Ichigo Group Holdings Co (ICHIF) Q2 2027 Earnings Call

0:01 Hello, everybody.

0:02 Thanks so much for joining. Today we're doing the Ichigo fiscal year 27-2, so the February 2027 first half corporate presentation. I am joined on my right by Ted Fujita, who is our lead independent director, and on my left by Dan Monsaku, who is a senior member of our finance team and the head of global IR for us.

0:23 Thank you very much, everybody. Let's jump forward. I've got a mic in my right hand. I've got a clicker in my left. Hopefully I can make this work. So here's the first half summary. We last had a call in July. Financing, not a lot has changed since then, certainly not in terms of our business and what we do, which is drive profitability for our shareholders by delivering assets that are improved assets for tenants and therefore ultimately for investors. So the numbers are pretty straightforward. We're on track for what we're going to achieve this year. First half looks a little light, not any issues at all. So business profit is up 3%, net income down 2%, STPS up 4%, cash CPS up 17%. We like that a lot because we're focused on cash flows and cash to shareholders rather than accounting earnings. Stock earnings down a little bit, flow earnings up.

1:18 Highlights are kind of we're on track. I mean, these are some bullet points, but I think the most important thing to understand is is that we're in an operating environment which is extremely paired or matched to our core capabilities. As you know, we are not a real estate company. We focus on sustainable real estate. We're not a company that does raw development where the construction costs have gone through the roof and it's made very, very difficult for a lot of our peers and I would call them competitors. And so we take existing assets, we improve them so that the surge in construction costs is actually very beneficial for us in terms of committed advantage. So things are going well. I'll talk about this later. We got the asset management flow earnings, 1.1 billion yen on performance fees from our office rate. Asset acquisitions on track.

2:10 We announced a 5 billion yen share buyback today. All shares will be canceled. We announced additional cancellation also of another 3.4% shares. At the bottom, we're on track for having record profits across the board. We expect to have business profit up 21% and income up 8% and EPS up 13% and ROE 15%. Cash ROE is 20%. We've raised our dividend this year 35% with a DOE of 5.1%. This effectively gives some more detail on what I just spoke to. Again, we focus on cash earnings. They are at 1.4x or accounting earnings. We are relentlessly focused on delivering value for our shareholders and ultimately we think that happens in terms of cash production.

3:04 Business profit, we have a diversified portfolio. Certain things go up, certain things go down. We forecast for a record. We fully expect to hit those numbers this year via some second half contribution.

3:21 We are structurally profitable. Our stock earnings, meaning kind of the earnings that are relatively fixed through things like contracts such as rental income, power generation contracts, base asset management fees, again, those are contractual, run about two times our fixed expenses. Our stock earnings ratio, so percentage of stock versus flow, 56% at this point in time. And again, I'm going to go very quickly through this, because this is material we have updated for today, but there's not a lot of change in the last three months. We expect to have a record high on cash earnings. Again, stock earnings we've actually forecasted down, and so 24.3, which is a record high for us last year. At this point, we have not changed the full-year forecast.

4:07 We could have. We didn't. But at this point, we're projecting ourselves coming at 25 on stock earnings for the full year, again, above what was embedded in the forecast at 23.8. So, again, we expect to have a record year for stock earnings this year also. We have long-term debt. It's about 90%. Half of it is fixed with an interest rate of 1.7%. There's been some push down in the average tenor of our borrowings and generally borrowed for 10 years. We have a business called Ichigo Owners which has a turnaround of generally about a year in terms of from ownership to sale. We borrow there generally for seven years.

