TOKYU CORPORATION Eyes JPY 70,000/Tsubo Top Rent in Shibuya; Targets Closing NAV Discount Through Expanded Asset Sales and Organic Growth Along Its Railway Lines

Summary

1H revenue rose on large property disposals in the Real Estate Sales business. However, operating income declined due to higher costs in Real Estate Leasing and surging procurement costs at Tokyu Power Supply. Full-year operating income guidance was cut. Net income guidance was maintained thanks to balance sheet recycling, and EPS guidance was raised. President Horie stated plainly that the share price is undervalued relative to asset value and set out a path to closing the NAV discount. The plan rests on three pillars: rent growth at station-connected properties, additional asset sales, and profit expansion in overseas businesses. For the next medium-term plan (MTP), management will bridge the gap until the Shibuya redevelopment projects contribute. It will do so through organic growth along its railway lines outside Shibuya and structural reform in the hotel business.

Key Points (Earnings Takeaways and Growth Initiatives)

• Management Strategy and Market View
  • Management estimates NAV per share at JPY 2,700 and P/NAV at around 0.6x, and views the shares as undervalued relative to asset value
  • Management cited rising interest rates, soaring construction costs, and a rigid fare system as drivers of share price weakness. It also pointed to the gap period until the Shibuya developments contribute around 2030 and to weaker supply-demand following the stock's removal from the MSCI ACWI in May
  • The Tokyu railway corridor generates 80% of operating income, with areas outside Shibuya accounting for 60%. The strategy is to grow earnings by combining population attraction with a larger share of wallet
  • Population growth along the lines and the Shin-Yokohama Line effect should allow profit growth without fare increases for now. Fare revisions will be considered if inflation squeezes profits
• Current Business Progress and Drivers
  • Real Estate Leasing was hit by unseasonable weather, with SHIBUYA SKY utilization falling to the 80% range versus the prior year (one-off). Pulling forward repair spending in anticipation of further cost inflation also weighed on profit
  • The YoY profit decline in the hotel business reflects a change in expense recognition method and should reverse within the fiscal year. ADR exceeded expectations, and management described performance as on track
  • At Tokyu Power Supply, procurement cost inflation driven by the Middle East situation coincided with promotional spending to acquire customers. Costs are front-loaded, but the customer base is growing
  • At Tokyu Store, inflation reduced customer traffic and items per purchase, but traffic has been recovering since July
• Key Strategic Initiatives and Changes
  • Property sales over the three-year MTP are expected to reach around JPY 100B, exceeding the initial JPY 70B target. Tax planning will be a priority for sales of properties with large unrealized gains
  • Overseas business profit forecast was raised from JPY 4.2B as of May to JPY 7.1B. Management aims to further exceed its earlier outlook of around JPY 15B for FY2035
  • Launched the new brand Tokyu Entamate in August. The business portfolio is being reshaped through the external sale of Central Foods and a review of the membership resort business
  • In hotels, joining GHA and raising the direct booking ratio will curb commissions paid to overseas OTAs, while revenue management will lift ADR

Outlook and Strategy

• Full-year operating income guidance was cut from JPY 110B to JPY 100B. Net income guidance of JPY 90B was maintained, and EPS rose to JPY 160.56 on share buybacks
• In 1H office rent revisions, the agreement rate for increases exceeded 90%, with increases of around 15%. The earnings contribution from rent revisions will come from next fiscal year onward
• The three Shibuya projects are unchanged from May. Management will scrutinize construction cost and rent outlooks and adjust course as needed
• The next MTP is considering a higher ROA target. Organic growth will be positioned as a theme on par with external growth through development
• GREEN×EXPO 2027, opening next March, is expected to draw 10 million visitors. The company aims to capture demand through rail, Minami-machida Grandberry Park, buses, and accommodation

Positive Factors

• Tokyu Railways' October ticket gate passenger count rose around +4% YoY. The residential population along the lines is expected to keep growing through 2040
• October hotel results showed utilization of around 83% and ADR of around JPY 31,200. Bookings from autumn onward are also solid
• Top asking office rent in Shibuya rose from JPY 60,000/tsubo per month to near JPY 70,000 in six months. Management said these are actual offer prices in live deals
• Soaring construction costs have led to a string of cancellations and postponements of other developers' redevelopment projects. Reduced new supply is a tailwind for the existing portfolio
• Tenant revenue at Tokyu's Shibuya commercial facilities exceeds JPY 100B per year, with room for further growth as new facilities open
• Land prices in Binh Duong, Vietnam are up roughly 3.5x in local currency terms since acquisition, while Yanchep, Australia is up +10% YoY. Unrealized gains on overseas land are expanding

