Earnings Call: Q4 2024

Oct 17, 2024

Summary

16th-period DPU rose 18.8% to ¥9,602, driven by disposition gains, rent growth and cost reductions. Asset replacements improved portfolio yield and quality, while rent increases are expected to offset higher financing costs.

Welcome to Mitsubishi Estate Logistics REIT Investment Corporation's financial presentation for the 16th fiscal period ended August 2024. I am Taka Nashi from Mitsubishi Jisho Investment Advisors. I will explain in line with the presentation material. There are four points I want to highlight. The first is on financial results. We achieved 12 consecutive periods of increase in revenues, profits, and DPU, mainly due to disposition gains, solid internal growth, and cost reduction. As a result, DPU increased 18.8% versus the last fiscal period and 2.3% versus the forecast to JPY 9,602. In addition, NAV per unit increased due to acquisition of the property at less than the appraisal value. The second is strategic asset replacement. Utilizing the proceeds from the disposal of the property in Sendai, we acquired MJ Logipark Aisai 1 anew at a relatively high yield on top of MJ Logipark Ichinomiya 1 that we announced last time and completed asset replacements over two fiscal periods. Despite the challenging environment for public offering, we continued external growth with a focus on improving profitability and the quality of our portfolio. The third is continuous internal growth. We expect our portfolio to continue to maintain high occupancy rate and achieve rent increase for 14 consecutive periods. Average rent increase for the 16th period was 6.4%, and expect the rent increase in the 17th period to be 4.0% looking at the contracts we have already concluded as of now. We are continuing with strong internal growth and will aim for continuous internal growth to contribute to increase in DPU by 1% or more per annum. Last of all, for ESG, we obtained SBTi certification for net zero as our GHG total net zero emission target in fiscal 2050 was recognized as science-based targets. We have also attained GRESB Real Estate Assessment five stars, the highest rank, for five consecutive years. On page 4, I will explain about DPU results. For the 16th and the 17th fiscal periods, DPU is expected to increase substantially due to returns from disposal gains for two consecutive periods with asset replacements. On top of that, in the 16th period, DPU increased by JPY 1,519, or 18.8%, to JPY 9,602 versus the last fiscal year, due to internal growth and cost reduction of leasing fees and others. In the 17th period, we are expecting DPU of JPY 9,441 due to increase in rent revenue due to asset replacements and progress of internal growth. Due to the impact of loss of disposition gains, DPU for the 18th fiscal period is expected to be JPY 8,219. Compared to DPU for the 15th fiscal period, DPU for the 18th fiscal period is expected to continue to grow steadily due to internal and external growth, despite the interest cost increase coming from the current financial environment. Please take a look at page 6. This shows our growth strategy based on current environmental changes, including inflation and rising interest rates. This slide shares our policies towards enhancing unitholder value. Enhancing unitholder value is achieved through growth of DPU and NAV, and we are describing our strategies for internal and external growth here. First, in external growth, we will continue to implement a disciplined growth strategy with a focus on capital costs. In acquiring properties, when acquisition yield exceeds implied cap rate, we will consider property acquisitions. In our pipelines, we have properties where we can expect relatively high yield, such as assets sourced from MJIA. Thus, despite the current environment, it is possible for us to achieve external growth through property acquisitions. In financing for property acquisitions, we can choose to do public offering or divest assets. In case of a public offering, on the condition that we can achieve growth in both DPU and NAV, we will carefully consider the timing and scale of offering, considering the level of the unit price and market sentiment. In the case of asset replacement without public offering, the key will be whether we will be able to improve NOI level profitability, and quality improvement of the portfolio before and after the asset replacement, and realize unrealized gain to unitholders. On the other hand, if unit price is trading softly and if implied cap rate exceeds the yield of the acquired property, we will consider buyback. As such, buybacks are an effective capital policy. As such, we will focus on the cost of capital and choose the effective approach to aim for external growth continuously. For internal growth, we will aim for an annual growth rate of 1% or more in DPU through rent increase utilizing rent gaps. We are considering shortening lease terms to capture rent revision opportunities early and the introduction of rent revision clauses linked to the CPI for contracts over 5 years. We will continue to aim to achieve strong internal growth. Now, we will review external growth for the past year. Please go to slide 7. Despite an environment of soft investment equity prices, we utilized low LTV last September to acquire high-yield property. Ensuring that, we strategically replaced assets, disposing assets over 2 periods and acquiring 2 relatively high-yield assets. As such, forecasted stabilized DPU increased 4.9%, realizing consistent external growth. As a part of asset replacements taking place in 2 fiscal periods, we acquired MJ Logipark Aisai 1 in Aichi Prefecture. As described in the right box, we improved the quality of the portfolio by acquiring 2 properties that are relatively new and profitable, and disposed of