Nomura Real Estate Holdings, Inc. (3231) Earnings Call Transcript & Summary

This is Kutsukake speaking. Thank you very much for attending the briefing session on the financial results from fiscal year ended March 2022 and the new mid- to long-term business plan. Today, we will discuss the results from fiscal year ended March 2022 and then present the new mid- to long-term business plan. In the interest of time, I would like to start without further ado. First, please turn to Page 5 of the presentation deck consolidated financial results from the fiscal year ended March 31, 2022. On a consolidated basis for the fiscal year end of March 2022, the group delivered operating revenue of JPY 645 billion; operating profit of JPY 91.2 billion; business profit of JPY 92.7 billion; ordinary profit of JPY 82.6 billion; and net profit of JPY 55.3 billion. Business profit exceeded the revised forecast announced in January 2022 as well as JPY 85 billion target in the mid- to long-term plan and increased by 21.3% from the previous year. The net profit growth was 31.1%. All levels of profits, including business profit achieved record high results. Next, please turn to Page 6. This page shows the change in business profit from the same period previous year by business unit. Please refer to the graph on the right. Residential Development business unit achieved increase of the number of housing units sold and improvement in gross profit ratio. Commercial Real Estate business unit increased gross profit from property sales, and property brokerage and CRE business unit delivered an increase of transactional value, mainly in retail business, resulting in higher profit for all business units. Please turn to Page 9. This is the earnings forecast for the term ending March 2023. I will come back to this in more detail later. But in this fiscal year, which is the first year of the new mid- to long-term business plan, we expect JPY 680 billion of operating revenue; operating profit of JPY 90.5 billion; business profit of JPY 97 billion; ordinary profit of JPY 85 billion; net profit of JPY 57 billion. The business profit is expected to grow by JPY 4.2 billion from the previous year. That is because overseas business unit from which we anticipate further growth is now established as an independent business unit starting this fiscal year. And we'll see an increase in number of housing units sold and because gross profit from property sales of commercial real estate business unit is expected to grow. Please turn to Page 10. Regarding shareholder return, dividend per share in the last fiscal year was raised from JPY 82.5 in the preceding year by JPY 15, given our strong performance, which resulted in achieving 10 consecutive years of increase in dividend, combined with the share buyback of JPY 7 billion, total return ratio was 44.3%. Dividend per share in this fiscal year is expected to increase for the 11th consecutive year to JPY 110. Please turn to Page 11. As shown here, in the last fiscal year, all 4 indicators of financial targets set in the previous mid- to long-term business plan were achieved. We aim to achieve further growth under the new mid- to long-term business plan while maintaining highly efficient management and high return policy. That concludes my presentation on the financial results. We will entertain questions on financial results during the Q&A session at the end of all of the presentations. Thank you.

Next, our new mid- to long-term business plan will be presented. Please refer to the presentation material available from our website. This part of the presentation will be made by Mr. Kutsukake, Mr. Matsuo, and Mr. Kurokawa. Mr. Kutsukake, please start.

Yes. Thank you. Now please turn to Page 2 of the material on new mid- to long-term business plan. First, I would like to describe Nomura Real Estate Group 2030 vision, which was announced at the same time as the new mid- to long-term business plan. While we develop the mid- to long-term plan, we also established Nomura Real Estate Group 2030 vision, which is "Be a life and time developer as never seen before" with 2030 as the target year. This phrase represents our determination to create new value based on the 2 pillars of life and time, which means to enrich people's respective lives in which every moment of their time by transforming ourselves into a life and time developer. Please turn to Page 5. In the previous mid- to long-term business plan in Phase I, in the last fiscal year ending March 2022, the record high profit exceeding the target of JPY 85 billion in business profit was achieved. In addition, ROA of 4.7%, ROE of 9.2% and total return ratio of 44.3% were achieved, reaching the target range for respective indicator. On the other hand, the environment surrounding our business is increasingly complex and uncertain with the need to respond to post COVID and with COVID situations accelerating evolution of digital technologies and rising geopolitical risks. Even against this backdrop to enable our group to realize sustainable yet high level of profit growth, new mid- to long-term business plan was developed under this vision. Please turn to Page 6. To achieve sustained high level of profit growth, clear vision and strategy to achieve that mission are required. Under the vision that I described at the beginning of this presentation, under the new plan, realizing high profit growth and high asset and capital efficiency are established as the priority things and further expansion of domestic real estate development business, high profit growth in service and management sector and steady growth of overseas business are positioned as business strategies for growth to promote our business. Under this new mid- to long-term plan, growth and sustainability will be integral in our efforts as we pursue our business. Please turn to Page 8. Next, I will touch on the financial targets under the new plan. Continuing from the previous plan to realize high profit growth and high asset and capital efficiency to achieve both high shareholder return and high growth remains our important policy, we intend to achieve ROE of 5% and ROE of 10% at an early timing. In addition, under the new plan, annual average profit growth rate of 8% level, a high level is set as our objective. During Phase 1, we aim to realize JPY 115 billion of business profit. Regarding shareholder return, in view of achieving both growth and return, during Phase 1, total return ratio of 40% to 50% and during Phase 2, dividend ratio of around 40% are adopted as our policy. Details will be given by Mr. Kurokawa, CFO later. Next, please turn to Page 9. This page shows our group's sustainability policy or Vision 2050, Earth Pride. In order to realize this materiality or challenges up to 2030 are shown. As you can see here, we are already implementing various measures through our business. Going forward, according to the materiality, KPIs will be established to further accelerate our efforts. That is all from me. I will now turn the microphone over to Mr. Matsuo, COO, to discuss the major strategies to achieve this plan. Mr. Matsuo, please start.

