NTT Urban Development / 8933

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1 COVERAGE INITIATED ON: Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an owner s manual to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at sr_inquiries@sharedresearch.jp or find us on Bloomberg. Research Report by Shared Research Inc.

2 Research Report by Shared Research Inc. INDEX How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company s most recent earnings. First-time readers should start at the business section later in the report. Executive summary Key financial data Highlights Trends and outlook Quarterly trends and results Full-year FY03/18 results Full-year outlook Long-term outlook Business Business description Segments Offices/Retail segment Residential segment Strengths and weaknesses Market and value chain Historical performance Summary Income statement Balance sheet Cash flow statement Other information Corporate timeline News and topics Major shareholders Shareholder returns Top management Main properties Company profile /69

3 Research Report by Shared Research Inc. Executive summary NTT Group: real estate company focusing on leasing offices and commercial buildings NTT Urban Development Corporation (NTT Urban) was established in 1986 as one of NTT Group s real estate companies. The company received land and buildings from the Nippon Telegraph & Telephone Corp. (NTT) as investment-in-kind, and in turn expanded its asset base by merging with multiple other NTT Group real estate companies. The result: NTT Urban now holds many properties with book value significantly less than market value. In FY03/17, it was sitting on unrealized gains of JPY609.0bn (+JPY46.9bn YoY). Through the 1990s, NTT Urban grew its real estate holdings by developing properties acquired from NTT. But in 2006, it began to focus on acquiring its own real estate for development. The company has two segments: the Offices/Retail segment (87.4% of operating profit in FY03/17) and the Residential segment (7.9% of operating profit). The company is also expanding overseas, in a bid to diversify its businesses. In the Offices/Retail segment, NTT Urban holds major properties in Otemachi, one of central Tokyo s leading business districts. The company also owns office buildings in regional cities. Its main tenants are NTT Group companies. Some of its office buildings in Otemachi were constructed in the 1990s, and are losing their competitive edge as they age and as surrounding buildings are redeveloped. NTT Urban s earnings may also suffer as the NTT Group reduces office space used in a drive to increase efficiency and respond to falling numbers of employees. Over the next three to five years, earnings hinge on the construction of new office buildings, vacancy rates, and changes in rents. The company opened the Shinagawa Season Terrace in May 2015 and completed the construction of the Urbannet Nihonbashi 2-Chome Building in January 2016 and the Urbannet Ginza 1-Chome Building in February The company plans to complete construction for the Otemachi 2-Chome Area 1st Class Urban Redevelopment Project in July Trends and outlook For FY03/19, using JGAAP, NTT Urban is forecasting operating revenue of JPY168.0bn (+0.7% YoY), operating profit of JPY30.0bn (+1.2%), recurring profit of JPY27.8bn (+1.3%), and net income attributable to shareholders of the parent of JPY17.0bn (-9.1%). Excluding the impact of property sales, the company expects operating revenue to rise 3.1% YoY and operating profit to rise 11.7%. Using International Financial Reporting Standards (IFRS), the company forecasts operating revenue of JPY167.5bn, operating profit of JPY28.0bn, and net income attributable to owners of parent of JPY16.0bn. From Q1 FY03/19, the company will voluntarily use IFRS. FY03/19 company forecasts are displayed based on IFRS. In the Offices/Retail segment, the company plans to shift from a strategy of developing properties to hold long-term toward developing properties to sell. NTT Urban also plans to increase revenue by developing more properties in collaboration with other companies, developing multi-purpose properties (e.g. combining retail and residential facilities), and participating in area redevelopment projects. In the Residential segment, the company plans to shift its focus from increasing the number of properties delivered to maximizing profits. Strengths and weaknesses NTT Urban s strengths: its status as a member of the NTT Group, a strong portfolio, and significant unrealized gains. Weaknesses: a revenue base skewed toward a few large properties in the Offices/Retail segment, reduced demand for office space from its main client, and exposure to a shrinking population in regional cities (see Strengths and weaknesses). 03/69

4 Research Report by Shared Research Inc. Key financial data Income statement FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Operating revenue 144, , , , , , , , , , ,500 YoY 4.4% 3.4% -2.4% -6.1% 19.2% 15.9% -19.6% 20.4% 3.1% -11.6% - Gross profit 40,017 33,401 41,251 40,409 46,004 52,666 42,718 55,938 51,548 50,821 YoY -5.1% -16.5% 23.5% -2.0% 13.8% 14.5% -18.9% 30.9% -7.8% -1.4% GPM 27.7% 22.4% 28.3% 29.5% 28.2% 27.8% 28.1% 30.6% 27.3% 30.5% Operating profit 25,244 16,129 24,324 25,365 27,401 30,458 24,836 37,771 31,393 29,635 28,000 YoY -12.1% -36.1% 50.8% 4.3% 8.0% 11.2% -18.5% 52.1% -16.9% -5.6% - OPM 17.5% 10.8% 16.7% 18.5% 16.8% 16.1% 16.3% 20.6% 16.6% 17.8% 16.7% Recurring profit 19,504 10,215 18,554 19,229 22,016 24,865 20,395 33,832 28,710 27,432 YoY -25.5% -47.6% 81.6% 3.6% 14.5% 12.9% -18.0% 65.9% -15.1% -4.5% RPM 13.5% 6.8% 12.7% 14.1% 13.5% 13.1% 13.4% 18.5% 15.2% 16.4% Net income 15,989 6,116 9,307 15,586 12,073 11,343 16,235 16,557 16,682 18,701 16,000 YoY 8.3% -61.7% 52.2% 67.5% -22.5% -6.0% 43.1% 2.0% 0.8% 12.1% - Net margin 11.1% 4.1% 6.4% 11.4% 7.4% 6.0% 10.7% 9.0% 8.8% 11.2% 9.6% Per share data (JPY) Shares issued ('000, year end) 3,291 3,291 3,291 3,291 3, , , , , ,120 EPS EPS (fully diluted) Dividend per share Book value per share Balance sheet (JPYmn) Cash and cash equivalents 8,954 9,601 10,270 9,924 12,148 18,313 17,891 14,846 16,945 18,073 Total current assets 148, , , , , , , , , ,367 Tangible fixed assets 745, , , , , , , , , ,324 Investments and other assets 39,737 42,238 46,495 45,269 42,544 43,692 45,359 47,557 45,296 49,149 Intangible fixed assets 3,338 3,416 4,969 4,562 5,756 5,427 24,556 25,994 25,228 25,818 Total assets 936, , , , , ,507 1,033,220 1,033,557 1,005,898 1,019,659 Accounts payable 9,052 6,287 8,083 13,175 10,742 11,850 8,473 9,182 6,002 6,638 Short-term debt 25, , ,530 6,611 11,232 Total current liabilities 116,772 84, ,822 88, , ,021 98, , , ,859 Long-term debt 331, , , , , , , , , ,484 Total fixed liabilities 636, , , , , , , , , ,989 Total liabilities 753, , , , , , , , , ,849 Net assets 183, , , , , , , , , ,810 Total interest-bearing debt 511, , , , , , , , , ,766 Cash Flow Statement (JPYmn) Cash flows from operating activities -12,091 35,168 40,417 3,704 48,089 51,870 36,988 17,430 71,910 46,273 Cash flows from investing activities -57,397 6,695-28,257-23,033-39,885-37,962-67,778-14,570-36,710-63,471 Cash flows from financing activities 63,079-30,028-14,641 12,650-6,660-8,656 31,777-6,781-27,345 14,068 Financial ratios ROA (RP-based) 2.1% 1.1% 2.0% 2.1% 2.4% 2.6% 2.0% 3.3% 2.8% 2.7% ROE 11.2% 4.1% 6.1% 9.7% 7.1% 6.3% 8.4% 8.1% 8.0% 8.5% Equity ratio 19.6% 20.2% 21.0% 21.9% 22.7% 23.2% 23.8% 24.4% 25.7% 26.7% Note: Figures may differ from company materials due to differences in rounding methods. As the company has decided to voluntarily use IFRS from Q1 FY03/19, forecasts for FY03/19 are displayed based on IFRS. 04/69

5 Research Report by Shared Research Inc. Recent updates Highlights On May 9, 2018, NTT Urban Development Corporation announced earnings results for full-year FY03/18; see the results section for details. On the same day, the company announced dividends of surplus (dividend increase). On the same day, the company decided that the year-end dividend for FY03/18 would be JPY10 per share, a JPY1 increase (annual dividend of JPY19, including interim dividend of JPY9 per share). On February 19, 2018, Shared Research updated the report after interviews with the company. For previous releases and developments, please refer to the News and topics section 05/69

6 Research Report by Shared Research Inc. Trends and outlook Quarterly trends and results Cumulative (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 % of FY FY Est. Operating revenue 33,255 68, , ,633 40,776 72, , , % 163,000 YoY 24.6% -3.7% 11.8% 3.1% 22.6% 6.2% -4.5% -11.6% -13.6% Gross profit 9,440 20,330 34,732 51,548 14,514 24,796 37,261 50,821 YoY 25.9% -0.2% 14.5% -7.8% 53.8% 22.0% 7.3% -1.4% GPM 28.4% 29.7% 29.4% 27.3% 35.6% 34.1% 33.0% 30.5% SG&A expenses 4,214 9,000 12,988 20,155 5,192 9,246 14,044 21,185 YoY 17.7% 11.3% 4.4% 10.9% 23.2% 2.7% 8.1% 5.1% SG&A ratio 12.7% 13.1% 11.0% 10.7% 12.7% 12.7% 12.4% 12.7% Operating profit 5,225 11,329 21,743 31,393 9,321 15,550 23,217 29, % 29,000 YoY 33.4% -7.8% 21.4% -16.9% 78.4% 37.3% 6.8% -5.6% -7.6% OPM 15.7% 16.5% 18.4% 16.6% 22.9% 21.4% 20.6% 17.8% 17.8% Recurring profit 4,439 9,790 19,663 28,710 9,287 14,819 21,938 27, % 27,000 YoY 42.6% -6.9% 28.5% -15.1% 109.2% 51.4% 11.6% -4.5% -6.0% RPM 13.3% 14.3% 16.6% 15.2% 22.8% 20.4% 19.4% 16.4% 16.6% Net income 2,832 6,286 12,783 16,682 6,172 9,659 15,106 18, % 17,500 YoY 28.8% 9.2% 62.1% 0.8% 117.9% 53.7% 18.2% 12.1% 4.9% Net margin 8.5% 9.2% 10.8% 8.8% 15.1% 13.3% 13.4% 11.2% 10.7% Quarterly FY03/17 FY03/17 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Operating revenue 33,255 35,290 49,694 70,394 40,776 32,016 40,125 53,883 YoY 24.6% -20.7% 43.8% -8.9% 22.6% -9.3% -19.3% -23.5% Gross profit 9,440 10,890 14,402 16,816 14,514 10,282 12,465 13,560 YoY 25.9% -15.4% 44.5% -34.3% 53.8% -5.6% -13.4% -19.4% GPM 28.4% 30.9% 29.0% 23.9% 35.6% 32.1% 31.1% 25.2% SG&A expenses 4,214 4,786 3,988 7,167 5,192 4,054 4,798 7,141 YoY 17.7% 6.2% -8.4% 25.2% 23.2% -15.3% 20.3% -0.4% SG&A ratio 12.7% 13.6% 8.0% 10.2% 12.7% 12.7% 12.0% 13.3% Operating profit 5,225 6,104 10,414 9,650 9,321 6,229 7,667 6,418 YoY 33.4% -27.1% 85.4% -51.4% 78.4% 2.0% -26.4% -33.5% OPM 15.7% 17.3% 21.0% 13.7% 22.9% 19.5% 19.1% 11.9% Recurring profit 4,439 5,351 9,873 9,047 9,287 5,532 7,119 5,494 YoY 42.6% -27.8% 106.7% -51.2% 109.2% 3.4% -27.9% -39.3% RPM 13.3% 15.2% 19.9% 12.9% 22.8% 17.3% 17.7% 10.2% Net income 2,832 3,454 6,497 3,899 6,172 3,487 5,447 3,595 YoY 28.8% -2.9% 205.2% -55.0% 117.9% 1.0% -16.2% -7.8% Net margin 8.5% 9.8% 13.1% 5.5% 15.1% 10.9% 13.6% 6.7% Note: Figures may differ from company materials due to differences in rounding methods Note: Net income refers to net income attributable to shareholders of the parent FY03/18 FY03/18 FY03/18 06/69

7 Research Report by Shared Research Inc. Quarterly performance by segment Segments (cumulative) (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Operating revenue 33,255 68, , ,633 40,776 72, , ,800 YoY 24.6% -3.7% 11.8% 3.1% 22.6% 6.2% -4.5% -11.6% Offices/Retail 20,593 41,615 67, ,613 23,422 45,207 67,280 91,964 YoY 1.0% -4.3% 2.0% 7.8% 13.7% 8.6% -0.3% -19.1% Residential 8,769 19,215 39,203 59,607 14,236 21,468 35,228 59,758 YoY 131.4% -13.0% 25.9% -7.5% 62.3% 11.7% -10.1% 0.3% Other 5,114 10,565 15,779 21,534 4,354 8,642 14,289 21,226 YoY 37.8% 24.0% 23.0% 9.9% -14.9% -18.2% -9.4% -1.4% Adjustments -1,221-2,851-4,244-6,122-1,237-2,525-3,880-6,149 Segment operating profit 5,225 11,329 21,743 31,393 9,321 15,550 23,217 29,635 YoY 33.4% -7.8% 21.4% -16.9% 78.4% 37.3% 6.8% -5.6% Offices/Retail 5,828 12,323 22,631 33,801 9,616 16,611 23,901 29,880 YoY 27.1% 18.4% 39.1% 12.7% 65.0% 34.8% 5.6% -11.6% Residential 338 1,258 2,571 3,068 1,020 1,279 2,705 4,960 YoY -23.2% -69.3% -47.6% -74.0% 201.8% 1.7% 5.2% 61.7% Other ,258 1, ,140 1,819 YoY 102.6% 40.2% 27.8% -17.4% -32.2% -23.9% -9.4% 0.2% Adjustments -1,336-3,113-4,717-7,293-1,583-2,995-4,529-7,025 Segments (quarterly) (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Operating revenue 33,255 35,290 49,694 70,394 40,776 32,016 40,125 53,883 YoY 24.6% -20.7% 43.8% -8.9% 22.6% -9.3% -19.3% -23.5% Offices/Retail 20,593 21,022 25,886 46,112 23,422 21,785 22,073 24,684 YoY 1.0% -9.0% 14.1% 17.6% 13.7% 3.6% -14.7% -46.5% Residential 8,769 10,446 19,988 20,404 14,236 7,232 13,760 24,530 YoY 131.4% -42.9% 120.9% -38.8% 62.3% -30.8% -31.2% 20.2% Other 5,114 5,451 5,214 5,755 4,354 4,288 5,647 6,937 YoY 37.8% 13.3% 21.0% -15.0% -14.9% -21.3% 8.3% 20.5% Adjustments -1,221-1,630-1,393-1,878-1,237-1,288-1,355-2,269 Segment operating profit 5,225 6,104 10,414 9,650 9,321 6,229 7,667 6,418 YoY 33.4% -27.1% 85.4% -51.4% 78.4% 2.0% -26.4% -33.5% Offices/Retail 5,828 6,495 10,308 11,170 9,616 6,995 7,290 5,979 YoY 27.1% 11.5% 76.1% -18.6% 65.0% 7.7% -29.3% -46.5% Residential , , ,426 2,255 YoY -23.2% -74.8% 60.9% -92.8% 201.8% -71.8% 8.6% 353.7% Other YoY 102.6% 11.2% 7.3% -54.1% -32.2% -17.0% 22.2% 21.7% Adjustments -1,336-1,777-1,604-2,576-1,583-1,412-1,534-2,496 Note: Figures may differ from company materials due to differences in rounding methods Offices/Retail Business segment Cumulative FY03/17 FY03/17 FY03/17 Note: Figures may differ from company materials due to differences in rounding methods FY03/18 FY03/18 FY03/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Operating revenue 20,593 41,615 67, ,613 23,422 45,207 67,280 91,964 YoY 1.0% -4.3% 2.0% 7.8% 13.7% 8.6% -0.3% -19.1% Offices/Retail leasing 20,566 41,387 62,522 83,360 20,757 42,303 64,208 86,236 YoY 0.9% -0.4% 0.2% 0.0% 0.9% 2.2% 2.7% 3.5% Sales of revenue-generating properties - - 4,601 29, ,381 YoY % 35.0% % Operating profit 5,828 12,323 22,631 33,801 9,616 16,611 23,901 29,880 YoY 27.1% 18.4% 39.1% 12.7% 65.0% 34.8% 5.6% -11.6% Offices/Retail leasing 5,828 12,323 19,231 24,800 9,616 16,611 23,901 27,980 YoY 27.1% 28.4% 33.5% 33.3% 65.0% 34.8% 24.3% 12.8% Sales of revenue-generating properties - - 3,400 8, ,900 YoY % -21.2% % Quarterly FY03/17 FY03/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Operating revenue 20,593 21,022 25,886 46,112 23,422 21,785 22,073 24,684 YoY 1.0% -9.0% 14.1% 17.6% 13.7% 3.6% -14.7% -46.5% Offices/Retail leasing 20,566 20,821 21,135 20,838 20,757 21,546 21,905 22,028 YoY 0.9% -1.6% 1.4% -0.8% 0.9% 3.5% 3.6% 5.7% Sales of revenue-generating properties - - 4,601 25, ,381 YoY % 37.8% % -90.5% Operating profit 5,828 6,495 10,308 11,170 9,616 6,995 7,290 5,979 YoY 27.1% 11.5% 76.1% -18.6% 65.0% 7.7% -29.3% -46.5% Offices/Retail leasing 5,828 6,495 6,908 5,569 9,616 6,995 7,290 4,079 YoY 27.1% 29.5% 43.9% 32.6% 65.0% 7.7% 5.5% -26.8% Sales of revenue-generating properties - - 3,400 5, ,900 YoY % -42.1% % 07/69

8 Research Report by Shared Research Inc. Offices/Retail Business segment: factors affecting operating revenue and operating profit Cumulative FY03/17 FY03/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Operating revenue 207-1,879 1,329 8,243 2,829 3, ,649 Offices/Retail leasing ,600 2,800 New ,000 1, ,100 1,500 Existing 900 1,600 2,600 3, ,300 3,300 3,900 Other -1,000-2,200-3,300-4, ,800-2,700-2,600 Sales of properties - -1, , ,600-27,200 Other ,600 2,600 2,600 2,700 Operating profit 1,242 1,913 6,367 3,813 3,788 4,288 1,270-3,921 Offices/Retail leasing 1,600 3,000 4,700 5, ,200 1, New Existing 1,500 3,100 4,700 6,000 1,000 2,200 3,000 3,400 Other ,400-3,400 Sales of properties ,400-2, ,400-7,300 Other ,200 3,000 2,900 3,000 Quarterly FY03/17 FY03/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Operating revenue 207-2,086 3,208 6,914 2, ,813-21,428 Offices/Retail leasing ,200 New Existing , ,400 1, Other -1,000-1,200-1,100-1, Sales of properties - -1,900 2,700 6, ,600-22,600 Other , Operating profit 1, ,454-2,554 3, ,018-5,191 Offices/Retail leasing 1,600 1,400 1,700 1, ,500 New Existing 1,500 1,600 1,600 1,300 1,000 1, Other ,000 Sales of properties ,200-3, ,400-3,900 Other , Offices/Retail Business segment: leasable area and vacancy rate Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Floor space available for rent ('000sqm) 1,137 1,137 1,129 1,109 1,104 1,118 1,119 1,109 YoY -8.0% -6.4% -6.8% -2.3% -2.9% -1.6% -0.9% 0.0% Vacancy rate (nationwide) 4.8% 4.5% 4.1% 4.1% 3.6% 3.3% 3.3% 3.4% Vacancy rate (five wards of central Tokyo) 4.2% 3.9% 2.9% 3.2% 2.1% 2.0% 1.2% 1.4% Residential Business segment: status of condominium sales FY03/17 FY03/18 Cumulative FY03/17 FY03/18 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Units transferred ,157 YoY 31.8% -31.6% -36.0% -18.3% 235.6% 37.8% 74.5% 34.4% Price per unit (JPYmn) YoY 8.6% -9.3% -9.3% -4.9% 2.6% 2.6% -2.6% 5.1% Quarterly FY03/17 FY03/18 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Units transferred YoY 31.8% -43.1% -44.7% 9.9% 235.6% -44.5% 165.5% -2.9% Price per unit (JPYmn) YoY 8.6% -11.3% -9.3% 3.2% 2.6% 7.9% -9.2% 18.0% 08/69

9 Research Report by Shared Research Inc. Residential Business segment: factors affecting operating revenue and operating profit Cumulative FY03/17 FY03/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Operating revenue 4,979-2,878 8,060-4,854 5,467 2,253-3, Residential property sales 5,200-2,200 8,800 8,900 5,400 2,000-4,200-2,600 Units transferred 800-5,800-9,700-7,900 7,700 4,400 12,100 11,900 Unit price 200-1, , ,500 Shareouts 4,000 3,500 17,200 15,000-3,300-3,700-16,700-16,700 Residential lots 200 1,200 2,300 3, , Residential rentals , Other , ,400 Operating profit ,834-2,337-8, ,892 Residential property sales 200-2,400-2,000-2,000 2, ,600 2,700 Residential rentals Other ,900-1, , Quarterly FY03/17 FY03/18 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Operating revenue 4,979-7,857 10,938-12,914 5,467-3,214-6,228 4,126 Residential property sales 5,200-7,400 11, ,400-3,400-6,200 1,600 Units transferred 800-6,600-3,900 1,800 7,700-3,300 7, Unit price 200-1, ,800 Shareouts 4, ,700-2,200-3, ,000 - Residential lots 200 1,000 1, Residential rentals Other , ,400 Operating profit , , ,758 Residential property sales 200-2, ,100-1, ,100 Residential rentals Other ,100-1, /69

