KENEDIX Realty Investment Corporation

Semiannual Report
Third Fiscal Period
From May 1, 2006 to October 31, 2006

Basic Investment Strategy
In principle, Kenedix Realty Investment Corporation ("the Investment Corporation") invests in real estate andspecified assets including securities backed by real estate for the purpose of securing stable earnings,
sustainable investment asset growth and maximum cash distribution to investors.
To this end, the Investment Corporation adopts a dynamic and flexible investment stancethat accurately reflects its environment and market trends, and endeavors to ensure
a timely response to each and every opportunity.
The Investment Corporation strives to develop a diversified investment portfolio named"KENEDIX Selection," adopting a three-point investment criteria based on property type,area and size.
In order to realize its objectives, the Investment Corporation has appointed Kenedix REIT Management, Inc.
("Asset Management Company"), as its asset management company.
The Asset Management Company is supported by the vision, experience,and human resources of Kenedix, Inc. ("Kenedix")

Note: Kenedix REIT Management, Inc. is a wholly owned subsidiary of Kenedix, Inc.

Kenedix, Inc.
"a pioneer in real estate investment management services in Japan""assets under management totaling approximately 540 billion yen"

Shared vision,experience,andhuman resources

Kenedix REIT Management,Inc.

Extensive information network(Asset Management Company)"Trends and Timing"+"Three-point investment criteria"(Type,Area and Size)

Kenedix Realy Inverstment Corporation"A diversified asset portfolio"(KENEDIX Selection)

Stable earnings

Sustainable investment asset growth

Real Estate Inverstment Trust Market(Broad investor base)Contents
To Our Unitholders....................................1
Investment Highlights ...............................1
Special Issue .............................................2
Properties Roster ......................................6
Portfolio Highlights ...................................8
KENEDIX Selection ...................................9Q&A .........................................................10
Financial Summary .................................13
Management Review & Policies..............14
Financial Statements ..............................19
Management Report ...............................35

To Our Unitholders
Taking this opportunity to present our third semiannual report, I would like to thank all unitholders for their continued support andunderstanding as we strive to achieve stable earnings and sustainable growth.
In its third fiscal period (May 1, 2006 to October 31, 2006), Kenedix Realty Investment Corporation (“the Investment
Corporation”) recorded operating revenues of ¥5,288 million, ordinary income of ¥2,125 million and net income of ¥2,124 million.
As a result, cash distribution for the fiscal period under review was ¥13,529 per unit.
Looking at its fourth fiscal period and beyond, the Investment Corporation will continue to pursue stable growth from a mediumand long-term perspective by investing mainly in mid-sized office buildings based on the revised portfolio development policy,
which announced on December 11, 2006. We offer our sincere appreciation to all unitholders for continuing to share and support
our vision.

Taisuke Miyajima
Executive Director, Kenedix Realty Investment Corporation
CEO and President, Kenedix REIT Management, Inc.

Investment Highlights
Cash Distribution for the Third Fiscal Period (May 1, 2006 to October 31, 2006): ¥13,529 per unit
Note: The third fiscal period commenced on May 1, 2006 and ended on October 31, 2006, a period of 184 days.

Investment Highlights
Results for the First
Fiscal Period

Results for the Second
Fiscal Period

Results for the Third
Fiscal Period

Operating Revenues¥1,196 million¥2,871 million¥5,288 million

Operating Income¥589 million¥1,343 million¥2,565 million

Ordinary Income¥243 million¥1,103 million¥2,125 million

Net Income¥242 million¥1,101 million¥2,124 million

Distribution per Unit

¥3,052¥13,884¥13,529

Financial Results
First Fiscal Period

Second Fiscal Period

Third Fiscal Period

Total Assets¥77,325 million¥92,053 million¥160,314 million

Unitholders’ Equity¥44,527 million¥45,387 million¥90,933 million

Unitholders’ Equity to Total Assets

57.6%

49.3%

56.7%

Unitholders’ Equity per Unit

¥561,008¥571,840¥579,192

1

Special Issue
Dialogue:

Asset Management
Company’s Approach
Taisuke Miyajima

Haruo Funabashi

CEO and President
Kenedix REIT Management, Inc.

Auditor (part-time)
Kenedix REIT Management, Inc.

To begin with, please give us your frank opinion and impression

Funabashi: Well, that sort of activity is really important.

of the efforts of the Compliance Committee at Kenedix REIT

Sharing information is an essential prerequisite for having aManagement, Inc.

lively discussion, not only about market conditions, but also

Miyajima: While there have been recent cases where investment
corporations charged with misconduct have been ordered to
improve business operations, I personally believe we are now
at a point where we have to face issues of corporate ethics andabout developments at government authorities such as the
Financial Services Agency and Ministry of Land, Infrastructure
and Transport. On top of that, I think it would encourage
discussion about compliance in specific areas.

governance more seriously. While you have assumed the postof auditor at Kenedix REIT Management and participate as a

What are your thoughts about safeguarding investors’ profits?

member of the Compliance Committee, what are your thoughts
about the actual management of the company?

Miyajima: J-REITs operate as a kind of external management,in that companies establish an asset management company,

Funabashi: Simply put, I think things are going very well rightnow. I feel that the Compliance Committee and the Board of
Directors are more than window dressing; they place problems
and issues squarely on the table and discuss them. The words“disclose” and “discuss” demonstrate a “can-do” approach tobusiness ethics, and I give the company credit for taking this toheart and putting it into practice.
Miyajima: Putting information on the table for discussion isdefinitely something that we try to do on a daily basis. The
Compliance Committee has one attorney-at-law, who is an
outside member, and auditors from Kenedix, Inc., a sponsor
company. In order to hold a proper discussion with people whohave no direct contact with our asset management business,
we are taking steps to provide information through briefings inorder to share as much information as possible on such issues
as current market conditions and trends.

2

which then manages the investment corporation. This scheme
evolved because it was thought to suit the Japanese market.
However, what you need to be most careful about under sucha style of J-REIT asset management is the question of how toprotect investor’s profits. Although the asset managementcompany is commissioned by the investment corporation andmust also protect investor’s profits, it is also a subsidiary of its
companies. What are your thoughts on that point?
Funabashi: J-REITs receive and manage large amounts offunds from an unspecified number of investors. In my opinion,
this system must underlie all J-REITs. The most important thingis to consider things from the investor’s point of view. From
what I think, the asset management company’s position should
be biased toward the investor. The bias should be weighted
toward the investor at a ratio, ideally, of about seven points forthe investor and three points for the companies of the asset

management company.
Miyajima: I see..... While continuing to safeguard investor profits, we must grow the Investment Corporation through fair andour tenants to say that their business performance improved bymoving into an office owned by the Investment Corporation isthe best possible outcome.

stable dealings with our companies. I believe that safeguarding

Miyajima: Incidentally, I would like to refer to some data here.

investors’ profits will increase demand for the Investment

According to a survey, approximately 94% of the businessCorporation, which will ultimately benefit the support-line

offices in Tokyo today are occupied by small- and medium-size

companies.

enterprises of fewer than 29 employees. The area of each floor

Funabashi: That’s right. If we produce results that satisfy
the investor, more and more people will invest, and continue investing in J-REITs. That’s both a plus for the asset
management company and, in the medium and long terms, forthe sponsors. I suppose you could say that the J-REIT systemof the offices that the Investment Corporation invests in is
on average about 100 tsubo – just enough space for a smallor medium-size enterprise of 10 to 30 people. In otherwords, nearly every company is a potential tenant of theInvestment Corporation.

is a business model that must consider things from that kind ofThat’s exactly why, as you say, tenant satisfaction is truly

macro perspective.

important. In December 2005, we conducted a customer
satisfaction survey by giving questionnaires to the tenants,
including their employees, of all of the office buildings that theWhat do we need to keep in mind when investing mainly in

Investment Corporation invests in. By making repeatedmedium-sized office buildings?

improvements based on the survey results, we will make even

Funabashi: I believe that we need to continually work tobetter office environments.

provide a better office environment at more reasonable prices.

Funabashi: That’s really important. Today, Japan’s economic

The office and working environment that surrounds manyfoundation is supported by a countless number of small- andJapanese is not always of high quality. We must provide themedium-size companies. If we can contribute to increasing thebest possible property at the most reasonable prices so thatdrive and motivation of office workers by providing comfortable

our tenants can work in comfort. Achieving that, and getting

office environments, it will have a positive, though indirect,
effect on the Japanese economy.

What is your opinion regarding timely information disclosure?
Funabashi: Timely information disclosure is vital for companies,
whether they are J-REITs or business corporations that
accumulate funds from a large number of unspecified
investors. Given that J-REITs invest primarily in real estate, it issomewhat easier to see what is to come in the market. In otherwords, there are fewer surprises for investors. However, it does
not mean that we can be loosened in information disclosure:
we have to disclose appropriate information in a highly
transparent manner since the rules concerning what and how
to disclose information are clearly specified.
Miyajima: A problem would arise when an unusual event
occurs that falls outside of the rules.
Funabashi: That’s right. However, in today’s world, if one cannot
decide whether information should be disclosed or not, I thinkthat in any event, the disclosure should be made. Whether the
information is positive or negative, letting investors know what
the company is doing will help put their minds at rest andenable you to gain their future understanding.
Miyajima: That is certainly true. Making a disclosure aboutsomething you have doubts about does need some courage.

3However, we always strive to be forthcoming in our disclosures.
Funabashi: Depending on what has been disclosed, investors
may temporarily sell off their investment units and the company
may receive an avalanche of calls. Nevertheless, this is transitory
phenomenon. To build a long-term relationship of trust withinvestors, you have to have courage and overcome the obstacles.

believe the ideal is a state in which we are naturally protectedwithout having to be conscious of the regulations and rules.
When someone has a real sense of fulfillment from their job,
they can be in compliance without consciously trying to be.
Miyajima: I certainly agree with you.
The creation of such an environment is the job of company
management. If each and every employee enjoys their work

Finally, could you tell us about the direction that you believe

and makes the business grow, and we continue to expand as a
J-REIT throughout the market while gaining the trust of

our company should take?

investors, then we will have achieved the ideal that we have set
Funabashi: I would like to see us share the professional J-REIT

for ourselves.

team spirit with each and every one of our employees, and see
us strive to become the most knowledgeable source about
medium-sized office buildings, while providing facilities thatmeet all of our customers needs. These are things we should
be proud of, as we carry on with our work.
If we become so well-known in the market that people say,“For medium-sized office buildings, let’s ask Kenedix first,”
we’ll be able to collect even more information.
Best of all, as a J-REIT asset management company, we are fully
staffed with financial and real estate experts. Through the optimal
combination of knowledge in these different fields, I would like to
see us become an even more expert team in our field.
Miyajima: As the president of the Asset Management
Company, I would like to see our employees take on a greaternumber of challenges each day.
Funabashi: Yes, me too. What energizes people the most iswhen they fully exert themselves passionately toward theachievement of a goal. Only then do we feel challenged andexperience a purpose in life. How to establish compliance andprotect officers and employees are important issues, but I

Haruo Funabashi
Auditor (part-time)
Kenedix REIT Management, Inc.
July 1997
Deputy Commissioner, National Tax Administration

February 2003
Chief Executive Officer, Sirius Institute Inc. (current position)

June 1998
Secretary General, Securities and Exchange SurveillanceCommission

May 2004
Visiting Professor, Graduate School of International
Corporate Strategy, Hitotsubashi University (current
position)

June 2000
Director General, Minister’s Secretariat, National Land Agency
July 2001
Vice-Minister for Land and Hokkaido Development,
Ministry of Land, Infrastructure and Transport

4

October 2004
Auditor, Kenedix REIT Management, Inc. (current position)
March 2005
Auditor, Kenedix, Inc. (current position)

A-13

Belles Modes Building

A-18

KDX Omori Building

A-2

Sogo Hirakawacho Building

A-17

Ebisu East 438 Building

A-21
A-16

Toshin 24 Building

NTB.M Building

A-12

Portus Center Building5Properties Roster
Properties as of the end of the 3rd period (64 properties)
Type

Area

AcquiredTime

Completion
Date (Note2)

Occupancy Ratio(%)(Note3)

May 1994

97.1

Nihonbashi 313 Building

Chuo ward, Tokyo

5,940

Apr.1974

100.0

Toshin 24 Building

Yokohama, Kanagawa

5,300

Sep.1984

100.0

Sogo Hirakawacho Building

Chiyoda ward, Tokyo

5,180

Mar.1988

100.0

Ebisu East 438 Building

Shibuya ward, Tokyo

4,640

Jan.1992

100.0

Higashi-Kayabacho Yuraku Building

Chuo ward, Tokyo

4,450

Jan.1987

100.0

Noir Hatchobori

Chuo ward, Tokyo

3,680

Jun.1993

100.0■

KDX Omori Building

Ota ward, Tokyo

3,500

Oct.1990

100.0■

KDX Hamamatsucho Building

Minato ward, Tokyo

3,460

Sep.1999

100.0■

KDX Higashi-Shinjuku Building

Shinjuku ward, Tokyo

2,950

Jan.1990

100.0■

Dai-ichi Kayabacho Building

Chuo ward, Tokyo

2,780

Oct.1987

100.0■

NTB M Building

Minato ward, Tokyo

2,690

Feb.1992

100.0

K&Y Building (Southern Plaza)

Nakano ward, Tokyo

2,533

Aug.1992

97.0

KDX Shin-Yokohama Building

Yokohama, Kanagawa

2,520

Sep.1990

99.6

Harajuku F.F. Building

Shibuya ward, Tokyo

2,450

Nov.1985

100.0

KDX Kajicho Building

Chiyoda ward, Tokyo

2,350

Mar.1990

100.0

KDX Hamacho Building

Chuo ward, Tokyo

2,300

Sep.1993

65.3

FIK Minami Aoyama

Minato ward, Tokyo

2,270

Nov.1988

100.0

KDX Funabashi Building

Funabashi, Chiba

2,252

Apr.1989

97.9

Kanda Kihara Building

Chiyoda ward, Tokyo

1,950

May 1993

100.0

KDX Yotsuya Building

Shinjuku ward, Tokyo

1,950

Oct.1989

100.0

NNK Building

Shinjuku ward, Tokyo

1,610

Jun.1992

100.0■

Kiba Ocean Building

Koto ward, Tokyo

1,580

Oct.1992

69.1■

KDX Nogizaka Building

Minato ward, Tokyo

1,065

May 1991

100.0

Koishikawa Yoshida Building

Bunkyo ward, Tokyo704

Oct.1992

100.0

Portus Center Building

Sakai, Osaka

5,570

Sep.1993

100.0■

KDX Minami Semba Dai-1 Building

Osaka, Osaka

1,610

Mar.1993

100.0■

KDX Minami Semba Dai-2 Building

Osaka, Osaka

1,560

Sep.1993

90.0

Hakata-Ekimae Dai-2 Building

Fukuoka, Fukuoka

1,430

Sep.1984

99.2

86,224

Avg.17.0 yrs

97.7

Office■■•Office (29 properties) Sub Total
Tokyo
Metropolitan
Area
Other Regional Areas(¥M)(Note1)

5,950

■

RetailAcquisition Price

Chiyoda ward, Tokyo

■

Other
Regional
Areas

Location

Belles Modes Building

■

Tokyo
Metropolitan
Area

Name

■ ■ Acquired on May 1, 2006
■ Acquired during the 3rd Period■

Jinnan-zaka Frame

Shibuya ward, Tokyo

9,900

Mar. 2005

100.0

Yoyogi M Building

Shibuya ward, Tokyo

2,479

Aug. 1991

100.0

ZARA Tenjin Nishi-dori

Fukuoka, Fukuoka

3,680

Nov. 2005

100.0

16,059Avg. 3.5 yrs

100.0

Retail (3 properties) Sub Total

Notes:
1. Figures in the “Acquisition Price” column represent the real estate or trust beneficiary interest sales price (excluding consumption tax, rounded down to the nearest million yen) for each property
acquired, identified in relevant Real Estate or Trust Beneficiary Interest Purchase and Sales Agreements.
2. The “Completion Date” column refers to the date of construction completed recorded in the land register. Each average age subtotals and total for the investment portfolio is shown as theweighted-averages portfolio age based upon acquisition prices with a base date of October 31, 2006.
3. “Occupancy Ratio” is the leased floor area divided by total leasable floor area. The figure is rounded to the first decimal place. Ratios are calculated as of October 31, 2006. Each average ratio
subtotals and total for the investment portfolio is shown as the average occupancy ratio.
4. The total acquisition price for 65 properties held by the Investment Corporation as of December 11, 2006.
5. The weighted-average age of the 65 properties held by the Investment Corporation as of December 11, 2006 with a base date of December 1, 2006.
6. The current name of the property is the “FSD Building.” Plans are in place to change the name of the property to the “KDX Nishi-Gotanda Building” on April 1, 2007.

