Mitsui Fudosan Co., Ltd. (8801) Earnings Call Transcript & Summary

I am Wataru Hamamoto, Executive Managing Officer of the Accounting and Finance Department. I will present the results for the fiscal year ended March 2020 using the investor presentation, which is available on the Investors page on our website. Please turn to Slide 45. This page shows the profit and loss statement. As you may have already seen the results, I will only touch briefly on the key items. Consolidated operating revenues were JPY 1.9056 trillion. Operating income was JPY 280.6 billion. Ordinary income was JPY 258.5 billion. And profit attributable to the owners of the parent was JPY 183.9 billion. We were able to show positive year-on-year growth in operating revenues and earnings in fiscal 2019. These results represent new record highs at all levels, with operating revenue setting a new high for the eighth consecutive year and all levels of profits each hitting new highs for the sixth consecutive year. That said, on the back of the COVID-19 outbreak during the fiscal year and in response to requests from national and local authorities, Mitsui Fudosan has chosen to proactively cooperate with government guidance to prevent the spread of COVID-19 by shutting down retail facilities and hotels from March. In addition, we have also established rent relief programs for retail tenants that have been impacted by the shutdown. Despite the challenging operating environment, as noted earlier, we achieved year-on-year growth in operating revenues and profits. Additionally, we have maintained our financial soundness and face no issues in maintaining employment. As such, with regard to shareholder returns, we will maintain our annual dividend per share of JPY 44, as initially guided. And on top of the JPY 15 billion share buyback program implemented in March and April, we will initiate a new share buyback program of up to a maximum of JPY 10 billion, which will raise our total shareholder return ratio of profit attributable to owners of the parent to 36.9%. This covers the profit and loss statement. Please now turn to Page 47 for a discussion of the balance sheet. I will briefly highlight the key items here as well. Total assets were JPY 7.3953 trillion, up JPY 592.6 billion from March 2019. In the middle of the right-hand side of the table, total interest-bearing debt was JPY 3.4811 trillion, up JPY 574.5 billion from March 2019. On the lower right, net assets were JPY 2.4865 trillion, up JPY 65.7 billion from March 2019. As a result, the D/E ratio was 1.45x and the equity ratio was 32.6%. This completes the overview of the profit and loss statement and the balance sheet. Please turn back toward the front of the presentation to Page 12. This page highlights our robust financial foundation. I will touch upon recent fundraising activities. Very simply stated, we have absolutely no concerns with regard to cash flow. As you may already be aware, despite the spread of COVID-19 during this period, we were able to raise a total of JPY 145 billion in domestic corporate bonds in March and April. More than 90% of our debt is long-term debt. In addition, we have more than JPY 400 billion in untapped yen-denominated commitment lines. On this basis, with regard to cash needs in fiscal 2020, including foreign currency needs, we believe we are well positioned. Please turn back to Pages 48 and 49. We present here our full year consolidated forecast for the fiscal year ending March 2021. In spite of a very challenging environment given the lack of visibility, Mitsui Fudosan has chosen to provide full year forecast for fiscal 2020 at this time. We are aware that many companies have chosen not to do so at this time, but Mitsui Fudosan has disclosed full year forecast. It goes without saying that the ongoing threat of COVID-19, both in Japan as well as globally, is having a meaningful impact on the economy. At this stage, given that this is a new coronavirus, there is no clarity in terms of when the outbreak might subside and even the experts cannot provide a definite time line. For Mitsui Fudosan, it was very difficult to formulate forecast with a strong degree of certainty. However, we felt it was important to provide a sense of our view of the situation. We, therefore, chose to set certain assumptions as the basis for formulating the forecast we have disclosed. Specifically, as indicated in the fourth bullet point on Page 48, we have assumed that economic activity in first quarter will continue to be limited by restrictions and guidance set forth by the authorities. There have been suggestions that some less seriously impacted prefectures could see an easing of restrictions this week, which would allow us to reopen some LaLaport and Mitsui Outlet Park facilities. However, we do not assume a widespread lifting of restrictions in first quarter. Instead, we think there will be a more measured shift from second quarter onward with a gradual easing of restrictions in several phases that would allow for a gradual return toward more normal conditions by the end of the calendar year. That said, we do