KENEDIX Realty Investment Corporation

Semiannual Report
Second Fiscal Period
From November 1, 2005 to April 30, 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.

                                   #$ %  

    !"&' %   ( )$  $
*$+   &$ '  ,) #   (  '     & -./  )   

     !

#     $ % "&0    )Contents
To Our Unitholders ....................................1
Investment Highlights ................................1
Portfolio Highlights ....................................3
KENEDIX Selection ..................................4
Properties Roster ......................................6
Board of Directors .....................................8

Questions & Answers ................................9
Financial Summary .................................12
Management Review & Policies .............13
Financial Statements ..............................17
Management Report ...............................33

To Our Unitholders
Taking this opportunity to present our 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 second fiscal period, (November 1, 2005 to April 30, 2006) Kenedix Realty Investment Corporation recorded operating
revenues of ¥2,871 million, ordinary income of ¥1,103 million and net income of ¥1,101 million. As a result, cash distribution for the
fiscal period under review was ¥13,884 per unit.
Looking at its third fiscal period and beyond, the Investment Corporation in concert with Kenedix REIT Management, Inc. will continue
to pursue stable growth from a medium- and long-term perspective. We offer our sincere appreciation to all unitholders forcontinuing 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 Second Fiscal Period (November 1, 2005 to April 30, 2006): ¥13,884 per unit
Note: The second fiscal period commenced on November 1, 2005 and ended on April 30, 2006, a period of 181 days.

Investment Highlights
Results for the First Fiscal Period

Results for the Second Fiscal Period

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

Operating Income¥589 million¥1,343 million

Ordinary Income¥243 million¥1,103 million

Net Income¥242 million¥1,101 million

Distribution per Unit

¥3,052¥13,884

Financial Results
First Fiscal Period

Second Fiscal Period

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

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

Unitholders’ Equity to Total Assets

57.6%

49.3%

Unitholders’ Equity per Unit

¥561,008¥571,840

1

A-13

Bells Modes Building

A-18

KDX Omori Building

B-19

Residence Charmante Tsukishima

2

A-17

Ebisu East 438 Building

A-21
C-1 Jinnan-zaka Frame

NTB.M Building

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

Immediately following IPO as of August 1, 2005 (29 properties)Type   !  

As of June 12, 2006 (59 properties)   

Total ¥9.9B

 

Total ¥16.059B

Total ¥32.197B

11.6%

16.2%
56.8%

  $   
 Total ¥18.986B

Total ¥43.421BArea        !  

31.5%

31.0% 52.7%

3.7%

     

Total ¥23.421B

Total ¥2.281B Total ¥78.279B

17.0%     
"
 

96.2%

Total ¥114.338B

82.9%

      
Total ¥58.802B#   

 

Size


$


16.2%

$
 Total ¥11.12B

18.2%

7.1%

$

 

29.5%

Total ¥33.2B



 

22.6%

" #   

 



Total ¥9.9B

Total ¥8.2B

13.4%

Total ¥9.9B$ 

Total ¥12.1B

8.8%
"
 

30.3%

Total ¥41.7B

24.1%

Total ¥18.05B



 

29.5%

Total ¥13.813B

Total ¥40.6B

Note : 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 acquisitionprice basis. Percentage figures are rounded off to the first decimal place.
3. B=billions

Total Acquisition Price

61 billion yen

Total Acquisition Price

137.7 billion yen

Total Number of Properties

31 properties

Total Number of Properties

59 properties

Weighted-Average Portfolio Age

11.7 years

Weighted-Average Portfolio Age

11.1 years

Note: The average age of building construction, current as of April 30, 2006, is shown as the weighted-average portfolio age based upon acquisition prices.

External Growth Performance (based on acquisition price)
59 properties¥137.7B

(¥B)
140
120

 !

   

31 properties¥69.1B

35 properties¥81.4B
15.2%

17.9%

25.5%

100

60

29 properties¥61.0B
16.2%

40

31.0%

80

20

11.6%

27.4%

52.7%

54.6%

%&&   '  ( %)
*+ , - )  
*  ! , -

31.5%

56.8%
59.2%

 )  
*   , - )    +  +! * .+ , -Note: Amounts of less than ¥100 million omitted for money amounts, and digits below decimal point omitted for ratios

3

KENEDIX Selection (As of June 12, 2006)
Office Buildings (25 properties)
Emphasis on mid-sized office buildings in the Tokyo Metropolitan Area, in particular Central Tokyo.

Tokyo’s 23 wards
18 properties ¥58.0B

    Central Tokyo
15 properties ¥51.3B

    !" 

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

Greater Osaka Area
3 properties ¥8.7B

3 properties ¥6.7B

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)
12.9%

Chiba
1 property ¥2.2B
Notes:
1. Central Tokyo consists of the Chiyoda, Chuo, Minato, Shibuya and Shinjuku wards.
2. Greater Osaka Area consists of Osaka and Hyogo prefectures.
3. Money amounts are rounded to the nearest ¥100 million.
4. Ratios indicate the total acquisition price for properties in each area in proportion to
the total acquisition costs for all properties combined.
5. Ratios are rounded to the first decimal place.

Tokyo Metropolitan Area
(not incl. Tokyo's 23 wards)(3 properties)
12.8%
Tokyo's 23 wards(not incl. central Tokyo)(3 properties)
8.6%

Central Tokyo(15 properties)
65.5%*The data above is based upon a portfolio of 25 office buildings held by Kenedix Realty Investment Corporation, including 15 properties held at the end of thesecond fiscal period and 10 properties already acquired during the third fiscal period as of June 12, 2006.

Office Building Average
Vacancy Ratio

Corporate Income
Distribution by Prefectures

Avg. vacancy ratio(%)

Other Regional Areas
48.9%




Tokyo
44.1%

Osaka



30 ~ 99
employees
4.8%

100 and above
employees
1.5%

10 ~ 29
employees
15.2%




Number of Employees per Office(Tokyo) (% of total offices)
YokohamaTokyo's 23 Wards






Tokyo's 23 Wards


Yokohama





Chiba
1.3%

Osaka

Source :KDRM, based on the following references.
2000~2004 : K.K. Ikoma Data Service System (IDSS)“White Paper on Real Estate” (2000~2005 editions)2005 : IDSS, “Office Market Report” (2006 winter)

Saitama
1.7%

Source :KDRM, based on information of National Tax Agency

Note: References to "KDRM" are to Kenedix REIT Management, Inc.

4

Kanagawa
4.0%

1~9
employees
78.5%
Source:
KDRM, based on Search Report about Office asof 2004 (Tokyo Metropolitan Government Bureauof General Affairs)
Note:
Includes 695 offices (0.1%) for which employees
were seconded from other companies

Residential Properties (31 properties)
Emphasis on residential properties in densely populated areas with a high number of households.

       

Hokkaido
1 property ¥1.8B

     !  
Greater Osaka Area
2 properties ¥3.9B
Tokyo’s 23 wards
21 properties ¥31.7B
Fukuoka
2 properties ¥1.7B

Kanagawa
2 properties ¥2.1B
Residential Portfolio(based on acquisition price)

Nagoya3 properties ¥2.1B

Notes:
1. Greater Osaka Area consists of Osaka and Hyogo prefectures.
2. Money amounts are rounded to the nearest ¥100 million.
3. Ratios indicate the total acquisition price for properties in each area inproportion to the total acquisition costs for all properties combined.
4. Ratios are rounded to the first decimal place.

Hokkaido
1 property
4.1%
Nagoya3 properties
4.8%
Greater Osaka Area
2 properties
9.0%

Fukuoka
2 properties
3.9%

Tokyo Metropolitan Area
(not incl. Tokyo's 23 wards)
2 properties
4.8%

Tokyo's 23 wards
21 properties
73.1%*The data above is based upon a portfolio of 31 residential properties held by Kenedix Realty Investment Corporation, including 16 properties held as of the end of
the second fiscal period (excluding two properties sold on May 10, 2006) and 15 properties already acquired during the third fiscal period as of June 12, 2006.

