Earnings Call: Q2 2027

Sep 14, 2026

Summary

27th-period DPU was ¥3,390, in line with forecast, while EPU exceeded forecast by ¥38. The rebuilding plan addresses cost and rate pressure through asset recycling, contract reviews, selective investment, and flexible financing.

Welcome to AEON REIT's financial results presentation for the 27th fiscal period ended July 31, 2026. The 6 months from February 1, 2026, to July 31, 2026. Without further ado, I will begin by commenting on the investment corporation's financial results and draw your attention to page 5. As we announced at the time of our previous financial results presentation, AEON REIT is committed to strengthening its platform for sustainable growth over 2 years up to the January 2028, 30th fiscal period. As a part of this commitment, we are reviewing our earnings structure. Backed by stable rental income centered on long-term fixed rent master lease agreements, AEON REIT has achieved steady distribution growth through the acquisition of properties and use of cash on hand. Meanwhile, inflation, rising interest rates, and other current changes in our external environment, including upswings in construction costs and interest expenses, are impacting the investment corporation's earnings. As such, we are prioritizing investments based on the characteristics of each property, undertaking the disposition and replacement of properties, reviewing the structure of contracts, and adopting a flexible approach toward financing during our rebuilding period. Through these initiatives, we will work to strengthen our earning structure and financial base, thereby transitioning to a sustainable growth phase. Directing your attention to page 6, I would like to comment on changes in the business environment from the time of the investment corporation's IPO to the present. Revisiting the investment corporation's operating assumptions at the time of its IPO, AEON REIT's earning structure was underpinned by stable rental income generated through long-term fixed rent master lease agreements, and efforts to contain financing costs against the backdrop of a low interest rate environment. However, changes in commodity prices and the shift to an inflationary environment are placing upward pressure on both operating and repair expenses, as well as other costs. At the same time, the gradual increase in interest rates is also driving up financing costs. Turning to the property acquisition environment, rising property prices, coupled with intense competition, are making it increasingly difficult to secure investment returns. From an asset management perspective, the importance of repairs and maintenance is growing due to the surge in construction costs and aging of properties. In light of these changes in the environment, we are reviewing our earnings structure while continuing to implement measures tailored to the acquisition and management environments. Owing to inflation and the upswing in interest rates, the investment and financing environments in which the investment corporation operates are changing, resulting in increases in investment amounts and financing costs. As far as the amount of investment is concerned, we continue to confront a variety of issues, including higher construction costs and increasing repair expenses per property as buildings age. In response, we are prioritizing investments according to the characteristics of each property, while engaging in the disposition and replacement of properties and reviewing the structure of contracts. From an interest rate perspective, we are experiencing higher interest expenses and greater exposure to high interest rates when refinancing. Looking ahead, we will look flexibly at procuring funds through short-term variable rate financing while reducing our interest burden by repaying borrowings. Taking into account such factors as our investment unit price and financial position, we will consider buyback of treasury investment units should this option help reduce the cost of capital. Taking a closer look at each of these measures, I ask that you turn to page 8. Given their limited nature, we ensure the optimal allocation of funds by organizing priorities based on the effectiveness of each investment and tenants' capacity to absorb additional costs. In specific terms, we evaluate properties based on master lessee's rent to operating revenue, as well as cost burden to operating profit ratios. For properties where effective investment returns are anticipated, we prioritize revitalization investment. Conversely, for properties where we believe proactive additional investment should be curtailed, we will consider the options of disposal and replacement in light of such factors as growth potential and capital efficiency. Meanwhile, we will continue to undertake construction work as required to ensure the safety, legal compliance, and business continuity of all properties. Drawing your attention to page 9, I would like to touch on the disposal and replacement of properties. The decision to dispose of or replace a property is based on more than just short-term earnings. Rather, each initiative is geared toward enhancing the quality of the portfolio