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

Good morning, everyone. Thank you for joining us today. Today, I would like to report on the financial results for the 47th fiscal period as well as explain our future outlook. I will also talk about NBF's newly established distribution policy as well as our future EPU and DPU growth targets. Please turn to Page 3. I will now explain the highlights of our earnings forecast based on the results of the 47th period. The office market remains strong, and NBF is doing well in each of its key metrics. First, the graph on the left. The occupancy rate for the 47th period remained unchanged from our forecast at 98%. We expect occupancy to remain high in the 48th period at 98.8% due to the sale of the building portion of NBF Toranomon Building and 98.4% in the 49th period. As for the 49th period, there will be a temporary 0.4 percentage point impact from D-TOWER TOYAMA, which we will acquire in June and which is a newly built property with a current occupancy of 47%. However, if we exclude D-TOWER TOYAMA, portfolio occupancy would be 98.8%, indicating that our existing properties are going to maintain high occupancy. Our core rental revenue is steadily increasing. We expect an annual increase of 2.7%, including both internal and external growth during the 47th to 49th fiscal period. Now please turn to the graph on the right. EPU was JPY 2,107 in the 47th period, an increase of JPY 63 from the previous forecast. We achieved our EPU target of JPY 2,100 one period ahead of schedule. We are expecting continuous growth in EPU, reaching JPY 2,150 in the 49th period, marking an increase of JPY 43 in the 12 months from the 47th period. Please turn to Page 4. These are the financial results of the 47th period. Due to factors including the disposal of Tsukuba Mitsui Building, total operating revenues were JPY 50.8 billion, net income of JPY 22.6 billion, and distribution per unit was JPY 2,462. Let me explain the key factors behind the period-on-period changes in revenues and expenses. Number one, real estate rental revenues increased by 1.3% overall with existing properties growing by 1.1%. On the expenses side, the largest increase was in #2, building management expenses. The figure appears to have increased significantly compared to the 46th period when we had the temporary decline in expenses. But if we were to exclude this one-off factor, the actual increase in building management expenses was only 1% over 6 months. Number three, interest expense rose by JPY 120 million despite minimal refinancing activity during the period. This was due to a 0.03 percentage point increase in the average borrowing rate driven by higher interest rates. As a result, and although we do not have the numbers in the material, if we were to exclude one-off factors in the previous period, the NOI from property leasing activities in the 47th period grew by just under 1% and EPU increased by 1.8%. Next, please turn to Page 6 for the earnings forecast for the next 2 periods. For the 48th period, due to factors including the disposal of Shiba NBF Tower, we are forecasting total operating revenues of JPY 50.6 billion and net income of JPY 22.6 billion. For the 49th period, total operating revenues is forecast to be JPY 47.3 billion with net income of JPY 18.2 billion. By using disposal gains and retained earnings, we plan to pay out a DPU of JPY 2,400 for both periods. I will now explain the outlook for revenues and expenses in our forecast. Regarding, #1, real estate rental revenues, we expect a 2.7% increase over the next year through the 49th period, out of which revenues from existing properties are projected to increase by 2.1%. Meanwhile, for expenses, we are forecasting, #2, building management expenses to increase by around 2% per annum based on the previous period's results. For #3, interest expense, considering the outlook of higher interest rates, we are forecasting borrowing rates to be 1% in the 48th period, and 1.25% in the 49th period, which leads to a JPY 430 million increase in interest expense. As a result, as shown in #4, NOI from property leasing activities is forecast to increase by 1.6% per annum, while EPU is projected to grow by 2% per annum. Next, please turn to Page 9 for internal growth. The yellow line represents the period-on-period change in rental income for our existing properties. Between the 47th to the 49th fiscal period, rental income is expected to continue increasing by more than 2% annually. Please note that the impact of rent revisions represented by the blue bars has turned positive for the first time in 4 years. We expect the impact from rent revisions to further increase going forward. For details, please refer to Page 10. The breakdown of rent increases and decreases shown in the upper right reflects the current status of rent renewal negotiations. On the left, we show the contribution of each fiscal period's earnings. You can see that rent increases accounted for just over 30%. However, on the right, we show the numbers based on what was agreed with tenants. Here, you can see that more than half of the tenants agreed to rent increases in the second half of last year. Meanwhile, the number of tenants for which we agreed to lower rents