Nippon Building Fund Inc. (8951) Earnings Call Transcript & Summary

Ladies and gentlemen, this is Daisuke Yamashita, President and CEO of Nippon Building Fund Management. I assumed the position of President in April of this year. Since this is the first time for me to explain the results, let me first briefly introduce myself. I joined Mitsui Fudosan in 1988. And before assuming this position, I was engaged in the management of a housing-related subsidiary. Going back even further, I had been involved in the purchase and sale of office buildings for about 10 years, since 2003. As you all know, J-REITs started in 2001, so I have experienced a period of market volatility from the era of bad debt disposal to the overheated market to the period of financial turmoil after the Lehman Shock to the Great East Japan Earthquake in the period of recovery. NBF has a number of projects that I was involved in that at a time, and I am well familiar with the property characteristics. I will continue to take the initiative to meet the expectations of our unitholders by leveraging this experience. And I would like to ask for your continued support as well. Before reporting our financial results, we would like to announce that we have decided to split our investment units into 5 units with a record date of September 30, as announced yesterday. This decision was made with the aim of expanding our investor base and improving liquidity by creating an environment that makes it easier for investors to invest in light of the launch of the New NISA scheme. We appreciate your understanding. Please refer to Page 3 of the investor deck. Here, I will go over the highlights of the financial results as well as explain the key points of our future earnings forecast based on this fiscal period's financial results. First, as shown in the table on the left, the office leasing market has definitely bottomed out and NBF's occupancy rate has also improved significantly, and we are now forecasting an occupancy rate in the 98% range. The occupancy rate forecast for the 48th fiscal period includes the 0.8% positive effect of the recently announced sale of the NBF Toranomon building. But in any case, the occupancy rate remains at a high level, indicating a solid situation. In our core business, real estate rental revenues have been on a downward trend for some time. But after bottoming out in the 46th period, we have confirmed an upward trend in revenues and are now steadily recovering. Next, as shown in the table on the right, EPU increased in the 46th period, partly due to a onetime decrease in expenses, but excluding the special factor, EPU is expected to bottom out and begin to recover in the 47th period, reaching a level above JPY 10,500 2 periods ahead. Next, I will explain the income statement for the current period on Page 9. During the period under review, we completed the acquisition of Toyosu Bayside Cross Tower in March and the disposition of GranTokyo South Tower and Panasonic Tokyo Shiodome Building, as planned. The red box depicts the financial figures for the period ended June 30, 2024. Operating revenue was JPY 50.2 billion. Operating income was JPY 24.6 billion. Net income was JPY 23.3 billion. NBF reserved JPY 1 billion of its retained earnings and total distributions amounted to JPY 22.2 billion. The distribution per unit will be JPY 13,082. I will now explain the change factors on the right side of the page. First, a breakdown of the JPY 2.9 billion increase in operating revenues. Real estate rental revenues, which are the basis for NBF's revenue decreased by JPY 0.1 billion, but there were profits from 2 property dispositions of JPY 5.2 billion, resulting in a JPY 3.5 billion increase in operating revenue from the previous fiscal period. Next, the factor behind the decrease in operating expenses is as follows: Property taxes increased due to property acquisitions and revaluation, but repair expenses decreased, and utilities expenses also decreased due to seasonal factors. Operating expenses declined JPY 900 million, including a one-off decrease in expenses of approximately JPY 400 million to JPY 500 million. This was due to factors such as the rise in utilities expense in the year before, which led to a large amount of building management fees being collected, but the actual utilities expense during the period was not that large, which led to many cases in which there were unused portions of the building management fees. As a result, operating income increased by JPY 3.8 billion from the previous period. NBF's management policy is on Page 12. The management policy will remain unchanged with the main focus being on the stable growth of DPU. NBF's views on the current market as well as NBF's potential strategies are summarized in the following 4 sections. Please refer to it later. I will now begin with internal growth. First, regarding trends in the leasing market. According to data from the brokerage company, MIKI SHOJI, the vacancy rate in Central Tokyo has recovered to 5.0% due to strong positive corporate demand and market rents have also been rising for 6 consecutive months since entering 2024. Although there will be a large supply next year, we have heard that leasing is already in progress. So we believe that the office leasing market has already entered a recovery phase, and we feel that the trend has definitely changed. Please refer to the graphs on Page 13 for the average occupancy rate and move-in move-out rates during the period. The occupancy rate in NBF's portfolio improved by 0.4 points from the previous period to 97.8%. The occupancy rate 2 periods ahead is expected to improve by 0.8 points to 98.7% following the sale of the building portion of NBF Toranomon Building, which is being vacated. Next, on Page 14, I will explain changes in rental income from existing properties. The yellow line graph shows the period-on-period percentage change in rental income of existing properties. Rental income from existing properties in the current period declined slightly, but rental income from existing properties in the next period and 2 periods ahead is expected to turn positive. The bar graph breaks it down into 2 components. The green bars show the impact of tenant replacement, where the recovery in occupancy rates is expected to turn positive in the next fiscal period forecast. The blue bars show the impact of tenant replacement. Although we still have the impact from accepting lower rent revisions because we were working to retain large tenants at a time when there were concerns about large supply. At the moment, the number of tenants agreeing to increase rent revisions is on the rise, and earnings from rent revisions are expected to turn positive from 2 periods ahead. We expect both the unit rent at the time of new leasing and at the time of rent revision by existing tenants to turn positive in the future. Next, I will explain external growth. Please see Page 15. The office transaction market has remained strong. We still have not seen any weakening on transactional cap rates. In this environment, NBF believes