Tosei Corp

TSE:8923

Earnings Call Transcript 2018-Q2

[Noboru Hirano, executive]

This is Hirano speaking, Director and CFO of Tosei Corporation. Thank you very much for gathering.

As we ended the first 6 months of the fiscal year ending November 2018, we would like to present you the financial results today.

Please open Page 3 of the presentation material. As you can see, we have the bar chart showing from top line revenue to profit for the period. In terms of revenue, we booked JPY 32.5 billion, up 23% compared to the same period last year. The full year forecast of revenue is JPY 67.8 billion, which means our progress to date is 48%. However, as normal years, we have property supply to Tosei REIT in the second half of the fiscal year. Thus excluding this part of the business, we have achieved 56% progress rate. On the profit side, we have the operating profit, profit before tax and profit for the period for the first 6 months, which are all exceeding last fiscal year by more than 10%. In particular, the profit before tax, shown on the top-right corner, was 111% or up 11% year-on-year to book JPY 6.5 billion. Compared to the full year forecast of JPY 10 billion, we have achieved 65% progress rate on the profit before tax. In short, we achieved approximately 50% in revenue and about 2/3 in profits.

Please skip the next slide, and go to Page 5. From this page, I would like to explain the results by segment, starting with the Revitalization Business. As the bar chart shows, we had a huge sales of property in Q1. And adding the Q2 sales, we booked a total revenue of JPY 17.5 billion, which is 98% or down 2% compared to the last fiscal year. The chart on the bottom-left corner gives details, including the full year forecast. And as described, the initial target for this fiscal year is to be 98% compared to last fiscal year. Therefore, we are mostly in line with the initial target.

In terms of gross profit margin, we posted 28.8% in the first 6 months, and the same figure was 22.8% for the full year in the previous fiscal year, as the chart indicates.

In the previous fiscal year, the sales to REIT were included in Q4, which is taken as a bridge transaction of properties to Tosei REIT. That is the reason behind the drop in profit margin in the last fiscal year. However, the gross profit margin, excluding the REIT, were 28% last year, so we were able to maintain the same level of margin in the first 6 months this fiscal year.

The first half revenue of JPY 17.5 billion is translated to number of properties of 24 compared to a total of 50 properties, excluding the property to REIT for the full year in the previous fiscal year, thus we have mostly achieved half of the total number in the previous fiscal year. There were more small-sized properties of less than JPY 1 billion, which accounted for about 40% of the total properties. And these small-sized properties were also about 40% in the previous fiscal year and were about 35% in the year before. Thus there is a slight trend of more small-sized properties being sold compared to the past.

Next is Page 6 for the development business. As the bar chart shows, the large sales of condominiums, which is colored in light blue, were booked in Q2. As shown on the right picture, The Palms Yutenji master Place, which has 89 units, were mostly sold at 95% or so in Q2 and largely contributed to the revenue and profit.

For the first 6 months, we posted revenue of JPY 8.6 billion, an increase of approximately 4x compared to the same period of the previous fiscal year.

If you look at detached houses, excluding condominiums, we were 96% compared to the previous fiscal year; thus the pace is slightly slow.

In terms of the gross profit margin, we achieved 26.0% in Q2 compared to 18.8% for the full year in the previous fiscal year on the back of the large contribution from the condominiums. However, if you look at the detached houses alone, the same level of profit margin is achieved in the fiscal year under review compared to the previous fiscal year.

Regarding the high-margin contribution by The Palms Yutenji, we acquired the original land of this project through M&A about 4 years ago by using our various capabilities around sourcing.

Next is Page 7. I have just explained the sales in our Revitalization and Development businesses and now is the acquisitions in these businesses to fuel the future growth. The total acquisition amount on delivery basis was about JPY 35 billion as of end of Q2. This is the amount based on our calculation of expected disposition values, so we have reached this level of acquisition amount so far. The acquisition target on a full year basis is JPY 80 billion, which means the progress rate is 44%. However, on a contract basis or based on deals signed by the end of May and actual acquisitions scheduled later, the amount is JPY 53.5 billion and the progress rate is 67%. Based on the historical trend of the acquisition amount in the first half versus the full year, we believe we can more or less achieve the JPY 80 billion target in this fiscal year under review.

