{"url_path":"/sec/lgps/10-k/2026/item-5","section_key":"item-5","section_title":"Item 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS**","topic":"sec","document":{"doc_type":"20-F","doc_date":"2026-07-13","source_url":"https://www.sec.gov/Archives/edgar/data/2040290/0001493152-26-032936-index.html","accession_number":"0001493152-26-032936","cik":"0002040290","ticker":"LGPS","issuer_name":"LOGPROSTYLE INC.","edgar_url":"https://www.sec.gov/Archives/edgar/data/2040290/0001493152-26-032936-index.html","primary_entity_key":"0002040290","primary_entity_name":"LOGPROSTYLE INC."},"word_count":11829,"has_tables":true,"body_markdown":"**ITEM\n5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS**\n\n \n\n*The\nfollowing discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial\nstatements and the related notes included elsewhere in this annual report. This discussion contains forward-looking statements reflecting\nour current expectations that involve risks and uncertainties. See “Disclosure Regarding Forward-Looking Statements” for\na discussion of the uncertainties, risks, and assumptions associated with these statements. Actual results and the timing of events could\ndiffer materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under\n“Risk Factors” and elsewhere in this annual report.*\n\n \n\n**Overview**\n\n \n\nIn\nJapan, we are a holding company that through our subsidiaries, owns and operates a real estate renovation and resale company (with subsidiaries\nincluding construction companies, building material manufacturers, and building materials trading companies), a real estate development\ncompany (with subsidiaries including building management companies and design offices), a hotel management company, and a restaurant\nmanagement company.\n\n \n\nOne\nof our subsidiaries, LogSuite, which is engaged in the real estate renovation and resale business, operates mainly in central Tokyo.\nIn our real estate renovation business, LogSuite acquires condominium units from owners, and will demolish them, leaving only the framework,\nwhereupon it will reconstruct the interior, install plumbing and other elements. In doing so, LogSuite incorporates our unique designs,\nwhich we believe is one of our core strengths. During the renovation process, LogSuite begins selling to individual customers through\nonline platforms, including our own original internet media, LogRenove (https://www.logrenove.jp/), as well as through real estate brokers.\nThe entire process of a condominium renovation project, from the purchase of an original condominium unit to the delivery of the completed\nproject, typically takes approximately twelve months, including six months for construction. Under the brand “Log Mansion,”\nLogSuite has sold approximately 1,700 renovated condominium units over the past 15 years, establishing the “Log Mansion”\ncondominium unit as our flagship product and signature offering.\n\n \n\n48\n\n \n\n \n\nThe\nterm “Log” appears in our name, the names of our subsidiaries, and our brands. It represents the natural solid wood used\nextensively in our condominium units, and is meant to evoke for our customers our commitment to ensuring that most of the natural solid\nwood building materials used in the interiors of the condominium units LogSuite constructs are manufactured in-house. By controlling\nmost of the aspects, from importing raw materials to distribution and installation, we believe that our comprehensive control process\nenables us to supply natural solid wood in large quantities at comparatively lower prices. We believe that this enables us to attract\nand retain both domestic and international customers, with domestic customers representing approximately 80% and international customers\naccounting for approximately 20% of our total customer base.\n\n \n\nOne\nof our subsidiaries, Prostyle, a real estate developer, is engaged in real estate development, including the development of residential\ncondominiums and our unique machinaka ryokan (“Machinaka Ryokan”), a particular type of hotel located in a central urban\narea featuring traditional Japanese elements, which offers our guests the experience of staying in a Japanese ryokan, typically found\nnear suburban tourist attractions, but with the convenience of an urban setting. Prostyle purchases land parcels, plans and designs through\nits design office, and develops properties on the purchased land. During the development process, Prostyle begins selling the properties\nthrough various online platforms, including our original internet media, as well as through real estate brokers. The entire process of\na condominium development project, from land purchase to delivery of the completed property, typically takes approximately 18 to 24 months,\nand the entire process of a hotel development project typically takes approximately 42 months.\n\n \n\nOur\nhotel management subsidiary, ProstyleRyokan, manages ryokan-style hotels in Tokyo, Yokohama, and Okinawa. The concept of the hotels managed\nby ProstyleRyokan is to provide guests with the experience of staying in a ryokan-style hotel, which is typically in suburban tourist\ndestinations, while providing the convenience of an urban location. For example, Asakusa is one of the most famous districts and urban\nareas in Japan. ProstyleRyokan targeted the area by operating a Machinaka Ryokan, a ryokan-style hotel, and designing all common areas\nand guest rooms to meet ryokan specifications, with approximately 70% of the guest rooms including open-air baths. All Machinaka Ryokans\nmanaged by ProstyleRyokan feature tatami flooring and private rooms with saunas. In addition, each Machinaka Ryokan is designed to reflect\nthe unique character of its surroundings, to ensure that no two are alike.\n\n \n\nOne\nof the key features of our business model is our focus on niche targeting. Specifically, in the renovation business, we target affluent\nindividuals and international customers. In the hotel management business, we target families and international tourists. By defining\nour target clearly, we are able to adhere to our principle of “differentiation” and offer unique products and services that\nare valued by our customers. Another key feature is our one-stop services, where each subsidiary plays a distinct role, enabling us to\nprovide comprehensive real estate services to our customers. This end-to-end service model streamlines our customers’ procurement\nprocess, reducing the time and cost involved in selecting and negotiating with multiple service providers. In addition, our integrated\napproach provides seamless internal communication and coordination, improving overall efficiency and reducing the time required for the\ndevelopment process.\n\n \n\n**Factors\nImpacting Our Operating Results**\n\n \n\nOur\nfinancial condition and results of operation have been and will continue to be affected by a number of factors, many of which may be\nbeyond our control, including those factors set out in the section headed “Risk Factors” and those set out below.\n\n \n\n**Limited\nsupply of inventory available in the target areas**\n\n \n\nOur\nsubsidiary, LogSuite, acquires pre-owned condominium units for our real estate renovation and resale business, while another\nsubsidiary, Prostyle, acquires lands for our residential real estate development business. Prostyle also purchases and demolishes\nexisting buildings to build new condominium buildings. During the fiscal years ended March 31, 2026 and 2025, 100% and 84.0% of\nLogSuite’s revenue and 67.0% and 100% of Prostyle’s revenue were derived from the sales of properties located\nin Tokyo, respectively. The residential property market in Tokyo is highly competitive with limited pre-owned condominium units,\nland, and existing buildings for demolishment available for acquisitions. The results of our property development operations depend\nin part upon our continuing ability to successfully identify and acquire an adequate number of pre-owned condominium units, land,\nand existing buildings for demolishment to renovate pre-owned condominium units for the purpose of resale or to build new\ncondominium buildings, in desirable locations in our market. To date, we have primarily identified pre-owned condominium units,\nland, and existing buildings for demolishment through real estate agencies. We also acquire pre-owned condominium units through our\nactive market search and the information obtained from other companies in the same industry. However, there can be no assurance that\nour long-standing relationships with these real estate agencies will continue, or that an adequate supply of land and development\nsites that meet our specifications will continue to be available to us on terms similar to those available in the past, or that we\nwill not be required in the future to devote a greater amount of capital to the acquisitions of such real estate properties than we\nhave historically.\n\n \n\n49\n\n \n\n \n\nAn\ninsufficient supply of pre-owned condominium units, land, or existing buildings for demolishment in Tokyo or our inability to purchase\nor finance such real estate properties on reasonable terms could have a material adverse effect on our sales, profitability, reputation,\nability to service our debt obligations, and future cash flows, which could impact our ability to compete for real estate properties.\nAny general real estate property shortage or any decline in the availability of suitable real estate properties that may be purchased\nat the prices that we deem commercially reasonable could limit our ability to develop new projects or result in increased deposit requirements\nor real estate property costs. Moreover, the supply of potential development sites in Tokyo will diminish over time and we may find it\nincreasingly difficult to identify and acquire attractive real estate properties through real estate agencies at the prices we deem commercially\nreasonable in the future. Our real estate property acquisition costs are a major component of our cost of real estate development and\nsales and increases in such costs could reduce our gross margin. We may not be able to pass through to our customers any increased land\ncosts, which could adversely impact our revenue, earnings, and margins.