Tenpo Innovation 3484
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2021-11-02
2021-08-26
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Shinjuku 4-1-6, JR Shinjuku Miraina Tower 11F, Shinjuku-ku, Tokyo 160-0022
Summary
Tenpo Innovation is a real estate company specializing in restaurant properties. It earns revenue from subleasing properties (usually with fixtures and furniture) it has leased from owners to restauranteurs: fee revenue such as key money, and gains on the resale of fixtures in its Restaurant Subleasing business.
Real Estate Management & Development
Key dates
2018-11-30
Coverage initiation
Executive summary
Business overview
Tenpo Innovation is a real estate company specializing in restaurant properties. It earns revenue from subleasing to restauranteurs properties (usually with fixtures and furniture) it has leased from owners: fee revenue such as key money, and gains on the resale of fixtures in its Restaurant Subleasing business. Rising property numbers are steadily increasing the scale of revenue. Although there was some negative impact from the COVID-19 pandemic, the business environment recovered somewhat in 2H, and FY03/21 saw ongoing revenue growth. Revenue comprises recurring revenue (rent and renewal fees) and one-off revenue when a restaurant is sublet (key money and fixture sales). The company subleased 1,706 properties (+22 YoY) as of end-FY03/21. It concluded 314 new contracts (-83 YoY). Tenpo Innovation is the only Japanese company specializing in this business and leads the market in number of restaurant subleases (based on a company survey).
Tenpo Innovation mainly handles fully furnished restaurants in prime urban Tokyo locations, where there are many prospective restaurant operators. Some 84,000 restaurants are in business in Tokyo. Each year, about 7% either open or close, based on annual averages. Restaurants require different knowledge and expertise than office and residential properties, such as suitable locations and facilities like wastewater pipes and air extraction system ducting. By specializing in this area, Tenpo Innovation has steadily built up its management expertise, including ability to assess properties and troubleshoot. This has enabled it to build a powerful network of leading local real estate businesses and agents for procuring properties and finding tenants. The owners and real estate agents have their properties leased with peace of mind while maintaining rents. Tenants can open restaurants in prime locations quickly, with low setup costs. Tenpo Innovation controls vacancy and collection risks. While its margins are lower than companies that build and sublease residential properties, it has forged a unique position by focusing on highly specialized area.
Building a property portfolio is labor intensive (the company had 28 salespeople as of end-FY03/21), but such expertise tends to lie with individuals. The company has made efforts to share this sales expertise of veteran employees within the company and launched a practical training program to build a firm foundation for growth.
Earnings trends
FY03/21 results: For FY03/21, Tenpo Innovation reported full-year revenue of JPY10.3bn (+3.6% YoY), operating profit of JPY732mn (-6.8% YoY), recurring profit of JPY842mn (+3.7% YoY), and net income of JPY576mn (+2.0% YoY). In the Restaurant Subleasing business, Tenpo Innovation worked to minimize business risks by focusing on addressing the needs of existing tenants and landlords. After the state of emergency declaration was lifted, the company, first of all, focused on finding tenants for subleased properties for which it had received contract cancelation requests as desires among potential customers to open restaurants recovered. Then, to respond to the needs for opening restaurants during the pandemic, the company resumed property procurement activities not only in urban areas, which had thus far been its focus, but also in suburbs. In the Real Estate Trading business, despite a notable market tendency to hold off on making transactions, the company continued working on gathering information and developing customers to ensure that it could accurately recognize and capture what few opportunities there were to buy/sell properties.
FY03/22 forecast: The company forecasts full-year revenue of JPY11.3bn (+9.6% YoY), operating profit of JPY814mn (+11.2% YoY), recurring profit of JPY870mn (+3.4% YoY), and net income of JPY595mn (+3.4% YoY). In the Restaurant Subleasing business, the company intends to aggressively procure and sublet properties while working to gather a wide array of information regarding trends in restaurant opening demands in the pandemic era. The company expects that, during the pandemic, the tendency among customers to choose properties that allow for further reduction in fixed costs will become more prominent, and thinks it is crucial to procure properties that meet such needs of restaurant operators as soon as possible. In particular, as the pandemic nears its end, properties looking for new tenants will increase, and there may be more opportunities to purchase prime properties than usual. For this reason, the company intends to step up its information gathering activities. In the Real Estate Trading business, to accurately discern and seize opportunities for buying/selling properties, the company will continue to collect relevant information and develop customers, and strengthen its relationship with real estate agents.
