JRH Financial Results for the 25th Fiscal Period
We would like to explain the financial results and executive summary for the 25th (September 2018) Fiscal Period.
Please look at “Executive Summary” on page 3.
Executive Summary for the 25th Fiscal Period
The first point in the executive summary is operation. We are confident that steady management for maintaining a high occupancy rate, JRH’s main characteristic, including cost control is being executed.
The second point is finance. We are implementing cost reduction under the planned conditions while obtaining understanding from various lenders.
As for sustainability initiatives, the third point, we participated in the GRESB Real Estate Assessment for the first time and received “Green Star” and “2 Star” in the current period (25th fiscal period).
In relation to IR, the fourth point, JRH is receiving strong support and understanding from overseas investors.
We intend to further strengthen this aspect.
The fifth point is the progress of the medium-term target of distribution per unit. For details, please refer to page 4.
Progress of Medium-Term Target of Distribution per Unit（1/2）
We announced the medium-term target in November 2016 and two years have passed in the three-year plan. We have already achieved the distribution level of 2,000 yen from 1,900 yen.
With cost reduction indicated in the lower part of the page, the goal has nearly been achieved by conducting time-consuming work such as the reduction of BM fees and shifting the form of existing properties from trust beneficiary interest to real estate.
The reduction of financing costs is also expected to be achieved as planned if the current financial environment persists.
Progress of Medium-Term Target of Distribution per Unit（2/2）
Regarding acquisition of new properties indicated in the upper part of the page, we set a goal of acquiring properties worth 20 billion yen. While acquiring properties, we also sold properties expected to encounter risks over the ultra-long term in the active real estate market.
As a result, the accumulated total became 5.3 billion yen upon deducting the disposition amount from that of acquisition, but as usual we intend to establish a strong portfolio over the long term including through replacement rather than purchase of properties for the remaining 15 billion yen through all means over the next year. We will proactively acquire properties as a team, but the purpose of the acquisition is to achieve the targeted amount of distributions and the acquisition of 20 billion yen itself is not a goal.
Please look at page 5.
Comparison between the 24th (March 2018) and the 25th (September 2018) Fiscal Period
Comparison of the status of portfolio, operation and finance between the 24th and 25th fiscal periods are indicated and the results remain favorable.
Please look at page 6.
Unitholders as of the 25th Fiscal Period End (as of September 30, 2018)
The composition of unitholders is indicated. Especially, as for the relation with foreign investors, we intend to continue implementing the existing IR policy and gain further understating from investors.
Next, we will explain the financial results. Please look at page 8.
II. Financial Results for the 25th (September 2018) Fiscal Period
We would now like to explain the financial results for the 25th fiscal period (September 2018).
First, please look at page 9.
Key Figures Trend
The financial results from the past are indicated in order.
Looking at distribution per unit in the rightmost part, distribution per unit for the current period (25th fiscal period) was 1,946 yen, increasing slightly from the forecast of 1,940 yen.
As for the forecast for the 26th fiscal period (March 2019) and 27th fiscal period (September 2019) announced at the same time, we forecasted that the amount will be 1,950 yen for both periods.
We will explain the details later.
Financial Results Overview – 25th Fiscal Period (April 1, 2018 – September 30, 2018)（1/2）
The overview of the financial results for the 25th fiscal period (September 2018) is indicated on pages 10 and 11.
① in the leftmost row is the forecast announced on May 15 and ② on its right is
the result for the 25th fiscal period.
Operating revenue increased by 58 million yen from the forecast and the increase in “Other Revenue” was the key factor of the difference. As for “Other Revenue,” premium income or penalty income were not included in the budget as they cannot be estimated upon the forecast as previously explained. However, a little less than 30 million yen was recorded in the actual results and has become a key factor of difference.
Financial Results Overview – 25th Fiscal Period (April 1, 2018 – September 30, 2018)（2/2）
On the other hand, as for expenses, the factors are indicated on the right side of the column of operating income, and the increase in restoration expenses by 35 million yen has become a factor of decrease in profits. This is because the restoration expenses after the tenant move-out was higher than the forecast as more tenants moved out in April to May than the forecast.
