Ichigo Inc

TSE:2337

Earnings Call Analysis

Ichigo Reports Strong Q1 with Hotel Growth

In Q1, Ichigo experienced a significant rise of 44% in stock earnings, mainly propelled by a remarkable surge in its once pandemic-hit hotel sector, now surpassing pre-COVID profitability. Revenue per available room (RevPAR) is already 20% above pre-COVID levels, showcasing the sector's robust recovery. The cash earnings per share (EPS) saw a year-on-year increase of 23%. Although asset management's operating profit ascended by 20%, clean energy suffered a minor setback due to one-off maintenance expenses. The company endured a slight increment in fixed costs, primarily from salary increases set against an inflationary backdrop. With substantial unrealized gains, the company suggests the potential to end the year between 1.5 to 2 times the forecast. Notably, the economic operating cash flow exceeded net income, highlighting strong cash generation and a healthy financial stance for future investments or shareholder returns.

Remarkable Growth in Stock Earnings and Hotel Business

The company saw a significant 44% increase in stock earnings compared to the previous year, with an expenses ratio at a very healthy 245%. This growth was spearheaded by an 'explosive' improvement in the hotel segment, which has bounced back from COVID-19 related unprofitability to surge toward new heights of profitability. Notably, Revenue per Available Room (RevPAR) has climbed 20% compared to pre-COVID levels, indicating that the hotel business is performing better than ever.

Navigating Through the Labor Shortage in Tourism

Despite the broader labor shortages in Japan, which are even more pronounced in the tourism sector, the company managed to protect its workforce during the pandemic. This strategy has allowed the company to capture the emerging strong demand in the tourism industry as conditions improve.

Asset Management and Sustainable Real Estate Driving Earnings

The company's asset management fees, linked to Net Operating Income (NOI), have seen growth in the office space and the hotel business, offering a considerable contribution to earnings overall. Additionally, the 'Ichigo owners' segment of the business, which deals with super prime residential offerings, has impressively high turnover, with properties held for an average of just seven months. Sustainable real estate remains the biggest driver of the business, though the clean energy segment has faced a slight decrease due to maintenance activities.

Increase in Cash Earnings per Share

The company witnessed a 23% year-on-year rise in Cash Earnings per Share (EPS), despite a lighter quarter in terms of capital gains. This improvement is attributed to the solid growth across the company's operations, particularly in the hotel business. This positive outcome reflects the reopening of Japan and a promising forward outlook.

Solid Operating Profit and Adjusted Expectations for Growth

The all-in operating profit increased by 20%, although the sustainable growth rate is expected to be flat because significant growth in stock earnings is being counterbalanced by a decrease in flow earnings, which is not expected to persist throughout the full fiscal year. The decline in the clean energy segment is primarily due to one-off maintenance expenses.

Inflation Impacts and Salary Increases

While the company's fixed expenses have risen by approximately JPY 1 billion, with over half of that attributed to increased salaries, this reflects not only a response to inflation but also a deliberate choice to compensate the workforce appropriately.

Anticipation of Record Earnings

The company forecasts JPY 17 billion for the year, expressing confidence that not only may this year's forecast be surpassed, but they may also achieve record earnings for the firm. With 22% of assets in the hotel category — a very profitable asset class — the company is optimistic about their earnings potential, which forms about one-third of their stock earnings from real estate.

Advantageous Financing Position

The company continues to secure financing effectively, capitalizing on the opportunity to borrow money at favorable terms, fixed and covenant-light, for the long term. This ability to borrow is considered a critical advantage, especially since rates, in general, have not risen for them.

Earnings Call Transcript 2024-Q1

[Scott Callon, executive]

Hi, everybody. Scott Callon from Ichigo. Thank you so much for joining. This is as is right in front of you, the FY '24 Q1 corporate presentation. I'm joined to my right by Dan Morisaku, who is a senior member of Finance team and our Head of Global IR. Wanna say hello?

[Dan Morisaku, executive]

Hi, everybody. Thank you very much for entering the call.

[Scott Callon, executive]

So starting with Page 7, It's Q1 summary. Stock earnings were up 44% over last year. Our stock earnings expenses ratio is at 245%. That's a good thing. So the higher that number, the better it is. As you know, we are structurally profitable. We designed that into the firm after the financial crisis. And so the growth of the stock earnings is really, really good. To be very clear, this is driven primarily by absolutely explosive growth in our hotels. We took significant damage, certainly on a short-term earnings basis during COVID the hotel business went from being spectacularly profitable tools to actively unprofitable. And now we're racing forward again towards spectacular profitability, which is really important and exciting.

