Ichigo Inc

TSE:2337

Earnings Call Transcript 2023-Q3

[Scott Callon, executive]

Hi, everybody. I'm Scott Callon from Ichigo. Thank you very much for joining us today. We'll be reviewing what's right in front of you the FY '23/2 Q3 corporate presentation. I'm joined, as always, by Dan Morisaku, who is the senior member of our Finance team and the Head of Global IR for us.

So let's jump into it. Let's go to the first page summary page, which I think is Page 8. So simultaneous for today's earnings announcement, we raised our full year forecast. We have been guiding you to this. There's been a significant turnaround in the market environment. We continue to have strengths and capabilities across sustainable real estate and sustainable infrastructure more broadly, our Clean Energy business. And so the market environment is very positive for us to operate in. So we took up our operating profit forecast to JPY 11.9 billion for the full year. That's up. And we had shown a range at the beginning of the year given COVID and all the things that are going wrong in the world, we thought it was prudent to show a range.

At this point, we've consolidated down to a single set of numbers across all of our KPIs. The OP -- new OP number puts us up 23% above the bottom of the initial forecast and 12% above the top. On net income, those numbers are plus 39% against the bottom end of the range and plus 6% against the top. Two big drivers to this are significant recovery in hotel business. You can see in the 3 months, Q3, we just went through, it's nearly a double year-on-year in terms of what RevPAR looks like. We've recovered to pre-COVID levels which is an extraordinary statement.

I mean we don't have a full return to travel within Japan yet, we don't have inbound Chinese tourists where at one point, about 30% of total inbound tourists that are not really coming at this point. But it tells you that there is a significant upward opportunity. There has been some withdrawal of hotel supply in the market. If we get a better demand environment, there will be a lot of upside there.

The final -- I'll go through some more detail. The second additional driver is a huge gain on behalf of our Ichigo Office shareholders, and we have a performance fee on that asset sale, which we'll record in Q4. I think it's worth knowing as we launched a digital real estate business is our first token. It's sold out immediately. This is really, I think, a pretty exciting, interesting opportunity for a new customer set. Again, I'll discuss that in some more detail.

And cash generation continues to be robust. So we're doing both growth investments that's primarily in real estate with a forecast of about JPY 45 billion for the year, and we're also doing share buybacks. And we've completed share buybacks year-to-date at 3x at last year's level.

Next slide, please. So a lot of this is material that we provide to you on an ongoing basis. We think that's our job. If you want to monitor how we're doing. You need to see both transparency and the ability to compare what existing activity looks like against activity over time. So I'm going to skip through this pretty quickly. As you can see, we have a very durable earnings model. Stock earnings are on at about double our fixed expenses. We don't expect to ever lose money is the way putting it.

On the right-hand side, shows what's happening with the stock earnings, not a lot of movement there. Sustainable real state is down a little bit. Asset Management is down a little bit. Clean Energy is up a little bit, and that's sort of the point in the stock earnings. So they shouldn't move around all that massively.

Next page, please. So here are the details of the revision, I pointed to on the earlier slide what it looks like relative to the initial forecast. On a year-on-year basis, we've got OP up 19%, we've got EPS up 42%. Look, it's worth pointing out that these we don't think are the key metrics for us. So it's far better since we're cash driven and we're not accounting driven to look at all-in operating profit and cash EPS is the best measures of how we're doing and so there, you've got all OP up 23% versus last June in a forecast and cash EPS up 18%.

Next page, please. Pointing us to a little bit earlier in terms of what the drivers are, just to give you a little bit more detail on the Ichigo Office performance fee. We sold -- and it appears in the slide later. But we sold an asset originally bought from GE. If you remember all this, a number of years ago, GE, [indiscernible] Capital, they wanted to have a solid counterparty as part of the exit out of real estate in Japan. We were a counterparty to them. We bought assets as a sponsor. We put some of those assets into Ichigo Office. We executed a transaction where we sold out the asset purchase. And I think by memory, by 2015 at 2x. Along the way, we also had these kind of enormous returns kind of the magic of Japanese real estate investing where you fund substantially below your cap rate.

By the way, so there was a very, very large capital gain that we generate on behalf of the Ichigo Office shareholders. And it's worth pointing out that our REITs are the only J-REITs without a fixed fee, they are performance fee-only REITs it's structured to -- because it's, we think, the right way to do it. You should not be earning money just because you do things like other 2 REITs were like, "We sold an asset. We deserve a fee for that." We want to ask them if we deserve a fee for that.

