Mitsui Fudosan Co Ltd
TSE:8801
Earnings Call Analysis
Q3-2024 Analysis
Mitsui Fudosan Co Ltd
During the third quarter of the fiscal year ending March 2024, Mitsui Fudosan experienced significant achievements, with new record highs in sales, operating income, ordinary income, and profit attributable to owners of parents. Highlighting continuous growth, the company achieved the second consecutive record high for operating income and the third for net profit. Responding to this strong performance, the full-year forecast for ordinary income increased from JPY 255 billion to JPY 265 billion, and profit attributable to owners of parent from JPY 215 billion to JPY 220 billion. Additionally, an increased dividend per share forecast reflects the company's robust earnings upgrade and shareholder value focus.
Mitsui Fudosan showcased a 4.5% increase in operating revenue reaching JPY 1.699 trillion, a 15% uplift in operating income to JPY 245.2 billion, a 7.3% rise in ordinary income to JPY 199.7 billion, and a notable 13.1% increase in profit attributable to owners of parent amounting to JPY 166.4 billion. The company is on track with 73.9% of the revised operating revenue forecast attained and similar progress across other financial metrics, signaling a confidence in meeting end-of-year expectations.
Although the Leasing segment showed robust growth, highlighting revenue increases from key developments like 50 Hudson Yards, the rise in U.S. interest rates led to a JPY 17.6 billion spike in net interest expenses. Moreover, a decrease in equity in income of affiliated companies slightly impacted profits compared to the previous year. Despite these challenges, the Property Sales segment to domestic individuals showed progress, primarily driven by Park Court Jingu Kitasando The Tower, with a record low inventory underscoring strong near-term selling conditions. However, sales to investors and overseas individuals witnessed a downturn in the absence of large-scale property disposals compared to the previous year.
The Management segment saw an operating revenue increase but a dip in operating income, affected by declining brokerage and asset management profits. Conversely, the Facility Operations segment celebrated significant revenue and income increases, fueled by better hotel occupancy rates and higher spectator turnouts for entertainment venues. The 'Other' segment also posted improvements, underscoring the company's diversified strengths.
Overseas venture earnings marked a substantial rise with JPY 72.5 billion in profits, a year-on-year increase of JPY 20.4 billion. Notable growth was attributed to the Leasing segment's operations at 50 Hudson Yards, sales of properties in the U.S., and improved management and facility operations including Halekulani Hotel in Hawaii. Overseas profits hence constituted 29% of the company's total operating profits, signifying the importance of international expansion in their portfolio.
Mitsui Fudosan's total assets surged to JPY 9.6477 trillion, partly influenced by currency exchange rates. Ongoing investments in projects like Yaesu 2-Chome Central District and LaLaport TAICHUNG in Taiwan were key factors for the asset increases. The company's strategic capital allocation is evident in the increment of the real property for sale balance and tangible/intangible assets. Despite a higher outstanding balance of interest-bearing debt, foreign exchange rates and impending cost recovery are likely to reduce this debt by the fiscal year-end.
Revisions to the segment forecasts were made to adapt to market conditions and business trends, with the Leasing and Management segments outpacing previous estimates. However, valuation losses due to rising cap rates necessitated a downward adjustment in the Property Sales forecast. Nonoperating income and expenses also saw improvements. The revised ordinary income forecast rests at JPY 265 billion, marking an incremental rise from the initial estimate. The profit forecast for owners of parents increased to JPY 220 billion. The forecast for year-end interest-bearing debt is set lower at JPY 4.5 trillion than previously anticipated. Reflecting these positive revisions, the full year dividend guidance improved, conveying an upward trend from historical payouts and enhancing shareholder returns.
