Hulic : Integrated Report 2024 PDF10,743KBNEW

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URL: https://www.hulic.co.jp/en/

Integrated Report 2024

Publication of Integrated Report 2024

CONTENTS

Takaya	Saburo
Maeda	Nishiura
President,	Chairman,
Representative Director	Representative Director

Corporate Philosophy, Sustainability Vision and Medium- and Long-term Management Plan

About Hulic Group

History of Hulic Group

Profile of Hulic

Message from the Chairman,

Representative Director

Message from the President,

Representative Director

Financial and Non-financial Highlights

Hulic Group's Value Creation Story

Hulic Group's Value Creation Process

Special Feature Hulic's Story of Sustainability Materiality Assessment

KPIs/Targets and Results for Non-finanial Information

2 Business Strategies

Progress of Medium- and Long-Term Management Plan (2020-2029) and Medium-Term Management Plan (2023-2025)

4	Message from the Executive Officer in Charge of
Finance Financial Strategy and Capital Management

6 Hulic Growth Strategies by Business Segment

8 Sustainability Initiatives

18 Contributing to Actions for Mitigating Climate Change and Reducing our Environmental Impact

24 Providing Safe, Secure Buildings and Spaces

Collaborating with Business Partners and Local Communities

Promoting Diversity and the Development

26 of Professional Human Resources

1. Maintaining and Improving Governance Trusted by Stakeholders

36 Financial and Corporate Information, etc.

Financial Information

Stock Information

Corporate Information

External Evaluations

Third-party Assurance

38

42

46

56

64

66

71

74

88

98

99

100

101

About the Integrated Report

Financial Information		Non-financial Information

Integrated Report 2024

The Report explains our initiatives for the sustainable growth of the Hulic Group ("the Group") with

financial and non-financial information.

• Summary of Consolidated Financial Results, Investor		• Initiatives for Sustainability
Presentations		https://www.hulic.co.jp/en/sustainability/
• FACTBOOK		• Sustainability Book
• IR Information		• News Release
https://www.hulic.co.jp/en/ir/

Editorial Policy

For more than half a century, Hulic Co., Ltd., ("the Company") has been in a real estate leasing business focused on office buildings in central Tokyo. With the corporate philosophy of "for the realization of a society full of safety, peace of mind and trust, and for the continuous improvement of corporate value," we have been pursuing growth of our company as well as realization of a sustainable society.

• This report explains the Company's value creation process and how the strengths we have cultivated feed into increasing medium- to long-term corporate values as well as social value. It also outlines Medium-Term Management

Plan (2023-2025) and topics such as initiatives in the field of sustainability to support our growth.

• This report references a range of materials to ensure that the editorial process and the content meet our standards. These reference materials include the International Integrated Reporting Framework recommended by the International Financial Reporting Standards (IFRS) Foundation and the Guidance for Collaborative Value Creation 2.0 issued by Japan's Ministry of Economy, Trade and Industry.
• We would like to use the Report as one of our communication tools with our shareholders, investors, and our stakeholders.

The aims of the Report are to facilitate a multi-facet understanding of the Group's sustainable growth among investors and other stakeholder groups as well as to create new opportunities for dialogues. In issuing the Report, it has been reviewed by the Board of Directors. This report also includes messages from executive officers that convey Hulic's management strategy. The Chairman and Representative Director provides a general overview of management strategy, the President and Representative Director explains fiscal year materials as well as the Medium-Term Management Plan, and the Executive Officer in Charge of Finance covers Hulic's financial strategy. Financial and sustainability related information which we were unable to present in the Report from space constraints are available on our website.

Reporting Boundary	Time of Issuance
Hulic Co., Ltd. and its Group companies	June 2024
Reporting Period	Reference Guidelines
Fiscal Year 2023 (from January 1, 2023 to December 31, 2023)	International Integrated Reporting Framework (IFRS Foundation)
Information as of December 31, 2023 in principle unless otherwise noted.	Guidance for Collaborative Value Creation 2.0 (Ministry of Economy, Trade and Industry)
Notwithstanding the foregoing, included some activities and information after	The Japanese Ministry of the Environment "The Environmental Reporting Guidelines (2018)"
GRI (Global Reporting Initiative) "The GRI Standards 2021"
January 1, 2024.

Hulic Co., Ltd. Integrated Report 2024

1

Corporate Philosophy and Basic Stance

Corporate Philosophy

For the realization of a society full of safety,

peace of mind and trust,

and for the continuous improvement of corporate value

	Basic Stance
Ideal	We aim to be a company that grows each day by utilizing stable corporate
Company	infrastructures.
Corporate	We always conduct business from a new viewpoint in an effort to increase our corporate
Culture	value.
Stance to	We are committed to providing optimal products and services to customers, placing
Customers	customer satisfaction as our top priority.
Ideal	Each of Hulic's employees strives to provide high quality value as a professional.
Employees

Medium- and Long-Term Management Plan (2020-2029)

Sustainability Vision

We aim to pursue realization of a sustainable society and continued growth of Hulic by

putting our Corporate Philosophy into practice.

We commit to take a faithful approach to all of stakeholders. To this end, we pursue initiatives based on a three-point Vision.

• We create shared value with our society by actively engaging with the environmental issues through our corporate activities.
• We lay the foundation for the future by providing peace of mind to our customers through offering our high value-added products and services.
• We take compliance seriously, respect human rights and strive to perform transparent corporate activities based on our high ethical standards.

