Ichigo Inc

TSE:2337

Earnings Call Transcript 2021-Q3

[Scott Callon, executive]

Hi, everybody. This is Scott Callon. Thank you so much for joining. I'm in a mask with a few colleagues here. So hopefully, you can hear me through the muffled mask. I'm working off of a presentation that's on our website, FY '21/2 Q3 corporate presentation. So let's go to it.

Starting on Page 8. You can see the summary of activities year-to-date. It's been a very tough year. Despite that, everything that's going on in the world, we continue to have a very durable earnings model with our stock earnings running at about double our fixed expenses. We continue to be structurally profitable.

Stock earnings. So those are -- they're relatively fixed contractually, earnings that are core of our business. The drop-off in sustainable real estate is affected entirely from hotel, rental income having fallen off. The drop-off in asset management is again [ pieced ] off of our hotel REIT. And we have an uptick in clean energy, which continues to grow pretty well.

We did a first time ever in Japan for a real estate company financing under the UN principles for positive impact. Ichigo Owners continues to grow. We announced today under a share buyback, and I'll talk to that later in the presentation.

Looking at Page 9. COVID impacts, and we've touched on this before, so I'll go relatively quickly through. As I mentioned, a decrease in the Ichigo Hotel asset management fees, really no impact on Ichigo Office and Ichigo Green. Sustainable real estate has actually -- we've had some partial recovery in the hotel rental income, but that's been the place that's been overwhelmingly the biggest impact. We have a mix of fixed rents and variable rents. We're not receiving variable rents at this point in time.

Most people expect to see something more negative on retail, and that actually really hasn't happened. Our retail assets have held in very well. That's in part because we've got a mix of retail that includes both things like restaurants that are relatively Amazon-proof but not COVID-proof, but also supermarkets, drugstores that have done relatively well under COVID. So the impact of those together is kind of an offset.

Residential assets have done very well as income producers, and they're the source of the key activity in terms of generating revenues out of the sustainable growth of the business in terms of capital gains. But the big drop-off in sustainable real estate, SRE, for us has been we've held off selling assets. No need to -- not of kind of fear of confusion out there other than the place that we're active, that has continued to be very, very strong, which is residential. Clean Energy, no impacts at all. Growth is very much on track.

Turning to COVID countermeasures. We've touched on this before. It's a broad effort on our part to support our tenants through a very, very difficult time period, and that's across all asset types, office, hotels, retail, residential. We're a big company with resources. Our ability to work for tenants is really important, and we have dedicated ourselves to that over the last year.

Page 11 shows the economic results. As I said, a very difficult year. OP is down 66%. EPS is down 70%. That's on stock earnings dropping about 20%, flow earnings dropping 72% and some push down in SG&A but not enough to cover kind of this drop off.

Turning to Page 12. You can see the segment earnings details. A drop-off in asset management, OP down 44%. Again, that's primarily on activities, a drop-off in fees we earned in each of the hotel REIT. And by the way, I mean, I'd say it's been a very tough year, and it has been for all of us. So thank you on the phone for joining. But we don't think there's been any change at all in terms of forward prospects of the firm. That's why we're buying back our stock today. So we're actually very positive. We're very positive. We have written this out in a way that is, of course, important to all of our shareholders and our stakeholders.

We have held off in selling assets that are valuable. We fully expect to be monetizing. So really, what's happened is -- and we understand the time value of money. We prefer to -- we have made the profits this year, but we've effectively just pushed profits out into the future. And we fully expect them to come back.

Sustainable real estate is down, very big as explained, 73% on OP. That's on a drop of flow earnings of about 60% and drop in stock earnings. So the kind of the more fixed earnings of 48%. You'll notice on the right-hand side that we're showing rental income after depreciation. You see depreciation has exactly doubled year-on-year. And that's actually very important. This is noncash hit to earnings. Depreciation has exists in most accounting regimes around the world. Taxable depreciation is well above what economic depreciation is. Effectively, this is a tax shield. And so we are pushing -- we're actually pushing hard down on EPS to generate more cash that we can use for things like investments for growth, either growing earnings or buying back our stock if we think it's cheap. And we think it's cheap today.

Clean energy is the one area that's grown, OP up 43% year-on-year. Again, you can see on the right-hand side, power generation revenue after depreciation, we've grown as we continue to grow this business. And one of the great things about the clean energy business is you have this very big depreciation that, again, serves as a tax shield. So we're using that tax shield as effectively as we can for all of you, our shareholders.