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Good afternoon, everyone. I am Uchida, Executive Manager of Investor Relations at Mitsui Fudosan. I will present the details of our results for the third quarter of the fiscal year ending March 2024. Similar to previous briefings, I will use the financial results and business highlights presentation dated February 9, which is available on our website. Let's get started. As always, I will start with an overview of third quarter. There are 3 key takeaways. Please turn to Page 3 of the presentation materials. The first takeaway is our achievement of new record highs for the 9-month third quarter in each of sales, operating income, ordinary income and profit attributable to owners of parent. Furthermore, this is the second consecutive new record high for operating income and the third consecutive new record high for net profit attributable to owners of parent. The second takeaway relates to the full year forecast, which we revised up at second quarter. We have revised up our full year forecast again. We revised up the full year forecast for ordinary income from JPY 255 billion to JPY 265 billion, reflecting a JPY 10 billion improvement.
We also revised our full year profit attributable to owners of parent from JPY 215 billion to JPY 220 billion, an improvement of JPY 5 billion. The new forecast represents a new record high for profit attributable to owners of parent. The third takeaway is an upward revision of JPY 2 to our full year dividend per share guidance to JPY 72 from the JPY 70 announced on November 8, 2023, reflecting the upward revision of our earnings forecast. We are now guiding for a fiscal year-end dividend per share of JPY 37, up JPY 2 from the JPY 35 announced last November 8. For more details, please see today's press release notice regarding revision to dividend forecast. I will now discuss the results in more detail. Please turn to Page 61 of the presentation. I will start with the consolidated profit and loss statement. For the 9-month third quarter results, consolidated operating revenue was JPY 1.699 trillion, up JPY 72.6 billion or 4.5% year-on-year. Operating income was JPY 245.2 billion, up JPY 31.9 billion or 15% year-on-year. Ordinary income was JPY 199.7 billion, up JPY 13.5 billion or 7.3% year-on-year. Profit attributable to owners of parent was JPY 166.4 billion, up JPY 19.2 billion or 13.1% year-on-year. On progress versus our full year plan, please see the box titled Progress Comparison with Full Year Forecast on the right.
Compared to our upwardly revised forecast, operating revenue stands at 73.9%, operating income at 73.2%, ordinary income at 75.4% and profit attributable to owners of parent at 75.7%. As you can see, we are making steady progress toward achieving our forecast. Next, before commenting on the segment details, please return to the table on the left. I will touch upon the major items below the line. First, under nonoperating income and expenses, the interest burden under net interest income and expense increased JPY 17.6 billion year-on-year. The major factor behind the increase is the rise in interest rates in the U.S. We note that the vast majority of domestic borrowings are long-term fixed rate and as such, the impact on earnings is limited. Equity in net income or loss of affiliated companies declined JPY 0.6 billion year-on-year. This primarily reflects a high year-on-year base for comparison on the back of strong profits from overseas property sales in the previous fiscal year. Factoring in net other nonoperating income and expenses, overall, nonoperating income and expenses was a negative JPY 45.5 billion, which was a JPY 18.4 billion widening of losses. Next, I will discuss extraordinary gains and losses. As shown in the table titled Extraordinary Gains and Losses on the upper right, Mitsui Fudosan posted JPY 58.5 billion in extraordinary gains in third quarter, the combination of gains on sales of investment securities and sales of tangible assets.
As a part of ongoing balance sheet control initiatives, we continue to partially reduce our holdings in equities as well as selling tangible assets. There were no extraordinary losses posted in third quarter. Please turn to the next page. I will now cover the segment results in more detail. I will start with the Leasing segment. Please turn to Page 63. As shown at the top of the page, third quarter 9-month operating revenues were JPY 606.1 billion, and operating income was JPY 130.7 billion. This represents year-on-year increases of JPY 47.1 billion and JPY 15.2 billion, respectively. In the comments section on the left, we describe recent conditions for the leasing segment. In addition to revenue and profit growth at 50 Hudson Yards in New York, which began operations in the previous fiscal year, the year-on-year growth in operating revenues and profits were the result of GMV growth at existing retail facilities and contributions from the new openings of LaLaport KADOMA and MITSUI OUTLET PARK OSAKA KADOMA last April. We showed the office vacancy rate in the box in the middle of the page. Mitsui Fudosan's Non-consolidated Metropolitan Area Office Vacancy Rate as of the end of December was 3.1%, an improvement of 0.5 percentage points from 3.6% as of the end of September.
