Scott, I think we can start.
Okay. Thank you everybody. I very much appreciate you joining. My Name is Scott Callon. I'm Chairman of Ichigo. I'm joined by Dan Morisaku, who just said, "Scott, I think you can, we can start." Dan is the senior member of our finance department, head of our global IR. I'm working off of the FY 2022 Q3 corporate presentation, so the February and fiscal year, so it ends next month, which is right in front of you and is also available on our website. Let's get started. Again, we're grateful for you joining us. It's an incredibly difficult time in the world. We hope you're all okay. Let's start on page eight.
The broad summary, of course, is we're still operating under COVID, which has been devastating for the world and really hard on us. In that context, I mean, it's very much the case that how we are operating is dependent on COVID. Japan effectively defeated COVID as of September, and now with Omicron surging, literally cases are up 54% in the last couple weeks off of a very low base. Well, kind of all bets are off as to where we go from here. In, you know, in the context of the world not ending because of COVID, it's. If we work off of that assumption, it appears that we've hit bottom, and we're in the midst of a broad set of recovery. Certainly in the real estate market.
It says prices of many assets are recovering. Recovered is probably the right word, and I'll go into that more detail. We're very comfortable we're gonna have a strong fourth quarter. We were gonna have a bigger Q3. This quarter was very light because one large transaction, the client decided to push it into the end of this month. A whole bunch of stuff is gonna happen in the current quarter, which is we're in right now. There's been some recovery in domestic travel demand, but not nearly enough to really drive anything interesting in terms of economics from our hotels. Full recovery, unfortunately, including inbound, which is gonna be important to us, is gonna take some time.
I mean, the good news is the clean energy business is kind of COVID is totally irrelevant to it. It continues to grow well. We've had six new plants brought online this year. One wind plant, our first one. F Ive solar power plants. Panel power generation revenue up 10% year-on-year. We've launched a new business within Ichigo Owners, which I'll describe and which we think is really interesting and will be a growth driver going forward. We continue to execute on sustainability. We actually were awarded the highest leadership level in the CDP Climate Change Assessment, and we're growing our ESG financing very rapidly, and I'll explain to you why that's important. Turn to the next page 10. I'm sorry, next page nine. The, we still...
You know, this is a durable earnings model. We unfortunately went to the wall, nearly to the wall during the Global Financial Crisis and learned from that, and we need to make sure we run a business which is structurally profitable. Despite all the heavy downward pressure on earnings from COVID, we continue to run with stock earnings, so effectively kind of our fixed earnings at double fixed expenses, 191%. You can see on the right side of the page that sustainable real estate stock earnings, and that has fallen by 11%, but we've got growth of 15% in asset management and 10% in clean energy.
That all sums together because sustainable real estate is so important to us too, and a -2% decrease in stock earnings. You'll see there's been a shift in the composition of earnings as sustainable real estate has come in and asset management is rebounding and clean energy continues to grow. Clean energy at this point is actually 31% of our total stock earnings. Next page 10. Ugly numbers in terms of the OP and net income. You can see the cash EPS, however, is dramatically different. As you know, over a multi-year period, we've shifted towards focusing on as much as possible generating cash earnings. And that's important because Japan has high tax rates, so it's useful to use the tax shield.
Much of this is coming through depreciation allowances, which are aggressive from a tax perspective, meaning they're higher than actual true accounting economic depreciation. Anyway, the headline numbers are ugly. We fully expect to have a huge fourth quarter, and we will come in above last year, and we're on track on our full year forecast. I'm turning to page 11, the segment details. So we've got an increase in asset management. As you can see, 19% on the OP line down on the table, which is both an increase in base AM fees, asset management fees off of Ichigo Office and Ichigo Hotel.
Sustainable real estate, the stock earnings, this is rental income is down both on the page right there is downtime re-tenanting, which is true. The major impact on our stock earnings, it's had very little impact in our small and mid-sized office, which are our core kind of bread and butter in the office sector. We have had a completely different experience in our one large office asset, which is called Tradepia Odaiba. Large office buildings have been a little bit of a train wreck. We're now re-tenanting it. There's some loss of income on that. The other element that is pushing down our stock earnings is actually hotels, which at this point have not recovered really at all.
A robustly profitable asset class for us pre-COVID, which is currently earning nothing. In terms of flow earnings, the market has come back up for almost, it's come back in every asset category, and we're actively marketing assets. Again, we expect we're gonna have a strong Q4. I touched already on clean energy, which we've got six new plants online through Q3. Another three that were actually come online already in Q4. But as of Q3, operating profit clean energy is up 12% year-on-year. Next page. So just looking at the COVID impacts, the earnings on the top of the page, it said low. That's true for office. The one exception is, again, we have a single large office, which has had a very different impact.
You know, we can talk about it in more detail if you want a QA on that. Small and midsize offices have been extraordinarily robust. Really no impact to speak of on earnings from COVID. No visibility in terms of impact from it. The big offices are just a massive exception. That's across the entire market, and we notice that in the single large office asset that we have. Hotel, the stock earnings impact has been devastating. There's been a little going on in hotels in Japan and across the world.
