Ichigo Inc

TSE:2337

Earnings Call Transcript 2022-Q4

[Scott Callon, executive]

So thank you, everybody, for joining. My name is Scott Callon. I'm the Chairman of Ichigo, We're working off of FY '22/2 Full-Year Corporate Presentation. So this is our full year earnings. I'm joined by Tet Fujita, who is our Lead Independent Director; and also by Dan Morisaku, who is a senior member of Finance team and the Head of Global IR for Ichigo.

I'm going to hit -- start video again. And you cannot start your video because I also stopped it, continues to be the case. So we're just going to run forward. My apologies to everybody.

You don't have to see my face. This is not a bug. So let's work this one forward. Turning to page -- the first page, which would be Page 8. And I'm jumping to ask, of course, they are -- it's a terrible time in the world with COVID. We've got an extraordinary humanitarian disaster and war in Ukraine, what -- we stand with the Ukrainian people.

So turning to Ichigo, rather than the world outside. Here's the case what happened during the year. I mean look still a mixed bag. We expect a lot more from our business. And yet I think it's pretty good at this point that a lot more is going well than poorly. And certainly on a forward-looking basis, we feel pretty confident that we've hit bottom, we'll go up from here.

So some highlights from the year. Flow earnings were up 67%. This is in the Sustainable Real Estate, both multi-asset and residential sales. So the key change there is, last year, we were primarily selling Ichigo Owners assets, which are residential assets. There's clearly been a broadening of the market and its appetite for a broad range of assets. So our Sustainable Real Estate business is coming back.

Even in the most damaged class, we've taken a bunch of damage from COVID, in the hotel space, we actually did a hotel asset sale at a very good price in the final quarter. So that's continue to be fairly specifically with respect to location and buyer, but things are coming back.

Second point, Ichigo Owners, was a business we started 5 years ago continues to grow very, very well. Acquisitions were up 10% year-on-year. And that -- this is a super prime Tokyo residential business, voracious demand for these assets. When acquisitions are up, that tells you that earnings will be up. So it's a very strong leading indicator of what the return is going to be.

We launched a new business, co-ownership business, we continue to drive our long-term stock earnings. By stock, of course, we mean where stock plus flow business. Flow was kind of what happens on a daily basis, and you can have variable flow, but it's not kind of embedded.

Our structural earning stock are things that are embedded in contracts, such as rental agreements and that sort of thing. So the co-ownership business, we think will be entering its stride. And again, to remind you what that is, it's a small lot, the ability to own kind of a single -- parts of real estate at $10,000, for example, at a time as opposed to kind of buying a $10 million building by yourself. So that was a brand-new business we launched last year, and one that we think will be valuable.

Looks like we may have a video, and we do. We have video. Now you have to look at me. Again, I don't know if that was -- that's a [ feature or not ].

So turning to -- and then Clean Energy business. Stock earnings were up 13% year-on-year. This is a great business.

I mean the stable earnings driver and has extraordinary deep social significance given what's going on, both global warming and the problems we have with trying to get enough energy to keep ourselves going in the midst of this -- the Ukrainian crisis.

Nine new plants online last year, including our first wind power plant. And this is a business we need to and will grow. Propera is our proprietary AI-based hotel revenue management system. It's growing market share. We went 2.6x the number of hotels that are on the system, that's obviously small. You'll see later in the presentation, we expect to grow very, very substantial this year.

So this is on a growth track. You should watch this very carefully. Our ability to grow this business, given the powerful kind of platform economics to it, is a potential significant driver of our corporate value.

We did a JPY 1.5 billion share buyback. Dollar has gone from JPY 103 2 years ago to JPY 128 today. So it's not as easy to say at JPY 100 per dollar, $50 million has become slightly more complicated math, But anyway, about $12 million, and we announced another share buyback of the same size today. It is a sixth consecutive year of us doing buy backs. I'll talk a little bit more about our approach to buybacks later in the presentation.

Next page, please. So this is what it looks like in terms of our stock earnings versus fixed expenses. It is incredibly important to us that we'd be structurally profitable. So it was a way of saying the flow earnings are powerful and they're ongoing. But in the worst case, even if we have no flow earnings, we expect to be robustly profitable. And as you can see, our stock earnings are about 2x our expenses. So we don't expect to ever go upside now, and that's really very important.

Turning to the right side of the page, our stock earnings, a drop off very unusual, given how durable our Sustainable Real Estate earnings are. This is mostly rental income, has been absolutely unprecedented. But a drop off 10%, offset -- largely offset by an increase in stock earnings in Asset Management and Clean Energy.

Next page, please. So one of the things we've done from today is to try to give you more -- and I apologize if I didn't express my thanks at the beginning of this call for everybody for joining. We're incredibly grateful of your time.

It's important to understand the firm's economics. And by the way, this is not meant to make us look good. This is meant to be -- this something -- we're actually pretty pure. So we want -- we think we need to be transparent. We think we need to exist for the benefit of the world.

And one of the issues that's occurred with transparency is, as you know, we have moved the majority of our assets into the fixed asset class, which is not only just an accounting category, but it's actually a tax category. And by moving our assets from real estate for sale to fixed assets, it enables us to have a tax shield and depreciation, which is really, really valuable.

So with a 30% tax rate, we've got about JPY 5 billion of depreciation on an annual basis that translates into JPY 1.5 billion of increased cash available to shareholders. It doesn't show up as profits. And so that's one of the things we need the market to understand is that we're actively managing the firm to maximize cash flow for -- long-term cash flow for shareholders, but it means we're going to be hitting net income and EPS, and we need to be transparent about that.

