Earnings Call: Q1 2022

Jul 14, 2021

everybody. I'm Scott Callan, Chairman of Vitsigo. I'm joined by Dan Morizaku, who is a senior member of finance team and our Head of Global YR. I'll be working off of presentation that's on our website, FY 2022, so the February 2022 Q1 corporate presentation. Somebody going to put that on the screen for me? All right. Let's get going. Let's move forward. This is our first time doing a Zoom meeting. Hopefully, it's going to go well. All right. Let's start on Page 8, FY 2022 to Q1 summary. It actually was a pretty light quarter from an earnings perspective with actually, from a business perspective a very good quarter. We think Q2 will be a little light also. But there's clearly a major change in the market environment that's We think very productive for us from an earnings perspective and you'll see results primarily in the second half of this year. We continue to have a very slow hotel earnings recovery because of COVID. We are running at 30% of revenues, so down 70% relative to pre COVID. In the quarter, we did primarily to logistics asset sales, the value was completed, gross profit margin on them were 34%. There has been no COVID impact on clean energy, which continues to grow very well, so stock earnings in that business. So those are our fixed earnings, up 18% year on year. We launched 2 new businesses. Well, and in fact, one new business, which is digital owners, it's a GPLP structure, ownership business. So it's an asset management business. I'll go into details on that later. And Prepera, which is our AI based hotel revenue management system, in fact, the launch of that business is we began a full schedule of that with external sales promotion to clients. And I'll go into some details on that later. And the final thing we did as we accelerated our RE100 target by 15 years from 2,040 to 2025. Turning to Page 9. This is again a slide here. Those who have been with us before and many of you have, so thank you for that. It's familiar. It's a durable earnings model. We continue to run at earnings despite a very depressed earnings environment due to COVID at RR fixed expenses. You can see we're down year on year on our stock earnings and sustainable real estate, that's almost entirely hotels, which we expect to rebound as we come out of COVID as it manages up year on year, clean energy is up year on year. And I'll go through kind of more details there. Going to Page 10, again, a light quarter. So none of these numbers kind of screened out This is the rebound for each to go, but that is the reality that we think we are experiencing and will deliver to you going forward. But headline numbers will be down 40%. Net income down 29%, EPS down 27%. That's actually a reflection of our long term interest rate hedges. So we have fixed our interest rates. We think that's the early thing to do, but very, very low. And so last year's Q1, we took about $200,000,000 of gains, a little bit over $200,000,000 So about $2,000,000 in gains on those hedges. This quarter, we took 170,000,000 dollars of loss on those entities. These are non cash, but that's kind of where that big swing is coming from. Page 11 sees segment details. A real decrease in HMO hotel based fees and performances, it's actually relative to pre COVID more than anything else. Mass and management is actually up, as you can see in the middle of the page on a OP basis, about 6% year on year. Sustainable real estate is down. The stock earnings is again overall in the hotels, it's about minus $3,000,000,000 or $30,000,000 Full earnings are also down year on year. But we sometimes we stack our earnings in different quarters depending on kind of what transaction volume looks like. So we don't think that's really material, Peter. And I'm clear there as you can see, 25% up year on year. We launched our first wind plant this year so that in Yoazawa, Northern Japan, that is contributory. And we brought a bunch of plants online last year. Thank you. So we're getting a full year contribution from solar plants as we enter this year. Page 12 gives you some details on COVID impacts. One of the probably the I mean, hotels are high, office low and retail low is part of a little bit surprising for you. So let me go through that. On the office side, it's so clearly the case that there's been a differential impact on midsize offices versus large offices, which is to say we only have one large office in Podaga. And the mids and there has been more activity in our big companies to move to remote and push that space. In the midsize office, which is every single other office asset that we own, we're seeing really no impact. Our tenants are saying, we have had some vacancies generally with companies with direct COVID impacts, so we travel agencies or something like that. And then we released assets at a higher rate for the existing tenants. So truly, there has been variable earnings impact there. And retail is actually similar, which is to say restaurants have been incredibly hard hit. But because we have a combination of some retailers, which are obviously more sensitive and the collier retailers are sensitive to COVID in a negative way and offset by retailers such as drug stores or supermarkets or kind of select more suburban retail locations, which has done very, very well. The over impact of retail is low. Residential has effectively no impact. Clean energy has no impact. Independent has done a very good job of defending incomes during COVID. And so there's really no change in tenants' ability to pay their rents and tenants' desire to pay their rents. Again, COVID, if anything, is a positive driver of demand for residential real estate, both as tenants as buyers because suddenly in your apartment, it feels really, really small. So there is no government impact there. In terms of flow and risk, meaning what's happening in the buy sell market for these assets, There has been a significant impact on office, hotel and retail. There's been no impact on residential logistics. For the reason that it's skipped for residential, I mean, it's a driver demand and also because of higher earnings stability. Logistics, similarly higher earnings stability and kind of the shift to work from home and the ongoing shift of transactions online. We feel actively online, of course, is a driver for our demand for the successes. Just to speak to office, hotel and retail. The big issue over the past year has been a blowout and spreads between what buyers want to pay and what sellers want to sell out for office, hotel and retail. For slightly different reasons, for hotel and retail, that's because there have been immediate negative impacts that are just massive in the hotel space. Worries about retail, both kind of