Ichigo Inc

TSE:2337

Earnings Call Transcript 2022-Q1

[Scott Callon, executive]

Hi, everybody. I'm Scott Callon, Chairman of Ichigo. I'm joined by Dan Morisaku, who is a senior member of finance team and our Head of Global IR. I'll be working off of a presentation that's on our website, FY 2022, so the February 2022 Q1 Corporate Presentation.

Somebody [ up and down ] the screen for me? [ So it's yes ]. All right. Let's get going. It's important. This is our first time doing Zoom meeting. Hopefully, it's going to go well.

All right. Let's start on Page 8, FY 2022/2 Q1 Summary. It actually was a pretty light quarter from an earnings perspective with actually, from a business perspective, a very good quarter. We think Q2 will be a little light also. But there's clearly a major change in the market environment. It's going to be, we think, very productive for us from an earnings perspective. And you'll see results primarily in the second half of this year.

We continue to have a very slow hotel earnings recovery because of COVID. We are running at 30% of revenues, so down 70% relative to pre-COVID. In the quarter, we did primarily 2 logistics asset sales of value-add was completed, gross profit margin on the 34%. There has been no COVID impact on Clean Energy, which continues to grow very well. So stock earnings in that business, so those are our fixed earnings, up 18% year-on-year.

We launched 2 new businesses -- well, in fact, 1 new business, which is Ichigo Owners, it's a GP/LP structure ownership business. It's an Asset Management business. I call the details on that later. And Propera, which is our AI-based hotel revenue management system. In fact, the launch of that business as we began a full-scale rollout of that with external sales promotion to clients, and I'll go into some details on that later.

And the final thing we did is we accelerated our RE100 target by 15 years from 2040 to 2025.

Turning to Page 9. This is again a slide here. Those who have been with us before, and many of you have, so I thank you for that, it's familiar. It's a durable earnings model. We continue to run that earnings despite a very depressed earnings environment due to COVID [ that doubled our fixed ] expenses. You can see we're down year-on-year on our stock earnings and Sustainable Real Estate. That's almost entirely hotels, which we expect to rebound as we come out of COVID. Asset Management is up year-on-year. Clean Energy is up year-on-year. And I'll go through kind of more details later.

Going to Page 10. Again, [ a like work ]. So none of these numbers are [ done screening out ]. This is the rebound for Ichigo, but that is the reality that we think we are experiencing and what deliver to you going forward. But the headline number is OP down 14%; net income down 29%, it gets down 27%. That's actually a reflection of our long-term interest rate hedges. So we have fixed our interest rates. We think that's a lucrative thing to do but very, very well.

And so last year's Q1, we took about JPY 200 million of gains, a little bit over JPY 200 million, so about USD 2 million in gains on those hedges. This quarter, we took JPY 170 million loss on those hedges. These are noncash. But that's kind of what [indiscernible] is coming here.

Page 11 sees about segment details. [ Number of ] decrease in Ichigo Hotel base, AM fees and performance fees. It's actually relative to pre-COVID more than anything else. Asset Management was actually up. As you can see in the middle of the page, on an OP basis, about 6% year-on-year.

Sustainable Real Estate is down. The stock earnings is again our overall earnings from hotels is about minus JPY 3 billion or USD 30 million. Core earnings are also down year-on-year. But we -- sometimes we stack our earnings into different quarters, depending on kind of what transaction will look like. So we don't think that's really material [indiscernible].

And on Clean Energy, you can see 25% up year-on-year. We launched our first wind plant this year, so that in Yonezawa, Northern Japan. That is contributory coming from a bunch of plants off-line last year [indiscernible]. So we're getting a full year contribution from the solar plants as we entered this year.

Page 12 gives us some details on COVID impacts. One of the -- probably the -- I mean, hotels are high; office, low; and retail, low. It sparks a little bit surprisingly, so let me go through that. On the office side, it's so clear the case. There has been a differential impact on mid-sized offices versus large offices, which is to say we only have 1 large office in Odaiba. And the mid -- and there has been more activity on quite big companies to move to [indiscernible] and pushback space.

In the mid-sized office, which is every single other office asset that we own, we're seeing really no impact. Our tenants are staying. We have had some vacancies generally with companies with direct COVID impacts like the travel agencies or something like that. And then the [indiscernible] assets, they have higher rates in the existing tenants. So truly, there has been variable earnings effect there.

And retail is actually similar, which is to say restaurants have been incredibly hard hit. But because we have a combination of some retailers, which are obviously more sensitive and the core retailers that are sensitive to COVID, in a negative way and offset by retailers such as drug stores or supermarkets or kind of slightly more suburban retail locations, which has done very, very well, [ the COVID ] impact on retail is low. Residential has effectively has no impact. Clean Energy has no impact.

The tenants have done a very good job of defending incomes during COVID, so there's really no change. And tenant's ability to pay their rents and the tenant's desire to pay rents, again, COVID, if anything, is a positive driver of demand for residential, say, both as tenants as buyers because suddenly -- and your apartment sale is really, really small. So there really is no COVID impact there.

In terms of flow earnings, meaning what's happening in the buy and sell market for these assets, there has been a significant impact on office, hotel and retail. There's been no impact on residential and logistics. For the reason I just gave for residential, I mean, it's a driver of demand and also because of high earning stability. Logistics, similarly, high earnings stability and kind of the shift to work from home and the ongoing shift of transactions online. We feel like the online, of course, is a driver [ of the natural successes ].

