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Edited Transcript of 8801.T earnings conference call or presentation 12-May-20 10:59am GMT

Full Year 2020 Mitsui Fudosan Co Ltd Earnings Net Conference

Tokyo May 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Mitsui Fudosan Co Ltd earnings conference call or presentation Tuesday, May 12, 2020 at 10:59:00am 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 our fiscal 2019 results. I will discuss the results in more detail later, but Mitsui Fudosan reported year-on-year growth in operating revenues and profits for the fiscal year ended March 2020. Operating revenues increased JPY 44.4 billion. Operating income grew JPY 18.4 billion and profit attributable to the owners of the parent rose JPY 15.3 billion. The results for operating revenues, operating income, ordinary income and profit attributable to the owners of the parent, all represent new record highs. We note that Mitsui Fudosan has been actively cooperating with the authorities in their efforts to prevent a widespread outbreak of COVID-19 since January.

We have closed our retail facilities and hotels and are implementing support measures for our retail tenants. Despite the challenging operating environment, we achieved year-on-year growth in operating revenues and profits. Additionally, we continue to have access to financing, reflecting our sound financial base and face no issues in maintaining employment.

As such, with regard to shareholder returns, we will maintain our annual dividend per share of JPY 44 as initially guided. And on top of the JPY 15 billion share buyback program implemented in March and April, we will initiate a new share buyback program of up to a maximum of JPY 10 billion, which will raise our total shareholder return ratio to 36.9%.

I will discuss our forecast for the fiscal year ending March 2021 in detail later. However, given the current constraints on economic activity, owing to measures to limit the spread of COVID-19, it is extremely difficult to forecast with a high degree of certainty at this time. We have chosen to provide forecast based on certain assumptions. We note that our guidance for the fiscal 2020 full year dividend is JPY 44, unchanged year-on-year.

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 were JPY 1,905.6 billion, up JPY 44.4 billion or 2.4% year-on-year. Operating income was JPY 280.6 billion, up JPY 18.4 billion or 7% year-on-year. Ordinary income was JPY 258.5 billion, up JPY 4.4 billion or 1.7% year-on-year. And profit attributable to the owners of the parent was JPY 183.9 billion, up JPY 15.3 billion or 9.1% year-on-year.

In the table in the upper right, we show actual results relative to our forecast in percentage terms. Operating revenue fell short of our most recent forecast by JPY 107.3 billion, as a result of pushouts to handovers and margin improvements in the Property Sales segment into the next fiscal year. In addition, revenues for the Other segment declined owing to the impact of COVID-19. However, operating income exceeded the forecast by JPY 0.6 billion on the back of higher profits from the Leasing and Management segments. Sales of investment securities fell short of our initial plan, and we also posted extraordinary losses related to COVID-19. As a result, net income fell short of our most recent forecast by JPY 8 billion. That said, we were still able to extend the record for consecutive record highs with operating revenue hitting new highs for the eighth consecutive year, and operating income, ordinary income and profit attributable to owners of the parent, each setting new records for the sixth consecutive year.

I will cover the segments in more detail later, but returning to the table on the left, I will briefly touch upon the COVID-19 impact upon our results.

Although not noted here, COVID-19 primarily had an impact on our retail facilities and hotel businesses as a result of closures or shortened operating hours. Roughly speaking, overall operating revenue was depressed by around JPY 7 billion and operating income around JPY 5 billion. However, the underlying strength of our businesses in Mitsui Fudosan's 3 core segments of Leasing, Property Sales and Management more than offset the impact of COVID-19, allowing each segment to post year-on-year gains in operating profit and supporting a year-on-year increase in overall operating profit.

Next, I will touch upon the key items below the line. Nonoperating income was negative JPY 22.1 billion, widening by JPY 14 billion year-on-year. The primary reasons for the larger losses are the high base for comparison in equity and net income or loss of affiliated companies, owing to significant handover levels for residential properties in Thailand and other Asian countries in the previous fiscal year and the absence of last fiscal year's one-off gains under Other nonoperating income. The net interest burden rose JPY 1 billion year-on-year. This reflects the increase in overseas investments leading to higher interest expenses.

Next, extraordinary gains and losses. Please look at the table on the right-hand side of the page. We posted JPY 16.7 billion in extraordinary gains on the sale of investment securities. This is mainly the result of sales of strategic equity holdings, which we review every year. This fiscal year, we sold equity holdings in 13 names. Next, extraordinary losses. We incurred JPY 4.2 billion in losses on the disposal of noncurrent assets, JPY 2.9 billion in losses on the sale of businesses, JPY 2.8 billion in losses on the valuation of investment securities and JPY 1.5 billion in impairment losses.

