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

Welcome to the Earnings Presentation of Nippon Prologis REIT's May 2023 Fiscal Period. During this fiscal period, we observed a number of changes in the global capital market rents, but we have strived to maximize our unit holder value, and continue to demonstrate excellent operational and financial performances. We have successfully conducted offerings in 2 consecutive fiscal periods, capitalizing on timely windows of opportunities of global capital markets and raising JPY 51 billion equity in total. With the proceeds of the offering, we have continued our external growth, acquiring 4 highly advanced modern logistics properties in the amount of JPY 95 billion at fair value with an average NOI yield of 4.6%. Through the 2 consecutive offerings, the size of our AUM has exceeded JPY 900 billion, and our DPU on a stabilized basis has increased by about 3%, further enhancing our unit holder value. At the same time, we have successfully maintained the same healthy conservative leverage ratio. This continued strong balance sheet will benefit our investments in various ways, especially if the global capital markets and the real estate market are potential dislocated in the future. Through the offering in June, we have acquired a brand new highly advanced modern logistics property, Prologis Park Soka. The property is with the age of only 1-year being 100% leased with the average lease term of 13.5 years. The property qualifies as an eligible green project. Having the highest quality and located in a superb location, Prologis Park Soka will position itself as our new flagship property equivalent to other trophy assets such as Prologis Park Ichikawa 1. The property has highly convenient access to CBD Tokyo and is surrounded by densely populated residential areas with which the property has significant potential upside as high-quality real estate. Also, we have factored in provisions in our lease contracts, which entitles to negotiate the rents upward only during lease terms, depending on the future macroeconomic environment, including city eyes. In this way, our investors will likely be able to enjoy the property stable cash flows, while capturing future economic upside. Prologis Park Soka is located in the Tokyo-Gaikan Expressway submarket, where we can charge premium rents as the demand is significantly strong and the vacancy has been historically low. Due to the small number of land sites available for new developments, the Tokyo-Gaikan Expressway submarket has significant scarcity of modern logistics facilities. And among the properties within the submarket, Prologis Park Soka is the only property that has specs and features meeting our customers' highest criteria such as a large floor area exceeding 100,000 square meters and the most advanced seismic isolator systems. With these ideal location and specs, we can expect meaningful upside potential of the property in the long-term. The vicinity of Prologis Park Soka is quite ideal as a logistic facility location. The site is close to 2 major expressways in the Tokyo metropolitan area and the new expressway is scheduled to be constructed right next to the property. The property is surrounded by densely populated residential areas and is also within working distance from a major train station. With this location, the property will attract sufficient workforce for our customers who operate at the property. The property is leased to 3 customers. The largest space is leased to a company called Suzuken, a successful fast-growing pharmaceutical wholesaler. Suzuken has been historically growing by increasing their leasing space at Prologis NPR properties, highly evaluating the Prologis Group's development expertise. Another large space user at the property is a company called YAOKO, who is a major grocery store rapidly expanding their franchise. They are bringing in the most advanced automation systems, which is made possible as a result of the property's highly advanced specs and features. Prologis Park Soka is equipped with the highly advanced specs and features, which satisfy the sophisticated needs of our customers, their employees and our society. For example, from an environmental standpoint, the facility is equipped with a number of motion sensor LEDs and will be equipped with approximately 3-megawatt of solar panels. We are also currently in the process to install rechargeable batteries to the site to moderate the usage of electricity within the building. There are plenty of amenities for the convenience and welfare of our customers' employees. In terms of anti-disaster functions, the facility is equipped with large-scale emergency power generators and the highly advanced seismic isolators. With these features, Prologis Park Soka will be one of the most attractive properties in our modern logistic facility portfolio. We are highly proud of the acquisition of this property. The acquisition of Prologis Park Soka was an ideal addition to the series of our flagship properties that we have accumulated since our inception. They have unparalleled quality and excellent locations that would maximize our unit holder value in the long-term. Our flagship properties due to the high-quality, super locations, competitive advantage and scarcity have demonstrated significant appreciation of values, which are arising from considerable compression of appraisal NOI yield as well as continued rent growth. As a result, our flagship properties have substantially contributed to the growth of our NAV per unit, benefiting our unit holder value in the long-term. Our highlights for the May 2023 fiscal period are as follows: first, we continue to deliver stable operational and financial performances; second, as a result of our strong leasing activities, our internal growth continued as represented by the accelerated rent growth; third, we continue to maintain a robust equation pipeline for future external growth; fourth, we maintained one of the strongest balance sheets; and fifth, we are further elevating our strong commitment to ESG setting new KPI targets. This page illustrates NOI results of the May 2023 fiscal period and our forecast for the November 2023 and May 2024 fiscal periods. Our NOI for the May 2023 fiscal period was JPY 21.7 billion, which was in