*The share price is the closing price on October 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 first half of fiscal year February 2019 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 August 2018, the cumulative supply results were 468 buildings with 17,655 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 at 1.4% (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 the sale multiple condominiums at the same time in one permanent condominium gallery. Furthermore, in the recent years, the company has developed in managing large-scale projects, and expanding areas to cover in its businesses to Osaka prefecture, with a focus mainly on the Hokusetsu area that is adjacent to the Kobe-shi and the Hanshin area. 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 conducts planning, development and sales (of single buildings) of apartments for investment, 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 enhanced 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 90% or more. 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 8-10%, 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 Personality 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 120 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 operating income increased 9.1% and 5.6%, respectively, YoY, both exceeding the initial estimates. Sales stood at 22,411 million yen, up 9.1% YoY. While other real estate sales shrank by 95.1% YoY to 116 million yen as a reaction to sale in the previous term of base ground for condominium sites (about 1.8 billion yen), sale of condominium units grew by 23.7% YoY to 20,030 million yen, as the result of successful delivery, including 2 pieces of large-scale property with a total of over 100 units. Sale of detached houses and property leasing revenue, too, increased. Operating income grew by 5.6% YoY to 2,511 million yen. Although the gross profit rate in the condominium sales business, which is the company's mainstay, was on the same level as the same period of the previous term, the overall corporate gross profit margin declined by 1.0 point due to a drop in other real estate sales which are highly profitable. An increase in SG&A expenses, however, was only slight because of a downturn in sales promotion expenses following a steady progress with sale of condominium units and other factors. Net income rose significantly, as the tax burden rate dropped because the company was relieved of accumulated earnings tax. Factors in difference from the initial estimates As for sales, real estate for sale got in full operation, yielding revenue from real estate rent higher than initially forecasted, while the number of condominium units delivered exceeded the estimate by 14. Regarding profit, in addition to higher sales than the estimate, the factors in the difference from the initial forecast are the SG&A expenses lower than originally projected and the profitability improvement in the condominium sales business. Condominium sales Sales were 20,030 million yen (up 23.7% YoY), and segment income stood at 2,376 million yen (up 35.7% YoY). The number of units delivered to customers grew by 33.9% YoY to 514 affected by the contribution large-scale condominiums, such as "WAKOHRE Kobe Sannomiya Trad Tower" (a total of 194 units) and WAKOHRE Shin-Kobe Masters Residence (a total of 122 units). The company delivered to customers 415 condominium units (compared to 410 units in the estimate) in the first quarter and 99 units (compared to 90 units in the estimate) in the second quarter, both exceeding their respective estimates. WADAKOHSAN released 316 condominium units (down 23.3% YoY), with the number of units for which the company concluded contracts being 209 (down 20.8% YoY) and the number of units contracted but undelivered being 504 (down 31.2% YoY). Although the number of contracts concluded decreased by 20.8% YoY on a unit basis, the amount of contracts shrank only slightly by 4.4% YoY to 11,118 million yen because of a rise in the unit sales price. The company expects that it will enter into contracts for 670 condominium units, up 6.0% from the previous term, for the full year. Detached housing unit sales Sales and segment income were respectively 899 million yen (up 34.5% YoY) and 23 million yen (in the same term of the previous year, the company suffered a loss of 7 million yen in segment income). The company made a steady progress with contract conclusion and delivery in the secondary sale of "WAKOHRE-Noie Kobe-Kanokodai" (Kita-ku, Kobe-shi), a large-scale property with a total of 90 units released in July 2017. The number of detached housing units delivered to customers was 24, up 5 YoY (from 19), the number of units for which the company concluded contracts significantly grew to 42 from 23 YoY, and the number of units contracted but undelivered was 32 (up from 13 in the previous term). Other real estate sales Sales stood at 116 million yen (down 95.1% YoY), and segment loss was 23 million yen (in the same term of the previous year, the company gained profit of 511 million yen). In addition to the fact that the sales in the same term of the previous year were boosted by sale of base ground for sites for condominium development (about 1.8 billion yen), the number of apartments for investment sold shrank to 1 (115 million yen) YoY from 3 (280 million yen); however, holding plenty of development property, sales will significantly grow for the full year through selling of 9 apartments for investment (111 units), excluding land sale. Property leasing revenue Property leasing revenue was 1,309 million yen (up 9.9% YoY), and segment income was 490 million yen (down 0.8% YoY). The occupancy rate of real estate for residential use exceeded 90%, while the lease of stores and offices remained healthy at a level of slightly less than 90%; however, profit showed a slight decrease due to initial costs, such as placement fees, accompanying the start of lease of real estate for sale. After completion of construction, the company on its own looks for residents for its real estate for sale, and sells such property to local HNWIs and corporate bodies after property leasing revenue becomes stable. Total assets as of the end of the first half stood at 83,546 million yen, down 4,056 million yen from the end of the previous term. Although the company saw a decrease in condominium units and detached houses, real estate for sale showed growth due to an addition of the real estate for sale which got in full operation in the first half of this term. As for real estate for sale in process, while detached houses and real estate for sale increased, condominium units shrank. Advances received also dropped due to delivery of large-scale property. Equity ratio was 26.5% (24.0% at the end of the previous term). Operating CF, which was 3,262 million yen in the red in the same period of the previous term, turned positive to 1,143 million yen following the steady progress with delivery of condominium units and other property, and the improvement in the efficiency of capital due to a decline in inventory. In addition, the company secured free CF of 468 million yen.

