Mitsui Fudosan Co Ltd

TSE:8801

Earnings Call Transcript 2018-Q3

[Kawabata Shingo, executive]

Good afternoon. I am Kawabata, Executive Manager of the Investor Relations Department. I will present Mitsui Fudosan's Third Quarter Fiscal 2017 results. Overall, we reported year-on-year declines in both operating revenue and operating income for third quarter fiscal 2017. The result of a significant skewing of operating revenue and profit recognition to fourth quarter for both our Property Sales to individuals and Property Sales to investors businesses. We continue to see strong performances in our office leasing, retail facilities leasing and residential Property Sales businesses. With regard to the Property Sales to Investors business, as recently disclosed in press releases by both NBF and our logistic REIT. We continue to make good progress with asset sales. As such, we remain on track for achieving our full year forecast for both operating revenue and profit, which represent new record highs.

Our full year guidance remains unchanged. I will now explain our results in more detail using the fact book. Please turn to Page 2 for a summary of the consolidated profit and loss statement. For the third quarter of the fiscal year ending March 2018, consolidated operating revenue was JPY 1,101 600,000,000, down JPY 97 billion year-on-year or 8.1% year-on-year. Operating income was JPY 135.9 billion, down JPY 30.5 billion or 18.3% year-on-year. Ordinary income was JPY 121.2 billion, down JPY 34.8 billion or 22.3% year-on-year. Profit attributable to the owners of the parent was JPY 72 billion, down 33.3% or JPY 35.9 billion.

We show the progress we have made toward our full year forecast in percentage terms as of the third quarter in the table in the upper right-hand side of the page. Operating revenue was 61.5%, while profits were generally in the 50% range. Relative to the previous fiscal year, the pace of progress may appear slower, but as explained in the outset, the timing of revenue and profit recognition, primarily in the Property Sales segment this fiscal year, is heavily skewed towards fourth quarter, hence, the lower progress rate year-to-date versus last year.



I will briefly touch upon the key items below the line as shown on this page. Nonoperating income and expenses fell JPY 4.3 billion year-on-year. Within this, equity method income and losses declined JPY 1.6 billion, primarily reflecting the high level of income last fiscal year at overseas equity method subsidiaries on the back of Property Sales and the absence of such gains this fiscal year. This is a continuation of the trend as of second quarter. There was an increase of JPY 0.9 billion in interest expenses on a net basis for interest income and expenses. This is mainly the result of increased overseas investment pushing up interest expense slightly. Other nonoperating income and expenses declined, reflecting the impact of one-off gains in the previous fiscal year and the absence of such gains this year. These moves are in line with our initial expectations.

We reported JPY 7 billion in extraordinary losses in third quarter. On a full year basis, we are expecting to post JPY 15 billion in extraordinary losses, half of which was posted in third quarter. The extraordinary losses are the result of impairment losses taken on a number of leasing assets.

Now I will discuss the performance of the individual segments in more detail. I will start with the Leasing segment. Please turn to Page 3. Leasing segment operating revenues rose JPY 17.8 billion and operating income was up JPY 6.2 billion. As noted in the comments section, the year-on-year improvements were largely due to progress on upward rent revisions for existing office properties and the full year contribution from Lalaport Shonan Hiratsuka, which came online last fiscal year. In addition, we continue to see DMV at our existing retail facilities improved solidly year-on-year. This is also underpinning the higher operating revenues and profits. Tokyo Metropolitan area office vacancy rates continue to decline. Our nonconsolidated Tokyo Metropolitan area office building vacancy rate was 1.6% as of the end of December 2017. We expect our vacancy rate as of the end of the current fiscal year to be around the mid-2% level, in line with our initial forecast. The slight rise in the projected vacancy rate as of the end of the fiscal year is related to the expected completion of Tokyo Midtown Hibiya in February. Leasing has been very strong, but some tenants will only be moving in after the end of the current fiscal year. We show major projects for the first 9 months of this fiscal year, both newly opened and those making full year contributions in the lower right-hand side of the page for your reference. In addition, we also show our nonconsolidated results in the lower left-hand side of the page for your reference.

Revenue increased JPY 4.8 billion year-on-year on the back of new projects, which came online during the fiscal year and full year contributions from projects, which came online in the previous fiscal year. Revenue from existing properties rose JPY 5.2 billion year-on-year. For the contribution from shifting, termination and other, while this is typically a negative figure in most quarters, for third quarter, we reported a positive contribution of JPY 0.2 billion. The properties in shifting, termination and other, include the logistics properties developed by Mitsui Fudosan. Last fiscal year, we completed construction and initiated operations at a number of large-scale logistics properties. The positive revenue contribution from these completed logistic properties outweighed the negative impact from properties being shifted or terminated.

Moving next to the Property Sales segment. Please turn to Page 4. Segment revenue was down JPY 124.5 billion year-on-year, while OP declined JPY 32.2 billion. With regard to the residential business, please refer to the subtotal line in the table on the right. We reported sales of 2,412 units, down 424 units year-on-year. As a result, revenue and income from Property Sales to individuals declined year-on-year by JPY 11 billion and JPY 2.4 billion, respectively. As shown below, Property Sales to Investors also reported year-on-year declines, with revenue down JPY 113.5 billion and operating income falling JPY 29.8 billion. However, as indicated in the comments section, relative to the 3,900 newly built condominium units we expect to report on a full year basis, the contract rate as of the end of December already stands at 96%. So the underlying sales environment remains solid. In addition, as noted at the outset, there is a heavy skewing of revenue and profit recognition to fourth quarter this fiscal year for the Property Sales to Investors business as well.

