Sumitomo Realty & Development : Basic Management Strategy and Medium- to Long-term Outlook for “Sustainable Growth” ( 3.1MB )

	May 11, 2023
To whom it may concern:
Company:	Sumitomo Realty & Development Co., Ltd.
Representative:	Kojun Nishima,
	Representative Director and President
Securities code:	8830 (TSE Prime Market)
Contact:	Tetsuya Mogi,
	General Manager of Corporate Planning
	Department

Basic Management Strategy and Medium- to Long-term Outlook for "Sustainable Growth"

Sumitomo Realty & Development Co., Ltd. (the "Company") formulated and announced the Ninth Management Plan in May of last year when uncertainty was still strong over such issues as the COVID-19 pandemic and the situation in Ukraine.

Although the financial environment and other conditions remain unpredictable, COVID-19 pandemic has been finally settled down and economic activity is expected to normalize. Under these circumstances, we restate and summarize our basic management strategy and accompanying medium- to long-term outlook to further increase corporate value as follows, taking into consideration recent changes in social and economic conditions.

1. Earnings Targets (Page 3)
2. 1. We aim to surpass ¥300.0 billion in ordinary profit in the next medium-term management plan, earlier than the medium- to long-term outlook forecast set out last year.
   2. Growth strategy by segment
      Our office building leasing business in Tokyo has proven to be resilient in the face of the COVID-19 pandemic, and we will continue to position it as our solid foundation. In addition to office building leasing business, we will also expand other businesses such as Shinchiku Sokkurisan remodeling, through initiatives of high social significance including contribution to decarbonization, aiming to "surpass ¥300.0 billion in ordinary profit" with the comprehensive strengths of the Group as a whole.
   3. Impact of rising interest rates
      We maintain a fixed interest rate debt ratio of more than 80%, mainly for long-term debt, to prepare for a sudden rise in interest rates. We have also made progress in expanding its equity capital and currently has a high debt rating in the AA zone.
      Even in case interest rates rise in the future, a 0.5% rise in market interest rates would increase interest payments by about ¥2.0 billion annually and this is only 0.5% of the current leasing revenue of ¥400.0 billion; we believe the future increase in revenue will be sufficient to absorb this impact.
      The target of "ordinary profit exceeding ¥300.0 billion in the next medium-term management plan" incorporates the assumption of a 0.5% rise in market interest rates.
3. Profit Distribution Policy (Page 6)
4. 1. We believe that employees are the source of increasing corporate value, and the policy is to first return the fruits of sustainable growth to the Group's highly diverse workforce centered on career hires.
      In the previous fiscal year, in addition to a salary increase based on our unique compensation system that evaluates solely on each employees' ability (job responsibilities) and performance, a special allowance of ¥100,000 for daily living support was paid uniformly to all Group employees at the end of the year in consideration of the rapid rise in prices especially for utilities, and together with an expansion of the fiscal year-endlump-sum payment in conjunction
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with renewing record profit, a total of 7% increase in wages was implemented. We will continue to make generous human capital investments in our employees along with returns to shareholders in line with sustainable growth.

