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Edited Transcript of 8801.T earnings conference call or presentation 14-May-19 4:00am GMT

Full Year 2019 Mitsui Fudosan Co Ltd Earnings Presentation

Tokyo May 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Mitsui Fudosan Co Ltd earnings conference call or presentation Tuesday, May 14, 2019 at 4:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Masanobu Komoda

Mitsui Fudosan Co., Ltd. - President, CEO & Director

* Wataru Hamamoto

Mitsui Fudosan Co., Ltd. - Executive Managing Officer & GM of Corporate Planning Department

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Presentation

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Wataru Hamamoto, Mitsui Fudosan Co., Ltd. - Executive Managing Officer & GM of Corporate Planning Department [1]

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I am Wataru Hamamoto, Executive Managing Officer of the Accounting and Finance department. I will present the fiscal 2018 results using the investor presentation. In addition to the slide we show on the screen, we have provided you with the presentation and handout form. For your convenience, as you follow along, page numbers for the slide shown on the screen are in the upper right hand.

Please turn to slide 35. I will start with a summary of the consolidated results. We have already announced our earnings as reported in the press. The consolidated operating revenues were JPY 1.8611 trillion, up JPY 110 billion year-on-year. Operating income was JPY 262.1 billion, up JPY 16.2 billion year-on-year. Ordinary income was JPY 254.1 billion, up JPY 13.7 billion and profit attributable to the owners of the parent was JPY 168.6 billion, up JPY 12.7 billion year-on-year. Not only did we report positive year-on-year growth in operating revenues and profits, but we also set new record highs for revenues in all levels of profit.

I will discuss the segment results in more detail in a moment but will highlight the extraordinary gains and losses here. We generated JPY 1.4 billion in extraordinary profits through the sale of some of our strategic equity holdings. On extraordinary losses, the JPY 13.5 billion year loss includes JPY 11.4 billion in write-downs. We made some changes to our market appraisal method, which impacted the valuation of some domestic assets.

With regard to shareholder returns, reflecting the strong results at our stated total shareholder returns policy to pay up around 35% of profit attributable to owners of the parent, Mitsui Fudosan will raise its full year dividend per share JPY 4 to JPY 44 and also conduct a share buyback of up to a maximum of JPY 16 billion.

Turning to the individual segments. Please see Slide 36. This is a summary of the consolidated profits and loss statement by segment. I will start with the Leasing segment. Operating revenues were JPY 603.2 billion, up JPY 45.1 billion year-on-year, while operating profit was JPY 141.9 billion, up JPY 3.6 billion. Operating revenue was boosted by solid improvements in upper rent revisions for domestic offices, full year contributions from Tokyo Midtown Hibiya and other properties completed in the previous fiscal year and contributions from properties which started operations in fiscal 2018 such as: LaLaport NAGOYA minato AQULS, MITSUI OUTLET PARK TAICHUNG PORT as well as 55 Hudson Yards in the U.S. The nonconsolidated Tokyo metropolitan area office building vacancy rate for Mitsui Fudosan fell to 1.7% as of the end of March 2019.

For the Property Sales segment, revenues were JPY 530.7 billion, up JPY 31.1 billion year-on-year, and OP was JPY 98 billion, up JPY 15 billion. For the domestic residential subsegment, there were significant handovers of high-priced condominiums pushing up revenues. However, at the profit level, there was a high base for comparison as a result of the concentration of high-margin condominiums sold in the previous year. As a consequence, OP declined year-on-year. Revenues and profits for the Property Sales to Investors and Overseas Individual subsegment also grew year-on-year driven by sales to investors such as our J-REITs and the contribution from sales of properties in the U.K. As a result, the Property Sales segment as a whole reported year-on-year improvements to revenues and profits.

