Japan Metropolitan Fund Investment Corp

TSE:8953

Earnings Call Analysis

Earnings Call Transcript 2018-Q2

[Katsuhisa Sakai, executive]

Welcome to this presentation of JRF's operating results for the 32nd Period, the 6 months from September 1, 2017 to February 28, 2018. Having assumed the position of President and CEO of Mitsubishi Corp.-UBS Realty Inc. from April this year, I would first like to extend my appreciation and ask all stakeholders for their continued support and understanding. Following in the footsteps of my predecessor Mr. Shuichi, I would also like to confirm the asset management company's commitment to maintaining the highest ethical standards on managing the assets of the investment corporation with the aim of maximizing profits and returns to unitholders.

Turning to the presentation materials, I direct your attention to the table of contents on Page 1. I will begin with an overview of JRF's business strategy before commenting on the repurchase of investment units. I will then touch briefly on the investment corporation's medium-term targets, its future acquisition strategies and sustainability management. Moving on, I will pass the microphone to Mr. Araki, Head of the Asset Management Company's retail division, who will comment on the implementation of JRF's business strategy. Mr. Araki will then provide an overview of JRF's financial results for the February 2018 period, together with forecast for the August 2018 and February 2019 periods.

Let us begin with a look at JRF's business strategy. Please turn to Page 3 of the presentation materials. Despite the change in President and CEO at the asset management company, JRF will continue to promote its existing acquisition, asset management and financial strategies. From an acquisition strategy perspective, we will build on a portfolio size that exceeds JPY 900 billion while undertaking the bold replacement of assets. As in the past, we will accelerate the shift toward urban-type properties and aim to build a portfolio that exhibits higher location advantage and tenant substitutability. Taking into consideration the ongoing purchase and sale of properties at high prices, we will refrain from rationally expanding our asset size. We will continue to adopt a stringent approach toward the acquisition of new assets while focusing on prime urban-type properties. Looking at opportunities as they arise, we will consider undertaking public offerings in a bid to secure external growth. Over and above the acquisition of new properties, maintaining and improving competitiveness through the replacement of tenants and renewal properties is an extremely important strategy for retail property REIT. Building on the experience gained from the completed large-scale renewal of Nara Family, we will work to further enhance our retail property management skills going forward. Through renewal work at various properties including, KAWASAKI Le FRONT, the second phase project at mozo wonder city and GYRE, which are planned for the future. With my predecessor, Mr. Shuichi assuming a leadership role in the development of domestic real estate at our sponsor company, I am hoping to forge even closer ties with Mitsubishi Corporation and its group company, Mitsubishi Corporation Urban Development Inc. while uncovering opportunities to acquire new properties and to cooperate in existing property renewals. While Mr. Araki will provide details of the investment corporation's financial strategy shortly, I would like to make a few comments. First, JRF repurchased its own investment units for a total of approximately JPY 10 billion between October 2017 and January this year. Taking into consideration the low interest rate environment and dominant yield curve, we also took steps to lengthen the periods of our existing debt and improve our fixed interest rate ratio, while actively exploring new procurement methods, including the issuance of green bonds, as reported in this morning's Nikkei, Japan's leading economic newspaper.

Looking now at the effect of repurchase of own investment units, please turn to Page 5. JRF completed the repurchase of its own investment units outlined during our presentation of the investment corporation's August 2017 period results on January 23, 2018. After completing this repurchase for approximately JPY 10 billion, the total number of 49,181 investment units acquired was canceled on February 9, 2018, during the February 2018 period. As indicated at the right side of the page, this repurchase of own investment units has contributed to an improvement in each of the investment unit price, DPU and NAV per unit indicators.

Directing your attention to the bottom left of the page and our approach going forward. We will continue to position the repurchase of own investment units as one option for increasing unitholders' value. JRF maintains free cash flows from its annual amount of depreciation of roughly JPY 12 billion. We envisage applying these free cash flows across 4 broad areas: one, the acquisition of properties; two, the renewal of existing properties; three, repayment of loans; and four, repurchase of own investment units. Drawing from each of these options, JRF will undertake the repurchase of its own investment units when there are no opportunities to acquire prime properties and the price of investment units are undervalued in relative terms.

Moving onto JRF's medium-term targets and future acquisition strategies, I ask that you turn to Page 7. JRF's portfolio size currently stands at JPY 910.1 billion. As I mentioned a moment ago, we continue to adopt a cautious approach toward investment, focusing closely on market trends. Should conditions remain the same, we will work toward growth and a portfolio size of JPY 1 trillion at a slow and measured pace. From an investment target perspective, we have essentially achieved our medium-term portfolio composition target announced during the Investment Corporation February 2016 period results presentation by lifting the ratio of urban-type properties to around 50%. Looking ahead, we will focus on further lifting the ratio of urban-type properties while carefully identifying consumer trends. Meanwhile, NAV per unit climbed to JPY 217,000, buoyed by the effects of repurchasing own investment units and an increase in appraisal value.