Page 13 shows our revised forecast. You can see on the bottom of the page, this is a very tough year. We did JPY 28 billion -- JPY 27.7 billion of OP last year. We're forecasting this year to be at only JPY 9.5 billion. Again, we think it comes back, but let's be very direct about not the kind of year that we all wanted to have.

We started the year with a forecast on net income of JPY 2 billion to JPY 8 billion. We bumped it up to JPY 3.5 billion to JPY 8 billion. We're ending up with a forecast of about JPY 5 billion and give us an ROE of about 5%. For a firm that aspires to and has delivered 15% ROE through the cycle, this is obviously well below what we expect and well below what we think is normalized for us.

Moving to Page 15, and speaking to some of the elements of the business model, you could see on Page 15 it's a mixture of stock and flow earnings. You'll see that our fixed expenses are JPY 7.5 billion, which is up over time. Some of that is just things like us sponsoring the J.League, doing some more IT spend and getting -- and building for growth. And if you separate out kind of those activities meant to build kind of the intangible assets like brand, which we think are very, very valuable, we're really kind of running more like a pre-fiscal year '19 to kind of cost structure. And we have some flexibility on it should we need to push it down more. But we think these investments are very valuable and will pay off for all of us going forward.

Page 16 shows that we continue to grow kind of unrealized gains. These are appraisal value-based unrealized gains, meaning third-party appraisers look at our assets and tell us what they're worth. They think they're worth JPY 56.2 billion above what it says on our balance sheet. So we have -- on our balance sheet, it says we have JPY 100 billion of shareholder equity. The appraisers will tell you actually, that's got JPY 56 billion of gains. So it's 56% more than that.

If you turn to Page 17, in reality, the third-party appraisers have been massively too low over time. We've generally generated 2 to 3x what the third-party appraisers think. We're going to generate in terms of the profitability on sales with assets off the balance sheet. If you look at the drop from 2.8x to 1.7x in terms of the multiple relative to the third-party appraisers view is what the embedded value is in our balance sheet, that's fully a function of us shifting from selling kind of core multiyear value-add to our Ichigo Owners business, which is generally a 6 to 8-month hold, very, very fast turnover. We run a lower gross margin on it. This year, we're running at a 12% gross margin out of Ichigo Owners, typically our multiyear core value add. It's going to be like a 30% gross margin. So there's no shift here at all in any way in the structural profitability of the business. It's just -- it's a mix effect that's important this year.

As I said earlier, we're cash -- we're well positioned from a cash perspective. There's just no reason for us to sell some of our assets that we've added value to in this environment. We're happy to wait to look to see what the future looks like post vaccine, post, hopefully, COVID and hopefully post -- post meaning in the next kind of 12 to 18 months.

Page 18 shows another key element to the business model. We generate real cash, robust cash generation that's well above. So our economic operating cash flow is well above our net income, and that's grown over time. Last year was a little bit of an exception. We came at 3.6x on net income because we had a noncash write down. That's not typical. As of Q3, so the quarter reporting, we're at 1.8x in this year. We'll probably end up in the full year 1.9 or 2x. But the point is that we generate substantial more cash than our accounting earnings. And that's valuable.

Page 19 shows what's happening with our financing situation. We continue to borrow very long, very cheap. And COVID has not changed it. So we are a preferred borrower for lenders. So 10 year -- 10.1-year average long-term right now at 90 basis points.

Page 20, I touched on earlier, we were the first Japanese real estate company to borrow the syndicated loan program out of -- and this is from SMBC based on UN Principles for Positive Impact. They did -- SMBC did an evaluation of Ichigo and our activities and across the firm, the EDS and the G and chose us to be the first borrow from them as an example of a responsible and sustainable company, which we're very, very pleased with.

Going to Page 22 shows what's happened in the sustainable real estate business. We continue to be selective on acquisitions and sales. We're almost entirely operating within the Ichigo Owners business this year. So again, that's a very high turnover business. And the nice thing about that, it's a very uncertain market environment. It's proven to be less uncertain, actually. We thought there was going to be a lot worse going on. But Japan has actually ridden out COVID relatively well. We're in a state of an emergency right now in Tokyo right now. But still by global standards, we've done very, very well.

