Ichigo Inc

TSE:2337

Earnings Call Analysis

Strong Growth Driven by Real Estate and Clean Energy Ventures

Ichigo reported a very strong quarter with All-In OP up 119% and cash net income up 30%. This solid performance was supported by growth in their sustainable real estate and clean energy businesses. The company is also expanding into Generative AI and sports branding. Despite a slight drop-off in asset management, stock earnings, driven by sustainable real estate, remained robust. Share buybacks continued, with shares being considered undervalued, and dividends increased. Ichigo's outlook includes expectations of record cash earnings and continued growth across their diverse business segments including real estate and clean energy.

Strong Start to the Fiscal Year

Ichigo had a robust first quarter, showcasing a powerful business model that generates significant earnings growth. All-In Operating Profit (OP) jumped 119% year-on-year, and cash net income rose by 30%. This surge points to both normalized revenue and a solid operational performance, highlighting the company's capability to weather various market conditions.

Diverse Revenue Streams

The company's revenue streams are diversifying, particularly in sustainable real estate and clean energy sectors. The sustainable real estate arm saw explosive growth, driven by strong sales. Meanwhile, the clean energy segment faced some volatility due to weather conditions but is recovering. Notably, the company is involved in Generative AI, with a customer launch already underway, which could open new avenues for revenue.

Focus on Shareholder Value

Ichigo remains committed to enhancing shareholder value, trading below 10x cash EPS. This has led to consistent stock buybacks and dividend increases. They executed a buyback worth JPY 1.2 billion this year, alongside a JPY 6 billion buyback from the previous year. The company aims for a 4% shareholder-return KPI, ensuring a growing dividend correlating with earnings growth.

Strategic Acquisitions and Market Position

The company strategically acquired a private REIT asset manager, allowing for enhanced value-added real estate services across multiple products. Despite increased competition, especially in Japan's hotel sector, Ichigo remains optimistic about growing its market share, particularly as tourism rebounds post-COVID. The hotel operator's revenue increased by 75%, indicating a strong operational turnaround.

Challenges and Opportunities

One significant challenge faced by Ichigo is talent acquisition, as the demand for quality value-add assets exceeds supply. They plan to enhance their talent pool to support ongoing growth. Additionally, the company capitalizes on Japan's GDP-plus economic recovery, expecting a sustained demand for their services and products, particularly in the hotel and real estate sectors.

Future Outlook and Guidance

Going forward, Ichigo expects record cash earnings and stock earnings, projecting growth of 50% for its residence token assets. Last year, this segment generated JPY 20 billion, and the company anticipates a further 50% increase this year. Overall, Ichigo shows strong growth potential, driven by strategic initiatives and a solid foundation in various sectors.

Earnings Call Transcript 2025-Q1

[Scott Callon, executive]

Hi, everybody. I'm Scott Callon, Chairman of Ichigo. Thank you so much for joining us today. I'm speaking off of the presentation that's in front of you. It's also on our website, FY '25/2. So the February 2025 current fiscal year Q1 corporate presentation. I'll go through this relatively quickly. And thanks to so many of you, you are veterans. You understanding our company well. And we're kind of -- we try to be consistent in the way we describe ourselves and provide disclosure to you. So this will be very familiar. And that's the point we should be transparent about what we're doing and allow you to track our activities.

Very strong quarter. More to the point, this is not a quarter-by-quarter battle, of course, years are built on quarters and decades are built on years. So it's great and important to have strong quarters. But more fundamentally, the underlying business model is very powerful. The activity we're doing right now is going to generate significant forward earnings growth, and so this quarter just kind of reflects that.

I wouldn't say that we over-earned. We had a relatively light quarter in the first quarter last year. But this quarter, we had -- this quarter was more normal. So we had a pretty big value uplift, but it was a strong quarter. So All-In OP, up 119%, so more than double year-on-year. Cash net income up 30%. That's probably a stronger reflection, a better reflection on what kind of actual activity looks like, but we're doing very, very well.

I'll touch on many of the points on this page going forward, but we're growing the asset management business. We bought a private REIT business in order to do more activity there. We're expanding our clean energy business. We actually have a set of capabilities and technology that, I think it may surprise you that we're involved in Generative AI, but we are. And we've got a first customer launch there, and we're doing more in sports. The sports business has primarily been a branding business up to this point, and the branding impact is really, really powerful.

We've been a top sponsor of J.League, so Japan's Soccer League or as we say, with a more British pronunciation, football league for many, many years, and that's been great. We bought a J3 soccer club of our own. And -- but we actually wanted to develop an earnings stream out of it. It's a non-asset business. And so we're doing more activity in that area also.