Japan Population Growth Rate
Rank
1
2
3
4
5
6
7
8
9
10
11
12

City
Tokyo's 23 wards
Yokohama
Osaka
NagoyaSapporoKobe
Kyoto
Fukuoka
Kawasaki
Saitama
Hiroshima
Sendai
Total

Population
as of 2005

Rent Index by TypeGrowth rate
(2000-2005)

8,483,050
3,579,133
2,628,776
2,215,031
1,880,875
1,525,389
1,474,764
1,400,621
1,327,009
1,176,269
1,154,595
1,024,947

4.3%
4.4%
1.2%
2.0%
3.2%
2.1%
0.0%
4.4%
6.2%
3.8%
1.8%
1.7%

127,756,815

0.7%

Source:MIC Statistics Bureau, Population Census 2005
Notes:
1. Based on the population as of October 1, 2005
2. Cities where the Investment Corporation owns properties are highlighted
3. References to "MIC" are to Ministry of Internal Affairs and Communications.












Office Rent Index









Residential Rent Index

Source:Japan Real Estate Institute
Note:
The index shows conditions as of September each year, with the year
2005=100.

5Properties Roster
Properties as of the end of the 2nd period (35 properties)
Type

Area

Tokyo
Metropolitan
Area

Name

Location
Chiyoda ward, Tokyo

5,950

May 1994

80.5

Nihonbashi 313 Building

Chuo ward, Tokyo

5,940

Apr. 1974

100.0

Sogo Hirakawacho Building

Chiyoda ward, Tokyo

5,180

Mar. 1988

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

K&Y Building (Southern Plaza)

Nakano ward, Tokyo

2,533

Aug. 1992

98.8

Harajuku F.F. Building

Shibuya ward, Tokyo

2,450

Nov. 1985

100.0

KDX Hamacho Building

Chuo ward, Tokyo

2,300

Sep. 1993

87.3

FIK Minami Aoyama

Minato ward, Tokyo

2,270

Nov. 1988

100.0

KDX Funabashi Building

Funabashi, Chiba

2,252

Apr. 1989

91.9

Kanda Kihara Building

Chiyoda ward, Tokyo

1,950

May 1993

100.0

NNK Building

Shinjuku ward, Tokyo

1,610

Jun. 1992

100.0

Koishikawa Yoshida Building

Bunkyo ward, Tokyo

704

Oct. 1992

100.0

Portus Center Building

Sakai, Osaka

5,570

Sep. 1993

100.0

Hakata-Ekimae Dai-2 Building

Fukuoka, Fukuoka

1,430

Sep. 1984

96.7

48,26917.4 yrs

97.3

Office (15 properties) Sub Total

Tokyo
Metropolitan
Area
Residential

Sold onMay 10, 2006
Sold onMay 10, 2006

Other
Regional
Areas

Storia Sirokane

Minato ward, Tokyo

3,150

Feb. 2003

92.5

Tre di Casa Minami Aoyama

Minato ward, Tokyo

2,460

Feb. 2004

100.0

Court Mejiro

Shinjuku ward, Tokyo

1,250

Mar. 1997

85.1

Apartments Motoazabu

Minato ward, Tokyo

1,210

Jan. 2004

97.1

Apartments Wakamatsu-Kawada

Shinjuku ward, Tokyo

1,180

Feb. 2004

97.8

Court Nihonbashi-Hakozaki

Chuo ward, Tokyo

1,130

Feb. 2004

94.3

Side Denenchofu

Ota ward, Tokyo

1,110

Feb. 1997

94.4

S-court Yokohama-Kannai

Yokohama, Kanagawa

945

Mar. 2003

100.0

Court Motoasakusa

Taito ward, Tokyo

880

Jan. 2005

82.3

Storia Todoroki

Setagaya ward, Tokyo

877

Dec. 2002

100.0

Bloom Omotesando

Shibuya ward, Tokyo

875

Mar. 2003

85.2

Clair Court Rokakouen

Setagaya ward, Tokyo

831

Aug. 1998

100.0

Human Heim Okachimachi

Taito ward, Tokyo

830

Dec. 2004

100.0

Court Shinbashi

Minato ward, Tokyo

748

Dec. 1997

95.2

Court Suitengu

Chuo ward, Tokyo

659

Jul. 2003

94.9

Venus Hibarigaoka

Sapporo, Hokkaido

1,800

Mar. 1989

82.7

Abreast Hara

Nagoya, Aichi

444

Feb. 2000

100.0

Abreast Hirabari

Nagoya, Aichi

407

Mar. 2000

97.5

20,786

5.2 yrs

91.1

Residential (18 properties) Sub Total

Retail6

Tokyo
Metropolitan
Area(%) (Note3)

Belles Modes Building

OfficeOther
Regional
Areas

Completion
Date (Note2)

Occupancy Ratio(¥M) (Note1)

Acquisition Price

Jinnan-zaka Frame

Shibuya ward, Tokyo

9,900

Mar. 2005

100.0

Yoyogi M Building

Shibuya ward, Tokyo

2,479

Aug. 1991

87.1

Retail (2 properties) Sub Total

12,3793.9 yrs

97.4

Total 35 properties

81,43412.3 yrs

94.9

Additional properties during the 3rd period (26properties) (as of June 12, 2006)
Type

Area

Tokyo
Metropolitan
Area

OfficeOther
Regional
Areas

Name

Location(%) (Note3)

Toshin-24 Building

Yokohama, Kanagawa

5,300

Sep. 1984

100.0

Ebisu East 438 Building

Shibuya ward, Tokyo

4,640

Jan. 1992

100.0

KDX Omori Building

Ohta ward, Tokyo

3,500

Oct. 1990

100.0

KDX Hamamatsucho Building

Minato ward, Tokyo

3,460

Sep. 1999

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

KDX Shin-Yokohama Building

Yokohama, Kanagawa

2,520

Sep. 1990

100.0

KDX Yotsuya Building

Shinjuku ward, Tokyo

1,950

Oct. 1989

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

86.0

30,010

-

-

5,353

Jan. 2004

100.0
58.2

Office (10 properties) Sub Total
Residence Charmante Tsukishima

Tokyo
Metropolitan
Area

Completion
Date (Note2)

Occupancy Ratio(¥M) (Note1)

Acquisition Price

Chuo ward, Tokyo

Regalo Ochanomizu I&II

Bunkyo ward, Tokyo

3,600

1 : Jan. 2006
2 : Feb. 2006

Regalo Shiba-Kouen

Minato ward, Tokyo

2,260

Nov. 2005

74.4

Chigasaki Socie Ni-bankan

Chigasaki, Kanagawa

1,160

Jan. 1991

91.3

Court Nishi-Shinjuku

Shinjuku ward, Tokyo

1,130

Oct. 2005

96.3

Regalo Komazawa-Kouen

Setagaya ward, Tokyo

912

Feb. 2006

95.6

Court Shin-Okachimachi

Taito ward, Tokyo

878

Oct. 2005

97.0

Primo Regalo Kagurazaka

Shinjuku ward, Tokyo

762

Jan. 2006

93.2

Primo Regalo Youga

Setagaya ward, Tokyo

730

Dec. 2005

100.0

Court Shimouma

Setagaya ward, Tokyo

638

Oct. 2005

100.0

Ashiya Royal Homes

Ashiya, Hyogo

2,330

Jun. 1991

78.5
31.1

Residential

Other
Regional
Areas

Regalo Ibaraki I&II

Ibaraki, Osaka

1,600

1 : May 1991
2 : Mar . 1993

Collection Higashi-Sakura

Nagoya, Aichi

1,264

Mar. 2006

22.4

Renaissance 21 Hirao Jousui-machi

Fukuoka, Fukuoka

900

Oct. 2005

58.0

Montore Nishikouen Bay Court

Fukuoka, Fukuoka

826

Feb. 2006

61.0

24,343

-

-

3,680

Nov. 2005

100.0

3,680

-

-

63,992--

Residential (15 properties) Sub Total
Other Regional Areas

ZARA Tenjin Nishi-dori

Fukuoka, Fukuoka

RetailRetail (1 property) Sub Total
Total 26 properties
Total 59 properties

137,759 (Note4) 11.1 yrs (Note5)90.8 (Note6)

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 on which construction was first completed. Each average age subtotals and total for the investment portfolio isshown as the weighted-average portfolio age based upon acquisition prices with a base date of April 30, 2006.
3. "Occupancy Ratio" is the leased floor area divided by total leasable floor area for each property as a percentage to the nearest first decimal place. Ratios arecalculated as of April 30, 2006 for the second fiscal period and as of May 31, 2006 for 26 properties acquired during the third fiscal period. Subtotals and total
for the investment portfolio are weighted-averages.
4. The total acquisition price for 59 properties held by the Investment Corporation as of June 12, 2006.
5. The weighted-average age of the 59 properties held by the Investment Corporation as of June 12, 2006 with a base date of April 30, 2006.
6. The weighted-average occupancy ratio is calculated as of May 31, 2006 based on the 59 properties held by the Investment Corporation as of June 12, 2006.

