3454.T

• Core Management Principles

  • The company prioritizes gross profit over revenue as its most important performance metric, as real estate transactions have highly variable cost ratios across properties, and gross profit better reflects actual earning power that contributes to corporate value.
  • The company allows period-over-period earnings volatility to prioritize maximizing long-term shareholder value; it does not sell properties with upside potential early to smooth period earnings, and adheres to the discipline of selling only when a property's latent value is fully realized to maximize returns.

• Investment Banking Business Operations

  • The company focuses on carefully selected small-to-medium sized assets with stable supply and demand balance. After acquisition, it implements value-up measures including optimal tenant mix and facility upgrades to continuously improve net operating income (NOI). Properties are sold at the optimal market timing, and proceeds are recycled into new high-quality projects to continuously improve portfolio quality. Other investments are made in small, staged tranches focused on venture companies.

• HNF (Higashi Nippon Real Estate) Tohoku Regional Strategy

  • HNF, the company's subsidiary focused on the Tohoku region centered in Aomori, leverages a dense local information network and strong relationships with local governments and real estate industry players to gain early access to off-market, pre-public high-quality properties before they are available through general brokerage. High off-market deal flow and a high volume of referral deals are core competitive advantages that allow the company to build a high-yield, profitable portfolio in a low-competition market.

• ESG and CSV (Creating Shared Value) Strategy

  • The company frames solving social issues as a core differentiation from competitors and a core growth strategy that delivers sustained high profitability. The primary example is revitalizing regional economies: the company actively invests in regional areas rather than concentrating capital in the Tokyo metropolitan area, redefines and revitalizes regional properties that face challenges such as lack of successors and limited access for outside investors. This creates economic circulation in regional regions while allowing the company to capture high yields in a low-competition market, aligning regional problem solving and investment return maximization rather than treating these goals as a tradeoff.

• Rental Real Estate Portfolio Update

  • The rental portfolio has a total acquisition price balance of 64.8 billion yen across 89 properties, maintaining a high NOI yield of 7.4%. Both balance and property count decreased this period due to accelerated property sales, but multiple new acquisition projects are already underway to seed future earnings. Unrealized gains (difference between market value and book value) on rental properties totaled 17.7 billion yen, a 3.4 billion yen decrease year-over-year, driven by the realization of gains through property sales. This decrease is a positive indicator of a normally functioning investment cycle that locks in returns, and the company will continue this cycle.
  • The portfolio is diversified across major cities nationwide, not concentrated in Tokyo. Investments are made across asset types including office, commercial, hotels and ryokans, with no rigid asset allocation requirements; the company flexibly adjusts investments based on market and industry changes. The proportion of hotel assets decreased this period following the sale of hotels acquired during the COVID-19 pandemic.
  • The rental portfolio is structured to balance fixed and variable rent: 34.6% of rental revenue is variable rent (primarily hotels), which directly captures upside from inflation and economic growth through increases in average daily rates, offsetting the risk of eroding real value from fixed rent that cannot be adjusted until contract renewal. Fixed rent from office and residential assets covers fixed costs including interest payments, limiting downside risk, while variable rent captures unlimited upside. This strategy balances risk management and return maximization.

• Funding Strategy

  • The company primarily uses loans to acquire real estate, and sets loan terms to 10+ years in principle to reduce refinancing risk. It primarily uses variable rate loans but uses interest rate swaps to fix a portion of interest rate exposure to reduce interest rate fluctuation risk.

• Capital Cost and Valuation Approach

  • The company's profit structure is built on stable, steadily growing rental income, with more volatile capital gains from property sales layered on top. Management acknowledges that the company's price-to-book ratio (PBR) has traded below 1x while TOPIX has trended upward, and accepts this market valuation seriously. Analysis finds the gap between high period ROE and low PBR is driven by a persistently high cost of capital: the stock market assigns a higher risk premium to the company due to uncertainty from earnings volatility driven by variable property sale timing. Management acknowledges that more work is needed to build market understanding of the repeatability of the company's earnings.
  • The company justifies allowing earnings volatility based on two core characteristics of real estate: 1) Irreversibility: Each property is highly unique, and cannot be repurchased on the same terms once sold, so early premature sale discards potential future gains. 2) Latent value realization through matching: A property's value jumps sharply when matched with the optimal buyer that values it most. The company invests time and effort to achieve this optimal match, which requires holding period adjustments that cause annual earnings volatility, but this approach maximizes latent value and long-term shareholder value.
  • The company continuously monitors each property by comparing expected return to cost of capital during the holding period. If a property's expected return falls below cost of capital (meaning it will no longer generate the return shareholders expect), the company will immediately sell and replace the property regardless of whether it has unrealized gains. This combination of a philosophy that maximizes returns and discipline that protects capital efficiency controls volatility while working to continuously improve corporate value.

