Mitsui Fudosan Co Ltd

TSE:8801

Earnings Call Transcript 2019-Q1

[Kawabata Shingo, executive]

Good afternoon. I am Kawabata, Executive Manager of the Investor Relations department. I will present Mitsui Fudosan's First Quarter Fiscal 2018 Results.

Overall, Mitsui Fudosan achieved positive year-on-year revenue and profit growth in first quarter, primarily driven by the strong revenue and profit growth in the Property Sales segment. This was the result of multiple completions of high-margin domestic and overseas projects, and the start of handovers during first quarter.

We are making good progress towards our full year forecasts. I will now explain our results in more detail using the fact book.

Please turn to Page 2 for a summary of the consolidated profit and loss statement. For the first quarter of the fiscal year ending March 2019, consolidated operating revenue was JPY 442.3 billion, up JPY 60.7 billion year-on-year or 15.9% year-on-year.

Operating income was JPY 55.7 billion, up JPY 4 billion or 7.8% year-on-year. Ordinary income was JPY 54.6 billion, up JPY 6.5 billion or 13.6% year-on-year.

Profit attributable to the owners of the parent was JPY 38 billion, up 12.4% or JPY 4.2 billion year-on-year. I will discuss the segment results in more detail using the pages that follow. On this page, I will briefly touch upon the key items below the line.

Nonoperating expenses improved by JPY 2.5 billion year-on-year. Within this, equity and net income and losses of affiliated companies increased JPY 0.6 billion. The improved positive contribution reflects progress on handovers for residential properties at overseas equity-method subsidiaries, led by the Singaporean and Thai subsidiaries.

Net other nonoperating income increased by JPY 1.9 billion, the aggregation of smaller items, including some one-off factors. We reported no extraordinary profit or losses in first quarter.

In the table on the upper right-hand of the page, we show the progress relative to our full year forecast in percentage terms. Revenue from operations was 23.7%., operating income was 22.3% and profit attributable to the owners of the parent was 24.9%.

The rate of progress this time was slightly ahead of where we typically are in first quarter. We are making good progress towards our full year guidance. Now I will discuss the performance of the individual segments in more detail.

I will start with the Leasing segment. Please turn to Page 3. Leasing segment operating revenues rose JPY 9.5 billion year-on-year, but operating income fell JPY 1 billion. On the Domestic side, we made solid progress on upward rent revisions for our existing office properties and saw positive contributions from both office properties and retail facilities, including Tokyo Midtown Hibiya, which came online last fiscal year.

There was also a contribution from a new U.S. office property. However, there were 2 domestic office completions in first quarter, for which we incurred initial expenses. As a consequence, while revenues increased, profits declined in first quarter. With regard to the new office property coming online in the U.S. this fiscal year, the 55 Hudson Yards Project in New York is slated for completion in October, but contracts have already commenced for some tenants.

Under accounting practice in the U.S. and Europe, free rent is amortized over the term of the lease contract. As a result, there is revenue recognition from the outset. Therefore, although the property is not yet fully completed, we are already generating revenues and profit.

For your reference, we disclosed segment information for overseas profits on Page 7. In first quarter, we reported year-on-year increases of JPY 2.4 billion and JPY 0.9 billion in revenues and operating profits, respectively.

The vast majority of the increase is the result of the contribution from 55 Hudson Yards.

Returning to the Domestic business, our non-consolidated Tokyo Metropolitan Area office building vacancy rate was 2.5% as of the end of June 2018. This is a 0.3 percentage point increase relative to the 2.2% as of the end of March. The rise in the vacancy rate is due to the completion of Misubu Tamachi in May. The property is 100% leased, but some of the leases only start from July or later, hence, the slight increase as of the end of June.

We note that the Nihonbashi Takashimaya Mitsui Building completed in June, but given that all of the leases will only commence in July or later, this property was not included in calculating the vacancy rate as of the end of June.

We continue to expect the vacancy rate as of the end of March 2019 to be around the 2% level, in line with our initial guidance. For your reference, as shown on the lower left, nonconsolidated revenues increased year-on-year on the following positive contributions. JPY 3.3 billion from new properties coming online and full year contributions. JPY 2.6 billion from existing properties and JPY 0.6 billion from shifting, terminations, et cetera.

Revenues from shifting and terminations rose on contributions from currently operational logistics properties. Moving next to the Property Sales segment. Please turn to Page 4.

Segment revenue was up JPY 40.6 billion year-on-year, while OP increased JPY 5.7 billion. With regard to the domestic residential business, please see the table on the upper right.

We report sales of 1,074 units, down 150 units year-on-year. However, unit prices rose substantially year-on-year to JPY 96.99 million.

The average unit price exceeded the JPY 100 million mark for condominiums, up significantly year-on-year in first quarter. There was a high concentration of handovers in central Tokyo high-end properties. Such properties tend to command high margins as well.

