Mitsui Fudosan Co Ltd

TSE:8801

Earnings Call Transcript 2021-Q1

[Atsuro Uchida, executive]

Good afternoon, everyone. I am Uchida, Executive Manager of the Investor Relations department. I will present the first quarter fiscal 2020 results. I will discuss the results in more detail later, but at a high level, our first quarter results were impacted by the COVID-19 outbreak, reflecting our decision to cooperate with government requests and close our retail facilities, hotels and retail brokerage sales offices. In addition, given that the decision to close our retail facilities curtailed opportunities to generate revenue, we chose to provide rent relief for retail tenants while the facilities were closed.

We note that since mid-May onward, we gradually reopened our retail facilities and hotel and resort properties having put into place appropriate preventative measures to ensure the safety and security of our customers and facility staff as a top priority.

In our office business, requests to terminate leases or for rent relief have been limited. Existing office rent revenues are increasing. In the domestic residential business, we have made solid progress in handovers for properties such as The Tower Yokohama Kitanaka and Park City Musashi-Koyama The Tower.

Reflecting factors such as the temporary closures of facilities or restricted operating hours, we reported year-on-year declines in revenues and profits for the Leasing, Management and the Other segment, which includes the facility operations. However, the Property Sales segment reported year-on-year gains in revenues and profits, driven by handovers of domestic residential properties focused primarily on central urban, large-scale redevelopment projects. That said, overall consolidated revenues and profits declined year-on-year. The Q1 results are in line with our initial consolidated guidance.

I will now explain our results in more detail using the fact book. Please turn to the next page for the consolidated profit and loss statement. First, first quarter operating revenues were JPY 407 billion, down JPY 20.1 billion or 4.7% year-on-year. Operating income was JPY 36.8 billion, down JPY 14 billion or 27.6% year-on-year. Ordinary income was JPY 29.7 billion, down JPY 19.6 billion or 39.8%. And profits attributable to the owners of the parent was JPY 13.7 billion, down JPY 19.4 billion or 58.5% year-on-year.

In the table on the upper right, we show actual results relative to our full year forecast in percentage terms. Operating revenue stood at 22%, operating income at 18.4% and profit attributable to the owners of the parent at 11.5%.

Relative to historical progress rates for first quarter, optically, the percentage for profit attributable to owners of the parent appears low. This reflects the impact of factors such as extraordinary losses taken in first quarter related to COVID-19 and the fact that the consolidated tax burden rate was temporarily elevated in first quarter. On a full year basis, the progress is largely in line with our initial assumptions for our forecast.

Next, returning to the left-hand side of the page, I will touch upon the key items below the line before discussing segment results in more detail. Looking at the breakdown of nonoperating income, equity in net income or loss of affiliated companies declined JPY 3.2 billion year-on-year, primarily owing to a high base for comparison. This is related to the large number of handovers of high-margin condominiums in residential property sales business in Thailand in the first quarter of the previous fiscal year and the decline in hotel occupancy rates at affiliated companies because of the COVID-19 outbreak.

Net other nonoperating income declined JPY 2.4 billion year-on-year, primarily reflecting commissions related to the establishing of foreign currency borrowing facilities. As a result, nonoperating income was a negative JPY 7.1 billion with the losses widening by JPY 5.6 billion year-on-year.

Next, extraordinary gains and losses. Please look at the table on the right-hand side of the page. We posted JPY 6.2 billion in extraordinary gains in sales of investment securities. In line with our policy to reduce our strategic equity holdings, we sold some of our holdings during first quarter as a part of our ongoing review of strategic holdings.

In extraordinary losses, we posted JPY 11.8 billion in COVID-19-related losses. This is the aggregation of fixed costs for facilities, which were closed as a result of the outbreak, such as rent expenses for leases on retail facilities and hotels, depreciation expenses and other fixed costs.

Please turn to Page 3 for a detailed discussion of the segment results. Starting with the Leasing segment. Operating revenues fell JPY 20.4 billion, and operating income declined JPY 11 billion year-on-year. As noted in the comments section, the key contributors on the positive side were the increase in existing office rent revenues; the contribution from Mitsui Outlet Park Yokohama Bayside, which opened in June; and the full year contribution from LaLaport Numazu, which opened in the previous fiscal year. At the same time, we incurred initial opening expenses related to the completion of new office projects such as Bunkyo Garden Gate Tower, Otemachi One and Toyosu Bayside Cross. And as noted at the outset, segment results were impacted by the closure of retail facilities and rent relief measures granted to the tenants of the retail facilities.

Although not noted in the comments section, we gradually reopened retail facilities from mid-May onward. Since reopening, customer traffic has gradually improved. Reflecting this, GTV at our regional malls and outlet parks has been recovering.