7

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 Trust and 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 he became chief executive officer and president. Prior toserving as our executive director, he transferred his employment to the Asset Management Company in 2005, continuing to serve in thesame 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 Miyajimaholds 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 and served as a director for The Housing Loan Guarantee Corporation since 1998
and as a director for the Victim Support Center of Tokyo since 2000.

Shiro Toba
Shiro Toba has been a supervisory director since May 2005. He joined Chuo Aoyama Pricewaterhouse Coopers (formerly Chuo
Shinko Audit Corporation) in 1989 and became a Japanese 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.

8

Questions & Answers" Questions & Answers" are based on an interview with Taisuke Miyajima, CEO andPresident of Kenedix REIT Management, Inc. (" Asset Management Company" ), the asset
management company for Kenedix Realty Investment Corporation (" the Investment
Corporation" ).

Q.

What strategies have been advanced to differentiate the Investment Corporation from its
competitors?

A.

The Investment Corporation is a diversified real estate investment trust that primarily invests in office buildings, residential properties,
retail properties and other real estate assets. In specific terms, the Investment Corporation is engaged in selective investment inmedium-sized office buildings located in the Tokyo Metropolitan Area, as well as residential properties located in densely populatedareas with a high number of households.
management company.

The Investment Corporation has appointed Kenedix REIT Management, Inc. as its asset

The Asset Management Company boasts specialized knowledge of real estate and financial markets and islargely comprised of employees transferred from Kenedix, Inc. Leveraging the know-how and expertise of the Kenedix Group, theInvestment Corporation is well placed to pursue dynamic growth.

Growth Potential

Q.

What target for asset scale have you set for the future?

A.

As of April 30, 2006, the end of the Investment Corporation’s second fiscal period, the Investment Corporation owned a portfolio of 35
properties with total acquisition costs of approximately ¥81.4 billion. As of June 12, 2006, the date the Investment Corporation’s
second fiscal period results were announced, this balance had increased to 59 properties with total acquisition costs of approximately¥137.7 billion. In July 2005, on the occasion of the Investment Corporation’s public listing, we identified an asset scale target
exceeding ¥200 billion by December 31, 2008. Based on the steady progress achieved to date, we have decided to bring forward thistarget and 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.

The Investment Corporation has appointed Kenedix Advisors Co., Ltd. ("Kenedix Advisors") as its sole property management company.
This decision was made to ensure a single point of contact for all matters relating to property management, to ensure a unified
approach and procedure, and to enhance response times and the quality of service.
Furthermore, scale merits apply in connection with building management, property insurance and other management activities, whichcollectively contribute to a lighter administrative burden and reduced costs.
In specific terms, the Asset Management Company has undertaken a variety of activities including repairs, maintenance and renovationof existing properties with the aim of increasing rent level and occupancy ratio.
Examples of activities:-

Improve common use areas including toilets and entrances, increase property competitiveness through renewal and upgrade-

Ascertain tenants needs through tenant satisfaction surveys-

Enhance tenant communication (decorate entrance halls and common use areas to reflect seasonal events such as Christmas
and New Years, present greeting cards and flowers to new tenants)-

Strengthen leasing activities through close ties with leasing intermediary companies.

9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 number ofbuildings on the market, the acquisition prices and rent level of medium-sized office buildings offer a wider scope of acquisition andleasing 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 large pool ofcompeting properties, the Investment Corporation recognizes that medium-sized office buildings exhibit higher rates of tenant turnoverwith 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.
this segment enables the Investment Corporation to leverage this considerable strength.

Focusing on

We also hold high expectation for continued

increase in rent level in line with favorable economic trends.

Q.

Why does the Investment Corporation invest in residential properties?

A.

Maintaining a certain percentage of the investment portfolio in residential properties provides a number of advantages.

First, in aneffort to ensure prudent investment, the Investment Corporation adheres to investment criteria based on type, area and size. In
investing in residential properties, the Investment Corporation strives to diversify risk. In addition, residential properties offer relatively
stable rent levels.

This in turn delivers steady earnings and cash flows.

When investing in residential properties, the Investment

Corporation places emphasis on acquiring competitive properties located in densely populated areas with a high number of households.

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 estate markets

are subject to a variety of trends based on property type, area and size. While activity in one area may be robust, other areas may
experience stagnant conditions. With this in mind, the possibility that real estate prices will appreciate nationwide is considered 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 withmarket 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 in markets overseas.

10

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 highcredit 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?
avoid the risk of future increase in interest rates?

A.

Following the decision by the Bank of Japan to lift quantitative monetary easing policies, interest rates are expected to show a moderate
rise.

What measures do you have in place to

We believe the key factor in determining future market conditions will be the speed of interest rate increase. If the pace atwhich interest rates rise serves to promote economic growth, the impact on real estate markets is naturally favorable. For example, inan environment where economic growth outpaces the increase of interest rates, rent levels can also be expected to rise.

With this inmind, 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. Looking ahead, we will also consider the issue of fixed rate
investment corporate bonds as a measure to avoid the risk of future increase in interest rates.

11

Financial Summary
Trends in Operating Conditions
PeriodFirst Fiscal Period

Second Fiscal Period(As of October 31, 2006)(As of April 30, 2006)

Operating revenues

Millions of Yen

1,196

2,871

（Rental revenues）

Millions of Yen

1,196

2,871

Operating expenses

Millions of Yen

606

1,527

(Property-related expenses）

Millions of Yen

518

1,265

Operating income

Millions of Yen

589

1,343

Ordinary income

Millions of Yen

243

1,103

Net income(a)Millions of Yen

242

1,101

Total assets(b)Millions of Yen

77,32592,053

Interest-bearing debt(c)Millions of Yen

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

44,52745,387

Millions of Yen

44,28544,285(e)

Per Unit

79,37079,370(d)／(e)Yen

561,008

571,840

Total distribution(f)Millions of Yen

242

1,101

Distribution per unit(f)／(e)

Yen

3,052

13,884（Earnings distributed per unit）

Yen

3,052

13,884（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）

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

0.6（2.2）

2.5（4.9）

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

％

57.6

49.3

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

％

37.5

45.6

Payout ratio (Note 4)(f)／(a)

％

99.9

99.9

[Other reference]
Number of properties

Properties

31

35

Total leasable floor area㎡

81,298.67

104,868.65

Occupancy ratio at the end of period

％

96.6

94.9

Depreciation expenses for the period

Millions of Yen

268

650

Capital expenditures for the period

Millions of Yen

47

510

Leasing NOI (net operating income)(Note 5)

Millions of Yen

945

2,256

FFO (funds from operation)(Note 6)

Millions of Yen

510

1,752

FFO per unit

(Note 7)

Yen

6,430

22,076

Notes:
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 reflects the value on August 1, 2005, which was the first actual date of operations of the first fiscal period.
2. Annualized values are calculated based upon a period of 181 days. 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 off to the first decimal place.
5. Leasing NOI = Rental and other operating revenues from rental and other operating expenses + Depreciation expenses for the period
6. FFO = Net income + Depreciation expenses for the period
7. FFO per unit = FFO / number of investment units issued and outstanding (figures below ¥1 rounded off)12

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). Thereafter, the Investment Corporation first reported its operating results for period ending on October 31,
2005.

