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Raysum 8890
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2021-11-14
2021-10-14
2021-08-13
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Summary
Among listed companies, Raysum Co., Ltd. is classified as a medium-sized real estate company, ranking 35th (based on revenue) out of about 130 real estate companies. Since its establishment in 1992, the company has consistently provided wealth management services utilizing real estate to high-net-worth individuals. Raysum acquires properties with strong potential to fulfil client needs, and revitalizes them by conducting major renovations (to re-purpose the properties) and anti-earthquake reinforcement. The company then enhances property values further by cultivating and attracting tenants highly capable of responding to societal changes and pay the rent, and offers them as investment properties to prospective clients.
Real Estate Management & Development
Key dates
2019-04-19
Coverage initiation
Executive summary
Business overview
Among listed companies, Raysum is classified as a medium-sized real estate company, ranking 52nd (based on revenue) out of 135 real estate companies. Since it was founded in 1992, it has been providing wealth management services that utilize real estate to high-net-worth individuals. Its mainstay Asset Value Creation business accounted for 82.3% of total revenue and 141.6% of total operating profit in FY03/21. In this business, the company acquires properties with high potential use value and revitalizes them through a variety of means, including large-scale renovation and reconstruction to change how a property is used and improve its tenant composition and life span. While Japan’s real estate industry tends to emphasize real estate’s tangible assets (i.e., land and buildings), Raysum focuses on practical knowledge that links individuals who actually use real estate properties with its owner clients (and their purposes of owning real estate), and utilizes it. For example, the company conducts research into potential tenant groups which can adapt to social changes and increase their abilities to bear rent, sometimes even involves in promoting businesses of such tenant groups, and also develops properties to meet their needs. As a result, the company is able to continue to increase the value of assets under management over the medium to long term. What makes the company stand out is that it continues to support its clients in improving the value of their assets even after closing a sale with them.
The company’s Asset Value Improvement business (13.9% of revenue and 46.4% of operating profit) has adopted an individual customer service representative system that is better able to grasp individual client needs and provide an asset-value enhancement services that continuously realizes the potential value of the client’s assets.
The Future Value Creation business segment (3.8% of revenue and operating loss of JPY2.0bn), operates Raysum directly owned and operated properties that conduct businesses that will meet increasing social demand over the medium- and long-term, such as community hostels, advanced medical care clinics, and environment/energy-related facilities. The experience and knowhow acquired through these businesses will be used to enhance the Asset Value Creation and Asset Value Improvement businesses’ ability to generate new ideas and proposals for their clients.
The company’s Asset Value Creation business mainly targets high-net-worth individuals, but it also serves large companies. Raysum handles a range of real estate, including commercial properties, offices, and condominiums, as well as lodging, educational, medical and logistics facilities, and complexes that combine some of these functions. The company does business mainly in central Tokyo, but in the past several years it has expanded into other parts of Japan (Kyoto, Osaka, Kobe, Fukuoka, Hiroshima, and Takamatsu), as well as overseas. Real estate parcels generally range in price from JPY1.0bn to JPY10.0bn, but; the company focuses mainly on properties valued at around JPY3.0bn. The company signs around 20 contracts per year. Raysum has around 50 core clients and some 50 second-tier clients (as of June 2021). The company says repeat business (selling multiple investment properties to existing clients) is growing. Clients earn net yield of around 4% on their initial investment, but the company notes that its approach concentrates more on gradually raising the value of the properties it sells to clients rather than yields. Also, the company says that it meets the needs of clients whose major focus is not initial yields but who intend to hold properties over the medium to long term. As a result of the above-mentioned expansion of property development into regional cities, Raysum has been seeing more and more client referrals from local financial institutions that understand the nature of the wealth management products and services it offers, and has been actively entering into business alliances with dozens of regional banks to increase the flow of these referrals.
Earnings trends
In FY03/21, the company reported consolidated revenue of JPY32.2bn (-41.4% YoY), operating profit of JPY1.6bn (-86.6% YoY), recurring profit of JPY1.4bn (-88.7% YoY), and net income of JPY663mn (-91.6% YoY). As the COVID-19 pandemic continued to constrain social and economic activities, the company also felt the impact from delayed construction, postponed property inspections, and constraints on discussions with financial institutions and clients.
The company projects FY03/22 consolidated revenue of JPY62.0bn (+92.4% YoY), operating profit of JPY8.0bn (+386.9% YoY), recurring profit of JPY7.5bn (+451.4% YoY), and net income of JPY4.8bn (+624.0% YoY). It expects earnings to recover in the mainstay Asset Value Creation business.
