Tosei Corp

TSE:8923

Earnings Call Transcript 2020-Q2

[Noboru Hirano, executive]

Good afternoon. This is Hirano speaking, Director and CFO of Tosei Corporation. I would like to explain the financial results for the first 6 months of this fiscal year, ending November, 2020.

Please open Page 4 of your handouts. Here are the highlights of the cumulative results in the first 6 months. As shown on the top, we booked revenue of JPY 45 billion, up 30.8% year-on-year, which was a very strong performance.

This presentation is slightly different from the past, and let me give you an example using the operating profit on the top right. Next to the figures of the previous fiscal year and the year before, you can see the white bar in the middle, which is the initial operating profit forecast of JPY 13.7 billion set at the beginning of the fiscal year. The bar next to that is the actual OP in the first 6 months of this fiscal year, which was JPY 9.8 billion.

We booked a large valuation loss of inventories at the end of the first 6 months based on valuation of the lower of cost or market basis, which was JPY 7.6 billion. Therefore, as shown on the right, Q2 operating profit is revised down from JPY 4.3 billion to negative JPY 3.3 billion, leading to a cumulative OP of JPY 2.1 billion in the first 6 months. This figure leads to a drop of 72% in the operating profit compared to the same period last fiscal year.

The same explanation applies to the profit before tax shown on the bottom left as well as the profit for the period on the bottom right. In terms of the profits, we had achieved more than 70% of the initial forecast as of Q2. However, we have largely dropped from the initial forecast due to the valuation loss, as mentioned.

Please go to Page 6 of your handouts. First, I'd like to explain our revitalization business. We booked revenue of JPY 27.6 billion as of Q2, up 62% year-on-year. This is based on the extremely good performance in Q1 as well as the good sales volume in Q2. Gross profit is shown in the bar chart, while the gross profit margin is shown in the line. The margin in Q1 was 29.2%, while that of Q2 is shown in the red line. The margin from the normal trading business was 26.9%. However, due to the valuation loss, we booked a valuation loss of JPY 1.4 billion, leading to a margin drop in Q2. As a result, the gross profit margin in the first 6 months was 23.2%, as shown in green.

In the first 6 months of this fiscal year, we sold a total of 29 properties versus 28 properties in the same period last year, almost flat year-on-year. In terms of the value per property, the average was JPY 600 million in the previous fiscal year, while the same amount was JPY 950 million in this fiscal year. Thus, size of properties increased over last year. The number of properties sold to Tosei REIT were 2 properties in Q1 and 1 property in Q2, a total of 3 properties in the first 6 months.

Next is the development business on Page 7. We booked revenue of JPY 9.9 billion in development business in the first 6 months, down 3%, but mostly flat compared to the same period last year. We have seen a large increase, especially in Q2, due to sale and delivery of a total 240 units of the Palms Sagamihara, which is shown in the picture. As a matter of fact, we also had a similar condominium sold in Q1 of the previous fiscal year, which was the Palms Chofu Manor Garden. Regarding other performance in the development business, we booked a gross profit margin of 22.8% in Q1, and 22.7% in Q2 for the properties sold, as shown in red.

Here, we also booked the valuation loss. In detail, we have the hotels under development or in completion as well as the commercial facilities under development, which the future expected rents are revised conservatively leading to the valuation loss of JPY 6.2 billion in the development business. As a result, the cumulative gross profit margin as of end of Q2 was negative 40%, and the segment as a whole booked a large negative in the first 6 months. As for detached houses, we sold a total 31 houses in the first 6 months of this fiscal year versus 43 houses in the same period last year, a slight slowdown year-on-year, which is partially due to the impact from COVID-19 pandemic.

Please go to Page 8 for the Rental Business. In the bottom right, you can see the chart for the increase and decrease of rental properties. We had 76 properties in the end of the previous fiscal year, acquired 13 new properties while sold 15 properties in this fiscal year. Therefore, the number of rental properties was 74 as of end of this first 6 months. The revenue as shown in the upper chart on the left was JPY 2.7 billion as of Q2, 6.8% decline compared to the previous fiscal year.

