Nippon Commercial Development (NCD) specializes in developing land with leasehold interest (leasehold land) into real estate products. It procures land (including land with buildings) from landowners, converts them into vacant lots, and leases these to tenants. The company does not build structures on its own; rather it solicits tenants such as major supermarkets and home improvement centers, which shoulder the cost to construct their own buildings. The land lease is based on a fixed-term commercial land lease agreement*1 under which the company becomes the owner of the leasehold land and the tenant the leasehold right holder. Ultimately, the company earns capital gains from selling the land to professional investors such as REITs, asset management companies, or other businesses. The process from securing a tenant to selling the leasehold land to an investor takes roughly one year to 18 months, and NCD collects land rent from tenants in the intervening period. Once it sells the land to an investor, the latter becomes the landowner and collects land rent from the tenant for a period of 20 to 30 years.
Real Estate Management & Development
Executive summary
Business overview
Nippon Commercial Development (NCD) specializes in developing land with leasehold interest (leasehold land) into real estate products. It procures land (including land with buildings) from landowners, converts them into vacant lots, and leases these to tenants. The company does not build structures on its own; rather it solicits tenants such as major supermarkets and home improvement centers, which shoulder the cost to construct their own buildings. The land lease is based on a fixed-term commercial land lease agreement*1 under which the company becomes the owner of the leasehold land and the tenant the leasehold right holder. Ultimately, the company earns capital gains from selling the land to professional investors such as REITs, asset management companies, or other businesses. The process from securing a tenant to selling the leasehold land to an investor takes roughly one year to 18 months, and NCD collects land rent from tenants in the intervening period. Once it sells the land to an investor, the latter becomes the landowner and collects land rent from the tenant for a period of 20 to 30 years.
Because the buildings on the leasehold land are constructed and owned by tenants, investors who purchase the land from NCD do not have to make additional investments in building construction, maintenance, management, or repairs. Since the tenants bear the building costs, there is also little risk of them vacating the land prematurely. The company generally searches for land that matches the requirements of potential tenants, and in most cases, has a tenant lined up by the time it purchases a land lot. It also frequently receives requests to purchase land directly from tenants wishing to open a business, and accepts such requests assuming these tenants will do so. By signing the land purchase agreement around the same time as it concludes a fixed-term commercial land lease agreement with the tenant, thereby fixing cash flows, NCD can nearly eliminate the time lag between the start of loan repayment (on borrowings for the land acquisition) and the start of rent inflow from the tenant. The investors, who are the final buyers of the land, are ensured stable, long-term returns thanks to the fixed-term commercial land agreement that spans a period from 10 to under 50 years. Once these agreements expire, tenants (leasehold right holders) are required to tear down their buildings and return the land as a vacant lot to the landowner. The company calls this business model of investing exclusively in leasehold land the JINUSHI Business.
The main buyer of NCD’s leasehold land is JINUSHI Private REIT Investment Corporation (JINUSHI REIT*2), a private REIT that is operated by, and has concluded a sponsor support agreement with, consolidated subsidiary JINUSHI Asset Management Co., Ltd. Other buyers are leasing companies, listed REITs (J-REITs), asset management companies, other business companies, and individual investors. The company collects land rent from tenants until the corresponding properties are sold. The company records capital gains from selling land to a buyer. At the same time, it enters into a property management agreement with that buyer and collects property management (PM) fees. Additionally, JINUSHI REIT pays consolidated subsidiary JINUSHI Asset Management asset management (AM) fees associated with latter’s operational activities. The company is a pioneer in the specialist leasehold land business, and differentiates itself from competitors by engaging in the entire spectrum of leasehold land operations (sourcing, finding tenants, sales, and contracted management).
Ordinarily, it takes NCD a minimum of six months to develop a leasehold land product (proposing land that matches tenant needs or searching for land at the request of a tenant), and between one year and eighteen months from sourcing the land to selling it to an investor. According to the company, the sale of leasehold land can be conducted smoothly when land rent is generated following the conclusion of fixed-term commercial land lease agreement. The typical amount of time required between the launch of construction on a tenant store and its final opening is about one year.
NCD mainly sources information on potential land acquisitions from financial institutions, real estate brokers, developers, and tenants. It purchases land from business companies, individuals, and municipalities through direct negotiations, and rarely participates in bidding. Because its relationship with tenants in principle dissolves once the fixed-term commercial land lease agreements expire, the company procures land that can be easily repurposed for other uses such as residential properties. Such land needs to meet several conditions, such as being close to an urban area with a population of over 200,000 people, being adjacent to a major road, having access to the necessary infrastructure, and having a conventional shape.
In FY12/20, the company reported revenue of JPY29.9bn, operating profit of JPY2.4bn, and OPM of 8.1%. This broke down into revenue of JPY29.5bn, segment profit of JPY4.6bn, and segment profit margin of 15.6% in the Real Estate Investment business, revenue of JPY416mn, segment profit of JPY251mn, and segment profit margin of 60.3% in the Subleasing, Leasing and Fund Fee business, and revenue of JPY16mn, segment profit of JPY6mn, and segment profit margin of 37.5% in the Planning and Brokerage business.
NCD’s portfolio of real estate for sale is regionally distributed across the major metropolitan areas of Japan. At end-December 2020, the Tokyo metropolitan area accounted for 53%, the Osaka metropolitan area for 22%, the Nagoya metropolitan area for 12%, other domestic areas for 10%, and overseas locations for 3%. The company is headquartered in Osaka, but it has built a strong sales force in the Tokyo metropolitan area, which is a massive market. The bulk of its tenants are daily necessity retailers such as home improvement centers (25% of the balance of real estate for sale as of end-December 2020), supermarkets (24%), drug stores (19%), and electronics mass retailers (3%). That said, NCD actively procures when it finds quality land that is easy to repurpose, and teams up with other tenants that had not been represented in the JINUSHI REIT portfolio previously. These include logistics facilities, factories, and warehouses (collectively 10%) along with hospitals and schools. It also handles overseas properties.
