Ichigo Inc

TSE:2337

Earnings Call Transcript 2022-Q3

[Scott Callon, executive]

Okay. Thank you, everybody. We very much appreciate you joining. My name is Scott Callon, Chairman of Ichigo. I'm joined with -- by Dan Morisaku, who just -- as said, Scott, I think we can start. Dan is the senior member of our Finance Department and Head of our Global IR.

I'm working off of the FY '22, so the February, end of fiscal year, so it ends next month. Q3 corporate presentation, which is right in front of you, and is also available on our website. So let's get started. And again, we're grateful for you joining us. It's an incredible difficult time in the world. We hope you're all okay.

Let's start on Page 8. So the broad summary, of course, is we're still operating under COVID, which has been devastating for the world and really hard on us.

In that context, I mean, it's very much the case that how we are operating is dependent on COVID. Japan effectively defeated COVID as of September, and now with Omicron surging, literally, cases are up 50 fold in the last couple of weeks off of a very low base. Kind of all bets are off as to where we go from here. But in the context of the world not ending because of COVID, it's -- if we work off that assumption, we've -- it appears that we've hit bottom, and we're in the midst of a broad set of recoveries.

Certainly, in the real estate market, prices of many assets are recovering, and recovered is probably the right word, and I'll go into that in more detail. But we're very comfortable we're going to have a strong fourth quarter. We were going to have a bigger Q3. This quarter was very light because one large transaction, the client decided to push it into the end of this month, so a whole bunch of stuff is going to happen in the current quarter, which is we're in right now.

There's been some recovery in domestic travel demand, but not nearly enough to really drive anything interesting in terms of economics from our hotels. And full recovery, unfortunately, including inbound, which is going to be important to us, it's going to take some time.

I mean, the good news is the Clean Energy business is kind of [indiscernible] that's totally irrelevant to it. It continues to grow well. We've had 6 new plants brought online this year: 1 wind plant, our [ first 1 went live at ] solar power plants, power generation revenue up 10% year-on-year.

We've launched a new business with Ichigo Owners, which I'll describe and which we think is really interesting, and will be a growth driver going forward, and we continue to execute on sustainability. We actually -- we are awarded the highest leadership level in the CDP Climate Change Assessment, and we're growing our ESG financing very rapidly, and I'll explain you why that's important.

Turn to the next page, Page 10. I'm sorry. Next page, Page 9. The -- We still -- this is a durable earnings model. We unfortunately went to the wall -- [ near went to the ] wall during the global financial crisis and we learned from that, and we need to make sure we run a business which is structurally profitable. So despite all the heavy downward pressure on earnings from COVID, we continue to run with stock earnings, so effectively kind of our fixed earnings at double fixed expenses, 191%.

You can see on the right side of the page that sustainable real estate stock earnings, and that has fallen by 11%, but we've got growth of 15% in Asset Management, and 10% of Clean Energy. So that all sums together, because Sustainable Real Estate is so important to us -- a minus 2% decrease in stock earnings. You'll see there's been a shift in the composition of our earnings, as Sustainable Real Estate has come in, and Asset Management is rebounding, and Clean Energy continues to grow. So Clean Energy, at this point is actually at 31% of our total stock earnings.

Next page, Page 10. All the numbers in terms of OP and Net Income, you can see the Cash EPS, however, is dramatically different. As you know, over a multi-year period, we've shifted towards -- focused on, as much as possible, generating cash earnings. And that's important because Japan has high tax rates, so it's useful to use the tax shield. Much of this is coming through depreciation allowances, which are aggressive from a tax perspective, meaning the higher than actual -- a true accounting economic depreciation.

By the way, so the headline numbers are ugly. We're going to have -- we fully expect to have a huge fourth quarter and we will come in above last year, and we're on track on our full year forecast.

Turning to Page 11, the segment details. So we've got an increase in Asset Management, as you can see, 19% on the OP line down on the table, which is both an increase in base AM fees, Asset Management fees off of Ichigo Office and Ichigo Hotel.

Sustainable Real Estate stock earnings. So leases, rental income is down. Both on the page right there is downtime of re-tenanting, which is true. The major impact on our stock earnings, which have very, very little impact in our small and mid-size office, which are core kind of bread and butter in the Office sector. We have had a completely different experience in our one large Office asset, which is called Tradepia Odaiba, large office buildings have been a little bit of a train wreck. And we're now re-tenanting it. So there's some -- so some loss of income on that.

And the other element that is pushing down our stock earnings is actually Hotels, which at this point have not recovered really at all. A robustly profitable asset class for us, pre-COVID, which is currently earning nothing.

In terms of flow earnings, the market has come back for almost -- it's come back in every asset category, and we're actively marking assets. And again, expect we're going to have a strong Q4.

I touched already on Clean Energy, which we've got 6 new plants online through Q3, another 3 that have actually come online already in Q4. But as of Q3, operating profit of Clean Energy is up 12% year-on-year.

Next page. So just looking at the COVID impacts, the earnings -- On the top of the page, It said we are low, that's true for Office. The one exception is, again, we have a single large office, which has had a very different impact. And it's -- We can talk about it more in detail if you want it in Q&A on there, but small and mid-sized office have been extraordinarily robust. Really, no impact to speak of on earnings from COVID. No visibility in terms of impact from it and the big office are just a massive exception. That's across the entire market and we notice that, and I think our large office asset all that we have.

Hotel, the stock earnings impact has been devastating. Going on in hotels in Japan, and across the world.

