Mitsui Fudosan Co Ltd

TSE:8801

Earnings Call Transcript 2024-Q1

[Atsuro Uchida, executive]

Good afternoon, everyone. I am Uchida, Executive Manager of Investor Relations at Mitsui Fudosan. I will present the details of our results for the first quarter of the fiscal year ending March 2024. Similar to previous briefings, I will use the financial results and business highlights material dated August 4, 2023, which is available on our website.

Let's get started. As always, I will start with an overview of first quarter. Please turn to Page 3 of the presentation material, which shows the highlights of the results. As outlined in the blue box on the upper part of the page, during the quarter, we achieved new record highs for first quarter operating income and profit attributable to owners of the parent for the second consecutive year. We have made no changes to our full year forecast as initially disclosed. Overall, we are making solid progress toward achieving the consolidated earnings forecast announced at the beginning of the fiscal year.

Next, please turn to Page 4 of the presentation material. We show here the results for each business. In first quarter, we were able to achieve year-on-year increases in operating revenues and profits for the major segments of leasing, management, facility operations and the property sales to individuals business within the Property Sales segment. For property sales to investors included within the Property Sales segment, planned disposals will take place mainly in second quarter and beyond. As a result, as of first quarter, revenues and profits fell year-on-year. However, we are making steady progress in signing sales agreements and are on track to achieve our full year forecast. We highlight the key factors behind the revenue and profit growth for each segment in the blue box, but I will provide a more detailed explanation later.

From the perspective of progress rates versus our full year forecast, the core segments contributing to stable and continuous profits for the group, Leasing and Management exceeded 25%. We are making steady progress. In the Facility Operations segment, there was a significant improvement in revenues and profits for the mainstay Hotel and Resorts business, the progress rate versus full year forecast is already at 40%.

I will now discuss the results in more detail. Please turn to Page 59 of the presentation. I will start with the profit and loss statement. First quarter operating revenues were JPY 561.3 billion, down JPY 15.3 billion or 2.7% year-on-year. Operating income was JPY 80.4 billion, up JPY 3.2 billion or 4.3% year-on-year. Ordinary profit was JPY 72.8 billion, down JPY 0.6 billion or 0.8% year-on-year. Net profit attributable to owners of the parent was JPY 85.8 billion, up a substantial JPY 32.9 billion or 62.2%. The progress rate relative to our forecast is shown on the right in the table titled progress comparison with full year forecast. As you can see, we are making good progress. Operating revenue and operating income both stand at 24.4%, ordinary income is 29.7% and net profit attributable to owners of the parent is at 40.9%.

Before looking at the individual segments in more detail, please return to the table on the left side of the page. I will touch upon the major items below the line. First, under nonoperating income and expenses, net interest income and expense increased JPY 6.1 billion year-on-year. This is mainly driven by the rise in policy rates in the U.S. and an increase in outstanding borrowings and is in line with our initial plan. With regard to domestic borrowings, the majority has already been shifted to long-term fixed rate borrowings so the impact on earnings is limited. Equity in net income or loss of affiliated companies grew JPY 2.8 billion year-on-year. This is mainly due to factors such as growth in property sales profits and equity method affiliates in Asia and the improved occupancy rates at domestic hotels. If we also take into account net other nonoperating income and expenses, overall nonoperating income and expense was down JPY 3.8 billion year-on-year.

Next, I will comment on extraordinary gains and losses. As shown in the table on the upper right entitled extraordinary gains and losses, we posted JPY 48.9 billion in extraordinary profits in first quarter on gains on the sale of strategic equity holdings. This is part of our efforts to promote balance sheet control. We are continuing to reduce some of our equity holdings on an ongoing basis. There were no extraordinary losses posted in first quarter.

Next, please look at the lower part of the table on the left. Profits and losses attributable to noncontrolling interest was a negative JPY 0.8 billion. This is primarily related to profit distributions to noncontrolling shareholders of Tokyo Dome.

Please turn to the next page for a detailed explanation of segment results. First, the Leasing segment. Please look at Slide 61. As we show at the top of the page, first quarter operating revenues were JPY 197.8 billion, and operating income was JPY 44.1 billion. This represents year-on-year increases of JPY 18 billion and JPY 4.7 billion to operating revenues and operating profits, respectively. Please see the comment box on the left side of the page for more color on business conditions in the Leasing segment.

First quarter benefited from the increase in revenues and profits from New York's 50 Hudson Yards which began operations in the previous fiscal year. In addition, there were positive contributions from GMV growth at existing retail facilities as well as the start of operations at LaLaport KADOMA and MITSUI OUTLET PARK OSAKA KADOMA, which opened in April. These factors drove year-on-year revenue and profit growth. We show the office vacancy rate in the box in the middle of the page.

