Q1 operating income fell JPY 3.2B vs. plan due to front-loaded costs in real estate leasing and Middle East-driven impact on Power Supply; office rent revisions and record-high ADR levels are key to achieving full-year targets

Summary

Q1 operating income came in at JPY 31.3B (−2.8% YoY), JPY 3.2B below the May guidance. The real estate sales business contributed +JPY 3.7B driven by a large-scale asset-turnover building sale, but this was more than offset by front-loaded redevelopment-related costs in the real estate leasing business and higher power procurement costs at Tokyu Power Supply stemming from Middle East tensions. Management characterized the front-loaded leasing costs at JPY 1.0–1.5B and indicated they expect these to normalize in H2. Hotel ADR and RevPAR continued to track at record-high levels, with the foreign guest ratio at Shibuya hotels sustained above 85%. Full-year guidance was maintained, and management explicitly committed to achieving the EPS target.

Key Points (Earnings Takeaways and Growth Actions)

• Management Strategy and Market Assessment
  • Crude oil price increases driven by Middle East tensions have materialized first in the power retail business; management noted the pass-through to railways and real estate leasing operates with a lag and has not yet surfaced
  • Reaffirmed the policy of balancing organic growth with cost optimization, premised on inflation, rising construction costs, and higher interest rates
  • Acknowledged that in the current sharp inflation environment, low-price competitors have an edge in the supermarket business; remedial measures launched in July
• Near-Term Business Progress and Drivers
  • The JPY 1.0–1.5B in front-loaded real estate leasing costs were spread across outsourcing, maintenance, and asset retirement expenses with no concentration in any specific property
  • Changed the recognition method for hotel variable rent from a lump-sum booking in Q4 to quarterly pro-rata allocation, resulting in a −JPY 500M impact on a standalone Q1 basis; expected to wash out over the full year
  • Shibuya Sky underperformed expectations due to operational restrictions from strong winds and rain; variable income from commercial facilities was soft
  • Tokyu Store showed signs of improvement per July flash data
• Strategically Important Initiatives and Inflection Points
  • Pushing to shorten contract terms on office lease renewals; management noted initial results of fixed-term lease re-contracting at levels close to the top rent of JPY 60,000
  • Share buyback ongoing: 9,605 thousand shares / approximately JPY 16.2B acquired cumulatively through end-July (cap: JPY 20B)
  • Shelf registration for bond-type preferred shares prepared in May, positioned as a capital policy tool to support large-scale redevelopment investments
  • Announced a future development concept for approximately 112 hectares in Si Racha, Thailand; also signed a business alliance for flying car route verification

Outlook and Strategy

• Full-year guidance maintained at May announcement levels (operating income JPY 110B, net income JPY 90B), targeting achievement through H2 normalization of front-loaded costs and top-line growth
• EPS of JPY 158.15 positioned as the top-priority mid-term plan commitment; management expressed intent to secure through extraordinary gains if operating income falls short
• Confirmed the existence of asset sale and cross-shareholding disposal candidates; execution to be considered based on developments from Q2 onward
• Tokyu Railways saw July gate passage volume trending at approximately +3% YoY, running ahead of the full-year ridership plan of +2.4%
• Power procurement cost increases at Tokyu Power Supply expected to moderate as fuel cost adjustment pass-through progresses; the pace of profit decline seen in Q1 is not expected to persist
• Office rent revisions progressing steadily on a contract basis, with the effect to be gradually reflected in future earnings

Positive Factors

• Hotel ADR reached JPY 27,795 (+JPY 1,335 YoY), with Shibuya area + Capitol at JPY 59,350 (+JPY 3,027)—both at record-high levels
• Foreign guest ratio at Shibuya hotels exceeded 85%, with the all-hotel average sustained at approximately 50%, demonstrating continued inbound capture
• Asset-turnover building sales in the real estate sales business posted Q1 operating income of JPY 7.1B (vs. JPY 3.3B prior year), in line with expectations; 85% progress rate against full-year target of JPY 8.4B
• Office vacancy rate at an extremely low 1.4% company-wide, and 0.1% for S/A-class buildings in the Shibuya area
• Tokyu Railways ridership growing steadily: commuter passes +2.6%, non-commuter +2.3%; fare revenue JPY 39.44B (+2.3%)
• JPY 20B share buyback execution in progress, continuing efforts to improve capital efficiency

Concerns / Risks

• Crude oil price increases driven by Middle East tensions pushing up power procurement costs; Power Supply saw a −JPY 900M earnings decline in Q1. Risk of pass-through to railways and real estate via fuel cost adjustments
• Tokyu Store continues to see declining items per transaction due to price inflation; same-store revenue at −0.2%, a significant gap versus full-year guidance of +3.9%
• Q1 cost growth rate of +11% in the real estate leasing business exceeded full-year assumptions; need to monitor whether there is structural cost inflation beyond front-loading
• Interest expense was JPY 3.6B in Q1 (vs. JPY 2.6B prior year, +JPY 1.0B), with full-year forecast at JPY 15.3B (+JPY 3.4B), reflecting expanding interest rate burden
• Interest-bearing debt balance at JPY 1,456.6B (+JPY 71.9B vs. prior fiscal year-end), D/E ratio rising to 1.6x
• Overseas subsidiary real estate sales contracting: Vietnam at 8 units (vs. 127 prior year), Australia at 50 lots (vs. 66 prior year)