I think the right way is to create maximum alignment with our shareholders in order to benefit the shareholders of both this company and the shareholders at REITs. I always thought that other REITs that follow us has been years since we introduced this as the first J-REITs to go to no fixed fees and performance only fees and no one has followed us.

So I'll share some detail on the following pages. The implication of this is when things go poorly, and they did go poorly for us under COVID, we take a hit as we should in our Asset Management business because our shareholders of our Asset Management Vehicles REITs are taking a hit. But we've just had a very powerful transaction, and we're going to go on behalf of Ichigo Office shareholders who want to benefit from that due to the performance fee.

Next page. Just a little bit topic ongoing on disclosure. We -- as you know, we've moved the assets into the fixed asset category to take advantage of the depreciation shield. It means that we pay less in taxes and we generate more cash, it dampens our accounting earnings that also moves earnings -- core earnings out of our sustainable real estate business out of the OP line into the net income line. And just to give some clarity on what's actually happening in SRE business, we have an all-in OP number that puts those transactions back there.

Next page. So these are kind of spectacularly large numbers on a year-on-year basis. You can see. And that's important because we do have -- particularly our value-add activity in the sustainable real estate business move around from quarter-to-quarter. And so last year, we were pretty light through Q3 and had a very big Q4. This year, we've done kind of almost all of the business we expect in terms of very big capital gains for Q3. So the numbers look very, very big. I think more realistic appraisal of how we're doing is kind of as I pointed out earlier, kind of up 20% year-on-year.

Next page, please. Turning to segment details. You can see on the far left, Asset Management is down a little bit. That's a much smaller rate of ours is a Hotel REIT, which is doing very, very well compared to what it was. Ichigo Office, however, is down a little bit. We sold an asset last year, again, a strong profit for the Office REIT shareholders, that's one of the kind of drivers of what we do that's differentiating for us in the REIT and Asset Management business. We're not sitting on assets because we are an Asset Management base -- assets under management, AUM-based performance fees -- AUM-based nonperformance fees. We are an only performance fee. So if there's an asset that is valuable. We think that we can sell it at a high price, reinvest the money and generate higher growth and earnings for our shareholders, we do that.

So we did sell an asset last year, pushed down our assets under management, so we had a drop off in some of the NOI that we have participation in. And also the first half of this year had a relatively weak occupancy, which is now recovered. So anyway, going forward, we expect the Office REIT to go up, there is a small hit to it this year. Sustainable real estate is up very exceptionally year-on-year. Clean Energy is kind of flat. I mean it's a little bit of weather wiggling around, but minus 2%, but it's effect will kind of flat year-on-year.

Next page, please. Turning to stock plus flow earnings, I already touched on that, so we'll just run forward. Next page, please. You can see what our stock earnings will click, and they are relatively stable, but I would point out that -- so we define our Asset Management earnings ones that are kind of linked to NOIs being stock and the ones that are linked to capital gains activities being slow. You can actually see the drop-off between where we were -- and this is the blue numbers, right, between where we were in FY 2022 with -- I'm sorry, starting with FY 2022, so the fiscal year '20 we had JPY 2 billion of stock earnings that dropped to JPY 18 million, so about 10%. There were some COVID impacts and so we had some recovery in 2022, but we do take an impact from movements and what's happening in that with our REITs and again, as we think we should.

Next page, please. We have lots of embedded forward earnings. This is what third party appraisal value tells you is on the balance sheet. So you got a balance sheet of about JPY 100 billion and the third party appraises. In terms of net assets, the appraises say there's another kind of JPY 65 billion on top of that. And if you turn to the next page, please. In actuality, we end up selling assets generally at 2x or more of what the third party appraises say. So there is a way of saying there is significant embedded foreign earnings in this business.

Next page, please. And economic, we focus on economic operating cash flow and that almost always exceeds net income. It's -- again, we are not accounting profit driven with our economic profit from. Next page, please. In terms of what's happening, we're financing, we're still borrowing on average of 10 years. We're still borrowing for less than 100 basis points. Actually, new financing, despite everything that's happened with the BOJ is cheaper for us this year than it was last year. There has been a push down in with the average remaining loan maturity from about 10 years to 6 years. That's in part driven by the changes in kind of the SRE business, a sustainable real estate business. As you know, we built out what we call Ichigo Owners, a platform with an average hold of less than a year. And so it's a very high turnover business.