Financial Targets	Non-financial Targets
(see details on pp. 38-39, Medium- and Long-Term Management Plan)	(see details on pp. 36-37, KPIs/Targets and Results for Non-financial Information)

"Driving innovation" and "Accelerating progress" as our motto, we continue

Target Profile to steadily increase our corporate value through evolving ourselves (FY2029)

Basic

Strategies

1 Further evolve the

business model and

Business

2		3		Create unique new
	Strengthen
	business domains

flexibly in response to changes in macro environment

Strike a balance between P/L Growth, B/S Soundness, Profitability, and

restructure the leasing

portfolio

development and value-	and improve Group
added businesses
strengths

Management Infrastructure

Basic Policy

Productivity (efficiency) at a high level and achieve further growth through dynamic transformation backed by overwhelming speedy decision- making

4			5
	Strengthen the management			Implement management that emphasizes
	foundation and implement stringent risk			sustainable co-creation and co-existence
	management			with society

2

Hulic Co., Ltd. Integrated Report 2024

Hulic Co., Ltd. Integrated Report 2024

3

History of Hulic Group

A Real Estate Company with Over 60 Years of Growth and Achievements

In 1957, Hulic (then called Nihonbashi Kogyo) was established to manage the branch buildings and other properties of the former Fuji Bank (now Mizuho Bank). In 2007, the Company made a new start to mark the 50th anniversary of being established by changing the corporate name to Hulic Co., Ltd. ("the Company"). Then in 2008, we became a public company by listing our shares on the First Section of the Tokyo Stock Exchange (current Prime Section).

We have steadily strengthened the business base with a unique growth strategy centered on real estate development, reconstruction, investments, and M&As.

Toward further growth by JPY180.0 Bln

"driving innovation and accelerating progress"

				In 2023
				• Made Hulic Biz Frontier Co., Ltd., a subsidiary	150.0
										144.0
			137.4
In 2017		In 2019	123.2
• Established Hulic Property		• Made Nippon View Hotel*	109.5
Solutions Co., Ltd.		CO., Ltd., a subsidiary

About Hulic Group

Consolidated Ordinary profit (Unit: JPY bln)

■ Initial forecast

■ Results (difference over initial forecast) ■ Plan/targets

In 1957

In 2010

In 2012

• Completed Hulic head office building

• Spun off insurance agency business as Hulic Insurance Service Co., Ltd.

• Established Nihonbashi Kogyo Co., Ltd.

• Merged with Senshu Shoji Co., Ltd. and Fuyo General Development

• Merged with Shoei Co., Ltd. (a real estate

Started property management for

and Finance Co., Ltd. (real estate leasing companies)

company)

the former Fuji Bank (now Mizuho

In 2013

Bank) branch

In 2008

buildings and

• Established Hulic Reit Management

• Listed shares on the First Section of

insurance

Co., Ltd. [full-scale entry into J-REIT

the Tokyo Stock Exchange

agency business

In 2011

business (real estate investment

business)]

• Established Hulic Hotel

34.3

Management Co., Ltd.

25.9

In 2007

20.0

16.8

12.3

• Changed corporate name 10.9

10.9

to Hulic Co., Ltd.

Financial

Crisis

Great East

Japan

Earthquake

In 2015

• Merged with Simplex Investment Advisors Inc. (a real estate company)

51.4

42.5

		In 2018			95.6		Medium-Term
					Management Plan
		• Made HULIC FUFU Co.,
			Ltd., a subsidiary								Phase II (2023-2025)
			84.6
72.5
61.8

Spread of COVID-19

Hulic Group's Value Creation Story

Strategies

1957

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2029 Fiscal Year

Business

Long-Term Management Plan before the previous plan (2009-2018)

Previous Long-Term Management Plan (2014-2023)

Launch of Medium- and Long-term Management Plan (2020-2029)

Record of Business and Sustainability Initiatives

Achieved the plan's targets four years ahead of schedule

Achieved the targets of previous Long-term management plan four years ahead of schedule

* Absorbed and Merged by Hulic Hotel Management Co., Ltd.

Building on the leasing business as a foundation, grew through M&As in addition to taking on property development/reconstruction and new businesses

Advancement of development and reconstruction business

Business

Started PPP business

Initiatives

&New

• Completion of HULIC &New SHIBUYA, the first property under our &New brand of medium-sized commercial buildings, in 2017

Senior citizen-related businesses

Tourism-related businesses

Started new businesses (children's education and Bizflex etc.)

General

• Established CSR Vision

• Issued first CSR Report, and continued to publish reports until 2019

• Issued first Integrated Report

• Established a CSR Committee

• Established Sustainability Vision and a Sustainability Committee

• Conducted three years of joint research with the Massachusetts Institute of Technology (MIT) on natural ventilation and natural lighting systems; patented Natural Lighting System in 2016

• Started disclosing

• Disclosed SBT-approvednear-term GHG emissions reduction targets (by 2030)

• Established the Hulic Guidelines for Longer Life Buildings as standard specifications for 100-year offices

information in line with

• Achieved RE100 in 2023

Environment

TCFD recommendations

• Ranked first in the real estate/warehouse industry in the Environmental Management Survey conducted by Nikkei Inc. (ranked top every year until the survey ended in 2019) • Declared converting to 100% renewable energy sourced electricity for electricity consumption at all company-owned buildings by 2029

• Completed fireproof wooden commercial building (HULIC &New GINZA 8)

• Opened the Hulic Suginami Office in the Ogikubo area of Suginami ward, Tokyo, creating a conducive working environment for

• Obtained the highest "Eruboshi" rank

• Certified as a Health & Productivity Management Outstanding Organization (Small-

Sustainability

employees with disabilities

and Medium-sized Enterprises Category) for six consecutive years from 2019

Initiatives

• Declared ensuring all company-owned buildings can withstand a seismic intensity of level 7 by 2029

Society

• Established a Diversity Promotion Project Team (formerly the Women's Career Promotion Project Team)

• Concluded an Official Gold Partner Agreement with the Japan Para-Badminton Federation

• Started to take preventive measures against Mt. Fuji volcanic ash

• In order to enable continuous use and prompt resumption of activities in the event of a major earthquake, adopted an

• Started special sponsorship of the Hulic Cup Kisei Championships

fallout

optimal structural format

• Established the Hulic Cup Hakurei Championships and women's rank-deciding competition

• Transitioned to a system where a

• An external director serves as a chairperson of

• Organized a Risk Management Committee, a Fund ALM Committee, and a Compliance Committee

• Appointed a female external director

• Established Corporate Governance Guidelines, a Remuneration Committee and a Nominating Committee

non-executive director serves as

Corporate

the Board of Directors

chairperson of the Board of Directors

Governance

• Introduced the Board Benefit Trust (BBT), a stock compensation system for directors, etc.

