Ichigo Inc.

Everybody, thanks so much for joining. I'm Scott Callen, chairman of Ichigo. I'm joined by Dan Morisaku, who is a senior member of finance team and the head of global IR for us. We are doing something brand new. We just did a Japanese earnings call. We were wearing our suit and our tie for the global call. We decided we think to join the globe in recognizing how incredibly hot it is ever in the world right now. So, forgive us if that's okay. We've gone casual very quick, the fact that we're in the middle of July. So, I'm talking off of what's in front of you, which is FY272, the February 2027 Q1 corporate presentation. Let's jump into it.

We've got a slightly different format today.

We tried to simplify it. Hopefully, that's helpful for you. If you have any feedback, we of course welcome it. So please feel free to come back to us on it. So the summary is, look, we're off to a strong start. It's not surprising. The real estate market continues to be very strong. The Japanese market, real estate market for decades has had a compelling advantage of being very low cost of financing, low interest rates. but with no inflation and therefore no ability to raise rents. And so it's changed in the most profound and powerful ways that rents are going up. And so it's made real estate a more attractive asset class. And it's flowing through in our business both because we have a balance sheet in which the value of assets is going up and second because what's driving this is inflation, construction inflation in particular. And as you know, our business model, which is value-add, is very durable with respect to inflation. We spend very little amount of money on CapEx, and so we are advantaged in the operating environment. And to the extent this is secular, that we have inflation in Japan, we're going to be advantaged on a permanent basis. So business profit is up 45% year-on-year, net income up 24%, EPS up 32%. Of course, EPS is growing faster than net income because we think our shares are extraordinarily cheap. trading sub 10 times PE, something like 7.4 times cash PE. They're as compelling as they've ever been. We've bought about 10% of our shares, more than 10% of our shares outstanding in the last two years. We think the shares are a compelling value for all of our shareholders, and we're putting our money where our mouth is. Cash APS is up 70% year-on-year. Stock Earnings says increase in integral owner's assets, which is true, but the whole point is stock earnings are relatively stable, so they're not going to move around very much, go up a tiny bit. Earnings go up a bunch on sales of value-added retail assets. And the real estate subsidiary, which is primarily office and residential assets. Highlights are we're trying to, and I'll talk about this later, continue to innovate on behalf of our tenants and therefore for our investors, because ultimately the value of of a real estate asset is his ability to serve tenants well and our investors and our shareholders by serving our tenants. So we're doing some stuff with respect to innovating in the office space. We continue to innovate in the hotel space with our hotel brand, The Knot, and we completed a $10 billion share buyback, as I said earlier. The bottom of the page shows the four-year forecast. We're well on track to meeting it and beating it. Just touched on the key issues there. You should see we're on track for record profits this year again. And we think this is secular. I mean, I think it's our job to have record profits every year. We have your funds as shareholders. We should be deploying those funds in a more powerful way on a consistent basis year after year. So we're on track for another year of record profits. And, again, I expect that will continue. Cash earnings are more than two times accounting earnings because we focus on long-term cash flows. This is not a company that is super focused on doing anything on the accounting side that does not have powerful value for shareholders, and we think it's ultimately rooted in generating cash flows for shareholders. There's a bunch of material that I'll go through relatively quickly, and it's meant to give you transparency on how we're running the business, and this will be an example of it. You can see you have a diversified portfolio. The record forecast for this year in business profit has got a number of drivers to it, the most important being SRE, so Sustainable Real Estate Business, and agency loaners. I labeled this, for the first time, we called the section KPIs. It's meant to give you some sense of key performance indicators, not in a narrow sense, but in a broad sense, and the things that we focus on to deliver enduring value for you as shareholders. One of them is structural profitability, so a KPI there is we want our stock earnings to be well above our fixed expenses to make us structurally profitable, and we are. So currently running at about 200%, 196%. is the kind of the relative fixed earnings, which is stock relative to fixed expenses. You can see on the right side, on the upper pie graph, you can see that, I did a pie circle, you can see that it's the stock earnings are relatively diversified, and you can also see in Q1 that almost all the flow earnings came out of a sustainable