right now with assets that are suffering, but going forward, what's going to happen with online. And office, similarly, what's going to happen going forward from a work from home perspective. And as we as you probably know, Japanese leases tend to be very, very short, typically 2 years. So in the office market, for example, people are worried that tenants are going to throw back a bunch of space inside office. We already have enough information at this point. So it's been over a year, they've been in this province almost a year and a half. So 70% of leases have come up for renewal and they're getting renewed. And so result of kind of expectation we're going to break out of this horrible deep COVID period and go into something that we're all going to leave for COVID, But a normal normalized environment and the robust kind of leasing ongoing leasing activity and operating performance of those assets has meant we have hotel, retail and office now market emerging for transactions. And we expect it's quite possible that we'll do some significant transactions, a lot of more significant transactions in any of those assets or across all those assets in the second half. Let me turn to Page 14 and go quickly through kind of our business model. This is our standard disclosure. You can see that we do generate significant higher both stock and FL earnings than our costs. In the Q1, we came in at 4,000,000,000 yen for stock earnings. Our forecast for both the bottom of the range and the top of the range is 14,400,000,000 over the 4 years. So we're coming in about 10% higher on stock earnings. We think there will be it's very likely we beat we certainly beat low end of the forecast on floor earnings and it's quite possible we come in above the high end of the forecast depending on what happens to the market and the attractiveness of price. That still means we have a ways to go to what pre COVID looks like, which is fiscal year 2020 2020 2020, as you can see on the page. But it's manifestly the case that we'll begin to experience post COVID rebound, which is going to take us back to more normalized revenues. Page 15 shows the embedded forward in the earnings and the business and the balance sheet. We have significant unrealized gains that exceed our accounting. So our earnings our economic earnings exceed our accounting earnings, we have unrealized gains that are expected in future periods. Page 16 shows you how, in fact, we have 3rd party appraisers saying that the assets are worth X. In general, we do somewhere between 2 and 3x of actual realized earnings. So at the appraisers, I've told you on the last page that we have about $63,000,000,000 so $600,000,000 out of the end of the dollar in unrealized gains and the balance sheet is falling 2x to 3x that in terms of our actual realizations. Page 17. This is a business that generates significant cash. We run the business in order in that way in order to do so. We take as much as possible tax shields such as depreciation, accelerated depreciation. It means our stated earnings, our stated EPS are lower than the actual cash that is generated. That's a good thing for all of us. It means we generate cash that is not subject to the cash and we could use it to invest in the business and or buy back our stock when it is cheap. And so that is a hallmark of the business. Page 18 gives some sense of what how we finance the business outside of the equity in it. It kind of continues to be and for us certainly an amazing place to be a borrower. We're financing all in 90 basis points for debt that is about 10 years. Hasn't been really any significant change. We're continuing to show the strength and durability of our business and as a counterparty for financial institutions. Page 20 gives you acquisition and sales activity. It was a like for primarily we bought a residential that was in that's an need to go honors business and we sold 2 of these assets that we had gone through and kind of done all the value add that we needed to do. I mean, so it's a worthy question as to whether or not we have all those assets or sell them. There's both a strong desire and ongoing robust analysis assets. That's a reason to hold them. It's also the case that isn't that demand has kind of gone through the roof as people have pushed their as buyers have pushed the real estate spending out of hotel, retail, office into logistics and residential because they feel safer. So we thought we could get and we did get unfairly price. And on that basis, we took a very good price for those of business assets. And for 2 owners, no sales during the Q1, we expect to see a significant transaction average over the year. Page 21 gives you some sense of where we've taken the Chigoni's business. Again, this is a business we set up from 0 on March 1, 2017. So we've now got 4 years of track record. It continues to grow very, very well. This is, I would think, a really, really good business, very high turnover, average hold as of end of last year was 9 months. So even during COVID, just robust demand, the ability to execute. I mean, there's some pushing out of I think the average hold was maybe 7 months. It pushed it to 9 months. It's very hard for us to get transactions done during the COVID period. Anyway, as you can see on the page, in the 1st year, if you add buyers and sellers, we did a JPY 8,000,000,000 of transactions. In the 2nd year, we did JPY 25,000,000,000. In the 3rd year, we did JPY 37,000,000,000. In the 4th year, this last year, we did JPY 56,000,000,000. This is the business going very fast. We fully expect to get to be about JPY 90,000,000,000 to JPY 100,000,000,000 pretty quickly. So there's a lot more upside in growth in this business. And because we're taking a gross profit, typically somewhere between what we started for about 10%. We're generally delivering something that looks more like 13%, 14%, 15%. And because we use some debt to structure the business and because the hold is so short, This has a very powerful kind of 30%, 40%, 50% ROE economics to the business. So the growth is very, very positive. Page 22 shows something new we're doing in the business. So I've just described the existing business, which is on the top of the page. You take all kind of assets and this is all Tokyo prime located brand new residential assets. It makes it very easy for a little bit, first of all, on the balance sheet because these are outstanding assets that people, anybody who want to own. It's substantially derisked the business and we generate floor earnings on gains of sale to individual institutional investors and or sometimes we do, we'll sell this as part of our private fund business. So we'll get the flow earnings and the gains on sale and then we'll get the