Hey, thanks so much for joining. Today we're doing the Ichigo FY 2027/2, so the February 2027 first half corporate presentation. I am joined on my right by Tet Fujita, who is our Lead Independent Director, and on my left by Dan Morisaku, who is a Senior Member of Finance Team and the Head of Global IR. Thank you very much, everybody. Let's jump forward. I've got a mic in my right hand. I've got a clicker in my left. Hopefully, I can make this work. Here's the first half summary. We last had a call in July. Quite honestly, not a lot has changed since then.
Certainly not in terms of our business and what we do, which is drive profitability for our shareholders by delivering assets that are improved assets for tenants, and therefore ultimately for investors. The numbers are pretty straightforward. We're on track for what we're going to achieve this year. First half looks a little light. Not any issues at all. Business profit is up 3%, net income down 2%, EPS up 4%, cash EPS up 17%. We like that a lot because we're focused on cash flows and cash to shareholders rather than accounting earnings. Stock earnings down a little bit. Flow earnings up. Highlights are kind of we're on track.
These are some bullet points, but I think the most important thing to understand is that we're an operating environment which is extremely paired or matched to our core capabilities. As you know, we are not a real estate company. We focus on sustainable real estate. We're not a company that does raw development where the construction costs have gone through the roof and it's made very difficult for a lot of our peers and I would call them competitors. We take existing assets, we improve them so that the surge in construction costs is actually very beneficial for us in terms of competitive advantage.
Things are going well. I'll talk about this later. We got some AM, asset management flow earnings, JPY 1.1 billion on performances from our office REIT. Asset acquisitions on track. We announced a JPY 5 billion share buyback today. All shares will be canceled. We announced additional cancellation also of another 3.4% shares. At the bottom, we're on track for having record profits across the board. We expect to have business profit up 21%, net income up 8%, and EPS up 13%, and ROE at 15%, cash ROE at 20%.
We've raised our dividend this year 35% with a DOE of 5.1%. This effectively gives some more detail on what I just spoke to. Again, we focus on cash earnings. They are at 1.4x our accounting earnings. We are relentlessly focused on delivering value for our shareholders, and ultimately we think that happens in terms of cash production. Business profit, we have a diversified portfolio. Certain things go up, certain things go down. We're forecast for a record. We fully expect to hit those numbers this year via some second half contribution. We are structurally profitable.
Our stock earnings, meaning kind of the earnings that are relatively fixed through things like contracts such as rental income, power generation contracts, base asset management fees, again, those are contractual, run about 2x our fixed expenses. Our stock earnings ratio, so percentage of stock versus flow, 56% at this point in time. I am going to go very quickly through this because this is material we have updated for today, but there is not a lot of change in the last three months. We expect to have a record high on cash earnings.
Stock earnings we have actually forecasted down, and so JPY 24.3 billion, which was a record high for us last year. At this point, we have not changed our full year forecast. We could have. We did not. But at this point, we are projecting ourselves coming in at JPY 25 billion on stock earnings for the full year, again, above what was embedded in the forecast at JPY 23.8 billion. We expect to have a record year for stock earnings this year also. We have long-term debt. It is about 90%. Half of it is fixed with an average interest rate of 1.7%.
There has been some push down in the average tenor of our borrowings, and generally borrowed for at 10 years. We have a business called Ichigo Owners, which has a turnaround of generally about a year in terms of from ownership to sale. We borrow there generally for seven years. What has happened is we have increased our Ichigo Owners business a little bit relative to the total pie. We have also increased, and this is a very good thing, we started issuing bonds and we are getting an increasing amount of uncollateralized debt, generally which have terms around three years, so that is pushing down the average tenor.
But this is from strength rather than weakness. As you can see, rates have gone up. 26 basis points year- to- date in terms of average borrowing costs. That has de minimis effect on our earnings, about JPY 800 million. And we forecast for it. It is not an issue at all. The one thing that is going on that is clearly a negative for everybody in the real estate world, and that includes us because we have borrowings, is that interest rates have gone up. It is overwhelmingly far more important the other factor, which is that interest rates are going up because inflation has gone up. Replacement cost has gone up. The competitors and their ability to compete with us has gone down.
