Ichigo Inc

TSE:2337

Earnings Call Analysis

Ichigo Posts Strong Growth, Expansion

Ichigo has successfully transitioned from defensive management during COVID to aggressive growth, with a substantial increase in opportunity set. The company reports a 20% year-on-year increase in all-in Operating Profit (OP) and a remarkable 70% rise in Cash Earnings Per Share (EPS). Hotel earnings are accelerating with Revenue per Available Room (RevPAR) rising 31% over pre-COVID levels. Ichigo is also expanding its presence in digital security tokens, a niche where it leads in Japan, and has increased acquisitions by 50% year-on-year to JPY 74 billion. The firm expects significant transactions in upcoming quarters, which should further drive earnings. Clean Energy is predicted to grow next year following a minor dip this year due to one-off plant maintenance.

Robust Growth and Strategic Optimism

Ichigo's Chairman, Scott Callon, presented a strong vision for growth in the recently concluded Q3 earnings call. The company's performance in the quarter was marked by a striking 20% increase in All-in Operating Profit (OP) and a 70% surge in Cash Earnings Per Share (EPS), compared to the same period last year. Stock earnings were predicted to reach unprecedented heights, buoyed by a 31% rise in hotel revenue per available room (RevPAR) versus pre-COVID levels. Acquisition efforts were robust, with a 50% year-on-year increment, setting the tone for confident predictions of future earnings expansion.

Recovery and Resilience in Hospitality and Real Estate

The recovery narrative was particularly compelling for Ichigo's hotel segment. Following a 'punch in the face' during COVID times, the business is roaring back, demonstrating structural profitability that has retained its foundation throughout the crisis. Hotels led the charge with RevPAR climbing by 31%, a testament to the strength of Ichigo's brand. Sustainable real estate was also a standout, with a notable 33% growth in stock earnings year-on-year, signaling a robust rebound and likely continued profitability.

Focused Asset Management and Digital Expansion

An increase in asset management earnings by 14%, despite certain lapses in floor earnings, echoed confidence in ongoing operational success. Ichigo's digital security token space stride positions them as a leader in Japan, showing their adaptability and future-focused strategy. Furthermore, the company's commitment to alignment and value delivery for Real Estate Investment Trust (REIT) shareholders was evident through share purchases and reinforcing of asset management resources.

Selective Investments and Clean Energy Prospects

While net acquisitions remained flat, the decision to acquire more indicates tactical business moves and possibly an advantage amid withdrawal by U.S. and European competitors. Additionally, the 5% decline in clean energy was attributed to one-off plant maintenance, but with the inauguration of a major solar plant, prospects for the coming year were optimistic, pointing towards regained momentum and potential growth.

Financial Health and Stability

Financial prudence was visible in the company's approach to financing and loan maturities, balancing long-term borrowing in the multi-asset business with shorter turnovers in the owners business. The company's approach to sales and acquisitions suggested an emphasis on delivering value both in office spaces and hotels, paving the way for what may be a competitive advantage in the market.

Earnings Call Transcript 2024-Q3

[Scott Callon, executive]

