Industrial & Infrastructure Fund Investment Corp

TSE:3249

Earnings Call Analysis

Earnings Call Transcript 2022-Q2

[Katsuji Okamoto, executive]

Thank you for joining us today as we present by IIF's results for the 28th fiscal period, the 6 months from February 1, 2021, to July 31, 2021. As far as today's proceedings are concerned, I would firstly comment on specific highlights of the fiscal period in the review. After then passing the microphone to Mr. Hidehiko Ueda, Executive Officer and Head of the Industrial Division, who will elaborate on the current status of IIF's operations, we will open the floor to questions.

Without further ado, I would like to touch briefly on the highlights of the 28th fiscal period and refer you to Page 3 of the presentation materials. During the fiscal period under review, IIF implemented measures to strengthen the quality of its portfolio and expand its business space in a bid to secure continuous growth. There were 4 key points to the 28th fiscal period. First, IIF took steps to build up an acquisition pipeline while implementing the replacement of assets.

During the fiscal period under review, IIF worked diligently to strengthen the quality of its portfolio. In specific terms, the Investment Corporation acquired the remaining 40% co-ownership interest in IIF Shonan Health Innovation Park at an acquisition price of JPY 15.4 billion and disposed of 4 properties, including IIF Shinagawa IT Solution Center for a total disposition price of JPY 16.2 billion. Second, IIF have continued to push forward development projects.

Once again, during the fiscal period under review, IIF have commenced development of a BTS-type logistics facility, which captures business expansion needs. As I mentioned briefly during the last investor presentation, work on the redevelopment of a cold storage facility at IIF Atsugi Logistics Center III as well as the acquisition of an existing building and development of a new building at IIF Yokkaichi Logistics Center. Details of which were announced on September 8 has begun.

Third, IIF has successfully diversified its funding source of security issuance of social bonds. Together with the issuance of 10- and 15-year bonds, the investment corporation has raised long-term debt funds of totaling JPY 5 billion under favorable terms and conditions.

Fourth, IIF has further indicated its commitment to engage in ESG initiatives. In addition to setting the reduction in CO2 emissions per unit by 50% by 2030 compared with 2015 as a new target towards coming neutrality by 2050, IIF have also initiated to switch to electricity procured from renewable energy and IIF Shonan on Health Innovation Park.

Looking at each highlight in more detail, I direct you to Page 4, The underlying principle of IIF's asset replacement initiatives is to strengthen the quality of the portfolio by replacing assets with a potential risk of a decline in future profitability. In addition to its inherent high profitability, the acquisition of IIF Shonan Health Innovation Park at a price that was in line with initial forecasts contributed to a significant increase in unrealized gains which, in turn, will boost net asset value or NAV.

As far as the disposal of assets is concerned, IIF sold land which saw interest in 2 manufacturing properties together with 2 data centers. for a total of 4 properties at prices that exceeded both book and appraisal values. While IIF Shinagawa IT Solution Center, the largest we sold is classified as data center. The property is mostly occupied by office tenants. Taking into consideration the property is roughly JPY 1 billion unrealized loss at the time of disposition and forecast for the increase in vacancy rates and in [indiscernible] rent in the surrounding area, IIF disposed of the property at an early stage given the current active purchase and sale market.

Turning to the second highlight here on Page 5. IIF was the first non-health care REIT to issue social bonds through 2 series of 10- and 15-year bonds totaling JPY 5 billion. There are 3 key points to the issuance of social bonds in this instance. First, IIF successfully increased its long-term debt financing options and with the growing interest in ESG. Second, the Investment Corporation has established a unique social finance framework as a J-REIT that focuses on industrial and infrastructure properties. Third, the issuance of social bonds in this [instance] was completed under favorable terms and conditions.

In particular, IIF was the J-REIT to issue 15-year bonds in each trade around a 0.6% level, including ordinary investment corporation bonds. Coupled with the need to build up the asset side of its balance sheet and bolster its acquisition pipeline, IIF recognize the underlying importance of the procuring funds in its efforts to secure continued growth. Currently, the lending's stance of each of these banks remains unchanged with IIF continuing to receive strong support. However, as assets under management or AUM expand going forward, we understand the importance of further diversifying our financing methods as well as our financial strategy.

The fact that we were able to raise long-term debt funds with a term of 10 and 15 years from ESG investors, under favorable conditions and expectations of future growth is extremely significant from the perspective of increasing our fundraising options and responding to the growing interest in ESG.