As a result, the results of distribution per unit increased by 24 yen from the forecast to 1,964 yen as indicated in the lower part.
<25th Fiscal Period: Initial Forecast vs. Results>
The factors of change in distribution are indicated on page 11. Distribution per unit became 1,964 yen by adding temporary difference adjustment and reversal of distribution reserve as in the previous period.
Next, please look at page 12.
Results for the 24th Fiscal Period vs. the 25th Fiscal Period（1/3）
The comparison of the results for the 25th fiscal period and the previous period (24th fiscal period) is indicated here.
As for operating revenue, the results for the current period (25th fiscal period) in ②decreased by 34 million yen from that for the previous period in ①. However, we sold Satella Nagayama, a property which we owned in Asahikawa City, Hokkaido, in the previous period (24th fiscal period), and a decrease of approximately 50 million yen in total consisting of the absence of approximately 30 million yen of gain on disposition and decrease of approximately 20 million yen of operating revenue was seen due to the impact of the sale. Revenue for other properties increased slightly.
Results for the 24th Fiscal Period vs. the 25th Fiscal Period（2/3）
In addition, the main breakdown of the change in expenses is indicated in the column of operating income.
First, as for the increase in repair expenses, JRH usually conducts large-scale exterior wall renovation work in which capital expenditure is recorded. However, it conducted repair work of Green Park Komatsujima, which it owns in Sendai City, this time and 22 million yen of the construction costs has become a major factor of increase in repair expenses.
The increase in the number of move-outs in April to May from the previous year was a major factor of increase in restoration expenses.
Results for the 24th Fiscal Period vs. the 25th Fiscal Period（3/3）
In addition, reversal of distribution reserve and temporary difference adjustment increased by 7 million yen from the previous period. The increase is due to the start of the process of reversing the gain on disposition of Satella Nagayama, which was sold in the previous period, over four periods from the current period (25th fiscal period) and adding it to distributions after recoding it as distribution reserve.
As a result, distribution per unit decreased slightly from 1,967 yen in the previous period to 1,964 yen.
Please look at page 15.
Forecast for the 26th (ended March 31, 2019) and the 27th Fiscal Periods (ended September 30, 2019)（1/3）
Next, we will explain the forecast for the 26th fiscal period (March 2019) and 27th fiscal period (September 2019).
We have announced our forecast that distribution per unit will be 1,950 yen for both the 26th and 27th fiscal periods.
In the column of key factors of the difference of operating income for the 26th fiscal period, it is indicated that there will be a decrease of 48 million yen in “Other Decrease” but as explained previously, premium income and penalty income are not included in the forecast and are indicated as negative factors in comparison with the results for the previous period.
Forecast for the 26th (ended March 31, 2019) and the 27th Fiscal Periods (ended September 30, 2019)（2/3）
In addition, the expected average occupancy rate is indicated in blue in the column of operating revenue and we forecast the occupancy rate to be 97.8% for both the 26th and 27th fiscal periods. The 26th fiscal period started with a favorable occupancy rate exceeding the forecast and therefore the blue figures shall be considered as forecasted figures calculated by viewing the occupancy rate in a slightly conservative way.
Forecast for the 26th (ended March 31, 2019) and the 27th Fiscal Periods (ended September 30, 2019)（3/3）
In the column of ordinary income, both interest expenses and financial costs are expected to decrease for both the 26th and 27th fiscal periods. In addition to the full-period contribution of the impact of the refinancing of approximately 14.4 billion yen implemented this June, refinancing of approximately 14.2 billion yen is scheduled to be implemented in December during the 26th fiscal period and refinancing of approximately 7 billion yen is scheduled to be implemented in three installments in the 27th fiscal period, and the decrease in financial costs when refinancing of loans during periods when the interest rate was high can be implemented at the current interest rate level has been incorporated into the forecast.
