*The share price is the closing price on April 25, 2018. The number of issued shares is obtained by deducting the number of treasury stocks from the number of shares issued at the end of the latest quarter. ROE, BPS are actual results at the end of the previous term.

 

*The forecasted values were provided by the company.

This Bridge Report presents WADAKOHSAN's earnings results for fiscal year February 2018 and earnings estimates for fiscal year February 2019.

 

 

 

 

This time-honored real estate firm was founded in 1899. With its main bases among Kobe-shi, Akashi-shi and Hanshin area in Hyogo Prefecture, the company has developed its community based real estate business by selling lots for condominiums and detached houses, and dealing in real estate leases and effective land use. The company specializes in buying up sites and planning, and outsources design, architecture and sales to other firms. The main focus is selling lots for medium scale condominiums, under the "WAKOHRE" brand name, with around 30-50 units each. Within Kobe-shi, the company has been the number one "provider of buildings" for 20 years running and is placed the second as "a provider of condominiums." The company was also ranked as the third "provider of buildings" and the ninth "provider of condominiums" in the Kinki region (ranking in 2017). As of the end of February 2018, the cumulative supply results were 460 buildings with 17,350 residences (based on those which had started construction). [Business philosophy - symbiosis (living together) your way of living contributes to others' happiness] The corporate philosophy is "symbiosis," where your way of living contributes to the happiness of others, values the connections between people and supports one another. Based on this idea, the company holds up "PREMIUM UNIQUE" as its product concept, and aims to create unique places to live in that fit each customer's own way of life, while responding to the feelings of each person who resides there. [Corporate history] The property leasing business was established in Kobe-shi, in January 1899. In December 1966, the business was incorporated under the name of WADAKOHSAN Ltd., and in September 1979 it was reorganized into WADAKOHSAN CO., Ltd. having achieved success in selling condominiums wholesale, in March 1991 through the company's own brand, "WAKOHRE," the company regularized its condominium business. Following the Great Hanshin Earthquake in January 1995, the company engaged in projects developing superior buildings for earthquake recovery, and contributed to local reconstruction. In September 2004, the company began trading stocks over-the-counter (becoming listed on the JASDAQ in December). In June 2007, the company reached a milestone, having constructed 10,000 residences with the "WAKOHRE" series as the foundation, and in March 2008 it established a detached house business promotion office, and regularized its wooden detached housing business. [Business segments] The business segments are divided into sales of condominiums developed for the "WAKOHRE" brand, sales of detached houses developed for the "WAKOHRE-Noie" brand (the sales for both businesses are entrusted to external enterprises), other real estate revenue from dealing in the sale and development of real estate for investment and residential land, property leasing revenue from the lease of condominiums (the rental condominium brand "WAKOHRE-Vita" and others), stores, parking lots etc., and "others," including things like insurance agency fees not included in the report segment. The sales composition for the term ended Feb. 2018 puts the condominium sales at 77.3% (FY2/17: 84.1%), sales of detached houses at 5.1% (FY2/17: 4.3%), other real estate sales revenue at 10.1% (FY2/17: 3.8%), property leasing revenue at 6.8% (FY2/17: 7.5%), and others at 0.7% (FY2/17: 0.3%). The segment profit composition puts condominium sales at 60.8 (FY2/17: 70.7%), sales of detached houses at1.4% (FY2/17: ▲0.2%), other real estate sales at 14.1%(FY2/17: 3.1%), property leasing revenue at 21.3%(FY2/17: 24.8%), and others at 2.4% (FY2/17: 1.6%). Condominium sales business The main areas are the Kobe and Akashi areas (around Kobe-shi and Akashi-shi in Hyogo Prefecture), the Hanshin area (Ashiya-shi, Nishinomiya-shi, Amagasaki-shi, Itami-shi and Takarazuka-shi in Hyogo Prefecture), and the focus is on developing medium scale condominiums with 30-50 units whose market has low competition, under the "WAKOHRE" brand with leading condominium businesses. In addition to a sales strategy that focuses on highly popular areas and supplies different types of condominiums in the same area, thereby realizing diversified needs of consumers and achieving high sales efficiency. Strengths include establishing an efficient business model with unique local community strategy, such as condominium gallery strategy that suppresses selling costs by handling multiple properties at the same time in one permanent condominium gallery. In recent years, the company is pursuing new possibilities by responding to large-scale projects and expanding to Hokusetsu area in Osaka Prefecture and Himeji-shi in Hyogo Prefecture, which are adjacent areas between Kobe and Hanshin. Detached house sales business Since 2007, the company has been developing around 10 houses with the "WAKOHRE-Noie" brand, in Kobe-shi and further west. From the large amount of various site information the company is able to gather, there are many properties suitable for sale for detached house lots in terms