Moving on to trends in distribution per unit or DPU and NAV. I draw attention to Page 6. As indicated here on this page, IIF's DPU and NAV have experienced steady growth. DPU has increased roughly 1.3x over the past 6 years and NAV approximately 1.4x over the past 5 years.

On Page 7, we provide a snapshot of trends in IIF's AUM growth. While engaging in the replacement of assets, IIF's portfolio currently totals roughly JPY 370 billion. This represents an increase of around 3.4x compared with the balance sheet as of the end of December 2011 as well as improved portfolio stability.

Your attention to Page 8, I would like to touch on trend in indices after replacement of assets and issuance of social bonds. IIF's AUM totaled 73 properties at an acquisition price of approximately JPY 370 billion. From a profit perspective, the average net operating income or NOI yield and average NOI yield after depreciation coming in at 5.8% and 4.8%, respectively. The unrealized gain in portfolio also expanded to JPY 77.1 billion.

In addition, loan-to-value or LTV came in at 48.2% on a book value basis and 40.6% on an appraisal basis. The average interest rate on debt was 0.3%.

As far as [unit holder value] is concerned and is presented at the bottom right of the page, DPU on a stabilized basis was JPY 3,040 after adjusting for property-related taxes and other factors, with NAV growing to JPY 126,087.

With this, I conclude my portion of the presentation and pass the microphone to Mr. Ueda.

[Hidehiko Ueda, executive]

Thank you, Mr. Okamoto. Moving on, I will comment on the current status of IIF's operations. IIF's DPU for the 28th fiscal period was JPY 3,266, again higher than the initial forecast. This largely reflects the disposition of 3 properties in total, including IIF's Tsukuba Manufacturing Center and IIF Hiroshima Manufacturing Center. DPU for the 29th fiscal period is projected to come in at JPY 3,046. Forecasts are expected to contribute to this change in DPU include: the expensing for property-related taxes on assets acquired in 2020, temporary seasonal fluctuations in utilities, business management costs relating to IIF Shonan Health Innovation Park, and movements in the gain in sales and property rental revenue following the replacement of assets.

While anticipating the incidents for accounting purposes of additional depreciation in connection with the redevelopment of IIF Atsugi Logistics Center III, IIF will going to take a distribution in excessive profits to offset a [indiscernible] tax and accounting discrepancy.

Looking further at it, and as indicated here on Page 11, DPU in the 30th fiscal period is expected to total JPY 3,070. The main factors for this change in DPU of expensing of property-related taxes on assets acquired in 2021, reversal of the previous mentioned temporary costs and movements in the gain on sale and property rental revenue following the replacement of assets.

In the 30th fiscal period, construction on redevelopment of IIF Atsugi Logistics Center III will begin. Steps will also be taken to adjust the tax and accounting discrepancy allowing IIF to reverse the amount of temporary difference adjustment. Together with efforts to address demolition costs and downtime, IIF will undertake an optimal payable distribution, thereby stabilizing DPU. With the absence of such items as additional depreciation and their managed costs from the 31st fiscal period, IIF will maintain optimal payable distribution to the amount of revenue decrease during the redevelopment period. At present, this is estimated at JPY 3 per unit. Please refer to Pages 40 and 41 for details.

I direct your attention to the graph at the right of the page. We provide details of IIF's stabilized DPU after adjusting for property-related taxes and estimated temporary loss of revenue. As you can see in the previously announced stabilized DPU of JPY 3,040 remained unchanged. Moving forward, we will look to increase, IIF's distribution by 4% each year, focusing mainly on external growth.

This forecast of JPY 3,040 reflects certain assumptions, including an estimated negative impact of JPY 130 owing to the 6-month downtime period at IIF Kobe Logistics Center and IIF Hamura Logistics Center.

Turning to IIF Yokkaichi Logistics Center, our forecast takes into account revenue from existing building while excluding contributions from the new building.

Following reference, we provide a cumulative estimate of the new enhanced effects that the relatively large measures currently undertaken by the Investment Corporation are expected to have on DPU here on Page 12.

As far as development projects and internal growth projects are concerned, we recognize the potential for improvement in profitability over the medium to long term. Taking into account the completion of construction at the multi-tenant type IIF Narashino Logistics Center in 2026, the estimated impact on DPU comes in at between JPY 240 and JPY 300. Compared with the forecast DPU of JPY 3,040 in the 30th fiscal period, this translates to an 8% to 10% improvement based on the current number of units issued and outstanding.

