Japan Logistics Fund Inc. Semi Annual Report

Transcription

1 Japan Fund Inc. Semi Annual Report The 21 st Period (From August 1, to January 31, 2016) May 24, 2016

2 Management Discussion and Analysis Background of JLF Japan Fund, Inc. (JLF) is Japan s first dedicated logistics REIT, founded with the aim of contributing to the Japanese economy by converging the flow of money (finance) with the flow of goods (logistics), which is the lifeblood of the economy. To that end, we leverage the history and experience of Mitsui & Co., Ltd., which as a general trading company has worked in logistics operations for more than 100 years. Based on the Act on Investment Trusts and Investment s of Japan (Act No. 198 of 1951; including revisions enforced thereafter) (AITIC), JLF was founded on February 22, 2005 by Mitsui & Co., Partners Ltd. (MLP) as the asset management company, and was listed on the REIT section of the Tokyo Stock Exchange on May 9 of the same year (security code: 8967). Since JLF s initial public offering, we have applied a discerning eye for logistics sites, building specifications, tenant needs and other factors to investment decisions that are tied to real demand. In the process, we have built a portfolio that can be expected to deliver stable earnings over the mid to longterm. As Japan s first dedicated logistics REIT entering a market of REITs invested mainly in office and residential assets, JLF became a pioneer and has since demonstrated to the market a track record of the logistics sector s ability to deliver stable cash distributions to its investors. Basic Policy As the pioneer of JREIT dedicated to logistics properties, we aspire to provide stability and growth of dividends in the midtolongterm by leveraging its unparalleled experience and expertise in logistics business and in financial markets. is a series of economic activities, such as transportation, storage, loading/unloading, packaging, labeling, sorting, or information integration, which connect manufacturers and consumers directly. We believe logistics is a vital function supporting the foundations of industry and people s life in Japan. As a consequence, demand for logistics properties is likely to be stable in the long term. These days, supply chain management which optimizes the entire logistics process is becoming widespread. It is imperative to construct logistics system that can be flexibly adjusted based on consumers various needs. Therefore, logistics business providers now actively seek highly versatile logistics facilities in order to build elastic logistics systems. Furthermore, consolidation of logistics functions to improve efficiency, as well as separation of ownership and use of logistics facilities to reinforce balance sheets, are growing trends in the logistics business. Given the current environment, we see great investment opportunities in this area. Investment Policy Acquisition of new properties Compared with other asset types, logistics properties tend to have less liquidity in the acquisition market. We believe, therefore, that collecting a broad range of information and making precise investment decisions based on the information gathered is the only way to achieve high quality property acquisitions. In order to avoid unnecessary price competition, we strive to gain early access to property information and promote negotiated transactions by leveraging our extensive networks of sponsors and the information sourcing channels of MLP. When acquiring properties, we make investment decisions focusing on the location and versatility of properties, which are essential factors in pursuing longterm stability in managing logistics properties. As a general rule, we avoid acquiring properties with unique structural features that suit only certain types of tenants in certain industries. Instead, we prefer properties with specifications that meet broad logistical demand. To minimize fluctuations in revenue arising from factors such as rent reduction request from tenants or unexpected tenants departure, we acquire properties that will help reduce the risk of overconcentration of tenants by avoiding excessive dependency on a single tenant or industry, and will help diversify lease period expirations. 2

3 Portfolio Management In renewing existing lease contracts, we prefer the way to ensure generating stable revenue flow, such as urging the existing tenant to renew the lease with longer term. In case that a tenant decides to move out, we conduct leasing activities based on this policy so that leases are maintained without any discontinuity and that revenues are secured, by leveraging our sponsor network, intermediary companies well versed in logistics properties and tenant information, and the network of the asset management company. We promote the improvement of the overall satisfaction level of tenants by maintaining close contact with them. Specifically, we respond to tenants needs with respect to expanding rental space, making functional improvements in line with tenant and industry needs, and implementing renewal of the properties. We conduct repairs and renovations of properties by keeping related costs below a certain level. In addition, we strive to maintain an optimal level of maintenance management for the properties by selecting appropriate property management companies that can provide efficient management in line with the characteristics of each property, by improving the quality of the property management control at the asset management company, and by standardizing various procedures. Furthermore, we will make additional investments in properties with locational advantage in term of leasing and properties with OBR (Own Book Redevelopment) potential, taking into consideration tenant requests, the leasing needs of facilities, floor area ratios and other factors. Financial strategy We set the highest priority on stability and growth of dividends while maintaining relatively conservative LTV (Loan to Value) in financing. When pursuing debt financing, we diversify funding sources and repayment due dates. In addition, with regard to tenant leasehold and security deposits, we may use such deposits to partially fund property acquisitions for efficient cash management purpose. Strategic and Financial Review of the 21 st Period (The Period Ended January 31, 2016) During the 21 st fiscal period under review, the Japanese economy as a whole continued to recover moderately, primarily as a result of the gradual increase in capital expenditure based on growth in corporate earnings and strong consumer spending in response to steady improvement in employment and personal income, despite some impact of slower growth in emerging economies on exports and production. In the logistics properties leasing market, growth in demand for large logistics properties was driven by the establishment and expansion of distribution centers by ecommerce businesses, retailers strengthening logistics functions, and thirdparty logistics (3PL) providers. In the Tokyo metropolitan area, however, the gap between asking rent level and the actual rent level demanded by tenants widened in some areas as a result of the continued supply of large new facilities over the last few years, and cases were observed in which lease terms for new properties were relaxed and there was a fall in the contract rate of tenants at the time of completion. In the logistics properties acquisition market, investors both in Japan and abroad were even more eager to invest in logistics properties, which would yield higher returns than those on other types of investments, as investment opportunities were decreasing due to the monetary easing worldwide. Under these circumstances, JLF promoted the acquisition of property at appropriate prices based on the characteristics of individual pieces of property, such as the location and building specifications through offmarket transactions, rather than competitive bidding. It purchased four properties, namely Chiba Kita Center, Chiba Kita Center II, Urayasu Chidori Center III, and Zama Center (total acquisition price 8,848 million yen, total appraisal value 10,110 million yen, average discount from appraisal value of 12.5%). In association with the acquisition of these properties, JLF executed a public offering for the first time in two years. JLF announced the mediumterm business plan stable + Growth in March 2013 and has been managing investment, aiming for stable distribution and sustainable growth. As a result of the acquisition of the four properties and the public offering, JLF was able to achieve the target dividends per unit of 4,000 yen set in stable + Growth six months ahead of schedule. As an effort for continuous internal growth, JLF has also decided to implement the redevelopment of Kiyosu Center, which will be the third round of OBR (Own Book Redevelopment, which means the redevelopment of properties held by JLF on its own). 3

4 Results of Operations The following table illustrates the financial results of the 20 th /21 st Period: The 20 th Period The 21 st Period Ended July 31, Ended January 31, 2016 Operating revenue 7,074 million 7,554 million Operating expenses 3,473 million 3,563 million Operating income 3,601 million 3,991 million Ordinary income 3,210 million 3,549 million Net income 3,209 million 3,548 million Distributions in excess of earnings per Unit 0 0 Dividends per Unit 3,866 4,033 In the 21 st Period, operating revenue rose to 7,554 million, a 6.8% increase compared to the 20 th Period. The major factors contributing to the increase were new acquisitions (four properties) and fullperiod contribution from fully occupied Yachiyo Center. On the other hand, factors such as tenant turnovers, increase of repair expenses and expenses from new investment units issuance negatively impacted to the net income. Net income rose to 3,548 million, a 10.6% increase from the previous period, and earnings per unit (= dividends per unit) increased to 4,033 at the 21 st period, a 4.3% increase even after the issuance of new investment units. Business Outlook Recognition of the Environment The Japanese economy is expected to continue on a mild recovery trend due to strong domestic demand based largely on a gradual increase in capital expenditure, backed by growth in domestic corporate earnings, and strong consumer spending associated with steady improvement in employment and personal income. The quantitative and qualitative monetary easing policy with a negative interest rate implemented by the Bank of Japan is expected to stimulate the economy in terms of capital expenditure and other aspects. However, risks that significantly affect the Japanese economy, such as economic trends in emerging countries, the development of refugee crisis in Europe, the pace of the U.S. economy recovery, and geopolitical risks in the Middle East and East Asia need to be continuously monitored. In the logistics facilities market, development projects have been continuously announced even in the environment where land prices and construction expenses are rising against the backdrop of the strong willingness of investors in Japan and abroad to invest, and development areas are also expanding. JLF believes that recent new properties have an aspect whereby they will be forced to set a relatively high asking rent even in emerging areas, as the developers need to recover high development costs. Meanwhile, as the potential demand of tenants, which was accumulated in the environment where new supply was limited after the Great Financial Crisis, has been absorbed by the rise in supply in the last few years, the supplydemand balance is being relaxed. As the number of properties that take time to decide on tenants and that are forced to ease the lease terms is increasing in some areas, given that tenants have strengthened the tendency of carefully evaluating the location, building specifications and rent, JLF believes that properties could be unable to be sold at a price based on the rent level assumed by developers. In the financial market, JLF also considers that it is necessary to pay attention to the possibility that the expected yield of logistics facilities will rise significantly (the price will fall) associated with a rise in interest rates due to the termination of monetary easing in the future. In this environment, JLF will maintain the existing policy of realizing stable distribution per unit and sustainable growth and will make efforts to build a framework that will enable it to respond accurately to future changes in the financial and real markets, in order to achieve a new mediumterm business plan stable + Growth 2.0, following the last plan stable + Growth. 4

5 Strategies & Challenges JLF is the only JREIT to have announced a midterm business plan that sets forth quantitative DPU targets and a timeline for reaching those targets. In March 2013, we have launched our current midterm business plan stable + Growth. The original DPU target of the plan was to achieve 4,000 (4.0% CAGR) by the Period Ending July 31, Through property acquisitions and OBR completion, however, we expect that we can achieve the plan stable + Growth a halfyear early. As a result, actual CAGR reached to 5.8%. This time, we have announced our new midterm business plan stable + Growth 2.0 with a quantitative DPU target ( 4,280 or 2.0% CAGR) and timeline for reaching the target (by January 2019 or the 27 th Fiscal Period.) amid an uncertain outlook for financial and property markets. We may be able to achieve higher growth rate if market turns (i.e. falling real price) by leveraging our expertise of contrarian investing. Thanks to QE, low cost capital is abundant. The situation makes logistics property developments accelerate even in high construction costs and expensive land price environments. Thanks to QE, again, yield is scarce. Compared to other asset class, real developments, especially logistics property developments, still have better profitability, so we see more new entrants in the sector. As a result of these, developable site is running out in the metropolitan areas. Now developers seek the vacant land in exterior edge of the metropolitan areas. As long as the developers can find tenants, it may have no problem. However, we concern this overextension of location once logistics property market trend turn arounds. Many of these developers exit their developed properties to their own REITs. So it is getting harder to identify investment opportunity in open market. Also, we see more real investors enter into logistics property investments (not only developments but investing logistics properties as core assets), with fundamental assumption that rent will drastically rise. It is natural the prices rise irrational price level to us. As long as things go according to this scenario, acquiring properties at those level could be a better option under current low interest rate environment. We fear, however, significant downside impact to the logistics property price may happen if rent may not rise as high as developers have expected. In reality, several tenants keep cautious attitude to rent level, reflecting uncertainty in global economy. Even though developers assume rent to rise and set relatively high asking rent, many of the tenants cannot afford that rent. For newly developed properties, we see longer leasing period (taking longer time to fill vacancy of those properties) and longer rentfree period (if normalized over the entire leasing period, real rent is significantly lower than the asking rent.) We concluded that developers are too aggressive in developing properties, and investors are too careless in logistics property pricing. We will not follow current overheated market. 5

6 Current favorable market environment enables JREITs to raise equity at a premium to NAV. Low capital cost situation accelerates pace of property acquisitions by JREITs, and they often pay too much for those acquisitions. Still, in the shortterm, DPU grows and unit price rises nonetheless. It works as long as the trend continues, but once market turns down JREITs that relies on the market environment too much may fall into vicious cycle; e.g. DPU growth is halted or even falls, risk of unrealized valuation losses increases, funding becomes more difficult, etc. For many JREITs, property support from sponsors are regarded as driver of external growth. In return, sponsor controls everything and capitalizes its position, that creates corporate governance issues; e.g. the sponsor decides the what / when / how much of property to acquire in what price, development profit from OBRs goes to the sponsor, decisionmaking at the asset management company leans toward sponsor, etc. At this moment, many sponsors (tend to be developers) are eager to develop new properties, even under current severely escalated construction cost situation. Sooner or later, JREITs may be forced to buy some of these highcost properties (nearly equal to compressed cap rate properties). We fear sometime in near future, we may see conflictofinterest issue once again. We see signs of change in the market environment, and believe it will become much important to have independent growth strategy that does not rely solely on financial markets and sponsors. 6

7 In our new midterm business plan stable + Growth 2.0, we continue to employ our unique strategy that seeks independent DPU growth that is not swayed away by market changes. 7

8 JLF s Unique Strategy 1) Acquisition Strategy Market is always cyclical, and thus we have stuck to acquisition strategy aligned with the market environment. Under booming market we acquired properties at appropriate prices according to location, building specs and individual property characteristics. Once the market bursts, we employed contrarian investing approach to seize acquisition opportunities. Especially for contrarian investing, we have enough track records since our IPO. According to a real investors survey conducted by CBRE, Inc., a global real services provider, those investors current anticipated return on multitenant logistics center exceeds that of the preglobal Financial Crisis time (the price higher, the yield lower). We believe the current market is in irrational exuberance. Actions we have to take under this market environment are, therefore, staying away from fever covering the market and making every effort to purchase properties at appropriate prices. At the same time, securing borrowing capacity to position JLF for future acquisition opportunities is imperative in case the market trend should turn around. We are not saying we will not buy in this market, but saying we buy at appropriate prices. Of course it is not easy task, but we have made every effort and uncovered acquisition opportunities even in difficult market environments by combining sponsor support and the asset manager s knowhow. As a result of our initiatives, we purchased properties 8.3% discount from appraisal value at the time of acquisition, versus our competitors purchased only 1.9% discount. We will continue to work to uncover acquisition opportunities at appropriate prices. 8

