Business-related Risks

As part of its risk management, the Heiwa Real Estate Group has identified the following risks associated with its businesses operations and financial results as of March 31, 2019, and recognizes that these risks could potentially have a significant influence on decisions by investors.

1. Risks Associated with the Leasing Business

The Heiwa Real Estate Group’s Leasing Business develops, leases, manages, and operates stock exchange buildings, office buildings, commercial facilities, and residential buildings. The leasing rates charged by this business could potentially be affected by changes in land prices, market rates in the office leasing market, intensified competition with other commercial facilities, or other similar factors. Moreover, buildings under ownership could be damaged or destroyed by a major earthquake or other natural disaster, or by a man-made calamity such as an accident or act of terrorism. Any of these factors could potentially impact the Group’s business performance.

2. Risks Associated with Real Estate Development Projects

The Heiwa Real Estate Group is involved in real estate development projects, including the redevelopment of the Nihonbashi Kabutocho and Kayabacho district in Tokyo. If a building under ownership is demolished in one of these projects, the Company will incur a loss on the disposal of an asset. Furthermore, various factors may cause costs to increase above expectations or cause projects to be delayed or even suspended, including increased land prices and construction costs, delays in obtaining development-related permits and authorization, delays in attracting tenants due to defective construction work, or worsening conditions in the office building market. Any of these outcomes could potentially impact the Group’s business performance.

3. Risks Associated with Investment in Leased Real Estate and Interest-Bearing Liabilities

The Heiwa Real Estate Group acquires and reconstructs office buildings with the aim of stabilizing and bolstering the earnings power of its Leasing Business, and mainly procures interest-bearing liabilities for the purpose of funding such acquisitions or reconstruction projects. The Group’s policy is to maintain an appropriate level of interest-bearing liabilities and debt-to-equity ratio, depending on cash flow generated from the leased buildings it has acquired as well as other factors. It also aims to ensure that the majority of the interest-bearing liabilities it procures are long-term loans with fixed interest rates in order to minimize the impact of interest rate fluctuations. Nevertheless, interest rate fluctuations and related factors could potentially impact the Group’s business performance.

4. Risks Associated with the Real Estate Solutions Business

The Heiwa Real Estate Group’s Real Estate Solutions Business develops, sells, operates, and manages revenue-generating real estate, develops and sells homes, and provides real estate agency services. The profitability of such assets may decline due to market trends and decreasing demand in the real estate market, and fluctuation in supply of housing development properties. Furthermore, condominium sellers in joint-venture partnerships could go bankrupt, sales competition could intensify due to oversupply, interest rates and land prices could fluctuate in the future, situations surrounding competitors could change, the acquisition status of the sites for development, and the tax system could be revised. Any of these factors could potentially impact the Group’s business performance.

5. Risks Associated with Changes in Real Estate Prices

In the event that real estate owned by the Heiwa Real Estate Group decreases in value due to changes in the real estate market or other reasons in the future, the Group may be forced to post an impairment loss, an appraisal loss on portofolio assets, or some other form of loss. Any of these results could potentially impact the Group’s business performance.

6. Risks Associated with the Impact of Deferred Tax Assets on Financial Results

In accordance with current accounting standards, the Heiwa Real Estate Group projects the amount of deferred tax assets it can expect to recover based on estimates of future taxable income. If these estimates are lowered and some or all of the deferred tax assets are deemed unrealizable in the future, or if tax-related laws are revised or corporate tax rates reduced, deferred tax assets could decrease and tax expenses increase. Any of these outcomes could potentially impact the Group’s business performance and financial results.

7. Risks Associated with Capital Alliance with Mitsubishi Estate

Heiwa Real Estate and Mitsubishi Estate Co., Ltd., concluded an agreement to form a capital and business alliance on February 17, 2011. Based on this agreement, Heiwa Real Estate has been collaborating with Mitsubishi Estate in related businesses, and both companies are currently working together to maximize business synergies, particularly with respect to the redevelopment of the Nihonbashi Kabutocho and Kayabacho district. In the event of changes in the operating environment or unforeseen circumstances in the future, however, there is a possibility that the initial objectives of the alliance may not be achieved, or that the alliance may be terminated in the future due to certain reasons. Any of these results could potentially impact the Group’s business performance.

8. Risks Associated with Real Estate-Related Laws and Regulations

Each of the Heiwa Real Estate Group’s businesses is subject to various laws in Japan, including the Building Standards Act and the City Planning Act. If such laws are revised or if new laws are enacted in the future, the Group may be required to take on new obligations and incur higher costs. These factors could potentially impact the Group’s business performance and financial results.

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