As you see on the page, we've got RevPAR already 20% versus pre-COVID. So the hotel business is doing the best it's ever done. We work very hard to keep our people. You should know there is an industry-wide labor shortage and the labor shortage throughout Japan. It's particularly severe in the tourism sector. We protect our employment to cost us money during COVID, but it's meant that we're able to capture I'll tell demand that is merging that as said, extremely strong. In the asset management business, we've got asset management fees that are linked to NOI and we're seeing growth both in the office space. And as I said, the hotel spectacular growth in revenue, which is not only in the assets we all within, this company took [ 37 ] Ichigo Inc. But also within our [ our REITs ] that is an extraordinary contributory to our earnings.

Having that worth pointing out that we highlight is each of owners, which is our primarily super prime residential business with very high turnover. It has an average holding period of only about 7 months. It gives a very reduced low-cost kind of provision to asset buyers, meaning we entered the business where other players were taking, we thought too high margins. We get about a 10% to 15% gross margin in this business is growing very, very fast. We're expanding our sales channels. We launched our third co-ownership asset. I'll talk a little bit later. We launched -- we will be launching them actually [ albeit gone ]. The sales activity around our second Ichigo Residence Token, I'll talk about that later. And so there's a lot of things going on it. Next page.

You can see how things break out across the 3 main drivers of our business, sustainable real estate was over only the biggest driver of our business, asset management and clean energy. Clean Energy is down a little bit because we've got maintenance activity with respect to our wind power plant, our major wind power plant. So that's an expected explosive growth in sustainable real estate. So stock earnings, that means contractual earnings and so whenever we were talking about is rental income, and that's effectively almost entirely a rebound in hotel space and asset management reflects both growth in each of the office, both some increase in assets under management there, about 5%, but primarily substantial growth in NOI each of office plus spectacular growth and NOI at each of the hotel. Because the office REIT is so much bigger than the hotel REIT, then obviously is a bigger driver of asset management.

I'll jump to Page 10. Look, we've actually got a ton of material. So I was -- we go fast and sorry for the technical failure because the goal was to go fast rather than so today. I'm going to dump pretty quickly. We tend to have a robust Q&A. I hope we're going to have that again today. So please jump in if you think I've skipped anything that's important. All in all, it is pretty much flat. Cash EPS is up 23% year-on-year. As you know, we focus on cash and on accounting earnings. The [ OP ] reflects the fact that we had a very light quarter from a capital gains perspective, and we will not have a light year. So there's a bunch of stuff coming Q2, Q3, Q4. And despite having hardly any capital gains during the quarter because of the spectacular growth and our stock remains primarily driven by the rebound in the [ tow ] business, but across the board. I mean, Japan has reopened, things are really, really good. The forward outlook is as good as it's ever been. So we end up being flat on an all-in OP basis and cash EPS has actually [ not prey ] substantial. Next page.

This is how things break out. Asset Management, all-in operating profit, plus 20%, a sustainable growth rate is expect to be flat. That's because, as I said earlier, huge growth and stock earnings being offset by a decrease in flow earnings. That is not roughly happen during the full year, but that's what the first quarter looks like. And clean energy down year-on-year on primarily, a maintenance expenses that are one-off.

Next page, actually jumping to Page 13. Look, this is a material that we provide an ongoing basis. It speaks to kind of structural elements of the business model. I will go quickly through this. I may even to skip some pages you should see on this page that we have an increase in our fixed expenses from about JPY 8 billion a year to JPY 9 billion a year for the full year forecast. Over half of that is people cost. I mean we've increased salaries as we should. And there's been some inflation to them. So this is reflecting kind of a little bit of inflation environment, but primarily us choosing to pay our people more.

Page 14. What's worth pointing out here is our all-time record high for stock earnings, which basically right around the number on FY 2022, so fiscal year [ '20 ] February 20. A little bit higher than that in the fiscal year 2019, 1 in February 2019. Our forecast for this year is about JPY 17 billion. It is quite possible -- not only do we beat this year's forecast, but we set a record for Ichigo's firm in terms of most stock earnings. If we were able to declare today that is done, we will be telling that today we'll be raising our forecast. There is, of course, a significant link.