9 2) Unrealized gain We have consistently accumulated unrealized gain through a) purchasing properties at appropriate prices, b) contrarian investing, and c) OBRs. Combined with current favorable real market, our portfolio appraisal value keeps rising. Unrealized gain of our portfolio now reached 66.0 billion and unrealized gain as % of book value 33.2%, the highest level among JREITs. We believe we can absorb negative impacts on our business such as sudden tenant departure, rent reduction, and recognition of nonrecurring one time losses by effectively utilizing our unrealized gain. We see our unrealized gain as risk buffer for sudden market environment changes. 9

10 3) Borrowing capacity JLF has employed contrarian investing as one of our basic acquisition strategies. Under the current real market, we believe now is the time to secure borrowing capacity to position JLF for a future turn in real market. As of the end of fiscal period ended January our LTV is as low as 27.1%, the lowest level of LTV among JREITs. Our conservative LTV policy enables us to keep the highest issuer credit rating. Under main scenario of stable + Growth 2.0, expected LTV ceiling is 35.0%. If we find contrarian investing opportunity in market turn scenario, we may leverage up beyond 35.0% threshold. We have borrowing capacity to an LTV of 35% of about 32.0 billion (the size of our portfolio will grow 15.2%), and to 40% of about 57.0 billion (the size of our portfolio will grow 26.8%). We will continue to control LTV at conservative level for the time being to secure borrowing capacity, and enhance ability to withstand unforeseen events to position JLF to seize contrarian investment opportunity. 4) Stable Earning Base and Financial Standing Stable cash in and stable cash out create stable earning. In order to enhance DPU stability, therefore, we strived to lengthen leases and leveled out the leasing ladder as well as strived to lengthen debt maturities at fixed rate and leveled out the maturity (redemption) ladder. On earnings base, our average remaining life of leases is 7.0 years. On finance side, our average remaining life of debt maturities is 5.9 years. We believe we could build stable portfolio that will endure future potential rent and interest rate fluctuations in the market. 10

11 5) OBR (Own Book Redevelopment) JLF intends to continue OBR as a major driver for organic growth. On September 1,, we announced the launch of OBR#3 Kiyosu Center. Kiyosu Center is a landonly asset, and thus we can carry out redevelopment without recognizing temporary loss resulting from tearing down the existing building. We believe the project enables us to achieve future organic growth through the redevelopment while maintaining stability in the level of DPU. Leasing activities of the property are under way so as to be fully operational upon completion of construction. JLF sees the following four points as the standards for implementing OBR; a) good location, b) better profitability than if bought from market, c) small writedown on fixed assets due to building age, and d) significant untapped floortoarea ratio. Among our portfolio, we identified about 45 OBR candidates, including Kiyosu Center. Assuming we conduct all of these 45 OBRs, we can potentially add about 200,000 m 2 to our total gross floor area, or 18% increase. As we have explained, we intend to conduct one OBR in every 23 years, and it will take close to 10 years to complete those 45 OBRs. 11

12 6) Change in Ownership Structure of the Asset Manager Our main sponsor, Mitsui & Co., is bolstering its real asset management business. In order to concentrate human resources and expertise, funds, and information, it decided to establish a strategic holding company, Mitsui & Co. Asset management Holdings, Ltd. (MAH). These changes create a new structure, which JLF become MAH s subsidiary company by transferring the shares of JLF. Mitsui & Co. still continues in its capacity under the sponsor support agreement signed with JLF. 12

13 Message from President Let me tell you about the two sources of my pride. First, the employees of Mitsui & Co., Partners. Please come visit our company. Our employees will greet you with smiles and impress you with their abundance of expertise and motivation for work. Frankly, I think it is the greatest place to work in Japan. Second, the quality of Japan Fund. Please take a good, hard look at JLF. You will find JLF is of the highest quality in every respect, from LTV to tenant profile and asset quality, to name a few. Without a doubt, JLF is Japan s most reliable REIT. Workplace reforms aimed at improving worklife balance make it easier to get work done. This makes it a more rewarding and satisfying place to work for all employees. Because our employees enjoy a high level of satisfaction, they are able to manage the REIT with a singular focus on the longterm view. The result is stable DPU growth. In other words, shareholder value grows in proportion to employee satisfaction. JLF is the only JREIT to release a midterm management plan that sets forth numerical targets and a timeline for achieving those targets. And JLF reached those targets a halfyear early. The two sources of My Pride described above enable the creation of a followon midterm plan. To date, we have condensed the essence of our management principles into a keyword: stable + Growth (March 2013); Reborn (September 2013); V=D/(rg) (March 2014); Muscular REIT (September 2014); Independent REIT (March ); and Integrity (September ). And now I pass on the baton to my successor, who will carry forward the new midterm management plan, stable + Growth 2.0, and both sources of My Pride. I believe firmly you will find the fruits of his efforts rewarding and I ask for your continued support and kindness. Takayuki Kawashima President Mitsui & Co., Partners Ltd. 13

14 Risks Risk Profiles The principal risks with respect to investment in JLF are as follows: (i) Risks related to the marketability of the investment securities or the investment corporation bonds Risk associated with the fluctuation of market prices of the investment units or investment corporation bonds of JLF Risk associated with the distribution of cash Risk associated with the fluctuation of income and expenses Risk due to the fact that the rights of unitholders and the rights of shareholders are not always identical Risk associated with JLF s investment units transactions in the market Risk associated with the redemption and coupon payment of the investment corporation bonds of JLF (ii) Risks related to the management policy of the investment corporation Risk due to the fact that the investment target is limited to logistics properties Risk associated with the dependency on a small number of tenants Risk associated with single tenant properties Risk of not being able to purchase properties from Mitsui & Co., Ltd., Trust Bank, Limited and Kenedix, Inc. as planned Risk of not being able to acquire or transfer of real Risk associated with funding through issuance of new investment units, borrowings and issuance of investment corporation bonds Risk associated with the dilution of value when new investment units are issued Risk associated with redevelopment projects (OBR) (iii) Risks related to parties concerned and framework of the investment corporation Risk associated with the dependency on Mitsui & Co., Ltd., Mitsui & Co. Asset Management Holdings Ltd., Trust Bank, Limited and Kenedix, Inc., and with conflicts of interest Risk associated with the dependency on interested parties of JLF and with conflicts of interest Risk of dependency on executive officers of JLF and personnel of MLP Risk associated with changes in the investment policy of JLF Risk of bankruptcy or deregistration of JLF Risk associated with deposits and guarantees (iv) Legal risks related to beneficial interests of real and trusts Risk associated with defects of real Risk associated with lease contracts Risk that accompanies damage, loss and deterioration of real due to disasters, and degradation of the surrounding environment Risk associated with owner liability and repair/maintenance costs related to real Risk associated with administrative laws and regulations related to real Risk associated with the establishment or amendment of laws Risk of being affected by bankruptcy, etc. of the seller Risk associated with the master lease company Risk associated with subleasing Risk associated with the use of real by tenants, etc. Risk associated with jointownership of properties Risk associated with sectional ownership buildings 14

15 Risk associated with properties with leased land Risk associated with properties with leased building Risk associated with properties with limited proprietary right of land Risk associated with development properties, etc. Risk associated with detrimental substances Risk associated with specific facilities under the Water Pollution Prevention Act Risk associated with reserve land Specific risk when owning real in the form of trust beneficiary rights Risk associated with jointownership, etc. of trust beneficiary rights Risk related to forward commitment, etc. Risk related to landfill (v) Risks related to a taxation system Risk associated with requirements for dividend deductibility Risk of dividend deductibility requirements not being fulfilled expost facto due to corrections following tax inquiries, etc. Risk of reduced tax system accompanying the acquisition of real not being applied Risk associated with changes in the general tax system (vi) Other Risk associated with expert reports, etc. Risk associated with the dependency on market reports Risk associated with the application of impairment accounting Risk of increased tax burden due to discrepancy between accounting and taxation Risk associated with investment in silent partnership equity interests The current risk profile of the JLF and the risk management systems employed by the MLP to manage those risks; The appropriateness and effectiveness of the risk management structure are regularly evaluated and enhanced by the MLP. Deposits are exposed to risks of bankruptcy of the financial institutions which hold the deposit, and other credit risks. Such risks are, however, managed by limiting shortterm deposits and depositing financial institutions with high credit ratings. Loans and investment corporation bonds are mainly used for asset acquisition or debt repayment, etc. While loans and bonds are exposed to liquidity risk at the time of due date and maturity date, such risk is controlled by diversifying lenders and maturity and due dates, diversifying financing means, establishing commitment lines to secure liquidity as well as monitoring cash flows periodically. JLF has 13 billion yen of commitment lines; no amount has been drawn down as of March 31, Debt with a floating interest rate is exposed to interest rate fluctuation risks. JLF will manage the risk by maintaining conservative level of LTV and by increasing fixedrate debt ratio. Circumstances in which the JLF may use leverage; JLF may take out loans or issue longterm or shortterm investment corporation bonds for the purpose of acquiring assets, repair of properties, payment for dividends, payment for working capital of JLF, or repayment of obligations (including repayment of tenant leasehold or security deposits, and obligations related to loans or longterm or shortterm corporate bonds) and other activities. 15

16 The types and sources of leverage permitted and associated risks; JLF may raise funds through loans and issuance of investment corporation bonds. Associated risks are; There are risks of delinquency in payment of principal or interest, or insolvency with regard to investment corporation bonds due to deterioration of JLF s credit status or other reasons. There is no guarantee that monetary debt and issuance of investment corporation bonds can be made at a timing or on terms that JLF desires since the possibility and terms of monetary debt and issuance of investment corporation bonds are affected by JLF s economic credibility, interest rate environment and other factors. As a result, there is a possibility that JLF will not be able to purchase assets that it had planned to purchase, forced to sell assets that it had not planned to sell, or face cashflow issues. In cases where JLF makes loans or issues investment corporation bonds, financial covenants such as restricting monetary distribution to unitholders (including distribution in excess of earnings) may be imposed, collateral may be set to assets under management, or changes to articles of incorporation may be restricted. Such restrictions may affect the operation of JFL or may have a negative influence over the amount of monetary distribution, etc. to unitholders. All of JLF s debt as of the date of this document are unsecured; however, financial covenants have been imposed prescribing that a certain level of financial indicator figures must be maintained based on assets and liabilities, etc. The interest rate of loans and investment corporation bonds depends on the market trend at the time of the loan or issuance of the investment corporation bond, and will be influenced by subsequent market trends if the interest rate is variable. If the interest rate of the loan and investment corporation bond rise or if the amount of JLF s loan and investment corporation bond issuance increase, the amount of JLF s interest payment will increase. Such increase may have a negative impact on the amount of monetary distribution, etc. to unitholders. Any restrictions on leverage; The borrowing of funds will be limited to borrowings from qualified institutional investors that are prescribed in Article2, Paragraph 3, Item 1 of the Financial Instruments and Exchange Act (only institutional investors prescribed in Article 6715 of the Act on Special Measures concerning Taxation). The amount limit of the borrowings and investment corporation bond issuance shall be 1 trillion yen, respectively, and the sum of the two shall not exceed 1 trillion yen. Any restrictions on collateral and asset reuse arrangements; When borrowing funds or issuing investment corporation bonds, JLF may offer assets under management as collateral. Maximum level of leverage which the MLP is entitled to employ on behalf of the JLF; The upper limit of the percentage of the balance of borrowings and investment corporation bonds to JLF s total assets (hereinafter referred to as the Percentage of Liabilities ) will be 60%. However, the Percentage may temporarily exceed 60% due to acquisitions of new assets, etc. In order to secure the financial health and future margin for growth, JLF will maintain a lower Percentage of Liabilities and pursue conservative management for the time being. 16

17 Asset Management Report 1. Outline of Asset Management Operation (1) Changes in Key Indicators Fiscal period Management period The 17 th Period (from August 1, 2013 to January 31, 2014) The 18 th Period (from February 1, 2014 to July 31, 2014) The 19 th Period (from August 1, 2014 to January 31, ) The 20 th Period (from February 1, to July 31, ) The 21 st Period (from August 1, to January 31, 2016) Operating Revenue (Millions of yen) 6,645 6,972 9,416 7,074 7,544 of which real leasing business revenue (Millions of yen) 6,645 6,971 6,795 7,068 7,544 Operating Expenses (Millions of yen) 3,199 3,437 3,554 3,473 3,563 of which real leasing business expenses (Millions of yen) 2,544 2,758 2,833 2,776 2,850 Operating Income (Millions of yen) 3,446 3,534 5,862 3,601 3,991 Ordinary Income (Millions of yen) 3,021 3,108 5,456 3,210 3,549 Net Income (Millions of yen) 3,020 3,106 5,456 3,209 3,548 Total assets (Millions of yen) 193, , , , ,459 (Periodonperiod change) (%) (+12.5) (+3.7) (1.3) (+0.7) (+5.2) Net assets (Millions of yen) 116, , , , ,592 (Periodonperiod change) (%) (+16.9) (+0.1) (+2.0) (0.0) (+8.1) Unitholders capital (Millions of yen) 113, , , , ,823 The number of investment units outstanding Net Assets per Unit (Units) (Yen) 166, , , , , ,457 (Note 9) 140, , , ,127 Total Dividends (Millions of yen) 3,020 3,106 3,237 3,208 3,549 Dividends per Unit (Yen) 18,196 3,743 3,900 3,866 4,033 of which earnings Distribution per Unit (Yen) of which Distributions in excess of earnings per Unit (Yen) Ordinary Income to total assets (Annualized) (Note 1) (%) Net income to Net Assets (Annualized) (%) 18,196 3,743 3,900 3,866 4, (3.3) 1.6(3.2) 2.7(5.4) 1.6(3.3) 1.7(3.4) 2.8(5.5) 2.7(5.4) 4.6(9.2) 2.7(5.4) 2.9(5.7) Capital adequacy ratio (Note 3) (%) (Periodonperiod change) (%) (+2.3) (2.1) (+2.0) (0.5) (+1.6) Number of days under management (Days) Payout Ratio (Note 4) (%)