ongoing management fees as us serving as a GP to a private fund. The brand new activity, which we started as of May 1, because we've begun a GP, what we call co ownership business to our clients, but it's GP LP structure. So as you know, our asset management business currently has our 2 public REITs plus our public infrastructure funds, so a solar power producer. And we also have a private fund business, which is on this page. This structure is it's an LTCP structure using a profit concentrator. So it is goes under a different kind of regulatory regime, which is a lighter and lower cost regulatory regime. But it doesn't and what it is, it enables to offer small lot of investments. So to go after a brand new market, typically on the order of so minimum investment size is about 1,000,000 yen so about US10 $1,000 We're starting a slightly larger than that right now in terms of the first asset going to market. But it does enable you to serve the needs of investors in the real estate category in a brand in a different way. And the market as we have on the bottom page is very, very large. We would want it is our ambition to grow this business to be similar to the size of our existing asset management business that would imply several 100,000,000,000 yen or so about $2,000,000,000 plus worth of asset center management. It's something we've just begun, but we think it's an exciting and important new growth opportunity. And our deliverable in this as is all everyone do in Japanese sustainable real estate is to offer very high quality products as a fiduciary and it's deeply trustworthy. Unfortunately, in real estate, that's not always the case that you have. This is a business. It's the single largest industry on the planet. There are a lot of actors who are attracted to it, who are not strong fiduciaries, put that way. And so we as you can see from the growth of our As You Go on this business, this is an area where we think we provide a social good, giving investors an opportunity to invest in high quality durable return of real estate. And that's still important in Japan because interest rates have been at 0 for years, for decades. So this is very important for people to be able to save for the future. Turning to Page 23. We continue to provide growth support for future REITs and if you go green. Worth noting, on the page is the final bullet point for each of our office. We have actually we made a decision to transition to renewable energy across all the assets. We had some partially owned assets that we don't fully have control over that we aren't able to make the cut over with a more negotiated process. But HMO Office is going to be almost entirely renewable energy powered portfolio within the next year. Let me turn to Page 24. We'll talk about what's going on in clean energy. We actually changed the graphs, the bar graphs on this page, which used to be speaking to megawattage power generation. We still have that data on the bottom of the page. We also removed each of the green, which is got, as you can see, 29.4 megawatts on it. For those who are familiar with our materials, there used to be a green bar running on the bottom that had 29 megawatts on it. We've just taken that out and we've shown here purely the activity that's on balance sheet for this company. And it has and then we show the total CapEx. And the reason why we made the switch is because megawatts kind of all megawatts aren't created equally. You do then have a question of utilization rates. And so solar runs at about you put up a solar plant, it runs kind of during the day. There is a conversion ratio in terms of its efficiency. Utilization of solar is about 15%. We now have a brand new wind plant that is at 50%, so it's 3x higher. We are planning and expect to do something significant in fully local green biomass. What we do with this is 90%. And so if you show kind of megawatts on the page, they're just dramatically different economics and productivity from this. So we've made the switch to reflect an ongoing diversification of our mix. We continue to expect to do a lifeline forward in solar. We have ambitions and have begun work and hopefully we'll do a lot in multiple green biomass and we certainly want to do more in the middle. Page 25 gives you some sense of the wind at our back from kind of Japanese energy policy. It is so clearly the case that Japanese government has is moving towards, so it's currently under review for our revision, the 2,030 target and the 2,050 target. Even with the current target, which may be pushed up over 2,050, there is just an overwhelming demand for renewable energy. We are not going to solve the problems of climate change by continuing to burn fossil fuels. Japanese government understands that. And so there is extraordinary ambition to source more energy in a renewable way without us applying. And so as one of Japan's major and solar power producers, we went and we're measuring the wind and green biomass, there's so much more we think we can do. There's so much more that we think we should do on behalf of society and certainly because economics is a very powerful effort for shareholders. So this is this continues to be an area with even arguably a very conservative politically Japanese administration has made a significant policy commitment to doing more with renewables, which we think will be an ongoing support for activity in this area. Page 26, we'll provide some details on Propeller. So that's our, again, our AI based hotel revenue optimization system. We have been using this in our existing hotels and driving increase in revenues on the order of 20% to 30%. It's a very powerful system. We have begun and I'll talk about on the next page new activity in terms of selling this externally. So what we have here is just some sense for you of where we would expect to take prepare our own in the near term. So our target target is to take it to 2,000 hotels. It would be 10% market share of Japanese hotels supplying site controllers, which effectively kind of an efficient API to allow hotels to link their reservation management systems into online travel agencies. So that's target 10% market share of site controllers for Japan over the next 5 years. Page 27 gives you some sense of how we're trying to get there. One of the things we've done is not quite a premium model because we ask for money even for the light version. But we have been kind of marketing full preparer and realize that there's an opportunity just to go for customer count and build kind of customer understanding of product and also get more data from it. So we have introduced something we'll call Prepare Lite, which gives price trends visualization only. It does and recommendations to hotel operators. Again, this