Mitsui Fudosan Co Ltd

TSE:8801

Earnings Call Transcript 2019-Q3

[Shingo Kawabata, executive]

Good afternoon. I am Kawabata, Executive Manager of the Investor Relations Department. I will present Mitsui Fudosan's Third Quarter Fiscal 2018 Results.

Overall, Mitsui Fudosan reported strong revenues and profit growth for third quarter. The property for sale segment was the key driver of third quarter earnings, continuing the trend from second quarter. In addition, Leasing segment profits turned positive on a year-on-year basis from third quarter. Strong trends in the Management segment's brokerage business also supported overall profit growth. As a result, the 3 main segments reported positive year-on-year growth for sales and operating income.

Below the line, there was also a substantial year-on-year increase in nonoperating income as a result of a strong contribution from the Overseas business. In particular, robust condominium sales in Bangkok boosted equity in net income of affiliated companies. All of these factors supported strong overall revenue and profit growth.

Our full year forecast remained unchanged. As announced in November, we continue to guide for new record highs in revenue from operations, operating income and net income attributable to the owners of the parent.

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 first 9 months of the fiscal year ending March 2019, consolidated operating revenue was JPY 1.244 trillion, up JPY 142.4 billion year-on-year or 12.9%. Operating income was JPY 156.3 billion, up JPY 20.4 billion or 15% year-on-year. Ordinary income was JPY 152.5 billion, up JPY 31.2 billion or 25.8% year-on-year. Profit attributable to the owners of the parent was JPY 102.2 billion, up 41.9% or JPY 30.1 billion.

I have already touched upon segment earnings, so I will elaborate on the key items below the line on this page. First, equity in net income or losses of affiliated companies increased JPY 9.6 billion year-on-year to JPY 9.8 billion. The strong contribution reflects good progress in the residential sales businesses at overseas equity-method subsidiaries, primarily in Bangkok as well as areas such as China and Singapore.

In third quarter, we reported an extraordinary loss of JPY 1.8 billion.

As shown on the right-hand side of the page, we took a loss on the retirement of fixed assets. The loss relates primarily to the retirement of existing structures at the Mitsui Outlet Park Yokohama Bayside, which is currently under reconstruction.

In the table on the upper right-hand side of the page, we show the progress relative to our full year forecast in percentage terms. We are making good progress toward our full year guidance, achieving 60%-plus levels for revenue and earnings at all levels.

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 33.6 billion year-on-year, and operating income improved by JPY 0.4 billion. There were multiple office property completions in 2018, such as Tokyo Midtown Hibiya, musubu Tamachi Station Tower South and Nihonbashi Takashimaya Mitsui Building. As a result of initial expenses, these new properties are still in the red, but the magnitude of losses is shrinking as tenants move in and push up occupancy rates.

There were positive profit contributions from solid progress on upward rent revisions for our existing office properties and a contribution from 55 Hudson Yards, which was completed in October. As a result of the above, segment operating income improved by JPY 0.4 billion.

Our nonconsolidated Tokyo Metropolitan Area office building vacancy rate fell to 2.2% as of the end of third quarter. We have been guiding for a vacancy rate of around the 2% level as of the end of the fiscal year in March and are making good progress towards achieving this target.

Moving next to the Property Sales segment. Please turn to Page 4. Segment revenue was up JPY 82.3 billion year-on-year, while OP increased JPY 20.5 billion.

With regard to the domestic residential business, please see the table on the upper right. We reported sales of 2,217 units, down 195 year-on-year. However, as you can see, unit prices rose substantially year-on-year to JPY 80.73 million, up JPY 19.53 million. As a result, despite the decline in units sold, revenues from domestic Property Sales to Individuals increased.

Over the first 9 months of the fiscal year, there was a high concentration of handovers in Central Tokyo high-end properties, such as Park Court Akasaka Hinokicho and Park Court Aoyama The Tower, which tend to command high margins. Therefore, the operating profit margin improved, and profits grew by JPY 6.4 billion year-on-year.

Property Sales to Investors and Overseas Individuals reported a year-on-year revenue increase of JPY 50.9 billion and operating income increase of JPY 14.1 billion. The trend is largely unchanged from second quarter. Major contributors to the increase in both revenues and profits for the Overseas Property Sales business are the continued handovers of the BBC Television Centre condominium properties and the sale of the 70 Mark Lane office property in second quarter.

Returning to the residential business, we show inventory levels for the domestic residential business in the third table down on the right-hand side of the page. As of the end of December, condominium inventory stood at 161 units and detached housing inventory at 35 units for a total of 196, down from the end of September. As a result of the initiation of sales after completion at a number of properties in first quarter, we had seen a temporary increase in inventory levels. However, selling conditions have been solid at each of these properties, hence, the decline in inventory levels as of the end of December. We believe that inventory levels will continue to decline into the fiscal year-end.

Next, the Management segment. Please turn to Page 5. Operating revenues for the Management segment rose JPY 16.9 billion year-on-year, and OP rose JPY 3 billion.

I will discuss the subsegments of Property Management and Brokerage and Asset Management separately. The former reported higher revenues, but a decline in operating income of JPY 0.1 billion. The higher revenue was primarily the result of an increase in the number of units under management in the Repark Car Park Leasing business.

