Nippon Prologis REIT, Inc. (3283) Earnings Call Transcript & Summary

Welcome to the earnings presentation of Nippon Prologis REIT. During the fiscal period ended May 2020, despite the uncertainty caused by COVID-19, we continued to maximize our investor value through steady growth. We have achieved continued external growth through a follow-on offering. Our operating performance continued to be solid, and we continued to maintain the strongest balance sheet in the industry. Unfortunately, we had a fire at one of our properties. However, there were no casualties and its economic impact to NPR is limited. Despite the uncertainty caused by COVID-19, our customers' demand for high-quality logistics space is increasing. The modern logistics facilities now play an even more important role. More than 60% of our floor space is used for either e-commerce or storing daily consumer goods, such as food and beverage, apparel and pharmaceutical. As a result of the potential risks observed in the global supply chains, our customers tell us that they are increasing the levels of inventories. At the same time, under the stay-at-home and working-from-home environment, people are spending more money on Internet, which is fueling the growth of Japanese e-commerce businesses. Of course, our business is not totally immune from the COVID-19 crisis. On a selective basis, we have accepted rent deferral requests from our customers who have suffered from shutdown of retail stores under the state-of-emergency situation. However, the deferred rent amount is only a small fraction, less than 10 basis points of our total annual revenues, and is expected to be repaid in the near future. During this fiscal period, we have conducted our ninth follow-on offering in February 2020 and acquired 3 new assets from the sponsor: Prologis Park Chiba 1, Prologis Park MFLP Kawagoe and Prologis Park Tsukuba 1-B. The total size of accretion was JPY 59 billion with 4.5% average cap rate. As a result, the size of our AUM has grown to JPY 700 billion over the last 7.5 years since our inception. We have achieved significant accretion through the offering. Our stabilized DPU has grown by 5%, while our loan-to-value ratio has remained below 38%. With this conservative post-offering leverage, we continue to have significant additional investment capacity. If we were to increase our leverage to 50%, we would have additional investment capacity of JPY 160 billion. For the fiscal period ended May 2020, our NOI was JPY 18 billion and our DPU was JPY 4,645, exceeding our previous forecast by 90 and 160 basis points, respectively. It was attributable to the historical high average occupancy of our portfolio. It was 99.2%, significantly exceeding our previous forecast of 98.8%, thanks to our strong leasing activities, driven by the robust demand from our customers. For the fiscal period ending November 2020, we continue to forecast solid performances, reflecting our continued strong leasing performance and rent growth being achieved this year. For the fiscal period ending May 2021, our forecasted NOI is marginally lower, primarily because the property taxes for newly acquired facilities will start to be expensed from this fiscal period, and for budgeting purposes, we have factored in somewhat conservative average occupancy scenario of 98.7%. Our operating performance continues to be strong. During the May 2020 fiscal period, this contrasts for about 15% of our total floor area expired. As a result of successful leasing negotiations, we have achieved rent growth for 68% of the renewed or newly signed leases. The weighted average rent growth for all the leasing renewals or retenanting was 3.2%. For the November 2020 fiscal period, we have already signed lease renewals or retenanting for 85% of the expiring floor areas, and the expected rent growth will likely be more than 2%, reflecting strong demand from our customers. We continue to have strong acquisition pipeline from the sponsor Prologis. Adding 2 new development projects announced during this fiscal period, we now have 12 pipeline properties with a total estimated acquisition price of approximately JPY 260 billion. The pre-leasing of properties, which are still under construction, is proceeding quite well. Thus, we are able to continue to grow the size of our AUM by about JPY 50 billion to JPY 60 billion per year. We are advantaged to acquire these assets at fair value exclusively from our sponsor without being exposed to steep market competition. Our earnings base is very stable as we have a diverse portfolio in terms of number of customers and with staggered lease maturities. Many of our customers are blue-chip large institutions in e-commerce and 3PL businesses. Our earnings base continues to be quite resilient even under adverse conditions. Our balance sheet remains one of the strongest among all J-REITs. Our pro forma LTV on a book value basis is conservative 37.7%. On an appraisal value basis, our LTV is only 30%. At the same time, we are maintaining significant liquidity. With the combination of our cash on hand and our line of credit, our liquidity continues