Message from the President

President and Representative Director
Group CEO
Nomura Real Estate Holdings, Inc.
Eiji Kutsukake

Formulation of the New Mid- to Long-term Business Plan and its Background

Based on our Group Vision of

New Value, Real Value

Integrating all that is precious to people and communities,
we build cities--dynamic stages that connect today with tomorrow's possibilities--
and embrace every moment of life's pursuits.
We create new value, social value, and, above all, real value.

we pursued the previous Mid- to Long-term Business Plan from April 2016 to demonstrate our commitment to all stakeholders. During the three years of Phase 1 of the previous Mid- to Long-term Business Plan, we steadily laid the groundwork for future growth, such as accelerating initiatives in mixed-use redevelopment for residences, in addition to offices and other complexes, expanding businesses for property development for sales, and establishing the foundations for our overseas business.
During that period, while Japan's overall economy recovered moderately, social issues such as population decline and labor shortage became more apparent. At the same time, the diversification of lifestyles and work styles, such as the increasing number of dual-income households, is advancing at a rapid pace stemming from the low birthrate and aging population and other factors. In the real estate market, in addition to significant changes in customer needs, sales prices of new housing are rising as a result of high construction costs and increased competition for land acquisition.
Under these circumstances, the Group's operating profit in FY2019/3 was ¥79.1 billion, compared with the ¥85.0 billion targeted for Phase 1 of the previous Mid- to Long-term Business Plan, while ROE was 8.9%, compared with its targeted level of 10%. As a result, the issues to be addressed by each business unit have become clear, and the Group is keenly aware of the seriousness of these issues.
In April 2019, we announced our new Mid- to Long-term Business Plan. Based on the groundwork for growth laid out in the previous Mid- to Long-term Business Plan, we formulated the new Mid- to Long-term Business Plan through a backcasting perspective with an eye on future, asking ourselves what we must do strategically in response to the rapidly changing social environment based on a medium- to long-term perspective. This plan is aimed at realizing sustainable growth by continuing to create new value through leveraging the Group's strengths.

Corporate Philosophy and Business Strategy

In corporate management, it is extremely important to have a clear corporate philosophy and the business strategies, organization, and governance structure necessary for realizing that philosophy. Without them, we cannot expect to achieve sustainable corporate growth. And we believe that real estate is the aggregation of various histories and thoughts in which land and buildings have been connected. Through providing development and related services that leverage the uniqueness of each real estate, we will utilize such land and nurtured assets while changing roles with the times, creating new value, and linking this value to the future. I believe this is our responsibility to society.

Responsiveness to the Changing Social Environment

When formulating and executing business strategies, it is important to have an accurate understanding of the continuously changing social and business environments, and to address the social issues of the times. For more than 60 years since its foundation, the Nomura Real Estate Group has confronted various continually changing social issues through its real estate development business and diverse real estate services.
For its Action Guideline "What We Value," the Group has established the following five points: taking a client-first approach; creating new value based on original ideas; always being a challenger; acknowledging our growth with society; and working with vigor and achieving wellness. These points are connected to the "market-in" approach, which anticipates and addresses changes occurring in all fields surrounding real estate. These include shifts in customer preferences in the residential development business resulting from diversifying lifestyles and work styles, growing office needs in the leasing business stemming from workstyle reforms and technological innovations, as well as the progress of IoT and digital technology, expanding business opportunities for inheritance-related real estate brokerage, and increases in inbound investments to Japan. This is a major strength of the Group's business strategy.
Additionally, I believe that it is important to continue to fully leverage the Group’s strengths such as its development results for a wide range of asset types in urban development, not limited to housing, as well as its commitment to product quality and the Group's abilities as a whole, in order to achieve growth in each phase under the new Mid- to Long-term Business Plan. Going forward, we must continuously heighten our creative strengths through Groupwide efforts to translate customer needs obtained from the front lines into specific product development, as well as raise our sensitivity to global trends and customer needs.

