Q&As Regarding Business

In Japan, most of the company housing and dormitories that are primarily owned by large blue-chip companies are aging. However, in recent years, instead of rebuilding run-down company housing or making new acquisitions, companies have included cost-reduction as a factor in their management strategy and have thus been turning to outsourcing.

Traditionally, we would begin sales campaigns in response to the needs and demands of our corporate clients. But from the previous fiscal year, we are intensifying our use of the "Top Sales" business style through corporate visits by executives, including the company president, in order to combine such needs with orders in the early stages.

We have worked on:

1. Strengthening the sales approach for industry types expected to be in demand.
2. Strengthening partnership with Leopalace Leasing Corporation to improve the ability to win customers.

In addition, we have been shifting our sales operations to gain prompt results, by reinforcing our sales efforts to focus on low-use and major business connections (such as corporate customers with high potential to increase contracts).

As a result, number of units under corporate contracts reached another record level of 204,000 units (up 11.2% from the same month last year) as of the end of September 2011.

Currently, in the Leasing Business, we are implementing "New Channel Strategy" which reduces fixed costs and gains tenants through various channels. Leopalace Partners, which are the core of the strategy, will contribute to increase and stabilize occupancy rates by increasing avenues for tenant recruitment.

Setting up franchise branches, which includes switching from a fixed to a variable cost structure, has also helped reduce SG&A expenses.

As of the end of September 2011, there are 158 offices.

In addition, the Partner Sales Department has been established to promote development of new Leopalace Partners. By creating a system for following up even more closely with Leopalace Partners, we aim to help our partners quickly learn our propriety contract system so that they can proceed with their sales activities.

The reserve for apartment vacancy loss is set according to the projected loss that could occur during a logical predictable period to prepare for the risk of increased vacancies. The reserve fund started in the fiscal year ended March 2009, considering the accounting trend concerning reserves in recent years and the rapid decrease in occupancy rate starting in the latter half of the year ended March 2009.

The reserve for apartment vacancy loss is calculated based on the profitability of individual buildings, and is marked to market quarterly. Therefore, when profit improves due to various reasons such as (1) recovery of occupancy rate, (2) earning additional revenue and (3) reduction of cost, reversal of the reserve account will push profits up profits in the leasing business division.

Due to the profitability improvement of subject apartments and passage of remaining period, there was a reversal of apartment vacancy loss of 6.1 billion yen (reduction in cost) in the first half of this fiscal year.

In order to minimize the decline in occupancy rate, we disperse the risk by (1) location of the unit (units supply not centered in a certain area) and (2) customer demographics (pioneer corporate customers instead of just individual customers).

Occupancy rate is not the only factor in deciding the profits for our lease units. The other factor, rent, can be set/revised flexibly according to the trend in demand. For example, we take the initiative to control the occupancy rate and profit standard by setting the rent lower for units with declining occupancy rate, and setting the rent higher for areas with high demand. This is only possible since we manage the leasing units ourselves. In the first half of this fiscal year, we have started optimizing master lease rents (i.e., reevaluating rents payable to the owners). Reviewing and revising master lease rents in line with market prices enables cost reduction immediately as well as in the future.

Through the above measures, we minimize the variability of company performance due to the decline in occupancy rate.

571,908 rooms as of September 31, 2011.
Please refer here for past and latest results.

This term refers to properties for which we subcontract the construction but not the Master leasing system. In other words, with these products we complete the construction and then pass the property to the owners so that they can handle things such as rental administration and management; alternatively we introduce the owners to our related companies who can handle these tasks for them.

These "properties managed by their owners" have been well received among those who have requirements such as "I don't need surety because I will take the risks myself. In return, I would like a product that has a lower price for the building (i.e., yielding a high return)." They are also popular with owners who are already doing business with us and are considering ownership of a second or third building.

"Properties managed by their owners" are the product that can ensure orders and profits without placing burden on our Leasing business division. Thus, we will continue to increase the sales of these products as one of the strategic products in helping us to achieve Medium-term Management Plan.

In our business, orders and occupancy rates have an inseparable relationship. In the current situation where rapid recovery of occupancy rates is difficult, it is important to offer products which can secure orders in the regions with solid demand.