is a revenue optimization algorithm for hotels. It's incredibly sophisticated. Having told the hotels how they should price their rooms, 3 65 days, 24 hours a day, however, light does not give them the ability to have automated optimization. So once we tell them what to do in the live version, they have to figure out how they're going to implement that in their preservation system, which is incredibly manual process. But anyway, it does give an opportunity for hotel operators to get the advice from Propeura and to begin doing some relatively primitive optimization of the price. And for that, they asked for 24,000 yen so that's $200 per hotel. And the goal is again to take this including light to 2,000 hotels within 5 years and then drive earnings by shifting our customers from light to Propeller all the time. And Propeller, the full version of this, we asked for 1% of revenues. So to give you some sense of economics, if everyone if you get to our market share through those hotels and everyone is sitting on light, that'll be about $600,000,000 so $6,000,000 kind of subscription model revenue system. If people are all sitting on the full version, if using the full version and using the sample earnings model of a typical hotel, on the bottom right of the page, there'll be $4,000,000,000 So US40 million dollars So that's what we think is a conservative view of where we can get to for the next 5 years, somewhere between an ongoing revenue of US6 $1,000,000 US40 $1,000,000 And if we could do more than that, we will certainly do more than that. But we think this is really interesting. And I'm sorry, I didn't talk about the second part of this, which is that we're trying to integrating the cycle pillars to allow users to get onto our system easily. We will have access to 60,000 hotels, 80% of all Japanese hotels. We effectively have that right now and we think we'll keep that decision. Page 28, we as I mentioned earlier, we're excelling our RE100 target by 15 years, 2024 to 2025. So RE100 is just a commitment to have 100 percent renewable electricity across all of your operations. So we do that by 2025. Page 29 shows where we are today. So here I probably need to explain to you that the RE100 does not kind of envision self production of renewable energy. And so the trick of the matter is we're already net zero carbon today. And so we more than get to the RE100 target. We don't need to wait another 4 years. We are there today. Our total power plant production, CO2 reductions, is greater than it's about double our CO2 emissions. We are net zero carbon. We are positive contributor in the global fight against climate change today. And so what that means is that the target of going to RE 100. So because we are by the RE100 initiative, the weight counts means that if we're selling our renewable energy to our customers, they don't count it as part of our renewable energy contribution. So what we're effectively telling you is we're going to do both. We are going to continue to grow our own renewable energy production. We're likely to sell all of it externally, but we're also going to buy in because we've done the math on it and it's certainly very doable to buy in renewable energy despite what I said earlier, a gap that is going to grow significantly over time. Currently, there's barely any premium to renewable energy. So we can make the with contracts. So we think they're good for the world and good for our tenants who believe in working for the world. Page 3 shows our buyback activity. We did buybacks 5 years in a row. We did one earlier this year for 1,500,000,000 yen. So it's half of what we've done in previous years. We would expect to have ongoing buyback activity given the cash generation and we think it's a good share price. And finally, Page 31, just a reminder that we are a JV sponsor. So Japan's soccer league or football league use the global word for this sport. And this is something that has kind of had curtailed activity given that we've been operating under COVID. But we do have a shoulder program where we just take it to our shoulders to go to every day the club and every day we got a game and that's something that we will continue to do going forward. So that is the prepared presentation. We're going to now begin the question and answer question session. So if you are online in Zoom, you ask a question by raising your hand. And maybe you're more sophisticated on this than we are. This is our first time we've done this. So apologies if we have any challenges in getting this done with you. And when it's your turn, you can unmute yourself via a prompt and then you can press and you can go forward. If you are on the phone, you press star then 9. If you want to draw your question, you press star then 9 again. Once you turn to speak, you press star then 6. So hopefully, we're all going to get through this together. But anyway, let's and you can also ask questions via chat. So three ways to get into the call. You either go through the Zoom app or browser and you raise your hand and we get going that way. You can do it via the phone or you can do it via chat if you're online. So why don't I take the first question or input of any sort from anybody. The line is open as it were. The app browser, the app, the browser, the line and the chat session are all available to you. Again, thank you for your time today. So the first person we have. Hi, this is Go ahead. Yes, this is Greg at 172. Can you hear me? Hi, Greg. Thanks for joining. Of course. Yes, thanks very much. My first question is on the asset sale. As you know, Scott, the office business has been pretty much unscathed by COVID. And obviously, everybody has noticed that your rate is now back above NAV. I guess, obviously, you cannot comment on asset sales. But my question is more it seems to be easier to sell office, but you haven't sold anything in Q1. Would you still be looking to sell potentially in the rest of the year? Or do you have like a balance issue in your portfolio where you prefer to keep office and sell other assets so that you don't deplete and sell what you can sell as opposed to what you would like to sell would be my first question. So both statements are correct, Greg. Yes, we expect to sell losses this year. And so we and we run hopefully what you would our shareholders and investors would think is a pretty robust and rigorous process. So we have a sale process which invites everybody in in order to make sure we can get the best price. And so that takes a little bit of time. So we think there will be activity in the second half of the year. And secondly, we do pay attention to kind of the mix of our portfolio. It's very diversified. At this point, it's about a quarter retail, a quarter