Such are the key factors of the difference in the forecasts for the 26th and 27th fiscal periods.
IV. Detailed Information for the 25th Fiscal Period
Next, we will explain the operating results for the 25th fiscal period in detail.
Please look at page 17.
Occupancy and NOI Yield
The red solid line indicates the occupancy rate which was 98.6% as of the end of the 25th fiscal period. The occupancy rate as of the end of the previous period (24th fiscal period) was 99.1%, the highest ever. The occupancy rate for the current period fell slightly but remained at the 98% range. In addition, the average occupancy rate during the period was 98.2%, hovering at the 98% range for the eighth consecutive period.
With regard to the improvement of occupancy rate, please skip the next page and go to page 19.
Tracking the Process from Moving-out to Moving-in
We have introduced the “Daily Occupancy Forecasting System” for each period. Although there were office building relocations that occurred with the merger of the management company at this time, we are still managing the “Daily Occupancy Forecasting System,” which we have utilized from the past, and we strive to shorten the downtime and improve the occupancy rate by utilizing this system.
The status of move-ins/outs for the 6 months of the 25th fiscal period is indicated in the upper part of the page. The figure indicates that there were many move-ins and move-outs in the 25th fiscal period with the number of move-ins increasing by 192 units and move-outs by 76 units from the previous period (24th fiscal period).
Please look at page 20.
Track Records of Asset Management 1
All these data have been indicated in the material for each fiscal period but please look at the Long-term Vacancy Units (over 60 days) –Trend in # of Units on the left side of the lower part. JRH classifies vacancies over 60 days as “long-term vacancies” and it was able to reduce the number of such vacancies to 35 units, accounting for 0.26% of all units, as of the end of the 25th fiscal period.
The changes in parking lot occupancy rate are indicated on the right side of the lower part. We explained the parking lot occupancy rate in detail in the material for the previous period and this time only indicate the changes in occupancy rates for the current fiscal period, but the material shows that a high occupancy rate in the range of 93% has been maintained.
Please look at page 21.
Track Records of Asset Management 2
JRH has disclosed the “Economical Occupancy Rate” in the upper left graph from the period before the previous period. As explained repeatedly in each period, JRH also focuses on “Economical Occupancy Rate” which includes the operational status during the month as “Average Occupancy Rate” indicates only the 6-day average occupancy rate at of the end of each month.
The rate for the 25th fiscal period was 96.5%, decreasing slightly from 97.1% in the previous period, but we will continue to conduct management for improving the “Economical Occupancy Rate” which has a significant impact on operating revenue.
Please look at page 22.
Rent Trend 1（1/2）
We will explain the rent trends at tenant turnover.
Please look at the graph on the left side of the upper part. The percentage of rent increase units at tenant turnover for the previous period (24th fiscal period) was 51.5%, which was the highest ever. In the current period (25th fiscal period), this figure was 50.1%, decreasing slightly from the previous period but remaining in the range of 50%. As indicated in the upper part of the page, the market condition of the 23 wards of Tokyo remains favorable and we are making continuous efforts to increase the rent centering on such areas.
Rent Trend 1（2/2）
On the other hand, the change in rent at tenant turnover saw a decrease of 924 thousand yen on a monetary basis as indicated in ※ in the table on the right side of the middle part and the breadth of decrease has expanded slightly from an approximate decrease of 600 thousand yen in the previous period. The breadth of decrease has shrunk from an approximate decrease of 2.4 million yen in the same period of the previous year, and we aim to further reduce the breadth of decrease and flip it into growth.
We couldn’t achieve growth in the 25th fiscal period but we are making continuous efforts to make the percentage change at tenant turnover closer to zero and achieve growth.
Next, please look at page 24.
Operating Revenues, NOI and Rent per Tsubo Trends
These data have also been introduced from the period before the previous period.
In the lower graph, the red solid line indicates rent per tsubo of the entire portfolio and the blue solid line indicates the average rent per tsubo of the 154 properties held from 2010.
