KENEDIX Realty Investment Corporation

Semiannual Report
Fourth Fiscal Period
From November 1, 2006 to April 30, 2007

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

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

Kenedix, Inc.
ÒA pioneer in real estate investment management services in JapanÓ
ÒAssets under management totaling approximately 540 billion yenÓShared vision, experience, andhuman resources

Kenedix REIT Management,Inc.

Extensive information network(Asset Management Company)

ÒTrends and TimingÓ
+ÒThree-point investment criteriaÓ
(Type, Area and Size)

Kenedix Realy Inverstment Corporation

ÒA diversified asset portfolio Ó(KENEDIX Selection)

Stable earnings

Sustainable investment asset growth

Real Estate Inverstment Trust Market(Broad investor base)Contents
Growth since IPO ......................................1
External Growth Performance...................1
To Our Unitholders....................................2
Investment Highlights ...............................3
KENEDIX Selection ...................................5
Portfolio Composition ...............................5

Properties Roster ......................................6
Q&A ...........................................................8
Financial Summary .................................11
Management Review & Policies..............12
Financial Statements ..............................19
Management Report ...............................35

Internal growth

External growth

Growth since IPO
2005

2006

Set goal of achieving
aggregate portfolio
acquisition value of¥200B by 2008

Year for achieving
aggregate portfolio
acquisition value of¥200B moved forward
to 2007

Targeted aggregate portfolio acquisition value of¥200B substantially achieved

Revised portfolio goals toplace more emphasis on
office properties

Revised memorandum of
understanding with the Kenedix Group

Increase in ratio of office properties

Implementation ofcustomer satisfaction(CS) survey

Renovations undertaken in
response to CS survey

Strongportfolio
focusing on
mid-sized
officeproperties

Goal of improving profitability

Rent levels increased
for new contracts

KDX standard
Goal of maintaining and improving NOI yield levels

Able to get unsecuredloans from inception

Financing

2007

Rated A3 by
Moody'sRated A+by JCR

Issuance of investment
units through global offering

July 2005
Initial public
offering (listing)

Shelf registration
for investment
corporation bonds

Shelf registration forinvestment units

Issuance of investment
corporation bonds

Issuance of investment
units through global offering

Establishment ofcredit facility

May 2006
First global
offering

May 2007
Second global
offering

JCR = Japan Credit Rating Agency, Ltd.

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

OfficeCentral urban retailResidential

197.1(77 props.)

200

175.1
(72 props.)

180
146.7
(64 props.)

160
140

70.0%

120

66.2%

100
80

61.0
(29 props.)

69.1(31 props.)

60
54.6%

81.4
(35 props.)

58.7%

59.2%

10.9%

9.1%

8.1%

30.2%

24.5%

21.8%

4th period(Ending
Apr. 30, 2007)

4th period
results announced(as of Jun. 11, 2007)

40

52.7%

20

16.2%

17.9%

15.2%

31.0%

27.4%

25.5%

0

Immediately
following IPO(Aug. 1, 2005)

1st period(Ending
Oct. 31, 2005)

2nd period(Ending
Apr. 30, 2006)

3rd period(Ending
Oct. 31, 2006)

Note: Amounts of less than ¥100 million omitted for total acquisition price and digits below decimal point omitted for ratios.

1

To Our Unitholders

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

Taisuke Miyajima

Taking this opportunity to present our fourth semiannual report, I would like to thank all unitholders for their continued
support and understanding as we strive to achieve stable earnings and sustainable growth. The operating results forthe fourth fiscal period are as follows.

Distribution per Unit ¥13,682
In its fourth fiscal period (November 1, 2006 to April 30, 2007), Kenedix Realty Investment Corporation (“Investment
Corporation”) recorded operating revenues of ¥5,778 million, operating income of ¥2,686 million and net income of¥2,148 million. As a result, cash distribution per unit for the fiscal period under review was ¥13,682.

External Growth - Investment focusing on mid-sized office buildings
The Investment Corporation conducted a review of its portfolio development policies in December 2006, in order toshift to investing more in office buildings. The Investment Corporation has been emphasizing investment in mid-sized
office buildings located in the Tokyo metropolitan area. Furthermore, to respond to recent conditions in the office leasing market (rent level increases, improvement of occupancy ratios, etc.), the Investment Corporation has decided toinvest mainly in office buildings and to make no new investment in residential properties for a certain period.

Based on the new portfolio development policy, the Investment Corporation acquired 10 office buildings and sold two
residential properties during the fiscal period under review. In addition, the Investment Corporation acquired five additional office buildings on June 1, 2007.

Internal Growth - Emphasis on cash flow
The Investment Corporation has increased its office portfolio NOI yield levels by increasing the newly contracted rent levels, increasing rent realizedat contract renewal and reviewing the operating costs. Taking into consideration economic and real estate market trends, the Investment
Corporation will continue to adopt a tenant-oriented approach to its leasing
activities to ensure timely and flexible responses as well as optimal tenantsatisfaction. Accordingly, the Investment Corporation will aim to increasecash flow by offering office environments with high tenant appeal.

2

Financial Strategy - Realization of flexible debt funding and stable financial management
Since its public listing in 2005, the Investment Corporation has maintained
the confidence of financial institutions. Thanks to these established relationships of trust, the Investment Corporation realized successive debt
financing at the time of property acquisition during the fiscal period underreview. In addition, the Investment Corporation issued ¥12.0 billion of
investment corporation bonds and provided diversified financing methods.
The Investment Corporation will continue to diversify its financing methods
while varying maturities to avoid refinancing risk, lengthen average debt
maturities and effectively fix interest rates to avoid the risk of future
increase in interest rates.

Investment Highlights
Cash Distribution for the Fourth Fiscal Period (November 1, 2006 to April 30, 2007): ¥13,682 per unit
Note: The fourth fiscal period commenced on November 1, 2006 and ended on April 30, 2007, a period of 181 days.

Investment Highlights
Results for the
Results for the Third
Results for the First
Fiscal Period
Fiscal Period
Second Fiscal Period

Results for the FourthFiscal Period

Operating Revenues¥1,196 million¥2,871 million¥5,288 million¥5,778 million

Operating Income¥589 million¥1,343 million¥2,565 million¥2,686 million

Ordinary Income¥243 million¥1,103 million¥2,125 million¥2,148 million

Net Income¥242 million¥1,101 million¥2,124 million¥2,148 million

Distribution per Unit

¥3,052¥13,884¥13,529¥13,682

Financial Results
Results for the First Results for the Second Results for the Third Results for the FourthFiscal Period
Fiscal Period
Fiscal Period
Fiscal Period

Total Assets¥77,325 million¥92,053 million¥160,314 million ¥188,400 million

Unitholders’ Equity¥44,527 million¥45,387 million¥90,933 million¥90,877 million

Unitholders’ Equity to Total Assets

57.6%

49.3%

56.7%

48.2%

Unitholders’ Equity per Unit

¥561,008¥571,840¥579,192¥578,839

3

A-13

KDX Kojimachi Building

A-40

Toranomon Toyo Building

A-2

KDX Hirakawacho Building

4

A-37

KDX Ochanomizu Building

A-21
A-32

KDX Shiba-Daimon Building

KDX Shinbashi Building

A-42

KDX Kyoto Karasuma BuildingKENEDIX Selection (As of June 11, 2007)
Office portfolio (44 properties)
Emphasis on mid-sized office buildings in the Tokyo metropolitan area, in particular central Tokyo.
Niigata
1 property ¥ 1.3B

Acquisition price(Tokyo metropolitan area)

Tokyo’s 23 wards
31 properties ¥104.1B

Sendai1 property ¥ 2.1B

Central Tokyo
24 properties ¥88.2B

Acquisition price(Other regional areas)

Tokyo’s 23 wards(excluding central Tokyo)
7 properties ¥15.9B

Greater Osaka area
4 properties ¥ 14.1B

Fukuoka
2 properties ¥ 3.7B

Tokyo’s 23 wards

Chiba
1 property ¥2.2B

Office portfolio(based on acquisition price)

Kanagawa
3 properties ¥9.1B

Hachioji, Tokyo
1 property ¥1.1B

Other regional areas(8 properties)

15.4%
CentralTokyo(23 properties)

63.9%
Notes:
1. Central Tokyo consists of the Chiyoda, Chuo, Minato, Shibuya and Shinjuku wards.
2. Acquisition price are rounded to the nearest ¥100 million.
3. Ratios indicate the total acquisition price for properties in each area in proportion to
the total acquisition price for all properties combined.
4. Ratios are rounded down to the first decimal place.

Tokyo metropolitan area
(excluding central Tokyo)(13 properties)

20.6%

Portfolio Composition (As of June 11, 2007) (77 properties)
Type

Area

Size

Residential:

Other Regional´7.5-10.0B:

Less than ´1.0B:

30 properties

Areas:

2 properties

14 properties

Total ¥43.052B

17 properties

Total ¥19.750B

Total¥34.576B

21.8%
Central

8.1%

70.0%

17.5%

Total ¥10.731B

10.0% 5.4%

´1.0-2.5B:´5.0-7.5B:

37 properties

9 properties

Total ¥51.183B

82.4%

25.9%

32.0%

Total
¥63.193B

urban
retail:26.5%

3 properties

Office:

Tokyo

Total
¥16.059B

44 properties

metropolitan area:

Total¥137.979B

60 properties´2.5-5.0B:

Total¥162.514B

15 properties

Total ¥52.233B

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

5

Properties Roster
Properties as of the end of the 4th period (72 properties)
Type

Area

Name

Other
Regional
Areas

Acquisition Price(¥M) (Note 1)

Completion
Date (Note 2)

Occupancy Ratio(%) (Note 3)

KDX Ochanomizu Building (Note 5)

Chiyoda ward, Tokyo

6,400

Aug. 1982

100.0

KDX Shiba-Daimon Building (Note 6)

Minato ward, Tokyo

6,090

Jul. 1986

93.0

KDX Kojimachi Building

Chiyoda ward, Tokyo

5,950

May 1994

97.1

KDX Nihonbashi 313 Building

Chuo ward, Tokyo

5,940

Apr. 1974

98.9

Toshin 24 Building

Yokohama, Kanagawa

5,300

Sept. 1984

100.0

KDX Hirakawacho Building

Chiyoda ward, Tokyo

5,180

Mar. 1988

100.0

Ebisu East 438 Building

Shibuya ward, Tokyo

4,640

Jan. 1992

100.0

Higashi-Kayabacho Yuraku Building

Chuo ward, Tokyo

4,450

Jan. 1987

89.1

KDX Toranomon Building

Minato ward, Tokyo

4,400

Apr. 1988

0.0

KDX Nishi-Gotanda Building

Shinagawa ward, Tokyo

4,200

Nov. 1992

73.7

KDX Hatchobori Building

Chuo ward, Tokyo

3,680

Jun. 1993

100.0

KDX Omori Building

Ohta ward, Tokyo

3,500

Oct. 1990

100.0

KDX Hamamatsucho Building

Minato ward, Tokyo

3,460

Sept. 1999

100.0

KDX Higashi-Shinjuku Building

Shinjuku ward, Tokyo

2,950

Jan. 1990

100.0

KDX Kayabacho Building (Note 7)

Chuo ward, Tokyo

2,780

Oct. 1987

84.9

KDX Shinbashi Building

Minato ward, Tokyo

2,690

Feb. 1992

100.0

Nakano ward, Tokyo

2,533

Aug. 1992

100.0

Yokohama, Kanagawa

2,520

Sept. 1990

100.0

Harajuku F.F. Building

Shibuya ward, Tokyo

2,450

Nov. 1985

100.0

KDX Kajicho Building

Chiyoda ward, Tokyo

2,350

Mar. 1990

100.0

KDX Hamacho Building

Chuo ward, Tokyo

2,300

Sept. 1993

100.0

FIK Minami Aoyama

Minato ward, Tokyo

2,270

Nov. 1988

100.0

KDX Funabashi Building

Funabashi, Chiba

2,252

Apr. 1989

100.0

KDX Okachimachi Building

Taito ward, Tokyo

2,000

Jun. 1988

100.0

Kanda Kihara Building

Chiyoda ward, Tokyo

1,950

May 1993

100.0

KDX Yotsuya Building

Shinjuku ward, Tokyo

1,950

Oct. 1989

100.0

KDX Shinjuku-Gyoen Building

Shinjuku ward, Tokyo

1,610

Jun. 1992

100.0

KDX Kiba Building

Koto ward, Tokyo

1,580

Oct. 1992

100.0

KDX Nishi-Shinjuku Building (Note 8)