as a whole, as well as capital efficiency. When selecting candidate properties, we comprehensively assess a variety of factors, including each property's location and competitiveness, profitability and potential, asset quality and operational efficiency, as well as consistency with our portfolio strategy and the market environment. With this in mind, we will identify potential candidates for disposal by focusing on properties where a decline in earnings and cash flow is anticipated, owing to future increases in repairs and capital expenditures, where there is limited scope for internal growth, and where the potential exists to realize significant unrealized gains. Rather than an across-the-board approach, we will evaluate each asset on its own merits and decide whether to hold and invest in its growth or replace and reallocate the funds elsewhere. In 2025, we undertook the replacement of assets, disposed of AEON MALL Yamagata Minami, and acquiring five land leasehold properties. By recycling our portfolio into growth investments and unlocking capital through asset sales, we successfully boosted EPU and DPU while paying down debt. Moving forward, we will continue to pursue the replacement of assets that help enhance the quality of the portfolio and capital efficiency. Next, I will comment on the status of efforts to review the structure of contracts and ask that you turn to page 10. Under our current rent structure, we primarily charge a fixed rent with fluctuating costs like property and city planning taxes passed on as variable rent. Although this structure ensures a stable revenue stream, it can limit the capacity to absorb higher costs during periods of inflation. While this allows us to maintain stable earnings through fixed rents, a defining feature of the investment corporation, we are also exploring a rent structure that takes into account variable factors, including performance and costs. In doing so, we are working to build an earning structure that is resilient to fluctuating costs. We are also reviewing the scope of variable factors, calculation methods, and extent of application to ensure they align with the characteristics of the property, as well as contract terms and conditions. Here on page 11, I would like to elaborate on the investment corporation's financial strategy. AEON REIT places a high priority on stabilizing distributions and has long worked diligently to extend debt maturities and increase the proportion of fixed-rate debt. As of the end of the 27th fiscal period, the average debt maturity stood at 7.4 years, with both the fixed interest rate ratio and long-term debt ratio coming in at 100%. Even in an environment of rising market interest rates, positive steps have been taken to contain the increase in funding costs to a limited level on the back of a financial policy centered on long-term fixed-rate financing. Moving forward, we will continue to maintain a stable financial base while taking into consideration interest rate trends and diversifying debt maturities. Turning to the graph at the left of page 12, AEON REIT's fixed rate debt ratio stood at 100% as of the end of the 27th fiscal period, exceeding the J-REIT average of 79.2%. Building on this high fixed rate debt ratio, we will consider the selective use of floating rate borrowings, taking into account future interest rate trends, financing terms and conditions, and the application of funds. While the shift to floating rate borrowing is expected to reduce financing costs, it may also impact the investment corporation's DPU in the event interest rates rise. The table at the right of the page estimates the impact on DPU based on various combinations of changes in interest rates and the fixed interest rate ratio, assuming a refinancing amount of JPY 30 billion. By flexibly procuring funds while leveraging our existing high fixed interest rate ratio, we will manage the risks associated with the increase in interest rates to a certain extent and work to maintain a balance between funding costs and financial stability. Moving next to page 13, we provide a snapshot of the investment corporation's free cash flow, representing AEON REIT's available financial capacity after factoring in depreciation, capital expenditures, and distributions in excess of earnings. As illustrated on this page, AEON REIT will focus on enhancing unitholder value when utilizing its free cash flow while taking into consideration such factors as investment opportunities, its financial condition, and capital efficiency. Free cash flow will broadly be used for three purposes. To enhance the investment corporation's earning capacity through various measures, including the acquisition of properties. To stabilize the investment corporation's financial base through repayment of borrowings and other means. To enhance capital efficiency through the buyback of treasury investment units, et cetera. While continuing to undertake each of these initiatives, AEON REIT will flexibly utilize its free cash flow while maintaining a balance between growth investments, financial soundness, and capital efficiency. This concludes our presentation of the investment corporation's strategic