And so the nice thing about the Ichigo Owners business is it's a fast turnover business. You can turn on a dime. And so we've emphasized activity in that business. So as you can see on the page, 54% of all assets we acquired this year were out of Owners. If you exclude -- as you know, we have a hotel brand, a boutique hotel brand called The Knot. If you exclude the 2 Knots that we put up in Sapporo and Hiroshima this year, actually, 80% of all our acquisitions were done out of Owners -- Ichigo Owners.

We continue to execute on acquisitions in Owners, and we've got current inventory of about JPY 18 billion. We expect to grow that because it's a place where, given how there's a shortage of yield in the world, given how strong residential performance has been in Japan, Japan has done a very good job of protecting wages and the population, the people. And so there are no significant arrears in residential housing in Japan. So it's been a great bond substitute. And the result is there's a massive demand for the asset.

People are worried about hotels. People are worried about retail. People are worried about office. What that has resulted is a surge in demand for logistics, which is an obvious place to be in a world where people are hunkering at home and residential in the case of Japan. So on the asset side, sales side, we sold 31 assets out of owners. So that's 90%. So 80% -- effectively 80% of our purchases and 90% of our sales have been out of Owners.

Turning to some of the activity, just to give you some sense of what we do in terms of value add. We spend a lot of time trying to understand our tenant needs. That makes us very differentiated as a real estate owner. Most real estate owners don't want to meet their tenants. Most tenants don't want to meet their owners. So we do -- we work very hard to be an owner that tenants actually want to be with. And meeting with tenants is really important to us. We learn kind of what their needs are and then try to be responsive to them.

So Page 23 shows an example of what we call the Ichigo Layout Office. It's basically a pre-build out office. In Japan, both build out and returning to original condition is borne by the tenant, so it's very expensive. And it's hard, especially on small tenants and start-ups. And so we prefit it out and use our economies of scale and our engineering to get something that offers very good value for tenants. And the result of that is, for example, we put this Ichigo Layout Office into the CTN Building that we own in Chiyoda, which is in Central Tokyo. And we took up the rent 2.1x. So from JPY 11,000 per tsubo to JPY 22,000 per tsubo. And that gives you a sense of kind of the value that we offer. I mean even JPY 22,000 [indiscernible] for us, it's a double, but that's a very, very competitive rent for tenants in Central Tokyo. And in this case, it means it frees them of all the kind of build-out and takedown costs should they ever exit.

Page 24 shows another example of value-add. Here is -- we had an empty space in a hotel. It's a terrible time for restaurants, as you know. Despite that, the hotel has been doing reasonably well. We were able to work with a Korean restaurant to come in at 2.2x what the previous tenant was paying. And that included kind of putting our engineers to work to help them get the build, the fit-out done economically and fully compliant. We reworked the hotel floor plan to give them additional storage space. If you're getting the impression that we work very hard for our tenants, that's the impression I'm trying to covey, and it is actually accurate.

And so we designed the lease. We built a step-up rent, so they can go in kind of at lower cost at the beginning and with a percentage rent, so it decreases their economic risk. We worked very hard to try to do the right thing for our tenants in the world. And as an example of -- it shows up in powerful economics. So this was -- it was rented out at JPY 15,000 to JPY 16,000 per tsubo. We're currently getting -- Actually the step-up will be up to JPY 37,000.

Page 25 shows another example of value-add that we've done. We've introduced -- as you know, we have a boutique brand, hotel brand. By the way, we spent a bunch of work in the last couple of years doing a lot more hotels, which has very powerful growth characteristics. As Asia gets richer, it travels more to Japan. Japan has done a huge amount of work to become more accessible in both -- in terms of flights and in terms of visas to Asia and global tourism. And of course, COVID comes, and then it kind of -- it blows a hole on it, at least temporarily. So anyway, but we've done a bunch of work on our hotels. It's been a very, very successful area for us. We fully expect post COVID it will be successful again.

But we introduced a hotel brand called The Knot, which is a boutique brand. We have another hotel brand called the OneFive. It's interesting, in Japanese, whatever we describe to some people, no one ever points out that it's a pun, which I think is really amusing because it's such an obvious pun, Ichigo. It doesn't mean OneFive in Japanese, but it could be. It could be read -- it could be said as OneFive. And so OneFive is actually a reference to our company name using a pun. And this is kind of a lower price point but still high-quality service. The problem with Japanese hotels is despite Japan being -- having the best restaurants on the planet, it has kind of these box-like in low service level hotels is really kind of difficult to understand given how good Japanese service is. And so this is, we think, is a really nice offer.

