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

Welcome to the earnings presentation of Nippon Prologis REIT. Let us first explain our 10th follow-on offering and new acquisitions. We have conducted a Global Green Equity offering, approaching a variety of investors across the world and raised JPY 38 billion new capital. Regardless of the ongoing pandemic, the offering was well accepted by investors and the market. Also, the green nature of the offering attracted significant attention from all investors. With the proceeds from the offering, we have acquired 3 new high-quality properties from the sponsor Prologis with a total acquisition price of JPY 62.2 billion. The average appraisal cap rate was 4.5%, which was quite fair in light of the most recent appraisal cap rate of 4.4% for our existing portfolio. Let us briefly review the profile of each property. Prologis Park Chiba New Town is the largest property in this offering. It is a large state-of-the-art multi-tenant facility conveniently located in the Greater Tokyo area, adjacent to a train station and nearby residential areas. The property was completed in 2016 and was 100% occupied until 2020 when its major tenant, ZOZO Inc., a successful apparel e-tailer, moved out to Prologis Park Tsukuba 2 to expand their space. Therefore, the properties occupancy dropped to less than 50% in June 2020 and over the last 5 months has been rapidly recovered to 85%. In light of the excellent quality and location of the property, we believe that the remaining space will be leased within a reasonably short period of time. We acquired the property with 4.5% cap rate. Since its development, Prologis Park Chiba New Town has been a showcase of most advanced logistics automation technologies in collaborative efforts with our customers. Many of our customers in the facility are equipped with automated logistics robots with sophisticated computerized inventory and distribution management systems. This represents the Prologis Group's efforts to optimize our e-commerce customers' warehouse operations through technological innovation. Currently, about 60% of the total floor area is utilized for e-commerce-related operations with automated functions. Prologis Park Chiba 2 is another large multi-tenant facility built right next to Prologis Park Chiba 1, which we acquired a year ago. Prologis Park Chiba 1 and 2 have become an integrated major logistics center with total floor space of 200,000 square meters. They are conveniently located in the Greater Tokyo area with good access to Central Tokyo as well as broader geographical areas through multiple expressways and ring roads. Chiba 2 is being leased to multiple 3PL companies. We acquired Chiba 2 with 4.4% cap rate. Prologis Park Tsukuba 2 is a high-quality build-to-suit property located approximately 50 kilometers northeast of Central Tokyo. It is adjacent to Prologis Park Tsukuba 1A and 1B, which we acquired in 2018 and 2020. The property is exclusively leased to ZOZO, who moved from Prologis Park Chiba New Town. At the same time, the property is designed for potential multi-tenant conversion in the future as is the case for other build-to-suit properties in our portfolio. Its proximity to major expressways provides good access to Central Tokyo as well as to broader Eastern Japan. We acquired the property with 4.7% cap rate. As a result of this offering and acquisitions, we have achieved significant accretion as demonstrated by our steady DPU and NAV per unit growth. Following this offering, our stabilized DPU will grow by 3.6% and our NAV per unit will grow by 1.2%. Our portfolio will grow by about 9% to more than JPY 750 billion, positioning us as one of the largest logistics J-REITs. Our LTV will remain unchanged, which will allow us to have significant optionality regarding financing of our future acquisitions. During the fiscal period ended November 2020, we continue to maximize our investor value through steady growth. Number one, we recorded very strong financial performances exceeding our forecast. Number two, we continue to maintain very stable portfolio operations. Number three, we continue to have robust acquisition pipeline from the sponsor Prologis. Number four, we continue to maintain the strongest balance sheet in the J-REIT industry. And number 5, the redevelopment project of Prologis Park Iwanuma 1 is proceeding well. For the fiscal period ended November 2020, our NOI was JPY 18.9 billion, and our DPU was JPY 4,860, exceeding our previous forecast by 1.1% and 2.1%, respectively. It was attributable to the historical high average occupancy of our portfolio. It was 99.4%, significantly exceeding our previous forecast, thanks to our strong leasing capabilities and the robust demand from our customers. Going forward, we forecast healthy growth as a result of our expected strong leasing performance and additional revenues from the new properties. For the fiscal period ending May 2021, our forecasted DPU is marginally lower primarily because the property taxes for the acquisitions in 2020 will start to be expensed from this fiscal period. And for budgeting purposes, we have factored in somewhat conservative scenarios. In the fiscal period ending November 2021, DPU will increase as a result of acquisitions in 2021. Our operating performance continues to be strong. Over the last 3 fiscal periods, we continue to record historical high occupancy of above 99%. Going