10 Research Report by Shared Research Inc. Full-year FY03/18 results Operating revenue: Operating profit: Recurring profit: Net income*: JPY166.8bn (-11.6% or -JPY21.8bn YoY) JPY29.6bn (-5.6% or -JPY1.8bn YoY) JPY27.4bn (-4.5% or -JPY1.3bn YoY) JPY18.7bn (+12.1% or +JPY2.0bn YoY) *Net income is net income attributable to shareholders of the parent Excluding property sales, operating revenue was JPY162.9bn (+2.5% or +JPY3.9bn YoY) and operating profit was JPY26.9bn (+19.9% or +JPY4.5bn). Revenue and profit fell YoY due to the decline in property sales. However, as the number of booked properties rose in the Residential Business segment and rent-free periods ended in the Offices/Retail Business segment, revenue and profit that make up the foundations of businesses expanded. Operating revenue reported by the company for each segment includes both inter-segment internal operating revenues and transfers. Offices/Retail segment Operating revenue: Operating profit: JPY92.0bn (-19.1% or -JPY21.6bn YoY) JPY29.9bn (-11.6% or -JPY3.9bn YoY) Both revenue and profit fell YoY due to the decline in property sales. Excluding that impact, operating revenue was JPY89.6bn (+6.7% or +JPY5.6bn YoY) and operating profit was JPY27.9bn (+12.5% or +JPY3.1bn). In addition to securing revenue on the acquisition and completion of construction for new properties such as the UD Yumesaki Building (Osaka City, Osaka Prefecture) and 185Dartmouth Street (Boston, USA), rental revenues rose due to the end of rent-free periods used to attract occupants at the Shinagawa Season Terrace. Other revenue-boosting factors included the booking of a temporary compensation income related to urban redevelopment projects in Q1 FY03/18 (April-June 2017). Operating revenue fell due to lower profits from the sale of income-generating properties. The average vacancy rate at the company s office buildings in the five wards of central Tokyo (Chiyoda, Chuo, Minato, Shinjuku, and Shibuya) was down to 1.4% at the end of March 2018 and 1.2% at the end of December 2017 (versus 2.9% at the same time the previous year). This compares with 2.0% at the end of September 2017 (3.9%), 2.1% at the end of June 2017 (4.2%), and 3.2% at the end of March 2017 (6.3%). On a nationwide basis, the average vacancy rate for the company's office buildings was down to 3.4% at the end of March 2018 and 3.3% (4.1%) at the end of December This compares with 3.3% at the end of September 2017 (4.5%), 3.6% at the end of June 2017 (4.8%), and 4.1% at the end of March 2017 (5.7%). Properties currently under development include Otemachi Place (the Otemachi 2-Chome Area 1st Class Urban Redevelopment Project A Block in Chiyoda, Tokyo), the Shinbashi 1-Chome Project (Minato, Tokyo), and the Harajuku Station Project (Shibuya, Tokyo). Residential segment Operating revenue: Operating profit: JPY59.8bn (+0.3% or +JPY151mn YoY) JPY5.0bn (+61.2% or +JPY1.9bn) 10/69

11 Research Report by Shared Research Inc. The company delivered 1,157 condominiums (versus 861 in FY03/17) at an average price of JPY41mn (versus JPY39mn in FY03/17). Segment operating revenue was up JPY151mn YoY. On the plus side, an increase in the number of condominium units delivered added JPY11.9bn, higher average price added JPY1.5bn, and higher sales of detached housing and lots contributed an additional JPY600mn. On the minus side, a drop in the sale of equity stakes in certain properties had a negative impact of JPY16.7bn. Segment operating profit was up JPY1.9bn YoY, reflecting a JPY3.7bn increase in the gross profit from delivered condominiums, a JPY1.0bn decrease on the sale of equity stakes in certain properties, and higher SG&A expenses resulting in a negative impact of JPY600mn. Other segment Operating revenue: Operating profit: JPY21.2bn (-1.4% or -JPY308mn YoY) JPY1.8bn (+0.2% or +JPY3mn) For details on previous quarterly and annual results, see the Historical financial statements section. 11/69

12 Research Report by Shared Research Inc. Full-year outlook Note: Figures may differ from company due to differences in rounding methods. As the company has decided to voluntarily use IFRS from Q1 FY03/19, forecasts for FY03/19 are displayed based on IFRS. Earnings forecasts by segment FY03/18 FY03/19 FY03/19 (JPYmn) FY Act. FY Act. FY Est. J-GAAP J-GAAP IFRS Operating revenue 166, , ,500 Operating profit 29,635 30,000 28,000 OPM 17.8% 17.9% 16.7% Recurring profit 27,432 27,800 RPM 16.4% 16.5% Net income 18,701 17,000 16,000 Net margin 11.2% 10.1% 9.6% FY03/19 Est. (by segment) FY03/18 FY03/19 FY03/19 (JPYmn) FY Act. FY Est. FY Est. J-GAAP J-GAAP IFRS Operating revenue 166, , ,500 Offices/Retail 91,964 89,600 92,700 Residential 59,758 61,000 58,200 Other 21,226 22,800 22,000 Operating profit 29,635 30,000 28,000 Offices/Retail 29,880 28,800 27,000 Residential 4,960 6,900 6,800 Other 1,819 1,900 1,900 Note: Figures may differ from company materials due to differences in rounding methods. As the company has decided to voluntarily use IFRS from Q1 FY03/19, forecasts for FY03/19 are displayed based on IFRS. From Q1 FY03/19, the company will voluntarily use IFRS. FY03/19 company forecasts are displayed based on IFRS. In FY03/19, using JGAAP, NTT Urban is forecasting operating revenue of JPY168.0bn (+0.7% YoY), operating profit of JPY30.0bn (+1.2%), recurring profit of JPY27.8bn (+1.3%), and net income attributable to shareholders of the parent of JPY17.0bn (-9.1%). Excluding the impact of property sales, the company expects operating revenue to rise 3.1% YoY and operating profit to rise 11.7%. Using International Financial Reporting Standards (IFRS), the company forecasts operating revenue of JPY167.5bn, operating profit of JPY28.0bn, and net income attributable to owners of parent of JPY16.0bn. Historical forecast accuracy Results vs. Initial Est. FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Sales (Initial Est.) 147, , , , , , , , , ,000 Sales (Results) 144, , , , , , , , , ,800 Results vs. Initial Est. -1.9% -1.2% 3.3% -5.0% 5.3% 5.7% 2.7% 8.9% -0.7% 2.3% Operating profit (Initial Est.) 34,500 28,500 24,000 24,500 26,000 27,500 20,000 25,200 31,000 29,000 Operating profit (Results) 25,244 16,129 24,324 25,365 27,401 30,458 24,836 37,771 31,393 29,635 Results vs. Initial Est % -43.4% 1.4% 3.5% 5.4% 10.8% 24.2% 49.9% 1.3% 2.2% Recurring profit (Initial Est.) 28,500 21,500 18,000 18,700 19,800 22,100 14,500 21,000 28,000 27,000 Recurring profit (Results) 19,504 10,215 18,554 19,229 22,016 24,865 20,395 33,832 28,710 27,432 Results vs. Initial Est % -52.5% 3.1% 2.8% 11.2% 12.5% 40.7% 61.1% 2.5% 1.6% Net income (Initial Est.) 15,000 12,000 9,000 9,500 10,400 11,500 8,000 12,000 17,000 17,500 Net income (Results) 15,989 6,116 9,307 15,586 12,073 11,343 16,235 16,557 16,682 18,701 Results vs. Initial Est. 6.6% -49.0% 3.4% 64.1% 16.1% -1.4% 102.9% 38.0% -1.9% 6.9% Note: Figures may differ from company materials due to differences in rounding methods. 12/69

13 Research Report by Shared Research Inc. Long-term outlook Medium-term vision In May 2013, NTT Urban announced its Medium-Term Vision 2018 For Further Growth. The company lays out growth strategies in two stages. During stage one the first three years (FY03/14 to FY03/16) it plans to focus on business foundations, aiming for operating profit of JPY30bn in FY03/16 (JPY28bn from the Leasing segment; JPY5bn from the Residential Property Sales segment). The company plans to build on these foundations during stage two, the second three years (FY03/17 to FY03/19). It is targeting operating profit of about JPY40bn in FY03/19. In November 2014, the company announced revisions to the Medium-Term Vision 2018 in line with changing market conditions, such as rising construction costs and land and property prices, mainly in the Greater Tokyo Area. Earnings targets After revising its targets, NTT Urban is now aiming for operating revenue of JPY bn and operating profit of JPY25-26bn between FY03/16 and FY03/18. In FY03/19, the company is targeting operating revenue of JPY200bn and operating revenue of JPY30bn (these targets include revenue and profits from the sale of properties). According to the company, revisions to targets in the Medium-Term Vision 2018 do not represent a change to its core strategy. Instead, it has enhanced its strategy in different segments, in response to an ongoing rush of development demand for large office buildings in central Tokyo, and changing conditions in the real estate industry including rising construction costs, and higher land and property prices in the Greater Tokyo Area. Medium-Term Vision 2018: Earnings targets FY03/15 FY03/16 FY03/17 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Act. Act. Est. Target Target Target Target Operating revenue 152, , , ,000~190, ,000 Operating profit 24,836 37,771 31,000 25,000~26,000 30,000 Impact of property sales on OP 4,000 16,900 7,000 OP excl. impact of property sales 20,800 20,900 24,000 Investment targets NTT Urban plans to invest about JPY360bn over the five years of its medium-term vision (including inventory investment for the Residential Property Sales segment) JPY20bn more than its previous investment target. The breakdown of investment is as follows: Mixed use properties: Hotels: Office buildings (central Tokyo): Rental accommodation: For temporary use and partnered properties: Renovations: Overseas: JPY80bn JPY40bn JPY100bn JPY10bn (including serviced accommodation for the elderly) JPY30-40bn JPY40bn JPY60bn The company also intends to invest about JPY20bn per year in procuring land for condominiums. Interest-bearing debt controls In FY03/19, the company is aiming for interest-bearing debt to be on par with 1H FY03/15, at about JPY500bn. This is more specific than the company s previous target of an interest-bearing-debt-to-ebitda ratio of about 9x. 13/69

14 Research Report by Shared Research Inc. Accelerating the cash cycle Between FY03/15 and FY03/19, NTT Urban plans to fund investment of JPY360bn with its operating cash flow of about JPY30 40bn per year. It plans to make up the difference between operating cash flow and its investment target by selling assets worth about JPY bn to J-REITs and private placement funds. But the Premier Investment Corporation invests mainly in office buildings in the Greater Tokyo Area and major regional cities, plus residential properties in the Greater Tokyo Area. NTT Urban thus plans to establish a private placement fund to invest in rental residential properties nationwide, and perhaps commercial facilities and serviced accommodation for the elderly. As planned, the company launched NTT Urban Development Private REIT, Inc. in February Strategy per business Office business Thus far, the company has developed properties to hold long-term. But it plans to shift toward developing properties to sell. NTT Urban also plans to increase revenue by developing more properties in collaboration with other companies (including reconstruction properties held by J-REITs), and participating in area redevelopment projects. The company also plans to establish a private placement fund, as an exit strategy (potential purchaser) for development projects. (As stated above, the company launched NTT Urban Development Private REIT, Inc. in February 2016.) It also intends to generate more revenue from fees by increasing assets under management (AUM). The company also plans to renovate existing flagship office buildings (including business continuity planning [BCP]). Moving from development to hold long-term, toward development to sell According to the company, it does not plan to sell all its properties. Rather, it plans to increase the proportion of properties it sells as opposed to holding long-term thus exiting investments sooner. NTT Urban will consider selling both existing properties and new developments. The company may sell existing properties if it judges it appropriate, for example, properties that require future maintenance. It will not sell all new developments, but instead will consider conditions in the market, investment targets, and controls on interest-bearing debt when making the decision whether to sell or to hold. Office buildings in central Tokyo The company opened the Shinagawa Season Terrace on May 2015, and completed construction for the Urbannet Nihonbashi 2-Chome Building on January 2016 and the Urbannet Ginza 1-Chome Building on February In July 2018, it plans to complete the Otemachi 2-Chome Area 1st Class Urban Redevelopment Project. Over the course of the company s medium-term vision (through FY03/19), it plans to invest JPY100bn in office buildings in central Tokyo. As of November 2015, the company had announced plans to develop an integrated office and hotel facility in Shinbashi 1-Chome (Minato, Tokyo), with a planned floor space of around 36,100sqm (27 floors above ground and two floors below ground). Construction is scheduled for completion in July /69

15 Research Report by Shared Research Inc. Office buildings scheduled for completion in the Special Zone for Asian Headquarters during the midterm plan Completion date Project Floors Land (sqm) Floor space (sqm) Income (est.; JPYmn) May Shinagawa Project (Shinagawa Season Terrace) 32 above ground, 1 below 49, ,716 6,000~7,000 In March 2009, NTT Urban, Taisei Corporation, Hulic Co., and Tokyo City-Development Co. won the leasehold rights to the Shibaura Water Reclamation Center for JPY86.4bn. With a total investment of JPY40.6bn, these four developers plan to construct a multistory commercial and office building with 4,790sqm of rentable floor space per floor. The development includes 3.5ha of green space. The building will also be adapted for business continuity planning, with seismic isolation features and an emergency power supply lasting up to 72 hours. Jan (complete) Nihonbashi 2-Chome Project (Urbannet Nihonbashi 2-Chome Building) 10 above ground, 1 below 1,687 14,795 1,000 The reconstruction of the former Nihonbashi Asahi Seimei Kan. NTT Urban plans to construct an office building with each about 1,000sqm of floor space per floor, located five minutes walk from JR Tokyo Station and one minute from the Tokyo Metro Nihonbashi Station. The company is focusing on safety for this development, with an emergency power supply lasting up to 72 hours and seismic bracing. Feb (complete) Ginza 1-Chome Project (Urbannet Ginza 1-Chome Building) 8 above ground, 1 below 1,737 11,720 1,000 In April 2013, NTT Urban acquired an accommodation and conference facility from the NTT Group and began redeveloping it as an office building. This building features the latest safety and comfort features, including an emergency power supply lasting up to 72 hours, anti-seismic construction, and energy-efficient LED lighting. July 2018 (planned completion) Otemachi 2-Chome Area 1st Class Urban Redevelopment Project A Bldg. 35 above ground, 3 below 19,900 Project A Bldg total 202,000 NTT Urban's share 35,000 Otemachi 2-Chome Area 1st Class Urban Redevelopment Project B Building 33 above ground, 3 below 150,000 A redevelopment project in Otemachi 2-Chome (Chiyoda, Tokyo), including the land where the Nippon Telegraph and Telephone Corporation is located. The Urban Renaissance Agency will be the representative developer, with NTT Urban as the joint developer. The company acquired a total floor space of about 35,000sqm across 4.5 floors (the 25th floor to the 28th floor, and part of 29th floor) from joint lease holders, including the Ministry of Finance and NHK. The company plans a total investment of JPY57.5bn in its stake, including both the land and the building. July 2019 (Planned completion) Shinbashi 1-Chome Project (Urbannet Ginza 1-Chome Bldg.) 27 above ground, 2 below ground 3,072 36,100 NTT Urban plans to develop an integrated office and hotel facility located three minutes walk from Shinbashi Station. Kyushu Railway Company plans to operate the hotel business. NTT Urban expects to invest JPY44.2bn. Note: Estimated income figures are Shared Research estimates. Note: Income from the Shinagawa Project includes sublease income. Developing buildings for temporary use and partnered properties During the first half of the medium-term vision, NTT Urban will check the feasibility of about 10 development projects in the Greater Tokyo Area and the Nagoya, Osaka, and Kobe areas, before starting development on some of these projects. The company plans to invest about JPY30 40bn over the course of the medium-term vision (through FY03/19), with the aim of pushing up revenue. Candidate projects include: Meieki Minami Building (Minami, Nagoya Station, Aichi) Sumitomo Corporation Nagoya Building (Higashi, Nagoya Station, Aichi) UD Midosuji Building (Midosuji, Osaka) Possible development project in Nakanoshima, Osaka Harumi 4 Chome Building (Rinkai, Chuo, Tokyo) 15/69

16 Research Report by Shared Research Inc. Commercial business (hotels, retail) The company plans to launch a hotel business, and develop mixed-use properties (e.g. combining retail and residential facilities). Launching a hotel business aimed at foreign tourists in Kyoto and Osaka Over the course of the medium-term vision, the company plans to start projects in Osaka (Universal City Station Project) and Kyoto (Shin Puh Kan Redevelopment Project). The company does not expect a contribution to revenues from the hotel business over the course of the medium-term plan (through FY03/19). As of February 2018, the company has been working on the following projects (work in process or already opened): UD Yumesaki Buildings (former name: Universal City Station Project): The company is constructing an integrated bridal commercial facility with a floor space of 20,607sqm (17 floors above ground, one floor below ground, 390 guestrooms) on a site 2,639sqm in size. The site is located near Universal City Station in Osaka. The company began construction in October 2015, and commenced operations in August 2017 and invested a total of roughly JPY11bn in the project. Candeo Hotels Japan (run by Candeo Hospitality Management, Inc.) and wedding facility AVANCER LIAN OSAKA (run by BlessGate Co., Ltd.) are in this facility. Kyoto Shinpukan Project: Shinpukan in Kyoto (a commercial facility completed in 2001, with three floors above ground, site area of 6,384sqm, and floor space of 6,082sqm) is located within a one-minute walk from Karasuma Oike Station and designated as a tangible cultural property by Kyoto City. The company is developing an integrated hotel (213 guestrooms) with seven floors above ground and one below ground, and commercial facility on the site of the Shinpukan while keeping the building of the old Kyoto Central Telephone Office. The company started construction in October 2017 and plans to complete construction by August Former Kiyomizu Elementary School Project: Kyoto City selected NTT Urban s proposal among other applications from private businesses regarding the use of the former site of Kiyomizu Elementary School (constructed in 1933, four floors above ground, and floor space of 4,200sqm). While maintaining the appearance of the elementary school, the inside will be remodeled into a 40-room hotel. The company plans to complete construction by FY03/19. Small Luxury Hotel Development: On November 2015, the company announced it would develop small luxury hotels in a capital and business partnership with Hiramatsu Inc. Development is underway for hotels with rooms on Kashiko Island (Mie Prefecture), Atami (Shizuoka Prefecture), and Hakone (Kanagawa Prefecture). The company opened the hotel on Kashiko Island in July 2016 and the hotel in Atami in October Seragaki Okinawa Project: The company is creating another company with Tokyu Land Co. (TSE1: 3289) and Milial Resort Hotels Co., Ltd. (a subsidiary of Oriental Land Co., Ltd. [TSE1: 4661]). This new company will develop, own, and manage a hotel in Seragaki, Okinawa Prefecture that is scheduled to open in summer Hyatt International Asia Pacific Ltd., an associated company of Hyatt Hotels Corporation, will operate this hotel. Harajuku Station Project: In FY03/15, the company acquired the Harajuku Dai-Ichi Mansions in Shibuya, Tokyo. In this project, the company is planning to open a multi-purpose complex in front of Harajuku station in spring NTT Urban also owns Harajuku Quest in the same area (a commercial facility in Shibuya, Tokyo, completed in 1988, with four floors above ground, two floors below ground, site area of 1,834sqm and floor space of 5,971sqm), and is considering ways to utilize its holdings in the Harajuku area as a whole. Both operations are expected to generate synergies, and the company expects to invest JPY55.0bn. Kobe Station Project: The company is negotiating with Sun Television Co. (unlisted) and Juraku Corporation (unlisted) on the multi-purpose development of a lot near Kobe Station (Kobe, Hyogo) for construction of a broadcast station and hotel (completion in 2020;13 floors above ground, 1 floor below ground; site area of about 3,000sqm and floor space of 13,600sqm [all details tentative]). It has not disclosed the amount of its investment in the project. Residential business In the Residential segment, thus far the company has focused on growing the number of properties (condominiums) delivered. But the company plans to shift its focus to profits, while delivering a steady supply of about 1,300 units per year (prior to 16/69

17 Research Report by Shared Research Inc. revisions to the medium-term vision, the company planned to sell 1,600 units in FY03/16 and 2,000 units in FY03/19). It also intends to increase the proportion of high-value-added property developments, including high-end condominiums and mixed-use properties. The company also plans to develop serviced accommodation for the elderly, and convert existing office buildings to residential properties. Since shifting to a strategy focused on higher profitability, the company has strived to increase the proportion of urban condominium sales. As a result of sales of real estate equity stake from FY03/16 FY03/17 and efforts to reduce suburban condominium inventory, total condominium inventory in FY03/17 including future developments was about 3,300 units, two-thirds of which are suburban. Developing serviced accommodation for the elderly Over the course of the medium-term vision, NTT Urban plans to collaborate with the NTT Group to develop about 10 serviced residential properties for the elderly in central Tokyo and its outskirts. Overseas NTT Urban aims for its overseas businesses to account for about 10% of total operating profit by FY03/19. The company plans to build a stable revenue base by acquiring and managing properties that generate revenues in the US and UK. It also plans to expand into Southeast Asia. The company plans to invest about JPY60.0bn overseas over the course of the medium-term vision (through FY03/19). The company also has seen a contribution to revenue from the 1 King William Street office building in London and the 125 West 25th Street mixed-use building in New York, as renovations for both buildings were completed in November /69

18 Research Report by Shared Research Inc. Business Business description NTT Group property firm that originally got its assets as investment-in-kind NTT Urban was founded in 1986 as a property company for the Nippon Telegraph and Telephone Corporation (NTT) Group, Japan s largest telecoms group. NTT in turn transferred land and properties to NTT Urban as investment-in-kind. NTT Urban has since grown its assets by merging with other NTT real estate companies established across Japan in a similar manner. As a result of how it was founded and subsequent mergers, NTT Urban holds many properties with a book value significantly less than respective market value. The total book value of the company s leasing properties was JPY813.6bn at the end of FY03/17 (JPY795.9bn at the end of FY03/16), compared with a market value of JPY1.42tn (JPY1.36tn at the end of FY03/16) resulting in unrealized gains of JPY609.0bn (JPY562.1bn at the end of FY03/16). Redeveloping properties in 1990s; buying land and developing from 2006 Through the 1990s, NTT Urban grew its real estate holdings by developing and redeveloping properties with low book values, acquired as investment-in-kind from NTT. The development of these properties wound down in September 2005, with the end of construction of Urbannet Nagoya Building. From the following year, 2006, the company focused on acquiring its own real estate for development, although it also acquired unused land and accommodation and community facilities for redevelopment from the NTT Group. Over the next three to five years, the company aims to use its strengths as a developer to turn a profit on land acquired from outside the NTT Group. At the same time, it plans to take advantage of business opportunities on real estate held by NTT Group. Offices/Retail segment drives earnings NTT Urban has two segments: the Offices/Retail segment and the Residential segment. The Offices/Retail segment drives earnings, accounting for 58% of operating revenue and 87% of operating profit in FY03/17. Operating revenue (left) and operating profit (right) breakdown by segment (FY03/16) Operating revenue breakdown OP breakdown (before eliminations) Other 11% Other 5% Residential 8% Residential 31% Offices/Retail 58% Offices/Retail 87% 18/69