And as you can see, we took a hotel that had 2 different sections and redesigned and refurbished it. We rebranded it. It's now the OneFive Villa Fukuoka and the OneFive Terrace in Fukuoka. You can see from the OneFive Villa, which opened in February. And so despite kind of everything that's going on in COVID, occupancy is at 96%, RevPAR is at JPY 16,000. By the way, these are very good numbers. So things are going very, very well. And we fully expect to do, as I say, post COVID, a lot more in the hotel space.

Page 26 speaks to another activity. And broadly, we're trying to induce content. We're trying to take assets that are going to break out of the box. So there's a building. Okay. That's -- well, that's not super interesting as a building. What can you do with the building? So perhaps some of you know Akihabara, which is a major train station. It's kind of the major center of anime culture in Japan, has this kind of like go-to kind of tower building, which we bought called Akiba Cultures Zone. We sponsored and we have been -- we started an anime studio and took one of Japan's leading anime directors Mamoru Oshii, financed a brand-new anime series called VLADLOVE. And we're doing a bunch of things using that building with VLADLOVE, the anime content. And that's gone well.

But quite honestly, again, COVID, with all these events and you have these ambassadors and you have live shows and characters, and none of this is happening because we're in the midst of COVID. So the first episode of VLADLOVE is actually available for free on YouTube, if you have any interest in looking at it from one of Japan's great anime directors. But this has been kind of basically pushed out for 6 months to 12 months at least to the kind of a post-COVID culture.

Page 27 points to our 2 REITs and our solar power -- this is solar power producer. The Ichigo Office and Ichigo Green have effectively not had any real COVID impact. The hotel has had a very serious COVID impact. We did put in subordinated debt of about JPY 500 million. So it was small. This is a show of gesture to the banks. Yes, we're aware. We're the sponsor of this hotel, and thank you for rolling all the financing at great terms. And we'll put a spade. And again, this show has a supportive sponsor.

Page 28 shows what's going on in the clean energy business, which, by the way, we're trying to figure out what's called a green energy business instead. I mean back in the day, we were choosing between clean and green, and it increasingly feels like we've got a brand for our solar power producer called Ichigo Green, and the world is kind of calling stuff green instead of clean. So maybe we need to change the name of this segment. But it's scaling very rapidly. So it continues to go very well, with our first wind power plant expected to come on this year, and we're active. And I've talked about this before potentially in genuinely green, good for the planet, biomass, that we're hopeful will be a growth driver for this business going forward.

Page 29, I indicated earlier, we announced a share buyback today. We don't think today's earnings are all normalized. Stock is coming quite a bit. We're trading well below breakup value. We think a lot of kind of operating value to the company. So we're going to be buying back our stock. And that's the JPY 1.5 billion buyback today. That's about 1% of shares outstanding. So this will be the fourth year in a row we bought about JPY 3 billion -- we bought JPY 3 billion of our shares back, assuming we can -- we complete this transaction.

And on Page 30, as you know, we have an ongoing J.League shareholder program, which is, in many ways, quite innovative. The J.League has not been nearly as active as we would have expected. There has been difficulty getting tickets to the fans. So we've actually had to substitute a whole bunch of other kinds of events for our shareholders, but we have been actively doing so. And that continues to be something that our shareholders across the broad Ichigo Group. So it's not just this company, Ichigo Inc. It includes Ichigo Office REIT, Ichigo Hotel REIT and Ichigo Green, all the shareholders of those entities have been participating in this.

So that's what I have in terms of the presentation. Very, very interested in taking questions or feedback.

[Scott Callon, executive]

[Operator Instructions] But happy to take anything from anybody. And again, thank you for joining us. [Operator Instructions] Greg, I think the line is open for you.

[Gregoire Brillaud, analyst]

Yes. Can you hear me?

[Scott Callon, executive]

Yes. Thank you so much.

[Gregoire Brillaud, analyst]

Yes. I had a quick question regarding the -- your full year forecast. Hold on. Let me find the page. But basically, when we look at your new full year forecast and the actual 9 months for recurring profit, your implied Q4 recurring profit is, I think, JPY 0.3 billion. Your implied OP is JPY 1 billion. I was wondering where the difference comes from. Is there any kind of additional losses that you expect? Or is it all kind of interest and others?

