Real Estate Rags to Riches

Coyo's Mizukami: King of Factory Leasing

YOU'VE PROBABLY NEVER HEARD of Yoichi Mizukami, the unassuming 60-year-old shacho of Coyo Corporation (8866 on the Jasdaq). Certainly if you passed him on the street, nothing would tell you that he is the pioneer of partnership investments into real estate in Japan and today runs a highly successful real estate investment and property management business, with sales of JPY119 billion (about $128 million). We talked to Mizukami about his beginnings and his views on the real estate investment business in Japan.

How did you get started?

In the early 60s, my father was running a steel fabrication firm, and when I turned 20 he asked me to take over. Frankly, I had little interest in running a factory and instead decided to get into steel-based construction -- still an emerging idea at the time. The problem was that I didn't have much money, so I got into real estate leasing as a means of bankrolling my project.

Unfortunately, I found out that there was a law in Tokyo that prevented leasing agents from borrowing money to invest in real estate. Stymied for a while, I eventually found a real estate firm in Matsudo, Chiba that was willing to take a risk with me. Chiba's legal controls didn't include leasing restrictions.

My first property was a 200 tsubo factory. I moved to Matsudo to be near the property and to take advantage of other opportunities there. But soon after I settled in, I saw something that shocked me. Back in those days, although urban workers were starting to improve their lives, things were still really tough for farmers. In each family, the youngsters would soon have to leave for the city to find work -- leaving their parents to look after the fields. Also, property taxes were suddenly increased dramatically, causing untold hardship to those farm families.

I decided at that time to work with these people, to help them recover a decent lifestyle. I approached a number of farmers and suggested that we build warehouses and small factories, which bring in a rental income. This was a very radical idea at the time, and many people were suspicious of my motives. Why would I, at my own expense, build on their property and then share the rent with them? It seems obvious now, but back then many people told me that the business was bound to fail.

Finally, several families took up my offer and the projects were quite successful. Over the succeeding years, through to the early 70s, our success spread by word-of-mouth and I started getting as much business as I could handle. Coyo Corporation started out of this simple beginning.

Is it fair to say that you pioneered the concept of real estate investment partnerships in Japan?

Yes. Back in the 60s and 70s, there were two main methods of investing in real estate. Large companies would form subsidiaries and buy and sell using company or group funds. Smaller speculators would use their own cash, flipping properties after a short time for a quick profit, then moving on for a bigger kill. Neither of these groups of investors contributed much to the property owners other than to drive up land prices. The corporations would basically pull land off the market and lock it up as a company asset for many years -- of course, if they built apartments, et cetera, I suppose that could be seen as a public service. The speculators are just there for the money.

My concept was to put together a contracted group of investors and to have them regard the property as a long-term investment with interest being paid from rental income. So this was a form of REIT, I suppose. In addition, I wanted to make a contribution to the good of society. I set myself a rule to always make sure that the family owning the property also benefited from any development. Was I successful in this second goal? Well, I still live in harmony beside my neighbors in Matsudo, so I suppose they must still like me.

Fast-forwarding to 2003, what does the company look like now?

I've tried to stay true to my roots, and the bulk of our business is warehouse leasing. However, now we also lease and sublease commercial real estate, private housing and condominiums. My overall vision is definitely the same: guaranteeing a rental income for property owners.

But this has to be a tough market. Don't most companies these days own their own properties?

Yes, they do -- and particularly in the last 20 years, it has been hard to find arbitrage opportunities in leasing. However, interestingly, we're coming full circle. The new accounting rules being introduced for corporations, to take effect in 2006, mean that many companies are looking to divest themselves of their real estate and lease it back -- which will boost the real estate refinancing and securitization market. This is an area that we're moving into aggressively.

Also, our preferred area of business is distressed real estate. While this is riskier to deal with, thanks to over 40 years of experience, my team is able to take a building with a lot of debt, refinance it, then restore the building, then market it again. There are not many investment firms that can complete the full cycle at a reasonable cost -- but with all our internal resources, we're one of them. Of course, risk equals reward, and in this category we're improving all the time.