On May 25, 2021, Tenpo Innovation announced a new medium-term management plan that runs through FY03/24. The plan targets FY03/24 revenue of JPY14.2bn, operating profit of JPY1.1bn, OPM of 7.6％, 520 new contracts, and 2,451 subleased properties. This would put revenue at 1.37x the FY03/21 amount and operating profit at 1.47x, with OPM rising 0.5pp versus FY03/21. The company positions this medium-term plan as a midpoint in achieving its long-term management goals. Under the plan, it aims to get a good start on building a 100-strong sales team that can help it achieve its goals of 5,500 subleased properties by end-FY03/29 (versus 1,706 in FY03/21) and a 5% share of the market in Tokyo and the surrounding area (versus just over 1% in FY03/21).
Strengths and weaknesses
Shared Research sees the company’s strengths as: expertise in subleasing restaurants with fixtures and furniture; a powerful network of leading local real estate agents; and systematic training programs for increasing specialist personnel. Its weaknesses are: low barriers to entry; lack of online procurement capabilities; and limited scope to improve margins.
Key financial data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures through FY03/15 were prepared under the Companies Act, so they are not subject to auditing based on the Financial Instruments and Exchange Act (listed on TSE Mothers in October 2017).
Note: The company plans to implement a 2-for-1 stock split with December 10, 2019 as the record date. Per share data is calculated to adjust for the stock split.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: One-off revenue/number of contracts data provided through FY03/18 due to an increase in revenue from real estate sales included under one-off revenue.
Note: Average refers to financial year average.
Note: One-off revenue from fees such as key money and sales of building fixtures
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Real estate trading revenue is included under one-off revenue.
Note: Figures may differ from company materials due to differences in rounding methods.
1H FY03/22 results (out November 2, 2021)
Summary
Results for 1H FY03/22 (April–September 2021)
Business environment (restaurant industry)
The restaurant industry was hit hard by the COVID-19 pandemic and the states of emergency declarations issued in response by the Japanese government, as these effectively forced restaurant operators to either shut down temporarily or shorten operating hours multiple times, and reduce hours allowed for serving alcoholic beverages, leading to sharp drops in customer traffic and revenue, with the hardest hit being bars and other establishments that depend on sales of alcoholic beverages. The severe situation continued as the fifth wave of infections peaked in August 2021.
Real estate market
Rents on commercial properties in key districts in Tokyo have held at high levels in recent years. However, the company said that amid the COVID-19 pandemic, properties looking for new tenants increased sharply, especially in urban areas and in the parts of Tokyo that are popular with foreign tourists and those with many bars, restaurants, and amusement facilities. Demand was especially weak for large properties with hefty overheads, those located some way from stations, and those on upper floors, putting further downward pressure on rents.
Status of the company’s businesses
In the Restaurant Subleasing business the company proactively procured restaurant properties that were small, well-located, and fully-furnished to meet the demand for new restaurants run by individual owners or small businesses, an area that has been robust even during the COVID-19 pandemic. The company also promoted hiring to strengthen sales capabilities, while for existing customers, the company provided information and application support for restaurants in the four prefectures around the Tokyo Metropolitan area that sought financial aid related to shortened operating hour requests. In the Real Estate Trading business, despite a continued strong market tendency to hold off on making transactions, the company focused on gathering information, developing customers, and sourcing properties to ensure that it could recognize and capture precisely what few opportunities there were to buy/sell properties.
