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 from 2:00 PM. In FY2025, the company posted revenue of JPY 1,086.1B (+3.0%) and net income of JPY 87.0B (+9.3%), achieving record-high profits for the third consecutive fiscal year. For FY2026, the company plans operating income of JPY 110.0B (+6.6%) and net income of JPY 90.0B (+3.4%), marking a fourth consecutive year of record earnings, with upward revisions to medium-term plan targets. At the briefing, President Horie reiterated the policy of targeting JPY 100B in operating income excluding property sales, making clear his intent to drive top-line expansion across all businesses through organic growth and creativity in existing operations. On shareholder returns, the company newly introduced a total payout ratio of 40% 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 Assessment
  • While acknowledging uncertainties in the global economy, the company's base case assumes a favorable operating environment driven by improving foot traffic and rising rents/sale prices
  • Personnel costs factor in a JPY 7.0B YoY increase, but the policy is to absorb this through employee creativity and organic growth
  • Management acknowledges that PBR decline 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 achieved organic growth with existing-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 recovered +3.1%, but front-loaded costs including personnel expenses (+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
  • Filed shelf registration for bond-type class shares and issued digitally enhanced retail bonds, establishing diversified financing instruments that break from conventional frameworks
  • Formed private fund "TR1 Realty," selling five rental residential properties (~JPY 14B), expanding the asset-recycling business model with fee income

Outlook and Strategy

• FY2026 targets operating income of JPY 110.0B and net income of JPY 90.0B (EPS JPY 158.15), representing a JPY 5.0B upward revision to operating income versus the published medium-term plan
• FY2027 targets further revised upward to EPS JPY 164.88, operating income of JPY 112.0B, and net income of JPY 92.0B
• Advancing three Shibuya redevelopment projects (Shibuya Upper West Project / Shibuya Scramble Square Phase II / Miyamasuzaka District Type-I Urban Redevelopment), targeting a doubling of rental income around Shibuya Station from ~JPY 45B to ~JPY 90–95B by FY2035
• Gross floor area under Tokyu's involvement near Shibuya Station expected to expand to ~860,000 m² by FY2035 (+32% from the current ~650,000 m²)
• Overseas: establishing an annual average supply capacity of 1,000 units in Binh Duong, Vietnam; committed an additional JPY 23B investment in Yanchep, Australia, targeting ~JPY 15B in business profit by FY2035
• In the retail segment's daily necessities and food & beverage domains, growth strategy encompasses store network expansion as well as new business development and M&A
• Next medium-term plan to be formulated and disclosed within FY2026, with an update to the long-term management vision also under consideration
• President Horie expressed strong conviction in reaching JPY 100B in operating income excluding property sales, calling on all business units to deliver creative organic growth

Positive Factors

• EPS of JPY 152.25 exceeded the JPY 96 assumption at medium-term plan formulation by ~59%, evidencing the tangible results of structural reforms and organic growth
• Shibuya-area office vacancy rate remains exceptionally low at 0.0–0.2%, with existing properties commanding top rents of ~JPY 60,000 per tsubo/month
• Tokyu Railways ridership at 119.5% of FY2000 levels, outperforming the Kanto private railway average; combined revenue uplift from the Shin-Yokohama Line and Meguro Line accounts for 34% of total growth
• Maintains high credit ratings of R&I AA- and JCR AA, with average funding cost of 0.88%, average debt maturity of ~7 years, and 70% fixed-rate ratio ensuring resilience against rising interest rates
• Achieved CDP Climate Change A List (highest rating), selected for major ESG indices including FTSE and MSCI for two consecutive years

Concerns and Risks

• Middle East developments are not factored into earnings guidance, leaving residual risk of spillover effects on energy costs and inbound tourism demand
• Interest expense expected to rise from JPY 11.8B to JPY 15.3B (+JPY 3.4B), with interest-bearing debt expanding to JPY 1,440B (+JPY 55.2B)
• Construction cost index up +36% vs. 2021, with a scenario where a further +50% increase in construction costs would compress retained floor ROA to 1.2%
• ROE of 9.6% (FY2026 forecast) declines 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 on a declining trend

Performance Highlights

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

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) Existing-Property Rental Income: +JPY 2.5B YoY (+2.5%)
• Dividend: Annual JPY 30 → JPY 32 (JPY 2 increase forecast); share buyback of JPY 20B