Japan Excellent : Financial Results Material

Asset Management Report for the 31st Period

(Semi-Annual Report for the 31st Period)

From July 1, 2021 to December 31, 2021

I. Greetings

To Our Unitholders

We would like to express our sincere gratitude for your continued support of Japan Excellent, Inc. (JEI) and Japan Excellent Asset Management Co., Ltd.

We hereby report the financial results of JEI for the 31st period (from July 1, 2021, to December 31, 2021).

During the 31st period, in August, we decided to sell Kowa Shirokanedai Building, an old property, to our sponsor Nippon Steel Kowa Real Estate and announced a policy to stabilize future distribution by utilizing the gain on sale. We then acquired Sapporo Otemachi Building (70% equity interest) located in central Sapporo City to increase revenue.

On the leasing front, the period-end occupancy rate of the entire portfolio resulted at 93.1% as the leasing market was slower than expected due to the impact of the COVID-19 pandemic while departures of large tenants were seen. Furthermore, for rent revision, we realized upward rent revision of +4.6% for 4.2% of the area subject to rent revision while making flexible responses by comprehensively taking tenants' business conditions into account.

On the financial front, we strived to enhance asset efficiency through acquisition of Sapporo Otemachi Building entirely with funds on hand. In addition, we realized lower interest rates by changing to floating rates, extension of remaining period of debt, and diversification of repayment dates through refinancing of long-term loans by means of green syndicated loans, a first of such by an office J-REIT.

As a result, in the 31st period, JEI recorded operating revenue of 10,666 million yen, operating income of 4,485 million yen, and net income of 3,846 million yen, while distribution per unit decreased by 95 yen from the previous period to 2,843 yen.

In addition, after entering the current period (the 32nd period), we have decided on the following three additional measures, taking into account the impact of the stagnation of the leasing market due to the spread of the Omicron variant: (1) acquisition of ARK Hills FRONT TOWER (49% equity interest in anonymous association), (2) sale of Shintomicho Building, an old property, to a third party, and (3) implementation of JEI's first buyback of investment units in view of the current level of the investment unit price. The decision was made with an aim to enhance unitholder value over the medium to long term while further increasing revenue and strengthening the financial base for stable distribution.

Furthermore, for ESG, we made progress in various initiatives including establishment of a medium- to long-term target for CO2 emissions reduction (46% reduction of CO2 emission intensity by FY2030 compared with FY2013) and reduction of CO2 emissions through a shift in electricity source at seven properties. In addition, in the 32nd period, we announced the recognition, policy, promotion system, etc. concerning climate change for each of the four items ("governance", "strategy", "risk management", "indicators and targets") recommended by the Task Force on Climate-Related Financial Disclosures (TCFD) based on the TCFD recommendations, with regard to climate change responses.

About Future Asset Management

In the real estate transaction market, while transaction prices are expected to remain steady for the time being backed by factors such as vigorous appetite for investment by market participants, JEI will continue to set the sponsor pipeline as the main source of property acquisition and advance talks with the sponsor. At the same time, JEI intends to earnestly work on acquisition from third parties as well.

In the office building leasing market, while there are trends of office consolidation and such mainly among large companies and an outlook of an increase in supply of new office floors in central Tokyo from 2023 onwards, there is a further revitalization of economic activity in general, the emergence of moves to review office functions with an eye to the post- COVID society and such. These factors are assumed to bring conflicting effects on each other, and it is expected that the vacancy rate will remain range-bound for the time being and newly concluded rents will soften due to owners' priority stance for occupancy.

Under such circumstances, JEI believes that, as indicated by the increasing number of relocation aimed at improving the location and building grade, large buildings with superior location and performance owned by JEI will easily fit into the new office strategy, and thus attract demand as core offices.

As to the policy on leasing activities for the time being, JEI will place upmost priority on "early refilling of vacated floors" and "prevention of departure" of existing tenants. Especially with the vacated floors, JEI will work to achieve early refilling of vacated floors by cooperating with sponsors, setting flexible conditions taking into account the level of difficulty by property and other efforts.

As for rent renewal, while shifting to a basic stance of prioritizing prevention of tenant departures, JEI will also flexibly attempt upward rent revision on the upturn in the situation.

