ORIX (IX) Q4 2020 Earnings Call Transcript

ORIX (IX 0.05%)
Q4 2020 Earnings Call
May 22, 2020, 2:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Kohei Uehara

Hello, it is scheduled time at 3:00. So, let us get started with this session. So, thank you all very much for your participation to business performance announcement meeting for FY 2020 March end for ORIX. Thank you very much, indeed.

I'm going to be the emcee for this meeting from corporate planning department, and my name Kohei Uehara. I look forward to your cooperation in advance. As for the presentation material, you'll be able to refer to it on the screen, but also, at the same time, you'll be able to download it whenever necessary. So please make sure to -- that you can see the slides.

As for the schedule for today, we start from the presentation from Mr. Yano, head of treasury and accounting headquarters; followed by Mr. Inoue, CEO and representative president -- director, president. And after the presentation of the two executives, we will be entertaining questions.

We are scheduled to conclude the session at 16 hours. So because this meeting will be conducted online, there could perhaps be a possibility of you not being able to hear us well, but please do excuse us. As for the questions, after the presentation by CEO, Mr. Inoue, on the screen, please send us -- write out your questions and send them on the template, questionnaire form.

I'm sorry for this, but in the interest of time, we would like you to limit your questions to just one question. Now if we don't have enough time to entertain all your questions, we will be sending back the response through the secretary later on.

Hitomaro Yano -- Director, Executive Officer, andHead of Accounting

So good afternoon. I am Yano of treasury and accounting headquarters. Thank you very much for your attendance in spite of the busy schedule to this business performance announcement meeting of our company. Let me share with you the actual result for FY 2020 March end period.

Please open Page 2 of the handout slides. The page shows the net income and ROE for the full year. So harsh economic environment due to COVID-19 affected us in Q4. However, our net income was at JPY 302.7 billion.

This is lower than the prior year, but we did manage to achieve our target of JPY 300 billion. ROE was kept at double digit at 10.3%. There was a reversal of deferred tax liability associated with conversion of DAIKYO to 100% subsidiary in the third quarter. The reduction of corporate tax by JPY 27 billion contributed positively to the after-tax profit.

As a result, although net income declined by 6.5% year on year, pre-tax segment profits grew by 4.1%. Now please turn to the next page. The page shows the breakdown by business segment. Segment profit for the year was at JPY 417.7 billion.

Let me explain further by breaking down the profit into base profit versus investment gains. Until the third quarter, we were referring to the dark blue part of the bar chart as segment profits that excludes gains on sales. In order to facilitate for the ease of your understanding, we started to describe this as base profits from the fourth quarter. The base profit was down 5.5% year on year at JPY 277.9 billion.

Decline in profit in corporate financial services and others, as well as a negative impact from COVID-19, of which the details will be shared later, affected us, but a steady positive contributions were enjoyed from NXT Capital and Avolon investments we made in FY 2019. Now investment gains grew strongly by 30.3% from JPY 107.3 billion to JPY 139.8 billion. Gains on sales of PE investment, both in Japan and overseas, were posted, while a rebalance of business portfolio such as ORIX Living, Houlihan Lokey, a department for ESG data collection, analysis, evaluation at RobecoSAM was done at the right timing. Now please refer to the chart at the bottom of the slide.

The bar chart shows the trend of segment profits for the first five years. Investment profits, pale blue part, may fluctuate due to changing environment. However, as a result of strategic capital allocation and timely exit, we have been successful in maintaining the level at around JPY 130 billion, on average, which we believe is a proven track record of ORIX. As for the base profits at that blue part of the chart, it constitutes 70% of the segment profits for the fiscal year that displays a steady growth over the past five years.

Now please turn to the next slide that shows segment highlights. This is Page 4, so segment highlights. As shown on the chart on the left, segment profits from investment and operation, as well as overseas grew, while profits from all four other segments decreased. Now over to the table on the right.

Details by segment will be explained later by using slides after Page 16. So allow me to share with you just the highlights by making use of the slides. Now first, corporate financial services segment. Profits from the segment were down by JPY 10.9 billion year on year at JPY 14.6 billion.

Negative impact came from reduction in agency fee income from life insurance brokerage business, but efforts to diversify products, as well as the focus on nonlife insurance is under way. But on the other hand, Yayoi that provides accounting software services, the charged support, in fact, have increased number of membership and also the packaged products have increased sales. And the negative impact was JPY 1.8 billion from the leasing account standard changes. Segment assets declined by 1.1% year on year at JPY 948.3 billion due to a decline in the finance and leasing.

