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(December 20, 2011)

“Questions & Answers” are based on an interview with Taisuke Miyajima, CEO and President of Kenedix REIT Management, Inc., the asset management company for Kenedix Realty Investment Corporation in late November 2011.

• Q. Please tell us about the purpose behind your raising funds through public offering for the first time in approximately a year and nine months.
• Q. How does the public offering contribute to the profitability of the portfolio to promote property acquisitions in this period of time?
• Q. Do you perceive that the real estate transaction market is being invigorated?
• Q. The release of collateral pledges has been cited as an important feature of raising funds through public offering. What effects does this bring?
• Q. What merits have been brought by the creation of additional capacity for property acquisitions, which you cited as an important feature of the public offering?
• Q. How do you perceive the current office building leasing market?
• Q. What measures are you taking to maintain a stable occupancy rate?
• Q. Could you tell us about your leasing activities?
• Q. Do you foresee any impact of the “2012 Problem,” in which large-sized office buildings are predicted to be supplied in large quantities?
• Q. There is an increasingly growing interest in endeavors for environmental friendliness, such as energy saving at office buildings, after the Great East Japan Earthquake. What are your measures in such endeavors?
• Q. The J-REIT market is celebrating its tenth anniversary year in 2011. What position in the market do you aim to attain?

Please tell us about the purpose behind your raising funds through public offering for the first time in approximately a year and nine months.

Broadly speaking, the latest issuance of new investment units through public offering had three important features. First, it allowed us to newly acquire four properties at prices that secure relatively high profitability. Second, it helped release all collateral pledges of our borrowings established in April 2009, enabling us to issue investment corporation bonds. This and other advances resulted in significant improvement in our financial base, enhancing flexibility and dynamism as we implement our financial strategy going forward. Third, it lowered LTV (the ratio of interest-bearing debt) from 43% to 40.3%, giving us additional capacity to newly acquire properties amounting to approximately 30 to 40 billion yen. We believe these achievements will make significant contributions to the growth of the Investment Corporation over the medium to long term.

How does the public offering contribute to the profitability of the portfolio to promote property acquisitions in this period of time?

We conducted public offering in the tenth fiscal period (fiscal period ended April 30, 2009), ahead of other J-REITs, and restarted property acquisitions in November 2009. By continuously acquiring properties going forward, we nimbly entered the second stage of growth. Since the restart of acquisitions, we have acquired 13 properties totaling 43 billion yen by the end of the thirteenth fiscal period, and the average NOI yield of these properties stands in the mid-5% level. Considering the fact that the average NOI yield of properties that were acquired earlier is less than 5%, we can say that promoting property acquisitions in this period of time has enabled us to secure relatively large revenues, which in turn has surged revenues of the entire portfolio.

Do you perceive that the real estate transaction market is being invigorated?

Currently, the real estate transaction market has a considerable volume of CMBS (commercial mortgage-backed securities) nearing maturity and private placement real estate funds that are about to be refinanced, and these are increasingly providing opportunities for property acquisitions. Under such circumstances, market participants have come to share the view that “you should turn to Kenedix Realty Investment Corporation for mid-sized office buildings.” This is because of our track record in which we again steered to growth as early as in the tenth fiscal period (fiscal period ended April 30, 2009) and have actually acquired many properties. Such a view has facilitated an inflow of good property information to us through various channels, and recently there are many cases in which information comes to us directly from sellers without any intermediates. This, as a result, has placed us in an advantageous position in the mid-sized office building transaction market, enabling us to acquire properties strictly selected from among an abundance of property information. The four properties we acquired in the thirteenth fiscal period (fiscal period ended October 31, 2011) all came from third parties. We will continue proactive property acquisitions by capitalizing on this advantage.

The release of collateral pledges has been cited as an important feature of raising funds through public offering. What effects does this bring?

The release of collateral pledges is extremely important to us, as it gives us flexibility and dynamism in our financial operations.
Originally, the collateral pledges for our properties were established (in April 2009) in order to facilitate fund procurement amid the financial crisis. By now, however, the turmoil in the financial market has settled and the borrowing conditions by banks have also been normalized. On top of this, the fact that we raised funds through public offering has proved that fund procurement from the capital market is possible, and this led to the release of the collateral pledges.
The release of the collateral pledges has allowed us to issue investment corporation bonds, totaling 1.5 billion yen, for the first time in approximately four years and a half after restrictions had been imposed on issuing. In addition, the resulting reinforcement of our financial base has helped us to undertake borrowings from financial institutions with which we had no prior transactions. This has further diversified procurement methods, securing further dynamism in our financial operations. The release of collateral pledges has also given us more freedom to replace assets in our portfolio, as we can now flexibly sell properties without having to obtain consent from relevant financial institutions.

What merits have been brought by the creation of additional capacity for property acquisitions, which you cited as an important feature of the public offering?

In terms of LTV (the ratio of interest-bearing debt), we aim to keep the ratio at the lower half of the 40% level as a rule to secure stable financial operations. However, our policy allows us to raise the figure to the upper half of the 40% level if borrowings are undertaken for acquiring blue-chip properties and other important purposes.
The latest fundraising through public offering has lowered LTV from 43.0% to 40.3%, creating additional capacity to newly borrow funds from financial institutions. This, combined with cash on hand, has made it possible for us to acquire properties, if we so desire, totaling approximately 30 to 40 billion yen. The enhanced financial base has also reduced fund procurement costs, and we believe we can further promote expansion of our portfolio size by using the procured funds for new property acquisitions.
Moreover, since borrowings from financial institutions allows to use procured funds more dynamically compared with funds raised through issuing investment units, we can promptly buy properties in good timing when blue-chip properties become available in the market. We believe that, in order to acquire excellent properties from the market, it is important for us to always be prepared to procure funds at anytime.
The latest fundraising through public offering has created an environment in which we have a more favorable standing than before for acquiring properties, and enhanced our financial base on which we can securely implement growth strategies going forward. We will work to realize an expanded asset size through continuously acquiring properties, and aim to build a portfolio of 100 properties and totaling 400 billion yen as a medium- to -long term target.

