Transition period

Dec 18, 2024

Summary

The merger lifted asset size to ¥576.4 billion and created a dual sponsor platform; the transitional period marked 16 consecutive periods of DPU growth. Forecast DPU rises to ¥2,406 in the 18th period and ¥2,478 in the 19th.

I am President Sakanoshita of Mitsui Fudosan Logistics REIT Management. Thank you for viewing the streaming video of Mitsui Fudosan Logistics Park Inc.'s results briefing for the 17th fiscal period, which ended October 2024. on August 5, 2024, MFLP-REIT announced the signing of a merger agreement with Advance Logistics Investment Corporation, hereafter ADL. Following resolutions at the respective shareholders' meetings, the merger took effect on November 1st. I will go into more detail later on the merger, its importance, and our growth strategy going forward, but we are confident that this merger will further elevate unitholder value. With regard to results of the 17th fiscal period, as a consequence of the merger with ADL, the current period is a transitional three-month period from August to October 2024. If we look at the results on a six-month basis, MFLP-REIT achieved growth in revenues and distributions for the 16th consecutive period. We are very grateful for the support of investors and the efforts of all involved parties. Thank you. Moving on to the results, I will start with a discussion of operational highlights using the investor presentation material for the 17th fiscal period. Please turn to page 3. The absolute DPU for the 17th fiscal period was ¥4,657. After adjusting for the shortened fiscal period as a result of the merger with ADL and the investment unit split, DPU for the period under review was ¥2,328. In the 17th period, in addition to the full-period contribution of the four MFLP properties acquired in the 16th fiscal period and continued stable operations, DPU grew 4.7% year-on-year on the increase in the FFO payout ratio and a ¥29 adjustment from a temporary distribution in excess of profits to cover merger-related expenses incurred. MFLP-REIT was able to achieve 16 consecutive fiscal periods of DPU growth since its listing. For the DPU forecast following the 17th fiscal period, we expect to achieve continued DPU growth. We project DPU for the 18th fiscal period to be ¥2,406, and the 19th fiscal period to be ¥2,478, reflecting the growth in the portfolio as a result of the merger with ADL, the acquisition of three properties in November in conjunction with the merger, and the leverage of negative goodwill related to the merger. NAV per unit at the end of the 17th fiscal period was ¥122,474. Our assumption for NAV per unit as of the end of the 18th fiscal period after the merger is ¥126,316, which represents a CAGR of 7.5% from the end of the first fiscal period. Going forward, we will continue to focus on achieving stable DPU growth and enhancing NAV. Next, I will discuss the merger with ADL. Please turn to page 7. First is an overview of the merger. The merger was an absorption-type merger with MFLP-REIT as the surviving corporation and ADL as the dissolving corporation. A merger agreement was signed on August 5th, with the merger taking effect from November 1st. We believe the merger of two dedicated logistics facilities REITs will result in the achievement of substantial growth in asset size and the realization of improved operational efficiency. In conjunction with this merger, there was also an absorption-type company split with MFLP-REIT's asset management company, Mitsui Fudosan Logistics REIT Management, absorbing the logistics J-REIT business from ADL's asset management company, Itochu REIT Management, and creating a dual sponsor structure consisting of Mitsui Fudosan and the Itochu Group. Next, we show the impact of the merger. Please turn to page 9. This slide shows the asset sizes of MFLP-REIT and ADL within the overall J-REIT market. Through the merger and new acquisitions, MFLP-REIT's asset size grew significantly to JPY 576.4 billion, achieving MFLP-REIT's stated medium-term asset size target of JPY 500 billion. As a result of a larger presence in the J-REIT market and a higher market cap, we expect liquidity to improve. Going forward, backed by strong support from the two sponsors and the supply of pipeline properties, we will pursue a growth strategy as a leading player in the logistics sector to achieve continuous external growth in the interest of enhancing unitholder value. Please turn to page 10. I will now discuss how we will leverage the negative goodwill resulting from the merger. In this merger, MFLP-REIT accepted ADL's assets and assumed its liabilities after marking them to market. The merger consideration, calculated based on MFLP-REIT's investment unit price, was lower than the difference between the assets accepted