17th Fiscal Period Financial Report (REIT) November 7, 2014

Transcription

1 17th Fiscal Period Financial Report (REIT) November 7, 2014 REIT Issuer: Japan Rental Housing Investments Inc. Stock Exchange Listing: Tokyo Stock Exchange Securities Code: 8986 URL: Representative: Toshiya Kuroda, Executive Director Asset Manager: Mi-Casa Asset Management Inc. Representative: Yutaka Higashino, President and Chief Executive Officer Inquiries: Atsushi Chikamochi, Chief Financial Officer TEL: Scheduled date of submission of semiannual securities report: December 15, 2014 Scheduled date of commencement of distribution payment: December 9, 2014 Preparation of supplementary financial results briefing materials: Yes Holding of financial results briefing session: 1 Yes (for analysts and institutional investors) (Amounts are rounded down to the nearest million yen) 1. Status of Management and Assets for the 17th Fiscal Period (from April 1, 2014 to September 30, 2014) (1) Status of Management (% figures indicate the percentage of increase (decrease) over the previous fiscal period) Operating revenues Operating income Ordinary income Net income Million yen % Million yen % Million yen % Million yen % 17th period 7, , , , th period 6, , , , Net income per unit Return on equity (ROE) Ratio of ordinary income to total assets Ratio of ordinary income to operating revenues Yen % % % 17th period 1, th period 1, (2) Status of Distributions Distribution Total Ratio of Distribution Total Payout in excess of earnings distributions distributions per unit distributions ratio per unit in excess of earnings to net assets Yen Million yen Yen Million yen % % 17th period 1,761 2, th period 1,617 2, (Note 1) The source of funds for payment of distributions for the 16th fiscal period is the amount including 45 million appropriated from distribution reserve, and differs from net income. (Note 2) The payout ratio for the 16th fiscal period is calculated using the following formula because new investment units were issued in the fiscal period. Payout ratio = Total distributions Net income 100 (3) Financial Position Total assets Net assets Capital adequacy ratio Net assets per unit Million yen Million yen % Yen 17th period 197,988 95, ,750 16th period 191,486 95, ,714 (4) Status of Cash Flows Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities Cash and cash equivalents at the end of the fiscal period Million yen Million yen Million yen Million yen 17th period 4,456 (8,696) 3,866 10,859 16th period 3,051 (26,780) 23,810 11,232

2 2. Earnings Forecast for the 18th Fiscal Period (from October 1, 2014 to March 31, 2015) (% figures indicate the percentage of increase (decrease) over the previous fiscal period) Operating revenues Operating income Ordinary income Net income Distribution per unit Distribution in excess of earnings per unit Million yen % Million yen % Million yen % Million yen % Yen Yen 18th period 7,096 (0.5) 3,184 (3.8) 2,382 (8.3) 2,382 (8.3) 1,615 0 (Reference) Expected net income per unit (18th fiscal period): 1, Other (1) Changes in Accounting Policies, Changes in Accounting Estimates, and Retrospective Restatement 1 Changes in accounting policies accompanying amendments to accounting standards: 2 Changes in accounting policies other than 1: 3 Changes in accounting estimates: 4 Retrospective restatement: No No No No (2) Number of Investment Units Issued and Outstanding 1 Number of investment units issued and outstanding (including treasury investment units) at the end of the fiscal period 17th fiscal period: 1,475,060 units 16th fiscal period: 1,475,060 units 2 Number of treasury investment units at the end of the fiscal period 17th fiscal period: 0 units 16th fiscal period: 0 units (Note) For the number of investment units used as the basis for calculating net income per unit, please refer to Notes on Per Unit Information on page 32. * Presentation of the status of implementation of audit procedures This financial report does not fall under the purview of the audit procedures outlined in the Financial Instruments and Exchange Act. At the time of disclosure of this financial report, the audit procedures outlined in the Financial Instruments and Exchange Act have not been completed. * Explanation of the appropriate use of the earnings forecast, and other matters of special note The earnings outlook and other forward-looking statements contained in this document are based on information currently available to and certain assumptions deemed reasonable by Japan Rental Housing Investments Inc. Consequently, actual results may differ materially depending on a number of factors. In addition, the forecast is not intended as a guarantee of the amount of distributions. For the preconditions for the earnings forecast and matters to note in the use of the earnings forecast, please refer to 2. Management Policies and Management Status; (5) Earnings Outlook on page 11. Japan Rental Housing Investments Inc. will hold a financial results briefing session for analysts and institutional investors on November 7, The financial results briefing materials used on the day will be uploaded on the website of Japan Rental Housing Investments Inc. 2

3 1. Affiliated Juridical Persons of the Investment Corporation The chart below illustrates the structure of the Investment Corporation as of November 7, (A) Asset management entrustment (B) General administration entrustment / Asset custody entrustment / Investment unit agency entrustment / Agreement on special account administration (C) General administration entrustment (D) Agreement on special account administration (E) General administration entrustment regarding organizational management (F) Business collaboration agreement (Note 1) The general administrator regarding organizational management was changed to Mi-Casa Asset Management Inc. on July 1, (Note 2) AppleRingo Ventures 1 Limited falls under the category of specified affiliated juridical person (refers to specified affiliated juridical person provided in Article 12, Paragraph 3 of the Cabinet Office Ordinance on Disclosure of Information, etc. on Regulated Securities (Ordinance of the Ministry of Finance No.22 of 1993, as amended); the same applies hereinafter) of the Investment Corporation. 3