6

■ Acquired on May 1, 2006
■ Acquired during the 3rd Period

Type

Area

Acquired
Time

Name

■

Residence Charmante Tsukishima

Chuo ward, Tokyo

5,353

■

Regalo Ochanomizu l&II

Bunkyo ward, Tokyo

3,600

Storia Sirokane

Minato ward, Tokyo

3,150

Tre di Casa Minami Aoyama

Minato ward, Tokyo

Regalo Shiba-Kouen

Minato ward, Tokyo

Court Mejiro
Apartments Motoazabu

Ⅰ: Jan. 2006
Ⅱ: Feb. 2006(%)(Note3)

100.0
93.8

Feb. 2004

100.0

Nov. 2005

100.0

Shinjuku ward, Tokyo

1,250

Mar. 1997

100.0

Minato ward, Tokyo

1,210

Jan. 2004

94.6

Apartments Wakamatsu-Kawada

Shinjuku ward, Tokyo

1,180

Feb. 2004

96.3

Chigasaki Socie Ni-bankan

Chigasaki, Kanagawa

1,160

Jan. 1991

91.3

Court Nihonbashi-Hakozaki

Chuo ward, Tokyo

1,130

Feb. 2004

97.2

Court Nishi-Shinjuku

Shinjuku ward, Tokyo

1,130

Oct. 2005

93.0

Side Denenchofu

Ota ward, Tokyo

1,110

Feb. 1997

97.2

Gradito Kawaguchi

Kawaguchi, Saitama

1,038

Feb. 2006

100.0

S-court Yokohama-Kannai II

Yokohama, Kanagawa

945

Mar. 2003

100.0

Regalo Komazawa-Kouen

Setagaya ward, Tokyo

912

Feb. 2006

100.0

Court Motoasakusa

Taito ward, Tokyo

880

Jan. 2005

100.0

Court Shin-Okachimachi

Taito ward, Tokyo

878

Oct. 2005

100.0

Bloom Omotesando

Shibuya ward, Tokyo

875

Mar. 2003

100.0

Human Heim Okachimachi

Taito ward, Tokyo

830

Dec. 2004

100.0

Primo Regalo Kagurazaka

Shinjuku ward, Tokyo

762

Jan. 2006

96.0

Court Shinbashi

Minato ward, Tokyo

748

Dec. 1997

100.0

Primo Regalo Youga

Setagaya ward, Tokyo

730

Dec. 2005

100.0

Court Suitengu

Chuo ward, Tokyo

659

Jul. 2003

90.0■

Court Shimouma

Setagaya ward, Tokyo

638

Oct. 2005

100.0

■

Ashiya Royal Homes

Ashiya, Hyogo

2,330

Jun. 1991

80.3

Venus Hibarigaoka

Sapporo, Hokkaido

1,800

Mar. 1989

84.6

■
■

■
■

Ⅰ: May 1991■

Regalo Ibaraki I&II

Ibaraki, Osaka

1,600

■

Collection Higashi-Sakura

Nagoya, Aichi

1,264

Mar. 2006

94.0■

Renaissance 21 Hirao Jousui-machi

Fukuoka, Fukuoka

900

Oct. 2005

91.9■

Montore Nishikouen Bay Court

Fukuoka, Fukuoka

826

Feb. 2006

84.1

Abreast Hara

Nagoya, Aichi

444

Feb. 2000

100.0

Abreast Hirabari

Nagoya, Aichi

407

Mar. 2000

90.8●

Ⅱ: Mar. 1993

67.1

Residential (Total 32 properties) Sub Total

44,459Avg. 4.7 yrs

91.8

Total of 64 properties

146,742

Avg.11.8 yrs

95.3

Properties Acquired in the 4th Period
KDX Nishi- Gotanda Building (Note6)● Acquired during the 4th Period

Shinagawa ward, Tokyo

Total of 65 properties

4,200

Nov. 1992-

150,942 (Note4)

Avg.12.0 yrs (Note5)-

Properties Sold during the 3rd Period
Tokyo
Metropolitan
Area

Jan. 2004

Occupancy Ratio

2,260

■

Tokyo
Metropolitan
Area

Completion
Date (Note2)

2,460

■

Other
Regional
Areas(¥M) (Note1)

92.9

■

Residential

Acquisition Price

Feb. 2003■

Tokyo
Metropolitan
Area

Location▲ Sold during the 3rd Period▲

Storia Todoroki

Setagaya ward, Tokyo

877

Dec. 2002-▲

Clair Court Rokakouen

Setagaya ward, Tokyo

831

Aug. 1998-

7

Portfolio Highlights
Portfolio Composition
The Investment Corporation strives to develop a diversified investment portfolio adopting a three-point investment criteria basedon property type, area and size.

Immediately following IPO as of August 1, 2005 (29 properties)

Type

Retail: 3 properties
Total ¥16.059B

Office: 11 properties
Total ¥32.197B

Retail: 1 property
Total ¥9.9B

As of December 11, 2006 (65 properties)

10.6%

16.2%
59.9%
Residential:
32 properties
Total ¥44.459B

Residential:
17 properties
Total ¥18.986B

Area

Office: 30 properties
Total ¥90.424B

29.4%

31.0% 52.7%

Other Regional Areas:
3 properties
Total ¥2.281B

Other Regional Areas:
13 properties
Total ¥23.421B

3.7%

15.5%
Tokyo Metropolitan Area:
52 properties
Total ¥127.521B

96.2%
84.4%

Tokyo Metropolitan Area:
26 properties
Total ¥58.802B

Size¥7.5-10.0B:
1 property
Total ¥9.9B

Less than ¥1.0B:
11 properties
Total ¥8.2B

13.4%¥5.0-7.5B:
2 properties
Total ¥11.12B

16.2%
18.2%

¥7.5-10.0B: 1 property
Total ¥9.9B

8.0%
6.5%

¥5.0-7.5B:
6 properties
Total ¥33.293B
22.0%

29.5%
¥1.0-2.5B:
11 properties
Total ¥18.05B

22.6%¥2.5-5.0B:
4 properties
Total ¥13.813B

Less than ¥1.0B:
16 properties
Total ¥12.138B¥1.0-2.5B:
28 properties
Total ¥47.778B

31.6%¥2.5-5.0B:
14 properties
Total ¥47.833B

31.6%

Notes : 1. The Tokyo Metropolitan Area consists of Tokyo, Kanagawa, Saitama and Chiba prefectures.
2. Percentage figures in the above pie charts represent the proportion of each category as a percentage of the total calculated on a property acquisition-pricebasis. Percentage figures are rounded down to the first decimal place.
3. B=billions

Total Acquisition Price

61 billion yen

Total Acquisition Price

150.9 billion yen

Total Number of Properties

29 properties

Total Number of Properties

65 properties

Weighted-Average Portfolio Age

11.7 years

Weighted-Average Portfolio Age

12.0 years

Note: The weighted-average portfolio age, current as of December 1, 2006, is shown as the weighted-average portfolio age based upon acquisition prices with a base date of December 1, 2006.

External Growth Performance (based on acquisition price)
(¥B)
160

OfficeResidential

Retail64 properties¥146.7B

65 properties¥150.9B

10.9%

10.6%

120

80

29 properties¥61.0B

40

16.2%
31.0%
52.7%

31 properties¥69.1B

35 properties¥81.4B

30.2%

29.4%

15.2%

17.9%
27.4%

25.5%

54.6%

59.2%

58.7%

59.8%

Immediately Following IPO
1st Period
2nd Period
3rd Period
3rd Period Results Announced(as of Dec. 11, 2006)(Aug. 1, 2005)(ending Oct. 31, 2005) (ending Apr. 30, 2006)(ending Oct. 31, 2006)
Note: Amounts of less than ¥100 million omitted for total acquisition price and digits below decimal point omitted for ratios.

8

KENEDIX Selection (As of December 11, 2006)
Office Buildings (30 properties)
Emphasis on mid-sized office buildings in the Tokyo Metropolitan Area, in particular Central Tokyo.

Tokyo’s 23 wards
23 properties ¥70.1B

Acquisition price(Tokyo Metropolitan Area)

Central Tokyo
18 properties ¥57.6B

Acquisition price(Other Regional Areas)

Tokyo’s 23 wards(not incl. central Tokyo)

Greater Osaka Area
3 properties ¥8.7B

5 properties ¥12.5B

Fukuoka
1 property ¥1.4B

Tokyo’s 23 wards

Office Portfolio(based on acquisition price)

Kanagawa
2 properties ¥7.8B

Other Regional Areas(4 properties)
11.2%
Tokyo Metropolitan Area
(not incl. Tokyo's 23 wards)(3 properties)
11.1%

Chiba
1 property ¥2.2B
Notes:
1. Central Tokyo consists of the Chiyoda, Chuo, Minato, Shibuya and Shinjuku wards.
2. Acquisition Price are rounded to the nearest ¥100 million.
3. Ratios indicate the total acquisition price for properties in each area in proportion to
the total acquisition price for all properties combined.
4. Ratios are rounded down to the first decimal place.

Tokyo's 23 wards(not incl. central Tokyo)(5 properties)
13.8%

Central Tokyo(18 properties)
63.7%*The data above is based upon a portfolio of 30 office buildings held by Kenedix Realty Investment Corporation (including 29 properties held at the end of the third fiscal
period and 1 property already acquired during the fourth fiscal period) as of December 11, 2006. In addition, as of the same date, the Investment Corporation holds 32
residential properties and 3 retail properties.

Number of Employees per Office (Tokyo)(% of total offices)

Office Building Average Vacancy Ratio
Avg. vacancy ratio(%)

30 ~ 99
employees
4.8%

12

100 and above
employees
1.5%

1110 ~ 29
employees
15.2%

10
9
8
7
6
5
4
3
2

1996

1998

2000

2002

2004

Tokyo's 23 Wards

Yokohama

Osaka

Source: 2006 K.K. Ikoma Data Service System (IDSS)

2006

1~9
employees
78.5%
Source:Kenedix REIT Management, Inc., based on Research Report about Officeand Corporate Statistics in Tokyo as of 2004
(Statistics Division, Tokyo Metropolitan Government Bureau of General Affairs)

9Questions & Answers“Questions & Answers” are based on an interview with Taisuke Miyajima, CEO and President ofKenedix REIT Management, Inc. (“Asset Management Company”), the asset management company
for Kenedix Realty Investment Corporation (“the Investment Corporation”).

Changes to the Portfolio Development Policies

Q. Please elaborate on the changes to the portfolio development policy announced in
December 2006.
A. The Investment Corporation adopts a dynamic and flexible investment stance that accurately reflects its environment and market
trends, and endeavors to ensure a timely response to each and every opportunity. The Investment Corporation strives to develop
a diversified investment portfolio for its basic policy. Based upon this basic policy, the Investment Corporation has conducted areview of its portfolio development policies in order to shift to investments in office buildings. Details are as follows.
(After the changes)
Type of Use(Before the changes)
Investment Ratio Target

Type of Use

Investment Ratio Target

Office Buildings

50% - 100%

Office Buildings

More than 50%

Residential Properties

0% - 30%

Residential Properties

More than 20%

Central Urban-Type Retail Properties

0% - 20%

Retail Properties

Other

0% for now

OtherLess than 30%

Q. What are the reasons for changing the portfolio development policy at this time?
A. The Investment Corporation adheres to a basic policy that adopts a dynamic and flexible investment stance. Working from thispolicy, as of December 11, 2006, the Investment Corporation owned a portfolio of 65 properties with a total acquisition price ofapproximately ¥150 billion, demonstrating its success in diversifying properties.
The Investment Corporation has previously emphasized investment in mid-sized office buildings located in the Tokyo
Metropolitan Area. However, to respond to recent conditions in the office leasing market (increased rent levels, improvement ofoccupancy ratios, etc.), the Investment Corporation has decided to invest mainly in office buildings and to make no new investment
in residential properties for a certain period.

Q. Are there any changes for the target asset scale that you have set for the future, and are you
going to achieve this target only by investing in office buildings?
A. The Investment Corporation’s goal of an asset scale target exceeding ¥200 billion by December 31, 2007, remains unchanged.
We will invest mainly in office buildings, but also in central urban-type retail properties located in highly flourishing districts as analternative to investment in office buildings.

Q. Reflecting upon your decision not to conduct any new investment in residential properties,
do you think that residential properties are losing their attractiveness as investment targets?
A. The Investment Corporation recognizes a certain advantage of a portfolio comprising of some residential properties, as they
contribute to realizing stable cash flows. However, the Investment Corporation has concluded that concentrating new investment
mainly in office buildings will have a more positive impact on the improvement of cash flows.

Q. Are you planning to invest mainly in mid-sized office buildings heretofore?
A. The Investment Corporation has previously emphasized investment in mid-sized office buildings located in the Tokyo
Metropolitan Area. The Investment Corporation will continue to invest mainly in mid-sized office buildings, while keeping in mind
an approach of diversifying properties. For the investment area, the Investment Corporation will continue to invest mainly in theTokyo Metropolitan Area and a certain ratio of office buildings in major cities of Other Regional Areas.

10

Q. Are there any policy changes for the category of “retail properties?”
A. There are no policy changes for the category of “retail properties.” The Investment Corporation has previously invested in central
urban-type retail properties located in highly flourishing districts as an alternative to investment in office buildings. To make thissituation evident, the Investment Corporation has decided to refer to these past investments as “central urban-type retail properties,”
rather than simply as “retail properties.”

Growth Potential

Q. What target for asset scale have you set for the future?
A. As of December 12, 2006, the date the Investment Corporation’s third fiscal period results were announced, the Investment
Corporation owned a portfolio of 65 properties with total acquisition price of approximately ¥150 billion. Based on the steadyprogress achieved to date, we will endeavor to exceed an asset scale of ¥200 billion by December 31, 2007. Our goals, however,
do not revolve entirely around increasing asset scale. In concert with efforts to increase the size of the Investment Corporation’s
portfolio, we will make every effort to steadily enhance earnings per share (EPS).

Q. What steps does the Investment Corporation take with regard to property management?
A. Rental revenues provide a major source of income for the Investment Corporation. Accordingly, every effort is made to maintainand enhance rent level and occupancy ratios, which are the key components in the Investment Corporation’s leasing activities.
While taking into consideration economic and real estate market trends, the Investment Corporation adopts a tenant-oriented
approach to its leasing activities with the aim of ensuring a timely and flexible response as well as optimal tenant satisfaction.
Based on the aforementioned, the Asset Management Company undertakes property management activities as follows.
• Implement customer satisfaction surveys in an effort to identify tenant needs. Implement appropriate remedial and improvement
measures.
• Enhance tenant satisfaction and property competitive advantage through renovation of co-owned areas as well as upgrades
and renewal for the facility.
• Promote new tenant leasing activities together with existing tenant renewal negotiations based on movements in real estateleasing markets and tenant needs in an effort to capitalize on “trends” and “timing.”• Strengthen leasing activities through efforts to improve ties with leasing intermediary companies.
• Review property management contents and standards.
The Investment Corporation has appointed Kenedix Advisors Co., Ltd. ("Kenedix Advisors") as its sole property managementcompany.

Investment Properties

Q. Please elaborate on the unique characteristics of medium-sized office buildings.
A. Compared with large-sized office buildings, medium-sized office buildings provide greater liquidity. In addition to the larger numberof buildings on the market, the acquisition prices and rent level of medium-sized office buildings offer a wider scope of acquisitionand leasing opportunities. Under these circumstances, the Investment Corporation recognizes that medium-sized office buildings
provide the Investment Corporation with the best avenue to leverage its abilities in identifying properties with competitive advantage
and its expertise and know-how in property leasing and management. Furthermore, given tenant characteristics and the largepool of competing properties, the Investment Corporation recognizes that medium-sized office buildings exhibit higher rates oftenant turnover with rent levels more finely attuned to economic trends, particularly in times of recovery.

Q. Why does the Investment Corporation invest mainly in medium-sized office buildings?
A. As a fund manager, the Kenedix Group boasts a wealth of experience and know-how in medium-sized office buildings. Focusing
on this segment enables the Investment Corporation to leverage this considerable strength. We also hold high expectation forcontinued increase in rent level in line with favorable economic trends.

11

Q. What are your thoughts on the leasing market for residential properties?
A. In line with changes in population trends, fluctuations in the number of households by area are experiencing increased polarization.
In this context, we are seeing steady leasing demand for residential properties primarily in the Tokyo Metropolitan Area.
In addition, the population and the number of households in certain major cities of Other Regional Areas are also increasing.
Accordingly, we expect leasing demand for residential properties in Sapporo, Nagoya and Fukuoka to expand. The Investment
Corporation intends to invest in residential properties with a keen eye to the aforementioned trends.

Q. What are your expectations for the real estate and J-REIT markets?
A. We believe that real estate markets will remain active in the Tokyo Metropolitan Area. Accordingly, the ability to acquire prime
properties at reasonable prices will become increasingly difficult. The Investment Corporation also recognizes that real estatemarkets are subject to a variety of trends based on property type, area and size. While activity in one area may be robust, otherareas may experience stagnant conditions. With this in mind, the possibility that real estate prices will appreciate nationwide isconsidered slim. Under these circumstances, the ability to accurately identify real estate trends by property type, area and size
will become more important. Currently, Japanese Real Estate Investment Trust ("J-REIT") market is comprised of over 30 publicly
listed trusts with market capitalization exceeding ¥3 trillion. Looking ahead, it would not be a surprise if there were between 50
and 70 listed J-REITs with market capitalization around ¥10 trillion in the next few years. In the domestic market, yields on REITs
exceed 10-year government bonds by nearly 2.0%. At this level, J-REITs remain highly competitive when compared with REITs inmarkets overseas.