Please turn to Page 8. To date, JRF's retail properties have been classified into the 2-broad suburban and urban-type categories. Suburban-type properties are made up of type A large-scale retail properties that are in the largest class in their relevant areas and type B retail properties located in densely populated areas. Urban-type properties are divided into Type C retail properties in favorable locations adjacent to major stations and Type D retail properties in prime urban shopping districts. Having said this, that is indicated by the 4 property photos at the bottom right of the page, a significant number of JRF's suburban-type properties is located in Tsurumi ward, Osaka, the Itabashi and Nakano wards of Tokyo and Ukyo ward, Kyoto, areas with fairly large commercial and retail populations. Many of JRF's investors reside overseas. Speaking with overseas unitholders, for example, the word suburban is associated with countryside areas with small populations. In this sense, we are aware that the traditional meaning of suburban does not fully convey the nature of some of the properties in our portfolio.

Here on Page 9, we plot JRF's suburban-type properties on a series of maps. As you can see, the vast majority of JRF's suburban-type properties are located in densely populated areas near large cities where the population per square kilometer exceeds 4,000.

Please turn to Page 10. Taking the aforementioned into consideration, we have redefined and classified JRF's portfolio into 3: urban, commuter town and suburban categories. As you can see from the pie chart at the bottom left of the page, over 90% of the portfolio is comprised of urban-type properties and commuter town-type properties located in densely populated areas near large cities. As far as our future asset acquisition policy is concerned, we will purchase properties from top to bottom, focusing first on urban-type properties; second, on commuter town-type properties and then suburban-type properties. On this basis, we will continue to focus mainly on acquiring urban-type properties as our first priority. In the case of the suburban-type category, we will in principle refrain from purchasing any assets that are not large-scale retail properties with the robust ability to attract customers from a wide area.

For a comment on JRF's future acquisition strategies, I ask that you turn to Page 11. The real estate purchase and sales market is currently experiencing a difficult environment. As far as the acquisition of assets is concerned, there are only a handful of opportunities to purchase retail properties to deliver both the proper yield and quality. Despite these difficult conditions, JRF acquired full prime urban-type properties at an acquisition price of JPY 23 billion during the February 2018 period. G-Bldg. Midosuji 02 was the largest of JRF's 4 acquisitions during this period. The property is located in the Shinsaibashi area of Osaka on Midosuji Street, the largest luxury brand shopping street in Western Japan and houses the flagship store in Asia of the global luxury brand, Prada. From a target yield perspective, JRF, in principle, undertakes an equity offering for properties with the average NOI yield after depreciation of the portfolio is projected at 3.7% or more as a part of its assets acquisition strategy. For properties with the average NOI yield after depreciation of the portfolio is expected to come in at 2.9% or higher, the tendency is to undertake refinancing attributable to replacement of assets. With the exception of those extraordinary circumstances, when conditions are conducive to an accretive public offering, even in the case where property yields are extremely high, and the price of investment units forced low NAV, such as the immediate aftermath of a financial crisis, our policy of not undertaking a public offering that would dilute NAV remains unchanged.

Please turn to Page 12. Taking into consideration movements in EPS attributable to the renewal of properties, JRF continues to target a DPU of JPY 4,500 over the medium term while adopting stability measures that utilize reserves. In the February 2018 period, DPU climbed from our projection of JPY 4,330 at the time of the previous period's results presentation to JPY 4,410. This reflects the positive JPY 80 impact of the repurchase of own investment units.

Turning to the August 2018 period. JRF is projecting DPU to come in at JPY 4,430. This is again up from our projection of JPY 4,330 at the time of the previous period's results presentation and reflects the positive contribution of JPY 100 attributable to the repurchase of own investment units.

Looking further ahead, JRF is also anticipating a DPU of JPY 4,430 for the February 2019 period. While EPS is expected to tighten in both the August 2018 and February 2019 periods, owing mainly to the negative impact on rents during the period of downtime while renewals are being completed at KAWASAKI Le FRONT and the incidence of temporary expenses relating to the renewal of properties, JRF plans to stabilize distributions through the reversal of reserves.

I would now like to comment on JRF sustainability management. Please turn to Page 14. The asset management company, Mitsubishi Corp.-UBS Realty Inc. has established an environmental charter and responsible property investment policy and set up a sustainability committee in 2013 to promote group-wide discussion and awareness while incorporating ESG concerns in the investment corporation's asset investment and management processes.