Now let me move on to maintenance leasing segment. Profit was JPY 33.7 billion, minus JPY 5.1 billion year on year. Auto lease profit was solid and Rentec saw an increase in profit due to Windows PC repurchase demand. However, with the intent to enhance service quality, service costs and SG&A expenses rose and IT assets needed to be depreciated, resulting in a profit decline.

As with corporate financial services, there was a negative impact from the accounting standard change of JPY 2.6 billion. For segment assets, there was a slight dip in auto driven by heated competition, but Rentec increased its IT-related assets and, all in all, a 2% increase year to date, standing at JPY 889.6 billion. Real estate segment profit was year on year minus JPY 12.4 billion, ending at JPY 76.9 billion. Logistics and commercial facilities, rental condominiums were sold and ORIX Living was sold as well, and profits from such neighbor sales were sustained.

However, gains from sales dropped year on year. Asset-managed business is strong. DAIKYO also saw a JPY 1.6 billion profit increase due to last-minute demand before the consumption tax hike. Segment assets were JPY 749.7 billion.

New investments continued, but we proactively sold facility assets. New lease accounting standards pushed up assets by JPY 90.4 billion. So year to date, actual assets decreased by JPY 60.9 billion. Next is investment and operation segment.

Profit was JPY 55.7 billion, a year-on-year increase by JPY 17.5 billion. Investment in our operation segment enjoying two major gains on sales in private equity investment, resulting in a JPY 4.5 billion profit. Concession business, namely airport, saw profit of JPY 6.2 billion. This was due to an increase in duty-free sales from increased inbound visitors and insurance income for typhoon damages from two years ago.

Details will be explained later, but although this business is affected by COVID-19, impact on our financials will be from the year ending March 2021. Segment assets grew year to date by 16%, standing at JPY 847.1 billion. This was due to new key investments in Japan and wholly subsidizing our overseas investment in wind power business. Profits for the Retail segment dropped JPY 3.8 billion year on year to JPY 80.4 billion.

Life insurance contracts and premium increased due to enriching our product lineup with foreign currency whole life policies. However, COVID-19 has heightened market volatility and suppressed interest rates, causing a loss for former Hartford Life Insurance's durable annuity. Real estate investment loans for banking and local financial institutions' loan guarantees increased, respectively, securing profit. As for segment assets, due to operating assets increasing for life insurance and banking, a 17% year-to-date increase amounting to JPY 4.1839 trillion.

Lastly, our overseas business segment. Profit increased year on year by JPY 31 billion to JPY 156.4 billion. Profits from new investments from the previous year contributed greatly. We also rebalanced our portfolios, such as Houlihan Lokey, UAF, RobecoSAM's ESG data collection, analytics, evaluation arm, and benefit from capital gains.

Segment assets increased year to date by 5% to JPY 3.2874 trillion, acquirement of U.S. real estate loan and servicing firm, Hunt Real Estate Capital, contributed to this increase. Let me now move on to Page 5. On this page, we are showing the impact of COVID-19 on our Q4 pre-tax profits.

I will cover four major areas of business. First is the impact of the stock and bonds market fluctuating. The market value of securities held dropped and resulted in a negative impact of JPY 3 billion. Former Hartford Life Insurance liability reserves for variable annuity shifted as well, a negative impact of JPY 7 billion.

OCE, formerly Robeco, AUM decreased, thus see decline, a negative impact of JPY 3 billion. Energy prices plummeted and JPY 3 billion was acknowledged as loan loss provisions for U.S. energy operators. In April, the market has recovered and, as of today, the factors explained earlier are impacting positively upon 2021 March Q1 results.

The second area is facility operation included in our real estate segment. Here in Japan, we operate 5,000 rooms at hotel and in facilities. Inbound traffic, mainly from Asia, has decreased dramatically. Domestic travel and business trips were put on hold, and occupancy rates dropped.

Also in an effort to stop the spread of the virus, we shut down aquariums and some other facilities, and the overall impact is a negative JPY 2 billion. The third area is our concession business. Kansai Airport, where we have a 40% share, operates a total of three airports, including the Kansai International Airport. Because of the global restrictions imposed on travel, many international flights were either cut back or canceled.

As a result, March arrival and departures for the three airports was minus 32% year on year, and passengers declined by 69%. Despite this decline in sales, we are conscious of sustaining employment and contributing to the local community, but we are seeing a major setback in profits. Having said that, there is a three-month lag in account settlements for Kansai Airport. Therefore, the concession business impact is not reflected yet in our 2020 January to March Q4 results.

This also goes for the fourth area, aircraft leasing business. There is no impact for Q4 results. When we combine these four areas, the impact of the COVID-19 outbreak is approximately JPY 15 billion to JPY 20 billion before tax. I have now explained the results for the year 2020 March, and I will now hand over to our CEO, Inoue.