In addition to selling land directly to JINUSHI REIT, NCD also sells land to leasing companies in bridge transactions that assume eventual property sales from these companies to the REIT. The company's bridge transaction framework of JPY60.0bn in total secured from two leasing companies has allowed NCD to sell leasehold land at an early stage. This has shortened its inventory turnover period (from procurement to sales) from about two years (up to FY03/19) to a period of roughly one year to eighteen months (from FY03/20). The early sales to leasing companies have brought NCD’s interest-bearing debt and balance of real estate for sale to normal levels, allowing it to pursue a more flexible financial strategy. Its financial indicators such as total asset turnover rate, ROE, equity ratio, and net D/E ratio have improved as a result. This has given rise to a virtuous cycle, in which the company’s improved financing capability and early generation of income (recovery of development costs) can be rechanneled into land procurement.
The company takes out long-term loans to be repaid over a period of five to 30-plus years, and it continues to build up its on-hand liquidity to facilitate flexible procurement of land. This has been its financial strategy to date, especially since the 2008 global financial crisis. In FY12/20, net D/E ratio was 0.90x, and debt coverage ratio (DCR) was 176%. Since FY03/14, none of its loans for development projects have been subject to financial covenants. Additionally, these loans do not include provisions for interim (excluding pre-scheduled) repayments.
The company plans to change its trade name to JINUSHI Co., Ltd. effective January 10, 2022.
Earnings trends
In FY12/20 (irregular nine-month period), revenue was JPY29.9bn, operating profit JPY2.4bn, recurring profit JPY2.2bn, and net income attributable to attributable to owners of the parent JPY1.6bn. Land procurement fell short of target due to impact from the COVID-19 pandemic and rising land prices, but NCD made headway with sales to new buyers (business companies). While it is difficult to make YoY comparisons due to the change in fiscal year and the presence of early sales to leasing companies in FY03/20, the company thinks the impact from the external environment on net income was negligible.
In FY12/21, NCD forecasts revenue of JPY51.0bn, operating profit of JPY5.4bn, recurring profit of JPY4.2bn, and net income attributable to owners of the parent of JPY2.9bn. It has not disclosed projected YoY growth rates as FY12/20 was an irregular nine-month period.
NCD does not disclose medium-term management plans or numerical targets. At end-January 2021, JINUSHI REIT had assets under management (AUM) of JPY109.3bn, achieving its goal since establishment of AUM of over JPY100bn within five years of the start of operation. JINUSHI REIT targets AUM of JPY151.5bn by 2022, its sixth year in operation, and aims for AUM of JPY300.0bn over the medium to long term.
Strengths and weaknesses
Shared Research views NCD’s strengths as: 1) its ability to develop and convert leasehold land into financial products that deliver stable, long-term returns to investors; 2) its access to a major buyer, JINUSHI REIT, which doubles as a source of stable, long-term income through asset management contracted by a consolidated subsidiary JINUSHI Asset Management; and 3) its ability to procure capital at favorable terms thanks to a track record in leasehold land product development and growing name recognition.
We think its weaknesses are: 1) limited investor base and sources of recurring revenue; 2) a boutique-style approach that is customized to meet leasehold land needs and therefore is not conducive to bulk procurement or bulk sales; and 3) the unique nature of the leasehold land business that undermines synergies from M&A or operations of overseas subsidiaries.
Key financial data
Note: FY12/20 was an irregular nine-month period due to a change in the fiscal year-end.
Note: Figures may differ from company materials due to differences in rounding methods.
Recent updates
Sale of real estate for sale
On November 30, 2021, Nippon Commercial Development Co., Ltd., announced the sale of real estate for sale.
On the same day, the company announced the sale of real estate for sale it owns inTomiya , Miyagi Prefecture (site area: 77,746.42sqm).
The selling price and buyer were undisclosed due to nondisclosure requirements in the sales contract. The selling price is equivalent to at least 10% of forecast FY12/21 consolidated sales of JPY51.0bn. The sales contract was concluded on November 30, 2021, with settlement and property delivery expected to take place on December 15, 2021. The company said that the transaction was already factored into its FY12/21 consolidated earnings forecast.
Borrowing of funds for the purchase of real estate for sale; acquisition of fixed assets; establishment of nomination and compensation committee
On November 26, 2021, Nippon Commercial Development Co., Ltd. announced that it would secure loans to fund the purchase of a real estate that it would hold for sale in the future.
More specifically, the company reported that it would secure loans from two banks, 77 Bank and Shinsei Bank, for a total of JPY7.5bn. Equal to more than 30% of its net asset value of JPY24.8bn as of the end of FY12/20, the loans will be used to finance the purchase of a real estate the company will hold for sale in the future. The property the company plans to buy is a 77,746.42sqm tract of land located in the city of Tomiya in Miyagi Prefecture. The purchase contract is scheduled to be signed on November 30, 2021, and the transaction finalized the same day with both the payment and the ownership of the land changing hands. According to the company, the impact of the land purchase and the additional loans is already reflected in its forecast for consolidated financial results for FY12/21.
The company announced the acquisition of fixed assets.
The company announced that, on the same day, its board of directors had approved the acquisition of fixed assets that would be used in connection with its long-term leasing business.
The company plans to create a more stable business structure and has worked on a long-term leasing business, or recurring-revenue business. As part of this, it decided to acquire a 42,290.10sqm tract of land located in the city of Soka in Saitama Prefecture. The value of the land acquisition was said to exceed 30% of the company's net asset value of JPY24.8bn as of the end of FY12/20. The purchase contract is scheduled to be signed in December 2021, with the transaction also being finalized the same month. The company said this transaction would not result in any changes to its projections for full-year consolidated results for FY12/21.