How do you perceive the current office building leasing market?

Immediately following the Great East Japan Earthquake, some tendencies were observed for temporary freezing of office relocation plans and suspending the search for properties. Thereafter, however, there has been almost no direct impact of the earthquake and disaster. Presently, the vacancy rate of office buildings in the five central wards of Tokyo remains at around 8 to 9%. In contrast, the average occupancy rate of the office buildings we own in the Tokyo economic zone is around 5%, falling below the market average, and our average occupancy rate for the past three years has remained stable at a high level of around 94%.

What measures are you taking to maintain a stable occupancy rate?

The stable occupancy rate has been realized within the backdrop of our endeavors to create an office environment that satisfies tenants, our customers.
We also conducts property management operations on its own, and endeavors to deepen the relationship with tenants through daily activities.
One of the specific endeavors is CS (customer satisfaction) surveys, which we continue to implement periodically in order to identify tenants’ requests for buildings and services and respond to them. The results of the fourth CS survey conducted in September 2011 showed a “heightened degree of satisfaction,” both in terms of hardware and software services (operating and management services) over the previous survey. Indeed, the proportion of tenants who are willing to continue their lease has increased as a result of our responding in earnest to the requests received through the CS surveys, and we believe such endeavors provide the base for the stable occupancy rate being maintained.

Could you tell us about your leasing activities?

Our leasing capability, which has been further enhanced, is another source of strength. Our portfolio of mid-sized office buildings has a size surpassing 200 billion yen, and we have many properties to lease. As such, we closely exchange information on a daily basis with many leasing brokers. When any vacancy occurs at our properties, these firms swiftly let us know tenant candidates that are suitable for specific properties, leading to a shortened period of vacancy.
We have sufficiently accumulated know-how in leasing activities through our experience in operating many mid-sized office buildings to date. We will exercise our high operation and administration ability, one of our strengths, in the management of our portfolio that is composed of properties featuring strong competitiveness among mid-sized office buildings. By doing so, we will continue our efforts in maintaining and improving the occupancy rate.

Do you foresee any impact of the “2012 Problem,” in which large-sized office buildings are predicted to be supplied in large quantities?

We don’t expect any major impact, as our tenant segment is for the volume zone of 50 to 200 tsubos in the leased floor area per tenant and thus does not overlap with the tenant segment of large-sized office buildings. Moreover, in terms of the floor size, mid-sized office buildings are better suited for small- and medium-sized enterprises, which represent a large customer base and are naturally diversified without any concentration on certain business types. Because of these characteristics, we consider mid-sized office buildings, if properly operated and managed, to be an investment target that can achieve comparatively good performance.

There is an increasingly growing interest in endeavors for environmental friendliness, such as energy saving at office buildings, after the Great East Japan Earthquake. What are your measures in such endeavors?

With regard to reduction of power consumption in the summer of 2011, we achieved reduction at the rate in the 30% level at our properties classified as large users, in contrast to the reduction target of 15% set by the government for peak consumption.
On top of power saving in the common areas of these properties, this achievement was made possible thanks to the proactive cooperation by tenants in their exclusively leased areas. This means that close communication with tenants also led to the power saving achievement. As for our measures to reduce power consumption in common areas, aside from making air conditioning and lighting adjustments and other measures, we proactively conducted energy-saving work, such as securing a construction budget of approximately 100 million yen to replace emergency guiding lamps with LED lamps.
In the mid-sized office building market, the environmental response still lags behind as many buildings are managed individually and separately by respective owners. However, since we own a portfolio of mid-sized office buildings totaling more than 200 billion yen, we are in a position that allows us to take initiatives in energy saving and environmental measures for the entire portfolio, not individually for separate properties, thus utilizing our advantage of economies of scale. Going forward, environment-friendly real estate will attract attention even further, and there is a possibility that, in the near future, environmental response will become a significant factor affecting competitiveness of office buildings. Therefore, we established an “Environment Policy” in November 2011 to heighten our environmental awareness and endeavor to manage properties based on this policy.
In addition, to exemplify our endeavors being specifically materialized, we received the DBJ Green Building Certificate in June 2011 from the Development Bank of Japan for three of our properties, becoming the first recipient of the certificate among J-REITs. These environment activities are presented in the “Environmental Initiatives” section of our website.

The J-REIT market is celebrating its tenth anniversary year in 2011. What position in the market do you aim to attain?

Among J-REITs, we are the only REIT that has a portfolio of mid-sized office buildings totaling more than 200 billion yen. We believe that the mid-sized office building market, which has a wide ranging stock of both properties and tenants, is endowed with high potential. Indeed, the decisive factors that should determine the evaluation of a J-REIT are the cash flows generated from the portfolio of properties it owns, as well as the management ability of its asset management company. We have sufficient experience and track record as professionals in mid-sized office buildings, and our human resources, who are rich in experience, are engaged in daily operations with confidence, in all aspects from property acquisitions, property sales, administration, management, leasing and financial operations. We will work to enhance our creditworthiness by expanding the portfolio size, so that our unitholders can be assured that we are a reliable and solid REIT. By doing so, we are resolved to contribute to enhancing the returns for our unitholders over the medium to long term.