The losses on the disposal of noncurrent assets are primarily the result of refurbishments at existing businesses and tear down costs related to the move to new headquarter offices. The losses on the sale of businesses are from the transfer of the Yaesu and Otagawa Vacation Home management business as disclosed last autumn.

The impairment losses are mainly the result of a revaluation of some of our domestic assets to market, but are unrelated to the impact of the COVID-19 outbreak. We show the aggregate extraordinary losses related to the novel coronavirus outbreak of JPY 2.4 billion under losses related to COVID-19. These losses reflect measures to support tenants in our retail facilities, which have been significantly impacted by the COVID-19 outbreak.

Next, please turn to Page 3 for a detailed discussion of the segment results. Starting with the Leasing segment. Operating revenue rose JPY 32.7 billion year-on-year, and operating income grew by JPY 3.9 billion. We had initially expected operating income to increase JPY 2 billion year-on-year, but ultimately, the results were around JPY 2 billion higher than our forecast. The major reason for the overshoot was the stronger-than-expected performance of the office leasing business. On a year-on-year basis, as noted in the comments section, there were full year contributions from a number of large-scale office buildings and retail facilities, such as Nihonbashi Takashimaya Mitsui Building, Musubu Tamachi Station Tower South, 55 Hudson Yards and Mitsui Outlet Park Taichung port. In addition, there were contributions from LaLaport Numazu and COREDO Muromachi Terrace, which opened during fiscal 2019 as well as upward rent revisions for existing office renewals. These factors ultimately contributed to higher operating revenues and profits. The nonconsolidated Tokyo metropolitan area office building vacancy rate for Mitsui Fudosan remained at the extremely low level of 1.9%. Our initial assumption was a vacancy rate of around 2%. The rate remained stable at low levels throughout the fiscal year.

Next, the Property Sales segment. Please turn to Page 4. Operating revenues for the Property Sales segment fell JPY 6.6 billion year-on-year, but operating income rose JPY 25.7 billion. I will explain the subsegment details. First, the domestic residential business reported a JPY 16.7 billion year-on-year decline in operating revenues, but operating income increased by JPY 3 billion. Compared to our forecast of JPY 29 billion in operating income, we achieved JPY 29.6 billion, exceeding our guidance by roughly JPY 0.6 billion. As noted in the comments section, operating revenues fell year-on-year on a decline in the number of units sold, but profits improved on the recognition of multiple high-end central urban large-scale redevelopment projects. For instance, we made solid progress in handovers of units for Park Tower Harumi in second quarter and started handovers for The Tower Yokohama Kitanaka in March.

The total combined number of condominium and detached home units sold was 3,675, down 83 year-on-year. Similar to last fiscal year, average unit prices remained at high levels, with the blended average for condominiums and detached homes above JPY 73 million. Although not noted here, the OPM for the domestic residential business as of the end of the fiscal year was 11%, significantly higher than the 9.3% reported in the previous fiscal year. Completed inventory stood at 186 units for condominiums and detached homes, continuing the trend of extremely low inventory levels from the previous fiscal year.

Next, in the Property Sales to investors and overseas individuals subsegment. Operating revenue was up JPY 10.1 billion year-on-year, and operating profits increased a hefty JPY 22.6 billion. We made solid progress in sales of properties to domestic REITs and others. As a result, we were able to achieve a level largely in line with the upwardly revised target of JPY 95 billion announced at the time of second quarter results.

Next, the Management segment. Please turn to Page 5. Overall, operating revenues rose JPY 17.1 billion, and operating income grew JPY 0.4 billion. Relative to our forecast, we were able to exceed our operating income target by JPY 3.6 billion. The breakdown of profit growth by subsegment is as indicated in the comments section. The improvement was the result of full year contributions from large-scale properties in the operations and management business within property management and the increase in the number of managed units for the Repark Car Park Leasing business at Mitsui Fudosan Realty. These factors contributed to higher year-on-year subsegment revenues and profits.

In the Brokerage and Asset Management subsegment, while we reported a significant increase in Asset Management fees related to the sales of some properties managed by Mitsui Fudosan Investment Advisors, there was a high base for comparison in corporate brokerage transactions and a decline in consignment sales projects. As a result, while subsegment revenues increased, profits declined year-on-year. However, total Brokerage transactions, the combination of corporate and retail transactions were at record high levels, both in terms of the number of transactions and transaction value, which increased 4.5% year-on-year.

Finally, the Other segment. Please turn to Page 6. The key business for this segment is facilities management, which is primarily focused on the hotels and resorts business. In addition, it also includes the new construction under consignment business, a built-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.

