Our Accommodations
Consistently Create Value

4th Period
NAF Report | September 2007 – February 2008

http://www.naf-r.jp/english/index.html

Profile

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

Contents
Financial Highlights ......................................................................... 1

Corporate Structure and Governance............................................... 24

NAF Snapshot .................................................................................. 2

Rental Apartment Investment Characteristics.................................. 28

To Our Stakeholders ........................................................................ 4

Management‘s Discussion and Analysis .......................................... 30

Our Accommodations Consistently Create Value............................. 7
External Growth .......................................................................... 8Internal Growth ........................................................................... 10
Value Chain ................................................................................. 12

Financial Statements........................................................................ 37

NAF Portfolio ................................................................................... 16
Portfolio Map............................................................................... 16
New Acquisitions......................................................................... 18
Representative Accommodation Assets ....................................... 20
Portfolio Summary ....................................................................... 22

Nippon Accommodations Fund Inc.

Notes to Financial Statements ......................................................... 41
Independent Auditors’ Report.......................................................... 49
Appendix ......................................................................................... 50
Portfolio Policy................................................................................. 54
Corporate Data and Investor Information ........................................ 58

Financial Highlights

Yen in millions

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

4th Period

3rd Period

2nd Period

4th Period

September 1, 2007 to
February 29, 2008

March 1, 2007 to
August 31, 2007

April 1, 2006 to
February 28, 2007

September 1, 2007 to
February 29, 2008

¥ 4,092
1,631
1,630

¥ 3,524
1,448
1,447

¥ 5,072
2,030
2,028

$ 39,053
15,566
15,556

2,361

2,055

2,873

22,533

3,317
1,630

2,806
1,447

4,131
2,028

31,657
15,556

Total assets
Total liabilities
Total net assets (b)LTV (Loan-to-value) ratio (Note 3)

129,969
67,36062,60949.6%

114,366
51,94062,42643.3%

108,097
45,09063,00739.3%

1,240,399
642,871597,528

Total number of common units issued (units) (c)Net assets per unit (Yen/$) (b) / (c)Distribution per unit (Yen/$) (a) / (c)Funds from operations per unit (Yen/$) (Note 3)

113,480
551,717
14,36620,809113,480
550,10212,75018,106

113,480555,223
17,871
25,359Total revenues (Note 2)
Income before income taxes
Net income
Funds from operations (Note 3)
Net operating income from property
leasing activities (Note 3)
Total amount of cash distribution (a)5,265.48
137.11
198.60Notes 1. U.S. dollar amounts are translated from yen, for convenience only, at the rate of ¥104.78 = U.S.$1.00 in effect on February 29, 2008.
2. Total revenues do not include consumption taxes.
3. Funds from operations: Net income + Depreciation and amortization – Gain on sale of investment properties
Net operating income from property leasing activities: (Revenue from property leasing – Rental expenses) + Depreciation and amortization
LTV ratio: Interest-bearing debt ÷ Total assets
Funds from operations per unit:(Net income + Depreciation and amortization – Gain on sale of investment properties) ÷ Total number of units issued and outstanding at end of period

Occupancy Rate (Portfolio average)

Ratings (As of February 29, 2008)

(%)

100
98

96.8

96.5

97.0

96.7

96.8

Rating Agency

RatingOutlook

Moody’s Investors Service Inc.

A1

StableRating and Investment Information Inc.

AA

StableLong-term Corporate

A+

StableShort-term Corporate

A-1

—

97.2

96
94

Standard and Poor’s

92
90

9
2007

10

11

12

(End of the month)

1
2008

2

NAF’s properties have maintained a stablehigh occupancy rate since its listing on theTokyo Stock Exchange.

NAF’s ratings from major rating agencies
are among the highest for J-REITs.

NAF Report September 2007 – February 2008

1

NAF Snapshot(As of February 29, 2008)

Profitability
97.2%

An occupancy rate of 97.2 percent

5.4%

Net operating income (NOI) yield* of 5.4 percent¥14,366

Distribution per unit of ¥14,366 for the 4th Period

Outstanding Portfolio¥123,246 million

Steady portfolio expansion to 37 properties with a totalacquisition value of ¥123,246 million

168,959.94m2/
3,735 units

3,735 units with a total rentable area of 168,959.94m2

92.0%

92.0 percent of portfolio located in the 23 wards of Tokyo

Stability
A1, AA, A+
49.6%

Rated A1 by Moody’s; AA by Rating and Investment Information;
and A+ (Long-term) and A-1 (Short-term) by Standard and Poor’s
LTV (Loan-to-Value) ratio of 49.6 percent, long-term fixedratio of 80.6 percent* Weighted average of annual NOI yield on the acquisition value of each property.

2

Nippon Accommodations Fund Inc.

Real Estate for Living Accommodations

Accommodation assets
Senior residences

Corporate
housing/
Dormitories/
Student
apartments

Houses built for retail saleServiced apartments

HotelsService provided

High

Rentalapartments

Low
Short

Length of time/stayLong

Real estate for living accommodations is classified in relation to two axes,“length of time/stay” and “service provided.” Accommodation assets are defined as rental apartments,
corporate housing, dormitories/student apartments, serviced apartments and senior residences.

NAF’s Two Core Strategies
1. Investment in Accommodation Assets
Accommodation assets: newly developed residential properties created in response toongoing social and lifestyle changes
Objective: to maximize the value of accommodation assets by providing accommodations
that satisfy diverse tenant needs

2. Utilization of the Mitsui Fudosan Group
Full and active use of the Mitsui Fudosan Group’s value chain from planning anddevelopment to management and operation
Access to investment opportunities through Mitsui Fudosan’s properties and its Group’s
extensive real estate information network

NAF Report September 2007 – February 20083

To Our Stakeholders

The six months ended February 29, 2008 (the “4th Period”) was the third period sinceNippon Accommodations Fund Inc. (“NAF”) listed its investment units on the Tokyo
Stock Exchange. NAF performed well during the 4th Period, acquiring seven properties
and achieving an occupancy rate of 97.2 percent as of the end of the period. Looking
forward, NAF will use the Mitsui Fudosan Group’s pipeline to steadily expand its
portfolio by acquiring highly strategic properties.
Market Environment and
4th Period Performance
Since last year, the Japanese real estate investment
trust (J-REIT) market has remained weak, impacted bydeclines in stock markets worldwide stemming from thesubprime mortgage crisis in the United States. However, in
the residential rental market in the 23 wards of Tokyo,
demand remained stable during the six months ended
February 29, 2008 due to factors including the ongoing
population influx from other areas and the increasing
number of single and two-person households. The same
factors are projected to drive the development of theresidential rental markets in Japan’s major regional cities.
New development has been increasing the supply of rental
housing in recent years, despite residential building
statistics from the Ministry of Land, Infrastructure, Transport
and Tourism suggesting a temporary drop in the total
number of construction starts for rental apartments in 2007.
However, the overall balance of supply and demand remains
stable, due to the demolition of existing stock including
Nobuyuki Nakai

aging properties such as company housing and dormitories.

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

The supply of rental housing featuring outstanding location,
management and facilities is still limited in number, andoccupancy rates and rents have been rising moderately atsuch highly competitive properties. Land prices have been
increasing, particularly in central Tokyo, amid intensifying
competition to acquire properties. However, there are signsof a drop in demand to acquire properties, reflecting thechanging conditions in the real estate market.

4

Nippon Accommodations Fund Inc.

In this environment, NAF acquired seven properties
valued at ¥15,012 million during the 4th Period, and as ofprevious period supported greater speed for tenantsolicitation activities geared to each individual property.

February 29, 2008 its portfolio consisted of 37 properties
valued at ¥123,246 million on an acquisition price basis,

4th Period Highlights

compared with ¥108,234 million as of the end of the➤ Seven properties acquired

previous period. The overall occupancy rate was 97.2
percent as of February 29, 2008, compared with 96.9
percent at the end of the previous period.
As a result, total revenues were ¥4,092 million➤ Occupancy rate remains high at 97.2%➤ Issued corporate bonds inNovember 2007

(compared with ¥3,524 million for the previous period),
operating income was ¥2,103 million (compared with

NAF procured a total of ¥15,000 million from several¥1,795 million for the previous period) and net income wasfinancial institutions to fund the acquisition of properties¥1,630 million (compared with ¥1,447 million for theduring the 4th Period. Subsequently, we issued our firstprevious period). Distribution per unit totaled ¥14,366

series of unsecured bonds (total ¥10,000 million, 7-year(compared with ¥12,750 for the previous period) andterm) with the objectives of repaying existing borrowings

exceeded projections announced along with results for theand increasing the ratio of fixed-rate, long-term debt to

3rd Period.

total interest-bearing debt. As a result, interest-bearing
debt as of February 29, 2008 totaled ¥64,500 million, andNAF’s loan-to-value (LTV) ratio stood at 49.6 percent,

4th Period Initiatives

compared with 43.3 percent at the end of the previous

During the 4th Period, NAF made use of its pipeline ofperiod. NAF secured long-term, fixed-rate loans, which

properties from its sponsor Mitsui Fudosan Co., Ltd. andaccounted for 80.6 percent of NAF’s interest-bearing debt

others to acquire seven properties in the Park Axis series.

as of February 29, 2008, compared with 68.7 percent at

In addition, cooperation between NAF’s REIT

the end of the previous period.

management company, Mitsui Fudosan Accommodations
Fund Management Co., Ltd., and its master property
management company, Mitsui Fudosan Housing Lease Co.,

Future Initiatives

Ltd., supported leasing tailored to the unique features of

NAF manages its high-quality portfolio with aneach property and each location. At the Okawabataemphasis on stability, and works to achieve steady external

Apartment Communities, we worked to raise both the level

and internal growth.

of service that staff can provide to residents and the

Our strategy for external growth entails steadyproperty’s market competitiveness. Our efforts included

expansion of our portfolio through the acquisition ofcompletion of a large-scale exterior renovation program at

properties in the Park Axis and the Park Cube series. We are

the River Point Tower and the start of similar construction

currently structuring our portfolio with a greater weighting

work on Park Side Wings. Moreover, we completed interiorof single and compact apartments, from which we canrenovation work on the Pier West House community andexpect a high occupancy rate. In addition, we are selectively

leasing office. Flexible use of our new portfolio

investing in areas adjacent to central Tokyo as well as inmanagement system that began full-scale operation in theregional cities, aiming to steadily acquire properties while

NAF Report September 2007 – February 2008

5

To Our Stakeholders

4th Period (Actual)

5th Period (Forecast)(Ended February 29, 2008)(Ending August 31, 2008)

Total revenues¥4,092 million¥4,507 million

Operating income¥2,103 million¥2,225 million

Net income¥1,630 million¥1,631 million¥14,366¥14,370

Acquisition price basis¥123,246 million¥140,001 million

Number of properties

37

44

Distribution per unit (Yen)
Assets under management

avoiding excessive price competition. Under this policy, NAF
has already acquired seven properties in the 5th Period(March 1, 2008 to August 31, 2008).

OutlookDuring the 5th Period, we expect the initiatives
discussed above to result in total revenues of ¥4,507

During the 4th Period, our strategy for internal growth

million, operating income of ¥2,225 million, net income ofincluded strengthening the brand penetration of both the¥1,631 million, and distribution per unit of ¥14,370. This

Park Axis and Park Cube series to heighten theirforecast is valid as of April 2008 and assumes that NAF

recognition in the real estate rental market. Moreover,will not acquire or exchange any additional properties andwith an optimized operational and management structure

will not issue new units during the 5th Period.

that makes use of the expertise of each company in the

NAF will continue to invest in accommodation assets

Mitsui Fudosan Group, NAF uses additional strategic

and will make use of the Mitsui Fudosan Group’s pipeline

investment to maintain asset value over the long term in

to expand its portfolio by acquiring high-quality properties.

order to maintain or raise its rents and occupancy rate.

We also aim to maximize unitholder value throughRegarding financial strategy, while our upper limit for
the LTV ratio is 60 percent, we expect to operate with aneffective management and brand strategies that enhancecompetitiveness.

LTV ratio in the 40 to 50 percent range. We will continue
to implement a strategy that emphasizes long-term, fixed-

June 2008

rate funding in response to the risk of rising interest rates
and refinancing risk. We will give due consideration to themost appropriate issue of bonds within this limit in order
to increase the diversity and flexibility of our funding.
NAF is committed to earning the trust of unitholders
and all stakeholders, and is therefore strengthening
corporate governance while working toward achieving amore thoroughgoing stance of legal compliance.

6

Nippon Accommodations Fund Inc.

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

Our Accommodations
Consistently Create Value
Through selective investment and advanced operating expertise, NAF
has maintained high revenues and income and aims to continue making
steady progress.

External Growth
NAF will steadily expand its portfolio centered on the acquisition of properties in
the Park Axis series. Implementation of NAF’s strategy is aimed at raising thevalue of its properties.

➥ page 8

Internal Growth
NAF’s REIT management company, Mitsui Fudosan Accommodations FundManagement Co., Ltd., and its master property management company, Mitsui
Fudosan Housing Lease Co., Ltd., work together to conduct quick and efficientleasing activities. The construction of a highly profitable portfolio forms the basis
for increasing rents and occupancy rates.

➥ page 10

Value Chain
NAF believes it can secure stable profits by fully and actively deploying the single
organic value chain of the Mitsui Fudosan Group.

➥ page 12

NAF Report September 2007 – February 20087

Our Accommodations Consistently Create Value

External Growth
NAF selectively invests in assets with the location, scale and facilities that will
maintain NAF’s position of strength and competitiveness in the real estate leasing
market over the medium-to-long term. Based on its powerful pipeline, NAF aims
for steady growth in the future through stable acquisitions of properties.
NAF was established with assets under management valued at approximately ¥38,989 million. NAF’s portfolio had
increased to ¥101,385 million when NAF listed its units, and at the end of the 4th Period, assets under management had
expanded to ¥123,246 million. During the 5th Period, NAF has completed the acquisition of properties valued at approximately¥15.0 billion. The value of assets under management at the end of the 5th Period, including properties under contract scheduled
for acquisition by the end of the period, is projected to total approximately ¥140 billion.
Looking forward, NAF aims to consistently expand its portfolio by steadily acquiring properties.

Acquiring Highly Strategic Properties➤ Increasing the Proportion of Single and Compact Units to Total Units
The need for single and compact rental housing in major urban centers among single adults and couples
is expanding steadily. NAF has therefore aimed to stably increase profits by raising the proportion of single
and compact apartments in its portfolio.

