Earnings Call Transcript - IX Q3 2022

Operator, Operator

Good evening, ladies and gentlemen. Thank you for joining this teleconference of ORIX Corporation for the Third Quarter Consolidated Financial Results for the nine-month period ended December 31, 2021. And this conference is attended by Executive Officer, Head of Treasury and Accounting Headquarters Mr. Yano. Before we begin, we have a request; please make sure that your mobile phone and other technical devices are either turned off or kept away from the telephone in order to avoid feedback. If we experience severe feedback during the meeting with the organizers' consent, we may have to suspend the meeting for a short while and speak to the person who is causing the feedback with your kind understanding. We will hear from Mr. Yano, and then after the presentation, we will have a Q&A session. The whole duration of the meeting is approximately one hour. Now we're going to start the meeting, and I would like to give the floor to Mr. Yano.

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

Good afternoon. I am Yano, the executive officer and head of treasury and accounting headquarters for ORIX. Thank you for joining us for the third quarter results announcement for FY22 March end, despite your busy schedule. So let me start. Please refer to the handout slide just as usual, and please turn to Page 2 of the handout. I'll go over the executive summary for key points to begin with. The first is net income and ROE; ORIX posted ¥211.3 billion in net income for the nine months ended December 2021, up 48.8% year-over-year. Annualized ROE was 9.1%. For the third quarter alone, net income was ¥64.7 billion, up 34.2% year-over-year. On December 17, we revised up our full year net income target from ¥250 billion to ¥310 billion. We have achieved 68.2% of our revised full year target of ¥310 billion. Although we're trying to sell Yayoi in the fourth quarter and earnings remained strong, there is still a lack of visibility in the market due to COVID. Therefore, we decided to leave our full year net income target unchanged at ¥310 billion. The second point is capital recycling. As you know, at ORIX, we aim to achieve higher asset efficiency and profitability through ongoing asset replacement in our portfolio. We have secured an investment pipeline of ¥1 trillion, both within and outside Japan in areas such as renewable energy and private equity investments. Deals we have already announced are steadily being executed. At the same time, we're moving forward with well-timed asset sales, including Yayoi and overseas private equity under these incentives. Going forward, we aim to improve ROE through a well-balanced mix of investments and asset sales. The third point is credit rating; ORIX is currently rated by five major credit agencies, and four of these have raised either their outlook or rating in the last six months. Although some rating agencies downgraded ORIX immediately following the outbreak of COVID, they now appear to have taken a positive view of ORIX Group, evidenced by our stable business base displayed by our ability to maintain a certain level of earnings and asset quality despite the COVID crisis. The last point is the shareholders' return. In December 2021, we announced a floor for the dividend and set the dividend payout ratio for this fiscal period. In addition to a net income forecast upwards revision, if net income exceeds ¥285 billion, full year DPS is expected to mark a record high. Please turn to the next page. As I mentioned before, net income rose 48.8% year-over-year for the nine months ended December 2022 to ¥211.3 billion. This translates to annualized ROE of 9.1%. The bar chart on the left shows the trend of net income and ROE. Should we achieve a net income of ¥310 billion, ROE is expected to be 9.9% at the end of the fiscal period. Coupled with the ongoing share repurchase program, EPS is expected to reach ¥257, surpassing the fiscal year '19 margin and record a new high. The right-hand bar chart shows quarterly net income and ROE trends. Net income was down 20.6% Q-on-Q, owing to losses at investees, but was 34.2% higher compared to a year ago when the post-COVID recovery had just started. Next page, please. This is a breakdown of segment profit. Segment profits were up 44.8% year-over-year to ¥350.8 billion. Allow me to break down segment profits into base profits and investment gains just as usual. The dark blue bar or base profit was up 34.4% to ¥254.9 billion, which is 73% of segment profit. The overseas segment, which includes ORIX USA, ORIX Europe, and Asia and Australia, sustained strong performance into the third quarter and contributed significantly to profit growth. The light blue is investment gains, which were up 81.6% year-over-year to ¥95.9 billion. ORIX USA realized multiple PE exits from Q1 through Q3 and posted investment gains. Property sales, primarily logistics centers in the Real Estate segment, also contributed. We plan to continue to take advantage of the favorable market to generate both higher base profits and investment gains. Please turn to Pages 5 and 6. These