\n\n \n\n**Competitive\nmarket**\n\n \n\nThe\nresidential real estate industry is highly competitive, and we face competition from many sources, including from other real estate developers\nboth in the immediate vicinity and the geographic market where our condominium units, either renovated or newly developed, are and will\nbe located. Specifically, we compete, or will compete, with numerous housing alternatives in attracting residents, including condominiums\nas well as single and multifamily homes available to rent or purchase. Increased competition may prevent us from acquiring attractive\npre-owned condominium units or land parcels or make such acquisitions more expensive, hinder our market share expansion, or lead to pricing\npressures that may adversely impact our margins and revenue. See “Risks Factors—Risks Related to Our Business and Industry—*Pre-owned\ncondominium units and land in Tokyo are limited and if we cannot continue to successfully identify and secure an adequate inventory in\nthese areas at commercially reasonable costs, our operations could be adversely impacted*.” Competitors may independently renovate\ncondominium units or develop land and construct housing units that are superior or substantially similar to our products and because\nthey are or may be significantly larger, have a longer operating history, and have greater resources or lower cost of capital than us,\nmay be able to compete more effectively in one or more of the markets in which we operate or plan to operate.\n\n \n\nAny\nof our current or future competitors may also receive investments from or enter into other commercial or strategic relationships with\nlarger, well-established and well-financed companies and obtain significantly greater financial, marketing, and real estate development\nresources than us. We cannot assure you that we will be able to compete successfully against our current or future competitors. Any failure\nto compete effectively in the residential real estate developers in Japan, particularly in Tokyo, would have a material adverse effect\non our business, financial condition, and results of operations.\n\n \n\n**Ability\nto maintain relationship with service providers and agencies**\n\n \n\nWe\nprimarily rely on service providers, including contractors, to perform the construction of substantially all of our condominiums, including\nthe procurement of raw materials apart from natural solid wood supplied by our subsidiaries, construction, and delivery of the projects.\nIf our contractors fail to timely construct and deliver projects, we will be subject to penalties for such delay under our contracts\nwith customers. We also primarily rely on real estate agencies to identify land and development sites for acquisition. Therefore, to\nthe extent such service providers and agencies experience pressures in raw materials (including an increase in the price of lumber),\nlabor (including an increase in labor cost), or timely construction and delivery of projects, such pressures may pass through to us,\nwhich could increase our cost and adversely impact our business, prospects, liquidity, financial condition, and results of operations.\n\n \n\n**Availability,\nskill and performance of contractors**\n\n \n\nWe\nengage contractors to renovate and construct substantially all of our condominiums and to select and obtain raw materials used in the\nrenovation and construction. Accordingly, the timing and quality of our renovation and construction depend on the availability and skill\nof our contractors. While we have been in the past able to cooperate with reliable contractors and believe that we have a good professional\nrelationship with our contractors, we can provide no assurance that these relationships will not deteriorate and that skilled contractors\nwill continue to be available at reasonable rates in our markets. In addition, as we expand into new markets, we typically must develop\nnew relationships with contractors in such markets, and there can be no assurance that we will be able to do so in a cost-effective and\ntimely manner, or at all. The inability to enter into business relationships with skilled contractors at reasonable rates on a timely\nbasis could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.\n\n \n\nWe\nare exposed to risks that the performance of our contractors may not meet our standards or specifications. Under our contracts with customers\nwith respect to our condominiums and in accordance with Japanese law, the properties we develop are subject to warranty of quality. Specifically,\nour condominium units, whether renovated or newly constructed, are covered by a two-year nonconformity warranty under the terms of our\nsales agreements. For newly constructed condominium units, the Housing Quality Assurance Act mandates that sellers provide a 10-year\nwarranty against defects in primary structural components. Additionally, the Act on Assurance of Performance of Specified Housing Defect\nWarranty obliges sellers to secure their ability to fulfill this warranty by either depositing security funds with the Legal Affairs\nBureau of the Ministry of Justice or obtaining housing defect warranty insurance. We have selected to purchase housing defect warranty\ninsurance to meet this requirement. Beyond these legal requirements, we offer an extended after-sales service warranty for both renovated\nand newly constructed condominium units, with coverage periods ranging from two to 10 years, depending on the type of defect and the\nspecific characteristics of each component. Lastly, for renovated condominium units, although not legally required, we purchase housing\ndefect warranty insurance to ensure our financial capacity to address any defects that may arise.\n\n \n\nEven\nthough we put our best efforts in quality control and, to date, we have not discovered that our contractors have engaged in improper\nrenovation or construction practices or have installed defective materials in our residential condominiums or buildings, we cannot guarantee\nthat our contractors will continuously provide the services meeting our standards. Negligence or poor work quality by any contractors\nmay result in structural defects or substandard construction quality in our condominiums, which could in turn cause us to suffer project\ndelays, cost overruns, and financial losses, harm our reputation, or expose us to third-party claims. Even if the contractor performing\nthe construction work in such instances is ultimately held responsible for the consequences of any such property defects, any such incidents\ncould have lasting adverse effects on us and our business reputation. We work with more than 130 contractors on different projects and\nwe cannot guarantee that we can effectively monitor their work at all times. In addition, contractors may make use of third-party subcontractors\nwith which we have no direct relationship, further limiting our ability to manage the foregoing risks. Although our construction contracts\nwith contractors contain provisions designed to protect us, we may be unable to successfully enforce these provisions and, even if we\nare able to successfully enforce these provisions, the contractor may not have sufficient financial resources to compensate us. Moreover,\nthe contractors may undertake projects from other property developers, engage in risky undertakings, or encounter financial or other\ndifficulties, such as supply shortages, labor disputes, or work accidents, which may cause delays in the completion of our property projects\nor increases in our costs.\n\n \n\n50\n\n \n\n \n\n**Availability\nof building materials or labor**\n\n \n\nThe\nreal estate development industry experiences labor and raw material shortages from time to time. These labor and raw material shortages\ncan be more severe during periods of strong demand for housing, during periods following natural disasters that have a significant impact\non existing residential and commercial structures, or a result of broader economic disruptions.\n\n \n\nIn\naddition, our success in our existing markets or those we may choose to enter in the future depends substantially on our ability to source\nlabor and local materials on terms that are favorable to us. Such markets may exhibit a reduced level of skilled labor relative to increased\nproperty development demand in these markets. In the event of shortages in labor or raw materials in such markets, local contractors,\ntradespeople, and suppliers may choose to allocate their resources to developers with an established presence in the market and with\nwhom they have longer-standing relationships with. Labor and raw material shortages and price increases for labor and raw materials could\ncause delays in and increase our costs of home construction, which in turn could have a material adverse effect on our business, prospects,\nfinancial condition, and results of operations.\n\n \n\n**Change\nin industry trends**\n\n \n\nThe\nreal estate industry is susceptible to economic trends, policy interest rate trends, land price trends, real estate sales price trends,\nreal estate taxation, etc. Therefore, a downturn in the real estate market, a significant increase in interest rates, or other changes\nin the situation could affect our performance.\n\n \n\n**Timing,\nsize and mix of property sales and project completions**\n\n \n\nBecause\nwe recognize real-estate revenue principally upon delivery and legal settlement, our revenue and operating results in any period are\nsignificantly affected by the number, size, type and timing of the projects completed and delivered during that period. Our sales mix\nincludes renovated condominium units, newly developed residential condominiums, land parcels and, from time to time, whole-building sales\nto institutional purchasers. Individually significant transactions—such as the sale of land for the Sennen project and the three\nwhole-property sales recognized in the fiscal year ended March 31, 2026—can materially shift revenue and gross profit between reporting\nperiods, and a delay in the completion or settlement of one or more projects can make a period non-indicative of future results.\n\n \n\n**Inventory\ninvestment, project duration and capital recycling**\n\n \n\nOur\nbusiness is capital-intensive and operates on a capital-recycling model under which we commit capital to acquire and develop inventory\nand recover that capital, together with our margin, upon the sale and settlement of the completed property. A condominium renovation\nproject typically takes approximately twelve months, a residential development project approximately 18 to 24 months, and a hotel development\nproject approximately 42 months, from acquisition to delivery. Our operating cash flow, inventory turnover and the capital committed\nto projects therefore depend on the length of these cycles and the timing of monetization. Delays in construction, sales or settlement\ncan extend our cash-conversion cycle, increase carrying and financing costs, compress margins and reduce the capital available to fund\nnew projects.