Mitsui Fudosan Co Ltd

TSE:8801

Earnings Call Analysis

Strong revenue growth with positive outlook despite declining profits.

In the first quarter, Mitsui Fudosan reported a 12.3% year-on-year increase in operating revenue to JPY 630.3 billion. Although operating income and ordinary profit rose by over 23%, profit attributable to owners of parent dropped by 24.3% due to the absence of prior year’s extraordinary gains from investment securities sales. Segments like Property Sales and Facility Operations saw substantial gains, while Leasing and Management experienced minor profit declines. The company expects to meet full-year targets, with Property Sales to domestic individuals already achieving 43% of its full-year profit goal. The forecast for extraordinary gains this fiscal year stands at JPY 85 billion.

Overview of Financial Performance

For the first quarter of the fiscal year ending March 2025, Mitsui Fudosan reported significant growth in key financial metrics. Operating revenue increased by 12.3% to JPY 630.3 billion, and business income rose by 23.9% to JPY 104.7 billion. Ordinary profit saw a 23.7% increase to JPY 90.1 billion. However, profit attributable to owners of the parent fell by 24.3% to JPY 65 billion year-on-year due to the absence of extraordinary profits from the sale of investment securities in the prior fiscal year.

Leasing Segment Performance

The leasing segment experienced growth in operating revenue, which reached JPY 207.1 billion, up JPY 9.2 billion year-on-year. However, business income remained largely unchanged at JPY 44.5 billion. The company reported stable office vacancy rates in metropolitan areas at 2.5%, similar to the previous fiscal year. The forecast for the fiscal year-end vacancy rate is around 2%, indicating stable leasing performance.

Property Sales Segment

The property sales segment demonstrated substantial year-on-year growth. Operating revenue for this segment increased by JPY 45.6 billion to JPY 191.7 billion, while business income rose by JPY 15.4 billion to JPY 48.6 billion. Particularly notable was the progress in property sales to domestic individuals, where operating revenue and income increased by JPY 49.8 billion and JPY 12.8 billion, respectively. The high-end property sales continued to perform strongly, with a very low completed inventory of 72 units and an impressive contract rate of 92% for new domestic condominiums.

Facility Operations

Facility operations saw a year-on-year growth, with operating revenue rising by JPY 9.8 billion to JPY 55.7 billion, and business income increasing by JPY 5.6 billion to JPY 11.2 billion. The Hotel & Resorts business significantly contributed to this growth, with an increase in operating revenue by JPY 7.5 billion to JPY 39.9 billion. Additionally, the Sports and Entertainment business, which includes Tokyo Dome City, grew operating revenue by JPY 2.3 billion to JPY 15.8 billion.

Management Segment

In the management segment, operating revenue increased by JPY 5.1 billion to JPY 115 billion. However, business income declined slightly by JPY 0.2 billion to JPY 15 billion. The Property Management subsegment saw revenue rise by JPY 3.9 billion to JPY 87.5 billion, but profits dropped by JPY 0.4 billion due to increased expenses related to systems upgrades. The Brokerage and Asset Management subsegment showed modest increases in revenue and business income.

Overseas Business

The company's overseas business reported combined profits of JPY 12.8 billion, a slight decline of JPY 0.3 billion year-on-year. The Leasing segment experienced an increase in revenues but a decrease in profit due to higher property taxes. The Property Sales segment benefitted from progress in sales of overseas residences, such as 200 Amsterdam and Cortland, driving an increase in both revenues and profits. Improved occupancy rates and average daily rates for the Halekulani Hotel in Hawaii also contributed positively.

Balance Sheet Insights

Total assets as of the end of the first quarter were JPY 9,737.4 billion, up JPY 247.9 billion from the previous fiscal year-end. About 70% of this increase was due to the impact of foreign exchange rate changes. The outstanding balance of interest-bearing debt was JPY 4,698 billion, reflecting an increase of JPY 267.6 billion, influenced significantly by foreign exchange rate changes. The company's debt-to-equity ratio stood at 1.49x, and the equity ratio was 32.4%.

Guidance and Outlook

Mitsui Fudosan is confident in achieving its full-year earnings targets. The progress rates for key segments like Leasing and Management are already above 25%. For the Property Sales segment, the domestic individual subsegment has reached 43% of its full-year profit target of JPY 96 billion. The facility operations segment is also ahead of schedule, with a progress rate over 37%. The company continues to monitor market trends and remains proactive in completing contracts and handovers to achieve its business income target of JPY 74 billion for the fiscal year.

Earnings Call Transcript 2025-Q1

[Atsuro Uchida, executive]

Good afternoon, everyone. I am Uchida, Executive Manager of Investor Relations at Mitsui Fudosan. I will explain our results for the first quarter of the fiscal year ending March 2025. As usual, I will use the financial results and business highlights materials dated August 2nd, which are available on our website. Let's get started.