Shinjuku ward, Tokyo

1,500

Oct. 1992

100.0

KDX Monzen-Nakacho Building

Koto ward, Tokyo

1,400

Sept. 1986

100.0

KDX Hon-Atsugi Building

Atsugi, Kanagawa

1,305

May 1995

100.0

KDX Hachioji Building

Hachioji, Tokyo

1,155

Dec. 1985

96.4

KDX Nogizaka Building

Minato ward, Tokyo

1,065

May 1991

100.0

Koishikawa Yoshida Building

Bunkyo ward, Tokyo

704

Oct. 1992

100.0

Portus Center Building

Sakai, Osaka

5,570

Sept. 1993

97.1

KDX Minami Semba Dai-1 Building

Osaka, Osaka

1,610

Mar. 1993

100.0

KDX Minami Semba Dai-2 Building

Osaka, Osaka

1,560

Sept. 1993

93.6

Hakata-Ekimae Dai-2 Building

Fukuoka, Fukuoka

1,430

Sept. 1984

95.8

KDX Niigata Building

Niigata, Niigata

1,305

Jul. 1983

83.9

115,979

Avg. 18.1 yrs

95.7

Tokyo
KDX Nakano-Sakaue Building
Metropolitan
KDX Shin-Yokohama Building
Area

OfficeLocation

Acquired during the 4th Period

Office (Total 39 properties) Sub Total
Frame Jinnan-zaka
Tokyo
Central Metropolitan Area KDX Yoyogi Building
Urban
Retail Other Regional Areas ZARA Tenjin Nishi-doriShibuya ward, Tokyo

9,900

Mar. 2005

91.7

Shibuya ward, Tokyo

2,479

Aug. 1991

100.0

3,680

Nov. 2005

100.0

16,059Avg. 4.0 yrs

94.7

Fukuoka, Fukuoka

Central Urban Retail (Total 3 properties) Sub Total

Notes:
1. Figures in the “Acquisition Price” column represent the real estate or trust beneficiary interest sales price (excluding consumption tax, rounded down to the nearest million yen) for each property acquired, identified in relevant Real Estate or Trust Beneficiary Interest Purchase and Sales Agreements.
2. The “Completion Date” column refers to the date on which construction was first completed. Each average age subtotals and total for the investment portfolio is shown as the weighted-averages portfolio age based upon acquisition prices with a base date of April 30, 2007.
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 are calculated as of October 31,
2006. Subtotals and total for the investment portfolio are weighted-averages.
4. The total acquisition price for 77 properties held by the Investment Corporation as of June 11, 2007.
5. As of June 11, 2007, the name of the property is the “Kenkyusha Building.” Plans are in place to change the name of the property to the “KDX Ochanomizu Building” on October 1, 2007. The same applies below.
6. As of June 11, 2007, the name of the property is the “Shuwa Dai-san Shiba Park Building.” Plans are in place to change the name of the property to the “KDX Shiba-Daimon Building” on September 1, 2007. The same applies below.
7. As of June 11, 2007, the name of the property is the “Dai-ichi Kayabacho Building”. The name of the property has been changed to the “KDX Kayabacho Building” on July 1, 2007. The same applies below.
8. As of June 11, 2007, the name of the KDX Shinjuku 286 Building is the “Aqusis Building,” “KDX Shinjuku 286 Building” is the “KDX Nishi-Shinjuku Building” is the “N.S. EXCEL Building,”“KDX Kyoto Karasuma Building” is the “Karasuma Building,” “KDX Hakata Building” is the “Hakata Ekimae Building,” and “KDX Sendai Building” is the “Sendai Honcho Park Building.”
Following the acquisition, the Investment Corporation intends to carry out procedures to change the name of the buildings. The same applies below.

6

Type

Area

Residence Charmante Tsukishima

Other
Regional
Areas

Acquisition Price

Chuo ward, Tokyo

5,353(¥M) (Note 1)

Completion
Date (Note 2)

Jan. 2004: Jan. 2006

Occupancy Ratio(%) (Note 3)

100.0

Regalo Ochanomizu .

Bunkyo ward, Tokyo

3,600

Storia Sirokane

Minato ward, Tokyo

3,150

Feb. 2003

Tre di Casa Minami Aoyama

Minato ward, Tokyo

2,460

Feb. 2004

92.5

Regalo Shiba-Kouen

Minato ward, Tokyo

2,260

Nov. 2005

100.0

Court Mejiro

Shinjuku ward, Tokyo

1,250

Mar. 1997

95.0

Apartments Motoazabu

Minato ward, Tokyo

1,210

Jan. 2004

91.7

Apartments Wakamatsu-Kawada

Shinjuku ward, Tokyo

1,180

Feb. 2004

97.8

Chigasaki Socie Ni-bankan

Chigasaki, Kanagawa

1,160

Jan. 1991

96.1

Court Nihonbashi-Hakozaki

Chuo ward, Tokyo

1,130

Feb. 2004

98.4

Shinjuku ward, Tokyo

1,130

Oct. 2005

90.9

Ota ward, Tokyo

1,110

Feb. 1997

97.2

Gradito Kawaguchi

Kawaguchi, Saitama

1,038

Feb. 2006

100.0

S-court Yokohama-Kannai

Yokohama, Kanagawa

945

Mar. 2003

97.4

Regalo Komazawa-Kouen

Setagaya ward, Tokyo

912

Feb. 2006

95.6

Court Motoasakusa

Taito ward, Tokyo

880

Jan. 2005

97.5

Court Shin Okachimachi

Taito ward, Tokyo

878

Oct. 2005

91.6

Bloom Omotesando

Shibuya ward, Tokyo

875

Mar. 2003

100.0

Human Heim Okachimachi

Taito ward, Tokyo

830

Dec. 2004

100.0

Primo Regalo Kagurazaka

Shinjuku ward, Tokyo

762

Jan. 2006

100.0

Primo Regalo Youga

Setagaya ward, Tokyo

730

Dec. 2005

100.0

Court Shimouma

Setagaya ward, Tokyo

638

Oct. 2005

96.7

Ashiya Royal Homes

Ashiya, Hyogo

2,330

Jun. 1991

89.0

Venus Hibarigaoka

Sapporo, Hokkaido

1,800

Mar. 1989

98.7

Tokyo
Metropolitan Court Nishinjuku
Area
Side Denenchofu

Residential

Location

Name: Feb. 2006

: May 1991

96.0
88.6

Regalo Ibaraki .

Ibaraki, Osaka

1,600

Collection Higashi-Sakura

Nagoya, Aichi

1,264

Mar. 2006

98.5

Renaissance 21 Hirao Jousui-machi

Fukuoka, Fukuoka

900

Oct. 2005

91.6

Montore Nishikouen Bay Court

Fukuoka, Fukuoka

826

Feb. 2006

97.2

Abreast Hara

Nagoya, Aichi

444

Feb. 2000

97.8

Abreast Hirabari

Nagoya, Aichi

407

Mar. 2000

100.0: Mar. 1993

95.0

Residential (Total 30 properties) Sub Total

43,052

Avg. 5.2 yrs

96.5

Total of 72 properties

175,090

Avg. 13.6 yrs

95.9

Minato ward, Tokyo

9,850

Aug. 1962

100.0

Shinjuku ward, Tokyo

2,300

Aug. 1989

100.0

KDX Kyoto Karasuma Building (Note 8)

Kyoto, Kyoto

5,400

Oct. 1982

97.1

KDX Hakata Building (Note 8)

Fukuoka, Fukuoka

2,350

Jul. 1982

96.9

KDX Sendai Building (Note 8)

Sendai, Miyagi

2,100

Feb. 1984

97.7

Properties Acquired in the 5th Period
Toranomon Toyo Building
Tokyo
Metropolitan Area KDX Shinjuku 286 Building (Note 8)

OfficeOther
Regional
Areas

Total of 77 properties

197,090 (Note 4)--

AcquisitionPrice

Sales Price

Completion Date(¥M) (Note 1)(¥M)(Note 2)

Properties Sold during the 4th Period
Type

Area

Name

Court Shinbashi
Tokyo
Residential Metropolitan Area Court Suitengu
Residential (Total 2 properties) Sub Total

Location
Minato ward, Tokyo

748

895

Dec. 1997

Chuo ward, Tokyo

659

708

Jul. 2003

1,407

1,603

-

7

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

Changes to the Memorandum of Understanding with Kenedix and Kenedix
Advisors

Q. Please elaborate on the changes to the Memorandum of Understanding announced in
April 2007.
A. As the sponsor company, Kenedix, Inc. has provided property information and support staff to the Investment
Corporation and the Asset Management Company. At the same time, the Investment Corporation believes that the role of
J-REITs in the Kenedix Group has increased in importance. Accordingly, the Investment Corporation revised theMemorandum of Understanding with Kenedix, Inc. and Kenedix Advisors Co., Ltd. in April 2007 for the purpose ofadjustment of real estate information flow in the Kenedix Group, and provide the Investment Corporation with increased
preferential rights which strengthened its property acquisition capacity even more.
Details of the Change of Memorandum of Understanding• When Kenedix, Inc. receives information regarding any available property that in its reasonable opinion meets ourinvestment criteria, including properties under development, from parties other than the contracting parties, the AssetManagement Company has first preferential rights to such information.
(Before Revision: The Investment Corporation had second preferential rights after certain pension funds to such property
information acquired by Kenedix, Inc.)• In the event that Kenedix, Inc. disposes of a property that in its reasonable opinion meets our investment criteria,
including properties under development or properties that it owns, the Asset Management Company has firstpreferential negotiating rights with respect to such properties.
(Before Revision: The Investment Corporation had second preferential negotiating rights with respect to such properties
after certain pension funds)

Kenedix, Inc. / Kenedix Advisors Co., Ltd.

Warehousing

Brokerage

Properties for
proprietaryinvestment

Pension funds

Private funds(including
development projects)

Exclusive information provided

Information received
no later than third parties

Asset Management
Kenedix REITManagement, Inc.

Kenedix Realty
Investment Corporation

Also as a result of the revisions, the Pipeline relationship between the Kenedix Group and the Investment Corporation was
significantly strengthened, allowing the Investment Corporation preferential rights to properties developed by the Kenedix
Group. Looking ahead, the Investment Corporation and the sponsor company plans to closely cooperate to achieve
further external growth in such investments as Group-wide joint investments and property developments.

8Changes to the Portfolio Development Policies
Q. Please elaborate on the changes to the portfolio development policy announced in December 2006.
A. The Investment Corporation adopts a dynamic and flexible investment stance that accurately reflects its environment and market trends, andendeavors to ensure a timely response to each and every opportunity.

The Investment Corporation strives to develop a diversified investment

portfolio for its basic policy. Based upon this basic policy, the Investment Corporation has conducted a review of its portfolio development
policies in order to shift to investments in office buildings. Details are as follows.
(After the changes)
Type of Use

Investment Ratio Target

Office Buildings

50% – 100%

Residential Properties

0% – 30%

Central Urban-Type Retail Properties

0% – 20%

Other

0% for now

Based on the new portfolio development policy, we have acquired 15 office buildings with total acquisition price of approximately ¥51.8 billion
since the fourth fiscal period. As of June 11, 2007, the Investment Corporation owns a portfolio of 44 office buildings with a total acquisition
price of approximately ¥137.9 billion, and the office ratio of the whole portfolio increased from 58.7% (as of the end of third fiscal period) to
70.0%.

Q. What are the reasons for changing the portfolio development policy in December 2006?
A. The Investment Corporation adheres to a basic policy that adopts a dynamic and flexible investment stance. Working from this policy, as ofJune 11, 2007, the Investment Corporation owned a portfolio of 77 properties with a total acquisition price of approximately ¥197 billion,
demonstrating its success in diversifying properties.
The Investment Corporation has been emphasizing investment in mid-sized office buildings located in the Tokyo metropolitan area.
Futhermore, to respond to recent conditions in the office leasing market (increased rent levels, improvement of occupancy ratios, etc.), theInvestment Corporation has decided to focus more on office buildings and to make no new investment in residential properties for a certain
period.

Q. Reflecting upon your decision not to conduct any new investment in residential properties, what are your plans
for the current residential properties in the portfolio?
A. The Investment Corporation recognizes a certain advantage of a portfolio comprising of some residential properties, as they contribute torealizing stable cash flows. However, the Investment Corporation will continue to invest mainly in office buildings, and decrease the ratio of
residential properties in our portfolio, by considering replacement of assets.

Growth Potential
Q. What target for asset scale have you set for the future?
A. As of June 11, 2007, the date the Investment Corporation’s fourth fiscal period results were announced, the Investment Corporation owned aportfolio of 77 properties with total acquisition price of approximately ¥197 billion. We are almost there to achieve our asset scale goal of“achieving aggregate portfolio acquisition value of ¥200 billion by the end of year 2007”. The Investment Corporation will aim to build a strong
portfolio focusing on mid-sized office buildings by continuing to improve the quality of its portfolio, such as location, size and type of properties,
through various measures, including replacement of assets. In addition, the Investment Corporation aims ¥400 billion for the asset size formid- and long-term goal. Our goals, however, do not revolve entirely around increasing asset scale. In concert with efforts to increase the sizeof the Investment Corporation’s portfolio, we will make every effort to steadily enhance earnings per share (EPS).

Q. What steps does the Investment Corporation take with regard to property management?
A. Rental revenues provide a major source of income for the Investment Corporation. Accordingly, every effort is made to maintain and enhance
rent level and occupancy ratios, which are the key components in the Investment Corporations’ leasing activities.

While taking into

consideration economic and real estate market trends, the Investment Corporation adopts a tenant-oriented approach to its leasing activities
with the aim of ensuring a timely and flexible response as well as optimal tenant satisfaction.
Rental revenue aforementioned, the Asset Management Company undertakes property management activities as follows.
・Identify and enhance satisfaction through use of tenant surveys
・Maintain attractive properties based on KDX standards

9

・Leasing management based on CS Strategy
・Careful control of management and operating costs
The Investment Corporation has appointed Kenedix Advisors Co., Ltd as its sole property management company.