The type of acquisition is shown in different shades in the bar chart. Those with the colored diagonal lines are the acquisitions for Revitalization Business, and those with solid colors are those for Development Business. What is noteworthy is the green solid box, which shows acquisition of logistics for development. We have acquired land for development of hotel as well as condominium, so we are working on the acquisition of a wide variety of products. Next is the Rental Business on Page 8. We booked revenue of JPY 2.9 billion, which was 97% or down 3% year-on-year. Please have a look at the left bar chart. The blue box represents the rental income from our noncurrent assets. This revenue alone was 118% or up 18% year-on-year. As we are targeting the expansion of the ratio of stable businesses, as described in our medium-term management plan, in particular, the growth of our rental revenue, the increase in the rental revenue from our noncurrent assets is due to the efforts we are paying over the medium term.

The revenue from our noncurrent assets have reached exactly 50% within the rental revenue. In the previous fiscal year, the revenue from noncurrent assets accounted for 40%, and revenue from the inventories were 60%. So as you can see, we were able to increase the revenue from noncurrent assets.

In regards to the gross profit margin, we have achieved 45.9% as of Q2, which is the same level compared to the full year margin of 45.9% in the previous fiscal year. We will move on to the fourth segment, the Fund and Consulting Business on Page 9. The right side shows the balance of assets under management, which reached JPY 635.2 billion. From the balance of JPY 552 billion as of the end of the previous fiscal year, we saw an increase by JPY 91.5 billion and decrease by JPY 8.5 billion from disposal of assets. So on a net basis, the balance increased by JPY 83 billion to reach JPY 635 billion. The full year forecast is JPY 650 billion, so we're able to steadily increase their balance towards the target. The left of the slide are revenue and gross profit margin. If you look at Q2 of the previous fiscal year, we booked a large revenue from brokerage fees, and due to this factor, the revenue was 81% or down 19% year-on-year. Nevertheless, the forecast in this fiscal year is factoring the absence of such large revenue in Q2, so we have achieved 50% progress against the full year forecast.

What we would like to highlight is the revenue in dark blue, which is the AM fee. This is the revenue which increases when the balance of AUM grows. The revenue in the first half of this fiscal year booked 151% or up 51% year-on-year. In other words, we have seen a steady progress in our efforts to expand the ratio of stable businesses instead of a one-off revenue such as the brokerage fees.

Next on Page 10 is the fifth segment, the Property Management Business. This is also one of the initiatives in our medium-term management plan: the expansion of the ratio of stable businesses. In the first half of this fiscal year under review, the number of properties under management have fluctuated. However, we were able to book the equivalent number of properties as the end of the previous fiscal year. In terms of revenue of the left slide, we booked JPY 2.47 billion, which was 112% or up 12% year-on-year. In terms of progress against the full year forecast, we reached 48%. In the previous fiscal year, we were also at 48% progress at the end of first half, so we are in line with the pace of achieving the full year forecast as in the past years.

What I would like to note is the operating profit shown in the bottom-left chart. We booked JPY 204 million of OP in the first half, which is 152% or up 52% year-on-year. The progress rate against the full year forecast is 72%. This is the result of increasing our top line revenue while improving the profitability and profit margin.

I have covered the 5 segments, so we would like to move on to Page 11 to give you the summary of our balance sheet. Total assets increased by JPY 12.3 billion from the end of the previous fiscal year to JPY 134.9 billion. To give you the details around the increase of JPY 12.3 billion, there is a box with letter A, the change in inventory. As details are described at the bottom half of the slide, there were once a decline of book value by JPY 18.8 billion due to disposal of properties. However, it then increased by JPY 21.5 billion due to acquisition of new properties added by the construction and value-up work, pushing up the book value by JPY 7 billion. Net-net, there is an increase of approximately JPY 10 billion of inventories. We also increased our cash and equivalents by JPY 2 billion, which all adds to a total of JPY 12 billion increase in total assets.

