Morningstar | In Boost for Governance, Mitsubishi Estate Removes Takeover Defense and Announces Large Buyback. See Updated Analyst Note from 14 May 2019
Mitsubishi Estate made a surprisingly positive change to its shareholder orientation by announcing the removal of its takeover defense measures and its first-ever share buyback.The company originally introduced the takeover defense measures in 2007, when the large unrealized gains on its numerous office properties in the Marunouchi district between Tokyo Station and the Japanese Imperial Palace attracted some attention from activist investors. After instituting the takeover defense plan in 2007, Mitsubishi Estate obtained shareholder approval to renew it for three-year periods in 2010, 2013, and 2016. It explained the decision not to further renew it as reflecting management’s consideration of marketwide trends in Japan and the company’s own efforts to strengthen its corporate governance.
In addition to the unrealized gains on its portfolio of prime properties, we believe another reason investors might have considered Mitsubishi Estate to be a theoretical takeover target is its relatively limited financial leverage, which has also contributed to its ROE being below that of some peers, like Sumitomo Realty. In this context, the second positive piece of news is Mitsubishi Estate’s first-ever share buyback, which at JPY 100 billion represents close to 4% of its shares outstanding.
Other elements of Mitsubishi Estate’s full-year earnings announcement were positive if less surprising. Net profit of JPY 134.6 billion beat the consensus forecast, and the company guided for JPY 137 billion in the just-started year ending March 2020. Mitsubishi Estate increased its dividend payout ratio to 31% for the just-ended year from 30% in the previous period.
We raise our fair value estimate from JPY 2,020 to JPY 2,200, 18% above the current share price, as we roll forward our model by a year.
Mitsubishi Estate is a real estate company. The Building segment is engaged in the development and leasing of office buildings. The Lifestyle Property segment is engaged in the development, leasing and operation of retail properties. The Residential segment is engaged in the construction and sale of condominiums and single-family houses. The International segment is engaged in the real estate leasing and development in the U.S., U.K. and Asia. The Architectural Design & Engineering segment is engaged in the design and administration of construction and civil engineering projects. Co. also operates hotels and provides real estate investment and brokerage services.
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