Mitsui Fudosan Co Ltd

TSE:8801

Earnings Call Transcript 2020-Q2

[Atsuro Uchida, executive]

[Interpreted] Good afternoon, everyone. I am Uchida, Executive Manager of the Investor Relations Department. I will present Mitsui Fudosan's Second Quarter Fiscal 2019 Results. I will discuss the results in more detail later, but in summary, both revenues and profits rose year-on-year, mainly driven by profits from our core Leasing segment. Second quarter Leasing segment revenues and profits grew year-on-year supported by full year contributions from large-scale office properties and retail facilities completed in the previous fiscal year. The Management segment also reported year-on-year increases in revenues and profits owing to solid growth at the retail brokerage and Car Park Leasing businesses. The Property Sales segment posted higher revenues and profits as well.

Although I will discuss segment results in more detail later, revenues and profits in the domestic residential business were up year-on-year, bolstered by handovers for a number of large-scale central urban condominium projects in second quarter. Revenues and profits declined at the Property Sales to Investors and Overseas Individuals subsegment in the absence of last year's contributions from sales of properties in the U.K. However, we are making good progress in negotiations to sell multiple properties and are on track to achieve our full year targets of year-on-year growth in both revenues and profits.

Reflecting the strong conditions for Sales of Properties to Investors, we have revised up our full year forecasts. We now expect revenues, operating income and ordinary income to come in JPY 13 billion higher and profit attributable to the owners of the parent to be JPY 5 billion higher than our initial forecasts. As a result, we expect to set new record highs for revenues, operating income, ordinary income and profit attributable to owners of the parent for the fiscal year ending March 2020.

I will now explain our results using the Fact Book. Please turn to Page 2 for the consolidated profit and loss statement.

First, cumulative operating revenues for second quarter fiscal 2019 were JPY 888.7 billion, up JPY 28 billion or 3.3% year-on-year. Operating income was JPY 118.6 billion, up JPY 6.4 billion or 5.8%. Ordinary income was JPY 107.8 billion, up JPY 1.2 billion or 1.2%. Profit attributable to the owners of the parent was JPY 66.3 billion, down JPY 2.2 billion or 3.2% year-on-year. While we reported year-on-year gains for operating revenues and all levels of profit down to ordinary income, net income fell slightly year-on-year. The decline reflects the impact of a strong profit contribution from the U.K. in the previous fiscal year, which is subject to lower corporate tax rates. Corporate taxes in second quarter fiscal 2019 were higher relative to second quarter fiscal 2018, hence the year-on-year decline in net income.

We show the actual results relative to our full year forecast in percentage terms in the upper right-hand table. Versus our upwardly revised forecasts, operating revenue stood at 44.2%; operating income, 42.4%; and profit attributable to the owners of the parent at 37.9%. Compared to the progress rates as of second quarter fiscal 2018, this year's pace may appear somewhat slower. But as noted earlier, fiscal 2019 profit contributions from the Property Sales to Investors subsegment are skewed to second half.

Although not included in this table, progress rates at the operating income level by segment are as follows: Leasing, 54%; the domestic residential subsegment, 82%; the Property Sales to Investors and Overseas Individuals subsegment, 11%; and Management segment, 55%. We are making good progress toward our revised full year forecast.

Returning to the table on the left-hand side of the page, I will touch upon the key items below the line. I will cover individual segment details later.

First, looking at the breakdown of nonoperating income. Other nonoperating income is down JPY 4 billion year-on-year, reflecting a high base for comparison. Net interest expenses rose by JPY 1.4 billion, primarily the result of an increase in overseas investments. Equity in net income or loss of affiliated companies was largely in line with last fiscal year, up JPY 0.2 billion, supported by progress in handovers of overseas residential properties in Asia and other factors. As a result, nonoperating income was negative JPY 10.7 billion, with the loss widening by JPY 5.1 billion year-on-year.

Next, we posted a net extraordinary loss of JPY 1.2 billion in second quarter. This is the aggregation of renovations at multiple existing properties, which resulted in losses on the retirement of fixed assets.

