Advance Residence Investment Corporation
Questions & Answers at the Presentation Meeting
For the Results of the 9th Fiscal Period Ended January 2015
Date & Time:

15:30 ‐ 16:30, March 13, 2015

Presenter:

Kenji Kousaka, President, AD Investment Management Co., Ltd

Note:

In the text below, “ADR” refers to Advance Residence
Investment Corporation. Also, questions of a similar nature
have been consolidated.

Q&As are listed in chronological order

External growth
Q1.

During the fiscal period ended January 2015, ADR engaged in significant portfolio
replacement activity through acquisitions and disposals. Given that, what is your policy
regarding ongoing property dispositions going forward? Also, in taking on the portfolio
replacement initiative, you managed to acquire properties at low prices while selling
properties in the portfolio for high prices. How were you able to do that?
A1.

We are not actively looking to dispose of our assets. We only dispose of them when we areoffered a good deal. Going forward, we hope to do the same.
We were able to acquire properties at relatively low prices during the fiscal period ended
January 2015 mainly for two reasons: first, we acquired many properties using bridge funds
arranged in the past when prices were a lot more reasonable; and second, rural properties
accounted for a relatively high proportion of the properties acquired. Meanwhile, many ofthe properties sold were located in central Tokyo’s “premium area.” I am not sure what kindof business model those who purchased the properties have in mind, but I think they
probably have their own commercial opportunities of some sort.

Q2.

What do you perceive as attainable in terms of the NOI yield and yield after depreciation withrespect to properties to be acquired going forward?
With respect to the current sponsor pipeline (refer to page 12 of the earnings presentationmaterials), you explained that the acquisition cost for a total of 23 properties was around 36
billion to 37 billion yen. What were the yield level assumptions used to estimate those costs?
A2.

We aim to achieve external growth that improves the quality of our portfolio, despite thedifficult environment for acquisitions. Therefore, the yield level of our existing portfolio canbe considered as our hurdle rate.
When we receive an inquiry from the sponsor on what the yield should be for thedevelopment projects intended to be sold to us, we tell them a yield of around 5% forproperties in the 23 wards of Tokyo. That is the yield level assumption used to estimate thetotal volume.
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Q3.

Presumably ADR could find itself faced with increasing demands from investors on the basis of
their comparing ADR with other REITs. For instance, investors could potentially urge you to buy
more properties. If that were to happen, would you hold firmly to your conservative stance onthe NOI yield level of the existing portfolio? Or, would you to some degree consider lowering
your hurdle rate?
A3.

Q4.

In the residential sector, we basically think that it will be difficult to improve throughoperation upon the yield at the time of purchase. Therefore, we don’t intend to lower ourhurdle rate, but instead to continue acquiring properties at yields we deem appropriate.

Would you foresee the share of acquisitions from sponsors to increase for future
property acquisitions?
Also, are there any advantages in acquiring properties through the bridge funds goingforward?
A4.

Up until now, we have achieved external growth without relying too much on oursponsors. Hence, the share of properties acquired from the sponsors is only around 20%.
Going forward we think the share will increase because it will become more difficult toacquire properties on the open market at a reasonable price. We will also continue toacquire properties using our own sourcing routes.
Although we would like to continue in creating bridge funds should there be any
opportunities to do so, with the soaring property prices, it has currently become difficult
to acquire properties at a yield that will make economic sense to create one.

Q5.

Given that prices are rising in the senior housing market, where do you see yourself headedwith respect to properties in that sector?
A5.

When acquiring properties in the senior housing sector we look for a certain yield premium
over that sought in the residential sector. As such, given the current market environment, wehave no interest in acquiring properties in the senior housing sector.

Measures regarding internal growth and aged properties
Q6.

According to page 14 of the earnings presentation materials, rents increased for the first timesince the merger this fiscal period. Could you tell me why?
A6.

Rents increased partially due to our initiatives to perform daily repairs and upgrade
properties, but the higher rents were mainly due to tightening supply. In other words, thelimited supply of new rental housing on the market has heightened demand for REIT
properties.

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Q7.

The average age of buildings in the portfolio is 9.3 years. What are your thoughts on that? Also,
where are you going in terms of initiatives related to property repairs and upgrades against a
backdrop of increasing capital expenditures?
A7.

In the residential sector, generally buildings may be considered adequate for ongoinginvestment purposes up to the 15-year point when equipment renewals start to become
necessary. However, if the properties are structurally sound, there is no reason we should
dispose of the properties. I would like to show that J-REIT is the vehicle that can holdproperties for a longer term, such as 30 or even 40 years. While our 9.3-year averagebuilding age is not exactly young, by properly maintaining the properties through various
initiatives I would like to keep them under our management for the long term.
Meanwhile, whereas capital expenditures are increasing partially due to somewhat higher
fees for repair and renovation work, we anticipate that spending related to repairs will keep
edging up given the need to address issues of aging. As such, depending on location, size ortype of properties, for units having rent increase potential, upgrade work will be
implemented and equipment and fixtures will be replaced for units where work is needed tomaintain the rent level. By doing so, we aim to build a portfolio that enables us to manage
properties over the long term.

Target for Earning per unit
Q8.

At the earnings presentation held in September 2014, we were told that you would betargeting EPU of between 4,700 and 4,800 yen, after having surpassed EPU of 4,500 yen.
However, in today’s presentation we were told that EPU growth would be at no more thanaround 130 yen (refer to page 25 of the earnings presentation materials), even if you pursue
external growth by leveraging your currently available capacity for acquisitions. Although you
may be able to achieve EPU of 4,700 yen, what steps do you intend to take in order to bring
EPU up to the 4,800 yen mark going forward?
A8.

Our medium- to long-term EPU target remains unchanged. That said, although we previously
stated that we hoped to hit that target over a period of two to three years, it now seems
likely that doing so will take a bit longer given the severity of price increases. However, ourposition remains unchanged in terms of aiming for EPU of between 4,700 and 4,800 yen
through an adequate combination of internal and external growth.

Disclaimer
This material contains forward-looking statements on future operating results,plans, business objectives and strategies of the company.
Forward-looking statements provide current expectations of future events based on
number of assumptions and include statements that do not directly relate to any
historical or current facts.
Forward‐looking statements are not guarantees of future performance and thecompany’s actual results may differ significantly from the results discussed in
the forward-looking statements.
This material is based on Japanese GAAP unless otherwise stated.
This material was not created for the purpose of soliciting investment in thecompany. Investments should be based on your own judgment and responsibility.

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