Q4 2026 Mori Hills REIT Investment Corp Earnings Call
Speaker #1: I'm Yamamoto, president and CEO of the Asset Management Company. Before starting the presentation, let me make three comments. Firstly, upward rent revision: as the economy has shifted to an inflationary trend, and the real estate rental market is extremely strong, rent growth is expected to continue over the medium to long term.
Speaker #1: Given these circumstances, rents will pass through Thai properties of Mori Hills REIT are strong, and rent increase has been continuing. Rents of fixed rent master lease are also expected to increase, upon the upcoming lease renewal.
Speaker #1: Besides, by promoting shorter contract terms, we intend to achieve accelerated and periodic rent increase. Secondly, property acquisition: we didn't announce property acquisition on the occasion of this earnings announcement.
Speaker #1: For the property we considered up until just before the previous earnings announcement, we resumed negotiations without delay, thereafter. However, as a new fiscal year of our sponsor, Mori Building just started, and their disposition needs remain fluid, the negotiations were temporarily suspended.
Speaker #1: As we think their needs will be clearer as the situation develops we aim to resume discussions to achieve this goal. Thirdly, interest rate assumptions: we incorporated additional interest rate hikes in September 2026 and January 2027 in this financial forecast, partly due to a resulting increase in interest expenses (DPU excluding gains on dispositions will decrease).
Speaker #1: Despite the expected increase of fixed master lease rent I explained earlier, a time lag will arise unfortunately, because the timings of interest expense increases are earlier.
Speaker #1: We will address this issue by considering property dispositions proactively and implementing various measures using the proceeds from property dispositions now and begin my presentation please look at page 4 of the material at hand.
Speaker #1: Management with awareness of cost of capital and unit price: as described, on the top left, a management policy is to aim to achieve DPU of 3,100 yen or more improved DPU excluding gain on transfer and target, and recovery of the NAV multiple to 1.0 time by implementing various measures.
Speaker #1: The four main specific measures are shown below that. Firstly, external growth: we'll continue to acquire highly competitive properties at lower than appraisal values by utilizing the sponsor's pipeline.
Speaker #1: We'll effectively deploy proceeds funds from the disposal of La Forte Harajuku Land in a case of temporarily raising the book value basis of the V to 50% or the market value basis of the V to 40% acquisition capacity would be 30 billion yen, and we'll consider using this capacity.
Speaker #1: Secondly, internal growth: for fixed rent master lease rent increases are expected. The obtained current rent appraisals show the 4.4% increase for a Tago Green Hills and the 3.7% increase for Toranomo Hills Mori Tower.
Speaker #1: When renewing contracts, we aim for continued rent increases while promoting strengthening contract terms from 5 to 3 years. For pass-through type properties, we achieved rent increase with the occupancy rate remaining high and continue to expect increases for the 41st period.
Speaker #1: For office, during the 40th period, rent increased by 7.3% from revisions and by 1.9% from replacements during the 41st period, rent will increase by 8.7% from revisions and by 11.1% from replacements for residential properties during the 40th period, rent increased by 11.4% from revisions and by 19.6% from replacements, in a 41st period rent will increase both from revisions and replacements.
Speaker #1: Thirdly, property transfer: we continue to return to unit holders gains on disposition from disposition installments of La Forte Harajuku Land if we assume transfer of 5% ownership interest it will continue by 2030.
Speaker #1: We will also actively consider disposition of other owned properties that would contribute to maintaining and increasing DPU, excluding gains on disposition. Fourthly, capital policy: effect from pushing up DPU due to the acquisition of owned investment units for approximately 900 million yen in the 40th period is plus 8 yen per unit excluding gains on disposition.
Speaker #1: We will continue to consider share repurchase depending on the outlook for property acquisition and the financial situation due to dispositions and the market environment.
Speaker #1: In this phase of DPU, we will use gains on disposition from the medium to long term property disposition. We aim to steadily increase DPU excluding gains on disposition by combining various measures mainly through property acquisition at lower than appraisal values by utilizing the sponsor's pipeline and through rent increases of fixed rent master lease and pass-through type properties driven by the strong real estate rental market and use of funds from active property disposition now and move on to financial results.
