Ichigo Group Holdings Co

Hi, everybody. I'm Scott Callan, Chairman of Ichigo. I'm joined today by Dan Morisaku, who is a senior member of our finance team and the head of our global IR. Thank you very much for joining us for the February 2025 Q3 corporate presentation. Let me start with our world-class weightlifting team, but that's okay. I don't know if you know this, but we do have a world-class weightlifting team. The woman on the left is our employee, Hiromi Miyake, who is the Greatest weightlifter in Japanese history. She won a silver medal at the London Olympics, a bronze medal at Rio. She is standing next to Tank Murakami, who was just in the most recent Olympics and took tenth in the world in the 102-kilogram class.

I just love the picture. Forgive me for showing it to you.

It's one of the things that we do. These are not sponsored external athletes. These are employees of Ichigo, and we're super proud of them and proud of. of sending Japanese athletes into the world. Okay, let's jump into it. Page 6, the Q3 summary. Three things. All-in operating profit was down 7% year-on-year. Cash and income down 12%. Cash UPS down 9% because we've been buying back some stock. That's on stock earnings actually heading up 13% year-on-year, so it's the flow earnings that are down. As you know, we're forecasted to be up in the full year. We expect to have a very strong Q4, and everything is going to be good. We're expanding the REIT pipeline, in particular hotels. The hotel REIT is doing very, very well, so it's well-positioned to acquire. The office REIT, as you know, we operate it on behalf, intensively on behalf of the office REIT shareholders. It does the significant value-add work that we also do within the main company, which is this company, 237, and so it is both a buyer and a seller of assets because it sells assets when it's added value and it buys them to create value. So despite that share price being weak, it is also an active acquirer because it's been able to sell assets at very good levels. We're in the midst of an ongoing share buyback. 3.9% share is outstanding. We've executed about half of that since the end of December.

The earnings model is durable.

