Mitsui Fudosan Co Ltd

TSE:8801

Earnings Call Transcript

[Atsuro Uchida, executive]

Good afternoon, everyone. I am Uchida, Executive Manager of Investor Relations at Mitsui Fudosan. I will explain the Mitsui Fudosan Group's results for the third quarter of the fiscal year ending March 2025. As usual, I will use the financial results and business highlights materials dated February 7, which are available on our website.

Let's get started. As always, I will begin with an overview of the third quarter results. Please turn to the financial highlights on Page 3 of the presentation materials.

The first key takeaway is the third quarter 9-month results as shown in the box at the top of the page. We are making steady progress towards achieving our full year forecast. In addition to the strong progress of each of the businesses in the leasing, management and facility operations segments, we also made progress on the sale of investment securities.

With regard to strategic equity holdings within investment securities, relative to our policy of reducing strategic equity holdings by 50% as set out in our group long-term vision & INNOVATION 2030, as of the end of the current third quarter, we have made substantial progress, having already achieved a reduction of more than 20% when compared to the market value of strategic equity holdings as of the end of fiscal 2023.

The second key takeaway is the upward revision to our full year forecast based on our expectations of progress in our main segments where performance continues to be strong. We have factored in an increase of JPY 20 billion for each of operating income, business income and ordinary income and a JPY 5 billion increase for net income. As such, we expect to hit new record highs at the consolidated level for each of operating revenue, operating income, business income, ordinary income and net profit. We also expect to achieve new record highs for business income for each of the Leasing, Property Sales, Management and Facility Operations segments.

We note, as shown in the box on the right, that under the & INNOVATION 2030 plan announced in April 2024, we had set an EPS growth target for a CAGR of 8% or higher for the period to the end of fiscal 2026 based on the fiscal 2023 projected net income of JPY 220 billion. For fiscal 2024, the first fiscal year under the plan, our initial guidance for EPS growth was the low 7% range. But as a result of this upward revision, fiscal 2024 EPS growth is now projected to rise to the high 9% range.

For the third and final takeaway, please look at the box on the lower right. Based on the increased certainty of achieving our full year forecast and other factors, we have also decided to implement a share repurchase of up to a maximum of JPY 45 billion. If we factor in the share repurchase on top of our full year dividend guidance of JPY 30 per share, our total shareholder return ratio for this fiscal year is projected to be 53.5%. Please see today's press release announcement regarding the determination of share repurchase for more details.

I will now explain the results in more detail. Please turn to Page 61 of the presentation materials. I will start with the profit and loss statement.

Third quarter 9-month operating revenue was JPY 1,676.7 billion, down JPY 22.2 billion or 1.3% year-on-year. Business income, which is the combination of operating income and gains and losses on the disposal of tangible assets and equity method investments, was JPY 225.2 billion, down JPY 30 billion or 11.8% year-on-year. Ordinary income was JPY 172.9 billion, down JPY 26.8 billion or 13.4% year-on-year. Profit attributable to owners of parent was JPY 144 billion, down JPY 22.4 billion or 13.5% year-on-year. Optically, these results show an overall decline in revenue and profits. But as we have said from the beginning of this fiscal year, it is a reflection of the heavy concentration of revenues and profits for the Property Sales segment in fourth quarter.

If we look at each of the segments apart from Property Sales, the fact that the Leasing, Management and Facility Operations segments all reported solid positive year-on-year growth in both revenues and profits, as you can see, should provide reassurance.

On the right, we show the progress rate relative to our full year forecast. Please see the box titled Progress Comparison with Full Year Forecast. The progress rates relative to the upwardly revised full year forecast are 64.5% for operating revenue, 57.8% for business income, 61.8% for ordinary income and 60% for profit attributable to owners of parent. The progress rates may optically appear slow for third quarter, but this is primarily because profit recognition for both property sales to domestic individuals and property sales to investors subsegments within Property Sales skews heavily to fourth quarter.

Overall, we believe we are making steady progress toward achieving our upwardly revised full year 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 net interest burden increased JPY 6.3 billion year-on-year. Major factors for the increase include the rise in interest-bearing debt outstandings as a result of progress in investments in Japan and overseas and changes in foreign exchange rates. Relative to our full year projection for a net interest burden of JPY 79 billion, the progress rate as of third quarter is 76%. As such, the progress is within the assumed range and in line with our initial plan. We note that BOJ decided to raise the policy rate on January 24, but given the vast majority of our domestic borrowings are long term and fixed, the impact of the rate hike on earnings is limited.