And so we introduced cash-based accounting that will be on the next page, I'll go through. But one of the things that also needs to happen is by moving assets into fixed asset category, under J-GAAP, so under the Japan's accounting system, it means that the Sustainable Real Estate activity, where we add value to assets and then we sell them and make money because we've added value to the assets, if you're doing that against real estate for sale, it shows up as OP, as operating profit. But if you do it against fixed assets, it doesn't show up as operating profit, it shows up as extraordinary gains.

So the result of this is because we think we've done the absolute right thing for all of you, our shareholders, which is to maximize cash flow, we now have a P&L statement that looks like we have -- that's kind of a certain amount of OP, operating profit, and then like a whole bunch of extraordinary gains. And it's like, "What's going on with these guys?"

And that's purely a function of us using the tax shield. And so in order to truly understand what's happening with the Sustainable Real Estate business and the profitability generated, you need to put back those extraordinary gains into the operating profit number. Because it is truly operating profit. This is core activity in the firm and a Sustainable Real Estate, but it's sitting in under Japanese GAAP, extraordinary gain. So let's start turn to the next page, where we'll see the actual numbers. And so as you can see, all-in OP.

So that's what we're calling it all-in. You take not just operating profit, but you return the numbers from down below in net income back to the operating profit line and then recurring profit line.

So all-in OP was up 28% year-on-year. Cash EPS was up 33%. And again, these are, we think, the most important numbers that you should look at. You should understand how we're doing on an OP basis, and fully understand that including kind of unraveling the accounting kind of treatment that makes it harder to see. So we try to do that by giving you all-in disclosure.

And you should also look to see how much cash we're generating. And so these are numbers that, year-on-year, have done very, very well. And we expect to continue to do well on them and continue to grow them and you should be tracking us on that. So that's what the year looks like with the numbers, and let's move forward.

Next page, please. So bringing this into categories. The other thing that we've done from today -- again, we think the stock is underpriced. That's why in the market we're buying the stock today. We think part of the reason for that may be that we need to be kind of more transparent and help understand the economic drivers and profitability. So we're trying to do better disclosure on that.

So one of the breakouts that you see from today, so if you look at all-in operating profit, you can see Asset Management is up 31% year-on-year. We've now broken out between our 2 categories -- subcategories within Sustainable Real Estate from today.

So we have the multi-asset business, which is our classic long term across all sorts of assets. Value-add business, typical hold, 3 or 4 years. And again, across all asset classes is what we think we can add value, primarily since we're operating in hotels, office, a little bit of residential that's migrated primarily to the Owners business and retail.

And then the Owners business, which is a short-term hold, typically 7 to 8 months, much quicker turnover primarily Tokyo super prime located brand-new residential. So these are very different business models, and we thought important for you to understand those different business models.

And you can see they move around at certain amount. These are businesses that are primarily -- the Owners business is almost entirely flow earnings because it holds -- stock earnings on real estate is typically rental income. And since you've got 7 months hold, you don't hold this for very long, you turn it over.

But as you can see, the multi-asset business doubled year-on-year, and owners of nearly half. And that's fine. We don't pressure these businesses to make sales based on kind of fiscal year earnings like that. They move around, and they generate the earnings that are durable. And they can move between quarters and move between fiscal years.

The implication of that, of course, one, the multi-asset comeback is really important to us and to Owners as well, just have more earnings next year and the following year. And you can see also Clean Energy was up 16%, and this is just a robust, really good business that is indifferent to the operating environment.

Next page, please. I won't go in too much detail on the COVID impact. You can see on the bottom, we have in both fronts, office and hotel, highlighting Q2 and Q3 because of the changes that have occurred there. Primarily Residential and Clean Energy, they have no real impacts.

The one area that is having a significant impact continues to be on stock earnings is hotels. And it continues to be kind of relative to the impact -- well more than relatively impact, fairly significant impact on the buy-sell element, which is flow earnings to the bottom.

Next page, please. So this will go through kind of elements of our business model. And again, this is something we talk about regularly because we think it's important to understand. But I'm not going to spend tons of time on it because something we've talked very regularly.

So at the heart of the business, it's a combination of both kind of robust stock earnings, which make us structurally profitable. And on top of that, we have flow earnings. You can see the big drop off that occurs as we moved into COVID, both on the stock side because it's a very, very durable earnings.

The hotels went from making lots and lots of money to making no money. And these are kind of contracted rents that we think kind of very durable. We think it should be described as stock earnings because they're very, very durable. But when we had a global pandemic, things went really south there.

And then also a fairly significant drop off in flow earnings, I'll talk to that later. You'll see that flow earnings to continue -- are going to go up quite a bit and more. And we still got pressure on stock.

Next page, please. And this is how things break down. You can see you've got Asset Management on the top. You've got Clean Energy on the bottom, Sustainable Real Estate in the middle. Sustainable Real Estate has been overwhelmingly our biggest earnings driver across the board and also for stock earnings. It has gotten fairly -- very hard -- squeezed very hard by COVID. We've got growth in Clean Energy, and Asset Management has been relatively stable.

Next page, please. The other element that's important is that we have embedded [ forward ] earnings. We add value to our assets day in and day out. But on an accounting basis, earnings and value creation does not -- doesn't come into existence until we actually do an asset sale.

And so we have annual third-party appraisals of all of our assets. The appraisers think that we've got JPY 6.5 billion -- JPY 65 billion of unrealized gains on our balance sheet, which tells you that they think NAV is about 65% above what our balance sheet is.