The breakdown is shown in different colors where the blue represents the rental income from fixed assets, which steadily grew in Q1 and Q2. On the other hand, the green represents the rental income from inventories, which dropped in Q1 versus Q4 of the previous fiscal year due to property disposition to Tosei REIT. This caused a temporary drop in rental income in Q1. However, we restarted the business and saw a steady recovery to JPY 1.4 billion in Q2. As written in the comments above, the COVID-19 pandemic has resulted in some retail tenants requesting for rent reductions or payment holidays. However, such rental revenue is small compared to the entire business, and the impact to the P&L is insignificant.

Moving to the Fund and Consulting Business on Page 9. You can see the bar chart on the top right as well as the chart underneath. Regarding the status of AUM, we were able to add new private funds of JPY 83.6 billion compared to the end of the previous fiscal year, as shown in the bottom chart. While the AUM dropped by JPY 10.7 billion due to disposition, the private fund had a net increase of JPY 72 billion. As mentioned earlier, the disposition to Tosei REIT were booked in the revitalization business, and the AUM of Tosei REIT increased by JPY 6.4 billion. Thus, the net increase of AUM in the Fund and Consulting Business were JPY 79.3 billion. As a result, the balance of AUM grew to JPY 925.8 billion.

As in the bar chart on the left, we posted revenue of JPY 2.1 billion as of Q2, up 66.6% compared to the previous fiscal year. What is especially noteworthy is the dark blue, which represents AM fee, which was JPY 1.1 billion as of Q2, up 36% year-on-year. Along with the increase of AUM, as explained earlier, we were able to see a steady growth in the AM fee. Other revenue, including acquisition fee, brokerage fee, et cetera were JPY 1 billion in the first 6 months, which was 2.1x compared to the same period last year. As a result, the overall performance was steady.

In particular, as written above, we acquired new overseas clients in the AM business in the United States, South Korea and Germany on top of the existing clients in China and Singapore. Due to an increased investment from overseas, we were able to grow the size of our AUM.

Let me move to our Property Management Business on Page 10. The bar chart on the right shows the number of properties that we manage. The number was 659 as of end of the previous fiscal year. And adding some cancellation of the contracts and the new customer acquisition, the net increase was 30, which leads to 689 properties under management in the first 6 months.

The revenue in the left bar chart shows a drop in Q2 compared to Q1. Thus, the revenue in the first 6 months was JPY 2.8 billion, which was down 1.9% year-on-year. The red boxes in the bar chart are showing the hotel-elated PM/BM fees. This revenue includes the facility maintenance, guest room cleaning, et cetera, which was JPY 256 million in Q1, but JPY 101 million in Q2. Our PM/BM fees consist not only the Cocone hotels run by Tosei, but also external hotels, which had a temporary closure and drop in room occupancy during the period, leading to a large decline in the PM/BM fees from these hotels.

The gross profit margin, on the other hand, was 30.0% for the full year in fiscal year 2019, but was 34% in the first 6 months of this fiscal year, an increase of around 4 percentage points. The hotel-related revenue dropped, as mentioned earlier, which gross profit margin is generally low. Thus, the drop in hotel revenue pushed up the gross profit margin. In addition, as pictures are shown in the bottom right, we had a total 12 logistic facilities as of end of May, a total floor space of 170,000, for which we contracted and received the PM fees. Due to the tenant's leasing activities in those facilities, we had an increase in the PM fees, resulting in the upward profit margin. Based on these factors, we booked a year-on-year increase in the profits.

Next is our Hotel Business on Page 11. You can see the list of hotels held by Tosei on the right. In those which we held from the beginning of this fiscal year are the 2 hotels on the top, Tosei Hotel Cocone Kanda and Ueno. As described in the chart, they were temporarily closed during May and June and reopened from July 1. Regarding Tosei Hotel and Seminar Makuhari, it was once opened in March after a large renovation work, but temporarily closed in June and reopened in July.

Next is the fourth hotel Asakusa Kuramae and the fifth hotel were Ueno, Okachimachi, where the reopening date for Asakusa Kuramae was rescheduled from the first to July, but the Okachimachi was opened in July, according to the initial schedule. Therefore, we have 5 hotels which we have opened as of today.

As shown on the left, revenue dropped in Q1 and compared to Q4 of the previous fiscal year. The occupancy rate in December and January were quite steady at 90%. However, it dropped to 70% in February, leading to a weak revenue in Q1. After entering Q2, the occupancy rate in March and April were 20% and went down to 0% in May due to temporary closure to counter COVID-19 pandemic, leading to a huge decline in revenue. As for the profit, the company expectation was that the opening expenses of new hotels would lead to negative profit, and we ended the first 6 months with a negative JPY 477 million in OP, and a large impact was in the hotel business.

