Business Risks

Listed below are the principal risks among the matters described in the Annual Securities Report (only available in Japanese language) that the management recognize may have a significant impact on the financial position, operating results and cash flows of the consolidated companies. All forward-looking statements included herein reflect the judgment of the Leopalace21 Group (the "Group") management as of the end of the consolidated fiscal year ended March 2024.

(1) Risk Related to Natural Disasters and Climate Change

a. Natural Disasters etc.

The Company's business may be severely damaged or lost by natural disasters such as earthquakes, typhoons, and other torrential rains; large-scale demonstrations, conflicts, and civil unrest due to terrorism and political instability; outbreaks of infectious diseases; and other unforeseen events that may arise in or outside Japan.
To ensure that its business operations are not interrupted or suspended only for a short period of time, the Company will strive to reduce risk by promptly identifying internal and business damage and formulated a business continuity plan (BCP), to take appropriate measures to restore operations and prevent damage from spreading. However, in the case of natural disasters etc. may affect the financial position, business performance, and cash flow of the Group.

b. Climate Change

There are transition risks related to climate change, including higher operating costs due to stricter regulations (such as carbon taxes), increased construction expenses for new properties, transaction avoidance by corporate clients, and reduced valuations from investors due to delays in environmental action. There are also physical risks such as the increasing costs due to longer construction periods caused by increased number of extreme heat days. If these risks materialize, the Group's financial position, operating results, and cash flow may be affected.

(2) Risks Related to Information Security

The Group holds a great deal of information, including personal information obtained through the client companies. To control information security, the Group has drawn up the required information security guidelines, and train the executives and employees about information security issues. Nevertheless, in the unlikely event of a cyber-attack, unauthorized access, or leakage of information, there is a possibility that the Group's financial position, business performance, and cash flow may be affected due to a loss of public trust, compensation for damages, and other factors.

(3) Financial Risks

a. Risk of Changes in Demand and Sales Prices

Since many of the Company's apartments are utilized based on corporate contracts, such as employee housings for the client companies, fluctuations in employment conditions, business travel needs, etc., against the backdrop of the economy and corporate performance, this may affect the use of apartment rooms.
The Company concludes a master lease agreement with apartment owners to lease back the constructed apartment for a period of time and at a rent level that are both fixed at the time the contract is concluded. Therefore, fluctuations in the amount of rental income received from tenants during the contract period could adversely affect the Company's profitability.

b. Risk of Increase in Reserve for Apartment Vacancy Loss

In order to prepare for a risk of losses due to an increase in apartment vacancies, the Company has established a "Reserve for apartment vacancy loss" which equals to the amount of loss that may be expected during a reasonably estimable period. The amount of this reserve is based on the rent levels set for individual leased units and occupancy rate forecasts calculated for each apartment building. Should any of these figures deteriorate against the estimated values it could lead to an increased amount of the reserve, and this could adversely affect the results of the Company's Leasing Business.

c. Risk of market value fluctuations of Tangible Non-current Assets and Marketable Securities

Impairment losses or appraisal losses due to declines in the current market value of tangible non-current assets, marketable securities, or other assets could adversely affect the Company's business performance as well as its financial position.
Impairment losses have been recorded in the fiscal year ended March 2023 for the tangible non-current assets related to resort business in Guam based on the appraisal to net realizable values, for which the Company has a policy of withdrawal. The Company will continue to get appraisals on a regular basis to confirm whether or not further impairment is necessary. However, depending on future trends in the real estate market and other factors, additional losses may be recorded, which may have an impact on the Group's financial results.

d. Risks Related to Lease/guarantee deposits received

The Company records the cost of cleaning at the time of move-out, which is deposited by the tenant at the time of signing the apartment lease, as well as the cost of future apartment maintenance and repair, which is deposited by property owners, as long-term deposits. The Company makes a concerted effort to ensure the soundness of the apartment maintenance. The Company also budgets for cleaning costs when tenants move out and for regular maintenance and repairs based on a detailed long-term plan. However, an unexpected, large-scale repair or cleaning could have an impact on the Company's financial position and cash flows.
The Company also has deposits for Leopalace Resort memberships related to the resort business, most of them have been deposited since the opening of the resort complex in July 1993. Should there be an unexpected number of requests for reimbursement of these deposits, this could have an impact on the Company's financial position and cash flows.

(4) Other Risks Related to Overall Management

a. Shareholder Derivative Lawsuit against the Current and Former Directors and Audit & Supervisory Board Members

As announced on December 13, 2023, the Company received a notice of lawsuit from TENZAN Co., Ltd., a corporate shareholder of the company with whom it used to have a business relationship, concerning a lawsuit against twenty-four current and former Directors, and five current and former Audit & Supervisory Board Members. Although the Company has come to the conclusion that this action is illegal, any deterioration in public confidence related to this matter may affect the financial position, business performance, and cash flows.

b. Impact of Defects on Apartment Buildings which Leopalace21 Constructed

It came to light that there were construction defects such as parting walls and others in our construction buildings as announced in May 2018, February and May 2019, following the announcement in April 2018 about the parting wall defects in attics.
In connection with this issue, the Group's consolidated results of operations could be adversely affected by a loss of credibility due to delayed repairs.

c. Other

The Group is aware that it incurs a variety of risks in the course of operating its businesses, and it attempts to prevent, disperse or avoid such risks whenever possible. Nevertheless, the Group's financial position, business performance, and cash flows may be affected by the changes in economic conditions, real estate market conditions, financial and stock markets, legal regulations, natural disasters, and a variety of other factors.

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April 1-30, 2024
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."