So we're financing at typically kind of 5 years, even though on average, we'll hold for only 8 months, we think that's more than enough. So anyway, there's been some push down on that, and that just reflects more powerful economics because Owners has got extraordinarily powerful economics. Very short hold period, and I'll talk about Owners later. But at -- and in return for that, we can actually -- because of the short hold, because we're using debt to funding well below our cap rate, you can actually push down your gross margin on it, deliver better value to customers that still have phenomenal kind of 50% plus ROE business.

Next page, please. We're doing a lot, as we always have because we think it's right in ESG and sustainability, this point about 1/4 of our loan book is the Ichigo bank loans. Next page, please. We are climate positive, we both have significant, as you know, in our Clean Energy business, renewable non-CO2 generating clean power production, and we're also pushing down our CO2 emissions.

Next page, please. RE100 is a measurement of turning all of our -- so we produce all this renewable power. We also are converting our assets through renewable power. We're about 60% of the way there. we expect to get to 100% by 2025. Next page, please. I'm saying next page please a lot. It feels like that because we're going quickly. CDP is another set of activities around assessing and monitoring and improving our activities. We recognize it is called leadership level at CDP with an A minus score in both Climate Change and Water Security.

Next page, please. Turning to what's going on in each of these businesses. We continue to be selective on acquisitions and sales. That's been true forever and will continue to be true forever. This year, we are net sellers. If you look down towards the bottom of the page, you can see that most of our activity is in Owners. We bought about JPY 26 billion worth of assets. We sold JPY 22 billion. So Owners is a super prime brand new Tokyo residential real estate business, very, very liquid and we're very good at it, if I'm to put it that way. And with very powerful economics.

We're generally earning a gross margin of something above 10% to 15% on that. We're actually outperforming that this year. You can see our gross margin against sales price is 22%. That's across all of our activity in 20% -- 29% against the book value. The other thing that's worth pointing out is Owners continues to build out its customer base and the kinds of products that it offers. We started small lot investment products. We started a new digital real estate business. We will touch on later. So it continues to expand kind of the diversification and in that sense, the durability of its clients client base and its earnings base.

Next page, please. So looking at what's happening to Owners. And so this year, we expect about 70% of our sale activity will be Owners and 30% in the multi-asset business. The multi-asset business is also a very good business. It just has a longer hold period to it. Typically, something looks more like 3 years or 4 years rather than kind of 8 months for Owners. And so it has, therefore, a much higher gross margin to it. You need to have the higher gross margin to justify the longer hold. We do try to understand the mathematics of IRR. The additional advantage of Owners is its very short hold for very liquid assets. It's risk reducing as a business. So it continues to be a strategic priority to grow Owners. You can see on the page the growth and activity since we started the business 5 years ago, and this will continue.

Next page, please. A new business we started just in the last couple of months is digital real estate. And if I can put it this way, this is a full faith in credit business. There's a lot of things that have gone wrong in digital assets across the world because they're about kind of believing that something magic is going to happen with these cyber assets and when I say full faith in credit, these are backed by real assets. So we had 3 very high-quality central Tokyo residential assets, asset managed by Ichigo, and we try to be the best in not just in Japan and best in the world in what we do. And so what's interesting about this business, is one kind of this whole kind of chaos that's happening with Bitcoin and other digital assets did not affect us at all because this is a very different asset class. These are secured by real physical assets that have real value that have real NOI attached to them and real liquidity and real demand. But the other thing that was interesting to us about it is we're active in private equity funds.

We are active in listed REITs. We found that this business has taken us into a very different kind of client and customer class. So unsurprisingly, so our REIT shareholders tend to be older, 50s and 60s and the real estate security tokens that we -- the first one we launched, SKU is very young, 30 -- primarily 30-year-olds and 40-year-olds women. And so I mean, we literally sold out the first one immediately. And so we think it's exciting, which is a way of saying, using digital technology in a sensible way, to offer kind of in a super ease of transaction, low cost, real assets. It's a mechanism to deliver kind of value. we think is very powerful. And so we would hope and we would expect to build up this business and grow it to an element of our core Asset Management business.