I am Matsuo, COO. Thank you very much for coming. I'd like to explain some specific strategies to realize the plan. First, please see Page 16. The plan targets business profit to grow at an average annual growth rate of 8% from JPY 92.7 billion in the fiscal year ending March 31, 2022, to JPY 115 billion in Phase 1, JPY 140 billion or more in Phase 2 and JPY 180 billion or more in Phase 3. I will explain specific strategies for each business unit to achieve this target. Please turn to Page 24. First is the Residential Development business unit. Due to factors such as the decline in birth rate and aging population, the domestic housing sales market is not expected to expand, but the number of single-person and things households is increasing. And in addition, lifestyle changes accelerated by COVID-19 are diversifying housing needs. In response to these needs, we will provide a broad product lineup and housing-related services and further broaden the scope of our business, by strengthening our involvement in urban redevelopment and reconstruction projects. And further deepen proud, our top condominium brand in Japan and stably supply 4,000 to 5,000 units per year. In addition to the housing business, we are also improving our domestic development business in general to capture increasingly diversified development opportunities, such as competitions for mixed-use projects centered on fixed lease properties. Next, please turn to Page 25. The commercial state business unit. This business unit offers a wide range of products and services, including office, retail, hotel and logistics facilities. And our strategy is rooted on identifying market changes, responding to the needs of each individual customer and providing new value. Through the expansion of development profits and realization of unrealized profits by investing in various brand assets generated from here, we will achieve a gross profit of property for sales of over JPY 30 billion in Phase 1 and JPY 40 billion level in Phase 2. At present, the main earnings drivers are buildings and logistics. First, logistics is supported by strong demand and acquisitions are progressing well. We will also strengthen our medium- and long-term initiatives such as enhancing our product capability through our unique initiatives and participating in land readjustment projects. In addition, proposing a flexible office portfolios that accommodate diversified workstyles remains an important strategy. In addition to H1T, a satellite-type shared office with more than 200 locations and H1O, a small serviced office. And as you well know, PMO, a medium-scale, high-grade office. Shibaura project is under construction as a representative large-scale office building. Please see Page 26. Shibaura project is a 235-meter high twin tower in the rapidly transforming Hamamatsucho area. In terms of height, it is almost the same height as Roppongi Hills. This is the largest development in the group's history and represents a combination of our value creation. The S tower will be completed in the fiscal year ending March 31, 2025. The site area is equivalent to one Tokyo Dome, gross floor area is 50,000 square meters, the scale is equivalent to 5 Nomura Shinjuku buildings. In addition to office retail and housing, the upper floors of S tower will be occupied by a 5-star luxury hotel. While utilizing the rare waterfront location, we will challenge the creation of new values that will create the future for people and society by proposing new work styles and reducing CO2 emissions to zero in the entire district. Please turn to Page 27. Investment Management business unit will expand AUM of listed REITs and private REITs, which is our core business through stable acquisition of sponsor developed properties by utilizing the leasing value chain, in addition to meet the diverse needs of institutional investors, we will work to establish private funds with a wider range of assets. In addition, we will expand our investor base and product development through collaboration within the motor securities group and develop new business areas such as M&A of overseas asset management companies. Next, please turn to Page 28. The property brokerage and CRE business unit. In April 2021, Nomura Real Estate Solutions was established to consolidate the operations of this business unit. In addition to each retail and wholesale businesses, the major feature is that there is a specialized organization for the middle business, which is brokerage business targeting small and medium-sized companies and business owners in the transaction price range of around JPY 300 million to JPY 700 million. In addition to our strength in being able to respond to a wide range of customers by offering solution-based proposals, we will also leverage our network of financial institutions and licensers, including the Nomura Securities Group to expand transaction volume. In addition, we will further refine our digitally enhanced services such as Nomu.com, which is one of our strengths and propose value services to our customers, thereby expanding transaction opportunities. Please turn to Page 29. In the Property and Facility Management business unit, this business unit expects a stable increase in the stock of assets under management by undertaking the management of assets developed by the group. As the importance of quality management continues to increase, as seen in the April 2022 revision act and advancement of proper condominium management, we aim to increase orders by offering highly competitive construction proposals such as re:Premium, a product that allows for longer repair cycles for large-scale repair work. In addition, as a working population declines due to the falling birth rate and aging population, we will work to improve productivity and service quality through DX in order to provide management services and construction proposals with a high level of customer satisfaction. Please turn to Page 30. This is the overseas business unit, which was newly established in the fiscal year ended March 31, 2023. The group has been engaged in overseas business for some time from around 7 years ago. And we expect full-scale contribution to profits from the fiscal year ending March 31, 2023. In Thailand, we have already participated in 16 properties with local partners. In Vietnam, we have participated in several large-scale township developments with a total of several thousand to more than 10,000 units. Further in the Philippines, we have established a local joint venture with a local developer. Thus steady growth is underway. By leveraging the know-how cultivated in Japan and responding to the needs of customers in each country, we aim to expand the volume of our housing sales, business and commercial property sales business, aiming for 15% or more of business profit to be generated for overseas business in Phase 3. These are the specific strategies to realize the plan. Now after this, Mr. Kurokawa, CFO, will explain the financial strategy.