We've got 22% of our assets in hotels. There are a very, very profitable asset class. So we're probably generating this point about 1/3 of our stock earnings with the wind or real estate business out of hotels. So what happens with the hotels over the next year is going to be important. But if things go -- as they're going right now, it is quite possible we could take [indiscernible] that's what we can do it for all of you.

I'll skip through the next couple of pages. 16, the only thing we're pointing out is that it's a small number relative to what we normally do. So this is -- this shows we have all these embedded profits in the firm, unrealized gains. And what's the multiple against those gains that we actually get from the realized meetings, we have third-party appraisers to tell us what are our embedded kind of forward earnings simply based on unrealized gains. We always beat that. We got it like a really small number for the first quarter. We don't think that's representative for the full year. Anyway, it's basically not specifically significant. We think we end up the year at something that looks like between 1.5x and 2x.

And then '17, very quickly, our economic operating cash flow exceeds net income. We are all about generating the maximum amount of cash for our shareholders over long term. And we use that cash as well as we can to, right? We invest for growth, that can mean investing in the business. You can also mean buy back our stock. We didn't make a stock buyback announcement today. You should fully expect that to be active in stock as appropriate. And so there's no signal from not having announcement.

Turning to Page 18. We continue to finance really well. Rates have gone up in demand. They haven't gone up for us. And yes, it's still a remarkable time to borrow money and invest on behalf of all of you. I mean one of the huge advantages is [ apparent ] if you can borrow if you're creditworthy like you to go is extraordinary amounts of money fixed covenant less covenant light for long term, and we continue to do so. And we think that's an important to do that in order to decrease our cost of capital and where more value for you as shareholders.

Page 19. Again, this is kind of update information. We are very active. As a firm now, we have a significant clean-energy business. We are recognized broadly within Japan. It's been a company that caters and implements in a global best practice way on [ team ]. And so we are increasingly able to borrow within ESG frameworks. And these are great. I mean, this is very, very wonderful terms of instance. They are -- we don't pay more for ESG borrowing, we pay less, and the terms and conditions tend to be better. So in fact, about 1/3 of ESG loan or loan ESG right now is good and we expect to grow a matter of time.

Next page shows that we are climate positive. We substantially -- we have -- and the blue shows how much CO2 generation we do. We have been pushing that out very, very substantial over time. As you can see, the green is our actual production of either it be a solar wind power plant, so how much you contribute to CO2 reduction. And you can see the green bar is much, much higher than the blue bar.

Next page shows what we're doing in terms of our own -- and this is really about the blue bar on the previous page, converting over to renewable energy, we're currently at 71% across the firm. We expect to get to 85% this year and by 100% by 2025. And again, separate from this, we have all this massive car [ production ].

I'll move to Page 23, selective acquisitions sales. I think we've used this title for like the last 10 years because we are selective on acquisitions of sales. We are very careful about where we deploy our capital and conservative about it. I mean there's always a margin of safety on acquisitions and attached to a very clear headed view of how we're going to add value to an asset plan to buy it. And on the sales side, we just -- you can count on us to run a very, very robust sales process when we sell anything and get the maximum price for genuine value creation that we have done.

We have been -- we were net acquirers, as you can see on the page, we've about JPY 14 billion that is almost entirely Ichigo Owners that business, again, is kind of prime, super prime residential, brand new delivered by us to investors running from individuals to big, global institutions who want access to highly secure returns in Japan. As you know, residential is a very robust and steady and stable asset class in terms NOI. People pay the rent, you pay the rent in Japan. And so this has been a very strong substitute for -- increase yield for a country where there really is no yield. So instead of owning Japanese bonds and cash and offer you effectively nothing on resi and real estate and office substantial [ market z]. And these days, some of it looks like somewhere like 3% to 4% range.

Next page touches a little bit on what [ timing ] hotels. And as you can see, RevPAR is up. I mean, this launch. So we're kind of RevPAR revenue per available room. [ Plans ] can COVID and now driven [indiscernible] above pre-COVID. And that's despite inbound tourism still only recovered to 70% to pre-COVID levels. So what we're suggesting is, at some point, the demand is a really, really attractive for [ torch, you should all come. ] I mean it's spectacularly delicious and friendly and clean and safe and no social conflict and cheap. And so I think it's pretty straightforward to underwrite to continue growth in Japanese tourism.