And again, it is very complementary to what we're already doing. We're finding a different set of customers, the assets that we're providing very strong NOI. We think this is a very good -- these are good assets. This will help those investors grow assets and take care of their retirement needs and in a fully appropriate way. So this is not a wild speculation. This is real asset investing, using kind of digital technology to get that done.

Next page, please. We continue to work on behalf of our 2 REITs and in Ichigo Green. It is our expectation, and we've been building a pipeline of assets for both office and hotel that at some point, these companies will be able to go into the market and raised new capital to grow themselves arguably, both under scale at this point. They both had strong performance. With the caveat, hotels had strong performance in part dealing with the impact of -- and minimizing the impact of COVID. You can see it's got a dividend yield of only 2.6%. But I would point out, that's after the disaster of COVID, even at the bottom, it was bouncing around at something, I think it was 1.5% to 2%. So despite all the things that's gone wrong, there is kind of a lot of value being generated by these REITs.

Ichigo Green is also -- its a solar power, listed solar power producer can just do very well. Next page, please. I pointed out that we've done some sales. I'd also point out, we've done acquisitions also at Ichigo Office. So this is not a passive structure where you try to J-REIT classic, you try to grow AUM because you make money on AUM and you never sell an asset. This is an actively managed just like we do on balance sheet.

We're constantly marketing the market, the assets that we own, where we value them relative to where they're able to be sold in the market. We think something has reached a very high price. We will sell it and recycle the capital and buy other assets. So in the last year, we've done -- we acquired 2 assets that we think we can add value-add upside to monetized some value growth the asset sales.

Next page, please. Clean Energy has scaled up. The -- and rapidly is an interesting adverb at this point. Going forward, this is all kind of Feed-In Tariff assets, super, super secure. You've got to guaranteed purchasing contract for 20 years backed by high credit Epcos and the Japanese government. Going forward, we expect to be moving into the non-FIT business. You can see we've got about 145 megawatts of operating plants. We have some plans to enter, we're going to be -- we will do more in solar. We'll do more -- a little bit more in FIT solar, a little bit more in FIT wind power. We'll do something in biomass again within the FIT. Probably the biggest growth is going to come out of non-FIT. So in other words, not relying upon these guaranteed contracts with the government kind of under the government legislative structure, but instead doing long-term contracts with just a huge amount of demand out there for companies that want to switch out of fossil fuel-based energy to renewable and Clean Energy.

Our current pipeline for the solar non-FIT business, that again, we expect to structure with long-term contracts, there are similar economics to our FIT business, it's a pretty broad range at this point, but it looks like to be something between 50 and 200 megawatts.

Next page, please. We continue to deploy capital in ways that we think will have value for our shareholders. We think the shares are cheap. We think they're very, very cheap on the basis of our visibility with the continuing strength of the business and the opportunities that we see in the market kind of rebound. Just to be very clear, COVID was crushing for us, about 1/4 of our assets in hotels. That went from a very valuable and earnings generating business to a very terrible earnings nonprofitable business. So the rebound that's happened in hotels is significant. And we continue to do a lot of things across the board as I have touched on some of them to drive earnings growth.

Next page, please. I'd also point out that we have a J.League shareholder program. We've had it for a number of years in many ways. It is a first for Japan and the way we've run it, we try to do everything we can for our shareholders and to be very, very specific, when you're a sponsor of the daily, which we are, you get all these free tickets and goodies and things like that. Generally, the sponsor companies take them and give it to like executives. We don't do that. We believe we work and belong to our shareholders, and that comes in the door for us, including being a sponsor of the J.League, belongs to the shareholders until we have this innovative program where we gave away all tickets and uniforms and all sorts of things and things like a special holiday gifts because we think we should to our shareholders. We exist to serve shareholders, customers in the world, and that's important to us. Those are my prepared remarks. So at this point, I will turn to questions.

[Scott Callon, executive]

And, Greg, thank you so much. You are welcome to step in, let's see, could someone de mute you, do I do that? My apologies. Who does that?

[Gregoire Brillaud, analyst]

Can you hear me?

[Scott Callon, executive]

Greg, we can hear you. We see a picture, too.

[Gregoire Brillaud, analyst]

Okay. Great.