Financial Strategy

Q. What benchmark have you established for interest-bearing debt ratio, and what are theInvestment Corporation’s debt policies?
A. The Investment Corporation is conscious of maintaining a prudent financial strategy together with an appropriate interest-bearing
debt ratio (a balance between total assets and interest-bearing debt). Currently, the target ratio is set between 35 to around 50%.
From its incorporation, the Investment Corporation has undertaken debt on an unsecured and unguaranteed basis. This reflects
the high credit standing of the Investment Corporation and an acknowledgement by financial institutions of the quality of investment
properties, investment policies and the Asset Management Company’s personnel and management.

Q. How do you see interest rate trends in the future? What measures do you have in place to
avoid the risk of future increase in interest rates?
A. The interest rates are expected to show a moderate rise. We believe the key factor in determining future market conditions will be
the speed of interest rate increase. If the pace at which interest rates rise serves to promote economic growth, the impact on realestate markets is naturally favorable. For example, in an environment where economic growth outpaces the increase of interest
rates, rent levels can also be expected to rise. With this in mind, the Investment Corporation invests primarily in medium-sized
office buildings, characterized by relatively high rates of tenant turnover. Under these circumstances, we are able to maintain rent
levels in line with market trends. In an effort to avoid the risk of future increase in interest rates, the Investment Corporation
adopts a prudent fixed interest rate policy. In principle, we enter into interest-rate swap agreements to fix cost levels on floating
rate long-term debt. Furthermore, the Investment Corporation acquired an A3 credit rating from Moody’s Investors Services, Inc.
in February 2006 and A+ rating from Japan Credit Rating Agency, Ltd. in December 2006. Looking ahead, we will also consider
the issue of fixed rate investment corporation bonds as a measure to avoid the risk of future increase in interest rates.

12

Financial Summary
Trends in Operating Conditions
PeriodFirst Fiscal Period

Second Fiscal Period

Third Fiscal Period(As of Oct. 31, 2005)(As of Apr. 30, 2006)(As of Oct. 31, 2006)

Operating revenues

Millions of Yen

1,196

2,871

5,288

（Rental revenues）

Millions of Yen

1,196

2,871

5,131

Operating expenses

Millions of Yen

606

1,527

2,723

(Property-related expenses）

Millions of Yen

518

1,265

2,397

Operating income

Millions of Yen

589

1,343

2,565

Ordinary income

Millions of Yen

243

1,103

2,125

Net income(a)Millions of Yen

242

1,101

2,124

Total assets(b)Millions of Yen

77,32592,053

160,314

Interest-bearing debt(c)Millions of Yen

29,00042,00062,000Unitholders’ equity(d)Millions of Yen

44,52745,38790,933

Millions of Yen

44,28544,28588,729(e)

Per Unit

79,37079,370157,000(d)／(e)Yen

561,008

571,840

579,192

Total distribution(f)Millions of Yen

242

1,101

2,124

Distribution per unit(f)／(e)

Yen

3,052

13,884

13,529（Earnings distributed per unit）

Yen

3,052

13,884

13,529（Distribution in excess of earnings per unit）

Yen

−

−

−

Unitholders’ capital
Number of investment units issued and outstanding
Unitholders’ equity per unit

Return on assets（annualized）(Note 1, 2)％

0.3（1.3）

1.3（2.6）

1.7（3.3）

Return on unitholders’ equity (annualized)(Note 2, 3)％

0.6（2.2）

2.5（4.9）

3.1（6.2）

Unitholders’ equity ratio at the end of period(d)／(b)

％

57.6

49.3

56.7

Interest-bearing debt ratio at the end of period(c)／(b)

％

37.5

45.6

38.7

Payout ratio (Note 4)(f)／(a)

％

99.9

99.9

99.9

[Other reference]
Number of properties

Properties

31

35

64

Total leasable floor area㎡

81,298.67

104,868.65

192,085.34

Occupancy ratio at the end of period

％

96.6

94.9

95.3

Depreciation expenses for the period

Millions of Yen

268

650

1,135

Capital expenditures for the period

Millions of Yen

47

510

655

Leasing NOI (net operating income)(Note 5)

Millions of Yen

945

2,256

3,869

FFO (funds from operation)(Note 6)

Millions of Yen

510

1,752

3,102

FFO per unit

(Note 7)

Yen

6,430

22,076

19,759Notes:
1. Return on assets = Ordinary income / (Total assets at the beginning of period + Total assets at the end of period) / 2 x 100
Total assets at the beginning of first fiscal period reflect the value on August 1, 2005, which was the first actual date of operations of the first fiscal period.
2. Annualized values for the second fiscal period are calculated based upon a period of 181 days, and 184 days for the third fiscal period. Annualized values
for the first fiscal period are calculated based upon a period of 92 days, the actual number of business days in the first fiscal period (from August 1, 2005 to
October 31, 2005).
3. Return on unitholders’ equity = Net income / (Total unitholders’ equity at the beginning of period + Total unitholders’ equity at the end of period) / 2 x 100
Total unitholders’ equity at the beginning of period reflects the value on August 1, 2005, which was the first actual date of operations of the first fiscal period.
4. Payout ratio is rounded down to the first decimal place.
5. Leasing NOI = Rental revenues ‐ Rental expenses + Depreciation expenses for the period
6. FFO = Net income + Depreciation expenses for the period ‐ Profit on sale of trust beneficiary interests in real estate or real estate
7. FFO per unit = FFO / number of investment units issued and outstanding (figures below ¥1 rounded down)

13

Management Review & Policies
Operating Conditions for the Second Fiscal Period(1) The Investment Corporation
The Investment Corporation was established on May 6, 2005 in accordance with the Investment Trust and Investment Corporation Law (“theInvestment Trust Law”). On July 21, 2005, the Investment Corporation was listed on the Real Estate Investment Trust Market of the Tokyo Stock
Exchange. (Securities Code: 8972).

As of October 31, 2006, the end of the third fiscal period, the number of investment units issued andoutstanding totaled 157,000 units.
The Investment Corporation appointed Kenedix REIT Management, Inc. as its asset management company. In concert with the AssetManagement Company, the Investment Corporation strives to maximize cash distribution to investors by securing stable earnings and sustainable
investment growth. To this end, the Investment Corporation adopts a dynamic and flexible investment stance that accurately reflects its
environment and market trends, and endeavors to ensure a timely response to each and every opportunity. The Investment Corporation
endeavors to develop a diversified investment portfolio named “KENEDIX Selection,” adopting a three-point investment criteria based on property
type, area and size.

(2) Investment Environment and Management Performancea. Investment environment
During the fiscal period under review, the Japanese economy made an improvement in corporate earnings and capital expenditures along withrobust employment conditions. Although growth in personal consumption was stagnant, the economic recovery continued.
As for real estate, according to a land price survey (Kijun Chika) conducted by prefecture and local governments on July 1, 2006, commercial
and residential land prices in the three major metropolitan areas rose for the first time in 16 years. Tokyo’s 23 wards, Osaka, Kyoto and Nagoya
are showing an increasing trend for higher land prices and an even higher margin of increase. Average commercial land prices are on a strong
upward trend in Tokyo and increasing in each prefecture, including Chiba, Kanagawa, Aichi, Kyoto, and Osaka. Thus, land prices in the central
inner cities of Japan’s three major metropolitan areas and in outlying regions are showing a clear price recovery, as revealed in the land prices(Chika Kouji) officially announced in 2006.
b. Management performance
In the beginning of the fiscal period under review, the Investment Corporation acquired 26 properties with a total acquisition price of ¥58,033
million. From the viewpoint of review of its portfolio, the Investment Corporation sold 2 residential properties (total acquisition price of ¥1,708
million) on May 10, 2006. Using the original network of the Asset Management Company, the Investment Corporation acquired 4 office buildings
and 1 residential property in the Tokyo Metropolitan Area during the third fiscal period with a total acquisition price of ¥8,983 million. As a result, thenumber of properties owned as of October 31, 2006 stood at 64, with a total acquisition price of ¥146,742 million. Looking at the portfolio as awhole, 58.7% was comprised of office buildings, 30.2% of residential properties and 10.9% retail properties on an acquisition price basis. In
addition, the occupancy ratio as of the end of the third fiscal period was 95.3%, reflecting stable investment and asset management.
＜External Growth Performance after IPO＞
Immediately following IPO(as of August 1, 2005)

First Fiscal Period(as of October 31, 2005)

Second Fiscal Period(as of April 30, 2006)

Second Fiscal Period(as of April 30, 2006)

Type of Use

Total
Acquisition Price(Millions of Yen)

Ratio
(%)

Total
Acquisition Price(Millions of Yen)

Ratio
(%)

Total
Acquisition Price(Millions of Yen)

Ratio
(%)

Total
Acquisition Price(Millions of Yen)

Ratio
(%)

Office Buildings

32,19752.7

37,76754.6

48,26959.2

86,224

58.7

Residential Properties

18,98631.0

18,98627.4

20,78625.5

44,45930.2

Retail Properties

9,900

16.2

12,37917.912,37915.2

16,059

10.9

Total

61,083100.0

69,132100.0

81,434100.0

146,742

100.0

Tokyo Metropolitan Area

58,80296.2

61,281

88.6

71,783

88.1

123,321

84.0

Area

Other Regional Areas

2,281

3.7

7,851

11.3

9,651

11.8

23,421

15.9

Total

61,083100.0

69,132100.0

81,434100.0

146,742100.0

Notes: Total acquisition price is the total of acquisition price for each property classified by type and area.
Total acquisition price is rounded down to the nearest million yen. Percentages are rounded down to the nearest first decimal place.

14

Operation and Management of Existing Properties
The Investment Corporation has appointed Kenedix Advisors Co., Ltd. as its sole property management company for the entire portfolio as ofthe end of the third fiscal period. In establishing a single point of contact for all matters relating to property management activities, the Investment
Corporation strives to secure consistent policies, specifications and procedures along with ensuring swift and quality service. As of October 31,
2006, the investment portfolio maintains a high occupancy ratio. The Investment Corporation is satisfied with the quality of property management.
In addition to property management services, the Investment Corporation has executed master lease agreements with Kenedix Advisors
covering all of its properties held as of October 31, 2006 (excluding Residence Charmante Tsukishima, Jinnan-zaka Frame, ZARA Tenjin Nishi-dori
and tenants without approval for subleasing). In appointing a member of the Kenedix Group as lessee, the Investment Corporation is able toprovide better tenant-oriented leasing management through Kenedix Advisors. At the same time, this scheme allows the Investment Corporation tomore effectively utilize tenant security and guarantee deposits.
The Investment Corporation leverages scale merits and the communication and negotiation skills of the Kenedix Group in an effort to reduce
operating costs, and have succeeded reductions in building maintenance costs.
CS Strategy-Based Leasing Management
The Investment Corporation recognizes each tenant as a key customer and strives to enhance customer satisfaction and raise thecompetitiveness of its properties as the means to maintain and increase earnings. As a part of these efforts, the Asset Management Company
implemented a survey in collaboration with J.D. Power Asia Pacific Inc., an internationally recognized company that engages in customer
satisfaction evaluation, covering the Investment Corporation’s office building portfolio. As a part of this survey the administration officers of eachtenant and tenant employees were asked to respond to many questions including building location and environment, external façade, entrance, airconditioning system of lease space areas, lighting ventilation, OA compliant, elevators, toilets, kitchen facilities, smoking area, parking,management company service, status and standard of cleaning, security, fire prevention and remarks of each building and its facilities as well as
the nature and quality of operating and management services.
On a scale of five, respondents were asked to rank each of the aforementioned questions. The survey provided invaluable information
pertaining to the strengths and weaknesses of each building. Under the remarks section, a number of respondents provided insightful observations.
Based on survey results, the Investment Corporation will work to clarify and improve outstanding issues.
Through this vital feedback channel, the Investment Corporation will also implement appropriate maintenance and renovation for each
property taking into consideration associated costs and benefits. Through these means, the Investment Corporation is working efficiently togenerate improvements in rent levels and asset values, increase earnings and promote sustained internal growth.

(3) Capital Acquisition
To support the acquisition of additional assets, the Investment Corporation undertook debt financing of ¥20 billion during the third fiscal period
comprising ¥18 billion of long-term debt and ¥2 billion of short-term debt. As a result, the balance of debt financing as of October 31, 2006 stood at¥62 billion comprising ¥48.5 billion of long-term debt and ¥13.5 billion of short-term debt. Of this amount, ¥37.3 billion of long-term debt as of
October 31, 2006 was procured on a floating rate basis. In order to minimize the risk of future increase in interest rate, the Investment Corporation
has entered into interest-rate swap agreements, effectively fixing applicable interest rates.
Since its public listing through to the end of the third fiscal period, the Investment Corporation has undertaken flexible debt funding on both an
unsecured and unguaranteed basis. This is the result of the high standing in which the Investment Corporation, its investment policies, asset
quality as well as the personnel and expertise of the Asset Management Company are held among financial institutions. In addition, the Investment
Corporation strives to diversify repayment dates for its debt financing in an effort to reduce refinancing risk. The Investment Corporation also
strives to extend average repayment period by placing added emphasis on long-term debt.
Note: Short-term debt is repayable within 1 year. Long-term debt is repayable over terms exceeding 1 year.

(4) Operating Results and Cash Distribution
As a result of the aforementioned management performance, the Investment Corporation reported operating revenues of ¥5,288 million for its
third fiscal period. Operating income was ¥2,565 million, ordinary income ¥2,125 million and net income ¥2,124 million.
In accordance with Article 67.15 of the Special Taxation Measures Law, the Investment Corporation distributes the total amount of its
unappropriated retained earnings for each period. Cash distribution for the third fiscal period was ¥13,529 per unit.

15

Future Management Policies and Pending Issues(1) Investment Environment
Looking ahead, the Japanese economy is forecasted to continue its path toward full-fledged recovery on the back of domestic private-sector
demand. Favorable conditions are attributed to a robust corporate sector and the positive flow-on effects to the household sector. Buoyed by
improvements in employment conditions resulting in an upswing in household disposable incomes, personal consumption is expected to increase.
Signs are strong for capital expenditure growth, bolstered by an improvement in corporate earnings. Driven by the aforementioned gains in
employment conditions and household disposable incomes, the construction of residential properties is also expected to bottom out with signs of
upward movement.
Against this economic backdrop, positive signs are emerging in the domestic real estate market. Posted land prices for March 2006, and aland survey conducted by prefecture and local governments for September 2006, confirmed land price appreciation in the three major cities ofTokyo, Osaka and Nagoya. At the same time, land prices for specific major cities in regional areas are also increasing. On a nationwide basis, land
prices are exhibiting increased polarization. Appreciation is restricted to major economic and financial centers of the Tokyo Metropolitan Area (inparticular the Central Tokyo), and specific regional areas that exhibit strong potential for population growth (for example, Sapporo in Hokkaido andFukuoka in Kyushu).
From the perspective of real estate purchase and sales, the acquisition of prime properties is expected to become increasingly competitive.
This is attributed to the continued flow of domestic and overseas real estate funds in search of higher returns. With little change anticipated in theforeseeable future, activities in the real estate market are expected to remain robust with positive conditions prevailing throughout.

(2) Management Policies and Pending Issues
a. Existing property management strategy
Rental revenues provide a major source of income for the Investment Corporation.

Accordingly, every effort is made to maintain andenhance rent level and occupancy ratios, which are the key components in the Investment Corporation’s leasing activities.

While taking into

consideration economic and real estate market trends, the Investment Corporation adopts a tenant-oriented approach to its leasing activities withthe aim of ensuring a timely and flexible response as well as optimal tenant satisfaction.
Based on the aforementioned, the Asset Management Company undertakes property management activities as follows.
・ Implement customer satisfaction surveys in an effort to identify tenant needs. Implement appropriate remedial and improvement
measures.
・ Enhance tenant satisfaction and property competitive advantage through renovation of co-owned areas as well as upgrades and renewal
for the facility.
・ Promote new tenant leasing activities together with existing tenant renewal negotiations based on movements in real estate leasing
markets and tenant needs in an effort to capitalize on “trends” and “timing”.
・ Strengthen leasing activities through efforts to improve ties with leasing intermediary companies.
・ Review property management contents and standards.
b. New property investment strategy
The Investment Corporation will continue to invest in medium-sized office buildings located in the Tokyo Metropolitan Area as the cornerstoneof its investment policy. At the same time, the Investment Corporation will emphasize residential properties in densely populated areas with ahigh number of households and retail properties in central urban commercial districts. To facilitate the implementation of the aforementioned
investment policy, in addition to the original network of the Asset Management Company, the Investment Corporation will leverage the support-line
provided by the Kenedix Group. The Kenedix Group comprises Kenedix, Kenedix Advisors and other affiliated companies.
Through this support-line, the Asset Management Company is positioned to secure real estate information related to properties, for which theKenedix Group acts as intermediary (excluding the original network of the Asset Management Company), as well as pension funds, private
placement funds and development properties. Based on this information and depending on its source, the Investment Corporation is able toconsider acquisition either on a priority basis or at the same time as all other third parties. Against the backdrop of a competitive market, the roleof this support-line is increasingly significant in the Asset Management Company’s acquisition of quality properties.
Another key role of the support-line is to facilitate property acquisition through the warehousing function.