Thank you, everybody. I appreciate you joining today. My name is Scott Callon. I'm Chairman of Ichigo. I'm joined right here by Dan Morisaku, who is a senior member of our finance team and the Head of our Global IR. Speaking to the FY '24/2, Q3 quarter presentation, which we put up on our website. So let's let turn forward. So starting with the Page 7, which is a Q3 summary and forgive me, I'm looking down on the [indiscernible] this is where it's in front of me. The -- look, business is very good. It's a simple step. The -- we're on track. The opportunity set has grown very substantially. We went from kind of managing for a lot of growth, managing defensively during COVID, that was all over at this point. And so we're running forward very hard. All-In OP is up 20% year-on-year. Cash EPS is up 70% year-on-year. Stock earnings, which are kind of the stable -- more stable element of earnings stream for us are forecast to hit a record high. Hotel earnings are growing very, very rapidly. RevPAR is up 31% versus pre-COVID. Flow earnings are going fine. We've taken some action to grow quickly in the digital security token space. We arguably the leader in Japan right now for real estate in that, and that's something that's really exciting opportunity that we're going to continue to push really hard on. Acquisitions at this point, including contracted resettlement is JPY 74 billion, that's about -- up about 50% year-on-year. We're acquiring assets because we are very good at taking them and delivering kind of high value out of them to our investor clients. So the fact that we've grown this by 50% year-on-year speaks directly to both kind of our confidence on the ability to deliver that value and it speaks to what future earnings growth, it's going to look like. We announced also today that we did another share purchase, Ichigo Office. The 2 of them had reset our -- that our sustainable real estate business is growing really rapidly. And in fact, which is fantastic. We also want to grow our asset management business. And so putting more resources, more talent into the asset management business and actually only shares in our public REITs is one way to demonstrate that we really care about getting the right alignment and delivering value for our REIT shareholders. I'll go to Page 8, which has got the kind of further details on -- at a summary level, our stock earnings versus ship expenses are up about 200% again. We are structurally profitable even during kind of things went horribly wrong during COVID when we took kind of a punch in the face in a hotel business that didn't change the fact that we were structurally very, very profitable and we'll stay that way. You can see that stock earnings were up 33% year-on-year. That's led by sustainable real estate, which is -- and particularly the kind of very strong rebound in hotel [indiscernible] we define Stock earnings is anything that's contractual. There is more volatility, unfortunately, in our hotel earnings than we would want for this definition, but these are contracting the embedded earnings. It just moves around a little bit more in hotels and they do in other parts of our business. Asset Management is up 14% year-on-year, clean energy is [ same ]. We provide all in disclosure for increased earnings transparency. There's a lot going on. This is a pretty long presentation. So I'm not going to go into a lot of details, but it is important for you to have transparency on what we're doing. So we would expect a little bit up, too. Again, OP is up 20%. Cash EPS is up 17%. These are the key metrics that you should be measuring us, and we should -- and we measure ourselves. So every quarter, those are going to be the headline numbers. If those numbers are down, then we have a problem, it doesn't matter. Look, the problem with the accounting profit regime is unjust and actually capture full delivery value to our shareholders, [indiscernible] economic profit, all-in OP and cash EPS much more directly speak to that. So those are the numbers you should be looking at. So we point out that it's not a hotel rental income, it's increasing across all asset types, and I think it's very good. Going into the segment, earnings details kind of there's some bolt points to the top, just to jump into the numbers a little bit. We've got All-In OP up about [ 5% ] year-on-year. In asset Management, there's been a drop off of floor earnings in the Asset Management business because we did a large office sale last year in each office REIT, which generated in significant performance fees, those went away. But because of the various significant growth in our hotel NOI in each of hotel, we have participation in that. And I would point out that Ichigo believes very strongly in certain all shareholders. We are a public company with shareholders. In this entity, 237 Ichigo REIT, but we also serve as shareholders just as intensively and tenaciously as we should into office REIT and into the hotel REIT into the [indiscernible]. And so we have participation. We have a pure only performance fee structure in these REITs to make sure we have this -- we think the single best alignment among all Japanese REIT asset managers. And so the example of that is because Ichigo Hotel REIT is doing really very well. We are actually earning some good [indiscernible]. Turning to sustainable real estate. You can see that multi-asset is up 52% year-on-year. Ichigo owners is down nearly 40%. That is not the way we expect the end of the year. So you should know that we expect to do a significant transaction in Ichigo owners on this quarter, and that will be a significant earnings driver, not only to owners but across the front. Clean Energy is down year-on-year, about 5%. That's expected we have one-off plant maintenance that hits this year. You should know that we launched our second largest solar plant this month in every home. And so next year, we'll be -- we'll see growth in lead our new business. There's a lot to talk about it. I don't know if I just hold faster or talk less. So turning to next page. As you know, we have accommodation of stock and flow earnings. This is something we provide on ongoing basis to you. It is currently above it's 225% for this year in terms of the stock earnings, fixed expenses. We had -- we came down very substantially from -- in during the COVID period, and we're roaring back, and we expect to be well above that starting from next year. We continue to finance very well. It does look like and in this case, that our remaining loan maturity has just dropped off. That's largely a function of the fact that we continue to grow our owners business, owners business. And then as you know, it's a phenomenal business. We buy assets, we add value to them. We have a turnaround under less than 