Concerns and Risks

• Full-year interest expense is projected at JPY 18.1B (+JPY 6.0B), with rising rates pressuring recurring profit. Net interest-bearing debt/EBITDA is expected to rise to 7.3x
• 1H FCF was JPY -61.4B. Spending on land and buildings for sale swelled to JPY 104.8B, increasing interest-bearing debt
• Higher energy prices stemming from the Middle East situation have cut Tokyu Power Supply's full-year operating income guidance to JPY 2.5B (-JPY 2.7B)
• Soaring construction costs raise concerns over the profitability of large-scale Shibuya developments. Plans may be revised depending on construction cost trends
• Inflation-driven cost increases and higher capex are unavoidable over the medium to long term, making the fare revision decision a key focus going forward
• Risks include the impact of consumer thriftiness amid inflation on Tokyu Store traffic and continued fuel cost increases at Tokyu Bus

Performance Highlights

1H operating revenue was JPY 540.1B (+4.1%) and operating income was JPY 54.2B (-7.8%), a case of higher revenue but lower profit. Large disposals in Real Estate Sales drove revenue growth, while higher leasing costs and rising power procurement costs weighed on profit. Recurring profit was JPY 53.3B (-24.0%), reflecting the absence of a gain equivalent to negative goodwill booked in the prior year. However, lower income taxes lifted interim Net Income Attributable to Owners of Parent Company to JPY 58.4B (+4.0%).

Segment Performance

• Tokyu Railways Passengers Carried: 576,029 thousand (+2.5% YoY)
• Tokyu Railways Fare Revenue: JPY 78,413M (+2.4% YoY)
• Hotel Utilization Rate: 79.6% (+0.1pt YoY)
• Hotel ADR: JPY 27,530 (+JPY 1,298 YoY)
• Hotel RevPAR: JPY 21,903 (+JPY 1,046 YoY)
• Office Vacancy Rate (Company-Wide, September 2026): 2.21% (YoY ―)
• Tokyu Store Revenue Growth: All Stores +1.1%, Existing Stores +0.1%
• Tokyu Department Store Total Revenue Growth (Incl. Leasing): Existing Stores +1.9%
• Condominium Units Delivered: 44 units (-2 units YoY)
• Tokyu EBITDA: JPY 110.4B (-8.0% YoY)
• Equity Ratio: 32.1% (+0.8pt vs. end of prior fiscal year)

Q&A List

• Q

  I have a good understanding of this fiscal year. On the next MTP, you mentioned closing the discount by enhancing the value of the railway corridor and optimizing the asset portfolio. The three major Shibuya projects will likely be the centerpiece of the next MTP, but their contribution will come in the latter half. Could you explain your growth strategy for the first half, and any measures to counter the share price discount?

  A

  As you point out, the earnings contribution from the Shibuya redevelopment projects is still some way off. To show how we will grow until then, we deliberately presented our profit breakdown by area this time. The discussion has so far focused on Shibuya, but 60% of our total profit is generated along the lines outside Shibuya. In Shibuya, redevelopment and openings by other operators will increase the working population. We will grow earnings not only in real estate leasing but in other businesses as well. Meanwhile, the railway corridor is our main battleground, and we will grow it firmly. Fortunately, the population along our lines is increasing. As evidence, revenue at commercial facilities along the lines, including shopping centers, is rising faster than inflation. It is not that we neglected the corridor in the past. But we will focus on the corridor as well as Shibuya to unlock organic growth in the existing portfolio. Our aim is organic growth that more than offsets the rise in interest expense. We will not skimp on investment for organic growth and will proactively front-load repair spending. We expect construction costs to keep rising, so we will do the work early and recover the cost through subsequent earnings. In this way, one storyline is to enhance the earning power of the existing portfolio, centered on organic growth, across Shibuya, the corridor, overseas, and areas outside the corridor. Among individual businesses, Hotels & Resorts still holds significant upside, and we see it as still mid-way through structural reform. We will raise ADR through revenue management and other measures. Commission rates charged by overseas OTAs have risen considerably. We will therefore raise the direct booking ratio, including by joining GHA, to reduce commissions. There is also room to control labor and other costs. We raised the profit forecast for Hotels & Resorts this time, but we aim to add further upside. The other pillar is asset portfolio optimization. With interest rates rising, we will raise the ROA target above our initial assumption. We plan to disclose the target level in our upcoming management plan. Using that yardstick, we will identify businesses and properties with growth potential, those that would unfortunately be better managed by others, and those that fall outside our core area strategy, and proceed with asset recycling. I could go on for another 30 minutes, but I will stop here. As noted in the presentation, we intend to significantly expand our share of wallet in the corridor businesses, and we will work on this diligently as well.

