AIRPORT FACILITIES Co.,LTD. Q4 FY2025 earnings call

• Company Overview

  • Founded in 1970, currently 123 employees, listed on the Tokyo Stock Exchange Standard market after transitioning from the Prime market in January 2026, major shareholders include Japan Airlines, ANA Holdings, and Development Bank of Japan, with 6 consolidated subsidiaries including 3 overseas entities.
  • Corporate mission: "Contribute to the future of aviation and the creation of attractive communities through the provision of valuable facilities and services" centered on airport-based operations, prioritizing stable long-term profit accumulation over short-term rapid growth.
  • Core business advantage: Fixed rent structure for airport real estate leasing means the business is minimally impacted by fluctuations in passenger volume; only the water supply and drainage business sees mild impact from passenger terminal and hotel utilization, which accounts for only 10% of total revenue so does not move overall performance significantly.

• Business Strategic Progress

  • Further Strengthening of Haneda Airport Inside Business: The Haneda Airport 1-chome (Seibijo District) project is ongoing, with land elevation works for disaster risk reduction requiring facility relocation and restructuring. Tenant relocation from Seibijo District to the New Seibijo District is expected to concentrate next fiscal year, with renovation and layout adjustment works currently in progress to meet tenant需求. Other progresses include solar panel installation at Haneda domestic cargo terminal area, and winning a construction management contract for aircraft parking space maintenance at Shizuoka Airport.
  • Expansion of Non-Asset Rotational Real Estate Business: Launched in 2022 via a dedicated subsidiary, the business follows a model of acquiring small/medium office buildings, adding value via hardware and software improvements, then selling after 2-3 years to realize capital gains for reinvestment, which is aligned with the goal of improving profit growth and capital efficiency. The rotational business has performed solidly to date, with work progressing on private fund formation.
  • Business Area Expansion and Growth Investment: The company is pursuing growth at regional Japanese airports (pursuing hangar expansion and reconstruction projects to meet growing maintenance demand) and expanding into environmental-related businesses such as solar power, storage batteries, and hydrogen to promote energy transition, plus plans to introduce digital transformation to address industry challenges such as labor shortages, aligned with the commercialization of Level 4 autonomous driving in airport operations starting December 2025.

• Capital Policy Progress

  • Cash Allocation: 33 billion yen of total growth investment planned over the mid-to-long term plan period, which is higher than the average annual investment level of the past 10 years, with a clear commitment to actively pursue growth investment.
  • Shareholder Return Enhancement: Changed the dividend policy from the previous 40%+ payout ratio to targeting the higher of 60% consolidated payout ratio or 3.0% DOE, to reflect the company's stable revenue profile and suppress excess capital accumulation. The company has achieved 3 consecutive years of dividend increases, plans a record annual dividend of 37 yen per share for the current fiscal year, completed a 1 billion yen share repurchase in October last year, and will continue to conduct opportunistic repurchases going forward. The previous shareholder preferred program was discontinued to consolidate returns into dividends and share buybacks for better shareholder equality.
  • Listing Market Transition: Moved from the Prime market to the Standard market in January 2026, to align with the company's size and allow limited management resources to focus on business strategy, while supporting the goal of improving capital efficiency and market valuation alongside ongoing share repurchase activities.
  • IR Strengthening: Committed to increasing dialogue with shareholders and individual investors to incorporate feedback and reduce cost of equity.

1. Airport Inside Real Estate Business: Accounts for approximately 54% of total revenue. This segment owns and leases highly specialized airport facilities including aircraft hangars, in-flight meal factories, pilot training centers, engine maintenance buildings, air cargo terminals and related special processing facilities across multiple Japanese airports, with the majority of assets concentrated at Haneda Airport. Revenue comes from fixed long-term lease payments to aviation and aviation-related clients. 2. Airport Inside Infrastructure Business: Accounts for approximately 22% of total revenue. This segment operates three core businesses: heat supply covering an area equivalent to 23 Tokyo Domes with stable operation since 1993, water supply and drainage management leveraging 50 years of operational experience, and shared communication services covering almost the entire Haneda Airport area. Total airport-based business accounts for 76% of overall revenue, with approximately 70% of total company revenue generated from Haneda Airport operations. 3. Airport Outside Real Estate Business: This segment includes traditional real estate leasing targeting airport workers and airport-adjacent hotels, plus the newly launched rotational non-asset real estate business targeting small and medium-sized office buildings. As of the presentation, the rotational business has acquired 11 buildings, with 2 already sold and is progressing steadily, and work is ongoing to form a private real estate fund. 4. Other Businesses: Includes small-scale overseas real estate development at airports in Singapore and Canada, and solar power generation that utilizes the rooftops of the company's existing cargo terminals and hangars to reduce CO2 emissions. Financial performance for 2024 fiscal year: Total company revenue hit a record high of 31.1 billion yen, operating profit was 4.4 billion yen, net income was 2.5 billion yen, showing steady recovery post-COVID-19. For the first three quarters of the current fiscal year, cumulative revenue is 24.24 billion yen, operating profit is 4.889 billion yen, and net income attributable to parent company shareholders is 1.969 billion yen, all increasing year-over-year, and is on track to meet full-year guidance despite recording a large impairment loss related to Haneda Airport 1-chome project facility demolition costs.

