Seibu : July. 11, 2023 IR Meeting on Real Estate Business Q&A

Seibu Holdings Inc. IR Meeting on Real Estate Business

Record of Questions and Answers

The following is a summary of the question and answer session from the IR Meeting on Real Estate Business, held on July 11, 2023.

Q1. With regard to your asset holdings, you mentioned that "forest and wilderness areas are regulated and cannot be developed immediately" and that "development of assets in Minato-ku requires consultation with the local government," but the project period is too long, and from the stock market's point of view, it does not seem to have a sense of speed. What do you think is needed to speed up real estate development in the future? Is it possible to procure real estate that is easy to develop externally and start the recycling process from there?

A1. As for sense of speed, this may be an area where different people have different ideas. It is a fact that there are many landholdings that are very difficult to develop due to permissions. On the other hand, we are thinking about whether there are any assets that could be recycled in the short term. Although it is my personal view, there are two reasons for this, the first being that I believe the value of real estate is at a plateau. For the past few years, it has been a situation where one could generally make money if you purchased assets and resold them, but now I hear that there is quite a bit of hesitation. At this juncture, it is not desirable to suddenly get badly burned in an area of business where there is little experience. Second, since we have such an abundance of landholdings, we want to carefully assess whether there are any areas where we can utilize them. We understand that in our relationships with many different stakeholders, no matter how hard we try, there are areas where we cannot speed up the process, and as you say, it is very frustrating from the outside. I would like to continue to assess whether there are any projects that can be developed in a shorter period of time, in a considered manner.

Since last year, we have been consolidating the Group's assets into SEIBU REALTY SOLUTIONS ("SRS"), and for the past three years I have been saying that we should organize the Group's land information, find sites that can be developed, and move forward on those that can generate profits quickly. As you can see from my work experience, I have experience in acquisitions when I was with ORIX, but regarding whether purchasing land is something we should do now, I honestly believe that we should do what we can with landholdings we already own. I believe we can continue to have discussions on this point.

On the other hand, it may be possible to enter into small equity investment projects from the perspective of training young employees as a prelude to full-fledged efforts by SRS. This is not to be positioned as a major source of income or main source of revenue, but rather as a learning experience for the next major stage of investment. I would like to avoid making a major error by rushing into the market, including the painful experience in the past when land for condominiums was overly chased.

Q2. I assume that you are trying to develop your own real estate with unrealized gains, but are you 1

envisioning resort areas such as Hakone, rather than properties in central Tokyo?

A2. As for land, it is not always necessary to have unrealized gains, but if the book value of the land is below market value, sufficient profit can be generated by investing in buildings and increasing the value of the property. Rather than taking a risk by entering into land in a completely unfamiliar area and not knowing the context of the area, we believe it is better to first proceed with increasing value of land we already own and understand the area well, and where we have established a relationship with the local government.

Q3. When starting the capital recycling business, do you sell your existing real estate and then recycle the business, or do you recycle the business with funds raised from financial institutions? What are your thoughts on the first step?

A3. For example, in the case of developing a property in a resort area, we would be willing to take out a corporate loan for two years and pay it back after that. However, we are more conscious than ever of the Group's debt capacity, and as a first step toward central urban redevelopment, etc., we keep in mind the realization of unrealized gains from investment and rental properties. In May, we announced our entry into the capital recycling business as a means of realizing this goal. We will soon select a collaboration partner and will consider a combination of financing methods for development. Although it is not clear at this point, we believe it is important to consider what the Real Estate segment and the Group's portfolio should look like in five or ten years and create a story to move toward that goal.

The Real Estate segment faces a variety of challenges. Buildings are concentrated chronologically (a large number of buildings were completed in the 1990s), and land is concentrated geographically (large tracts of land are held locally), making diversification ineffective. In terms of use, the portfolio is not well-diversified, with a high proportion of hotels. We are discussing internally "how to diversify the portfolio," and although there is no easy solution, "how to diversify the age composition of the buildings by systematically updating the functions of the buildings." We would like to discuss during this fiscal year the story of how to make asset diversification effective for the five or ten years, and to provide a sense of direction.

