Sumitomo Realty’s October-December Results Show Steady Progress but No Surprises

We maintain our fair value estimate of JPY 4,000 for Sumitomo Realty, equivalent to 0.47 times net asset value assuming a 30% tax rate on unrealized gains and 9% above the current share price. Net profit for October-December was JPY 37.9 billion (annualized return on equity of 9.4%), bringing total profit for the nine months from April to December 2021 to JPY 129.0 billion, 86% of Sumitomo Realty’s guidance of JPY 150 billion for the fiscal year ending in March. Nine-month operating profit of JPY 193.8 billion was 85% of full-year guidance of JPY 228 billion, with the core leasing segment reaching 83% of its guidance of JPY 160 billion, the property sales segment reaching 94% of its guidance of JPY 50 billion, and the housing-construction and brokerage segments reaching 63% and 93% respectively of their full-year guidance of JPY 18 billion and JPY 16 billion. In general, the results show steady progress despite the deteriorating office market, with operating profit up 8.0% from a year earlier and up 5.2% from 2019, the previous historical high recorded before the coronavirus pandemic. The company’s office vacancy rate rose to 5.9% at year-end from 5.6% in September but did not prevent leasing segment profit from topping 2019 (when the vacancy rate was only 1.6%) due to rent contributions from buildings in Kojimachi and Ochanomizu completed last year, as well as a reduced impact than in 2020 from closures of event halls and hotels. Sumitomo Realty believes the worsening of its vacancy rate has subsided for the time being. It has nearly completed leasing of new buildings in Tamachi and Kanda, with the focus now on filling its redevelopment project in Mita to be completed next year. Condo sales were in line with original guidance. Other businesses are up versus 2020, with brokerage exceeding prepandemic levels and housing construction still below 2019 but on a rising trend.