[indiscernible], I would like to comment on recent acquisitions and our investment strategy going forward from Page 14. Thanks largely to demand for at-home consumption underpinned by various factors including e-commerce, risk new development, supply and demand and related activities continue to boost logistics facilities. Coupled with these favorable tailwinds, trends in the manufacturing industry are also strong. Despite the impact of COVID-19 variance and shortages in supply of semiconductors, the global manufacturing PMI is expecting steady growth.

Turning your attention to Japan and the graph at the right of the page, 69.1% of the company's surveyed have upwardly revised their earnings forecast at the time of announcements for the first quarter of fiscal year made were from the manufacturing sector. Clearly, this indicates the trends in manufacturing performance remain firm.

Here on this page, we provide details of IIF's acquisition pipeline, focusing mainly on properties with preferential negotiation rights. With the addition of our existing property redevelopment projects to properties for which preferential negotiation rights have been acquired through corporate real estate or CRE and public real estate or PRE proposals, IIF is enjoying steady growth in its acquisition pipeline.

Addition to the pipeline since our last investor presentation, include land which we saw interest in both IIF Saitama Iruma Manufacturing Center and IIF Tochigi Mooka Manufacturing Center at the top this page, and existing and new buildings at IIF Yokkaichi Logistics Center at the bottom center of the page.

Drawing your attention to the next page, we provide details of IIF's current acquisition activities. Looking at the environment in which IIF operates, business segment related to manufacturing, demand for at-home consumption and logistics is favorable. At the same time, companies are exhibiting diverse cash, new investment and other CRE needs.

Due perhaps to the recent surge in prices as a result of overheated logistics development activity, we have seen an increase for the redevelopment and expansion of properties in our portfolio with relatively low values and lower floor area ratios.

At the bottom of the page, we provide examples of recent CRE proposals and proposals for properties within our portfolio for the previously mentioned properties outside [indiscernible] for which preferential negotiation rights have been acquired. While continuing to propose unique CRE solutions to operating companies, we will implement measures that will realize the inherent real estate value of the properties IIF funds. Through these and other means, we need to build up the pipeline even further.

As you can see from the right side of the page, IIF maintains a long list of 42 properties under consideration with a total value of JPY 220.2 billion. The number of properties currently under detailed consideration or so called shortlist comes to 19.

Looking at the short list in specific terms, properties for outside the logistics field, mainly manufacturing and R&D facilities accounted for 42.1% and logistics properties, 57.9%. Included in this 57.9% are development projects, of which about 60% are on balance sheet with around 40% acquired from external sources. By acquisition method, projects developed through CRE proposals accounted for 100%. As you can see, acquisition conditions remained steady. IIF is confident in its ability to continue acquiring properties that are typical for the fund.

Delving more deeply into IIF's recent acquisition activities, I would like to elaborate on purchase of IIF Yokkaichi Logistics Center and IIF Atsugi Logistics Center III.

Turning first to IIF Yokkaichi Logistics Center. The property is a complex project to encompass the acquisition of an existing building and new building development based on CRE proposal that captures the business expansion needs of a major logistics company. The property is located in close proximity to Yokkaichi-higashi interchange, where transportation convenience has increased dramatically and an area that is home to the distribution business of major logistics companies as one of the largest semiconductor manufacturing plants. IIF is taking steps to acquire an existing building and develop a new building based on CRE proposal in collaboration with Kajima Group.

Directing your attention to the photo at the center left of the page, the property consists of 2 buildings, an existing building that is currently in use and the building that is no longer in news.

Plans are in place for IIF Kajima Tatemono Sogo Kanri Co., Ltd to execute a 10-year fixed-term building this contract over the existing building pictured at the right of this photo. The left of this photo. The building pictured at right of this photo [indiscernible]and new building construction. Upon completion, IIF and Kajima Tatemono Sogo Kanri Co., Ltd will again execute a 10-year fixed-term building the next [indiscernible].

Here on page 18 we provide details of the schedule and scheme for this acquisition. IIF acquired an entire land and existing building for JPY 3.64 billion in December 2021. Plans are in place to acquire the new building and to secure contributions to profit without any downtime by utilizing the bridge function of Kajima Group.

During the new building development period, IIF and Kajima Leasing as Bridger will enter into a fixed term land lease contract. Upon completion, IIF will then acquire the building from Kajima Leasing.

IIF is scheduled to acquire the new building in October 2022 at an acquisition price of JPY 5.18 billion, bringing the total acquisition price of existing and new buildings to JPY 8.82 billion. The appraisal value of the 2 buildings is JPY 9.99 billion, which translates to an unrealized gain ratio of 13.3%.

