Fiscal Period Business Report nd (Statement of Financial Performance) 22 June 1, 2016 – November 30, 2016
The Daiwa Office Investment Corporation logo symbolizes hospitality with an open door and the desire to be a bright and open investment corporation. We will continue to aim to be a highly-transparent investment corporation that is further cherished and trusted by our investors and tenants.
6-2-1 Ginza, Chuo Ward, Tokyo http://www.daiwa-of_ce.co.jp/en/ I. Overview of Daiwa Office Investment Corporation
To Our Investors
We would like to express our deep gratitude to all our unitholders for your support of Daiwa Office Investment Corporation (DOI). In the 22nd Fiscal Period, DOI posted operating revenues of 12,853 million yen and operating income of 6,143 million yen. Our distribution per unit for the 22nd Fiscal Period is 10,695 yen, an increase by 187 yen from the 21st Fiscal Period See page 4 for financial and management highlights
Average contract rent at the end of the 22nd Fiscal Period increased 114 yen from the end of the previous fiscal period to 19,219 yen, indicating an increase for the fourth consecutive fiscal period. Rent revisions contributed to 8.7 million yen increase in monthly contracted rents from the end of the previous fiscal period, which was a 6.1% rate of increase for average monthly rent. Furthermore, the rate of increase for average monthly rent stood at 7.2% due to replacement of tenants, and the occupancy rate was 97.7%. We will realize sustainable internal growth through the thorough implementation of the hands-on approach that continuously applies “Bonji-Tettei” as the code of conduct. See page 8 for details of internal growth
During the 22nd Fiscal Period, DOI acquired Heiwa Higashi-nihonbashi Building on June 1, 2016, Square Daikanyama Building on June 29, 2016, Shinjuku West Building and Ogikubo TM Building on July 21, 2016 (total acquisition price: 13,392 million yen) using funds obtained through the public offering announced in July 2016. DOI will continue to selectively acquire office properties centering on the five central wards of Tokyo in an effort to further improve the value of its portfolio. See page 12 for details of external growth
In financial matters, DOI promoted diversification of repayment dates by taking out long-term borrowings. DOI will continue striving to further strengthen financial structure while working to reduce future refinancing risks. See page 15 for details of financial conditions
DOI will continue to increase the competitiveness of its properties and aim to achieve its medium- to long-term goal of continuous growth through the utilization of investment capacity from capital increase, etc., while increasing long-term EPS (net income after deducting gain on sales of properties). We wish for the continued success of our unitholders and ask for your continued support of DOI.
Yoshimi Murakami Executive Director of Daiwa Office Investment Corporation Table of Contents
I. Overview of Daiwa Office Investment Corporation II. Asset Management Report……………………………17
To Our Investors……………………………………………… 2 III. Balance Sheets… ……………………………………… 22 Characteristics and Strategies of Daiwa Office Investment Corporation ………………………… 3 IV. Statements of Income and Retained Earnings…… 24
Financial and Management Highlights………………………… 4 V. Statements of Changes in Net Assets……………… 25 Overview of Portfolio (portfolio list)…………………………… 5 … …………………………26 Overview of Portfolio (portfolio distribution)…………………… 6 VI. Statements of Cash Flows
Internal Growth Measures… ………………………………… 8 VII. Notes to Financial Statements……………………… 27 External Growth Measures……………………………………12 VIII. Independent Auditor’s Report… ……………………41 Financial Conditions… ………………………………………15
Description of Asset Manager…………………………………16 IX. Investor Information… …………………………………42
2 Characteristics and Strategies of Daiwa Office Investment Corporation
Characteristics of Daiwa Office Investment Corporation Office Specialized REIT Focused on the Five REIT Central Wards of Tokyo Effective application of operational knowhow specialized in office Places priority on owning office buildings in favorable locations for buildings which there is high demand
Office buildings 100.0% Major Regional Cities 3.1% Five Central Greater Tokyo Wards of Tokyo 8.3% 88.6%
Based on acquisition price
(Note) Please note that the percentages in the above graphs are as of December 21, 2016.
Growth Strategies Investment in 500.0 Activities for solid growth (billion yen) selectively-chosen 467.7 500 ・Continue acquiring Achievement of a 500 billion yen asset size competitive properties 458.3 properties 445.7 413.2 ・Leverage borrowing Keep the medium-to-long term, upper-limit 387.5 capacity LTV target range within 40%~50% 400 364.0
300 Establishment of stable revenue base ・Property management Continuation of “Bonji-Tettei” activities Thorough implementation of hands-on 200 approach Further strengthen relations with tenants
・Maintain and Capture tenant needs by reinforcing ties with 100 improve property property managers value Strategic renewals and lease-up activities ・Financial activities Reduce refinancing risk by extending borrowing periods and diversifying 0 Fiscal period Fiscal period Fiscal period Fiscal period Fiscal period Fiscal period Medium-term repayment dates ended ended ended ended ended ended goal May 2014 November 2014 May 2015 November 2015 May 2016 November 2016
Distribution per Unit Fiscal period ended November 2016 yen (actual) (22nd Fiscal Period) 10,695
Fiscal period ending May 2017 yen (forecast) (Note) The forecasts on distribution are calculated based (23rd Fiscal Period) 10,700 on certain assumptions and may vary due to changes in the status and other factors. Moreover, Fiscal period ending November 2017 the forecasts set forth herein should not be yen (forecast) (24th Fiscal Period) 10,710 construed as a guarantee of distribution amounts.
I. Overview of Daiwa Office Investment Corporation 3 Financial and Management Highlights
Steady increase of distributions due to progress in internal growth
■ Operating Revenues ■ Operating Income ■ Net Income (million yen) (million yen) (million yen) 13,000 7,000 6,000 12,853 12,363 11,837 5,324 10,000 6,108 6,143 5,250 10,387 5,000 5,614 4,000 4,688 9,763 4,031 4,770 7,000 4,438 3,641
3,000 2,000 4,000
0 0 0 18th Period 19th Period 20th Period 21st Period 22nd Period 18th Period 19th Period 20th Period 21st Period 22nd Period 18th Period 19th Period 20th Period 21st Period 22nd Period
■ Changes in Rental Revenues (million yen) External growth (acquisition/full contribution from properties sold) (Note 1) 11,000 227 External growth 229 (Note 1) Amount obtained by subtracting rents and 115 27 common area fees income in the previous 10,000 (acquisition/during-the-period contribution from properties sold) (Note 2) 267 117 fiscal period of properties sold in the Internal growth (increase/decrease of rents of existing properties) 154 previous fiscal period from the amount of 9,000 839 rents and common area fees income 176 282 increased compared to the previous period 349 148 due to full year contribution from properties 8,000 215 acquired in the previous fiscal period. 261 511 (Note 2) Amount obtained by subtracting rents and 7,000 6 64 common area fees income decreased in the current fiscal period due to sales of –55 properties in the current fiscal period from 6,000 the amount of rents and common area fees income increased in the current fiscal 0 period due to acquisition of properties in the current fiscal period. 17th Period 18th Period 19th Period 20th Period 21st Period 22nd Period
10,710 ■ Distribution per Unit 9,900 10,560 (yen) 9,750 9,000 10,550 10,700 12,000 Forecast from one year earlier Forecast from six months earlier Actual dividends 8,328 9,850 9,350 10,695 7,570 8,700 10,508 10,000 6,550 7,300 9,688 7,820 9,142 5,500 7,540 5,350 7,200 8,256 8,000 6,250 7,621 5,500 7,478 6,542 6,000 5,986
4,000
2,000
0 14th Period 15th Period 16th Period 17th Period 18th Period 19th Period 20th Period 21st Period 22nd Period 23rd Period 24th Period
22nd Period 21st Period 20th Period 19th Period 18th Period (November 2016) (May 2016) (November 2015) (May 2015) (November 2014) Operating revenues (million yen) 12,853 12,363 11,837 10,387 9,763 Operating income (million yen) 6,143 6,108 5,614 4,770 4,438 Ordinary income (million yen) 5,325 5,326 4,689 4,032 3,642 Net income (million yen) 5,324 5,250 4,688 4,031 3,641 Total number of units issued (units) 497,869 484,000 484,000 441,000 441,000 Net assets per unit (yen) 515,230 511,818 511,777 505,566 504,746 Distribution per unit (yen) 10,695 10,508 9,688 9,142 8,256 Total assets (million yen) 483,450 476,690 460,705 432,232 399,555 Loan-to-value (LTV) (based on total asset value) (%) 42.3 43.3 41.7 44.3 40.2 Number of investment properties 53 50 50 47 46 Asset size (billion yen) 467.7 458.3 445.7 413.2 387.5 Total rentable area (m2) 336,722.04 328,027.44 325,313.01 288,833.07 286,088.89 Occupancy rate (%) 97.7 98.7 98.3 97.3 97.2 (Note) Distribution per unit for the 22nd fiscal period is calculated by dividing the amount obtained by subtracting provision for reserve for reduction entry (164 million yen) from unappropriated retained earnings by the total number of investment units issued. 4 Overview of Portfolio (portfolio list)
(as of December 21, 2016) Acquisition Rentable Structure and Execution Appraisal Ownership Type Price Value at End Property Name Address Area (m2) No. of Floors Completion of Major PML (%) Share of Period (Note 2) (Note 3) Repairs mm yen Land Building (%) (mm yen) (Note 4) Five Central Wards of Tokyo (Note 1) Fee simple and 1 Daiwa Ginza Ginza, Chuo-ku, Tokyo 8,179.62 SRC B3/12F July 1963 2003 14,100 3.0 16,700 leasehold Fee simple 4.53 2 Daiwa Ginza Annex Ginza, Chuo-ku, Tokyo 2,032.11 SRC B3/8F Aug. 1972 2003 3,050 0.6 3,500 Fee simple Fee simple 3.97 3 Daiwa Shibaura Shibaura, Minato-ku, Tokyo 9,619.67 SRC B1/12F Oct. 1987 8,265 1.8 7,670 Fee simple Fee simple 3.82 4 Daiwa Minami-Aoyama Minami Aoyama, Minato-ku, Tokyo 2,715.54 S SRC B2/5F Sept. 1990 4,550 1.0 4,410 Fee simple Fee simple 9.19 5 Daiwa Sarugakucho Sarugakucho, Chiyoda-ku, Tokyo 3,657.43 SRC 8F June 1985 3,190 0.7 3,340 Fee simple Fee simple 7.14 Compartmentalized 6 Daiwa A Hamamatsucho Hamamatsucho, Minato-ku, Tokyo 3,663.38 SRC B2/10F July 1993 2,865 0.6 3,380 Fee simple ownership 3.79 7 Daiwa Jingumae Jingumae, Shibuya-ku, Tokyo 2,198.61 RC B1/4F Dec. 1997 2,800 0.6 2,320 Fee simple Fee simple 13.33 8 Daiwa Shibadaimon Shibadaimon, Minato-ku, Tokyo 2,386.48 SRC RC B1/7F Nov. 1996 2,578 0.5 2,960 Fee simple Fee simple 3.72 9 Daiwa Misakicho Misakicho, Chiyoda-ku, Tokyo 2,137.53 S 8F July 1996 2,346 0.5 2,730 Fee simple Fee simple 4.24 10 Daiwa Shimbashi 510 Shinbashi, Minato-ku, Tokyo 2,641.56 SRC B1/8F Apr. 1974 2006 2,080 0.4 2,470 Fee simple Fee simple 5.51 11 Daiwa Tsukijiekimae Tsukiji, Chuo-ku, Tokyo 2,659.59 SRC 10F Jan. 1996 1,560 0.3 1,650 Fee simple Fee simple 4.23 12 Daiwa Tsukiji Tsukiji, Chuo-ku, Tokyo 1,487.44 SRC B1/7F Jan. 1990 1,240 0.3 1,430 Fee simple Fee simple 4.98 13 Daiwa Tsukishima Tsukishima, Chuo-ku, Tokyo 8,426.28 S 5F July 1996 7,840 1.7 9,230 Fee simple Fee simple 4.87 14 Daiwa Nihonbashi Horidomecho Nihombashi-Horidomecho, Chuo-ku, Tokyo 2,850.81 SRC B2/7F Apr. 1993 2,520 0.5 2,530 Fee simple Fee simple 4.68 15 Daiwa Azabudai Azabudai, Minato-ku, Tokyo 1,697.88 SRC B2/9F Apr. 1984 1,600 0.3 1,860 Fee simple Fee simple 6.64 Compartmentalized 16 Daiwa Kyobashi Hatchobori, Chuo-ku, Tokyo 3,265.83 SRC B1/8F Oct. 1974 2005 3,460 0.7 3,290 Fee simple ownership (100%) 4.51 Compartmentalized 17 Daiwa Kojimachi 4-chome Kojimachi, Chiyoda-ku, Tokyo 2,690.90 SRC B2/9F Oct. 1987 2,910 0.6 2,750 Fee simple ownership (100%) 6.19 Compartmentalized 18 Daiwa Onarimon Shinbashi, Minato-ku, Tokyo 11,614.92 SRC 9F Apr. 1973 2003 13,860 3.0 13,400 Fee simple ownership (100%) 3.89 19 Shinjuku Maynds Tower (Note 5) Yoyogi, Shibuya-ku, Tokyo 45,543.97 