Q1 summary, we are structurally profitable. That's really, really important. Our stock earnings, so those are contractual earnings. We run ourselves to be above twice our fixed expenses, and that will continue to be the case. Earnings were particularly -- stock earnings were particularly driven by our sustainable real estate business. We had a little bit of drop-off in asset management. We'll get that back. That business is growing.

The clean energy business had kind of -- had rough weather. That weather is a little bit volatile, but that's already come back. So that's off a little bit. But anyway -- so we're growing stock earnings. And so what you can tell from this, though, is we had a huge uplift in the quarter, and that's what I was speaking to earlier. We are a stock plus flow earnings business model. The flow earnings were much more normalized, much bigger during the quarter, and that's what generated the really big numbers. The really big numbers you can see here.

So again, All-In OP, up 119%; cash EPS, up 34%. You can see cash EPS is up 34% and cash net income is up only 30%. That's because we're buying back our stock and consistently. We -- at this share price, we are trading below 10x cash EPS for a business that is a really good business and is growing. So we think the shares are very cheap. And as a result, we're buying them in.

And as the subtitle points out, our cash earnings are 1.3x our accounting earnings because we focus on maximizing long-term cash flows for shareholders. We focus on economic profit, rather than accounting profit. Those are slightly different statements, but we work for shareholders. And it is generating long-term cash flows, which we think is ultimately [indiscernible] shareholder value.

In terms of the segment earnings details, you can see explosive activity and sustainable real estate. That's on the back of just very strong sales activity. I'll speak to this later, but -- and we try to be transparent about what's going well and what's not going well. And of course, more things are going well, and that creates the high-class problem. We are constrained on talent right now. Particularly, our residence token business, which I'll describe again somewhere later, is exploding, and we really need the talent.

We need more activity around our value add because we are, at this point, not demand constrained, but supply constrained. We have more demand for high-quality value-add assets, and at this point, the ability to produce some. That is a problem. It's something we have to work on and we are working on.

We will have -- we expect record cash earnings this year. We -- for the second consecutive year, we expect to have record stock earnings. It's worth looking a little bit as -- what's happening here on the page and it reflects some activity and the volatility of the hotel business. We think the hotel business that we have is a very good business, and it was devastating bad -- devastatingly bad in COVID. We also understand that.

And we understand that we didn't predict COVID, but one has to be very, very careful about hotels because they are the only asset class we own that reprices daily, which is to say, this is a daily rate for hotel. It changes all the time. And if unlike -- unlike a residential contract or an office contract which run for years, people generally stay hotels for 1 day or 3 days or 5 days. So as a result, it has more volatility in its earnings, which is why we manage this particular asset class. So that's no more than 25% of our total assets. Having said that, we think it's a really good business, a really good asset class.

Hotels are hard and hard is good, meaning if you want to add value, be in a place where adding value, it's harder to do and therefore, you can actually add value. And so Japan is absolutely world-class in its restaurants. It is not world-class in its hotels. We have found an opportunity to deliver value there. And what I'm speaking to is that we're having kind of an absolute growing bag in hotel revenues. I'll touch upon that.

But you can see it on this page, in the hotel operator and PROPERA revenues and PROPERAs are a dynamic pricing system for hotels, which you can see were negative, were seriously negative during COVID. And now if you look on the right, you can see it's JPY 567 million. It used to be [indiscernible]. It's rolling back. This is in the first quarter, right? So this is a business which is doing very well.

I told you that we like the hotel business because it's harder to do. The fundamentals of the business, of course, are also very strong. There is -- this is a GDP-plus business, meaning you get -- Japan is preferred destination for Asian tourists. As those economies continue to grow and there's more income there, there is additional spend that goes into tourism.

Of course, the Yen is very, very cheap right now. So that's an additional kind of winder back on this, but there is significant demand for Japanese hotels, significant opportunity to deliver greater value than what other operators are doing. And this is something that we will continue to do. And so watch space, the hotel earnings are going to be robust.

We continue to finance very well. You can see there's been a jump in our financing costs. That's because Japanese financing costs have gone up. So TIBOR, [indiscernible] TIBOR which is the base rate for most of our loans has gone from 7 basis points to 30 basis points. It's still only 30 basis points. It's still extremely cheap, but that's a 23-basis-point uptick. You can see that increasing in our financing costs.