Please turn to Page 3 for a detailed discussion of the segment results starting with the Leasing segment. Operating revenue increased JPY 20.2 billion and operating income rose JPY 6.5 billion. The overall trend is largely unchanged from first quarter. As noted in the comments section, the main driver was full year contributions from large-scale office properties and retail facilities completed and launched in the previous fiscal year. These include the Nihonbashi Takashimaya Mitsui building, msb Tamachi Station Tower South, 55 Hudson Yards, Lalaport Nagoya Minato AQULS and MITSUI OUTLET PARK TAICHUNG PORT in Taiwan.

Although not noted in the comment section, we also reported year-on-year improvements in revenues and profits for existing office properties and retail facilities. We enjoyed solid trends with higher office rent revenues from Tokyo Midtown Hibiya and increases in GMV at existing retail facilities.

Our nonconsolidated Tokyo Metropolitan Area office building vacancy rate was 1.8%, down 0.2 percentage points from the end of June. This decline reflects the take-up of contracted office space by tenants for new and existing properties, including properties which are making a full year contribution from this fiscal year. We expect the vacancy rate to remain steady at low levels of around 2% on a full year basis. We continue to see strong demand for office space from corporates. Progress on office leasing remains solid.

Next, the Property sales segment. Please turn to Page 4. Property Sales operating revenues fell JPY 10.3 billion, while operating income declined JPY 3.2 billion year-on-year. Please refer to the comments section for details on the subsegments. Property Sales to Domestic Individuals reported a JPY 20.1 billion increase in operating revenues and a JPY 5.9 billion increase in operating income. As noted in the comments section, the key driver was the start of handovers for a large-scale central urban redevelopment property, Park Tower Harumi, in second quarter as well as continued progress for Park Court Hamarikyu The Tower and other central urban high-end properties for which handovers began in first quarter.

Total combined condominium and detached home units sold were 2,036, up 381 year-on-year. Continuing the trend from last year, the blended average unit price for condominium and detached homes was above JPY 80 million. Although not included on this slide, the OPM for the domestic Residential business was 14.5%, exceeding the 12.4% of second quarter fiscal 2018.

Combined condominium and detached home inventory as of the end of September was up marginally to 210 units from June 2019. This slight increase reflects the new inclusion of many large-scale projects which completed in second quarter. That said, we continue to make solid progress with contracts and handovers in the run-up to the full year. The absolute level is also low relative to the overall total.

The contract rate compared to our full year target of 3,400 units is already 94% as of the end of September, surpassing the 90% level of the same period last fiscal year.

Next, Property Sales to Investors and Overseas Individuals subsegment revenues fell JPY 30.5 billion and operating income declined JPY 9.1 billion. This reflects the high base for comparison on the back of sales of London office property, 70 Mark Lane, and profits on the handovers of condominiums at the Television Centre project in the last fiscal year.

However, we are making solid progress toward the full year targets in negotiations for the sale of properties. As noted at the outset, the progress we expect to make in Property Sales to Investors was a factor in the revision to our full year forecast. We revised up both operating revenue and operating income for the subsegment by JPY 13 billion. We remain focused on generating solid profits in second half by taking advantage of the opportunity to sell property and maintaining balance sheet discipline.

Next, the Management segment. Please turn to Page 5. Operating revenue increased JPY 11.4 billion and operating income grew by JPY 5.2 billion. The drivers of the year-on-year increase in revenues and profits are as shown in the Comments section. The number of units under management at the Repark Car Park Leasing business at Mitsui Fudosan Realty grew. The Rehouse brokerage business also reported an increase in retail brokerage transactions, reflecting higher levels of activity in the used housing market. We note that the combined number of Rehouse and corporate brokerage transactions hit a new record high. Transaction volume also increased 8.5% year-on-year.

Finally, please turn to Page 6 for the Other segment. Operating revenue increased JPY 6.6 billion while operating income fell JPY 1.6 billion. The Facility Operation subsegment benefited from full year contributions from the 4 Garden Hotel properties in Gotanda, Otemachi, Nihonbashi and Kanazawa, which came online last fiscal year. However, this was offset by the impact of initial costs related to the opening of the Halekulani Okinawa and 3 Garden Hotel properties: Hakata Gion, Kyoto Station and Ginza-gochome in first half fiscal 2019. Please note that the New Construction Under Consignment business for built-to-order detached homes and the Reform and Renewal business for offices, retail facilities and residential properties, which had formerly been included in the Mitsui Home segment are now included in the Other segment. The New Construction under consignment business within the Other segment is mainly the Mitsui Home built-to-order detached home business.

