Mitsui Fudosan Co Ltd

TSE:8801

Earnings Call Transcript 2023-Q2

[Atsuro Uchida, executive]

Good afternoon, everyone. I am Uchida, Executive Manager of Investor Relations at Mitsui Fudosan. I will present a detailed explanation of the Mitsui Fudosan Group's results for the first half of the fiscal year ending March 2023.

As we did in first quarter, I will use the presentation deck entitled Financial Results and Business Highlights to explain the results. The Investor Relations group has significantly updated these materials this year. The presentation is bilingual, which will allow us to provide the same information in the same format to both domestic and overseas investors.

The materials cover 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 and overviews of each business, ESG initiatives and the major markets addressed by Mitsui Fudosan. Please feel free to read through this information later.

I will start with an overview of the financial results for the first half of fiscal 2022. Please open to Page 3 of the materials, which shows the financial highlights. As highlighted in the blue box on the upper left, for operating revenues and all levels of profit, operating ordinary and net profit attributable to owners of the parent Mitsui Fudosan reported year-on-year improvements for first half fiscal 2022.

In addition, the results represent new record highs for first half at all levels. For operating income and net income, this is the second consecutive quarter of new record highs. The progress rates versus our full year forecast range between the 40% plus to over 50%. As always, profit recognition for property sales skews towards the second half. As such, overall, we are making solid progress toward achieving the full year forecast announced at the beginning of the fiscal year.

In line with our initial guidance, the interim DPS is JPY 30 per share. Please look at the area outlined in red in the table in the lower left. For first half fiscal 2022, the segment operating income for leasing, property sales, management and other segments each increased or improved year-on-year. We have summarized the major factors supporting profit growth for each segment in the box on the right, but I will provide a detailed explanation later.

Next, please turn to Page 4 of the materials. We comment here on the outlook for the full year for each segment. As noted earlier, overall progress toward the full year forecast announced on May 13 is in line with our expectations. Therefore, we are not revising our full year forecast for operating revenues, operating income, ordinary income and net profit attributable to owners of the parent. However, we have made some changes to the operating income segment breakdown based on first half changes in the external environment and macro trends.

Specifically, we have revised up our segment operating income forecast for property sales and management by JPY 5 billion each for a total of JPY 10 billion. For the Other segment, we have factored in a decline of JPY 10 billion. We highlight the fact that the consolidated full year operating income forecast remains unchanged from our initial guidance of JPY 300 billion. I will go into more detail on this later as well.

As always, we show the ongoing impact from COVID-19 on our businesses on Page 6. Please look through this later. I will now explain the results in more detail. Please jump forward to Page 56 of the materials. We show here the consolidated profit and loss statement. Operating revenue in first half fiscal 2022 was JPY 1,057 billion, up JPY 60.1 billion or 6% year-on-year. Operating income was JPY 131.5 billion, up JPY 30.5 billion or 30.2% year-on-year.

Ordinary income was JPY 120.2 billion, up JPY 31.3 billion or 35.3% year-on-year. Net profit attributable to the owners of the parent was JPY 100.1 billion, up JPY 13.8 billion or 16% year-on-year. The progress rates versus our full year guidance are shown on the right in the box Entitled Progress Comparison with Full Year Forecast.

As you can see, with progress rates of 48% for operating revenue, 43.8% for operating income, 46.3% for ordinary income and 52.7% for net profit attributable to 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 6.8 billion year-on-year. As explained, when we announced first quarter results, the key driver of the increase is the impact of U.S. accounting treatment.

Under U.S. accounting standards, interest paid on properties under development is considered a necessary expense for the property and as such, is capitalized and included in the construction book value on the balance sheet. However, once a property has been completed and becomes operational, interest paid is expensed as a part of leasing revenue-related expenses.

Given the multiple completions of large-scale properties in the U.S. this fiscal year, starting with 50 Hudson Yards, interest expenses have increased as we had expected. Equity in net income or loss of affiliated companies increased JPY 4.9 billion year-on-year. This is mainly 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 0.8 billion year-on-year. I will also discuss extraordinary gains and losses.

As shown in the table titled Extraordinary Gains and Losses on the upper right, Mitsui Fudosan posted JPY 44 billion in gains on sales of investment securities in first half. This is the result of continued sales of some of our equity holdings, reflecting ongoing progress on initiatives to reduce strategic equity holdings.

Under extraordinary losses, we posted JPY 2.1 billion in losses on step acquisition. We incurred acquisition losses in increasing our stake in a development-related equity method affiliate when the affiliate became a subsidiary. At the time the affiliate became a subsidiary, it was necessary to mark-to-market the book value for raw land held by this affiliate from the time we took the initial stake and reflect this in equity.