Next, the Management segment. Operating revenues were JPY 377.4 billion, up JPY 23.6 billion, and OP was JPY 53.4 billion, up JPY 4.7 billion. The year-on-year growth in both revenues and OP was supported by an increase in the number of properties under management in the Property Management business and an increase in the number of units for the Repark Car Park Leasing business. Also, the brokerage business benefited from higher levels of large-scale corporate brokerage transactions as well as higher transaction levels at the retail rehouse brokerage business.

For Mitsui Home, operating revenue was JPY 261.7 billion, up JPY 9.5 billion year, and OP was JPY 6.2 billion, up $0.7 billion. The Reform/Renewal business benefited from increased renovations orders for residential office and commercial properties, boosting segment revenues and profits.

Finally, for the Other segment, operating revenues were JPY 87.9 billion, up JPY 0.6 billion, while OP was JPY 4.6 billion, down JPY 2.1 billion. Trends in the existing hotel business remains solid. However, profits were depressed by initial opening expenses from 4 new hotel properties launched in fiscal 2018 such as: The Mitsui Garden Hotel, Nihonbashi Premier and the Mitsui Garden Hotel Kanazawa. As a result, despite higher revenues, operating income was down year-on-year.

Next, turning to the balance sheet. Please see Slide 37. Total assets were JPY 6.8027 trillion, up JPY 518 billion. With regard to the major line items, outstandings in real property for sale rose JPY 105.6 billion to JPY 1.6305 trillion. Tangible and intangible fixed assets were JPY 3.5004 trillion, up JPY 181.5 billion. The increase was the result of investments in domestic projects such as: Nihonbashi Muromachi Mitsui Tower; Nihonbashi Takashimaya Mitsui building; and in the U.S., the 55 and 50 Hudson Yards projects.

Investment securities increased JPY 84.7 billion to JPY 872.6 billion on the back of higher market prices for equities. On the liability side, the outstanding balance of interest-bearing debt was JPY 2.9066 trillion, up JPY 301.9 billion from the end of March 2018. As a result, our net D/E ratio was 1.24x, up 0.06 percentage points year-on-year. The equity ratio was 34.4%, down 0.7.% points from the previous fiscal year. We also disclosed the unrealized gains on our rental properties as of the end of fiscal year-end.

Please see Slide 38. The book value of our rental properties as of the end of fiscal year-end was JPY 3.024 trillion, while the appraised market value of our rental properties was JPY 5.7736 trillion. The resulting unrealized gains stood at JPY 2.7496 trillion, up JPY 274.2 billion year-on-year. The increase in market value is the result of the inclusion of a number of new projects such as 55 Hudson Yards and cap rate compression which impacted the discount rates used in the appraisal.

Next, I will discuss our forecast for the current fiscal year ending March 2020. Please refer to Slide 41. For fiscal 2019, we forecast operating revenue of JPY 2 trillion, up JPY 138.8 billion year-on-year. We guide for operating income of JPY 267 billion, up JPY 4.8 billion; ordinary income of JPY 246 billion, down JPY 8.1 billion; and profit attributable to the owners of the parent of JPY 170 billion, up JPY 1.3 billion.

I will briefly touch on the key factors for our segment operating income forecast. We forecast Leasing segment revenue of JPY 630 billion, up JPY 26.7 billion year-on-year and segment OP of JPY 144 billion, up JPY 2 billion. On the back of full year profit contributions from projects completed in the previous fiscal year such as Nihonbashi Takashimaya Mitsui building and musubu Tamachi Station Tower South, we expect both revenues and operating income to rise year-on-year. We forecast the nonconsolidated metropolitan area vacancy rate as of the end of March 2020 to be around the 2% level.

Next, for the Property Sales segment, we project revenues of JPY 600 billion, up JPY 69.2 billion and OP of JPY 111 billion, up JPY 12.9 billion. On the back of an expected increase in domestic residential units sold and year-on-year increases in revenues from property sales to investors, we expect the overall segment to report year-on-year growth in both revenue and operating income.