• Appointed 2 additional external directors (Ratio of female among

• Made all external officers (directors and auditors) independent officers

directors and auditors: achieved 30%)

4

Hulic Co., Ltd. Integrated Report 2024

Hulic Co., Ltd. Integrated Report 2024

Financial and Corporate Information, etc.Sustainability Initiatives

5

Profile of Hulic

Hulic's Management Policy and

Business Strategies

Management Policy

"Driving Innovation" and "Accelerating Progress"

Balanced Management

Leasing Business

We are providing the real estate leasing business based on many rental properties we own, primarily in Tokyo 23 wards. We have approx. 250 properties (as of December 31, 2023) including disaster-resilient and highly safe offices, commercial facilities, hotels, senior living, and rental housing in convenient locations near stations. These form the core of our business model.

Development Business

pp. 46-47

pp. 48-50

About Hulic Group

Strike a balance between P/L Growth, B/S Soundness, Profitability, and Productivity (efficiency) at a high level

P/L Growth		B/S Soundness
Posted continued earnings growth since listing on TSE		External credit rating: AA- (stable)
Average rate of growth of Consolidated Ordinary Profit: 20.0%		Equity Ratio (FY2023): 37.9%*
Profitability		Productivity (Efficiency)
Maintained higher profitability than competitors		Putting emphasis on income per employee and ROE
Ordinary Profit to Sales Ratio (FY2023): 30.7%		ROE (FY2023): 13.0%
		*50% (JPY175 Bln) of hybrid finance (JPY350 Bln) was calculated as nominal equity.

Business Strategies

For company-owned properties whose floor area could be increased in accordance with zoning laws, we systematically				Story
			Creation
carry out reconstruction suitable for the location with optimal floor area ratio. This enables us to increase leasing
revenue while making qualitative improvements to our portfolio. In addition, we promote development and
redevelopment business drawing on the expertise built in the reconstruction of owned properties. Furthermore, We				Value
pursue opportunities in PPP business*1 and development of next generations assets which meet the needs of times
			Group's
including logistics facilities, data centers and research facilities.
*1 We are participating in projects to support the efficient use and operation of public assets (national and local government-owned land) by providing the know-how cultivated through the		Hulic
development and reconstruction of office buildings and commercial & lodging facilities.

Value-added Business	pp. 51
We are engaged in the business of using various value-added methods including renewal, renovation and conversion

Diversification of assets

Current Businesses

Leasing Business		Development/Reconstruction Business
Value-added Business		New Acquisitions (including M&As)
Publicly offered REIT		Private REIT

Initiatives in growth fields in line with the needs of the times

Seniors / Tourism / Environment

"&New" (urban-style commercial facilities)		Next Generation Assets

Expansion of business domains

New Businesses

New initiatives responding

to market needs

• Bizflex business
• Children's education business etc.

to increase the asset value of properties we own and those we have recently purchased or invested in for resale. We		Strategies
take profits by sales of these properties once we have maximized a property's value. We also hold assets for short-term
	Business
warehousing purposes with the aim of helping distribution of real estate in response to the diverse needs in the real
estate market.
New and Other Businesses	pp. 52-55
We launched several new businesses in recent years on the back of our corporate culture which allows us to constantly
challenge in progressive new business fields. We will continue to create new businesses in targeted fields that have		Initiatives
unmet market needs and good growth prospects by employing various methods including business collaboration and
alliance, as well as M&As.
	Sustainability
• Senior citizen-related business
As the aging of society proceeds, we anticipate that social demands for nursing and medical care will increase. Therefore, we are
actively promoting the development of senior living, hospitals, and burial pavilions, as well as businesses to promote wellness and

Our Strengths

1	Stable revenue structure centered	2	The majority of properties is in	3	Selection and concentration
prime locations of central Tokyo
on leasing business	strategy
			and/or near stations

Core Fields	Non-core Fields
• Tokyo and/or near stations	• Regional office buildings
• Medium-sized office buildings	• Large-scale office buildings
• Reconstructions, and small to medium-sized developments	• Large-scale developments
• Senior living, hotels, ryokan (Japanese-style luxury inns), next generation	• Condominiums for sale
assets

6 Hulic Co., Ltd. Integrated Report 2024

QOL of healthy and active seniors.
• Tourism-related business
etc.
To capture demand for tourism, which is expected to increase over the medium- to long-term, Hulic operates own brand hotels (THE
GATE brand) and luxury ryokans (FUFU brand) and owns leasing hotels.	Information,
• Medium-scale flexible office business
We will provide a series of medium-scale flexible offices called "Bizflex" to respond the diversified office needs.
• Children's education business	and Corporate
We promote businesses that provide education-related services for children.
• Other businesses
Our Group companies are in various businesses including operation of REITs (both publicly and private) and private fund, building	Financial
management, insurance, and contracting for construction work among other opportunities.

Hulic Co., Ltd. Integrated Report 2024

7

Message from the Chairman, Representative Director

Saburo Nishiura

Chairman,

Representative

Director

We intend to respond flexibly to the changing environment and continually improve our corporate value, guided by our motto: "driving innovation" and "accelerating progress."

Analysis of the Business Environment

financial difficulties, affecting the Chinese economy. As China is Japan's largest trading partner, the impact on Japanese companies, especially manufacturers, is significant, raising concerns about further negative impact going forward. Moreover, heightened tensions in the international arena, especially between the United States and China, alongside China-Taiwan relations and North Korea, have prompted Japan to spend more on defense. I feel that many international issues are directly or indirectly affecting the Japanese economy, making decision-making for businesses more complex.

• Analysis of the Domestic Environment

There are many domestic challenges and risks as well.