Speaker #1: Please go to page 6. In the middle, you see a summary of financial results for the 40th period, ended July 2026. Key figures are bordered in red: operating revenue was 11 billion 126 million yen, operating income 6 billion 688 million yen, net income 5 billion 807 million yen, and DPU 3,100 yen.
Speaker #1: The summary is written at the top left. Revenue and income decreased period on period for the 40th period. However, we achieved DPU target as planned by implementing various measures.
Speaker #1: The first point listed below is we disposed of a 5% ownership interest in La Forte Harajuku Land and will distribute the entire 1 billion 257 million yen from gain on disposition.
Speaker #1: We also executed a partial reversal of reserve reduction entry. The second point is we repurchased and canceled 890 million yen of owned investment units.
Speaker #1: The third point is owned properties both excellent location and quality. Therefore, high occupancy rates were maintained for both offices and residences. This resulted in high occupancy rate of 99.0% for offices and 93.7% for residences.
Speaker #1: In a 40th period, next I'll explain main factors for period on period increase and decrease shown in the box on the right. Operating revenue decreased by 255 million yen.
Speaker #1: The breakdown is as follows: gain on disposition part of La Forte Harajuku for the 40th period increased by 1 billion 257 million yen. An increase of 123 million yen was from full period contribution of property acquired Toranomo Hills in a 39th period.
Speaker #1: An increase of 6 million yen was from full period contribution of property revision of the ground rent of La Forte Harajuku. A decrease of 1 billion 590 million yen was from gain on disposition part of La Forte Harajuku for the 39th period.
Speaker #1: Office rent of fixed master lease of Arakumori Building decreased by 36 million yen. Office rent of pass-through type properties decreased by 25 million yen due to partial downtime.
Speaker #1: And rent on disposition part of La Forte Harajuku decreased due to disposition. Operating expenses decreased by 61 million yen. Depreciation expenses of acquired property and others increased and maintenance and repairs decreased.
Speaker #1: Operating revenue decreased due to a gap of 260 million yen from change in disposition volume from 7% to 5%. Gain on disposition part of La Forte Harajuku was 1 billion 520 million yen in a 39th period and was 1 billion 260 million yen in the 40th period.
Speaker #1: As operating expenses decreased, operating income increased, excluding the volume change in disposition of La Forte Harajuku. Known operating expenses increased by 117 million yen due to an increase in interest expenses, etc.
Speaker #1: The box on the bottom right explains increase and decrease factors from forecast and actuals. Ordinary income decreased by 11 million yen. A low residential and office rent decreased.
Speaker #1: DPU plan was achieved due to decreased operating expenses. That's all for the financial results summary for the 40th period. Please go to page 7 for dividends and any V per unit growth record.
Speaker #1: On the left, dividends per unit is shown. We maintained stable distribution through gain on disposition and utilization of internal reserves. The bar graph outlined in red shows the 40th period.
Speaker #1: The two bars on the right indicate forecast for the current 41st and 42nd periods. The forecasts are based on the assumption internal reserves will be utilized in addition to gain on disposition part of La Forte Harajuku.
Speaker #1: As shown on the right, any V per unit is steadily growing due to the increase in the appraisal values of owned properties. The bar graph bordered in red shows results for the 40th period.
Speaker #1: Appraisal values increased as appraisal rents of most of the properties increased more than increasing asset management fee property tax and others. Page 8 shows forecast for the current 41st and 42nd periods.
Speaker #1: You see the summary on the top left. DPU forecast is 3,100 yen for the 41st period and 3,100 yen for the 42nd period due in part to the fact of property dispositions.
Speaker #1: There are points listed below. In a 41st and 42nd periods, 5% ownership interest in La Forte Harajuku Land will be divested and DPU is expected to be maintained at 3,100 yen through reversal of reserve for reduction entry.