1. 1. Dividends will be "doubled within 7 years, to ¥100 per share" from the current ¥52 per share.
      Through "sustainable dividend increases in line with profit growth," we will reward our shareholders for their long- term support of the Company as we aim to increase our corporate value through sustainable growth.
2. Investments for Growth (Page 8)
3. 1. Investment in leasing office assets with gross floor area of over 700,000 tsubo (approx. 2,300,000 square meters) in central Tokyo mainly comprising redevelopment, is making steady progress.
      In the previous fiscal year (ended March 31, 2023), Sumitomo Fudosan Tokyo Mita Garden Tower, one of the Company's largest buildings with gross floor area of 60,000 tsubo (approx. 200,000 square meters), and Sumitomo Fudosan Shinjuku First Tower with gross floor area of 30,000 tsubo (approx. 100,000 square meters), were completed.
      We will continue to steadily promote redevelopment projects underway in Ikebukuro, Yaesu, Tsukiji, Roppongi, and other locations in central Tokyo, and we will strive to further expand our earnings base and increase corporate value by completing and putting these projects into operation.
   2. Overseas Investment (India)
      In addition to expanding the earnings base centered on the leasing business in central Tokyo, the Company is making full-fledged overseas expansion in India, with our "Tokyo office building leasing business" model of acquiring the development site independently, developing, leasing, managing and owning buildings by ourselves for the long term.
      In November last year, we acquired our second office building site in Mumbai, the economic center of India. Together with the first acquired site, we are promoting the office building development with gross floor area of approximately 80,000 tsubo and an investment scale of nearly ¥200.0 billion. We have already started underground construction for the first property, and we are aiming to complete construction of both properties during the next medium-term management plan.
      Starting with these developments, we first invest ¥500.0 billion in India, taking into consideration various property types and business models in addition to the long-term ownership of office buildings, which will increase 10% of domestic ordinary profit of ¥300.0 billion in Japan, or ¥30.0 billion, through overseas operations as our source of further growth.
4. Governance (Page 10)
5. 1. Diversification of the Board of Directors
      We have decided to make changes to its Directors and Corporate Auditors due to the expiration of the terms of office of all Directors (previously announced in February). The number of Outside Directors will be increased from the current two to three, meeting the one-third ratio of Outside Directors recommended in Japan's Corporate Governance Code, and a total of two females, one Director and one Corporate Auditor, will be appointed.
   2. In light of future trends in the review of corporate takeover rules by the Ministry of Economy, Trade and Industry and the Financial Services Agency, we will consider abolishing the "advance warning takeover defense measures against malicious takeover action" that we have introduced.
   3. Progress was made in reducing strategic shareholdings, and the ratio to shareholders' equity at the end of the previous fiscal year was 16.6%, down two percentage points year on year, relative to the numerical target of 10% or less by FY2030 at the latest.
      We will continue to examine the significance of the strategic holding of shares individually, and we will proceed to sell shares that are deemed to have lost their significance to continue holding as subject to reduction.
6. Capital Efficiency (Page 12)
7. 1. In the previous fiscal year, we achieved ROE of 9.4%, well above the cost of capital.
      Going forward, we will continue to maintain ROE that exceeds the cost of capital while balancing financial stability, such as the shareholders' equity ratio, with enhanced profitability.

For details, please refer to the following pages.

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1. Earnings Targets

(1) Aiming to surpass ¥300.0 billion in ordinary profit in the next medium-term management plan

With top priority placed on achieving objectives of the medium-term management plans it has formulated every three years, the Company has increased its corporate value as a result of having steadily implemented the plans. The Company has executed eight management plans, and has achieved increases in ordinary profit in 23 fiscal years, excluding the three fiscal years under the global financial crisis and the COVID-19 pandemic.

In the fiscal year ended March 31, 2023, the first year of the Ninth Management Plan, we achieved record ordinary profit for the second consecutive year and record profit for the tenth consecutive year, making a good start toward achieving the goals for the cumulative three-year period of the medium-term management plan.

For the fiscal year ending March 31, 2024, we aim to renew record-high profits with expecting higher profits in all business segments of the mainstay office building leasing (Leasing segment), condominium sales (Sales segment), housing (Construction segment) and Brokerage segment.

At the time of the announcement of the Ninth Management Plan in May last year, when the business environment outlook was uncertain due to the COVID-19 pandemic and the situation in the Ukraine, the Company has set its long- term vision to achieve ¥300.0 billion in ordinary profit by FY2030 at the latest through the contribution of earnings from operations of new buildings to be completed. However, the outlook for each business segment including the hotel and multipurpose hall businesses, which were affected by the COVID-19 pandemic, has improved compared to a year ago, and surpassing ¥300 billion in ordinary profit is now expected to be achievable during the next medium-term management plan (2026-2028), earlier than initially expected.

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(2) Growth strategy by segment

Our office building leasing business in Tokyo has proven to be resilient in the face of the COVID-19 pandemic, and we will continue to position it as our solid foundation. In addition to office building leasing business, we will also expand other businesses such as Shinchiku Sokkurisan remodeling, through initiatives of high social significance including contribution to decarbonization, aiming to "surpass ¥300.0 billion in ordinary profit" with the comprehensive strengths of the Group as a whole.

Leasing

For office buildings, the trend toward increasing floor space is becoming apparent against the backdrop of tenants' staff returning to office and increased hiring as economic activity normalizes. By steadily capturing these tenant companies' needs, we will maintain and improve the profitability of existing buildings and continue on the trajectory of long-term profit growth through operation of new buildings to be completed with gross floor area of over 700,000 tsubo.

