Edited Transcript of 3231.T earnings conference call or presentation 12-May-20 10:59am GMT

Please refer to Page 16. The left-hand top graph shows the number of housing contracted. 4,353 units were contracted in the fiscal year. As a result, as you can see in the graph, on the upper right, at the beginning of the period ending March in FY ’21, 2,069 units have been contracted equal to JPY 145 billion. Even though we have suspended our sales activities in our model rooms after the declaration of the state of emergency, we have been able to secure a steady level of housing units contracted that are not yet posted as housing units sold. Furthermore, as already mentioned, the gross profit margin was 20.4%, up 1.3 points from 19.1% of the previous year.

With respect to land acquisition shown on the bottom right, we have acquired land worth JPY 380 billion for 6,200 units, with accumulated land bank worth JPY 1.400 trillion.

Please refer to Page 18. These are the main properties for the fiscal year ended March 2020. By utilizing large-scale sites, mixed-use development comprising residents, retail facilities, child care facilities, elderly housing with the supportive services have been developed to provide a highly convenient lifestyle, highlighted by PROUD CITY Hiyoshi and PROUD CITY Kichijoji as well as PROUD Ebisu Hillside Garden, offering an outstanding metropolitan location. A wide array of properties offering outstanding convenience were well received. Furthermore, the Hiyoshi development will showcase our first ACTO project, where we will own a part of the residential area with our staff on-site to promote area management activities on a continuous basis. These all represents our corporate strategy of pursuing higher added value.

Next, I shall explain our Commercial Real Estate Business Unit. Please refer to Page 21. In our Commercial Real Estate Business Unit, based on our mid- to long-term business plan formulated last year, our property development sales business performed well, inclusive of strategic changes in the leasing asset portfolio. Leasing operating revenues decreased, resulting from the absence of the adjusted expenses paid by the tenant moving out in the previous fiscal year and the effect of property sales.

Furthermore, in March, against the backdrop of the spread of the new coronavirus, our gym, MEGALOS, was subject to a shutdown for 1 month. And the hotels we operate were subject to lower occupancy. However, this was offset by the increase in the property for sales leading to increases in both revenues and earnings for the overall business unit.

Please refer to Page 24. The sales amount of properties for sales for the Commercial Real Estate Business Unit was JPY 106.8 billion. Gross profit was JPY 17.6 billion. This includes sales of properties transferred from long-term leasing assets as part of strategic asset replacement of the leasing portfolio. We have acquired estimated total investment amount of JPY 151.5 billion worth of land for development of properties for sales, which represents 21 projects. Some properties were transferred from fixed assets to inventories during the fiscal year, like the previous fiscal year. Total property development stock is approximately JPY 525 billion.

This is the earnings results of the fiscal year ended March 2020. Now I’d like to talk about forecast of operating results for fiscal year ending March 2021 and the impact of COVID-19.

Please turn back to Page 9. As noted on the outset, for the fiscal year ending March 2021, forecasts are not disclosed because, as of date, it is difficult to reasonably calculate the business impacts of the spread of novel coronavirus disease, COVID-19.

I’d like to briefly explain our recognition at this juncture. As a major real estate developer, the impact of COVID-19 for the company can be categorized into 3 broad types. Type 1 is the risk of lost earnings over a certain period of time that won’t be recovered. Earnings over a certain period of time are lost due to business’ voluntary restraint and closures as well as the slowdown of economic activities, in general. Corresponding specific cases are rent reduction or exemption for tenants mainly in our retail facilities, temporary closures of our fitness club operation and revenue decline of hotel business due to drop in occupancy.

Type 2 is the risk of delay of earnings. In this case, earning is not lost, but the timing will be delayed. For instance, planned sales schedule is pushed back because sales activities are voluntarily withheld, or completion delays due to the suspension of construction. In such cases, the business opportunity itself is not lost but just deferred. So the earnings will be recognized at some point in the future. However, it is difficult to estimate precisely when that will be at this point.

Type 3 is the risk of price decline of goods and services. This is triggered by temporary market deterioration, so it may recover once the turmoil subsides. Even so, possible implications for our business includes sales price decline of housing sales, price decline of services provided in our service management businesses and valuation fluctuations of inventory assets. We must reasonably estimate which business will be impacted by which type, to what extent and decide what kind of strategies need to be taken.

Now please turn to Page 10. The matrix describes the impact to our major business units. The major impact type 1 to 3 refers to the 3 types of the previous page. The figures represent business profit of each business unit.

Before the outbreak of COVID-19, for this fiscal year ending March 2021, we had forecasted a year-on-year profit decline for Residential Development Business Unit due to decrease in number of housing units sold, and profit increase for Commercial Real Estate Business Unit due to increase of sales of property for sales. We will closely analyze the impacts to business units and operations in the coming months.

