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 third quarter results for the fiscal year ending March 2021. I will discuss the results in more detail later, but overall, the rate of progress relative to our full year forecast for both operating income and profit attributable to the owners of the parent exceeded 82%. In first quarter, we reported year-on-year declines in operating revenues and profits as the COVID-19 outbreak led to temporary closures of our retail facilities, hotel and resort properties and retail brokerages. From second quarter onward, however, these business have shifted into recovery mode. In addition, from first quarter, we have seen continued growth in rental revenue from existing offices and the pace of domestic residential sales and handovers has remained strong. In third quarter, property sales to investors grew significantly. I will now explain our results in more detail using the fact book. Please turn to the consolidated profit and loss statement. Third quarter operating revenues were JPY 1.468 trillion, up JPY 172.5 billion or 13.3% year-on-year. Operating income was JPY 164.4 billion, down JPY 5.8 billion or 3.5% year-on-year. Ordinary income was JPY 143.2 billion, down JPY 13.3 billion or 8.5% year-on-year. Net profit attributable to the owners of the parent was JPY 98.8 billion, down JPY 3.4 billion or 3.3% year-on-year. Please see the progress rates for the results relative to the full year forecast as shown in the table on the upper right. Operating revenue stood at 75.3%; operating income, 82.2%; and net profit attributable to the owners of the parent was 82.4%. Although not shown here, progress rates versus full year forecast for the individual segments, such as Leasing or Management, are over 75%, while the Property Sales segment progress rate is over 85%. Next, returning to the table on 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 6 billion year-on-year. This reflects the high base for comparison in the Thai residential business where there were many handovers of high-margin properties in the corresponding bid of the last fiscal year. Following occupancy rates at hotels managed by affiliates on the back of the COVID-19 outbreak also had a negative impact this fiscal year. Net other nonoperating income declined JPY 2.4 billion year-on-year, mainly reflecting increases in commissions related to the establishment of foreign currency borrowing facilities. As a result, nonoperating income was negative JPY 21.1 billion, with losses widening JPY 7.4 billion year-on-year. Next, extraordinary gains and losses. Please look at the table on the right. In extraordinary gains for third quarter, we posted JPY 44.5 billion in gains from the sale of investment securities. As we did in first half, we further lowered our holdings in Oriental Land and other stocks, in line with our policy to reduce strategic equity holdings. We also posted JPY 2.6 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 14.2 billion in COVID-19-related losses for the first 9 months of the fiscal year. This is the aggregation of fixed costs for 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. As the total as of first half was JPY 13.2 billion, the increase in third quarter on a stand-alone basis was approximately JPY 1 billion, reflecting the impact of the temporary closure of only the Halekulani Hotel in Hawaii. On an overall basis, as of the end of third quarter, virtually all of the facilities have reopened. We also posted JPY 33 billion in impairment losses related to the sale of the Shinjuku Mitsui Building as noted in our second quarter results. 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 increase in the book value at that time based on the then current level of unrealized gains. Please turn to Page 3 for a detailed discussion of the segment results. Starting with the Leasing segment, third quarter operating revenue declined JPY 15.7 billion and OP fell JPY 21.5 billion. For more color on conditions in the Leasing segment, please see the comments section, which details trends from first quarter through third quarter. In the office business, while we incurred initial opening expenses for newly completed office properties, Leasing revenue and profits on existing offices has consistently grown from the beginning of first quarter. While revenues and profits for retail facilities were down as a result of the temporary closures in first quarter, we were able to reopen facilities from mid-May onward. The recovery in customer footfall has been better than we had expected. In second quarter and third quarter, revenues recovered, mainly driven by existing facilities. Revenues and profits are also benefiting from the contributions of newly opened facilities such as Mitsui Outlet Park Yokohama Bayside and LaLaport AICHI TOGO. Although not noted in the materials, December quarter GTV for our regional malls and outlet parks was running at around 85% to 95% of last year's levels. GTV was recovering from October through mid-November on the decline in new infections and consumption