Message from the President

On behalf of Leopalace21, I would like to take this opportunity to convey my gratitude to our shareholders and investors for their continued support.

We sincerely apologize for the distress and trouble caused by the construction deficiencies resulting from inadequacies in our management system. We will work together as a company in conducting investigations and repair works, and take effort to restore trust as soon as possible.

Investigations of all buildings are planned to be completed by June 2019, and we will prioritize investigations on the subject series announced in April and May (14,709 buildings subject to top-priority investigations). For buildings with construction deficiencies, we will be consulting with specific administrative agencies and conducting repair works at our expense.

We will continue further investigations concerning the cause of the deficiencies, and organize a structure to prevent recurrence and strive for thorough quality control.

We recently announced the financial results of the six months ended September 30, 2018, recording net sales of 255.4 billion yen (-1.3% year-on-year), operating profit of 7.1 billion yen (-48.6 year-on-year), and net loss of 5.8 billion yen as a result of the recording of extraordinary losses related to repair work expenses and impairment losses (loss on sales of our apartment properties), as well as deterioration of our business results caused by the parting wall deficiencies

In the Leasing Business, both occupancy rates and profits decreased because we suspended recruitment of new tenants into buildings subject to top-priority investigations which impacts tenant matching. Although the average occupancy rate during the six months was 90.99%, up 0.79p year-on-year, the occupancy rates at the end of September was 88.40% (-1.81p year-on-year) due to the suspension of new tenant recruitment into apartments subject to top-priority investigations. We will work together as a company in conducting investigations and repair works, and take effort to resume the renting of units as soon as possible. Also, we will continue to expand tenant services such as the introduction of IoT in our apartments, aiming to increase competitiveness of our products.
In the Development Business, although we concentrated orders in metropolitan areas such as Tokyo, orders decreased under the negative environment surrounding the apartment construction industry. Orders received (including real estate development sales) reached 35.3 billion yen (-10.0% year-on-year).

Although we could not achieve the financial forecasts during the six months ended September 30, 2018, new initiatives have been started as our "next move". As we announced on October 29, 2018, we have resolved to sell 120 apartment buildings to a fund in this fiscal year. We are aiming to regrow the Development Business by constructing new schemes of selling assets to the fund. In the Leasing Business, we plan a full-scale entry into the "minpaku (private lodging)" business. Initially, we will utilize company-owned apartments in the "minpaku" business, and will expand to other properties as a measure to utilize vacant and old properties. In the International Business, which we aim to expand in the long-term, we plan to invest 100 billion yen in real estate development in the ASEAN region in the next 10 years.

As our return to shareholders, we have repurchased 8.3 million shares (3.28% of our outstanding shares) and retired 7.8 million shares in October. However, in consideration of the net loss for the six months ended September 30, 2018, interim dividends will not be paid, and term-end dividends are yet to be determined. Term-end dividend forecasts will be announced in accordance to the progress of fiscal year earnings forecasts.

We sincerely apologize for the distress and trouble we have caused to our stakeholders.

Leopalace21 would like to request the continued support and encouragement of all our stakeholders.

November 2018
Eisei Miyama
President and CEO

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