S SRC B3/34F Sept. 1995 133,800 28.5 122,000 Co-ownership Co-ownership 2.03 20 SHIBUYA EDGE Udagawacho, Shibuya-ku, Tokyo 2,480.65 RC B1/9F Aug. 2006 5,900 1.3 4,870 Fee simple Fee simple 1.56 Fee simple and 21 Daiwa Kodenmacho Nihombashi-Odenmacho, Chuo-ku, Tokyo 2,379.31 SRC 8F Mar. 1985 2,460 0.5 2,150 leasehold Fee simple 4.19 22 Daiwa Jimbocho Kanda-Jimbocho, Chiyoda-ku, Tokyo 3,164.26 S B1/8F Mar. 1997 4,150 0.9 3,470 Fee simple Fee simple 5.05 23 Daiwa Nishi-Shimbashi Nishi-Shimbashi, Minato-ku, Tokyo 4,815.84 SRC B1/10F July 1993 5,000 1.1 6,000 Fee simple Fee simple 3.76 24 Daiwa Kayabacho Building Nihombashi-Kayabacho, Chuo-ku, Tokyo 5,899.11 S SRC B1/8F Apr. 2010 5,600 1.2 7,710 Fee simple Fee simple 4.50 25 Daiwa Jinbocho 3-chome Kanda-Jimbocho, Chiyoda-ku, Tokyo 2,889.34 S 9F Feb. 2010 3,550 0.8 4,620 Fee simple Fee simple 5.33 26 E SPACE TOWER Maruyamacho, Shibuya-ku, Tokyo 13,960.87 S SRC B1/15F Oct. 2002 24,000 5.1 32,800 Fee simple Fee simple 3.11 27 Daiwa Nihonbashi Hongokucho Nihombashi Hongokucho, Chuo-ku, Tokyo 2,143.08 S 8F May 2010 1,721 0.4 2,310 Fee simple Fee simple 3.80 Compartmentalized 28 shinyon curumu Shinjuku, Shinjuku-ku, Tokyo 6,751.31 S RC B2/11F Jan. 2012 9,650 2.1 13,700 Right of site ownership (100%) 4.44 29 Daiwa Akasaka Akasaka, Minato-ku, Tokyo 8,739.17 SRC B2/7F Sept. 1990 9,200 2.0 12,900 Fee simple Fee simple 7.14 30 Daiwa Shibuya Miyamasuzaka Shibuya, Shibuya-ku, Tokyo 6,327.95 S B1/12F Dec. 1988 7,000 1.5 8,660 Fee simple Fee simple 5.64 31 Azabu Green Terrace Minami Azabu, Minato-ku, Tokyo 13,234.39 S RC B1/6F Sept. 2009 14,000 3.0 15,900 Fee simple Fee simple 2.67 32 Daiwa Ebisu 4-chome Ebisu, Shibuya-ku, Tokyo 2,885.64 SRC B1/9F Dec. 1997 4,135 0.9 5,380 Fee simple Fee simple 2.44 Compartmentalized 33 LAQUAS Higashi Shinjuku Okubo, Shinjuku-ku, Tokyo 7,498.33 S10F Aug. 2010 8,450 1.8 10,200 Fee simple ownership (100%) 4.46 34 Concept Aoyama Jingumae, Shibuya-ku, Tokyo 4,421.15 S RC B1/7F Nov. 2001 9,800 2.1 11,800 Fee simple Fee simple 4.42 35 Shinsen Place Shinsen-cho, Shibuya-ku, Tokyo 2,811.35 RC B1/9F Sept. 2001 4,800 1.0 6,260 Fee simple Fee simple 6.21 36 Glass City Shibuya Nanpeidaicho, Shibuya-ku, Tokyo 8,566.73 S SRC B1/11F Feb. 2004 16,000 3.4 17,800 Fee simple Fee simple 1.61 37 River Gate Nihonbashi Hakozakicho, Chuo-ku, Tokyo 32,063.06 S SRC RC B2/20F Feb. 1994 28,000 6.0 30,100 Fee simple Fee simple 1.76 38 Daiwa Hatchobori ekimae Hatchobori, Chuo-ku, Tokyo 2,622.42 S SRC B1/10F Feb. 2006 2,871 0.6 3,210 Fee simple Fee simple 5.89 39 Daiwa Hatchobori ekimae West Hatchobori, Chuo-ku, Tokyo 1,723.15 SRC B1/9F Feb. 1996 1,647 0.4 1,800 Fee simple Fee simple 7.03 40 Nikko Building Nishishinjuku, Shinjuku-ku, Tokyo 6,967.61 SRC RC S B2/11F Aug. 1991 13,710 2.9 14,800 Fee simple Fee simple 4.32 41 Kirin Nihonbashi Building Nihonbashi Koami-cho, Chuo-ku, Tokyo 5,630.17 S SRC 7F Feb. 1999 8,180 1.7 8,230 Fee simple Fee simple 5.76 42 Heiwa Higashi-nihonbashi Building Higashi Nihonbashi, Chuo-ku, Tokyo 5,015.88 S 7F Mar. 2008 6,370 1.4 6,560 Fee simple Fee simple 4.37 43 Square Daikanyama Building Daikanyamacho, Shibuya-ku, Tokyo 1,588.35 S 6F Mar. 2001 2,280 0.5 2,470 Fee simple Fee simple 6.21 44 Shinjuku West Building Nishishinjuku, Shinjuku-ku, Tokyo 1,120.58 RC 4F Mar. 1989 942 0.2 1,160 Fee simple Fee simple 8.28 45 Shin Kanda Mikuracho Building Kanda Mikura-cho, Chiyoda-ku, Tokyo 1,732.42 SRC S B1/7F Jan. 1991 1,592 0.3 1,680 Fee simple Fee simple 6.01 Subtotal 276,901.67 415,622 88.6 444,160 Greater Tokyo Area (Note 1) 46 Daiwa Higashi-Ikebukuro Higashi-Ikebukuro, Toshima-ku, Tokyo 4,461.47 SRC S B1/9F June 1993 2,958 0.6 3,650 Fee simple Fee simple 3.55 47 Daiwa Shinagawa North Kita-Shinagawa, Shinagawa-ku, Tokyo 6,548.17 SRC B1/11F July 1991 7,710 1.6 6,010 Fee simple Fee simple 7.19 48 Daiwa Osaki 3-chome Osaki, Shinagawa-ku, Tokyo 1,786.06 S RC B1/6F Sept. 2007 1,650 0.4 2,320 Fee simple Fee simple 6.14 49 Daiwa Kamiooka Kamiooka Nishi, Konan-ku, Yokohama City, Kanagawa 2,630.30 S SRC B3/7F May 2011 2,000 0.4 2,600 Fee simple Fee simple 6.29 50 Integral Tower Kamiogi, Suginami-ku, Tokyo 17,778.14 S SRC B2/18F June 1993 15,220 3.2 18,500 Fee simple Fee simple 1.18 51 Meguro Place Tower Meguro, Meguro-ku, Tokyo 3,519.50 S SRC B2/14F July 2009 5,600 1.2 6,410 Fee simple Fee simple 1.68 Compartmentalized 52 Ogikubo TM Building Ogikubo, Suginami-ku, Tokyo 3,849.63 SRC B1/7F Nov. 1990 3,800 0.8 4,300 Fee simple ownership (100%) 6.41 Subtotal 40,573.27 38,938 8.3 43,790 Major Regional Cities (Note 1) 53 Daiwa Meieki Meieki-Minami, Nakamura-ku, Nagoya City, Aichi 7,461.90 S 12F Dec. 2007 5,300 1.1 7,660 Fee simple Fee simple 10.31 54 Kitahama Grand Building Awaji-cho, Chuo-ku, Osaka City, Osaka 13,517.62 S SRC B1/16F Feb. 2008 9,481 2.0 11,500 Fee simple Fee simple 3.48 Subtotal 20,979.52 14,781 3.1 19,160 Total 338,454.46 469,341 100.0 507,110 (Note 1) The Five Central Wards of Tokyo are Chiyoda, Chuo, Minato, Shinjuku and Shibuya Wards (or ku). The Greater Tokyo Area is Tokyo (excluding the Five Central Wards), and Kanagawa, Chiba and Saitama Prefectures. Major Regional Cities are the Osaka area (Osaka, Kyoto and Hyogo prefectures), Nagoya area (Aichi, Mie and Gifu prefectures) and ordinance designated cities and core cities set forth in the Local Autonomy Act. (Note 2) The Rentable Area is indicated as of November 30, 2016 (end of 22nd Fiscal Period). (Note 3) Structure acronyms are S for steel, RC for reinforced concrete and SRC for steel-reinforced concrete. (Note 4) The values entered in the Appraisal Value at End of Period column are the appraisal values in the real estate appraisal reports with a pricing point of December 1, 2016 for Shin Kanda Mikuracho Building and of November 30, 2016 (end of 22nd Fiscal Period) for other properties. (Note 5) The entrusted real estate corresponding to trust beneficiary interests that DOI owns regarding Shinjuku Maynds Tower is a co-ownership interest equal to 6/7 of the entire property. The figure shown for the Rentable Area is the figure equivalent to 6/7 of the total rentable area of the entire building.
I. Overview of Daiwa Office Investment Corporation 5 Overview of Portfolio (portfolio distribution)
DOI concentrates its investment in the Five Central Wards of Tokyo (Chiyoda, Chuo, Minato, Shinjuku and Shibuya)
Shibuya-ku
7 Daiwa Jingumae 20 SHIBUYA EDGE 30 Daiwa Shibuya Miyamasuzaka 32 Daiwa Ebisu 4-chome 46 Daiwa Higashi-Ikebukuro
Ikebukuro Sta. 46
Toshima- ku 19 Shinjuku Maynds Tower 26 E SPACE TOWER 34 Concept Aoyama 35 Shinsen Place 36 Glass City Shibuya 43 Square Daikanyama Building
Asakusa Sta.
Nakano Sta. 50 Suginami-ku Oshiage Sta.
52 Ogikubo Sta. 33 Higashi Suidobashi Sta. 9 5 Akihabara Sta. Shinjuku Sta. Kinshicho Sta. 50 Integral Tower Shinjuku-ku 22 Shinjuku-ku Kudanshita Sta. 25 44 42 Shinjuku Sta. 45 27 40 28 21 14 Otemachi Sta. Ningyocho Sta. 19 Yotsuya Sta. 17 Chiyoda-ku Nihombashi Sta. Honancho Sta. 37 24 Suitengumae 52 Ogikubo TM Building 28 shinyon curumu 33 LAQUAS Higashi Shinjuku 40 Nikko Building 44 Shinjuku West Building Tokyo Sta. Sta. 41 Akasaka- Chuo-ku mitsuke Sta. Hibiya Sta. Shibuya-ku Aoyama- 16 3938 Tokyo Metro 7 itchome Sta. Akasaka Sta. Hatchobori Minato-ku Toranomon Sta. Sta. Ginza Line 1 2 Gaienmae Sta. 29 Ginza Sta. Marunouchi Line 34 11 Hibiya Line 4 Shimbashi Sta. 12 Tozai Line Omotesando Sta. 23 Chiyoda Line 10 Tsukishima Sta. 20 18 Yurakucho Line 13 Hanzomon Line 30 15 6 Namboku Line 26 Shibuya Sta. Fukutoshin Line 3 Daiwa Shibaura 4 Daiwa Minami-Aoyama 6 Daiwa A Hamamatsucho 35 8 Toei Subway 36 Shibakoen Sta. Oedo Line 43 Minato-ku Asakusa Line Mita Line 32 Tokyu Denen-Toshi Line 31 Shinjuku Line Ebisu Sta. 3 Naka-meguro Sta. JR Yamanote Line Saikyo Line Tokyu Toyoko Line Chuo Line Sobu Line 8 Daiwa Shibadaimon 10 Daiwa Shimbashi 510 15 Daiwa Azabudai Keiyo Line Yokosuka Line 51 Meguro Sta. and Sobu Rapid Line Shinagawa Main investment area: Sta. Five Central Wards of Tokyo 47 Focused investment Osaki Sta. area: Greater Tokyo 48 Shinagawa- 54 53 49 Major Regional Cities 18 Daiwa Onarimon 23 Daiwa Nishi-Shimbashi 29 Daiwa Akasaka 31 Azabu Green Terrace 51 Meguro Place Tower ku
6 DOI concentrates its investment in the Five Central Wards of Tokyo (Chiyoda, Chuo, Minato, Shinjuku and Shibuya)
(as of December 21, 2016)
Chuo-ku
2 Daiwa Ginza Annex 11 Daiwa Tsukijiekimae 12 Daiwa Tsukiji 13 Daiwa Tsukishima
Ikebukuro Sta. 46
Toshima- ku 1 Daiwa Ginza 37 River Gate 14 Daiwa Nihonbashi Horidomecho 16 Daiwa Kyobashi 21 Daiwa Kodenmacho 24 Daiwa Kayabacho Building
Asakusa Sta.
Nakano Sta. 50 Suginami-ku Oshiage Sta.
52 Ogikubo Sta. 33 Higashi Suidobashi Sta. 9 5 Akihabara Sta. Shinjuku Sta. Kinshicho Sta. 27 Daiwa Nihonbashi Hongokucho 38 Daiwa Hatchobori ekimae 39 Daiwa Hatchobori ekimae West 22 Shinjuku-ku Kudanshita Sta. 25 44 42 Shinjuku Sta. 45 27 40 28 21 14 Otemachi Sta. Ningyocho Sta. 19 Yotsuya Sta. 17 Chiyoda-ku Nihombashi Sta. Honancho Sta. 37 24 Suitengumae 41 Kirin Nihonbashi Building 42 Heiwa Higashi-nihonbashi Building Tokyo Sta. Sta. 41 Akasaka- Chuo-ku mitsuke Sta. Hibiya Sta. Chiyoda-ku Shibuya-ku Aoyama- 16 3938 Tokyo Metro 7 itchome Sta. Akasaka Sta. Hatchobori Toranomon Sta. Sta. Ginza Line 1 2 Gaienmae Sta. 29 Ginza Sta. Marunouchi Line 34 11 Hibiya Line 4 Shimbashi Sta. 12 Tozai Line Omotesando Sta. 23 Chiyoda Line 10 Tsukishima Sta. 20 18 Yurakucho Line 13 Hanzomon Line 15 6 30 5 Daiwa Sarugakucho 9 Daiwa Misakicho 17 Daiwa Kojimachi 4-chome 22 Daiwa Jimbocho Namboku Line 26 Shibuya Sta. Fukutoshin Line 35 8 Toei Subway 36 Shibakoen Sta. Oedo Line 43 Minato-ku Asakusa Line Mita Line 32 Tokyu Denen-Toshi Line 31 Shinjuku Line Ebisu Sta. 3 Naka-meguro Sta. JR Yamanote Line Saikyo Line 25 Daiwa Jinbocho 3-chome 45 Shin Kanda Mikuracho Building Tokyu Toyoko Line Chuo Line Sobu Line Keiyo Line Yokosuka Line 51 Meguro Sta. and Sobu Rapid Line Shinagawa Main investment area: Sta. Five Central Wards of Tokyo 47 Focused investment Osaki Sta. area: Greater Tokyo 48 Shinagawa- 54 53 49 Major Regional Cities ku 47 Daiwa Shinagawa North 48 Daiwa Osaki 3-chome 49 Daiwa Kamiooka 53 Daiwa Meieki 54 Kitahama Grand Building
I. Overview of Daiwa Office Investment Corporation 7 Internal Growth Measures
Realizing rent increases upon contract renewal and tenant replacement while working to heighten tenant satisfaction
Office Market Trends
Further improvements in vacancy rate are observed and rent levels are showing signs of recovery.
■ Office Building Rental Market of Tokyo ■ Office Building Rental Market of 23 Wards of Tokyo (yen/tsubo) (%) (tsubo) (%) 24,000 10.0 400,000 9.0 Average rents of existing buildings (left axis) Predicted figures Vacancy rate of existing buildings (right axis) 300,000 7.5 22,000 8.0
200,000 6.0 20,000 6.0 100,000 4.5 18,319 18,000 4.0 0 3.0 3.29 16,000 2.0 -100,000 1.5 Floor area of new supplies 14,000 0.0 -200,000 Floor area of new demands Vacancy rate (right axis) 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 (Source) Miki Shoji (Source) CBRE “Mid-term Office Market Outlook 2016~2020”
■ Occupancy Rate ■ Rate of New Leases and Cancellations*
(%) (%) 100.0 20.0 98.3 98.7 97.7 97.7 97.2 97.3 97.3 97.6 13.4 96.4 96.4 95.9 96.3 97.5 10.0 9.8 95.4 95.0 96.8 7.2 7.4 8.2 95.0 5.7 6.1 6.2 3.3 4.4 3.9 3.2 4.3 3.5 94.3 2.0 1.8 2.9 2.6 92.8 0.0 92.4 -1.7 -1.6 90.0 -3.4 -2.8 -2.4 -3.2 -2.8 -3.9 -3.9 -3.8 -5.9 -5.3 -5.7 Occupancy rate (actual) -10.0 -7.3 -6.3 -6.1 Occupancy rate (forecast) -12.0 Rate of new leases Expected rate of new leases Occupancy rate (forecast) -14.7 85.0 85.7 (as of disclosure in July 2016) -20.0 Rate of cancellations Expected rate of cancellations End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of 7th 8th 9th 10th 11th 12th 13th 14th 15th 16th 17th 18th 19th 20th 21st 22nd 23rd 24th 7th 8th 9th 10th 11th 12th 13th 14th 15th 16th 17th 18th 19th 20th 21st 22nd 23rd 24th Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period *Transition of rate of new leases and cancellations areas to the total rentable area.
