Message from the President

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• We will resolve the construction defects problem by the end of the year and transform from a "company-centered" to an "employee-centered" organization

  President and CEO
  Bunya Miyao

Leopalace21's Social Value and Past Initiatives

In Japan today, it is said that there are about 5.4 million single-person rental housing units. The approximately 550,000 units managed by Leopalace21 account for about 10% of that total. In addition, approximately 300,000 units of our properties are used by companies as company-leased housing. In all respects, we are a company that provides indispensable social infrastructure, and we are aware that our social responsibility is also very heavy. Despite this obligation, the construction defects problem came to light in 2018, putting the very existence of Leopalace21 in jeopardy and causing significant damage to various stakeholders, including property owners, employees, and shareholders.

Today, the top-down organizational culture that was the root cause of the problem has been fundamentally reformed, and we have worked to improve the Company's earnings structure and financial soundness by implementing a variety of painful business structural reforms while at the same time ensuring that the highest priority is placed on compliance. As a result, performance has recovered to a level higher than in fiscal year 2017 before the construction defects problem, and with respect to the construction defects problem itself, we are on track to completely eliminate obvious defects by the end of 2024.

Here, I would like to explain not only the business results and outlook, but also the improvement of the company's financial soundness and the future of the Leopalace21 Group.

Fiscal Year 2023 Review

In fiscal year 2023, we recorded net sales of JPY 422.6 billion, operating profit of JPY 23.3 billion, and net income of JPY 42.0 billion. As a result, both operating profit and net income have remained in the black for three years in a row. This was due to higher unit rent prices and the curbing of SG&A expenses, even though the occupancy rate was slightly lower than planned.

The reason for the occupancy rate falling below the plan is believed to be due to the adoption of a price-focused strategy that emphasizes the new contract profitability. In our price-focused strategy, we are trying to curb low-profit monthly contracts to focus on profitability. As a result, the occupancy rate for general rental housing was up by 2.16 percentage points year-on-year, while the occupancy rate for monthly contracts was down by 0.19 points as of March 31. The impact of this curtailment of monthly contracts resulted in an overall occupancy rate that was lower than planned.

The operating profit of JPY 23.3 billion slightly exceeds the figure for fiscal year 2017, which was just before the disclosure of the con-struction defects problem. Fiscal year 2017 was the highest ever profit since we launched our focus on the leasing business in the aftermath of the global financial crisis following the Lehman Brothers collapse.

Despite the fact that operating profit was roughly the same in fiscal year 2017 and fiscal year 2023, net sales declined by approximately JPY 100 billion in the same period, from JPY 530.8 billion in fiscal year 2017 to JPY 422.6 billion in fiscal year 2023. Over the past seven years, we have made significant improvements in our earnings structure, mainly due to a reduction in fixed costs due to the halving of the number of employees from 7,690 to 3,853. As for occupancy rates, comparing fiscal year 2017 and fiscal year 2023, in fiscal year 2017, the average occupancy rate was 90% and the figure at the end of the year was nearly 93%-94%, while in fiscal year 2023, the average occupancy rate was 85% and the figure at end of the year was 88%, 5 percentage points lower. Considering the patterns of move-ins and move-outs during the year, in fiscal year 2017, the operating profit was raised to such a level where it could not be increased any further, but in fiscal year 2023, with a little more leeway in occupancy, we managed to generate operating profit exceeding that of fiscal year 2017, so I believe we are making steady progress in strengthening profitability, including by raising unit rent prices.

I believe that achieving these profit figures for fiscal year 2023, which surpassed those of fiscal year 2017, has enabled us to clear a significant hurdle in our business recovery.

Share Price Trends and Shareholder Return

Our share price, which is one indicator of how outsiders view the Company, has nearly doubled over the past year. I am grateful for this acknowledgment that our profitability, which had hit rock bottom, is now recovering thanks to various initiatives. However, while the operating profit for fiscal year 2023 is on par with fiscal year 2017, the share price is still not performing well, and this is because the damage from the construction defects problem has not been fully resolved. Going forward, with regard to the construction defects problem, we will definitely eliminate obvious defects by the end of 2024, and at the same time, I intend to be proactive in disseminating information that will help restore the Company's credibility.

Meanwhile, in terms of shareholder return, we finally managed to resume dividend payments in fiscal year 2023. In fiscal year 2023 we also carried out an acquisition of treasury stock after taking into consideration our financial soundness and share price level. Going forward, we plan to focus primarily on dividends, and for fiscal year 2024, we aim to increase dividends based on profit growth. After that, we will set medium- to long-term targets, including profitability targets, for the following fiscal year, which is when the construction defects problem ought to be resolved. In this context, I would like to explain our medium- to long-term shareholder return policy, including the dividend policy.

