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

Good afternoon, everyone. I am Uchida, Executive Manager of the Investor Relations department. I will explain our results in more detail later, but at a high level, we reported higher revenues, but a lower operating income on a year-on-year basis in the fiscal year ended March 2021. Operating revenue increased JPY 101.9 billion, while operating income declined JPY 76.8 billion, and profit attributable to the owners of the parent fell JPY 54.3 billion. Supported by the strength of the Property Sales segment, operating revenue exceeded JPY 2 trillion, hitting a new record high. Despite the uncertain operating environment owing to the pandemic, we were able to achieve our full year forecast for operating revenue, operating income and profit attributable to the owners of the parent. Based on this, and the fact that we were able to maintain financial soundness and see no issues in maintaining employment, we will pay a full year dividend per share of JPY 44, in line with our initial guidance. This is a reflection of the importance we place on rewarding shareholders in a stable and sustainable manner. In addition, we have decided to implement a new share buyback program of up to a maximum of JPY 15 billion. The resulting total shareholder return ratio will be 44.2% of profit attributable to the owners of the parent. I will go into more details later but for the fiscal year ending March 2022, we project operating revenue of JPY 2.15 trillion, operating income of JPY 230 billion, and profit attributable to owners of the parent of JPY 160 billion. Our dividend per share guidance for fiscal 2021 will be JPY 44, matching the fiscal 2020 level. I will now explain the results in more detail using the fact book. Please turn to Page 2 and the consolidated profit and loss statement. First, operating revenue was JPY 2.075 trillion, up JPY 101.9 billion year-on-year or 5.3%. Operating income was JPY 203.7 billion, down JPY 76.8 billion year-on-year or 27.4%. Ordinary income was JPY 168.8 billion, down JPY 89.6 billion year-on-year or 34.7%. Profit attributable to the owners of the parent was JPY 129.5 billion, down JPY 54.3 billion year-on-year or 29.6%. We show the progress rate for the results relative to our guidance in the upper right. Operating revenue overshot our most recent forecast by JPY 57.5 billion, boosted mainly by growth in the Property Sales segment. Operating income exceeded our most recent forecast by JPY 3.7 billion. This was the result of the improvement in operating income and operating profit margin for the domestic residential business and the growth in the management segment on the higher-than-expected increase in the number of brokerage transactions in spite of the impact of the resurgence of COVID-19 infections from the end of last year on our retail facilities and hotels. Reflecting the impact of proactive asset sales undertaken from the perspective of asset efficiency as a part of our balance sheet control initiatives, net income exceeded our most recent forecast by JPY 9.5 billion. We were able to surpass our most recent full year forecast for operating revenue, operating income and profit attributable to the owners of the parent. 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 11.8 billion. This is a reflection of the lower hotel occupancy rates at affiliated companies on the back of the pandemic and the high base for comparison in the Thai Residential Property Sales business related to the concentration of handovers of high-margin properties in the previous fiscal year. As a result, net nonoperating losses widened JPY 12.7 billion year-on-year. Next, extraordinary gains and losses. Please look at the table on the right-hand side of the page. Starting with extraordinary gains, we posted JPY 45.9 billion in gains on the sale of investment securities. This is in line with our policy to reduce our strategic equity holdings. We also posted a JPY 20.7 billion gain on the sale of fixed assets. This is a part of our initiatives for balance sheet control. We executed on our initial plan as of the beginning of the fiscal year to sell assets. We also posted JPY 10.7 billion in gains on the sale of shares held in associates, primarily in conjunction with the sale of an office property in the U.K. Next, extraordinary losses. First, we recorded cumulative losses of JPY 14.7 billion related to COVID-19. This is mainly the aggregation of fixed costs for facilities, which were temporarily closed as a result of the outbreak. While JPY 13.2 billion of this amount was incurred in first half, the figure for second half was only roughly JPY 1.5 billion. The second half impact was mainly related to the temporary closure of the hotel properties in Hawaii. Impairment losses for fiscal 2020 were JPY 39.6 billion, related primarily to the sale of the Shinjuku Mitsui Building as discussed at the end of first half. Please turn to Page 3 for a detailed discussion of the segment results. Starting with the leasing segment. Operating revenue fell JPY 12.9 billion year-on-year, while operating income declined JPY 25.1 billion. We had forecast a year-on-year operating income decline of JPY 17.8 billion, but fell short by JPY 7.3 billion. The main cause of the shortfall was the impact of the decline in GMV at our retail facilities related to the resurgence of COVID-19 infections from the end of the calendar year and restrictions ongoing out as a result of the second state of emergency. Please see the comments section for an explanation of current conditions at the leasing segment. First, in offices, rent revenue continued