Mitsui Fudosan's nonconsolidated metropolitan area office vacancy rate as of the end of June was 3.2% on solid progress on tenants moving into Tokyo Midtown Yaesu and other existing properties. This represents a 0.6% point improvement from the 3.8% level as of the end of fiscal 2022. Typically, the vacancy rate oscillates within a range during the fiscal year, but we expect the vacancy rate as of the end of the fiscal year to be in line with our expectation of around 3%. The outlook remains unchanged from our initial projections.

Next is the Property Sales segment. Please turn to Page 62. As shown at the top of the page, overall first quarter results for the Property Sales segment were operating revenues of JPY 146.1 billion, an operating income of JPY 30.1 billion. On a year-on-year basis, revenues fell JPY 56.2 billion and profits dropped JPY 12.7 billion.

Looking at the individual subsegments, I will start with the property sales to individuals business. Please look at the second row from the top. Operating revenues were JPY 115.5 billion and operating income was JPY 28.6 billion. On a year-on-year basis, this represents a JPY 39.4 billion rise in sales and an JPY 18.3 billion increase in profit. The main factors behind this growth are shown in the comment section on the left. In first quarter, we made progress on handovers of Park Court Jingu Kitasando The Tower. We list the other major properties which reported handovers during the quarter in the box below the comment section on the left.

When comparing this fiscal year to the previous fiscal year, we are expecting a relatively higher proportion of central urban large-scale high-end properties this year. Also, although not disclosed here, the OPM for property sales to individuals in first quarter was 24.8% in excess of our full year target of 16.1%. We expect to continue to make good progress toward achieving our full year target. The number of reported units are shown in the middle of the table. The combined units for condominiums and detached housing were 1,094 units, down 76 units year-on-year. The average unit price for condominiums and detached housing was significantly higher year-on-year at over JPY 100 million. This is a reflection of the mix of units reported and shows the strong skewing of prices during first quarter to the high end.

Near-term sales conditions remain strong. As shown at the bottom of the page, completed condominium inventory in first quarter fell further from 55 units as of the end of March to 36 units. For detached housing, completed inventory remains at 0. We continue to extend the record lows for inventories. The contract progress rate on new domestic condominiums relative to our full year unit target of 3,350 units as of the end of June was 87%. This compares to 83% last year at the same time and 86% 2 years ago. As we have seen over the last few years, the contract progress rate has remained high and steady at more than 80%.

Next is property sales to investors and overseas individuals. Please return to the upper part of the page. First quarter operating revenues were JPY 30.6 billion, and operating income was JPY 1.4 billion. This is a JPY 95.6 billion year-on-year drop in revenues and a JPY 31.1 billion year-on-year decline in profits. The timing of property disposals and property sales to investors is tied to individual negotiations for each property. In first quarter fiscal 2022, we executed on multiple property disposals, including rental residential properties developed in the U.S.

In contrast, the only disposals during first quarter fiscal 2023 were sales of domestic rental residential properties. In other words, the majority of property disposals planned for this fiscal year will come in second quarter and beyond. As a result, optically, first quarter revenues and profits appeared down year-on-year. However, we are making solid progress on sales contracts. You should see solid profit recognition come through from second quarter onward.

We note that there have been multiple property sales in the U.S. this fiscal year. In line with our initial plan, we have been able to sell East Coast combined lab and office properties and rental residential properties, which should contribute to profit in second quarter. 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 the trends of transaction market players and the financial and real estate markets. We remain committed to making solid progress on contracts and handovers to achieve our full year profit forecast of JPY 96 billion.

Next is the Management segment. Please turn to Page 63. This segment consists of the Property Management business, which focuses on managing properties under contract and the Car Park Leasing business, Repark, and the Asset Management business, which includes the Corporate and Retail Brokerage businesses and the Asset Managed business for our sponsored REITs and others. Please look at the top row of the table. The overall management segment reported first quarter operating revenues of JPY 109.9 billion and operating income of JPY 15.3 billion, up JPY 3.2 billion and JPY 1.3 billion, respectively.

Looking at the conditions for the individual businesses, I will start with Property Management. Subsegment operating revenues were JPY 83.5 billion and operating income was JPY 9.1 billion, up JPY 2.5 billion and JPY 0.8 billion, respectively. The key factors were ongoing measures to reduce costs designed to improve operating efficiency and the revision of parking fees in the Repark business. Next, the Brokerage and Asset Management business reported operating revenues of JPY 26.4 billion and operating income of JPY 6.2 billion, up JPY 0.6 billion and JPY 0.4 billion, respectively. The key factors include an improvement in transaction unit prices in the Retail Brokerage business.

Next is the Facility Operations segment, which is new from this fiscal year. Please turn to Page 64. We have aggregated the Hotel and Resorts and the Tokyo Dome businesses, which were previously included in the other segment as the next growth pillars. Please look at the top row of the table. The overall Facility Operations business reported first quarter operating revenue of JPY 45.8 billion and operating income of JPY 5.5 billion, up JPY 19.4 billion and JPY 11 billion, respectively. As shown in the comment section on the left, the key factors were the substantial improvement in ADRs for the Hotel and Resorts business and the increase in operating days and spectator numbers for Tokyo Dome.