Just to speak office, hotel and retail. The big issue over the past year has been a blowout in spreads between what buyers want today and what's [ going to ] sell out for office, hotel and retail. For slightly different reasons, for hotel and retail, just because there have been immediate negative impacts that are just massive in the hotel space. Worries about retail, both kind of right now with assets that are suffering, but going forward, what's going to happen with online. And office similarly, what's going to happen going forward for work-from-home perspective.

And as we -- as you probably know, Japanese leases tend to be very, very short, typically 2 years. So in the office market, for example, people are worried that tenants are going to flow back a bunch of space with inside office. We already have enough information at this point. So it's been over a year. There have been probably it's almost 1.5 years. So 70% of leases have come up for renewal and end up getting renewed. And so the result of kind of expectation we're going to break out of this horrible, deep COVID period and going to something that [indiscernible] COVID, but a normalized environment and the robust kind of leasing -- ongoing leasing activity and operating performance, all this that's managed.

We have hotel, retail and office now market hungry for transactions. And we expect -- it's quite possible that we'll do some significant transactions -- a lot more significant transactions in many of those assets -- or across all those assets in the second half of this year.

Let me turn to Page 14 and go quickly through kind of our business model. And this is our standard disclosure. You can see we do generate significantly higher both the stock and flow earnings than our fixed costs. In the first quarter, we came in at JPY 4 billion for stock earnings. The forecast for both the bottom of the range and the top of the earnings is JPY 14.4 billion over 4 years. So we're coming at about 10% higher on stock earnings. We think there will be -- very likely, we beat -- we certainly beat the one forecast on flow earnings, and it's quite possible we come in above this -- the high end of the forecast and what happens to market [indiscernible] surprising.

That still means we have a ways to go to what pre-COVID looks like, which is fiscal year 2020/2 [indiscernible] page, but it's not definitely the case. But we're beginning to experience a post-COVID readout, which is going to take it back to the normal or more normalized earnings.

Page 15 shows the embedded forward in the earnings and the business and the balance sheet. We have significant unrealized gains, exceed -- our accountings, our earnings -- our economic earnings exceeded our accounting earnings, and we had some unrealized gains at our respective future periods.

Page 16 shows you how -- in fact, we have third-party appraisers saying that the assets are worth x. In general, we do somewhere between 2 and 3x of an actual realized earnings. So appraisers, I've told you on the last page, we have about JPY 63 billion, so USD 600 million to the dollar. And unrealized gains in the balance sheet is probably 2 to 3x that in terms of our actual organizations.

Page 17, this is a business that generates significant cash. We run the business in order -- in that way in order to do so. We take as much as possible tax shields such as depreciation, accelerated depreciation. It means our stated earnings or stated EPS are lower than the actual cash that is generated. And that's a good thing for all of us. It means we generate cash that is not so [indiscernible], and we can use it to invest in the business and/or buy back our stock when it is due. And so that is the hallmark of the business.

Page 18 gives some sense of what -- how we finance the business outside of the equity in it. It has been and continues to be and for us, certainly, an amazing place to be a borrower. We're financing all in at 90 basis points for debt that is about 10 years, hasn't been really any significant change. We continue to show the strategy of our business and as a counterparty for financial institutions.

Page 20 gives you acquisition and sales activity. It was a light quarter. Primarily, we bought our residential. That was an Ichigo Owners business, and we sold 2 logistics assets that we had gone through, and we've kind of done all the value that we needed to do. I mean it's a worthy question as to whether or not with all those apps [indiscernible] assets or someone -- there's both a strong desire and ongoing robust [indiscernible]. This is an asset that's a reason the whole loan -- it's also the case that in that demand has kind of gone through the roof as people have pushed their -- as buyers have pushed the real estate spending out of hotel, retail, office into logistics and residential because they feel safer. So we thought we could get and we get a fair price. And on that basis, we took a very good price for those logistics assets.

And for Ichigo Owners, no sales during the first quarter. I would expect to see a significant transaction [indiscernible] the year.

Page 21 gives you some sense of where we've taken the Ichigo Owners business. Again, this is a business we set up from 0 on March 1, 2017. So we've now got 4 years of track record that continues to grow very, very well. This is, we think, a really, really good business, very high turnover. Average hold as of end of last year was 9 months. So even during COVID, just robust demand and the ability to execute. I mean some pushing out of -- I think the average a little bit maybe 7 months, it pushes the 9 months is the spirit of a transactions done during the COVID period.

But anyway, as you can see on the page, in the first year, if you buy themselves, we did an JPY 8 billion of transactions. In the second year, we did about JPY 25 billion. In the third year, we did JPY 37 billion. In the fourth year, just last year, we did JPY 56 billion. This is the business has been [indiscernible] very fast. We fully expect to get to be about JPY 90 billion to JPY 100 billion pretty quickly. So there's a lot more upside on growth in this business.

And because we're taking a gross profit typically somewhere between what we targeted for about 10%, we're generally delivering something that looks more like 13%, 14%, 15%. And because we use some debt to structure the business because of all this so short, it's had a very powerful at 30%, 40%, 50% ROE economics to the business. So the growth is very, very positive.