We are structurally profitable. We are stock earnings, so our contractually fixed earnings are run over 200% of our fixed expenses. We show the stock earnings on the right up across all fronts. Sustainable real estate up 16% year on year. That's being driven by an incredibly powerful hotel market in particular. About 32% of our assets right now are office, 25% are hotel. We've got about 20% in resi and 20% in kind of urban, walk-up retail. All asset classes are performing very well, but in particular hotels are super strong. that has been a significant driver of earnings this year. Asset management is up 12% year on year and clean energy is up five. I'm not going to go into too much detail on all the numbers. I mean, they are as they are because there's some kind of highlights in terms of broad themes and broad activity and the way we're positioning ourselves in the market, but as I said earlier, All NOP is down 7% year-to-date. Cash EPS is down 9%. We expect both of them to be up a double digit in the case of all NOP and single digit in the case of cash EPS when we finish the year in Q4. It's worth pointing out that the operating profit or recurring profit numbers, which are accounting numbers, look spectacularly good. But, guys, everybody, we are cash-based. We don't pick and choose the numbers that we want to show. We show them the numbers that are the most important numbers, and they are all in operating profit and gas GPS. So that's where we are right now. In terms of the details, asset management, you can see on all NLP is up substantially, 31% year on year. Sustainable real estate is down despite as I just pointed out that the the stock earnings being up 16% year-on-year So as a result, obviously if we just do this we do the math on this is because a flow activity has been down we're going to have a bunch of sales and q4 some which already contracted for and We expect to have a very strong year clean energy is down on OP basis, but but up on a cash earnings basis You know, it is a business that One of the things we liked about it is it generates a significant amount of depreciation allowances for us to effectively shelter our income so the cash earnings are more important, as you can see those on the all-inclusive profit on the right. We're forecasting record cash earnings on stock earnings growth. And, again, it's across the board. Every segment we expect to generate record earnings on the stock basis this year. You can see there's a significant increase in funding costs. It's like, I mean, it looks pretty big. I mean, it's like the 1.3% after kind of hanging around at 90 business points for all those years. But in fact, it's not super material. We borrow about 200 billion yen. We've got half of that hedged with hedges that for many, many years were costless money and then suddenly when interest rates went up, they did what they were supposed to do, which is they're now significant earnings generators for us, meaning that we were fully hedged against the increase in interest rates. So half the portfolio is hedged, and so when you run kind of a 30 basis point increase against 200 billion yen, that tells you that the additional cost to the firm and financing is about 300 million yen a year, meaning $2 million U.S. I mean, this is trivially small. As a reminder that a move from 90 basis points to 120 basis points, it sounds big in terms of the multiple, but in fact, it's only 30 basis points. This is not a material move. We all should be cautious about what the future looks like. I say that because we are. We're in the business of defending kind of Your earnings stream and your value, but I would also point out that there's no signs that Japan is suddenly going to have 5% interest rates. So the move that has occurred at this point is not particularly material for us, and if anything, and I've said this before, the most important thing that's happened is because of inflation, which is what is driving up these interest rates, replacement costs is finally going up, and so it has made at two elements that push into our business in a very positive way. One, it means that all of our existing assets finally are growing in value every year because of replacement, because we move the replacement costs. And two, we have a value-add business. We work to not to destroy buildings and rebuild them, which is incredibly wasteful of not only union and environmental resources, but also financial resources. So in an environment where Your classic construction company and developers is tearing down buildings and putting them up and they have to pay 100% of building costs and we generally only put in 5% of building costs. It's a way of saying that construction inflation is a very powerful driver of the economics of our business. So we're in a very good operating environment. We are selective of acquisitions and sales. We always say this. It's always true. I hope that's okay. Again, you know, we need to be smart for you. We have bought at this point 40 billion yen worth of assets when you include contracted assets up to 70 billion yen, most of the additional 30 billion yen that's coming in the fourth quarter. about two-thirds of that is going to be Ichigo owners, so Super Prime, a brand-new residential in Tokyo. We've got about 10 billion yen that's in hotels coming out, a hotel also in Tokyo in the multi-asset area. Sales are also, you know, significant to where active buyer and sellers. We are able to operate in diverse market environments because we add value. We're not in the business of betting on where the market is going to go. We're in the business of genuinely taking assets, repositioning them, making them better, making them more valuable, and on-selling them once we have added value to them. So at this point, 42.7 billion yen of sales, and it goes up to 54 billion yen, including contractor pre-settlement. This is what it looks like across kind of over time. And we expect this year, as you can see, this is as of Q3, we expect at the moment, when you include the contract resettlement, it's 71 billion yen for acquisitions. It's 54 billion yen for sales. We think we end up with probably acquisition stays about that in the fourth quarter. We probably add on another 12 billion yen of sales and that's where we end up in the year. So pretty flat in terms of the buy and sell activity. Owners is a business we started eight years ago. It's an extraordinary business. You buy assets. We work with developers. We get assets that are built to our specifications in areas where there are unmet needs. Again, this is kind of super prime Tokyo real estate residential. The holding period is generally under a year. We have a gross margin of generally 10% or more. It's running on an LTV that looks something like 70%. You run a math on that, you've got ROEs that are well over 50%. It's an extraordinarily powerful business. It will continue to grow. You can see, though, that we're expecting this year on the forecast to be down from last year. What's happening, I'll talk about that on the next page also. We've pushed out some of our resident token activity. and so actually we think we'll fall in below this year's forecast for owners of 4.5 billion in terms of LP. As I said, we expect to beat our forecast so we'll more than cover it elsewhere. Let me turn to the next page and I'll explain why. We originally thought we're going to do four security tokens. So these are resident tokens. They're secure digital investments on a blockchain. backed by hard assets. As you can see, the kinds of buildings that we're selling is a really nice assets and nice areas of Tokyo. Instead of doing two of these, two times kind of – instead of doing four of these this year, four times kind of 10 billion yen for a 40 billion yen uplift in our AM in the security tokens area, instead we did two. and the two of its, you know, based a little bit on the market got a little bit dazed and confused around what's happening in the United States and are we all going to be safe and is it going to be okay and old Trump won and now everybody's really happy so it is okay. So really what's happened is we haven't changed our forecast for next year. Everything, we just pushed this stuff out from this year and the next year. We're more than able to be in our numbers this year based on our current level activity