 

 

【Business Environment】 According to the reference data of the company, the condominium market in the Kinki region did not see a rise in prices like in the Tokyo Metropolitan area, and the monthly rate of conclusion of contracts for the first half of the fiscal year 2018 was 74.1%, exceeding 70% which is the rough indication of peaks and troughs. The number of units supplied was 9,087, up 3.1% YoY, with the average price per condominium unit being 37,630,000 yen, up 1.5% YoY, and the unit price per square meter being 645,000 yen, up 3.7% YoY, both showing growth. It is expected that the number of units supplied will shrink by 16.2% YoY to around 9,000 in the second half. In Kobe-shi and the Hanshin area, the number of condominium units supplied in the first half of fiscal 2018 stood at 1,568 (up 121.8% YoY) in Kobe-shi, and 630 (down 7.4% YoY) in Hyogo prefecture. The average price per condominium unit was 34,460,000 yen (down 5.4% YoY) in Kobe-shi, and 49,250,000 yen (up 5.5% YoY) in Hyogo prefecture. The unit price per square meter was 704,000 yen (up 20.5% YoY) in Kobe-shi, and 631,000 yen (up 2.8% YoY) in Hyogo prefecture. According to a real estate investigation company, the monthly rate of conclusion of contracts for condominium units in the Kinki region was 80.6% in August, which exceeded the rates of the previous month (74.0%) and the same month of the previous year (80.0%); however, the rate declined to 72.8% in September, falling below the rates of the previous month (80.6%) and the same month of the previous year (74.5%). Sales and ordinary income are estimated to grow 11.0% and 3.1%, respectively, YoY, with full-year earnings estimates unchanged. 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 deliver 760 condominium units (up 12.4% from the previous term) for the full year, predicting a sales growth by 15.2% from the previous term to 31.3 billion yen. Although the scheduled number of units to be completed in the second half is 260 (down 13.4% YoY), WADAKOHSAN entered into contracts for 204 units among the 260 units in the first half. "WAKOHRE Okamoto The Residence" (Higashinada-ku, Kobe-shi; a total of 38 units), which the company worked on as an area renovation (retail market redevelopment project), is scheduled to be delivered in Feb. 2019. "WAKOHRE Okamoto The Residence," which was propelled as a "`(former) Okamoto market' redevelopment project," is walkable to and from 2 Stations of 2 lines with flat roads, including "Okamoto" Station on Hankyu-Kobe Line that is in a 6-minute walking distance, and "Settsu-Motoyama" Station on JR Kobe Line that is in a distance of 8 minutes of walk. Its residential environment is also excellent from an educational aspect. All the residences face south and are offered in diverse plans (with areas exclusively for residential use ranging from around 70m2 to over 100m2). The area renovation is a project to redevelop the "retail market" that thrived as local commercial facilities mainly in the Kansai region in the post-war period. The project is in progress also in the vicinity of Sannomiya Station and in front of Tsukaguchi Station (Amagasaki-shi, Hyogo prefecture). The number of units to be released is estimated at 740 (up 25.2% from the previous term) for the full year, with 424 units (up 136.9% from the previous term) scheduled to be released in the second half, including "WAKOHRE Senri Takemidai Masters Residence" (Suita-shi, Osaka prefecture; a total of 66 units). "WAKOHRE Senri Takemidai Masters Residence" is in a 5-minute walking distance from "Momoyamadai" Station on Kita-osaka Kyuko Line. The company is scheduled to deliver the condominium in September 2019. The company plans to enter into contracts for 670 units (up 6.0% from the previous term) for the full year, and concluded contracts for 209 units in the first half. Buildings to be delivered in the next term, including "WAKOHRE The Kobe Tor-Road" (Chuo-ku, Kobe-shi; a total of 192 units), will account for the majority of the contracts concluded. "WAKOHRE The Kobe Tor-Road" is in a distance of 8 minutes of walk from "Sannomiya" Station on JR Tokaido Main Line and 7 minutes of walk from "Kobe-Sannomiya" Station on Hankyu-Kobe Line. It is a large-scale property released in October 2017 and is scheduled to be delivered in August 2019. In Osaka prefecture where the company engages in business as part of its wide-area development strategy, while focusing mainly on the Hokusetsu region, WADAKOHSAN is expanding into Osaka-shi. In addition to the new establishment, in April, of "WAKOHRE Senri Condominium Pavilion (Toyonaka-shi, Osaka prefecture; 1-minute walk from "Ryokuchikoen" Station on Kita-osaka Kyuko Line)," a standing condominium gallery, the company relocated Osaka Office from Shinmachi, Nishi-ku, to the front of Osaka Station that is in the heart of Osaka in August. Sale of "WAKOHRE Toyonaka Dear Place" (Toyonaka-shi, Osaka prefecture; a total of 22 units) and "WAKOHRE Ikeda Station Flats" (Ikeda-shi, Osaka prefecture; a total of 39 units) has been fully in progress. "WAKOHRE Toyonaka Dear Place" is situated in a good location that is in a distance of a 3-minute walk from "Okamachi" Station on Hankyu-Takarazuka Line. It is characterized by its design that attaches weight to independence of each dwelling unit as demonstrated by the fact that the condominium has 2 residences on each floor, meaning that every unit is located on the corner of the building. Its delivery is scheduled in November 2019. "WAKOHRE Ikeda Station Flats" is located in the vicinity of "Ikeda" Station on Hankyu-Takarazuka Line which is in a 4-minute walking distance, and it takes only 19 minutes to get directly to Umeda-shi, Osaka prefecture. All the units look south, and the condominium satisfies myriads of needs through 7 types of unit plans ranging from units with 2 bedrooms to 4-bedroom units. The company plans to deliver the condominium in August 2020. Meanwhile, in Osaka-shi, the company is moving ahead with "WAKOHRE Osaka Shinmachi Tower Residence" (Nishi-ku, Osaka-shi; a total of 118 units), a high-rise condominium project supplied by the company for the first time. The residents can use "Hommachi' Station on Subway Midosuji Line, Yotsubashi Line, and Chuo Line, which are in a distance of an 8-minute walk, and other 6 stations of 5 railway lines. In addition to the "liveability" provided through a wide range of facilities within a walking distance, including parks, educational institutions, and commercial facilities, residents can walk to the Shinsaibashi area where department stores and other shops gather. The characteristics of each dwelling unit are lighting and ventilation achieved by making the most of the condominium's open corner plot which faces 3 connecting roads. The "library," a common area of the condominium, features books selected by JUNKUDO Bookstore. The company entered into contracts for nearly a third of the condominium units within about a month from the release, and it plans to deliver the condominium in January 2021. As for procurement, the company has already procured real estate for the coming 3 terms including this term and will do business carefully with a focus on profitability. Accordingly, the number of condominium units procured for the full year is estimated at 700, down 11.6% from the previous term. Detached housing unit sales The company plans to deliver 60 detached housing units for the full year, up 6 compared to the previous term, expecting that sales will grow by 23.9% from the previous term to 2.2 billion yen. In the second half of this term, starting sale of "WAKOHRE-Noie Koyoen" (Nishinomiya-shi, Hyogo prefecture; a total of 3 lots), in addition to the secondary delivery of 26 units of "WAKOHRE-Noie Kobe-Kanokodai," the company will increase the number of units delivered to customers to 36 from 35 in the same period of the previous term. As of the end of August, the company concluded contracts for 14 units. All the residences of "WAKOHRE-Noie Koyoen" meet the superior next-generation housing performance criteria for "certified low-carbon housing" in terms of thermal insulation property and energy efficiency. Other real estate sales The company plans to sell land for development and apartments for investment, such as small-sized apartments. As for apartments for investment, the company plans to sell 9 wooden/steel-framed buildings and 111 units. The projects for 53 buildings and 599 units are ongoing.