Retail impact has actually been low, because there's a mix of, as an asset class, you've got kind of central business district, kind of, you know, restaurants, et cetera, in the, in the retail space, which have been devastated, but they've been offset by categories such as suburban locations, drug stores, supermarkets are doing really well. Across the entire portfolio that we have, the impact has been low. There's been no impact on residential. There's been no impact on clean energy. In terms of flow earnings, the circles indicate, you know, where changes have occurred. As of Q2, you know, this impacts us, meaning our core business is we buy assets, we improve them, we sell them at a higher value because they're more valuable. They're improved assets.
As of Q2, offices and retail had come back in terms of investor demand for these assets if they're good. In this quarter, it's become clear that, you know, it is investor dependent, but there is emerging demand for hotels again. That's so buyers wanna buy hotels, even though the market hasn't returned. I think that's a function of two things. Some of the buyers are correctly, you know, thinking that at some point COVID ends, hopefully correctly. We go back to some version of the past. Although in our view, it's probably safe to underwrite for decreased business travel.
Our assets, which are, you know, of course, we're located entirely in Japan, and so we're very leveraged to inbound activity. As Asia continues to grow and become wealthier and discretionary income grows faster than GDP, you know, there is leverage growth to GDP in Asia, in the Japanese hotel sector. You know, the ability to underwrite over a multi-year period to growth in hotels is not unreasonable. It is also the case that we've got a little bit of pull-out of supply in the hotel space. We do have investors who are underwriting to, we think, things rebound. That's one source of driving demand, investor demand to buy hotel assets.
The other one is that residential logistics and office assets performed really well. Their prices are high. You have some shift in investor demand away from those assets towards hotels because they offer kind of a higher cap rate for investors who are looking for a return. Turning to page 14, I'll go through quickly. I think I'm probably already speaking quickly. I won't speak any quicker than this. Page 14, this is kind of we step through kind of the elements of the business model. We have stock and flow earnings. I talk about this every quarter, so I'll just kinda run forward.
I mean, talk about it every quarter because it's a fundamental element of the business model. You got the stock earnings, which protect the downside and give you stability in earnings. You get flow earnings, which your upside, as you can see, we've had a COVID impact, which is overwhelmingly on the flow side. As we, at some point, when we normalize, we'll get the flow earnings back and more. Page 15 shows stock earnings. It's actually the first time we've broken it out through the categories in this way. The clear obvious element here is that clean energy continues to grow and will grow very strongly, we think, into the future.
There's been a big drop-off in sustainable real estate, which is primarily, as I said, decrease in hotel rental income and decrease in office income from our big office asset. Page 16. Again, one element of this business is that we have an embedded forward earnings. This shows the appraisal value based on realized gains. The appraisers are not us. These are third-party appraisers. They look at our balance sheet, they see all these unrealized gains. We'll get an end-of-year appraisal in a couple of months. We expect this to be stable or possibly even go up because the assets are performing robustly. Page 17 shows that not only do we have significant appraisal value based on realized gains. When we actually sell assets, we come in significantly higher than that.
1.5x is what we're seeing this year. The number is this low, the multiple relative to the appraisal value based on realized gains is lower this year because we've primarily done sales in our Ichigo Owners business, which is a higher turnover. We've primarily done sales this year, and we basically got rid of some assets that we didn't want to have and sold them at above our appraisal value. We're happy with that. In the last couple of years, it's been a shift towards Owners, which is a higher turnover business and has lower gross margin to us from return, you know, providing very good value to our investors.
We think over time, we end up going back to something like 2x-3x in terms of the multiple lift relative to what the implied third-party appraisers say are the unrealized gains in our balance sheet. Page 18. Again, we're focused on economic operating cash flow and maximizing it. Year in and year out, you see us generating significantly greater economic operating cash flow than our stated accounting-based net income. Page 19. No real change in our financial base, meaning it continues to be very robust. We fund extraordinarily cheaply. There's been some drop off in the remaining loan maturity. As you can see, it's 6.7 years at this point.
That's largely because we've been increasing our Ichigo Owners activity, and the average hold for an Ichigo Owners asset is about eight months. We're borrowing kind of more typically five, six, and seven years to give us a buffer so we can hold this thing for longer. We don't really need to finance for 10 years for an asset that we're going to hold for eight months. There's been some pushdown on that, and that's purely a phenomenon of having substantially more liquid assets. Turning to sustainability. We continue to push very hard because this is something we believe in. We've accelerated an RE100 target, which is 100% renewable energy. Electricity is actually the definition that's used here. I mean, these are all assets.
This is almost the entire electricity. Anyway, to 2025. To be clear, this is about not how much renewable energy we produce, where we produce massively more renewable energy than we consume. It's actually keeping all of our clean energy assets aside and asking what percentage of your renewable energy that you're purchasing is gonna be renewable, and we're gonna go 100% by 2025. Next page shows that we're gonna get there a lot faster on Ichigo Office. That's gonna be the first Ichigo entity that cuts over 100% renewable energy, and that's gonna happen by April. Page 23 shows the result for this year for the CDP Climate Change Assessment. We did very well, as we should.
I mean, it's an A-minus, and we were penalized for the exact phenomenon that I just described, which is like, wait a minute, you're not consuming as much renewable energy as we want you to. It's not part of the thinking that energy consumers will also be massive energy producers. In the CDP rules and in the RE100 rules, we get no credit at all for being a massive renewable energy producer. Anyway, be that as it may, we still scored with an A-minus, which puts us in a leadership category globally in the top 13% of all companies that are within the CDP process. As you can imagine, companies that go through the CDP process are companies that really care about sustainability.