Under the warehousing function,members of the Kenedix Group may acquire or temporarily hold an investment property sourced from the original network of the AssetManagement Company on those occasions when the Investment Corporation is not itself in the immediate position to acquire the property, or for
timing reasons the property fails to completely comply with the Investment Corporation’s investment criteria. In the case of the warehousing
function, the Investment Corporation maintains “first priority” arrangements to acquire the property once initial obstacles have been cleared.
Note: Pension Funds refer to the real estate investment funds for pension plans and other plans and managed by Kenedix Advisors.

16

(3) Financial Strategy
The Investment Corporation will continue to pursue debt financing on an unsecured and unguaranteed basis and as well as makearrangements to ensure fixed interest rate debt in line with interest rate trends and other considerations.
In addition, the Investment Corporation will seek to diversify its debt repayment period to reduce refinancing risk, maintain long-term debt
ratios at or above prudent levels and issue investment corporate bonds with the aim of extending the average repayment period of its liabilities.
The Investment Corporation will maintain the ratio of interest-bearing debt to total assets at a prudent level and implement leveraged
management in an effort to ensure stable financial management.

(4) Information Disclosure
Consistent with its basic information disclosure policy, the Investment Corporation proactively engages in IR activities with the aim of promptly
providing a wide range of relevant information to investors. In specific terms, the Investment Corporation provides information through the Timely
Disclosure Network System (TDnet), which is a system operated by the Tokyo Stock Exchange, as well as press releases and its Web site (URL:
http://www.kdx-reit.com/eng/ ).

(5)

Acquiring Credit Rating
As a part of efforts to diversify procurement methods, including the issue of investment corporation bonds, and to extend the average

repayment period for its overall debt financing, the Investment Corporation acquired a credit rating of A+ (Outlook : Stable) from Japan Credit
Rating Agency, Ltd. on December 11, 2006. The Investment Corporation’s investment policies, quality of individual assets, real estate portfolio, theunsecured and unguaranteed nature of debt financing, quality of the Asset Management Company’s personnel and the support of the Kenedix
Group were appraised by the credit rating agency. This is the second credit rating acquired following the A3 (Outlook: Stable) from Moody’s
Investors Services, Inc. on February 28, 2006.
<Credit Rating>Credit Rating Agency
Japan Credit Rating Agency, Ltd.

(6)

Details of the Rating
Senior Debts：A+
Outlook: Stable

Change of Portfolio Development Policy
The Asset Management Company resolved to change management guidelines contained in its company regulations on December 11, 2006.

a. Overview
The Investment Corporation adopts a dynamic and flexible investment stance that accurately reflects its environment and market trends, andendeavors to ensure a timely response to each and every opportunity. The Investment Corporation strives to develop a diversified investment
portfolio adopting a three-point investment criteria based on property type, area and size for its basic policy. Based upon this basic policy, theInvestment Corporation has conducted a review of its portfolio development policies in order to shift to investments in office buildings, and has
made changes to the management guidelines of the Asset Management Company.
b. The Major Changes in the Management Guidelines
Portfolio Development Policy
After the Change in Management Guidelines

Before the Change in Management Guidelines

Taking into consideration the liquidity and scale of the real estate

Taking into consideration the liquidity and scale of the real estatemarket, the degree of real estate market information, prudent

market, the degree of real estate market information, prudent

diversification based on the type of use for each property,

diversification based on the type of use for each property,

diversification of the tenant base, and the management results of thediversification of the tenant base, and the management results of theKenedix Group, the Investment Corporation shall invest mainly in

Kenedix Group, the Investment Corporation shall invest primarily in

office buildings, and also shall be able to invest in central urban-typeoffice buildings, residential properties, retail properties and otherretail properties, residential properties, and other properties.

properties.

“Central Urban-Type Retail Properties” refers to retail properties“Retail Properties” refers to mainly central urban-type retail properties

located in highly flourishing districts with high potential for attracting

located in highly flourishing districts

alternative tenants.
c. Details of the Changes
The Investment Corporation adheres to a basic policy that adopts a dynamic and flexible investment stance, which accurately reflects its
environment and market trends, endeavors to ensure a timely response to each and every opportunity, and strives to develop a diversified

17

investment portfolio with a three-point investment criteria based on property type, area and size. Working from this policy, as of December 11, 2006,
the Investment Corporation owned a portfolio of 65 properties with a total acquisition price of approximately ¥150 billion, demonstrating its successin diversifying properties.
The Investment Corporation has previously emphasized investment in mid-sized office buildings located in the Tokyo Metropolitan Area.
However, to respond to recent conditions in the office leasing market (increased rent levels, improvement of occupancy ratios, etc.), the Investment
Corporation has decided to invest mainly in office buildings and to make no new investment in residential properties for a certain period. The
Investment Corporation previously invested in central urban-type retail properties located in highly flourishing districts as an alternative toinvestment in office buildings. To make this situation evident, the Investment Corporation has decided to refer to these past investments as“Central Urban-Type Retail Properties,” rather than simply as “Retail Properties.”
d. Investment Portfolio Target
After the Change in Management Guidelines
Investment Portfolio Target

Investment Ratio Target

・A Type of Use

Office Buildings

Office buildings for leasing purposes as their principal use

50-100%Residential Properties

Residential properties for leasing purposes as their principal use

0-30%

Retail properties located in highly flourishing districts

0-20%

Central Urban-Type
Retail Properties
Other

Amusement parks, business hotels, parking, educational, medical
and health care-related facilities, low-lying leasehold land and other

0% for now

・
B AreaTokyo Metropolitan Area

Major cities in Tokyo, Kanagawa, Saitama and Chiba prefectures

More than 70%

Other Regional Areas

Primarily government-designated cities in Other Regional Areas

Less than 30%

Office Buildings, Central Urban-Type Retail Properties, Other・C SizeMinimum Investment
Residential Properties
Maximum Investment

More than 1.0 billion yen
per investment
More than 0.5 billion yen
per investment

Investment in a single property shall not exceed 30% of the total investment portfolio after
acquisition

Before the Change of Management Guidelines
Investment Portfolio Target

Investment Ratio Target

・A Type of Use

Office Buildings

Office buildings for leasing purposes as their principal use

More than 50%

Residential Properties

Residential properties for leasing purposes as their principal use

More than 20%

Retail Properties
Other

Mainly central urban-type retail properties located in highly
flourishing districts
Amusement parks, business hotels, parking, educational, medicalLess than 30%

and health care-related facilities, low-lying leasehold land and other・
B AreaTokyo Metropolitan Area

Major cities in Tokyo, Kanagawa, Saitama and Chiba prefectures

More than 70%

Other Regional Areas

Primarily government-designated cities in Other Regional Areas

Less than 30%

Office Buildings, Retail Properties, Other・C SizeMinimum Investment
Residential Properties
Maximum Investment

More than 1.0 billion yen
per investment
More than 0.5 billion yen
per investment

Investment in a single property shall not exceed 30% of the total investment portfolio after
acquisition

Investment Ratio= The subtotal of investment in each asset classification / Total acquisition price of the investment portfolio
Acquisition Price=The price only refers to the purchase price of real estate or trust beneficiary interest, and excludes the taxes and acquisition expenses.

18

Financial Statements（Third Fiscal Period:From May 1, 2006 to October 31,2006）

20
21
22
23
24
25

Report of Independent Auditors
Balance Sheets
Statements of Income and Retained Earnings
Statements of Changes of Unitholders’ Equity
Statements of Cash Flows
Notes to Financial Statements

19

Kenedix Realty investrnent Corporation

Report oflndependent Auditors

To the〕Board ofE)irectors and Unitholdel‐
s of
Kenedix Realty lnvestment Corporation

We have audited the accompanying balance sheets ofKelledix Realty lnvestment Colporation asof OctOber 31, 2006 and Apri1 30, 2006, and the related statements of income and retained
eamings,chalages in unitholders'的

uiけ,and cash nows for the six"month periods then ended,

all expressed in yen, These flnancial stateIIlents are the responsibility of the Company's
Our responsibiltty is to expl・ ess an opinion on these flnancial statements based

management,on our audits.

lVe conducted our audits in accordance with auditing standards generally accepted in Japan.
Those standards require that we plan and perforrll the auditto obtain reasonable assLlranCe about
whether the flnancial statements are fl・ ec of matel・ial 打lisstatement.

An audit includes

exaHlining, on a test basis, evidence suppolting the amounts and disclosures in the flnallcial
statements.

An audit also illcludes assessing the accounting principles used and signiflcant

estimates made by management, as well as evaluating the overall flnancial statement・pェesentation.

We believe that our audits provide a reasonable basis for our opinion,ly,in ali material respects,
In our opinion,the flnancial statements referred to above present rail・
the flnancial position of Kenedix Realty lnvestment Corporation at October 31,2006 and Apl‐ il
30, 2006, and the results of its operations and its cash nows for the six―
Inonth periods thenended in conforlnity with accounting principles genel・
ally accepted in Japan.

しDecember 7,2006

20
KENEDIX Realty investment Corporation

匁

鉢

み

Kenedix Realty Investment Corporation

BALANCE SHEETSAs of October 31, 2006 and April 30, 2006
In thousands of yen

As of October 31, 2006
AssetsCurrent assets:
Cash and bank deposits
Rental receivables
Consumption tax refundable
Other current assets￥

9,488,708
83,375599,486
72,300

As of April 30, 2006￥

7,843,092
47,704
138,323
90,170Total current assets
Property and equipment, at cost:
Land
Buildings and structures
Machinery and equipment
Tools, furniture and fixtures

10,243,869

8,119,289

91,714,229
58,684,305
741,661
612,929

52,329,667
30,980,765
442,540
600,118

Less-accumulated depreciation
Net property and equipment
Other assets:
Organization costs
Unit Issuance costs(2,033,503)
149,719,621(918,354)
83,434,736

35,62888,923
226,301

40,717−458,296

OthersTotal assets￥

160,314,342￥

92,053,038￥

406,892
15,000,000
1,748
767,536
28,287￥

188,956
11,500,000
4,463
529,895
16,574

Liabilities and Unitholders’ Equity
Liabilities
Current liabilities:
Trade and other payables
Short-term debt
Deposits received
Rents received in advance
Other current liabilities
Total current liabilities
Long-term debt
Leasehold and security deposits received
Others

16,204,463
47,000,000
6,124,894
51,688

12,239,888
30,500,000
3,528,348
397,786

Total liabilities

69,381,045

46,666,022

Unitholders' capital
Units Authorized: 2,000,000 units
Units Issued and outstanding:157,000 and 79,370units
as of October 31, 2006 and April 30, 2006, respectively

88,729,652

44,285,003

Retained earnings

2,124,112

1,102,013

79,533−90,933,297
160,314,342

45,387,016
92,053,038

Unitholders' equity

Unrealized gain from deferred hedge transactions
Total unitholders' equity
Total liabilities and unitholders' equity

￥

￥

21

Kenedix Realty Investment Corporation

STATEMENTS OF INCOME AND RETAINED EARNINGSFor the period from November 1, 2005 to April 30, 2006 and the period from May 1, 2006 to October 31, 2006
In thousands of yen

From May 1, 2006
to October 31, 2006

From November 1, 2005
to April 30, 2006

Operating Revenues:
Rental revenues￥

Profit on sale of trust beneficiary interests in real estate

5,131,499￥

2,871,789

157,334

Total operating revenues

5,288,833

2,871,789

Property-related expenses

2,397,202

1,265,552

Asset management fees

203,842

150,114Administrative service and custodian fees

46,72837,777

Other operating expenses

75,86974,363

2,723,641

1,527,806

2,565,192

1,343,983

Interest expense

375,765

164,607

Financing related expense

20,904

11,743

Amortization of organization costs

5,090

5,090

Amortization of unit issuance costs

17,785

55,119Others, net

20,5674,410

2,125,081

1,103,014

1,009

1,015

2,124,072

1,101,999

40

14Operating Expenses:

Total operating expenses
Operating income
Non-Operating Expenses:

Income before income taxes
Income taxes
Net income
Retained earnings at the beginning of period
Retained earnings at the end of period

22¥2,124,112¥

1,102,013

Kenedix Realty Investment Corporation

Statement of Changes in Unitholders’ Equity
For the period from May 1, 2006 to October 31, 2006

(Thousands in Yen)
Unitholders’ Equity
Unrealized gain
Unitholders’

Retainedfrom deferred

capitalearnings

hedge

Total

transactions
Balance at the beginning of a period￥

Changes during the fiscal period
New unit issuance

44,285,003￥

1,102,013￥−￥ 45,387,016

44,444,649−−

44,444,649

Payment of dividends−△1,101,973−△1,101,973

Net income−

Interest-rate swap−

2,124,072−−
79,533

2,124,072
79,53344,444,649

1,022,099

79,53345,546,281

79,533￥ 90,933,297

Total changes during the fiscal period
Balance at the end of period￥

88,729,652￥

2,124,112￥(Note: The statement of changes in unitholders’ equity is required to disclose from this fiscal period.)23

Kenedix Realty Investment Corporation

STATEMENTS OF CASH FLOWSFor the period from November 1, 2005 to April 30, 2006 and the period from May 1, 2006 to October 31, 2006
In thousands of yen

From May 1,2006
to October 31,2006

From November 1,2005
to April 30,2006

Cash Flows from Operating Activities:
Income before income taxes￥

2,125,081￥

1,103,014

Adjustments to reconcile income before income taxes
to net cash provided by operating activities:
Depreciation and amortization

1,169,328

661,924

375,765

164,607

Rental receivables(35,671)

46,728Consumption tax refundable(461,163)

771,868

Trade and other payables

214,623(73,711)

Rents received in advance

237,642

149,650

Sale of trust beneficiary interests in real estate

1,763,670−

Others, net(136,387)(137,274)

5,252,888

2,686,806

Cash payments of interest expense(363,960)(149,708)

Cash payments of income taxes(1,015)(855)

4,887,913

2,536,243

Interest expense
Changes in assets and liabilities:

Subtotal

Net cash provided by operating activities
Cash Flows from Investing Activities:
Purchases of property and equipment(69,184,115)(13,173,409)

Proceeds from leasehold and security deposits received

2,852,843

772,228

Payments of leasehold and security deposits received(256,297)(220,261)

Payments of restricted bank deposits(750,424)(82,013)

Proceeds from restricted bank deposits

225,670

181,004(717)(7,489)(67,113,040)(12,529,940)

Proceeds from short-term debt

13,000,000

1,500,000

Payment of dividends(11,000,000)

Proceeds from long-term debt

18,000,000

11,500,000

Proceeds from issuance of units

44,444,650-

Payment of dividends(1,098,661)(239,970)

Net cash provided by financing activities

63,345,989

12,760,030

Net change in cash and cash equivalents

1,120,862

2,766,333

Cash and cash equivalents at the beginning of period

7,057,143

4,290,810

Others, net
Net cash used in investing activities
Cash Flows from Financing Activities:

Cash and cash equivalents at the end of period

24￥

8,178,005¥

7,057,143

Kenedix Realty Investment Corporation

Notes to Financial Statements
For the period from November 1, 2005 to April 30, 2006 and the period from May 1, 2006 to October 31, 2006

1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Kenedix Realty Investment Corporation (“the Investment Corporation”) is a real estate investment corporation whose units are listed on theTokyo Stock Exchange. The Investment Corporation is engaged in ownership and operation of selected office buildings, residential and retailproperties in Japan. The Investment Corporation was incorporated as an investment corporation under the Law Concerning Investment Trusts
and Investment Corporations of Japan, or the Investment Trust Law. Pursuant to this law, the Investment Corporation is externally managed by alicensed asset management company, Kenedix REIT Management, Inc.("Asset Management Company"), a wholly-owned subsidiary of Kenedix,
Inc.(“Kenedix”)
On May 6, 2005, the Investment Corporation was originally formed with ¥200 million of initial capital contributions from Kenedix, AssetManagement Company and their executives and employees. On July 20, 2005, the Investment Corporation raised ¥41,869 million of equity
capital through an initial public offering of 75,000 investment units and was listed on the J-REIT section of the Tokyo Stock Exchange on thefollowing day.
On August 1, 2005, 29 properties with an aggregate purchase price of ¥61,083 million were acquired with additional debt proceeds of ¥23,000
million and substantial operations of the Investment Corporation were commenced from that date.
On August 16, 2005, the Investment Corporation completed third-party allotment of 3,970 investment units, generating an additional ¥2,216
million. Subsequent to that, the Investment Corporation acquired 2 additional properties in September, 2005.

During the period ended April 30,

2006, the Investment Corporation acquired 4 additional properties by utilizing internal cash and bank borrowing.
On May 1, 2006, the Investment Corporation raised ¥42,172 million of equity capital through a public offering of 73,660 investment units and 26
properties with an aggregate purchase price of ¥58,033 million were acquired with additional debt proceeds of ¥16,000 million.
On May 26, 2006, the Investment Corporation completed third-party allotment of 3,970 investment units, generating an additional ¥2,273 million.
During the period ended October 31, 2006, the Investment Corporation sold 2 properties and acquired 5 properties.
At October 31, 2006, the Investment Corporation had total unitholders’ capital of ¥88,730 million with 157,000 investment units outstanding.
The Investment Corporation owned a portfolio of 64 properties with total acquisition costs of ¥146,742 million containing total leasable area of
192,085 m2. The occupancy ratio was approximately 95.3%.

