HEIWA REAL ESTATE CO.,LTD.

Office building leasing for corporate tenants accounts for the majority of operating income in the Building Business segment, and there is a risk that rent levels and occupancy rates could decline due to deterioration in economic conditions or the supply-demand balance. The Company seeks to reduce this risk through concentrated development in the three central Tokyo wards and major regional cities, but if economic fluctuations or supply-demand deterioration occur beyond expectations, leasing revenue could be significantly affected.

In real estate development and sales, there is a risk that expected profits may not be achieved due to deterioration in economic conditions, increases in material and construction costs, fluctuations in interest rates and land prices, bankruptcy of joint business partners, development delays, or tax system changes. Although risk control rules have been established for properties held for sale, if unexpected circumstances arise or properties cannot be sold within the expected timeframe, the profit plan could be affected.

In projects such as the Nihonbashi Kabutocho and Kayabacho redevelopment and the Sapporo redevelopment, there is a risk of unexpected costs or project delays/suspension due to rising land and construction costs, delays in permit and licensing procedures, prolonged consensus-building with stakeholders, and delays in tenant recruitment. During the development period, revenue from existing leasing assets may decrease, and extraordinary losses may also arise when demolishing existing buildings.

The Company primarily procures funds for the acquisition and development of leasing business assets and income-producing real estate through interest-bearing debt. The balance of interest-bearing debt has expanded from ¥206,236 million in the 102nd fiscal year to ¥272,683 million in the 106th fiscal year, and the net D/E ratio has also risen from 1.5x to 1.9x. Although the Company addresses this by making the majority of its borrowings long-term and fixed-rate, if financial conditions or interest rate trends differ from expectations, an increase in financial expenses could affect business performance.

The Company obtains external appraisal valuations for held leasing business assets at the end of each fiscal period; however, if asset values decline due to deterioration in the real estate market, business performance and financial condition could be affected through the recognition of impairment losses or inventory valuation losses. In addition, if the market price of investment securities, including strategically held shares, declines significantly, this could also affect business performance and financial condition.

The Company is working to maximize business synergies based on the capital and business alliance with Mitsubishi Estate concluded in 2011, and the capital and business alliance and three-party agreement with Taisei Corporation concluded in June 2024; however, unexpected events or changes in the environment may prevent the initially expected effects from being achieved. If the alliances or agreements are terminated for any reason in the future, business performance could be affected.

If held assets are damaged or destroyed by earthquakes or other natural disasters, or by man-made disasters such as accidents or terrorism, business performance could be affected due to substantial repair and rebuilding costs or a decrease in leasing revenue. Although the Company implements disaster prevention capability enhancements and BCP measures, these measures may not be effective if unexpected circumstances arise.

Various laws and regulations, including the Act on Land and Building Leases, the Building Standards Act, and the City Planning Act, apply to the Company's business, and future legal amendments or new regulations could create new obligations or costs that affect business performance and financial condition. Although the Company responds by obtaining early information on regulatory changes and legal opinions, the risk of amendments or new regulations differing from expectations cannot be eliminated.

As the Company handles a large amount of confidential information, including personal information, if a cyberattack or information leak by officers or employees occurs, business performance and financial condition could be affected through a decline in social trust or the occurrence of damages. Although the Company continues to develop its information security management framework and provide training, there is no guarantee that all information leaks can be prevented given the increasing sophistication of cyberattacks, and there is also a risk that business operations could be halted in the event of a system failure.

A decrease in development opportunities and an increase in operating costs due to tightened regulations requiring real estate development and operations with lower environmental impact, as well as reputational decline from a delayed response to changing customer needs for green offices, could affect business performance and financial condition. Although the Company has established a Sustainability Committee, chaired by the Representative Executive Officer and President, to monitor PDCA cycles and report to the Board of Directors, a delayed response could result in impacts beyond expectations.