Makoto Inoue -- Executive President, Group Chief Executive Officer, and Director

This is Inoue speaking. So I'll start my presentation from Slide No. 6. I'm sorry to repeat what has been -- already been presented.

But just as has been announced yesterday, for 2020 March end, pre-tax net income at JPY 412.6 billion, in fact, was an increase by 4.3%. However, our net income was down by 6.5% year on year at JPY 302.7 billion. That was the result. ROE was at 10.3%, which is lower than 11%.

However, just as announced last time, we remain to be unchanged in setting our target of achieving ROE of above 11%, and we will continue to exert our effort in that regard. Now due to market fluctuation, multiple numbers of credit rating agency has changed their outlook to negative of ORIX -- for ORIX. But the credit rating of A, in fact, is maintained. 2020 March end dividend payment has been scheduled for the full year.

Per share of JPY 76 is to be paid; first half JPY 35, second half JPY 41. So thereby, the payout ratio will be 32% for the year. And just as we have announced in the last year, with a maximum of JPY 100 billion, shares repurchase program was executed. So let me report the details on the shares repurchase program.

2019 November 1st through to May 8th, 2020, was the exercising period. 34 million shares have been repurchased at the price of JPY 55.8 billion in total. The average share price was JPY 1,638, 1-6-3-8. Shares outstanding of ORIX, in fact, compared to the treasury stock is 5.8%.

So therefore, 11 million shares in excess of 5% will be canceled -- or has been canceled. Unfortunately, from February this year, there was an outbreak of COVID-19 pandemic that had resulted in the sharp decline of the share price. So therefore, the shares repurchased may not have provided enough benefit to the shareholders. This is our understanding.

So our initial target for the shares repurchased to the maximum extent of JPY 100 billion was not being used fully this time. As to the extension of the exercising period for the program or renewed program for the repurchase is not planned because we need to place the highest priority to securing liquidity at this point in time. So we want to continue to watch over the development of COVID-19 pandemic and also the recovery of the macroeconomic conditions before we arrive at the decision to go ahead or whether or not to continue with this execution. So as of October of last year, we had made a mention about our midterm direction.

But as of now, we do not know how long this COVID-19 pandemic is going to continue and how much time is required before the macroeconomic conditions will be recovered. So all the major countries, including Japan, they are all trying to find their own way to prevent pandemic. So therefore, there is no alignment and no harmony between -- among different countries of the world. So under such circumstances, as for ORIX, we have decided to refrain from disclosing any short-term direction, as well as a midterm direction because we find the disclosure to be associated with much difficulty.

As has been said, 2021 March end, the major challenge for us will be securing liquidity. So COVID-19 -- the battle with the COVID-19 is very much dependent on the timing. It would give a major impact to ORIX' business performance. However, from a financial standpoint, so we remain -- our long-term debt ratio remains to be high, and we have an ample amount of liquidity as well.

So the finance, as well as the operating cash flow of ORIX Group -- the impact, that is, given from COVID-19, will remain to be limited. So please refer to Page 8. So 2021 March end, cash on hand verification. Although we have carried out the verification within the limited scope, however, it has been concluded.

So the magnitude of the impact that is given to various different businesses has been verified from sector to sector, but we are going to maintain other than, of course, the operation of the facilities. And assuming worst case and JPY 500 billion worth of new investments and loan extension is to be executed, we can still be securing JPY 600 billion of cash. So we remain to be unchanged in upholding a basic policy of prioritizing the liquidity for the time being. But for this year, while funding stress will be considered in a conservative manner, by controlling the new investment and loan extension, we should be able to secure enough liquidity.

However, in order for us to raise the level of accuracy, from a midterm perspective, as soon as we start to see the end of the battle against COVID-19, we -- of course, putting our effort in bringing our business back to its usual speed is going to be the first and foremost importance. However, we think that it would take a certain amount of time. Now real estate segment, facility operation, inclusive of hotels and inns, unfortunately, they are all closed. So therefore, the revenue generation from this total segment asset of JPY 118 billion is not to be expected for the time being.

Because of the incurrence of HR cost, as well as the depreciation cost, before we start to see the recovery in the inbound tourist demand, profit contribution will be -- remain to be negative. And as for rentable properties, request for rent reduction has been received, and we are responding on a case-by-case manner. As for concession business, centered around Kansai Airport, until -- for four years, until March of 2020, vis a vis the investment -- total investment of JPY 20 billion, we were able to receive a dividend income of JPY 19.1 billion. However, we are assuming that this dividend income will be zero for the coming New Year and that there will be no contribution made to the overall profit generation.