[Scott Callon, executive]

We have a little bit of a buffer in there. But it's going to be a light quarter to -- is our expectation. We've -- as you know, the big drivers in addition to kind of the stack of stock earnings we have is the flow earnings we generate. And we expect to be quiet in the corner.

[Gregoire Brillaud, analyst]

Understood. And just a follow-up question regarding the activity that you're seeing in the marketplace for hotels. How would you describe it over the past month? And what's your expectation regarding volume of transaction outside of Ichigo? But in the marketplace going into March, are you seeing clearing prices? Are you looking at more opportunities into March if you see things? How would you describe that, please?

[Scott Callon, executive]

And so Greg, this is buy-sell activity in the hotels, you mean?

[Gregoire Brillaud, analyst]

This is to -- yes, to add -- to look for buying opportunities in the hotel space. Yes.

[Scott Callon, executive]

Yes. It's funny, and thank you so much, Greg. I mean you're always with us. It's going to break my heart if you're never on -- if I ever have a call and you don't join us. Thank you so much. I'm so grateful to you.

Nothing really has changed in the last 3 months. I mean it's been very quiet. As you know, because you're in Japan also, there's been a lot of frantic worry, not too much activity perhaps on Japan's rising COVID cases. We're currently in the state of emergency in Tokyo. And things has been very quiet.

It's -- having said that, so to the question is, do we expect transaction activity to emerge? We do because it's just getting harder and harder for some operators to persist through this. As you know, we've picked up operating contracts at the hotels, which I mentioned earlier, we have the new brand called OneFive, and we bought a hotel operator early last year. It's up to, I think, it's 15 hotels, and 8 of them are branded as OneFive hotels. The -- no, 13 hotels, and 8 of them are OneFive hotels. And we think we're probably going to do more of that. And it's quite possibly the case that we can end up doing some hotel acquisitions. But the problem is none of us want to step in front of a train. And the good news is the vaccine seemed to have taken out -- let me know if you think I'm wrong on this. A lot of the kind of the tail risk on there's no solution to COVID. So it certainly feels easier for us to step into a situation.

The other thing I would point out is our Propera hotel revenue management system continues to expand its footprint, and that's going very, very well. So we do think we're advantaged in driving higher profitability from hotels from pretty much almost all of our peers. But at the moment, there's not -- honestly, I wouldn't be able to provide you material non-public information, but there's not a lot kind of that's happening right now in terms of hotel buys and sells.

Happy to take a question or input from anybody. [Operator Instructions] Richard, the line is open. Thank you so much.

[Unknown Analyst]

So with regards to the share buyback, so did you complete the previous one? And -- yes.

[Scott Callon, executive]

Yes. So we did it. We did a buyback at the half. We're doing another buyback today.

[Unknown Analyst]

Okay. And so you said the price to buy back the shares with the exiting broker. Is it also possible to adjust it if the shares spike up or -- so how do the instructions typically work? So is there accelerated buyback if the shares move down? Or is this like more like a volume weighted thing?

[Scott Callon, executive]

It's more volume weighted. I mean one has to be very, very careful. I mean, so the way this works is the reason we get safe harbor from being in the stock is by handing over the execution entirely to a trust bank or a broker. But you should feel pretty confident. You should feel very confident that we'll get this done. There's been one case where the full amount wasn't executed during the buyback period, and then we just relaunched the buyback. So we're really expecting to get this purchase completed.

[Unknown Analyst]

Okay. And maybe a follow-on question on the hotel business. So you bought some operating contracts. And so I understood that you converted those to FiveOne (sic) [ OneFive ] hotels and looking forward in the next few years. So how many hotels do you expect to acquire? Or what do you see as like an optimal number of hotels?

[Scott Callon, executive]

That's a good question. We -- I -- we actually go back and forth on this. I mean the great thing about hotels is they have a significant amount of kind of available growth, which is not just Japanese domestic travel growth but inbound growth, which is great. That's the good news. The second bit of good news is that it's actually an underperforming asset class. And so there's an opportunity to add value. The third good news is that unlike offices where it's harder to add value, hotels are very operational assets. So if you're good at what you're doing, you can do more of this. So that's all the good news.

The bad news is, it is the single most volatile asset, right, because you price hotels daily. And so it has the most economic sensitivity. So we've actually been managing, and we have data on our total portfolio. Let me find what page that is in the presentation. On Page 50, you can see our real estate portfolio. And hotels are 26%. We've actually wanted them to be no more than 25% for the very reason we didn't predict COVID. But if something goes horribly wrong, it's hotels where you take the biggest impact.