policies during this rebuilding period. Directing you to page 14, I would now like to elaborate on AEON REIT's financial results for the 27th fiscal period. In the fiscal period under review, operating revenues totaled JPY 21,438,000,000. Ordinary income, JPY 6,061,000,000. Net income, JPY 5,968,000,000. On this basis, DPU came in at JPY 3,390, in line with the initial forecast. Meanwhile, AEON REIT's EPU was JPY 2,839, up JPY 38 compared with the initial forecast of JPY 2,801. Turning to page 15, I will comment on the difference between the investment corporation's actual and forecast DPU. First, rent revenue, et cetera, had a positive impact on DPU of JPY 63, owing to such factors as insurance claims received and currency gains. Other factors that positively impacted DPU include a JPY 3 upswing attributable to the gain from disposal of properties following the partial sale of Daiei-Ibaraki Process Center. From an operating expense perspective, the impact on DPU was JPY 13 higher than expected. This was largely due to decreases in repair and maintenance expenses, as well as depreciation compared with plans. Turning to extraordinary income and losses, DPU was positively impacted JPY 7 owing to insurance claims received following the earthquake that occurred during the period. Conversely, DPU was negatively impacted JPY 50 due to the damages incurred. Taking into account each of the aforementioned, net income per unit was JPY 2,839 higher than the initial forecast. Next, I would like to comment on distribution in excess of earnings. Turning to that portion of AEON REIT's portfolio that is comprised of fixed term leasehold properties built for business purposes. The distribution in excess of earnings attributable to the allowance for temporary difference adjustment came to JPY 119. This mainly reflected a discrepancy in tax and accounting profit due to leasehold amortization, et cetera, and a discrepancy in tax and accounting profit from the overseas treatment of SPCs under the so-called controlled foreign company or CFC tax system. Of the other distribution in excess of earnings totaling JPY 432, JPY 43 relates to damages incurred as a result of the earthquake, and JPY 389 an allowance for the increase in repair costs. Based on these factors, AEON REIT's DPU for the 27th fiscal period came in at JPY 3,390, in line with the forecast. Turning to the next page, I would like to comment on earnings forecasts for the 28th and 29th fiscal periods. Looking first at the 28th fiscal period, operating revenues are projected to climb JPY 45 million compared with the previous forecast, owing to increases in rent revenue and dividends received from SPCs. Increases in repair and maintenance expenses, as well as other expenses related to the rent business, are expected to exceed decreases in depreciation and insurance expenses. As a result, operating expenses are anticipated to expand JPY 29 million compared with the previous forecast. Taking into account the increase in interest income, ordinary income and net income are projected to climb JPY 43 million compared with previous forecasts. Based on the aforementioned, AEON REIT's forecast EPU and DPU for the 28th fiscal period are expected to come in at JPY 2,905 and JPY 3,180 respectively, both up JPY 20 compared with previous forecasts. Turning next to the 29th fiscal period, operating revenues are expected to increase JPY 12 million compared with the previous fiscal period, owing to such factors as higher dividends received from overseas SPCs. Meanwhile, both repair and maintenance expenses as well as depreciation are anticipated to climb. As a result, operating income is estimated to decline JPY 153 million compared with the previous fiscal period. In addition, owing to an increase in borrowing related expenses, both ordinary income and net income are forecast to decline JPY 274 million compared with the previous fiscal period. Accounting for these factors, AEON REIT's forecast EPU and DPU for the 29th fiscal period are expected to come in at JPY 2,775 and JPY 3,050 respectively, both down JPY 130 compared with the 28th fiscal period. Looking at a breakdown of DPU, plans are in place to undertake a distribution in excess of earnings of JPY 237 per unit for each fiscal period. The primary factor behind the forecast decrease in DPU in the 29th fiscal period is the anticipated increase in construction costs, which is in turn attributable to efforts aimed at maintaining the functionality as well as safe operations of each property, which we believe will help strengthen the investment corporation's revenue base over the medium to long term. Touching briefly on topics for the fiscal period under review, I ask that you turn to page 17. First, I would like to comment on the partial transfer of a property. In the fiscal period under review, AEON REIT transferred the main building portion of the Daiei-Ibaraki Process Center. This initiative was made after AEON Food Supply, which was exploring potential sites for a new process center in the Kansai region as part of the AEON Group's efforts to reform its supply chain, expressed its intention to acquire the property for redevelopment, taking into account