The company has not formulated a medium-term management plan as of May 2021, but it targets an equity ratio of 50% or more and ROE of 10–20%, levels the company believes will allow it to weather the value-creation risks it faces regardless of market price fluctuations. By maintaining a strong balance sheet (it is already maintaining an equity ratio in the 55.0–59.9% range, refer to “Financial strategy” in the Medium-term outlook section) and shifting toward higher-priced properties, the company aims to boost revenue per transaction, fund purchases mainly out of operating cash flow, secure human resources that will help it to harness its comprehensive planning and development capabilities that cover property sourcing, sales, and tenant cultivation while strengthening the ability to withstand potential downturns in real estate prices, and continue to grow steadily.
Strengths and weaknesses
Shared Research thinks Raysum’s strengths are: 1) ability to tailor properties to client requirements, 2) accumulated expertise (tenant management, legal/tax, construction), and 3) close relationships with ultrahigh-net-worth clients. In our view, the company’s weaknesses are: 1) earnings structure whereby stable sources of earnings do not fully compensate for fixed expenses, 2) general lack of awareness of changes in the company’s business model, and 3) personnel numbers rising more slowly than pace of business would warrant.
Key financial data
Note: Fiscal year end was changed in FY03/12.
Note: Figures rounded to the nearest million yen. (The company rounds down amounts under JPY1mn.)
Note: Fiscal year end was changed in FY03/12.
Note: Figures rounded to the nearest million yen. (The company rounds down amounts under JPY1mn.)
Note: In FY03/19, the company withdrew from the Servicing business, and in FY03/20, it reclassified reporting segments into Wealth Management, Property Management, and Other.
Note: In FY03/21, the company renamed the Wealth Management, Property Management, and Other segments as the Asset Value Creation, Asset Value Improvement, and Future Value Creation segments respectively. The change involved the names only, and had no impact on segment data.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures rounded to the nearest million yen. (The company rounds down amounts under JPY1mn.). Hyphens appearing in YoY change lines indicate a change of more than a 1,000% YoY.
Note: Figures may differ from company materials due to differences in rounding methods.
Hyphens appearing in YoY change lines indicate a change of more than a 1,000% YoY.
Note: Starting in FY03/22, the company renamed the Wealth Management, Property Management, and Other segments as the Asset Value Creation, Asset Value Improvement, and Future Value Creation segments respectively. The change involved the names only, and had no impact on segment data.
Note: Figures may differ from company materials due to differences in rounding methods.
Hyphens indicate a change of more than a 1,000% YoY.
1H FY03/22 results
Earnings summary
*Net income/loss attributable to owners of the parent
In FY03/21 the company renamed the Wealth Management, Property Management, and Other segments as the Asset Value Creation, Asset Value Improvement, and Future Value Creation segments respectively. The change involved the names only, and had no impact on segment data.
Performance by segment
Asset Value Creation business
The company envisions future society, and purchases real estate that has potential with a view to creating properties that meet future societal needs, and changes their use, performs major renovations, and attracts new tenants, among other initiatives. Its focus extends beyond single properties. The company offers real estate assets to customers that are meaningful for the entire city, taking into account the surrounding community, local governments, cultural development, and environmental protection.
In 1H, the company sold large properties with prices of JPY2.0bn or greater, such as Premium Residence Shirokane Chojamaru in Minato Ward and Ikejiri Ohashi Project in Meguro Ward. The company also sold 12 properties, including those with regional particularities such as the historical 110-year-old Kaigan Building in Kobe. Considering that there are several other large properties with prices of JPY2.0bn or greater that the company expects to sell by the end of 2021, the company states that it is steadily progressing with plan for this business.
As a new initiative, the company is working to form gateway-type real estate investment products, which would allow investment in units of JPY200mn to JPY300mn into the broad real estate lineup bundling multiple properties with prices of JPY2.0bn or greater. The company aims to increase opportunities for deals with younger "new rich" investors, in addition to the traditional "old rich" customers.
Inventory (the total of real estate for sale and real estate for sale in process) totaled JPY70.0bn (+JPY1.8bn YoY).
Asset Value Improvement business
In this business, the company provides rental management and building management services on properties it has provided to customers to maintain or increase their value. When tenants change, the company provides plans to improve the property's value with a view to the future, taking into account customers’ wishes, with the aim of long-term improvements in asset value.
Future Value Creation business
In this segment, the company mainly operates in-house businesses designed to cope with future societal issues. These businesses include community hostels, advanced medical facilities for a super-aging society, and the development of emergency power sources to cope with a rise in the number of natural disasters. The experience and expertise gained through operating these will be used to enhance the Asset Value Creation and Asset Value Improvement businesses’ ability to generate new ideas and proposals for their clients.
In 1H FY03/22, Asset Holdings and WeBase felt the impact of people limiting outings and travel due to the government’s emergency declaration and measures to prevent the epidemic. In this environment, the businesses continued operations with preventative measures in place. Revenue grew but profit fell YoY, impacted by start-up costs for the newly opened Etajima-sou property in the Seto inland sea.
For details on previous quarterly and annual results, please refer to the Historical performance and financial statements section.
Company forecast for FY03/22
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures may differ from company materials due to differences in rounding methods.