office, a quarter rental and about a 5th residential. So we're not going to sell office all down to nothing. And that's, of course, this is like an amazing process. Everything on the balance sheet is for sale. But the reality is we expect to do transactions across all of those asset classes. We expect to do a residential sales, office sales, hotel sales, retail sales. The market is reopening. It is manifestly the case. Now things could happen between now and kind of the timing that we're looking towards. With the degree of kind of normalization that has occurred, there is an ability to transact at levels that we think makes sense. And that was not the case through the last year. Understood. And the hotels, have you seen a narrowing of the spread between buyers' price and sellers' price? Is that kind of coming down a bit? Yes. And that's because I mean, it's a really interesting question to ask as to how Delta and the other variants could affect things. But the vaccination progress has been robust enough. It appears to be the case that potential hotel buyers are taking the view that even if we have particularly difficult variants, COVID variants out there, that there's going to be a vaccine solution. And so the desire for like really big discounts that we didn't think necessarily reflected normalized earning power for hotels has gone away. So there has been a closing of spreads in the hotel space also. Understood. Thank you. And one more question, if I may, is regarding Propera. You've given us 5 year targets, which is very useful. When I look at the market share, obviously, outside you're looking in, I have the impression that it's an ambitious market share. But at the same token, you usually express targets so that you can beat them. So I'm kind of I'm intrigued what this 10% represent and do you already have fairly good leads that would make the business kind of take off on year 1, so to speak? Thank you. Yes. So actually, the targets on Page 26 for the previous page, yes, it's that's a thank you. That's a worthy question. We do tend to be conservative and we put out targets that we can beat. And in this case, the reality is that our sales internally and our existing to give you some sense of this. We have 46 external customers right now, so that's 50%, right? So we're going to take that we think we're going to take that up 44. And effective, that's an exponential growth, we get that. The revenue results are so powerful for our customers, for ourselves internally our customers that this is very straightforward. The return on investment, the uplift in returns for those people using Preparer is so powerful that we think there is a major market opportunity. And 10% to that extent, it will be interesting it's an interesting issue because we're either going to succeed or not. And if we succeed, we're probably going to be well more than 2,000 hotels. But the issue and the reason why we introduced 4 Fairlight, that's on Page 27, is we're introducing basically very sophisticated technology, cutting edge technology in a business. So kind of could you put it on Page 27, that in an industry that the Japanese hospitality industry is unlike the restaurant industry, I've said it before, where Japanese restaurants are absolutely world class. The hospitality industry isn't necessarily cutting edge. And so you have very you have serious degree of conservatism. It's the best kind of people to try. We show people all the data, our data and with a multi year track record. It's proved to be like a very tough sale process. So it's like, okay, fine. So just to make it a lot cheaper for people to participate and prepare and see the results. So yes, we think these targets are credible. The big issue, as I said earlier, is there's going to be different economics to prepare a white and prepare a full version. And so and it's a 6 it's a 6.7 full difference. So migrating to the full review of prepared is, of course, going to be an important element of this. But yes, we think this is doable. And we think we've probably, Jim, insufficiently transparent about what our ambition has been. And you'll see we're likely to offer some more disclosure on what we think we can do, for example, in the owner's business too. Ichigo has been a little bit of a place where we kind of we don't talk about what our goals are and we kind of say now we've achieved this. And so it's kind of part of the value of the future if we don't give people guidance somewhere we think we're going to take the firm. So you can continue to count on us to be conservative. But yes, we do think there is a big opportunity here and we fully expect. Understood. Thank you very much. So we have someone else. Richard, you can go ahead. Hi, Scott. Thanks for this. I had just one question on the business on Slide 15, where you showed that last year, the appraisal based or the end of the value based unrealized gains grew by more than 10%, basically accelerating from the growth in the previous years. So yes, and given basically impact on office and retail space and on hotels, so how did you achieve this? And could you put some extra color on this? Yes. I mean, just to be very, very clear, these are 3rd party appraisals. So this is not easy to go on what these things are. Look, there was there continues to be a robust amount of NOI coming out of the assets. We did do a markdown and there was a little bit of that we had kind of taken out of these appraisal on our own that so we actually haircut the 3rd party appraisers, said our assets were worth in FY 2022. And the Braves just kind of went back and looked at it. And we went back and looked at it given the post COVID, I mean, kind of we're still on COVID, but given the pending rebound, we removed that. So that was kind of I can't remember what order of magnitude was about half of this year. But the reality is the assets continue outside of hotels, which are clearly in a very different space, continue to perform very well and the barbie appraisers and recommends. Then maybe another question on office. So you mentioned that the impact of this pandemic on life size offices is different from the midsize. Are you seeing now some more concrete yes, could you specify this a little bit more? And do you see that companies are really changing the model they operate? And with satellite offices? Is it yes, do you see the demand coming through and or are there other confirmation of this? So we've had some uptick in vacancy in our midsized offices, but it's almost entirely been kind of COVID related. And I think I've talked about this before, but roughly the kind of offices we have is central city location. Typically, the 1st floor is going to be retail because you can get kind of twice the rent