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

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

Q. What are your expectations of 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 atreasonable prices will become increasingly difficult. The Investment Corporation also recognizes that real estate markets are subject to avariety 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 41 publicly listed trusts with total market capitalization exceeding ¥6 trillion.

Lookingahead, 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 1.0%. At this level, J-REITs remain highly
competitive when compared with REITs in markets overseas.

Financial Strategy
Q. What benchmark have you established for interest-bearing debt ratio, and what are the Investment Corporation’s
debt policies?
A. The Investment Corporation is conscious of maintaining a prudent financial strategy together with an appropriate interest-bearing debt ratio (abalance between total assets and interest-bearing debt). Currently, the target ratio is set between 35 to around 50%.
Corporation seeks to continue diversifying the debt maturity to decrease the refinance risk.

The Investment

In addition, the Investment Corporation will aim tolengthen the average debt maturity by increasing the portion of its long-term borrowings and issuing the investment corporation bonds.

Q. How do you see interest rate trends in the future? What measures do you have in place to avoid the risk of future
increase in interest rates?
A. The interest rates are expected to show a moderate rise. We believe the key factor in determining future market conditions will be the speedof interest rate increase. If the pace at which interest rates rise is in line with economic growth, the impact on real estate markets is naturally
favorable and rent levels can also be expected to rise.

With this in mind, the Investment Corporation invests mainly in mid-sized officebuildings, characterized by relatively high rates of tenant turnover. Under these circumstances, we are able to maintain rent levels in line withmarket 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 borrowings. Furthermore, theInvestment Corporation acquired an A3 credit rating from Moody’s Investors Services, Inc. in February 2006 and A+ rating from Japan Credit
Rating Agency, Ltd. in December 2006. In addition, we have issued 5 year and 10 year investment corporation bonds in March 2007.

10

Financial Summary
Trends in Operating ConditionsFirst Fiscal
PeriodOperating revenues

Second Fiscal

Third Fiscal

Fourth Fiscal

PeriodPeriodPeriodPeriod(As of Oct. 31,(As of Apr. 30,(As of Oct. 31,(As of Apr. 30,

2005)

2006)

2006)

2007)

5,288

5,778

2,871

5,131

5,647

1,527

2,723

3,091

2,397

2,607

Millions of Yen

1,196

2,871

（Rental revenues）

Millions of Yen

1,196

Operating expenses

Millions of Yen

606(Property-related expenses）

Millions of Yen

518

1,265

Operating income

Millions of Yen

589

1,343

2,565

2,686

Ordinary income

Millions of Yen

243

1,103

2,125

2,148

242

1,101

2,124

2,148

Net income(a)Millions of Yen

Total assets(b)Millions of Yen

77,32592,053

160,314

188,400

Interest-bearing debt(c)Millions of Yen

29,00042,00062,00088,500Unitholders’ equity(d)Millions of Yen

44,52745,38790,93390,877

Millions of Yen

44,28544,28588,72988,729Unitholders’ capital(e)

Per Unit

79,37079,370157,000

157,000(d)／(e)Yen

561,008

571,840

579,192

578,839

Total distribution(f)Millions of Yen

242

1,101

2,124

2,148

Distribution per unit(f)／(e)

Yen

3,052

13,884

13,52913,682
13,682

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

（Earnings distributed per unit）

Yen

3,052

13,884

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

Yen

−

−

−

−

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

0.3（1.3）

1.3（2.6）

1.7（3.3）

1.2（2.5）

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

0.6（2.2）

2.5（4.9）

3.1（6.2）

2.4（4.8）

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

％

57.6

49.3

56.7

48.2

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

％

37.5

45.6

38.7

47.0

Payout ratio (Note 4)(f)／(a)

％

99.9

99.9

99.9

100.0

Number of properties

Properties

31

35

64

72

Total leasable floor area㎡

81,298.67

104,868.65

192,085.34

223,322.77

Occupancy ratio at the end of period

％

96.6

94.9

95.3

95.9

Depreciation expenses for the period

Millions of Yen

268

650

1,135

1,243

Capital expenditures for the period

Millions of Yen

47

510

655

1,132

[Other reference]

Leasing NOI (net operating income)(Note 5)

Millions of Yen

945

2,256

3,869

4,283

FFO (funds from operation)(Note 6)

Millions of Yen

510

1,752

3,102

3,261

FFO per unit

(Note 7)

Yen

6,430

22,076

19,75920,772

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

11Management Review & Policies
Operating Conditions for the Fourth 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).

Subsequently, the Investment Corporation has conducted a global offering in May 2007. As of April 30,

2007, the end of the fourth fiscal period, the number of investment units issued and outstanding totaled 157,000 units.
The Investment Corporation appointed Kenedix REIT Management, Inc. as its asset management company. In concert with the AssetManagement Company, the Investment Corporation strives to maximize cash distribution to investors by securing stable earnings and sustainable
investment growth. To this end, the Investment Corporation adopts a dynamic and flexible investment stance that accurately reflects its
environment and market trends, and endeavors to ensure a timely response to each and every opportunity. The Investment Corporation
endeavors to develop a diversified investment portfolio named “KENEDIX Selection,” adopting a three-point investment criteria based on property
type, area and size.

(2) Investment Environment and Management Performancea. Investment environment
During the fiscal period under review, the Japanese economy made an improvement in corporate earnings and capital expenditures along withrobust employment conditions. Although growth in personal consumption was stagnant, the economic recovery continued.
According to the official announcement of land prices as of January 1, 2007, average land prices in Japan for the one-year period fromJanuary 2006 increased by 2.3% for commercial properties and 0.1% for residential properties. This was the first increase since 1991, or in 16
years. In Tokyo, the average increase was 13.9% for commercial properties and 8.0% for residential properties, the second consecutive yearthat prices for both categories increased.
b. Management performance
In the fiscal period under review, the Investment Corporation acquired 10 office buildings with a total acquisition price of ¥29,755 million.
From the viewpoint of reviewing its portfolio on December 11, 2006, the Investment Corporation sold 2 residential properties (total acquisition priceof ¥1,407 million) on April 20, 2007.
¥175,090 million.

As a result, the number of properties owned as of April 30, 2007 stood at 72, with a total acquisition price of

Looking at the portfolio as a whole, 66.2% was comprised of office buildings, 24.5% of residential properties and 9.1% central

urban retail properties on an acquisition price basis. In addition, the occupancy ratio as of the end of the fourth fiscal period was 95.9%,
reflecting stable investment and asset management.
＜External Growth Performance after IPO＞
Immediately following IPO
First Fiscal Period(as of August 1, 2005)(as of October 31, 2005)

Second Fiscal Period(as of April 30, 2006)

Third Fiscal Period(as of October 31, 2006)

Total
Acquisition Price(Millions of Yen)

Ratio
(%)

Total
Acquisition Price(Millions of Yen)

Ratio
(%)

Total
Acquisition Price(Millions of Yen)

Ratio
(%)

Total
Acquisition Price(Millions of Yen)

Ratio
(%)

Total
Acquisition Price(Millions of Yen)

Ratio
(%)

32,19752.7

37,76754.6

48,26959.2

86,224

58.7

115,979

66.2

9,900

16.2

12,37917.912,37915.2

16,05910.9

16,0599.1

Residential Properties

18,98631.0

18,98627.4

20,78625.5

44,45930.2

43,052

24.5

Total

61,083100.0

69,132100.0

81,434100.0

146,742100.0

175,090

100.0

Tokyo Metropolitan Area

58,80296.2

61,281

88.6

71,783

88.1

123,32184.0

150,364

85.8

Office Buildings
Type of Use

Central Urban Retail
Properties

Area

Other Regional Areas

2,281

3.7

7,851

11.3

9,651

11.8

23,421

15.9

24,726

14.1

Total

61,083100.0

69,132100.0

81,434100.0

146,742100.0

175,090

100.0

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

12

Fourth Fiscal Period(as of April 30, 2007)

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 fourth 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, 2007, the investment portfolio maintains a high occupancy ratio.

The Investment Corporation is satisfied with the quality of property

management.
In addition to property management services, the Investment Corporation has executed master lease agreements with Kenedix Advisors
covering all of its properties held as of April 30, 2007 (excluding Residence Charmante Tsukishima, Frame Jinnan-zaka, ZARA Tenjin Nishi-dori
and tenants without approval for subleasing). In appointing a member of the Kenedix Group as lessee, the Investment Corporation is able toprovide better tenant-oriented leasing management through Kenedix Advisors. At the same time, this scheme allows the Investment Corporation
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, and have succeeded reductions in building maintenance costs.

(3) Capital Acquisition
To support the acquisition of additional assets, the Investment Corporation undertook borrowings of ¥29.0 billion during the fourth fiscal
period comprising ¥9.5 billion of long-term borrowings and ¥19.5 billion of short-term borrowings (Note1). In addition, the Investment Corporation
undertook prepayment of ¥12.0 billion in short-term borrowings provided from cash on hand from the issuance of the investment corporation bonds.
As a result, the balance of interest-bearing debt stood at ¥88.5 billion as of April 30, 2007, comprising ¥76.5 billion in borrowings (¥58.0 billion in
long-term borrowings and ¥18.5 billion in short-term borrowings) and ¥12.0 billion in investment corporation bonds. In addition, the long-term
debt ratio (Note2) was 79.1% and the long-term fixed interest debt ratio (Note3) was 75.7%.
As of April 30, 2007, the Investment Corporation had ¥46.8 billion in long-term borrowings, of which ¥43.8 billion had fixed interest rates or
floating interest rates effectively fixed by utilizing interest-swap agreements.
Since its public listing through to the end of the fourth 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 periods by placing added emphasis on long-term debt.
Notes:
1. Short-term borrowings refers to borrowings with a period of less than or equal to one year from the drawdown date to the repayment date.
Long-term borrowings refers to borrowings with a period of more than one year from the drawdown date to the repayment date.
2. Long-term debt ratio＝（Balance of long-term borrowings＋Balance of investment corporation bonds）÷（Total borrowings＋Balance ofinvestment corporation bonds）
3. Long-term fixed interest debt ratio＝（Balance of long-term fixed interest rate borrowings＋Balance of investment corporation bonds）÷（Total
borrowings＋Balance of investment corporation bonds）
The balance of long-term fixed interest rate borrowings includes borrowings with floating interest rates effectively fixed by utilizing interest-rate
swap agreements.
The Investment Corporation acquired a credit rating of A+ (Outlook: Stable) from Japan Credit Rating Agency, Ltd. on December 11, 2006.
This was the second credit rating acquired following the A3 (Outlook: Stable) from Moody’s Investors Services, Inc. on February 28, 2006.
Details of the credit ratings as of April 30, 2007 are as follows.
Credit Rating Agency
Moody’s Investors Service
Japan Credit Rating Agency, Ltd.

Details of the Ratings
Rating：A3
Outlook：Stable
Senior Debts：A+
Outlook: Stable

On February 7, 2007, a resolution was made concerning the offering of investment corporation bonds (hereafter the “comprehensive
resolution”, the same applies below). The Investment Corporation also filed a debt shelf registration statement. Details are as follows.

13

Total Amount of Ceiling for Gross Amount of Each Investment
Corporation Bond Offering / Planned Issue Amount
Effective Period of Resolution / Planned Issuance Period¥100,000,000,000 respectively
February 15, 2007 to February 14, 2009
Acquisition funds for specified assets, repayment funds for borrowings,
repayment funds for investment corporation bonds, refund funds for lease andUse of Funds

guarantee deposits, funds to pay for repairs and maintenance, working
capital, etc.

The Investment Corporation issued investment corporation bonds for the purpose of diversifying financing to support portfolio growth, with anemphasis on increasing the proportion of debt with fixed interest rates and longer maturity periods and achieving an appropriate mix of debt andequity financing.

Details of the investment corporation bonds are as follows. In addition, the Investment Corporation issued its 10-year

investment corporation bond, “Second Series Unsecured Investment Corporation Bond” in the shortest period of time after IPO among J-REITs.
Accordingly, the Investment Corporation has succeeded in diversifying maturities and lengthening its average debt maturity.

Name of Investment Corporation Bonds

Total Amount of the Bonds

First Series Unsecured Investment

Second Series Unsecured Investment

Corporation Bonds

Corporation Bonds(Ranking pari passu among the Specified(Ranking pari passu among the Specified

Investment Corporation Bonds

Investment Corporation Bonds)¥9,000,000,000¥3,000,000,000

Interest Rate

1.74％ per annum

2.37％ per annumTerm

5 years

10 yearsIssuance Date

March 15, 2007

March 15, 2007

Redemption Date

March 15, 2012

March 15, 2017

The Investment Corporation established a credit commitment line with The Bank of Tokyo-Mitsubishi UFJ, Ltd., allowing it to borrow up to ¥2.5
billion on an unsecured basis.
On April 26, 2007, the Investment Corporation filed an equity shelf registration statement to conduct equity financing. Details are as follows.
Planned Issue Amount¥100,000,000,000

Application for the Shelf Registration Date

April 26, 2007

Planned Issuance Period

May 7, 2007 to May 6, 2009
Acquisition funds for specified assets, repayment of borrowings, repayment of

Use of Funds

investment corporation bonds, refund of lease and guarantee deposits, funds to pay
for repairs and maintenance, working capital, etc(4) Holding of General Meetings of Unitholders
The Investment Corporation held its Third General Meeting of Unitholders on January 25, 2007. All the agenda items were resolved as
initially submitted including a change to certain sections of the Articles of Incorporation, and the appointment of an Executive Director, SubstituteExecutive Director and two Supervisory Directors.