The company announced the establishment of the nomination and compensation committee.
By way of explanation, the company said that the establishment of the nomination and compensation committee was part of its overall effort to strength its corporate governance structure, with this move in particular being aimed at enhancing the fairness, transparency, and objectivity in the director nomination and compensation decision-making process. Officially established on November 26, 2021, the committee is tasked with deliberating and reporting on such matters as the nominations of new directors, dismissals of directors, director compensation, and other important matters. The committee must have at least three directors selected by the board of directors, the majority of which must be independent outside directors.
The sale of real estate for sale to JINUSHI Private REIT Investment Corporation
Nippon Commercial Development Co., Ltd. announced the sale of real estate held for sale to JINUSHI Private REIT Investment Coroporation (JINUSHI REIT).
The company announced the sale of three properties from the portfolio of real estate held for sale to JINUSHI REIT under the sponsor support agreement entered into on November 10, 2016. According to the company, the total sale price for the three properties (JPY4.9bn) will be included in FY12/22 consolidated results, so there will be no impact on FY12/21 consolidated results.
Overview of the properties
Ken Depot Hakata (Hakata, Fukuoka Prefecture), 2,186sqm land area
Kohnan Koshigaya (Koshigaya, Saitama Prefecture), 14,651sqm land area
Feel Nagoya Kita (Nagoya, Aichi Prefecture), 4,960sqm land area
The contract conclusion date is set for December 3, 2021, and the property is to be transferred on January 7, 2022.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
**FY12/20 was an irregular nine-month period due to a change in the fiscal year-end.
Note: Figures may differ from company materials due to differences in rounding methods.
**FY12/20 was an irregular nine-month period due to a change in the fiscal year-end.
Q3 FY12/21 results
Summary
Cumulative Q3 FY12/21 (January–September 2021) results
* YoY change is not presented as FY12/20 was an irregular nine-month period.
Revenue and profits fell on actual terms but profit margins improved
Cumulative Q3 revenue and profits grew versus the irregular nine-month fiscal year of FY12/20 (cumulative Q3 of April–December 2020). However, comparing the latest cumulative Q3 figures with the results over the same nine months in 2020 (simple sum of quarterly results during January–September 2020), revenue was down 25.7%, operating profit dropped 15.0%, recurring profit fell 7.3%, and net income attributable to owners of the parent fell 8.1%.Meanwhile , the gross profit margin improved 2.5pp to 16.0% over the same period, as did the operating profit margin, which rose 1.1pp to 9.1%.
In terms of the business environment, NCD did not receive requests for land rent reductions or vacating notices from tenants during Q3 as well, and the performance of its recurring-revenue businesses was stable. The company also made headway selling properties to JINUSHI Private REIT Investment Corporation (JINUSHI REIT) and major leasing companies. Further, the company made steady progress in sourcing real estate for sale, by making Tsunoda Co., Ltd. its subsidiary and obtaining Tsunoda's property holdings. As a result, the balance of real estate for sale increased by JPY4.8bn from JPY38.4bn at end-December 2020 to JPY43.2bn.
Focus on recurring-revenue businesses
NCD plans to expand earnings from its recurring-revenue businesses, including rent income from the long-term leasing business and AM fees from the asset management business associated with JINUSHI REIT. In cumulative Q3 FY12/21, recurring-revenue businesses made up 17.5% of the company's overall gross profit. NCD says it will build a stable business structure and aim for sustainable growth by increasing the ratio of recurring earnings to fixed costs.
By segment
Real Estate Investment business
Distribution by land use and region
Roughly 80% of the tenants in the JINUSHI Business were daily necessity retailers and their peripheral businesses. These included home improvement centers (30%), supermarkets (25%), and drugstores (16%), along with logistics facilities, factories, and warehouses that together accounted for another 7% (weightings based on the total value of the real estate for sale balance as of end-September 2021). By region, the Tokyo metropolitan area made up 52%, the Osaka metropolitan area 29%, the Nagoya metropolitan area 7%, other domestic areas 9%, and overseas (US) 3% (same basis).
Subleasing, Leasing and Fund Fee business
In tandem with growth in the asset balance for JINUSHI REIT, consolidated subsidiary JINUSHI Asset Management recorded growth in AM fees.
Planning and Brokerage business
Full-year company forecasts and outlook
Note: Figures may differ from company materials due to differences in rounding methods.
**FY12/20 was an irregular nine-month period due to a change in the fiscal year-end.
Full-year forecasts
FY12/21 (January–December 2021) forecasts
The company does not disclose projected YoY growth rates, as the previous fiscal year (FY12/20) was an irregular nine-month period. NCD has generally prioritized the sale of land to JINUSHI REIT. However, Shared Research believes that expanding its sales to leasing companies will help the company stabilize its quarterly revenue, which currently tends to be disproportionately high during the period spanning from January through March. As of the announcement of the Q3 financial results, the company forecasts remain unchanged.
In addition to syndicated loan agreements, NCD began borrowing unsecured funds from multiple financial institutions, and is raising funds at interest rates that are almost at the same level as those for the collateral loans it took out for each of its previous acquisitions. As of end-Q3 FY12/21, the balance of the company's borrowings stood at JPY42.6bn, against a JPY43.2bn balance of real estate for sale. Total borrowings included JPY2.4bn in unsecured loans that can be used to acquire properties. Thanks to an array of financing options that have become available to the company for purchasing not only real estate for sale but also real estate to be held for the long term, the company appears well positioned to flexibly procure properties. The company said that procurement was on a recovery track in Tokyo, Osaka, and Nagoya.
