Generating Returns fromthe Accommodation Value Chain

1st Period
October 2005 – March 2006

http://www.naf-r.jp/

Profile

Nippon Accommodations Fund Inc. (“NAF”) was incorporated as an investment corporation on
October 12, 2005 with an initial investment by Mitsui Fudosan Co., Ltd. (“Mitsui Fudosan”), and waslisted on the Tokyo Stock Exchange on August 4, 2006 with assets of more than ¥100 billion. NAF
invests in accommodation assets* located mainly in the 23 wards of Tokyo. The Investment Trust andInvestment Corporation Act of Japan requires an investment corporation to be managed by an
external entity. NAF's assets are managed by Mitsui Fudosan Accommodations Fund Management
Co., Ltd., a 100 percent subsidiary of Mitsui Fudosan.
assets in this report are defined as rental apartments,* Accommodation
dormitory/student apartments, serviced apartments, senior residences andcorporate housing. They do not include hotel properties.

Contents
Financial Highlights........................................................................... 1
To Our Stakeholders.......................................................................... 2

Generating Returns fromthe Accommodation Value Chain ....................................... 4■ Investing in Accommodation Assets
Rental Apartment Investment Characteristics ............................ 6
Portfolio Map ............................................................................. 8
Property Brand Strategy ............................................................. 10
Brand Strategy ........................................................................... 12
Representative Accommodation Assets...................................... 14
Portfolio Summary...................................................................... 18

Nippon Accommodations Fund Inc.

■ Leveraging the Comprehensive Strengths of the
Mitsui Fudosan Group
The Mitsui Fudosan Group’s Value Chain................................... 20
Mitsui Fudosan’s Accommodation Asset
Development Capabilities........................................................ 22
Management/Operation Capabilities Leveraging
Mitsui Fudosan Group Expertise.............................................. 23
Corporate Structure and Governance ................................................ 24
Portfolio Policy .................................................................................. 28
Financial Statements ......................................................................... 32
Corporate Data and Investor Information ......................................... 34

Financial Highlights

1st Period
October 12, 2005 to March 31, 2006

Yen in millions

U.S. dollars in thousands(Except per unit data or
where otherwise indicated)(Note 1)
(Except per unit data)¥

Total revenue (Note 2)
Income before income taxes
Net income
Funds from operations (Note 3)
Net operating income from property leasing activities (Note 3)
Total amount of cash distribution (a)Total assets
Total liabilities
Net assets (b)LTV (Loan-to-value) ratio (Note 3)
Total number of units issued (units) (c)Net assets per unit (Yen/$) (b) / (c)Distribution per unit (Yen/$) (a) / (c)Funds from operations per unit (Yen/$) (Note 3)

924
378
377
507
734
377
43,64422,02821,61748.1%
42,480508,871
8,871
11,936$ 7,866
3,218
3,209
4,316
6,248
3,209
371,533
187,520
184,021

4,332
76
102

Notes 1. U.S. dollar amounts are translated from yen, for convenience only, at the rate of ¥117.47 = U.S.$1.00 in effect on March 31, 2006.
2. Total revenue does not include consumption taxes.
3. Funds from operations: Net income + Depreciation and amortization
Net operating income from property leasing activities: (Revenue from property leasing – Rental expenses) + Depreciation and amortization
LTV ratio: Interest-bearing debt / Total assets
Funds from operations per unit: (Net income + Depreciation and amortization) / Total number of units issued and outstanding at end of period

Regional Allocation (As of November 30, 2006)

Portfolio by Category (As of November 30, 2006)(Based on acquisition value)(Unit-based)

Greater Tokyo

Other Major Cities

2.1%

2.4%

Large (3BR or more)

Others (retail)

8.4%

0.1%

Single(studio)
31.8%

Family(2BR)
18.8%

23 Wards of Tokyo
95.5%

Compact (1BR)40.9%

Note: Greater Tokyo includes Tokyo (other than the 23 wards), Kanagawa, Chiba and Saitama.
Other Major Cities includes Sapporo, Sendai, Nagoya, Kyoto, Osaka, Kobe, Hiroshima and Fukuoka.

NAF Report October 2005 – March 2006

1

To Our Stakeholders

Nippon Accommodations Fund Inc. leverages thecomprehensive strengths of the Mitsui FudosanGroup to invest in and operate residential realestate under the rubric of accommodation assets.
The fund seeks to maximize investor value
through optimal asset management with theobjectives of securing stable earnings andsteadily increasing assets under management.
Nobuyuki Nakai
Executive Director of Nippon Accommodations Fund Inc.
President and CEO of Mitsui Fudosan Accommodations Fund Management Co., Ltd.

Overview of Performance
Nippon Accommodations Fund Inc. (NAF) was incorporated on October 12, 2005 under the Investment Trust andInvestment Corporation Act of Japan, with asset management entrusted to Mitsui Fudosan Accommodations FundManagement Co., Ltd. On August 4, 2006, NAF listed its units on the J-REIT section of the Tokyo Stock Exchange.
NAF’s first fiscal period began on October 12, 2005 and ended on March 31, 2006. NAF acquired five properties
on November 30, 2005 as well as two more properties during its first period. Total acquisition price was ¥41,036
million. Total revenue for the period was ¥924 million, and operating income for the period was ¥466 million. Net
income for the period was ¥377 million, and cash distribution per unit was ¥8,871.
During the second fiscal period, NAF has acquired 21 properties and sold 1 property. Assets under management
on an acquisition price basis total ¥101,386 million.

NAF’s Strategies
NAF’s objective is to maximize investor value. Our fundamental policy is to take a medium-to-long-term
perspective in managing assets to secure stable earnings and steadily increase assets under management. NAF
employs two strategies to achieve its objective: invest in accommodation assets, and leverage the comprehensive
strengths of the Mitsui Fudosan Group.
NAF invests primarily in residential real estate, and also invests in trust beneficiary rights in trust assets composed
mainly of residential real estate. Changes in lifestyles and family structure are resulting in various new needs, withconsequent growth in demand for residential real estate structured to accommodate these needs. Real estatedevelopment must therefore take these social changes and new needs into account. Given changes in needs and thestructure of society, NAF focuses investment on a subset of the residential real estate category it defines as“accommodation assets,” which principally consist of rental apartments, student dormitories and apartments, serviced
apartments for short-term stays, senior residences and corporate housing.

2

Nippon Accommodations Fund Inc.

Real Estate for Living Accommodations
Accommodation assets

High

Diversified needs for residential properties

Serviced apartments

Senior residences
HotelsChangingfamily structures

Service provided

Changing
lifestyles

Corporate
housing/
Dormitories/
Student
apartments

Rentalapartments

Houses built for retail saleSocial Background

Low
Short

Length of time/stayLong

Accommodation assets are defined as rental apartments, dormitory/student apartments,
serviced apartments, senior residences and corporate housing. They do not include hotel properties.

NAF’s residential properties respond to a diverse array of tenant needs. We seek to enhance the value of theseproperties as accommodation assets by meeting the needs and wants of tenants. From serviced apartments for shortterm stays to rental apartments leased for a comparatively longer term, NAF aims to secure stable earnings throughoptimal management of accommodation assets.
On the other hand, NAF also believes that its concept of providing accommodation assets requires it to operate
under an integrated system of total quality management that encompasses every stage from planning anddevelopment to property management and operation. As a matter of policy, therefore, NAF energetically makes
maximum use of the value chain of the Mitsui Fudosan Group, which is integrated from the marketing of rental
properties, land selection and acquisition, and planning and development to leasing and property management
and operation.
Maximum use of the Mitsui Fudosan Group’s value chain allows NAF to acquire optimal investment opportunities
and continuously add accommodation assets that meet diverse tenant needs.

August 2006

Nobuyuki Nakai
Executive Director of Nippon Accommodations Fund Inc.
President and CEO of Mitsui Fudosan Accommodations Fund Management Co., Ltd.

NAF Report October 2005 – March 20063

Generating Returns from theSponsored by a leading real estate company, NAF has held large-scale assets since the time➤

Japan’s First Listed Residential J-REIT with
Over ¥100 Billion in Assets at IPO➤

Investing in Accommodation Assets

NAF offers convenience that meets the diverse needs of occupants in order to maximize the value of
its accommodation assets, thus increasing investor value.

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Nippon Accommodations Fund Inc.

➤

Leveraging the Comprehensive Strengths of
the Mitsui Fudosan GroupNAF aims to maximize returns by leveraging the comprehensive strengths in accommodation assets of
the Mitsui Fudosan Group, a leading real estate company in Japan.