(5) Operating Results and Cash Distribution
As a result of the aforementioned management performance, the Investment Corporation reported operating revenues of ¥5,778 million,
operating income of ¥2,686 million, ordinary income of ¥2,148 million and net income of ¥2,148 million for its fourth fiscal period.
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 fourth fiscal period was ¥13,682 per unit.

14

Future Management Policies(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.
Under this economic condition, positive signs are emerging in the domestic real estate market. Posted land prices for March 2007, and aland survey conducted by prefecture and local governments for September 2006, confirmed land price appreciation in the three major cities ofTokyo, Osaka and Nagoya. At the same time, land prices for specific major cities in regional areas are also increasing. On a nationwide basis,land prices are exhibiting increased polarization. Appreciation is restricted to major economic and financial centers of the Tokyo metropolitan
area (in particular the central Tokyo), and specific regional areas that exhibit strong potential for population growth (for example, Sendai in Tohoku
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.
The Investment Corporation will focus investments in mid-sized office buildings in the Tokyo metropolitan area based on its investment
policies and the following trends:
・Increasing Occupancy Ratios and Increasing Rents for Office Buildings
・Increasing Role of the Tokyo Metropolitan Area as Business Hub・Large Tenant Demand for and Increasing Availability of Mid-Sized Office Buildings
Note: The Tokyo metropolitan area consists of Tokyo, Kanagawa, Saitama and Chiba prefectures.
Increasing Occupancy Ratios and Increasing Rents for Office Buildings
Office property occupancy ratios and rents have steadily increased in some major cities, such as Tokyo and Osaka. We believe theseincreased occupancy ratios and rents reflect improved demand, and, if sustained, may allow us to achieve higher rental revenues from our officeproperties.
Increasing Role of the Tokyo Metropolitan Area as Business Hub
The Tokyo metropolitan area serves as Japan’s main business hub. We believe this concentration of business activity in the Tokyo
metropolitan area is intensifying, along with increasing demand for office space. By focusing our investments on office properties in the Tokyo
metropolitan area, we believe we can continue to take advantage of this trend.
Large Tenant Demand for and Increasing Availability of Mid-Sized Office Buildings
We believe that there is a substantial market of tenants for mid-sized office buildings in Japan, and that we can take advantage of thisdemand by providing attractive and competitive office spaces and customer-oriented property management. In addition, we believe that tenants at
mid-sized office buildings have a relatively high turnover ratio, which facilitates increases in rent levels in line with market trends. Moreover, we
believe the supply of mid-sized office buildings available for purchase in Japan is increasing, as demonstrated for example, by an increase in the
proportion of office buildings with a total area of less than 10,000 ㎡ among office buildings sold in Japan from 76% in the year ended March 31,
2003 to 81% in the year ended March 31, 2006.

(2) Management Policies
a. Existing property management strategy (Internal Growth Strategies)
Taking into consideration economic and real estate market trends, the Investment Corporation adopts a tenant-oriented approach to its
leasing activities with aims of ensuring a timely and flexible responses as well as optimal tenant satisfaction. Accordingly, the Investment
Corporation will aim to increase of the cash flow by offering office environment with high tenant satisfaction.

Based on the aforementioned, theAsset Management Company undertakes property management activities as follows:・Identify and enhance satisfaction through use of tenant surveys
・Maintain attractive properties based on KDX standards

15

・Leasing management based on CS Strategy
・Careful control of management and operating costs
The Investment Corporation has appointed Kenedix Advisors Co., Ltd. as its Property Management Company for its entire portfolio.
Identify and enhance tenant satisfaction through use of tenant surveys
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. During the fiscal period ended April 30, 2006, the Investment
Corporation conducted a customer satisfaction survey through J.D. Power Asia Pacific, Inc., an internationally recognized company that engages
in customer satisfaction evaluation, to better understand the needs of its tenants and take steps to respond to their preferences. This survey
covered 20 of its properties, 19 of which were office properties and one of which was a central urban retail property. As a part of this survey theadministration officers of each tenant and tenant employees were asked to respond to many questions concerning building location andenvironment, entrance, air conditioning system for lease space areas, elevators, toilets, management company service, security, and fire
prevention, as well as the nature and quality of operating and management services. On a scale one to five, respondents were asked to rankeach of these areas. The survey provided invaluable information pertaining to the strengths and weaknesses of each building. Under theremarks section, a number of respondents provided insightful observations. Based on survey results, the Investment Corporation work to clarify
and improve outstanding issues. Through this vital feedback channel, the Investment Corporation also implemented appropriate maintenanceand renovations for each property taking into consideration associated costs and benefits.
Plans are in place to conduct a second customer satisfaction survey during the fiscal period ending October 31, 2007.
Through these means, the Investment Corporation is working efficiently to generate improvements in rent levels and asset values, increase
earnings and promote sustained internal growth.
Maintain attractive properties based on KDX standards
The Investment Corporation aims to provide attractive mid-sized office buildings in order to enhance portfolio value and rental revenues.
We believe that the quality of mid-sized office buildings in Japan vary considerably depending on the nature of the owner. For example, abuilding owned by an individual or small company that owns only one or a few buildings may not have the resources to provide high-quality
maintenance. Furthermore, when a building is owned by a large company, property management is often dictated by that company’s priorities
and does not necessarily correspond to tenant needs or satisfaction.
The Investment Corporation aims to differentiate itself by efficiently providing certain uniform standards, termed “KDX” standards, as well as
attractive office environments.
Examples of KDX standards include the followings:
・Installation of security cameras for elevators and entrance halls
・Installation of emergency devices for elevators
・Installation of modern restrooms that include western-style toilets with hot-water self-cleaning functions
・Creation and distribution of security and evacuation maps
・Creation and distribution of detailed building rules
In addition, the Investment Corporation enhances its brand awareness by renaming its office buildings so that “KDX” is included in the newname.
Leasing management based on CS Strategy
The Investment Corporation aims to provide flexible and focused leasing activities that take into account economic and market trends, andthat utilize the results of tenant surveys to enhance tenant satisfaction.
In addition, the Investment Corporation believes that tenants at mid-sized office buildings generally tend to have high turnover ratios, and theInvestment Corporation is focused on obtaining higher rent levels when entering new lease contracts.

The Investment Corporation also

negotiates with tenants that pay lower rent levels than the market price in order to raise rents under existing leases.
Careful control of management and operating costs
The Investment Corporation utilizes the scale merits of owning many properties and the negotiating strength of the Kenedix Group (theKenedix Group refers to Kenedix, Inc., Kenedix Advisors and other related companies, the same applies below) to reduce building management
costs.

Accordingly, the Investment Corporation reduces property management expenses, electricity costs and property taxes.

The Investment

Corporation will continue to carefully control management and operating costs by periodically reviewing its property management standards toensure that they remain relevant and appropriate for each property, and by maintaining an appropriate balance between initiatives that aim tosustain or increase revenues with its efforts to control operating costs.

16

The Investment Corporation has appointed Kenedix Advisors Co., Ltd. as its sole property management company for the entire portfolio as ofthe end of the fourth 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.
The Investment Corporation is presently satisfied with the quality of property management. In addition to property management services, theInvestment Corporation has executed master lease agreements with Kenedix Advisors covering almost all of its properties held as of April 30, 2007
(excluding Residence Charmante Tsukishima, Frame Jinnan-zaka, ZARA Tenjin Nishi-dori and tenants without approval for subleasing).

In

appointing a member of the Kenedix Group as lessee, the Investment Corporation is able to provide better tenant-oriented leasing management
through Kenedix Advisors.
guarantee deposits.

At the same time, this scheme allows the Investment Corporation to more effectively utilize tenant security and

The Investment Corporation leverages scale merits and the communication and negotiation skills of the Kenedix Group in

an effort to reduce operating costs.

In addition, the Investment Corporation has succeeded in reducing in building maintenance costs.

b. New Property Investment Strategy (External Growth Strategy)
The Investment Corporation will continue to concentrate on mid-sized office buildings with an emphasis on the Tokyo metropolitan area while
also investing in central urban retail property located in highly flourishing districts as an alternative to investment in office properties. In addition,
the Investment Corporation will make no new investment in residential properties for a certain period and consider replacement of assets. To
facilitate the implementation of the aforementioned investment policy, the Investment Corporation will leverage the “Multi-Pipeline” provided by the
support of the Kenedix Group, in addition to the original network of the Asset Management Company.
Through the Multi-Pipeline, the Asset Management Company is positioned to secure real estate information related to properties for which
the Kenedix Group acts as intermediary, properties under development, properties that it owns, and pension funds (Note). Based on thisinformation, the Investment Corporation has first preferential negotiating rights for an acquisition. Against the backdrop of a competitive market,
the role of the support-line is increasingly significant for the Asset Management Company’s acquisition of quality properties.
Note: Pension Funds refer to real estate investment funds for pension plans that are managed by Kenedix Advisors Co., Ltd.
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 in the event that the Investment Corporation is not itself in
an immediate position to acquire the property, or the property fails to fully comply with the Investment Corporation’s investment criteria at thatspecific time.
The Investment Corporation seeks to continue improving the quality of its portfolio in terms of location, size and type of properties,
through various measures including replacement of assets. In addition, the Investment Corporation will continue to steadily grow by acquiringproperties and aims accelerate this growth by utilizing its leverage relationship with the Kenedix Group and the Asset Management Company’s
original network for sourcing properties, as well as make diversified acquisitions, as discussed below.
Leverage Relationship with the Kenedix GroupAs the sponsor company, Kenedix, Inc. has provided property information and support staff to the Investment Corporation and the AssetManagement Company. At the same time, the Investment Corporation believes that the role of J-REITs in the Kenedix Group has increased inimportance.
In April 2007, the Investment Corporation revised the Memorandum of Understanding between it, Kenedix, Inc., Kenedix Advisors Co., Ltd.
and the Asset Management Company, which was originally conducted at the time of the Investment Corporation’s IPO.
Details of the Change of Memorandum of Understanding
・When Kenedix, Inc. receives information regarding any available property that in its reasonable opinion meets our investment criteria, including
properties under development, from parties other than the contracting parties, the Asset Management Company has first preferential rights tosuch information.
(Before Revision: The Investment Corporation had second preferential rightsafter certain pension funds to such property information acquired by
Kenedix, Inc.)
・In the event that Kenedix, Inc. disposes of a property that in its reasonable opinion meets our investment criteria, including properties underdevelopment or properties that it owns, the Asset Management Company has first preferential negotiating rights with respect to such properties.
(Before Revision: The Investment Corporation had second preferential negotiating rights with respect to such properties after certain pension
funds.)
・As long as the Investment Corporation and the Asset Management Company continue to not invest in new residential properties, the Revised
Memorandum of Understanding will not apply with respect to residential properties.

17

Also as a result of the revisions, the Pipeline relationship between the Kenedix Group and the Investment Corporation was significantly
strengthened, allowing the Investment Corporation preferential rights to properties developed by the Kenedix Group. Looking ahead, theInvestment Corporation and the sponsor company plans to closely cooperate to achieve further external growth in such investments asGroup-wide joint investments and property developments.
Utilize the Asset Management Company’s Original Network for Sourcing Properties
The Asset Management Company’s employees have diverse experience in the real estate and financial markets in Japan.

A part of theInvestment Corporation’s growth strategy involves acquiring information about potential acquisition opportunities through the Asset Management
Company’s network. The Investment Corporation plans to continue to utilize the Asset Management Company’s knowledge, experience andnetwork of contacts in the real estate market to help locate and acquire properties that match its investment strategy.
Make Diversified Acquisitions
As of April 30, 2007, the Investment Corporation owned 72 properties for a total acquisition price of approximately ¥175.0 billion with a 95.9%
occupancy ratio.

Supported by this asset base along with the management know-how of mid-sized office building accumulated by the AssetManagement Company, the Investment Corporation plans to continue acquiring properties based on its diversified property acquisition strategy.
Against the backdrop of stable trends in its investment units, the Investment Corporation believes that this strategy will enable it to take a moreaggressive approach to acquiring properties.

(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/ ).