I am incredibly proud of the fact that we're being recognized for being truly world-class in what we're doing on sustainability. It's accurate, and it's good for the world. It's what we should be doing, and we're gonna continue to push hard on it. Page 24 shows one direct financial impact of this. To be clear, we operate to be good for the world, not because it's the right way, you know, because it's about profitability. We operate to be good for the world because it's the right thing to do. One of the elements that's been very, very powerful about doing more on ESG is...
It's a good thing, financial institutions have become much more sensitive, and Japanese financial institutions very rapidly towards who are the borrowers and are they doing the right thing, for the planet and for society. It's probably easier, so we've done a bunch of stuff on ESG. It's probably easier to look at the next page, which shows. Page 25. We've increased the ESG loans 8x in the last two years. They're now about 20%, 17% of our total loan portfolio.
The reason why this is really meaningful is, one, it's fundamentally correct in terms of doing the right thing for the world, and it's important that we, as operators and lenders, are sensitive to what we're doing and whether or not it's the right thing for the planet and for society. It's also the case that these loans have incredibly attractive terms. By switching to ESG loans, we're getting a brand-new set of lenders. Because there's a strong desire right now on the part of financial institutions in Japan to demonstrate the bona fides that they're doing the right thing for the planet and that they care about ESG, you know, and we're very good at ESG. We have lenders who are actively seeking borrowers like ourselves.
This process has brought us into a whole net new set of lenders. It has diversified our lender portfolio. These loans come with no amortization, which of course means, you know, the effective duration of a loan is shorter depending on how much amortization is. The real estate loans, you always have amortization, these loans don't. In many cases, they're uncollateralized, and there are no restrictions on the use of proceeds. They're not tied to specific real estate assets. These are phenomenally good loans. I pointed out earlier, on the page, you know, not a fundamental change in our financial position that it probably underestimates what's happening right now.
We are increasingly, you know, a very attractive borrower for a broad range of financial institutions, and we can use this really well on behalf of our shareholders. You know, one of the things about Japan is we all know it's a low growth economy and a mature economy, and so it's harder to drive top line growth. It's also the case that it's the single best place in the world to be a borrower. You can borrow effectively infinite amounts of money for nearly free. This is an extension of that. It's been a very powerful and positive transition during the COVID period towards ESG, and we fully expect to be monetizing it for all of you going forward.
Turning to page 27, it shows what's going on in terms of buy and sell activity. We continue to be selective in acquisitions and sales. This has always been the case. I don't think that title has changed for a couple of years at this point. Actually, that's a wrong number. It says net acquisition is JPY 1.3 billion, it should be JPY 13.3 billion, yeah. We're gonna push all that out the door. As you can see, Q3 sales have just been JPY 12.4 billion, but we have a JPY 17.7 billion sale to a domestic institutional investor, which will close actually this month.
Kind of pretty balanced in terms of buying and selling activity, year to date. Page 28, Ichigo Owners, which is a relatively new business for us, continues to drive long-term growth. Again, this is a very, you know, high turnover, low margin to us, therefore great product for the client. You know, typically, we will have margins, gross margins of somewhere like 25%-30% in our longer term, sustainable kind of mixed asset, sustainable real estate business. This is more like a 10%-15% gross margin, but with a turnover of literally, eight months on average. You're able to generate kind of our RE sort of 30%, 40%, 50% .
We just did a Japanese language earnings call a little while ago, and an analyst asked, you know, an appropriate question, "Why aren't you growing it faster?" The answer is, you know, yes, completely agree, and we're going to grow it. There is a little bit of kind of operating continuing in COVID with a very kind of Japanese regulatory environment, which requires a lot of face-to-face interaction to buy and sell activity. It's just part of the regular structure that they operate. It's been a very difficult execution period for our Owners team, which is only a little bit above 10 people.
This is a phenomenal business, and I'm going to talk about it a little more, but we are growing it and we will, and you should expect substantial growth going forward. At this point, we're kind of running a turnover. It looks about kind of less than JPY 30 billion a year. The key question is how quickly we get to JPY 40 billion-JPY 50 billion per year. That's kind of billions of yen, kind of order of magnitude, kind of $300 million-400 million a year turnover, and more going forward. Page 29 shows one example of a new business that we've put into Owners. Owners has been, and I'll put that on the next page.
To talk about kind of our asset management business, it's primarily been us working through our public REITs, and so you own a share on a REIT, and we work hard for you, and we deliver a high return. Typically at this point, it's about a 5% yield on our Ichigo Office asset and on Ichigo Green, our solar power producer. The hotel yield has been pushed down, but it's also kind of typically 5%-6%. The issue with owning a REIT is it's effectively a share ownership. It doesn't give you depreciation, which you know has significant tax benefits. It's not as conducive for doing estate planning.
We wanted to have a small lot, kind of small investment lot, product for investors that would be an alternative to the REIT. It would give actual genuine full ownership to our investor client, and the advantages, the tax advantages and the estate planning advantage to that. This is what this new co-ownership business is. We did a first asset sale in Meguro in Central Tokyo, and this is just brand new, right? We started the asset management in December. Today, we're starting the second transaction, again in Meguro in Central Tokyo. We think this is gonna be a really nice business.