forward, reflecting strong demand from our customers, we will likely achieve high occupancy near 99%. During the November 2020 fiscal period, the weighted average rent growth was strong at 2.7%. We expect similar strong rent growth for the fiscal periods ending May and November 2021. For the May 2021 fiscal period, we have already signed lease renewals or re-tenanting for a substantial portion of the expiring floor areas. Our earnings base is very stable as we have a diverse portfolio in terms of number of customers and well-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 certain adverse conditions. Our quality customer base allows us to perform well even under the COVID-19 environment. More importantly, more than 80% of our floor space is used for e-commerce and storage of consumer goods. This makes our operational performance even more resilient under the emergency. We expect to see a further permanent increase in Japanese e-commerce penetration, which was accelerated by the COVID-19 pandemic. Also, our customers are willing to increase their inventory levels to make their operations more resilient. As a result, we expect that our portfolio of properties will play more instrumental roles post COVID-19. We continue to have strong acquisition pipeline from the sponsor Prologis. We now have 13 pipeline properties with a total estimated acquisition value 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 balance sheet remains one of the strongest among all J-REITs. Our pro forma LTV on a book value basis is conservative 37.5%. On an appraisal value basis, our LTV is only 30%. This will allow us to retain significant growth potential and optionality for future acquisitions. If we were to increase our book value leverage to 50%, our additional investing capacity will be about JPY 180 billion. It means that we can continue to grow in any kind of financial environment in the long term. The redevelopment project of Prologis Park Iwanuma 1 is proceeding well. We will start the construction in March 2021. We are redeveloping the property on our own balance sheet while we will fully take advantage of development expertise of the sponsor Prologis. The new building will be equipped with a slope, which will maximize the functions of this multi-storied building. Also, the land site will be elevated. And therefore, the new building will be resilient against natural disasters such as tsunami and flood. The new building will be completed in or around April 2022. We expect that our pro forma NOI yield will be 5.3%, and the expected property value will exceed the cost of development by about JPY 700 million. The advanced logistic properties continue to be scarce in Japan. While the supply of high-quality logistics properties has been increasing, its cumulative stock accounts for only 5.3% of the entire logistics space. This figure remains extremely low among developed countries compared to roughly 30% or 35% in U.S. and 15% in Europe. While the supply in Tokyo was historically high in 2019, it has been well absorbed by the historical high demand. As a result, the most recent vacancy rate has been decreased to historical low 0.5%. In Osaka, the supply peaked in 2017, and there has been constant demand. Accordingly, the vacancy rate has been lowered to 3.7%. Going forward, whilst the supply is expected to increase in 2021 and 2022 due to the construction of multiple large facilities, we understand that the pace of pre-leasing is also accelerated as a result of strong demand. The overall supply and demand will likely remain in balance. The pace of pre-leasing is accelerated by the strong demand and growth of e-commerce. Notably, the average size of recently contracted leases in e-commerce is approximately 40% larger than the average of all companies. In addition, the percentage of pre-leasing is increasing significantly in the Greater Tokyo and Osaka areas. More than 55% of new supply to come in 2021 has been pre-leased as of the end of November 2020. As the e-commerge e-commerce penetration rate in Japan remains significantly lower than those of other major countries, we believe there is significant room of future growth. This will result in significant upside for modern logistics real estate owners and our investors. Another tailwind for the logistics real estate business is the shortage of labor even under the COVID environment. Our customers are not able to secure enough number of truck drivers and warehouse workers. As a result, our customers must consolidate their functions into larger modern logistics facilities. And logistic properties now must be located conveniently for commute in order to attract sufficient workforce. At the same time, introduction of automation and robotic systems in logistic facilities has been accelerated. Accordingly, the need for high-spec facilities which can accommodate such systems has increased. Summarizing our presentation. First, we have successfully completed our tenth follow-on offering and increased our unit holder value. Second, we continue to record very strong financial performances. Third, we continue to maintain very stable operational performances. Fourth, we continue to have robust acquisition pipeline. Fifth, we maintained the strongest balance sheet. Sixth, the redevelopment of Prologis Park Iwanuma 1 is proceeding well and Japanese logistics real estate market continues to be strong. Thank you for your continued support.