18

Financial Statements（Fourth Fiscal Period:From November 1, 2006 to April 30,2007）
20
21
22
23
24
25

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

19

Kenedix Realty Investment Corporation20

Kenedix Realty Investment Corporation

BALANCE SHEETSAs of April 30, 2007 and October 31, 2006
In thousands of yen

As of April 30, 2007
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:
Ground leasehold
Organization costs
Corporate bond Issuance costs
Unit Issuance costs
OthersTotal assets
Liabilities and Unitholders’ Equity
Liabilities
Current liabilities:
Trade and other payables
Short-term debt
Deposits received
Rents received in advance
Other current liabilities
Total current liabilities
Corporate bonds
Long-term debt
Leasehold and security deposits received
OthersTotal liabilities
Unitholders' equity
Unitholders' capital
Units Authorized: 2,000,000 units
Units Issued and outstanding:157,000 units
as of April 30, 2007 and October 31, 2006, respectively
Retained earnings
Unrealized gain from deferred hedge transactions
Total unitholders' equity
Total liabilities and unitholders' equity

￥

￥

￥

￥

8,923,063
75,125302,041
32,956
9,333,185

As of October 31, 2006￥

9,488,708
83,375599,486
72,300
10,243,869

113,187,263
67,134,816
823,009602,585(3,230,846)
178,516,827

91,714,229
58,684,305
741,661
612,929(2,033,503)
149,719,621

285,145
30,53868,875
71,13994,969188,400,678−
35,628−88,923
226,301
160,314,342

413,751
20,000,000
26,743916,372
87,286
21,444,152
12,000,000
56,500,000
7,578,756−
97,522,908￥￥

406,892
15,000,000
1,748
767,536
28,287
16,204,463−
47,000,000
6,124,894
51,68869,381,045

88,729,652

88,729,652

2,148,118−
90,877,770
188,400,678

2,124,112
79,53390,933,297
160,314,342￥

See notes to financial statements

21

Kenedix Realty Investment Corporation

STATEMENTS OF INCOME AND RETAINED EARNINGSFor the period from May 1, 2006 to October 31, 2006 and the period from November 1, 2006 to April 30, 2007
In thousands of yen

From November 1, 2006
to April 30, 2007
Operating Revenues:
Rental revenues
Profit on sale of trust beneficiary interests in real estate
Total operating revenues
Operating Expenses:
Property-related expenses
Asset management fees
Administrative service and custodian fees
Other operating expenses
Total operating expenses
Operating income

5,647,462
130,748
5,778,210￥

5,131,499
157,334
5,288,833

2,607,389
306,965
66,601
110,510
3,091,465
2,686,745

2,397,202
203,842
46,72875,8692,723,641
2,565,192

Non-Operating Expenses:
Interest expense
Financing related expense
Amortization of organization costs
Amortization of unit issuance costs
Amortization of corporate bond issuance costs
Others, net
Income before income taxes
Income taxes
Net income

479,926
20,595
5,090
17,785
1,501
12,9692,148,879
821
2,148,058

375,765
20,904
5,090
17,785−
20,5672,125,081
1,009
2,124,072

Retained earnings at the beginning of period

60

40

Retained earnings at the end of period
See notes to financial statements

22￥

From May 1, 2006
to October 31, 2006¥

2,148,118¥

2,124,112

Kenedix Realty Investment Corporation

Statement of Changes in Unitholders’ Equity
For the period from November 1, 2006 to April 30, 2007

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

Retainedfrom deferred

capitalearnings

hedge

Total

transactions
Balance at the beginning of a period
Changes during the fiscal period
Payment of dividends￥

88,729,652￥

2,124,112￥

79,533￥ 90,933,297−(2,124,052)−(2,124,052)

Net income−

Interest-rate swap−

2,148,058−−(79,533)

2,148,058(79,533)−

Total changes during the fiscal period￥

Balance at the end of period

88,729,652

24,006￥

2,148,118(79,533)(55,527)−￥ 90,877,770￥

For the period from May 1, 2006 to October 31, 2006

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

Retainedfrom deferred

capitalearnings

hedge

Total

transactions
Balance at the beginning of a period￥

Changes during the fiscal period
New unit issuance

44,285,003￥

1,102,013￥−￥ 45,387,016

44,444,649−−

44,444,649

Payment of dividends−(1,101,973)−(1,101,973)

Net income−

Interest-rate swap−

2,124,072−−
79,533

2,124,072
79,533

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

44,444,649￥

88,729,652

1,022,099￥

2,124,112￥

79,53345,546,281

79,533￥ 90,933,297

See notes to financial statements

23

Kenedix Realty Investment Corporation

STATEMENTS OF CASH FLOWSFor the period from May 1, 2006 to October 31, 2006 and the period from November 1, 2006 to April 30, 2007
In thousands of yen

From October 1,2006
to April 30,2007

From May 1,2006
to October 31,2006

Cash Flows from Operating Activities:
Income before income taxes￥

2,148,879￥

2,125,081

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

1,288,871

1,169,328

479,926

375,765

8,250(35,671)

Consumption tax refundable

297,446(461,163)

Trade and other payables

3,328

214,623

Rents received in advance

148,836

237,642

1,433,571

1,763,670

37,018(136,387)

5,846,125

5,252,888(420,546)(363,960)(924)(1,015)5,424,655

4,887,913(31,759,821)(69,184,115)

Proceeds from leasehold and security deposits received

1,909,350

2,852,843

Payments of leasehold and security deposits received(455,487)(256,297)

Payments of restricted bank deposits(361,623)(750,424)

Proceeds from restricted bank deposits

355,864

225,670

6,555

(717)

(30,305,162)(67,113,040)

Proceeds from short-term debt

19,500,000

13,000,000

Payment of short-term debt

(14,500,000)(11,000,000)

Proceeds from long-term debt

9,500,000

18,000,000

Interest expense
Changes in assets and liabilities:
Rental receivables

Sale of trust beneficiary interests in real estate
Others, net
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

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

Proceeds from issuance of units−

44,444,650

Proceeds from issuance of corporate bonds

12,000,000−

Payment of corporate bond issuance costs（70,376）−

Payment of dividends(2,120,522)(1,098,661)

Net cash provided by financing activities

24,309,102

63,345,989

Net change in cash and cash equivalents(571,405)

1,120,862

Cash and cash equivalents at the beginning of period

8,178,005

7,057,143

Cash and cash equivalents at the end of period
See notes to financial statements

24￥

7,606,600¥

8,178,005

Kenedix Realty Investment Corporation

Notes to Financial Statements
For the period from May 1, 2006 to October 31, 2006 and the period from November 1, 2006 to April 30, 2007

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

During the period ended April 30,

2006, the Investment Corporation acquired 4 additional properties by utilizing internal cash and bank borrowing.
On May 1, 2006, the Investment Corporation raised ¥42,172 million of equity capital through a public offering of 73,660 investment units and 26
properties with an aggregate purchase price of ¥58,033 million were acquired with additional debt proceeds of ¥16,000 million.
On May 26, 2006, the Investment Corporation completed third-party allotment of 3,970 investment units, generating an additional ¥2,273 million.
During the period ended October 31, 2006, the Investment Corporation sold 2 properties and acquired 5 properties.
During the period ended April 30,2007, the Investment Corporation acquired 10 additional prpperties by utilizing internal cash and bankborrowing,and sold 2 properties.
On March 15,2007, the Investment Corporation issued the investment corporation bonds. Their total amounts is ¥12,000 million and term are
five years and ten years.
At April 30, 2007, the Investment Corporation had total unitholders’ capital of ¥88,730 million with 157,000 investment units outstanding. The
Investment Corporation owned a portfolio of 72 properties with total acquisition costs of ¥175,090 million containing total leasable area of 223,323
m2. The occupancy ratio was approximately 95.9%.

A portfolio of 72 properties consists of 39 office buildings, 30 residential properties and 3

central urban retail properties. 58 properties are located in the Tokyo Metropolitan Area and 14 properties are located in Other Regional Areas.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with the provisions set forth in the Investment Trust Law of Japan,
the Japanese Corporation Law, the Securities and Exchange Law of Japan and related regulations, and in conformity with accounting principles
and practices generally accepted in Japan (“Japanese GAAP”), which are different in certain respects as to the application and disclosure
requirements of International Financial Reporting Standards or accounting principles generally accepted in the United States of America.
The accompanying financial statements are a basically translation of the audited financial statements that were prepared for Japanese
domestic purposes from the accounts and records maintained by the Investment Corporation and filed with the Kanto Local Finance Bureau of the
Ministry of Finance as required by the Securities and Exchange Law.

In preparing the accompanying financial statements, relevant notes havebeen added and certain reclassifications have been made from the financial statements issued domestically in order to present them in a form thatis more familiar to readers outside Japan. The Investment Corporation’s fiscal period is a six-month period which ends at the end of April andOctober of each year, respectively. The Investment Corporation does not prepare consolidated financial statements because it has no
subsidiaries.

25

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, 2006
to April 30, 2007

From May 1, 2006
to October 31, 2006

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

2-46 years

2-46 years

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

3-17 years

3-17 years

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

3-15 years

3-15 years(c) Impairment of Fixed Assets
The Investment Corporation adopted “Accounting Standard for Impairment of Fixed Assets” (“Opinion on Establishment of AccountingStandard for Impairment of Fixed Assets” issued by the Business Accounting Deliberation Council in Japan on August 9, 2002) and“Implementation Guidance for the Accounting Standards for Impairments of Fixed Assets” (“Financial Accounting Guidance No. 6” issued by the
Accounting Standards Board of Japan on October 31, 2003). The Investment Corporation has not recognized an impairment loss on any of theproperties during the fiscal periods ended April 30, 2007 and October 31, 2006.
(d) Organization Costs
Organization costs are amortized over a period of five years, comprised of ten fiscal periods, with an equal amount amortized in each fiscal
period.
(e) Unit Issuance Costs
Unit issuance costs are amortized over a period of three years under the straight-line method. Underwriters’ commissions in connection with
the issuance of unitholders’ equity are offset against proceeds raised since the “Spread Method” was used for the unit issuance. Under the
Spread Method, securities underwriters underwrite the units at the issue price and offer them to investors at the offer price, which is different fromthe issue price.

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

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

Corporate Bond Issuance Costs
Investment corporation bonds isuuance costs are amortized over a loan period under the straight-line method.

(g) Accounting Treatment of Trust Beneficiary Interests in Real Estate
For trust beneficiary interests in real estate, which are commonly utilized in the ownership of commercial properties in Japan and throughwhich the Investment Corporation holds all of its real property, all assets and liabilities within trust are recorded in the relevant balance sheet
and income statement accounts.

26

(h) 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.
(i)

Taxes on Property and Equipment
Property-related taxes including property taxes, city planning taxes and depreciable property taxes are imposed on properties on a calendar

year basis. Under the Japanese tax rule, the seller of the property at the time of disposal is liable for these taxes on the property from the date ofdisposal to the end of the calendar year in which the property is disposed. The seller, however, is reimbursed by the purchaser for these accrued
property-related tax liabilities.
When the Investment Corporation purchases properties, it typically allocates the portion of the property-related taxes related to the period
following the purchase date of each property through the end of the calendar year.

The amounts of those allocated portions of theproperty-related taxes are capitalized as part of the acquisition costs of the related properties. Capitalized property-related taxes amounted to¥101 million and ¥182 million as of April 30, 2007 and October 31, 2006.

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

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

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.
(k) 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 adopted special treatment for interest-swap agreements because its
interest-rate swap agreements met the criteria for hedging accounting under this treatment, the net amount to be paid or received under theinterest rate swap contract is added to or deducted from the interest on the assets or liabilities for which the swap contract was excuted.

(l)Rounding of Amounts Presented
Amounts have been truncated in the Japanese financial statements prepared in accordance with Japanese GAAP and filed with regulatory

authorities in Japan, whereas amounts have been rounded to the nearest million in the accompanying financial statements.

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

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

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

27

(ｃ) Beginning the fiscal period ended April 30, 2007, the Investment Corporation changed the hedging accounting treatment from deferred hedge
to the special method on interest swap due to a change in amendments to the Investment Trust Law and the modification of the articles ofincorporation.
As a result, net asset decreased by ¥ 59 million compared with the previous accounting method.

4. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following as of April 30, 2007 and October 31, 2006:
In thousands of yen

As of April 30, 2007
Cash and bank deposits ...................................................................................

As of October 31, 2006

¥ 8,923,063¥ 9,488,708

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

(1,316,463)(1,310,703)

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

¥ 7,606,600¥ 8,178,005

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

5. SCHEDULE OF PROPERTY
In millions of yen
As of April 30, 2007
Acquisition costsLand¥ 113,187¥

Book value

Acquisition costs−¥ 113,187¥ 91,714

Accumulated
depreciation¥

Book value−¥ 91,714

Buildings andstructures

67,135

3,026

64,10958,684

1,897

56,787

Machinery andequipment

823

119

704

742

73

669

Tools, furnitureand fixtures

603

86

517

613

63

550

¥ 181,748¥ 3,231¥ 178,517¥ 151,753¥ 2,033¥ 149,720

Total

28

Accumulated
depreciation

As of October 31, 2006

6. SHORT-TERM AND LONG-TERM DEBTS
The following summarizes short-term and long term debt outstanding as of April 30, 2007 :(As of April 30, 2007)
Classification

Drawdown Date
July 31, 2006

Unsecuredshort-term debt

Unsecured current potion of
long-term debt

Repayment Date

Weighted-averageinterest rate

July 31, 2007

0.73%

Balance(In millions of yen)¥

September 20, 2006

September 20, 2007

0.75%

4,000

October 31, 2006

October 31, 2007

0.75%

1,000

December 1, 2006

November 30, 2007

0.82%

500

January 19, 2007

January 18, 2008

0.84%

1,000

March 1, 2007

February 29, 2008

0.96%

3,500

April 2, 2007

October 2, 2007

0.95%

2,000

April 2, 2007

April 2, 2007

0.97%

1,500

April 2, 2007

April 2, 2007

1.02%

1,000

November 1, 2005

October 31, 2007

0.77%

1,500

Subtotal

Unsecured
long-term debt

4,000

20,000August 1, 2005

July 31, 2008

0.87%

9,500

August 1, 2005

July 31, 2010

1.29%

9,500

November 1, 2005

October 31, 2008

1.09%

3,500

December 8, 2005

December 7, 2008

1.10%

2,000

March 1, 2006

February 28, 2009

1.45%

2,000

March 16, 2006

March 16, 2009

1.48%

2,500

May 1, 2006

April 30, 2009

1.63%

6,500

May 1, 2006

April 30, 2011

2.20%

2,500

May 1, 2006

April 30, 2016

2.73%

5,000

July 14, 2006

July 13, 2011

2.15%

1,000

September 1, 2006

August 31, 2013

2.12%

3,000

December 1, 2006

November 30, 2011

1.96%

2,500

April 2, 2007

April 2, 2010

1.57%

2,000

April 2, 2007

April 2, 2012

1.88%

2,000

April 17, 2007

April 16, 2011

1.04%

3,000

Subtotal
Total

56,500¥76,500

7. UNSECURED LINE OF CREDIT
The Investment Corporation established a credit facility with a financial institution in March 2007 which provides access to an aggregate ¥ 2.5
billion on an unsecured basis, the company have drawn ¥ 1.0 billion from this credit facility.