\n\n \n\n**Availability\nand cost of financing**\n\n \n\nWe\nfinance the acquisition and development of our projects principally through project-level and corporate borrowings, a substantial portion\nof which bears interest at variable rates. Our results are affected by the availability and cost of financing, including project-level\nloan-to-value ratios, benchmark rates and contractual margins, interest expense, the amount of borrowing cost capitalized into inventory,\nand our ability to refinance or extend maturing borrowings on acceptable terms. Higher interest rates increase our financing costs and\nfuture cost of revenue and may reduce customer mortgage affordability and demand. See “Item 5.B. Liquidity and Capital Resources”\nand “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Interest Rate Risk.”\n\n \n\n**Project\nand product mix**\n\n \n\nGross\nmargins, capital requirements and cash-conversion periods differ significantly among our activities—renovated condominiums, residential\ndevelopments, whole-building institutional sales, land transactions, hotel development and hotel operations. Changes in the mix of projects\ndelivered in a period therefore affect our consolidated gross margin independently of changes in total revenue.\n\n \n\n**Hotel\noperating performance**\n\n \n\nOur\nhotel results are affected by occupancy, average daily rate (“ADR”) and revenue per available room (“RevPAR”),\ninbound-tourism demand, seasonality, and our fixed rent and lease obligations, labor and other operating costs. Because our hotels are\noperated under long-term leases requiring fixed rent and security deposits, hotel profitability is sensitive to changes in occupancy\nand ADR relative to these largely fixed costs.\n\n \n\n**Mix\nof transaction-based and recurring revenue**\n\n \n\nOur\nrevenue includes both transaction-based revenue from real-estate sales and more recurring revenue from hotel operations, property-management\nand related services. The relative contribution of these sources affects the stability of our operating margins, and we intend over time\nto increase the proportion of recurring revenue relative to transaction-based real-estate sales.\n\n \n\n**Customer\ndiversification and inbound demand**\n\n** **\n\nOur\ncustomer base is diversified across domestic and international customers. In our condominium renovation and resale business, international\npurchasers accounted for approximately 20% of LogSuite’s sales of pre-owned condominium units in the fiscal year ended March 31,\n2026, and in our hotel business, inbound tourists represent a principal guest segment, particularly at Prostyle Ryokan Tokyo Asakusa.\nThis diversification reduces our dependence on any single customer segment, while exposing our results to trends in inbound tourism and\ninternational demand for Tokyo residential property.\n\n \n\n**Dependence\non institutional purchasers and timing of contracted exits**\n\n \n\nCertain\nof our projects are structured for sale to institutional purchasers, including whole-building sales. Our results in a period may depend\non a limited number of such transactions and are affected by purchaser financing, deposit and settlement timing, cancellation or default\nrisk and the availability of alternative purchasers, which can materially affect period-to-period comparability.\n\n \n\n51\n\n \n\n \n\nAccording\nto 2024 White Paper on Land, Infrastructure, and Transportation issued by the Ministry of Land, Infrastructure, Transport, and Tourism,\nJapan’s land prices rose for the third consecutive year, and the rate of increase expanded for all-use averages, residential land,\nand commercial land. In 2023, the housing demand was firm in urban centers and convenient areas with superb living environments, and\nland prices in these areas continued to rise. Additionally, the land prices in three major metropolitan areas, including greater Tokyo\nmetropolitan, also continued to rise. Nevertheless, we cannot guarantee that this trend will continue. For example, Japan has recently\nexperienced high levels of inflation, causing the Bank of Japan to announce an increase of its policy interest rate for the first time\nin 17 years (since February 2007). Nevertheless, while there was a rise in the Flat 35, a 35-year fixed residential mortgage rate established\nby the partnership among private financial institutions and the Japan Housing Finance Agency, the floating mortgage rate has been declining.\nSee “Business—Market Opportunities—Real Estate Markets in Japan—Market outlook for new condominium units.”\nWhile the higher interest rate may theoretically result in lower real estate prices and slower real estate market, the long-term impact\nof these policy initiatives on Japan’s economy remains uncertain. In addition, the occurrence of pandemics, such as the COVID-19\npandemic, the occurrence of large-scale natural disasters, such as earthquakes and typhoons, as well as other policy changes (see also\n“—Changes in the policies of the Japanese government that affect demand for residential properties may adversely affect the\nability or willingness of prospective buyers to purchase residential real estate.”), may also adversely impact the Japanese real\nestate markets. Any future deterioration of the Japanese or global economy may result in a decline in consumption that would have a negative\nimpact on demand for our real properties and their prices.\n\n \n\n**Future\nOutlook of Market Trend**\n\n \n\nThe\nfollowing outlook reflects management’s current assessment of market trends reasonably likely to affect our businesses and should\nbe read together with “—D. Trend Information” below, which describes the underlying market data in greater detail.\n\n \n\nNew-condominium\nsupply, prices and affordability. According to the Real Estate Economic Institute, new-condominium supply in the greater Tokyo metropolitan\narea decreased by 4.5% in 2025 to 21,962 units, the lowest level since the survey began in 1973, while the average selling price increased\nby 17.4% to JPY91.82 million, a record high, and the initial-month contract rate declined to 63.9%, remaining below 70% for the second\nconsecutive year. Supply is forecast to increase by approximately 2.2% to around 23,000 units in 2026, although land availability, acquisition\ncompetition and elevated construction costs remain significant constraints. We believe high new-condominium prices may continue to support\ndemand for more affordable renovated units, while rising land, acquisition, construction and financing costs and reduced customer affordability\nmay adversely affect our sales velocity and gross margins.\n\n \n\nPre-owned\ncondominium and renovation market. Contracts for pre-owned condominium units in the greater Tokyo metropolitan area increased by 24.1%\nto a record 49,314 transactions in the fiscal year ended March 31, 2026, with the average contract price increasing by 7.8% and the average\nprice per square meter increasing by 8.4%. These trends support demand for our renovation business, but may also increase the cost of,\nand competition for, suitable pre-owned inventory, which could affect our acquisition volume, inventory turnover, selling prices and\ngross margins.\n\n \n\nInterest\nrates and financing conditions. The Bank of Japan raised its policy rate to approximately 0.75% in December 2025 and has indicated that\nfurther increases may occur if its economic and inflation outlook is realized. A higher-rate environment may reduce customer mortgage\naffordability and investor demand, raise capitalization rates, and increase our project-level and corporate borrowing costs, interest\nexpense and refinancing costs, which could affect our ability to maintain target project margins.\n\n \n\nHotel\nand inbound-tourism outlook. Visitor arrivals to Japan reached a record 42.7 million in 2025, an increase of 15.8%, supporting continued\ninbound demand. According to Japan Tourism Agency data, overall accommodation occupancy was 59.4% in March 2026 while Tokyo occupancy\nwas 73.6%, reflecting both strong Tokyo demand and continuing variation by location and property type. We expect our hotel results to\nbe affected by occupancy, ADR and RevPAR, inbound guest mix, labor and wage pressures, utilities, fixed rent, online travel-agency costs\nand new hotel supply, as well as by capital investment in Prostyle Ryokan Tokyo Asakusa II.\n\n \n\nDemographic\noutlook. As described under “—D. Trend Information,” the 2023 Regional Population Projections published by the National\nInstitute of Population and Social Security Research indicate that, although Japan’s national population is expected to decline,\ncentral Tokyo—our focus market—is projected to be comparatively resilient. We do not, however, view population trends alone\nas assuring stable demand for our products.\n\n \n\n**Key\nOperating and Financial Performance Indicators**\n\n \n\n**Revenue**\n\n \n\nOur\nrevenue is primarily derived from real estate business including condominium renovation, and real estate development, and hotel management\nand accommodation business.\n\n \n\n**Cost\nof revenue**\n\n \n\nOur\ncost of revenue is primarily comprised of the costs to purchase units, construction costs, and capitalized interests.\n\n \n\n**Gross\nprofit and gross profit margin**\n\n \n\nGross\nprofit is the difference between our revenue and cost of sales. Gross profit margin is the profit expressed as a percentage of revenue.\n\n \n\n**Selling,\ngeneral and administrative expenses**\n\n \n\nSelling,\ngeneral and administrative expenses are primarily comprised of personnel costs for general corporate functions and sales and marketing\nstaff, brokerage fees, advertising expenses, taxes and dues, and outsourcing fees.\n\n \n\n**Operating\nprofit and operating profit margin**\n\n \n\nOperating\nprofit is the difference between our revenue and cost of revenue and selling, general and administrative expenses. Operating profit margin\nis the profit margin as a percentage of revenues.\n\n \n\n52\n\n \n\n** **\n\n**Other\nincome (expenses)**\n\n \n\nOther\nincome (expense) is comprised of interest expenses and other income (expenses), in which, from time to time, we have non-recurring, non-operating\ngains and losses that are reflected through other income (expense).\n\n \n\n**Key\nPerformance Indicators**\n\n \n\n**Average\nselling price per unit**\n\n \n\nAverage\nselling price per unit represents the aggregate revenue we recognized from the sale of condominium units during the period divided by\nthe number of condominium units sold and delivered during the period.\n\n \n\n**Occupancy\nrate**\n\n \n\nThe\noccupancy rate is calculated by dividing the number of rooms utilized by the total number of rooms available. The Company utilizes revenue\nper available room as a key performance indicator.