4 2. Management Policies and Management Status (1) Management Policies Disclosure is omitted because there are no material changes from the Investment Policy, Investment Targets and Distribution Policy in the most recent semiannual securities report (submitted on June 27, 2014). (2) Management Status 1 Overview of the Period under Review (a) Profile of the Investment Corporation Japan Rental Housing Investments Inc. ( the Investment Corporation ) is a rental housing investment corporation operating investments in rental residential properties throughout Japan. The Investment Corporation was established on October 7, 2005 with the promotion of Mi-Casa Asset Management Inc. ( the Asset Manager ) and based on the provisions of Investment Trusts and Investment Corporations Law (Law No. 198 of 1951, as amended), and investment securities issued by the Investment Corporation on June 22, 2006 are publicly listed on the Tokyo Stock Exchange Real Estate Investment Trust market (stock code 8986). The Investment Corporation added assets of 52 properties under management of 52.9 billion based on acquisition cost to its portfolio as a result of the merger with Prospect Reit Investment Corporation ( former PRI ) on July 1, Since the merger, the Investment Corporation has been improving distributions, primarily by replacing properties (acquiring new properties and disposing of existing properties), strengthening overall operations, and reducing costs by improving borrowing terms. During the period under review (the 17th period), the Investment Corporation acquired four new properties ( 7,870 million based on acquisition price) through bank borrowings and funds on hand and disposed of two properties (disposition price 420 million). As a result, the properties under management at the end of the period under review consisted of 189 properties and 11,590 units, with a total acquisition price of 189,564 million (a total book value of 184,589 million) and a total rentable floor area of 464, square meters (an increase of 3.5% from the end of the previous period and an increase of 20.1% from the end of the 15th period). The difference between the total appraisal value and the total book value (unrealized gain or loss) became an unrealized gain of 5,130 million, an increase of 4,512 million from 617 million at the end of the previous period. This was attributable to an improvement in the appraisal value of properties owned at the end of the 16th period and depreciation after taking into account capital expenditure during the period under review. The number of investment units issued by the Investment Corporation as at the end of the fiscal period under review was 1,475,060, representing a total unitholders capital of 79,517 million. The Investment Corporation reserved distribution reserve of 7,020 million based on gains on negative goodwill as of September 30, (b) Investment Environment During the fiscal period under review, prospects for the Japanese economy looked uncertain, reflecting negative year-onyear growth in GDP (gross domestic production) for the April-June quarter due to sluggish private consumption reflecting a reaction to the consumption tax hike and the effects of bad weather, etc. In addition, concerns about economies in Europe and China and geopolitical risks such as the Ukraine and Islamic State problems continued to be in the public conscious, amid movements toward the tapering of the monetary easing in the United States. Under these economic circumstances, the Nikkei 225 Index, which was 14, at the beginning of the fiscal period under review (April 1, 2014), remained unstable but rose to a new year high of 16,374.14, following the significant depreciation of the yen after September. At the end of the period under review (September 30, 2014), the index stood at 16, The Tokyo Stock Exchange REIT Index was 1, at the beginning of the period and subsequently remained firm with upward momentum due to long-term interest rates which remained stable at a low level and expectations of higher office rent levels. The index was 1, at the end of the period under review. In the real estate market, properties were traded actively as in the previous period, against the backdrop of the financing of J-REITs through initial public offerings (IPO) and public offerings (PO). According to Report on Internal Migration in Japan Derived from the Basic Resident Registration, 2013 Results of the Ministry of Internal Affairs and Communications (published on January 30, 2014) and the Statistical Report on Building Starts 2013 of the Ministry of Land, Infrastructure, Transport and Tourism (published on January 31, 2014), the net population inflow continued in the 23 wards of Tokyo, as well as major urban centers (major cities) such as Sapporo, Sendai, Nagoya, Osaka and Fukuoka, although housing starts remained limited compared to their peak in Therefore, the supply-demand balance in the rental apartment market during the period under view remained generally favorable. As a result, occupancy rates for quality rental apartments in the major urban centers owned by JREITs remained high, 95% or higher, in general. Sales prices for rental apartments rose further in not only the 23 wards of Tokyo but also major cities, reflecting the active investment activities of professional investors (listed and unlisted REITs that invest in properties of 1 billion or more per property, private funds in Japan and overseas, and business corporations including insurance companies, etc.). 4