But over the four years, the accumulated amount of equity method income is JPY 50.4 billion, including JPY 3.1 billion of interest income from JPY 12 billion of shareholders' loans. So concession remaining period is as long as 39 years. If you were to take that into account, even if we were to bear losses for a single year, we will be able to recover back the business just as easily. So as for aircraft leasing business, for 2020 March end, the segment lease -- segment asset was JPY 555.3 billion with segment profit being JPY 44.6 billion.

However, many airlines have forwarded the request for deferral for the leasing fee. So we're responding to the request on a case-by-case basis. So before we can start to see the full recovery in terms of the distribution of goods and people, it would take -- I think the airline industry will remain to be sluggish. But ORIX has a long-standing experience, as well as knowledge and many and varied experiences and knowledge, starting from 1990 as a result of experience in Gulf War, SARS, 9/11, GFC.

So based on my own experience, I am imagining that it may take more than a year. Well, according to a newspaper article, it states it may perhaps be extended for -- until 2024. But I think that it would take more than a year before we can come up from the COVID-19 pandemic crisis. However, more than 50% of our investment, in fact, are in intangible assets.

So we foresee the downside risk to be limited. Asset management segments, ORIX Europe or former Robeco. In 2019 December, AUM was EUR 287 billion, but by end of March of 2020, unfortunately, it was downsized to EUR 233 billion. But from April, we started to see some recovery in the amount of AUM.

So of course, we feel the need to watch closely over the development in Europe. So as to the COVID-19 impact to other segments, it is not -- no way zero. So in the finance department, we have been receiving a request for lease fee deferral -- lease repayment deferral. So some negative impact must be taken into account.

So there are many uncertainties right now. And for this reason, we will refrain from disclosing any details regarding midterm plan for now. Once we start to see how things will settle with COVID-19 pandemic, we would like to take an opportunity to explain in a little more detail. And now moving on to Page 10, please.

Having said that, predictions for when the corona issue subdues or when it subdues, we analyzed the time line for how long it will take to return to business as usual and estimated the impact on ORIX Group's consolidated net profits. Considering the global situation and the status of Japan's state of emergency issuance, we do not believe that the outbreak will mitigate during Q1 nor Q2. However, with our tentative scenario, if, by the end of Q3 things gradually return to normality, our estimate is that our group net profit will dip to a JPY 200 billion to JPY 180 billion range. If the impact were to prolong for one year, our net profit will drop to possibly JPY 120 billion to JPY 80 billion range.

Now these numbers assume that we do not make any new investments or divest any assets during the given duration. So please understand that these estimates are for reference only. Now currently, we have many new investments in our pipeline, and we are going to conduct physical due diligence. India, Europe and the Middle East, there are many projects on the rise.

However, we cannot allocate manpower to do due diligence. So once COVID-19 subdues, we will mobilize our team. However, unfortunately, we cannot forecast when COVID-19 will settle and when people can be mobilized. So depending on this time line, these numbers will see an uptake.

Now moving on to Page 11. Our basic approach is that the spread of COVID-19 does impact us tentatively, but hereafter, the market will turn for the better. This trend will be an opportunity for ORIX to further accelerate growth. Worldwide, M&A entry prices inclusive of key investments, have hiked, and we believe prices will begin to adjust.

After COVID-19 is contained, we will be agile, not miss out on opportunities, and we are preparing ourselves for that timing. As of last October, we announced our midterm direction of JPY 400 billion and JPY 500 billion. This remains unchanged, and we plan to redraw our time lines. As for our new midterm business plan, incorporating our midterm direction, we request that you wait until we see the COVID-19 impact mitigating.

Our basic policy for the MICE IR project remains unchanged. However, we do need to validate the impact of COVID-19. We must secure ample liquidity to endure prolonged facility closures. How the new way of life and social distancing will impact us? Will operating an IR facility be possible adhering to such concepts? We will closely monitor the reopening of Las Vegas.

For Osaka IR, the MGM-ORIX consortium is the only operator participating in the RFP process. However, since the state of emergency issuance continues, the government has yet to disclose IR basic policy. Uncertainty around future processes remain but our understanding is that the Osaka City government will issue its own stance. As a candidate operator, we are not in a position to comment on this matter.

We are, however, undergoing necessary considerations and analysis and will reflect these findings on future proposals cited. Let me now move to Page 12. ORIX Group believes that the outbreak of COVID-19 will possibly bring about various new business opportunities. This is why that we are not changing our midterm direction, in other words, not changing our group net income expansion to JPY 400 billion and JPY 500 billion.