pages show the breakdown of profits and assets by segment. Six segments led by Overseas posted higher profits year-over-year, and overall segment profit was sharply higher by ¥108.4 billion. Compared to two years ago, all segments posted higher segment profit with the exception of three businesses, which were affected severely by COVID. ORIX's Overseas segment has grown to 47% of total segment profits for the nine months ended December 2021. Within Japan, businesses with a minor COVID impact are expanding, showing the strength of ORIX's diversified portfolio. We expect the three COVID-impacted businesses to gradually pick up as conditions normalize. The breakdown of segment assets shows a large increase in the Environment and Energy segment following the acquisition of Elawan. Additionally, assets in the Insurance segment rose on growth in the number of insurance policies, while growth in new leasing business in South Korea and China led to an increase in assets in the Asia and Australia segment. Page 11 and onward provides individual segment information, which I will explain briefly. Please turn to Page 11 at this point in time. Now, first is Corporate Financial Services and Maintenance Leasing. Corporate Financial Services recorded investment gains and valuation gains on our remaining stake from the IPO of Safie. Although we booked some impairment losses on the stake in the third quarter, following a decline in the share price, it still contributed strongly to profit growth. Auto profits were up on a strong used car market and a focus on margin improvement; an ongoing recovery in rental costs, which were impacted by COVID, also led to a large upswing in profit. Rentec profits were higher on growth in rental equipment earnings, led by 5G-related equipment. Profits have doubled compared to the year earlier level as utilization rates recovered from COVID lows. As a result, the profit doubled. We announced the planned fourth quarter sale of Yayoi in December, and this is expected to be ORIX's largest ever exit in terms of both selling price and profits, with a pretax gain on sales expected to be around ¥160 billion. Please turn to Page 13. This is the Real Estate segment. The Investment and Operations unit, the business model to develop logistics centers and other properties, lease the properties, and then sell the properties, is bearing fruit. Although the facilities operations business including hotels and inns continued to be impacted by COVID, occupancy rates are gradually improving, particularly at inns located in the country areas close to Tokyo. Although visibility is lacking with COVID variants spreading, we're working to improve earnings further by leveraging our knowledge and expertise in operating safely during COVID. Daikyo profits doubled year-over-year on strong condo sales and growth in construction and repair work orders. Please turn to Page 15. This is the PE and Concession segment. In December, we announced the sale of Kobayashi Kako, a PE investee manufacturing facilities, to Sawai Group Holdings. We posted impairment losses on this transaction, which led to lower profits year-on-year. However, all other industries are performing well. For example, APRESIA System, a network equipment manufacturer, is enjoying profit growth on the back of demand for 5G-related solutions. In the Concession business unit, Kansai Airport is still in the red as international traffic has not yet recovered. Please turn to Page 17. This is the Environment and Energy segment. Greenko began contributing to the group's earnings from Q2 and Elawan from Q3. Profit growth is also supported by investment gains from the sale of a stake in a Vietnamese renewable energy company with ESCO Power Corporation. Our renewable energy capacity in this segment is Japan's largest at 3 gigawatts at the end of December 2021, and by March end FY26, we plan to expand this figure to 8 gigawatts. We are moving steadily to achieving this goal through projects both within and outside of Japan. Please turn to Page 19 for the Insurance segment. Earnings from the former Hartford Life segment of the business fluctuate depending on market conditions, affecting the whole segment's earnings. But excluding this, ORIX Life recorded profit growth. ORIX Life operates an omnichannel strategy, including Internet and mail-order sales. As outlined on Page 20, this has allowed the firm to post growth in policies well above the industry average. As you can see, policies in force have increased to 2.4-fold in the last seven years. Please turn to Page 21 for the Banking and Credit segment. ORIX Bank has sustained steady earnings and non-face-to-face marketing efforts utilizing our online platform have supported growth in real estate investment loans despite COVID challenges. The Credit business posted reversals for credit costs during the same period last fiscal year owing to lower demand from long-string COVID lockdowns. The absence of this reversal led to lower profits year-on-year, but it is still solid. Please turn to Page 23 for Aircraft and Ships. This segment was previously more heavily weighted towards