As always, I will begin with an overview of the first quarter results. Please turn to Page 3 of the presentation materials. As shown in the box at the top of the page, Mitsui Fudosan reported positive growth for operating revenues, operating income and ordinary income on a year-on-year basis, also hitting new record highs for each. With regard to the new profit metrics set out in our group long-term vision and Innovation 2030, business income also rose JPY 20.2 billion or 23.9% year-on-year on factors such as solid profit growth, in the domestic property sales to individuals and facility operations businesses. Owing to a high base for comparison, first quarter profit attributable to owners of parent declined JPY 20.8 billion or 24.3% year-on-year, reflecting the absence of extraordinary profits from the sale of investment securities in the previous fiscal year, the vast majority of which was recorded in first quarter.

The progress rates relative to our full year forecast at all levels of profit exceeded 25%. Overall, we are progressing in line toward achieving our initial full year forecast. Please turn to Page 5 of the presentation materials. I will now cover the individual segments. In first quarter, the key segments of Property Sales and Facility Operations achieved substantial year-on-year growth in operating revenues and profits. For the Leasing and Management segment, operating revenues grew year-on-year, but profits declined slightly. All segments are making steady progress toward achieving the full year forecast.

We highlight the main factors for year-on-year changes in operating revenues and profits for each segment in the box, but I will go into more detail later. The progress rates versus the full year business income forecast for the segments of Leasing and Management, which generate core profits on a stable and continuous basis are above 25%. We are making solid progress toward our targets. For the Property Sales segment, we have set a high full year profit target for the property sales to domestic individual subsegment of JPY 96 billion. The current progress rate is already at 43%. For the Property Sales subsegment of property sales to investors and overseas individuals, which includes gains and losses on tangible assets and equity method investments, our full year profit target is JPY 74 billion.

As the majority of property sales will be reported in the second half of this fiscal year, the current progress rate is around 10%. We are steadily advancing toward achieving the full year earnings targets and expect to continue to make good progress on contracts going forward. The progress rate versus the full year business income target for the facility operations segment is already over 37%, mainly driven by the strong revenue and profit growth from the hotel and resorts business. This business is doing well, running ahead of our initial plan. I will now discuss the results in more detail. Please turn to Page 62 of the presentation.

I will start with the consolidated profit and loss statement. Operating revenue for first quarter fiscal 2024 was JPY 630.3 billion, up JPY 69 billion or 12.3% year-on-year. Business income, which is the combination of operating income and gains and losses on the disposal of tangible assets and equity method investments was JPY 104.7 billion, up JPY 20.2 billion or 23.9% year-on-year. Ordinary profit was JPY 90.1 billion, up JPY 17.2 billion or 23.7% year-on-year. Profit attributable to owners of parent was JPY 65 billion, down JPY 20.8 billion or 24.3% year-on-year. On the right, we show the progress rate relative to our forecast. Please see the box titled Progress Comparison with full year forecast.

Operating revenue was 24.2%, business income, 28.3% and ordinary income was 34.7%, and profit attributable to owners of parent was 27.7%. As you can see, we are making steady progress. Next, before commenting on the segment details, please return to the table on the left. I will touch upon the major items below the line. First, under nonoperating income and expenses, the net interest burden increased JPY 3.2 billion year-on-year. Major factors for the increase include the rise in interest-bearing debt as a result of investments in the previous fiscal year. However, the progress rate versus the full year target for net interest burden of JPY 79 billion is 24%, in line with our initial forecast.

We note that the BOJ decided to raise the policy rate on July 31, but as the majority of our domestic borrowings are long term and fixed rate, the impact on earnings is limited. Equity in net income or loss of affiliated companies fell JPY 0.7 billion year-on-year. This primarily reflects a high year-on-year base for comparison on the back of strong profits in overseas property sales at Asian equity method affiliates in the previous fiscal year. Factoring in dividends received and net other nonoperating income and expenses Overall, nonoperating income and expenses was a negative JPY 3.5 billion year-on-year. Next, I will discuss extraordinary gains and losses.

As shown in the table titled extraordinary gains and losses on the upper right, Mitsui Fudosan posted JPY 6.9 billion in gains on sales of investment securities as extraordinary gains. Based on the new policy on investment securities outlined in and Innovation 2030, we continue to make disposals of a portion of the equities we hold. As the vast majority of gains on sales of investment securities in the previous fiscal year were reported in first quarter, optically, extraordinary profits appear to have fallen year-on-year. However, this decline is purely a function of the timing. As indicated in our full year forecast, we plan to generate extraordinary gains of JPY 85 billion, including gains on the sale of tangible assets. There were no extraordinary losses posted in first quarter.