Please turn to Page 15. JRF engages vigorously in sustainability management. As a part of these endeavors, the investment corporation is taking steps to become the first J-REIT to undertake the issuance of green bonds. Green bonds are financial instruments issued by operating companies, funds, local governments and related entities for the purpose of funding Green projects. JRF has identified certain properties that fulfill the eligibility selection and evaluation criteria of the asset management company's sustainability committee as eligible Green projects. This eligibility criteria encompasses properties with a rating of 3 stars or higher under the DBJ Green Building Certification program or B+ or higher CASBEE for Building Certification. The total amount of debts for eligible Green projects is calculated by multiplying the total book value of eligible green projects by the LTV ratio, excluding tenant leasehold and security deposits. This amount is then recognized as the theoretical upper limit of green bond issuance.

Following today's presentation, we will consider the propriety as well as terms and conditions of a potential issuance through marketing activities aimed at investors. The issuance of green bonds will mark a milestone as the first such initiative by a JREIT.

Here on Page 16, I would like to touch briefly on instances where JRF's various sustainability activities have been recognized by external organizations, beginning with the investment corporation's inclusion in the MSCI Japan ESG Select Leaders Index. This is especially significant following the decision by the Government Pension Investment Fund to utilize the MSCI Japan ESG Select Leaders Index as one of its ESG indices and commence passive investment checking the index. As a result, domestic institutional investors, including artificial funds, are also expressing their keen interests. Moreover, 3 new properties have received CASBEE for Building Certification and 2 properties DBJ Green Building Certification for a total of 5 additional properties. In another bid to contribute to society, the investment corporation set up a polling station for early voting at Nara Family. At the same time, JRF is continuing its support for the used books donation initiative to support children's futures organized by the Secretariat for the National Movement to support children's futures run by the Cabinet of[indiscernible] Japan and other shopping centers in Abiko. Moving forward, JRF will continue to vigorously engage in sustainability management.

With this, I conclude my portion of this presentation. I would like to hand the microphone to Mr. Araki.

[Keita Araki, executive]

Thank you, Mr. Sakai. In my capacity as head of the asset management company's retail division, I would like to comment on the implementation of JRF's business and financial strategies before elaborating on the investment corporation's financial results and forecast.

Please turn to page 18. The ratio of AEON group and Ito-Yokado master lease properties has fallen substantially from around 50% to 29% over the past 5 years. In addition, steps have been taken to dispose those suburban-type properties that have seen their competitiveness steadily decline with a particular focus on GMS-type facilities from 2015. As a result, the ratio of GMS-type facilities compared with the portfolio as a whole has declined dramatically to roughly 12%. Looking ahead, JRF will concentrate on the acquisition of mainly urban-type properties. On this basis, we can expect the ratio of AEON group and Ito-Yokado master lease properties, including the portion made up of GMS-type facilities, to contract even further. This, in turn, will minimize the overall impact on the portfolio in relative terms. Meanwhile, the volume of floor space under direct lease agreements has increased to 570,000 square meters, coupled with an upswing in the percentage of fixed term lease contracts to 62.1% and a tenant network that has expanded to 962, we are well placed to boost earnings on the back of our SC management capabilities.

Shifting to the investment corporation's internal growth strategy, please turn to Page 19. In similar fashion to the previous presentation, the size of each circle and oval is indicative of the size of JRF's investment in each project. While the length of each red line represents the downtime in rent attributable to the period of construction. First, and as depicted at the left side of the page, renewal work at Abiko Shopping Plaza continues to progress smoothly. The project is expected to come to an end on April 25, in line with plans. Looking at projects underway in 2018, second phase work at the mozo wonder city, the renewal of GYRE and urban-type flagship store and a large-scale investment plan at KAWASAKI Le FRONT, are scheduled from the August 2018 period. Through these and other means, the investment corporation will work to further enhance the competitiveness of its facilities.

Since 2014, JRF has undertaken the renewal of a number of properties, including first-phase projects at Oyama Yuen Harvest Walk and mozo wonder city as well as Nara Family. While KAWASAKI Le FRONT is the only large-scale renewal project currently in the works from 2019, plans are in place to undertake several smaller-scale projects, including these third-phase projects at mozo wonder city and Oyama Yuen Harvest Walk as well as Kyoto Family. Taking these factors into account, large-scale renewal projects, such as the first-phase project at mozo wonder city and Nara Family that have continued for several years since 2014 placing considerable negative pressure on net income as a result of the extended period of downtime will come to an end on the completion of work at KAWASAKI Le FRONT.

