Sekisui House : Section３ Strategies and Initiatives for Sustainable Growth

Section 1

Section 2

Section 3

Section 4

Section 5

Section 6

Section 7

SEKISUI HOUSE Value Report

41

Value Creation Story

Mechanisms and Catalysts

Strategies and Initiatives

Mid-Term Management Plan

Management Foundation

ESG Management

Data

CONTENTS

for Creating Value

for Sustainable Growth

3Section

Strategies and Initiatives for Sustainable Growth

1. Financial and Capital Strategy

1. Environmental Strategy

1. Human Resources Strategy

1. Technology Development Strategy

51 Sekisui House's Digital Technology and Initiatives for Digital Transformation (DX)

	Section 1		Section 2	Section 3	Section 4
	Value Creation Story		Mechanisms and Catalysts	Strategies and Initiatives	Mid-Term Management Plan
CONTENTS		for Creating Value	for Sustainable Growth

Financial and Capital Strategy

Section 5		Section 6		Section 7		SEKISUI HOUSE Value Report	42
Management Foundation		ESG Management		Data

We will balance further growth investment with healthy finances as we create new value that addresses our changing times and environment.

Yosuke Horiuchi

Representative Director of the Board

Vice Chairman, Executive Officer

In Charge of Division of Finance and

ESG and TKC Project

Head of ESG Management Promotion

Headquarters

Changes in the Business Environment and Sekisui House's Response

The business environment in which Sekisui House operates has changed significantly over the past 10 years, as represented by megatrends such as the increasing topicality of climate change, biodiversity conservation, resource recycling and other environmental issues, as well as changes in economies, government policies and demographics. In particular, year after year the ESG management expected of companies is increasing in importance, including initiatives to achieve carbon neutrality, which has been taken up as an urgent issue worldwide. In this business environment, with the shift to remote work and home schooling and other aspects of people's lifestyles in the "new normal" brought about by the COVID-19 pandemic, attention to housing has been rising worldwide.

• Sekisui House has provided customers with value in housing based on a belief it has held since its founding: that helping to resolve social issues supports its sustainable growth. After reexamining our value creation process centered on that corporate story, we substantially revised the way we identify material issues and reclassified them from five issues to three: creation of high-quality housing stock; contributing to a sustainable society; and diversity and inclusion. The development and popularization of eco-friendly housing, an area on which we were the first company in the industry to focus in Japan, is one of our representative initiatives for contributing to a sustainable society. Today, more than 90% of our customers for new detached houses choose a net zero energy house (ZEH). Our current focus is on

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SEKISUI HOUSE Value Report

43

Value Creation Story

Mechanisms and Catalysts

Strategies and Initiatives

Mid-Term Management Plan

Management Foundation

ESG Management

Data

CONTENTS

for Creating Value

for Sustainable Growth

Financial and Capital Strategy

popularizing ZEH for rental housing and switching to ZEH for all units in the condominium buildings we develop. We intend to lead the industry in this initiative as well. Meanwhile, for the RE100 initiative, our initial target date for employing 100% renewable energy sources for the electricity used in our business activities was 2040, but we now expect to reach that goal by 2030, ten years ahead of schedule. Through this and other measures, we are making steady progress in decarbonization. Based on our efforts to address our material issues, we intend to continue creating new value to provide happiness in the era of the 100-year lifespan.

• Furthermore, to realize our global vision to make home the happiest place in the world, we aim to offer happiness through the integration of our technologies, lifestyle design and services and to make Sekisui House technologies the global de facto standard. We will therefore step up our investment for growth, considering options including mergers and acquisitions as well as capital or business tie-ups so that we can provide new added value and fully demonstrate our technologies worldwide.

Basic Policies of the Fifth Mid-Term Management Plan

1 Lay growth foundations with an eye on the Third-Phase Management Vision and where the Group should be in 10 years

2 Build a strong financial position to respond flexibly and agilely to growth opportunities

3 Promote investment for growth and strengthen shareholder returns for sustainable improvement in corporate value

Investment for growth

Investment in real estate

Investment in foundations

for growth

Improving Measures to Take Our Healthy Finances to the Next Phase

Sekisui House provides housing, a product that creates close, long-lasting relationships with customers, as well as services for residents. To earn the trust of those customers and other stakeholders, we consider it vital to make ongoing investments in business growth, and by extension, to build a strong financial base that enables such investment.

  Under the Fifth Mid-Term Management Plan, we have continued our efforts to improve our finances from the Fourth Mid-Term Management Plan. By successfully promoting improvement of capital and asset efficiency in management through these efforts, we have reached a major milestone, and I feel we are ready to pick up our pace for further growth. We have already started studying financial strategies for the coming Sixth Mid-Term Management Plan, and we want to employ KPIs suited to Sekisui House so our employees can work together to achieve the plan's targets. Moreover, despite the ongoing COVID-19 pandemic we have maintained AA credit ratings from two domestic rating agencies. We will continue working to balance further growth investment with healthy finances, while maintaining these AA ratings as a measure of their robust health.