for the 1st floor retail relative to the kind of the floors 2 to 10 to 2 to 20 or whatever. And so there have been we have had some vacancies in the first four retail tenants. We've also had a little bit of vacancy from, let's say, like traveling, these and things like that, so clearly had a COVID impact. And so when we did the vacancy and we leased up, the 1st floor retailer, we've been able to find, as I said earlier, about retailers. We've been able to find replacements like drug stores and other retailers doing really, really well. And so that's not been a problem. And the office tenants, we've been able to find office tenants. And so the net effect of a vacant a COVID related vacancy has been an increase in NOI that we are actually we're releasing the spaces at higher rents than the previous tenants. It is just remarkable story about the robustness of these smaller midsize assets that serve overwhelmingly small and midsize companies. And to be clear, sometimes people worry about SMEs and credit kind of capability. But in Japan, this is incredible. I mean, of course, we have we do credit risk premium, but incredibly robust tenants. The data rents, No move big moves for remote on the part of SMEs in Japan. And so that's just been very durable. Now the one exception to this is the one big asset in the app, which is Adaiwa, where we were we were going into COVID, we were going to re tenant the place. And so we actually expected to have 30% vacancy. So it's going to go down 70%. And then COVID occurred and we got additional 25% of notices from big firms and or IT firms that are I mean, they actually couldn't be big IT firms that decided to go more remote. And so, OZYRA has gone down to 45% occupancy at this point. And what's happening with Air and so that's like a completely different outcome than's happening with our small and midsize offices. Again, this is a former headquarters building of a major reference corporation. It's a big asset. Big companies are in it. And yet even in the case of Lozadaiva, we're releasing it at rents that are kind of at or above our business plan. So we'll take a year to do that. And it's going to cost us probably $3,000,000 to $4,000,000 of rent this year. But that is still noticeably a very different outcome than it's with our small midsize assets, which are kind of what we can do. So yes, I mean things are fine, not only fine, again, we continue to do long vacancies. If we get vacancies, even in COVID, we get enough that come in. It has always been our belief. This is why we involve small and midsized offices that it's an underpriced, incredibly powerful, durable asset that people seem to like big buildings and they don't seem to understand it. Big buildings tend to have more powerful tenants, more aggressive, turns out to go to work. Well, in the COVID environment, has perhaps one off, but you're better off. You would put the durability of earnings is all in the office. Okay. And then maybe final question. You mentioned earlier that this quarter and the next quarter will probably are a bit light, but that there are some big changes underlying changes happening, of which the results will be seen from the second half year onwards. What do you mean by that? And could you add a bit more light on these big changes that are happening? Or did I misunderstand it? No, thank you. I probably just explained it poorly. Sorry, Richard. Thanks for asking the question to give you a chance to get that right. So by light, I mean, this is not exactly a quarter where you go, wow, what a great quarter. But typical for us, I mean, as I said earlier, our accounting earnings are below our economic earnings. And in this case, it's a little bit more we've got a bunch of things in the pipeline that we're highly confident we're going to deliver on. So you're just seeing some moving around within the year where earnings show up. But the second element as to why and what has changed is we think we will see some coming back of stock earnings kind of hotels likely towards the end of the year as Japan emission rates continue. We don't really need tons of global travel without having to happen. Japan just needs to go back to a more normalized environment. We think that probably happens. But most importantly, it's the flow earnings. So if you look at Page 14, which shows $7,700,000,000 of lower earnings in the bottom of the range and $12,100,000 at the top of the range. And we'll see what happens. We feel very comfortable that we're going to be within that range and possibly go through the top because of a turnaround and the ability to sell what we think are very good assets in a market that's less robust. Okay. Thanks. Thank you. I think we have someone else. I'm getting a note. Hold on. It's a question via chat from Will. I'm going to read it out loud. Last time you mentioned the office asset and I'll dive ahead to Laura's, I have 2 tenants make it. Any comment on releasing activity? Yes. I mean, we're releasing. We think we'll kind of fill a backup within the next year. And just as a reminder, so this is an asset which was smack in the middle of the Olympic venue. So and so this is really, really tragic. We were going to get people get all excited about the Olympics, which is including the Paralympics, it's only a 2 month event. So we never quite understood how people would get really excited about, wow, it's going to be fabulous for real estate. It's like it's just a 2 month event. You can do you can lease your hotels for 2 months for 3 to 5 times the normal rate, but it's only 2 The additional hope was that we're going to get all this activity in the area and people were going to be excited. It was going to kind of build more value and status and prestige for the area. And that kind of unfortunately is not going to happen. Now having said that, Odaiba is located kind of 15 to 20 minutes from city center depending on how you Japan has multiple city centers, but from kind of the western and eastern city parts of the city center. And this is a very high quality asset with super high grade specs that we're leasing for kind of 16,000 yen, 17,000 yen per subo to give you some sense of that. That's probably half to a third of what you get in kind of more city center for equivalent kind of asset. So it's a very good value It's one thing that is just super powerful. So the vacancies that have gone up, to be clear, the reason why big buildings have been impacted, you see 3 things. You see very expensive space being sent back. You see space being held by big companies being sent back. You see space held by IT companies being sent back. In the case of Oziiva, we've had the second and the third, but not the first. I mean, it's just really good value, 1. And 2, the