Moving to Page 12, we have details of acquisition for the main development and revitalization businesses. The bar chart on the left has some figures in the bubble, where the acquisition in the first 6 months based on the future revenue expectation was JPY 32.7 billion on a delivery basis. Although details are not described, the amount at the end of Q1 was JPY 28 billion on a contract basis, so the progress in Q2 was not so strong.

Due to the COVID-19 pandemic, our activities for new acquisitions were mostly suspended from the middle of March, leading to the weak performance up to Q2 in this fiscal year. The annual target of acquisition is JPY 83 billion, of which 40% is achieved as of the end of the first 6 months. What we should note is the year-on-year comparison of the acquisition from last fiscal year to this fiscal year. The total acquisition in the previous fiscal year was JPY 72 billion for the full year, of which 40% where for revitalization businesses shown in diagonal lines, and 60% were for development business. Nevertheless, the ratio was reversed in the first 6 months of this fiscal year, where 80% of acquisitions were for revitalization businesses and 20% were for development businesses. Especially the acquisition for the revitalization businesses is making a steady progress compared to the full year-end fiscal year 2019. So by carefully watching the situation on COVID-19, we hope to restart the acquisition activities going forward.

That is all for the 6 business segments and the situation around acquisition. Now I would like to explain our balance sheet on Page 13. Total assets were JPY 161.8 billion in the end of the previous fiscal year, and JPY 161.1 billion as of the end of the first 6 months in this fiscal year, a decline of JPY 700 million. In detail, cash and cash equivalents increased by JPY 2.4 billion, while inventories were down JPY 6.5 billion. However, as explained earlier, we booked valuation loss of JPY 7.6 billion, which is an amount equal to the drop in our book value.

The column A has a negative JPY 6.5 billion, which would have been a positive JPY 1.1 billion if we did not book the valuation loss. The investment properties/PPE increased by JPY 3.8 billion, and details are in the column B. In particular, the new acquisition led to an increase of JPY 2.2 billion, and the value-added investment on existing inventories were JPY 900 million. In addition, the IFRS accounting standard changed from this fiscal year, and these assets are to be disclosed under both the assets and liabilities. As we booked JPY 1.2 billion of lease assets, we ended up with an increase of JPY 3.8 billion in the investment properties/PPE.

Moving to the liabilities on Page 14. Borrowings increased by JPY 3.3 billion, which is based on a drop due to repayment upon disposition and increase due to new acquisitions, leading to approximately JPY 1.4 billion of a net increase. On top of that, we have the lease liabilities of JPY 1 billion as well as debt rollover and others, leading to a total JPY 3.3 billion of increase in borrowings.

The equity, on the other hand, was down JPY 1.6 billion. In the past years, Tosei have increased the balance of equity, but the situation was different in the first 6 months of this fiscal year. Profit increased by JPY 1.1 billion, but dividend payment for the previous fiscal year led to a drop of JPY 1.9 billion, while the shares owned in Tosei REIT as a sponsor dropped in its price, leading to valuation losses coupled with the share back. As a result of these factors, equity dropped by JPY 1.6 billion. The equity ratio went down slightly compared to the previous fiscal year to 35.2%.

The next is the situation around the inventories on Page 15. Total book value stands at JPY 67 billion with a total of 111 properties. The same figure in the end of the previous fiscal year were a total book value of JPY 73.5 billion and 111 properties. Therefore, the book value has declined by more than JPY 6.5 billion, which, of course, includes the drop due to disposition and the increase due to acquisitions. But the bigger impact on the drop in book value was due to the valuation loss of JPY 7.6 billion, as mentioned before.

The future revenue or expected disposition value is JPY 105.1 billion, which the same figure was JPY 126.7 billion at the end of the previous fiscal year. This is due to the more conservative expectation for all properties based on the lower of cost of market valuation. And as a result, the expected disposition value as well as the expected gross profit margin are revised down to JPY 105 billion and 13.5%, respectively.

Next, Page 16 shows the historical inventories and expected disposition values. If you compare the two bars on the right, hotel has largely declined, which is not due to disposition, but rather due to the revision based on a more conservative expectation of the future revenue.