And if you turn to the next page in fact, the -- those accounting-based, third-party appraisal-based unrealized gains are very, very low. In fact, we have more than -- we have typically 2 to 3x that with a really, really good year and fiscal year '18/2. But you should expect 2 to 3x on appraisal-based -- third-party appraisal-based, unrealized gains. And so the implication of that is that we've got something like 2 to 3x our current stated DPS and actual NAV.

Next page, please. The other thing we focus on is robust cash generation. Earnings are about -- accounting earnings don't necessarily come with cash. And so that's how you can have accounting earnings and not actual real cash flow. So we're very, very focused on generating significant cash flow. You can see the big COVID drop-off of that occurs. Nonetheless, we will robustly generate much more cash than what our stated net income is.

Next page, please. And then, finally, we -- one of the great things about being in Japan is that you can borrow kind of -- forever kind of fixed at almost nothing. So we continue to borrow an average term of 10 years at less than 100 basis points. That's fixed.

We've had some drop-off in the remaining loan maturity. That's because a lot of our business is now a 7-month business, and we've been fine with that. But we will stabilize that number. But the thing that's important to understand that we have a very, very durable -- less equity capital, but durable debt, which enables us to sustain the business very well and kind of ride in and out of difficult periods.

Next page, please. Let me turn to sustainability. One thing that's worth pointing out is we are robustly climate positive. So we have, based on our solar and wind power plants, about 2.3x more CO2 reduction than our total CO2 emissions. And we think that's an incredibly important social contribution and that we continue -- that we'll continue to focus on.

On the next page, it shows something totally different, which is not -- the previous page, on the left-hand side, so kind of what we're doing for reduction. On the right-hand side, it shows emissions. This page shows how much we're doing on to reduce emissions. So we have a target of being a 100% renewable energy, and that's for electricity by 2025. And 80% right now of our total energy consumption is that to our [ CDO ] 20% is gas. So we're 53% of the way there.

And that generates a total reduction of 43%. Because, again, it's against the 50% target. And we fully expect to get 100% of renewable energy under the RE100 electricity standard by 2025.

Next page, please. It's pretty clear that ESG has got a very -- is extremely important and to the world and increasingly important to investors and to financial institutions. And it's also pretty clear that Ichigo is well advanced in this space. And so we are increasingly recognized for our -- for kind of our robust environmental credentials. For example, we're getting finances. One example of financing is we got from Shinsei Bank just 2 months ago.

Next page, please. And broadly, because there has been a shift towards greater understanding of what needs to happen to support the planet and avoid us from global warming, the -- there's an increasing market for providing ESG lending.

These terms tend to be very, very attractive. They, for example, will frequently not have amortization in them, not really any covenants. This is very good debt. So we are very interested and very focused on having as many ESG loans as possible. It's currently 17% of our portfolio. We expect to grow this from here.

Next page, please. Yes, you can see, we are increasingly in ESG Indices. We'd like to be in more. We are, in fact, in 3 of the 5 indices adopted by GPIF, the Japanese national pension system, which is the largest pension fund in the world. We are a leadership -- we're awarded a leadership and scored A- from CDP.

We get lots of acknowledgment for the truth, which is where we're very focused on having a light -- stepping lightly on the planet and trying to do everything we can to be responsible.

Next page, please. So turning to what's happening in terms of the 3 different categories. Sustainable Real Estate. We're looking to be selective by acquisitions and sales. We've been saying that for years. [ Definitely income ] title hasn't changed because we are selective in acquisition and the sales.

I'd pointed out earlier, residential sales seems to be relatively stable. Market conditions are also allowing for us to be active across kind of all asset classes, which is very, very important. You can see that we continue to be primarily acquirer in Ichigo Owners, selecting super prime residential. We would like to do more in other asset classes, and we will. But in the last year, we were primarily focused in the resi area.

And then sales actually primarily in multi-asset outside of Ichigo Owners. So you can see on the bottom of the page, multi-asset was a net seller of about JPY 22 billion and Owners was a net buyer of about 8.5%.

Next page, please. Owners is going very well. You can see, so this is the 1, 2, 3, for 5 years since we started the business, and it will continue to grow and continue to grow our profitability, very nice business. When you think about it, the ability to turn over kind of assets at 7 months have kind of a 10% to 15% gross margin using leverage, I missed it -- so I have to actually do the math, something like 40% 50%, 60% ROE business, somebody is a really, really good business. And because it's very high turnover and you have really, really good assets. The amount of financial risk we're taking on is very low. So it's a great business and one that we're happy we've created.

I would point out, we think it is also very responsible. 10% to 15% gross margin is actually much lower than what the market has been asking from buyers. So we are the value leader in this space. We think that -- we thought about margins, were way too big. We thought we can do better for our customers and for our investors by providing better value and we are. And so this is a business with extraordinary robust demand. Increasingly, we're recognized as an [ intensive ] premiere provider of high-class residential in Tokyo. And so we will grow this business.

Next page, please. Asset Management, we've got 3 different listed vehicles to REITs and a solar power producer, green infrastructure fund. These haven't grown very much over the last couple of years. It is a priority of the firm for us to do more here. And you should track us on that to see if we have. It's worth pointing out on the ESG topic, the Ichigo office has gone over 100% to renewable energy. It is the only REIT only Japanese REIT that has done so. So we're leading the pack there at this point, Ichigo hotels 31% to renewable energy. Ichigo Green is a renewable power producer, so it is by definition, not 100% renewable energy, so we can put that on the page, so that's true.