Restaurant Subleasing business
For 1H FY03/22, the Restaurant Subleasing segment reported revenue of JPY5.0bn (+5.0% YoY) and segment profit of JPY340mn (+54.4% YoY).
At end-1H FY03/22, the number of sublease properties was 1,812 (+106 from end-March 2021) and the number of contracted properties (new and renewed contracts; renewed contracts are for properties subleased after a restaurant has closed, concluded with the person opening a new restaurant) was 191 (+54.0% YoY). Segment profit was up 54.5% YoY, absorbing increases in costs such as salaries and bonuses and hiring costs.
Real Estate Trading business
For 1H FY03/22, the Real Estate Trading segment reported revenue of JPY670mn (+61.7% YoY) and segment profit of JPY102mn (+44.1% YoY).
Under this business, the company purchases and builds restaurant properties with the ultimate aim of strengthening its relationships with real estate agents and promoting its restaurant subleasing business. In 1H FY03/22, the company sold two properties and purchased three against the backdrop of a subdued market due to the pandemic, thus ending the quarter with three properties in inventory.
Full-year FY03/22 forecast
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Real estate trading revenue is included under one-off revenue.
Summary
Business policies
In the Restaurant Subleasing business, the company intends to aggressively procure and sublet properties while working to gather a wide array of information regarding trends in restaurant opening demands in the pandemic era. It expects that, during the pandemic, the tendency will become more prominent for customers to choose properties with furnishings and fixtures left by the previous tenant, which will allow them to reduce fixed costs such as rent and leasing fees and avoid the need to take out loans when opening restaurants. However, it believes that customers’ desire to open new restaurants in good locations will remain strong. The company therefore thinks it is all the more crucial to procure properties that meet such needs of restaurant operators as soon as possible.
There has been multiple state of emergency declarations since the previous fiscal year, but these have been accompanied by financial aid for complying with shortened operating hour requests. The company believes this has helped to curtail restaurant property contract cancellations. At the same time, management thinks that if the market picks up as the pandemic nears its end, properties looking for new tenants will increase, and there may be more opportunities than usual to purchase prime properties. For this reason, the company intends to step up its information gathering activities with a focus on procuring properties that meet demand in the pandemic era—properties that are small, favorably located, and have furnishings and fixtures in place. According to management, real estate agents are the main source of information on properties for procurement, while in the leasing channel the same can be said for the company’s website, inukitenpo.com. The website’s membership remains high, leading the company to believe that it continues to fulfil an important role as a leasing tool.
The FY03/22 forecast assumes 420 new contracts (+33.8% YoY) and 1,916 subleased properties at end-FY03/22 (+12.3% YoY).
In the Real Estate Trading business, to accurately discern and seize opportunities for buying/selling properties, the company will continue to collect relevant information and develop customers, and strengthen its relationship with real estate agents, which it says has already led to referrals to some properties in favorable locations. To date, the average procurement price has been around JPY92mn and the average holding period roughly nine months, and the company does not expect FY03/22 to be much different.
CSR and ESG initiatives
Promoting “Kodomo Shokudo” (“Children’s Cafeteria”) restaurants as CSR initiative
Since June 2019, the company has been promoting “Kodomo Shokudo” (“Children’s Cafeteria”) establishments as one of its CSR initiatives. Kodomo Shokudo establishments are intended to provide meals to children who are not able to get enough food, and a comfortable and safe place to stay until their parents get home. They are often run by local authorities or communities but can have an uncertain outlook due to difficulties in securing sufficient locations, personnel, and funding. As Kodomo Shokudo establishments also may be associated with poverty, sanitation concerns, and unstable management, they are not always well received by the broader community.
The company works in collaboration with local governments and communities, suggesting that customer restaurants use their facilities to operate Kodomo Shokudo establishments and providing them with funding to do so.