In terms of finance, JEI will strive to conduct stable and sound financial management based on its basic policy of continuing to reduce financing costs, fixing the interest rates of loans, extending borrowing periods, and diversifying maturity dates. Furthermore, from the standpoint of maintaining and strengthening financing base through diversification of fund procurement means, JEI will work on environmentally conscious or new methods of funding including sustainability finance.

With regard to ESG, JEI intends to strive to further evolve and deepen its initiatives by taking on challenges in new areas, such as carbon neutrality and expansion of information disclosure in line with TCFD recommendations, in addition to previous efforts in order to further accelerate our initiatives.

Finally, as always, JEI remains committed to strict adherence to the Financial Instruments and Exchange Act and other laws and regulations, and in addition to promoting compliance, we also disclose information on the status of our operations to our unitholders in an accurate and easy-to-understand manner.

We kindly ask for your continued understanding and support.

Asset Management Report for the 31st Period (Semi-Annual Report for the 31st Period)

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1. Asset Management Report

1. Outline of Asset Management Operation

1. Operating Results and Financial Position of the Investment Corporation

		27th Period		28th Period	29th Period	30th Period	31st Period
		July 1, 2019,		July 1, 2020,	July 1, 2021,
Fiscal period			January 1, 2020,	January 1, 2021,
	to December 31,		to December 31,	to December 31,
		2019		to June 30, 2020	2020	to June 30, 2021	2021
Operating revenue	(Millions of yen)	10,890	12,717	11,043	10,567	10,666
(Rental revenues)	(Millions of yen)	(10,890)	(11,013)	(10,729)	(10,567)	(10,666)
Operating expenses	(Millions of yen)	7,978	6,426	6,119	5,977	6,180
(Property operating expenses) (Millions of yen)	(5,906)	(5,697)	(5,487)	(5,355)	(5,563)
Operating income	(Millions of yen)	2,912	6,290	4,924	4,590	4,485
Ordinary income	(Millions of yen)	2,247	5,631	4,291	3,976	3,846
Net income	(Millions of yen)	2,246	5,631	4,290	3,975	3,846
Total assets	(Millions of yen)	288,790	293,532	294,004	293,970	293,960
(Period-on-period change)	(%)	(0.9)	(1.6)	(0.2)	(-0.0)	(-0.0)
Net assets	(Millions of yen)	142,377	152,133	152,418	152,335	152,206
(Period-on-period change)	(%)	(-1.0)	(6.9)	(0.2)	(-0.1)	(-0.1)
Unitholders' capital (Note 1)	(Millions of yen)	139,972	147,907	147,907	147,907	147,907
Total outstanding investment	(units)	1,305,700	1,353,000	1,353,000	1,353,000	1,353,000
units
Net assets per unit	(yen)	109,042	112,441	112,652	112,590	112,495
Net income per unit (Note 2)	(yen)	1,720	4,179	3,171	2,938	2,842
Total distribution	(Millions of yen)	3,810	4,004	4,059	3,975	3,846
Distribution per unit	(yen)	2,918	2,960	3,000	2,938	2,843
(Profit distribution per unit)	(yen)	(1,841)	(2,960)	(3,000)	(2,938)	(2,843)
(Distribution in excess of
earnings per unit)	(yen)	(1,077)		(－)	(－)	(－)	(－)
(Note 3)
Return on assets (Note 4)	(%)	0.8		1.9	1.5	1.4	1.3
(Annualized rate)	(%)	(1.6)	(3.9)	(2.9)	(2.7)	(2.6)
Return on equity (Note 5)	(%)	1.6	3.8	2.8	2.6	2.5
(Annualized rate)	(%)	(3.1)	(7.7)	(5.6)	(5.3)	(5.0)
Capital ratio (Note 6)	(%)	49.3	51.8	51.8	51.8	51.8
(Period-on-period change)	(%)	(-1.0)	(2.5)	(0.0)	(-0.0)	(-0.0)
Payout ratio (Note 7)	(%)	107.0	71.1	94.6	100.0	100.0
Number of investment	(properties)	33	35	34	35	36
properties
Number of tenants (Note 8)	(tenants)	200	193	191	187	587
Total leasable area (Note 9, 10)	(m2)	345,940	332,702	331,112	336,375	341,070
Occupancy rate	(%)	99.6	99.6	98.0	96.4	93.1
Depreciation	(Millions of yen)	1,929		1,946	1,824	1,847	1,891
Capital expenditure	(Millions of yen)	1,726	806	1,127	1,547	1,305
Net operating income (NOI)	(Millions of yen)	6,913	7,263	7,066	7,059	6,994
(Note 11)
Funds from operation (FFO) per	(yen)	4,367	4,341	4,287	4,303	4,240
unit (Note 12)
FFO multiples (Note 13)	(times)	20.3		14.4	15.0	18.3	15.8
Debt service coverage ratio	(times)	9.4	17.0	13.9	13.2	13.2
(DSCR) (Note 14)
Interest-bearing debt	(Millions of yen)	129,600	125,600	125,600	125,600	125,600
Loan-to-value (Note 15)	(%)	44.9	42.8	42.7	42.7	42.7
Number of days in operation	(days)	184	182	184	181	184

