Mitsui Fudosan Co Ltd

TSE:8801

Earnings Call Transcript 2020-Q1

[Atsuro Uchida, executive]

Good afternoon, everyone. I am Uchida, Executive Manager of the Investor Relations Department. I will present Mitsui Fudosan's First Quarter Fiscal 2019 Results. I will discuss the results in more detail later, but at a high level, overall revenues and profits were down year-on-year. This was primarily the result of a lower number of domestic residential units sold relative to the previous first quarter, which depressed revenues and profits for the Property Sales segment. However, the Leasing segment, which is the core contributor to overall profits reported higher year-on-year revenues and profits, reflecting the contributions of large-scale office properties and retail facilities, which were completed and came online last fiscal year. The Management segment also reported higher year-on-year revenues and profits on solid growth in the Property Management and Retail Brokerage businesses. Under the full year plan for the Property Sales segment, condominium unit volumes will pick up in second quarter and beyond. As such, the progress as of first quarter is in line with our full year forecast. I will now explain our results in more detail using the Fact Book. Please turn to the next page for the consolidated profit and loss statement. First, operating revenues for the first quarter of the fiscal year ending March 2020 were JPY 427.1 billion, down JPY 15.1 billion or 3.4% year-on-year. Operating income was JPY 50.8 billion, down JPY 4.8 billion or 8.8% year-on-year. Ordinary income was JPY 49.3 billion, down JPY 5.3 billion or 9.7% year-on-year. Profits attributable to the owners of the parent were JPY 33.1 billion, down JPY 4.9 billion or 12.9% year-on-year.

In the table on the upper right-hand side of the page, we show the actual results relative to our full year forecast in percentage terms. Operating revenue stood at 21.4%, operating income at 19.1% and profit attributable to the owners of the parent at 19.5%. Relative to where we stood at the end of first quarter fiscal 2018, the progress has been slightly slower. But as noted earlier, it reflects the fact that the majority of handovers for the domestic Residential business will come in second quarter and beyond. As such, we believe we have made good progress relative to the full year forecast. Next, please look at the table on the left-hand side of the page. I will discuss the individual segments in more detail later, but we'll touch upon the key items below the line here.

First, looking at the breakdown of nonoperating income. There is a high base for comparison for other nonoperating income, the result of a number of one-off factors leading to a year-on-year decline of JPY 1.9 billion in first quarter. In addition, net interest expenses increased by JPY 0.7 billion on the back of an increase in overseas investments. At the same time, equity in net income or loss of affiliated companies rose JPY 2.2 billion year-on-year, reflecting continued solid progress in handovers of overseas residential properties primarily in Thailand. As a result, nonoperating income was negative JPY 1.5 billion with the loss narrowing by JPY 0.4 billion. There were no extraordinary gains or losses reported in first quarter. Please turn to the next page for a detailed discussion of the segment results. Starting with the Leasing segment. Operating revenue increased JPY 11.5 billion, and operating income grew JPY 4.5 billion. As noted in the comments section, the main driver was full year contributions from large-scale office properties and retail facilities completed and launched in the previous fiscal year. These include the Nihonbashi Takashimaya Mitsui Building, musubu Tamachi, 55 Hudson Yards, LaLaport NAGOYA Minato AQULS and the Mitsui Outlet Park TAICHUNG PORT in Taiwan. In addition, although not noted in the comments section, we also made good progress with existing properties, both offices and retail facilities. Tokyo Midtown Hibiya reported an increase in rent revenue as tenants took up occupancy. Retail facilities also showed a solid performance with GMV up on a year-on-year basis. Our nonconsolidated Tokyo Metropolitan Area office building vacancy rate was 2%, up 0.3 percentage points from the end of March. The increase is temporary, reflecting the impact of new properties completed during the quarter. As the contracted tenants take up occupancy, the vacancy rate will fall. We'll also continue to make good progress on office leasing. Next, the Property Sales segment. Please turn to Page 4. Operating revenues fell JPY 31.9 billion and operating income fell JPY 9.8 billion. With regard to the domestic Residential business, please look at the upper right-hand side of the page. The total combined number of condominium and detached home units sold was 657, down 417 units year-on-year. This depressed operating revenue by JPY 42.5 billion and operating income by JPY 12.3 billion. Continuing the trend of last fiscal year, sales were concentrated in central urban, high-end condominiums. Average unit prices for condominiums exceeded JPY 100 million. The blended average for condominiums and detached homes was JPY 93.84 million.