18 Number of properties held at end of period (Bldgs) Total leasable area at end of period (m 2 ) 974, ,015, , ,055, ,099, Number of tenants at end of period (Tenants) Occupancy rate at end of period (%) Depreciation and amortization (Millions of yen) 1,519 1,614 1,583 1,668 1,717 Capital expenditure (Millions of yen) NOI (Net Operating Income) from leasing business (Note 5) (Millions of yen) FFO (Funds From Operation) (Note 6) (Millions of yen) 5,642 5,839 5,627 5,992 6,420 4,562 4,733 7,121 4,909 5,274 FFO per unit (Note 7) (Yen) 27,484 5,703 8,580 5,915 5,993 (Note 1) Ordinary Income to Total assets = Ordinary income / {(Total assets at the beginning of the period + Total assets at the end of the period) / 2} x 100 (Figures are rounded off to the nearest one decimal place.) Net Income to Net assets = Net Income / {(Net assets at the beginning of the period + Net assets at the end of the period) / 2} x 100 (Figures are rounded off to the nearest one decimal place.) (Note 3) Capital adequacy ratio = Net assets at the end of the period / Total assets at the end of the period x 100 (Figures are rounded off to the nearest one decimal place.) (Note 4) Payout Ratio = Total Dividends / Net Income x 100 (Figures are rounded down to one decimal place.) (Note 5) NOI from leasing business = Real leasing business revenue Real leasing business expenses + Depreciation and amortization + Loss on retirement of noncurrent assets. (Note 6) FFO = Net Income + Depreciation and amortization + Loss on retirement of noncurrent assets (including extraordinary loss) (Note 7) FFO per Unit = FFO / The number of investment units outstanding (Figures are rounded off to the nearest integral number.) (Note 8) For amounts in units of millions of yen, figures are rounded down to the nearest million yen. (Note 9) JLF has conducted 5for1 investment unit split, as record date of January 31, 2014 and as effective date of February 1, For comparison purpose, figures of Net Assets per Unit above are calculated assuming the split has occurred at the beginning of the Period ended January 31, 2014 (the 17 th Period). (2) Status of Capital Increase, etc. Investment Units Issued and Outstanding and Changes of the Unitholders capital are as follows. Date Summary Total number of investment units issued Unitholders capital (Millions of yen) Change Balance Change Balance Remarks February 22, 2005 Private placement offering 1,000 1, (Note 1) May 6, 2005 June 1, 2005 February 8, 2006 March 8, 2006 August 31, 2007 February 23, 2010 March 25, 2010 August 30, 2010 Capital increase through public offering Capital increase through thirdparty allotment Capital increase through public offering Capital increase through thirdparty allotment Capital increase through public offering Capital increase through public offering Capital increase through thirdparty allotment Capital increase through public offering 55,700 56,700 29,562 30,062 2,800 59,500 1,486 31,548 (Note 3) 46, ,000 35,668 67,217 (Note 4) 2, ,800 2,147 69,365 (Note 5) 13, ,300 12,656 82,021 (Note 6) 8, ,800 5,123 87,145 (Note 7) , ,446 (Note 8) 16, ,300 9,689 97,136 (Note 9) 18

19 September 24, 2010 September 13,2013 October 2,2013 October 28,2013 Capital increase through thirdparty allotment Distribution in Excess of Earnings Capital increase through public offering Capital increase through thirdparty allotment , ,559 (Note 10) 148, ,095 (Note 11) 16, ,000 14, ,729 (Note 12) 2, ,000 1, ,559 (Note 13) February 1,2014 Investment Unit Split 664, , ,559 (Note 14) September 16, Capital increase through public offering 47, ,500 8, ,360 (Note 15) Capital increase through October 15, 2, , ,823 (Note 16) thirdparty allotment (Note 1) Upon establishment of JLF, investment units were issued at the price of 500,000 yen per unit. Investment units were newly issued at the price of 550,000 yen per unit (net proceeds of 530,750 yen) for new properties acquisition. (Note 3) Investment units were newly issued through thirdparty allotment at the price of 530,750 yen per unit for new properties acquisition. (Note 4) Investment units were newly issued at the price of 793,800 yen per unit (net proceeds of 767,070 yen) for new properties acquisition. (Note 5) Investment units were newly issued through thirdparty allotment at the price of 767,070 yen per unit for new properties acquisition. (Note 6) Investment units were newly issued at the price of 971,180 yen per unit (net proceeds of 937,486 yen) for new properties acquisition. (Note 7) Investment units were newly issued at the price of 624,680 yen per unit (net proceeds of 602,784 yen) for a new property acquisition. (Note 8) Investment units were newly issued through thirdparty allotment at the price of 602,784 yen per unit for partial repayment of bank loans. (Note 9) Investment units were newly issued at the price of 627,590 yen per unit (net proceeds of 605,592 yen) for a new property acquisition. (Note 10) Investment units were newly issued through thirdparty allotment at the price of 605,592 yen per unit for partial repayment of bank loans. (Note 11) Distribution in Excess of Earnings was resolved at the price of 3,138 yen per unit in order to level out the loss associated with OBR. (Note 12) Investment units were newly issued at the price of 947,700 yen per unit (net proceeds of 914,652 yen) for new properties acquisition and partial repayment of bank loans. (Note 13) Investment units were newly issued through thirdparty allotment at the price of 914,652 yen per unit for partial repayment of bank loans. (Note 14) JLF has implemented a 5 for 1 investment unit split. (Note 15) Investment units were newly issued at the price of 191,782 yen per unit (net proceeds of 185,290 yen) for partial new properties acquisition and repayment of borrowings with respect to the acquisition of new properties. (Note 16) Investment units were newly issued through thirdparty allotment at the price of 185,290 yen per unit for financing future acquisition of specified assets, partial repayment of the borrowings or partial redemption of the investment corporation bond. Changes in market price of investment securities The market price of JLF s investment securities listed on the Tokyo Stock Exchange REIT Market changed during each fiscal period as follows: Fiscal period The 17 th Period The 18 th Period The 19 th Period The 20 th Period The 21 st Period For the six months ended January 31, 2014 July 31, 2014 January 31, July 31, January 31, 2016 Highest 1,150,000 yen 245,900 yen 278,600 yen 261,900 yen 241,300 yen Lowest 861,000 yen 212,100 yen 231,100 yen 227,100 yen 193,300 yen 19

20 (3) Distributions, etc. Concerning Taxation; Act No. 26 of 1957; including revisions enforced thereafter) (hereafter, the Special Taxation Measures Act ) that allows the maximum amount of distribution of earnings to be treated as a taxdeductible expense, JLF decided to distribute to unitholders the full amount of net income excluding fractions below one yen of the amount of dividends per investment unit. As a result, JLF s dividend per investment unit was 4,033 yen. Fiscal period Total amount of unappropriated retained earnings Accumulated earnings Total amount of cash distributions Thousands of yen Thousands of yen Thousands of yen The 17 th Period (from August 1, 2013 to January 31, 2014) The 18 th Period (from February 1, 2014 to July 31, 2014) The 19 th Period (from August 1, 2014 to January 31, ) The 20 th Period (from February 1, to July 31, ) The 21 st Period (from August 1, to January 31, 2016) 3,020,567 3,107,029 5,456,363 3,209,318 3,549, ,219, ,020,536 3,106,690 3,237,000 3,208,780 3,549,040 Dividends per unit Yen 18,196 3,743 3,900 3,866 4,033 of which total amount of earnings distributions Earnings distribution per unit of which total amount of capital refunds Thousands of yen 3,020,536 3,106,690 3,237,000 3,208,780 3,549,040 Yen 18,196 3,743 3,900 3,866 4,033 Thousands of yen Capital refunds per unit Yen Portion of total amount of capital refunds that is total amount of distributions from reserve for adjustment of temporary differences, etc. (Portion of capital refunds per unit that is distribution from reserve for adjustment of temporary differences, etc. per unit ) Portion of total amount of capital refunds that is total amount of distributions from distribution of reduction in capital, etc. under the tax law (Portion of capital refunds per units that is distribution from distribution of reduction in capital, etc. under the tax law) Thousands of yen Yen Thousands of yen (4) Significant Subsequent Events Not applicable to the 21 st Period (from August 1, to January 31, 2016). Yen 20

21 [Reference Information] < Issuance of Investment Bond > JLF issued the following investment corporation bond after the end of the fiscal period and before the date of this Financial Report. Name of the bond Japan Fund, Inc. #4th Unsecured Bond (private offering to qualified institutional investors) Total amount of the bond issue 1.7 billion yen Coupon 0.535% Subscription date February 4, 2016 Payment date February 8, 2016 Collateral Redemption method and date Use of proceeds There is no secured mortgage or guarantee on the bond. There are no assets reserved as security for the bond. The entire amount will be redeemed on February 8, The bonds may be repurchased at any time upon notifying the investors by document prior to the repurchase. In case JLF repurchases, JLF will pay accrued interest as well as break funding cost (if any) to the investors on the date of repurchase. Repayment of an existing longterm loan 21

22 2. Outline of JLF (1) Status of Unitholders Capital The 17 th Period The 18 th Period The 19 th Period The 20 th Period The 21 st Period Fiscal period (as of January 31, 2014) (as of July 31, 2014) (as of January 31, ) (as of July 31, ) (as of January 31, 2016) Total number of investment units authorized (Units) 2,000,000 10,000,000 10,000,000 10,000,000 10,000,000 Total number of investment units issued (Units) 166, , , , ,000 Unitholders capital (Millions of yen) 113, , , , ,823 Number of unitholders (Persons) 6,721 7,266 7,804 8,382 9,626 (2) Matters Concerning Investment Units Major unitholders as of January 31, 2016 are as follows: Name Japan Trustee Services Bank, Ltd. (Trust Account) The Master Trust Bank of Japan, Ltd. (Trust Account) Trust & Custody Services Bank, Ltd. (Securities Investment Trust Account) The Nomura Trust and Banking Co., Ltd. (Investment Trust Account) Address Number of investment units owned (Units) Portion in the total number of investment units issued (%) 1811 Harumi, Chuoku, Tokyo 182, Hamamatsucho, Minatoku, Tokyo 87, Harumi Island Triton Square Office Tower Z, 1812 Harumi, Chuoku, Tokyo 66, Otemachi, Chiyodaku, Tokyo 36, The Chugoku Bank, Ltd , Marunouchi, Kitaku, Okayama 17, Metlife Inc. 413 Taihei, Sumidaku, Tokyo 17, The Fuji Fire and Marine Insurance Company, Limited Trust & Custody Services Bank, Ltd.(Cash in Trust Taxable Account) STATE STREET BANKWEST PENSION FUND CLIENTSEXEMPT State Street Bank And Trust Company Minamisenba, Chuoku, Osaka 14, Harumi Island Triton Square Office Tower Z, 1812 Harumi, Chuoku, Tokyo 1776 HERITAGE DRIVE, NORTH QUINCY, MA 02171, U. S. A. P.O.BOX 351 BOSTON MASSACHUSETTS U.S.A. 12, , , Total 454, (Note ) The Portion in the total number of investment units issued is indicated with figures rounded down to two decimal places. 22

23 (3) Matters Concerning Officers, etc. A. The executive director, supervisory directors and accounting auditor in The 21 st Period are as follows: Total compensation or Title Name Major concurrent posts outside JLF fee for The 21 st Period Executive Director Takayuki President, Mitsui & Co., Partners Ltd. (Note 1) Kawashima President and CEO, Daiichi Appraisal Co., Ltd. Supervisory Director Takachiyo Suto President and CEO, Daiichi Kousan Co., Ltd. (Note 1) Chairman and CEO, Appraisal Firm A Square Ltd. 1,800 Supervisory Director Lawyer, Mahoroba Law Office Toshima Aaraki (Note 1) Corporate Auditor, SAZABY LEAGUE, Ltd. 1,800 Supervisory Director (Note 1) Tetsuya Azuma Azuma Certified Public Accountant Office Certified public accountant and licensed tax accountant Representative Liquidator, Melco Metecs Co., Ltd. Accounting auditor Ernst & Young (Note 3) (Note 4) ShinNihon LLC 15,700 (Note 1) The executive director and supervisory directors do not own investment units of JLF under their own or other names. The supervisory directors might serve as directors or auditors of entities other than the above, but there are no mutual business interests between JLF and such entities, including those above. Takayuki Kawashima is to leave on June 21, 2016, and Keita Tanahashi is to take office on the same day. (Note 3) The audit contract with an accounting auditor is renewed every fiscal period. The renewal requires deliberation about reappointment or nonreappointment at a meeting of the Board of Directors. (Note 4) Fees to accounting audit include fees associated with audit of English financial statement and comfort letter. Fee on comfort letter were 3,200 thousand yen. B. Imposition of regulatory penalty (suspension) on Accounting Auditor On December 22,, the Financial Services Agency suspended the Accounting Auditor, Ernst & Young ShinNihon LLC, from taking new contracts for three months (from January 1 to March 31, 2016). (4) Asset Management Company, Custodian and Administrative agent Asset management company, custodian and administrative agent as of January 31, 2016 are as follows: Business Asset management company Custodian of assets Administrative agent Mitsui & Co., Partners Ltd. Trust Bank, Limited Trust Bank, Limited Name 1,800 23

24 3. Investment Assets of JLF (1) Asset Composition of JLF Type of assets Real Use of assets Region (Note 1) The 21 st Period (as of January 31, 2016) Total amount owned (Millions of yen) Percentage to total assets (%) (Note 3) The 20 th Period (as of July 31, ) Total amount owned (Millions of yen) Percentage to total assets (%) (Note 3) Tokyo Metropolitan Area 7, , Kinki/Chubu/Kyushu Areas 6, , Other Areas Real in trust Subtotal 13, , Tokyo Metropolitan Area 148, , Kinki/Chubu/Kyushu Areas 27, , Other Areas 9, , Subtotal 184, , Deposits and other assets (Note 4) 10, , Total assets 209, , (Note 1) For region, please refer to "Area Classification" below. The total amount owned is based on the figures posted on the Balance Sheets as of the end of the fiscal period (real and real in trust are presented in book values after depreciation), and figures below one million yen have been omitted. (Note 3) Figures are rounded off to the first decimal place. (Note 4) Deposits and other assets include; deposit in trust assets of 3,745 million yen for the 21 st Period and of 3,477 million yen for the 20 th Period, Investment securities of 2 million yen for the 21 st Period and of 77 million yen for the 20 th Period. <Area Classification> Area classification Tokyo Metropolitan Area Kinki area Chubu area Kyushu area Other areas Bay areas Inland areas Major areas Shinagawa (Oi, etc.), Koto (Shinkiba, Shiomi, Tatsumi, etc.), Oota (Haneda area, etc.), Yokohama, Kawasaki, Urayasu and Funabashi Around national route No.16, Tama district of Tokyo, Southern Saitama, Eastern Kanagawa, and Northwestern Chiba Bay areas along the Osaka Bay and adjacent to consumption areas in and around Osaka, between Osaka and Kobe, between Kyoto and Osaka, as well as along the Kinki Expressway Nagoya Port area, Komaki, Kasugai and Toyota Fukuoka Areas where locational advantage can be attained, e.g. close to consumption areas 24