Page 22 shows something new we're doing in the business. So I'd just describe the existing business, which is on the top of the page. You take all kind of assets, and this is all Tokyo prime-located, brand-new residential assets, makes it very easy for all of it -- for us to hold on the balance sheet because we do have outstanding assets that people -- anybody would want to own. It's substantially derisked the business. And we generate flow earnings on gains on sales and individual and institutional investors and.or sometimes we do -- we'll sell this as part of our private fund business. So we'll get the flow earnings and the gains on sale, and then we get the ongoing management fees as serving as a GP to a private fund.

The brand-new activity which we started as of May 1 which is we've begun a GP, what we call a co-ownership business to our clients but is GP/LP structure. So as you know, our Asset Management business currently has our 2 public REITs plus our public infrastructure funds of the solar power producer. And we also have a private fund business which is on this stage. This structure is -- it's an LP/GP structure. It's in a partnership structure. So it is -- goes under a different kind of regulatory regime, which is a lighter and lower-cost regulatory regime. But it doesn't -- and what it is, it enables to offer a small-lot investments. So to go after a brand-new market, typically on the order of -- so minimal investment size is about JPY 1 million, so it's about USD 10,000. We're starting at slightly [ larger ] than that right now in terms of the first assets we're going to market with, but it does enable you to serve the needs of the investors in the real estate category in the brand in a different way.

And the market, as we have on bottom page, is very, very large. We would want -- it is our ambition to grow this business to be similar to the size of our existing Asset Management business, so that would imply to JPY 100 billion, so it's $1 billion-plus worth of assets under management. It's something we've just begun, but we think it's an exciting an important growth opportunity.

And our deliverable in this as is all been going in Japanese [indiscernible] real estate is to offer very high-quality products as a fiduciary and then [indiscernible] trustworthy. Unfortunately, in real state, that's not always the case that you have. And this is a business that's the single-largest industry on the planet. There are a lot of actors who are attractive to it who were not strong fiduciaries, if we it put that way. And so we -- as you can see from the growth of our Ichigo Owners business, this is an area where we think we could provide a social [ to it ] giving our investors an opportunity to invest in high-quality, durable return of real estate. And that's so important in Japan because interest rates have to be been at 0 for -- for years, for decades. So this is very important for people [indiscernible] for the future.

Turning to Page 23. We continue to provide growth support to the REITs to go green. Worth noting on the page is the [ final hold ] for Ichigo Office. We have actually -- we made a decision to transition to renewable energy across all the assets. We had some partially owned assets that we don't fully have control over that we are able to make the cutover with a more negotiated process. But Ichigo Office is going to be almost entirely renewable energy power portfolio within the next year.

Let me turn to Page 24. We'll talk about what's going on in Clean Energy. We actually changed the graph -- the bar graphs on this page, which used to be speaking to megawattage power generation. We still have that data on the bottom of the page. We also removed Ichigo Green, which is got -- as you can see, 29.4 megawatts on it. But that -- for those who are familiar with our materials, it used to be a green bar running on the bottom, that 29 megawatts on it. So we've just taken that out, and we've shown here purely the activity that's on balance sheet for this company.

And it has -- and then we show the total CapEx. And the reason why we made the switch is because megawatts -- kind of all megawatts aren't created equally. You do then have a question of utilization rate, right? And so solar runs at about -- if you put up a solar plant, it runs kind of during the day. There is a conversion ratio in terms of its sufficiency. Utilization of solar is about 15%. We now have brand new in plant that is at 50%. So it's 3x higher. We are planning and expect to do something significant in fully local green biomass where the utilization is 90%. And so if you show kind of megawatts on the page, they're just at dramatically different economics and productivity for them. So we made the switch to reflect an ongoing diversification of our mix. We continue to expect to do a [ life going forward in store ]. We have ambitions are -- have begun work, and hopefully, we do a lot in the local green biomass. And we certainly want to do more [indiscernible].

Page 25 gives you some sense of the wind in our back kind of Japanese energy policy. It is so clear the case that the Japanese government has -- is moving towards. So it's currently under review for a revision, the 2030 target and a 2050 target, even with the current target, which may be pushed out to 2050, there is just an overwhelming demand for renewable energy. We are not going to solve the problems of climate change by continuing to grow loss fuels, Japanese government, no chance that. And so this extraordinary ambition to source more energy in a renewable way without [ us of life ], right?. So as one of Japan's medium and [indiscernible] producers, we let them and worth mentoring the wind and local green biomass. There's so much more they think can do. There's so much more that we think we should on behalf of society and certainly because economics is a very powerful of that for shareholders. So this is -- this continues to be an area with -- even arguably a very conservative politically Japanese administration has made a significant policy committed to doing more with renewables, which we think will be an ongoing support for activity in this area.

Page 26, which I will provide some details on Propera. So that's our -- again, our AI-based hotel revenue optimization system. We have been using this in our existing hotels and driving increase in revenues on the order of 20% to 30%. It's a very powerful system. We have begun, and I'll talk about on the next page, new activity in terms of selling this externally. So what we have here is just some sense of you of where we would expect to take Propera in the near term. So our 5-year target is take it to 2,000 hotels. It will be 10% market share of Japanese hotels supplying site controllers, which effectively kind of efficient API to allow hotels to link their reservation management systems into online travel agencies. So that's the target, 10% market share of site controllers in Japan over the next 5 years.

