Business and other risks
This section explains major items that may be a cause of risk concerning the business operations of the Apaman Group. In addition, for the purpose of disclosing information that may be important concerning investment decisions, this section includes other items that may or may not be a risk factor. The Apaman Group is aware of that these problems could occur and is taking actions to prevent these problems and respond properly in the event of a problem.
Forward-looking statements in this section are based on judgments of the Apaman Group as of the date this document was submitted.
1. Operation of franchised stores
The Apaman Group operates a network of franchised real estate brokerage stores.
Potential problems involving this business include but are not limited to the inability to continue providing high-quality services, the appearance of a competitor that provides better services than those of the Apaman Group, damage to the reputation of all franchised stores due to poor services, illegal activity or some other improper activity by a franchised store, and the desire of companies operating franchised stores to start operating on their own. If these problems or other events decrease the number of franchised stores or slow the growth rate in the number of stores, there may be a negative impact on the performance of the Apaman Group.
2. IT systems
The development of IT systems is a key element of the infrastructure for the Cloud Technology Business of the Apaman Group. Therefore, the internal development, outsourced development and purchase from other companies of IT systems required by franchised stores are important issues at the group. The development, purchase and other activities concerning IT systems may require substantial expenditures that could have a negative impact on the performance of the Apaman Group.
Furthermore, although computer systems and databases are backed up, an IT system malfunction, major natural disaster, computer virus or other problem could affect the database or interrupt services. If this happens, Apaman may incur losses and there may be litigation demanding the payment of damages from franchised stores, real estate owners and tenants, and individuals and others who want to become a tenant. These events may have a negative impact on the performance of the Apaman Group. The Apaman website is accessible to individuals at no cost. Even if the Apaman IT system is inoperable for a certain time, there are unlikely to be demands for the payment of damages from individuals. However, if there are repeated problems involving the website, the public loss of confidence in the Apaman website may have a negative impact on the performance of the Apaman Group.
3. Restoration construction in the property management operation of the Platform Business
The Platform Business of the Apaman Group receives orders from tenants and property owners, who are parties who sign rental agreements, for construction work to return a property to its original condition when a tenant leaves. Property owners are responsible for the cost of this restoration work with the exception of intentional negligence of the tenant as stipulated in Ordinance for the Prevention of Residential Rental Disputes in Tokyo of the Tokyo metropolitan government. For many years, the Apaman Group has used the fixed-amount system for the cost of restoration work. However, as most restoration projects are based on the actual cost, restoration construction projects may have a negative effect on the earnings of the Apaman Group.
In addition, if other large cities throughout Japan where the Apaman Group operates enact ordinances about residential rentals similar to the one in Tokyo, there may be a negative impact on the performance of the Apaman Group.
4. The real estate market in Japan
Changes in the real estate market in Japan have a significant effect on the performance of the Apaman Group’s Platform Business.
In the Cloud Technology Business, the health of the real estate rental market indirectly affects results of operations through the performance of franchisees.
In addition, there is a direct effect on results of operations from increases and decreases in wages, the levels of rental agreement renewals and property vacancies, and other aspects of the real estate market.
If real estate prices in Japan decrease, there may be a need to write down the book values of properties owned by the Apaman Group.
If the current weakness in Japan’s real estate market continues for a long time or becomes even worse, there may be a negative impact on the financial condition, results of operations and cash flows of the Apaman Group.
The Apaman Group uses primarily loans from financial institutions to procure funds required for business operations. The group may become unable to procure required funds at reasonable terms if there is a downturn in the group’s performance or financial soundness, a problem that damages the group’s reputation, general financial instability or some other event. If this happens, there may be difficulty concerning financial liquidity. Furthermore, a significant change in interest rates could raise interest expenses and create other problems that have a negative impact on the performance of the Apaman Group.
6. Deferred tax assets
At the end of September 2020, consolidated deferred tax assets were 1,814 million yen, a figure based on the forecast for taxable income. In the future, Apaman may decide based on results of operations or for other reasons that there is unlikely to be taxable income that is sufficient to enable the use of deferred tax assets. If this happens, deferred tax assets would be reduced and there may be a negative impact on the financial condition and performance of the Apaman Group.