The table on Page 20 provides details of renewal projects completed since April 2014, by the type of renewal as well as capital expenditure and the effect of each investment. Due to the different effects on profitability by each renewal project, we have classified renewal investments into 3 broad categories. Investments that are made with the aim of increasing profitability are classified as Defensive, Stay investments are those that while profitability is roughly the same, are geared toward maintaining the competitiveness of each property through such means as the updating of facility's environment and revising MD structure. Defensive investments include those intended to minimize, wherever possible, any decline in profitability at properties that are expected to suffer a downturn in revenue due to a variety of factors, including changes in the competitive and surrounding environments. The goal in this instance is to stabilize earnings. Although JRF will vigorously undertake offensive investments, steps will also be taken to adopt the Stay or Defensive approach as and when required and to continue to hold certain facilities when properties can be expected to generate stable medium and long-term earnings, while matching efforts to achieve the targeted portfolio.

Please turn to Page 21. Building on our explanation following the completion of renewal work at Nara Family at the time of our last results presentation, I would now like to comment on the status of progress over the ensuing period. Since our previous discussions, we have ramped up efforts to raise awareness towards the renewal work completed at Nara Family. This has included a review of promotional initiatives placing greater emphasis on raising the property's profile and enhancing the ability to attract customers. The goal has been to capture the growing number of customers encouraged to visit Nara Family, thereby boosting specialty store sales. In specific terms, we appointed a sales promotion company with attributes best suited to facilities where the focus is on raising the quality of tenants. We also held several events that hit the sweet spot of targeted customers, some of which are presented at the right side of the page. We increased facility advertising that draws on the unique attributes of the region in collaboration with Nara City in order to attract inbound tourists. Again, in the context of attracting inbound demand, we introduced a UnionPay Card settlement system to encourage travelers from China to use the facility. Our goal is to strengthen efforts aimed at attracting customers in order to boost purchases. We also reinforced efforts geared toward increasing card memberships among customers visiting the facility. As a result, the total number of Nara Family card members climbed 31% compared to the level prior to renewal work. Against the backdrop of an aging customer base, we saw the number of membership jumped 45% among customers under the age of 39. As indicated along the top line of the table at the top left of the page, these efforts contributed to steady year-on-year increases in specialty store, key tenant and total facility-wide sales of 5%, 2% and 3%, respectively, for the 5-month period from November 2017 to March 2018.

The graph at the bottom left of the page plots year-on-year trends in specialty store sales on a monthly basis since November 2017. As you can see, sales for both floors subject to renew and total specialty stores have climbed close to 10% year-on-year since December. In addition, we took steps to replace the property management company in March. In this manner, we are placing considerable emphasis on frontline-based management that matches the attributes of the facility. In the future, we will further increase facility-wide sales through a series of ongoing improvement measures. The goals are to maintain the facility's leading position in terms of sales in Nara prefecture and to strengthen profitability.

Here on Page 22, we provide an overview of KAWASAKI Le FRONT, a property that JRF acquired in 2013. While factoring in weak sales at Marui Company Limited, the principal tenant, this urban-type facility in an excellent location maintained NOI yields before and after depreciation of 6.2% and 5%, respectively, outstripping the portfolio average. With this in mind, KAWASAKI Le FRONT is a property that contributes significantly to earnings. As expected, Marui closed its business in the middle of January and is scheduled to vacate the premises toward the end of April. Confident in our ability to maintain a high NOI yield after depreciation as well as the facility's competitiveness by undertaking certain investments, renewal plans are currently underway in earnest. The decision to promote renewal plans was based on a variety of factors. First, the property is located in front of Kawasaki station, a major metropolitan terminus; second, the surrounding area is recognized as a fertile market with a population of 1 million within a 5-kilometer area that is continuing to expand; third, KAWASAKI Le FRONT is the largest retail facility of its kind at the east exit of Kawasaki station with a lease area that exceeds 50,000 square meters. Taking these and other factors into consideration and by improving the facility's environment while putting in place a tenant profile that is unique compared with surrounding facilities, we are convinced that the property is capable of maintaining its competitive advantage over the medium to long term. In undertaking renewals, we are looking to position KAWASAKI Le FRONT as the leading retail facility at the east exit of Kawasaki station. We are working to increase daily foot traffic within the immediate commercial and retail area and to attract customers from a broad trading area in excess of 5 kilometers that had been lacking until now. To achieve these objectives, we plan to introduce new tenants that can attract customers on a daily basis and also entertain. Moving forward, every effort will be made to differentiate KAWASAKI Le FRONT from surrounding facilities. In specific terms, renewal plans encompass an area of approximately 30,000 square meters. In addition to the sections vacated by Marui, this also includes specialty store areas. As far as the sections previously occupied by Marui are concerned, the first floor is being converted to a supermarket. With more than just shoppers in mind, we plan to establish a new food court on the second floor in an effort to attract surrounding office workers.