As of April 30, 2006, the end of the second fiscal period, the number of investment units issued and outstanding totaled 79,370 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 second fiscal period, the Japanese economy made a steady shift from moderate to full-fledged recovery. Conditions were
buoyed by an increase in capital expenditure on the back of an improvement in corporate earnings, and robust employment conditions contributing
to an upswing in personal consumption.
On March 9, 2006, the Bank of Japan lifted its quantitative monetary easing policy, which was first implemented in March 2001. At the sametime, the Central Bank announced that it would shift its focus from the bank’s current account balance to unsecured call interest rates.

Inannouncing the policy shift, the Bank of Japan pledged to anchor the unsecured call rate near zero for a prudent period. Thereafter adjustments
would be made on a gradual basis in accordance with changes in the economy and consumer prices.
Turning to real estate markets in Japan, official announcements as of January 1, 2006, indicated land prices in the major metropolitan areasof Tokyo, Osaka, Kyoto and Nagoya had either held their value or made a steady increase. In other regional areas, the decline in residential andretail property prices narrowed.

Furthermore, signs of a slight increase have emerged in certain major cities in regional areas.

b. Management performance
As of October 31, 2005, the Investment Corporation owned a portfolio of 31 properties with a total acquisition costs of ¥69,132 million.
Using the original network of the Asset Management Company, the Investment Corporation acquired 3 office buildings in the Tokyo Metropolitan
Area and 1 residential property in the Other Regional Areas during the second fiscal period with a total acquisition costs of ¥12,302 million. As aresult, the number of properties owned as of April 30, 2006 stood at 35, with a total acquisition costs of ¥81,434 million.

Looking at the portfolio

as a whole, 59.2% was comprised of office buildings, 25.5% of residential properties and 15.2% retail properties on an acquisition price basis. In
addition, the occupancy ratio as of the end of the second fiscal period was 94.9%, reflecting stable investment and asset management.
＜External Growth Performance after IPO＞

Type of Use
Area

Immediately following IPO(as of August 1, 2005)
Total
Ratio
Acquisition Costs(%)(Millions of Yen)First Fiscal Period(as of October 31, 2005)
Total
Ratio
Acquisition Costs(%)(Millions of Yen)

Second Fiscal Period(as of April 30, 2006)
Total
Ratio
Acquisition Costs(%)(Millions of Yen)

Office Buildings

32,19752.7

37,76754.6

48,26959.2

Residential Properties

18,98631.0

18,98627.4

20,786

25.5

Retail Properties

9,900

16.2

12,37917.912,379

15.2

Total

61,083100.0

69,132100.0

81,434

100.0

Tokyo Metropolitan Area

58,80296.2

61,281

88.6

71,783

88.1

Other Regional Areas

2,281

3.7

7,851

11.3

9,651

11.8

Total

61,083100.0

69,132100.0

81,434100.0

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

Percentages are rounded down to the nearest first decimal place.

13

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 second fiscal period. In establishing a single point of contact for all matters relating to property management activities, theInvestment Corporation strives to secure consistent policies, specifications and procedures along with ensuring swift and quality service. As of
April 30, 2006, the investment portfolio maintains a high occupancy ratio.
management.

The Investment Corporation is satisfied with the quality of property

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 April 30, 2006 (excluding Jinnan-zaka Frame and tenants without approval for subleasing).

In appointing amember of the Kenedix Group as lessee, the Investment Corporation is able to provide better tenant-oriented leasing management throughKenedix Advisors. At the same time, this scheme allows the Investment Corporation to more 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. For example, steps are being taken to negotiate with insurance brokers to improve fire insurance cover terms and conditions
while reducing premiums paid.

Labor saving measures in connection with operating schemes and initiatives to standardize contracts have also

contributed to minimizing real estate trust commissions. Furthermore, the Investment Corporation is implementing a gradual review of building
management responsibilities and 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 of December 2005. As a part of this survey theadministration officers of each tenant and tenant employees were asked to respond to 40 questions covering each building and its facilities as wellas the nature and quality of operating and management services.
<Questions Covered by the Survey>
1. Building location and environment, external façade, entrance (design, access, lighting, other), lease space areas (air conditioning
system, lighting, ventilation, OA compliant, other), common use areas (elevators, toilets, kitchen facilities, smoking area, parking, other),management company service, status and standard of cleaning, security, fire prevention.
2. Remarks
On a scale of five, respondents were asked to rank each of the aforementioned questions.
pertaining to the strengths and weaknesses of each building.

The survey provided invaluable information

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) Funds Procurement and Acquiring Credit Ratings Accreditation
As of October 31, 2005, the balance of debt financing stood at ¥29.0 billion and comprised ¥19.0 billion of long-term debt and ¥10.0 billion ofshort-term debt. To support the acquisition of additional assets, the Investment Corporation undertook debt financing of ¥13.0 billion during thesecond fiscal period comprising ¥11.5 billion of long-term debt and ¥1.5 billion of short-term debt. As a result, the balance of debt financing as ofApril 30, 2006 stood at ¥42.0 billion comprising ¥30.5 billion of long-term debt and ¥11.5 billion of short-term debt.

Of this amount, ¥28.3 billion of

long-term debt as of April 30, 2006 was procured on a floating rate basis. In order to minimize the risk of future increase in interest rate, theInvestment Corporation has entered into interest-rate swap agreements, effectively fixing applicable interest rates.
Since its public listing through to the end of the second fiscal period, the Investment Corporation has undertaken flexible debt funding on bothan 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, theInvestment 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.

14

Long-term debt is repayable over terms exceeding 1 year.

As a part of efforts to diversify procurement methods, including the issue of corporate bonds, and to extend the average repayment period for
its overall debt financing, the Investment Corporation acquired a credit rating of A3 (Outlook: Stable) from Moody’s Investors Services, Inc. on
February 28, 2006. The ability to acquire a credit rating so quickly after its initial public listing is attributed to the high standing in which theInvestment Corporation, its investment policies, quality of individual assets, real estate portfolio, the unsecured and unguaranteed nature of debt
financing, quality of the Asset Management Company’s personnel and the support of the Kenedix Group are held.

<Credit Rating>Credit Rating Agency

RatingIssuer rating: A3

Moody’s Investors Services, Inc.

Outlook: Stable(4) Operating Results and Cash Distribution
As a result of the aforementioned management performance, the Investment Corporation reported operating revenues of ¥2,871 million for its
second fiscal period.

Operating income was ¥1,343 million, ordinary income ¥1,103 million and net income ¥1,101 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 second fiscal period was ¥13,884 per unit.

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
confirmed land and property price appreciation in the three major cities of Tokyo, Osaka and Nagoya. At the same time, land and property prices
for specific major cities in regional areas are also increasing.

On a nationwide basis, land and property prices are exhibiting increased

polarization. Appreciation is restricted to major economic and financial centers of the Tokyo Metropolitan Area (in particular the Central Tokyo),and specific regional areas that exhibit strong potential for population growth (for example, Sapporo in Hokkaido and Fukuoka 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
the foreseeable 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.

15

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.

(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/ ).

