Ichigo Inc. (ICHIF) Q2 2026 Earnings Call Transcript

2025-10-15 13:46:37 ET

Ichigo Inc. (ICHIF) Q2 2026 Earnings Call October 14, 2025 8:00 PM EDT

Company Participants

Scott Callon - Chairman & Representative Statutory Executive Officer

Conference Call Participants

William Montgomery
Gregoire Brillaud

Presentation

Scott Callon
Chairman & Representative Statutory Executive Officer ...

I'm Scott Callon, Chairman of Ichigo. Thank you very much for joining today. I'm joined on my right, Tet Fujita, who is our Lead Independent Director; and on my left by Dan Morisaku, who is a senior member of Finance team and Head of our Global IR. We're going to be going through the FY '26 to the February 2026 first half corporate presentation that's in front of you. Thank you so much, everybody, for joining. We're really grateful for your time.

So let's start on Page 6. One of the things you should know, we changed a name of one of our earnings classifications. We were calling it all-in operating profit. We've changed it to business profit. There's no change in the definition of itself. The reason we changed it is because we started doing this disclosure, and I'll go into some more details a couple of years ago. And since then, a number of big Japanese real estate firms have started using an equivalent disclosure and they're calling it business profit and just felt like it was the -- it was easier for investors to use a similar naming scheme for it.

It was also a little bit by calling it all in. People thought it was possibly all in everything, but the [indiscernible] So we went -- we made a name change. So going forward, it's going to be business profit, BP as opposed to all-in OP. I hope that's okay. All right.

So on to the summary for the first half. Business profit, we think these are the 2 major KPIs we should be focusing on. business profit, which is a broad definition that encompasses our core operating earnings and cash EPS are the 2 major measures -- earnings measures for the firm. So one of them was up 60% year-on-year and the other one was up 52%. So it was a very strong quarter. It's -- the business environment is superb, and we run forward.

Stock earnings up 14% year-on-year, flow earnings up 91%. As you know, we have a business where we have very strong sustainable recurrent profitability coming off of just kind of stock, meaning kind of recurrent contractual earnings and then on top of that, we have flow earnings. We are forecasting record earnings for the year that will bring in EPS at JPY 38. So EPS growth higher than net income growth because of the effect of the share buyback, put us an ROE of 14% and cash ROE of about 18%.

In the first half, we completed a JPY 5 billion a year share buyback. We acquired on the acquisition side. The main thing that we did is we acquired 3 hotels with value and upside. The hotel market is very strong. It's also inefficient, and there are opportunities for us to deploy our capabilities there that we think are very powerful and will drive forward earnings for us. So just to show you how OP plus extraordinary gains feeds into business profit.

One of the things that we do, we exist to serve shareholders in the world, we use the tax shield of declaring assets to be fixed assets. So if you carry your assets as current assets, you don't get depreciation. If you put into the fixed asset category, you do. And so you get a tax shelter result, it means you generate more cash flow. And we serve, as I said, shareholders in the world by having stronger cash flow, we can deploy that cash against forward investments or buybacks. And so that's really, really positive. That's why we have cash earnings that are 1.3x our accounting earnings.

But the impact of that is when you put assets -- and this is an accounting definition, it has real-world impact because it gives us a tax shield and generates higher cash flow for us. It means that when you record the gains and there are gains on the value add, it shows up as extraordinary gains as opposed to part of operating profit. So because we are literally taking similar assets and the ones that we can get away with putting into fixed asset categories we get the tax shield, we put into a fixed asset category, but they are equivalent assets to what we have in current assets, you want to be able to have a broader look at what our total profitability is from our value activity, and that's what business profit does for you. So business profit is up 60% year-on-year. And as I say, it's been very robust.

To look at the breakdown of this. And in fact, we have a little bit of logistics issue because the camera is right in front of me and is blocking my view on the screen, I'm going to look down on occasion. But that's fine. We're going to go forward anyway. The year-on-year activity has -- is up 60%. If you look off to the right, you can see that on the full year, at the forecast, we're expecting Asset Management down 31%, Sustainable Real Estate to be up 67%, Hotel down 33%. So we have an adjustment and I can see the screen. That's good. Thank you very much. Ichigo Owners up 68%, Clean Energy is down 13%. And the total is we've got year-on-year, we're forecasting up 14%.

And so we, of course, always expect to beat our forecast, and you should expect us to also. But what I'm pointing to here is we have a portfolio of businesses. They all deploy our capabilities in value-add in real estate. Clean Energy is an example of that of us taking undeveloped and kind of unused land in many cases, former factories, schools, dumps and turning that in solar and wind energy. But there's going to be some volatility among the segments, but there's a portfolio effect and diversification effect that's very, very powerful.