\n\n \n\n**Average\ndaily rate (ADR)**\n\n \n\nThe\naverage daily rate is calculated by dividing the total sales by the number of rooms utilized. We set the hotel room rates based on a\nnumber of factors, including local market conditions with reference to room rates set by competitors, recent occupancy rates, and seasonal\noccupancy fluctuations.\n\n \n\n**Revenue\nper available room (RevPAR)**\n\n \n\nRevPAR\nis calculated as room revenue divided by the number of available room nights during the period, and is equivalent to the product of the\noccupancy rate and ADR. We use RevPAR, together with occupancy and ADR, to evaluate the operating performance of our hotel business.\n\n \n\n**A.\nOperating Results**\n\n \n\n**Results\nof Operations**\n\n** **\n\nA\ndetailed comparison of the fiscal year ended March 31, 2025 with the fiscal year ended March 31, 2024 is not included in this annual\nreport. That comparison was included under “Item 5. Operating and Financial Review and Prospects” in our annual report on\nForm 20-F for the fiscal year ended March 31, 2025, filed with the SEC on July 7, 2025, and is incorporated herein by reference. Where\nrelevant to an understanding of a multi-year trend, targeted comparative information for the fiscal year ended March 31, 2024 is included\nin the discussion below.\n\n \n\n**(in thousands, except change % data)**\n\n \n\n  \nFiscal Year Ended March 31, \n\n \n2026(¥)  \n2025(¥)  \n2024(¥) \n\nRevenue \n 22,221,163  \n 20,650,916  \n 14,121,840 \n\nGross profit \n 4,408,421  \n 3,559,270  \n 2,651,889 \n\nGross profit margin \n 19.8% \n 17.2% \n 18.8%\n\nOperating income \n 1,571,580  \n 1,342,516  \n 938,501 \n\nOperating income margin \n 7.1% \n 6.5% \n 6.6%\n\nNet income \n 759,961  \n 753,621  \n 323,605 \n\nOperating cashflow \n (2,201,764) \n 804,637  \n (2,083,273)\n\nInventory \n 16,555,068  \n 13,612,387  \n 13,518,460 \n\nShort-term loans \n 1,605,658  \n 1,885,259  \n 2,574,734 \n\nLong-term loans \n 15,462,426  \n 10,883,950  \n 10,624,137 \n\nInterest expenses \n 328,962  \n 209,971  \n 422,769 \n\n \n\n**Comparison\nof Results of Operations for the Fiscal Years Ended March 31, 2026 and 2025**\n\n** **\n\n  \nFiscal\nYear Ended March 31,  \nVariance \n\n  \n2026($)  \n2026(¥)  \n2025(¥)  \n¥  \nYoY\n% \n\nRevenue \n    \n    \n    \n    \n   \n\nReal estate \n 129,497  \n 20,600,358  \n 18,819,041  \n 1,781,317  \n 9.5%\n\nHotel \n 8,236  \n 1,310,224  \n 1,248,784  \n 61,440  \n 4.9%\n\nOthers \n 1,952  \n 310,581  \n 583,091  \n (272,510) \n (46.7%)\n\nTotal Revenue \n 139,685  \n 22,221,163  \n 20,650,916  \n 1,570,247  \n 7.6%\n\nCost of revenue \n 111,973  \n 17,812,742  \n 17,091,646  \n 721,096  \n 4.2%\n\nGross Profit \n 27,712  \n 4,408,421  \n 3,559,270  \n 849,151  \n 23.9%\n\nSelling,\nGeneral and Administrative Expenses \n 17,833  \n 2,836,841  \n 2,216,754  \n 620,087  \n 28.0%\n\nOperating\nincome \n 9,879  \n 1,571,580  \n 1,342,516  \n 229,064  \n 17.1%\n\nOther\nincome (expense), net \n (2,014) \n (320,376) \n (194,272) \n (126,104) \n 64.9%\n\nNet\nincome before tax \n 7,865  \n 1,251,204  \n 1,148,244  \n 102,960  \n 9.0%\n\nIncome tax expenses \n (3,088) \n (491,243) \n (394,623) \n (96,620) \n 24.5%\n\nNet\nIncome \n 4,777  \n 759,961  \n 753,621  \n 6,340  \n 0.8%\n\n \n\n53\n\n \n\n* *\n\n*Revenues*\n\n \n\nRevenues\nincreased by JPY1,570,247 thousand, or 7.6% year-over-year, to JPY22,221,163 thousand ($139,685 thousand) in the fiscal year ended March\n31, 2026, from JPY20,650,916 thousand in the fiscal year ended March 31, 2025. This increase was primarily driven by the increase in real estate sales. A further breakdown of sales figures is\npresented under “Results of Operations by Segment” below.\n\n  \n\n*Cost\nof Revenues*\n\n \n\nCost\nof revenues increased by JPY721,096 thousand, or 4.2% year-over-year, to JPY17,812,742 thousand ($111,973 thousand), which reflects the\nhigher direct costs associated with the higher revenue during the fiscal year ended March 31, 2026.\n\n \n\n*Gross\nProfit and Gross Profit Margin*\n\n \n\nGross\nprofit was JPY4,408,421 thousand ($27,712 thousand) during the fiscal year ended March 31, 2026, compared to JPY3,559,270 thousand during\nthe fiscal year ended March 31, 2025. Gross profit margin was 19.8% during the fiscal year ended March 31, 2026, compared to 17.2% during\nthe fiscal year ended March 31, 2025.\n\n \n\n*Selling,\nGeneral and Administrative Expenses (“SG&A expenses”)*\n\n \n\nSG&A\nexpenses increased by JPY620,087 thousand or 28.0% year-over-year to JPY2,836,841 thousand ($17,833 thousand), primarily due to:\n\n \n\n \n●\nAn\nincrease in outsourcing fees, mainly due to fees related to investor relations.\n\n \n●\nAn\nincrease in taxes and dues, mainly due to higher non-deductible consumption taxes and higher enterprise tax.\n\n \n\n*Other\nIncome (Expense), net*\n\n \n\nOther\nexpense, net, increased by JPY126,104 thousand, or 64.9%, year-over-year from JPY194,272 thousand to JPY320,376 thousand ($2,014 thousand),\nprimarily due to an increase in interest expense resulting from higher average debt balances and an increase in the effective interest\nrate.\n\n \n\n*Net\nIncome*\n\n \n\nAs\na result of the foregoing, the net income was JPY759,961 thousand ($4,777 thousand) during the fiscal year ended March 31, 2026, compared\nto JPY753,621 thousand during the fiscal year ended March 31, 2025.\n\n \n\n**Results\nof Operations by Segment**\n\n \n\nThe\nfollowing discussion is based on segment information. Sales in each business segment represents sales recorded before intersegment transactions\nare eliminated. Income (loss) before income tax in each business segment represents operating income (loss) reported before intersegment\ntransactions are eliminated and excludes unallocated corporate expenses. Refer to Note 19 of the consolidated financial statements.\n\n** **\n\n**Real\nEstate Segment:**\n\n \n\nThe\nfollowing table presents the segment income before income tax for real estate segment for the fiscal years ended March 31, 2026 and 2025:\n\n \n\n(in\nthousands, except change % data)\n\n \n\n  \nFiscal Year Ended March 31,  \nVariance \n\n  \n2026($)  \n2026(¥)  \n2025(¥)  \n¥  \nYoY % \n\nRevenue \n    \n    \n    \n    \n   \n\nExternal customers \n 129,497  \n 20,600,358  \n 18,819,041  \n 1,781,317  \n 9.5%\n\nIntersegment \n 211  \n 33,580  \n 21,920  \n 11,660  \n 53.2%\n\nTotal Revenue \n 129,708  \n 20,633,938  \n 18,840,961  \n 1,792,977  \n 9.5%\n\nCost of revenue \n 103,428  \n 16,453,324  \n 15,578,567  \n 874,757  \n 5.6%\n\nGross Profit \n 26,280  \n 4,180,614  \n 3,262,394  \n 918,220  \n 28.1%\n\nSelling, General and Administrative Expenses \n 8,567  \n 1,362,798  \n 1,257,330  \n 105,468  \n 8.4%\n\nOperating income \n 17,713  \n 2,817,816  \n 2,005,064  \n 812,752  \n 40.5%\n\nOther income (expense), net \n (1,828) \n (290,863) \n (194,243) \n (96,620) \n 49.7%\n\nIncome before income tax \n 15,885  \n 2,526,953  \n 1,810,821  \n 716,132  \n 39.5%\n\n \n\n  \nFiscal Year Ended March 31,  \nVariance \n\n  \n2026  \n2025  \nAmount  \nPercentage \n\nCondominium renovation \n    \n    \n    \n   \n\nNumber of units sold \n 41  \n 41  \n -  \n 0.0%\n\nAverage selling price per unit \n 187,974,976  \n 192,007,756  \n (4,032,780) \n (2.1)%\n\nReal estate development \n    \n    \n    \n   \n\nNumber of condominium units sold to individual purchasers \n -  \n 33  \n (33) \n -100.0%\n\nNumber of condominium buildings sold to institutional purchasers \n 7  \n 4  \n 3  \n 75.0%\n\nNumber of units included in condominium buildings sold to institutional purchasers \n 127  \n 78  \n 49  \n 62.8%\n\n \n\nFor\nthe fiscal year ended March 31, 2026, sales increased by JPY1,792,977 thousand to JPY20,633,938 thousand ($129,708 thousand). This increase\nwas primarily due to an increase in sales in real estate development. Our sales from new condominium developments increased primarily\ndue to the increase in the number of condominium buildings sold to institutional purchases from 4 buildings for the fiscal year ended\nMarch 31, 2025 to 7 buildings for the fiscal year ended March 31, 2026, up by 3 buildings as well as sales of land for the Sennen project.\nThis increase was partially offset by a decrease in our sales in condominium renovation. Our sales from renovated condominiums decreased by JPY165,344 thousand, as the average selling price per unit decreased from JPY192,008\nthousand in the fiscal year ended March 31, 2025 to JPY187,975 thousand in the fiscal year ended March 31, 2026, while the number of units\nsold remained unchanged at 41 units.\n\n \n\nIncome\nbefore income tax increased by JPY716,132 thousand to JPY2,526,953 thousand ($15,885 thousand) primarily due to an increase in gross\nprofit driven by our real estate development sales, reflecting both a higher number of condominium buildings delivered and an improved\ngross profit margin, partially offset by increases in selling, general and administrative expenses and interest expenses.\n\n \n\n54\n\n \n\n \n\n**Hotel\nSegment:**\n\n \n\nThe\nfollowing table present the segment income before income tax for hotel segment for the fiscal years ended March 31, 2026 and 2025:\n\n \n\n(in\nthousands, except change % data)\n\n \n\n  \nFiscal Year Ended March 31,  \nVariance \n\n  \n2026($)  \n2026(¥)  \n2025(¥)  \n¥  \nYoY % \n\nRevenue \n    \n    \n    \n    \n   \n\nExternal customers \n 8,236  \n 1,310,224  \n 1,248,784  \n 61,440  \n 4.9%\n\nIntersegment \n 1  \n 147  \n 21,725  \n (21,578) \n (99.3%)\n\nTotal Revenue \n 8,237  \n 1,310,371  \n 1,270,509  \n 39,862  \n 3.1%\n\nCost of revenue \n 7,368  \n 1,172,152  \n 1,112,486  \n 59,666  \n 5.4%\n\nGross Profit \n 869  \n 138,219  \n 158,023  \n (19,804) \n (12.5%)\n\nSelling, General and Administrative Expenses \n 556  \n 88,460  \n 94,807  \n (6,347) \n (6.7%)\n\nOperating income \n 313  \n 49,759  \n 63,216  \n (13,457) \n (21.3%)\n\nOther income (expense), net \n 5  \n 819  \n 428  \n 391  \n 91.4%\n\nIncome before income tax \n 318  \n 50,578  \n 63,644  \n (13,066) \n (20.5%)\n\n \n\n  \nFiscal Year Ended March 31,  \nVariance \n\n  \n2026  \n2025  \nAmount  \nPercentage \n\nOccupancy rate \n 64.5% \n 74.7% \n -10.2% \n -13.7%\n\nAverage daily rate \n 22  \n 19  \n 3  \n 16.8%\n\n \n\nFor\nthe fiscal year ended March 31, 2026, sales increased by JPY39,862 thousand to JPY1,310,371 thousand ($8,237 thousand). This increase\nwas mainly due to a higher average daily rate, which increased from approximately JPY19,000 in the fiscal year ended March 31, 2025 to\napproximately JPY22,000 in the fiscal year ended March 31, 2026, partially offset by a decrease in occupancy rate, which decreased from\n74.7% in the fiscal year ended March 31, 2025 to 64.5% in the fiscal year ended March 31, 2026. The decrease in occupancy rate was primarily attributable to external factors affecting inbound travel demand, including the Chinese government’s\nadvisory against travel to Japan and heightened geopolitical tensions in the Middle East.