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

Welcome to the earnings presentation of Nippon Prologis REIT's November 2022 fiscal period. 10 years have passed since our inception. We have strived to maximize our unit holder value. And for this fiscal period, we continue to demonstrate excellent operational and financial performances. This time, our highlights are as follows: First, we have successfully completed our 12th follow-on offering and acquisition. Second, we continue to deliver stable financial results. Third, we have achieved continued internal growth through steady rent growth, while we are maintaining robust acquisition pipeline for future external growth. Fourth, we maintained a strong balance sheet with improved credit rating, and this we are further elevating our strong commitment to ESG. In December 2022, we have successfully conducted our 12th follow-on offering. Through this offering, we acquired 3 cutting-edge properties for a total acquisition value of JPY 43 billion with a fair NOI yield of 4.4%. The properties, all developed by the Prologis Group are highly functional Class A logistics facilities in excellent locations. With the 3 properties, all being eligible green projects, we have conducted our third green equity offering and successfully raised JPY 25 billion. Through this offering, we continued to achieve attractive acquisition as demonstrated by our steady growth in DPU and NAV per unit. As a result of the offering, our stabilized DPU has grown by 1.6% and our NAV per unit has grown by 30 basis points. At the same time, our LTV remained unchanged. This will allow us to retain significant additional investment capacity. This page illustrates NOI results of the November 2022 fiscal period and our forecast for the May and November 2023 fiscal periods. As a result of the continued steady rent growth and effective cost controls, our NOI for the November 2022 fiscal period was JPY 21 billion, exceeding our forecast by 20 basis points. As for the May and November 2023 fiscal period, revenues from the 3 newly acquired properties will contribute, and we expect further robust growth of NOI. Despite the ongoing global trends of inflation, our portfolio's financial performances are anticipated to be stable through various control efforts. The current increase in electricity expenses is scheduled to be passed through to our customers with some time lags. As the ongoing negotiation with the customers in terms of how our electricity invoices to the customers are determined, or resolved, we anticipate that our NOI will further increase. Our DPU for the November 2022 fiscal period was JPY 4,927 exceeding our forecast by 40 basis points as a result of the increased NOI. As for the May and November 2023 fiscal period, our DPU is expected to gradually increase as a result of the acquisitions of 3 new properties. The DPU forecast are JPY 4,929 and JPY 4,962 respectively. During the November 2022 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 97.8%, which is in line with our long-term historical average occupancy rate of 97% to 98%. As for May and November 2023 fiscal periods, we're expecting average occupancy rates of 97.9% and 98.2%, respectively. Rents continue to rise. In the second half of 2022, we have achieved average rent growth of 3.6% for all the lease renewals and re-leasing. Throughout 2022, the all-inclusive average rent growth was 3.7%. As for May 2023 fiscal period and beyond, our leasing activities are proceeding quite well, and we are reasonably confident about the outlook of our rent growth. This slide illustrates one example of how the Prologis Group smartly structured win-win scenarios among our customers and NPR. Sub leasing transactions satisfy various needs of our customers who typically pursue fast growth, taking advantage of significant size and high quality of our properties. In this case, we have reached the needs from 2 customers, MonotaRO and the medical device dealer company. And as a result, we have successfully accommodated significant space expansion needs of both the companies within our portfolio. These transactions have resulted in the successful lease-up of a newly built property Prologis Park in Inagawa 1 and the successful tenant replacement of Prologis Park and Amagasaki, a beautiful property with no downtime while increasing rents. Also, our customers were able to significantly save their transition costs. This represents the Prologis Group's in-depth understanding of our customers' needs, which is coming from Prologis customer-centric [indiscernible] culture. It is hard to copy corporate cultures and therefore, such Prologis business principle will continue to differentiate ourselves from the rest of the market. Our acquisition pipeline from our sponsor Prologis remains robust. We now have an acquisition pipeline of 11 properties with an estimated value of JPY 220 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 64 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 200 billion. Our such strong financial status was highly evaluated by creating rating agencies. And during this fiscal period, JCR has upgraded our rating to AA+, one of the highest among all J-REITs. Our strong commitment to ESG is highly recognized by several ESG rating agencies. Notably, we have received a top 5 star rating from GRESB for 8 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 exceeding 98% of our entire portfolio. In 2022, NPR and Prologis have jointly identified ESG-related materiality in connection with our business activities in Japan and have set up multiple targets, which we will continue to pursue to achieve. Regarding 2 targets, which were due in 2022, the installation of solar panels and LEDs, we have successfully achieved them with a wide margin. 