Executive summary

Business overview

First Brothers (FB) is a real estate investment management and investment banking company. It was founded in February 2004 by Tomoki Yoshihara, who had previously worked at Mitsui Trust and Banking Company (currently Sumitomo Mitsui Trust Bank). Two former colleagues of Mr. Yoshihara joined the management team as directors not long after the company was established. Many of the company’s employees have a background in the financial industry, and are professionals in related fields (attorneys, certified public accountants, real estate appraisers, and class-1 architects). According to the company, FB has carved out a unique position as an investment bank that is also a real estate company.

In the Investment Management segment, which drove much of FB’s initial growth, the company manages client assets through private funds that mainly invest in real estate and real estate trust beneficiary rights. The balance of assets under management (AUM) in this segment as of end-FY11/21 was JPY23.0bn. The segment accounted for 4.1% of total revenue and 3.3% of operating profit in FY11/21. Around the period of its listing in February 2015, FB refocused its operations, positioning as its core business the Investment Banking segment where the company uses its own capital to make investments, primarily in real estate. The balance of FB’s proprietary assets in this segment as of end-FY11/21 was JPY61.4bn (95 properties). The Investment Banking segment accounted for 94.9% of total revenue and 95.8% of operating profit in FY11/21. As of end-FY11/21, the AUM and proprietary assets of the two segments combined stood at JPY84.4bn.

Under the Investment Banking segment, FB owns a portfolio of properties for lease (end-FY11/21 breakdown by asset type: commercial 27.8%, office 27.6%, hotels 28.8%, residential 15.8%; Greater Tokyo area 48.7%), through which it projects to generate stable income over the medium to long term. FB applies strict valuation (appraisal) criteria to acquire real estate that has unrealized value stemming from its location and other attributes. Many of the properties the company targets are owned by individuals rather than real estate companies, and FB explains that there is often room to raise their rent and occupancy. The company sources properties through various channels ranging from referrals from financial companies to real estate brokers, and conducts due diligence to select and acquire one or two properties per month from several hundred offered. FB maintains that because it can rapidly appraise properties (in one to three days) and raise capital, it receives offers on good deals ahead of many competitors.

The main sources of revenue in the Investment Banking segment are capital gains (mainly gains from property sale; 66.4% of total gross profit in FY11/21) and investment income centering on rental income (32.1%). The company achieves a relatively high return on properties with its capital gains yield trending at over 1.0 regardless of the trend in the market (at end-FY11/21, sales prices exceeded acquisition prices by 28%). The properties FB purchases are generally small to mid-sized (around JPY1.0bn per property); the company also develops new properties if it feels it can generate sufficient returns. FB would opportunistically sell its properties to realize capital gains (at end-FY11/21, the market value of its properties exceeded their book value by 18%). The company says it mainly focuses on maximizing property values before sale and tends not to confine itself to metrics such as days in inventory (739–1,823 days in FY11/17–21). Thanks to further expansion of FB’s real estate portfolio in FY11/21, gross profit from property lease exceeded the corresponding SG&A expenses, raising the SG&A coverage ratio (gross profit from property lease divided by SG&A expenses) to 131%. OPM in the Investment Banking segment has averaged 22.6% over the past five years.

FB’s real estate portfolio has continued to expand, aided by the addition of Higashinihon Fudosan Co., Ltd. as a consolidated subsidiary in April 2019. Higashinihon Fudosan owns a large number of quality properties in Japan’s Tohoku region with their total asset value standing at JPY12.7bn, or 29.3% of FB’s proprietary assets as of end-FY11/19. Properties include office buildings near stations and in business districts, as well as roadside and other commercial facilities. According to the company, these properties had an average NOI yield (net operating income [NOI] divided by acquisition price) of 8.0%, higher than the average for FB’s properties.

Because FB uses debt to fund property acquisitions, its loan balance tends to expand in tandem with growth in investment (loan balance of JPY50.9bn at end-FY11/21). Leverage, calculated as the loan balance divided by the book value of FB’s properties, was 82.2% at end-FY11/21. The company generally tries to borrow long-term with ten-year or longer loans and uses interest rate swaps to maintain a fixed interest rate for certain portions of its loan balance (29.5% at end-FY11/21). The weighted average interest rate before the fixation of interest rates is around 0.9%. This shows that FB enjoys extremely low preferential interest rates compared to its peers, where interest rates tend to be over 1%.