aircraft, but the ships business is comprising a growing proportion of earnings. The ships business posted a sharp upturn in profits as a strong marine shipping market drove sales of ORIX-owned vessels and the execution of new ship collateral loans. In aircraft leasing, both OAS and Avolon's earnings are in an uptrend, aided by recovery in the passenger market. Leasing revenues are on the rise, and we expect further recovery going forward. Please turn to Page 25 for ORIX USA. In addition to recording investment gains on a number of PE exits, Lument, which both originates and sells real estate loans in addition to managing these assets, performed well. Nine-month segment profits already surpassed the prior full year record at ORIX USA. ORIX asset management business is growing, and the PE business and earnings driver is also focused on utilizing third-party AUM in addition to proprietary funds. Please turn to Page 27 for ORIX Europe. AUM continues to increase here and reached a new record high for the third quarter in a row, coming in at EUR 339 billion at the end of December '21. Transtrend, a CTA firm, booked growth in performance fees, which helped ORIX Europe's profits surpass the previous year's record high in the first nine months of the fiscal year, like ORIX USA. Please turn to Page 30, last segment, Asia and Australia. As COVID variants become more widespread, we continued to control asset exposure in line with conditions in each country and region. Profit growth was fueled by expansion in new leasing business in South Korea and China, which experienced relatively smaller impacts from COVID. This completes our review of segment earnings. Please return to Page 7, and I would like to talk about capital recycling. We continued to aggressively invest in new opportunities. We have a ¥1 trillion investment pipeline focused on areas such as environment and energy, PE investment, and logistics centers. In the Energy and Environment segment, we are moving forward with multiple new investments in renewable energy companies. Within Japan, these are focused on development, while overseas, we're looking at M&A opportunities with companies with their own pipeline projects. We are currently considering a large private equity investment, mainly in Japan and the U.S., and we are looking at companies that could become a future business unit for the group. In Real Estate, we continued to develop high value-added logistics center properties, which utilize our group's expertise such as the installation of solar panels and ensuring facilities receive CASBEE accreditation. For MICE IR Osaka Prefecture City, an area development plan was announced in December '21, and in April, Osaka Prefecture City aims to apply for the central government's approval of the plan. We are also moving forward with asset sales. As I have already explained in each of these different segments, in terms of sales, we have already done the PE investment in the U.S., and the Kobayashi Kako sales will continue. We will continue to balance investment and sales in the portfolio. I would like to talk about the Kobayashi Kako now; I would like to talk about the credit ratings now. Of the five agencies that define our rating, four of them, S&P, Moody's, Fitch, and JCR have upgraded our outlook already in FY '22 March. We believe that these upgrades reflect an overall positive view on ORIX's stable business base, diversified stable earnings sources, high profitability, and steady asset quality and our conservative management balance sheet. While maintaining a financial baseline with an A credit rating, we plan to appropriately control the D/E ratio, liquidity at hand, and capital adequacy, and continue to procure funding under favorable conditions. Now, in December ’21, we upgraded our net income target and revised EPS upward from ¥78 per share to a higher range of ¥70 to ¥80, or a 33% dividend payout ratio. The graph on the left illustrates this. This shows if net income surpasses ¥285 billion, dividends per share will hit a record high, and if net income surpasses a certain threshold, then dividends will also increase. You see the graph on the right, which illustrates how ORIX has consistently raised dividends as profits have grown. Assuming net income of ¥310 billion, dividends per share will be ten times that over a decade ago. We would like to do our best to meet your expectations. Right now, talking to many other predictors, we are introducing stricter anti-COVID measures, and there is a global uncertainty leading to market volatility, which means that the situation remains unpredictable. We believe that our net income target of over ¥300 billion is very achievable. Again, ORIX is expected to continue to grow through ongoing capital recycling; achieving an 11% ROE is of utmost importance to ORIX, and we plan to continue to return capital to shareholders throughout this process. First, we would like to achieve a full year net income target, and then move on to the next page. That concludes my remarks. Thank you very much for your kind attention. I'd be happy to answer any questions you may have. Thank you.