A portfolio of 64 properties consists of 29 office buildings, 32 residential

properties and 3 retail properties. 51 properties are located in the Tokyo Metropolitan Area and 13 properties are located in Other Regional
Areas.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with the provisions set forth in the Investment Trust Law of Japan,
the Japanese Corporation Law, the Securities and Exchange Law of Japan and related regulations, and in conformity with accounting principles
and practices generally accepted in Japan (“Japanese GAAP”), which are different in certain respects as to the application and disclosure
requirements of International Financial Reporting Standards or accounting principles generally accepted in the United States of America.
The accompanying financial statements are a basically translation of the audited financial statements that were prepared for Japanese
domestic purposes from the accounts and records maintained by the Investment Corporation and filed with the Kanto Local Finance Bureau of the
Ministry of Finance as required by the Securities and Exchange Law.

In preparing the accompanying financial statements, relevant notes have25

been added and certain reclassifications have been made from the financial statements issued domestically in order to present them in a form thatis more familiar to readers outside Japan.

The Investment Corporation’s first fiscal period began on May 6, 2005 and ended on October 31, 2005.

The Investment Corporation’s fiscal period is a six-month period which ends at the end of April and October of each year, respectively. The
Investment Corporation does not prepare consolidated financial statements because it has no subsidiaries.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(a) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, deposits placed with banks 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 purchase.
(b) Property and Equipment
Property and equipment are stated at cost. Depreciation of property and equipment is calculated on a straight-line basis over the estimateduseful lives of the assets ranging as stated below:
From May 1, 2006
to October 31, 2006

From November 1, 2005
to April 30, 2006

Buildings and structures ......................................................................................................

2-46 years

2-46 years

Machinery and equipment ...................................................................................................

3-17 years

3-17 years

Tools, furniture and fixtures .................................................................................................

3-15 years

3-15 years(c) Impairment of Fixed Assets
Beginning the fiscal period ended October 31, 2005, the Investment Corporation adopted “Accounting Standard for Impairment of Fixed
Assets” (“Opinion on Establishment of Accounting Standard for Impairment of Fixed Assets” issued by the Business Accounting Deliberation
Council in Japan on August 9, 2002) and “Implementation Guidance for the Accounting Standards for Impairments of Fixed Assets” (“Financial
Accounting Guidance No. 6” issued by the Accounting Standards Board of Japan on October 31, 2003).

The new accounting standard wasapplicable for all reporting periods beginning after April 1, 2005. The Investment Corporation has not recognized an impairment loss on any ofthe properties during the fiscal periods ended October 31, 2006 and April 30, 2006.
(d) Organization Costs
Organization costs are amortized over a period of five years, comprised of ten fiscal periods, with an equal amount amortized in each fiscal
period.
(e) Unit Issuance Costs
Unit issuance costs are amortized over a period of three years under the straight-line method. Underwriters’ commissions in connection with
the issuance of unitholders’ equity are offset against proceeds raised since the “Spread Method” was used for the unit issuance. Under the
Spread Method, securities underwriters underwrite the units at the issue price and offer them to investors at the offer price, which is different fromthe issue price.

The difference between the offer price and the issue price represents the underwriting commission received by the securities

underwriters, eliminating the need for the issuer to pay underwriting commissions. If securities underwriters had underwritten the units at theissue price and offered the units to investors at an offer price equal to the issue price (known as the “Conventional Method”), a commission would
have been incurred and it would have been expensed as new unit issuance costs. Therefore, the Spread Method understated unit issuancecosts by ¥1,263 million on the balance sheet and decreased amortization of unit issuance costs by ¥253 million and increased income before
income taxes on the income statement by the same amount compared to the Conventional Method for the period from May 1, 2006 throughOctober 31, 2006.
(f)

26

Accounting Treatment of Trust Beneficiary Interests in Real EstateFor trust beneficiary interests in real estate, which are commonly utilized in the ownership of commercial properties in Japan and throughwhich the Investment Corporation holds all of its real property, all assets and liabilities within trust are recorded in the relevant balance sheet
and income statement accounts.
(g) Revenue Recognition
Operating revenues consist of rental revenues including base rents and common area charges, and other operating revenues including utility
charge reimbursements, parking space rental revenues and other miscellaneous revenues. 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. Reimbursements from tenants including utility charge reimbursements are recorded on a gross basis and such amounts are recorded
both as revenue and expense during the fiscal period, respectively.
(h) Taxes on Property and Equipment
Property-related taxes including property taxes, city planning taxes and depreciable property taxes are imposed on properties on a calendar
year basis. Under the Japanese tax rule, the seller of the property at the time of disposal is liable for these taxes on the property from the date ofdisposal to the end of the calendar year in which the property is disposed. The seller, however, is reimbursed by the purchaser for these accrued
property-related tax liabilities.
When the Investment Corporation purchases properties, it typically allocates the portion of the property-related taxes related to the period
following the purchase date of each property through the end of the calendar year.

The amounts of those allocated portions of theproperty-related taxes are capitalized as part of the acquisition costs of the related properties. Capitalized property-related taxes amounted to¥182 million and ¥32 million as of October 31, 2006 and April 30, 2006.

In subsequent calendar years, such property-related taxes are charged

as operating expenses in the fiscal period in which the installments of such taxes are paid to the relevant tax authorities.
(i)

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 tax rates.
(j)Derivative Financial Instruments
The Investment Corporation utilizes interest-rate swap agreements as derivative financial instruments only for the purpose of hedging its

exposure to changes in interest rates. The Investment Corporation deferred recognition of gains or losses resulting from changes in fair value ofinterest-rate swap agreements because its interest-rate swap agreements met the criteria for deferral hedging accounting.
(k) Rounding of Amounts Presented
Amounts have been truncated in the Japanese financial statements prepared in accordance with Japanese GAAP and filed with regulatory
authorities in Japan, whereas amounts have been rounded to the nearest million in the accompanying financial statements.

Totals shown in theaccompanying financial statements do not necessarily agree with the sums of the individual amounts.

3. Changes in Accounting Policy(a) Beginning the fiscal period ended October 31, 2006, unit issuance costs have been capitalized and amortized over a period of 3 years,
although unit issuance costs were previously expensed in the period of payment. Due to a change in Accounting Rules for Investment Corporation
effective on May 1, 2006 and “Tentative Solution on Accounting for Deferred Assets” (Practical Solution No.19 issued by the Accounting Standards
Board of Japan on August 11, 2006) issued by the Accounting Standards Board of Japan, appropriate deferred charges such as new unit issuancecosts are allowed to be capitalized and being amortized over a 3 year period.
As a result of this change in accounting policy, non-operating expenses of the Investment Corporation during the current period decreasedby ¥89 million yen and income before income taxes increased by the same amount compared with the amounts which would have been recorded
under the previous accounting rule.
(b) Beginning the fiscal period ended October 31, 2006, the Investment Corporation adopted the new accounting standards,

Accounting

27

Standard for Presentation of Net Assets in the Balance Sheet” (Statement No.5 issued by the Accounting Standards Board of Japan on December
9, 2005) and its implementation guidance (the Financial Accounting Standard Implementation Guidance No.8 issued by the Accounting Standards
Board of Japan on December 9, 2005).

4. Cash and Cash Equivalents
Cash and cash equivalents consisted of the following as of October 31, 2006 and April 30, 2006:
In thousands of yen

As of October 31, 2006
Cash and bank deposits ...................................................................................

¥ 9,488,708¥ 7,843,092

Restricted bank deposits held in trust ..............................................................

(1,310,703)(785,949)

Cash and cash equivalents ..............................................................................

¥ 8,178,005¥ 7,057,143

Restricted bank deposits held in trust are retained for repayment of tenant leasehold and security deposits.

28

As of April 30, 2006

5. SCHEDULE OF PROPERTY
In millions of yen
As of October 31, 2006
Acquisition costs
Land

Accumulated
depreciation¥ 91,714¥

As of April 30, 2006
Book value

Acquisition costs−¥ 91,714¥ 52,330

Accumulated
depreciation¥

Book value−¥ 52,330

Buildings andstructures

58,684

1,897

56,78730,981847

30,134

Machinery andequipment

742

73

669

442

32

410

Tools, furnitureand fixtures

613

63

550

600

39

561

¥ 151,753¥ 2,033¥ 149,720¥ 84,353¥ 918¥ 83,435

Total

6. SHORT-TERM AND LONG-TERM DEBTS
The following summarizes short-term and long term debt outstanding as of October 31, 2006 and April 30, 2006:(As of October 31, 2006)
Classification

Unsecuredshort-term debt

Unsecured current potion of
long-term debt

Drawdown Date

Repayment Date

Weighted-averageinterest rate

Balance(In millions of yen)March 1, 2006

February 28, 2007

0.69%

¥

May 1, 2006

April 30, 2007

0.68%

2,000

July 31, 2006

July 31, 2007

0.68%

4,000

September 20, 2006

September 20, 2007

0.70%

6,000

October 31, 2006

October 31, 2007

0.70%

1,000

November 1, 2005

October 31, 2007

0.77%

1,500

Subtotal

Unsecured
long-term debt

500

15,000August 1, 2005

July 31, 2008

0.87%

9,500

August 1, 2005

July 31, 2010

1.29%

9,500

November 1, 2005

October 31, 2008

1.09%

3,500

December 8, 2005

December 7, 2008

1.10%

2,000

March 1, 2006

February 28, 2009

1.45%

2,000

March 16, 2006

March 16, 2009

1.48%

2,500

May 1, 2006

April 30, 2009

1.63%

6,500

May 1, 2006

April 30, 2011

2.20%

2,500

May 1, 2006

April 30, 2016

2.73%

5,000

July 14, 2006

July 13, 2011

2.15%

1,000

September 1, 2006

August 31, 2013

2.12%

3,000

Subtotal
Total

47,000¥62,00029

7. PER UNIT INFORMATIONThe net asset value per unit as of October 31, 2006 and April 30, 2006 was ¥579,192 and ¥571,840. Net income per unit as of October 31,
2006 and April 30, 2006 was ¥13,575 and ¥13,884.
The weighted average number of units outstanding of 156,460 and 79,370 was used for the computation of the amount of net income per unit
as of October 31, 2006 and April 30, 2006.

8. INCOME TAXESThe Investment Corporation is subject to corporate income taxes at a regular statutory rate of approximately 40%. However, the Investment
Corporation may deduct from its taxable income amounts distributed to its unitholders, provided the requirements are met under the Special
Taxation Measure Law of Japan. Under this law, the Investment Corporation must meet a number of tax requirements, including a requirement it
currently distribute in excess of 90% of its taxable income for the fiscal period in order to be able to deduct such amounts.

If the Investment

Corporation does not satisfy all of the requirements, the entire taxable income of the Investment Corporation will be subject to regular corporate
income taxes. Since the Investment Corporation distributed approximately 100% of its distributable income in the form of cash distributions
totaling ¥2,124 million and ¥1,102 million for the periods ended October 31, 2006 and April 30, 2006.

Such distributions were treated as

deductible distributions for purposes of corporate income taxes. The effective tax rate on the Investment Corporation’s income was 0.05% and0.09% for the periods ended October 31, 2006 and April 30, 2006. The following summarizes the significant difference between the statutory tax
rate and the effective tax rate:
From May 1, 2006
to October 31,2006

From November 1, 2005
to April 30,2006

Statutory tax rate .....................................................................................................

39.39%

39.39%

Deductible cash distributions ...................................................................................

(39.37)(39.35)

Other ........................................................................................................................

0.03

0.05

Effective tax rate ......................................................................................................

0.05%

0.09%

9. UNITHOLDERS’ EQUITYThe Investment Corporation issues only non-par value units in accordance with the Investment Trust Law.
price of new units is designated as stated capital.

The entire amount of the issue

The Investment Corporation is required to maintain net assets of at least ¥50 million as

required by the Investment Trust Law.

10. RELATED-PARTY TRANSACTIONS(a) Transactions with Kenedix Advisors Co., Ltd. ("Kenedix Advisors")
Kenedix Advisors, a wholly-owned subsidiary of Kenedix, provides the Investment Corporation with property management services and related
services. For these services, the Investment Corporation pays Kenedix Advisors property management fees and other fees in accordance withthe terms of its Property Management Agreements. Transactions with Kenedix Advisors are as follows:
In thousands of yen

From May 1, 2006
to October 31, 200630

From November 1, 2005
to April 30, 2006

Property management fees ......................................................................................

¥ 183,464¥ 104,453

Management transfer fees .......................................................................................

66,2008,400

Construction management fees ...............................................................................

24,537

16,306(b) Transactions with Y.K. KDX1 (“KDX1”)
KDX1 is a wholly owned subsidiary of Kenedix. On November 1, 2005, the Investment Corporation acquired additional property from KDX1
for ¥5,950 million.

The purchase price of these properties was determined based on an independently appraised value at the time of acquisition.

(c) Transactions with Y.K. KDX2 (“KDX2”)
KDX2 is a wholly owned subsidiary of Kenedix. On May 1, 2006 the Investment Corporation acquired 4 properties from KDX2 for ¥8,300
million. The purchase price of these properties was determined based on an independently appraised value at the time of acquisition.
(d) Transactions with Y.K. Lump Sum Investment (“Lump Sum”)
Lump Sum is a wholly owned subsidiary of Kenedix.

On May 1, 2006 the Investment Corporation acquired 4 properties from Lump Sum for¥7,100 million. The purchase price of these properties was determined based on an independently appraised value at the time of acquisition.
(e) Transactions with Y.K. KW Property10 (“KW Property10”)
KW Property10 is a wholly owned subsidiary of Kenedix. On May 1, 2006 the Investment Corporation acquired 2 properties from KW
Property10 for ¥4,426 million. The purchase price of these properties was determined based on an independently appraised value at the time ofacquisition.
(f) Transactions with Y.K. KW Property5 (“KW Property5”)
KW Property5 is a wholly owned subsidiary of Kenedix.
for ¥7,310 million.

On May 1, 2006 the Investment Corporation acquired 7 properties from KW Property5

The purchase price of these properties was determined based on an independently appraised value at the time of acquisition.

(g) Transactions with Y.K. KDX3 (“KDX3”)
KDX3 is a wholly owned subsidiary of Kenedix. On May 1, 2006 the Investment Corporation acquired 1 property from KDX3 for ¥3,680 million.
The purchase price of these properties was determined based on an independently appraised value at the time of acquisition.

31

11. BREAKDOWN OF RENTAL AND OTHER OPERATING REVENUES AND PROPERTY-RELATED EXPENSES
Rental and other operating revenues and property-related expenses for the periods from May 1, 2006 to October 31, 2006 and from November
1, 2005 to April 30, 2006 consist of the following:
In thousands of yen

From May 1, 2006
to October 31, 2006

From November 1, 2005
to April 30, 2006

Rental and other operating revenues:
Rental revenues .................................................................................................

¥

3,908,749¥

2,220,814

Common area charges ......................................................................................

640,707353,853

Subtotal ........................................................................................................

4,549,456

2,574,667

Parking space rental revenues ...........................................................................

175,387

86,129

Utility charge reimbursement ..............................................................................

314,355

152,653

Others:Miscellaneous ....................................................................................................

92,301

58,340Subtotal ........................................................................................................

582,043

297,122

Total rental and other operating revenues ...............................................................

¥

5,131,499¥

2,871,789

Property management fees and facility management fees .....................................

¥

529,334¥

322,416

Depreciation ............................................................................................................

1,135,559

650,193

Utilities .....................................................................................................................

296,833

146,890

Taxes .......................................................................................................................

179,543

9,328

Insurance .................................................................................................................

13,9798,621

Repairs and maintenance .......................................................................................

62,66655,117

Trust fees .................................................................................................................

43,761

21,337

Others ......................................................................................................................

135,527

51,650Total property-related expenses ..............................................................................

32¥

2,397,202¥

1,265,552

12. LEASESThe Investment Corporation, as lessor, has entered into leases whose fixed monthly rents are due in advance with lease term of generally two
years for office buildings and residential properties and with lease term ranging from two to ten years for retail properties.

The future minimum

rental revenues under existing non-cancelable operating leases as of October 31, 2006 and April 30, 2006 are as follows:
In thousands of yen

Due within one year .................................................................................................

As of October 31, 2006

As of April 30, 2006¥¥

Due after one year ...................................................................................................
Total ................................................................................................................

