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A Quick Take of Lead Real Estate Firms
Lead Real Estate Co., Ltd. (LRE) has applied to raise $27 million in an IPO of American Depositary Shares, equivalent to the underlying common stock, according to F-1 registration. statement.
The company develops and sells luxury homes and other real estate businesses in Japan and Dallas, Texas.
For risk-on investors, an LRE IPO could be an interesting opportunity at a time when Japanese high-rise real estate has become a favored wealth transfer asset.
I’m more cautious, so my prospects for an IPO are on hold for now.
Lead Realty Overview
Based in Tokyo, Japan, Reed Real Estate was established to develop single-family homes and condominiums in Tokyo and Kanagawa Prefecture.
The management team is led by Founder, President and CEO Eiji Nagahara, who has worked for various real estate companies such as FEC Co., Mibu Co. and Uptown Co. since its inception in 2001.
The company also operates hotels in Tokyo and leases multi-family units to renters in Japan and Dallas, Texas.
Lead Real Estate has booked investments of $2.6 million at fair market value from investors, including founder Eiji Nagahara, as of December 31, 2021.
Lead Real Estate – Customer Acquisition
The company operates through real estate agents and targets wealthy family buyers buying for personal use and institutional clients buying for investment purposes.
The company recently launched a listing and marketing platform called Glocaly to match condo sellers and buyers.
As the chart below shows, the percentage of selling, general and administrative expenses as a percentage of total revenue increases as revenue increases.
|
sales, general management |
cost to income |
|
Period |
percentage |
|
Sixmos. Ends December 31, 2021 |
12.4% |
|
Fiscal year ending June 2021 |
9.2% |
|
Fiscal year ending June 2020 |
9.4% |
(Source – SEC)
As shown in the table below, the sales, general and administrative efficiency multiple, defined as how many dollars of additional new revenue is generated for each dollar of sales, general and administrative expenses, was just 2.9 times in the most recent reporting period. rose to
|
sales, general management |
Efficiency rate |
|
period |
many |
|
Sixmos. Ends December 31, 2021 |
2.9 |
|
Fiscal year ending June 2021 |
2.5 |
(Source – SEC)
Leading the real estate market and competition
According to a 2021 market research report by Japan Real Estate Chuo citing Real Estate Economic Institute, the latest report shows that 280 high-rise condominiums are planned or under construction across Japan from 2021 onwards. increase.
The 280 buildings will provide more than 109,000 apartments, nearly 75% of which will be in the Tokyo metropolitan area.
The main drivers of this expected growth are changes to inheritance tax deductions in 2015 and increased construction around public transport stations.
The chart below also shows the historical and projected future annual supply of new condominiums in high-rise buildings in the Tokyo metropolitan area.
Tokyo high-rise condominium supply (Real Estate Economic Institute)
Major competitors or other industry participants are:
-
Mitsubishi Estate (OTCPK:MITEY)
-
Sumitomo Realty & Development (OTCK:SURDF)
-
Mori Trust (OTCK:MRGIF)
-
Tokyo Tochi Co., Ltd.
-
Mitsui Fudosan (OTCK:MTSFF)
-
Nomura Real Estate Development (OTCK:NMEHF)
-
Daiwa House Group (OTCK:DWAHY)
-
Tokyo Tatemono (OTCK:TYTMF)
-
Nakano Co., Ltd.
-
Daikyo
Lead Real Estate Financial Performance
The company’s recent financial results can be summarized as follows:
-
Increased top-line revenue
-
Improve gross profit and gross profit margin
-
Improve operating income and operating margin
-
Increase operating cash
Below are the relevant financial results obtained from the company’s registration statement.
|
gross income |
||
|
period |
gross income |
% variance vs. prior |
|
Sixmos. Ends December 31, 2021 |
$53,368,877 |
55.9% |
|
Fiscal year ending June 2021 |
$84,347,100 |
29.7% |
|
Fiscal year ending June 2020 |
$65,055,186 |
|
|
gross profit (loss) |
||
|
period |
gross profit (loss) |
% variance vs. prior |
|
Sixmos. Ends December 31, 2021 |
$8,967,131 |
126.4% |
|
Fiscal year ending June 2021 |
$11,143,967 |
49.7% |
|
Fiscal year ending June 2020 |
$7,445,301 |
|
|
gross profit |
||
|
period |
gross profit |
|
|
Sixmos. Ends December 31, 2021 |
16.80% |
|
|
Fiscal year ending June 2021 |
13.21% |
|
|
Fiscal year ending June 2020 |
11.44% |
|
|
Operating income (loss) |
||
|
period |
Operating income (loss) |
Operating margin |
|
Sixmos. Ends December 31, 2021 |
$2,322,969 |
4.4% |
|
Fiscal year ending June 2021 |
$3,399,625 |
4.0% |
|
Fiscal year ending June 2020 |
$1,340,715 |
2.1% |
|
Comprehensive income (loss) |
||
|
period |
Comprehensive income (loss) |
net profit margin |
|
Sixmos. Ends December 31, 2021 |
$1,396,208 |
2.6% |
|
Fiscal year ending June 2021 |
$2,086,541 |
3.9% |
|
Fiscal year ending June 2020 |
$750,022 |
1.4% |
|
Cash flow from operating activities |
||
|
period |
Cash flow from operating activities |
|
|
Sixmos. Ends December 31, 2021 |
$ (10,297,400) |
|
|
Fiscal year ending June 2021 |
$ (1,833,446) |
|
|
Fiscal year ending June 2020 |
$ (384,457) |
|
|
(Glossary) |
As of December 31, 2021, Lead Real Estate had $2 million in cash and $63.8 million in debt.