In this fiscal year ending March 2011, the first year of our Medium-term Management Plan that was formulated in line with this thinking, the amount of orders received will decrease when compared with the past result as we will specialize in our order receiving activities in areas and for projects, where we can expect stable profits (especially inner-city areas) in our Leasing business.

It is a system to support the apartment management of the owners from the construction of the lease housing to the management and operations for a maximum of 30 years. The system involves rent payment to the owner, management and repair to take the burden off the owner and to contribute to consolidating a steady income.

The biggest risk in lease housing management is vacancies. In our case, with the 30 year Master leasing contract, a fixed rent is paid to the owners for a certain period regardless of the existence of vacancies. Therefore, the biggest possible risk is having more vacancies than expected during this period.

Providing apartment properties best suited to the area by executing New Area Strategy and Area-specific Product Strategies will be indispensable to minimize such risk.
In addition, we will keep implementing various measures such as the diversification of contract structures and enhancement of interior and exterior equipment.
In the Leasing business, as well as to raise occupancy rate, the appropriate adjustment of rental fees will also become an important matter to increase profitability.

Our approach to new owners starts by identifying current land owners through viewing of registry documents and cadastral maps in the legal affairs bureau. This is of course a legitimate method for obtaining personal information.

Then we perform sales activities in steps starting by building connections through questionnaires using sales promotion tools and through invitation to various events held in different areas, and contacting potential customers who show interest.

There are many cases where we receive repeat orders from existing owners and where existing owners introduce us to different owners. Therefore we have implemented a Customer inquiry center in branches over Japan to develop a close relationship with our owners, and Owner gatherings are held every 6 months to exchange information.

Furthermore, we pay our most careful attention to the management of our customers' personal information. Promotional posters are posted in all our sales branches to enhance employee awareness, and an agreement for treatment of personal information is signed apart from the contract and a copy is stored by both the land owner and Leopalace21.

Currently, as of the end of May 2011, units managed by the Company that have been damaged are 137 buildings, 2,373 units (includes 32 structures located within the 30 km evacuation zone near the damaged nuclear power plants), making up less than 1% of the national total. There were no buildings collapsed in the earthquake or swept away by the tsunami. In addition, there was no particularly major damage at branch offices either. Furthermore, we have resumed our apartment construction subcontract operations in Sendai City starting in July.

Just after the earthquake, to confirm the safety of our buildings, we have dispatched teams made up of engineers with first-rate architectural and construction qualifications to the sites, and they have been verifying the safety of the properties one by one. Also, we have begun offering residences to victims in need of emergency housing.

Furthermore, we have received orders and finished construction and delivery, within the period as requested, for 364 temporary housing in Miyagi and Fukushima prefectures through the Japan Prefabricated Construction Suppliers & Manufacturers Association. We have received the Housing Bureau Director Award from the Ministry of Land, Infrastructure, Transport, and Tourism for this accomplishment.

For things such as repairing the Company's property (30 buildings) and the furniture and appliances from the buildings damaged mentioned in Q1, we have declared an extraordinary loss of 1.262 billion yen for the fiscal year ended in March 2011.

As for disaster-related demand, there are demands such as (1)relocation demand from disaster areas, (2)restoration demand from corporations and local governments, and (3)construction of temporary housing.

However, regarding (1), in areas where an earthquake with a magnitude of 5 or greater occurred (13,227 buildings in Tokyo and 15 other prefectures), investigations of the safeness for each property must be undertaken before moving in. Taking into consideration this and the need for time to officially receive aid from prefectures in the earthquake disaster area with regards to (2) & (3), we believe there is a need to carefully assess the positive effects to performance during fiscal year ending in March 2012.

It can be boiled down to two reasons.

The first reason is the intensification of competition in the leasing market.

According to the data from Housing and Land Survey in 2008 (Statistics Bureau of Ministry of Internal Affairs and Communications), the ratio of vacant homes on Japan's total number of households dwellings (vacancy rates) rose from 12.2% in 2003 to 13.1%, a new record high.

In this environment, where choices abound for customers looking for a unit to lease, it is extremely important to raise the value of properties so as to be selected by tenants, thus making it possible to increase revenues in the Leasing business.

The second reason is to move forward with real improvements in the earnings structure of the Leasing business despite the tough business environment and to move the business into the black quickly.