its strategic location, age, and current operating status. With a transfer price of JPY 103 million, the gain on transfer came in at JPY 6 million. This initiative was also made to avoid the risk of increased future large-scale repair and capital expenditures, as well as a decline in profitability as the building ages. Moreover, in retaining ownership of the land, AEON REIT will continue to secure land rent income through its land rent contract. As such, the investment corporation will maintain stable earnings by offsetting the decline in rental income resulting from the partial sale of the building with this land rent income. Meanwhile, containing future operating costs and reducing taxes and public charges have helped improve NCF, boosting the property's overall appraised value by JPY 290 million from JPY 8 billion and JPY 10 million to JPY 8 billion, JPY 300 million following the transfer. As such, this initiative avoids future increases in costs and enhances the property's value without compromising profitability. Moving on to page 18, I will comment on the investment corporation's internal growth. AEON REIT secured an increase in rent at 11 properties in the fiscal period under review. As one example, I would like to touch on the revitalization investment undertaken at AEON MALL Morioka. By developing one of the city's largest event spaces and replacing the carpet in the common area on the second floor with PVC tiles made from environmentally friendly materials AEON REIT has taken positive steps to improve comfort and visibility. Moving forward, the investment corporation will continue to pursue internal growth in an effort to enhance the competitiveness of its properties and improve their functionality. Here on page 19, we provide details of the renewal of certain overseas property lease agreements. Overseas properties are managed on a net lease basis. With a fixed term of 10 years, rent revisions are linked to the CPI every three years. Repair and other expenses are borne by the lessee. For AEON Taman Universiti Shopping Center, the two-year contract term expired on June 24, 2026, and was successfully renewed for an additional eight years. Acquired in June 2014, the rent on this property has increased 20% over the past 12 years. Since acquiring AEON Mall Seremban 2 in September 2016, the rent has increased by 17% over the past 10 years. Currently, AEON CO. (M) BHD. is constructing a new building across the street from AEON Mall Seremban 2, which the investment corporation owns. On completion, the two buildings will be connected by a bridge, which we expect will enhance the convenience of the facility as a whole and increase the property's value. As previously announced in an August press release, the current lease for the property expires in September 2026. Plans are in place to renew the agreement for a further five years. Turning to page 20, I would like to elaborate on the investment corporation's sustainability initiatives. AEON REIT is committed to enhancing the value of its assets over the medium to long term and strengthening its revenue base by reducing its environmental impact. As outlined at the left of the page, for example, steps have been taken to install inverter control panels at AEON Mall Kagoshima Bay. On an investment of JPY 61 million, the investment corporation has successfully secured an increase in annual rent of approximately JPY 8 million for a return on investment of 14.4%. This initiative is based on a benefit-sharing model. The installation of the inverter control panels that help reduce energy consumption, thereby lowering operational costs for the master lessee. At the right of the page, we provide details of MSCI ESG ratings and DBJ Green Building certified properties. As you can see, AEON REIT's MSCI ESG rating was upgraded from A to double A in 2026, outperforming the midterm target announced in September 2022. At the same time, successful steps were taken to recertify six properties under the DBJ Green Building Certification System in the 27th fiscal period. Of this total, AEON MALL Kahoku, AEON MALL Kasai Hojo, and AEON MALL Miyakonojo Ekimae saw their ratings improve by one rank. Moving forward, we will continue to undertake sustainability initiatives. Please turn to page 21. In closing, I would like to touch briefly on portfolio KPIs as of the end of the 27th fiscal period. AEON REIT's portfolio currently consists of 53 properties with a total value of JPY 480.5 billion, a portfolio NOI yield of 5.6%, and an NOI yield after depreciation of 3.4%. While total unrealized gains amount to JPY 97.5 billion, the investment corporation's NAV per unit comes in at JPY 158,772. AEON REIT's LTV, based on total assets including deposits, and LTV on a market value basis, are 45.1% and 37.1% respectively. Looking ahead, the investment corporation will continue to strengthen its platform for sustainable growth and enhance unitholder value over the medium to long term while maintaining a balance between profitability, financial soundness, and asset value. This then concludes the presentation of AEON REIT's financial results for the 27th fiscal period. I thank you for your interest and attention.