Earnings Call: Q4 2026

May 18, 2026

Summary

March 2026 occupancy and internal rent growth strengthened, while acquisitions and property-sale gains supported earnings. EPU is forecast to grow 4% over three periods, with rising interest costs partly offset by rental growth.

Hello, everyone. I'm Iinu Eiichi, CEO of Japan Real Estate Asset Management. Before turning to our financial results for the fiscal period ended March 2026, I would first like to briefly comment on the public offering we conducted in March. This public offering allowed us to add several high-quality properties with strong rent growth potential to the portfolio. I would like to take this opportunity to once again express our sincere appreciation for your support. Now, let me begin our presentation on the financial results. Please turn to page 3. I would like to begin with the key highlights of our March 2026 financial results and earnings outlook for the following fiscal periods. For the period ended March 2026, occupancy rose significantly to 98.9%, up 1.5 percentage points from the end of the previous period, bringing us close to the 99% level. Driven primarily by upward rent revisions and a continued progress in internal growth, rental revenues from existing properties increased both from 6 months before and relative to our earnings forecast. In addition, The Link Sapporo portfolio, which we acquired during the period, also contributed to earnings growth. When it comes to our earnings outlook, looking ahead, we expect rental revenues to continue expanding, supported by accelerating internal growth at existing properties, as well as contributions from the properties acquired through the public offering. These gains are expected to more than offset the increase in interest expenses. As a result, we project EPU growth of 4% over the 3 periods, beginning with the period ended March 2026, equivalent to an average annual growth rate of 2.7%. Please turn to page 4. Let me walk you through the highlights of the results for the period. During the period, we completed the acquisition of 4 of the 5 properties acquired through the public offering. On the disposition side, we executed the second tranche of the phased sale of Akasaka Park Building and the first tranche of the phased sale of JRE Tenjin Crystal Building. As a result, we recorded approximately JPY 5.6 billion in gains on property sales, bringing operating revenues to JPY 42.4 billion and net income to JPY 18.6 billion. The major factors behind the changes are shown on the right-hand side. First, compared with the previous period, rents and common service charges from existing properties increased 1% or approximately JPY 330 million, driven by tenant turnover and upward rent revisions. On the other hand, property-related revenues declined by approximately JPY 380 million overall, mainly because the previous period included around JPY 500 million in one-off income, such as cancellation penalty payments from tenants. Next, versus our forecast, rents and common service charges from existing properties exceeded our initial assumptions by approximately JPY 50 million. On the expense side, repair and maintenance costs came in above plan due to leasing-related fit-out and refurbishment work. However, this was partially offset by lower utility expenses, resulting in an NOI coming in JPY 8 million above forecast. Meanwhile, depreciation expenses associated with the properties acquired in March, which are not being factored into the forecast, were posted during the period. As a result, property-related profit came in approximately JPY 20 million below forecast. Consequently, EPU, shown in the third row from the bottom in the left-hand column, came in at JPY 1,966, down JPY 4 from forecast. As for DPU, after retaining a portion of gains on property sales internally, we distributed the remaining amount to unit holders. DPU increased to JPY 25 from the previous period to JPY 2,536, in line with our forecast. Next, please turn to page 6. I will now discuss our earnings forecasts for the current and the next period. Starting with the current period, in April, we acquired Comore Yotsuya, while also completing the third tranche of the disposition of the Akasaka property and the second tranche of the Tenjin disposition during the same month. In addition, we plan to sell Daido Seimei Niigata Building on May 20. Including gains from these three property sales, we expect to record approximately JPY 5.7 billion in disposition gains, resulting in operating revenues of JPY 43.8 billion and net profit of JPY 19.1 billion. The major factors behind the changes are shown on the right-hand side. Rents and common service charges from existing properties are expected to increase by 1.9% from the previous period, or approximately JPY 630 million, reflecting continued progress in internal growth. In addition, properties acquired through the public offering are expected to contribute approximately JPY 900 million in revenues. On the expense side, we are factoring in higher utility costs as well as increased interest expenses, which are shown under non-operating expenses. However, we expect the increase in property-related revenues to more than offset these cost increases. As a result, EPU is projected to increase JPY 14 from the previous period to JPY 1,980. As for DPU, after retaining a portion of gains on property sales internally, we plan to distribute the remaining amount to unit holders, resulting in projected DPU of JPY 2,561, up JPY 25 from the previous period. Turning to the following period, at this point, only the fourth tranche of the Akasaka disposition has been finalized. Rents and common service charges from existing properties are expected to increase by 1.7% from the previous period, or approximately JPY 590 million, reflecting accelerating rent revisions. As a result, EPU is projected increase JPY 10 from the previous period to JPY 1,990. DPU is expected increase JPY 25 from the previous period to JPY 2,586. This assumes that the approximately JPY 4 billion gain from the Akasaka disposition will be fully distributed together with a reversal of retained earnings equivalent to JPY 113 per unit. As you are aware, the assumed reversal of retained earnings could ultimately be replaced by gains on future property sales, should additional disposition be