25 (2) Major Assets Held The outline of major assets held by JLF is as follows: Name of real, etc. Book value (Millions of yen) (Note 1) Total leasable area (m 2 ) Leased area (m 2 ) (Note 3) Occupancy rate (%) (Note 4) Portion of real leasing business revenue (%) (Note 4) Funabashi Center 7,329 29, , (Note 5) Urayasu Center 2,806 9, , (Note 5) Hiratsuka Center 1,346 11, , (Note 5) Shinkiba Center 2,264 10, , (Note 5) Urayasu Chidori Center Funabashi Nishiura Center 5,235 31, , (Note 5) 4,527 35, , Kawasaki Center 9,915 41, , (Note 5) Narashino Center 1,517 2, , Yachiyo Center 7,995 56, , (Note 5) Yokohama Fukuura Center 8,485 35, , (Note 5) Yachiyo Center II 4,385 32, , Urayasu Chidori Center II 1,521 6, , (Note 5) Ichikawa Center 4,334 18, , (Note 5) Shinonome Center (Note 6) Narashino Center II (Note 6) Ichikawa Center II (Note 6) Souka Center (Note 6) 11,465 16, , ,942 43, , (Note 5) 16,282 66, , (Note 5) 5,927 21, , (Note 5) Tatsumi Center 8,742 29, , (Note 5) Kashiwa Center 3,550 20, , (Note 5) Musashimurayama Center Kashiwa Center II (land) ShinKoyasu Center (Note 6) 8,347 40, , (Note 5) 2,526 54, , (Note 5) 9,504 29, , (Note 5) Misato Center 3,806 19, , (Note 5) Sagamihara Center 8,010 44, , (Note 5) Chiba Kita Center 1,494 14, , (Note 5) Chiba Kita Center II 4,619 25, , (Note 5) Urayasu Chidori Center III 1,063 5, , (Note 5) Zama Center 1,743 9, , (Note 5) Primary use 25

26 Name of real, etc. Book value (Millions of yen) (Note 1) Total leasable area (m 2 ) Leased area (m 2 ) (Note 3) Occupancy rate (%) (Note 4) Portion of real leasing business revenue (%) (Note 4) Daito Center 9,131 92, , (Note 5) Osaka Fukuzaki Center Kiyosu Center (land) (Note 7) 3,479 23, , (Note 5) Kadoma Center 1,086 7, , (Note 5) Komaki Center 1,956 9, , (Note 5) Komaki Center II 1,795 10, ,708.4 (Note 5) Fukuoka Hakozaki Futo Center 2,781 24, , (Note 5) Tajimi Center 9,215 75, , (Note 5) Fukuoka Kashiihama Center 2,709 21, , (Note 5) Kasugai Center (land) , , (Note 5) Maebashi Center 1,024 3, , Hanyu Center 1,458 3, , Saitama Kisai Center 3,474 24, , (Note 5) Kazo Center 3,327 25, , (Note 5) Total 198,743 1,099, ,096, Primary use (Note 1) The book value is indicated with figures rounded down to the nearest million yen. The total leasable area is the registered floor area less any area of space not considered for rent. With regard to items for which a more accurate leasable area can be confirmed based on the building floor plan attached to the lease contract, the area recognized to be leasable is indicated as per such floor plan. For Kashiwa Center II (land) and Kasugai Center (land) the leasable area of land indicated in the lease contract is provided. (Note 3) The leased area represents the total area as part of the total leasable area of the area of the building (or land) indicated in the lease contract of each piece of real, etc. It is possible in each lease contract that the portion not included in the leasable area is part of the area for rent concerning the building provided in the lease contract. (Note 4) The occupancy rate and the portion of real leasing business revenue are indicated with figures rounded off to the nearest one decimal place. (Note 5) Not disclosed as the tenant did not agree to disclosure. (Note 6) Figures for coownership are indicated. Shinonome Center: 47%, Narashino Center II: 90%, Ichikawa Center II: 90% Souka Center: 50%, ShinKoyasu Center: 51% (Note 7) As the lease agreement with the tenant of the land expired on November 30,, JLF has launched the redevelopment project to construct a new building. 26

27 (3) Details of Properties [Details of real Portfolio Properties] The outline of portfolio properties held as of January 31, 2016 is as follows: Name of real, etc. Funabashi Center Urayasu Center Hiratsuka Center Shinkiba Center Urayasu Chidori Center Funabashi Nishiura Center Kawasaki Center Narashino Center Yachiyo Center Yokohama Fukuura Center Yachiyo Center II Urayasu Chidori Center II Location 332 Hamacho, Funabashi, Chiba 79 Minato, Urayasu, Chiba 14 Nagatoro, Hiratsuka, Kanagawa 252 Shinkiba, Kotoku, Tokyo 122 Chidori, Urayasu, Chiba 341 Nishiura, Funabashi, Chiba 2321 Sakuramoto, Kawasaki, Kawasaki, Kanagawa 322 Akanehama, Narashino, Chiba Kamikouya, Yachiyo, Chiba 231 Fukuura, Kanazawaku, Yokohama, Kanagawa 20391, Kamikouya, Yachiyo, Chiba Type of ownership Book value (Millions of yen) Appraised value at end of period (Note) (Millions of yen) 7,329 7,020 2,806 4,860 1,346 1,830 2,264 3,520 5,235 8,560 4,527 7,950 9,915 11,700 1,517 2,290 7,995 11,300 8,485 10,900 4,385 7, Chidori, Urayasu, Chiba Real 1,521 1,800 Ichikawa Center 1836 Tajiri, Ichikawa, Chiba Real 4,334 5,390 Shinonome Center Narashino Center II Ichikawa Center II Souka Center Tatsumi Center Kashiwa Center Shinonome, Kotoku, Tokyo 363 Akanehama, Narashino, Chiba Takahamamachi 1, Ichikawa, Chiba 1639, Aoyagi, Souka, Saitama 385, Tatsumi, Kotoku, Tokyo 6671 Oaota, Kashiwa, Chiba 11,465 14,400 6,942 9,580 16,282 22,400 5,927 7,940 8,742 11,400 3,550 4,530 27

28 Name of real, etc. Musashimurayama Center Kashiwa Center II (land) ShinKoyasu Center Misato Center Sagamihara Center Chiba Kita Center Chiba Kita Center II Urayasu Chidori Center III Zama Center Daito Center Osaka Fukuzaki Center Kiyosu Center (land) Kadoma Center Komaki Center Komaki Center II Fukuoka Hakozaki Futo Center Tajimi Center Fukuoka Kashiihama Center Kasugai Center (land) Maebashi Center Hanyu Center Location 1261 Inadaira, Musashimurayama, Tokyo 18231, Fujigaya, Kashiwa, Chiba 312 Moriyacho, Kanagawaku, Yokohama, Kanagawa 4801 Aza Fukata, Nizo, Misato, Saitama 591 NishiHashimoto, Midoriku, Sagamihara, Kanagawa 1004 Yokodocho, Hanamigawaku, Chiba, Chiba 551 Naganumacho, Inageku, Chiba, Chiba 1519 Chidori, Urayasu, Chiba 1143 Komatsubara, Zama, Kanagawa 211, Midorigaoka, Daito, Osaka 2136 Fukuzaki, Minatoku, Osaka, Osaka 92 Haruhigogashima, Kiyosu, Aichi 97 Tonoshimacho, Kadoma, Osaka 7901 Nagata, Shimozue, Komaki, Aichi 5481, Kakinokijima, Nishinoshima Komaki, Aichi 426 Hakozaki Futo, Higashiku, Fukuoka, Fukuoka Asahigaoka, Tajimi, Gifu 2110 Kashiihama Futo, Higashiku, Fukuoka, Fukuoka Type of ownership Book value (Millions of yen) Appraised value at end of period (Note) (Millions of yen) 8,347 9,890 2,526 2,540 9,504 11,400 3,806 4,520 8,010 9,550 Real 1,494 1,850 4,619 5,170 1,063 1,390 1,743 1,940 9,131 18,100 3,479 6,080 Real Real 1,086 1,600 Real 1,956 1,940 Real 1,795 1,740 2,781 3,390 9,215 11,400 2,709 3, Takamoridai, Kasugai, Aichi Real 877 1, Kamimasudamachi, Maebashi, Gunma Kawasaki, Hanyu, Saitama 1,024 1,390 1,458 1,930 28

29 Name of real, etc. Saitama Kisai Center Kazo Center Location 8022 Nishinoya, Kazo, Saitama 121 Minami Shinozaki, Kazo, Saitama Type of ownership Book value (Millions of yen) Appraised value at end of period (Note) (Millions of yen) 3,474 4,670 3,327 4,540 Total 198, ,762 (Note) The appraised value at end of period is based on the value appraised by a real appraiser as of the end of the fiscal period in accordance with the method and criteria of asset appraisal provided for by the Articles of Incorporation of JLF and the regulations specified by The Investment Trusts Association, Japan. The status of leasing of real properties, etc. held by JLF is as follows: The 21 st Period (from August 1, to January 31, 2016) Real Total Occupancy leasing Portion of Name of real, number of rate business real etc. tenants [as of end revenue leasing [as of end of period] [during the business of period] (%) period] revenue (%) (tenants) (Note 1) (Millions of (Note 1) yen) Funabashi Center Urayasu Center Hiratsuka Center Shinkiba Center Urayasu Chidori Center Funabashi Nishiura Center Kawasaki Center Narashino Center Yachiyo Center Yokohama Fukuura Center Yachiyo Center II Urayasu Chidori Center II Ichikawa Center Shinonome Center Narashino Center II Ichikawa Center II Total number of tenants [as of end of period] (tenants) The 20 th Period (from February 1, to July 31, ) Occupancy rate [as of end of period] (%) (Note 1) Real leasing business revenue [during the period] (Millions of yen) Portion of real leasing business revenue (%) (Note 1) Souka Center

30 Name of real, etc. Tatsumi Center Kashiwa Center Musashimurayama Center Kashiwa Center II (land) ShinKoyasu Center Total number of tenants [as of end of period] (tenants) The 21 st Period (from August 1, to January 31, 2016) Occupancy rate [as of end of period] (%) (Note 1) Misato Center Sagamihara Center Chiba Kita Center Chiba Kita Center II Urayasu Chidori Center III Zama Center Daito Center Osaka Fukuzaki Center Kiyosu Center (land) (Note 3) Kadoma Center Komaki Center Komaki Center II Fukuoka Hakozaki Futo Center Real leasing business revenue [during the period] (Millions of yen) Portion of real leasing business revenue (%) (Note 1) Total number of tenants [as of end of period] (tenants) The 20 th Period (from February 1, to July 31, ) Occupancy rate [as of end of period] (%) (Note 1) Real leasing business revenue [during the period] (Millions of yen) Portion of real leasing business revenue (%) (Note 1) Tajimi Center Fukuoka Kashiihama Center Kasugai Center (land) Maebashi Center Hanyu Center Saitama Kisai Center Kazo Center Total , , (Note 1) The occupancy rate and the portion of real leasing business revenue are indicated with figures rounded off to the nearest one decimal place. 30

31 Not disclosed as the tenant did not agreeccto disclosure. (Note 3) As the lease agreement with the tenant of the land expired on November 30,, JLF has launched the redevelopment project to construct a new building. [Statements of Renewable Energy Power Generation Facilities, etc.] Not applicable. [Statements of Rights to Operate a Public Facility, etc.] Not applicable. [Details of securities Portfolio Property] The outline of securities portfolio properties held as of January 31, 2016 is as follows: Name Type Book Value Market Value Unit price Amount Unit price Amount Silent Partnership Equity Interests in Fund III Limited Liability Company as the Proprietor (Note 1) Silent Partnership Equity Interests Unrealized Gain/Loss (Thousand s of yen) 2,634 2,634 Remarks (Note 1) Fund III Limited Liability Company had the following investments. However, as JLF exercised its preferential negotiation rights to acquire trust beneficiary rights or real, JLF acquired all the following assets in the fiscal period ended January 31, JLF s interest is 4.34% of the entire investment in the silent partnership. Silent partnership investment with Vega Limited Liability Company as a proprietor / Fund III : Urayasu Center (trust beneficiary ) Preferred investment in TMK Sirius / Fund III : Zama Center (real ) Silent partnership investment with Spica Limited Liability Company as a proprietor / Fund III : Chiba Kita Center (trust beneficiary ) The book value is used as the appraisal value. (4) Outstanding Contract Amounts, etc. and Current Prices of Specified Transactions The Outstanding contract amounts, etc. and current prices of specified transactions as of January 31, 2016 is as follows: Division Overthecounter (Note 1) Type of derivative transactions Interest rate swap transactions Receive variable, pay fixed Contract amount, etc. (Note 1) Amount that exceeds one year Market value 7,500,000 7,500,000 Total 7,500,000 7,500,000 Contract amount, etc. is measured at the amount calculated by the counter party to the interest rate swaps contracts based on the prevailing market interest rates and other assumptions. Because the interest rate swap transactions qualify special treatment stipulated in the financial instruments accounting standard, market value of the swaps are omitted. (5) Status of Other Assets rights with real, etc. as trust assets are all included in the table in (3) Details of Portfolio Properties above. There are no other significant investment assets that were specified assets as of January 31, (6) Status of Asset Holding by Country and Region Not applicable for countries and regions other than Japan. 31

