Mitsui Fudosan Frontier REIT Management Inc. (FICV) - Earnings Call Transcript - Financial Results Meeting 38th Fiscal Period (January 1, 2023 to June 30, 2023)

 

Shintaro Ono: Ladies and gentlemen, my name is Shintaro Ono, CEO of Mitsui Fudosan Frontier REIT Management. Now, I'd like to start my presentation on Frontier Real Estate Investment Corporation's Financial Results for the 38th Fiscal Period Ended in June 2023.

 

On Page 13 of the investor presentation, you will find the summary of the financial results. The first bullet point outlines the DPU for three fiscal periods. Far left is the DPU for the 38th period ended in June 2023, which marked ¥11,109. This is drop by ¥13 compared to the 37th period, but ¥119 higher than the forecast of ¥10,990 announced in February.

 

The deeper you forecast for the 39th and the 40th period is shown on the right. The DPU for the current 39th period ending in December 2023 is projected at ¥10,500. And for the 40th period ending in June 2024, we have announced a DPU guidance of ¥10,640.

 

Next. The second bullet point highlights our initiatives to strengthen the portfolio. First, we completed the third phase of the sale of Ito-Yokado Higashi-Yamato's stake in June based on the sales contract signed in February of last year. With this, the transfer of the entire stake has been completed.

 

The second point to highlight is acquisition agreement signed for two properties developed by the sponsor. One is the 18.5% quasi-co-ownership stake in Mitsui Shopping Park, Lalaport Izumi. And the other asset is Shin-kawasaki Square. I will elaborate on these acquisitions later.

 

The third point is regarding AEON MALL NAGOYADOME-Mae, for which we have reached an agreement on a rent hike in conjunction with a revitalization construction project.

 

The fourth point is that we have successfully completed the leasing activities of the vacant floor space at GINZA GLASSE.

 

Box below shows our financials. As of the end of the 38th fiscal period, LTV was 42.5% on book value basis and 34.0% on appraisal basis. The fourth box illustrates our sustainability initiatives. As of the end of the 38th period, the green building certification ratio of the portfolio was 87.6%.

 

In June, BRANCH Hakata Papillon Garden acquired the S rank of CASBEE real estate certification. These are the highlights of the financial results.

 

Page 14 shows by item, the main factors impacting the change in DPU from the actual in the 37th period to the forecasted DPU leading up to the 40th period. In the 38th period while the rent revenue went down due to the 20% equity transfer of Ito-Yokado Higashi-Yamato during the 37th period and the tenant replacement of the former [indecipherable] floorspace at GINZA GLASSE. Other revenue, such as the restoration fee revenue at GINZA GLASSE and sales gained from Higashi-Yamato increased.

 

As a result of all these factors, the DPU for the 38th period was ¥11,109, down by ¥13 from the previous fiscal period. The expected decline in rental income due to the sale of Ito-Yokado Higashi-Yamato as well as the tenant replacement at GINZA GLASSE will be offset by rent revenue growth from the new assets to be acquired. And as such, we forecast DPU to be ¥10,500 and ¥10,640 for the 39th and 40th fiscal periods, respectively. I will provide more details later on the earnings forecast page.

 

Page 15 is a summary of the financial results for the 38th period ended in June 2023. The table on the left is a snapshot of the P&L statement. I'd like to draw your attention to the figures for the 38th period and we'll explain how they stand vis-a-vis their results from the 37th period. Compared to the 37th period, operating revenue and profit grew in the 38th period.

 

Let me go through the key figures. The top row in the column highlighted by green is the operating revenue, which was up by ¥98 million compared to the previous period to ¥11 billion and ¥530 million.

 

Please refer to the box at top-right for the main reasons behind the changes in revenue. The main factors behind the growth in operating revenue were as follows, ¥13 million increase in the sales-linked rent from the facilities achieving higher retail sales, including a mainly from Mitsui Outlet Park IRUMA and increase in other revenue of ¥171 million due to restoration fee revenue at GINZA GLASSE, where there was a tenant replacement and ¥103 million increase in gain on sales of Higashi-Yamato.

 

On the other hand, the main factors for the revenue decline were rent income drop of ¥84 million with the sale of Ito-Yokado Higashi-Yamato and another ¥72 million drop in rent stemming from the tenant replacement at GINZA GLASSE, among others.

 

Next. Let me point out the expenses related to rent business using the table on the left. The second line from the top is the expenses related to rent business for the 38th fiscal period. The figure excludes depreciation in the relevant expenses were up by ¥98 million to ¥2.476 billion. The main reasons for this increase are listed in the second box from the top on the right side and you can see the repair and maintenance expenses were higher by ¥100 million and the property tax by ¥37 million. As a result, NOI was ¥8.917 billion shown in the third line from the top on the left table, which was a decrease of ¥103 million from the previous period.

 

The line below is depreciation and amortization. The D&A expenses for the 38th period was ¥1.895 billion, down by ¥60 million from the previous period. As a result, the operating income for the period under review was ¥6.460 billion, an increase of ¥73 million from the previous period.

 

Next, let me move on to the non-operating items. Non-operating income was ¥27 million, an increase of ¥25 million from the previous period. The main reason for this increase was the receipt of reinsurance proceeds. As a result, ordinary income was ¥6.147 billion and net income was ¥6.146 billion, an increase of ¥96 million from the previous period.

 

The DPU for the 38th period was ¥11,109. After retaining the entire amount that can be retained from the sales gain of Ito-Yokado Higashi-Yamato. In sum, the 38th period marked our result with growth in revenue and profit and drop in DPU compared to the previous period.

 

Next. Let's move on to the earnings forecast on Page 16. I would like to share a forecast for the current period, which began from July the 39th fiscal period ending in December 2023, as well as for the 40th period ending in June 2024.