Speaker #1: And from the 42nd period, MHR expects upward revisions of fixed master lease rent and aims to further increase DPU, excluding gains on dispositions by implementing various measures, using the proceeds from property dispositions next I'll explain main increase and decrease factors from the 40th to 41st periods in a box on the right.
Speaker #1: Operating revenue will increase 32 million yen. The breakdown is as follows: an increase of 1 billion 254 million yen will be from gain on disposition part of La Forte Harajuku for the 41st period.
Speaker #1: Residential rent will increase by 35 million yen driven by increasing occupancy rates and unit rent. Office rent will increase by 21 million yen driven by fitting vacancies and rising unit rent.
Speaker #1: Despite partial downtime, a decrease of 1 billion 257 million yen will be from gain on disposition part of La Forte Harajuku for the 40th period and rent on disposition part of La Forte Harajuku will decrease due to disposition.
Speaker #1: Operating expenses will increase by 87 million yen. Property management fee mainly for Roppongi Hills and Toranomo Hills will increase by 68 million yen. Maintenance and repairs will decrease.
Speaker #1: Known operating expenses will increase by 202 million yen due to an increase in interest expenses, etc., assuming additional interest hikes in September 2026 and January 2027.
Speaker #1: The box on the bottom right shows increase and decrease factors from the 41st to 42nd periods. Operating revenue will increase by 71 million yen.
Speaker #1: The breakdown is as follows: excluding matters related to La Forte Harajuku office rent of pass-through type properties will increase by 67 million yen due to fitting vacancies and rising unit rent despite partial downtime.
Speaker #1: Fixed master lease rent of Atago Green Hills will increase by 22 million yen due to renewal. And residential rent will increase by 8 million yen due to rising occupancy rates and unit rent.
Speaker #1: Next, operating expenses increased by 104 million yen from the previous period due to increased property management fees and maintenance and repairs, maintenance and repairs was primarily spent on the exterior wall work at Holland Hills Moritala with 43 million yen recorded in each of 42nd and 43rd periods.
Speaker #1: But this is temporary in nature. Non-operating expenses increased by 191 million yen from the previous period. As mentioned at the beginning, expenses are rising ahead of the budget, but from the 42nd period onwards, rent increases are expected for fixed rent master lease properties and an overall revenue increase trend will continue including pass-through type properties.
Speaker #1: In addition to this, we are actively considering property dispositions and by utilizing the proceeds from dispositions for various measures such as property acquisitions, loan repayment, and acquisition of own investment units, we aim to increase DPU excluding gains on disposition.
Speaker #1: Please turn to page 9. This page shows a model of a medium to long-term disposition and acquisition policy. First, for disposition at the top, we conduct a phased disposition of La Forte Harajuku on a medium to long-term basis.
Speaker #1: Based on this policy, following the disposition in July of this year, we'll conduct a disposition in December. And as shown on the right, there is option A to ultimately dispose of all interest and option B to participate in redevelopment with minor interest after disposing of a certain portion of the property and this decision will be made in the future.
Speaker #1: Additionally, by considering dispositions of other properties we hold besides La Forte Harajuku, we will continue to return gains on disposition to our unit holders while retaining a portion of the property to address the decrease in the reserve for reduction entry.
Speaker #1: Next, for acquisition in the middle, our policy is to continue parallel with dispositions to expand our portfolio size. Please turn to page 10 for medium to long-term internal growth.
Speaker #1: The trend for fixed rent master lease properties. Amid favorable supply-demand conditions in the office market, rent increases are expected underpinned by strong office demand for headquarters functions.
Speaker #1: Specifically, Atago Green Hills will come up for renewal in the 42nd period and Toranomo Hills Moritala will come up for renewal in the 43rd period.
Speaker #1: If revised at the same amount as the current appraisal value for rent, this would result in increases of 44 million yen and 56 million yen respectively on a full-year basis for a total increase of 100 million yen.
Speaker #1: As a result, rent revenue is expected to increase from 6 billion 728 million yen in the 40th and 41st period to 6 billion 750 million yen in the 42nd period and 6 billion 828 million yen in the 43rd period.