and liabilities assumed, effectively NAV at market value. This resulted in roughly JPY 26 billion in negative goodwill. The negative goodwill will be recognized as RTA, Reserve for Temporary Difference Adjustments, on a net basis within net assets to be utilized in managing the future stability of DPU. Next, I will cover MFLP-REIT's growth strategy. Please turn to page 13. In conjunction with the merger, sponsor support has been strengthened through the creation of a dual sponsor structure with top comprehensive developer, Mitsui Fudosan, and major trading house, Itochu Group. MFLP-REIT aims to maximize unitholder value by leveraging the strong sponsor support to achieve external growth, internal growth, and stable operations. It will benefit from Mitsui Fudosan's strengths, its ability to source land for development backed by its CRE strategy, its property development capability as a comprehensive developer, and its strong leasing capability, which leverages the group's network. MFLP-REIT will also benefit from the Itochu Group's strengths, its capabilities in real estate and logistics properties, as well as its abundant network of 100,000 corporate customers, reflecting its position as a major trading house. Please turn to page 15. I will now discuss MFLP-REIT's roadmap. With regard to the asset size roadmap at the top of the page, MFLP-REIT has achieved its medium-term asset size target of JPY 500 billion through the merger. The creation of a dual sponsor structure will enable not only continuous property acquisitions, but we will also consider expansion of the asset classes to be acquired, such as data centers and cold and chilled storage facilities, as well as expanding the regions we target for acquisitions. Next, on our financial strategy, the projected LTV for the 18th fiscal period following the merger is expected to fall to 39.9%, significantly boosting our acquisition capacity. While taking a flexible approach to procuring funds, reflecting the scale of assets to be acquired and conditions in the funding market, MFLP-REIT will continue to control LTV to lock in acquisition capacity. Next is DPU. Even after the merger, MFLP-REIT will continue to consider measures to strengthen unitholder returns, such as leveraging the negative goodwill from the merger to achieve stable DPU growth and share repurchases, as well as public offerings subject to market conditions. MFLP-REIT aims to further grow DPU by promoting medium to long-term internal growth on positive rent reversions backed by inflation. Finally, on market capitalization. Through the merger, we expect to see market capitalization grow and liquidity improve. Going forward, on the back of market cap growth, we aim to further enhance the liquidity of the investment units backed by inclusion in major indices, the support of ESG investors through managing assets with an emphasis on ESG, and continuous NAV growth backed by the expansion of unrealized gains. Next, I will talk about our internal growth strategy. I will start with an update of the portfolio's operational status. Please turn to page 16. The graph on the left shows the status of lease expiries with tenants. Lease signings in the 17th fiscal period, with the exception of one contract, has been completed. MFLP-REIT is making very solid progress on leasing signings for 18th fiscal period lease expiries. In addition, we have managed to secure the agreement of many tenants to higher rent levels in renewing their leases. Please look at the lower right. We are implementing a number of measures to achieve internal growth at times other than when a lease is expiring. We have incorporated a clause in our leases, which provides a mechanism for reviewing rent levels during a lease after a certain period, for instance, three years. The vast majority of our leases are already enabled for raising rents to reflect inflation. We are also planning to increase the number of leases with step-up clauses, which allow for automatic rent increases in the back half of a lease contract. By signing leases that are upside only, which include rent increases over the course of a contract, we will build a portfolio that responds to inflation going forward. We will also promote internal growth by leveraging green lease clauses. At MFLP Funabashi Nishiura, by adopting LED lighting in compliance with green lease clauses, we will not only make progress on conserving energy, but can also achieve internal growth by having the tenants share a portion of the savings achieved in electric power costs. Looking now at interest-bearing debt, please turn to page 17. As shown in the upper half of the page, as of the end of the 17th fiscal period, outstanding interest-bearing debt was ¥159.7 billion, LTV was 41.4%, average borrowing rate is 0.59%, and average