thing that's interesting is as you see kind of more work from home and the businesses are kind of more slightly more desirable of having a low cost base course. And there's been a little bit of migration of work activity in general towards home, but it means and this is out closer to Chiva, where the Verdesen land and early airport is. It actually has kind of been a little bit of for reasons that aren't clear to me of, if we're not we don't need city center space nearly as much. And so again, to be clear, this is 15 to 20 minutes from city center, but we're very much massively within commute distance and all that sort of thing. It's kind of a secondary office market that we thought was going to grow more. It doesn't necessarily look it's going to like it's going to grow more, but we'll find out together. Anyway, ability to lease it is robust and we're just leasing it up. So you should expect to see us back to where we were about a year from now. Happy to take more questions via chat or app or browser for the phone. We'll have another question. Okay. We'll have another question. You mentioned office logistics and residential asset sales. Now how about renewable asset sales potential? Thank you. So Ari is now reading your questions. So better than me. Yes, well, we've gone through this before. I mean everything in the everything in to be clear, we don't have this thing where it's like we're never going to sell an asset. It'll work for you. If an asset is sellable at a price that we think is a really good price, we'll sell it. Having said that, there's nothing right now where and it's an interesting question as to why. And we probably should do some more work on this. But at this point, there's nothing that is like this asset is priced below where it should be. If anything, our view is, as I said earlier, that there's kind of massive because of particularly because of changes in the operating policy. But those reflect kind of overall demand for renewable energy. So private companies, for example, are feeling pressure. So Japan has a huge manufacturing base. It sells to the world. It sells to companies that increasingly want to source via renewable power, renewable energy. So they're asking their suppliers to use renewable energy. So when you read the math, we can't figure out where the supply comes from to meet this map, which is a way of saying that we think it's quite possible. As I said earlier, there's not a particular premium for renewable energy right now. It depends on the region, but across Japan on average is only a small premium for renewable power. We think it's possible that that could make it go very substantially because it doesn't go up. It's impossible to meet Japan's national energy rules. It's a way of saying we could get a significant push again on some version of FIF for subsidizing renewable energy via the government. Right now, as you know, the infrastructure funds only have a 20 year non tax period. We could get that generated become make them truly readable. So REITs have a permanent non taxable period. The Japanese infrastructure market only gave 20 years. So again, that would be a reason for the infrastructure funds to be able to purchase at higher prices. And we think that is very possibly a subject of Japanese government positive policy change. So anyway, I mean, at the moment, we see kind of no rush to monetize our energy assets. Now it's probably worth pointing out that on Page 15, those are only our unrealized gains on real estate. It doesn't show unrealized gains on our renewed lending portfolio, which we think are very substantial. And I probably have to duck and cover on what the number is. Kind of certainly 30,000,000,000 yen possibly 30,000,000,000 yen I mean not small numbers is what we think those numbers look like. So there is a lot of value there. And if and when we choose to monetize them through an asset sale, that will be a powerful driver for Hi. Hi. Hi. Hi. Who is this? This is Garrett from the Trufflehound Capital. How are you? Thanks for calling in. Absolutely. Thank you. Just another question on the green energy business. In the past, you've talked about cap rates on these development assets of 8%, 9%, 10%, 11%. Yes. And can you help put that into context because the value add real estate business, the cap rates discussed are more like 4% to 5%. So why is it the case that the cap rates in the green energy business, which as you mentioned has these tailwinds and has guaranteed pricing for 20 years through the 5th, why are those cap rates so much higher? Part of the answer is that that's a pre depreciation cap rate. And so if people think that we actually think there's a market mispricing. If people think that your asset is only good during the 5th period. And so in other words, depreciation is roughly about half, right? So if you think that there's no terminal value to your solar plant after 20 years, then it means your renewable energy assets are also generating about a 5% cap rate. Now we think that is manifestly wrong, but it's interesting because there is a difference in pricing between global solar assets, which do see value beyond fit periods and Japan, which seems to put no pricing, no value at all. And we run the numbers on this. And what happens after 20 years is you do need to do this is a very small degree and you probably know this, depreciation over time like kind of less than 1% a year of the ability of solar panels to produce. You do need to do some changes in what they call forgive me, they're called power conditioners in Japanese. I can't remember what we call it in English, but the equipment, it's not the solar panels. You need to take those panels and convert them to electricity. You need to do some conversion there. We've run our numbers on that. And we fully expect to be a sub-ten yen for kind of kilowatt power producer, which would make us and well below 10 once the period ends, which would mean that these are going to be very profitable energy assets. And again, if there is a premium for renewable energy, then it would be bigger than that. So yes, I mean, our view is actually a mispricing. Okay. Yes, because it certainly seems out of line compared to what how these kinds of assets are viewed in the United States. That's exactly right. And then another question on Prepera, longer term, if it's successful, what can you kind of talk about the cost structure a little bit? And one specific question is, is there any kind of revenue share with Fujitsu? No. So those are our economics. Yes, I mean, this is it's got the kind of the classic platform kind of exponential economics to it. We put a couple of $1,000,000 into developing the system. We do have we've continued to upgrade it, but the ongoing