We realize that COVID-19 will greatly change values in many areas, here in Japan and around the world. Digitalization, new investments in light of AI acceleration, office space cost reduction due to more people working from home, we do anticipate many new themes will emerge. Let me move on to Page 13. As mentioned earlier, it is extremely difficult to discuss our forecast for the year ending March 2021.

However, our interim dividend forecast for the fiscal year will be the same as before, JPY 35. And considering the circumstances, the payout ratio is planned to be raised to 50% for this term only. As for the second half dividend, please do understand that this is dependent on the COVID-19 situation, as well as our future performance. Until we see a containment of COVID-19 and can judge that the world economy is on a recovery trajectory, there will be no share buyback.

We do realize that recovering from the COVID-19 crisis will take a certain amount of time. However, fiscal year 2021 March and beyond in some shape and form, we trust the world economy will revive. And a minimum JPY 300 billion profit will be our goal, and then thereafter, JPY 400 billion and JPY 500 billion. That will be our commitment.

When the economy revamps to normality, our intent is to allocate surplus capital into new investments for the growth of ORIX Group. On that occasion, we seek your understanding that we will revise our dividend payout ratio to the level of last year. As for resuming share buyback, we will consider liquidity, ROE and equity ratio. And after the chaos surrounding the world economy subdues, announcements will be made accordingly.

Now please move on to Page 14. This will be the summary page. The outbreak of COVID-19 has imposed great damage upon Japan's and the world's economy, and we must prepare for an unprecedented state. Unfortunately, at this time, we could not disclose any concrete numbers for our future outlook.

For the foreseeable future, our basic policy will be to secure liquidity and take a very cautious management approach. Lastly, let me report to you that the impact of COVID-19 has been limited in our day-to-day business operations. At our overseas businesses, including Europe and the U.S., all of our managerial members are working from home, and there has been zero impact on business operations. Here in Japan, 60% of our managerial members are teleworking, and, again, I would like to report to you that there has been no impact upon our business operations.

We will continue to be mindful of the health and well-being in continuing our operations. So this will conclude my presentation, and I apologize for the inconvenience of having to present to you over the phone, but this has been the explanation of the year just ending, as well as our outlook for this fiscal year.

Kohei Uehara

So we'd like to start the Q&A now, start entertaining your questions. [Operator instructions] And we have received the first question from Nomura Securities, Mr. Sakamaki. On Page 5, with regard to the decline of energy price, what kind of exposures ORIX holds in the energy space?

Unknown speaker

ORIX USA, in fact, has an exposure to energy-related or they do own some energy-related portfolio. So there are some requests for rescheduling, but at the moment, it is not subject to impairment as of now. So with regard to the portfolio size, it is about tens of billions of yen. So we do not foresee any major negative impact.

Kohei Uehara

So from Goldman Sachs securities, a question from Mr. Nakamura with regard to the increase of the risk for advance provision. So by applying CECL, for the first quarter '21 March onwards, how do you see the risk increasing for the cost of provision from second quarter and later?

Unknown speaker

So from the first quarter, yes, we're going to be applying this new model, CECL, and we are now collecting the information as of now. So as of now, so the total amount of provision as of March end is less than -- just less than JPY 60 billion. And so I suppose the amount is going to increase pretty much, but there will be no major negative impact given to P&L. And for second quarter and later on, this is going to be my personal opinion to a certain extent, but I wonder if we should be reflecting our view to this.

But for the first quarter, in any case, in light of the current situation, the whole life will be reflected. So from the second quarter, we cannot foresee us increasing the subject. So that is what we foresee at the moment. And as for the second question from Mr.

Nakamura, again. This is in regard to aircraft leasing business. So there has been no changes in terms of the cash flow generation from the lease income from aircraft. So therefore, the risk for impairment is, I think, limited.

Kohei Uehara

So how do you see the downside risk from ORIX Avalon in the next one to two years?

Unknown speaker

So there has been some request for deferral. Three months of deferral of the leasing fee has been received from the airline companies. So the deferral for the principal part is going to be accepted, but at the moment, we are carrying out negotiations so that we can continue to receive the leasing portion of the interest income part. Virgin Atlantic, Avianca and also there have been cases of airline filing Chapter 11.

So therefore, whether our aircraft will continue to be used by these airline companies or not is yet to be known. But in any case, we are carrying out negotiations right now. And even in light of this possible filing of Chapter 11 and even if they are to continue to use our aircraft by leasing, in fact, it will be calculated on an hourly basis. So therefore, we would have to closely watch over the development.

