Financial and capital strategies in the Medium-Term Management Plan

The current Medium-Term Management Plan, which corresponds to Phase 1 of the Long-Term Vision Mission TREEING 2030, is positioned as a three-year period to lay the foundation for future growth and for our contribution to decarbonization. We will diversify our residential real estate business in the United States, which has become a pillar of earnings, enter businesses in which procurement of materials and construction are undertaken by one company, and restore the earning power of our housing business in Japan, which remained an issue in the previous Medium-Term Management Plan. By accelerating investments and initiatives in decarbonization-related businesses, we intend to gain a foothold to realize our Long-Term Vision. In order to actively invest in new growth fields, while building a profit base, I consider it important to balance the preservation of financial soundness and a growth in earnings mindful of capital efficiency. Specifically, we have set the ambitious targets of making growth investments for the future while maintaining an equity ratio of 40% or more and a net debt-to-equity ratio of 0.7 times or less, and achieving a ROE of 15% or above consistently.

Review of fiscal 2022 and future outlook

In the fiscal year ended December 31, 2022, thanks to the strong performance of our single-family homes business in the United States, which is a pillar of earnings, and the yen's depreciation, the Group's overall net sales were 1,669.7 billion yen, up 20% year on year, recurring income was 195.0 billion yen, a 42% year-on-year increase, and net income was 108.7 billion yen, up 25% year on year. Both recurring income and net income reached record highs, and recurring income exceeded the target of 173.0 billion yen set for the fiscal year ending December 31, 2024, the final year of the Medium-Term Management plan. ROE stood at 19.4%, significantly exceeding the cost of equity (recognized as around 7%) due to the large increase in net income, and well outpacing the target of 15%, following 20.2% for the fiscal year ended December 31, 2021.

In order to achieve a stable ROE of 15% or above going forward, it is necessary to secure profitability of our housing and real estate business in the United States, which accounts for 70% to 80% of our profits. In the fiscal year ending December 31, 2023, a decline in earnings compared to the previous fiscal year, which showed strong performance, is inevitable partly due to the temporary adjustment phase of the United States housing market against the backdrop of a sharp rise in interest rates. On the other hand, we believe that the United States housing market will continue to grow over the medium to long term as the tight supply-demand relationship continues for the time being, driven by the growing population of homebuyers' groups including millennials and Generation Z, buyers, along with a shortage of available previously-owned homes in the market. In such a business environment, we believe that we can secure a certain level of profitability by promoting sales strategies tailored to the conditions in each region, and in fact, contracts and sales of houses have been progressing favorably this year.

In addition to newly entering the state of Florida in January 2023, the Group is actively promoting initiatives to increase profits, improve profitability, and prepare for labor shortages. These include obtainment of land with reduced risks, such as purchase contracts with options and the use of land bankers, and promoting the FITP_*1 business, which provides integrated services from the design of structural panels to manufacturing, delivery, and construction. In addition to the housing and real estate business in the United States, we are also improving profitability in the domestic housing business by reviewing sales prices and streamlining production, reducing our assets by selling domestic nursing homes to funds, and decreasing cross-shareholdings. We will continue to aim for profit growth mindful of capital efficiency across the entire Group.

Maintaining financial soundness

In order to achieve the Medium-Term Management plan and realize the Long-Term Vision, financial stability and soundness that can withstand the effects of economic fluctuations are prerequisites. This is becoming even more material, especially in the context of our growing housing and real estate business in the United States, which is easily affected by market environments. We have been working to maintain our financial soundness, and while interest-bearing debt has increased due to business expansion, we have maintained an equity ratio of over 40% and a net debt-to-equity ratio of 0.7 times or less thanks to the steady accumulation of profits and timely public offerings.

In addition to the active investments and loans to decarbonization-related businesses set forth in our Long-Term Vision, demand for funds is expected to rise through the acquisition of real estate for sale, mainly in the United States housing market, and the growth of our real estate development business. Although we consider that financial indicators will change depending on the timing of these investments and the funding environment, we will continue to balance active investments for growth with financial soundness while maintaining financial discipline.

Investments for growth

In order to increase ROE and ROIC, the Group has adopted IRR and NOI yield as quantitative criteria for new investments and stipulates that efficiency indicators such as IRR calculated from business plans exceed hurdle rates (WACC, etc.) set for each country and business as a general rule.

Under the Medium-Term Management Plan, we plan to invest approximately 300.0 billion yen in total over the three-year period, of which 62.0 billion yen is earmarked for decarbonization-related investments such as forestry funds, timber industrial complexes, and overseas non-residential construction. In the fiscal year ended December 31, 2022, we made investments amounting to a total of 62.6 billion yen, mainly for commercial real estate development in the United States, the acquisition of a panel manufacturing company to jumpstart the FITP business, model homes in Japan and overseas, and IT-related investments. As a result of careful consideration, some projects were abandoned, so the progress in the first year was slower than expected, but in 2023, we will move ahead with projects such as ESG-friendly offices near Atlanta, a seven-story office building of mass timber construction near Dallas, and forestry funds. We will also continue to promote the businesses set forth in the Long-Term Vision and actively invest in our business expansion.

Acquisition of real estate for sale

In the Medium-Term Management Plan, apart from the investment plan mentioned above, we plan to acquire real estate for sale, mainly in the United States, where steady housing demand is expected, but we are particularly conscious of controlling inventory risk and improving the turnover rate.

With regard to risk control, we have established a limit for investment in real estate for sale as an operational rule and imposed certain restrictions to avoid excessive inventory levels. This limit was set in such a way that even if a certain amount of loss occurred, it would not significantly impair financial soundness. We are controlling the balance of real estate for sale based on these approaches and rules. In addition, subsidiaries in the United States have been obtaining funds individually from financial institutions for the acquisition of real estate for sale in the United States, but in the fiscal year ended December 31, 2022, we switched part of these funds to parent company loans with the aim of reducing financing costs. By establishing our own covenants for these loans, we can maintain the financial soundness of our subsidiaries and control the amount of real estate for sale.

In order to expand our single-family homes business in the United States, which predominantly focuses on houses built for sale, it is vital that we acquire real estate for sale in a continuous manner. In addition to our growth strategy, we will continue to strive for sound business growth through a system that controls inventory risk.

Policy on shareholder returns

Sumitomo Forestry recognizes that returning profits to shareholders is one of its most important tasks, and our basic policy is to provide these returns in a continuous and stable manner. Going forward, we will continue to improve ROE and enhance equity by properly utilizing retained earnings for effective investments and R&D activities that contribute to the long-term enhancement of corporate value. We will also return profits at an appropriate level according to profit trends while comprehensively considering the balance between our management base, financial position, cash flow, and other factors.

Our TSR over the past 10 years has been 241.4% cumulatively, which is higher than TOPIX. In recent years, we have pursued our growth strategy while utilizing funds obtained through a public offering of approximately 35.0 billion yen in July 2021, which resulted in an increase in profits and net income per share, leading to an increase in our stock price and corporate value. We will continue to return profits to shareholders by paying stable and continuous dividends and increasing corporate value.