• Full-year current fiscal year guidance is maintained at: revenue of 36.5 billion yen, operating profit of 5.8 billion yen, net income of 3.0 billion yen, with year-to-date performance tracking in line with this forecast.
• The revised 7-year mid-to-long term management plan ending in 2028 fiscal year maintains its original targets: total revenue of 40.0 billion yen, net income of 3.8 billion yen, and ROE of 6.0%. The company confirms its commitment to achieving these targets, with all key initiatives progressing as planned.
• Management notes that 6% ROE is the near-term goal to meet the company's estimated 5-6% cost of equity, and will consider further increasing ROE targets after this goal is achieved, rather than setting higher targets prematurely given the company's historical performance and current position.
• The rotational non-asset real estate business will continue to be expanded as a core growth driver, with the company targeting this business to drive overall profit growth, diversify revenue streams, and improve capital efficiency over the medium term.

• High geographic concentration on Haneda Airport: Approximately 70% of total revenue comes from Haneda Airport. Management mitigates this risk by maintaining a highly diversified tenant base across multiple aviation, cargo, and aviation-related companies with no single large client dependency, while expanding operations to 11 other domestic airports, 2 overseas airports, and airport-offline real estate business to gradually diversify the company's revenue base.
• Exposure to passenger demand fluctuations: Only the water supply and drainage business has mild exposure, which accounts for only 10% of total revenue so any impact on overall profit is limited. The heat supply business has already adjusted its pricing structure to link with raw material costs, eliminating the impact of raw material price and temperature fluctuation on profitability, so the business is resilient even to severe demand shocks equivalent to the COVID-19 pandemic.
• Entry barriers protect existing business: While there are high barriers to new entry (government land leasing requirements, compliance with strict airport layout and construction regulations, specialized industry knowledge), the company's long-standing expertise and incumbency position creates sustainable competitive advantage that limits new competitive entry.

Q: What benefits do airlines get from choosing to lease facilities from Kuko Setsubi instead of owning them on their own balance sheet?

A: First, airport ground facilities require enormous upfront capital investment. By leasing from us, airlines eliminate this large one-time cost burden, allowing them to focus their limited capital on investing in aircraft core business, which improves their capital efficiency and cash flow management. Second, airport real estate requires highly specialized expertise unique to the industry, including compliance with airport-specific construction rules that differ from general real estate development. We have accumulated this specialized knowledge over decades, allowing us to deliver highly functional facilities efficiently and smoothly, which is a core competitive advantage. Additionally, for essential but low-utilization facilities such as SD sewage treatment plants and aircraft washing facilities that would be a heavy investment burden for a single airline, we build and operate these facilities for shared use across multiple airlines, creating economies of scale that reduce costs for all industry participants.

Q: What types of clients do you serve beyond Japan Airlines and ANA?

A: We work with a very broad range of domestic airlines including Skymark, Starflyer, Solaseed Air, and affiliate airlines of both the JAL and ANA groups. Beyond airlines, we operate the domestic cargo terminal at Haneda Airport and own/lease international logistics facilities in Rinku Town near Kansai International Airport, so we also have broad relationships with logistics companies. Across the aviation supply chain, we serve many different companies involved in in-flight catering, crew training, ground handling and other related functions, so our client base is much broader than it may appear from outside the industry.

Q: How difficult is it for new competitors to enter this business?

A: All airport land is owned by the national government, so any new development requires leasing land from the government via public tender, which is the first key barrier to entry. Additionally, any new development must align with the national government's master plan for efficient airport function, which requires specialized knowledge of airport operations and planning that differs completely from general real estate entry barriers. There are also very strict construction regulations related to proximity to runways and aircraft operations that require deep expertise to comply with. Our company has decades of experience understanding and navigating these requirements, which gives us a durable competitive advantage.

Q: Will the company consider raising the ROE target beyond 6% to 7-10% in the future?