12-month YoY comparison with reference values (January–December 2020 period)
Compared against the reference values for the period spanning from January through December 2020 (simple sum of results for four quarters), the FY12/21 forecasts imply a 21.3% decline in revenue, 7.7% growth in operating profit, a 9.7% decline in recurring profit, and an 11.2% decline in net income. The company said that it made a conservative revenue forecast in light of uncertainties brought about by the COVID-19 pandemic, but that it planned to tailor its sales approach to each individual project toward meeting the initial revenue target.
Sales to JINUSHI REIT recorded in January
NCD sold 11 real estate investment products (sales value of JPY12.6bn) to JINUSHI REIT on January 8, 2021. JINUSHI REIT funded the purchase with a combination of new investment units issued to institutional investors (fifth capital increase) and loans. With this fundraising round, its AUM reached JPY109.3bn, achieving the target set when the REIT was established (AUM of over JPY100.0bn by the fifth year of operation). JINUSHI REIT is planning on its sixth capital increase in early January 2022. The freshly raised funds will be earmarked for purchases of around 25 properties for roughly JPY42.4bn, lifting the REIT's total assets to JPY151.5bn.
Company forecasts versus results
Note: Figures may differ from company materials due to differences in rounding methods.
Note: FY12/20 was an irregular nine-month period due to a change in the fiscal year-end.
According to the corresponding data that has been disclosed, the company’s results exceeded its initial forecasts in each financial year during the period spanning from FY03/15 through FY012/20. The company’s initial forecasts are mainly based on land sourcing for which ownership has been fully transferred to NCD, but many deals that are in progress (down payment issued or contract signed) at the time of forecast formulation ultimately undergo ownership transfer, and any revenue contributions from such deals throughout the fiscal year will push earnings above the initial forecasts. In addition, the company sets conservative targets for non-operating income and expenses, and recurring profit and net income therefore tend to overshoot the initial forecasts to a greater degree than operating profit.
Comparison with old FY03/21 initial forecasts
The company’s old FY03/21 initial forecasts (12 months) anticipated revenue of JPY75.0bn (+1.1% YoY), operating profit of JPY5.6bn (+6.8% YoY), recurring profit of JPY4.6bn (unchanged YoY), and net income attributable to owners of the parent of JPY3.2bn (+0.7% YoY). The reference value for the April 2020–March 2021 period (released along with Q1 FY12/21 results) were revenue of JPY50.8bn (-31.5% YoY), operating profit of JPY4.7bn (-9.9% YoY), recurring profit of JPY4.5bn (-1.7% YoY), and net income attributable to owners of the parent of JPY3.4bn (+6.1% YoY). NCD was hit by a sharp decline in revenue during this period due to changes in the planned sale of properties, but it managed to secure an increase in net income.
On December 24, 2020, NCD decided to launch a long-term leasing business by utilizing its own funds to hold on to some real estate investment products in the JINUSHI Business (rather than selling them). The objective is to secure long-term rental income. The company has historically generated the bulk of its revenue and profit from one-time revenue business by developing and selling real-estate investment products that do not require additional investment and are expected to generate stable, long-term income. However, to prepare for future changes in an unpredictable market environment, NCD thinks it needs to transition to a more stable business structure. As a result, it has decided to use its own cash to hold some real estate investment products in the JINUSHI Business over the long term, and thus stabilize its earnings structure by increasing steady income derived from recurring revenue.
Medium-term management plan
Vision
NCD does not disclose medium-term management plans. However, it says business will naturally expand as long as it continues to strengthen the building blocks to growth: procurement of quality properties and expansion of JINHUSHI REIT. In its JINUSHI Business, the company acquires land for preselected tenants and turns these properties into financial products. Its business model is unique in that NCD creates leasehold land from scratch. The company believes that its revenue and recurring profit should expand in parallel when its business model functions properly. Its focus on leasehold land (JINUSHI Business) is in stark contrast to the conventional real estate business that handles land and buildings in a package, which is more prone to risk.
The company is working to build enough financial strength (boosting its equity ratio, reducing its net D/E ratio, and improving its total asset turnover rate) to survive future setbacks, should there be another turmoil in the financial and real estate markets that is on par with or worse than the 2008 global financial crisis.
The company does not formulate numerical targets for management indicators. It believes sustainable growth can be achieved by building a business model that is not at the mercy of changes in the management environment. Its main financial priorities are securing investment returns, productivity per employee, and cash on hand. It has accumulated ample cash on hand since the 2008 global financial crisis. While the company thinks it will need to pay attention to its net D/E ratio, debt coverage ratio (DCR), and ROE in the future, it realizes it will not be able to secure favorable deals if it clings to these indicators. Consequently, it aims to pursue a flexible and balanced management strategy.
Growth tracks JINUSHI REIT
NCD’s cumulative direct (sponsor) sales to JINUSHI REIT and the AUM of the private REIT increase in tandem. Roughly 85.0% (FY03/20) of the REIT’s AUM originates from this sponsor route. As of January 31, 2021, JINUSHI REIT’s AUM had reached JPY109.3bn (versus JPY82.0bn as of January 31, 2020), achieving the initial target of JPY100.0bn in five years. Following the conclusion of a sixth round of fundraising in January 2022, the company projects that JNUSHI REIT’s AUM will amount to about JPY151.5bn and indicates that it aims to achieve JPY300.0bn over the medium- to long-term (in five years at the earliest). In June 2021, JINUSHI REIT received a new rating of A/Stable from Japan Credit Rating Agency (JCRA). Shared Research believes that this will positively impact credit appraisals from investors and financial institutions, enabling financing at low interest rates and for large amounts, and facilitating increases in asset balance.
Now we assume that nearly 40% of NCD’s revenue comes from sales to JINUSHI REIT (historically, the range has been 36–55%), and that 75% of the REIT’s AUM (based on AUM of JPY109.3bn as of January 2020) originates from the sponsor (NCD) route. For the REIT’s AUM to increase by another JPY200.0bn and reach the JPY300.0bn target, NCD will have to sell another JPY150.0bn (75% of JPY200.0bn) in properties to the REIT. Further, assuming the REIT continues to account for about 50% of NCD’s overall medium- to long-term revenue, we infer that the company’s total revenue over the medium to long term would be JPY300.0bn (double of JPY150.0bn).
