Message from the President and CEO

The ordinary personal strengths of our employees are indispensable to our continued business as a developer. Involving more than 80 landowners, the Yaesu Project is one of the most challenging redevelopment projects in Japan in terms of securing agreements across the board. When working with individuals or corporations, the Company assigns responsibility for directly communicating with the clients to a single employee. They must consider: How do we gain their full trust? Put them at ease with entrusting us with their business? Make working with us even more appealing? Building solid one-on-one relationships over time through repeated contact eventually bears fruit, leading to the acquisition of projects and business success.

When building condominiums, it is not enough to simply subdivide buildings. Over the years, we have formed agreements with numerous landowners and management associations and then received orders for new reconstruction projects, creating a virtuous cycle; the sealing of deals often happens for reasons that have nothing to do with money, among them the trust that comes with the Tokyo Tatemono name or a client wanting to see things through to the very end with a trusted account manager. For developers, securing a consistent stream of future quality projects is essential. Sometimes new project propositions come in thanks to the referral of a satisfied customer. We constantly aspire to be a business with a reputation that grows organically through word of mouth and to further expand on this foundation because in some ways the world is smaller than you imagine. When you get right down to it, a company's strength comes down to retaining personnel with the requisite personal strengths.

We have established "Trust beyond the era." as our corporate philosophy. The conviction that trust is something that, once tarnished, can never be returned to its original luster, no matter how much time passes, is something I keep firmly in mind. Behaving with sincerity is a valuable skill. Every one of our employees considers the best way to gain customer trust and communities and then consistently acts accordingly, creating relationships and work that leads to future involvement. I believe this mindset is evident in the way we carry out everyday actions, such as greeting others, keeping promises, and maintaining eye contact during conversations. In light of this, the Company's ideal job candidates are trustworthy people who forge their own paths. At the same time, we must never lose sight of the need to be diligent and thorough.

The Company's corporate culture and DNA have played a role in shaping this mindset, which must be regularly reinforced and passed down. In the last few years, our employee engagement survey has identified a lack of communication as an issue, so we have launched various measures to redefine the Company's essential "goodness." We have recently expanded our workforce, bringing in both new graduates and mid-career professionals. Even so, we are a company with a limited number of employees, and we want to cultivate our strength by fostering a sense of unity.

Looking back on the five-year medium-term business plan that began in 2020 (the "Plan"), I realize we have made steady progress despite some unanticipated events. Kicking off at the start of the COVID-19 pandemic, the first three years were filled with uncertainty. However, the negative impact on our business performance proved to be not that significant, and some aspects of our business even benefited. Accordingly, the Company's results remained solid, especially for our mainstay Commercial Properties Business and Residential Business.

In the Commercial Properties Business, the market's vacancy rate rose due to effects of the pandemic, but we think the effects were temporary and will settle as things return to normal. In addition, we are aware that a number of companies have decided to permanently change their employees' workstyles by switching to a focus on remote work and some have reduced their office space. However, I believe that there will be no major impact on Japan's overall office market and that most companies will return to office-centric workstyles. Actually, because office demand peaked in 2019, we are now seeing a solid trend of companies that were unable to secure an office in their ideal location in the past seizing on the current opportunity to upgrade while integrating and expanding their office space. The massive supply of office space in 2023 has given rise to concerns that some areas could see another rise in vacancies in existing buildings in less attractive locations. However, given that our office portfolio is highly competitive and includes large-scale redevelopment projects that will be completed in the near term, we have determined that for us there is no cause for serious concern.

In the Residential Business, sales prices are still on the rise due to a low interest rate environment and an increase in wealthy individuals in Japan. Interest in residences has been growing since the start of the pandemic. Owing to these factors, the market has remained stable. Also, prices are unlikely to fall because of a limited supply of newly built condominiums. In fiscal 2022, we were able to record a very high gross margin in excess of 30% for properties scheduled for delivery. Fiscal 2023 kicked off with the percentage of agreements for properties scheduled for delivery at over 70% and projections for fiscal 2024 call for the year to begin with the percentage at over 50%, as sales proceeded apace. We do not expect this business environment to change much and are not concerned about the outlook for the Residential Business in the Plan.

Meanwhile, in property sales to investors, which has expanded as a profit growth driver over the course of the Plan, we have been acquiring a diverse stock of assets, including logistics properties, and have been able to secure higher than expected sales prices. We recognize that there are concerns, especially among overseas investors, about the decline in the trading market due to rising interest rates, however, cash remains overabundant in Japan and steep interest rate hikes are unlikely, so I do not think there will be a significant impact on achieving the targets of the Plan.

Of course, due to changes in the business environment since the Plan was formulated, there are a few businesses where profit has been lower than anticipated. However, the aforementioned mainstay business results and property sales were able to offset any shortfalls. We are now even more confident that we will achieve the goals of the Plan.