With regard to the projected vacancy rate as of the end of the fiscal year, our initial guidance was for around the 3% level. As of the end of the first half, we indicated we expected it to be around the mid-2% level. With 2 months to go to the end of the fiscal year, we reviewed the expected vacancy rate and now expect to finish the fiscal year in the low 2% range. This is a substantial improvement compared to our expectations as of the end of the fiscal year and as of the end of the first half. Next is the Property Sales segment. Please turn to Page 64. As shown at the top of the page, overall third quarter operating revenue was JPY 403.9 billion and operating income was JPY 86 billion. On a year-on-year basis, operating revenue declined JPY 24 billion and operating income fell JPY 4.7 billion. Looking at the individual subsegments, I will start with property sales to domestic individuals. Please look at the second row from the top. Operating revenue was JPY 207.4 billion and operating income JPY 36.8 billion. This represents year-on-year increases of JPY 11.8 billion and JPY 7.3 billion, respectively. As stated in the comments section on the left, the main driver was progress on handovers for PARK COURT JINGU KITASANDO THE TOWER. Other key reported properties are listed in the box below the comment section on the left for your reference.
The number of reported units are shown in the middle of the table. The combined units for Condominiums and Detached Housing were 2,198, down 246 units year-on-year. The average unit price for Condominiums and Detached Housing was up year-on-year at over JPY 90 million. Near-term selling conditions remain strong. Third quarter completed inventory, as shown in the table on the lower part of the page, was 40 units for Condominiums and 16 for Detached Housing. At a combined total of 56 units, completed inventory remains at a record low level. The contract progress rate for new domestic condominiums relative to the full year unit target of 3,330 was 95% as of the end of December. As has been the case for the last few years, we have been able to stably maintain a high level of close to 100%. Although not shown on this page, the third quarter OPM for the domestic housing business was 17.8%, above the 14.6% as of the end of the previous fiscal year. We are making steady progress toward achieving our full year operating income forecast of JPY 50 billion and OPM target of 16.1%. Next, turning to property sales to investors and overseas individuals, please look at the third row from the top of the table near the top of the page. Operating revenue was JPY 196.4 billion and operating income was JPY 49.1 billion, falling JPY 35.8 billion and JPY 12.1 billion year-on-year, respectively.
In the absence of large-scale disposals of properties such as offices in the previous fiscal year, operating revenue and operating income was down year-on-year. However, the contract rate for planned disposals for the current fiscal year is very close to 100%. We will continue to focus on achieving fiscal year-end profits through steady progress on handovers. Next, the Management segment. Please turn to Page 65. This segment consists of the property management business, which focuses on managing properties under contract and the car park leasing business, Repark, and the brokerage and asset management business, which includes the corporate and retail brokerage business and the asset management business for our sponsored REITs and others. Please look at the top row of the table. The overall Management segment reported third quarter operating revenues of JPY 336.9 billion and operating income of JPY 45.8 billion. Operating revenue rose JPY 8.1 billion, while operating income fell JPY 2 billion year-on-year. Looking at conditions for the individual businesses, I will start with property management. Subsegment operating revenues were JPY 257.1 billion, and operating income was JPY 28.9 billion, up JPY 8.4 billion and JPY 0.9 billion, respectively.
The key factors were improved occupancy rates and the review of parking lot rates and other measures at the Repark business. Next is the Brokerage and Asset Management subsegment Operating revenues were JPY 79.8 billion and operating income was JPY 16.8 billion, falling JPY 0.3 billion and JPY 2.9 billion, respectively. The key factor was the absence of the project management fees generated in the previous fiscal year. Next is the Facility Operations segment. Please turn to Page 66. Please look at the top row of the table. For the Facility Operations segment as a whole, third quarter operating revenues were JPY 144.4 billion and operating income was JPY 21.1 billion. Operating revenues improved JPY 37.6 billion year-on-year, and operating income rose a substantial JPY 24.4 billion. The key factors as outlined in the comment section on the left were the significant improvement in ADRs for hotels and resorts and the increase in spectator numbers for Tokyo Dome. Looking at the individual subsegments, the Hotel and Resorts business posted revenues of JPY 104.7 billion, up a strong JPY 36.6 billion year-on-year. The operating revenues for the Sports and Entertainment subsegment, which is primarily the Tokyo Dome City business, were JPY 39.6 billion, up JPY 1 billion year-on-year.