Raysum forecasts FY03/22 consolidated revenue of JPY62.0bn (+92.4% YoY), operating profit of JPY8.0bn (+386.9% YoY), recurring profit of JPY7.5bn (+451.4% YoY), and net income of JPY4.8bn (+624.0% YoY).
The company assumes the impact of the COVID-19 pandemic on domestic and overseas economies will be relatively limited due to the growing vaccination rate worldwide. It aims to get performance back on track by deepening its relationships with individual clients who are highly motivated to invest, and by enhancing its ability to respond to institutional investors who have significant asset management needs.
The company said its policy was to pay out at least 20% of consolidated net income as dividends in principle, while considering future business development needs. For FY03/22, it forecast a year-end dividend per share of JPY27.0.
Forecast by segment
Raysum expects higher revenue and profit in the Asset Value Creation business to drive overall performance. It also anticipates higher revenue and profit in the Future Value Creation business.
Asset Value Creation
The company forecasts revenue of JPY55.0bn (+107.4% YoY) and operating profit of JPY9.4bn (+196.6% YoY).
In FY03/21, there were delays in the timing of completion of commercial products, especially in the case of large projects that contribute significantly to earnings, and the company was only able to sell four properties at prices of JPY2.0bn or greater. In FY03/22, however, it plans to sell 10 such properties and 25 properties in total (versus 21 in FY03/21).
Inventory at end-FY03/21 (the total of real estate for sale and real estate for sale in process) came to JPY68.2bn (+JPY19.8bn versus end-FY03/20). The pandemic allowed the company to build up its inventory of rare properties. The following are representative projects scheduled for sale in FY03/22.
Premium Residence Shirokane Chojamaru (Shinagawa Ward, Tokyo): The company remodeled all 17 newly constructed units with an average private floor space of 100sqm into seven luxury rental units averaging 300sqm each.
Kaigan Building (Kobe, Hyogo Prefecture): Completed in 1911, this 110-year-old building (three stories, floor area of 1,185sqm at time of construction) is a registered tangible cultural property. The company conducted a major renovation on it from end-2020 through February 2021 and simultaneously attracted tenants to bring the property from an over 50% vacancy rate to full occupancy.
Shijo Karasuma Office Building (Kyoto, Kyoto Prefecture): The company renovated a 30-year-old office building (floor area of roughly 6,000sqm) from July to October 2020. The company improved the environment for existing tenants and attracted eager new tenants in order to greatly increase the level of rent.
medock Comprehensive Medical Clinic (Shinagawa Ward, Tokyo): This clinic specializes in circulatory system and cardiac examinations. The company used the frame of a 50-year-old building, but made it seem as if it were newly built by using the “refining” renovation method established by architect Shigeru Aoki.
In 1H FY03/21, the COVID-19 outbreak resulted in construction delays, postponement of viewings, and limitations on meetings with financial institutions and clients, causing segment revenue to fall to JPY4.1bn (-70.7% versus 1H FY03/20) and operating profit to JPY68mn (-97.0% versus 1H FY03/20). Such issues diminished significantly in 2H, and revenue came in at JPY22.4bn (‑33.3% versus 2H FY03/20) and operating profit at JPY3.1bn (-69.0% versus 2H FY03/20). The company says that, from 2H onward, interest in investing has been recovering among affluent individuals and institutional investors.
It expects increased revenue to translate to higher profit, with OPM of 17.0% (versus segment OPM of 11.9% in FY03/21). Segment OPM generally exceeded 20% between FY03/16 and FY03/20, but fell temporarily to 11.9% with the impact of the COVID-19 pandemic. Based on historical levels, Shared Research believes this projection of a 17.0% OPM is conservative.
Asset Value Improvement
Raysum forecasts revenue of JPY4.0bn (-10.8% YoY) and operating profit of JPY540mn (-47.7% YoY).
This business generates income by providing management services for real estate owned by clients and rental income from real estate for sale held by the company itself. The segment projections for FY03/22 assume that rental income will fall as the company makes progress on the sale of real estate for sale. The forecast does not factor in rental income from newly purchased properties.
Future Value Creation
The company projects revenue of JPY3.0bn (+146.9% YoY) and operating loss of JPY1.3bn (operating loss of JPY2.0bn in FY03/21).
In this segment, consolidated subsidiary Asset Holdings, Ltd., runs Raysum Golf & Spa, WeBase Co., Ltd., runs community hostels, and LIBERTÉ JAPON operates the Japanese shops of LIBERTÉ PÂTISSERIE BOULANGERIE (Paris, France).
In FY03/22, Raysum expects revenue and profit to increase at Asset Holdings and LIBERTÉ JAPON, pushing segment revenue and profit higher YoY. In FY03/21, the pandemic caused travel restrictions and kept more people at home, hurting performance at Asset Holdings, WeBase, and LIBERTÉ JAPON. However, the company does not expect the impact on Asset Holdings and LIBERTÉ JAPON to be as bad in FY03/22, so segment performance should recover somewhat. WeBase, which operates community hostels typically used by incoming tourists, is remodeling some of its dormitory-type rooms into private single rooms to attract Japanese tourists.