of location, area, and site shape. In addition, where the business period for condominiums is just under two years, these projects can be as short as one year, meaning that with high capital turnover and they can be used to fill the gaps of the period completed the condominium construction. Utilizing design and planning abilities that take the surrounding environment into consideration, cultivated by the work in condominiums, the company aims to differentiate itself from traditional "power builders." Other real estate sales business The company handles planning, development and sales (of single buildings) of real estate for investment like rental condominiums, and the sale of residential land and land for industrial use. As well as shouldering the function of effective utilization of property information, revenue from selling off lease properties (inventory assets) that accompanies property handover is also included in this segment. Recently, the company has been strengthening sales of single rental housing buildings aimed at investors. Property leasing business The company mainly manages residential properties, in addition, stores and offices, parking lots, self-storage and others. As a business that can maintain a stable cash flow, in an industry that tends to be strongly influenced by condominium market conditions, since its founding the company has continued to contribute to the stability of revenue. Its basic strategies are to assure stable revenue by improving the occupancy rate (the rate of tenants moving in), and to maintain and improve the quality of its portfolio through movement of property. With the residences, keeping in mind the movement of property after a fixed period of time has expired, the asset composition is focused on 200-300 million yen properties, with many hopeful buyers amongst high net worth individuals. The company maintains an occupancy rate of 95%. In addition, by managing assets and liabilities appropriately, it also aims to reduce the risk of lengthening investment return periods, and the risks associated with assets becoming excessive. The yield of each property is high, at 9-10%, and it aims to cover the burden of indirect expenses with the stable revenue from the leasing operations. Strengths WADAKOHSAN's strengths are: (1) having the area among Kobe, Akashi, and Hanshin, the foremost residential areas in Japan, as their area of business; (2) the WAKOHRE brand prevailing in their business area; (3) amid the business environment exposed to management risk due to fluctuations in real estate market conditions, maintaining sound finance and having high stability in operations via thorough risk management; and (4) succeeding in differentiating the company itself from major real estate companies and railway property firms through expanding business in primarily mid-scale condominiums under the product concept of "PREMIUM UNIQUE," while possessing the capabilities of handling large-scale condominiums. Although they have been prudent in their property selection, in recent years, they are expanding their business area to Himeji-shi in Hyogo Prefecture and Osaka Prefecture (Hokusetsu area), which are next to their existing business region, while strengthening their capabilities to handle large-scale condominiums. Their efforts to boost their growth are garnering much interest. Japan's foremost residential area as their region of business They meet the high demand for housing by making Japan's foremost residential area, area among Kobe, Akashi and Hanshin, their main area of business while establishing a comparative advantage with their information capabilities; they even have a reputation for building a community entrenched in the region. Prevailing WAKOHRE brand in Kansai Their WAKOHRE brand is prevailing in Kansai, and the power of the brand lets them hold their own against other major condominium developers. In the 20th (2017) Condominium Brand Questionnaire Survey, conducted by the Osaka headquarters of Nihon Keizai Shimbun Inc., WAKOHRE was ranked in the 5th place in the Individuality brand section and the 4th place in the Familiarity brand section. Maintaining sound finances via thorough risk management They are maintaining sound finances via thorough risk management, have well-balanced transactions with financial institutions and remain stable. As a result, in their corporate history spanning over 110 years in the real estate industry, where many companies have gone out of business, they have only reported a deficit during fiscal year ended Feb. 2010 after being affected by the global financial crisis. They continue to have stable dividends. Successful in differentiating themselves from major firms, and having room for growth due to expand their business areas Small and medium condominium businesses were eliminated in the Kinki region due to the real-estate recession after the global financial crisis, and only major real estate companies and railway real estate companies survived. However, since these real estate companies specialize in large-scale properties and properties along the railroads, there are not many cases where they compete in site acquisitions with WADAKOHSAN, who develops medium-scale condominiums with around 30-50 units. Meanwhile, WADAKOHSAN has its sights on further expanding its operations, making efforts to develop large-scale properties in the existing business area and expanding into Himeji-shi in Hyogo Prefecture and Osaka Prefecture (Hokusetsu area), which are next to their existing business area.