1. Decline in Working-Age Population and Other Demographic Issues

Population decline has long been a serious issue, with Japan's population decreasing by approximately 800,000 people compared with the previous year.* And this decline is expected to accelerate in the future. In 2023, I met with many business leaders, and it was apparent that most industries were grappling with labor shortages. The lack of workers, particularly in onsite demand for construction, as well as bus and taxi drivers, is a critical issue. Due to these developments, there has been a significant increase in construction costs within the real estate sector. Construction costs for Expo 2025 Osaka have doubled from the initial budget. In particular, the construction industry's regulation on an upper limit for overtime hours, adopted since 2024, has also had an impact. In the hotel industry, where there is a heavy reliance on workers from overseas, especially cleaners, the weakening yen has led to a reduction in their numbers. Also, in senior living, while the number of residents is growing, it has become increasingly

(2) Earthquake Risk	Group
The Noto Peninsula Earthquake struck at the very
Hulic
beginning of 2024. Further, the probability of an
About
earthquake directly under the Tokyo metropolitan
area or in the Nankai Trough occurring within the next
30 years is said to be very high. The Great Hanshin-
Awaji Earthquake, the Great East Japan Earthquake, the
Kumamoto Earthquake, and the Hokkaido Eastern Iburi
Earthquake all reached a maximum seismic intensity	Story
of level 7 on the Japanese scale. Building collapses
Creation
naturally pose a serious threat, and depending on the
time and location of an earthquake, there could be
Value
fires or tsunami. As mentioned earlier, there is still a
shortage of workers in the construction industry, which	Group's
is expected to worsen in the future. Consequently, post-
Hulic
earthquake reconstruction is likely to face even greater
challenges, both for manpower and financially.
(3) Risk of a Mt. Fuji Eruption
Although it is not a topic that is being talked about, we	Strategies
also regard the eruption of Mt. Fuji as a natural disaster
risk. In the event of an eruption, Tokyo, Kanagawa,
Shizuoka, Yamanashi, and other neighboring prefectures	Business
would suffer considerable damage. In the past,
electrical equipment was usually installed underground
of buildings. However, in recent years, to mitigate
flood-related risks, there has been a growing trend for
installing electrical equipment on rooftops. As a result,
volcanic ash from an eruption could penetrate electrical
systems, potentially making lighting and heating/cooling	Initiatives
systems in buildings unusable, even after electricity is
restored. Also, if volcanic ash accumulates on roads or
Sustainability
railways, it could affect transportation and logistics.
(4) Global Warming
In 2023, many cities exceeded their record high

• Analysis of the International Environment About the COVID-19pandemic, which has lasted for three or four years, I have seen a decline in mask wearing, even on trains, indicating that we might be nearing
  the resolution of this crisis. However, in international relations, there are many ongoing issues with new ones emerging.

• The prospect of a ceasefire in Ukraine following Russia's invasion remains uncertain. Imports from agricultural nations, such as Russia and Ukraine, have been disrupted, resulting in ongoing price increases in

Japan due to higher raw material costs. In response to requests from organizations such as the Japan Business Federation and labor unions, companies are significantly increasing base salaries, highlighting the broad global impact of the Russia-Ukraine issue.

• In the Middle East, the conflict between Israel and Hamas continues. Given that oil prices have already surged, I believe that Japan's strong dependence on imports will lead to substantial economic repercussions if there are more price hikes. In China, several major real estate companies have gone bankrupt or are facing

challenging to recruit care workers. It is highly likely that the shortage of workers will continue to worsen going forward. While measures to address the declining birth rate are being discussed, a rapid recovery seems unlikely because we need to wait at least 20 years from now that the newborns are becoming the age of working population. It is clear that even efforts to improve productivity through digital transformation (DX) will not easily resolve the problem of labor shortages.

• According to Surveys of Population, Population Change and the Number of Households based on the Basic Resident Register issued by the Ministry of Internal Affairs and Communications (as of January 2023)

temperatures. Globally, reducing greenhouse gas
emissions has become critical, leading the Japanese	etc.
government to designate 2030 as a milestone year for
Information,
interim progress and to declare the commitment to
achieve carbon neutrality by 2050. While switching to
renewable energy sources is certainly the main focus,	Corporate
in reality, many people recognize that achieving this
goal without nuclear power generation is going to
and
be challenging. However, I think it is crucial for every
Financial
company to swiftly meet its own responsibilities for their
carbon neutrality.

8 Hulic Co., Ltd. Integrated Report 2024

Hulic Co., Ltd. Integrated Report 2024

9

Message from the Chairman, Representative Director

In addition to the above, there are many other	and employees, as well as to ensure our sustainable
issues and risks to consider. While action must be	growth. Dealing with immediate challenges is vital, yet
taken to address these issues, there is also the need to	it is also necessary to prepare for the future. Moreover, it
generate profits, improve our financial performance,	has become quite common for profitable companies to
and provide returns to stakeholders, such as customers,	engage in corporate social responsibility activities.
local communities, financial institutions, shareholders,

Approach to Corporate Management

(2) Enhancing Financial Position/Safety

When I first became the president of Hulic Co., Ltd., ("the Company"), our borrowings were secured by collateral. (Currently, all of our loans are unsecured.) Having collateralized loans implies a perceived lack of soundness from the bank's viewpoint. Given our role as a real estate management company for banks at that time it was natural to think that way. As a result, to secure funding in the future and attract new talented employees, we made the decision to go public. Following our listing, we conducted three rounds of

Key Management Metrics	Our Situation
(as of December 31, 2023)
❶ PBR 1 or higher (benchmark for	Approx.1.5
the Tokyo Stock Exchange Prime
times
Market)
❷ ROE 10% or higher	13.0%
❸ Equity ratio (after considering	37.9%
hybrid finance): 30% or higher

About Hulic Group

Creation Story

I have served as president and chairman for 18 years, and I believe that we are facing challenging times. Despite the difficult circumstances, since going public Hulic has achieved increases in profits and dividends for 15 consecutive fiscal periods.

