Japan Prime Realty Investment Corporation

December 2020 (38th) Period Analyst Meeting〔Date: February 17, 2021〕[Q&A Session Summary]
Q. For the fiscal period ending December 31, 2021, you plan to pay DPU of
7,550 yen but if your operating results are better than anticipated, will you
distribute the planned reversal of internal reserves on top or will you reduce
the reversal of internal reserves and keep DPU at 7,550 yen?
A. Our forecasts of financial results for the fiscal period ending December 31,
2021 are conservative estimates but if our operating results are better thananticipated, we plan to adjust the reversal of internal reserves and keep DPU
at 7,550 yen.
Q. While you plan to reverse internal reserves in the fiscal period ending
December 31, 2021, you intend to internally reserve all gains on sale of realestate, causing DPU to fall in the fiscal period ending June 30, 2021. Why
are you not planning to use internal reserves in the fiscal period ending June30, 2021?
A. We decided to internally reserve all gains on sales of real estate on the basisthat we plan to increase DPU for the fiscal period ending June 30, 2021 by
50 yen from the DPU forecast of 7,500 yen announced at the time of ourprevious results announcement and that this will help stabilize JPR's
performance in the medium to long run. Moreover, in the fiscal period ending
June 30, 2021, we expect to be able to operate more or less as previously
anticipated and so do not plan to reverse internal reserves, whereas in thefiscal period ending December 31, 2021, DPU is expected to fall temporarily
because the impact of move-outs by large tenants will last longer than
anticipated and so we decided to use internal reserves to make up for this.
Q. Could you give details of move-outs and rent reductions for other commercial
facilities besides restaurants and bars?
A. During the previous state of emergency, we granted rent reductions to theretail tenants of commercial buildings which were completely shut on thejudgment of the owner as well as to restaurant and bar tenants. Under the1latest state of emergency, restaurants and bars have been mainly affected,
with shorter opening hours and so forth, while retail tenants have continued
to operate almost as normal and so we do not plan to grant them rent
reductions. However, if necessary in the future, we may hold consultations
with individual stores and grant them rent reductions depending on theirindividual circumstances, including the risk of them moving out.
Q. The percentage of tenants which have accepted an upward revision in rent isaround 30%. What led to the tenants accepting these upward revisions inrent?
A. The rent gap is negative 3.2% and the rents for around 46% of the totalleased area are less than market rents. In collaboration with the PM, we gettenants with low rents to accept rent increases by negotiating an upwardrevision in rent, carefully explaining market conditions in the surroundingarea to them. However, in the current environment, we negotiated withemphasis on maintaining relations with tenants in the medium and long run
and so the percentage of upwards revisions in rent fell to 33%, but we also
managed to renew contracts with the remaining 66% based on same terms
and conditions. Already in the fiscal period ending June 30, 2021, we haveachieved upward revisions in rent and rent increases on tenant replacement.
Q. The property taxes and city planning taxes will now be reevaluated from2022. What impact will this have on DPU?
A. The postponement of revaluation will cause expenses to fall by around 100
million yen both in the fiscal period ending June 30, 2021 and in the fiscal
period ending December 31, 2021 and if revaluation is conducted as plannedin 2022, this will cause expenses to rise by around 100 million yen in thefiscal period ending June 30, 2022. As for the impact on financial results fromthe fiscal period ending June 30, 2022, we are likely to be able to offset theincreases in property taxes and city planning taxes with cost reductions,progress in leasing activities and external growth, and we believe that ourresults will bottom out in the fiscal period ending December 31, 2021.
Q. In terms of your property acquisitions strategy, are there any features you
attach particular importance to in the office properties you prioritize forinvestment, for instance, property location, size, sense of cap rate?
A. Otemachi Financial City, which we recently acquired, was acquired based on2consideration of features such as its very rare location in Otemachi, its futurestability and building age. We have always adopted a policy of investing in
carefully selected prime properties but moving forward, in a post-COVID
environment, we intend to attach more importance than ever before tolocation and building spec.
Q. Could you give details of the status of the pipeline for property acquisitions
from parties other than your main sponsor Tokyo Tatemono? In the materials
used for the previous results announcement, the pipeline for acquisitions
from Tokyo Tatemono included the office building Sendai Kakyoin Terrace.
Why was this property absent from the pipeline this time?
A. Last year, we acquired Sencity Building in Chiba from the Taisei Group andplan to continue acquiring properties from parties other than our mainsponsor Tokyo Tatemono when the opportunity arises but we expect thatmost of our acquisitions will be from our main sponsor Tokyo Tatemono.
Otemachi Financial City, JPR Shinsaibashi West and JPR Kojimachi Building
acquired from Tokyo Tatemono are all real estate for long-term ownershipwhich Tokyo Tatemono reclassified as real estate for sale from noncurrent
assets. Since Tokyo Tatemono looks set to continue reclassifying properties
like this in the future, we intend to mainly acquire these kinds of properties
moving forward. We considered acquiring Sendai Kakyoin Terrace but
decided not to go ahead based on a comprehensive assessment of variety offactors including the price, growth potential and market conditions.
Q. You are pushing ahead with the replacement of portfolio assets which willlead to improvement in portfolio quality. Do you intend to continue replacing
portfolio assets? Could you give details of the criteria for sold properties, ifany?
A. We intend to continue replacing portfolio assets. As for the criteria for soldproperties, we take into consideration factors such as the building age,market conditions and the income and expenditure outlook but we consider
sale on the precondition that NOI exceeding that of the sold property can be
maintained through a property acquisition.
Q. What is the background to the establishment of a new division for ESG? Will
you accelerate the replacement of properties with room for improvement inenergy efficiency? And what is your policy on the use of renewable energy?
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A. We have always actively implemented sustainability initiatives but last year
we took further steps such as participating in the CDP's climate change
program and re-determining material issues, and we also achieved thehighest GRESB rating for a second year running and were assigned a ratingof 'A' by MSCI ESG. Since such operations have now become fairly time
consuming and costly, we set up a specialist division to implement the PDCA
cycle, step up our ESG initiatives and further improve our external ratings.
Regarding energy performance, instead of selling those properties with room
for improvement in energy efficiency, we intend to seek to improve energy
performance based on expert advice, through improvements in terms offacilities such as the installation of LED lighting and through operational
improvements. As for renewable energy, since renewable energy currently
costs more than regular energy, we intend to incorporate renewable energy
based on an assessment of availability and costs. In the past, we attachedimportance to cost when reviewing our electricity suppliers but moving
forward we will also attach importance to the renewable energy rate.
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