Next is our liabilities and equity on Page 12. Within our liabilities, the largest is borrowings, which increased by approximately JPY 5.7 billion compared to the end of the previous fiscal year. In detail, we repaid debt of around JPY 13 billion based on property disposal, but new acquisitions led to an increase in liabilities by JPY 20 billion or so. In the end, we saw an increase of JPY 5.7 billion or so in borrowings.

In terms of equity, there is an increase of JPY 3.4 billion compared to the end of the previous fiscal year as shown in letter B. The first half profit increased by JPY 4.4 billion while we paid a dividend of JPY 1.2 billion resulting in an increase of total equity by JPY 3.4 billion.

Next is the box with letter C, the equity ratio. There is a slight drop compared to the end of the previous fiscal year to 36.8%. That is all for the summary of liabilities and equity.

On Page 13, we have the status of inventories. The total number of properties as of the end of the first half in the fiscal year under review was 122 or a book value of JPY 69.4 billion and a total expected disposition value of JPY 110.6 billion. The number of properties at the end of the previous fiscal year was 102, therefore, it has increased by 20 properties on the net, including the drop from disposal and increase from new acquisitions. Both the book value and the total expected disposition value increased by JPY 10 billion each compared to the end of the previous fiscal year. Among the 20 properties increased from the previous fiscal year, there were 13 for Revitalization and 7 for Development. To explain the property type, as mentioned before, we have added one row in this chart for logistics, and our balance of inventories of hotels are also increasing due to a new acquisition. So those are some of the characteristics of our inventories.

On Page 14, we have the track record of expected disposition values over the past 10 years. The far right is the latest figure as of end of the first half in this fiscal year under review. As mentioned, the property type that has increased are the hotels and logistics. As for detached houses, we have mostly an equal amount of houses sold and purchased. That is all for the inventory situation. Next is Page 15 where we have the noncurrent assets, or accounting wise, the investment properties and PPE: property, plant and equipment. The balance of book value of the 30 properties, which are company-owned as of end of May 2018, is JPY 33.4 billion, which is translated into a fair value of JPY 54.9 billion based on our calculation. By subtracting these figures, we come to the unrealized gains of JPY 21.4 billion. If we dispose these assets, the income tax on the unrealized gains will be around JPY 7 billion, which is the figure above the red box. Thus, the unrealized gain after tax is expected to be JPY 14.3 billion.

On the bottom left, we have the estimated total equity, including the unrealized gains after tax. Our current total equity is JPY 49.6 billion, and by adding the unrealized gains of JPY 14.3 billion, we expect a total equity on a consolidation basis to be JPY 63.9 billion. There has been no change in properties from the previous fiscal year, so the figure is mostly flat overall. Lastly, I will cover Page 16. As mentioned before, one of the target in our medium-term management plan is to expand the ratio of stable businesses. For that reason, we are increasing our noncurrent assets and growing our rental revenue. On the other hand, we have a bank borrowings for the property acquisition, and this slide shows our financial soundness regardless of the growing balance of borrowings.

The left chart shows our borrowing rates in periods for the existing assets. The top line shows the borrowing period for the noncurrent assets, which was an average of 16.4 years as of end of the previous fiscal year. However, the period has extended by 18 months or so to 17.9 years as of end of Q2 in this fiscal year under review. As mentioned, there is no change in the noncurrent assets. Thus the extension of the borrowing period was due to the refinancing of existing loans. The dotted line in the same chart are the borrowing periods for our inventories or current assets. The period which assets are purchased to sold is 1 year or more on average in the Revitalization Business and 2 to 3 years in the development business. Nevertheless, we try to extend the borrowing period to have enough room for repayment. Based on such effort, our borrowing period for current asset was 5.9 years as of end of Q2 in this fiscal year, which is slightly extended compared to the end of the previous fiscal year. With the increase in noncurrent assets, we are also growing the balance of borrowings. However, as we set clearly the maturity of these borrowings, we are protected against onetime financial confusions or other events where we may fall into a financial difficulty in repaying the debt. This is how we are progressing our medium-term management plan.

That is all for my presentation. Thank you very much.