32 4. Capital Expenditure for Properties (1) Scheduled Capital Expenditure Major scheduled capital expenditures associated with the planned repair work for real, etc. owned by JLF are listed below. The following estimated construction costs include those accounted for as expenses. Name of real, etc. (Location) Urayasu Chidori Center (Urayasu, Chiba) Narashino Center II (Narashino, Chiba) Funabashi Nishiura Center (Funabashi, Chiba) Purpose Scheduled period Total amount Estimated construction cost (Millions of yen) (Note) Payment for the period Total amount paid Exterior wall renewal April Renewal of exterior asphalt July Elevator renewal March Other real, etc. 91 (Note) Figures are rounded down to the nearest million yen. Total 171 (2)Capital Expenditure during the Fiscal Period The following provides a summary of major construction work applicable to capital expenditure performed during the fiscal period in connection with the real, etc. owned by JLF. Capital expenditure for the 21 st Period totals 56 million yen. In addition, repair expenses of 88 million yen are classified under operating expenses for the fiscal period. Name of real, etc. (Location) Saitama Kisai Center (Kazo, Saitama) Daito Center (Daito, Osaka) Yachiyo Center II (Yachiyo, Chiba) Purpose Period Amount of expenditure (Millions of yen) (Note) Exterior wall renewal October 6 Installment of lighting equipment December 6 Renewal of elevator January Other real, etc. 36 Total 56 (Note) Figures are rounded down to the nearest million yen. (3) Reserve for LongTerm Repair Plan (Reserve for Repairs) Not applicable. 32

33 5. Expenses and Liabilities (1) Expenses Related to Asset Management, etc. Item The 21 st Period (from August 1, to January 31, 2016) The 20 th Period (from February 1, to July 31, ) (a) Asset management fee 603, ,025 of which Management Fee I 410, ,253 Management Fee II 192, ,772 (b) Asset custody fee 20,039 19,372 (c) Administrative service fees 31,871 30,506 (d) Directors compensations 5,400 5,400 (e) Other expenses 52,347 60,927 (Note) Total 712, ,232 In addition to the above, there are asset management fees which were capitalized as acquisition costs; 61,936 thousand yen in the 21 st Period and 62,034 thousand yen in the 20 th Period. (2) Status of Borrowings The status of borrowings from each financial institution as of January 31, 2016 is as follows: Balance at Balance at beginning of end of Average Borrowing Repayment Classification (Lender) period period interest rate date due date (Millions of (Millions of (Note 1) yen) yen) Current portion of longterm loans payable Longterm loans payable The Bank of TokyoMitsubishi UFJ, Ltd. Mitsui Sumitomo Insurance Company, Limited February 7, 2011 September 30, ,700 1, % 1,000 1, % Subtotal 2,700 2,700 The Bank of TokyoMitsubishi UFJ, Ltd. The Bank of TokyoMitsubishi UFJ, Ltd. Mitsubishi UFJ Trust and Banking Trust Bank, Limited Mizuho Bank, Ltd. Banking Mitsubishi UFJ Trust and Banking Trust Bank, Limited February 27, 2012 February 27, 2012 February 27, 2012 March 26, 2012 March 26, 2012 March 26, 2012 March 26, 2012 August 31, ,000 2, % 2,500 2, % 2,000 2, % 3,500 3, % 1,000 1, % 1,000 1, % 1,000 1, % 2,000 2, % February 8, 2016 September 30, 2016 February 27, 2019 February 27, 2018 February 27, 2017 March 26, 2019 March 26, 2019 March 27, 2017 March 27, 2017 August 31, 2022 Use Remarks Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed 33

34 Classification (Lender) Longterm loans payable Mitsubishi UFJ Trust and Banking The Bank of TokyoMitsubishi UFJ, Ltd. Banking Mitsubishi UFJ Trust and Banking Resona Bank, Ltd. Mizuho Bank, Ltd. Banking Mitsubishi UFJ Trust and Banking Nippon Life Insurance Company Development Bank of Japan Inc. Development Bank of Japan Inc. Mizuho Bank, Ltd. Mitsubishi UFJ Trust and Banking Borrowing date August 31, 2012 August 31, 2012 August 31, 2012 August 31, 2012 August 31, 2012 September 18, 2012 February 28, 2013 February 28, 2013 February 28, 2013 March 11, 2013 March 11, 2013 December 27, 2013 Balance at beginning of period (Millions of yen) Balance at end of period (Millions of yen) Average interest rate (Note 1) 2,000 2, % 2,000 2, % 1,000 1, % 1,000 1, % 1,000 1, % 4,000 4, % 2,000 2, % 1,000 1, % % 2,000 2, % 2,000 2, % 1,500 1,500 1,000 1,000 The 77 Bank, Ltd Banking Trust Bank, Limited Development Bank of Japan Inc. Nippon Life Insurance Company Mitsubishi UFJ Trust and Banking Banking Banking December 27, 2013 December 27, 2013 February 25, 2014 February 25, ,000 3,000 1,500 1,500 1,000 1, % % 2,000 2, % 2,000 2, % 3,000 3, % Repayment due date August 31, 2022 August 30, 2019 August 31, 2017 August 31, 2017 August 31, 2017 August 31, 2020 February 28, 2023 February 28, 2023 February 28, 2023 February 28, 2022 February 29, 2024 December 25, 2020 December 27, 2023 August 31, 2022 February 28, 2022 February 28, 2023 Use Remarks Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed 34

35 Classification (Lender) Longterm loans payable Banking Nippon Life Insurance Company Trust Bank, Limited Banking Banking Shinkin Central Bank The Norinchukin Bank Trust Bank, Limited The Bank of Fukuoka Mizuho Trust & Banking Co.,Ltd. Borrowing date March 24, 2014 March 24, 2014 March 31, March 31, December 4, December 4, December 4, December 4, December 4, December 4, Balance at beginning of period (Millions of yen) Balance at end of period (Millions of yen) Average interest rate (Note 1) 1,000 1, % 2,500 2, % 1,000 1, % 1,000 1, % 2, % % 1, % 2, % % 2, % Subtotal 55,000 63,000 Total 57,700 65,700 Repayment due date February 28, 2017 February 29, 2024 March 29, 2024 March 31, 2025 November 29, 2019 November 30, 2022 November 30, 2022 November 30, 2023 November 28, 2025 November 28, 2025 Use Remarks Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed (Note 1) The average interest rate indicates a weighted average of interest rates for the period. Regarding the loans hedged by interest rate swaps to avoid interest rate fluctuation risk, the average interest rate indicates a weighted average of interest rates adjusted by considering the effect of the interest rate swaps. All the funds were used for the purchase of real properties or trust beneficiary rights of real, repayment of borrowings. (3) Status of Investment Bonds The status of investment corporation bonds issued as of January 31, 2016 is as follows: Balance at Balance at beginning of end of Interest Maturity Issue Issue date period period rate date (Millions of (Millions of yen) yen) First Series Unsecured Investment Bond Second Series Unsecured Investment Bond Third Series Unsecured Investment Bond November 29, 2010 December 27, 2013 March 12, , % 3,000 3, % 3,000 3, % Total 14,000 6,000 November 27, December 26, 2025 March 12, 2029 Repayment method Lumpsum payment on the maturity date Lumpsum payment on the maturity date Lumpsum payment on the maturity date Purpose Note (Note 1) (Note 1) (Note 1) (Note 1) The funds are used for the repayment of loans payable. This investment corporation bond is equipped with the same rank rider limited among certain investment corporation bonds. 35

36 (4) Status of ShortTerm Investment Bonds Not applicable. (5) Status of Investment unit warrants Not applicable. 6. Trading during the 21 st Period (1) Status, etc. of Real Estate Properties and AssetBacked Securities Trading Type of asset Real Name of real, etc. Chiba Kita Center Chiba Kita Center II Urayasu Chidori Center III Zama Center Date Acquisition September 4, September 11, September 11, October 1, Price (Millions of yen) (Note) Date Price (Millions of yen) (Note) Transfer Book value (Millions of yen) Sales gain (loss) (Millions of yen) 1,459 4,608 1,053 1,728 Total 8,848 (Note) The acquisition price and transfer price do not include various costs (intermediary fees, taxes and dues, etc.) required for acquisition or transfer of the property, and indicate the purchase and sale price of the property as described in the sales contract, etc. (2) Status, etc. of Other Assets Trading Not applicable. (3) Valuation of Specified Assets, etc. A. Real Estate Properties Acquisition /Transfer Acquisition Acquisition Acquisition Acquisition Type of asset Real Trust beneficiary Trust beneficiary Trust beneficiary Name of real, etc. Chiba Kita Center Chiba Kita Center II Urayasu Chidori Center III Zama Center Transaction date September 4, September 11, September 11, October 1, Acquisition or transfer price (Note 1) (Thousands of yen) Real appraisal value (Thousands of yen) 1,459,000 1,770,000 4,608,000 5,070,000 1,053,000 1,360,000 1,728,000 1,910,000 Real appraisal institution The Tanizawa Sōgō Appraisal Co., Ltd. The Tanizawa Sōgō Appraisal Co., Ltd. DAIWA REAL ESTATE APPRAISAL CO.,LTD. Japan Real Estate Institute Date of price July 31, July 31, July 31, July 31, (Note 1) The acquisition or transfer price does not include various costs (brokerage commissions, etc.) required for acquisition or transfer of the property, and indicates the purchase and sale price of the property as described in the sales contract, etc. The relevant appraisal was implemented in accordance with the provisions of Part of Particulars, Chapter 3 Appraisal of Prices of SecuritizationProperties of the Real Estate Appraisal Standards issued by the Ministry of Land, Infrastructure, Transport and Tourism. 36

37 B. Others The Act on Investment Trusts and investment s (AITIC) Article 201 Paragraph 2 requires valuation for some of the transactions conducted by JLF. For those valuations, JLF entrusted to Ernst & Young ShinNihon LLC other than the above mentioned transactions. During the period, 4 interest rate swap transactions qualify the AITIC requirement and JLF received valuation report from Ernst & Young ShinNihon LLC. (4) Status of Transactions with Interested Parties, etc. and Major Shareholders A. Transactions Classification Buy Transaction amount Sell Total amount 8,848,000 thousand yen thousand yen Breakdown of Transactions with interested parties, etc. and major shareholders Spika Limited Liability Company 4,608,000thousand yen (52.1%) thousand yen (%) Vega Limited Liability Company 1,053,000 thousand yen (11.9%) thousand yen (%) TMK Sirius 1,728,000 thousand yen (19.5%) thousand yen (%) Total amount 7,389,000 thousand yen (83.5%) thousand yen (%) (Note 1) Interested parties, etc. are comprised of interested parties, etc. of an asset management company with which JLF has an asset management consignment contract as defined in Article 123 of the Order for Enforcement of the Investment Trust Act. JLF got refunded 75,229 thousand yen from Silent Partnership Equity Interests in Fund III Limited Liability Company as the business operator at this moment. B. Fees, etc. Paid to Interested Parties, etc. and Major Shareholders Details of transactions with interested parties, etc. Total and major shareholders Portion Classification amount Amount paid (B) / (A) paid (A) Name of party to which fees were paid (B) Insurance expenses 23,713 Mitsuibussan Insurance Co., Ltd. 22, % Asset custody fee 20,039 Trust Bank, Limited 20, % Administrative service fees 31,871 Trust Bank, Limited 31,87% Other expenses 35,193 Trust Bank, Limited 15, % (Note) Interested parties, etc. are comprised of interested parties, etc. of an asset management company with which JLF has an asset management consignment contract as defined in Article 123 of the Order for Enforcement of the Investment Trust Act. (5) Status, etc. of Transactions with the Asset Management Company Pertaining to Its Business Other than Asset Management As of January 31, 2016, MLP engages in leasing of houses and buildings as bybusiness in accordance with Building Lots and Buildings Transaction Business Act Article 2 Paragraph 1, and conducts leasing of some of the properties JLF owns in the form of trust beneficially. However, MLP sees the leasing is a part of the Asset Management Agreement and the leasing fees are included to the asset management fees. Therefore, MLP does not receive the leasing fees from JLF as additional fees. 37

38 7. Financial Information (1) Financial Position and Operating Results For the financial position and operating results, please refer to the accompanying documents: Balance Sheets, Statements of Income, Statements of Unitholders Equity, Notes to Financial Statements and Statements of Cash Distribution. (2) Changes in Calculation Method for Depreciation Not applicable. (3) Changes in Valuation Method of Real Estate Properties, etc. Not applicable. (4) Status, etc. of Beneficiary Certificates of Investment Trusts Established by JLF Not applicable. 8. Other Information (1) Notice Major contracts approved by the Board of Directors of JLF during the 21 st Period are as follows; Date of Approval Items Summary September 9, November 25, January 28,2016 Underwriting New Investment Unit Issuance Conclusion of Memorandum of Amendment on Agreement for Administration of Unitholder Registry and Specified Accounts Contracts Associated with New Investment Bond Issuance (2) Disclosure relating to overseas real investment corporation Not applicable. (3) Disclosure relating to property held by overseas real investment corporation Not applicable. Regarding new investment unit issuance approved by the Board on September 1,, JLF contracted with SMBC Nikko Securities Inc., Nomura Securities Co., Ltd. and UBS Securities Japan Co., Ltd. on underwriting new investment unit issuance With respect to the recent enforcement of the Act on the Use of Numbers to Identify a Specific Individual in the Administrative Procedure (Act No, 27 of 2013), JLF concluded a Memorandum of Amendment on Agreement for Administration of Unitholder Registry Agreement and Specified Accounts with Trust Bank, Limited to add administration relating to the acquisition, use and management of personal numbers and corporate numbers. With respect to the issuance of Japan Fund Inc. #4th Investment Bond (private offering to qualified institutional investors), JLF decided to entrust administration relating to the Bond to DBJ Securities Co., Ltd. (4) Others For the purpose of this report, amounts that are below one unit are rounded down to one unit and percentages are rounded off to the nearest unit unless otherwise specified. 38