[Scott Callon, executive]

Thanks for joining.

[Gregoire Brillaud, analyst]

Scott, So I have 2 questions, please. The first one is regarding Page 32 on the mega solar. So interestingly, you mentioned you want to expand it to non-FIT. Can I just confirm what kind of target pipeline would you have in terms of megawatts? Would you be targeting the secondary market or just the primary market kind of greenfield. And also, I was wondering do -- I thought the power company at this stage still had the option to refuse renewable energy sources. They didn't have to accept it even if it was cheaper compared to their own source. So how do you plan to make sure that the this generated is being used? Because I think you do have to go to the [indiscernible] companies. So that was my first question.

[Scott Callon, executive]

So thanks, Greg. So we expect this to be 50 to -- right now, we have about 50-to-200-megawatt pipeline. And when I say pipeline, that's a big range, I get that. Because we are kind of -- we just started this, we're in conversations with a lot of folks on it. We think we'll do at least 50 megawatts in it, and we could do as much as 200. This is -- we expect this to be primary. We're happy to buy stuff on a secondary basis. So we never found really great economics from that. We just -- we're good at all these assets we have in almost entirely, probably it's 95%, maybe it's 98% of our assets, we developed ourselves, and so we're fully capable of doing the developments. We're one of the largest in the [indiscernible] solar power producers in Japan.

And we expect to do -- I mean, some of it could go to Epcos, you're right. We're certainly not going to focus on them. We expect to do direct transactions with companies. And the background to that is Japan, as you know, has a very, very significant electronics and industrial base with an export component to a particular electronics so then component makers. And they have very, very strong need. And I would include auto manufacturers and all our suppliers also to try to decarbonize their -- the production systems. Part of that is directly linked to final consumer demand. I mean the really big tech companies globally wants to move -- cut off fossil fuels and move to renewable energy and suppliers who are using renewable energy. Part of this is trying to derisk kind of future government mandates about kind of using kind of dirty fossil fuels that are destroying the planet. And so we see a significant amount of direct demand from final electricity consumers.

[Gregoire Brillaud, analyst]

I see. That's interesting. So in that point of view for corporate users and manufacturers, you will place the facilities, you will use their facilities on site and provide directly to them from basically their roof and stuff.

[Scott Callon, executive]

No, no, no. We expect to have independent plants. So this business has always been for us. As I say, I've been saying for years, when people go to us and say, "Hey, can we take -- can we do new developments" and it's always been true for both the Real Estate and a Clean Energy business. Sure. You can do the new bailment. You're just not allowed to take development risk. And this is the way you're seeing almost everyone have done in the history of the firm. Certainly the history of the firm since I joined it, which was in 2008, is we derisk new development. So our solar power plants have always -- and wind power plants have been put with a customer in hand and a contract in hand. When we do new development, for example, like lists facility, we signed a contract with the tenant before we put up the warehouse, et cetera. We'll do the same thing with this. We'll make sure we have contracts in hand from buyers and then we'll put the plant up.

[Gregoire Brillaud, analyst]

Okay. Great. And my second question was regarding the value-add business. I mean generally speaking, whether it's your Ichigo Owners or the main business, I guess, bit less maybe for Ichigo Owners, but with rates kind of starting to go up, once you expect that the velocity of transaction could be at risk of coming down a little bit. I mean, how are you guys looking at that? Are you worried? Or will you be using more of the REITs when that happened to try and grow AUM. I know you're not -- you mentioned you -- you're not taking fees and you want to focus when adding value, but that would -- could still provide kind of a captive customers. And basically, how are you guys thinking about velocity going into next year?

[Scott Callon, executive]

Could someone put up the slide that shows our buy and sale activity, the one that's active on acquisitions and sales. Sorry, I'm not sure who's controlling the screen. Thank you.

So look, Greg, we're actually increasing the velocity of activity across the firm. So the multi-asset business was our main business, and within sustainable real estate continues to be a very strong business. So good news is Ichigo Owners is outgrowing it, and it's because we're strategically growing it. So it's very substantially derisked some kind of changes in the environment because we literally have a whole period of about 8 months. And so you can put step out the door really fast.

