Mitsui Fudosan Co Ltd

TSE:8801

Earnings Call Transcript 2022-Q3

[Atsuro Uchida, executive]

Good afternoon, everyone. I am Uchida, Executive Manager of Investor Relations at Mitsui Fudosan. I will explain the third quarter results for the fiscal year ending March 2022. Before getting into a detailed explanation, there are 3 key points that I would like to highlight at the outset.

The first is the 9-month profit attributable to owners of the parent, which was JPY 123.5 billion, up 24.9% year-on-year. This represents a new record high on a 9-month basis.

The second is that based on the results up to the end of third quarter, we have chosen to revise up our full-year forecast. On the back of a JPY 10 billion improvement in OP, we are raising our forecast from JPY 230 billion to JPY 240 billion. We revised the ordinary income forecast up from JPY 205 billion to JPY 215 billion, similarly reflecting a JPY 10 billion improvement. We project a JPY 15 billion improvement in profit attributable to owners of the parent, raising our forecast from JPY 160 billion to JPY 175 billion.

The third is that we are revising up our guidance for the fiscal year-end dividend per share as well as announcing a share buyback, reflecting the upward revision to our full-year forecast. With regard to the dividend per share, we have raised our full-year guidance from the JPY 44 per share announced initially to JPY 55 per share. In addition, as a part of flexible measures related to capital strategy, we will undertake a share buyback program of up to JPY 15 billion. For more details, please see today's press releases entitled notice regarding Revision of Dividend Forecast and notice regarding Resolution on Share Buyback.

I will now explain the results in more detail using the Fact Book, as always. Please open to Page 2, which shows the profit and loss statement. Amidst the ongoing impact of the pandemic on a year-on-year basis, 9-month third quarter results for this fiscal year saw a recovery in the retail facilities leasing business and a substantial improvement in revenues and profits for the car park leasing business Repark, and the retail brokerage business Rehouse. This was offset by a lower number of condominium units sold year-on-year in the domestic residential business and a heavy skewing of handovers in the property sales to investors business to fourth quarter.

As a result, operating revenue was JPY 1,466.9 billion, down JPY 1.1 billion or 0.1% year-on-year. Operating income was JPY 154.5 billion, down JPY 9.9 billion or 6% year-on-year. And ordinary income was JPY 137.8 billion, down JPY 5.4 billion or 3.8% year-on-year. However, profit attributable to owners of the parent was JPY 123.5 billion, up JPY 24.6 billion or 24.9% year-on-year.

For the progress rate relative to our forecast, please see the table in the upper right. Following the upward revision to our full-year forecast, the progress rate on operating revenue was 68.2%, operating income was 64.4%, and net profit attributable to the owners of the parent was 70.6%. We continue to make solid progress towards achieving our full-year forecast.

Next, looking back to the table on the left. I will discuss the segment results in more detail later, but would first like to touch upon nonoperating items below the line. If we look at the breakdown of nonoperating income and expenses, equity in net income/loss of affiliated companies was up year-on-year on the improving operating conditions for the hotel business at affiliates. Others on a net basis also rose year-on-year for an overall year-on-year improvement of JPY 4.4 billion.

Next, I will discuss extraordinary gains and losses. Please see the table on the right. Extraordinary profits for the 9-months to third quarter were JPY 51.1 billion, resulting from gains on the sale of investment securities. This reflects our efforts to control the balance sheet and continued reductions to strategic equity holdings. Under extraordinary losses, we recorded JPY 4.2 billion in losses related to COVID-19. These losses are the aggregation of fixed costs, such as leases for retail, and other facilities that were temporarily closed as a result of the state of emergency. As of the end of first half, this figure was JPY 3.9 billion. So extraordinary losses for third quarter on a stand-alone basis was JPY 0.3 billion, reflecting a declining trend.