that this is an opportune time to strengthen the quality of our portfolio with a strong sponsor pipeline, including asset replacement and to grow our assets under management. On this page, I would like to explain about the NBF Toranomon Building, which we announced in July. NBF Toranomon Building is a 61-year-old building, which was acquired in 2004 and has been managed stably. However, after a bank branch on the ground floor vacated the building, we have been considering how to manage the building going forward. After considering the 4 options described on the right, we have chosen to transfer the building to Mitsui Fudosan and continue to hold the land. The background to this choice is that Mitsui Fudosan will be responsible for the redevelopment and NBF will obtain preferential negotiation rights with the aim of reacquiring a highly competitive new building. We are proud that NBF's strength lies in its ability to create joint value with its sponsors, which enables this kind of approach. In our core business of real estate leasing, NBF intends to achieve continuous growth through both internal and external growth, including property replacements. Next is finance. Please proceed to Page 17. In the financial markets, interest rates are in an upward phase due to the Bank of Japan's policy rate hike and reduced purchases of JGBs. In terms of our debt financing, we will continue to flexibly respond to the situation by utilizing long-term floating rate debt and adjusting the terms of debt financing, while maintaining a base of long-term fixed rate debt. In addition, although the investment unit price is unstable due to the rising interest rates, we intend to make a comprehensive judgment on equity financing based on the profitability of acquired properties, LTV, EPU and DPU growth and other factors. We are aware that we should be cautious about POs in light of the current market situation and will make appropriate decisions on POs with a view to achieving stable growth over the medium to long term. As shown in the financial data table in the upper left, the LTV ratio at the end of the period was 42.4%. The long-term fixed interest rate ratio was 88.4%. The average funding rate was 0.45%, and the average remaining period on debt was 5.3 years, indicating that NBF continues to maintain conservative financial management. Below that, the total debt capacity, assuming a standard LTV limit of 46% is approximately JPY 92 billion. As shown in the graph on the bottom right, we will pay attention to the diversification of repayment deadlines, utilize long-term floating rate loans and adjust funding periods to reduce interest payments. Next, on Page 18, we will discuss the appraisals. As shown in the upper left table, the total value of appraisals for the period was JPY 1.7 trillion, and unrealized gains increased by JPY 0.5 billion to JPY 345.6 billion. In the bottom left table showing the status of each property, the appraisal value decreased for 12 properties, but this was due to increases on estimated costs such as property tax. The next Page 21 explains the forecast. The dark red box is the forecast for the fiscal period ending December 31, 2024, and the orange box on the right is the forecast for the fiscal period ending June 30, 2025. For the fiscal period ending December 31, 2024, we are forecasting operating revenue of JPY 50.5 billion, operating income of JPY 23.5 billion and net income of JPY 22.0 billion. Although we are going to sell Tsukuba Mitsui Building, the profit from dispositions will decrease by JPY 500 million from the previous fiscal period. In real estate rental revenues, we expect real estate rental revenues from existing properties to increase by approximately JPY 400 million. In terms of costs, we expect an increase in utilities, repair expenses and building management expenses due to seasonal factors, but we anticipate a decrease in property taxes due to the sale of properties, resulting in an increase in revenues and decrease in income. Next, for the fiscal period ending June 30, 2025. Although real estate rental revenue is expected to be positive, mainly from existing properties 2 periods ahead, operating revenue is expected to be JPY 45.6 billion. Operating income is JPY 19.4 billion and net income is JPY 17.8 billion because we do not anticipate profit from dispositions. Therefore, in conjunction with the return on gains on sales and the reversal of retained earnings, we have set the distribution per unit at JPY 12,000 for both fiscal periods, unchanged from the previous announcement for the December 2024 fiscal period and the same amount as the previous fiscal period for the June 2025 fiscal period. Next, please see Page 23. The left-hand side shows the balance of retained earnings, which is expected to be JPY 16.3 billion in the fiscal period ending December 31, 2024, due to the profit from the disposition of the Tsukuba Mitsui Building. It is expected to be JPY 13.8 billion in the fiscal period ending June 30, 2025, after taking into account the reversal of retained earnings. The graph on the right represents the breakdown of DPU. NBF aims to increase the distribution based on rental income, which corresponds to the orange portion. Additionally, we plan to utilize retained earnings and gains from disposals to achieve stable growth in DPU. Regarding EPU, although there was a temporary factor of building management costs in the current period, we recognize that without this temporary factor that EPU would have been in the JPY 10,300 range. We expect distributions based on real estate rental income to bottom out in the next period, and we would like to raise our target from JPY 10,500 to JPY 11,000 as we are on track to meet our previous EPU target of JPY 10,500 2 periods ahead. While utilizing the accumulated retained earnings and in light of the steady increase in EPU, the DPU for the fiscal period ending June 30, 2025, was set at JPY 12,000, the same amount as the period ending December 31, 2024. Next, I would like to explain NBF's ESG initiatives. If you turn to Page 29, it contains the highlights of our efforts during the current fiscal period. You can see the progress of the main KPIs on Pages 31 and 32. All environmental performance indicators in 2023 have improved compared to the previous year. The rate of green building certifications on Page 33 shows an achievement of 98.8%. As shown on Page 34, we have received SBT certification for our net zero GHG emissions target through 2050. Details are also available on our website. In closing, demand in the office leasing market is strong and the need for high-quality office buildings remains firm. The Japanese economy is also transforming from a world without interest rates to one with interest rates and is also transforming into one with inflation as wages rise. With regard to office billings, although there is currently an increase in costs, including interest rates, we intend to improve real estate rental income by striving to raise the unit prices of rent. That concludes my presentation. Thank you very much for your time.