executed going forward. Next, please turn to page 8. This page shows trends in portfolio occupancy and rent and common service charges. Starting with the chart on the left, the yellow line represents occupancy. As of the end of the period, occupancy rose significantly by 1.5 percentage points from the previous period to 98.9%. This improvement primarily reflects rising occupancy at our Tokyo metropolitan properties, supported by a strong leasing market. While occupancy is expected to decline slightly in the current period, we project a recovery back toward the 99% level in the period ending March 2027. Next, the bar chart below shows trends in rents and common service charges. From the period ended March 2026 through March 2027, we expect rent growth of approximately JPY 1.3 billion, or 4% over the two forecast periods, driven by internal growth at the base portfolio, shown in dark green, as well as contributions from acquired properties, shown in blue. Now, turning to the chart on the right, this chart shows period-on-period changes in rents and common service charges from existing properties. As you can see, growth from both tenant turnover and rent revisions continues to accelerate, and rents at existing properties are expected to continue trending upward. The projected increase of the two forecast periods is 3.7%, which is 0.3 percentage points higher than the level we presented at the time of the public offering announcement in March. Going forward, we will continue to drive internal growth through both upward rent revisions and tenant turnover. Next, please turn to page 9. I'd now like to discuss the portfolio's future rent growth potential. The chart on the left shows trends in market rents across the portfolio. As you can see, the pace of market rent growth continues to accelerate, with the annualized growth rate now exceeding 10%. In particular, sponsor-related properties are seeing especially strong momentum, with average market rent growth exceeding 14%, significantly above the portfolio average. On the right-hand side, we highlight leasing transactions completed since the period ended March 2026. All of these examples involve sponsor-related properties in central Tokyo. Through both tenant turnover and upward rent revisions, we have achieved rent increases ranging from 20% to more than 40%. It is also worth noting that in most of these cases, post-revision rents have exceeded the property's market rent levels. Going forward, we will continue to focus on maximizing rent growth through both upward rent revisions for existing tenants and rent increases associated with tenant turnover. Next, please turn to page 10. This page highlights examples of internal growth initiatives driven through value enhancement projects. By renovating common areas and lounge spaces to improve tenant comfort and overall property competitiveness, we have been able to achieve substantial rent increases through both tenant turnover and rent revisions. At Tokyo Opera City Building, we have been upgrading the cafe lounge area for office workers, with part of the renovated space already reopened. The new space has been very well received by tenants and workers, and we are already seeing positive results in rental performance as well. As shown here, we have achieved strong internal growth with significant rent uplifts. At Sanno Grand Building, we are carrying out renovations to common areas while leveraging the property's strong location. As construction has progressed, occupancy has recovered sharply to the high 90% range, while contract rents for new leases and expansion space have also increased compared with the levels prior to the renovation work. Next, please turn to page 11. This page outlines the status of our rent revisions. Starting with the chart on the left, the green line shows the percentage of tenants subject to lease renewal during each period for whom rent increases were achieved. As you can see, the ratio has continued to rise steadily over time, reaching the mid 50% range in the period ended March 2026. For the current period ending September 2026, the ratio is certain to move even higher. We believe we are making solid progress toward our target of more than 70% by the period ending March 2027. Turning to the chart on the right, the average rent uplift rate has also continued to improve, reaching 6.1% most recently, steadily approaching our target of 7% or higher. In addition to our strong negotiating position, supported by our high fixed-term lease ratio of more than 70%, we are also intensifying rent revision negotiations with tenants under ordinary lease agreements, which are more common at regional properties. We are now seeing the results of these efforts expand nationwide. Please turn to page 12. As mentioned on the previous page, the fixed-term lease ratio shown in the upper-left chart remains above 70%. In addition, the rent cap shown in the lower-left chart has expanded significantly from the previous period, reflecting continued increases in market rents. As you are aware, leasing market conditions remain very favorable. However, rather than becoming complacent with the current environment, we intend to continue proactively pursuing rent increases across the portfolio. Next, turning to page 13. This section covers our external growth initiatives. This page illustrates how the portfolio has changed as a result of property acquisitions and dispositions executed since the period ended March 2026. Looking at the second row from the top, portfolio assets have increased by approximately JPY 40.5 billion, bringing total assets under management to roughly JPY 1.2 trillion. In addition, while the average NOI yield of the disposed of properties was 2.8%, the acquired properties carry an average NOI yield of 3.6%, allowing us to enhance overall portfolio profitability. The newly acquired properties also consist mainly of relatively newer assets, contributing to reduction in the portfolio's average building age. Beginning on page 14, we provide the details on acquired properties. As Comore Yotsuya, Shinjuku Eastside Square, and the Kandabashi Park Building are additional acquisition of ownership percentage of the properties already held within the portfolio, I will omit details today. Please turn to page 17. This is The Link Sapporo, which we acquired in