Retail impact has actually been low because there is a mix of -- as an asset class, you've got kind of central business district kind of restaurants, et cetera, in the retail space. Which have been devastated, but they've been offset by categories such as suburban locations, drugstores, supermarkets are doing really well. So across the entire portfolio we have, the impact has been low. There's been no impact on Residential, there's been no impact on Clean Energy.

In terms of flow earnings, the circles indicate where changes have occurred. And so as of Q2, the -- and so this impacts us, meaning, our core business is we buy assets, we improve them. We sell them at a higher value because they're more valuable. They're improved assets.

So as of Q2, offices and retail had come back in terms of investor demand for these assets, if they're good. And in this quarter, it's become clear that it is asset-dependent, but there is -- I'm sorry, is investor-dependent, but there is emerging demand for hotels again. And that's -- So buyers want to buy hotels, even though the market hasn't returned. And I think that's a function of 2 things. Some of the buyers are correctly thinking at some point, COVID ends, hopefully correctly, and we go back to some version of the past. Although, in our view, it's probably safe to [ underwrite ] for decreased business travel.

And in our assets, which are, of course, we're located entirely in Japan, and so we're very leveraged to inbound activities. So as Asia continues to grow and become wealthier and discretionary income grows faster than GDP, there is leverage growth to GDP in Asia, in the Japanese hotel sector. So the delay to underwrite over a multi-year period growth in hotels is not unreasonable.

And it's also a case that we've got a little bit of pull out of supply in the Hotel space. And so we do have investors who are underwriting to, we think, things rebound. And so that's one source of, of driving demand, investor demand by the Hotel assets.

The other one is that, is that residential, logistics, and office assets are performed really, really well. And so the prices are high, and so you have some shift in investor demand away from those assets towards hotels because they offer kind of a higher cap rate for investors who are looking for a return.

Turning to Page 14. And I'll go through quickly. I think I'm probably, already speaking quickly. I won't speak any quicker than this.

Page 14. This is kind of -- step through kind of the elements of the business model. We have stock and flow earnings, and I talk about this every quarter, so I will just kind of run forward. I mean, talk about it every quarter because it's the fundamental element of the business model.

You get the stock earnings, which protect the downside and give you stability in earnings and you get full inside, a flow earnings. Which the upside, as you can see, we've had a COVID impact, which is overwhelmingly on the flow side. And as we -- at some point when we get normalized, we'll get the flow earnings back and more.

Page 15. Shows stock earnings. It's actually the first time we've broken it out through the categories in this way. So the clear obvious element here is that Clean Energy continues to grow and will grow very strongly, we think, in the future.

There's been a big drop-off in Sustainable Real Estate, which is primarily, as I said, a decrease in Hotel rental income, and decreased in Office income from our big office asset.

Page 16. Again, one element of this business is that we have an embedded forward earnings. This shows the appraisal value-based unrealized gains. So the appraisers are not us, these are third-party appraisers that they got a balance sheet, they see all these unrealized gains. We'll get an end-of-year appraisal in a couple of months. We expect this to be unstable or possibly even go up because the assets are performing robustly.

Page 17. Shows that not only do we have significant appraisal value-based unrealized gains but when we actually sell assets, we come in significantly higher than that. And so 1.5x is what we're seeing this year. The number is just low, and the multiple relative to the appraisal value-based unrealized gains is lower this year because we've primarily done sales in our Ichigo Owners business, which has a higher turnover -- I'm sorry, we primarily in sales -- this year in -- we basically got appraisal assets that we didn't want to have and sold to them at above -- above our appraisal value. We're happy with that.

But in the last couple of years, there's been a shift towards Owners, which is a higher churn of business and has lower gross margin to loss from return, providing very good value to our investors. We think over time, we end up going back to something like a 2x to 3x in terms of the multiple lift relative to what the implied third-party appraisers say or the unrealized gains in our balance sheet.

Page 18. Again, we're focused on economic operating cash flow and maximizing it. So year in and year out, you see us generating significantly greater economic operating cash flow than our stated accounting-based net income.

Page 19. No real change in our financial base, meaning, it's continues to be very, very robust. We fund extraordinarily cheaply. There's been some drop off in the remaining loan maturity, as you can see, it's 6.7 years at this point. That's largely because we've been increasing our Ichigo Owners activity, and the average hold for an Ichigo Owners asset is about 8 months, and so we're borrowing kind of more typically 5, 6 and 7 years. They give us a buffer on, we can hold this thing for longer. We don't really need to hold finance for 10 years for an asset that were on hold for 8 months. So there's been some push down on that, and that's purely a phenomenon having more liquid -- substantially more liquid assets.

Turning to sustainability. We continue to push very hard because this is something we believe in. So we've accelerated an RE100 target, which is 100% renewable energy. Electricity is actually the definition that's used here. I mean, these [ are the things that offset ] is almost [ dire ] electricity. But anyway, to 2025.

To be clear, this is about not how much renewable energy we produce, where we produce massively more renewable energy than we consume. It's actually keeping all our Clean Energy assets aside and asking what percentage of your renewable energy that you're purchasing. It's going to be renewable, and we're going to go 100% by 2025.

Next page shows that we're going to get there a lot faster on Ichigo Office, so that's going to be the first Ichigo entity that cuts over 100% renewable energy, and that's going to happen by April.

Page 23. Shows results for this year for the CDP Climate Change Assessment. We did very well, as we should. I mean, it's an A minus, and we were penalized for -- to be exact phenomenon that I just described. Which is like, wait a minute, you're not consuming as much renewable energy as we want you to. And it's not part of the thinking that energy consumers will also be massive energy producers. So in the CDP rules and in the RE100 rules, we get no credit at all for being a massive renewable energy producer, but anyway.