Performance Highlights

Q1 consolidated operating revenue was JPY 273.4B (+4.6% YoY), operating income JPY 31.3B (−2.8% YoY). Top-line growth was secured by a large-scale asset-turnover building sale in the real estate sales business, but operating income declined due to front-loaded redevelopment costs in the real estate leasing business and higher power procurement costs. Net income attributable to owners of parent company was JPY 36.2B (+43.4% YoY), with net income increasing on a bottom-line basis thanks to lower income taxes.

Segment Performance

• Tokyu Railways Ridership: 290,739 thousand (+2.5% YoY)
• Tokyu Railways Fare Revenue: JPY 39.44B (+2.3% YoY)
• Hotel Business Utilization Rate: 79.7% (+0.8pt YoY)
• Hotel Business ADR: JPY 27,795 (+JPY 1,335 YoY)
• Hotel Business RevPAR: JPY 22,146 (+JPY 1,269 YoY)
• Office Vacancy Rate (Company-Wide): 1.4%
• Office Vacancy Rate (Shibuya Area S/A-Class): 0.1%
• Tokyu EBITDA: JPY 61.7B (+3.4% YoY)
• EPS: JPY 63.85 (+JPY 19.83 YoY)

Q&A List

• Q: Regarding front-loaded costs in real estate—what types of expenses were incurred ahead of schedule? Is it correct to assume the full-year plan remains intact?
  A: Primarily an accumulation of maintenance and asset retirement expenses, with no concentration in any specific property or cost category. Guidance anticipated a certain level of cost increase from the prior year, centered on H1, and a meaningful portion of that increase has already materialized in Q1. Additionally, top-line growth fell short of expectations due to weather and other factors, contributing to the earnings shortfall versus guidance in the real estate leasing business. Going forward, we will pursue further revenue expansion while exercising cost control.
• Q: Stores and power retail in Life Services are visibly tracking below plan—how will you offset this to achieve the full-year target?
  A: It is true that Tokyu Store has been soft due to the impact of price inflation. We have been implementing remedial measures sequentially, and July flash data shows signs of improvement. We intend to achieve the budget through cost management, including the management of policy-driven costs in H2. Tokyu Power Supply has clearly been affected by surging crude oil prices. However, going forward, fuel cost adjustment pass-through will progress, so the pace of profit decline seen in Q1 will not continue as-is. Additionally, the impact of crude oil price increases may partially pass through to electricity-consuming services such as railways and the real estate business, which requires close monitoring. While the headline JPY 3.2B miss appears large, there are areas of softness. Both cost restructuring and top-line growth are necessary. Net income and EPS are commitments under the mid-term plan, and we are determined to deliver on them. We will first address operating income achievement, and if there is any shortfall, we will ensure EPS delivery.
• Q: Operating income was slightly below plan, but recurring profit came in roughly on track—what drove the favorable variance in non-operating items?
  A: On a plan-comparison basis, the improvement was driven by higher equity method investment income.
• Q: Net income is also JPY 2.5B below plan—is there any consideration of booking extraordinary gains from cross-shareholding disposals?
  A: The variance in quarterly net income is due to timing differences in income taxes, which will normalize within the fiscal year. We will monitor developments, particularly Q2 trends, and will act if necessary. Considering balance sheet management and rising interest rates, we are prepared to explore such options.
• Q: Were there any areas of softness in real estate leasing revenue beyond weather impacts? Were you originally targeting higher levels? And what is the trend on office rent increases?
  A: The softness in Q1 was in commercial facilities. On the other hand, office rent revisions are an area of expectation within this fiscal year's plan. While some effects will take time to materialize, progress on a contract basis is steady. Regarding the shortening of contract terms and increasing rent revision opportunities mentioned at the May briefing—for example, we are seeing five-year contracts being shortened, and tenants re-contracting on fixed-term leases at levels close to the top rent of JPY 60,000. This has not yet fully flowed through to reported figures, but the initiatives are progressing as planned.
• Q: Of the JPY 3.2B plan shortfall in Q1, excluding front-loaded real estate costs, is the remainder largely attributable to factors not embedded in the plan such as the Middle East situation and weather?
  A: Exactly. The Power Supply earnings decline is explained by the Middle East impact, supplemented by weather effects and front-loaded real estate costs. While individual businesses like Tokyu Store underperformed their respective plans, other businesses outperformed, so the net residual is essentially the Power Supply Middle East impact and front-loaded costs.