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

Good afternoon, everyone. I am Uchida, Executive Manager of the Investor Relations department. I will present the second quarter results for the fiscal year ending March 2021. I will discuss the results in more detail later, but overall, first half sales and profits declined year-on-year. Results were impacted by a number of factors. This includes lower sales and profits owing to the state of emergency in Japan in April and May, during which our retail facilities, hotels and Rehouse retail brokerage offices were closed, a high base for comparison in the property sales to investors subsegment, the fact that occupancy rates for our car parks and hotels are still recovering and extraordinary losses related to the sale of the Shinjuku Mitsui Building as a part of balance sheet control efforts. At the same time, we were able to make solid progress, backed by an increase in leasing revenues and profits for existing offices, the earlier-than-expected reopening of retail facilities and subsequent recovery in GTV, and revenue and profit contributions from new retail facilities coming online in first half and handovers of domestic residential properties for sale. In Property Sales to Investors, although first half revenues and profits are down year-on-year, we have already completed contracts for the sale of multiple properties, making solid progress towards second half profit recognition. Reflecting these conditions, we have made some revisions to the full year forecast announced in May 2020. Specifically, progress in Property Sales to Investors relative to our full year forecast has already exceeded our initial assumptions. As such, we revised up our full year operating revenue forecast to JPY 1.950 trillion. For operating income, we have also adjusted the segment forecast to reflect differences in the magnitude and pace of recovery for each business versus our initial forecast, factoring in conditions 6 months on from the announcement of forecast in May 2020. We have made no changes to our overall forecast for operating income, ordinary income or profit attributable to the owners of the parent. At this time, all of our businesses are in recovery mode. We believe we are making solid progress towards achieving our full year forecast. I will now explain our results in more detail using the fact book. Please turn to Page 2 for the consolidated profit and loss statement. Second quarter operating revenues were JPY 797.4 billion, down JPY 91.3 billion or 10.3% year-on-year. Operating income was JPY 64.1 billion, down JPY 54.4 billion or 45.9% year-on-year. Ordinary income was JPY 47.2 billion, down JPY 60.5 billion or 56.1% year-on-year. Profit attributable to owners of the parent was JPY 9 billion, down JPY 57.2 billion or 86.4% year-on-year. The progress rate for the results relative to the aforementioned revised results is shown in the table on the upper right. Operating revenue was 40.9%; operating income, 32.1%; and profit attributable to owners of the parent was 7.5%. Compared to the progress rates as of second quarter in the past, progress for net profit appears to be significantly slower. However, this reflects the impact of extraordinary losses related to the COVID-19 outbreak and, as noted at the outset, the extraordinary losses related to the sale of the Shinjuku Mitsui Building. It also reflects the temporarily elevated consolidated tax burden ratio as of the end of second quarter. On a full year basis, progress versus our forecast is in line with expectations. Next, returning to the left-hand side of the page. I will touch upon the key items below the line before discussing segment results in more detail. Looking at the breakdown of nonoperating income, equity and net income or loss of affiliated companies fell JPY 5.4 billion year-on-year. This reflects a high base for comparison in the Thai residential property sales business on the back of a concentration of handovers of high-margin properties in the first half of the previous year and lower occupancy rates at hotels managed by affiliates as a result of the COVID-19 outbreak. Net other nonoperating income declined JPY 1.2 billion year-on-year, primarily reflecting commissions related to the establishing of foreign currency borrowing facilities. As a result, nonoperating income was negative JPY 16.9 billion, with losses widening JPY 6.1 billion year-on-year. Next, extraordinary gains and losses. Please look at the table on the right-hand side of the page. In the first half of fiscal 2020, we posted JPY 28.3 billion in gains on the sale of investment securities. This is in line with our policy to reduce our strategic equity holdings. As we did in first quarter, we sold some of our holdings in second quarter as well. We also posted JPY 2.5 billion in gains on the sale of shares held in associates, primarily our holdings in an entity in China. In extraordinary losses, we recognized JPY 13.2 billion in COVID-19-related losses. This is the aggregation of fixed cost per facilities, which were closed as a result of the outbreak, such as rent expenses for leases on retail facilities and hotels, depreciation expenses and other costs. The corresponding figure for first quarter was JPY 11.8 billion. As you can see, the overall impact from facility closings had largely run its course in second quarter. We also posted JPY 32.8 billion in impairment losses related to the sale of Shinjuku Mitsui Building. In line with the land revaluation law, we marked the land for the Shinjuku Mitsui Building to market in fiscal 2001. The write-down reflects the increased unrealized gains as a result of the revaluation. The sale contract is dated October 9, which is after the end of second quarter on September 30. However, given the magnitude of the impact, we have factored it into second quarter results as an event