[Seiichiro Yamaguchi, executive]

Good afternoon. This is Yamaguchi speaking, President and CEO of Tosei Corporation.

I would like to cover our business development in the fiscal year ending November 2018, starting from Page 20 of your presentation material.

Please turn to Page 21. This is the forecast for the fiscal year 2018 under review. We have kept the initial guidance of JPY 67.8 billion in revenue, JPY 10.9 billion in operating profit, JPY 10 billion in profit before tax and JPY 6.6 billion in profit for the year. As Mr. Hirano has mentioned, we achieved more than 65% in the progress on the profit, so we believe we had a good first half in the fiscal year under review. Turning to Page 22, we have this segment overview of the JPY 6.6 billion profit for the year. I would like to give more details from Page 24, so please have a look at this page for your reference. Moving to Page 23, we have the recognition of the current business environment. I will give the highlights only. Starting with the second row, offices, we are expecting a supply of 1.45 million square meter or 441,000 tsubo in this fiscal year. Regardless of the large office supply in 2018 and 2020, the market seems to have absorbed the supply issue. Based on what we see in the market of small- to medium-sized buildings and through the feedback of other developers, there seems to be a solid demand. The vacancy rate is also kept low.

As for the rents for small- to medium-sized buildings, the average was around JPY 16,000 per tsubo 5 years ago and is growing close to JPY 20,000 per tsubo or more based on some analyst report, which is showing the steady demand of the market.

Next is housing, in the third line from the top. As you already know, the supply of new condos in the 23 wards of Tokyo were impacted by the rise in construction and material costs, leading to a weak supply of 35,000 units, and the contract rate was also around 70% or so in the previous fiscal year. However, there are expected increase in supply of 38,000 units in this fiscal year under review. What is noteworthy is the used condos, which supply based on contract, was 37,000 units in the previous fiscal year exceeding that of the new condos. Therefore, there has been a spread of used condominium market. Moving to hotels. We are specialized in Tokyo, and the number of hotel rooms in Tokyo has totaled 154,000 or 1,139 buildings. Based on the number of construction project and analyst reports, there is an expectation of additional 180 buildings or 24,000 rooms or so by the Olympic, Paralympic games. As a result, the number of hotel rooms will grow by 15% by the Olympic game; thus the inbound tourism has to grow to cover the expected decline of occupancy rate from the current level, a concern frequently raised by people. Nevertheless, the government estimates that an increase of 40 million tourists by the Olympic game will be enough to absorb the supply. The inbound tourists have to grow to verify that assumption. And if the number will grow steadily according to this pace, the supply would be more than covered.

Regarding logistics facilities, which we have newly entered, the stock is estimated to be 4.56 million tsubo. There is a massive supply of 400,000 to 500,000 tsubo each year, and concerns were raised from around 3 years ago against the peak out of the logistics supply. Nevertheless, we have seen demand exceeding supply each year. The e-commerce has grown to JPY 16 trillion last year from the JPY 15 trillion 2 years ago, so there has been a growth of JPY 1 trillion or 9% each year.

Also, the 3PL, third-party logistics operators, are expecting revenue growth of 5% or so each year. Thus we believe that logistics is basically a stably growing market. There are apparently many supply of logistics facilities along the metropolitan intercity expressway, and we would like to carefully select the best location and property for the investment and development.

Regarding the funds market, due to the negative interest rate, the yield gap of the office buildings in Tokyo has become the highest compared to the rest of the world. As we manage the funds, including those from overseas investors, the market is basically active, especially for private funds. Although there are some funds that exit, it is basically an active market today.

As for J-REITs, there has been a recovery of J-REIT index to the middle of 1,700 to 1,800 points, and it exceeded JPY 800 billion in acquisition in the first half of this fiscal year under review, so we have seen a steady market in the first half. So that was a brief explanation on the current business environment.

Next page is the forecast in the second half based on such business environment. Let me touch on the highlights. For the Revitalization Business, we have a full year revenue forecast of JPY 39.3 billion, while achieved JPY 17.5 billion in the first half, so the concern is whether we can achieve JPY 21.7 billion in the second half. Roughly speaking, approximately JPY 10 billion is the amount expected to be sold as a bridge transaction to Tosei REIT. To achieve the remaining JPY 11.7 billion, we will focus on sales of small- to medium-sized properties.

