Earnings Call: Q4 2024

Mar 14, 2024

Summary

15th-period revenue, profit, and DPU rose for the 14th consecutive period. Five acquisitions will expand the portfolio to JPY 399.7 billion, with DPU projected at JPY 9,214 and JPY 9,313 for the next two periods.

I am CEO Sakanoshita of Mitsui Fudosan Logistics REIT Management. Thank you for viewing the streaming video of the results briefing for the 15th fiscal period ended January 2024 for Mitsui Fudosan Logistics Park Inc. Before presenting the earnings result, I would like to extend our deepest condolences and sympathies to the victims of the Noto Peninsula earthquake, which struck on January 1, 2024. We pray for the earliest possible recovery and reconstruction of the affected area. Moving on to the 15th fiscal period results, we are pleased to report that MFLP-REIT has achieved the 14th consecutive period of higher revenues, profits, and DPU. I would like to take this opportunity to thank investors for their support and all those involved for their hard work. Let's get started. I will use the investor presentation material for the 15th fiscal period to explain the operating highlights. Please turn to page 4. I will start with an overview of the fiscal period under review, the 15th. Operating revenue was JPY 11.8 billion, ordinary income and net profit were both JPY 4.4 billion, and DPU was JPY 8,898. The year-on-year growth in DPU relative to the 13th fiscal period was 5.9%. With regard to the 16th and 17th fiscal periods, MFLP-REIT projects DPU of JPY 9,214 and JPY 9,313, respectively. Consequently, the projected annual average growth rate for DPU from the first to the 17th fiscal period is 7.6%. The key takeaways for the four operational highlight sections of external growth, internal growth, ESG initiatives, and financial strategy are as shown on the lower part of the page. On external growth, we conducted a public offering in July 2023, acquiring a total of five properties from our sponsor, Mitsui Fudosan, two MFLP properties in August 2023, and three MFLP properties in February 2024. In addition, this March, we will make the additional acquisition from IHI Corporation of the remaining 50% co-ownership stake in MFLP Tomei Ayase, which we had acquired in August 2023. As a result, MFLP-REIT's asset size will grow to 30 properties for a value of JPY 399.7 billion. We believe this will not only expand the scale of the portfolio, but enhance its quality by contributing to further stability. In addition, the occupancy rate for our portfolio properties has generally trended around 100%. We are making very good progress on upcoming lease expiries and continuing our solid progress on internal growth. On ESG, we received a five-star rating from GRESB for the second consecutive year and achieved a 100% green building certification ratio for logistics facilities. On financial strategy, MFLP-REIT's forecast for the 16th fiscal period LTV is 40.8%, and projected acquisition capacity at a 50% LTV is JPY 70 billion. We are also making progress on measures to control funding rates in the face of rising near-term interest rates. MFLP-REIT will continue to focus on continuously improving unitholder value over time. I will now go into more detail on the individual sections. Please turn to page 5. I will start with external growth. MFLP-REIT conducted a public offering in July 2023, acquiring two properties in August 2023, MFLP Tomei Ayase and MFLP Tokorozawa for JPY 13.7 billion. In February 2024, we acquired three properties, MFLP Hiratsuka III, MFLP Shinkiba I, and SG Realty MFLP Fukuoka Kasuya for JPY 17.3 billion. In addition to this, in March 2024, we plan to additionally acquire the remaining 50% co-ownership stake for MFLP Tomei Ayase from IHI Corporation for JPY 9.9 billion. The total acquisition cost for the five properties is anticipated to be JPY 41 billion. MFLP Tomei Ayase is a logistics facility that was developed jointly with IHI Corporation as a part of Mitsui Fudosan's CRE strategy. In addition to the 50% acquired from Mitsui Fudosan in August 2023, MFLP-REIT chose to acquire the remaining 50% stake in response to IHI's intention to sell. We rate this property highly for its superior location and quality as well as its rarity value. In addition, on top of the positive boost to DPU, with MFLP-REIT's ownership increasing to 100% on the unwinding of the co-ownership relationship, the valuation on the portion already acquired from Mitsui Fudosan rose, contributing to a higher NAV, resulting in a doubly positive impact on unitholder value from external growth. Through the acquisition of these five properties, MFLP-REIT's asset size will increase to just under JPY 400 billion at JPY 399.7 billion. We will continue to tap into the abundant sponsor pipeline, as well as leveraging opportunities to buy from third parties in our aim to achieve our medium-term asset size target of JPY 500 billion, while also taking the market environment into consideration. MFLP-REIT will continue to focus on growth accompanied by enhanced quality, not just expansion of scale. Please turn to page 6. The overview of the portfolio after the five new acquisitions is shown on the right-hand side of the page. With the acquisition of five properties, MFLP-REIT's portfolio will grow to 30 properties with an asset size of JPY 399.7 billion. The average adjusted forecast NOI yield for the portfolio is 4.7%, with the NOI yield after depreciation at 3.1%. The average appraisal NOI yield will be 