Heiwa Target for Mitsubishi Estate Exploiting 49% Value Discount: Real M&A
Mitsubishi Estate Co., whose $1.4 billion Rockefeller Center investment ended in default, may find buying Heiwa Real Estate Co. the cheapest way to profit from the rebirth of Tokyo’s oldest neighborhood as a financial center.
Mitsubishi Estate, which currently holds an 11 percent stake in Heiwa, will pursue acquisitions to help it overtake Mitsui Fudosan Co. as the biggest developer in Japan, President Hirotaka Sugiyama said last month. Heiwa, which owns some land and about six buildings including the Tokyo Stock Exchange in the historic Nihonbashi district, trades at a 49 percent discount to the value of its net assets, the cheapest of any Japanese real estate developer, according to data compiled by Bloomberg.
A takeover of Heiwa would give Mitsubishi Estate, which has turned Marunouchi into Tokyo’s most expensive business district, a foothold in Nihonbashi, a center of commercial life in Japan’s Edo period from 1603 to 1867. The former owner of Manhattan’s Rockefeller Center, which projects profit will decline after it missed three-year sales and earnings targets, would be making inroads into Mitsui Fudosan’s most important district as tax breaks accelerate construction in Nihonbashi.
“Buying Heiwa would open a door for them there and will probably help boost their profit target in the long run,” said Hideyuki Shinkai, a fund manager in Tokyo for Norinchukin Trust & Banking Co., which has $149 billion in assets. “Mitsubishi Estate is probably aiming for participation in redevelopment of the area around the Tokyo Stock Exchange as an international financial center by entering Mitsui Fudosan’s territory.”
Heiwa rose 3.9 percent, its biggest gain in more than three months, to 185 yen as of the 3 p.m. close of trading in Tokyo. Shares of Mitsubishi Estate were unchanged at 1,447 yen.
‘The Time Being’
Mitsubishi Estate’s Sugiyama said in an interview on June 22 that the company doesn’t have a plan to boost the stake, “for the time being.” Company spokesman Ryuichiro Funo said the stance toward Heiwa has not changed since then.
Naoto Kato, a spokesman for Heiwa, said there is no plan for Mitsubishi Estate to raise its stake.
“We are not in the position to comment on a plan by Mitsubishi Estate and Heiwa,” said Hideaki Yamakawa, a spokesman at Mitsui Fudosan. The company, along with Mitsubishi Estate and Heiwa, is based in Tokyo.
Mitsubishi Estate, Japan’s second-biggest real estate company by sales, forecast in May that profits will drop 14 percent in the fiscal year ending in March as demand for office space and new homes weakens after Japan’s biggest earthquake on March 11 spurred the worst nuclear disaster since Chernobyl 25 years ago. By market capitalization, Mitsubishi Estate is Japan’s largest developer, with a value of 2.01 trillion yen ($25 billion). Mitsui Fudosan is valued at 1.27 trillion yen.
Mitsubishi Estate fell short of its three-year profit target in the year ended in March, after the global credit crisis halted a recovery in Japan’s real estate market. It posted net income of 64 billion yen last fiscal year, about half of the 115 billion-yen goal it had set in 2008.
The company still announced plans last month to invest about 600 billion yen over the next three years, 53 percent more than the previous three-year period, to redevelop buildings in central Tokyo in anticipation of a recovery in rents. About half of the funds will be spent outside the Marunouchi area.
Tokyo’s office vacancy rate fell to 8.88 percent in May, after reaching a record of 9.19 percent in March, while rents in the city’s five main business districts slid to an all-time low in May, according to Miki Shoji Co., a privately held office brokerage company.
Mitsubishi Estate is still aiming to double operating profit for its residential business to 26 billion yen by the year ending March 2014.
‘Difficult to Neglect’
“Without purchasing a company, I don’t think the company can achieve double profit growth,” said Masahiro Mochizuki, a Tokyo-based analyst at Credit Suisse Group AG who has a “neutral” rating on Mitsubishi Estate. “It’s difficult to neglect the possibility that it may acquire Heiwa.”
Mitsubishi Estate’s largest deal outside Japan was a $1.4 billion investment in the owner of Manhattan’s Rockefeller Center two decades ago.
The move was part of a buying spree by Japanese investors that included California’s Pebble Beach golf course and Vincent Van Gogh’s Sunflowers painting as the Nikkei 225 (NKY) Stock Average reached a record close of 38,915.87 in December 1989. Many of the purchases were later sold at a fraction of their cost as the country’s asset bubble burst.
