Performance trend of Heiwa Real Estate Investment Trust < 8966 >.

1. Performance overview for the fiscal year ending May 2024.

For the fiscal year ending May 2024 (45th period), operating revenue was 873.5 billion yen (+0.9% YoY), operating profit was 4.483 billion yen (-0.3% YoY), ordinary profit was 3.939 billion yen (-1.4% YoY), and net income was 3.938 billion yen (-1.4% YoY). Rental income increased due to high occupancy rates and rent increases for both offices and residences. Although costs for value-added investments were incurred upfront, these were covered by the transfer gains. As a result, operating revenue and profits exceeded the revised estimates published on March 25, 2024. Note that in the case of REITs, if more than 90% of pre-tax profits are paid as dividends, corporate taxes are exempt, so net income for the period is at roughly the same level as ordinary profit.

As for internal growth, first was internal growth through value-added improvements to existing properties. Rent revision amounts for offices and residences reached the highest levels since 2020. The rental income growth rate due to rent revision was 0.40% for offices, 0.56% for residences, and 0.48% for the portfolio as a whole. Second, the portfolio occupancy rate remained high. The average occupancy rate during the period was 98.6% for offices (+0.14 points YoY), 97.3% for residences (+0.18 points YoY), and 97.8% for the entire portfolio (+0.2 points YoY). In residences, one reason for the high occupancy rate was due to fewer departures and more renewals compared to the May 2023 period, which happens to be a busy season due to graduation, enrollment, and employment. As for external growth, the company acquired assets to form the foundation for future internal growth. The company continued external growth through sponsor pipelines and third-party asset swaps, resulting in a transfer gain of 0.9 billion yen due to the realization of hidden gains for 14 consecutive periods. Furthermore, the company is steadily increasing its asset size through a public equity offering. It maintained the procurement period and fixed-rate ratio at a reasonable level in financial management, maintaining a sound financial foundation.

Therefore, EPU was originally 2,676 yen (-40 yen YoY) due to upfront costs incurred by value-added investments. EPU is an indicator used to clarify the flow of rent increases by adding back the value-added expenses related to the policy of adding value-enhancing expenses (included in operating expenses) to 1 per-share distribution except for transfer gains and internal reserves, and then calculating it. On the other hand, DPU (distributed per unit) covered value-added expenses through transfer gains due to the realization of hidden gains for assets swaps and performed an internal reserves transfer breakdown, resulting in the highest level of 3,380 yen (+80 yen YoY) for 17 consecutive periods. With ample internal reserves (5.75 billion yen) and hidden gains (58.56 billion yen), the continuous acquisition of properties, stabilization of financial foundation, and stable distribution payments are made possible.

2. The financial status

As of the end of May 2024 (end of 45th period), total assets were 2,431.63 billion yen (+1.0% YoY), net assets were 1,189.53 billion yen (+0.4% YoY), and interest-bearing debt was 1,140.37 billion yen (+1.3% YoY). Although the average procurement interest rate was 0.851% (+0.077 points YoY), it is expected that the relatively low procurement cost will continue because of good relations with major financial institutions and the maturity of past borrowings with relatively high interest rates. The average procurement period was 7.39 years, the long-term interest-bearing debt ratio was 100.0%, and the fixed-rate ratio was 70.4%, allowing for sufficient preparation for future interest rate increases. As for expected future interest rate increases, plans to cover them include rent increases via value-added improvements with the use of internal reserves and hidden gains. In addition, the commitment line (a bank lending framework that can be used when necessary) from major domestic banks has been expanded from 7 billion yen to 8 billion yen from the start of the November 2024 period, expanding liquidity at hand in preparation for unforeseen events.

On the other hand, the appraisal LTV (the ratio of interest-bearing liabilities to the appraised value (book value + unrealized gains and losses) at the end of the term) is maintaining a good low level of 40.3%. After the public offering of shares issued in the beginning of the 2024 November term, the appraisal LTV decreased to 39.3%. In the same REIT, the standard level for the same ratio is maintained at 40-50%, and the upper limit is set at 65%. However, the same ratio will decrease in the long term with the increase in the appraised value, and in recent years it has been at a good low level while remaining stable, which can be evaluated as high safety.

(Written by FISCO guest analyst Nozomi Kokushige).