REALGATE INC. Q1 FY2026 earnings call

Quarterly Financial Performance

• Total revenue reached 38% of the full-year plan, and operating profit reached 62% of the full-year plan, which is on track as scheduled. The first quarter saw a strong start to full-year plan achievement.
• All key metrics (revenue, operating profit, net income) increased year-over-year, with operating profit increasing 675 million yen year-over-year.
• The sale of one property boosted the company's equity capital ratio on the balance sheet.
• Selling, general and administrative expenses increased due to an 8% base pay raise and incremental personnel costs.

Operational Updates

• Two new properties opened in the first quarter: THESTEPS (with an attached hotel) and FURAM SANGUBASHI. Both are already near full occupancy and have entered the revenue contribution phase.
• Three new properties were acquired: 2 owned properties and 1 master lease property, with one of the new properties expected to contribute revenue starting in the second half of the fiscal year.
• The company has already started work on new hotel and urban shopping mall projects, and plans to pursue further growth through joint ventures with major developers and fund formation.

Mid-term Management Plan (2028)

• The plan targets approximately 40% year-over-year operating profit growth in the 18th fiscal period, followed by 30%+ annual growth for the subsequent two years, working toward a long-term target of 5 billion yen in operating profit. The first quarter had a very strong start, and the company is working to achieve the 5 billion yen target ahead of schedule.
• To meet the plan targets, the company expects to open 4 hotel properties totaling approximately 50 rooms.
• The newly announced 100-Year City & Building Project will launch first with 3 company-owned properties, followed by large-scale revitalization of older buildings through joint ventures with major developers to advance the mid-term plan.

The company operates two main revenue segments: flow-type revenue and stock-type revenue. For the first quarter:

• Flow-type sales: Recorded large contributions from one completed property handover and one completed property sale, with the majority of full-year flow gross profit recognized in the first quarter. This segment drove strong quarterly profit growth.
• Stock-type sales: Experienced a temporary decrease in the first quarter due to strategic terminations and business format changes of properties, and the impact of selling one property in October 2025 which affected two months of revenue. However, stock gross profit still increased year-over-year, and stock gross profit continues to grow steadily and covers all of the company's fixed costs. As of the end of December 2025, the company holds 12 owned properties with a total floor area of 13,192 square meters, expected annual rent of 1.2 billion yen, and an estimated property value of 24 billion yen at a 5% assumed yield. Total accumulated properties across the portfolio reached 76 units, a net increase of 1 unit from the previous quarter after adding 3 new properties and closing 2 existing projects.

• Management maintained the full-year 2026 September term target of 1.47 billion yen in operating profit, representing 40.9% year-over-year growth. The company confirmed the first quarter progress is on schedule and full-year target achievement remains on track with no issues expected.
• For the first half of the fiscal year, management expects revenue to reach ~56% of the full-year plan and operating profit to reach ~66% of the full-year plan. The second quarter will see no flow gross profit recognition and a large increase in upfront investment, so operating profit growth will be limited, but this is all within plan and does not impact full-year results.
• For full-year 2026 September term, the company targets 95%+ annual occupancy for stock-type revenue, 8 new property acquisitions (3 already completed as of Q1), 2 owned property sales (1 completed, 1 already contracted for Q4), and 2 design/construction contracts (1 handed over, 1 scheduled for handover in Q4), all of which are progressing as planned.
• The company does not plan to issue an upward revision to the full-year guidance at this time, and will focus on delivering results exceeding the current plan.

• Unforeseen events such as major natural disasters could delay construction of the remaining Q4 design/construction project, which would shift flow gross profit recognition to a future period, though this risk is considered low outside of extreme events.
• While rising property prices in the current strong real estate market make large transactions more challenging, the company's pipeline has sufficient deals to meet its full-year acquisition target, and the company can leverage its expertise in revitalizing existing properties to outperform in the current market where new construction is already difficult due to rising construction costs.
• Potential new regulations requiring front desk facilities for small-scale inn operations in residential areas of Shibuya would not impact the company, as most of the company's hotel properties are located in commercial areas, and the company would avoid new small-scale hotel projects in affected areas if regulations are implemented, with no impact on already opened properties.
• There is minor temporary volatility in occupancy as the company pursues rent increases during unit turnover and handles large unit terminations, but the company does not view this as a material risk as long as occupancy remains above 95%, which it currently is.

Q: Occupancy has decreased slightly. Does this have an impact on earnings?

A: The decrease in occupancy is only around 0.2%. We are actively negotiating rent increases, so there is no impact on earnings at all. Going forward, there will be some minor occupancy fluctuation as we handle large unit terminations and continue rent increase negotiations, but this is intentional to grow earnings, and there is no cause for concern as long as occupancy remains above 95%, which it currently is.

Q: Why is Q2 operating profit guidance lower than Q1?

A: There will be no flow gross profit recognized in Q2, and we plan to spend more on upfront investment than we did in Q1. This is why Q2 operating profit will be lower than Q1, but this is all planned and expected. We are working to avoid unplanned upside to profit that would come from underinvesting, which is not our goal.

Q: Did the Q1 property sale impact stock-type sales?

A: The property sale settlement was in October 2025, so it impacted two months of revenue (November and December 2025), which is why we see a current impact. Combined with the impact of strategically terminated properties in the prior year, this is why stock-type sales were flat between Q4 of the prior fiscal year and Q1 of this fiscal year. However, this is a temporary impact from portfolio rebalancing, and earnings are steadily growing as we add new properties. Stock sales are expected to recover starting from Q2 this fiscal year.

Q: Why did master lease sales decrease from the previous quarter, and is this temporary?