Be that as it may, we still scored with an A minus, which puts us in the leadership category globally in the top 13% of all companies that are within the CDP process. And as you can imagine, companies that go through the CDP process are companies that really care about sustainability. So I am incredibly proud of the fact that we're being recognized for being truly world class in what we're doing on sustainability. And it's accurate, and it's good for the world. It's what we should be doing, and we continue to push hard on it.

Page 24. Shows 1 direct financial impact of this. And to be clear, we operate to be good for the world, not because it's the right way, because it's about profitability. We operate to be good for the world because it's the right thing to do.

But one of the elements that's been very, very powerful about doing more on ESG is -- and it's a good thing, financial institutions become much more sensitive. And Japanese financial institutions are very rapidly towards who are the borrowers, and are they doing the right thing for the planet, and for society. And so it's probably easier to -- we've done a bunch of stuff on ESG, it's probably easier to look at the next page, which shows.

So Page 25. We've [ incurred ] ESG loans 8x in the last 2 years. They're now about 20% -- 17% of our total loan portfolio. The reason why this is really meaningful is, one, it's fundamentally correct in terms of doing the right thing for the world. And it's important that we, as operators and lenders, are sensitive to what we're doing and whether or not it's the right thing for the planet, and for society. But it's also the case that these loans have incredibly attractive terms.

So by switching to ESG loans, we're getting a brand new set of lenders, so because there is a strong desire right now on the part of financial institutions in Japan to demonstrate the bonafides that they're doing the right thing for the planet, and that they care about ESG, we have -- and we're very good at ESG, we have lenders who are actively seeking borrowers like ourselves. And so this process has brought us into a whole net new set of lenders, so it has diversified our lender portfolio.

These loans come with no amortization, which, of course, means -- the effective duration of a loan is shorter, depending on how much amortization is. And the real estate loans, you always have amortization, these loans don't. In many cases, they're uncollateralized, and there are no restrictions on the use of proceeds, they're not tied to specific real estate assets, so these are phenomenally good loans.

So I pointed on, earlier on the page, not a fundamental change of financial position, but it probably underestimates what's happening right now. We are increasingly a very attractive borrower for a broad range of financial institutions, and we can use this really well on behalf of our shareholders.

One of the things about Japan, as we all know, it's a low growth economy, and a mature economy, and so it's harder to drive top line growth. It's also the case that it is the single best place in the world to be a borrower. You can borrow effectively, and [ fund that money ] from your retreat, and so this is an extension of that. So it's been a very, very powerful and positive transition during the COVID period towards ESG, and we fully expect to be monetizing it for all of you going forward.

Turning to Page 27. It shows what's going on in terms of buy and sell activity. We continue to be selective on acquisitions and sales. This has always been the case, I don't think that title has changed for a couple of years at this point.

Net buyers in the first 3 quarters of -- by just -- just actually, that's a wrong number. So it's net acquisitions of JPY 1.3 billion, and it should be JPY13.3 billion, yes. But we're going to push all of that out of the door. And you can see Q3 sales have just been JPY 12.4 billion, but we have a JPY 17.7 billion sale to a domestic institutional investor, which will close actually this month. So kind of pretty, pretty balanced in terms of buying and sell activity year-to-date.

Page 28. Ichigo Owners, which is a relatively new business for us, continues to drive long-term growth. And again, this is a very high turnover, low margin to us, therefore, great product for the client. So typically, we will have margins -- gross margins or something like 25% to 30% in a longer-term, sustainable kind of mixed asset, Sustainable Real Estate business. This is more like a 10% to 15% gross margin but turnover literally 8 months on average, and so you're able to generate kind of ROE sort of [ 13%, 14%, 15% ]. We just did Japanese language earnings call a little while ago, and an analyst ask an appropriate question, why aren't you growing it faster?

And there is a little bit of -- and the answer is, yes, I completely agree, and we're going to grow it. There was a little bit of kind of operating continuing in COVID with a very kind of Japanese regulatory environment, which requires a lot of face-to-face interaction to buy and sell activity as is part of the regulatory structure that we operate in. It's been a very, very difficult execution period for our Owners team, which is only a little bit above 10 people. But this is a phenomenal business. And I'm going to talk about it a little more, but we are growing it, and we will -- and you should expect substantial growth going forward.

So at this point, we're kind of running a turnover, it looks about, kind of less than JPY 30 billion a year. The key question is how quickly we get to JPY 40 billion to JPY 50 billion per year. And so that's kind of billions of yen kind of order of magnitude, kind of $300 million, $400 million a year turnover, and more going forward.

Page 29. Shows 1 example of a new business that we've put into Owners. So Owners has been -- and I'll put that on the next page, but just talk about kind of our Asset Management business, it's primarily been us working through our public REITs. And so you own a share on a REIT, and we work hard for you when we deliver a high return. And typically, at this point, it's about 5% yield. On our Ichigo Office asset and on Ichigo Green, our solar power producer, the Hotel was obviously been pushed down, but it's also kind of typically 5% to 6%.

The issue with owning a REIT is it's effectively a share ownership. It doesn't give you depreciation, which has significant tax -- tax benefits. It doesn't -- it's not as conducive through doing estate planning. So we wanted to have a small lot, kind of small investment lot product for investors that would be turf to the REIT would give actually genuine full ownership to our investor client. And the advantages, the tax advantages, and the estate planning advantage to that. So this is what this new go co-ownership business is.