16

Financial Statements
18

Report of Independent Auditors

19

Balance Sheets

20

Statements of Income and Retained Earnings

21

Statements of Cash Flows

22

Notes to Financial Statements

17

Kenedix Realty Investment Corporation

BALANCE SHEETSAs of April 30, 2006 and October 31, 2005
In thousands of yen

As of April 30, 2006
AssetsCurrent assets:
Cash and bank deposits
Rental receivables
Consumption tax refundable
Other current assets
Total current assets
Property and equipment, at cost:
Land
Buildings and structures
Machinery and equipment
Tools, furniture and fixtures￥

Less-accumulated depreciation
Net property and equipment
Other assets:
Organization costs
OthersTotal assets

7,843,092
47,704
138,323
90,1708,119,289

As of October 31, 2005￥

5,175,750
94,432
910,191
34,737
6,215,110

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

44,730,358
25,483,112
373,723
592,488(918,354)
83,434,736(268,161)
70,911,520

40,717458,296

45,807
153,040￥

92,053,038￥

77,325,477￥

188,956￥

260,400

Liabilities and Unitholders’ Equity
Liabilities
Current liabilities:
Trade and other payables
Short-term debt
Deposits received

11,500,000
4,463

10,000,000
71,142529,895
16,574

380,244
1,515

Total current liabilities
Long-term debt

12,239,888
30,500,000

10,713,301
19,000,000

Leasehold and security deposits received
OthersTotal liabilities

3,528,348
397,786

2,976,381
108,541

46,666,022

32,798,223

44,285,003

44,285,003

1,102,013
45,387,016
92,053,038

242,251
44,527,254
77,325,477

Rents received in advance
Other current liabilities

Unitholders' equity
Unitholders' capital
Units Authorized: 2,000,000 units
Units Issued and outstanding: 79,370 units
Retained earnings
Total unitholders' equity
Total liabilities and unitholders' equity

￥

￥

19

Kenedix Realty Investment Corporation

STATEMENTS OF INCOME AND RETAINED EARNINGSFor the period from May 6, 2005 to October 31, 2005 and the period from November 1 ,2005 to April 30, 2006
In thousands of yen

From November 1, 2005
to April 30, 2006
Operating Revenues:
Rental revenues
Total operating revenues
Operating Expenses:
Property-related expenses
Asset management fees
Administrative service and custodian fees
Other operating expenses
Total operating expenses
Operating income

20￥

2,871,789
2,871,789

From May 6, 2005
to October 31, 2005￥

1,196,027
1,196,027

1,265,552
150,114
37,77774,363
1,527,806
1,343,983

518,875
56,23912,381
18,671
606,166
589,861

Non-Operating Expenses:
Interest expense
Financing related expense
Amortization of organization costs
New unit issuance costs
Initial public offering related costs
Others, net
Income before income taxes
Income taxes
Net income

164,607
11,743
5,090
55,1194,410
1,103,014
1,015
1,101,999

57,74185,496
5,090
66,675
124,9786,789
243,092841
242,251

Retained earnings at the beginning of period
Retained earnings at the end of period

14
1,102,013

242,251¥¥

Kenedix Realty Investment Corporation

STATEMENTS OF CASH FLOWSFor the period from May 6, 2005 to October 31, 2005 and the period from November 1, 2005 to April 30, 2006
In thousands of yen

From November 1,2005
to April 30,2006

From May 6, 2005
to October 31,2005

Cash Flows from Operating Activities:
Income before income taxes￥

1,103,014￥

243,092

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

661,924

275,432

Interest expense

164,607

57,741

Rental receivables

46,728(94,432)

Consumption tax refundable

771,868(910,191)

Trade and other payables(73,711)

260,400

Rents received in advance

149,650

380,244

Others, net(137,274)(51,157)

2,686,806

161,129(149,708)(57,082)(855)-

2,536,243

104,047(13,173,409)(71,179,681)

Proceeds from leasehold and security deposits received

772,228

3,008,243

Payments of leasehold and security deposits received(220,261)(31,862)

Payments of restricted bank deposits(82,013)(884,940)

Proceeds from restricted bank deposits

181,004-

Others, net(7,489)(10,000)(12,529,940)(69,098,240)

Proceeds from short-term debt

1,500,000

10,000,000

Proceeds from long-term debt

11,500,000

19,000,000-

44,285,003(239,970)-

12,760,030

73,285,003

Net change in cash and cash equivalents

2,766,333

4,290,810

Cash and cash equivalents at the beginning of period

4,290,810-

Changes in assets and liabilities:

Subtotal
Cash payments of interest expense
Cash payments of income taxes
Net cash provided by operating activities
Cash Flows from Investing Activities:
Purchases of property and equipment

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

Proceeds from issuance of units
Payment of dividends
Net cash provided by financing activities

Cash and cash equivalents at the end of period￥

7,057,143¥

4,290,810

21

Kenedix Realty Investment Corporation

Notes to Financial Statements
For the period from May 6, 2005 to October 31, 2005 and the period from November 1, 2005 to April 30, 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, Inc., 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.
At April 30, 2006, the Investment Corporation had total unitholders’ capital of ¥44,285 million with 79,370 investment units outstanding.

The

Investment Corporation owned a portfolio of 35 properties with total acquisition costs of ¥81,435 million containing total leasable area of 104,869
m2.

The occupancy ratio was approximately 94.9%. A portfolio of 35 properties consists of 15 office buildings, 18 residential properties and 2

retail properties.

30 properties are located in the Tokyo Metropolitan Area and 5 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 Commercial Code, 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 from 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 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 Ministryof Finance as required by the Securities and Exchange Law.

In preparing the accompanying financial statements, relevant notes have been

added and certain reclassifications have been made from the financial statements issued domestically in order to present them in a form that ismore 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.
Investment Corporation does not prepare consolidated financial statements because it has no subsidiaries.

22

The

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 November 1, 2005
to April 30, 2006

From May 6, 2005
to October 31, 2005

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

2-46 years

2-46 years

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

3-17 years

3-15 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).
applicable for all reporting periods beginning after April 1, 2005.

The new accounting standard was

The Investment Corporation has not recognized an impairment loss on any ofthe properties during the fiscal periods ended October 31, 2005 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 expensed as incurred. 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 from the 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 the issue 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 decreased new unit issuance costs by ¥1.631 billion and increased income before
income taxes by the same amount compared to the Conventional Method for the period from May 6, 2005 through October 31, 2005.
(f)

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 andincome statement accounts.

23

(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 purchase 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¥32 million and ¥121 million as of April 30, 2006 and October 31, 2005. 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. Cash and Cash Equivalents
Cash and cash equivalents consisted of the following as of April 30, 2006 and October 31, 2005:
In thousands of yen

As of April 30, 2006
Cash and bank deposits ................................................................................

¥ 7,843,092¥ 5,175,750

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

(785,949)(884,940)

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

¥ 7,057,143¥ 4,290,810

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

24

As of October 31, 2005

4. SCHEDULE OF PROPERTY
In millions of yen
As of April 30, 2006
Acquisition costs
Land

Accumulated
depreciation¥ 52,330

Buildings andstructures
Machinery andequipment
Tools, furnitureand fixtures
Total

¥

As of October 31, 2005
Book value

Acquisition costs－¥ 52,330¥ 44,730

30,981847

30,134

442

32

600
¥ 84,353

Accumulated
depreciation¥

Book value－¥ 44,730

25,483

246

25,237

410

374

10

364

39

561

592

12

580

¥ 918

¥ 83,435¥ 71,179¥ 268¥ 70,911

5. SHORT-TERM AND LONG-TERM DEBTS
The following summarizes short-term and long term debt outstanding as of April 30, 2006 and October 31, 2005:(As of April 30, 2006)
Classification

Drawdown Date

Repayment Date

Weighted-averageinterest rate

Balance(In millions of yen)August 1, 2005

July 31, 2006

0.40%

¥

Unsecured

September 21, 2005

September 20, 2006

0.35%

6,000

short-term debt

November 1, 2005

October 31, 2006

0.35%

1,000

March 1, 2006

February 28, 2007

0.36%

500

Subtotal

Unsecured
long-term debt

4,000

11,500August 1, 2005

July 31, 2008

0.87%

9,500

August 1, 2005

July 31, 2010

1.29%

9,500

November 1, 2005

October 31, 2007

0.77%

1,500

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

Subtotal

30,500Total¥

42,000(As of October 31, 2005)
Classification

Drawdown Date

Repayment Date

Weighted-averageinterest rate

Balance(In millions of yen)Unsecured

August 1, 2005

July 31, 2006

0.39%

¥

short-term debt

September 21, 2005

September 20, 2006

0.32%

Unsecured

August 1, 2005

July 31, 2008

0.87%

9,500

long-term debt

August 1, 2005

July 31, 2010

1.29%

9,500

6,000

Subtotal

10,000Subtotal
Total

4,000

19,000¥29,00025

6. PER UNIT INFORMATIONThe net asset value per unit as of April 30, 2006 and October 31, 2005 was ¥571,840 and ¥561,008.

Net income per unit as of April 30, 2006

and October 31, 2005 was ¥13,884 and ¥5,303.
The weighted average number of units outstanding of 79,370 and 45,683 was used for the computation of the amount of net income per unit asof April 30, 2006 and October 31, 2005.