5 (c) Management Performance To expand distributions, the Investment Corporation continued to focus on increasing rental revenues through the acquisition of new properties and the strengthening of operations and cost cutting. a. Acquisition of new properties, etc. For the purpose of distributing stable profits to investors over the long-term, the Investment Corporation aims as the basic policy to achieve sustainable growth in asset scale and to improve portfolio quality by acquiring new properties (in principle, properties worth 1 billion or more) in the Tokyo metropolitan area, centering on the 23 wards of Tokyo, and large, first-class properties (in principle, properties worth 1 billion or more) in other major cities and disposing of relatively old, small properties, especially outside the Tokyo metropolitan area (especially properties worth 0.5 billion or less) to improve efficiency in asset management. Under the basic policy above, the Investment Corporation acquired four properties and disposed of two properties in the period under review, as described below. All of the four properties which the Investment Corporation newly acquired are high-quality properties with prospects of high occupancy that were completed in or after 2005 and are located in areas of high convenience in the 23 ward of Tokyo or Sapporo, Sendai and Osaka where populations continued to flow in. These new properties did and are expected to contribute to revenues of the Investment Corporation in the period under review and the subsequent periods. The two properties we disposed of were the smallest properties in our portfolio and were aged more than 25 years. The disposition of the two properties contributed to an increase in distributions in the period under review by recording gains on dispositions totaling 125 million. <Properties newly acquired> Acquisition date Property name Location Rental apartment category Acquisition price (A) (Note) Appraisal value at the time of acquisition (B) Difference between acquisition price and appraisal value at the time of acquisition (B) (A) (A/B) Method of raising funds for acquiring May 26, 2014 Gran Casa Urasando Sapporo, Hokkaido Family 1,510,000 1,560,000 50,000 (96.8%) Bank loans and funds on hand June 5, 2014 Pregio Miyakojima Osaka, Osaka Studio 1,610,000 1,680,000 70,000 (95.8%) Funds on hand July 1, 2014 Forest Hill SendaiAoba Sendai, Miyagi Studio 2,750,000 2,800,000 50,000 (98.2%) Bank loans September 1, 2014 Gran Casa Ginza East Chuo-ku, Tokyo Studio 2,000,000 2,040,000 40,000 (98.0%) Bank loans Total 7,870,000 8,080, ,000 (97.4%) (Note) The acquisition price does not include acquisition expenses, the settled portion of fixed property taxes and city planning taxes, and amounts equivalent to consumption taxes or local consumption taxes. <Properties disposed> Disposition date Property name Location Disposition price (Note) As of end of March 2014 Book value Appraisal value Gains on sales May 21, 2014 Dome Yotsuya Nagoya, Aichi 205, , ,000 71,661 July 2, 2014 Dome Takamine Nagoya, Aichi 210, , ,000 53,665 Total 415, , , ,327 (Note) The disposition price does not include disposition expenses, the settled portion of fixed property taxes and city planning taxes, or amounts equivalent to consumption taxes or local consumption taxes. 5

6 b. Strengthening of overall operations The total rentable floor area of the properties owned by the Investment Corporation increased 3.5% from 448, square meters at the end of the previous period to 464, square meters at the end of the period under review (the total number of units of properties also rose 3.9% from 11,157 to 11,590), reflecting the four new properties acquired and the two properties disposed of during the period under review. As a result of focusing on the existing initiatives described below, the average occupancy rate during the period reached a record high of 97.5% (the single-month occupancy rate at the end of September 2014 was 98.1%). Particularly in office and retails units, vacancies were eliminated as of the end of the period under review (including units where occupancy was applied for) as a result of focusing on leasing activities, and this helped the Investment Corporation achieve the high occupancy rates. The Investment Corporation also strived to improve the occupancy rates of parking spaces, which raised the occupancy rate to 89.5% at the end of the period under review. To improve the efficiency of management further, the Investment Corporation also consolidated the number of contractors of property management (PM) from 10 to 9 across the country by reducing the contractors for multiple properties in the same districts in the Tokyo metropolitan area on July 1, <Overall occupancy rates for properties owned since the merger with the former PRI> (Note 1) Occupancy rate = Total leased floor area Total rentable floor area (Note 2) The overall occupancy rate for the Investment Corporation portfolio declined substantially between the end of April and the e nd of August 2010 (84.9% in April 2010, 84.4% in May, 84.6% in June, 87.0% in July, and 87.0% in August) due to the early termination of the fixedterm building lease contract for Hill Top Yokohama Negishi, the largest property owned by the Investment Corporation. However, given that we charged a penalty fee equivalent to the rent for the remaining period of the lease contract (until May 2010) and that the property was disposed of on September 17, 2010, we showed the overall occupancy rates from July to August 2010 in the above graph by e xcluding the occupancy rate for Hill Top Yokohama Negishi. (Existing initiatives) Daily Occupancy Projection System (a system independently developed by the Asset Manager, the system predicts monthly occupancy rates on a daily basis, helps understand dynamic information regarding individual vacancies and shortens the cycle for identifying individual vacancies, conducting onsite inspections, investigating causes, taking action, and verifying effects) Three-week Rule (minimizing opportunity losses by fully enforcing a rule to restore properties to their original state within three weeks of tenants vacating) Downtime 60 days (a policy to conclude a new contract within 60 days of tenants vacating) and Action 30 (revision of leasing action for rooms not contracted within 30 days of tenants vacating) to further improve occupancy rates and income by shortening vacancy periods Taking stronger action on Key Focus Properties and Long-term Vacancies (vacancies over 60 days) High-Cost Construction Approval Committee (a newly established committee conducting a detailed, systematic examination of the content and amount of construction work for 1 million or more when orders are placed, to optimize expenses for high-priced construction work) Formulation of Standard Specifications for Work to Restore Properties to their Original State (managing expenses and construction schedules and building better apartments by setting standard specifications for work to restore properties to their original state) 6