I am Kurokawa, the CFO, I will explain our approach to profit growth, financial strategy and shareholder return policy under this plan. First, let me discuss about the profit growth targeted in this plan. Please turn to Page 12. There are two diagrams. The image cycle on the left illustrates the relationship between ROE and profit growth in Phase 1. ROE is 9%; shareholder returns are 40% to 50%; and shareholders' equity ratio is 30%; then profit growth is limited to 4% to 5%. As you can see, this is a general equation. And to the plan, we aim to break out this cycle and achieve a profit growth rate of 8%, while maintaining a constant level of leverage and shareholder returns at an ROE of 9%. How can this be accomplished? Following page shows this. Please turn to Page 13. This represents our business portfolio -- the business portfolio of our group. The upper row shows our business structure, middle and lower rows shows our business characteristics and financial strategies. First, about the business structure, starting with one of our first, ever top development capability and going to the left and right property sales business and the leasing business each will be growing. The flow of high-quality assets developed here will continue to drive the growth of our service management business, which is a major strength of our group's business portfolio structure. It is important to firmly rotate this cycle. In terms of finance, in the property sales business, we will continue to expand investments and aim for a high ROA while improving profitability by reviewing investment targets for individual businesses and expanding business volume through overseas development. The leasing business with low ROA will be controlled in tandem with the service management business with high ROA. By appropriately combining these two businesses, which can expect relatively stable profits, but have different business characteristics, we will achieve ROA of 5% and at the same time, build a strong business foundation. By adopting these strategies, we hope to achieve both business expansion and high ROA and achieved a profit growth of 8%. Our major policy in the plan is to return profits to shareholders by achieving high profit growth and returning the results to the shareholders. Please turn to Page 18. In Phase 1, we plan to continue to provide a total return ratio of 40% to 50% by combining stable dividends with flexible share buybacks as is currently done. In Phase 2 and beyond, we plan to gradually increase the dividend payout ratio from the Phase 1 stage from the current level of 30% to 40% with the aim of shifting the focus of returns into dividends. Of course, we will continue to consider share repurchases after Phase 2, depending on the situation. Based on these high asset and capital efficiency, we will achieve both profit growth and solid shareholder returns. We appreciate your kind understanding and support. This concludes my explanation of a new mid- to long-term business plan. Thank you very much for your kind attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]