The ability to organically drive rental growth from our assets is the highest it has ever been. The ability to deploy our value add capabilities at low cost and add value to our assets is the highest it has ever been. But we should be clear. It is probably, I am going to use some numbers just so that they are helpful for you. 70%-80% wind at our back. Maybe 10%-20% wind in our face. 70%-80% wind at our back is what I just talked to you about our increased competitiveness in a world of higher inflation, and call it 10%-20% wind in our face because of interest rates.
So one of them is obviously far more powerful than the other. This is what our business looks like across the board. I am just going to run forward. Hopefully, we have some things to talk about in question and answer. You can see we had net acquisitions, year- to- date. Although, most of it is Ichigo Owners, which turns over really, really fast. And the sustainable real estate purchase, most of that was actually a building we bought up in Sapporo, which was very, very rarely an example of us doing development. We hardly ever do it.
It was not quite a once in a lifetime, but very rarely happens. Very little activity other than the high turnover Ichigo Owners going on, and we expect to have significant sale activity in the second half, some of which was already contracted for as you can see on this page. Looking on the far right, you can see both acquisitions and sales activity. Again, overwhelmingly, it's in the high turnover Ichigo Owners business, which continues to go very, very well. You can see on the right-hand side, there are executed contracts already, and this is how we have some insight already into what our second half profits look like.
Because, of course, purchases don't generate profits, but sales actually generate accounting profits. This is one of the things we've always felt about our business underestimates the economic value created because accounting profits are only shown when you sell assets you've added value to. We continue to have substantial growth in the unrealized gains on our balance sheet. That doesn't appear in the accounting profits, but is something that we have insight into. We have right now about JPY 110 billion of stated shareholder equity. The third-party appraisal value of what our unrealized gains is about JPY 76 billion.
We're generally selling our assets for over twice of what the third party appraisers think. So that puts us at JPY 152 billion. So in reality, overwhelmingly, we have, in fact, kind of 2.5x of shareholder equity relative to our stated accounting shareholder equity. That's because all the value we've continued to create over time with our value add activity. Bunch of segments. They move around as portfolio. That's fine. Asset management up 66%. Sustainable real estate up 38%. Hotel down 57%. Ichigo Owners up 39%. Clean energy down 17%. Moving double digits. The net of it is you end up +3%. On the full year, we expect to be up over 20%- 21%.
The remote has failed. SRE, sustainable real estate business profit is up 38%. Some decrease in stock earnings, although it was higher than forecast because office rents continue to go up. But we had asset sales that are going to push down our stock earnings a little bit. The thing that's incredibly fabulous beyond belief, I think everybody on this call is familiar with our very big asset, Tradepia Odaiba. Occupancy growth continues to be fantastic. We actually are showing here 99% occupancy. I think the real number is 99.7%.
We've rounded it down. So that is an asset that is performing extraordinarily well. We have an average rent. In Japan, as some of you know, we use this thing called tsubo as a unit of area. It's 3.3 sq me. Anyway, the average existing rent on that is about 16,000. We're currently filling at 20%, so it gives you about 20% upside. That is an asset, as you also know, that's for sale. So we have what we think is going to be a very powerful sale process in terms of monetizing this asset and the value that we brought to it on behalf of all of our shareholders. Floor earnings are up 63%. As of the first half, we expect to see a lot more in the second half.
This is an example of. We like to at least, on one slide every single quarter, show you what we do. Because at heart we don't bet on red and black. We are not a leverage play on Japanese real estate. We are a careful. We truly are a careful acquirer of assets that we can add value to and make them better and generate higher value for the tenants, and therefore higher value in terms of NOI generation for ourselves and ultimately for the owners that we sell to. This is an example of an asset we bought two years ago. We are increasingly converting it into what we call Ready-to-Move-In offices. Perhaps you know this, but in Japan, moving costs are extraordinarily high. The tenant pays for it.
