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Edited Transcript of 8801.T earnings conference call or presentation 11-Nov-19 7:00am GMT

Q2 2020 Mitsui Fudosan Co Ltd Earnings Presentation

Tokyo Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Mitsui Fudosan Co Ltd earnings conference call or presentation Monday, November 11, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Wataru Hamamoto

Mitsui Fudosan Co., Ltd. - Executive Managing Officer, MD & Director

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Presentation

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Wataru Hamamoto, Mitsui Fudosan Co., Ltd. - Executive Managing Officer, MD & Director [1]

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I am Wataru Hamamoto, Executive Managing Officer of the Accounting and Finance Department. Thank you for taking the time out of your busy schedules to attend the second quarter fiscal 2019 investor and analyst briefing for Mitsui Fudosan. I will present the first half fiscal 2019 results and discuss current market conditions for our businesses.

I will start with our results for the first half of the fiscal year ending March 2020. Consolidated operating revenues were JPY 888.7 billion, up JPY 28 billion year-on-year. Operating income was JPY 118.6 billion, up JPY 6.4 billion year-on-year. Ordinary income was JPY 107.8 billion, up JPY 1.2 billion year-on-year.

Profit attributable to the owners of the parent was JPY 66.3 billion, down JPY 2.2 billion year-on-year. Although operating revenues and all levels of profit down to and including ordinary profit rose year-on-year, net profits fell year-on-year. The decline at the net profit level reflects a high base for comparison. In first half fiscal 2018, we reported a significant profit contribution from the U.K., where corporate tax rates are low. As a consequence, first half fiscal 2019 corporate taxes increased year-on-year. I will discuss our full year forecast later in the presentation, but as previously announced, we expect our full year net profits to rise year-on-year.

Next, I will briefly touch upon the performance of the individual segments and the key underlying factors. Starting first with the Leasing segment. Operating revenue was boosted by full year contributions from properties completed in the previous fiscal year, such as the Nihonbashi Takashimaya Mitsui Building, musubu Tamachi Tamachi Station Tower South and 55 Hudson Yards. Segment operating revenues rose JPY 20.2 billion year-on-year while operating profit increased JPY 6.5 billion.

Next, the Property Sales segment. In the domestic residential subsegment, solid progress was made on handovers at Park Tower Harumi and other condominium properties. The year-on-year increase in contracted units and higher margins pushed up subsegment revenues and profits. However, revenues and profits for the property sales to investors and overseas individuals subsegment fell year-on-year in the absence of last fiscal year's contribution from the sale of condominium units at the Television Centre project and the 70 Mark Lane office building. As a result, the Property Sales segment as a whole reported a revenue decline of JPY 10.3 billion year-on-year and an OP decline of JPY 3.2 billion.

Next, the Management segment. Reflecting an increase in the number of units under management for the Repark car park leasing business as well as a higher number of retail transactions at the Rehouse brokerage business operating revenues were up JPY 11.4 billion and OP was up JPY 5.2 billion.

For the Other segment, in the facility operations business, while there were full year contributions from new hotel properties completed last fiscal year, such as the Mitsui Garden Hotel Nihonbashi Premier and others, profits were depressed by initial opening expenses from new hotel properties opened this year, such as the Halekulani Okinawa, Mitsui Garden Hotel Ginza-gochome and others. As a result, operating revenues were up JPY 6.6 billion while OP was down JPY 1.6 billion.

Next, when we released our first half earnings, we also revised up our full year forecast for the fiscal year ending March 2020. I will touch upon the key points. Reflecting the strong selling conditions in the Property Sales to Investors business, we revised up our initial forecast for operating revenue and operating income by JPY 13 billion, respectively. On the back of the higher operating income forecast, we now project ordinary income of JPY 259 billion, up JPY 13 billion.

Based on current conditions, we now forecast extraordinary losses of JPY 5 billion. Factoring this in, we now project profit attributable to owners of the parent of JPY 175 billion, up JPY 5 billion from our previous forecast. As a result, we now expect to hit new record highs in operating revenues, operating income, ordinary income and profit attributable to the owners of the parent.

This completes the discussion of the first half fiscal 2019 results. I would now like to talk about the operating environment for our mainstay businesses.

Starting first with the office business. Corporate demand to move to new offices or expand floor space remains strong, supported by the desire to improve productivity and attract superior human resources. As of the end of September, the vacancy rate for the 5 central wards of Tokyo has fallen to 1.64%. More recently, vacancy rates appear to have fallen further. Asking rents continue to rise. On the back of new supply coming online, there have been concerns that secondary vacancies resulting from a shift into new properties could start to rise. However, Mitsui Fudosan's secondary vacancy level is low. The company aims to also raise rent levels in filling vacancies in existing properties. As a result, the Tokyo metropolitan area vacancy rate for Mitsui Fudosan was 1.8%. We expect our vacancy rate to remain stable at around the 2% level as of the end of the current fiscal year.

With regard to existing properties, for tenants paying submarket rent levels, Mitsui Fudosan has been asking for upward rent revisions when the leases come up for renewal. Progress on this front is running ahead of our initial plan, both in terms of the number of upwardly revised leases as well as the magnitude of the increases.

On leasing progress for new properties, there have recently been a number of completions of large-scale redevelopment projects starting with Tokyo Midtown Hibiya in 2018. Reflecting the highly positive assessment of our mixed-use developments and our ability to create neighborhoods, leasing progress has been strong with all of the properties fully leased. We are currently focusing on leasing activities for Otemachi One Tower slated for completion in 2020. Inquiry levels have been very high. Recently, major international tech player, Dell, announced it has committed to the property. We have already signed leases with a number of tenants. As we have seen with other new properties in the Hibiya and Nihonbashi areas, we now expect to be fully leased at the time of completion.