39 39

40 Financial Statements Balance Sheet The 21 st Period (as of January 31, 2016) The 20 th Period (as of July 31, ) Assets Current assets Cash and deposits 6,297,144 3,764,732 Cash and deposits in trust 3,745,434 3,477,634 Operating accounts receivable 325, ,827 Prepaid expenses 13,664 32,872 Deferred tax assets 6 28 Income taxes receivable 1, Other Total current assets 10,383,464 7,408,960 Noncurrent assets Property, plant and equipment Buildings 7,017,457 6,334,203 Accumulated depreciation (1,392,814) (1,294,516) Buildings, net 5,624,642 5,039,686 Structures 176, ,636 Accumulated depreciation (48,518) (43,774) Structures, net 127,604 80,861 Tools, furniture and fixtures Accumulated depreciation (529) (471) Tools, furniture and fixtures, net Land 8,044,883 7,266,512 Buildings in trust 109,340, ,736,225 Accumulated depreciation (18,338,465) (16,808,271) Buildings in trust, net 91,001,847 89,927,953 Structures in trust 3,259,992 3,191,511 Accumulated depreciation (918,188) (852,412) Structures in trust, net 2,341,804 2,339,099 Tools, furniture and fixtures in trust 23,735 23,111 Accumulated depreciation (14,737) (13,609) Tools, furniture and fixtures in trust, net 8,998 9,501 Land in trust 91,593,017 86,649,520 Total property, plant and equipment 198,743, ,313,433 Intangible assets Other 3,059 3,392 Total intangible assets 3,059 3,392 Investments and other assets Investment securities 2,634 77,573 Longterm prepaid expenses 277, ,449 Guarantee deposits 10,010 10,010 Other 2,000 2,000 Total investments and other assets 292, ,032 Total noncurrent assets 199,038, ,694,858 Deferred assets Investment corporation bond issuance costs 37,749 42,227 Total deferred assets 37,749 42,227 Total assets 209,459, ,146,046 40

41 The 21 st Period (as of January 31, 2016) The 20 th Period (as of July 31, ) Liabilities Current liabilities Operating accounts payable 435, ,055 Current portion of investment corporation bond 8,000,000 Current portion of longterm loans payable 2,700,000 1,700,000 Distribution payable 5,920 5,762 Accrued expenses 705, ,167 Income taxes payable Accrued consumption taxes 164,809 9,009 Advances received 1,342,066 1,237,970 Deposits received 353 Total current liabilities 5,354,569 11,852,712 Noncurrent liabilities Investment corporation bond 6,000,000 6,000,000 Longterm loans payable 63,000,000 56,000,000 Tenant leasehold and security deposits 820, ,072 Tenant leasehold and security deposits in trust 5,362,847 5,248,738 Longterm deposits received 328, ,599 Total noncurrent liabilities 75,512,629 68,305,410 Total liabilities 80,867,199 80,158,122 Net assets Unitholders' equity Unitholders' capital Unitholders' capital, gross 123,288, ,023,665 Deduction from unitholders' capital (464,424) (464,424) Unitholders' capital 122,823, ,559,241 Surplus Voluntary retained earnings Reserve for reduction entry of special provisions of replaced property 2,219,363 2,219,363 Total voluntary retained earnings 2,219,363 2,219,363 Unappropriated retained earnings (undisposed loss) 3,549,321 3,209,318 Total surplus 5,768,685 5,428,682 Total unitholders' equity 128,592, ,987,923 Total net assets 128,592, ,987,923 Total liabilities and net assets 209,459, ,146,046 41

42 Statement of Income and Retained Earnings The 21 st Period (from August 1, to January 31, 2016) The 20 th Period (from February 1, to July 31, ) Operating revenue Rent revenue real 7,351,937 6,886,049 Other lease business revenue 192, ,565 Distribution revenue of silent partnership 9,886 5,826 Total operating revenue 7,554,679 7,074,441 Operating expenses Expenses related to rent business 2,850,266 2,776,102 Asset management fee 603, ,025 Asset custody fee 20,039 19,372 Administrative service fees 31,871 30,506 Directors' compensations 5,400 5,400 Other operating expenses 52,347 60,927 Total operating expenses 3,563,012 3,473,334 Operating income 3,991,667 3,601,106 Nonoperating income Interest income Interest on securities 322 Interest on refund 397 Insurance income 1,794 6,438 Compensation income 600 Reversal of distribution payable Other Total nonoperating income 3,289 9,095 Nonoperating expenses Interest expenses 291, ,808 Borrowing related expenses 36,801 34,711 Investment unit issuance expenses 37,391 Interest expenses on investment corporation bonds 68,246 80,251 Amortization of investment corporation bond issuance costs 4,478 5,912 Other 6,500 0 Total nonoperating expenses 445, ,683 Ordinary income 3,549,552 3,210,518 Income before income taxes 3,549,552 3,210,518 Income taxes current 748 1,222 Income taxes deferred 21 (22) Total income taxes 770 1,199 Profit 3,548,782 3,209,318 Retained earnings brought forward 538 Unappropriated retained earnings (undisposed loss) 3,549,321 3,209,318 42

43 Statement of Changes in Net Assets The 21 st Period (from August 1, to January 31, 2016) Unitholders' equity Unitholders' capital Surplus Balance at beginning of current period Changes of items during period Issuance of new investment units Dividends of surplus Unitholders' capital, gross Deduction from unitholders' capital Unitholders' capital Voluntary retained earnings Reserve for reduction entry of special provisions of replaced property Voluntary retained earnings Unappropriated retained earnings (undisposed loss) Total surplus Total unitholders' equity Total net assets 114,023,665 (464,424) 113,559,241 2,219,363 2,219,363 3,209,318 5,428, ,987, ,987,923 9,264,500 9,264,500 9,264,500 9,264,500 (3,208,780) (3,208,780) (3,208,780) (3,208,780) Profit 3,548,782 3,548,782 3,548,782 3,548,782 Total changes of items during period Balance at end of current period 9,264,500 9,264, , ,002 9,604,502 9,604, ,288,165 (464,424) 122,823,741 2,219,363 2,219,363 3,549,321 5,768, ,592, ,592,426 The 20 th Period (from February 1, to July 31, ) Unitholders' equity Unitholders' capital Surplus Balance at beginning of current period Changes of items during period Provision of reserve for reduction entry of special provisions of replaced property Dividends of surplus Unitholders' capital, gross Deduction from unitholders' capital Unitholders' capital Voluntary retained earnings Reserve for reduction entry of special provisions of replaced property Voluntary retained earnings Unappropriated retained earnings (undisposed loss) Total surplus Total unitholders' equity Total net assets 114,023,665 (464,424) 113,559,241 5,456,363 5,456, ,015, ,015,605 2,219,363 2,219,363 (2,219,363) (3,237,000) (3,237,000) (3,237,000) (3,237,000) Profit 3,209,318 3,209,318 3,209,318 3,209,318 Total changes of items during period Balance at end of current period 2,219,363 2,219,363 (2,247,044) (27,681) (27,681) (27,681) 114,023,665 (464,424) 113,559,241 2,219,363 2,219,363 3,209,318 5,428, ,987, ,987,923 43

44 Statement of Cash Flows The 21 st Period (from August 1, to January 31, 2016) The 20 th Period (from February 1, to July 31, ) Cash flows from operating activities Income before income taxes 3,549,552 3,210,518 Depreciation 1,718,125 1,669,380 Investment unit issuance expenses 37,391 Amortization of investment corporation bond issuance costs 4,478 5,912 Interest income (337) (414) Interest income on securities (322) Interest expenses 360, ,060 Loss on retirement of noncurrent assets 7,824 30,968 Decrease (increase) in operating accounts receivable (192,405) (92,450) Decrease (increase) in consumption taxes refund receivable 79,598 Increase (decrease) in accrued consumption taxes 155,799 9,009 Increase (decrease) in operating accounts payable 251,172 (334,563) Increase (decrease) in accrued expenses 13,571 21,375 Increase (decrease) in advances received 104,096 64,195 Other, net 89,333 (2,101) Subtotal 6,098,836 5,020,168 Interest income received Interest expenses paid (382,839) (361,783) Income taxes paid (1,934) (945) Net cash provided by (used in) operating activities 5,714,399 4,658,176 Cash flows from investing activities Purchase of property, plant and equipment (1,517,285) (996,760) Purchase of property, plant and equipment in trust (7,638,372) (8,735,538) Proceeds from tenant leasehold and security deposits 30,834 4,030 Proceeds from tenant leasehold and security deposits in trust 192,209 86,667 Repayments of tenant leasehold and security deposits in trust (78,100) (403) Proceeds from redemption of investment securities 75,229 2,440 Net cash provided by (used in) investing activities (8,935,484) (9,639,565) Cash flows from financing activities Increase in shortterm loans payable 13,000,000 2,000,000 Decrease in shortterm loans payable (13,000,000) (2,000,000) Proceeds from longterm loans payable 8,000,000 2,000,000 Redemption of investment corporation bonds (8,000,000) Proceeds from issuance of investment units 9,264,500 Payments for investment unit issuance expenses (37,391) Dividends paid (3,208,064) (3,236,424) Net cash provided by (used in) financing activities 6,019,043 (1,236,424) Net increase (decrease) in cash and cash equivalents 2,797,958 (6,217,813) Cash and cash equivalents at beginning of period 6,975,847 13,193,661 Cash and cash equivalents at end of period 9,773,806 6,975,847 44

45 Notes to Financial Statements 1. Organization JLF is the first logistics properties focused JREIT, with target area of Tokyo Metropolitan area, Kinki, Chubu and Kyushu. Based on the AITIC, JLF was founded on February 22, 2005 by MLP as the asset management company, and was listed on the REIT section of the Tokyo Stock Exchange on May 9 of the same year (securities code: 8967). As of the end of the 21 st Period (January 31, 2016), JLF had a total of 42 properties under management (total acquisition price: 212,603 million yen), including 4 properties (total acquisition price: 8,848 million yen) that were acquired during the period. In addition, its total assets amounted to 209,459 million yen. 2. Basis of Presenting Financial Statements JLF maintains its accounting records and prepares its financial statements in accordance with accounting principles generally accepted in Japan (Japanese GAAP), including provisions set forth in the Financial Instrument and Exchange Act of Japan, the AITIC, the Companies Act of Japan and the related regulations, which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards. The accompanying financial statements are prepared from the Japanese financial statements of JLF, which were prepared in accordance with Japanese GAAP and were presented in the Securities Report of JLF filed with the Kanto Local Finance Bureau of the Ministry of Finance. The amounts in the financial statements originally prepared in Japanese have been rounded off to the nearest thousand in the accompanying financial statements unless otherwise specified. JLF does not prepare consolidated financial statements, as JLF has no subsidiaries. 3. Summary of Significant Accounting Policies (1) Standards and method of valuation of assets Securities Availableforsale securities Nonmarketable securities are stated at cost determined by the moving average method. For the silent partnership equity interest, the method of allocating the partnership s profit/loss is based on JLF s proportional interest. (2) Depreciation method for noncurrent assets (i) Property, plant, and equipment (including trust assets) The straightline method is used. The useful lives of property, plant and equipment are listed below. Buildings 2 to 50 years Structures 2 to 48 years Tools, furniture, and fixtures 2 to 15 years (ii) Intangible assets The straightline method is used. (3) Accounting for deferred assets (i) Investment unit issuance expenses Investment unit issuance expenses are expensed as incurred. (ii) Investment corporation bond issuance costs Investment corporation bond issuance costs are amortized by the straightline method over the period through redemption. (4) Accounting for income and expenses Accounting for property taxes Property tax, city planning tax, depreciable asset tax, and the like levied on real assets and other properties are accounted for as expenses related to rent business at the amounts corresponding to the period out of those determined to be charged. The amount of property tax, etc. paid to the seller as part of settlement for acquisition of real and real in trust is not accounted for as expenses but included in acquisition cost of the respective real, etc. In the 21st Period, the property tax, etc. included in the acquisition cost of real was 16,898 thousand yen. In the 20th Period, the property tax, etc. included in the acquisition cost of real was 55,470 thousand yen. (5) Hedge accounting method (i) Hedge accounting method The special treatment of interest rate swaps is applied because the interest rate swaps satisfy the requirements for this special treatment. (ii) Hedging instruments and hedged items Hedging instruments: Interest rate swap transactions Hedged items: Interest on borrowings (iii) Hedging policy JLF utilizes derivative transactions to hedge the risks specified in the Articles of Incorporation of the Investment based on its risk management policy. 45

46 (iv) Method of assessing hedge effectiveness The assessment of hedge effectiveness is not performed because the interest rate swaps satisfy the requirements for the special treatment. (6) Scope of cash and cash equivalents in the statement of cash flows Cash and cash equivalents consist of cash on hand, cash in trust, deposits and deposits in trust withdrawable on demand, and shortterm investments, which are easily convertible into cash, with low risk of price fluctuation and with a maturity of less than three months. (7) Other significant basis for preparation of financial statements (i) Accounting for trust beneficiary right for real, etc. as trust asset With regard to trust beneficiary right for real, etc. held as trust asset, all assets and liabilities as well as all revenue and expense items associated with trust assets are accounted for under the respective account items of the Balance Sheet and Statement of Income and Retained Earnings. Of the trust assets accounted for under the respective account items, the following items with significance are separately indicated on the Balance Sheet. (a) Cash and deposits in trust (b) Buildings in trust, Structures in trust, Tools, furniture and fixtures in trust and Land in trust (c) Tenant leasehold and security deposits in trust (ii) Method of accounting for consumption taxes Transactions subject to consumption taxes are recorded at amounts exclusive of consumption taxes. 4. Notes to Balance Sheet (1) Commitment line contracts JLF has the commitment line contracts with the banks. The 21 st Period (as of January 31, 2016) The 20 th Period (as of July 31, ) Total amount specified in the commitment line contracts 13,000,000 13,000,000 Loan balance at end of period Outstanding loan commitments at end of period 13,000,000 13,000,000 (2) The breakdown of reserve for reduction entry of special provisions of replaced property prescribed in Article 2, Paragraph 2, Item 28 of the Ordinance on Accounting of Investment s is as follows. Corresponding property Items Reason for recognition and amount Policy for reversal Description of reversal in the period Ichikawa Center II / land Breakdown Gain on sales of real properties of 2,618,320 thousand yen due to sales of Funabashi Nishiura Center II and Yokosuka Center. Reversal into retained earnings is made in accordance with tax regulations. Not applicable. The 21 st Period (as of January 31, 2016) The 20 th Period (as of July 31, ) Balance before provision and reversal in the period 2,219,363 thousand yen 2,219,363 thousand yen Reversal in the statement of income and retained earnings Amount on the balance sheet 2,219,363 thousand yen 2,219,363 thousand yen Provision as disclosed in 22 Distribution Information Reversal as disclosed in 22 Distribution Information Balance after provision and reversal in the period 2,219,363 thousand yen 2,219,363 thousand yen (3) Minimum amount of net assets prescribed in Article 67, Item 4 of the AITIC The 21 st Period The 20 th Period (as of January 31, 2016) (as of July 31, ) 50,000 50,000 46