NOI yield and NOI yield after depreciation following the acquisition of the new building are 5.4% and 3.4% (sic) [ 4.3% ] respectively, with expectations that new building will generate optimal payment distributions, NOI yield after adjusting for optimal payable distributions is projected to come in at 3.8%.

Elaborating further on IIF Yokkaichi Logistics Center here on Page 19, the properties located in the Yokkaichi area, which was the largest value of manufactured product shipments of semiconductors and other electronic components in Japan, an outstanding transportation convenience. The Yokkaichi-higashi interchange on the Higashi-Meihan Expressway provides access to a wide area via the Shin-Meishin Expressway and Isewangan Expressway. As such, the area is home to many distribution bases of major logistics companies.

In addition, IIF Yokkaichi Logistics Center is located close to Kioxia Yokkaichi Plant, which is currently expanding scale due to increasing demand for semiconductors.

Moving on to the next property, IIF Atsugi Logistics Center III, I direct you to Page 20. This is a cold storage redevelopment for Oisix ra daichi backed by expanding the market for at-home consumption. And previously provided background details of the redevelopment, I will refrain from explaining further and asking you turn to the key indices at the right of the page.

Costs and various indicators associated with redevelopment are progressing as initially anticipated. After redevelopment, the total floor area is expected to increase approximately 40%. The appraisal value is projected to come in at JPY 7.03 billion, which translates to a significant increase of the development costs of over 25%. As a result, the investment will generate an unrealized gain of approximately JPY 2.6 billion and an unrealized gain ratio of 58.6%. This in turn will lead to an increase in NAV.

Here on Page 21, we provide a schedule of the redevelopment project. As you can see from the date if you move across at the top half of the page, demolition work will commence from the end of January 2022. Construction is scheduled to come to an end in September 2023.

Turning to the data that runs across the bottom half of the page. We provide details of distribution in excess of profits as a result of redevelopment. In the 28th, 29th fiscal periods, IIF [indiscernible] distributions in excess of profits in accordance with the company guidelines to address incidence on increasing depreciation of earnings book value for taxable income in excess of account income.

IIF will then undertake a temporary distribution in excess of profits during the construction period for temporary costs related to demolition and removal as well as a decrease in rent revenue due to downtime. After the completion of construction and in addition to the increase in revenue due to redevelopment, IIF plans to undertake an optimal payable distribution up to 30% of the property's depreciation with the annual further increase in distributions.

Moving on to Page 23. I would like to touch on early cancellation of these contracts and the status of tenant replacement. As I mentioned during the last investor presentation, we are undertaking the large-scale renovation work at IIF Kobe Logistics Center with the aim of converting it into a multi-type facility and leasing of the property after completing construction. Work is progressing in line with plans with a steady stream of leasing inquiries. From a leasing perspective, demand is high for floor space between 2,000 and 4,000 tsubo. For the purpose of these discussions, floor space is presented on a tsubo basis, the unit of area that is commonly used in Japan. 1 tsubo is equivalent to approximately 3.3 square meters.

In this instance, we have confirmed that the purpose of use of floor space of 10,000 tsubo and are aiming to quickly lease up the property.

Switching your attention to the second property, IIF Hamura Logistics Center is a distribution base for the Coca-Cola Group and is located in the Route 16 area of Hamura City, Tokyo. The Coca-Cola Group is consolidating its logistics business in the country region and has decided to cancel the lease contract prior to expiry in May 2022. IIF has already received interest several potential tenants, some of whom looking for further increase in floor space.

The current total floor area is approximately 1,180 tsubo and the floor area ratio 60.4%. With the potential to expand, IIF will decide whether to lease or redevelopment after conducting a comparative analysis of investment effects.

Here on Page 24, I would like to touch on the state of actions taken toward key tenants facing lease expiration. As illustrated by the pie chart at the top left of the page, 59.3% of all lease contracts have a remaining lease period of 5 years or more with 10.7% scheduled to expire in less than 2 years.

Drawing your attention to the table that runs along the bottom of the page, we list details of our response to a key tenant facing lease expiration in the next 2 years where rent levels exceeded more than 1% of the portfolio as a whole.

For, IIF Shinagawa Data Center, IIF has concluded a 10-year fixed-term building lease contract with the existing tenant and would realize an increase in rent.