outside of the security tokens FC area. And quite honestly, we have a major new customer who wanted some real size from us in this area. And so we held off some of our transactions actually to be able to service them probably in the Q1 or Q2 of next year. So the business is fine. And we expect to hit our target, although it's not going to happen this year. It's going to happen more fundamentally next year. We've done community work on behalf of our REITs. We put several new assets, some assets into the hotel REIT. We put two assets, and we put four assets into the office REIT. That ends up with us having 14% year-on-year growth in AOM. If you add kind of 60 billion yen, which we think we do next year in the token side, plus kind of what our activity we have on the REIT side that implies kind of 15 to 20 to perhaps 25% or more growth in AUM in this business next year also. Hotels continue to be really, really good after, you know, having been terrible beyond belief. This was the hotel business is a business that we think has powerful economics. It's driven by two things. It's an era where there's genuine growth. in Japan. It's, you know, Hotel Academy is growing well beyond GDP growth. The inbound activity is enormous. So one, so it's, there is a growth, it is a growing business. It's growing kind of GDP plus in part because we've got Asian inbound that has income levels rise. Tourism tends to grow at a GDP plus basis. Japan's a really nice place and easy to get to and the end is really, really cheap. But it's also the case that we're getting much more inbound activity from the U.S. and Europe. So one reason to be involved in this space is that there's genuine growth there. But for mental, I mean, you can have lots of growth, but if it's done in terms of supply, it doesn't really matter. You can still have terrible economics in the business. It turns out that hotels are still under supply in the quality that people need. These are harder assets to manage operationally. We have a set of capabilities, including a hotel operator that we acquired and we built out. that enables us to be advantaged in the space. We have an advantage dynamic pricing system called Prepara that enables us to generate higher economics from our hotels. So this is a very, very nice business. You can see that the hotel operator called One Five Hotels that's the primary driver of the One Five Hotels operating Prepara income went negative in fiscal year 21-2, 22-2, and 23-2 and now it's come roaring back. So the number on the right-hand side, 1.3 billion yen, is just only the first three quarters of the year. So you can see the activities of lunch. In fact, as we have on top of the page is growing 90% year on year, and we see more growth just in the last quarter. Last quarter this year, we're going to see more growth relative to what we've done year to date. This continues to be a very, very powerful place to be active in terms of economics, we can drive for your shareholders. This is an example of some of our valid activities, not in hotel space, but in an office. We've generated NOI of plus 81%. That was on kind of – it was actually a fairly substantial recap X, cap X of the building. We generally put in something that looks more like 5% in cap X to improve buildings. In this case, we did 30, so it was a fair amount. And that 30% span drove an NOI increase of 81%. External appraisals have doubled asset value. This is over the last two years. So it's been enormously successful. We took an old building. The first floor was a warehouse. The top was a penthouse that was really, really, really nice but lived in by an individual who was an owner. This is kind of our bread and butter. We could take this and make it into something substantially better with, you know, and because it's substantially better, you get these powerful economics. To be clear, we are driven by the creation of value and it's only when we create value do we get these economics. Those economics flow from the value creation that has occurred and this is a robust example of the activity that we do. Our problem child. As you know, we're very grateful to you. We have such veteran investors and shareholders. You've spent a lot of time with us. As you know, we have a single large office asset. It's on the Tokyo waterfront. It's spectacular views. It was the original headquarters building for Sojitsu, the huge trading company, so the spec is fantastic on it. The structural engineering is great. The views are fantastic over the water, Tokyo Bay. And it was on the Olympic site. And so it was all incredibly exciting and totally full. And then COVID came and the Olympics were effectively kind of canceled for all intents and purposes in terms of a viewing event, at least in person. And we had all these departures. And so it was devastating. And so we spent the last couple of years refilling NASA, reconfiguring it, doing the things that we do. You know, we introduced No cafe in the first floor and I'm on the top floor and we we change the office configurations We did what we call ready to move in offices. There's a little bit of a Japan thing, but it is enormous expensive in Japan tenants are have to pay for both the fit out and and the moving back to kind of the original skeleton condition of Office when they mill when they move in so it's really really expensive and because of rising Not only construction costs, but because of the shortage of construction labor, it takes months and months and months. So we have identified a market need, which is like people would rather just move into their offices. And, frankly, there's an environmental element to this because, as you know, we believe deeply in working for a better world and a better earth. Climate change is real. The activity that we have, we want to make sure it's productive for society and the planet. This whole process of kind of Building out an office and then effectively tearing it down after five years and throwing it away is really not good for anybody. It is super wasteful. So we have pre-fitted out offices. Tenants can move in immediately. They don't have to worry about it. They don't have all these costs of setup. They don't have the cost of the strip down. And they pay a premium. It's typically up to 50%. And they're happy to pay a premium given the total economics of the package. They can move in immediately. It saves them time. We do it for them. We have economies of scale. We're really good at this. So there's some powerful economics to this also, and we've done this at smaller assets, and we've done this now for the first time in a large building, which is Odaiba, and it's going well. So we're up to 88% under contract. We know we will hit the occupancy in April. We expect to – our goal, actually, is to get to 100%. This is a building that is doing really, really well. was originally a great asset and it was devastated by COVID and we're bringing it back to where it is and should be, which is a great asset. And the plan is to sell it. So we're filling this up and we're going to sell it and we'll do well for our shareholders. Green energy is kind of just stable. We have ambitions to do more here. As you know, we did an investment in Giga Green, a German solar operator, in part because, you know, solar, of course, and climate change is global, not just in Japan, and the solar opportunity is also global. We would like to do more in Japan, and we expect to do so. We've got some work going on in green biomass and a non-fit solar power. We also have begun activity, and if we get some more details for you, we'll perhaps be able to announce it at the next quarter earnings announcement in battery storage, and we think that will be a really interesting area also for our shareholders. As I said earlier, we're in the midst of a buyback, and we think the shares are compelling value. There's a lot of cash flow being generated. The forward outlook looks good. We should be buying our shares. We have a progressive dividend policy and a shareholder return KPI based on DOE, dividend over equity of over 4%. We bump our dividend. We expect to bump our dividend also going forward. And finally, on returns, we have a unique J-League shareholder program, which is fun for any and all shareholders that care about soccer or football, if you want to pronounce it that way.