47 5. Notes to Statement of Income and Retained Earnings Breakdown of income from real leasing business The 21 st Period (from August 1, to January 31, 2016) The 20 th Period (from February 1, to July 31, ) (i) Real leasing business revenue Rent revenuereal Rent income 7,100,833 6,654,353 Land rents received 114, ,741 Facility charges 136,893 7,351, ,955 6,886,049 Other lease business revenue Parking charges 10,081 8,931 Utilities charges 168, ,739 Other operating income 14, ,855 11, ,565 Total real leasing business revenue 7,544,793 7,068,614 (ii) Real leasing business expenses Expenses related to rent business Taxes and dues 620, ,770 Outsourcing service expenses 180, ,930 Utilities expenses 175, ,964 Repair expenses 88,869 58,438 Insurance expenses 22,833 21,662 Other expenses related to rent business 36,544 36,446 Depreciation 1,717,654 1,668,920 Loss on retirement of noncurrent assets 7,824 30,968 Total real leasing business expenses 2,850,266 2,776,102 (iii) Income from real leasing business ((i)(ii)) 4,694,526 4,292, Notes to Statement of Changes in Net Assets Total number of investment units authorized and total number of investment units issued and outstanding The 21 st Period (from August 1, to January 31, 2016) The 20 th Period (from February 1, to July 31, ) Total number of investment units authorized 10,000,000 units 10,000,000 units Total number of investment units issued and outstanding 880,000 units 830,000 units 7. Notes to Statement of Cash Flows Relationship between cash and cash equivalents at end of period and the amount on the balance sheet The 21 st Period (from August 1, to January 31, 2016) The 20 th Period (from February 1, to July 31, ) Cash and deposits 6,297,144 3,764,732 Cash and deposits in trust 3,745,434 3,477,634 Longterm deposits received (Note) (268,772) (266,519) Cash and cash equivalents 9,773,806 6,975,847 (Note) Longterm deposits received means the deposits for which the withdrawal is restricted based on the coownership agreement for the property in trust. 47

48 8. Lease Transactions Operating lease transactions (as a lessor) Future lease payments receivable The 21 st Period (from August 1, to January 31, 2016) The 20 th Period (from February 1, to July 31, ) Due within one year 13,810,916 12,345,929 Due after one year 66,982,541 65,537,235 Total 80,793,457 77,883, Financial Instruments (1) Matters concerning the status of financial instruments (i) Policies on financial instruments JLF procures funds mainly by additionally issuing investment units, borrowing funds, or issuing investment corporation bonds for the purpose of securing funds required for acquisition of assets and repair of assets, payments of dividends, and operation of JLF or repayment of debts. When procuring funds through interestbearing debt, JLF comprehensively takes into account the conditions in the capital market and the financial environment, the capital structure of JLF and lease terms with tenants, impact on the existing unitholders, and other factors, expects the future changes in economic and social conditions, and selects an effective means of procuring funds in terms of long or short loan periods and fixed or variable interest rates. JLF may utilize derivative transactions solely for the purpose of hedging foreign exchange risk, interest rate fluctuation risk, and other risks arising from liabilities associated with JLF. JLF invests surplus funds in securities and monetary claims with a focus on safety and liquidity, and does not invest only for acquiring profit from aggressive investment. (ii) Description of financial instruments and associated risks, and the risk management system Deposits are one means of investing the surplus funds of JLF and are exposed to credit risk such as the bankruptcy of deposit financial institutions. JLF works to mitigate credit risk by shortening the period of deposits and dealing with deposit financial institutions with high credit ratings. Investment securities are the equity interests in the silent partnership, and are exposed to credit risks of the silent partnership as well as to price fluctuation risk of the real market. JLF tries to reduce these risks by monitoring the financial status of the silent partnership and environment of the real market. Loans payable and investment corporation bonds are used primarily for acquisition of assets and repayments of debts, and are exposed to liquidity risk at the time of repayment/redemption. JLF strives to mitigate liquidity risk by diversifying lenders, repayment periods, and means of funds procurement and by securing liquidity on hand by setting commitment lines and manages liquidity risk by preparing cash flow management sheet and other methods. Variable interest rate borrowings are exposed to the risk of interest rate fluctuations. Derivative transactions are utilized for certain loans as hedges by JLF to mitigate this risk. See (5) Hedge accounting method above under Summary of Significant Accounting Policies for details about the hedging instruments, hedged items, hedging policy, and method of assessing hedge effectiveness, etc. in hedge accounting. (iii) Description of financial instruments Fair value of financial instruments comprises value based on market prices or rationally calculated value in the case the market prices are not available. As certain assumptions are applied in performing calculations of such value, the value may differ if different assumptions are used. In addition, the contract amount of derivative transactions, which is presented in the following section entitled Derivatives, is not indicative of the market risk attributable to derivative transactions. 48

49 (2) Matters concerning fair value, etc. of financial instruments Amounts on the Balance Sheet, fair value and their difference as of January 31, 2016 are as follows; Amount on the balance sheet Fair value Difference (i) Cash and deposits 6,297,144 6,297,144 (ii) Cash and deposits in trust 3,745,434 3,745,434 Total assets 10,042,578 10,042,578 (i) Current portion of investment corporation bond (ii) Current portion of longterm loans payable 2,700,000 2,716,816 16,816 (iii) Investment corporation bond 6,000,000 6,405, ,000 (iv) Longterm loans payable 63,000,000 64,770,025 1,770,025 Total liabilities 71,700,000 73,891,842 2,191,842 Derivative transactions Amounts on the Balance Sheet, fair value and their difference as of July 31, are as follows; Amount on the balance sheet Fair value Difference (i) Cash and deposits 3,764,732 3,764,732 (ii) Cash and deposits in trust 3,477,634 3,477,634 Total assets 7,242,367 7,242,367 (i) Current portion of investment corporation bond 8,000,000 8,016,800 16,800 (ii) Current portion of longterm loans payable 1,700,000 1,715,748 15,748 (iii) Investment corporation bond 6,000,000 6,299, ,400 (iv) Longterm loans payable 56,000,000 57,911,497 1,911,497 Total liabilities 71,700,000 73,943,446 2,243,446 Derivative transactions (Note 1) Method of calculating fair value of financial instruments Assets (i)cash and deposits, (ii) Cash and deposits in trust The fair value is recognized as the book value, as they are settled in the short term and accordingly the fair value is almost equal to book value. Liabilities (i) Current portion of investment corporation bond, (iii) Investment corporation bond The reference value disclosed by the Japan Securities Dealers Association is used as the fair value. (ii)current portion of longterm loans payable, (iv) Longterm loans payable The fair value is calculated by discounting principal and interest at a rate to be applied when same amounts of loans are newly borrowed. (Regarding the longterm loans that are hedged by the interest rate swaps, the fair value is calculated by discounting principal and interest at a rate to be applied when the same amounts of loans are newly borrowed. Because the interest rate swaps accounted for using the special treatment are treated together with the hedged longterm borrowings, the amount of the principal and interest includes the fair value of the swaps.) Derivative transactions See Derivatives below. Financial instruments for which fair value is difficult to determine The 21 st Period (as of January 31, 2016) Not applicable. The 20 th Period (as of July 31, ) Amount on the balance sheet Investment securities * 77,573 * The fair value of the investment securities is not disclosed because there is no quoted market price available for these securities and it is extremely difficult to determine the fair value. 49

50 (Note 3) Scheduled redemption amount of financial claims after the closing date The 21 st Period (as of January 31, 2016) Within After 1~2 years 2~3 years 3~4 years 4~5 years 1 year 5 years Cash and deposits 6,297,144 Cash and deposits in trust 3,745,434 Total 10,042,578 The 20 th Period (as of July 31, ) Within After 1~2 years 2~3 years 3~4 years 4~5 years 1 year 5 years Cash and deposits 3,764,732 Cash and deposits in trust 3,477,634 Total 7,242,367 (Note 4) Scheduled repayment amount of longterm loans payable and other interest bearing debt after the closing date The 21 st Period (as of January 31, 2016) Within 1 year 1~2 years 2~3 years 3~4 years 4~5 years After 5 years Longterm loans payable 2,700,000 8,000,000 2,500,000 10,500,000 7,000,000 35,000,000 Investment corporation bond 6,000,000 Total 2,700,000 8,000,000 2,500,000 10,500,000 7,000,000 41,000,000 The 20 th Period (as of July 31, ) Within After 1~2 years 2~3 years 3~4 years 4~5 years 1 year 5 years Longterm loans payable 1,700,000 6,000,000 5,500,000 6,500,000 2,000,000 36,000,000 Investment corporation bond 8,000,000 6,000,000 Total 9,700,000 6,000,000 5,500,000 6,500,000 2,000,000 42,000, Derivatives (1) Transactions not subject to hedge accounting Not applicable to the 21 st and 20 th Periods. (2) Transactions subject to hedge accounting The 21 st Period (from August 1, to January 31, 2016) The following table shows the contract amount on the closing date for derivative transactions, or the amount corresponding to the principal specified in the contract. Hedge accounting method Special treatment of interest rate swaps Type of derivative transactions Interest rate swap transactions Receive variable, pay fixed Primary hedged items Longterm borrowings Contract amount Amount over one year Fair value (Thousands of yen) Method used to calculate the fair value 7,500,000 7,500,000 * * Because the interest rate swaps accounted for using the special treatment are treated together with the hedged longterm borrowings, their fair value is included in that of the longterm borrowings. 50

51 The 20 th Period (from February 1, to July 31, ) The following table shows the contract amount on the closing date for derivative transactions, or the amount corresponding to the principal specified in the contract. Contract amount Hedge accounting method Special treatment of interest rate swaps Type of derivative transactions Interest rate swap transactions Receive variable, pay fixed Primary hedged items Longterm borrowings Amount over one year Fair value (Thousands of yen) Method used to calculate the fair value 2,000,000 2,000,000 * * Because the interest rate swaps accounted for using the special treatment are treated together with the hedged longterm borrowings, their fair value is included in that of the longterm borrowings. 11. Tax Effect Accounting (1) Breakdown of major causes of deferred tax assets and deferred tax liabilities Deferred tax assets The 21 st Period (as of January 31, 2016) The 20 th Period (as of July 31, ) Enterprise tax not deductible 6 28 Total deferred tax assets 6 28 Deferred tax assets, net 6 28 (2) Breakdown by major cause of material difference between the effective statutory tax rate and the effective tax rate after applying tax effect accounting The 21 st Period (as of January 31, 2016) The 20 th Period (as of July 31, ) Effective statutory tax rate 32.31% 34.15% Adjustments Deductible cash distributions (32.31%) (34.13%) Other 0.02% 0.02% Effective tax rate after applying tax effect accounting 0.02% 0.04% 12. Transactions with Related Parties (1) Parent company and principal corporate unitholders Not applicable to the 21 st and the 20 th Periods. (2) Subsidiaries and affiliates Not applicable to the 21 st and the 20 th Periods. (3) Sister companies Not applicable to the 21 st and the 20 th Periods. (4) Directors and principal individual unitholders The 21 st Period (from August 1, to January 31, 2016) Classification Director or the close relative (Note 1) Name of company or individual Takayuki Kawashima Address Paidin capital or investment Business description or occupation Executive Director of Japan Fund, Inc. and President of Mitsui & Co., Partners Ltd. Voting rights holding ratio Nature of transaction Payment of asset management fee to Mitsui & Co., Partners Ltd. (Note 1) Transaction amount (Thousands of yen) 665,022 (Note 3) Account Accrued expenses Balance at end of period (Thousands of yen) 434,488 (Note 3) This is a transaction executed by Takayuki Kawashima as President of a third party (Mitsui & Co., Partners Ltd.), and the fee is in line with the Articles of Incorporation of JLF. 51

52 (Note 3) Asset management fee includes acquisition fee of 61,936 thousand yen which was included in the book value of the acquired properties. Of the above amounts, the transaction amount does not include consumption taxes while the balance at the end of period does. The 20 th Period (from February 1, to July 31, ) Classification Director or the close relative (Note 1) (Note 3) Name of company or individual Takayuki Kawashima Address Paidin capital or investment Business description or occupation Executive Director of Japan Fund, Inc. and President of Mitsui & Co., Partners Ltd. Voting rights holding ratio Nature of transaction Payment of asset management fee to Mitsui & Co., Partners Ltd. (Note 1) Transaction amount (Thousands of yen) 643,059 (Note 3) Account Accrued expenses Balance at end of period (Thousands of yen) 419,167 (Note 3) This is a transaction executed by Takayuki Kawashima as President of a third party (Mitsui & Co., Partners Ltd.), and the fee is in line with the Articles of Incorporation of JLF. Asset management fee includes acquisition fee of 62,034 thousand yen which was included in the book value of the acquired properties. Of the above amounts, the transaction amount does not include consumption taxes while the balance at the end of period does. 13. Lease Properties JLF holds logistics properties (including land) for lease in the Tokyo Metropolitan area and other areas. The amounts on the Balance Sheet, changes during the period, and fair value of lease properties are as follows. Amount on the balance sheet The 21 st Period (from August 1, to January 31, 2016) The 20 th Period (from February 1, to July 31, ) Balance at the beginning of the period 191,313, ,742,393 Changes during the period 7,429,605 7,571,040 Balance at the end of the period 198,743, ,313,433 Fair value at the end of the period 264,762, ,938,000 (Note 1) The amount on the balance sheet is acquisition cost less accumulated depreciation. The increase of the lease properties in the 21 st Period is mainly by the acquisition of Chiba Kita Center (1,509,001 thousand yen), Chiba Kita Center II (4,653,030 thousand yen), Urayasu Chidori Center III (1,068,474 thousand yen) and Zama Center (1,751,894 thousand yen). The increase of the lease properties in the 20 th Period is mainly by the acquisition of Sagamihara Center (8,145,763 thousand yen) and Kasugai Center (land) (875,416 thousand yen). (Note 3) The fair value at the end of the fiscal period is the appraisal value provided by an outside real appraiser. The income concerning lease properties, etc. for the 21 st and 20 th Periods is indicated under Notes to Statement of Income and Retained Earnings above. 14. Segment Information (1) Segment information Description is omitted as JLF engages in a single segment of the real leasing business. (2) Related information The 21 st Period (from August 1, to January 31, 2016) (i) Information by product and service Description is omitted as net sales for external customers in a single product/service category exceed 90% of the operating revenue on Statement of Income and Retained Earnings. (ii)information by region (a) Net sales Description is omitted as net sales for external customers in Japan exceed 90% of the operating revenue on Statement of Income and Retained Earnings. 52