For the Management segment, we project operating revenue of JPY 410 billion, up JPY 5.6 billion and operating income of JPY 52 billion, down JPY 3.1 billion. We anticipate the Rehouse Retail Brokerage business will remain solid. But owing to expected declines in consignment sales at Mitsui Fudosan residential, we project segment profits to fall despite higher revenues.

Finally for the Other segment, we forecast JPY 360 billion in operating revenue, up JPY 37.2 billion and JPY 4 billion in OP, down JPY 5.1 billion year-on-year. The existing hotel and resort business continues to perform well, but we will incur initial opening expenses for properties coming online this fiscal year and as such, expect revenues to rise but OP to decline.

I will also touch briefly upon the balance sheet. For tangible and intangible assets, we project new investments of JPY 390 billion. Given that we forecast depreciation of JPY 85 billion, we expect outstandings in tangible and intangible assets to increase. Major investments this year include investments in 50 Hudson Yards. For real property for sale, we project new investments of JPY 610 billion and cost recovery of JPY 440 billion, with new investments outweighing cost recovery. The increase in investments for real property for sale is primarily related to investments in logistics facilities and overseas residential projects.

With regard to interest-bearing debt, continued progress on large scale projects will push up outstanding debt levels to approximately JPY 3.300 trillion. Finally, we are guiding for a full year dividend per share of JPY 44, unchanged year-on-year, to be split evenly between the interim and second half. This completes my presentation of the fiscal 2018 results and the fiscal 2019 forecast. Thank you.

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Masanobu Komoda, Mitsui Fudosan Co., Ltd. - President, CEO & Director [2]

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Good afternoon. I am President and CEO, Komoda. Thank you for finding the time in your busy schedules to participate in the Fiscal 2018 Mitsui Fudosan Analyst Briefing. Last year, we announced our long-term vision, VISION 2025, indicating what the Mitsui Fudosan group aims to look like in the mid-2020s and beyond.

Today, I will provide an update on the 3 strategies we highlighted in VISION 2025: drive evolution in the creation of neighborhoods, innovate business models by harnessing real estate tech, dramatically grow the overseas business. I will also discuss our portfolio strategy and our capital allocation policy.

First on driving evolution in the creation of neighborhoods. Near-term demand in the current office market is very strong, supported by solid corporate earnings and management appetite to address issues of attracting and retaining superior human capital and improving productivity. As a result, corporate management increasingly view offices as an investment rather than a cost, driving strong demand for central urban S-class properties. We expect this trend to continue. Against this strong market backdrop, we saw the completion of many mixed-use redevelopment projects such as Tokyo Midtown Hibiya, Nihonbashi Takashimaya Mitsui Building and Nihonbashi Muromachi Mitsui Tower from 2018 onward. Leasing progress was strong with these properties largely fully leased up at the time of completion.

In particular, in the Nihonbashi area, the transition towards mixed-use properties has led to a positive rerating of the neighborhoods' value by corporate tenants. Nihonbashi is now attracting tenants from new industries and foreign-based companies such as the Toyota Group's new autonomous driving software development company and the Boston Consulting Group, which have already committed to taking office space. The Tokyo American Club is slated to open a Nihonbashi satellite in the autumn of 2020. Going forward, we aim to accelerate our initiatives to create demand by attracting new growing tenants to further enhance our area branding.

We continue to make good progress on leasing for projects completing after fiscal 2019. Bunkyo Garden Gate Tower and Toyosu 2nd District 2-1 Project are already virtually fully leased up. We are seeing many inquiries for the OH-1 Project. In marketing the property, we are highlighting the rarity value of the location as well as the value of the property itself. With regard to our future development pipeline, we continue to make good progress in winning projects, particularly in the Yaesu and Nihonbashi area. Our total combined domestic and overseas office floor space by around 2025 is now expected to be 1.5x higher than our initial forecast set out when we launched the VISION 2025 plan.