after the reporting period. Please turn to Page 3 for a detailed discussion of the segment results. Starting with the Leasing segment, first half operating revenues declined JPY 18.7 billion and operating income fell JPY 14.6 billion. As noted in the comments section, there were revenue and profit contributions from newly opened facilities in first half, such as Mitsui Outlet Park Yokohama Bayside, LaLaport AICHI TOGO, and in a new format integrating a park and retail facilities, RAYARD MIYASHITA PARK and RAYARD Hisaya-odori Park. However, this was offset by the impact of COVID-19, where we closed retail facilities and offered rent relief measures for retail tenants in first quarter and initial opening costs for newly completed large-scale office properties such as Bunkyo Garden Gate Tower, Otemachi One and Toyosu Bayside Cross. Operating income fell JPY 14.6 billion year-on-year in first half. This compares to the approximately JPY 11 billion profit decline in first quarter related to the impact of COVID-19 on retail facilities leasing. The implied second quarter operating profit decline was JPY 3 billion. As you can see, for the most recent quarter, we have seen a significant reduction in the magnitude of profit declines. Although not noted in the comment section, we started to reopen our retail facilities from mid-May onward. All of our facilities are open at this time. The recovery in customer levels has been solid. The recovery in GTV levels for our regional malls and outlet parks has been faster than we had initially expected. Overall, GTV has already returned to 80% to 90% of the previous year's levels with some facilities reporting positive year-on-year gains in GTV. In the office business, new properties have been effectively spoken for and will be fully leased by the time of completion. Request to cancel leases or for rent relief from existing tenants remain limited at this time. The nonconsolidated Tokyo Metropolitan Area office building vacancy rate was 2.6%, up 0.5% from the 2.1% level at the end of June. The increase in vacancy rates is temporary, reflecting the staggered timing of tenants moving into newly completed offices. The vacancy rate remains at historically low levels. Next, the Property Sales segment. Please turn to Page 4. Operating revenues for the Property Sales segment fell JPY 17.6 billion, and operating income declined JPY 4.1 billion. Looking first at the domestic residential business, please see the table in the upper right. The number of units sold, a combination of condominiums and detached homes, was 2,218, up 182 units year-on-year. The resulting subsegment operating revenue increased JPY 12.6 billion, and operating income rose JPY 2.2 billion. Similar to last year's trend, average unit prices were pushed up by the recognition of a high number of high-end central urban large-scale redevelopment condominium projects. The average unit price for condominiums was JPY 80.49 million. On a blended basis, including detached homes, the average unit price was JPY 79.21 million. While not indicated here, the subsegment OPM was 14.8% for the first half. Given the 14.5% level for the same period in the previous year, this fiscal year's margin reflects a similar skewing to high-margin properties. The subsegment OPM on a full year basis for last fiscal year was 11%. The implied margin based on our full year forecast for this fiscal year is 10.6%. We are making good progress towards achieving our forecast. On near-term sales conditions, we have restarted selling activity from June, following the lifting of the state of emergency. We have seen a solid return in customer traffic by customers that had been considering the purchase of a home prior to the outbreak. Additionally, the experience of sheltering in place during the spring has led to an increase in new customers who have started to consider buying a home. At this time, we are seeing solid trends in both customer traffic and the progress rate. Relative to our full year target of 3,800 condominium units for the full year, the contract rate was 92.2% as of the end of September. As you can see, this is largely in line with or slightly higher than the 94% level of the last fiscal year or the 89.5% level of first half fiscal 2019. If we take into account the fact that there were restrictions on selling activity in the spring, the current level reflects the solid progress we have made since the beginning of the fiscal year when the contract rate was 81.6%. Completed inventory for condominiums and detached homes stood at 266, down 60 units from 326 at the end of June. Absolute inventory volume remains at low levels. As indicated, the impact of COVID-19 on the domestic residential sales business has been limited to this point. We believe it is necessary to continue to monitor market trends closely. However, we remain focused on achieving our full year targets by maintaining activity levels and closing sales. Next, the Property Sales to Investors and Overseas, Individuals subsegment. Reflecting a high base for comparison, first half operating subsegment revenue fell JPY 30.2 billion, and operating income declined JPY 6.4 billion. However, as noted at the outset, we have already signed multiple sales contracts with J-REITs and others for office buildings and logistics facilities. On this basis, we have already exceeded 90% of our full year targets, making solid progress. Next, the Management segment. Please turn to Page 5. Operating revenues fell JPY 17.4 billion, and operating income declined JPY 17.2 billion. The key factors for the lower revenues and profits are as follows. As indicated in the comments section, the occupancy rate for Mitsui Fudosan Realty's Repark car park leasing business is still below last fiscal year's levels as a result of restrictions on activity related to COVID-19 earlier in the year. Also, owing