Next, on Page 25, we provided summary of IIF's internal growth in revision to rents going forward. Looking at the first line of the table that runs across the top half of the page, IIF have signed a memorandum to partially benefit from reductions in electricity charges following the installation of LED lighting at IIF Mitaka Card Center. Details of IIF Fukuoka Hakozaki Logistics Center I and II presented in lines 2 and 3. Here, IIF has executed new fixed-term lease contracts with existing tenants. Each test, the investment corporation has successfully secured an increase in rent.

Turning to line 4 of the table, IIF is projecting an increase in rent from January 2022 in line with the completion of work to extend the existing building.

Moving on to the data provided on the bottom half of the page, we outlined the status of rent revisions. As you can see, the rent of properties that are subject to negotiation distribution are expected to fall broadly within the range of market rents. We also anticipate maintaining the current status of budgets.

Jumping slightly ahead, I will now touch briefly on trends in IIF's LTV, which continued to decline in small increments on the back of successive public offerings or [POs].

As indicated here on Page 28, the IIF's LTV based on book value came in at 48.2% owing to the recent strategic [issuance] of social bonds. While LTV on an appraisal early basis is 40.6%, IIF's stance toward LTV remains unchanged. Despite some small measure of fluctuation, our policy is to maintain LTV at around the current level.

I would now like to provide an overview of the social bonds mentioned at the start of this presentation. In connection with the issuance of ESG bonds, many investment corporations in J-REIT sector are employing proceeds procured through the issuance of green bonds to purchase properties that require environmental certification. Although such rewards differ in the project are allocated to purchase eligible social projects, the concept of issuance of social bonds is basically the same. In issuing social bonds, IIF as the only J-REIT specializing in industrial properties, decided on its own framework for eligible social projects and bank reporting.

In this instance, the investment corporation received the highest Social 1(F) rating from Japan Credit Rating Agency, Ltd.

Here on Page 30, we provide an ever view of eligible social projects. IIF [indiscernible] 5 categories of eligible social projects: facilities that contribute to medical-related developments, facilities that contribute to job creation and development of regional communities; facilities that contribute to the maintenance and improvement of social life networks, facilities that contribute to the maintenance and improvement of public lifelines and facilities to contribute to disaster prevention and the maintenance of logistics networks.

Drawing your attention to Page 31, we provide 5 indicators that match each eligible social project. IIF has identified output, outcome and impact indicators for each eligible social project. Investment Corporation plans to publish detailed annually in its ESG report and online.

Turning to the next page, I would like to comment on IIF's future refinancing activities. IIF's successfully issued a series of 10-year bonds at 0.39% and 15-year bonds at 0.68%. Despite these measures, the average interest rate for the portfolio as a whole is 0.73%, which suggests there is still room for improvement in reducing interest costs. In particular, IIF will continue to refinance existing loans with high interest rates until 2024. Meanwhile, should the current manager easing environment continue, we expect to secure further improvements in borrowing costs. Conversely, should interest rates increase in the future, we believe that IIF is fairly resilient from an increase in costs attributable to an upswing in interest rates.

In closing, I would like to touch on initiatives in the addressing ESG concerns here on Page 34. As you can see, the investment corporation has declared its intended to reach carbon neutrality by 2050. And we set a target of reducing CO2 emissions per unit by 50% in 2030 compared with 2015. Currently, IIF has successfully reduced CO2 emissions by about 30%. Every effort will be made to reduce CO2 emissions even further by switching to the procurement of electricity that is derived from renewable energy where possible for directly managed properties and by introducing the latest energy-saving air conditioners and LED lighting to reduce electricity consumption.

At the right side of the page, we provide a snapshot of initiatives undertaken at IIF Shonan Health Innovation Park. This facility switched to non-FIT and nonfossil certificate 100% renewable energy on August 1. The significance of this initiative cannot be overstated. Looking at Investment Corporation as a whole, the amount of electricity consumed by IIF Shonan Health Innovation Park is substantial. This year we'll help reduce CO2 emission with 18.8% across the entire portfolio.

Directing your attention thought the photo at the bottom left, IIF has offered certain grounds on the property free of charge to Kanagawa Prefecture for the construction of temporary medical facilities adjacent to Shonan Kamakura General Hospital.

As you can see from the fire at the bottom right, IIF has also set our group vaccination area as a mission to combat the spread of COVID-19.

In addition to tenants and invented companies, these areas also being group vaccination site by Fujisawa City.

Turning to the next page, we provide details of external recognition and certifications. Pages 36, 37 and 38 outline the initiatives in which the MC-UBS Group participants, IIF's approach towards sustainability as well as ESG materiality. For more details, we direct you to the Investment Corporation's website and ESG report where details have already been provided.

