Mitsui Fudosan Co Ltd

TSE:8801

Earnings Call Transcript 2023-Q1

[Atsuro Uchida, executive]

[Interpreted] Good afternoon, everyone. I am Uchida, Executive Manager of Investor Relations at Mitsui Fudosan. As always, I will present a detailed explanation of Mitsui Fudosan's First Quarter Fiscal 2022 Results.

Before we start, please note we have made a change to the accompanying materials for this call. Rather than using the fact book as we have to this point, my explanation will be based on the financial results and business highlights. We have updated the presentation this year. The materials are bilingual, which will allow us to provide the same information in the same format to both domestic and overseas investors. The presentation covers not only the quarterly financial results, but include information on Mitsui Fudosan's management approach, historical earnings trends, the group's medium- to long-term direction, overviews of each business, ESG initiatives, and the major markets addressed by Mitsui Fudosan. Please feel free to read through this information later at your leisure.

I will start with an overview of the financial results for the first quarter of the fiscal year ending March 2023. Please open to Page 3 of the presentation, which shows the financial highlights. As shown in the box outlined in red, the Mitsui Fudosan Group reported year-on-year improvements in operating revenues and all levels of profit in Q1 fiscal 2022. Furthermore, all of the headline figures represent new record highs for first quarter results, with operating income reporting a new Q1 record high for 2 consecutive years. Progress relative to the full year forecast for revenues and all levels of profit exceeded 25% as well, reflecting the solid progress towards achieving our initial full year forecast.

Next, please turn to Page 4 of the presentation. I will touch upon the performance of each segment. In the core segments of Leasing, Property Sales and Management, we were able to report year-on-year improvements in revenues and profits. The Other segment reported higher revenues year-on-year as well as an improvement in the magnitude of operating losses. We highlight the key factors underpinning the higher sales and profits in the blue box.

I will go into more detail later. In the core 3 segments of Leasing, Property Sales and Management, we are making good progress versus the full year forecast with Q1 results generally between the 25% to 30% level. We present the COVID-19 impact on our individual businesses on Page 6, which you can review later.

I will now explain the results in more detail. Please turn to Page 55, where we show the consolidated profit and loss statement. Operating revenue in Q1 fiscal 2022 was JPY 576.7 billion, up JPY 128 billion or 28.5% year-on-year. Operating income was JPY 77.1 billion, up JPY 41.9 billion year-on-year. This was more than double the previous Q1 level, up 119.6% year-on-year. Ordinary profit was JPY 73.4 billion, also more than double the previous year for an increase of JPY 42.3 billion or 135.9% year-on-year.

Net profit attributable to owners of the parent was JPY 52.9 billion, up JPY 18.5 billion or 53.9% year-on-year. The progress rates versus our full year guidance are shown on the lower right in the box entitled Progress Comparison With Full Year Forecast. As you can see, with progress rate of 26.2% for operating revenue, 25.7% for operating income, 28.3% for ordinary income and 27.9% for net profit attributable to the owners of the parent, Mitsui Fudosan has made good progress towards achieving the full year forecast.

Next, before discussing the segment results in detail, please return to the table on the left. I will touch upon the major items below the line. First, under nonoperating income and expenses, net interest income and expenses increased JPY 3 billion year-on-year. The major factors behind this increase are a rise in foreign currency-denominated interest-bearing debt as a result of the need for funds related to developments in the U.S., and reflecting U.S. accounting standards, the start of expensing interest paid on new properties. Offsetting this, equity in net income or loss of affiliated companies increased JPY 1.1 billion year-on-year. This is chiefly due to improved occupancy rates in the facilities operation business at equity method affiliates and growth in business profits from the overseas Property Sales business. Including the improvement in net other nonoperating income and expenses, overall nonoperating income and expenses improved JPY 0.3 billion year-on-year.

I will also discuss extraordinary gains and losses. As shown in the table entitled Extraordinary Gains and Losses on the upper right, Mitsui Fudosan posted JPY 10.8 billion in gains on sales of investment securities in Q1. This is the result of continued sales of some of our equity holdings, reflecting ongoing progress on initiatives to promote balance sheet control and reduce strategic equity holdings. With regard to extraordinary losses, Mitsui Fudosan has been posting losses related to COVID-19 over the last 2 years. Q1 COVID-19 losses in the last fiscal year were JPY 2.6 billion. However, in the virtual absence of temporary closures of facilities related to the pandemic, Q1 COVID-19 losses this fiscal year were 0.

Next, please look at the lower part of the table on the left. Profits and losses attributable to noncontrolling interest were a negative JPY 4.5 billion in Q1 fiscal 2022. This is primarily the result of profit distributions to noncontrolling shareholders on the back of progress on Property Sales to Investors in the U.S.

I will now cover the segment results in more detail. I will start with the Leasing segment. Please turn to Page 57 of the presentation. We show the Q1 segment results at the top of the page, operating revenue of JPY 179.5 billion and operating income of JPY 39.3 billion. This represents year-on-year increases of JPY 22.9 billion and JPY 8.1 billion, respectively. In the comments section on the left, we describe recent conditions for the leasing segment. In addition to the revenue and OP growth from existing domestic office properties and 50 Hudson Yards in New York, Leasing segment revenues and profits also benefited from a recovery from the pandemic impact at existing retail facilities and the start of operations at LaLaport Fukuoka in April.