However, the acquired company is currently in the midst of a development project for which development profits have yet to be realized, hence the losses. Going forward, we expect to secure solid profits when the development project at this subsidiary is completed.

Next, please look at the lower part of the table on the left. Profits and losses attributable to noncontrolling interest were a negative JPY 5 billion as of first half 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 58 of the materials. We show the first half segment results at the top of the page, operating revenue of JPY 363.4 billion and operating income of JPY 75.1 billion. This represents year-on-year increases of JPY 41.5 billion and JPY 9.4 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 the newly completed 50 Hudson Yards in New York, first half 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 leading to year-on-year increases for operating revenue and profits.

We show the office vacancy rate in the middle of the page. As a result of the temporary impact related to the completion of Tokyo Midtown Yaesu, Mitsui Fudosan's nonconsolidated metropolitan area office vacancy rate as of the end of September was 6.7%. If we exclude Midtown Yaesu, the office vacancy rate is at the low 4% level, generally flat compared to the 4.1% as of the end of June.

For large-scale properties like Tokyo Midtown Yaesu, the schedule for tenants moving in is staggered. It takes a certain amount of time after completion before all the tenants take occupancy. Because of this, optically, the vacancy rate can look temporarily elevated immediately following completion, but as tenants move in, the vacancy rate should gradually decline.

With regard to the leasing situation for Midtown Yaesu, despite the ongoing pandemic impact, we continue to have success in signing leases at top rent levels for Central Tokyo and are making progress every month toward our objective of being fully occupied by the grand opening slated for next spring.

Our forecast for the vacancy rate as of the end of the fiscal year, including Midtown Yaesu, remains unchanged. As previously indicated, we expect the fiscal year-end vacancy rate to stabilize at around the low to mid-4% level.

Next is the Property Sales segment. Please turn to Page 59. As shown at the top of the page, overall first half results for the Property Sales segment were operating revenue of JPY 286.5 billion and operating income of JPY 57.1 billion. This represents a year-on-year decline of JPY 26.3 billion in operating revenue, but a modest improvement of JPY 41 million in OP.

Looking at the individual subsegments, I will start with property sales to individuals domestic. Please look at the second row from the top. Operating revenue was JPY 119.4 billion and operating income JPY 13.2 billion, down year-on-year, JPY 19.2 billion and JPY 5 billion, respectively. As stated in the comments section on the left, the main factor was the year-on-year decline in the number of units reported and the relatively lower handover levels for central urban, high-end properties in first half.

A significant proportion of the central urban high-end handovers for this fiscal year are concentrated in second half. The key properties reporting sales are shown in the box below the common section on the left including Park City Kashiwanoha Campus South Mark Tower and other large-scale properties in the Metropolitan and surrounding area. This is a continuation of the trend from first quarter.

Although not noted on this page, the OPM for the domestic residential business was 11%, above the 9.8% reported in first half fiscal 2021. The number of reported units are shown in the middle of the table. The combined units for condominiums and detached housing were 1,830, down 63 units year-on-year.

The average unit price for condominiums and detached housing was over JPY 65 million. While this is lower than the first half level of the previous fiscal year, as noted earlier, it is a reflection of a difference in the mix of properties reported.

As I commented earlier, compared to first half last fiscal year, many of this year's reported properties are located in the metropolitan and surrounding area with handovers for high-end central urban properties skewing to second half. Near-term selling conditions remain strong.

First half completed inventory, as shown in the table on the lower part of the page is at record low levels with condominiums down to 57 units from the 82 units as of the end of March and completed inventory for detached housing at only 2 units. These are record low levels for completed inventory.

The contract progress rate for new domestic condominiums relative to the full year unit target of 3,250 has advanced to 91% as of the end of September. The contract rate was 90% at the end of September 2021 and 92% at the end of September 2020. As you can see, we continue to see similar trends to the last few years with the contract rates remaining stably at high levels above 90%.

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 167 billion and operating income JPY 43.9 billion, for a year-on-year decline of JPY 7 billion in operating revenue, but a year-on-year gain of JPY 5 billion in OP.

While there was a high base for comparison at the top line in the absence of the disposal of large-scale properties such as Iidabashi Grand Bloom and others in first half fiscal 2021. As noted at the time of first quarter results, this was offset by sales to investors of rental residential properties developed in the U.S., such as West Edge Tower in Seattle and the Gage in Denver, and domestically developed rental residential properties such as the Park Access series. We also continue to make good progress on sales and handovers for condominium project 200 Amsterdam in New York. This combined to drive the increase in 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.

