JRH Financial Results for the 26th Fiscal Period
Although it has already been announced via press release, we would like to report a change in the organization of the Asset Manager.
My name is Fukushima and I was appointed as Representative Director on April 1.
The former President Yamauchi will continue to be engaged in management as Chairman and Director.
Furthermore, Deputy Director Nakamura, who supported the management of JRH for years, has retired from his position as General Manager of Asset Management Department at JRH, and Ichikawa has been appointed as his successor. We seek further growth as we intend to rejuvenate the staff responsible for the front line of our management business.
We would like to report and explain the executive summary of JRH.
Please turn to page 1.
Topics for the 26th Fiscal Period (Ended March 2019)
There are three topics this time. The first is “Progress of Medium-Term Targets and Establishment of New Medium-Term Targets,” the second is “Amount of New Rent at time of Tenant Turnover Turning to a Positive Figure” in management, and the third is “Commencement of Property Replacement that Suits the New Medium-Term Targets.”
The main items and figures are indicated on this page, and the details will be explained in each section.
Please look at page 4.
Progress of Medium-Term Target of Distribution per Unit
This is the first topic. The progress of each item indicated for the previous medium-term targets is as described. The summary is described in the next page.
Please look at page 5.
Progress Summary of Medium-Term Targets for Distribution(2 1/2 years after the start of the 3-year plan)(1/2)
Unfortunately, we have not achieved “New Property Acquisition.” We sought to acquire 20 billion yen but only accumulated a little over 5 billion yen, partially due to the impact of sales of properties.
On the other hand, we achieved “Cost Reduction,” exceeding the predetermined value. We implemented “payout of reserve for temporary difference adjustments” as scheduled.
As a result, we achieved distribution per unit of roughly 2,000 yen, slightly different from the scheduled breakdown.
With this achievement, we would like to end the explanation on the previous medium-term targets achieved half a year ahead of schedule.
Progress Summary of Medium-Term Targets for Distribution(2 1/2 years after the start of the 3-year plan)(2/2)
Some issues were also made clear in the summary of the previous medium-term targets. As indicated above, the fact that there was no contribution to the growth of distribution due to properties not being acquired as scheduled was an issue. We also regard the failure to improve portfolio quality in aspects such as location, age and scale of portfolio properties as an issue.
As will be explained later, we believe that the sourcing system for property acquisition has been enhanced significantly with the merger of the Asset Manager in October 2018. The volume of property information has increased rapidly. Under such circumstances, we will be setting new medium-term targets and putting them into action.
Please look at page 6.
New Medium-Term Targets(1/2)
In the new medium-term target, we will make efforts with improvement of portfolio quality positioned as the utmost priority.
Under the basic premises of “maintenance of the distribution level” and “maintenance of the LTV level,” we will proactively replace assets to improve “region,” “building age” and “size.”
Specifically, we aim to replace properties valued at 20 billion to 30 billion yen on a monetary basis (10-15% of the entire portfolio). We will mainly sell properties located far from the center of their respective metropolitan area, properties small in scale, and older properties. Meanwhile, we plan to proactively acquire properties located at the center of their respective metropolitan area, properties exceeding a certain scale, and properties that are relatively new.
We will maintain our basic policy to conduct diversified investment across the nation, and we want to realize a ‘replace and shift’ of properties by setting the center of each metropolitan area as a key area. We would also like to rejuvenate the portfolio overall by selling properties that are older in age and purchasing newer properties.
New Medium-Term Targets(2/2)
In order to achieve this goal, we will work in coordination with Daiwa Securities Group Inc., the sponsor, to prepare various policies and measures.
First, we will utilize approximately 6 billion yen of current cash on hand as well as ample cash on hand, generating 0.8 billion yen of amortization in each fiscal period. (Amortization: approx. 1.8 billion yen/fiscal period, capital expenditure: approx. -1 billion yen/fiscal period, difference: approx. 0.8 billion yen)
Next, we will adopt various methods to acquire new projects such as speedy investment decisions made through full utilization of property information which increased rapidly after the merger of the Asset Manager, utilization of warehousing functions by the sponsor, and forward commitment to development properties.