Page 27 gives you some sense of how we're trying to get there. One of the things we've done is not quite a premium model because we have [ for money ] even for the light version. But we have been kind of marketing full Propera and realize that there's an opportunity just to go for customer count and build kind of customer understanding a product and also get more data from it. So we have introduced something we'll call the Propera Lite, which gives price trends, visualization only, it does -- and recommendations to hotel operators. Again, this is a -- we have an optimization algorithm for hotels that's incredibly sophisticated. It -- having told the hotels how they should price their rooms 365 days and 24 hours a day, however, Lite does not give them the ability to have automated optimization. So once we tell them what they do in the Lite version, they have to figure out how they're going to implement that in their reserves system, which is an incredibly new process. But anyway, it does give an opportunity for hotel operators to get the advice from Propera and to begin doing some relatively primitive optimization of the price.

And for that, we asked for JPY 24,000, so that's $200 [indiscernible]. And the goal is, again, to take this, including Lite, to 2,000 hotels over 5 years and then drive earnings by shifting our customers from Lite to Propera at time. And Propera, the full version of this, we asked for 1% of revenues. So to give you some sense of economics, if everyone is -- if you get to our market share to the hotels and everyone is sitting on Lite, that will be about JPY 600 million, so USD 6 million of our subscription model revenue system. If people are all sitting on the full version, if they use the full version and using the same earnings model of a typical hotel on the bottom right of the page, that would be JPY 4 billion, so USD 40 million. So that's what we think is a conservative view of where we can get to with Propera in the next 5 years, somewhere between an ongoing revenue loss of USD 6 million to USD 40 million. And if we could do more than that, [ we tend to do ] more than that. But we think this is really interesting.

And I'm sorry, I didn't talk about the second quarter on this, which is that we're tightly integrating with site controllers to allow users to get on to our system easily. We will have access to 16,000 hotels and 80% of all Japanese hotels. We effectively have that right now, and we think we will keep that decision.

Page 28. We -- as I mentioned earlier, we're excelling in our RE100 target by 15 years from 2040 to '25. So RE100 is just a commitment to have 100% of the renewable electricity across all the operations. So we do that by 2025.

Page 29 shows where we are today. So here, I probably need to explain to you that the RE100 does not kind of envision self-production of renewable energy. And so the truth of the matter is, we're already net-zero carbon today. And so we more than get to the RE100 target. We don't need to wait another 4 years. We are there today. Our total power plant of production CO2 reductions is [indiscernible] is about double of CO2 emissions. We are net-zero carbon. We are a positive contributor in the global fight against climate change today.

And so what that means is that the target of going to RE100 -- so because we are by the RE100 initiative, the way it counts things, if we're selling our renewable energy to our customers, they don't count it as part of our renewable energy contribution. So what we're effectively telling you is we're going to do both. We are going to continue to grow our own renewable energy production. We are likely to sell a little bit externally, but we're also going to buy in because we ran the math on it, and it's certainly very doable to buy in renewable energy despite what I said earlier, a gap that is going to grow significantly over time.

Currently, there is barely any premium to renewable energy, so we can make the shift with contracts, so we think they're good for the world and good for our tenants we've been working for a while.

Page 30 shows our buyback activity. We did buy back shares 5 years in a row. We did 1 earlier this year for JPY 1.5 billion. It's half of what we've done in previous years. We would expect to have ongoing buyback activity given the cash generation, and we probably think it's a [indiscernible] share price.

And finally, just a reminder that we are a J.League sponsor, so Japan Soccer League or Football League. I've used the [ football ] word for this work. And this is something that is kind of at curtail activity given that we've been operating at this COVID. But we do have a show or program where we need to pick up from our shareholders to go to. Every day, we call that -- every day, we got a game is not something that [indiscernible] continue to do going forward.

[Scott Callon, executive]

So that is the prepared presentation. We're going to now begin the question-and-answer question -- session. [Operator Instructions] So why don't I take the first question or input [indiscernible] from anybody? [Operator Instructions] So the first question we have -- go ahead.

[Gregoire Brillaud, analyst]

Yes, this is Greg at Point72. Can you hear me?

[Scott Callon, executive]

Thanks for joining. Of course.

[Gregoire Brillaud, analyst]

My first question is on the asset sale. As you got the office business is -- has been pretty much unscathed by COVID, and obviously, everybody has noticed that your REIT is now back above NAV, I guess, which you cannot comment on asset sales. But my question is more -- it seems to be easier to sell office, but you haven't sold anything in Q1. Would you still be looking to sell potentially in the rest of the year? Or do you have like a balance issue in your portfolio where you prefer to keep office and sell other assets, so that you don't deplete and sell what you can sell as opposed to what you would like to sell? Would be my first question.

[Scott Callon, executive]

So both statements are correct, Greg. Yes, we expect to sell losses this year. And so we -- and we run, hopefully, what we would -- our shareholders and investors, we think, is a pretty robust [indiscernible] process. So we have a sale process which invites everybody in order to make sure we can get the best price. And so that takes a little bit of time. So we think there will be activity in the second half of the year.

And secondly, we do pay attention to kind of the mix of our portfolio. It's very difficult to diversify it. At this point, it's about 1/4 retail, 1/4 office, 1/4 hotel and about 1/5 residential. So we're not going to sell our office all down to nothing. And that, of course, is a [indiscernible], but everything on the balance sheet is for sale. But the reality is we expect to do transactions across all of those asset classes. We expect to do residential sales, office sales, hotel sales, retail sales. The market is reopening. It is -- manifests for the case.