And as of now, AVITAS, from the appraisal company, the aircraft valuation, in fact -- the devaluation, in fact, has not occurred as of now. And -- but in thinking about the time line to maturity extent, maybe 20% or so of an impairment risk may be possible. This is what we think for now. And in light of what had happened in the past, the volatility of aircraft, in fact, was to the maximum extent of 25%.

So I think the biggest risk would be to the maximum of 25%. So if it was to continue for 2024, then there could perhaps be an impairment risk sometime in the future. This is our way of thinking right now.

Kohei Uehara

So we have, from Mizuho Securities, Sato-san, a question. So as listed on Page 9, MICE IR, which is a major investment for the future, the prerequisite for the investments has changed dramatically. And so if nothing is done, then, obviously, the demand in capital cost will rise within the capital markets or the markets itself. And so in terms of portfolio rebalancing, have you changed your policy or thinking pre-corona and post-corona?

Unknown speaker

So to be quite honest, MICE IR project, we are in conjunction with MGM, and MGM themselves have closed their facilities in Las Vegas. So we do need to carefully watch what they do and, at the same time, will MICE IR investment be a good investment for ORIX? We are revisiting this concept. I cannot say anything solid at this moment, but in terms of the bidding timing, nothing has been announced to date. But we can assume -- or I can assume that there will be a dramatic delay.

So for the upcoming few months, we will validate the situation and, once again, we will judge whether it is a positive investment on behalf of ORIX. Now from that perspective, rebalancing the portfolio, again, to be candid, we have approximately 5,000 rooms, accommodations for hotel. We do have some new projects, but again, with the impact of COVID-19 for operational activities, we have to be a bit more rigid in our outlook perhaps. But at the same time, the mid- to small-sized hotel accommodations, it is also possible that a round of purchasing can occur as well.

So again, another question is when inbound will come back, when will people become more mobilized and travel. So for real estate portfolio, we will rebalance, recycle, but at the same time, for new investments, the possibility of such investments is also in the horizon. Now for rebalancing the portfolio, again, the COVID-19, regardless of this issue, our sense is that the JPY 12 trillion portfolio total asset rebalancing is as usual. In other words, we will adhere to our previous policy and enhance or improve our ROA and ROE.

Kohei Uehara

So from Citigroup Securities, this is a question from Mr. Niwa -- or Ms. Niwa. So what will be the subject for acquisition? Will it change in terms of the criteria? If you could be so kind enough to elaborate on the menu that appears on Page 12.

So I think the investment that you have been making recently has been focused around the infrastructure, but what we have gathered as a result of COVID-19 is that the diversification in terms of the investment was not enough. And also, the listed -- the public company's stock price, share price tends to be high globally. So I think the valuation remains to be too high for you to carry out any acquisition in that regard. So just as you mentioned in your comment, do you think that the level of the target, the price-wise, would be -- would come down to your expected level?

Unknown speaker

So let me answer to the question. So we have -- you said that we have been focusing our investment activities around infrastructure. So it is more of photovoltaic solar power infrastructure here in Japan that we have been making an investment for. But fortunately or unfortunately, with regard to solar power, there has not been any request for rescheduling.

So therefore, with regard to the solar power investment, we do not foresee any major issues because the payment will be made by the government, the national government or the EPCOs. So therefore, I think they tend to be safer in terms of the nature of investment. And in the United States, service provision related to infrastructure, a PE, are the subject for investment in the United States. And that is for the sake of the service company for the maintenance of infrastructure-related assets.

So the state government and also federal government in the United States will be the -- subject to credit extension. So we don't foresee major issues arising from there. And as for the entry price, we did continue to rise and will be higher. So with the current conditions, there will be some sectors that may start to see a decline in the entry pricing.

And in the case of Japanese real estate asset, with many people working from home on a telework basis, with regard to office buildings, there could be a decline in the pricing. But in the prime location, that could not be the case. And warehouses or logistics-related facilities, we foresee an uptick of the price rather than a decline. So therefore, we do have more than teens in numbers of the -- numbers of assets that we own.

So if we start to see overheating the pricing, there could perhaps be a possibility of us disposing of some of the assets. So unless they are truly good quality, we will not be making any renewed investment. But in the case of overseas, we don't -- we cannot judge in a unified manner as to the valuation being too high or low. So -- but of course, we would base our decision on the -- whether the valuation is high or low.

So -- but I'm sure we would be able to start to see how things will develop from maybe September of this year. The outlook may become a little more accurate. So basically, we would be putting together a plan for IRR of more than 15%. And with exit in mind and -- so if we can identify any deal that falls into or that fulfills all this criteria, we would -- we may be perhaps forthcoming in terms of making a new investment.

If not, we will not just buy those assets. So please understand that our base expense remains to be unchanged.