29

8. PER UNIT INFORMATIONThe net asset value per unit as of April 30, 2007 and October 31, 2006 was ¥578,839 and ¥579,192. Net income per unit as of April 30, 2007
and October 31, 2006 was ¥13,681 and ¥13,575.
The weighted average number of units outstanding of 157,000 and 156,460 was used for the computation of the amount of net income per unit
as of April 30, 2007 and October 31, 2006.

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

If the Investment

Corporation does not satisfy all of the requirements, the entire taxable income of the Investment Corporation will be subject to regular corporate
income taxes. Since the Investment Corporation distributed approximately 100% of its distributable income in the form of cash distributions
totaling ¥2,148 million and ¥2,124 million for the periods ended April 30, 2007 and October 31, 2006.

Such distributions were treated as

deductible distributions for purposes of corporate income taxes. The effective tax rate on the Investment Corporation’s income was 0.04% and0.05% for the periods ended April 30, 2007 and October 31, 2006.

The following summarizes the significant difference between the statutory tax

rate and the effective tax rate:
From November 1, 2006
to April 30,2007

From May 1, 2006
to October 31,2006

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

39.39%

39.39%

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

(39.38)(39.37)

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

0.03

0.03

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

0.04%

0.05%

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

The entire amount of the issue

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

required by the Investment Trust Law.

11. 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, 2006
to April 30, 2007

From May 1, 2006
to October 31, 2006

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

¥ 202,279¥ 183,464

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

21,20066,200Construction management fees ...............................................................................

37,432

24,537(b) Transactions with Y.K. KDX2 (“KDX2”)
KDX2 is a wholly owned subsidiary of Kenedix. On May 1, 2006 the Investment Corporation acquired 4 properties from KDX2 for ¥8,300
million. The purchase price of these properties was determined based on an independently appraised value at the time of acquisition.

30

(c) Transactions with Y.K. Lump Sum Investment (“Lump Sum”)
Lump Sum is a wholly owned subsidiary of Kenedix.

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

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

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

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

12. BREAKDOWN OF RENTAL AND OTHER OPERATING REVENUES AND PROPERTY-RELATED EXPENSES
Rental and other operating revenues and property-related expenses for the periods from November 1, 2006 to April 30, 2007 and from May 1,
2006 to October 31, 2006 consist of the following:
In thousands of yen

From November 1, 2006
to April 30, 2007

From May 1, 2006
to October 31, 2006

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

¥

4,234,864¥

3,908,749

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

730,439

640,707

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

4,965,303

4,549,456

182,047

175,387

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

274,748314,355

Miscellaneous ....................................................................................................

225,364

92,301Others:Parking space rental revenues ...........................................................................

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

682,159

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

¥

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

¥

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

582,0435,647,462¥

571,266¥

5,131,499
529,334

1,243,900

1,135,559

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

275,900

296,833

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

206,872

179,543

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

14,701

13,979Repairs and maintenance .......................................................................................

89,96462,666

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

46,396

43,761Others ......................................................................................................................

158,390

135,527

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

¥

2,607,389¥

2,397,20231

13. 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, 2007 and October 31, 2006 are as follows:
In thousands of yen

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

As of April 30, 2007

As of October 31, 2006¥

1,266,446¥

9,741,832

9,709,697¥

11,008,278¥ 10,976,113

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

1,266,416

14. 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 of the interested-related positions outstanding as of April 30, 2007:(As of April 30, 2007)
Type
Interest-rate swap:
Fixed rate payable and floating rate receivable

32

Notional amount¥43,800 million

15. PROPERTY INFORMATION
Details of the property portfolio as of April 30, 2007 were as follows:
Type

Office Buildings
Tokyo
Metropolitan
Area

Location
Number of properties

Residential Properties

Central Urban Retail Properties

Other Regional Tokyo Metropolitan Other Regional
Areas
Area
Areas

34

Tokyo
Metropolitan
Area

Other Regional Areas
1

5

22

8

2

¥ 11,475¥ 33,481¥ 9,571¥ 12,379

Property information(In millions of yen)
Acquisition price¥ 104,504

Percentage of total acquisition costs¥ 3,680

59.7%

6.6%

19.1%

5.5%

7.1%

2.1%

Net book value

106,573

11,45734,15810,00812,918

3,688

Appraisal value at year end

115,507

11,68034,5709,898

14,290

3,760

60.9%

6.2%

18.2%

5.2%

7.5%

2.0%

Percentage of total appraisal value
Financial results for the period ended April 30, 2007
(In thousands of yen)
Rental and other operating revenues¥ 3,087,334¥ 549,071¥ 1,090,495¥ 379,854¥ 386,418¥ 108,000

Rental revenues

2,742,506

459,137

1,013,089

322,332

275,495

108,000

Other revenues

344,828

89,934

77,40657,522110,923−

Property-related expenses

758,438

207,552

175,945

128,684

72,4898,275

303,838

106,093

86,41337,266

29,687

4,239

Taxes

112,653

36,49917,785

15,905

19,546

2,725

Utilities

198,90238,528

11,851

7,126

19,006−

Repairs and maintenance

28,636

18,05014,58325,470256−

Insurance

6,418

3,313

2,770

1,525

465

111

Property management fees

Trust fees and other expenses

107,991

5,069

42,543

41,392

3,529

1,200

2,328,896

341,519914,550

251,170

313,92999,725

Depreciation expenses

603,001

181,014271,223

97,43869,6509,856Operating income from property leasing activities

1,725,895

160,505

643,327

153,732

244,279

89,869

NOI (Net Operating Income)Capital expenditures

727,217

34,231

14,18465,632289,794−

NCF (Net Cash Flow)

1,601,679

307,288

900,366

185,538

24,13599,725A breakdown of property-type as of April 30, 2007 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

Properties

106,28856.4

11,456

6.1

117,744

62.5

Tokyo Metropolitan Area

34,15818.2

Other Regional Areas

10,008

5.3

44,16623.5

12,918

6.8

Subtotal
Central Urban Retail

Percentage of
total assets

Tokyo Metropolitan Area
Other Regional Areas
Subtotal

3,689

2.0

16,607

8.8

Total

178,517

94.8

Bank deposits and other assets

9,884

5.2

Total assets

188,401

100.0

Total liabilities
Net assets¥

97,52351.8

90,87848.2

33

16. SUBSEQUENT EVENTSIssuance of New Investment UnitsOn April 26, 2007 and May 14, 2007, the Board of Directors of the Investment Corporation resolved to issue
new investment units as follows. The payments for new investment units through public offering were completed
on May 22, 2007. As a result of the issuance of additional investment units, the Investment Corporation had total
unitholders’ capital of ¥123,203,689,870 with 197,900 investment units outstanding as of May 22, 2007.
(1) Issuance of New Investment Units through Public Offering
Total number of newly issued units:
40,900units
Japanese Primary Offering:
26,710 units
International Offering:
14,190units
Offer price per unit:¥873,180
Total amount of offerings:¥35,713,062,000
Issue price per unit:¥842,886
Net proceeds:¥34,474,037,400
Payment date:
May 22, 2007
Delivery date of investment unit certificates:
May 23, 2007
Starting date of the computation for cash distribution: May 1, 2007
(2) Issuance of New Investment Units through Third-party Allotment
Total number of newly issued units:
up to 2,100 units
Offer price per unit:¥842,886
Net proceeds:¥1,770,060,600
Payment date:June 19, 2007
Delivery date of investment unit certificates:
June 20, 2007
Starting date of the computation for cash distribution:
May 1, 200734

Management Report
36
36
37
38
38
40
42
43
44
44
44
45
47
48
49
50
50

Structure of Investment Corporation
Board of Directors
Outline of the Asset Management Company
The Kenedix Group
Memorandum of Understanding with Kenedix and Kenedix Advisors
Policies with Respect to Certain Activities
Our Investment Objective and Strategy
Distributions
Movements in Investment Units Issued and Outstanding
Trends of Investment Unit Certificate Price on the Tokyo Stock Exchange
The Main Investors of the Investment Corporation
Borrowings
Investment Corporation Bonds
Portfolios Outline
Capital Expenditure
Expenses and Liabilities
Details of Related-Party Transactions

35

Structure of Investment Corporation
Investment Corporation
Information and Property Providers(Support-Line Companies)
Kenedix, Inc.
Kenedix Advisors Co., Ltd.

General Meeting of Unitholders④

Asset Management Company
Administrative Agent for Directors’ Meeting

Administrative Agent
Asset Custodian

Kenedix Realty Investment Corporation②

Mizuho Trust & Banking Co., Ltd.

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

Kenedix REIT Management, Inc.

Accounting Auditor

Transfer Agent③

The Chuo Mitsui Trust and Banking Co., Limited

Ernst & Young ShinNihon①

Asset Management Agreement / Operating Agency Agreement②

Administrative Agency Agreement / Asset Custodian Agreement③

Transfer Agency Agreement④

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

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

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

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

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

36

Outline of the Asset Management Company
Name:

Kenedix REIT Management, Inc.

Capital:¥200 million

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

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

November 9, 2004

Renamed to Kenedix REIT Management, Inc.

February 28, 2005

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

April 18, 2005

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

April 26, 2005

Obtained approval to be Operating Agent for the Investment Corporation

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

Compliance Committee
Representative Director

Investment Management Division
Real Estate
Investment
Group

Asset
Management
Group

Financial Planning Division

IR
Group

Finance andAccounting
Group

Corporate Planning / Administration Division
Business
AdministrationGroup

Principal Shareholder:

Name
Kenedix, Inc.

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

Number of Stocks Owned
6,450 units

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

37

The Kenedix GroupThe Kenedix Group is made up of Kenedix, Inc. (“Kenedix”), as well as its subsidiaries and affiliates, including leading providers of real estateadvisory services, real estate asset and property management services and real estate investment management services in Japan. Kenedix
owned 5.00% of our units as of April 30, 2007. Since our formation, which was promoted by Kenedix, we have received significant support fromthe Kenedix Group in our business and activities, particularly from Kenedix, Kenedix REIT Management Co., Ltd. (“Asset Management Company”)
and Kenedix Advisors Co., Ltd. (“Kenedix Advisors”). We expect to continue to rely on these companies and believe that our relationship withthem 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 is listed on the First Section of the Tokyo Stock Exchange. The core businesses of Kenedix
include real estate advisory, asset management and collateralized debt investment management services, including on behalf of international
investors, pension funds and other institutional investors. Kenedix targets investment in office buildings, in addition to residential, retail, logistics
and other facilities, while actively engaging in real estate development for investment. Kenedix has also diversified its investment into areas suchas hotels, nursing homes and other properties for which income depends heavily on active property management, and responded to global
movements of funds by making more investments overseas. We believe we benefit from the experience and resources of Kenedix and thecompetitive advantages of our relationship with Kenedix as an independent real estate management company.
• Kenedix REIT Management, Inc. The Asset Management Company is broadly responsible for the formulation and execution of ourinvestment strategy and our other activities. The Asset Management Company’s employees have diverse experience in the real estate andfinancial markets in Japan, including experience in real estate appraisal 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 ourinvestment strategy.
• Kenedix Advisors Co., Inc. Kenedix Advisors was incorporated in November 2003 as a real estate fund and property managementcompany, 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 aleasing management company for most of our properties pursuant to variable pass-through master lease agreements described in this report.
We and the Asset Management Company are parties to a memorandum of understanding dated May 31, 2005 with Kenedix and Kenedix
Advisors, which was recently revised in April 2007. The memorandum of understanding provides us with certain assurances from Kenedix and
Kenedix Advisors with respect to information, 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 on May 31, 2005 with Kenedix, Kenedix Advisors and the Asset Management Company, which
was subsequently revised on April 9, 2007 to provide us with increased preferential rights. We believe that revised memorandum of
understanding reflects the strengthened relationship between the Kenedix Group and us. The revised memorandum of understanding has a termof one year, which is automatically renewed for successive one-year periods unless any of the parties notifies the other parties of its intent toterminate the memorandum of understanding at least 30 days prior to the expiration of the term.