19 Research Report by Shared Research Inc. Segments Segments include the Offices/Retail segment, the Residential segment, and Other. Segment Offices/Retail Residential Other Business description Leases office buildings and commercial facilities in major cities, such as Tokyo, Nagoya, Osaka, Hiroshima, Fukuoka, and Sapporo Sells and leases condominiums and other residential properties Manages office buildings Segments FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/16 FY03/17 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Operating revenue 138, , , , , , , , , , ,633 YoY 7.8% 4.4% 3.4% -2.4% -6.1% 19.2% 15.9% -19.6% 20.4% - 3.1% Offices/Retail (Leasing) 89,679 99,210 97,333 91,844 90,323 93,745 95,709 90, , , ,613 YoY 5.4% 10.6% -1.9% -5.6% -1.7% 3.8% 2.1% -5.1% 32.2% - 7.8% % of operating revenue 64.9% 68.8% 65.2% 63.0% 66.0% 57.5% 50.6% 59.7% 65.6% 55.6% 58.3% Residential (Property Sales) 38,414 32,688 41,643 41,725 28,484 54,939 79,527 46,620 48,859 64,461 59,607 YoY 17.5% -14.9% 27.4% 0.2% -31.7% 92.9% 44.8% -41.4% 4.8% % % of operating revenue 27.8% 22.7% 27.9% 28.6% 20.8% 33.7% 42.0% 30.7% 26.7% 34.0% 30.6% Others 10,111 12,377 10,247 12,124 18,034 14,483 13,949 14,612 14,073 19,600 21,534 YoY -3.1% 22.4% -17.2% 18.3% 48.7% -19.7% -3.7% 4.8% -3.7% - 9.9% % of operating revenue 7.3% 8.6% 6.9% 8.3% 13.2% 8.9% 7.4% 9.6% 7.7% 10.3% 11.1% Elimnations ,416-6,122 Operating profit 28,718 25,244 22,382 30,972 25,365 27,401 30,458 24,836 37,771 37,771 31,393 YoY 14.5% -12.1% -11.3% 38.4% -18.1% 8.0% 11.2% -18.5% 52.1% % Offices/Retail (Leasing) 26,025 35,560 31,521 29,226 27,482 29,216 27,189 23,566 36,722 29,988 33,801 YoY 12.3% 36.6% -11.4% -7.3% -6.0% 6.3% -6.9% -13.3% 55.8% % % of operating profit 77.5% 114.6% 140.8% 94.4% 86.0% 86.7% 73.2% 77.4% 83.5% 68.2% 87.4% Residential (Property Sales) 6,593-6,018-10, ,374 2,914 8,222 4,405 5,074 11,808 3,068 YoY 26.1% % 74.4% % 157.8% 112.1% 182.2% -46.4% 15.2% % % of operating profit 19.6% -19.4% -46.9% 1.7% 4.3% 8.6% 22.1% 14.5% 11.5% 26.8% 7.9% Others 973 1,500 1,358 1,212 3,090 1,580 1,729 2,485 2,199 2,199 1,816 YoY 2.3% 54.2% -9.5% -10.8% 155.0% -48.9% 9.4% 43.7% -11.5% % % of operating profit 2.9% 4.8% 6.1% 3.9% 9.7% 4.7% 4.7% 8.2% 5.0% 5.0% 4.7% Eliminations -4,873-5,798-6,252-6,647-6,583-6,310-6,682-5,620-6,225-6,225-7,293 Note: Figures may differ from company materials due to differences in rounding methods. *Operating revenue in the former segments was measured in sales to external customers, while calculations in the new segments also include inter-segment internal operating revenues and transfers. *Operating revenue and operating profit compositions in the new segments are before eliminations. Starting from FY03/17, the former Leasing segment and Residential Property Sales segment have been regrouped as the Offices/Retail segment and the Residential segment. As part of this change, the company merged the operations of its residential leasing business, which had been under the Leasing segment, with the Residential Property Sales business, together now referred to as the Residential Business. 19/69

20 Research Report by Shared Research Inc. Offices/Retail segment Offices/Retail segment accounted for 58.3% of operating revenue and 87.4% of operating profit in FY03/17. NTT Urban leases office buildings and commercial facilities in major urban areas across Japan, including Tokyo, Nagoya, Osaka, Hiroshima, Fukuoka, and Sapporo. Overview of Offices/Retail segment Real estate (office building) development The company first acquires the land, then designs, constructs, and operates the building. NTT Urban handles all aspects of the process except construction, which it outsources. Sometimes the company also outsources design to NTT Facilities, Inc. The whole process generally takes about four to five years for a midsize office building (floor space of up to 15,000sqm), though it can take seven to 10 years depending on the timing of land acquisitions, the macro economy, and property size. During the land acquisition and design stage, net operating income (NOI) and the weighted average cost of capital (WACC) are indicators of expected revenue. The company targets NOI above the market average, while also looking at WACC as a performance metric. We estimate the company s WACC at about 4%. Net operating income (NOI): rental revenue renting costs + depreciation (includes long-term prepaid expenses). Real estate development Offices/Retail earnings structure Operating revenue Operating revenue in the Offices/Retail segment depends on total rentable floor space, rent per square meter, and the vacancy rate. Rentable floor space: Varies according to office building acquisitions, sales, renovations, and changes in contracts. Vacancy rate: Varies according to the supply of new office space, the age of buildings, and employment trends which in turn depend on population, the economy, and corporate earnings. Rent: Generally lags the vacancy rate. NTT Urban revises rents every two to three years. Shared Research understands that the small number of clients in office buildings means vacancy rates and rents are affected by changes in the wider economy, unlike residential properties, which are rented out to numerous individual tenants. Revenue from sale of real estate: the company is replacing assets in its rental real estate portfolio. In order to do so, it reclassifies properties it plans to sell from fixed assets to inventory, then books operating revenue from the sale. Gains from the sale of fixed assets are booked as extraordinary gains on the income statement. 20/69

21 Research Report by Shared Research Inc. FY03/17 operating profit for the segment was JPY113.6bn (+7.8% YoY), with JPY83.4bn (+0.4% YoY) attributable to the Offices/Retail segment, and JPY29.7bn (+35.0% YoY) attributable to the sale of real estate properties. Leasable area was 1.1mn sqm (-2.3% YoY), the vacancy rate was 4.1% (5.7% in FY03/16), and average rent was JPY6,500/sqm (Shared Research calculations.) Offices/Retail segment cost of sales NTT Urban releases a breakdown of parent-level costs for the Offices/Retail segment (previously the Leasing segment) in its securities filings. The Offices/Retail segment is mainly operated by the parent company, with the primary difference between the parent and the group s finances being the earnings from the Akihabara UDX building. Operating revenue from the Offices/Retail segment as a whole was only 1.1x the parent s segment revenue in FY03/17. These similarities lead Shared Research to believe that the parent-level cost structure does not differ significantly from that of the group as a whole. At the parent-level, costs are about 65% of operating revenue in this segment. Costs include depreciation, taxes and duties, and outsourcing expenses. Most costs are fixed. Depreciation: on office buildings. Assets depreciate based on the declining-balance (fixed percentage) method applied over their estimated useful lives (15-50 years for buildings). The straight-line method is used for the Granpark Tower, the NTT Cred Motomachi Building, and properties acquired after April 1998 (see Balance sheet). Taxes and duties: includes fixed asset taxes and real estate acquisition taxes. Acquisition taxes spike when the company acquires large properties. Outsourcing: management expenses for office buildings, plus maintenance and upkeep. Other: utilities and other expenses. This includes the cost of land and buildings that are sold to generate revenue from real estate sales. Office Retail segment (formerly Leasing) cost breakdown at the parent Note: Figures may differ from company materials due to differences in rounding methods. (Leasing) refers to the old segmentation, which is now the Office/Retail segment. FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/16 FY03/17 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Office/Retail (Leasing) operating revenue 89,380 91,744 90,573 84,996 82,603 82,208 87,730 83, ,535 95, ,640 Office/Retail (Leasing) operating costs 59,602 55,780 57,108 53,046 53,961 53,467 57,407 56,259 71,650 63,062 67,600 % of Office/Retail (Leasing) operating revenue 66.7% 60.8% 63.1% 62.4% 65.3% 65.0% 65.4% 67.5% 64.2% 65.7% 65.2% Personnel expenses % of Office/Retail (Leasing) operating revenue 0.4% 0.4% 0.4% 0.5% 0.6% 0.6% 0.5% 0.4% 0.4% 0.4% 0.4% Depreciation 21,749 21,700 21,500 19,506 20,142 19,550 20,205 19,358 19,532 18,950 14,508 % of Office/Retail (Leasing) operating revenue 24.3% 23.7% 23.7% 22.9% 24.4% 23.8% 23.0% 23.2% 17.5% 19.8% 14.0% Taxes and dues 7,235 7,269 7,798 7,894 8,413 8,164 8,034 8,129 8,256 8,107 7,693 % of Office/Retail (Leasing) operating revenue 8.1% 7.9% 8.6% 9.3% 10.2% 9.9% 9.2% 9.8% 7.4% 8.5% 7.4% Outsourcing expenses 10,172 10,526 10,826 10,381 10,255 10,478 10,447 10,347 10,342 9,990 8,554 % of Office/Retail (Leasing) operating revenue 11.4% 11.5% 12.0% 12.2% 12.4% 12.7% 11.9% 12.4% 9.3% 10.4% 8.3% Other 20,078 15,937 16,611 14,836 14,656 14,795 18,257 18,052 33,119 25,623 36,472 Gross profit 29,778 35,964 33,465 31,950 28,642 28,741 30,323 27,089 39,885 32,878 36,040 GPM 33.3% 39.2% 36.9% 37.6% 34.7% 35.0% 34.6% 32.5% 35.8% 34.3% 34.8% Offices/Retail segment SG&A expenses Personnel and outsourcing comprise the bulk of SG&A expenses in the Offices/Retail segment. NTT Urban does not release a breakdown of SG&A expenses by segment. Based on the parent-level GPM, Shared Research estimates the segment s SG&A expenses were around JPY6.0bn in FY03/16. Personnel: Personnel expenses are estimated to be in the JPY2.0bn range, based on the total number of employees in the segment (199 in FY03/17), the average salary at the parent-level (JPY8.6mn), and the company s share of labor expenses such as social insurance. 21/69

22 Research Report by Shared Research Inc. Offices/Retail segment: personnel expenses (estimated) (JPYmn) FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/16 FY03/17 Personnel expenses 1,587 1,656 1,716 1,850 1,869 1,830 1,895 1,934 1,996 1,996 1,971 Salaries and bonuses 1,380 1,440 1,492 1,609 1,625 1,591 1,648 1,682 1,736 1,736 1,714 Number of employees Average annual salary (parent) Employers' share of social insurance contribution Note: Salaries and bonuses, social insurance based on Shared Research estimates Outsourcing: includes brokerage commissions equal to one month s rent, paid to real estate companies. Offices/Retail segment features NTT Urban focuses on office buildings in this segment, and most tenants are members of NTT Group. The company has properties in a variety of regional locations, but most are located in the Greater Tokyo Area (Tokyo Metropolis, plus Kanagawa, Chiba, Saitama, Ibaraki, Gunma, and Tochigi Prefectures). Within the Greater Tokyo Area, properties in Otemachi and Akihabara generate significant revenue. The company is expanding overseas, having established a UK subsidiary in October Main tenants: NTT Group and financial companies Most tenants are NTT Group companies. Leasing revenues from NTT Group clients accounted for 19.7% of segment operating revenue (14.5% when including the impact of property sales) in FY03/17 (parent-level). In FY03/16, it was 22.3% (17.6% when including the impact of property sales). We understand that the NTT Group is reducing the amount of office space it rents, as it cuts costs in the face of fierce competition, and post-war baby boomers retire, leading to a fall in employee numbers. The NTT Group also needs less space for equipment as it takes its network online. Revenue from the NTT Group FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/16 FY03/17 (JPYmn) Par. Act. Par. Act. Par. Act. Par. Act. Par. Act. Par.Act. Cons. Act. Cons. Act. Cons. Act. Cons. Act. Cons. Act. (a): Office/Retail (Leasing) operating revenue 89,380 91,744 90,573 84,996 82,603 82,208 96,595 91, , , ,613 (a'): Office/Retail (Leasing) operating revenue excl. property sales ,058 86,222 83,387 83,944 (b): Operating revenue from NTT Group companies 25,144 30,186 31,191 28,236 26,600 26,341 25,721 21,289 20,088 18,579 16,507 (b) / (a) 28.1% 32.9% 34.4% 33.2% 32.2% 32.0% 26.6% 23.2% 16.6% 17.6% 14.5% (b) / (a ) % 23.3% 22.3% 19.7% Note: Figures may differ from company materials due to differences in rounding methods Note: Due to changes in accounting methods, years up to FY03/13 are parent-based, and years from FY03/14 on are consolidated (Leasing) refers to the old segmentation, which is now the Office/Retail segment Focusing on Greater Tokyo but maintaining a nationwide presence At end-march 2017, the company held 36 major properties (excluding overseas properties) with a total floor space of 1.91mn sqm. By region, it held 14 properties with 845,104sqm (total floor space composition ratio: 44.2%) of floor space in central Tokyo (Chiyoda, Chuo, Minato, Shinjuku, and Shibuya), for a total of 16 properties with 861,695sqm (45.1%) of floor space in the Greater Tokyo Area, compared with 22 properties with 1.1mn sqm (54.9%) of floor space in other regions. (Source: Shared Research based on major properties information from the company s annual securities report) NTT Urban s distribution of floor space by region differs from that of major real estate companies. As of the end of March 2017, 5.4%, 17.2%, and 3.6% of Mitsubishi Estate (TSE1: 8802), Mitsui Fudosan (TSE1: 8801), and Sumitomo Realty & Development (TSE1: 8830) s major properties (by total floor space) were located outside of Tokyo. NTT Urban has a high proportion of rental properties outside of Tokyo due to mergers with NTT Group regional real estate companies. In FY03/17, office buildings and commercial facilities in central Tokyo accounted for 57% of net operating income (excluding property sales). Office buildings and commercial facilities in the Greater Tokyo Area (excluding central Tokyo) accounted for 2% of NOI. Other properties accounted for 40% of NOI. 22/69

23 Research Report by Shared Research Inc. Floor space available for rent (left) and NOI (right) by region (FY03/16) Breakdown of floor space of main properties Breakdown of NOI (excl. impact of property sales) Other 55% Central Tokyo 44% Other 40% Central Tokyo (five wards; office buildings) 57% Greater Tokyo Area 1% Greater Tokyo Area (other; incl. central Tokyo) 1% Greater Tokyo Area (office buildings; excl. central Tokyo) 2% Note: Central Tokyo includes Chiyoda, Chuo, Minato, Shinjuku, and Shibuya wards. Note: NOI excludes property sales. NOI by region and property type (excluding the impact of property sales) FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/16 FY03/17 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Total 52,748 64,277 61,480 56,722 54,318 53,499 51,489 47,509 48,170 46,182 47,322 Offices/Retail 47,669 58,209 56,153 51,812 49,702 49,361 47,633 44,088 44,725 45,829 46,750 Central Tokyo (five wards) 23,353 32,983 31,955 30,207 28,745 28,007 24,649 22,170 23,389 24,046 26,960 YoY 44.3% 51.3% 52.0% 53.3% 52.9% 52.4% 47.9% 46.7% 48.6% 52.1% 57.0% Greater Tokyo Area (excl. Central Tokyo) 5,865 6,052 5,827 3,752 3,376 3,393 3,372 2,663 2,660 2,658 1,089 YoY 11.1% 9.4% 9.5% 6.6% 6.2% 6.3% 6.5% 5.6% 5.5% 5.8% 2.3% Other regions 18,450 19,173 18,370 17,852 17,579 17,960 19,611 19,254 18,675 19,124 18,699 YoY 35.0% 29.8% 29.9% 31.5% 32.4% 33.6% 38.1% 40.5% 38.8% 41.4% 39.5% Residential and Others 5,078 6,068 5,327 4,909 4,615 4,137 3,856 3,421 3, Tokyo Metropolis 927 2,002 1,806 1,634 1,938 1,779 1,535 1,289 1, YoY 1.8% 3.1% 2.9% 2.9% 3.6% 3.3% 3.0% 2.7% 3.1% 0.8% 1.2% Other regions 4,151 4,065 3,520 3,275 2,677 2,358 2,369 2,132 1, YoY 7.9% 6.3% 5.7% 5.8% 4.9% 4.4% 4.6% 4.5% 4.0% - - Note: Central Tokyo includes Chiyoda, Chuo, Minato, Shibuya, and Shinjuku wards Note: The Greater Tokyo Area includes Tokyo Metropolis, plus Kanagawa, Chiba, Saitama, Ibaraki, Gunma, and Tochigi prefectures Greater Tokyo Area properties center on Otemachi, Akihabara, and Minato The company has 11 major office buildings in the Tokyo metropolitan area including Urbannet Otemachi Building, Otemachi First Square, the Akihabara UDX building, and the Shinagawa Season Terrace. The net operating income of these properties (excluding the impact of property sales) made up 80% of net operating income in the Greater Tokyo Area (including central Tokyo) (excluding the NTT Makuhari Building sold in March 2016) in FY03/13 (the company has not released individual building s NOI since FY03/13). Shared Research thinks that the buildings in Otemachi and Akihabara UDX building made a particularly large contribution to earnings among major properties. 23/69

24 Research Report by Shared Research Inc. Main properties (Greater Tokyo Area) Location Name Type Floors Floor space Land Completed NOI Otemachi, Chiyoda Urbannet Otemachi Building Office Otemachi First Square JA Building, Keidanren Kaikan Otemachi Financial City North Tower Office Office Office 22 above ground, 5 below 23 above ground, 4 below (East Tower) 23 above ground, 5 below (West Tower) 37 above ground, 4 below 31 above ground, 4 below (sqm) (sqm) FY03/13 117,618 9,361 Feb ,131 54,284 6,236 Feb ,478 May ,517 1,506 Apr ,287 8, Oct Subtotal 207,368 17,561-9,896 Chiyoda (excluding Otemachi) Akihabara UDX Office 22 above ground, 3 below 155,629 11,548 Jan ,462 Urbannet Kanda Building Office 19 above ground, 1 below 14,266 1,855 Jul Subtotal 169,895 13,403-7,462 Chuo Minato Urbannet Nihonbashi 2-Chome Building Seavans N Building Office Office 10 above ground, 1 below 24 above ground, 2 below 14,795 1,687 Jan ,488 13,144 Jan ,371 Granpark Tower Office 34 above ground, 4 below 138,423 14,227 Aug ,224 Granpark Heights Residential 28 above ground, 4 below Oct Shinagawa Season Terrace Office 32 above ground, 1 below 202,716 49,547 Feb Shinjuku Subtotal 419,627 76,918-6,595 Tokyo Opera City Office Note: For buildings in which the company holds a stake, a proportion of the floor space is given according to NTT Urban s stake Note: The NTT Makuhari Building (Chiba Prefecture) is excluded as it was sold in March 2016 Net operating income breakdown (Greater Tokyo Area properties; FY03/13) 36 above ground, 1 below 33,086 3,831 Jul ,221 Total 829, ,713-25,174 Note: Excludes property sales Note: The NTT Makuhari Building is excluded from the Tokyo metropolitan area NOI since it was sold on March 2016 Properties in Otemachi (Chiyoda, Tokyo) Major real estate companies tend to focus on developing entire areas, with considerable property portfolios in those areas. For example, Mitsubishi Estate in Marunouchi (Chiyoda, Tokyo), and Mitsui Fudosan in Nihonbashi (Chuo, Tokyo). Although it is not yet focusing on the entire area, NTT Urban does hold a number of office buildings in Otemachi (Chiyoda, Tokyo). Otemachi (Chiyoda, Tokyo): along with neighboring areas Marunouchi and Nihonbashi, Otemachi is the home of many financial, trading, and newspaper companies. Otemachi is within walking distance of JR Tokyo Station, and is on a number of Tokyo Metro lines. The area is mostly office buildings, meaning that there are no residential buildings, and zero registered residents. The daytime population is about 72, /69

25 Research Report by Shared Research Inc. As of the end of April 2017, asking rents were about JPY12,172/sqm for large office buildings in Otemachi (at least 60sqm per floor) relatively expensive compared with the rest of central Tokyo, which averaged about JPY8,137/sqm in large office buildings (source: Sanko Estate). NTT Urban holds the following buildings in Otemachi (district and block numbers in parentheses): JA Building and Keidanren Kaikan (1-3) Otemachi First Square (1-5) Otemachi Financial City North Tower (1-9) Urbannet Otemachi Building (2-2). As of May 2017, the company also has a stake in Otemachi 2-Chome Area 1st Class Urban Redevelopment Project (2-1). Shared Research expects that NTT Urban may be able to develop the area by using land owned by NTT Communications Corp. (2-1), NTT Data (TSE1: 9613) (2-2), and NTT East (2-2). Otemachi properties and developments Akihabara UDX (Chiyoda, Tokyo) Completed in March 2006, the Akihabara UDX building is one of the largest office buildings in Akihabara. It is located to the north of JR Akihabara station. It was NTT Urban s first major in-house development project after development wound down on land and properties transferred from the NTT Group between 2000 and As of the end of April 2017, asking rents were about JPY7,578/sqm for large office buildings in Sotokanda and Iwamotocho (at least 60sqm per floor) slightly lower than the average for central Tokyo of about JPY8,137/sqm (source: Sanko Estate). Akihabara: encompasses Sotokanda near JR Akihabara Station and Kanda-Sakumacho in Chiyoda (Tokyo), along with Akihabara in Taito (Tokyo). JR lines, the Tsukuba Express line, and the Hibiya Line (Tokyo Metro) connect in Akihabara, and the area is within walking distance of Iwamotocho Station (Tokyo Metro; Shinjuku Line) and Suehirocho Station (Tokyo Metro; Ginza Line). Akihabara Electric Town is the home of many electronics and software stores. In December 2001, the Tokyo Metropolitan Government auctioned off 15,728sqm of land in Akihabara. The government held a design competition where both the acquisition price and entrants plans for the land were considered. NTT Urban s joint entry 25/69