• Shareholder Return Policy

  • The company uses return on equity (DOE, Dividend on Equity) as the core metric for dividends, targeting a 2.0% DOE to deliver stable, sustained dividends with an annual year-end dividend payout. The company recognizes sustained growth in shareholder equity as a core indicator of corporate growth, driven by the cycle of earning returns from rental income and property sales, reinvesting into higher quality assets, and growing the overall portfolio.

• For the FY2026 November period, the company will maintain a cautious and flexible stance on property acquisition and sale, continuing to closely monitor market trends given ongoing uncertain global and domestic economic conditions including interest rate movement, inflation changes, and monetary policy shifts.
• The full-year guidance for FY2026 November is: 17.7 billion yen in revenue, 2.9 billion yen in ordinary profit, and 2.6 billion yen in net income attributable to parent shareholders.
• Management notes that the 2.9 billion yen ordinary profit guidance excludes planned gains from the sale of certain fixed-asset properties, which will be recorded as special profit below ordinary profit per accounting rules. To correctly evaluate the total economic value the company generates, investors should focus on net income that includes this special profit, which explains the high ratio of net income to ordinary profit in the guidance that reflects the impact of strategic asset rotation.
• A year-end dividend of 37 yen per share is planned for FY2026 November, consistent with the 2.0% DOE target.
• The company will maintain the First Brothers Premium Premium Shareholder Benefit Club, which awards points based on shareholding quantity and holding period that can be redeemed for items including Amazon gift cards to incentivize long-term shareholding and thank shareholders for their support.

1. Investment Banking Business (Rental Real Estate Investment): Gross profit of 3.58 billion yen, representing a 16.4% increase year-over-year. Within this segment, rental revenue reached 7.67 billion yen with 3.5 billion yen in gross profit, and property sales generated 9.44 billion yen in revenue with 3.86 billion yen in gross profit. This segment contributes approximately 45.7% of the company's total gross profit.
2. Investment Management Business: No new fund acquisitions were completed in the period. A managed property was sold, which reduced the total entrusted asset balance but allowed the company to earn a sales fee and asset management fees.
3. Facility Operation Business (Hotel Operation): Gross profit of approximately 0.32 billion yen, representing a 25.2% increase year-over-year. Revenue grew year-over-year supported by inbound demand, but an operating loss was recorded at the operating profit level due to non-cash accounting expenses including goodwill amortization from M&A. A special loss was recorded in Q4 from impairment of fixed assets and goodwill related to a subsidiary in this segment. This segment contributes approximately 4.1% of the company's total gross profit.

Consolidated total gross profit across all segments was 7.83 billion yen, a 53.5% increase year-over-year. Ordinary profit was 4.43 billion yen, a 102.1% increase year-over-year, and net income attributable to parent shareholders was 1.74 billion yen, a 23.5% increase year-over-year.

• The Bank of Japan's elimination of negative interest rate policy has pushed long-term interest rates higher. Benchmark rates for variable rate loans (TIBOR and short-term prime rate) have risen gradually, though they have stabilized recently. Management does not take a complacent view of future interest rate movement, and now more strictly monitors the profitability of each individual property, incorporating the possibility of further interest rate increases into analysis.
• Earnings are inherently volatile period-over-period due to the company's investment strategy of holding properties until optimal sale timing to maximize value, which creates uneven timing of capital gain realization across fiscal periods. This volatility has led to a higher risk premium and lower stock market valuation than the company's underlying earning power would support.
• The investment management business faces headwinds from investor caution driven by rising interest rates and weak overseas real estate market conditions, leading to a lack of new fund acquisition activity in the reporting period.
• In summer 2025, facility operation business faced temporary negative impacts from reputation damage related to unfounded earthquake prediction rumors spread on social media, which caused demand declines at some properties, though the company was able to offset this impact with dynamic pricing and optimized marketing channels.
• Unrealized gains on the rental portfolio decreased 3.4 billion yen year-over-year due to accelerated property sales, though management frames this as a positive result of the investment cycle rather than a risk.

No Question and Answer section was included in the provided transcript.