If we use a medium- to long-term growth outlook of five years, the REIT’s AUM will need to increase AUM at an average pace of JPY40.0bn per year to reach target, and NCD will need to generate average annual sales of JPY60.0bn over the next five years. In reality, we understand NCD will try to increase its customer base outside of JINUSHI REIT, so the estimates above render a conservative picture, mainly extending the company’s present framework out into the future.
Key to growth lies in procurement
NCD’s balance of real estate for sale (end of year) is calculated using the formula “Balance of real estate for sale (start of year) + Procurement value – Sales value.” In FY03/18, NCD sold 21 properties (of which 16 to JINUSHI REIT) and procured 61. In FY03/19, it sold 22 properties (of which 11 to JINUSHI REIT) and procured 41 (no data disclosed for FY03/20). As procured properties have significantly exceeded those sold, the balance of real estate for sale has increased sharply from JPY31.6bn at end-March 2017 to JPY41.1bn at end-March 2018, and further to JPY69.5bn at end-March 2019. In FY03/20, the balance of real estate for sale fell substantially to JPY43.5bn due to early sales of properties. Although the company has not disclosed the relevant data, we infer that the number of properties sold greatly exceeded those procured in FY03/20.
Leasehold land market in need of further expansion
Assuming land sales equals revenue, the balance of real estate for sale holds steady at a certain level, and the period from land procurement to sale is one year, it becomes apparent that NCD in any fiscal year needs to procure land inventory that matches the projected revenue for the next fiscal year. The company has indicated that procuring quality land has become difficult due to surging land prices. To increase procurement, NCD thinks the leasehold land market needs to expand further. However, such growth hinges on trends such as rising awareness regarding leasehold land, companies moving land assets off their balance sheets or selling leasehold land to boost earnings, and trading companies or housing developers developing new land to be put up for sale. According to NCD, leasehold land accounted for roughly 2.6% (about JPY470.0bn) of the total AUM for listed REITs (about JPY18tn) as of 2019. The company sees potential for that share to grow to 30% (roughly JPY5.4tn, assuming total AUM for listed REITs holds steady) as the leasehold land market expands in the future.
Note: FY03/21 figures are reference values provided by the company.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Revenue (left), recurring profit (right), net income (right).
Note: FY12/20 was an irregular nine-month period.
Note: FY12/21 figures are company forecasts.
Note: Figures may differ from company materials due to differences in rounding methods.
Business
Business overview
Specialist in leasehold land
NCD develops land with leasehold interest (leasehold land) into real estate products, which it leases and eventually sells. With the company handling just the land, the lessees—who are business operators (tenants)—shoulder the construction, maintenance, management, and repairs of the structures on top. The company procures land and secures the tenants around the same time to narrow the time lag between the start of its loan repayment (on borrowings for land acquisition) and the start of rent payment by the tenants. Ordinarily, it takes NCD between six months and two years (at the longest) to develop a leasehold land product (proposing land that matches tenant needs or searching for land at the request of a tenant), and between one year and eighteen months (inventory turnover period) from land procurement to sale, including conversion of the land to a vacant lot. The company says the optimal timing to sell leasehold land is immediately after tenants launch their businesses, but there are a rising number of cases where the sale is made before that point. This is because the buyer (the investor who becomes the landowner) is able to collect rent on the land from the start of construction work even though it takes around two years for tenants to complete construction and start their businesses.
JINUSHI Business
The company focuses on (leasehold) land transactions. It enters into commercial land lease agreements with tenants for a fixed term that spans from 10 years to under 50 years. Because tenants are responsible for the construction of the structures on the land, neither the company nor the investors to whom it sells the land need to make additional investments in building construction, maintenance, management, or repairs. For investors, these land assets become a source of stable, long-term (20–30 years) revenue. NCD’s business model, which it refers to as the JINUSHI Business from the Japanese word for landlord (jinushi), entails three steps: 1) purchase land (procurement), 2) turn land into vacant lot and lease to tenant (rental income: recurring revenue), and 3) sell land (sales gains: one-time revenue). The company secures tenants around the same time as it procures land (entry point) and sells the bulk of its land holdings to JINUSHI REIT as a priority buyer (exit point).
The company collects land rent from tenants until the corresponding properties are sold. The company records capital gains from selling land to a buyer. At the same time, it enters into a property management agreement with that buyer and collects property management (PM) fees. Additionally, JINUSHI REIT pays consolidated subsidiary JINUSHI Asset Management asset management (AM) fees associated with latter’s operational activities. The company is a pioneer in the specialist leasehold land business, and differentiates itself from competitors by engaging in the entire spectrum of leasehold land operations (sourcing, finding tenants, sales, and contracted management).
Segments
The company has three reportable segments: Real Estate Investment; Subleasing, Leasing and Fund Fee; and Planning and Brokerage. In FY12/20, the company reported revenue of JPY29.9bn, operaitng profit of JPY2.4bn, and operating profit margin of 8.1%. The breakdown by segment is outlined below. This broke down into revenue of JPY29.5bn, segment profit of JPY4.6bn, and segment profit margin of 15.6% in the Real Estate Investment business, revenue of JPY416mn, segment profit of JPY251mn, and segment profit margin of 60.3% in the Subleasing, Leasing and Fund Fee business, revenue of JPY16mn, segment profit of JPY6mn, and segment profit margin of 37.5% in the Planning and Brokerage business, and revenue of JPY0 and a segment loss in Other business (including overseas private finance initiatives [PFI]). The company booked JPY2.4bn in corporate expenses under adjustments to segment profits.
