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(December 13, 2012)

"Questions & Answers" are based on an interview with Naokatsu Uchida, CEO and President of Kenedix Office Partners, Inc., the asset management company for Kenedix Realty Investment Corporation.

• Q. The asset management company changed its management guidelines and company name in the fiscal period under review (fiscal period ended October 31, 2012). Can you give us an overview of the changes and the intentions behind them?
• Q. Could you provide us with an overview of the fiscal period under review (fiscal period ended October 31, 2012) and your efforts going forward?
• Q. Please explain the cash dividend results for the fiscal period under review (fiscal period ended October 31, 2012) and the forecast dividend for the next fiscal period (fiscal period ending April 30, 2013).
• Q. The Investment Corporation acquired three properties in the fiscal period under review (fiscal period ended October 31, 2012). Could you give us an overview of the acquisitions and what you have attained with these acquisitions?
• Q. What were your intentions behind selling some properties while acquiring new ones?
• Q. Please tell us the characteristics of the current situation of mid-sized office buildings?
• Q. A lease contract has been cancelled by a large tenant in the fiscal period ending April 2013. Could you provide us with an overview of the cancellation and what countermeasures you are taking?
• Q. Please tell us about the renovation, energy saving, environmental friendliness and other initiatives you are conducting as part of your property management and operations.
• Q. What are your strengths in achieving internal growth?
• Q. What financial operation measures did you undertake in the fiscal period ended October 2012?
• Q. What is your view on the J-REIT market and the future prospects of the Investment Corporation?

The asset management company changed its management guidelines and company name in the fiscal period under review (fiscal period ended October 31, 2012). Can you give us an overview of the changes and the intentions behind them?

The Investment Corporation has conducted investment and management focusing on mid-sized office buildings in the Tokyo Metropolitan Area, and intends to promote investment primarily in office buildings. In line with this policy, in September, the name of the asset management company was changed from Kenedix REIT Management to Kenedix Office Partners and the Management Guidelines were modified. These changes highlight our focus on office buildings. The main revision of the guidelines was an increase in the investment ratio target for office buildings from "50%-100%" to "80%-100%." Office buildings comprise over 90% of our portfolio so now our name and management guidelines reflect this reality. "Partners" also reflects our dual role as a good partner with investors and with tenants.

Could you provide us with an overview of the fiscal period under review (fiscal period ended October 31, 2012) and your efforts going forward?

In the fiscal period under review, we took advantage of our property acquisition capacity to acquire three office buildings located in the Tokyo Metropolitan Area. We also sold some properties from the perspective of asset replacement. Going forward, we will continue efforts to enhance the portfolio quality through asset replacement, with our focus on mid-sized office buildings. We will also consider and implement various investment methods, including joint investment with sponsors to secure future property acquisition opportunities with a continued commitment to the basic portfolio management strategy. We are determined to conduct management that is "half a step ahead" and in tune with the status of the Investment Corporation as well as market trends.
Mid-sized office buildings are generally perceived to take more time to recover compared to the larger buildings. Nevertheless, our portfolio is already showing positive signs. The average occupancy ratio of the entire portfolio remained solid at 94.3% throughout the fiscal period and was 95.5% at the end of the fiscal period (October 31, 2012). Shortened rent-free periods granted to new tenants resulted in an increase in the rent-based occupancy ratio that actually generates rental revenues. While maintaining the occupancy ratio at the current level going forward, we aim to improve leasing terms and conditions, including increasing rent levels and shortening the rent-free periods even more.
In our financial operations, we intend to continue to diversify debt maturities and further extend the life of our borrowings, as well as reduce financing costs. We currently have good relationships with ten banks with which we have transactions, and we aim to expand the lender base in preparation for future growth.

Please explain the cash dividend results for the fiscal period under review (fiscal period ended October 31, 2012) and the forecast dividend for the next fiscal period (fiscal period ending April 30, 2013).

