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

Welcome to the earnings presentation of Nippon Prologis REIT's November 2021 fiscal period. It has been 9 years since our inception, and we continue to demonstrate excellent operational and financial performances. Demand from our customers continues to be strong, and we continue to further enhance our unit holder value. This time, our highlights are as follows: First, we have successfully completed our 11th follow-on offering and acquisition. Second, we have delivered strong financial results. Third, we achieved high occupancy and steady rent growth. Fourth, we continue to have a robust acquisition pipeline. Fifth, we maintained a strong balance sheet. And sixth, we maintain fully committed to ESG and transparency. In November and December 2021, we have successfully conducted our 11th follow-on offering. Through this offering, we acquired 3 cutting-edge properties for a total acquisition value of JPY 58 billion. The properties all developed by the Prologis Group are highly sustainable Class A logistics facilities in excellent locations. These properties are all eligible green projects with industry-leading sustainable features. The average age of the properties is only 0.3 years, with a long average remaining lease term of 8.6 years. Based on third-party appraisals, these properties will generate an attractive average NOI yield of 4.4%. Two of the properties are multi-tenant facilities, while the third is the build-to-suit. Let us briefly review the profile of its property. Prologis Park [indiscernible] 2 is the largest property in the offering. It is a brand-new, large state-of-the-art multiturn facility conveniently located in the inland Osaka area, assisting to a newly built major express rate that covers the entire Western Japan with good access to major cities such as Osaka, Kure and Kobe. Also, the densely populated vicinity allows the facility to attract sufficient workforce for our customers who operate at the facility. Prologis Park [indiscernible] 2 was developed through close collaboration with the local municipality. The facility is designed to be fully integrated into the local community being highly eco-friendly and providing a shelter location to local residents in case of natural disasters. Prologis Park Ebina 2 is a large build-on food facility leased to [indiscernible], a successful and growing food and meal kit e-commerce retailer. It is conveniently located in the Greater Tokyo area near major express rates. The entire facility is equipped with the cold storage system as we anticipate increasing demand from food and beverage e-commerce in the future. The property is also conveniently located to attract sufficient workforce. Prologis Park Kobe 5 is another high-quality multi-tenant property located in the Greater Osaka area. It is a logistics center broadly covering Western Japan being located near major Expressway. The customers at the facility offer daily consumer goods, such as food and clothings. The facility can also accommodate our customers' cold storage needs. Through the offering, we continue to achieve attractive accretion as demonstrated by our steady growth in DPU and NAV per unit. As a result of the offering, our stabilized DPU has been grown by 2.7%, and our NAV per unit has grown by 1.4%. This means that after the 2 offerings in 2021, the total annual growth of our stabilized DPU and NAV per unit is 5.0% and 6.7%, respectively. As a result of this acquisition, the size of our AUM has grown by 7.6% and exceeded JPY 800 billion, positioning us as one of the largest logistic's series. At the same time, our LTV remains unchanged. This page illustrates NOI results of the November 2021 fiscal period and our forecast for the May and November 2022 fiscal periods. As a result of the continued high portfolio occupancy and steady rent growth, our NOI for the November 2021 fiscal period was JPY 20 billion, exceeding our forecast by 20 basis points. As for the May 2022 fiscal period, revenues from the 6 new properties acquired in 2021 will contribute, while the property taxes for the new acquisitions will start to be expensed from January. As a result, our NOI is expected to be marginally higher. As for the November 2022 fiscal period, revenues from the new properties will fully contribute and we forecast that our NOI will further increase. Our DPU for the November 2021 fiscal period was JPY 4,945, exceeding our forecast by 50 basis points as a result of the increased NOI. As for the May 2022 fiscal period, our DPU is expected to be marginally lower due to the property tax expense effect from the new acquisitions. As for the November 2022 fiscal period, our DPU is expected to hike as a result of full revenue contribution from the new acquisitions. During the November 2021 fiscal period, we have achieved continued high occupancy and steady rent growth, reflecting strong demand from our customers. The average occupancy for the period was high at 98.8%. Due to the currently remaining vacant space at Prologis Park [indiscernible] 2, the average occupancy is expected to temporarily declined in the May 2022 fiscal period. In the November 2022 fiscal period, the space is anticipated to increase and exceed 98%. Rents are growing. Throughout 2021, the weighted average rent growth for all the lease renewals and re-leasing was 3.3%. Our average rent growth has improved significantly over the last 4 years, and we will continue to pursue robust rent growth in the future. Our acquisition pipeline from our sponsor Prologis remains robust. We now have an acquisition pipeline of 13 properties with an estimated value of JPY 240 billion. The average pace of our external growth of JPY 50 billion to JPY 60 billion per year will continue. Leveraging this strong pipeline support from Prologis, we will continue to acquire high-quality facilities without being exposed to market competition. Our capital structure is one of the strongest in the global REIT community. Our debt maturities are well laddered, and almost all of our borrowings are long-term loans with fixed interest rates. Our average all-in cost of debt is only 60 basis points. We are maintaining the LTV below 38% on a book value basis. Our LTV on an appraisal basis is below 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 investment capacity will be about JPY 190 billion. Our strong commitment to ESG is highly recognized by several ESG rating agencies. Notably, we have received a top 5 sell rating from [indiscernible] for 7 consecutive years. Also, we are now the only J-REIT included in the honorable Dow Jones Sustainability World Index. The percentage of eligible green projects is now 98% of our entire portfolio. As for our 4 KPIs related to SDGs, we are demonstrating remarkable progress and achievement. In September 2021, we launched our new ESG website. It transparently provides investors with various detailed quantitative and qualitative ESG data of our business. Now let us explain the current status of the logistics real estate market in Japan. Advanced logistic properties in Japan continue to be scarce. While the supply of high-quality logistic properties has been increasing, its cumulative stock accounts for only 5.6% of the entire logistics space. While the supply in the Tokyo metropolitan area continues to be high, it has been well absorbed by unprecedented demand. As a result, the vacancy rate at the end of the third quarter of 2021 remained low at 2.6%. The Osaka market also continues to demonstrate tight supply-demand balance. The vacancy rate, therefore, remains low at 1.6%. Going forward, while the supply in Tokyo is expected to remain elevated in 2022, the overall supply-demand balance is expected to continue to be tight. The serious shortage of labor in the logistics industry has been a tailwind for the logistics real estate business. Our logistics customers continue to have difficulty in retaining enough number of truck drivers and warehouse workers. To stay competitive, our customers must consolidate their facilities into larger advanced logistic facilities. At the same time, our customers are accelerating introduction of automation and robotic systems. Therefore, high-spec logistics facilities, which can accommodate such systems are increasingly becoming instrumental. Another tailwind is the continued growth of e-commerce. As the e-commerce penetration rate in Japan remains significantly lower than those of other major countries. Even after the significant increase under the pandemic in 2020, we believe Japanese ECOs business continues to have significant growth potential in the long term. We believe that accelerated e-commerce growth will drive further demand resulting in significant upside for advanced logistics real estate owners. Here are key takeaways: Number one, through the second offering in 2021, we have acquired brand-new sustainable facilities of the highest quality and further increase our unitholder value; number two, we have achieved strong financial results backed by the solid operational performances; number three, our continued high occupancy and steady rent growth reflects strong demand from our customers; number four, we continue to have robust acquisition pipeline from the sponsor Prologis; number five, we are maintaining one of the strongest balance sheets in the industry; number six, we continue to be fully committed to ESG and the Japanese logistics realistic market remains very healthy. Thank you for your time and continued support.