7. 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 ¥1,102 million and ¥242 million for the periods ended April 30, 2006 and October 31, 2005. Such distributions were treated as deductible
distributions for purposes of corporate income taxes. The effective tax rate on the Investment Corporation’s income was 0.09% and 0.34% for
the periods ended April 30, 2006 and October 31,2005.

The following summarizes the significant difference between the statutory tax rate andthe effective tax rate:
From November 1, 2005
to April 30,2006

From May 6, 2005
to October 31,2005

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

39.39%

39.39%

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

(39.35)(39.25)

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

0.05

0.20

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

0.09%

0.34%

8. UNITHOLDERS’ EQUITYThe Investment Corporation issues only non-par value units in accordance with the Investment Trust Law. The entire amount of the issue
price of new units is designated as stated capital. The Investment Corporation is required to maintain net assets of at least ¥50 million as
required by the Investment Trust Law.

9. 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 November 1, 2005
to April 30, 2006
Property management fees .................................................................................

26

From May 6, 2005
to October 31, 2005

¥ 104,453¥ 43,711

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

8,400

62,000Construction management fees ...........................................................................

16,3062,334

(b) Transactions with Y.K. KDX1 (“KDX1”)
KDX1 is a wholly owned subsidiary of Kenedix, Inc.. On August 1, 2005 the Investment Corporation acquired 2 properties from KDX1 for¥4,483 million.

On November 1, 2005, the Investment Corporation acquired additional property from KDX1 for ¥5,950 million. The purchaseprice of these properties was determined based on an independently appraised value at the time of acquisition.
(c) Transactions with Kenedix, Inc.
Kenedix, Inc. provides the Investment Corporation with real estate brokerage services.

For these services, the Investment Corporation pays

Kenedix brokerage fees. Transactions with Kenedix are as follows:
In thousands of yen

From November 1, 2005
to April 30, 2006
Brokerage fees ....................................................................................................

From May 6, 2005
to October 31, 2005-

¥ 786,890

10. 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 6, 2005 to October 31, 2005 and from November
1, 2005 to April 30, 2006 consist of the following:
In thousands of yen

From November 1, 2005
to April 30, 2006

From May 6, 2005
to October 31, 2005

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

¥

2,220,814¥

930,805

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

353,853

136,844

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

2,574,667

1,067,649

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

86,12930,728

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

152,653

76,389Others:Miscellaneous ................................................................................................

58,34021,261

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

297,122

128,378

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

¥

2,871,789¥

1,196,027

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

¥

322,416¥

124,553

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

650,193

268,161

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

146,890

68,784

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

9,328

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

8,621

－
2,603

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

55,11721,807

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

21,337

9,322

Others ................................................................................................................
Total property-related expenses ...........................................................................

51,650¥1,265,552

23,645¥

518,87527

11. 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 April 30, 2006 and October 31, 2005 are as follows:
In thousands of yen

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

As of April 30, 2006

As of October 31, 2005¥¥

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

¥

811,080

973,916

3,273,632

3,864,685

4,084,712¥ 4,838,601

12. 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 April 30, 2006:(As of April 30, 2006)
Type
Interest-rate swap:
Fixed rate payable and floating rate receivable

28

Notional amount¥36,300 million

Fair value¥398 million

Unrealized gain
¥398 million

13. PROPERTY INFORMATION
Details of the property portfolio as of April 30, 2006 were as follows:
Type

Office Buildings

Location

Residential Properties

Retail Properties

Tokyo Metropolitan
Area

Other Regional
Areas

Tokyo Metropolitan
Area

Other Regional
Areas

Tokyo Metropolitan
Area

13

2

15

3

2

Number of properties
Property information(In millions of yen)
Acquisition price¥ 41,269¥ 7,000¥ 18,135¥ 2,651¥ 12,380

50.7%

8.6%

22.3%

3.3%

15.2%

Net book value

42,018

7,127

18,7082,827

12,756

Appraisal value at year end

42,422

7,080

18,4382,660

13,500

50.4%

8.4%

21.9%

3.2%

16.1%

Percentage of total acquisition costs

Percentage of total appraisal value
Financial results for the period ended April 30, 2006
(In thousands of yen)
Rental and other operating revenues¥ 1,374,031¥ 398,814¥ 613,346¥ 92,236¥ 393,362

Rental revenues

1,220,100

335,345572,382

84,423362,417

Other revenues

153,931

63,46940,964

7,813

30,945

Property-related expenses

290,610

129,492

100,532

35,00559,720Property management fees

141,856

91,58147,444

15,381

26,154

Taxes

－

2,498

872

5,958

－

Utilities

89,75322,017

7,810

2,535

24,775

Repairs and maintenance

30,572

6,447

12,986

3,275

1,837

Insurance

2,905

3,269

1,399

646

402

Trust fees and other expenses

25,5243,680

30,021

7,210

6,552

NOI (Net Operating Income)

1,083,421

269,322

512,81457,231

333,642

Depreciation expenses

280,142

124,457

150,163

30,53364,898Operating income from property leasing activities

803,279

144,865

362,651

26,698

268,744

Capital expenditures

337,62143,986

24,837

17,70686,301

NCF (Net Cash Flow)

745,800

225,336487,977

39,525247,341

A breakdown of property-type as of April 30, 2006 was as follows:

Class of assets

Property type
Office Buildings

Area
Tokyo Metropolitan Area

Balance at the end of period(In millions of yen)¥

Other Regional Areas
Subtotal

Property and equipment

Residential Properties

Tokyo Metropolitan Area
Other Regional Areas
Subtotal

Retail Properties

Tokyo Metropolitan Area
Subtotal

Total

Percentage of
total assets

42,018

45.6

7,127

7.7

49,14553.3

18,708

20.3

2,827

3.1

21,53523.4

12,75613.9

12,756

13.9

83,436

90.6

Bank deposits and other assets

8,617

9.4

Total assets

92,053100.0

Total liabilities

46,66650.7

45,387

49.3

Net assets¥

2914. Subsequent Events
1.

Issuance of New Investment UnitsOn April 3, 2006 and April 19, 2006, the Board of Directors of the Investment Corporation resolved to issue new investment units asfollows. The payments were completed on May 1, 2006 and May 26, 2006, respectively. As a result of the issuance of additional
investment units, the Investment Corporation had total unitholders’ capital of ¥88,729,652,470, with 157,000 investment units outstanding
as of May 26, 2006.
(1) Issuance of New Investment Units through Public Offering
Total number of newly issued units:73,660 units

Japanese Primary Offering:

50,370 units

International Offering:

23,290 units

Offer price per unit:¥593,096

Total amount of offerings:¥43,687,451,360

Issue price per unit:¥572,519

Net proceeds:¥42,171,749,540

Payment date:

May 1, 2006

Delivery date of investment unit certificates:

May 2, 2006

Starting date of the computation for cash distribution:

May 1, 2006

(2) Issuance of New Investment Units through Third-party Allotment

30

Total number of newly issued units:

3,970 per unit

Issue price per unit:¥572,519

Net proceeds:¥2,272,900,430

Payment date:

May 26, 2006

Delivery date of investment unit certificates:

May 26, 2006

Starting date of the computation for cash distribution:

May 1, 2006

2. Debt Financing
On May 1, 2006, the Investment Corporation obtained debt financing as follows:(1) Series 7-A
Lenders:

Sumitomo Mitsui Banking Corporation

Amount Borrowed:

The Bank of Tokyo-Mitsubishi UFJ, Ltd.
¥2,000 million

Interest Rate:
Repayment Due Date:

0.36909％ floating rate of interest (Note)
April 30, 2007

Collateral:

Unsecured, unguaranteed

Note: The interest rate covers the period commencing May 1, 2006 through July 31, 2006.

Thereafter, the interest rate shall becalculated based on the three-month yen TIBOR +0.23%.