Probably the right way to look at it is on the next page, where we kind of parse out for Owners, kind of how these different businesses work. Owners has classically been the top two. We do residential asset sales, so super prime assets, brand new, high quality, Central Tokyo, residential. It's either the top, so we just get the gains on the sale or it's the residential asset sale, and then we'll do the asset management for the owner. The new co-ownership business is an extension of that. It really changes. It's similar to residential asset sales plus asset management, but it is small lot focused for individual investors rather than institutional investors.
Our, at this point, the asset management period is 12 years for the first two co-ownership assets, and we think it's gonna be 10+ years going forward. This will be a strong, durable earning stream. Look, we're really good at this, at managing real estate assets and growing value for them. There is a huge need, it's true globally, but particularly in Japan, for an honest return on one's savings. Real estate, high quality real estate is compelling value, and we're excited about growing this business for... At this point, we've been primarily serving institutional investors, high net worth. This expands the product category to kind of, you know, people like us. You know, so we're happy to do that.
Page 31 shows what's going on in the portfolio for Ichigo Hotel REIT, Ichigo Office REIT, and Ichigo Green. You know, this has been a particularly challenging operating environment for the hotels, so we've been doing more there. As you can see, in terms of the growth, Ichigo Group support there, we provided support and debt so that the investors know that we're there and we're a firewall between them and anything going wrong. We've also taken down the operator risk, so kind of affected the credit risk on weak operators by transferring the asset management, the operator contracts to Hakata Hotels, which is one of our subsidiaries. Turning to the next page, clean energy continues to grow very, very rapidly.
What's not on the page is you can see on the upper right-hand side, we've got a pipeline, which is about 28% growth. Pipeline is, you know, actually, contracts in place for us to build and operate. You know, there's been substantial change in Japan's attitude, similar, you know, to what I spoke of with respect to financial institutions. With respect to sustainability and ESG, there is a massive push on the part of the Japanese government for us to transition to renewable energy. What's happening right now that we're very excited about is we have been limiting our growth. Actually, we've been limiting our growth in this business.
There was actually a COVID reason, which was, you know, the rural areas where you would primarily gonna be putting up these solar and wind power plants have had much less COVID than the metropolitan areas. In the last year and a half, we have, you know, teams that go out and meet with representatives in local communities and talk about kind of, you know, this is what our track record is, and this is how we would, you know, we would work with you and to set up a renewable power plant and go through all the zoning and the environmental issues and everyone wants us to visit.
We've had this problem of the acquisition process for new assets has been severely hampered by COVID. Anyway, at some point that will presumably go away. But during this period, the Japanese government has pushed harder on making kind of expansion possible. The other bottleneck that we had in terms of growing our renewable energy business has been access to the grid. There's been this policy change underway that's gonna give renewable energy producers substantially better access to the grid. We think this is really. This doesn't happen in the next six months, but it's a process underway, and it's gonna happen within 12-24 months.
There's going to be areas where we think there are very interesting opportunities to put up new plants that are gonna become available to us. So that will be a growth driver going forward. We fully expect this business will be at least double what it is today over the next kind of five years. Turning to the next page, stock buybacks. It's something we believe in. We didn't make an announcement today. Sorry about that. You know, this question was raised also in the Japanese analyst meeting. You know, Hasegawa-san, our CEO, who took the question, you know, talked about, you know, well, we can get rid of that cash levels. I mean, at the end of the day, we do think the stock is cheap.
You know, we try to stay in our lane with respect to what we say and what we don't say. It's very, very difficult to talk about the share buyback issue. We didn't make an announcement. You know, you should interpret it to mean that we have uses of cash that we're looking at very carefully, but we do think the stock is cheap, and you should fully expect us to be back in the market buying our shares at some point. Finally, you know, we continue to have our J.League shareholder program.
You know, one of the things that we made a decision over in the last couple of years that have had severe COVID impacts is one, to do more in hotels, which have, you know, have had very powerful economics and will at some point again, but have been devastated by COVID. The kind of sports as a growth industry, we continue to believe is really true, but this has also been something that has had severe COVID impacts. Anyway, we continue to offer our J.League shareholder program to all of our shareholders, not only in this company, Ichigo Inc. 2337, but also our two REITs and Ichigo Green, the solar power producer. Those are my prepared remarks, as it were. I'm happy to turn to question and answer.
If you're on Zoom, you can raise your hand via the app or the browser. There's probably also a process, I don't know that there are very many people on the phone, but there's theoretically a process. You enter star nine to ask a question and star six to unmute for that. I suspect almost everybody's gonna be on the app or browser. Anyway, again, thank you very much for your time, and happy to take any at all questions or comments.
Hi, Scott, this is Greg at Point72. Can you hear me?
Greg, I can hear you. Thank you so much.
Great. Two questions, please. One. The first one is regarding your comment on real estate transaction and the fact that you were seeing some inquiries returning for hotels.
Yeah.
Wondering if you could develop on that. That was my first question.
Greg, let me ask you about that. When we say develop, what specifically should I answer for you?
Well, are we talking already about very concrete kind of?
Oh, yeah.
proposals? Or are we just-
Oh, yeah.
People have more, the phone ringing a bit more, if you will.
Yeah. Well, okay, so I'll answer that question. Thank you for clarifying. Go ahead and tell me what your second one is, and I'll answer both of them.
The second question is regarding the Ichigo Owners program.
Yeah.
What kind of yield you are targeting for this type of 10-year, 12 years investment for the investors?
I'm sorry, Greg, I dropped the central or what did you say? What sort of yield did you say?