Now things could happen between now and kind of the timing that we're looking towards. With the degree of kind of no organization measures occur, there is -- there was an ability to transact at levels that we think make sense. And that was not the case for the last year.

[Gregoire Brillaud, analyst]

Understood. And the hotels, have you seen a narrowing of the spread between buyer's price and sales price? Is that kind of coming down a bit?

[Scott Callon, executive]

Yes. And that's because -- I mean, it's a really interesting question as to how Delta and the other variance could affect things. But the vaccination progress has been robust enough. It appears to be the case that potential hotel buyers are taking the view that even if we have particularly difficult variance, COVID variance out there that there's going to be a vaccine solution. And so the desire for really big discounts that we didn't think necessarily reflected normalized earning power for hotels has gone away. So there has been a closing of spreads in the hotel space also.

[Gregoire Brillaud, analyst]

Understood. And one more question, if I may, is regarding Propera. You've given us a 5-year targets, which is very useful. When I look at the market share, obviously, outside looking in, I have the impression that it's an ambitious market share. And at the same token, you usually express target, so that you can bid them. So I'm intrigued when did this 10% represent, and do you already have fairly good leads that would make the business kind of take off on year 1, so to speak?

[Scott Callon, executive]

Yes. So actually, the targets on Page 26 or the previous page, yes, it's -- that's -- thank you, that's a worthy question. We do tend to be conservative, and we put out targets that we can beat. And in this case, the reality is that ourselves internally and our existing -- so to give you some sense of this, we have 46 external customers right now. So that's it, right? So we're going to take that -- we think we're going to take that up for 44. And effectively, that's an exponential growth. We get that.

The revenue results are so powerful for our customers, for ourselves and internally, our customers that this is very straightforward. The return on investment, the uplift in returns for those people using Propera is so powerful that we think there is a major market opportunity. And 10%, to that extent, it will be interesting. It's an interesting issue because we're either going to succeed or not. And if we succeed, we're probably going to be well over 2,000 hotels.

So that's -- the issue and the reason why we introduced Propera Lite, that's on Page 27, is we're introducing basically a very sophisticated technology, cutting-edge technology in the business. So kind of could you put out Page 27, that in an industry that the Japanese hospitality industry is unlike a investment industry, and I've said it before, where exactly the returns are absolute world class. The hospitality industry isn't necessarily cutting edge. And so you have a very -- you have a serious degree of conservatism. It's [indiscernible] to try -- we show people all the data, our data and with the multiyear track record, it's proved to be that can be a very tough sales process. So it's like, okay, fine. So just to make it a lot cheaper for people to participate in Propera and see the results.

So yes, we think the stats are credible. The big issue, as I said earlier, is there's going to be different economics [indiscernible]. And so that -- and it's a 6 -- roughly 6.7-point difference. So migrating to the full we're going to prepare is, of course, going to be an important element of this. But yes, we think this is doable.

And we think would probably be insufficiently transparent about what our ambition has been. And you'll see we're likely to offer some more disclosure on what we think we can do, for example, the owners business to -- Ichigo has been a little bit of a place where we kind of speak -- we don't talk about what our goals are and now we've kind of say, now we've achieved this. And so it's kind of hard to evaluate the future if we don't give people guidance on where we think we're going to take the firm. So you can continue to count on us to be conservative. But yes, we do think there is a big opportunity here, and we fully [indiscernible].

So we have someone else. [ Richard ]? You can go ahead.

[Unknown Analyst]

Scott, thanks for this. Just 1 question on the basis on Slide 15, where you show that last year, the appraisal based of the value-based unrealized gains grew by more than 10%, basically accelerating from the growth in the previous years. So yes and given basically the impact on office and retail space and hotels, so how did you achieve this? And could you put some extra color on this?

[Scott Callon, executive]

Yes. I mean just to be very, very clear, these are third-party appraisals. So this is not Ichigo, these things are. Look, there was -- there continues to be a robust kind of NOI coming out of the assets. We did do a markdown. There was a little bit of -- that we have kind of taken out of these appraisal on our own that -- so we actually haircut the third-party appraisers said that our assets were worth in FY '22, and the appraisers kind of went back and looked at it. And we went back and looked at it, given the post-COVID, I mean, kind of we're still all on COVID. But given the pending rebound, we removed that. So that was kind of -- I can't remember. Our order of magnitude is about half of this year. But the reality is the assets continue outside hotels, which are clearly in a very different space, continue to perform very well, and the third-party appraisers kind of [ represent that ].

[Unknown Analyst]

Then maybe another question on office. So you mentioned that the impact of this pandemic on life science offices is different from the midsized. Are you seeing some more concrete -- yes, could you specify this a little bit more? And do you see that companies are really changing the model they operate and with satellite offices? Is that -- yes, do you see the demand coming through or other, yes, confirmation of this?

[Scott Callon, executive]

So we've had some uptick in vacancy in our midsized offices, but it's almost entirely been kind of COVID-related. And I think I've talked about this before. But roughly, the kind of offices we have is central city location, particularly the [ first one ] is going to be retail because you can get kind of lease the rent, to first for retail relative to the kind of the floors to 10 through to 20 or whatever.