We continue to make good progress on selling properties. Results to date are in line with plan, and we are on track for achieving our full year guidance for the segment. We show inventory levels for the residential business in the lower right-hand side of the page. As of the end of December, the inventory level for completed condominiums stood at 217 units, down a substantial 173 units from the end of March 2017.

Next the Management segment. Please turn to Page 5. Operating revenues for the Management segment rose JPY 6.5 billion year-on-year, but OP fell JPY 2.7 billion. As noted in the comments section, the higher revenue was primarily the result of an increase in the number of units under Management in the Repark, Car Park Leasing business. The Rehouse brokerage business was also a positive factor. The number of retail transactions increased contributing to higher revenues. With regard to profits, the absence of large-scale corporate brokerage transactions, relative to the previous fiscal year, was one factor behind the year-on-year decline. In addition, initial cost related to the &mall e-commerce business started in November 2017, are included in this segment contributing to the lower profits.

For your reference, the data on the total managed units for the Repark, Car Park Leasing business and transactions in the brokerage business are shown on the right-hand side of the page. Next the Mitsui Home segment. Please turn to Page 6. Operating revenues fell JPY 0.1 billion, and the operating loss narrowed by JPY 0.7 billion. Revenues from the new construction and Reform and Renewal businesses declined, but improved overall margins led to a narrowing of the operating loss.

Next the Other segment. Other segment operating revenue increased by JPY 3.2 billion year-on-year, and OP fell by JPY 0.5 billion. As stated in the comments section, revenues improved on the back of full year contributions from hotel properties in the Kyobashi area of Tokyo and the Nagoya area, launched in the previous fiscal year. However, operating income declined on initial expenses related to the opening of new hotel properties this fiscal year such as the Kyoto property, which opened in September, the Ginza property opened in October and the reopening of the renovated Celestine Hotel in Shiba in November. In addition, profitability was also depressed by the recently started work-selling business, a shared office business targeted at corporate. This business is still at an early phase of development, and as such, expenses still outweigh revenues.

Moving on to the consolidated balance sheet. Please refer to Page 7 for a discussion of the asset side of the balance sheet. Total assets as of the end of December 2017 were JPY 6,701,000,000,000, up JPY 436.3 billion from March 2017. We showed the major line-item changes on the right-hand side of the page. Outstandings in real property for sale as of the end of December 2017, rose to JPY 1,427,400,000,000, up JPY 93.2 billion from March 2017. New investments outweighed cost recovery as usual. In particular, there was an increase in real property for sale of JPY 36.8 billion at Mitsui Fudosan Residential, of which, roughly half is for the GSK building acquired from NBF.

Next the changes in tangible and intangible fixed assets as shown in the lower right-hand side of the page. The outstanding balance as of the end of December was JPY 3,116,600,000,000, up JPY 148.8 billion from the end of March 2017. We show the breakdown by company with Mitsui Fudosan reporting an increase of JPY 10.4 billion, and Mitsui Fudosan America, posting a JPY 125.1 billion increase. As noted in the comments section, in addition to investments in the existing 55 Hudson Yards Project, Mitsui Fudosan America invested in the newly acquired 50 Hudson Yards Project, primarily reflecting the acquisition of land. These were major contributors to the overall increase.

In the domestic business, Mitsui Fudosan continued to make investments in the Tokyo Midtown Hibiya project as well as the Halekulani Okinawa resort hotel project. Holdings in investment securities increased by JPY 154.4 billion to JPY 782.2 billion. We made no new acquisitions. The increase is due solely to the rise in equity prices.

Next on the liability side of the balance sheet as shown on Page 8. The outstanding balance of interest-bearing debt as of the end of December 2017 was JPY 2,611 500,000,000, up JPY 324 billion from the end of March 2017. We show a breakdown by company on the right. The major changes were an increase of JPY 195.6 billion at Mitsui Fudosan, and an increase of JPY 155.7 billion at Mitsui Fudosan America. The main driver of the increase at Mitsui Fudosan America is due to the investments made in the 2 Hudson Yards Projects, highlighted earlier.

As a result, the D/E ratio as of the end of third quarter fiscal 2017 was 1.23x, and the equity ratio was 35.4%.

Finally, I will also comment briefly on the faulty installation at a condominium complex located in Yokohama. As you know, in line with our stated policy to seek damages, on November 28, 2017, we filed a lawsuit for total compensation of JPY 45.9 billion against the 3 companies involved. We provide an explanation of the contingent liabilities on Page 14. We have updated our statement to reflect the filing of the lawsuit. With regard to the compensation, we are seeking of JPY 45.9 billion, we had previously estimated damages to be JPY 39 billion. However, in addition to the damages, we have factored in the expected legal expenses related to the lawsuit as well as the relevant consumption tax amount. However, at this stage, we continue to be unable to provide a reasonable estimate of the potential impact on the consolidated results of the Mitsui Fudosan Group. As such, as of third quarter fiscal 2017, we have not provisioned against a possible impact. This completes my remarks.