Morningstar | Mitsubishi Estate Delivers Solid Third Quarter as Tokyo Office Rents Continue to Rise
Mitsubishi Estate delivered solid results for the October-December quarter, achieving 76% of its operating profit guidance of JPY 215 billion for the fiscal year ending March 2019 and 79% of its full-year net profit guidance of JPY 123 billion. Annualized ROE for the quarter was 8.0%, compared with 7.2% for the fiscal first half and 7.3% last fiscal year, while earnings depended on capital gains to a lesser degree. Capital gains totaled about JPY 2 billion in the quarter, versus an average of around JPY 5 billion per quarter in the past two years.By segment, office buildings through the third quarter achieved 77% of guidance for full-year operating profit, residential achieved 89%, and the lifestyle-property segment, which includes retail and logistics, achieved 76%. However, international fell slightly short at 65% due to lower income from sales of properties.
Mitsubishi Estate’s core office-building business in Japan benefited from a rise in average rents of about 2% year-on-year (similar to recent quarters) as the vacancy rate continues to decline, as well as the addition of space from new buildings such as msb Tamachi in May and the Marunouchi Nijubashi Building in October. A new logistics building and strong performance at outlet malls drove the profit increase in lifestyle properties. We expect the strong results in office leasing in Japan to continue for the next several years, notwithstanding a relatively heavy year for new supply in 2020 as the labor market is tight and many corporate tenants are looking to upgrade their existing office space.
We maintain our no-moat rating on Mitsubishi Estate and lower our fair value estimate from JPY 2,300 to JPY 2,020, 7% above today’s closing price, as we transfer coverage to a new analyst. Our new earnings forecasts are 1% to 5% higher than the previous forecasts, but the fair value estimate falls slightly as we now set the cost of equity for Mitsubishi Estate at 8% instead of 7% previously.
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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