4%. MFLP-REIT expects to maintain yield levels similar to pre-acquisition levels. However, the average building age will decline from 7.1 years to 6.6 years, and the ratio of Green Building certification for logistics facilities will rise to 100%. MFLP-REIT's portfolio, consisting of young properties with superior environmental specifications, has been further strengthened by the acquisitions. The top five property ratio will decline from 37.8% to 34.7%, and the top five tenant ratio will also drop from 30% to 27.4%, reflecting improved diversification. We believe the portfolio stability has been significantly enhanced. Next, I will discuss prospects for external growth. Please turn to page 7. As shown in the upper part of the page, Mitsui Fudosan continues to expand its logistics facilities development business. Its cumulative track record has grown to 64 developed and operational properties for a total investment of JPY 850 billion or more. Mitsui Fudosan has announced it expects total cumulative investments to hit JPY 1 trillion during the fiscal year ending March 2024. Backed by the continued expansion of the logistics facilities development business at our strategic partner, Mitsui Fudosan, we believe MFLP-REIT can continue to achieve steady external growth over time by continuing to acquire high-quality properties over the medium to long term. Even after the acquisition of five new properties, MFLP-REIT has an abundant pipeline with right of first look properties at seven properties for a floor area of 920,000 sq m. In addition, leasing is proceeding smoothly, driving an increase in stabilized properties. As well, similar to the acquisition of the co-ownership stake at MFLP Tomei Ayase from IHI Corporation, we will continue to be flexible in leveraging opportunities to buy from third parties. MFLP-REIT aims to achieve steady progress in external growth toward its medium-term asset size target of JPY 500 billion, making acquisitions in a timely manner, acquiring properties from both the abundant sponsor pipeline, as well as taking advantage of third-party opportunities. MFLP-REIT will also maintain its focus on quality, location, and balance to build a highly stable portfolio in its aim to achieve high-quality growth. Let's move on to internal growth. Please turn to page 8 for an update on portfolio operating conditions. On the left, the graphs show the status of lease signings. As shown in the lower graph, we have completed lease signings for the 15th fiscal period and are making extremely good progress on expiries in the 16th fiscal period. Many tenants have also agreed to higher rents in renewing their leases. Please look at the upper right side of the page. This pie chart shows the distribution of remaining lease periods to expiry. Of the overall portfolio for MFLP-REIT, roughly half the leases will be up for renewal in less than three years. More than 70% of leases will be up for renewal in less than five years. In response to concerns about the macro environment and continued inflationary pressures, we aim to achieve steady internal growth by continuing to lock in positive rent reversions at renewal. Please look at the lower right. In order to achieve internal growth, even during lease periods, we are implementing a number of measures. MFLP-REIT's leases are now being enabled for rent revisions in response to inflation during the course of a lease, with the ability to renegotiate rent levels at specified intervals, such as every three years. MFLP-REIT continues to roll out this clause in its leases. The ratio of leases which incorporate this renegotiation clause is roughly 80%. MFLP-REIT is also promoting the adoption of a green lease clause. Incorporating a green lease clause in the lease will lead not only to progress in energy conservation through joint efforts to switch over to LED lighting, but can contribute to internal growth if MFLP-REIT is able to share in the reduction in electricity costs by reflecting part of the savings as secondary rent. Next, I will discuss current market conditions for logistics facilities and leasing. Please turn to page 9. The three graphs at the top of the page show leasing market conditions for Greater Tokyo, Greater Osaka, and Greater Nagoya areas as of the end of December 2023. On the back of a significant increase in supply, the Greater Tokyo vacancy rate, including newly completed properties, is rising, but the vacancy rate for properties that have been in operation for 12 months or more remains low. Supply for the Greater Tokyo area is expected to decline sharply in 2024 and 2025. We expect supply-demand to improve. For the Greater Osaka area as well, increased supply has led to higher vacancy rates, including newly completed properties, but the vacancy rate for existing properties remains extremely low. For Greater Nagoya, new supply levels were high in 2022 and 2023, pushing up vacancy rates, including newly completed properties. At the same time, demand has been firm. This is reflected in the stable vacancy rate trend for existing properties. Near-term, we believe that new developments of logistics facilities have become increasingly difficult on the back of surging costs for construction materials and labor, in addition to higher land costs. That said, demand remains very strong for advanced logistics facilities. We believe leasing market trends will remain firm. Please see the lower left. This pie chart shows an analysis of the stock of domestic logistics