Significance of the Four Value Creation Initiatives under the New Mid- to Long-term Business Plan

We have established the following four themes under the new Mid- to Long-term Business Plan to be of particular importance for our value creation: enriched lifestyles and work styles; multifunctional urban development toward exceptional convenience, comfort, and safety; urban development and community building toward the future of the global environment and local communities; and global expansion of high-quality products and services. These initiatives embody the direction of the vision laid out in the Group's corporate philosophy. They also clarify the process through which the Group will increase corporate value in the medium to long term over the next nine years.
These four themes for value creation can be realized only by utilizing both the strengths cultivated by the Group and the groundwork laid out to date, along with a spirit of taking on challenges. Each theme is directed at a future that goes beyond the track record built up by the Group. Going forward, we will continue to strive to create new value.
In addition to continuously growing in response to the changing social environment in Japan, pursuing our overseas business is becoming increasingly significant for the sustainable growth of the Group. We will not only look to capture growth in Asian countries, including ASEAN countries, but also consider business expansion in the mature markets of Europe and the United States. We also believe that there is no time to waste in promoting our global business and acquiring expertise, such as inbound needs from overseas to Japan.

Profit Plan and Business Portfolio

Under our new profit plan, we have established business profit*1 as our profit target and set targets of ¥85.0 billion for Phase 1, ¥100.0 billion for Phase 2, and ¥120.0-140.0 billion for Phase 3. The new profit plan takes into account the current and future real estate market and the business environment. I would particularly like to mention our ideal business portfolio. To date, the Group's business portfolio has been aimed at achieving well-balanced growth in terms of its composition ratio for the property sales business, where development profits can be realized in a relatively short term, the leasing business, which produces stable cash flows, and service and management business such as investment management, including REIT, property brokerage and CRE, and property and facility management. Under this profit plan, in accordance with the business growth of the entire Group, we adopted a policy of targeting high levels of ROE and ROA by controlling the volume of total assets while accelerating asset turnover. In pursuit of this target, we will work to have the Property Sales and Service & Management each account for 40% of our business in FY2028/3.
The housing sales business, as exemplified by PROUD, and property development businesses such as PMO and other property sales businesses that realize development profits are the main pillars of our business. In addition to accelerating their development, we plan to conduct management of total assets, including existing properties for lease with an eye on expected completion of new large-scale leasing properties in the near future, in order to manage the balance sheet to an appropriate scale and, at the same time, realize development profits.

*1 Business profit = operating profit + share of profit (loss) of entities accounted for using equity method + amortization of intangible assets associated with corporate acquisitions

Strategic Initiative for Our Overseas Business

We are moving ahead with the establishment of the foundations set forth in the previous Mid- to Long-term Business Plan for our overseas business. Under the new Mid- to Long-term Business Plan, we will strategically increase the number of target countries and investment amount in order to expand our overseas profits in the near future. We plan to increase our overseas business profit to 15-20% of our total profit by FY2028/3 under the new Mid- to Long-term Business Plan by accelerating investment and recovery in each phase.
Real estate development is a strongly localized business, closely related to the living and working styles that stem from the country's laws, culture, business customs, and history. Accordingly, it is important to promote joint-venture businesses with reliable local partners. In addition to providing funding to businesses, there are many opportunities for the Company to provide its problem-solving know-how and expertise cultivated in Japan, and we will aim to develop our businesses by creating new value.
At the same time, we must carefully consider the variety of risks involved with overseas expansion, such as currency risks. As a function of headquarters, we have established the International Business Department to facilitate coordination between business units and to research and monitor real estate markets in each country. We will expand the scale and accelerate the pace of our overseas business. The expansion of our overseas business provides a good opportunity for our employees to change their mindset and perspectives. We expect the new environment to provide us with a broader perspective and greater sensitivity, which will lead to positive returns for both our domestic and overseas businesses.