To be very clear, this is not interest rates going up during [indiscernible]. This is interest rates going up in a very strong economic period. So we will earn overly more in terms of the plus that this delivers to us in terms of our business from the strong economic environment and increased interest costs. But interest costs are going up, and we, of course, understand that and need to deliver to you, and we'll deliver it to you a greater uptick in earnings as a result.

We are selective on acquisitions and sales. We've used this slide title for probably 7 years at this point, because it's true. In the first quarter, we were net sellers. As you can see, JPY 9.1 billion. We sold to Ichigo office. We sold to the Ichigo Residence -- our fourth Ichigo Residence Token, which is a securitized token, I'll talk about later.

And we sell externally too. It is a case that we -- and I hope it's okay for me to say this, we're actually very good asset managers. We want to grow our asset management business. We'd like to serve the world. Investing to defend people's life savings is something really, really meaningful. This is a business -- we think it's a good business. And so we're putting assets into these businesses. To be very clear, we could sell these assets at a higher price elsewhere. We could.

It means we lose the forward asset management fees. And so when we take a total look at this and the valuation attached to an asset management business, we think it does make sense to sell the assets at a slight discount into our asset management business, but it's only a slight discount. We're not going to do it for more than like, I don't know, 20%, 30%. But on that basis, we're doing.

So to be clear, we do have opportunities to sell into our asset management, but those are opportunities that exist elsewhere too. I mean there's this overwhelming demand for the value-add assets [indiscernible].

As I said earlier, our stock earnings are growing substantially. You can see by far, it is substantially up higher than pre-COVID. Our hotel operator won 5 hotels and revenue is up 75% year-on-year, and this business is growing very, very well and there's more upside to come.

Ichigo Owners is growing very well. It's a little bit harder to see the economies of scale in this business. And so probably the most important part of the description on this page is the one that is a little harder to see, which is the growth in OP, which is literally up 50x over the initial from 7 years ago. So this is a really good business.

We buy assets, we work with the developers. We work primarily with midsize developers. So in terms of understanding the value that we create, we are very, very experienced. And this is a business where we buy Tokyo Prime residential assets, brand new. We specify with the developers what we want. So we have a much richer data set, which is moving from kind of like mid data to this big data. We've been in this for so long as to what different markets need, what customer has been intense, what are they looking for, what sort of size is, what sort of features and what set of locations? We work with a developer to build to our spec and then we lease up very, very rapidly.

So our holding period is generally -- and we'll get leased up to 85% to 90% and then we'll sell the asset on. Holding period, it tends to run for like 7 to 8 months. We're running at 85% LTV. We have gross margin. It looks like 10% to 15%. You run the math on it. We've got [indiscernible] like 50% to 100%.

It's a fantastic business. We're generating real value by helping developers design product that fits tenant needs, and therefore, creating robust assets that have ongoing demand, which are good for the new owners of those assets, which, in many cases, is proving to be these Ichigo Residence Tokens. So our customers, our investor clients. So this is a business that is growing and will continue to grow.

The 4th Ichigo Residence Token sold out immediately. To be clear, all 4 have sold out immunity. This is what we were saying earlier. We cannot produce enough of this product. And to be clear, we will not compromise on delivering really, really good value for our investors and so that means, we need to continue to build out our capabilities in terms of value-add activity. And that is, as I said earlier, we're working with developers, we need to be able to involve at the design stage. We're involved in engineering checks and all the assets. We're involved in leasing up the assets.

So across the firm, we need to continue to add these capabilities and we are. And as we add those capabilities, this business will grow. So by the way, this is same sort of assets what we would put into a REIT, particular wrap around this. So product profile, it's on the blockchain, it's bought through a securities firm. It's completely securitized. You get this return. It feels like a REIT investment except for whatever reason, there is a broad customer set that prefers to buy it this way as opposed to a REIT.

Our REIT investors, our REIT shareholders tend to be older, 50s, 60s and 70s, because that's where our assets are in Japan and across the world. Our residence tokens, investors tend to be younger, 20s and the 30s. So it's a completely different customer set. They have a voracious demand for high-quality assets in Japan now that it has an inflation, and we offer not only an ongoing dividend yield, which all right, so the [indiscernible] has gone up to 1%. This gives you 300 basis points above it, plus an opportunity for capital gain. So again, this is an asset category we expect to go.

So to give you some sense of that, we were at JPY 5 billion 2 years ago. We have grown [ 4x it ] last year. This year, we expect to increase it yet again 50%, next year by another 50%. We're really at this point at constrained primarily by our ability to generate these assets. So this will grow and grow very rapidly.