1,266,416
9,709,697¥

10,976,113

811,080
3,273,632¥

4,084,712

13. DERIVATIVES AND HEDGE ACCOUNTINGThe Investment Corporation has entered into interest-rate swap agreements with several Japanese financial institutions to hedge its variable
rate long-term debt obligations. The Investment Corporation utilizes interest-rate swap agreements, which are derivative financial instruments,
only for the purpose of mitigating future risks of fluctuations of interest rates, but does not enter into such transactions for speculative or trading
purposes. The Investment Corporation entered into such derivative transactions to hedge risk in accordance with its Articles of Incorporation andthe established risk management policies of the Asset Management Company.
The following summarizes the notional amounts and the estimated fair value of the interested-related positions outstanding as of October 31,
2006:(As of October 31, 2006)
Type
Interest-rate swap:
Fixed rate payable and floating rate receivable

Notional amount¥37,300 million

Fair value¥131 million

33

14. PROPERTY INFORMATION
Details of the property portfolio as of October 31, 2006 were as follows:
Type

Office Buildings
Tokyo
Metropolitan
Area

Location
Number of properties

Residential Properties

Other Regional
Tokyo
Areas
Metropolitan Area

25

4

Retail Properties

Other Regional
Areas

Tokyo
Metropolitan Area

Other Regional
Areas

24

8

2

1

Property information(In millions of yen)
Acquisition price¥ 76,054¥ 10,170¥ 34,888¥ 9,571¥ 12,379¥ 3,680

51.8%

6.9%

23.8%

6.5%

8.4%

2.5%

77,200

10,22535,85910,04012,698

3,698

81,777

10,38035,764

9,772

13,860

3,760

52.7%

6.7%

23.0%

6.3%

8.9%

2.4%

¥ 2,743,043¥ 533,037¥ 1,072,316¥ 312,697¥ 362,406¥ 108,000

Rental revenues

2,398,817

434,607

1,004,999

272,643

330,391

108,000

Other revenues

344,226

98,43067,31740,05432,015−

Property-related expenses

663,594

195,170

207,365

108,647

81,251

5,616

Percentage of total acquisition costs
Net book value
Appraisal value at year end
Percentage of total appraisal value
Financial results for the period ended October 31, 2006
(In thousands of yen)
Rental and other operating revenues

Property management fees

272,674

104,71186,48534,81026,361

4,294

Taxes

101,026

28,595

20,124

10,367

19,535−

Utilities

209,547

44,86812,5396,892

22,987−

Repairs and maintenance

25,913

7,804

16,125

11,292

1,533−

Insurance

5,686

3,346

2,755

1,623

447

122

Trust fees and other expenses

48,7485,846

69,33743,663

10,3881,200

NOI (Net Operating Income)

2,079,449

337,867

864,951

204,050

281,155

102,384

Depreciation expenses

504,629

176,661

282,575

94,01867,8209,856Operating income from property leasing activities

1,574,820

161,206

582,376

110,032

213,335

92,528

Capital expenditures

431,691

63,87872,17677,9909,803−

NCF (Net Cash Flow)

1,647,758

273,989

792,775

126,060

271,352

102,384

Balance at the end of period

Percentage of
total assets

A breakdown of property-type as of October 31, 2006 was as follows:
Class of assets

Property type
Office Buildings

Area
Tokyo Metropolitan Area

(In millions of yen)¥

Other Regional Areas

Property and equipment

6.4

87,425

54.6

Tokyo Metropolitan Area

35,85922.4

Other Regional Areas

10,040

6.3

Subtotal
Retail Properties

45,899

28.7

Tokyo Metropolitan Area

12,698

7.9

Other Regional Areas

3,698

2.3

16,396

10.2

Subtotal
Total

149,720

93.4

Bank deposits and other assets

10,594

6.6

Total assets

160,314100.0

Total liabilities

69,381

43.3

90,933

56.7

Net assets

34

48.2

10,225

Subtotal
Residential Properties

77,200¥Management Report
36

Structure of Investment Corporation

36

Board of Directors

37

Outline of the Asset Management Company

38

The Kenedix Group

38

Memorandum of Understanding with Kenedix and Kenedix Advisors

40

Policies with Respect to Certain Activities

42

Our Investment Objective and Strategy

42

Distributions

43

Movements in Investment Units Issued and Outstanding

43

Trends of Investment Unit Certificate Price on the Tokyo Stock Exchange

43

The Main Investors of the Investment Corporation

44

Debt Financing

45

Investment Corporation Bonds

46

Portfolios Outline

48

Capital Expenditure49

Expenses and Liabilities

49

Details of Related-Party Transactions

35

Structure of Investment Corporation
Investment Corporation
Information and Property Providers(Support-Line Companies)

Kenedix Realty Investment Corporation

Kenedix, Inc.
Kenedix Advisors Co., Ltd.

Mizuho Trust & Banking Co., Ltd.

General Meeting of Unitholders④

Asset Management Company
Administrative Agent for Directors’ Meeting

Administrative Agent
Asset Custodian②

Board of Directors
Executive Director: Taisuke Miyajima
Supervisory Director: Kimio Kodama
Supervisory Director: Shiro Toba①

Kenedix REIT Management, Inc.

Accounting Auditor

Transfer Agent③

The Chuo Mitsui Trust and Banking Co., Limited

Ernst & Young ShinNihon①

Asset Management Agreement / Operating Agency Agreement②

Administrative Agency Agreement / Asset Custodian Agreement③

Transfer Agency Agreement④

Memorandum of Understanding with Kenedix, Inc. and Kenedix Advisors Co., Ltd.

Board of Directors
The members of our board of directors are as follows:

Taisuke Miyajima
Taisuke Miyajima has been our executive director since May 2005. In 1985, he joined Mitsubishi UFJ Trust and Banking Corporation (formerly The Mitsubishi Trustand Banking Corporation) where he gained about a decade of business experience in a number of positions within the company, including its Capital Markets
Department. He joined Kenedix (formerly Kennedy-Wilson Japan Co., Ltd.) in 1998, and was seconded to the Asset Management Company in 2004 where hebecame chief executive officer and president. Prior to serving as our executive director, he transferred his employment to the Asset Management Company in 2005,
continuing to serve in the same position. He has obtained approval from the Commissioner of the Finance Services Agency for holding concurrent positions with us
and the Asset Management Company pursuant to Article 13 of the Investment Trust Law, as of April 18, 2005. Taisuke Miyajima holds 20 of our units.

Kimio Kodama
Kimio Kodama has been a supervisory director since May 2005. He was admitted to the Japanese bar in 1963 and is a general practitioner of Japanese law. He
established Hanzomon Sogo Law Office (formerly Towa Law Office) in 1966. He has been a director of Kyoritsu Women’s Educational Institution since 1997 andserved as a director for The Housing Loan Guarantee Corporation since 1998.

Shiro Toba
Shiro Toba has been a supervisory director since May 2005. He joined Misuzu Audit Corporation (formerly Chuo Shinko Audit Corporation) in 1989 and became aJapanese certified public accountant in 1993. Prior to being certified as a tax accountant in 2002, he established Toba Public Accounting Office in 1997. He has been
serving as a representative director of Minori Accounting Co., Ltd. since January 2005 and as a director of BTK Solution Co., Ltd. since March 2005.

36

Outline of the Asset Management Company
Name:

Kenedix REIT Management, Inc.

Capital:¥200 million

History: November 28, 2003 KW REIT Management was established
July 2, 2004

Building Lots and Buildings Transaction Business License, License No. (1) 83303, issued by the Governor of Tokyo

November 9, 2004

Renamed to Kenedix REIT Management, Inc.

February 28, 2005

Discretionary Transaction Agent License, License No. 33, issued by the Governor of Tokyo

April 18, 2005

Investment Corporation/Asset Management License, License No. 44, granted by the Prime Minister of Japan

April 26, 2005

Obtained approval to be Operating Agent for the Investment Corporation

Organization Chart:
Shareholder’s Meeting
Auditors
Board of Directors
Compliance Officer
Investment Committee

Compliance Committee
Representative Director

Investment Management Division
Real Estate
Investment
Group

Asset
Management
Group

Financial Planning Division

IR
Group

Finance andAccounting
Group

Corporate Planning / Administration Division
Business
AdministrationGroup

Principal Shareholder:

Name
Kenedix, Inc.

Location
2-2-9, Shimbashi, Minato-ku, Tokyo

Number of Stocks Owned
6,450 units

Ratio (Note)
100.00%(Note) Ratio represents the number of stocks owned in proportion to the total number of outstanding stocks.

37

The Kenedix GroupThe Kenedix Group is made up of leading providers of real estate advisory services, real estate asset and property management services
and real estate investment management services in Japan. Since our formation, which was promoted by Kenedix, Inc. ("Kenedix"), we havereceived significant support from the Kenedix Group in our business and activities, and we expect to continue to rely on the Kenedix Group. We
believe that our relationship with the Kenedix Group provides us with competitive advantages.
• Kenedix, Inc. Kenedix was originally founded in April 1995 under the name of Kennedy-Wilson Japan and renamed to Kenedix, Inc. in
May 2005. Kenedix commenced property fund management in February 1999. Kenedix commenced managing property funds for major
Japanese insurance companies in July 2001 and was listed on NASDAQ Japan (now Nippon New Market-Hercules) of the Osaka Securities
Exchange Co., Ltd. in February 2002. Kenedix entered the real estate development business in August 2002 and commenced managing
property funds for pension funds in November 2003. Kenedix was listed on the Second Section of the Tokyo Stock Exchange in December 2003
and moved to the First Section in December 2004. The core businesses of Kenedix include real estate investment advisory, asset management
and note investment management, including on behalf of international investors, pension funds and other institutional investors. Kenedix
primarily targets investment in office buildings, in addition to residential, retail and logistics properties, while actively engaging in real estatedevelopment for investment. We believe we benefit from the experience and resources of Kenedix and the competitive advantages of ourrelationship with Kenedix as an independent real estate management company.
• Kenedix REIT Management, Inc. Kenedix REIT Management, Inc. ("Asset Management Company") acts as our asset managementcompany, and is broadly responsible for the formulation and execution of our investment strategy and our other activities. The AssetManagement Company’s employees have diverse experience in the real estate and financial markets in Japan, including experience in real estateappraisal and securities analysis. We seek to take advantage of the knowledge and experience of the Asset Management Company and its
employees in the real estate market to help us locate and acquire properties that fit our investment strategy.
• Kenedix Advisors Co., Inc. Kenedix Advisors Co., Inc. ("Kenedix Advisors") was incorporated in November 2003 as a real estate fundand property management company, particularly for pension funds. Kenedix Advisors was renamed from KW Pension Fund Advisors Co., Ltd. in
May 2005 and is a 100% subsidiary of Kenedix. We have appointed Kenedix Advisors as our property manager for all of our properties.
Kenedix Advisors also acts as a leasing management company for most of our properties pursuant to variable pass-through master leaseagreements described in this report.
We and the Asset Management Company are parties to a "Memorandum of Understanding" with Kenedix and Kenedix Advisors dated May
31, 2005. The Memorandum of Understanding provides us with certain assurances from Kenedix and Kenedix Advisors with respect toinformation, negotiation rights and other support for the acquisition of properties.

Memorandum of Understanding with Kenedix and Kenedix Advisors
We entered into a Memorandum of Understanding with Kenedix, Kenedix Advisors and the Asset Management Company on May 31, 2005. The
Memorandum of Understanding has a term of three years, which is automatically renewed for successive one-year periods unless any of theparties notifies the other parties of its intent to terminate the Memorandum of Understanding at least 90 days prior to the expiration of the term.
We have no current intention, and are not aware of any current intention of the Asset Management Company, Kenedix or Kenedix Advisors, toterminate the Memorandum of Understanding.

Support from Kenedix
Pursuant to the Memorandum of Understanding, Kenedix has agreed to provide support to us in the following areas:• Second Preference to Property Information Acquired by Kenedix.
When Kenedix receives information regarding any available property, including properties under development, which, in its reasonable opinion,
meets the investment criteria of any of the real estate investment funds in which the major investors are pension funds to which Kenedix Advisorsserves as asset management company (the “Pension Funds”), Kenedix, unless otherwise prohibited by laws or regulations or contracts to which it
is a party, has agreed to preferentially provide information on such property to Kenedix Advisors. Kenedix has agreed to grant the AssetManagement Company preference in information regarding any available property which, in its reasonable opinion, meets our investment criteriabut (i) does not meet the investment criteria of any Pension Funds, or (ii) in its reasonable judgment, made after providing such information onsuch property to Kenedix Advisors, is difficult to sell to a Pension Fund. Until Kenedix becomes capable of reasonably determining that it isdifficult to sell such property to a Pension Fund or us, Kenedix agrees not to provide such information to third parties or to acquire the property foritself.

38

• Second Preference Negotiating Rights for Kenedix Property.
In the event that Kenedix disposes of a property that it owns or that is owned by one of its subsidiaries or a fund fully financed by Kenedix or one ofits subsidiaries (a “Kenedix Property”) and, in its reasonable opinion, meets the investment criteria of a Pension Fund, Kenedix, unless otherwise
prohibited by laws or regulations or contracts to which it is a party, has agreed to grant Kenedix Advisors preferential negotiating rights for suchproperty. Kenedix will grant the Asset Management Company preferential negotiating rights for a Kenedix Property which, in its reasonable
opinion, meets our investment criteria and (i) does not meet the investment criteria of any Pension Funds, or (ii) no Pension Fund has agreed topurchase during the period for its preferential negotiating rights. In the event that Kenedix and the Asset Management Company do not reach an
agreement for purchase and sale of such property during the negotiation period, Kenedix may offer such property to a third party upon giving
notice to the Asset Management Company. If the terms proposed by such third party are no more favorable to Kenedix than those proposed by
Kenedix Advisors or the Asset Management Company, Kenedix will offer an option to Kenedix Advisors or the Asset Management Company toconsider purchasing such property on such terms for a Pension Fund or us, respectively.
• Information on Property Owned by Kenedix Private Placement Funds.
In the event that Kenedix disposes of a property which is owned by a real estate investment fund for which it serves as asset managementcompany (excluding any fund referred to in the immediately preceding paragraph) and, in its reasonable opinion, meets the investment criteria of aPension Fund or us, Kenedix will, unless otherwise prohibited by laws or regulations or contracts to which it is a party, provide information on suchproperty to Kenedix Advisors and the Asset Management Company no later than such time as Kenedix provides such information to third parties.
• Property Acquisition Support.
The Asset Management Company may request Kenedix to purchase and hold a property owned by a third party, with a view to reselling it to us.
In the event that Kenedix has accepted such a request and purchased the property directly or indirectly through its subsidiaries, we are granted afirst option to purchase such property for one year following the acquisition, and Kenedix may not offer such property to any party other than the
Asset Management Company during such period.

Support from Kenedix Advisors
Pursuant to the Memorandum of Understanding, Kenedix Advisors has agreed to provide support to us in the following areas:• Property Information Acquired by Kenedix Advisors.
When Kenedix Advisors receives information regarding any available property which, in its reasonable opinion, does not meet the investment
criteria of any Pension Funds but meets our investment criteria, Kenedix Advisors, unless otherwise prohibited by laws or regulations or contracts
to which it is a party, agrees to preferentially provide information on such property to the Asset Management Company. Until such time that
Kenedix Advisors reasonably determines that it is difficult to sell such property to us, Kenedix Advisors agrees not to provide such information tothird parties.
• Preferential Negotiating Rights for Property Owned by Pension Funds.
In the event that Kenedix Advisors disposes of a property which is owned by a Pension Fund, Kenedix has agreed, upon the request of Kenedix
Advisors, to find, negotiate a sale with, and arrange for the delivery of the property to a buyer. If Kenedix Advisors reasonably determines thatsuch property meets our investment criteria, it has agreed, unless otherwise prohibited by laws or regulations or contracts to which it is a party, togrant the Asset Management Company preferential negotiating rights for such property. In the event that Kenedix Advisors and the AssetManagement Company do not reach an agreement for the purchase and sale of the property during the negotiation period, Kenedix Advisors may
offer such property to a third party upon giving notice to the Asset Management Company. If the terms proposed by such third party are no morefavorable to Kenedix Advisors than those proposed by the Asset Management Company, Kenedix Advisors has agreed to offer an option to the
Asset Management Company purchase such property on such terms for us.

39

Policies with Respect to Certain Activities
Basic Policies
We seek to achieve our investment objective within the framework of the following basic policies, which are reflected in our articles ofincorporation as follows:• We will invest, directly or indirectly, primarily in office buildings, residential and retail properties located in the Tokyo Metropolitan Area
including major cities in Tokyo, Kanagawa, Saitama and Chiba prefectures and Other Regional Areas throughout Japan, including
government-designated cities (or seirei shitei toshi; cities designated by government ordinance and authorized to perform many of thefunctions normally performed by prefectures), through specified assets.
• We will conduct an investigation and a comprehensive review of all relevant information regarding any prospective acquisition target,
such as anticipated future revenues from such property, potential of the area in which such property is located, construction specifications,equipment, estimated earthquake resistance, state of maintenance, environmental and geological features, and related rights attached tosuch property.
• We will maintain the percentage of the value of our specified real estate assets relative to the value of our specified assets at 75% ormore at any time. Specified real estate assets refers to real estate, real estate leasing rights, surface rights, and beneficiary interests intrusts which hold real estate, land leasing rights or surface rights.
• We will maintain the percentage, calculated in accordance with the ordinance of the Ministry of Finance issued under Article 67-15,
Paragraph 9 of the Special Taxation Measures Law, of the value of our real estate assets relative to the total value of our assets at 75%
or more at any time.

Other Policies
We and the Asset Management Company have developed additional policies with respect to our activities. These policies, to the extent
that they are not addressed in our articles of incorporation, may be amended or revised from time to time without a vote of our unitholders.
These policies are not binding and are intended to guide the implementation of our investment objective and management of our operations. The
Asset Management Company has broad discretion to develop our business strategies and to manage our operations. At any given time, ourbusiness operations or the characteristics of our property portfolio may not be fully consistent with these policies.