As you can see, both subsegments were able to grow revenues. Next, the Other segment. Please turn to Page 67. Please look at the top row of the table. For the Other segment as a whole, third quarter operating revenues were JPY 207.4 billion and operating income was JPY 1.8 billion. This represents year-on-year improvement of JPY 3.7 billion and JPY 3.4 billion, respectively. Next, for reference, we show figures for the overseas business. Please turn to Page 68. Overall combined overseas profits in third quarter were JPY 72.5 billion, up JPY 20.4 billion year-on-year. Please note there is a 3-month lag in reflecting overseas profits. The figures included in the third quarter fiscal 2023 earnings reflect the results for the overseas business for the period of January to September 2023. Within this, the Leasing segment reported increases in revenue and OP of JPY 24.1 billion and JPY 6 billion, respectively, with 50 Hudson Yards, the main contributor of revenue and profit growth. The Property Sales segment reported revenue gains of JPY 14.2 billion and profit gains of JPY 16.9 billion on the back of property disposals in the U.S. The management and facilities operations segments posted a JPY 4.3 billion improvement in revenue and JPY 1.1 billion gain in profits as a result of improvements in occupancy rates and ADRs at the Halekulani Hotel in Hawaii.
As a result of the above, overseas profits accounted for 29% of total operating profits as of the end of third quarter. Next, I will talk about the balance sheet. Please turn to Page 69. At the bottom of the page on the left, total assets as of the end of third quarter fiscal 2023 were JPY [ 9.6477 ] trillion, up JPY 823.3 billion from the end of the previous fiscal year. Of the increase in outstanding assets, more than 30% or around JPY 280 billion is attributable to the impact of changes in foreign exchange rates. I will now discuss the major components of change such as investment and cost recovery. Please turn to Page 70. As shown in the table on the upper left, the total outstanding balance of real property for sale was JPY [ 2.4449 ] trillion, up JPY 281.3 billion from the end of the previous fiscal year. New investments were JPY 496.1 billion, cost recovery was JPY 275 billion and other, which include elements such as ForEx impact was JPY 60.2 billion. As you can see in the breakdown by company, Mitsui Fudosan reported a net increase in investments of JPY 79.1 billion and Mitsui Fudosan Residential, a net increase in investments of JPY 99 billion. At Mitsui Fudosan America, while there was cost recovery related to the sale of development properties, new investments and the impact of the weaker yen resulted in a net increase in investments of JPY 3.5 billion.
Mitsui Fudosan U.K. reported a net increase in investments of JPY 75.9 billion on the back of investments and the impact of the weak yen. Next, looking at the lower left, the outstanding balance of tangible and intangible assets was JPY [ 4.4434 ] trillion, up JPY 150.3 billion from the end of the previous fiscal year. The key contributing factors for both investments and cost recovery are shown in the comment section on the lower right. New investments, including redevelopment at the Yaesu 2-Chome Central District Project and construction investment at LaLaport TAICHUNG in Taiwan were JPY 185.3 billion. Depreciation was JPY 99 billion. Other, which includes ForEx impact and other factors, was JPY 64 billion. Taking all of the above into account, on a net basis, there was an increase of JPY 150.3 billion compared to the end of the previous fiscal year. On the liability side, please see the table on the upper right. The outstanding balance of interest-bearing debt as of the end of third quarter fiscal 2023 was JPY [ 4.7405 ] trillion, up JPY 691.9 billion from the end of the previous fiscal year. Of this increase, more than 20% or JPY 137.2 billion is due to the impact of changes in foreign exchange rates. With regard to the impact of ForEx on the balance sheet, the calculations are based on the ForEx rate as of the end of quarterly reporting periods for the overseas subsidiaries, which we show on the lower right on Page 70.