And we did the first asset sale in Nakameguro in Central Tokyo and -- So this is just brand new, right, and started the asset management in December. Today, we're starting the second transaction, again, Nakameguro at Central Tokyo, and so this is just random, right? And started the asset. Management in December, today we are starting the second transaction again in Nakameguro in Central Tokyo but we think this is going to be over the next business.

So probably the right way to look at it is on the next page, where we kind of parse out for Owners kind of how these differences work. So Owners has classically been at the top 2, we do residential asset sales, so super prime assets, brand-new, high-quality, Central Tokyo, residential. And it's either at the top, so we just get the gains of the sale or it's the residential asset sale, and then we'll do the Asset Management for the Owner. And then the new Co-ownership business is an extension that it really changes, it's similar to residential asset sales plus Asset Management, but it is a small-lot focused for individual investors rather than institutional investors. And our -- at this point, the Asset Management period is 12 years for the first 2 co-ownership assets, and we think it's going to be 10-plus years going forward.

So this will be a strong, durable earnings stream Look, we're really good at this, at managing real estate assets and growing value for them. There is a huge need. It's true globally, but particularly in Japan for an honest return on 1 savings, it's real estate, high-quality real estate is a compelling value, and we're excited about growing this business for.

At this point, we've been primarily serving institutional investors, high net worth. This expands the product category to a kind of people like us. So we're happy to do that.

Page 31. Shows us going on in -- for Ichigo REITs, to Ichigo REITs & Ichigo Green. This has been a particularly challenging operating environment for the hotels. So we've been doing more there. You can see in terms of the each of the gross support there, we've provided some in their debt so that the investors know that we're there or a firewall between them and anything going wrong, we've also taken down the operating risk, so kind of effective the credit risk on weak operators by transferring the assets management, they operate contracts to Hakata Hotels who is our owned subsidiary.

Turning to the next page. Clean Energy continues to grow very, very rapidly. And what's not on the page, as you can see on the upper right-hand side, we've got a pipeline which is about 28% growth. What's not on here is -- and so pipeline is actually contracts in place for us to build and operate. We -- there's been substantial change in Japan's attitude similar to what I spoke about with respect to financial institutions, and with respect to sustainability in ESG, there was a massive push on the part from the Japanese government for us to transition to renewable energy. And what's happening right now that we're very excited about is we have been limiting our growth. Actually, we limit our growth in this business. There was actually a COVID reason, which was in the rural areas where you would primarily going to be putting up these solar and wind power plants have had much less COVID than the metropolitan areas.

And so in the last 1.5 years, we have, teams that go out and meet with representatives and local communities and talk about kind of this is what our track record is, and this is how we would work with you, and to set up a renewable power plant, and go to all the zoning and the environmental issues and no one wants us to visit.

So we've had this problem of the sales, kind of the acquisition process for new assets has been severely hampered by COVID. Anyway, so at some point, that will presumably go away. But during this period, the Japanese government has pushed harder on making kind of expansion possible. So the other neck that we had -- the bottleneck that we had in terms of growing our renewable energy business has been access to the grid. And so there's been -- there's policy change underway that's going to give for new [ renewable energy ] producers substantially better access to the grid. We think this is really is nothing happen in the next 6 months, but it's a process underway, and it's going to happen within 12 to 24 months. Is going to be areas where we think there are very interesting opportunities to put up new plants that are going to become available to us, so that will be a growth driver going forward. We fully expect this business will be double what it is today over the next kind of 5 years.

Turning to next page. Buybacks. It's something we believe in. We didn't make an announcement today. Sorry about that. This question was raised also in the Japanese analyst meeting. Hasegawa-san, our CEO, who took the question is talked about we're looking to given that cash levels. I mean at the end of the day, we do think the stock is cheap. We try to stay in our lane with respect to what we see and what we don't say. It's very difficult to talk about this year buyback issue. And we didn't make an announcement. You should talk about the mean that we have uses of cash that we're looking at very carefully. But what would you think, the stock is cheap, and you should fully expect us to be back in the market buying, buying our shares at some point.

And finally, we continue to have our J.League Shareholder Program. One of the things that we made a decision over in the last couple of years that have had severe COVID impacts is, one, to do more in hotels, which have had very powerful economics and will at some point again, but I've been devastated by COVID. And sports as a growth industry, we'll continue to believe is really true, because it's also been something that has had severe COVID impacts. But anyway, we continue to offer our J.League Shareholder Program to all of our shareholders, not only in this company, and to go [indiscernible] , but also our 2 REITs and each of the wind and solar power producer.

So those are my prepared remarks as it were. I'm happy to turn to question and answer. So if you -- everyone is on Zoom, you can raise your hand via the app or the browser. And there's probably also a process. I don't know that there are very many people on the phone, but this, theoretically the process, you enter star 9 to ask the question, and star 6 to unmute for that, but I suspect almost everybody is going to be on the app, or browser.

Anyway, again, thank you very much for your time. And I'm happy to take any known questions or comments.

[Gregoire Brillaud, analyst]

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

[Scott Callon, executive]

Greg, I can hear you. Thank you so much.

[Martin Fackler, executive]

Great. Yes. Two questions, please. One, the first one is regarding your comment on real estate transaction and the fact that you were seeing some inquiries returning for hotels. If you could develop on that? That was my first question.

[Scott Callon, executive]

And Greg, let me ask about that. When we say development, what specific one should I answer for you?

[Gregoire Brillaud, analyst]

Well, are you -- are we talking already about very concrete kind of proposals? Or are we -- does people have more -- are they following in a bit more, if you will.

[Scott Callon, executive]

Okay, I'll answer that question. Thank you for clarifying. Go ahead and tell me what your second one is, and I'll answer both of them.