Next is the situation of our fixed assets on Page 17. Fixed assets as of the end of the first 6 months were 32 properties with a book value of JPY 49.9 billion. The number of properties were also 32 in the end of the previous fiscal year and remained flat. But in this fiscal year, we acquired the remaining ownership of a large-sized building which we used to own 50% previously. By acquiring the remaining 50%, we obtained 100% of the ownership, and we believe it was a good acquisition.

The book value became JPY 49.9 billion with a fair value of JPY 70.5 billion. The fair value at the end of the previous fiscal year was JPY 78.1 billion. Thus, the decline in fair value is also due to the conservative review. The unrealized gains, two lines above the red box on the right, were JPY 20.6 billion versus JPY 31.8 billion as of the end of the previous fiscal year. This decline is also based on the conservative review of our business.

Last is borrowings from financial institutions on Page 18. The left chart shows the trend in the interest rates and duration. And the weighted average borrowing rates as of the end of the first 6 months in this fiscal year was 1.0%, which is declining continually. As for duration, the average for fixed assets in light blue is 15.1 years, while that for inventories in green is 7.2 years. We are able to have a longer duration for the newly acquired fixed assets as well as for the inventories to prepare for any economic cyclicality.

This concludes my presentation. Thank you very much.

[Seiichiro Yamaguchi, executive]

Good afternoon. This is Yamaguchi, CEO of Tosei Corporation. I would like to explain the revised forecast and plans in the second half of the fiscal year, ending November, 2020.

First is Page 23. Due to the COVID-19 pandemic, we have unfortunately revised the forecast to a decline in both revenue and profit for this fiscal year. Please have a look at the box in the bottom. The revenue is revised down from JPY 80.3 billion to JPY 64.8 billion, the profit before tax is revised down from JPY 13 billion to JPY 4 billion, and the profit for the year is revised down on JPY 8.8 billion to JPY 2.4 billion.

So the revised guidance expects a decline in both revenue and profit, which is coming from the inventory valuation, as explained earlier by Mr. Hirano, mainly for the hotels and commercial facilities, which led to a large valuation loss of JPY 7.6 billion. However, after this valuation loss of JPY 7.6 billion, we believe that most of the downside risk is covered.

What is noteworthy is the bottom third column from the left. Revised forecast before the valuation loss is shown, where revenue is down from JPY 80.3 billion to JPY 64.8 billion, and profit before tax is revised from JPY 13 billion to JPY 11.7 billion. Regardless of the extremely tough environment with COVID-19, we are still estimating this level of profit. Nevertheless, we decided to book the valuation loss of JPY 7.6 billion, as explained many times, in order to factor the downside risk in the business. Based on the revision, the annual dividend is cut from JPY 47 to JPY 13 per share. However, the payout ratio is expected to be over 25%, which is unchanged from the initial forecast.

Page 24 is added after the results presentation meeting.,, So please have a look at it in your spare time.

I would like to cover the details from the following slides, so please open Page 25. This shows the expected progress of the profit before tax. The left bar chart is the achievement in the first 6 months. For example, the Revitalization Business on the very left booked profit of JPY 7 billion in the first half, and the development business was JPY 1.5 billion, while the rental and other businesses follow.

So we booked profit of JPY 9.5 billion once in the first 6 months. However, the valuation loss of JPY 7.6 billion dragged down the profit before tax to JPY 1.8 billion as of end of Q2.

In the second half of this fiscal year, we are starting with a profit before tax of JPY 1.8 billion, which is right in the middle. As we move to the right of the chart, we expect to gain profit of JPY 2.1 billion in the second half. Thus adding this profit of JPY 2.1 billion to the JPY 1.8 billion as of end of Q2, we expect a profit before tax of JPY 4.0 billion on the full year.

Please take a look at the comments in the bottom. The preconditions for the valuation loss are described. In the Hotel Business, the valuation factors 1% or more increase in the buyer's cap rate, and the occupancy rate is revised from around 90% of the pre-COVID-19 level to the range between 60% and 70%. As for the commercial facilities under development, the valuation includes a 0.5% increase in buyer's cap rate and a 20% decline in the future expected rents. Thus, as mentioned, we have factored downside risk quite conservatively.

Now let me skip Page 26 and move to Page 27. We have shown the revised full year forecast and the plans for the second half by segment. Looking at the comments on the right, I would like to give the explanation for each segment.