Where is the real estate market now?

I think we've hit the bottom of this cycle and the market will rise from here on. We're very bullish about this and are aggressively buying property all over Kanto.

Why do you feel positive about real estate?

Well, after 13 to14 years of continual drops, prices have basically flattened out. The construction industry may not have addressed its debt problems, but the shakeout has still been severe and thus the remaining players are better positioned to make a profit than before. Also, Japan's redistribution of its population means that Chiba and other urban areas are still experiencing some growth -- a trend that will continue.

We suppose that a flat market means that your company has to have another revenue stream.

Yes, a central tenet of our business makeup has been to retain a reliable flow of earnings. We do this through both rental and lease-back income and through property management and marketing. Due to all the interest in securitization, we are creating a very nice pool of tenants who have taken out 20-year agreements on the buildings so as to entice investors like us to buy the real estate and lease it back.

Furthermore, even after the 20 years, because many of these companies have purpose-built the buildings they're in and want to have a physical presence in the area near their suppliers and subsidiaries -- they are likely to want to stay in the current premises, barring any refurbishing activity, of course. These are our most desirable tenants, and barring financial problems, we consider them to be life-time customers.

I'd just add that we try to increase the quality of our income by making sure that tenancy rates are high and by finding quality tenants. For this, marketing and an extensive network of prospective tenants allow us to do large deals with distressed properties. Whereas the owner might wait one to two years to get a real estate broker to fill a building, I can do it in just a few months. You'd be surprised at some of the giant companies I've been dealing with recently who want to do business based on our ability to generate a positive cash flow quickly out of an apparently "dead" building.

What does your property portfolio look like at present?

We lease about 700 warehouses, 150 office and commercial buildings and 50 private homes. We've also formed investment partnerships to buy 10 large office buildings. We also have a substantial property management business, and we have about 1,000 properties under management right now.

How do you rank against the competition?

Well, it's hard to say because everyone covers so many sectors. And then, even within each sector, the measurements can include gross income, gross floor space and number of properties under management. We are probably No. 2 in terms of gross income, with revenues of JPY134 billion (approximately $1.21 billion).

How do you raise cash to run your projects?

Well, there are four ways. First, we raise money from private and institutional investors. Second, we use non-recourse loans from banks. Third, we use our own cash. Fourth, we put together partnerships of up to 10 companies. We have access to roughly 700 wealthy individuals and corporations, and we form limited partnerships with them to finance leases, buildings and projects. A typical partnership consists of about 10 investors.

What is your most promising new business?

There are three: financing the buy-out of factories from larger companies and leasing them back; converting office space into apartments; and providing incubation space for venture companies.

For the apartment conversion business, our main target is the "Silver market." That is, older married couples in their 60s who, after having raised a family, want to move back into the city to enjoy better access to entertainment and convenience. For example, living in a new apartment near the waterfront area, older folks can go to Yurakucho to catch a play or live show, they can go to Ginza to enjoy a good meal, and yet they can still be home in just a few minutes on the subway. We're especially focusing on people living in the bed towns in Chiba.

What do you think about foreign companies trying to enter the market?

They're becoming a major force in the market. But clearly they're in a different league and manage their investments on a portfolio basis. Because of their high overheads and expectations for financial returns, they buy in bulk and let the returns on the best properties make up for the low performing ones. In contrast, we're smaller and we have lower cost resources. We must do a detailed study of each building, ensuring that we can maximize the return on that particular property.

Are you planning to do business with foreign companies?

After a long period of just wanting to stick to our own business sector, recently we have been seeing a lot more big deals where we need partners to execute them. As a result, we've started working with several foreign brand name financial firms to put together partnerships and securitization programs. On the investor side, we are still looking for more partners and are interested in working with foreign firms. We have very good deal flow and a waiting list of tenants.

On the tenant side, we welcome inquiries about cost-effective office space, factories and warehouses -- particularly in Chiba or Saitama -- although we're also quite active in Tokyo as well. @