Mitsubishi Estate purchased 80 percent of The Rockefeller Group in three stages in 1990 and 1991. It lost Rockefeller Center to creditors in 1996 and booked 150 billion yen in losses and writedowns, according to the company. Mitsubishi Estate bought the remaining 20 percent of Rockefeller Group, which invests in and manages commercial real-estate, in 1997.
Now, Mitsubishi Estate’s 53 billion yen ($656 million) acquisition of Towa Real Estate Development Co. could serve as a guide for future deals, Sugiyama said in the June 22 interview. The developer first announced the partnership with Towa in 2004, buying one-third of the Tokyo-based company three months later. It increased its ownership to 100 percent by April 2009.
The acquisition of Towa, which develops apartments in western Japan, enabled Mitsubishi Estate to sell apartments in areas where it didn’t have a strong presence, Sugiyama said.
“We would like to look at deals that will boost business feasibility,” said Sugiyama, 62, citing Towa as an example.
Mitsubishi Estate bought its Heiwa stake in a deal that closed on March 7. The magnitude-9 earthquake four days later and crisis at the Fukushima nuclear plant sent the Nikkei average down 18 percent in three days through March 15.
Stock Market Slump
Heiwa has lost 19 percent to 185 yen since the earthquake, nearly double Mitsubishi Estate’s 11 percent drop to 1,447 yen and almost five times the 4.4 percent retreat in the Nikkei. That means Mitsubishi Estate could buy the rest of Heiwa for 23 percent less than the 230 yen it paid for the March stake, excluding a possible premium, data compiled by Bloomberg show.
Heiwa currently trades at the cheapest valuation relative to net assets of the 22 Japanese real estate developers with a market value greater than $250 million, data compiled by Bloomberg show. Heiwa, with a market capitalization of $441 million, trades at 0.51 times book value, or assets minus liabilities. That compares with a median multiple for the group of 0.97. Mitsubishi Estate fetches 1.67 times, and Mitsui Fudosan 1.24 times, the data show.
The quality of office buildings Heiwa controls and lower sales for the Tokyo Stock Exchange may account for Heiwa’s cheaper valuations, according to Satoshi Yuzaki, a Tokyo-based analyst at Takagi Securities Co. Revenue for the TSE, Heiwa’s main tenant, may be curbed by a weaker stock market, he said.
Still, Heiwa has generated more operating income per dollar of sales than Mitsubishi Estate and Mitsui Fudosan. Heiwa’s operating margin almost doubled to 28 percent last fiscal year, compared with 16 percent for Mitsubishi Estate and Mitsui Fudosan’s 8.6 percent, data compiled by Bloomberg show.
An acquisition of Heiwa would intensify a century-old competition between Mitsubishi Estate and Mitsui Fudosan, which are each part of two of Japan’s largest so-called keiretsu, or groups of companies that often share business relationships and own shares in each other.
About 43 percent of the floor space Mitsui Fudosan holds in central Tokyo is in the ward that includes Nihonbashi, according to the company. Besides the TSE, the area is home to one of the flagship stores of Isetan Mitsukoshi Holdings Ltd., Japan’s biggest department store operator, and the headquarters of Nomura Holdings Inc., Japan’s largest brokerage.
The revival of Nihonbashi, which includes plans to bury a highway and resurrect a river-cruise route that hasn’t been used since the Edo era, could boost the area’s economy by as much as 3.1 trillion yen through higher property values and revenue generated by more visitors, according to Nihonbashi Michikaigi, a group of academics that advocates for the redevelopment.
Fueling the development are tax breaks on property acquisitions as well as financial assistance offered by the government for specific zones including Nihonbashi. The latest of these were established on June 22 by Japan’s Cabinet Office.
Average asking rents for office space in Marunouchi are still the highest in Japan at 24,200 yen per tsubo, according to Los Angeles-based CB Richard Ellis Group Inc. (CBG) One tsubo, a measure of property area in Japan, is 3.3 square meters, or 35.5 square feet.
“Mitsubishi Estate continues to create an entire portfolio of relatively new buildings in Marunouchi, but they also know that pretty soon there are going to be much younger crop of buildings in Nihonbashi,” said James Fink, senior managing director at Colliers International in Tokyo. “They will want to have some participation in that.”