If we compare the COVID-19-related losses on a year-on-year basis, losses for the same period last fiscal year were JPY 14.2 billion versus this fiscal year's JPY 4.2 billion. If we compare operating profit after adding back these expenses, third quarter OP for this fiscal year declined from JPY 154.5 billion to JPY 150.3 billion versus JPY 150.1 billion from a starting point of JPY 164.4 billion for the same period last year. After adjusting operating income for the extraordinary losses, real operating profit was up on a year-on-year basis.

Please turn to the next page for a discussion of the individual segments. Please open to Page 3. First is the leasing segment. On a year-on-year basis, operating revenues increased JPY 33.2 billion, and operating profit rose JPY 5 billion. Please see the comments section for more details on operating conditions at the Leasing segment. 9 months third quarter results improved mainly due to a year-on-year recovery in the retail facilities business. In particular, there was no state of emergency declared during the 3-months of third quarter, which supported a solid recovery in GMV to close to fiscal 2019 levels.

The office business also reported year-on-year improvements on full term contributions from properties completed last fiscal year, such as Bunkyo Garden Gate Tower, and the impact of higher revenues and profits from existing offices. As a result, the Leasing segment reported a year-on-year increase in revenues and profits.

With regard to the office vacancy rate, Mitsui Fudosan's metropolitan area office vacancy rate for the parent as of the end of December was 4.1%, generally unchanged compared to the end of September. This reflects the fact that we have been able to solidly capture tenant demand after the lifting of the state of emergency from October 2021. We are making progress on re-leasing vacant space. With the lifting of the state of emergency from October 2021, tenant leasing activities are finally restarting in earnest. We expect the vacancy rate as of the end of the fiscal year to be in the mid-3% level. With regard to the upward revision, we have revised up our Leasing segment OP forecast roughly JPY 2 billion from JPY 128 billion to JPY 130 billion, mainly reflecting the impact of ongoing cost reduction initiatives.

Next is the Property Sales segment. Please turn to Page 4. Overall, the Property Sales segment reported a JPY 120.8 billion year-on-year decline in operating revenues and a JPY 22.3 billion drop in operating profits. For our breakdown, please see the table on the right of the comment section. For domestic residential property sales, operating revenues fell JPY 62.9 billion year-on-year, and operating income declined JPY 11.2 billion year-on-year.

As noted at the end of second quarter and indicated in the comments section, this is mainly due to the year-on-year decline in the reported number of units for the 9-months to third quarter. In addition, the comparison is to a high base, reflecting the absence of multiple central urban large-scale high-margin properties such as the Tower Yokohama Kitanaka and the Court Jingu-Gaien, which were reported in the same period last fiscal year.

Subsegment revenues and profits declined year-on-year as a result. The combined total of condominium and detached housing units reported was 2,775, down 545 year-on-year. The blended average price per unit for condominiums and detached housing was JPY 67.23 million.

Near-term sales remain very strong. Completed inventory remained stable at low levels with inventory as of third quarter for condominiums and detached housing of only 111 units, down 31 units from the end of September. Although not noted in the materials, the OPM of third quarter was 11%. With regard to the projected number of condominium units to be reported on a full-year basis, in conjunction with the upward revisions discussed at the outset, we raised our forecast from the initial 3,100 units to 3,200 units.

The contract rate versus the new full-year target of 3,200 as of the end of December is virtually 100%. The contract rate as of the end of December in the previous year was 97%, and the year before was virtually 100%. So as you can see, contract rates have remained stable at high levels, unchanged over the last few years. With regard to the upward revisions, reflecting the improved OPM relative to the initial plan for the domestic residential business, we have revised up our full-year OP forecast approximately JPY 2 billion from JPY 22 billion to JPY 24 billion.

In Property Sales to Investors and Individuals overseas, third quarter operating revenue was down JPY 57.8 billion, and operating income fell JPY 11 billion. Appetite to invest remain solid in the real estate investment market for asset classes generating stable cash flows such as offices, logistics facilities, and rental residential properties. We have seen no deterioration in cap rates in near-term transactions.

