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

Let's get started. Thank you for taking time out of your busy schedules despite the bad weather to participate in Mitsui Fudosan's analyst briefing. I will present a brief overview of our results for the first half of the fiscal year ending March 2022. I will start with the consolidated profit and loss statement. Despite the ongoing impact from the pandemic, operating revenues and profits rose year-on-year. Operating revenues improved by JPY 199.4 billion year-on-year, operating income by JPY 36.7 billion and ordinary profit by JPY 41.5 billion on recoveries in the retail facilities, Repark and Rehouse businesses as well as growth in the property sales to investors subsegment. Net profit attributable to the owners of the parent rose JPY 77.2 billion year-on-year as a result of the drop in extraordinary losses compared to first half fiscal 2020 and extraordinary profits on the sale of strategic equity holdings. Our interim dividend per share has been set at JPY 22, in line with our guidance. Next, I will touch upon the progress made versus our full year forecast. Given the ongoing impact from COVID-19, the recovery pace in first half fiscal 2021 varied from segment to segment. That said, we continue to make solid progress relative to the full year forecast for operating revenue, operating income and net profit attributable to owners of the parent. Overall, we are tracking in line with our forecast. With regard to the impact of COVID-19 on our earnings, as shown at the bottom of the page, compared to our initial full year assumption of an impact of approximately JPY 65 billion. The first half impact was roughly JPY 43.5 billion, generally in line with plan. Next, I will discuss the individual segments. The Leasing segment reported a year-on-year improvement in operating income of JPY 2 billion, mainly owing to the year-on-year recovery in GMV at our retail facilities in spite of the ongoing pandemic. If we compare operating profits in first half fiscal 2021 to first half fiscal 2020 before the COVID-19 extraordinary losses on fixed costs related to the temporary shutdown of retail facilities, segment profits rose JPY 9 billion year-on-year. This should give you a sense of the recovery trend in the retail facilities business. Next, the Property Sales segment. Operating profits increased JPY 26.4 billion year-on-year. Within this, the domestic residential property sales business reported a JPY 7.7 billion year-on-year decline in operating income, reflecting a year-on-year drop in units sold of 325. The fall in operating profit is mainly the result of a high base for comparison on a year-on-year basis, given the high concentration of handovers for large-scale central urban properties last first half, such as the Tower Yokohama Kitanaka and Park City Musashi-Koyama The Tower. However, operating profits for the property sales to investors and overseas individuals subsegment rose JPY 34.2 billion year-on-year, supported by progress in sales of properties such as Iidabashi Grand Bloom and others. Next, the Management segment. Profits rose JPY 13.8 billion year-on-year. By business, Property Management reported a JPY 7.4 billion year-on-year increase in profits. This was primarily the result of improvements at the Repark business, such as the year-on-year recovery in occupancy rates and the impact of ongoing cost reduction measures such as the renegotiation of rents for carparks and closures of unprofitable locations. Profits in the brokerage and asset management business rose JPY 6.3 billion year-on-year. The Rehouse business reported more than 20,000 transactions, recovering to close to pre-COVID-19 levels of 2 years ago. There was also an increase in large-scale handovers in the corporate brokerage business. Next is the Other segment. Operating profits fell JPY 2.7 billion year-on-year. Similar to the Leasing segment, as discussed earlier, if we compare operating profits for first half fiscal 2021 to first half fiscal 2020 after adding back the COVID-19 extraordinary losses, then profits were effectively unchanged year-on-year. This is the result of a year-on-year decline in operating profits, owing to the inclusion of operating losses from Tokyo Dome Corporation from this fiscal year, offset by the year-on-year recovery in the hotel and resorts business, primarily driven by a rebound in occupancy rates. Next, I will comment briefly on the outlook going forward, including prospects for the second half. First, the full year forecast we announced at the beginning of the current fiscal year on May 14 had factored in the impact of the state of emergency initiated on April 25. We had expected to see a recovery in the macro backdrop as a result of progress on vaccinations, but felt that the pace of recovery was uncertain and therefore assumed that COVID-19 would have an impact throughout the current fiscal year. However, in first half, various states of emergency and priority measures to prevent the spread of COVID-19 were expanded to cover a broader area and were extended several times. This had an impact mainly on our retail facilities and hotels businesses. As a result, the first half earnings trend was slightly weaker than we had expected. When we look at second half, however, with more than 70% of the population fully vaccinated now and active cases well below the peak levels seen immediately following the end of the Olympic Games, at this time, we believe the situation is stabilizing. We expect our businesses to see some recovery as a result. Based on this, while we expect that there will still be some lingering impact from the pandemic, we believe that our full year results should be largely in line with our initial expectations. That said, we will remain vigilant in monitoring the COVID-19 situation, given the potential for an increase in active cases to impact our earnings. Based on this view, I will now move on to talk about the near-term conditions and outlook for each of our businesses. I will start with the office leasing business. The nonconsolidated Tokyo Metropolitan area vacancy rate for Mitsui Fudosan as of the end of first half fiscal 2021 was 3.9%, down 0.8 percentage points from the 4.7% as of the end of first quarter. We expect the vacancy rate as of the end of the fiscal year will be similar to the level as of the end of first half. Near term, we are hearing a wide variety of views from tenants as well as workers, reflecting the broad take-up of remote work as a result of the pandemic. While working from home has the benefit of making it possible to both work and look after children or elderly parents at the same time, many have also expressed concerns about declining employee engagement, slower progress on employee development, diminishing knowledge worker productivity and fewer contact points with customers. To address such concerns, our tenants are increasingly seeking communication spaces for employees and customers as a necessary functionality for fixed office space. The wider adoption of working from home has also led to an increase in needs for satellite office