debt term was 8.3 years. Outstanding interest-bearing debt is expected to rise to ¥225.1 billion at the end of the 18th fiscal period, owing to debt raised to acquire properties in conjunction with the merger with ADL. As a result, LTV is projected to drop to 39.9%. And acquisition capacity at an LTV of 50% is forecast to be ¥115 billion. MFLP-REIT continues to maintain a low LTV and sufficient leverage capacity amongst the J-REITs. Please turn to page 18. On the upper part of the page, we show the diversification of lease expiries and the diversification of maturities for interest-bearing debt below. Of MFLP-REIT's leases, roughly half will expire in less than 3 years. More than 70% will expire in less than 5 years. Lease expiries are particularly concentrated in the current and next fiscal periods. MFLP-REIT is positioned to capture opportunities to raise rents. In response to the macro backdrop and concerns that recent inflationary trends will continue, we will pursue higher rent levels in lease signings. We aim to achieve solid internal growth. With regard to the timing of interest-bearing debt coming due, maturities are diversified across the fiscal periods. The amount of planned refinancing in this and the next fiscal period is low, resulting in a limited impact from rising interest rates. Next, I will discuss our external growth strategy. Please turn to page 19. As a result of the merger, which took effect on November 1, and the acquisition of 3 properties, asset size has exceeded the medium-term asset size target of JPY 500 billion, rising to JPY 576.4 billion. With the creation of a dual sponsor structure as a result of the merger, the pipeline includes not only properties developed by Mitsui Fudosan, but also those developed by the Itochu Group. After the merger, properties with the right of first look have increased to 10 for total floor space of 1.02 million square meters. We will continue to make acquisitions from a robust sponsor pipeline, as well as opportunistic acquisitions of third-party properties, focusing on quality growth rather than just scale. In the current environment where the share price has been soft, we are being cautiously selective in acquiring properties, taking into consideration not only property yields and growth potential, but other factors such as implied cap rate and NAV multiple levels. Next, I will explain our new post-merger operational strategy. Please jump forward to page 24. Leveraging the scale of the portfolio and enhanced stability as a result of the merger, as well as the expanded pipeline, MFLP-REIT will proactively consider asset turnover with the aim of further enhancing portfolio stability and elevating profitability. As shown on the graph on the left side of the page, the unrealized gains on the portfolio have been increasing every year, backed by the rise in real estate appraisal values. As of the end of the 17th fiscal period, unrealized gains were an abundant JPY 87.4 billion. By being smart in timing sales of properties, we aim to strengthen unitholder returns through the use of the abundant unrealized gains. Also, depending upon the timing of asset turnover, there may be times when the NOI declines temporarily. In such cases, we will leverage the negative goodwill of roughly JPY 26 billion to stabilize DPU. In addition, as shown on the right, as a result of the dual sponsor structure, we expect greater opportunities to acquire new asset types developed by both sponsors. Specifically, we are assuming an increase in data centers on the development of technologies such as 5G and IoT, as well as R&D facilities, which nurture innovation by encouraging interactions between many research institutions and manufacturing plants. The rising penetration of food e-commerce and chilled deliveries is also expected to boost demand for cold and chilled storage facilities. Also, leveraging the enhanced stability of the portfolio, we will consider value enhancement or redevelopment of older properties and expanding the regions we target for investment, targeting highly profitable regional properties. This completes my presentation. In closing, as I stated at the outset, MFLP-REIT was able to achieve higher revenues and distributions in the 17th fiscal period. We were also able to successfully complete the merger with ADL on November 1. The merger has led to an improvement in our market presence, backed by the increase in asset size, the enhanced stability of the portfolio, and has broadened our choices in terms of the growth strategy going forward. I would like to once again express my gratitude to investors and all involved parties. Thank you. We will focus on the management of MFLP-REIT with the continued aim of maximizing unitholder interest, backed by the dual sponsor structure. Thank you.