Looking at the aerial shot of the surrounding area pictured at the left of the page, Cube Kawasaki, an office building managed by MCUBS MidCity is located adjacent to KAWASAKI Le FRONT. From an operating perspective, we also plan to pursue opportunities for collaboration and to harness the strengths of the group. On the ninth and tenth floors, we are working to attract tenants with considerable entertainment appeal. The goal is to cover as broad an area as possible to pique the interest of consumers with specific objectives in mind.

On the leasing front, our efforts are progressing extremely well. This reflects the facility's competitive location in front of Kawasaki station. With the exception of the large entertainment areas on the ninth and tenth floors, we have already received firm interest to open new stores for more than roughly 70% of the total leasable area. As far as the large entertainment areas are concerned, we're engaging in negotiations with several candidates.

In undertaking renewal plans, we withdraw on the experience gains through past endeavors, including Nara Family. We will pay particular attention to putting in place an earnings structure that is capable of minimizing the downside risks associated with any dropping rent in the event tenant sale should decline. In specific terms, we will look to fix around 80% of rents for the facility as a whole. If it's to fix rents, we'll continue after also introducing systems for setting sales best trends with guaranteed minimums. In the event that any decline in tenant sales exceeds expectations, these initiatives will help secure a certain level of rent. In the event that sales should increase, we will utilize a mechanism that will ensure an increase in sales-based trends. Our goal is to eliminate any business plan downside risk wherever possible.

We provide a business schedule at the bottom right of the page. We plan to open space on a progressive basis in line with the relocation of certain tenants and other factors. The sections previously occupied by Marui and lower specialty store floors are scheduled to open in spring next year during the August 2019 period, followed by specialty store upper floors in the fall of 2019 during the February 2020 period and the ninth and tenth entertainment floors around March 2021. Also in the table at the bottom right of the page, we provide details of downtime as well as temporary expenses, including losses on disposals and maintenance, while renewals are under-weighed by period. The downtime in temporary expenses associated with renewals will have a negative impact on net income from the August 2018 period. We intend to stabilize distributions by undertaking reversals of reserves as required.

Next, I would like to comment on mozo wonder city. Please turn to Page 23. Completed in 2009, mozo wonder city has a total leasable area of around 87,000 square meters and annual sales in excess of JPY 50 billion. This property is the leading large-scale shopping mall in the Tokai region, which covers the area between Tokyo and Osaka. Since the facility opened, we have witnessed an upswing in retail property and other development activities in the surrounding areas, including in front of Nagoya station. Against the backdrop of an increasingly competitive environment, which includes the opening of LaPorte Nagoya Minato within a 10-kilometer area in the fall of this fiscal year, we will undertake renewals on a periodic basis in order to maintain and improve the competitiveness of the property.

Following in the footsteps of the first-phase project in 2015, I would like to comment briefly on the second-phase project. In this instance, the major tenant experienced a deterioration in sales efficiency was asked to cancel its agreement. Efforts are being channeled towards splitting the space into smaller lots and attracting multiple popular tenants with the ability to appeal to large numbers of customers. In this manner, we are working to increase profitability. By inviting such high-profile companies as Tokyu Hands Inc. to take up space, thereby lifting the facility's appeal to customers, revitalizing the west side interest through to Kami-Otai station and implementing a variety of other measures, we will secure a high NOI yield after depreciation and maintain the competitiveness of the facility through the outlined renewal plan. Details of the second-phase project are provided at the bottom left of the page. As you can see, the plan is scheduled to conclude after commencing work on a progressive basis in line with the expiration of existing tenant contracts from February to December this year. Based on an investment amount of JPY 790 million, the return on this project is expected to come in at 10.9%.

Here on this page, we touch briefly on another property in JRF's portfolio. While, Abiko Shopping Plaza contributes to earnings with an NOI yield before and after depreciation of 6.3% and 4.4%, respectively, in fiscal 2016, well above the portfolio average, the anchor tenant Ito-Yokado is experiencing a downward trend in sales, following the opening of Ario Kashiwa within a 5-kilometer area in 2016. However, the commercial and retail zone within the 3-kilometer area is made up of large numbers of high-income households with a population of 120,000. Following deliberations with Ito-Yokado a portion of the third floor GMS sales area was returned and earmarked as part of an expansion of the specialty store zone. Confident that we will also be able to maintain a high NOI yield after depreciation as well as the competitiveness of the facility, we are undertaking renewal with a view to opening on April 25. The key features of this renewal plan include renovating the sales space at Ito-Yokado and expanding the specialty store zone. Working to attract tenants that match the daily requirements of consumers, we will open 40 new stores while relocating and renovating 16 other stores within the specialty store zone of 56 stores. In order to increase the frequency and duration of visits by consumers, we are taking steps to set up an open lounge area on the third floor and a community space in front of the external entrance. Our aims are to emphasize the ability of the property to address customers' needs on a daily basis and further entrench the facility as an essential part of the region and community.