7 c. Diversification of financing sources As a result of focusing on the strengthening of the bank formation through the expansion of transactions with new banks, the Investment Corporation commenced transactions with six new banks. For three properties (total acquisition price 6,260 million) of the four properties newly acquired, excluding one property that was acquired using only funds on hand, the Investment Corporation raised funds from The Bank of Tokyo-Mitsubishi UFJ, Ltd. ( BTMU ) and five other new banks (The Hiroshima Bank, Ltd., The Hyakugo Bank, Ltd., The Kagawa Bank, Ltd., The Senshu Ikeda Bank, Ltd. and The Nomura Trust and Banking Co., Ltd.) through syndicated loans of 6.25 billion arranged by BTMU, which acted as the arranger and the agent. For 2.3 billion that came due on September 22, 2014, the Investment Corporation refinanced it by raising 1.3 billion from BTMU and 1.0 billion from the Development Bank of Japan, Inc. (DBJ), both through syndicated loans arranged by BTMU, which acted as arranger and agent. The overview of borrowings in the period under review is as described below. <Summary of borrowings> (Arranger and agent: BTMU) Date of borrowing Amount of borrowing (million yen) Interest rate Due date Use of funds May 26, ,500 JBA one-month Japanese yen TIBOR+0.50% September 22, 2014 Acquisition of Gran Casa Urasando* July 1, ,750 JBA one-month Japanese yen TIBOR+0.60% June 28, 2019 Acquisition of Forest Hill SendaiAoba September 1, ,000 JBA one-month Japanese yen TIBOR+0.60% August 30, 2019 Acquisition of Gran Casa Ginza East September 22, ,300 JBA one-month Japanese yen TIBOR+0.60% 1, % (fixed interest rate) September 30, 2019 * Refinancing of funds of 1.5 billion to acquire Gran Casa Urasando and existing short-term loans of 0.8 billion To hedge the risk of interest rate increases, the Investment Corporation concluded interest-rate swaps to fix the interest rate for additional borrowings of 10.0 billion ( 5.0 billion borrowings on August 7, 2014 and 5.0 billion borrowings on September 24, 2014), in light of the interest rate environment and an increase in borrowings ( 6.25 billion) associated with the acquisition of new properties. As a result, the Investment Corporation has fixed interest rates for 71.0 billion of the total borrowings of billion as of the end of the period under review, combining 60.0 billion for which interest rates were fixed before the end of the previous period with 11.0 billion for which interest rates were fixed during the period under review (the sum of 10.0 billion for which interest rates were fixed by the interest-rate swaps above and 1.0 billion borrowings with fixed interest rate from DBJ). As a result of the above, the Investment Corporation has maintained a stable financing base, with the ratio of interestbearing debt to total assets being 50.0%, the ratio of long-term interest-bearing debt (excluding interest-bearing debt to be repaid within a year) 88.5%, and the ratio of fixed interest rates 71.7%. (d) Summary of Results and Distributions As a result of the management efforts described above, the Investment Corporation recorded operating revenues of 7,131 million, up 689 million, or 10.7%, from the previous period, with rental revenues increasing with the acquisition of four new properties and gains on the disposition of the two properties. Following this, operating income amounted to 3,311 million, up 9.6%, ordinary income amounted to 2,597 million, up 10.9%, and net income was 2,596 million, up 11.0%. The Investment Corporation has decided to distribute the entire total distribution amount of 2,597 million (up 8.9% from the previous period), which is unappropriated retained earnings of 2,597 million, excluding fractions in which the cash distribution per investment unit is less than one yen (Note). As a result, the distribution per investment unit came to 1,761, an increase of 144 from the previous fiscal period. The appropriation policy of the Investment Corporation for distribution reserve stipulates that the Investment Corporation can appropriate distribution reserve in the following cases: 1) A loss on the disposition of properties is posted, 2) Financial charges and other expenses will be amortized at once, and 3) The Investment Corporation s Board of Directors determines that the appropriation is appropriate. We believe that this policy helps the Investment Corporation carry out flexible investment management. (Note) With respect to cash distributions, the Investment Corporation has made the decision to distribute the total amount of unappropriated retained earnings, except for fractions in which cash distribution per investment unit becomes less than one yen, bearing in mind that the maximum distribution of profits will be tax-deductible in accordance with Article of the Special Taxation Measures Law (Law No. 26 of 1957, including subsequent revisions; Special Taxation Measures Law ). 7