A: We are aware that market expectations for many listed companies are around 8% ROE, and we acknowledge that higher ROE would be desirable. However, given the company's historical low ROE performance, we have set the 6% target to first meet our cost of equity, which is the immediate priority. After we achieve 6% ROE steadily, we will reconsider setting higher targets in the future.

Q: What is the background for changing the dividend policy to the higher of 60% payout or 3.0% DOE?

A: After increasing the payout ratio from 30% to 40% when we set the original 2022 mid-term plan, we reviewed the policy again in light of the Tokyo Stock Exchange's push for capital cost and share price conscious management. After extensive discussion, we decided to set a more ambitious policy to reflect our stable earnings profile, and added the DOE floor to prevent excessive capital accumulation and signal our commitment to returning capital to shareholders.

Q: Why did the company transition to the Standard market from the Prime market?

A: The transition was decided during the mid-term plan review. We re-evaluated the most appropriate listing market for our company amid a changing business environment, and decided that moving to Standard would allow us to balance ongoing share repurchases (to improve capital efficiency) with stable compliance with listing requirements. Given that we only have 123 employees, this also allows us to focus our limited management resources on business strategy rather than meeting more onerous Prime market requirements, which supports sustainable corporate value improvement.

Q: How stable is the company's earnings structure, and what are the characteristics of your rent structure and contract terms?

A: While the broader aviation industry is often seen as vulnerable to external shocks, almost all of our airport real estate business uses fixed rent contracts, and specialized purpose facilities typically have very long contract terms, so earnings are relatively stable and not heavily impacted by external changes. Only the water supply and drainage business sees mild fluctuation from passenger volume, but this only accounts for 10% of total revenue so does not impact overall performance materially. In terms of rent structure, we typically charge a fixed monthly rent plus separate pass-through of usage-based costs like utilities. Contract terms vary: whole-building leases to single tenants often have terms longer than 10 years, while smaller office spaces typically have 1-year auto-renewable contracts, so we have a good mix of contract tenures.

Q: The company discontinued shareholder preferreds at the end of March 2025, is there any plan to restart them?

A: Our previous preferred program offered dining vouchers at a limited number of airport restaurants, which had unequal access for shareholders that do not frequently use Haneda or Narita airports. We decided to discontinue the program to consolidate all shareholder returns into dividends and share buybacks, which is more equitable for all shareholders. There is no plan to restart the program at this time.

Q: Will you consider opening low-cost hourly accommodation at Haneda Terminal 3 to address demand from overnight passengers?

A: Passenger terminal operation is not within our business area; our core strength at Haneda is domestic cargo and maintenance facilities, and we will continue to focus on these core areas. We have already developed hotels near the airport (Tokyu Stay Kamata, Hotel JAL City Haneda Tokyo West Wing) to meet passenger demand, and we will continue to pursue facility development that meets user demand near airports where we have existing presence.

Q: Do you plan to introduce automated aircraft washing machines going forward?

A: There are no specific requests from airlines for this investment at present, so there is no planned introduction. However, we will consider the idea as appropriate going forward to address industry labor shortages and improve productivity.

Q: How are you mitigating the risk of high dependence on Haneda Airport?

A: While Haneda accounts for a large share of our revenue, our facilities there are highly diversified across multiple tenants and business segments, so we do not have material single-client concentration. We also already have operations at 11 other domestic airports, 2 overseas airports, and a growing airport-offline real estate business including the rotational real estate business, and we are working to build a more balanced business model that combines stability and growth with higher risk tolerance.

Q: What is your growth strategy after the recovery of aviation demand post-COVID?

A: We revised our mid-term plan last May to account for the post-COVID change in the business environment, with two core pillars: business strategy restructuring and capital policy strengthening. We are actively pursuing investment in our core airport business to build stable profit, while using the stable cash flow from our core airport business to grow the non-asset rotational real estate business that improves profit growth and capital efficiency. The rotational business is already performing well, and we are working to continue expanding it including through private fund formation. We will continue to implement the plan steadily to improve earnings across all segments and build a sustainable growth base.

Q: Which growth area has the most potential going forward: existing airport expansion, regional airports, or new business areas?

A: Haneda Airport is still our core revenue driver, so prioritizing further strengthening of our Haneda business makes the most sense for earnings contribution. The Haneda Airport 1-chome district restructuring will allow us to better utilize existing facilities, improve customer responsiveness and drive higher revenue and better capital efficiency, and we are also pursuing functional upgrades at the domestic cargo terminal area. We are also actively pursuing opportunities at regional airports for hangar expansion and reconstruction to meet growing maintenance demand. Additionally, we are expanding into environmental businesses including renewable energy, and are preparing to introduce DX initiatives to address industry challenges such as labor shortages, aligned with the upcoming commercialization of autonomous driving in airport operations.