The dividend per unit for the fiscal period ended October 2012 was 9,557 yen, an increase of 193 yen from the previous fiscal period ended April 2012. With this achievement, we have successfully maintained a dividend per unit at the 9,000 yen level over the four fiscal periods in the last two years amid continued tough conditions in the office building leasing market through property acquisitions and utilization of gains on sale of properties through asset replacement.
Moreover, we aim to maintain a stable dividend level by internally reserving part of the gains on sale of properties as a reserve for reduction entry, which will be translated to approximately 1,700 yen in dividend per unit.
We forecast a dividend per unit of 8,880 yen for the fiscal period ending April 2013, but we intend to increase the value as much as possible through asset management efforts including the replacement of assets, reduction in financing costs as well as leasing existing properties.

The Investment Corporation acquired three properties in the fiscal period under review (fiscal period ended October 31, 2012). Could you give us an overview of the acquisitions and what you have attained with these acquisitions?

In September 2012, we acquired Fuchu South Building, Kasuga Business Center Building and Nakameguro Business Center Building for a total acquisition price of 10.8 billion yen. These acquisitions were made to raise the percentage of our investments in mid-sized office buildings in the Tokyo Metropolitan Area as well as further enhance and stabilize our overall investment portfolio. All three properties were acquired at reasonable prices lower than their respective appraisal values and contributed to increase earnings. Kenedix, Inc., our main sponsor, was involved in the acquisitions as the brokerage firm. We utilized the comprehensive capabilities of the Kenedix Group to make proposals that suited the needs of the seller. This led to our successful acquisition of these blue-chip properties within the intense competition over property transactions.
We intend to continue enhancing opportunities to acquire properties by utilizing our sponsor networks, as well as acquire properties through our original networks.

What were your intentions behind selling some properties while acquiring new ones?

Our intentions were to increase the investment ratio in office buildings in the Tokyo Metropolitan Area and enhance the quality of our portfolio. We sold KDX Omori Building in the fiscal period under review (fiscal period ended October 31, 2012) after comprehensively considering the property's future competiveness, its position in our portfolio and the terms and conditions for sale presented by the buyer. In addition, Gradito Kawaguchi was sold since it was a residential property, while Kanazawa Nikko Building that was sold in the fiscal period ending April 2013 was a multi-use building including a hotel, categorized under "Other" in asset type. Both properties were assets we had prioritized for replacement based on the Investment Corporation's management policy. We intend to continue to conduct replacement of assets to enhance the quality of our portfolio.

Please tell us the characteristics of the current situation of mid-sized office buildings?

The occupancy ratio of the entire portfolio was 95.4% as of the end of the previous fiscal period (fiscal period ended April 30, 2012), and remained almost the same at 95.5% for the fiscal period under review (fiscal period ended October 31, 2012). The Investment Corporation has over 800 tenants in its properties, of with a turnover or about 10% each year. A characteristic of mid-sized office buildings is that they have a large number of tenants that relocate at a certain frequency. Utilizing such characteristics of mid-sized office buildings, the Investment Corporation is committed to maintain and improve the occupancy ratio of its properties by continuously enhancing the quality of operations, in an aim to realize "buildings selected by tenants."
One of the issues for the Investment Corporation to tackle is the improvement in lease terms and conditions. Our basic policy is to enhance the profitability of the portfolio by increasing unit rent and shortening rent-free periods even if the occupancy ratio remains at, for example 95%.
In the fiscal period under review, the average rent-free period for the office buildings in the Tokyo Metropolitan Area was 3.9 months, and the average vacancy period was 3 months. These represent a reduction of approximately 2 months in both rent-free period and the vacancy period compared to the previous fiscal period, when the average rent-free period was 6 months and the average vacancy period was 5.1 months. One of the factors behind these reductions is the increase in lease contracts for expanded space within the same building. We consider that this is evidence that our continuous implementation of customer satisfaction surveys and focus on communication with tenants are serving as an important factor for tenants selecting our mid-sized office buildings.

A lease contract has been cancelled by a large tenant in the fiscal period ending April 2013. Could you provide us with an overview of the cancellation and what countermeasures you are taking?

KDX Nihonbashi Kabutocho Building had been fully leased to a major securities firm, but the lease contract was terminated at the end of November 2012 due to the tenant reviewing their operation bases including relocations for consolidation of offices. The impact of this cancellation on the entire portfolio is around 2.3% in terms of total leased floor area.
The property is a high-graded building in the area with convenient transportation access and is relatively new. Currently, renovation work is under way so that the property can be leased to multiple tenants when completed. Restoration work of over 70% of the floor space has already been completed, and we will complete the remaining restoration work as well as conduct leasing activities to the spring of 2013.