For the Development Business, we recorded JPY 8.6 billion in revenue in the first half, and there are maybe concerns for the JPY 6.2 billion target in the second half. We have one commercial facility and several detached houses scheduled to be sold, and details will be covered from the next page.

The operating profit at the bottom of the chart shows a second half target of JPY 249 million, or 4% OP margin for the development business. To answer your question why the OP margin will drop from 16.3% in the first half, this is due to the introduction of IFRS accounting. The advertisement spending, mainly of the condominiums, which are subject for delivery in the following fiscal year or beyond, will be incurred in this fiscal year under review. Due to this upfront booking of expense, we are expecting a drop in profit margin. Therefore, it is not the case where the properties to be sold in the second half of the fiscal year under review have extremely low profit margin.

In the rental business, we have a full year revenue forecast of JPY 6.7 billion where the first half result was JPY 2.9 billion and the second half target is JPY 3.7 billion. You may have doubts on a sharp increase in rental revenue from JPY 2.9 billion to JPY 3.7 billion. Regarding the forecast in the second half, we factored in the acquisition of rental assets of approximately JPY 10 billion. If we achieve the same level of acquisition in the second half compared to the first half, we believe we can hit the full year revenue forecast.

The remaining businesses of Fund and Consulting, Property Management and others had a steady progress in the first half of this fiscal year under review. So we believe the second half will also remain steady in terms of achieving their targets in these businesses. That was all for the summary.

And now I would like to give some details on second half strategies for each segment from Page 25.

First is the strategies in Revitalization Business. As mentioned, the target revenue in the second half is JPY 21.7 billion, including the bridge transaction of properties worth JPY 10 billion to Tosei REIT. On the top of Page 25, there is the second half sales plan of 29 small-sized buildings and 6 mid- to large-sized buildings. Part of the mid- to large-sized buildings are contracted, so the remaining strategy is to sell the small-sized buildings. We have sold 22 small-sized buildings in the first half. And based on the brisk market environment for all sizes from large, medium to small, we hope to achieve the targets smoothly.

Moving on to Page 26, we have the strategies in the second half for the Development Business. The sales of Yutenji master Place were mostly completed in the first half, with the unsold units of 4 in the first half, and now down to 2 units, of which both have already received customer applications. So we believe Yutenji will have no issue in achieving their target.

As for detached houses, the full year target is 138 units, and we have sold 46 units in the first half. So the concern may be on the second half target of 92 units, which is double that of the first half. This is one business area where we have to work hard against the target. Nevertheless, there are more houses scheduled to be completed in the second half by our subsidiary, Urban Homes, so that is the reason why target is higher for the second half of this fiscal year.

At the bottom of this page is the picture of the Palms Chofu Manor Garden. This is one of the large-scale properties with 162 units and sales of below JPY 8 billion, which is on sale today. This will contribute to our performance in the next fiscal year. We have, so far, received applications and contracts for about half of the total units, around 8 units, so we believe there is a steady progress in the sales activities.

Going to Page 27, we have the pipeline of our development projects. This schedule shows the completed projects from 2017. There may be questions while we are looking back at the year 2017 when we are in the year 2018. The Hotel Cocone Kanda in 2017 is still held by our company, and the commercial facility T'S BRIGHTIA Minami Aoyama is a prime property and we are searching the ultimate timing to sell. So for the meantime, it is still under our ownership.

The rest are the pipelines from 2018 to 2020. We have 3 hotels or 4 including conversion, 4 commercial facilities, 5 condominiums and 2 logistics facilities, which leads to a total of 15 projects in the pipeline, equivalent to approximately JPY 36 billion in sales.

In the pipeline in the previous fiscal year, under the line 2020 and after, we had only the top 2 projects, Palms Sagamihara as a condominium and Ueno 3-chome Hotel Project. Therefore, in the first half of this fiscal year under review, we were able to add, in addition, 3 projects, 2 logistics facilities of Sagamihara and Hasuda as well as 1 condominium namely the Toda Condominium Project.