As is typical every year, there is a high concentration of completions and handovers in fourth quarter, which is why we reported an operating loss as of second quarter. The Other subsegment within the Other segment consists primarily of the Reform and Renewal business for Mitsui Home, Mitsui Designtec and Mitsui Fudosan Reform. Revenues for this business were up year-on-year.

Next, please see the right-hand side of Page 6. For your reference, we have compiled financial data for the Overseas business in this table. Under the long-term vision, Vision 2025, we have set out a strategy to grow our Overseas business. Our Overseas business is split across a number of segments. For your convenience, we have pulled together a table showing revenues and profits for the Overseas components of the various segments such as leasing and Property sales as well as the equity method companies to show the progress we are making towards our target.

The total combined Overseas profit for first half was JPY 14 billion, accounting for 11.5% of total operating income. Looking at the major contributions, operating income for Property Sales was down, reflecting the impact of a high base owing to last fiscal year's contributions from Property Sales in the U.K. However, we continue to see steady growth in the Overseas Leasing business with revenues up JPY 7 billion and operating income up JPY 3.2 billion. Key factors underpinning the improved Leasing profits include higher profits from New York's 55 Hudson Yards, which was completed in the previous fiscal year; progress in occupancy at multiple rental residential properties developed in the U.S.; improved occupancy rates for the Television Centre and One Angel Court office properties in London; and contributions from MITSUI OUTLET PARK TAICHUNG PORT in Taiwan.

Please turn to Page 7 for a discussion of the balance sheet. Total assets as of the end of second quarter fiscal 2019 were JPY 7,100.5 trillion, up JPY 297.8 billion from the end of March 2019. The main driver of the increase in assets was the increase in real property for sale with the outstanding balance rising JPY 71.3 billion from March 2019 to JPY 1,701.9 trillion, as shown in the table in the upper right. New investments were JPY 242.5 billion while cost recovery was JPY 152.9 billion. After taking into account other factors such as foreign exchange, investments outweighed cost recovery, as is typical every year. The main contributors were the increase in residential investments at Mitsui Fudosan Residential and development investments at Mitsui Fudosan and Mitsui Fudosan America Group, resulting in a net increase of JPY 71.3 billion.

Next, turning to tangible and intangible assets. The outstanding balance rose to JPY 3,605.8 trillion, up JPY 105.3 billion from March 2019. In the comments section, we highlight our major investments, including projects such as LaLaport Numazu, which opened in October, the Halekulani Okinawa and Overseas, the 50 Hudson Yards project.

New investments were JPY 170.1 billion. After factoring in depreciation and foreign exchange impact, the net total was an increase of JPY 105.3 billion versus March 2019.

Please see Page 8 for the liability side of the balance sheet. Outstanding interest-bearing debt as of the end of second quarter was JPY 3,228.9 trillion, up JPY 322.3 billion from March 2019. Our full year forecast is for an outstanding balance of JPY 3,300 trillion. The current level is already very close to the full year target level, but we expect to recover costs on domestic property sales to investors in second half. As such, we expect to finish the full year in line with our target.

With regard to the breakdown by company as well as cash inflows and outflows, please see the comments section on the right.

The D/E ratio as of the end of second quarter was 1.33x and the equity ratio was 34.3%.

Finally, I would like to comment on the upward revision to our full year forecast. Please turn to Page 11. Reflecting the strong progress in sales activity for the Property Sales to Investors subsegment, we have raised our full year forecasts. We have revised up our operating revenue and operating income forecasts for the Property Sales to Investors subsegment by JPY 13 billion from our initial forecast. As a consequence, we are now guiding for overall operating income of JPY 280 billion.

Based on a review of current conditions, below the line we have factored in JPY 5 billion in extraordinary losses. As a result, we have revised up our full year forecast for profit attributable to owners of the parent by JPY 5 billion to JPY 175 billion. We are now expecting full year fiscal 2019 operating revenues to set a new record high for the eighth consecutive year while operating income, ordinary income and net profit attributable to owners of the parent are expected to set new record highs for the sixth consecutive year.

This completes my remarks.