Daito Trust Q2 FY2027: Operating profit rises 14.3%, outlook lifted

Daito Trust reported revenue of ¥988.6 billion, operating profit of ¥79.2 billion and interim net income attributable to owners of the parent of ¥64.1 billion for the first half of FY2027. The figures were up 3.0%, 14.3% and 28.6%, respectively, from a year earlier, with profit growth outpacing revenue.

• Growth in rental income: Higher occupancy and an increase in managed properties lifted revenue and profit in the rental business.
• Improved construction margins: Completed construction revenue declined, but price revisions and other factors raised the gross margin on completed construction by 2.8 percentage points from a year earlier.
• Expansion in property development: The consolidation of THE Global Co. and solid performance across businesses contributed to higher revenue and profit.
• Impact of special items: Daito Trust booked a ¥9.8 billion gain from the sale of Solasto shares, while also recording a ¥4.3 billion valuation loss on its JustCo shares.

Rental income and property development drove profit growth, while the net income increase also included the gain on the Solasto share sale. The operating margin rose to 8.0% from 7.2% a year earlier, as improved profitability in the rental and construction businesses supported core earnings.

Real estate leasing revenue rose 4.0% year on year and operating profit increased 16.7%. Higher rental income at property management companies reflected growth in master-leased properties and strong occupancy. The residential rent-based occupancy rate in September was 97.7%, up 0.4 percentage points from a year earlier.

Construction revenue from completed projects fell 6.1% year on year, while operating profit rose 11.4%. Price revisions and other factors improved the gross margin on completed construction, but higher interest rates increased customers' financing costs and new construction orders declined 13.2%.

Real estate development revenue increased 30.6% year on year and operating profit rose 53.3%. Growth reflected the consolidation of THE Global Co., as well as sales of investment apartments and income-producing properties. Other businesses recorded a 6.7% increase in revenue, but operating profit fell 20.1% as costs rose for expanding care facilities and hiring.

Operating profit trends varied across business lines. Development stood out for growth, while other businesses recorded a decline. Stable, recurring income from the rental business supports the group, but fewer construction orders could weigh on completed construction revenue in the future.

Daito Trust raised its full-year forecast for FY2027. The company cited rent revisions and high occupancy in the rental business, as well as the consolidation of THE Global Co. It lifted its revenue forecast by 1.5% and its operating profit forecast by 5.6% from the previous outlook.

The new forecasts imply year-on-year increases of 4.8% in revenue, 10.9% in operating profit and 10.1% in net income. First-half operating profit reached about 52.9% of the full-year forecast, but investors should watch the weakness in construction orders and trends in materials and labor costs.

Total assets at the end of September stood at ¥1.5667 trillion, up ¥199.2 billion from the end of the previous fiscal year. The equity ratio fell 2.1 percentage points to 34.4%. Operating cash flow deteriorated to a negative ¥31.8 billion from a negative ¥15.7 billion a year earlier, while investing cash flow was negative ¥12.7 billion.

• Assets and liabilities: Real estate for sale and real estate under development increased, while long-term borrowings rose ¥145.8 billion from the end of the previous fiscal year.
• Cash flows: Financing cash flow was positive ¥123.1 billion, and cash and cash equivalents stood at ¥338.7 billion at the end of the first half.
• Dividends: The interim dividend was ¥81 per share, with a year-end forecast of ¥84. The annual forecast of ¥165 is ¥14.6 higher than the previous-year result of ¥150.4, adjusted to reflect the stock split.
• Treasury shares: Spending on share repurchases during the first half was ¥13.4 billion.

Assets and interest-bearing debt increased, reflecting purchases of properties for development and the acquisition of THE Global Co. The annual dividend forecast assumes a consolidated payout ratio of 50.2%, as the company pursues growth investment alongside shareholder returns.

Daito Trust made THE Global Co. a wholly owned subsidiary as it seeks to expand its property development business. THE Global Co. specializes in residential development in central areas of the Tokyo metropolitan region and capital-efficient management. Daito Trust aims to strengthen the group's development and sourcing capabilities, link them more closely with its construction functions and diversify its exit strategies.

Separately, Daito Trust sold all of its shares in Solasto, ending a capital and business alliance that began in 2015. The company judged that the collaboration had delivered limited benefits and booked a ¥9.8 billion gain on the sale as an extraordinary gain in the first half.

The strategy to make development a core pillar of the group is clear, but integration and profit generation after the acquisition remain key tests. Daito Trust aims to increase investment and strengthen earnings in property development through collaboration with THE Global Co.

Although profit increased in the first half, fewer construction orders and rising interest rates and costs could affect future orders and margins. Against the backdrop of an uncertain business environment flagged by the company, investors should watch the following:

• Higher interest rates: Increased financing costs could make customers more cautious about investing in rental housing and potentially affect construction orders.
• Fewer orders and a smaller order backlog: New construction orders fell 13.2% year on year in the first half, and the order backlog at the end of September was down 4.7%, raising concerns about future completed construction revenue.
• Raw material and energy prices: Persistently high prices could increase construction and facility operating costs, putting pressure on margins.
• Upfront costs in the care business: Continued spending to expand facilities and recruit staff could delay a recovery in profit from other businesses.
• Post-acquisition integration: If collaboration with THE Global Co. does not proceed as planned, growth in development and returns on investment could be affected.

Occupancy and growth in managed units support the rental business, but a recovery in construction orders and the ability to generate earnings from the acquired business are medium-term focal points. Materials prices, interest rates, and the effects of currency and geopolitical risks on logistics and energy could also cause results to fluctuate.