➤ Acquisitions in Areas Adjacent to Central Tokyo
Competition to acquire investment properties has become increasingly intense in central Tokyo, which
has caused returns from property management to decrease. NAF is therefore increasing investments in subcentral Tokyo* with the objective of expanding opportunities to acquire highly profitable properties.

➤ Selective Investment in Major Regional Cities
With needs similar to the 23 wards of Tokyo, there is steady demand for rental housing in the central
areas of major regional cities including Fukuoka and Nagoya. NAF is expanding investment in these areas,
limited to properties it judges to be highly competitive in terms of location and quality.

* Sub-central Tokyo: Refers to the areas outside central Tokyo (which consists of the five central wards of Tokyo – Chiyoda-ku, Chuo-ku,
Minato-ku, Shinjuku-ku, and Shibuya-ku – plus Bunkyo-ku) that have convenient access to transportation, mainly in the northern andeastern parts of the city (Taito-ku, Kita-ku, Itabashi-ku and others).

8

Nippon Accommodations Fund Inc.

Asset Growth (Acquisition Price Basis)
200,000 (Yen in millions)

150,000

140,001
123,246
101,385

100,000

108,234
Park Axis

50,00038,98641,036Park Cube
Okawabata
Apartment Communities

0

Establishment

March 31,2006

August 31,
2006 (IPO)

August 31,
2007

February 29,
2008

August 31,
2008*(estimated)* Assets acquired and assets scheduled for acquisition (contracts concluded) as of April 14, 2008 have been added to total assets as of August 31, 2008 (acquisition price basis).

Progress in Brand Strategy➤ Park Axis: Steady Growth through Ongoing
Acquisitions from Mitsui Fudosan
The Park Axis series is the core of NAF’s external growth strategy. Taking advantage of Mitsui
Fudosan’s many years of expertise, the numerous properties in the series are both competitive andattractive to customers. The Park Axis series is also distinguished by its quality, based on exacting
quality control and management from the construction stage. NAF aims to continue its steadyacquisition of properties in the series.

➤ Park Cube: Selective Acquisitions Based on Extensive
Property Information
Properties in the Park Cube series are carefully selected according to NAF’s specific acquisition
criteria based on extensive information from the Mitsui Fudosan Group’s extensive real estate
information network and NAF’s own information channels. NAF will continue to follow a policy of
selectively investing in properties that will retain sufficient quality, making use of the technicalsupport of Mitsui Fudosan.

NAF Report September 2007 – February 20089

Internal Growth
NAF manages its leasing business to maintain a high occupancy rate and will work
to increase profitability in ways such as raising rents on new contracts. Based on
an optimized management and operating structure that makes use of the expertise of each company in the Mitsui Fudosan Group, NAF will work to maintain andimprove asset value over the long term.
The occupancy rate of properties in NAF’s portfolio at the end of the 4th Period (February 29, 2008) remained at the highlevel of 97.2 percent. NAF has maintained a high occupancy rate since its Tokyo Stock Exchange listing in August 2006,
reaching 97.2 percent at the end of the 2nd Period and 96.9 percent at the end of the 3rd Period. This is the result of the highly
competitive power of our assets, represented by the Park Axis series developed by Mitsui Fudosan, together with the quick andefficient leasing activities conducted by NAF’s REIT management company, Mitsui Fudosan Accommodations Fund Management
Co., Ltd. and its master property management company, Mitsui Fudosan Housing Lease Co., Ltd.

Dynamic Earnings Capability
Changes in Rents for 4th Period Contracts
New Contracts (372 Units)
Increase

No Change

Decrease

257 units

73 units

42 units

Total change in rents

Decrease
11.3%
42 units

Total tenant rents before new contracts Change¥1,516,000¥66,545,000

No Change
19.6%
73 units

2.3%

Total (856 units) including renewals (484 units)
Total change in rents

NAF increases rents for its new

Changes in Rents for
New 4th Period Contracts¥166,136,000

in line with market conditions. During
the 4th Period, NAF increased rents for
69 percent of 372 units that changed

372
units

Total tenant rents before new contracts Change¥1,501,000

tenants, within a reasonable frameworktenants. This trend of raising rent at the
Increase
69.1%
257 units

turnover of a unit has continued sincethe 2nd Period.

0.9%

Rent trends
New Contracts (372 Units)

3rd Period

4th Period

339 units
67.2%

354 units
73.4%

372 units
69.1%

Total change in rents¥634,000¥829,000¥1,516,000¥69,865,000¥69,102,000¥66,545,000

0.9%

1.2%

2.3%

Total tenant rents before new contracts
ChangeTotal Including Renewals

2nd2
d Periodi d

3rd
3d Periodi d

4thh Period
i d

Number of units

660 units

654 units

856 units

Total change in rents¥745,000¥876,000¥1,501,000¥145,266,000¥140,254,000¥166,136,000

0.5%

0.6%

0.9%

Total tenant rents before new contracts
Change10

2nd Period

Number of units(Percentage of units with increased rent)

Nippon Accommodations Fund Inc.

Our Accommodations Consistently Create Value

Occupancy Rates of NAF-Managed Assets and Total J-REIT-Managed Residential Assets
100 (%)

NAF
Residential assets allocated to real estate investment trusts

98
96
94
92
90
88

9
2006

10

11

12

1
2007

2

3

4

5

6

7

8

9

10

11

12

1
2008

2

*The Investment Trusts Association, Japan, “Property Data of Real Estate Investment Trusts”

Structuring a Highly Profitable Portfolio
As of the end of the 4th Period, overall net operating income (NOI) yield on NAF’s portfolio,
calculated as annualized leasing income before depreciation and amortization divided by theacquisition value of the portfolio, was approximately 5.4 percent. Return on appraised value,calculated as the ratio of NOI to the appraised value

Distribution of Projected and Actual Return

derived using the capitalization rate, was approximately
4.9 percent. Moreover, all NAF properties have solid

7.00%

baseline returns, with NOI yield for individual buildings
6.50%

ranging from 4.7 percent to 6.8 percent. These results
demonstrate that NAF has structured a highly profitable

Actual Return

6.00%

portfolio.
5.50%

5.00%

4.50%

3C
Central Wardsa
23 Wards of Tokyo
GreatereTokyoyRegionalg
Citiest
Circlee size:
Acquisition
i
price

4.00%
4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00%

Projected Return

NAF Report September 2007 – February 200811

Value Chain
NAF is securing steady profits through the full and active use of the Mitsui
Fudosan Group’s value chain from planning and development to management andoperation of accommodation assets.

Operation, Planning/
Development of Accommodation Business

MarketResearch /Analysis

Site Acquisition

Feedbackto Planning /Development

Planning and
DesignComprehensive operating
system conducted by
the Mitsui Fudosan GroupREIT Management

Management /Operation
Construction
Management /Supervision
Leasing

Property
Management

Residential Building
Maintenance12

Nippon Accommodations Fund Inc.

Initial Leasing/
Tenant BrokerageOur Accommodations Consistently Create Value

Market Research / Analysis
Analysis of supply and demand trends using statistical data, occupancy surveys of new
properties and fixed property observation. Examination of micro market characteristics andneeds based on representative data, real estate brokers’ opinions, and historical occupancy
and rental data.

Site Acquisition
Development of site acquisition strategy based on macro market and potential demand
trends. An extensive site information database supports property development capabilities of
all types from small buildings to complexes and large development projects.

Planning and Design
Targeting of customers and development of property concepts according to purpose,
number of residents, family structure and lifestyle. Strategic planning covers specifications,
grades and tastes suitable for target demographics and concepts, as well as design, safety,
function, operation and maintenance.

Construction Management / Supervision
Management of the design and construction process using real estate development
expertise gained from tenant feedback. Quality control includes a rental apartment
construction and design checklist, and frequent on-site meetings and checks by professionals
in construction, structures and facilities.

Leasing
The leasing process includes individual plan evaluation; discussions on living
environment, competitive landscape and other conditions; and setting rents. Other activities
include creating a framework for conveying product appeal, using leasing specialists, andmanaging a leasing agency network.

Management / Operation
Working to understand tenant needs, and using the feedback obtained in reinvestment
and development. The decision to reinvest in renewal and renovation is based on appropriate
investment return analysis. Value-added services take advantage of economies of scale.

NAF Report September 2007 – February 200813

Attractive Properties for Lease Support a High Occupancy Rate
The leasing process involves finding tenants by introducing and explaining rental apartments andhandling the signing of contracts. In Japan, these duties are carried out by an independent leasing agent
who shows customers actual available apartments rather than setting up a model apartment. In order to do
this properly, leasing agents need to be very knowledgeable about every property they handle.
NAF is able to maintain a portfolio with a high occupancy rate through effective leasing activities that
use the value chain of the Mitsui Fudosan Group, the expertise of Resident First Co., Ltd. in handling thePark Axis series and other properties, and the wide-ranging network of real estate brokers developed overmany years by Mitsui Fudosan Housing Lease Co., Ltd.

Quick and Efficient Leasing Management
Leasing management includes the administration of all tenant brokerage activities and the creation ofrental apartment marketing tools, based on leasing plans drawn up by the master property managementcompany in conjunction with the asset management company.
For the Park Axis series, Resident First Co., Ltd. carries out the initial leasing management activities anddeals directly with the tenant. This speeds up decision-making from creating a leasing plan to carrying out
sales activities for a quicker process to reach the signing of a lease. To market vacant units, Mitsui Fudosan
Accommodations Fund Management (the REIT Management Company) and Mitsui Fudosan Housing Lease(the Master Property Management Company) work together to monitor trends in the apartment leasing
market, and actively make use of the networks of Resident First and other real estate brokers to minimize
the period of vacancy.

Data Transfer Process between Master Property Management Company and
REIT Management Company
Building
Building Management
Management
Company,
Company, Broker,
Broker, etc.
etc.

TenantTenantMasterMaster Property
Property Management
Management Company
CompanyEZ
EZ System
SystemPMPM
SystemSystem•• Contract
Contract information
information•• Payment
Payment information
information forfor rent
rent•• Expenditure
Expenditure information
information…included
in a in a…are included
comprehensive
comprehensive databasedatabase• Income
andandexpenses• Income
expenses• Contract
information• Contract
information…areconverted
intointo…areconvertedaccounting
informationaccounting
information

Prescribe
Prescribe flexible
flexible solutions
solutions
ProvideProvide feedback
feedback on
on status
status ofof operations
operations

AM
AM System
SystemRent
Rent management
management
REIT
REIT Management
Management Company
Company

Accounting
Accounting systemsystem•• Draw
Draw upup an
an incomeincome plan
plan

Set
Compare results
results
Set investment
investment •• Compare
withstrategy
with forecast
forecast
strategy

Produce
Produce andand disclose
disclose financial
financial information
information
MonthlyMonthly disclosure
disclosure ofof occupancy
occupancy rate,
rate, income
income forecast
forecast

14

Nippon Accommodations Fund Inc.

Our Accommodations Consistently Create Value

Leasing
The Park Axis series is very well known and highly regarded byreal-estate brokers, who often give it high priority when showing
properties to customers. Expectations are high for rental apartmentsfrom the Mitsui Fudosan Group, and we intend to live up to those
expectations.
Kyosuke Tashiro — Resident First Co., Ltd.

Leasing
Our mission is to support customers in their search for theapartment that suits them, by letting them know the appeal of eachapartment, and it is something I do with pleasure. The Park Axis series
is made up of appealing properties that cater to various tenant needs.
Hitomi Sugiura — Resident First Co., Ltd.

Asset Management
The strength of NAF lies in its ability to conduct leasing throughthe Mitsui Fudosan Group as a collective entity. This integrated
leasing system provides a high occupancy rate. We aim to leverage
this synergy effect to increase investment value for all unitholders.
Yoshihisa Otake — Director, Chief Investment Officer,
Mitsui Fudosan Accommodations Fund Management Co., Ltd.

Leasing Management
We set leasing guidelines with Mitsui Fudosan Accommodations
Fund Management, clarifying roles and authority. We are able to
make decisions faster, conclude lease contracts sooner and maintaina higher occupancy rate than other companies, because we work inclose day-to-day cooperation.
Tomoko Shintomi — Customer Coordinator,
Mitsui Fudosan Housing Lease Co., Ltd.

NAF Report September 2007 – February 2008

15

NAF Portfolio(As of February 29, 2008. Numbers in red for each property refer to the Portfolio Summary on pages 22-23.)

Portfolio Map

Adachi-ku
Itabashi-ku

Kita-ku
Nerima-ku

Katsushika-ku

Arakawa-ku

10
Bunkyo-ku 15

Taito-ku

8

Sumida-ku

Shinjuku-ku

16

17

Chuo-ku

4 12

13

Koto-ku1
95 Minato-ku 14
Setagaya-ku

5.0 k mImperial
Palace22
Shibuya-ku

Edogawa-ku

21
Chiyoda-ku

3

2.5 k mSuginami-ku

23

18

20

6

10.0 k m

Nakano-ku

7.5 k mToshima-ku

11
Meguro-ku

7

2

Tokyo Bay

Shinagawa-ku

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

16

Nippon Accommodations Fund Inc.

