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

FY03/22 results: Tenpo Innovation reported full-year revenue of JPY11.4bn (+10.4% YoY), operating profit of JPY910mn (+24.3% YoY), recurring profit of JPY987mn (+17.2% YoY), and net income of JPY662mn (+15.1% YoY). At its Restaurant Subleasing business, the company saw strong demand from individual and small corporate restaurateurs despite the ongoing fallout from the pandemic and related restrictions on businesses, and in response moved aggressively to meet this demand by acquiring new restaurant properties that had the right profile (small size, good location, and fully furnished), while at the same time working to recruit additional sales people and providing additional training for its employees. As part of its outreach to existing customers located in Metropolitan Tokyo and the three neighboring prefectures, the company provided information about and help with applications for special government subsidy payments to operators of drinking/dining establishments that cooperated with the government's request to shorten operating hours (to help reduce new coronavirus infections). At its Real Estate Trading business, the company faced much of the same obstacles in terms of pandemic-related restrictions but nevertheless continued seeking out the right buying and selling opportunities, began sharing customer information with its Restaurant Subleasing business, and otherwise focused its efforts developing new customers and acquiring new restaurant properties.

FY03/23 forecast: The company is projecting full-year revenue of JPY12.7bn, operating profit of JPY1.1bn, recurring profit of JPY1.1bn, and net income of JPY733mn. These figures are not directly comparable with FY03/22 figures as the company will be reporting FY03/23 results on a consolidated basis versus a nonconsolidated basis in past years. Because the company's underlying assumption is that it will be some time yet before conditions in the restaurant industry are back to where they were prior to the pandemic, its Restaurant Subleasing business will be focusing mainly on acquisitions of highly marketable locations based on its expectation of rising demand for restaurant properties with not only good locations, but that are also fully furnished and small, so as to better control fixed costs. With the number of restaurants advertising for tenants on the rise, the company believes now may be an good time to acquire prime properties at lower-than-usual prices, and has indicated that it is actively preparing to take full advantage of these opportunities by broadening its sources of information. At its Real Estate Trading business, plans call for further strengthening its relationships with real estate agents with the help of closer coordination with its Restaurant Subleasing business; this is expected to aid its efforts to develop new customers and acquire additional information about properties of interest, with this in turn helping the company take advantage of new opportunities to buy and sell properties. 

Medium-term plan: On May 25, 2021, Tenpo Innovation announced a new medium-term business 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

Recent updates

Upgrade of dividend forecast, establishment of subsidiary, and start of new business

On March 24, 2022, Tenpo Innovation Inc. announced an upgrade of its dividend forecast.

At a meeting of its Board of Directors held on the same day, the company announced a revision of the dividend forecast announced on February 3, 2022.

Based on the company's dividend policy, the year-end dividend forecast for FY03/22 has been revised upward to JPY12/share, up JPY1 from the previous forecast, in consideration of the company's recent business performance and financial position.

On March 24, 2022, Tenpo Innovation announced the establishment of a subsidiary and the start of a new business.

The company announced that its Board of Directors had resolved at a meeting held on the same day to establish a subsidiary and launch a new business (store rent guarantee business) through this subsidiary.

The newly established subsidiary is Store Safety Co., Ltd. (located in Nagoya, Aichi Prefecture), which is due to be established (and start operations at the same time) on April 1, 2022, and will be wholly-owned by the company. The company plans to invest JPY100mn in the new subsidiary.

The business profile of the subsidiary is as follows: it receives an application from a new tenant for a retail property, examines the application, and then enters a guarantee agreement with the tenant upon receipt of a guarantee fee from the tenant. In the event that the tenant defaults on rent or other obligations, the subsidiary pays the rent due to the landlord on the tenant's behalf, and following this, the subsidiary claims reimbursement from the tenant.

With the establishment of this subsidiary, the company plans to move to consolidated accounting from FY03/23. The impact of the establishment of the subsidiary on the company's consolidated financial results for FY03/23 will be disclosed in the earnings forecast to be released at the time of the full-year earnings announcement on May 11, 2022.

Trends and outlook

Quarterly trends and results

Full-year results for FY03/22 (out May 11, 2022)

Summary

Nonconsolidated results for the 12-month period of FY03/22 (April 2021–March 2022)

• Revenue:            JPY11.4bn (+10.4% YoY)
• Operating profit:  JPY910mn (+24.3% YoY)
• Recurring profit:   JPY987mn (+17.2% YoY)
• Net income:        JPY662mn (+15.1% YoY)  

Market conditions for restaurant industry

FY03/22 was a tough year for the restaurant industry as a whole, which continued to suffer from sporadic state of emergency declarations by the government in response to new waves of coronavirus infections, and multiple mandates calling for dining and drinking establishments to temporarily close or reduce operating hours. All this greatly depressed customer traffic and sales at nearly all dining and drinking establishments, with bar owners suffering the most because the government also put restrictions on the hours during which alcoholic beverages could be served.            