First, in the Revitalization Business, revenue is revised down from JPY 46.7 billion to JPY 33.6 billion. Operating profit is down from JPY 9.1 billion to JPY 5.2 billion, and approximately JPY 13.1 billion of revenue is pushed back to the following fiscal year or later. As the current market stands, we believe we don't have to sell properties at a loss, and thus, we have postponed sales of some projects.

Second, in the development business, in the second paragraph, revenue is revised from JPY 17.3 billion to JPY 15.4 billion. Operating profit is down from a positive JPY 2.6 billion to negative JPY 3.7 billion. And as mentioned, we booked valuation loss of JPY 6.2 billion, mainly for the hotels and commercial facilities, which led to a drop in the operating profit.

The third graph shows the Rental Business, where revenue slightly dropped from JPY 5.9 billion to JPY 5.7 billion, but we expect operating profit to be in line with the initial forecast of JPY 2.3 billion. Although multiple tenants have requested rent reduction or payment holidays, we believe those impacts are insignificant and that we will be able to secure profit based on the initial forecast.

Next is the Fund and Consulting Business. Our AUM has grown to JPY 920 billion. On the full year, revenue is revised upwards from JPY 3.1 billion to JPY 5.1 billion, and operating profit is revised up from JPY 1.7 billion to JPY 3.5 billion, which is expected to double. Regardless of the difficulty faced with the COVID-19 pandemic, we expect both revenue and profit to grow in this business. The pandemic started in March, but the overseas investors have adjusted their risk premium and are still seeking for investment opportunities aggressively in the stable Tokyo market. This is the reason why we are expecting a year-on-year growth on revenue and profit in the Fund and Consulting Business.

Following is the property management business. Revenue is revised down from JPY 6.5 billion to JPY 5.7 billion, while operating profit is revised up from JPY 0.5 billion to JPY 0.6 billion. The drop in the management and cleaning of hotels are expected to drag down the revenue, while the consignment for the property management of logistics facilities is expected to push up the profits.

What I would like to repeat again in the first part of this presentation is that we unfortunately booked the valuation loss for both the Revitalization and Development businesses, leading to a decline in revenue and profit. However, in the 3 stable business segments, namely Rental, Fund and Consulting as well as property management businesses, we expect a partial drop in revenue, but are forecasting an increase in profit. Therefore, these stable businesses are the backbone of Tosei, supporting the company's operation in times of crisis.

Last is the hotel business. As you are aware, the segment is in a tough environment with a weather forecast sign of heavy rain. Revenue is revised down from JPY 1.8 billion to JPY 0.4 billion, and operating profit is also revised down from negative JPY 0.1 billion to negative JPY 1.0 billion. We have reopened 5 hotels from July, but the occupancy rate in the second half of this fiscal year is expected to be extremely low at 10% to 15% compared to around 95% prior to COVID-19. Therefore, the hotel business will be running normally throughout this year, but with the notion as if it were in a practice period to prepare for a better operation when business normalizes post COVID-19.

Next is Page 28 with the recognition of the current business environment. Due to the COVID-19 pandemic, we believe that the overall economy will be sluggish, driving a soft end-user market as well as the investment market, mainly consisting of the high net worth individuals. This outlook is shown in the weather forecast signs, as you see in the slide. Nevertheless, the key trend we should highlight is the fourth line from the bottom, the logistics facilities with the sunny mark. This is based on the rising demand of e-commerce due to the lockdown, and so far, we are not seeing a drop in the rent or increase in the buyer's cap rate. The logistics facilities is the only category where we are expecting a sunny weather condition.

In the private fund, one line below, mainly the overseas investors have adjusted the risk premium during March, April and May, and the investment has restarted today. Different from the Lehman crisis when all investments were suspended across the board, the environment today is sunny or partially cloudy as investment is continuing. Those are the key highlights of the business environment.

Moving to Page 29. We have various trends such as the cap rate post-Lehman crisis, the vacancy rate of the rental office market, and the asking rent index. Let me just explain one point. On the top chart, showing the trends in cap rate, you can see the orange line representing business hotels. Prior to the financial crisis in 2007, the hotel cap rate was 5.3%, but increased to 6.3% after the Lehman crisis in 2009. Since that time, up to today, the prices have increased and cap rates have declined to the level of 4.5% prior to COVID-19, showing a high level of liquidity.

In our forecast going forward, we applied the same conservative outlook as the past Lehman crisis with a cap rate increase of 1%. On the other hand, the occupancy rates were unchanged in the past crisis. However, in the latest forecast, we have reduced it from around 95% to above 60% based on the conservative review of the business, as mentioned.