The "La Tour" premium leasing residences series has grown to a scale of 4,000 units and has been well-accepted for its hospitality and service. We will continue to improve our brand value and further extend our strong performance.

In the hotel and event hall business, we are striving to restore the profitability to the pre-COVID-19 levels during the current fiscal year, and aiming for further growth in the next medium-term management plan and beyond with the contribution to earnings from the full-scale operation of Haneda Airport Garden including flagship hotels with a total of 1,700 guestrooms, directly connected to Haneda Airport, which fully opened in January.

Sales

For condominium sales with firm demand under the low interest rate environment, more than 90% of the 3,000 units planned to be delivered in the current fiscal year were already sold, and sales activities including those for the next fiscal year and beyond are making steady progress as planned.

Although rising construction costs continuously needs to be addressed, we have already secured the necessary amount of land for condominiums to be delivered by the next medium-term management plan amid continuing intensified competition for land acquisition. We will maintain our policy of focusing on profit with controlling the pace of sales, rather than chasing volume of units or sales, and will also maintain the high level of profit scale that we have achieved in previous medium-term management plans.

We are promoting development that contributes to decarbonization with the adoption of the "ZEH-M Oriented" high environmental performance as the standard specifications for all condominiums we design from the Ninth Management Plan.

Construction

In Japan, 90% of the over 50.0 million existing houses do not meet the latest energy-saving standards, posing a major social challenge for decarbonization. Our "Shinchiku Sokkurisan" remodeling business has been well received for its "high-insulation remodeling" that achieves high energy-saving performance, and the percentage of orders for "high- insulation remodeling" for full remodeling has reached 30% at present (target of 20% for the Ninth Management Plan).

In custom homes, we have launched the sale of "SUMICA" with the latest ZEH (Zero Energy House) specifications as standard; it combines the solar power generation service "SUMIFU × ENEKARI," which offers the benefits of solar power generation services for peace of mind at zero initial cost simply with a fixed monthly service fee, and high thermal insulation specifications, and the ZEH ratio is now increasing to 80% (target of 60% for the Ninth Management Plan).

In both businesses, we aim to achieve record-high profit by increasing orders through appealing to customers for high disaster prevention and environmental performance, while focusing on cost control, minimizing the impact of material price fluctuations.

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Brokerage

Sumitomo Fudosan Real Estate Sales Co., Ltd. is one of the industry-leading company mainly with transactions of existing housings, focusing on spreading its "STEP" brand, while operating Mansion Plaza brokerage offices which exclusively handle high-class condominiums, and launching STEP Auctions, an industry-new service that offers fairer and more transparent transactions under the principle of "Customer First." This new service has been well-accepted by many sellers.

Following the discontinuation of distributing insert flyers, in January we completely terminated our operations of sending direct mail (DM), which had been sent to customers using registered information, from the perspective of protecting personal information. We, instead, have shifted our focus to an advertising strategy utilizing the Internet, promoting efficient advertisement by paperless operations and digital transformation (DX).

While the supply of new housing is on the decline, the existing housing market, which is being revitalized by an increase in high-quality stock, is expected to grow, and we will strive to expand our market share by strengthening Group collaboration with our other businesses such as custom homes and remodeling, and condominiums that we have sold in the past, as well as further pursuing customer-oriented services.

(3) Impact of rising interest rates on earnings is expected to be negligible

Preparing for the recent global inflation and the accompanying rise in interest rates is an important management issue for the Company as a real estate company with large up-front investments.

Our financing policy is to manage our finances conservatively, focusing on long-term debt with 10-year maturities, maintaining a fixed interest rate ratio of over 80%, and diversifying refinance dates (interest-bearing debt as of the end of the previous fiscal year was approximately ¥3.9 trillion, with the long-term ratio at 95% and the fixed interest rate ratio at 86%).

In addition, the shareholders' equity ratio, which indicates financial soundness, has improved every year, almost doubling to 28% from 15% 10 years ago, and the debt rating, which indicates creditworthiness of bonds and other financial assets, has improved to the AA zone rated by both Japan Credit Rating Agency, Ltd. (JCR) and Rating and Investment Information, Inc. (R&I), and we have earned a high evaluation for our financial stability as well as our profitability.

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