has dropped to almost 0. Turning to the bottom of the slide. The number of free rent months has shortened from 4 months in the 46th period to 2.9 months in the 47th period. Meanwhile, the rent gap has been widening due to higher market rents, increasing from 3.2% in the 46th period to 4.8% in the 47th period. Going forward, we plan to grow rental income further by increasing the number of rent increase agreements and by raising the unit rent pricing. Next, let's move on to external growth. Please turn to Page 11. This is the Yokohama Mitsui Building, whose acquisition was announced on January 31. This is a 13-year-old office building located just a 5-minute walk from Yokohama Station, making it the closest office building to Yokohama Station within the Minato Mirai area. We are acquiring approximately 73% of the total with an acquisition price of JPY 43.1 billion. The seller is our sponsor, Mitsui Fudosan. The property is 99.3% occupied and its appraisal NOI yield is 3.9%. Next, please turn to Page 12. This newly built property marks NBF's first acquisition in Toyama Prefecture. Toyama is an area that has benefited from improved accessibility to Tokyo since the opening of the Hokuriku Shinkansen in 2015. Toyama has a strong manufacturing industry with many manufacturers and trading companies having their offices there. This property is a newly built property completed last year, located just a 3-minute walk from Toyama Station. There has been almost no new supply of office buildings in the Toyama area for over 20 years and future supply is also expected to remain limited. This lack of supply makes this newly built prime location property extremely competitive. The current occupancy is 47%. We plan to lease up the property quickly, utilizing Mitsui Fudosan's strong leasing capabilities. We have not factored in any contribution up to the 49th period, but we expect this property to start contributing to our portfolio in the 50th period onwards. Next, please turn to Page 13. This is the Shiba NBF Tower, which we have decided to dispose. The decision to dispose the property is based on the fact that this is a 38-year-old and land leasehold property with a significant depreciation cost burden as well as further CapEx being expected. The disposal price is JPY 32.1 billion, and we are expecting a disposal gain of around JPY 4.5 billion. At the bottom, we show the effect of the property replacement. We acquired 2 properties while disposing 1. Both the quality and profitability of the portfolio improved with asset size increasing by around JPY 20 billion, the property age becoming younger from 38 years to 10 years and the yield improving. Please turn to Page 14. This is our financial performance. Please see the finance data section at the upper left. We are continuing our disciplined financial management with LTV at the end of the 47th period at 42.4%, long-term fixed interest ratio of 88.2%, average interest rate of 0.48% and average remaining life of 4.82 years. The LTV is expected to become 43.1% following the acquisitions of Yokohama Mitsui Building and D-TOWER TOYAMA. Although interest rates are on the rise, we will maintain our discipline of having at least 80% of our debt as long-term fixed interest debt while also making use of short-term and variable interest debt to control interest payments, thereby establishing a prudent and robust financial base. Please turn to Page 16. In this results announcement, we have entered a phase in which we are confident of continuous EPU growth, and we have, therefore, set a new distribution policy. Please see the bar chart on the left. Until the 47th period, we had been reversing our retained earnings to add the 3% EPU portion to our distribution on top of the pink EPU portion. From the 48th period, however, we will increase the additional portion to 10% by utilizing disposal gains from future strategic property replacements as well as retained earnings. As you can see from the bar chart on the right, we have been building up our retained earnings and together with the strategic property replacements, we believe we can continue to pay out the newly increased additional portion for the time being. With this new distribution policy and with the aim of continuously growing our EPU and DPU, we have set a new goal of surpassing an EPU of JPY 2,200 and DPU of JPY 2,400 as early as possible and moving to the next stage of further DPU expansion. We will steadily realize EPU growth through both internal and external growth, while utilizing the strategic property replacements and retained earnings to aim for further DPU growth. Lastly, please turn to Page 18. In terms of ESG, we achieved the highest rating of 5 stars in the real estate assessment for the 2024 GRESB assessment, and received the top A level rating in the disclosure assessment for the seventh consecutive year. Additionally, we have achieved 100% green building certification for our portfolio. Please visit our website for more details. This concludes my presentation. In closing, the targets we have set are merely milestones, and we will do our utmost to transitioning as quickly as possible to the next stage of DPU growth. We sincerely appreciate your continued support, and thank you for your attention.