Looking at the blue solid line, the rent per tsubo has decreased by 2.7% over the past 7 years. However, in the above bar graph, the dark blue bar indicates the operating revenues of the 154 properties and the amount remains almost the same when comparing the figures for September 2011 and September 2018. We would again like to explain that although rent per tsubo is decreasing slightly, operating revenue remains unchanged based on the number of properties with the reduction of downtime and NOI (in the light blue bar graph) is on an upward trend due to the reduction of expenses.
Please look at page 25.
Cost for unit repair/restoration and major exterior wall repair
Here, we will explain the construction work.
As explained previously, we are conducting construction work by setting the restoration and repair costs at approximately 400 million yen per period and the upper limit of capital expenditure at 1 billion yen per period. In addition, we are progressing such construction work by being aware of the dispersion of periods to avoid the concentration of construction work in a single period.
In the 25th fiscal period, we have completed the construction work with a capital expenditure of a little over 1 billion yen, which is almost the same amount as the targeted upper limit.
As for the future outlook for costs for exterior wall repair and renovation, as indicated in the upper part, the peak is estimated to be 850 million yen in the 28th fiscal period. However, the amount is expected to decrease to a level below 300 million yen for some time from the 31st fiscal period.
Next, we will explain the content of the construction work.
Please look at page 26.
Unit Renovation in the 25th Fiscal Period
We present “Deim Hashimoto,” which we own in Sagamihara City, as a specific example.
We apologize that the floor plan on the right side of the page is small and difficult to see, but we have converted the room style from a traditional Japanese style to a Western style and eliminated the room partitions. As seen in the picture at the lower part, the room partitions have been eliminated and renovation has been implemented to create a sense of openness.
In addition, the lower right modular bath in the floor plan before the renovation has been changed to suit the preference of tenants in recent years by separating the bathroom and toilet.
Such renovation can only be implemented upon tenant turnover but we intend to continue implementing it by grasping the timing.
Please look at page 27.
Exterior Wall Repair and Renovation in the 25th Fiscal Period 1
Properties that underwent exterior wall repair and renovation in the 25th fiscal period are introduced on pages 27 and 28.
As indicated in the upper part and introduced previously, repair expenses of 22 million yen was spent exclusively for “Green Park Komatsujima” and capital expenditure of 784 million yen was spent to implement the work for the other 11 properties.
Please look at page 29.
We will explain the status of interest-bearing debt.
We refinanced approximately 14.4 billion yen in the 25th fiscal period.
As indicated on the right side of the upper part of the page, we realized the extension of borrowing periods by extending the borrowing period from 5 years before refinancing to 7.3 years on average and reducing all-in costs from 1.45% to 0.88%.
The contract for the refinancing was concluded in March and a fixed interest rate was applied only for the borrowing of 1 billion yen and variable interest rate for that of the remaining amount. However, an interest rate swap agreement was concluded upon the borrowing in June and all interest rates were fixed.
Please look at the graph on the left side of the lower part of the page. The orange line graph indicates the change in ratio of debt with fixed interest rates. As indicated at the bottom of the graph, the ratio of fixed interest rates decreased to 64.0% as the interest rate swap under the basket method became due in the 24th fiscal period but recovered to 76.5% by fixing all interest rates in the refinancing implemented in the current period (25th fiscal period). As for future refinancing, we intend to basically fix interest rates and conduct management by setting the targeted ratio of fixed interest rate at 80-90%.
Please look at page 30.
The above graph indicates maturity ladder and financial cost but the impact of refinancing is included in the forecast announced this time for the 26th and 27th fiscal periods. The impact of refinancing is also included in the mid-term plan as the 27th fiscal period is the final period. However, we intend to implement refinancing in a way that contributes to revenue in the future as there are still borrowings at high interest rates in comparison with the current interest rate level even after the 28th fiscal period.
The lower graph indicates all-in finance costs and average tenor including future plans. The financial cost is forecasted to decrease to a level close to 1% in the 27th fiscal period.
Please look at page 31.