Equity in net income or loss of affiliated companies fell JPY 1 billion year-on-year. This primarily reflects a high year-on-year base for comparison on the back of strong profits in overseas property sales at Asian equity method affiliates in the previous fiscal year. Factoring in dividends received and net other nonoperating income and expenses, overall nonoperating income and expenses was a negative JPY 2.1 billion year-on-year.

Next, I will discuss extraordinary gains and losses. As shown in the table entitled Extraordinary Gains and Losses on the upper right, Mitsui Fudosan posted JPY 49.9 billion in extraordinary profits in the 9 months of third quarter fiscal 2024 from gains on sales of investment securities, both securities held for pure investment and strategic equity holdings. As discussed at the outset, for strategic equity holdings, relative to our target of reducing our holdings by 50% during the 3-year period from fiscal 2024 to fiscal 2026 under our long-term vision & INNOVATION 2030 plan, as of the end of third quarter fiscal 2024, we have achieved a 20% plus reduction based on the market value of strategic equity holdings as of the end of fiscal 2023.

Under extraordinary losses, Mitsui Fudosan posted JPY 2.8 billion in impairment losses, unchanged from the level reported as of second quarter. This is primarily related to a change in business policy for some domestic facilities. As a result of the policy change, we reviewed the market value of the properties, reporting the gap between market and book value as impairment losses.

I will now cover the segment results in more detail. I will start with the Leasing segment. Please turn to Page 63 of the presentation materials. As shown at the top of the page, third quarter operating revenue was JPY 642.6 billion, and business income was JPY 131.5 billion. This was a year-on-year top line increase of JPY 36.4 billion and a slight profit increase of JPY 2 million.

In the comments section on the left, we describe recent conditions for the Leasing segment. In third quarter, despite the impact of sales of domestic and overseas properties in the previous fiscal year and other factors, rent revenue from existing offices and GMV from existing retail facilities grew. The overall segment reported higher revenues and a small increase in profits year-on-year.

We show the office vacancy rate in the box in the middle of the page. Mitsui Fudosan's nonconsolidated metropolitan area office vacancy rate as of the end of December was 2.5%, largely unchanged from the 2.4% as of the end of September. With regard to our forecast for the fiscal year-end vacancy rate, as previously indicated, we expect an improvement in the year-end vacancy rate to around the mid-1% level.

Next is the Property Sales segment. Please turn to Page 64. As shown at the top of the page, overall third quarter segment operating revenue was JPY 305 billion and business income was JPY 51.5 billion. On a year-on-year basis, this represents declines of JPY 98.8 billion and JPY 41.6 billion, respectively.

Looking at the individual subsegments, I will start with property sales to domestic individuals. Please look at the breakdown in the box at the top of the page. Operating revenue was JPY 221.7 billion, and operating income was JPY 43.7 billion. This represents year-on-year increases of JPY 14.3 billion and JPY 6.8 billion, respectively. As stated in the comments section on the left, this mainly reflects the year-on-year increase in the number of reported units and profit margin on the back of the completion and handovers of Park Tower Kachidoki, a large-scale redevelopment project in the Tokyo Bay Area. 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 2,400, up 202 units year-on-year. The average unit price for condominiums and detached housing was over JPY 90 million, a high level similar to the high level of the previous fiscal year.

Near-term selling conditions remain strong. Completed inventory for third quarter, as shown in the table on the lower part of the page, was a record low level of just 9 units for condominiums and only 25 units for detached housing for a total of 34. Although not shown on the slide, the contract rate relative to the full year target for new domestic condominiums of 3,650 hit 100% as of the end of December. In addition, while the progress rate relative to the full year profit forecast for property sales to domestic individuals of JPY 96 billion is at 46% as of the end of December, rest assured that this is due to a high level of handovers and profit recognition expected in fourth quarter. The OPM for the property sales to domestic individual subsegment as of third quarter was 19.7%.

Next, turning to property sales to investors and overseas individuals, which includes gains and losses on tangible assets and equity method investments. Please return to the top of the page. Operating revenue was JPY 83.2 billion, down JPY 113.2 billion year-on-year. Business income was a combination of JPY 5.5 billion in operating income and a combined JPY 2.1 billion in gains on equity method investments and gains and losses on tangible assets for a total of JPY 7.7 billion. Operating income fell JPY 43.6 billion year-on-year and the combination of gains on equity method investments and gains and losses on tangible assets declined JPY 4.8 billion year-on-year. As such, the decline in business income was the total of the aforementioned losses of JPY 43.6 billion and JPY 4.8 billion for a year-on-year decline of JPY 48.5 billion.