Q4. Do you want to do as much of the future development on your own as possible, or is there a possibility of partnering with other companies? I know that some railway companies are thinking of creating better outcomes by partnering with other companies, but does SRS have the same idea?

A4. I myself have experience in various companies before joining SRS, so I am not a purist at all. What is important is to be aware of our strengths and weaknesses, and to be flexible in thinking about our weaknesses, such as partnering with other companies as needed. For example, if we were to develop housing in Minato-ku, the price of condominiums for sale sold under the Seibu

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brand would not go up. It would likely be possible to consider partnering with a company that has a certain premium. Conversely, for rental condominiums, we believe we have a certain degree of brand power as a result of our efforts with Tokyo Garden Terrace Kioicho. It would also be conceivable to add hotel services to that. The basic idea is that we should not stick to a purist approach, but rather, depending on the project, choose whether it is better for us to go it alone, or whether it is better for us to work with another company, because while it will result in a certain degree of profit sharing, it will also reduce risk and increase profitability for SRS.

Q5. Regarding the redevelopment of Minato-ku, is there any difference in the degree of difficulty of development between the Takanawa-Shinagawa area and the Shibakoen area? Is it possible that the hurdles are higher in the Shibakoen area because it is a park area? It was mentioned that the Takanawa-Shinagawa area also requires coordination with various stakeholders, so please explain if there is any difference in the degree of difficulty of redevelopment.

A5. The Shibakoen area is an urban planning park zone, and we are basically trying to develop what should be a park area, so the level of difficulty is very high in terms of permissions. That is all I can tell you at this point.

Speaking from a textbook approach, among the three areas of Kioicho, Takanawa-Shinagawa, and Shibakoen, Kioicho has the lowest hurdle because of the lack of shade restrictions. The Takanawa-Shinagawa area is subject to shade restrictions and also has height restrictions due to its proximity to Haneda Airport. In light of these factors, the level of planning difficulty is somewhat higher than in Kioicho.

Q6. (Considering the high level of difficulty), would the order of redevelopment be Takanawa- Shinagawa area first, starting in the late 2020s?

A6. The degree of difficulty of development will likely have an impact on the schedule, but we have not yet decided which will come first by the degree of difficulty.

Q7. Is the opening of the Maglev Chuo Shinkansen related to the redevelopment schedule?

A7. They are not related directly. We are more concerned about the development of the west exit of Shinagawa Station in terms of the flow of people. At the current Shinagawa Station, the east exit can be accessed via a pedestrian deck to the office district directly on the second floor level, but the west exit descends to the street level on the first floor due to the structure of the station. If a sky deck is built over Route 15 in the future, it will be possible to pass through the west exit directly at the second floor level.

Q8. There was some discussion about asset diversification not working effectively. I am concerned that while diversification is not working effectively within one asset class, there may actually be

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over-diversification in terms of asset classes, facilities, and types of services, and as a result, economies of scale cannot be enjoyed. I would like to ask for your thoughts on what should be done to ensure that none of the services are half-heartedly provided, or whether they should be left as they are.

A8. My three years at ORIX were a powerful experience for me as a businessman. In his book, Mr. Miyauchi of ORIX says, "Managers do not make business decisions when they start a business, but when they stop." At ORIX, many projects were proposed to the company and worked on, but many had to be withdrawn within about two years. I also say internally that we should try various things first. However, there is no need to extend everything we are working on now. I believe it is important to try a variety of things, and after two to three years, to have a thorough discussion and make a decision as to whether to keep them in the Group and scale them up, or to withdraw from them. We often say internally, "Think Big, Start Small, Scale Fast." First, we consider social issues with a big vision, and then start working on solutions on a small scale. Then, if the market responds favorably, we will move forward to scale up. From the outside, it may seem that we are only doing small projects half-heartedly, but we learn from doing various things, and we can understand various issues and make our discussions more concrete if we actually do them, rather than discussing them without doing them, and we have been working on these smaller projects for several years. However, I am not sure if we will continue all of our businesses and services, but rather we will choose what to keep from here. I think the timing will eventually become right for us to sort out parceling business of land for sale, which we have been engaged in for some time, including whether to continue to work on it on a permanent basis.