Achieving ROE That Exceeds Cost of Equity and Increasing Shareholder Returns

Under the new Mid- to Long-term Business Plan, management's focus is on capital policies, particularly those that enhance capital efficiency and shareholder returns. Taking into account the level of cost of equity expected by investors, we will target ROE of over 10% as a key performance indicator (KPI) from Phase 2 of the new Mid- to Long-term Business Plan. In order to achieve this target, we will aim for ROA of over 5% by combining more development profits in the property sales business and the service & management business, in which asset efficiency is high.
In addition to achieving increased dividends for seven consecutive fiscal years, we have managed our shareholder returns based on dialogue with capital market participants, such as in FY2018/3 when we became the first company in Japan's real estate industry to execute share buybacks, which we have subsequently continued to do. For Phase 1 of the new Mid- to Long-term Business Plan, our target for the total return ratio is 40-50%.

Furthering Our Efforts in CSR and ESG

As for CSR and ESG initiatives, we need to raise awareness regarding sustainable growth of our corporate value. Going forward, we will explain internally and externally in specific terms the risks and opportunities to be looked at from both environmental and social standpoints when considering the sustainable enhancement of corporate value and earnings power, as well as outlining the strategies to be pursued to capture opportunities and minimize risks. The Group has incorporated efforts to address environmental and social issues into the performance evaluation of corporate officers.
In May 2019, we signed the United Nations Global Compact and registered as a participating company, placing CSR and ESG at the center of our management and business activities. During the process of formulating the new Mid- to Long-term Business Plan, in addition to recognizing business opportunities and risks, we held numerous discussions, including with external directors, from a variety of angles and from a backcasting perspective, in regard to the allocation of management resources, our approach for enhancing our strengths, and ways to offset our weaknesses. These efforts are playing a part in enhancing the Group's corporate governance and, in turn, enhancing its corporate value. Furthermore, I have great expectations for the new external directors who were appointed at the Ordinary General Meeting of Shareholders in June 2019. Moving forward, we will strive to evolve our corporate governance further, based on our evaluation of the effectiveness of the Board of Directors, which we have conducted for several years.

Realizing Development Profits and Enhancing Corporate Value

I believe that net asset value (NAV), which is based on the market value of assets that create value through the development of land and areas, should be used as the appraisal standard for corporate valuation in the real estate industry. However, looking at capital markets, most real estate developers in Japan, ourselves included, have a lower valuation than their NAV. Of course, while valuation is also influenced by market conditions and the operating environment, real estate investment trusts (REITs), which own properties and acquire stable cash flows from leasing, are generally appropriately valuated, with an NAV ratio to market value of approximately 1.0 times, and an ROA of approximately 2-3%. Meanwhile, despite most developers, including the Group, having an ROA at the 4% level and surpassing REITs for efficiency, the stock market's valuation is below 1.0 times. Therefore, it must be said that our accumulation and growth of profits as well as our expansion of unrealized profits have not led to an appropriate market valuation.
Through repeated discussions with investors, I have come to find that, in the Company's valuation, trust in the realization of unrealized gains is not enough. To sustainably increase corporate value, it is essential for the value we produce to obtain appropriate valuations from capital markets. As CEO, I believe that it is my duty to achieve a higher evaluation from stakeholders by appropriately realizing value under our new Mid- to Long-term Business Plan.

In Conclusion

The new Mid- to Long-term Business Plan is a nine-year plan that will run from April 2019 to March 2028. As I mentioned at the beginning of my message, the core of the plan is the creation of new value with an eye on the significantly changing social environment and the establishment of a framework for realizing new value creation, encompassing profit plans and capital policies.
Through the achievement of our new Mid- to Long-term Business Plan, I hope that the Group's corporate value will be recognized by all stakeholders over the medium to long term and that we continue to be a corporate group that is supported by our stakeholders.
We ask for your continued understanding and support going forward.

September 2019