ES-CON JAPAN Ltd. Q2 FY2026 earnings call

Overall Financial Position

• Total consolidated assets reached ~481 billion yen, up from ~459 billion yen at the end of the previous period, with steady growth in investment. Equity ratio stands at 15.7% currently, with a full-year target of 17-18%.
• Credit rating upgraded one notch from A+ Positive to AA- Stable, and 10 billion yen in unsecured corporate bonds was issued in the first half to fund growth.

5th Mid-Term Management Plan Progress

• The plan entered its second year, with a planned 3-year gross investment of 250 billion yen. 1.5 years into the 3-year period, progress against the full-year fiscal 2026 plan reaches 56.4%, which is on track.
• Stock revenue currently covers approximately 115% of general administrative expenses, delivering high operational safety. Target ROE is maintained at ~14%, against a 10-year average cost of capital of ~7.5%.

Key Project Progress

• Hokkaido (Kitahiroshima): The Tonarie Kitahiroshima commercial complex and Escon Field HOKKAIDO Hotel opened in March 2025, with the hotel exceeding occupancy and average daily rate targets. The 197-unit Le Jade Hokkaido Kitahiroshima condominium project is already sold out, with a new station opening near the ballpark scheduled for summer 2028.
• Nagasaki (Omura): Two condominium buildings at the Shin-Omura Station front development (total 191 units) are fully sold out, with the full development completed and opened.
• Aichi (Chubu Region): As a subsidiary of Chubu Electric Power, Escon has acquired multiple large former factory sites, including 31,000 tsubo of Denso's Ikeda factory site in Kariya, 12,000 tsubo of Kewpie's Koromo factory site in Toyota, and leads commercial and residential development for the 62,000 tsubo Nagoya Racecourse site redevelopment, with Chubu Electric Power as the lead group representative.
• Multiple land readjustment projects are ongoing across the Kansai and Chubu regions, progressing in coordination with landowners and local governments.
• The company won the Good Design Award for the 8th consecutive year, this time for the Techno Farm Fukuroi indoor hydroponic lettuce farm, a joint venture with Chubu Electric Power.

Long-Term Vision 2030

• Focuses on deepening existing core businesses, stabilizing the profit structure, delivering synergies with Chubu Electric Power, and increasing growth through diversification of development types, geographic expansion, global expansion, and entry to new business areas.
• Quantitative targets for FY2030 are 30 billion yen in ordinary profit and 1 trillion yen in total real estate assets, with 600 billion yen held on-balance sheet and 400 billion yen held off-balance sheet via REIT, private funds, and fractional ownership structures.

1. Residential Development Segment: Revenue of 18.409 billion yen, segment profit of 3.173 billion yen. It achieved significant year-on-year revenue and profit growth driven by high-margin projects such as DIAMAS Hayama, accounting for ~52.3% of total consolidated revenue. Acquired land pipeline has planned sales of ~400 billion yen across over 4,700 units, with a geographically balanced regional distribution.
2. Real Estate Development Segment: Revenue of 6.236 billion yen, a year-on-year decline in revenue and profit. As of the end of October, ~32 billion yen in sales contracts have been completed, with a total pipeline of ~300 billion yen in asset stock. Commercial land plots account for 36.9% of asset stock, which are less exposed to rising construction costs.
3. Real Estate Leasing Segment: Revenue of 8.881 billion yen, segment profit of 4.221 billion yen. It achieved year-on-year revenue and profit growth, with segment profit margin improving by 2.4 percentage points, accounting for ~25.2% of total consolidated revenue. Growth was driven by the April 2025 M&A of Shiba Real Estate and strong performance of the newly opened Escon Field HOKKAIDO Hotel. Total leased assets now stand at ~111 billion yen, with high occupancy rates.
4. Asset Management Segment: Revenue of 0.952 billion yen, segment profit of 0.497 billion yen, achieving year-on-year revenue and profit growth, positioned as a key future growth engine.
5. Other Businesses: Revenue of 0.702 billion yen, segment profit of 0.148 billion yen. Includes ongoing Hawaii condominium development investments with returns expected to contribute from the fiscal year after next.

• Full-year fiscal 2026 consolidated operating profit target is 23 billion yen, which represents an upward revision from the previous 20 billion yen target set in the mid-term plan. Next fiscal year's target is further increased to 25 billion yen, up from the original 22 billion yen target.
• The 5th mid-term plan has already had its medium-term profit targets upward revised, and management remains committed to hitting the higher targets.
• The company maintains a progressive dividend policy with a commitment not to cut dividends, targeting a full-year dividend of at least 48 yen per share, matching the prior year's payout.
• Long-term guidance for 2030 targets 30 billion yen in ordinary profit and 1 trillion yen in total real estate assets, with 10% of total profit targeted to come from overseas business.
• Full-year 2026 ordinary profit is targeted at 17.5 billion yen, on track to hit this target as of the second quarter.

• Rising construction costs and lengthening construction completion timelines have reduced capital efficiency for residential development, and profitability beyond FY2028 remains uncertain.
• Holding large volumes of leased assets can tie up capital and reduce liquidity available for flow development business, creating balance sheet risk for smaller independent developers.
• Land prices in Kitahiroshima Hokkaido are rising rapidly, creating cost pressure for future development projects in the region.
• An upcoming market correction or downturn is a foreseeable possibility that the company is preparing for by building a stable business foundation.
• Acquiring M&A targets often faces pricing competition from other buyers, requiring comprehensive assessment of post-acquisition integration before pursuing deals.

Q: The market currently seems to undervalue Escon's stock relative to its performance. What does management believe will improve market perception, and what barriers to understanding exist for outside investors? / A: Management believes the market broadly discounts real estate developers due to concerns about rising construction costs squeezing future profits. Escon already has stable flow income from development plus growing recurring rental income as part of the Chubu Electric Power group. Management plans to grow REIT AUM from the current 70 billion yen to 400-500 billion yen, growing asset management revenue to 5-6 billion yen. Building out this recurring revenue stream will improve investor perception of the company's hybrid business model.

Q: Can you share your outlook on the condominium market, your land acquisition strategy, and is the increase in average unit price in your pipeline driven by more high-end projects? What is the overall approach to your acquisition portfolio now that land readjustment projects are growing in share? / A: The biggest current challenges for residential development are rising construction costs, longer construction timelines, and lower capital efficiency. Current and next year's already started projects are selling well and can maintain solid margins, but 2028 and beyond remains uncertain. The company follows a quality-over-quantity strategy, so average selling prices are rising even as total unit counts stay stable, with more high-end large-unit projects. The company will combine residential development with value-add on income-producing properties and land readjustment to build a balanced stable pipeline, and prepare to capitalize on opportunities during a future market correction.

Q: What is the outlook for M&A activity, especially for corporate real estate (CRE) spin-outs from Japanese manufacturers? / A: Escon receives frequent inbound opportunities for M&A, but many brokered deals face competitive pricing. Management is specifically interested in deals where the seller lacks succession, and Escon as a full-service developer can add value to the portfolio after acquisition. The company will actively pursue these synergetic M&A opportunities going forward.

Q: Is continued growth in Kitahiroshima Hokkaido sustainable given rising land and construction costs, and can you pass higher costs through to buyers? / A: A new station 4 minutes' walk from Escon Field HOKKAIDO is under development and will open in summer 2028, improving accessibility significantly. There is strong unmet demand from customers in Honshu for second homes in Hokkaido to escape summer heat, plus demand from professionals related to the Rapidus chip project. Management sees strong potential to continue developing premium product to meet this demand and maintain profitability, and will not miss these growth opportunities to strengthen the Hokkaido business base.