Operator, Operator

Thank you very much, Mr. Yano. We are now ready for the Q&A session. So let us begin the Q&A session. Please refrain from asking more than one question at a time. The first question is from Mitsubishi UFJ Morgan Stanley, Mr. Kaku, please.

Unidentified Analyst, Analyst

Hello, I hope you can hear my voice. This is Tsujino speaking. As a matter of fact, I know that there were a number of exits from your investment, one case in the United States, a ¥9.9 billion equity method holding exit. So I'm not sure what you have sold or divested. If you could be so kind enough to give us a little more detail as to what you sold at what price and some indication of IRR perhaps, I think it will be very helpful if you could give us a little more detail. The reason why you were successful in making a number of exits this time is for what reason? PE activity was pretty strong in the United States until the end of last year. Have you decided to move faster in making an exit out of these investments? Also, at the same time, the loan balance is increasing. Is there any area that is not affected by Forex or any area that is affected by Forex in the United States?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

As to the gains on sales, properties as to Real Estate, most of the properties were sold in the first half, so it did not affect the third quarter results very much. During the third quarter with Energy and Environment, in Vietnam, renewable energy was divested, and we generated some profit from this. And in the United States, just as we do in Japan, in Hanzhong PE, there is one case as such in the United States. We make various bits and pieces of investments here and there. There are industries where we have certain initiatives, while we do not for others. That is one of the investments we are making. For this time, there were about three deals, which amalgamated into the amount that you have quoted. We decided to make an exit out of this investment because we thought the time was right. I am sure these will be followed by some others during the course of this year. I hope this answers your question.

Unidentified Analyst, Analyst

Yes, thank you very much, Mr. Yano. Thank you.

Operator, Operator

Nomura Securities, Sakamaki-San, please ask your question.

Naruhiko Sakamaki, Analyst

Yes. This is Sakamaki, Nomura Securities. Thank you. My first question is about the progress against the plan and also the risks in the fourth quarter in terms of profit. Can you please talk about those? You mentioned the ¥160 billion Yayoi sale was explained. Against the plan, the progress is pretty good. But in the third quarter, you had an increase in performance fees. What about in the fourth quarter? What are the potential negative factors? How does it compare to the third quarter or year-on-year? Can you provide some additional comments, please? The second question is about Energy and Environment. In Japan, for wind power, I think there is a review at the government or regulation level. Can you please update us on this?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

Thank you. With regard to your first question, for Yayoi, the ¥160 billion pretax has been announced, and post-tax is usually about 70% of this. But tax-wise, it is going to be a little complicated. The post-tax profit is not going to be very high, unfortunately, probably lower than what you might expect. That said, we have this level of profit, and I am sure that there's going to be a question about the remaining ¥200 billion. We intend to achieve ¥310 billion, and if possible, go even higher. In the fourth quarter, we are not expecting big capital gains, excluding Yayoi. We do not believe that profit will increase that much in the fourth quarter except for Yayoi. We will take another look at the asset situation, and we might have to post impairments in the fourth quarter. We aim to achieve ¥310 billion, and if possible, we hope to go even higher. That is my response to your first question. For Environment and Energy, we are steadfast and making steady progress without any big changes. That's all I can update you on. I hope that satisfies your question.

Operator, Operator

Thank you for the question. SMBC Nikko Securities, Muraki-San, please.