With regard to office leasing, new leasing has been largely completed. Request for rent relief or lease terminations from existing office tenants has been limited. The nonconsolidated Tokyo metropolitan area office building vacancy rate was 2.1%, up 0.2 percentage points from 1.9% as of the end of March. The slight increase is temporary and reflects the staggered timing of tenants moving into newly completed offices. The vacancy rate remains at historically low levels.

Next, the Property Sales segment. Please turn to Page 4. Operating revenues for the Property Sales segment increased JPY 29 billion, and operating income improved by JPY 13.6 billion. First, with regard to the domestic residential business, please look at the table on the upper right. The number of units sold, a combination of condominiums and detached homes, was 1,449, up 792 units year-on-year. As a result, subsegment operating revenues rose JPY 66 billion, and operating income increased JPY 19.3 billion.

In a continuation of the trend seen in the previous fiscal year, average unit prices were pushed up by the recognition of a high number of high-end, central urban large-scale redevelopment condominium projects. The average unit price for condominiums was JPY 88.99 million. On a blended basis, including detached homes, the average unit price was JPY 88.13 million. While not noted here, the sub-segment OPM was 19.5% in first quarter. Even in comparison with the 9.1% OPM of first quarter fiscal '19, you can appreciate that the margin on units handed over during first quarter were very high. We note that the full year OPM for last fiscal year was 11%, and our full year guidance implies a 10.6% OPM. We believe we are solidly on track for our full year forecast.

Completed inventory stood at 326 units, up 140 units from the end of March. While inventory has increased, this reflects the impact of COVID-19. It includes the impact of temporary closures of our sales centers, which meant we were unable to conduct sales activity for April and May and the completion of new suburban properties during this period. Sales activity has since resumed, we expect to make progress, but we'll be tracking customer trends closely.

Relative to our full year condominium unit sales target of 3,800, the contract ratio as of the end of June stands at 83.1%. Relative to the 81.6% level as of the beginning of the fiscal year, the pace of progress has been slow as a result of the temporary suspension of selling activity. However, when compared to the 86% level of June 2019 and the 81% level of June 2018, the progress rate is still high at above 80%. As such, we believe that we will be able to make good progress toward our full year target through our sales activity going forward.

Next, the Property Sales to Investors and Overseas, Individuals subsegment. Reflecting a high base for comparison, subsegment operating revenues fell JPY 37 billion, and operating income declined JPY 5.6 billion year-on-year. However, we continue with our negotiations for Property Sales in second quarter and beyond, primarily with J-REITs and private funds.

Next, the Management segment. Please turn to Page 5. Operating revenues declined JPY 9.8 billion, and operating income fell JPY 7.7 billion year-on-year. As noted in the comments section, both revenues and profits were lower as a result of government requests to restrict activity outside of the home to essential tasks to contain the COVID-19 outbreak. This resulted in lower utilization rates for Mitsui Fudosan Realty's Repark car park leasing business and lower brokerage transaction volume owing to the closing of the retail brokerage Rehouse sales offices.

With regard to trends in the secondary market for condominiums, the number of completed transactions fell in April and May. However, after the lifting of the state of emergency and the reopening of brokerage sales offices starting in June, transaction levels have been recovering. We will continue to track the sustainability of the recovery trend in second quarter and beyond.

Finally, the Other segment. Please turn to Page 6. The key business for this segment is the facility operation subsegment, which is primarily focused on the hotels and resorts business. In addition, it also includes the new construction under consignment business, a build-to-order detached home business and the reform and renewal business for offices, retail facilities and residential properties, both previously included in the Mitsui Home segment.

For the segment as a whole, operating revenues declined JPY 18.8 billion, and operating income fell JPY 7.8 billion year-on-year. The major reason for the year-on-year declines is the closure of our hotel and resort properties in the facility operations business in response to government requests.

Although not indicated in the comments section, I will provide more detail. Following the national government's declaration of a state of emergency in April, we closed 18 of a total of 32 hotel properties operated under the Garden Hotel and Celestine brands and all 5 of the resort properties in order to protect our customers and hotel staff from COVID-19.

From the 1st of June onward, after putting into place appropriate protections, we have been reopening our hotels. We are currently focused on domestic demand, given the limited prospects for demand from inbound travelers to Japan at this time.

Next, please refer to the right-hand side of Page 6. We show here figures for the Overseas business for your reference. As noted to date, we have compiled revenues and profits for the Overseas components of each segment such as Leasing and Property Sales into a single table for your convenience.

As shown in the table, total Overseas profits were JPY 6.4 billion in the first quarter, down JPY 1.4 billion year-on-year. In first quarter, Overseas profits accounted for 16.9% of consolidated operating income. However, we note that our Overseas businesses operate on a calendar year basis. Therefore, the first quarter figures for the Overseas business covered the period between January and March. For this reason, the COVID-19 impact appears to be relatively larger for the domestic business in first quarter which covers the April to June period.