What is the kind of all-in yield you are hoping to offer for this kind of-
For the investors?
Yes, yes.
Okay. On hotels, look, this is very country-specific. You'll see some hotel sales from us. You know, because Omicron has exploded again, I mean, there's always a possibility that we could see a retreat from hotels, but there are transactions that are kind of gonna happen. That reflects, as I said, I think two things. You know, one, investors taking a long view on Japanese hospitality as a growth industry, and they wanna be involved. And/or two, you know, they see the very high prices for not unreasonable prices, but you know, the resi prices are up, office prices are up. There continues to be this absolute hunger for yield.
Demand for real estate appears to be not only constant, but growing. If you don't feel comfortable buying retail and you don't feel comfortable buying hotels and if you're worried about work from home and don't feel comfortable buying office, then, you know, it's squeezed up prices of other assets. Within that group, the most kind of impacted is hotels. They offer on a forward kinda normalized basis, substantially higher yields than the other assets. It appears to be that people are making choices like that. From our perspective, you know, we have managed our portfolio to no more than 25 of the assets being hotels, because even though they are, they're extremely high, very profitable.
To step back just to explain that, it's both clearly a growth industry. It's also the case that it's operational, and the execution for hotel operators has been not world-class like it is, for example, in Japanese restaurants and other parts of the hospitality sector. There's an opportunity for us to earn, we think, very good returns there. You know, it's a very difficult environment. If folks wanna buy our hotels, and the ones that we think kind of would be non-core for us, we're happy to sell to them at these prices. You'll see some hotel transactions. In terms of the co-owner business, you know, these are actually, you know, low yields to the final investor, in part because that's where the pricing is these days.
You know, something that looks like the high 2s to the low 3s would be where kind of the yield is. You get on top of that, you get a tax benefit, and you get some advantage in terms of estate planning. That's where that market is currently being priced.
I see. All-in, including the tax benefit from depreciation, we're talking maybe like 4% all-in, that kind of thing, you would think?
That may be a little high, but yeah. You know, again, these are super prime, so it's probably not surprising that these assets are trading at those levels. Yeah, that's where they are.
This is always new properties from here on.
Yes.
You build, develop, and sell. Okay. Understood.
Well, we actually don't build. Kind of the way that the business model works and why we're able to get good properties at good prices, just to kind of state this quickly, is we will agree with the developer to buy the asset.
Right
It's kind of 18-24 months in advance. They take all the construction risk on it. In return for Ichigo being this is, you know, tends to be small and mid-sized developers. Instead, we backstop the credit on this. Again, allows them to finance the building of the asset with a bank as a result. We lease it up. Those are the two kind of kind of major activities that we take that would be drivers of value. We do leasing, and we do the credit backstop. The other thing we do for our individual investors, and it's primarily individual investors, is, you know, we're experts in real estate, and so they have Ichigo's effective guarantee on this is a good asset.
Those are the sources of the margin, which is only about 10% on a gross margin basis, 10%-15%. This is a very high quality product. We think there is. You know, the market is pricing it too wide at too high margins, and we can, you know, we can do this business and generate 30%-45% RE and offer kind of this, you know, good quality value to our investors. We expect to grow it quite a bit.
Understood. Thank you very much. Thank you.
Happy to take any and all questions or comments. Will, go for it.
Okay. Hi, Scott.
How you doing?
Okay, good. You can hear me. Yeah. Thanks for the presentation. I did listen to the Japanese, so some of this is confirming some of the information from there.
Yeah.
The JPY 17 billion. This is also a presentation, page 27.
Yeah.
The comment about that sale was to close in Q4.
Yeah.
I think on the disclosure document, it said expected November 17. I had thought it would be in Q3, but obviously it was delayed. That's fine. The other comment was the JPY 40 billion-JPY 45 billion range was the expected asset sales value in Q4, and that many of those transactions were closing in January. This is all commentary made, you know, in Japanese. My question is, are there any sort of risks about further delays that we should think about, or is that JPY 40 billion-JPY 45 billion number a solid number?
It's solid. I mean, that happens on occasion.
Yeah.
The investor that was gonna do the JPY 18 billion transaction in November pushed it back. I mean, somebody just pushed it back. Yeah, I mean, we've had a fiftyfold increase in COVID in Tokyo in the last two weeks. You know, we should all be a little bit careful about kind of what happens from here. We are highly confident this all gets done. There are, you know, the other transactions that we're highly confident get done too. We expect to have a very strong fourth quarter.
Okay. The commentary was that likely to exceed the bottom range. I mean, the top range has not been changed. You haven't reduced it.
Yeah.
Is the top range still within reason or is that a huge stretch?
Yeah, I don't think it happens. I mean, it's a range. If we thought it was out of the question, we would pull it down, but you know, we end up somewhere in the middle.
Okay. Thank you.
Yeah.
Next question. This was actually mentioned on the Ichigo Office REIT earnings call.
Yeah
... back in December. They mentioned they were pursuing or exploring the concept of bridge funds.
Yeah.
You know, this is what GLP has done previously.
Yeah.
Now today in Japanese version, this was also.
Yeah
... mentioned as a potential strategy. I think that's great news. Could you just sort of comment on that and what, you know, what might unfold? Just any further color on that strategy.
