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Edited Transcript of 8801.T earnings conference call or presentation 7-Feb-20 9:00am GMT

Q3 2020 Mitsui Fudosan Co Ltd Earnings Net Conference

Tokyo Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Mitsui Fudosan Co Ltd earnings conference call or presentation Friday, February 7, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Atsuro Uchida

Mitsui Fudosan Co., Ltd. - Executive Manager of IR Department

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Presentation

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Atsuro Uchida, Mitsui Fudosan Co., Ltd. - Executive Manager of IR Department [1]

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Good afternoon, everyone. I am Uchida, Executive Manager of the Investor Relations Department. I will present Mitsui Fudosan's Third Quarter Fiscal 2019 Results. I will discuss the results in more detail later, but at a high level, we reported year-on-year increases in both operating revenues and profits in third quarter in the core profit-generating Leasing segment. This was the result of significant contributions from the large-scale office properties and retail facilities, which came online in the previous fiscal year.

The Management segment also reported year-on-year gains in both revenues and profits on growth in businesses such as car park leasing, retail brokerage and asset management.

For the Property Sales segment, 9-month revenues and profits for the domestic residential subsegment rose year-on-year, reflecting sales of large-scale central urban condominiums. Optically, 9-month revenues and profits for the property sales to investors and overseas individuals subsegment are down year-on-year. However, the contracts for virtually all of the properties we expect to sell this fiscal year are already in place, and we are making smooth progress toward the planned handovers. As such, we expect to achieve our full year forecast for year-on-year gains in both revenues and profits.

Additionally, on January 30, we announced an upward revision to our full year forecast. In the press release, we indicated that we would subscribe to Oriental Land's tender offer to buy back treasury shares, tendering 1.5 million common shares of Oriental Land. We project this will push up profits attributable to the owners of the parent by JPY 17 billion and have accordingly revised up our forecast from JPY 175 billion to JPY 192 billion.

As a consequence, we ultimately expect to hit new record highs this fiscal year for operating revenues, operating income, ordinary income and profits attributable to the owners of the parent.

I will now explain our results in more detail using the fact book. Please turn to the next page for the consolidated profit and loss statement. First, operating revenues for third quarter for the fiscal year ending March 2020, were JPY 1.2954 trillion, up JPY 51.4 billion or 4.1% year-on-year. Operating income was JPY 170.3 billion, up JPY 13.9 billion or 8.9% year-on-year. Ordinary income was JPY 156.6 billion, up JPY 4 billion or 2.7% year-on-year. Profits attributable to the owners of the parent were JPY 102.2 billion, up JPY 53 million or 0.1% year-on-year. These Q3 results represent new record highs for operating revenue, operating income and ordinary income.

We note that relative to the magnitude of year-on-year growth for operating revenue down through to ordinary income, the magnitude of profit growth for net income is lower. However, this reflects a high base for year-on-year comparison. In the previous fiscal year, we recognized significant profits in the U.K., where corporate tax rates are lower. As a result, there was an increase in corporate taxes this fiscal year, which limited year-on-year growth in net income. In the table on the upper right-hand side of the page, we show the actual results relative to our full year forecast in percentage terms. Relative to our upwardly revised forecast, operating revenue stood at 64.4%, operating income at 60.8%, profits attributable to the owners of the parent at 53.3%. Optically, our progress may appear slightly slow relative to where we stood last fiscal year at this time. However, this is a consequence of the skewing of profit recognition for property sales to investors and overseas individuals to fourth quarter and the recent upward revision to our net income forecast.

While we do not show the achievement rates of operating income by segment here, we are making solid progress relative to our current full year forecast with leasing at 82%, property sales to domestic individuals at 78%, property sales to investors and overseas individuals at 22%, and management at 80%.

Returning to the left-hand side of the page and setting aside segment details for later, I will highlight the key items below the line. First, looking at the breakdown of nonoperating income, there is a high base for comparison in equity in net income or loss of affiliated companies, primarily due to a significant number of handovers in the Thai residential business in the previous year, hence, the JPY 4.6 billion year-on-year decline. The net interest burden rose JPY 1.9 billion, mainly as a result of increases in overseas investments. Other nonoperating income declined JPY 3.2 billion, reflecting a high base for comparison, owing to a combination of a number of one-off factors last fiscal year. As a result of these elements, nonoperating income was negative JPY 13.7 billion, with the loss widening by JPY 9.8 billion year-on-year.

Next, for extraordinary gains or losses, we reported extraordinary profits of JPY 3.6 billion in third quarter from the sale of investment securities. However, we also posted JPY 5.4 billion in extraordinary losses in the form of losses on the sale of the Izu vacation home management business as announced on November 7 and losses on the disposal of fixed assets, the aggregation of multiple refurbishment projects at various existing facilities.