to increase year-on-year, supported by new properties such as Otemachi One Tower and others contributing on a full year basis and existing domestic offices. However, operating revenues and income from retail facilities fell significantly on the impact of temporary closures in Q1. That said, with the gradual resumption of operations from May onward and better-than-expected traffic, operating revenues mainly at existing facilities were in recovery mode from Q2 into Q3. The business also benefited from operating revenue and OP contributions from newly opened facilities such as Mitsui Outlet Park Yokohama Bayside and LaLaport AICHI TOGO. Subsequently, in Q4, however, a second state of emergency was announced, leading to a resumption of shortened operating hours and restrictions on activity. Ultimately, this resulted in lower year-on-year operating revenues and OP for the segment as a whole. Our nonconsolidated Tokyo metropolitan area office building vacancy rate was 3.1%, a 0.4 percentage point improvement from 3.5% as of the end of December. The major contributor to the improvement was take-up of vacated space in existing properties and was largely in line with our most recent forecast. Next, the Property Sales segment. Please turn to Page 4. The overall Property Sales segment reported operating revenues up JPY 190.6 billion, but a decline of JPY 5.5 billion in operating income. I will explain in more detail. The domestic residential subsegment posted a JPY 56.7 billion year-on-year increase in operating revenue and JPY 10.3 billion improvement in operating income. Relative to our forecast, operating income was JPY 40 billion, exceeding our forecast of JPY 33 billion by JPY 7 billion. The main contributing factors are as shown in the comments section. Handovers for high-margin central urban large-scale redevelopment projects such as the Tower Yokohama Kitanaka and the Court Jingu-Gaien, proceeded smoothly, boosting profits. The number of total units sold, a combination of condominiums and detached homes was 4,290, up 615 from the previous fiscal year. Continuing the high level trend from last year, the blended average unit price for condominiums and detached homes was over JPY 75 million. Completed inventory as of the end of the fiscal year stood at 167 for condominiums and detached homes, remaining stably at low levels and continuing the trend of the previous 2 fiscal year. While not indicated here, the OPM was 12.3%, surpassing the 11% margin achieved in the previous fiscal year. As you can see, this is a reflection of the high-margin properties booked during the fiscal year. Next, the Property Sales to investors and individuals overseas subsegment. While operating revenue hit a new record high, there was a high base for comparison at the OP level. In the absence of the previous fiscal year sales of high-margin properties, operating revenue rose JPY 133.9 billion, but operating income fell JPY 15.9 billion. In the real estate investment market, appetite for asset classes generating stable cash flows, such as offices, logistics facilities and rental residential properties remains firm. We have seen no deterioration in cap rates relative to pre-pandemic levels. We made solid progress on property sales to investors, including domestic REITs. As a result, subsegment operating income was largely in line with our forecast of JPY 81 billion, which was revised up at first half. Next, the management segment. Please turn to Page 5. This segment consists of the Property Management business, which focuses on managing properties under contract, Mitsui Fudosan's Realty's Car Park leasing business, Repark; the corporate and retail brokerage businesses; the asset management business for our sponsored REITs and others; and the consignment sales business, which concentrates on selling condominiums developed by other developers. On a year-on-year basis, operating revenue fell JPY 18.5 billion, and operating income declined JPY 15.7 billion. Initially, we had forecast an operating income decline of JPY 22.6 billion. But the full year operating loss was JPY 6.9 billion smaller than we had expected. The main factors behind this were the better-than-expected retail residential brokerage transaction numbers at Rehouse, supported by the strong residential market, which boosted the profit contribution of this business and a better-than-expected profit contribution from Repark as a result of expense reductions. Please see the comment section for further details. In the Property Management business, operating revenues and operating profits declined year-on-year as a result of lower occupancy rates for the Repark business, primarily as a result of the pandemic. We note that the Repark business is seeing an improvement in profit margins as a result of cost reductions, part of initiatives to enhance business efficiency. Next, the Brokerage and Asset Management business. This business also reported year-on-year declines in operating revenue and operating income as a result of the impact of the temporary closure of Rehouse agencies during the state of emergency in Q1. However, from Q2 onward, with the restart of economic activity, there was an increase in the volume of brokerage transactions. In Q3, the number of brokerage transactions recovered to exceed the previous fiscal year's levels. The second half trend was generally strong. Finally, the Other segment. Please look at Page 6. The mainstay business of this segment is the Facilities Operation business, which persists on Hotels & Resorts. In addition, there is the new construction under consignment business, which includes the Mitsui