 

 

It is projected that sales will mark a record high of 39.0 billion yen in the fiscal year ending Feb. 2019 for the second consecutive term. In the condominium sales business, which is the company's mainstay, because sales of detached houses are healthy, while the company is making good progress with conclusion of contracts for condominium units delivered to customers in this term, there is little concern over sales as long as every piece of property, including real estates for investment, is completed as planned. Although sales promotion expenses are expected to be recorded following a rise in the number of condominium units released in the second half, it is predicted that there will be room for an upward trend in profit so long as the company successfully concludes contracts with customers on a steady basis. The number of condominium units released in the second half is estimated at 424, up significantly (slightly less than 2.4 times) from 179 in the same period of the previous term. Last-minute demand before the consumption tax raise scheduled in October 2019 is expected from the second half of this term onward. Regarding profit, the impact of an increase in land prices, and construction costs hovering high are the causes of concern; however, in the first half, the company secured a gross profit rate, which remains nearly unchanged YoY, in the condominium sales business. We will keep an eye on the trend in the second half in order to have future prospects for the period after the next term (by the end of the previous term, the company completed procurement of sites for development for the coming terms up until the fiscal year ending Feb. 2021). Founded in Jan. 1899, the company will mark the 120th anniversary in Jan. next year. We would like to see WADAKOHSAN CORPORATION hit a record high in the fiscal year ending Feb. 2019, which will be the icing on the cake for the anniversary.

◎ 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.