For a detailed discussion of the segment results, please turn to Page 3. Starting with the Leasing segment, operating revenue increased by JPY 29 billion and operating income by JPY 8.9 billion. Trends in third quarter were largely unchanged from the first and second quarters. As noted in the comments section, the main driver was the full year contributions from large-scale office properties and retail facilities, both in Japan and overseas, which were completed and came online in the previous fiscal year. This includes the Nihonbashi Takashimaya Mitsui Building, musubu Tamachi, 55 Hudson Yards, LaLaport NAGOYA minato AQULS, and the Mitsui Outlet Park Taichung Port in Taiwan. LaLaport Numazu, which opened in third quarter, also started to contribute to revenues during the quarter. Although not noted in the comments section, we were able to grow operating revenues and profits from existing properties, both offices and retail facilities as well. The nonconsolidated Tokyo metropolitan area office building vacancy rate declined to 1.5%, following a further 0.3 percentage points from the end of September. At this level, there are effectively no vacancies. The decline in the vacancy rate reflects the solid progress in leasing for new properties, properties which are contributing on a full year basis for the first time and existing properties as tenants move in.

On a full year basis, we had previously indicated, we expect it to be around the 2% level, but it now appears likely we will finish the full year below 2%. The vacancy rate remained stable at low levels. We continue to see strong demand from tenant companies. Leasing for new offices is progressing smoothly.

Next, the Property Sales segment. Please turn to Page 4. Operating revenues for the Property Sales segment fell JPY 0.9 billion year-on-year, while operating income increased JPY 6.1 billion. I will explain the subsegment details. First, the Domestic Residential business reported increases in operating revenue and operating income of JPY 14.5 billion and JPY 6.5 billion, respectively.

The main driver, as stated in the comments section, was the steady and continued progress in handovers of large-scale central urban redevelopment projects such as Park Tower Harumi in second quarter, Park Court Hamarikyu The Tower in first quarter and the number of other centrally located, high-end properties. The total combined number of condominium and detached home units sold was 2,608, up 391 units year-on-year. With regard to average unit prices, similar to last fiscal year, prices remain at high levels. The blended average for condominiums and detached homes was JPY 74 million. Although not noted here, the OPM as of third quarter was 11.6%, significantly higher than the 8.9% level for third quarter fiscal 2018.

With regard to trends in completed inventory, inventory units as of the end of September crept up temporarily to 210 units, reflecting the impact of multiple new large-scale completions in second quarter. However, the combined condominium and detached home inventory as of the end of December was 196, showing steady declines from the end of September. As well, inventory units remain at low levels relative to the overall total. Relative to the full year condominium unit sales target of 3,400, the contract rate as of the end of December was already 99.9%, effectively 100%, and in line with the 99% level of last year at this time. As such, all that remains for this fiscal year is the completion of handovers.

Next, in the property sales to investors and overseas individuals, reflecting the high base of last fiscal year in which we sold U.K. properties such as 70 Mark Lane, an office property, and the television center condominiums, third quarter operating revenues were down JPY 15.5 billion and operating income fell JPY 0.4 billion year-on-year. That said, as noted at the outset, we have largely completed the sales contracts for the properties necessary to achieve our full year targets. We continue to make good progress towards the operating income target of JPY 95 billion, which we revised up at the end of second quarter. We expect to achieve our full year forecast with both operating revenues and operating income to rise year-on-year. We continue to be committed to solidly securing profits by remaining focused on taking advantage of the positive environment for selling properties and balance sheet control, reflecting an enhanced awareness of asset efficiency.

Next, the Management segment. Please turn to Page 5. This segment reported an JPY 18.2 billion improvement in operating revenues and a JPY 4.2 billion improvement in operating income. The drivers of growth by subsegment are as indicated in the comments section. There was an increase in the number of units under management at the Repark Car Park Leasing business at Mitsui Fudosan Realty. Also, the sale of some properties managed by Mitsui Fudosan Investment Advisors drove a substantial increase in asset management fees. In addition, although not noted in the comments section, the Rehouse brokerage business reported an increase in retail brokerage transactions. Total brokerage transactions, including both the Rehouse business and corporate brokerage transactions are running at record high levels, both in terms of the number of transactions and transaction value, which increased by 3.4% year-on-year. Furthermore, relative to its peers, Mitsui Fudosan boasts an abundant pipeline of development projects for offices, retail facilities, condominiums and other asset classes. On the back of the ongoing stream of completions, the number of properties under management has continued to grow. As such, the Property Management business continues to report solid growth in operating revenues and profits.