Speaker #1: And for the 44th period onwards, the DHC section of Ark Mori Building will come up for renewal in the 44th period, followed by the two floors of Roppongi Hills Moritala in the 45th period.
Speaker #1: Also, as we are promoting shorter contract periods, renewal periods will arrive on a regular basis and we aim to achieve continued rent increases. The graphs on the right show the rent revenue trend for pass-through type properties.
Speaker #1: With occupancy rates remaining high, rent increases continue for both revisions and replacements. The upper graph is for offices and the lower one is for residential properties.
Speaker #1: For offices at the top, rent revenue is expected to increase from 2 billion 36 million yen in the 40th period to 2 billion 58 million yen in the 41st period.
Speaker #1: And 2 billion 126 million yen in the 42nd period. For residential properties below, rent revenue is expected to increase from 569 million yen in the 40th period to 605 million yen in the 41st period and 613 million yen in the 42nd period.
Speaker #1: We aim to continue the rent revenue increase from the 43rd period onwards as well. In this way, we can expect medium to long-term internal growth with increases in pass-through type properties to date as well as expected growth in fixed rent master lease properties.
Speaker #1: Please turn to page 11 for the portfolio of Mori Hills REIT. Focusing on central Tokyo, premium properties and value creation, we invest in properties where we can expect asset value improvement through redevelopment of their superior surrounding areas such as Toranomo Hills and Azabudai Hills, instead of only focusing on individual properties.
Speaker #1: Now, I am going to skip ahead to page 23. This is about external growth. The Mori Building Group has an extensive property pipeline and Mori Hills REIT has preferential negotiation rights.
Speaker #1: Therefore, we are able to acquire premium properties in central Tokyo without competitive bidding. Please turn to page 24. The graph at the top shows the trend in assets under management of Mori Hills REIT.
Speaker #1: On the right, the bar with red figure is the 40th period, which stands at 414.9 billion yen. Please turn to page 25. This map shows properties in which the Mori Building Group is involved.
Speaker #1: Red indicates properties held by Mori Hills REIT and green indicates properties developed, owned, and managed by the Mori Building Group. Adjacent to Azabudai Hills in the center, Mori Hills REIT holds Holland Hills Moritala, Roppongi Fast Plaza, and View Tower.
Speaker #1: And the integration with Azabudai Hills allows us to utilize its facilities, which improves convenience for our tenants. Additionally, orange indicates properties under planning, which are projects in Roppongi Gochome and Toranomo Sanchome.
Speaker #1: They are also planned to be adjacent to Roppongi Hills and Toranomo Hills held by Mori Hills REIT and similar effects are expected. As such, extremely high-quality redevelopment properties by Mori Building and high-value added properties adjacent to them are properties with strong office demand, where rent increases can be achieved.
Speaker #1: Mori Hills REIT intends to acquire such properties. Next, please turn to page 26. From this page, I will explain internal growth. First, the left graph shows the trend in occupancy rates and both offices and residential properties maintain high occupancy rates.
Speaker #1: In the 40th period, offices were at 99% and residential properties were at 93.7%. For the 41st period, the projections are 98.8% and 96.2% respectively.
Speaker #1: The right graph shows the comparison of vacancy rates in central Tokyo offices and the red line in the middle shows the office vacancy rates for Tokyo's five central wards.
Speaker #1: Published by Miki Shoji and the line above is the office vacancy rates for Minato Ward as its subset, in July they were at low levels of 2.0% and 2.2% respectively.
Speaker #1: On the other hand, the line at the bottom is for Mori Hills REIT and it stands at than other categories. Please turn to page 27.
Speaker #1: This page shows the results and projections of rent revisions and tenant replacements for each fiscal period. The figures are rates of change. And all are increases.
Speaker #1: The upper section is for offices and the lower section is for residential properties. I already mentioned at the beginning, but let me explain again with these graphs.
Speaker #1: First, the graph on the upper left for offices. Revision shown in a dark line was plus 7.3% in the 40th period and the 41st period is projected to be plus 8.7%.