When considering sustainable growth, the Company's most pressing concern is the magnitude and duration of the rising trend in construction costs. Although we have been seeing prices for materials and parts settling somewhat, personnel-related costs are still soaring due in part to the adoption of rules capping overtime work in the construction industry. We must consider the possibility that construction costs will stay high overall. Because construction is already under way, the impact of rising construction costs will be minimal for the Yaesu Project and most of the properties scheduled for sale during the Plan. In addition, because we reined in expenses to counter the rise in construction costs, I believe we can ensure appropriate profitability.

At issue going forward is land that has already been secured and ensuring the profitability of projects with agreements under which we bear the construction costs. From fiscal 2025, while rising construction costs will have some effect on property sales to investors and condominium residences, we plan to fully start construction of other large-scale redevelopment projects. Most redevelopment projects are promoted in collaboration with groups of landowners, so it can be difficult to control when construction will begin. Aiming to achieve the profit growth outlined in the long-term vision, we need to regularly hold deeper discussions on what kind of strategies we should create for the entire Company.

We are also paying close attention to the effects of interest rate hikes on business results. Regarding fund procurement, we do not have any significant concerns because we have already been acquiring long-term, fixed-rate borrowings in consideration of the inherent nature of our business. However, in the Residential Business, performance is directly affected by customer's ability to purchase as well as the effects of the cap rate on real estate sales. Currently, long-term housing loan interest rates remain low and demand is holding steady. In my many years of experience, even if cap rates rise for logical reasons, when it comes to actual sales of highly competitive properties, transactions often take place at much higher levels, even in real estate sales. While keeping a watchful eye on the situation, we will continue to make rational decisions based on our experience to date and the local trade activity.

Because the real estate business significantly affects the environment and society as a whole, we must address stakeholder demands head on to ensure the Company remains in operation. Although addressing environmental concerns could lead to higher costs, I feel that it is important to approach efforts to achieve the SDGs as opportunities as well as to consider the nature of the value we provide to customers and how our efforts are evaluated. Recognizing that it is imperative to intentionally set ambitious goals and have all employees work diligently together to achieve those goals, in fiscal 2021 we set medium- to long-term targets aimed at reducing greenhouse gas emissions and rolled out various initiatives. In February 2023, we further accelerated measures to achieve our medium- to long-term targets, for example, expanding the scope of properties covered and moving up the fiscal years we had originally set for achieving those targets. In the environmental field, while we may not have yet rolled out many measures unique to the Company, we have spearheaded such initiatives as installing solar panels on the roofs of developed logistics properties to supply power for in-house use with surplus power distributed to other Company facilities. Going forward, we will thoroughly discuss what the Company can and should do while striving to tackle challenges in various fields.

In April 2022, we identified seven priority issues related to human rights and began expanding human rights assessments when entering new businesses overseas. In the supply chain, we have made steady progress, such as attaching the Group's sustainable procurement standards to construction subcontracting agreements, encouraging compliance, and conducting surveys to monitor compliance status.

Regarding governance, I feel that discussions are frank regardless of the meeting type, whether they be the Company's Board of Directors meetings or management meetings. External directors have brought a fresh perspective, pointing out internal practices that have become habitual. Due to the nature of the real estate business, the amount of money involved in each investment project is ever larger. As a result, Board of Directors meetings were taking longer and longer to discuss each project. By further expanding the scope granted to managing officers for decision making regarding investment projects, we have enhanced the effectiveness of the Board of Directors and expanded medium- to long-term discussions, including those concerning the long-term vision, the Plan, and our business portfolio. In the effectiveness evaluation survey, we received feedback that we should increase the number of people with corporate management experience and that we need DX experts. We take this feedback seriously.

Diverse personnel are needed to support sustainable management, but I do not think our top management can make important decisions without a proper understanding of the inner workings of the real estate industry. Experience is crucial when making final decisions on whether to approve or reject various projects. Because there are non-logical aspects to the real estate business, namely personal relationships, I feel it is important to be able to make forecasts supported by experience and draw in good people. I believe that it's still vital to take advantage of these possibilities by building experience through everyday actions.

In the long-term vision, we declared our aim to be a good company for all stakeholders. Realistically, being the best company for all stakeholders simultaneously and at all times is difficult. Moreover, because enhancing medium- to long-term corporate value is linked to being a good company for all stakeholders, we cannot limit our thinking to only the present. Basically, we must secure ongoing growth over the long-term in order to earn a solid reputation rooted in that probability and expectations for the future. Going forward, the Tokyo Tatemono Group will continue moving full-steam ahead to become a next-generation developer. Moving forward, the Group asks for your continued understanding and support.