What we do at the beginning of every year is we don't forecast in the case of the REITs, any performance fees. And yet there is significant activity within the REITs. They do generate value-add gains, and we do result in performance fees. So just as an explanation, we end up with -- and go to Page 10, the previous page, we end up with generally a year-on-year forecast that's down, so you can see asset management forecast down for the year, we'll find out together whether or not there is activity in the REITs that results in performance fees.

But you should not be surprised if we end up beating that by a lot because we will if we have performance fee activity, related activity out of the REITs. So I will go quickly through -- we just jumped past 11 asset management. I will go quickly through all these slides, but only very quickly and just kind of highlight things.

So I think I've said my bit on asset management and turning to SRE, so sustainable real estate. What's worth pointing out here and just to kind of go to some kind of more unusual activity because as you know, we want to have ongoing disclosure that's consistent. And so you see a lot of the same information and it's updated in the current period. And so I'm not going to go into a lot of detail about why we presenting information and hopefully, it's self-explanatory. But we had -- in flow earnings, we had a significant contribution from a gain on sale on a data center investment that we were involved in.

We have -- data centers are really interesting. We're constantly looking for opportunities for us to create value in new asset classes, and we have been involved in data centers and took a JPY 2 billion gain on that. We also exited -- as part of a cleanup, we did some things that were kind of small scale and didn't work out, for example, in coin laundries. I mean we have things that we experiment as a firm. Similar to Amazon, we're happy to have things go wrong, only go wrong at small scale, but there are opportunities to learn.

As you know, we entered the storage business that went phenomenally well. We exited a massive gain. There was some idea that maybe coin laundry would be interesting. No, it hasn't proved to be interesting. So we entered, we exited and we took some gains of sale on the exit in this quarter.

Hotel, what's worth pointing out is that we have 2 branded hotel chains, one of them is the KNOT, which is kind of a higher-end lifestyle or boutique hotel. Another one is the OneFive. These are both Ichigo proprietary brands. OneFive is kind of a lower cost point, but very good food from -- Japan people really care about good food. I think people visiting Japan do also. And so it's kind of a point of -- that's interesting to our guests. They come and they stay in Japan and they stay at the hotel and they have really good food. Anyway, so 3 of those hotels, one in Tokyo, one in Hiroshima and OneFive Osaka Namba have been key to driving the hotel earnings.

Ichigo Owners, you'll have kind of volatility from quarter-to-quarter based on whether or not we have a transaction in terms of selling portfolio, we did, and therefore, you had to earnings up doubled year-on-year. We expect to have security token activity and portfolio sales in the second half. The year is looking quite strong. Clean Energy is pretty much kind of flat year-on-year. I said this before, we want to grow this business more. I'll talk a little bit about later. But at the moment, it's just a solid contributor with a significant contribution from cash contribution, earnings contribution from lower depreciation attached to it in addition to the earnings that we generate on an accounting basis.

So again, we are forecasting a record business profit -- I mean, record everything, operating profit, stock earnings, flow earnings, net income across the board, but this shows kind of how this all ties together by segment on business profit. It is an important element of our business that we're structurally profitable. Our stock earnings, so again, these are kind of -- these are fixed -- relatively fixed earnings, contractual ongoing. They're not capital gains, let me clear that, that are going to show up in flow earnings, are generally about twice our fixed expenses. And so even we do nothing on the flow side, and we always do things on the flow side, we are profitable.

And stock and flow earnings, both are expected to be record this year. Again, there are going to be some pages why I barely say anything, this is going to be one of them. This shows where our stock earnings break up across the segments, again, quite diversified. We have a strong financial base. We're careful about how we borrow and diversification of our borrowing and most importantly, by the tenor long-term borrowing. So 85% of our borrowing right now is long term. We've actually did a certain amount of bridge activity that we're going to lengthen out this year.

So we'll probably be banging up more above 90%. But the point of the matter is that we borrow very long term. It's important to have that solid structural and durable underpinning for the liability side of our balance sheet. So dividing across our businesses, we borrow primarily for the sustainable real estate business and hotels that -- generally these are 10-year borrowings, Ichigo Owners has got a 1-year turnover and to show how conservative we are with about kind of the length of our borrowing, even though it has 1-year turnover, we generally borrow for 7 years.