The company believes that operating Kodomo Shokudo establishments on restaurant premises solves or at least ameliorates the issues traditionally encountered. By their very nature, restaurants already have the space and personnel (cooks) needed to run these establishments, and by using “makanai” (food prepared for employees using the same ingredients already procured for the restaurant), meals can be provided with minimal effort and at low cost. Moreover, as restaurant premises are also patronized by ordinary consumers they are not likely to draw attention for any association with poverty, and because the meals are prepared by professionals there are few concerns from a sanitation standpoint. Furthermore, as this is a project planned and executed by a TSE1-listed company as part of its CSR activities, locals can feel reassured about the establishments’ patrons. For the company, having ready-made ties with restaurants renders the project easily scalable.
The company sees these Kodomo Shokudo establishments going beyond providing meals to children, ultimately becoming a form of social infrastructure by also evolving into local community venues and offering child-rearing support to parents.
Utilizing “inuki” (fully furnished and equipped) properties as ESG initiative
The company’s business scheme includes the subleasing of “inuki” (fully furnished and equipped) properties, a practice that contributes to reduction of waste. At its mainstay Restaurant Subleasing business, the company subleases to restauranteurs properties it has leased from owners. When a lessee closes their restaurant, it is common to leave the premises in skeleton form, with the fixtures (e.g., kitchen equipment, air-conditioning, tables, floor concrete, drainage pipes, exhaust ducts, signage) ending up as waste. Tenpo Innovation subleases the premises to new tenants with these fixtures still in place (i.e., as “inuki” properties). By reusing fixtures in this manner, it helps to reduce waste.
Over the past five years, the company has subleased 1,037 “inuki” properties with an average floor space of 56.8m2. As the standard restaurant has an estimated 13,500kg of fixtures, the company has thus far prevented 13,999.5t from being discarded. In other words, over the past five years the company has reduced restaurant fixture waste by an amount equivalent to about 1,400 heavy-duty trucks that can hold 10 tons each.
Medium-term management plan (out May 25, 2021)
On May 25, 2021, Tenpo Innovation announced a new medium-term management plan that runs through FY03/24. Quantitative targets for FY03/24 are revenue of JPY14.2bn, operating profit of JPY1.1bn, OPM of 7.6%, 520 new contracts, and 2,451 subleased properties. This would put revenue at 1.37x the FY03/21 amount and operating profit at 1.47x, with OPM rising 0.5pp versus FY03/21.
Aim and themes
The aim of the new medium-term plan is to maximize the subleased property count and lease margins. Maximizing the former actually leads to maximizing the latter, which serve as a recurring revenue stream, and this will actively increase enterprise value. The themes of the plan are “specialization” and “professionalization.” By specializing in the Restaurant Subleasing business and pursuing related knowledge and experience as an organization, Tenpo Innovation aims to continue as a professional company unrivaled in Tokyo and the surrounding region in the areas of restaurant properties in general, and of restaurants sold with existing furnishings and fixtures in particular.
Key measures
Aggressive recruitment of sales staff
To achieve its long-term goal of 5,500 leased properties, the company aims to have a 100-strong sales team in place by end-FY03/25, the year after the latest medium-term plan ends (the sales team had just 30 members in FY03/21), so it plans to hire two new salespeople per month during FY03/22–FY03/25 (about 96 members in total). As part of this effort, the company will introduce an animated video to use as a tool when explaining the company and its operations to potential employees to prevent mismatches in hiring.
Enhancement of property introductions on inukitenpo.com
On the company’s inukitenpo.com website, the company has begun introducing properties using video instead of just photographs. The aim is to enhance its pull marketing by more effectively promoting the appeal of the properties it introduces, using video to provide information on both the properties and the surrounding area.
Improvement in employee loyalty
The company will conduct three measures to improve employee loyalty. First, it will enhance employee benefits, including provision of 130 days off annually and a newly established “refreshment vacation.” Next, it will enhance its retirement benefits program by using a unique arrangement in which retirement benefits systematically accumulate. Finally, aiming to create an environment where it is easy for employees to achieve results, the company will introduce a new employee evaluation system that clarifies activity targets.