26 Research Report by Shared Research Inc. with Daibiru Corporation (TSE1: 8806) and Kajima Corporation (TSE1: 1812) won the competition. Funding for the project came from investments from NTT Urban and Kajima, plus financing backed by revenues from the project. UDX Tokutei Mokuteki Kaisha (UDX TMK; UDX Special Purpose Company) leases the property to tenants. In March 2008, NTT Urban made UDX TMK a consolidated subsidiary after acquiring preferred stock in UDX TMK from Kajima, thus increasing its stake from 50% to 66%. NTT Urban subsequently cut its stake from 66% to 61% in November 2013 with the sale of 5% of the voting rights to the Premier Investment Corporation. Properties outside Greater Tokyo Area NTT Urban holds 22 major properties with 1.1mn sqm of floor space outside the Tokyo metropolitan area, accounting for 55% of floor space at major properties (end-fy03/17) and 40% of Offices/Retail segment net operating income (FY03/17). Most were once owned by NTT, and are generally located in urban areas. The lion s share of these properties is small or midsize office buildings; 4 have a floor space of less than 10,000sqm, and the average floor space per building is 26,986sqm (excluding Grand Front Osaka) less than the average floor space of 61,550sqm in the Tokyo metropolitan area. The table below shows the eight properties that made significant contributions to NOI in FY03/13. In that year, these properties together made up 49% of total NOI at properties outside the Greater Tokyo Area. Urbannet Nagoya Building (Aichi), NTT Cred Motomachi Building (Hiroshima), and NTT-T Building (Fukuoka) made particularly significant contributions to revenue. The company has not released Grand Front Osaka s contribution to NOI. But its book value was JPY50.7bn when it was completed in FY03/13, and Shared Research estimates that its NOI was JPY2 3bn. Main properties (outside the Greater Tokyo Area) Name (location) Type Size Floor space (sqm) Land (sqm) Completed NOI (FY03/13) Urbannet Nagoya (Higashi, Nagoya) Office 22 above ground, 3 below 75,047 5,997 Sep ,121 Grand Front Osaka (Kita, Osaka) Office 38 above ground, 3 below 481,628 33,251 Mar Tradepia Yodoyabashi (Chuo, Osaka) Office 21 above ground, 3 below 48,795 6,517 Oct NTT Cred Okayama (Kita, Okayama) Office 21 above ground, 2 below 35,685 4,161 Feb NTT Cred Motomachi (Naka, Hiroshima) Office 35 above ground, 2 below 160,418 21,801 Mar ,232 NTT Hakushima (Chuo, Hiroshima) Office 14 above ground, 1 below 38,813 7,052 Apr NTT-T (Chuo, Fukuoka) Office 7 above ground, 3 below 61,506 8,526 Sep ,039 Urbannet Sapporo (Chuo, Sapporo) Office 10 above ground, 1 below Note: Tradepia Yodoyabashi changed from a fixed asset to real estate for sale in end-fy03/16 Vacancy rates and rents seem stable for regional office buildings. Compared with Tokyo, relatively limited demand is balanced by limited supply. The vacancy rate was higher at regional properties than properties in central Tokyo in FY03/17, with the national vacancy rate at 4.1%, compared with 3.2% in central Tokyo. 31,255 5,639 Oct Total 9,887 Overseas In October 2009, NTT Urban established a UK subsidiary. In September 2011, the company established an office in Australia, followed by offices in Singapore and the US in April 2013 and October 2013 respectively. As Japan s population falls, NTT Urban intends to diversify its portfolio by expanding overseas. The company said yields are higher on overseas real estate than domestic real estate, though there is forex risk. The company also plans to negate any competitive edge local companies have by focusing on collecting data, thus making overseas expansion a viable business. Overseas 26/69

27 Research Report by Shared Research Inc. operations generated operating revenue of JPY5.7bn and recurring profit of JPY1.7bn (including equity in earnings of affiliates) in FY03/17. London NTT Urban has acquired four properties in the UK. It has focused on increasing the value of these properties by driving up their occupancy rate, raising rents, and renovating them. 103 Mount Street: acquired in November 2009, this was the company s first overseas acquisition. It successfully increased the property s value and sold it in February The company booked revenue from the sale of this property in FY03/13. 1 King William Street (office building): acquired in June 2011 for GBP67.5mn (about JPY8.9bn). Located at 1 King William Street, London, EC4, this property has seven floors above ground and one below, with a total floor space of about 8,400sqm. It is in the City of London (the Square Mile), where many banks, insurance companies, and brokerages are located. The company completed renovations on the property in November 2016 with eight floors above ground, one below, and a total floor space of 9,306sqm, and NTT Group plans to sign a lease. 20 Finsbury Circus, London EC2: acquired in September 2012 for GBP42.9mn (about JPY5.4bn). This property has seven floors above ground and one below, with a total floor space of 8,000sqm. 265 Strand, London, WC2R 1BH: acquired in April 2013 for GBP77mn (about JPY11.6bn). This property has eight floors above ground and one below, with a total floor space of about 7,000sqm. Melbourne NTT Urban began operating in Australia after establishing a subsidiary there in September In November 2011, the company s subsidiary established a residential development company together with Sumitomo Forestry Co., Ltd. (TSE1: 1911). Both companies had a 50% stake. This residential development company has invested in about 405,700sqm of land in and around Melbourne, spread across 349 lots for residential properties for the first project, and 967,100sqm of land across 1,065 lots for the second project. The company expects to book revenue over multiple years. US In October 2013, the company established a subsidiary in the US to invest in and manage real estate assets, UD USA Inc. It currently has investments in a total of seven properties in New York, Boston, and Washington DC. New York 125 West 25th Street: in December 2013, NTT Urban announced its participation in a redevelopment project for 125 West 25th Street, a combined office and commercial building in New York City (total floor space of 20,700sqm, 11 floors above ground and one floor below ground). Construction began in February The total cost of the project is JPY10bn, with NTT Urban s investment at JPY1.3bn (USD/JPY100). The company sold this property in December Lexington Avenue: a combined office and commercial building in New York City (total floor space of 69,243sqm, 35 floors above ground and two floors below ground), acquired in August Broadway: a combined office and commercial building in New York City (total floor space of 12,321sqm, six floors above ground and one floor below ground), acquired in July Pearl Street: a combined office and commercial building (total floor space of 18,941sqm, eight floors above ground and one floor below ground), acquired in March Boston 141 Tremont Street: 13 floors above ground; floor space of 6,377sqm, acquired in January Tenants include a law office and an insurance company. 27 School Street: 6 floors above ground; 2 floors below ground; floor space of 5,799sqm. This combined office and commercial facility was built over 110 years ago. The company acquired both 141 Tremont Street and 27 School Street in January 2015 for the combined total of JPY5.6bn (with the exchange rate set at USD1/JPY117). 27/69

28 Research Report by Shared Research Inc. Two Oliver Street: 11 floors above ground; 1 floor below ground; leasing space of 20,773sqm. Tenants include an IT company and a marketing company. Acquired in July 2015 for JPY9.8bn (forex rate: USD1/JPY123). 185 Dartmouth Street: a combined office and commercial building (total floor space of 15,298sqm, eleven floors above ground and two floors below ground), acquired in May Washington DC th Street: a building for both office use and commercial use; 11 floors above ground and 3 floors below ground; leasing space of 9,847sqm. It is the first property the company has acquired in Washington DC, in collaboration with local developer Normandy Real Estate Partners. Acquired in December Southeast Asia In April 2013, NTT Urban opened a branch in Singapore to serve as a regional base for Asia. The company is using the NTT Group s network of local contacts to build relationships with local partners as it forms a business plan for this region. 28/69

29 Research Report by Shared Research Inc. Residential segment This segment accounted for 30.6% of sales and 7.9% of operating profit in FY03/17. NTT Urban sells residential properties, mainly condominiums, in the residential property sales business. Segment overview NTT Urban buys land, then plans and designs, builds, rents and sells residential properties. The company outsources construction and sales, selecting subcontractors based on the specifics of each property. The whole process takes about two to three years, making product planning based on expected future market conditions and demand difficult. Changes in the wider economy thus affect this segment more than the office leasing business. Residential segment flow Residential segment earnings structure Operating revenue Segment operating revenue is comprised of operating revenues from residential property sales (97.0% in FY03/17) and rental income from residential properties (3.0% in FY03/17). Segment operating revenue depends on the number of properties sold and average price. Properties sold: Depends on the wider economy, but NTT Urban s condominium sales (by unit) are increasing over the long term. In FY03/13, the company surpassed annual sales of 1,000 units, and its midterm target is to hit 2,000 units per year by FY03/19. Per the medium-term vision, the company plans to focus on profits, while delivering a steady supply of about 1,300 units per year. Average price: The company focuses on properties that cost about JPY40mn per unit, but average unit price may change depending on land acquisitions. It targets gross profit margin of at least 20% when acquiring land for development. 29/69

30 Research Report by Shared Research Inc. Residential segment trends FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/16 FY03/17 (JPYmn, units) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Total operating revenue 38,414 32,688 41,643 41,725 28,484 54,939 79,527 46,620 48,859 48,865 57,803 YoY 17.5% -14.9% 27.4% 0.2% -31.7% 92.9% 44.8% -41.4% 4.8% % Residential sales 38,414 32,688 41,643 41,725 28,484 54,939 79,527 46,620 48,859 48,865 57,803 YoY 17.5% -14.9% 27.4% 0.2% -31.7% 92.9% 44.8% -41.4% 4.8% % Condominiums Operating revenue 30,319 24,845 30,677 31,626 22,392 47,371 75,486 45,404 46,916 46,916 52,814 Number of properties and lots ,052 1,423 1,079 1,054 1, Average price Greater Tokyo Area Operating revenue 12,299 14,731 15,959 22,948 16,330 27,979 54,073 24,368 28,664 28,664 27,227 Number of properties and lots Average price Other regions Operating revenue 18,020 10,114 14,718 8,678 6,062 19,392 21,413 21,036 18,252 18,252 25,587 Number of properties and lots Average price Residential lots Operating revenue 6,805 7,841 9,040 7,785 4,098 6,618 4,049 1,219 1,948 1,948 4,988 Number of properties and lots Greater Tokyo Area Operating revenue 3, ,481 1, , ,404 Number of properties and lots Other regions Operating revenue 3,331 7,291 6,559 5,828 3,817 2,423 3,530 1,169 1,330 1,330 2,584 Number of properties and lots Others 1,289-1,925 2,312 1, Residental leasing ,835 1,803 YoY % Others ,760 - YoY Operating profit 6,593-6,018-10, ,374 2,914 8,222 4,405 5,074 11,808 3,068 YoY 26.1% % 112.1% 182.2% -46.4% 15.2% % OPM 17.2% % 4.8% 5.3% 10.3% 9.4% 10.4% 24.2% 5.3% Note: Figures may differ from company materials due to differences in rounding methods. Residential segment costs As in the Leasing segment, NTT Urban releases a breakdown of parent-level costs in its securities filings. Excluding FY03/09 FY03/11, the Residential Property Sales segment is operated only by the parent company, so the parent-level cost structure does not differ significantly from that of the group as a whole. Land and administrative expenses are the main costs in this segment. Land: 25 40% of operating revenue, depending on the mix of properties by area. Compared with regional properties, land accounts for a larger proportion of the selling price in Greater Tokyo Area properties. Because properties take about three years to develop, changes in the price of land during that time affect its share of the costs. Administrative expenses: About 45% of operating revenue. Mostly architectural expenses. Also, per the Accounting Standards for Measurement of Inventories, the company books evaluation losses on inventory as an administrative expense if the net selling price of condominiums falls below the acquisition cost (i.e., if the book value is not recoverable). The company booked such losses in FY03/09 (JPY7.9bn) and FY03/10 (JPY12.7bn). Accounting Standards for Measurement of Inventories: inventory assets are booked on the balance sheet at the acquisition cost. However, the book value of the asset will be reduced to the net selling price if the net selling price falls below the acquisition cost. In such cases, the company books impairment losses (evaluation losses on inventory). Residential segment (formerly Property Sales) cost breakdown at the parent Note: Figures may differ from company materials due to differences in rounding methods. FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/16 FY03/17 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Residential (Property Sales) operating revenue 38,415 29,094 36,505 38,014 28,484 54,939 79,537 46,601 47,968 63,564 57,462 Residential (Property Sales) operating costs 28,147 28,808 42,595 33,346 23,392 45,596 62,282 36,558 36,978 45,566 48,294 % of Residential (Property Sales) operating revenue 73% 99% 117% 88% 82% 83% 78% 78% 77% 72% 84% Land 10,825 6,951 10,914 13,889 10,804 20,930 26,670 13,951 13,794 13,794 25,004 % of Residential (Property Sales) operating revenue 28.2% 23.9% 29.9% 36.5% 37.9% 38.1% 33.5% 29.9% 28.8% 21.7% 43.5% Personnel % of Residential (Property Sales) operating revenue 0.1% 0.1% 0.1% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other expenses 17,273 21,832 31,661 19,448 12,570 24,654 35,606 22,606 23,184 31,763 23,288 % of Residential (Property Sales) operating revenue 45.0% 75.0% 86.7% 51.2% 44.1% 44.9% 44.8% 48.5% 48.3% 50.0% 40.5% Gross profit 10, (6,090) 4,668 5,092 9,343 17,255 10,043 10,990 17,998 9,168 GPM 26.7% 1.0% -16.7% 12.3% 17.9% 17.0% 21.7% 21.6% 22.9% 28.3% 16.0% 30/69

31 Research Report by Shared Research Inc. SG&A expenses Advertising, outsourcing, and personnel expenses comprise the bulk of SG&A expenses in this segment. Most expenses are variable, excluding personnel. NTT Urban does not release a breakdown of SG&A expenses by segment, but Shared Research estimates the SG&A expenses were about JPY6.0bn and the SG&A-to-sales ratio was about 11% in this segment in FY03/16 based on parent-level GPM. Advertising: newspaper advertisements and leaflets in this segment account for most of the group s advertising expenses. These expenses move in line with operating revenue in this segment, and have accounted for 5-7% of segment operating revenue since FY03/10. Note: Figures may differ from company materials due to differences in rounding methods. Outsourcing: the company pays real estate companies brokerage commissions at 3% of the selling price of the property (condominium). Personnel: Shared Research estimates personnel expenses were about JPY1.0bn in FY03/17, based on the total number of employees in the segment (105), the average parent-level salary (JPY8.6mn), and the company s share of labor expenses such as social insurance. Residential Property sales: Personnel Expenses (Est.) (salaries and bonuses, social insurance based on Shared Research estimates) Residential segment features FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/16 FY03/17 (JPYmn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Advertising expenses (cons.) 1,817 2,350 2,478 1,985 1,962 3,676 5,138 3,037 3,303 3,303 3,527 % of Residential (Property Sales) operating revenue 4.7% 7.2% 6.0% 4.8% 6.9% 6.7% 6.5% 6.5% 6.8% 5.1% 5.9% (JPYmn) FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/16 FY03/17 Personnel expenses Salaries and bonuses Number of employees Average annual salary (parent) Employers' share of social insurance contribution In this segment, NTT Urban sells residential properties, mainly condominiums. The company also has its own condominium brand, Wellith. It primarily develops and sells condominiums for families, mostly in Tokyo, Osaka, and Fukuoka. Most condominiums have three bedrooms, are 70-80sqm in size, and sell for about JPY40mn. According to the company, its status as a member of the NTT Group reassures potential purchasers of condominiums. But Shared Research understands that barriers to entry are low in the condominium development industry and it is difficult to either pursue economies of scale or gain a competitive edge. Based on data from the Real Estate Economic Institute, Shared Research calculates that the top 10 suppliers (by number of condominiums) accounted for just 40% or less of the total in financial year 2016 (NTT Urban was unseated in the top 20 in FY2016 after ranked the 17th in FY2015). Shared Research thus expects that NTT Urban s position in the industry is unlikely to affect its profitability or growth prospects. 31/69

32 Research Report by Shared Research Inc. Strengths and weaknesses Strengths Member of NTT Group: Japanese consumers trust NTT, Japan s largest telecoms carrier and formerly a publicly owned company. Furthermore, NTT owns 67.3% of NTT Urban s outstanding shares, and NTT Group companies accounted for 19.7% of operating revenue (14.5% when including the impact of property sales) in the Offices/Retail segment in FY03/17. Shared Research thinks that this gives NTT Urban a competitive advantage when acquiring land, selling condominiums, leasing office buildings, and obtaining credit ratings for its corporate bonds. Strong portfolio: NTT Urban holds four properties in Otemachi, Chiyoda, a top business district with office rents among the highest in Japan the Urbannet Otemachi Building, Otemachi First Square, the JA Building and Keidanren Kaikan, and Otemachi Financial City North Tower (about 11% of the total floor space at major office buildings in Otemachi). The company s vacancy rate may be high, but its profitability is on par with major real estate competitors (as measured by EBITDA yield [EBITDA / total value of real estate for rent]) (see Market and value chain). Significant unrealized gains: NTT Urban s balance sheet lists land acquired from NTT as investment-in-kind at the acquisition price meaning the company is sitting on significant unrealized gains. At the end of March 2017, the company s market value for real estate for rent was JPY1.4tn, with unrealized gains of JPY609.0bn (+JPY47.0bn YoY). Shared Research believes these unrealized gains boost the company s return on capital, help secure profits from the sale of real estate, create cash flows, and lend the company a degree of flexibility when forming management strategies and targets for capex. Weaknesses Revenue base not diversified: The Offices/Retail segment generated 87.4% of operating profit in FY03/17 (before eliminations) a higher proportion of earnings than major competitors (see Market and value chain). Akihabara UDX building, Urbannet Otemachi Building, and Otemachi First Square accounted for significant proportions of Offices/Retail segment net operating income (NOI) (excluding the NTT Makuhari Building sold on March 2016) in FY03/13, at 24%, 13%, and 11% respectively. If renting stops for redevelopment at these buildings, it may have a significant albeit temporary impact on revenue. Falling demand for office space from main client: The NTT Group accounted for 19.7% of revenue in the Leasing segment in FY03/17 excluding the impact of property sales. But employee numbers are falling at the NTT Group as post-war baby boomers retire and NTT pushes for efficiency in the face of fierce competition in the telecoms industry. Shared Research expects this will lead to a falling demand for office space from NTT Group companies (see Market and value chain). Exposed to Japan s shrinking regional markets: In FY03/17, 40% of the Offices/Retail segment s NOI were accounted for by properties outside Greater Tokyo. This underscored the fact that the company is more involved in regional markets than its major competitors. The National Institute of Population and Social Security Research expects Japan s population to decline, particularly in regional areas (it expects the population of Tokyo to increase by 1% between 2010 and 2025, compared with an overall decline of 6%). However, NTT Urban holds a higher proportion of regional properties than its competitors the result of mergers with regional NTT Group real estate companies meaning it may be more exposed to the falling population, and subsequent lower demand for office space in regional cities. 32/69

33 Research Report by Shared Research Inc. Group companies NTT Urban has 23 consolidated subsidiaries and 17 equity-method affiliates, as below (stake in parentheses): Consolidated subsidiaries Property management NTT Urban Development Builservice Co. (100%): design, construction, and management of properties in the Greater Tokyo Area and west Japan. NTT Urban Development Hokkaido Co. (100%): management and maintenance of real estate and parking lot holdings in Hokkaido. Management Otemachi First Square Inc. (56.5%): management of the Otemachi First Square building and the land it sits on. Motomachi Parking Access Co., Ltd. (58.3%): maintenance and management of underground passageways in Motomachi, Hiroshima. Shinagawa Season Terrace Building Management Co. (60.0%): management of the Shinagawa Season Terrace building and the land it sits on. Facility operation Knox Twenty-One Co., Ltd. (100%): operation of NTT Group convention facilities. DAY-NITE Co., Ltd. (100%): operation of halls and conference rooms, plus restaurants catering to tenants of NTT Urban buildings in Tokyo. Akihabara UDX (development, holding) UDX Tokutei Mokuteki Kaisha (UDX TMK; UDX Special Purpose Company) (61.0%): development and holding of the Akihabara UDX building. Overseas subsidiaries UD Europe Limited (100%): investment in and operation of real estate in the UK. UD USA Inc. (100%): investment in and operation of real estate in the US. UD Australia Pty Limited (100%): investment in and operation of real estate in Australia. Investment management NTT Urban Development Asset Management Co. (100%): investment management based on the Financial Instruments and Exchange Act. Premier REIT Advisors Co., Ltd. (53.1%): investment management, per the Financial Instruments and Exchange Act. The company acquired a stake in Premier REIT Advisors and made it a consolidated subsidiary in May Four other companies hold stakes: Ken Corporation, Sohgoh Real Estate, The Chuo Mitsui Trust and Banking Company, and Nikko Properties Corporation. Premier REIT Advisors directs the investments of the Premier Investment Corporation, a REIT that listed in September 2002, and invests mainly in office buildings and residential properties. As of October 2016, the total value of Premier Investment Corporation's portfolio (by acquisition value) was JPY236.0bn. This REIT provides another possible buyer of properties developed by NTT Urban, and also aims to generate revenue from fees and related businesses by growing assets under management. 33/69

34 Research Report by Shared Research Inc. Equity-method affiliates Tokyo Opera City Building Co., Ltd. (23.7%): manages the Tokyo Opera City building. DHC Tokyo Co., Ltd. (50.0%): supplies cooling and heating systems for Granpark Tower. Tokyo Opera City District Heating & Cooling Co., Ltd. (36.2%): supplies heating and cooling systems for Tokyo Opera City. Harumi Yonchome City Planning Design Co. (36.0%): investigates and plans urban development in Harumi (Chuo, Tokyo). 335 Grices Road Pty Ltd. (50.0%): develops and sells lots for residential properties. 34/69

