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

Welcome to the earnings presentation of Nippon Prologis REIT's May 2021 fiscal period. It has been 8.5 years since our inception, and we continue to demonstrate excellent operational and financial performances this fiscal period. Despite the pandemic, our operations were not disrupted. Demand strengthened for high-quality and well-located logistics space, and we continue to maintain significant future growth potential. During this fiscal period, we realized several important achievements. Number one, we conducted our tenth follow-on offering. Number two, we have recorded continued excellent financial performances that exceeded our forecast. Number three, we continue to maintain robust acquisition pipeline for future external growth. Number four, we continue to have one of the strongest balance sheets. And number five, we are fully committed to ESG playing a leading role. First, our continued external growth during the fiscal period. We conducted our tenth follow-on offering and accretion of 3 new properties from the pipeline provided by the sponsor, Prologis. The total acquisition price was JPY 62 billion, and the average appraisal NOI yield was quite fair at 4.5%. We have successfully raised equity capital of JPY 29 billion. More importantly, we have structured this as the green equity offering for the first time as a J-REIT and have successfully drawn significant interest from various institutional investors around the world. As a result of this offering and acquisition, the size of our AUM has exceeded JPY 750 billion in terms of acquisition value, and our equity market capitalization has reached JPY 900 million levels. This page illustrates the economic impact of the offering. Maintaining the leverage at neutral, we have grown our DPU by 3.6% and our NAV per unit by 1.2%. With this conservative post-offering leverage of 38% in terms of book value of our balance sheet, we continue to have significant investment capacity and financing optionality for our future growth. Next, our financial performances. This page illustrates NOI results of the May 2021 fiscal period and our forecast for the November 2021 and May 2022 fiscal periods. As a result of the continued high portfolio occupancy, successful rent growth and increased revenues from Prologis Park Chiba New Town, our NOI for the May 2021 period was JPY 19.7 billion, exceeding our forecast by 90 basis points. As for the November 2021 fiscal period, revenues from the 3 new properties will fully contribute, and rents are expected to continue to grow. As a result, our NOI is expected to further increase. As for the May 2022 fiscal period, we have assumed relatively conservative occupancy and expense scenarios due to uncertainty. Also, the property taxes for the 3 new assets will start to be expensed in January. Accordingly, the expected NOI appears marginally lower than that of the preceding period. Our DPU for the May 2021 fiscal period was JPY 4,847, exceeding our forecast by 150 basis points as a result of the increased NOI. As for the November 2021 fiscal period, our DPU is expected to increase as a result of the increasing NOI. As for the May 2022 fiscal period, our DPU is budgeted to be marginally lower due to the conservative assumptions of occupancy and expenses. Next, an overview of our operational performances. Reflecting strong demand from our customers, we have continued to record historical high occupancy rate of 99.4% in the May 2021 fiscal period. As for the November 2021 and May 2022 fiscal periods, we are anticipating continued high occupancy rate exceeding 98%. The rent growth was high. During the May 2021 fiscal period, rate change for all lease renewals and retention was 3.9%, exceeding our expectation, which compares to 3.1% in 2020 and 1.6% in 2019. The retention ratio of all the lease expiries was more than 80%. We have achieved positive rate changes for more than 80% of all the expired floor space. As for the November 2021 fiscal period, we have already resolved nearly 70% of all the lease expiries, and our rents are expected to continue to grow. After the acquisition of new properties earlier this year, we continue to have robust acquisition pipeline from the sponsor. At this moment, we have 14 property acquisition pipeline on a publicly announced basis, which is estimated to be worth roughly JPY 260 billion in total. Reflecting strong demand, pre-releasing of these development properties are proceeding quite well. Accordingly, we remain confident in our expectation to grow our AUM by about JPY 50 billion to JPY 60 billion per year in the long term. In addition, over the next couple of years, in light of the size of properties to be completed, we anticipate that the pace of our external growth will likely be higher. Next, let us explain our financial strategies. In April, we have obtained an additional credit rating of AA from R&I, which is the highest among all J-REITs. And in May, we have issued long-term green bonds in the total amount of JPY 12 billion. The issuance has attracted