The tenant also has to take the asset and return it to its original condition. So exit costs are really, really high. So one of the unmet needs for tenants in Japan is to just make the office ready for them. You do all the fit for them. We are a very large, experienced real estate firm. Another reason. We do construction. We do engineering, structural engineering. So another issue is that we have both kind of capabilities in doing this and economies of scale that a small tenant will typically not have. Remember, we serve mostly SMEs.
So we can actually do this for tenants and command much, much higher rents, and the math works for them. It works fantastically well for them. So this is an example. When we bought the building, it had one floor that was empty, so we filled it with three Ready-to-Move-In offices. We've increased the rents. Rental income is up 1.8x- 2.1x. We're forecasting, in totality, 1.8x on the NOI, and it will be full. So this is going really well. We're looking for other opportunities in the area. Hongo is near Tokyo University, and so there's a bunch of startups there and a lot of new activity there, and a significant demand for this kind of office space, which we're providing. Hotel business profits are down 57% year-on-year. We expect to have no flow earnings in this segment.
So, do expect it to be down, and we will deliver on the expectation. Again, we have other segments as a portfolio business. We expect the full year forecast in the segment down 29%, and that's fine. We will still have record earnings as a totality because we are a totality with different segments and different exposures. RevPAR. I told you there's overwhelmingly a wind at our back. Look, hotels have been weak. We should all recognize that. We have RevPAR down 12%. That's two things. It is continuing effects of.
We're going to have the same store sales effect roll off on this. But as you know, China was coming in massive size to Japan, and then there's a diplomatic dispute between China and Japan, and Chinese travelers drop off. So what we're seeing a drop off in RevPAR from that, from Chinese inbound. We've also had a drop off in Osaka and Kyoto from the end of the Osaka World Expo. So RevPAR is down 12% in total, based on 20%, 30% drop off in Osaka and Kyoto.
RevPAR for Tokyo, Fukuoka, and others up about 5%. Despite the RevPAR decrease, total room revenue is up 16% because we have new hotel acquisitions and openings. As you know, we took some hotels offline to make them better, as we do, and brought them online. The full contribution from that is going to happen in the second half of the year. Owners business profit up 39% year-on-year. We actually expect it to double, so there will be relatively explosive earnings activity out of Owners in the second half. At the core of what Owners is we serve tenants and investors to drive growth. We call this a fabulous business model.
It is slightly different from other sustainable real estate activity, meaning that we contract with developers. We design assets. They build them to our spec. We buy them after they are built, so we do not take the development risk on this. We then lease them up really quickly. We now have this massive database on what tenant needs are and in what areas. It is a very high turnover business and very high returns and continues to grow well. Asset management business. BP business profit up 66% year-on-year. Look, we have talked about this before.
We are above what the full year forecast looks like. A big driver of the returns in this business is performance fees. We get performance fees only if we have gains on sale in assets in our listed REITs. We do not control the listed REITs. That is a different governance structure, has different shareholders. We are not about to start the year by saying, we forecasted we are going to make these returns on sales in the REITs because they are going to do this, because that is not something that we can actually speak to.
It results in a structurally, forgive me for this, but we have not figured out a better way of handling this, and if you have any ideas on it, we do not forecast in performance fees at the beginning of the year. Year- after- year, our REITs work their assets really hard. We are Ichigo. We have the same value add activity there. We end up generating these performance fees. What happens is we systematically outperform our asset management forecast because these numbers come in. Unsurprisingly, we have had a big return in the first half. We may well have some stuff in the second half.
Again, I cannot speak to that. That is coming in above forecasts. This effectively is going to happen every single year. We are trying to grow the asset management business. It has gotten harder because it has gotten harder in some of the growth areas. In general, real estate share prices operating company share prices are down, REIT share prices are down. We care a lot about generating accretive activity for our shareholders. We do not want to do new issuance on the REITs unless it serves their interests. It has gotten harder with rates going up to put out, for example, security tokens at levels that are attractive to investors.