(Note 1) Unitholders' capital does not account for the changes in unitholders' capital due to the implementation of distribution in excess of earnings related to the allowance for temporary difference adjustments, etc.

(Note 2) Net income per unit is calculated by dividing the net income by the weighted-average number of units outstanding during the six months period.

(Note 3) Distribution in excess of earnings per unit in the 27th period is from reserve for temporary difference adjustments. (Note 4) Return on assets = Ordinary income / [(Period beginning total assets) + (Period end total assets) / 2] × 100

Asset Management Report for the 31st Period (Semi-Annual Report for the 31st Period)

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(Note 5) Return on equity = Net income / [(Period beginning net assets) + (Period end net assets)/ 2] × 100 (Note 6) Capital ratio = Period end net assets / Period end total assets × 100

(Note 7) Payout ratio = (Distribution per unit (not including distribution in excess of earnings per unit) / Net income per unit) × 100 (Figures are rounded to the first decimal place.)

As new investment units were issued in the 28th period, the formula below was used to calculate the amount. Payout ratio ＝ (Total distributions (not including distribution in excess of earnings / Net income) × 100

In addition, when accounting for reversal of allowance for temporary difference adjustments with the following formula, the payout ratio is 94.8%.

(Total distributions (not including distribution in excess of earnings) / (Net income － Reversal of allowance for temporary difference adjustments)) × 100

(Note 8) Number of tenants indicates the number of end tenants in each property as of the end of each period in principle, starting from the 31st period. When a tenant has multiple tenancies in the same property, it is counted as one tenant, and when in multiple properties, it is counted as multiple tenants. However, ① for the residential portion of Shiba 2-Chome Building and HAMARIKYU INTERCITY, the number of tenants is counted as one, considering the master lease company as the tenant, since the importance of each end tenant is low, and ② for the properties in which real estate is co-owned or trust beneficiary rights are quasi-co-owned, and in which the percentage of JEI's ownership or quasi-co-ownership is low (AKASAKA INTERCITY AIR, GRAND FRONT OSAKA (Umekita Plaza, South Building) and GRAND FRONT OSAKA (North Building)), the number of tenants indicates the number of the master lease companies considering the master lease company as a tenant, since the importance of each tenant is low. In addition, the number of tenants for ③ Osaka Kogin Building (land with leasehold interest) is counted as one based on the lease agreement for the leased land.

(Note 9) For properties with joint ownership (including quasi co-ownership of trust beneficiary interest), a figure obtained by multiplying the leasable area of the entire property by the ownership ratio (As for AKASAKA INTERCITY AIR, GRAND FRONT OSAKA (Umekita Plaza/South Building), and GRAND FRONT OSAKA (North Building), a figure obtained by multiplying the ratio of co-ownership interests held by the trustee by the ratio of quasi co-ownership of trust beneficiary interest held by JEI.) is indicated as JEI's leasable area. The same applies hereinafter.

(Note 10) Spaces are rounded to the nearest specified unit. The same applies hereinafter. (Note 11) NOI = Rental revenues - Property operating expenses + Depreciation

(Note 12) FFO per unit = (Net income + Depreciation - Gain on sale of real estate + Loss on sale of real estate + Impairment loss) / Total number of outstanding investment units (the figure is rounded down to the whole number).

(Note 13) FFO multiples = Period end investment unit price / Annualized FFO per unit

(Note 14) DSCR = (Net income before interest and taxes + Depreciation (*)) / (Interest expenses + Interest expense on investment corporation bonds)

* Includes depreciation except for property operating expenses.