The -- it's a worthy question is to kind of -- and it's the one I think about, and I should think about. And I'm very interested in your input on and everyone's input on. I mean this business is designed to be robust through all sorts of environments as it should be. And so thinking about what's happening with increased interest rates. I mean by definition, increase interests are not good. So we have to understand it's a negative. And having said that, I mean, a couple of thoughts. One is that rates have gone up basically 25 basis points for the 10-year JGB. And there's been a huge repricing in the market. And it's not quite clear, and it's a repricing that kind of suggests that rates are going to move 100 to 150 or something like that. It's not quite clear that's the case. And it's even okay, okay, you not removing that much. We'll deal with that. I mean rates were that much higher kind of 10 years ago. So we can go back to the world.

And its -- so I'd point out that it's not clear something fully -- the market is priced in something very, very dramatic. Okay. But rates going up a bit. So that's great. On the other hand, the reason why rates are going up, is because there's inflation. And what that implies is the value when it's definitely the case. The value of the assets that we own has gone up. And so one of the things about our business has always had a built-in hedge, which is the value of the assets go up. And that's a good thing. And so financing has gotten higher, but we have this -- I just pointed to this huge amount of increased value that comes from the value of assets, which is defined by replacement costs.

And so you get some cap rate expansion that comes out of rates going up, but you also get the if anyone tried to buy -- build a new asset, it's going to cost them 30% more than it used to. And so our existing assets have become more valuable. And the second thing I'd point out is rising inflation costs for guys like us, since we don't tear buildings down and put in 100% CapEx, which tend to put in like 5% to 7% CapEx much less inflation sensitive. So where I'm doing is, this increase in real estate inflation, which links to kind of higher rates. In 2 ways its very supportive of us.

And the final point I would make is to think about it's been very hard for us to buy assets. And so we're happy to -- on the other hand, we're also happy to take a hit on our book of existing real estate, where we actually lose some of our unrealized gains. And so we've got losses compared to where we were. In return, if we could buy real estate cheaper, it fuels the value-add engine. And so we're -- we've built the business to be robust through all sorts of environments, with environments where you've got real estate inflation, environment where you've real estate deflation, again, this has actually built an edge into it. So just to go back to kind of where we were.

And there could be some decrease in market velocity and I'm with you. I think we should probably use that as the base case because we're kind of very quickly increasing the velocity of our business by shifting towards a model that's more into Owners and to be kind of specific about it, we expect to do more on Asset Management. And so it's going to take stuff off balance sheet. It's going to make us less sensitive to what's happened kind of in the broad market environment, even though as it's going to do, we think we're pretty robust at any rate. Greg, did I answer your question?

[Gregoire Brillaud, analyst]

Yes, absolutely. No, that's kind of, I guess, on the line of what I was thinking, I think it makes a lot of sense to how Ichigo Owner kind of expand and then, yes, move things. I mean scale more in the Asset Management business via the REITs. But I think you bring a good point about you have the replacement costs because you don't have to develope assets. i think that's definitely a plus in the inflationary environment.

[Scott Callon, executive]

It is -- and that's why I kind of -- what we own has gotten more valuable. Yes. So thank you. I'm with you. Just -- I mean, the math on compounding is slightly different, but just to kind of make it slightly easy. Would you rather earn 30% on a 3-year hold or 10% on a 1-year hold? It should be the 1-year hold because those 2 are not equivalent. One of them puts the exposes to much less risk about the world changing. And so by increasing our turnover, we think we are both increasing our profitability and pushing risk down in the business, and that's a very powerful combination.

Happy to take the next question or come from anybody. Richard?

[Unknown Analyst]

Yes, I saw that you have been selling some hotel assets so now that the hotel business is recovering, could you add some color on why to sell them now? Is it -- and will your more strategic allocation be towards hotels going forward? It was 25% -- is -- will there be a new number? Please add some color.

[Scott Callon, executive]

So the hotel business -- I'm sorry, maybe [indiscernible] San is controlling screen. Can we go back to the acquisition sales page. The -- look, the hotel and I hope it's okay. I mean, I try to be super transparent and to let you know our thinking and allow you to kind of decide you agree or disagree and often you disagree where you can provide some input on that because we want alone.