(2) Series 7-B
Lenders:

The Chuo Mitsui Trust and Banking Co., LimitedAozora Bank, Ltd.
The Bank of Tokyo-Mitsubishi UFJ, Ltd.
Mitsubishi UFJ Trust and Banking Corporation
Resona Bank, Ltd.

Amount Borrowed:¥6,500 million

Interest Rate:

0.53909％ floating rate of interest (Note)

Repayment Due Date:

April 30, 2009

Collateral:

Unsecured, unguaranteed

Note: The interest rate covers the period commencing May 1, 2006 through July 31, 2006.
calculated based on the three-month yen TIBOR +0.40%.

Thereafter, the interest rate shall beInterest on variable interest rate loans has been fixed at 1.62875%

until April 30, 2009, through interest-rate swap transactions.

(3) Series 7-C
Lenders:

Aozora Bank, Ltd.
Mitsui Sumitomo Insurance Co., Ltd.

Amount Borrowed:¥2,500 million

Interest Rate:

0.63909％ floating rate of interest (Note)
2.19875％ fixed rate of interest

Repayment Due Date:

April 30, 2011

Collateral:

Unsecured, unguaranteed

Note: The interest rate covers the period commencing May 1, 2006 through July 31, 2006.
calculated based on the three-month yen TIBOR +0.50%.

Thereafter, the interest rate shall beInterest on variable interest rate loans has been fixed at 2.19875%

until April 30, 2011, through interest-rate swap transactions.

(4) Series 7-D
Lender:Development Bank of Japan

Amount Borrowed:¥5,000 million

Interest Rate:

2.73125％ fixed rate of interest

Repayment Due Date:

April 30, 2016

Collateral:

Unsecured, unguaranteed

31

32

Management Report
34

Structure of Investment Corporation

34

Outline of the Asset Management Company

35

The Kenedix Group

35

Memorandum of Understanding with Kenedix and Kenedix Advisors

37

Policies with Respect to Certain Activities

39

Our Investment Objective and Strategy

39

Distributions

40

Movements in Investment Units Issued and Outstanding

40

Trends of Investment Unit Certificate Price on the Tokyo Stock Exchange

40

The Main Investors of the Investment Corporation

41

Debt Financing

41

Investment Corporate Bonds

42

Portfolios Outline

43

Capital Expenditure

44

Expenses and Liabilities

44

Details of Related-Party Transactions

33

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

Accounting Auditor

Investment Corporation

Kenedix, Inc.
Kenedix Advisors Co., Ltd.

Ernst & Young ShinNihon
Kenedix Realty Investment Corporation④

Asset Management Company
Administrative Agent for Directors’ Meeting①

Mizuho Trust & Banking Co., Ltd.

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

Kenedix REIT Management, Inc.

Administrative Agent
Asset Custodian②

General Meeting of Unitholders

Trasfer Agent③

The Chuo Mitsui Trust and Banking Co., Limited①

Asset Management Agreement / Operating Agency Agreement②③Administrative Agency Agreement / Asset Custodian Agreement
Transfer Agency Agreement④

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

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 Ch ar t :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(Note) Ratio represents the number of stocks owned in proportion to the total number of outstanding stocks.

34

Ratio (Note)
100.00%

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.

35

• 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.

36

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 retail properties, such as urban commercial buildings.
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 estate37

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 morethan 50% office buildings, more than 20% residential properties and less than 30% retail and other 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 in the future, 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.

38

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 retail properties inmajor 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, residential properties in densely populated areas with a highnumber of households and, to a lesser extent, retail properties in central urban commercial districts. We believe that our diversified strategy
gives us the flexibility to take advantage of a range of market opportunities to acquire a diverse portfolio of attractive properties, while lowering ouroverall portfolio risk and differentiating 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

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

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

Unappropriated Retained Earnings¥242,251,377¥1,102,013,492

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）
－
（ － ）

39

Movements in Investment Units Issued and Outstanding
Movements in unitholders’ capital and the number of investment units issued and outstanding during the first and second fiscal periods are
summarized in the following table. (Note 4)
Settlement Date

Investment Units Issued andOutstanding (Units)
Increase
Balance(Decrease)400
400
75,00075,4003,970
79,370Particulars

May 6, 2005
July 20, 2005
August 16, 2005

Private placement
Public offering
Third-party allocation

Unitholders’ Capital(Millions of Yen)
Increase
Balance(Decrease)200
200
41,86842,0682,216
44,285

Remarks(Note 1)
(Note 2)
(Note 3)

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. From the end of the second fiscal period, the Investment Corporation issued additional new investment units (offer price: ¥593,096; issue price: ¥572,519) asa means to fund the acquisition of additional properties (payment date: May 1, 2006).

Furthermore, the Investment Corporation issued additional new

investment units by way of third-party allocation (issue price: ¥572,519) to assist in the acquisition of new investment properties (payment date: May 26,2006).

As a result, unitholders’ capital as of May 26, 2006 stood at ¥88,729 million with 157,000 investment units issued and outstanding.

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

The Main Investors of the Investment Corporation
The main investors of the Investment Corporation as of April 30, 2006 are as follows.
Number ofInvestment Units
owned

Ratio (%)

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

8,559

10.78

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

5,160

6.50

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

4,970

6.26

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

4,580

5.77

Kenedix, Inc.

2-2-9, Shinbashi, Minato-ku, Tokyo

3,970

5.00

Nanto Bank, Ltd.

16, Hashimotocho, Nara-shi, Nara

1,963

2.47

AIU Insurance Company ORD-4 Lending

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

1,575

1.98

Trust & Custody Services Bank, Ltd.
(securities investment trust account)

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

1,390

1.75

The Hiroshima Bank, Ltd.

1-3-8, Kamiyacho , Naka-ku, Hiroshima

1,273

1.60

State Street Bank and Trust Company

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

1,175

1.48

34,615

43.61

Name
Goldman Sachs International
Japan Trustee Services Bank, Ltd.
(trust account)
Nikko Cititrust and Banking Co.
(investment trust account)
The Master Trust Bank of Japan, Ltd.
(trust account)

Address

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

40Debt Financing
Debt financing on a financial institution basis as of April 30, 2006 are as follows.
Balance atthe end ofPrevious
Period(Millions of Yen)

Balance atthe end ofcurrent
Period(Millions of Yen)

Aozora Bank, Ltd.

2,000

2,000

The Bank of Tokyo-Mitsubishi UFJ, Ltd.

1,000

1,000

500

500

Mitsubishi UFJ Trust and Banking Corporation

500

500

The Chuo Mitsui Trust and Banking Co., Ltd.

3,000

3,000

1,000

1,000

1,000

1,000

1,000

1,000

－

1,000

0.347

－

500

0.361

10,00011,500Mitsubishi UFJ Trust and Banking Corporation

2,700

2,700

The Norinchukin Bank

2,500

2,500

1,200

1,200

1,000

1,000

The Chuo Mitsui Trust and Banking Co., Ltd.

1,000

1,000

The Bank of Tokyo-Mitsubishi UFJ, Ltd.

800

800

Classification
LenderResona Bank, Ltd.

Short-Term Loan

Sumitomo Mitsui Banking Corporation
Aozora Bank, Ltd.

Drawdown
Date

August 1,
2005

September 21,
2005

Resona Bank, Ltd.
Mitsubishi UFJ Trust and Banking Corporation
Sumitomo Mitsui Banking Corporation

November 1,
2005
March 1,
2006
Subtotal

The Chiba Bank, Ltd.
Sumitomo Mitsui Banking Corporation

August 1,
2005

Resona Bank, Ltd.

300

300

Sumitomo Mitsui Banking Corporation

3,750

3,750

3,750

3,750

1,500

1,500

500

500

－

1,500

The Chuo Mitsui Trust and Banking Co., Ltd.

Long-Term Loan

Mitsubishi UFJ Trust and Banking Corporation

August 1,
2005

Resona Bank, Ltd.
Sumitomo Mitsui Banking Corporation

November 1,
2005

The Norinchukin Bank

November 1,
2005

－

3,000

－

500

December 8,
2005

－

1,500

－

500

－

800

－
－

500

March 16,
2006

－

2,500

Subtotal

19,00030,500Total

29,00042,000Resona Bank, Ltd.
Aozora Bank, Ltd.
Resona Bank, Ltd.
The Chiba Bank, Ltd.
Aozora Bank, Ltd.