[Gregoire Brillaud, analyst]

And the second question is regarding the Ichigo co-owners program, what kind of yield you are targeting for the -- this type of 10 years, 12 years investment for the [indiscernible] investors?

[Scott Callon, executive]

And I'm sorry, Greg, I dropped the central. Where did you say -- what sort of yield [indiscernible].

[Gregoire Brillaud, analyst]

Yes, what is the kind of all-in yield you are hoping to offer for these kind of [indiscernible].

[Scott Callon, executive]

For the investors?

[Gregoire Brillaud, analyst]

Yes. Yes.

[Scott Callon, executive]

Okay. So on hotels -- Look, this is very contrary. You have seen some hotel sales from us. Because Omicron has exploded again, I mean, there's always a possibility that we could see a retreat from hotels, but there are transactions that are kind of going to happen.

And that reflects, as I said, I think 2 things. One, investors taking a long view on Japanese hospitality as a growth industry, and they want to be involved, and or 2, they see the very high prices for -- not on regional prices, but the resi prices are up, office prices are up. They are continued to be this absolute hunger for yield. Demand for real estate appears to be not only constant but growing, so if you don't feel comfortable buying retail, and you don't feel comfortable buying hotels, and if you're worried about work-from-home, and don't feel comfortable buying Office, then it squeezed up prices of other assets.

So within that group, the most kind of impacted, is hotels. And so they offer on a forward kind of normalized basis, substantially higher yields in the other assets. So it appears to be that people are making choices like that.

And from our perspective, we have managed our portfolio to no more than 25 of the assets being hotels. Because even though they're extremely high -- very profitable, and to step back just to explain that. It's both clearly, a growth industry. It's also the case that it's operational. And the execution for hotel operators has been not world-class like it is, for example, in Japanese restaurants and other parts of the hospitality sector. So there's an opportunity for us to earn, we think, very good returns too.

But it's a very difficult environment. So if, if folks want to buy our hotels, and the ones that we think kind of would be non-core for us, we're happy to sell it to them at these prices. So you'll see some Hotel transactions.

In terms of the co-owner business, these are actually low yields to the final investor in part because that's where the pricing in these days, but something that looks like the high 2s to the low 3s, would be where kind of the yield is. And you get -- on top of that, you get a tax benefit, and you get some advantage in terms of estate planning. That's where that market is currently being priced.

[Gregoire Brillaud, analyst]

I see. So all in, including the -- the tax benefit from depreciation, we're talking maybe like 4%, 4% all in, that kind of thing, you think?

[Scott Callon, executive]

That may be a little high, but the, yes -- so -- Again, these are super prime, so it's probably not surprising that these assets are trading at those levels. But yes, that's what they are.

[Gregoire Brillaud, analyst]

And this is always new properties from here on. You build, develop and sell. Okay, understood.

[Takanori Sakamatsu, executive]

Yes. We actually don't build. So kind of the way that the business model works and why we're able to get good properties at good prices, just kind of state this quickly, is we will agree with the developer to buy the asset in advance, and so it's kind of 18 to 24 months in advance. They take all the construction risk on it, but in return for Ichigo being [indiscernible] -- so this is -- and they tends to be small and mid-sized developers instead. We backstopped the credit on this. It allows them to finance the building of the asset with a bank as a result, and then we lease it up. So those are the 2 kind of major activities that we take that would be a driver to value, so we do leasing and we do the credit backstop.

The other thing we do for our individual investors, it's primarily individual investors, is we're experts in real estate. And so they have Ichigo's effective guarantee on this is a good asset, and those are the sources of the margin. Which is only about 10% on a gross margin basis, 10% to 15%, so this is a very, very high-quality product.

And we think there is -- the market is pricing it too wide, too high margins, and we can do this business to generate 30%, 40%, 50% already, and offer kind of this good quality value to our investors, so we expect to grow it quite a bit.

[Scott Callon, executive]

Happy to take any and all questions or comments. Will, go for it.

[William Montgomery, analyst]

Okay. Scott. Yes. Thanks for the presentation. And I did listen to the Japanese, so some of this is affirming some of the information from there. So the JPY 17 billion, this is also a presentation on Page 27. The comment about that sale was to close in Q4, and I think on the disclosure document, it said it expected November 17. So I had thought it would be in Q3, but obviously, it was delayed. Then -- and that's fine. But the other comment was at JPY 40 billion to JPY 45 billion range, was the expected asset sales value in Q4, and that many of those transactions were closing in January. This is all commentary made in Japanese.

So my question is, are there any sort of risk about further delays that we should think about? Or is that JPY 40 billion to JPY 45 billion number, a solid number?

[Scott Callon, executive]

It's solid. I mean, so -- and this happens on occasion, but the investor was going to do the JPY 18 billion transaction in November pushed it back. And so I mean, so we just pushed it back.

Yes. I mean, again, we've had a 50-fold increase in COVID, in Tokyo in the last 2 weeks, so we should all be a little bit careful about kind of what happens from here. But we are highly confident this all gets done. And there are -- the other transactions that we're highly confident to get them too. So we expect to have a pretty strong fourth quarter.

[William Montgomery, analyst]

Okay. And the commentary was that likely to exceed the bottom range and would still -- I mean, the top range has not been changed. You haven't reduced it. So is the top range still within reason, or is that a huge stretch?

[Scott Callon, executive]

Yes, I don't think it happens. I mean, it's a range. If we thought it was out of the question, we pull it down, but we end up somewhere in the middle.

