Fitch Ratings has assigned Japan-based Mitsui Fudosan Co., Ltd. first-time Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of 'A'.
The Outlook is Stable. Fitch has also assigned a senior unsecured rating of 'A'.
Mitsui Fudosan's ratings reflect the strength of its business profile, which benefits from a large and diversified portfolio, quality properties, high rental-income stability and a solid liability profile.
The Stable Outlook reflects Mitsui Fudosan's high portfolio value and strong property performance, which allows the company to manage its loan-to-value (LTV) ratio and EBITDA interest cover within the sensitivities for its ratings.
Key Rating Drivers
Large Scale, High Quality Portfolio: Mitsui Fudosan's business profile strength reflects significant scale and superior property quality, including location, diversification, grade and resilient performance. It owns over 100 properties, including Grade A or A- properties in the Tokyo CBD, urban and regional shopping complexes, logistics facilities and hotels. The total portfolio is valued at JPY9.7 trillion. Its property portfolio also compares favourably with that of 'A' rated peers in APAC. These factors underpin Mitsui Fudosan's solid performance, including its rapid recovery from market downturns.
Strong Property Performance: The high quality of Mitsui Fudosan's property portfolio underpins high demand for its space and supports its historically strong earnings visibility. Occupancy rates have been above the market average, except on a few occasions when, for example, the company opened a new landmark property. The portfolio's occupancy rate was 95.7% at end-March 2023 and that of its Tokyo offices was 96.2%, and are likely to remain high. Leasing activity also remains strong. Properties less than five years old make up 30% of the portfolio and command higher rents.
Strong Recurring EBITDA Interest Coverage: Mitsui Fudosan's interest coverage by its recurring EBITDA (defined as total EBITDA less that of the property sales segment; recurring EBITDA is mainly rental income from investment properties and management fees) compares favourably with that of 'A' rated, more conservatively capitalised APAC peers.
Fitch expects Mitsui Fudosan to maintain recurring EBITDA interest coverage of 4.5x to 4.6x over the financial years ending March 2024 to March 2027 (FYE24-FYE27), driven by solid rentals and low interest rates. The company's high level of fixed-rate funding provides greater visibility for this expectation.
High but Stable LTV: Mitsui Fudosan's leverage, as measured by net debt to property asset value, or LTV, is high for its rating (40% at end-March 2023), but remains stable despite significant business and asset expansion. The company's leverage management is largely in line with that of other large Japanese real estate companies. These factors, along with strong relationships with its core lenders and good access to funding, support its strong bankable profile.
Large Property Sales: Mitsu Fudosan's property sales segment is large relative to that of 'A' rated peers. The segment accounted for 34% of the company's consolidated EBITDA and 22% of property asset value in FYE23, contributing to the relatively high LTV. Mitsui Fudosan's large development pipeline for both leasing and property sales is likely to require additional capital and leverage control.
Mitsui Fudosan's demonstrated record of disposing of assets and recycling sales proceeds into new investments, while maintaining extensive exit options (such as sales to its sponsored REITs and funds, and to institutional investors) mitigate risks associated with its high LTV and large development pipeline. In addition, the property sales segment has been highly cash generative, helping keep leverage under control.
Derivation Summary
Mitsui Fudosan business profile, including its portfolio as Japan's largest real estate company, the quality of its properties, high rental income stability and solid liability profile, as well as its majority operations in the highly stable and matured Japanese real estate markets, compares favourably with those of the industry peers in the 'A' category of APAC peers.
Mitsui Fudosan's financial flexibility, namely EBITDA interest cover ratio, compares well with those of APAC peers. It is further enhanced by its diversified funding sources, including conventional debt and equity as well as multiple exit options (ie sales to its sponsored REITs and funds, and third-party investors); strong relationships with core lending banks; and, Japan's low interest rates, easy access to bank loans, and banks' strong appetite for lending to large corporates such as Mitsui Fudosan and real estate transactions.
The financial structure of APAC peers is stronger than that of Mitsui Fudosan. Even so, Mitsui Fudosan's 40% LTV does not present any material risk because of its strong business profile and financial flexibility.
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer:
Revenue growth of 1%-2% a year in FYE24-FYE27, driven by 3%-6% growth in leasing revenue and broadly flat growth in other business revenue;
EBITDA margin of 20%-21% in FYE24-FYE27;
Capex of around JPY260 billion a year in FYE24-FYE27
Net investment in properties for sale declining from JPY220 billion in FYE24 to break-even in FYE25-FYE27;
Total shareholder return of 45%, including a dividend payout ratio of 30.4%. The remainder will be used for share buybacks.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch does not envisage positive rating action within the next 12-18 months given Mitsui Fudosan's high exposure to non-recurring property sales.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Recurring EBITDA interest cover remaining below 4.0x for a sustained period (FYE23: 5.2x);
LTV ratio above 40% for a sustained period (FYE23: 40%)
Liquidity and Debt Structure
Strong Liquidity, Asset-Liability Management: Mitsui Fudosan had available liquidity of JPY534 billion at end-March 2023, consisting of cash of JPY134 billion and undrawn committed facilities of JPY400 billion. The company has additional undrawn borrowing facilities, which are very common in Japan, but these are not committed and are not included in available liquidity. The sum of available liquidity and additional borrowing facilities is more than sufficient to cover all short-term debt (JPY803 billion).
The liquidity ratio is low, due mainly to the large amount of non-recourse debt maturing within one year. The company uses non-recourse debt for some real estate projects and it has a shorter maturity than most of the company's corporate debt. Non-recourse debt accounted for 17% of the company's total debt and 30% of short-term debt. The company maintains liquidity at around the same level as its short-term corporate debt (JPY568 billion).
In principle, Mitsui Fudosan maintains a high long-term/fixed-rate ratio of outstanding debt due to the long-term nature of its real estate assets. Long-term and fixed-rate debt accounted for 93% and 90%, respectively, of the company's corporate debt. The company maintains diversified funding sources, although bank borrowings are the largest at 76% of corporate debt. The company's strong bankable profile, with solid relationships with lending institutions, supports the high level of bank borrowings.
Issuer Profile
Mitsui Fudosan is the largest Japanese real estate company by revenue. Its diversified activities include property leasing, development and sales, construction and design, brokerage, property management, and asset management and consulting. However, its core business remains property leasing.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.
MITSUI FUDOSAN CO., LTD. 