Next, turning to the retail facilities business. Since April 2019, the domestic retail market had been consistently reporting year-on-year declines in monthly GMV, primarily in the department store and GMS channels, although GMV for September on a stand-alone basis was up year-on-year, supported by a demand pull forward ahead of the consumption tax hike. However, Mitsui Fudosan's retail facilities reported positive year-on-year GMV growth at both regional shopping centers and outlet malls despite the negative impact of cooler summer temperatures and a series of typhoons. This reflects the success of initiatives to boost customer traffic around the extended Golden Week holidays and various events at our facilities.

The defining feature of our retail facilities business is our focus on constantly refreshing our facilities to stay ahead of evolving trends and consumer tastes while also taking into account local needs and characteristics. As an example, over the 38-year life of LaLaport Tokyo-Bay located in Funabashi, we have done 16 renewals to the facility. We aim to keep the customer experience fresh and were amongst the first to shift to a focus on simply selling things to providing consumers with enjoyable experiences. This focus on continually upgrading the competitiveness of our facilities is supporting our continued GMV growth. We have continued to leverage our track record and accumulated expertise to regularly renew our existing facilities and develop new properties.

Most recently, at the end of September, we opened a new urban style facility in Nihonbashi Muromachi, COREDO Muromachi Terrace. The store lineup boasts dining options representing top-class restaurants from not only Japan but around the world, carefully selected brands and opportunities for memorable experiences. GMV for the month of October has been very strong, running ahead of plan. The lineup includes the first Japanese outpost for Eslite Spectrum, reputed to be the best bookstore in Asia. Eslite Spectrum offers a broad array of experiences and content, providing consumers with a wide variety of events in areas such as music, art or cooking demonstrations. The facility is just across the street so I would urge you to stop by today and experience it for yourselves.

In October, we also opened LaLaport Numazu. These properties will contribute to this fiscal year's earnings.

I would now like to talk about the domestic condominium business. The Tokyo metropolitan market for properties close to stations and large-scale properties remains strong. It is true that some properties are taking longer to sell for reasons of location or price. Total market inventory volume is declining but against the backdrop of a falling level of new supply. We believe that going forward there is more of a need to closely monitor trends.

Mitsui Fudosan concentrates on high value-added, centrally located, high-end, large-scale redevelopment properties. Our properties continue to sell well. Near-term sales remain strong. For example, in the first 3 months of sales, we were able to secure contracts for 80% of the units offered at Park Court Bunkyo Koishikawa The Tower. Mitsui Fudosan plans to sell 3,400 units in the current fiscal year, reflecting strong selling conditions. The contract rate as of September already stands at 94%. Inventory for completed units remains low. For the units available for sale in the next fiscal year and beyond, contracts are already in place for around 2,500 units.

While we will continue to monitor market trends closely, we remain focused on locking in profits. However, with regard to land bank acquisitions, land prices and fierce competition makes the environment increasingly challenging. That said, rather than simply pursuing volume, we will continue to selectively invest in promising plots of land, focusing on our strength in centrally located, high-end, large-scale redevelopment projects in building our land bank.

Turning now to the property for sale to investors business. In the domestic market, investor appetite remains strong. Prime area office yields continue to decline. Against this backdrop, Mitsui Fudosan is making good progress with our sales activity. As noted earlier, this is the basis for the upward revision to full year forecast. By creating added value through development, we have been able to build up a portfolio of superior properties for sale across multiple asset classes. Excluding the domestic residential assets for sale, the balance of real property for sale has risen to over JPY 1 trillion. Leveraging our expertise in valuing real estate, we are focused on generating profits by identifying the optimum timing to sell our superior properties and appropriately managing our balance sheet.

Next, I will discuss our overseas business. In the mature property markets of the U.S. and Europe, which are characterized by high levels of transparency and liquidity, we are focused primarily on the development of office and rental residential properties.

In the U.S., the 55 Hudson Yards project was completed in October 2018 and is virtually fully occupied. We continue to make progress on the neighboring 50 Hudson Yards project slated for completion in 2022. We already have a contract with BlackRock, the anchor tenant for this property. Inquiry levels remain very high.

In the U.K. market where concerns about Brexit have led to higher levels of uncertainty, we have finished the leasing process for the completed properties of One Angel Court and 2 Television Centre at rent levels higher than our initial assumptions. Both properties are virtually fully occupied. More than 90% of the handovers for the Television Centre condominiums have been completed as well. We will continue to monitor the impact of Brexit.

In Asia, we are focused on capturing the growth of emerging countries on the back of economic development and rising populations. We are primarily concentrating on growing our business in retail facilities and residential properties for sale. During the current fiscal year, we will see a full year contribution from Mitsui Outlet Park Taichung Port in Taiwan. GMV growth is running ahead of our initial assumptions. We hold high expectation for contributions to our fiscal 2019 earnings.

In closing, we expect to achieve our eighth consecutive year of new record highs for operating revenue and our sixth consecutive year of new record highs for operating income, ordinary income and profit attributable to the owners of the parent, respectively.

As we focus on achieving our forecast, we remain committed to managing our business by concentrating on profitability and efficiency. We are committed to enhancing corporate value as we strive to achieve our long-term vision, VISION 2025 objectives. This completes my remarks.

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