significant attention from a number of fixed income investors, and we have achieved favorable coupons, which are only 47 basis points for 10 years and 73 basis points for 15 years. We continue to have one of the strongest balance sheets in the J-REIT community. Our LTV, in terms of the book value of our balance sheet, continues to be modest at 37.8%. On an appraisal value basis, it is below 30%. All the borrowing and bonds are for long term with fixed interest rates. The average borrowing term is 9 years, reflecting our efforts to further strengthen our balance sheet. The average all-in debt cost is only 60 basis points. Assuming that we increased the leverage up to 50% of our balance sheet, we have additional investment capacity of approximately JPY 180 billion. With the continued compression of appraisal cap rates, our portfolio now has unrealized capital gain of about JPY 200 billion, which is further enhancing our financial strength. With this balance sheet, we are prepared for our continued growth in any kind of financial environment in the future. As a member of the Prologis group, we continue to fully commit to ESG, which is highly rated by several ESG rating agencies. We have received the highest 5-star rating from GRESB for 6 consecutive years, and we are the only J-REIT who is included in Dow Jones Sustainability World Index and CDP A List. This page summarizes our KPIs in connection with material SDGs for our business, which is in line with the Prologis Group's global KPIs. We are committed to continue to reduce our carbon footprint by installing solar panels and LEDs. We will ultimately make all the lease contracts green leases and maintain more than 95% of our portfolio to be green buildings. Let us touch upon some of other recent developments of NPR. Regarding Prologis Park Iwanuma, we have commenced the reconstruction project. The new building is scheduled to be completed in April 2022, and we have good outlook of its pre-leasing. Regarding Prologis Park Ibaraki, 80% of the space to be vacated by Nitori has been already leased up with no downtime. Regarding Prologis Park Chiba New Town, which we acquired with 85% occupancy rate in February, we have already completed the lease-ups of the remaining space, which is ahead of our original schedule. Next, let us brief you on the recent status of Japanese logistics real estate market. While the supply of high-quality modern logistics properties continues, its stock still remains only a fraction of the entire warehouse space in Japan. As we continue to observe strong demand from users of modern logistic real estate space, both the Tokyo and Osaka metropolitan markets continue to be very solid. As for Tokyo, the vacancy rate at the end of the first quarter of 2021 continue to be low at only 1.1%. The supply volume has been significant over the last couple of years, while the pace of absorption has constantly exceeded the supplies. In Osaka, the vacancy rate also continues to remain low. At the end of the first quarter 2021, it was only 1.9%. The supply volume is expected to increase in 2021 and 2022, but we are expecting continuous strong demand. For example, more than 70% of total supply to come in 2021 has been already pre-leased at the end of June. Accordingly, the market is likely to continue to be tight. As the e-commerce penetration rate in Japan remains significantly lower than those of other developed countries, we believe there is significant room of future growth. This will result in significant upside for modern logistic real estate owners and our investors. The fast pace of pre-releasing this year is primarily due to the strong demand from e-commerce. Notably, the average size of recently contracted leases in e-commerce is approximately 40% larger than the average of all the companies. Also, e-commerce leases tend to be long, with which modern logistic facilities can generate long-term stable cash flows. Another tailwind for the logistics real estate business is the shortage of labor. Our customers are not able to secure enough number of truck drivers and warehouse workers. As a result, our customers must consolidate their facilities 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 workday system in logistics facilities has been accelerated. Accordingly, the need for high-spec facilities, which can accommodate such systems, has increased. Summarizing our presentation. Number one, we have significantly enhanced our investor value through our most recent offering. Number two, our financial performance continues to exceed our previous forecast, reflecting continued strong demand from our customers. Number three, we continue to have robust acquisition pipeline and strong external growth potential. Number four, we are maintaining strongest balance sheet. Number five, NPR and the Prologis Group are fully committed to ESG. And Japanese modern logistics real estate market continues to be strong. This strength is further supported by favorable market conditions for high-quality, well-located logistics space. Thank you for your time and continued support to NPR.