Accommodation Value Chainof its listing as a residential J-REIT, with the aim of being a driving force in the sector.
➤

First Residential J-REIT Sponsored by a
Leading Real Estate Company

NAF Report October 2005 – March 2006

5

Rental Apartment Investment Characteristics

The high-quality rental apartments that NAF selects as accommodation assets are highly attractive,

Accommodation assets form the basis of NAF’s investment strategy.

competitive properties that generate stable earnings.

Growing Rental Needs and Demand

Demand: Steady Growth of Households
Forecast change in number of households in major urban areas(2000 = 100)
115
Greater Tokyo
110

Nagoya area
Kansai area
Fukuoka
Other areas

105
100

Investing in Accommodation Assets

95

2000

2005

2010

2015

Source: National Institute of Population and Social Security Research
Note: Other areas excludes Hokkaido, Miyagi, Greater Tokyo, Nagoya area, Kansai area,
Hiroshima and Fukuoka.

Demand: Decreasing Home Ownership Ratein the 25-54 Age Bracket
Home ownership rates by age of head of household (%)

1978

1988

1998

2003

Average

59.9

61.1

60.0

60.9

Under 25

9.9

4.5

2.7

2.7

25 to 54

58.6

58.9

54.1

52.9

55 to 59

79.0

79.3

76.7

76.7

60 to 64

77.9

80.3

79.2

78.9

77.4

81.2

80.0

75.5

79.4

80.3

60 to 74
75 and over

75.9

Source: “Housing in Japan (1978),” Prime Minister’s Office; “Housing Statistical Survey (1988)”
and “Housing/Land Statistical Survey (1998),” General Affairs Agency;“Housing/Land Statistical Survey (2003),” Ministry of Internal Affairs and Communications

Supply: Limited Supply from Private Companies
Number of rental residential construction starts by construction owner(Thousands of residences)
900
800
700
600
500
400
300
200
100
0
1989 1991 1993

Aggregate total
Individual
Corporate
Public entity

1995

1997

1999

2001

2003

2005

Source: “Housing Construction Statistics,” Ministry of Land, Infrastructure and Transport

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Nippon Accommodations Fund Inc.

Japan’s population is projected to decrease in the
future. Given an aging population with a low birthrate andthe trend toward nuclear families, however, the number ofsmaller households is conversely projected to increase.
Moreover, lifestyles are evolving, with changes in theemployment environment and a move toward urban homes
in pursuit of more convenient living. NAF concentrates
investment in large urban areas, primarily the 23 wards ofTokyo, where projected stable growth in the number ofhouseholds points to expanding demand for rental
apartments.
In addition, over the past 25 years, the age at whichpeople in Japan acquire their own home has been trending
upward, with a decreasing rate of home ownership amongpeople between the ages of 25 and 54, the primary rental
customer segment. This trend indicates a shift towardrental apartment occupancy.

A Tight Supply of High-Quality
Rental Apartments
Conventionally, individual landowners seeking toutilize their assets effectively have been the principal
source of rental apartments in Japan, and the supply by
private companies has been limited. In this environment, in
2004, the former Urban Development Corporation was
reorganized as the Urban Renaissance Agency, an
independent administrative institution. Rather than directly
supplying rental apartments, the Urban RenaissanceAgency now takes the position of transferring or leasing
tracts of land it has prepared to private developers. Thus
control of the supply of rental apartments is shifting to theprivate sector.
In addition, the available rental apartments generally
do not compare favorably to owned houses in terms offloor space or building and construction quality. Looking

at apartment floor space per unit in Tokyo, units with theleast amount of floor space are concentrated in company
housing and rental housing, and units with greater floor
space are increasingly concentrated in owned andoccupied houses. In Tokyo, company and rental units tend
to have less floor space, while owned and occupied
houses are generally much larger. As a result, high-quality
apartments are scarce, as demand grows but the supply
remains limited.

Supply: Relative Scarcity of Quality Apartments
Number of Tokyo residential units by floor space (2003)(Thousands of residences)
1,200
1,000
800
600
400
200
0

High-Quality Rental Apartments
Generate Highly Stable Earnings
In general, apartment rents are not greatly affected bychanges in economic conditions or asset values. Moreover,
the risk of sudden shifts in vacancy and lease rates is lower
for rental apartments than for office buildings because
apartment lease contracts are subdivided and diversified interms of contract period and renewal and termination
dates. As a result, the potential for fluctuations in earnings
is also limited. These conditions allow NAF to structure adiversified portfolio of rental apartments throughinvestments congruent with NAF’s basic policy of securing
stable earnings.

Company housing(private and public)
Rental (private)
Rental (other)
Rental (public)
Owned and occupied〜29

30〜49 50〜69 70〜99 100〜149 150〜
Total floor area per dwelling (m2)

Source: “2003 Housing/Land Statistical Survey (August 2004),” Ministry of Internal Affairs andCommunications

Stability: Relatively Stable Rents
Offices (Tokyo)(1985 = 100)
Private rental houses
170(Tokyo, non-wooden, over 30m2)
160
150
140
130
120
110
100
0
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Source: “Annual Report: Consumer Price Index,” Cabinet Office, Japanese Ministry of Internal
Affairs and Communications, and “Service Price Index for the Private Sector,” Bank of Japan

Common Practices in Japan’s Rental Apartment Market
Contract Validity Period

Key Money

Leases in Japan are generally 2-year contracts, which can be renewedby paying an extension fee (usually one month’s rent).

The tenant pays key money to the landlord prior to signing a lease
contract. It is equivalent to two months’ rent and is not refunded.

Security Deposit

Commission Fee

The tenant must pay a security deposit in advance to the landlord to
insure against future unpaid rent and/or damages. Generally, it isequal to two months’ rent and is typically refunded when moving out(a cleaning and/or repair fee may be deducted prior to refund).

A commission fee is paid to the leasing agent; by regulation, it cannot
exceed one month’s rent.

Guarantor/Joint Surety
A guarantor is required when signing a lease contract. The guarantor musthave an income sufficient to cover the rent if the tenant cannot pay and/or
the cost of repairs to the apartment if the tenant causes any damage.

NAF Report October 2005 – March 2006

7

Investing in Accommodation Assets

Portfolio Map

Okawabata (River Point Tower)
Okawabata (Park Side Wings)
Okawabata (Pier West House)
Park Axis Gakugei Daigaku
Adachi-ku

Park Axis Ichigaya

Itabashi-ku

Park Axis Shibuya Jinnan
Park Axis Aoyama Kotto DoriKita-ku

Nerima-ku

Katsushika-ku

Park Axis Shirokanedai

Arakawa-ku

10Park Axis Tsukishima

Bunkyo-ku 15

Nakano-ku

Park Axis Nihonbashi Stage

Chiyoda-ku
Imperial
Palace22
Shibuya-ku

Park Axis Hongo no Mori

16

17

Setagaya-ku

11Park Axis Ochanomizu Stage
Park Axis Okachimachi

2

7

Meguro-ku

Park Cube Hongo
Park Cube Kanda

Shinagawa-ku

Park Cube Ichigaya
Park Cube Asakusa Tawaramachi
Park Cube Ueno
Park Cube Keio Hachioji
Park Cube Keio Hachioji II
Park Axis Meieki Minami
Note: Numbers in red for each property refer to the Portfolio Summary on pages 18-19.

8Nippon Accommodations Fund Inc.

Ota-ku13

Koto-ku1
95 Minato-ku 14

Tokyo Bay

Edogawa-ku

19

Chuo-ku

4 12Park Axis Tameike Sanno
Park Axis Roppongi Hinokicho Koen

21

3

Park Axis Hamamatsucho

Sumida-ku

Shinjuku-ku

Suginami-ku

24 23

18

20

6

Park Axis Minami Azabu
Park Axis Shibuya

Taito-ku

8

5.0 k mPark Axis Otsuka

10.0 k m

Toshima-ku

7.5 k mPark Axis Bunkyo Stage

2.5 k mPark Axis Kagurazaka Stage

Investment Criteria

Tokyo➤ Area• Tokyo 23 Wards (80% or more)• Greater Tokyo(Tokyo (other than the 23 wards),
Kanagawa, Chiba, Saitama)• Other Major Cities(Sapporo, Sendai, Nagoya, Kyoto,
Osaka, Kobe, Hiroshima, Fukuoka)➤ Investment Size
¥1 billion or more per property(in principle)➤ Ownership Interest
Fee simple (in principle)➤ Building Structure
Reinforced concrete or steel reinforced
concrete (no wooden structures)

NAF Report October 2005 – March 2006

9

Property Brand Strategy

NAF aims to maintain and improve the long-term competitiveness and value of its assets. The Park Axis series
and the Park Cube series are central to the structure of NAF’s portfolio.