In the same period of the previous fiscal year, we completed sales of lab and office and large-scale rental residential properties, mainly overseas. In this fiscal year, we recorded sales of MFIP Tama, which is a data center, as well as other properties, but as explained at the end of second quarter, we incurred losses related to the sale of rental residential properties in the U.S. in third quarter, which depressed profits. While the third quarter progress rate relative to the full year business income forecast is still 10%, we have signed sales contracts or reached agreement on all of the properties we expect to report this fiscal year. As such, we expect to make very solid progress on handovers in fourth quarter to record the remaining 90% of targeted profits.

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 businesses 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 operating revenue of JPY 355.5 billion and business income of JPY 51 billion in the first 9 months of the fiscal year. This represents year-on-year increases of JPY 18.5 billion and JPY 5.1 billion, respectively.

Looking at the conditions for the individual businesses, I will start with property management. Please look at the breakout in the table at the top of the page. Subsegment operating revenue was JPY 268.3 billion, and business income was JPY 28.7 billion. This represents a year-on-year increase of JPY 11.2 billion in revenue and a slight JPY 0.2 billion year-on-year decline in business income. The key factors were a year-on-year improvement in occupancy rates for the Repark car park leasing business, but an increase in expenses related to system upgrades.

Next is the Brokerage and Asset Management subsegment. Operating revenue was at JPY 87.2 billion and business income JPY 22.2 billion for year-on-year increases of JPY 7.3 billion and JPY 5.3 billion, respectively. The key factors were increases in unit prices in the retail brokerage business.

Next is the Facility Operations segment. Please turn to Page 66. Overall, Facility Operations reported third quarter operating revenue of JPY 169.1 billion and business income of JPY 31.8 billion. This represents year-on-year increases of JPY 24.6 billion and JPY 10.6 billion, respectively. The key factors, as outlined in the comments section on the left, were further increases in ADRs in the hotel and resorts business and the increase in operating days and spectator numbers at Tokyo Dome.

Looking at the individual subsegments, the hotel and resorts business posted operating revenue of JPY 123.3 billion, up JPY 18.5 billion. The sports and entertainment business consisting primarily of Tokyo Dome City reported operating revenue of JPY 45.7 billion, up JPY 6.1 billion year-on-year. As you can see, both subsegments reported year-on-year top line growth.

Next is the Other segment. Please turn to Page 67. This segment mainly consists of the new construction under consignment business of Mitsui Home and the interior construction and renovation business for offices and hotels of Mitsui Designtec. Overall, the Other segment reported third quarter operating revenues of JPY 204.4 billion and business income was JPY 4.6 billion. This represents a year-on-year decline of JPY 3 billion in revenue, but a JPY 0.5 billion improvement in business income. Revenues declined as a result of lower sales for build-to-order homes at Mitsui Home, which impacted the new construction under consignment business and accounts for the majority of the other segment. However, overall profits rose on large-scale orders at Mitsui Designtec for offices, hotels and others.

Next, for reference, we show figures for the overseas business. Please turn to Page 68. Please note, there is a 3-month lag in reflecting overseas profits. The figures included in third quarter reflect the results of the overseas business for the period of January to September 2024.

Overall combined overseas business profit for third quarter fiscal 2024 was JPY 20.5 billion, down JPY 50.5 billion year-on-year. Within this, the Leasing segment reported an increase in revenues and profits from progress on leasing and ForEx impact, which was offset by an increase in property taxes and a high base for comparison as a result of the impact of Property Sales in the previous fiscal year. Operating revenues grew JPY 19.6 billion and profit rose JPY 0.4 billion year-on-year.

In the Property Sales segment, a high base for comparison on the back of the sale of large-scale properties in the U.S. in the previous fiscal year and the impact of losses in third quarter related to selling a U.S. rental residential property led to a JPY 111.8 billion drop in revenue and a JPY 51 billion decline in profit.

The combination of the Management and Other segments reported a JPY 3 billion increase in revenue and a slight decline in profits on the back of improved RevPAR at the Halekulani Hotel, but an increase in expenses.

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 were JPY 9,820.3 billion, up JPY 330.7 billion from the end of the previous fiscal year. Of the JPY 330.7 billion increase in outstanding assets, roughly 10% or JPY 41.4 billion is the result of the impact of foreign exchange rate changes.