 

 

Sales and ordinary income grew 12.0% and 10.5%, respectively, YoY. Sales grew 12.0% YoY to 35,149 million yen. Sales of condominium units, which are their mainstay, saw a 3.0% sales growth as the number of units delivered to customers dropped, but unit price rose due to the increase of projects at good locations, and other real estate sales, including wooden apartments for investment and land not to be used in projects, increased nearly three times, and the detached housing unit sales rose 30.8% YoY as the sales from large-scale projects were healthy. The property leasing revenue increased by 2.5% YoY, as the operation of small-sized real estate for investment began. As for profit, the profit from the sale of condominium units declined, due to the increase in land prices, construction cost hovering high, and the recoil from highly profitable property in the previous term, and the profit from lease of real estate declined due to the repair cost for real estate the company owns, but operating profit grew 7.9% YoY to 3,304 million yen, contributed to the significant increase in profit from the sale of other real estate and the improvement of profit/loss from sale of detached houses. Net income grew 15.9% YoY to 1,589 million yen, as tax burden decreased because the company was relieved of accumulated earnings tax due to the increase of outstanding shares through the public stock offering in Feb. 2018. The term-end dividend is to be 30 yen/share, up 3 yen/share from the previous term (payout ratio: 19.0%). Condominium sales Sales were 27,178 million yen, up 3.0% YoY, while segment income was 2,472 million yen, down 8.9% YoY. The company completed 24 condominium buildings, including "WAKOHRE Toyonaka-Shoji The Residence (54 units; 2,469 million yen)" and "WAKOHRE Ikeda The Residence (49 units; 1,953 million yen)," and delivered 676 units to customers (down 11.3% YoY). The number of units delivered to customers declined, but unit price rose due to the increase of projects at good locations, and then sales grew. However, profit declined due to the rise in land prices and construction costs, and the recoil from the income from highly profitable real estate in the same period of the previous year. The company sold 16 buildings and 591 units (up 5.7% YoY) mainly in Kobe, Akashi, and Hanshin regions, and concluded contracts for 632 units (down 11.7% YoY) worth 28,535 million yen (down 0.4% YoY). The number of units to be delivered to customers at the end of the term was 809 (down 5.2% YoY), and the balance was 35,285 million yen (up 4.0% YoY). The inventory of completed units at the end of the term was 2 buildings and 19 units, out of them 1 building and 10 units have already seen the conclusion of a contract as of Apr. 23. Detached housing unit sales Sales were 1,774 million yen (up 30.8% YoY), and segment income was 57 million yen (a loss of 6 million yen was posted in the same period of the previous year). As the conclusion of contracts and delivered units of "WAKOHRE-Noie Kobe-Kanokodai," a large-scale project with a total of 90 units (Kita-ku, Kobe-shi), which were released in Jul. 2017, progressed smoothly, the number of units delivered to customers increased from 38 to 54. "WAKOHRE-Noie Kobe-Kanokodai" is located 5 min. on foot from the "Dojo-minamiguchi" Station of Shintetsu Sanda Line, and has a wide array of amenities, including the heat insulation property that is about 1.5 times that of conventional real estate, which is achieved by "super heat insulation × airtightness for all units," mothers' space, which can be used for children's learning activities and homemaking, and a cloak for shoes, which can store strollers. Other real estate sales Sales were 3,539 million yen (up 198.7% YoY), and segment income was 573 million yen (up 385.6% YoY). The company sold and handed over 21 pieces of real estate, including small-scale wooden apartments for investment and raw land. The breakdown of the sales are 2,575 million yen from 5 pieces of land for development, etc., 608 million yen from 7 pieces of real estate for investment, and 357 million yen from 9 pieces of other property. Property leasing revenue Property leasing revenue was 2,403 million yen, up 2.5% YoY, and segment income was 865 million yen, down 9.1% YoY. The occupancy rate of real estate for residential use was kept high, while the lease of shops and offices was healthy. In order to develop an optimal lease portfolio, the company acquired a commercial building in Sannomiya-cho, Chuo-ku, Kobe-shi. Term-end total assets were 87,603 million yen, up 11,385 million yen from the end of the previous term. As for assets, the company saw the increase in cash and deposits, real estate for sale (mainly real estate for investment), real estate for sale in process (mainly the procurement of land for new projects), fixed assets (such as the acquisition of commercial buildings), etc. As for liabilities and net assets, the company witnessed the augmentation of advances received (increase of security deposits through contracts), interest-bearing liabilities (rise in long-term debts for procuring land), net assets (increase through the capital increase by a public offering), etc. Equity ratio was 24.0% (24.6% at the end of the previous term). The company procured about 1 billion yen through the public offering in Feb. (No. of shares issued: 1,100,000; issue price: 992 yen/share). The company plans to allocate it to the project for redeveloping the retail market. * ROE (return on equity) is "net profit margin (net income÷sales)" multiplied by "assets turnover (sales÷total assets)" multiplied by "financial leverage (total assets÷net assets, reciprocal number of equity ratio)". ROE = net profit margin × assets turnover × financia leverage * The data in the table above is based upon figures taken from the official earnings announcement filings, and total assets and capital required to calculate the data above are averages for the term (Using the values at the end of the previous and current terms, and therefore the data listed in the official earnings announcement filings and the data above do not necessarily coincide because they use term end equity ratio).