to the closure of retail facilities in first quarter, retail facility operations and management fees declined in second quarter. In the retail brokerage business, the closure of the Mitsui Rehouse brokerage offices in the first quarter led to a lower number of brokerage transactions in second quarter. However, in the retail residential brokerage business, while contract numbers fell in April and May, after the lifting of the state of emergency and the restart of economic activity from June, near-term transaction numbers at Rehouse have recovered to last fiscal year's level. For Repark, as of September, the occupancy rate has recovered to more than 90% year-on-year. Finally, the Other segment. Please turn to Page 6. The key business for this segment is the Facilities Operations subsegment, which is primarily focused on the hotels and resorts business. It also includes the new construction under consignment business, the Mitsui home built-to-order detached home business and the reform and renewal business for offices, retail facilities and residential properties. Overall, operating revenues fell JPY 37.5 billion, and operating income declined JPY 17.1 billion. The declines are primarily the result of the closure of our hotel and resort properties during first quarter. Additionally, occupancy rates in first half have remained depressed on a year-on-year basis. We have also incurred initial opening expenses for a number of newly opened hotel properties. I will provide more detail beyond what is indicated in the comments section. Following the national government's declaration of a state of emergency in April, we closed 18 of a total 32 hotel properties operated under the Garden Hotel and Celestine brands and all 5 of the resort properties. Subsequently from June onward, we reopened the Garden Hotel properties. Occupancy rates have improved every month, but due to a slow recovery in demand from inbound travelers to Japan, first half conditions have remained tough particularly for Tokyo properties. However, recently, we have seen a pickup in activity, particularly from the 4-day weekend, which started September 19. We have seen an increase in reservation numbers supported by measures designed to boost domestic demand such as the go-to travel campaign. In contrast for our resort properties, Japanese travelers had historically accounted for a high proportion of the customer base in many cases. As a result, we saw a relatively rapid recovery. Occupancy rates as of September for all our resorts were either flat or up year-on-year. Next, please refer to the right-hand side of Page 6. We show here figures for the Overseas business for your reference. As noted to date, we have compiled revenues and profits for the overseas component of each segment, such as leasing and property sales as well as the contribution from equity method affiliates into a single table for your convenience. As shown in the table, total Overseas profits were JPY 12.8 billion, down JPY 1.2 billion year-on-year. In the Leasing business, while there was a profit contribution from 55 Hudson Yards in the U.S., there was a temporary dip in leasing profitability as some office tenants, unrelated to the COVID-19 outbreak, chose to move out at the expiry of their leases. The closure of retail facilities and weaker GTV as a result of COVID-19 also contributed to a JPY 2.7 billion decline in operating income. On the office tenants that moved out, new tenants to take up the vacant space are already in place. We are also already seeing a recovery at retail facilities where GTV had declined, similar to what we have seen in Japan. As such, going forward, we expect to see operating revenues and operating income recover. Overseas operating income in Property Sales rose JPY 700 million year-on-year. While there was a high base for comparison related to the profit contribution from a China project in first half fiscal 2019, it was offset by progress on handovers at properties, such as television center in the U.K. The Overseas, Management and Other businesses reported a JPY 600 million profit decline related to the temporary closure of the Halekulani Hotel in Hawaii due to COVID 19. The pro forma operating income of overseas affiliates rose JPY 1.4 billion year-on-year on the back of the sale of shares in an associated company in China, as alluded to earlier. We note that the first half overseas OPM was 18.5%. This reflects the fact that the progress rate for overseas profits relative to the full year forecast is higher than for the domestic business. At this point, overseas profits account for a relatively higher proportion of the full year profit forecast. On a full year basis, progress is in line with expectations. We expect the overseas OPM to be around 10% on a full year basis. On the near term, COVID-19 impact on the Overseas business, conditions vary from country to country in terms of the spread of the infection and the pace of economic recovery. We will monitor local conditions closely going forward, but we expect the overseas business to remain relatively stable given the long duration of office building leases in the U.S. and Europe. On the outlet malls and retail facilities we operate in Taiwan, as noted earlier, GTV is recovering. Residential property sales in China have been proceeding smoothly since the restart of sales. Customer footfall has returned to pre-COVID-19 levels. Please turn to the next for a discussion of the balance sheet. Total assets were JPY 7.6122 trillion, up JPY 216.9 billion versus March 2020. On the main drivers of the increase, please first turn to the table on the upper right entitled Real Property for Sale. The outstanding balance was JPY 2.0056 trillion, up JPY 97.7 billion year-on-year. New investments were JPY 273.5 billion, while cost recovery was JPY 152 billion. After taking into account other factors, including