Progress on Construction Defects Problem

Since the construction defects problem came to light, we have been working to inspect the properties and undertake repair work. We have been inspecting vacant rooms, and in the case of occupied rooms, we have used postal mail, SMS, phone calls, and other means to ask for tenants' cooperation with inspections in terms of permission to enter and temporary relocation. As a result, as of the end of April 2024, we completed repairs on 68,320 of the 94,284 units that were identified as having obvious construction defects and classified as number of rooms requiring repairs.

What remains are the 14,018 units classified as number of rooms requiring repairs where defects have already been identified through inspections, and approximately 2,390 uninspected units where defects are predicted based on previous inspection results, totaling around 16,400 units that are considered to need repairs. If you calculate backwards from the time remaining, it is necessary to proceed with repair work at a pace of over 2,000 units per month, and to that end, we are taking steps to augment our repair capabilities beyond the current level.

For the future of the Company, resolving the construction defects problem is the number one priority. We will steadily undertake the repair of construction defects, and will work to eliminate obvious defects by the end of 2024, which is the target deadline.

Number of construction defects (as of April 30, 2024)

• *1 Nail series/Six series: Product series prioritized for inspection
  　Gold Nail New Gold Nail
  　Gold Residence New Silver Residence
  　New Gold Residence Special Steel Residence
  　Better Steel Residence Con Grazia
• *2 Other series: Product series in addition to Nail series and Six series
  　This refers to 42 series of properties constructed by Leopalace21 that are subject to our inspections,
  　excluding properties that are subject to priority inspections.

Future Outlook for Rental Housing

When considering the Company's future, we cannot ignore Japan's demographic trends. Japan's population has been declining since peaking in 2018, and it is estimated that the population will fall below 100 million by 2030. Although the overall population is declining rapidly, the number of single-person households, which our rental properties cater to, is predicted to decline at a slower rate than the population.

Furthermore, even as the decline continues, it has been uneven across regions, with some areas seeing large declines of 20% or 30%, while others are expected to remain roughly unchanged. We believe that the immediate impact of the population decline will be relatively small, as we primarily target the Tokyo metropolitan area and other areas where the population decline is less pronounced.

Furthermore, in view of the shortage of workers in various industries such as construction and caregiving, and the growing acceptance of foreign workers to do these jobs, we believe that there will be a sufficient need for single-person residences such as our apartments to accommodate these workers.

Taking all of these factors into consideration, I believe it is inevitable that the number of rental housing units we manage will decrease from the current 550,000. However, I also believe that the rate of decrease will be small, and that in some areas the number of units may actually increase in the future.

Resumption of Construction Contracting

We have 550,000 units under management, and some of these properties are beginning to exceed 25 years old. For these older properties, several options are anticipated, including transitioning to properties managed by the owners themselves, and Leopalace21 rebuilding the properties is one of those options. In the future, when the construction defects problem has been resolved, we are considering resuming the Development Business, which builds apartment buildings. I believe the rebuilding of older properties is a promising target for the Development Business.

For these older properties, the owners are aging and the time for a generational change is approaching. Going forward, while of course respecting the property owner's wishes, I would like to approach the next generation to clearly communicate the benefits of Leopalace21's rental management in the hope that they will choose us for their rebuilding needs, treating this as a sales activity that is just as important as new sales.

Introduction of Regional Branch Office System

Since the construction defects problem came to light, in parallel with the repair works aimed at eliminating the problem, Leopalace21 has been promoting reform of its corporate culture to address the issues that led to the construction defects problem in the first place, including the prevalence of top-down management and the lack of inter-departmental cooperation due to siloed thinking within a vertically structured organization.

As the final step in our corporate culture reform, we are considering the introduction of a regional branch system. We envision a system where business operations can be basically completed within the regional branch office, with local personnel handling sales to individuals, corporate sales, property management, communication with property owners after contract conclusion, and those who are engaged in design and construction.

Although we have explored regional autonomy in the past, the final decision-making authority ultimately rested with the head office. Going forward, we will establish clear rules for the top managers in each region and delegate significant decision-making authority to them, thereby strengthening our efforts to focus on profits in each region. This focus on regional profitability will eliminate the drawbacks of acting on top-down directives regardless of regional conditions and lead to greater awareness of the profitability of individual properties we handle. I also think that the regional branch system is a good fit for the new Leopalace21 as it will lead to a transformation into an organization where employees can think individually about how to improve profits.