(Note 15) Loan-to-value = Period end interest-bearing debt / Period end total assets × 100

Asset Management Report for the 31st Period (Semi-Annual Report for the 31st Period)

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(2) Asset Management Development

Japan Excellent, Inc. (JEI) was founded on February 20, 2006, under the Law Concerning Investment Trusts and Investment Corporations of Japan (Law No. 198 of 1951, as amended; hereinafter referred to as the "Investment Trust Law"). On March 15, 2006, it completed the corporate registration to the Kanto Finance Bureau (registration number 52, issued by the Head of the Kanto Local Finance Bureau) and listed on the Real Estate Investment Trust Section of the Tokyo Stock Exchange (Securities Code: 8987) on June 27, 2006.

Since the listing, JEI has continued investment management primarily in office buildings with the aim of maintaining sound corporate growth and stable revenues from the medium- to long-term perspectives. On December 31, 2021, JEI settled its 31st period.

1) Business conditions and results

In the 31st period (ended December 2021), although the world economy moved towards recovery reflecting the steady progress of COVID-19 vaccination in major countries in Europe and the U.S., additional measures to boost the economy, etc., infections by a more contagious COVID-19 variant have been spreading again, and thus the situation requires careful attention to the restrictions on economic activities to prevent infection.

In the U.S., interest rates have been rising sharply due to the expectation that the pace of interest rate hikes by the U.S. Federal Reserve Board (FRB) will speed up because of concerns about inflation against the backdrop of the recent improvement in economic indicators, the rise in the consumer price index and such.

In Japan, the impact of COVID-19 has been a concern with possible resurgence of infections due to new variants in the future, and the outlook remains uncertain. However, the GDP growth rate for July to September stood at 1.2% year on year, indicating a recovery trend. Concerning the domestic finance market, although it has remained calm as the Bank of Japan has maintained the ongoing monetary easing stance, careful attention should continue to be paid to future changes.

In the real estate transaction market, the acquisition appetite of investors within and outside of Japan has remained strong as the favorable fund procurement environment has continued backed by policies for monetary easing, differences in interest rates in Japan and abroad being maintained and such. Under such circumstances, JEI acquired Sapporo Otemachi Building (acquisition price: 4.06 billion yen) in December 2021.

In the office building leasing market, there have been moves to decrease the floor space reflecting the needs for more efficiency and consolidation in view of promoting telework and reducing fixed cost under the COVID-19 pandemic.

On the other hand, there have been more contracts due to floor expansion within the same building, relocation for larger space, improvements in building grade, etc. The vacancy rate in the five central wards of Tokyo published by Miki Shoji Co., Ltd. showed a slower pace of increase compared with the first half of 2021, and the vacancy rate as of the end of December 2021 stood at 6.3%, only up 0.1 points from the end of June 2021.

The average unit rent has shifted downward since August 2020, and that for December 2021 dropped by 2.7% compared with that for June 2021. Under such circumstance, the occupancy rate (Note 1) at the end of the period under review was 93.1%, down 3.3 points from the end of the previous period, because of the impact of stalled leasing activities due to the declaration of a state of emergency, etc.

The total number of properties owned and managed by JEI at the end of the period under review was 36 with a total acquisition price of 286.6 billion yen and total leasable area of 341,069.62 m2 (103,173.56 tsubos).

2) Fund procurement highlights

JEI will work on stable and sound financial operations over the medium to long term with a basic policy of procuring funds for the long term at fixed interest rates.

In the 31st period, JEI acquired Sapporo Otemachi Building for 4.06 billion yen in December 2021 as part of expansion of the asset size. The acquisition was made entirely using cash on hand in order to improve asset efficiency. Furthermore, from November to the end of December 2021, JEI refinanced long-term loans of 9.51 billion yen in total that had matured with long-term loans (3.76 billion yen for borrowing period of 4 years and

5.75 billion yen for borrowing period of 8 years) through a syndication with green loans, the first of such for an office REIT, after newly establishing a green finance framework.

As a result, as of the end of the 31st period, the average remaining period of interest-bearing debt (Note 2) was

4.4 years (unchanged from the end of the previous period), the period-end average interest-bearing debt interest rate (Note 3) was 0.73% (down 0.01 points from the end of the previous period), and the loan-to-value ratio of total assets (total assets-based LTV) (Note 4) was 42.7% (unchanged from the end of the previous period).

Asset Management Report for the 31st Period (Semi-Annual Report for the 31st Period)

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