Kohei Uehara

So from Daiwa Securities, Watanabe-san, we have two questions. So just on DPS on Page 10, your estimates and your payout ratio of 50%. And when we consider this prerequisite, then normality of within this year, JPY 76 would be a good figure. Last year, you had considered the minimum line for dividend, but do you have resistance toward a decrease in dividend? And also what are the conditions for you to deem that the corona or the COVID-19 has been contained?

Unknown speaker

So JPY 35 interim and 50% payout ratio and JPY 76 are equivalent to maintain this level as we did last year. The after-tax has to be JPY 190 billion. That will be the bottom line for the full-year net income. Now JPY 190 billion, give or take, I do believe that we can reach that threshold.

However, some of our activities are interdependent on other activities. So that is why we had given you this number. Now we do have resistance toward decreasing our dividend. We do not want to do that, but again, considering the circumstances, this may be a possibility.

But our approach is to make sure that we uptick every effort to make sure that this does not happen and sustain the JPY 76 mark, which is on par with the previous fiscal year, which means that payout ratio of 50% is obviously quite reasonable. However, again, if the COVID-19 impact prolongs for a year or even longer, then in terms of liquidity procurement, we have to prioritize liquidity. So this will perhaps result in a lesser dividend. I know that I'm going in circles, but that is our approach and intent.

Now the second question, what is your definition or conditions to deem that COVID-19 has been contained? Now here in Japan, Japan as a country is moving toward containment, but the PCR testing here in Japan is extremely limited at the moment. So perhaps we do not have that many patients or perhaps with the BCG shots, Japanese are perhaps immune to the virus. We do not know. About run us recently, perhaps from China, if they carry with them a proof or a passport saying that they are negative, perhaps we can welcome them in.

So if we can be confident that it has been contained in China and apparently, it is called a negative passport and apparently the Chinese government is considering such an issuance. So if they possess that, we can perhaps have them come in. And once China begins to mobilize, it will have a ripple effect. So the containment of COVID-19 equals people are starting to travel, that will be the minimum condition.

And if people start moving, inbound traffic will increase and our operational business will increase and aircraft business will increase. Whether we can go back to what it was prior to corona? It will take some time. But again, to contain the virus, it is to minimize the number -- the spread and cases. But obviously, we cannot just judge by the Japanese numbers.

The U.S. is undergoing quite severe or dire situation. So what will happen with the Southern Hemisphere, we do not know. The African continent, obviously, will be impacted greatly by the virus as well.

So all in all, we do not know which direction this will take. And I am not, obviously, an expert in this field. So I will have to refrain from making any solid comments. But containing the number of cases and seeing a dramatic decrease, as well as secondary containment -- contamination is put to a stop, that will be the condition.

Kohei Uehara

So from SMBC Nikko Securities, this is a question from Muraki-san. So the net profit JPY 180 billion to JPY 200 billion and also a reduction of maybe a possible JPY 80 billion to JPY 120 billion. And in that case, what will be the prerequisite for base profit, as well as investment gain? And what would be the amount of losses that will be drawn from aircraft leasing business, as well as concession? And also, how do you foresee an investment opportunity from here down the road?

Unknown speaker

PE fund remains to be highly competitive. And also, there will be some intervention from the government, as well as the central bank. So we do -- I do have an interest in this. So with regard to JPY 180 billion to JPY 200 billion of simulation for the net profit is based on no investment, no divestment, no new divestment, no new investment.

And so JPY 20 billion to JPY 30 billion, in fact, will be an impact to aircraft leasing business, and the concession will be damaged by JPY 20 billion to JPY 30 billion. And in the case of KIX, so there is an equity income -- equity method income, so which means that the loss would not be reflected to P&L directly, but the revenue may come down to as low as zero. So in other words, which means that JPY 10 billion worth of income may perhaps go altogether. So therefore, the personnel costs and also taking into account the depreciation charge, about the JPY 20 billion to JPY 25 billion of negative may perhaps be expected -- anticipated for.

With regard to the investment, the second part of your question, so some of the rehabilitation, restructuring investment out there in the regions may be the case. There could perhaps be a possibility by making use of ORIX services, which we up and run. So NPL, nonperforming loan, investment may perhaps start to increase as a result. But of course, there is a relation between -- among regional banks that we have to take into consideration.

But we don't intend to issue uncollateralized bond. So therefore, project or maybe some investment through the means of perhaps municipal government bond perhaps would be the way in which we will be making an investment. And also at the same time, I don't know whether there will be some possibility of an acquisition or selling of the business, especially in real estate. But of course, as we have said, we would stick staunchly to our direction, policy and criteria.