In October 2021, the company established a lodging business subsidiary, From First Hotels Co., Ltd., and fully launched business operations associated with lodging and other hospitality services. Gross profit from property sale accounted for 68.6% of overall gross profit (average over the five-year period ending with FY11/21), indicating that the company depends on one-time revenue for about 70% of its gross profit. Shared Research believes that the company can stabilize its earnings structure through earnings stemming from the operation of lodging facilities (bringing in guests, performing customer service, providing meals, etc.).

Trends and outlook

For FY11/21, the company reported full-year consolidated revenue of JPY26.7bn (+70.6% YoY), operating profit JPY4.9bn (+94.4% YoY), recurring profit JPY4.4bn (+141.1% YoY), and net income attributable to owners of the parent of JPY2.8bn (+20.8% YoY). Income and gross profit from property lease both increased as the company pushed ahead with expanding the portfolio of properties for lease, and both the selling price and gains from property sale increased due to the sale of several properties. 

For FY11/22, the company's initial forecast calls for full-year revenue of JPY24.9bn (-6.7% YoY), operating profit of JPY2.9bn (-41.7% YoY), recurring profit of JPY2.0bn (-54.1% YoY), and net income attributable to owners of the parent of JPY1.3bn (-53.5% YoY). Although the company sees rental income increasing in tandem with expansion in the portfolio of leasing properties, its forecast for property sales in connection with the makeover of its leasing property portfolio is more conservative than the previous year. As it also is premised on a YoY decline in sales of leasing properties carrying relatively large unrealized gains, the initial forecast calls for YoY decreases in both revenue and profit.

The company does not publicly disclose a medium-term business plan. Although its policy is to increase profit and shareholders’ equity while expanding its real estate portfolio, property sale currently accounts for a relatively large portion of its profit, which means annual earnings may be subject to short-term fluctuations driven by property sale trends. However, FB thinks gross profit (= gross profit from property lease + gross profit from property sale + other) will remain in an uptrend over the medium to long term provided its shareholders’ equity and investment portfolio continue to expand.

FB aims to pay a stable dividend (year-end only) irrespective of fluctuations in short-term earnings. It looks to increase the dividend over the medium to long term in line with company growth, and targets a dividend on equity ratio (DOE) of 2.0%.

Strengths and weaknesses

First Brothers’ strengths are 1) due diligence and value-add capabilities that underpin the property investment cycle from purchase to sale; 2) a strong credit that enables financing through long-term borrowings at low interest rates; and 3) a growing real estate portfolio centering on properties with high NOI yield. Its weaknesses are 1) a governance system that needs further development; 2) uncertainties surrounding capital gains-reliant earnings structure; and 3) the company’s inability to date to fully recoup the investments in renewable energy and startup companies.

Definition of terms

Key financial data

Trends and outlook

Quarterly trends and results

Q1 FY11/22 results

Summary

• Revenue: JPY6.3bn (+175.5% YoY; 25.5% of the full-year plan)
• Operating profit: JPY1.1bn (+641.5% YoY; 39.2%)
• Recurring profit: JPY1.0bn (+943.6% YoY; 51.9%)
• Net income attributable to owners of the parent: JPY665mn (+992.2% YoY; 51.2%)
  
  

In Q1 FY11/22, revenue rose JPY4.0bn (175.5%) YoY to JPY6.3bn, while gross profit increased JPY1.1bn (191.4%) YoY to JPY1.7bn. Operating profit grew JPY977mn (641.5%) YoY to JPY1.1bn, and net income expanded JPY604mn (992.2%) YoY to JPY665mn. Both the selling price and gains from property sales increased due to the sale of several properties. The growth in revenue (JPY4.0bn) consisted of YoY increases of JPY3.9bn in the Investment Banking segment and JPY198mn in the Other segment, and a YoY decrease of JPY14mn in the Investment Management segment. The company's balance of property holdings temporarily declined. 

Q1 FY11/22 results were impacted by preceding property sales. While the company continued to prioritize its investment in properties for lease, the book value of its corresponding portfolio declined 5.3% from the end of FY11/21 to JPY58.7bn. Gross profit in properties for lease declined 1.2% YoY to JPY587mn, while unrealized gains through value enhancement of properties for lease dropped 11.4% YoY to JPY9.9bn. Thanks to these unrealized gains, the company continued to generate profit on sales of properties.