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 5.9% of the entire logistics space. While the supply in the Tokyo Metropolitan area continues to be elevated, it has been well absorbed by unprecedented demand. Most recently, however, the vacancy rate at the end of the third quarter of 2022 has marginally increased to 5.2% since supplies from new entrants have larger vacant space. On the other hand, properties all on 1 year continue to demonstrate a low vacancy rate of 1.7%. It means that the demand for existing Class A properties, including NPR's portfolio continues to be strong. The Osaka market continues to demonstrate tight supply-demand balance. The vacancy rate, therefore, remains low at 1.7%. Moreover, the vacancy rate for properties all down 1 year is only 0.9%. Going forward, since the cost of construction has been significantly increasing, the supply in Tokyo is expected to pick out in 2023, and the overall supply-demand balance is expected to continue to be reasonably solid. One of the major demand drivers is the continued growth of e-commerce. Japanese e-commerce business is not slowing down in the post-covid environment, which is different from U.S. and European markets. As a result of ongoing changes in the demography and behaviors of Japanese consumers as well as accelerated penetration of smartphones among younger generations, Japanese e-commerce business is still in the middle of its long-term growth. As the e-commerce penetration rate in Japan remains significantly lower than those of other major countries. Even after the substantial increases under the COVID situation, we believe that Japanese e-commerce business continues to have tremendous 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. The serious shortage of labor in the logistics industry has been a significant tailwind for the logistics real estate business. Our logistics customers continue to have difficulty retaining sufficient number of truck drivers and warehouse workers. As a result, our customers have no choice but to consolidate their facilities into larger advanced logistics facilities. At the same time, our customers are accelerating introduction of automation and robotic systems. Therefore, high-spec logistic facilities, which can accommodate such systems are increasingly becoming instrumental. 10 years have passed since our inception. Let us review the trajectory that we have come through and discuss our future. Over the last 10 years, we have significantly grown our business. First, our growth and profitability. Our portfolio size has achieved significant critical mass growing by more than 6x in terms of market value based on third-party appraisals. The market cap rates continue to compress over the last 10 years, but our portfolio is successfully generating attractive 5.1% NOI yield, one of the highest among all logistics J-REITs. Secondly, our business has been established on significant stability with limited downside risks. For example, the significant diversity of our portfolio is represented by the diversity achieved by our 58 properties. Our 5 largest properties account for only less than 20% of the entire portfolio, and our top 20 customers occupy only 52% of the entire space, which are one of the lowest among all logistics J-REITs. And we have built one of the strongest balance sheets in the J-REIT community. Our LTV on a book value basis has been lower to only 38%, and our additional investment capacity is 10x larger than that of 10 years ago. We have continuously placed the growth of our unitholder value as our first priority. Over the last 10 years, our stabilized DPU has grown by 4.3% per annum, and our NAV per unit has grown by 10% per annum, respectively. Our market cap has grown by more than 8x. This increased liquidity is now significantly benefiting our global scale investors. Our sponsor Prologis has played a leading role in developing Japanese modern logistics real estate business, and NPR is succeeding its DNA as a pioneer. We have been jointly capturing the most advanced needs of Japanese logistics industry in various areas such as advanced technologies, environmental friendliness, anti disaster functions and enhanced ESG requirements. Going forward, our business environment will have further advanced needs. We will continue to maintain the highest levels of management philosophy and principles to meet such future needs. While we will strive to continue to maximize our unitholder value, further growing the profitability and maintaining the stability of our business. Here are key takeaways. Number one, through our 12th offering, we have acquired brand-new cutting-edge facilities of the highest quality and further increased our unitholder value. Number two, we have achieved strong financial results backed by the solid operational performances. Number three, our stable occupancy and steady rent growth continued and at the same time, we continued to have significant external growth potential, backed by the robust pipeline. Number four, we are maintaining one of the strongest balance sheets in the industry. Number five, we continue to be fully committed to ESG and the Japanese logistics real estate market remains healthy. We are fully committed to continue our success to maximize our future unitholder value. We really appreciate your continued support.