Other segment operating revenues were up JPY 1.2 billion year-on-year, but operating profit declined JPY 6.8 billion. Relative to our forecast, operating income fell short by JPY 1.7 billion. The majority of the JPY 6.8 billion year-on-year operating income decline relates to the facilities management business. While there were full year contributions from the 4 Mitsui Garden Hotel properties, Gotanda, Otemachi, Nihonbashi and Kanazawa, which came online in the previous fiscal year, we also incurred initial expenses in fiscal 2019 related to the opening of the Halekulani Okinawa and 6 Mitsui Garden Hotel properties: Hakata Gion, Kyoto Station, Ginza-gochome, Jingugaien, Sapporo and Roppongi. In addition, the business was impacted by the COVID-19 outbreak, including lower occupancy rates.

Next, please refer to the right-hand side of Page 6. We show here figures for the overseas business for your reference. As noted to date, we have compiled revenues and profits for the overseas components of various segments, such as Leasing and Property Sales into a single table for your convenience. The total combined JPY 27.5 billion in overseas operating profits shown here represents 9.6% of the consolidated operating profits, largely in line with our initial forecast. By segment, the Property Sales segment reported year-on-year profit declines in the absence of last fiscal year sales of office, property and residential units in the U.K.

The Management and Other segment reported profit declines as well as the Halepuna Waikiki in Hawaii, the former Waikiki Parc Hotel was closed for renovations. In contrast, the Leasing segment, which is the core profit driver, reported a JPY 9.2 billion increase in operating revenues and a JPY 2.6 billion increase in operating profit.

As you can see, the Leasing business continues to generate stable and solid growth. The key contributions came from 55 Hudson yards in New York, which was completed in the previous fiscal year as well as progress in securing tenants for multiple large-scale rental residential properties developed in the U.S. We also saw improved occupancy rates in our London office properties, Television Center and 1 Angel Court as well as the contribution from Mitsui Outlet Park Taichung port.

Please turn to the next page for a discussion of the balance sheet. Total assets were JPY 7,395.3 billion, up JPY 592.6 billion from the end of March 2019. Looking at the main drivers of the increase, please refer to the table in the upper right-hand of the page entitled real property for sale. The outstanding balance was JPY 1,907.8 billion, up JPY 277.2 billion from the end of March 2019. New investments were JPY 628.9 billion, while cost recovery was JPY 341.8 billion. Taking into account other factors such as foreign exchange impact, investments significantly outweighed cost recovery as is typical every year.

By company, the increase of JPY 277.2 billion was the net result of investments and cost recovery, reflecting residential investments at Mitsui Fudosan Residential and development investments by Mitsui Fudosan and Mitsui Fudosan America Group.

Next, turning to tangible and intangible assets. The outstanding balance was JPY 3,753.1 billion, up JPY 252.6 billion from March 2019. As shown in the comments section, major investments include Otemachi One Tower, which was completed in February 2020, LaLaport Numazu, which started operations in October 2019, the Halekulani Okinawa, which opened in July 2019 as well as additional investments overseas for 50 Hudson yards, which is slated for completion in 2022. As a result, new investments were JPY 379.2 billion. After taking into account depreciation and foreign exchange impact, the net total increase was JPY 252.6 billion.

The next page shows the liability side of the balance sheet. Outstanding interest-bearing debt as of the end of March 2020 was JPY 3,481.1 billion, up JPY 574.5 billion from March 2019. The breakdown by company as well as cash inflows and outflows are as described in the comments section on the right-hand side of the page. As a result, the D/E ratio as of the end of March 2020 was 1.45x, and the equity ratio was 32.6%. Also, as this is the end of the fiscal year, we also marked our portfolio of rental properties to market.

Please turn to the next page. As of the end of March 2020, the market value of our rental properties stood at JPY 6,089.5 billion. The unrealized gains, the difference between market value and book value were JPY 2,918.4 billion, up JPY 168.7 billion from March 2019. As the cap rate used to appraise the properties was not revised, the increase is primarily the result of new inclusions of new properties at market value and improvements in NOI, which reflect the strong leasing environment for new offices.

Finally, I will discuss our full year forecast for fiscal 2020. Please turn to Page 13. First, I will explain the assumptions we have used for our forecast this time. As you know, since the start of 2020, the COVID-19 outbreak has had and continues to have a widespread and significant impact on domestic and overseas economies. The outbreak has had an impact on Mitsui Fudosan's businesses. As a company, we have proactively cooperated with the authorities in their efforts to contain the spread of COVID-19 by closing our retail facilities and hotels. We are also providing support to our tenants through measures such as rent relief programs. However, subject to when the outbreaks subsides and national or local government measures, there could be a further impact on our earnings.

At this stage, it is extremely difficult to quantify the magnitude of constraints on economic activity over the course of the current fiscal year. Given this, we hope you can appreciate that it is highly challenging to formulate full year forecast with a high degree of certainty at this time. As such, we have chosen to disclose forecast based on certain assumptions, which we believe to be reasonable to the best of our knowledge at this time. Our assumption is that economic activity will continue to be severely constrained in first quarter as a result of national and local government initiatives.