Segment results

Investment Management segment

• Revenue: JPY239mn (-5.6% YoY)
• Operating profit: JPY25mn (+57.3% YoY)
  

On a YoY basis, fees from real estate management and operation declined, but outsourcing costs were also lower. As a result, revenue was down, but profit was up YoY. Competition surrounding the purchase of relatively large-scale properties (the primary investment target of the company’s funds) was fierce compared to competition associated with small to mid-sized properties in which the company invests on its own account. For this reason, the group refrained from acquiring new properties through the funds in which it manages investment on an independent basis. As of end-February 2022, the group's AUM balance remained flat from end-FY11/21 at JPY23.0bn.     

Investment Banking segment

• Revenue: JPY5.9bn (+190.3% YoY)
• Operating profit: JPY1.5bn (+275.0% YoY)
  

The company manages properties for lease while improving their value and sells them when appropriate from the perspective of portfolio rotation. In Q1 FY11/22, the company sold JPY4.8bn (JPY941mn in Q1 FY11/21) of properties for lease, and gross profit from property sale was JPY1.1bn (JPY8mn). The capital gains yield (selling price divided by acquisition price) was 1.31x (versus 1.28× at end-FY11/21).

Selling price and gains from property sale increased YoY due to the sale of several properties for lease. At end-February 2022, the balance of the leasing property portfolio stood at JPY58.2bn (90 properties), a decrease of 5.2% from end-FY11/21. Settlement was not reached for any acquired properties in Q1. Unrealized gains were JPY9.9bn (-11.4% from end-FY11/21), and NOI yield was 7.2% (unchanged). Gross profit from property lease was JPY587mn, down from JPY594mn in Q1 FY11/21 as property sales preceded property lease. 

The geographical distribution of the lease portfolio as of end-February 2022 was as follows: Greater Tokyo area 46.0% (-2.7pp from end-FY11/21) and other major cities 54.0% (+2.7pp). The breakdown by asset type (breakdown of balance based on acquisition price) was as follows: commercial 29.3% (+1.5pp from end-FY11/21),offices 24.7% (-2.9pp), hotels 30.4% (+1.6pp), and residential 15.6% (-0.2pp). Performance in the hotel industry was sluggish due to the effects from the COVID-19 pandemic, and the company took advantage of this favorable opportunity to acquire hotel properties.

Gross profit from property lease

The company has a policy of expanding both quality and volume of its lease portfolio to generate stable growth in gross profit from property lease (net income from property lease, calculated as NOI [excluding special factors] minus depreciation). For Q1 FY11/22, gross profit from property lease was JPY587mn. The company previously disclosed gross profit from property lease divided by SG&A expenses as the SG&A coverage ratio, but halted this practice from Q1 due to expense allocations becoming increasingly complicated in line with the booking of revenue from its managed hotels. 

Classification of current and fixed assets on balance sheet

In principle, the company records properties for lease as current assets on its balance sheet to ensure that these properties can be promptly sold when it conducts portfolio rotation. However, effective from the end of FY11/21, the company began recording properties with relatively high yields as fixed assets with the intention of generating long-term leasing income. The company in Q1 sold five properties, including office buildings, booked as current assets for JPY3.2bn. 

Financing

The company raises funds on a project-by-project basis when it acquires individual properties for lease. Currently, in principle, the company uses ultra-long-term basis loans (ten years and longer, variable interest rate loans), combined with interest rate swaps to convert outstanding loans into fixed payments. The balance of outstanding loans as of the end of February 2022 stood at JPY47.4bn (down JPY3.5bn from end-FY11/21), the average interest rate on loans was 1.00% (+0.01pp), the average remaining period of loans was 9.6 years (-0.6 years), and the fixed interest rate ratio was 31.5% (+2.0pp). The average interest rate on loans increased slightly as the sale of properties allowed the company to repay loans with relatively favorable terms. Compared to end-FY11/21, the company's portfolio of properties for lease decreased JPY3.2bn while loans decreased JPY3.5bn. The leverage ratio at end-February 2022 was 80.8%, down 1.4pp from 82.2% at the end of FY11/21. 