Free cash flow was negative ($7.2 million) for the 12 months ended December 31, 2021.
Details of Lead Real Estate IPO
Lead Real Estate expects to raise a total of $27 million from the IPO of American Depositary Shares representing the underlying common stock.
Existing shareholders have shown no interest in buying shares at the IPO price.
After the IPO, the company’s founders control approximately 84.4% of the public company’s voting shares.
Assuming a successful IPO, the company’s enterprise value at IPO would be approximately $227.4 million, excluding the impact of the underwriter’s over-allotment option.
The float ratio (excluding the underwriter’s over-allotment) to the number of outstanding shares will be approximately 13.8%. Figures below 10% are generally considered “low float” stocks, which can fluctuate significantly in price.
Management has said it will use the net proceeds from the IPO as follows:
About 50% for domestic business expansion, including expansion of development and sales of condominiums in Japan.
Approximately 30% for the development of the Glocaly platform, including sales and marketing, feature development, and server maintenance costs.When
About 20% for general corporations
(Source – SEC)
Company roadshow executive presentations are not available.
With respect to unresolved legal proceedings, management has confirmed that the Company is not currently a party to any legal or administrative proceedings that would materially adversely affect its financial condition or operations.
The IPO’s sole listing bookrunner is Network 1 Financial Securities.
LRE metrics
Below is a table of the company’s relevant capitalization and valuation metrics at IPO, excluding the impact of underwriting options.
|
measurement [TTM] |
amount |
|
Market capitalization at IPO |
$195,735,150 |
|
Corporate value |
$227,448,150 |
|
Price/Sales |
1.89 |
|
EV/Revenue |
2.20 |
|
EV/EBITDA |
44.29 |
|
earnings per share |
$0.22 |
|
Operating margin |
4.96% |
|
net profit margin |
3.08% |
|
Free float to outstanding shares ratio |
13.79% |
|
per share at proposed IPO mid-price |
$13.50 |
|
net free cash flow |
-$7,207,277 |
|
Free cash flow yield per share |
-3.68% |
|
Debt/EBITDA multiple |
11.73 |
|
Capital investment ratio |
-5.75 |
|
revenue growth rate |
55.86% |
|
(Glossary) |
(Source – SEC)
Commentary on the IPO of Lead Real Estate
LRE is seeking funding from the US capital markets for its expansion plans in Japan.
The company’s financials delivered higher top-line revenue, higher gross and gross margins, higher operating income and operating margin, and higher cash used in operations.
Free cash flow was negative ($7.2 million) for the 12 months ended December 31, 2021.
Selling, general and administrative expenses as a percentage of total revenue increased as revenue increased. The efficiency multiple for sales, general and administrative expenses rose to 2.9 times he in the most recent reporting period.
The company did not characterize any plans to pay the dividend, but management said the cash dividends paid out will be paid in Japanese Yen.
The company’s CapEx Ratio has been negative (5.75) over the past 12 months, indicating that it is spending heavily on capital expenditures as a percentage of operating cash flow.
The company is benefiting from strong growth dynamics in the industry as the market opportunity for building residential towers in Japan is large and expected to grow strongly.
Network 1 Financial Securities is the sole underwriter, and the four IPOs it has led in the last 12 months have generated an average return of 498.2% since IPO. This is a top class performance for all major underwriters during the period.
The main risk to the company’s outlook is a rising interest rate environment, but so far Japan’s monetary authorities have stepped in to keep rates low during periods of inflation.
In terms of valuation, management is asking investors to pay an EV/earnings multiple of around 2.2x.
While the company appears to be well positioned in a growth market, its exposure to currency risk is significant as the Japanese Yen has depreciated against the US Dollar over the past year, as the chart below shows.
1 Year Chart: Japanese Yen vs. US Dollar (Google Finance)
So while the company may be doing well in development activity, that performance risks being partially offset by the yen’s depreciation against the dollar.
For risk-on investors, an LRE IPO could be an interesting opportunity at a time when Japanese high-rise real estate has become a preferred asset transfer asset.
I’m more cautious, so my prospects for an IPO are on hold for now.
Expected IPO Pricing Date: To be announced.