So there is an element, as I told you, the 10%-20% that is a wind at our face with rising interest rates. This is a slightly different issue. The fact that real estate and REIT share prices are low. This is a little bit, you can toss this into the same 10%-20% drag wind at our face as opposed to wind at our back. We like the business a lot. It has fantastic returns on capital because there really is hardly no capital to speak of going into it. We will continue to see how we can innovate in this space to generate ongoing returns. Clean energy, down a little bit. We forecast it would be down because there was some maintenance, one-off maintenance activity.
We had a lightning strike. That is pretty unusual. Global warming is real. You should know that things like floods, of course, are pretty obvious to people. Lightning is also increasing across the world. That was interesting. We had it covered by insurance. We had mostly covered by insurance. This is a business that is basically on track. As expected, because it is a really stable business. We are looking at building out battery storage activity and green biomass. This is a business, again, we would like to grow. We completed JPY 5 billion of buyback.
Earlier this year, we announced a JPY 5 billion buyback today. We think the shares are extraordinarily cheap. Of course, it is our job to get the shares to a level higher than extraordinarily cheap, so we will continue to work on that. If the shares are cheap, we can deploy capital against them in a way that we think is accretive for shareholders. We think that is the case today by buying the shares in at the current share price, which closed today at JPY 386. Basically, eight times earnings trading below NAV.
When you put it in unrealized gains, we think shares are very, very attractive. We will have a second consecutive double digit dividend increase. As you know, we will run out of room at some point in time on buybacks because there are minimum requirements for the free float. We will therefore be shifting towards dividends when that happens, and you should continue to expect to see significant ongoing dividend increases. Global warming is real. We think it is responsible and, of course, in a powerful way, in generating high returns for our shareholders.
We believe our shareholders join us in recognizing that it is our corporate responsibility to do the right thing for the world, and we are doing so. We are climate positive. Our CO2 reduction activity is 11x of CO2 emissions. We have 100% renewable electricity across all Ichigo operations. We are a CDP A A list. There is only something less than 20 basis points of all companies in the world qualify for that. We are recognized as being best in class in our sustainability, and we know that is important to you. It is important to all of us also. Those were, as it were, my prepared remarks. I am now happy to take any questions or comments from anybody. Thank you so much for your time. I think it is Greg.
Hi. Can you hear me?
Yes. Thanks so much.
Yes, fine. Thank you for the presentation. I have a couple of questions. The first one is, as you mentioned, you guys bought three offices in the first half.
Yes.
The amount is a bit large. Should we understand that this is partially asset replacement for the Tradepia Odaiba building?
I don't know if I would describe it as asset replacement. But yeah, we think office is really interesting. Having said that, JPY 11.5 billion of that is the Sapporo building, which was development and different. So it really is. Wait a minute, I should turn to the page where we had this. Or can somebody take us to the asset acquisition page? So yeah, off the top of my head, it was about JPY 4 billion of office acquisitions. And quite honestly, Greg, we'd like to do more. We're finding office to be really, really compelling. There is very robust demand for offices. Corporate profits are high.
Corporations have continued to compete for talent by giving them better and bigger offices. And the economics of new development have been absolutely crippled. I've said this before, but people talk about Japan, it's like you can never raise rents, and it's because it's an open development market, which is true. But that was only half of the issue was that Japan is very pro-building. It's easy to get approvals to put up new developments of any sorts of real estate. But the issue historically has not been that somebody can put up an office next to you. It's that they can put it at the same price because there was no construction inflation as you put up your building 20 years ago, so you can never raise rents.
What's happening now is literally new offices are coming online, and they have to have rents 40% and 50% higher. The numbers don't work, so they're not coming on. The supply is being restricted and the ability to provide high quality, as I say, we improve offices, is a very, very powerful way to deliver value for tenants and therefore our shareholders. So office, we think, is the most powerful place to be. The good news is we bought two assets. The bad news was it was only JPY 4 billion worth. We'd like to do more. So yeah, we expect to sell Odaiba. We will sell it at very good levels. We'll have a process. It's a big asset. It's a very big asset.