Our mixed-use neighborhood creation is a major growth driver underpinning our profit growth going forward. We will continue to focus on maximizing the added value of our neighborhoods and on ensuring we secure lease terms that appropriately reflect this value.

I would like to highlight 2 new business initiatives within our neighborhood creation initiatives. The first is the SMART ENERGY business which will be launched in the Nihonbashi Muromachi area in fiscal 2019. In a first for Japan, we have built a large-scale gas co-generation system fueled by city gas with our own network of power lines and heating pipes to provide electric power and heat to not only our own properties in the area but to surrounding office and commercial properties as well. We are already committed to supplying energy to around 20 properties in our supply area. This SMART ENERGY business dramatically improves the disaster readiness of the neighborhood as it enables business continuity even in the event of a major natural disaster where access to the grid is lost. Even under normal conditions, the low CO2 emissions levels means it is also aligned with the SDGs.

Going forward, as a part of promoting Smart City initiatives, we will look to deploy this capability in other neighborhoods to further enhance added value.

The second is the Nihonbashi Life Science business. As you know, we established LINK-J in March 2016. We continue to focus on developing a forum and fostering a community for open innovation in the life science field. Last year, in response to the surging demand for office space in life science, we doubled the number of life science bases in Nihonbashi to 8. These properties are already fully occupied. Currently, more than 80 companies and organizations have come together in our life science cluster. We have also opened a centrally located shared wet laboratory, which represents a new asset class. We understand that there are many such life science clusters in central urban areas in the U.S. which create an ecosystem that allows many life science players to work together to create new businesses. However, there is no equivalent in Japan yet. We aim to further enhance our area branding by creating a life science ecosystem in Nihonbashi.

Next, I will discuss the growth going forward for our retail facilities. On the back of last year's natural disasters such as earthquakes and torrential rainstorms. Domestic retail players such as department stores reported slightly negative like-for-like sales trends. However, Mitsui Fudosan's existing retail facilities were able to achieve positive like-for-like growth in GMV. Moreover, LaLaport Nagoya Minato AQULS, which opened in September 2018, continues to report stronger than initially expected sales trends. We plan to open 3 to 5 facilities a year based on our combined domestic and overseas pipeline. This is also a 1.5 fold increase from our expectations at the time we announced the VISION 2025 plan.

Going forward, given changes in consumer behavior as a result of the emergence of e-commerce, we will focus on differentiating ourselves from our peers. With our retail facilities, we aim to create enjoyable real onsite experiences that consumers will value such as providing fine dining or pleasant and comfortable spaces to foster the development of communities or creating enjoyable personal engagement experiences. We will also develop tie-ins with our own e-commerce site and mall. Through these initiatives, we hope to compete and coexist effectively alongside e-commerce.

Next, enhancing the competitiveness of our residential business and our future pipeline. Reflecting the increase in double income households and rising demand to live closer to the workplace, residential buyers are showing a preference for prime locations such as central urban or station front locations even at higher prices. We believe that demand will remain firm but also recognize that consumers are increasingly selective. Projects in a sub-optimal location or area may require longer selling periods. We believe it is necessary to continue to closely monitor market trends.

Mitsui Fudosan continues to see strong sales trends for high value-added condominium projects that are large-scale redevelopments or centrally located or projects targeting the high-end of the market. In fiscal 2018, we achieved an OPM in excess of 9%. We project condominium unit sales of 3,400 in fiscal 2019. The contract rate is already 75% and inventory levels are very low. Land bank acquisition is increasingly challenging, given rising land prices on the back of the low interest rate environment. Competition continues to be fierce, but the Mitsui Fudosan's group approach is to be disciplined and selective in our investments by focusing on our strengths, namely large-scale redevelopment or high-end projects rather than simply pursuing scale. As a result, we think our annual domestic condominium unit volumes are likely to be between 3,500 to 4,000 units a year. But we aim to continue to generate high profits by focusing on raising unit prices and profitability.