Topics

With the establishment of lodging business subsidiary From First Hotels Co., Ltd., the company made a full-fledged entry into the business of accommodation and other hospitality services. In addition to a luxury onsen ryokan (Japanese-style inn with hot spring baths) acquired in FY11/21, the company in Q1 FY11/22 made Omido, which operates a classic hotel with over 100 years of history, a consolidated subsidiary (FB acquired all shares in Omido on December 1, 2021). The company's policy is to operate hotels under multiple brand names. At the same time, it aims to provide high quality services by effectively leveraging the historical and local aspects of the classic hotels and onsen ryokans under its operation. 

Company forecast for FY11/22

Initial forecast

For FY11/22, the company's initial forecast calls for full-year revenue of JPY24.9bn (-6.7% YoY), operating profit of JPY2.9bn (-41.7% YoY), recurring profit of JPY2.0bn (-54.1% YoY), and net income attributable to owners of the parent of JPY1.3bn (-53.5% YoY). Although the company sees rental income increasing in tandem with expansion in the portfolio of properties for lease, its forecast for property sales in connection with the makeover of its leasing property portfolio is more conservative than the previous year. As it also is premised on a YoY decline in sales of leasing properties carrying relatively large unrealized gains, the initial forecast calls for YoY decreases in both revenue and profit.

The company commented that the declines it projects for full-year FY11/22 are due to a temporary downturn in proceeds from the sale of properties for lease that occurred in connection with portfolio rotation. It additionally indicated that these declines are a non-permanent consequence of growth strategies it is currently implementing.

Medium-term outlook 

FB does not disclose medium-term business plans. In the following section, we present our views on the medium-term outlook for the company while reflecting on the events that led to the company’s establishment, the business climate at the time of its founding, and its growth trajectory. 

Company establishment and business climate at the time

FB was established in February 2004 during a period when schemes to liquidize and securitize real estate gained traction, as exemplified by the successive J-REIT listings at the time. In the early 1990s, the real estate market was bogged down by disposals of non-performing loans following the collapse of a bubble fueled by excess investment in real estate. From 1991 to 2001, a period commonly referred to as Japan’s lost decade, a number of financial institutions successively filed for bankruptcy. Following the launch of the first two J-REITs in September 2001, the J-REIT industry embarked on an expansion phase that was ultimately followed by periods of stagnation, realignment, and renewed growth. As of December 2020, J-REITs had a market value of JPY14.4tn (62 entities) (Source: Association for Real Estate Securitization’s “JREIT.jp”). 
FB’s founder, Tomoki Yoshihara, had previously worked at Mitsui Trust and Banking Company (currently Sumitomo Mitsui Trust Bank) and Morgan Stanley Properties Japan (currently Morgan Stanley Capital), where he had witnessed the emergence of the real estate securitization market. Mr. Yoshihara says his original intention when founding the company was to make contributions to the domestic markets leveraging the experience he had accumulated while working at trust banks and foreign financial institutions during Japan’s lost decade.

Focus on fund management to ride out financial crisis

From its inception through 2005, FB rapidly acquired properties, incorporated these into funds, and mainly focused on the Investment Management segment. By FY11/05, it had acquired over JPY100.0bn in real estate holdings. From 2006, however, the company refrained from chasing high-priced properties and instead pivoted to an approach of carefully selecting acquisitions as property prices were approaching a peak. At the same time, it started progressively selling off previously acquired properties. In 2004–2005, large numbers of properties valued at several tens of billions of yen circulated on the market. From late 2006, the supply of large properties worth over JPY10.0bn dwindled, pushing down yields. In September 2008, just as FB was selling off its properties and building up cash reserves, the collapse of Lehman Brothers sent shockwaves through the world. The company managed to ride out the subsequent financial crisis without adverse impact by focusing on fee-based management of real estate funds and abstaining from proprietary investments in real estate.

Initiatives related to rescue cases

As uncertainties prevailed in the financial industry following the global financial crisis, liquidity declined in the real estate market. During this period (2008 to 2013), FB expanded its AUM by undertaking management of properties rescued from troubled funds. This involved asset management for funds originally managed by another company at the request of fund investors or lenders (such as banks) due to loan defaults or other reasons. According to the company, as real estate prices plummeted in the aftermath of the global financial crisis, FB leveraged its trustworthiness—based on the fact that none of the properties under its management had ever defaulted—to undertake management of a large number of rescued assets. However, this sharply pushed down gross profit in the Investment Management segment because asset management fee rates for rescue cases were low, compared with the fee rates of projects that begin with property acquisition. As of 2020, all rescued assets under the company’s management had been sold. 