line with our original forecast. The amount of revenues were slightly lower than the forecast due to the longer-than-expected lease-up downtime at a couple of properties, which was offset by continued rent growth and effective cost controls. As for the November 2023 fiscal period, revenues from the newly acquired Prologis Park Soka will contribute, and we expect further robust growth of NOI by 6.6%. As for the May 2024 fiscal period, there will be a small dip arising from the Japanese property tax effect from the acquisition of Prologis Park Soka. Aside from that, we're expecting continued stable NOI. Despite the ongoing global trends of inflation, our portfolio's financial performance is anticipated to be stable through various cost control efforts. The ongoing increases in liquidity expenses is scheduled to be pass-through to our customers with some time lags. We anticipate that our NOI will further increase once the ongoing negotiations with our customers, regarding how the electricity invoices are determined are resolved. Our DPU for the May 23 fiscal period was JPY 4,940 exceeding our forecast by 20 basis points as a result of our effective cost control. As for the November 2023 and May 2024 fiscal period, our DPU is expected to increase due to the acquisition of Prologis Park Soka. The DPU forecast are JPY 544 and JPY 560 respectively. During the May 2023 fiscal period, we have achieved continued stable, high occupancy and rent growth, reflecting strong demand from our customers. The average occupancy for the period was 97.5%, which is in line with our long-term historical average occupancy rate of 97% to 98%. As for both November 2023 and May 2024 fiscal periods, we are expecting average occupancy rates of 98.1%. This time, rents continue to rise more strongly. During the May 2023 fiscal period, we have achieved weighted average rent growth of 5.4% for all the lease renewals and re-leasing. The tenant retention ratio for the May 2023 fiscal period was about 70%. And for 85% of the renewed space, we have achieved rent growth, representing upward momentum of market rents. As for the November 2023 fiscal period, our leasing activities are proceeding quite well, and we are confident about the outlook of our rent growth. Throughout the year of 2023, we are expecting to achieve higher average rent growth than -- that of 2022. This slide illustrates examples of how the Prologis Group smartly structured win-win scenarios with our customers and achieve attractive rent growth. Such 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 the first case, at Prologis Park Yokohama-Tsurumi, we have successfully replaced one customer space with 2 new leases, capturing our customers' intention in early stages. As a result, we have achieved 10% rent growth with no lease-up downtime. In the second case, at our flagship Prologis Park Tokyo-Ohta, we have replaced the customer with a coal storage system with a new lease contract and achieved 19% rent growth. In both cases, our new customers were able to significantly save costs and increase revenues by moving into a space and at the same time, we were able to maximize rent growth. This represents the Prologis Group's in-depth understanding of our customers' needs, which is coming from Prologis Customer Centricity 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 5 properties with an estimated value of JPY 120 billion. The average pace of 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 68 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%, additional investment capacity will be about JPY 210 billion. In recognition of a strong financial status, we are obtaining a AA+ credit rating from JCR, 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 eighth 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 KPI targets. Regarding 2 targets, which were due in 2022, the installation of solar panels and LEDs, we have successfully achieved them with a wide margin. This year, after the achievement of 2 KPI targets, we have set up ambitious new targets. As for the installation of solar panels, we now have the capacity of 53 megawatts. Accordingly, we have set a new target of 75 megawatts by 2030. We have installed LEDs for 80% of our total floor area. By 2030, we will make it 100%. Currently, 57% of lease contracts in terms of the size of floor area consists of green leases. We continue to be committed to make it 70% by 2026. The Prologis Group and NPR are committed to achieve these targets by bringing in highly motivated resources. 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 6.5% 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 arising from the continued needs to consolidate logistic facilities and the steady growth of Japanese e-commerce businesses. Most recently, however, the vacancy rate at the end of the first quarter of 2023 has increased to 8.2% since supply from new entrants have larger vacancy. On the other hand, properties older than 1-year continued to demonstrate a low vacancy rate of 2.5%. It means that the demand for existing Class A properties, including NPL's portfolio continues to be strong. The Osaka market continues to demonstrate good supply-demand balance. The vacancy rate, therefore, remains relatively low at 4.6%. Moreover, the vacancy rate for properties older than 1-year is only 1.8%. Going forward, while the supply in Tokyo is expected to remain high throughout 2023, the supply will likely peak, especially due to the increased cost of construction and the overall supply-demand balance is expected to be reasonably solid. We will continue to be vigilant in monitoring the status of the market. Here are key takeaways. Number one, through our 13th follow-on offering, we have acquired a brand-new cutting-edge facility with the highest quality and further increase our unit holder value. Number two, we have achieved strong financial results backed by the solid operational performances. Number three, our stable occupancy, and strong rent growth continued. Number four, we continue to have significant external growth potential backed by the robust pipeline. Number five, we are maintaining one of the strongest balance sets in the industry. Number six, 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 unit holder value. We really appreciate your continued support.