Next, our Logistics Facilities business. We continue to make good progress in capturing business opportunities in our Logistics Facilities business, which we started in fiscal 2012. We currently have 19 operational facilities. If we include projects under development, we currently have 33 projects in total. Cumulative investments for land and physical structures to date have grown to around JPY 500 billion. We expect to launch many new facilities again this year. We are seeing strong inquiry levels even for projects still in development and are making solid progress in leasing. We feel demand remains solid. We expect to see continued firm demand for logistics facilities given the increasing need for more sophisticated supply chain management, the growing e-commerce market and a shift to omnichannel strategies.

In the metropolitan area, we are focused on locations with superior access to key transportation notes, concentrating on areas within the ring roads of the Tokyo Gaikan Expressway, the Ken-O Expressway and National Route 16. We are also targeting expansion in areas of high population density in the Tokyo area surrounding greater Nagoya and in Kyushu. We have also just decided to participate in 2 logistics facilities projects in Bangkok, Thailand, our first overseas projects for the Logistics Facilities business. Going forward, we will proactively seek overseas business opportunities focusing on areas where we see promise for the logistics business.

We continue to see solid growth in the scale of our 5 sponsored REITs, with aggregate assets of JPY 2.280 billion. Mitsui Fudosan Logistics Park Inc, which was established in fiscal 2016, has seen its asset scale more than double since inception. We aim to contribute further to the growth of the real estate investment market by continuing to promote a model that allows us to collaborate and grow alongside investors.

Next on our Hotel and Resorts business. In fiscal 2018, we opened 4 new Mitsui Garden Hotel properties in Otemachi, Gotanda, Nihonbashi and Kanazawa. For the 3 located in Central Tokyo in particular, performance has been strong with both occupancy rates and ADRs for all 3 exceeding our initial expectations. The Mitsui Garden Hotel and hotel the Celestine brands have been well supported by both inbound travelers as well as upper middle domestic travelers. Overall, occupancy rates have remained unchanged at the 90% level and ADRs continue to rise up 4% year-on-year.

Furthermore, we are very much looking forward to the opening of the Halekulani Okinawa on July 26. We aim to create an incomparable luxury resort, building on the tradition and spirit of Hawaii's Halekulani but also leveraging Okinawa's natural beauty and rich culture. We will continue to open new properties and are already on track for achieving our target of 10,000 rooms under management by fiscal 2020. Beyond this, while we remain disciplined and selective about locations, we will continue to pursue promising opportunities with a view to growing rooms under management to 15,000 by around 2025. We aim to grow this business into one of our core businesses.

Next, I will discuss our overseas business strategy. Fundamentally, as you know, the real estate industry is a local industry. It is necessary to have deep local ties for all parts of the process starting from gathering information about land available for sale, negotiating development approvals, formulating a sales strategy and going to market. Therefore, ensuring operations on the ground are localized and collaborating with good local partners is very important. I believe the strength that Mitsui Fudosan can leverage in its overseas operations is the comprehensive one stop capability it is cultivated in Japan in all asset classes such as offices, retail facilities or logistics facilities and all functionalities ranging from investment and development through to management and operations, and sales and leasing. Furthermore, the process does not end with the completion of a project. Mitsui Fudosan has expertise that allows it to improve cash flow by enhancing the value of the property even after completion. Mixed-use neighborhood developments fully capitalize on Mitsui Fudosan's comprehensive strength.

With regard to partnering, the long-standing capital and operational relationship between major U.K. developer Stanhope and Mitsui Fudosan U.K. is an excellent example of a good partnership. Together as developers capable of generating added value, we are jointly developing a number of projects such as the Television Centre project.