A: The main drivers of the decrease are exactly the two factors I already mentioned: the Q1 property sale and the strategic property terminations last fiscal year. This is a temporary change, so there is no reason for concern.

Q: What is the scale of the recent base pay raise and personnel increase, and what are the plans going forward?

A: We implemented an approximately 8% base pay raise. We plan to add around 4 employees per quarter, which equals around 20 new employees per full year.

Q: Why did taxes and public dues increase in selling, general and administrative expenses in Q1?

A: Q1 recorded large operating profit, so the increase comes from higher taxes on operating profit and personnel costs, which is a natural result of stronger performance.

Q: Is there a risk that the Q4 flow gross profit could be delayed to a future period?

A: The design/construction flow gross profit is progressing on schedule for completion, and the property sale flow gross profit is already under contract, so there is no material risk of the amount changing. The only remote possibility of delay would be a major natural disaster like a large earthquake that halts construction, but if there is no disaster, everything will go as planned.

Q: What percentage of properties have completed rent increases, and how far along are you?

A: Rent increases are an ongoing process, they never finish. We rent units on approximately 2-year contracts per unit, so we always implement rent increases during turnover and termination events. We typically request and implement 5% to 10% rent increases during turnover, and while rent can decrease during an economic downturn, this is a permanent ongoing practice.

Q: You added a new property in Setagaya Ward. Have you changed your acquisition strategy that was originally centered on Shibuya, Minato, and Meguro Wards?

A: Our basic strategy of focusing on Shibuya Ward has not changed. This new property is near Ikejiri-Ohashi in Setagaya, and we already have multiple properties near Ikejiri-Ohashi that crosses into Meguro Ward, which has solid profit potential, so that is why we acquired it. We will gradually expand into nearby areas if attractive opportunities arise, so this is not a strategy change.

Q: Is the IP Hotel announced in May 2025 included in the 4 hotels scheduled to open by 2027 under the mid-term plan?

A: We are in discussions to include IP Hotel in the 4-hotel plan, and we expect to share some progress on this within this calendar year.

Q: Is it correct to understand that current revenue comes almost entirely from operating properties, and acquired projects that are not yet open do not contribute to current revenue?

A: Strictly speaking, operating properties are already open and generating rent revenue, so rent revenue on the income statement comes entirely from operating properties. However, acquired projects can still impact current earnings: we may have negative earnings from fees related to acquiring the property, or positive earnings from construction contracting for the project, so they do impact current results to some degree.

Q: Can you share more details on the joint venture with major developers for large-scale old building revitalization, including the timeline and plans?

A: We announced this initiative as part of the 100-Year City & Building Project, where we have said we will form JVs with major developers to transform large urban areas. We have been negotiating this project for a long time, and we expect to be able to make an announcement very soon, so please stay tuned.

Q: When do you plan to implement shareholder returns like dividends and shareholder benefits?

A: As we have previously shared, we will start considering shareholder returns after net income breaks through 1 billion yen, and this policy has not changed.

Q: What impact will stricter regulation of minpaku (private vacation rentals) have on your business?

A: We do not operate minpaku; our accommodation business is all licensed inn business, so minpaku regulations do not affect us at all. While there is discussion of new rules requiring front desks for small inns in residential areas of Shibuya, we would not pursue new small hotel projects in affected areas if the rules pass, and there is no risk of already opened properties losing their licenses. Most of our properties are in commercial areas anyway, so we expect no material impact.

Q: Do you plan to upgrade your full-year guidance?

A: We do not plan to issue an upward revision at this time. Stock gross profit is steadily accumulating with fixed contracts, and flow gross profit is all already contracted so there is very little volatility. While there is a possibility that profit could be up to 1 billion yen higher than planned if we fail to acquire all planned properties and thus do not spend the budgeted upfront investment, that is not a desirable upside, so we are keeping our current plan and working to deliver results exceeding the existing guidance.

Q: What properties are included in the 7 operating owned properties listed in your disclosure materials?

A: They are properties 1, 3 through 8 on the owned property list as of the end of December 2025. The Nakameguro 1-chome Redevelopment Project (property 6) is included even though it is not fully completed, because it already collects rent from existing tenants, so it is categorized as operating.

Q: What is your approach to financing amid rising interest rates? Will you still rely primarily on borrowing, or will you consider equity financing?

A: Borrowing is our default approach, but we cannot borrow indefinitely, so capital increases and third-party allocations are also on the table as options. We are also considering business expansion through JVs and fund formation that requires less balance sheet capacity. There are no specific plans finalized at this point.

Q: Previously you said you would not do a capital increase until the prior mid-term plan ending September 2027 was complete. Does that still hold after the mid-term plan was rolled over to 2028?

A: The prior mid-term plan covering September 2025 to September 2027 targeting 30% annual operating profit growth has already concluded. The new Mid-term Management Plan 2028 targets further growth, so the old commitment no longer applies. Under the new plan, we still prioritize debt financing like borrowing, but we always consider equity financing as an option to strengthen our capital base. There are no concrete plans at this time.

Q: What is your outlook for property acquisitions this fiscal year? Is it getting harder to acquire properties in the current market?

A: It is more challenging to acquire very large properties, but we have a full-year target of around 8 properties, and we already acquired 3 in Q1, so progress is good. Content is what matters most. While it is true that the real estate market is strong and property prices are rising, construction costs are also rising which makes new construction difficult, and that creates more opportunities for us to leverage our revitalization expertise to source good deals. We only announce contracted properties, but we already have a large pipeline of deals, and we expect to exceed our 8-property target this year.