MIRARTH HOLDINGS, Inc.

With the New Condominium Development Business and investment development/securitization business accounting for the majority of revenue, rising borrowing costs from the central bank's gradual interest rate hikes are intensifying upward pressure on cap rates, raising the risk of a decline in the market value of held real estate, application of the lower-of-cost-or-market method to inventory, and impairment. Combined with persistently high construction costs and declining purchasing power among actual demand buyers, risks of prolonged sales negotiations and abandonment of new developments are also anticipated. In response, the Group conducts monthly information sharing with external experts, stress simulations, ROIC management, and diversifies investment into the Detached House and Renovation & Resale businesses.

For our Group, which relies on interest-bearing debt for fundraising, policy interest rate hikes directly increase interest expenses and put direct pressure on project profitability. There are also concerns about the impact on cash flow from stricter lending stances by financial institutions, as well as difficulties in procuring materials, construction delays, and cost overruns due to escalating tensions in the Middle East. In response, the Group is utilizing sustainable finance such as green bonds and sustainability-linked loans, fixing interest rates through derivatives, and promoting asset-light management.

The business environment is changing significantly due to the transition from the FIT system to the FIP system, fluctuations in electricity market prices, increased output curtailment, grid connection constraints, and rising costs for power generation equipment, construction, and maintenance. Since the majority of held power plants are under the FIT system, which structurally prevents passing on cost increases to electricity sales revenue, there is a risk that business plan revisions and impairment losses on fixed assets may occur, affecting business performance and financial condition. In response, the Group is promoting the early sale of low-yield solar power plants and their replacement with high-yield assets such as storage batteries, and expanding the fee business consignment scheme following the package sale of land and development rights.

Excessive capital allocation to businesses with high volatility risk can lead to greater losses in the event of failure, while conversely, an overemphasis on stable-income businesses can lead to a decline in expected rates of return. Concerns over sunk costs may delay the shift toward growth areas by continuing investment in low-profitability businesses, and there is a risk that retaining businesses with ROIC below WACC could lead to a PBR below 1x and depressed share prices. In response, the Group has established a system for reporting asset balances at monthly Board of Directors meetings, quarterly ROIC/WACC verification, and agile execution of procurement restraint and sale of completed properties.

Against the backdrop of a declining working-age population due to the falling birthrate and aging society, along with the expansion of remote work and changing attitudes toward work, competition for talented human resources is intensifying. Loss of personnel and shortages of diverse talent risk increasing the workload of existing employees, causing organizational rigidity and declining productivity, which could lead to a mid- to long-term competitive disadvantage through stagnation in value creation and reduced social reputation. In response, the Group is expanding the application of defined contribution pension plans across the entire Group, enhancing Group-wide common training and e-learning programs, promoting DE&I initiatives, and improving the ratio of female hires and strengthening employment of people with disabilities.

Risk scenarios include damages and loss of trust due to operational errors, misconduct by management or employees, occurrence of compliance violations, and prolonged handling of issues due to monitoring function failures. As the Group expands, ensuring the effectiveness of internal control functions has become increasingly important, and there is an inherent risk that delayed initial response could expand the extent of damage. In response, the Group is deepening J-SOX assessment and internal audit operations, implementing agile off-site audits, and promoting a Group-wide integrated risk management system by improving the effectiveness of the three lines of defense.

As proper management of working hours, remote work support, and employee health management are directly linked to securing and retaining excellent talent, inadequate or delayed implementation of such measures can lead to a disadvantage in the competition for talent, decreased motivation, and worsening productivity. Furthermore, this includes the risk of leading to serious competitive disadvantage for business continuity through a decline in social reputation. In response, the Group conducts monthly monitoring of working hours, introduction of 1-on-1 meetings, management training, and 360-degree assessments, formulation of a human rights policy, and quarterly risk identification through due diligence.

Risks include system encryption and business disruption due to internal misconduct or ransomware, deficiencies under J-SOX due to leakage of important data, administrative sanctions and significant liability for damages, and a crisis in the management foundation through loss of brand value and market trust. The risk of IT infrastructure vulnerabilities directly affecting business continuity is expanding, and the rating was upgraded from C rank to B rank in fiscal 2025. In response, the Group has introduced EDR products, rapid initial response by SOC experts, established a robust security foundation through the introduction of SASE, and maintains an objective log monitoring system.

There are risks of difficulty adapting to markets and regulations different from existing businesses, failure to achieve anticipated business plans and investment returns, delays in post-acquisition system and organizational integration progress, deteriorating business performance due to unrealized synergies and additional costs, and impairment losses on goodwill and fixed assets. As market conditions intensify, the importance of the integration process with existing businesses has increased, and in fiscal 2025 the risk name was changed to "Entry into New Businesses and Integration." In response, the Group has made prior consultation with the Risk Management Committee mandatory, established multifaceted verification through risk checklists, and built a system to prevent the expansion of losses through consideration of exit criteria.

This encompasses a wide range of risks, including losses due to local legal amendments and exchange rate fluctuations, market risks associated with price fluctuations and difficulty in sales, construction delays and deteriorating relationships with local partners, contract non-performance due to differences in business customs or insufficient understanding of local laws, and business disruption due to unforeseen natural disasters or terrorism. The potential risks of international business, including geopolitical risks, were an important matter deliberated at the extraordinary Risk Management Committee meeting in fiscal 2025. In response, the Group conducts impact assessments through regular meetings and external reports, reviews monthly financial documents, performs multifaceted contract reviews involving multiple departments and experts, and revises checklist items in light of geopolitical risks.