With regard to efforts to localize our overseas operations, an American with extensive experience and a deep network of professional connections has been CEO of Mitsui Fudosan America since fiscal 2015. This has allowed us to attract many talented local individuals contributing to our current ability to win business opportunities. As a result of all of these strengths, we were able to generate profits of JPY 55.4 billion from our overseas business in fiscal 2018. Overseas operating profit accounted for 19.8% of consolidated OP. The challenge for us going forward will be to ensure appropriate governance controls are in place as our overseas business expands. We have established a new organization within our international division, the global governance group, to address this issue. In addition to providing training for overseas staff, we believe it is important for us to swiftly strengthen our governance framework.

Next, our growth scenario for the overseas businesses. We break it down into 3 phases. During the first phase, the 3 years from fiscal 2017 to fiscal 2019. Profits jumped significantly in fiscal 2018 on the back of Property Sales to Investors in the U.K.; condominium sales from the Television Centre project; and our equity method profits from the sale of residential properties in Asia, primarily Thailand. As a result of the high base for comparison owing to strong property sales profits in fiscal 2018, fiscal 2019 profits are expected to fall slightly year-on-year. However, we expect solid profit gains in the Leasing segment on full year contributions from 55 Hudson Yards and MITSUI OUTLET PARK TAICHUNG PORT. We believe the average annual profit contribution from the overseas businesses for the 3-year period will be around JPY 35 billion.

In the subsequent 3 years to fiscal 2022, we expect to see steady growth in leasing profits from rental residential properties, primarily in the U.S. and a series of new retail facilities coming online in Asia. We have also already locked in a pipeline for condominiums in Asia, primarily for Thailand and Singapore. Combined with such profits from property sales, we are laying the foundations to generate between JPY 50 billion to JPY 60 billion a year in profits from the overseas business.

By around 2025, we should see a contribution from 50 Hudson Yards, which should further build the base for leasing profits for the overseas business. We continue to seek superior business opportunities and are monitoring real estate cycles in various asset classes and regions. While the progression of annual property sales profits can be lumpy, we believe we can aim to generate combined leasing and property sales profits of between JPY 80 billion to JPY 100 billion a year from our overseas business.

I would now like to discuss our portfolio strategy. To date, in the interest of building an optimized asset portfolio, we had regularly reviewed and adjusted our asset inventory to achieve stable profit growth in both income and capital gains. However, excluding the residential business, the outstanding balance of real property for sale has grown 1.8 fold from 5 years ago to JPY 990 billion. As such, we are currently carrying a significant volume of rental assets with unrealized development gains. The current real estate investment market remains firm. But Mitsui Fudosan plans to realize unrealized profits by continuing to sell pipeline projects and appropriately managing its balance sheet.

Finally, our capital allocation policy. We believe the appropriate allocation of capital is to allocate our yearly profits to enhancing shareholder returns and investing for future growth in a balanced manner to maintain financial soundness. We believe this allows us to sustainably grow corporate value and shareholder value over time. When we announced VISION 2025 last year, we set our total consolidated shareholder return target at around 35% of profit attributable to owners of the parent through a combination of a stable dividend and share buybacks from time to time.

Based on the favorable results for fiscal 2018, we have raised our fiscal 2018 full year dividend per share from JPY 40 to JPY 44 as well as announcing a share buyback program of up to a maximum of JPY 16 billion as a recurring form of shareholder returns, in line with our stated total shareholder return target of 35%.

Going forward, we will continue to focus on improving our core profit-generating capability by undertaking growth investments, while monitoring real estate market cycles and by reviewing our portfolio. We will also focus on improving capital efficiency through our engagement with the capital markets and believe it is important to continue to improve ROA and ROE.

I have discussed our portfolio strategy and capital policy. Our fiscal 2018 results represent a strong start for VISION 2025. We were able to achieve strong profit growth and make solid progress with our strategic initiatives. Fiscal 2019 will be an important year. We must maintain and expand on the current momentum as we strive toward our future targets. We are committed to achieving our fiscal 2019 targets of OP of JPY 267 billion and profit attributable to the owners of the parent of JPY 170 billion. We ask for your continued support.

This completes my remarks. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]