SYLA Technologies Begins U.S. IPO Effort (Pending:SYT)

A Quick Take On SYLA Technologies Co., Ltd.

SYLA Technologies Co., Ltd. (SYT) has filed to raise an undisclosed amount in an IPO of its ADSs representing underlying common shares, according to an F-1 registration statement.

The firm provides Japanese individuals and institutions with access to real estate property investment opportunities.

SYT is growing quickly but using a high amount of free cash and operating profit is dropping.

I’ll provide a final opinion when we learn more about the IPO.

SYLA Overview

Tokyo, Japan-based SYLA Technologies Co., Ltd. was founded to develop multiple investment platforms for various investors in real property in Japan.

Management is headed by co-president and CEO Hiroyuki Sugimoto, who has been with the firm since March 2017.

The company’s primary offerings include:

• Individual asset investment & management

• Corporate and institutional asset investment & management

• Other leasing, management, brokerage and crypto activities

As of June 30, 2022, SYLA has booked fair market value investment of $21.1 million from investors including SY Co., Ltd. and RightNow Co.

SYLA – Client/User Acquisition

The firm seeks to create online marketplaces where individuals and institutional investors may conduct real estate investment transactions online, pursuant to a recently-enacted Japanese law allowing such activity.

SYLA has created a real estate crowdfunding platform for individuals and institutions to lower the barriers to entry for real estate investing while providing indirect financial functions to real estate companies via the platform.

The company has over 180,000 registered members.

Selling, G&A expenses as a percentage of total revenue have varied slightly as revenues have increased, as the figures below indicate:

Selling, G&A	Expenses vs. Revenue
Period	Percentage
Six Mos. Ended June 30, 2022	14.2%
2021	14.8%
2020	14.7%

Click to enlarge

(Source – SEC)

The Selling, G&A efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, rose to 1.9x in the most recent reporting period, as shown in the table below:

Selling, G&A	Efficiency Rate
Period	Multiple
Six Mos. Ended June 30, 2022	1.9
2021	1.4

Click to enlarge

(Source – SEC)

SYLA’s Market & Competition

According to a 2022 market research report by Plaza Homes, the Japanese market for residential real estate has remained robust despite the pandemic, due to a ‘flight to safety’ by investors.

The main drivers for this expected growth are real estate transaction volumes have dropped in Osaka and Yokohama, while Tokyo and Nagoya have fared better.

The market research firm expects that the real estate market in Japan will remain strong in the coming years, driven by two main factors.

Firstly, the population is expected to continue to grow, especially in the capital city of Tokyo.

Secondly, the Japanese economy is forecast to rebound in the second half of 2022.

Also, companies are transitioning slowly to a ‘hybrid’ work environment, but existing norms of working at the office remain more entrenched than in other developed nations.

This has resulted in an increase in demand for apartments close to major business districts.

In order to take advantage of this expected growth, foreign investors can invest in Japanese real estate through a New-Type Entity (NTE).

An NTE is a Japanese corporation that is 100% foreign-owned, and which is exempt from many of the restrictions that apply to foreign companies investing in the country.

Demand for larger footprint residential property is growing, to accommodate a growing need for home office area amid increasing time spent at home by families.

The rise in e-commerce is also benefiting the industrial and logistics property sector in Japan.

The real estate crowdfunding market is highly fragmented, with over 250 companies as of July 31, 2022. Management says its firm is the largest in terms of number of members, as determined by a company-sponsored research report.

The report, ‘The Top Five Real Estate Crowdfunding Platforms in Japan’, was released on August 1, 2022, by the Tokyo-based market research firm, Tokyo Kantei.

The report looks at the five largest platforms in terms of the number of projects listed, total project value, and number of members.

According to the report, Tokyoreit is the largest platform in terms of the number of projects listed, with 1,160 projects.

SYLA Technologies’ Financial Performance

The company’s recent financial results can be summarized as follows:

• Growing topline revenue

• Increasing gross profit

• Reduced gross margin

• Dropping operating profit

• A swing to cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Six Mos. Ended June 30, 2022	$ 62,974,636	36.4%
2021	$ 118,324,212	26.8%
2020	$ 93,295,250
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
Six Mos. Ended June 30, 2022	$ 10,916,754	38.3%
2021	$ 22,358,532	11.9%
2020	$ 19,980,614
Gross Margin
Period	Gross Margin
Six Mos. Ended June 30, 2022	17.34%
2021	18.90%
2020	21.42%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Six Mos. Ended June 30, 2022	$ 1,988,916	3.2%
2021	$ 4,844,742	4.1%
2020	$ 6,307,818	6.8%
Net Income (Loss)
Period	Net Income (Loss)	Net Margin
Six Mos. Ended June 30, 2022	$ 1,061,883	1.7%
2021	$ 1,978,685	3.1%
2020	$ 3,093,662	4.9%
Cash Flow From Operations
Period	Cash Flow From Operations
Six Mos. Ended June 30, 2022	$ (18,129,034)
2021	$ 178,196
2020	$ 1,910,198
(Glossary Of Terms)

Click to enlarge

(Source – SEC)

As of June 30, 2022, SYLA had $12.1 million in cash and $144.7 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2022, was negative ($33.3 million).

SYLA Technologies’ Details

SYLA intends to raise an undisclosed amount in gross proceeds from an IPO of its ADSs representing underlying common shares.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Management says it will use the net proceeds from the IPO as follows:

We intend to use the net proceeds from this offering for working capital and general corporate purposes, which may include investments, acquisitions, or strategic collaborations to expand our customer base, as well as the development and marketing of new services.

(Source – SEC)

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, management says the firm is not a party to any legal proceedings that would have a material adverse effect on its financial condition or operations.

The sole listed bookrunner of the IPO is Boustead Securities.

Commentary About SYLA’s IPO

SYT is seeking U.S. public capital market funding to invest in its general, unspecified corporate growth initiatives.

The company’s financials have produced increasing topline revenue, growing gross profit, lowered gross margin, reduced operating profit and a swing to cash used in operations.

Free cash flow for the twelve months ended June 30, 2022, was a very hefty negative ($33.3 million).

Selling, G&A expenses as a percentage of total revenue have varied as revenue has grown; its Selling, G&A efficiency multiple rose to 1.9x in the most recent reporting period.

The firm currently plans to pay dividends, if any, based on the sole discretion of its Board of Directors. The company has a history of paying dividends each year going back to 2013.

The company’s trailing twelve-month CapEx Ratio was negative (1.73), which indicates it has spent heavily on capital expenditures even as it generated operating cash use.

The market opportunity for providing real estate investment opportunities in Japan via online sourcing is large and has recently received the benefit of favorable legislation, so the company has positive industry growth dynamics in its favor.

Boustead Securities is the sole underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (71.1%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

The primary risks to the company’s outlook as a public company include a rising interest rate environment and slowing global economic backdrop which may negatively impact investor willingness to purchase interests in real estate property.

When we learn more about management’s pricing and valuation assumptions.

Expected IPO Pricing Date: To be announced.