The rate applied as of the end of third quarter fiscal 2023 is JPY 149.58 to the dollar, which was the rate as of the end of September 2023. While not shown on this page, the rate as of the end of December was JPY 141.83 to the dollar. As such, the impact of foreign exchange rate movements on total balance sheet assets and interest-bearing debt is expected to decline relative to the impact as of third quarter. Going back to Page 69, as a result of the above, the D/E ratio as of the end of third quarter was 1.55x and the equity ratio of 31.7% as shown on the lower right. Finally, I will discuss the revisions to the earnings forecast. Please turn to Page 71. First, the full year forecast for overall consolidated operating income of JPY 335 billion remains unchanged from the forecast as of November 8, 2023. However, we have revised the segment breakdown for operating income to reflect changes in macro trends for the financial markets and others as well as changes in business conditions for individual asset classes. Specifically, reflecting the improvement in office vacancy rates and strong GMV conditions for retail facilities, we revised up the Leasing segment operating income forecast to JPY 167 billion, an increase of JPY 5 billion from the initial forecast.
At JPY 167 billion, this represents a new record high for operating income for our core profit-generating business of leasing. For the Property Sales segment, profits generated from the sale of domestic and overseas properties are running ahead of our initial assumptions. However, as a result of taking into account valuation losses, which reflect the impact of some increases in cap rates on real property for sale triggered mainly by the rise in U.S. interest rates, we now project operating income of JPY 131 billion, down JPY 15 billion from our initial forecast. For the Management segment, we now project operating income of JPY 65 billion, up JPY 5 billion from our initial forecast, mainly to reflect the strong Retail Brokerage business and firm operating conditions at the Repark business. At JPY 65 billion, this represents a new record high for operating income for the Management segment. While we revised up the operating income forecast for Facility Operations as of the end of second quarter by JPY 5 billion, mainly in the hotel and resorts business, based on the continuation of stronger-than-expected near-term operating conditions, we revised our November 8 forecast up by a further JPY 5 billion to JPY 24 billion.
Effectively, we now project this business to exceed our initial expectations by JPY 10 billion. For nonoperating income and expenses, we are factoring in a JPY 5 billion improvement in net interest income and expense. In addition, based on a review of nonoperating income and expenses, we are factoring in an improvement of JPY 5 billion in other nonoperating income and expenses. For ordinary income, we revised up our initial forecast by JPY 10 billion as of November 8, 2023 to JPY 255 billion, but now revised up by a further JPY 10 billion to JPY 265 billion. For profits attributable to owners of parent, we also revised up our initial forecast by JPY 5 billion on November 8, 2023 to JPY 215 billion. Factoring in the above changes, we now revised up our forecast of further JPY 5 billion to JPY 220 billion. With regard to interest-bearing debt, taking into account near-term ForEx conditions, we now project outstanding fiscal year-end interest-bearing debt to be JPY 4.5 trillion, down JPY 100 billion from our November 8, 2023 forecast of JPY 4.6 trillion. Interest-bearing debt as of the end of third quarter was JPY [ 4.7405 ] trillion. We expect this to decline by more than JPY 200 billion as we make progress on planned cost recovery into the end of the fiscal year. As indicated at the outset, based on the upward revision to our full year forecast, we have raised our full year dividend per share guidance by JPY 2 to JPY 72 per share from the November 8 guidance of JPY 70.
We note that our original full year dividend guidance for this fiscal year was JPY 68 per share, so the recent revision represents a JPY 4 improvement from the initial guidance. As well, the dividend per share paid for the March 2023 fiscal year was JPY 62, so the upwardly revised guidance represents a year-on-year increase of JPY 10. Given that the interim dividend already paid was JPY 35 per share to reflect the upper revision to the full year guidance, the fiscal year-end dividend guidance has been raised to JPY 37 from the JPY 35 announced on November 8. We continue to monitor trends in financial and real estate markets but the group as a whole is committed to achieving our full year operating income, ordinary income and net profit targets. This completes my remarks. [Statements in English on this transcript were spoken by an interpreter present on the live call.]