaining debt maturity was 4.77 years. And the ratio of long-term fixed rate borrowings was 82.7%. In this period as well, while maintaining our basic policy of securing long-term fixed rate borrowings, we raised debt by combining this with long-term floating rate loans and other instruments. The next page outlines our recent financing transactions. As shown in the table at the top, we were able to secure additional long-term fixed rate borrowings at low interest rate levels in October. Domestic interest rates are expected to continue rising gradually, so we will continue to pursue financing based on long-term fixed rate borrowings as the core while also balancing the containment of borrowing cost increases and the maintenance of a robust financial base. Next, please turn to Page 18. This section explains our growth targets for EPU and DPU as well as the strategies to achieve them. First, regarding our targets. We will continue to aim for an average annual growth of 3% in EPU and 2% in DPU over the medium to long term. Next, let me explain the strategies for achieving these targets. Please refer to the box at the bottom for the 3% EPU growth. For internal growth, our occupancy rate has now reached the upper 98% range, and we aim to raise it further, specifically to 99%. At the same time, we will make every effort to advance rent revision negotiations to significantly higher levels, 1 step, 2 steps and further beyond the current level. For external growth, as mentioned earlier, we will pursue acquisitions of high-quality properties with strong growth potential, leveraging both our sponsor pipeline and our proprietary sourcing channels. Meanwhile, regarding dispositions, in addition to the already scheduled phased disposition of Akasaka Park, which is confirmed through the period ending March 2028, we will also consider disposing other properties where profitability is a concern in order to enhance the competitiveness of the portfolio. The assumed growth rate of rent underlying the 3% EPU growth target is approximately 3% to 4% per year. Next, please look at the box at the top concerning the 2% DPU growth target. As before, we will remain committed to achieving 2% DPU growth by adding to EPU the gains on sale generated through asset replacement and the portion of retained earnings funded by those gains. The phased disposition of Akasaka Park began in the September 2025 period. And over the next 6 fiscal periods, we will return approximately JPY 23 billion of gains on sale to our unitholders. In addition, including incremental gains anticipated from future property sales, we aim to achieve sustainable annual DPU growth of 2% Finally, regarding the portion indicated by the yellow dotted line, if we determine that EPU growth exceeding 3% is achievable, primarily driven by internal growth, we intend to revisit our 2% DPU growth target and revise it upward. Next, please turn to Page 20, which covers ESG initiatives. The upper section shows progress against our CO2 reduction targets, both the CO2 emission reduction ratio and the renewable energy adoption ratio have exceeded 90% of our fiscal year 2030 targets. We will continue to promote energy efficiency across the entire portfolio through measures such as AC updates, LED retrofitting and advancing NZEB net zero energy building initiatives while also further increasing the use of renewable electricity. In the lower left section, the rate of environmental certification acquisition has improved further from the previous period, reaching approximately 95% at the end of this fiscal period. We will continue to enhance the competitiveness of our portfolio from an ESG perspective as well. This concludes our explanation based on the materials. Finally, I would like to reiterate our view on the current office rental market and our future initiatives. For a long time in Japan, there's been a perception that rents, whether for offices or other types of real estate, rarely increase. However, as the economy transitions into an inflationary phase, tenants awareness of rising rents has begun to change in recent years. Specifically among tenants, the idea that under inflation, rents naturally increase is starting to take fruit. We are seeing that resistance to rent increase requests is gradually diminishing compared with the past. In fact, high-quality office buildings in prime areas such as Marunouchi and Otemachi as well as other well-located high-spec properties owned by JRE are beginning to see successive rent revisions at higher rates. We believe that the area in which quality generates value, allowing us to receive rents commensurate with the value of superior properties has finally arrived. This trend is expected to accelerate further, and we are confident it will strongly support our revenue growth. JRE intends to continue achieving growth that surpasses inflation by combining this acceleration in internal growth with external growth through asset replacement and other initiatives. We hope you will pay close attention to JRE's initiatives moving forward. That concludes my presentation. Thank you very much.