[William Montgomery, analyst]

Next question. This is actually mentioned on the Ichigo Office REIT earnings call back in December. They mentioned they were pursuing or exploring the concept of bridge funds, and this is what GLP has done previously. And then now today, in Japanese version, this is also mentioned as a potential strategy. So I think that's great news. Could you just sort of comment on that and what might unfold? Just any further color on that strategy?

[Scott Callon, executive]

Yes. I mean, look, from our -- from ICH, we call this company Ichigo Inc. ICH. By the way, from this company's perspective, we exist to serve shareholders. That includes not our shareholders, but the REIT shareholders. And it's really important that we have strong governance around that, such that the REIT shareholders genuinely benefit from any transaction that happens.

The issue that the Office REIT is having, I mean, the classic REIT issue is that when there's money available, you need to make sure the assets are there for you, so it's very high. And so money available, typically, because they're asked to pay out their earnings, requires doing a public offering. And so it's actually important to do bridge funds to kind of align the -- we now have money and we have an asset at the time that we want money because in order to raise money, you also need that asset. So bridge funds make sense from the perspective of a REIT.

From our perspective, this is -- it's -- the Asset Management business is a non-asset business, so it has, effectively, an infant ROI to it. It's a good strong business. We believe Japanese real estate is -- offers strong value, and we believe that we have the capability to deliver that value in truly in a world-class way for our REIT investors. So we'd like to do more there.

And I think I said that the Asset Management business hasn't grown, and I own that. I mean, we wanted -- we wanted to be in public offerings. We wanted to, as much as possible, to generate, we made a standard for any transaction that has to be accretive. We thought that was going to be the best way to get a premium valuation for REITs, and they didn't work out that way. The REITs, over many, many years, people wanted to see more external growth. And so we've now been taking a hard look at it, okay, we should do, we should try bridging some assets into the REIT.

Now the other role that we're going to play is it's very, very competitive to buy Office assets. And we can offer Office assets to the REIT effectively at a discount to the market because we get ongoing economics at a pretty good multiple for asset management on the REITs. So there's a little bit of the REIT kind of is leading it into us unlike -- because we have some assets, Will, and everybody on our balance sheet. Office assets, and can we please buy them? Can you put them into a bridge fund? So I think there's been a meeting of minds on that, and you should expect to see something on this.

[William Montgomery, analyst]

Okay. I've raised this issue before, and I kind of know what you're going to say, but I'm going to raise it again. Your renewables fund share price is 4% below all-time highs. It's trading at [ 1.6x ] price to book, it's 44% above the IPO price. And you're sitting on some -- I mean, you're sitting on some assets that could very easily be put into that REIT, and I think the financing would be -- could be done very easily.

So considering things like we didn't do a buyback, and the share price is pretty weak recently. I mean, I hate to say that -- I don't mean offense, but it's underperforming [ Mitsubishi stake ] for the past 6 months, which -- that's unlikely, or uncharacteristic of Ichigo.

So I think one of the things you might consider is perhaps using a little bit -- some of the other tools in your toolkit that you've kept off, that you've not been using. Because you obviously want to own these renewables assets, they're very valuable. I understand that. But at least signaling the market their value through a PO, and making the REIT investors happy as well. There are a lot of possibilities, I think, that you might want to consider.

So is your stance unchanged from the last time that you're adamantly against selling them? Or could there potentially be some flexibility in terms of your renewables fund going forward?

[Scott Callon, executive]

Well, okay. I mean, I'm a huge believer in flexibility. So yes, for the -- are we flexible, yes. I think our basic stance on Ichigo Green is that its subscale, so you need to either grow it to roll it in. And thank you for your input. I'm not ignoring it, I genuinely agree with you. And to your very first point, it's not at all insulting to point out that our shares have underperformed. I am deeply and intimately aware of that and want to fix it. So I appreciate your input and everybody's input on this. Anyway -- always looking for good ideas, and I thank you for it.

[William Montgomery, analyst]

Okay. I'll leave it there and if need be, come back.

[Scott Callon, executive]

Okay. Sounds good. Thank you, Will.

Garrett, I think you're up. Are you there? Can you -- I think we need you to unmute or somebody needs to unmute you.

[Garrett King, analyst]

Got it. Can you hear me now?

[Scott Callon, executive]

Yes, yes. [indiscernible]

[Garrett King, analyst]

Great, great. Just a question on the last conference call around that time Japan Renewable Energy have been acquired for JPY 200 billion, and the report was they had 708 megawatts on an equity basis of renewable energy assets, which comes to around JPY 280 million per megawatt, which would imply for Ichigo's 170 megawatts, roughly a $48 billion comparable value.

And you mentioned on that last call that, well, the fit is a lot higher for Ichigo's assets, and there could be some other key differences in the quality of the energy, but that you guys are still going to look into that comp, and see what it meant for the value of your assets.

Do you have anything that you can add as to maybe what that implied as to the value of your assets or any additional insight?

[Scott Callon, executive]

Yes. I mean, did you just say USD 4.8 billion? Pretty sure I...

[Garrett King, analyst]

JPY 48 billion.

[Scott Callon, executive]

Yes. Okay. I'm pretty sure that's what I said.

So we're not off by [ dollar, American ]

[Garrett King, analyst]

Yes, that would be great if it was U.S.

[Scott Callon, executive]

I think that number is still correct. I mean, one of the things that's happened, and then forgive me if you're all aware of this, that has been explosive and powerful and fantastic for the world, for Japan since that transaction, is that Mitsubishi Corp. came in and absolutely clubbed the pricing of offshore wind and [ taking ] it from kind of massively uneconomical to wow. These numbers are really, really interesting.