properties that are expected to lose competitiveness in the future as the age of the building exceeded 15 years. In the property acquisition this time, the appraisal NOI yield of the property is 5.5%, exceeding implied cap rate of 4.4%, which leads us to expect potential DPU growth. Additionally, acquisition price more than 20% below its appraisal value indicates potential NAV growth. As such, we made a decision that this would most contribute to unitholder value improvement compared to other options of buyback and debt repayment. As cash on hand after the asset acquisition is approximately JPY 3 billion, we will utilize it to improve unitholder value considering capital cost. Please go to page 9. I would like to give an overview of MJ Logipark Aisai 1, which we acquired this time. Its location is favorable in the suburbs of Nagoya, accessible for wide area delivery via multiple expressways and artery roads. We believe it is a highly competitive property as it is designed to enhance traffic lines and efficiency in cargo operation. Furthermore, it is a development type PDP program, which is our unique program. It is a joint development with Ronko Japan, our tenant. By MJIA supporting the development methodology and the exit, we were able to obtain this property with attractive appraisal NOI yield of 5.5% and good margin. Let me explain about our pipeline in the next page 10. In conjunction with the announcement of the financial results this time, we added sponsor-developed properties to our pipeline, bringing the total to 14 properties and approximately 835,000 sq m. The total value is around JPY 160 billion. We will utilize them, looking at the market environment, to realize continuous external growth at an appropriate timing and size. Next is on internal growth strategy. Please go to page 11. At the top of the page, we have rent revision track record. For the 16th fiscal period, we realized rent revision of 6.4% for the agreements already signed. In the current 17th fiscal period, we have increased rent by 4.0% for those already signed, and this upward trend is continuing. Average rent increase in the past three years was 6.3%. As described at the right bottom of the page, contribution from rent growth converted into DPU has been 1% or more per annum for the past three years. We are expecting average rent increase of 5%-6% in the coming two years. At the left bottom of the slide, we have a case of cost reduction through self-consumption of solar power generation. It started operation from August this year, and almost 70% of the building's electricity usage is sourced from solar power generation, contributing to reduction in utilities cost. We will continue to achieve internal growth to reduce cost and improve profits through our unique initiatives. Please move on to slide 12. This is about our financial strategy. We continue to leverage the high creditworthiness of Mitsubishi Estate Group to ensure stable financial operations. At the right bottom of the page, light blue shows the 10-year fixed interest rate, and the dark blue shows three months variable interest rate. As the cost of procuring fixed interest rate remains high, we will control overall costs by combining some variable interest rate with a target fixed interest rate ratio of at least 85%, while keeping an eye on interest rate trends in the future financing. From the perspective of ALM and debt costs, we aim for an average procurement period of approximately five to six years. Next, on page 13, I will explain about addressing inflation and rising interest rates. In order to address inflation, we will aim at an internal growth exceeding inflation by implementing measures such as continuous rent increases, by capturing rent gap opportunities, and by shortening lease terms. In the portfolio, the ratio of remaining lease period of less than five years accounts for a majority at 55%. In the 16th fiscal period, we reduced average lease term after renewal of agreements from 5.4 years to 3.8 years to move up the timing for rent negotiations. The upper right bar graph shows NOI growth on the same properties basis. Excluding the impact of vacancies, in one year from the fiscal period ended August 2023, NOI improved 3%, exceeding the increase of inflation rate. At the bottom of the slide, we estimated the impact of increasing rent and rising interest rates on future DPU. During the four fiscal periods from the current fiscal period ending February 2025, the 17th to the 20th fiscal period, we are assuming average rent increase of 5%-6% every period. With regard to interest rates, we calculated the results based on the assumption that we refinance at a fixed interest rate for five years using the base interest rate on September 30, 2024, and we believe that internal growth will be sufficient to offset the increase in expenses due to rising interest rates. On the right side, we estimated a further rise in interest rate by 0.25%. Even in this case, we believe internal growth will exceed rise in interest rates. We will aim to continue growing in the future, even as interest rates rise. Last of all, I will explain about ESG initiatives on page 15. We obtained the highest ranking, five stars, in GRESB Real Estate this fiscal year again for a fifth consecutive year. Also, in addition to SBTi near-term certification, we obtained SBTi certification net zero for fiscal 2050. We are making good progress in obtaining environmental certification for the properties we own, and the green building certification ratio of our portfolio increased to 97.7%. For the details of our ESG initiatives, we published the Sustainability Report 2024 today and also updated the information on our website. We would be grateful if you could take a look at that also. That is all from me, and thank you for your attention.