\n\n \n\nIncome\nbefore income tax decreased by JPY13,066 thousand to JPY50,578 thousand ($318 thousand) primarily due to an increase in hotel operating\ncosts that exceeded the growth in revenue, which, together with the lower occupancy rates, resulted in a decline in gross profit.\n\n \n\n**Other\nSegment:**\n\n \n\nThe\nfollowing table present the segment income before income tax for other segment for the fiscal years ended March 31, 2026 and 2025:\n\n \n\n(in\nthousands, except change % data)\n\n  \nFiscal Year Ended March 31,  \nVariance \n\n  \n2026($)  \n2026(¥)  \n2025(¥)  \n¥  \nYoY % \n\nRevenue \n    \n    \n    \n    \n   \n\nExternal customers \n 1,952  \n 310,581  \n 583,091  \n (272,510) \n (46.7%)\n\nIntersegment \n 2,154  \n 342,723  \n 183,549  \n 159,174  \n 86.7%\n\nTotal Revenue \n 4,106  \n 653,304  \n 766,640  \n (113,336) \n (14.8%)\n\nCost of revenue \n 3,231  \n 514,009  \n 562,360  \n (48,351) \n (8.6%)\n\nGross Profit \n 875  \n 139,295  \n 204,280  \n (64,985) \n (31.8%)\n\nSelling, General and Administrative Expenses \n 875  \n 139,127  \n 303,413  \n (164,286) \n (54.1%)\n\nOperating income \n -  \n 168  \n (99,133) \n 99,301  \n (100.2%)\n\nOther income (expense), net \n (76) \n (12,108) \n (5,541) \n (6,567) \n 118.5%\n\nLoss before income tax \n (76) \n (11,940) \n (104,674) \n 92,734  \n (88.6%)\n\n \n\nFor\nthe fiscal year ended March 31, 2026, sales decreased by JPY113,336 thousand to JPY653,304 thousand ($4,106 thousand). This decrease\nwas mainly due to a decrease in sales at Yantai Propolife Wood Industry (JPY26,094 thousand, compared with JPY140,144 thousand in the\nprior year) and the absence of sales at Propolife Vietnam (nil, compared with JPY113,726 thousand in the prior year), partially offset\nby an increase in sales at Okinawa Igeto.\n\n \n\nLoss\nbefore income tax decreased by JPY92,734 thousand to JPY11,940 thousand ($76 thousand) primarily due to a decrease in selling, general\nand administrative expenses of JPY164,286 thousand.\n\n \n\n**Seasonality\nand transaction timing**\n\n \n\nOur\nresults are not subject to conventional seasonality in the sense of a recurring intra-year demand cycle; however, our revenue and operating\nresults can vary significantly between periods because of the timing of construction completion, property delivery and legal settlement,\nthe concentration of individually significant whole-building or land sales in particular periods, customer mortgage-closing patterns,\nthe availability of land and renovation inventory, and inbound-tourism and holiday patterns affecting hotel occupancy, ADR and RevPAR.\nBecause the timing of a limited number of projects can materially shift results between periods, our results for any interim period or\nfiscal year may not be indicative of results for subsequent periods.\n\n \n\n**B.\nLiquidity and Capital Resources**\n\n \n\n**Cash\nFlows/Liquidity**\n\n \n\n**Cash\nflows for the fiscal years ended March 31, 2026 and 2025**\n\n \n\nAs\nof March 31, 2026, we had cash of JPY2,281,913 thousand ($14,345 thousand) and total debt obligations due within the next 12 months\nof approximately JPY6,490,348 thousand, including JPY4,878,372 thousand of current maturities of long-term debt. We manage liquidity\nthrough a combination of cash generated from property sales and hotel and property-management operations, project-level and corporate\nborrowings, and, when appropriate, equity financing.\n\n \n\nOur\nreal-estate financing is generally structured by reference to individual projects and the expected timing of property completion and\nsale. Management monitors liquidity through cash-flow forecasts, project-level cash and debt-maturity schedules, lender and covenant\nmonitoring, and evaluation of expected proceeds from contracted and anticipated property sales. We expect to satisfy debt maturities\nduring the next 12 months through a combination of cash on hand, proceeds from the completion and sale of real-estate projects, cash\ngenerated from operations, and the refinancing or extension of certain project-level borrowings.\n\n \n\n55\n\n \n\n** **\n\nOur\nliquidity outlook depends on the timing of property sales and settlements, continued access to financing and the cost of borrowing. Delays\nin project completion or asset sales, reduced customer demand or an inability to refinance maturing obligations on acceptable terms could\nadversely affect our liquidity. To preserve liquidity, management may adjust the timing of new property acquisitions, development expenditures,\ndiscretionary capital investments and shareholder distributions. Based on our current cash-flow forecast and financing plans, we believe\nthat our available liquidity will be sufficient to meet our obligations for at least the next 12 months.\n\n \n\nAs\nof March 31, 2026, we had leasehold and guarantee deposits of JPY402,318 thousand, compared with JPY465,968 thousand as of March 31,\n2025. These deposits consist of security deposits placed with hotel owners (approximately JPY178 million) and office and other leasehold\ndeposits, and are generally unavailable for our operating or financing requirements during the applicable lease terms.\n\n \n\nUnder\nour hotel lease agreements, we generally provide the hotel owner with a deposit equal to six months’ rent at commencement of the\nlease. The hotel owner may apply the deposit against unpaid rent or other obligations, and we may be required to replenish any amount\napplied within five days. The deposits are generally refundable after expiration of the lease, return of the hotel property and settlement\nof all outstanding obligations.\n\n \n\nDuring\nthe fiscal year ended March 31, 2026, the decrease in leasehold and guarantee deposits provided JPY63,650 thousand of operating cash,\ncompared with JPY119,560 thousand of cash used to fund additional deposits during the fiscal year ended March 31, 2025. The FY2025 increase\nprincipally related to the deposit for our new head office in connection with the relocation completed in April 2025.\n\n \n\nWe\nincorporate existing and expected security-deposit requirements into our rolling liquidity forecasts. Future hotel openings or lease\nrenewals may require additional deposits and thereby reduce cash otherwise available for property investment, debt repayment and other\ncorporate purposes.\n\n \n\n(in\nthousands)\n\n** **\n\n  \nFiscal\nYear Ended\nMarch 31, 2026  \n\nFiscal Year Ended\nMarch 31,\n2025\n \n\n  \n(US$)  \n(JPY)  \n(JPY) \n\nCash flows from operating\nactivities: \n    \n    \n   \n\nNet income \n 4,777  \n 759,961  \n 753,621 \n\nDepreciation and amortization \n 453  \n 72,077  \n 144,087 \n\nAmortization of debt issuance\ncosts \n 52  \n 8,292  \n 84,928 \n\nStock-based compensation\nexpense \n 80  \n 12,709  \n - \n\nDeferred income taxes \n 114  \n 18,079  \n 91,910 \n\nProvision of allowance\nfor credit losses \n (18) \n (2,792) \n 84,048 \n\nChanges\nin operating assets and liabilities: \n    \n    \n   \n\n(Increase) decrease in\ntrade notes and accounts receivable, net \n (144) \n (22,874) \n 43,435 \n\n(Increase) in inventories,\nnet \n (18,498) \n (2,942,681) \n (93,927)\n\n(Increase) decrease in\nconsumption taxes receivable \n (1,093) \n (173,854) \n 63,639 \n\n(Increase) decrease in\nprepaid expenses \n (656) \n (104,298) \n (44,678)\n\n(Increase) decrease in\nadvances to vendors \n (112) \n (17,743) \n (70,369)\n\nDecrease (increase) in\nleasehold and guarantee deposits \n 400  \n 63,650  \n (119,560)\n\n(Increase) decrease in\nlong-term prepaid expenses \n (545) \n (86,754) \n (6,639)\n\nIncrease (decrease) in\naccounts payables \n 456  \n 72,493  \n (40,412)\n\nIncrease (decrease) in\naccrued expenses \n 121  \n 19,187  \n (102,236)\n\nIncrease (decrease) in\nincome taxes payable \n 597  \n 94,893  \n 182,562 \n\nIncrease (decrease) in\ncontract liabilities \n 50  \n 7,926  \n (100,391)\n\n(Decrease) increase in\ndeposits received \n (117) \n (18,665) \n 20,510 \n\nOther, net \n 243  \n 38,630  \n (85,891)\n\nNet\ncash flows (used in) provided by operating activities \n (13,840) \n (2,201,764) \n 804,637 \n\nCash flows from investing\nactivities: \n    \n    \n   \n\nPurchase of short-term\ninvestments \n (2,829) \n (450,115) \n (367,150)\n\nProceeds from sales of\nshort-term investments \n 1,890  \n 300,662  \n 223,921 \n\nPurchases of property and\nequipment \n (10,273) \n (1,634,243) \n (37,464)\n\nPurchases of software \n (16) \n (2,584) \n (19,563)\n\nPurchases of long-term\ninvestments \n -  \n -  \n (270,000)\n\nProceeds from redemption\nof long-term investments \n 1,697  \n 270,000  \n - \n\nOther,\nnet \n (27) \n (4,356) \n (5,599)\n\nNet\ncash flows (used) in investing activities \n (9,558) \n (1,520,636) \n (475,855)\n\nCash flows from financing\nactivities: \n    \n    \n   \n\n(Decrease) in short-term\nborrowings, net \n (1,739) \n (276,590) \n (685,830)\n\nBorrowings from long-term\nloans \n 76,218  \n 12,124,650  \n 12,946,844 \n\nRepayments for long-term\nloans \n (47,400) \n (7,540,495) \n (12,708,107)\n\nProceeds from issuance\nof bonds \n 314  \n 50,000  \n - \n\nRedemption of bonds \n (211) \n (33,500) \n (49,270)\n\nPayments for finance leases \n (53) \n (8,412) \n (8,664)\n\nPayment for debt issuance\ncosts \n (127) \n (20,221) \n (67,498)\n\nProceeds from issuance of shares \n -  \n -  \n 1,379,632 \n\nPayments for dividends \n (495) \n (78,703) \n - \n\nPayments of listing expenses \n (2,087) \n (331,966) \n (235,037)\n\nPurchase of treasury\nshares \n (14) \n (2,222) \n - \n\nNet\ncash flows provided by financing activities \n 24,405  \n 3,882,541  \n 572,070 \n\nEffect\nof exchange rate changes on cash and cash equivalents \n 8  \n 1,257  \n 1,422 \n\nNet increase\nin cash and cash equivalents \n 1,015  \n 161,398  \n 902,274 \n\nCash\nand cash equivalents at the beginning of the year \n 13,330  \n 2,120,515  \n 1,218,241 \n\nCash\nand cash equivalents at the end of the year \n 14,345  \n 2,281,913  \n 2,120,515 \n\nSUPPLEMENTAL CASH FLOW INFORMATION: \n    \n    \n   \n\nCash paid for interest \n 3,101  \n 493,261  \n 476,650 \n\nCash paid for taxes \n 2,547  \n 405,140  \n 127,857 \n\n** **\n\n56\n\n \n\n** **\n\n**Operating\nActivities**\n\n \n\nNet\ncash used in operating activities was JPY2,201,764 thousand ($13,840 thousand) in   the fiscal year ended March 31, 2026, compared\nwith net cash provided by operating activities of JPY804,637 thousand ($5,058 thousand) in the fiscal year ended March 31, 2025. The\nJPY3,006,401 thousand year-over-year change primarily reflected a greater investment in real-estate inventory during FY2026, partially\noffset by a decrease in leasehold and guarantee deposits.