In addition, as for the volatility in distributions which occurs when replacing properties, we aim to stabilize distributions by flexibly utilizing a total of approximately 6.8 billion yen of reserve for temporary difference adjustment and distribution reserve. We will also eye the buyback of own investment units depending on the situation and make efforts to achieve the new medium-term target.
Please look at page 7.
Future Level of Distribution on a Stabilized Basis
The present thinking on distributions is indicated here. We will maintain at least 2,000 yen of stabilized distribution. There will be cases where sale will precede acquisition in property replacements. Offsetting decrease in revenue from sale by acquiring newer properties using funds obtained from disposition and cash on hand is the basic premise. However, temporary decrease in revenue may occur due to the timing of property acquisition, etc. In such a case, we plan to cover the amount by adding reserve for temporary difference adjustment to the planned amount and reversing it, thereby maintaining distribution per unit of 2,000 yen. After achieving the new medium-term target of improvement of portfolio quality, we will look to realizing an asset size of 250 billion yen and further growth of distributions.
Please look at page 9.
Key Figures Trend
Here we will explain the status of the financial results for the fiscal period ended March 2019. These are the trends of key indicators. We forecast distribution per unit of 2,000 yen for both the fiscal period ending September 2019 and the fiscal period ending March 2020.
Please look at page 10.
Results for the 25th Fiscal Period vs. the 26th Fiscal Period
This is the comparison between the results for the 25th Fiscal Period and that for the 26th Fiscal Period. Operating revenue for the fiscal period ended March 2019 was 8,256 million yen, remaining largely unchanged from the previous fiscal period. Distribution was 1,990 yen, an increase of 26 yen from the previous fiscal period. We believe that there were no significant changes in the portfolio and stable management has been achieved.
Please look at page 11.
26th Fiscal Period: Initial Forecast vs. Results
This is the comparison with the initial forecast. There are also no significant differences between the initial forecast and results. Distribution was 1,990 yen, an increase of 40 yen.
Please look at page 12.
Forecast for the 27th (ended September 30, 2019) and the 28th Fiscal Periods (ended March 31, 2020)(1/2)
This is the forecast for the 27th and 28th fiscal periods. In the fiscal period ending September 2019, 10 properties worth 4.5 billion yen were sold. We plan to post approximately 130 million yen as net gain on sales and the entire amount is scheduled to be used as distribution reserve.
At the same time, we decided on acquisition of a new property scheduled to be completed in July 2019 and valued at 1.1 billion yen. The property is scheduled to contribute to revenue from the fiscal period ending March 2020 onward. Approximately 120 million yen in decrease in revenue stemming from the sale of 10 properties is expected in the fiscal period ending September 2019. As for budgeting, decrease in revenue from selling of properties will be covered with the reversal of reserve for temporary difference adjustment, and the distribution forecast is 2,000 yen per unit. However, our basic policy is to offset decrease in revenue from the selling of properties sales through acquisition of new properties. Also, it is possible that partial/full cancellation of reversal may occur if the properties expected to contribute to revenue are acquired in the current fiscal period.
Forecast for the 27th (ended September 30, 2019) and the 28th Fiscal Periods (ended March 31, 2020)(2/2)
For the fiscal period ending March 2020, we will basically adopt the same policy. We plan to proactively acquire properties to cover as quickly as possible the decrease in revenue. As for budgeting, as of today, we will additionally reverse part of the reserve, etc. and maintain the distribution forecast at 2,000 yen per unit.
It is possible that partial/entire cancellation of the reversal will occur as indicated if property acquisitions are implemented smoothly and the decrease in revenue can be covered through the selling of properties also in the fiscal period ending March 2020.
Please look at page 14.
Summaryfor26th Fiscal Period (Ended March 2019)
We will explain the management status for the fiscal period ended March 2019. For “internal growth,” change in rent at time of tenant turnover turned to a positive figure. For “external growth,” we have decided to sell 10 properties and acquire 1 new property in line with the new medium-term targets. As for “finance strategy,” we implemented refinancing as scheduled.
Please look at page 15.