Next page, please. Here's what's happening on the Clean Energy business. It has grown very rapidly. It slows down this year a bit. We've talked about this before. We don't have a slide in this presentation. We'd like to go into green biomass and hopefully start our business this year. So that is work underway. And hopefully, we'll have some good news for you when we start the business. When I say green biomass, I mean actual biomass that's good for the planet because our -- really a lot of the biomass out there is not. And if you want to have a conversation about that, we can. But this will be generally good for the planet, locally sourced for full cycle good for the planet, biomass.

Next page, please. I touched on Propera earlier on the first slide, we 2.6x-ed it this year. We expect to 4x it this coming year, so over the next 12 months. So that's obviously a very important growth target. And this could be kind of a very valuable platform. The basic -- the customer use case for this is Japan does not have very sophisticated pricing optimization for its ports hotels. There is a large market opportunity for this. We have spent years developing a proprietary AI-based system for this. When we put this into hotels, typically uplift, is 20% or more on actual revenues. So there's even higher translation than [ NOI ] growth. And so this is something we think has significant kind of customer and social value, and we expect to grow rapidly and stay tuned.

Next page, please. So we've done our sixth consecutive year of buybacks and will be all as of today's announcement. Let me just touch on that one a little bit. So as you can see, we've generally done JPY 3 billion of buybacks kind of year-on-year out twice a year. Last year, we only did JPY 1.5 billion. And so we got all sorts of questions as to why weren't doing more buybacks when the stock was cheap. And the answer is -- we are very involved in trying to do more and to try to do things that are big.

And that results in us having on a non-infrequent basis, material or non-public information. And if we're sitting on material or non-public information, we can buy back our stock. And so anything, for example, that's going to generate over 10% of forecast sales. So a very large, for example, Owners transaction or a very profitable Owners transaction, anything that will generate over 30% forecast.

Net income falls into the material non-public information bucket, -- anything that you would take normally is material falls into the material non-public information bucket.

And so -- and the challenge is, so if we're sitting on MMBI and we'll get a question, and I'll get a good question, "Well why aren't you buying any stock?" And I basically have to talk to my sleep because I can't say we're sitting on an MMBI because that would be releasing an MMBI. We wouldn't know what it is. And so you end up with this kind of mumble, mumble thing.

So the reason I'm telling you is right now is for all of you, next time you think the stock is cheap and you think, hopefully, correctly that we're very aligned with our shareholders and we're going to be buying our stock when it's cheap. The answer may not be, oh, Ichigo, one, doesn't think the stock is cheap or Ichigo two, doesn't have a financial capability to buy back the stock. We think our stock is very cheap. And we've robust ongoing capability to buy back our stock. The answer may not be, oh, the sitting on an MMBI. But if you ask me that question, or you ask Hasegawa-san, our CEO in Japanese that question, we're going to mumble into our sleeve because we can't actually talk about it. So just FYI. I hope I've give you the information you need to understand why we only bought JPY 1.5 billion last year.

And so on the next page, please. We continue to have a J.League shareholder program. It's two firsts for shareholder program in Japan. We include not only our own shareholders, but also the shareholders of our REITs and each of the renewables, solar power producer and we're also a source company offer shareholders to get every J.League game. This, of course, had a COVID impact that was really unfortunately J.League is back up and running, so we're back giving up tickets to our shareholders.

Next page, please. Let me turn over to the forecast. So again, the 2, we think most important numbers here, are all-in operating profit and cash EPS. As you see, I mean -- and if you look at FY '22/2 on the left-hand part of the page, I didn't touch on this on the results page. We literally are generating cash EPS as twice our standard in accounting EPS.

So we are far more profitable than maybe classic EPS numbers look like. But there is another reason why we have our ability to invest for the future, including buying back our stock, we think it's cheap. And so turning to the right-hand side, you can see on all-in operating profit, we think we've got a range. It's still super uncertain out there.

There's COVID uncertainty, of course, but there's also kind of macro uncertainty. There's Ukraine uncertainty. So we thought -- we actually talked about, should we go with the spot numbers? Should we go with the range thing? We don't like the range thing. They like to have numbers put out and we beat them. But the challenge with that is it would call on us possibly to kind of be conservative given all the things that are going out there because our job is to beat our forecast. And so we decided to go with the range yet again this year.

As you can see on operating profit, its bias, the upside minus 4% to plus 18%. On cash EPS, minus 3% to plus 13%. The actual EPS numbers will look better than that. They'll be plus 2% to plus 33% and that's of course, we did some impairments this last year that pushed down EPS that didn't have impact and that are noncash impairments that didn't impact cash EPS.

I mean, at Ichigo, and we have Tet on the call, who is both our Lead Independent Director and also the Head of our Audit Committee, we're very conservative. And so every time we have an opportunity to go, this looks like it could have impairment risk. We write stuff down, historically, the result of that has been we write it down. We actually get the money back, but we are very conservative about uncertainty.

Next page, please. In terms of the segment details, we got Asset Management down 40%. Sustainable Real Estate is up 1% to plus 32%. Multi-asset is going to be down from down 10% to plus 30%. Owners is going to have a rebound, plus 39%. Clean Energy, 3%.

Just in terms of the Asset Management number, it's probably wrong. Things that we've looked -- it's in part it's a function of about 20 -- half of that is a drop-off of -- we have performance fees on office sales. We have performance fees in both our office REIT and hotel REIT. We are actually the only J-REITs that are entirely based on performance fees. We think that creates alignment with our shareholders.

And no one else wants to take that risk. So we are very aligned with our shareholders across kind of everything we do. And so that drop-off is -- we didn't put performance. We don't have an assumption about kind of gains on sale that would accrue performance fees for us in the office REITs, so that explains about half the year-on-year drop-off.