Park Axis Series➤ Residential rental apartments planned / developed by Mitsui Fudosan➤ Leverages Mitsui Fudosan’s expertise in the condominium business➤ Features design, facilities and specifications to fit urban lifestyles

Residence

Investing in Accommodation Assets➤ Basic specifications for durability andsound insulation➤ Space designs that appeal to residents➤ Fixtures and finishes that consider
aesthetics, livability, advanced featuresand convenience

Location➤ Area setup that was quick to note“migration back to central Tokyo”➤ Security measures to provide safe
urban living➤ Areas offered are popular in rental market,
can expect stable demand in futureManagement➤ Appropriate long-term maintenance and improvement
plan and common area management menu
➤ Securing high-quality tenants through strong leasing
capabilities and rigorous screening

Brand value enhanced by
Portfolio with potential for sustainable
10

Nippon Accommodations Fund Inc.

Park Cube Series➤ Planned / developed by third parties other than the Mitsui Fudosan Group➤ Meets NAF’s own construction and design standards

Quality➤ Basic specifications for durability andsound insulation

Management➤ Appropriate long-term maintenance andimprovement plan and common area
management menu

➤ Fixtures and finishes that consider
functionality, advanced featuresand convenience➤ Security that provides safe and secureresidential spaces➤ Securing high-quality tenants throughstrong leasing capabilities and rigorous
screening

total quality management
asset value growth over the long term
NAF Report October 2005 – March 2006

11

Brand Strategy

Five features differentiate NAF: development plans that respond to diversifying needs; designs that address
both form and function; support services for resident convenience; services to ensure safety and comfort;
and an advanced information and communications environment for superior quality, safety and security.

Investing in Accommodation Assets

function and aesthetics in everything from the façade(exterior), entrance and corridor to the doorway of each
unit. In cooperation with architects and/or interior
designers, additional differentiation is sought to offer adesign suitable to its surrounding environment andcustomer attributes.
For example, Ryoichi Misawa, President of Misawa
Associates, has been selected to cooperate on Park Axis
Nihonbashi Stage, and Masuo Fujiwara, President of We &F, is cooperating on Park Axis Aoyama Kotto Dori and Park
Axis Tameike Sanno.

Development Plans
That Meet Diversifying Needs
Taking advantage of the Mitsui Fudosan Group’s
marketing expertise, the Park Axis series is designed with adetailed targeting strategy considering location andsurrounding environment. Apartments are developed
according to those plans (floor plan, facilities, etc.) to meet
specific target demands in response to a wide range oflifestyles and lifestages.

Designs That Address Both
Form and Function
For the Park Axis series to maintain its appeal for along period of time, Mitsui Fudosan’s designs combine

Reception (Park Axis Nihonbashi Stage)

Image photoSupport Services
for Resident Convenience
Concierge Service Providing reception services similar to
those of a concierge (customer relations at hotels) tosatisfy the needs of tenants looking for a quality lifestyle aswell as everyday services
Household Services Providing services in partnership withother service providers to increase tenant convenience inareas including house cleaning, furniture/home applianceleasing, food catering and transportation service to andfrom hospital/school
Payment by Credit Card 24-hour Internet credit card
payments available for initial payments (deposit andkey money)

Tenant guidebook

The above is a summary of services/support already provided in some of the buildings in the portfolio at IPO. These services are not necessarily available at all buildings. NAF is
willing to improve and provide these services/support to more buildings.

12

Nippon Accommodations Fund Inc.

Services to Ensure
Safety and Comfort
C-Desk 24/7, toll-free service to accept/respond torequests for rent renewal and issuance of certification of
parking space as well as trouble shooting including waterleaks, air conditioning and water heater problems
Tenant Guidebook Distribution of a tenant guidebook
to assist tenants from moving in to moving out. It also
explains procedures for paying water, gas, electricity andother utility bills.

Superior Quality,
Safety and Security
The Park Axis series is designed and constructed under
total quality management based on Mitsui Fudosan’s
expertise in condominiums, considering easy facility
renewals, maintenance and convenience of tenants. The
Park Axis series takes a proactive approach to ensure
safety and comfort, key issues in today’s society, inproviding rental apartments.

Front Door
(Dimple key & double lock/thumbturn for crime prevention)

The front door of each unit uses a
dimple key that meets crime prevention
standards. A double lock andthumbturn further enhance security.

Floors and Bordering Walls
Floor slabs more than 200mm thick andbordering walls at least 180mm thickcontribute to sound insulation.

Dimple key

Double lock(basic concept)(reference photo)

Diagram of floors& bordering walls
Bordering wall
180mm

Vertical Wastewater Pipes(reference photo)

For hard-to-upgrade water drainage
piping inside units, maintenance-free
cast iron pipes are used.

Floor slab thickness
Approx. 200mm or more

Information / Communications
Units are high-speed Internet ready,and are equipped with fiber-optic
wiring. They can also furnish a variety
of information content, including
satellite and cable TV.

The above illustrates a model unit and a general plot plan of Park Axis Ochanomizu Stage. This is not applicable to all properties.

NAF Report October 2005 – March 200613

Representative Accommodation Assets

Okawabata Apartment Communities① River Point Tower② Park Side Wings③ Pier West House

Investing in Accommodation Assets• This property is one part of the large-scale
Okawabata River City 21 development, which
occupies approximately nine hectares.
• River Point Tower was the first high-rise rental
apartment building in Tokyo.
• A 24-hour management system and on-siterestaurants and sports facilities help makeOkawabata Apartment Communities a convenient,
comfortable place to live.
Acquisition price:¥ 29,696 million

Appraisal value:¥ 29,700 million

PML:① 4.9%② 9.9%③ 8.9%

Address:

Chuo-ku, Tokyo

Units:

544

Acquisition date:November 30, 2005

Site area:

30,291.75m2

Land ownership right:① Land use rights 23.19%

Skylight Tower Pier West Square② Land use rights 8.60%(Condominium building) (Commercial complex)③ Common ownership 1.62%

City Front Tower(Condominium building)Pier West House

Floor area of building:(Managed building forrental apartments)
Acquired asset

River Point Tower(Rental apartments)
Acquired asset

Channel Mark Club
(Sports facility/restaurant)
Sumida River
Okawabata Area Map

Park Side Wings(Rental apartments)
Acquired asset① 42,177.83m2② 15,737.63m2③ 847.27m2

Completed:① March 30, 1989
② July 19, 1988
(Building expansion on March 30, 1989)③ April 4, 1988

Notes: 1. Numbers in red for each property refer to the Portfolio Summary on pages 18-19.
Notes: 2. Appraisal dates are November 30, 2005 for properties 1 through 5; February 28, 2006 for property 6; March 31, 2006 for properties 7 through 10; and April 30, 2006 forproperties 11 through 27.
Notes: 3. PML = Probable maximum loss

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Nippon Accommodations Fund Inc.

Park Axis Aoyama Kotto Dori
Located near sophisticated clothing boutiques andcafes, Park Axis Aoyama Kotto Dori is in an exclusive
residential area.
Acquisition price:¥ 1,730 million

Appraisal value:¥ 1,730 million

PML:

9.2%

Address:

Minato-ku, Tokyo

Units:

40

Acquisition date:November 30, 2005

Site area:

502.76m2

Floor area of building:

1,939.54m2

Completed:

August 31, 2005

Park Axis Shirokanedai
Trendy cafes and restaurants and the Institute for
Nature Study opposite enhance the fashionable
residential area around Park Axis Shirokanedai.
Acquisition price:¥ 5,140 million

Appraisal value:¥ 5,140 million

PML:

12.0%

Address:

Minato-ku, Tokyo

Units:

99

Acquisition date:

April 12, 2006

Site area:

1,063.80m2

Floor area of building:

5,992.92m2

Completed:

September 9, 2005

NAF Report October 2005 – March 200615

Park Axis Minami Azabu

Investing in Accommodation Assets

Located near the famous Azabu Juban shopping area,
Minami Azabu has been popular for many years as an
excellent neighborhood to live in.
Acquisition price:¥ 3,939 million

Appraisal value:¥ 3,960 million

PML:

9.2%

Address:

Minato-ku, Tokyo

Units:

64

Acquisition date:August 7, 2006

Site area:

956.12m2

Floor area of building:

5,060.75m2

Completed:February 28, 2003

Park Axis Nihonbashi Stage
Park Axis Nihonbashi Stage is a neighborhood
landmark and provides dedicated concierge, delivery
and catering services for residents.
Acquisition price:¥ 7,557 million

Appraisal value:¥ 7,570 million

PML:

11.3%

Address:

Chuo-ku, Tokyo

Units:

184 Residential; 1 Retail

Acquisition date:August 7, 2006

Site area:

1,443.06m2

Floor area of building:

12,488.08m2(includes 49.35m2 parking area)

Completed:

August 31, 2004

Notes: 1. Numbers in red for each property refer to the Portfolio Summary on pages 18-19.
Notes: 2. Appraisal dates are November 30, 2005 for properties 1 through 5; February 28, 2006 for property 6; March 31, 2006 for properties 7 through 10; and April 30, 2006 forproperties 11 through 27.
Notes: 3. PML = Probable maximum loss

16

Nippon Accommodations Fund Inc.