facilities. Leading-edge logistics facilities account for only 6.9% of total domestic logistics facilities. Given the limited stock of advanced facilities, we believe potential appetite to move out of old, cramped facilities that cannot accommodate the latest equipment remains strong. In addition, tenant needs for e-commerce also remains strong. As shown in the graph on the lower right, Japan's e-commerce penetration ratio still has significant room to grow compared to global or U.S. e-commerce penetration. While there may be some sub-markets that may be temporarily impacted by increased supply, we believe the overall supply-demand balance will remain favorable. Next, I will discuss our ESG initiatives. Please turn to page 10. MFLP-REIT and the asset management company consider ESG initiatives to be amongst their most important management issues and are focused on further strengthening and promoting these initiatives. Please look at the upper left. In October 2023, MFLP-REIT received GRESB's highest five-star rating for the second consecutive year. In addition, it received an A-level rating for the third consecutive year, the highest rating for disclosures. Please look at the lower left. These are the results from a customer satisfaction survey conducted by Mitsui Fudosan last year targeting MFLP and MFIP workers and truck drivers. In the survey of workers, more than 80% indicated they were either satisfied or very satisfied. The results of this survey reflect the extremely high level of customer satisfaction with both the well-thought-out tangible elements, as well as the level of intangible services at facilities developed and operated by Mitsui Fudosan, including properties owned by MFLP-REIT. The survey of truck drivers revealed that drivers feel that they are rushed for time and constantly worrying about entry times, often scrambling to eat or use the facilities. MFLP-REIT will continue to collaborate with Mitsui Fudosan to address the 2024 problem by supporting improvements to the working environment for truck drivers through a combination of measures using digital tools and a wide range of initiatives. Please look at the right side of the page. MFLP-REIT is making steady progress on environmental KPIs. In particular, in the fiscal period under review, as a result of improvements made to existing properties, we were able to raise the ratio of Green Building certifications for logistics facilities to 100%. Going forward, we will continue to strengthen and promote ESG. We will proactively leverage external evaluations to better communicate the progress MFLP-REIT is making on its ESG initiatives. Please turn to page 11 for the financial strategy. As shown in the upper left, outstanding interest-bearing debt as of the end of the 15th fiscal period was JPY 131.3 billion. LTV was 36.4%. The average interest rate was 0.48%, and average time to maturity was 8.3 years. The outstanding balance of interest-bearing debt is projected to be JPY 157.2 billion as of the end of the 16th fiscal period on the back of new borrowings related to new acquisitions. As a result, LTV as of the end of the 16th fiscal period is projected to be 40.8%, and acquisition capacity, assuming a 50% LTV as of the end of the 16th fiscal period, is forecast to be JPY 70 billion. MFLP-REIT continues to maintain a low LTV and solid leverage capacity amongst J-REITs. Please look at the lower half of the page. This covers the funding situation in response to the near-term rise in interest rates. Generally, each year, MFLP-REIT has borrowed funds to acquire new properties in 2022, 2023, and 2024. While responding flexibly to rising base rates for borrowings, which are effectively market rates, MFLP-REIT has been proactively moving to control its interest rate burden by shortening borrowing maturities, shifting to variable rate debt, and leveraging the tightening of spreads through the use of sustainability-linked loans. Finally, I will explain DPU growth and the financial results. Please turn to page 12. DPU for the 15th fiscal period was JPY 8,898. As a result of the impact of the acquisition of two MFLPs in August 2023, continued stable operations, and the raising of the FFO payout ratio to 72%, 15th fiscal period DPU rose 5.9% year-on-year, achieving 14 consecutive fiscal periods of DPU growth since the time of its listing. As a result of the three MFLPs acquired in February 2024, the additional acquisition of the stake in MFLP Tomei Ayase, as well as assuming a rise in the FFO payout ratio to 73%, 16th fiscal period DPU is forecast to be JPY 9,214. In addition to the full-period contribution from the additional acquisition of the stake in MFLP Tomei Ayase, assuming the FFO payout ratio rises to 74%, 17th fiscal period DPU is projected to be JPY 9,313. As a consequence, we aim to achieve year-on-year annual DPU growth of around 5% for the 16th and 17th fiscal periods, similar to what we achieved in the 15th fiscal period. Note that we show the per unit value of FFO below the DPU bars in the graph. The FFO per unit for the 16th and 17th fiscal periods, after adjusting for the increase in the number of investment units on the back of the public offering, is the same level as the FFO per unit for the 14th fiscal period before the sixth follow-on offering. While the effect of the increase in the FFO payout ratio has a significant impact on DPU growth for MFLP-REIT from the 15th fiscal period onward, the fact that the per unit FFO remains unchanged