not expect to see a V-shaped recovery and assume that a return to fully normal conditions will take until the end of the fiscal year. This is the basis for our forecast. We note that actual results could vary from our forecast, subject to the actual timing of when the COVID-19 outbreak comes under control. In the event that we need to revise our forecast, we will do so in a timely manner. Please turn to Page 49 for our forecast. We have provided comments on the left-hand side. But please look at the table on the right. Touching upon the key figures, we project operating revenues of JPY 1.850 trillion, operating income of JPY 200 billion, ordinary profit of JPY 169 billion and profit attributable to owners of the parent of JPY 120 billion. Under operating income, you can also find the segment breakout. We are expecting segment OP to fall across the board in fiscal 2020. By segment, we expect the year-on-year decline at leasing to come primarily from the closures of retail facilities. For Property Sales, we expect a decline in property sales to investors. In the Management segment, we expect weakness in the Rehouse residential brokerage business and the Repark car park leasing business. The Other segment will be impacted by a weaker hotel business. In addition to this, we are expecting to incur COVID-19-related losses at the extraordinary level. Although not shown on this slide, the aggregate negative impact from the COVID-19 outbreak factored into our earnings forecast is expected to be around JPY 100 billion. Finally, as noted in the last bullet point on the lower left-hand side of Page 49, we are guiding for an annual dividend per share of JPY 44 for fiscal 2020, unchanged year-on-year. This completes my remarks.

Good afternoon, everyone. I am President and CEO, Komoda. Thank you for finding the time in your busy schedules to participate in the Fiscal 2019 Mitsui Fudosan Analyst Briefing Conference Call. I will cover 2 topics today, an update of the current situation and a discussion of our management policies and strategies going forward. With regard to the operating environment, as you know, globally, we continue to be in the midst of the struggle to contain the spread of infections from a new coronavirus. Currently, in an effort to prevent the spread of COVID-19, countries around the world have imposed lockdowns on their populations, restrictions on travel as well as asking businesses to shut down. These actions have had a significant negative impact on the global economy. In Japan, it is unclear when the outbreak will subside. Predicting when COVID-19 will come under control is very hard. Even if Japan were to see an end to the state of emergency, in the absence of a vaccine or a clear and effective treatment regime, the reality is that we will need to learn to coexist with the novel coronavirus. This will mean commercial activity will continue to be subject to some sort of restrictions. We must be prepared for a long haul. Governments around the world have focused their efforts on the very difficult balancing act of trying to contain the spread of COVID-19 while also maintaining a certain level of economic activity. With regard to our own response to the crisis, we believe that the public and private sector must work together to overcome the challenges of containing the outbreak and revitalizing the economy. In order to avoid the Three Cs, Mitsui Fudosan is proactively restricting sales activity and promoting initiatives to encourage changes in public behavior. In normal circumstances, the nature of our business is to foster the creation of active and vibrant neighborhoods and communities. But at the moment, what is needed are measures to keep people safe by limiting activity outside the home. To this end, it has become necessary to suspend sales activities and services. This will result in a temporary but significant decline in profits. However, I believe companies do not exist solely to maximize economic value. Companies also have social responsibilities. At this time of crisis, I firmly believe it behooves us to prioritize protecting human life over profitability in the short term in order to fulfill our social responsibilities. Therefore, Mitsui Fudosan is devoting its efforts to support local communities and our tenants. Even if this comes at the cost of a temporary decline in profits, I believe this is the right choice. I am committed to ensuring that Mitsui Fudosan supports and contributes to the community to overcome the challenges we face today. This approach will further enhance the sense of trust that society, our customers and our tenants have in Mitsui Fudosan as a company. I firmly believe that taking an active role in supporting society during this crisis will only elevate the perception of Mitsui Fudosan as an integral and necessary part of society once the COVID-19 outbreak subsides. With regard to the impact on the individual segments, I will discuss current market conditions as well as the challenges we see going forward. I will start with the business that has felt the biggest impact, the retail facilities business. If