Rental Business Status
■ Average Contract Rent and Market Rent ■ Attribution Analysis/Monthly Contract Rent* (yen/tsubo) (Million Yen) 30,000 100 2,000 Decrease by Tenants’ 27,000 90 Cancellations Decrease by 1,950 Transfer +59 –68 +57 –15 24,000 78.85 80.16 80 Decrease by 1,905 1,900 Rent Revisions 78.52 79.53 +8 0 21,000 70 1,863 1,850 Increase by Increase by 19,105 New Leases Increase by 18,674 Rent Revisions New Acquisition 18,000 19,219 60 18,738 1,800
15,000 Average contract rents* 50 Unit rent index 1,750 (Period-on-period comparison, right axis)** 12,000 40 End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of 1,700 4th 5th 6th 7th 8th 9th 10th 11th 12th 13th 14th 15th 16th 17th 18th 19th 20th 21st 22nd Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period End of 21st FP End of 22nd FP Monthly Contract Rent Monthly Contract Rent (Note) Average contract rent of the existing 49 properties at the end of November 2016 is 19,331 yen (amount of change from the previous period: +209 yen) * Monthly Contact Rent is a total of final rent from tenants contracting at the end of the Fiscal Period. * Average contract rents are average monthly contracted rents with tenants at the end of each fiscal period. Monthly Contract Rent for Shinjuku Maynds Tower was adjusted to 6/7 of the total. ** Unit rent index is the earning rates of unit rent of individual properties indexed with the 7th Fiscal Period as 100.
8 Status of Contract Renewal
■ Monthly Rent Increase Due to Contract Renewal/New Lease Contract Renewal New Lease Total Increased Rent as Percentage of Rents and Increased Rent as Percentage of Net (Note 1) (Note 2) Common Area Fees Income (Note 3) Income (Note 4) (thousand yen / (thousand yen / (thousand yen / month) month) month) 6-month conversion 12-month conversion 6-month conversion 12-month conversion 19th Fiscal Period (ended May 2015) 5,862 3,157 9,020 0.7% 1.3% 1.5% 3.0% 20th Fiscal Period (ended November 2015) 7,938 6,438 14,376 1.0% 2.0% 2.1% 4.3% 21st Fiscal Period (ended May 2016) 13,479 766 14,246 0.8% 1.7% 1.8% 3.6% 22nd Fiscal Period (ended November 2016) 8,759 3,988 12,747 0.7% 1.5% 1.5% 2.9% (Note 1) “Contract renewal” indicates, for the portion of which lease contract was renewed during each fiscal period, the total of net increase in monthly rent calculated by subtracting the total of monthly rents before renewal from the total of monthly rents at the end of the relevant fiscal period. (Note 2) “New lease” indicates, for the portion for which a lease contract was concluded with a new tenant in each fiscal period, the total of net increase in monthly rent calculated by subtracting the total of monthly rents under the lease contract with the immediately preceding tenant from the total of monthly rents at the end of the relevant fiscal period. (Note 3) The figures are calculated by dividing the amount obtained by multiplying the total of net increase in monthly rents due to contract renewal and new lease by 6, by rents and common area fees income in the immediately prior fiscal period, rounded to the first decimal place. (Note 4) The figures are calculated by dividing the amount obtained by multiplying the total of net increase in monthly rents due to contract renewal and new lease by 6, by net income in the immediately prior fiscal period, rounded to the first decimal place.
■ Changes in Ratios of Areas with Rent Increase/Decrease/ ■ Changes in Rent Increase/Decrease Rate of Contract Unchanged and Cancellation upon Contract Renewal Renewal Tenants (sections) (%) 22nd Period 42.6 53.4 3.9 15.0 0.2 21st Period 49.0 50.1 0.7 9.0 10.0 9.8 7.3 20th Period 37.5 61.1 1.4 5.2 9.0 6.1 4.3 7.2 5.0 6.1 19th Period 26.5 70.8 2.7 5.0 5.2 4.5 1.0 0.0 2.5 18th Period 4.8 8.6 66.7 19.9 0.0 0.0 0.0 0.0 17th Period 8.5 7.9* 14.1* 57.4 12.1 -5.2 -6.5 -4.9 -5.1 -5.0 -7.0 -7.0 16th Period 10.0 4.6 77.1 8.2 -10.2 -10.0 15th Period 14.4 3.1 70.3 12.3
-15.0 14th Period 18.9 67.3 13.8 Increase rate 13th Period 40.6 0.8 54.6 4.0 -20.0 Decrease rate -22.7 0.0 20.0 40.0 60.0 80.0 100.0 -22.7 Rent increase / decrease rate (%) -25.0 14th 15th 16th 17th 18th 19th 20th 21st 22nd Decrease Increase Unchanged Cancellation Period Period Period Period Period Period Period Period Period * Of the increase in the 17th FP, 14.1% is due to some tenants switching from sublease agreements to (Note 1) “Increase rate” and “Decrease rate” indicate the simple average of rent increase/decrease against contract rents before renewals for lease contracts whose contract renewal periods have arrived in master lease agreements and 7.9% is due to negotiations with tenants. the above periods and whose rent renewals have been agreed, rounded to the first decimal place. (Note 2) “Rent increase / decrease rate” are obtained by dividing the total of contract rents after renewal for lease contracts whose contract renewals have been agreed by the total of contract rents before renewal, rounded to the fist decimal place. ■ Increase/Decrease in Monthly Rent due to New Lease and ■ Area of which Contract Ended/Will End In and After Increase/Decrease Rate (compared to the previous tenant the Fiscal Period Ended November 2016 (the 22nd fiscal period) for the same section) (based on rentable area) (Thousand yen) (%) (%) 60,000 New tenant (left axis) Increase/decrease rate (right axis) 59,042 22.5 30.0 Previous tenant (left axis) 55,054 52,580 Scheduled 50,000 25.0 24.6 46,142 23.6
40,000 15.0 20.0 35,345 14.0 18.1 17.6 18.2 32,188 30,000 29,203 29,970 15.0 9.8 20,000 7.2 7.5 10.0
10,000 5.0 2.6 0 0.0 0.0 19th Period 20th Period 21st Period 22nd Period 22nd Period 23rd Period 24th Period 25th Period 26th Period (Note) “New tenant” refers to the tenant who concluded a new lease contract in the respective fiscal period, (Note) The ratio of areas of which lease contracts are scheduled to be renewed in each fiscal period to the and “Previous tenant” refers to the tenant, for the same section for which the new tenant concluded a total rentable area (329,312.48m2) as of the end of November 2016 is indicated. lease contract, which had been under a lease contract immediately before the new tenant.
I. Overview of Daiwa Office Investment Corporation 9 Internal Growth Measures
“Bonji-Tettei”
Continuous internal growth and maximization of asset value through “Bonji-Tettei” “Bonji-Tettei” Accurate grasp of present ◦In depth understanding of the leasing market ◦Understanding of features of portfolio properties situations ◦Capturing real opinions of occupying tenants ◦Determined budget control ◦Proactive interactions with brokers ◦Conducting tenant satisfaction surveys Activities for internal growth ◦Accompanying new tenant candidate viewings ◦Thorough examination of properties ◦Frequent visit on tenants ◦Solid numerical analysis in detail
◦Prompt and appropriate strategic lease-up Realization of internal growth ◦Realizing stable revenue over a long-term by building up solid relationships with tenants ◦Reliable cost control based on rigorous repair plans, etc. Aims to maximize asset value Office Management Team (7 members) Aims to maximize asset value through the organization of the investment corporation’s portfolio by assigning personnel in charge Hiroshi Udagawa Takafumi Ushiku Kotaro Ishii Jun Arai Chie Kamimura Yuuki Kobatake Jun Iwasaki and specialist groups to each Asset management Asset management Asset management Asset management Asset management Asset management Asset management work history: work history: work history: work history: work history: work history: work history: 1 month property. 10 years 4 months 12 years 2 months 10 years 7 months 10 years 7 months 10 years 5 months 4 years 1 month
Investment Planning Team Middle office work: Budget and performance management for the portfolio (3 members)
Construction Management Engineering: Formulation and implementation of construction planning for assets Team (4 members) (Note) “Asset Management work history” is the number of years engaged in the relevant work (as of end of Nov. 2016) and does not indicate the number of years employed at the asset management company. Occupancy Status of Properties Subject to Leasing Improvement in the Fiscal Period Ended November 2016 (22nd FP)
■ Daiwa Tsukishima (Acquisition Price: 7,840 million yen) ■ Daiwa Shimbashi 510 (Acquisition Price: 2,080 million yen) ■ Daiwa Osaki 3-chome (Acquisition Price: 1,650 million yen)
100.0(%) 100.0 100.0(%) 99.6 100.0(%) 100.0 100.0 100.0 100.0 99.6 99.6 100.0 90.0 90.0 88.0 50.0 56.7 88.0 80.0 80.0 * （82.2） 78.9 78.9 13.2 0.0 70.0 70.0 ‘15/11 ‘16/2 ‘16/5 ‘16/8 ‘16/11 ‘15/11 ‘16/2 ‘16/5 ‘16/8 ‘16/11 ‘15/11 ‘16/2 ‘16/5 ‘16/8 ‘16/11
• Promoted to increase inquiries by holding property • Captured floor expansion motive of the existing tenants • With the property’s high scarcity value due to its viewings before and after the major renewal work and through constant and good relationships and succeeded relatively new age and proximity to the station, raising recognition of the property among brokers. in concluding a floor expansion agreement without succeeded in drawing out the needs of major companies • Visited brokers separately considering business creating any downtime. by tapping into the needs for sub-offices/relocation of 100 100 100 categories/styles that would match the property *Without the floor expansion from the existing tenant, the occupancy companies with rent-paying capacity. characteristics and explained the property. rate would have fallen to 88.2%. • As a result of negotiations, contracts were concluded at an90 early stage with favorable terms and conditions to 90 realize full occupancy. 50 Properties Subject to Leasing Improvement in the Fiscal Period 80ending May 2017 (23rd FP) 80
0 70 70 ■ Daiwa Tsukishima (Acquisition Price: 7,840 million yen) ■ Concept Aoyama (Acquisition Price: 9,800 million yen) ■ River Gate (Acquisition Price: 28,000 million yen) • Aim for securing tenants • With the move-out of the main • Aim for early securement of centering on companies based in tenant, implemented renovation tenants by taking advantage of the the area, etc. by taking of facilities (air-conditioning, property feature capable of advantage of favorable access to plumbing-related) to enhance securing 600 tsubos or larger area central Tokyo and relatively low the value of the building, which per floor at a reasonable rent in rent level for the size and grade had been left undone since Tokyo’s major three wards. of the property. completion. • For leasing sections scheduled to • Aim for early leasing of the • Aim to take in needs of creative be vacated but still occupied remaining vacancies by businesses and/or needs from (cancellation dates yet to arrive), launching campaigns targeting Shibuya area where vacancies aim to conclude leasing contracts tenants and brokers. are decreasing, capitalizing on before the cancellation dates by the brand strength of the conducting a property viewing Aoyama area. using currently vacant sections.
10 Measures to Increase Portfolio Value
■ Strategic Renewal Work ■ Coexistence with Local Societies Daiwa Tsukishima Shinjuku Maynds Tower Entrance Shinjuku Maynds Tower participated in “Shinjuku Minamirumi” (annual Before After event held for the fourth time) organized by Odakyu Electric Railway Co, Ltd., Takashimaya Co., Ltd., East Japan Railway Company, Asahi Mutual Life Insurance Company and Daiwa Securities, and arranged a delightful space featuring shooting stars and snow crystals displayed in a row from the snow-covered Christmas tree to the pedestrian deck and to the main entrance.
Pedestrian Deck Christmas Tree Elevator Hall Before After
Restroom Before After Plants Entrance
Concept Aoyama Restroom Before After Period: November 9, 2016 – February 14, 2017
Environmental Efforts
■ Progress in Introduction of Green Leasing at Shinjuku Maynds Tower Ratio of Areas with LED Lighting Installed*
As part of measures to protect the environment and raise tenant satisfaction, the Investment (%) 40.0 Shinjuku Maynds Tower Corporation has taken initiatives in which it concludes green leasing agreements with tenants 35.0 36.3 and promotes installation of LED lighting in areas exclusively occupied by the tenants since 30.0 2014. Around 40% of areas exclusively occupied by the tenants are expected to have LED lighting in the fiscal period ending May 2017. 25.0 20.0 18.2 Benefits for Tenants Benefits for the Investment 15.0 •Reduction of utility charges and maintenance Corporation costs 10.0 10.3 •Reduction of maintenance costs •Improvement of working environment in offices 6.9 •Enhancement of property value by making 5.0 3.4 3.4 •Contribution to corporate social responsibility energy-saving investments (CSR) 0.0 •Receiving green lease fees •Enhancement of the company’s image 18th 19th 20th 21st 22nd 23rd Period Period Period Period Period Period *Forecast figure is indicated for the 23rd FP. ■ Acquired “Green Star” Rating for 5th Consecutive Year at GRESB 2016 Daiwa Real Estate Management participated in the Global Real Estate Sustainability Benchmark (GRESB)’s GRESB Real Estate Assessment in 2016, targeting Daiwa Office Investment Corporation, and received a high evaluation on sustainability in both “management and policy” and “implementation and measurement” and acquired Green Star, the highest category, for the fifth consecutive year.
I. Overview of Daiwa Office Investment Corporation 11 External Growth Measures
Investment in selectively-chosen, high-quality competitive properties even in a harsher acquisition environment
Current Portfolio and Acquisition Policy
DOI will invest in competitive properties based on in-depth data analysis upon careful selection from among the vast information on properties obtained through diverse sourcing.