Looking at the individual segments, the Hotel and Resorts business generated JPY 32.3 billion in operating revenues, up a hefty JPY 14.9 billion. Operating revenues for the Sports and Entertainment subsegment, primarily the Tokyo Dome City business was JPY 13.4 billion, up JPY 4.5 billion. Both businesses achieved year-on-year revenue growth. As of the end of the previous fiscal year, Tokyo Dome had already been recovering from the impact of COVID-19 with operating profits in the black, but the Hotel and Resorts business also moved into the black in this first quarter. We hold high expectations for the revenue and profit contributions for these businesses going forward.

Next is the Other segment. Please turn to Page 65. The mainstay businesses of the Other segment are the New construction under Consignment business, which includes the Mitsui Home built-to-order detached housing and Mitsui Designtec, which chiefly focuses on construction of interiors and renovation work for offices and hotels. Please look at the top row of the table. In first quarter, overall, other operating revenues were JPY 61.5 billion, while operating losses were JPY 1.8 billion. Revenues were up JPY 0.1 billion year-on-year while operating losses narrowed by JPY 0.1 billion. By nature, revenues and profits in the New construction under Consignment business, which accounts for the majority of the other segment, typically skew heavily to the end of the fiscal year. As such, the business was loss-making in first quarter, but we expect profits to grow as we move into second half.

Next, for reference, we show figures for the Overseas business. Please turn to Page 66. Overall combined Overseas business profits in first quarter were JPY 14 billion, down JPY 9.6 billion year-on-year. Please note, there is a 3-month lag in reflecting overseas profits. The figures included in first quarter fiscal 2023 earnings reflect the results for the Overseas business for the period of January to March 2023.

Within this, the Leasing segment reported increases in operating revenues of JPY 8.5 billion and operating income of JPY 3.3 billion. As already mentioned previously, due to the high base for comparison on a year-on-year basis as a result of profits reported on sales of rental residential properties in the U.S. last first quarter, the Property Sales segment posted operating revenue declines of JPY 68 billion and operating income decline of JPY 16.2 billion. The Management and Other segment posted an operating revenue increase of JPY 2 billion and operating income improvement of JPY 0.5 billion year-on-year. The resulting OPM for the Overseas business is 16.6%.

Next, I will talk about the balance sheet. Please turn to Page 67. At the bottom of the page on the left, total assets as of the end of first quarter 2023 were JPY 9,137.4 billion, up JPY 296 billion versus the end of the previous fiscal year. Of the JPY 296 billion increase in outstanding assets, slightly less than 10% or roughly JPY 22.6 billion is the increase as a result of foreign exchange rate changes.

I will now discuss the major components of change such as cost recovery. Please turn to Page 68. The total outstanding balance of real property for sale as shown in the table on the upper left was JPY 2,166.7 billion, a slight increase of JPY 3.1 billion from the end of the previous fiscal year. New investments were JPY 104.5 billion, offset by cost recovery of JPY 101.9 billion. Others, which includes ForEx impact was JPY 0.4 billion. As you can see in the breakdown by company, new investments outweighed cost recovery at Mitsui Fudosan, but a cost recovery exceeded new investments by JPY 25.4 billion at Mitsui Fudosan Residential. The net balances at both Mitsui Fudosan America and Mitsui Fudosan U.K. were up slightly more than JPY 4 billion each on the investments and the impact of the weak yen.

Next, looking at the lower left, the outstanding balance of tangible and intangible fixed assets was JPY 4,366.9 billion, up JPY 73.7 billion from the end of the previous fiscal year. The key contributing factors are explained in the comment section on the lower right. New investments, including construction costs for the Yaesu Ni-Chome District Redevelopment Project and LaLaport TAICHUNG in Taiwan were JPY 98.7 billion. This was offset by depreciation of JPY 31.6 billion, taking into account ForEx impacts and other factors under other of JPY 6.6 billion results in a net increase of JPY 73.7 billion compared to the end of the previous fiscal year.

On the liability side, please look at the table on the upper right. The outstanding balance of interest-bearing debt as of first quarter was JPY 4,239.1 billion, up JPY 190.5 billion versus the end of fiscal 2022. Of this increase, roughly 30% or JPY 58.9 billion is the impact of changes in ForEx rates.

Going back to Page 67, as a result of the above, the D/E ratio as of the end of first quarter was 1.4x, unchanged from the end of the previous fiscal year and the equity ratio was 33.2% as shown on the lower right.

Finally, on the outlook for our full year forecast for our overall business, we believe we are making solid progress, including the impact of the COVID-19 reopening. We will continue to monitor the environment for the financial and real estate markets as we grow our profit. We aim to achieve our initial forecast.

This completes my presentation.

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