I will now cover the segment results in more detail. I will start with the Leasing segment. Please turn to Page 64 of the presentation materials. As shown at the top of the page, first quarter operating revenue was JPY 207.1 billion and business income was JPY 44.5 billion. This represents a JPY 9.2 billion increase in operating revenues, with profits largely unchanged year-on-year. In the comments section on the left, we describe recent conditions for the leasing segment. In first quarter, while rent revenues for existing offices and GMV for existing retail facilities grew as a result of an increase in property taxes on overseas properties. The overall segment reported year-on-year growth in operating revenues, but a slight decline in profits.

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 generally stable at 2.5%, largely unchanged from the 2.2% as of the end of fiscal 2023. Our forecast for the fiscal year-end vacancy rate is around the 2% level, largely unchanged from our initial projection. Next is the Property Sales segment. Please turn to Page 6.

As shown at the top of the page, overall first quarter segment operating revenue was JPY 191.7 billion, and business income was JPY 48.6 billion. On a year-on-year basis, this represents increases of JPY 45.6 billion and JPY 15.4 billion, respectively. Looking at the individual subsegments, I will start with Property Sales to domestic individuals. Please look at the second row from the top. Operating revenue was JPY 165.4 billion and operating income was JPY 41.4 billion. This represents year-on-year increases of JPY 49.8 billion and JPY 12.8 billion, respectively. As stated in the comments section on the left, the main driver in first quarter was progress on handovers for Park Tower Kachidoki.

Other key reported properties are listed in the box below the comment section on the left for your reference. This fiscal year, we expect a further increase in the proportion of central urban large-scale high-end properties relative to the previous fiscal year. Although not shown here, the OPM for the overall domestic housing business as of first quarter was 25%. This is higher than the full year OEM forecast of 22.9%, but we expect to make steady progress towards 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 1,768, up 674 year-on-year. The average unit price for condominiums and detached housing was over JPY 90 million, a high level similar to the JPY 100 million plus level of the previous fiscal year. This is a reflection of the mix of reported properties.

As noted earlier, a high proportion of the properties reported in first quarter were high-end properties similar to the previous fiscal year. Near-term selling conditions remain strong. Completed inventory for first quarter, as shown in the table on the lower part of the page, was 53 units for condominiums and only 19 units for detached housing. The combined total remains very low at 72 units. The contract rate relative to the full year target for new domestic condominiums of 3,650 has risen to 92% as of the end of June. Last fiscal year at this time was 87%. The previous fiscal year was 83%, this should give you a sense for the strong progress we are making this fiscal year. Next, turning to the property sales to investors and overseas individuals, which includes gains and losses on tangible assets and equity method investments. Please return to the top of the page.

Operating revenue was JPY 26.3 billion and business income was JPY 7.1 billion, a combination of JPY 5.1 billion in operating income, JPY 1.8 billion in gains on equity method investments and JPY 0.1 billion in gains on disposals of tangible assets. This represents a year-on-year decline of JPY 4.2 billion in revenues, but a JPY 2.6 billion increase in profit. In the Property Sales to Investors business, the timing of disposals is based on negotiations with counterparties for each property. In the previous fiscal year, we reported disposals primarily of domestic rental residential properties. In this first quarter, profits were generated not only on domestic rental residential properties, but also included gains on sales of overseas residential properties in New York.

As indicated at the outset, the vast majority of handovers for this fiscal year will be in second half. Hence, the first quarter progress rate versus the full year target of slightly less than 10%. The real estate investment market continues to have a strong appetite for properties that generate stable cash flows such as offices, logistics facilities and rental residential properties. Going forward, we will continue to monitor the activities of buyers and sellers and financial and real estate market trends, while remaining firmly focused on achieving our full year business income target of JPY 74 billion by proactively completing contracts and handovers. Next, the Management segment. Please turn to Page 66.

This segment consists of the Property Management business, which focuses on Managing Properties under contract and the car park leasing business Repark, and the Brokerage and 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 115 billion and business income of JPY 15 billion. This represents a year-on-year increase in revenues of JPY 5.1 billion and a JPY 0.2 billion decline in profit. Looking at the conditions for the individual businesses, I will start with Property Management.

Subsegment operating revenue was JPY 87.5 billion and business income was JPY 8.6 billion. This represents a JPY 3.9 billion increase in revenue, but a JPY 0.4 billion drop in profit. The key factors were a year-on-year improvement in occupancy rates for the Repark car park leasing business but an increase in expenses related to systems upgrades. Next is the Brokerage and Asset Management subsegment. Operating revenue was JPY 27.5 billion and business income was JPY 6.4 billion for year-on-year increases of JPY 1.1 billion and JPY 0.1 billion, respectively. The key factors were increases in number of transactions and unit prices in the retail brokerage business. Next is the facility operations segment. Please turn to Page 6. Overall, facility operations reported first quarter operating revenue of JPY 55.7 billion and business income of JPY 11.2 billion for year-on-year increases of JPY 9.8 billion and JPY 5.6 billion, respectively.

