Nomura Real Estate Holdings Inc

TSE:3231

Earnings Call Transcript 2021-Q2

[Eiji Kutsukake, executive]

I'm Kutsukake. Thank you very much for attending the financial results briefing on the second quarter results for the 6 months ended September 30, 2020. In the interest of time, I would like to begin without further ado.

Please turn to Page 5 of the financial results presentation material. The consolidated financial results for the 6 months from April 1 to September 30, 2020, were as follows: operating revenue was JPY 223.9 billion; operating profit was JPY 24.1 billion; business profit was JPY 24.6 billion; ordinary profit was JPY 19.4 billion; and profit attributable to owners of the parent was JPY 12 billion.

I will discuss the performance by business unit later. Interim dividend is unchanged from the previous year at JPY 40 per share. Annual dividend forecast also remains unchanged from JPY 80 per share that we announced in the beginning of the fiscal year. As of the end of the second quarter, shareholders equity ratio stands at 30.2%.

Next, please turn to Page 6. I will now explain the year-on-year changes in operating revenue and profit by business unit. Residential Development Business unit recorded increase year-on-year in both operating revenue and business profit at JPY 83.9 billion and JPY 1.7 billion, respectively. This is because average price of housing units sold and gross margin ratio increased, although the number of housing units sold for Residential Development Business unit was 994, which was almost flat from the same quarter the previous year.

In Commercial Real Estate Business unit, both operating revenue and business profit declined to JPY 80.4 billion and JPY 15.2 billion, respectively. This is mainly due to a decrease in revenue from property sales and temporary closure of fitness studios, lower hotel occupancy and leasing revenue decrease from the retail facilities because of the COVID-19 impact.

Service and management sector recorded JPY 67.2 billion of revenue and JPY 10.2 billion of business profit. Both revenue and business profit from investment management business unit increased as the impact of the pandemic was limited. But Property Brokerage & CRE Business units saw both revenue and business profit decline since both number of transactions and total transaction value decreased as a result of temporary closure of branches and limitation on face-to-face sales activities. Property & Facility Management business unit revenue and business profit were also down due to decrease in construction orders.

Please turn to Page 9. The forecast for fiscal year ending March 31, 2021, for the company overall and for each business unit remains unchanged from the forecast announced in July this year.

Next, I will briefly discuss the performance of each business unit. Please turn to Page 16. First, regarding Residential Development Business unit, the total number of housing units sold, including both condominiums and detached housing in housing sales business was 994 in the second quarter, almost unchanged from 997 units from the same quarter previous year.

There were more higher-price range units sold in Central Tokyo, including the Court Jingu-Gaien. The average price of housing units sold was above JPY 75 million per unit. Gross margin ratio was 22.4%. As a result, both revenue and profit rose for the Residential Development Business unit as a whole. However, the average price of housing units sold and gross margin ratio are, as of the current timing, and is subject to change as number of housing units sold increases since there are variances between individual properties.

In the fiscal year ending March 2021, the average price per housing unit is expected to rise slightly to the upper range of JPY 60 million, while gross margin ratio is expected to remain at the same level as the previous year at around 20%. In the first 6 months of this fiscal year, there was no sales of rental housing.

Please turn to Page 17. Top left chart is the number of housing contracted. Total of 1,711 units were contracted in the first 2 quarters of fiscal '21 ending in March. In April and May, during the first quarter, after the state of emergency was declared, sales activities were voluntarily restrained. And even after the resumption of sales activities, the number of customers received in the model units have to be limited.

Despite these restrictions in sales activities, customer demand remained strong. In the 3 months during the second quarter, 1,453 units were contracted, which was higher year-on-year.

This resulted in 86.6% of contract rate against the number of housing sales of 3,700 units or JPY 250 billion expected to be booked this term. This trend compares favorably vis-a-vis the performance in recent years. As mentioned earlier, gross margin ratio is 22.4% currently and is expected to be around 20% on a full year basis, which is similar to the previous year's level.

As for the land acquisition from the beginning of this fiscal year, please refer to lower right chart. 1,450 units, equivalent to revenue worth JPY 137 billion, were acquired. Accumulated land bank is worth JPY 1,530 trillion. In this year's acquisition of redevelopment project in the center of Tokyo, specifically Nishi-Azabu 3-chome redevelopment project that appears on the following page on Page 18 is included, driving up the value and equivalent of sales per unit. We expect these numbers to change as more land is acquired going forward.

I will next discuss Commercial Real Estate Business unit. Please turn to Page 20. In commercial real business unit, sales of property for sales decreased year-on-year. Furthermore, due to the spread of COVID-19 infection, fitness club Megaros was temporarily closed in April and May. Hotel occupancy declined. Leasing revenue decreased in retail facilities during the period when business activities were voluntarily restricted. These impacted the results.

In the leasing business, revenue from new properties such as Tokyo Toranomon Global Square, an office building that was completed in this fiscal year, and SOCOLA Musashi Koganei Cross, a retail facility, is newly added.