The many services related to the broad-based leasing business are undeveloped territory that is still full of great potential. In addition, we have proven results in maturing partnership with landowners by establishing maintenance contracts for broadband operations, and general maintenance service for furnishings and appliances in the fiscal year ending in March 2011. By reaping these results, we will move forward the initiative and raise the value of existing properties. We believe that developing rent policies in accordance with rising unit rent prices and values will lead to a realistic and attainable rise in revenues.

In order to get a head start in offering equipment that should be included in apartments of the future, we are currently moving forward with the installment of solar power systems and apartment security systems.

Solar power systems can reduce both power consumption by the housing unit and the burden on the environment. In addition, any surplus electricity can be sold, and many landowners are proactive in their installment. The inclusion of apartment security systems is expected to cover the needs of corporate housing and dorms, as well as increase the occupancy rate of women.

Due to the Great East Japan Earthquake, order and sales figures for both services have been slightly lower than expected for the first half of this fiscal year. However, we will be strengthening our marketing efforts for not only the second half of this fiscal year, but for the following year as well.

As for the solar power system, we have completed the installation of 1,478 units with 12,122kW in power generation capacity. This is the equivalent of 260,000 Japanese cedar trees in terms of Co2 reduction, and 1,610,000 liters in terms of gasoline.

The partnership officially began in the fourth quarter of the fiscal year ended March 2011, after receiving steady results in obtaining materials and the number of rental agreements, will continue on into the fiscal year ending March 2012.

Regarding the material supply to properties, we have already begun supplying the amount for newly constructed properties and plan to officially begin supplying for needed reforms to pre-existing properties after next fiscal year.

As for customer attraction, we have begun to attract customers using ERA Group, an affiliate of JS Group Corporation, and in addition to increasing performance 1.5 times in the fourth quarter of the fiscal year ended March 2011 when compared to the previous year, we are also beginning to work on the need for company housing for employees and new staff of each company in JS Group Corporation.

Leopalace Resort Manenggon Hills Guam is a composite sports resort facility located in the Yona hills area near the center of the island. The resort area covers almost 1% of the entire island of Guam with 5.2 million square meters.

On-site facilities include a hotel, condominiums, a spa, not to mention the Pan-Pacific Sports Center. This center is a world class sporting complex that draws not just tourists but also professional athletes who come here either as part of a team camp or just for their own personal training.

As we implement our new Medium-Term Management Plan, we are focusing on concentrating our management resources in our core business and transforming our business to low cost structure. Therefore, we are prioritizing our other three businesses (real estate, silver < elderly care > , and domestic hotel businesses) based on their degree of synergy with our core business in a way that will maximize profit on a consolidated basis.
Please see here for our policies on our business and our consolidated subsidiaries.

With declining birth rate and with an aging society, the population of our main customers, the young generation, will decrease. However, according to the Population Census by the ministry of internal affairs and communications and Population Statistics by the National Institute of Population and Social Security Research, one-person households (studio apartment tenant layer customers) are predicted to continue to increase until 2030, and we expect demand for our leasing units will continue to be strong.

Also, the individual households in the “above 35, below 64 age group” and “Silver layer above age group” are expected to increase. Therefore we believe it is important to create corporate demand and develop the silver business to answer to new customer needs.

Developing our business in areas where people are centralized is the absolute requirement to secure tenants. Currently, 70% of our lease housing is located in the 3 major metropolis areas – Tokyo, the Tokai area surrounding Nagoya, and the Kinki area surrounding Osaka.

The Kyushu area could be a candidate for business development in the future with the Shinkansen connecting to Hakata in 2011, but we plan to make a careful decision by paying attention to the movement in demand.

Our CSR activities are implemented to various stakeholders including our customers, shareholders, employees, environment and society based on our 4 Basic Policies. We especially focus our efforts on Realization of society considerate of global environment and Contribution to local society , as we believe these are important social responsibilities for us as a corporation supplying 500,000 housing units.

On the environment side, we certainly minimize the environmental load in our offices and construction, and we also implemented measures to decrease the environmental load from our customers without having our customers to make large effort, by installing water saving faucets and shower heads in our lease housing.

For the local society side, we implemented measures in everyday activities such as cleaning activities with the owners and their families, implementation of security lights on apartment exteriors and registration of our branches and offices to the Kids Dial 110 to contribute to local safety and security, and we plan to further develop these measures.