The key factors as outlined in the comment section on the left were the significant further improvement in ADRs for the Hotel & Resorts business and the increase in spectator numbers at Tokyo Dome. Looking at the individual subsegments, the Hotel & Resorts business posted operating revenue of JPY 39.9 billion, up JPY 7.5 billion year-on-year. While the Sports and Entertainment business consisting primarily of Tokyo Dome City, reported operating revenue of JPY 15.8 billion, up JPY 2.3 billion year-on-year. As you can see, both businesses were able to grow revenues year-on-year.

Next is the other segment. Please turn to Page 6. This segment mainly consists of the new construction under consignment business of Mitsui Home and Interior Construction and Renovation business for offices and hotels of Mitsui Design Tech. Please look at the top row of the table. Overall, Other segment first quarter operating revenue was JPY 60.6 billion, and business income was a loss of JPY 0.5 billion. This is a year-on-year decline in revenues of JPY 0.9 billion, but a JPY 0.7 billion improvement in profit. By nature, operating revenues and profits for the new construction under consignment business, which accounts for the majority of the other segment tends to skew towards the fiscal year-end. As a result, business income as of first quarter was in the red, but we expect profits to rise into the second half. Next, for reference, we show figures for the overseas business.

Please turn to Page 69. Overall combined overseas profits for first quarter were JPY 12.8 billion, down JPY 0.3 billion year-on-year. Please note, there is a 3-month lag in reflecting overseas profits. The figures included in the first quarter reflect the results for the overseas business for the period of January to March 2024. Within this, the Leasing segment reported an increase in revenues and profits from progress on properties and ForEx impact, which was offset by an increase in property taxes, resulting in a year-on-year JPY 7.3 billion increase in revenues but a decline of JPY 0.8 billion in profit. In the Property Sales segment, progress in sales of overseas residences, such as 200 Amsterdam and Cortland, drove a JPY 1.3 billion year-on-year increase in revenues and a JPY 0.3 billion increase in profit. The combination of management and other segments reported a JPY 1.4 billion increase in revenues and a JPY 0.1 billion improvement in profits, on the back of improved occupancy rates and ADRs for the Halekulani Hotel in Hawaii. As a result of the above, first quarter overseas business income margin was 12.3%. Next, I will talk about the balance sheet. Please turn to Page 70.

At the bottom of the page on the left, total assets as of the end of first quarter were JPY 9,737.4 billion, up JPY 247.9 billion from the end of the previous fiscal year. Of the JPY 247.9 billion increase in outstanding assets, roughly JPY 161.6 billion or slightly less than 70% is the result of the impact of foreign exchange rate changes. I will now discuss the major components of change such as investment in cost recovery. Please turn to Page 21.

As shown in the table on the upper left, the total outstanding balance of real property for sale was JPY 2,424.8 billion, up JPY 49.5 billion from the end of the previous fiscal year. New investments were JPY144.1 million, cost recovery was JPY 130.9 billion and other, which includes elements such as ForEx impact was JPY 36.3 billion. As you can see in the breakdown by company, Mitsui Fudosan reported a net increase in investments of JPY 3.2 billion and Mitsui Fudosan Residential, a net increase in cost recovery of JPY 7.6 billion. For the overseas subsidiaries, primarily as a result of foreign exchange impact due to the weak yen, Mitsui Fudosan America reported a net increase of JPY 28.7 billion and Mitsui Fudosan U.K., a net increase of JPY 11.8 billion. Next, looking at the lower left, the outstanding balance of tangible and intangible assets was JPY 4,525.9 billion, up JPY 120.3 billion from the end of the previous fiscal year. The key contributing factors for both investments and cost recovery are shown in the comment section on the lower right.

New investments, including construction investments for Park Well State, a senior residence and Tokyo Bay Arena were JPY 92.9 billion, but depreciation was JPY 33.7 billion. Factoring in other, for which the vast majority of JPY 61.8 billion was ForEx impact, there was a net increase of JPY 120.3 billion versus the end of the previous fiscal year. On the liability side, please see the table on the upper right. The outstanding balance of interest-bearing debt as of first quarter was JPY 4,698 billion, up JPY 267.6 billion compared to the end of the previous fiscal year. Of this increase, more than 30% or JPY 91.9 billion was the impact of changes in foreign exchange rates. Going back to Page 70, as a result of the above, the D/E ratio as of the end of first quarter was 1.49x and the equity ratio was 32.4%.

The group as a whole will continue to monitor domestic and overseas financial and real estate market trends while firmly focusing on achieving the business income and net profit targets for this fiscal year and the achievement of the KPIs set out in -- and Innovation 2030. This completes my presentation.