Speaker #1: Replacement shown in a light-colored line was plus 1.9% in the 40th period and the 41st period is projected to be plus 11.1%. We can tell that solid positive growth continues.
Speaker #1: Next, the graph on the lower left for residential properties. Revision shown in a dark line was plus 11.4% in the 40th period. Replacement shown in a light-colored line was plus 19.6% in the 40th period.
Speaker #1: An arrow is drawn for the 41st period and it means both revision and replacement are projected to increase. We can see positive growth at high levels.
Speaker #1: Please turn to page 28. The graph on the left is about the rate of rent gap. This is data on pass-through type properties for offices and due to the rise in market rents, the rent gap increased from minus 7.5% in the previous period to minus 9.3% in the 40th period.
Speaker #1: Additionally, for the 41st period, resigning of contractor mostly completed and upward revision is expected. Furthermore, at Mori Hills REIT, fixed-term lease agreements account for 99% of pass-through type offices, so we intend to continue actively realizing upward revisions and promoting internal growth.
Speaker #1: Please turn to page 29 for the overview of fixed rent master lease. Two key points are described in the upper right. The first point was explained before.
Speaker #1: But that is, we can realize stable cash flow both in the short and medium to long term. With abundant demand for office space serving as corporate headquarters and strong resilience to temporary vacancies.
Speaker #1: The second point is a new one which is added this time. And that is, we can achieve cash flow growth through continued rent increases with creation of growth opportunities by shorter contract terms, amid continued favorable supply-demand conditions in the office market.
Speaker #1: We believe that the ability to achieve both stability and growth is a strength of Mori Hills REIT's fixed rent master lease. The table below shows figures by contract.
Speaker #1: Properties with upcoming contract renewals are Atago Green Hills and Toranomo Hills Moritala, with renewals in 2027. We anticipate rent increases as explained earlier. The reasons are as the contracts between Mori Building and End Tenants continue to maintain high occupancy rates, rent increases are achieved based on the current market trend and additionally due to changes in office needs.
Speaker #1: The large-scale properties with abundant facilities owned by Mori Hills REIT are now desired more than ever. We still have some time before those renewals.
Speaker #1: And we are expecting further rent increases against a backdrop of favorable supply-demand conditions in the office market. Also, as shown in the lower right of the table, the renewals in 2027 involved two properties, which represent about 38% of the entire fixed rent master lease and if we combine the three-year period from 2027 to 2029, about 61% will be up for renewal.
Speaker #1: After that period, considering shorter contract periods, a certain volume will be renewed on a regular basis. And we intend to realize continuous rent increases.
Speaker #1: Next, please turn to page 30. From this page, I'll explain financial management, reduction in LTV is shown in the upper left, and in the 40th period it was 46.4% on a book value basis and 36.5% on an appraisal value basis, maintaining a stable level.
Speaker #1: Below that, average interest rate was 0.94% in the 40th period, reflecting current interest rate trends. As shown on the right of the graph, assuming additional rate hikes in September 2026 and January 2027, we project 1.14% for the 41st period and 1.36% for the 42nd period.
Speaker #1: And in the lower right, JCR rating is AA flat stable. And together with the stable level of LTV, we continue to maintain a strong financial position.
Speaker #1: Please turn to page 31. Regarding extension in remaining duration of debt in the upper left, it was 3.4 years at the end of the 40th period.
Speaker #1: And as the funding duration remains unchanged at about eight years on average, we expect to maintain three to four years for the average remaining duration of debt.
Speaker #1: And on the right, the fixed rate ratio decreased from 74.9% in the previous period to 68.7% due to our flexible responses in consideration of interest costs.
Speaker #1: Let me skip one page to page 33 for sustainability initiatives. This is about external assessment of our initiatives. As shown in the upper left, we have acquired four stars in GRISB rating.
Speaker #1: As a final note, we'll execute measures based on the operations with awareness of unit price, explained at the beginning, and managing operations steadily to meet the expectations of our investors.