Ota-kuTokyo

Okawabata (River Point Tower)
Okawabata (Park Side Wings)
Okawabata (Pier West House)
Park Axis Gakugei Daigaku
Park Axis Ichigaya
Park Axis Shibuya Jinnan
Park Axis Aoyama Kotto DoriPark Axis Kagurazaka Stage
Park Axis Shirokanedai
Park Axis Bunkyo Stage
Park Axis Tsukishima
Park Axis Otsuka
Park Axis Minami Azabu
Park Axis Shibuya
Park Axis Nihonbashi Stage
Park Axis Hamamatsucho
Park Axis Hongo no Mori
Park Axis Tameike Sanno
Park Axis Roppongi Hinokicho Koen
Park Axis Ochanomizu Stage
Park Axis Okachimachi
Park Cube Hongo
Park Cube Kanda
Park Cube Ichigaya
Park Cube Asakusa Tawaramachi
Park Cube Ueno
Park Cube Keio Hachioji
Park Cube Keio Hachioji II
Park Axis Meieki Minami
Park Cube Ikebukuro Kanamecho
Park Axis Meguro Honcho
Park Axis Shin Itabashi
Park Axis Akihabara
Park Axis Toyocho
Park Axis Takinogawa
Park Axis Asakusabashi
Park Axis Marunouchi
Park Axis Ropponmatsu
Park Axis Hakataeki Minami

A Portfolio Mainly Composed of Large-Scale Properties in the 23 Wards of Tokyo
Regional Allocation
Greater Tokyo: 2%

Tokyo Wards
Other than
3 Central
Wards: 44%

Portfolio by Acquisition Price

Portfolio by Property Age

Other Major Cities: 6%

23 Wards ofTokyo: 92%

3 Central
Wards
of Tokyo: 48%

Less thanMore than ¥2 billion:¥10 billion: 22%24%(18 properties)(1 property)¥5 – ¥10 billion:
18% (3 properties)

92% of portfolio is locatedin the 23 wards of Tokyo¥2 – ¥5 billion:
36% (15 properties)

Average ¥3.3 billion
per property

Less than
1 year: Less thanMore than
11%
2 years: 9%
5 years: 27%

Less than
5 years:
14%

Less than
3 years:
39%

Average 6.6 years

A Balanced Mix of Properties Centered on Single and Compact Units
Portfolio by Category

Portfolio by Monthly Rent
More than¥500,000: 1%¥300,000 –¥500,000: 8%

Large: 6%

Family: 14%
Single: 38%

Compact: 42%

Percentage of Single andCompact Units: 80%

Portfolio by Unit Area
More than80m2: 8%¥200,000 –¥300,000:
20%¥150,000 –¥200,000:
20%

Less than¥100,000:
16%¥100,000 –¥150,000: 35%

Average ¥174,000 per unit

60m2 –
80m2: 13%

Less than
30m2: 28%50m2 –
60m2: 13%40m2 –
50m2: 14%30m2 –
40m2: 24%

Average 45.0m2 per unit

Notes: 1. 3 Central Wards of Tokyo includes Chiyoda, Chuo and Minato wards; Greater Tokyo includes Tokyo (other than the 23 wards),
Kanagawa, Chiba and Saitama; Other Major Cities includes Sapporo, Sendai, Nagoya, Kyoto, Osaka, Kobe, Hiroshima and Fukuoka.
2. Percentages for Regional Allocation, Portfolio by Acquisition Price and Portfolio by Property Age are based on acquisition price.
Average property age has been calculated using a weighted average based on acquisition price.
3. Percentages for Portfolio by Category, Portfolio by Monthly Rent and Portfolio by Unit Area are unit-based, excluding retail units.

NAF Report September 2007 – February 200817

(Numbers in red for each property refer to the Portfolio Summary on pages 22-23 excluding properties acquired during the 5th Period.)

New Acquisitions
4th Period
Park Axis Toyocho

Park Axis Marunouchi

Park Axis Ropponmatsu
Acquisition date: September 14, 2007
Acquisition price: ¥1,515 million
Rentable area:

3,473.67m2

Location:

Fukuoka-shi, Fukuoka

Units:

111 Residential,
1 RetailCompleted:

March 2007

Acquisition date: September 14, 2007

Park Axis Takinogawa

Acquisition price: ¥3,950 million
Rentable area:

5,412.40m2

Location:

Koto-ku, Tokyo

Units:
Completed:

140
March 2007

Park Axis Asakusabashi

Acquisition date: September 14, 2007

Acquisition date: September 14, 2007

Acquisition price: ¥1,920 million

Acquisition price: ¥1,820 million

Rentable area:

3,821.75m2

Rentable area:

2,924.75m2

Location:

Nagoya-shi, Aichi

Location:

Kita-ku, Tokyo

Units:

98 Residential,
1 Retail

Units:

48 Residential, 1 RetailCompleted:

March 2007

Completed:

November 2006

Park Axis Hakataeki Minami
Park Axis Akihabara

Acquisition date: September 14, 2007
Acquisition price: ¥1,200 million

18

Acquisition date: September 14, 2007

Acquisition date: September 14, 2007

Acquisition price: ¥2,717 million

Acquisition price: ¥1,890 million

Rentable area:

3,400.78m2

Rentable area:

4,668.29m2

Location:

Taito-ku, Tokyo

Location:

Fukuoka-shi, Fukuoka

Units:

78 Residential, 1 Retail

Units:

176 Residential, 1 RetailCompleted:

July 2007

Completed:

March 2007

Nippon Accommodations Fund Inc.

Rentable area:

1,346.07m2

Location:

Chiyoda-ku, Tokyo

Units:

41

Completed:

September 2006

NAF Portfolio

5th Period
Park Axis Nihonbashi Hamacho

Park Axis Nishi Funabashi

Park Cube Oimachi

Acquisition date: March 11, 2008
Acquisition price: ¥1,020 million
Rentable area:

2,074.35m2

Location:

Funabashi-shi, Chiba

Units:

55

Completed:

September 2007

Park Cube Yoyogi Tomigaya
Acquisition date: March 11, 2008
Acquisition price: ¥1,975 million
Acquisition date: March 11, 2008

Rentable area:

1,929.10m2

Acquisition price: ¥5,540 million

Location:

Shibuya-ku, Tokyo

Rentable area:

6,999.83m2

Units:

38

Location:

Chuo-ku, Tokyo

Completed:

Units:

118

Completed:

July 2006

July 2007

Acquisition date: May 21, 2008
Acquisition price: ¥1,440 million
Rentable area:

1,511.12m2

Location:

Shinagawa-ku, Tokyo

Units:

65

Completed:

March 2008

Park Cube Itabashi Honcho

Park Axis Monzen Nakacho

Park Cube Gakugei Daigaku
Acquisition date: March 27, 2008
Acquisition price: ¥910 million
Rentable area:

957.88m2

Location:

Meguro-ku, Tokyo

Units:

24

Completed:

March 2008

Acquisition date: March 27, 2008

Acquisition date: March 27, 2008

Acquisition price: ¥1,700 million

Acquisition price: ¥4,170 million

Rentable area:

1,886.39m2

Rentable area:

5,317.07m2

Location:

Koto-ku, Tokyo

Location:

Itabashi-ku, Tokyo

Units:

55

Units:

165 Residential, 1 RetailCompleted:February 2007

Completed:

March 2008

NAF Report September 2007 – February 200819

(Numbers in red for each property refer to the Portfolio Summary on pages 22-23.)

Representative Accommodation Assets
Okawabata Apartment Communities

Park Axis Shirokanedai① River Point Tower

Park Axis Aoyama Kotto Dori

20

Nippon Accommodations Fund Inc.

Park Axis Shibuya Jinnan② Park Side Wings③ Pier West House

Park Cube Ikebukuro Kanamecho

Park Axis Tsukishima

NAF Portfolio

Park Axis Minami Azabu

Park Axis Nihonbashi Stage

Park Axis Ochanomizu Stage

Park Axis Meguro Honcho

Park Cube Hongo

Park Cube Kanda

Park Axis Meieki Minami

Park Axis Shin Itabashi

NAF Report September 2007 – February 200821

Portfolio Summary
No. Name

Location

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

Chuo-ku, Tokyo

Setagaya-ku, Tokyo
Shinjuku-ku, Tokyo
Shibuya-ku, Tokyo
Minato-ku, Tokyo
Shinjuku-ku, Tokyo
Minato-ku, Tokyo
Bunkyo-ku, Tokyo
Chuo-ku, Tokyo
Toshima-ku, Tokyo
Minato-ku, Tokyo
Shibuya-ku, Tokyo
Chuo-ku, Tokyo
Minato-ku, Tokyo
Bunkyo-ku, Tokyo
Minato-ku, Tokyo
Minato-ku, Tokyo
Bunkyo-ku, Tokyo
Taito-ku, Tokyo
Bunkyo-ku, Tokyo
Chiyoda-ku, Tokyo
Shinjuku-ku, Tokyo
Taito-ku, Tokyo
Taito-ku, Tokyo
Toshima-ku, Tokyo
Meguro-ku, Tokyo
Itabashi-ku, Tokyo
Chiyoda-ku, Tokyo
Koto-ku, Tokyo
Kita-ku, Tokyo
Taito-ku, Tokyo
Hachioji-shi, Tokyo
Hachioji-shi, Tokyo
Nagoya-shi, Aichi
Nagoya-shi, Aichi
Fukuoka-shi, Fukuoka
Fukuoka-shi, Fukuoka

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

22

Nippon Accommodations Fund Inc.

NAF Portfolio(As of February 29, 2008)

Acquisition Price (Note 1)

Portfolio Share

Rentable Area

(Yen in millions)(%)(sq. m.)29,69624.1

43,812.41

1,760
2,570
3,230
1,730
1,400
5,140
4,440
930
1,655
3,939
1,283
7,558
2,025
2,910
2,860
2,170
9,710
1,070
1,760
2,454
1,794
2,508
2,233
1,609
1,810
3,430
1,200
3,950
1,820
2,717
113,360
991
1,130
2,121
2,440
1,920
1,515
1,890
7,765
123,246

1.4
2.1
2.6
1.4
1.1
4.2
3.6
0.8
1.3
3.2
1.0
6.1
1.6
2.4
2.3
1.8
7.9
0.9
1.4
2.0
1.5
2.0
1.8
1.3
1.5
2.8
1.0
3.2
1.5
2.2
92.0
0.8
0.9
1.7
2.0
1.6
1.2
1.5
6.3
100.0

2,437.66
3,313.33
2,766.62
1,537.24
1,891.05
4,704.44
6,078.93
1,383.99
2,606.37
3,938.14
1,094.28
10,025.40
2,426.45
3,317.94
2,710.69
2,054.46
12,025.25
1,621.73
2,160.12
3,194.59
2,127.50
4,012.68
3,041.61
1,886.82
1,884.77
4,395.99
1,346.07
5,412.40
2,924.75
3,400.78
145,534.46
2,814.32
3,082.32
5,896.64
5,565.13
3,821.75
3,473.67
4,668.29
17,528.84
168,959.94

Rentable Units

PML (Note 2)
(%)

544

64
84
75
40
59
99
154
30
52
64
20
184 Residential, 1 Retail80
86 Residential, 1 Retail
70
46
324
42
60
95
51
76
91
65
60
152
41
140
48 Residential, 1 Retail
78 Residential, 1 Retail3,074 Residential, 4 Retail52
47 Residential, 1 Retail
99 Residential, 1 Retail169
98 Residential, 1 Retail
111 Residential, 1 Retail
176 Residential, 1 Retail
554 Residential, 3 Retail3,727 Residential, 8 Retail

4.5
7.9
7.0
7.6
7.3
6.8
7.0
7.5
8.7
6.5
6.8
6.4
7.4
7.9
7.5
7.1
8.8
8.2
9.2
7.2
6.8
8.2
8.9
6.8
8.8
7.5
8.1
8.5
7.3 East, 7.5 West
7.4
10.8
5.8
8.9
7.1
7.6
4.1
6.1
2.2
3.1
3.8 (Portfolio PML)

2. PML = Probable maximum loss
3. Greater Tokyo includes Tokyo (other than the 23 wards), Kanagawa, Chiba and Saitama.

NAF Report September 2007 – February 200823

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

Real Estate Investment Trust (REIT) Structure
Nippon Accommodations Fund Inc. (NAF) is an investmentchange in the future in response to changes in the external

corporation established with the objective of investing ininvestment environment and the status of NAF’s assets underassets, primarily Designated Assets as defined under the

management.

Investment Trust and Investment Corporation Act of Japan.

In addition, the REIT Management Company has

NAF was established on October 12, 2005, with Mitsuiconcluded contracts with other companies in the Mitsui

Fudosan Accommodations Fund Management Co., Ltd. (theFudosan Group to promote smooth, effective management of“REIT Management Company” or “MFAFM”) as its asset

NAF’s assets. An Agreement on Provision of Real Estate

management company.

Information/Advisory Service with Mitsui Fudosan Co., Ltd.

NAF has entrusted management of all of its assets to theprovides information regarding real estate owned or

REIT Management Company, which is the asset management

developed by Mitsui Fudosan Accommodations Businesscompany required under the Investment Trust and Investment

Division, and other management advisory information. Each

Corporation Act of Japan. Operating in accordance with theof (i) a Memorandum on Provision of Real Estate Brokerage

REIT Management Agreement concluded on October 13,

Information with Mitsui Fudosan Real Estate Sales Co., Ltd.

2005, the REIT Management Company manages NAF’s assetsand (ii) an Agreement on Provision of Real Estate Informationaccording to NAF’s asset management and administration

with Mitsui Fudosan Residential Co., Ltd. provides access topolicies and the asset management guidelines embodied in thecertain real estate property information. A Basic Agreement

internal regulations of the REIT Management Company. The

on Property Management with Mitsui Fudosan Housing Lease

asset management guidelines take current investment

Co., Ltd., the master property management company toconditions into account and follow NAF’s basic operating

which NAF has entrusted property management services ofprinciple of taking a medium-to-long-term perspective inall its properties, is fundamental to NAF’s policy ofmanaging assets to secure stable earnings and steadily

outsourcing such property management services required inincrease assets under management. These guidelines may

managing real estate.
Independent Auditor

Asset Custodian

The Chuo Mitsui Trust andBanking Company, Limited

KPMG AZSA & Co.

Asset Custody
Agreement

Transfer Agent

The Chuo Mitsui Trust andBanking Company, Limited
General Administrative Agent(Bond Administration)

The Chuo Mitsui Trust andBanking Company, Limited
Property Information Provider

Mitsui Real Estate
Sales Co., Ltd.

Transfer Agency
Service Agreement

REIT
Nippon Accommodations
Fund Inc.

Financial Agency
Agreement

Memorandum on
Provision of Real Estate
Brokerage Information

Agreement on Provisionof Real Estate Information(TSE 3226)

24

Nippon Accommodations Fund Inc.

Fiscal Administrative
Service Agreement(Tax Return Filing)

General Administrative Agent(Accounting)

HEISEIKAIKEISHA TAX Co.
General Administrative Agent(Tax Return Filing)

Zeirishi-Hojin
PricewaterhouseCoopers

REIT Management Agreement andGeneral Administrative Service Agreement
REIT Management Company

Mitsui Fudosan
Accommodations FundManagement Co., Ltd.
Agreement on Provision ofReal Estate Information/Advisory Service

Real Estate Information Provider

Mitsui Fudosan
Residential Co., Ltd.

General Administrative
Service Agreement(Accounting)

Real Estate Information/Advisory

Mitsui Fudosan Co., Ltd.

Basic Agreement
on Property
Management
Master Property
Management Company

Mitsui Fudosan
Housing Lease Co., Ltd.

