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Arealink Co., Ltd. (JP-8914) TSE Mothers ( II )

2018-11-02  提供機構:FISCO  作者:FISCO  點閱次數:2

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Responds to all process for self-storage properties with land, from land purchases through to the exit strategy

2. The self-storage business growth strategy

(1) Conditions in the self-storage market

The scale of the Japanese self-storage market (container storage and rental storage rental income) was estimated to be ¥65.7bn in 2017. In the same year, the Company’s self-storage rental income (including administration costs) was net sales of ¥9,886mn for self-storage management within the Property Management Service segment. Based on this, it is estimated that the Company’s share of the self-storage market is 15.1%.

Medium-term Management Plan – Basic Policy

There is the opinion that the Japanese self-storage market will grow to be worth approximately ¥77.8bn in 2020, an average annual growth rate of 5.8% for the 3 years from 2017 until 2020. As previously stated, the Company is planning an average annual growth rate for self-storage management net sales of 10.6%. Based on the market outlook and the Company’s revenue plan, its market share in FY12/20 will have risen to 17.2%.

In the self-storage business, the United States greatly leads Japan. According to the Company’s survey and estimates, the volume of supply (the number of units) of self-storage in 2015 was approximately 20 million units in the United States, but only around 450,000 units in Japan, which is a difference of roughly 44.4 times. The number of households during the same period was approximately 114.59 million households in the United States and around 56.41 million households in Japan, a difference of roughly 2.0 times. On dividing the number of households by the number of units supplied, in the United States there are 6 households per unit, but in Japan, there are 125 households per unit. From this, we understand that there is an enormous gap between the two countries in terms of the extent to which self-storage has spread.

As there are differences between Japan and the United States in terms of living conditions and lifestyle, it cannot be asserted that self-storage will spread in Japan to the same extent as in the United States. But in the United States, where the areas of homes are wider than in Japan, the current situation, in which self-storage has spread more than in Japan, can be said to be extremely interesting and full of suggestions.

(2) The features and strengths of self-storage as real estate investment

As mentioned in the History section, since it was established, the Company has developed various business forms within the broad framework of real estate investment, and it is currently focusing on the self-storage business. The major reason for this is that the Company considers that self-storage will spread as the choice of real estate investment.

At FISCO, we think this opinion of the Company is persuasive. What is most important for real estate investment is customer acquisition, and on this point, self-storage is thought to have a major advantage. As previously stated, compared to in the United States, the extent to which self-storage is known and has spread in Japan are low. When considering factors like housing conditions, in terms of the social structure, the potential demand for self-storage can be said to be extremely large. Japan has entered a stage of a declining population, but at FISCO, we think that the effects that this declining population will have on the demand-supply balance in the self-storage market will be smaller than in the residential real estate market. It is also considered that even under a declining population, competition will not occur between residential real estate and self-storage. Cases of an apartment resident renting a neighboring unit that has become vacant, instead of choosing storage, would seem to be extremely rare.

Self-storage also has many advantages on the points such as the initial investment and maintenance and man­agement. This is easy to understand when comparing it to investment in residential real estate, like in apartments and condominiums. It goes without saying that for residential real estate, bathrooms and kitchens are essential. A certain level of investment is also necessary for the interior decoration. Also, should the tenant leave, it will be necessary to pay the costs to restore the property to its original condition. In contrast, as self-storage is intended for the storage of items, these costs are basically unnecessary.

In terms of location also, self-storage is superior. It is not a problem if it is located at a distance from a train station or shopping district. Commercial zones are considered to have a radius of around 2 km, but with the assumption of the use of a vehicle, the important points for self-storage are ease of use, such as being alongside a community road, and ease of access. These features of self-storage mean that there is little competition with other real estate, like residences and parking lots, for the securing of land, and relatively inexpensive land can be acquired and utilized for a rational price. These points can be expected to contribute to keeping down the initial investment and improving the investment yield.