Just to point that out, and the reason I point it out and then to set it aside. The good news is it's not relevant to our assets, which -- so you've probably seen [ RENOVA ] stock, it's gotten clubbed as a result because they had a whole bunch of -- They're going to do offshore wind priced in to their future value and it's looking at, that is the game has completely changed.

So Garrett, we still think that our value is at least that. And for the reason -- I mean, this is a little -- things are fluid in a positive sense, but for, because of the policy changes that appear to be underway in order to allow us to get better access to the grid. We think we're going to have more growth in the business. Now that's separate from what's the existing stock of assets, Garrett, that you just pointed to. But yes, we think that, that value still very much holds up and is real.

So to Will's point earlier, we do think the stock is significantly undervalued. And we need -- we obviously are motivated in to take some action to address that.

Richard, you are next. Are you there?

[Unknown Analyst]

Yes. Scott. Yes. So could you elaborate a little bit more on the Hotel strategy? So you mentioned that you're willing to sell some Hotel assets if the price is right, but will there be a change to the strategy?

So you're obviously developing this PROPERA program, which is [ asset light ], but also the you mentioned the operational gearing of the business and at structurally, or long term, Japanese hotel assets are a growth business and a potentially very good business, given the efficiencies in the sector.

So yes, could you elaborate a little bit on how you envision the Hotel strategy going forward with regards to business travel, boutique and other areas you're focusing on?

[Scott Callon, executive]

Yes. So look [indiscernible] -- and I think this is pretty straightforward, so we try to be straightforward. We've got a portfolio of Hotel assets. We have the PROPERA system, which is very powerful and non-asset and we're expanding. And actually, one of the areas that's -- we've been significantly adding to the functionality of PROPERA, which is great.

But like anything, we have a portfolio which has assets which we -- ranked over everything, and so what's going to be sold in the Hotel space are the assets that are the lowest priority assets for us, and we'll recycle that money into -- it certainly is going to go into things like Ichigo Owners. It's going to go into things like bridge funds for the REITs, it's going to go into growing our renewable energy business. So we're not abandoning hotels, but we try to be, if possible, sophisticated about kind of understanding where price and the value is, and responding to that.

And the challenge with hotels has always been at prices daily, and that makes it the most economically sensitive. It turns out, it's also the most pandemic sensitive of any -- any real estate assets. So at this point, the pandemic is not over. Folks are leading into -- we think it's going to rebound sometime soon. We have lots of Hotel assets, we're happy to sell some to the folks who want to buy them. So I think that's as a fundamental sense. Does that make sense?

[Unknown Analyst]

Yes. So it's not so much a change in strategy. It's just selling some of the assets where you have less -- less optimistic view on the return potential and basically people coming in with the right pricing [indiscernible] and basically selling them.

[Scott Callon, executive]

We're going to sell assets, Hotel assets at above where we bought them several years ago pre-pandemic during a midst of a pandemic crisis where hotels doing nothing, so we think -- we should probably do some of these sales.

[Unknown Analyst]

Yes. And with regards to the competitive environment, so obviously, it has been a tough 2 years. Initially, yes, a few players stepped out, but have you seen further transactions or further reduction in competition? Or is everybody still holding on? And have you seen anything there?

[Scott Callon, executive]

You mean in hotels, right?

[Unknown Analyst]

Yes, in hotels.

[Scott Callon, executive]

Yes, we're still seeing hotel operators kind of falling over. But the Japanese government has been good about trying to support service industries that are deeply affected by COVID. And so when we say [indiscernible] this probably been a couple of percent which were all supply, but not more than what it was.

The key mechanism that the Japanese government has done is it supported kind of individuals and restaurants, in particular, with subsidies. With hotels, it's generally been them asking banks for forbearance, so don't pull on your loans and keep on lending, and so there's been a lending programs to allow hotels which are underwater to stay alive.

But it's been such an incredibly hard environment despite that. You've had weaker operators that's kind of pulled the plug, so there has been some withdrawal of supply, but it's a few percent, no more than that.

[Unknown Analyst]

Okay. Maybe one final question on financing. As on Slide 25, you pointed to the ESG finance support and that is growing. So is it fair to assume that basically, over time, all your -- your loans will roll into these ESG type loans?

[Scott Callon, executive]

[indiscernible]

[Unknown Analyst]

And does that mean that you also have a lower financing costs going forward? Or is it just the terms or some other features that are just beneficial?

[Scott Callon, executive]

The financing costs are roughly the same. It's the other elements, though, which are incredibly powerful. I mean, I think the right way to think about it is these ESG loans have really no covenants to speak of. I mean, not only covenants, but the -- it really makes a difference. Is this -- do you have total flexibility to do whatever you want with the money? Or do you have to do it with a certain asset or a certain category or a certain location, amortization on it?

As I said, the effective duration of a loan is -- you probably know this, but you're paying -- typically in Japan, you'll pay -- in our case, we'll pay 80 basis points for a loan, but we would pay 3% principal per year. And with these loans, there's no amortization principle. So you're just 80 basis points of -- for the loan. So from a cash flow perspective, these are very, very powerful loan structures. So our ambition is to go -- we've done [indiscernible] in them over the last 2 years to grow as rapidly as we can.

We got some more time. I mean, we -- Will, you're back. Sounds good. Will, go for it.

[William Montgomery, analyst]

Okay, back for more. Okay. There's 3 questions. On hotels, so the Hotel REITs [indiscernible] and Japan Hotel REIT and [indiscernible], they published their monthly data. And the at the end of the state of emergency, their October number improved from about 50-some-odds about 60% average occupancy in November again from about 60% to mid -- about 68% . So we track this utilization data, airport traffic utilization NTT DOCOMO publishes and it suggests that December is going to probably be better than November.