So the good news on the hotels is that Japan has not delivered kind of the degree of capability in hotels in terms of the service offering and the price for value that, for example, in the restaurant business, where Japanese restaurant are just phenomenal, world-class, great. And that's just kind of high end. This is a world-class great. hotels are not necessarily. So we -- and the harder assets to operate. And so we thought there was a big opportunity, and we continue to believe that there's a big opportunity to do well in hotels for customers. And therefore, do well as an owner and operator. That's the good news. Bad news is the terrible thing about hotels is it really price daily. And so we didn't know the COVID was coming, but we've limited ourselves no more than our total assets of 25% of hotels. Despite the kind of the enormous we think, profitability that was generated and we will generate again.

Just to be clear, though, on the sales that we've done, you can see about JPY 15 billion. Most of these are not so much -- no buyers loving the hotel business and buying them. It's a little bit early for that. None of these Richard, has been kind of repositioning. So we're going to take this hotel in the asset, and we'd like underlying real estate. We think there may be a hotel to resi conversion or something like that.

So an essential good news is probably, it started right about now. I pointed out this huge rebound in the hotel business has occurred in the last 3 months especially and over the last year and the implications of all the Chinese beginning to come as soon as the Chinese and Japanese and Koreans stop fighting about visas. The implication is it looks like this hotel market is going to open up. We don't expect to be larger than what I just told you. We're not -- I mean, we just think you need to be very, very strong in risk management and one of the things what that -- the problem with hotels even if the most spectacular returns appear to be available as we replace the preprice daily. And so they're very economically sensitive, you would -- you should not expect us to have ever more than core of our assets to hotels.

If anything, I think it's going to shrink because the Owners business will grow, and that is a business very linked and specialized in resi because resi is so durable and therefore, kind of if you're nothing in the bank and nothing in bonds still in Japan, the ability to earn 2%, 3%, that's generally what it is at this point in resi. Its powerful for investors, and it's just really, really durable. And hotels, you can earn 5%, you can earn negative 5%. And so that's just a really, really hard asset for a pretty conservative group of investors, the Japanese people in terms of what their asset allocation looks like.

[Unknown Analyst]

Okay. And then so basically, do you think it's more attractive to be on the operator side or with your software? Or yes. And on the market generally, so I guess with the recent developments, yes, tourism will recover, but do you expect it to recover back to the pre-COVID levels because back then, people were quite optimistic about the tourism boom. And Japan had seen quite some spectacular growth numbers over the past 10 years or so. Yes, what was 2019 like peak tourism?

[Scott Callon, executive]

Yes, we don't think so. I mean, look, we're not in the business of predicting the future, just to step back now. I told you what was really positive about hotels in Japan that we think it's an underserved market. We've demonstrated the ability with, for example, our not brand with our OneFive brand to offer new products that are very that are very powerful in terms of cost performance and have generated the demand. The problem is they are priced all the time. So we don't have a balance sheet that fill will tell. So one answer, Richard, is to grow our Hotel REIT. We'll have other -- we'll have our investors deciding they're going to have 1% or 2% or 3% or 4% or 5%, whatever they're going to have the assets in hotels and not the cost.

And so that, we think, is probably the right long-term solution that will continue to be very active in hotels, and we're going to migrate more activity to the Hotel REIT. And quite frankly, I think we're going to do that with office too. That we expect to do more with the Office REIT as an answer. And so on your question, have we peaked out with Japanese tourism, probably not. As you know, travel is a GDP-plus business tends to grow. And actually, to be more specific, it grows faster than GDP. It also is very linked to growth in disposable income. And so the growth in Asia is a massive driver tourism within nature. And it is a massive driver of tourism to Japan because Japan is lovely. And it's clean and it's safe, it is nice and it's delicious. And I don't think you have to -- you don't have to make any brave predictions.

If you see GDP growth and income growth in Asia, you see growth in tourism to Japan. And the japanese government is massively kind of all over the news, continued to build kind of out it's tourist linked activity most specifically, air travel restrictions and a lack of capacity in Narita has always been a problem for Japan, and that's been expanded very, very substantially. So Yes, it continues to be good there. I think that's a pretty easy kind of assessment of what a possible future looks like.

But we're not going to be putting a bunch of stuff, hotels on our balance sheet. It's not going to happen. So I think you will probably more likely to see growth in Ichigo Hotel.

All right. We will bring this to a close. Thank you, everybody. We're grateful. We know you're busy. We're grateful for your time. It's truly an honor and probably work for all of you. Still a tough world out there. Take care. Be safe. Thanks so much.