Nomura Real Estate Holdings Inc
TSE:3231
Earnings Call Analysis
Q2-2024 Analysis
Nomura Real Estate Holdings Inc
The company experienced a notable increase in business profit by 17.2% or JPY 8.9 billion, while net income decreased by 2.7% or JPY 0.9 billion compared to the same period last year. The rise in business profit was driven by strong performance in residential and commercial real estate development units, but extraordinary losses, including impairment losses on intangible assets related to the U.K. subsidiary Lothbury, resulted in the net income decline.
The Residential Development unit saw an increase in business profit largely due to an enhanced gross profit ratio in housing sales and higher rental housing sales. Specifically, the gross profit ratio on housing sales was impressively high at 26.6% in the second quarter. Although a lower gross profit ratio is anticipated for the second half of the year, the company projects to maintain its full-year forecast, reflecting favorable sales of houses and rental housing.
The company announced its plans to raise the full-year dividend to JPY 130 per share for the 12th consecutive year and to acquire treasury shares up to JPY 7 billion. These strategies are set to result in a total return ratio of 45.5% based on the full-year earnings forecast, with a dividend payout ratio of 34.8%. The firm aims to gradually increase the dividend payout ratio to 40% as part of its mid-to-long-term business plan.
The Proud Flat rental housing development recorded an operating revenue of JPY 16.3 billion and gross profit of JPY 3 billion over six months. The company also advanced land acquisitions, securing a land bank equivalent of 38 properties worth JPY 98.9 billion, moving closer to the mid-to-long-term goal of an annual gross profit of JPY 2 billion to JPY 4 billion.
The Commercial Real Estate Business Unit strategically replaced assets and, despite a decline in office rental revenue due to property evictions for reconstruction, saw general improvements in operating revenue and business profit. This was supported by an uptick in property sales and recovering hotel revenues post-COVID. The second quarter saw JPY 74.6 billion in property sales and JPY 22.7 billion in gross profit, contributing to a significant land bank for future sales totaling JPY 906.0 billion.
The overseas business unit reported a year-on-year decline in business profit, with sales in Thailand progressing while profits in Vietnam dropped due to the rebalancing from large-scale housing sales in the previous year. Nevertheless, the unit has invested significantly, securing approximately JPY 610 billion as its stake in total project costs, indicating a strategic emphasis on large-scale projects, especially in Vietnam.
The Investment Management business experienced better operating revenue and profits year-on-year, largely due to increased management fees from a larger AUM of private REITs. The company faced challenges with its U.K.-based investment management company Lothbury, notably investor cancellations due to a sharp rise in interest rates, which led to impairment losses. Moving forward, Lothbury will focus on market conditions and rebuilding through new funds, while the business unit seeks partnership opportunities in developed countries like the United States.
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I am Arai. Thank you for joining Nomura Real Estate Holdings Financial Results briefing for the 6 months from April 1 to September 30, 2023. Without further ado, let me begin.
Please refer to Page 4 of the fiscal year 2024 March Q2 financial results. First, I would like to provide an overview of the financial results. Consolidated financial results for the second quarter were JPY 368.3 billion in operating revenue, JPY 61.4 billion in business profit and JPY 32.9 billion in profit attributable to owner of parent. Compared to the same period last year, business profit increased by JPY 8.9 billion, 17.2% and net income decreased by JPY 0.9 billion, minus 2.7%, while business profit increased mainly due to higher income in the residential and commercial real estate development business units, net income declined due to extraordinary losses. This was mainly due to impairment losses on intangible assets, et cetera, associated with Lothbury, our U.K. subsidiary as well as loss on building reconstruction. We will report on this matter again in the investment management section.
Please continue to Page 5. By business unit, in Residential Development business unit, the increase in business profit was due to improved gross profit ratio in housing sales and higher rental housing sales. In Commercial Real Estate business unit, it is due to increasing property sales. Please see Page 6. Our full year forecast remains unchanged from the initial guidance. While we do not anticipate the extraordinary loss at our subsidiary in the U.K. that I mentioned earlier, the sales of houses as well as rental houses and residential development business unit and the sale of properties in the commercial real estate business unit were favorable. We anticipate to fully achieve our full year forecast.
Please refer to Page 10 for further information on shareholder returns. As announced in April of this year, we plan to raise our full year dividend to JPY 130 per share for the 12th consecutive year. In addition, we have recently decided to acquire treasury shares up to JPY 7 billion. As a result, the total return ratio based on the full year earnings forecast is expected to be 45.5% and the dividend payout ratio of 34.8%. We have announced our policy to gradually increase the dividend payout ratio to 40% towards Phase 2 of the mid- to long-term business plan, and we are making a steady progress towards this goal.
Next, let me explain our performance by business unit. Please turn to Page 12. In Residential Development business unit, both operating revenue and business profit improved year-on-year. While the number of housing units sold as of Q2 was 1,994 units, down by 64 units year-on-year, gross profit ratio rose. In addition, sales of rental housing totaled JPY 16.8 billion, which increased by JPY 13.4 billion.
Please continue to Page 13. As shown in the line graph, gross profit ratio on housing sales was very high at 26.6% in second quarter. This level was achieved due to this concentration of projects with relatively high gross margins in the first half of the fiscal year. We do not anticipate a gross profit ratio in the second half has to be high as first half with our full year forecast to be in the 23% range.