Market conditions for real estate 

Rents on commercial properties in the key districts in Tokyo where the company is focused had been holding up well in the years just prior to the pandemic in 2020, but the fallout from the pandemic left many properties empty and looking for tenants, especially in those areas that depend heavily on foreign tourist traffic and districts with high concentrations of restaurants and amusement facilities. With this sudden jump in vacancies, rents soon felt the pressure as well, especially in the case of large properties with high overhead costs, properties located some distance from train/subway stations, and properties located on the upper floors of buildings. 

Conditions at the company’s businesses

At its Restaurant Subleasing business, the company saw strong demand from individual and small-scale corporate restaurateurs despite the ongoing fallout from the pandemic and related restrictions on businesses, and in response moved aggressively to meet this demand by acquiring new restaurant properties that had the right profile (small size, good location, and fully furnished), while at the same time working to recruit additional sales people and providing additional training for its employees. As part of its outreach to existing customers located in Metropolitan Tokyo and the three neighboring prefectures, the company provided information about and help with applications for government subsidy payments to operators of drinking/dining establishments that cooperated with the government's request to shorten operating hours. At its Real Estate Trading business, the company faced much of the same obstacles in terms of pandemic-related restrictions but nevertheless continued seeking out the right buying and selling opportunities, began sharing customer information with its Restaurant Subleasing business, and otherwise focused its efforts developing new customers and acquiring new restaurant properties.   

Restaurant Subleasing business

For FY03/22, the Restaurant Subleasing segment reported full-year revenue of JPY10.4bn (+9.2% YoY) and a segment profit of JPY724mn (+46.1% YoY).

At the end of FY03/22, the segment reported a total of 1,951 subleased properties (+245 YoY); contracted properties* totaled 407 (+29.6% YoY). (*Contracted properties include new and renewed contracts; renewed contracts are for properties subleased after a restaurant has closed, concluded with the person opening a new restaurant.) 

Real Estate Trading business

For FY03/22, the Real Estate Trading segment reported full-year revenue of JPY970mn (+25.3% YoY) and segment profit of JPY186mn (-21.3% YoY).

The company's Real Estate Trading business purchases and builds restaurant properties with the ultimate aim of strengthening its relationships with real estate agents and promoting its restaurant subleasing business. During FY03/22, the company sold five properties and bought six, thus ending the year holding three properties, this despite the dull market conditions in the wake of the pandemic which finds most buyers preferring to watch and wait from the sidelines. 

Company forecast for FY03/23

Summary

• Revenue:           JPY12.7bn (—)
• Operating profit: JPY1.1bn   (—)
• Recurring profit:  JPY1.1bn   (—)
• Net income:       JPY733mn (—)
• EPS:                 JPY41.37 (versus JPY37.36 in FY03/21)
• YoY comparisons not meaningful due to switch to consolidated accounting in FY03/23 
  

Company outlook for FY03/23

The outlook for FY03/23 remains clouded by uncertainty, in the company's view, for even though a good portion of Japan's population has been vaccinated against COVID-19, there are still worries about outbreaks of infections by new variants of the virus and, outside of Japan, increasing geopolitical risks in the wake of the Russian invasion of Ukraine.  

Because the company's underlying assumption is that it will be some time yet before conditions in the restaurant industry are back to where they were prior to the pandemic, its Restaurant Subleasing business will be focusing mainly on acquisitions of highly marketable locations based on its expectation of rising demand for restaurant properties with not only good locations, but that are also fully furnished and small, so as to better control fixed costs. With the number of restaurants advertising for tenants on the rise, the company believes now may be an good time to acquire prime properties at lower-than-usual prices, and has indicated that it is actively preparing to take full advantage of these opportunities by broadening its sources of information.         

At its Real Estate Trading business, plans call for further strengthening its relationships with real estate agents with the help of closer coordination with its Restaurant Subleasing business; this is expected to aid its efforts to develop new customers and acquire additional information about properties of interest, with this in turn helping the company take advantage of new opportunities to buy and sell properties.                

Along with its decision to establish a new subsidiary (Store Safety Co., Ltd.) at the beginning of FY03/23, the company also decided to begin reporting results on a consolidated basis. In keeping with this, its forecast for FY03/23 represents consolidated revenues and earnings as opposed to the nonconsolidated figures reported in past years. 

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.