High returns through combination of capital gains and investment income 

According to the company, FB’s management team of financial industry veterans enables it to flexibly transition between the fee-based business and the proprietary investment operations. From FY11/13, the supply of large properties worth over JPY10.0bn dwindled, pushing up corresponding prices. As a result, FB reoriented its efforts toward proprietary investment in small and mid-sized properties of around JPY1.0bn. The company applies strict valuation (appraisal) criteria to acquire real estate that has unrealized value attributed to its location and other features. Its capital gains yield (ratio of selling price to acquisition price) nearly consistently trends above 1.0 irrespective of market trends. In the case of total returns in real estate funds, investment income generated throughout the asset management period is added to the capital gains (difference between acquisition price and selling price), and leverage is also factored. Accordingly, FB has largely avoided losses in its property deals, and its returns have been higher than implied by its capital gains yield.

Envisioned growth trajectory over medium to long term 

In addition to its core businesses of managing properties for lease and real estate assets, the company is also involved in hospitality services, such as hotel management, and renewable energy businesses. It maintains a policy of striving to achieve sustainable growth through coexistence and collaboration with local communities. In the process of growing its portfolio, it refreshes its holdings to generate unrealized gains, enabling further investment and growth. Its group policy is to enhance its real estate portfolio while increasing profits and shareholders’ equity. That said, because its share of profit from the sale of real estate (one-time revenue) is relatively high at present, fiscal year profit or losses may fluctuate depending on property sale trends.

FB thinks its gross profit (GP from property lease + GP from property sale + other GP) will remain in an uptrend over the medium to long term provided its shareholders’ equity and investment portfolio continue to expand. It has thus far categorized large properties (several billions to several tens of billions of yen) as target assets for its funds (off-balance-sheet investment) and small to mid-sized properties (around JPY1.0bn) as those for proprietary investment (on-balance-sheet investment). However, FB’s financial condition has improved to the extent it is now capable of purchasing properties worth JPY10.0bn using its own capital, so the dividing line between fund-owned and proprietary assets may become blurred in the future.

In an effort to secure earnings streams that are relatively unaffected by conditions in the real estate market, FB engaged in other investment and management businesses (such as renewable energy, venture capital funds, bonds, and private equity). The company relies on one-time revenue (from property sale) to a greater extent than its competitors. Gross profit from property sale accounted for 68.6% of the company's overall gross profit (average over the five-year period ending with FY11/21), substantially higher than the rate of 38.2% associated with competitor Ichigo Inc. In FY11/21, the company began operating lodging facilities (bringing in guests, performing customer service, providing meals, etc.) primarily through consolidated subsidiary From First Hotels Co., Ltd. Shared Research believes that the company's decision to begin managing hotels and performing other hospitality services in FY11/21 constitutes an appropriate strategy that will help stabilize its earnings structure.

Business

Business overview

Core business

Since its inception in February 2004, First Brothers (FB) has achieved growth by setting up and managing real estate funds targeting institutional investors. Around the time of its listing in February 2015, the company overhauled its operations and currently focuses on the management of its own assets, securing stable income from the mainstay real estate investments, while also investing in a range of peripheral fields. 

The company’s businesses divide into the Investment Management segment and the Investment Banking segment. In FY11/21, Investment Management accounted for 4.1% of total revenue and 3.3% of operating profit, and Investment Banking 94.9% and 95.8%, respectively. In Investment Management, FB sets up and manages private funds that invest client capital in real estate. In Investment Banking, the company conducts various types of investments using its own capital, and also provides corporate advisory. The Investment Management segment comprises asset management and real estate advisory. The Investment Banking segment spans real estate investment, skin-in-the game investing in funds, other investment, and corporate advisory.

Asset Management segment

Asset management operations (fund business)

FB sets up and manages funds that mainly cater to institutional investors. These funds invest in relatively large real estate properties (several billions to several tens of billions of yen each) and are operated with the intent of securing both investment income and capital gains. FB says it aims to offer investment services that put client satisfaction first and accordingly times the sale of fund properties so that they can generate the most profit. This means assets under management (AUM) fluctuate significantly in tandem with swings in the real estate market. In addition, the company provides asset management services for other real estate investments undertaken independently by investors. The balance of FB’s AUM exceeded JPY300.0bn in FY11/09 due in part to the rise in assets rescued from funds of other asset managers amid worsening market conditions following the global financial crisis. However, the AUM contracted sharply as FB continued to sell off properties. From FY11/13, the supply of large properties (over JPY10.0bn) in the market dwindled, pushing up corresponding prices. Consequently, FB refrained from new acquisitions for funds in which it was investing as a principal. At end-FY11/21, the balance of FB’s AUM stood at JPY23.0bn (up JPY11.1bn compared to end-FY11/20; JPY11.1bn increase during the term, no decrease during the term). The increases and decreases are attributable to asset management services commissioned and completed for other property investments undertaken independently by investors.