Let me explain the following 2 points. The leasing business of the Commercial Real Estate Business Unit is already facing lost earnings of rent reductions and rent waivers, mainly in the retail facilities. Going forward, we need to closely monitor how long such measures are going to be extended.

Retail facilities are the type of assets impacted, but they account only for 18% of the total leasing business revenue. Therefore, the impact to the overall business can be regarded as limited.

As for our property for sale business, some temporary turmoil in the real estate market is to be expected in the short run. Under such circumstances, we will take advantage of the company’s strong financial position, with shareholders’ equity ratio being above 30% and temporarily hold assets. We will not rush to sell assets in soft market, but we’ll determine the appropriate timing flexibly while earning leasing income in the meantime.

Consequently, sales volume and gain on sales may temporarily decline. Needless to say, the real estate market situation differs by asset classes, such as office, logistics and retail. Buyers are also more diversified, and listed REITs, private REITs and private funds are under different conditions with different needs. We will execute sales at the most appropriate timing and method.

Meanwhile, if real estate prices are to drop, we can take a strategy to acquire quality projects for the next phase of future business opportunity. Consequently, on short-term basis, our balance sheet may temporarily expand because capital recovery will decrease due to lower volume of sales, while new investments increase and may potentially lower our ROA and ROE.

However, our mid- to long-term direction remains unchanged. We will manage our leasing business portfolio without being affected by short-term market fluctuations, so as to achieve a business portfolio that combines high asset efficiency and earnings stability.

Now please turn to Page 11. The annual dividend per share for fiscal year ended March 2020 was JPY 80, in line with what was announced at the beginning of the fiscal year. In addition, we completed the acquisition of treasury shares of JPY 8 billion. Therefore, the total return ratio was 46.5%. Although the earnings forecast for the fiscal year ending March 2021 is to be determined, we plan to maintain the annual dividend per share at JPY 80.

We place importance in paying stable dividend to our shareholders. Furthermore, even under the current uncertainties related to the impacts of COVID-19, our financial foundation is sound enough to sufficiently maintain this dividend payout level.

Please turn to Page 12. Recently, in Japan, there have been notable changes taking place in people’s lifestyle and work style, driven by various factors, such as lower birth rate and the coming of the super-aging society as well as the increase of dual-income households and single households. We are responding to such business environment changes so as to create new business opportunities.

Changes in lifestyle leads to diversified needs for dwellings. As forms of household change, the kind of houses people want to live is diversifying. And now with the rapid adoption of remote working, people are beginning to realize a new aspect of needs, which is to a secure space for working and doing tasks at home. People are now spending much more longer hours inside their houses and in their communities than they used to. We can assume that through such experiences, comfort and convenience of a house and the sense of connection and bonding to the community will become even more important. The emergence of such new needs leads to new business opportunities for one of our core business, the housing sales business.

As an example of how we are responding to the changes in business environment, I’d like to introduce the KAMEIDO PROJECT, which is a mixed-use development currently underway. It is a comprehensive development project consisting of residence, retail facility and schools, offering high convenience.

The theme of the urban development is in harmony with the local community. It aims to create a diverse community and generate future-oriented value creation for the local community. The residence offers a wide range of unit types and floor plans to meet diverse needs. It also introduces a system to enhance flexibility for renovation works to accommodate the changes in one’s lifestyle.

Central air-conditioning system is installed to provide comfortable room temperature throughout the whole house, and at the same time, realize superior environmental performance. The urban development project aims to be the choice to live and visit for various people. We reckon that this kind of approach is being very well received.

Now please turn to Page 13. With regards to work style and the way people work, it is not only about teleworking and working from home, but diversified workspace offering is also important.

In addition to the traditional office space, new workplace formats like shared office and serviced office are in demand. For example, some large-scale condominiums have working space as a part of the common use area. In the suburbs of the Tokyo metropolitan area, shared offices are operating in station front retail facilities. Such merging of place to live and place to work is already happening. We provide new forms of office space under H10, human first office, which is our brand for small office with services and H1T, human first time, which is our shared office brand. It’s a new business opportunity born from market in-approach of thinking, first and foremost, about the people who actually use office space and what their needs are.

The world is facing an unprecedented difficult times right now. But even so, we will continue to move forward. So that through real estate development and providing real estate-related services to meet the diversified needs of people who live or work and who visit and use the facilities, we shall contribute for a better society and urban communities where people can live for a long time and realize our group vision, new value, real value.

This concludes today’s presentation, thank you for your attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]