Real Estate Investment
Business overview
In this business, NCD develops leasehold land as real estate investment products and sells these to JINUSHI REIT and other investors based on a business model it calls the JINUSHI Business. The basic approach of the JINUSHI Business is to provide real estate investment products that generate low-risk, stable, and long-term profit for investors. The company independently purchases land and attracts tenants with whom it enters into fixed term commercial land lease agreements. It converts land into real estate investment products that generate stable profit over the long term, and sells these to a range of investors such as JINUSHI REIT, leasing companies, listed REITs (J-REITs), asset management and other companies, and individual investors.
Subleasing, Leasing and Fund Fee
Subleasing operations
In the subleasing business, the company borrows land lots from landowners and subleases these to tenants, generating stable rental income that it shares with the landowners. NCD proposes the optimal use for the land (commercial facility, parking lot, logistics facility, etc.), and handles complex tasks associated with development on behalf of landowners. The construction and operation of buildings on the land are the responsibility of the tenants, which means the landowners and NCD can bypass risks associated with ownership over these buildings.
Leasing operations
In the leasing business, the company leases its portfolio properties to tenants (usually for a few years) prior to selling them off. Further, by holding real estate products in JINUSHI Business for the longer term, the company is able to expand long-term, stable rental income and move forward with initiatives to stabilize its business structure.
Fund fee operations
In the fund fee business, the company earns fees from managing properties owned by funds and other investors. It also earns asset management fees from investment corporations.
Planning and Brokerage
Planning operations
In the planning business, the company provides consulting services leveraging its expertise in the JINUSHI Business. For example, it advises property owners on how to operate idle assets or how to use such assets to build a business. It also helps corporate tenants with the selection of potential store locations and even negotiate terms for store openings. The company earns outsourcing fee revenue for such services.
Brokerage operations
In this business, the company mediates real estate transactions and receives brokerage fees.
Other
The company operated an “Other Businesses” segment through FY03/19, but due to its relatively low significance, it reclassified the segment into the “Other” business, which includes the overseas private finance initiative (PFI) operations.
The company booked JPY2.4bn in corporate expenses under adjustments to segment profits in FY12/20.
Note: FY12/20 was an irregular nine-month period.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: FY12/20 was an irregular nine-month period.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: FY12/20 was an irregular nine-month period.
Note: Revenue from JINUSHI REIT includes both real estate sales value and AM fees.
Note: Figures may differ from company materials due to differences in rounding methods.
Overview of business model
Background to formation of JINUSHI Business
Breaking up land and building as separate assets for investment
The basic approach of the company’s business model (JINUSHI Business) begins with breaking up the value of commercial real estate into (leasehold) land and the building(s) constructed on such land and reassessing their values separately. While land and buildings are often valued together, they are two distinct asset categories with different risks and returns. Land does not depreciate and maintains its value as long as it is not affected by natural phenomena such as ground subsidence or by market fluctuations. Land also generally does not generate expenses other than property taxes. According to the company, returns on land investments are roughly equivalent to those on leasing buildings, but land can be rented out for long periods, resulting in continuous returns.
Buildings, on the other hand, require construction costs and are depreciated over a certain period depending on their structure. In addition to property taxes, consumption tax, and various types of insurance (fire, earthquake, and liability insurance), building owners must shoulder a range of other costs such as repair expenses, utility costs for common-use facilities, cleaning fees, and management fees. For these reasons, net returns on building investments are typically several percentage points below gross returns. The difference between land and building investments has been compared to that between bonds and stocks (Safehold [NYSE:SAFE], see figure below).
Land with leasehold rights
In Europe and the US, buildings are legally regarded as a part of the land on which they are established. If a building has the same owner as the land it sits on, the building ownership rights cannot be separated from the land ownership rights. In Japan, however, land and buildings are considered separate estates under the Real Property Registration Act. If the land and building have different owners, the land with leasehold interest is referred to as leasehold land, the owner of the land as the landowner (lessor), and the party (legal entity) leasing the land as the leasehold right holder. The leasehold right holder pays rent to the landowner to lease the land. There are two types of leasehold rights: ordinary (pursuant to either the old Land Lease Act or the new Act on Land and Building Leases) and fixed term (general fixed-term land lease rights, land lease rights with special provisions for building transfer, and fixed-term commercial land lease rights). Ordinary leasehold rights can be renewed when a lease agreement expires, and right holders can request that the landowner buys back the building constructed on the land.
JINUSHI Business based on fixed-term commercial land lease rights
While the old Land Lease Act prioritized the interests of the leasehold right holders, the new Act on Land and Building Leases aims to stabilize the position of landowners. The enactment of the Act on Land and Building Leases in 1992 introduced fixed-term leasehold rights. Because these cannot be renewed, the landowner-tenant relationship in principle dissolves once their lease agreement expires. Right holders also cannot ask their landowner to buy back their building. They must demolish all structures on the land and return the land as a vacant lot to the landowner once their lease agreement comes to an end.
Fixed-term commercial land lease rights are a type of fixed-term leasehold rights that concern ownership of a building that is mainly used for business purposes. After the Act on Land and Building Leases was revised in 2008, the term of fixed-term commercial leasehold rights was changed from “10 to 20 years” to “10 to just under 50 years,” paving the way for the generation of long-term income for the lessors. These rights are granted through fixed-term commercial land lease agreements with special provisions that preclude contract renewals, the right to request the buyback of buildings at the end of the lease, and contract term extensions through building reconstruction. These special provisions are mandatory for agreements with terms of 10 years to just below 30 years, but they are optional for agreements with terms of 30 years to just below 50 years. Fixed-term commercial land lease agreements must be notarized. The company’s JINUSHI Business stands on these fixed-term commercial land lease rights.