And we're happy to provide additional value to our shareholders.

In terms of environmental activity, we have gotten 200% renewable energy in everything that we own and everything that we operate. And of course, that's completely separate from all of our production activity, which you can see on the next page. So our CO2 reduction results from our solar and wind power, our production, it gives us the result of 4.4x of our CO2 emissions. So we are explicitly climate positive. And this is you can see this is how this is trend trends over time. We both been reducing our carbon emissions and we've been growing our carbon CO2 emission reduction activity. That's what I have. So this is now open to the floor open night open mic night as it always is happy to take anything from everybody. I'm Greg. Thank you very much. Go ahead.

Hello, can you hear me?

Yes.

Yes, hi Scott, thank you for your time. Yeah, I have two questions, please. One is on hotels. So I see that... compared to your H1 results, the Ref Bar has increased quite a bit, you know, from 2,000, 12,900 to 14,000. But you've left the free year on change for the profit forecast for the stock learnings. Is that kind of all in that's being taken into account or should we think that the 6.2 billion is a bit conservative?

Thank you for the question. And And you've given me the opportunity, Greg, to clarify. We have not bumped our forecast this quarter. So, yes, the numbers are going to come in higher. You're absolutely right. And as I said, we didn't move the owner's forecast, which we think is going to come in lower. So that's a forecast that comes from earlier in the year. We'll come in much higher on hotels, and we'll come in lower on owners.