8 2 Outlook for the Next Fiscal Period (a) Management Environment As discussed in 1 Overview of the Period under Review, (b) Investment Environment, the Japanese economy is expected to continue to recover moderately, mainly reflecting a pickup in corporate earnings due to the weaker yen and the continuation of significant monetary easing by the Bank of Japan, despite concerns remaining about the impact of the consumption tax hike in April 2014 on the economy. Under these circumstances, competition over the acquisition of properties is expected to intensify further, as continued upward momentum in prices of new properties is expected in the 23 wards of Tokyo as well as Sapporo, Sendai, Nagoya, Osaka and Fukuoka in the 18th fiscal period, given the limited supply of quality new rental apartments on the market and the net population inflow continued in major urban centers. New contracted rents and occupancy rates are also likely to remain stable in quality rental apartments, particularly those owned by investment corporations in central Tokyo. (b) Management Policies for the Next Fiscal Period and Challenges to be Addressed In light of the management environment described above, the Investment Corporation will focus on the following three points as its priority strategies for distributing profits to investors over the long-term by improving profitability, as in the previous period: a. External growth through the acquisition of new properties As the Investment Corporation and the Asset Manager are a so-called self-funding investment corporation and asset management company, respectively, that do not belong to any particular group of real estate developers, trading companies, financial institutions, or the like, the Investment Corporation and the Asset Manager focus on receiving information on properties from a number of sources, including real estate private funds, asset management companies of real estate investment corporations, financial institutions, real estate firms, real estate agents and investors in order to acquire new properties. To promote these endeavors, the Asset Manager is working to develop new property information, using its own channels based on the asset managers in charge of properties approaching sellers directly, in addition to a team dedicated to acquiring properties. The Investment Corporation continues to target studio-type and family-type properties of 1 billion or more, in principle, located in Sapporo, Sendai, Nagoya, Osaka, and Fukuoka, in addition to the 23 wards of Tokyo and the Tokyo metropolitan area, for tenants likely to represent stable demand. The Investment Corporation will also work proactively on silent partnership investment in bridge funds for the purpose of securing the first refusal rights. b. Continuing to strengthen overall operations The Investment Corporation will continue to maintain its high occupancy rates by using the Daily Occupancy Forecasting System of the Asset Manager. The Investment Corporation will also aim to minimize its opportunity losses by shortening the restoration period based on the promotion of existing initiatives such as the Three-Week Rule (a rule to restore properties to their original state within three weeks of tenants vacating) and Downtime 60 days (a policy to conclude a new contract within 60 days of tenants vacating) and by enhancing appeal to end tenants through proactive leasing activities. In addition, with the Action 30 days (revision of leasing action for rooms not contracted within 30 days of tenants vacating), the Investment Corporation will strive to prevent long-term vacancies from occurring. The Investment Corporation will continue to increase rental revenues by focusing on the collection of key money, etc. and an improvement in the occupancy rates of the parking space attached to properties (a total of 3,575 units). In addition, to achieve high-quality work to restore properties to their original state at an appropriate cost, the Investment Corporation will continue to strive to cut costs further by improving its construction order monitoring system through the Repair/Restoration Cost Approval Committee, and to reduce its costs and shorten restoration periods by fully enforcing the Normalization of Restoration. The Investment Corporation will strive to reduce costs by actually owning real estate properties, instead of holding the trust beneficiary interests to those properties whose trust period has expired, and by reducing trust fees through negotiations with trustees. c. Raising funds for acquiring new properties and diversification of financing methods When raising funds for acquiring new properties, the Investment Corporation will diversify financing by combining financing methods such as bank borrowings, the issuance of investment corporation bonds, and capital increases through public offerings. The Investment Corporation will consider the flexible issuance of investment corporation bonds, taking into account market trends, given an improvement in external ratings and the change of bank borrowings to unsecured loans in the previous period. With respect to bank borrowings, the Investment Corporation will seek to reduce financing costs further, with about 52% of the total assets LTV (the value obtained by dividing the balance of interest-bearing debt by total assets) as the upper limit for the foreseeable future. 8

9 3 Future Management Policies and Challenges (a) External Growth Strategy The Investment Corporation aims to achieve sustainable growth in asset scale and improve portfolio quality, to distribute stable profits to investors over the long term by enhancing earnings strength. Specifically, as management policy of the Investment Corporation at present, the Investment Corporation will continue to 1) acquire new properties in the Tokyo metropolitan area, centering on the 23 wards of Tokyo, and acquire large, first-class properties in other areas (in principle, properties worth 1 billion or more in the both cases) and 2) replace properties owned through the disposition of small properties with a relatively old building age (particularly 500 million or less per property) located in areas other than the Tokyo metropolitan area and former premium type properties to improve management efficiency. As discussed in 2 Outlook for the Next Fiscal Period, (b) Management Policies for the Next Fiscal Period and Challenges to be Addressed, a. External growth through the acquisition of new properties, the Investment Corporation will continue to work on the acquisition of new properties. The Investment Corporation believes that silent partnership investment in bridge funds to achieve the first refusal right, as it did in the 15th and 16th periods, are a useful method for external growth in the future. Therefore, the Investment Corporation will continue to drive external growth actively in both acquiring properties directly through the Investment Corporation and securing properties in a flexible manner through the formation of bridge funds, in light of trends in the real estate market and the status of financing to acquire properties. Even if a loss arises from the disposition of properties, the Investment Corporation can appropriate distribution reserve ( 7,020 million after distributions at the end of the 17th period) based on gains on negative goodwill up to the amount of unappropriated distribution reserve. This will make it possible to avoid or reduce the impact of reduced dividends. (b) Internal Growth Strategy a. Continuing to strengthen overall operations As discussed in 2 Outlook for the Next Fiscal Period, (b) Management Policies for the Next Fiscal Period and Challenges to be Addressed, b. Continuing to strengthen overall operations, the Investment Corporation will continue to strengthen its efforts for overall operations. b. Reduction of expenses As discussed in 2 Outlook for the Next Fiscal Period, (b) Management Policies for the Next Fiscal Period and Challenges to be Addressed, b. Continuing to strengthen overall operations, the Investment Corporation will continue to strengthen its efforts to reduce costs. c. Alliances with real estate agents throughout Japan Since its merger with the former PRI, the Investment Corporation has been consolidating its property management ( PM ) companies with a view toward improving efficiency and reducing costs, and has now entered into an alliance with 9 leading PM companies across the country. Particularly in relation to 112 properties that are mainly located in, we will continue to carry out high-quality property management and leasing activities in close cooperation with property management company HASEKO LIVENET, with which the Investment Corporation has entered into an alliance. Through its alliances with these PM companies, the Investment Corporation can access a powerful network of leading real estate agents with regional and property expertise, and have established a structure for cooperative rental agency and rental management services to maintain and increase occupancy rates. Moving forward, we will continue to strengthen ties to leading real estate agencies throughout Japan, engaging in effective leasing activities tailored to the type of property and its location. This will result in higher occupancy rates, improved rent levels, and reduced tenant turnover. (c) Financial Strategy As discussed in 2 Outlook for the Next Fiscal Period, (b) Management Policies for the Next Fiscal Period and Challenges to be Addressed, c. Raising funds for acquiring new properties and diversification of financing methods, the Investment Corporation will consider raising additional interest-bearing debt, with about 52% of the total assets LTV as the upper limit for the foreseeable future. With respect to bank borrowings, the Investment Corporation aims to prolong borrowing periods further, diversify due dates, fix variable interest rates, and reduce financial costs, etc. The Investment Corporation will also seek to maintain a solid bank formation and further expand financing sources by promoting the use of new lenders. The Investment Corporation will consider the issuance of investment corporation bonds from the perspective of diversifying its menu of capital acquisition methods. The Investment Corporation will also consider equity financing, taking into comprehensive account the acquisition of new properties, the total assets LTV, the impact on distributions and the financial market environment, etc. 9