Part of that also links to the fact that tourism globally kind of grows faster than GDP, particularly -- and that's particularly the case with economies that are moving up in terms of income levels, which described a broad amount of Asia. So Japan is close to Asia, it's a great place to come, and it's an affordable place to come, so there's a lot of growth.

Next page shows what we're doing in terms of capturing hotel demand. 3 that we actually expanded during COVID to position the long-term growth. But if we have to operate OneFive Hotels, we have maintained an occupancy previous and through COVID that involved pushing down RevPAR heart. We kept the hotels up and running. We kept the employment and we kept the folks ready for a rebound at some point and that renews occurred. Compared to [indiscernible] is our AI-based hotel revenue management system. We use that internally and we really effectively, what we haven't delivered upon for you yet. And the kind of point of work going on there is more substantial external sales of this because it is a very powerful revenue management system. I'll touch on a little bit on the next page, and we expect to be that hopefully -- we will provide for all of you though, that will make you happy.

We have 2 Ichigo hotel brands, THE KNOT, which is kind of a higher level of Boutique Hotel brand and OneFive which is more kind of -- what's the right way to describe. It's probably a budget. I mean, I hate to use the word budget because the kind of the soft service and hospitality is really, really good. And as part of the reason why it's seen very well by book brands proving to be very effective and powerful both inbound and domestic.

Page 26. I think the only other thing here to point to is we are broadening diversifying our sales earnings. We're moving beyond earnings that are driven by asset ownership, meaning kind of operating income and gains on sales. The hotel operator will turn robustly positive OneFive will return robustly positive this year. We expect to see expanded activity with Propera asset management, we -- there's more to be done there, and we will be generating stock earnings, these businesses in a non-asset way.

Next page, just kind of points to -- this is what we do as a bread and butter in sustainable real estate. Some examples of the activity that we have had in the retail space. Many of you have known Akihabara, which is the main hub in Central Tokyo. Both of these assets are right snack in front of the station. Like you walk out of the station, then boom, right in front of you is -- are these 2 buildings owned by us, like literally feet away. And this is what we do.

The older assets 4 years plus in both cases, we have spec them up to make that sure they are totally earthquakes safe and structural engineering is right for them to run for hundreds of years. And during the COVID period, I think one of them, I see a soft map for Bandai Namco, we did 2 summers ago and the other one we did last year, but massive increase in rents based on kind of the quality that we have provided and the [ scrubber ] location. So what we do, we see more examples of this, very, very powerful in terms of -- look, at the end of the day, these assets have value because of the NOI that generate. We are intensely focused on driving higher NOI in order to create more value for our shareholders. For [ bikes ] because that's what we do. We create value. We make it more valuable than we sell them on the set capital for a year.

Page 28 shows going on. It's somewhat busy. We must show the time line over time, Ichigo owners where demand is very, very robust. You can see that we've used more conservative assumptions. For this year, we expect to sell about JPY 50 billion, last year generated JPY 4.2 billion of operating profit, that is got a lower gross margin assumption relative to last year, where we did JPY 20 billion, generate JPY 2.5 billion of operating product. We've done so well over the years.

We just feel like it's probably smarter to underwrite to lower gross margins. So we'll see what happens. But anyway, there will be ongoing growth in this business and we're generating that -- we're doing the acquisitions, you can see on the bottom in order to fund this growth.

Next page shows some of the new initiatives. Both are focused on kind of bringing new owners into real estate. The one on the left is a co-ownership business. Really, the kind of -- it's a little bit of a partnership, probably the best way of describing it relative to -- on the right, I mean, on the left, it does give you actual real estate ownership and so you can get kind of depreciation allowances, and so it's like physical ownership of an asset and we offer a diversified small scale investments for large individuals and kind of high net worth and [ captured ] companies to own your track portfolio.

On the right side, and I've talked about this before, we are actually doing tokens on the blockchain and -- this is not -- and I've said this before, this is asset back. So it's real. You don't have to kind of believe in the future a bit going. You get -- it is kind of really like a REIT, but it's taking the shape of a token. It's an interesting question as to why people want to buy this versus buy a REIT on the token stock exchange? And the answer is, they can make you what a good choice in. It turns out that the buyers of these tokens skew younger, the skew more male. And this got a lot than our REIT shareholders, but it effectively kind of the same product. Do you want to buy it via a token, do you wanna [ boom ] via token? But it gives you this ongoing secure return just like we offer our [ investors ] our REITs.