And so there have been -- we have had some vacancies in the first 4 retail tenants. We've also had a little bit of vacancy from [ measures ] like traveling and things like that, that was so clearly had a COVID impact. And so then -- until when we did the vacancy and we lease up, the first floor retailer, we've been able to [indiscernible], as I said earlier about retailers, we've been able to try replacements like drug stores, and I think retail has been really, really well. And so that's not a bit of a problem. And the office tenants, we've -- [indiscernible] office tenants. And so the net effect of vacant -- COVID-related vacancy has been an increase in NOI that we are actually -- we're really seeing this basis at higher rents than the previous tenants. It is just a remarkable story about the robustness of these small and midsized assets that served, although limitedly, small and midsized companies.

And to be clear, sometimes people worry about SMEs and got a kind of capability. But this is incredible. I mean, of course, we have -- we do credit incredibly robust tenants, the data rest. No move, big move to remote on the part of SMEs in Japan. And so that has been very doable.

Now the one exception to this is the 1 big asset app, which is Odaiba, where we were going in the COVID, we were going to re-tenant the place. And so we actually expected to have 30% vacancy. So it's going to down 7. And then COVID occurred. We got an additional 25% notices from big firms and/or IT firms that are -- they actually couldn't be big IT firms that decided to go more remote. And so Odaiba's gone down to 45% occupancy at this point. And what's happening there, so that's a completely different outcome that's happening with our small and midsized offices. Again, this is a former headquarters building of a major corporation. It's a big asset. Big companies earn it.

And then even in the case of Odaiba, we're re-leasing it at rents that are kind of at or above our business plan. So we'll take a year to do that. And it's going to cost us probably $3 million or $4 million of rent this year. But that is still noticeably a very different outcome with our midsized assets, which are kind of [indiscernible] do.

So yes, I mean, things are fine, not only fine. Again, we continue to be on long vacancy. If we get vacancies even with COVID, we get an upside from in. It has always been our belief, and this is why we involved the small and midsized office that it's an underpriced, incredibly powerful, durable asset that people seeing the like big buildings, and they don't seem to understand that big buildings tend to have more powerful tenants, more aggressive and out to go to work well in the government environment as perhaps a one-off. But you're better off, you -- with the durability of earnings [indiscernible] office.

[Unknown Analyst]

Okay. And then maybe a final question. You mentioned earlier that this quarter and the next quarter will probably -- are a bit light, but there are some big changes, underlying changes happening, of which the results will be seen from the second half year onwards. What do you mean by that? And then could you add a bit more light on these big changes that are happening? Maybe I misunderstand it.

[Scott Callon, executive]

Thank you. I probably just explain it for me, sorry, Richard. Thanks for asking the question to give you a chance [indiscernible]. So by light, I mean, this is not exactly a quarter and you go, wow, what a good quarter. But typical for us, I mean, as I said earlier, our accounting earnings are below our economic earnings. And in this case, it's a little bit more -- we've got a bunch of things in the pipeline that were at the company we're going to deliver on. So you're just seeing some moving around within the year where earnings show up.

Now -- but the second element as to why and what has changed is, we think we will see come -- some coming back stock earnings kind of hotels likely towards the end of the year as Japan permission rates continue. We don't really need tons of global travel for that to happen. Japan just needs to go back to a more normalized environment. I think that probably happens.

But most importantly, it's the flow earnings. So if you look at Page 14, which shows JPY 7.7 billion of flow earnings in the bottom of the range and JPY 12.1 billion at the top of the range, you can all see what happens. We feel very comfortable that we're going to be within that range unless we go through the top because of a turnaround in the ability to sell what we think are better good assets in the market that's best for us.

Do we have someone else? I'm getting a note. It's a question via [indiscernible]. I'm going to read it out loud. Last time you mentioned the office asset [indiscernible] had 2 [indiscernible]. Can you comment [indiscernible]?

Yes. I mean, we're re-leasing. We think we'll kind of fill it back up within the next few. And this is a reminder. So this is an asset which was smack right in the middle of the Olympic venue. So -- and so it's really, really strategic. We were going to get -- people get all excited about the Olympics, which is, including the Paralympics, is only a 2-month event. We never quite understood how people were getting really excited about, "Wow, this is going to be fabulous for real estate." It's like this just a 2-month event. You can do -- you can lease your hotels for 2 months for 3 to 5x the normal rate, but it's only 2 months.

The -- this is all -- hope was that we're going to get all this activity in the area, and people are going to be excited, and it was going to kind of build more value and status and prestige for the area. And that kind of unfortunately is not going to happen.

Now having said that, Odaiba is located kind of 15 to 20 minutes from city center, depending on how you -- depends on multiple city centers, but from kind of the western and eastern cities, parts of the city center. And this is a very high-quality asset with super high-grade specs that we're leasing for kind of JPY 16,000, JPY 17,000 per [indiscernible] to give you some sense of that, and that's probably half to 1/3 of what you get in kind of more city center for equivalent kind of asset. So it's a very good value is one thing that is just super powerful. So the vacancies that have gone up, to be clear, it means buildings have been impacted.

You see 3 things. You see very expensive space being sent back. You see space being held by big companies being sent back. You see space held by big companies being sent back. In the case of Odaiba, we've had the second and the third, but not [indiscernible], I mean, it's just really good value. One, and two, the thing that's interesting is you see kind of more work from home and the businesses are kind of slightly more desirable of having a low cost base, of course. And there's been a little bit of migration of work activity in general towards home, but it means, and this is out closer to [indiscernible] in 30 or 40 years. It actually has kind of been a little bit of -- for reasons that are clear to me of, if we're not -- we don't need city center space nowadays as much.