real estate business, and that will change during the course of this year. Stock earnings, so another element of the business is you want to have both stock and flow. The stock earnings is contractual. The flow is also very durable. You can have a business like a convenience store or a supermarket and it's all flow earnings, but every day you're creating value for your customers and they're coming to the stores. And so by no means is this situation where the stock earnings are really valuable and the flow earnings are, you know, should have a low multiple on them. The source of our flow earnings, that we add value to assets in a systematic way and generate value for tenants and therefore generate value for investors and owners of those assets when we on-sell them. We have diversity and that's another element of our business. We have a portfolio of businesses and it moves around a little bit. It gives us broader diversification. I have to tell you, though, we're not a real estate conglomerate. There's a core element in everything that we do, which is value-add, and we express that value-add through a number of different asset classes and business models. We have a very strong financial position that expresses itself in a way, and we work to achieve that, that expresses itself both in us wanting to have overwhelming long-term loans, and they're currently, and systematically over time, we manage to be about 90% of our loans being long-term, and also we reduce interest rate risk by hedging our loans. So currently fixed rate loans are about 56% of the portfolio, a weighted average interest rate of 1.53%. So you can see the interest rate has gone up substantially over the last couple of years, which is to say it's gone off of an incredible low basis from 100 basis points to 153 basis points. by given that inflation is running at three and construction inflation is running between five and 10%. This is still extraordinarily low cost funding in order to take advantage of the market opportunity that is in front of us. Again, we're trying to provide some perspective on the drivers of the business and how they express themselves. This is what the full year forecast looks like. The sustainable real estate business continues to be our major driver. We have significant contributions from our owners, and from the hotel elements of the business, we'd like to grow clean energy and asset management more. On the right side, you can see the assets. About half of our assets are owned and on balance sheet, overwhelmingly real estate, and you can see on the bottom of the page, asset management also has a substantial number of assets that we invest and manage on behalf of our investor clients. In terms of acquisition and sale activity, net acquisitions in the first quarter, that is not what the year is going to look like. And to be clear, in a sense, the acquisitions of 34 billion yen kind of overestimate the actual acquisition activity, which is to say, issued owners were taking in assets that we had agreed with the developer to buy generally kind of 18 to 24 months ago. So those are not new person's activity. In the office space, most of this is coming on, and I'll talk about it, the brand new, the Village Sapporo asset, which is a couple years old soon. In terms of actually brand new acquisition activity, it's on the order of something that looks really like $3 billion, like tiny. And we expect this year to take down the balance sheet. I've been saying this for a while. We've had stuff coming in. So the balance sheet has been growing, and the balance sheet is going down, folks. It's getting smaller. It reflects our view that we want to manage the balance sheet. We want to be capital efficient. There's a lot of risk out in the world right now that continues to be a phenomenal seller's market. We have ongoing capabilities and value add that we can express in highly capital efficient ways. We don't need this size of balance sheet, so the balance sheet is going down. So anyway, for the first quarter, we added some balance sheet growth, but that will change from the second quarter onward. This is what the timeframe, this is what acquisitions and sales look like over time. Been some balance sheet growth, but relatively balanced. But we're going to take it down. From here on, And again, I'll order a magnitude. It's not as if we're going to have the balance sheet in the next kind of 18 months. It continues to be very productive. Business is productive, but the balance sheet shrinkage is going to occur. So to go into the segment earnings, again, we have a portfolio, and it moves around quite a bit. You can see Asset management is down quite a bit. Hotel is down. Sustainable real estate is up a ton. Clean energy is up a bit. That results in a totality of being up 45% in terms of business profit in the first quarter. Sorry, I jumped ahead. So on SRE, Sustainable Real Estate, so this is a business where we buy assets and improve them. It's overwhelmingly focused on office and retail, although we've had some increased activity in logistics. Not a lot happening on the stock side. This is stable earnings. The balance sheet is not moving around, so you wouldn't expect it to be moving that much. I think the most important thing to point