I'll turn to the REITs now. We -- it's our job to support these REITs and grow value for all the REIT shareholders. We believe in asset management and believe asset management is fundamentally about serving the shareholders of those that you have kind of a covenant with. So it's a way of saying anything that we do in the REIT space needs to fit the needs of the REIT shareholders.

We will never kind of violate that covenant. It has meant that, for example, over the years, we have not done public offerings nearly as often as many of our REIT sponsor peers because we've taken a very skeptical view on whether or not those POs, put offerings really makes sense for the shareholders of the REIT themselves. And we do not use REITs, it's like exit vehicles for things that we're known ourselves. So anyway, we've done a bunch on the REITs. This is -- I will not -- this is a long presentation. I'll run forward, but those are our values, and you continue to count on us to intensively serve the REIT shareholders.

And at the end of the day, the goal is to be recognized and we work for that. I'll talk a little bit about our returns on each of [ offer ], that kind of support the market coming, understanding what we do in the space and what we're good at.

Next page shows some of the activity. One of the things we do want to do is we want to increase alignment between us, so Ichigo [ 327 ] as an [ asset management REITs ]. And so doing everything you can to align yourself as a sponsor with the REIT shareholders we think that are important. And one of the ways we have done that is we've actually bought the REITs ourselves. And so we are co-owners of REITs, and it's underscored our commitment to drive shareholder value for the REIT shareholders.

We're just like you. If we don't succeed, it damages us and it's -- at the end of the day, we're going to do our best for REITs also we want to show the alignment in a physical way. Through ownership, talk is cheap. So that's what we're doing.

Page 32. addresses recently, there was a shareholder [ Ichigo Office 3], [ we made ] shareholder meeting to make a large number of proposals and at the end of the day, the Ichigo Office shareholders along [ devoted ] for each fund. And that was a positive outcome. It was an opportunity for us to -- we engage with our shareholders Ichigo Office 3, and that's happened. I hypothesis, the way it happened is really kind of based on what we've done for the shareholders over the year.

So the next page shows the outperformance of Ichigo Office REIT. And we have just absolutely crushed the market. So this is our job. This is why investors trust their life savings or their institutional savings to each of -- because we work really, really hard to deliver outstanding performance, and we have definitely done that in Ichigo Office and Ichigo Office REIT shareholder like myself.

Next page shows what's happened with dividend growth, which has also been very, very, very high for a long period of time, we were the single highest performing REIT in Japan of all the REITs in terms of consecutive years of dividend growth. Unfortunately, that disappeared in 2019, you can run for it. It's pretty hard there is some underlying volatility NOI for you to -- and this is a distribution vehicle for you like always grow earnings forever. By the way, we've done very, very well, and we will continue to do well for our [ channel ].

And next page shows NAV growth, which is similar. It doesn't move quite as a spectacular there's been a lot of growth there. Turning quickly to the Clean Energy business, there will be more growth there. We have a little bit of push down this year on one-off maintenance costs, as I pointed out earlier, particularly with respect to the wind power plant and we've got a pipeline of Green Biomass asset nonfit solar that's coming that we think will be very additive, not just to our earnings but this is about, we are all experiencing today, Tokyo has been blazingly out as it has been in the last couple of days, but we're all experiencing globally. Enormous kind of weather turbulence and kind of trying to get ourselves off fossil fuels in order to address that issue. It's incredibly important to plan and we're deeply involved and are going to be even more involved.

Final page of the presentation before the appendix, did have our daily shareholder program, which is an is extraordinary innovative. We offer it to all shareholders, not just for the owners of this company, but to all the shareholders of REITs. And the JV is back and roaring and opening, and that's a much better place to be than very -- COVID period. So we're giving out all these [ free tickets ] to all our shareholders and it's a [ happy time ]. That's what I got. Thank you so much for your patient listening. Apologies for the technical difficulties at the very beginning.

[Scott Callon, executive]

I'm happy to take any questions or comments. Again, thank you so much. So if anybody wants to either raise their hand or somebody already has. I think is great. Great. Thank you.

[Unknown Analyst]

Scott, can you hear me?