Occupancy and NOI Yield
This page is about internal growth. The occupancy rate and NOI yield are indicated. We continue to maintain a high occupancy rate. The occupancy rate as of the end of March 2019 was 99.0% and even the average occupancy rate during the period was 98.7%. NOI yield also remains at a high level. We believe that this was achieved as a result of the steady efforts made by the members of the Management Department.
Please look at page 16.
Tracking the Process from Moving-out to Moving-in
This is the “Daily Occupancy Forecasting System” with which we are all familiar. Process tracking using this system supports management at the high occupancy rate explained previously.
Please look at page 17.
Track Records of Asset Management
The results in process tracking are indicated here. The percentage of refurbishment within three weeks based on the “Three-Week Rule” is approximately 89%. “Re-tenanting within 60 days” was achieved in approximately 85% of the projects.
As a result, for “long-term vacancy,” across the entire portfolio only 14 units experienced long-term vacancy of more than 60 days. We believe that such results will contribute to maximizing revenue in the current portfolio.
Please look at page 18.
“Rent trends,” which is one of the topics in the 26th fiscal period, is indicated here. The percentage change at tenant turnover of the entire portfolio remained negative until the 25th fiscal period when it finally turned positive.
While percentage change at tenant turnover was already positive in the 23 wards of Tokyo, the rate also turned positive in the Osaka metropolitan area, Nagoya metropolitan area and Fukuoka metropolitan area. Utilizing such change as a driving force, we were able to increase the rate by approximately 1% across the entire portfolio. However, there are some properties where rent decreased. Moreover, there are still areas other than the above four areas where the rate remains negative.
As mentioned at the beginning, we aim to transform the portfolio by conducting large-scale asset replacements and create a portfolio through which stable rent increase can be realized.
The status upon contract renewal is as indicated on the right part of the page.
Please look at page 19.
Cost for unit repair/restoration and major exterior wall repair
Here is the trend for construction-related costs. We are conducting necessary construction work in a timely manner as before.
Please look at page 20.
Unit Renovation in the 26th Fiscal Period
Renovations conducted in the fiscal period ended March 2019 are indicated here. We renovated 21 rooms in total. We realized re-tenanting with rent increase at 15 out of the 17 units excluding 4 vacant units.
Please look at page 21.
Exterior Wall Repair and Renovation in the 26th Fiscal Period 1
The exterior wall repair and renovation conducted in the fiscal period ended March 2019 is indicated here. We conducted construction work for a total of 14 properties worth approximately 800 million yen.
Please look at page 23.
Exterior Wall Repair and Renovation in the 26th Fiscal Period 2
We will explain external growth here. In the new medium-term targets, we aim to replace 10% to 15% of the portfolio assets. By setting key areas, we will proactively conduct asset replacement. Diversification of information sources progressed with the merger of the Asset Manager, and the decrease in acquisition opportunities became a concern due to the Rotation Rule (refer to page 65) with REITs investing in the other residences managed by the Asset Manager. However, we have been able to implement many sourcing activities by making up for such decrease. This is just the figure for aggregated information, but in the 26th fiscal period we were able to collect information on 942 projects, approximately three times the number of projects in the 25th fiscal period.
Unfortunately, there are no projects for which contracts were concluded during the 26th fiscal period, but among the 942 projects there are some that are currently being negotiated. We will work toward being able to report them as achievements in the financial results material for the next fiscal period.
We plan to conduct asset replacements in the meantime, but we will not give up on our mid-term goal of achieving an AUM of 250 billion yen.
Please look at page 24.
Focused Investment in Key Areas
The key areas are indicated here. As mentioned at the beginning, there will be no significant changes to our policy of conducting diversified investment nationwide. There is no plan for changeover to a policy such as conducting focused investment only in Tokyo.
However, through careful selection and the setting of key investment areas in each metropolitan area, we will acquire properties capable of surviving. We intend to focus more on central metropolitan areas.
Please look at page 25.
Decision on Asset Replacement (Announced on April 11, 2019)
This is the third topic. It is the first step in asset replacement for our medium-term target. In the current fiscal period ending September 2019, we have already sold 10 properties worth 4.5 billion yen. On the other hand, we have decided to newly acquire a property worth 1.1 billion yen.