(3) Features and strength of the self-storage business

The Company’s self-storage business is divided into three major types, including the outdoor container-type self-storage. Below, self-storage properties with land, which is the type that the Company is currently focusing on the most, is described.

The business model for self-storage properties with land is that once the Company has acquired land, it constructs self-storage property on it and sells both the land and property to investors (such as the wealthy and business companies), and then with a rental guarantee for full occupancy, it collects revenue for its management (tenant recruitment, operations and management). Therefore, the series of processes involved, from the purchase of the land through to the management and administration after the acquisition of the end-user customers, can be broadly divided into five processes.

Land purchases are an extremely important aspect for the start of the business. As previously mentioned, one feature of self-storage locations is that they do not overlap with the land used for residences and parking lots, so it would seem it is possible to purchase the land for a rational price in accordance with the actual situation. The Company raises the funds for purchases through bank loans and other such means, in addition to the capital increase it conducted in June 2018. Keeping in mind customer acquisition after the construction of the property, it has established extremely detailed guidelines for land purchases and conducts strict surveys. For FY12/18, it has completed the acquisition of the land during the 1H for the 50 properties it plans to open, and in the 2H, it will work on securing the land for the property openings in FY12/19.

The construction of properties is divided into steel frame and wooden construction (2 x 4 construction method) as appropriate according to the location conditions (including the surrounding environment, the application area, and the zoning area). Compared to the container-type, the construction period is long, which means that capital efficiency is poor. The Company is working to raise the quality of its in-Company designers and on designs that will contribute to improving efficiency and shortening the construction period. Also, since the prices at the time of the sale are determined by the income approach rather than by the cost-accumulation method, fluctuations in construction costs directly affect the Company’s gross profit margin. Therefore, achieving low-costs designs is another important theme. It aims for a profit margin on sales of approximately 20% (on a gross profit basis), and it seems that the Company is currently essentially achieving this target.

For sales, prices are set using the income approach and the land and property are sold as a package to investors. Once sold, the Company will shift to self-storage management with a rent guarantee for full occupancy. The sales activities themselves are typically carried out at the stage when the land has been purchased and the building construction confirmed. As there is a rent guarantee, demand from investors is strong, and in practically every case, the sales are completed before the buildings are constructed. The current issue is that due to a change in the attitude of banks toward lending, there have been some cases in which investors were unable to obtain loans and therefore the sales negotiations were unable to be progressed.

On this point, the Company is working to diversify its exit strategy, such as conducting sales to private-placement funds formed for the purpose of investing in real estate. Up to the present time, two private-placement funds, whose main purpose is investing in the commodity of self-storage, have been formed, and a total of seven self-storage properties with land have been sold to these funds. The formation of private-placement funds is expected to continue in the future, and at the present time, the focus is on the No.3 fund, which is scheduled to be formed sometime in November and December 2018. The Company plans to open a further 35 properties in FY12/18 2H (50 properties on a full fiscal year basis), and the funds are expected to play the role of being the major receptacle for the large number of property openings.

For the acquisition of end-user customers, the Company conducts detailed investigations, such as of the fees in neighboring parking lots, and it works to set appropriate prices. In addition, it aims to exceed the break-even point at an early stage by conducting the necessary advertising and publicity and other campaigns. The occupancy rate that constitutes the break-even point is set to an average of 70%, which is a lower level than for the container-type self-storage, of 80%. Therefore, essentially, the profitability of self-storage properties with land exceeds that of the container-type self-storage.

In self-storage management, the portion paid to investors as the rent guarantee becomes the cost of sales, which is subtracted from rental income, which are net sales, and the difference becomes the gross profit, with the gross profit margin being set at approximately 20%. Currently, the Company continues to actively open properties, so many properties have only just opened. Therefore, the percentage of newly opened properties with low occupancy rates is comparatively high, so the situation is that profitability appears to be low. However, the properties that exceed the break-even point from the third year onwards obtain incidental income from the end user, of fees for administration and for the “security guarantee pack,” in addition to the gross profit of rental income. So they have a higher profit margin than is generally considered.

