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Morningstar | In Line Interim Results With Strong Property Sales Offsetting Weakness in Leasing for Mitsui Fudosan

Mitsui Fudosan reported half-year results in line with our expectation. For the six-month period ending September 2018, revenue and operating profit were up 19% and 22% year over year, respectively. The main driver of growth was strong property sales with revenue and operating profit up 73% and 157%, respectively, driven by rising average selling prices. For leasing, the largest contributor to earnings, the top line grew 8% but earnings fell 1% on margin compression. The weakness is reflected in rising vacancy rates across the company’s office and retail assets during the quarter. The company maintained its original forecast for fiscal 2018 except for the better margin on the property side, guiding for 7% top-line growth but a modest operating income growth of 2% along with 5% growth in net profit. With the outperformance of the property sales segment offset by the weakness of the leasing segment, we reaffirm our fair value estimate of JPY 2,600, representing 1.2 times our forward book value estimate, together with our no-moat rating with stable outlook for the firm.

For the property sales segment, on the domestic side, total units booked were basically flat, yet revenue was 39% higher due to higher selling prices and larger units across major cities. Margin also expanded as costs remained constant, resulting in operating profit being more than double. Units under contract and not yet booked were ~4,400 units, same as last fiscal year-end. For overseas projects, the top line almost tripled along with improved margin. As a result, the overseas segment is now the larger contributor to operating income than the domestic segment. For the fiscal year, the company maintained its original guidance for the segment on the top line but increased the operating income slightly, mostly on the strength of overseas sales.

For the leasing segment, results were weaker compared with a year ago, but that was expected. Vacancy rates continued to trend higher and increased 30 to 60 basis points since end of last fiscal year in March 2018. For the broader market, the office vacancy rate in Tokyo metro continued to trend downward since the peak in 2012. The strong uptake was supported by in-migration and lower-than-average supply during those years. However, office supplies are expected to tick higher to above the long-term trend of 1.02 million square feet over the next three years, averaging 1.38 million square meters per year. While the company expects its portfolio’s vacancy rate to trend lower going forward, the higher supply level will likely cap the lease rate for the company’s Tokyo portfolio in the medium term. For the segment, the company guided a top-line growth of 8% and flat earnings for the year, slightly ahead of the run rate seen at interim.

On the property sales side, in the metro Tokyo market, new unit launches are expected to be stable at 38,000 units in 2018, in line with the average of the past five years. Inventory also remains flat near 7,000 units. However, price growth has been strong since 2012, riding on the back of growing demand but flat supplies. We expect this trend to be unchanged in the near term.