home built-to-order detached home business and the reform and renewal business for offices, retail facilities and residential properties. The overall segment reported declines of operating revenue of JPY 57.1 billion. Operating income also fell JPY 29.5 billion for a segment operating loss of JPY 27.2 billion. We fell short of our forecast, posting an operating loss of JPY 1.2 billion larger than projected. The lower operating revenues and profits were mainly from the Facilities Operation business, the result of the temporary closure of hotels and resorts in Q1 and the significant subsequent decline in demand for domestic and overseas hotel accommodation. In Q2 and Q3, earnings were showing signs of a gradual recovery, backed by improving occupancy rates as a result of the government's Go To Campaign. However, with the second nationwide state of emergency in Q4, and suspension of the Go To Campaign, occupancy rates dropped to 30% to 50% from the beginning of the calendar year and have since remained low. Next, please look at the right-hand side of Page 6. For reference purposes, we show here figures for the Overseas business. Total Overseas profits were JPY 27.9 billion as of the end of fiscal 2020, up JPY 0.3 billion million year-on-year. In the Leasing business, while there was a profit contribution from the Hudson Yards projects in the U.S., as noted at the end of Q3, unrelated to COVID-19, there were some tenants that chose to move out when their leases expired. This led to a temporary dip in rent revenues. Additionally, there was an increase in the asset tax burden, which is tied to progress on projects as well as the impact of COVID-19 on retail facilities in Asia, which led to temporary closures and lower GMV. As a result, Overseas leasing profits fell JPY 4.5 billion. With regard to tenant departures at some office properties, the vacated space is now fully spoken for. GMV at retail facilities that was depressed by COVID-19 is now recovering. Based on this, going forward, we expect to see a recovery in both operating revenues and profits. Reflecting the high base for comparison, Property Sales reported lower operating revenues and profits year-on-year. The Management and Other segments reported an operating income decline of JPY 3.3 billion, reflecting the impact of the temporary closure of the Halekulani Hotel in Hawaii as a result of the pandemic. We note that the Halepuna Hotel is scheduled to reopen in July 2021. The Halekulani Hotel reopening is scheduled for October 2021. As noted at the outset, the pro forma operating income contribution from Overseas equity method affiliates increased substantially on the back of the sale of shares held in an affiliate related to the sale of a U.K. office property, rising JPY 9.8 billion year-on-year. Please turn to the next page for a discussion of the balance sheet. Total assets were JPY 7.7419 trillion, up JPY 346.6 billion from March 2020. On the main drivers of the increase, please look at the table on the upper right, titled Real Property for Sale. Outstandings were JPY 1.9305 trillion, up JPY 22.6 billion from March 2020. New investments were JPY 516.7 billion, while cost recovery was JPY 544.1 billion and Other was JPY 50.1 billion. While we made progress on the sale of domestic SPCs and progress on cost recovery on multiple large-scale redevelopment projects at Mitsui Fudosan Residential, when we take into account Mitsui Fudosan's development investments and the shift of some properties from tangible assets to property for sale, the net result was an increase of JPY 22.6 billion. Next, turning to tangible and intangible assets. The outstanding balance was JPY 3.7968 trillion, up JPY 43.6 billion from March 2020. We touch upon the main factors for change in the comments section. There was an increase in tangible assets as a result of making Tokyo Dome a consolidated subsidiary. Progress on construction at New York's 50 Hudson Yards also led to investments. This was offset by the sale of the Shinjuku Mitsui Building and the transfer of some properties from tangible assets to property for sale. Factoring in depreciation and the negative impact of ForEx, resulted in a net increase of JPY 43.6 billion versus March 2020. The next page shows the liability side of the balance sheet. Outstanding interest-bearing debt was JPY 3.6234 trillion, up JPY 142.3 billion from March 2020. As a result, as of the end of the fiscal year, the D/E ratio was 1.42x, and the equity ratio was 33%. Note that as a result of the TOB, Tokyo Dome Corporation became a consolidated subsidiary as of January 25, 2021, and was delisted on April 23. We transferred a 20% stake in Tokyo Dome Corporation to Yomiuri Shimbun Group as of April 27, 2021. Please see Page 16. Tokyo Dome's balance sheet has been included in our accounts from the end of fiscal 2020. We plan to reflect its profit and loss statement in our accounts from Q1 fiscal 2021. In integrating Tokyo Dome's balance sheet, we have applied the necessary consolidated accounting treatment for a business combination in compliance with accounting standards. After reflecting market valuation of real estate and other assets, Tokyo Dome's assets of JPY 358.5 billion and liabilities of JPY 238 billion were integrated into our consolidated balance sheet. Given that this is the end of the fiscal year, we have also reviewed the market value of our rental properties. Please see Page 9. As of the end of March 2021, market value was JPY 5.8561 trillion. The unrealized gains, the difference between market and book value is JPY 2.8264 trillion, down JPY 91.9 billion from March 2020. The decline