1 year. We do have or tend to do loans that are 5 to 7 years in that business because we should even you can sell assets in 6 months, you should build -- you should still borrow long term, if you can because it's the right way to manage the business. But it doesn't mean that we grow our owners business, the average loan maturity drops. In the multi-asset business, we're borrowing generally for 10 years. We're on track for record hotel. Stock earnings were, as I pointed out earlier, 31% RevPAR. So that's revenue for our available room versus pre-COVID, which is driven by Ichigo brand hotels. There's a little bit of -- actually, the numbers on the page, it says [indiscernible] to hotel Il Palazzo, it's about 55%. That's actually plus 22%. I think we've already correctly down on the website. But actually, that number is more accurate to what Il Palazzo is going to do. That is a hotel we just reopened. It's actually running at lower vacancy right now. We -- it should be plus 22% on the page. But in fact, we expect to get it to 50% or more above pre-COVID. But as you can see, after an extraordinary plunge in hotel earnings, it's going into COVID, it's running back, and it will continue to go up. We are selective of an acquisition of sales. There's a lot of data on the page. I think it's probably most important to know that net acquisitions have been relatively flat year-on-year, but we are buying more assets. It's a little bit of a function of some drop-off in competition as U.S. and European real estate players struggle what's going on in their books in particular office portfolios, but it's driven more by -- and I'll talk to this in some detail in growing strength that we have in resonance with business with owners. And kind of continued activity on our part to deliver more value in office in the hotels. And it's a way of saying we'd become what matters, meaning we always were competitive, but we increasingly -- it feels like we're commended an advantage in [indiscernible] profit. I'm not going to talk in a lot of detail. This again kind of gives you the tracker of time what's happening with our buy-and-sell activity. Again, we buy assets, we add value to them, we sell assets. So the fact of the matter is that you can see on the right-hand side, acquisitions at this point are up 50% over last year. That is a fairly strong predictor of what our earnings are going to look like going forward. On occasion, I talk at a very high level about kind of how we add value. It's helpful to kind of give examples. And this is an example. We do lots of things and lots of different ways to our tenants and to be innovative in doing so. And so one of the things you know about Japan is it's very expensive to take on new office space. Japan in general, overwhelmingly, -- in fact, it kind of rounds to about 100%. You get an office space. It's completely empty. You need to fit it out yourself. And then at the very end, you need to take the fit out and reduce it back to 0, back to it was. And so it's very, very expensive. And there hasn't been enough work on, I think, across the industry to serve tenants who don't want to not only put in all that CapEx, but all the time and activity to build out to office. And so we are -- we've done this for a number of years and continue to do more of it. We're designed offices, they are professional. They have great aesthetics, they're ready to move [indiscernible], and they're great. And you can see on the page, you're going to get from that. And so this is -- these are 3 different assets. We're showing where we used to run the math and what before we did, they're ready to move an office. I was pre-fit in preconfigure it, any uptick is plus 80% plus 50%, plus 60%. And those are economics that make a ton of sense for tenants who don't want to have to be at the burden of moving in that and don't want to have to spend their time with an IT company trying to figure out how to fit on office. I'll turn a little bit to Ichigo owners. We'll probably talk about this more in Q&A because there's a lot to talk about here. You should know that we -- this is a business where we think we create a lot of value, not only for -- and so we're creating effectively a new ecosystem that is -- creates value for the developers and certainly creates value for the investors because this is a kind of super prime, brand-new residential real estate business. But it is -- it's hard to think about what the right analogy is, it's kind of unique because we're in Japan is like you have a very deep understanding of what client needs are and what tenant needs are. On the basis of that, you work with developers to build to Ichigo-spec. And so this is not a business where we pitch up and look around for a bunch of newly developed residentials and buy them. We actually are much more [indiscernible] involved with the developable land. This is what we need. We will move around the blueprints to make sure that -- at this point, we've done this for a number of years. We have one of the biggest players in this market, if not the biggest. We lease out for -- as on the page over 2,000 rooms per year. We're doing 30, 40 buildings a year, one of the biggest -- and this is all residential. So we know that this is really, really well. And able to work and support developers through this process, where we can help them because they're selling to Ichigo, they can get better bank financing, we're able to buy at lower costs, we were able to buy assets so we know we can lease because of that. But so we are increasingly big data in the space. And it's an extraordinarily powerful business that works for everybody. The other thing I would point out is we take less margin than our competitors. And that's a way of saying, this is a business we target to a 10% gross margin, where before entry [indiscernible] guys out there are trying to take 20%. And what that tells you is worth value to the investor. And so we deliver we think, the best combination of value to developer. And so is we know [indiscernible] our solo supply and value to the investor and deputy investors are -- as inflation has picked up or through very fundamental need for high-quality yield, which we deliver to this [indiscernible , and until this business is growing and will continue to grow. I know we said meeting client diverse needs. That's a little bit -- I mean client needs are actually relatively straightforward and probably not that worse in the sense and what [indiscernible] is looking for is great real estate with ongoing powerful economics, half of them are of high return on. The diversity element of this is we've begun to move into diversity in our channels. And so let's talk a little bit about the growth of digital securities. We all say digital securities, which Ichigo