Superficies right versus leasehold rights
A superficies right (a right in rem) is a strong right to control a property directly. Its perfection requirement (requirement to duly assert one’s right against third parties) calls for the registration of the superficies right, which is a process landowners must cooperate with. Even if the land is sold to a new owner, the superficiary may assert its superficies right to the new landowner, and continue to use the land. The superficiary may also sell the superficies right to a third party without having to receive the landowner’s permission. A land lease right (a right in personam) is a right to request a certain activity from a contractual counterparty (obligor). It gives the holder the right to claim usage of land to a landowner, but nothing more. If the holder wishes to transfer the land lease right to a third party or reconstruct the building above the land, it needs permission from the landowner. If the land is sold to a new owner, the land lease right holder may assert its right to the new landowner, provided that the existing building on that land has been registered.
Characteristics of JINUSHI Business
The JINUSHI Business has three distinct features:
The company thinks a viable exit strategy, such as the sale of its leasehold land to REITS or asset management companies after concluding a lease agreement with a tenant, is crucial in strengthening the JINUSHI Business model. Since the formation of JINUSHI REIT, the company has achieved stable growth and earnings. The business model uses a backcasting approach (setting a future goal first, and then looking back at the present moment and determining the steps that need to be taken to arrive at the goal).
Three growth phases
NCD growth trajectory and milestones
The growth of the company’s JINUSHI Business can be divided into three stages.
NCD’s core business around its inception in April 2000 entailed the planning, development, operation, and management of commercial properties. After engaging in property development, revitalization, securitization, and subleasing, the company eventually pivoted to real estate investment with JINUSHI Business (leasehold land operations) as the centerpiece.
The JINUSHI Fund is a private real estate fund that invests capital from pension funds and other sources into leasehold land. It aims to contribute to stable investment by providing safe and steady long-term investment opportunities through the JINUSHI Business. The company enters a contract to handle the operation and management of portfolio assets, and earns PM fees from the property owner. Listed REITs are liquid as their units can be freely traded by a wide range of investors. However, their unit price tracks both real estate appraisal value and the stock market, resulting in comparatively large price fluctuations. Private REITs, such as JINUSHI REIT, are less liquid but their unit price is determined based on the appraisal value of the underlying real estate portfolio. The investment period for JINUSHI REIT is uncapped in principle, and is adjusted to match the investment needs of financial institutions and institutional investors.
NCD sells land under the following key agreements.
1. Sponsor support agreement with JINUSHI REIT
2. Basic agreement regarding property supply to Kenedix (unlisted; delisted in March 2021) J-REIT
3. Basic agreements establishing comprehensive land sales/purchase arrangements with SMFL MIRAI Partners Company, Limited and ML Estate K.K.
The basic agreements with SMFL MIRAI Partners and ML Estate essentially function as a bridge transaction (interim sales/purchase arrangement) prior to an eventual property sale to JINUSHI REIT. NCD prioritizes transactions with JINUSHI REIT, followed by (in descending order) the Kenedix J-REIT, SMFL MIRAI Partners and ML Estate, and other buyers. Roughly half of the company’s revenue is derived from property sales to JINUSHI REIT (actual share was 40–55% in FY03/17–19), and the lion’s share of its revenue comes from property sales to JINUSHI REIT, the Kenedix J-REIT, and SMFL MIRAI Partners and ML Estate (JINUSHI REIT, SMFL MIRAI Partners, and ML Estate made up just over 73% of its revenue in FY03/20).
Formation of private fund
In FY03/12, the company formed the JINUSHI Investment Limited Partnership (JINUSHI Fund: total fund size of JPY30.0bn) with two partners: major investment consulting firm HC Asset Management Co., Ltd. (HC) and major real estate broker Tokyu Livable Inc. (TLI). NCD handles fund formation, property selection, investment decisions, and property management, HC invests funds from pension funds and other investors as a contracted investment manager, and TLI provides asset management functions. Four numbered funds (No. 1, 2, 3, and 4) have been set up under the JINUSHI Fund thus far, and many of these have been dissolved with their roles and functions being transferred to JINUSHI REIT.
Property supply agreement with listed REIT
In October 2014, NCD entered into an agreement to supply properties to Kenedix Retail REIT (TSE REIT: 3453), a commercial facility REIT established by a subsidiary of Kenedix. The company agreed to support the growth of the REIT by supplying land through its JINUSHI Business. In this way, it secured another stable exit route (in addition to JINUSHI Fund), paving the way for further investment opportunities.
Formation of private REIT
On November 10, 2016, NCD entered into a sponsor support agreement with JINUSHI REIT and wholly owned subsidiary JINUSHI Asset Management.
Strengthened financial condition by securing bridge transaction partners
In November 2019, SMFL MIRAI Partners, NCD, and wholly owned subsidiary JINUSHI Asset Management entered into a basic agreement that establishes the terms regarding the comprehensive sales/purchase of real estate for sale (including trust beneficiary rights). In December 2019, NCD, and JINUSHI Asset Management entered the same agreement with ML Estate.
The agreements with SMFL MIRAI Partners and ML Estate are capped at JPY30.0bn each, allowing the company to sell its land to these parties up to this amount. When SMFL MIRAI Partners or ML Estate wishes to sell the properties acquired under the agreements, a third-party designated by JINUSHI Asset Management (assumes JINUSHI REIT, but another party is also possible) will have preferential negotiating rights. In short, the arrangement with SMFL MIRAI Partners and ML Estate functions as a bridge transaction (interim purchase/sales arrangement) prior to an eventual property sale to JINUSHI REIT. By taking advantage of these agreements (capped at JPY60.0bn in total), NCD can enhance its financial indicators such as its total asset turnover rate (by shortening the time from land procurement to sales) and equity ratio, while reducing its interest-bearing debt. The company also plans to improve its financial condition by raising its capital procurement capacity and securing development profits at an early stage, and work to drive growth and expand AUM at JINUSHI REIT. Both agreements are effective from the date on which they were signed to January 31, 2025. Once the sales amounts reach their caps, the company intends to set up an additional arrangement.