Therefore, despite the year-on-year decline in units, both revenues and profits grew strongly on both the higher unit prices and higher margins. We also show inventory levels for the domestic residential business in the third table down on the right-hand side of the page.

Condominium inventory stood at 167 units as of the end of June, up 59 units from the end of March. The increase is the result of completions and the start of sales for multiple properties in first quarter.

However, selling conditions remain strong, and on an absolute basis, 167 units in inventory is significantly lower than historical levels. Market conditions remain very strong.

Property sales to investors and individuals overseas, et cetera, reported year-on-year improvements in revenue, but optically, profits declined in first quarter. However, as shown on Page 7, revenues from overseas property sales rose JPY 19.2 billion and operating income increased by JPY 2.2 billion.

The increase in both revenues and profits for the overseas property sales business derives from handovers for the BBC Television Centre condominium property. Therefore, by implication, the Property Sales to investors business reported year-on-year revenue and profit declines in first quarter.

This is due to a high base for comparison, reflecting the sale of high-margin domestic properties in first quarter fiscal 2017, and the absence of such sales in first quarter of fiscal 2018.

Next, the Management segment. Please turn to Page 5. Operating revenues for the Management segment rose JPY 6.1 billion year-on-year, and OP rose JPY 0.4 billion. The higher revenue was primarily the result of an increase in the number of units under Management in the Repark Car Park Leasing business and higher unit contract prices in retail brokerage transactions for the Rehouse business.

With regard to the upswing in profits. The primary contribution came from the increase in the number of consignment sales projects for Mitsui Fudosan Residential. As you can see from the relevant table, the number of brokerage transactions at the Mitsui Rehouse business in first quarter was 9,881, an increase of 1 transaction or essentially flat year-on-year.

However, as noted earlier, contract unit prices continued to rise, up 5% year-on-year, for a 13% year-on-year increase in transaction volume to JPY 394.7 billion.

With regard to the flat year-on-year growth in transaction numbers, this was the result of a lower number of transactions completed during the quarter. However, the total number of transactions initiated in first quarter was up several percentage points year-on-year. Market conditions remain strong. We continue to make good progress on the number of transactions, and believe we are on track for achieving our full year forecast.

Next, the Mitsui Home segment. Please turn to Page 6. Operating revenues rose JPY 5.1 billion and operating losses narrowed by JPY 1.7 billion. As noted in the comments section, revenues rose on higher sales from the new construction and the Reform/Renewal businesses, which led to a smaller operating loss. The improved sales from the new construction business reflected a higher year-on-year order backlog as of the beginning of first quarter.

Turning to the final segment, the Other segment on the right-hand side of the page. Other segment operating revenue fell JPY 0.6 billion and OP declined JPY 0.8 billion.

The existing Hotel and Resort business continues to perform well. However, we opened 2 new hotel properties in first quarter, the Mitsui Garden Hotel Otemachi and the Mitsui Garden Hotel Gotanda, for which we incurred significant initial expenses, which depressed segment profits.

The top line decline is the result of a lower order backlog for Mitsui Fudosan reform company relative to the previous fiscal year, but is largely in line with plan.

Moving on to the consolidated balance sheet. Please refer to Page 8 for a discussion of the asset side of the balance sheet. Total assets as of the end of first quarter was JPY 6,396,300,000,000 up JPY 111.5 billion from March 2018.

We show the major line item changes on the right-hand side of the page. Outstandings in real property for sale as of the end of June 2018 were JPY 1,524,600,000,000 down JPY 0.1 billion from March 2018.

New investments were up year-on-year, but were outweighed by the increase in cost recovery. As noted earlier in the discussion of the Property Sales segment, we made very good progress in sales of residential properties leading to the higher level of cost recovery in first quarter.

Next, the changes in tangible and intangible fixed assets as shown in the lower right-hand side of the page. The outstanding balance as of the end of June was JPY 3,356,400,000,000, up JPY 37.4 billion from the end of March 2018.

We show the major items underpinning the increase in the comment section. In conjunction with the completion of Nihonbashi Takashimaya Mitsui Building and Misubu Tamachi Tamachi Station Tower South, Mitsui Fudosan paid the final installment of construction expenses.

In addition, Mitsui Fudosan America made new investments, including the 50 Hudson Yards and the 55 Hudson Yards Projects. Another major driver of the increase in assets was from investment securities. As of the end of first quarter, investment securities stood at JPY 829.4 billion, up JPY 41.5 billion from March 2018, primarily the result of higher share prices.

Next, on the liability side of the balance sheet as shown on Page 9. I will comment briefly on interest-bearing debt. The outstanding balance of interest-bearing debt as of the end of June 2018 was JPY 2,766.1 billion, up JPY 161.4 billion from the end of March 2018.

As a result, the D/E ratio as of the end of first quarter fiscal 2018 was 1.24x, and the equity ratio was 35%.

For your reference, we show a breakdown by company of interest-bearing debt on the right-hand side of the page, and the factors underpinning the changes in the comment section.

This completes my remarks.