So we'll have a process that puts some months into it in terms of getting the best price and having a robust competition for it. We will figure out a way to replace that Odaiba with office assets over time. But it's not so much as Odaiba office replacing as it is office is really attractive. There's money to be made, and we want to do more there. Does that make sense?
Yes. My second question, if I could, is on the target AUM.
Yeah.
Given the current situation, should I understand that this is more kind of an aspirational target at this stage? Because it is going to be hard to grow asset to JPY 400 billion in this second half, I guess.
I think that is right. Yes.
Okay. My last question is the buyback—
Yeah.
—as you mentioned, from your point of view, the current share price makes sense to do a buyback, but then you guys were already selling pretty close to the limit in terms of the free float versus TOPIX.
Yeah.
And of course, even outside of that, if you cancel shares and if you buy back and cancel shares, then your liquidity goes down. Which means from a large investor standpoint, it's kind of harder to buy the stock. How are you guys thinking about that as well?
You're on the right topic. There are some trade-offs here. But we think overwhelmingly it's the right choice to, if your shares are We think extraordinarily discounted to fundamental value to buy them in. You should know that probably this point, we have about JPY 8 billion worth of buybacks that we could do, before we run out of room, with the TSE free float. So we should all understand that we're going to be shifting towards dividends, and that's fine. So, yes. All the points you raised, completely agree with. Thank you so much for your extraordinary intelligence as always and forever, and that's what we have left on the buyback is everything we're going to shift to divs.
I'm sure, obviously, I'm sure you understand all this, Scott, but I guess one issue with a mid-cap like yours is that the free float itself can also lead to a discount. It's a bit chicken and egg. You're buying back shares because the share price is cheap, but then institutional investors will say, "Well, we can't buy the stock because there isn't enough liquidity," and so the discount doesn't contract. You see what I mean?
Yes. It's not as if we trade by appointment. We trade every single day. I think our— Yes, and we should be thoughtful about this. We think the buybacks are a good value. We're certainly not going to spit the shares out. Ultimately, we think our, we have an opportunity to grow a lot of value. We should demonstrate that, and the shares will go up as a result. There are enough kind of small and mid-cap also, institutional investors.
We have connections with literally tens of thousands of individuals. I'm comfortable that with the right outcomes, that we can move the shares higher and we clearly need to do something on that. It'll be interesting to see as we become a far higher dividend payer, how that impacts our kind of individual shareholders. My guess is they're going to like it a lot, and we'll find out together.
I guess one, I know you can't comment on that, but one suggestion would be if you have a decent, extraordinary gains as a result of the big asset sale in this second half—
Yeah.
—to maybe pay a special dividend as well.
Yeah, we are open to any and all ideas.
Okay, thank you.
Thanks. Will, thank you very much. We will take you off mute. Will, I think you are off mute.
Can you hear me?
We can.
Great, thanks. Could you explain to me why the security tokens are impacted by rising rates? I just didn't quite get that. You ran through it fairly quickly.
Yeah.
That's the first question.
The token product is, these are security tokens, so they are underlying real estate. The securities firms who put them together want to have the highest possible dividend. They did. As you know, for our company, and for our REITs, we generally hedge to have 50% or as high as 70%, 80% fixed rates. The securities firms didn't want that, so we did this with floating rates. What's happened is as rates have gone up, it's pushed down the dividend, and it's pushed it below where the securities firms want to have in terms of selling it as a yield product.
That's the answer. Rates have gone up, and there has been no protection from the rates going up. What's happening also is that rents are going up, and so in reality, if you're not totally focused on dividend yield, there's a capital gain opportunity, which is extraordinary. We actually liquidated our first security token. The yield that we marketed to the investors was an ongoing 4%. We ended up giving them double that, 8%, in terms of the annual return.