Looking at JRF's internal growth strategy from another perspective, I would like to touch on certain examples of rent increases at urban-type retail properties. Please turn to Page 25.

Currently, the rent gap for all urban properties stands at roughly 4%. This reflects the rate of deviation between contract rents and market rents identify in appraisal reports.

Turning to the graph at the left side of the page, we provide details of the amounts of monthly rents, subject to review by period. For example, in the February 2018 period, contracts with monthly rents totaling JPY 1,104,000,000 was subject to review. Rents were increased for 53.7% of this total and decreased 12%. On a net basis, this came to an increase of JPY 11.2 million. Even though the timing of rent revisions for the August 2018 and February 2019 periods are sometime in the future, steps have been taken to commence the renewal of certain August 2018 period contracts. In each case, we have secured an increase in rents.

The portions of each barcode in blue in the graph represent a downward revision in contract rents from the August 2017 to the August 2018 periods. This downward revision largely reflects a temporary increase in the rents of specialty store tenants at KAWASAKI Le FRONT during the period of renewal project work. If we exclude KAWASAKI Le FRONT, we are, for the most part, seeing the renewal of contracts on an increased or at least a Stay basis, at the time of each rent review for urban-type properties.

Looking at the examples of the upward revision of rents at the right of the page, I would like to comment in more concrete terms on instances where we are continuing to realize increases in rent with respect to urban-type properties. First, at G-Bldg. Minami-Aoyama 01 Building A, we have secured an 11.1% increase following a revision of the existing tenant’s agreement. At G-Bldg. Jingumae 06, we worked actively to attract a replacement tenant as existing tenant's contract came to an end. Through successful negotiations, we achieved a 9% increase in rent. At G-Bldg. Minami Ikebukuro 01, we undertook negotiations with a view to increase rents in line with the expiration of a fixed plus sales-linked format contract. Based on these negotiations, the tenant agreed to the switch to a fixed-rent agreement and a 41.9% increase in rent.

Please turn to Page 26. As I'm sure you are all well aware, the retail environment is experiencing dramatic change amid the steady advance of e-commerce and rapid expansion toward network society filled with SNS and other sites. Despite growing concern toward the impact of this change on the performance of retail facilities, online operators, including Amazon and Rakuten companies that are enjoying remarkable results are venturing into the field of brick-and-mortar stores. In this instance, these operators are working to provide customers with a complete shopping experience, thereby maximizing the strengths inherent in physical stores. Based on this concrete trend, we are seeing an upswing in new types of tenants, especially in high-traffic urban areas.

For its part, JRF is working vigorously to attract these new types of tenants by utilizing its SC management capabilities. As indicated at the left of the page, a concept shop of the leading men's fashion magazine, Safari, is scheduled to open at Marine & Walk Yokohama on April 27, functioning as an e-commerce showroom, customers can try on popular items that are featured in the magazine and then place an online order.

Looking at the center of the page, a number of limited period pop-up stores are opening at GYRE and CUTE CUBE Harajuku and the Omotesando, Harajuku area. Making the most of this prime location, LONG! LONGER!! LONGEST!!!, which boosts Japan's longest soft-serve ice cream, Lipton and the luxury brand, KENZO are the featured examples. Due to their considerable popularity, we are seeing an increase in magazine and television coverage. In addition to the tenants involved, this phenomenon is contributing to an upswing in sales for these facilities as a whole. Recognizing the ability to disseminate information and attract customers, properties in prime locations can also help address the need to open stores with uniquely new formats. In specific terms, THE Millennials, an innovative accommodation format that is targeting the millennial generation and opening stores in prime urban areas has successfully attracted customers at an inaugural facility in G-Bldg. Kyoto Kawaramachi 01 and a second facility in G-Bldg. Shibuya 01. In addition, glo, which mark its next-generation heated tobacco products opened an experienced-based flagship store in G-Bldg Umeda 01 in front of Osaka Umeda station. Looking ahead, JRF will strengthen its investment in urban properties in prime locations and work vigorously to attract new types of tenants that place considerable importance on the ability to disseminate information and attract high levels of traffic. By delivering a shopping experience that is unique to brick-and-mortar retail properties, we'll increase the competitiveness and profitability of facilities.