March 1,
2006

Mitsui Sumitomo Insurance Co., Ltd.
The Bank of Tokyo-Mitsubishi UFJ, Ltd.

Interest
Rate(Note 1)

Repayment
Date

0.397

July 31,
2006

Payment
MethodFull onmaturity
0.347

September 20,
2006

Usage

Remarks(Note 2)

Unsecured/
Unguranteed(Note 2)

Unsecured/
Unguranteed

October 31,
2006
February 28,
2007

0.86875

July 31,2008

1.28750

July 31,2010

0.76875

October 31,
2007

1.09

October 31,
2008

1.0975

December 7,
2008

1.44875

February 28,
2009

1.47625

March 16,2009

Full onmaturity

700

Notes :
1. The average interest rate is the weighted-average interest rate for the fiscal period.
transactions with the aim of minimizing the risk of future increase in interest rates.

The Investment Corporation entered into interest-rate swap

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 Corporate Bonds
The Investment Corporation had not issued investment corporate bonds as of April 30, 2006.

41

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

First Fiscal Period(As of October 31, 2005)
Total Amount Held
Ratio
(Millions of Yen)(%)
31,237
40.4
7,207
9.3
38,444
49.7
18,83224.4
899
1.2
19,732
25.5
12,734
16.5
12,734
16.5
70,911
91.7
6,413
8.3
77,325100.0

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
92,053100.0

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).

Purchase and Sales during the Second Fiscal Period
Purchase
Type

Area

Office Buildings

Tokyo
Metropolitan
Area

No.

Property Name

Date of
Acquisition

Acquisition
Price(Millions of Yen)

Date of
Sales

Sales
Book
Capital Gain
Price
Value
(Loss)(Millions of Yen) (Millions of Yen) (Millions of Yen)

A-13

Belles Modes
Building

November 1,
2005

5,950

-

-

-

-

A-14

KDX Funabashi
Building

March 1,
2006

2,252

-

-

-

-

A-15

KDX Hamacho
Building

March 16,
2006

2,300

-

-

-

-

10,502

-

-

-

-

1,800

-

-

-

-

1,800

-

-

-

-

12,302----

Total of Office Buildings

Residential
Properties

Other Regional
Areas

Sales

B-18

Venus Hibarigaoka

Total of Residential Properties
Total

December 8,
2005

Note : Acquisition prices are the sales amounts recorded in trust beneficiary interest agreements exclusive of associated costs such as brokerage fees andtaxes.

42

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 third
fiscal period (May 1, 2006 to October 31, 2006) are as follows. Planned capital expenditure includes portions classified into expenses foraccounting purposes.

Property Name
(Location)

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

PurposeSchedule

KDX Hamacho Building(Chuo-ku, Tokyo)

Conversion of leasable ares,
renewal work for interior facilities ofco-owned areas, otherMay 2006 to
October 2006

79

－

－

Chigasaki Socie Ni-bankan(Chigasaki, Kanagawa)

Large-scale renovation, other

As above

54－－

Venus Hibarigaoka(Sapporo, Hokkaido)

Renwal work for interphone system,
building exterior works, other

As above45－－

Dai-ichi Kayabacho Building(Chuo-ku, Tokyo)

Upgrade of external façade and air
conditioning system, other

As above

44－－

KDX Shin-Yokohama Building(Yokohama, Kanagawa)

Reparis and maintenance of exterior
façade, other

As above

43－－

Capital Expenditures During the Second Fiscal Period
The Investment Corporation undertook the following major capital expenditures as follows. In the second fiscal period, the Investment
Corporation completed work across its entire portfolio totaling ¥565 million.

This total comprised of ¥510 million in capital expenditures and ¥55

million for repairs, maintenance and renovation expenses.
Property Name

Purpose(Location)

Amount of Capital Expenditures

Schedule(Millions of Yen)

Nihonbashi 313 Building(Chuo-ku, Tokyo)

Installation of individual air
conditioning system, otherNovember 2005 toApril 2006

271

Yoyogi M Building(Shibuya-ku, Tokyo)

Screen installation, renovation ofentrance area, otherNovember 2005 toApril 2006

83

Hakata-Ekimae Dai-2 Building(Fukuoka, Fukuoka)

Toilet repairs and improvement work,
renovation of entrance area, otherNovember 2005 toApril 2006

36

Others117

Portfolio Total

510

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

Reserve for the end of the previous period－

92

Reserve for the fiscal period under review

92

130

Reversal of reserve for the fiscal period under review－

57

Reserve bring to the next period

92

165

43

Expenses and Liabilities
Details for Expenses
Item
Asset management fees
Custodian fees
Administrative service fees
Directors’ salaries
Audit fees
Other operating expenses
Total

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

First Fiscal Period
56,239
1,272
11,1095,352－
13,31987,291( Thousands of Yen)
Second Fiscal Period
150,114
10,23327,5445,400
4,000
64,963
262,254

Note : In addition to the asset management fees indicated in the above table, a total of ¥179,030 thousand for the first fiscal period and ¥46,636 thousand forthe second 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(Millions of Yen)
Purchase and Sale Amounts
Amount of PurchaseAmount of Sale
12,302
Total

Amount of Purchase from Related-Parties

Details of related-party transactions
Y.K. KDX1－
Amount of Sale to Related-Parties

5,950

－

5,950

－

(2) Fees(Thousands of Yen)
Total fees

129,159
Fees Concerning Related-party Transaction

129,159 (100.0％)

Details of fees and other payments to related parties:【Kenedix Advisors Co., Ltd.】
Leasing management fees

104,453 (80.9％)

Management transfer fees

8,400

(6.5％)

Construction supervision fees

16,305 (12.6％)

Subtotal

129,159 (100.0％)

Total

129,159 (100.0％)

Note: Related parties are defined under Implementation Ordinance No. 20 of the Investment Trust Law and include companies with whom the Investment
Corporation has concluded asset management agreements.

Related-party transaction details and commissions paid to Kenedix Advisors and Y.K.

KDX1 during the second fiscal period are listed in the above table.

44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 second fiscal period, April 30, 2006, areprovided in the following table.
KRI Closing Price
VolumeAggregate Market Value as of April 28, 2006: ¥48,574 million
Highest Trading Price: ¥670,000 (February 9, 2006)
Low Trading Price: ¥573,000 (October 19, 2005)

Volume (Unit)KRI Closing Price (Yen)

11,000660,000

3,000

640,000

2,500

620,000

2,000

600,000

1,500

580,000
Offer Price at IPO¥580,000

1,000

560,000

500

540,0000
2005/7/21

2005/8/31

2005/9/30

2005/10/31

2005/11/30

2005/12/31

2006/1/31

2006/2/28

2006/3/31

520,000
2006/4/28

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 1st fiscal period(79,370 units)

Financial Institutions(incl. Securities companies)
38,862 units (48.96%)

Other Domestic
Corporation
9,837 units (12.39%)

Foreign Corporation andIndividuals
12,682 units (15.97%)

Individuals andOthersEnd 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 andOthers17,989 units (22.66%)

12,345 units (15.55%)

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

Information Provided on the Investment Corporation’s Web site
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 anoffer 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 not guarantees
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, these forward-looking
statements are necessarily dependent upon assumptions, estimates and data that may be incorrect or imprecise and involve known and unknown risks anduncertainties. Accordingly, readers of this document should not interpret the forward-looking statements included herein as predictions or representations of 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 containedin this documents.

Kenedix Realty Investment Corporation
Corporate Data
(As of June 12, 2006)
Corporate Office
Daiichi-Tekko Bldg. 8F
1-8-2, Marunouchi, Chiyoda-ku,
Tokyo, 100-0005 Japan
Tel +81-3- 5288-7629
Fax +81-3- 3216-7000
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
Daiichi-Tekko Bldg. 8F
1-8-2, Marunouchi, Chiyoda-ku,
Tokyo, 100-0005 Japan
Tel +81-3- 5288-7629
Fax +81-3- 3216-7000

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