Please turn to Page 22. As I mentioned earlier, sales of property for sales in the first 2 quarters this fiscal year was JPY 35.9 billion in amount and generated JPY 6.3 billion in gross profit, both lower than the same period previous year. This is because of our strategy to bide time and not rush in selling property for sale but to ensure steady sales while taking into account the impact of COVID-19.

Although not included in the figures in the second quarter, the first 6 months of the fiscal year, sales of land port to a logistics facility to Nomura Real Estate Master Fund was already completed this month. Furthermore, although we cannot disclose the details yet, we are making good progress in the sale of multiple properties to take place from the third quarter and thereafter.

The full year plan for sales of property for sale is expected to be achieved. Total of 8 properties with estimated total investment amount of approximately JPY 44 billion was secured. This resulted in the estimated total investment amount of JPY 540 billion in the stock for property for sale.

We will continue to be vigilant about the possible impact of COVID-19 while we secure investment opportunities in each asset type, namely office buildings, retail facilities and logistics facilities, depending on the market environment.

Thus far, I've reported the results from the second quarter for fiscal year ending March 2021. I would now like to explain the expected impact from COVID-19 on our full year results. Please go back to Page 10. As we announced at the briefing session on the first quarter results in July, because of the spread of COVID-19, the expected impact from the pandemic is around JPY 20 billion in business profit from the actual loss of revenue opportunities and postponed revenue opportunities. For this reason, the business profit forecast for this fiscal year is JPY 60 billion, but the impact will not be limited to this fiscal year. Next fiscal year and beyond, although gradual recovery trend may be observed, certain level of impact is expected to remain.

Please turn to Page 11. As of today, the prospect of containing COVID-19 pandemic is still uncertain. In European countries, the number of cases are once again on the rise, and we need to remain vigilant in Japan as well. On the other hand, there are signs of resumption of economic activities supported by various policies, including the go-to campaigns.

There are also some positive developments toward gradual resumption of travels between some countries, mainly in Asia. Taking these into account, in the with-COVID and post-COVID environment in Japan and globally, gradual recovery in economic activities are anticipated. I believe the general view is that the recovery may take 2 to 3 years.

Our company's assumption is, and this is our assumption as of this moment, is that it will take until fiscal year ending in March 2023 to achieve recovery to the same level as the previous fiscal year, ending in March 2020 of JPY 82.8 billion in business profit or around JPY 80 billion in business profit.

Please turn to Page 13. Since the founding of our group, we have always strived to adapt to the changing society and environment, always from the customer perspective, anticipating changes in needs based on market in ideas and continue to deliver new added value to the society to enrich people's lives in the way they spend their time. Such mindset of our group will not change even after the impact of the pandemic that made people question fundamentally how they live, when lifestyle and work style are rapidly changing. In the post-COVID or with-COVID society, to meet the needs, we will deliver new value added to our customers and achieve growth of our company.

With respect to housing, the spread of the infection is sometimes understood as having caused one-way shift from the city center to the suburbs and from condominium to detached housing, but in reality, housing needs have become very diverse as work-style is changing, including working from home.

In the midst of this change, there is a greater interest in urban-type compact town, which is the concept Nomura Real Estate has been proposing to develop. Multifunctional convenient city Proud Tower Musashi-Koganei Cross, Proud City Hiyoshi, Proud Tower Kameido Cross and other properties that are very well received by our customers continue to show strong performance in sales.

People hesitate to travel or go out frequently. The convenience of having places to shop for daily necessities within the walking distance and to have good environment for telework and schools, and clinics nearby is valued, and I believe that is reflected in the strong performance of our properties.

As shown in the example of Proud Tower Higashi-Ikebukuro Station Arena property 1 minute far from Higashi Station, more than 100 units were sold quickly in August. There remains a strong need to see convenience of housing in Central Tokyo in front of station to reduce commuting time and avoid risk. To meet such diversifying needs, we will continue to offer a broad range of safe, secure and quality housing by leveraging our strength that takes advantage of area and regional characteristics.

Now please turn to Page 14. With respect to the workstyle, without a doubt, workstyle diversification is underway where individuals are trying to maximize performance, irrespective or -- of where they are. In recent years, as part of workstyle reform, there was a gradual shift already underway which manifested in full force because of the need to prevent the spread of infection.

Nomura Real Estate is developing quality small office called H1O for small office, and satellite shared office, H1T, based on the concept of Human First, which puts people who work in these offices first. They are very well received by the tenant companies and people who actually work in these offices. Already, it is decided to develop 15 H1O properties and 55 H1T offices, including affiliated offices.

Nomura Real Estate's midsized high-grade office PMO series, and from large office buildings, such as Tokyo Toranomon Global Square in Shibaura 1-chome District project to midsized PMO and smaller H1O and H1T for hourly rental and temporary use and can cater to diverse needs with high-quality office space regardless of size.

Under the concept of Human First, we will continue to deliver new value by offering our unique products and services that proactively address the new office style and ideal work style.

With that, I would like to conclude my presentation.

Nomura Real Estate Group will continue to create new value based on the market in ideas, and we'll continue to achieve growth by achieving our group vision, new value, real value through high-quality real estate development and services.

Thank you very much for your kind attention.