out is we continue to do very, very well. and the leasing activity with our biggest asset, which is traded via Odaiba. As you know, that is currently in the sale process. We would expect to generate some substantial returns on gains on sale this year. The floor earnings up a ton. And look, this is a quarter to quarter, and so we did less in Q1 last year. We did more in Q1 this year, but we sold an asset in Fukuoka. that we did very well on, and we sold a real estate subsidiary that we also did very well in terms of our activity, which is primarily, as I said earlier, residential and office. We continue to seek to innovate on behalf of tenants. And so one of kind of I We think it's an insight, but we prefer to think of the world in terms of hypotheses. Don't have a view. Have a hypothesis. Test it against the reality and evidence as it emerges. If it disproves your hypothesis, then adjust your hypothesis. And so one of the thoughts that we have is that WeWork, and this goes back over time, was genuinely a breakthrough in high aesthetic office and in creating communities. But WeWork is shared offices. and you know most of the world is not working in shared offices when the office environment they're in private offices and yet there was something very valuable we think in having an actual community and so the village is our is our office offer that is community-based and so literally it's called a village in Japan. The words we use are in Japanese, but there's a village mayor in each building who is an Ichigo employee who works to support the needs of the village members who are tenants. And we have these offices that have genuine communities in them. And we think that's something that's valuable. We have a hypothesis that all of us yearn for a community. I'm pretty sure a lot of you who are listening to this are in offices where you go up and down elevators and you don't know anybody, and you don't talk to anybody. You don't want them to talk to you, perhaps. I don't know. But for folks who want to have a genuine community in their office, this is something that we are providing. We think, again, we think the insight plus hypothesis is You know, communities are not just for shared offices. They're actually for private offices. So to have a community, of course, you need to have shared spaces. So you have shared lounges. You have shared entrance areas. You have cafes. You have all these things where the community gets together and we do events. You know, Meet the Neighbors is what we're calling these events in which we're doing together. And so that's the general framework for the village kind of offer. Specifically in the Sotaka office, we renovated an existing office, which we had bought from a single tenant. It was a corporate tenant, which is using the building for itself. They moved out, so the entire building became empty, and we actually set it up entirely as ready-to-move-in offices. And the concept there is everything is pre-fitted, so the tenant doesn't have to worry about kind of anything, move-in costs, and move-out costs, which are enormous expenses in Japan. They don't have to figure out about trying to get contractors and run contractors in a very difficult environment in terms of getting contract help. We do it all for them. We provide this for them, and you get a rent output for it because you're creating value. So the leasing is going on at about a 70% premium to what a classic, you have to pay for everything yourself and do everything yourself and don't have the flexibility. and so this is a very powerful offer. So it's not just in the case of Village Osaka. It's not just a community offer. It's also a ready-to-move-in office offer for the entire building. We also opened up the Village Sapporo this year. In this case, we work in the first floor. It is the first we work in Hokkaido. So Sapporo, of course, is in the northern island of Hokkaido. working with them to develop a community throughout the entire building itself. But this is again focused on not just having a cold slab of steel and glass but an actual genuine community within the building that can interact with each other and support each other and be human beings and community participants together. Hotel business is down the first quarter. We expect the full year to be up. The knot, which is, this is our, that's our boutique hotel offer. And, again, the inside slash hypothesis there was that, and we're now, we have six knots, and we'll talk about it a little bit later. We're working on our seventh one. The idea was, you know, Japan has super high class hotels that are really expensive, just like everyone in the world. They have all these budget hotels. It wasn't something in the category of kind of $100, $200 per night. that was really, that was nice. And so we thought there was a gap that could be filled. The Nats all share a common characteristic of being very local and also having, Japanese care about this and people coming to Japan care about this, having outstanding restaurants so you can go there and eat super, super well and also see them. And so these are really, and we'll talk a little bit later, but the Nats, Tokyo and Hiroshima are doing very well. We launched, and I'll talk about this later, NOS in Sonomia and Fukuoka.