\n\n \n\nCash\nused for inventory investment during the fiscal year ended March 31, 2026 primarily related to acquisitions of pre-owned condominium\nunits for renovation and resale and land and construction expenditures for residential development projects, reflecting increases of\nJPY1,325,813 thousand in real estate properties held for sale and JPY1,516,701 thousand in real estate properties in progress.\n\n \n\nBy\ncomparison, operating cash flow in the fiscal year ended March 31, 2025 benefited from the settlement of properties developed or acquired\nin earlier periods and a comparatively small net increase in inventories (JPY93,927 thousand). The timing of our operating cash flows\nmay vary materially between periods because cash expenditures for property acquisition and development generally occur before the related\nproperty sale and collection of proceeds.\n\n \n\nManagement\nmonitors working capital through cash-flow forecasts, project-level acquisition, development and settlement schedules, inventory-aging\nreports and debt-maturity monitoring. We generally seek to align project-financing maturities with expected property-sale dates and evaluate\nthe timing of new acquisitions and development expenditures in light of available cash, expected sale proceeds and financing capacity.\nDelays in project completion, property sales, purchaser settlement or refinancing could extend the cash-conversion cycle and increase\nour financing requirements and interest expense.\n\n \n\n**Investing\nActivities**\n\n \n\nIn\nthe fiscal year ended March 31, 2026, net cash used in investing activities increased to JPY1,520,636 thousand ($9,559 thousand) from\nJPY475,855 thousand ($2,991 thousand) in the prior year. This increase was primarily driven by the acquisition of land for future development,\nparticularly the land in Asakusa, Taito-ku acquired in October 2025 for the development of Prostyle Ryokan Tokyo Asakusa II. By contrast,\nin the prior year, investing outflows were lower, reflecting the absence of significant new land acquisitions and a focus on completing\nexisting projects.\n\n \n\nIn\nline with our capital-allocation policy, we evaluate potential property acquisitions based on expected project returns, alignment with\nour development strategy, and our cash and financing capacity. The timing and size of land purchases may vary between periods depending\non development opportunities and market conditions. We monitor capital-expenditure commitments closely to ensure alignment with our liquidity\nforecasts and project pipeline.\n\n \n\n**Financing\nActivities**\n\n \n\nIn the fiscal year ended March 31, 2026, net cash provided by financing\nactivities increased to JPY3,882,541 thousand ($24,406 thousand) from JPY572,070 thousand ($3,596 thousand) in the prior year. In FY2026,\nwe obtained JPY12,124,650 thousand in new long-term loans, primarily to fund the acquisition of land and to finance ongoing development\nprojects. These borrowings were primarily secured by project assets. Short-term borrowings decreased by JPY276,590 thousand on a net basis.\n\n \n\nDuring FY2026, we repaid JPY7,540,495 thousand of long-term loans, consistent\nwith the maturity schedules of our project and corporate financing. In comparison, in FY2025, net cash inflows were lower, as we obtained\nJPY12,946,844 thousand in long-term borrowings and repaid JPY12,708,107 thousand, reflecting fewer new project starts and a lower need\nfor financing at that time.\n\n \n\nIn\nFY2026, we paid dividends of JPY78,703 thousand, compared to nil in FY2025. In March 2026, we commenced repurchases under our share repurchase\nprogram, repurchasing JPY2,222 thousand of shares by year-end. However, on April 7, 2026, we discontinued the repurchase program, and\non May 15, 2026, our Board of Directors resolved to declare a cash dividend funded by the remaining unused portion of the program in\nthe aggregate amount of $519,414, or $0.022 per share, which was paid on June 30, 2026. See Item 16E and Note 18 to our consolidated\nfinancial statements.\n\n \n\nAs\npart of our capital policy, we balance debt financing, project-level borrowing, shareholder returns, and reinvestment in future growth.\n\n \n\n**Contractual\nObligations and Commitments**\n\n \n\nAs of March 31, 2026, the Company had a total of JPY21,869,409 thousand (approximately $137,475 thousand) of contractual\nobligations for future payments.\n\n \n\nSee Notes 10 and 13 and 18 to our consolidated financial statements for\nadditional information regarding debt, leases and other commitments.\n\n \n\n  \nAs of March 31, 2026\n\n(In thousands in ¥) \n  \n  \n   \nPayments due by period: \n\n  \nCurrency \nInterest Structure \nTotal  \nLess than\n1 year  \n1 – 3 years  \n4 – 5 years  \nMore than\n5 years \n\nShort-term debt \nJPY \nFixed rate \n¥622,802  \n¥622,802  \n¥—  \n¥—  \n¥— \n\nShort-term debt \nJPY \nVariable rate \n 985,598  \n 985,598  \n —  \n —  \n — \n\nLong-term debt \nJPY \nFixed rate \n 4,810,035  \n 1,811,938  \n 2,343,825  \n 238,854  \n 415,418 \n\nLong-term debt \nJPY \nVariable rate \n 10,732,747  \n 3,094,030  \n 7,614,290  \n 24,427  \n — \n\nBonds \nJPY \nFixed rate \n 46,500  \n —  \n —  \n —  \n 46,500 \n\nFinance lease payment \nJPY \nFixed rate \n 21,667  \n 8,432  \n 11,818  \n 1,417  \n — \n\nOperating lease payment \nJPY \nFixed rate \n 4,650,060  \n 581,655  \n 1,095,147  \n 820,945  \n 2,152,313 \n\nTotal \n  \n  \n¥21,869,409  \n¥7,104,455  \n¥11,065,080  \n¥1,085,643  \n¥2,614,231 \n\n \n\n  \nTotal\n\n(In thousands in US$) \n  \n  \n   \nPayments due by period: \n\n  \nCurrency \nInterest Structure \nTotal  \nLess than\n1 year  \n1 – 3 years  \n4 – 5 years  \nMore than\n5 years \n\nShort-term debt \nJPY \nFixed rate \n$3,915  \n$3,915  \n$—  \n$—  \n$— \n\nShort-term debt \nJPY \nVariable rate \n 6,196  \n 6,196  \n —  \n —  \n — \n\nLong-term debt \nJPY \nFixed rate \n 30,236  \n 11,390  \n 14,734  \n 1,501  \n 2,611 \n\nLong-term debt \nJPY \nVariable rate \n 67,469  \n 19,450  \n 47,865  \n 154  \n — \n\nBonds \nJPY \nFixed rate \n 292  \n —  \n —  \n —  \n 292 \n\nFinance lease payment \nJPY \nFixed rate \n 136  \n 53  \n 74  \n 9  \n — \n\nOperating lease payment \nJPY \nFixed rate \n 29,231  \n 3,656  \n 6,884  \n 5,161  \n 13,530 \n\nTotal \n  \n  \n$137,475  \n$44,660  \n$69,557  \n$6,825  \n$16,433 \n\n \n\n57\n\n \n\n** **\n\n**Off-Balance\nSheet Arrangements**\n\n \n\nAs\nof March 31, 2026, the Company did not have any off-balance sheet arrangements that have or are reasonably likely to have a material\ncurrent or future effect on our financial condition, results of operations, liquidity, cash requirements or capital resources.\n\n \n\n**Capital\nExpenditures**\n\n \n\nOur\ncapital expenditures consist principally of land, buildings, leasehold improvements, construction in progress, furniture, fixtures and\nequipment used in our hotel and other operating businesses. Capital expenditures exclude land and other real-estate assets acquired for\ndevelopment and resale that are classified as inventories.\n\n \n\nDuring\nthe fiscal year ended March 31, 2026, cash used to acquire property and equipment was JPY1,634,243 thousand, compared with JPY37,464\nthousand during the fiscal year ended March 31, 2025. The increase of approximately JPY1,596,779 thousand was primarily attributable\nto our acquisition in October 2025 of approximately 280.88 square meters of land at 6-5-2 Asakusa, Taito-ku, Tokyo for the development\nof Prostyle Ryokan Tokyo Asakusa II.\n\n \n\nThe\nsite is located within approximately 300 meters of our existing Prostyle Ryokan Tokyo Asakusa hotel. Our current development plan contemplates\na 10-story hotel containing 36 guest rooms. Construction is expected to begin in November 2026, with completion expected in July 2028\nand opening expected in October 2028. We expect the proximity of the two Asakusa hotels to provide opportunities for shared operating\nresources and other operational efficiencies.\n\n \n\nOn\nan accrual basis, capital expenditures were JPY1,634,243 thousand in FY2026, of which approximately JPY1,355,505 thousand related to\nour Hotel segment, JPY174,117 thousand related to our Real Estate segment, JPY3,084 thousand related to our Other segment and JPY101,837\nthousand related to corporate assets. By comparison, FY2025 capital expenditures were JPY37,464 thousand and consisted primarily of JPY18,192\nthousand in the Hotel segment, JPY750 thousand in the Real Estate segment, JPY15,244 thousand in the Other segment and JPY3,275 thousand\nin corporate assets.\n\n \n\nWe\nfunded the land acquisition with project-specific borrowings, and we plan to fund the remaining development expenditures, approximately\n80% of which are due upon completion of construction, with borrowings to be arranged at the time of payment. These expenditures, together\nwith any related borrowing and interest costs, will reduce our available liquidity before the hotel begins generating revenue and operating\ncash flow. The timing and amount of the remaining expenditures may be affected by final design, construction costs, regulatory approvals,\ncontractor availability and financing conditions.\n\n \n\n**C.\nResearch and Development, Patents and Licenses**\n\n \n\nNot\napplicable.\n\n \n\n**D.\nTrend Information**\n\n \n\n**Real\nEstate Markets in Japan**\n\n \n\nThe\neconomic condition of the real estate industry is intricately dependent on several key factors. In addition to economic growth and employment\nlevel, demographic trends, including population growth and urbanization, shape long-term demand for residential and commercial properties.\nInterest rates also play a pivotal role, as they directly influence mortgage costs, affecting both buyer affordability and investor returns.\nAdditionally, government policies, such as tax incentives, zoning laws, and housing subsidies, can either stimulate or hinder real estate\nactivities. Lastly, the availability of financing and credit conditions, coupled with market sentiment and consumer confidence, further\ndetermines the overall health and direction of the real estate sector.\n\n \n\n*General\ngeographical market trends*\n\n \n\nFor\nthe long-term outlook, while the decline in condominium demand may be inevitable due to the aging society in Japan, the data published\nby the National Institute of Population and Social Security Research (“IPSS”) indicates that the population in Tokyo, our\nfocus market, is expected to be less affected. According to IPSS’s “Regional Population Projections for Japan (2023 Estimates),”\npublished in December 2023 and based on the 2020 national census with projections through 2050, Tokyo is projected to be among the most\nresilient areas in Japan, being one of the few prefectures whose total population is expected to continue increasing in the near term\neven as the national population declines. Population concentration in central Tokyo, including the three central wards of Chiyoda, Chuo,\nand Minato where our condominium renovation business operates, is anticipated to remain comparatively strong, supporting demand for condominiums\nin our focus market.