Support from Kenedix
Pursuant to the revised memorandum of understanding, Kenedix has agreed to provide support to us in the following areas:• First Preference to Property Information Acquired by Kenedix.
When Kenedix receives information regarding any available property owned by a third party that, in the reasonable opinion of Kenedix, meets ourinvestment criteria, including properties under development, Kenedix, has agreed to preferentially provide information on such property to the
Asset Management Company, unless prohibited by laws or regulations or contracts to which it is a party. Until Kenedix becomes capable ofreasonably determining that it is difficult to sell such property to us, Kenedix has agreed not to provide such information to any person other thanthe Asset Management Company or to acquire the property for itself. Prior to the revision on April 9, 2007, the Asset Management Company had
a second-preference right to information, with the first-preference right reserved for real estate investment funds in which the major investors are
pension funds for which Kenedix Advisors served as asset management company.

38• First-Preference Negotiating Rights for Properties Owned by Kenedix.
In the event that Kenedix disposes of a property owned by Kenedix, an entity wholly owned by Kenedix, or a fund fully financed by Kenedix orwholly owned entity, such as silent partnership fund (a “Kenedix Property”) that, in the reasonable opinion of Kenedix, meets our investment
criteria, Kenedix has agreed to grant the Asset Management Company first-preferential negotiating rights for such property, unless prohibited bylaw or regulation or contracts to which it is a party. In the event that Kenedix and the Asset Management Company do not reach an agreement
for the sale and purchase of such property during the negotiation period, Kenedix may offer such property to any person other than the AssetManagement Company after giving notice to the Asset Management Company. Prior to the revision on April 9, 2007, Kenedix granted the AssetManagement Company second-preference negotiating rights for a Kenedix Property that no pension fund for which Kenedix Advisors served asasset management company had agreed to purchase during its first-preference negotiation period on that in the reasonable option of Kenedix, met
our investment criteria but did not meet the investment criteria of any such pension fund.
• Information on Property Owned by Kenedix Private Placement Funds.
In the event that Kenedix disposes of a property that is owned by a real estate investment fund for which it serves as asset management company(excluding any fund referred to in the immediately preceding paragraph) and, in the reasonable opinion of Kenedix, that meets our investment
criteria, Kenedix has agreed to provide information on such property to the Asset Management Company no later than such time as Kenedix
provides such information to any person other than the Asset Management Company, unless otherwise prohibited by law or regulation or contracts
to which it is a party.
• Property Pre-Acquisition Support.
The Asset Management Company may request Kenedix to purchase and hold a property owned or managed by a third party with a view toreselling it to us. In the event that Kenedix accepts such a request and purchases the property directly or indirectly through a wholly owned entity,
we are granted the first 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 revised memorandum of understanding, Kenedix Advisors has agreed to provide support to us in the following area:• First-Preference to Properties Owned by Pension Funds.
In the event that Kenedix Advisors disposes of a property that is owned by a pension fund, and if Kenedix Advisors reasonably determines thatsuch property meets our investment criteria Kenedix Advisors has agreed to preferentially offer to sell such property to the Asset Management
Company, unless otherwise prohibited by law or regulation or contracts to which it is a party. Kenedix Advisors has agreed not to offer to sellsuch property to other parties than the Asset Management Company during the negotiation period. In the event that Kenedix Advisors and theAsset Management Company do not reach an agreement for the sale and purchase of the property during the negotiation period, Kenedix
Advisors may offer such property to a third party after giving notice to the Asset Management Company.

39

Policies with Respect to Certain Activities
Basic Policies
We seek to achieve our investment objective within the framework of the following basic policies, which are reflected in our articles ofincorporation as follows:• We will invest, directly or indirectly, primarily in office, residential and retail properties located in the Tokyo metropolitan area including
major cities in Tokyo, Kanagawa, Saitama and Chiba prefectures and other major cities 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.

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. For
example, in December 2006 we revised our portfolio goals to concentrate more on office properties, as described below. These policies are notbinding 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, our business 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 properties, focusing on
mid-sized office properties, central urban retail properties and residential properties. In light of the favorable market conditions and outlook foroffice buildings, in December 2006, we revised our portfolio goals to concentrate more on office properties.
Geographic Diversification. Our geographic investment focus is on properties located in the Tokyo metropolitan area, including major
cities in Tokyo, Kanagawa, Saitama, and Chiba prefectures, with an emphasis on central Tokyo consisting of the Chiyoda, Chuo, Minato, Shibuya
and Shinjuku wards. A portion of our investment portfolio is also located in other major cities (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 real estatemarket 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 and central urban retailproperties 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.
In addition, we may purchase residential properties with a minimum value of ¥0.5 billion. The total floor space at an office or a central urban retailbuilding should be more than 1,000 m2. Our investment targets in residential properties are single-type, compact-type, family-type andprestige-type residential properties.
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.
Other Portfolio Goals. Based on our focus on properties in the Tokyo metropolitan area as described above, the Asset Management
Company decides on specific portfolio goals with respect to our investments. The policy takes into account general economic conditions, realestate market conditions, interest rate trends, population shifts, and other factors, with the aim of realizing our basic investment objective. In theevent of a significant change in economic, real estate market or other conditions, however, this portfolio management policy is reviewed andamended as and when considered appropriate by the Asset Management Company.

40

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. Pursuant to the revisions in investment guidelines in December 2006, the Asset Management
Company has set a broad framework for a portfolio consisting of 50%-100% office properties, less than 20% central urban retail properties andless than 30% residential properties 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 major cities. 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 a year, medium-term means a period of
more than a 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 thetotal value 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 limit our borrowings and issuances of investment corporation bonds to ¥1 trillion in the aggregate.
We have recently been seeking to raise long-term debt capital in longer terms, including debt with maturities over 5 years, in order to extend
our average maturity 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- 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 on such terms 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 would cause dilution of a unitholder’s investment in us.

41Our Investment Objective and Strategy
Our investment objective is to secure, in the medium to long term, relatively stable distributions for our unitholders through real estate
investment. We seek to achieve our investment objective through the following strategies:

External Growth Strategies
Seek Stable Portfolio Growth through Diversified Property Investments
We have continued to expand our property portfolio. We started with an initial portfolio that had an aggregate acquisition price of ¥61.1
billion shortly after our initial public offering in July 2005 and set a target of achieving a portfolio with an aggregate acquisition price of ¥200 billion
by the end of 2008. In 2006, we moved this target forward to the end of 2007. In June 2007, we achieved a portfolio with an aggregateacquisition price of ¥197.1 billion, thus substantially achieving our target six months early.
size in the future.

We intend to continue increasing our total portfolio

In light of the favorable market conditions and outlook for office buildings, we revised our portfolio goals in December 2006 toconcentrate more on office properties and have decided to make no new investments in residential properties for the foreseeable future. In
particular, we are targetting mid-sized office properties, with an emphasis on the Tokyo metropolitan area, especially central Tokyo. We believethat improved conditions in office property markets in major urban areas, including rising property values, occupancy ratios and rents, as well as
greater transaction volume, create a favorable environment for expanding our portfolio.

We seek to continue improving the quality of our portfolio,

such as the location, size and type of properties, through various measures, including replacement of assets.
Leverage Relationship with the Kenedix GroupWe believe that we have an increasingly strong relationship with the Kenedix Group, which has broad expertise and experience in real
property investment and management in Japan. In April 2007, we revised our memorandum of understanding with Kenedix, Kenedix Advisors
and the Asset Management Company, pursuant to which the Asset Management Company has first preference to informational and negotiatingrights from Kenedix and Kenedix Advisors about properties meeting our specified investment criteria. In addition, in a February 2007 press
release of Kenedix announcing its operating results for its fiscal year ended December 31, 2006, Kenedix noted the contribution of J-REITs andtheir sustained growth to the Kenedix Group, and noted that the Kenedix Group was taking steps to expand its J-REIT business.

We intend tocontinue to draw on the expertise and experience of the Kenedix Group and its employees to help us locate and acquire attractive properties andincrease their value through active property management. We refer to our portfolio in our marketing activities as “Kenedix Selection” toemphasize the importance of the Kenedix Group in the selection and management of our properties.
Utilize the Asset Manager’s Original Network for Sourcing Properties
The Asset Management Company’s employees have diverse experience in the real estate and financial markets in Japan. A part of our
growth strategy involves acquiring information about potential acquisition opportunities through the Asset Management Company’s network. We
plan to continue to utilize the Asset Management Company’s knowledge, experience and network of contacts in the real estate market to help us
locate and acquire properties that match our investment strategy.
Make Diversified Acquisitions
We plan to continue making diversified acquisitions of mid-sized office properties, including properties that we subsequently renovate with aview to enhancing their property values and rental revenues. For example, from time to time we acquire properties with high vacancy rates andmake substantial renovations to make them more attractive to potential tenants. We also purchase buildings and convert portions of them fromresidential or other use to office or retail space. We intend to continue acquiring properties for renovation as part of our diversified acquisition
strategy to enhance our portfolio.

Internal Growth Strategies
Increase Cash Flow 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 expect theAsset Management Company and Kenedix Advisors, working with on-site property management companies, to develop and implement strategies
to increase property value and revenues. Key components of our property management strategies include conducting tenant surveys andmaking appropriate improvements, maintaining attractive properties with uniform standards, engaging in flexible and focused leasing activities
geared towards tenant needs and market trends, and exercising careful control of management and operating costs. As a result of our property
management strategies and favorable conditions in the office property market, rents for units in our office properties tended to increase when we
entered into new lease agreements in the fiscal period ended April 30, 2007.

42

Achieve Efficient Property Management Centralized under Kenedix Advisors
We seek to implement efficient property management and leasing by engaging Kenedix Advisors as the property and leasing managementcompany for each of our properties.

By centralizing property management, we believe we can take advantage of the size of our portfolio todelegate property-related tasks in an efficient and cost-effective manner to on-site property managers and facility managers. In addition, byentering into centralized leasing arrangements with Kenedix Advisors, we believe we can take advantage of its network and experience in locating
and managing suitable tenants for our properties.

Distributions
In order to maintain our favorable tax treatment, which is available to J-REITs under the Special Taxation Measures Law of Japan, we must
distribute in excess of 90% of our distributable income as defined in the Special Taxation Measures Law, which differs slightly from retained
earnings under Japanese GAAP. Our articles of incorporation require that we make cash distributions of at least this amount. If our retained
earnings are less than 90% of our distributable income, or if we determine it is appropriate to do so, 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 the standards set by theInvestment Trusts Association of Japan. These standards 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. If such maximum amount is still below 90% of our distributable income as
defined in the Special Taxation Measures Law, our articles of incorporation further permit us to make distributions in the amount we determine
necessary to satisfy the requirements 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 toApril 30, 2006

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

Fourth Fiscal Period
November 1, 2006 to
April 30, 2007

Unappropriated Retained Earnings¥242,251,377¥1,102,013,492¥2,124,112,014¥2,148,117,194

Retained Earnings for the next fiscal period
Cash Distributions(Distribution per unit)
Earnings Distributed(Earnings Distributed per unit)
Payments for capital participations(Payments for capital participations per unit)¥14,137¥242,237,240（¥3,052）¥242,237,240（¥3,052）−（ − ）¥40,412¥1,101,973,080（¥13,884）¥1,101,973,080（¥13,884）−（ − ）¥59,014¥2,124,053,000（¥13,529）¥2,124,053,000（¥13,529）−（ − ）¥43,194¥2,148,074,000（¥13,682）¥2,148,074,000（¥13,682）
−
（ − ）

43

Movements in Investment Units Issued and Outstanding
Movements in unitholders’ capital and the number of investment units issued and outstanding until the end of the fourth fiscal period aresummarized in the following table.
Settlement Date

Particulars

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

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

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

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

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

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

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

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

Fourth Fiscal Period
April 30,2007¥918,000¥607,000

The Main Investors of the Investment Corporation
The main investors of the Investment Corporation as of April 30, 2007 are as follows.
NameJapan Trustee Services Bank, Ltd.
(trust account)
Nikko Cititrust and Banking Co.
(investment trust account)

Number ofInvestment Units
owned

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

14,2399.06

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

9,909

6.31

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

9,819

6.25

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

9,385

5.97

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

7,850

5.00

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

7,636

4.86

CGML-London Equity
The Bank of New York,
Treaty JASDEC Account2-3-14, Higashi-Shinagawa, Shinagawa-ku, Tokyo

6,243

3.97

2-7-1, Marunouchi, Chiyoda-ku, Tokyo

5,175

3.29

UBS AG London Asia Equities

1-5-1, Otemachi, Chiyoda-ku, Tokyo

3,853

2.45

The Gibraltar Life Insurance(Units held in general and other accounts)

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

3,599

2.29

77,70849.45

State Street Bank and Trust Company
Trust & Custody Services Bank, Ltd.
(securities investment trust account)
Kenedix, Inc.
The Master Trust Bank of Japan, Ltd.
(trust account)

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

44

Ratio (%)

Borrowings
Borrowings on a financial institution basis as of April 30, 2007 are as follows.
Classification

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

Drawdown
Date

Balance atthe End ofPrevious
Period(Millions of
Yen)

March 1,
2006

500

-

1,000

-

1,000

-

2,000

2,000

1,000

1,000

500

500

500

500

3,000

3,000

2,000

-

1,000

1,000

1,000

1,000

0.745

-

500

0.816

-

500

-

500

-

250

-

1,750

-

500

-

1,000

-

May 1,
2006

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

July 31,2006

September
20, 2006

Short-Term Borrowings

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

October
31, 2006
December
1, 2006

Resona Bank, Ltd.