Representative Accommodation Assets

Park Axis Meieki Minami
Park Axis Meieki Minami is located in a convenient,
comfortable area, and an 11-minute walk from
Nagoya Station on the Shinkansen Line.
Acquisition price:¥ 2,440 million

Appraisal value:¥ 2,440 million

PML:

5.8%

Address:Nakamura-ku, Nagoya

Units:

169

Acquisition date:August 7, 2006

Site area:

1,223.73m2

Floor area of building:

6,919.04m2

Completed:February 8, 2006

Park Cube Kanda
Adjacent to Nihonbashi, Otemachi and Akihabara,
Park Cube Kanda has an attractive design and isconvenient for commuting.
Acquisition price:¥ 2,454 million

Appraisal value:¥ 2,480 million

PML:

10.9%

Address:

Chiyoda-ku, Tokyo

Units:

95

Acquisition date:August 7, 2006

Site area:

506.93m2

Floor area of building:

4,000.74m2

Completed:

October 1, 2005

NAF Report October 2005 – March 2006

17

Investing in Accommodation Assets

Portfolio Summary

No. Name

Location

Okawabata Apartment Communities
River Point Tower
Park Side Wings
Pier West House
Park Axis Gakugei Daigaku
Park Axis Ichigaya
Park Axis Shibuya Jinnan
Park Axis Aoyama Kotto DoriPark Axis Kagurazaka Stage
Park Axis Shirokanedai
Park Axis Bunkyo Stage
Park Axis Tsukishima
Park Axis Otsuka
Park Axis Minami Azabu
Park Axis Shibuya
Park Axis Nihonbashi Stage
Park Axis Hamamatsucho
Park Axis Hongo no Mori
Park Axis Tameike Sanno
Park Axis Roppongi Hinokicho Koen
Park Axis Ochanomizu Stage
Park Axis Okachimachi
Park Cube Hongo
Park Cube Kanda
Park Cube Ichigaya
Park Cube Asakusa Tawaramachi
Park Cube Ueno
Tokyo 23 Wards Total
Park Cube Keio Hachioji
Park Cube Keio Hachioji II
Greater Tokyo Total (Note 3)
Park Axis Meieki Minami
Other Major Cities Total
Grand Total

Chuo-ku, Tokyo

Setagaya-ku, Tokyo
Shinjuku-ku, Tokyo
Shibuya-ku, Tokyo
Minato-ku, Tokyo
Shinjuku-ku, Tokyo
Minato-ku, Tokyo
Bunkyo-ku, Tokyo
Chuo-ku, Tokyo
Toshima-ku, Tokyo
Minato-ku, Tokyo
Shibuya-ku, Tokyo
Chuo-ku, Tokyo
Minato-ku, Tokyo
Bunkyo-ku, Tokyo
Minato-ku, Tokyo
Minato-ku, Tokyo
Bunkyo-ku, Tokyo
Taito-ku, Tokyo
Bunkyo-ku, Tokyo
Chiyoda-ku, Tokyo
Shinjuku-ku, Tokyo
Taito-ku, Tokyo
Taito-ku, Tokyo
Hachioji-shi, Tokyo
Hachioji-shi, Tokyo
Nagoya-shi, Aichi

Notes: 1. Acquisition Price does not include acquisition-related expenses, property tax (to be capitalized) and consumption tax(not refundable for residential properties). Amounts are rounded down to the nearest million.
Notes: 2. PML = Probable maximum loss

18

Nippon Accommodations Fund Inc.

(As of November 30, 2006)

Acquisition Price (Note 1)

Portfolio Share

Rentable Area

(Yen in millions)(%)(sq. m.)29,69629.3

43,812.41

1,760
2,570
3,230
1,730
1,400
5,140
4,440
930
1,655
3,939
1,282
7,557
2,025
2,910
2,860
2,170
9,710
1,070
1,760
2,454
1,794
2,508
2,233
96,824
991
1,130
2,121
2,440
2,440
101,385

1.7
2.5
3.2
1.7
1.4
5.1
4.4
0.9
1.6
3.9
1.3
7.5
2.0
2.9
2.8
2.1
9.6
1.1
1.7
2.4
1.8
2.5
2.2
95.5
1.0
1.1
2.1
2.4
2.4
100.002,437.66
3,313.33
2,766.62
1,537.24
1,891.05
4,704.44
6,078.93
1,383.99
2,606.37
3,938.14
1,094.28
10,025.40
2,426.45
3,317.94
2,710.69
2,054.46
12,025.25
1,621.73
2,160.12
3,194.59
2,127.50
4,012.68
3,041.61
124,282.88
2,814.32
3,082.32
5,896.64
5,565.13
5,565.13
135,744.65

Rentable Units

PML (Note 2)

Developer

(%)

544

64
84
75
40
59
99
154
30
52
64
20
184 Residential, 1 Retail80
86 Residential, 1 Retail
70
46
324
42
60
95
51
76
91
2,490 Residential, 2 Retail52
47 Residential, 1 Retail
99 Residential, 1 Retail169
169
2,758 Residential, 3 Retail

Mitsui Fudosan
4.9
9.9
8.9
9.7
8.5
8.7
9.2
8.4
12.0
7.2
10.1
7.4
9.2
10.7
11.3
9.4
11.2
9.8
9.5
10.0
10.3
10.1
10.9
9.1
9.1
10.8

Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Other Party
Other Party
Other Party
Other Party
Other Party

9.6
9.5

Other Party
Other Party

5.8

Mitsui Fudosan

5.1

3. Greater Tokyo includes Tokyo (other than the 23 wards), Kanagawa, Chiba and Saitama.

NAF Report October 2005 – March 2006

19

The Mitsui Fudosan Group’s Value Chain

The companies of the Mitsui Fudosan Group form a comprehensive operating system for rental
properties that spans from market research, site selection and acquisition, planning anddevelopment to leasing, management and operation, in which the Group functions as a single

Leveraging the Comprehensive Strengths of the Mitsui Fudosan Group

organic value chain.

■ Understanding of supply/demand trends in the market

through the analysis of statistical information/data on
housing for sale and rental apartments, occupancy surveysof new properties and fixed property observationand needs
based on a long track record (experience) in case studies
of potential properties/development project areas, housing
to real estate brokers, rent/occupancy historical data

MarketResearch /Analysis■ Examination of micro market characteristics■ Understanding of tenant needs, feedback for reinvestment

and development

Feedbackto Planning /Development

Comprehensive
systemthe Mitsui

Management /Operation■ Renewal/renovation (reinvestment) based on appropriate

investment return analysis■ Value-added services that take advantage of scale

Leasing■ Individual plan evaluation, discussions on living environ-ment, competitive landscape and other conditions, andsetting of rent details■ Construction of framework to convey product appeal(use of leasing specialist)■ Control/use of leasing agency network

Residential Building
Maintenance20

Nippon Accommodations Fund Inc.