Investment Banking segment

Real estate investment and skin-in-the-game investing in funds

FB owns a portfolio of properties for lease, through which it expects to generate stable income over the medium to long term. Small to mid-sized properties (around JPY1.0bn each) that tend to have high market liquidity make up the company’s real estate portfolio. While managing these assets, FB applies various measures to enhance their property value, and also develops new properties if it feels it can generate sufficient returns. The company refreshes the portfolio as necessary to secure capital gains from the value-added properties.

Real estate investment can be classified into four strategies: core, core plus, value-add, and opportunistic. Core investments mainly target returns from rental income (investment income). These investments are characterized by low yields, but also carry low risk by virtue of their focus on properties in prime locations. Core plus investments mainly target returns from investment income, but also look to resell properties at higher prices (capital gains). Value-add investments involve the acquisition of undervalued properties, which are enhanced to add value for sale at a higher price. These investments seek investment income as well. Opportunistic investments refer to acquisitions of high-risk properties (including auctioned properties and properties vacated through forced relocations). The aim is to add value to such properties and resell them at a higher price. We understand FB’s real estate investment and management style falls into the value-add category.

Many of the properties FB targets (real estate worth around JPY1.0bn each) are owned by individuals rather than real estate companies. These assets have yet to realize their full potential and often have room for rent and occupancy improvement. FB sources properties through various channels ranging from referrals from financial companies to real estate brokers, and conducts due diligence to select and acquire one or two properties per month. FB maintains that because it can rapidly appraise properties (in one to three days) and raise capital, it receives offers on good deals ahead of many competitors.

Previously, the company had recorded all proprietary investment assets as real estate for sale (current assets), instead of as fixed assets. However, the company changed its classification of these assets beginning with its announcement of financial results for FY11/21. In principle, the company still records properties for lease as current assets on its balance sheet to ensure that these properties can be promptly sold when it conducts portfolio rotation. However, the company began recording properties with relatively high yields as fixed assets with the intention of generating long-term rental income. To ensure sound financial health, it uses a conservative accounting method that depreciates real estate for sale, which is uncommon in the industry. In addition, if an opportunity arises to invest in large properties, the company also co-invests in funds with other institutional investors. The balance of FB’s proprietary investment assets has continued to increase from FY11/13 alongside a corresponding decline in the balance of its fund-managed assets, rising to JPY61.4bn by end-FY11/21.

Other investment: private equity

In addition to real estate, the company invests in non-performing loans, venture capital, shares of unlisted companies, and other assets. In FY11/16, it booked valuation losses on its entire investment in biotech startup Genaris and its subsidiary Genaris Omics after both went bankrupt. In the subsequent years, the company has not reported notable achievements or earnings contributions from this business.

Other investment: renewable energy

In December 2016, the company set up a new department to promote renewable energy operations, and began developing business in the geothermal energy sector through its consolidated subsidiary First Brothers Development Co., Ltd. Although it will take several years to develop full-fledged businesses in this field, FB plans to utilize hot water from power generation in peripheral businesses such as agriculture and the development of hot spring facilities, leveraging its expertise to contribute to society. Developing geothermal power stations presents a number of challenges including difficulties in securing favorable locations and the lengthy development period. This means that even if the company starts a development project, it will take years until the project can contribute to earnings. In August 2015, FB invested in FSK K.K. (formerly BPC Fukushima K.K.), a company established to build a biomass fuel factory. Although constructions began, operations never got off the ground and FB ultimately sold its stake.

Segments

Investment Management segment (FY11/21: 4.1% of total revenue, 3.3% of operating profit)

In this segment, the company manages assets for clients through private funds that mainly invest in real estate and real estate trust beneficiary rights. It provides a range of services including investment strategy planning and proposals, property acquisitions, property management during the investment period, and property disposition (sales). This business was the original growth engine of the company. However, as the company refocused its operations, the impact of this segment on overall performance weakened. The segment accounted for only 4.1% of total revenue and 3.3% of operating profit in FY11/21 in contrast to 58.3% and 63.8%, respectively, in FY11/15.