Thank you. And my second question is regarding the AUM target. So if we think about next year, as you mentioned, the real estate token sales, so that's pushed back a little bit to next year. But you do have a forecast there for next year, which is, you know, 100 billion yen. So I guess just accounting for that for next year, we should be at a minimum of 450 billion. How should we think about how we could grow the hotel? and the Office EUM for next year?

Yeah, I think it's easier for us to understand right now what the security token numbers look like, given kind of what our pipeline looks like with our customers on this. And we'll find out together.

you know we're certainly comfortable we end up the year at 450 plus and it's probably going to be a rain of 450 to 500 billion yen but you know we'll see because you know that's okay go ahead I'm sorry another way to I guess rephrase your question would be you're growing hotels faster than office either do you think there are opportunities for fix next year or is it still muted from your perspective

So, I mean, we've got on the page that one of the other drivers is we are currently begun marketing our private REIT, and so we'll have to see how much that generates for us. So that one, and we think that something ends up there. Currently, I mean, the public REIT is not at a level which is accretive for us to do a public offering, and we exist to serve our shareholders, and so we're not going to do diluted offerings. at the moment that activity is primarily as it's been you know this year which was you know we we sell fully valued assets and buy new assets that we can add value to so we're not underwriting next year towards a particular growth in office AM outside of outside of possibly the private rate space Understood I guess I was I was asking the question because you know as you as you mentioned I think

several times this year, you know, the replacement cost is rising, right? So the value of existing buildings is rising and I guess I totally agree with that, but it seems that for the real estate market, for the public market, the market doesn't seem to care about that, doesn't seem to agree, which is kind of, I guess you could call it strange, you could call it whatever it is, but isn't there a scenario where it would be useful to kind of maybe buy back shares for the REIT to kind of, you know, take advantage of this if other people are not seeing the opportunity. Because I guess, yeah, in an inflationary environment, I totally agree with you. But when you look at NAV or listed companies or even REITs, the market doesn't seem to care at the moment.

Yes. We think it's a mispricing. So to your point, completely agree that the office I mean, offices, we're seeing rental growth. It's directly linked to the increase in replacement costs. And forgive me, because I've said this before, but it's super important, so please allow me to say it again. You know, people think of demand classically, the challenge of raising rents, it tends to be an unconstrained supply market. So it's not going to be here. You get lots of new supply here. and but that's kind of a, it's only half of the conversation. It's that the new suppliers coming in at replacement costs hasn't changed for 20 years. So literally somebody can put in a brand new building or has been able to until a few years ago at the same price as what you did 20 years ago. So you can never raise rents because a brand new building will be able to offer the same rents. Now what's happening is Literally, there's been a surge, 50%, 60%, 70% increase in construction costs. And so new buildings are coming online, and they're coming online at 50% to 60% to 70% higher rents. And so we're able to raise our rents. So the office and offices, unlike kind of the devastations that's occurring in the United States and Europe, are full. And so it is a very robust asset class. And so we have been adding to our office portfolio, and we have been selling off of our balance sheet, Offices to reflect this increase in value at really good prices. So we will continue to do that. The public markets for the office REITs have not recognized that reality. And so we announced we had earnings last month for office REIT. We announced that you should expect us to focus more on things like buybacks rather than on asset growth because that is what the current market environment calls for us to do in terms of creating the most value for shareholders. So I completely agree with you. This is a really interesting opportunity. If the public rates are underpricing it, then the right thing to do is buy back shares, and you should expect that possibility. I mean, you can't really talk about buybacks, right? But that is certainly something that will be fundamental to our strategy on the office rate.

Understood. Okay. Thank you very much.

Thank you.

Okay.

I think we're going to call this a day, a morning, a day, and an evening. Thank you so much, everybody. We're really grateful for your time, and we will keep on running forward. Have a good day. Thanks for watching.