Operation, Planning /Development of Accommodation Business■ Development of site acquisition strategy based on macro

market and potential demand trends■ Large collection of site information supported by property

Site Acquisition

development capabilities of all types from small buildings
to complex development/large development projects■ Detailed development of target customers and property

operatingconducted by
Fudosan Group

Planning and
Designconcepts according to purpose, number of residents, family structure and lifestyle■ Planning of strategic plan variations, specifications,

grades and tastes suitable for established target and concept■ Strategic plan design discussed from the viewpoints ofdesign, safety, functionality, management/operation, running cost and maintenance/renewal

Construction
Management /Supervision■ Acquisition of approval, cost control, scheduling,

design/construction management (use of real estatedevelopment expertise gained from tenant feedback)■ Quality control(Use of rental apartments construction/design checklist
covering approx. 1,300 inquiries)■ On-site meetings/checks by respective professionals inconstruction, structure and facilities

Property
Management

Initial Leasing
Tenant Brokerage

NAF Report October 2005 – March 200621

Mitsui Fudosan’s Accommodation Asset Development Capabilities

Condominium Development
Understanding of residential land/development information based on considerable condominium
development experience in major cities nationwide
Condominium Units Sold by Mitsui Fudosan

Leveraging the Comprehensive Strengths of the Mitsui Fudosan Group

Mitsui Fudosan Ranking
1Units Sold
8,000
7,000

3
5

6,000

Ranking
Other Cities
Greater Tokyo

7
9

5,000
4,000

11

3,000

13

2,000

15

1,000

17

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

0

Apartment Development
During 1988 and 1989, Mitsui Fudosan developed 544 rental housing units at the Okawabata
River City 21 complex in Chuo-ku, Tokyo. Since 1999, Mitsui Fudosan has been developing andsupplying numerous rental housing units within the Park Axis series.
Park Axis Series Track Record(Units)
1,400

2,152 units completed (cumulative total as of March 2006)
Estimate
Actual

1,200

1,231
598

1,000
800

667

600

633

472

400
200
0

194

127
31
2000

28
2001

2002

2003

2004

2005

2006

Source: Mitsui Fudosan Co., Ltd.

■ Large Apartment Development Projects
Park Axis Aoyama 1-chome Tower (Note)(JV among Mitsui Fudosan, Tokyo Metro Government, ITOCHU and Taisei)■■

To be completed in 2007
Total units: 390
Shibaura Island Project A1 Block(Air Tower), A3 Block (Note)(JV among Mitsui Fudosan, Ken, Orix Real Estate,
Nippon Steel City Produce and Daiwa House* )■■To be completed in 2007, 2008
Total units: 2,000* Daiwa House in JV for A3 block only.
Note: Acquisition of these buildings is not planned as of November 2006.

22

Nippon Accommodations Fund Inc.

As of November 2006, NAF
has acquired Okawabata
Apartment Communities (544units) and 19 buildings of thePark Axis series (1,744 units).

Management/Operation Capabilities Leveraging Mitsui Fudosan Group Expertise

Property Management
Sustain asset value growth over the long term to maintain and improve rent and occupancy■

Unified property / tenant management data■

Promotes efficient and sure operation

Mitsui Fudosan Housing Lease will manage/operate all of NAF’s assets
Initial Leasing/Tenant Brokerage■

Efficient leasing enabled by direct sales from a Mitsui Fudosan Group
company with deep understanding of the property■

Able to obtain direct customer feedback for use in development,
management/operation and acquisition of assets

Residential Building Maintenance■

Extensive experience mainly in condominiums sold by Mitsui Fudosan

Example: Okawabata Apartment Communities
Okawabata Apartment Communities have maintained the rent/occupancy shown below
even 17-18 years after completion.
Taking advantage of Group companies’ engineering capabilities andaccumulated expertise in condominiums
Efficient capital expenditures from a long-term perspective:
Repair of external wall (1999)
Renewal of home security system (2000 – 2003)
Renewal of residential air conditioning ahead of schedule (2000 – ), etc.
Rent and Occupancy of Okawabata Apartment Communities
150

Rent per tsubo (renewal rent per tsubo in 98/1H = 100)

Occupancy (%)

140
130
120
110

100
95

Occupancy
New Rent
Total Avg. Rent
Chuo-ku Avg. Market Rent

90
85

(10-yr-old building)

80

100

75

90

70

80

65
98/1H 2H 99/1H 2H 00/1H 2H 01/1H 2H 02/1H 2H 03/1H 2H 04/1H 2H 05/1H 2H

NAF Report October 2005 – March 200623

Corporate Structure and GovernanceNippon Accommodations Fund Inc. has structured systems for compliance and risk management
and operates fairly and transparently with the aim of increasing investor value.

Real Estate Investment Trust (REIT) Structure
Asset Custodian

Accounting Auditor

The Chuo Mitsui Trust andBanking Company, Limited

KPMG AZSA & Co.
Asset Custody
Agreement
General Administrative Agent(Taxation)

Transfer Agent

The Chuo Mitsui Trust andBanking Company, Limited

Transfer Agency
Service Agreement

General Administrative Agent(Accounting)

HEISEIKAIKEISHA TAX Co.

REIT
Nippon Accommodations
Fund Inc.

General Administrative
Service Agreement(Taxation)

Zeirishi-Hojin
PricewaterhouseCoopers(TSE 3226)
General Administrative
Service Agreement(Accounting)

REIT Management Agreement andGeneral Administrative Service Agreement

Property Information Provider

REIT Management Company

Mitsui Real Estate
Sales Co., Ltd.

Mitsui Fudosan
Accommodations FundManagement Co., Ltd.

Memorandum on
Provision of Real
Estate Brokerage
Information

Master Property Manager
Basic Agreement
on Property
Management

Mitsui Fudosan
Housing Lease Co., Ltd.

Agreement on Provision ofReal Estate Information/Advisory Service
Real Estate Information/Advisory

Mitsui Fudosan Co., Ltd.

24

Nippon Accommodations Fund Inc. (NAF) is anassets to secure stable earnings and steadily increase

investment corporation established with the objective ofassets under management. These guidelines may change ininvesting in assets, primarily Designated Assets as defined

the future in response to changes in the externalby the Investment Trust and Investment Corporation Act ofinvestment environment and the status of NAF’s assets

Japan. NAF was established on October 12, 2005, with

under management.

Mitsui Fudosan Accommodations Fund Management Co.,

In addition, the REIT Management Company has

Ltd. (the “REIT Management Company”) as its asset

concluded contracts with the Mitsui Fudosan Group to

management company.

promote smooth, effective management of NAF’s assets. A

NAF has entrusted management of all of its assets toReal Estate Information and Advisory Service Agreement

the REIT Management Company, which is the asset

with Mitsui Fudosan Co., Ltd. provides information

management company required by the Investment Trust

regarding real estate owned or developed by Mitsui

and Investment Corporation Act of Japan. Operating in

Fudosan Accommodations Business Division, and otheraccordance with the asset management contract concluded

management advisory information. A Memorandum on

on October 13, 2005, the REIT Management Company

Provision of Real Estate Brokerage Information with Mitsui

manages NAF’s assets according to NAF’s asset

Fudosan Real Estate Sales Co., Ltd. provides access to real

management and administration policies and the asset

estate brokerage information. A Basic Agreement on

management guidelines embodied in the internal

Property Management with Mitsui Fudosan Housing Lease

regulations of the REIT Management Company. The asset

Co., Ltd., the master property management company tomanagement guidelines take current investment conditions

which NAF has entrusted all its properties, is fundamental

into account and follow NAF’s basic operating principle ofto NAF’s policy of outsourcing the property managementtaking a medium-to-long-term perspective in managing

services required in managing real estate.

Nippon Accommodations Fund Inc.

Management Team

From left to right:

Michihiko Takabe(Attorney at Law)
Supervisory Director

Yuji Yokoyama
Executive Director

Nobuyuki Nakai
Executive Director

Takeo Tomita(Attorney at Law)
Supervisory Director

Hiroyuki Sodeyama(Certified Public Accountant,Certified Public Tax Accountant)
Supervisory Director

Corporate Structure
General Meeting of Unitholders

executive directors plus at least one additional supervisory

In accordance with the current Articles of Incorporation,

director). As of June 26, 2006, NAF had two executive

the General Meeting of Unitholders is held within the 23

directors and three supervisory directors. NAF’s accounting

wards of Tokyo. In accordance with the Investment Trust

auditor is KPMG AZSA & Co.

and Investment Corporation Act of Japan and NAF’s Articles

NAF’s executive directors are responsible for businessof Incorporation, NAF convenes a General Meeting ofexecution. In addition, they have authority for all judicial

Unitholders. The General Meeting of Unitholders adopts orand extrajudicial proceedings related to the operations

vetoes resolutions on the basis of a simple majority of theof NAF.

voting rights of unitholders in attendance. Decisions on
substantive resolutions such as changes in the Articles ofSupervisory directors are responsible for supervisingbusiness execution by the executive directors.