■ Acquisition Policy ■ Distribution Chart of Portfolio Properties Building age (years) * Distance to station is indicated by calculating 80m as one minute • Place priority on the Five Central Wards of Tokyo and equivalent areas. 60 • Thoroughly select properties in view of actual demand toward location (distance to Properties acquired in the 23rd FP 55 Properties acquired in the 22nd FP station, station power, crowd attraction, surrounding environment), building specs, etc. Properties acquired after the sponsor change • Target properties to improve stability and profitability of our existing portfolio. 50 Properties acquired before the sponsor change Properties sold in the 22nd FP • Invest in buildings with an age of less than 25 years. 45
■ Sale Policy 40
• Consider replacement of properties if necessary through sale in light of properties’ 35 future competitiveness, profitability, etc. Daiwa Kudan
30 Ogikubo ■ Number of Properties Reviewed for Acquisition TM Building Shin Kanda Mikuracho Building 25 Shinjuku (cases) Number of properties reviewed (left axis) * Number of gross proposals (cases) West Building 500 100 Number of properties reviewed 20 in detail (right axis) 416 393 400 356 80 344 15 Square Daikanyama Building 300 296 300 268 289 60 264 Heiwa Higashi-nihonbashi Building 10 200 40 28 31 25 26 23 17 18 5 100 15 12 20 0 0 0 14th Fiscal 15th Fiscal 16th Fiscal 17th Fiscal 18th Fiscal 19th Fiscal 20th Fiscal 21st Fiscal 22nd Fiscal 0 1 2 3 4 5 6 7 8 9 10 11 Period Period Period Period Period Period Period Period Period Distance to station (minutes)
Property Acquisitions after Sponsor Change Total acquisition price: 244,199 million yen
Time of Acquisition 9th Period 10th Period 11th Period 12th Period 13th Period 14th Period Daiwa Nihonbashi Daiwa Daiwa Daiwa Kudan Daiwa Daiwa E SPACE TOWER Daiwa Jimbocho Nishi-Shimbashi Kayabacho Building Jinbocho 3-chome Hongokucho Osaki 3-chome
Property name
Area Chiyoda Ward, Tokyo Minato Ward, Tokyo Chiyoda Ward, Tokyo Chuo Ward, Tokyo Chiyoda Ward, Tokyo Shibuya Ward, Tokyo Chuo Ward, Tokyo Shinagawa Ward, Tokyo Acquisition price 4,150 million yen 5,000 million yen 4,000 million yen 5,600 million yen 3,550 million yen 24,000 million yen 1,721 million yen 1,650 million yen Japan Core Asset 2 YK Shining Nova No. 5 B Daiwa Property Co., Endeavor Realty Fund Seller ORIX JREIT Inc. (Note 1) (SPC) Ltd. Tokyu Land Corporation YK (Note 1) Tosei Corporation MCR Six GK
Acquisition date Mar. 10, 2010 Aug. 13, 2010 Sept. 2, 2010 Mar. 25, 2011 Mar. 29, 2011 July 8, 2011 May 11, 2012 Sept. 18, 2012
Time of Acquisition 15th Period 16th Period 17th Period shinyon curumu Daiwa Meieki Daiwa Kamiooka Daiwa Shibuya Daiwa Shibuya Dougenzaka Daiwa Akasaka Miyamasuzaka Integral Tower
Property name
Area Shinjuku Ward, Tokyo Nagoya City, Aichi Yokohama City, Kanagawa Shibuya Ward, Tokyo Minato Ward, Tokyo Shibuya Ward, Tokyo Suginami Ward, Tokyo Acquisition price 9,650 million yen 5,300 million yen 2,000 million yen 4,500 million yen 9,200 million yen 7,000 million yen 15,220 million yen Two domestic industrial Domestic special Domestic special Hakuba Capital 1 TMK E Buildings Limited Ogikubo Building YK Seller Shimizu Corporation companies purpose company purpose company (Note 1) Liability Company (Note 1)
Acquisition Dec. 3, 2012 Feb. 1, 2013 Mar. 1, 2013 July 3, 2013 Aug. 9, 2013 Sept. 27, 2013 May 29, 2014 date Apr. 12, 2013 (Note 1) "YK" stands for limited liability company and TMK (tokutei mokuteki kaisha) stands for special purpose company. (Note 2) The sum of i) the total acquisition price from the time of the above sponsor change on December 21, 2016 and ii) prices for additional acquisition of owned properties or of the site in owned properties during the same period, is 244,619 million yen. 12 Changes in Asset Size and Trading Performance
Aim to achieve medium-term goal of an asset size of 500 billion yen by utilizing acquisition capability earned through capital increase
(billion yen) 550 80.0 (%)
Total Acquisition Price LTV (based on total assets) (right axis) 500 Investment for competitive 500.0 70.0 properties after thorough selection 469.3 458.3 467.7 450 445.7 413.2 60.0 400 387.5 364.0 350 352.7 50.0 332.0 311.3 313.2 314.9 44.3 300 43.0 43.3 42.3 287.3 40.2 41.7 278.1 40.6 40.0 265.0 269.1 37.5 250 34.0 34.2 34.4 Acquisition properties Acquisition properties Acquisition properties • River Gate • Heiwa Higashi Daiwa Hatchobori ekimae 30.0 200 28.9 • Azabu Green Terrace • nihonbashi Building 28.1 • Daiwa Hatchobori ekimae • Square Daikanyama 25.3 25.5 Acquisition properties • Kitahama Grand Building West Building Acquisition property • Daiwa Shibuya Dougenzaka • Shinjuku West Building 150 • Ogikubo TM Building Acquisition properties Acquisition property • Daiwa Osaki • Daiwa Akasaka 20.0 • Daiwa Nishi-Shimbashi • E SPACE TOWER 3-chome • Daiwa Shibuya Miyamasuzaka Acquisition properties • Daiwa Kudan • Daiwa Ebisu 4-chome 100 • LAQUAS Higashi Shinjuku Acquisition properties Acquisition property Acquisition properties Acquisition property • Concept Aoyama • Nikko Building • Shin Kanda Acquisition property Acquisition properties Acquisition property • shinyon curumu • Integral Tower • Shinsen Place • Kirin Nihonbashi Mikuracho Building 10.0 Building 50 • Daiwa Jimbocho • Daiwa Kayabacho • Daiwa Nihonbashi • Daiwa Meieki • Glass City Shibuya • Daiwa Jinbocho 3-chome Hongokucho • Daiwa Kamiooka • Meguro Place Tower
0 0.0 8th 9th 10th 11th 12th 13th 14th 15th 16th 17th 18th 19th 20th 21st 22nd As of Dec. Medium- Fiscal Period Fiscal Period Fiscal Period Fiscal Period Fiscal Period Fiscal Period Fiscal Period Fiscal Period Fiscal Period Fiscal Period Fiscal Period Fiscal Period Fiscal Period Fiscal Period Fiscal Period 31, 2016 term goal
18th Period 19th Period 20th Period Kitahama Grand Daiwa LAQUAS Higashi Azabu Green Terrace Concept Aoyama Shinsen Place Glass City Shibuya Meguro Place Tower River Gate Building Ebisu 4-chome Shinjuku
Minato Ward, Tokyo Osaka City, Osaka Shibuya Ward, Tokyo Shinjuku Ward, Tokyo Shibuya Ward, Tokyo Shibuya Ward, Tokyo Shibuya Ward, Tokyo Meguro Ward, Tokyo Chuo Ward, Tokyo 14,000 million yen 9,481 million yen 4,135 million yen 8,450 million yen 9,800 million yen 4,800 million yen 16,000 million yen 5,600 million yen 28,000 million yen Azabu Green Terrace Domestic industrial Higashi Shinjuku Domestic special Domestic special Glass City TMK Meguro Place TMK GK GK North Beach company Building TMK (Note 1) purpose company purpose company (Note 1) (Note 1) Thames TMK (Note 1)
July 4, 2014 Aug. 1, 2014 Dec. 1, 2014 Dec. 3, 2014 Mar. 2, 2015 Mar. 2, 2015 May 1, 2015 May 1, 2015 June 2, 2015
20th Period 21st Period 22nd Period 23rd Period Daiwa Daiwa Hatchobori Kirin Nihonbashi Heiwa Higashi Square Daikanyama Shinjuku West Ogikubo TM Shin Kanda Nikko Building Hatchobori ekimae ekimae West Building nihonbashi Building Building Building Building Mikuracho Building
Chuo Ward, Tokyo Chuo Ward, Tokyo Shinjuku Ward, Tokyo Chuo Ward, Tokyo Chuo Ward, Tokyo Shibuya Ward, Tokyo Shinjuku Ward, Tokyo Suginami Ward, Tokyo Chiyoda Ward, Tokyo 2,871 million yen 1,647 million yen 13,710 million yen 8,180 million yen 6,370 million yen 2,280 million yen 942 million yen 3,800 million yen 1,592 million yen OH Real Estate Domestic industrial Domestic industrial Overseas company Kirin Beer Marketing Domestic special Hulic GK TC1 GK TC1 company company purpose company Management
Sept. 11, 2015 Sept. 11, 2015 Mar. 29, 2016 May 26, 2016 June 1, 2016 June 29, 2016 July 21, 2016 July 21, 2016 Dec. 21, 2016
(Note 3) Total acquisition price above includes acquisition prices of Daiwa Shibuya Dougenzaka divested in the 21st fiscal period and Daiwa Kudan divested in the 22nd fiscal period.
I. Overview of Daiwa Office Investment Corporation 13 External Growth Measures
Newly Acquired Properties
■ 22nd Fiscal Period Heiwa Higashi-nihonbashi Building [Acquired on June 1, 2016] Square Daikanyama Building [Acquired on June 29, 2016]
Location Higashi-nihonbashi, Chuo-ku, Tokyo Location Daikanyama-cho, Shibuya-ku, Tokyo Site Area 1,213.24m2 Site Area 503.72m2 Structure/Floor S/7F Structure/Floor S/6F Total Floor Area 1,989.40m2 Total Floor Area 6,724.10m2 Acquisition Price 2,280 million yen Acquisition Price 6,370 million yen Appraisal Value 2,420 million yen (as of June 1, 2016) Appraisal Value 6,450 million yen (as of April 30, 2016) Construction Date March 2008 Construction Date March 2001 Occupancy Rate 100.0% (as of June 1, 2016) Occupancy Rate 100.0% (as of June 29, 2016) Number of Tenants 5 (as of June 1, 2016) Number of Tenants 1 (as of June 29, 2016) • Located a 2-minute walk from Higashi-Nihonbashi Station on the • Located a 7-minute walk from Daikanyama Station on the Tokyu Toei Asakusa Subway Line and Bakuro-Yokoyama Station on the Toei Toyoko Line and Shibuya Station on the JR Yamanote Line. Shinjuku Subway Line and 3-minute walk from Bakurocho Station on • Faces Hachiman Dori which is a very busy street and an exclusive the JR Sobu Line (Rapid). residential area and apparel shops are located in the surrounding • Since the Horidomecho and Higashi-Nihonbashi area flourished areas. centering on textile industry for a long time, specific demands from • Highly flexible layout and efficient use is possible, and features apparel companies and such are expected. exterior with a modern façade mostly covered with glass. • Exterior with a modern façade mostly covered with glass.
Shinjuku West Building [Acquired on July 21, 2016] Ogikubo TM Building [Acquired on July 21, 2016]
Location Nishishinjuku, Shinjuku-ku, Tokyo Location Ogikubo, Suginami-ku, Tokyo Site Area 623.78m2 Site Area 970.53m2 Structure/Floor RC/4F Structure/Floor SRC/B1/7F Total Floor Area 1,438.16m2 Total Floor Area 5,116.78m2 Acquisition Price 942 million yen Acquisition Price 3,800 million yen Appraisal Value 1,140 million yen (as of July 1, 2016) Appraisal Value 4,230 million yen (as of July 1, 2016) Construction Date March 1989 Construction Date November 1990 Occupancy Rate 100.0% (as of July 21, 2016) Occupancy Rate 100.0% (as of July 21, 2016) Number of Tenants 7 (as of July 21, 2016) Number of Tenants 11 (as of July 21, 2016) • Located a 2-minute walk from Nishi-Shinjuku Station on The Tokyo • Located a 1-minute walk from Ogikubo Station on the JR Chuo/Sobu Metro Marunouchi Line and a 7-minute walk from Shinjuku Station Lines and the Tokyo Metro Marunouchi Line. which is the largest terminal station in Tokyo. • The property has high locational appeal among local residents to • Location amidst a concentration of various shop-visit type service service-related companies such as banks and securities companies, related industries such as temporary staffing businesses and cram schools and clinics since it is excellent in terms of proximity to financial businesses for end users of insurance, etc. Ogikubo Station. Also, back office demands of large companies in • Can also accommodate the office needs for a sales base that central Tokyo such as call centers are also assumed. requires loading/unloading as flat parking in the premises as well as • Highly flexible layout and efficient use is possible, and it is well-lit. warehouse sections on each floor are provided.
■ 23rd Fiscal Period Shin Kanda Mikuracho Building [Acquired on December 21, 2016]
• Located a five-minute walk from Kanda Station on the JR Location Kanda Mikuracho, Chiyoda-ku, Tokyo Yamanote/Keihin Tohoku/Chuo Lines and the Tokyo Metro Site Area 365.65m2 Ginza Line and a four-minute walk from Shin-Nihonbashi Structure/Floor SRC/S/B1/7F Station on the JR Sobu Line. Total Floor Area 2,167.76m2 • Located a seven-minute walk from Mitsukoshimae Station on the Tokyo Metro Ginza/Hanzomon Lines and Acquisition Price 1,592 million yen Kodenmacho Station on the Tokyo Metro Hibiya Line, and Appraisal Value 1,680 million yen (as of December 1, 2016) Iwamotocho Station on the Toei Shinjuku Line. Construction Date January 1991 • Rectangular-shaped (regular-shaped) rental space with no pillars with highly flexible layout, so efficient use is Occupancy Rate 43.4% (as of December 21, 2016) possible. Number of Tenants 3 (as of December 21, 2016)
14 Financial Conditions
Reduce refinancing risk by extending borrowing periods and diversifying repayment dates
Status of Interest-Bearing Liabilities (as of November 30, 2016)
During the 22nd Fiscal Period, DOI took out short-term loans of 8 billion yen in total to raise funds for the acquisition of new properties, and also conducted early repayment of existing loans (10 billion yen in total) including part of the aforementioned short-term loans. In addition, DOI refinanced matured existing loans (1.5 billion yen), successfully diversifying repayment dates. DOI will continue to focus on stable financial management.
■ Interest-Bearing Liabilities ■ Change in Remaining Years at Time of Procurement of Interest-Bearing Liabilities (billion yen)280 70.0 (%) (years) 10.0 10.0 5.0 (years) Average year remaining at the period end (right axis) 9.0 4.5 Interest-bearing liabilities (left axis) 4.5 240 60.0 Average remaining years at the time of LTV (based on acquisition price) (Note) (right axis) 8.0 procurement during the 22nd Fiscal Period 4.1 4.0 (left axis) 200 50.0 7.0 3.5 7.1 Medium-to-long term, upper-limit LTV target range 6.0 3.0 160 40.0 5.0 2.5 120 30.0 4.0 2.0
80 20.0 3.0 1.5 2.0 1.0 40 10.0 2.4 1.0 0.5
0 0.0 0.0 0.0 End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of End of 8th 9th 10th 11th 12th 13th 14th 15th 16th 17th 18th 19th 20th 21st 22nd 7th 8th 9th 10th 11th 12th 13th 14th 15th 16th 17th 18th 19th 20th 21st 22nd Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period (Note) Dotted line indicates average remaining years at the time of procurement during (Note) LTV (based on acquisition price): Total interest-bearing liabilities / Total acquisition price of properties the 22nd Fiscal Period excluding short-term borrowings ■ Diversification of Repayment Dates ■ Balance of Borrowings by Financial Institution (million yen) Financial institution Balance (mm yen) Share 25,000 Sumitomo Mitsui Banking Corporation 41,400 20.3% Investment Corporation Bond Sumitomo Mitsui Trust Bank 24,850 12.2% 20,000 Development Bank of Japan 21,750 10.6% Mizuho Bank 19,400 9.5% The Bank of Tokyo-Mitsubishi UFJ 16,000 7.8% 15,000 Shinsei Bank 14,000 6.9% Resona Bank 12,500 6.1% Mitsubishi UFJ Trust and Banking 8,500 4.2% 10,000 Mizuho Trust and Banking 6,000 2.9% The Bank of Fukuoka 5,500 2.7% 5,000 Kansai Urban Banking Corporation 5,000 2.4% Aozora Bank 3,000 1.5% Nishi-Nippon City Bank 3,000 1.5% 0 ORIX Bank Corporation 2,500 1.2% 23rd 24th 25th 26th 27th 28th 29th 30th 31st 32nd 33rd 34th 35th 36th 37th 38th 39th 40th 41st 42nd The Gunma Bank 2,500 1.2% Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period Period The 77 Bank 2,000 1.0% ■ Ratio of Fixed- to ■ Ratio of Long- to The Musashino Bank 2,000 1.0% Floating-Rate Borrowings Short-Term Liabilities Tokio Marine & Nichido Fire Insurance 2,000 1.0% The Yamaguchi Bank 2,000 1.0% End of 22nd End of 22nd 14.3 The Higashi-Nippon Bank 1,500 0.7% Fiscal Period 19.6% Fiscal Period % Nippon Life Insurance Company 1,300 0.6% The Kagawa Bank 1,000 0.5% The Hiroshima Bank 1,000 0.5% Taiyo Life Insurance Company 300 0.1% 80.4% 85.7% Fukoku Mutual Life Insurance 200 0.1% Investment Corporation Bonds 5,100 2.5% Fixed interest rates Long-term loans payable, etc. Total 204,300 100.0% Floating interest rates Short-term loans payable, etc.
