Business-related Risks

Business Risks

The following principal risks relating to the Company’s business and accounting conditions could have a material impact on decisions by investors. The following list includes some issues that are not necessarily considered to be risk factors but which are considered to be important when investors make investment decisions, and are included as part of our commitment to active information disclosure to investors. In recognition of these potential risks, the Hulic Group strives to avoid and mitigate the impact of risks. The forward-looking statements below reflect judgments by the Hulic Group as of the end of the current consolidated fiscal year.

Hulic Group Business-Related Risks

1. Risks relating to real estate leasing

The Hulic Group is mainly engaged in the real estate business, and the leasing of office buildings to companies accounts for the majority of our revenue. Generally, tenants’ need for offices is susceptible to economic fluctuations, and an economic downturn may have an unexpected impact on rent income. While many of the Hulic Group’s tenants are stable over long periods and historical data shows that rent fluctuations tend to be relatively smaller than economic fluctuations, a faltering national economy resulting in adverse real estate market conditions may affect the financial performance of the Hulic Group. In addition, delayed payments due to deterioration in the credit quality of tenants and residents, reduced rent based on requests for rent reductions or increased vacancy rates due to the departure of tenants resulting in a reduction in real property rent income may affect the financial performance of the Hulic Group.

2. Risks relating to property devaluation

Although the Hulic Group owns many commercial properties such as properties for lease, if a reduced rent level or increased vacancy rate due to a deterioration of the real estate market requires the recording of impairment losses for commercial properties, loss on revaluation of such assets may affect the financial performance of the Hulic Group.

3. Risks associated with reconstruction

While we believe that the Hulic Group's earning power is relatively stable, when rebuilding existing buildings, expenses relating to tenants' departure and the removal of equipment and facilities will result in enormous extraordinary losses. Rebuilding existing buildings by the Hulic Group which necessitates the recording of extraordinary losses, will strategically strengthen the Hulic Group's earning power in the medium- to long-term, and will be carried out in a well-planned manner based on the overall earnings plan. The Hulic Group will also control the impact of extraordinary losses as much as possible by exploring the sale of other fixed assets.
However, in some cases, the scale of rebuilding may have a significant impact on profit attributable to parent company shareholders through extraordinary losses, and depending on the timing, profit attributable to such shareholders for the fiscal year may fluctuate significantly. In addition, the Company's profit plan may be affected if a rebuilding project does not proceed as planned due to certain tenants' circumstances or other reasons.

4. Risks relating to real estate business investment decisions

Before making an investment decision such as the acquisition of a new property (whether for lease or for sale) and capital contributions to a SPC, the Hulic Group takes into full consideration the earnings stability and growth potential of the relevant property from an expert perspective. However, a failure to generate earnings as initially expected due to customer demand trends, interest rates, selling prices, or other changes, may affect the financial performance of the Hulic Group.

5. Other risks associated with real estate

a. Asbestos countermeasures

In accordance with amendments to the Order for Enforcement of the Industrial Safety and Health Act, all properties for lease that are owned and/or managed by the Hulic Group have been examined for airborne asbestos fibers, and all necessary measures have been taken. However, the discovery of the use of asbestos in a manner unexpected by the Hulic Group, resulting in disposal costs being incurred, may affect the financial performance of the Hulic Group. The designation of any construction materials other than asbestos as harmful to human health in the future and the imposition of an obligation to dispose of such materials on the Hulic Group may also affect financial performance.

b. Soil contamination countermeasures

Pursuant to the Soil Contamination Countermeasures Act (enacted on February 15, 2003), land owners may be ordered to investigate and report on whether soil is contaminated by the designated hazardous substances defined by the act as well as to take action to remove such contamination.
Currently no soil contaminant issues have been found at the properties for lease that are owned and/or managed by the Hulic Group. However, the financial performance of the Hulic Group may be affected if any soil contamination countermeasures are required in a manner unexpected by the Hulic Group, including contaminant inflow from adjacent areas or the designation of a new contaminant.

c. Other risks inherent to real estate business

The Hulic Group carries out not only statutory but also regular maintenance inspections of equipment and facilities, and continually takes every precaution, including paying close attention to minor repairs, to ensure the safety and security of assets.
However, the financial position and results of the Hulic Group may be affected if countermeasures are taken following any degradation of or damage to assets at an unexpected time and on an unexpected scale.