And the other half actually is kind of internal allocation, which we kind of look at and say, "This doesn't make sense." So to be clear, the -- we kind of shifted up our allocation regime for how we allocate headquarter costs. So the -- the Asset Management is a really low-cost business, uses no equity. It's a phenomenal business. It's not actually our best business because it's a non-asset business. So using equity has really durable returns to it. But because of low cost, when we shifted up our allocation mechanism for how we allocate headquarter costs to the various segments, we noticed, It was like oh, we were sending a bunch of cost to Asset Management, this doesn't make sense. And quite honestly, realized it and do make sense. I wanted to change the allocation regime.

I didn't have much time to talk with our external auditors about this. So we expect to fix this by Q1. You should know that there's not really that kind of significant drop-off in the Asset Management business. And apologies, we weren't able to pick these numbers. By now, we will be totally transparent about what we do and go through kind of a robust process with our external auditors to work with walk through kind of what got wrong with allocation mechanism, and why we need to fix it. And we expect to get done by Q1.

Next page, please. And this is the final page before we [ annex ] because I won't go into the appendix. You can see on the right-hand side, a mix of kind of, of course, stock and flow earnings.

Note the big drop-off in stock earnings. We continue to have kind of pretty severe COVID effects. And if you look compared to '20/2, so the February 2020, There's a 50 -- JPY 5 billion drop-off in stock earnings, which is mostly about hotels. A fair amount -- and a certain amount of Odaiba, our one big office asset in it. So which is just extraordinary.

We have never experienced anything like it. We're still experiencing the stock earnings effects. We don't think we're going to get a return on -- we're not going to get improvement this year on Odaiba because we're going to give 6 months free rents to lease up the space. And it happens to talk about more what we're doing to reposition the asset.

So a drop-off in stock earnings occurred this year. It comes back from next year. What you can see there is actually a fairly substantial rebound in flow earnings, which speaks to kind of the over-market has come back. So we experienced 2 very significant COVID impacts. One is this drop-off of stock earnings, which we're still experiencing. We expect it to remedy from next year.

The second one was as kind of -- this kind of collapse and liquidity in the broad real estate market for Sustainable Real Estate assets, and that is largely clear at this point. So it is coming back.

Those are my prepared remarks. As it were, Greg?

[Unknown]

Yes, 2 questions, please, Scott. One is you alluded at the beginning of the call regarding an improvement in the situation for hotel transactions. I was wondering if you could elaborate on that.

And then number two, as far as shareholder returns are concerned, I see that management has decided to release the dividend flat despite the improvement in cash earnings. I was wondering what are the thoughts behind that? Because one more yen would have been perhaps nice.

[Scott Callon, executive]

Yes. So on hotels, look, we did an asset sale in Q4. It was at robustly good price. It was a global investor taking a view on -- COVID is coming to an end and investing on the rebound. That was very, very promising.

And it just -- it tells you that, that was a market that was going to -- it was very frozen. It's began to open up. So we actually have a number of hotel assets that we're happy to sell. And so we've got to put them in the market, and we expect that we'll see some transaction activity around that.

But what's important about that transaction was it was above kind of pre-COVID pricing. So that -- so that's what's happening there. Broadly speaking, two things are happening that are going to be very robust and contributory across kind of all assets, not just hotels, to profitability.

One is we're experiencing inflation again -- labor inflation, materials inflation. And so what it tells you is replacement cost has gone up so existing assets become more valuable relative to building brand new assets. And so we own a whole bunch of existing assets that become more valuable.

And two, the yen is the weak yen. And so Japanese real estate is on sale. I mean this in a very profound way. And this is a very robustly reforming asset class that has done well for global investors for decades. And so we're seeing kind of a significant uptick in demand from -- of global buyers who are interested in buying assets JPY 128 when they -- it would have been in the JPY 115 at the beginning of this year and JPY 103 at the beginning of last year.

Greg, is that right, did I get to your questions?

[Unknown]

Yes.

[Scott Callon, executive]

Thank you. Let's turn to Will.

Oh, I'm sorry, wait a minute. I need to talk about the dividend.

So look, I mean I thought hard about the dividend. And -- we think the stock's very cheap. So we leaned into, and so we expect to have ongoing activity and buying back our shares. And two, we actually talked about the dividend today at the Board meeting.

We have a DOE policy, which is, we think, pretty clear, which is we expect to return a DOE based on equity. So above 3% of equity will be out year-after-year to our shareholders. It's got 4 on it. So it's progressive. So you know that dividend is effectively as a guaranteed return on our EPS for all of our shareholders.

We could bump it to JPY 8, it's like, why would we be doing that? Well us, because we can. What do you want, an answer. But it's a worthy question and worthy to make. We did think about should we move the dividend to JPY 8? Should we keep it at JPY 7, well we decided to keep it at JPY 7 based on our dividend policy and do a buy back and possibly more buy backs. I hope that makes sense.

Will, your next up. Can we unmute you? Can you unmute yourself?

[William Montgomery, analyst]

You answered some of my questions. The next question would be on the Odaiba transaction, specifically, I believe I heard on the Japanese call that it was about 80% utilized now or 80% occupancy, and you had to give up 6 months free rent.

Can you just comment on what level versus the prior tenant were you? Did you have to cut the new rent by X percent? Roughly speaking, how far down is that in -- and once it becomes fully rented, let's say, by the end of this year or next year, what's the full upside from that asset, getting back to -- closer to full utilization? That's the first question.

Then the second question in the stock earnings, you explained a little bit might be from this Asset Management business, accounting allocations, but definitely from Odaiba impact. But then I think there's a comment that other COVID factors.