I will now discuss the major components of change such as investment and cost recovery. Please turn to Page 70. As shown on the table on the upper left, the total outstanding balance of real property for sale was JPY 2,584 billion, up JPY 208.7 billion from the end of the previous fiscal year. New investments were JPY 401.9 billion; cost recovery was JPY 205.7 billion; and other, which includes elements such as ForEx impact, was JPY 12.5 billion.

As you can see in the breakdown by company, Mitsui Fudosan reported a net increase in investment of JPY 65.3 billion; Mitsui Fudosan Residential, a net increase in investment of JPY 52.4 billion; while the overseas subsidiaries such as Mitsui Fudosan America posted a net cost recovery of JPY 7.1 billion; and Mitsui Fudosan UK, a net increase in investments of JPY 25 billion.

Next, looking at the lower left, the outstanding balance of tangible and intangible assets was JPY 4,535.2 billion, up JPY 129.6 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 construction investments for senior residents, Park Wellstate Nishiazabu and Mitsui Outlet Park Marine Pia Kobe, which reopened in November after being fully rebuilt and expanded, were JPY 227.5 billion, but depreciation was JPY 103.7 billion. Factoring in JPY 5.9 billion for other, the vast majority of which was ForEx impact, there was a net increase of JPY 129.6 billion versus 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 third quarter was JPY 4,935.5 billion, up JPY 505.1 billion from the end of the previous fiscal year. Of this increase, just under 10% or JPY 43.1 billion was the impact of changes in foreign exchange rates.

Going back to Page 69, as a result of the above, the D/E ratio as of the end of third quarter was 1.64x and the equity ratio was 30.6%, as shown on the lower right.

Finally, I would like to discuss the revision to the full year forecast. Please turn back to Page 71. First, with regard to operating revenues, our forecast remains unchanged from our initial forecast of JPY 2.600 trillion as announced on May 10, 2024. For operating income, business income and ordinary income, each has exceeded our initial plan assumptions by JPY 20 billion. We revised our full year forecast for operating income to JPY 360 billion, business income to JPY 390 billion and ordinary income to JPY 280 billion.

The JPY 20 billion upward revision for business income breaks down as follows. First, for the Leasing segment's business income, we raised our forecast by JPY 5 billion on the back of factors such as the growth of overseas office profits, lifting our initial assumption from JPY 170 billion to JPY 175 billion. Second, for the Management segment's business income, we have factored in elements such as the strong retail brokerage business, growth in AUM and higher occupancy rates for rental residential properties to raise our forecast by JPY 10 billion, lifting our initial assumption of JPY 60 billion to JPY 70 billion. Third, business income for the Facility Operations segment will be revised up by JPY 5 billion, primarily reflecting better than initially expected operating conditions in the domestic Hotel and Resorts business. We, therefore, raised our initial assumption of JPY 30 billion to JPY 35 billion. As a result, the full year business income for the 4 core business segments of Leasing, Property Sales, Management and Facility Operations are expected to hit new record highs.

With regard to extraordinary gains and losses, as a result of the change in business policy for older domestic properties, we expect to incur additional impairment losses. We, therefore, revised down our initial assumption by JPY 10 billion to JPY 75 billion. As a result of all of the above, profits attributable to owners of parent has been revised up JPY 5 billion from our initial assumption to JPY 240 billion, a new record high. Following the upward revision, our forecast for each of operating revenue, operating income, business income, ordinary income and net profit attributable to owners of parent represent new record highs.

With regard to the outstanding balance of interest-bearing debt, taking into account current ForEx market conditions, we have revised our guidance for the fiscal year-end balance from our initial forecast of JPY 4.4 trillion to JPY 4.550 trillion, an increase of JPY 150 billion. The outstanding balance of interest-bearing debt as of the end of third quarter was JPY 4,935.5 billion. But given planned cost recovery into the fiscal year-end, we are expecting the balance to decline by around JPY 400 billion from the third quarter level.

The current macro backdrop is volatile, reflecting factors such as monetary policy of the BOJ and the Fed, inflationary trends and the transition to a new government in the U.S. However, the fundamentals for our core business of real estate, particularly for the Japanese real estate market, remain firm. The group as a whole will continue to monitor domestic and overseas financial and real estate market trends while firmly focusing on achieving the business income and net profit targets for this fiscal year and the achievement of the KPIs set out in & INNOVATION 2030.

This completes my presentation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]