we look at the progression of events as the outbreak expanded, it started with request to shelter at home, followed by government guidance to avoid the Three Cs, and subsequently, the declaration of a state of emergency, which came with a government request to voluntarily shut down facilities. As I noted earlier, our top priority is to save lives. In order to contain the spread of COVID-19, we have voluntarily shut down operations as much as possible. This will inevitably lead to a short-term decline in gross transaction value. It also poses some major temporary challenges for our smaller-scale tenants. As alluded to earlier, even if we see some easing of the restrictions, it is unlikely we see restrictions lifted across the board for all industries. As such, a full economic recovery is unlikely to materialize in the near future. Therefore, any recovery in gross transaction value will likely be gradual in nature. We must be prepared for the possibility that activity levels may remain low for some time. We consider tenants to be among our most important partners in this business. As such, we believe it is important that we show that we are prepared to be supportive. We are extending support in the form of rent relief for struggling tenants on a case-by-case basis and are generally trying to provide support as quickly as possible and to be accommodating as necessary. We aim to maintain our focus on establishing win-win relationships with our customers, our tenants and the local community for the long term. Next, the hotel and resorts business. The progression of events started with a major downturn in inbound travelers, followed by restrictions on domestic travel, and then the postponement of the Olympic and Paralympic games. This fiscal year, we expect profits to fall substantially. However, even after the outbreak subsides, we need to be prepared for a slow pace of recovery in terms of the return of inbound tourists and an improvement in sentiment from domestic travelers. I believe our strength in this business is the employees who create the guest experiences that contribute to the brand value of our hotels. As such, we are committed to maintaining employment levels. The impact on the office business is relatively small at this time. As you will have seen, the vacancy rate for the 5 central wards of Tokyo was 1.56% in April, remaining at historically low levels. However, if corporate earnings weaken, it will have an impact on the office market over time. We must be prepared for this. We have seen changes in how people work as a result of the outbreak, with many more now working from home or teleworking. These lifestyle or structural changes could have medium- to long-term implications for the office market. That said, Mitsui Fudosan is a company that has a track record of strong performance in times of crisis. We attribute this to our skill in mixed-use developments and our ability to successfully combine soft and hard element. Progress on leasing of new properties has been good to this point with all properties coming online virtually fully leased. However, we recognize the need to monitor the office market closely for potential changes. The residential market has performed well to date, supported by double income households and low interest rates, the market for high-end properties that are centrally located has been strong. Of the 3,800 condominium units we expect to sell this fiscal year, the contract rate at the beginning of fiscal 2020 was 81.6%, very high relative to typical levels. Therefore, we think that the COVID-19 impact in fiscal 2020 for this business will be limited. At the same time, our sales activities have been put on hold. Even if restrictions are eased, we will still need to reconfigure to ensure we can avoid the Three Cs, which will make the selling process tougher and could have an impact on sales. Additionally, if corporate earnings are hurt by COVID-19, this could have implications for employment and salary levels. If the value of financial assets were to decline or interest rates rise, this could hurt residential demand or reduce consumers' ability to buy. We will need to monitor the market even more closely going forward. On the back of poor visibility, players in the Property Sales to Investors market have been sitting on the fence, although the financial markets are generally calm, unlike the disruptions experienced during the global financial crisis. For the time being, the low interest rate environment is likely to be maintained globally. However, the market could change if we were to see signs of change in the financial markets that limit investors' ability to access capital or impact exit yield. In that event, we would need to determine whether the changes were one-off events or the sign of a turning point to the prolonged bull market we have seen over the last few years. We will need to be even more vigilant in monitoring the financial markets, macroeconomic conditions, the real estate market and the behavior of players to determine the appropriate timing to buy or sell property. Fundamentally, in Property