Medium-term outlook
As of May 2021, the company did not have a medium-term management plan, but it had in place the growth and financial strategies outlined below.
Growth strategies
The company’s two growth strategies are to create value at individual properties and accelerate expansion of the client base.
Creating value at individual properties
The company’s concept of creating value at individual properties considers the total worth of individual properties to be the sum of the thinking provided by the people involved. To accelerate this value creation, the company aims to eliminate mismatches between property locations and tenants that have increased with changing times, attract tenants with unique businesses that are a good fit for property locations and/or redeveloped properties, and undertake business development on behalf of tenants.
Raysum says conventional real estate has been assigned present and future values based on its past performance. However, Raysum believes that recognizing the changes are the key to creating value—major changes in demographics, people’s behavior, their use of money, and their values, regarding people as the key determinant of real estate value. The company employs the information it gathers to generate assumptions about the future of real estate. Specifically, the company is working to develop higher rent-bearing businesses. To this end, Raysum has begun operating a high-end medical clinic and community hostels.
Raysum creates value in three ways: renovation, conversion, and tenant cultivation. Its approach depends on the complexity of the project.
Renovation, the simplest approach, involves repairing and modernizing real estate while leaving its usage (such as offices or homes) unchanged. The goal is to restore rent levels that have fallen over time. Raysum says numerous specialized companies offer similar services, and its own offerings are relatively undistinguishable.
Conversion refers to changing the way property is used, such as turning an office building into an urban daycare center or a care center for seniors into a hotel for inbound tourists. The company explains that this approach presents higher barriers to entry, due to technical difficulty and the scale of investment. Raysum intends to accelerate its involvement in conversion by enhancing its engineering and leasing capabilities.
Raysum cultivates tenants by projecting the future shape of society and developing the required tenants as a product. Examples to date include a high-end specialty clinic and community hostels.
Accelerating expansion of the client base
High-net-worth clients have been Raysum’s main target since founding. The company explains that building relationships with these clients is difficult and time-consuming. Since the global financial crisis of 2008, the company has focused on offering unique real estate parcels. As a result, its properties range from JPY500mn to over JPY1.0bn. Accordingly, the company has accumulated experience in working with high-net-worth individuals with assets worth tens of billions of yen, the owners of public companies, major landowners, and families affiliated with long-established companies.
Raysum has also built a track record on projects that target high-net-worth clients, meet emerging needs, and are priced at JPY3.0bn or more. The company says it is seeing an increase in business from large companies interested in projects having these characteristics.
In addition, as a result of expanding property development into regional cities, including Kyoto, Osaka, Kobe, Fukuoka, Hiroshima, and Takamatsu, Raysum has been seeing more and more client referrals from local financial institutions that understand the nature of the wealth management products and services it offers. To increase its opportunities to conduct business with wealthy households living in rural areas, the company is forming business alliances with dozens of regional banks. Shared Research recognizes that many regional banks are experiencing declines in borrowers as rural populations age, deposits accumulate, and populations and company numbers decrease. Exacerbating this problem are declining lending rates caused by monetary easing policies implemented by the Abe administration, which are connected to falling profitability in the business of providing loans to SMEs, which was once a core business for regional banks. In response to these issues, regional banks are diversifying their sources of earnings to include the referral of companies as targets for M&A and of wealthy clients as potential investors. The business alliances the company has formed with regional banks are mutually beneficial; they enable the company to sell investment real estate to affluent individuals or households in rural areas and raise the capacities of regional banks to provide services to prominent clients and make it possible for them to increase lending opportunities.
Over the medium to long term, Raysum intends to continue working with high-net-worth individuals (the source of its business) while also stepping up sales efforts targeting extremely wealthy individuals, large companies, and institutional investors.
Financial strategy
Raysum says its financial strategy involves maintaining sound finances, which enables it to take risks, and managing the company with an eye to shareholder value.
Equity ratio above 50%, ROE of 10–20%
The company’s core Asset Value Creation business involves purchasing real estate, improving its profit structure, and selling it as investment properties, mainly to high-net-worth clients. For this business, the company explains it needs a system for flexibly acquiring real estate and maintaining investment in repairs and development of business formats to an unprecedented degree under any economic and business environments.
To support this, Raysum places importance on its equity ratio, and its policy is to maintain an equity ratio of at least 50%, and from FY03/14 through FY03/20 the ratio was indeed higher than 50%. In FY03/21, the equity ratio temporarily fell below the 50% line, hitting 44.7%. However, the company says this was not due to any unintentional performance-related decline, but occurred because it saw the current economic environment as an opportunity and increased its borrowing to acquire desirable properties. In addition, the company continued raising funds to acquire real estate through 10-year borrowings, as described in the next section.