[Scott Callon, executive]

Yes.

[Unknown Analyst]

I have a couple of questions. On the Ichigo Owners, I remember you started the year with your guidance. I think you hitted indeed probably lower gross profit margins. How is that kind of trending versus your initial expectations? That would be my first question.

[Scott Callon, executive]

Yes. So I don't have a lot of data for you on that, meaning we haven't done anything really of interest. And we're working on some big transactions. But yes, I think we're going to hit these numbers. Does that answer your question? So you're asking for some input on how are things [ tracking ] and I don't have an answer for you. Talk next quarter, the quarter after that.

[Unknown Analyst]

Understood. And my second question was, you touched upon salary increase for the staff on the hotels. Can you maybe just expand a little bit on that? And what was the range kind of broadly speaking of what you did on kind of base? And are you also kind of helping us with kind of some valuable bonuses? Or if you add color, that would be great.

[Scott Callon, executive]

It was over only focused on the base. But as you know, we have a system like most Japanese companies, where you get a base and then you have a bonus, which is some multiple of your [ bags ]. And so by raising everyone's basis, and we literally raised basis of everybody on average, about 5%, but extraordinarily skewed towards younger staff and lower salaries. And thinking about this was, look, their -- Japan is in place experiencing inflation in a way that hasn't experience literally in decades, and we need to take care of our people.

And Greg, to be clear, it was not a decision based on kind of what's happening in the market and where our salaries, and we did do this. It was just kind of it was exactly that. When we got together to the management team is like, wow, some of our younger folks who have less experience and lower salary are really experiencing an inflation hit and we should fix this and we should fix it for everybody. So on average, 5%, but there were people that are much higher than have there and the guidance we're paying more -- much lower than that, and we just explained this is what we're doing.

[Unknown Analyst]

That's great. And just the third question is on the Propera software revenues. We have been able to kind of develop that post-COVID, are you able to get more kind of third-party accounts?

[Scott Callon, executive]

Yes, yes. And the answer at this point is no. So that's a KPI that we've missed. And we've got -- I'm sucking in I don't demand from most of my life. You can tell from my [ accent ] and Greg knows it. I'm from California, but most of my life is in Japan. So when you hesitate or something you're sucking air. What should I say on this topic, I mean we're working on some large transactions. And I don't know if they come through and how soon they come through. But this has been an interesting experience of spectacularly and maybe [indiscernible] [ how much that shows ] kind of is very, very quickly been young. Page 26. It's says 40% earnings increase p.a.. I mean that's the right range. Normal looks like more like 20% to 30% plus for the hotels that we introduced this system.

And so those numbers are so big and so powerful. You would expect us to be selling this system like hotcakes. And it's been really fascinating to see how difficult the sales process has been with hotel operators, like big one -- it's like free money -- and we're fine with [ this ] system like, okay. So we have -- we've done a bunch of work on how we work on the sales process and we had implemented for free and all that sort of thing. And so we'll see if we get some breakthroughs sometime soon, but we haven't done these much in this space in terms of the external selling activity.

It clearly is a very powerful tool for us to deliver not only higher NOI from our own hotels, but give us competitive advantage because we do -- when we introduce it, we systematically get higher returns on sooner. We'll see sometime hoping that next year, we'll have an announcement where like we've done something really being very externally. But at the moment, we haven't delivered on it.

To give you some sense of that, growth from last year has been about 20% in terms of external customers for it. And but that's a low base. So it's not growing at all, but it's not growing nearly enough to satisfy us for, I think, satisfied.

[Unknown Analyst]

Understood. And then one last question, any update regarding Tradepia the vacancy rate, please?

[Scott Callon, executive]

Tradepia?

[Unknown Analyst]

Yes.

[Scott Callon, executive]

Tradepia is currently at 58% occupancy. It is contracted to be over 64% soon. The target for this year is to be 70%. I think we hit that. But it is kind of the one. So now we own 1 big office is that one. It has had a completely different experience from our small mid-sized offices that are running at occupancy nearly 100%. So that is assets we've had to work quite a bit on. And that's where it went down 58% -- actually went down below 50%. It's now 58%. It's [ contrary ] to go to 64%. We think we get above 70% this year.