Yeah, I mean, look, from ICH, we call this company Ichigo Inc., ICH. Anyway, from this company's perspective, you know, we exist to serve shareholders. That includes not only our shareholders, but the REIT shareholders. It's really important that you have strong governance around that, such that the REIT shareholders, you know, genuinely benefit from any transaction that happens. The issue that the office REIT is having, I mean, the classic REIT issue is that when there's money available, you need to make sure the assets are there for you. It's very hard. Money available typically because they're asked to pay out their earnings requires doing a public offering.
It's actually important to do bridge funds to kind of align the we now have money and we have an asset at the time that we want money because in order to raise money, you also need to have assets. Bridge funds make sense from the perspective of a REIT. From our perspective, you know, the asset management business is a non-asset business, so it has, you know, effectively an infinite RE to it. It's a good, strong business. We believe Japanese real estate offers strong value and we believe that we have the capabilities to deliver that value in truly in a world-class way for our REIT investors. We'd like to do more there.
I think I said that, you know, the asset management business hasn't grown, and I own that. I mean, we wanted to, as much as possible, to generate. We made a standard for any transaction that had to be accretive. We thought that was gonna be the best way to get a premium valuation for our REITs, and it didn't work out that way. The REITs, over many years, people wanted to see more external growth. We've now been taking a hard look at it. We should try bridging some assets into the REITs.
Now, the other role that we're gonna play is it's very, very competitive to buy office assets. We can offer office assets to the REIT effectively at a discount to the market because we get ongoing economics at a pretty good multiple, you know, for asset management on the REITs. There's a little bit of the REIT kind of is leading it into us on like, you know, because we have some assets, Will, you know, and everybody on our balance sheet, office assets, and can we please buy them. Can you put them into a bridge fund. I think there's been a meeting of the minds on that, and you should expect to see something on this.
Okay. I've raised this issue before, and I kinda know what you're gonna say, but I'm gonna raise it again. I mean, your renewables fund share price is 4% below all-time highs. It's trading at 1.6 price to book. It's 44% above the IPO price.
Yeah.
You're sitting on some assets that could very easily be put into that REIT, and I think a financing could be done very easily. You know, considering things like we didn't do a buyback and I mean the share price is, you know, pretty weak recently. I mean, I hate to say that, I don't mean offense, but it's underperforming Mitsubishi Estate for the past six months, which, you know, that's unlikely or uncharacteristic of Ichigo.
Yeah.
I think, you know, one of the things you might consider is perhaps, you know, using a little bit, you know, some of the other tools in your toolkit that you've kept, you know, off, that you've not been using. You know, because you obviously want to own these renewables assets. They're very valuable. I understand that. But, you know, at least signaling the market their value through an IPO and, you know, making the REIT investors happy as well. There are a lot of possibilities, I think, that you might want to consider. Is your stance unchanged from the last time that you're adamantly against selling them, or could there potentially be some flexibility in terms of your renewables fund going forward?
Well, okay. I mean, I'm a huge believer in flexibility, so yeah. Are we flexible? Yes. I think our basic stance on Ichigo Green is that it's subscale, so you need to either grow it or roll it in. You know, I thank you for your input. But I'm not ignoring it. I genuinely agree with you. To your very first point, it's not at all insulting to point out that our shares underperform. I am deeply and intimately aware of that, and wanna fix it. So I, you know, appreciate your input and everybody's input on this. I'm always looking for good ideas, and I thank you for it.
Okay. I'll leave it there and if need be, come back.
Okay. Sounds good. Thank you, Will. Garrett, I think you're up. Are you there? I think we need you to unmute, or somebody needs to unmute you.
Got it. Can you hear me now?
Yeah. Thanks.
Great. Thank you. Just a question on the last conference call. Around that time, Japan Renewable Energy had been acquired-
Yeah.
For JPY 200 billion.
Yeah.
The report was they had 708 MW on an equity basis.
Yeah.
Of renewable energy assets, which comes to around JPY 280 million per megawatt, which would imply for each of those 170 MW, roughly a $48 billion comparable value. You mentioned on that last call that, well, the FIT, you know, is a lot higher for each of those assets.
Mm-hmm.
There you know could be some other key differences in the quality of the energy, but that you know you guys are still gonna look into that comp and you know see what it meant for the value of your assets. Do you have anything that you can add as to maybe what that implied as to the value of your assets or you know any additional insight?
Yeah. I mean, did you just say $4.8 billion? I'm pretty sure I-
JPY 48 billion.
Yeah, yeah. Okay. I'm pretty sure that's what I said. We're not off by an order of magnitude.
Yeah. That'd be great if it was, U.S.
I think that number is still correct. I mean, one of the things that's happened, and then forgive me if you're all aware of this, that has been explosive and powerful and fantastic, for the world and for Japan since that transaction is that Mitsubishi Corp came in and absolutely clubbed the pricing of offshore wind, and took it from kind of massively uneconomical to wow, these numbers are really, really interesting. Just to point that out and the reason I pointed out and then to set it aside.
The good news is it's not relevant to our assets, which, you know, so you've probably seen RENOVA stock has just gotten clubbed as a result because they had a whole bunch of they're gonna do offshore wind priced in to their future value, and it's looking like that game has completely changed. Garrett, yeah, we still think that our value is at least that. For the reason, I mean, this is a little things are fluid in a positive sense, but because of the policy changes that appear to be underway in order to allow us to get better access to the grid. We think we're gonna have more growth in the business.
