Thinking points

  • Century 21 Real Estate of Japan (TSE: 8898) is the second largest franchisor of real estate agents in Japan, primarily generating revenues from fees and royalty from its franchisees. 
  • Key challenges for the company include the deterioration in the tax deduction on mortgages and long-term decline in the number of households in Japan.
  • Key opportunities include the large supply in apartments in the coming years and the pent-up demand for real estate transactions following the COVID-19 pandemic.
  • At JPY1,000 per share, C21 trades at an adjusted EV/EBIT of 5.3x with a market capitalization of JPY10.4bn.
  • Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of -0.7% to +6.2%, including shareholder returns, over the next 3-5 years.

Introduction

Century 21 Real Estate of Japan (C21 hereinafter) is a real estate brokerage franchisor. The company is the fifth largest real estate agent in Japan in transaction volume, behind real estate development groups, and the second largest franchisor of real estate brokerages in Japan after Apaman (TSE: 8889) . C21’s only business segment is Real Estate Franchising, and revenue is composed of service fees, IT service, and royalty from franchisees.

Source: Kenkyo Investing, based on company data

Business & operating environment

Company History

Century 21 was originally founded in 1971 in the U.S. and is now one of the world’s largest real estate brokerage networks, with 9,400 offices and 127,000 employees in 80 countries and regions.

In Japan, Century 21 Real Estate of Japan was established in 1983 by Itochu Corporation (TSE: 8001) in partnership with Century 21 Real Estate (NYSE: RLGY), and with capital participation from major Japanese banks. In 2004, C21 listed on the Tokyo Stock Exchange’s Jasdaq section, which was mainly geared for venture and small companies.

Industry and Business Model

C21 collects service fees and royalties in exchange for providing a real estate brokerage strategy and its sales promotion system to its franchisees. As a sub-franchisee, C21 also pays 10% of its revenue as royalty to Century 21 US.

Each franchisee pays the following fees to C21:

1) Royalty: JPY1.5~3.0 million at the time of joining (one-time payment);

2) Service fees (incl. IT service): 6% or franchisee’s total revenue (monthly payment); and

3) Other e.g. advertising expenses: JPY0.1 million (monthly payment) 

C21 itself does not engage in real estate brokerage but rather shares some characteristics of a consulting company. Growing the number of franchisees is critical in driving business results. As of September 2021, the company had 996 franchisees, making it the second largest Japanese real estate brokerage franchisor behind only Apaman (1,040 affiliates as of November 2021). The number of franchisees has been growing slowly at a CAGR of +2.5% from 784 in FY03/12. On another note, 60% of service revenues come from sales brokerage, and C21’s performance is highly affected by the real estate trading market.

Source: Kenkyo Investing, based on The Real Estate Transaction Promotion Center

In the Japanese real estate market, the number of transactions had generally been increasing on the back of low interest rates and the urbanization movement until 2019, with a spike in 2018 driven by a large supply of apartments in urban areas. However, the COVID-19 pandemic and the subsequent restrictions led to an abrupt drop in real estate transactions, and the number of transactions in 2020 dropped 13% from 2019.  

As a result, the company’s sales and operating profit have also stagnated. With that said, C21 is structured for relatively stable profitability. Operating margins previously hovered around 30% in the 2010s, but most recently fell to 24.4% in FY03/21. The company expects operating margins to come in at 23.2% in FY03/22.

Source: Kenkyo Investing, based on company data
Source: Kenkyo Investing, based on company data

Shareholders

As of the end of September 2021, the company had 11,325,000 shares issued and 902,500 shares in treasury, putting outstanding shares at 10,422,500. Foreign shareholders accounted for approximately 5.9% of total. Major shareholders are as follows.

Source: Kenkyo Investing, based on company data

Itochu is one of the largest Japanese trading companies. Chuo-Nittochi is a Japanese real estate developer. The other shareholders are financial institutions, funds, or well-known individual value investors.  

In 2020, the company executed a stock buyback of 155,000 shares (0.1% of outstanding shares). There are no stock options outstanding. 

Financials & valuation

  • Century 21 Real Estate of Japan (TSE: 8898) is the second largest franchisor of real estate agents in Japan, primarily generating revenues from fees and royalty from its franchisees. 
  • Key challenges for the company include the deterioration in the tax deduction on mortgages and long-term decline in the number of households in Japan.
  • Key opportunities include the large supply in apartments in the coming years and the pent-up demand for real estate transactions following the COVID-19 pandemic.
  • At JPY1,000 per share, C21 trades at an adjusted EV/EBIT of 5.3x with a market capitalization of JPY10.4bn.
  • Assuming a fair value EV/EBIT of 2-4x, investors can expect an investment CAGR of -0.7% to +6.2%, including shareholder returns, over the next 3-5 years.

With a stable source of revenue, C21 has been operating debt-free and is extremely cash-rich, with cash and deposits (incl. Certificate deposits) of JPY4.7bn out of total assets of JPY7.3bn (as of September 2021). As a result, it maintains a strong balance sheet with an equity ratio of 84.5%.

Some of the challenges the company faces include the risk of a decline in franchisees’ brokerage deals. According to the Ministry of Land, Infrastructure, Transport and Tourism (MLIT), the number of households in Japan is expected to peak out in 2023 and gradually decline through 2030. 40% of all households will be single-person households in 2030, 39.3% of which will be elderly single-person households. As the number of households declines, real estate brokerage transactions are also expected to decrease gradually. In addition, curbing of the mortgage tax cut policy (1.0% -> 0.7%) announced by the Japanese government at the end of 2021 may cool sentiment on home purchases from 2022.

In terms of opportunities, the urbanization trend and the pent-up demand in new apartments  after COVID-19 will likely support C21’s growth. The Real Estate Economic Institute Co., Ltd., expects apartment supply in the Tokyo metropolitan area in 2022 to be around 34,000 units, a 4.6% increase from 2021.

At JPY1,000 per share, C21 trades at an adjusted EV/EBIT of 5.3x with a market capitalization of JPY10.4bn. Assuming a fair value EV/EBIT of 2-4x and stable profits, investors can expect an investment CAGR of between -0.7% and +6.2%, including shareholder returns, over the next 3 to 5 years. The company also pays a hefty dividend, with a forecasted dividend yield of 4.5% on a 66% payout ratio.

The bottom line

Century 21 Real Estate of Japan is a real estate agent franchise company, with around one thousand franchisees. Although the company faces some challenges such as a curb in mortgage tax reduction policies and the long-term decline in the number of households in Japan, it also has tailwinds such as the urbanization trend and the pent-up demand for real estate following the COVID-19 pandemic. Buying in at JPY1,000 per share, investors can expect an investment CAGR of between -0.7% and +6.2%, including shareholder returns, over the next 3 to 5 years.


Kenkyo Investing
Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.