 

Referring to the box at upper left. I'd like to first go over the operating revenue guidance for the 39th period ending in December 2023. As indicated by the green column on the left, we are projecting ¥11.12 billion, a decline of ¥580 million over the 38th period. The period that just ended. And below that for operating income, we are projecting ¥5.917 billion, a decrease of ¥499 million.

 

Comparing the gardens against the results from the 38th period, I'd like to add a few comments by referring to the boxes on the right that list the major factors behind the change. We are guiding toward drop of ¥580 million for operating revenue. While we expect an increase of ¥102 million in rent revenue thanks to the two new assets to be acquired, there are multiple factors that work against the revenue growth.

 

With the sale of 70% of the quasi-co-ownership stake of Ito-Yokado Higashi-Yamato during the 38th period, the rent is projected to drop by ¥254 million and another ¥67 million drop in rent would derived from the tenant replacement at GINZA GLASSE, among others.

 

In the other revenue item, the one off restoration fee revenue of ¥179 million with a tenant [indecipherable] from GINZA GLASSE and the ¥136 million gain on sale of Higashi-Yamato will be absent in the current period.

 

We project the operating income to drop by ¥499 million with the expected decrease in repair expenses and property tax. Going back to the table on the left, the third line from the top, the ordinary income is projected to be ¥5.608 billion. And below that, net income is expected to be ¥5.670 billion, a drop of ¥538 million.

 

We plan to draw down ¥72 million from the reserve for reduction entry and project the DPU to be ¥10,500 for the 39th period.

 

Two columns to the right is a DPU forecast for the 48th period ending in June 2024. The new assets will make a full contribution throughout the period and rent will be raised for AEON MALL NAGOYADOME-Mae. At the same time, we expect an increase in property tax and repair expenses. The DPU projection for the 40th period is ¥10,640. This will conclude the part on the financial results.

 

Let me now explain our initiatives to strengthen the portfolio from Page 20. For Ito-Yokado Higashi-Yamato, the remaining 70% of the quasi-co-ownership stake sale process has been completed in June and the sales transaction has been completed in full.

 

On the right are the asset acquisitions scheduled to be closed during the 39th period. Both were developed by the sponsor and the sales agreements have been signed.

 

Page 21 is overview of Mitsui Shopping Park. Lalaport Izumi, located in Izumi City, Osaka. We will acquire 18.5% of the quasi-co-ownership stake on October 2. This will be the third Lalaport that we will be adding to the portfolio. The asset is well positioned to attract customers from a wide area, with the Hanwa Express running north-south and the Osaka Outer Loop line, the national Route 170 crossing the site from east to west.

 

The neighborhood is home to many families raising children and is well-suited for regional shopping center like Lalaport. The facility opened in October 2014 as a retail complex with approximately 200 stores. The Costco Wholesale Izumi warehouse is located on the adjacent site, forming a large retail cluster. With approximately 3,400 parking spaces that property is fit for attracting customers visiting by car. It is a highly competitive asset. The acquisition cost is ¥5.198 billion and the appraisal NOI yield is 5.3%.

 

The other asset is Shin-Kawasaki Square, located in Kawasaki City Kanagawa, shown on Page 22. It is a medium scale shopping center connected to two JR stations, Shin-Kawasaki and Kashimada by pedestrian walkways, roughly three minutes walk from both stations. The location is extremely convenient. The facility opened in March 2015 with 17 specialty stores. The asset is surrounded by residential areas with condos such as Park Tower, Shin Kawasaki and Park Station Kawasaki, with a trade area population of approximately 55,000 within a one kilometer radius.

 

The property has good road access and a rich trade area population. The acquisition cost is ¥9.4 billion and the appraisal NOI yield is 4.5%. Page 23 describes the internal growth that will result from a revitalization construction project at AEON MALL NAGOYADOME-Mae.

 

FRI will invest approximately ¥790 million for the signage and interior renovation. And subsequently, the annual rent will be raised by ¥52 million. Effective March 12, 2020, for the scheduled completion date of the construction work.

 

On top of this rent hike resulting from the revitalization construction investment contract was signed last year to raise the annual rent by ¥77 million from March 12 next year, resulting in a total annual rent increase of ¥129 million.

 

The lower half of Page 23 shows the status of GINZA GLASSE. The space was vacant from the first to the third floor, but we were able to attract a sports apparel brand as a new tenant.

 

Next, I'd like to explain our financial position on Page 24. As you can see by the upper left table, LTV at the end of the 38th period was 42.5% on book value basis and 34.0% on appraisal basis. As indicated by the upper-right graph, the average funding cost of debt as of the end of the 38th fiscal period was 0.44%, and the average remaining period of debt was 4.5 years.

 

Last but not least, let me offer an update on our sustainability initiatives. Please turn to Page 26. As part of our efforts to reduce environmental impact, we have set the greenhouse gas emission reduction target. On a basic unit basis, we aim to reduce the carbon intensity by 30% in 2030 compared to fiscal 2019.

 

As part of our initiatives for emission reduction, we will invest in energy conservation, including LED installation and strengthen our engagement with the tenants.

 

The upper-right hand side of Page 26 illustrates the GRESB assessment. Last year, we received a four-star rating in the 2022 real estate assessment, and we have received a Green Star rating for the eighth consecutive year. In the GRESB disclosure assessment, we received the highest rating of A. We also continued our efforts to maintain and improve our portfolios representation by environmental certifications, reaching 87.6% of the floor space in the portfolio being certified as green building.

 

We will continue to work with our stakeholders to enhance our sustainability initiatives and we'll disclose our efforts in an appropriate manner. This is the end of my presentation on Frontier Real Estate Investment Corporation's financial results for the 38th period ended in June 2023.

 

Thank you very much for your attention.

 

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