And so again, to be clear, this is 15 to 20 minutes from city center, but we're very much massively within commute distance and all the turning. It's kind of a secondary office market that we thought was going to grow more. Doesn't necessarily, look it's going to -- like it's going to grow [indiscernible] together. But anyway, ability to release it is robust, and we're just leasing it up. So you should expect to see us back to where we were about a year from now.

Happy to take more questions via chat or app or browser or the phone.

[Unknown Analyst]

We'll have another question.

[Scott Callon, executive]

Okay. We'll have another question.

[Unknown Analyst]

You mentioned office logistics and residential asset sales. Now how about renewable asset sales potential?

[Scott Callon, executive]

Thank you. So [indiscernible] is now reading your questions. She's better than me.

Yes. Well, we've gone through this before. I mean, yes, everything -- to be clear, we don't have the same where it's like we're never going to sell an asset. We work for you. If an asset is sellable at a price that we think is a really good price, we'll sell it.

Having said that, there's nothing right now where an interesting question is to why. And we probably should do some more work on this. But at this point, there's nothing that's like this asset is priced below where it should be. If anything, our view is, as I said earlier, that is kind of massive because of -- particularly because of the changes in Japanese energy policy. But those reflect kind of overall demand for renewable energy. So private companies, for example, feeling pressure to Japan is a huge manufacturing base. It's sells to the world. It sells to companies and increasing on a source via renewable power, renewable energy. So they're asking their suppliers to use renewable energy.

So when you run the math, we can't figure out where the supply comes from to meet this now, which is a way of saying that we think it's quite possible. As I said earlier, there's not a particular premium for renewable energy right now. It depends on the region. But across Japan, on average, it's only a small premium for renewable power. We think it's possible that, that premium could go very successfully because if it doesn't go up, it's impossible to meet Japan's national energy rules. It's a way of saying we could get a significant push again on some version of it or subsidizing renewable energy be it the government.

Right now, as you know, the infrastructure funds only have a 20-year nontax period. We could get that generated -- become -- make them truly beatable. So REITs have a permanent nontaxable period. The Japanese infrastructure market only get 20 years. So again, that would be a reason for the infrastructure funds to be able to purchase at higher prices. And we think that, that is very positive as a subject of Japanese government policy change.

So anyway, I mean, at the moment, we see kind of no rush to monetize our energy assets. Now it's probably worth pointing out that on Page 15, those are only our unrealized gains on real estate. It doesn't show unrealized gains on our renewable energy portfolio, which we think are very substantial. And I probably have to duck and cover on what the number is, certainly, JPY 30 billion, possibly JPY 30 billion. I mean not small numbers. It's what we think those numbers look like. So there is a lot of value there. And if and when we choose to monetize an asset sale, that will be a valuable driver from it.

Happy to take more questions.

[Garrett King, analyst]

This is Garrett from the Truffle Hound Capital. Just another question on the green energy business. In the past, you've talked about cap rates on these development assets 8%, 9%, 10%, 11%. And can you help put that into context? Because the value-add real estate business, the cap rates discussed are more like 4% to 5%. So why is it the case that the cap rates in the green energy business, which, as you mentioned, has these tailwinds and has guaranteed pricing for 20 years through the fit, why are those cap rates so much higher?

[Scott Callon, executive]

Part of the answer is that that's pre-depreciation cap rate. And so if people think that -- we actually think there's a market mispricing. If people think that your asset is only good during the FIT period. And so in other words, depreciation is roughly about half, right? So if you think that there's no terminal value to your solar plant after 20 years, then it means your renewable energy assets are also generating about a 5% cap rate.

Now we think that is manifestly wrong. But it's interesting because there's a difference in pricing between global solar assets, which do see value beyond FIT periods, and Japan, which seems to put no pricing, no value at all. And we run the numbers on this. And what happens after 20 years is you do need to do -- this is a very small degree you probably noticed, depreciation over time, like less than 1% a year of the ability of solar panels to produce. You do need to do some changes in what they call, forgive me, they call power conditioners in Japanese. I can't recall in English. But the equipment, it's not just solar panels. You need to take the standards of [indiscernible] electricity. You need to some good reason there. We've run on ours on that. And we fully expect to be a sub-JPY 10 for kind of kilowatt power producer, which would make us well below JPY 10 once the FIT period ends, which would mean that it's going to be very profitable energy assets. And again, if there is a premium for renewable energy, then that will only be bigger than that. So yes, I mean, our view is there's actually a mispricing.

[Garrett King, analyst]

Okay. Yes, because it certainly seems out of line compared to what -- how these kinds of assets are viewed in the United States.

[Scott Callon, executive]

Exactly right.

[Garrett King, analyst]

And then another question on Propera. Longer term, if it's successful, what -- can you kind of talk about the cost structure a little bit? And one specific question is, is there any kind of revenue share with Fujitsu?

[Scott Callon, executive]

No. So those are our economics. Yes, I mean, this is -- it's got the kind of the classic platform kind of exponential economics to it. We put a couple of million dollars into developing the system. We do have -- we've continued to upgrade it, but the ongoing kind of -- and the ongoing kind of IT requirements are de minimis unless we're going to bring in kind of new functionality that we think we can monetize. It's a very small team. And so we're going to have to put people into a certain amount of client service.

