Mitsui Fudosan Co Ltd

TSE:8801

Earnings Call Transcript 2022-Q1

[Atsuro Uchida, executive]

Good afternoon, everyone. I am Uchida, Executive Manager of Investor Relations at Mitsui Fudosan.

I will explain the results for the first quarter of the fiscal year ending March 2022. I will go into more detail later, but at a high level, despite the impact of the ongoing pandemic, we saw year-on-year recoveries at the retail facilities business within the leasing segment and the car park leasing business Repark and retail brokerage business within the Management segment. Higher year-on-year operating revenues as well as extraordinary gains generated by continued sales of strategic equity holdings allowed us to report year-on-year improvements to ordinary income and profit attributable to owners of the parent. Although the impact of the pandemic varied by segment, overall progress relative to the full year forecast announced at the beginning of the fiscal year is tracking in line with our expectations.

I will now explain the results in more detail using the fact book. Please turn to the next page. I will start with the consolidated profit and loss statement.

Operating revenues for first quarter fiscal 2021 were JPY 448.7 billion, up JPY 41.6 billion or 10.2% year-on-year. Operating income was JPY 35.1 billion, down JPY 1.7 billion or 4.7% year-on-year. Ordinary income was JPY 31.1 billion, up JPY 1.4 billion or 4.8% year-on-year. Profit attributable to the owners of the parent was JPY 34.3 billion, up JPY 20.6 billion or 149.8% year-on-year.

Optically, operating income was down slightly year-on-year, but this reflects the lower number of handovers year-on-year in first quarter fiscal 2021 in the domestic residential business. In addition, there was also a high base for comparison given that we reported a very high level of sales of central urban high-margin large-scale redevelopment condominium projects in the previous first quarter. The year-on-year drop in overall operating income is primarily the result of the large profit decline in the domestic residential subsegment of the Property Sales segment. If we exclude the Property Sales segment, overall operating income was solidly higher on a year-on-year basis.

Please see the table on the upper right for the progress rate versus our full year forecast. We made solid progress with operating revenue at 20.9%, operating income at 15.3% and net profit attributable to owners of the parent at 21.5%. Next, we return to the table on the left-hand side of the page. I will touch upon the key items below the line before commenting on individual segment results.

Nonoperating gains and losses increased JPY 3.1 billion year-on-year, with improvements in equity and net income or loss of affiliated companies reflecting the year-on-year recovery in occupancy rates at hotels operated by affiliates and in other nonoperating gains and losses. Next, extraordinary gains and losses. Please see the table on the right, starting with extraordinary gains. We reported JPY 23.5 billion in gains on sales of investment securities. This is part of our ongoing policy to promote balance sheet control and to reduce our strategic equity holdings. In extraordinary losses, we posted JPY 2.6 billion in losses related to the COVID-19 outbreak. This is the aggregation of rents and other fixed costs related to retail facilities and hotels that were temporarily closed during the state of emergency related to the pandemic, taken as an extraordinary loss. We note that, versus the extraordinary COVID-19 losses of JPY 2.6 billion for first quarter this fiscal year, the equivalent extraordinary losses in first quarter fiscal 2020 were JPY 11.8 billion. If we compare first quarter operating income after reversing the COVID-19 extraordinary losses, operating income for this first quarter would fall from JPY 35.1 billion to JPY 32.4 billion, while first quarter fiscal 2020 operating income would fall from JPY 36.8 billion to JPY 25 billion. After adjusting for the COVID-19 extraordinary losses, first quarter fiscal 2021 operating profit would have risen JPY 7.4 billion year-on-year.

We provide further explanation of these figures in the financial highlights section at the beginning of the investor presentation materials. Please review at your leisure.

Please turn to the next page. I will discuss the segment results in more detail. Please refer to Page 3.

I will start with the Leasing segment. On a year-on-year basis, first quarter operating revenues increased JPY 22 billion, and operating income rose JPY 2.4 billion. Please see the comments section for a description of the current conditions in the Leasing segment.

In first quarter, similar to the previous fiscal year, the segment was affected by a state of emergency declared in response to the pandemic, which primarily impacted our retail facilities business. However, as the number of retail facilities that were temporarily closed was lower on a year-on-year basis, DMV for the retail facilities recovered on a year-on-year basis. In the office business, we benefited from a full year contribution from Bunkyo Garden Gate Tower and other projects which were completed in the previous fiscal year as well as higher revenues and profits from existing domestic office properties. As a result, the overall segment reported higher operating revenues and profits on a year-on-year basis.