Incorporation require the attendance of unitholders that

The Board of Directors acts in accordance with thecontrol a simple majority of total units issued andInvestment Trust and Investment Corporation Act of Japan

outstanding, and a two-thirds majority of the voting rights

and NAF’s Articles of Incorporation and other internal rulesof such unitholders. The asset management policies andin exercising their responsibility to supervise thestandards are stipulated by NAF’s Articles of Incorporation.

performance of the executive directors. In accordance withthe current Articles of Incorporation, the Board of Directors

Executive Directors, Supervisory Directors,
Independent Auditor and the Board of Directors

passes or vetoes resolutions on the basis of a simple
majority of executive and supervisory directors on the Board

NAF’s Articles of Incorporation stipulate that NAF must

who are in attendance and are able to vote. Executive andhave one or more executive directors, and two or more

supervisory directors with a vested interest in a resolution

supervisory directors (but always equal to the number ofare prohibited from participating in related decisions.

NAF Report October 2005 – March 2006

25

The accounting auditor is selected by the Generalmaterial violations of laws, regulations or NAF’s Articles of

Meeting of Unitholders. It audits documents including

Incorporation that executive directors may commit in the

NAF’s financial statements. In addition, it is charged withcourse of their duties. The accounting auditor also

reporting to supervisory directors any unlawful acts or

performs other duties as required by laws and regulations.

Compliance Initiatives

Corporate Governance Structure
General Meeting of Unitholders

The REIT Management Company assumes full
responsibility for compliance in order to structure an

Auditorappropriate asset management system for NAF. A Chief
Board of Directors

Compliance Officer (CCO) has been appointed to supervise
compliance with laws, regulations and internal rules on the

Compliance Committee

part of the asset management company.

CCO
CEO

The CCO is responsible for internal audits at the REITManagement Company. The Chief Executive Officer (CEO)Investment Committee

may also appoint other employees to participate as needed ininternal audits, based on the recommendations of the CCO.
NAF’s entire organization and all personnel within it

Financial
Division

Investment
Division
CIO

CFO

are subject to internal audits. As a rule, internal audits are
conducted on a regular basis in accordance with thecompliance program, but the CEO may initiate

Investment,
Research &Strategy Team

Asset
Management
Team

FinancialTeam

Corporate
OperationTeamextraordinary audits.

Investment Strategy and the Process for Acquiring and Selling Properties
The REIT Management Company acts in accordancewith the asset management guidelines.

with NAF’s Articles of Incorporation in formulating andA diagram of the investment policies of the asset

amending the asset management guidelines that determine

management guidelines and the process for acquiring

fundamental investment policies and internal rules. In

and selling specific assets under management follows on

addition, it makes decisions regarding the acquisition andpage 27.

sale of specific assets under management in accordance

Investment Risk Management System
NAF itself is responsible for complying with theInvestment Trust and Investment Corporation Act of Japan

26

implementing other measures to enhance the culture ofcompliance among officers and employees.

and related laws and regulations in managing risks. In

NAF’s Board of Directors convenes as needed more

addition, the REIT Management Company has establishedthan once every three months, and resolves important

appropriate internal rules. In conjunction with appropriate

matters and reports on the status of business execution inorganizational systems, it is providing education andaccordance with laws, regulations and internal rules for

Nippon Accommodations Fund Inc.

Corporate Structure and Governance

Investment Policy & Acquisitions/Sale Decision Process

Compliance Checking System

Preliminary Plan
Chief Compliance Officer (CCO)

Check

Approval of CCO

Requires approval by independent external professional

Related-Party Transaction
When CCO determines thata compliance issue has arisen■■

Approval ofCompliance
Committee

Proposal by CIO

Related-Party Transaction
When CCO determines that a compliance issue has arisen

Compliance Committee

Check

Requires approval by independent external professional
Members: CCO (Chairman), CEO, 2 external professionals

Investment Committee

CCO can suspend discussion
when he sees any problem
in discussion process(Currently 1 lawyer and 1 CPA)

External professionals: Appoint professionals independent
from Mitsui Fudosan
Resolution: Need the votes of 2/3 or more and at least 1 outof the 2 independent external professionals

Related-Party Transaction

Report to Board of NAF

Related-party transactions require consent of independent external professional

the Board of Directors. Independent supervisory directors

Management Co., Ltd.

supervise business execution. Moreover, supervisory

The REIT Management Company formulates anddirectors can obtain as needed reports on operations andrevises an annual management plan that is the blueprint

financial condition from the REIT Management Company

for management and administration policies that comply

and from NAF’s asset custodian, The Chuo Mitsui Trustwith the asset management guidelines. This annual planand Banking Company, Limited. They can also conductand compliance with the asset management guidelines

required research. Of note, one of NAF’s executive

serve to eliminate or minimize risk. In addition, the REIT

directors has obtained approval in accordance with theManagement Company has established internal risk

Investment Trust and Investment Corporation Act of Japan

management regulations and a department that focuses on

to serve concurrently as the president and chief executive

managing each type of risk appropriately.

officer of Mitsui Fudosan Accommodations Fund

Restrictions on Related-Party Transactions
Laws and regulations prohibit the REIT Management
Company from conducting specified transactions withother entities specified by the Investment Trust andInvestment Corporation Act of Japan and its ordinances.

related parties. In the case of a transaction with aWith the objective of enhancing returns for NAF’s

potential conflict of interest between an entity specified

unitholders, the REIT Management Company’s internal

under the Investment Trust and Investment Corporation

regulations specify rules for handling related-party

Act of Japan and its ordinances and its asset managementtransactions. The REIT Management Company hascompany, in principle the REIT Management Company

established standards and procedures for related-party

must prepare a brief describing the transaction and delivertransactions and executes appropriate asset management

it to NAF, other related asset management companies andfor NAF by eliminating conflicts of interest.

NAF Report October 2005 – March 2006

27

Portfolio Policy

Portfolio Structure Policies
The portfolio structure policies and investment standards forindividual properties for the REIT Management Company and its
internal regulations that serve as asset management guidelines
are presented below.

When considering individual investments, NAF studies
regional characteristics and tenant needs. NAF then deploys thisinformation to invest in properties with suitable residential plans
and characteristics.

1. Investment Areas

2. Investment Standards

NAF emphasizes Greater Tokyo and other major cities ininvesting in accommodation assets. By region, approximately 80
percent of NAF’s assets are in the 23 wards of Tokyo.

The REIT Management Company identifies potential
investments and decides whether or not to invest in assets on thebasis of the asset management guidelines summarized in thetable below.

ItemStandard

Investment amountIn principle, the value of each property must exceed ¥1 billion. However, NAF may invest in properties
that do not meet this criterion upon consideration of relevant matters including property characteristics
and earning potential.

Ownership rights

In principle, NAF shall hold ownership rights of a whole property. However, NAF may invest in comparted
ownership upon consideration of the specific property. NAF may also invest in leaseholds, including fixedterm leaseholds, on the basis of consideration of earning potential, the stability of the leasehold rights
and other relevant matters.

Structure

Structures shall be reinforced concrete (RC) or steel reinforced concrete (SRC). Earthquake resistance shallconform to or substantially satisfy the New Earthquake Resistance Standards (in compliance with the1981 revision of the Building Standards Law (Law No. 201 of 1950), including subsequent revisions;
hereafter, the “ Building Standards Law”).

Properties for development

In principle, NAF shall acquire properties that are already producing stable rental income at the time ofacquisition, and shall not invest in property development that entails NAF acquiring sites andconstructing buildings on them. However, NAF may consider contracts to acquire uncompleted buildings
that, although incomplete, are expected to carry minimum risk in respect to completion, delivery andsubsequent leasing.

3. Due Diligence Standards
NAF selects assets to invest in only after due diligencecovering economic feasibility, physical condition and legal statusin accordance with the asset management guidelines. Due
diligence includes real estate appraisals and building inspection

Item
Economic
feasibility
studies28

reports from third-party specialists. Based on the results of suchdue diligence, the REIT Management Company in principle
undertakes investigation of the items listed below in order tomake investment decisions as a result of comprehensive review.

Issues InvestigatedMarket survey

1. Current residential environment in the relevant region and its mid-to-long-term forecast
2. Demand and supply for rental housing and housing sales in the relevant region
3. Rental housing competition trends in the relevant region
4. Markets rents in the relevant region, including current rents and its mid-to-long-term forecast
5. Discount rate and rate of return

Tenant survey

1. Tenant creditworthiness and rent income amount
2. Tenant information including tenant household status or industry, number or purpose of use

Nippon Accommodations Fund Inc.