And the only good news on Tradepia is that finally, it looks like we're joined the corner. Boy, it's hard. As a reminder that we overall prefer the small and midsized, there's a long story around this. And we actually made the money on the asset but it has proved to be far more work than we had expected on my first one because of the COVID experience and things happen.

[Unknown Analyst]

Okay. Thank you so much.

[Scott Callon, executive]

We have a question that's come in via chat for Michael. And I'll speak out loud. Real remote working is normal in Europe, U.S. with only 68% [ prime mass ] what is the trend in Japan? How is that impacting Ichigo's assets and strategy? So Michael, I mean, the Tradepia competition is a worthy one. So again, that's the only large office building we own -- which is -- and large office buildings are generally occupied by larger companies, which -- and speaking from our data sets, our data set, so it's been that the large companies are slightly more remote. It's not as the SMEs that occupy our buildings are less remote.

But the key difference is the large companies are more remote and they've been, therefore, pushing back space. And has gotten no space pushback. And what's the decisions that are being made by the tenants are, and I talked about this before, so forgive me for redoing it. So there is a war for talent in Japan. There's a labor shortage. And particularly a smaller company is going to have possibly less brand. They're actually trying to use office space as a way to attract talent. And we -- again, we have really good offices, really well located. And so the building Ichigo office means it's going to be a nice space.

And so what we're hearing from our tenants is, pre-COVID, we were 100% in the office. Now we're only 70%, and we're going to keep our space. That we're to give effectively 50% more space per worker and that's nice. We'll be put a [ lounge ] we want to give space for individuals, office space per individual for worker in Japan is small anyway. So increasing this to more like global standards or your [ intended ] is something that our tenants suggest to do.

So the short answer your question is, going remote has not impacted demand in any way in any materially in the small and mid-sized offices with bread and butter. And in fact, it has actually been -- it appears to be a demand driver because one thing that's happening is the big guys are pushing space back. I mean what smaller offices sort of coming to us. And the other reason why you would push a space back is because it's more expensive. And so to be clear, a large office building in Tokyo, by the way, it's much more expensive to build large office buildings. You have to gather all the land, you generally have to [ be premiums ] to some of the owners to get some of the land. It's much more expensive due to structural engineering to make a building that earthquake safe. And so it's just for more value for the money to do a small and midsized almost.

By the way, you would normally be paying, and this is the Japanese size, 3.3 meters squared, but it's called it [ Subop ] for you would pay kind of like 30,000 for [ Subop ] for reasonable office space in Tokyo. That's larger. And in our case, it generally -- it's something like 16,000 meters. In other words, we're like [ 40-600 ] cheaper. And so what's happening with the remote work is that people are migrating to our size and our cost point. So we actually think office is really interesting because there's still kind of a bunch of people out there going, well, we don't know about office and how is it going to turn out. We have been doing a small amount of acquisition offices, small amount, meaning kind of we also -- I said before, we're selective on acquisitions and sales, but we think it's an interesting place, and you should expect us to be continuing to be active there.

Happy to take Will. We're going to demute you. Are you there?

[William Montgomery, analyst]

Yes. Can you hear me?

[Scott Callon, executive]

Yes. Thanks for joining.

[William Montgomery, analyst]

Two questions. The first is on the RevPAR increase, 28% over pre-COVID. So can you explain what were the drivers of that? Was this rebranding, CapEx investment, different just operational efforts to raise pricing. Just kind of get into what drove this? And then of your existing, I guess, you said 24% of your current assets are hotel, is there room for further expansion as these sort of efforts are ongoing into the next year or 2? Can you just give some color there?

[Scott Callon, executive]

I'm going to give you a qualitative response because we did a number of things simultaneously, and it's small data rather than big data, so it's hard to do out. But I think the 2 drivers, the biggest driver is Propera. We implemented Propera, it really, really works. And the second one is branding. We have rolled out THE KNOT and the OneFive brands, they've been very, very successful. And when I say the branding is about -- forgive me, let me walk it back. I mean, the -- it's a service provision that is valuable and wanted by travelers that we have branded THE KNOT and the one in meaning the classic Japanese hotel, and I've said it before, so please forgive me, is like it's a box, it's really cheap or alternatively, you can pay a tonne of money for the 4 seasons.