Please tell us about the renovation, energy saving, environmental friendliness and other initiatives you are conducting as part of your property management and operations.

As a basic policy of the Investment Corporation, we secure a certain budget each fiscal period to allow us to continuously carry out energy saving measures, such as installing more energy-efficient equipment upon renewal of air-conditioning systems and replacing lighting equipment with LED lamps.
We are highly aware of our social mission as an owner of mid-sized office buildings with an asset size exceeding 290 billion yen. We are also resolved to continue to proactively implement environmental measures by taking advantage of cost reductions achieved through lump-sum placement of orders for services at multiple properties.
Moreover, while periodically receiving evaluations by outside organizations to demonstrate the high quality of our portfolio properties, we strive to clarify what we need to do with regard to the environmental load of our buildings, convenience for tenants and consideration of the surrounding environment as well as our unitholders, to realize efficient energy conservation and environmental measures.

What are your strengths in achieving internal growth?

Our major strength is property management conducted by us, the Asset Management Company. In the mid-sized office market, it is of utmost importance that an array of actions are taken promptly and flexibly by identifying tenant and property conditions early while communicating with many tenants. This is the strength of undertaking such in-house, without leaving it in the hands of outside property management companies.
Another is having a substantial asset size as an owner of mid-sized office buildings. In other words, we enjoy merits of scale by looking at the portfolio as a whole instead of by individual property. Specifically, when the same type of construction work is to be conducted, we also benefit in terms of expenses if we negotiate for several buildings together rather than for each building individually. By having a specialized division within the Asset Management Company, we can collectively undertake everything from the selection of service providers to verification of the appropriateness of price and supervision of construction work and, as a result, we can pursue merits of scale to the fullest.
At the Asset Management Company, rather than acquiring newly-built buildings as is at a relatively high price, we feel it is important that we apply our discerning eye for properties "worth refining" that exhibit a good balance between building age and price to acquire them at reasonable prices. Furthermore, we feel it is important that we leverage our asset management and property management know-how that we have accumulated to date to enhance added-value.
The mid-sized office buildings that we deal with have a solid market characterized by rich tenant demand and market stock. We think that closely communicating with many tenants to thoroughly grasp needs as well as conducting management and operations that achieve high tenant satisfaction leads to stable rent income.

What financial operation measures did you undertake in the fiscal period ended October 2012?

Our top priority is to reduce financing costs while maintaining financial stability. Therefore, we continue to focus on lowering borrowing interest rates as well as diversifying debt maturities and extend the average life of our borrowings.
In terms of lenders, we have established good relationships with ten banks and intend to continue to build a good track record with them. We are also working to expand our lender base in consideration of future growth. In addition, we may increase our balance of borrowings in a well-proportioned manner with lenders with which we have a relatively small balance of borrowings and may start transactions with new lenders with which we determine a long-term relationship can be established.

What is your view on the J-REIT market and the future prospects of the Investment Corporation?

In September 2012, the Tokyo Stock Exchange REIT Index regained the 1,000-point mark for the first time in about five and a half months. At the end of October, the Bank of Japan decided on further monetary easing through additional funding of its "Asset Purchase Program." Furthermore, there were three newly listed J-REITs in 2012 (as of December 13, 2012). These events give us a sense that the market is on a track for expansion, and we are seeing a favorable business environment. In addition, the market is beginning to be stimulated as revisions to the Act on Investment Trusts and Investment Corporations are being actively discussed and consideration has started for the diversification of capital policies and fund procurement measures for J-REITs. These and other factors give us the confidence that the J-REIT market still has considerable room for further development.
The Investment Corporation has successfully maintained a high occupancy ratio, shortened rent-free periods and increased the rent-based occupancy ratio in consideration of actual rental revenues through asset management operations in the fiscal period under review (fiscal period ended October 31, 2012). Based on such, we recognize the market is heading for a stage in which rents are ready to bottom out. We believe it is important for us to lease-up KDX Nihonbashi Kabutocho Building, which became fully vacant in December 2012, to enhance the profitability of our portfolio going forward.
We are resolved to continue asset management by doing our utmost to realize maximized unitholder value over the medium to long term as well as to fulfill our social mission as a J-REIT.