Our progress rate towards the subsegment full year profit target of JPY 107 billion is already at 80%. We will continue to monitor trends of the transaction market players and the financial and real estate markets and remain committed to making solid progress on contracts and handovers.

Next is the Management segment. Please turn to Page 60. This segment consists of the property management subsegment, which focuses on managing properties under contract and the car park leasing business, Repark, and the brokerage asset management subsegment, 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 first half operating revenue of JPY 217.5 billion and operating income of JPY 32.1 billion, up JPY 8 billion and JPY 6.6 billion, respectively. Profits even exceeded the pre-pandemic first half performance of fiscal 2019 of JPY 28.8 billion.

Looking at conditions for the individual businesses, I will start with Property Management. Subsegment operating revenues were JPY 164.4 billion, and operating income was JPY 18.5 billion, up JPY 6.3 billion and JPY 4.5 billion, respectively. The key factors were higher year-on-year occupancy rates at the Repark business and the ongoing impact of cost reduction efforts designed to improve operating efficiency as well as improved profits at various management subsidiaries.

Next, the Brokerage and Asset Management business reported revenues of JPY 53 billion and OP of JPY 13.6 billion, up JPY 1.7 billion and JPY 2.1 billion, respectively. The major contributors were the rise in transaction unit values in the retail rehouse brokerage business and increases in project management fee income from property development.

Next, I will cover the Other segment. Please turn to Page 61. 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 189.5 billion for an operating loss of JPY 9.1 billion. This represents a JPY 36.9 billion year-on-year increase in operating revenues and a JPY 11.8 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.

Also, although not included in the materials, there was an impact from the decrease in orders for the new construction under consignment business as a result of surging materials prices. The results represent a combination of year-on-year increases and declines at the individual businesses. Notably, this is the first half since the COVID-19 outbreak without a state of emergency or restrictions on activity for the hotel and resorts business.

However, the business was impacted by the seventh wave of COVID-19 infections in July and August. As well, the recovery in inbound travelers to Japan was limited. Despite this, based on our success in capturing domestic demand, we saw monthly occupancy rates improve on a year-on-year basis. We have been able to confirm a recovery trend.

We note that Tokyo Dome Corporation closes its books in January, so the first half figures reflected in our results cover the period from February to July of 2022. This business was impacted by the sudden rise in COVID-19 infections during the seventh wave. As such, progress is lagging our initial full year forecast assumptions for Tokyo Dome.

That said, we are seeing a solid year-on-year recovery trend from late March onwards, backed by the start of the professional baseball season and increased attendance for concerts and events. Earnings, which had been in the red since the start of the pandemic moved into the black for the first half of fiscal 2022.

Next, please look at Page 62. We show here figures for the overseas business for your reference. Total overseas business profits for first half were JPY 38.1 billion, up a substantial JPY 32.1 billion year-on-year. Please note there is a 3-month lag in reflecting overseas profits. The figures included in our first half fiscal 2022 earnings reflect the results for the overseas businesses for the period of January to June 2022. Within this, the Leasing segment reported year-on-year increases of JPY 17.9 billion in operating revenue and JPY 6.5 billion in operating income mainly driven by the contribution of 50 Hudson Yards.

As noted earlier, the Property Sales segment benefited from the contribution from sales of rental residential properties and condominiums in the U.S. with significant year-on-year increases in revenues of JPY 92.7 billion and operating income of JPY 19 billion. The management and other segments reported a year-on-year improvement in operating revenues of JPY 6.2 billion and the narrowing of the operating loss by JPY 1.5 billion.

This reflects the impact of the completion of renovation work at the Halekulani Hotel in Hawaii in the previous fiscal year and the restart of operations from October 2021. As a result, first half overseas business profits accounted for 27.5% of total operating income. On a full year basis, we expect overseas business profits to account for a little less than 20% of the total.

We highlight the fact that 50 Hudson Yards, 1 of the largest office properties in Manhattan was completed in second quarter. To date, we had indicated that leasing progress was around the 75% level. The current leasing status is around 85%. The New York office market has been gradually recovering since 2021, backed by tenants moving into new or higher quality properties.

In particular, we have seen a marked preference amongst tenants for large-scale redevelopments or highly accessible and attractive office properties. We continue to see strong leasing inquiries for 50 Hudson Yards, progress is going very well indeed. With regard to the remaining office floor space of around 15%, the available space is on very attractive high floors with excellent views. We continue to aim for high rent levels that we fit a prime Manhattan trophy property.