From Page 40 of the presentation materials, we provide operating results data for the July 2021 28th fiscal period, earnings forecast which for January 2022, 29th fiscal period, and the July 2022, 30th fiscal period. And major factors for changes from fiscal period to fiscal period. We ask that you review at your leisure.

This then concludes the presentation. We thank you for your interest and attention.

[Katsuji Okamoto, executive]

A brief Q&A session on IIF's July 2021 28th fiscal period results followed the presentation on September 16, 2021. 4 participants to total 7 questions. The following is a summary of the questions raised and answers provided.

Question, do you have a policy on interest and rate you place on external growth and even projects also?

Answer: External growth is indeed 1 driver of IIF's growth, taking into consideration such factors of development risk and the need to manage distributions. Increasing the rate placed on development projects is difficult within the framework of a J-REIT. Given the ongoing potential to acquire properties from external sources, IIF will focus mainly on external growth. Should the opportunity arise, however, we will consider the development of existing properties.

Question: What is your criteria for redevelopment or disposition when tenants vacate an old or underperforming property?

Answer: IIF does not necessarily undertake redevelopment when tenants back a property. We consider all 3 options of retenanting, redevelopment and disposition on a case-by-case basis. For example, the decision to redevelop IIF Atsugi Logistics Center III, was made successfully securing tenants, in contrast, the Investment Corporation disposed of this land to gain some interest in both IIF Hiroshima Manufacturing Center and IIF [indiscernible] Manufacturing Center. After seeing profitability and the level of redevelopment costs as well as the key interest purchase [indiscernible] companies. As each case arises in the future, we will make a decision based on individual characteristics.

Question: What are your thoughts on the costs and benefits of addressing ESG concerns?

Answer: Despite the expenses included the decision to switch to the procurement in electricity that is derived from renewable energy of IIF Shonan Health Innovation Park was based on the ability to manage costs with the support of the tenant. Takeda Pharmaceutical Company Limited and its own expenditures across the portfolio as a whole. With this in mind, rather than a automatically switching into our portfolio, we will consider costs and benefits going forward.

Question: What are your thoughts on the value amounts and yields of properties for which preferential negotiation rights have been acquired and where the probability of acquisition is high?

Answer: As shown on Page 15 of the investor presentation materials, the total net properties to be developed is about JPY 24 billion and roughly JPY 21 billion, [indiscernible] properties. As indicated on Page 16, the amount of properties which IIF has acquired preferential negotiation rights comes in at approximately JPY 7 billion for a total of around JPY 52 billion.

IIF target yield after depreciation falls between 4% and 4.5%. Targets by property type are around at 4% to 3 % range for logistics facilities and around the 5% to mid-4% range for manufacturing properties as well as recent and data centers.

Question: Has IIF set a limit on the maximum number of development projects at the [indiscernible] portfolio?

Answer: No specific decision has been made. While undertaking the development project, a J-REIT must take into consideration such key factors as the funds required to acquire a property in line for development, and the impact on DPU during the period of development. Moreover, the implementation of distributions in excess of profits is also subject to account and depreciation expenses pursuant to the provisions of the act on investment trust investment corporations.

At this point, we would therefore like to undertake a development in the event that a suitable property should arise rather than take steps to promote a development product. Looking at development projects that are not on the balance sheet, like the current IIF Yokkaichi Logistics Center, which utilizes the bridge funding customer leasing, IIF [indiscernible] not risk an opportunity while considering development methods.

Question: What are your thoughts for optimal payable distributions? Is there a chance IIF will introduce optimal payable distributions for existing properties?

Answer: IIF targets newly constructed properties on balance property be it on for development and relatively new properties acquired from external sources. As these properties are basically under long-term lease contracts, we believe we will be able to implement optimal payable distributions for the foreseeable future. At present, we are not looking to extend the scope of optimal payable distribution to include existing buildings that we already own and manage. At the same time, we have not set a specific building age as a condition for optimal payable distribution.

Question: Should the current interest rate environment continue, will IIF be able to procure funds at the recent low interest rate levels with respect to the issuance of such a bonds?

Answer: Drawing on the reaction investors received through securities companies, our recent issuance of social bonds seems to be well received. Amid the new instances of [indiscernible] issue, IIF social bonds are quite real. While reaching a total of JPY 5 billion in this instance, we have heard that there was demand for more than JPY 10 billion. With the successful issuance of ESG bonds at a low interest rate under our belt, we will continue to consider further opportunities as appropriate.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]