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

Hello, everyone, and thank you for joining us today. Before reporting on the results of the 48th period and explaining our future outlook, I would like to briefly comment on the equity offering we carried out the other day. This was NBF's equity offering after 3.5 years, and we received very positive feedback from many investors. The closing was successfully completed the other day, and I would like to express my sincere gratitude once again. As explained, when we announced the equity offering, we view this as the first step in returning to external growth through equity offering, the original model of J-REIT, and this is just a milestone in NBF's long-term growth trajectory. As we will outline today, backed by the robust office leasing market, NBF is steadily achieving rental income growth. With this strong internal growth as the base and by adding external growth through timely financing in consideration of market conditions, we aim to further accelerate EPU and DPU growth. Now I will explain the highlights of the 48th period results as well as our earnings forecast based on the results. Please turn to Page 3 of the presentation. The office market remains solid and NBF's various metrics also shows strong growth. As you can see from the table on the left, the occupancy rate for the 48th period was 98.9%, outperforming our forecast by a further 0.1 percentage points. We expect to maintain a high occupancy level of above 98%. In our core real estate leasing business, rental revenues in the 48th period grew by approximately JPY 600 million from the previous period, representing a robust 1.4% growth in just 6 months. Going forward, from the 48th to the 50th period, combining internal and external growth, we expect annual rental revenues to increase by around JPY 1.7 billion or 4.1%. Now please see the graph on the right. EPU in the 48th period was JPY 2,198, JPY 68 higher than our previous forecast. The outperformance was due to higher-than-expected rental income through tenant replacements, cost control such as lower-than-expected interest rates, and about JPY 20 per unit worth of expenses being pushed back to the next period. As for the 49th and 50th periods, EPU is also expected to rise further from the June forecast to JPY 2,200 in the 49th period and JPY 2,225 in the 50th period. As a result, our target EPU of JPY 2,200 is now expected to be achieved ahead of schedule in the 49th period. Although the growth rate will slow down in relative terms given the significant outperformance in the 48th period, we still expect steady EPU growth toward the 50th period. Please turn to Page 4. In the 48th period, we acquired Yokohama Mitsui Building in March and D-TOWER TOYAMA in June, while disposing Shiba NBF Tower in March. Operating revenues were JPY 51.2 billion. Net income was JPY 23.5 billion and distribution per unit was JPY 2,495. The key points regarding the period-on-period changes in revenues and expenses are as follows. Real estate rental revenues in 1 increased by 1.4% overall, further exceeding our initial assumptions with existing properties up 1.6%. Operating expenses in 2 decreased by 2.9% due to lower repair expenses, lower building management expenses as a result of accounting treatment, and lower depreciation due to property disposals. Interest expenses in 3 increased by only JPY 130 million, which was less than our forecast as we were able to secure financing at an average cost of around 1%. As a result, EPU for the 48th period rose by 4.3% from the previous period. Please turn to Page 6 for our earnings forecast for the next two periods. In July, we acquired Frontier Musashikosugi. And at present, there are no decided property disposals. For the 49th period, we are forecasting operating revenues of JPY 48.4 billion, net income of JPY 19.0 billion. And for the 50th period, operating revenues of JPY 48.3 billion, net income of JPY 19.2 billion is our forecast. Our revenue and expense forecasts are as follows. Real estate rental revenues in 1 are expected to grow by 4.1% during the 12 months to two periods ahead, with existing properties contributing 1.6% growth. Building management costs in 2 are expected to rise by about 2% annually for existing properties. We are also expecting increases in taxes and depreciation as a result of property acquisitions. Interest expenses in 3 are expected to increase by around JPY 600 million annually, reflecting additional financing for acquisitions as well as our expectation for higher interest rates. In the 49th period, with interest rates expected to rise, we secured long-term borrowings in July with an average maturity of around 11 years at 1.4% interest as a measure to curb future interest costs. For the 50th period, we are expecting financing at 1.25%, in line with previous assumptions. If we look at it over a 12-month period, the increase in real estate rental revenues