Masao Muraki, Analyst

I am Muraki from SMBC Nikko. I have one question on Page 7 with regard to capital recycling, thank you for your explanation. In the PE Investment, you mentioned ¥400 billion. I wasn't able to hear your explanation well, but there is going to be a major deal that may become one of your business units. Up until now in Japan, the deals were relatively smaller, but the Yayoi is going to be divested, which was a major investment. Will that happen in Japan or the United States? If you could give us a little more color to your statement. If there is execution of a larger deal, I understand your rating has been revised upward. Thinking about your capital policy going forward, if there was to be any major investment, is there going to be any implications for your credit rating?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

What I wanted to share with you is that there could be a case; it may not become as large as a segment, but we can look forward to giving birth to a unit. I apologize for the ambiguity of my earlier explanation. Regarding the geographical area, I must refrain from sharing any further details. As you know, we often receive offers directly from the seller and do not participate in tenders. We are going to divest Yayoi, so we are expecting to find something to replace Yayoi as a potential investment, but that doesn’t necessarily mean we have to make use of the proceeds generated from the sales of Yayoi; we don't see it as an obligation. However, it remains an option to reinvest the proceeds. Regarding ratings, we want to maintain our current credit rating. We are not intent on maintaining the current rating, but we would be pleased to if we can maintain it, as that would provide us with better conditions for financing. So we would like to think about the future within the range of the current rating, but if the investment appears promising, we would certainly pursue it, even if it might slightly sacrifice our credit rating. I hope this answers your question.

Masao Muraki, Analyst

Understood. Thank you.

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

Just to make a correction, my previous comment regarding Egypt should be Vietnam. I don't know why I mentioned Egypt. The Renewable Energy divestment took place in Vietnam and not in Egypt.

Operator, Operator

Thank you very much. Daiwa Securities, Watanabe-San, please.

Kazuki Watanabe, Analyst

Yes, this is Watanabe from Daiwa Securities. How do we interpret the guidance for this earnings announcement? FY22 profit and dividend plan, will this be disclosed at the beginning of the fiscal year? Also, for the midterm profit outlook, will you show not just 3 years, but maybe 5 years numbers? Can you please explain how your guidance policy works?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

We have had some internal discussions, and we will enter the planning phase quite soon, during which specifics will be decided. Unfortunately, at this point in time, nothing specific has been decided. But guidance, including dividends at the beginning of the fiscal year, should be communicated. That's our thinking. As for returns for investors, we hope to share some information in May. About the profit items, just showing a graph isn't sufficient. We haven't decided how we are going to present numbers over time, but we are looking to address this.

Kazuki Watanabe, Analyst

I understand. Thank you very much.

Operator, Operator

We will now take questions from JPMorgan Securities. Otsuka-san, please.

Wataru Otsuka, Analyst

I'm Otsuka from JPMorgan. I have a simple question. On Page 9 on the left-hand side, could you kindly explain how to interpret this chart? The ¥310 billion of profit if you're unsuccessfully achieving this, will you use the dividend payout of 32% and DPS is going to be between ¥78 to ¥85? Is this a correct understanding?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

Please refer to the right-hand side as well while interpreting the left-hand side. Any possibility of going beyond ¥85 should we succeed in achieving beyond ¥310 billion of profit was shown by the chart.

Wataru Otsuka, Analyst

Oh, I see then. In that case, my question is, as you are aspiring for ¥310 billion. The ¥85 DPS you shared in the publishing bulletin report is something that would reflect below the 33% payout ratio, which means you'd be able to, of course, increase DPS. Is it just a matter of how to interpret the communication of the corporate?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

In December, we raised our profit target; we thought that it was too early for us to carry out a revision. This is why we want to commit to achieving ¥310 billion, which means that we may be able to achieve the indicated DPS and perhaps even higher. That was our intent through this chart, which means this ¥78 to ¥85, as management, you are not conscious of this range, and there isn't much risk of falling within this range. As of now, that is correct. Thank you very much for that.

Operator, Operator

BofA Securities, Sasaki-san, please ask your question.