4:53 What's happened is we've increased our Ichigo Owners business a little bit relative to the total pie. We've also increased, and it's a very good thing, we started issuing and we're getting an increasing amount of uncollateralized debt. Generally, it's at terms around three years, so that's pushing down the average tenure, but this is from strength rather than weakness. As you can see, rates have gone up 26 basis points years-to-date in terms of average borrowing costs. That has de minimis effect on earnings about 800 million yen, and we forecast for it. It's not an issue at all. The one thing that's going on that is clearly a negative for everybody in the real estate world, and that includes us because we do have borrowings, is that interest rates have gone up. It is overwhelmingly far more important, the other factor, which is that interest rates are going up because inflation has gone up, replacement costs has gone up, the competitors and their ability to compete with us has gone down. And so the ability to organically drive rental growth from our assets is the highest it's ever been.

6:02 The ability to deploy or value add capabilities at low cost and add value to assets is the highest it's ever been. So, you know, but we should be clear. It's probably, I'm going to use some numbers just so that they're helpful for you. 78% wind at our back, maybe 10 to 20% wind at our face. 78% wind at our back is what I just talked to you about our increased competitiveness in a world of higher inflation. and call it 10 to 20% when they're phased because of interest rates. So one of them is obviously far more powerful than the other. This is what our business looks like across the board. I'm just going to run forward. Hopefully we have some things to talk about in question and answer. You can see we had net acquisitions year to date. Although, you know, most of it is itch.io owners, which turns over really, really fast.

6:55 And the sustainable real estate purchase, most of that was actually a building we brought up in Sapporo, which was very, very rarely an example of us doing development. We hardly ever do it. So it's not quite a once-in-a-lifetime, but very rarely happens. So very little activity other than the high turnover of owners going on, and we expect to have significant sale activity. In the second half, some of which was already contracted for, as you can see on this page. So looking on the far right, you can see both acquisitions and sales activity. Again, overwhelmingly, it's in the high turnover. It's your owner's business, which continues to go very, very well. You can see on the right-hand side, there are executed contracts already, and this is how we have some insight already into what our second half profits look like, because, of course, purchases don't generate profits, but to Thank you for joining us today.

8:17 Shareholder Equity. The third-party appraisal value of what are unrealized gains is about 76 billion yen. We're generally selling our assets for over twice of what the third-party appraisers think, so that puts us at 152 billion yen. So in reality, we have, in fact, kind of 2.5x of gains. Shareholder equity relative to our stated accounting shareholder equity, and that's because all the value is continued to create over time with a value-added activity. Funds and segments, they move around this portfolio, that's fine. So asset management up 60%, sustainable real estate up 38%, Hotel down 57, Ichigo Down Owners up 39, Clean Energy down 17.

9:06 So moving double digits and the net of it is you end up plus 3% and the full year we expect to be up over 20%, 21%. And the remote has failed. SRE, Standard Real Estate Business Profit is up 38%. Some decrease in stock earnings, although it was higher than forecast because the office rents continued to go up. But we had asset sales. We're going to push down the stock earnings a little bit. I mean, the thing that's incredibly, I mean, fabulous beyond belief. I think everybody on this call is familiar with our very big asset, traded P.O. Diva. Occupancy growth continues to be fantastic.

9:56 We actually are showing here 99% occupancy. I think the real number is 99.7. We've rounded it down. So that is an asset that is performing extraordinarily well. We have an average rent in Japan. As some of you know, we use this thing called SUBO as a unit of area. It's 3.3 square meters. But anyway, the average existing rental is about $16,000. We're currently filling it at $20,000, so it gives you about 20% upside. That is an asset, as you also know, that's for sale. So we have a very, what we think is going to be a very powerful sale process in terms of monetizing this asset and the value that we brought to it on behalf of all of our shareholders.

10:41 Flooring is up 63% out of the first half. We expect to see a lot more in the second half. This is an example of when we like to at least on one slide every single quarter show you what we do because at heart we don't bet on red and black. We are not a leverage play on Japanese real estate. We are a careful and we truly are a careful acquirer of assets that we can add value to and make them better and generate higher value for the tenants and therefore higher value in terms of NOI generation and ultimately for the owners that we sell to. And so this is an example of an asset we bought two years ago.