10 (3) Investment Risks Disclosure is omitted because there are no material changes from those stated in the most recent semiannual securities report (submitted on June 27, 2014). (4) Significant Events after the Closing of Accounts Not applicable. 10

11 (5) Earnings Outlook The earnings outlook for the 18th period (from October 1, 2014 to March 31, 2015) is operating revenues of 7,096 million, net income of 2,382 million and distribution per unit of 1,615. For the preconditions for this earnings outlook, please refer to Preconditions for Earnings Forecast for the 18th Fiscal Period (from October 1, 2014 to March 31, 2015) below. <Preconditions for Earnings Forecast for the 18th Fiscal Period (from October 1, 2014 to March 31, 2015)> Dates Item Portfolio assets Number of investment units issued and outstanding Operating revenues / Operating expenses Non-operating expenses Interest-bearing debt Distribution per unit Distribution in excess of earnings per unit Other Preconditions 18th fiscal period (from October 1, 2014 to March 31, 2015) (182 days) The Investment Corporation assumes the portfolio assets the Investment Corporation owns as of the end of the 17th period (September 30, 2014) comprising 189 properties and silent partnership equity interest investing in real estate beneficiary interest in trust. The Investment Corporation assumes there will be no change in the portfolio assets through the end of March In practice, there may be fluctuations due to other property acquisitions or sale, etc. The number of total investment units issued is 1,475,060 units as of the end of the 17th period (September 30, 2014). Afterward, it is assumed that there will be no change to this until the end of March Operating revenues and operating expenses are calculated under the above assumptions for portfolio assets. Of the property-related expenses, which are major operating expenses, expenses other than depreciation are calculated based on past results at owned properties as well as materials provided by previous owners and reflecting fluctuation factors of the expenses. Management fee is assumed to be approximately 398 million. For the expenditures for repair of buildings, the amount required in the relevant fiscal period is estimated, and is assumed to be approximately 372 million. Please note, however, the actual expenditures for repair could differ significantly from the estimated amount due to unexpected expenditures for repair possibly arising and other factors. Taxes are assumed to be approximately 405 million. Depreciation is calculated using the straight line method, including incidental expenses and additional future capital expenditure, and is assumed to be approximately 1,404 million. Non-operating expenses are assumed to be approximately 805 million under the assumptions for the interest-bearing debt below, and are broken down as follows: (1) Interest expenses: 485 million (2) Finance-related costs: 311 million (3) Amortization of issuance costs of new units: 6 million (4) Other: 1 million The total interest-bearing debt stood at 99,039 million at the end of the 17th period (September 30, 2014). It is assumed that this figure will remain unchanged until the end of the 18th period. Distribution per unit is based on the assumption that distribution will comply with the monetary distribution policy stipulated in the Articles of Incorporation of the Investment Corporation. At present, the Investment Corporation does not plan to make cash distribution in excess of earnings. The forecast is based on the assumption that no revisions impacting the forecast figures above will be made to laws and regulations, the tax system, accounting standards, the listing rules, or the rules of The Investment Trusts Association, Japan, etc. It is also assumed there will be no unexpected material change in general economic trends, the real estate market conditions, etc. 11

12 3. Financial Statements (1) Balance Sheets (Unit: thousand yen) 16th period (as of March 31, 2014) 17th period (as of September 30, 2014) Assets: Current assets: Cash and bank deposits 7,339,232 7,512,920 Cash and bank deposits in trust 3,893,263 3,346,582 Rental receivable 101, ,795 Prepaid expenses 604, ,448 Consumption taxes receivable 69,920 6,747 Other current assets 6,337 2,976 Allowance for doubtful accounts (7,772) (8,844) Total current assets 12,006,709 11,608,625 Fixed assets: Property and equipment: Buildings 22,312,407 27,701,335 Accumulated depreciation (1,945,420) (2,406,068) Buildings, net 20,366,987 25,295,266 Structures 109, ,272 Accumulated depreciation (19,185) (28,633) Structures, net 90, ,638 Machinery and equipment 61,968 61,968 Accumulated depreciation (17,632) (20,039) Machinery and equipment, net 44,335 41,929 Tools, furniture and fixtures 67,181 93,269 Accumulated depreciation (33,230) (42,832) Tools, furniture and fixtures, net 33,950 50,437 Land 17,428,108 20,802,809 Buildings in trust 78,975,201 79,828,112 Accumulated depreciation (10,266,010) (11,104,214) Buildings in trust, net 68,709,190 68,723,897 Structures in trust 359, ,095 Accumulated depreciation (80,852) (87,728) Structures in trust, net 278, ,366 Machinery and equipment in trust 431, ,729 Accumulated depreciation (110,068) (120,038) Machinery and equipment in trust, net 321, ,691 Tools, furniture and fixtures in trust 245, ,742 Accumulated depreciation (116,213) (128,424) Tools, furniture and fixtures in trust, net 129, ,318 Land in trust 69,388,362 68,246,417 Construction in progress in trust 6,210 6,680 Property and equipment, net 176,796, ,049,453 Intangible assets: Right of using water facilities Leasehold for land in trust 546, ,283 Right of using water facilities in trust Trademark rights Total intangible assets 547, ,499 12