is expected to offset higher operating expenses and interest expenses, leading to profit growth. We are, therefore, forecasting a DPU of JPY 2,420 in the 49th period and JPY 2,448 in the 50th period. Next, please turn to Page 9 for internal growth. The graph shows the period-on-period change in real estate rental revenues for existing properties broken down into tenant replacements in green and rent revisions in blue. Rental income for existing properties is growing steadily with a combined 1.6% increase in the 48th period, which contributed to the outperformance in earnings. The rent revision impact in blue is expected to rise significantly by 1.1% in the 50th period, including the effects of rent increases already agreed with major tenants. Meanwhile, the tenant replacement impact in green tends to fluctuate depending on the timing of tenant move-ins and move-outs, and is expected to be negative in the 50th period due to factors such as the departure of a large tenant from Shinjuku Mitsui Building. However, of the roughly 3,000 tsubo that is to be vacated, we have secured new tenants for nearly 2,000 tsubo, and we have received many inquiries for the remaining floor space. Although not reflected here, we are expecting this tenant replacement impact to contribute positively in the 51st period. Please turn to Page 10 for the status of rent negotiations. At present, in terms of the number of cases, there have been no rent decreases, and rent increases account for about 55% of the total with the ratio of rent increases steadily rising. We will continue to negotiate diligently to increase both the ratio and the extent of rent increases. As shown in the lower section, the average free rent period remains just under 3 months. The rent gap has widened from 4.8% to 8.1% between the 47th and 48th periods, reflecting rising market rents, indicating further potential for rent increases. Please turn to Page 11 for the financing results. As of the end of the 48th period, our LTV was 42.6%. The long-term fixed interest ratio was 86.9%. The average interest rate was 0.52%, and the average remaining maturity was 4.58 years, reflecting continued prudent financial management. After the Musashikosugi acquisition, the LTV as of the end of the 49th period is expected to be 43.1%. On the right side of Page 12, we have included the details of the July financing mentioned earlier. As you can see, with interest rates expected to rise, we believe we successfully executed financing that helps mitigate future risks. We will continue to maintain discipline and keep the long-term fixed interest ratio at above 80%, while adjusting maturities as well as making use of floating rate debt to control interest expenses, thereby building a solid financial base. Please turn to Page 15. On the left is our EPU and DPU forecast through to the 50th period. As explained at the last results briefing, starting from the 48th period, we will make additional distributions equivalent to 10% of EPU funded by disposal gains or retained earnings. In the 48th period, we recorded substantial disposal gains exceeding 10% of EPU, resulting in a distribution of JPY 2,495, which is JPY 95 above our forecast. For the 49th period, we plan to distribute JPY 2,420, equivalent to 110% of the EPU of JPY 2,200 and for the 50th period, JPY 2,448, equivalent to 110% of the EPU of JPY 2,225. We will begin linking the rise in EPU directly to DPU growth, as we have been explaining, starting from the 49th period, which is even earlier than we had anticipated. Please turn to Page 16 for our EPU and DPU growth outlook. By achieving rental revenue growth target for existing properties of more than 1% per period or more than 2% annually, we expect EPU to grow by around 2% to 2.5% annually from internal growth alone, even allowing for higher interest expense and building management costs. If we achieve external growth, that would add another 0.5% to 1% annually, enabling us to target total EPU growth of over 3% per annum. By accelerating EPU growth through a combination of continuous internal growth and flexible and timely external growth and strategically using disposal gains and retained earnings, we aim to achieve further DPU growth. If we are able to book large disposal gains through property replacements, the additional distribution could exceed 10% of EPU. Therefore, as you may be aware, continuing strategic property replacements could bring further upside to the DPU. Please turn to Page 19. As for ESG, we will continue to maintain 100% coverage of green building certifications. Please turn to Page 20. Regarding greenhouse gas emissions, in 2024, we achieved total reductions in Scope 1 and 2 that exceed our near-term target of a 42% reduction from 2021 levels. We will continue to work on total reductions toward achieving our net zero target for all scopes. Please see our website for details. That concludes my presentation. Thank you very much.