35 Research Report by Shared Research Inc. Market and value chain Office space: supply and demand Long-term growth in office space in Tokyo Total office space in Tokyo grew through the 1980s and the early 1990s. Growth continued from the mid-1990s onward, albeit at a slower rate. Total office floor space in Tokyo (23 wards) (ha) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3, (ha) Office floor space (Tokyo 23 wards) 5,101 7,037 7,332 7,619 7,809 7,925 8,006 8,106 8,150 8,288 8,544 8,703 8,672 8,748 8,889 8,959 9,006 9,014 9,094 9,142 9,173 9,236 Change #REF! 38.0% 4.2% 3.9% 2.5% 1.5% 1.0% 1.2% 0.5% 1.7% 3.1% 1.9% -0.4% 0.9% 1.6% 0.8% 0.5% 0.1% 0.9% 0.5% 0.3% 0.7% Source: Shared Research based on Bureau of Urban Development, Tokyo Metropolitan Government According to the Bureau of Urban Development (Tokyo Metropolitan Government), total office floor space in the 23 wards of Tokyo increased by about 1.5x between 1980 and But economic growth meant demand outstripped supply, leading to higher rents and lower vacancy rates. In central Tokyo (Chiyoda, Chuo, Minato, Shinjuku, and Shibuya) the vacancy rate fell to 0.39% in 1990, while rents rose to almost JPY12,500/sqm. By 2016, the vacancy rate was 3.6% (4.0% in 2015), and the average rent was about JPY5,601/sqm (about JPY5,345/sqm in 2015) (source: Miki Shoji Co.). The supply of office space continued to grow even after the bursting of the bubble economy in the early 1990s, due to the completion of buildings already in the design or construction stages. Total office floor space in the 23 wards of Tokyo increased by about 1.4x between 1990 and But this increase in supply, coupled with falling employment levels as the bubble economy burst, meant the vacancy rate rose to 8.1% in central Tokyo in Yet by 1995, the vacancy rate in central Tokyo was just 6.1%, despite the fact that total office space in the 23 wards grew 38.0% between 1990 and 1995, and the number of people on Tokyo s trains fell by about 3.2% over the same period (based on the number of people on JR, Tokyo Metro, and private railway lines, a measure of employment trends in Tokyo). Shared Research considers that this was because rising office space per person absorbed excess supply. Growth in office space began slowing in 1995, before losing more pace from 2000 onward. From 2005 onward, a certain amount of supply has been lost each year to deconstructions and redevelopments. Overall, the rate of growth in office floor space averaged just 1.0% between 2000 and Traffic on Tokyo s railway lines varies with the state of the domestic economy The number of people on Tokyo s railways fell between 1990 when the bubble economy burst and Since then, the number of users has been steadily growing, despite a dip from 2009 to 2011 following the global financial crisis. From 2000 to 2015, the number of Tokyo railway passengers increased at an average rate of 1.3% a year. The number of people on Tokyo s railway lines is correlated with Japan s GDP (correlation coefficient of 0.84 in the chart below). 35/69

36 Research Report by Shared Research Inc. Number of commuters on Tokyo s railways versus GDP (mn) 10,000 (JPYtn ) 550 9,500 Commuters GDP (right axis) 500 9,000 8, , , ,000 6, , Source: Shared Research based on Tokyo Statistical Yearbook, Tokyo Metropolitan Government Train users calculated as the number of people on Tokyo JR lines, metro, and private railways. Office space per person increased in the early 1990s; constant thereafter Tight supply of office space in the Greater Tokyo Area meant there was little leeway to increase office space per person in the 1980s. However, the supply of office space grew in the early 1990s as office buildings started in the bubble economy were completed. Office space per person increased, which in turn absorbed supply created by new office space and a falling employment rate. Office floor space per person Commuters (mn) 8,565 8,421 8,434 8,355 8,315 8,265 8,306 8,411 8,456 8,577 8,571 8,674 8,991 9,380 9,432 9,355 9,305 9,236 9,458 9,697 9,751 10,044 GDP (JPYtn) (sqm) Office floor space per person Change % -1.7% 2.6% -2.1% 0.0% -1.3% 4.9% -8.1% 0.5% (sqm) Office floor space per person Change 0.9% 0.0% -1.4% 0.5% -0.9% 2.8% 0.5% 4.5% -2.6% 0.9% Source: Shared Research based on Japan Building Owners and Managers Association 36/69

37 Research Report by Shared Research Inc. Demand for offices Vacancy rate and rents There s no chronic oversupply of office space in Tokyo. Rising office space per person has canceled out excess capacity created by a flood of supply between 1980 and 1995, and steadily rising supply since then. According to Miki Shoji Co. s Office Data (annual), in central Tokyo, the vacancy rate peaked at 8.1% in 2003, before turning downward and hitting 2.7% in It appears that changes in rents and vacancy rates are not the result of any structural issues, but rather short-term changes in the economic environment. After the global financial crisis, vacancy rates rose for rental offices in Tokyo and rents fell. However, as demand recovers, rents are picking up, and vacancy rates are trending down hitting a low in Central Tokyo office rent and vacancy rate (class A) (JPY/sqm) 0.0% 14,000 Monthly rent (JPY/sqm) Vacancy rate (right axis) 1.0% 12, % 10,000 8, % 4.0% 5.0% 6, % 4,000 2, % 8.0% 9.0% 0 Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q % (JPY) Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Rent / sqm 7,028 7,672 6,964 7,286 7,538 8,275 8,844 8,877 8,835 9,013 9,443 11,274 10,472 11,380 11,934 12,038 13,767 11,692 13,163 9,043 9,017 9,229 Vacancy rate 7.6% 6.1% 4.9% 3.3% 2.7% 2.0% 1.9% 1.0% 1.4% 0.8% 1.7% 1.2% 1.4% 1.3% 1.2% 1.4% 2.1% 2.4% 2.7% 3.8% 4.6% 5.6% (JPY) Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Rent / sqm 7,218 6,204 7,070 7,107 6,428 6,707 7,178 6,098 5,961 6,472 6,599 6,670 6,441 7,250 8,397 8,070 8,064 8,399 8,918 8,622 9,176 9,248 Vacancy rate 7.0% 7.4% 6.5% 6.7% 6.0% 4.9% 6.2% 6.0% 5.0% 5.4% 6.2% 9.0% 8.9% 9.2% 8.0% 7.6% 7.9% 6.8% 6.1% 5.3% 5.0% 4.0% (JPY) Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Rent / sqm 10,185 10,912 11,651 10,742 11,109 10,338 11,014 11,041 10,914 11,358 Vacancy Rate 4.8% 4.8% 4.0% 3.3% 3.3% 2.6% 2.9% 3.4% 3.9% 3.2% Source: Shared Research based on Sanko Estate Co. Note: Class A buildings: floor space over 33,000sqm, with at least 1,000sqm of rentable floor space per standard floor, no more than 15 years old Central Tokyo office rent and vacancy rate (class B) (JPY/sqm) 9,000 Monthly rent (JPY/sqm) Vacancy rate (right axis) 0.0% 8, % 7, % 6, % 5, % 4, % 3, % 2, % 1, % 0 Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q % (JPY) Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Rent / sqm 4,740 4,912 5,211 4,841 5,173 5,258 5,591 5,814 6,096 6,210 6,785 6,755 7,645 7,611 8,069 8,381 7,909 7,729 8,588 7,197 6,916 6,387 Vacancy rate 5.2% 5.8% 7.7% 7.2% 6.7% 6.1% 4.6% 4.0% 2.2% 1.9% 1.6% 1.5% 1.3% 1.3% 1.9% 1.3% 1.5% 2.0% 1.9% 2.6% 3.0% 4.2% (JPY) Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Rent / sqm 5,316 5,019 5,209 5,214 5,015 4,528 4,257 4,163 4,530 4,300 3,871 4,341 3,810 4,779 4,255 4,873 4,821 5,014 5,247 4,817 5,282 5,182 Vacancy rate 5.2% 6.3% 7.0% 7.0% 7.1% 6.8% 7.7% 7.2% 6.5% 6.2% 6.6% 6.4% 6.0% 5.7% 5.8% 5.7% 5.6% 5.4% 5.2% 4.5% 4.5% 4.5% (JPY) Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Rent / sqm 5,749 5,484 5,587 5,524 6,041 5,851 5,830 5,561 5,972 5,861 Vacancy Rate 3.7% 3.6% 3.4% 3.2% 3.0% 2.5% 2.6% 2.2% 2.0% 1.6% Source: Shared Research based on Sanko Estate Co. Note: Class B building: floor space over 660sqm and not categorized as Class A buildings (including buildings over 15 years old) 37/69

38 Research Report by Shared Research Inc. Demand In 2012, the supply of office space increased as new buildings were completed, but growth in demand outstripped rising supply. The balance of supply and demand improved further since 2013, when demand continued to recover and supply fell compared to Net absorption (the 23 wards of Tokyo) (sqm) 500, , ,000 Absorption demand New office space supply 200, , , , , ,000 Net absorption (the wards of 2010 Tokyo) (sqm) Absorption demand -1,112, , ,469 1,213,077 1,140,378 1,332,090 1,310,072 1,143,440 New office space supply 746, , , , , , , ,144 Source: Shared Research based on Sanko Estate Co. Note: (Net) Absorption Demand = total completed floor space seeking tenants at the start of the year + new floor space supply (floor space available for rent in new buildings completed during the year) total completed floor space seeking tenants at the end of Net absorption is an indicator of the change in demand for office space during the year (utilization rate = occupancy rate). New Office Space Supply shows the total floor space available for rent in new office building completed during the year. Jobs-to-applicants ratio The jobs-to-applicants ratio bottomed out in the second quarter of Since then, it has surpassed 2006 levels, a recent peak. Jobs-to-applicants ratio Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Jobs-to-applicants ratio (%) Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Jobs-to-applicants ratio (%) Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Jobs-to-applicants ratio (%) Source: Shared Research based on Ministry of Health, Labour and Welfare Supply of office space New office buildings According to Mori Trust Co., the supply of large office building space in Tokyo 23 wards was less than 1.0mn sqm in 2013 and 2014; this is despite the completion on new buildings as part of the redevelopment of the Otemachi and Marunouchi in In 2015, the supply of large office space was 1.1mn sqm, surpassing the 20 year average (1.0mn sqm) for the first time in three 38/69

39 Research Report by Shared Research Inc. years, although this fell to 970,000sqm in marked the second consecutive year of decrease in supply at 730,000sqm, but a supply increase is forecast going forward, with 1.4mn sqm and 1.6mn sqm projected for 2018 and 2020, respectively. Supply of new office space in the 23 ward of Tokyo Z Units supplied Supply ('000 sqm) 2,500 2,000 1,500 1, ,830 1, , ,160 1,540 1,210 1, ,750 1, , , , '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 Source: Shared Research based on Mori Trust Co. Office space is also depleted by destruction Some office space has been unavailable for rent due to destruction or redevelopment assuming that the difference between new supply and the year-on-year change in total office space is the amount of office space lost in this way (source: Miki Shoji Co.). As such, the rate of increase in office space is gradual. According to the Bureau of Urban Development, in January 2015, 10% of total office space in Tokyo 23 was built in the 1960s or before, at 9.2mn sqm. Shared Research understands that the demolishing and redevelopment of these office buildings will contribute to the dampening rate of increase in office space over the medium term. Office supply in central Tokyo ('000 sqm) Supply of office space 35,901 36,196 37,055 37,169 37,830 39,213 39,683 40,140 40,354 40,951 YoY 3.2% 0.8% 2.4% 0.3% 1.8% 3.7% 1.2% 1.2% 0.5% 1.5% Net increase (a) 1, , Increase (supply of new bulidings) (b) 1, , ,137 Decrease (a) - (b) Source: Shared Research based on Mori Trust Co. Note: Central Tokyo refers to Chiyoda, Chuo, Minato, Shinjuku, and Shibuya Note: The net increase is the YoY change in office space; the increase is all new supply Supply of office space in Otemachi Many of Japan's most important institutions are concentrated in Tokyo's centrally located Chiyoda ward, including the Imperial Palace in the center, the Otemachi-Marunouchi business district to the east, the government district in Kasumigaseki and National Diet Building and party headquarters in Nagata-cho to the south, and the Supreme Court in Hayabusa-cho to the west. In 2016, the total floor space of office buildings in Chiyoda ward was 12.5mn sqm (source: Miki Shoji Co.). Otemachi is in east Chiyoda ward is adjacent to Marunouchi, and along with Nihonbashi (Chuo), hosts a large assembly of financial institutions, general trading companies, and newspaper headquarters. In addition to being able to connect to the Marunouchi, Tozai, Chiyoda, Hanzomon and Toei Mita lines, Otemachi also is in walking distance of the JR Tokyo Station. As of 39/69

40 Research Report by Shared Research Inc. May 2017, the total floor space of office buildings in Otemachi was about 1.9mn sqm, of which NTT Urban held 210,309sqm (including portions of jointly owned properties), or 11%. Shared Research estimates that the floor space of rental office buildings in Otemachi increased by 346,000sqm or 22% YoY with the completion of the Otemachi Financial City Grand Cube in April 2016 and the Otemachi Park Building in February Main office buildings in Otemachi Property Type Zone / Block Floors Palace Building Office above ground, 1 below Otemachi Center Building Otemon JX Tower Building Otemachi Park Building JA Building, Keidanren Kaikan Office above ground, 4 below Office above ground, Office, stores, serviced apartments 5 below above ground, 5 below Office above ground, 4 below Land (sqm) Floor space (sqm) Completed Operator 10,440 66,850 Jan Mitsubishi Estate 5,775 67,412 Sep , ,500 Nov Mitsubishi Estate 9, ,855 Feb Mitsubishi Estate 13,400 71,200 Apr NTT Urban Development (portion owned: 26,517sqm) Otemachi Tower Offices, accommodation, stores above ground, 6 below 11, ,000 Apr Tokyo Prime Stage Taisei Corp. Tokyo Tatemono Otemachi First Square Office above ground, 5 below 11, ,207 Feb NTT Urban Development (portion owned: 54,284sqm) Otemachi Building Offices, stores above ground, 3 below 10, ,272 Apr Mitsubishi Estate Tokyo Sankei Building Otemachi Financial City Offices, stores, conference rooms above ground, 4 below Office above ground, 4 below 6,262 83,255 Stage I: Sep Stage II: Sep The Sankei Building Co. 14, ,100 Oct NTT Urban Development (portion owned: 8,949sqm) Otemachi Financial City Grand Cube Otemachi Nomura Building Shin-Otemachi Building Urbannet Otemachi Building Asahi Seimei Otemachi Building Office above ground, 4 below Office above ground, 5 below Offices, stores above ground, 3 below Office above ground, 5 below Office above ground, 4 below Nippon Building Office above ground, 4 below Total 1,885,335 11, ,800 Apr Mitsubishi Estate 4,423 59,930 Feb Nomura Real Estate Development 8,530 88,785 Dec Mitsubishi Estate 15, ,559 Feb NTT Urban Source: Shared Research based on various building data Note: The land and floor space for Otemachi Financial City represent the combined figures of the North and South Towers. Note: Office buildings exclusively used by single companies are not listed. Development 3,655 49,296 Jul Mitsubishi Estate 9, ,314 Jul Mitsubishi Estate 40/69

41 Research Report by Shared Research Inc. Per the Chain Urban Renaissance Project in Otemachi, in the medium-term, the Otemachi 2-Chome Area Redevelopment Project is being planned for May 2018 and the Otemachi 1-Chome Project for February Shared Research estimates that the completion of these projects will increase rental office space in Otemachi by 707,000sqm or 37% compared with figures at the end of May NTT Urban s main office buildings in the area, the Urbannet Otemachi Building and Otemachi First Square, were completed in February 1990 and February 1992 respectively, meaning they will be older and therefore less attractive than the new buildings. The additional supply of office space in Otemachi may also tip the balance of supply and demand against NTT Urban, increasing vacancy rates and putting downward pressure on rents. However, portions of the buildings in the redevelopment project are being used for accommodation and serviced apartments, in a bid to tap into demand for other types of facility. Chain Urban Renaissance Project in Otemachi: the Urban Renaissance Agency launched the Chain Urban Renaissance Project in Otemachi in January 2003, as part of its Fifth Urban Renaissance Project. This project proposes to revitalize the Otemachi area by sequentially rebuilding old buildings in new locations, without suspending business. The Urban Renaissance Agency will replot the sites of the former Government Complex Buildings (1 and 2) in order to do this. Major development projects in Otemachi Project and location Type Location Floors Land (sqm) Floor Space (sqm) Date completed Operator Otemachi 2-Chome Area Redevelopment Project Otemachi 1-Chome Project A Building Offices, stores, conference B Building rooms A Building Offices, stores, hotel B Building Source: Shared Research based on various data above ground, 3 below 33 above ground, 3 below 20, ,000 May ,000 Urban Renaissance Agency NTT Urban Development above ground, 20, ,700 Feb Mitsui & Co. 5 below Mitsui Fudosan 39 above ground, 5 below 41/69

42 Research Report by Shared Research Inc. Falling number of employees at NTT Group In FY03/17, 19.7% of revenues in the Office/Retail segment (14.5% when including the impact of property sales) were from NTT Group companies. In particular, many of the tenants of NTT Urban s properties in regional cities are NTT Group companies. At end FY03/17, the NTT Group had a total of 274,850 employees (241,450 employees at end-fy03/16). The Regional Communications segment comprising NTT East, NTT West, and outsourcing companies accounted for the largest number of employees within the group, after the data information communication business, at 68,250 employees (66,200 at end-fy03/16). Many of the employees of NTT East, NTT West, and outsourcing companies, however, are post-war baby boomers. Shared Research expects 2,000-6,000 such employees to retire each year over the next ten years or so counting from FY03/16. This may lead the NTT Group to reduce the office space it uses as the number of group employees falls. Age distribution of employees at NTT East, NTT West and outsourcing companies (March 31, 2016) (Employees) Source: Nippon Telegraph and Telephone Corporation Note: Figures for East Outsourcing Companies include regional subsidiaries (NTT East-Minami Kanto and others), NTT-ME and NTT EAST SOLUTIONS. The figures for West Outsourcing Companies include NTT BUSINESS SOLUTIONS, NTT MARKETING ACT, NTT NEOMEIT, NTT FIELDTECHNO and NTT BUSINESS ASSOCIE WEST. Figures for those outsourcing companies include the number of more than 60-year-old contracted employees. (Age) 42/69

43 Research Report by Shared Research Inc. Competitors and peers Earnings versus competitors NTT Urban Development Mitsubishi Estate Mitsui Fudosan Sumitomo Realty & Development (JPYmn) FY03/17 (JPYmn) FY03/17 (JPYmn) FY03/17 (JPYmn) FY03/17 Operating revenue 188,633 Operating revenue 1,125,405 Operating revenue 1,704,416 Operating revenue 925,151 Offices/Retail (Leasing) 112,589 Office Buildings 476,828 Leasing 536,518 Real Estate Leasing 333,604 Residential (Property Sales) 59,595 Residential 407,220 Residential Property Sales 488,710 Real Estate Sales 313,992 Investment Management 20,790 Management 347,672 Overseas 66,573 Other 16,448 Other 153,994 Other 331,516 Other 277,555 Operating profit (unadjusted) 38,686 Operating profit (unadjusted) 214,289 Operating profit (unadjusted) 265,800 Operating profit (unadjusted) 206,975 Operating profit 31,393 Operating profit 192,495 Operating profit 232,698 Operating profit 188,171 Offices/Retail (Leasing) 33,801 Office Buildings 133,570 Leasing 135,774 Real Estate Leasing 126,213 Residential (Property Sales) 3,068 Residential 19,253 Residential Property Sales 65,285 Real Estate Sales 46,189 Investment Management 4,520 Management 53,838 Overseas 26,313 Other 1,816 Other 30,632 Other 10,903 Other 34,573 Adjustments -7,293 Adjustments -21,793 Adjustments -33,102 Adjustments -18,804 Offices/Retail (Leasing) OPM 30.0% 28.0% 25.3% 37.8% Offices/Retail (Leasing) OP % of total 87.4% 62.3% 51.1% 61.0% EBITDA / Rental real estate (book value) 6.4% 4.9% 7.1% 5.3% EBITDA / Rental real estate (market value) 3.7% 2.8% 4.0% 3.3% Equity ratio 21.1% 29.0% 35.6% 20.2% ROE 8.0% 6.6% 6.7% 10.9% ROA (RP-based) 2.8% 3.1% 4.0% 3.5% Source: Shared Research based on NTT Urban Development, Mitsubishi Estate, Mitsui Fudosan, Sumitomo Realty & Development data Note: % of operating profit is the Offices/Retail segment (NTT Urban Development), Office Buildings (Mitsubishi Estate), Leasing (Mitsui Fudosan), and Real Estate Leasing (Sumitomo Realty & Development) s share of total operating profit. EBITDA calculated as operating profit + depreciation. Compared with competitors, the Offices/Retail segment generates a significant proportion of NTT Urban s operating profit. Offices/Retail segment: proportion of total operating profit The Offices/Retail segment accounted for 87.4% (83.5% in FY03/16) of NTT Urban s operating profit in FY03/17 higher than Mitsubishi Estate s 62.3% (60.1% in FY03/16), Mitsui Fudosan s 51.1% (53.3% in FY03/16), and Sumitomo Realty & Development s 61.0% (58.5% in FY03/16). NTT Urban s earnings performance depends on the Leasing segment, while competitors businesses are more diversified, including residential, real estate sales, and overseas businesses. Profitability against the value of real estate for rent Profitability in the Offices/Retail segment may be measured as EBITDA divided by the value of real estate for rent. The company s ratio of EBITDA to real estate value for rent was 6.4% in FY03/17 when based on book value. When based on market value, it was 3.7%. However, the company s Offices/Retail segment operating profit in FY03/17 included profit from property sales of JPY9.0bn. When excluding the impact of property sales, the ratio was 3.3% when based on book value and 1.9% when based on market value. These ratios are below that of Mitsubishi Estate, Mitsui Fudosan, and Sumitomo Realty & Development. The ratios for other companies were calculated using publicly available information. Main buildings The Greater Tokyo Area accounts for a lower proportion of NTT Urban s property portfolio (45.1%) than the three competitors above Mitsubishi Estate (94.6%), Mitsui Fudosan (82.8%), and Sumitomo Realty & Development (96.3%). Yet the proportion of NTT Urban s portfolio in regional cities (54.9%) is higher than that of its competitors. In terms of age and average floor space per building, NTT Urban s portfolio is close to that of Sumitomo Realty & Development; many of its buildings are newer and relatively smaller than those of Mitsubishi Estate. Main buildings for NTT Urban and major real estate companies NTT Urban Development Mitsubishi Estate Mitsui Fudosan (JPYmn) FY03/17 (JPYmn) FY03/17 (JPYmn) FY03/17 (JPYmn) FY03/17 Total floor by area (main properties) Source: Shared Research based on NTT Urban Development, Mitsubishi Estate, Mitsui Fudosan, Sumitomo Realty & Development data Note: Central Tokyo comprises Chiyoda, Chuo, Minato, Shinjuku and Shibuya Note: Tokyo Metropolis excludes the five wards counted under Central Tokyo Note: The Greater Tokyo Area includes Kanagawa, Saitama, and Chiba prefectures Note: Age (years) is the average age of the main properties in each company s portfolio, weighted by floor space. Sumitomo Realty & Development Central Tokyo (five wards) 44.2% 82.2% 41.2% 84.0% Tokyo 0.9% 0.0% 5.7% 11.1% Greater Tokyo area 12.4% 35.9% 1.2% Other 54.9% 5.4% 17.2% 3.6% Age (years) Floor space per property 40,811 84,058 83,428 36,547 Rental real estate (book value) 813,646 3,828,460 2,645,056 3,145,180 Rental real estate (market value) 1,422,649 6,791,968 4,828,439 5,141,621 Unrealized gain 609,003 2,963,508 2,183,383 1,996,441 Unrealized gain / Rental real estate (book value) 74.8% 77.4% 82.5% 63.5% 43/69