October last year. At the time of acquisition, occupancy stood at 71%, but leasing activity has progressed steadily since then. We have successfully captured demand from a wide range of tenants seeking expansion space or relocation to a better location. As a result, occupancy had recovered to 87.5% as of the end of the March 2026 period, approaching the 90% level. We will continue our leasing efforts toward achieving full occupancy. Please turn to page 18. This is Sapporo Arch building, which we acquired in March. The property is a newly completed building that was finished only last November. The property is conveniently located just a 4-minute walk from Odori Station in central Sapporo and is also close to the Tanuki Koji shopping street, offering strong accessibility and a highly attractive surrounding environment with abundant dining and retail amenities. Given that the building was only recently completed, occupancy currently stands at 66%. However, following the acquisition, we have been actively promoting leasing activities, including hosting a broker open house in April. We are already beginning to see the results of those efforts. We have received lease applications from prospective tenants and occupancy is expected to rise to 70% in June. We intend to maintain this leasing momentum and aim for an early lease up for the property. Please turn to page 19. This page highlights Mitsubishi Estate's recent development completions and future development pipeline as our sponsor. As you can see, the sponsor continues to maintain attractive pipeline of properties across central Tokyo as well as major regional cities. By fully leveraging both the sponsor pipeline and our own proprietary sourcing channels, we intend to continue creating acquisition opportunities and driving external growth through disciplined financing executed with close attention to market conditions. Next, please turn to page 21, which covers our financial profile. Starting with the table in the upper-left corner, since we completed a public offering during the period, we have also included figures as of the end of April, reflecting the post-PO position. Book value LTV rose to 44.8% as of the end of the period, but declined to 43.1% following the public offering. As a result, we secured approximately JPY 37 billion in acquisition capacity. In addition, the average interest rate stood at 0.82%, while the average remaining debt maturity was approximately five years. As for the long-term fixed rate debt ratio, in response to the recent relatively rapid rise in interest rates, we implemented financing measures with greater flexibility. As a result, the ratio declined slightly below 80% to 78% following the public offering. With respect to the interest rate outlook, we continue to assume a gradual upward trend consistent with our previous assumptions. To contain increases in financing costs, we have utilized long-term floating rate borrowings as well as medium-term fixed rate borrowings. Going forward, we will continue to closely monitor interest rate conditions and maintain a certain degree of flexibility in our long-term fixed rate debt ratio as we execute our financing strategy. Next, please turn to page 23. This page shows the trends in the EPU and DPU over the next three periods. As discussed earlier, we expect EPU through the period ending March 2027 to continue growing, supported by both internal growth at existing properties and external growth, more than offsetting higher costs such as increased interest expenses. Looking further ahead to the period ending September 2027, shown on the far right, we expect internal growth at existing properties to accelerate further, with EPU projected to increase by JPY 55 from the preceding period to JPY 2,045. As a result, over the three periods, beginning with the period ending March 2026, EPU is projected to increase by JPY 79 or 4% overall, representing an average annual growth rate of 2.7%. As for DPU, we expect to secure average annual growth of 2% supported by gains on property sales already identified and the utilization of retained earnings. Next, please turn to page 24. This page outlines our EPU and DPU growth targets. By combining internal growth initiatives centered around portfolio transitions with selective external growth opportunities that offer strong growth potential, we aim to achieve average annual growth of 3% in EPU and 2% in DPU. Finally, please turn to page 26. I would like to conclude with ESG initiatives. During the March 2026 period, we implemented several new initiatives. As the first J-REIT to do so, we established a green finance framework covering construction costs associated with converting existing buildings into ZEB-certified properties. Utilizing this framework, we also entered into a JPY 6 billion commitment-type term loan agreement with the Development Bank of Japan. We believe this has further strengthened our ability to promote energy efficiency initiatives across the portfolio. Please turn to page 27. The ratio of properties with environmental certifications has increased further to 97.2%. In addition, we obtained ZEB certification for three more properties during the period. Going forward, we will continue promoting initiatives aimed at enhancing the competitiveness of the portfolio from an ESG perspective as well. That concludes my presentation based on today's materials, but let me close with one final comment. As I explained earlier, internal growth at our existing properties continues to progress steadily and align with our expectations. The pace of rent growth has continued to strengthen period after period. At the same time as announcing our property disposition strategy, we also completed new acquisitions through the public offering in March, including sponsor-related properties in prime central Tokyo locations, as well as other assets with strong rent growth potential. Through these initiatives, JRE will continue enhancing the competitiveness of the portfolio and maximizing earnings growth. Even in a rising interest rate environment, we remain committed to steadily executing the distribution strategy outlined earlier and delivering growth that outpaces inflation. We hope you will continue to pay close attention to JRE's initiatives going forward. That concludes my presentation. Thank you very much.