Maintain AA Ratings* as a Measure of Robust Health

	D/E ratio of 0.45 or less			Debt repayment term (Net debt/EBITDA)
			of 1 year or less
* Ratings for Sekisui House
	Japan Credit Rating Agency, Ltd. (JCR) AA	Rating and Investment Information, Inc. (R&I) AA-

D/E Ratio	Debt Repayment Term
(Times)	(Years)

Shareholder returns		M&A		Efficiency
Lay solid foundations for growth, striking a balance
Payout ratio of at least 40%	ROE of at least 10%
	among investment for growth, efficiency, healthy
Flexible repurchases of	finances and shareholder returns.	Total asset turnover ratio of
Company stock				at least 1

0.52	0.54
Target	0.46	0.42
0.45
or less

0.37

1.34	1.37
Target

1.0 or less

0.01	0.13
(0.18)

Healthy finances

Maintain AA rating

D/E ratio of 0.45 or less

Debt repayment term of

1 year or less

Fourth Mid-Term	Fifth Mid-Term	Fourth Mid-Term	Fifth Mid-Term
Management Plan	Management Plan	Management Plan	Management Plan
	FY2017-FY2019		FY2020-FY2022		FY2017-FY2019			FY2020-FY2022
2017	2018	2019	2020 2021 2022 (FY)	2017	2018	2019	2020	2021 2022 (FY)

Section 1

Section 2

Section 3

Section 4

Section 5

Section 6

Section 7

SEKISUI HOUSE Value Report

44

Value Creation Story

Mechanisms and Catalysts

Strategies and Initiatives

Mid-Term Management Plan

Management Foundation

ESG Management

Data

CONTENTS

for Creating Value

for Sustainable Growth

Financial and Capital Strategy

A Growth Strategy of Aggressive Real Estate Investment and Investments in the Foundation for Medium-to-Long-Term Growth

For sustainable growth, we are aggressively investing in real estate with an emphasis on asset efficiency (turnover ratio), as well as investing in the foundation for growth from a medium-to-long-term perspective.

• Before investing in real estate, we set a hurdle rate (the minimum acceptable internal rate of return) based on the cost of capital as a standard for investment decisions. Sekisui House has made creation of high-quality housing stock one of its material issues, and to provide advanced, high-quality stock such as ZEH, ZEH condominiums and ZEB, real estate investment is indispensable. Investments under the Fifth Mid-Term Management Plan have progressed in Japan in particular, with aggressive purchases of land for detached houses, condominiums, and development projects. Since real estate investment generally entails risk, we emphasize asset turnover when making investment decisions. Especially in the development business and overseas business, where the scale of assets is large, we emphasize ROA and work to improve asset efficiency through monitoring.

We have set investments in our foundation for growth at ¥200 billion during the three-year period of the Fifth Mid-

Term Management Plan, with about ¥100 billion of this set aside for potential new businesses and M&A in Japan and

overseas, which we are currently studying. Our progress in this area has been steady, including the December 2021

acquisition of Holt, a homebuilding company in the United States. In addition, our SHAWOOD model house, built using

the conventional Japanese wooden-frame construction method, received excellent reviews at the IBS* held in Las Vegas

in 2020. As one consideration when transferring Sekisui House technologies to our overseas business, the required

housing performance differs in each region of the United States. Therefore, we intend to transfer our technologies

while working toward a nationwide rollout of SHAWOOD, building houses with excellent earthquake resistance in areas

where earthquakes are common, and houses that can withstand wind and flood damage in areas with frequent

hurricanes. We therefore think that a key point for growth investment will be M&A or business tie-ups with companies

that have their own factories, as well as the acquisition of factories in the United States capable of applying the

Japanese wooden frame construction method. We are eager to consider all suitable possibilities for collaboration in

Investment in Real Estate	(Billions of yen)
	Domestic	Overseas	Total
	business	business
Investment	920.0	970.0	1,890.0
(631.9)	(874.9)	(1,506.8)
Recovery	825.0	1,175.0	2,000.0
(810.1)	(975.3)	(1,785.4)
Net	95.0	-205.0	-110.0
investment	(-178.2)	(-100.4)	(-278.6)

Note: Figures in parentheses indicate actual results under the Fourth Mid-Term Management Plan

Planned Foundation for Growth

Improvement of	R&D
productivity
Investment to secure and	New business and M&A
develop human resources

Domestic business

(Billions of yen)

Three-year plan

920.0

FY2021 (Result)

601.6

214.7

198.5

188.3

65.4% progress

Overseas business

Houses for sale

Condominiums

Urban redevelopment

Three-year plan

970.0

FY2021 (Result)

559.6

57.7% progress

Strengthen the business foundation and consider and implement M&A as necessary [Over three years] About ¥200 billion

• · Acquired Holt in the United States
• · Other progress centered on investment in production equipment and R&D

various fields.