■ Status of Rating
Rating agency Target rating Rating Rating outlook
Rating and Investment Information, Inc. (R&I) Issuer rating A+ Stable
Japan Credit Rating Agency, Ltd. (JCR) Long-term issuer rating AA− Stable
I. Overview of Daiwa Office Investment Corporation 15 Description of Asset Manager
Organization of Asset Manager (as of December 31, 2016)
■ Description ■ Directors and Auditors
Company Name Daiwa Real Estate Asset Management Co., Ltd President and Representative Director Akira Yamanouchi Address 6-2-1 Ginza, Chuo-ku, Tokyo Vice President and Representative Yuji Shinotsuka Established October 21, 2004 Director Vice President and Representative Paid-in Capital 200 million yen Yoshiki Nishigaki Director President Akira Yamanouchi 9 Director Naoyuki Owa Board of Directors Executive directors: 4; Executive auditors: 1 Director (non-executive) Mikita Komatsu Non-executive directors: 2; Non-executive auditors: 2 Director (non-executive) Akihiko Ogino No. of Employees 69 (excluding dispatched employees) Auditor Tamaki Shibayama Registration of Financial Registration No. 355 (Financial Instruments), Director-General, Auditor (non-executive) Morimasa Matsuda Instruments Business Operator Kanto Local Finance Bureau (Kinsho) Auditor (non-executive) Shinji Kiso Building Lots and Buildings License No. (3)-83920, Governor of Tokyo Transaction Business License ■ Organizational Chart Discretionary Agent for Real License No. 34, Minister of Land, Infrastructure, Transport and Shareholders’ Meeting Estate Transaction Approval Tourism Corporate Auditors Member of The Investment Trusts Association, Japan Board of Directors Association Membership Member of Japan Investment Advisers Association Compliance Committee Member of Type II Financial Instruments Firms Association （*） Investment Committee Compliance Officer President and Representative Director Internal Control Office
Acquisition Origination Asset Management Private Fund Customer Relations Finance Administration Corporate Planning Department Department Department Management Department Department Department Department Department Office Office Investment Team Management Team Finance Team Residential Residential Investment Team Management Team Accounting Team Healthcare Healthcare Investment Team Management Team Management Team Infrastructure Investment Investment Team Planning Team Construction Management Team *Set up separately for each investment corporation Structure
Investment Corporation General Administrator Asset Manager ① ② Asset Custodian General Administrator related to the operation of the Sumitomo Mitsui Trust Bank, Limited administrative instruments General Meeting of Unitholders Manager of Unitholder Daiwa Real Estate Asset Registry, etc. Officers Management Co., Ltd ③ Special Account Management Executive Director: Yoshimi Murakami Institution Supervisory Director: Takayuki Hiraishi Sumitomo Mitsui Trust Bank, Limited ④ Supervisory Director: Hiroshi Sakuma ⑤ General Administrator (Investment Corporation Bonds) Supporting Company Accounting Auditor Sumitomo Mitsui Banking Corporation Daiwa Securities Group Inc. KPMG AZSA LLC Resona Bank, Ltd.
① Asset management contract/General administration affairs contract related to operation ④ Sponsor support agreement of administrative instruments ⑤ Fiscal agency agreement ② General administrative affairs contract/Asset custodian contract ③ Unitholder register, etc. management contract/Special account management contract (Note) The specified affiliated juridical person (meaning a specified affiliated juridical person as provided in Article 12, Paragraph 3 of the Cabinet Office Ordinance on Disclosure of Information, etc. on Specified Securities (Ordinance of the Ministry of Finance No. 22 of 1993; including amendments thereto)) of DOI is Daiwa Securities Group Inc. Daiwa Securities Group Inc. is the Asset Management Company’s parent company (meaning a parent company as stipulated in Article 8, Paragraph 3 of the Ordinance on Terminology, Forms and Preparation Methods of Financial Statements, etc. (Ordinance of the Ministry of Finance No. 59 of 1963; including amendments thereto))
16 II. Asset Management Report
1. Management Status and Other Performance Highlights Data
22nd Period 21st Period 20th Period 19th Period 18th Period Fiscal Period From June 1, 2016 From Dec. 1, 2015 From June 1, 2015 From Dec. 1, 2014 From June 1, 2014 ( To Nov. 30, 2016 ) ( To May 31, 2016 ) ( To Nov. 30, 2015 ) ( To May 31, 2015 ) ( To Nov. 30, 2014 ) (1) Operating Performance (Millions of yen, except per unit data or where otherwise indicated) Operating revenues 12,853 12,363 11,838 10,387 9,764 Rental revenues 12,687 11,948 11,777 10,112 9,693 Operating expenses 6,710 6,255 6,223 5,617 5,325 Property-related expenses 5,433 5,014 5,026 4,487 4,325 Operating income 6,143 6,108 5,615 4,770 4,439 Ordinary income 5,325 5,327 4,690 4,032 3,642 Net income 5,325 5,250 4,689 4,032 3,641 (2) Properties, etc. (as of end of period) Total assets 483,451 476,690 460,706 432,233 399,555 [period-on-period percentage changes] [+1.4%] [+3.5%] [+6.6%] [+8.2%] [+4.9%] Interest-bearing liabilities 204,300 206,300 192,300 191,300 160,800 Net assets 256,517 247,720 247,700 222,955 222,593 [period-on-period percentage changes] [+3.6%] [+0.0%] [+11.1%] [+0.2%] [+10.4%] Unitholders’ capital 251,552 243,404 243,404 219,156 219,156 (3) Distributions Total distribution amount 5,325 5,086 4,689 4,032 3,641 Dividend payout 100.0% 96.9% 100.0% 100.0% 100.0% (4) Per Unit Information Total number of units issued (units) 497,869 484,000 484,000 441,000 441,000 Net assets per unit (yen) 515,231 511,819 511,778 505,566 504,746 Distribution per unit (yen) 10,695 10,508 9,688 9,142 8,256 Distribution amount from earnings per unit (yen) 10,695 10,508 9,688 9,142 8,256 Distribution amount in excess of earnings per unit (yen) – – – – – (5) Financial Indicators ROA Notes 2 1.1% 1.1% 1.1% 1.0% 0.9% [annual rate] and 3 [2.2%] [2.3%] [2.1%] [1.9%] [1.9%] ROE Notes 3 2.1% 2.1% 2.0% 1.8% 1.7% [annual rate] and 4 [4.2%] [4.2%] [4.0%] [3.6%] [3.4%] Capital ratio 53.1% 52.0% 53.8% 51.6% 55.7% [period-on-period percentage changes] [+1.1%] [−1.8%] [+2.2%] [−4.1%] [+2.7%] LTV (loan to value) 42.3% 43.3% 41.7% 44.3% 40.2% Property leasing cash flows (NOI) Note 5 9,004 8,660 8,455 7,180 6,866 (6) Other Referential Information Number of investment properties 53 50 50 47 46 Number of tenants Note 6 558 543 558 450 479 Total rentable area (m2) 336,722.04 328,027.44 325,313.01 288,833.07 286,088.89 Occupancy rate Note 7 97.7% 98.7% 98.3% 97.3% 97.2% Depreciation 1,750 1,726 1,704 1,554 1,497 Capital expenditures 993 517 1,087 905 570 (Note 1) Operating revenues, etc. do not include consumption taxes, etc. (Note 2) ROA: Ordinary income ÷ [(Total assets at beginning of period + Total assets at end of period) ÷ 2] × 100 (Note 3) Figures for the 18th Fiscal Period are the annualized figures calculated based on 183 days of management. Figures for the 19th Fiscal Period are the annualized figures calculated based on 182 days of management. Figures for the 20th Fiscal Period are the annualized figures calculated based on 183 days of management. Figures for the 21st Fiscal Period are the annualized figures calculated based on 183 days of management. Figures for the 22nd Fiscal Period are the annualized figures calculated based on 183 days of management. (Note 4) ROE: Net income ÷ [(Net assets at beginning of period + Net assets at end of period) ÷ 2] × 100 (Note 5) Property leasing cash flows (NOI): Rental revenues − Property-related expenses + Depreciation (Note 6) Number of tenants is the number of end tenants. When there is a tenant occupying multiple buildings, the concerned tenant is counted and stated for each individual building. (Note 7) Occupancy rate: Total leased area ÷ Total rentable area
II. Asset Management Report 17 2. Developments in Asset Management in the Fiscal Period under Review
(1) Brief History of the Investment Corporation Daiwa Office Investment Corporation (the former DA Office Investment Corporation; hereinafter referred to as “DOI”) was established on July 11, 2005 in accordance with the Act on Investment Trusts and Investment Corporations (Act No. 198 of 1951; including amendments thereto) with Daiwa Real Estate Asset Management Co., Ltd. (former name K.K. daVinci Select) (the “Asset Manager”) as the organizer. After its establishment, DOI implemented an additional issuance of investment units through a public offering (99,600 units) on October 18, 2005 and then listed on the Tokyo Stock Exchange, Inc. (TSE) Real Estate Investment Trust Section (stock code: 8976) on the following day. Though initial assets under management were 79,573 million yen (sum total of acquisition price), subsequent activities, such as additional acquisition of properties and replacement of portfolio properties, resulted in the assets under management amounting to 467,750 million yen as of the last day of November 2016. DOI strives to secure stable revenue and sustained growth of the investment assets based on a clear portfolio development policy of specializing in investment in office buildings, with a particular focus on investment in a total floor area of more than about 2,000m2 situated in downtown Tokyo, as well as through dedicated efforts to heighten tenant satisfaction levels. (2) Investment Environment and Management Performance (A) Investment Environment (from June 2016 to November 2016) The Japanese economy during the fiscal period under review continued to show a modest recovery trend with real GDP growth rate (Second Preliminary Estimates) for July to September 2016 at an annual rate of 1.3%, recording a positive figure for three consecutive quarters under the ongoing quantitative/ qualitative monetary easing policy by the Bank of Japan. In the office building leasing market in central Tokyo, with new supply having settled down, the vacancy rate took a turn after peaking in June 2013, dropping to 3.75% at the end of November 2016. Led by improvement in the vacancy rate for large buildings, the overall vacancy rate that includes small- to medium-sized buildings also continues to be on an improving trend. The drop in the vacancy rate has led to an increase in office rent in some areas, and the market as a whole continues to see increase in rent, albeit slight. For the office building transaction market, an appetite for property acquisitions continued to be strong among real estate companies, funds (including J-REITs) and overseas investors with the continuing proactive lending attitude by financial institutions backed by the forecast of an increase in property prices in accordance with expectations for economic recovery. (B) Management Performance In view of increasing the long-term EPS (EPS (net income per unit) after deducting gain on sales of properties) over the medium to long term, DOI continued to work on “external growth,” which aims to boost revenue through acquisition of properties, and “internal growth,” which aims to maximize income generating from owned properties. Concerning external growth, DOI acquired “Heiwa Higashi-nihonbashi Building” (acquisition price: 6,370 million yen) and “Square Daikanyama Building” (acquisition price: 2,280 million yen) in June 2016, and “Ogikubo TM Building” (acquisition price: 3,800 million yen) and “Shinjuku West Building” (acquisition price: 942 million yen) in July 2016. In addition, DOI sold 1 property (Daiwa Kudan) during the fiscal period under review. As a result, DOI’s assets under management as of the end of the 22nd Fiscal Period (November 30, 2016) totaled 53 properties, the sum total of acquisition prices of which amounted to 467,750 million yen. Concerning internal growth, while the office leasing market trended, DOI conducted proactive leasing, such as capturing needs for floor expansion within the same property through strengthening relationships with existing tenants and reinforcing collaboration with leasing brokers and property managers. As a result, the occupancy rate as of the end of the 22nd Fiscal Period (November 30, 2016) was 97.7%.
18 (3) Overview of Capital Procurement (A) Procurement of Capital for New Property Acquisitions (a) In the 22nd Fiscal Period, DOI made the following borrowings and issued the following investment units to fund the acquisition of new properties. ・DOI took out short-term loans of 6,000 million yen in total from Sumitomo Mitsui Banking Corporation, Mizuho Bank, Ltd. and The Bank of Tokyo-Mitsubishi UFJ, Ltd. on June 1, 2016 to partially fund the acquisition of a new property (Heiwa Higashi-nihonbashi Building) acquired on the same day. ・DOI took out a short-term loan of 2,000 million yen from Sumitomo Mitsui Banking Corporation on June 29, 2016 to partially fund the acquisition of a new property (Square Daikanyama Building) acquired on the same day. ・A public offering with the payment date on August 2, 2016 (12,700 issued units, paid-in price of 587,489 per unit, a total paid-in price of 7,461,110,300 yen) and a third-party allotment with the payment date on August 31, 2016 (1,169 issued units, paid in price of 587,489 per unit, a total paid-in price of 686,774,641 yen) were implemented to repay part of the aforementioned short-term loans totaling 8,000 million yen and to allocate the funds to cash on hand which decreased after being used to acquire new properties (Ogikubo TM Building and Shinjuku West Building) acquired on July 21, 2016. (B) Procurement of Capital for Repayment of Borrowings In the 22nd Fiscal Period, DOI made the following borrowings to fund the repayment of borrowings that were due for repayment. ・A total amount of 1,500 million yen was borrowed from Yamaguchi Bank Ltd. on August 31, 2016 to fund the repayment of the same amount borrowed from Aozora Bank, Ltd. due the same day. DOI made an early repayment on September 30, 2016 of 10,000 million yen out of 11,000 million yen in total borrowings (long-term loans from Sumitomo Mitsui Banking Corporation and Sumitomo Mitsui Trust Bank, Ltd. taken out on May 26, 2016; short-term loans from Sumitomo Mitsui Banking Corporation, Mizuho Bank, Ltd. and The Bank of Tokyo-Mitsubishi UFJ, Ltd. taken out on June 1, 2016; and a short-term loan from Sumitomo Mitsui Banking Corporation taken out on June 29, 2016). (C) Status of Interest-Bearing Liabilities at End of the Fiscal Period under Review As a result of the above, the balance of interest-bearing liabilities outstanding as of the end of the 22nd Fiscal Period (November 30, 2016) stood at 204,300 million yen (short-term debt: 1,000 million yen; long- term debt: 198,200 million yen; investment corporation bonds: 5,100 million yen). The balance of the current portion of long-term debt stood at 28,250 million yen. The average remaining period of interest-bearing liabilities as of the end of the 22nd Fiscal Period stands at 4.1 years. (4) Capital Expenditures during the 21st Fiscal Period The following summarizes the primary construction work that constitutes capital expenditures implemented during the 22nd Fiscal Period. Capital expenditures for the 22nd Fiscal Period amounted to 992 million yen and, when combined with the 456 million yen in repair expenses charged to the 22nd Fiscal Period expenses, totals 1,449 million yen in construction work were implemented. Name of real estate Construction properties Purpose Period amount paid (Location) (Millions of yen) Daiwa Tsukishima From: Apr. 2016 (Chuo-ku, Tokyo) Renovation work of common areas To: Jul. 2016 70 Shinjuku Maynds Tower From: Jul. 2016 (Shibuya-ku, Tokyo) Repair work of mechanical parking facility To: Oct. 2016 69 Daiwa Shibaura From: Aug. 2016 (Minato-ku, Tokyo) Upgrading of elevators To: Nov. 2016 64 From: Jun. 2016 Other To: Nov. 2016 790 Total 993
II. Asset Management Report 19 (5) Overview of Financial Performance and Distributions As a result of the management described above, DOI posted financial performance for the 22nd Fiscal Period of 12,583 million yen in operating revenues, 6,143 million yen in operating income, 5,325 million yen in ordinary income and 5,325 million yen in net income. Concerning distributions, it is planned that the amount equivalent to distributions from earnings would be included in the amount of tax-deductible expenses based on application of special provisions for taxation of corporation tax (Article 67-15 of the Act on Special Measures Concerning Taxation (Act No. 26 of 1957; including amendments thereto) (the “Special Taxation Measures Act”)). Accordingly, DOI decided to distribute the entire amount of unappropriated retained earnings (excluding fractions of the distribution amount per unit that are less than 1 yen), and declared a distribution amount per unit of 10,695 yen.