We show the office vacancy rate in the middle of the page. Mitsui Fudosan's nonconsolidated metropolitan area office vacancy rate as of the end of June was 4.1%, up 0.9 percentage points from 3.2% as of the end of the previous fiscal year. On the back of ongoing tenant leasing movements, vacancies rates during the fiscal year tend to bounce around within a range. If viewed as a range, the end June level, i largely in line with our expectations. We note that Tokyo Midtown is will complete in Q2. As a result, upon completion, vacancy rates are expected to rise temporarily from this level. Near-term negotiations are picking up. As we make progress on tenants moving into the property, the vacancy rate should decline into the fiscal year-end. Our forecast remains unchanged. As previously indicated, we expect the fiscal year-end vacancy rate to stabilize at around 4%.

Next is the Property Sales segment. Please turn to Page 58. As shown at the top of the page, overall results for Property Sales segment were operating revenue of JPY 202.4 billion and operating income of JPY 42.9 billion. These represent a year-on-year improvement of JPY 83.6 billion and JPY 25.9 billion, respectively.

Looking at the individual subsegments, I will start with domestic residential sales. Please look at the second row from the top. Operating revenue was JPY 76.1 billion and operating income JPY 10.3 billion, up JPY 17.2 billion and JPY 2.4 billion, respectively. As stated in the comments section on the left, the main driver was the year-on-year increase in the number of units reported. The key properties reporting sales are shown in the box below the comment section on the left, including Park City Kashiwanoha Campus South Mark Tower and other large-scale properties in the metropolitan and surrounding area. Although not noted on this page, the OPM for the domestic residential business was 13.5%. We are making good progress toward achieving our full year OPM target of 11.6%.

The number of reported units are shown in the middle of the table. The combined units for condominiums and detached housing were 1,170, up 436 units year-on-year. The average unit price for condominiums and detached housing was over JPY 65 million. While this is lower than the previous Q1 level, it is a reflection of a difference in the mix of properties reported. As noted earlier, compared to Q1 last fiscal year, many of this year's reported properties are located in the metropolitan and surrounding area, which had an impact on average price.

Near-term selling conditions remain strong. Completed inventory, as shown in the table on the lower part of the page, is at record low levels with condominiums down to 73 units from the 82 units as of the end of March, and detached housing completed inventory at 0. The contract progress rate for new domestic condominiums relative to the full year unit target of 3,250 has advanced to 83% as of the end of June. The contract rate was 86% for the end of June 2021 and 83% for the end of June 2020. As you can see, we continue to see similar levels to the last few years with the contract rates remaining stably at high levels, above 80%.

Next, turning to Property Sales to Investors and Individuals Overseas, please look at the third row from the top of the table near the top of the page. Operating revenue was JPY 126.3 billion and operating income JPY 32.5 billion for year-on-year gains of JPY 66.3 billion and JPY 23.5 billion, respectively. In addition to sales to investors of rental residential properties developed in the U.S., such as West Edge Tower in Seattle and the gauge in Denver and domestically developed rental residential properties such as the Park Access series, we continue to make good progress on sales and handovers for condominium project 200 Amsterdam in New York. This drove a significant year-on-year improvement in revenues and profits. The real estate investment market for asset classes with stable cash flows such as offices, logistics facilities and rental residential properties remains robust with strong appetite from investors. We will continue to monitor trends of transaction market players and the financial and real estate markets, but we believe that we can make solid progress on contracts and handovers toward achieving our full year profit target of JPY 107 billion.

Next is the Management segment. Please turn to Page 59. This segment consists of the property management business, which focuses on managing properties under contract and the carpark leasing business, Repark, and the asset management business, which includes the corporate and retail brokerage businesses and the asset management business for our sponsored REITs and others.

Please look at the top row of the table. The overall Management segment reported operating revenue of JPY 106.7 billion and operating income of JPY 13.9 billion, up JPY 3 billion and JPY 2.4 billion, respectively. Looking at conditions for the individual businesses, I will start with Property Management. Subsegment operating revenues were JPY 80.9 billion and operating income was JPY 8.2 billion, up JPY 2.4 billion and JPY 1.7 billion, respectively. The key factors were the ongoing impact of cost reduction efforts designed to improve operating efficiency and higher occupancy rates at the Repark business.

Next, the brokerage and asset management business reported revenues of JPY 25.7 billion and OP of JPY 5.7 billion, each up JPY 0.6 billion. The major contributors were an increase in fee income on the back of sales of some properties at the asset management company and the rise in transaction unit values in the retail rehouse brokerage business.

Next, I will cover the Other segment, and provide some reference information on the overseas business. Please turn to Page 60. The mainstay businesses of the Other segment are the facilities operations business, which focuses on domestic and overseas hotels and resorts, the Tokyo Dome business, which we added in fiscal 2021, and the new construction under consignment business, which includes the Mitsui Home, built-to-order, detached housing and other businesses.

