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

Welcome to the earnings presentation of Nippon Prologis REIT's May 2022 fiscal period. It has been 9.5 years since our inception, and we continue to demonstrate excellent operational and financial performances. Demand from our customers remains strong, and we continue to further enhance our unitholder value. This time, our highlights are as follows. First, since April, we have a new CEO of the asset management company. Our growth strategies will not change. Second, we have continued to deliver strong financial results. Third, we continue to achieve steady rent growth and maintain a robust acquisition pipeline. Fourth, we have completed the redevelopment of Prologis Park Iwanuma. Fifth, we maintain a strong balance sheet, and the outlook of our credit rating has been upgraded. And sixth, the Prologis Group is further enhancing our ESG commitment and actively introducing advanced technologies of digital transformation for our customers. On April 1, Satoshi Yamaguchi has taken over the new CEO position of Prologis REIT management of our asset management company. Under his leadership, NPR's growth strategies are unchanged to further enhance our unitholder value. Especially, the clear division of roles between NPR and the sponsor Prologis continues to position NPR as the important long-term holding vehicle of quality assets while the sponsor continues to develop, contribute and operate NPR's best-in-class portfolio of properties. We will continue to be fully committed to enhance our unitholder value in the form of steady growth of our DPU and NAV per unit. To achieve it, we will continue to combine external growth and internal growth while we maintain well-organized financial strategies. This page illustrates our NOI results of the May 2022 fiscal period and our forecast for the November 2022 and May 2023 fiscal periods. As a result of the continued stable portfolio occupancy and steady rent growth, our NOI for the May 2022 fiscal period was JPY 21 billion, exceeding our forecast by 50 basis points. As for the November 2022 and May 2023 fiscal periods, we are expecting continued stable occupancy and rent growth that will increase the rental revenues. On the other hand, we're expecting higher utility expenses and the leasing commissions are anticipated to increase temporarily due to the expected leasing activities. As a result, the NOI is expected to be slightly lower than that of the May 2022 fiscal period. Going forward, the higher utility expenses are expected to be passed through to our customers with some time lags, and therefore, our future NOI will likely be back to normal. Our DPU for the May 2022 fiscal period was JPY 4,906, exceeding our forecast by 80 basis points as a result of the increased NOI. As for the November 2022 and May 2023 fiscal periods, we are planning to keep our DPU stable. The increasing utility expenses, which are supposed to be passed through to our customers in the future are to be temporarily offset by the marginal change of our payout ratio in the form of onetime surplus cash distributions. Historically, NPR has been recording high average occupancy rates in the range of 97% to 98% over the last 10 years since our inception, reflecting continued strong demand from our customers. During the May 2022 fiscal period, the average occupancy was stable at 97.5%. As for the November 2022 and May 2023 fiscal periods, we are anticipating higher occupancy of 98.1% and 98.2%, respectively. In our view, compared to the 99% level occupancy over the last couple of years, these expected occupancy rates will allow us to have more optionality in our leasing strategies and more opportunities to charge higher rents upon rollovers. Rents continue to grow. During the May 2022 fiscal period, we have achieved 3.7% weighted average rent growth for all the lease renewals and retenanting. Our average rent growth has improved significantly over the last 4.5 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. Accordingly, the average pace of our external growth of JPY 50 billion to JPY 60 billion per year will continue. Also the preleasing of pipeline properties proceeded quite well, which has resulted in immediate stabilization of these properties upon completion of construction work. Leveraging the strong pipeline support from Prologis, we will continue to acquire high-quality facilities without being exposed to market competition. As a result of the loss of building of Prologis Park Iwanuma by fire 2 years ago, NPR has conducted a redevelopment for the first time. The construction work has been completed as scheduled in April and the pace of preleasing was faster than we originally anticipated. Upon completion, the building has been 80% leased. With the elevated ground levels and the newly installed driveway and slopes, the new building has higher anti-disaster functions and enhanced efficiency of operations for our customers. And according to the appraisal opinion, the value of completed property is JPY 1.3 billion higher than its book value. Our capital structure continues to be one of the strongest in the J-REIT community. Our debt maturities are well laddered. Despite the rising interest rates globally, our debt cost is effectively controlled with almost all of our debt with fixed interest rates in the long term. Our average all-in cost of debt continues to be 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. And in March 2022, the outlook of our credit rating from JCR has been upgraded to AA flat positive, with which we will have more competitive cost of debt in the future. Our strong commitment to ESG is highly recognized by several ESG rating agencies. Notably, we have received the top 5-star rating from GRESB for 7 consecutive years, and our MSCI ESG rating has been upgraded to A. Also, we are 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 achievements. The Prologis Group and NPR have officially expressed support to TCFD. During the May 2022 fiscal period, we have added qualitative TCFD disclosure to our website. At our portfolio of properties, we are taking various ESG initiatives. For example, at multiple Prologis Parks located in the city of Tsukuba, we have started to provide renewable energy to our customer. At Prologis Park Inagawa 2, we have installed EV chargers for our customers. The Prologis Group is actively taking initiatives to contribute to our local communities. At multiple Prologis Parks, we are hosting various customer events. Also, we are signing agreements with municipalities to offer our facilities as emergency evacuation sites in case of natural disasters. To solve our customers' pain points in their daily operations, we are introducing the most advanced technologies. For example, we're installing LEDs with smart motion sensors, and computerized monitoring system called smart boxes, which allow us to monitor the warehouse operations in real time and significantly reduce the usage of electricity. Also, we are providing our customers with solutions for the shortage of workforce, utilizing digital technologies. For example, the cloud-based system called Logi Meter allows our customers to visualize their operations and optimize the allocation of their staff within their warehouse space. Our alliance company called Timee enables our customers to realize efficient worker recruitment and reduce the turnovers of workers, utilizing a well-designed smartphone application. Now let us explain the current status of the logistics real estate market in Japan. Advanced logistics properties in Japan continue to be scarce. While the supply of high-quality logistics properties has been increasing, its cumulative stock accounts for only 6% of the entire logistics space. As the supply in the Tokyo Metropolitan area continues to be high, at the end of the first quarter 2022, the vacancy rate has marginally increased to 4.4% from the previous 2.3%. On the other hand, the Osaka market continues to demonstrate tight supply-demand balance. The vacancy rate, therefore, remained low at 2.1%. Notably, the properties with the age of 1 year or older are demonstrating very low vacancy rates of 0.9% in Tokyo and 0.7% in Osaka, which represents solid operations of stabilized existing Class A properties. However, we think there are symptoms of increasing vacancy among newly supplied properties, especially among properties provided by new entrants to the market in case their locations and specs are not ideally meeting needs of warehouse space users. While we believe the market environment will continue to be reasonably solid, we will continue to be vigilant in monitoring the lease-up status of newly supplied properties. One of the major demand drivers 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 and '21, we believe Japanese e-commerce business continues to have significant growth potential over the long term. Symbolically, in 2021, the amount of e-commerce-related new leases has exceeded that of 3PL. E-commerce has become a major demand driver for quality logistics space in Japan. 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, under the new management, we will continue to have unchanged growth strategies; number two, we have achieved strong financial results backed by the solid operational performances; number three, our growth continues through steady rent growth and the robust acquisition pipeline; number four, we have completed our first redevelopment project; number five, we are maintaining one of the strongest balance sheets in the industry; number six, we are accelerating our ESG and DX initiatives; and the Japanese logistics real estate market remains healthy, while we will continue to be vigilant in monitoring its status. Thank you for your time and continued support.