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Risk Factors

Items within this report that are not statements of historical fact constitute forward-looking statements that are based on management’s evaluation of circumstances as of the fiscal year-end. Accordingly, statements may differ materially from actual results due to changes in the economic environment and operating conditions.
As of March 31, 2018, the Group has identified certain risks that it believes may materially impact its performance and financial position. In addition, readers are advised that unforeseen risks that can significantly affect the Group’s performance and financial position may arise in the future due to changes in the economic environment and operating conditions.
The Group is committed to identifying risks on an individual basis and appropriately evaluating each one in an effort to establish an optimal risk management system. The major risks identified as of March 31, 2018 are as follows.

(1)REAL ESTATE MANAGEMENT MARKET RISK

The Group’s real estate management segment’s performance may be adversely affected if management fees decline owing to reduced numbers of condominiums and buildings under management as a result of intensified competition.

(2)REAL ESTATE MARKET RISK

The performance of the real estate brokerage segment and the real estate development and sales segment may experience fluctuations due to the impact of market conditions. A significant drop in housing demand could result from an economic downturn, deterioration in corporate earnings or personal consumption, an increase in interest rates, or changes in real estate-related taxes brought about by fluctuating economic conditions. As a result, a decline in the value of assets held may affect the Group’s performance and financial position.
Regarding real estate inventories held, in the event that there is a major decrease in prices due to such factors as a worsening of market conditions, losses may be incurred by the loss on devaluation of inventories held by the Group. Consequently, the performance and financial position of the Group may be affected.

(3)CONSTRUCTION MARKET RISK

A sudden and sharp rise in the price of construction materials and labor, or a shortage of these, could affect the Group’s earnings.

(4)OTHER MARKET RISKS (LIQUIDITY, INTEREST RATE, SHARE PRICE AND CURRENCY EXCHANGE FLUCTUATIONS)

Funding to support the Real estate development and sales segment is mainly procured from financial institutions in the form of debt. In the event that the Group’s credit capacity decreases due to deteriorating performance, the procurement of financing becomes difficult due to a worsening financial situation or existing interest rates rise above expectations, the Group’s performance may be affected.
As part of its operating and investment activities, the Group maintains equity in publicly listed and private companies. In the event of a significant devaluation in the Group’s holdings due to an across-the-board and substantial decline in share prices, the Group’s performance may be affected.
In addition, the Group, which has overseas subsidiaries in Taiwan, Hong Kong and Australia, may be adversely affected by the appreciation in the value of the yen over Taiwan dollars, Australian dollars and Hong Kong dollars due to currency exchange rates.

(5)CREDIT RISK

In the course of operations of Real estate development and sales and Real estate management, the Group enters into construction agreements with a number of construction and contracting companies. In the event that a construction company suffers a material loss or credibility, which contributes to a delay in project completion, the Group’s performance may be affected.

(6)CONDOMINIUM DEVELOPMENT AND SALES RISKS

Condominium development and sales are long-term projects, and in the event that underground obstacles, soil contamination, and/or the results of negotiations with neighboring residents during the projects lead to unexpected costs, delays to the implementation of development plans, and changes to sales plans, the Group’s performance may be affected.

(7)Incidence of Defects

The Group extensively manages quality in its construction, but in the event that the Group’s responsibility is questioned due to design and construction defects, the Group could be responsible for repair work and compensation costs. Depending on this work and the scale of the costs involved, the Group’s performance may be affected.

(8)OPERATIONAL RISK

The Group is aware that it faces a wide range of operational risks in the performance of its business, such as improper sales practices, employee fraud, administrative errors and the occurrence of labor disputes. The Group endeavors to control such operational risks and maintain a reasonable level of management control. However, the Group’s business performance may be affected should a decline in sales result from the Group falling into disrepute or incurring payments for damages stemming from a case involving any of the abovementioned risks.

(9)LEGAL RISK

Because the businesses conducted by the Group are subject to real estate-related laws, the Group’s performance may be affected by new obligations and higher expenses arising from possible amendments made to real estate-related laws, such as the Building Lots and Building Transaction Business Act, the Building Standards Act, the City Planning Act, the Act on Advancement of Proper Condominium Management and the Construction Business Act, or if new real estate-related laws are established.

(10)PERSONAL INFORMATION RISK

The Group maintains a significant volume of personal information on parties such as real estate purchasers, individuals contemplating the purchase of real estate and compartmentalized owners in the real estate management business. The Group maintains internal rules and systems to handle personal information in accordance with the Personal Information Protection Act. However, in the event of an unforeseen circumstance whereby personal information is lost or leaked, resulting in loss of credibility, a decline in sales or a claim for damages, the Group’s performance may be affected.

(11)SYSTEM RISK

The Group implements measures including data backup to ensure the safety and reliability of its computer systems. In the event of unforeseen circumstances in which the Group’s systems are suspended, resulting in damages that significantly impact the Group’s business process and activities, performance may be affected.

(12)DISASTER RISK

The Group’s performance may be affected by earthquakes or other natural disasters, including wind and flood damage, accidents, and fires, or by terrorist attacks.

(13)DEFERRED TAX ASSETS

Deferred tax assets are recorded after consideration of the likelihood of realization, based on forecasts of future taxable income. However, deferred tax assets may have an impact on the Group’s net income for the period in the event of an adjustment becoming necessary due to subsequent business performance.

(14)GOODWILL

The Group accounts for goodwill occurring in conjunction with business acquisitions. The Group believes that its future earnings power, gained from results demonstrated in the value of each business and the synergistic effects of business integration, is appropriately reflected in the goodwill recorded in the balance sheet. However, if anticipated performance does not occur due to such factors as changes in business conditions and competition, impairment losses could be incurred that may affect the Group’s performance.

(15)RISKS IN JOINT VENTURES AND AFFILIATIONS WITH OTHER COMPANIES

The Group occasionally conducts its business through joint ventures or affiliations with other companies in line with its business strategy. When carrying these out, the Group makes decisions after a thorough review of the economic value and the prospective partner company, but the Group’s performance and reputation may be affected in the event that the expected results are not achieved due to changes in the business environment and competition conditions, or in the event of changes to the contract and/or dissolution of the affiliation.

(16)PREFERRED STOCK

Class 1 preferred stock issued by the Company (referred to as “preferred stock”) includes acquisition rights which provide that a holder of preferred stock can request that the Company acquires their preferred stock in exchange for common stock.
The period for requesting acquisition of such preferred stock is 18 years from October 1, 2007. Should common stocks be issued in accordance with a request for acquisition of preferred stock, the number of common stocks will increase and consequently the price of common stocks may be affected. However, as of June 22, 2018 the Company has received no requests for acquisition of any such preferred stock.

(17)RELATIONSHIP WITH THE ORIX GROUP

The relationship between the Group and ORIX Corporation as well as its subsidiaries and affiliates (hereinafter referred to as “ORIX Group”) as of March 31, 2017, is stated below.

・For details to status of ORIX Corporation’s shareholdings, please refer to Ownership.

・One of the Company’s executive officers is seconded to the Company by the ORIX Group.

・The Group has operating transactions related to buildings under management and construction contracts with the ORIX Group. The Group considers the profitability, importance, and transparency of each transaction.

The Group runs its business independently, but in the event of a change to its relationship with the ORIX Group, the Group’s credit capacity and business operations could be affected.