11:26 We're increasingly converting it into what we call ready to move in offices. Perhaps you know this, but in Japan, moving costs are extraordinarily high. It is, the tenant pays for it, the tenant also has to take the asset and return it to its original condition, so exit costs are really, really high. So one of the unmet needs for tenants in Japan is to Just make the office ready for them. I mean, you do all the fit for them. We are a very large experienced real estate firm. So another reason, and we do construction, we do engineering, structural engineering. So another issue is that we have both kind of capabilities in doing this and economies of scale that a small tenant will typically not have. And remember, we serve mostly SMEs. So we can actually do this for tenants and command much, much higher rents. And the math works for them.

12:18 I mean, it works fantastically well for them. So, this is an example. When we bought the building, it had one floor that was empty, so we filled it with three rented move-in offices. We've increased the rent. Rental income is up 1.8x to 2.1x. We're forecasting in totality 1.8x on the NOI, which is, and it will be full. So, this is going really well. We're looking for other opportunities in the area. This is, Hongo is near Tokyo, Tokyo University. and so there's a bunch of startups there and a lot of new activity there and a significant demand for this kind of office space which we're providing. Hotel business profit is down 57% year-on-year. We expect to have no flow earnings in this segment and so, you know, it's expected to be down and we will deliver on that application. Again, we have other segments as a portfolio business. We expect the four-year forecast to be down, in the segment down 29%, and that's fine. We will still have record earnings as a totality because we are a totality with different segments and different exposures.

13:35 Red bar. I told you there's overwhelmingly a window of action. I mean, look, hotels have been weak. We should all recognize that. We have red bar down 12%. That's two things, is continuing effects, and we're going to have kind of the same sort of sales effect roll off on this, but as you know, China was coming in massive size to Japan, and then there's a diplomatic dispute between China and Japan, and Chinese travelers drop off. So we're seeing a drop off in red par from that, from Chinese inbound. We've also had a drop off in Osaka and Kyoto from the end of the Osaka World Expo, so red par is down 12%. In total, based on kind of 20-30% drop-off in Osaka and Kyoto, RepCard for Tokyo, Fukuoka, and others is up about 5%.

14:24 Despite the RepCard decrease, total room revenue is up 60% because we have new hotel acquisitions and openings. And as you know, we took some hotels offline to make them better, as we did, and brought them online. And so the full contribution from that is going to happen in the second half of the year. Owners business profit up 39% year-on-year. We actually expect it to double, so there'll be relatively explosive earnings activity out of owners in the second half. And at the core of what Owners is, is we serve investors, tenants, and investors to drive growth. We call this an established business model. I mean, it's slightly different from other sustainable real estate activity, meaning that we contract with developers, We design assets.

15:15 They build them through our specs. We buy them after they're built so we don't take the development risk on this. We then lease them up really quickly. But we now have this massive database on what tenant needs are in what areas. It's a very high turnover basis and very, very high returns and continues to grow up. Active Management Business, BP, business profit up 66% year-on-year. Look, we've talked about this before. We actually, so we're above what the four-year forecast looks like. A big driver of the returns in this business is performance fees, and we get performance fees only if we have gains on sale in assets in our listed REITs.

16:04 We do not control the listed REITs. That is a different government structure. As different shareholders, we're not about to start the year by saying we forecasted we're going to make these returns on sales in the REITs because they can do this because that is not something that we can actually speak to. So it results in a structurally, forgive me for this, but we haven't figured out a better way of handling this. And if you have any ideas on it, we don't forecast in performance fees at the beginning of the year. Year after year, our REITs work their assets really, really hard. I mean, we are each ago. We have the same value-add activity there. We end up generating the performance fees. And so what happens is we systematically outperform our asset management forecast because these numbers come in. So unsurprisingly, we've had a big return in the first half. We may well have some stuff in the second half.