So in that background, in terms of your portfolio and your utilization, I mean, have you seen -- since the state of emergencies ended, an improvement or just kind of just give some background there, if you could?

[Scott Callon, executive]

Yes. So one of the things that's gone -- and you're absolutely right, that occupancy has been healthier. Part of the reason for that, Will, though, is that people have cut the daily rate. So [indiscernible] is that the [indiscernible] has gotten pushed down really hard. And that's the smart and the right way to do it. We've done that ourselves.

Look, at this point, we actually have a few of our hotels outperforming pre-COVID right now, believe it or not. But the exception [ approves the rule ] to most of the hotels on a [ RevPAR ] basis are still down 60% to 70%.

And the problem is when you're down and at the bottom, they're probably down 80%. And so when you go down from down 80%, to down 60%, that's from 20% to 40%, that's a double, but it really means they're still down 60%, so the hotels are still deeply impacted [indiscernible]. And part of it is because it's not just occupancy, it's that ADRs have dropped down so much in order to try to fill the hotels.

[William Montgomery, analyst]

Got it. And then this is specific to your Sustainable Real Estate division. So you break it out between the rent income and real estate sales. And just looking at the sort of the stock business, the rent side, it looks like in Q1, it was about JPY 4 billion, and that dropped in Q2, about JPY 200 million to JPY 3.8 billion. So clearly deteriorating. I think this was Odaiba, I think this was hotels...

[Scott Callon, executive]

Yes, that's exactly right. It's primarily the Odaiba, Will.

[William Montgomery, analyst]

But then in Q3, we are back up to JPY 3.9 billion. So about JPY 100 million improvement. Can you elaborate on what might be happening there?

[Scott Callon, executive]

It's a guess, but I think it's actually some improvement in hotels. This has been super volatile, as you know. It's -- we're both in Japan together. It's like, okay, the COVID is gone. No COVID is back. So the hotels have been showing some volatility.

[William Montgomery, analyst]

Got it. And then final, on the Odaiba, the Tradepia asset. So this is again from the Japanese where -- had leasing activity not been successful, it would have dropped to about 40%. When you picked up about 15% or so, and so it's rough -- closer to about 60% right now. And the anticipation, this is in your publication, of getting to 80% by the end of next year.

Just can you give a little bit of color on who's coming, what the rent levels are versus pre-COVID, things like that? How that will stage out over the next year?

[Scott Callon, executive]

Yes. I mean rents are down about 10% in the Odaiba asset. So look, I'm actually quite positive on that asset. I mean, which is to say, it does have -- and you were on the call, so you heard Hasegawa-san talk about the lower -- the kind of -- the lower levels of the building.

[William Montgomery, analyst]

Right, right.

[Scott Callon, executive]

And I don't know if -- and to be clear, so what's fantastic about the Odaiba asset, for those of you outside of Japan or outside of Tokyo who don't know that bay area, it's right over Tokyo Bay, and it's beautiful. And unlike Central Tokyo, where you have -- which is like Manhattan, the only views you have if you're facing over Grand Central in Central Manhattan, but anyway.

Central Tokyo doesn't have use like this for the most part, and so the upper floors are fantastic. They're truly differentiated. We've actually had a systematic program on let's get people who really care about the view and look over this phenomenal bay and the Rainbow Bridge and all that sort of things. So it's the lower floors which is slightly more challenged.

But we're -- I know it's a super compelling value. It's -- we're filling in about JPY 15,000 per [indiscernible]. The peak was up to JPY 17,000. We underwrote it originally to like JPY 13,000 to JPY 14,000 to JPY 15,000, so it's [ biding ] its business plan. There's no impairment risk on it. It's still massively above plan. And we're having to give free rent at this point, typically 6 months, could be as much as 1/3 of the rent period in order to get the thing filled and then kind of -- moving is really expensive in Japan, so it tends to lock people in for many, many years. And we think they can make sense to do that.

But one of the things we haven't done is we haven't rushed to fill it because we are confident, it's really great asset. It was built, as you know, originally as a corporate headquarter. It's one of Japan's biggest trading companies. Super high spec, beautiful, and we'll fill it over time.

So yes, it was actually going to go to 70% occupancy and then COVID push it down to what was going to be 40%, and what I just pointed out. We expect to close this fiscal year, so this is only -- it is only 2 months away, something like 50% to 60% occupancy and push it up probably to 80% over the next year. But there's no -- we think in the long run, the right thing is to fill it with the right tenants.

And to answer your question, it's all sorts of companies, IT companies, growing companies it's -- the biggest issue we're filling it quickly is that when companies decide they want to move to Odaiba at a cheaper price from Central Tokyo, I don't want to say the landlords are panicking, but the landlords are like panicking. Well don't go. We'll cut our rents by 40%. So this is one of the issues you need to be able to compete and have a differentiated offer. And so it's a little bit hard to compete if somebody in Central Tokyo wants to cut the rent by 40%, just to be clear everyone on Odaiba is about 20 minutes out of Central Tokyo.

But it's a fabulous area. And yes, I think we're going to fill in, and it's probably takes 18 months, but we'll -- I think likely, you'll see us running at near or full occupancy and better.

[William Montgomery, analyst]

Great. Appreciate it, Scott.

[Scott Callon, executive]

I think we're done. We've gone over time. Thank you everybody, appreciate you being with us. And again, I understand it's a really hard time of the world. Hope you and your family and friends are all safe. Take care. Be safe. Thanks so much for joining us today. We'll bring it to a close here.