Relative to our full year forecast, first quarter results are in line with our expectations. For the full year, we expect Overseas operating income to account for around 10% of the consolidated total.

With regard to the near-term impact of COVID-19 on our Overseas business, conditions are different for each country, reflecting the differences in the scale of the outbreak, the timing of the lifting of lockdown restrictions and the pace of economic recovery. We recognize we must continue to closely track trends in each individual country, but conditions for office buildings in Europe and the U.S. are relatively stable, reflecting the fact that the majority of leases are long-term leases.

With regard to our retail facilities in Taiwan, such as the outlet malls, GTV is recovering. Progress on our residential sales in China after the restart of sales activity has been smooth. Customer traffic for sales centers has returned to pre-COVID-19 levels.

Please turn to the next page for a discussion of the balance sheet. Total assets were JPY 7,653.8 billion, up JPY 258.4 billion versus March 2020.

With regard to the main drivers of the increase, please refer to the table on the upper right-hand side of the page entitled real property for sale. The outstanding balance was JPY 1,947 billion, up JPY 39.2 billion from the end of March 2020. New investments were JPY 150 billion, while cost recovery was JPY 98.5 billion. After taking into account other factors, including foreign exchange impact, investments exceeded cost recovery as is typical every year.

With regard to the net increase of JPY 39.2 billion broken out by company, we reported net increases after factoring in cost recovery in residential investments at Mitsui Fudosan residential and development investments at Mitsui Fudosan and Mitsui Fudosan America Group.

Next, turning to tangible and intangible assets. The outstanding balance was JPY 3,797.8 billion, up JPY 44.7 billion from March 2020. As shown in the comments section, major investments include the mixed-use project in Shibuya Rayard Miyashita Park, which opened in June; and additional investments for 50 Hudson Yards in New York slated for completion in 2022. New investments totaled JPY 80.8 billion. New investments were offset by depreciation and ForEx impact for a net increase of JPY 44.7 billion versus March 2020.

The next page shows the liability side of the balance sheet. Outstanding interest-bearing debt was JPY 3,806.9 billion, up JPY 325.8 billion from March 2020. Our initial forecast for outstanding interest-bearing debt as of the end of March 2021 was JPY 3.8 trillion. We are already at this level as of the end of first quarter. This reflects the fact that we chose to front-load our funding efforts to boost the level of cash on hand, given the uncertain prospects for the financial markets as a result of the impact of COVID-19 and the increase in development investments during the quarter.

Currently, the financial markets are generally calm, supported by Central Bank policies. But going forward, we aim to fine-tune the balance of outstanding debt while also taking into consideration our cash needs. In addition, from second quarter onward, in line with our strategy to control the balance sheet, we expect to recover costs in the Property Sales to Investors business. On a full year basis, we, therefore, expect to be in line with our guidance.

The breakdown of interest-bearing debt by company as well as cash inflows and outflows are as described in the comment section on the right. As a result, the D/E ratio as of the end of first quarter was 1.57x, and the equity ratio was 31.6%.

Finally, while not included in the fact book, I will discuss the COVID-19 impact incurred in first quarter and our progress relative to the full year guidance. First, I will briefly review the assumptions underlying our full year forecast. We expected that first quarter would be impacted by restrictions on economic activity for the duration of the quarter, but the conditions would gradually improve from second quarter onward, returning to more normal conditions by the end of the fiscal year. Based on this, we factored in a negative of more than JPY 80 billion on operating income from COVID-19 on a full year basis and a further negative of more than JPY 20 billion below the line.

Relative to our initial expectations, the impact of COVID-19 in first quarter on operating income was a negative of around JPY 25 billion. We also incurred an extraordinary loss of JPY 11.8 billion, as noted at the outset.

By segment, as already discussed, the businesses most impacted by COVID-19 were the retail facilities Leasing business, the Management segment and the Other segment, primarily the hotel and resorts business. However, for the Leasing business, we were able to reopen our facilities earlier than we had anticipated. Additionally, customer traffic has been running ahead of our expectations.

For the Management segment, the COVID-19 impact in first quarter was slightly larger than we had initially expected. However, the business has been recovering since June and continues to improve. That said, with regard to the Other segment, we had originally assumed that conditions in first quarter would be very challenging. From that perspective, the first quarter results could be considered to be generally in line with plan. However, the near-term recovery in hotel occupancy rates, including properties in Central Tokyo, is still quite modest. We will continue to monitor the situation.

Although trends for individual segments relative to forecast vary, as noted, the overall impact is largely in line with our initial assumptions. We, therefore, maintain our initial full year forecast.

Prospects for bringing the COVID-19 outbreak under control remain unclear, and the situation remains unpredictable. Going forward, we will continue to monitor the impact of COVID-19 on the group's businesses, including when the outbreak might subside or the tapering of new infections. If it becomes necessary to revise our forecast, we will do so in a timely manner. This completes my remarks.