• The earnings growth can be attributed to the recovery of the hotel segment, which had been in deficit for several years but turned profitable due to the resurgence of inbound tourism, along with an increase in capital gains from real estate sales. These sales are conducted not only to generate a profit but also to facilitate asset restructuring, with the aim of controlling the expansion of total assets. The equity ratio (after considering hybrid finance) improved from 37.1% in FY2022 to 37.9% in FY2023. This has helped to maintain our high external credit rating. We have a keen interest in maintaining external credit ratings in order to have a wider range of procurement options, even if borrowing from the financial institutions become limited due to tight Bank for International Settlements (BIS) regulations, etc.
• We do not set operating revenue as our management target. Instead, we are prioritizing profit items. This is because profits are essential for fulfilling our objectives. As I will discuss later, using renewable energy, improving seismic performance through development, reconstruction, distributing dividends to shareholders, and providing a high level of compensation for employees cannot be accomplished without profits. Since the real estate industry typically has high levels of borrowing, we set our profit target as the profit after interest payments. During the Medium- Term Management Plan (2023-2025), we are also aiming for a consolidated dividend payout ratio of 40% or higher as well as prioritizing profit attributable to owners of parent to make increased dividends possible. Ordinary profit has risen by over 10% annually since

our listing. The dividend per share for FY2023 increased by JPY8 compared with the previous year, for a total of JPY50. Further, despite of a public offering of shares in October 2021, net income per share (EPS) has also increased from JPY101.09 in FY2021 to JPY124.36 in FY2023. Our dividend payout ratio is one of the highest among the major developers.

• On Being a Good Company

I was a banker before becoming the president of Hulic. During my tenure at the bank, I undertook various responsibilities, including serving as chairman of the credit review committee. Based on that experience,

I had doubts about whether a company could be considered good solely based on profitability. While profitability is certainly important, I don't believe that it should be the only consideration. As a result, we have been redefining what constitutes a "good company" based on communication with financial institutions and corporate governance codes from the Tokyo Stock Exchange, making incremental improvements to our management since going public. Although we haven't reached an optimal level yet, we have made considerable progress. I think the following criterion are general guidelines for defining a "good company."

(1) Achieving growth

Japan has experienced persistent deflation for an extended period, resulting in sluggish growth rates compared with other countries. Despite this, Hulic has achieved annual growth of 10% or higher in ordinary profit for 15 consecutive fiscal periods since going public. I believe that having ordinary profit of over JPY100.0 billion is one of the benchmarks for being a leading company in Japan. We achieved this goal in FY2021 and have continued to increase this indicator since then.

public offerings to bolster equity base. As of December 31, 2023, our equity stood at JPY765.6 billion. However, because we listed later than some major developers,

I believe it is necessary to continue building up our equity by accumulating profits.

• Our external credit rating was upgraded to AA- in 2022, finally giving us a certain level of recognition from the market. Despite acquiring numerous properties again in 2023, we strategically reorganized our portfolio, curbing asset growth. As a result, our borrowing balance and financing costs remained consistent with the last fiscal year, reflecting our sensible operations and being mindful of our external credit rating.

1. Market Capitalization/Market Valuations Around 10 years ago, there was a brief period when our market capitalization exceeded JPY1 trillion, but since then, it has stayed between JPY700.0 billion and JPY900.0 billion. Through investor relations activities, both domestic and international, and consistently achieving profit growth and dividend increases, in August 2023 we again reached the market valuation milestone of JPY1 trillion. Our stakeholders include customers, local communities, financial institutions, employees, among others. For shareholders, we have undertaken initiatives that include gradually increasing the dividend payout ratio, which currently exceeds 40%; ensuring prompt financial announcements within one month of the financial closing date; introducing shareholder incentives as part of our strategy to promote long-termownership among individual shareholders; and improving disclosure on our website.
2. Key Management Metrics and Target Achievement We include the following indicators as part of our key

❹ Net D/E ratio: 3 times or less	1.3 times
❺ Debt/EBITDA ratio: 12 times or less	7.6 times
❻Vacancy rate: 1% or less	0.4%

management metrics. As of December 31, 2023, we have achieved the targets for all of these items.

(5) Sustainability

Looking at our environmental initiatives, we achieved RE100 in 2023, two years ahead of initial plan. We achieved this by generating renewable energy through our own solar power plants, rather than purchasing non-fossil certificates from external sources. We were the first to achieve RE100 through this method in Japan. Our plan is to continue investing JPY8.0 to 10.0 billion per year to alter the electricity for all company- owned buildings to 100% renewable energy sources by 2029. Further, we will incorporate industry-academia collaborations with Waseda University to explore insights into energy storage batteries and related technology. Going forward, we plan to install these new batteries at some of our solar power plants. Given the recent severe weather patterns, it is essential to tackle the issue of global warming by reducing greenhouse gas emissions.

• For governance, our Board of Directors is consisted of five executive directors and six external directors. In the Audit & Supervisory Board, there are two full-time members and three external members. In the past, the Chairperson of the Board of Directors was a non- executive director who was not an external director. However, we have transitioned to having an external director in this position since 2024. Also, we now have

Hulic Group's Value

Business Strategies

Financial and Corporate Information, etc.Sustainability Initiatives

10 Hulic Co., Ltd. Integrated Report 2024

Hulic Co., Ltd. Integrated Report 2024 11

Message from the Chairman, Representative Director

five female executives, including directors and Audit &	including experienced business executives, scholars
Supervisory Board members, with women making up	specializing in corporate law and child education
over 30% (as of April 1, 2024). External directors and	policy, lawyers, certified public accountants, and
external auditors come from diverse fields of expertise,	journalists.

For Key Stakeholders

major real estate companies typically carry around JPY3-4 trillion. Also, it is essential for us to maintain our current

AA external credit rating and continue

aiming for higher credit ratings. External

credit ratings are a barometer of our

financial soundness and are essential for

flexible bond issue. Hulic's external credit

About Hulic Group

We recognize the importance of addressing the needs of our various stakeholders, including customers, local communities, financial institutions, shareholders, and employees. We believe it is essential to provide optimal responses to every stakeholder.