16:49 Again, I can't speak to that. So that's coming in above forecast. Effectively, it's going to happen every single year. And we're trying to grow the asset management business. It has gotten harder because it's gotten harder in some of the growth. I mean, in general, real estate share prices, operating company share prices are down. REIT share prices are down. We care a lot about generating accretive activity for our shareholders. We don't want to do new issuance on the REITs unless it serves their interests. It's gotten harder with rates going up. to put out, for example, security tokens at levels that are attractive to investors. So there is an element, as I told you, that 10% to 20% that is a window to face with rising interest rates. This is a slightly different issue, the fact that real estate and share prices are low. So this is a little bit – you can toss this into the same 10% to 20% drag window to face as opposed to window to back.

17:50 But we will, you know, we like the business a lot, has fantastic returns of capital because there really are no capital speak of going into it.

17:58 We will continue to see how we can innovate in this space to generate ongoing returns. Clean energy, down a little bit. We forecast it to be down because there was some maintenance, one-off maintenance activity. We had a lightning strike. That's pretty unusual. Although, you know, global warming is real, and you should know that things like floods, of course, are pretty obvious to people. Lightning is also increasing across the world, so that was interesting. We had it covered by insurance, but we had mostly covered by insurance. Anyway, this is a business that's basically on track, as expected, because it's a really stable business. We're looking at building out battery storage activity and green biomass. You know, this is a business, again, we would like to grow. We completed 5.1 billion yen of buyback earlier this year.

18:47 We announced a 5 billion yen buyback today. We think the shares are extraordinarily cheap. Of course, it's our job to get the shares to a level higher than extraordinarily cheap, so we'll continue to work on that. But if the shares are cheap, we can deploy capital against them in a way that we think is appropriate for shareholders. We think that is the case today by buying the shares at the current share price, which goes today at 386 yen. Eight times earnings, trading below NAV when you put it in unrealized gains. We think shares are very, very attractive. We will have a consecutive double dividend increase. As you know, we will run out of room at some point in time on buybacks because there are minimum requirements for the free float. We will therefore be shifting towards dividends when that happens, and you should continue to expect to see significant ongoing dividend increases.

19:42 Global warming is real. We think it's really responsible and, of course, in a powerful way in generating high returns for our shareholders, but we believe our shareholders join us in recognizing that it is our corporate responsibility to do the right thing for the world, and we are doing so. So we are climate positive. Our CO2 reduction activity is 11x CO2 emissions. We have 100% renewable electricity across each of our operations. We are a CBT, the AA list is only like, Something less than 20 basis points of all companies in the world qualify for that. So we are recognized as being best in class in our sustainability. And we know that's important to you. It's important to all of us also. Those were, as it were, my prepared remarks.

20:27 Now, happy to take any questions or comments from anybody. Thank you so much for your time. Thank you.

20:34 Can you hear me? Yes. Thanks so much. Yes, thank you for the presentation. I have a couple of questions. The first one is, as you mentioned, you guys bought three offices in the first half. So the amount is a bit large. Should we understand that this is partially asset replacement for the Odaiba building? No, I don't know if I would describe it as asset replacement. But yeah, we think office is really interesting. Having said that, The 11.5 billion of that is the Sapporo building, which was development and different. So it really is, I should turn to the page where we have this. Or can somebody take us to the acquisition page?

21:25 So yeah, off the top of my head, it was about 4 billion yen of kind of office acquisitions. And, you know, quite honestly, we'd like to do more. We're finding office to be really, really compelling.

21:39 There is very robust demand for offices. Corporate profits are high. Corporations are continuing to compete for talent by giving them better and bigger offices. And the economics of new development have been absolutely crippled. And so it's, you know, I've said this before, but People talk about Japan, it's like you can never raise rent, and it's because it's an open development market, which is true. But there was only half of the issue was that, you know, Japan is very pro-building. It's easy to get approvals to put up new developments of any sort of real estate. But the issue historically has not been that somebody can put up an office next to you. It's that they can put it at the same price because there was no construction inflation as you put up your building 20 years ago.