space closer to workers' homes. We have seen a substantial year-on-year increase in user numbers and corporate contracts for our work styling business. Demand for spaces enabled for online meetings as well as privacy booth is very strong for both fixed office and satellite office locations. Usage hours for private cubicles at work styling have risen threefold compared to 1 year ago. As reflected in these comments, the widespread adoption of remote work cannot be simply equated with tenants giving up space in conventional offices. Instead, we are seeing a diversification in how people work, which takes productivity and lifestyles into consideration, leading to a combination of head office fixed office space, satellite offices and working from home. As we have said previously, we will continue to focus on not just the hard elements of office space, such as location and specifications, but soft elements such as services to provide optimal combinations that reflect how our customers will work in the post-COVID-19 world. We will, however, remain vigilant in monitoring for changes in office market trends triggered by the pandemic. Next, the retail facilities. In first half fiscal 2021, GMV generally hovered at around 80% of fiscal 2019 levels. If we look at figures for October and the immediate aftermath of the lifting of the state of emergency, our LaLaport and Mitsui Outlet Park facilities benefited from people venturing further field once restrictions were lifted. GMV reverted to fiscal 2019 levels, reflecting pent-up consumer demand and an increase in movement of people. We expect to see a recovery at retail facilities in central urban locations going forward on the back of lifting of restricted operating hours for restaurants from October 25. The first half trend for retail facilities overall relative to the full year forecast was slightly weak, but we expect to see an improvement in GMV in the second half. We expect full year earnings to be in line with plan. Next, the domestic residential Property Sales business. Reflecting the strong sales trends, the contract rate for condominiums as of the end of first half fiscal 2021 relative to the full year forecast of 3,100 units rose to 90%. In terms of customer demographics, our impression is that there has been a strong increase in buyers in their 20s and 30s. There is also an increase in double income household. There are a relatively high number of cases where couples are both taking out loans to buy high-priced properties. Buyers continue to be strongly focused on highly convenient central urban properties. In addition, there has been an increase in prospective buyers who are motivated by dissatisfaction with their existing homes, which is the result of spending much more time at home. This is driving demand for homes with more rooms or more space. This has led to strong demand for both central urban and suburban locations as well as demand for both condominiums and detached homes. Our completed inventory continues to trend at low levels. In particular, completed inventory of detached homes is at a record low. In central urban, large-scale redevelopment projects, an area of strength for Mitsui Fudosan, progress on sales of properties currently for sale is very good. For Park Tower Kachidoki Mid and South, contracts have been completed on virtually all of the properties that have been sold. Park Court Jingu Kitasando, where almost all the units are priced over JPY 100 million, is reporting very strong sales and solid progress on contracts. Next, on Property Sales to investors. Supported by a firm real estate investment market, we were able to sell a number of large-scale properties such as Iidabashi Grand Bloom in the first half of fiscal 2021. The outstanding balance of real property for sale, excluding residential properties, was JPY 1.3 trillion as of the end of the second quarter, including assets that had been transferred from tangible assets to real property for sale in the previous fiscal year. We aim to continue to realize unrealized gains, reflecting our focus on balance sheet control. On a full year basis, we are targeting revenues of JPY 400 billion and operating income of JPY 111 billion for the property sales to investors subsegment. Versus our revenue target, we have signed agreements for roughly 60%. We continue to move forward with negotiations on other properties. We expect to make solid progress in generating profits through asset sales ahead of the fiscal year-end. Next is the Management segment. In this segment, we made good progress toward our full year forecast mainly on recoveries in the Rehouse and Repark businesses. At Rehouse, brokerage transactions as of the end of second quarter had recovered to exceed the 20,000 level. Taking into account the impact of the front-loading of demand before the consumption tax hike in first half fiscal 2019, Rehouse has largely returned to pre-COVID-19 levels. We expect firm trends in second half, similar to first half. At Repark, profitability improved in first half, mainly on higher occupancy rates in central urban locations. We continue to implement measures to reduce costs through strategic expense initiatives such as renegotiating rents paid to landowners for car parks and the closure of unprofitable locations. Occupancy has returned to fiscal 2019 levels since the lifting of the state of emergency. For second half, we expect a recovery in revenues on a stabilization of new COVID-19 cases and greater movement of people. Relative to the overall full year forecast for the Management segment, we expect performance to remain slightly ahead of plan on the firm progress in the Rehouse and Repark businesses similar to first half. Next, on the hotels and resorts business. Occupancy rates in first half, mainly for business hotel properties were generally around 50%. As a result of extensions and the expansion of regions subject to states of emergency, the COVID-19 impact was larger than we had initially expected, leading to a slower-than-expected recovery. However, we are seeing a pickup in new reservations from October following the lifting of the state of emergency. In second half, there should be some recovery driven by pent-up demand for leisure travel. On a full year basis, while we are expecting to see some recovery in second half, the negative impact in first half was relatively large. We expect to trend slightly weaker than planned. We note that inbound travelers to Japan, which is a key driver of demand for accommodation, is still likely to need more time to recover. For the time being, our main target will be domestic demand. We will focus on capturing pent-up business and leisure travel demand. In closing, we are starting to see a number of signs of economic recovery near-term following the lifting of the state of emergency. Our first focus is to achieve our full year targets of operating income of JPY 230 billion and net income of JPY 160 billion. We will continue to aim for well balanced growth in both investments and shareholder returns. We humbly ask for the continued support of investors. This completes my presentation.