Portfolio Management Policies
We have portfolio management policies focusing on developing and maintaining a portfolio that seeks to achieve stable revenues anddistributions.
Types of Properties. We divide property acquisition targets into one of three functional types of properties: office buildings, focusing on
mid-sized office buildings, residential properties and central urban-type retail properties.
Geographic Diversification. Our geographic investment focus is on properties located in the Tokyo Metropolitan Area, including major
cities in Tokyo, Kanagawa, Saitama, and Chiba prefectures, with an emphasis on Central Tokyo consisting of the Chiyoda, Chuo, Minato, Shibuya
and Shinjuku wards. A portion of our investment portfolio is also located in Other Regional Areas (primarily government-designated cities or
major regional hub cities) with the aim of ensuring portfolio diversification and minimizing risks associated with changes in economic and realestate market conditions, earthquakes, typhoons and other natural disasters, and uneven population distribution among regions.
Size and Value of Property. Our general policy for the value of investment properties is to purchase office buildings and retail properties
with a minimum value of ¥1 billion with a total investment value of a single property not to exceed 30% of the total investment portfolio. We seek
to purchase residential properties with a minimum value of ¥0.5 billion. The total floor area at an office building or a retail property should be
more than 1,000 square meters. Our investment targets in residential properties are single-type, compact-type, family-type and prestige-type
residential properties. Single type properties consist of small apartments mainly for one person between 20-30m2 and have at least 20 units perbuilding. Compact type properties consist of larger apartments mainly for one or two people over 30m2 and have at least 15 units per building.
Family type properties consist of apartments mainly for three or more people over 60m2 and have at least 15 units per building. Prestige typeproperties consist of apartments mainly for high income families and executives of over 100m2 and have at least 5 units per building.
Tenant Characteristics. We make investment decisions based on a tenant’s attributes, credibility, line of business, purpose of use, leaseterms and conditions, and possible turnover.
Portfolio Goals. Based on our focus on properties in the Tokyo Metropolitan Area as described above, the Asset Management Company
decides on specific portfolio targets with respect to our investments. The policy takes into account general economic conditions, real estate40

market conditions, interest rate trends, population shifts, and other factors, with the aim of realizing our basic investment objective. In the eventof a significant change in economic, real estate market or other conditions, however, this portfolio management policy is reviewed and amended as
and when considered appropriate by the Asset Management Company.
The Asset Management Company has set non-binding portfolio composition boundaries as general aspirations with respect to our investment
activities. These may change from time to time. The Asset Management Company has set a broad framework for a portfolio consisting of
50%-100% office buildings, 0-30% residential properties and 0-20% central urban-type retail properties. In terms of location, the policy calls for
70% or more of our properties to be located in the Tokyo Metropolitan Area with the remainder in Other Regional Areas. However, at any given
time, our actual property portfolio may not reflect these given goals.

Compliance with Certain Japanese Tax Law Matters
We intend to manage our investments in such a manner as to qualify for lower property registration and acquisition taxes and for deductibilityof distributions to our unitholders under Japanese tax laws applicable to J-REITs.

Other Investments
We may, through the Asset Management Company, make investments other than as previously described, although we do not currently
intend to do so. We are permitted to make certain investments other than real estate-related investments within the restrictions imposed by the
Tokyo Stock Exchange’s J-REIT listing rules and the Investment Trusts Association’s J-REIT rules and our articles of incorporation. For example,
we are permitted to invest in securities issued in connection with real estate securitizations under Japanese law.
Our articles of incorporation prohibit us from investing in foreign real estate, assets or securities backed by foreign real estate and assets
denominated in foreign currency.
Our Investment Guidelines set forth that in principle, investment properties are acquired from a medium- and long-term prospective, andassets are not acquired for short-term buying and selling. Short-term herein means a period of less than 1 year, medium-term means a period of
more than 1 year to less than 5 years, and long-term means a period of more than 5 years.

Cash Management
Although our articles of incorporation allow us to invest surplus funds in low-risk negotiable securities and monetary claims, we do not intend
to make investments in securities and monetary claims for the purpose of cash management. Surplus funds may be used for acquisition of
investment properties and capital expenditures, working capital, distribution payment, and payment of obligations including repayment of tenantleasehold and security deposits and borrowings as well as redemption of bonds.

Financial Policy
We borrow only from qualified institutions as defined in the Securities and Exchange Law of Japan (assuming that our tenant leasehold andsecurity deposits are not loans for such purposes). All of our current borrowings are unsecured, provided that we maintain certain financial ratios.
We currently do not have any outstanding guarantees. By financing our property acquisitions only after we identify specific properties forpotential purchase, we seek to limit the amount of our cash and cash equivalents for which we have no immediate use.
In general, we seek to keep the aggregate amount of our borrowings (excluding tenant leasehold and security deposits) at 60% or less of thevalue of our total assets. We may, however, exceed that percentage from time to time, for example, as a result of financing acquisitions ofadditional properties through borrowings instead of equity.
We seek to raise long-term debt capital in longer terms, including debt with maturities over 5 years, in order to extend our average maturities
and lower refinancing risk by spreading principal repayments over fiscal periods. In this manner, we seek to create a relatively stable debt
financing program.
Depending on market conditions, our financing needs for particular acquisitions or our general liquidity requirements, we may make various
types of bank borrowings—fixed or variable interest, short-term or long-term—and also obtain bank lines of credit. We may also issue debt in thecapital markets. We may enter into interest hedging transactions, such as interest options and swaps, in order to minimize market and interest
rate risks with respect to our borrowings.
We may, by resolution of our board of directors and without unitholder approval, issue additional units in any manner and in such terms andfor such consideration as we deem appropriate, subject to the provisions of the Investment Trust Law. Existing unitholders have no preemptive
right to purchase units issued in any offering, and any such offering might cause dilution of a unitholder’s investment in us.

41Our Investment Objective and Strategy
Our investment objective is to secure, in the medium to long term, relatively stable distributions for our unitholders through investment in realestate and interests in real estate. We seek to achieve our investment objective through the following strategies:
Seek Stable Portfolio Growth through Diversified Property Investments
We seek to expand our property portfolio over time by acquiring a diversified range of office buildings, residential and central urban-type retailproperties in major metropolitan areas in Japan, with particular emphasis on the Tokyo Metropolitan Area. We believe that improved conditions
in real property markets in major urban areas, including stabilizing property values, falling vacancy ratios and greater transaction volume, create afavorable environment for expanding our portfolio. To capitalize on this environment, we are currently focusing our acquisition efforts on
mid-sized office buildings in the Tokyo Metropolitan Area, in particular Central Tokyo, and central urban-type retail properties in flourishingcommercial districts as an alternative to investment in office buildings. We believe that our diversified strategy gives us the flexibility to takeadvantage of a range of market opportunities to acquire a diverse portfolio of attractive properties, while lowering our overall portfolio risk anddifferentiating us from other J-REITs.
Leverage Relationship with the Kenedix GroupWe believe that we have a strong relationship with the Kenedix Group, which has broad expertise and experience in real property investment
and management in Japan. We intend to continue to draw on the expertise and experience of the Kenedix Group and its employees to help us
locate and acquire attractive properties and increase their value through active property management. We refer to our portfolio in our marketing
activities as “KENEDIX Selection”, to emphasize the importance of the Kenedix Group in the selection and management of our properties.
Increase Revenues and the Value of Properties that We Acquire through Active Property Management
A key part of our strategy is to increase unitholder value through focused and proactive management of our properties. We intend for the
Asset Management Company and Kenedix Advisors, working with on-site property managers, to develop and implement strategies to increase
property revenues and value. Key components of our property management strategies include flexible and focused leasing activities that are
geared toward particular tenant needs and market trends, careful control of management and operating costs, and achieving efficiencies by
centralizing appropriate aspects of property management.

Distributions
In order to maintain our favorable tax treatment available to J-REITs under the Special Taxation Measures Law of Japan, we must distributein excess of 90% of our distributable income as defined in the Special Taxation Measures Law, which differs slightly from retained earnings underJapanese GAAP. Our articles of incorporation require that we make cash distributions in at least this amount. Our articles of incorporation
permit us to distribute cash to our unitholders in excess of retained earnings up to the maximum amount calculated in accordance with thestandards set by the Investment Trusts Association of Japan, which set forth that a closed-end J-REIT, such as us, may distribute up to 60% of its
depreciation expense in excess of net income as a return of capital, in the event that its retained earnings are less than 90% of its distributable
income as defined in the Special Taxation Measures Law, if it determines that it is appropriate to do so.
However, if such maximum amount is still below 90% of our distributable income as defined in the Special Taxation Measures Law, ourarticles of incorporation further permit us to make distributions in the amount we determine to satisfy the requirements to maintain our favorable tax
treatment under the Special Taxation Measures Law. In any event, our articles of incorporation permit us to make distributions in at least theamounts required in order to maintain our favorable tax treatment under the Special Taxation Measures Law.
However, any distribution in excess of retained earnings is likely to create complex Japanese tax issues, especially for individual Japanese
resident unitholders. Accordingly, we do not intend to distribute any such excess amounts in the absence of appropriate changes in Japanese
tax law that address these Japanese tax issues.
Distribution Performance
Fiscal Period
Duration of Period

42First Fiscal Period
May 6, 2005 to October 31, 2005

Second Fiscal Period
November 1, 2005 to April 30, 2006

Third Fiscal Period
May 1, 2006 to October 31, 2006

Unappropriated Retained Earnings¥242,251,377¥1,102,013,492¥2,124,112,014

Retained Earnings for the next fiscal period
Cash Distributions(Distribution per unit)
Earnings Distributed(Earnings Distributed per unit)
Payments for capital participations(Payments for capital participations per unit)¥14,137¥242,237,240（¥3,052）¥242,237,240（¥3,052）−（ − ）¥40,412¥1,101,973,080（¥13,884）¥1,101,973,080（¥13,884）−（ − ）¥59,014¥2,124,053,000（¥13,529）¥2,124,053,000（¥13,529）−（ − ）Movements in Investment Units Issued and Outstanding
Movements in unitholders’ capital and the number of investment units issued and outstanding until the end of the third fiscal period aresummarized in the following table.
Settlement Date

Investment Units Issued andOutstanding (Units)
Increase
Balance(Decrease)400
400
75,00075,4003,970
79,37073,660153,030
3,970
157,000

Particulars

May 6, 2005
July 20, 2005
August 16, 2005
May 1, 2006
May 26, 2006

Private placement
Public offering
Third-party allocation
Public offering
Third-party allocation

Unitholders’ Capital(Millions of Yen)
Increase
Balance(Decrease)200
200
41,86842,0682,216
44,28542,17186,4562,272
88,729Remarks(Note 1)
(Note 2)
(Note 3)(Note 4)(Note 5)

Notes:
1. The Investment Corporation was established with an offer price of ¥500,000 per unit.
2. The Investment Corporation undertook an additional issue of new investment units (public offering) with the aim of procuring funds for the acquisition of
investment properties. The offer price was ¥580,000 per unit with an underwritten price of ¥558,250 per unit.
3. The Investment Corporation undertook an additional issue of new investment units by way of third-party allotment with the aim of procuring funds for theacquisition of investment properties. The issue price was ¥558,250 per unit.
4. The Investment Corporation undertook an additional issue of new investment units (public offering) with the aim of procuring funds for the acquisition of
investment properties. The offer price was ¥593,096 per unit with an issue price of ¥572,519 per unit.
5. The Investment Corporation undertook an additional issue of new investment units by way of third-party allotment with the aim of procuring funds for theacquisition of investment properties. The issue price was ¥572,519 per unit.

Trends of Investment Unit Certificate Price on the Tokyo Stock ExchangeHigh and low trading prices for the Investment Corporation’s investment units during the first and second fiscal period as traded on the REIT
market of the Tokyo Stock Exchange were as follows:
PeriodEnd of Fiscal PeriodHigh Price
Low PriceFirst Fiscal Period
October 31, 2005
¥618,000¥573,000

Second Fiscal Period
April 30,2006¥670,000¥574,000

Third Fiscal Period
October 31,2006¥636,000¥564,000

The Main Investors of the Investment Corporation
The main investors of the Investment Corporation as of October 31, 2006 are as follows.
NameJapan Trustee Services Bank, Ltd.
(trust account)
Nikko Cititrust and Banking Co.
(investment trust account)
Goldman Sachs International
Trust & Custody Services Bank, Ltd.
(securities investment trust account)
Kenedix, Inc.
The Master Trust Bank of Japan, Ltd.
(trust account)

Number ofInvestment Units
owned

Address

Ratio (%)

1-8-11, Harumi, Chuo-ku, Tokyo

13,672

8.71

2-3-14, Higashi-Shinagawa, Shinagawa-ku, Tokyo

12,055

7.67

6-10-1, Roppongi, Minato-ku, Tokyo

8,945

5.69

1-8-12, Harumi, Chuo-ku, Tokyo

8,145

5.18

2-2-9, Shimbashi, Minato-ku, Tokyo

7,850

5.00

2-11-3, Hamamatsucho, Minato-ku, Tokyo

7,029

4.47

State Street Bank and Trust Company

6-7, Kabutocho, Nihonbashi Chuo-ku, Tokyo

4,018

2.55

Resona Bank, Ltd.
The Joyo Bank, Ltd.
Sumitomo Mitsui Banking Corporation

2-2-1, Bingo-machi, Chuo-ku, Osaka
2-11-13, Hamamatsucho , Minato-ku, Tokyo
1-1-2, Yurakucho, Chiyoda-ku, Tokyo

3,260
3,183
2,542

2.07
2.02
1.61

70,702

45.03

Total
Note : Figures for ratio of investment units owned have been rounded down to the second decimal place.

43

Debt Financing
Debt financing on a financial institution basis as of October 31, 2006 are as follows.
Classification

LenderDrawdown
Date

Aozora Bank, Ltd.
The Bank of Tokyo-Mitsubishi
UFJ, Ltd.
Resona Bank, Ltd.
Mitsubishi UFJ Trust andBanking Corporation
The Chuo Mitsui Trust andBanking Co., Ltd.
Sumitomo Mitsui Banking
Corporation
Aozora Bank, Ltd.

August1,2005September
21, 2005

Resona Bank, Ltd.

Short-Term Loan

Mitsubishi UFJ Trust andBanking Corporation
Sumitomo Mitsui Banking
Corporation
Sumitomo Mitsui Banking
Corporation
The Bank of Tokyo-Mitsubishi
UFJ, Ltd.

November
1, 2005
March 1,
2006
May 1,
2006

Aozora Bank, Ltd.
The Bank of Tokyo-Mitsubishi
UFJ, Ltd.
Resona Bank, Ltd.
Mitsubishi UFJ Trust andBanking Corporation
The Chuo Mitsui Trust andBanking Co., Ltd.
Aozora Bank, Ltd.

July 31,2006

September
20, 2006

Resona Bank, Ltd.
Mitsubishi UFJ Trust andBanking Corporation
Sub Total

44

October
31, 2006

Balance atthe End ofPrevious
Period(Millions of
Yen)

Balance atthe End ofcurrent
Period(Millionsof Yen)Interest
Rate(Note 1)

Repayment
Date

0.434

July 31, 2006

0.471

September 20,
2006

2,000

-

1,000

-

500

-

500

-

3,000

-

1,000

-

1,000

-

1,000

-

1,000

-

0.538

500

500

0.541

-

1000

-

1000

-

2,000

-

1,000

-

500

-

500

-

3,000

-

2,000

-

1,000

-

1,000

11,50013,500

October 31,
2006
February 28,
2007

0.520

April 30, 2007

0.670

July 31, 2007

0.645

September 20,
2007

0.701

October 31,
2007

Payment
MethodFull onmaturity

Usage

Remarks(Note 2)

Unsecured/
UnguaranteedClassification

LenderDrawdown
Date

Balance atthe End ofPrevious
Period(Millions of
Yen)

Balance atthe End ofcurrent
Period(Millionsof Yen)

2,700

2,700

Mitsubishi UFJ Trust andBanking Corporation
The Norinchukin Bank

2,500

2,500

The Chiba Bank, Ltd.

1,200

1,200

1,000

1,000

1,000

1,000

800

800

300

300

3,750

3,750

3,750

3,750

1,500

1,500

Resona Bank, Ltd.

500

500

Sumitomo Mitsui Banking
Corporation

1,500

1,500

3,000

3,000

500

500

1,500

1,500

500

500

800

800

500

500

700

700

2,500

2,500

-

2,000

-

1,500

-

1,000

-

1,000

The Chuo Mitsui Trust andBanking Co., Ltd.
Sumitomo Mitsui Banking
Corporation
The Bank of Tokyo-Mitsubishi
UFJ, Ltd.

August 1,
2005

Resona Bank, Ltd.
The Chuo Mitsui Trust andBanking Co., Ltd.
Sumitomo Mitsui Banking
Corporation
Mitsubishi UFJ Trust andBanking Corporation

The Norinchukin Bank

November
1, 2005

Resona Bank, Ltd.
Long-Term Loan

Aozora Bank, Ltd.
Resona Bank, Ltd.