stimulus measures such as the government's Go to Campaign. However, from late November onward, we started to see the impact of the resurgence in new COVID-19 infections. For the office business, leasing of new properties coming online in fiscal 2020 had already been largely done. The new properties are generally fully occupied at completion. With regard to existing tenants, the number of lease cancellations and requests for rent relief remain limited. The nonconsolidated Tokyo Metropolitan Area office building vacancy rate was 3.5%, up 0.9 percentage points from the 2.6% level as of the end of September. As discussed previously, the increase is the result of a large-scale tenant moving out. The tenant had already indicated its intention to move out prior to the COVID-19 outbreak. As such, the rise in the vacancy rate is not related to COVID-19. While COVID-19 appears to be slowing down the decision-making process at corporates that are considering taking up new leases, we have been making progress on refilling the vacated floor space. We expect the vacancy rate as of the end of the fiscal year to be around the 3% level as signed tenants move in. Next is the Property Sales segment. Please turn to Page 4. Third quarter Property Sales operating revenues increased JPY 242.2 billion, while OP grew a hefty JPY 53.9 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 housing, was 3,320, up 712 units year-on-year. While not indicated in the table, the third quarter OPM was 12.7%, above the 11.6% level from the same period of the previous fiscal year. This reflects the concentration of high-margin properties sold. As a result, third quarter operating revenue for the domestic residential business rose JPY 55.9 billion and operating income increased by JPY 9.2 billion. The full year OPM for the previous fiscal year was 11%. This year, we are guiding for a similar level of 10.6% on a full year basis. We have made solid progress to achieving this level to date. Near-term selling conditions remain strong in terms of both customer footfall and progress on the contract rate. In addition to customers that had already been considering the purchase of a home prior to the COVID-19 outbreak, we have seen an increase in new customers. This reflects demand sparked by the experience of sheltering in place in the spring. Good progress is being made on not just the properties that have been available for sale to date, mainly in Chiba and Yokohama, but newly launched high end central urban properties, such as Park Court Toranomon and Park Tower Kachidoki Mid. Overall, the market for the autumn selling season was firmer than we had expected. Relative to our full year target of 3,800 condominium units, the contract rate as of the end of December has risen to 97%. As has typically been the case, we have been able to maintain a high contract rate. 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 then. Completed inventory for condominiums and detached housing stood at 187 units, down 79 units from the 266 level in September. At this level, we are below the 196 level as of same time last fiscal year. Absolute inventory volume remains at low levels. As indicated, the impact of COVID-19 on the domestic residential sales business remains limited to this point. However, we believe it is necessary to continue to closely monitor customer preference and market trends. We remain focused on maintaining activity levels and closing sales to lay the foundations for the next fiscal year. Next, the Property Sales to Investors and Overseas, Individuals subsegment. Third quarter operating revenue increased JPY 186.2 billion, while OP grew by JPY 44.7 billion. Transaction levels in the real estate market in first quarter were low, reflecting uncertainty about the economic impact of COVID-19. However, from second quarter onward, transaction activity resumed. Investor appetite for asset classes generating stable cash flows such as office properties, logistics facilities and rental residential properties remains strong. We have not seen a deterioration in cap rates from pre-COVID-19 levels. Given this backdrop, we chose to revise up our full year operating income forecast for the Property Sales to Investors subsegment by JPY 11 billion from JPY 70 billion to JPY 81 billion at the end of second quarter. This reflected our intent to ensure we took advantage of favorable selling conditions and to also make progress on balance sheet control. The substantial step-up in operating revenues and profits in third quarter reflect the completion of planned transactions with J-REITs and others for office properties, logistics facilities and others. We are making solid progress toward our full year operating income target of JPY 81 billion. Although not noted here, the OPM for third quarter was 23.8%. We have been able to maintain a level that is largely in line with the 23.4% level of last year at this time. Next, the Management segment. Please turn to Page 5. This segment consists of the Property Management business primarily focused on the management of buildings, the