Now, that's separate from what the existing stock of assets, Garrett, that you just pointed to. Yeah, we think that that value still very much holds up and is real. You know, to Will's point earlier, we do think the stock is significantly undervalued and we need you know we obviously are motivated and need to take some action to address that.
Got it. Okay. Thank you.
Thank you. Richard, I think you're next. You there?
Yes. Hi, there. Hi, Scott.
Thank you, Richard. Thanks for joining.
Hi. Yeah, so could you elaborate a little bit more on the hotel strategy? You mentioned that you're willing to sell.
Yeah.
Some hotel assets if the price is right.
Yeah.
Will there be a change to the strategy? You're obviously developing this PROPERA, which is,
Yeah.
asset-light.
Yeah.
You mentioned the operational gearing.
Yeah.
of the business and that structurally or long-term Japanese hotel assets are a growth business and a potentially very good business.
Yeah.
Given the inefficiencies in the sector, c ould you elaborate a little bit on how you envision the hotel strategy going forward, with regards to business travel, boutique and other areas that you're focusing on?
Look, I mean, I think this is pretty straightforward. We'll try to be straightforward. You know, we've got a portfolio of hotel assets. We have the PROPERA system, which is very powerful and asset-light, and we're expanding. Actually, one of the areas is that it's, we've been significantly adding to the functionality of PROPERA, which is great. You know, like anything, we have a portfolio which has assets. You know, we rank order everything. What's gonna be sold in the hotel space are the assets that are the lowest priority assets for us. We'll recycle that money into, you know, it certainly is gonna go into things like Ichigo Green.
It's gonna go into things like bridge funds for the REITs. It's gonna go into growing our renewable energy business. We're not abandoning hotels, but we try to be, you know, if possible, sophisticated about kind of understanding where price and value is and responding to that. The challenge with hotels has always been it prices daily, and that makes it the most economically sensitive. Turns out it's also the most pandemic sensitive of any of-
Mm-hmm.
Any real estate asset. You know, at this point, the pandemic is not over.
Mm-hmm.
Folks are leaning into, you know, we think it's gonna rebound sometime soon. We have lots of hotel assets. We're happy to sell some of them to folks who want to buy them. That, I think that's a fundamental stance. Does that make sense?
Yeah. It's not so much a change in strategy, it's just selling some of the assets where you have less
That's right.
Less optimistic view on the return potential, and
That's exactly it.
Basically, people coming in with the right pricing and
With good prices.
Basically, selling them.
We're gonna sell assets, hotel assets above where we bought them several years ago pre-pandemic, you know, during the midst of a pandemic crisis where hotels were doing nothing. We think we should probably do some of these sales.
Yeah. With regards to the competitive environment,
Mm-hmm.
Obviously it has been a tough two years. Initially, a few players stepped out. Have you seen further transactions or further reduction in competition, or is everybody still holding on and have you seen anything there?
You mean in hotels, right?
Yes, in hotels.
Yeah. We're still seeing, you know, hotel operators kind of falling over. You know, the Japanese government has been good about trying to support service industries that are deeply affected by COVID. When we say falling over, there's probably been a couple% withdrawal of supply, but not more than that.
Mm-hmm.
Plus, the key mechanism the Japanese government has done is it supported kind of individuals and restaurants in particular with subsidies. With hotels, it's generally been them asking banks for forbearance, and so don't pull any loans and keep on lending. There's been-
Mm-hmm.
There's been lending programs to allow hotels which are underwater to stay alive. It's been such an incredibly hard environment despite that. You've had weaker operators just kinda pull the plug. There has been some withdrawal of supply, but it's a few percent. No more than that.
Okay. Maybe one final question on the
Sure.
On financing, on slide 25, where you pointed to the ESG finance support and that it's growing. Is it fair to assume that basically, over time, all your loans will roll into these ESG type loans?
We would love that.
Does that mean that you also have that lower financing cost going forward, or is it just the terms or some other features that are just beneficial?
The financing costs are roughly the same. It's the other elements, though, which are incredibly powerful. I mean, you know, I think the right way of thinking about it is these ESG loans have really no covenants to speak of. I mean, not only covenants but, you know, that they. You know, it really makes a difference, is this you have total flexibility to do whatever you want with the money or do you have to do it, you know, with a certain asset or a certain category or a certain location?
Mm-hmm.
Amortization on it. You know, as I said, the effective duration of a loan is. You probably know this, but you know, you're paying. Typically in Japan, you'll pay, in our case, we'll pay 80 basis points for a loan, but we would pay 3% principal per year. With these loans, there's no amortization of principal, so you're just 80 basis points of the loan. From a cash flow perspective, these are very powerful loan structures. You know, our mission is to grow. We've done an 8x in them over the last two years to grow as rapidly as we can.
Understood. Thank you. Thank you.
Thank you. We have some more time. I'm gonna run out of time. You might wanna. Will's back. Sounds good. Will go for it.
Okay. Back for more. Thank you. Okay, there's three questions.
All right.
On hotels.
Yeah.
The hotel REITs, Invincible and Japan Hotel REIT and Ooedo Onsen, they publish their monthly data.
Yeah.
You know, at the end of this state of emergency, their October number improved from about 50%-something to about 60% average occupancy.
Yeah.
November again from about 60% to about 68%.
Yeah.
We track this utilization data, airport traffic utilization NTT DOCOMO publishes.
Yeah.