6. Risk relating to dependence on interest-bearing debt

The Hulic Group has JPY1,150,754 million balance of interest bearing debt as of the end of FY2019. In addition, since the Hulic Group plans to finance future rebuilding of existing properties, the balance of interest-bearing debt may further increase in tandem with future business growth. In this respect, the Hulic Group has obtained credit ratings from external agencies, and controls its financial position by maintaining and improving such credit ratings.
However, under certain circumstances such as changes to the financial environment, the Hulic Group may not be able to secure financing on favorable terms, which may impact the Hulic Group’s future business plans. Furthermore, about 87% of the Company’s existing long-term borrowings are subject to fixed interest rates, and the majority of its borrowings are hedged against future interest rate movements. However, the financial performance of the Hulic Group may be affected if financing costs increase as a result of rapid and significant rises in interest rates, or depending on the interest rate environment when refinancing fixed interest rate borrowing.

《Changes in Balance of Interest Bearing Debt》

FY2015 FY2016 FY2017 FY2018 FY2019
Balance of interest-bearing debt 658,214 665,375 826,697 975,227 1,150,754
Total assets
(Million yen)
1,091,266 1,133,994 1,352,137 1,525,979 1,776,272
Interest bearing debt ratio (%) 60.3 58.6 61.1 63.9 64.7

(Note)The Group has applied the “Partial Amendments to Accounting Standard for Tax Effect Accounting” (ASBJ Statement No. 28, February 16, 2018) and relevant Guidance effective from the beginning of 1Q FY2019. Accordingly, the figures presented for the change in interest- bearing debt balance have been adjusted to reflect these changes in presentation.

7. Risks from natural and man-made disasters

While the Hulic Group has established a “Business Continuity Basic Plan” covering earthquakes, other natural disasters, terrorism, and other man-made disasters, any damage to the assets owned by the Hulic Group may have an adverse effect on the Hulic Group's business and result in the devaluation of its assets. With respect to its properties which were constructed under the former Building Standards Act, the Hulic Group has completed aseismic reinforcing work on old existing properties and is currently carrying out the same work on newly acquired properties, focusing principally on earthquake countermeasures. The properties owned and/or managed by the Company are concentrated in the Tokyo metropolitan area, with approximately 50% of office buildings and other properties for lease being located in Tokyo's 23 wards, and the financial performance of the Hulic Group may be affected if a larger-than-expected earthquake strikes directly beneath Tokyo or other massive disaster occurs in this area, which causes unexpected damage to Hulic Group assets.

8. Risk relating to a decline in stock prices

The balance of investment securities held by the Hulic Group was JPY133,099 million as of the end of FY2019, including JPY77,658million of listed securities (which accounts for 4.3% of the total assets). The Hulic Group makes decisions on whether to hold or sell specific shares based on their significance to its business over the long term. In addition, stock prices trends are monitored on a daily basis, and the Fund ALM Committee holds monthly and/or extraordinary meetings where they discuss the impact of market trends and explore ways to respond.
However, the financial position and results of the Hulic Group may be affected if there is a higher than anticipated decline in stock prices or long-term stagnation of the stock market which results in the recording of losses on the revaluation of such shares.

《Changes to Balance of Investment Securities》

  FY2015 FY2016 FY2017 FY2018 FY2019
Investment securities
(Million yen)
114,362 121,136 136,047 124,694 133,009
(Listed securities)
(Million yen)
67,645 67,020 80,771 66,994 77,658
(Million yen)
46,717 54,116 55,276 57,699 55,351
Other net unrealized holding gains on securities(Million yen) 31,708 33,449 41,382 32,671 41,819

9. Risks relating to changes to legal regulations

Future amendments, repeals or new enactments of legal regulations or tax systems related to the Hulic Group’s real estate, construction and insurance businesses may affect the Hulic Group’s business development.

10. Risks relating to information security management

The Hulic Group retains information on many corporate and individual customers primarily in its insurance agency services, and also keeps internal information including a wide range of management information on the Hulic Group itself. Such information is managed under the control of the Compliance Committee in accordance with Information Security Policy as well as rules and regulations relating to information. In addition, the Hulic Group ensures that its officers and employees are fully aware of the importance of information management by providing related education and training. The Hulic Group has also implemented security measures at the system level.
However, notwithstanding these measures, any leaks of important information due to unavoidable system failure or other internal or external factors may cause the Hulic Group’s credit worthiness to deteriorate, incur compensation costs or otherwise affect the financial performance of the Hulic Group.

Relationship with Mizuho Financial Group (“Mizuho FG”)

1. Capital relationship with Mizuho FG

The Company was established as a company engaged in the real estate business in March 1957 with funds from the now defunct Fuji Bank, Ltd. and its close companies, with the aim of responding to various real estate regulations imposed on the banking industry.