kind of and the ongoing kind of IT requirements are de minimis unless we want to bring in kind of new functionality that we think we can monetize. It's a very small team. And so we're going to have to put people into a certain amount of client service, but it's a very straightforward system and it's an automated system. So client service is a little bit kind of and it's fully automated. So it's like, here's how you set it up. Congratulations, you're about to make more money from your hotel. So yes, I mean, the numbers that I said between $600,000,000 and $4,000,000,000 so call it again $100,000,000 $6,000,000 to $40,000,000 a year, almost all of that just drops to the bottom line is OP. So we like the business a lot and of course we want to do more of it. And more would be not only taking more market share, but adding capabilities and I've talked about this in previous calls. So currently we're focused on hotels, but this is a dynamic pricing algorithm. So you're really you can take it to other assets. You can take it to KROQ, you can take it to stadiums, you can take it to museums, concert halls. I mean, clearly already, you can take it to retail. I mean, clearly already the airlines have figured this out. And sophisticated hotel operators have figured this out. But this is a very low cost, very high quality product. With machine learning and a huge database, we think we have and this gets to Greg's question earlier, why do we think we can do this and get this kind of share is because we think we have the best product in the market. And we'll and having more data to feed the AI and the machine learning, we think increasingly give us ability to deliver more economics to our hotel customers. Okay, great. Yes, I think the strategy of getting as many customers as possible rather than prioritizing like near term cash flows makes a tremendous amount of sense. So thank you and best of luck. Yes, exactly, exactly. Yes, it's interesting. I mean, it took us a while to get there. I mean, we're classically a huge cash on cash return, real estate, and then we did energy, again, clean energy. And so it took us a while, my apologies, to kind of get to, wait a minute, we should just kind of go for growth. We should get this thing out there. A little bit internally, just take you inside kind of inside the curtain of like, what? People the whole point of this thing is for it to be fully automated and for people to make tons of money. Why do we want to do why wouldn't you want to break the system and give them something that doesn't do this for them? But the answer was in order to give tenants an ability to test in a way that kind of asks less economics in the moment a couple of months. So yes, we're excited. We think this is the right way to go. And sorry, because as usual, I wish I could prove this stuff out quicker. Sorry, it took us a while to get there, but we think this is a big opportunity. Anything else? We're open again for questions and or inputting. Yes. Hi, this is Greg again. Can you hear me? Yes. Thank you. Yes, just a quick follow-up and actually a contrary question to Will's question, I was going to ask if you would accelerate the investment in renewable and whether you would also consider investing from your funds, especially in the secondary markets? And any thoughts on the trajectory there? Thank you. Yes. I mean, we do have ambitions to do more. And there will be 3 potential drivers of our renewable energy business. One is clearly solar. It's the most competitive. And people talk about, for example, wind, kind of offshore wind, it's just so expensive. I mean, it has an advantage of being able to decide, so it's just literally our calculations are about 7 times more expensive than solar. So solar is a super competitive asset. To the extent we can get advances in battery technology that will help it become a base energy asset also. But solar is an area we have significant capability and doing more work on. The second one, as I said, is local and green biomass, which has limits in terms of the size. We're doing kind of local forest and we're going to prevent foresting guidance, which is why this is truly green as opposed to kind of doing chips in the Southeast United States and sending across the world, which we do not think traditional biomass is absolutely great. And the third one is, so solar is a really obvious one. Green biomass, we've done a lot of work on and are making progress on. We hope to be able to introduce that in the next beginning of the next kind of 24 months to our portfolio. The third one that's a little bit of variable is onshore wind where we have more coming. We'd like to do a lot more, as I said, because of the utilization rate is higher than in solar. And it's ability to deliver kind of a lot more kind of some mass that is not necessarily the case with solar given the limited amount of land that's available for continued solar activity here. And there, it depends quite a bit on government policy and what they're going to do on the grid because the problem we have with them right now is the grid is not kind of strong enough and not smart enough necessarily to accommodate it. So we do need some help over the next 5 to 10 years on that for us to be able to do a lot more in wind, but if possible, wind is far more competitive, tons of wind is far more competitive than offshore wind. So probably more expensive than solar, but you're going to run out of solar opportunities. So something maybe that's more like a 2x, to map x to solar as opposed to offshore to 7. So those are the 3 drivers and possible we do have a pipeline for onshore wind. We will do more there, we expect. We will do more in solar, but we expect we'll do more in biomass. So the key question is, how much more can we do? And we're going to try to do as I pass today as much as we can. Would you consider a solar rooftop? Or are you doing just normal plans? Yes. The problem with rooftop is you do need a sales channel for it. And yes, I mean, we're trying to be thoughtful by everything and that includes rooftop. But it does it is a different business model. You do need to have the ability to service or do small scale and get it up there and potentially service getting on the business model. But yes, that is something we're certain. Got you. Thank you. Thank you. Currently, there is no one in the queue. And we've gone over an hour. Sorry about that. And I guess we should probably take someone just popped up. Are we done? So unless there's anything else, I think we're going to bring this to a close. Thank you, everybody. We really appreciate your time. I appreciate the opportunity to work for you. It's a very hard time in the world. So everyone take care and be safe. Have a good day.