So as we've been growing our Owners business, it's a 7-year borrow versus a 10, it means the average length of our borrowing has gone down a little bit, but this is a very, very durable coverage over kind of in terms of our asset liability management. So the one thing that's worth pointing out on the page, of course, is that interest rates have gone up. So a 36 basis point increase in interest rates over the last 18 months, it is more than covered by the extraordinary increase in replacement cost, meaning construction cost, giving us much more value in terms of our existing assets.

People classically describe Japan as an open supply market, right. There are very few restrictions on building. But the problem is not that there are very few restrictions in the building in terms of owning existing assets. The problem has always been there's been no inflation. And so someone can put a new building next door to yours built at the same price as yours 20 years ago. That is not the case anymore.

There's been an absolute surge in inflation -- construction inflation, it's running probably 3x or so of more general inflation. The data that you see coming out on the construction industry implies it's only running about double. I can tell you that's not accurate. What's going on is people are in order to get things done, you need to pay more to accelerate the build itself. So you're seeing inflation running -- construction inflation running at something like 10% per annum, and that's pushing up replacement costs.

And what it means is when you put up a new building, you're putting up at a massive premium to what an existing building is similar was the case historically been in, for example, U.S. and Europe. And it means that we're able to raise rents. So that's one thing that's powerful for us in terms of our balance sheet is suddenly, we have the ability to raise rents across our balance sheet. But more fundamentally, as Ichigo, we have always been long construction costs. We are not guys who build from scratch. We're guys who take existing assets and improve them.

So it's been a punch in the face for those with more classic development models. It is an enormous wind at our back for us to take our capabilities in a high construction cost environment and deploy them against a bunch of assets which are not being torn down anymore and not competing with new assets because you can't build new assets at levels are competitive with what we can do with our value-add activity.

So it is, without question, the single best operating environment we've ever had in the context of -- and so I'll just leave the plus and the minuses, we're all aware of the extraordinary uncertainty in the global operating environment right now. So we have to manage both. One, a fantastic operating environment, which -- where we can deliver capabilities that we've built over years that are matched to that environment; and two, we should all be very careful about what the future looks like.

In terms of our acquisition and sale activity, as you can see, net sales, it's a small amount of net sales in the first half. We expect to be net sellers over the full year and probably going forward. We built the balance sheet a bit over the last couple of years. We saw the visibility and got there sooner on kind of how construction inflation was going to drive up kind of the value of assets because replacement costs are going up so high. In Japan, none of us has experienced this kind of construction inflation.

So the Japanese participants were -- I mean, we are a Japanese firm. But as you probably can tell from my accent, I'm American, this is something that we are able to kind of bring some insights from what's happening in the rest of the world and has happened in the rest of the world. So we saw how construction inflation would play through in terms of asset valuations earlier than most and accumulate some assets at very good prices.

It is a seller's market, it -- because what I've just told you is emphatically true that at the end of the day, we think that real estate needs to be underpinned by fundamentals to be worth owning. The fundamentals of the assets that we own are rising, rising costs have meant the ability to push through rent increases, and it's a very powerful position to be in. So we've been minor net sellers. In the first half, we expect to be net sellers over the full year and possibly going forward.

This kind of breaks out how we've done things across the 3 major acquirers and sellers in terms of segments, which is Ichigo Owners overwhelmingly since that's a high turnover model, generally say, less than a 1-year hold, hotel -- a hotel segment and our sustainable real estate segment. You can see we have executed contracts on the far right-hand side. We have -- we don't have them seem to be offset by executed contracts on the sell side, but this is true because we are going through processes that are generally auction processes, but they are auction processes, but we understand we're well along the way with the sales of our assets, and we'll complete them during this year.

Tradepia Odaiba was a problem asset. It was a great asset. It was 98% occupied at peak, then corona punched in the face -- COVID and coronavirus punched in the face, and we spent multiple years kind of repositioning the asset, primarily by focusing on delivering kind of a community experience in the asset. I said this before, one of the insights that was powerful about WeWork is that better quality assets and a better current environment is valuable. Some degree of kind of trying to build community can be valuable. Our kind of perspective on this is, yes, and not everybody wants to be the shared office. So delivering kind of higher quality in the asset itself, delivering a stronger community experience in the asset can be also associated with people having private offices, companies having their own offices, and that's what we delivered at Tradepia Odaiba.

And so we have had a multiyear process of building out a community and building out the aesthetics and the functionality of the asset, then we're back up to 95%. And we think we'll be at 97% again very, very soon. So this has gone very well. The result of that is we think it's ready to be sold, and we'll begin a process over the next year of putting this up for sale and we think we will generate significant gains on sale as part of that process.

