Mitsubishi Estate More Affected Than Peers by Interest Rate Rises, but Its Shares Are Cheap

We maintain our fair value estimates of JPY 2,800 for Mitsui Fudosan and JPY 4,000 for Sumitomo Realty, equivalent to 0.53 times Mitsui Fudosan’s net asset value assuming 30% tax rate and 0.45 times Sumitomo Realty’s net asset value, and reduce our fair value estimate for Mitsubishi Estate to JPY 2,100 from JPY 2,200. Our new estimate for Mitsubishi Estate is 0.54 times net asset value, compared with 0.57 times previously. Earnings for the December quarter, the third quarter in the companies’ fiscal years ending March 2023, were in line with expectations for Mitsui and Sumitomo Realty, with annualized return on equity of 6.6% for Mitsui and 9.5% for Sumitomo Realty, near their averages and on track to at least meet company guidance for the year. Mitsubishi Estate’s annualized ROE of only 4.9%, however, was below its average of around 7% and the ROE implied by its guidance for this year of around 8%. Some of this was due to the timing of property sales, which always creates noise in the quarter-to-quarter results of the developers (a reason to focus instead on annual trends), but the slight weakness of Mitsubishi Estate’s results was broad enough to raise a bit of concern even though management maintained its overall profit guidance for the current year and expressed confidence for its prospects in the new fiscal year starting in April. Mitsubishi Estate’s investment management segment in particular seems vulnerable to declining market value of managed assets overseas as higher U.S. dollar interest rates lead to higher cap rates for properties. That said, we think current share prices already incorporate the risk. There is 30% upside to our new fair value for Mitsubishi Estate, versus 14% upside for Mitsui and 28% upside for Sumitomo Realty. If global interest rates stop going up, this could be a good time to buy the sector at relatively depressed valuations, in our view.