44 Research Report by Shared Research Inc. Nationwide vacancy rate: NTT Urban and its three major competitors 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Mitsubishi Estate Mitsui Fudosan Sumitomo Realty & Development NTT Urban Development Mitsubishi Estate 4.8% 4.4% 5.6% 4.8% 2.8% 3.6% 1.7% 2.1% 2.9% 3.4% 3.6% 3.6% 4.0% 5.3% 2.8% 2.2% 2.9% Mitsui Fudosan 2.2% 4.1% 6.0% 5.0% 2.8% 1.4% 1.4% 1.3% 2.2% 3.1% 3.5% 2.9% 3.3% 3.5% 3.2% 2.2% 3.1% Sumitomo Realty & Development 2.5% 3.4% 5.4% 7.8% 6.9% 5.7% 4.8% 3.8% 5.1% 8.4% 8.2% 7.8% 7.1% 5.9% 4.9% 4.7% 4.5% NTT Urban Development 6.4% 7.3% 3.2% 4.3% 2.1% 4.2% 3.1% 6.4% 5.7% 5.4% 6.5% 7.4% 6.2% 4.1% 4.1% Source: Shared Research based on Mitsubishi Estate, Mitsui Fudosan, Sumitomo Realty & Development, NTT Urban Development data Note: Vacancy rate as of March /69

45 Research Report by Shared Research Inc. Historical performance Summary Q3 FY03/18 results Operating revenue: Operating profit: Recurring profit: JPY112.9bn (-4.5% or -JPY5.3bn YoY) JPY23.2bn (+6.8% or +JPY1.5bn YoY) JPY21.9bn (+11.6% or +JPY2.3bn YoY) Net income*: *Net income is net income attributable to shareholders of the parent JPY15.1bn (+18.2% or +JPY2.3bn YoY) In Q3 FY03/17, the results included operating revenue of JPY4.6bn and operating profit of JPY3.4bn accompanying the sale of income-generating properties. If that impact is excluded, cumulative Q3 FY03/18 operating revenue actually fell only 0.6% YoY, while operating profit rose 26.6%. Operating revenue reached 69.3% of full-year forecast (62.7% of full-year results in Q3 FY03/17), operating profit 80.1% (69.3%), recurring profit 81.3% (68.5%), and net income attributable to shareholders of the parent 86.3% (76.6%). Progress on the profit items is running high after the company booked JPY2.5bn in indemnities received on urban redevelopment projects in Q1 FY03/18, but overall progress is fairly much in line with the company s forecasts. Both the Offices/Retail and Residential segments reported lower revenues and higher profits. While Q3 FY03/17 reported increased revenues and profits in the Offices/Retail segment in accordance with the sale of income-generating properties, no such sales were made in cumulative Q3 FY03/18. Meanwhile, the bottom-line gains in the Offices/Retail segment were due to decreased vacancy rates in existing buildings, as well as the booking of a temporary indemnity related to urban redevelopment projects. In the Residential Business, while JPY18.2bn in operating revenue was reported in Q3 FY03/17 in accordance with the sale of equity stakes in certain properties, cumulative Q3 FY03/18 saw operating revenues fall to JPY700mn. Higher profits in the Residential Business reflected an increase in the number of condominium units delivered. Operating revenue reported by the company for each segment includes both inter-segment internal operating revenues and transfers. Offices/Retail segment Operating revenue: Operating profit: JPY67.3bn (-0.3% or -JPY221mn YoY) JPY23.9bn (+6.8% or +JPY1.3bn YoY) Along with increased rental revenues from the end of rent-free periods used to attract occupants at the Shinagawa Season Terrace, other revenue-boosting factors included the booking of a temporary indemnity related to urban redevelopment projects in Q1 FY03/17 (April-June 2017). Meanwhile, operating revenue fell due to decreased revenues on the sale of income-generating properties. Despite the fall in profits from the sale of income-generating properties, operating profit rose on a combination of improvements in the income-to-expenditure ratios at existing properties, and indemnities received on urban redevelopment projects. Segment operating revenue was down JPY221mn YoY. Lower vacancy rates and the end of rent-free periods in existing buildings including the Shinagawa Season Terrace (Minato, Tokyo), the Urbannet Nihonbashi 2-Chome Building (Chuo, Tokyo), and the Seavans N Building (Minato, Tokyo) brought in JPY3.3bn; indemnities received on urban redevelopment projects were worth JPY2.5bn; and contribution from newly launched buildings such as UD Yumesaki Building (Osaka City, Osaka) and 185 Dartmouth 45/69

46 Research Report by Shared Research Inc. Street (Boston, Massachusetts, USA, acquired in June 2017) amounted to JPY1.1bn. Lost revenue from properties sold in the previous year and the effect of tenants moving out due to building reconstruction negatively impacted the revenue by JPY2.7bn and lower revenue from the sale of income-generating properties by JPY4.6bn. In a large redevelopment project in which the company is participating, the indemnities received on urban redevelopment projects are provided to indemnify landowners for lost revenues for the new construction period under Article 97 of the Urban Renewal Act. The payment is expected several years later, but the company booked it in Q1 since relations of rights and the amount had been fixed. The booking of the indemnities has been factored into FY03/18 company forecasts. Segment operating profit was up JPY1.3bn YoY, stemming from a JPY3.0bn increase in gross profit from existing properties, JPY2.5bn from factors such as indemnities related to urban redevelopment projects, and a JPY200mn decrease in SG&A expenses. Lost revenue due to properties sold in the previous year caused a profit decline of JPY1.4bn and lower profit from the sale of income-generating properties caused a decline of JPY3.4bn. New buildings made a profit contribution of just JPY100mn. Expenses related to openings put pressure on profit. The average vacancy rate at the company s office buildings in the five wards of central Tokyo (Chiyoda, Chuo, Minato, Shinjuku, and Shibuya) was down to 1.2% at the end of December This compares with 2.0% at the end of September 2017 (versus 3.9% at the same time the previous year), 2.1% at the end of June 2017 (versus 4.2% at same time the previous year), 3.2% at the end of March 2017 (6.3%), and 2.9% at the end of December 2016 (9.2%). On a nationwide basis, the average vacancy rate for the company's office buildings was down to 3.3% at the end of December This compares with 3.3% at the end of September 2017 (versus 4.5% at the same time the previous year), 3.6% at the end of June 2017 (4.8%), 4.1% at the end of March 2017 (5.7%), and 4.1% at the end of December 2016 (7.5%). While the vacancy rate fell, contribution to revenue by rent increase was limited. Lease renewals at increased and decreased rents offset each other during the period, so the average rent level for renewals remained largely on par YoY. NTT Urban stated that it prioritized extending existing tenants contracts and shifting to fixed-term lease contracts rather than short-term rent raises, in preparation for the mass supply of offices from 2018 onward. During 1H the company completed construction and commenced commercial operations at the UD Yumesaki Building. Properties currently under development include the Otemachi 2-Chome Area 1st Class Urban Redevelopment Project A Block (Chiyoda, Tokyo), the Shinbashi 1-Chome Project (provisional name; Minato, Tokyo), and the Harajuku Station Project (Shibuya, Tokyo). Residential segment Operating revenue: Operating profit: JPY35.2bn (-10.1% or -JPY4.0bn YoY) JPY2.7bn (+5.2% or +JPY134mn) The company delivered 724 condominiums (versus 415 in Q3 FY03/17) at an average price of JPY38mn (versus JPY39mn). The average price fell YoY because the company booked sales of condominiums with leaseholds, which have a comparatively low price per unit. Segment operating revenue was down JPY4.0bn YoY. On the plus side, an increase in the number of condominium units added JPY12.1bn, and higher sales of detached housing and lots contributed an additional JPY700mn. On the minus side, a drop in the sale of equity stakes in certain properties (shareouts) had a negative impact of JPY16.7bn, and the fall in average selling price of the aforementioned condominium units pulled operating revenue down by an additional JPY300mn. Segment operating profit was up JPY134mn YoY, reflecting a JPY2.4bn increase in the gross profit from delivered condominiums, a JPY1.0bn decrease on the sale of equity stakes in certain properties, and higher SG&A expenses resulting in a negative impact of 46/69

47 Research Report by Shared Research Inc. JPY1.3bn. SG&A expenses rose on a YoY increase in sales-related expenses, including showroom-related expenses and sales incentives. As of end-q3, the number of contracted condominium units was 1,052, which accounted for 95.7% (vs. 82.7% in Q3 FY03/17) of the full-year target of 1,100 condominiums. In addition to sales measures, such as expanding the scope of advertising being conducted since FY03/17 and raising sales incentives, the company managed to increase the number of contracted condominium units by offering exceptionally convenient units and relatively inexpensive condominiums with leaseholds. However, the company says contracts for properties slated for completion in FY03/19 are falling short of the target, so in Q4 it will focus on achieving the full-year target while also accumulating contracted units for properties slated for completion in FY03/19. Other segment Operating revenue: Operating profit: JPY14.3bn (-9.4% or -JPY1.5bn YoY) JPY1.1bn (-9.4% or -JPY118mn) 1H FY03/18 results Operating revenue: Operating profit: Recurring profit: Net income*: JPY72.8bn (+6.2% or +JPY4.2bn YoY) JPY15.6bn (+37.3% or +JPY4.2bn YoY) JPY14.8bn (+51.4% or +JPY5.0bn YoY) JPY9.7bn (+53.7% or +JPY3.4bn YoY) *Net income is net income attributable to shareholders of the parent Operating revenue reached 44.7% of full-year forecast (36.3% of full-year results in FY03/18), operating profit 53.6% (36.1%), recurring profit 54.9% (34.1%), and net income attributable to shareholders of the parent 55.2% (37.7%). According to the company, progress was in line with the full-year plan. Both the Offices/Retail and Residential segments reported higher revenues and profits. The top- and bottom-line gains in the Offices/Retail segment were due to the booking of a temporary indemnity related to urban redevelopment projects in Q1 (April-June 2017). Higher revenues and profits at the Residential Business reflected an increase in the number of condominium units delivered. Operating revenue reported by the company for each segment includes both inter-segment internal operating revenues and transfers. Offices/Retail segment Operating revenue: Operating profit: JPY45.2bn (+8.6% or +JPY3.6bn YoY) JPY16.6bn (+34.8% or +JPY4.3bn YoY) In addition to contributions from higher occupancy rates in existing buildings and the end of rent-free periods used to attract occupants, rental revenue rose owing to the booking of a temporary indemnity related to urban redevelopment projects in Q1 (April-June 2017). The rise in operating profit reflects a combination of improvements in the income-to-expenditure ratios at existing properties, indemnities received on urban redevelopment projects, and lower SG&A expenses. Segment operating revenue was up JPY3.6bn YoY. Factors lifting the revenue were the end of rent-free periods in existing buildings including the Shinagawa Season Terrace (Minato, Tokyo), Urbannet Nihonbashi 2-Chome Building and the Urbannet Ginza 1-Chome Building (both in Chuo, Tokyo) that brought in JPY2.3bn; indemnities received on urban redevelopment projects 47/69

48 Research Report by Shared Research Inc. worth JPY2.5bn; and contribution from newly launched buildings such as UD Yumesaki Building (Osaka City, Osaka) amounting to JPY500mn. Lost revenue from properties sold in the previous year and the effect of tenants moving out due to building reconstruction negatively impacted the revenue by JPY1.8bn. In a large redevelopment project in which the company is participating, the indemnities received on urban redevelopment projects are provided to indemnify landowners for lost revenues for the new construction period under Article 97 of the Urban Renewal Act. The payment is expected several years later, but the company booked it in Q1 since relations of rights and the amount had been fixed. The booking of the indemnities has been factored into FY03/18 company forecasts. Segment operating profit was up JPY4.3bn YoY, stemming from a JPY2.2bn increase in gross profit from existing properties, JPY2.5bn from factors such as indemnities related to urban redevelopment projects, and a JPY300mn decrease in SG&A expenses. Lost revenue due to properties sold in the previous year caused a revenue decline of JPY900mn. The average vacancy rate at the company s office buildings in the five wards of central Tokyo (Chiyoda, Chuo, Minato, Shinjuku, and Shibuya) was down to 2.0% at the end of September This compares with 2.1% at the end of June 2017 (versus 4.2% at same time the previous year), 3.2% at the end of March 2017 (6.3%), 2.9% at the end of December 2016 (9.2%), and 3.9% at the end of September 2016 (10.8%). On a nationwide basis, the average vacancy rate for the company's office buildings was down to 3.3% at the end of September This compares with 3.6% at the end of June 2017 (versus 4.8% at same time the previous year), 4.1% at the end of March 2017 (5.7%), 4.1% at the end of December 2016 (7.5%), and 4.5% at the end of September 2016 (8.7%). While the vacancy rate fell, contribution to revenue by rent increase was limited. Lease renewals at increased and decreased rents offset each other during the period, so the average rent level for renewals remained largely on par YoY. The company decreased rent for some of its properties to accommodate the rent gap with nearby buildings. NTT Urban stated that it prioritized extending existing tenants contracts and shifting to fixed-term lease contracts rather than short-term rent raises, in preparation for the mass supply of offices from 2018 onward. During 1H the company completed construction and commenced commercial operations at the UD Yumesaki Building. Properties currently under development include the Otemachi 2-Chome Area 1st Class Urban Redevelopment Project A Block (Chiyoda, Tokyo), and the Shinbashi 1-Chome Project (provisional name; Minato, Tokyo). Residential segment Operating revenue: Operating profit: JPY21.5bn (+11.7% or +JPY2.3bn YoY) JPY1.3bn (+1.7% or +JPY21mn YoY) The company delivered 408 condominiums (versus 296 in 1H FY03/17) at an average price of JPY40mn (versus JPY39mn). Segment operating revenue was up JPY2.3bn YoY. On the plus side, an increase in the number of condominium units added JPY4.4bn, the rise in average selling price of those units pulled operating revenue up by another JPY300mn, and higher sales of detached housing and lots contributed an additional JPY1.1bn. On the minus side, a drop in the sale of equity stakes in certain properties had a negative impact of JPY3.7bn. Segment operating profit was up JPY21mn YoY, reflecting a JPY800mn increase in the gross profit from delivered condominiums and a JPY600mn decline from other factors including SG&A expenses. The increase in gross profit from delivered condominiums lifted operating revenues, but GPM fell 2.8% YoY to 21.5%, partly impacted by the rise in construction fees. As of end-1h FY03/17, the number of contracted condominium units was 904, which accounted for 82.2% (vs. 59.5% in 1H FY03/17) of the full-year target of 1,100 condominiums. In 2H, the company will work to achieve the full-year target while also accumulating contracted units for properties slated for completion in FY03/19. 48/69

49 Research Report by Shared Research Inc. Other segment Operating revenue: Operating profit: JPY8.6bn (-18.2% or -JPY1.9bn YoY) JPY655mn (-23.9% or -JPY206mn YoY) Q1 FY03/18 results Operating revenue: Operating profit: Recurring profit: Net income*: JPY40.8bn (+22.6% or +JPY7.5bn YoY) JPY9.3bn (+78.4% or +JPY4.1bn YoY) JPY9.3bn (+109.2% or +JPY4.8bn YoY) JPY6.2bn (+117.9% or +JPY3.3bn YoY) *Net income is net income attributable to shareholders of the parent Both the Offices/Retail and Residential segments reported higher revenues and profits. The Offices/Retail segment s higher profit is attributable to an increase in rental revenue owing to lower vacancy rates and the end of rent-free periods. Booking a temporary indemnity related to urban redevelopment projects boosted the segments revenue and profits. Higher revenue and profits at the Residential segment reflected an increase in the number of condominium units delivered. Operating revenue for each segment has been calculated to include both inter-segment internal operating revenues and transfers. Offices/Retail segment Operating revenue: Operating profit: JPY23.4bn (+13.7% or +JPY2.8bn YoY) JPY9.6bn (+65.0% or +JPY3.8bn YoY) In addition to contributions from higher occupancy rates in existing buildings and the end of rent-free periods used to attract occupants, rental revenue rose owing to the booking of a temporary indemnity related to urban redevelopment projects. The rise in operating profit reflects a combination of improvements in the income-to-expenditure ratios at existing properties, indemnities received on urban redevelopment projects, and lower SG&A expenses. Segment operating revenue was up JPY2.8bn YoY. Of this increase, JPY900mn was attributable to the end of rent-free periods in existing buildings including the Shinagawa Season Terrace (Minato, Tokyo), Urbannet Nihonbashi 2-Chome Building and the Urbannet Ginza 1-Chome Building (both in Chuo, Tokyo), while JPY2.5bn came from factors including indemnities received on urban redevelopment projects. Lost revenue due to properties sold in the previous year caused a revenue decline of JPY900mn. In a large redevelopment project in which the company is participating, the indemnities received on urban redevelopment projects are provided to indemnify landowners for lost revenues for the new construction period under Article 97 of the Urban Renewal Act. The payment is expected several years later, but the company booked it in Q1 since relations of rights and the amount had been fixed. The booking of the indemnities has been factored into FY03/18 company forecasts. Segment operating profit was up JPY3.8bn YoY, stemming from a JPY1.0bn increase in gross profit from existing properties, JPY2.5bn from factors such as indemnities related to urban redevelopment projects, and a JPY500mn decrease in SG&A expenses (though the company booked in Q1 FY03/17 the payment of fixed asset tax for properties sold in Q4 FY03/16, there were no such one-time expenses in Q1 FY03/18). 49/69

50 Research Report by Shared Research Inc. The average vacancy rate at the company s office buildings in the five wards of central Tokyo (Chiyoda, Chuo, Minato, Shinjuku, and Shibuya) was 2.1% at the end of June This compares with 3.2% at the end of March 2017 (6.3% same time the previous year), 4.2% at the end of June 2016 (14.2%), 3.9% at the end of September 2016 (10.8%), and 2.9% at the end of December 2016 (9.2%). On a nationwide basis, the average vacancy rate for the company's office buildings was 3.6% at the end of June This compares with 4.1% at the end of March 2017 (5.7% same time the previous year), 4.8% at the end of June 2016 (10.5%), and 4.5% at the end of September 2016 (8.7%), and 4.1% at the end of December 2016 (7.5%). However, contribution to revenue by a rise in rent was limited. According to the company, it prioritizes extending existing tenants contracts and shifting to fixed-term lease contracts rather than short-term rent raises, in preparation for the mass supply of offices. Properties currently under development include the Otemachi 2-Chome Area 1st Class Urban Redevelopment Project A Block (Chiyoda, Tokyo), the Shinbashi 1-Chome Project (provisional name; Minato, Tokyo), the Universal City Station Project (Osaka City, Osaka), and the Shinpukan Redevelopment Project (Kyoto City, Kyoto). Residential segment Operating revenue: Operating profit: JPY14.2bn (+62.3% or +JPY5.5bn YoY) JPY1.0bn (+201.8% or +JPY681mn YoY) The company delivered 292 condominiums (versus 87 in Q1 FY03/17) at an average price of JPY39mn (versus JPY38mn). As it delivered many condominiums around central Tokyo, the number of overall condominiums delivered rose, which raised the average price per condo. Segment operating revenue was up JPY5.5bn YoY, with an increase in the number of condominium units leading to a JPY7.7bn boost. The rise in average selling price of those units pulled operating revenue up by another JPY400mn, with higher sales of detached housing and lots contributing an additional JPY400mn. Meanwhile, a drop in the sale of equity stakes in certain properties had a negative impact of JPY3.3bn. Segment operating profit was up JPY681mn YoY, reflecting a JPY2.1bn increase in the gross profit from delivered condominiums while factoring in a JPY1.3bn decline in gains on property sales (including advertising costs, sales incentives, and showroom-related costs in line with property sales). The higher gross profit of delivered condominiums is attributable to GPM rising 5.2pp YoY of 24.3%, in addition to the higher operating revenue. The number of contracted condominiums in Q1 was 736, which accounted for 66.9% (vs. 40.3% in Q1 FY03/17) of the full-year target of 1,100 condominiums. Other segment Operating revenue: Operating profit: JPY4.4bn (-14.8% or -JPY759mn YoY) JPY268mn (-32.1% or -JPY126mn YoY) Full-year FY03/17 results Operating revenue: Operating profit: Recurring profit: Net income*: JPY188.6bn (+3.1% or +JPY5.6bn YoY) JPY31.4bn (-16.9% or -JPY6.4bn YoY) JPY28.7bn (-15.1% or -JPY5.1bn YoY) JPY16.7bn (+0.8% or +JPY124mn YoY) 50/69