Hotels are doing well. The significant inbound, the Japanese economy is doing fine. One has to be careful with Hotels. So on the downside because they reprice daily, unlike kind of you have longer leases with kind of every other asset category. And on the other hand, there's significant growth here. We're very good at this, both as an owner and operator. We have delivered despite the crushing experience of COVID, which turned everything off. Through the cycle, we have delivered extraordinary returns through our hotel business. We built out new brands. We've built out new capabilities, and we expect this to continue to be a very productive asset for our shareholders.

Ichigo Owners is -- I think it's ninth year at this point. That continues to be a business that goes very well. We like it a lot. I mean it's a high turnover business. We want more turnover on our balance sheet. We're delivering kind of a much lower margin in terms of gross margin, 10% on the business, which means we're a much better value-add, value provided for our customers, the buyers of those assets. As Jeff Bezos family has said, your margin is my opportunity over at Amazon. So this is a market that has been classically occupied by people taking 20%, 30% gross margins. We can run this business very, very well at 10%, and generate kind of 30%, 40%, 50% ROEs off the business, and that's what we're doing.

So we are the single best, we believe, value provider in the space. This is a business focused on Tokyo -- over only Tokyo prime location, brand-new residential assets.

We get them designed to our specs. This is a fabulous model. We're not building this. We're having developers build them to what we need. We use our leasing capability. We have -- we use our design capability and understanding what the market needs are and the functionality in the assets. And then we use our leasing capability, lease them up and we lease them up very quickly and we sell them. And it's an extraordinary powerful business.

That's what our OP looks like over time. It bounces around because things move between periods, but it is on a growth trend and will continue to grow. One of the things that we're doing with some of the Owners assets, we're putting them into security tokens. We -- and so these are kind of real estate-backed securities, so not crypto, but backed by hard assets. That's a business that is growing very well. It tends to have a little bit more of a capital market cycle associated with it. So when things get diced in the markets, people back away from it. Nonetheless, it's -- frankly, we're taking kind of our asset management capability similar to our REITs and putting them on the blockchain.

We did the very first Ichigo token. We actually completed the sale activity on that. We actually told the investors that they should expect a 4% annualized return on it. We sold it on that basis. We actually delivered about a 9% return. As always, we want to underpromise and overdeliver. So it is an example of us supporting our asset management capabilities and surprising people on the upside. So this is a good -- it's a good business. It's a good product. We're taking really good assets and serving the needs of investors, and we will continue to grow this.

And so AM will grow on these diverse drivers. One of the things that's powerful about kind of what we've done is we've built out not only our value-add capabilities over the last 5 years, we've developed a diverse kind of set of outlets, including, for example, security tokens in the last couple of years that give us multiple options for where we should place our assets that allows us to kind of optimize profitability for the firm.

Clean Energy, we should have grown more, and we have needs and desire to continue to do so. We think the most interesting new opportunity is battery storage, which is now kind of because of the drop in battery prices has meant kind of -- you want to call it grid parity decline means you have the ability to do very compelling economics in Japan. And so we expect to grow that. We've got some activity right now going on in green and biomass. We'll see how much we can scale that. What's interesting about battery storage is it is very scalable and could provide kind of some significant materiality to our clean energy business over time.

We've been consistent in buying back the shares, and we did JPY 5 billion year-to-date. To the extent that we're open to do so, we would expect to do more. And so stay tuned. We continue to think the shares are undervalued and buying them back is a good use of shareholders' capital. And because we're so cash generative, we can still do things in terms of growth activity. But I told you we grew the balance sheet, deliberately recognizing how we thought replacement costs.

And so we weren't predicting things. We're just kind of watching how replacement cost is going up so much and not seeing that fully reflected in asset prices. So we bought ahead of that. We don't expect to grow our balance sheet. We expect to shrink our balance sheet. There's going to be more capital available for share buybacks going forward. And we've been increasing our dividend, and we'll continue to do so.

And the final slide is we have an Ichigo J.League program. We're a top sponsor of the J.League's Japan soccer or football, if you want to call it, using a nonstandard term for Americans. And one of the things that we've done is we give our tickets away to all of our shareholders, not only at this company, but our REIT and infrastructure fund shareholders because these tickets belong to them, not to us.

On the renewable energy side, we are now 100% renewable. We have always been climate positive. We now -- we have 8x CO2 reduction relative to emissions, and that's delivered both on the production side in terms of substituting our clean energy activity, our production via wind and solar power for fossil fuels and also pushing down really hard our fossil fuel link consumption activity. So that's what I have in terms of the presentation. Thank you so much for your patient listening.

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