The principal revenue streams of the segment are acquisition fees associated with the funds’ property purchases, asset management fees obtained during the asset management period, disposition fees generated when selling properties, and incentive fees obtained when the selling price exceeds a certain amount. The business maintains a recurring-revenue model distinguished by high profitability and an extremely high marginal profit ratio. Segment OPM stood at 65.2% in FY11/14, 82.3% in FY11/15, and 74.6% in FY11/16. A sharp revenue decline in FY11/17 pushed the figure down to 12.8%, but it had risen to 34.0% in FY11/19 and 50.0% in FY11/20. In FY11/21, OPM was only 17.9%.

Investment Banking segment (94.9% of total revenue, 95.8% of operating profit)

In this segment, FB invests as the principal, concentrating on investments in real estate for lease, through which it expects to generate stable income. The company also conducts private equity investment applying the platform and strengths of the company’s existing businesses, investments in renewable energy and other social infrastructure, and skin-in-the-game investing (co-investment) in the private funds it originates. These investment activities are the driving force behind the company’s growth. In FY11/21, the segment accounted for 94.9% of total revenue and 95.8% of operating profit. The main revenue streams of the segment are capital gains (mainly gains on property sale: 66.4% of gross profit in FY11/21) and investment income (mainly rental income from real estate: 32.1%). Segment OPM in FY11/21 was 22.4%.

Proprietary investment

Real estate investment: FB invests in properties for lease that are not large enough to include in its funds but are expected to deliver high yields in the future. The purpose of such investments is to secure stable income. After acquiring properties, the company works to maximize the cash flows provided by these assets by applying various measures to add value. It takes a flexible approach toward sales, disposing of properties at the opportune time (for example, when a buyer offering favorable terms or a more lucrative investment opportunity appears) and refreshing its portfolio accordingly.

Other investment: To diversify its business portfolio and expand earnings opportunities, the company invests in a range of fields where it can use its existing strengths. Examples of such fields are private equity and renewable energy. However, these investments have yet to deliver notable earnings contributions.

Advisory business

Based on its experience to date in moving assets off balance sheet, setting up real estate securitization schemes, and arranging financing, the company provides a range of advisory services tailored to client needs, including corporate rehabilitation support and M&A-related advice.

Group companies

The FB group comprises the company (First Brothers Co., Ltd.), six main consolidated subsidiaries (including First Brothers Capital Co., Ltd., First Brothers Asset Management Co., Ltd., Higashinihon Fudosan Co., Ltd., First Brothers Development Co., Ltd., Fuji Facility Service, Inc., and From First Hotels Co., Ltd.), and one equity-method affiliate (Credit Guarantee No. 2 LLC, silent partnership investment ratio: 45.0%) among others. The group operates in the Investment Management and Investment Banking segments.

First Brothers Capital generated over 10% of consolidated revenue (after excluding internal transactions among consolidated companies) in FY11/20, when it reported revenue of JPY11.8bn, recurring profit of JPY2.2bn, net income of JPY396mn, net assets of JPY566mn, and total assets of JPY38.6bn.

Acquisition of Higashinihon Fudosan fuels growth

FB acquired shares in Higashinihon Fudosan (99.6% of voting rights) on April 26, 2019, making it a subsidiary. Established on December 23, 1983, Higashinihon Fudosan had operated stably for 35 years and enjoyed sound financial health underpinned by a portfolio of many quality assets located near railway stations or in business districts. After leading the firm for many years, the owner had been looking for a business successor, which was the main reason behind the share transfer to FB. The total acquisition cost was JPY4.2bn (includes share acquisition, funding for Higashinihon Fudosan’s share buyback, and advisory fees).

Higashinihon Fudosan owns a large number of properties in the Tohoku region, with the total asset value standing at JPY12.7bn at end-FY11/19. Properties include office buildings near stations and in business districts, and roadside and other commercial facilities with an average NOI yield (net operating income [NOI] divided by acquisition price) of 7.9% as of end-FY11/19. FB explains that expansion from the Greater Tokyo area into the Tohoku region has boosted its flexibility in terms of both business continuity and opportunities to acquire high-NOI properties such as office buildings near railway stations.