Management Team

Michihiko Takabe

Yuji Yokoyama

Nobuyuki Nakai

Takeo Tomita

Hiroyuki Sodeyama(Attorney at Law)
Supervisory Director

Executive Director

Executive Director(Attorney at Law)
Supervisory Director(Certified Public Accountant,Certified Public Tax Accountant)
Supervisory Director

Corporate Structure
General Meeting of Unitholders

supervisory directors (but always equal to the number ofIn accordance with the current Articles of Incorporation,

executive directors plus at least one additional supervisory

the General Meeting of Unitholders is held within the 23

director). As of February 29, 2008, NAF had two executive

wards of Tokyo. In accordance with the Investment Trust

directors and three supervisory directors. NAF’s

and Investment Corporation Act of Japan and NAF’s Articles

independent auditor is KPMG AZSA & Co.

of Incorporation, NAF convenes a General Meeting of

NAF’s executive directors are responsible for business

Unitholders. The third General Meeting of Unitholders

execution. In addition, they have authority for all judicial

convened on October 12, 2007. The General Meeting ofand extrajudicial proceedings related to the operations

Unitholders adopts or vetoes ordinary resolutions on theof NAF.

basis of a simple majority of the voting rights of unitholders
in attendance. Decisions on substantive resolutions such as

Supervisory directors are responsible for supervisingbusiness execution by the executive directors.

changes in the Articles of Incorporation require the

The Board of Directors acts in accordance with theattendance of unitholders holding at least a simple majority

Investment Trust and Investment Corporation Act of Japanof total units issued and outstanding, and a vote of two-and NAF’s Articles of Incorporation and other internal rules

thirds majority of the voting rights of such unitholders. The

in exercising their responsibility to supervise theasset management policies and standards are stipulated by

performance of the executive directors. In accordance with

NAF’s Articles of Incorporation.

the current Articles of Incorporation, the Board of Directors
passes or vetoes resolutions on the basis of a simple

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

majority of executive and supervisory directors on the Board

NAF’s Articles of Incorporation stipulate that NAF mustsupervisory directors having special interest in a resolution

have one or more executive directors, and two or more

who are in attendance and are able to vote. Executive andare prohibited from participating in related decisions.

NAF Report September 2007 – February 2008

25

The independent auditor is elected at the Generalregulations or NAF’s Articles of Incorporation that executive

Meeting of Unitholders. It audits financial and accounting

directors may commit in the course of their duties. The

documents including NAF’s financial statements. In

independent auditor also performs other duties as required

addition, it is charged with reporting to supervisoryby laws and regulations.

directors any unlawful acts or material violations of laws,

Compliance Initiatives

Corporate Governance Structure of MFAFM
General Meeting of Stockholders

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

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

Compliance Officer (CCO) of MFAFM has been appointed tosupervise compliance with laws, regulations and internal rules

Compliance Committee

on the part of the asset management company.

CCO
CEO

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

may also appoint other employees of MFAFM to participate asneeded in internal audits, based on the recommendations of
the CCO.

Financial
Division

Investment
DivisionCIO

CFO

MFAFM’s entire organization and all personnel within it are
subject to internal audits. As a rule, internal audits are
conducted on a regular basis in accordance with the compliance

Investment,
Research &Strategy Team

Asset
Management
Team

FinancialTeam

Corporate
Operation
Team

program, but the CEO may initiate extraordinary audits.

Investment Strategy and the Process for Acquiring and Selling Properties
The REIT Management Company acts in accordance with
NAF’s Articles of Incorporation in formulating and amending

management in accordance with the asset management
guidelines.

the asset management guidelines that determine investment

A diagram of the investment policy of the asset

policies and internal rules. In addition, it makes decisions

management guidelines and the process for acquiring andregarding the acquisition and sale of specific assets under

selling specific assets under management follows on page 27.

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

26

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

and related laws and regulations in managing risks. In

NAF’s Board of Directors convenes as needed at least

addition, the REIT Management Company has establishedonce every three months, and resolves important matters

appropriate internal rules. In conjunction with appropriate

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

Nippon Accommodations Fund Inc.

Corporate Structure and Governancesuch Board of Directors. Independent supervisory directors

the REIT Management Company, or MFAFM.

supervise business execution. Moreover, supervisory

The REIT Management Company formulates and revises

directors can obtain as needed reports on operations andan annual management plan that is the blueprint for

financial condition from the REIT Management Company

management and administration policies that comply withand from NAF’s asset custodian, The Chuo Mitsui Trust andthe asset management guidelines. This annual plan andBanking Company, Limited. Independent supervisorycompliance with the asset management guidelines serve todirectors can also conduct required investigations.

eliminate or minimize risk. In addition, the REIT

One of NAF’s executive directors has obtained approvalManagement Company has established internal risk

from the regulator in accordance with the Investment Trust

management regulations and a department that focuses on

and Investment Corporation Act of Japan to serve

managing each type of risk appropriately.

concurrently as the president and chief executive officer of

The following require approval of Compliance Committee

Related-Party Transaction
Amendments to asset management guidelines

Related-party transactions require approval by independent external professional

Restrictions on Related-Party Transactions
Laws and regulations prohibit the REIT Management

Investment Corporation Act of Japan and its ordinances.

Company from conducting specified transactions with

With the objective of enhancing returns for NAF’s

related parties. In the case of a transaction with a potential

unitholders, the REIT Management Company’s internal

conflict of interest between an entity specified under the

regulations specify rules for handling related-party

Investment Trust and Investment Corporation Act of Japantransactions. The REIT Management Company has

and its ordinances and its asset management company, inestablished standards and procedures for related-party

principle the REIT Management Company must prepare atransactions and executes appropriate asset management

brief describing the transaction and deliver it to NAF and

for NAF by eliminating conflicts of interest.

other entities specified by the Investment Trust andNAF Report September 2007 – February 200827

Rental Apartment Investment Characteristics

The high-quality rental apartments that NAF selects as accommodation assets are highly attractive,competitive properties that generate stable earnings.

Growing Rental Needs and Demand

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

Nagoya area
Kansai area
Fukuoka
Other areas

105
100
95

2000

2005

2010

2015

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

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

1978

1988

1998

2003

Average

59.9

61.1

60.0

60.9

Under 25

9.9

4.5

2.7

2.7

25 to 54

58.6

58.9

54.1

52.9

55 to 59

79.0

79.3

76.7

76.7

60 to 64

77.9

80.3

79.2

78.9

77.4

81.2

80.0

75.5

79.4

80.3

60 to 74
75 and over

75.9

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

Supply: Limited Supply from Private Companies
Number of rental residential construction starts by construction owner(Thousands of residences)
Aggregate total
900
Individual800
Corporate
700
Public entity
600
500
400
300
200
100
0
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Source: “Housing Construction Statistics,” Ministry of Land, Infrastructure and Transport

28

Nippon Accommodations Fund Inc.

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

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

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

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

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

(private and public)
Rental (private)
Rental (other)
Rental (public)

1,000
800

Owned and occupied

600
400
200
0

High-Quality Rental Apartments
Generate Highly Stable Earnings

Company housing〜29

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

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

Stability: Relatively Stable Rents
Offices (Tokyo)(1985 = 100)
Private rental houses
170(Tokyo, non-wooden, over 30m2)
160
150
140
130
120
110
100
0
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Source: “Annual Report: Consumer Price Index,” Cabinet Office, Ministry of Internal Affairs andCommunications, and “Service Price Index for the Private Sector,” Bank of Japan

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

Key Money

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

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

Security Deposit

Commission Fee

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

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

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

NAF Report September 2007 – February 200829

Management‘s Discussion and Analysis

Summary of Selected Financial Data

Total revenues (Note 2)
Rental revenue
Other revenue
Operating expenses
Income before income taxes
Net income (a)Funds from operations (Note 3)
Net operating income from property leasing activities (Note 3)
Total amount of cash distribution (b)Depreciation and amortization
Capital expenditures

Yen in millions

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

4th Period

3rd Period

2nd Period

4th Period

September 1, 2007 to
February 29, 2008

March 1, 2007 to
August 31, 2007

April 1, 2006 to
February 28, 2007

September 1, 2007 to
February 29, 2008

¥ 4,092
3,869
223
1,989
1,631
1,630

¥ 3,524
3,323
201
1,729
1,448
1,447

¥ 5,072
4,830
242
2,366
2,030
2,028

$ 39,053
36,9252,128
18,983
15,566
15,556

2,873
4,131
2,028
850
301

22,53331,657
15,556
6,977
5,135

2,361

2,055

3,317
1,630
731
538

2,806
1,447
608
159

Total assets (c)Interest-bearing debt
Total net assets (d)129,969

114,366

64,50062,60949,50062,426108,097
42,50063,0071,240,399
615,575
597,528

Total number of common units issued (units) (e)Net assets per unit (Yen/$) (d) / (e)Distribution per unit (Yen/$) (b) / (e)Funds from operations per unit (Yen/$) (Note 3)

113,480
551,717
14,36620,809113,480
550,10212,75018,106

113,480555,223
17,871
25,3595,265.48
137.11
198.60Return on total assets (Note 4)(Annual rate)
ROE (Note 4)(Annual rate)
LTV (Loan-to-value) ratio (Note 3)
Capital ratio (d) / (c)Payout ratio (b) / (a) (Note 5)
Number of days in period

1.3%(2.7%)
2.6%(5.2%)
49.6%
48.2%
100.0%
182

1.3%(2.6%)
2.3%(4.6%)
43.3%
54.6%
100.0%
184

2.7%(2.9%)
4.8%(5.2%)
39.3%
58.3%
100.0%
334

Number of investment properties (Note 6)
Total rentable area (m2)
Average occupancy rate at end of period (Note 6)37
168,960
97.2%

30
143,91296.9%

27135,744
97.2%

Notes 1. U.S. dollar amounts are translated from yen, for convenience only, at the rate of ¥104.78=U.S. $1.00, the approximate exchange rate on February 29, 2008.
2. Total revenues do not include consumption tax.
3. Funds from operations: Net income + Depreciation and amortization – Gain on sale of investment properties
Net operating income from property leasing activities: (Revenue from property leasing – Rental expenses) + Depreciation and amortization
Funds from operations per unit: (Net income + Depreciation and amortization – Gain on sale of investment properties) ÷ Total number of units issued and outstanding at end of period
Loan-to-value ratio: Interest-bearing debt ÷ Total assets
4. Return on total assets: Income before income taxes ÷ {(Initial total assets + Total assets at end of period) ÷ 2}
ROE: Net income ÷ {(Initial net assets + Net assets at end of period) ÷ 2}
The figures in parentheses are annualized based on the number of actual days in each period.
Annual equivalent amounts for the period ended February 29, 2008: Amount for the period ÷ Actual days in the period (182) x 365 days
Annual equivalent amounts for the period ended August 31, 2007: Amount for the period ÷ Actual days in the period (184) x 365 days
Annual equivalent amounts for the period ended February 28, 2007: Amount for the period ÷ Actual days in the period (334) x 365 days
Net assets and total assets used in calculating ROE and ROA are the respective beginning-of-period and period-end averages.
Paid-in capital at the company’s establishment is used for net assets and total assets for the beginning of the period ended March 31, 2006 (¥100 million each).
5. Payout ratio figures are calculated to one decimal place only.
6. Number of investment properties means units generally perceived to be one residential building. Average occupancy rate at end of period is the ratio of gross leased area to total rentable area atthe end of the period.

30

Nippon Accommodations Fund Inc.

Investment Environment and Operating Performance
In the residential rental market, people continued to move from other regions into the 23 wards of Tokyo, where NAF has concentrated over 90 percent of its portfolio investment. The number of households also expanded because of an increase in the number of single
and two-person households. As a result of these and other factors, demand for rental housing remained steady. The same factors areprojected to drive the development of the residential rental markets in Japan’s major regional cities, such as Nagoya and Fukuoka,
where NAF has assets.
New development has been increasing the supply of rental housing, despite residential buildings statistics from the Ministry of Land,
Infrastructure, Transport and Tourism suggesting a temporary drop in the total number of construction starts for rental condominiums in2007. However, the overall balance of supply and demand remains stable, due to the demolition of existing stock including aging properties such as company housing and dormitories. In addition, rental housing such as that provided by NAF that features outstanding location, management, facilities and specifications is still limited in number in the overall market, and occupancy rates and rents have been rising moderately at such highly competitive properties.
Land prices have been increasing, particularly in central Tokyo, amid intensifying competition to acquire properties. However, there aresigns of a drop in demand to acquire properties, reflecting the changing conditions in the real estate market.
Under such circumstances, NAF made use of its direct pipeline of properties from its sponsor Mitsui Fudosan Co., Ltd. during the 4th
Period to acquire seven properties valued at a total of ¥15,012 million on an acquisition price basis in September 2007. As a result, NAF’s
portfolio as of February 29, 2008 consisted of 37 properties valued at ¥123,246 million, on an acquisition price basis.
NAF’s assets under management are concentrated in the 23 wards of Tokyo, where demand for rental housing is solid. In addition,
cooperation between NAF’s REIT management company, Mitsui Fudosan Accommodations Fund Management Co., Ltd., and its master
property management company, Mitsui Fudosan Housing Lease Co., Ltd., supported leasing tailored to the unique features of each property
and each location.
At the Okawabata Apartment Communities, NAF worked to raise both the level of service that staff can provide to residents and theproperty’s market competitiveness. Efforts included completion of a large-scale exterior renovation program at the River Point Tower, andthe start of similar construction work on Park Side Wings. Moreover, NAF completed interior renovation work on the Pier West House
community and leasing office.
NAF’s master property management company began full-scale use of a portfolio management system in the previous period. This accelerated management and administration, and supported efforts to acquire tenants according to conditions at specific properties.
As a result of the leasing activities discussed above, the occupancy rate for NAF’s overall portfolio as of February 29, 2008 remained at
a high level of 97.2 percent.

Overview of Results
NAF listed its units on the Tokyo Stock Exchange during the 2nd Period. The 2nd fiscal period varied compared to the normal six-monthfiscal periods for an investment trust. The 2nd Period began on April 1, 2006 and ended on February 28, 2007, a total of 334 days.
Beginning with the 3rd Period, NAF’s fiscal periods will consistently be six months long.
For the 4th Period, total revenues were ¥4,092 million and operating income totaled ¥2,103 million.