The Hulic Group, however, has never been a subsidiary or affiliate of the former Fuji Bank. Ltd. or Mizuho FG, and Mizuho FG’s stake in the Company stands at 5.9% (Mizuho Capital Co., Ltd. owns 3.7% and Mizuho Bank, Ltd. owns 1.7%) as of the end of December 2019. There are also no requirements for prior approval from Mizuho FG, and no obstacles or restraints preventing the Hulic Group from making decisions. The shares in the Company held by “Mizuho Trust & Banking Co., Ltd., Retirement Benefit Trust: Oki Electric Industry Company Account, Standby Trust Bank/Master Trust Bank: Trust and Custody Services Bank, Ltd.” are retirement benefits trust assets entrusted by Oki Electronic Industry, Co., Ltd. to Mizuho Trust & Banking Co., Ltd. Since the right to give instructions to exercise voting rights remains with Oki Electronic Industry Co., Ltd., these shares are not included in Mizuho FG’s stake.

2. Business relationship with Mizuho FG

(Real estate leasing)
As high as 4.5% (down 3.6% y-o-y) of the Hulic Group's total operating revenue was from Mizuho FG during FY2019. This is due to Mizuho Bank, Ltd., the core company of Mizuho FG, being a key tenant in the office building leasing aspect of the Company's core real estate business. The reason behind these circumstances dates back to the period from 1996 through 1999, when the Company purchased 95 properties from former Fuji Bank, Ltd. (predecessor of Mizuho FG) upon the request of the former Fuji Bank due to financial-control issues, and the Hulic Group then leasing these properties back to former Fuji Bank.

《Ratio of operating revenue from Mizuho FG to total operating revenue》

  FY2015 FY2016 FY2017 FY2018 FY2019
Total operating revenue
(Million yen)
169,956 215,780 289,618 287,513 357,272
From Mizuho FG
(Million yen)
31,816 28,342 26,902 23,510 16,356
Ratio of operating revenue from Mizuho FG to total operating revenue(%) 18.7 13.1 9.2 8.1 4.5

  FY2015 FY2016 FY2017 FY2018 FY2019
Operating revenue in the real estate business(Million yen) 138,064 183,439 259,175 257,070 335,127
From Mizuho FG
(Million yen)
16,907 16,335 16,105 15,915 15,557
Ratio of operating revenue from Mizuho FG to total operating revenue(%) 12.2 8.9 6.2 6.1 4.6

The ratio of the borrowings from Mizuho FG to the Hulic Group’s total borrowings has remained at roughly 30%.

《Ratio of borrowings from Mizuho FG to the total borrowings》

  FY2015 FY2016 FY2017 FY2018 FY2019
Total borrowings
(Million yen)
620,113 627,375 776,697 872,145 986,040
From Mizuho FG
(Million yen)
229,269 223,305 273,010 306,880 349,609
Ratio of operating revenue from Mizuho FG to total operating revenue(%) 36.9 35.5 35.1 35.1 35.4

3. Human resources relationship with Mizuho FG

The Company has depended greatly on Mizuho FG for human resources support based on the long-established close relationship since its establishment. As of the end of December 2019, 11 of the Company's 29 officers and those equivalent to officers and19 of the Company's 181 employees (excluding those equivalent to officers) were originally employees of Mizuho FG. Such officers and employees originally working for Mizuho FG, with some exceptions, have officially transferred to the Company. As of the date of submission of this document, former Mizuho FG employees account for approximately 40% of the Company's officers.
In recent years, the Company has been proactively hiring personnel with expert knowledge of real estate development and other businesses that the Company needs in order to implement its business strategies, and the Company intends to continue with a similar policy going forward.

Establishment of a Management Advisory Committee

While the Hulic Group's relationship with Mizuho FG is as described above, the Hulic Group runs its businesses at its own responsibility as an independent entity.
In July 2008 the Company established a Management Advisory Committee (Note) in order for as many stakeholders as possible to obtain a better understanding of this independent entity's management through efforts towards further transparency and disclosure. The Company has also established a framework to provide advice and recommendations on general management issues such as reviewing matters to be resolved at or reported to a meeting of the Board of Directors so as to strengthen and secure the Company's independence and protect the interests of stakeholders.

(Note)The Management Advisory Committee consists of not less than four members who are third parties that have not previously worked for Mizuho FG and our specified shareholders (i.e., top 10 shareholders), and are legal professionals, accountants, academics or business persons appointed by the Company's Board of Directors. In principle Committee meetings are held once every month.

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