Repark Car Park Leasing business of Mitsui Fudosan Realty, the retail and corporate brokerage businesses, the asset management business for our sponsor to J-REITs and the consignment sales business, which focuses on selling condominiums developed by other developers. In third quarter, operating revenue fell JPY 18.2 billion and operating income dropped JPY 16.2 billion. Please see the comments section for a discussion of the conditions for this business during the first 9 months of the fiscal year. In first quarter, operating revenue and income fell as a result of the temporary closure of our Rehouse retail brokerages in response to the COVID-19 outbreak as well as lower occupancy rates for the Repark business owing to restrictions on movement. Subsequently, in second quarter and third quarter, we saw an improvement in operating revenues and profits with a start of economic activity, which led to an increase in the number of brokerage transactions at Rehouse and a recovery in occupancy rates at Repark. Having said that, partly due to the resurgence in COVID-19 infections from November, Repark's occupancy rate has yet to return to the previous fiscal year's level. However, we have implemented measures to improve efficiency such as cost cuts. Repark's margin is improving. In the retail brokerage Rehouse business, both the number of brokerage contracts and handovers during the 3 months of third quarter have recovered to match previous peak levels. 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 for Mitsui Home built-to-order detached housing and the Reform and Renewal business for offices, retail facilities and residential properties. Overall, third quarter segment operating revenue fell JPY 35.7 billion and OP dropped JPY 21.2 billion. The declines in operating revenue and profits are mainly due to the Facilities Operation business related to the impact of temporary closures of hotels and resorts in first quarter and initial opening costs associated with a number of new hotel properties coming online in fiscal 2020. In second quarter and third quarter, occupancy rates improved as a result of the Go to Campaign. Third quarter operating revenues improved sequentially versus second quarter. I will provide some more detail on trends in occupancy rates, which is not covered in the comments section. Since the reopening of hotel properties in June 2020, occupancy rates have gradually improved, mainly at noncentral urban properties and resort hotels, partly as a result of the Go to Campaign. In particular, following reports of the inclusion of Tokyo in the Go to Campaign in late September, there was a further pickup in reservations. The occupancy rate exceeded 60% in October and improved further in November. However, following the subsequent announcement of the suspension of the Go to Campaign, there were some cancellations. The occupancy rate for December ultimately dipped below the 60% level, a situation that has since continued to this point. This contrasts with our resort properties where Japanese travelers had historically accounted for a high proportion of the customer base in many cases. We have seen a relatively rapid recovery, partly because outbound travel for Japanese has been curtailed. For the 3 months of third quarter, almost all our facilities achieved year-on-year improvements in occupancy rates and ADRs. Next, please refer to the right-hand side of Page 6. We show here the figures for the Overseas business for your reference. As noted to date, we have compiled revenues and profits for the overseas components 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. Total third quarter overseas profits were JPY 17.1 billion, down JPY 5.4 billion year-on-year. In the Leasing business, while there was a profit contribution from Hudson Yards and other projects in the U.S., as noted at the end of second quarter, 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. Combined with the temporary closure of retail facilities mainly in Asia and weaker GTV due to COVID-19, this led to a JPY 3.7 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, we expect to see operating revenues and operating income recover going forward. Overseas operating revenue and income in Property Sales fell year-on-year due to a high base for comparison related to the profit contribution from a China project in fiscal 2019 and others. The Overseas, Management and Other businesses reported a JPY 1.7 billion 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 reported a net JPY 1 billion increase year-on-year on the back of the sale of shares in an associated company in China, as alluded to earlier, and the decline in the number of residential units for sale in Thailand. On the near-term COVID-19 impact on the Overseas business, we are monitoring local conditions closely. However, we expect the Overseas business to remain relatively stable given the longer average duration of 14.9 years for office building leases in the U.S. and Europe compared to Japan. In addition, we have had no issues with nonpayment of rents. On the outlet malls and retail facilities we operate in Taiwan, as noted earlier, GTV is recovering and has already returned to match last fiscal year's levels in the second half of calendar year 2020. 