Once again changing track, I would like to comment on JRF's financial strategy. Please turn to Page 27. As you can see from the maturity latter on this page, the amount of repayment each period is roughly JPY 25 billion. JRF has also secured a commitment line of credit totaling JPY 60 billion, which allows it to address any sudden financial crisis. A snapshot of refinancing activities undertaken between November 2017 and March this year is provided at the bottom left of the page. Over this period, JRF refinanced debt totaling JPY 23 billion and extended the average borrowing period from 5.9 years up to 8.3 years. At the same time, we were successful in substantially reducing the average debt cost from 0.8% to 0.63%. A total of JPY 107.5 billion is scheduled for refinancing up to the August 2020 period. Should conditions through occupant’s current financial markets remain unchanged, we anticipate undertaking borrowings at a cost that falls well below the average interest rate of existing debt of 1.39% going forward.

As indicated at the bottom right of the page, JRF maintains floating rate debt totaling JPY 21 billion repayable at any time as part of its total interest-bearing debt balance of JPY 405,991,000,000. While the investment corporation engages in diverse strategies that include the replacement of properties and issuance of various investment corporate bonds, it remains committed to funding flexibility that allows the repayment of debt in line with strategy implementation.

Please turn to page 28. Looking at trends in key financial indices, JRF's long-term borrowing and fixed interest ratios came in at 98.9% and 95.4%, respectively. The average loan term remaining until maturity comes in at 4.4 years, and the average cost of debt at 1.09%. Our book value LTV is 50.8%, and our LTV ratio, excluding tenant leasehold and security deposits, is 45%. For reference, JRF's LTV on a market value basis is 46.1%. This reflects the substantial amounts of unrealized gains. JRF maintains an LTV benchmark range of between 45% and 55% on a book value basis. Our acquisition capacity comes in at approximately JPY 85 billion at the upper limit of 55%.

Taking a quick look at the investment corporation's reserves, I direct your attention to Page 29. JRF currently maintains 3 types of reserves totaling JPY 5,089,000,000. On this basis, reserves per investment unit comes in at JPY 1,944. Details of the application reserves are presented at the bottom left of the page. We will continue to allocate reserves to such items as temporary expenses in connection with renewal and reconstructing of existing assets and to cover various circumstances, including downtime. Application was also extended to the stabilization of distributions.

The graph at the right of the page plots trends in reserves. A portion of the gain on sale of suburban properties together with a portion of the penalty received during the February 2018 period were credited to the investment corporation reserves. As a result, the balanced reserves stood at the aforementioned JPY 5,089,000,000 as of February 28, 2018. Moving forward, JRF plans to apply a portion of its reserves to cover the temporary drop in earnings attributable to renewal projects in KAWASAKI Le FRONT and mozo wonder city from the August 2018 period. Accounting for these factors, the balanced reserves is projected to come in at a substantial JPY 3,111,000,000, as of February 28, 2019.

I would now like to elaborate on JRF's financial results and forecast. Please turn to Page 31. Here, we provide a summary of JRF's financial results. The investment corporation's performance for the February 2018 period and forecast for the year to follow are presented from the next page. To begin, I would first like to comment on certain key points. Turning to the February 2018 and August 2018 periods. Previously announced forecast represented on the left side of the bar format data for each period. In each case, the effect of repurchasing own investment units has been added to forecast announced on October 16, 2017. In summary, net income increased compared with forecasts due mainly to the acquisition of properties and reductions in maintenance expenses in the February 2018 period. As a result, the allocation to reserves increased from the initial forecast to JPY 7,190,000, up JPY 2,720,000, bringing DPU to JPY 4,410.

Looking ahead, we recognize that JRF would encounter in a regular environment with temporary expenses and downtime associated with overlapping renewal projects mainly at KAWASAKI Le FRONT and including the second-phase project in mozo wonder city and GYRE, placing considerable downward pressure on earnings. As a result, net income is projected to decline substantially in the August 2018 and February 2019 periods. To offset the effects of the temporary expenses associated with large-scale renewal projects indicated by each text box and the downtime indicated by the blue bar graph, JRF will draw on a portion of its reserves.

Turning then to distributions, DPU is expected to come in at JPY 4,430 for each period. After excluding properties undergoing temporary renewal, the fund as a whole is exhibiting an upswing in earnings power. As each renewal project is completed, JRF is expected to draw one step closer to its medium-term DPU target of JPY 4,500.