51 Research Report by Shared Research Inc. *Net income is net income attributable to shareholders of the parent Excluding the impact of property sales, both revenue and profits rose, with operating revenue at JPY158.9bn (+7.2% or +JPY10.6bn YoY), and operating profit at JPY22.4bn (+7.5% or +JPY1.5bn YoY). Operating revenue and operating profit attributable to property sales were JPY29.7bn (+14.6% or +JPY5.1bn YoY) and JPY9.0bn (-46.9% or -JPY7.9bn YoY), respectively. The company changed its segment classification system at the beginning of FY03/17. The former Leasing and Residential Property Sales segments were regrouped as the Offices/Retails and the Residential segments. As part of this change, the company merged the operations of its residential leasing business, which had been under the Leasing segment, with the residential property sales business, together now referred to as the Residential Business. For the year, the Offices/Retail segment reported higher revenues and profits while the Residential segment saw both revenues and profits decline. The top- and bottom-line gains at Offices/Retail segment reflected a number of factors, including increases in rental income stemming from higher occupancy rates at existing properties and more property sales. The drop in revenues and profits at the Residential Business reflected a decline in the number of condominium units delivered, a decline in the average sales price of those units, and a decline in gains from property sales. Operating revenue for each segment has been calculated to include both inter-segment internal operating revenues and transfers. Offices/Retail segment Operating revenue: Operating profit: JPY113.6bn (+7.8% or +JPY8.2bn YoY) JPY33.8bn (+12.7% or +JPY3.8bn YoY) Rental revenue rose on contributions from higher occupancy rates in existing buildings and the end of rent-free periods used to attract occupants. Revenues from property sales also increased. The rise in operating profit reflects a combination of improvements in the income-to-expenditure ratios at existing properties and change in the depreciation method, which together were more than enough to offset the smaller gains realized on sales of income properties. Excluding the impact of property sales, the segment posted operating revenue of JPY83.9bn (+0.7% or +JPY600mn YoY), and operating profit at JPY24.8bn (+33.3% or +JPY6.2bn YoY). Segment operating revenue was up JPY8.2bn from the previous year. Of this increase, JPY1.6bn came from three properties in Boston, US 141 Tremont Street (acquired January 2015), 27 School Street (January 2015), and Two Oliver Street (July 2015) and new properties completed in FY03/16 such as the Urbannet Nihonbashi 2-Chome Building and the Urbannet Ginza 1-Chome Building (both in Chuo, Tokyo). Contributions from the Shinagawa Season Terrace (Minato, Tokyo) and improved vacancy rates at existing properties added another JPY3.3bn. Offsetting this were property sales that resulted in a JPY4.6bn drop in rental income versus the previous year. The company also saw a JPY7.6bn contribution from the sale of income properties. Segment operating profit was up JPY3.8bn from the previous year, with most of this stemming from a JPY5.9bn increase in gross profit from existing properties (of which JPY2.4bn stemmed from the change in the depreciation method mentioned above). Offsetting part of this, gains on the sale of income properties were down JPY2.1bn. The average vacancy rate at the company s office buildings in the five wards of central Tokyo (Chiyoda, Chuo, Minato, Shinjuku, and Shibuya) was 3.2% at the end of March This compares with 6.3% at the end of March 2016, 4.2% at the end of June 2016 (14.2% same time the previous year), and 3.9% at the end of September 2016 (10.8%), and 2.9% at the end of December 2016 (9.2%). 51/69

52 Research Report by Shared Research Inc. On a nationwide basis, the average vacancy rate for the company's office buildings was 4.1% at the end of March This compares with 5.7% at the end of March 2016, 4.8% at the end of June 2016 (10.5% same time the previous year), and 4.5% at the end of September 2016 (8.7%), and 4.1% at the end of December 2016 (7.5%). Properties currently under development include the Otemachi 2-Chome Area 1st Class Urban Redevelopment Project A Block (Chiyoda, Tokyo), the Shinbashi 1-Chome Project (provisional name; Minato, Tokyo), the Universal City Station Project (Osaka City, Osaka), and the Shinpukan Redevelopment Project (Kyoto City, Kyoto). Residential segment Operating revenue: Operating profit: JPY59.6bn (-7.5% or -4.9bn YoY) JPY3.1bn (-74.0% or -JPY8.7bn YoY) Segment profits and revenues fell due to the lack of revenue from property sales (compared to the previous year, when property sales substantially contributed to earnings), a decrease in the number of condominium units delivered, and a drop in unit price. The company delivered 861 condominiums (versus 1,054 in FY03/16) at an average price of JPY39mn (versus JPY41mn), with GPM declining 4.8pp YoY to 19.1% due to lower unit prices stemming from a greater proportion of suburban properties compared to the previous year. Excluding the impact of property sales and the sale of equity stakes in certain real estate holdings, operating revenue was JPY41.3bn (-14.8% or -JPY7.2bn YoY), and operating profit was JPY3.0bn (-51.6% or -JPY3.2bn YoY). Segment operating revenue was down JPY4.9bn from the previous year. A drop in the number of condominium units delivered had a negative JPY7.9bn impact. The decrease in average selling price of those units pulled operating revenue down by another JPY1.1bn and other factors including property sales an additional JPY12.7bn. Rental revenue from residential properties was also down JPY1.0bn YoY. On the plus side, the sale of equity stakes in certain properties and condominiums boosted revenue by JPY15.0bn and JPY3.0bn, respectively. Segment operating profit was down JPY8.7bn from the previous year. The decline reflected a JPY2.0bn decrease in the gross profit from delivered condominiums, a JPY700mn decline in gross profits from residential rental properties, and a JPY5.9bn decline in gains on property sales. Other segment Operating revenue: Operating profit: JPY21.5bn (+9.9% or +JPY1.9bn YoY) JPY1.8bn (-17.4% or -383mn YoY) FY03/16 results Operating revenue: Operating profit: Recurring profit: Net income: JPY183.0bn (+20.4% [JPY31.0bn] YoY) JPY37.8bn (+52.1% [JPY12.9bn] YoY) JPY33.8bn (+65.9% [JPY13.4bn] YoY) JPY16.6bn (+2.0% [JPY322mn] YoY) *Net income is income attributable to shareholders of the parent The rise in recurring profit was higher than that for operating profit because of a recovery in non-operating profit. Likewise, the increase in net income was lower than that for recurring profit because the company booked a loss on the sale of fixed assets (JPY8.0bn) and impairment losses (JPY4.9bn). As part of efforts to replace assets as outlined in the company s medium-term plan, the company sold fixed assets to Premier Investment Corporation and NTT Urban Development Private REIT, Inc. (a private 52/69

53 Research Report by Shared Research Inc. placement fund), and incurred losses on the sales of those fixed assets. In particular, the company booked a loss of JPY5.3bn on the sale of the NTT Makuhari Building. The company incurred impairment losses when a drop in profitability of seven buildings office buildings, commercial facilities, and others reduced their respective book values. Operating revenue for each segment has been calculated to include both inter-segment internal operating revenues and transfers. Leasing segment Operating revenue: Operating profit: JPY121.0bn (+31.9 % [JPY29.2bn] YoY) JPY36.7bn (+55.8% [JPY13.2bn] YoY) Revenues rose on increased property sales, contributions from new buildings, and improved vacancy rates in existing buildings. Profits rose thanks to recovering profitability from existing buildings and gains from property sales, shrugging off a rise in depreciation expenses following the completion of new properties. Segment revenue increased JPY29.2bn YoY. Rental revenue from new properties including Trad Mejiro (Toshima, Tokyo), Shinagawa Season Terrace (Minato, Tokyo), and two properties in Boston (US) acquired in January 2015 contributed JPY2.5bn to operating revenue. Rental revenue from existing properties was up JPY800mn due to improved vacancy rates (down by JPY0 due to lower rents, up by JPY800mn due to lower vacancy, and up by JPY0 for other reasons) and up JPY25.9bn for other reasons (+JPY28.0bn from property sales and a decline in lost revenue of -JPY2.1bn). The vacancy rate has been improving since Q3 FY03/15, but it only resulted in a sales increase of JPY100mn YoY due to the effect of rent-free periods on contracts in Q1 (April June). The improved vacancy rate increased sales by JPY300mn in Q2 (July September) due to the end of rent-free periods, and the same factor led to a sales increase of JPY200mn in Q3 (October December) and JPY200mn in Q4 (January March). Lease renewals were higher for buildings with increased rent than for those with decreased rent. According to the company, rent prices were pushed down due to efforts to shrink the rent gap between the company s buildings and neighboring buildings. Operating revenue from property sales was JPY34.7bn (JPY6.6bn in FY03/16). As part of the company s efforts to replace assets as outlined in the medium-term plan, the company sold inventory assets to NTT Urban Development Private REIT, Inc. (a private placement fund) for JPY20.1bn and to Premier Investment Corporation for JPY2.7bn. Sales profit from property sales was JPY16.9bn (JPY4.0bn in FY03/16). The sales profit also affects operating profit (details provided later). Segment operating profit was up JPY13.2bn YoY: JPY1.7bn of gross profit was added from existing buildings and JPY13.2bn from other factors (mostly changes in operating profit due to property sales), with operating profit being pulled down JPY1.8bn due to increased costs of new buildings. Although new buildings contributed to sales, depreciation expenses related to the Shinagawa Season Terrace caused profits to decline. The company s office building vacancy rates in the five wards of central Tokyo (Chiyoda, Chuo, Minato, Shinjuku, and Shibuya) were 2.2% as of June 30, 2015, 1.3% as of September 30, 2015, 1.3% as of December 31, 2015, and 2.1% as of March 2016, versus 1.7% as of March 31, Nationwide, the vacancy rate for company properties has been on the decline: the rate was 6.2% at end March 2015, 6.1% at end June 2015, 5.3% at end September 2015, 4.6% at end December 2015, and it stood at 4.1% as of end March From December 31, 2014 onward, buildings that the company has stopped leasing are not included in vacancy rates. Shinagawa Season Terrace, completed in February 2015, is also not included. 53/69

54 Research Report by Shared Research Inc. In FY03/16, construction finished on the Urbannet Nihonbashi 2-Chome Building (Chuo, Tokyo) and the Urbannet Ginza 1-Chome Building (Chuo, Tokyo), with rental contracts already closed for all floors. The company is actively working to pursue new initiatives, with buildings currently under development including the Otemachi 2-Chome Area 1st Class Urban Redevelopment Project (A Block) (Chiyoda, Tokyo) the Universal City Station Project (Osaka City, Osaka), and the Shinpukan Redevelopment Project (Kyoto City, Kyoto). It is also working on a small luxury hotel project as part of a business partnership with Hiramatsu, Inc. in the hotel business. Residential Property Sales segment Operating revenue: Operating profit: JPY48.9bn (+4.8% [JPY2.2bn] YoY) JPY5.1bn (+15.2% [JPY669mn] YoY) Sales were robust, with the number of delivered condominiums (1,054) and the average unit price (JPY41mn) remaining largely at the same level year-on-year. Segment operating revenue rose JPY2.2bn YoY. However, a lower number of delivered condominiums (1,054, a decrease of 26/-2.4% YoY) led to a fall in revenue of JPY1.0bn, and a drop in the average price per condo pulled down revenue by JPY600mn. Other factors added JPY3.9bn to revenue. Operating profit rose JPY669mn YoY. A fall in the number of delivered condominiums led to a decrease of JPY200mn, but stronger revenue from the sale of condominiums lifted gross profit by JPY800mn. Gross profit margin benefitted from buildings with high profit margins and high unit prices such as Wellith Ginza 2-Chome, which was delivered in Q2. Other Operating revenue: Operating profit: JPY19.6bn (+4.1% [JPY774mn] YoY) JPY2.2bn (-11.5% [JPY285mn] YoY). FY03/15 results Operating revenue: Operating profit: Recurring profit: Net income: JPY152.1bn (-19.6% [JPY37.1bn] YoY) JPY24.8bn (-18.5% [JPY5.6bn] YoY) JPY20.4bn (-18.0% [JPY4.5bn] YoY) JPY16.2bn (+43.1% [JPY4.9bn] YoY) The increase in net income was mainly due to the reversal of deferred tax liabilities in line with changes to corporate taxes (JPY4.1bn after the elimination of non-controlling interests). Leasing segment Operating revenue: Operating profit: JPY91.7bn (-5.0% [JPY4.9bn] YoY) JPY23.6bn (-13.3% [JPY3.6bn] YoY) Revenue and profits fell, partly because revenue from the sale of properties was down year-on-year. Segment revenue declined JPY4.9bn YoY. Rental revenue from new properties including 265 Strand and Trad Mejiro (Toshima, Tokyo) contributed JPY714mn to operating revenue. Overshadowing this positive impact, revenue from the sale of properties 54/69

55 Research Report by Shared Research Inc. dropped JPY1.6bn YoY, and rental revenue from existing properties fell JPY3.3bn (down by JPY1.2bn due to lower rents, JPY1.5bn due to higher vacancy, and JPY500mn for other reasons). Segment operating profit was down JPY3.6bn. Lower revenues from the sale of properties and existing properties lowered operating profit by JPY500mn and JPY2.9bn, respectively. Nationwide net operating income (NOI) fell JPY4.0bn to JPY47.5bn (-7.7% YoY) (excluding the effect of property sales). Despite a positive contribution from Trad Mejiro and other properties completed or acquired in FY03/15, NOI in the Greater Tokyo Area dropped JPY3.4bn to JPY26.1bn (-11.6% YoY), owing to a lower contribution from existing properties. In other areas, properties acquired overseas in FY03/14 contributed to NOI over the full year, but NOI fell by JPY545mn to JPY21.4bn (-2.5% YoY), again owing to lower revenues from existing properties. Vacancy rate and rents at existing buildings The company s vacancy rate for office buildings in central Tokyo (Chiyoda, Chuo, Minato, Shinjuku, and Shibuya) improved from 2.9% as of December 31, 2014, to 1.7% as of March 31, Nationwide, its vacancy rate declined from 6.7% to 6.2%. (From December 31, 2014 onward, buildings that the company has stopped leasing are not included in vacancy rates. Shinagawa Season Terrace, completed in February 2015, is also not included.) Vacancy rates fell at the Akihabara UDX building (Chiyoda, Tokyo), Granpark Tower (Minato, Tokyo), and Otemachi Financial City North Tower (Chiyoda, Tokyo), contributing to the decline in vacancy rates in the Greater Tokyo Area. In Q3 FY03/15, vacancies led to a year-on-year decline of JPY1.5bn in rental revenue from existing buildings. In Q4 (January to March 2015), however, the vacancy rate declined, meaning this factor no longer affected revenues. A decline in rents negatively affected revenues by JPY1.2bn over FY03/15, and JPY400mn in the three months of Q4 alone (January to March 2015). According to the company, rents are bottoming out, and it has been able to raise rents on certain existing properties when renewing contracts. In FY03/16, the company expects declining rents to have a smaller negative impact than in FY03/15. The sale of properties The sale of properties contributed JPY6.6bn to operating revenues (-19.7% [JPY1.7bn] YoY) and JPY4.0bn to operating profit (-11.9% [JPY500mn] YoY). The company sold rental condominiums and other properties. New buildings under development New buildings currently under development include the Urbannet Nihonbashi 2-Chome Building (Chuo, Tokyo), the Urbannet Ginza 1-Chome Building (Chuo, Tokyo), and the Otemachi 2-Chome Area 1st Class Urban Redevelopment Project (A Block) (Chiyoda, Tokyo). Residential Property Sales segment Operating revenue: Operating profit: JPY46.6bn (-41.4% [JPY32.9bn] YoY) JPY4.4bn (-46.4% [JPY3.8bn] YoY) In FY03/15, the company faced a pullback from the rush to beat the consumption tax hike the previous year. Plus, fewer properties were completed in FY03/15 than FY03/14, so the number delivered declined. The average unit price also fell year-on-year because the company sold many high-end properties in central Tokyo in FY03/14, compared with mostly suburban properties in FY03/15. Segment operating revenue decreased JPY32.9bn YoY. This was partly due to a decline of JPY30.0bn in revenues from condominiums as the company delivered fewer condominiums and the average unit price fell. The company also delivered 65 fewer residential lots, at 71, which had a negative impact of JPY2.8bn. 55/69

56 Research Report by Shared Research Inc. Lower revenue from the sale of condominiums and residential lots reduced operating profit by JPY6.5bn and JPY700mn, respectively, while lower selling costs made a positive contribution of JPY3.4bn. Segment operating profit thus fell by JPY3.8bn YoY. NTT Urban delivered 343 fewer properties than the previous year, at 1,080 (-24.1% YoY). The average unit price fell by JPY11mn YoY to JPY41mn as the company sold many high-end properties last year, whereas this year the company mostly sold suburban and family properties. As a result, operating revenue from condominiums declined, negatively impacting profits. Other Operating revenue: Operating profit: JPY18.8bn (+1.6% [JPY293mn] YoY) JPY2.5bn (+43.7% [JPY755mn] YoY) Revenues from contracted asset management and consulting related to private funds increased. Investments In FY03/15, NTT Urban initially planned to invest JPY100bn, but it did not achieve this target because it decided not to acquire certain properties, and limited spending on construction. Capex totaled JPY79.2bn (JPY61.4bn in FY03/14) as a result of strategic investments (Harajuku Dai-Ichi Mansions) and new developments (Shinagawa Season Terrace). 56/69

57 Research Report by Shared Research Inc. Income statement Income statement FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Operating revenue 138, , , , , , , , , ,633 YoY 7.8% 4.4% 3.4% -2.4% -6.1% 19.2% 15.9% -19.6% 20.4% 3.1% Operating costs 96, , , ,442 96, , , , , ,084 Gross profit 42,163 40,017 33,401 41,251 40,409 46,004 52,666 42,718 55,938 51,548 GPM 30.5% 27.7% 22.4% 28.3% 29.5% 28.2% 27.8% 28.1% 30.6% 27.3% SG&A expenses 13,445 14,773 17,271 16,926 15,043 18,603 22,207 17,881 18,166 20,155 SG&A-to-sales ratio 9.7% 10.2% 11.6% 11.6% 11.0% 11.4% 11.7% 11.8% 9.9% 10.7% Operating profit 28,718 25,244 16,129 24,324 25,365 27,401 30,458 24,836 37,771 31,393 YoY 14.5% -12.1% -36.1% 50.8% 4.3% 8.0% 11.2% -18.5% 52.1% -16.9% OPM 20.8% 17.5% 10.8% 16.7% 18.5% 16.8% 16.1% 16.3% 20.6% 16.6% Non-operating income 2,801 2,373 2,564 2,512 2,321 2,500 2,326 2,148 2,635 3,410 Non-operating expenses 5,323 8,113 8,477 8,282 8,457 7,885 7,919 6,590 6,573 6,093 Recurring profit 26,196 19,504 10,215 18,554 19,229 22,016 24,865 20,395 33,832 28,710 YoY 14.2% -25.5% -47.6% 81.6% 3.6% 14.5% 12.9% -18.0% 65.9% -15.1% RPM 19.0% 13.5% 6.8% 12.7% 14.1% 13.5% 13.1% 13.4% 18.5% 15.2% Extraordinary gains ,037 17, ,576 1,850 3, Extraordinary losses 1,929 4,147 6,025 2,652 2,863 3,436 13,103 3,375 14,011 2,296 Tax charges 10,252 9,755 14,366 5,431-2,951 5,545 7, ,127 7,899 Implied tax rate 41.0% 35.6% 65.8% 33.7% -18.0% 29.2% 37.0% -3.3% 17.9% 29.9% Net income attributable to non-controlling shareholders 2 1,648 1,335 1,384 3,790 1,351 1,460 3,255 2,435 1,858 Net income 14,758 15,989 6,116 9,307 15,586 12,073 11,343 16,235 16,557 16,682 YoY 13.6% 8.3% -61.7% 52.2% 67.5% -22.5% -6.0% 43.1% 2.0% 0.8% Net margin 10.7% 11.1% 4.1% 6.4% 11.4% 7.4% 6.0% 10.7% 9.0% 8.8% Note: Figures may differ from company materials due to differences in rounding methods. For further information related to operating revenue and operating profit, please refer to the "Business" section of this report. Information for non-operating income, non-operating expenses, extraordinary gains, and extraordinary losses is as follows: Non-operating income The amortization of negative goodwill is the primary component of non-operating income. For negative goodwill generated prior to March 2010, the company elects to amortize on a straight-line basis over 20 years. In FY03/08, NTT Urban booked negative goodwill of JPY38.5bn when it made UDX Tokutei Mokuteki Kaisha a consolidated subsidiary. Non-operating income FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Non-operating income 2,801 2,373 2,564 2,512 2,321 2,500 2,326 2,148 2,635 3,410 Amortization of negative goodwill - 1,926 1,926 1,926 1,926 1,926 1,853 1,780 1,926 1,926 Equity in earnings of affiliates 2, ,072 Others Non-operating expenses Interest expense is the primary component of non-operating expense, and has been declining due to the decreasing interest rate. Non-operating expenses FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Non-operating expenses 5,323 8,113 8,477 8,282 8,457 7,885 7,919 6,590 6,573 6,093 Interests paid 5,036 7,780 8,267 7,928 7,938 7,665 7,077 6,300 5,936 4,894 Interests paid / Interest-bearing debt % 1.6% 1.6% 1.5% 1.4% 1.2% 1.1% 0.9% Others ,199 Extraordinary gains Extraordinary gains primarily stem from the gain on the sale of fixed assets. Extraordinary losses The primary components of extraordinary losses are losses on sale of fixed assets, losses on disposal of fixed assets, and impairment losses. 57/69

58 Research Report by Shared Research Inc. In FY03/14 and FY03/16, the company sold non-core fixed assets, and booked over JPY8.0bn in losses on the sale of fixed assets. The company books JPY bn in losses on disposal of fixed assets annually. When market conditions worsen and cause a significant drop in the profitability of a fixed asset, the book value of the asset is reduced to its recoverable value, and an impairment loss is booked. Extraordinary losses FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Extraordinary losses 1,929 4,147 6,025 2,652 2,863 3,436 13,103 3,375 14,011 2,296 Losses on sale of properties 5 1,136 1, , ,020 - Losses on retirement of properties 1,724 1,892 1,389 1,052 2,319 2,119 1,476 1,220 1,073 2,150 Impairment losses , ,848 1,455 4, Others , /69