Although not shown here, the OPM remained above the 9% level in first quarter. Margins are trending in line with our initial plan. We note that the OPM for first quarter fiscal 2018 was around 17%, but this is an exceptionally high level, reflecting a strong concentrations of sales of very high-margin central urban properties during the quarter. The combined condominium and detached home inventory remains at the very low level of 130 units, down 41 units from March 2019. Our full year target for condominium unit sales is 3,400. The contract rate as of the end of June stood at 86%, higher than the 81% level of last year at the same time. Next, in Property Sales to investors and overseas individuals, operating revenue increased by JPY 10.5 billion, while operating income grew JPY 2.4 billion primarily on progress in sales of domestic properties to J-REITs and other investors. Next, the Management segment. Please turn to Page 5. Operating revenue increased by JPY 3.5 billion, and operating income grew JPY 1.8 billion. The drivers of the year-on-year increase in revenues and profits are shown in the comment section. There was an increase in the number of properties under management at the various property management companies and growth in the number of units under management at the Repark Car Park Leasing business. In addition, the Rehouse Brokerage business reported an increase in Retail Brokerage transactions. Finally, the Other segment. Please turn to Page 6. The Facilities Management business reported a JPY 1.6 billion increase in revenues, but a JPY 0.9 billion decrease in operating income. This reflects the full year contributions from the 4 hotel properties in Gotanda, Otemachi, Nihonbashi and Kanazawa that came online in fiscal 2018. This was offset by initial opening expenses for the Mitsui Garden Hotel Hakata Gion in late June. Please note that the new construction under consignment business for built-to-order detached homes and the reform and renewal business for offices, retail facilities and residential properties, which had formerly been included in the Mitsui Home segment are now included in the Other segment.

The new construction under consignment business within the Other segment is mainly the Mitsui Home built-to-order detached home business. As is typical every year, there is a high concentration of completions and handovers in fourth quarter, which is why the Other segment reported an operating loss in first quarter. The other subsegment within the Other segment consists primarily of the reform and renewal business from Mitsui Home, Mitsui Designtec and Mitsui Fudosan Reform. Revenues for this business rose year-on-year. Next, please see the right-hand side of Page 6. Here, we provide data for the overseas business for your reference. Under the long-term vision, VISION 2025 announced last year, we set out a strategy to grow our overseas business. Our overseas business is split across a number of segments. For your convenience, we have pulled together a table showing revenues and profits for the overseas components of the various segments, such as leasing and property sales as well as the equity method companies. The total combined overseas income for first quarter was JPY 7.9 billion, up JPY 0.6 billion year-on-year. Operating income for Property Sales fell year-on-year, reflecting the high base for comparison on the back of a high concentration of handovers for the Television Centre condominiums last fiscal year. However, profit contributions from leasing and the overseas equity method companies primarily from Asian residential property sales showed steady improvement. Please turn to the next page for a discussion of the balance sheet. Total assets as of the end of first quarter fiscal 2019 were JPY 6.9087 trillion, up JPY 106 billion from the end of March 2019. The main driver of the increase in assets was the JPY 33 billion year-on-year increase from the end of March 2019 in real property sales, bringing the total up to JPY 1.6633 trillion, as shown in the table in the upper right. New investments were JPY 107.8 billion, while cost recovery was JPY 74.4 billion. As is typical every year, investments outweighed cost recovery. The main contributors to the JPY 33 billion increase were the increases in development investments at Mitsui Fudosan and Mitsui Fudosan America Group. Next, turning to tangible and intangible assets, the outstanding balance rose to JPY 3.5594 trillion, up JPY 59 billion from the end of March 2019. As shown in the comments section, major investments included: The Halekulani Okinawa, which opened on July 26; follow-on investments for MFIP Haneda; as well as investments in 50 Hudson Yards for a combined total increase of JPY 59 billion. The next page shows the liability side of the balance sheet. Outstanding interest-bearing debt as of the end of first quarter fiscal 2019 was JPY 3.179 trillion, up JPY 272.4 billion from March 2019. With regard to the breakdown by company as well as cash inflows and outflows, please see the comment section in the upper right. As a result, the D/E ratio as of the end of first quarter was 1.35x, and the equity ratio was 34.1%. This completes my remarks. [Statements in English on this transcript were spoken by an interpreter present on the live call.]