13 (Unit: thousand yen) 16th period (as of March 31, 2014) 17th period (as of September 30, 2014) Investments and other assets: Investment securities 427, ,276 Guaranteed securities deposited 9,472 9,528 Lease deposits Long-term prepaid expenses 1,474,174 1,321,561 Reserve fund for repair 191, ,186 Total investments and other assets 2,102,492 1,756,295 Total fixed assets 179,446, ,353,248 Deferred assets: Issuance costs of new units 33,163 26,744 Total deferred assets 33,163 26,744 Total assets 191,486, ,988,618 Liabilities: Current liabilities: Accounts payable 286, ,133 Short-term loans 800,000 - Current portion of long-term loans - 11,352,260 Other accounts payable 29,349 18,592 Accrued expenses 333, ,768 Income taxes payable Rents received in advance 757, ,487 Other current liabilities 21,618 31,184 Total current liabilities 2,228,732 12,795,012 Long-term liabilities: Long-term loans 91,989,083 87,686,823 Leasehold and security deposits received 396, ,119 Leasehold and security deposits received in trust 1,266,531 1,239,278 Derivative liabilities 147, ,857 Total long-term liabilities 93,799,785 89,683,079 Total liabilities 96,028, ,478,092 Net assets: Unitholders equity: Unitholders capital 79,517,099 79,517,099 Surplus: Capital surplus 6,682,398 6,682,398 Distribution reserve 7,065,809 7,020,078 Unappropriated retained earnings (Accumulated deficit) 2,340,549 2,597,807 Total surplus 16,088,757 16,300,284 Total unitholders equity 95,605,857 95,817,384 Valuation and translation adjustments: Deferred gains or losses on hedges (147,675) (306,857) Total valuation and translation adjustments (147,675) (306,857) Total net assets *1 95,458,181 *1 95,510,526 Total liabilities and net assets 191,486, ,988,618 13

14 (2) Statements of Operations Operating revenues: 16th period (from October 1, 2013 to March 31, 2014) (Unit: thousand yen) 17th period (from April 1, 2014 to September 30, 2014) Rental revenues *1 6,412,647 *1 6,992,170 Gains from sales of real properties - 125,327 Dividends income 29,691 14,090 Total operating revenues 6,442,338 7,131,588 Operating expenses: Property-related expenses *1 2,777,952 *1 3,045,244 Asset management fees 401, ,200 Officers remuneration 8,400 6,800 Asset custody fees 10,428 11,885 Administrative service fees 36,523 40,377 Auditor s fees 15,000 14,400 Provision for doubtful accounts 427 3,282 Other operating expenses 171, ,885 Total operating expenses 3,421,180 3,820,075 Operating income 3,021,158 3,311,512 Non-operating income: Interest income Miscellaneous income 85,235 63,715 Total non-operating income 85,772 64,078 Non-operating expenses: Interest expenses 458, ,697 Finance-related costs 300, ,638 Amortization of issuance costs of new units 5,348 6,418 Other non-operating expenses 1,751 1,532 Total non-operating expenses 765, ,286 Ordinary income 2,341,012 2,597,303 Income before income taxes 2,341,012 2,597,303 Income taxes - current Total income taxes Net income 2,340,407 2,596,698 Retained earnings at beginning of the period 141 1,108 Unappropriated retained earnings (Accumulated deficit) 2,340,549 2,597,807 14

15 (3) Statements of Changes in Net Assets 16th period (from October 1, 2013 to March 31, 2014) Unitholders equity (Unit: thousand yen) Unitholders capital Capital surplus Distribution reserve Surplus Unappropriated retained earnings (Accumulated deficit) Total surplus Total unitholders equity Balance as of September 30, ,557,688 6,682,398 7,065,809 1,957,748 15,705,956 86,263,644 Changes of items during the period Issuance of new units 8,959,411 8,959,411 Cash dividends paid (1,957,606) (1,957,606) (1,957,606) Net income 2,340,407 2,340,407 2,340,407 Net changes of items other than unitholders equity Total changes of items during the period 8,959, , ,801 9,342,212 Balance as of March 31, ,517,099 6,682,398 7,065,809 2,340,549 16,088,757 95,605,857 Valuation and translation adjustments Deferred gains or losses on hedges Total valuation and translation adjustments Total net assets Balance as of September 30, ,551 35,551 86,299,196 Changes of items during the period Issuance of new units 8,959,411 Cash dividends paid (1,957,606) Net income 2,340,407 Net changes of items other than unitholders equity (183,227) (183,227) (183,227) Total changes of items during the period (183,227) (183,227) 9,158,985 Balance as of March 31, 2014 (147,675) (147,675) 95,458,181 15