• Customers

We convey to employees the idea that salaries are essentially funded through rents received from our customers. From this perspective, we must make every effort to serve our customers, as we believe that providing safe, secure, and convenient buildings is one of their most important objectives. Apart from residential properties and ryokan (Japanese inns), we typically prioritize office and commercial locations with convenient access (within three to five minutes of a station). Among our facilities, 63% are within three minutes of a station and 77% are within five minutes. We believe it is a benefit for customers if our facilities are as close to a station as possible, especially during the rainy season and winter.

• For business continuity plans (BCPs), there is a high risk of a major earthquake striking Tokyo within the next 30 years. As a result, we are pushing ahead with development, reconstruction, and seismic reinforcement to ensure that all company-owned buildings are upgraded to high-resilience structures capable of withstanding an earthquake with seismic intensity of level 7 on the Japanese scale by 2029. We also plan to finalize our response plan for an eruption of Mt. Fuji within the next few years. Furthermore, we make it possible to use renewable energy at company-owned buildings, allowing tenants to move closer to achieving their RE100 goals.

• Local Communities

Hulic was formerly known as Nihonbashi Kogyo. As the name suggests, our headquarters was located in Nihonbashi, Chuo ward in Tokyo until 2012 when we

relocated to Odenmacho, with the nearest station being Kodemmacho Station on the Hibiya Line. Odenmacho used to be an area with numerous companies in the textile industry, but over time, it transformed into a residential area with many condominiums. Though Hulic is not engaged in condominium development, we still prioritize maintaining strong relationships with neighboring residents. As an example, since the local neighborhood association didn't have mikoshi (portable shrines) and festival floats, we made donations to provide them. We also hold an annual summer festival, during which we participate in carrying the donated mikoshi along with members of the neighborhood association and nearby companies. During the summer festival, we are delighted to welcome many children who come to join the festivities. Further, we have established a daycare center within the head office building. Aside from employees' children, we also welcome local children, when space is available. We donated books when the local Nihonbashi Elementary School celebrated its 100th anniversary. Although our business model isn't focused on business to consumer (B to C) interactions, we are committed to building strong connections with the local community.

• Financial Institutions

Since joining Hulic, I have become even more aware of the importance of finance, and I prioritize communications with financial institutions for strong relationships with them. While it's not common for many companies to regard financial institutions as stakeholders, my perspective differs. I'm not solely influenced by my banking experience, but rather by the fact that developers, regardless of their backgrounds, must secure stable long-term funding as they repay development funds through rents. That's why I view financial institutions as crucial stakeholders. Our interest-bearing debts came to JPY1,445.0 billion, while

rating is currently AA-, yet it's clear that

achieving an AAA rating would make a

significant difference for investors.

• Shareholders

Before the COVID-19 pandemic, I devoted a significant amount of time to investor relations, including overseas investors. From this experience, I felt that the needs and expectations of each shareholder differ significantly. Since going public, we consistently prioritized shareholder

returns and have continued to raise dividends. We have also maintained a consolidated dividend payout ratio of 40% or higher, which is among the highest in the real estate developer sector. In addition, as a shareholder incentive, we send a gift catalog to mainly individual investors. In August 2023, our market capitalization exceeded JPY1 trillion. Furthermore, our price to book ratio (PBR) have exceeded 1 time. While stock prices are determined by the market, we intend to keep going after increased profits and dividends with a management strategy that is conscious of stock price valuations.

• Employees

With the declining working-age population, the challenge lies in efficiently recruiting employees. As of December 31, 2023, Hulic operates with a small team: 222 employees. Ordinary profit per employee exceeds JPY600.0 million, making us one of the top performers, based on productivity, among listed companies in Japan. For this reason, we have been recruiting professionals or people who have the potential to become professionals. First, looking at salaries, the average annual salary for 2023 was JPY19.08 million, ranking us among the top in the industry. At Hulic, employees reach an annual salary level of over JPY5.0 million in their second year with us.

• Also, we maintain fringe benefits at an exceptionally high level, as shown below.

1. Breakfast, lunch, and beverages at the head office cafeteria are free.
2. Single-persondormitories are usually provided for free.
3. Health exams allow individuals to select the level of screening, such as a comprehensive check-up (if desired, an MRI and other tests are provided for free).

• We also have a rehiring system for employees who resigned due to circumstances such as their spouse's relocation. Our approach to HR is considered top tier, even among other listed companies.
• Besides childcare leave, flexible work hours for childcare, and leave for tending to a sick child, we have established the following systems under our next- generation nurturing support program.
  1. Onsite daycare centers (contributes to flexibility of commuting by car)
  2. Subsidies for after-school club fees (up to JPY50,000 per month)
  3. Celebratory gifts (first born: JPY100,000, second born:
  JPY200,000, third or more: JPY1,000,000)
  4. Support for infertility treatments, etc.
• As a result of these initiatives, the fertility rate in 2023 was 2.8, a high rate compared with a five-year average of 1.7 and the national average of 1.3.*

*Source: Population Statistics of Japan 2022 issued by the Ministry of Health, Labour and Welfare

Hulic Group's Value Creation Story

Business Strategies

Financial and Corporate Information, etc.Sustainability Initiatives

12 Hulic Co., Ltd. Integrated Report 2024

Hulic Co., Ltd. Integrated Report 2024 13

Message from the Chairman, Representative Director

Above, I have outlined Hulic's response and	COVID-19 pandemic, and Russia's invasion of Ukraine.
approach to risk. Since becoming president, we have	While it's possible that some unexpected risks could
faced significant challenges that were previously	occur, we remain committed to steadily increasing
thought to occur only once every hundred years or	profits and holding assets that appreciate over time.
even once every few hundred years, including the 2008	In the following section, I would like to discuss Hulic's
economic crisis, the Great East Japan Earthquake, the	growth strategy.