Physical
condition
studiesLegalinvestigation

Survey ofearnings andrelated issues

1. Current property management costs and potential for cost reductions
2. Development of proposals for increasing value through change in management manner or renovation
3. Development of mid-to-long-term plan for repair and renovation expenses
4. Development of property cash flow projections
5. Verification that property is consistent with portfolio strategy

Location

1. Street conditions, access to major transportation
2. Convenience and access to public facilities
3. Status of borders between adjacent tracts and cross-border issues
4. Living conditions including view, light, ambient noise and airflow
5. Presence of unpleasant facilities
6. Future development plans in the surrounding area

Construction,equipment andspecifications

1. Building structure, age and construction company of property and other related matters
2. Layout, ceiling height, interior specifications (including ceiling, walls and floors), materials used for theinterior and exterior, status of maintenance (or deterioration) of facilities including sanitary facilities,
ventilation facilities, electrical facilities, elevators and parking
3. Need for immediate repairs

Building
management

1. Status of compliance with related regulations including the Building Standards Law, the City Planning Law
and the National Land Use Planning Law
2. Actual management status
3. Quality of the property management company and contract terms

Antiseismic
resistance andprobable
maximum loss
(PML)

1. Antiseismic resistance that meets the New Earthquake Resistance Standards or equivalent resistance
2. Checks of the construction company, architectural firm, construction engineering company, and institutionthat inspected construction. Confirmation of authenticity of the structural fabrication calculation sheets.
3. In principle, earthquake PML shall not exceed 15 percent. For buildings for which PML exceeds 20 percent,consideration of additional antiseismic reinforcing work, additional earthquake insurance and other relevant
matters must be considered.

Environmental,
soil and otherissues

1. Investigation of whether the building contains harmful materials
2. Investigation of land use records and soil contamination

Rights andrelated issues

1. Issues regarding ownership rights and mortgage
2. Lease contract terms
3. Any documentation related to confirmation of border or agreement regarding cross-border issues
4. Permission for occupancy of roads under the Traffic Law
5. Compliance with laws and regulations related to environmental preservation, including the Nature
Conservation Law and the Urban Green Space Conservation Law
Investigation shall be conducted as to whether the previous owner had obtained the enforceable real right.
In case of complicated relation of rights, the following matters, among others, shall be investigated; (thecomplicated relation of rights include relationship between NAF and others if NAF does not hold the title toproperty or jointly holds the title.)
1. (If the concerned right is leasehold) the perfection of such leasehold and the absence of any rightwhich supersedes such leasehold.
2. The registration status of the relevant right of site; the limitation on separate transfer of such right ofsite from the building thereon and the registration status of such limitation; share of such right
3. Measures to be taken to ensure the right of site; reserve rules or measures based on long-term
renovation plan
4. Existence of agreement on prohibition from division of co-ownership property and registration statusof such agreement; appropriate treatments in case of request for division of co-ownership property orsales of co-ownership share; (possible) claims against or from other co-owners.

NAF Report October 2005 – March 2006

29

5. Status of compartment of comparted-ownership.
6. Security arrangements established prior to involvement of NAF and succession of any rights or
obligations in connection thereto.
7. Terms of special agreement with the owner of site (or leasehold originator), other compartedownership holders, other co-owners and any other relevant parties, including agreement regarding
first refusal.
8. Characteristics of owners of site (or leasehold originator), comparted-ownership holders, co-owners orother relevant parties (for example, corporations or individuals).
9. Terms of trust agreement in case the relevant rights are beneficial interests in real estate trust.
Survey of property Documents regarding border confirmation or border certificatesboundaries

Policies for Portfolio Management and Operation
1. Basic Management Policies
The REIT Management Company prepares a yearly
management plan for NAF’s assets under its management foreach fiscal period. This management plan covers issues such as
handling of the assets and projected capital expenditures forproperties, including plans for large-scale renovation, and issubject to Investment Committee resolution.
The REIT Management Company acts in accordance with thisyearly management plan in undertaking management andoperation of the assets in cooperation with the property
management company. The REIT Management Company is also
responsible for implementing appropriate changes and revisions
to the yearly management plan if necessitated by significant
changes in the operating environment.

30

1. An organizational structure that can execute property
management operations according to the management andoperation specifications of the REIT Management Company.
2. The capability to accomplish smooth new tenant recruitment.
3. A reasonable compensation level for property management
operations compared to others in the region in which
properties are located.
In addition, the REIT Management Company will periodicallymonitor whether the selected property management company ismaintaining its capabilities at the level dictated by the standards
for selection. As a result of monitoring, the REIT Management
Company may require improvements or may change the property
management company.

2. Selection and Monitoring of the Property
Management Company

3. Policies for Property and Casualty
Insurance Coverage

The property management company is responsible for
proposal and implementation of various measures for day-to-day,on-site management of tenants and properties. Such functions of
the property management company are particularly important to
the management of accommodation assets in general and rental
housing in particular. Naturally, the property managementcompany should have specialized expertise in the business ofproperty management, and its operations must be organized andefficient so that it can provide consistent, high-quality services
across a widely dispersed array of properties and tenants.
NAF has selected Mitsui Fudosan Housing Lease Co., Ltd. toprovide these services as its master property managementcompany. In principle, NAF intends to entrust property
management for assets to be owned by NAF in the future to
Mitsui Fudosan Housing Lease, on the condition that it meetsthe following requirements:

NAF maintains property and casualty insurance coverage, tothe extent that is deemed appropriate, to address damage toproperty or claims for compensatory damages from third parties
due to disasters such as fires and accidents. Asset characteristics
determine such coverage.
NAF comprehensively determines earthquake insurance
coverage according to the effectiveness of insurance and the
projected impact of an earthquake on each building and on theportfolio as a whole. When earthquake PML for specificbuildings is projected at over 20 percent or when the acquisitionof such property causes portfolio PML to rise above 15 percent,
NAF comprehensively considers the impact from an earthquake,
insurance premiums and any other relevant issues to determine
whether or not to purchase earthquake insurance.

Nippon Accommodations Fund Inc.

Portfolio Policy

4. Basic Policies for Renovation Plans andCapital Expenditures
The renovation plans are strategic and require renovationand capital expenditures in addition to routine expenses incurredby small repairs in order to maintain and improve the market
competitiveness of properties and tenant satisfaction over the
medium-to-long term.

NAF determines and revises, for each property, an annual
renovation plan in yearly management plans that are based on
the established 12-year medium-term renovation plans.
NAF funds a reserve for renovation according toconsiderations of depreciation expenses and renovation plans
based on mid-to-long-term portfolio management. In principle,
NAF keeps capital expenditures within the scope of the overall
portfolio renovation plan.

Divestiture Policy
In principle, NAF aims to secure stable operating revenue
from assets under management through ownership over the
mid-to-long term, and does not engage in short-term divestiture.
However, NAF decides to sell specific assets after
consideration of the overall portfolio impact based on evaluationof trends affecting the future rental market in a given area,
actual or projected increases or decreases in asset values, risk ofasset impairment, obsolescence and associated costs, and otherrelevant factors.

Financial Policies
1. Issue of New Units
NAF may flexibly issue additional units with the objectiveof financing acquisition of assets, renovation and other capitalrequirements for operation, or to repay debt, including leasedeposits, security deposits, loans and bonds that NAF may
have issued.

2. Debt Financing
NAF may issue bonds or take on loans, including callmarket funding, with the objective of financing acquisition ofassets; renovation expenses; dividend payments; working
capital; or debt repayment, including lease deposits, security
deposits, loans and bonds that NAF may have issued. NAF only
borrows capital from qualified institutional investors as definedby Article 2-3-1 of the Securities and Exchange Law of Japan.
In addition, NAF may not take on loans or issue bonds thatexceed ¥1 trillion, respectively, nor may the total of loans andbonds exceed ¥1 trillion. According to NAF’s current Articles ofIncorporation, NAF may use its assets under management as
collateral for loans and bonds.

3. Loan-to-Value Ratio
The ratio of total loans and bonds outstanding to NAF’s
total assets is known as the loan-to-value (LTV) ratio. The REITManagement Company determines the upper limit of its LTV
ratio as part of its mid-to-long-term asset management plans
and its yearly management plans. The upper limit for NAF’s LTV
ratio is currently set at 60 percent, although issues including theacquisition of assets may cause the LTV ratio to temporarily
exceed 60 percent.

4. Derivatives
According to NAF’s current Articles of Incorporation, NAF
limits transactions involving financial derivatives to those withthe objective of hedging risks including the risk of change in theinterest rates associated with debts.