Please turn to Page 30. This slide covers our business strategy responding to COVID-19 and after containment of COVID-19. I would like to give some highlights. If you look at the pink box on the top left, one shows the measures to maintain a sound business foundation. As mentioned, we are focusing on expanding these 3 stable businesses, which are the backbone of Tosei Corporation. Also, securing sufficient cash on hand and extending the borrowing periods are another measure of the company, as was explained earlier by Mr. Hirano.

The middle blue box shows our business strategy. As mentioned, we have booked valuation loss of JPY 7.6 billion to adjust the value of our existing inventories to post-COVID-19 market price. At the same time, we are reviewing the timing to sell our inventories and restructuring the mix of our portfolio. We pushed back around JPY 15 billion of property for sale to the following year or after to avoid selling them at a loss. As for the product portfolio, we plan to acquire assets of logistics, residential and office buildings in this order.

On the right of this page are the measures for mid- to long-term growth. Please take a look at the second box from the bottom. To facilitate the business expansion measures, we are currently studying a new product portfolio, which is data center. Secondly, we have the launch of cloud funding. At present, we started to recruit members, and we will cover more details later on. Thirdly, we have started research on the security token, also known as STO. It is for the virtual currency, or cryptocurrency, where we are currently studying the possibility of issuing Tosei coins backed by real estate. Fourthly, we are working to develop a T-MAP system, or Tosei MAP system, to reinforce and expedite the investment decisions. Using our database for various information on real estate, including cap rate and rents, we will calculate the integrated price of the property and register them on the T-MAP system to allow quick decisions around the investment. Such system is under development today.

Moving to Page 31. We have shown the business strategy for a robust management structure, as mentioned before. Going through this page, number one is covering the SG&A expenses and interest rates by our stable businesses. As described in the bar chart, the gross profit forecast of the stable businesses is JPY 9.6 billion in fiscal year 2020, which covers the entire fixed cost and interest rate.

Number two, on the right is securing the short-term liquidity and long-term financing. The cash and equivalents were JPY 5.1 billion in 2007 prior to Lehman crisis, which is now JPY 35.4 billion. The equity ratio has picked up from 22% to 35%, while net debt-to-equity has also improved by going down from 2.8x to 1.0x.

I would like to skip Page 32 and move to Page 33. We have the pipeline of the future projects in the development business. We hope you can have a look at this for your reference.

Go to Page 34. We have the future recovery and growth stimulation and the thoughts of Tosei a company. Please look at the line graph on the left. This is the simulation on the recovery of profit before tax beyond 2021 to just show you an image. The profit before tax is around JPY 12 billion in 2019, and the forecast is JPY 4 billion in this fiscal year, which is why you can see a dip in the graph.

Our main scenario is based on the assumption that the life with COVID-19 will continue until next fiscal year 2021, and the full recovery of the economy and the end user or investment market to the pre-coronavirus level will not be seen for a while. Thus, the profit from this year to next year will have a moderate increase. But once recovery is seen next year, we believe that profit before tax will recover to the same JPY 12 billion level prior to COVID-19 beyond fiscal year 2022. As the graph illustrates, we are aiming to achieve this U-shaped recovery, and this is the simulation we are running today at the company.

Moving to Page 35. One of the new business areas includes cloud funding, as mentioned. Based on the Real Estate Specified Joint Enterprise Act, Tosei will use SPC as a vehicle to set up this business and will be the first company obtaining license from MLIT and FSA. We plan to start the subscription in fall, and I'm personally excited as this will be the first project to launch in Japan. We hope to receive many attentions from our audience today and the market as a whole.

Please go to Page 36. As explained earlier, a total of 5 hotels, 2 new hotels shown on the top and 3 existing hotels on the bottom opened or reopened in July. Hoping that the market will recover next year and beyond, we will be running these hotels normally during this fiscal year with a notion as if we are in a practice period before the recovery comes.

Next is Page 37. During the shareholder return policy or dividend policy. With the latest forecast of decline in both revenue and profit, we unfortunately have a drop in dividend from JPY 47 per share to JPY 13 per share. The payout ratio is kept at over 25%, but we have also made an announcement on the share buyback. With a cap of JPY 500 million, we are currently executing the buyback program.