January 19,
2007

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

March 1,
2007

Aozora Bank, Ltd.
Mitsubishi UFJ Trust andBanking Corporation
The Bank of Tokyo-Mitsubishi
UFJ, Ltd.
Sub Total

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

Repayment
Date

0.732

February 28,
2007

0.725

April 30, 2007

0.725

July 31, 2007

0.745

September 20,
2007
October 31,
2007
November 30,
2007

0.837

January 18,
2008

0.961

February 29,
2008

2,000

0.945

October 2,
2007

1,500

0.965

-

1,000

1.015

13,50018,500April
2, 2007

Payment
MethodFull onmaturity

Usage

Remarks(Note 2)

Unsecured/
Unguaranteed

April 2, 200845

Classification

LenderDrawdown
Date

Mitsubishi UFJ Trust andBanking Corporation

Balance atthe End ofPrevious
Period(Millions of
Yen)

Balance atthe End ofcurrent
Period(Millionsof Yen)

2,700

2,700

The Norinchukin Bank

2,500

2,500

The Chiba Bank, Ltd.

1,200

1,200

1,000

1,000

1,000

1,000

800

800

300

300

3,750

3,750

3,750

3,750

1,500

1,500

Resona Bank, Ltd.

500

500

Sumitomo Mitsui Banking
Corporation

1,500

1,500

3,000

3,000

500

500

1,500

1,500

500

500

800

800

500

500

700

700

2,500

2,500

2,000

2,000

1,500

1,500

1,000

1,000

1,000

1,000

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

August 1,
2005

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

The Norinchukin Bank

November
1, 2005

Resona Bank, Ltd.
Aozora Bank, Ltd.
Resona Bank, Ltd.

December
8, 2005

Long-Term Borrowings

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

March 1,
2006
March 16,
2006

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

May 1,
2006

Interest
Rate(Note 1)

Repayment
Date

0.869

July 31, 2008

1.288

July 31, 2010

0.769

October 31,
2007

1.090

October 31,
2008

1.098

December 7,
2008

1.449

February 28,
2009

1.476

March 16,
2009

1.629

April 30, 2009

2.199

April 30, 2011

1,000

1,000

Aozora Bank, Ltd.

1,500

1,500

Mitsui Sumitomo InsuranceCo., Ltd.

1,000

1,000

5,000

5,000

2.731

April 30, 2016

1,000

1,000

2.149

July 13, 2011

3,000

3,000

2.124

-

2,500

1.964

-

2,000

1.574

April 2, 2010

-

2,000

1.875

April 2, 2012

-

3,000

1.043

April 16, 2011

Sub Total

48,50058,000Total

62,00076,500Development Bank of Japan
Mitsubishi UFJ Trust andBanking Corporation
Development Bank of JapanThe Norinchukin Bank

July 14,2006
September
1, 2006
December
1, 2006

Sumitomo Mitsui Banking
Corporation
The Chuo Mitsui Trust andBanking Co., Ltd.

April 2,
2007

The Norinchukin Bank

April 17,
2007

Payment
MethodUsage

Remarks

Full onmaturity(Note 2)

Unsecured/
Unguaranteed

August 31,
2013
November 30,
2011

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

46

Investment Corporation Bonds
The status of the investment corporation bonds as of April 30, 2007 are as follows.
( Millions of Yen)
Issuance
Date

Balance at the End
of Previous Period(Millions of Yen)

Balance at the Endof current Period(Millions of Yen)

Interest
Rate(%)

Redemption
Date

Payment
MethodFirst Series Bonds

March

-

9,000

1.74

March 15, 2012

Full onSecond Series Bonds

15, 2007-

3,000
12,0002.37

March 15, 2017

maturity

Total

-

Usage

Remarks(Note1)(Note2)

Notes:
1. Ranking pari passu among the Specified Investment Corporation Bonds.
2. Funds procured through issuance of investment corporation bonds were used repay borrowings.

47

Portfolios Outline
Composition of Portfolio Assets
Type ofSpecified AssetType

Third Fiscal Period(As of October 31, 2006)
Total Amount Held
Ratio
(Millions of Yen)
(%)
3,466
2.2

Area

Office Buildings
Central Urban Retail
Properties
Total for Real Estate
Real EstateTokyo Metropolitan Area

Office Buildings

Other Regional Areas

Total for Office Buildings
Trust BeneficiaryInterest in Real Estate

Residential Properties

52

0.0

50

0.0

3,519
73,733
10,22583,95835,85810,03945,89812,645
3,698
16,343
146,200
10,594160,314

2.2
46.0
6.4
52.4
22.4
6.3
28.6
7.9
2.3
10.2
91.2
6.6
100.0

13,097
93,525
11,456104,981
34,15810,00844,166
12,867
3,688
16,556
165,704
9,598
188,400

6.9
49.6
6.1
55.7
18.1
5.3
23.4
6.8
2.0
8.8
88.0
5.1
100.0

Tokyo Metropolitan Area

Tokyo Metropolitan Area

Tokyo Metropolitan Area
Other Regional Areas

Total for Residential Properties
Central Urban RetailTokyo Metropolitan Area
Properties
Other Regional Areas
Total for Central Urban Retail Properties
Total of Trust Beneficiary Interests in Real Estate
Bank Deposits and Other Assets
Total Assets

Fourth Fiscal Period(As of April 30, 2007)
Total Amount Held
Ratio
(Millions of Yen)(%)
13,047
6.9

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

Area

Tokyo

No.

Property Name

Sales

Date of
Acquisition

Acquisition
Price(Millions of
Yen)

Date of
Sales

Sales Price(Millions ofYen)Book Value(Millions of
Yen)

CapitalGain (Loss)(Millions of
Yen)
-

A-37

KDX Ochanomizu Building

April 2, 2007

6,400

-

-

-

A-32

KDX Shiba-Daimon Building

March 1, 2007

6,090

-

-

-

-

A-39

KDX Toranomon Building

April 17, 2007

4,400

-

-

-

-

KDX Nishi-Gotanda Building

December 1, 2006

4,200

-

-

-

-

A-33

KDX Okachimachi Building

March 1, 2007

2,000

-

-

-

-

Area

A-38

KDX Nishi-Shinjuku Building

April 2, 2007

1,500

-

-

-

-

A-31

KDX Monzen-Nakacho Building

January 19, 2007

1,400

-

-

-

-

OfficeA-30

Metropolitan

A-34

KDX Hon-Atsugi Building

March 1, 2007

1,305

-

-

-

-

A-35

KDX Hachioji Building

March 1, 2007

1,155

-

-

-

-

A-36

KDX Niigata Building

March 1, 2007

1,305

Other
Regional
Areas
Total of OfficeTokyo
Residential

Metropolitan

Note:

48

Area

B-14

Court Shinbashi

B-15

Court Suitengu
Total of Residential

29,755
-

-

-

-

-

-

-

-

-

-

-

-

April 20, 2007

895

761

112

April 20, 2007
-

708

672

18

1,603

1,433

130

Total
29,755
1,603
1,433
130
Acquisition prices are the sales amounts recorded in trust beneficiary interest agreements exclusive of associated costs such as brokerage fees and taxes.

Capital Expenditure
Planned capital expenditures
Major capital expenditure plans for renovation of properties in which the Investment Corporation holds a trust beneficiary interest for the
fourth fiscal period (May 1, 2007 to October 31, 2007) are as follows. Planned capital expenditure includes portions classified into expenses foraccounting purposes.

Property Name
(Location)

PurposeKDX Toranomon Building(Minato-ku, Tokyo)

Renovation for the entire building

KDX Niigata Building(Niigata-shi, Niigata)

Schedule

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

May 2007 to
October 2007

330

−

−

Renewal work for common use areas,
upgrade of air conditioning system,other

As above

110

−

−

Ashiya Royal Homes(Ashiya-shi, Hyogo)

Upgrade of indoor facilities, other

As above95−−

KDX Shiba-Daimon Building(Minato-ku, Tokyo)

Renovation for external wall, upgrade ofindividual air conditioning system, other

As above72−−

KDX Funabashi Building(Funabashi-shi, Chiba)

Renovation for external wall, other

As above

55−−

Capital Expenditures During the Fourth Fiscal Period
The Investment Corporation undertook the following major capital expenditures as follows. In the fourth fiscal period, the Investment
Corporation completed work across its entire portfolio totaling ¥1,222 million. This total comprised of ¥1,132 million in capital expenditures and¥89 million for repairs, maintenance and renovation expenses.
Property Name
(Location)

PurposeSchedule
November 2006 to

Amount of Capital Expenditures(Millions of Yen)

Frame Jinnan-zaka(Shibuya-ku, Tokyo)

Fully renewal work, other

KDX Nihonbashi 313 Building(Chuo-ku, Tokyo)

Plumbing equipment work, interior facilities
work, other

As above

159

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

Upgrade of individual air conditioning
system, other

As above136

KDX Funabashi Building(Funabashi-shi, Chiba)

Upgrade of air conditioning system, other

As above82

KDX Nishi-Gotanda Building(Shinagawa-ku, Tokyo)

Renovation for entrance, other

As above48

Ashiya Royal Homes(Ashiya-shi, Hyogo)

Upgrade of indoor facilities and parking
facilities, other

As above

41

Harajuku F.F. Building(Shibuya-ku, Tokyo)

Upgrade of air conditioning system, other

As above

28

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

Renovation for external wall, other

As above18

April 2007

287

Others328

Portfolio Total

1,132

49

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)First Fiscal Period Second Fiscal Period Third Fiscal Period Fourth Fiscal Period

Fiscal period

−

92

165

288

Reserve for the fiscal period under review

92

130

148

118

Reversal of reserve for the fiscal period under review

−

57

26

0

Reserve bring to the next period

92

165

288

406

Reserve for the end of the previous period

Expenses and Liabilities
Details for Expenses

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

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

Third Fiscal Period
203,842
11,70535,0235,400
5,900
64,569Total

326,439( Thousands of Yen)
Fourth Fiscal Period
306,965
17,92848,6725,400
7,800
97,309484,075

Note : In addition to the asset management fees indicated in the above table, a total of ¥193,157 thousand for the third fiscal period and ¥117,550 thousand
for the fourth 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
There were no related-party transactions under the Investment Trust Law.
(2) Fees
Details of fees and other
Classification

Total Fees (A)(Thousands of Yen)

payments to related parties
Payment Recipient

Ratio

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

Leasing management fees

202,279

Kenedix Advisors Co., Ltd.

202,279

100.0Management transfer fees

21,200As above

21,200100.0

Construction supervision fees

37,431As above

37,431100.0

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

50

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 fourth fiscal period, April 27, 2007, areprovided in the following table.
KRI Closing Price
VolumeAggregate Market Value as of April 30, 2007: ¥140,986mn
Highest Trading Price: ¥918,000 (April 2, 2007)
Lowest Trading Price: ¥564,000 (June 20, 2006)

Volume (Unit)
11,000KRI Closing Price (Yen)
950,000

4,000

850,000

3,000

750,000

Offer Price at PO¥593,096

Offer Price at IPO¥580,000

2,000

650,000

1,000

550,000
450,000

0Jul. 21, 05

Oct. 31, 05

Apr. 30, 06

Oct. 31, 06

Apr. 30, 07

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
Financial Institutions
End of 3rd fiscal period(incl. securities companies)(157,000 units)
75,308 units (47.96%)

Other Domestic
Foreign Corporation andCorporation
Individuals
10,721 units (6.82%) 54,259 units (34.55%)

Financial Institutions(incl. securities companies)
73,049 units (46.52%)

Other Domestic
Foreign Corporation andCorporation
Individuals
10,022 units (6.38%) 63,198 units (40.25%)

End of 4th fiscal period(157,000 units)

Individuals andOthers

16,712 units (10.64%)
Individuals andOthers
10,731 units (6.83%)

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

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

URL

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

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

Kenedix Realty Investment Corporation
Corporate Data
(As of August 1, 2007)
Corporate Office
KDX Shinbashi Building 6F
2-2-9, Shimbashi, Minato-ku,
Tokyo, 105-0004, Japan
Tel +81-3- 3519-3491
Fax +81-3- 3519-3555
Date of Incorporation
May 6, 2005
Capital¥124,964,750,470
200,000units
Stock Listing
REIT market of the Tokyo Stock Exchange
Security Code8972
Transfer Agent
The Chuo Mitsui Trust & Banking Co., Ltd.
3-33-1 Shiba, Minato-ku, Tokyo 105-8574, Japan
Independent Auditors
Ernst & 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, Director/ General Manager
Masahiko Tajima
KDX Shinbashi Building 6F
2-2-9, Shimbashi, Minato-ku,
Tokyo, 105-0004, Japan
Tel +81-3- 3519-3491
Fax +81-3- 3519-3555

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