Focus on ultralong-term funding
To insulate itself from sudden market fluctuations, the company aims to raise funds entirely through 10-year borrowings. In addition, the company aims to procure funding without financial covenants and focuses on keeping borrowings down to the level that individual projects can cover principal and interest.
Taking banks’ behavior during the worsening financial climate following global financial crisis as a cautionary tale, even when repayment dates are in the future the company is now careful when it takes out loans to avoid covenants. It negotiates on recovery terms even when they are two to three years away to ensure it is prepared if market prices worsen. The company’s financial strategy is to maintain a financial status that alleviates the need to sell off inventories.
Stable shareholder returns
Raysum bought back shares worth JPY10.7bn in FY03/19, JPY700mn in FY03/20, and JPY1.4bn in FY03/21. To raise shareholder value over the medium to long term, the company plans to prioritize share-based compensation to executives and strategic partners. The company is also considering the possibility of using treasury stock to fund acquisitions.
Concentration of management resources
In August 2018, Raysum resolved to discontinue its Servicing business. The company explains that debtor rehabilitation and the handling of small real estate collateral formed the core of the Servicing business, which had little synergy with the mainstay Asset Value Creation business. In addition, Servicing was not highly profitable, and collecting receivables was time-consuming.
The company plans to allocate funds from the discontinued business to growth businesses, including its mainstay Asset Value Creation business, in a bid to raise capital efficiency.
Business
Business description
Company overview
Raysum is classified as a medium-sized real estate company, ranking 52nd based on revenue out of 135 listed real estate companies. Since it was established in 1992, the company has consistently provided wealth management services that utilize real estate to high-net-worth individuals. In FY03/21, revenue amounted to JPY32.2bn (-41.4% YoY), and operating profit was JPY1.6bn (-86.6% YoY).
The company business comprises the Asset Value Creation segment (82.3% of revenue and 141.6% of operating profit in FY03/21), the Asset Value Improvement segment (13.9% and 46.4%), and the Future Value Creation segment (3.8%, operating loss of JPY2.0bn).
Business model
In the Asset Value Creation business, the company’s mainstay, Raysum mainly buys preowned properties (land and buildings), adjusts relationships between property rights, and renovates (refurbishment that does not change their original purpose of use) and converts them (large-scale refurbishment that changes their use) to upgrade them into income properties (those that can generate rental income) that contribute to long-term asset management. The company earns revenue by providing an integrated asset management and property management service. The company handles a wide variety of real estate, including commercial facilities, offices, condominiums, lodging facilities, educational facilities, and healthcare facilities, and complexes that combine some of these functions. The price range of properties is also broad, extending from hundreds of millions of yen to tens of billions of yen. The company’s current target is properties priced at JPY3–5bn. In recent years, the company has signed around 20 contracts per year. Business is concentrated on the Tokyo metro area, but Raysum also operates in outlying areas of Japan and overseas.
High-net-worth households are the company’s principal client target in the Asset Value Creation business. Although Raysum handles many different types of property, a common theme is to make direct investments in properties and revitalize them by raising their asset value. The company puts together products (parcels of income property) after determining their long-term profitability, and then sells these products on to clients (investors). Raysum differs from typical real estate companies in that it first builds relationships with clients and ascertains their needs, then purchases property with the potential to generate earnings in the medium to long term, from which point it delivers long-term asset management value by improving tenant composition and conducting major renovations. While continuing to work with customers after concluding a sale with them, the company continuously enhances the asset value of properties to realize their greatest potential value.
Raysum maintains relationships with clients over the long term, from marketing stage to sales contracts and to property management after closing sales. In some cases, the company even takes on the responsibility of handling tenants of client assets sold by other companies. Building relationships with clients by serving them in real ways over such a long period of time enables the company to cultivate trust with them, which contributes to repeat business.
Business flow
The company aims to offer one-stop services enabled by the following business flow:
Acquire information on real estate for sale: Raysum’s purchasing department obtains information about real estate for sale from a trust bank or real estate broker.
Evaluate potential purchase: The purchasing department reviews real estate for sale upon receiving reports from the sales department on whether demand exists among existing clients or potential clients. Members of various functional divisions (such as sales, leasing, tenant management, and construction engineering) attend purchasing meetings for detailed discussions about how the company might increase value of the property in discussion.
Price negotiations, sales contract: If a project is given the go-ahead at the purchasing meeting, meaning the company thinks it may have added value potential, it moves forward with negotiating a price. It then back-calculates appropriate purchasing price from the potential selling price, and purchases the property if the figures are reasonable. The company usually finances property purchases without relying excessively on borrowing.