We continue to work for all of our investors, including, of course, our public REITs, which are really important to us. So we also did value-added activity on 6 assets, which we delivered to our investors. And we're also moving kind of more of our activity within the REITs themselves. So the REIT's share prices have performed great over time, but we're certainly not commanding premium, but we expect that we would command because arguably, we are, in terms of the results that we've generated, Japan's best REIT manager.

And so we continue to work on how we're going to grow value within the REITs and just generate really high returns from the investors. So that is an ongoing task, which we find really meaningful and we'll continue to deliver value bang on.

As I said earlier, we bought a private REIT asset manager. It's just adding kind of another tool or another vehicle for us to deliver high-quality value-added real estate across multiple products and channels. We do not think this is in conflict with our other channels. As I said earlier, the buyers for the security tokens are a completely different customer set. It turns out that our private REITs buyers tend to be different from public REIT buyers. So this is another opportunity for us to work for customers and deliver value.

It does add to the requirement, as I said earlier. And this is good news, but we are talent-constrained. I say it's good news because the talent relative to the value you can create on our platform is low cost. And so if they have the talent, we're going to drive earnings a lot, but there's a major major. It's a multiyear initiative, but it's really accelerating at this point. We have such demand for a product. We're opened a major initiative to grow our talent and develop our infrastructure such that we can deliver more earnings for you going forward.

Clean energy continues to grow. We'd like to grow a lot more. And therefore, we have begun a global expansion. We agreed to invest in GIGA.GREEN company, we think is absolutely fantastic and extraordinary talented, great values, great mission. It's just truly an honor and privilege to work with them. This is a business very similar to our clean energy business in Japan. So it's one that we think we understand it reasonably well. We expect to learn from GIGA.GREEN. We expect -- I mean, it's our job to add value in any sort of way, this is a business that we know really well, to GIGA.GREEN if at all possible.

But fundamentally, this is an alliance to work on climate change, which is real and requires a response on a global scale. So again, it's an honor and privilege to work with the wonderful folks at GIGA.GREEN.

We are working also on Generative AI. We'll see how far we can take this. We have some capabilities in the area and we have our first customer, and we'll see where we're going forward. We do believe this is a fundamental technology breakthrough that is very important. It will change how all of us live, how all of us work, including Ichigo, and we're taking our capability. We're not only deploying within the firm, but we are promoting on behalf of customers.

And as I said earlier, we're growing our sports business. We've been very involved in the soccer. We're now again involved in basketball. And so -- and it's a non-asset business. It's good for the brand to be involved. There's a halo effect from being involved in sports, but we would like to turn it into a pretty robust earnings stream. The ROI will be high because it's not an asset. So stay tuned. We'll continue to -- we'll do more in this year.

In terms of shareholder returns, this is what it looks like. The JPY 1.2 billion for this year. We did JPY 6 billion last year. Couldn't complete the buyback last year. So we completed it once we had it this year. So a total of JPY 6 billion was done last year. We would expect to continue to do buybacks going forward because, again, we think the shares are cheap.

We have been raising our dividend. I mean there's a version of, you know, we think our shares are very cheap. We could use all of our cash flow. I mean, look, we're able to invest for growth and we're able to return to shareholders. Given that the shares are cheap, we could do kind of -- we could do 100% share buybacks. We do have investors that care about dividends, and we care about serving our investors. So we have a shareholder-return KPI of 4%, and we are committed to that. It gives a durable and certain -- a growing dividend, given our earnings growth, and we'll continue that and we'll have buybacks in tandem with that.

We do have a J.League shareholder program. I think you all know this, but most of the Japanese companies who sponsor the J.League take the tickets that they receive and give them to like management or employees. We work for shareholders and we give them to our shareholders, which makes us unique in Japan.

We continue to be very, very active. We are climate positive and seeking to address the devastating impact of climate change. You can see this is both not only growing our activity in terms of CO2 reduction from production growth, I mean kind of switching out of fossil fuels and providing clean renewable energy, but also in terms of decreasing and making our own renewable energy transition in terms of what we do on the consumption side.

We expect to get 100% to renewable energy on the consumption side this year and we have recently been certified for SBT. So just to go back where I started, we -- and I will go back quickly where I started, very strong quarter, but it's really not about the quarter. We all understand that. Very strong platform, very strong business model. It is our requirement to deliver a very strong execution, which I think we're doing. And so we look forward to deliver on that execution going forward.

Thank you so much, everybody, for joining this call. We're really grateful to you. Have a nice morning, afternoon and evening. Take care.