Q9. I understand that at ORIX, withdrawal line criteria was set quite strictly, but will you yourself be managing in a similar manner?

A9. At ORIX, there were many people who wanted to work on new business even if it was left alone. What is important for SRS now is to first foster an atmosphere that encourages people to try new things in rapid succession. That is what we will focus on for the time being.

Q10.Regarding the Asset Management ("AM") business, some major real estate companies are considering this scheme, but I think it is not going well. In particular, given the difficulty in getting prized assets that cannot be parted with outside the company, I would like to know how SRS plans to increase AUM and what kind of scheme you are considering at this stage.

A10.We are in the process of internally discussing and sorting out the objective of AM business and its position in improving the balance sheet and profitability. However, we are well aware that it is not enough to simply create AUM with several tens of billions of yen under management. There are a number of asset management companies with AUM of 1 trillion yen, and we cannot say that we are a top player unless our AUM is on the order of 500 billion yen. We need to think carefully

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about how to position our asset management company in such a context. In addition, even if we simply create an asset management company and transfer assets to it, it is difficult to determine which balance sheet it will be placed on. I think shareholder attributes are different between the shareholders of Seibu Holdings and the shareholders of REIT investment corporations, and I don't think all Japanese shareholders have the same ideas about what kind of assets an entity holding shares should have, so creating a fund that looks like an offshoot Seibu Holdings would likely end in disaster. I am going to think carefully about attracting equity investors with different attributes by creating something with completely different characteristics.

Q11.Please tell us about the successes and failures of the Real Estate business of SRS. Also, how will the lessons from these failures be applied to future projects?

A11.First of all, if you compare a project that was launched after much thought and consideration with one that was proposed by an outside party and then taken on lightly, in terms of probability, the latter is more likely to fail than the former. Projects that fail to consider whether they will contribute in any way to solving social issues are also likely to fail. It is also important to consider the significance of us being involved in a project. To take the example of condominiums, there are many companies handling condominiums for sale, but what is the significance of Seibu's involvement in this field. In 2006-2007, when there were many other companies in the condominium business other than Seibu, there was no discussion about the significance of our involvement in condominium sales or where to get society to recognize the uniqueness of Seibu's condominium sales business. If there was any failure, I believe it was likely in this area.

Q12.The assets sold to GIC last year were only about one-tenth of the approximately 600 billion yen in Hotel and Leisure assets, giving us the impression that there is considerable potential in the scale of liquidation. We would like to know what you envision the size of the assets that can be transferred off-balance sheet in the current asset consolidation process.

Also, are there still any bottlenecks in taking the Group's assets outside the Group at present? We would also like to ask from the perspective of increasing ROE.

A12.The monetary scale of the assets to be liquidated in the future is completely undecided. We are aware that it will not be 10 billion yen or 20 billion yen. However, when it comes to the book value and scale of assets held, assets in the Takanawa-Shinagawa area and the Shibakoen area account for a significant portion. Therefore, when considering indicators such as ROA and ROE, we assume that it is difficult to make a significant impact without liquidating them. Other major asset holdings include Furano, Hakone, Karuizawa, and Shin-Yokohama, etc. We have not yet made any decision, but if there is potential for those as we move forward with our capital recycling business, we will consider liquidation without reserve. However, hotel REITs require extremely high profitability. Whether we can reach that level under the current circumstances is a point that must be considered.

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