7. Recruiting people needed for business operations
The Apaman Group uses a real estate information network as the platform for its business operations. There are also business operations outside Japan. Conducting these business operations requires people at all levels who have specialized knowledge concerning the real estate business. As a result, there is a critical need to recruit people with the skills required for the real estate business and to conduct training programs for these people. If the Apaman Group is unable to hire the necessary number of people or to give people the necessary training, there could be difficulties regarding future business operations as well as a negative impact on the performance of the Apaman Group.
8. Risk of impairment of non-current assets and goodwill
In the Apaman Group’s Sharing Economy Business, there are capital expenditures for coworking space interior work and other activities. There are also IT system development expenditures for the Cloud Technology and other businesses. For the growth of business operations, Apaman uses mergers and acquisitions as needed. Due to all of these activities, there is property and equipment, goodwill and other intangible assets on the consolidated balance sheet.
An impairment test is performed for assets for which the book value cannot be recovered. If this test results in the conclusion that assets cannot generate a sufficient cash flow, an impairment loss must be recognized.
If there are substantial asset impairment losses, there may be a significant impact on the financial condition and performance of the Apaman Group.
9. Risk involving valuation losses and allowance for doubtful accounts for investments, loans receivable, etc.
As one element of the ecosystem of the Apaman Group’s Sharing Economy Business, investments and loans are provided to companies that have good prospects for growth. Depending on the financial condition of companies receiving these investments and loans, there may be a need to post valuation losses or provisions for the allowance for doubtful accounts.
If these losses and other expenses are substantial, there may be a significant impact on the financial condition and performance of the Apaman Group.
10. Management of information
The database of the Apaman Group’s Platform Business contains information received from franchisees about rental properties and their owners and other items. In addition, individuals and others who are looking for properties to rent may supply personal information as part of the process for using the Apaman website to search for suitable properties. Furthermore, information about tenants and property owners and other information is stored in the Apaman Group’s rental management system or other IT systems.
The Apaman Group has a duty of confidentiality concerning all of this information. There are measures to strengthen the internal information management framework and IT systems are used to prevent leaks by protecting this information from unauthorized access. Despite these measures, information may be leaked to an external party due to a problem involving the internal information management framework, the unauthorized access to this information or some other reason. If this happens, the resulting demands for the payment of damages, harm to the public’s trust in the Apaman Group and other problems may have a negative impact on the financial condition, results of operations and cash flows of the Apaman Group.
11. Changes in real estate laws and regulations
The Apaman Group’s business operations are subject to many laws and other legal systems. Examples include, but are not limited to, the Building Lots and Buildings Transaction Business Act, the rental property management registration system, the National Land Use Planning Act, the Construction Business Act, the Building Standards Act, the City Planning Act, and the Act against Unjustifiable Premiums and Misleading Representations. If any of these laws and regulations are revised or abolished or if any new laws or regulations are enacted, there could be difficulties regarding future business operations as well as a negative impact on the performance of the Apaman Group.
12. Natural disasters and accidents
Earthquakes, typhoons and other natural disasters and accidents may damage or destroy assets in all businesses of the Apaman Group. Furthermore, these events may result in the cancelation of rental management agreements, sub-leasing agreements and other agreements of these businesses. As a result, these events may have a negative impact on the financial condition, results of operations and cash flows of the Apaman Group.
13. The COVID-19 pandemic
The health and safety of stakeholders and employees are the highest priorities of the Apaman Group in order to prevent the spread of COVID-19. Preventive measures involving this pandemic are given priority throughout the group. If this crisis has an even more severe and prolonged impact on economic activity because of a further increase in infections, another state of emergency or some other event, there may be losses due to many causes. Examples include, but are not limited to, temporary or permanent closings of directly operated rental brokerage stores and coworking locations, long-term difficulties concerning the operations of franchised stores, no securities transactions for business purposes, and the emergency distribution of hygiene supplies to employees and their families, franchisees, and others. As a result, the COVID-19 pandemic may continue to have a negative impact on the financial condition, results of operations and cash flows of the Apaman Group.