reflects a strong base as a result of the impact of stable operations of existing properties and new acquisitions, i.e. a stable portfolio and appropriate cash management. The NAV as of the end of the 15th fiscal period was JPY 481,892. NAV per unit after the acquisition of five new properties is projected to be JPY 482,747, for an average annual growth rate of 8.3% from the end of the first fiscal period. Going forward, we aim for a stable unit price and improvements to NAV. Next, I will cover the 15th fiscal period results. Please turn to page 13. MFLP-REIT was able to achieve growth in revenue, profit, and distributions in the 15th fiscal period. Actual 15th fiscal period operating revenue was JPY 11.845 billion, up JPY 366 million from the 14th fiscal period. On the right, we show the main breakdown of differences. In addition to revenue growth as a result of properties acquired in the 15th fiscal period, there were changes in utilities charges and seasonal changes in rental revenue for solar power generation facilities. In contrast, with regard to operating expenses, rental expenses increased JPY 72 million to JPY 274 million, and depreciation increased JPY 123 million to JPY 3.108 billion on increased expenses related to newly acquired properties, changes in utilities charges, increases in asset management fees, and others. Operating income grew JPY 134 million to JPY 4.738 billion. Under non-operating income and expenses, income increased JPY 31 million while expenses grew JPY 20 million as a result of an increase in issuance costs. This resulted in a net increase of JPY 11 million over the 14th fiscal period, for net profits of JPY 4.405 billion, up JPY 145 million. DPU exceeded the September forecast by JPY 117 to JPY 8,898, up JPY 94 from the 14th fiscal period. The breakdown of DPU is JPY 7,247 in EPU and JPY 1,651 in distributions in excess of profit. Please turn to page 14 for the earnings forecast for the 16th and 17th fiscal periods. Operating revenues for the 16th fiscal period are projected to rise JPY 574 million to JPY 12.419 billion, owing to changes in utilities charges and seasonal factors impacting solar power generation facilities' rents, on top of an increase in revenues resulting from the full-period contribution of properties acquired in the 15th fiscal period. However, rental expenses are projected to increase JPY 181 million to JPY 2.922 billion, and depreciation is projected to grow JPY 214 million to JPY 3.323 billion on the rise in expenses from properties acquired during the 16th fiscal period. The expensing of fixed asset and city planning taxes for properties acquired in the 14th and 15th fiscal periods. An increase in repair costs. Changes in utilities charges, and an increase in asset management fees. Operating income is expected to increase JPY 112 million to JPY 4.851 billion. In the absence of other non-operating gains posted in the 15th fiscal period and an expected increase in interest paid on the back of a rise in borrowings, non-operating income and expenses is expected to be a negative JPY 167 million. Net profit is projected to decline JPY 55 million to JPY 4.35 billion. Assuming a higher FFO payout ratio of 73%, DPU is projected to be JPY 9,214, which breaks down into JPY 7,156 in EPU and JPY 2,058 in distributions in excess of profit. Next, for the 17th fiscal period, operating revenues are expected to increase by JPY 73 million to JPY 12.493 billion as a result of an increase in revenues from full-period contributions from properties acquired in the 16th fiscal period, changes in utilities charges, seasonal factors impacting solar power generation facilities rents, and conservative assumptions for the impact of lease renewals. However, rental expenses are projected to increase by JPY 87 million to JPY 3.01 billion, and depreciation is forecast to rise JPY 34 million to JPY 3.357 billion on a decline in repair costs, changes in utilities charges, and an increase in outsourcing expenses. We forecast operating income to decline JPY 58 million to JPY 4.793 billion. Non-operating income and expenses is expected to increase JPY 2 million from the 16th fiscal period forecast. Net profit is projected to fall JPY 56 million to JPY 4.294 billion. Based on an increase in the assumed FFO payout ratio to 74%, DPU is projected to be JPY 9,313, which breaks down into JPY 7,064 in EPU and JPY 2,249 in distributions in excess of profits. Finally, we conducted the sixth follow-on offering in July 2023 and were able to acquire five new properties in the 15th and 16th fiscal periods as planned. We attribute MFLP-REIT's success in achieving steady growth in spite of the rapidly changing market to the support of investors and other involved parties, for which we are very grateful. Thank you so much. As a result, at just under JPY 400 billion, MFLP-REIT is getting closer to its medium-term asset size target of JPY 500 billion. We will work closely with our sponsor, Mitsui Fudosan, to consider the next growth strategy and management policy for MFLP-REIT. Next time, I hope to be able to talk about MFLP-REIT's roadmap for further improvements to unitholder value based on a review of the equity market, interest rate trends, real estate market conditions, and other factors, as well as the potential impact of such factors on MFLP-REIT. This completes my presentation. We remain committed to maximizing unitholder interest in managing the operations of MFLP-REIT. Thank you for participating today.