Next, I will move on to talk about the balance sheet. Please turn to Page 63. At the bottom of the page on the left, total assets as of the end of first half fiscal 2022 were JPY 8,748.2 billion, an increase of JPY 540.2 billion versus the end of the previous fiscal year. Of the JPY 540.2 billion year-on-year increase in assets, approximately 60% or JPY 322.4 billion is the result of the change in foreign exchange rates.

I will now discuss the major components of change such as investment in cost recovery. Please turn to Page 64. The total outstanding balance of real property for sale as shown in the table on the upper left was JPY 2,146.1 billion, up JPY 94.4 billion from the end of March 2022. New investments were JPY 198.5 billion, which was offset by cost recovery of JPY 202.8 billion.

Others, which includes ForEx impact was JPY 98.6 billion. The breakdown of these figures by company is as follows: while progress was made on cost recovery at Mitsui Fudosan Residential, after taking into account development investments at Mitsui Fudosan, Mitsui Fudosan Americas Group and Mitsui Fudosan U.K., the result was a net increase of JPY 94.4 billion from the end of March 2022.

Next, looking at the lower left, the outstanding balance of tangible and intangible fixed assets was JPY 4,297.8 billion, up JPY 383.7 billion from March 2022. We explained the key contributing factors in the comment section on the lower right. We incurred new investments of JPY 276.3 billion related to construction at Tokyo Midtown Yaesu, domestic SPC LaLaport Fukuoka and although not noted here, 50 Hudson Yards in New York. This was offset by depreciation of JPY 59.1 billion.

Taking into account ForEx impact and other factors under other of JPY 166.6 billion, this resulted in a net increase of JPY 383.7 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 second quarter was JPY 4,156.2 billion, up JPY 488.9 billion from March 2022. Of this increase, approximately JPY 200.7 billion reflects the impact of ForEx movements.

Going back to Page 63. As a result of the above, the D/E ratio as of the end of second quarter was 1.46x, and the equity ratio was 32.5% as shown in the lower right. Finally, I will discuss the outlook for our full year forecast for the fiscal year ending March 2023 and provide a detailed explanation of the changes made to consolidated segment forecast.

Please turn to Page 66. In the box on the right, we show the headline figures. Overall, we continue to make progress in line with our expectations. As such, we maintain the forecast as announced on May 13. That said, as a result of the impact from a sudden surge in COVID-19 infections this summer during the seventh wave, the rapid depreciation of the yen, a series of rate hikes by the FRB and other overseas central banks, the global emergence of inflationary pressures and rising energy prices, we have revised some of our segment forecast for operating income to reflect changes in the external environment and the macro backdrop.

Specifically for the Property Sales segment, reflecting the strength of the domestic residential business, we raised our full year operating income forecast by JPY 5 billion to JPY 145 billion. At JPY 145 billion, this represents a new record high for operating income for the Property Sales segment.

Next, for the Management segment, reflecting the ongoing cost reductions at the Repark business and the strength of the brokerage business, we raised our forecast by JPY 5 billion from our initial forecast and now project JPY 62 billion in operating income. We note that the JPY 62 billion OP forecast is also a new record high for the segment.

However, for the other segment, while we expect the hotel and resorts business to progress in line with our initial expectations, including a further improvement in demand going forward, reflecting the impact of the seventh wave of COVID-19 infections on Tokyo Dome and the impact of surging materials prices on the Mitsui Home, new construction under consignment business, we lower our full year OP forecast by JPY 10 billion to an operating loss of JPY 7 billion.

Taking into account the larger-than-expected impact of the seventh wave on the Tokyo Dome business, we revised up our initial full year COVID-19 impact forecast from JPY 20 billion to JPY 26 billion. In addition, reflecting the significant impact of the weaker yen on interest-bearing debt, we revised up our guidance for outstanding interest-bearing debt as of the end of the fiscal year from JPY 3,950 billion to JPY 4,150 billion. These figures are shown on the lower right of Page 67. Please refer to this at your leisure.

We continue to focus on achieving new record highs with our forecast for full year operating income of JPY 300 billion and net profit of JPY 190 billion, having revisited near-term conditions. Going forward, we will continue to focus on the recovery in retail facilities and revenue and profit growth in the office business, including 50 Hudson Yards in the Leasing segment, progress on contracts for the Property Sales and Management segments and the recovery and locking in of demand in the hotel and resorts business within the Other segment. Through this, we aim to achieve our initial full year forecast. This completes my presentation.

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