Total return, including the dividend and share buyback, is expected to be 46.3%, which is the ratio of the profit that we plan to return to our shareholders in this fiscal year.

Last is the current share price indicators on Page 38. On the left is the market cap, which was JPY 53.8 billion as of end of June or over JPY 56 billion as of today. In the middle, you can see the net book value of JPY 56.6 billion, which is after the revaluation, and one column on the right is the unrealized gain after tax at JPY 13.8 billion. The net asset value on the right is the sum of net book value and unrealized gains, which was JPY 70.4 billion. We believe this amount is the company's base underlying value, and it equates to JPY 14.88 on a per share basis. This is one way of interpreting our base value, and we hope that growth scenario on top of this will provide more picture to and drive the understanding of our shareholders.

This is all for my presentation. Thank you for your kind attention.

[Noboru Hirano, executive]

Now we would like to go into the Q&A session. The first question is the following. Regarding the real estate institutional investors who are your clients, are there any negative sentiment among those investors today? Can you give us the trend or your thoughts around the latest market sentiment?

[Seiichiro Yamaguchi, executive]

This is Yamaguchi speaking. Let me explain the sentiment of the overseas investors. As explained earlier, the AUM of Tosei's private fund is increasing, and most investors in U.S. and Europe as well as China and Singapore have set a new risk premium and are considering to or have restarted their investment.

In terms of the market for smaller-sized properties of JPY 500 million or less traded by investors, including high net worth individuals or business owners, it is slightly shrinking due to the weaker appetite or the lender's cautious behavior.

[Noboru Hirano, executive]

This is the next question, regarding the inventory valuation loss. I imagine hotels and related properties were affected more by the COVID-19, but what other properties such as retail stores or those in the revitalization business were subject to the valuation loss? Can you elaborate on your basic policy on your decisions for valuation? Also, the forecast occupancy rate is set at 60% to 70% in the hotel business, but do you not agree that such figures are too high and optimistic?

[Seiichiro Yamaguchi, executive]

This is Yamaguchi. We have explained the valuation loss of JPY 7.6 billion, which figure is based on quite a conservative assumption.

Regarding our hotel business, we mentioned that the cap rate increased sharply from 5.3% to 6.3% before and after the Lehman crisis. Thus, we believe there is a risk of around 1 percentage point increase in the cap rate.

As for the occupancy rates, we don't think that recovery to 60% or 70% will happen soon in this year or next year, but we believe that 60% or 70% occupancy rate should be enough to keep our business healthy when the market recovers. As explained, we used to have an occupancy rate of around 95% before the COVID-19, so the forecast is based on the conservative assumption. When you look at the land prices based on the value of inventories after the valuation loss, those prices are lower than the market expectation due to quite conservative a assumption in the softening market.

As for commercial facilities, we have received requests of rent reductions or payment holidays, but those impacts are insignificant to the full year performance in our Rental Business as mentioned. However, the new commercial facilities under development have rents set with a reduction of 20% based on the revaluation. The question remains on whether rents will drop 20% or whether the drop will be less than 20%, but we chose to use the conservative assumption.

In the Revitalization Business, all the cap rates have increased by around 0.5% when we book the valuation loss. We have been able to sell some properties in the Revitalization Business even after the COVID-19 pandemic in March. And we were successful in selling them by keeping the cap rate increase to less than 0.5%. Therefore, we believe the valuation loss is booked quite conservatively.

[Noboru Hirano, executive]

The third question is regarding the spread of remote working and the long-term demand of office buildings. Based on the current decline in demand in the metropolitan area, how much pressure are you expecting to receive in rents and occupancy rates? Also, do you think you will have to book valuation loss for the office building inventories? Could you also explain the status and the outlook for detached houses and condominiums as well?

As you read in various media today, some system integrators or IT companies are able to run the remote environment, and they are wishing to return to office-basis. So generally speaking, people say this trend will lead to a decline in office rents.

Nevertheless, for the office properties, on our balance sheet, we have rarely seen such situation. One reason is because our office customers are not entirely IT sector. And another reason is that 95% of our office customers in Tokyo are still SMEs with employee of less than 50. As you may have read in news, SMEs are struggling to convert their operation to a remote environment, so we do not think that the office demand will suddenly drop in the near future. So for the SMEs, in particular, we do not expect a rapid decline in the office demand.

This is all for the Q&A session. Thank you very much for attending our results presentation today.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]