The measures in the daily management and administration include the utilization of home workers and the automation of operations through introducing RPA. Part-time employees who allocate time to working at home are in an environment in which they can concentrate more on their work than regular employees, and the aim is to make use of this advantage.

Through the measures described above, the Company is accelerating its openings of self-storage properties with land properties and aiming to realize its quantitative vision for the medium-term management plan.

◆Results trends

Initial forecasts were for higher sales but lower profits, but results exceeded the forecasts for higher sales and profits

1. FY12/18 1H results

In FY12/18 1H, both sales and profits increased, with net sales of ¥13,943mn (up 34.2% year-on-year (YoY)), operating income of ¥1,494mn (up 17.2%), ordinary income of ¥1,344mn (up 3.4%), and net income of ¥910mn (up 6.2%)

The initial forecasts were for an increase in sales but decreases in profits. But each of the results exceeded their forecasts, net sales by 3.3% (¥443mn), operating income by 26.1% (¥309mn), ordinary income by 19.0% (¥214mn), and net income by 19.1% (¥145mn). As a result, as previously stated, both sales and profits increased.

For the FY12/18 full year, the Company plans to newly open 50 properties for self-storage properties with land, and in FY12/18 1H, it opened 15 properties, for a cumulative total of 37 properties at the end of 1H. As stated in the business model section, the self-storage properties with land process is first completed through brokerage (sales to investors), and in FY12/18 1H, the Company sold 15 properties (which includes those opened in previous fiscal years). The total sales price of the 15 properties was approximately ¥4.2bn for an average price per property of around ¥280mn. This high price seems to be due to the large percentage of steel frame, large-scale projects.

As a result of the steady progress made for property openings for the outdoor container-type self-storage also, the number of self-storage units during FY12/18 1H increased by 3,450 units. At the end of 1H, the total number of self-storage units had reached 85,005 units.

As a result of these business activities, sales and profits increased greatly in the Property Management Service seg­ment, with net sales rising 34.6% YoY to ¥12,356mn and operating income climbing 22.5% to ¥1,855mn. Looking at the breakdown of net sales by sub-segment, the Company posted a 13.1% increase to ¥5,435mn in self-storage management, a 77.2% increase to ¥5,943mn in self-storage brokerage, and a 4.2% decrease to ¥977mn in other property management services. In operating income by sub-segment, the Company posted a 93.5% increase to ¥774mn in self-storage brokerage due to higher sales, but an 8.0% decline in self-storage management to ¥773mn. The main factors behind this decline were the increase in the rent burden from properties opened in FY12/17 2H, and the rise in SG&A expenses, primarily for advertising and publicity.

The Property Revitalization & Liquidation Service segment saw a major increase in sales, but a decline in profits, with net sales rising 30.9% YoY to ¥1,587mn and operating income declining 13.6% to ¥298mn. This segment specializes in the limited land rights business, and the number of projects handled trended stably in line with the initial plan, leading to the increase in sales. The reason for the decline in operating income was the absence of property sales with high profit margins posted in the same period in the previous fiscal year.

As stated above, operating income exceeded the initial forecast by approximately ¥300mn. Breaking this down, it was due to the improvement in the profitability of self-storage management (approximately ¥70mn), the pushing forward of sales in self-storage brokerage (around ¥90mn), the pushing forward of sales ahead of schedule in the limited land rights business (approximately ¥80mn), and the improvement in profitability in other property manage­ment services (around ¥60mn). This can be read as indicating that the business is trending steadily in all areas. In the self-storage brokerage and the limited land rights businesses, sales scheduled for FY12/18 2H onwards were pushed forward to the 1H, so there may be some concerns that this will affect results in the 2H. But at FISCO, we think that such concerns are unnecessary, as the situation is that new projects are steadily being acquired and developed.