16 17th period (from April 1, 2014 to September 30, 2014) Unitholders equity (Unit: thousand yen) Unitholders capital Capital surplus Distribution reserve Surplus Unappropriated retained earnings (Accumulated deficit) Total surplus Total unitholders equity Balance as of March 31, ,517,099 6,682,398 7,065,809 2,340,549 16,088,757 95,605,857 Changes of items during the period Reversal of distribution reserve (45,731) 45,731 Cash dividends paid (2,385,172) (2,385,172) (2,385,172) Net income 2,596,698 2,596,698 2,596,698 Net changes of items other than unitholders equity Total changes of items during the period (45,731) 257, , ,526 Balance as of September 30, ,517,099 6,682,398 7,020,078 2,597,807 16,300,284 95,817,384 Valuation and translation adjustments Deferred gains or losses on hedges Total valuation and translation adjustments Total net assets Balance as of March 31, 2014 (147,675) (147,675) 95,458,181 Changes of items during the period Reversal of distribution reserve Cash dividends paid (2,385,172) Net income 2,596,698 Net changes of items other than unitholders equity (159,181) (159,181) (159,181) Total changes of items during the period (159,181) (159,181) 52,344 Balance as of September 30, 2014 (306,857) (306,857) 95,510,526 16

17 (4) Statements of Cash Distributions Item 16th period from October 1, 2013 to March 31, th period from April 1, 2014 to September 30, 2014 I. Unappropriated retained earnings 2,340,549,507 2,597,807,491 II. Reversal of distribution reserve 45,731,200 - III. Amount of distributions 2,385,172,020 2,597,580,660 [Amount of distribution per investment unit] [ 1,617] [ 1,761] IV. Retained earnings carried forward 1,108, ,831 Method for calculating the amount of distributions The cash distribution policy set out in Article 15, Paragraph 1 of the Articles of Incorporation of the Investment Corporation stipulates that the amount of distributions shall exceed the amount equivalent to 90% of profit available for distribution as provided for in Article of the Special Taxation Measures Law. Based on this policy, the decision was made to distribute, as a distribution of profits, 2,385,172,020, which is the maximum integral multiple of 1,475,060 investment units issued and an amount not exceeding the amount of unappropriated retained earnings of 2,340,549,507 plus reversal of distribution reserve of 45,731,200. The cash distribution in excess of profits set out in Article 15, Paragraph 3 of the Articles of Incorporation of the Investment Corporation will not take place. The cash distribution policy set out in Article 15, Paragraph 1 of the Articles of Incorporation of the Investment Corporation stipulates that the amount of distributions shall exceed the amount equivalent to 90% of profit available for distribution as provided for in Article of the Special Taxation Measures Law. Based on this policy, the decision was made to distribute, as a distribution of profits, 2,597,580,660, which is the maximum integral multiple of 1,475,060 investment units issued and an amount not exceeding unappropriated retained earnings. The cash distribution in excess of profits set out in Article 15, Paragraph 3 of the Articles of Incorporation of the Investment Corporation will not take place. 17

18 (5) Statements of Cash Flows Cash flows from operating activities: 16th period (from October 1, 2013 to March 31, 2014) (Unit: thousand yen) 17th period (from April 1, 2014 to September 30, 2014) Income before income taxes 2,341,012 2,597,303 Depreciation 1,246,382 1,361,776 Amortization of long-term prepaid expenses 255, ,159 Amortization of issuance costs of new units 5,348 6,418 Interest income (536) (362) Interest expenses 458, ,697 Increase (Decrease) in allowance for doubtful accounts (22,960) 1,071 Decrease (Increase) in rental receivable 11,404 (2,782) Decrease (Increase) in prepaid expenses 16,218 (22,083) Decrease (Increase) in consumption taxes receivable (69,920) 63,173 Increase (Decrease) in accounts payable 42,162 (8,301) Increase (Decrease) in other accounts payable (14,767) (12,615) Increase (Decrease) in accrued expenses 2,819 72,069 Increase (Decrease) in rents received in advance 129,897 (13,819) Decrease due to sales of property and equipment in trust - 273,425 Long-term prepaid expenses paid (882,701) (146,195) Other - net (12,479) 3,033 Sub-total 3,506,324 4,918,968 Interest received Interest paid (455,066) (461,853) Income taxes paid (601) (596) Net cash provided by (used in) operating activities 3,051,192 4,456,880 Cash flows from investing activities: Purchases of property and equipment (5,170,997) (5,764,343) Purchases of property and equipment in trust (21,903,533) (3,161,565) Purchases of investment securities (230,000) - Proceeds from reimbursement of investment securities 322, ,961 Net increase (decrease) in leasehold and security deposits received 58,456 53,625 Net increase (decrease) in leasehold and security deposits received in trust 142,418 (27,253) Other - net (47) 16 Net cash provided by (used in) investing activities (26,780,781) (8,696,558) Cash flows from financing activities: Proceeds from short-term loans 1,385,000 1,500,000 Repayments of short-term loans (585,000) (2,300,000) Proceeds from long-term loans 31,187,000 7,050,000 Repayments of long-term loans (15,140,039) - Proceeds from issuance of new units 8,959,411 - Payments for issuance costs of new units (38,512) - Cash dividends paid (1,957,568) (2,383,314) Net cash provided by (used in) financing activities 23,810,290 3,866,685 Net increase (decrease) in cash and cash equivalents 80,702 (372,992) Cash and cash equivalents at the beginning of the fiscal period 11,151,793 11,232,495 Cash and cash equivalents at the end of the fiscal period *1 11,232,495 *1 10,859,503 18