Medium- and long-term management goals
Tenpo Innovation has positioned its new medium-term plan as a midpoint in achieving its long-term management goals of accumulating a 5% share of its target market and 5,500 subleased properties by FY03/29 (the company estimates that there are 160,000 restaurants in Tokyo and three neighboring prefectures, of which it could potentially procure some 110,000). As of FY03/21, it had 1,706 subleased properties, representing just over 1% of restaurants in Tokyo, Kanagawa, Saitama, and Chiba, where it does business. To realize its goals for FY03/29 (5% market share and 5,500 subleased properties), the company first intends to implement its medium-term plan to maintain stable growth while building a 100-strong sales team.
The company thinks that once it achieves the target of 5,500 subleased properties, it may be able to develop a business leveraging its property portfolio as a single infrastructure. Real estate agents are potential acquisition targets, but Tenpo Innovation does not have any concrete plans in the near term in this respect.
Business
Business description
Restaurant specialist real estate company subleasing popular properties
Tenpo Innovation’s business model involves leasing restaurant premises from owners and subleasing them to those who want to open a restaurant. It also makes profits from purchasing restaurant equipment (cooking equipment, interior facilities, and fixtures) from restaurant operators leaving a property and reselling it to incoming tenants. Growth comes from increasing the number of subleased properties.
The term subleasing brings to mind the simple act of leasing one property to a second party. Refinements to the business model and growth scenarios are hard to picture. The company’s key characteristics come into focus when looking at the business by type of property and competitiveness. It leases popular restaurant properties in Tokyo and the surrounding areas*—prime, fully equipped restaurant premises** where a vast number of individuals want to open restaurants. Its advantage is specialization, which it uses to structure subleasing transactions that generate revenue and provide benefits to all stakeholders. Shared Research believes keys to properly understanding the company’s business are the superior value of the properties it deals with and the expertise that enables it to procure the properties.
This expertise takes a great deal of time and trouble to acquire, so the company has specialized here (it has no plans to get into brokerage, management, or other types of real estate businesses). In this sense it is a restaurant specialist real estate company. This specialized knowledge and expertise concerning such a niche field is often the domain of certain individuals. For that reason, in many cases (and industries) this can be an obstacle to scaling up the business. In this respect, Tenpo Innovation has indicated that it plans to broadly share its expertise within the company and establish systems that will enable it to respond as an organization and accelerate growth.
Key point 1: Popular properties
The company says that a surprisingly large number of people want to open restaurants in Tokyo, although this is hard to envisage and there are no relevant statistics. Meanwhile, there appears to be a myriad of restaurants, but the numbers are not so large considering that operations require a certain quality of location among other characteristics. Demand for properties that meet certain criteria vastly outstrips supply. The company says even fewer properties are already outfitted, which enables tenants to significantly reduce restaurant opening costs (from an investment of about JPY10mn down to JPY1–2mn). It deals in popular properties that meet these criteria and appear likely to attract large numbers of prospective tenants (see Market and value chain section). Over 90% of the properties it subleases are in Tokyo (half are in the seven urban wards), 90% are for restaurants, and nearly 90% come previously outfitted.
Key point 2: Highly specialized
The second key point is that Tenpo Innovation is highly specialized and backed by a wealth of experience as exemplified in its troubleshooting ability. Its salespersons are not just experts in real estate deals. They also have developed the ability to judge properties by inspecting and handling numerous individual properties and can negotiate with multiple relevant parties***. Personnel assigned to areas around major train stations gather information on local eating and drinking establishments and accumulate a wealth of knowledge and data on location, facilities, and the market. They also have a great deal of knowledge about problems at restaurants and specific ways to deal with them, as well as expertise in rent collection, which steadily builds up as the number of subleased properties grows. Meanwhile, they use this specialized knowledge and expertise to build solid relationships with a variety of specialists, such as lessors, including local real estate agents, and tenants, such as restaurant operators. The company believes its expertise in restaurant transactions in Tokyo is highly respected among these players.