Futoshi Sasaki, Analyst

Yes, this is Sasaki from Bank of America. I would like to ask a question about guidance, just a point of confirmation. Next May, for the fiscal year ending March '23, will the dividend outlook and the profit outlook be disclosed, and at the same time, will you be indicating the midterm updated policy? I understand that you have just made a commitment about that today. Is that correct?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

Unfortunately, I cannot say I am committed to this, but that is the intent. That is the intention.

Futoshi Sasaki, Analyst

The global situation is very unstable, and it's difficult to predict what would happen. But depending on the situation, you may refrain from showing us next year's guidance. Is that correct?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

I don't think that would be acceptable. We should provide some formal guidance, but as for the specific method of how we provide the guidance, what is the best approach and how much we can explain, we need some time to discuss this internally.

Futoshi Sasaki, Analyst

But your intention is for next fiscal year, dividend outlook, and midterm plan should be provided. That is the intention. Is that correct?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

Yes, correct.

Operator, Operator

Thank you for the question. The next person is UBS Securities, Okada-san, please.

Taiki Okada, Analyst

I am Okada from UBS. Regarding new investments, how attractive are they? The ¥1 trillion pipeline you shared with us, and might there be some more investment opportunities in the future? Your PBR level is getting closer to one time, and regarding share repurchases, from the level of attractiveness, how would you measure that?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

It goes without saying that if the share price goes up, the share repurchase program's benefit of repurchasing our shares at a discount would go away. If PBR exceeds 1x, it does not mean we will stop proceeding with the shares repurchase. PBR is just an accounting indication; we believe we have a much bigger value than a PBR of one time. However, if we do not proceed with the repurchases just because PBR is one time, it does not mean we refrain from executing our share repurchase program, as the decision is based on other factors beyond just PBR.

Operator, Operator

Thank you very much. Citigroup Securities, Niwa-san, please.

Koichi Niwa, Analyst

Yes, this is Niwa with Citi. I have a question about the impact of the COVID-19 pandemic. In the midyear, you explained that the impact has bottomed out and you can expect recovery to pre-COVID levels. My question is, as you plan next year and beyond, in the main three segments of your business, how long do you think it will take for them to recover to prepandemic levels according to your internal discussions? I would like to understand what was discussed internally and what your outlook is for the future.

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

To be honest, this is quite difficult, as I have explained briefly earlier. For example, in hotels and inns in Japan, we saw some recovery in autumn, but due to Omicron, the February-March timeframe saw a lot of cancellations. This is the situation. Therefore, it is challenging to indicate when the recovery will take place. Having said that, Omicron is becoming more like influenza or a common cold, and we see some normalization happening in Europe. Aircraft leasing may be the first to recover. Japan is very cautious; international flights are not returning. Compared to aircraft leasing, recovery for Kansai Airport concessions may be slower. We cannot really specify when the recovery will happen. However, sometime in the next fiscal year, we hope to see a recovery of our business. We need to ensure that profit will be posted even with delayed recovery. We need to assess what we can do in other areas, and that is what we're trying to figure out. I hope you understand the situation.

Koichi Niwa, Analyst

What about Avolon? If you could comment, in the third quarter, it appears that recovery is a bit slower than expected. Do you see this as temporary and that recovery will be strong in the future?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

For Avolon and ORIX Aviation, I combined them and thought I answered this question in that way. For Avolon, there is a delay. The closing of the fiscal year is different, and therefore, accounts closing-wise, it's about one quarter behind. The Hainan impairment was posted in the third quarter last year, so this is a significant negative strain. In the second quarter, there was a Chapter 11 recovery. These are extraordinary factors affecting the numbers. For ORIX in the third quarter, nothing significant happened on either side. Generally speaking, the airline industry is recovering, and lease fee payments are normalizing. We are recording cash collection as lease revenue. While some of these accounts have normalized as well, I believe the recovery is actually stronger than it appears when examining extraordinary items.

Operator, Operator

Thank you for the question. The next person is from Jefferies Securities.