For disposed assets, the average amount per property is approximately 450 million yen and the average building age is 24 years. As for the asset to be acquired, a newly constructed property worth approximately 1.1 billion yen is scheduled to be acquired.
Please look at page 26.
Overview of Disposed Assets and Asset to be Acquired(1/2)
The details of the disposed assets and the asset to be acquired are indicated here. The disposed assets are the 10 properties listed here. These were selected bearing in mind properties located outside the key areas, properties that are older in age, and properties that are small in scale. We consider these 10 properties to meet one or some of the above three requirements.
We decided the acquisition of the asset to be acquired by looking at properties within the key areas, properties that are younger in age and properties of a relatively large scale. The asset to be acquired is a newly constructed property scheduled to be completed this July in central Osaka worth 1.1 billion yen. We already own 3 properties in the neighboring area and have results and confidence in management. Therefore, while risks associated with leasing will occur with development projects, we have judged that we are able to conduct the acquisition with confidence based on past results.
We decided the disposition and acquisition as we believe that the replacement this time is in line with the new medium-term targets mentioned at the beginning although the size is not evenly balanced.
Overview of Disposed Assets and Asset to be Acquired(2/2)
Although selling of properties have preceded acquisition, we ask for your understanding that the Asset Manager has a firm belief in the new medium-term targets so that we may continue conducting asset replacements with a sense of reassurance. We appreciate your support.
Please look at page 27.
The status of interest-bearing debt is indicated here. We refinanced 14.2 billion yen in the fiscal period ended March 2019 as scheduled. As for the details of overall interest-bearing debt, the ratio of debt with fixed interest rate is 71% and LTV remains in the range of 50%. In this way, we are supported by many financial institutions.
Please look at page 28.
The status of diversification of repayment dates for borrowings is indicated here. The average remaining loan period is 4.05 years. It was extended by about 0.3 years from the previous fiscal period. We aim for further stabilization through continued consultation with lenders.
Please look at page 29.
Appraisal (as of March 31, 2019)
The status of appraisal value is indicated here. The total appraisal value as of the end of March 2019 was 264.8 billion yen, an increase of 5.3 billion yen from the previous fiscal period. Unrealized gain was 48.9 billion yen.
Please look at page 30.
Here we will introduce our ESG initiatives. In recent years, JRH and the Asset Manager have strengthened initiatives on environment, social and governance (ESG).
Specifically, we have promoted various initiatives such as the adoption of ESG policy, establishment of sustainability committee and participation in GRESB.
Please look at page 31.
Initiatives for ESG (Governance)
As for governance, we will strive to ensure strict governance continues to function by utilizing the characteristic of being a securities company group.
Please look at page 32.
Efforts on ESG | Sustainable Development Goals (SDGs)
The initiatives of Daiwa Securities Group Inc. are indicated here. We declare that we will make efforts to realize the “Sustainable Development Goals (SDGs),” international goals adopted by the UN in 2015, through business by regarding the SDGs as an important objective.
JRH is also a member of Daiwa Securities Group Inc., and will act based on the declaration. We believe that stable long-term management will become possible by striving to improve the environment and enhance the environmental system of portfolio properties, establishing a strong relationship with various stakeholders such as tenants, employees, unitholders and lenders, and constructing and maintaining a stricter system for governance.
We aim for stable and sustainable growth of JRH by continuing to strengthen ESG initiatives.
Please look at page 33.
Growth Strategy (Summary)
This is the final part. The future initiatives are indicated here. We will make efforts in the improvement of portfolio quality as the utmost priority based on the new medium-term targets. After achieving such improvement, we aim to achieve an AUM of 250 billion yen.
Of course, we aim to continue maximizing the revenue of each property with regard to the current management. As for financial aspects, we intend to continue constructing a more stable financial base.
As mentioned earlier, we will utilize reserves, etc. more flexibly when they are judged to contribute to the promotion of the new medium-term targets.
Finally, as the Asset Manager, we intend to continue conducting management by doing simple things naturally, being highly sensitive to information so as not to miss an opportunity, continuously reporting and providing explanations to lenders and equity investors with sincerity to gain their support, and maintaining strict governance when making such efforts.
This is the end of the explanation. Thank you for listening.