got #1 in Japan. So this is the third time we've done a securitized what's called security token in Japanese taken from English, securitized real estate. All of them have sold out immediately. It is an alternative to buying real estate directly, or buying real estate, kind of restructure or kind of fund structure. The -- we're finding the client set forward SKUs towards male and younger, as you can imagine. So this is a secure exit real state available on the blockchain and offers a very nice return and is an alternative kind of channel for us. And while we didn't expect to come into existence. So we're not -- we don't think we're the best in the world at figuring out kind of what's going to happen in the world. We don't think that's a job we looking anyone that's particularly good at that. But it is our job to understand changes that occurs when we get there as fast as possible. We think that something powerful [indiscernible]. An example of that is Japan just launched a new digital exchange called Start, and we are the very first company to this token. And there's a very, very large J.League market out there. We have a very large private funds market out there. We'll see what kind of the growth looks like in this market, but it could be very, very substantial. And again, we're finding that our investor clients like the kind of mediacy they like, quite honestly, mostly, I just told you, our third token was 7 real estate, 7 Residences. It's just easier to kind of drive around. You can see the 7 residences as I own this as opposed to our REIT, which are 110 of them. So the POC to be on the part of our investors [indiscernible] of ownership. But this is a market that is a diversified different clientele in it, and we're levering them Ichigo's asset management capabilities and a very strong ongoing return. This is what we think we're going to do. We'll give you more information. I think relatively soon, but we expect to grow this to -- we expect to grow this over JPY 1 billion business over time in terms of the assets under management and possible when we'll see it where we [indiscernible] this market, but [indiscernible]. I've talked a little bit about how we care about our REIT shareholders and it's true. And unfortunately, that may be slightly differentiating in Japan, we are intent to focus on certain [indiscernible]. And we do it in a way that, of course, creates ongoing value for us as an asset manager by being a very good asset manager, where we expect to be able to grow kind of the returns for our shareholders for some. Clean Energy business, it will continue to grow. We think there'll be no opportunities or there is some in green biomass, there is activity in Non-FIT Solar. We really like this business a lot at very powerful economics to it. Even in Non-FIT case, so FIT and tariffs -- we're only going to be doing a situations where we have an ongoing commitment from a buyer that gives us kind of powerful on the economics, and that's fun I talk about. I mentioned earlier that we put up a second largest solar plant. This project has JPY 40 pre-tax FIT. Perhaps this process started about a decade ago. And this was just kind of complicated path to get it find up and running all because there is a mess there, we work very, very closely with communities. We do not put up slower power or any Power plant at all without local support. And so this one has a little bit of winding back because we eventually not there. Total CapEx on it is about JPY 4.5 billion, anyone is above 5%, so it's about 5%, about 11% [indiscernible]. Again, it's a very nice business. We have continued to buy back our stock. We averaged JPY billion over the last kind of 7 years at this point. We think the shares are on the value relative to what we see kind of visibility in terms of what earnings look like and should expect us to continue to be active in buying back our stock. So I talk about our progressive dividend policy. It's the way of saying we expect to -- we won't cut it to go out of time. It has a payout ratio different equity patio or payout ratio or some more. We also have a J.League shareholder program. As you know, we are the top sponsor of the J.League that work all that well during the COVID period J.League kind of shut down for a while, but we do a number of things in order to probably serve our shareholders and this is what we do. I'll turn to activity on the global environment. We are climate positive and that's both represents growth in our own production of [indiscernible] energy, which is solar and wind at this point and also a reduction in activity in terms of our own non-renewable energy constitute. We're well on our way to hitting our RE100, meaning all 100% of energy is -- electricity is renewable energy source. Target for this year is 85%. We expect to be over 90%. We were recently ranked by the Nikkei, #1 in 2 different categories for GX green transformation. So we can broadly understood to be a company that really cares about environment and our understanding is correct. We care about the planet. Climate change is real, and we're taking the actions to defend the planet and all of us on this call against the cases of that. We bought a J.League soccer club. So very recently, it's based in Miyazaki, where we have a lot of activity. It was not a very large -- it's a taker club at this point. It did not cost us very much, but it's consistent with the activity we've done in terms of support sports, support branding, support local communities. We think this is a really interesting purchase from a branding perspective, from an opportunity to do what I said earlier, simple communities, I mean, and so capable -- what we do in this space. We do think there is a very interesting opportunity again, not only this time socially in the communities, but also in terms of the economics of this business. We have hired a very experienced team of soccer management professionals to help us kind of run forward with this, and we think it's really pretty exciting interesting. Those are -- as were my prepared remarks. Thank you, everyone, so much for your patient listening. Okay. I think we're done for the day. Just to go back to where I started. We've got an extraordinary opportunity set. To the extent that I can reach out to all of you and it's people who -- and I think if we [indiscernible] go, we care about need to go. We have more opportunities and talent. So one of the things to add -- just to add a final point about the firm is we are aggressively kind of both recruiting and growing talent. So if anybody -- if you want to introduce anybody that you go in is also very, very welcome. It's a very exciting time.

So thank you very much, everybody. We're grateful for your time, and hopefully, have a good day and a good evening.