53 (b) Property, plant, and equipment Description is omitted as the amount of property, plant, and equipment located in Japan exceeds 90% of the property, plant, and equipment on the Balance Sheet. (iii)information by major tenant Description is omitted as net sales for all single external customers are less than 10% of the operating revenue on the Statement of Income. The 20 th Period (from February 1, to July 31, ) (i) Information by product and service Description is omitted as net sales for external customers in a single product/service category exceed 90% of the operating revenue on Statement of Income and Retained Earnings. (ii)information by region (a) Net sales Description is omitted as net sales for external customers in Japan exceed 90% of the operating revenue on Statement of Income and Retained Earnings. (b) Property, plant, and equipment Description is omitted as the amount of property, plant, and equipment located in Japan exceeds 90% of the property, plant, and equipment on the Balance Sheet. (iii)information by major tenant Name of tenant Net revenue Related segment 15. Per Unit Information Sagawa Express Co., Ltd. (Note ) Real leasing business (Note ) Not disclosed, since the tenant s consent could not be obtained. The 21 st Period (from August 1, to January 31, 2016) The 20 th Period (from February 1, to July 31, ) Net assets per unit 146,127 yen 143,358 yen Profit per unit 4,092 yen 3,866 yen (Note 1) Profit per unit was calculated by dividing profit by average number of investment units during period. Diluted profit per unit is not stated as there are no dilutive investment units. The calculation of profit per unit is based on the following. The 21 st Period (from August 1, to January 31, 2016) The 20 th Period (from February 1, to July 31, ) Profit 3,548,782 3,209,318 Amount not attributable to common unitholders Profit pertaining to common investment units 3,548,782 3,209,318 Average number of investment units during period 867,105 units 830,000 units 16. Significant Subsequent Events Not applicable to the 21 st Period (from August 1, to January 31, 2016). 53

54 17. Securities (1) Stocks Not applicable (2) Securities other than stocks Type Silent Partnership Equity Interests Name Silent Partnership Equity Interests in Fund III Limited Liability Company as the business operator (Note 1) Aggregate face value Book value Interest receivable Interest payable Appraisal value Valuation gain or loss Remarks 2,634 2,634 Total 2,634 2,634 (Note 1) Fund III Limited Liability Company had the following investments. However, as JLF exercised its preferential negotiation rights to acquire trust beneficiary rights or real, JLF acquired all the following assets in the fiscal period ended January 31, JLF s interest is 4.34% of the entire investment in the silent partnership. Silent partnership investment with Vega Limited Liability Company as a business operator / Fund III : Urayasu Center (trust beneficiary ) Preferred investment in TMK Sirius / Fund III : Zama Center (real ) Silent partnership investment with Spica Limited Liability Company as a business operator / Fund III : Chiba Kita Center (trust beneficiary ) The book value is used as the appraisal value. 18. Contract Amounts and Fair Value of Derivative Transactions Classification Overthecounter Type of derivative transactions Interest rate swap transactions Receive variable, pay fixed Contract amount (Note 1) Amount over one year Fair value 7,500,000 7,500,000 Total 7,500,000 7,500,000 (Note 1) The contract amount represents the notional principal amount of the interest rate swaps. Because the interest rate swap transactions qualify for the special treatment stipulated in the financial instruments accounting standard, the fair value of the swaps is omitted. 54

55 19. Property, Plant, Equipment and Intangible Assets Property, plant and equipment Type of asset Balance at beginning of the period Amount of increase during the period Amount of decrease during the period Balance at end of the period Accumulated depreciation / Accumulated amortization Depreciation and amortization Net balance at end of the period Remarks Buildings (including accompanying 6,334, , ,017,457 1,392,814 98,424 5,624,642 (Note 1) facilities) Structures 124,636 51, ,122 48,518 4, ,604 (Note 1) Tools, furniture and fixtures Land 7,266, ,371 8,044,883 8,044,883 (Note 1) Buildings in trust (including accompanying facilities in trust) 106,736,225 2,628,945 24, ,340,312 18,338,465 1,547,433 91,001,847 Structures in trust 3,191,511 68, ,259, ,188 65,867 2,341,804 Tools, furniture and fixtures in trust 23, ,735 14,737 1,127 8,998 Land in trust 86,649,520 4,943,497 91,593,017 91,593,017 Subtotal 210,326,490 9,155,085 25, ,456,292 20,713,253 1,717, ,743,039 Intangible assets 5, ,424 2, ,059 Total 210,331,777 9,155,222 25, ,461,717 20,715,618 1,718, ,746,098 (Note 1) The amount of increase is primarily attributable to additional acquisition of Chiba Kita Center. The amount of increase is primarily attributable to additional acquisition of Chiba Kita Center II, Urayasu Chidori Center III and Zama Center. 20. Investment Bond First Series Unsecured Investment Bond Second Series Unsecured Investment Bond Third Series Unsecured Investment Bond Issue date November 29, 2010 December 27, 2013 March 12, 2014 Balance at beginning of the period (Thousands of yen) Amount of increase during the period (Thousands of yen) Amount of decrease during the period (Thousands of yen) Balance at end of the period (Thousands of yen) Interest rate 8,000,000 8,000, % 3,000,000 3,000, % 3,000,000 3,000, % Total 14,000,000 8,000,000 6,000,000 Redemption maturity date November 27, December 26, 2025 March 12, 2029 Use Collateral (Note 1) (Note 1) (Note 1) (Note 1) The funds are used for the repayment of loans payable. This investment corporation bond is equipped with the same rank rider limited among certain investment corporation bonds. (Note 3) The redemption schedule of investment corporation bond for each of the five years after the balance sheet date is as follows. Within 1 year Due after 1 year, but within 2 years Due after 2 years, but within 3 years Due after 3 years, but within 4 years Due after 4 years, but within 5 years Investment corporation bond 55

56 21. Loans Payable Classification (Lender) Shortterm loans payable Current portion of longterm loans payable Longterm loans payable Trust Bank, Limited Mitsubishi UFJ Trust and Banking Banking Trust Bank, Limited Mitsubishi UFJ Trust and Banking Banking Borrowing date September 10, September 10, September 10, November 26, November 26, November 26, Balance at beginning of period (Thousands of yen) Amount of increase during the period (Thousands of yen) Amount of decrease during the period (Thousands of yen) Balance at end of period (Thousands of yen) Average interest rate (Note 1) 2,000,000 2,000, % 2,000,000 2,000, % 1,000,000 1,000, % 3,000,000 3,000, % 3,000,000 3,000, % 2,000,000 2,000, % Subtotal 13,000,000 13,000,000 The Bank of TokyoMitsubishi UFJ, Ltd. Mitsui Sumitomo Insurance Company, Limited February 7, 2011 September 30, ,700,000 1,700, % 1,000,000 1,000, % Subtotal 2,700,000 2,700,000 The Bank of TokyoMitsubishi UFJ, Ltd. The Bank of TokyoMitsubishi UFJ, Ltd. February 27, 2012 February 27, 2012 Mitsubishi UFJ February 27, Trust and Banking 2012 Trust Bank, Limited Mizuho Bank, Ltd. Banking Mitsubishi UFJ Trust and Banking Trust Bank, Limited March 26, 2012 March 26, 2012 March 26, 2012 March 26, 2012 August 31, ,000,000 2,000, % 2,500,000 2,500, % 2,000,000 2,000, % 3,500,000 3,500, % 1,000,000 1,000, % 1,000,000 1,000, % 1,000,000 1,000, % 2,000,000 2,000, % Repayment due date Use Remarks September Non 25, guaranteed September Non 25, guaranteed September Non 25, guaranteed December 4, Non guaranteed December 4, Non guaranteed December 4, Non guaranteed February 8, 2016 September 30, 2016 February 27, 2019 February 27, 2018 February 27, 2017 March 26, 2019 March 26, 2019 March 27, 2017 March 27, 2017 August 31, 2022 Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed 56

57 Classification (Lender) Longterm loans payable Mitsubishi UFJ Trust and Banking The Bank of TokyoMitsubishi UFJ, Ltd. Banking Mitsubishi UFJ Trust and Banking Resona Bank, Ltd. Borrowing date August 31, 2012 August 31, 2012 August 31, 2012 August 31, 2012 August 31, 2012 September 18, Mizuho Bank, Ltd Banking Mitsubishi UFJ Trust and Banking Nippon Life Insurance Company Development Bank of Japan Inc. Development Bank of Japan Inc. February 28, 2013 February 28, 2013 February 28, 2013 March 11, 2013 March 11, 2013 Balance at beginning of period (Thousands of yen) Amount of increase during the period (Thousands of yen) Amount of decrease during the period (Thousands of yen) Balance at end of period (Thousands of yen) Average interest rate (Note 1) 2,000,000 2,000, % 2,000,000 2,000, % 1,000,000 1,000, % 1,000,000 1,000, % 1,000,000 1,000, % 4,000,000 4,000, % 2,000,000 2,000, % 1,000,000 1,000, % 500, , % 2,000,000 2,000, % 2,000,000 2,000, % Repayment due date August 31, 2022 August 30, 2019 August 31, 2017 August 31, 2017 August 31, 2017 August 31, 2020 February 28, 2023 February 28, 2023 February 28, 2023 February 28, 2022 February 29, 2024 Use Remarks Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Mizuho Bank, Ltd. 1,500,000 1,500,000 Mitsubishi UFJ Trust and Banking December 27, ,000,000 1,000, % December 25, 2020 Nonguaranteed The 77 Bank, Ltd. 500, ,000 Banking Trust Bank, Limited Development Bank of Japan Inc. Nippon Life Insurance Company December 27, 2013 Mitsubishi UFJ December 27, Trust and Banking ,000,000 3,000,000 1,500,000 1,500,000 1,000,000 1,000, , , % 2,000,000 2,000, % December 27, 2023 August 31, 2022 Nonguaranteed Nonguaranteed 57

58 Classification (Lender) Longterm loans payable Banking Banking Banking Nippon Life Insurance Company Trust Bank, Limited Banking Banking Shinkin Central Bank The Norinchukin Bank Trust Bank, Limited The Bank of Fukuoka Mizuho Trust & Banking Co.,Ltd. Borrowing date February 25, 2014 February 25, 2014 March 24, 2014 March 24, 2014 March 31, March 31, December 4, December 4, December 4, December 4, December 4, December 4, Balance at beginning of period (Thousands of yen) Amount of increase during the period (Thousands of yen) Amount of decrease during the period (Thousands of yen) Balance at end of period (Thousands of yen) Average interest rate (Note 1) 2,000,000 2,000, % 3,000,000 3,000, % 1,000,000 1,000, % 2,500,000 2,500, % 1,000,000 1,000, % 1,000,000 1,000, % 2,000,000 2,000, % 500, , % 1,000,000 1,000, % 2,000,000 2,000, % 500, , % 2,000,000 2,000, % Repayment due date February 28, 2022 February 28, 2023 February 28, 2017 February 29, 2024 March 29, 2024 March 31, 2025 November 29,2019 November 30,2022 November 30,2022 November 30,2023 November 28,2025 November 28,2025 Use Remarks Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Nonguaranteed Subtotal 55,000,000 8,000,000 63,000,000 Total 57,700,000 21,000,000 13,000,000 65,700,000 (Note 1) The average interest rate indicates a weighted average of interest rates for the period. Regarding the loans hedged by interest rate swaps to avoid interest rate fluctuation risk, the average interest rate indicates a weighted average of interest rates adjusted by considering the effect of the interest rate swaps. All the funds were used for the purchase of real properties or trust beneficiary rights of real, or repayment of borrowings. (Note 3) Annual repayments of longterm loans payable (except for current portion of longterm loans payable) scheduled for next five years after balance sheet date are as follows. Due after 1 year, but within 2 years Due after 2 years, but within 3 years Due after 3 years, but within 4 years Due after 4 years, but within 5 years Longterm loans payable 8,000,000 2,500,000 10,500,000 7,000,000 58

59 22. Distribution Information The 21 st Period (from August 1, to January 31, 2016) The 20 th Period (from February 1, to July 31, ) I. Unappropriated retained earnings 3,549,321,469 3,209,318,806 II. Distributions 3,549,040,000 3,208,780,000 Distributions per unit 4,033 3,866 III. Retained earnings to be carried forward Method of calculation of distributions The amount of distribution is limited to the amount of income in accordance with the cash distribution policy stipulated in Article 39 (1) of the Articles of Incorporation of JLF, and shall exceed the amount equivalent to 90% of the distributable dividend amount of JLF provided in Article of the Act on Special Measures Concerning Taxation. Based on these policies, JLF decided to distribute earnings of 3,549,040,000 yen, which is the maximum multiple of total number of investment units issued 880,000 units within the amount of unappropriated retained earnings at the end of period. JLF does not make distributions in excess of earnings as stipulated in Article 39 (2) of the Articles of Incorporation of JLF. 281, ,806 (Yen) The amount of distribution is limited to the amount of income in accordance with the cash distribution policy stipulated in Article 39 (1) of the Articles of Incorporation of JLF, and shall exceed the amount equivalent to 90% of the distributable dividend amount of JLF provided in Article of the Act on Special Measures Concerning Taxation. Based on these policies, JLF decided to distribute earnings of 3,208,780,000 yen, which is the maximum multiple of total number of investment units issued 830,000 units within the amount of unappropriated retained earnings at the end of period. JLF does not make distributions in excess of earnings as stipulated in Article 39 (2) of the Articles of Incorporation of JLF. 59