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Business and
Other Risks

Main items that are considered to be possible risk factors for our group business and other matters are indicated below. Matters about the future in the text is our group’s stance at the end of the current consolidated fiscal year.

(1)Circumstances Concerning Revenue

The dormitory business is our group’s main area of business and is managed/run with the spirit of Japanese “boarding houses,” with the philosophy of providing residents with home-like relaxation in everyday life. We partner with schools that use our dormitories as school dormitories and incorporate a system with companies where they contract the required number of rooms at required times depending on the fluctuations in the number of employees. Most of these properties and buildings for the business are developed through leasing agreements with landowners. Despite these finely-tuned services like above, schools with major contracts may cancel specified student dormitories, and companies with major contracts may cancel employee dormitory contracts after restructuring or making other developments. The risk of significant room vacancy, as a result, is attributed to our company.

In the Dormy Inn (business hotel) business, the company incorporates a system to avoid major fluctuations in occupancy rate by accepting long-term residents and differentiating the services from other companies in tangible and intangible aspects. However, economic trends and decreases in corporate demands may affect the business. In the resort (resort hotel) business, the group performance may be affected by sluggish performance during periods when major sales are expected, due to weather conditions such as poor weather, typhoons, and earthquakes.

In the food business, restaurants may be affected by decreased demands in individual consumers. Commissioned restaurants and cafeterias at golf clubs may affect the group performance if contracts with outsourcing golf clubs and companies are canceled.

(2)Financial Position

Our group promotes the group’s middle-term management plan as a demonstration of continuous growth. In the plan, the developments of the dormitory business and the hotel business are essential areas. Various financial instruments are used for developments while considering the company's overall financial balance to produce maximum effects safely. However, the performance and financial condition may be affected if developments do not go according to plan due to staggering real estate markets, volatility in asset values, extreme reduction of cash flow in existing developed assets, and deteriorating financial market trends.

(3)Legal Regulations and Quality Management

The products and services our group handles are strongly required to have safety and abide by the sanitation management clause of the Food Sanitation Act, the Personal Information Protection Act, and various legal regulations/orders related to safety management under the Hotel Business Act and the Fire Services Act. Our group incorporates a compliance system, a risk management committee, and an internal regulation system to regularly ensure compliance with the law and implementations. However, in the event of contingency such as food poisoning, leakage of personal information, or other contingencies, our group's social reputation may be damaged, negatively affecting the performance.

(4)Application of Asset-Impairment Accounting

On August 9th, 2002, the Business Accounting Council released “Opinion on Setting the Accounting Standard for Impairment of Fixed Assets.” From it, on October 31st, 2003, the Financial Accounting Standards Foundation/Accounting Standards Board of Japan released the “Guidelines for the Application of Accounting Standards Pertaining to the Impairment of Fixed Assets” (Guidance No. 6). In response to the guideline, for our group-owned tangible fixed assets, intangible fixed assets, investments, other assets, and lease assets, an “asset-impairment accounting” may be applied, which may affect the performance and financial conditions of the group if the business recognizes the prospects of a significant reduction in profitability in terms of continuous cash flow due to sudden changes in economic trends or deterioration in financial market trends.

(5)Important Contracts

Our group’s key business facilities such as dormitory buildings and hotel buildings are mainly rented in a batch from building owners under long-term leasing contracts with periods of 10 to 20 years. As some long-term leasing contracts cannot be canceled early, our company performance and financial condition may be affected if the operativity and profits significantly decrease in the said buildings.

As of March 31st, 2018, there were 58 buildings that could not be canceled early. The total remaining unfulfilled rent that cannot be canceled was 72,842 million yen.

(6)Reliance on Interest-Bearing Debt and the Impact of Interest Rate Movement

Our group finances the business through its own capital and loans from financial institutions. Of total assets, the percentage of interest-bearing debt was 41.3% as of March 31st, 2018. On the other hand, some company-owned properties are sold to investors as properties managed/operated by the company or as properties with lease contracts to reduce the dependence on interest-bearing debts. This term, the company concluded “The Basic Agreement on Comprehensive Bridge Lease Transactions” with Sumitomo Mitsui Finance and Leasing Co., Ltd regarding the liquidation of about 65 billion yen worth of real estate properties. As of March 31st, 2018, the percentage of fixed interest rates procured was 90.9%limiting the short-term effects of interest rate hikes to a minimum. However, if interest rate spikes persist in the future and the financing costs increase, it may affect the group’s performance.