22:25 So you can never raise rent. And what's happening now is, Literally new offices are coming online, and they have to have rents 40% and 50% higher. And the numbers don't work, so they're not coming off. And so the supply is being restricted, and the ability to provide high quality, as I say, we improve offices, is a very, very powerful way to deliver value for tenants and therefore our shareholders. So office, we think, is the most powerful place to be. I mean, the good news is we bought two assets. The bad news was it was only $4 billion worth. We'd like to do more. So, yeah, we expect to sell Odaiba. We will sell it at very good levels. And we'll have a process, which is, you know, it's a big asset. It's a very big asset.

23:11 And so we'll have a process that puts some months into it in terms of getting the best price and having robust competition for it. and we will figure out a way to replace that Odaiba with office assets over time but it's not so much as Odaiba office replacing as it is office is really attractive it's money we made and we want to do more there. Does that make sense?

23:32 Yes and then my second question if I could is on the target AUM so given the current situation should I understand that this is more kind of an aspirational target at this stage? Because it's going to be hard to grow asset to 400 billion in the second half, I guess. I think that's right, yes. Okay. And then my last question is the buyback. So, as you mentioned, you know, from your point of view, you know, the current share price makes sense to do a buyback. And you guys were already selling pretty close to the win in terms of the free flow versus topics. And, of course, even outside of that, if you cancel shares and if you buy back and cancel shares, then your liquidity goes down. So, which means, you know, from the reality investors standpoint, it's kind of harder to buy the stock. How are you guys thinking about that as well?

24:25 You're on the right topic. There are some trade-offs here, but we think overwhelmingly it's the right choice to, if your shares are, we think, extraordinarily discounted to fundamental value to buy them in. You should know that probably at this point we have about 8 billion yen worth of buybacks that we could do.

24:44 Thank you so much for your extraordinary intelligence always and forever. And that's what we have left by the back of the video. We're going to shift the dip.

25:09 I mean, I'm sure you understand all this, Scott, but, you know, I guess one issue with a mid-cap like yours is that the free float itself can also lead to a discount, and so it's a bit chicken and egg. You're buying back shares because the share price is cheap, but then institutional investors will say, well, you know, we can buy the stock because there's an antenna of liquidity, and then and so the discount doesn't contract. You see what I mean? Yeah, I mean, yes, and It's not as if we trade by appointment. We trade every single day. And so I think our... Yes, and we should be thoughtful about this. And we think the buybacks are of good value.

25:55 We're certainly not going to spit the shares out. And ultimately, we think our... I mean, we have a... Thank you. Thank you. Thank you. Thank you Will Thank you very much. We will take you off mute.

27:06 Can you hear me?

27:09 We can. Great, thanks. Could you explain to me why tokens are impacted by rising rates? I just didn't quite get that. You ran through it fairly quickly. That's the first question. So, I mean, the token product is, it's our, so these are security high tokens, so they're our underlying real estate. And the security firms who put them together want to have kind of the highest possible dividend. And so they did, and so, as you know, for our company and for our REITs, we generally hedge dividends.

27:54 So that's the answer. Rates have gone up and it is and there has been no protection from the rates going up. Now, what's happening also is that rents are going up. And so, in reality, if you're not totally focused on dividend yield, there's a capital gain opportunity, which is extraordinary. And we actually liquidated our first security token. The yield that we marketed to the investors was an ongoing 4%.

28:48 We ended up giving them a double that, 8%. in terms of annual return. But this is a market which is currently intermediated by securities firms, and so the math doesn't work for them. So it's kind of going into a pause right now. And we'll have to think together whether or not we restart it. It's something that you could go doing something totally different over the securities firms with the investors. It's not a pure yield play, but something that's yield plus capital gain. But for the moment, as I say, rising rates has impacted the dividend yield on these tokens, and it's below where the security terms want to settle. Did that make it clear?