So is this specifically retail or additional rent decreases from hotels? Just a bit more specifically on the non-Odaiba-related stock earnings. And what's behind those assumptions?

[Scott Callon, executive]

So let's see. Let's start with Odaiba. So actually, what's going on with Odaiba is it's currently a 50% leased, and we expect to get it to 80% by the end of this year. And we will be giving kind of 6 months free rent on that, and that's generally kind of on typically will be a 3-year lease.

And the sense -- the thoughts about kind of free rent is used all over the world. It's also used in Japan. It's used here in part because moving costs are really, really expensive. And so it's helpful for tenants to be able absorb some of those moving costs effectively by having a free rent period.

So generally, in Japan, classically, you will have anywhere between 2 to 3 months free rent, to like 9 months to a year when things are really, really bad. And so 6 months is kind of right in the middle of the ballpark.

For us, the advantage of free rent is attractive for the tenant. It also means you've got a higher -- we understand you don't get cash flows from the first 6 months. But then again, we intend to have an earnings stream that will last typically for 5 or 6 years that's substantially higher.

And when the next tenant comes, I don't know what the existing rent is, the in-place rent is, it's higher. So because we are so robust and cash-generative, it's kind of been -- we're perfectly happy to finance our tenants, in a sense, for the first 6 months.

So look, the downdraft on Odaiba this year just from last year. So looking at this drop from JPY 114.9 billion in FY '22/2 to JPY 13.1, JPY 10 billion of that is Odaiba dropping off. So you would expect at least kind of JPY 10 billion or more -- I'm sorry, when I say JPY 10 billion, I meant JPY 10 billion [Foreign Language]. Sorry, [Foreign Language] is a Japanese word. Which Will knows.

So let me stay on billions of yen. JPY 1 billion of that is going to be for Odaiba. And I think -- and I don't have it in front of me, but I think the Odaiba drop-off it's been occurred in previous years also. So it's probably JPY 1.5 billion -- or JPY 1.5 billion more. And that will come back.

And so in terms of the actual levels, they're kind of bang on where they've been. So kind of something that looks like JPY 15,000 to JPY 16,000 per tsubo. So -- and financial business plan for this asset was underwritten at something looks like more like JPY 13,000. So it continues to actually outperform on the business plan, which tells you, one, it's a great asset.

It's a big asset, which has been disastrous from the COVID, because it's the only big asset we own. Small, medium sized office has been extraordinarily robust. No real increase in vacancies. And when you re-lease, you're actually re-leasing it a step up. So typically 10% to 20% higher rents.

And so Odaiba is very different from that. It's like robustly, wow, this is going fantastic, no vacancy. And we did the re-lease when they were long vacancy. But tenants leave because we got to make more money. It was always not that. It's a large office, large office that have been struggling in Tokyo, but it's a good asset, at a really good price for tenants.

Meaning, it's a headquarters quality building, at JPY 15,000 to JPY 16,000 per tsubo when competitors. And the center of Tokyo is just 20 minutes out, would be something that we'll kind of 2x that.

Did that answer your question, Will? And now I'm going to turn to stock earnings.

[William Montgomery, analyst]

Yes. So I guess the 80% is already decided?

[Scott Callon, executive]

No. No. No.

[William Montgomery, analyst]

Is that a target?

[Scott Callon, executive]

It's a target. We think we'll get there.

[William Montgomery, analyst]

And on the hotel rents and retail rents for the non-office impact of stock, how is that going?

[Scott Callon, executive]

So there's a drop-off of about JPY 1.9 billion in stock earnings between FY '22/2 and this year's forecast, right? So JPY 1 billion of that is Odaiba. About JPY 400 million of that is a drop-off of us actually doing a very advantageous COVID release to the government for a COVID facility at one of our hotels.

And another JPY 500 million of that is asset sales and expected asset sales, and we haven't actually priced in the possibility we're going to get rent from asset purchases. So that's what explains the JPY 1.9 billion. And the asset sales are primarily would be -- it's a mix of both office and retail, the JPY 500 million drop-off.

That's the difference, the JPY 1.9 billion between last year and this year in stock.

So the indication of that is we'll get Odaiba back. Look, I mean the JPY 400 million on the COVID thing is a water in the bucket relative. That disaster has been the loss of stock earnings, which is kind of between 2022 and '23 -- this as forecast, '23/2, a JPY 5 billion drop-off in stock. Most of that is hotels. So at some point, COVID comes to an end and we'll get that back. But that's what kind of the immediate future looks like.

Next, we'll take [ Ben ]. We can unmute you? And you can unmute yourself?

[Unknown Analyst]

So I just have a couple of very basic and potentially silly questions. But I mean you mentioned the yen weakness, which is rapidly accelerating as we speak. What is the key delta here in terms of what's changing from a macro environment in terms of global interest?

Because I guess from -- everyone keeps on saying, yes, Japan real estate is on sale. But if all of your -- if the asset base and the cost base and the interest base is, if everything is yen-based -- yes. Maybe it's just my misunderstanding. Just trying to understand what a weaker yen actually changes. And maybe if you could expand upon that in terms of maybe interest rate differential, stability of Japan, et cetera, where the foreign interest is really probably coming from?

And then second question, very separate again. On the buyback, so you mentioned the MMBI side of this. So why not just announce a much larger buyback, and with a longer-dated range and give yourself more flexibility? And again, something that I don't understand, you've explained in the past, how you have to do all this through sort of a trust bank and you have to leave a lot of names in their hands.

But yes, maybe if you could explain why you couldn't just make something much larger and then maybe put a top end limit on where you would actually buy back the shares?