Please turn to Page 14. As shown on the left, the number of housing contracts in Q2 year-to-date totaled 1,588 units. Since the number of properties subject to sale is different, the number of houses contracted is lower compared to the same period last year. However, overall sales are strong and while not shown on the slide, we are making a good progress against the company plan. As shown on the right, while our plan is to post JPY 290 billion in operating revenue, we have closed 91.6% of the contracts. At present, we are promoting sales activities for properties that are scheduled to be booked in the next fiscal year and thereafter.
Please continue to Page 15. Land acquisition continues to be difficult this fiscal year. But in addition to individual land purchases, we combine methods such as redevelopment, rebuilding and rezoning and acquired land for 2,630 units worth JPY 183 billion by the end of the second quarter. As a result, land acquisition expected to be booked by the year ending March 2026 has been completed. In terms of mid- to long-term sales, we have secured a land bank equivalent to approximately JPY 1.8 trillion.
Please turn to Page 16. The rental housing to be developed as Proud Flat booked an operating revenue of JPY 16.3 billion and gross profit of JPY 3 billion in 6 months. In addition, as shown in the middle of the right graph, we are making a progress in land acquisition with 4 properties for a total investment of JPY 12.6 billion, securing a land bank equivalent of 38 properties worth JPY 98.9 billion. We are steadily increasing our land bank towards our mid- to long-term goal of annual gross profit of JPY 2 billion to JPY 4 billion.
Please turn to Page 18. In Commercial Real Estate Business Unit, we have strategically replaced our assets. And with the eviction of tenant in the properties, we are promoting reconstruction, our office rental revenue decreased. However, with an increase in sales of properties and hotel revenues recovering from COVID, overall operating revenue and business profit improved.
Please turn to Page 19. The vacancy rate of our leased assets as of the end of second quarter averaged 4.0% in all areas. This is a 0.5 percentage point improvement from 4.6% at the end of first quarter. The reason was progress in resigning contracts in vacant compartments at each office building.
Please turn to Page 20 for the section on property sales. Property sales in second quarter proceeded as expected with JPY 74.6 billion in sales and JPY 22.7 billion in gross profit. With regards to land acquisition, we purchased land for 9 properties worth JPY 115.0 billion in Q2 year-to-date. In addition to office and logistics facilities in light of the current recovery in demand, we acquired land for retail facilities for the first time since the fiscal year ending March 2020. As a result, the land bank for property for sales, including those under construction totaled JPY 906.0 billion.
We are building up on land bank to achieve gross profit on sales of JPY 40 billion each year from Phase II onwards.
Next, I will explain about the overseas business, so please turn to Page 23. In the overseas business unit, business profit was lower year-on-year. While the housing sales in Thailand is currently making progress, profit declined in Vietnam as a rebound from large-scale housing sales last year. Overseas business is in an expansionary period and profits continue to fluctuate due to the timing of sales. However, on a full year basis, we will aim to generate profit through primarily large-scale projects in Vietnam.
Please turn to Page 24. In the overseas business unit, we have secured investment worth approximately JPY 610 billion as our stake in the total project cost. Out of this amount, approximately JPY 540 billion is for housing sales business and approximately JPY 70 billion is for leasing business. We will continue to expand the investment as a growth driver in our mid- to long-term business plan. That is all for the commercial real estate business unit.
So let me turn over to Investment Management business unit in the service management sector. Please turn to Page 25. This business had a better year-on-year operating revenue and operating profit, thanks to the increase in management fees due to the larger AUM of private REITs. Meanwhile, as explained earlier, the funds at Lothbury, our U.K.-based investment management company faced increasing cancellations by investors expecting a significant drop in AUM. As a result, we recorded an impairment loss. This is due to -- after the sharp rise in interest rates in the U.K. after 2022, among the investors who invested in Lothbury fund, defined benefit corporate pension funds, which include some of our large customers and high percentage of the funds are canceled.
Going forward, Lothbury will continue to monitor market conditions closely as it seeks to rebuild itself through starting new funds and et cetera. In addition, Investment Management business unit will continue to search to partner with new asset management companies in other developed countries such as the United States.
Next is the Property Brokerage & CRE division -- business unit. In this business unit, operating revenue increased due to higher brokerage transaction volume in the metal business, which serves the owners of small and midsized companies and high net worth customers. By business unit, however, transaction volume increased not only in the metal business, but also in both retail and wholesale, and all businesses are performing well toward achieving the forecast for the current fiscal year.
Continuing on, we have the Property & Facility Management business unit, which is on Page 28. In this business unit, sales from property and facility management increased mainly due to higher number of housing units under management. Operating revenue and profit grew year-on-year due to an increase in sales of construction work on order. This is the end of those business units.
Last but not the least, please turn to Page 30. This page describes our company's approach to improving corporate value. Even before the Tokyo Stock Exchange announced its request for stock price consciousness management, we have continued to manage our company with an awareness on cost of shareholders' equity and share price, but we take this opportunity to reiterate our company's thinking and the details of our efforts. As a real estate developer, we recognize the importance of managing the company with price per book ratio and net asset value in mind. In addition, our cost of capital is 7% to 8%, and we believe that our shareholders and investors expect us to achieve an ROE above that level and profit growth over the mid- to long term.
As we stated in our 2030 vision and mid- to long-term business plan announced last April, we aim to enhance our corporate value by achieving high profit growth and high asset and capital efficiencies. The specific measures we are taking to achieve these goals are described in the presentation materials.
We hope you will also refer to the details in the integrated report published on our website.
Thank you very much for your kind attention.