Completion of 270,000㎡ land development in Koga City underpins confidence in H2 monetization; growth verticals expanded via residential hotels and Hokkaido healthcare

Summary

Revenue for 2Q FY12/2026 came in at JPY 16.8B (−3.1% YoY) and operating income at JPY 2.0B (−49.1% YoY), marking a top- and bottom-line decline. However, management emphasized that large-scale transactions in the DX Real Estate Value Enhancement segment are concentrated in H2, and that progress is tracking in line with plan. During the presentation, management highlighted a five-consecutive-period track record of beating initial full-year guidance, repeatedly explaining that there is no correlation between 2Q progress rates and full-year outcomes. Inventories reached a record-high JPY 74.1B, with revenue sources for H2 and FY12/2027 onward continuing to build.

Key Points (Earnings Highlights and Growth Actions)

• Business Strategy and Market Positioning
  • Management frames the rising interest rate environment as an opportunity to widen competitive advantages, highlighting the company's high OPM (21.5%) as evidence of rate resilience
  • Focusing on structural shifts in inbound tourism demand, the company has designated residential hotels—catering to long-stay needs of Western travelers—as a growth vertical
  • Regional hub cities are viewed as offering less competition and more opportunity relative to central Tokyo; the company's listings on four regional stock exchanges serve as a strategic platform for regional market penetration
• Current Business Progress and Drivers
  • The decline in gross profit margin (31.7% → 22.9%) was primarily driven by a higher revenue mix from the DX Revitalized Real Estate segment (33% → 52%) and project composition differences in the DX New Construction Real Estate segment. The H1 gross margin of 29.0% for DX New Construction exceeded the 20.6% assumption embedded in the full-year plan
  • The DX Real Estate Value Enhancement segment posted a revenue decline but improved gross margin to 30.3% (vs. 11.4% prior year) on the back of high-margin asset dispositions, with the large-scale Koga City project deliveries scheduled for H2
  • Of the JPY 74.1B inventory balance, commercial properties rose to 20 assets from 16 at end-FY2025, indicating steady pipeline build for the flagship AG Series
• Strategic Initiatives and Inflection Points
  • In Hokkaido, the company entered business cooperation agreements with FiberGate, Nihon Hospice Holdings, and Social Inclu. for the development of hospice housing and group homes for persons with disabilities. The first project (Higashi-ku, Sapporo; 35 hospice rooms + 22 group home rooms) is under development
  • Land preparation for the Shinhara-Takagi district in Koga City, Fukuoka (approx. 277,000㎡) is set for completion at end-August, with deliveries planned in H2. The Imaike district pipeline (approx. 174,000㎡) secures visibility into FY12/2027 and beyond
  • A new shareholder benefits program was introduced from FY12/2026 (digital gift of JPY 500 for holders of 100+ shares), alongside a newly established DOE floor of 6% to enhance dividend stability
  • Selected as a constituent of the JPX-Nikkei Mid and Small Cap Index for the fifth consecutive year in FY2026

Outlook and Strategy

• Full-year guidance is maintained at revenue of JPY 61.0B (+31.1% YoY) and operating income of JPY 17.5B (+74.6% YoY). H2 deliveries of the Koga City project are the linchpin for plan achievement
• Under the long-term management plan "LA Next Stage 2031," PHASE 1 (2026–2029) targets recurring profit of JPY 18.0B—double the FY2025 level—while PHASE 2 (2030–2031) aims for JPY 22.0B
• Rental properties are to be scaled from JPY 10.8B in FY2025 to JPY 40.0B in FY2031, expanding the recurring revenue base
• Capital allocation prioritizes growth investment of approximately JPY 421.0B, with an additional ~JPY 20.0B earmarked for M&A and strategic investment capacity
• Dividends are projected to increase for the sixth consecutive year (JPY 174/share annually, payout ratio of 34.3%). A progressive dividend policy combined with a DOE floor of 6% balances growth and shareholder returns
• Management targets a market capitalization exceeding JPY 100B at an early stage, driven by a dual approach of EPS growth and P/E multiple expansion

Positive Factors

• Operating income has exceeded initial full-year guidance for five consecutive periods. There is no correlation between 2Q progress rates and full-year upside magnitude; a low progress rate does not imply a full-year miss
• Operating income per employee has grown from JPY 25M in 2020 → JPY 84M in 2025 → a planned JPY 127M in 2026, approximately 7.5x the average of JPY 17M among the top five major developers
• ROE of 25.7% and ROIC of 8.6% both exceed the cost of equity (8.3%) and WACC (4.6%), with positive spreads maintained even under a +0.75% rate shock scenario
• Mid-size office buildings aged 20+ years account for 86% (7,430 buildings) in Tokyo's 23 wards, and this rebuild demand aligns with the company's "1.5-tier location" strategy
• Forward P/E of 5.4x and dividend yield of 6.4% suggest meaningful valuation upside versus the TSE real estate sector average (P/E 15.2x, dividend yield 3.1%)
• Inbound visitors to Japan are expected to reach an all-time high of ~43 million in 2025, with spending per tourist trending upward at JPY 72,000/person

Concerns and Risks

• Approximately 88% (~JPY 15.5B) of full-year operating income of JPY 17.5B must be booked in H2, creating direct earnings risk from any slippage in delivery timing
• Against interest-bearing debt of JPY 72.9B (short-term JPY 20.7B + current portion of long-term JPY 16.5B + long-term JPY 35.7B), rising rates would increase interest expense—an estimated additional burden of ~JPY 500M annually under a +0.75% scenario
• Gross margins in the DX New Construction Real Estate segment exhibit significant project-to-project variability; although the full-year plan assumption of 20.6% already incorporates a sharp decline from the prior-year actual of 41.8%, this warrants close monitoring
• The real estate sector broadly underperforms in an equity market facing rising rate headwinds; the company's share price has tracked the TSE sector index (Real Estate)
• Expanding inventories of JPY 74.1B have increased leverage dependency, with an equity ratio of 27.3% (net assets JPY 29.5B ÷ total assets JPY 108.2B)—still well short of the long-term target of 35%
• Uncertainty in the Chinese market may partially weigh on hotel demand (referenced during the presentation)

Performance Highlights

Cumulative 2Q FY12/2026 results: revenue JPY 16,833M (−3.1% YoY), operating income JPY 2,033M (−49.1%), recurring profit JPY 1,239M (−63.7%), and interim net income JPY 810M (−65.9%). Due to the H2-weighted plan, H1 progress stood at just 11.6%, but full-year guidance remains unchanged. Total assets were JPY 108.2B, with inventories at a record-high JPY 74.1B.

Segment Performance

• Inventories: JPY 74.1B (vs. JPY 65.3B at end-FY2025, +13.5%)
• Of which work-in-process for sale: JPY 46.9B / properties held for sale: JPY 27.2B
• Total Assets: JPY 108.2B (vs. JPY 101.9B at end-FY2025, +6.2%)
• Total Rental Properties: JPY 10.8B (vs. JPY 10.8B at end-FY2025, flat)
• Gross Profit Margin: 22.9% (vs. 31.7% prior-year period, −8.8pt)
• Dividend Per Share (Full-Year Forecast): JPY 174 (vs. JPY 112.66 prior year, +JPY 61.34)
• EPS (Full-Year Plan): JPY 506.8

Q&A List

(No Q&A session was conducted during the earnings presentation; not applicable)