If progress is made as planned for new openings of self-storage properties with land, the results may exceed the full year forecasts for FY12/18

2. Outlook for FY12/18

The full-year forecasts for FY12/18 are net sales of ¥30,000mn (up 39.6% YoY), operating income of ¥3,000mn (up 26.1%), ordinary income of ¥2,870mn (up 17.6%), and net income of ¥1,855mn (up 19.9%), for a double-digit growth in sales and profits. These figures were left unchanged from the initial forecast.

For the 2H also, the Company’s policy will be to pursue business expansion and revenue growth, centered on self-storage properties with land within the self-storage business. For self-storage properties with land, it plans to open 50 new properties for the full fiscal year, and in the 2H, it will work to open the remaining 35 properties. For the allotment of land, which is the first hurdle to overcome in order to execute this plan, it completed the allotment in the 1H of the land for the 50 properties for the full fiscal year, so the focus in the 2H will be on the construction of properties and the exit strategy (sales of properties).

Of these two points, the most important is the exit strategy. The Company will work to sell a total of 40 properties; namely, the 35 properties it will open in the 2H and the 5 properties opened in the past that it has not yet sold. In relation to this, it is currently advancing preparations for the formation of the No. 3 fund towards its launch sometime in November or December 2018. Based on the results of the previous No.1 and No.2 funds, it seems that the No. 3 fund will be larger in scale, in the range of ¥3bn to ¥4bn. As the Company estimates that the average price of self-storage properties with land in FY12/18 will be approximately ¥200mn, if the No. 3 fund is formed, the Company can be expected to sell approximately 15 to 20 properties to it. It will sell the remaining 20 to 25 properties to general investors and the wealthy.

Based on this business plan, on looking at the results forecasts for the 2H, net sales of ¥16,056mn are needed to in order to achieve the full fiscal year forecast. Sales ¥2,000mn higher than the 1H results will be required for this, but when considering that the number of openings of self-storage properties with land will be 20 properties more than in the 1H (15 properties in 1H ⇒35 properties in 2H), it is not only fully possible it will achieve the forecast, it can be said that the current revenue forecasts are somewhat conservative. This is especially true when considering that revenue from self-storage management, which is stock-type revenue, will steadily increase compared to in the 1H.

At FISCO, we estimate that the reason why Company has left unchanged its full fiscal forecasts, despite the fact that the 1H results exceeded their forecasts, is in consideration of the business uncertainties alongside brokerage (sales), typically of self-storage properties with land. Although it is true that uncertainties are a part of any sale, at FISCO we consider that currently there are no such uncertainties. As the sales price of self-storage properties with land come in a set, of an appealing investment yield and a rent guarantee, it is highly attractive for investors, such as the wealthy. Also, another positive aspect can be said to be the diversification of the exit strategy through the formation of funds. If based on these points, at FISCO we think it is extremely highly likely that the Company will achieve its full-year results forecasts for FY12/18.

◆Shareholder returns

The FY12/18 dividend forecast is ¥46, up ¥6 YoY

Returning profits to shareholders is one important management issue for the Company, which it fundamentally performs through paying dividends. Its basic policy is to pay a single dividend at the end of the fiscal period, targeting a dividend payout ratio of 30%. It decides on the dividend based on its medium-to long-term business plan and while observing the market environment and the timing of capital investment, comprehensively taking into consideration factors such as securing internal funds, its financial condition, and the level of profits.

In FY12/17, the Company paid a dividend of ¥40 for a dividend payout ratio of 31.7%, which was above its target of 30%. For FY12/18, it has announced a dividend forecast of ¥46, an increase of ¥6 from FY12/17. Earnings per share (EPS) will be ¥151.21, while the dividend payout ratio will be 30.4%. As previously stated, it is possible that the full-year results for FY12/18 will exceed the Company forecasts, so in this case, the dividend payout ratio may fall below 30%. The focus is on achieving a balance between investments for growth and enhancing returns to shareholders.

 

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