 

 

Business environment According to the reference material of the company, the condominium market in the Kinki region did not see a rise in prices like in the Tokyo Metropolitan area. In 2017, the number of condominium units supplied was 19,560, up 4.7% YoY, and the monthly rate of conclusion of contracts was as healthy as 76.1%. In 2018, the number of condominium units sold is estimated to be 18,000, down 8.0% YoY. The price per m2 is projected to be 630,000 yen, up 2.3% YoY, but the average price per unit is estimated to be 38.36 million yen, down 2.1% YoY. The company expects that "the condominium market will be relatively healthy, as mortgage rates are low and residents increasingly demand convenience in living." Sales and ordinary income are estimated to grow 11.0% and 3.1%, respectively, YoY. Sales are estimated to grow 11.0% YoY to 39 billion yen. While the sales of condominium units will increase 15.2% YoY to 31.3 billion yen due to the rise in the number of units delivered to customers, it is estimated that the detached housing unit sales will grow 23.9% to 2.2 billion yen, as the company will start offering "WAKOHRE-Noie Kobe-Kanokodai" for the second term. The revenue from rents of real estate is projected to rise as healthy as 4.0% YoY to 2.5 billion yen, but the sales of other real estate are forecasted to drop 15.2% to 3 billion yen from the recoil from the high performance in the previous term. As for profit, while the gross margin of sale of condominium units will decline due to the rise in land prices and construction cost, SGA will augment through active sales activities, expanding target regions and releasing large-scale projects. Accordingly, operating income is estimated to increase slightly by 1.4% YoY to 3,350 million yen, and ordinary income is forecasted to slightly increase 3.1% to 2.5 billion yen, although financial charges will decline. The annual dividend amount is to be 32 yen/share, including a dividend of 2 yen/share for commemorating the 120th anniversary of the startup of the business (estimated payout ratio: 20.9%). Condominium sales The company plans to complete 17 condominium buildings and deliver 760 condominium units, earning sales of 31.3 billion yen, up 15.2% YoY. As of the end of the previous term, the company had concluded sales contracts for 611 units. The contract ratio is 80.4%. The company finished to deliver "WAKOHRE Kobe-Sannomiya Trad Tower (Chuo-ku, Kobe-shi; a total of 194 units)" and "WAKOHRE Shinkobe Masters Residence (Chuo-ku, Kobe-shi; a total of 122 units)" in March, and plans to hand over 410 units in the 1st quarter, 90 units in the second quarter, 80 units in the third quarter, and 180 units in the fourth quarter. "WAKOHRE Kobe Sannomiya Trad Tower" is 9 min. on foot from Tokaido Main Line's "Sannomiya" Station, which is a terminal station that has administrative and commercial facilities. It offers a variety of room layouts, ranging from 1LDK to 4LDK (L: living room, D: dining room, K: kitchen), including a 160-m2 premium layout on the top floor. In the common use space, a library section and a study room were built. "WAKOHRE Shinkobe Masters Residence" is 2 min. on foot from "Shinkobe" Station of the Seishin-Yamate Line. It only takes 2 min. to reach "Sannomiya" Station, the next station. Working, living, and leisure can be realized at nearby places. The company paid attention to the safety in the premises, for example, by separating the routes for residents from the route to parking lots for vehicles. The common use space was designed by Cassina ixc. As for development and sale, the company will implement community-based strategies with display condominium units at the core, and make inroads into Hokusetsu, Osaka. In addition, the company will keep concentrating on the redevelopment (area renovation) of the "Ichiba," which has grown as a local commercial facility centered around the Kansai region since the war. Through the community-based strategy with display condominium units at the core, the company released 6 condominium properties, including "WAKOHRE Konanyamate Everge (a total of 35 units; Higashinada-ku, Kobe-shi; 6 min. on foot from "Konanyamate" Station of Tokaido Main Line)" and "WAKOHRE Konan The House (a total of 17 units; Higashinada-ku, Kobe-shi; 12 min. on foot from "Sumiyoshi" Station of Tokaido Main Line)," which were released at the same time at "WAKOHRE Motoyama Condominium Gallery (Higashinada-ku, Kobe-shi; 4 min. on foot from "Settsumotoyama" Station of Tokaido Main Line)." For making expand into the Hokusetsu region of Osaka, the company built a permanent condominium gallery "WAKOHRE Senri Condominium Pavilion (Toyonaka-shi, Osaka; 1 min. on foot from "Ryokuchi-Koen" Station of Kita-Osaka Kyuko Line)" in Toyonaka-shi, Osaka in Apr. In late Apr., the company released a first condominium (provisional name: WAKOHRE Senri-Tsukumodai Project) sold in Suita-shi, Osaka. This condominium building is located in a quiet residential district and near to commercial facilities, as it is 4 min. on foot from "Yamada" Station of the Hankyu Senri Line. The residential environment is good, as large-scale parks, such as "Sarusuberi Park," within 5 min. on foot from the condominium. As for area renovation, the company plans to deliver "WAKOHRE Okamoto The Residence (Higashinada-ku, Kobe-shi; a total of 38 units)" at the end of this term. Some projects in the vicinity of Sannomiya Station and Tsukaguchi Station (Amagasaki-shi, Hyogo Prefecture) are ongoing. "WAKOHRE Okamoto The Residence," which was built as a project for redeveloping "the former Okamoto market," is accessible to two separate stations on two separate lines without any slopes, 6 min. on foot from "Okamoto" Station of Hankyu Kobe Line and 8 min. on foot from "Settsu-Motoyama" Station of Kobe Line, and is surrounded by a good educational environment. It offers a variety of residential areas ranging from 70 m2 to over 100 m2. A condominium building whose units all have a southern exposure and which is located within 6 min. on foot from the Hankyu "Okamoto" station will be released for the first time in about 13 years. As for procurement, the company has already procured real estate for the coming 3 terms. It plans to do business carefully, while emphasizing profitability. Accordingly, the number of condominium units procured is estimated to be 700, down 11.6% YoY. Detached housing unit sales As the company will start to deliver the second term of "WAKOHRE-Noie Kobe-Kanokodai," the number of units delivered to customers is projected to increase from 54 in the previous term to 60. Other real estate sales The company plans to sell land for development and real estate for investment, such as small-sized apartments. As for real estate for investment, the company plans to sell 9 wooden/steel-framed buildings and 101 units. The projects for 40 buildings and 512 units are ongoing.