And there's really been nothing in the middle. And so trying to find [ in we ] have more little. It's not just a box and you actually get some soft service and you get kind of people caring about you. And both THE KNOT and the OneFive brands have really, really good food. I mean, it's -- this is a country that cares about food and people come here care about food. So there are some elements about making it a much higher quality experience. It's still a spectacular great price. I mean JPY 1,000 -- JPY 11,000 is less than $100 a day. I mean these are -- this is still really, really good value. So I would say it's those 2. It's Propera and it's also our service offer that has driven this increase. And yes, there's upside. There's no question on upside.

[William Montgomery, analyst]

Great. The second question is on, what can we expect in terms of AUM growth rates, either in sort of maybe average value per year, this year, next year, 2 years and office and hotel. Obviously, the hotel had some trouble in the most recent PO, so it might be a while before we see one there. But can you give us some maybe color on when that might next be, et cetera? Just on AUM growth generally?

[Scott Callon, executive]

Yes. So look, the honest answer is that's hard to say because at the end of the day, I'll give you the thinking and then maybe we can come up with something that makes sense. We exist to serve the retailers. And I think, unfortunately, it's not necessarily the case you can say that about all data responses. So we need to be able to do to grow because these are distribution vehicles in order to go, you need to do a public offering. So we think it's really important to make sure the public offerings grow value for the REIT shareholders. We're highly confident, we can do that with the hotel REIT today. We are actually confident that we can do that with the office REIT also I mean the hotel REITs is easier. I mean, we've got an edge that's very powerful [ in and ] kind of our ability.

And hotel business in general, as for execution in Japan. So despite Japan in the hospitality area, having the best restaurants in the planet doesn't have the best hotel. So there's more to be done here. So look, and we have ambitions to grow, and we think we can grow. Yes. I mean, can you underwrite the hotel, REIT to double-digit AUM growth on a CAGR, I think so. Yes. I mean because the opportunity is available, and it's relatively small, and I move in a minimum.

The office REIT is harder to pay but I think it will grow. I mean we've been growing it primarily through growing value and selling assets and making money and reinvesting those assets and making more money. And so it has been driven by primarily organic growth, that's fine. And the returns for shareholders as I pointed out earlier. When we're [ REIT it was ] that we have been great, Page 33. And yes, we do have investors who say, "We want you to be bigger. We want loan liquidity. We like what you do. Could you please get bigger. So we can participate more." So we'll see where we can take that. But yes, I think the most definitive version I can give you is we haven't grown [ these ] vehicles very much for years, and they will start to grow. And that will be a change. And it's also a firm priority to grow them.

We believe in the asset management business. We believe in serving the world. And by the way, when there wasn't a place in Japan, you had money in the bank. It wasn't a problem in terms of the loss of kind of the destruction of value -- economic value for [ Saber ]. Now that we have inflation in Japan, it is a real problem. And so for us to deliver, but we can in terms of robust returns for Japan savers through our REITs is something that I think has significant social importance. And so we want to grow it. So yes, I think you can underwrite hotel REIT to double-digit growth per annum. It's hard for me to say what obviously will look like, but we'll get some growth to in future. Is that sufficiently?

[William Montgomery, analyst]

That's good. That's very good. That's good, thank you. I said too, if you don't -- do one more. On the renewables, I think it was last quarter, you mentioned that you might pursue a strategy of accepting outside capital and then developing the asset on behalf of the investor rather than owning the assets yourselves. So this is a bit of a hybrid asset-light model. Can you maybe update us on where that's going and what we might see going forward in that business model?

[Scott Callon, executive]

Yes. We're really interested in that. And I don't know if people noticed, but we made a very senior [ level ] recently. [ Akida Yamanuchi ], who ran, I was asset management business and ran the sustainable asset businesses is very significant. And he joined us as Vice Chairman actually in the last few months. And he has a very, very significant experience both on the asset management side and the clean energy side. So if you're trying to get some sense of priorities inductively from what the hiring that we're doing in a very, very senior level.

That would give you -- but I think we'll bring response both on your asset management question on this one. So we'll see where we can go. But yes, there is a wall of demand for clean energy. And we are a strong provider in this. This is a business we want to grow more. I mean the growth has been okay, but I try to be pretty transparent. I wish we had done more, and we still want to do more. And we clearly have an opportunity to do more. So you will see accelerated growth in this area. I feel pretty comfortable in considering that as the forward direction for the [ target ].

All right. We're going to call it a day. Thank you, everybody, so much. It's an honor and a privilege work for you.