for Sale to Investors, I want to avoid a situation where Mitsui Fudosan would sell into a bad market for the sake of volume. If we found ourselves in this situation, given that many of these properties are generating cash flow, we would concentrate on income gains. For the overseas business, given the majority of leases in the U.S. and Europe, particularly for offices, are long-dated and around 10 to 15 years, the market is relatively stable. At the moment, particularly in the U.S., we are not seeing calls from tenants to lower rent levels. Leasing for 55 Hudson Yards is completed. For 50 Hudson Yards, which is slated to complete in 2 years' time, BlackRock and Facebook have already leased 75% of the property. Our office properties in the U.K., consisting of Television Centre and One Angel Court, are fully leased and have not been impacted by COVID-19. On the residential property for sale in the U.K., more than 90% of the condominiums have already been sold. In Asia, our retail facilities have been impacted by temporary shutdowns or low activity levels. Condominium sales activity has been suspended. Conditions going forward will depend on government guidance and the pace of economic recovery. However, as an example, in China, we restarted condominium sales in Changshu and Nantong. Progress has been good. Demand and price levels have virtually reverted to pre-pandemic levels. We will continue to work with our local subsidiaries to confirm our understanding of the local markets and the status of COVID-19 in each country. We will monitor the markets and society for signs of change and respond appropriately. This completes the overview of market conditions for the various segments. But I would also like to touch upon the larger implications of the COVID-19 outbreak. As has been widely suggested, the COVID-19 outbreak may bring about structural changes to society and our lifestyles. We think real estate will not be an exception to such changes. As an example, the broader embrace of working from home potentially has implications for the office market. However, we think this change, which is a part of the digital transformation, will actually create great new opportunities. Embracing real estate tech is one of the key strategies under our long-term vision, where we aim to leverage technology to innovate in real estate. The impact of the restrictions on activity will only accelerate and drive further progress in the digital transformation. As an example, we have chosen a conference call format for today's briefing. There are things that we could do to enhance the telework experience, such as improving video conferencing capabilities within offices or leveraging the WORKSTYLING model, which provides venues for employees to work closer to home and avoid crowded spaces. At the same time, we have also found that working from home is not necessarily viable for all roles where teleworking can be inefficient or cumbersome. For those cases where digital alternatives are inappropriate, it will be increasingly important that we, as a group, focus on the opportunities to improve the value we provide in our real office spaces. We have chosen to disclose full year forecast at this time based on a set of certain assumptions, as noted by Executive Managing Officer, Hamamoto. We expect first quarter to be a continuation of the tough conditions currently in place. However, we expect to see a gradual recovery start from July, although the pace will be measured. We are assuming that conditions will only return to normal by the end of the fiscal year. We expect profits to decline significantly for the retail facilities and hotels business as a result of restrictions. However, these declines are not a reflection of the value of the underlying business. We will take advantage of this time to further build on the attractiveness of our facilities and brand value in order to drive strong growth after COVID-19 comes under control and the economy recovers. Please note that our forecasts are based on specific assumptions that first quarter will be weak, but we will start to see a recovery from second quarter onward. Given this, to the extent that the actual situation differs from our assumptions, we would then need to review our forecast. If we need to revise our forecast, we will do so in a timely manner. Next, with regard to our long-term vision, VISION 2025, the current situation will not change the direction of our key medium-term and long-term strategies. Although there has been some suggestion that globalization is partly implicated in the COVID-19 outbreak, Mitsui Fudosan's focus on globalization as a strategy is not predicated on the movement of goods and people across borders. Instead, the globalization we are focused on is our engagement around the world in local real estate markets. As such, our globalization strategy would not be impacted by a backlash against globalization. As discussed earlier, with regard to suggestions that new potential opportunities in digital transformation are emerging as a result of the restrictions, digital transformation had already