[Scott Callon, executive]

Okay. So thanks, [ Ben ]. So the question on JPY weakness, global investors always worry about, are they going to get returns that turn into returns in their home currency. So you both get the local currency return and then you have to worry about FX. Is the target currency going to appreciate and depreciate?

So effectively, what's going on is there's an implied view that FX -- a lot of FX risk has -- that the risk has gone down. Or perhaps an implied view that the yen is at JPY 128. It's literally on an effective exchange basis at a 50-year low.

A half-century low for the Japanese yen is a reasonable entry point. So you're absolutely right. It is -- I mean, there's a little bit -- perhaps we have -- we want to spend $200 million and we can -- and that's our budget, and then we can do bigger assets. We want bigger assets, but it's overwhelmingly.

People think JPY 128 or JPY 123, JPY 120 is a very attractive entry point from an FX perspective? So you're absolutely right. It's -- all the economics are yen-based economics, it's the ability to not lose on the yen and perhaps gain on the yen, which is proving to be attractive to people.

So on your first question, does that make sense?

[Unknown Analyst]

Yes. I just find it a bit surprising that people are -- wouldn't global investors actually hedge out the yen exposure? That's sort of how I would have thought of it. I actually I wouldn't want to take that currency that's not what their expertise is?

[Scott Callon, executive]

Yes, and some people do. But most don't. Because long term -- the issue is that -- and so the kind of the defense of some people do, but some people don't. I mean, you have to rule the stuff. And so there's a little bit of operational issue around that.

I'm sure you're not going to be able to really do very well kind of 5 year or 10-year FX rate. So it's interesting. A lot of global investors do see FX. So FX exposure is a diversification correctly, it is. And so that's another reason why people don't hedge out the FX exposure.

The yen-dollar cross is super liquid, you can hedge it out. You generally can hedge it off for 3 months, 6 months and you're still rolling, right? So it's interesting. From my experience, overwhelmingly, global investors in Japanese real estate do it in yen. And so they care where the yen is.

[Unknown Analyst]

Sorry for the basic question.

[Scott Callon, executive]

No. No. The basic questions are at the heart of things. Yes. It's a very interesting topic. Isn't it? Look, on the buyback thing, yes. I mean, you're right. So another we're applying to this is for us to do bigger buybacks and lighten them out.

And frankly, we wish we had done that last year. And so yes -- and we didn't. And there's an embedded assumption, which is worth questioning that if we do smaller buybacks, there will be less of -- a less impact on the stock. And therefore, we would go buy the stock at better levels for our shareholders.

But we do know the way that against these opportunities. Last year, it was the first time ever where we've had so many things going on, like we got into the way. It was our first and very painful experience with like, " Oh we wish we had done a longer-term buyback at a bigger size."

So we don't monitor the situation. But yes, your thinking is clear. And it's certainly a possible alternative and one that we will try to be thoughtful about.

It is -- there's one other thought. The idea of not using a trust bank is kind of off the table. So lengthening out the term of your buybacks is doable, kind of trying to do it by ourselves in the market is not. You will have to hand over to a third party to avoid the problem being tainted by MMBI. But your essential point, which is you can linking the buyback, yes absolutely. And it's something we end up doing. For the moment, we decided to do a smaller shorter-term loan.

Did I answer your second question?

[Unknown Analyst]

Yes.

[Scott Callon, executive]

Next question, looks like from [ Clive ]. [ Clive ], can you unmute yourself?

[Unknown Analyst]

So I had a couple of questions actually. One was regarding the REITs. And you alluded to the fact that they're not growing, in particular, the green REIT.

So I wonder if you could maybe kind of tell us about what your kind of thinking is on how you kind of get that going again because you said you'd like to grow those, obviously. What can you do to kind of make that happen, especially in the green REIT, given it sort of seems strange?

It seems anomalous in the world we live in today that with renewables and renewed -- growing interest in that, that you don't have a green REIT that's growing?

[Scott Callon, executive]

Yes. Well, I mean, that may be our fault. So look, kind of across the board, when they say, "All right, it's probably my fault."

So look, what -- can give you some history on all of these, the 2 REITs. And technically speaking, green is an infrastructure fund. So it's really like without being a REIT. But yes, we can go REIT also.

Classic sponsors have kind of abused trust. They haven't dealt fairly with shareholders. They've used these as vehicles to put in assets, not necessarily at the correct price. And we just think it's wrong. I mean we're fiduciaries. We work for all of you, and we work for all shareholders.

And so we -- it's been very important to us that any transactions that the REITs do will be good for the REITs. And so for me, that meant for a long time, I was against doing any transaction on the REIT.

For example, look, to grow REITs, they have to pay out all the dividends. So you really don't have the ability to grow unless you do a public offering. So I feel very strongly, we shouldn't do public offerings unless they are manifestly accretive.

Remember, I mean, of course, shareholder value -- so the share price is EPS times the multiple. And the thinking was, if we are relentlessly focused, great fiduciaries, we're going to get a high multiple. And so not only will we do a better job of growing EPS for our shareholders of the REITs, we also get a high multiple for that. If we get a high multiple than we're able to do, it's easier for us to accretive transactions.

[ Clive ], that's not what happened. And it didn't happen for years. And so I was like -- I mean, basically kind of a value investor [ hard ]. I mean, the market is going to get this right at some point. But it becomes pretty clear the market is not giving us a high multiple. They're actually been punishing us for not growing our size.

And so the irony is choosing not to do public offerings has been punitive for shareholder value at the REIT level. So we're just rethinking it. And so we haven't done POs for years. We're certainly not going to do something kind of super like wildly, kind of massively dilutive.

