Mitsui Fudosan Co.,Ltd. Q4 FY2025 earnings call

Overall Financial Performance

• All top and bottom line metrics achieved year-over-year growth and updated all-time records, marking the 13th consecutive year of record operating revenue and 3rd consecutive year of record recurring and net income. Total business profit increased 52.5 billion yen year-over-year.
• Total assets hit 9.8 trillion yen at period end, with 284 billion yen of the 370.3 billion yen asset increase coming from foreign exchange impacts. Interest-bearing debt fell 14.3 billion yen year-over-year to 4.4 trillion yen, and net equity increased 36 billion yen to 3.2 trillion yen.

Long-Term Strategy "& INNOVATION 2030" Progress

• The target of 8%+ annual EPS CAGR from FY2024 to FY2027 is tracking ahead of plan: FY2025 EPS grew 13.7% year-over-year, and the 2-year CAGR through FY2026 is projected at 9.6% above the 8% target. ROE hit 8.0% in FY2025, projected to reach the low 8% range in FY2026, on track for the 8.5%+ FY2027 target.
• Interest-bearing debt is on track to hit the 4.5 trillion yen FY2027 target after a projected slight increase to 4.6 trillion yen in FY2026, and the D/E ratio of 1.4x remains within the 1.2x-1.5x target range. Cross-shareholdings have been reduced by 23% as of FY2025, with a target of 40% cumulative reduction by FY2026.
• 3-year cumulative cash inflow/outflow is 1/3 complete matching plan progress, on track overall.
• Shareholder returns: Annual dividend per share increased 1 yen to 31 yen for FY2025, with a projected 2 yen increase to 33 yen for FY2026, matching the 35% payout ratio target. Combined with 450 billion yen in share buybacks, the total payout ratio for FY2025 hit 52.7%.

Core Business Initiatives

• Response to rising construction costs: All projects through FY2028 are already contracted, with no near-term impact. Mitigation measures for future projects include renovation-based value-add, design changes to improve leasable floor ratios, value engineering, consolidated purchasing, and partial stake sales to partner investors to lock in returns.
• Cap Rate impact from rising interest rates: Domestic property appraisal Cap Rates remain unchanged from last year, and unrealized gains increased to 3.7 trillion yen due to strong demand for limited high-quality Japanese real estate. In the US and UK, high-occupancy stable cash flow properties have only seen moderate Cap Rate increases despite sharp risk-free rate gains. A 10bps Cap Rate increase would only reduce unrealized gains by 150 billion yen, a minor impact relative to total unrealized gains. Net interest expense is projected to remain flat at 80 billion yen in FY2026, with no visible impact on residential sales from recent mortgage rate hikes.
• Rent and property price growth: 80% of Tokyo metropolitan area office lease renewals have agreed to rent increases, with many seeing 10-15%+ increases. Large-scale redevelopment in the Nihonbashi/Yaesu area has lifted area asking rents far above peer areas, with more large projects coming that will further lift area values. For residential sales, the average selling price exceeded 100 million yen in FY2025, projected to hit 140 million yen in FY2026 driven by a focus on high-priced central Tokyo properties that see sustained strong demand from wealthy buyers and trade-up buyers.

Overseas Business (North America Focus)

• Some losses are provisioned for FY2026 due to lingering post-pandemic work pattern changes on the US West Coast and persistently high interest rates/Cap Rates. However, core East Coast office assets (led by 50 Hudson Yards) hold 900 billion yen in unrealized gains and generate stable high returns. In the US Sun Belt, the company has used its balance sheet strength to selectively invest in high-growth markets, with early projects seeing faster leasing and higher rents than projected, with 5,000 total planned units that will deliver long-term profit growth. There is no plan to change the long-term overseas expansion strategy, as the US market remains critical to long-term growth.

New Growth Initiatives (2nd and 3rd Paths of Strategy)

• 2nd Path (new asset classes): The LaLa arena TOKYO-BAY opened to above-expectation occupancy, driving increased foot traffic to adjacent commercial properties, with new arena projects planned in strictly selected locations across major metro areas. Lab & office business now totals 16 properties across Japan, the US, and the UK (including the flagship British Library project in London King's Cross), with over 500 billion yen in cumulative planned investment. Data center business has 7 planned projects with 300 billion yen in planned investment, making it one of the largest domestic pipelines.
• 3rd Path (new business areas): The life sciences business has built a community of 920 members, hosts over 1,000 annual events, and is expanding beyond lab leasing to add research equipment rental and consumables services. The company is exploring expansion into new growth areas including space and semiconductors, with the goal of becoming an "industrial developer" supporting emerging industries through M&A and partnerships as appropriate.

All four core segments achieved year-over-year profit growth and record-high profits for the period:

1. Leasing Segment: Business profit of 176.4 billion yen, an increase of 7.3 billion yen from the prior year. Growth was driven by expanding domestic and overseas office profit growth and increased sales at existing commercial facilities. The standalone Tokyo metropolitan area office vacancy rate improved to 1.3% as of period end, and existing commercial facility sales hit 105% of prior year levels.
2. Condominium Sales Segment: Business profit of 167.0 billion yen, an increase of 31.8 billion yen from the prior year. Domestic residential sales gained 46.6 billion yen in profit driven by delivery progress on large core projects, with a 23.3% overall profit margin for domestic residential sales. Investor-focused and overseas sales grew revenue but saw lower profit year-over-year due to the negative impact of prior year high-margin asset sales and recorded losses on some overseas property sales, even as accelerated asset rotation progressed per the "unrestricted asset sales" policy.
3. Management Segment: Total business profit of 71.6 billion yen, an increase of 5.3 billion yen from the prior year. Property management recorded 38.4 billion yen in business profit with a slight year-over-year decrease, driven by higher system costs offsetting improved utilization at Repark parking lots. Brokerage and asset management recorded 33.1 billion yen in business profit, an increase of 5.4 billion yen, driven by higher transaction prices for individual residential brokerage and expanded AUM for Mitsui Fudosan-affiliated REITs.
4. Facility Operations Segment: Business profit of 38.6 billion yen, a large 12.2 billion yen year-over-year increase. Growth was driven by sharply higher average daily rates for hotels/resorts and increased operating days and visitor volumes at Tokyo Dome.