NAF Report September 2007 – February 200831

Distributions to Unitholders
NAF determines the amount of cash distributions such that they exceed 90 percent of NAF’s taxable income available for dividends as
set forth in Article 67-15 of the Special Taxation Measures Law of Japan. For the 4th Period, cash distributions totaled ¥1,630,253,680, or¥14,366 per unit.
Yen in thousands, except per unit amounts

4th Period

3rd Period

2nd Period

September 1, 2007
to February 29, 2008

March 1, 2007
to August 31, 2007

April 1, 2006
to February 28, 2007

Net income available for distribution
Undistributed net income¥1,630,255
1¥1,446,885
15¥2,028,037
36

Total cash distribution(Per unit)
Distribution from net income(Per unit)
Cash distribution in excess of net income(Per unit)

1,630,254
14,366
1,630,254
14,366——

1,446,870
12,7501,446,870
12,750——2,028,001
17,871
2,028,001
17,871——

Note: The above cash distributions were paid after the close of the period.

Changes in Assets, Liabilities and Net Assets
AssetsTotal assets as of February 29, 2008 increased ¥15,603 million from August 31, 2007 to ¥129,969 million.
Total current assets increased ¥140 million from August 31, 2007 to ¥4,120 million.
Total investment properties increased ¥15,413 million from August 31, 2007 to ¥125,769 million as a result of the acquisition of new
properties and other factors. Compared to August 31, 2007, land including land held in trust increased ¥8,827 million and buildings
including buildings held in trust increased ¥6,586 million.

Liabilities
Current liabilities decreased ¥2,764 million from August 31, 2007 to ¥13,861 million. Short-term loans decreased ¥3,000 million
from August 31, 2007 to ¥12,500 million because NAF used capital procured through the issue of investment corporation bonds torepay short-term debt.
Long-term debt increased ¥18,000 million from August 31, 2007 to ¥52,000 million because NAF increased long-term debt to acquire
properties and repay short-term debt.
Consequently, interest-bearing debt as of February 29, 2008 increased ¥15,000 million from August 31, 2007 to ¥64,500 million.
The ratio of long-term, fixed-rate debt to total interest-bearing debt was 80.6 percent, compared to 68.7 percent as of August 31, 2007.
The loan-to-value ratio, calculated as interest-bearing debt divided by total assets at the end of the period, increased to 49.6 percent
from 43.3 percent as of August 31, 2007.

Net Assets
Net assets totaled ¥62,609 million as of February 29, 2008. Unitholders’ capital was unchanged at ¥60,979 million, although retained
earnings increased to ¥1,630 million from ¥1,447 million as of August 31, 2007.

32

Nippon Accommodations Fund Inc.

Management‘s Discussion and Analysis

Funding
Balance of Paid-in Capital
NAF was established on October 12, 2005 with initial paid-in capital of ¥100 million. NAF began investing activities on November
29, 2005 after ¥21,140 million was raised through private placements. As of February 29, 2008, NAF had issued 113,480 investment
units out of 2,000,000 total authorized units. NAF’s investment units were listed on the J-REIT section of the Tokyo Stock Exchange inAugust 2006 upon the completion of a public offering. As the Investment Trust and Investment Corporation Act of Japan does not contain any provision for the issue of more than one class of units, NAF’s investment units comprise the sole class of units authorized andissued by NAF.
Units outstanding
Issue date

Remarks

Increase

Balance(Units)

October 12, 2005
November 29, 2005
August 3, 2006
September 4, 2006

Initial capital (private)
Private placement
Public offering
Third party allocation200
42,28067,2003,800

Paid-in capital
Increase

Balance

Notes(Yen in millions)200
42,480109,680
113,480¥ 100
21,14037,612
2,127¥ 100
21,24058,85260,979Note 1
Note 2
Note 3Note 4

Notes 1. NAF was established with initial capital of ¥500,000 per unit.
2. Follow-on private offering at ¥500,000 per unit to raise funds for acquisition of investment properties.
3. Public offering of new units for ¥580,000 per unit (excluding underwriting fee: ¥559,700) to fund property acquisition.
4. Additional issue of new units (third party allocation) for ¥559,700 per unit undertaken pursuant to the public offering in Note 3.

Market Price of Units
High/Low (closing price) of units on the TSE:
4th Period
September 1, 2007 to
February 29, 2008

3rd Period
March 1, 2007 to
August 31, 2007

2nd Period
April 1, 2006 to
February 28, 2007

(Yen)

(Yen)

(Yen)

High

¥762,000¥1,030,000¥1,000,000

Low

528,000

685,000

583,000

Borrowings
Borrowings by financial institution as of February 29, 2008 are shown below.
Short-term debt
LenderSumitomo Mitsui
Banking Corporation
The Hachijuni Bank, Ltd.
Mitsubishi UFJ Trust andBanking Corporation
The 77 Bank, Ltd.
Total short-term debt

(Yen in millions)

Balance

Interest rate
(Note 1)

Date of maturity(Note 2)

¥ 5,500

0.9%

March 27, 2008

1,000

0.9%

March 11, 2008

5,000

1.0%

March 11, 2008

1,000

1.1%

July 31, 2008

Repayment
methodBulletpayment

Use offunds(Note 3)

Notes

Unsecured/unguaranteed/pari passu(Note 4)
Fixed rate

¥12,500

NAF Report September 2007 – February 200833

Long-term debt
Balance

LenderInterest rate

Date ofmaturity¥ 2,000
5,000

1.2%
1.4%

November 30, 2009
November 30, 2010

3,000

1.4%

November 30, 2010

3,000

1.8%

November 30, 2012

2,000

1.5%

February 26, 2010

3,000
3,000
3,000
5,000
1,000
1,000
1,000
2,000
2,000
1,000
3,000
2,000
¥42,000¥54,500

1.6%
2.1%
2.2%
2.1%
1.8%
1.5%
1.6%
1.6%
1.6%
1.6%
1.7%
1.6%

February 28, 2011
April 11, 2012
April 11, 2013
August 6, 2013
April 12, 2010
September 14, 2012
April 19, 2011
October 12, 2011
April 19, 2011
April 19, 2011
October 12, 2012
October 31, 2012

(Yen in millions)

Sumitomo Mitsui Banking
Corporation
The Chuo Mitsui Trust andBanking Co., Ltd.
The Sumitomo Trust &Banking, Co., Ltd.
The Bank of Tokyo-Mitsubishi
UFJ, Ltd.
Nippon Life Insurance Company
The Development Bank of JapanThe Hachijuni Bank, Ltd.
Mizuho Corporate Bank, Ltd.
The Chugoku Bank, Ltd.
Shinsei Bank, Ltd.
Shinkin Central Bank
The Bank of Fukuoka, Ltd.
Total long-term debt
Total borrowings

Repayment
methodBulletpayment

Use offunds(Note 3)

Notes

Unsecured/unguaranteed/pari passu(Note 4)
Fixed rate

Notes 1. The interest rate is presented by loan from each lending institution and is rounded to the nearest tenth. The weighted average interest rate is presented for the outstanding balance of short-term borrowings if the institution has provided more than one short-term loan.
2. The earliest maturity of short-term borrowings is presented if the institution has provided more than one short-term loan.
3. Use of the proceeds of debt financing included purchase of property or real estate trust beneficiary interests, refinancing of other borrowings, and operating expenses.
4. The loan agreements between NAF and each financial institution stipulate that the above borrowings from all financial institutions rank pari passu to each other.
5. The expected annual maturities of long-term borrowings within five years of the balance sheet date are as follows.
(Yen in millions)

Amount1 to 2 years

2 to 3 years

3 to 4 years

4 to 5 years¥4,000¥12,000¥6,000¥12,000

Bonds
Issue

Issue date

No. 1 unsecured November 15,
bonds
2007
Total

Balance as ofFebruary 29, 2008
(Yen in millions)

CouponMaturitydate

Redemption

Use ofproceeds

Notes¥10,000

1.7%

November 14,
2014

BulletPayment

Note 1

Note 2¥10,000

Notes 1. Use of funds includes repayment of borrowings.
2. This bond is only issued to rank pari passu with other bonds issued.

34

Nippon Accommodations Fund Inc.

Management‘s Discussion and Analysis

Capital Expenditures
1. Planned
NAF is planning the following capital expenditures for the renovation of its properties. The amounts below include repairs and maintenancecosts that will be expensed as incurred. Moreover, in addition to a steady program of expenditures for construction, repair and renovationof facilities, a program of renewal construction is being implemented in order to increase competitive power in the market as well as toincrease the level of tenant satisfaction.
Estimated amounts
Name of property

Objective

Estimated duration

Total amounts

Payment for thecurrent period(September 1, 2007

Cumulative
amount paid

to February 29, 2008)(Yen in millions)Okawabata Apartment
Communities

Repairs and renovation ofouter walls, etc.
(Construction area 3)
Renovation of emergency
lighting equipment,water pump, etc.

From October 2007 toJune 2008

¥310

¥53

¥55

From March 2008 to
July 2008

46

—

—

2. Capital Expenditures for the Current Period
The following table sets forth the capital expenditures for the current period. NAF posted ¥538 million in capital expenditures together
with ¥90 million for repairs and maintenance expenses.
Name of property

Okawabata Apartment
Communities

Other Properties

Objective

Expenditure

Period(Yen in millions)

Repairs and renovation of outer walls, etc.
(Construction area 2)

From March 2007
to December 2007

¥260

Renovation of administrative buildings and otherrenewal of communal areas. Renewal constructionof air conditioning equipment, water pipes, etc.

From September 2007
to February 2008

154

Renewal construction in rentable areas, etc.

From September 2007
to February 2008

113

Security improvements, brand recognition, etc.

From September 2007
to February 2008

11

Total

¥538

3. Cash Reserve for Capital Improvements
NAF accumulates a cash reserve from cash flows to prepare for large-scale mid-term to long-term capital improvements and repairs andmaintenance that will be conducted in accordance with NAF’s business plan for each property.
Yen in millions

Reserve balance at the beginning of the period
Amount accumulated in the current period
Withdrawal from reserves in the current period
Amount carried forward

As of February 29, 2008

As of August 31, 2007

As of February 28, 2007

¥696
651
607
¥740

¥413
438
156
¥696

¥523
191
300
¥413

NAF Report September 2007 – February 200835

Management‘s Discussion and Analysis

Expenses regarding Entrustment, etc.
The following table sets forth the breakdown of entrustment fees, etc. paid by NAF.
Yen in millions

Item

Asset management fees
Asset custody fees
Agent fees (stock transfer, accounting and administrative)
Directors’ remuneration
Auditor’s fees
Other expenses
Total

4th Period

3rd Period

2nd Period

September 1, 2007
to February 29, 2008

March 1, 2007
to August 31, 2007

April 1, 2006
to February 28, 2007

¥301
6
27
10
13
125

¥262
5
22
10
14
89

¥377
6
26
18
12
141

¥482

¥402

¥580

Related Party Transactions(1) Transactions
Description of transactions with related parties (Note 1)
Category

Total paid (A)(Yen in millions)

Amount ofpayment (B)Paid to

B/A(Note 2)

(Yen in millions)

Acquisition price of real estate andreal estate held in trust¥15,012

Mitsui Fudosan Co., Ltd.
Mitsui Fudosan Residential Co., Ltd.

Total

¥10,037

66.9%

1,608

10.7%

¥11,64577.6%(2) Fees Paid for the Period from September 1, 2007 to February 29, 2008
Description of transactions with related parties (Note 1)
Category

Total fees paid (A)(Yen in millions)

Amount ofpayment (B)Paid to

B/A(Note 2)

(Yen in millions)

Property management fees

¥277

Mitsui Fudosan Housing Lease Co., Ltd.

¥277

100.0%

Building management fees

131

Mitsui Fudosan Housing Lease Co., Ltd.

131

100.0%

Resident First Co., Ltd.

15

21.8%

Mitsui Rehouse Tokyo Co., Ltd.

1

1.4%

Mitsui Home Estate Co., Ltd.

1

0.9%

Leasing related service fees67(3) Other Payments to Related Parties
Paid toAmount of payment(Yen in millions)

Item

Mitsui Designtec Co., Ltd.

¥78

Repair and maintenance costs

Mitsui Home Remodeling Co., Ltd.

75

Repair and maintenance costs

Mitsui Fudosan Housing Service Co., Ltd.

8

Repair and maintenance costs

Notes 1. “Related parties” means parties defined in the government ordinance regarding the Investment Trust and Investment Corporation Act of Japan, principally, parties
related to an asset management company.
2. Figures indicate percentages of total price.

36

Nippon Accommodations Fund Inc.

Financial Statements

Balance Sheets
Nippon Accommodations Fund Inc.
As of February 29, 2008 and August 31, 2007

U.S. dollars in thousands
Yen in millions

AssetsCurrent assets:
Cash and cash equivalents
Rent receivables
Consumption tax receivables and other current assets(Note 1)

4th Period

3rd Period

4th Period

As of February 29, 2008

As of August 31, 2007

As of February 29, 2008

3,486
583
51
4,120

¥ 3,437
511
32
3,980

85,21876,391

813,304

42,866(2,315)
125,76980¥129,969

35,549(1,584)
110,35630¥114,366

409,105(22,094)
1,200,315
764$1,240,399¥ 12,500
480
648
233
13,861¥ 15,500
421
560
144
16,625$ 119,298
4,581
6,184
2,224
132,287

Total Liabilities

42,00010,0001,499
53,49967,36034,000—1,315
35,31551,940400,840
95,43814,306
510,584
642,871

Net Assets
Unitholders’ capital (Note 5)
Retained earnings

60,9791,630

60,9791,447

581,972
15,55662,609¥129,969

62,426¥114,366

597,528$1,240,399

Total current assets
Investment properties (Note 3):
Land including trust accounts
Depreciable property andimprovements including trust accounts
Accumulated depreciation
Total investment properties
Other assets
Total Assets¥$

33,2705,564
487
39,320Liabilities and Net Assets
Liabilities
Current liabilities:
Short-term loans (Note 4)
Accounts payable
Rent received in advanceAccrued expenses and other liabilities
Total current liabilities
Long-term liabilities:
Long-term loans (Note 4)
Bonds
Tenant security deposits
Total long-term liabilities

Total Net Assets
Total Liabilities and Net Assets
The accompanying notes to financial statements are an integral part of these balance sheets.

