EPS of JPY 152 marks consecutive record highs; targeting JPY 100B in operating income excluding property sales, with clear commitment to organic growth and 40% total payout ratio

Summary

Envalith had the opportunity to attend Tokyu's full-year earnings call held on May 13 at 2:00 PM. In FY2025, the company achieved record-high net income for the third consecutive year, with operating revenue of JPY 1,086.1B (+3.0%) and net income of JPY 87.0B (+9.3%). For FY2026, the company plans to deliver a fourth consecutive record-high net income with operating income of JPY 110.0B (+6.6%) and net income of JPY 90.0B (+3.4%), revising medium-term plan targets upward. At the briefing, President Horie reiterated Tokyu's objective of achieving JPY 100B in operating income excluding property sales, underscoring a clear directive across all business segments to drive top-line expansion through organic growth and creativity in existing operations. On shareholder returns, the company newly introduced a 40% total payout ratio as a near-term benchmark, resolving to execute JPY 20B in share buybacks and increase the annual dividend by JPY 2 to JPY 32.

Key Points (Earnings Highlights and Growth Actions)

• Management Strategy and Market Outlook
  • While acknowledging uncertainty in the global economy, the company's base case assumes a favorable operating environment sustained by improving foot traffic and rent/price increases
  • Personnel costs are budgeted at +JPY 7.0B YoY, but the plan is to absorb this through employee creativity and organic growth
  • Management acknowledges that a declining PBR reflects a higher cost of equity (5.1–6.5% → 5.7–7.9%) and lower growth expectations, with countermeasures to be presented in the next medium-term plan
• Current Business Progress and Drivers
  • Real estate leasing delivered organic growth with same-property rental income up JPY 2.5B (+2.5%); approximately 70% of Shibuya-area office tenants have agreed to rent increases
  • Hotel operations posted a record-high ADR of JPY 26,681 (+JPY 2,761), with the Shibuya hotel maintaining an international guest ratio above 80%
  • Tokyu Railways ridership grew +3.1%, showing continued recovery, but front-loaded cost increases—personnel costs +JPY 1.3B and maintenance costs +JPY 1.8B—resulted in a JPY 2.3B profit decline
• Strategic Initiatives and Inflection Points
  • Became the first Japanese hotel chain to join the Global Hotel Alliance (GHA), gaining access to a 34-million-member base to drive direct bookings
  • Completed shelf registration for bond-type preferred shares and issued digitally enhanced retail bonds, establishing a diverse, unconventional financing toolkit
  • Formed the private fund "TR1 Realty" and sold five residential rental properties for approximately JPY 14.0B, scaling the asset-recycling business with fee income

Outlook and Strategy

• FY2026 plan calls for operating income of JPY 110.0B, net income of JPY 90.0B (EPS JPY 158.15), representing an upward revision of +JPY 5.0B in operating income versus the original medium-term plan
• FY2027 targets further revised upward to EPS JPY 164.88, operating income JPY 112.0B, and net income JPY 92.0B
• Three Shibuya redevelopment projects (Shibuya Upper West Project / Shibuya Scramble Square Phase II / Miyamasuzaka District Category 1 Urban Redevelopment) are advancing, with a target to roughly double rental income around Shibuya Station from approximately JPY 45.0B to approximately JPY 90.0–95.0B by FY2035
• Managed floor area around Shibuya Station is expected to expand to approximately 860,000 m² by FY2035 (+32% from the current approximately 650,000 m²)
• Overseas, Tokyu is building a supply capacity of approximately 1,000 units per year in Binh Duong, Vietnam, and has committed an additional JPY 23.0B investment in Yanchep, Australia, targeting approximately JPY 15.0B in business profit by FY2035
• In retail operations—daily necessities and food service—growth strategy options include store network expansion as well as new businesses and M&A
• The next medium-term plan is scheduled for formulation and disclosure within FY2026, with an update to the long-term management vision also under consideration
• President Horie expressed strong commitment to reaching JPY 100B in operating income excluding property sales, calling on each business to pursue creative organic growth

Positive Factors

• EPS of JPY 152.25 exceeded the medium-term plan assumption of JPY 96 by approximately 59%, demonstrating tangible results from structural reforms and organic growth
• Shibuya-area office vacancy rates remain extremely tight at 0.0–0.2%, with existing properties commanding top rents of approximately JPY 60,000 per tsubo per month
• Tokyu Railways ridership stands at 119.5% of the FY2000 level, outpacing the Kanto private railway average; combined revenue gains from the Shin-Yokohama Line and Meguro Line account for 34% of the total increase
• Maintains high credit ratings of R&I AA- and JCR AA, with a weighted-average funding cost of 0.88%, average debt maturity of approximately 7 years, and a 70% fixed-rate ratio, ensuring resilience against rising interest rates
• Achieved the highest CDP climate change score of A List; selected for major ESG indices including FTSE and MSCI for the second consecutive year

Concerns and Risks

• Middle East geopolitical risks are not factored into guidance, leaving residual exposure to energy cost spikes and potential impact on inbound tourism demand
• Interest expense is projected to rise from JPY 11.8B to JPY 15.3B (+JPY 3.4B), with interest-bearing debt expanding to JPY 1,440.0B (+JPY 55.2B)
• The construction cost index has surged +36% versus 2021 levels, and in a scenario where costs rise an additional +50%, retained-floor ROA would decline to 1.2%
• ROE of 9.6% (FY2026 forecast) represents a decline from 10.0% in the prior year, narrowing the spread over the cost of equity (5.7–7.9%)
• PBR remains above 1.0x but continues to trend lower

Performance Highlights

In FY2025, profit growth in Hotel & Resort and Life Services segments drove results, with all segments achieving revenue growth. Operating income was roughly flat YoY due to a reversion in property sales, but negative goodwill recognition and higher equity-method investment gains lifted net income to JPY 87.0B (+9.3%), a new record high. For FY2026, the company projects profit growth across all segments, targeting JPY 110.0B in operating income.

Segment Performance

• EPS: JPY 152.25 (+JPY 17.44 YoY, +12.9%)
• ROE: 10.0% (+0.2pt YoY)
• Tokyu EBITDA: JPY 227.9B (+6.4% YoY)
• Tokyu Railways Ridership: 1,117M passengers (+3.1% YoY)
• Hotel ADR: JPY 26,681 (+JPY 2,761 YoY)
• Hotel RevPAR: JPY 21,233 (+JPY 2,137 YoY)
• Office Vacancy Rate (Overall): 0.95% (March 2026)
• Real Estate Leasing (Non-Consolidated) Same-Property Rental Income: +JPY 2.5B YoY (+2.5%)
• Dividend: Annual JPY 30 → JPY 32 (+JPY 2 increase forecast); share buyback of JPY 20.0B