3. Outlook for the Next Fiscal Period (1) Investment Environment The Japanese economy going forward is expected to see a moderate economic recovery through recovery in personal spending against the backdrop of favorable employment environment and the improved income environment while various economic measures, centering on the public works projects and financial policies promoted by the Abe administration and the monetary easing policy implemented by Bank of Japan continue. However, factors, such as policies to be set out by the U.S. President-elect Donald Trump, the downward swing of the Chinese economy, upset in emerging markets accompanying the U.S. “exit strategy,” drop in stock prices around the world due to geopolitical risks and downturn of the European economy, pose potential risks of disrupting the Japanese real economy and financial environment, and are thus thought to require attention. In the Tokyo office building leasing market, while new supply is on a low note, factors such as improvement in employment are stimulating demand, resulting in the vacancy rate dropping. Improvement in corporate performance is forecasted to increase demand for office floor space and rent is expected to improve as a consequence. In the office building transaction market, backed by the favorable financing environment and expectations of rent rising, among other factors, property acquisition appetite among investors overseas, real estate companies and funds (including J-REITs) is thought to grow even stronger. (2) Future Management Policy and Tasks (A) Strategy for Managing Existing Properties Despite such office leasing market conditions as described above, the tenant side is also expected to become more heavily selective with properties in terms of software such as crime/disaster prevention measures and operations/management on top of location and building specifications. Consequently, DOI will carry out operational management under the following policy with an aim to enhance the competitiveness of existing properties and thereby increase the normal EPS over the medium to long term. (a) Maintain and raise occupancy rates Concerning existing tenants, strive to reduce vacancy risks by improving the quality of buildings, equipment and management system. In addition, concerning new tenants, strive to maintain and raise occupancy rates through the provision of services that are of higher satisfaction levels than competing properties through proactive participation in the market. (b) Maintain and raise profitability Aim to secure stable revenue over the medium to long term through further strengthening good relationships with existing tenants, as well as proactively tapping the needs of new tenants by discerning the market environment. (c) Lower operational management costs Strive to lower operational management costs based on maintaining office environments of high tenant satisfaction levels by implementing efficient operational management and reviewing systematic construction work by optimally leveraging the economies of scale achieved from proactively realizing external growth.
20 (B) Strategy for New Property Investments DOI will invest in office buildings that have a total floor area of about 2,000m2 or more based on various external growth strategies, while maintaining a balance with the asset acquisition environment and financing situation. In principle, considerations will focus on Tokyo as the investment target area, but DOI will also consider investing in competitive properties in cities other than Tokyo from a viewpoint of territorially-distributed investments. As pipeline support, in addition to expanding its own information-sourcing channels, DOI will continue to search for properties that meet its investment criteria by proactively gathering real estate transaction market information through greater collaboration with the Asset Manager and Sponsor Group and utilizing the Group’s extensive network of clients, partners, etc. Furthermore, in the 22nd Fiscal Period, DOI acquired “Heiwa Higashi-nihonbashi Building,” “Square Daikanyama Building,” “Shinjuku West Building” and “Ogikubo TM Building” which are located in Tokyo. DOI believes that acquisition of these properties will contribute to further stabilization and enhancement of the portfolio. DOI will continue to strive to acquire properties in line with the investment strategy described above. (C) Financial Strategy DOI will conduct disciplined financial management of the following basic content. (a) Control leverage by keeping the ratio of interest-bearing liabilities to total assets (LTV) within the range of 40% to 50% at maximum, taking into consideration also the real LTV, etc., as a principle. (b) Diversify repayment deadlines, targeting 30.0 billion yen as the maximum amount of interest-bearing liabilities that shall become due during any single fiscal period as a principle. (c) Aim to have long-term loans account for at least 70% of total loans as a principle. (d) Achieve diversification of lenders, which shall mainly be Japanese financial institutions. (e) Pursuant to its fund management rules, maintain stability in its financial standing by managing necessary funds, such as the amount equivalent to distributions paid, separately from working capital. (D) Schedule of Capital Expenditures The following are the principal capital expenditures arising from renovation construction work, etc. currently planned for existing portfolio properties. Please note that the expected construction amount includes portions that are expensed as a separate account item of accounting costs.
Expected construction amount (Millions of yen) Name of real estate Scheduled Amount properties Purpose implementation paid Total (Location) period Total amount amount during current already period paid Daiwa Akasaka Upgrading of air-conditioning From: Nov. 2016 (Minato-ku, Tokyo system To: Jun. 2018 1,091 – – Ogikubo TM Building Upgrading of air-conditioning From: Feb. 2017 (Suginami-ku, Tokyo) equipment To: May 2017 88 – – Shinjuku Maynds Tower Changing lighting in exclusive From: Dec. 2016 (Shibuya-ku, Tokyo) areas to LED (green leasing) To: May 2017 60 – – Daiwa Akasaka Upgrading of mechanical parking From: Oct. 2016 (Minato-ku, Tokyo) facility To: May 2017 55 – – Daiwa Shibadaimon Upgrading of individual air- From: Feb. 2017 (Minato-ku, Tokyo) conditioning equipment To: May 2017 54 – –
II. Asset Management Report 21 III. Balance Sheets
As of May 31, 2016 and November 30, 2016 (Thousands of yen) As of As of May 31, 2016 November 30, 2016 Assets Current Assets: Cash and cash equivalents (Notes 3 and 4) 23,038,218 20,667,865 Tenant receivables 174,843 145,235
Consumption taxes receivable － 55,305 Prepaid expenses 427,960 369,096 Deferred tax assets (Note 13) 307 12 Other current assets 188,383 16,773 Total Current Assets 23,829,711 21,254,286 Investment Properties, at cost (Notes 5 and 6): Land 12,302,227 12,302,227 Buildings and structures 3,146,315 3,219,522
Tools, furniture and fixtures 18,958 19,126
Construction in progress 3,449 2,661
Land in trust accounts 351,272,600 359,306,652
Buildings and structures in trust accounts 102,387,897 104,787,007
Machinery and equipment in trust accounts 756,802 886,637
Tools, furniture and fixtures in trust accounts 187,063 228,556
Construction in progress in trust accounts 42,086 399,430
Other tangible fixed assets in trust accounts 4,337 4,337
Less: accumulated depreciation (21,675,860) (23,137,885)
Leasehold rights 2,407,102 2,398,276
Leasehold rights in trust accounts 306,884 306,884
Total Investment Properties, net 451,159,860 460,723,430 Other Assets: Trademark 596 542 Lease and guarantee deposits in trust 113,685 113,684 Long-term prepaid expenses 1,189,162 1,074,159 Deferred tax assets (Note 13) 355,230 165,910
Derivative assets (Note 4) － 80,483 Deferred investment corporation bond issuance costs 29,436 26,482 Others 12,353 11,944 Total Other Assets 1,700,462 1,473,204
Total Assets 476,690,033 483,450,920 The accompanying notes are an integral part of these financial statements. 22
(Thousands of yen) As of As of May 31, 2016 November 30, 2016 Liabilities Current Liabilities: Accounts payable 988,221 1,996,737
Short-term debt (Notes 4 and 9) － 1,000,000 Long-term debt due within one year (Notes 4 and 9) 21,200,000 28,250,000 Accounts payable – other 494,490 456,273 Income taxes payable 970 831 Accrued consumption taxes 534,191 89,141 Rent received in advance 2,051,728 2,028,281 Other current liabilities 365,653 264,660 Total Current Liabilities 25,635,253 34,085,923 Long-Term Liabilities:
Investment corporation bonds (Notes 4 and 9) 5,100,000 5,100,000
Long-term debt (Notes 4 and 9) 180,000,000 169,950,000
Tenant security deposits including trust accounts (Note 4) 16,870,266 16,952,100
Derivative liabilities (Note 4) 1,364,329 845,574
Total Long-Term Liabilities 203,334,595 192,847,674
Total Liabilities 228,969,848 226,933,597
Net Assets (Notes 8 and 14) Unitholders’ Equity:
Unitholders’ capital 243,403,874 251,551,759
Units authorized: 2,000,000 units Units issued and outstanding: 484,000 units as of May 31, 2016 and 497,869 units as of November 30, 2016, respectively Reserve for reduction entry － 164,163 Retained earnings 5,250,226 5,324,776 Total Unitholders’ Equity 248,654,100 257,040,698 Valuation and translation adjustments Deferred gains or losses on hedges (933,915) (523,375)
Total valuation and translation adjustments (933,915) (523,375)
Total Net Assets 247,720,185 256,517,323 Total Liabilities and Net Assets 476,690,033 483,450,920
The accompanying notes are an integral part of these financial statements.
III. Balance Sheets 23 IV. Statements of Income and Retained Earnings
For the fiscal periods ended May 31, 2016 and November 30, 2016 (Thousands of yen) For the fiscal periods For the fiscal periods ended May 31, 2016 ended November 30, 2016 Operating Revenues: Rental revenues (Note 7) 11,947,802 12,687,269 Other revenues related to property leasing (Note 7) 91,981 63,616 Gain on sale of investment properties (Note 11) 323,700 102,139 Total Operating Revenues 12,363,483 12,853,024 Operating Expenses: Property-related expenses (Note 7) 5,014,202 5,433,014 Asset management fees 994,954 1,043,441 Asset custody fees 23,183 24,159 Administrative service fees 73,682 82,492 Trust fees 19,720 18,936 Directors’ compensation 5,400 6,300 Other operating expenses 123,887 101,197 Total Operating Expenses 6,255,028 6,709,539 Operating Income 6,108,455 6,143,485 Non-Operating Revenues: Interest income 132 45 Reversal of distribution payable 689 624 Other non-operating revenues 4,902 10,357 Total Non-Operating Revenues 5,723 11,026 Non-Operating Expenses: Interest expense 597,307 603,225 Interest expense on investment corporation bonds 16,892 16,708 Borrowing expenses 166,855 173,072 New investment units issuance costs － 31,339 Other non-operating expenses 6,154 4,738 Total Non-Operating Expenses 787,208 829,082 Ordinary Income 5,326,970 5,325,429 Income Before Income Taxes 5,326,970 5,325,429 Income taxes – current 978 837 Income taxes – deferred 75,798 6 Total Income Taxes (Note 13) 76,776 843 Net Income 5,250,194 5,324,586 Retained Earnings Brought Forward 32 190 Retained Earnings at End of Period 5,250,226 5,324,776
The accompanying notes are an integral part of these financial statements.
24 IV. Statements of Income and Retained Earnings V. Statements of Changes in Net Assets
For the fiscal periods ended May 31, 2016 and November 30, 2016 (Thousands of yen) Unitholders’ Equity Number of Deferred Gains Reserve for Total Net Units Unitholders’ Retained or Losses on Assets (Units) Reduction Hedges Capital Entry Earnings Balance as of 484,000 243,403,874 － 4,689,024 (392,515) 247,700,383 November 30, 2015 Cash distributions (4,688,992) (4,688,992) declared － － － － Net income － － － 5,250,194 － 5,250,194 Net changes of items other than － － － － (541,400) (541,400) unitholders’ equity Balance as of 484,000 243,403,874 － 5,250,226 (933,915) 247,720,185 May 31, 2016 Issuance of new 13,869 8,147,885 8,147,885 investment units － － － Provision of reserve 164,163 (164,163) for reduction entry － － － － Cash distributions (5,085,873) (5,085,873) declared － － － － Net income － － － 5,324,586 － 5,324,586 Net changes of items other than － － － － 410,540 410,540 unitholders’ equity Balance as of 497,869 251,551,759 164,163 5,324,776 (523,375) 256,517,323 November 30, 2016 The accompanying notes are an integral part of these financial statements.
V. Statements of Changes in Net Assets 25 VI. Statements of Cash Flows
For the fiscal periods ended May 31, 2016 and November 30, 2016 (Thousands of yen)
For the fiscal periods For the fiscal periods ended ended May 31, 2016 November 30, 2016 Cash Flows from Operating Activities: Income before income taxes 5,326,970 5,325,429 Depreciation and amortization 1,726,590 1,750,179 Amortization of bond issuance costs 2,954 2,954 New investment units issuance costs － 31,339 Interest expense 614,199 619,933 Decrease in tenant receivables 63,993 29,608 (Decrease) increase in accounts payable (93,048) 382,297 Increase (decrease) in rent received in advance 110,704 (23,447) Decrease in investment properties due to sale 9,127,507 3,795,174 Interest payments (614,107) (620,025) Decrease (increase) in consumption taxes receivable 515,291 (55,305) Other, net 582,002 (81,115) Net Cash Provided by Operating Activities 17,363,055 11,157,021 Cash Flows from Investing Activities: Payments for purchases of investment properties (22,669,418) (14,558,212) Payments for purchases of intangible assets － (82,008) Proceeds from tenant security deposits 882,544 1,152,741 Refunds of tenant security deposits (549,537) (1,070,907) Net Cash Used in Investing Activities (22,336,411) (14,558,386) Cash Flows from Financing Activities: Proceeds from short-term debt － 8,000,000 Repayments of short-term debt (5,500,000) (7,000,000) Proceeds from long-term debt 21,700,000 1,500,000 Repayments of long-term debt (2,200,000) (4,500,000) Proceeds from issuance of new investment units － 8,116,546 Distributions paid (4,688,696) (5,085,534) Net Cash Provided by Financing Activities 9,311,304 1,031,012 Net Change in Cash and Cash Equivalents 4,337,948 (2,370,353) Cash and Cash Equivalents at Beginning of Period 18,700,270 23,038,218 Cash and Cash Equivalents at End of Period (Note 3) 23,038,218 20,667,865
The accompanying notes are an integral part of these financial statements.