Our nonconsolidated Tokyo metropolitan area office building vacancy rate was 4.7% as of the end of June, up 1.6 percentage points from 3.1% as of the end of March. However, this increase is temporary, reflecting the impact of the completion of refurbishment work at an existing property in the Ginza area and tenant replacement activity. As new tenants move in, from second quarter, the vacancy rate will decline. We expect the vacancy rate to settle at around the low end of the 3% level at the end of the current fiscal year.

Next, the Property Sales segment. Please refer to Page 4. Overall segment operating revenues declined JPY 17.7 billion year-on-year, while operating income fell JPY 8.5 billion. Please see the comments section for a discussion of the breakdown of the results. In the domestic residential business, operating revenues fell JPY 68.8 billion and operating income dropped JPY 17 billion year-on-year. I have already touched upon the major factors behind the declines, but as noted in the comments section, this is the result of a high base for comparison.

In first quarter fiscal 2021, the number of units sold fell year-on-year. In addition, many of the units handed over in first quarter fiscal 2020 were in central urban high-margin large-scale redevelopments such as The Tower Yokohama Kitanaka and The COURT Jingu Gaien. The total number of units sold, a combination of condominiums and detached homes, was 734, down 715 units year-on-year. The blended average unit price for condominiums and detached homes was over JPY 80 million. Our sales continued to be concentrated in a price range higher than the market average. Near-term sales remain strong. Completed inventory of condominiums and detached homes in first quarter was only 127 units. Trends in completed inventory remained stable at low levels. Although not indicated in the materials, the operating profit margin as of first quarter was 13.4%.

The contract rate for condominiums versus the full year unit target of 3,100 has risen to 86% as of the end of June. This compares to 65% 3 months ago at the beginning of the fiscal year. Last fiscal year, at this time, the contract rate was 83%. 2 years ago, it was 86%. As you can see, we have been able to consistently maintain a high contract rate of more than 80% over the last few years.

Next is the Property Sales to Investors and Individuals (Overseas) subsegment. First quarter fiscal 2021 operating revenues increased JPY 51 billion, and operating income grew JPY 8.4 billion year-on-year. Investor appetite in the real estate transaction market remains firm for asset classes which generate stable cash flows such as offices, logistics facilities and rental residential properties. We have seen no changes in cap rates relative to pre-COVID-19 levels. In first quarter fiscal 2021, we sold a number of properties, primarily rental residential properties to REITs. We are confident that we will be able to continue to transact and hand over properties going forward to achieve our full year operating income target of JPY 111 billion.

Next, the Management segment. Please refer to Page 5. This segment consists of the Property Management business, which focuses on managing properties under contract; Mitsui Fudosan Realty's car park leasing business Repark; the corporate and retail brokerage businesses; the asset management business for our sponsored REITs and others; and the consignment sales business, which concentrates on selling condominiums developed by other developers. Operating revenue increased JPY 13.4 billion, and operating income rose JPY 6.9 billion year-on-year. Please see the comments section for further details.

In the Property Management business, operating revenues rose JPY 8.2 billion and operating income grew JPY 5.1 billion year-on-year. The main driver was the improvement at the Repark business. In addition to a recovery of occupancy rates to around 90% of the pre-COVID-19 fiscal 2019 levels, we also benefited from continued efforts to reduce costs designed to enhance business efficiency. Next, in the brokerage and asset management business, operating revenues rose JPY 5.2 billion and operating income improved JPY 1.8 billion year-on-year. The major driver was the recovery in the brokerage business led by Rehouse. The year-on-year recovery reflects not only a rebound from the impact of the rehouse closures during the first state of emergency last fiscal year but the recovery in the number of rehouse brokerage transactions to very close to pre-COVID-19 fiscal 2019 levels and a rising level of corporate brokerage transactions.

Finally, the Other segment. Please turn to Page 6. The mainstay businesses of this segment have been the facilities operation business, which focuses on hotels and resorts; the new construction under consignment business, which includes the Mitsui Home built-to-order detached home business; and the reform and renewal business for offices, retail facilities and residential properties. From first quarter fiscal 2021, this segment includes the Tokyo Dome business as well. Overall, operating revenues increased JPY 23.9 billion, while operating income fell JPY 3.1 billion, for an operating loss of JPY 13.2 billion.