• Q

  Following the downward revision to the profit plan, I would like to revisit your growth strategy for real estate leasing. Page 22 of the presentation shows figures such as the agreement rate for rent increases, CPI-linked clauses, and the rate of increase. However, it is unclear whether these outperform pure-play developers or are in line with the industry average. Could you share any comparable data points?

  A

  Real estate leasing posted lower profit this year, contrary to our expectations. Bad weather was the main factor. For example, SHIBUYA SKY, the observation deck at Shibuya Scramble Square, closes when it rains and admission fees are refunded. As a result, I believe utilization was in the 80% range versus the prior year. This is a one-off factor. On repair costs, our message to front-load the work properly has clearly taken hold. In any case, real estate leasing is a growth area for us. Soaring construction costs are forcing redevelopment projects nationwide to be cancelled or postponed. Projects already under construction and existing portfolios actually benefit from a tailwind, as new supply is not coming to market. In this environment, we are not simply riding market trends. Through recycled reinvestment into Shibuya and the communities along our lines, we will enhance urban functions in both hardware and software and raise the quality of life for workers. Our stance is to lead market rents ourselves. As for peer comparisons, there is talk of JPY 100,000/tsubo per month in the east. We hold a partial stake in TOFROM and follow its developments closely. Personally, I suspect the JPY 100,000 figure is partly aspirational. The JPY 60,000 and JPY 70,000 levels we present can be taken as our actual offer prices. These are top rents in Shibuya, not average rents. They are not targets but figures we are actually quoting in deals, so they can be considered firm. Each company sends out messages with different intentions, which makes an apples-to-apples comparison difficult, but that is our view.

• Q

  I assume many of your properties are leased to tenants within the group. I sense that you may not be collecting sufficient rent because they are group companies. What is your view on this?

  A

  My understanding is that rents for intra-group leases are basically close to market levels. Some hotel and commercial leases include a turnover-based component. Any shortfall in fixed rent is made up by the variable component, so the owner and operator are in the same boat. These are market-competitive rents. Put differently, if a business could not operate profitably while paying market rent, it could not open in other companies' properties, so we take this seriously. Regarding business development through intra-group leasing, I have told each company to pay full rent while achieving a higher ROA than the real estate leasing business. That is what creates synergies and a conglomerate premium, so we set a higher hurdle. I cannot name specific properties or facilities, but some group company stores leasing from us have an ROA above 20%. We want to raise the average level of such stores and have them contribute to lifting overall ROA. In the zero-interest-rate era, market attention focused more on absolute operating income and net income than on ROA. At least since I became president, we have focused on yields and set targets to achieve them. I am therefore confident that the efficiency of the overall portfolio will improve.

• Q

  You are revising the plan at this point, but how do you assess the current MTP overall? You set out various keywords such as organic growth, so I would like to hear how you performed on those.

  A

  The current MTP's numerical targets were set during the recovery from the COVID-19 pandemic and were subsequently revised upward, so the assessment depends on the point of comparison. I will therefore refrain from a numerical assessment and offer a qualitative one. The yield-oriented mindset, such as the ROA focus I mentioned earlier, has steadily taken root across each company and business. The current MTP was also the first time we explicitly introduced the term organic growth. The company has a development-driven culture, and attention to existing businesses was somewhat lacking. Having worked with REITs for many years, I felt we were not allocating enough management resources to organic growth, so we built it into the MTP. Here too, I believe awareness has advanced a step or two at the parent company and across consolidated subsidiaries. There is still room for organic growth. Beyond the remaining six months, we intend to make it a major theme in the next management plan, on par with external growth through development.