And for to the competition with PE fund, up until now, we have been engaging in a battle field in the area where the competition is not that harsh with the PE funds. So especially, not SMEs, but really middle to smaller sizes, we have been making an investment. So it was not a crowded market as such, especially between and among different PE funds. And also in regards to government, as well as the central bank intervention, we do not foresee any intervention or any deals that the government or the central bank may be interested.

We have been avoiding those deals. So we -- and that, of course, attitude of ours remains to be unchanged.

Kohei Uehara

From Mitsubishi UFJ Morgan Stanley Securities, Tsujino-san, we have a question. Now you explained the payout ratio and considering the prerequisite, then JPY 180 billion to JPY 200 billion net income scenario. If you go below that, then can I understand the dividend will be lower than last year?

Unknown speaker

Yes, that will be the worst-case scenario, but we will do our best to not make that happen, not have that happen. Now for the first quarter and second quarter, round about when Q2 ends, we do believe that we can see more or less of an outlook of what will happen. And then at that point in time, we will see what the numbers will be for fiscal 2021 March. And then 50% payout ratio, do we execute that, do we fine-tune that? We will consider at that point in time.

But again, unfortunately, JPY 35 interim and if there's zero revenue for the second half of the year, then we may be below last year's level, but we want to avoid that at all cost.

Kohei Uehara

Now for real estate, the pre-tax profit, that there was a JPY 2 billion impact. And so for the real estate service profit for the operational business, the profit was quarter on quarter, OK, quarter on quarter, JPY 5 billion year on year, it dropped by JPY 10 billion, I believe. So in terms -- you absorb a lot of this through expense reduction, correct?

Hitomaro Yano -- Director, Executive Officer, andHead of Accounting

So this is Yano speaking, and I will respond to the second question. And now for the operational business, Tsujino-san, I'm not sure which number you are referencing to. But we sold some of the services -- a service business. And for the operational business in nature, it is prone to seasonality.

So usually, Q4 is the worst, usually. So the numbers that we are relaying to you now, for this quarter, is an estimate that we work from, and we are comparing that. So there will be a slight difference from the actual statements. Now for the operation business, hotels and the inns, as well as the seminar facilities and aquariums, this is what we referred to.

Kohei Uehara

So the real estate service income, we do have other services income?

Unknown speaker

No, we are just carving that out. So if you do have a more detailed question, if you could give us a call, we will explain this in more detail. I know we cannot have a conversation at this point. So let me stop there for this question.

Kohei Uehara

So the question is from Mr. Tom Grew of Alma Capital. Is it the case that 50% is maximum you will pay this year? So there is a possibility of no H2 dividend if things become very bad.

Unknown speaker

Yes, that's right. That is our worst-case scenario. But as I said, I try to avoid this worst case scenario. That is my effort.

So maybe I try to maintain maybe around JPY 18 billion net income. But it's dependent upon coronavirus issues. Therefore, this is 50% is I declare today and then maybe half year results -- when we announce the half year result, if this is a worst-case scenario happens, there is maybe a chance to revise this idea.

Kohei Uehara

From JPMorgan Securities, Otsuka-san, we have a question. On Page 10, for net income, let's say, the range was JPY 200 billion, then in comparison to the JPY 300 billion for 2020 March period, which business is seeing a decline?

Unknown speaker

So this will be operational business and aircraft and concession. So these three.

Kohei Uehara

So from SMBC Nikko Securities, Taki-san, I believe, is how we pronounce this Chinese character. So being affected by COVID-19, would you be focusing very much on the maintenance of the current credit rating?

Unknown speaker

S&P, Moody's, Fitch, all those credit agencies, disregarding the numbers that we have been announcing, whether it's the reflection of COVID-19 crisis or not, but automatically, it was -- they have changed the outlook to negative. So they may -- we have not been receiving any negative impact to our liquidity. However, our outlook is now a negative watch. So in terms of credit rating maintenance, I may have mentioned the same back in October, but you see we would like to, at the best effort, maintain A.

But you see, we don't -- we are not adamant about this. So we may let this credit rating go a little lower. But of course, it would remain to be our target for sure.

Kohei Uehara

So it is time for us to conclude this session. So I would like to close the Q&A opportunity for now. So the presentation this time, in fact, was conducted online. So please do excuse us if you had any difficulty in hearing.

So I would just like to conclude the business performance announcement session for 2020 March for ORIX. Thank you all very much for your participation into this session despite of your manifold duties. Thank you very much.

Duration: 61 minutes

Call participants:

Kohei Uehara

Hitomaro Yano -- Director, Executive Officer, andHead of Accounting

Makoto Inoue -- Executive President, Group Chief Executive Officer, and Director

Unknown speaker

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