December
8, 2005

The Chiba Bank, Ltd.
Aozora Bank, Ltd.
Mitsui Sumitomo InsuranceCo., Ltd.
The Bank of Tokyo-Mitsubishi
UFJ, Ltd.

March 1,
2006
March 16,
2006

Aozora Bank, Ltd.
The Chuo Mitsui Trust andBanking Co., Ltd.
The Bank of Tokyo-Mitsubishi
UFJ, Ltd.
Mitsubishi UFJ Trust andBanking Corporation
Resona Bank, Ltd.

May 1,
2006

Interest
Rate

Repayment
Date(Note 1)

0.869

July 31, 2008

1.288

July 31, 2010

0.769

October 31,
2007

1.090

October 31,
2008

1.098

December 7,
2008

1.449

February 28,
2009

1.476

March 16,
2009

1.629

April 30, 2009

2.199

April 30, 2011

-

1,000

Aozora Bank, Ltd.

-

1,500

Mitsui Sumitomo InsuranceCo., Ltd.

-

1,000

-

5,000

2.731

April 30, 2016

-

1,000

2.149

July 13, 2011

-

3,000

2.124

August 31,
2013

Sub Total

30,50048,500Total

42,00062,000Development Bank of Japan
Mitsubishi UFJ Trust andBanking Corporation
Development Bank of Japan

July 14,2006
September
1, 2006

Payment
MethodUsage

Remarks

Full onmaturity(Note 2)

Unsecured/
Unguaranteed

Notes :
1. The average interest rate is the weighted-average interest rate for the fiscal period. The Investment Corporation entered into interest-rate swap
transactions with the aim of minimizing the risk of future increase in interest rates. The effect of interest-rate swap transactions has been incorporated into
calculations for the weighted-average interest rate.
2. Funds procured through debt financing were used to acquire trust beneficiary interests in real estate.

Investment Corporation Bonds
The Investment Corporation had not issued investment corporation bonds as of October 31, 2006.

45

Portfolios Outline
Composition of Portfolio Assets
Type ofSpecified Asset
Real Estate

Type

Area

Office Buildings
Retail Properties

Tokyo Metropolitan Area
Tokyo Metropolitan Area

Total for Real Estate
Office Buildings

Tokyo Metropolitan Area
Other Regional Areas

Total for Office Buildings
Trust BeneficiaryInterest in Real Estate

Residential
Tokyo Metropolitan Area
Properties
Other Regional Areas
Total for Residential Properties
Retail Properties

Tokyo Metropolitan Area
Other Regional Areas

Total for Retail Properties
Total of Trust Beneficiary Interests in Real Estate
Bank Deposits and Other Assets
Total Assets

Second Fiscal Period(As of April 30, 2006)
Total Amount Held
Ratio
(Millions of Yen)
(%)
2,338
2.5
55
0.1
2,393
2.6
39,679
43.1
7,126
7.7
46,80650.8
18,707
20.3
2,826
3.1
21,53423.4
12,70013.8
12,70013.8
81,040
88.0
8,618
9.4
92,053
100.0

Third Fiscal Period(As of October 31, 2006)
Total Amount Held
Ratio
(Millions of Yen)
(%)
3,466
2.2
52
0.0
3,519
2.2
73,73346.0
10,225
6.4
83,95852.4
35,85822.4
10,0396.3
45,89828.6
12,645
7.9
3,698
2.3
16,343
10.2
146,200
91.2
10,594
6.6
160,314100.0

Note: “Total Amount Held” is the amount allocated in the balance sheets at the end of the period (figures are on a net book value basis after deducting
depreciation).

46

Purchase and Sales during the Fiscal Period Under Review
Status of Real Estate and Securities Backed by Real Estate Purchase and Sales
Purchase
Type

Area

No.

Property Name

Date of
Acquisition

Sales

Acquisition
Price(Millions of Yen)

Sales
Price
(Millionsof Yen)Date of
Sales

Book
Value
(Millionsof Yen)CapitalGain(Loss)(Millions of
Yen)

A-16

Toshin 24 Building

May 1, 2006

5,300

-

-

-

-

A-17

Ebisu East 438 Building

May 1, 2006

4,640

-

-

-

-

A-18

KDX Omori Building

May 1, 2006

3,500

-

-

-

-

A-19

KDX Hamamatsucho Building

May 1, 2006

3,460

-

-

-

-

-

-

-

-

September 1,

A-29

KDX Higashi-Shinjuku Building

Metropolitan

A-20

Dai-ichi Kayabacho Building

May 1, 2006

2,780

-

-

-

-

Area

A-21

NTB･Ｍ Building

May 1, 2006

2,690

-

-

-

-

A-22

KDX Shin-Yokohama Building

May 1, 2006

2,520

-

-

-

-

A-27

KDX Kajicho Building

July 3, 2006

2,350

-

-

-

-

A-23

KDX Yotsuya Building

May 1, 2006

1,950

-

-

-

-

A-26

Kiba Ocean Building

June 20, 2006

1,580

-

-

-

-

A-28

KDX Nogizaka Building

July 14, 2006

1,065

-

-

-

-

May 1, 2006

1,610

-

-

-

-

May 1, 2006

1,560

Office

Tokyo

Other

A-24

Regional
Areas

A-25

KDX Minami-Semba Dai-1
Building
KDX Minami-Semba Dai-2
Building

2006

Total of Office
B-19

2,950

-

-

-

-

37,955----Residence Charmante Tsukishima

May 1, 2006

5,353

-

-

-

-

B-20

Regalo Ochanomizu I&II

May 1, 2006

3,600

-

-

-

-

B-21

Regalo Shiba-Kouen

May 1, 2006

2,260

-

-

-

-

B-22

Chigasaki Socie Ni-bankan

May 1, 2006

1,160

-

-

-

-

B-23

Court Nishi-Shinjuku

May 1, 2006

1,130

-

-

-

-

B-34

Gradito Kawaguchi

June 30, 2006

1,038

-

-

-

-

B-24

Regalo Komozawa-Kouen

May 1, 2006

912

Metropolitan

-

-

-

-

B-25

Court Shin-Okachimachi

May 1, 2006

878

-

-

-

-

Area

B-26

Primo Regalo Kagurazaka

May 1, 2006

762

-

-

-

-

B-27

Primo Regalo Youga

May 1, 2006

730

-

-

-

-

B-28

Court Shimouma

May 1, 2006

638

-

-

-

-

1,015

902

72

Tokyo

Residential

B-10

Other
Regional
Areas

Storia Todoroki

May 10,--2006
May 10,

B-12

Clair Court Rokakouen

-

-

985

861

84

B-29

Ashiya Royal Homes

May 1, 2006

2,330

-

-

-

-

B-30

Regalo Ibaraki I&II

May 1, 2006

1,600

-

-

-

-

B-31

Collection Higashi-Sakura

May 1, 2006

1,264

-

-

-

-

May 1, 2006

900

-

-

-

-

May 1, 2006

826

-

-

-

-

25,381

-

2,000

1,763

157

-

-

-

-

B-32
B-33

Renaissance 21 Hirao
Jousui-machi
Montore Nishikouen Bay Court
Total of Residential

2006

Other
RetailRegional

C-3

ZARA Tenjin Nishi-dori

May 1, 2006

3,680

Areas
Total of Retail

3,680

Total
67,016
2,000
1,763
157
Note : Acquisition prices are the sales amounts recorded in trust beneficiary interest agreements exclusive of associated costs such as brokerage fees and taxes.

47Capital Expenditure
Planned capital expenditures
Major capital expenditure plans for renovation of properties in which the Investment Corporation holds a trust beneficiary interest for the
fourth fiscal period (November 1, 2006 to April 30, 2007) are as follows. Planned capital expenditure includes portions classified into expenses
for accounting purposes.

Property Name
(Location)

PurposeSchedule

Nihonbashi 313 Building(Chuo-ku, Tokyo)

Plumbing equipment work, interior
facilities work, other

Jinnan-zaka Frame(Shibuya-ku, Tokyo)

Planned Amount of Capital Expenditure(Millions of Yen)
Paid in the
Total AmountFiscal Period
Total
Previously
Under Review
Paid

November 2006
to April 2007

161

12

12

Fully renewal work, other

As above

127

4

4

KDX Funabashi Building(Funabashi-shi, Chiba)

Upgrade of air conditioning system,other

As above87

1

1Ashiya Royal Homes(Ashiya-shi, Hyogo)

Upgrade of indoor facilities and parking
facilities, other

As above

63−−

Higashi-Kayabacho Yuraku Building(Chuo-ku, Tokyo)

Upgrade of individual air conditioning
system, other

As above

47−−

Capital Expenditures During the Third Fiscal Period
The Investment Corporation undertook the following major capital expenditures as follows. In the third fiscal period, the Investment
Corporation completed work across its entire portfolio totaling ¥655 million. This total comprised of ¥718 million in capital expenditures and ¥62
million for repairs, maintenance and renovation expenses.
Property Name

Purpose(Location)

Amount of Capital Expenditures

Schedule(Millions of Yen)

KDX Hamacho Building(Chuo-ku, Tokyo)

Conversion of leasable areas, renewal
work for interior facilities of co-owned
areas, other

Chigasaki Socie Ni-bankan(Chigasaki-shi, Kanagawa)

Large-scale renovation, other

As above

57

Venus Hibarigaoka(Sapporo, Hokkaido)

Renewal work for interphone system,
building exterior works, other

As above52

May 2006 to

81

October 2006

Others464

Portfolio Total

655

Long-Term Repairs, Maintenance, and Renovation Plans
The Investment Corporation formulates long-term repairs, maintenance, and renovation plans on an individual investment property basis andallocates a portion of its cash flows generated during the period to a reserve for repairs, maintenance, and renovation to meet large-scalerenovation over the medium to long terms. The following amount has been transferred to the reserve from period cash flows.
( Millions of Yen)
Fiscal period

First Fiscal Period

Second Fiscal Period

Third Fiscal Period

−

92

165

Reserve for the fiscal period under review

92

130

148

Reversal of reserve for the fiscal period under review

−

57

26

Reserve bring to the next period

92

165

288

Reserve for the end of the previous period

48

Expenses and Liabilities
Details for Expenses

(a)
(b)
(c)
(d)
(e)
(f)

Item
Asset management fees
Custodian fees
Administrative service fees
Directors’ salaries
Audit fees
Other operating expenses

Second Fiscal Period
150,114
10,23327,5445,400
4,000
64,963

Total

262,254( Thousands of Yen)
Third Fiscal Period
203,842
11,70535,0235,400
5,900
64,569326,439

Note : In addition to the asset management fees indicated in the above table, a total of ¥46,636 thousand for the second fiscal period and ¥193,157 thousand
for the third fiscal period, representing property acquisition management fees, was included in the book values of individual real estate assets.

Details of Related-Party Transactions(1) Details
Purchase and Sales Amounts
Amount of Purchase (Millions of Yen)
Amount of Sales (Millions of Yen)
67,016
Total−
Amount of Sale to Related -Parties

Amount of Purchase from Related -Parties
30,816(46.0%)−

Y.K. KDX 2

8,300(12.4%)−

Y.K. Lump Sum Investment

7,100(10.6%)−

Y.K. KW Property 10

4,426(6.6%)−

Y.K. KW Property 5

7,310(10.9%)−

Y.K. KDX 3

3,680(5.5%)−

Details of related-party transactions(2) Fees
Details of fees and other
Classification

Leasing management fees

Total Fees (A)(Thousands of Yen)

183,464

Ratio

payments to related parties
Payment Recipient

Amount of Fee (B)(B /A)%(Thousands of Yen)

Kenedix Advisors Co., Ltd.

183,464100.0Management transfer fees

66,200As above

66,200100.0

Construction supervision fees

24,537As above

24,537100.0

Note: Related parties in the above table are the related parties for the Asset Management Company, which are defined under Implementation Ordinance No.
20 of the Investment Trust Law. Transaction details and commissions paid to Kenedix Advisors, Y.K. KDX2, Y.K. Lump Sum Investment, Y.K. KW
Property10, Y.K. KW Property5, and Y.K. KDX3 during the fiscal period under review are listed in the above table.

49Trends in Investment Unit Prices
The Investment Corporation’s investment unit certificates were first listed on the Tokyo Stock Exchange on July 21, 2005. Trends ininvestment unit price and trading turnover from the date of public listing to the close of its third fiscal period, October 31, 2006, areprovided in the following table.
Aggregate Market Value as of October 31, 2006: ¥98,596mn
Highest Trading Price: ¥670,000 (February 9, 2006)
Lowest Trading Price: ¥564,000 (June 20, 2006)

KRI Closing Price
VolumeVolume (Unit)KRI Closing Price (Yen)

11,000670,000

4,000

640,000

3,000

610,000

2,000

580,000
Offer Price at IPO¥580,000

1,000
0Jul. 21, 05

Oct. 31, 05

550,000

Jan. 31, 06

Apr. 30, 06

Jul. 31, 06

520,000
Oct. 31, 06

Notes: 1. Investment unit prices are shown based upon closing prices.
2. References to "KRI" are to Kenedix Realty Investment Corporation.

Details of the Unitholders
End of 2nd fiscal period(79,370 units)

Financial Institutions(incl. securities companies)
37,279 units (46.96%)

Other Domestic
Corporation
6,756 units (8.51%)

Foreign Corporation andIndividuals
22,990 units (28.96%)

Individuals andOthersEnd of 3rd fiscal period(157,000 units)

Financial Institutions(incl. securities companies)
75,308 units (47.96%)

Other Domestic
Corporation
10,721 units (6.82%)

Foreign Corporation andIndividuals
54,259 units (34.55%)

Individuals andOthers12,345 units (15.55%)

16,712 units (10.64%)

Note: Comparative ratios are rounded down to the second decimal place.

Information Provided on the Investment Corporation’s Website
The Investment Corporation will make every effort to disclose relevant and accurate information on its Web site in a timely fashion.

URL

http://www.kdx-reit.com/eng/

This semiannual report includes translation of certain documents originally filed and made available in Japan in accordance with the Securities and Exchange Law ofJapan. This English language semiannual report was prepared solely for the convenience of readers outside Japan and is not intended to constitute a document for
an offer to sell, or seeking an offer to buy, any securities of Kenedix Realty Investment Corporation.
English terms for Japanese legal, accounting, tax and business concepts used herein may not to be precisely identical to the concept of the equivalent Japaneseterms. With respect to any and all terms herein, including without limitation, financial statements, if there exist any discrepancies in the meaning or interpretation
thereof between the original Japanese documents and English translation contained herein, the original Japanese documents will always govern the meaning andinterpretation.
None of Kenedix Realty Investment Corporation, Kenedix REIT Management, Inc. or any of their respective directors, officers, employees, partners, unitholders,
agents, affiliates or their advisors will be responsible or liable for the completeness, appropriateness, or accuracy of English translations or the selection of the
portion(s) of any document(s) translated into English.
The financial statements of Kenedix Realty Investment Corporation 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 semiannual report contains forward-looking statements. These statements appear in a number of places in this semiannual report and include statements
regarding the intent, belief, or current and future expectations of Kenedix Realty Investment Corporation or Kenedix REIT Management, Inc. with respect to its
business, financial condition and results of operations. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “would,”“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or the negative of these terms or other similar terminology. These statements are notguarantees of future performance and are subject to various risks and uncertainties. Actual results, performance or achievements, or those of the industries in which
we operate, may differ materially from any future results, performance or achievements expressed or implied by these forwardlooking statements. In addition, theseforward-looking statements are necessarily dependent upon assumptions, estimates and data that may be incorrect or imprecise and involve known and unknown
risks and uncertainties. Accordingly, readers of this document should not interpret the forward-looking statements included herein as predictions or representationsof future events or circumstances.
Potential risks and uncertainties also include those identified and discussed in this document. Given these risks and uncertainties, readers of this document are
cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of information produced herein. We disclaim any obligation to
update or, except in the limited circumstances required by Tokyo Stock Exchange, announce publicly any revisions to any of the forward-looking statements
contained in this documents.

Kenedix Realty Investment Corporation
Corporate Data
(As of March 1, 2007)
Corporate Office
NTB•M Bldg. 6F
2-2-9, Shimbashi, Minato-ku,
Tokyo, 105-0004, Japan
Tel +81-3- 3519-3491
Fax +81-3- 3519-3555
Date of Incorporation
May 6, 2005
Capital¥88,729,652,470
157,000 units
Stock Listing
REIT market of the Tokyo Stock Exchange
Security Codes
8972
Transfer Agent
The Chuo Mitsui Trust & Banking Co., Ltd.
3-33-1 Shiba, Minato-ku, Tokyo 105-8574, Japan
AuditorErnst & Young ShinNihon
Hibiya Kokusai Bldg.
2-3, Uchisaiwai-cho 2-chome, Chiyoda-ku,
Tokyo 100-0011, Japan
Investor Relations
For further information, please contact our Asset Management
Company:
Kenedix REIT Management, Inc.
Financial Planning Division, General Manager
Masahiko Tajima
NTB•M Bldg. 6F
2-2-9, Shimbashi, Minato-ku,
Tokyo, 105-0004, Japan
Tel +81-3- 3519-3491
Fax +81-3- 3519-3555

URL: http://www.kdx-reit.com/eng/