Boost value: The leasing, tenant management, and construction engineering departments coordinate to raise the value of purchased properties through renovation and conversion. If complicated rights issues exist, the legal team works to resolve them. The company handles rights-related adjustments, increasing a property’s rent-generating potential and introducing other measures to boost asset value, and then sells the property on to a client
Time frame from purchase to sale: In FY03/20, the inventory turnover ratio in the mainstay Asset Value Creation business was 0.7x (down from 0.9x* in FY03/19) while the inventory turnover period was 1.4 years (1.1 years in FY03/19). In FY03/21, the inventory turnover ratio temporarily fell to 0.3x, and the inventory turnover period grew to 3.1 years. The time spent in inventory varies widely by property. Tenant-creation projects in particular require time to build the business initially, and so properties in this category typically take more than one year in inventory.
Post-sale client support: Once property rights are transferred, the company’s property management department continues to support clients by taking steps to improve the property or as a rental property manager. Alternatively, the company may manage tenants at client properties as a new business (in the Future Value Creation business category)
Feedback on clients’ needs: In many cases, clients who are building assets steadily may make additional investments or replace assets they currently hold. The property management department feeds such information back to the sales and purchasing departments
*Inventory turnover ratio was calculated by dividing projected CoGS (70% of revenue) in the Asset Value Creation business by the average of real estate for sale and real estate for sale in progress at the beginning and end of the fiscal year.
Unique features
Most traditional real estate companies specialize in properties that perform a specific function, such as offices, commercial properties, or housing, so that they can sell properties efficiently. In contrast, Raysum handles a diverse range of properties, offering a customized real estate product development service whose main purpose is to produce good asset management results for clients who are mostly high-net-worth individuals. It does so by continuing to bring out the potential value of client properties in the medium to long term, even after closing sales on these properties.
Another conventional way to segment the real estate industry is by business attribute: developer, owner (landlord), salesperson, manager, and broker. Raysum’s integrated organizational format, which is not split into specialized sections, enables the company to develop customized products that fulfill a client’s aims and increase the asset value of a property even after selling it. The photo below illustrates all the people who might be involved in creating a business model. The office layout (the management team at the center with individual teams radiating outward) fosters open and swift decision-making.
Raysum takes a one-stop approach to customer service. Meanwhile, in many cases high-net-worth individuals that who are steadily building up assets will make additional investments or replace existing assets after a certain period of time. For this reason, the company works to maintain an ongoing relationship with clients, keeping high-net-worth individuals within its sphere of activity and encouraging repeat business. The company says it has around 50 core clients and some 50 second-tier clients and the number of clients that hold multiple properties is growing.
Earnings structure
The Asset Value Creation business accounts for around 90% of the company’s revenue (although this temporarily dropped to 82.3% in FY03/21). In this business, the company concludes contracts on around 20 properties each year in its target price range of JPY3–5bn. Raysum generates revenue in the Asset Value Improvement business by managing client properties and through rent income on property the company holds for sale.
Raysum’s high OPM (about 20%; temporarily fell to 5.1% in FY03/21) is due to the purchasing department’s stringent selection standards (holding down cost of sales) and the amount of value increased following purchase (high sale price).
On the other hand, rising personnel expenses are crimping profits for the company. As Raysum is often involved in all processes up to and including the operation of the buildings it sells, it requires employee involvement from tenant leasing through to operation. The company is recruiting mid-career personnel and has begun recruiting new graduates, looking toward the future. SG&A expenses (personnel expenses in particular) are rising accordingly. That being said, the company generally intends to operate business with a few talented personnel, and the large number of higher-priced properties in line with client needs means that revenue per employee is rising (per-employee revenue for the Asset Value Creation business: bottomed out in FY08/11 at JPY85mn/person, increasing in FY03/20 to JPY705mn/person, but temporarily falling to JPY382mn/person in FY03/21). For these reasons, the SG&A ratio declined from 26.3% in FY08/11 to 8.2% in FY03/20 (but temporarily rose to 14.3% in FY03/21) and currently has relatively little impact on earnings.
In financing property purchases, Raysum has lower interest expenses than competitors that are more highly leveraged. (In FY03/21, interest expense was JPY399mn (JPY285mn in FY03/20), compared with operating profit of JPY1.6bn (JPY12.2bn in FY03/20).
Note: Fiscal year end was changed in FY03/12.
Overview by segment
Note: Fiscal year end was changed in FY03/12.
Note: Figures rounded to the nearest million yen. (The company rounds down amounts under JPY1mn.)
Asset Value Creation business (82.3% of revenue, 141.6% of operating profit in FY03/21)
In the Asset Value Creation business, the company acquires investment properties for clients, and then renovates, develops, and sells these properties. The company tailors schemes for each client including the utilization of special-purpose companies (SPCs) and trust beneficiary interests in accordance with such objectives as business succession. The company thus aims to create value over the medium to long term that maximizes the future potential of properties. Through large-scale refurbishment and the changing of property use, the company works to create value that surpasses typical norms.