NAF Report September 2007 – February 200837

Statements of Income
Nippon Accommodations Fund Inc.
September 1, 2007 to February 29, 2008, March 1, 2007 to August 31, 2007 and April 1, 2006 to February 28, 2007

U.S. dollars in thousands
Yen in millions

Revenues (Note 6):
RentalOther revenue related to property leasing
Gain on sale of investment properties
Total Revenues
Operating Expenses (Note 6):
Property management fees
Real estate taxes and insurance
Repairs and maintenance
Other rental expenses
Depreciation and amortization
Asset management fees
Other expenses
Total Operating Expenses
Operating Income
Interest and other income
Interest expense
New investment unit issue costs
New investment unit publication costs
Other expenses
Income before Income Taxes
Current and deferred income taxes (Note 7)
Net Income

4th Period

3rd Period

2nd Period

4th Period

September 1, 2007 to
February 29, 2008

March 1, 2007 to
August 31, 2007

April 1, 2006 to
February 28, 2007

September 1, 2007 to
February 29, 2008

¥3,869223—
4,092¥3,323201—
3,524¥4,830238
55,072$36,925
2,128—
39,053

425
115
91
145
731
301
181
1,989
2,103
6
(474)
—
—
(4)
1,631
1
¥1,630

375
117
87
140
608
261
141
1,729
1,795
4
(349)
—
—
(2)
1,448
1
¥1,447

534
140
104
158
850
377
203
2,366
2,706
2
(493)
(119)
(65)
(1)
2,030
2
¥2,028

4,056
1,098
868
1,384
6,977
2,873
1,727
18,98320,07157(4,524)——(38)
15,566
10$15,556

The accompanying notes to financial statements are an integral part of these statements.

38

Nippon Accommodations Fund Inc.

(Note 1)

Financial Statements

Statements of Changes in Net Assets
Nippon Accommodations Fund Inc.
For the period from April 1, 2006 to February 29, 2008

Yen in millions
Number of
Units

Unitholders’CapitalRetained
Earnings

Balance as of March 31, 2006

42,480¥ 21,240¥

Cash distribution declared—
67,200Issuance of new units through public offering as of August 3, 2006
Issuance of new units through allocation toa third party as of September 4, 2006
Net income
Balance as of February 28, 2007
Cash distribution declared
Net income
Balance as of August 31, 2007
Cash distribution declared
Net income
Balance as of February 29, 2008

Total

377

¥ 21,617—
37,612

(377)
—

(377)
37,612

3,800
—

2,127
—

—
2,028

2,127
2,028

113,480

60,9792,028

63,007————(2,028)1,447(2,028)
1,447

113,480

60,9791,447

62,426————(1,447)
1,630(1,447)
1,630

113,480¥60,979¥ 1,630¥62,609

U.S. dollars in thousands (Note 1)
Number of
Units

Unitholders’CapitalBalance as of March 31, 2006

42,480$ 202,710

Cash distribution declared—
67,200Issuance of new units through public offering as of August 3, 2006
Issuance of new units through allocation toa third party as of September 4, 2006
Net income
Balance as of February 28, 2007
Cash distribution declared
Net income
Balance as of August 31, 2007
Cash distribution declared
Net income
Balance as of February 29, 2008

Retained
Earnings

Total

3,598

$ 206,308—
358,962(3,598)—(3,598)358,962

3,800—

20,300——19,35520,30019,355

113,480

581,972

19,355

601,327————(19,355)
13,810(19,355)
13,810113,480

581,972

13,810595,782————(13,810)
15,556(13,810)
15,556

113,480$581,972$ 15,556$597,528$

The accompanying notes to financial statements are an integral part of these statements.

NAF Report September 2007 – February 200839

Financial Statements

Statements of Cash Flows
Nippon Accommodations Fund Inc.
September 1, 2007 to February 29, 2008, March 1, 2007 to August 31, 2007 and April 1, 2006 to February 28, 2007

U.S. dollars in thousands
Yen in millions

Cash Flows from Operating Activities:
Income before income taxes
Depreciation and amortization
New investment unit issue costs
Amortization of bond issue costs
Interest expense(Increase) Decrease in rent receivables
Increase (Decrease) in accounts payable
Increase (Decrease) in rents received
in advance
Decrease in investment properties due
to saleCash payments of interest expense(Increase) Decrease in consumption tax
refund receivable
Other, net
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities:
Payments for purchases ofinvestment properties
Proceeds from tenant security deposits
Payments for tenant security deposits
Other, net
Net Cash Used in Investing Activities
Cash Flows from Financing Activities:
Proceeds from short-term loans
Repayment of short-term loans
Proceeds from long-term loans
Proceeds from issuance of investment units
Proceeds from bonds
Payments for bond issue costs
Payment of distribution
Net Cash Provided by Financing Activities
Net Change in Cash and Cash Equivalents
Cash and Cash Equivalents at the Beginningof the Period
Cash and Cash Equivalents at the Endof the Period

4th Period

3rd Period

2nd Period

4th Period

September 1, 2007 to
February 29, 2008

March 1, 2007 to
August 31, 2007

April 1, 2006 to
February 28, 2007

September 1, 2007 to
February 29, 2008

¥ 1,631
731
—
3
474
(72)
59

¥ 1,448
608
—
—
349
(52)
(277)

¥ 2,030
850
119
—
493
(269)
585

$ 15,566
6,977
—
29
4,524
(687)
563

88

40

303

840

—
(387)

—
(313)

667
(458)

—
(3,693)

(9)
(4)
2,514

65
(6)
1,862

(51)
(8)
4,260

(86)
(38)
23,993(16,144)
351
(168)
(2)
(15,963)(7,359)
221
(173)
(5)
(7,316)(63,196)
853
(212)
(5)
(62,560)(154,075)
3,350(1,603)(19)(152,348)

53,000(56,000)
8,000—
10,000(58)(1,444)
13,49849

32,000(29,000)
4,000
—
—
—
(2,026)
4,974
(480)

52,000(42,500)
12,00039,619——(377)
60,7432,442

505,822(534,453)
76,350—95,438(554)(13,781)
128,822
468

3,437

3,917

1,475

32,802¥ 3,486¥ 3,437¥ 3,917$ 33,270

The accompanying notes to financial statements are an integral part of these statements.

40

Nippon Accommodations Fund Inc.

(Note 1)

Notes to Financial Statements
Nippon Accommodations Fund Inc.
September 1, 2007 to February 29, 2008, March 1, 2007 to August 31, 2007, April 1, 2006 to February 28, 2007 and October 12, 2005 to March 31, 2006

Note 1

Organization and Basis of Presentation

Organization
Nippon Accommodations Fund Inc. (hereinafter “NAF”) was formed on October 12, 2005 as an investment corporation under theInvestment Trust Law of Japan with Mitsui Fudosan Accommodations Fund Management Co., Ltd. (hereinafter “MFAFM”) acting as asponsor. Registration with the Kanto Local Finance Bureau of the Ministry of Finance was completed on November 11, 2005 and NAF
started acquisition of properties on November 30, 2005.
NAF is an externally managed real estate fund, formed as an investment corporation. MFAFM, as NAF’s asset management company,
is engaged in acquiring, managing, leasing, and renovating office properties. MFAFM is a 100% subsidiary of Mitsui Fudosan Co., Ltd.
On August 3, 2006, NAF had raised approximately ¥40,000 million through an initial public offering of investment units. Those investment units are listed on the J-REIT section of the Tokyo Stock Exchange.
As of February 29, 2008, NAF had ownership or beneficiary interests in 37 properties containing approximately 168,960 square metersof rentable space. As of February 29, 2008, NAF had leased approximately 164,158 square meters to tenants. The occupancy rate for theproperties was approximately 97.2%.

Basis of Presentation
The accompanying financial statements have been prepared in accordance with the provisions set forth in the Investment Trust andInvestment Corporation Act of Japan and the Japanese Securities and Exchange Law and its related accounting regulations, and in conformity
with accounting principles generally accepted in Japan (hereinafter “Japanese GAAP”), which are different in certain respects as to applicationand disclosure requirements of International Financial Reporting Standards.
The accompanying financial statements have been restructured and translated into English from the financial statements of NAF preparedin accordance with Japanese GAAP and filed with the appropriate Local Finance Bureau of the Ministry of Finance as required by the Financial
Instruments and Exchange Law. Some supplementary information included in the statutory Japanese language financial statements, but notrequired for fair presentation, is not presented in the accompanying financial statements. NAF does not prepare consolidated financial statements, as NAF has no subsidiaries.
The translation of the Japanese yen amounts into U.S. dollars is included solely for the convenience of readers outside Japan, using theprevailing exchange rate at February 29, 2008, which was ¥104.78 to U.S. $1. The convenience translation should not be construed as representation that the Japanese yen amounts have been, or could in future be, converted into U.S. dollars at this or any other rate of exchange.

Note 2

Summary of Significant Accounting Policies

Cash and Cash Equivalents
NAF considers all highly liquid investments with original maturity of three months or less to be cash and cash equivalents.

Investment Properties
Investment properties are recorded at cost, which includes the allocated purchase price and related costs and expenses for acquisitionof the properties and the beneficiary interests of properties in trust. Property and equipment balances are depreciated using the straightline method over the estimated useful lives. The estimated useful lives of the principal investment properties (including assets held in trust)
are as follows:
Buildings and improvements

2-47 years

Structures

3-60 years

Machinery and equipment

12-45 years

Tools, furniture and fixtures

2-15 years

NAF Report September 2007 – February 2008

41

Costs related to the renovation, construction and improvement of properties are capitalized. Expenditures for repairs and maintenancewhich do not add to the value or prolong the useful life of a property, are expensed as incurred.

Deferred Assets
Costs for the initial public offering of units and start-up expenses were charged to income when incurred. New unit issue costs arecharged to income when incurred.
Bond issue costs are amortized over the period of the bonds under the straight-line method.

Income Taxes
Income taxes are accounted for on the basis of income for financial statement purposes. The tax effect of temporary differences
between the amounts of assets and liabilities for financial statements and for income tax purposes is recognized as deferred taxes.

Real Estate Taxes
NAF-owned properties are subject to taxes including property tax, city planning tax and depreciable asset tax. Taxes for each fiscal
period are charged to income on an accrual basis.
The owner of properties is registered in a record maintained by the local government in each jurisdiction, and the taxes are imposed on
the owner registered in the record, as of January 1, based on the assessment made by the local government.
When the property is purchased before January 1 of any given calendar year, these taxes for the previous year are imposed on the seller. The Company pays the seller the corresponding tax amounts for the period from the property’s transfer date to December 31 of theprevious year as part of the purchase prices of each property, and capitalizes these amounts as the cost of the property. Capitalized property tax for the period ended February 29, 2008 amounted to ¥7 million.

Accounting Treatment of Beneficiary Interests in Trust Assets including Real Estate
For trust beneficiary interests in real estate, all assets and liabilities associated with assets in trust as well as all income generated andexpenses incurred from assets in trust are recorded in the relevant balance sheet and income statement accounts.

42

Nippon Accommodations Fund Inc.

Notes to Financial Statements

Note 3

Schedule of Investment Properties

Investment properties as of February 29, 2008 and August 31, 2007 consisted of the following:
Yen in millions

As of February 29, 2008
Acquisition
Costs

Accumulated
Depreciation

As of August 31, 2007

Book Value

Acquisition
Costs

—
—

¥ 41,797
43,421¥ 32,969
43,421

85,218—85,218

Buildings and improvements
Buildings and improvements in trust

23,12917,167(947)(1,082)

Building and improvements
including those in trust
Structures
Machinery and equipment
Tools, furniture and fixtures
Structures in trust
Machinery and equipment in trust
Tools, furniture and fixtures in trust
Construction in process
Construction in process in trust

40,296
511
345
366
874
120
284
—
71

(2,029)
(44)
(16)
(76)
(61)
(13)
(76)
—
—

Land
Land in trust¥ 41,797
43,421

Land including trust total

Other investment properties total
Total

Note 4¥

Accumulated
Depreciation¥

Book Value——¥ 32,969
43,421

76,390—76,39022,182
16,084

16,896
16,622

(598)
(795)

16,29815,82738,267
468
328
289
813
107
208
—
71

33,518
364
99
285
874
120
267
0
21

(1,393)
(27)
(6)
(49)
(47)
(9)
(52)
—
—

32,125
336
93
236
828
111
215
0
21

2,570

(286)

2,284

2,031

(191)

1,841

¥128,084¥(2,315)¥125,769¥111,940¥(1,584)¥110,356

Short-Term and Long-Term Loans

Short-term loans consist of short-term borrowings under loan agreements. The annual interest rates on short-term loans outstanding
are fixed rates and as of February 29, 2008 and August 31, 2007 ranged from 0.88% to 1.07% and from 0.89% to 1.02%, respectively.
Long-term loans are at fixed rates and consist of the following:
Yen in millions

Unsecured loans due 2009 to 2013 principallyfrom banks and insurance companies withinterest rates mainly ranging from 1.2% to 2.2%

As of February 29, 2008

As of August 31, 2007

¥42,000¥34,000

The annual maturities of long-term loans as of February 29, 2008 were as follows:
Yen in millions

2009
2010
2011
2012
Thereafter¥ 2,000
11,0009,000
12,0008,000

NAF Report September 2007 – February 200843

Note 5Unitholders’ Capital

Total number of units authorized
Total number of units issued and outstanding

As of February 29, 2008

As of August 31, 2007

As of February 28, 2007

2,000,000
113,480

2,000,000
113,480

2,000,000
113,480

NAF shall maintain minimum net assets of at least ¥50 million as required by the Investment Trust and Investment Corporation Act of Japan.

Note 6

Rental Revenues and Expenses

Rental revenues and expenses for the periods ended February 29, 2008, August 31, 2007 and February 28, 2007 were as follows:
Yen in millions

4th Period

3rd Period

2nd Period

September 1, 2007
to February 29, 2008

March 1, 2007
to August 31, 2007

April 1, 2006
to February 28, 2007

Revenue from Property Leasing:
Rental:Rental revenues
Facility charge¥3,766103¥3,24380¥4,720110

Subtotal

3,869

3,323

4,830

186
37

159
42

200
37

223

201

238

Total revenues from property leasing

4,092

3,524

5,068

Rental Expenses:
Property management fees
Repairs and maintenanceReal estate taxes
Trust fee
Utilities
Insurance
Depreciation and amortization
Leasing-related service fees, etc.
Other rental expenses

425
90
107
9
41
8
731
67
28

375
87
110
9
33
7
608
78
19

534
104
131
12
50
10
850
68
28

Other revenues related to property leasing:
Income from leasing rights, etc.
Miscellaneous income
Subtotal

Total rental expenses
Operating Income from Property Leasing Activities

44

Nippon Accommodations Fund Inc.

1,506

1,326

1,787

¥2,586¥2,198¥3,281

Notes to Financial Statements

Note 7

Income Taxes

NAF is subject to income taxes in Japan. The effective tax rates on NAF’s income based on applicable Japanese tax law were 0.06%,
0.07% and 0.09% for the periods ended February 29, 2008, August 31, 2007 and February 28, 2007, respectively. The following tablesummarizes the significant differences between the statutory tax rates and NAF's effective tax rates for financial statement purposes.