Hulic's Growth Strategy

thinking is something that all executives and employees must engage in daily.

• A good salary certainly attracts top employees, and it is essential to increase productivity in order to raise salaries. Our goal going forward is to maintain an optimal workforce size within our organization. Having raised base salaries last year, we are now targeting an increase in starting salaries and a roughly 10% raise in salaries for 2024. What's more, we plan to pass on the benefits of higher productivity directly to our employees.

(2) Commercial Facilities

Commercial facilities are gradually returning to normal operation as COVID-19 restrictions ease and inbound tourism increases. We have identified Ginza, Shinjuku East Side, Shibuya/Aoyama, and Asakusa as our focus area, and all of them are progressing smoothly. Commercial properties in prime locations are experiencing significant interest from luxury brands and other retailers looking to establish new stores. For development projects in the prime area of Ginza, we

About Hulic Group

Creation Story

• HR Development Strategy

As the challenge of population decline has been clear since I assumed the president post, we have consciously steered away from labor-intensive ventures and opted to concentrate on business to business (B to B) operations. Our tourism-related business segment is an exception, though. For new graduate recruiting, we aim for a balanced ratio of male and female hires, with approximately half from science and engineering as well as half from the humanities. Moving forward, we are committed to prioritizing training programs that allow new employees to experience tangible growth. We also strive to provide a comfortable work environment through competitive salaries, fringe benefits, and spacious offices.

• I have always emphasized the distinction between work and tasks. Tasks typically involve accurately

executing predefined activities. Although new employees sometimes have to perform tasks to gain an overall understanding, we prefer that other employees do not do any tasks. Therefore, we recommend leaving these to systems or outsourcing them. I believe that employees should engage in meaningful work, which means thinking about a job that needs to be done then adding value. The process of thinking is challenging. To me, this involves studying, reading many books, meeting various people and having discussions.

• As a company, we believe in reducing overtime work and encouraging each person to create more time for studying, reading, and meeting people, in addition to providing English conversation classes and online learning. However, I believe that meeting people involves giving to others. Without giving, there can be no receiving. Therefore, it is essential to cultivate an interest in varied subjects and to continually learn.
• • Hulic sponsors the Hulic Cup Kisei Championships for shogi (Japanese chess) and the Hulic Cup Hakurei Championships for female shogi players as part of our cultural support, in this way contributing to the shogi community. Shogi players carefully ponder every move, along with later moves and their opponent's response, a single match can take an entire day.
  • On days without matches, shogi players research new moves, often using AI. When a new move is effective, it becomes known to all shogi players. So, they must continually research new strategies. I suggest promoting tsumeshogi (shogi puzzles) within the company as a form
    of thinking exercise to underscore the significance of critical thinking. Critical

• Real Estate Business Strategy

It is expected that the real estate market will become increasingly challenging as the population continues to decline, with the residential and office sectors being particularly affected. After becoming president, I made several decisions about what we wouldn't pursue; one of those was residential properties.

(1) Offices

The demand for office space will decrease as the working-age population declines. That's why we have been reducing the percentage of office properties in our portfolio, aiming to bring it down to 50%. In the current landscape where the average vacancy rate stands at approximately 6%, our vacancy rate has consistently remained below 1%. Given that 99% of Japanese companies are small and medium-sized, we have outlined the following as our fundamental strategy.

• We prioritize medium-sized buildings, typically with a site area of 500 tsubo* or less, often ranging from 200 to 300 tsubo. ② Properties should be strategically located within a 3-4 minute walk from train stations. ③ Buildings must have a high seismic resistance to effectively withstand major earthquakes. ④ Our buildings must be resilient to a potential Mt. Fuji eruption, with mechanism
  in place to swiftly resume operations following the ash fall. ⑤ We intend to contribute to tenants' RE100 goals by altering all company-owned buildings to 100% renewable energy use by 2029.

* One tsubo is approximately 3.3 m2.

• The costs associated with BCP initiatives and environmental compliance are rising. While current profits are important, I intend to manage the business with a balance between the present and the future.

are receiving a high volume of inquiries, even before completion of buildings. In Ginza, we are planning approximately 10 development and reconstruction projects in the future, aiming to improve both floor area ratios and overall business profitability.

1. Hotels and ryokans (Japanese style luxury inns) As inbound tourism returns, both hotels and ryokan have seen an increase in average daily rates (ADRs), accompanied by exceptionally high occupancy rates. Our directly managed hotels are located in Ginza/Yurakucho, Asakusa, Ryogoku, Kyoto, Sapporo, and Maihama, among other areas. Development is also underway in Yokohama, the Sapporo Station area, Fukuoka's Tenjin, and Osaka's Shinsaibashi, with openings scheduled to take place gradually. Two of our FUFU brand of luxury ryokan opened in Karuizawa in December 2023. This has brought the number of FUFU ryokan to 11, with three in Atami, two in Hakone, two in Karuizawa, and one each in Nikko, Kawaguchiko, Kyoto, and Nara. We are planning developments in Jogashima (Kanagawa Prefecture) and Ginza. While the weakening yen is having a clear impact, I don't foresee a decline in tourists coming from overseas anytime soon, especially considering factors such as Japan's safety, delicious cuisine, and unique seasonal experiences. Nonetheless, securing labor is crucial in the tourism-relatedsector. Employees in hotel operations were given substantial base salary raises. Further, we are committed to boosting business efficiency without compromising the level of service for any reason. We are promoting the efficiency of DX while optimizing workflows and focusing on improving services through initiatives that include room renovations and events.
2. Senior living

As of December 31, 2023, the number of senior

Hulic Group's Value

Business Strategies

Financial and Corporate Information, etc.Sustainability Initiatives

14 Hulic Co., Ltd. Integrated Report 2024

Hulic Co., Ltd. Integrated Report 2024 15

Message from the Chairman, Representative Director

living units (beds) reached approximately 4,800, approaching our goal of 5,000. Despite the high demand stemming from population aging, there is a clear shortage of caretakers. To address this shortfall, Hulic has implemented initiatives such as a scholarship program for students pursuing careers in caretaking and the introduction of monitoring sensors to enhance caretaking support. However, challenges remain due to the weakening yen, resulting in a decline in workers from overseas, compounded by the physical demands of caretaking. Simultaneously, aging populations are a global phenomenon, especially in developed countries. Consequently, we already invested in a senior living in the United States operated by a subsidiary of Mitsui

• Co., Ltd. This move capitalizes on the many workers available in the US, offering promising investment opportunities compared with Japan. For overseas investments, our strategy for the future focuses on making only financially sound and carefully selected investments.