Subleasing transactions that benefit all parties
In light of these two key points, actual transactions and benefits for involved parties (Tenpo Innovation, real estate agents, tenants) are as follows:
Tenpo Innovation: Setting advantageous rents
First, the company says virtually all of the perspective tenants prioritize locations over slight variations in the rent*. This allows Tenpo Innovation to set rents to those charged by the owner plus a margin, which means the owners can maintain their rental revenues. By leasing to a professional company backed by expertise, the owners (and real estate agents acting on their behalf) reap benefits as well as peace of mind. The company says that, generally, the owners are not necessarily positive about fully fitted out properties with the equipment of the previous tenants as is, due to liability for defect warranties. However, with Tenpo Innovation, which has considerable experience in troubleshooting restaurant structural issues as the lessee, the owner can lease the property with peace of mind and a shorter vacant period than a skeleton property. The owner receives a stable rental revenue by leasing to the company.
Real estate agents: Less management work
The real estate agents still get commission revenue (the company pays sublessee name-change fees whenever there is a change of tenant), while reducing the trouble involved in leasing (they get a brokerage commission for introducing a tenant). They also have less management involvement by leaving troubleshooting up to the company.
Tenants: Securing prime locations
The tenant has a restaurant in a prime location, and rent is no major issue if they are able to reduce restaurant opening costs and cut the time required to start operation with an inuki property. The tenant can also discuss a range of matters with the company after occupancy given the company’s wealth of specialized knowledge. Tenpo Innovation acts as a kind of representative in dealings with the owner (the vacating tenants are also able to avoid work to restore the premises to their original condition and reduce exit costs by selling the fixtures).
Steady rent collections and growth possible
For Tenpo Innovation, leasing out properties means it has to deal with vacancy risk and collection risk. It minimizes these risks as the properties are in demand, it has property management capabilities, and is proactive in the search for succession tenants. The company has well-established collections capabilities.
The occupancy rate at properties leased by the company* is extremely high, and the month-end collection rate was 99.4% (FY03/19 average based on company data). As tenants’ rights are protected** under the Act on Land and Building Leases, the company is forced to cancel some contracts. Even when such cases are included, Tenpo Innovation has a cancelation rate of about 1%*** of its leased properties annually. With the number of leased properties increasing, the company’s business model has prospects for steady growth.
Actual business flows
The company’s business flows go from property leasing to subleasing to management, described in more detail as follows:
Restaurant property leasing
Obtaining restaurant property information
The company targets properties with characteristics many prospective tenants prefer: roadside and ground floor, equipped, and relatively low face-value rent. Tenpo Innovation begins with sales activities aimed at leading local real estate agents and conducted by personnel assigned to a particular station area. It receives offers from people considering shutting down restaurants on its specialist restaurant acquisition website, tenpokaitori.com. It also gains information via business partners or existing restaurant clients. The most important route is leading local real estate agents, who provide 80% of the company’s property leads by number, with the others accounting for 10% each*. There are almost inevitably competitors, but there is no specific information available on competition at this stage.
Property survey
Upon obtaining a property lead, the salesperson in charge visits the site and does a simple check of location and condition of property. The salesperson conducts a detailed field survey of properties with good prospects (about 30% of initial leads) to gauge whether a restaurant opening is feasible. This takes into account marketability such as visibility from the road, volume of foot traffic, working population in nearby offices, and how well competing restaurants are doing. Salespeople also check details such as power supply, pipe conditions, and whether other elements of the facilities are suitable for opening a restaurant. Likely candidates for attracting restaurants are assessed internally, covering criteria such as rent and subleasing rent.
Once a decision is made within the company, the salesperson looks into contracts and restaurant facilities and equipment, while the property manager conducts another field survey. The property manager performs a thorough check of 50 items including legal compliance, with a key focus on avoiding problems, to decide whether it is indeed appropriate to lease the property. Checks include issues with facilities impinging on neighboring property boundaries, water leaks, insect droppings or other hygiene issues, and defective kitchen equipment. Executives also conduct site inspections, and a contract is signed if there are no issues.