From second quarter onward, we expect to see a gradual easing of restrictions for a return to more normal levels of activity toward the fiscal year-end. Based on this assumption, we project operating revenue of JPY 1.850 trillion, operating income of JPY 200 billion, and profit attributable to the owners of the parent of JPY 120 billion.

I will now explain the segment forecast, starting with the Leasing segment. Taking into account the closure of retail facilities in response to national and local government requests and the rent relief we are providing to tenants at our facilities, we forecast operating revenue to decline JPY 36 billion and operating income to fall JPY 32.8 billion. However, we expect our nonconsolidated Tokyo metropolitan area office vacancy rate to remain between 2% to 3%, broadly unchanged from the 1.9% level of fiscal 2019.

Next, the Property Sales segment. We project operating revenue to increase JPY 15.9 billion, but operating income to fall JPY 20.7 billion. We provide a detailed breakdown on Page 14. For domestic residential property sales, we expect combined sales of condominium and detached housing units of 4,300, up year-on-year. As you can see in the table on the lower left, on the back of the increase in unit volume, we expect operating revenues of JPY 310 billion, operating income of JPY 33 billion for an operating profit margin of 10.6%.

We forecast subsegment revenues and profits to grow year-on-year, and expect to maintain a high operating profit margin. Similar to fiscal 2019, there will continue to be multiple handovers of centrally located large-scale redevelopment condominium properties. Of the 3,800 condominium units we expect to sell in fiscal 2020, the current contract rate already stands at 81.6%, very high relative to typical levels. We believe the impact of COVID-19 on this business in fiscal 2020 will be limited.

However, for the property sales to investors and overseas individuals subsegment, we believe, given the impact of COVID-19 on the overall market, it will be necessary to carefully consider the timing of property sales with a focus on when the outbreak might subside. As such, we project year-on-year decline in both operating revenues and operating income. We forecast operating revenues of JPY 230 billion and operating income of JPY 70 billion.

Next, please turn back to Page 13 for the Management segment forecast. Factoring in the impact of COVID-19 on the brokerage business at Mitsui Fudosan Realty and the Car Park Leasing business, we project operating revenues to fall JPY 11.4 billion and operating income to decline JPY 5.6 billion.

Finally, for the Other segment, taking into account hotel closures on the back of national and local government guidance and the fall in demand for accommodation, we project operating revenues to decline JPY 24 billion and operating income to fall JPY 15.2 billion, primarily in the Facilities Management business.

Our overall fiscal 2020 operating income forecast factors in the impact of COVID-19 to each of the segments. However, we have also taken into account the impact below the line. Reflecting the negative impact of COVID-19 on equity in net income or loss of affiliated companies, we are projecting ordinary profit to decline JPY 89.5 billion year-on-year to JPY 169 billion.

In addition, we have also factored in JPY 10 billion in extraordinary gains. Hence, our guidance for profit attributable to owners of the parent of JPY 120 billion, down JPY 63.9 billion. With regard to dividends per share, in fiscal 2020, we aim to pay an annual dividend of JPY 44 per share, unchanged year-on-year, to be divided evenly between an interim and year-end dividend of JPY 22 each.

Next, with regard to our investments. Please turn to Page 14 again. We project the investments in tangible and intangible assets to decline JPY 129.2 billion to JPY 250 billion in fiscal 2020. We are guiding for investments in real property for sale to increase from fiscal 2019 JPY 628.9 billion to JPY 700 billion. The increase is the result of additional investments in large-scale domestic development projects. Based on these plans, we expect the outstanding balance of interest-bearing debt in fiscal 2020 to be JPY 3,800 billion. We note that our actual earnings may vary depending upon when the COVID-19 outbreak subsides. Should we need to revise our forecast, we will do so in a timely manner.

Finally, I would like to take the opportunity to reiterate our shareholder returns policy and our view on enhancing corporate value. Our stated policy on shareholder returns is to focus on a total shareholder return ratio, which is a combination of stable dividends and flexible share buybacks. This reflects our capital strategy in which we seek to achieve a sustainable balance between maintaining financial soundness and investing for growth on the one hand and rewarding shareholders on the other.

Our business real estate is very broad-based and multifaceted. Our businesses are tied into society in multiple ways, ranging from business activities to daily life. While the COVID-19 outbreak will inevitably have a one-off negative impact, we firmly believe that our medium- to long-term corporate value remains unchanged, given the prospects for continued growth supported by completions of projects in our abundant development pipeline, our ability to generate added value by combining multiple real estate products and functionalities, our broad customer base and a sound financial foundation. As such, we reiterate our commitment to our shareholder return policy, which is based on our belief in our ability to continue to enhance corporate value in the medium- to long term. This completes my remarks.