• For FY2026 (March 2026 term), Mitsui Fudosan projects 425.0 billion yen in business profit (a 26.3 billion yen year-over-year increase) and 260.0 billion yen in net income attributable to parent shareholders (an 11.2 billion yen increase), with all core metrics projected to hit new all-time records. A buffer for potential losses from asset rotation and external uncertainty is already included in the forecast.
• Segment-level guidance: The Leasing segment is projected to deliver 175.0 billion yen in business profit, flat year-over-year, as new commercial facility openings and domestic rent growth are offset by higher completion costs for US projects and asset rotation impacts. The Condominium Sales segment is projected to deliver 190.0 billion yen in business profit, a large year-over-year increase driven by higher margins from large high-priced central Tokyo projects and accelerated asset rotation. The Management segment is projected to deliver 75.0 billion yen in business profit (profit growth driven by higher managed residential units and management fees). The Facility Operations segment is projected to deliver 45.0 billion yen in business profit (profit growth driven by sustained strong hotel demand and Tokyo Dome value-up initiatives).
• The FY2027 "& INNOVATION 2030" quantitative targets remain on track, with the company confident of hitting all 2026 targets even after accounting for near-term growth costs from new US projects.

• Uncertainty over the medium and long-term impact of US trade and tariff policy on the global economy cannot be fully assessed at this stage, requiring ongoing careful monitoring.
• Post-pandemic work pattern changes on the US West Coast and persistently high global interest rates/Cap Rates have created downward pressure on some overseas asset values, requiring a loss buffer to be provisioned in FY2026 forecasts.
• Sustained high construction costs could lead to project delays or cancellations across the industry, reducing future new supply of offices and residential, though Mitsui Fudosan has contracted all near-term projects and is implementing mitigation measures for future developments.
• A 100% success rate for all overseas investments is not possible given market volatility, so the company will continue to maintain loss buffers as appropriate for projected risks.
• While current visibility indicates limited impact, tariff policy could lead to industry downturns for some office tenants that could pressure rental revenue, though the company's diversified tenant base limits concentration risk.

Q: What is the confidence level for hitting the FY2026 (2026 term) quantitative targets for business profit, net income, and ROE under & INNOVATION 2030, and what is the outlook for exceeding targets? / A: Management has strong confidence in achieving all 2026 targets. Decoupling from broad market trends and reflecting added value in pricing is now embedded across the organization, and the Management and Facility Operations segments are already tracking above original targets due to stronger-than-expected market conditions. The Leasing and Condominium Sales segments are also successfully lifting office rents and condominium prices. While temporary "growing pains" from new project completion costs in the US Sun Belt will pressure near-term profits, these costs are already factored into forecasts, and overall progress remains on track. Uncertainty from US tariff policy means management will focus first on hitting the stated targets. ROE improved to 8.0% in FY2025 from a projected mid-7% at launch, and is on track for the 8.5%+ 2026 target, with balance sheet management via buybacks and shareholder returns to continue controlling equity capital.

Q: With losses projected for overseas business again in FY2026, is there any plan to change the overseas business strategy? / A: The loss buffer reflects lingering impacts from the pandemic on US West Coast residential and persistently high interest rates, which are temporary, not a sign of broader strategic failure. The 1 trillion yen in US East Coast office assets hold 900 billion yen in unrealized gains, making this one of the most successful global real estate investments in history. Given Japan's demographics, capturing the dynamism of the US market (half of global real estate investment volume) remains critical to long-term growth, so there is no change to the long-term overseas expansion strategy. Management will continue to carefully monitor market conditions and time buys/sells to realize profits efficiently.

Q: Can office rent increases outpace rising costs from inflation, higher interest rates, and higher construction costs, and can the current pace of rent increases be maintained amid potential tenant volatility from US tariff policy? / A: Management is negotiating rent increases by highlighting the added value the company provides, including programs supporting employee health and flexible work options. Over 80% of Tokyo metropolitan area lease renewals have agreed to rent increases, with most non-increases coming from special cases like scheduled reconstruction. Many agreements have secured 10-15%+ rent increases, with both volume and size of increases growing in H2 FY2025, and management will continue targeting high rent increases for all renewals going forward. Cost increases will be offset by operational efficiency improvements. There has been no visible impact from tariff policy to date, and the 3,000 diversified tenant base have limited concentration in export-exposed industries, while high-quality prime office space has consistent strong demand, so major impacts are not expected.

Q: What does the company think about delivering positive surprises for the stock price, such as updating the long-term plan or announcing off-cycle share buybacks? / A: Management is always focused on the stock price, but believes the most important driver is steadily executing on the & INNOVATION 2030 strategy of combined growth, efficiency, and returns and hitting all stated quantitative targets. The strategy already has a target of 50%+ total payout annually and a policy of flexible ongoing share buybacks, so management will consider more flexible action if it supports improving growth, efficiency, and returns, factoring in market conditions, investment opportunities, share price levels, and financial health.