With regard to the upward revision of full-year forecast, factoring in increases in property sales relative to the initial plan, we have revised up our OP forecast by roughly JPY 2 billion to JPY 113 billion from JPY 111 billion. We note that we already have contracts for virtually all of the planned property sales in place, so we have good visibility into achieving our full-year target.

Next is the Management segment. Please turn to Page 5. This segment consists of the Property Management business, which focuses on managing properties under contract, Mitsui Fudosan Realty's car park leasing business, Repark, the corporate and retail brokerage businesses, the asset management business for our sponsored REITs and others, and the consignment sales business, which concentrates on selling condominiums developed by other developers. On a year-on-year basis, operating revenues improved JPY 23.8 billion, and operating income rose JPY 16.3 billion. Please see the comments section for more detail on conditions in this segment.

Property Management reported an JPY 11.3 billion increase in operating revenues and a JPY 8.4 billion rise in OP. We continue to see improvements at the Repark business, a major factor in the recovery. Repark occupancy rates have rebounded to 90% of the pre-COVID-19 fiscal 2019 levels. In particular, in the absence of a state of emergency, demand for the 3-months of third quarter recovered to the high 90s. On top of this, Repark continued to execute on strategic cost reduction measures with a view to improving business efficiency.

Next is the brokerage and asset management business. Operating revenues in OP also improved year-on-year, rising JPY 12.5 billion and JPY 7.9 billion, respectively. The main drivers are not only the rebound from a low base, reflecting the full closures of all Re-House outlets in first quarter fiscal 2020, but at Re-House, rising unit transaction values and an increase in brokerage transactions and an increase in corporate brokerage transactions. Reflecting the current operating conditions, we have revised up the full-year management segment operating revenues by JPY 15 billion and OP by JPY 13 billion. As a result, we are now projecting a significant increase in full-year operating profit from JPY 44 billion to JPY 57 billion. This represents a new record high for the segment.

Finally, the Other segment. Please turn to Page 6. We -- the mainstay businesses of this segment had been the Facilities Operations business, which focuses on hotels and resorts, the new construction under consignment business, which includes the Mitsui Home built-to-order detached housing business, and the reform and renewal business for offices, retail facilities and residential properties. From first quarter fiscal 2021, this segment includes the Tokyo Dome business as well. For the segment as a whole, operating revenues increased JPY 62.6 billion year-on-year, but the operating loss widened JPY 5.3 billion to JPY 26.1 billion. Both the increase in operating revenues and the drop in profits are primarily due to the inclusion of Tokyo Dome Corporation results from first quarter. Tokyo Dome closed its fiscal year in January. The cumulative third quarter results included in this segment covered the period from February to October of 2021. We expect full-year results to be largely in line with expectations.

In the Facilities Operation business, we reported a year-on-year improvement in third quarter in the lodging focused hotel business, with the lifting of the state of emergency on a nationwide basis from October, and the rapid decline in new daily cases. This led to an upturn in tourism demand, which had been depressed by restrictions in the first half. However, the rebound was more modest for resort hotels in the absence of the Go To travel campaign of fiscal 2020, and the temporary closure of hotel properties in Hawaii.

Near term, we have seen a rise in new daily infections as a result of the Omicron variant. Given that we are expected to fall short of our initial full-year plan for this business, we have revised our forecast for this segment, mainly reflecting the weaker performance of the Hotel and Resorts business, we have lowered our forecast for operating revenue by JPY 15 billion, and have widened our operating loss forecast by JPY 9 billion.

Next, please look at the right-hand side of Page 6. We show here figures for the overseas business for your reference. Total overseas profits were JPY 22.1 billion for the 9-months to third quarter, up JPY 4.9 billion year-on-year. Please note, there is a 3-month lag in reflecting overseas profits. The figures included in our third quarter earnings reflect the results for the overseas businesses for the period of January to September 2021.