Appraisal (as of September 30, 2018)
We will explain the appraisal.
The number of properties held at the end of the current period (25th fiscal period) is the same as that held at the end of the previous period (24th fiscal period) and the appraisal value increased by 3.9 billion yen for the same 198 properties. Cap rate is still on a downward trend and the decrease in cap rate for 148 of the 198 properties has become a major factor of increase in appraisal value.
Please look at page 32.
We will introduce sustainability initiatives.
We participated in the GRESB Real Estate Assessment for the first time this year and received “Green Star” and “2 Star.”
As for residential REITs, the acquisition of data for the rental portion is difficult compared to other sectors and assessment is relatively difficult among all real estate. As for residential J-REITs other than JRH which have been disclosed, two received “3 Star” and two received “2 Star.” JRH was able to receive “2 Star” despite its first time participating and we will therefore aim to further improve the evaluation.
Merger of Asset Manager (dated October 1, 2018)
The merger of asset management companies as of October 1 is indicated again.
We believe that the merger was not a significant event as it was just a merger of fellow subsidiaries in Daiwa Securities Group and that the most important thing is to continue conducting management of JHR which has been viewed positively. We conducted such management in line with the abovementioned theme in October and November.
Please look at page 34.
Overview of New Merged Company
As for the organization, the staff of Japan Rental Housing Investments Inc., the former asset management company, joined the existing organization of Daiwa Real Estate Asset Management Co. Ltd. without any change to the business policy, content, etc.
Regarding the investment division, we established the Investment Team of Japan Rental Housing Investments Inc. in the Acquisition Department. We intend to first receive all bulk projects at the Acquisition Department, classify them by investment type, prevent the loss of valuable information even in the current harsh acquisition environment and realize the growth of Japan Rental Housing Investments Inc. as a result of such efforts.
Please look at page 35.
Merger of Asset Manager (Measure to prevent conflicts of interest)
The measure to prevent conflicts of interest concerning the acquisition of rental residential properties is indicated.
In general, Japan Rental Housing Investments Inc. will be granted priority for properties of which acquisition is being considered when the completion year of the property in the western calendar is an odd number, and Daiwa Residential Private Investment Corporation will be granted priority when the completion year of the property in western calendar is an even number.
We competed against each other in the past in bids as different companies, but now we intend to sort out priority within the division based on the odd and even number rule and prevent the loss of valuable information.
As for the amount of information, we intend to urge the people familiar with each market to establish a system which “ensures the obtainment of information on transactions of rental residential properties by consulting with a certain party” and obtain an overwhelming amount of information.
Please look at page 36.
Merger of Asset Manager (Expansion of property acquisition opportunities)
As for the acquisition method of properties, the utilization of a bridge fund with Daiwa Securities Group’s funds will be considered when the acquisition timing differs from the disposition timing of the seller due to fund procurement, due diligence, etc. We also intend to create a cycle in which we establish a strong alliance with developers that want to develop rental apartments but do not have REITs or good partners within their group and then let Japan Rental Housing Investments Inc. or Daiwa Residential Private Investment Corporation acquire the properties developed by said developers after completion.
The Asset Manager communicated with many small- and medium-sized independent developers as it is an independent asset management company having no developers, etc. within the group. With the addition of Japan Rental Housing Investments Inc., we would like to further develop the relationship with developers.
Please look at page 38.
Growth Strategy (Summary)
We have summarized our future growth strategy and there are basically no changes from the content which we have explained previously.
As for “(1) New Properties Acquisitions,” we intend to implement various measures as explained in the previous section.
As for “(2) Operation of properties held,” we consider it as the most important issue as explained repeatedly, and properties continue to be operated by the staff of Japan Rental Housing Investments Inc.
Regarding the “Finance Strategy,” we would like to response flexibly under the rapidly changing environment.
Growth Strategy (1)External Growth
There are no changes in the details of the growth strategy after page 39, but we intend to add the know-how of the staff managing other investment corporations and make efforts to achieve better results.
This is the end of the explanation. Thank you for listening.