Activist investor Elliott urges Mitsui Fudosan for significant buyback; outlines three avenues for value creation

Mitsui Fudosan Co Ltd (8801.T), Mitsui Fudosan operates primarily in the real estate sector in Japan. The company is structured into five distinct business segments. Firstly, the leasing unit focuses on renting out office buildings and commercial spaces. Secondly, the allotment sale segment is responsible for selling condominiums and houses to individual customers, as well as providing rental properties and office spaces for investors.

The management segment oversees property management, brokerage services, and asset management. Mitsui Home is involved in new construction, renovation, and refurbishment projects. Lastly, the “others” segment encompasses the operation of hotels, golf courses, and resort facilities, and engages in the loan guarantee business.

Stock Market Value: The market capitalization of Mitsui Fudosan stands at 3.869 trillion yen, equivalent to 4,144.00 yen per share. Additionally, the company’s stock is also traded in the United States in the form of American depositary receipts, under the ticker symbol MTSFY.

Mitsui Fudosan
Mitsui Fudosan, Japan’s top real estate firm, is undervalued despite premium quality and stagnant stock.

Elliott Management is renowned for its proficiency and success as an activist investor, he has a percentage ownership of 2.5%. The firm boasts a team comprising analysts with backgrounds from prominent tech private equity firms, as well as engineers and operating partners who have previously served as CEOs and COOs in the technology sector.

In its investment assessments, Elliott employs a comprehensive approach, engaging specialty and general management consultants, expert cost analysts, and industry specialists. Known for its patient approach, Elliott often observes companies for an extended period before initiating investments, maintaining an extensive roster of highly qualified board candidates.

While historically concentrating on strategic activism within the technology sector, Elliott has expanded its activism efforts in recent years, engaging in longer-term strategies and fostering value creation at the board level across a broader spectrum of companies.

Elliott Management is pressuring Mitsui Fudosan to initiate a 1-trillion-dollar share repurchase plan and reduce its stake in Oriental Land. Elliott Management typically looks for three key criteria in its activist investments: (i) a high-quality business, (ii) trading at a discount to its fair value, and (iii) potential for catalyzing change to enhance shareholder value.

Skyline of Tokyo, Japan.
Mitsui Fudosan urged to divest Oriental Land stake, accelerate real estate asset disposal, and buy back shares. (Credits: CNBC News)

Mitsui Fudosan undeniably fits the bill as a high-quality business, being Japan’s leading real estate company. Its properties are esteemed for their prime locations and attractive rental pricing. Despite its focus on commercial real estate, Mitsui Fudosan commands a notable brand presence, allowing it to command premium pricing from tenants eager to be associated with its quality offerings.

A cursory analysis reveals that Mitsui Fudosan is currently trading at a significant discount to its fair value. Since January 2014, its stock price has remained stagnant while the Nikkei has surged by over 120%. Furthermore, Mitsui Fudosan’s net asset value has nearly tripled during this period.

Previously trading at a premium, the company now trades at a post-tax discount of 33%. Even after factoring in its stock portfolio valued at 800 billion yen, which includes a substantial position in Oriental Land Company, its net asset value stands at 7,103 yen per share, suggesting an 84% discount to its stock price.

The root causes of this underperformance are likely familiar to those monitoring recent activist campaigns in Japan, including those by Elliott, ValueAct, and Palliser, as well as actions by the government and the Tokyo Stock Exchange.

Mitsui Fudosan
Shareholder discontent fueled by low ROE, inefficient capital allocation, and governance issues at Mitsui Fudosan. (Credits: Mitsui Fudosan)

Mitsui Fudosan grapples with low valuation and return on equity, both in absolute terms and relative to its peers. Governance practices further erode shareholder confidence, with the company’s substantial stock portfolio diluting its return on equity significantly.

Remedying these issues necessitates improved capital allocation and corporate governance, with a board instilling confidence in shareholders regarding matching portfolio growth with shareholder returns. Mitsui Fudosan can take immediate steps to create value for shareholders by divesting its stake in Oriental Land, accelerating the disposal of non-core real estate holdings, and utilizing proceeds for share buybacks and strategic real estate investments.

This campaign echoes Elliott’s engagement at Dai Nippon Printing, where similar strategies led to significant share repurchases and value creation. Despite Mitsui Fudosan’s governance challenges, there are signs of optimism, including the absence of a large controlling shareholder, minimal cross-shareholdings, and vocal commitments from President and CEO Takashi Ueda to enhance shareholder returns and capital efficiency.

Sajda Parveen
Sajda Parveen
Sajda Praveen is a market expert. She has over 6 years of experience in the field and she shares her expertise with readers. You can reach out to her at [email protected]
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