to exceed JPY 30 billion. This makes us able to effectively manage our future refinancing. In addition, we issued JPY 10 billion green bonds in April. The terms were very long, for 20 years and 30 years, and we achieved very attractive all-in coupons of 0.9% and 1.0%, respectively. This demonstrates our strong credit and ESG commitment being well regarded. On April 30, a fire occurred at one of our properties, Prologis Park Iwanuma 1, which is located in the suburban area of the city of Sendai, northern part of Japan. Fortunately, there were no casualties. The property is covered by fire and profit insurances. And as a result, most of the economic damages will be covered and the impact on our future earnings will be limited. After the completion of the demolition work, we will start to rebuild the facility. The stock of modern logistics real estate continues to be scarce in Japan. As a result of significant success of modern logistics real estate business in Japan, the supply of new properties is increasing. However, the current stock accounts for just 5% of the entire logistics space. This figure remains extremely low among developed countries compared to roughly 30% in U.S. and 15% in Europe. In Tokyo, we experienced historical high supply in 2019, which was met by historical high demand. As a result, the market vacancy rate has been lower to just 0.5% at the end of the first quarter this year. This is the lowest vacancy in the market's history. In Osaka, there has also been constant demand. Accordingly, the vacancy rate has been lower to 3.7%. In 2021, the supply is expected to increase again. So far, we see strong leasing activities for new developments, and we currently forecast that the upcoming supply will likely be absorbed smoothly. How would the post-COVID logistics real estate industry look like? According to the survey conducted by CBRE Japan in March, 30% of the logistics real estate users are anticipating increase in their inventory volume in the long term to make their supply chain system more resilient. Also, 17% of the space users are anticipating the acceleration of introduction of automation for their logistics operations. The automation system will allow them to effectively control their logistics costs, including labor, while protecting their employees' health through social distancing. These expectations by logistics companies will likely fuel the growth of demand for high-quality logistics space. At the end of the market section, let me explain the recent trend of urban logistics properties. Our sponsor, Prologis, has recently launched a series of new projects called Prologis Urban in Japan. Prologis named logistics facilities located in urban areas, Last Touch, which is a concept to connect logistics systems with consumers living in metropolitan areas. Prologis Urban is a new brand for facilities located in major gateway cities in the world, such as New York, London, Paris and Tokyo. As a result of rapid growth of e-commerce, these urban logistics facilities will continue to play important roles. By combining the large-scale modern logistics facilities and these urban properties, Prologis is committed to provide the best logistics network to our society. Over the last 7.5 years, we have continued to grow our investor value. DPU has grown by 44% and NAV per unit has more than doubled through external growth, rent growth, debt cost reduction and cap rate compression. We continue to have the highest quality portfolio, which is yielding 5.2% appraisal NOI and 5.3% cash-on-cash NOI, which compares to the current 4.4% appraisal cap rate. The properties are new, with an average age of 7.5 years, and with the most advanced specs as modern logistics facilities. We believe that such quality assets are in the best position to capture future upside. Our balance sheet continues to be one of the strongest among all J-REITs. Our average remaining debt term is 5.6 years, and our all-in debt cost remains at just 60 basis points. With this strong financial position, we are highly resilient against capital market shocks and have the ability to grow across the cycle. In terms of the size of market cap, we are now positioned the second among all J-REITs and the sixth globally as a public logistics real estate company, and we are included in all major stock indices. We believe that our such premier position will continue to attract investor interest globally. We are highly rated by several leading third-party ESG agencies. Most importantly, we have been awarded the highest 5-star rating from GRESB for 5 years in a row. Summarizing our presentation. Number one, we continue to deliver strong performance even under the global uncertainty. The outlook for our business is very favorable. Number two, accordingly, we continue to deliver strong performance, both operationally and financially. Number three, we continue to have strong growth strategies backed by our sponsor pipeline, quality portfolio, operations and the strongest balance sheet. And number four, Japanese logistics real estate market continues to be strong. Thank you for your continued support.