Finally, the Other segment. Please turn to Page 6. The key business for this segment is the facilities management business, which is primarily posted on the hotel and resorts business. In addition, it also includes the new construction under consignment business, a build-to-order detached home business and the reform and renewal business for offices, retail facilities and residential properties, which were previously included in Mitsui Home, which was a stand-alone segment until last fiscal year. Third quarter operating revenues for the Other segment rose JPY 5.1 billion year-on-year, but operating income fell JPY 3 billion. The operating revenue increase reflects the full year contributions from the 4 Garden Hotel properties of Gotanda, Otemachi, Nihonbashi and Kanazawa, which were launched in the previous fiscal year. However, at the operating income level, this was offset by initial opening costs for new properties launched this fiscal year, such as the Halekulani Okinawa and 4 Garden Hotel properties, Hakata Gion, Kyoto Station, Ginza Gochome and Jingu Gaien. Next, please refer to the right-hand side of Page 6. We show here figures for the overseas business for your reference. Under the long-term vision, Vision 2025, we set out a strategy to grow the overseas business. To show the progress we are making, we have compiled the revenues and profits for the overseas components of the various segments, such as Leasing and Property Sales as well as the equity method companies in this table for your convenience. The total combined overseas profits for third quarter was JPY 22.6 billion, accounting for 12.9% of consolidated operating profit. By segment, overseas profits for Property Sales were down year-on-year on a high base for comparison, given the substantial profits generated on property sales in the U.K. last fiscal year. However, the core profit-generating leasing business reported a year-on-year increase of JPY 8.3 billion for operating revenues and JPY 3.4 billion in operating profits. This reflects the stable and solid growth we have been able to achieve. The key drivers were profit increases related to 55 Hudson Yards, which was completed last fiscal year, and progress in securing tenants for multiple large-scale rental residential developments in the U.S. We also benefited from improved office occupancy in London for properties such as the Television Center and One Angel Court as well as profit contributions from properties such as the Mitsui Outlet Park Taichung Port in Taiwan.

Next, please turn to the following page for a discussion of the balance sheet. Total assets as of the end of third quarter were JPY 7.2999 trillion, up JPY 497.2 billion from the end of March 2019. For the main drivers of this increase, first, please refer to the table in the upper right-hand of the page entitled Real Property for Sale. The outstanding balance was JPY 1.8305 trillion, up JPY 199.9 billion from the end of March 2019. New investments were JPY 419.6 billion while cost recovery was JPY 197 billion. Taking into account other factors such as ForEx impact, as is typical every year, investments outweighed cost recovery significantly. By company, the increase of JPY 199.9 billion is the net result of investments and cost recovery, reflecting investments in residential projects by Mitsui Fudosan Residential and investments at Mitsui Fudosan and Mitsui Fudosan America.

Next, turning to tangible and intangible assets. The outstanding balance was JPY 3.6678 trillion, up JPY 167.3 billion from the end of March 2019. As shown in the comments section, major investments include LaLaport Numazu, which opened in October, the Halekulani Okinawa, which opened in July, and overseas, 50 Hudson Yards. New investments were JPY 256.2 billion, which were offset by depreciation and ForEx impact for a net increase of JPY 167.3 billion from March 2019.

The next page shows the liability side of the balance sheet. Outstanding interest-bearing debt as of the end of third quarter was JPY 3.449 trillion, up JPY 542.4 billion from the end of March 2019. Our initial forecast was for outstanding interest-bearing debt to be JPY 3.3 trillion. As of the end of third quarter, the balance exceeds our full year target. However, we expect a significant concentration of cost recovery from property sales to domestic investors in fourth quarter. As such, we expect the outstanding balance of interest-bearing debt to decline from the third quarter level. The breakdown by company as well as cash inflows and outflows are as shown in the comments section on the right-hand side of the page. As a result, the D/E ratio as of the end of third quarter was 1.42x, and the equity ratio was 33.3%.

Finally, I would like to touch upon the revision to our full year forecast. Please turn to Page 11. On January 30, we issued 2 press releases. The first referred to our tendering of holdings in Oriental Land to the tender offer for treasury shares by Oriental Land. The second referred to the upward revision of our full year forecast given expected gains on the sale of investment securities related to the participation in the tender offer. These releases were the result of our stated intention to sell back a part of our holdings in Oriental Land shares to Oriental Land. Should Oriental Land acquire all of the 1.5 million shares we intend to tender into Oriental Land's tender offer, we expect to post JPY 20.7 billion in extraordinary profits to our consolidated accounts as a result of the profits on the sale of investment securities in the fiscal year ending March 2020. Taking this into account, we have chosen to revise up our full year forecast for the second time this fiscal year. We revised up our forecast for profit attributable to the owners of the parent by JPY 17 billion over the previously upwardly revised forecast to JPY 192 billion. As a result, we expect to hit new record highs for the sixth consecutive year for operating revenue, operating income, ordinary income and profits attributable to the owners of the parent.

This completes my remarks.

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