REALGATE INC. Q2 FY2025 earnings call

• Overall Financial Performance: Revenue, operating profit, and net profit all increased year-over-year in the second quarter. First half progress toward full-year targets is on track. The company acquired 2 owned properties and 1 master lease property in the second quarter, bringing the year-to-date total to 6 acquired properties. Self-capital ratio improved from 15.7% to 17.2% quarter-over-quarter following completed property sales.
• Growth Strategy: The company focuses on flexible adaptation to external market conditions. In boom markets, the company benefits from rising rent and high property sale prices; in downturns, it can acquire high-quality properties at lower costs and sees increased demand for master lease and property management services. Rising construction costs and interest rates increase demand for the company's core real estate regeneration business, and foreign exchange exposure is minimal due to a low share of foreign-owned properties and foreign tenants. The company has maintained an occupancy rate above 95% even through the COVID-19 pandemic, outperforming broader market trends for office properties. The company will continue to focus on increasing the count of high-margin owned properties, concentrate expansion in central Tokyo, and leverage its regeneration planning and technical capabilities to grow. Total owned properties increased after converting OMB Kita-Sendagaya and OMB Higashi-Azabu from master lease to ownership. There are currently 6 projects scheduled to open in future fiscal years.
• Mid-Term Target: Management is targeting 5 billion yen in operating profit for the mid-term, and aims to maintain 30% annual operating profit growth to accelerate achievement of this target.

The firm organizes revenue into two core segments: Stock-type (recurring revenue) and Flow-type (transactional revenue). Both segments achieved year-over-year revenue growth in the second quarter. Stock-type revenue grew steadily quarter-over-quarter, with a strong year-to-date increase that drove expanded stock gross profit. Flow-type revenue met management expectations as all scheduled property sales completed in the first half of the fiscal year. As of the end of the second quarter, total revenue hit 67% of the full-year planned target, and operating profit hit 78% of the full-year planned target. The second quarter achieved the highest quarterly revenue in the company's history. Converting properties from master lease to full ownership increases gross margin by 2x to 3x, which will boost future segment profitability.

• Full-year fiscal 2025 guidance is maintained at 1 billion yen in operating profit, with no upward revision despite stronger than expected first half progress.
• Management expects to hit ~85% of full-year revenue target and over 90% of full-year operating profit target by the end of the third quarter.
• Stock-type gross profit is projected to grow steadily quarter-over-quarter for the full year. Fixed costs will continue increasing, but this will be offset by growth in both stock and flow gross profit.
• The company plans to proactively increase front-loaded investment in the first half to support 30% growth starting from the next fiscal year, and will reduce investment spending slightly in the second half. Management expects full-year results to land in line with the original plan. An upward revision to full-year guidance would only be considered in the second half if unplanned positive performance emerges.

• Low current liquidity ratio (with negative net liquidity reported in the period) and balance sheet risks from property acquisition activity.
• Exposure to broader real estate market price declines and shifts in Tokyo office occupancy trends.
• Interest rate and construction cost volatility that could impact project economics.

Q: Why has management not upwardly revised the full-year operating profit plan despite much stronger than expected first half progress?

A: Management is holding the original full-year plan because it is proactively investing more heavily in front-loaded projects in the first half to lay the groundwork for 30% annual growth starting from the next fiscal year. The company expects to hit the original full-year target as planned, with the extra investment positioning it for stronger long-term growth rather than pulling forward profits into the current fiscal year.

Q: What explains the large increase in stock-type sales/gross profit this quarter?

A: The growth comes from converting two existing master lease properties (OMB Kita-Sendagaya and OMB Higashi-Azabu) to full ownership. This conversion eliminates master lease rent expenses, increases the gross margin on these properties by 2x to 3x, and immediately lifts total recurring gross profit for the stock segment.

Q: What is your outlook for the Tokyo real estate market over the next 1-2 years, and how would you handle a drop in property prices?

A: RealGate's business model is designed to perform well across market cycles. In a downturn with falling prices, the company gains access to high-quality underpriced properties for acquisition, and sees increased inbound demand for master lease and property management services from property owners looking to reduce their own risk. Rising interest rates and construction costs also increase demand for the company's real estate regeneration services compared to new construction, so the company is positioned to grow even if market conditions soften.