This is a market which is currently intermediated by securities firms, and so the math doesn't work for them. It's kind of going into a pause right now. We'll have to think together whether or not we restart it as something that Ichigo doing something totally different, or with securities firms, with the investors as not a pure yield play, but something that's yield plus capital gain. But for the moment, as I say, rising rates has impacted the dividend yield on these tokens, and it's below where the securities firms want to sell them. Did that make it clear?
Yes. Thank you.
From our perspective, it is not as if we do not care. This is the whole point of being. One of the things we developed over the last five years is diversified number of channels. If this channel goes slow, we do not have a problem. We have so many investors who want our assets. That is fine. It is a channel that is currently slowing for the reason I just described.
Got it. I guess somewhat similar question in terms of just cap rate trends. Assume we are underwriting higher income due to inflation, but how are cap rates moving? Are they moving higher, kind of in similar levels, so transaction values are flattish, or are transaction values generally increasing? Maybe you have to speak to different asset classes—
Yeah.
—maybe office, maybe hotels. Can you just give a general overview of how the cap rates are moving?
Yeah, it is interesting. Cap rates are really not moving.
Yeah.
I would say probably call it +0.1%. There has been some edge up. Although it depends on, there is a little bit of a flight towards quality, which is benefiting us, because we have assets, as you know, that we focus on prime locations. But cap rates really have not moved because the increase in interest rates has been offset by increased expectations of, that are real, of rents going up. Hotels are a slightly different world. Hotels also, interestingly enough, cap rates are relatively stable, which is, I guess people have a view that the Chinese are going to come back or that Japan is so fantastic that everyone who is coming to Japan from the U.S. and all other parts of the world telling their friends, and then they keep on coming.
There appears to be an embedded view in more classic real estate classes like office, for example, that rents are going up, which is correct. There appears also to be an embedded view, which is a little bit harder to speak to, but is an embedded view, that also hotel rates are going to be going up over time. Again, I describe cap rates as pretty much flattish.
Thanks. Okay, and then on hotels, business profits down very—
Yeah.
—significantly—
Yeah.
—but RevPARs, obviously this seems temporary on the China inbound view, but is it also an inflation cost impact—
Yes.
—so you're getting squeezed, basically?
Yeah.
What's the outlook next year? Is this going to mitigate, you're excited for profit recovery? Or just give us maybe a forward view.
Yeah, because we have two Knots that we've brought on this year that are going to contribute. Our Knot series is doing extraordinarily well, and we have more in the pipeline. So we continue to see this as a growth sector. But as you know, hotels are fantastic. They've been super profitable for us, but they're the most volatile.
So we restrict our exposure to hotels to about a quarter max. I think it's currently at 28%, which is fine. But yeah, we see growth in hotels that are somewhat more Ichigo specific because of the ongoing rollout of the Knot series. Again, just to describe what that is again, Japan has plenty of luxury hotels and plenty of budget hotels, but doesn't seem to have a lot that's that $100 a night that's really nice.
So that's what the Knot has focused on in a boutique hotel. If you're a global person who thinks boutique hotels, like Ace Hotel, that sort of thing, that's what our offer is like. Really good food, really good restaurants, good soft service, English speaking help, and all that sort of thing. People being able to tell you what the neighborhood is like and where you can go, all that sort of thing. So that's the offer. It's really successful and we're expanding it.
One last one, okay?
Absolutely. Go for it.
Battery storage.
Yeah.
My understanding is that first stage, this is adjacent to your own solar assets to improve—
Yeah.
—utilization. But then is there a future story, like data center, outside your own assets, developing this for other power sources, et c? Is there any story there?
Yes. We're looking really hard as to how we deploy against this. It's not only for us.
Okay. How have these implementations gone? This is a new technology for you—
Yeah.
—a new strategy. Have there been any bumps in the road or any—
No.
—how's it going generally?
We just have one up and running. It's just like solar, but even better. These are battery packs. It's not really operating. It's really simple. You understand your CapEx, your cost of power, all sort of thing. We've got one up and running and it's going fine.
Okay. Thanks.
Thank you. Okay. I think we're done. Thank you so much, everybody. It's an honor and a privilege to work for all of you. Take care. Have a good day.