Overall, as shown in the top row of the table, Other segment operating revenue was JPY 88 billion for an operating loss of JPY 7.4 billion. This represents an JPY 18.4 billion year-on-year increase in operating revenues and a JPY 5.7 billion year-on-year narrowing of the operating loss. The key factors, as outlined in the comments section on the left, were the year-on-year improvement of ADRs and occupancy rates for the hotel and resorts business and the increase in operating days and attendance at Tokyo Dome. Specifically, this is the first Q1 since the COVID-19 outbreak without a state of emergency or restrictions on activity. Although we have not seen a rebound in inbound travelers to Japan, based on our success in capturing domestic demand in the hotel and resorts business, occupancy rates for the June quarter improved on a year-on-year basis.

New daily infections have been rising rapidly since July, so the recovery is still a work in progress. We will continue to monitor conditions closely. We note that Tokyo Dome Corporation closes its books in January, so the Q1 figures reflected in our results cover the period from February to April of 2022. In February, we were in the midst of large-scale renovations at Tokyo Dome. Quasi emergency measures were still in place in March of this year, which is why this business reported operating losses for Q1. However, we have been seeing a recovery in attendance figures for professional baseball games and concerts. As such, we believe we can aim for a return to operating profitability on a full year basis.

Next, please look at the lower part of the page. We show here figures for the overseas business for your reference. Total overseas business profits for Q1 were JPY 23.6 billion, up a substantial JPY 19.9 billion year-on-year. Please note, there is a 3-month lag in reflecting overseas profits. The figures included in our Q1 fiscal 2022 earnings reflect the results for the overseas businesses for the period of January to March 2022. Within this, the Leasing segment reported year-on-year increases of JPY 8.3 billion in operating revenue and JPY 3 billion in operating income.

As noted earlier, the Property Sales segment benefited from the contribution of sales of rental residential properties and condominiums in the U.S., with significant year-on-year increases in revenues of JPY 75.8 billion and operating income of JPY 16.4 billion. The Management and Other segments reported a year-on-year improvement in operating revenues of JPY 2.3 billion and a narrowing of the operating loss by JPY 0.3 billion. This reflects the impact of the completion of renovation work at the Halekulani Hotel in Hawaii, and the restart of operations from October 2021. As a result, Overseas business profits accounted for 30.1% of the total. On a full year basis, we expect Overseas business profits to account for a little less than 20% of the total.

Next, I will move on to talk about the balance sheet. Please turn to Page 61. At the bottom of the page on the left, total assets as of the end of Q1 fiscal 2022 were JPY 8.377 trillion, an increase of JPY 169 billion versus the end of the previous fiscal year. Although not noted here, of the JPY 169 billion year-on-year increase in assets, approximately JPY 115 billion is the result of the change in foreign exchange rates.

I will now discuss the major components of change, such as cost recovery. Please turn to Page 62. The total outstanding balance of real property for sale as shown in the table on the upper left was JPY 2.463 trillion, down JPY 5.3 billion from the end of March 2022. New investments were JPY 112.8 billion, which was offset by cost recovery of JPY 147.7 billion. Others, which includes ForEx impact, was JPY 29.5 billion. The breakdown of these figures by company is as follows. While progress was made on cost recovery at Mitsui Fudosan Residential and Mitsui Fudosan Americas Group, after taking into account development investments at Mitsui Fudosan and Mitsui Fudosan U.K., the result was a net decline of JPY 5.3 billion from the end of March 2022.

Next, looking at the lower left, the outstanding balance of tangible and intangible fixed assets was JPY 4.563 trillion, up JPY 142.1 billion from March 2022. We explained the key contributing factors in the comment section on the lower right. We incurred new investments of JPY 83.4 billion related to construction at 50 Hudson Yards in New York and domestic SPC LaLaport Fukuoka. This was offset by depreciation of JPY 29.1 billion. Taking into account ForEx impact and other factors under other of JPY 87.8 billion, this resulted in a net increase of JPY 142.1 billion versus March 2022.

On the liability side, please look at the table on the upper right. The outstanding balance of interest-bearing debt as of the end of Q1 was JPY 3.9209 trillion, up JPY 253.7 billion from March 2022. Of this increase, approximately JPY 96 billion reflects the impact of ForEx movements.

Going back to Page 61, as a result of all of the above, the D/E ratio as of the end of Q1 was 1.42x and the equity ratio was 33%, as shown in the lower right.

Finally, I will discuss the outlook for our full year forecast for the fiscal year ending March 2023. Our forecasts are shown on Page 63 and 64. We have made no changes to our forecast at this time. Near term, we have seen a resurgence in COVID-19 new daily infections. We will monitor the situation closely, but while there may be some differences at the segment level, overall, we believe that our progress to date is largely in line with our expectations.

We continue to focus on achieving our initial full year forecast, supported by operating revenue and profit growth in the Leasing segment from the recovery in the retail facilities business and newly completed office properties, continued progress on contract rates in the Property Sales and Management segments and recovery and success in capturing demand in the hotel in resorts and Tokyo Dome business within the Other segment.

This completes my remarks.

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