foreign exchange impact, investments exceeded cost recovery as is typical every year. The net increase of JPY 97.7 billion is the result of netting the increases in residential investments at Mitsui Fudosan Residential and development investments at Mitsui Fudosan and Mitsui Fudosan America group with cost recovery at each company. Next, turning to tangible and intangible assets. The outstanding balance was JPY 3.7821 trillion, up to JPY 29 billion from March 2020. As indicated in the comments section, major investments include the mixed-use project in Shibuya, RAYARD MIYASHITA PARK, which opened in first half, and additional investments for 50 Hudson Yards in New York, slated for completion in 2022. New investments totaled JPY 134 billion. New investments were offset by depreciation and ForEx impact for a net increase of JPY 29 billion versus March 2020. The next page shows the liability side of the balance sheet. Outstanding interest-bearing debt was JPY 3.7833 trillion, up JPY 302.2 billion from March 2020. Our forecast for outstanding interest-bearing debt as of the end of 2021 is JPY 3.8 trillion. We are already at this level as of the end of second quarter. This reflects the increase in development investments during first half. From second quarter onward, in line with our strategy to control the balance sheet, we expect to recover costs in the Property Sales to Investors business. Taking into account expected investments and cost recovery, we, therefore, expect to be in line with our guidance on a full year basis. The breakdown of interest-bearing debt by company as well as cash inflows and outflows are as described in the comment section on the right. As a result, the D/E ratio as of the end of second quarter was 1.59x, and the equity ratio was 31.3%. Next, I will explain the partial revision to our forecast for fiscal 2020. Please turn to Page 11. As noted at the outset, we have revised our full year guidance for operating revenue to JPY 1.950 trillion. Our full year forecast for operating income, ordinary income and profit attributable to owners of the parent remain unchanged, but we have made some adjustments to the segment forecast for operating income. We set out our full year forecast 6 months ago in May. The impact from COVID-19 has continued for longer than we had initially assumed. As a result, the impact on some businesses has been larger than we had expected. In response, we have been executing on company-wide measures to enhance profits and control costs. The segment revisions reflect not only the differing impact of COVID-19 on each business in terms of the magnitude and speed of recovery, but the management measures we are implementing. The segments most impacted by COVID-19, as noted when we initially disclosed our forecast, are Retail Facilities Leasing, the Management businesses of Repark and Rehouse and Facilities Operation within the Other segment. Relative to our initial forecast, we have taken into account a shorter-than-expected period of closure for retail facilities and the rapid recovery in GTV after reopening and revising up our operating income forecast for the Leasing segment by JPY 15 billion to JPY 128 billion. For the Property Sales segment, the impact of COVID-19 on the real estate transaction market was smaller than expected relative to our initial assumptions. Reflecting this, we raised our previous operating income forecast by JPY 11 billion to JPY 114 billion. In contrast for the Management segment, the pace of recovery for the Car Park Leasing Repark business has been slower than initially expected. Also, while near-term conditions at the retail brokerage Rehouse business have reverted to largely flat levels year-on-year. We revised down our full year operating income forecast by JPY 17 billion to JPY 33 billion, reflecting the magnitude of the first half decline. For the Other segment, reflecting the relatively slow pace of recovery in demand for accommodations in our hotel business, we revised down our initial forecast by JPY 13 billion to an operating loss of JPY 26 billion. Under the Elimination or Corporate line, we expect an improvement of around JPY 4 billion in company-wide expenses. However, as noted earlier, we have also factored in improvements at individual segments and businesses as a result of disciplined cost control. Our annual dividend per share guidance is unchanged from our initial forecast at JPY 44 per share. Finally, although not noted in the materials, with regard to the impact of COVID-19 on first half results, in addition to a negative impact at the operating income level of roughly JPY 50 billion, as indicated earlier, there was JPY 13.2 billion in extraordinary losses and a negative JPY 3 billion at the nonoperating level for a total negative impact of JPY 65 billion. On the segment breakout of the approximately JPY 50 billion negative impact on operating income, I can say that the absolute year-on-year difference for the Leasing, Management and other segments can effectively be viewed as the COVID-19 impact. I have explained the conditions for each of our businesses in first half 2020. Currently, each segment is in recovery mode. We believe that earnings have bottomed in second quarter and expect to make solid progress toward achieving our full year forecast going forward. We note that predicting when the COVID-19 outbreak will come under control is still difficult. The situation remains very challenging. Our revised forecasts assume that we will not see a dramatic impact on economic activity as a result of a resurgence in the number of infections. In the event that we must revise our forecast as a result of further COVID-19 developments, we will disclose new forecasts in a timely manner. This completes my remarks. [Statements in English on this transcript were spoken by an interpreter present on the live call.]