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 page for a discussion of the balance sheet. In third quarter, total assets were JPY 7.5964 trillion, up JPY 201 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 1.8849 trillion, down JPY 22.9 billion year-on-year. New investments were JPY 409.8 billion, while cost recovery was JPY 393.7 billion. After taking into account other factors, including foreign exchange impact, the outstanding balance declined in a departure from the trend up to the end of second quarter in which we typically reported net increases due to investments. While net increases driven by investments outweighing cost recovery were reported by Mitsui Fudosan Residential and Mitsui Fudosan America group, Mitsui Fudosan and domestic SPCs made progress on selling properties boosting cost recovery. Hence, the JPY 22.9 billion year-on-year decline in overall real property for sale. Next, turning to tangible and intangible assets. The outstanding balance was JPY 3.8053 trillion, up JPY 52.1 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; the luxury hotel property, HOTEL THE MITSUI KYOTO, which opened in November 2020; and additional investments for 50 Hudson Yards in New York slated for completion in 2022. New investments totaled JPY 193 billion. New investments were offset by depreciation and ForEx impact for a net increase of JPY 52.1 billion versus March 2020. The next page shows the liability side of the balance sheet. Third quarter outstanding interest-bearing debt was JPY 3.7194 trillion, up JPY 238.3 billion from March 2020. The D/E ratio as of the end of third quarter was 1.49x, and the equity ratio was 32.8%. Regard to the tender offer for the common stock of Tokyo Dome Corporation announced last year, we were able to acquire 84.82% of the voting rights represented by share certificates. As of January 25, 2021, Tokyo Dome has become a consolidated subsidiary of Mitsui Fudosan. We plan to integrate Tokyo Dome's balance sheet into our consolidated balance sheet as of the end of the current fiscal year and the profit and loss statement from the next fiscal year. Please refer to the footnote to the table of tangible and intangible assets on Page 12. Reflecting the results of the recent TOB, the value of new investments under tangible and intangible assets as of the end of the current fiscal year is expected to change from our initial guidance of JPY 250 billion to JPY 550 billion. Finally, although not covered in these materials, I will talk about the impact of COVID-19 on our third quarter results. As noted previously, the main segments that have been impacted by COVID-19 on an ongoing basis are the retail facilities Leasing business, the Management segment with the Repark and Rehouse businesses as its mainstays and the Other segment with the Facility Operation business at its core. At the operating income level, the total negative impact of COVID-19 on the Leasing, Management and Other segments was approximately JPY 55 billion. In addition to this, as indicated earlier, there was a negative impact of approximately JPY 17 billion from COVID-19 at the nonoperating level, including extraordinary losses, which brings the total to a negative impact of JPY 72 billion. As of the end of second quarter, the total negative COVID-19 impact was roughly JPY 65 billion, implying a JPY 7 billion increase in third quarter. The main drivers of the increase were the Facility Operations and retail facilities Leasing businesses. We note that in partially revising up our full year forecast at the end of second quarter, our assumption was that we would not see a major negative impact on economic activity as a result of a resurgence in COVID-19 cases. Since then, we have seen an increase in new cases and the imposition of a second state of emergency in Japan at the beginning of 2021, which has just been extended. The situation remains challenging. However, while there are some businesses where COVID-19 may have a larger impact, there are other businesses that have not seen as much of an impact as we initially expected. Moreover, as a company, we remain focused on firm-wide initiatives to enhance profitability and control costs. At this stage, it is our view that conditions have not deteriorated to the point where there might be a further significant impact on our forecast. It is still unclear when COVID-19 might come under control or when the state of emergency might be lifted, making it an extremely difficult operating environment. If we look at the individual businesses and segments, it is possible that there will be some variance relative to Individual segment forecast, but we continue to be firmly focused on achieving our overall operating income and net income forecast. This completes my remarks. [Statements in English on this transcript were spoken by an interpreter present on the live call.]