So it's a way of saying that our primary desire, actually, to be very, very clear, is we think we will do more in terms of the not boutique hotels. We will do more in the OneFive. But the real place we want to drive a lot of activity is our Propera AI system, which we have begun selling externally. It's a platform business. We expect to get 1% of total sales. So it's just kind of -- there's huge return to scale to it. It's a big business. It is also an example of us taking dynamic pricing into the hotel space. There are lots of places. So when I say dynamic pricing, it's obviously not just for hotels. An obvious example of another place where you have surges in demand and you want to try to optimize and load balance using dynamic pricing.

I mean everyone know it's a way of kind of -- things like airlines, but in the demand case and a real estate example. Karaoke is another place where you have this huge surge activity, and dynamic pricing would be very, very interesting. We're involved with the daily dynamic pricing for stadium events, et cetera, et cetera. So what we like a lot about this business is we've developed a core IT platform built on significant capability and expertise in hotels.

We think it is broadly able to expand it into other areas that, again, have a real estate angle, but ultimately, we could take into kind of the broader world. And so that's where -- and we had a Board meeting today, and we actually spoke at length about kind of our ambitions for the Propera IT platform and this business. And it's -- I think it's one of the most exciting things that we're doing.

[Unknown Analyst]

Okay. So then you can leverage basically your expertise via Propera rather than owning the assets.

[Scott Callon, executive]

I'm sorry. It's a non-asset business.

[Unknown Analyst]

At least it is a balance between the two?

[Scott Callon, executive]

Yes. I mean, look, assets are -- I mean the great thing about assets is they're actually secure and they're durable. I mean real estate is, particularly in Japan, we have this extraordinary ability to borrow kind of amounts of money for free. But we -- actually, we understand. At the end of the day, if you're going to kind of -- if you're going to have these kind of extraordinary kind of U.S. and Chinese tech company returns to move away, there's got to be a limit to our balance sheet. And so using our balance sheet productively is one way to grow value. And then outside of that, we want to have non-balance sheet activity because that's how we really, really kind of can grow our margins and ROE. So it is a mixture of the 2.

Greg, go ahead. Go ahead, again.

[Gregoire Brillaud, analyst]

Yes. Just a follow-up on -- since you mentioned Propera, Scott. May I ask, did your team develop this in-house? Or did you work together with TIS or Fujitsu? And who would be selling this to third party? Are you using these 2 company's sales force? Are you doing this in-house? Can you describe a little bit how you're thinking about this?

[Scott Callon, executive]

Yes. We actually -- and we disclosed this. The -- meaning there are some things we haven't disclosed. So I'm going to talk about -- but we have worked with Fujitsu on some of the core AI technology. But this is deeply proprietary. This is Ichigo. We have significant capability, which we hired. So build by [ are a lie ]. We built our own kind of capability in dynamic pricing in the hotel space. We bought some -- kind of the actual construction of the software platform itself, we outsourced to an IT company. But it's now all run internally. And then the alliance part is we aligned with Fujitsu on using some of their core IT capabilities. But we are very confident that we are highly differentiated and highly capable.

And in this space, we're generating kind of 20% plus uplift in revenues. So that obviously has a multiplier effect in terms of NOI at our hotels and deploying the technology. We are -- we have hired our own people, Greg, for doing the external sales because you're on the right point. The IT system is available. We're actually doing more work to expand its capabilities. We've hit the market we had. We are now selling 2 version system. One is Propera and one is Propera Lite, as we've come to understand that some people want a kind of a less featured product at a lower price point. It truly is, I think, one of the most exciting things that we're doing. So hopefully, we're going to have the ability to -- and we'll talk about this more, but we'll have the ability to kind of come to all of you, 6 months, 12 months, 18 months and start telling you kind of some of the milestones that we've had.

Part of the reason we've been a little bit kind of -- it's not that we have been secretive. We just haven't talked about it much, very much kind of a development and rollout. We wanted to get into the market. We wanted to understand, are we succeeding, and it's become very obvious we have a pipeline of customers potentially coming in. Hopefully, we'll be able to speak to that also. I think it's very interesting. And as I say, primarily interesting because it's deeply proprietary. We are quite comfortable, and we're advantaged that we have our own capability that no one else has.