Within this, the overall Leasing segment was essentially flat year-on-year, reflecting the impact of rising new COVID-19 infections during this period in Taiwan and Malaysia, which impacted our retail facilities leasing business on the one hand, but an increase in profits from new and existing office leasing properties on the other.

The Property Sales segment reported significant profit gains in the 9-months to third quarter, reflecting the impact of the sale of U.K. office property mortgage in the Property Sales to Investors business. For management and other, operating profit fell JPY 3.3 billion, primarily because the Halekulani Hotel in Hawaii was closed for renovations until September and the impact of the pandemic. Please note that the Halekulani reopened in October 2021.

Turning to the next page. I will now comment on the balance sheet. Total assets as of third quarter fiscal 2021 stood at JPY 8,186.9 billion, up JPY 445 billion from the end of the previous fiscal year. On the main drivers of the increase, first, please look at the table on the upper right hand. This shows the outstanding balance of real property for sale, which rose JPY 121.3 billion from the end of the previous fiscal year to JPY 2,51.8 billion. New investments were JPY 389.1 billion, cost recovery was JPY 297.3 billion, while others, including ForEx impact were JPY 29.5 billion.

In terms of the breakout by corporate entity, while we made progress on cost recovery at Mitsui Fudosan, Mitsui Fudosan Residential and Mitsui Fudosan UK as a result of property disposals, taking into account the development investments at Mitsui Fudosan America Group, the balance increased by a net JPY 121.3 billion.

Next, the outstanding balance of tangible and intangible assets was JPY 3,938.5 billion, up JPY 141.7 billion from the end of the previous fiscal year. We touch upon the key cost recovery items in the comment section, while we incurred further investments at 50 Hudson Yards in New York, factoring in, depreciation and ForEx impact resulted in a net increase of JPY 141.7 billion.

On the next page, we show the liability side of the balance sheet. Outstanding interest-bearing debt as of the end of third quarter fiscal 2021 was JPY 3,959.9 billion, up JPY 336.5 billion from the end of March 2021. As a result of the above, the D/E ratio as of the end of third quarter was 1.49x, and the equity ratio was 32.5%. Please note that given the high concentration of handovers in the Property Sales to Investors business in fourth quarter, we expect the outstanding balance of interest-bearing debt to come in at JPY 3,700 billion, in line with our initial plan.

Finally, although not included in the materials, I will comment on the cumulative third quarter fiscal 2021 COVID-19 impact. Briefly to recap the assumption underpinning the full-year forecast we announced at the beginning of the fiscal year, we assumed the full-year profit impact of COVID-19 will be JPY 60 billion above the line and JPY 5 billion below the line for a total of $65 billion. Relative to this, the 9-month third quarter COVID-19 impact was approximately JPY 49 billion above the line and roughly JPY 6 billion below the line for a combined total of JPY 55 billion.

By segment, the COVID-19 impact on the retail facilities leasing and Tokyo Dome businesses was largely in line with our initial assumptions. The COVID-19 impact on the Management segment businesses of Repark and Rehouse was virtually 0 and therefore, lower than our initial assumptions, which is a positive development. However, the impact on the Hotel and Resorts business has been larger than we initially expected. Therefore, although there is some variance in the individual businesses, the overall COVID-19 impact is largely in line with our initial expectations.

In closing, as discussed at the beginning, based on our upward revision to the full-year forecast, we have revised up our fiscal year-end dividend per share guidance for a full-year dividend of JPY 55, and will also conduct a JPY 15 billion share buyback. The near-term situation continues to be uncertain on the back of rising new daily infections from the Omicron variant since the start of the year. However, overall, our businesses are in a recovery trend, although there is some variance in the degree of recovery. We continue to make good progress. The group as a whole remains focused and committed to achieving our full-year forecast for operating profit and net income. This completes my remarks.