59 Research Report by Shared Research Inc. Balance sheet Balance sheet FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Assets Cash and deposits 9,577 8,954 9,601 10,270 9,924 12,148 18,313 17,891 14,846 16,945 Accounts receivable 6,009 5,167 14,403 6,458 15,480 13,786 18,058 5,569 9,170 9,026 Inventories 122, ,316 81,593 80,613 94,206 87,684 78,497 93, ,416 93,864 Real estate for sale - 11,133 11,767 7,630 14,854 21,706 31,558 33,361 41,736 25,156 Real estate for sale in process - 116,527 69,622 72,648 78,843 65,576 46,559 59,987 99,374 68,204 Others 11,791 6,010 19,603 16,421 10,331 18,225 10,483 11,483 12,678 17,981 Total current assets 150, , , , , , , , , ,816 Buildings and structures 369, , , , , , , , , ,536 Machinery, equipment and vehicles 3,072 2,614 2,418 2,132 2,039 2,131 1,831 1,815 1,557 1,292 Land 333, , , , , , , , , ,023 Construction in progress 246 9,359 6,624 9,718 17,503 7,012 14,099 2,212 3,604 7,998 Others 3,717 3,767 4,069 3,824 3,664 3,458 2,885 2,703 2,554 2,708 Total tangible fixed assets 709, , , , , , , , , ,557 Investment securities 14,637 16,391 17,535 21,150 20,656 19,056 19,986 22,841 24,311 22,518 Long-term prepaid expenses 19,630 18,920 18,410 17,982 17,308 16,765 16,176 15,635 15,072 14,571 Deferred tax assets Others 4,735 4,376 5,961 6,990 6,908 6,301 7,136 6,529 7,618 7,767 Investment and total other fixed assets 39,099 39,737 42,238 46,495 45,269 42,544 43,692 45,359 47,557 45,296 Total intangible fixed assets 1,817 3,338 3,416 4,969 4,562 5,756 5,427 24,556 25,994 25,228 Total fixed assets 750, , , , , , , , , ,081 Total assets 900, , , , , , ,507 1,033,220 1,033,557 1,005,898 Liabilities Accounts payable 28,139 9,052 6,287 8,083 13,175 10,742 11,850 8,473 9,182 6,002 Short-term debt - 25, , ,530 6,611 Current portion of long-term debt 45,190 41,979 44,339 67,360 48,712 56,041 57,412 53,200 36,775 27,364 Current portion of bonds payable 11,611 5,109 2,861 1,611 1,611 62, ,999 19,998 Other current liabilities 42,466 34,834 31,486 27,768 25,229 38,212 31,286 37,201 42,976 52,817 Total current liabilities 127, ,772 84, ,822 88, , ,021 98, , ,792 Bonds payable 88, , , , ,091 84, , , ,975 90,982 Long-term debt 296, , , , , , , , , ,125 Deferred tax liabilities 56,973 60,403 70,854 68,644 60,305 61,116 63,841 59,555 58,658 59,367 Lease and guarantee deposits received 108,792 97,857 92,434 88,081 82,437 74,628 69,694 68,715 69,424 75,024 Negative goodwill 38,530 34,032 32,234 30,186 28,402 26,617 22,935 21,286 22,951 21,037 Others 5,609 5,804 6,210 9,169 9,458 9,910 50,056 45,160 32,442 11,013 Total long-term liabilities 594, , , , , , , , , ,548 Total liabilities 722, , , , , , , , , ,341 Net assets Capital stock 48,760 48,760 48,760 48,760 48,760 48,760 48,760 48,760 48,760 48,760 Capital surplus 34,109 34,109 34,109 34,109 34,109 34,109 34,109 34,109 31,648 31,648 Retained earnings 53,392 65,103 67,270 72,628 84,265 91,402 97, , , ,195 Accumulated other comprehensive income ,122 1,948 5,596 9,776 7,187 3,067 Non-controlling interests 41,573 35,443 35,305 35,248 37,714 37,614 42,975 44,730 45,871 45,884 Net assets 177, , , , , , , , , ,556 Working capital 100, ,431 89,709 78,988 96,511 90,728 84,705 90, ,404 96,888 Total interest-bearing debt 441, , , , , , , , , ,080 Net debt (net cash) 432, , , , , , , , , ,135 Figures may differ from company materials due to differences in rounding methods. Assets The Offices/Retail segment is the driver of NTT Urban s earnings. About 80% of its assets are tangible fixed assets. Current assets Inventories form the bulk of current assets, mainly real estate for sale and real estate for sale in process. Real estate for sale: This item includes completed inventories of real estate for sale in the Residential segment. In the Offices/Retail segment, the company also reclassifies facilities from fixed assets to inventory assets when it decides to sell them rather than hold them long-term. Gains and losses on the sale of facilities (inventory assets) in the Offices/Retail segment are thus booked at the operating profit stage. Real estate for sale in process: Primarily condominiums under construction in the Residential segment. Tangible fixed assets Buildings, land, and construction in progress form the bulk of tangible fixed assets. Buildings: Mostly facilities (office buildings) in the Leasing segment. The company depreciates buildings over their estimated useful lives (15-50 years), using the declining-balance (fixed percentage) method. However, the straight-line method is used for the Granpark Tower, NTT Cred Motomachi Building, and properties acquired after April /69

60 Research Report by Shared Research Inc. In 2007, the Japanese government amended corporate tax law. As a result, buildings (excluding depreciable mining assets) acquired on or after April 1, 2007 depreciate based on the straight-line method; buildings acquired between April 13, 1998 and March 31, 2007 depreciate based on the old straight-line method; and buildings acquired before March 31, 1998 depreciate based on the old straight-line method or the old declining-balance method. Land: NTT Urban was founded with investment-in-kind from Nippon Telegraph and Telephone Corporation (NTT), and subsequently continued to acquire properties at book value via mergers. In FY03/06, land on the balance sheet totaled JPY76.4bn. By FY03/17, the company had grown this figure to JPY501.0bn, by purchasing and developing land. According to the company, unrealized gains on real estate for rent totaled JPY609.0bn in FY03/17. Liabilities NTT Urban s main liabilities are interest-bearing debt and lease and guarantee deposits received. Interest-bearing debt Interest-bearing debt made up 70% of total liabilities in FY03/17. Total long-term interest-bearing debt corporate bonds and long-term loans payable accounted for about 90% of interest-bearing debt. According to the company, it does not maintain a specific ratio between corporate bonds and loans payable, instead choosing the method of financing based on conditions at the time. The company pays about % for funding via corporate bonds. Its long-term corporate bonds are rated A+ by Rating and Investment Information, Inc. Short-term issues are rated a-1. It aims to maintain tight controls over its balance sheet as part of its medium-term plan, and considers the interest-bearing-debt-to-ebitda ratio a key indicator of its financial health. The ratio of interest-bearing debt to EBITDA peaked at 11.8x in FY03/10, and was 10.4x in FY03/17 (up from 8.9x in FY03/16). Lease and guarantee deposits received Lease and guarantee deposits comprised 10% of total liabilities in FY03/17. The company returns these deposits to tenants when they move out. Negative goodwill NTT Urban booked negative goodwill of JPY38.5bn in FY03/08 when it made UDX Tokutei Mokuteki Kaisha (UDX TMK; UDX Special Purpose Company) a consolidated subsidiary. The company amortizes negative goodwill over 20 years using the straight-line method. It books the amortization of negative goodwill as non-operating income. Net assets Net assets vary depending on increases in retained earnings and changes in non-controlling interests. In FY03/08, non-controlling interests increased by JPY41.5bn YoY with the consolidation of UDX TMK. In FY03/09, non-controlling interests fell by JPY6.1bn as the company acquired more preferred stock in UDX TMK. In FY03/14, non-controlling interests increased by JPY5.4bn as the company sold part of its stake in UDX TMK. 60/69

61 Research Report by Shared Research Inc. Cash flow statement Cash Flow Statement FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities (1) 5,700-12,091 35,168 40,417 3,704 48,089 51,870 36,988 17,430 71,910 Pre-tax profit 25,010 27,393 21,819 16,122 16,425 18,969 20,338 18,869 23,120 26,440 Depreciation 23,246 25,762 25,520 23,388 24,765 23,766 24,566 23,474 23,914 18,871 Gains on sale of properties ,037-17, ,434-1,850-3, Losses on sale of properties 5 1,136 1, , ,020 - Change in inventories -39,933-12,822 25,211 1,987-14,306 13,208 18,724-8,006-29,294-25,418 Income taxes paid -8,257-13,363-4,258-2,940-9,250-2,779-6,287-3,785-7,824-3 Cash flows from investing activities (2) -77,893-57,397 6,695-28,257-23,033-39,885-37,962-67,778-14,570-36,710 Purchase of properties -74,892-66,225-22,231-24,533-24,305-40,689-66,911-74,635-47,400-37,792 Proceeds from sale of properties 5,753 19,629 30,667 1, ,228 20,271 6,604 41, Free cash flow (1+2) -72,193-69,488 41,863 12,160-19,329 8,204 13,908-30,790 2,860 35,200 Cash flows from financing activities 85,038 63,079-30,028-14,641 12,650-6,660-8,656 31,777-6,781-27,345 Net change in short-term debt -7,842 25,798-25, ,321-9, , Proceeds from long-term debt 125,000 76,500 42,500 33,300 72,000 29, ,222 66,500 56,383 42,000 Repayment of long-term debt -26,261-45,190-41,979-44,339-67,360-48,712-64,689-57,425-63,215-42,151 Proceeds from issuance of bonds - 23,664 10,966 9,994 14,993 10,000 15,990 29, Repayment of bonds -12,300-11,611-5,111-2,861-1,611-1,611-62, ,000 Dividends paid -3,290-4,278-3,949-3,949-3,949-4,936-5,594-5,265-5,266-5,924 Simple FCF (NI + A + B - C) -70,116-50,301 42,329 17,098-3, ,696-42,535-59,583 40,362 Depreciation and amortization of goodwill (A) 23,246 23,836 23,722 21,603 22,980 21,981 22,849 21,825 21,999 16,956 Capital expenditures (B) -74,892-66,225-22,231-24,533-24,305-40,689-66,911-74,635-47,400-37,792 Working capital changes (C) 33,228 23,901-34,722-10,721 17,523-5,783-6,023 5,960 50,739-44,516 Note: Figures may differ from company materials due to differences in rounding methods. Cash flows from operating activities Operating cash flow varies with net income, depreciation, gains and losses on the sale of fixed assets in the Offices/Retail segment, changes in lease and guarantee deposits received, and changes in inventories in the Residential Business segment (real estate for sale and real estate for sale in process). Gains on the sale of fixed assets are booked as a negative cash flow (outflow); losses are booked as a positive cash flow (inflow). Capital inflows from the sale of fixed assets are booked as income from the sale of tangible fixed assets under investment cash flow. But gains and losses on the sale of fixed assets are already included in pretax net income, so the company subtracts gains and adds losses on the cash flow statement. Cash flows from investing activities Investment cash flow varies with outflows for the acquisition of tangible fixed assets and inflows from the sale of tangible fixed assets. In FY03/08, the company booked a significant negative investment cash flow. This was because it spent JPY74.9bn acquiring tangible fixed assets including Osaka Station North District Advance Development (Grand Front Osaka) and Otemachi 1-Chome Area 1st Class Urban Redevelopment Project. The company also spent JPY10.8bn on investments in the securities of affiliates acquiring more preferred stock in UDX Tokutei Mokuteki Kaisha (UDX TMK; UDX Special Purpose Company). In FY03/09, NTT Urban again booked a significant negative investment cash flow. This was partly due to outflows of JPY19.5bn on the acquisition of land for Tradepia Yodoyabashi, JPY16.0bn for land in Kanda (Chiyoda, Tokyo), and JPY8.4bn for the Otemachi 1-Chome Area 1st Class Urban Redevelopment Project. FY03/15 saw negative cash flow of JPY67.8bn due to investment activities: outgoing cash flow from the acquisition of fixed assets was JPY76.3bn due to the acquisition of Harajuku Dai-Ichi Mansions and investment in Shinagawa Season Terrace, while incoming cash flow from the sale of fixed assets halted at JPY7.5bn. Cash flows from financing activities Cash flows from financing activities vary with changes in interest-bearing debt and dividend payments. 61/69

62 Research Report by Shared Research Inc. Other information Corporate timeline Founding to 2005 In 1985, the Japanese government privatized the Nippon Telegraph and Telephone Corporation (NTT). The following year, in January 1986, NTT established NTT Urban Development Corporation (NTT Urban) in order to use unused land held by NTT. NTT transferred land and properties to NTT Urban as investment-in-kind. As a result, NTT Urban holds many properties with a book value significantly less than their market value. From its founding through the 1990s, NTT Urban increased its real estate holdings by developing and redeveloping real estate with low book values, acquired as investment-in-kind from NTT. Examples of buildings completed during this period include Urbannet Otemachi Building (completed June 1990) and Otemachi First Square (completed February 1992). NTT also used a similar method to establish other real estate companies across Japan. NTT Urban has grown its assets by merging with these companies. In particular, in April 1999, NTT Urban merged with real estate companies in five locations across Japan: Sapporo, Nagoya, Osaka, Hiroshima, and Fukuoka. This meant the company acquired regional real estate assets with low book values across Japan, which in turn these subsidiaries of NTT had acquired via investment-in-kind from NTT. Examples of major regional buildings acquired via these mergers include the NTT Cred Okayama Building, the NTT Cred Motomachi Building, and the NTT-T Building. The development and redevelopment of properties transferred from NTT wound down in September 2005, with the completion of the Urbannet Nagoya Building onward In addition to developing midsize office buildings, from 2006 onward, NTT Urban has also developed large office buildings by submitting bids for development and redevelopment projects. For example, Akihabara UDX was completed in January 2006, JA Building and Keidanren Kaikan in April 2009, Otemachi Financial City North Tower in 2012, and Grand Front Osaka in March The Shinagawa Season Terrace was completed in February The company is also participating in the Otemachi 2-Chome Area 1st Class Urban Redevelopment Project, which is scheduled to be completed in May In October 2009, NTT Urban established a subsidiary in the UK. The company has focused on overseas development since then, establishing offices in Australia in September 2011, the US in October 2013, and Singapore in April Date January 1986 June 1987 September 1988 October 1988 June 1990 June 1991 February 1992 April 1993 June 1993 February 1994 Description Nippon Telegraph and Telephone Corporation (NTT) establishes NTT Urban Development Corporation with capital of JPY3.0bn as a wholly owned subsidiary, in order to utilize its real estate holdings. NTT Urban completes construction of its first rental property, the Urbannet Kojimachi Building. Establishes DHC Tokyo Co., Ltd. to provide heating and cooling services for Granpark Tower. Merges with NTT Building Co. Completes construction of Urbannet Otemachi Building. Establishes Otemachi First Square Inc. to manage Otemachi First Square. Completes construction of the first phase of the Otemachi First Square Building. Merges with NTT Actif Co. and NTT Crais Co. Completes construction of the NTT Makuhari Building. Merges with NTT Estate Co. 62/69

63 Research Report by Shared Research Inc. October 1994 July 1995 August 1995 May 1996 April 1999 June 2000 November 2001 February 2002 NTT Urban acquires shares in Knox Twenty-One Co., Ltd. as a result of its merger with Knox Twenty-One s parent company, NTT Estate Co. Completes construction of Tokyo Opera City (office buildings). Completes construction of the Granpark Building. Completes construction of second phase of Otemachi First Square Building. Merges with NTT Tokai Real Estate Co., NTT Kansai Building Co., NTT Cred Co., NTT Kyushu Real Estate Co., and NTT Hokkaido Real Estate Co. Establishes NTT Urban Development BuilService Co. to design, construct, and manage real estate for NTT Urban. Establishes UDX Tokutei Mokuteki Kaisha (UDX TMK; UDX Special Purpose Company) together with Kajima Corporation as a vehicle to bid on Akihabara lots 1 and 3. Successfully acquires Akihabara lots 1 and 3 in cooperation with Daibiru Corporation and Kajima Corporation. August 2003 Begins construction of Akihabara UDX Building (tentative name) in Akihabara lot 3. October 2004 November 2004 September 2005 January 2006 December 2006 March 2008 April 2009 October 2009 May 2010 August 2011 September 2011 July 2012 October 2012 March 2013 October 2013 February 2015 February 2016 Completes construction of Urbannet Sapporo Building. Lists on the First Section of the Tokyo Stock Exchange. Completes construction of Urbannet Nagoya Building. Completes construction of Akihabara UDX. Establishes NTT Urban Development West BS Co. Makes UDX Tokutei Mokuteki Kaisha (UDX TMK; UDX Special Purpose Company) a consolidated subsidiary. UDX TMK holds and develops the Akihabara UDX building. Completes construction of the JA Building and Keidanren Kaikan. Establishes UD Europe Limited in order to invest in and manage real estate in the UK. Acquires stock in Premier REIT Advisors Co., Ltd. (now a consolidated subsidiary). Completes construction of Urbannet Tenjin Building. Establishes UD Australia Limited in order to invest in and manage real estate in Australia. Completes construction of Urbannet Kanda Building. Completes construction of Otemachi Financial City North Tower. Completes construction of Grand Front Osaka building. Establishes UD USA Inc. in order to invest in and manage real estate in the US. Completes construction of the Shinagawa Season Terrace Launched private placement fund (unlisted, open-end, private placement real estate investment corporation) News and topics June 2017 On June 1, 2017, the company announced a change in specified subsidiary. On May 31, 2017, the company s US subsidiary Downtown Properties Owner, LLC, upon resolution by its decision-making body, acquired equity interests in Stuart Street Holdings LLC, a real estate investment and operation company based in the US. NTT Urban now indirectly holds 98% interest in Stuart Street Holdings, making Stuart Street Holdings its specified subsidiary as the total invested capital of Stuart Street Holdings amounts to more than 10% of NTT Urban s paid-in capital. The company will not disclose the counterparty of the transaction, nor the total invested capital of Stuart Street Holdings, as per the request of the counterparty. NTT Urban s investment in Stuart Street Holdings amounts to USD96.5mn and its ownership is 98% (98% indirectly held interests). 63/69

64 Research Report by Shared Research Inc. May 2017 On May 15, 2017, the company announced changes in representative director and members of the management. At the Board of Directors meeting held on the same day, the company resolved the following changes in management. The official change is subject to resolution at the ordinary shareholders meeting and Board of Directors meeting scheduled for June 22, 2017; the changes will come to effect on the same day. Name Candidacy and changes Current position Hiroshi Nakagawa Candidate for newly appointed representative director and president Representative director and senior executive vice president Masayuki Kusumoto Candidate for newly appointed representative director Executive vice president Sadao Maki Resigning representative director Representative director and president March 2017 On March 6, 2017, the company announced the development launch of its Harajuku Station Project. The project to utilize the plot of land in front of Harajuku Station is slated to begin in March 2017 and involves rebuilding the company s holdings in that area notably the Harajuku Apartments built in 1959 into a single multi-purpose facility. Being an area located between the streets of Omotesando and Takeshita Dori (both major shopping and tourist spots in the area), the higher floors of the new building will also offer views of the adjacent Meiji Jingu Shrine and the greens of Yoyogi Park. NTT Urban also owns Harajuku Quest (a commercial facility in Omotesando, Shibuya, built in 1988) and plans to maximize synergies between these two properties once the new facility opens in Harajuku Station Project Location Jingumae 1-chome, Shibuya Ward, Tokyo Area (sqm) About 5,000 Floor space (sqm) About 26,800 Floors Usage Construction Date Opening Date 10 above ground, 3 below Shops, offices, halls, shared residences, parking Fall 2017 (tentative) Spring 2020 (tentative) May 2016 On May 13, 2016, the company announced it is changing some of its senior executives. At a board of director s meeting on the same day, the company decided to change some of its senior executives on June 21, Name Current position New senior executive vice president (planned) Hiroshi Nakagawa Senior executive vice president, Nippon Telegraph East Corporation Ex-senior executive (planned) Yoshiharu Nishimura Senior executive vice president, Nippon Telegraph East Corporation March 2016 On March 22, 2016, the company announced it is selling fixed assets. The company decided to sell its NTT Makuhari Building on March 30, 2016 as part of its portfolio strategy to replace assets. 64/69

65 Research Report by Shared Research Inc. Details of sale Name: NTT Makuhari Building Floor space: 170,499sqm Type: Office Book value: JPY26.3bn (as of the end of February 2016) Sell price: JPY21.5bn Loss on sale: Approximately JPY5.3bn (consolidated and parent) The company expects to book a loss on sale of approximately JPY5.3bn (consolidated and parent) from the sale for FY03/16 earnings results. It still maintains its FY03/16 full-year targets. Major shareholders Top shareholders Amount held Nippon Telegraph and Telephone Corporation (NTT) 67.30% Japan Trustee Services Bank, Ltd. (Trust account) 2.67% Goldman Sachs & Co., Regular Account 1.78% Northern Trust Co. (AVFC) Re U.S. Tax Exempted Pension Funds 1.23% The Master Trust Bank of Japan, Ltd. (Trust account) 1.09% State Street Bank and Trust Company % Goldman Sachs International 0.91% The Bank of New York Mellon Corporation % Japan Trustee Services Bank, Ltd. (Trust account 5) 0.68% The Bank of New York % As of March 31, 2017 Shareholder returns NTT Urban is committed to the stable, long-term distribution of profits, while growing reserves to build the capital necessary to increase corporate value. The company plans to allocate reserves to investment in real estate for developments that will increase corporate value. The company plans to issue a full-year dividend per share of JPY18 (payout ratio of 33.9%) in FY03/18. Top management Representative Director and President Hiroshi Nakagawa (born March 1955) joined Nippon Telegraph and Telephone Public Corporation in 1978, after graduating from the Faculty of Economics, Kyoto University. At Nippon Telegraph and Telephone East Corporation, Mr. Nakagawa served as director of department of general affairs and human resources, director of department of corporate planning, financial director, and executive managing director. In June 2012, he became vice-president of the company. In June 2016, he took up his post as vice-president of NTT Urban Development Corporation. Since June 2017, he has been serving as president of the company. 65/69

66 Research Report by Shared Research Inc. Main properties Five wards of central Tokyo Property Urbannet Otemachi Building Otemachi First Square JA Building, Keidanren Kaikan Otemachi Financial City North Tower Location Chiyoda, Tokyo Chiyoda, Tokyo Chiyoda, Tokyo Chiyoda, Tokyo Total floor space 117,618sqm 54,284sqm (portion owned by NTT Urban) 26,517sqm (portion owned by NTT Urban; total of JA Building and Keidanren Kaikan) 8,949sqm (portion owned by NTT Urban) Floors 22 floors above ground, 5 below West Tower: 23 floors above ground, 5 below East Tower: 23 floors above ground, 4 below JA Building: 37 floors above ground, 3 below Keidanren Kaikan: 23 floors above ground, 4 below 31 floors above ground, 4 below Completed June 1990 West Tower: February 1992 East Tower: May 1997 April 2009 October 2012 Property Akihabara UDX Seavans N Building Granpark Tower Tokyo Opera City Location Chiyoda, Tokyo Minato, Tokyo Minato, Tokyo Shinjuku, Tokyo Total floor space 155,629sqm 78,488sqm 117,659sqm (portion owned by NTT Urban; tower and residences in total) 33,086sqm (portion owned by NTT Urban) Floors 22 floors above ground, 3 below 24 floors above ground, 2 below 34 floors above ground, 4 below 54 floors above ground, 4 below Completed January 2006 January 1991 August 1996 July /69

67 Research Report by Shared Research Inc. Property Shinagawa Season Terrace Urbannet Ginza 1-chome Building Urbannet Nihonbashi 2-chome Building Location Minato, Tokyo Chuo, Tokyo Chuo, Tokyo Total floor space 202,716sqm (total) 11,720sqm 14,795sqm Floors 32 floors above ground, 1 below 8 floors above ground, 1 below 10 floors above ground, 1 below Completed February 2015 February 2016 January /69