\n\n \n\n*Governmental\npolicies regarding residential real estates*\n\n \n\nJapanese\ngovernment has certain policies to lessen homebuyers’ burden at the time they purchase homes. For example, National Tax Agency\n(NTA) has provided the exemption of monetary tax gifts received from direct ascendants for the construction, purchase, or renovation\nof a residence intended for personal use and meeting certain requirements. Additionally, subject to certain conditions, NTA has allowed\nindividuals to utilize a housing loan or similar financing to construct, acquire, or renovate a personal residence and beginning using\nthe residence as their primary dwelling during January 1, 2022 to December 31 2025, to deduct, for the year of acquisition and subsequent\nyears, an amount calculated based on the outstanding balance of the housing loan at the end of each year from their income tax liability.\nThese policies were introduced to help counteract the effect of the consumption tax rate increase in 2014 and 2019 on housing demand\nand were extended in 2024.\n\n \n\n58\n\n \n\n* *\n\n*Market\noutlook for new condominium units*\n\n \n\nIn\n2025, new condominium prices in the greater Tokyo metropolitan area reached record highs, particularly in Tokyo’s inner 23 wards.\nThe average price per unit for new condominiums in the greater Tokyo metropolitan area, including Tokyo, Kanagawa, Saitama, and Chiba\nprefectures, was JPY91.82 million (approximately $577 thousand), a 17.4% increase from 2024 and a record high, according to “Trends\nin the Greater Tokyo New Condominium Market in 2025” published by the Real Estate Economic Institute on January 26, 2026 (“REI\n2025 Report”). The average unit price per square meter (approximately 10.76 square feet) was JPY1,392,000 (approximately $9 thousand),\nan increase of 18.3% from 2024, also a record high. Specifically, the average price per unit for new condominiums in the inner 23 wards\nof Tokyo in 2025 was JPY136.13 million (approximately $856 thousand), a 21.8% increase from the previous year, while the average unit\nprice per square meter was JPY2,109,000 (approximately $13 thousand), a 23.3% increase from the previous year. In the six central wards\nof Tokyo (Chiyoda, Chuo, Minato, Shinjuku, Bunkyo, and Shibuya), the average price per unit reached JPY195.03 million (approximately\n$1.23 million). At the same time, the number of new condominium units launched in the greater Tokyo metropolitan area fell 4.5% from\nthe previous year to 21,962 units in 2025, the lowest level since 1973, reflecting constrained land supply and elevated construction\ncosts. We believe that the increase in new condominium prices is due to higher land prices, labor costs, and raw material costs. More\ninvestors may have decided to speculatively purchase new condominium units because of the Japanese yen depreciation and rising real estate\nproperty prices.\n\n \n\nThe\nREI 2025 Report also indicates that the first-month contract rate of new condominiums (the percentage of newly released condominiums\nthat were under contract within the first month) in the greater Tokyo metropolitan area fell from 66.9% in 2024 to 63.9% in 2025, remaining\nbelow 70% for the second consecutive year. The first-month contract rate for new condominiums in the inner 23 wards of Tokyo was 64.6%\nin 2025, down 4.2 percentage points from the previous year.\n\n \n\nAdditionally,\nwhile still moderate by historical standards, housing mortgage interest rates have been rising. In Japan, individual homebuyers typically\nhave the option to choose between a full-term fixed interest rate, a limited-term fixed interest rate (e.g., for two, three, or five\nyears), or a floating interest rate. Flat 35, a long-term fixed-rate housing mortgage provided through partnerships among private financial\ninstitutions and the Japan Housing Finance Agency, offers a fixed interest rate, ensuring stable payments and eliminating the risk of\nfuture rate hikes. As a result, Flat 35 is popular among individual homebuyers for its predictability. In contrast, floating rate loans\nstart with a lower initial rate but carry the risk of future increases. The choice between the two depends on the borrower’s risk\ntolerance and ability to manage potential interest rate fluctuations over the long term, typically 30 to 35 years. As of June 2026, the\nmost frequent Flat 35 interest rate for loan terms of 21 to 35 years was 3.21% per annum, according to the Japan Housing Finance Agency,\nup from approximately 1.85% in June 2024. Following the Bank of Japan’s exit from its negative interest rate policy in 2024 and\nsubsequent increases in its policy rate, interest rates on variable-rate mortgages have also begun to rise after a prolonged period of\ndecline. We believe that the rising interest rate environment, together with elevated property prices, may weigh on homebuyers’\npurchasing capacity, although demand in central Tokyo has so far remained resilient.\n\n \n\nThe\noutlook for new condominium markets in our geographic markets remains firm. The “Greater Tokyo and Kinki Area Condominium Market\nForecast — Supply Forecast for 2026” published by the Real Estate Economic Institute on December 23, 2025, projects that\nthe supply of new condominiums in the greater Tokyo metropolitan area will increase by approximately 2.2% year-on-year to around 23,000\nunits in 2026, although supply in the 23 wards of Tokyo is expected to decline by approximately 5.9% to around 8,000 units due to the\ndifficulty of securing development sites. The popularity of high-end properties in central Tokyo is expected to continue, and sales prices\nare expected to remain at high levels. Separately, new condominium housing starts in the greater Tokyo metropolitan area declined 19.0%\nyear-on-year in the January–October 2025 period, based on the construction starts statistics of the Ministry of Land, Infrastructure,\nTransport and Tourism, partly reflecting the mandatory energy-efficiency standards that took effect in April 2025.\n\n \n\n*Market\noutlook for pre-owned condominium units*\n\n \n\nThe\npre-owned condominium market in the greater Tokyo Metropolitan area has experienced a significant shift since around 2019, challenging\nJapan’s traditional preference for new construction. According to the Trends in the Metropolitan Real Estate Distribution Market\n(2022) by REIN dated January 23, 2023, in 2015, 41,553 new condo units were supplied, while 34,776 pre-owned condominium contracts were\nrecorded. However, in 2016, for the first time, the number of pre-owned condominium contracts (37,189) surpassed the supply of new units\n(36,960). Although these figures briefly converged in 2017 and 2018, from 2019 onwards, pre-owned condominium contracts have consistently\noutnumbered new unit supplies. This trend is largely due to the persistently high sales prices of newly built condominiums, particularly\nin Tokyo. According to “Trends in the Greater Tokyo Real Estate Distribution Market (FY2025)” published by the Real Estate\nInformation Network for East Japan (“REINS”) on April 17, 2026 (“REINS FY2025 Report”), the average unit price\nper square meter for contracted pre-owned condominium units in the greater Tokyo metropolitan area in the fiscal year ended March 31,\n2026 was JPY846,300 (approximately $5 thousand), substantially lower than that of new condominium units in the same area. See “—Market\noutlook for new condominium units.” Consequently, more affordable pre-owned condominiums are increasingly being recognized as a\nviable option. The REINS FY2025 Report also shows that the number of contracts executed for pre-owned condominiums in the greater Tokyo\nmetropolitan area was 49,314 in the fiscal year ended March 31, 2026 (up 24.1% from the previous fiscal year), a record high and the\nthird consecutive year of increase, with contracts rising year-on-year across all four prefectures, including the 23 wards of Tokyo.\n\n \n\nDespite\ntheir affordability compared to new condominium units, pre-owned condominium unit prices are also rising. The REINS FY2025 Report indicates\nthat the average unit price per square meter of contracted pre-owned properties in the greater Tokyo metropolitan area in the fiscal\nyear ended March 31, 2026 was JPY846,300 (approximately $5 thousand, an increase of 8.4% from the previous fiscal year), an increase\nfor the thirteenth consecutive year. The prices of pre-owned condominiums rose in all four prefectures in the greater Tokyo metropolitan\narea. The average contract price of pre-owned condominium units was JPY53.22 million (approximately $335 thousand, an increase of 7.8%\nfrom the previous fiscal year), also rising for the thirteenth consecutive year and reaching a record high.\n\n \n\n59\n\n \n\n \n\nLastly,\nthe share of pre-owned condominium contracts for buildings less than 10 years old decreased from 27.1% in 2015 to 23.7% in 2022, according\nto the Real Estate Distribution Market in the Greater Tokyo Metropolitan Area by Building Age (2022) by REIN. Meanwhile, the share for\nbuildings aged 21-30 years and those over 31 years increased from 17.1% to 18.5% and from 24.3% to 31.5%, respectively. This trend is\nexpected to persist, with a growing number of contracts for renovated older condominiums as buildings continue to age, driving demand\nfor renovations. We believe data is valuable for understanding the ongoing and future trends in the greater Tokyo metropolitan area’s\ncondominium market.\n\n \n\n**Global\nConsiderations**\n\n \n\nIn\naddition to ongoing geopolitical conflicts and related economic sanctions, evolving\ninternational trade and tariff measures, continued depreciation of the yen against the U.S. dollar, elevated construction and raw-material\ncosts, and a rising domestic interest-rate environment could lead to higher input and financing costs and disruptions in global markets. It\nis unclear how the continued development and complexity of this situation will affect the Japanese economy and our business in the future.\nIn particular, there is a risk that changes related to the acquisition of new customers and additional purchases by existing customers\ncould adversely affect the Company’s results of operations; that deteriorating global economic conditions could have an adverse\neffect on the Company’s industry, business and results of operations; and that many of the other risks listed under “Risk\nFactors” could have an incremental effect.