Clients
Clients in this business tend to be high-net-worth individuals, but Raysum is also seeing an increase in corporate clients that are interested in the company’s products to improve net operating income over the medium to long term. Raysum has around 100 key clients, half of which are core and half second-tier. The number of clients that hold multiple properties is growing. New clients are typically introduced by trust banks and tax accountants or by other clients.
Products (properties)
Property types vary to match clients’ investment needs and include residential and office properties, as well as commercial and multiuse buildings and development projects.
Properties range in price from billions to over ten billions of yen, but most are in the neighborhood of JPY3–5bn. Property types and prices vary broadly.
The company’s purchasing department carefully vets properties for purchase. As its policy is to purchase properties suited to client needs, the company requires the people it puts in charge of purchasing to have a discerning eye, be adept negotiators, and demonstrate imagination and leadership throughout the process from purchasing to product conversion and post-sale management.
The purchasing department obtains information about properties to be purchased mainly from real estate brokers, trust banks, and financial institutions, as well as from funds.
All directors participate in a weekly purchasing meeting. On average, the company is considering 20–30 projects at any one time, and around five new projects arrive each week. Of this total, five or six of the best opportunities are considered at weekly purchasing meetings, with properties being considered from the perspectives of buyer, seller, local residents, and the local government. The company also takes a close look at the social aspect of projects and the value of assets to the clients who purchase properties. Even projects that are given the go-ahead for further consideration at purchasing meetings, the company back-calculates selling prices that clients would find meaningful and then negotiates closely with sellers on that basis. This lengthy process means that the percentage of purchases concluded is low, but the ones that are concluded generate high margins for the company.
The company transfers purchased properties to the tenant marketing department to find new tenants able to pay higher rents. In the process, the company handles renovation, conversion, and changes of property use, which can be complicated. (See “The difficulties of changing property use.”) The legal and engineering teams supports efforts to increase value via rights, as well as ensuring compliance. Expertise in these areas allows the company to shorten the lead time between purchase and selling contract and increases the inventory turnover ratio. In FY03/21, the inventory turnover ratio in the mainstay Asset Value Creation business was 0.3x (down from 0.7x in FY03/20 and 0.9x* in FY03/19), but the time spent in inventory varies widely by property.
*Calculated by dividing projected CoGS (70% of sales) in the Asset Value Creation business by the average of real estate for sale and real estate for sale in process at the beginning and end of the fiscal year.
Sales
The company’s salespeople must be able to understand the objectives of affluent individuals who wish to acquire properties worth billions of yen and be able to imagine products suited to those objectives. They must have the leadership and production skills to suitably mobilize internal management resources in line with the meaning and purpose of a client’s holdings, based on a wide range of knowledge and experience in real estate, finance, taxation, financial conditions, and history. They also need to be able to persistently build a wide range of trusting relationships with clients and their families, tax accountants, financial institutions, and other parties involved with the client, in order to make transactions with the client a reality. As a result, the company’s earnings growth has been driven by a small number of experienced and elite personnel, followed by the next generation of mid-career professionals. At the same time, the recent increase in the company’s workforce has been in the area of improving the quality and value of products purchased by those affluent individuals who wished to acquire properties worth billions of yen, and in the Future Value Creation business, which seeks to create in-house mechanisms to address future social issues.
Raising value in three stages
The company raises value by differentiating itself at three stages. The first stage is renovation, in which a building’s use remains unchanged. The second stage, conversion, involves changing the use of building. At the third stage, the company develops real estate according to its own vision for the property (including what tenants to place). Specific examples to date include community hostels and an advanced, specialized medical clinic. Some examples are outlined below.
Commercialization of rich vein of residences in highly central, rare locations
Raysum believes that the source of long-term asset value improvement for its clients is the realization that value goes beyond preconceived notions and the incorporation into its products of the virtuous cycle this new appreciation can create in the future. For example, although growth potential is not as strong as in emerging Asian economies, the company continues to discover new demand for rental residences with a certain level of security and economic scale in prime locations in central Tokyo (including in Shirokane, Nishiazabu, Hiroo, and Omotesando), where the standards of living and culture are high.
Complete renovation of new condo building in Shirokane Chojamaru in central Tokyo, focusing on location and potential demand
Structure: Reinforced concrete, three floors above ground, total of seven luxury rental units averaging 300sqm each
Site area: Roughly 1,277sqm
Floor area: Roughly 2,135sqm
Premium Residence Shirokane Chojamaru is a luxury residential building situated at the top of Shirokane Chojamaru, a low hill between Meguro and Hiroo. The hill in central Tokyo was formerly dotted with the residences of feudal lords surrounded by extensive gardens and even now is rich in greenery. The building itself looks out on the Institute for Nature Study. To best draw out the potential of this location, the company in 2020 acquired a total of 17 new condominiums averaging some 100sqm each and carried out large-scale remodeling from autumn 2020 to early 2021.