Information Disclosure Policy
NAF defines itself as an open, transparent investment trust,and has a disclosure policy for public awareness. Moreover, NAF
works to maintain an environment that encourages timely andaccurate disclosure of unbiased information to all investors. In
keeping with its name, NAF’s fundamental policy is toaccommodate investors in disclosing information.

NAF discloses information in accordance with theInvestment Trust and Investment Corporation Act of Japan, theSecurities and Exchange Law of Japan, and the rules of theTokyo Stock Exchange and the Investment Trusts Association,
Japan. Moreover, NAF energetically discloses of its own accord
information that it believes is relevant to investment decisions.

NAF Report October 2005 – March 200631

Financial Statements

Balance Sheet
Nippon Accommodations Fund Inc.
As of March 31, 2006

1st Period
As of March 31, 2006

AssetsCurrent assets:
Cash and cash equivalents
Rent receivables
Consumption tax receivables and other current assets
Total current assets
Investment properties:
Land including trust accounts
Depreciable property and improvements including trust accounts
Accumulated depreciation
Total investment properties, net
Other assets
Total Assets
Liabilities
Current liabilities:
Short-term loans
Accounts payable
Received in advanceAccrued expenses and other liabilities
Total current liabilities
Long-term loans
Security deposit
Other liabilities
Total Liabilities
Net Assets
CapitalUnits authorized: 2,000,000
Units issued and outstanding: 42,480
Retained earnings
Total Net Assets
Total Liabilities and Net Assets

Yen in millions

U.S. dollars in thousands¥ 1,475
191
30
1,696

$ 12,556
1,626
255
14,43830,663
11,393(130)
41,92622¥43,644

261,028
96,986(1,107)356,908187$371,533¥ 3,000
114
216
71
3,401
18,000626
122,028$ 25,538
970
1,839
604
28,952
153,2315,329
9187,520

21,240180,812377
21,617¥43,6443,209
184,021$371,533

Note: U.S. dollar amounts are translated from yen, for convenience only, at the rate of ¥117.47 = U.S.$1.00 in effect on March 31, 2006.

32

Nippon Accommodations Fund Inc.

Statement of Income
Nippon Accommodations Fund Inc.
October 12, 2005 to March 31, 2006

1st Period
October 12, 2005 to March 31, 2006

Yen in millions

Revenue:
RentalOther revenue related to property leasing

U.S. dollars in thousands

¥849
75
924

$7,227638
7,866

Current and deferred income taxes

114
3
32
42
130
69
69
458
466
4
(76)
(9)
(7)
(2)
378
1

970
26
272
358
1,107
587
587
3,899
3,967
34
(647)
(77)
(60)
(17)
3,218
9

Net Income¥377$3,209Total Revenue
Operating Expenses:
Operating expenses
Real estate taxes and insurance
Repairs and maintenance
Other rental expenses
Depreciation and amortization
Asset management fees
Other expenses
Total Operating Expenses
Operating Income
Interest and other income
Interest expense
Founding costs
New investment unit issue costs
Other expenses
Income Before Income Taxes

Note: U.S. dollar amounts are translated from yen, for convenience only, at the rate of ¥117.47 = U.S.$1.00 in effect on March 31, 2006.

NAF Report October 2005 – March 200633

Corporate Data and Investor Information (As of November 30, 2006)■ Corporate Data
Corporate office

1-1, Nihonbashi-Muromachi 2-chome, Chuo-ku, Tokyo 103-0022, Japan+81-3-3246-3677
http://www.naf-r.jp/ (Japanese only)

Date of incorporation

October 12, 2005

Capital¥21,240 million (as of March 31, 2006)

Transfer agent

The Chuo Mitsui Trust and Banking Co., Ltd.
33-1, Shiba 3-chome, Minato-ku, Tokyo 105-8574, Japan

Business office of the transfer agent

Stock Transfer Agency Department of
The Chuo Mitsui Trust and Banking Co., Ltd.
8-4, Izumi 2-chome, Suginami-ku, Tokyo 168-0063, Japan

Accounting auditor

KPMG AZSA & Co.
AZSA Center Building
1-2, Tsukudo-cho, Shinjuku-ku, Tokyo 162-0063, Japan

Investor relations

For further information, please contact the REIT Management Company:
Mitsui Fudosan Accommodations Fund Management Co., Ltd.
1-1, Nihonbashi-Muromachi 2-chome, Chuo-ku, Tokyo 103-0022, Japan+81-3-3246-3677■ Investor Information
Fiscal period*

Six months ending February 28 (February 29 in leap years) and August 31

Total number of units issued

42,480 (As of March 31, 2006)

Distribution per unit

¥8,871 (As of March 31, 2006)

Unit listing

Tokyo Stock Exchange (Securities Code: 3226)* The first fiscal period was from the date of incorporation on October 12, 2005 to March 31, 2006.
The second fiscal period is from April 1, 2006 to February 28, 2007.

Major Unitholders
Number of Units Held

Percentage of Total

Nippon Life Insurance Company

8,180

19.26%

Japan Trustee Services Bank, Ltd. (Trust Account)

6,720

15.82%

Mitsui Fudosan Co., Ltd.

6,600

15.54%The Master Trust Bank of Japan, Ltd. (Trust Account)

6,380

15.02%The Norinchukin Bank

4,000

9.42%

The Chuo Mitsui Trust and Banking Company, Limited

3,600

8.47%

Name

34

(As of March 31, 2006)

Sumitomo Mitsui Banking Corporation

2,000

4.71%

Resona Bank, Ltd.

2,000

4.71%

The Hachijuni Bank, Ltd.

2,000

4.71%

Ueda Yagi Tanshi Co., Ltd.

1,000

2.35%

Nippon Accommodations Fund Inc.

Disclaimer
This document was prepared solely for the convenience of andreference by overseas investors and does not correspond to theoriginal Japanese documents.
This English document contains selected information
including a partial translation of the Securities Report (Yuka
shoken hokokusho) filed on September 20, 2006 pursuant to
the Securities Exchange Law of Japan, and the financial
statements and the Performance Information Report for theperiod from October 12, 2005 to March 31, 2006, of Nippon
Accommodations Fund Inc. prepared pursuant to the Investment
Trust and Investment Corporation Act of Japan. This document
should not be deemed a summary of the above mentioned
Securities Report and the Financial Statements and the
Performance Information Report.
The contents of this document do not constitute an offer tosell or solicitation of an offer to buy or sell any security of Nippon
Accommodations Fund Inc. or otherwise, nor is it advice or therecommendation of Nippon Accommodations Fund Inc. to enter
into any transaction.
English terms for Japanese legal, accounting, tax and businessconcepts used herein may not be precisely identical to the conceptof the equivalent Japanese terms. With respect to any and allterms herein including, without limitation, financials statements, if
there exist any discrepancies in the meaning or interpretation
thereof between the original Japanese documents and English
statements contained herein, the original Japanese documents will
always govern the meaning and interpretation. None of Nippon
Accommodations Fund Inc., Mitsui Fudosan Accommodations

Fund Management Co., Ltd. or any of their respective directors,
officers, employees, partners, shareholders, agents or affiliates will
be responsible or liable for the completeness, appropriateness or
accuracy of English translations contained in this document. No
person has been authorized to give any information or make any
representations other than as contained in this document inrelation to the matters set out in this document, and if given or
made, such information or representation must not be relied upon
as having been authorized by Nippon Accommodations Fund Inc.,
Mitsui Fudosan Accommodations Fund Management Co., Ltd. or
any of their respective directors, officers, employees, partners,
shareholders, agents or affiliates.
The financial statements of Nippon Accommodations Fund
Inc. have been prepared in accordance with generally accepted
accounting principles in Japan (Japanese GAAP) which may
materially differ in certain respects from generally accepted
accounting principles in other jurisdictions.
This document contains forward-looking statements andinformation. We base these statements on our beliefs as well as
our assumptions based solely on certain limited information
currently available to us. Because these statements reflect ourcurrent views concerning future events, these statements involve
known and unknown risks, uncertainties and assumptions. Our
future performance could materially differ from those set out inthese forward-looking statements. We do not undertake and will
not undertake to release revisions of forward-looking statements
to reflect future events or circumstances or of any otherstatements or information contained herein.

NAF Report October 2005 – March 2006

Nippon Accommodations Fund Inc.
1-1, Nihonbashi-Muromachi 2-chome,
Chuo-ku, Tokyo 103-0022, Japan

http://www.naf-r.jp/ (Japanese only)

Printed in Japan on recycled paper with soy-based vegetable ink.