On Pages 32, 33 and 34, we outlined financial results and forecast in more detail. When you first adjust profit and loss performance in the February 2018 period, I direct your attention to Page 32. At the top right of the page, we provide details as the major factors behind changes in JRF's financial results in the February 2018 period compared with the August 2017 period. As you can see, operating revenue grew JPY 955 million. This included increases of JPY 851 million attributable to such factors as penalty income in connection with Marina & Walk Yokohama and JPY 387 million from increased rent following the acquisition of new properties including G-Bldg. Kobe-Sannomiya 01 and G-Bldg. Midosuji 02. Meanwhile, operating expenses climbed JPY 226 million, owing mainly to the upswing in expenses related to newly acquired properties of JPY 120 million and an increase in repairs and maintenance costs in existing properties of JPY 161 million. There were no major changes in nonoperating revenue and expenses. As a result, net income came in at JPY 12,232,000,000, up JPY 806 million compared with the previous period. Accounting for the increase in reserves of JPY 719 million as well as a straight-line amount of reserve depreciation of JPY 31 million, the total amount of distributions came to JPY 11,545,000,000. Taking into consideration the cancellation of investment units following the investment corporations repurchase activities, DPU was JPY 4,410 for the February 2018 period.

Turning to the bottom right of the page. We provide details of the major factors behind changes in JRF's financial results in the February 2018 period compared with revised forecast announced in October last year. Net income for the period under review was JPY 449 million higher than revised forecast announced in October 2017. This was mainly due to the increase in rent following the acquisition of G-Bldg. Kobe-Sannomiya 01 and G-Bldg. Midosuji 02 and increase in other revenue attributable to revenues associated with restoration of existing properties to their original condition, and reductions in repairs and maintenance costs at each property. Accounting for these factors, the allocation to reserves climbed JPY 450 million compared with the revised forecast. As a result, DPU came in JPY 4,410.

Turning to the next page, I would like to touch briefly on JRF's balance sheet as of the end of February 2018 period. As of February 28, 2018, total assets stood at JPY 902,191,000,000, up JPY 4.5 billion compared with the balance as of August 31, 2017.

Looking at the characteristics of major changes in balance sheet items, the acquisition of new properties boosted assets by JPY 31,046,000,000. Cash and deposits declined JPY 21,778,000,000, owing to such factors as the repurchase of own investment units. Total liabilities came to JPY 469,210,000,000, up JPY 13,546,000,000. Major movements included an increase in interest-bearing liabilities of JPY 13.1 billion. Unrealized profit climbed JPY 8,012,000,000 to JPY 135,188,000,000.

Here on Page 34, I would like to comment on profit and loss in the August 2018 and February 2019 periods as well as the major factors that are expected to underpin changes between periods. At the top right of the page, we provide details of major factors behind changes during the August 2018 period compared with February 2018 period. Operating revenue is projected to decline JPY 1 million. In specific terms, rent contributions for the full period from properties newly acquired are estimated to come in at JPY 301 million. Revenue will also increase JPY 483 million after deducting the decline in rent associated with downtime from revenues relating to the restoration of KAWASAKI Le FRONT to its original condition. In contrast, operating revenue will be negatively impacted to the tune of JPY 799 million due to such factors as the absence of penalty income in connection with Marina & Walk Yokohama posted during the February 2018 period.

Operating expenses are anticipated to grow JPY 1,528,000,000. In addition to expenses relating to the restoration of KAWASAKI Le FRONT to its original condition as well as repairs and maintenance expenses of JPY 996 million, we expect an increase in repair and maintenance expenses of JPY 430 million at other properties. Accounting for these factors, operating income is forecast to come in at JPY 12,941,000,000, down JPY 1,530,000,000. Net income is then projected to total JPY 10,703,000,000.

JRF plans to undertake the reversal of reserves of JPY 894 million to partly offset the temporary expenses and downtime as a result of renewal projects at KAWASAKI Le FRONT and other properties. On this basis, total distribution is estimated to come in at JPY 11,597,000,000 for a forecast DPU of JPY 4,430.

Finally, I would like to touch briefly on forecast for the February 2019 period. Again, at the bottom right of the page, we provide details of major factors behind changes compared with the August 2018 period. Operating revenue is projected to fall JPY 1,167,000,000. This is largely due to the absence of revenues relating to the restoration of the sections previously occupied by Marui Company Limited to their original condition at KAWASAKI Le FRONT. We estimate that operating expenses will decrease JPY 800 million. While on the one hand construction costs relating to renewal work at KAWASAKI Le FRONT are anticipated to climb, this will be more than offset by the absence of expenses relating to the restoration of KAWASAKI Le FRONT to its original condition of JPY 905 million. As a result, net income is forecast to total JPY 10,514,000,000, down JPY 189 million. Based on this forecast, we intend to reverse drawdown reserves by an amount totaling JPY 1,083,000,000, bringing the amount of total distribution to JPY 11,597,000,000. This will allow us to declare a DPU of JPY 4,430, unchanged from the forecast DPU for the August 2018 period.

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