But it's a very straightforward system, and it's an automated system. So client service is a little bit kind of -- and it's really honest with you. It's going to say, here's how you set it up. Congratulations, you're about to make more money from your hotel. So yes, I mean, the numbers that I said between JPY 600 million and JPY 4 billion, so call it again, $6 million to $40 million a year.

Almost all that just drops to the bottom line [ as it will be ]. So we like the business a lot. And of course, we want to do more of it. And more would be not only taking more market share but -- and capabilities. And I talked about this in previous call. And so currently, we're focused on hotels, but this is a dynamic pricing covering them. So your ability -- you're committed to other assets to be taken care of. You can take it to stadium. You can take in to museums, [indiscernible] calls. I mean, clearly, already, you can take it to retail. I mean, clearly, already the airlines have figured this out. And the sophisticated hotel operators have figured this out. But this is a very low-cost, very high-quality product.

With machine learning and a huge database, we think we have -- let's get to Greg's question earlier, why do we think we can do this and get this kind of shares because we think we have the best product in the market. And having more data to feed the AM and the machine learning, we think increasingly give us ability to deliver more economics to our hotel customers.

[Garrett King, analyst]

Okay. Great. Yes. I think the strategy of getting as many customers as possible rather than prioritizing like near-term cash flows makes a tremendous amount of sense.

[Scott Callon, executive]

Yes. Exactly, exactly. Yes, I think it's the same. I mean it took us a while to get there. I mean we were classically on a huge cash-on-cash return real estate. We did energy -- again, clean energy. And so it took us a lot of -- my apologies to kind of get to -- wait a minute, we should just kind of go for growth. We should get this thing out there.

A little bit internally, just take you inside kind of inside the curve of like what? People -- the whole point of this thing is we're going to be fully automated for people to make tons of money. Why do we want to do? Why would you want to break the system if you don't -- if it's something that doesn't [indiscernible]. But the answer was, in order to give tenants the ability to test in a way that kind of has less economics in the [indiscernible]. So yes, we're excited. We think this is the right way to go. And sorry, June, July, wish I could previous -- startup quicker. Sorry, it took a while to get there, but we think this is a big opportunity.

Anything else? We're open again for any questions [indiscernible]

[Gregoire Brillaud, analyst]

This is Greg again. Can you hear me?

[Scott Callon, executive]

Yes. Yes. Thank you.

[Gregoire Brillaud, analyst]

Yes. Just a quick follow-up, actually, a contrary question to [ Will's ] question. I was going to ask if you would accelerate the investment in renewable and whether you would also consider investing from your funds, especially in the secondary markets. And any thoughts on the trajectory there?

[Scott Callon, executive]

Yes. I mean we do have ambitions to do more. And there will be 3 potential drivers of our renewable energy business. One is including the solar. It's the most competitive. And people talk about, for example, wind kind of offshore wind is just so expensive. I mean it has an advantage of being able to decide which is good. So literally, our calculations are about 7x more expensive than solar. So solar is a super competitive asset to the extent we can get advanced better technology that will help it become a base energy asset also. But solar is an area where we have significant capability and doing more work on.

The second one, as I said, is local and green biomass, which has limits in terms of the size. We're doing kind of local for us and going to prevent the [indiscernible], which is why this is truly green as opposed to kind of doing chips in the Southeast United States. It's addressable, which we now think traditional biomass is absolutely great.

And the third one is -- so solar is really an obvious one. Green biomass, we've done a lot of work on making progress on. We hope to be able to introduce that in the next -- beginning in the next kind of 24 months to our portfolio. The third one is there's a little bit of variable is onshore wind, where we have more coming. We'd like to do a lot more, as I said, because the utilization rate is higher than. And so we have this ability to deliver kind of a lot more kind of some mass that is not necessarily the case with solar given the limited amount of land that's available for continuous solar activity here.

And there, it depends quite a bit on government policy and what they're going to do on the grid because the problem we have with wind right now is the grid is not kind of strong enough and not smart enough necessarily to accommodate it. So we do need some help probably in the next 5 or 10 years on that for us. We will include a lot more in wind, if possible. Wind is far more competitive. Onshore wind is far more competitive than offshore wind. So probably more expensive than solar, but you're going to run out of solar opportunities. So something maybe that's more like a 2x, 2.5x to solar as opposed to offshore, which is separate.

So those were the 3 drivers, and possible -- we do have a pipeline for onshore wind. We will do more there, we expect. We will do more in solar where we expect we'll do more in biomass. So the key question is how much more can we do. And we're going to try to do that as much as we can.

[Gregoire Brillaud, analyst]

Would you consider a solar rooftop? Or are you doing just normal plants?

[Scott Callon, executive]

Yes. The problem with rooftop is you do need a sales channel for it. And yes, I mean, we have -- we're trying to be thoughtful wherever, and that includes rooftop. But it does -- it is a different business model. You do need to have the ability to service these small scale and get it out there and protect the service depending on the business model. But yes, that is something we [indiscernible] talking about.

Thank you. Currently, there is no one in the queue. And we've got over an hour. It's over an hour. And I guess, we should probably take -- someone just popped up. It's -- are we done? So that's -- unless there's anything else, I think we're going to bring this to a close.

Thank you, everybody. We really appreciate your time. I appreciate the opportunity to work for you. So it's a very hard time in the world. So everyone, take care and be safe. Have a good day.