was mainly the result of balance sheet control initiatives where we transferred properties from tangible assets to property for sale and the impact of foreign exchange on overseas assets. There were no particular revisions to the cap rate used in the appraisal of market value. I will now discuss the earnings forecast for the fiscal year ending March 2022. Please turn to Page 13. The situation continues to be challenging with the ongoing spread of COVID-19 infections. Based on the state of emergency initiated on April 25, 2021, our group businesses have been impacted by the authorities' request for the temporary closure of some facilities, shortened operating hours and restrictions on crowding and going out, which has led to lower traffic levels and occupancy rates for facilities. Given this backdrop, while we expect progress on vaccinations will lead to an improvement in economic conditions, there is still uncertainty about the pace of recovery. Our forecasts assume that the impact of the pandemic will persist throughout the fiscal year. By segment, starting with Leasing. We expect operating revenues to increase JPY 56.9 billion and operating income to increase JPY 7.2 billion. While taking into account the impact of COVID-19, we expect an improvement in GMV for our retail facilities as well as full year contributions from new properties coming online. We forecast the nonconsolidated Tokyo Metropolitan Area office building vacancy rate to settle around the lower half of the 3% level as of the end of the fiscal year. Although, as is typical, there will be a certain level of new leases and terminations during the period. Next, for the Property Sales segment. Please turn to Page 14 for a detailed discussion. For the domestic residential business, our forecast for total combined condominiums and detached homes is 3,650 units for operating revenue of JPY 270 billion and operating income of JPY 22 billion and an OPM of 8.1%. Compared to fiscal 2020, this is an JPY 18 billion year-on-year decline in operating income. We are not expecting to see a deterioration in sales, but fiscal 2021 is a fallow period in terms of large-scale properties. The forecast reflects the resulting lower level of unit handovers in central urban, large-scale redevelopment projects versus typical year. Current selling conditions remain strong for Park Tower Kachidoki Mid and other central urban high-end properties. The current land bank stands at 26,000 units. As such, we expect to be able to generate stable profits over the medium-term going forward. For Property Sales to investors, given the firm real estate investment market, we aim to ensure we do not miss out on the timing of sales. We will continue to solidly realize unrealized gains through asset sales. We project operating revenue of JPY 400 billion and operating income of JPY 111 billion, up JPY 10.6 billion and JPY 32.7 billion, respectively. Next, we're turning to Page 13 and the Management segment. Backed by the profit contribution from increases in retail brokerage transactions, improved occupancy rates and the impact of cost reductions at the Car Park Leasing business, we forecast an increase in operating revenue of JPY 17 billion and a JPY 4 billion increase in operating profit. Finally, for the Other segment, we have newly factored in the impact of operating revenue and profit contributions from Tokyo Dome, taking into account the impact of restrictions on large-scale events and capacity as a result of the pandemic. We assume that the Hotels and Resort business will continue to generate loss on the ongoing impact of COVID-19, but we also expect to see some improvement in occupancy rates driven by a focus on capturing domestic demand. We project a JPY 113.1 billion increase in operating revenues and a JPY 5.2 billion increase in operating profit. In total, we are guiding for a JPY 142.4 billion increase in operating revenues to JPY 2.15 trillion. For operating income, we project JPY 230 billion, up JPY 26.2 billion. Factoring an expected recovery and contributions from equity and net income of affiliated companies, our forecast for ordinary income is JPY 205 billion, up JPY 36.1 billion year-on-year. After taking into account extraordinary profits of JPY 30 billion, our forecast for profit attributable to owners of the parent is JPY 160 billion, up JPY 30.4 billion year-on-year. Our fiscal 2021 guidance for dividends per share is unchanged from fiscal 2020 at JPY 44 on a full year basis, split evenly between the interim and fiscal year end dividend. Next, on investments. Please turn back to Page 14, looking at the right-hand side of the page. For investments in tangible and intangible assets in fiscal 2021, reflecting the impact of integrating Tokyo Dome's tangible assets in fiscal 2020, we expect investments of JPY 230 billion, down JPY 335.2 billion year-on-year from JPY 565.2 billion. On real property for sale, we project investments of JPY 600 billion, up slightly from the JPY 560.7 billion of fiscal 2020. This is mainly reflecting the increase in construction-related investments for logistics facilities and rental residential properties currently under development. Based on this, we project the outstandings for interest-bearing debt as of the end of March 2022 to be JPY 3.700 trillion. We note that due to the uncertainty surrounding the spread of COVID-19 going forward, actual results may differ from our forecast. In the event that revisions become necessary, we will do so in a timely manner. This completes my remarks. [Statements in English on this transcript were spoken by an interpreter present on the live call.]