Unidentified Analyst, Analyst

I would like to ask questions about the interest rate hike in overseas locations. I don't think there is much of unrealized loss on fixed income. Regarding financing and foreign currency-denominated funding, if you cannot share with us the sensitivity to Forex, could you kindly share with us your expectations concerning profit or loss from FX, especially renewable energy? How does the interest rate hike affect profit or loss generation by Renewable Energy?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

First of all, regarding the Japanese market, even with yen fluctuations, it does not have an impact on P&L at all. In ORIX Life, we will benefit if the interest rate rises. For ORIX USA, we have asset values of about ¥2 trillion. During the time when the interest rate was low, we did fix some of the interest rates. Thus, the mismatch in terms of interest rates is not significant. If the rate hikes by about 1% suddenly, we could see about ¥2 billion of an impact on our profit. However, that is quite insignificant from our standpoint. For renewable energy, I do not foresee any major issues. In the Japanese market, if financing costs go down, there will be unrealized gains. From a business value standpoint, the interest rate for renewable energy outside of Japan does not fluctuate significantly, and we don't expect any issues to arise.

Unidentified Analyst, Analyst

Okay. Thank you very much.

Operator, Operator

The floor is open for questions. We are accepting questions. Mitsubishi UFJ Morgan Stanley, Tsujino-san, please.

Natsumu Tsujino, Analyst

For ORIX operation, you included aircraft impairment and stated that you have reviewed this from different perspectives. Previously, you mentioned there was very little possibility that payment would be posted, and better assets would be kept, while older ones would be sold off. However, we have seen the impairment. Was there a substantial change in this?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

This was a Chapter 11 issue, and that was the trigger for us to review this. We decided to post an impairment of around ¥2 billion to ¥3 billion. Yes, that is what occurred. We tried to be conservative, and this is how we proceeded. There is no additional intent beyond that.

Natsumu Tsujino, Analyst

Understood. Going into the fourth quarter, for aircraft and the investees, real estate properties, will you be evaluating these assets more aggressively? Is that correct?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

Of course, generally, we look at this every quarter. However, we tend to examine things more seriously in the fourth quarter, which is why we see larger numbers then. We will continue to monitor this closely, as required by accounting rules. Whatever is necessary for the fourth quarter, we will do that. Beyond that, I cannot provide much additional information.

Natsumu Tsujino, Analyst

What is the overall average cost of funding regarding the interest payments in the United States?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

To calculate this, for example, in early '20, the short-term interest rate went down. From July to September, we noticed that the number started to decrease overall. The assets have decreased slightly, but the interest payment financing cost reduced significantly in the United States.

Natsumu Tsujino, Analyst

If there are five short-term interest rate hikes in a year, will the interest rate rise considerably? You previously stated ¥2 billion for the year. I'm wondering if this will be sufficient. I'm just a bit worried about what you said. Can you please clarify?

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

Your analysis seems to focus on what is happening at ORIX USA, correct? The interest rates went down, and the interest payments were reduced while assets shrank as another reason. Both factors played out last year. I typically analyze consolidated numbers. ORIX Corporation and ORIX USA involve parent-and-subsidiary loans, and we manage our financing. There are some discrepancies as we analyze the balance sheet, and that is the only difference. I'm also reviewing the Aircraft business in these calculations. This may be a full year estimate, but the overall increase may not occur within one year, so adjustments are required. Nevertheless, I do take a comprehensive view of the balance sheet while executing ALM analysis, so ¥2 billion appears feasible at this point based on active interest rate changes.

Natsumu Tsujino, Analyst

Understood. Thank you.

Operator, Operator

We are still accepting questions. There seem to be no further questions. I would like to conclude this Q&A session for now and ask Mr. Yano to share his final remarks.

Hitomaro Yano, Executive Officer, Head of Treasury and Accounting Headquarters

Thank you very much for joining us in this teleconference despite your busy schedule. As we have shared, our business performance is steadily moving forward. If you have any further questions, please don’t hesitate to ask us through the IR Department or Sustainability Department. Thank you.

Operator, Operator

With this, we would like to conclude the ORIX's teleconference. Thank you very much for taking part in this session. This concludes the meeting.