\n\n \n\nExcept as discussed above and elsewhere in this annual report, management\nhas not identified any additional known trends, uncertainties, demands, commitments or events that it currently expects to have a material\neffect on our revenues, profitability, liquidity or capital resources. This assessment is based on information available as of the date\nof this annual report and is subject to the risks and uncertainties described under *“Risk Factors*”.\n\n \n\n**E.\nCritical Accounting Estimates**\n\n \n\n**Critical\nAccounting Policies and Estimates**\n\n \n\nOur\nconsolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these consolidated\nfinancial statements and accompanying notes requires us to make estimates and judgments that affect the reported amounts of assets, liabilities,\nrevenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and\non various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making\njudgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We have identified certain\naccounting policies that are significant to the preparation of our consolidated financial statements. These accounting policies are important\nfor an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important\nto the portrayal of our financial conditions and results of operations and require management’s difficult, subjective, or complex\njudgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in\nsubsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and\nbecause of the possibility that future events affecting the estimate may differ significantly from management’s current judgments.\nWhile our significant accounting policies are more fully described in Note 2 to the consolidated financial statements included elsewhere\nin this annual report, we believe the following critical accounting policies involve the most significant estimates and judgments used\nin the preparation of our consolidated financial statements.\n\n \n\n**Use\nof Estimates**\n\n \n\nSignificant\naccounting estimates reflected in our consolidated financial statements include impairment of long-lived assets, valuation of stock-based compensation,\nrecoverability of deferred taxes and allowance for credit losses. Economic conditions may increase the inherent uncertainty in the estimates and assumptions indicated above. Actual\nresults may differ from previously estimated amounts, and such differences may be material to our consolidated financial statements.\n\n \n\n60\n\n \n\n \n\nThe\nfollowing critical accounting policies rely upon assumptions and estimates and were used in the preparation of our financial statements:\n\n \n\n**Recoverability\nof Real-Estate Inventories**\n\n** **\n\nAs\nof March 31, 2026, our inventories totaled JPY16,555,068 thousand, including JPY7,513,572 thousand of real-estate properties held for\nsale and JPY8,739,298 thousand of real-estate properties in progress. We carry inventories at the lower of cost and net realizable value.\nDetermining net realizable value requires significant judgment because our projects differ in location, stage of completion, target customer,\nexpected selling method and anticipated settlement date.\n\n \n\nFor\neach material project, we estimate the expected selling price based on executed contracts, current asking prices, recent comparable transactions,\nexpected market conditions and the intended exit strategy. We then deduct estimated remaining construction, renovation, selling, disposal\nand other costs necessary to complete and sell the property. Our estimates are also affected by expected project-completion and sale\ndates because delays may result in additional construction, financing, maintenance and marketing costs.\n\n \n\nInventories\nand their composition are disclosed in Note 5 of the consolidated financial statements.\n\n \n\n**Warranty\nObligations**\n\n** **\n\nWe\nprovide purchasers of renovated condominium units with a two-year non-conformity warranty, in addition to statutory liabilities under\nJapanese law. These warranties are assurance-type warranties that do not represent separate performance obligations. We estimate expected\nwarranty costs based on historical repair experience. Because our historical warranty costs have been insignificant, no warranty reserve\nwas recorded as of March 31, 2026.\n\n \n\n**Impairment\nof Long-Lived Assets**\n\n \n\nAs\nof March 31, 2026, our property, plant and equipment totaled JPY1,929,365 thousand and our operating lease right-of-use assets totaled\nJPY4,059,263 thousand. These assets primarily relate to our hotel operations, offices and the land acquired for future hotel development.\n\n \n\nWe\nreview long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.\nPotential indicators include sustained operating losses, reductions in occupancy, ADR or RevPAR, adverse changes in market conditions,\nconstruction delays or cost overruns, plans to suspend or abandon a project, changes in the expected use of an asset, and changes in\nlease or operating arrangements.\n\n \n\nWhen\na triggering event exists, we group assets at the lowest level for which identifiable cash flows are largely independent and compare\nthe carrying amount with the undiscounted cash flows expected from the asset group. These projections require estimates of occupancy,\nADR, RevPAR, revenue growth, operating margins, rent, payroll and other operating costs, capital expenditures, remaining useful life\nand the expected disposition value. If the carrying amount is not recoverable, we measure impairment using estimated fair value.\n\n \n\n**Realizability\nof Deferred Tax Assets**\n\n \n\nAs\nof March 31, 2026, we had gross deferred tax assets of JPY2,039,183 thousand and a valuation allowance of JPY141,329 thousand. After\ndeferred tax liabilities of JPY1,457,166 thousand, our net deferred tax asset was JPY440,688 thousand. We also had net operating loss\ncarryforwards of JPY620,486 thousand.\n\n \n\nWe\nrecognize deferred tax assets only to the extent that it is more likely than not that they will be realized. This assessment requires\nsignificant judgment regarding the timing, amount and character of future taxable income during the periods in which temporary differences\nreverse and tax-loss carryforwards remain available.\n\n \n\nIn\nevaluating realizability, we consider objective positive and negative evidence, including historical taxable income or losses, the consistency\nand predictability of recent earnings, reversals of existing taxable temporary differences, expiration dates of tax attributes, jurisdictional\nrestrictions and prudent and feasible tax-planning strategies. Forecasted taxable income is based on our approved business plan and incorporates\nassumptions concerning project completions and sales, hotel performance, operating margins, financing costs and other taxable income\nand deductions.\n\n \n\n**Allowance\nfor Credit Losses**\n\n \n\nWe\nestimate expected lifetime credit losses on trade receivables and leasehold and guarantee deposits under ASC 326. As of March 31, 2026,\nour allowance associated with non-current assets was JPY81,256 thousand, compared with JPY84,048 thousand at March 31, 2025. A substantial\nportion of this allowance relates to leasehold and guarantee deposits, including deposits associated with hotel arrangements.\n\n \n\nOur\nestimate begins with historical loss experience and is adjusted for the specific financial condition of counterparties, the contractual\nterms and remaining duration of the arrangement, collateral or other recovery rights, current market and economic conditions and reasonable\nand supportable forecasts. Because certain hotel security deposits are not recoverable until the end of long-term leases, the estimate\nis sensitive to the long-term creditworthiness of the property owner and the enforceability and expected recovery of the deposit.\n\n \n\nManagement\nreviews material counterparties individually and updates the estimate when credit information, payment practices, market conditions or\nrecovery expectations change.\n\n \n\n**Valuation\nand Recognition of Stock-Based Compensation**\n\n \n\nDuring\nthe fiscal year ended March 31, 2026, we granted performance-based stock units under our performance share plan. We measure equity-classified\nawards at grant-date fair value and liability-classified awards at fair value at each reporting date until settlement. Compensation expense\nfor performance-based awards is recognized when achievement of the applicable performance conditions is probable.\n\n \n\nThe\nprincipal judgments include the classification of each component of the award, grant-date fair value, the probability of achieving financial\nand nonfinancial performance targets, the expected number of awards that will vest, the requisite service period and, for liability-classified\nawards, the fair value at each reporting date. Changes in the probability assessment may result in cumulative catch-up adjustments to\ncompensation expense.\n\n \n\nWe\nrecognized JPY12,709 thousand of stock-based compensation expense during FY2026.\n\n \n\nManagement\nreassesses the probability of achieving performance conditions at each reporting date using actual results, approved forecasts and the\nterms of the plan.\n\n \n\n**Lease\nTerm and Discount Rate**\n\n \n\nAs\nof March 31, 2026, we recognized operating lease right-of-use assets of JPY4,059,263 thousand and operating lease liabilities of JPY4,144,286\nthousand, principally relating to hotels and offices. Our hotel leases generally have long contractual terms and may include renewal\nor termination provisions.\n\n \n\nMeasuring\nright-of-use assets and lease liabilities requires judgment in determining the lease term and the discount rate. The lease term includes\nrenewal periods when we are reasonably certain to exercise the renewal option and excludes periods after a termination date when we are\nreasonably certain to exercise a termination option. In making this assessment, we consider the strategic importance and location of\nthe property, leasehold improvements, expected hotel performance, relocation or replacement costs and economic penalties associated with\ntermination.\n\n \n\nBecause\nthe interest rates implicit in our leases generally are not readily determinable, we estimate an incremental borrowing rate using the\nlease term, the nature and value of collateral, prevailing economic and interest-rate conditions and our credit profile. As of March\n31, 2026, the weighted-average remaining operating lease term was 9.3 years and the weighted-average operating lease discount rate was\n2.29%.\n\n \n\nWe\nreassess the lease term when a significant event or change in circumstances within our control affects whether we are reasonably certain\nto exercise an option.\n\n \n\n61"}