[Gregoire Brillaud, analyst]

Understood. And just as a kind of follow-up on that, and I guess that's more of a general industry question, but one of the consequences of COVID, as we all know, has been more digitalization and including through the -- I guess, I think there are some efforts being done also in the related market to make things more digital, such as contracts, the pamphlets that explain the important things in Japanese, the thing where you have to usually sit down face-to-face, trying to get rid of that. Are you -- I mean, I'm sorry, this is more a general question as opposed to Ichigo specific, but are you seeing some developments that are accelerating that's making the kind of real estate transaction world, the buy-buy business kind of more modern in a way, especially for residential?

And how are you guys trying to use those technology to accelerate kind of sales pitch with customers, for Ichigo Owners? Or -- and one last point is, do you think that could be a threat for the incumbents with very large kind of brokerage arms, which use a lot of manpower to do contracts and carry out sales?

[Scott Callon, executive]

Yes. I mean, you're absolutely right. There is -- what is going on in real estate is actually, from a technology perspective, very important. There have been -- and COVID has been a huge driver. It's mostly still to come, meaning that there have been legal requirements, as you know, that require kind of face-to-face contract settlement that requires kind of actual physical keeping of documents with the hanko stamp on it, et cetera. And that's kind of going away. So it hasn't happened quite yet, but it is -- the legal barriers are falling to digitalization. And that's very important. It's fantastically great.

I mean to give you some sense of this, I mean, we're operating in a state of emergency today. We had a state of emergency last -- this March. We have about 250 people at headquarters here at Ichigo. Last March, we pushed down hard on staff, but we're probably 80 people in the office today. I don't know, 15, something like that on our day of earnings announcement. And that's in part because we have reshaped our IT platform and our business processes over the last year. It's been extraordinarily positive in terms of our ability to be productive and to be productive from all over the place. And this is even before these legal changes have come in.

The incredibly kind of labor-intensive processes that are occurring are probably -- are good for the real estate industry and good for society because you're wiping away kind of inefficient practices. They're not good for employment in those parts of -- I mean, these jobs are going to go away, and so they have to be substituted with higher value jobs. Now because there's a labor shortage in Japan, I think everyone ends up with a job, and so you end up kind of with a net social benefit.

But it also, Greg, does allow for people like us who don't have these huge labor forces who are necessary to process all this stuff to enter. And it's not just us. I mean other kind of companies are going to be kind of looking at these opportunities. So we think it's pretty exciting.

Richard, go ahead.

[Unknown Analyst]

With regards to appraisal values and assessment of your properties, have you reviewed them post COVID-19? And yes, is there a risk of impairments at the fiscal year end? Or is this appraisal process done continuously? Or is this like by the end of February, some kind of a cutoff point where you reassess the appraisal values of your properties?

[Scott Callon, executive]

Let's see. There's a page that speaks to this on the presentation, Page 37. Look, we're very conservative. And we took a -- we did a write-down last fiscal year. But I mentioned earlier, JPY 8 billion of assets that we thought were generally COVID vulnerable. So we're already done. We've done some small investments in new enterprises in the last couple of years. We have a very small U.S. hotel investment. It's a couple of million dollars. It could be vulnerable to impairments, but there's nothing material.

Page 37 shows what the appraisers, the third-party appraisers see for embedded gains. So they say about JPY 50 billion, as I mentioned earlier. The balance sheet is just really solid. I mean the right way to think about us, we think we have -- it's not that we're at risk of having losses. We think we have, on JPY 100 billion worth of shareholder equity, we think we have at least JPY 100 billion today in -- under COVID of unrealized gains. So the right way to think about Ichigo is just big earnings bank, future earnings based on kind of the value-add that we've done because our economic profits exceed our accounting profits. So you don't have to worry about some bump in the dark that we're going to have something blocked. It's just [indiscernible].

It's just not our reality. We manage the balance sheet very conservatively. We are very fast to do write-downs, and we think write-downs need to happen. And as a result, we have these -- the big embedded -- we write-down things that are potentially vulnerable. We don't write-up anything because it is a lower cost of market accounting system. So we have this huge embedded gains in the balance sheet.

Anything else? Happy to take questions or input. Otherwise, we will bring it to a close. Okay. Everybody, again, thank you. I think we're done. Thank you so much for the opportunity to be with you today. Everyone, hang in there. Hopefully, spring is coming. And again, we're grateful for the opportunity to work for you, everybody. Take care. Be safe.