The increase in operating revenues and the decline in operating income mainly reflects the impact of Tokyo Dome, which pushed up operating revenues but depressed profits. Tokyo Dome ends its fiscal year in January. The Tokyo Dome figures reflected in our first quarter results are its results for the period of February to April 2021. In the facilities operation business, occupancy rates at our hotels and resorts have been improving on a year-on-year basis, but with the extension of the third state of emergency, the expansion of the prefectures subject to a state of emergency and continued guidance to stay at home, overall operating conditions remain challenging. The recovery remains a work in progress.

Next, please look at the right-hand side of Page 6. For reference purposes, we show here figures for the overseas business. Total overseas profits in first quarter fiscal 2021 were JPY 3.7 billion, down JPY 2.7 billion year-on-year. Please note there is a 3-month lag in reflecting overseas profits. The figures included in our first quarter earnings reflect the results for the overseas businesses for the period of January to March 2021. Within the overseas business, profits from the Leasing business fell JPY 1.3 billion year-on-year as a result of increased expenses related to the completion of properties under development and the impact of asset taxes and foreign exchange. For Management and Other, operating income fell JPY 1.1 billion, reflecting the impact of the temporary COVID-19-related closure of the Halekulani hotel in Hawaii. Please note that the Halepuna hotel is slated to restart operations in July 2021. We plan to reopen the Halekulani hotel in October 2021.

Turning to the next page, I will now comment on the balance sheet.

Total assets in first quarter fiscal 2021 stood at JPY 7.8239 trillion, up JPY 81.9 billion from the end of the previous fiscal year. On the main drivers of the increase, first, please look at the table on the upper right hand. This shows the outstanding balance of real property for sale, which rose JPY 49.8 billion from the end of the previous fiscal year to JPY 1.9803 trillion. New investments were JPY 103.6 billion. Cost recovery was JPY 92.8 billion, while others, including ForEx impact, were JPY 39 billion. In terms of the breakout by corporate entity, while we made progress on cost recovery at Mitsui Fudosan Residential and others, taking into account the development investments at Mitsui Fudosan and Mitsui Fudosan America, the balance increased by JPY 49.8 billion.

Next, the outstanding balance of tangible and intangible assets was JPY 3.8658 trillion, up JPY 69 billion from the end of the previous fiscal year. We touch upon the key investment and cost recovery items in the comments section. While we incurred further investments as a result of construction progress at 50 Hudson Yards in New York and LaLaport Shanghai Jinqiao in China, factoring in depreciation and ForEx impact resulted in a net increase of JPY 69 billion versus the end of the previous fiscal year.

On the next page, we show the liability side of the balance sheet. Outstanding interest-bearing debt as of the end of first quarter fiscal 2021 was JPY 3.7182 trillion, up JPY 94.8 billion from the end of March 2021.

As a result of the above, the D/E ratio as of the end of first quarter was 1.45x, and the equity ratio was 32.8%.

Finally, although not included in the materials, I will comment on the first quarter fiscal 2021 COVID-19 impact and the outlook for the full year forecast which we announced at the beginning of the fiscal year.

Briefly, to recap the assumption underpinning the full year forecast we announced at the beginning of the fiscal year. Our expectation had been that, although the economic situation was likely to start to recover on the back of progress in vaccinations, the pace of recovery was still unclear. As such, we assumed that there would be lingering effects from COVID-19 over the course of the fiscal year. Based on this, we assumed the full year profit impact of COVID-19 would be JPY 60 billion above the line and JPY 5 billion below the line, for a total of JPY 65 billion. Relative to this, the first quarter COVID-19 impact was approximately JPY 20 billion above the line and roughly JPY 4 billion below the line, for a combined total of JPY 24 billion. By segment, we expect COVID-19 to mainly affect our retail facilities, Repark and Rehouse, Facilities Operations and Tokyo Dome businesses. When we look at our expectations for the COVID-19 impact by segment compared to near-term conditions, although there is some variance in individual businesses, the overall impact is largely in line with our initial expectations. As such, we believe we are making solid progress toward achieving our full year forecast as initially disclosed.

It continues to be very challenging to predict when the pandemic will come under control. However, in the event that we feel we need to revise our forecast based on the outlook for bringing COVID-19 under control and the impact of the pandemic on our group businesses, we will do so in a timely manner.

This completes my remarks.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]