26 VI. Statements of Cash Flows VII. Notes to Financial Statements
For the fiscal periods ended May 31, 2016 and November 30, 2016 Note 1 – Organization and Basis of Presentation Organization Daiwa Office Investment Corporation (the former DA Office Investment Corporation; hereinafter referred to as “DOI”) was established on July 11, 2005 as an investment corporation under the Act on Investment Trusts and Investment Corporations (Act No. 198 of 1951, including subsequent revisions, hereinafter referred to as the “Investment Trust Act”) by the founder (the former daVinci Select; now, Daiwa Real Estate Asset Management (hereinafter referred to as the “Asset Manager”)). DOI is an externally managed real estate fund, established as an investment corporation. The Asset Manager, as DOI’s asset management company, is engaged in acquiring, managing, leasing, and renovating office properties. Daiwa Securities Group Inc. currently owns 100% of the shares of the Asset Manager. On October 18, 2005, DOI had raised approximately 49,498,710 thousand yen through an initial public offering of units. Those units were listed on the J-REIT section of the Tokyo Stock Exchange. As of November 30, 2016, DOI had ownership or trust beneficiary interests in 53 office properties with approximately 336,722m2 of rentable office space and had leased office space to 558 tenants engaged in a variety of businesses. The occupancy rate for the office properties was approximately 97.7%.
Basis of Presentation The accompanying financial statements have been prepared in accordance with the provisions set forth in the Investment Trust Act, the Financial Instruments and Exchange Act and their related accounting regulations, and in conformity with accounting principles generally accepted in Japan (“Japanese GAAP”), which are different in certain respects as to application and disclosure requirements of International Financial Reporting Standards or accounting principles generally accepted in the United States of America. The accompanying financial statements have been reformatted and translated into English from the financial statements of DOI prepared in accordance with Japanese GAAP and filed with the appropriate Local Finance Bureau of the Ministry of Finance as required by the Financial Instruments and Exchange Act. In preparing the accompanying financial statements, relevant notes have been expanded and certain reclassifications have been made from the Japanese GAAP financial statements. Certain supplementary information included in the statutory Japanese GAAP financial statements, but not required for fair presentation, is not presented in the accompanying financial statements. DOI maintains its accounting records in Japanese yen. DOI’s fiscal period is a six-month period ending at the end of May and November of each year.
VII. Notes to Financial Statements 27 Note 2 – Summary of Significant Accounting Policies (a) Cash and Cash Equivalents Cash and cash equivalents consist of cash, demand deposits, and short-term investments which are highly liquid, readily convertible to cash and with insignificant risk of market value fluctuation, with maturities of three months or less from the date of acquisition. (b) Investment Properties Investment properties are recorded at cost, which includes the allocated purchase price, related costs and expenses for acquisition of the office properties and the trust beneficiary interests in trust. Investment property balances are depreciated using the straight-line method over the estimated useful lives as follows: As of May 31, 2016 As of November 30, 2016 Buildings and structures 2-64 years 2-64 years Machinery and equipment 4-23 years 7-23 years Tools, furniture and fixtures 5-18 years 5-15 years Cost related to the renovation, construction improvement of properties is capitalized. Expenditures for repairs and maintenance which do not add to the value or prolong the useful life of property, are expensed as incurred. (c) Deferred Investment Corporation Bond Issuance Costs Deferred investment corporation bond issuance costs are amortized on a straight-line basis over the respective terms of the bonds. (d) New Investment Units Issuance Costs The issuance costs of new investment units are expensed when incurred. (e) Income Taxes Deferred tax assets and liabilities are computed based on the difference between the financial statements and income tax bases of assets and liabilities using the statutory rate. (f) Real Estate Taxes Investment properties are subject to various taxes, such as property taxes and city planning taxes. Owners of the properties are registered by records maintained in each jurisdiction by the local government. The taxes are imposed on the registered record owner as of January 1 of each year, based on an assessment made by the local government. When a property is purchased within the calendar year, the taxes for corresponding calendar year are imposed on the seller. DOI pays the seller the corresponding amount of the taxes for the period from property acquisition date to December 31 of the calendar year and capitalizes these amounts as acquisition costs of the property, rather than expensing them. In subsequent calendar years, such taxes on investment properties are charged as operating expenses in each fiscal period. The following is a summary of capitalized real estate taxes. (Thousands of yen) For the fiscal periods ended For the fiscal periods ended May 31, 2016 November 30, 2016 Capitalized real estate taxes 53,870 39,921 (g) Consumption Taxes Consumption taxes are excluded from transaction amounts. Generally, consumption taxes paid are offset against the balance of consumption taxes withheld. As such, the excess of payments over amounts withheld is included in the current assets while the excess of amounts withheld over payments is included in the current liabilities. Non-deductible consumption taxes relating to investment properties are amortized equally over five years. (h) Hedge Accounting DOI enters into derivative transactions for the purpose of hedging risks in the Articles of Incorporation of DOI in accordance with its general risk management policy. DOI uses interest-rate swaps as hedging instruments in order to hedge the risk of interest rate fluctuations related to borrowings. Pursuant to Japanese GAAP, DOI applies the special accounting treatment to interest-rate swaps which qualify for hedge accounting and meet specific criteria. Under the special accounting treatment, the related differentials paid or received under such swap contracts can be recognized and included in interest expense or income of the hedged assets or liabilities, and the interest-rate swaps are not required to be measured at fair value separately. The assessment of hedge effectiveness has been made each fiscal period except for interest-rate swaps which meet the special criteria. 28 (i) Revenue Recognition Operating revenues consist of rental revenues including base rents and common area charges, and other operating revenues such as utility charge reimbursements, parking space rental revenues and other income. Rental revenues are generally recognized on an accrual basis over the life of each lease. Utility charge reimbursements are recognized when earned and their amounts can be reasonably estimated. (j) Accounting Treatment of Trust Beneficiary Interests in Real Estate For trust beneficiary interests in real estate, all assets and liabilities with respect to assets in trust, as well as all income generated and expenses incurred with respect to assets in trust, are recorded in the relevant balance sheet and income statement accounts of the accompanying financial statements.
Note 3 – Cash and Cash Equivalents Cash and cash equivalents stated on the accompanying balance sheets and statements of cash flows as of May 31, 2016 and November 30, 2016 consisted of the following: (Thousands of yen) As of May 31, 2016 As of November 30, 2016 Cash and deposits 20,940,425 19,070,683 Cash and deposits in trust 2,097,793 1,597,182 Cash and cash equivalents 23,038,218 20,667,865
Note 4 – Financial Instruments (a) Qualitative Information for Financial Instruments Policy for Financial Instrument Transactions DOI raises funds through borrowings, issuance of investment corporation bonds and issuance of investment units for acquisition and renovation of investment properties, cash distributions of dividends and repayment of bank borrowings. In financing through interest-bearing debt, DOI raises funds with longer term, fixed-rate and well- diversified maturities to secure stable financing capacity and avoid potential risk of rising interest rates. Surplus funds are managed considering risk and liquidity, by investing in highly liquid monetary assets and securities (in principle, deposits). DOI enters into derivative transactions only for the purpose of hedging interest rate risks arising from liabilities. Nature and Extent of Risks arising from Financial Instruments and Risk Management Proceeds from borrowings and investment corporation bonds are used mainly to acquire investment properties and repay or redeem outstanding borrowings and bonds. These borrowings and bonds are exposed to liquidity risk. Such risk is managed in ways such as maintaining the LTV ratio at low levels, diversifying maturities, keeping the ratio of long-term debt to total debt at high levels, and diversifying lenders. For the floating-rate borrowings exposed to the risk of future interest rate fluctuations, DOI uses derivative transactions (interest-rate swap) as hedging instruments, in order to avoid interest rate fluctuations and to fix the amount of interest payments for floating-rate borrowings. DOI evaluates the effectiveness of hedges by the correlation between the change in aggregated amount of cash flow of the hedging instruments and the change in aggregated amount of cash flow of the hedged items. The assessment of hedge effectiveness is omitted for the interest-rate swaps which meet the specific criteria under the special accounting treatment. Derivative transactions are executed and monitored in compliance with the rules and procedures set forth in the risk management policy of DOI. Tenant security deposits including trust accounts are exposed to liquidity risk arising from refunding deposits in the event of vacating of properties by tenants. Such risk is managed by reserving some parts of the funds. Bank deposits are used for investing DOI’s surplus funds. These bank deposits are exposed to credit risks such as bankruptcy of the depository financial institutions. DOI manages credit risk by investing only in short-term deposit and setting a minimum credit rating requirement for the depository financial institutions (excluding deposits for settlement purposes). Supplemental Explanation regarding Fair Value of Financial Instruments The fair value of financial instruments is based on their quoted market price. When there is no quoted market price available, fair value is reasonably estimated. Since certain assumptions and factors are reflected in estimating the fair value, different assumptions and factors could result in a different value. Also, the contractual amounts of derivative transactions do not represent the market risk involved in these derivative transactions.
VII. Notes to Financial Statements 29 (b) Estimated Fair Value of Financial Instruments Book value, fair value and difference between the two as of May 31, 2016 and November 30, 2016 were as follows: (Thousands of yen) As of May 31, 2016 As of November 30, 2016 Assets Book value Fair value Difference Book value Fair value Difference Cash and cash equivalents 23,038,218 23,038,218 – 20,667,865 20,667,865 – Total 23,038,218 23,038,218 – 20,667,865 20,667,865 – Liabilities Short-term debt – – – 1,000,000 1,000,000 – Long-term debt due within one 21,200,000 21,292,250 92,250 28,250,000 28,320,007 70,007 year Investment corporation bonds 5,100,000 5,221,170 121,170 5,100,000 5,184,930 84,930 Long-term debt 180,000,000 180,362,802 362,802 169,950,000 170,032,843 82,843
Total 206,300,000 206,876,222 576,222 204,300,000 204,537,780 237,780
Derivative (1,365,242) (1,365,242) – (765,091) (765,091) – transactions (*) (*) The value of assets and liabilities arising from derivatives is shown at net value and with the amount in parenthesis indicating the net liability position. The financial instruments whose fair value is deemed extremely difficult to determine are excluded from the above table (See Note 2 below). Notes: 1. Methods to estimate fair value of financial instruments and derivative transactions
Assets: (1) Cash and cash equivalents Due to the short maturities, the book value of these assets is deemed a reasonable approximation of the fair value.
Liabilities: (1) Short-term debt, long-term debt due within one year and long-term debt For short-term debt and long-term debt with floating interest rates, their fair value and book value are nearly identical and there are no significant changes in DOI’s credit risk after borrowing. Therefore, for these items, their book value is assumed as their fair value. For short-term debt and long-term debt with fixed interest rates, their fair value is calculated based on the present value of principle and interest cash flows discounted at the current interest rate which is estimated to be applied if similar new debt is entered into. However, the fair value of certain floating-rate long term debt that qualifies for the special treatment of interest-rate swaps is calculated based on the present value of principle and interest cash flows which are processed as a single unit with the interest-rate swap. (2) Investment corporation bonds The fair value of investment corporation bonds are based on their quoted market price.
30 Derivative Transactions: The Company applies the hedge accounting for all derivative transactions. Contractual amount and fair value were as follows: (Thousands of yen) As of May 31, 2016 Hedge Type of accounting method derivative Contracted amount Fair value (*1) transaction Hedged item Total Due after one year Deferral hedge Interest-rate swap accounting Receive floating/ Long-term debt 82,800,000 81,300,000 (1,365,242) method Pay fixed Special treatment Interest-rate swap for interest-rate Receive floating/ Long-term debt 28,350,000 19,850,000 – (*2) swaps Pay fixed 111,150,000 101,150,000 (1,365,242)
(Thousands of yen) As of November 30, 2016 Hedge Type of accounting method derivative Contracted amount Fair value (*1) transaction Hedged item Total Due after one year Deferral hedge Interest-rate swap accounting Receive floating/ Long-term debt 99,600,000 99,600,000 (765,091) method Pay fixed Special treatment Interest-rate swap for interest-rate Receive floating/ Long-term debt 28,350,000 14,350,000 – (*2) swaps Pay fixed 127,950,000 113,950,000 (765,091)
(*1) The fair value is provided by financial institutions. (*2) Fair values of interest-rate swaps with the special treatment are included in fair values of related long-term debt as the interest-rate swaps are processed as single unit with the hedged long-term debt. 2. Financial instruments whose fair value is deemed extremely difficult to determine Tenant security deposits including trust accounts (with a book value of 16,870,266 thousand yen as of May 31, 2016 and 16,952,100 thousand yen as of November 30, 2016) that have been deposited by tenants were excluded from the scope of fair value disclosure because they are not marketable, and the actual deposit period is not estimable, which in turn makes it difficult to reasonably estimate the future cash flows.
VII. Notes to Financial Statements 31 3. Redemption schedule for monetary claims (Thousands of yen) Due after Due after Due after Due after As of May 31, 2016 Due within one to two two to three three to four four to five Due after one year years years years years five years Cash and cash equivalents 23,038,218 – – – – – Total 23,038,218 – – – – –
(Thousands of yen) Due after Due after Due after Due after As of November 30, 2016 Due within one to two two to three three to four four to five Due after one year years years years years five years Cash and cash equivalents 20,667,865 – – – – – Total 20,667,865 – – – – –
4. Redemption schedule for short-term debt, investment corporation bonds and long-term debt (Thousands of yen) Due after Due after Due after Due after As of May 31, 2016 Due within one to two two to three three to four four to five Due after one year years years years years five years Investment corporation bonds – – – 3,000,000 – 2,100,000 Long-term debt 21,200,000 19,400,000 21,500,000 25,000,000 33,300,000 80,800,000 Total 21,200,000 19,400,000 21,500,000 28,000,000 33,300,000 82,900,000
(Thousands of yen) Due after Due after Due after Due after As of November 30, 2016 Due within one to two two to three three to four four to five Due after one year years years years years five years Short-term debt 1,000,000 – – – – – Investment corporation bonds – – 3,000,000 – – 2,100,000 Long-term debt 28,250,000 17,350,000 22,000,000 31,600,000 24,200,000 74,800,000 Total 29,250,000 17,350,000 25,000,000 31,600,000 24,200,000 76,900,000
32 Note 5 – Tangible Fixed Assets of Investment Properties Investment properties as of May 31, 2016 and November 30, 2016 consisted of the following: (Thousands of yen) As of May 31, 2016 As of November 30, 2016 Acquisition Accumulated Acquisition Accumulated cost depreciation Book value cost depreciation Book value Land 12,302,227 – 12,302,227 12,302,227 – 12,302,227 Buildings and structures 3,146,315 (1,807,702) 1,338,613 3,219,522 (1,895,482) 1,324,040 Tools, furniture and fixtures 18,958 (9,261) 9,697 19,126 (10,007) 9,119 Construction in progress 3,448 – 3,448 2,661 – 2,661 Land in trust accounts 351,272,600 – 351,272,600 359,306,652 – 359,306,652 Buildings and structures 102,387,898 (19,378,467) 83,009,430 104,787,007 (20,718,843) 84,068,164 in trust accounts Machinery and equipment 756,802 (389,890) 366,912 886,637 (411,720) 474,917 in trust accounts Tools, furniture and fixtures 187,063 (86,203) 100,860 228,556 (97,496) 131,060 in trust accounts Construction in progress 42,086 – 42,086 399,430 – 399,430 in trust accounts Other tangible fixed assets 4,337 (4,337) – 4,337 (4,337) – in trust accounts Total 470,121,734 (21,675,860) 448,445,873 481,156,155 (23,137,885) 458,018,270
VII. Notes to Financial Statements 33 Note 6 – Fair Value of Investment and Rental Properties The book value, net changes in the book value and the fair value of the investment and rental properties were as follows: (Thousands of yen) For the fiscal periods ended For the fiscal periods ended May 31, 2016 November 30, 2016 Book value: (Note 1) Balance at beginning of period 439,123,699 451,114,325 Change during the period (Note 2) 11,990,626 9,207,014 Balance at end of period 451,114,325 460,321,339 Fair value (Note 3) 483,390,000 505,430,000 (Notes) 1. The book value represents the acquisition cost less accumulated depreciation. 2. Significant changes For the fiscal period ended May 31, 2016, the major reasons of increase are acquisitions of two assets (21,890,000 thousand yen). The major reason of decrease is sale of two assets (9,127,507 thousand yen) and depreciation (1,726,073 thousand yen). For the fiscal period ended November 30, 2016, the major reasons of increase are acquisitions of four assets (13,392,000 thousand yen). The major reason of decrease is sale of “Daiwa Kudan Building” (3,795,174 thousand yen) and depreciation (1,749,716 thousand yen). 3. The fair values as of May 31, 2016 and November 30, 2016 were determined by the sum of appraisal values provided by external real estate appraisers.