To sustainably improve corporate value, we also recognize the importance of investment in various intangible assets

that support value creation and in non-financial capital such as ESG. Accordingly, the remaining ¥100 billion for our

growth foundation has been earmarked for investments in areas such as productivity-improving equipment, IT, research

and development, and the securing and development of human resources. These investments are proceeding steadily.

Regarding human capital, we believe that in order for Sekisui House to provide happiness to customers, its employees

must be happy. One initiative to ensure this involves conducting ESG dialogue and a Well-Being Survey targeting all

employees. We have also been working to strengthen our organization. Efforts have included making 2021 the kickoff

year for a variety of personnel system reforms and establishing a dedicated department for human resources development

in February 2022. Since self-directed career development by each employee is indispensable for building a strong

organization, we will continue to proactively conduct personnel system reforms and invest in human capital.

* International Builders' Show: One of the world's largest housing exhibitions

Over three years

About ¥200 billion

Section 1

Section 2

Section 3

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Section 5

Section 6

Section 7

SEKISUI HOUSE Value Report

45

Value Creation Story

Mechanisms and Catalysts

Strategies and Initiatives

Mid-Term Management Plan

Management Foundation

ESG Management

Data

CONTENTS

for Creating Value

for Sustainable Growth

Financial and Capital Strategy

Stable Returns and Improved Value for Shareholders

In addition to investments for growth and robust finances, we recognize that returns to shareholders is a key management theme of our financial and capital strategy. In the Fifth Mid-Term Management Plan, we are working to improve capital efficiency by meeting our KPI of ROE of at least 10%, which exceeds the cost of shareholders' equity (considered to be about 6%), and we are targeting an average dividend payout ratio of 40% or more over the medium term. For shareholder returns in FY2021, we paid dividends of ¥90 per share, an increase of ¥6 from the previous fiscal year, and repurchased approximately ¥15 billion (approximately 6.6 million shares) of our stock. In FY2022, we are planning our eleventh consecutive year of dividend increases with dividends for the year totaling ¥94. We also plan to repurchase up to ¥30 billion, or 15 million shares, of our stock. Continuous dividend growth remains our aim as we work to improve shareholder value through flexible stock repurchases.

• Enhanced engagement with shareholders and investors is key for the Sekisui House Group to grow sustainably and increase its corporate value. We will continue to proactively conduct investor relations activities and appropriately reflect your suggestions and opinions in our management.

ROE Calculation Method and Breakdown
				ROE	=	Profit	margin	×	Total asset	×	Financial
				turnover ratio	leverage
Fourth Mid-Term		11.5%	5.8%		0.96 times		2.06
Management Plan
	(Final FY result)
Fifth Mid-Term		At least 10%	At least 5%		At least 1.0 time		Approx. 2
Management Plan
	(Target)
		Target level				At least 6%		At least 1.2 times		Approx. 2
ROE
(%)						11.6
12				11.3		10.8	11.5		11.0	10.5
								9.5
10	9.2	9.0								Steadily generate
8
										ROE of 10% or
6			7.9									higher
4
2		Third Mid-Term		Fourth Mid-Term	Fifth Mid-Term
	Management Plan		Management Plan	Management Plan
0		FY2014-FY2016		FY2017-FY2019	FY2020-FY2022
	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022		(FY)
											(Plan)

EPS and Dividends per Share
(Yen)	EPS: Net income	Third Mid-Term Management Plan	Fourth Mid-Term Management Plan	Fifth Mid-Term Management Plan
250	(earnings)		FY2014-FY2016		FY2017-FY2019		FY2020-FY2022
per share									236.99
								227.37
	Dividends per share
200						205.79
				193.06	186.53
					181.18
				175.48
150		130.91
	118.63	120.16
100					77	79	81	84	90	94
				64
50	43	50	54
0
	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022	(FY)
										(Plan)
	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022
	(Result)	(Plan)

EPS: Net income

(earnings) per	118.63	130.91	120.16	175.48	193.06	186.53	205.79	181.18	227.37	236.99
share (Yen)
Dividends per	43	50	54	64	77	79	81	84	90	94
share (Yen)
Dividend payout	36.2	38.2	44.9	36.5	39.9	42.4	39.4	46.4	39.6	39.7
ratio (%)