Statutory effective tax rate
Deductible distributions paid
Others
Effective tax rate

4th Period

3rd Period

2nd Period

September 1, 2007
to February 29, 2008

March 1, 2007
to August 31, 2007

April 1, 2006
to February 28, 2007

39.39%(39.37)0.04

39.39%(39.36)0.04

39.39%(39.35)
0.05

0.06%

0.07%

0.09%

The tax effects of significant temporary differences that resulted in net deferred tax assets or liabilities as of February 29, 2008,
August 31, 2007 and February 28, 2007 were as follows:
Yen in thousands
As of February 29, 2008

As of August 31, 2007

As of February 28, 2007

Deferred tax assets:
Enterprise taxes

¥ 19

¥ 19

¥ 19

Total deferred tax assets
Deferred tax liabilities

19
—

19
—

19
—

Net Deferred Tax Assets

¥ 19

¥ 19

¥ 19

NAF was established as an investment corporation under the Investment Trust and Investment Corporation Act of Japan, and as longas an investment corporation distributes to its unitholders at least 90% of taxable income for a period and other requirements prescribedin Japanese tax regulations are met, the investment corporation is allowed to deduct the total amount of distributions paid in calculating
its taxable income under Japanese tax regulations.

Note 8Per Unit Information

Information about earnings per unit for the periods ended February 29, 2008, August 31, 2007 and February 28, 2007 and net assets
per unit as of February 29, 2008, August 31, 2007 and February 28, 2007 was as follows.
The computation of earnings per unit is based on the weighted average number of common investment units outstanding during theperiod. The computation of net assets per unit is based on the number of common investment units outstanding at each period end.
Yen

Earnings per Unit:
Net income
Weighted average number of investment units outstanding

Net Assets per Unit

4th Period

3rd Period

2nd Period

September 1, 2007
to February 29, 2008

March 1, 2007
to August 31, 2007

April 1, 2006
to February 28, 2007

¥14,365
113,480¥12,749
113,480¥23,375
86,757

As of February 29, 2008

As of August 31, 2007

As of February 28, 2007

¥551,717¥550,102¥555,223

NAF Report September 2007 – February 200845

Note 9Transactions with Related Parties(September 1, 2007 – February 29, 2008)(1) Parent Company and Major Corporate Unitholders: None applicable(2) Directors and Major Individual Unitholders
Classification

Director and/or
close relative

Name

Nobuyuki Nakai

Principal businessor occupation

Executive Directorof NAF and
President & CEOof MFAFM

Nature oftransaction
Payment of asset
management fees to
MFAFM (Note 1)

Amount oftransaction

Account(Yen in millions)¥393(Notes 2 and 4)

Payment for the provision ofgeneral administration services
relating to organizational
management to MFAFM (Note 3)¥6(Note 4)

Balance at endof period(Yen in millions)

Accounts
payable(Note 4)

Accounts
payable(Note 4)¥316

¥0Notes 1. Nobuyuki Nakai entered into this transaction as a representative of MFAFM, and this amount is subject to the conditions set forth in the by-laws of NAF.
2. The amount of asset management fees includes ¥92 million for management related to acquisition of properties included in the book value of each investment property, etc.
3. Nobuyuki Nakai entered into this transaction as a representative of MFAFM, and this amount is set forth in the “General Administration Agreement relating toOrganizational Management” concluded between NAF and MFAFM.
4. Consumption taxes are not included in transaction amounts. Consumption taxes are included in the balance at the end of the period.

(3) Subsidiaries: None applicable, because NAF has no subsidiaries in which it has invested.
(4) Sister Companies: None applicable(March 1, 2007 – August 31, 2007)(1) Parent Company and Major Corporate Unitholders: None applicable(2) Directors and Major Individual Unitholders
Classification

Director and/or
close relative

Name

Nobuyuki Nakai

Principal businessor occupation

Executive Directorof NAF and
President & CEOof MFAFM

Nature oftransaction
Payment of asset
management fees to
MFAFM (Note 1)

Amount oftransaction

Account(Yen in millions)¥304(Notes 2 and 4)

Payment for the provision ofgeneral administration services
relating to organizational
management to MFAFM (Note 3)¥1(Note 4)

Balance at endof period(Yen in millions)

Accounts
payable(Note 4)

Accounts
payable(Note 4)¥275

¥0Notes 1. Nobuyuki Nakai entered into this transaction as a representative of MFAFM, and this amount is subject to the conditions set forth in the by-laws of NAF.
2. The amount of asset management fees includes ¥42 million for management related to acquisition of properties included in the book value of each investment property, etc.
3. Nobuyuki Nakai entered into this transaction as a representative of MFAFM, and this amount is set forth in the “General Administration Agreement relating toOrganizational Management” concluded between NAF and MFAFM.
4. Consumption taxes are not included in transaction amounts. Consumption taxes are included in the balance at the end of the period.

(3) Subsidiaries: None applicable, because NAF has no subsidiaries in which it has invested.
(4) Sister Companies: None applicable

46

Nippon Accommodations Fund Inc.

Notes to Financial Statements

Note 10Significant Subsequent Events

1. Acquisition of Assets
Based on the provisions for investments and policies on asset management set forth in the contract, NAF has completed the acquisitionof the following assets.
Park Axis Nihonbashi Hamacho
Date of Acquisition

March 11, 2008

Acquisition Price (Note)¥5,540 million

Location (Residence Indication)
Building

9-4, Nihonbashi Hamacho 1-chome, Chuo-ku, Tokyo
Completed

July 2006

Structure /Number of Floors

RC 12F

Rentable Area

6,999.83m2

Park Cube Yoyogi Tomigaya
Date of Acquisition

March 11, 2008

Acquisition Price (Note)¥1,975 million

Location (Residence Indication)

14-13, Tomigaya 2-chome, Shibuya-ku, Tokyo

Building

Completed

July 2007

Structure /Number of Floors

RC 9F

Rentable Area

1,929.10m2

Park Axis Nishi Funabashi
Date of Acquisition

March 11, 2008

Acquisition Price (Note)¥1,020 million

Location (Residence Indication)
Building

4-6, Nishi Funabashi 3-chome, Funabashi-shi, Chiba
Completed

September 2007

Structure /Number of Floors

RC 5F

Rentable Area

2,074.35m2

Park Axis Monzen Nakacho
Date of Acquisition

March 27, 2008

Acquisition Price (Note)¥1,700 million

Location (Residence Indication)

7-10, Monzen Nakacho 2-chome, Koto-ku, Tokyo

Building

CompletedFebruary 2007

Structure /Number of Floors

RC 12F

Rentable Area

1,886.39m2

Park Cube Itabashi Honcho
Date of Acquisition

March 27, 2008

Acquisition Price (Note)¥4,170 million

Location (Residence Indication)
Building

18-6, Yamato-cho, Itabashi-ku, Tokyo
Completed

March 2008

Structure /Number of Floors

RC 14F

Rentable Area

5,317.07m2

NAF Report September 2007 – February 200847

Notes to Financial Statements

Park Cube Gakugei Daigaku
Date of Acquisition

March 27, 2008

Acquisition Price (Note)¥910 million

Location (Residence Indication)

13-23, Gohongi 3-chome, Meguro-ku, Tokyo

Building

Completed

March 2008

Structure /Number of Floors

RC 3F

Rentable Area

957.88m2

Park Cube Oimachi
Date of Acquisition

May 21, 2008

Acquisition Price (Note)¥1,440 million

Location (Residence Indication)
Building

26-2, Oi 1-chome, Shinagawa-ku, Tokyo
Completed

March 2008

Structure /Number of Floors

RC 14F

Rentable Area

1,511.12m2

Note: Acquisition Price excludes miscellaneous expenses for acquisition, fixed property taxes, urban planning taxes, consumption taxes and local consumption taxes.

2. Borrowing Funds
To purchase the assets mentioned above and related incidental expenses, NAF has borrowed funds as shown below.
Balance

Interest rate

(Yen in millions)(Note 1)

Sumitomo Mitsui
Banking Corporation¥6,500

The Chuo Mitsui Trust andBanking Co., Ltd.

2,000

LenderDate of loan

Date of maturity

1.0%

March 11, 2008

June 11, 2008

1.0%

March 11, 2008

April 30, 2008

The Sumitomo Trust &Banking, Co., Ltd.

4,800

The Bank of Fukuoka, Ltd.

2,000

1.0%

March 27, 2008

May 12, 2008

The Chuo Mitsui Trust andBanking Co., Ltd.

1,500

1.0%

May 21, 2008

August 15, 2008

1.0%

March 27, 2008

May 12, 2008

Repayment
methodBulletrepayment

Notes

Unsecured/
unguaranteed/pari passu(Note 2)

Notes 1. The interest rate is presented by reference to each of the loans and is rounded to the nearest tenth.
2. The loan agreements between NAF and each financial institution stipulate that the above borrowings from all financial institutions rank pari passu to each other.

48

Nippon Accommodations Fund Inc.

Independent Auditors’ Report

To the Board of Directors of
Nippon Accommodations Fund Inc.:
We have audited the accompanying balance sheets of Nippon Accommodations Fund Inc. (a Japanese Real
Estate Investment Trust) as of February 29, 2008 and August 31, 2007, and the related statements of income,changes in net assets and cash flows for each of the periods from September 1, 2007 to February 29, 2008, fromMarch 1, 2007 to August 31, 2007 and from April 1, 2006 to February 28, 2007, expressed in Japanese yen.
These financial statements are the responsibility of the Company’s management. Our responsibility is toindependently express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of Nippon Accommodations Fund Inc. as of February 29, 2008 and August 31, 2007, the results of its
operations and its cash flows for each of the periods from September 1, 2007 to February 29, 2008, from March
1, 2007 to August 31, 2007 and from April 1, 2006 to February 28, 2007, in conformity with accounting
principles generally accepted in Japan.
Without qualifying our opinion, we draw attention to Note 10 to the financial statements, which states that Nippon
Accommodations Fund Inc. has completed the acquisition of assets and has borrowed funds.
The U.S. dollar amounts in the accompanying financial statements with respect to the period ended February
29, 2008 are presented solely for convenience. Our audit also included the translation of yen amounts into U.S.
dollar amounts and, in our opinion, such translation has been made on the basis described in Note 1 to thefinancial statements.

Tokyo, JapanMay 27, 2008
KPMG AZSA & Co., an audit corporation incorporated under the Japanese Certified Public
Accountants Law, is the Japan member firm of KPMG International, a Swiss cooperative.

NAF Report September 2007 – February 200849

Appendix

Primary Related Corporations
Overview of the Roles of Primary Related Corporations
The following outlines the contractual relationship between
NAF and its REIT management company, and the contractual rela-tionship between NAF’s REIT management company and primary
related corporations.

Role

Name

Overview of Relevant Operations

REIT managementcompany and generaladministrative agent

Mitsui Fudosan
Accommodations FundManagement Co., Ltd.
(MFAFM)

MFAFM serves as the company entrusted with asset management as required
under the Investment Trust and Investment Corporation Act of Japan (Article 198,
Paragraph 1) and under a REIT Management Agreement entered into between
MFAFM and NAF on October 13, 2005 (as amended). Under this agreement,
MFAFM undertakes asset management of NAF in accordance with the asset
management guidelines of MFAFM and the Articles of Incorporation of NAF.
Under the above agreement, MFAFM is entrusted with (1) management of assets
owned by NAF; (2) fund procurement to be conducted by NAF; (3) reporting on
the condition of assets owned by NAF; (4) formulating management plans for
assets of NAF; and (5) any other matters related to the above items listed in (1)through (4) that NAF may require.
In addition, pursuant to Article 117 of the Investment Trust and Investment
Corporation Act of Japan, MFAFM undertakes management of (1) the Board of
Directors; (2) the general meeting of unitholders; and (3) any other mattersrelated to the above items listed in (1) and (2) that NAF may require, as General
Administrative Agent based on a General Administrative Service Agreement dated
March 1, 2006. The matters entrusted to the Transfer Agent pursuant to theAgreement between NAF and the Transfer Agent are not included in the above
matters set forth in (1) and (2).

Real estate information/ Mitsui Fudosan Co., Ltd.
advisory service provider

Mitsui Fudosan provides real estate sales information, real estate management
information, and other services to MFAFM under an Agreement on Provision ofReal Estate Information/Advisory Service that MFAFM entered into with Mitsui
Fudosan on February 23, 2006.

Real estate
information provider

Mitsui Fudosan
Residential Co., Ltd.*

Mitsui Fudosan Residential provides real estate sales information to MFAFM underan Agreement on Provision of Real Estate Information that MFAFM entered intowith Mitsui Fudosan Residential on September 26, 2007.

Property information
providerMitsui Real Estate
Sales Co., Ltd.

Mitsui Real Estate Sales provides real estate brokerage information and otherservices to MFAFM under a Memorandum on Provision of Real Estate Brokerage
Information that MFAFM entered into with Mitsui Real Estate Sales on March 31,
2006.

Master property
management company

Mitsui Fudosan
Housing Lease Co., Ltd.

In principle, MFAFM will entrust to Mitsui Fudosan Housing Lease as master
property management company, all property management services required forreal estate of NAF, under a Basic Agreement on Property Management between
MFAFM and Mitsui Fudosan Housing Lease dated March 31, 2006.

* Incorporated as a wholly owned residential sales subsidiary through a corporate split from Mitsui Fudosan Co., Ltd. in October 2006.

50

Nippon Accommodations Fund Inc.

Mitsui Fudosan Accommodations Fund Management Co., Ltd.
REIT Management Company and General Administrative Agent
MFAFM, as a REIT management company provided for in theInvestment Trust and Investment Corporation Act of Japan, performs management of NAF’s assets and undertakes managementof the institutions of NAF. As of February 29, 2008, MFAFM has
been entrusted as a REIT management company only by NAF.
As of the same date, MFAFM has paid-in capital of ¥300 million. There is no capital relationship with NAF. Nobuyuki Nakai,
President & CEO of MFAFM, is concurrently an executive directorof NAF.

■ Operation■■

Undertakes asset management of NAF pursuant to a REITManagement Agreement based on an entrustment from NAF in
accordance with the Articles of Incorporation of NAF and theInvestment Objects and Policies set forth therein.
Undertakes management of the general affairs of the general
meeting of unitholders and the Board of Directors of NAF as
General Administrative Agent based on an entrustment from
NAF and pursuant to a General Administrative Service
Agreement.