It suggests that December is gonna probably be better than November.
Yeah.
In that background, in terms of your portfolio and your utilization, I mean, have you seen, you know, since the state of emergency's ended, an improvement or just kind of give some background there if you could.
Yeah. One of the things that's gone, and you're absolutely right, that occupancy has been healthier. Part of the reason for that well, though, is that people have cut the daily rate.
Yeah.
The problem is that the RevPAR has gotten pushed down really hard.
Yep.
That's the smart and the right way to do it, and we've done that ourselves. Look, at this point, we actually have a few of our hotels outperforming pre-COVID right now, believe it or not. You know, the exception that proves the rule, most of the hotels on a RevPAR basis are still down 60%-70%. You know, the problem is when you're down, you know, and at the bottom, they were probably down 80%. When you go down from down 80% to down 60%, that's from 20% to 40%, that's a double, but it really means you're still down 60%. The hotels are still deeply impacted. They just are.
Part of it is because it's not just occupancy, it's that ADRs have dropped down so much in order to try to fill the hotels.
Thank you very much. Got it. This is specific to your sustainable real estate, division.
Yeah.
You break it out between rent income and real estate sales.
Yeah.
Just looking at the stock business, the rent side.
Yeah.
Looks like in Q1 it's about JPY 4 billion, and that dropped in Q2 about JPY 200 million to JPY 3.8 billion.
Yeah.
Clearly deteriorating. I think this was Odaiba. I think this was hotels.
Yeah. That's exactly right. It's primarily Odaiba, Will.
in Q3, we were back up to JPY 3.9 billion, so about JPY 100 million improvement. Can you elaborate on what might, you know, be happening there?
It's a guess, but I think it's actually some improvement in hotels. You know.
Right.
This has been super volatile.
Yeah.
As you know. We're both in Japan together. It's like, "Okay, the COVID's gone. No, COVID's back." The hotels have been showing some volatility.
Got it. Thank you. Final, on the Odaiba, the Tradepia asset.
Yeah.
This is again from the Japanese where-
Yeah
... had leasing activity not been successful, it would have dropped about 40%.
Yeah.
You picked up about 15% or so.
Yeah
It's roughly closer to about 60% right now. The anticipation, this is in your publication.
Yeah, yeah
... of getting to 80% by the end of next year. Just, can you give a little bit of color on, you know, who's coming, what the rent levels are-
Yeah
versus pre pre-COVID, things like that? How that will stage out over the next year.
Yeah. I mean, rents are down about 10% in the Odaiba asset. So look, I'm actually quite positive on that asset. I mean, which is to say it does have. You were on the call, so you heard Hasegawa-san talk about the lower levels of the building.
Right. Right.
To be clear, what's fantastic about the Odaiba asset for those of you outside of Japan or outside of Tokyo who don't know the Odaiba area, it's right over Tokyo Bay, and it's beautiful. Unlike Central Tokyo, where you have which are like Manhattan, you know, the only views you have are if you're facing over Grand you know Grand Central in Central Manhattan. Anyway, you know, Central Tokyo really doesn't have views like this for the most part. The upper floors are fantastic. They're truly differentiated. We've actually had a systematic program on let's get people who really care about the view and look over this phenomenal bay and the Rainbow Bridge and all that sort of thing.
It's the lower floors which are slightly more challenged. You know, it's a super compelling value. It's filling at about JPY 15,000 per tsubo. The peak was up to JPY 17,000. We underwrote it originally to, like, JPY 13,000 to JPY 14,000 to JPY 15,000 , so it's beating its business plan. There's no impairment risk on it. It's still massively above plan. You know, we're having to give free rent at this point, you know, typically six months, could be as much as 1/3 of the rent period, in order to get this thing filled and then. Moving is really expensive in Japan, so it tends to lock people in for many years. We think it makes sense to do that.
One of the things we haven't done is we haven't rushed to fill it because we are confident it's a really great asset. It was built, as you know, originally as a corporate headquarters for one of Japan's biggest trading companies, super high spec, beautiful, and, you know, we'll fill over time. Yeah, it was actually gonna go to 70% occupancy, and then COVID pushed it down to what was gonna be 40%. As Will just pointed out, we expect to close this fiscal year, so this is only two months away, something like 50%-60% occupancy and push it up probably to 80% over the next year. We think in the long run, the right thing to do is to fill it with the right tenants.
To answer your question, you know, it's all sorts of companies, you know, IT companies, growing companies. It's the biggest issue with filling it quickly is that when companies decide they wanna move to Odaiba at a cheaper price from Central Tokyo, I don't wanna say the landlords are panicking, but, I mean, the landlords are, like, panicking. Like, "Don't go. We'll cut our rents by 40%." You know, this is one of the issues. You need to be able to compete and have a differentiated offer. It's a little bit hard to compete if somebody in Central Tokyo wants to cut their rent by 40%. Just quickly, everyone, Odaiba is about 20 minutes out of Central Tokyo.
It's a fabulous area, and yeah, I think we're gonna fill it and it's probably takes 18 months, but we'll, I think, likely you'll see us running it, you know, near full occupancy by then. Great. Appreciate it, Scott. Thank you. I think we're done. We've gone over time. Thank you, everybody. Appreciate you being with us. I understand it's a really hard time in the world. Hope you and your family and friends are all safe. Take care. Be safe. Thanks so much for joining us today. We'll bring it to a close here.