ORIX JREIT : Uploaded 43rd Presentation Material with Transcript

Presentation

Tanaka: Hello everyone.

My name is Tanaka of ORIX Asset Management Corporation. Thank you for watching the video presentation of ORIX JREIT Inc., or OJR for short, on its financial results for the 43rd fiscal period ended August 31, 2023.

I will explain OJR's current situation and future performance forecasts based on that along with these materials.

Please, see page five. First, let me explain OJR's portfolio.

See the pie chart on the left side of the bottom row and the asset type ratios.

The majority of OJR's assets consist of offices, particularly mid-sized offices. This is followed by retail facilities at 15%, residential at 11%, logistics facilities at 5%, and hotels and others at 12%.

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Please, see page eight. I will explain our business landscape and our performance result, as well as our operational tactics.

First, in terms of business landscape for external growth, the real estate transaction market continues to see high prices and limited opportunities to acquire prime properties, but in order to promote external growth, we have improved the structure of our acquisition team and made efforts in selective sales and flexible, carefully selected investments. In the current fiscal period, OJR acquired a mid-sized office in Sapporo and a residential property in Fukuoka, both of which can take advantage of OJR's strengths, while selling Hotel Nikko Himeji, which had concerns due to lack of expected improvement in earnings, through property replacement focusing on improving the quality of the portfolio.

In terms of business landscape for internal growth, tenant demand in offices is on a recovery trend, but rents continue to be weak, especially in central Tokyo, due in part to the large supply.

In urban retail facilities, inquiries from restaurants are increasing, but there is limited appetite for opening stores in large plots.

In the residential sector, there are signs of bottoming out in the decline in rents for single types of properties in central Tokyo.

In the hotel section, the environment is becoming favorable for inbound demand in addition to strong domestic demand for lodging, but operational issues remain due to rising personnel and other costs and staff shortages.

In addition, there is a continuing upward trend in property management costs, such as utilities, in terms of expenses for all uses, and these factors have been factored into the budget.

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Under these circumstances, the occupancy rate in the fiscal period ended August 31, 2023 improved slightly in office and urban retail properties, and significantly in residential properties compared to the same period of the previous year, as a result of leasing activities emphasizing occupancy. We will continue our policy of focusing on occupancy while striving to maintain and improve rental revenues. In addition, variable rents increased for hotels, reflecting their strong performance.

As for the financial environment, interest rates are rising in Japan and overseas, but there has been no significant change in the lending attitude of financial institutions. In the current fiscal period, we continued to promote sustainable finance initiatives and increased our procurement ratio to approximately 18%. The Company has a commitment line of JPY40.5 billion, and cash on hand is about JPY48 billion, ensuring sufficient liquidity. We will continue to operate with an emphasis on financial stability while taking into consideration the cost of funds.

Retained earnings, which contribute to the stability of distributions, amounted to approximately JPY1.7 billion at the time of the announcement of financial results, or JPY646 per unit, due to the appropriation of the loss on the sale of Hotel Nikko Himeji. We will continue to increase the amount of the internal reserve as much as possible to prepare for any temporary downturn in performance.

With regard to ESG, the importance of managing for the realization of a sustainable society is increasing, and the ability to respond to the 2050 Net Zero is being called into question. OJR has established a new long-term goal for GHG emissions reduction and strengthened the mid-term goal for 2030, which is the path to achieve the goal as well as a transition roadmap to achieve the goal. We will steadily implement ESG initiatives with the aim of achieving long-term stable growth in investor value.

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Distributions are then explained on page nine.

As for the results for the fiscal period ended August 31, 2023, distributions, excluding amounts related to capital gains JPY3,636, much higher than six months ago forecast due to an increase in rental revenues from all usage of the property. In addition, by using internal reserves to cover the loss on the sale of Hotel Nikko Himeji, distributions are maintained at the six-month ago forecast.

For FYE 2/2024, we assume JPY3,900, an increase of JPY80 from the forecast six months earlier. The increase was mainly due to higher rental revenues from all usage, mainly from offices and hotels, a 7% increase in distributions, excluding amounts related to capital gains.

For FYE 8/2024, distributions are expected to be JPY3,530 due to the decrease in gains on sales, an increase in utilities expenses, and a decrease in rental income from hotels and other properties compared to the previous fiscal period, but distributions excluding the amount related to capital gains. are expected to exceed the levels forecasted six months earlier for the 43rd and 44th fiscal periods.

In the event that the distribution is less than these estimated distributions, we will consider using internal reserves.

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Please refer to page 10 for the detailed variation factors in this report later on.

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Next, I will explain internal growth. First, regarding the office, please see page 12.

Regarding the occupancy rate shown in the upper line graph, it was 97.2% at the end of fiscal period ended August 31, 2023, slightly higher than the previous assumption. Although the tenant move-out that occurred during the COVID-19 pandemic has subsided and demand for office space is on a recovery trend, we assume that the occupancy rate will remain at around 97%, taking into account the impact of the large supply of office space in central Tokyo with premising that factor in some amount of move-outs.

The line graph in the lower row shows the percentage change in rent due to tenant replacement. For the fiscal period ended August 31, 2023, it was minus 12%. The main reason for this large negative figure is that the previous tenant's rent was significantly higher than the current market rent in one of the shop tenants on the first floor of the office. Excluding such one replacement, the figure would be minus 1%. Although the rate of increase/decrease has continued to be negative due to leasing that emphasizes occupancy, the negative range itself has become smaller.

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Next, please see page 13. Here is the status of rent renewal for existing tenants of offices.

The bar graph in the upper row shows the status of rent renewal at the time of contract renewal by space. Although it is difficult to increase rents in central Tokyo where market rents are declining, we have been able to increase rents in the suburbs of the Tokyo metropolitan area and in regional areas. In the central Tokyo area, the floor space in rent reduction increased slightly due to renewals with tenants paying higher rents than market rents.

The line graph at the bottom shows the percentage change in rent at the time of contract renewal, which was 0% for fiscal period ended August 31, 2023. The renewals at the same rent are expected to continue in the future.

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Next, please see page 14. This is a tenant analysis in the office section.

As shown in the diversified tenant base on the left, OJR has more than 900 office tenants, with an average leased space of approximately 130 tsubo per tenant, and even the tenant with the largest amount of rent paid per property accounts for less than 2% of the total portfolio rent. Therefore, the impact of the move-out of one tenant on our business performance has been reduced.

The tenant industry category shows no concentration in any particular industry as shown in the pie chart on the right.

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Next, regarding retail facilities, please see page 15.

The ratio of suburban-type and urban-type in retail properties by rents is approximately half as shown in the pie chart on the left.

Please see the line graph in the upper row on the right. The yellow line indicates the occupancy rate of urban retail facilities. After a series of vacancies due largely to the COVID-19 pandemic, we continued to focus on occupancy and leasing without regard to business type or industry category. As such, the occupancy rate for the fiscal period ended August 31, 2023 was 92.6%, much higher than the previous forecast. Most of the properties have recovered from the pandemic, and the remaining properties to strengthen leasing are JouLe SHIBUYA and aune Kyoto Sanjo in the lower row.

Please see the pie chart on the right side of the bottom row. As for the fiscal period ended August 31, 2024, the estimated vacancy of urban retail properties is JPY15 million per month in rent, of which 90% is accounted for by the two properties I mentioned earlier. Inquiries are currently increasing in a wide range of industries, and we will steadily promote recovery.

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