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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, 2016, 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, 2016 are as follows.

REAL ESTATE MARKET RISK

The performance of the real estate development and sales segment and the real estate brokerage segment may experience fluctuations due to the impact of market conditions. Condominium sales results in particular are susceptible to movements in land prices and construction costs, as well as to the supply of condominiums by and the product prices of competitors. In addition, 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 accompanying the loss on devaluation of inventories held by the Group. Consequently, the performance and financial position of the Group may be affected.

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.

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.

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.

CONDOMINIUM DEVELOPMENT AND SALES RISKS

The Group is engaged in the evaluation and survey of development sites, acquisition, condominium design, construction and sales. As such, an individual development project extends over a significant period before income is collected and secured.
Furthermore, the Group’s condominium development and sales business is subject to a variety of public authority approvals and procedures, including explanations of planned developments to local and neighboring residents. Accordingly, the Group is subject to a variety of business risks that could adversely affect performance. These risks are outlined as follows.

Opposition by Local and Neighboring Residents

In addition to acquiring all necessary approvals stipulated under the Building Standards Act, the City Planning Act and other related laws for each particular condominium development, as well as adhering to local government guidelines, the Group strives to obtain the opinions of neighboring residents and the local community.
At the same time, the Group endeavors to ensure harmony with the local environment and protect natural surroundings. Notwithstanding the acquisition of necessary approval, in the event the Group is forced to delay the development process or amend its initial sales plans due to opposition and negotiations with local and neighboring residents, the Group’s performance may be affected.

Site Risk, Soil Contamination

Prior to acquiring land for condominium development, the Group makes every possible effort to ascertain the presence of such things as buried objects and soil pollution caused by chemical substances that are not suitable for a living environment. In addition, the Group imposes a liability on the seller at the time of executing a purchase and sale agreement to cover soil contamination and damage in an effort to minimize risk.
In the event, however, any ensuing damage materially exceeds expectations or the seller is unable to meet the amount of damages incurred, thereby resulting in changes in original development plans, delay in completion or increase in costs, the Group’s business performance may be affected.

Incidence of Defects

With regard to condominium construction work, the Group places orders with construction companies that possess sufficient technical expertise, based on its own in-house standards, and has systems in place to comply with mandatory building regulations, including earthquake resistance. In addition to enforcing strict quality management controls that meet proprietary quality and design standards and those of technical reviews upon each construction project, multiple checks are carried out at each stage of design and construction.
In the event, however, an unforeseen circumstance involving an incidence of a design or construction defect arises, the Group could be held liable and incur repair work and compensation costs. The terms and extent of any such loss may affect Group performance.

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.

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.

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.

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.

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.

DEFERRED TAX ASSETS

The Group has accrued tax loss carryforwards, which are recorded under deferred tax assets in the Group’s consolidated financial statements. 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.
Once the tax loss carryforwards are fully used or have expired within the allowable number of years under tax regulations, the tax benefit is regarded as having been lost, and the Group will be required to pay corporation tax at the standard rate,which will affect on Group’s net income and cash flows.

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.

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, 2016 the Company has received no requests for acquisition of any such preferred stock.

RELATIONSHIP WITH THE ORIX GROUP

On February 27, 2014, the Company became a consolidated subsidiary of ORIX Corporation. The relationship between the Group and ORIX Corporation and its subsidiaries and affiliates (hereinafter referred to as “ORIX Group”) as of March 31, 2015, is stated below.

Capital Relationship

ORIX Corporation holds 547,490 thousand of the Company’s shares (537,490 thousand in common stock and 10,000 thousand in preferred stock), accounting for 64.14% of the Company’s outstanding shares (62.97% in common stock and 1.17% in preferred stock). ORIX Corporation holds 64.13% of the voting rights attributable to the Company’s shares (including 0.02% held indirectly), and the Company is an affiliate of ORIX Corporation pursuant to the equity method of accounting.

Personal Relationship

One of the Group’s officers also serves as an officer in the ORIX Group, and two of the Group’s officers have been seconded from the ORIX Group.

Business Relationship

In addition to joint projects and contract sales related to condominium sales, the Group does business with the ORIX Group that involves sales and other activities related to building management and construction. The Group evaluates each transaction in terms of its profitability, significance, and transparency.
Although the Group operates independently, its credibility and operations could be affected by changes in the relationship with the ORIX Group.