Note 7 – Rental Revenues and Expenses Rental revenues and expenses for the fiscal periods ended May 31, 2016 and November 30, 2016 were as follows: (Thousands of yen) For the fiscal periods ended For the fiscal periods ended May 31, 2016 November 30, 2016 Revenues from property leasing: Rental revenues 11,947,802 12,687,269 Other revenues related to property leasing 91,981 63,616 Total revenues from property leasing 12,039,783 12,750,885 Rental expenses: Consignment expenses 868,700 942,415 Utilities expenses 1,051,127 1,068,009 Taxes and dues 895,930 1,045,891 Insurance expenses 17,250 17,056 Repair expenses 403,759 456,738 Depreciation 1,726,073 1,749,716 Other 51,363 153,189 Total rental expenses 5,014,202 5,433,014 Income from property leasing 7,025,581 7,317,871
34 Note 8 – Net Assets DOI issues non-par value units in accordance with the Investment Trust Act and all of the amounts issued are designated as stated capital. DOI maintains a minimum of 50 million yen of net assets as required by the Investment Trust Act.
Note 9 – Short-Term Debt, Long-Term Debt Due Within One Year, Long-Term Debt and Investment Corporation Bonds Short-term debt, long-term debt due within one year, long-term debt and investment corporation bonds as of May 31, 2016 and November 30, 2016 consisted of the following: (Thousands of yen) As of May 31, 2016 As of November 30, 2016 Unsecured loans due 2017 to 2026, principally from banks and insurance companies with interest 201,200,000 199,200,000 rates mainly ranging from 0.2% to 1.0% 0.4% unsecured bond due 2019 3,000,000 3,000,000 1.0% unsecured bond due 2024 2,100,000 2,100,000 Total 206,300,000 204,300,000 (Note) The interest rates presented are daily weighted average interest rates. As for long-term debts which were hedged by interest-rate swaps for the purpose of avoiding interest rate fluctuation risk, the swapped interest rates are used to calculate daily weighted average interest rates.
The annual maturities of short-term debt, long-term debt and investment corporation bonds as of November 30, 2016 were as follows: (Thousands of yen) Due after Due after Due after Due after Due within one to two two to three three to four four to five Due after one year years years years years five years Short-term debt, long-term debt 29,250,000 17,350,000 25,000,000 31,600,000 24,200,000 76,900,000 and investment corporation bonds
Note 10 – Leases As Lessor The future minimum rental revenues under existing non-cancelable operating leases as of May 31, 2016 and November 30, 2016 were as follows: (Thousands of yen) As of May 31, 2016 As of November 30, 2016 Due within one year 10,461,097 9,765,206 Due after one year 17,018,806 16,105,193 Total 27,479,903 25,870,399
VII. Notes to Financial Statements 35 Note 11 – Gain on Sale of Investment Properties Gain on sale of investment properties for the fiscal period ended May 31, 2016 was as follows: (Thousands of yen) For the fiscal period ended May 31, 2016 Daiwa Shibuya Dogenzaka Building: Proceeds from sale of investment property 6,400,000 Cost of selling investment property (4,474,587) Other expenses related to sale (225,505) Gain on sale of investment property 1,699,908 Daiwa Minami-Senba Building: Proceeds from sale of investment property 3,335,062 Cost of selling investment property (4,652,920) Other expenses related to sale (58,350) Loss on sale of investment property (1,376,208)
Gain on sale of investment properties for the fiscal period ended November 30, 2016 was as follows: (Thousands of yen) For the fiscal period ended November 30, 2016 Daiwa Kudan Building: Proceeds from sale of investment property 4,048,485 Cost of selling investment property (3,795,174) Other expenses related to sale (151,172) Gain on sale of investment property 102,139
Note 12 – Reduction of Investment Properties Purchased with Government Subsidies Government subsidies of 32,898 thousand yen were deducted from the acquisition cost of the buildings in trust as of May 31, 2016 and November 30, 2016.
36 Note 13 – Income Taxes DOI is subject to Japanese corporate income taxes on all of its taxable income. However, DOI may deduct the amount distributed to its unitholders from its taxable income when certain requirements, including a requirement to distribute in excess of 90% of distributable profit for the fiscal period, are met under the Special Taxation Measure Act of Japan. If DOI does not satisfy all of the requirements as specified in the Act, the entire taxable income of DOI will be subject to regular corporate income taxes in Japan. DOI has made distribution in excess of 90% of its distributable profit for each fiscal period in order to be able to deduct such amount from taxable income. The following table summarizes the significant difference between the statutory tax rate and DOI’s effective tax rate for financial statement purposes. (%) For the fiscal periods ended For the fiscal periods ended May 31, 2016 November 30, 2016 Statutory tax rate 32.31% 31.74%
Deductible cash distributions (30.85) (31.74)
Others (0.02) 0.02
Effective tax rate 1.44% 0.02%
The significant components of deferred tax assets and liabilities as of May 31, 2016 and November 30, 2016 were as follows: (Thousands of yen) As of May 31, 2016 As of November 30, 2016
Deferred tax assets:
Accrued enterprise tax 17 12
Deferred losses on hedges 431,326 267,141
Total deferred tax assets 431,343 267,153
Deferred tax liabilities:
Reserve for reduction entry 75,806 75,806
Deferred gains on hedges – 25,425
Total deferred tax liabilities 75,806 101,231
Net deferred tax assets 355,537 165,922
VII. Notes to Financial Statements 37 Note 14 – Per Unit Information Information about earnings per unit for the fiscal periods ended May 31, 2016 and November 30, 2016 and net assets per unit as of May 31, 2016 and November 30, 2016 were as follows: (Yen) For the fiscal periods ended For the fiscal periods ended May 31, 2016 November 30, 2016 Earnings per Unit:
Net income per unit 10,847.51 10,800.73
Weighted average number of units outstanding (units) 484,000 492,984
(Yen) As of May 31, 2016 As of November 30, 2016
Net Assets per Unit 511,819 515,231
The computation of earnings per unit is based on the weighted average number of units outstanding during the period. The computation of net assets per unit is based on the number of units outstanding at each period end as stated on the balance sheets. The diluted net income per unit is not stated as there are no diluted investment units. There is no amount that is not available to ordinary unitholders.
Note 15 – Distribution Information DOI’s Articles of Incorporation stipulate that DOI is required to make cash distribution in excess of 90% of distributable profit as defined in the Special Taxation Measure Act of Japan for each fiscal period. Therefore, the total amount of dividends that DOI has determined to pay out is 5,085,872,000 yen for the fiscal period ended May 31, 2016 and 5,324,708,955 yen for the fiscal period ended November 30, 2016 that are the largest integral multiple of 484,000 and 497,869, the number of units outstanding as of May 31, 2016 and November 30, 2016, respectively, after deducting provision of reserve for reduction entry as stipulated in Article 66-2 of the Special Taxation Measure Act of Japan. Furthermore, DOI does not pay out dividends that exceed accounting profits as outlined in Article 32-2 of DOI’s Articles of Incorporation. (Yen) For the fiscal periods ended For the fiscal periods ended May 31, 2016 November 30, 2016 Ⅰ Unappropriated retained earnings 5,250,225,912 5,324,776,691
Ⅱ Cash distributions declared 5,085,872,000 5,324,708,955 Ⅲ Voluntary Retained Earnings Provision of reserve for reduction entry 164,162,797 – Ⅳ Retained earnings brought forward 191,115 67,736
38 Cash distributions are declared by the board of directors after the end of each period. Such distributions are payable to unitholders of record at the end of each period. Information of cash distributions per unit and the board of directors meeting dates when the distributions were proposed and approved were as follows: (Yen) For the fiscal periods ended For the fiscal periods ended May 31, 2016 November 30, 2016 Cash distributions per unit 10,508 10,695
Board of directors meeting dates July 15, 2016 January 20, 2017
Note 16 – Related-Party Transactions Not applicable.
Note 17 – Segment Information For the fiscal periods ended May 31, 2016 and November 30, 2016 Segment Information Segment information has been omitted as DOI has only one segment, which is property leasing business. Related Information Information about Products and Services Disclosure of this information has been omitted as operating revenues to external customers for a single product/service category account for more than 90% of the operating revenues on the statements of income and retained earnings. Information about Geographic Areas (1) Operating revenues Disclosure of this information has been omitted as domestic operating revenues account for more than 90% of total operating revenues. (2) Investment properties Disclosure of this information has been omitted as domestic investment properties account for more than 90% of the book value of the total investment properties. Information about Major Tenants Disclosure of this information has been omitted as there is no tenant that accounts for 10% or more of the operating revenues recorded in the statements of income and retained earnings.
VII. Notes to Financial Statements 39 Note 18 – Significant Subsequent Events Acquisition of Asset DOI acquired the trust beneficial interest in real estate on December 21, 2016 as described below. Overview of the asset Asset type Trust beneficial interest in domestic real estate
Property name Shin Kanda Mikuracho Building
Location 5-1 Kanda Mikura-cho, Chiyoda-ku, Tokyo
Acquisition price 1,592,000 thousand yen (excluding acquisition-related costs, consumption taxes, etc.)
Agreement date December 15, 2016
Acquisition date December 21, 2016
Seller OH Real Estate Management Co., Ltd.
40 VIII. Independent Auditor’s Report
VIII. Independent Auditor’s Report 41 IX. Investor Information
History of Investment Unit Price
(yen)900,000 18,000 (units)
Investment unit price (left axis) Trading volume (right axis) 800,000 16,000
700,000 14,000
600,000 12,000
500,000 10,000
400,000 8,000
300,000 6,000
200,000 4,000
100,000 2,000
0 0 2014 2015 2016 Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov.
Overview of Investment Units and Unitholders (as of November 30, 2016)
■ No. of Investment Units by Investor Type ■ No. of Unitholders by Investor Type Individuals/others Financial institutions 8,691 Foreigners 61,792 units (12.4%) Individuals/others 22nd 22,035 units (4.4%) 218,952 units (44.0%) (94.6%) Fiscal Period 101 Financial institutions Total: 497,896 units (1.1%) Other domestic 163 Other domestic corporations 191,428 units (38.4%) Securities firms 3,662 units (0.7%) corporations (1.8%) 216 Foreigners (2.4%) Individuals/others Financial institutions Foreigners 53,390 units (11.0%) 15 21st 20,292 units (4.2%) 212,202 units (43.8%) Securities firms (0.2%) Fiscal Period Total 9,186 Total: 484,000 units Other domestic corporations 191,340 units (39.5%) Securities firms 6,776 units (1.4%)
Top Ten Unitholders (as of November 30, 2016) IR Calendar
January 20, 2017 : Announcement of financial results Number of 22nd Fiscal Period Percentage Name of Investor Units Owned Share February 14, 2017: Sending of Japanese version Business (units) Report for 22nd Fiscal Period (Statement of Financial Performance) 1. Daiwa Investment Management Inc. 128,905 25.89% February 15, 2017: Start paying distributions for 22nd Fiscal Period 2. Japan Trustee Services Bank, Ltd. (Trust Account) 70,700 14.20% 3. Daiwa Securities Group Inc. 59,321 11.91% Trust & Custody Services Bank, Ltd. Nov. 4. 52,849 10.62% (Securities Investment Trust Account) End of Aug. fiscal period 5. The Master Trust Bank of Japan, Ltd. (Trust Account) 51,052 10.25% July Jan. The Nomura Trust and Banking Co., Ltd. 6. 17,676 3.55% End of (Investment Trust Account) fiscal period Feb. 7. STATE STREET BANK AND TRUST COMPANY 505012 5,786 1.16% May 8. CBLDN STICHTING PENSIOEN FONDS METAAL EN TECHNIEK 4,295 0.86% BNP PARIBAS SECURITIES SERVICES July 2017: Announcement of financial results for 9. 4,217 0.85% 23rd Fiscal Period SYDNEY/JASDEC/AUSTRALIAN RESIDENTS August 2017 : Sending of Japanese version Business STATE STREET BANK - WEST PENSION Report for 23rd Fiscal Period 10. 3,643 0.73% (Statement of Financial Performance) FUND CLIENTS - EXEMPT 505233 August 2017 : Start paying distributions for 23rd Fiscal Period (Note) The percentage share figures are rounded to the second decimal place
42 Investor Memo
End of fiscal period May 31 and November 30 of each year
General Meeting of Unitholders Held at least once every two years
Date for finalizing Unitholders with voting rights for the General Meeting of Unitholders Date publicly announced beforehand
Reference date for finalizing payment of May 31 and November 30 of each year distributions (distributions are paid within three months of this reference date)
Listed financial instruments exchange Tokyo Stock Exchange (securities code: 8976)
Newspaper in which notice is posted Nikkei Inc.
Manager of Unitholder Registry, etc. Sumitomo Mitsui Trust Bank, Limited, 1-4-1 Marunouchi, Chiyoda-ku, Tokyo 100-8233
Transfer Agency Department of Sumitomo Mitsui Trust Bank, Limited, 2-8-4 Izumi, Suginami-ku, Tokyo Office handling administrative affairs 168-0063 Phone 0120-782-031 (toll-free in Japan)
Service counter Head Office and All branches of the Sumitomo Mitsui Trust Bank nationwide
Provision of Information via Website
Daiwa Office Investment Corporation conducts information distribution via its website as an important tool for IR activities. DOI also provides an e-mail delivery service, “IR mail Delivery Service,” which informs the subscribers of updates in website content such as press release announcements via e-mail free of charge. The website will be continually enhanced and enriched so that the current situation and future strategies of DOI are clearly communicated.
Daiwa Office Investment Corporation http://www.daiwa-office.co.jp/en/
Important information is distributed via e-mail. Please access and follow the simple steps if you wish to receive our IR mail Delivery Service.
IX. Investor Information 43 Fiscal Period Business Report nd (Statement of Financial Performance) 22 June 1, 2016 – November 30, 2016
The Daiwa Office Investment Corporation logo symbolizes hospitality with an open door and the desire to be a bright and open investment corporation. We will continue to aim to be a highly-transparent investment corporation that is further cherished and trusted by our investors and tenants.
6-2-1 Ginza, Chuo Ward, Tokyo http://www.daiwa-of_ce.co.jp/en/