Outlook for Fiscal Year 2024

Our goal for fiscal year 2024 is to increase both sales and profit for the fourth consecutive fiscal year, reaching net sales of JPY 428.6 billion and operating profit of JPY 26.6 billion through a profit optimization strategy centered on increasing occupancy rates and rent unit prices.

annual occupancy rate of 87% and a year-end occupancy rate of 90%. To achieve these targets, we will focus on strengthening corporate sales and increasing the number of tenants of foreign nationality. With respect to increasing rental unit prices, we intend to achieve this by thoroughly reviewing and adjusting the rents on unprofitable properties. A representative example of what has been reviewed so far is the monthly contract. Monthly contracts were often signed with relatively low rents in order to maintain occupancy rates, which was a drag on efforts to improve profitability. Although reviewing monthly contracts sometimes resulted in contract termination and a decrease in the overall number of contracts, which in turn led to lower occupancy rates, reviewing contracts with an emphasis on profitability has led to increases in unit rent prices. Learning from the example of monthly contracts, we will proceed to review other contracts in the same way, taking into account rent per unit and other measures of profitability, rather than simply focusing on occupancy rates.

We are also considering revisiting our promotions related to attracting tenants in fiscal year 2024. These promotions sometimes include, for example, several months of free rent for tenants. We will analyze the merits and demerits of this free rent policy, which has remained in place as a matter of tradition, to see whether it is actually effective, taking into account factors such as the number of contracts and the length of the contracts. Combining the results of this analysis with the current impact of rising costs, we will consider the optimal promotion policies and review costs to ultimately improve profitability.

• FY2024 Management Plan

  

Sustainability Strategy

Initiatives to Promote Digital Transformation (DX)

In our management plan for fiscal year 2024, in addition to the complete repair of all obvious construction defects by the end of 2024, and execution of our profit optimization strategy to strengthen profitability, we will promote sustainability management. In terms of sustainability management, we will continue to advance the environmental initiatives in addition to promoting DX to improve productivity and promoting human capital management that will strengthen the human resources essential for the Company's sustainable value creation.

In the case of DX in particular, the previously unavoidable process of handing over room keys when renting housing has been replaced with smart locks that can be locked and unlocked using a smartphone or other device, which not only eliminates the need to change locks and hand over keys but also eliminates the need for keys for room inspections, among other benefits. It is estimated that the introduction of smart locks can reduce related administrative time by an average of 42 minutes per rental unit. We have already installed smart locks in 270,000 units, which means that we have saved approximately 180,000 hours of work per year.

Furthermore, in relation to promoting DX, last November we launched full-scale operation of contact centers that cover everything from room search to application and contracting. There are three such centers: a contact center responsible for finding rooms before moving in, a contract administration center handling move-in procedures, and a tenants support center for any problems that may arise during the tenancy. This allows us to handle everything from contract signing to move-in and post-move-in services for individual customers without face-to-face interaction. As a result, we have been able to consolidate our nationwide network of leasing offices from 109 to 70 locations.

Environmental Initiatives

As one of the environmental initiatives in our sustainability strategy, we have launched the Leopalace Green LP Gas service, which supplies LP gas with virtually zero CO2 emissions to rental properties under management. This system uses LP gas supplied through Leopalace Green Energy, in which we have an equity stake. The supplied gas offsets greenhouse gases generated across the entire value chain with carbon credits obtained from environmental conservation projects, effectively rendering its CO2 emissions from LP gas usage virtually zero. The cumulative supply from January 2023 to March 2024 amounted to approximately 470,000 m3, and the CO2 emission reduction from this supply amounted to approximately 3,000 tons. Following on from the earlier launch of Leopalace Green LP Gas, in June 2024 we also launched Leopalace Green Electricity, an electricity supply service that also features virtually zero CO2 emissions. We hope to contribute to the environment by "greening" the energy sources that are essential to our daily lives.

Establishment of Scholarship Program

As part of our efforts to create social value through the provision of housing, we have been considering how to contribute to society through the rental housing we manage. As one such initiative, we have established the Leopalace21 Scholarship Program, a scholarship program that includes the free rental of our properties to address soaring tuition fees and long-term repayment of scholarship funds, which have become important issues in Japanese society.

Under this program, students entering a university, junior college, or vocational school in Japan in April 2025 will be eligible to receive either a free rental in one of our properties or an annual scholarship of JPY 360,000, lasting the number of years of regular enrollment in the school, faculty, or department in which the student is enrolled. The scholarship is in the form of a grant that does not require repayment. We hope to help solve social challenges by utilizing the rental housing we manage to support people in choosing their career path freely without being limited by financial circumstances.

In Conclusion

Since the press conference announcing our change in leadership in May 2019, we have been working to rebuild Leopalace21 with a strong determination to ensure it survives because of its important social value in supplying housing infrastructure for single people. Today, I feel that this rebuilding is finally being accomplished.

However, there would be no point in returning the Company to its original state. I think it is important to break away from the top-down approach that has led to undesirable outcomes in the past and transform from a "company-centered" to an "employee-centered" organization. To improve the value we deliver to society, I believe it is important to take ideas that have never been seen before and translate them into reality.

I would like to ask our stakeholders for their continued understanding and support of the Company's management.

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  Sustainability

  Leopalace21 is working to solve a wide variety of social issues with the aim of creating a sustainable society under the sustainability vision of "We go on creating new value for society today and in the future."

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