Let me turn to Page 28. On the acquisition, as Mr. Hirano explained, we have a full year target of JPY 80 billion on delivery basis versus the current acquisition of JPY 53.5 billion on contract basis. Therefore, the remaining acquisition is JPY 26.5 billion, and we would like to use various approaches, including M&A, as we have a certainty, to some degree, in attaining the target. In terms of the issues around the sales promotions in the second half, the suburban areas are where we are seeing a slight drop in liquidity. Also, as many of you in the audience are from financial institutions, there is some level of cautiousness towards lending in the suburban areas, and they are selective decisions by financial institutions, by deal, property or customer, so we believe we have to continue our sales activities carefully.

From Page 29, I would like to highlight some topics. On our initiative to promote property acquisition through M&A, we set up a new M&A group strategy department in this fiscal year under review. Since 2016, we have acquired 5 companies, 30 properties worth JPY 17 billion. In particular, Company M was acquired in December 2017 and Company S in March 2018, leading to 2 M&As in the first half of this fiscal year. There are some inquiries in the second half, so we would like to work hard to close them successfully.

On the right chart, there is gross profit margin on the right column. In fiscal year 2017, properties acquired through M&A generated gross profit margin of 39.7%, while properties acquired by normal acquisition generated 26.7%. In this fiscal year under review, there were 7 properties acquired through M&A, including a major property that hit a home run, leading to a gross profit margin as high as 50.4%, which is higher than the properties acquired by normal acquisition, which generated 27.4%. One of the reason is because we can create a win-win situation between the seller and our company. When a company sells its owned property, it pays 30% income tax. And when a lack of successor leads to business liquidation by the owner of the company, the total tax paid by the individual may become 60% or so. Instead, if the company buy stock in M&A, the tax rate will be only 20%. For our company, we will pay some risks in M&A, such as residual book value on the balance sheet or employment risk of the existing employees. Thus we factor these risks for a discount, and through sincere negotiations, we are able to close the deals. From this perspective, we are able to acquire properties at a discount.

Now let me go to Page 30. The other topics is entering into logistics business. When we say new entry, it is new in terms of development of logistics facilities. However, we have made investment from the past such as investment to logistic funds or working on PM/BM businesses, so we have been doing many marketing activities and have decided to finally enter the market. As the first logistics facility, we have started the Sagamihara Logistics Development project. There are 2 pictures of logistics facilities on the right as examples of our PM/BM operation. On top of these 2, we have logistics facilities, including Moriya, Ogijima and Hasuda under our PM/BM operation. Going forward, we will develop logistics facilities by ourselves as well and we would like to expand the menu in our Development Business.

Turning to Page 31, the third topic is Tosei Hotel Cocone Ueno, which is a conversion project. We plan to open the hotel in December 2018 as the second round of hotel opening following Cocone Kanda, which opened in December last year. Our own hotel brand lineup is shown in the middle of the left slide. Following Kanda and Ueno, we plan to open 2 Tosei hotel brands in the Olympic Paralympic year, one in Okachimachi and the other in Asakusa. Therefore, we will have a total of 4 hotels in our lineup. We received various information around development projects or disposed assets on a daily basis. Thus, we would like to work hard for the acquisitions.

Outside of the 2 hotels in 2020, we hope to open up around 2 hotels per annum based on the acquisition activities.

Last but not least, we have our dividend policy on Page 32. As shown, we plan to increase year-end division from JPY 25 per share in the previous fiscal year to JPY 30 per share in this fiscal year under review. Our payout ratio will be 21.6%, and we would like to pay our utmost effort to drive earnings to achieve the target. The current net book value, as shown, is JPY 49.6 billion. And as Mr. Hirano explained earlier, the unrealized gain after tax is calculated at JPY 14.3 billion. The net asset value is JPY 63.9 billion, and NAV per share is around JPY 1,300. In addition, we have a growth opportunity, and that is the message we hope to send to the market through our company's IR activities.

This concludes my presentation, and I thank you all for your kind attention.