But we're going to experiment that a little bit. Okay, maybe we should come to market. And so that's kind of the obvious place to start to see if we can do public offerings that win market support and create a virtuous cycle.

To me, it's ironic. I mean the other REITs have been doing dilutive offerings, but they've earned multiple that's "been growing" when growing is not growing EPS or DPS, but growing kind of asset size. Japan is a little bit of too big to fail thing. Big is good, Banks like it. I understand all that. So, that's one thought.

On Ichigo Green itself, this is kind of trapped between 2 legs of the stool. I don't know. I left the United States of America before. I mean, I remember English or if I do have English, it's like from the 1980s. It's -- and what all this is good about reminding me, on a regular basis, that there's an opportunity here.

Yes. The -- we have all these assets -- great assets in our Clean Energy business. Green is priced kind of too low for us to want to put those assets into that business. Meaning, we need -- these seems to be transactions that are good for all shareholders.

And yes, Green is also not necessarily priced high enough in order to buy assets from other people. So it's kind of stuck at. It's not growing. And to be honest, the big places to really move the needle and have an impact and the kind of breakthrough, it is not going to be an office. Green is going to be an office, because it's so much bigger. It's a 2 billion -- it's a JPY 200 billion portfolio.

And hotel probably has more of an opportunity, given its kind of sophistication and ability to add value to assets, including prepare to kind of grow quickly. So I wouldn't hold you breadth on growing and growing, but it's really hard. It's run super low cost. It's a great vehicle.

It's hard for institutions to buy. It's, largely at this point, individual investor portfolio. Do we have hopes and dreams for it? Yes, but it's not clear. I hope to get to be super transparent, but that's going to be the major vehicle for growth. I would expect to see a lot more of office and hotel.

Did it answers your question?

[Unknown Analyst]

Yes, perfectly.

And then I had a second question. On the midsized office market, I mean looking at the short term, we can see just in the office market generally in Tokyo, occupancies and rents have been kind of edging down and it is what it is from very high levels, obviously. But what's your view on sort of the medium to longer term on where the midsized office market goes in Tokyo?

I mean it's easy for people like me to get a view on the big -- the mega-sized office market and know what's going on with new mega projects in [ Toronto ] and other places like that. But what's going on in the sort of the less visible and, dare I say, glamorous end of the market where you guys are playing? What's the sort of medium-term, long-term outlook for that? If you could talk through that, please?

[Scott Callon, executive]

Can I say, it's a better asset class. It truly is.

[Unknown Analyst]

Okay.

[Scott Callon, executive]

We're just focused on kind of the big buildings because they're exciting and they're beautiful and they drove the assets. And it looks like huge volatility, and they come with kind of premium pricing. And frankly, it's harder with a big assets just as physics and engineering to make it earthquake protective.

And you have all these tenants, and typically bigger tenants with more pricing power. And so it's an inferior asset class. And so the great thing about mid and small office is how incredibly robust and how diversified and how durable the economics are to the asset classes.

And so to your point on rents, we have actually experienced no downtick in NOI in our offices. Outside of a little bit of COVID because typically -- so we do very well located central -- CBD kind of office, near the station. And typically, as you would know, [ Clive ]. The first floor is going to be retail.

So we've had some turnover in retail tenants from that. But you re-lease at a higher rent because as you also know, Japan has quasi-rent control. And so we've had such a good kind of rent market, I mean, economic and operating environment for like a decade, that people are kind of in place rents are typically kind of 20% to 30% below where they should be when you re-lease.

So we continue to have -- we're long vacancy in our midsized office portfolio. When tenants leave, we get to have a small celebration, which feels inappropriate because the tenant is leaving, but it means we get to re-lease that a good a way as you say, these days, kind of 10% to 20% higher.

Over the longer run, that still feels very durable. And the reason is small -- so who do I mean by small midsized office? Overall, small and midsized firms, I'll speak to that. But it's also big firms are increasingly because they're doing kind of more satelliting and more downsizing.

And so we've got a new source of demand because classically mid and small sized office with just a small SMEs, and then we have bigger companies coming into the space because they like the kind of better pricing and they want to have kind of remote work and they also want to have office. So there's a new source of demand for that.

But most fundamentally, the big drivers of demand in this business, in this asset class, are SMEs. And they are desperately fighting for talent, and they want to do it with office space. And so we're hearing from all our tenants is, "Yes, we're doing more remote. We have less people in the office that's going to be ongoing, and we want to keep our space."

We always thought it'd be more attractive to have more space for worker, and this is important to us. And they're also seeking to upgrade and want better quality space again in the fight for talent. So as you know, when you hire somebody in Japan, it's effectively a lifetime commitment.

Under Japanese labor law, you're better off if you can, trying to keep your talent, not by raising their salaries by 10% to 20% to 30%, but paying 10% to 20% to 30% more for better office space, so it makes them feel near that station. And you don't have to put an umbrella when you walk through the office also.

So office continues to be ironically supported. Everyone thought that the increase in workers was going to be a demand drag on mid and small-sized office. In fact, it has been a demand driver. Because there's been -- for the fight -- and in the fight for talent, SMEs want to have more space for worker, and that's more than the decrease in the number of workers in terms of its impact.

Did I answer your question?

[Unknown Analyst]

Yes, definitely. I would have a follow-up, but I noticed we're over the hour. So I'll leave it there.

[Scott Callon, executive]

I don't mean to cut everybody off. [ Clive ] is being -- [ Clive ], you're a gentleman. Thank you very much. I think we were done. We actually have run over time. Thank you so much, everybody. We really appreciate your time. and we're going to work hard for you. Everybody, have a really good day. Thanks so much. Bye.