Some walls were removed between the 17 units, and the interiors were completely redone using natural wood and stone. Upon completion, the 17 units had become seven, each averaging 300sqm, creating a rare rental residential building in the heart of Tokyo. Many people came to see the units in February and March, and the company completed contracts (with monthly rents of several million yen) mainly with affluent individuals in their 20s and 30s. All units were occupied as of May 2021, and the company says it improved the value of the property significantly.
Complete renovation of office and exhibition space in Nishiazabu (Tokyo)
Structure: Reinforced concrete, four floors above ground, one floor below ground
Site area: 863sqm
Gross floor area: 3,220sqm
TOKI-ON Nishiazabu is located in Tokyo’s Minato Ward near the Roppongi Hills commercial complex in the peaceful, upscale neighborhood of Nishiazabu, which is home to many of the foreign embassies in Tokyo. Raysum took the 10-year-old office and exhibition space built by the previous owner on the 863sqm site and did a full renovation in order to re-purpose the property.
The total makeover of the building carefully considered the desires of the tenant/owner in every respect and, as a result, Raysum was able fill its lower-level floors (basement and the first two above-ground floors) with ENEKO Tokyo, a wedding-restaurant facility featuring Japan’s first Basque restaurant under Chef Mitsuboshi. The previous owner had been using the two upper floors (the third and fourth floors) as his own personal living space, but the renovation converted these two upper floors into high-end residential rental units that were quickly able to command rents higher than properties in the surrounding area and have remained fully occupied since completion.
Remodeled to create high-end serviced office space
Structure: Reinforced concrete, five floors above ground
Site area: 571sqm
Floor area: 1,075sqm
Located in the Hiroo district of Tokyo’s Shibuya Ward, this building is on a site of 571sqm that was formerly used as serviced office space for the architectural firm Kengo Kuma and Associates. The renovation by Raysum converted the property into a high-end residential rental property. The attraction of the property is further enhanced by its location directly across from a lush green park situated on the site of a former residence of the powerful Satsuma clan (related to the current Imperial family).
After acquiring the property, Raysum undertook a full renovation in order to give all apartment units within the building a grand view of the park, making good use of large glass sliding doors in the living space so that residents would be afforded an enticing view of the park across the road, so as to give the impression that this high-end apartment building is located in the middle of a forest. Since its delivery to the buyer, the renovated property has maintained a consistently high occupancy rate and, as the property manager, Raysum has been working to enhance its value by making upgrades to individual rooms whenever tenants change.
Bringing out the unique and rare value and underlying strength of historical buildings
The simple scrap-and-build approach, purely for reasons of economic efficiency, ultimately negates the lifestyles, cultures, and thoughts that people have so carefully nurtured over decades and even, in some cases, for more than a century. Raysum continues working to stop such loss and bring out the true potential of historic buildings loved by the local residents in a manner suited to a new era.
Commercialization of 110-year-old nationally registered tangible cultural property
Structure: Reinforced concrete, three floors
Site area: Roughly 842sqm
Floor area: Roughly 2,047sqm
Operated by: Raysum
This particular property is located in central Kobe, in an area that retains traces of the city’s old shipping prosperity. Built during the heyday of wool trading during the Meiji era and formerly the headquarters of a general trading company, this building survived both the World War II bombing of Kobe and the Great Hanshin Earthquake and is now a nationally registered tangible cultural property with a 110-year history. The company meticulously repaired and waterproofed the roof, exterior walls, and window frames to ensure that the building can extend its history for decades to come. It also replaced the electrical system and drainpipes, switched to LED lighting for the stained-glass windows in common areas to promote energy efficiency, and updated the illumination of the façade in coordination with Kobe City.
In addition, given that more than half of the building was vacant when Raysum acquired it in autumn 2020, the company’s marketing team worked to attract tenants from all over Japan and overseas, even as the aforementioned large-scale renovation was underway, along with work on room interiors and air conditioning systems. As a result, the building was almost fully occupied by June 2021, and there is even a waiting list for potential tenants.
Preparing a 90-year-old registered cultural property in Kyoto for sale
Structure: Reinforced concrete, one floor below ground, five floors above ground
Site area: roughly 330sqm
Floor area: roughly 1,000sqm
Operator: Raysum
Kyoto’s Sanjo Avenue is home to many old but modern buildings that managed to escape destruction during the war. Located in the Tanoji district of central Kyoto, the roughly 90-year-old building is located on the corner of a street that is popular with domestic and foreign tourists alike, and once served as the office of a newspaper company. The renovation work by Raysum will allow the old building to remain in active use with the help of retrofitting to bring its earthquake resistance up to code; the renovation also addressed the many fine structural details that will allow the building to remain in keeping with its historic nature as a designated cultural property. The client is planning to further enhance the value of the property over time by changing the kinds of tenants occupying each floor with the aim of increasing the attraction of the building as a global cultural information center. Even after handing over the property to the client, the company has continued to conduct initiatives aimed at raising its asset value, such as ensuring that it is certified compliant with the latest earthquake resistance standards.