been and continues to be positioned as a key growth strategy. As such, this strategy remains unchanged. However, those who may have been skeptical about working from home prior to the crisis have been forced into trying it and many have found it easier than they expected. We may need to adjust our strategy to reflect the impact of the crisis, which is accelerating and expanding the scale of digital transformation. What is most important for Mitsui Fudosan, as noted earlier, is our focus on creating active and vibrant neighborhoods that bring people together. The value we create by building neighborhoods is the source of our profits. Creating contact points also sparks innovation. This is what we are aiming to achieve. As a result of the outbreak, we are temporarily taking actions that discourage large gatherings and reduce direct contact. But I do not believe that this means our strategy is fundamentally incorrect. Under the current circumstances where there continues to be a risk of a second wave of infection, there will need to be restrictions on gatherings and measures to minimize direct contact. However, we do not believe that these restrictive conditions will become a part of our normal lives in future. If COVID-19 were like cancer or dementia, which are not contagious conditions, the situation would be different. However, we are facing an infectious disease that spreads through human contact and where a vaccine or treatment regime has not yet been established. This is a crisis that represents a huge challenge for mankind. It is not possible to view the current situation as normal in any way. When we return to normal conditions, I believe firmly that Mitsui Fudosan's strength will allow us to be successful with our strategies. This crisis has also reaffirmed a recognition that the role of a company is not solely to generate profits, but that companies also have an important role to play in fulfilling social responsibilities. The single most important thing that we can do in this crisis is to protect and save lives. As a consequence, our ability to engage in sales activity is restricted, which, in turn, will hurt profitability in the short term. To the extent that partners, such as our tenants, face significant challenges, it behooves those of us that are better positioned to provide assistance. Furthermore, there is a recognition that we must support the medical professionals who are working on the front lines to combat COVID-19. It is precisely these types of actions that lead to the creation of a sustainable society. I believe this is aligned with the spirit of ESG. From this perspective, I believe it is now even more important to embrace ESG as we focus on implementing our VISION 2025 strategies. With regard to financial soundness, the COVID-19 outbreak has served to reaffirm its importance in my view. As I have said in the past, we do not believe that excessive leverage is a good thing for a real estate company. Mitsui Fudosan has focused on maintaining a healthy balance sheet using the D/E ratio as a key metric. As a result, even in the current crisis, we have stable access to capital. Going forward, we may see attractive opportunities to acquire assets. We will remain disciplined in selecting investments and continue to manage our balance sheet appropriately while taking into account the need to maintain a good balance between investments and cost recovery. Finally, with regard to shareholder returns, as we have said in the past, our aim is to maintain financial soundness and maintain an appropriate balance between investments and shareholder returns. We believe it is important to continue to invest for growth while also enhancing shareholder returns and maintaining a good balance on a sustainable basis. Since March, the global equity markets have seen sharp declines. Mitsui Fudosan's share price fell significantly, which may have been a cause for concern for investors, for which we apologize. We remain confident in our ability to generate profits and are committed to further enhancing our shareholder returns. To clearly communicate our confidence and signal our view that the share price was too low, we undertook a share buyback of JPY 15 billion in March. It was our hope that this would be interpreted as an indication of our unchanged commitment to rewarding shareholders. In fiscal 2019, we undertook support measures for partners, primarily our retail tenants. We have also maintained employment, including the employment at group companies. We were also able to generate year-on-year growth of more than 9% in net profits. Given this, we felt we needed to appropriately reward shareholders. Hence, the total shareholder return ratio of 36.9% based on the JPY 44 annual dividend as initially guided, the JPY 15 billion share buyback in March and an additional JPY 10 billion share buyback plan. I do not view the 36.9% level as sufficient. But we are also in the midst of a crisis. Once the outbreak subsides and profit growth normalizes, I would like to consider further improvements to shareholder returns. This completes my remarks. Thank you.