On a stand-alone basis, the Repark business reported growth for both revenues and operating income. However, on the back of recent labor tightness, payroll costs at the office and retail facilities, Property Management subsidiaries, increased. Additionally, there was a slightly elevated base for comparison as a result of a one-off push-up to profits in the operation and management fee business last fiscal year.

In contrast, the Brokerage and Asset Management subsegment reported substantial positive growth for both revenues and operating income. We continue to see solid growth in the number of retail brokerage transactions for the Rehouse business. There were also multiple large-scale brokerage transactions for corporates in third quarter, boosting transaction volume significantly.

All of the above contributed to higher revenues and operating income for the overall segment.

Next, the Mitsui Home segment. Please turn to Page 6. Operating revenues rose JPY 8.8 billion, and operating losses narrowed by JPY 1 billion. Revenues rose on higher sales from the new construction and the Reform/Renewal businesses. Higher revenues contributed to the decline in losses for the segment.

Please look at the table in the lower left-hand side of the page. As you can see, revenues were particularly strong in the Reform/Renewal business, and orders are up JPY 6 billion. Although Mitsui Home does reform and renewal work for detached homes, recently, there has been an increase in demand for interior work from office tenants as they move into new offices. Mitsui Home has been successful in capturing orders for this type of work, which is driving the stronger order growth.

Turning to the Other segment on the right-hand side of Page 6. Other segment operating revenue was up JPY 0.6 billion, but OP declined JPY 0.1 billion.

The existing hotel business continues to perform well. However, we incurred initial opening expenses for 3 new hotel properties in 2018; the Mitsui Garden Hotel Otemachi, the Mitsui Garden Hotel Gotanda and Mitsui Garden Nihonbashi Premier, which depressed segment profit. This is why this segment is reporting a slight decline in operating income despite the sales growth.

I would also like to touch on Overseas earning. Please see Page 7. As you can see, Overseas revenues and operating income for the Leasing segment in third quarter reported year-on-year increases of JPY 8.6 billion and JPY 3.7 billion in revenues and operating profits, respectively. As noted earlier, the overall Leasing segment reported an operating income increase of JPY 0.4 billion. Backing out from these numbers, the domestic Leasing business was in the red up to the end of third quarter, with the Overseas profit contribution offsetting the losses. The vast majority of the increase is the contributions from 55 Hudson Yards and One Angel Court in the U.K.

In Overseas property for sale, revenues increased by JPY 73.9 billion and operating income by JPY 19.7 billion. As alluded to earlier, much of the increase is the result of handovers of condominiums at the Television Centre and the sale of 70 Mark Lane.

Similar to the Leasing segment, the domestic business reported a year-on-year decline in operating income of JPY 5.6 billion, reflecting the relatively slower progress in selling domestic properties to investors to date. However, as indicated in a recent Mitsui Fudosan Logistics Park Inc press release, a number of properties have been sold to the logistics REIT for revenue of JPY 48.6 billion to be recognized in fourth quarter. There will also be a number of other properties that will be sold in fourth quarter, so we would expect to make progress in generating domestic property for sales revenue.

Finally, operating income at the Overseas management and the Other business fell JPY 0.3 billion. The primary business of this segment is the hotel business. We are currently renovating the Waikiki Parc Hotel in Hawaii, contributing to the slight decline in profit.

Moving on to the consolidated balance sheet. Please refer to Page 8 for a discussion of the asset side of the balance sheet. Total assets as of the end of third quarter were JPY 6,622.3 billion, up JPY 337.6 billion from March 2018. We show 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 2018 were JPY 1,576,000,000,000, up JPY 51.2 billion from March 2018. In the second table down, we show new investments and cost recovery. As you can see, new investments outweighed cost recovery.

We show the breakdown by company on the upper right. If you look at Mitsui Fudosan UK Group, you will see a decline of JPY 42.3 billion in real property for sale. The decline reflects the handovers of BBC Television Centre residential properties and the sale of 70 Mark Lane.

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 3,447,000,000,000, up JPY 128 billion from the end of March 2018. The increase reflects new investments for new properties discussed earlier, such as the Nihonbashi Takashimaya Mitsui Building or LaLaport NAGOYA minato AQULS. In addition, new investments were also made in the U.S. for 55 Hudson Yards and 50 Hudson Yards.

Another major driver of the increase in assets was from cash and time deposits. As of the end of third quarter, cash and time deposits stood at JPY 180.5 billion, up JPY 79.6 billion from March 2018. The balance is temporarily elevated ahead of anticipated overseas investments, primarily for the U.S. We expect the balance to refer to levels similar to last fiscal year-end as we head into the fiscal year-end.

Next, on the liability side of the balance sheet as shown on Page 9. I will comment briefly on interest-bearing debt. The outstanding balance of interest-bearing debt as of the end of December 2018 was JPY 3,046,000,000,000, up JPY 441.4 billion from the end of March 2018. Our initial forecast for outstanding interest-bearing debt was JPY 2.9 trillion. We have exceeded this level as of the end of December. But as noted earlier, there will be a heavy concentration of domestic sales of property to investors in fourth quarter.

On the back of this, we expect to make progress on cost recovery. As a consequence, we expect the outstanding balance of interest-bearing debt as of the end of the fiscal year to be in line with our initial target. As a result, the D/E ratio as of the end of third quarter fiscal 2018 was 1.36x, and the equity ratio was 33.9%.

This completes my remarks.