(5) Logistics facilities

The demand for new logistics facilities in the central Tokyo area is high, catering to the requirements of approximately 14 million Tokyo residents. However, competition is fierce. In addition, logistics companies must address issues such as a shortage of drivers and achieving carbon neutrality throughout the distribution process. For these reasons, we are targeting locations as close to Tokyo as possible, preferably within the inner areas of National Route 16, which offers good access to highways and other transportation routes. At the same time, large-scale logistics developments at Narita Airport have different objectives. Narita Airport is the top domestic hub for cargo handling. And the completion of a third runway is scheduled for 2029. However, Narita Airport has been open for over 45 years, and the facilities are aging. So, we intend to construct four warehouses and a building for customs clearance and quarantine by 2029. Put simply, although they are logistics facilities, our aim is to transform them into places capable of managing all operations near the airport. Our logistics facilities will have unique features, making them highly competitive and relatively easy to lease out.

(6) Key Thoughts on Owning Real Estate

A declining population and labor shortages have

made the real estate business increasingly tough in recent years. In addition, we must address issues such as seismic performance and carbon neutrality, even if these do not immediately contribute to profits. In these circumstances, I believe the following items are crucial:

• Carefully interpreting demographic trends (such as owning senior living and limiting the proportion of office in our portfolio).
• Considering the volume and needs of target companies when strategizing for offices (medium-sized buildings/ flexible office space targeting growing companies, etc.).
• Differentiating our properties as much as possible by offering distinctive features (nearness to train stations, BCPs, and environmental friendliness).
• Carefully selecting prime locations tailored to each asset type.

• I aim to develop our business as a company capable of thriving despite the population decline.

• New Businesses

Relying solely on conventional approaches will be difficult for sustaining continuous growth in the face of rapid environmental changes. Since going public, we have expanded our business model and diversified our portfolio to include assets beyond traditional office and commercial spaces, such as properties catering to seniors, health, and tourism. Recently, we ventured into developing logistics facilities and data centers. Our diversification extends further with initiatives that include flexible offices (Bizflex), education, and rental offices. At the same time, we have established a framework for financing new businesses, although it's important to note that profits from these businesses could be realized some time in the future. While taking risk is essential for generating profit, after some thought, our track record suggests that we have mitigated risk by taking on relatively low-risk investments. Taking even greater risks in the future is essential along with the continuing population decline. Hulic's equity stands

at JPY765.6 billion, and when combined with the unrealized gains from real estate of JPY384.9 billion, this totals JPY1,150.5 billion. We will allocate approximately 10% of this amount, around JPY110.0-120.0 billion, for this type of risk-taking. Of course, it is natural for us to carefully identify property and business risks even more thoroughly than before. We have also started to assess overseas projects that we had not previously joined,

setting clear limits on our involvement.

• Further, we have set a certain target yield as a criterion for making investment decisions. However, for properties in our strategic areas, we have allocated dedicated resources as part of our strategy to strengthen our portfolio. For example, in the heart of Ginza, the yield can be as low as 2% or even less. Despite the low yields at the time of acquisition, properties in Ginza significantly contribute to the unrealized gains, affirming their considerable role in bolstering our portfolio.
• Two years ago, we established the Business Creation Department. They are responsible for new business initiatives such as mergers and acquisitions (M&As) and overseas business.
• We also have the Sales Promotion Department who specializes in identifying the needs of companies that we are currently not working with and ways to address those needs, while contributing to revenues. In 2023, Hulic was selected as the developer for a pioneering R&D-centric urban development project spearheaded by JFE Holdings, Inc. and Kawasaki City. We proposed bringing R&D-focused tenants into the area, along with residential functions, supermarkets, and other amenities for the people who will work there. Also, as part of our Narita Airport logistics development project, we intend to develop facilities that can accommodate not only logistics but also customs clearance, quarantine, and other operations. I believe adding
  this kind of value is part of our new business initiatives.
• Although we acknowledge

M&As are challenging, we are considering M&As as one way to grow our business. There is a possibility that some companies could struggle to adapt to change. As a result, we are also exploring the adoption of new business models to bolster growth as a Group.

• Becoming a Leading Company

in Japan

Although Hulic currently has just over 200 employees, we aspire to become one of the leading companies in Japan. We have defined a leading company based

		Indicator	Hulic
		(as of December 31, 2023)
		Ordinary profit:	JPY137.4 billion
	Profitability	JPY100 billion or
		more
		External credit
	B/S	AA- (stable)
	Soundness	rating: AA level
		・Market cap: JPY1	Approx. JPY1,133.8
		trillion or more
	Market	billion
	evaluation	・PBR: 1 time or	1.5 times
		higher
	Capital	ROE: 10% or higher	13.0%
	efficiency
		Nikkei SDGs
	SDGs	Management	4 stars
	Survey:
		4 stars or more

on the opinions of experts from several fields, including financial institutions:

While we accomplished all of the items listed above in 2023, there are still many challenges ahead. To become a leading company in Japan, we are committed to "driving innovation" and "accelerating progress" (our motto), as well as fostering integrity, maintaining a strong sense of ownership, and working "ahead of the curve."

About Hulic Group

Hulic Group's Value Creation Story

Business Strategies

Financial and Corporate Information, etc.Sustainability Initiatives

16 Hulic Co., Ltd. Integrated Report 2024

Hulic Co., Ltd. Integrated Report 2024 17