 

 

The business of selling other real estate, in which the company develops and sells real estate for investment for the asset management and measures against inheritance taxes of wealthy people, is expanding. As for real estate for investment, the company exerts its know-how for developing, leasing, and selling real estate by itself, while considering the surrounding environments and the realty market situation, differing from the sublease, which is now a social issue. The buyer is wealthy people, and their purposes of purchase are asset management and measures against inheritance tax, and so they do not need to take out a loan beyond their solvency. The company started business with wooden buildings, but it is procuring steel-framed buildings for investment, being able to respond to needs of buyers and deal with transactions brought to them. The business of developing real estate for investment can be expected to become a new source of revenue.

◎ Corporate Governance ReportUpdated on March 22, 2018 Fundamental way of thinking The fundamental policy regarding the company's corporate governance is that establishing a highly transparent, sound and efficient business framework is believed to be an issue of utmost importance, and we are working to implement it. Although we are a small organization, we are building a simple and efficient organizational framework that also takes mutual checking and balancing, and independence into account. To further strengthen the speeding up of decision making and realizing a highly transparent management, we are striving to strongly maintain the following 5 principles of the governance system. 1. The manifestation of supervisory functions based on substantial discussion at the board of directors' meeting. 2. Timely and adequate deliberation on important matters for managerial decision-making via the board of managing directors. 3. Implementation of highly effective auditing by the auditor. 4. Establishment of an internal control system via installing an internal auditing room, holding an internal integration committee, etc. 5. Collaboration with external agencies such as law firms to create a compliance structure. <Reasons for Non-compliance with the Principles of the Corporate Governance Code> WADAKOHSAN has implemented all the Basic Principles of the corporate governance code.