Diversification of buyers
In addition to JINUSHI REIT, NCD sells land to a diverse range of buyers such as leasing companies, listed REITs (J-REITs), asset management companies, other corporations, and individual investors. Demand for leasehold land is strong.
Procurement of real estate
Secures tenants before purchasing land
The first step in the JINUSHI Business workflow is the procurement of land. By the time NCD purchases a land lot, it has already secured the tenant. This means it signs the land purchase agreement with the seller around the same time it concludes the fixed- term commercial land lease agreement with the tenant. The company says it often receives information on the land to be purchased from prospective tenants. By timing its loan and lease agreements so that they more or less coincide, the company can nearly eliminate the time lag between the start of loan repayments (on borrowings for land acquisition) and the start of land rent inflows, and get a good grasp of the long-term investment yield. Thanks to its extensive experience as the only domestic company that invests exclusively in leasehold land, NCD has been able to forge firm relationships with its tenants. The company says its sales representatives constantly explore optimal matches between land and tenants by gauging the affinity between the two through diagnostic simulations. They develop leasehold land products by assessing suitable matches between tenants and land, and identify tenants who are likely to operate stable, long-term businesses on the land.
Procurement channels and methods
NCD receives information on land sellers from financial institutions, real estate brokers, developers, and tenants. It purchases land from companies, individuals, and municipalities through direct negotiations, and rarely participates in bidding. Because its land leases in principle dissolve once the fixed-term commercial land lease agreements expire, the company procures land that can be easily repurposed, including for other uses such as residential properties. Such land needs to meet several conditions, such as being close to an urban area with a population of over 200,000 people, being adjacent to a major road, having access to necessary infrastructure, and having a conventional shape. NCD also collaborates with condominium developers to develop land. Such partnerships are mutually beneficial as bringing a major supermarket or home improvement center chain near a condominium building (or vice versa) is a win for both parties. Other sellers include leasehold land owners who wish to sell their land to increase their earnings, or store operators who wish to move their land off the balance sheet. NCD says trading companies and property developers are also increasingly developing leasehold land to be put up for sale. It attributes this trend to a deepening awareness in the market of the benefits of leasehold land, which is less prone to development risk than erecting a building and has a higher likelihood of generating stable profit.
Optimal distribution (by region, land use)
Overview
The company’s portfolio of real estate for sale is regionally tilted toward the three major metropolitan areas: Tokyo, Osaka, and Nagoya. While it is headquartered in Osaka, NCD has built a strong sales force in the Tokyo metropolitan area, which is a major market. By industry, the bulk of its tenants are daily necessity retailers (supermarkets, home improvement centers, drugstores, and electronics mass retailers). That said, NCD actively procures when it finds quality land that is easy to repurpose, and teams up with other tenants including logistics facilities, factories, warehouses, hospitals, and schools. It also handles overseas properties.
Distribution by region
As of end-December 2020, the Tokyo metropolitan area accounted for 53% of the company’s balance of real estate for sale (JPY38.4bn), the Osaka metropolitan area for 22%, the Nagoya metropolitan area for 12%, other domestic areas for 10%, and overseas locations (US) for 3%. The Tokyo metropolitan area encompasses Tokyo, Kanagawa Prefecture, Saitama Prefecture, Chiba Prefecture, and parts of Ibaraki Prefecture (Tsukuba, Moriya, etc.). The Osaka metropolitan area covers the Osaka, Hyogo, Kyoto, Shiga, and Nara prefectures. The Nagoya metropolitan area includes the Aichi, Mie, and Gifu prefectures. Other domestic areas refer to ordinance-designated cities and major cities, and other neighboring areas (excluding those in the Tokyo, Osaka, and Nagoya metropolitan areas). The company is headquartered in Osaka, but it has increased personnel at its Tokyo branch and is shifting its focus from the Kansai to the Kanto area. It is also taking measures to build its overseas presence. When expanding domestically, NCD does not aim to simply cover a wider area; rather, it concentrates its efforts to metropolitan areas with a population of at least 200,000 people.
The company has developed a total of 210 land lots in its JINUSHI Business with a total value of just above JPY310.0bn (as of end-December 2020). The distribution by area is Tokyo metropolitan area 41.6%, Osaka metropolitan area 34.3%, Nagoya metropolitan area 11.0%, other domestic areas 12.8%, and overseas locations 0.4%.
Distribution by land use
As of end-December 2020, home improvement centers accounted for 25% of NCD’s balance of real estate for sale (JPY38.4bn), supermarkets for 24%, drugstores for 19%, logistics facilities, factories, and warehouses for 10%, car dealerships for 5%, electronics mass retailers for 3%, and other businesses for 14%. Daily essentials retailers (supermarkets, home improvement centers, drugstores, and logistics facilities) made up roughly 80% of the compay's tenants. The large weightings for daily essentials retailers and logistics facilities, factories and warehouses reflect consumption trends focused on suburban shopping centers and e-commerce, as well as impact of the COVID-19 pandemic. Logistics facilities, factories, and warehouses generate lower rent per unit area than daily essentials retailers (rent per unit area is relatively high for supermarkets) because they tend to be situated at a distance from residential areas, but the company says demand from such tenants is growing. Other tenants include restaurants, model homes, funeral halls, and sports clubs.
The company has developed land with a total value of just above JPY310.0bn (as of end-December 2020) in its JINUSHI Business. The breakdown by tenant is supermarkets 34.8%, home improvement centers 16.9%, hotels 9.4%, drugstores 8.4%, electronics mass retailers 6.7%, logistics facilities, factories, and warehouses 2.9%, wedding halls 2.9%, car dealers 2.5%, health examination centers 1.7%, driving ranges 1.1%, schools 1.0%, and other 11.7%.
Real estate for sale (comparison of year-end balances)