■ Fees for the Asset Management Operation
NAF pays asset management fees to MFAFM, in accordancewith the REIT Management Agreement concluded with MFAFM.
These fees comprise items 1 to 4 below, with the method of calculation and payment dates as follows.
Management Fees 1
The amount equivalent to 5% of the amount of the revenue
arising from Real Estate, etc. as calculated on each closing date(excluding revenues from the sale of Real Estate, etc. and other
Managed Assets) will be payable. Management Fees 1 are paid
without delay after definite settlement of accounts.
Management Fees 2
The amount equivalent to 5% of income before income tax
prior to deduction of Management Fees 1 and 2 as calculated oneach closing date will be payable. Management Fees 2 are paid
without delay after definite settlement of accounts.
Management Fees 3
In the event that Real Estate, etc. is newly acquired, compensation equivalent to 1% (0.5% if it is acquired from Related
Parties) of the total amount of the acquisition price of said Real
Estate, etc. (excluding consumption tax, local consumption tax,
and acquisition costs) will be payable. Management Fees 3 arepaid at or before the end of the next month after the month of theacquisition date.
Management Fees 4
In the event that Real Estate, etc. is sold, compensation equivalent to 1% (0.5% if it is sold to Related Parties) of the total
amount of the sales price of said Real Estate, etc. (excluding consumption tax, local consumption tax) will be payable.
Management Fees 4 are paid at or before the end of the next
month after the month of the sales date.

NAF Report September 2007 – February 200851

■ History of MFAFM■ Directors and Staff

MFAFM is a REIT management company that is a limited liability company duly established under the laws of Japan. Major
events in the history of MFAFM are as follows.

As of February 29, 2008, the directors and corporate auditorsof MFAFM are as follows.

January 4, 2005
March 4, 2005

EstablishedObtained license as a building lots and building transactions agent under the Building
Lots and Building Transactions Law

March 25, 2005

Title

Nobuyuki Nakai

President & CEO (standing)

Yoshihisa Otake

Director & CIO (standing)Morio Shibata

Director & CFO (standing)Kaneo Maeda

Director

Michio Yamada

Corporate Auditor

Changed name (from “MF Residential AssetManagement Co., Ltd.” to “Mitsui Fudosan
Residential Fund Management Co., Ltd.”)

July 8, 2005

Name of Directors and Auditors

In addition, one important executive other than the directors
and auditors is as follows.

Obtained approval as a discretionary transac-

Name

Title

tion agent under the Building Lots and

Tetsuya Kanazawa

Chief Compliance Officer

Building Transactions Law
September 26, 2005 Obtained approval as a REIT managementcompany under the Investment Trust andInvestment Corporation Act of Japan
December 15, 2005

Changed name (from “Mitsui Fudosan
Residential Fund Management Co., Ltd.” to“Mitsui Fudosan Accommodations FundManagement Co., Ltd.”)

February 8, 2006

Obtained approval to undertake management of the institutions

September 30, 2007 Registration of financial instruments andexchange business

The staff other than those mentioned above comprises 13
persons.

■ Outline of Financial Condition
An outline of the financial condition of MFAFM is as follows.
Outline of principal assets and liabilities for the most recent
fiscal year:
Current as of March 31, 2008

Total Assets
Total Liabilities
Unitholders’ Equity(Yen in millions)

¥855
78
777

Profit and loss for the most recent fiscal year:
Fourth Fiscal Year
(April 1, 2007 – March 31, 2008)

Operating Income
Ordinary Profit
Net Income

52

Nippon Accommodations Fund Inc.

(Yen in millions)

¥817
399
230

Appendix

Mitsui Fudosan Co., Ltd. ("Mitsui Fudosan")Real Estate Information and Advisory Service Provider
Pursuant to an Agreement on Provision of Real Estate
Information/Advisory Service, Mitsui Fudosan provides to MFAFM adiverse array of support services that employ the information andexpertise of Mitsui Fudosan in the area of real estate management
and administration.
In order to receive such services, MFAFM provides Mitsui
Fudosan with acquisition guidelines included in asset management
guidelines.

■ Provision of Information on Real Estate and Other
Assets Owned or Developed by Mitsui Fudosan
In case Mitsui Fudosan initiates selling activities of real estateor real estate-related assets which it owns or is developing under
its Accommodation Division, and is consistent with MFAFM’s asset
management guidelines, Mitsui Fudosan notifies MFAFM, in principle, before or at the same time as it notifies any third party of suchsales, unless such notification cannot be made due to lack of consent of third parties or for any other unavoidable reasons.
When MFAFM receives such notification and provides written
notification that it will consider the purchase of such real estate orassets, Mitsui Fudosan deals with NAF as a prospective purchaser
on a pari passu basis with regard to any third party interested inpurchasing such estate or other assets.

■ Provision of Third-Party Real Estate Sales Information
Regardless of whether Mitsui Fudosan has originated or is brokering the sale, Mitsui Fudosan’s Accommodation Division in principle notifies MFAFM of information concerning available realestate or real estate-related assets owned by third parties, whensuch real estate or assets are consistent with MFAFM’s asset management guidelines, unless such notification cannot be made due
to lack of consent of third parties or for any other unavoidable reasons, or Mitsui Fudosan itself intends to acquire such real estate orassets with the objective of development or ownership.

■ Provision of Real Estate Management Information
Mitsui Fudosan will provide in writing upon request by MFAFM
and at least once per calendar year real estate management information (see note below) drawn from information that its
Accommodation Division supervises if MFAFM deems such information necessary for its business and Mitsui Fudosan agrees tosuch provision.

Note: “Real estate management information” means the following
information:(a) Information regarding medium-to-long-term trends relevant to
the operating environment of the real estate leasing market in
Japan including economic trends, population dynamics, andtrends in housing stock.
(b) Trends in new supply of residential properties for lease (including
property summaries, level of rent and initial leasing conditions),
recent lease contracts entered for specific residential properties,
area marketing surveys, financial data for other real estate invest
ment corporations, income and expense data for specific properties, and real estate leasing market trends including vacancy rate
and rent trends.
(c) Other information related to items (a) or (b) above that MFAFM
requests, as needed.

■ Provision of Advisory Services
MFAFM has entrusted the following activities to Mitsui
Fudosan.
(a) Support services for the acquisition of real estate or real estaterelated assets (including due diligence prior to such acquisition,
review of relevant building plans and conditions of construction).
(b) Advice regarding the management and administration of realestate or real estate-related assets which NAF owns or is considering acquiring.
Such advice includes, but is not limited to (i) advice and support
in connection with the management and administration of thelong-term maintenance plan for buildings and facilities and deliberations on and preparation of related budgets and plans; (ii) advice
and support in connection with the investigation or review of theplan and estimated costs for maintenance and renovation to be
conducted in connection with real estate or real estate-related
assets; and (iii) advice and support in connection with large-scale
repair projects to be executed in respect of real estate or realestate-related assets.

■ Operation Fees
MFAFM will provide the compensation as separately discussed
and agreed with Mitsui Fudosan under this agreement.

NAF Report September 2007 – February 2008

53

Portfolio Policy

Portfolio Structure Policies
Set forth below are the portfolio structure policies andinvestment standards for individual properties for the REITManagement Company and its internal regulations that serve asasset management guidelines.

regional characteristics and tenant needs. NAF then deploys thisinformation to invest in properties with suitable residential plans
and characteristics.

2. Investment Standards
1. Investment Areas
NAF emphasizes Greater Tokyo and other major cities inJapan in investing in accommodation assets. By region,
approximately 80 percent of NAF’s assets are located in the 23
wards of Tokyo.
When considering individual investments, NAF studies

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

ItemStandard

Investment amountIn principle, the value of each property must exceed ¥1 billion. However, NAF may invest in properties
at or below ¥1 billion after taking into account property characteristics and earning potential and certain
relevant matters.

Ownership interests

In principle, NAF shall hold ownership interests of a whole property. However, NAF may invest incompartmentalized ownership upon consideration of the specific property. NAF may also invest in
leaseholds, including fixed-term leaseholds, on the basis of consideration of earning potential, thestability of the leasehold rights and other relevant matters.

Building structure

Building structures shall be reinforced concrete (RC) or steel reinforced concrete (SRC). Earthquake
resistance shall conform to or substantially satisfy the New Earthquake Resistance Standards (incompliance with the 1981 revision to the Building Standards Law (Law No. 201 of 1950), as amended,
the “Building Standards Law”).

Properties under development In principle, NAF shall acquire properties that are already producing stable rental income at the time ofacquisition, and shall not invest in land with a view to NAF's own construction of the building thereon.
However, NAF may consider contracts to acquire uncompleted buildings that, although incomplete, areexpected to carry minimum risk in respect to completion, delivery and subsequent leasing.

3. Due Diligence Standards
NAF selects assets to invest in only after due diligencecovering economic feasibility, physical condition and legal statusin accordance with the asset management guidelines. Due
diligence includes real estate appraisals and building inspection
Item
Economic
feasibility
studies54

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

Issues InvestigatedMarket survey

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

Tenant survey

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

Nippon Accommodations Fund Inc.

Physical
condition
studiesLegalinvestigation

Survey ofearnings andrelated issues

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

Location

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

Construction,equipment andspecifications

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

Building
management

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

Antiseismic
resistance andprobable
maximum loss
(PML)

1. Antiseismic resistance that meets the New Earthquake Resistance Standards or equivalent resistance
2. Checks of the construction company, architectural firm, construction engineering company, and institutionthat inspected construction. Confirmation of authenticity of the structural fabrication calculation sheets.
3. In principle, earthquake PML shall be below 15 percent. For buildings for which PML is at or above 20
percent, consideration of additional antiseismic reinforcing work, additional earthquake insurance and otherrelevant matters must be considered.

Environmental,
soil and otherissues

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

Rights andrelated issues

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

NAF Report September 2007 – February 200855

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

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

56

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

2. Selection and Monitoring of the Property
Management Company

3. Policies for Property and Casualty
Insurance Coverage

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

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

Nippon Accommodations Fund Inc.

Portfolio Policy

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

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

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

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

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

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

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

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

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

NAF Report September 2007 – February 200857

Corporate Data and Investor Information(As of February 29, 2008)■ Corporate Data
Corporate office

1-1, Nihonbashi-Muromachi 2-chome, Chuo-ku, Tokyo 103-0022, Japan+81-3-3246-3677
http://www.naf-r.jp/english/index.html

Date of incorporation

October 12, 2005

Capital¥60,979 million (as of February 29, 2008)

Unitholders

3,523

Transfer agent

The Chuo Mitsui Trust and Banking Company, Limited
33-1, Shiba 3-chome, Minato-ku, Tokyo 105-8574, Japan

Business office of the transfer agent

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

Independent auditor

KPMG AZSA & Co.
AZSA Center Building
1-2, Tsukudo-cho, Shinjuku-ku, Tokyo 162-8551, Japan

Investor relations

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

Disclaimer
This document was prepared solely for the convenience of andreference by overseas investors and does not correspond to theoriginal Japanese documents.
This English document contains selected information including apartial translation of the Securities Report (Yuka shoken hokokusho)
filed on May 28, 2008 pursuant to the Financial Instruments andExchange Law of Japan, and the Financial Statements andPerformance Information Report for the period from September 1,
2007 to February 29, 2008, of Nippon Accommodations Fund Inc.
prepared pursuant to the Investment Trust and Investment Corporation
Act of Japan. This document should not be deemed a summary of theabove mentioned Securities Report and the Financial Statements andPerformance Information Report.
The contents of this document do not constitute an offer to sell orsolicitation of an offer to buy or sell any securities of Nippon
Accommodations Fund Inc. or otherwise, nor is it advice or therecommendation of Nippon Accommodations Fund Inc. to enter into
any transaction.
English terms for Japanese legal, accounting, tax and businessconcepts used herein may not be precisely identical to the concept of
the equivalent Japanese terms. If there exist any discrepancies in themeaning or interpretation with respect to any and all terms herein
including, without limitation, financial statements, between theoriginal Japanese documents and English statements contained herein,
the original Japanese documents will always govern the meaning andinterpretation. None of Nippon Accommodations Fund Inc., Mitsui
Fudosan Accommodations Fund Management Co., Ltd. or any

58

Nippon Accommodations Fund Inc.

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

■ Investor Information
Fiscal period*

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

Total number of units issued

113,480 (As of February 29, 2008)

Distribution per unit

¥14,366 (As of February 29, 2008)

Unit listing

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

Major Unitholders(As of February 29, 2008)

Number of Units Held

Name

Percentage of Total

Japan Trustee Services Bank, Ltd. (Trust Account)

11,1199.79%

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

9,547

8.41%

NikkoCiti trust and Banking Corporation (Investment Account)

8,504

7.49%

Mitsui Fudosan Co., Ltd.

6,600

5.81%

The Nomura Trust and Banking Co., Ltd. (Investment Account)

6,054

5.33%

Trust & Custody Services Bank, Ltd. (Securities Investment Trust Account)

5,217

4.59%

CGML-IPB Customer Collateral Account

4,255

3.74%

The Chuo Mitsui Trust and Banking Company, Limited

3,600

3.17%

Sumitomo Mitsui Banking Corporation

3,390

2.98%

American Life Insurance Company GA-L

2,728

2.40%

*Number of units held as a percentage of total units issued and outstanding, rounded down to the nearest hundredth.

Composition and Distribution of Unitholders
Overseas corporations
and individuals
85 (2.41%)
Financial institutions
89 (2.53%)

Other domestic corporations
62 (1.76%)

Individuals and others
7,554 (6.66%)

Securities companies
20 (0.57%)

Other domestic corporations
8,809 (7.76%)

Individuals and others
3,267 (92.73%)

Overseas corporations
and individuals
18,842 (16.60%)

Number of unitholders
Total 3,523

Securities companies
1,890 (1.67%)

Financial
institutions
76,385
Individuals and others(67.31%)
2,288 (2.01%)

Number of units held
Total 113,480

Unit Price Range and Trading Volume(Units)
30,000(Yen)
1,200,000
End-of-Month Closing Price (Left scale)Monthly Trading Volume (Right scale)

1,000,000

25,000800,000

20,000600,000

15,000400,000

10,000200,000

5,000

0Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June
2006
2007

July Aug. Sept. Oct. Nov. Dec.

Jan. Feb.
2008

0

NAF Report September 2007 – February 200859

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

http://www.naf-r.jp/english/index.html

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