29:31 Yes. Thank you. And from our perspective, it's not as if we don't care. I mean, it's like we have the whole point of being one of the things we developed over the last five years is the diversified number of channels. And so if this channel goes slow, we don't have a problem. We have so many investors who want our assets, so that's fine. But it is a channel that is currently flying for the reason I just described.

29:57 Got it. And I guess somewhat similar question in terms of just cap rate trends. So I assume we're underwriting higher income due to inflation, but how are cap rates moving? Are they Thank you for joining us. Yeah, probably plus, you know, call kind of plus 0.1%. I mean, there's been some edge up.

30:53 Although, it depends on, there's a little bit of kind of a flight towards quality, which is benefiting us. Because we have, you know, we have assets, as you know, that we focus on prime locations. But cap rates really haven't moved because the increase in interest rates has been offset by interest, increased expectations. I mean, that are real, of rents going up. Hotels are a slightly different world. Hotels also, interestingly enough, cap rates are relatively stable, which is, I guess, people having a view that the Chinese are going to come back or that Japan is so fantastic that everyone, you know, is coming to Japan from the U.S. and all the parts of the world are telling their friends and they keep on coming. So, you know, there appears to be a better view of, In more classic real estate classes, like office, for example, that brings it going up, which is correct.

31:44 And there appears also to be an embedded view, which is a little bit harder to speak to, but is an embedded view that also hotel rates are going to be going up over time. So, again, I described cap rates pretty much flattish.

31:58 Thanks. Okay, and then on hotels, so business profits down, you know, very... Significantly, the rep parts, obviously, this seems temporary on the China inbound view, but is it also an inflation cost impact? So you're getting squeezed, basically? And then what's the kind of outlook next year? Is this going to mitigate your excited for profit recovery or just kind of give us an Yeah, because we have two nots that we've brought on this year that are going to contribute and are not series is doing the extraordinary well.

32:43 And we have more in the pipeline. So we continue to see this as a growth sector. But as you know, I mean, hotels are fantastic. They've been super, super profitable for us, but they're the most volatile. So we restricts. are our exposure to hotels to about a quarter max. And so I think it's currently at 28%, which is fine. But yeah, we see growth in hotels that are kind of somewhat more Ichigo specific because of the rollout and the ongoing rollout and the not series. We have no, you know, and again, just to describe what that is again, I mean, Japan has plenty of luxury hotels and plenty of budget hotels, but doesn't seem to have a lot that's that kind of $100 a night that's really nice. And so that's kind of what The Knot has focused on in a boutique hotel.

33:32 If you're kind of a global person who thinks boutique hotels like Ace Hotel, that sort of thing, that's what our offer is like.

33:39 Really good food, really good restaurants, good soft service, English speaking, help and all that sort of thing. People kind of being able to tell you what the neighborhood is like and where you can go, all that sort of thing. So that's the offer. It's really successful and we're expanding it.

33:54 One last one, okay? Absolutely, go for it. Battery storage. Yeah. So... My understanding is that first stage, this is like adjacent to your own solar assets to improve utilization. But then is there a future story, like data center, outside your own assets, sort of developing this for other power sources, et cetera? Is there any story there? Yes. So, I mean, we're... Yes, I mean, we're looking really hard at how we deploy against this, and it's not only kind of for us.

34:40 Okay. How have these implementations gone? I mean, this is a new technology for you, a new strategy. Have there been any bumps in the road or any – how is it going generally? So we just have one up and running, but it's just like, I mean, it's – It's just like solar, but even better. I mean, you know, these are battery packs. I mean, it's not really operating. It's really simple. You know, we like, you know, you understand your capex, your cost of front and all sort of thing. So we've got one up and running and it's going fine.

35:15 Okay. Thanks. All right. Thank you. Okay. I think we're done. Thank you so much, everybody. It's an honor and privilege to work for all of you. Take care. Have a good day.