Generating Returns fromthe Accommodation Value Chain

2nd Period
NAF Report | April 2006 – February 2007

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”), andwas 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 FundManagement Co., Ltd., a 100 percent subsidiary of Mitsui Fudosan.
* Accommodation assets in this report are defined as rental apartments, dormitory/student apartments, serviced apartments,
senior residences and corporate housing. They do not include hotel properties.

Contents
Financial Highlights ............................................................................. 1
NAF Snapshot ...................................................................................... 2
To Our Stakeholders ............................................................................ 4
Rental Apartment Investment Characteristics ..................................... 6
NAF Growth Strategies........................................................................ 8
Portfolio Map....................................................................................... 10
Property Brand Strategy....................................................................... 12
Representative Accommodation Assets .............................................. 14
Portfolio Summary ............................................................................... 16
The Mitsui Fudosan Group’s Value Chain ........................................... 18
Mitsui Fudosan’s Accommodation Asset Development Capabilities... 20

Nippon Accommodations Fund Inc.

Management/Operation Capabilities Leveraging
Mitsui Fudosan Group Expertise ..................................................... 21
Corporate Structure and Governance .................................................. 22
Management‘s Discussion and Analysis.............................................. 26
Financial Statements ........................................................................... 33
Notes to Financial Statements............................................................. 37
Independent Auditors’ Report ............................................................. 45
Appendix.............................................................................................. 46
Portfolio Policy..................................................................................... 48
Corporate Data and Investor Information ........................................... 52

Financial Highlights

Yen in millions

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

2nd Period

1st Period

2nd Period

April 1, 2006 to
February 28, 2007

October 12, 2005 to
March 31, 2006

April 1, 2006 to
February 28, 2007

¥ 5,072
2,030
2,028

924
378
377

$ 42,823
17,13917,123

2,873
4,131
2,028

507
734
377

24,25734,87817,123

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

108,097
45,09063,00739.3%

43,64422,02821,61748.1%

912,673
380,699
531,974

Total number of 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)

113,480555,223
17,871
25,35942,480508,871
8,871
11,936

Total revenue (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)¥4,687.80
150.89214.11

Notes 1. U.S. dollar amounts are translated from yen, for convenience only, at the rate of ¥118.44 = U.S.$1.00 in effect on February 28, 2007.
2. Total revenue does 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) ÷ Total number of units issued and outstanding at end of period

Occupancy Rate (Portfolio average)
(%)

100
98

97.1

97.3

97.5

8
2006

9

10

97.1

96.6

96.7

12

1
2007

97.2

96

NAF’s properties have maintained
a stable high occupancy rate since
the listing on the stock exchange.

94
92
90

11
(End of the month)2

Ratings (As of February 28, 2007)
Rating Agency

RatingOutlook

Moody’s Investors Service Inc.

A1

StableRating and Investment Information Inc.

AA

StableLong-term Corporate

A+

StableShort-term Corporate

A-1—

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

Standard and Poor’s

NAF Report April 2006 – February 2007

1

NAF Snapshot(As of February 28, 2007)

1. NAF is Japan’s first...

... listed residential J-REIT, with over ¥100 billion in assets at IPO.
... residential J-REIT sponsored by a real estate company.

2. NAF’s portfolio is...

... currently made up of 27 acquired properties with a total acquisition value of¥101,385 million.
... located in popular areas and comprises large-scale properties.
The occupancy rate is 97.2 percent.

3. Total return on NAF properties is...

... ¥17,871 in distribution per unit for the 2nd period, with a forecast of¥12,340 per unit for the 3rd period.
... a 139.2 percent total return since its Tokyo Stock Exchange listing on
August 4, 2006.

4. NAF’s finances are...

... highly sound: The LTV (Loan to Value) ratio is 39.3 percent and the long-term
fixed ratio is 70.6 percent.
... rated A1 by Moody’s, AA by Rating and Investment Information,
A+ (Long-term) and A-1 (Short-term) by Standard and Poor’s.

2

Nippon Accommodations Fund Inc.

Real Estate for Living Accommodations

Accommodation assets

High

Diversified needs for residential properties

Serviced apartments

Senior residences
HotelsChangingfamily structures

Service provided

Changing
lifestyles

Corporate
housing/
Dormitories/
Student
apartments

Rentalapartments

Houses built for retail saleSocial Background

Low
Short

Length of time/stayLong

Accommodation assets are defined as rental apartments, dormitory/student apartments,
serviced apartments, senior residences and corporate housing. They do not include hotel properties.

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 April 2006 – February 2007

3

To Our Stakeholders

Nippon Accommodations Fund Inc. (NAF) acquired 21 properties during the period ended
February 28, 2007, and maintained a high occupancy rate averaging 97.2 percent at theend of the period. Results exceeded projections when NAF listed its investment units.
Looking forward, NAF will invest in accommodation assets and leveraging thecomprehensive strengths of the Mitsui Fudosan Group in working to generate steadyexternal and internal growth and further expand unitholder value.
Nobuyuki Nakai
Executive Director of Nippon Accommodations Fund Inc.
President and CEO of Mitsui Fudosan Accommodations Fund Management Co., Ltd.

Overview of Performance
During NAF’s 2nd Period (April 1, 2006 to February 28,2007), demand continued to expand for new properties in
the rental housing market in the 23 wards of Tokyo
because of the population influx from other areas and theincrease in one- and two-person households. Occupancy

distribution per unit totaled ¥17,871, which exceeded
projections when NAF listed its investment units.

Fundamental Management
Policies and Outlook

rates were strong and rents increased moderately for

NAF will invest in accommodation assets and leverage

properties with competitive advantage from factors

the comprehensive strengths of the Mitsui Fudosan Group

including location, property management and facilities.

with the aim of expanding unitholder value by structuring

Competition to acquire income-producing properties

and managing a high-quality portfolio of rental housing,intensified as a result of marked increases in land prices,primarily in the 23 wards of Tokyo.

particularly in city centers.

4

million, and net income totaled ¥2,028 million. CashOur strategy for generating external growth entails

Given these conditions, NAF generated steady growthusing the Mitsui Fudosan Group’s pipeline and further

by using the Mitsui Fudosan Group’s pipeline to selectively

enhancing our proprietary information channels to quickly

invest in highly competitive properties. We acquired four

obtain information on outstanding buildings with the aim

properties in April 2006 and seventeen properties inof steadily acquiring properties. In the 3rd Period, which

August 2006, and sold one property in June 2006.

will end August 31, 2007, we have already acquired threeConsequently, as of February 28, 2007 NAF’s portfolio

properties: Park Cube Ikebukuro Kanamecho in Marchconsisted of 27 properties valued at ¥101,385 million on

2007, and Park Axis Meguro Honcho and Park Axis Shinan acquisition price basis.

Itabashi in April 2007.

As a result, operating revenues for the 2nd Period

Our strategy for generating internal growth entails

totaled ¥5,072 million, operating income was ¥2,706

managing and operating rental properties with the

Nippon Accommodations Fund Inc.

objective of maximizing rental revenues over the medium-and a cash distribution per unit of ¥12,340 for the 3rd

to-long term. We will formulate and implement leasing

Period ending August 31, 2007. This projection assumes

strategies tailored to the individual features of each of ourno acquisitions or transfers of properties and no issue of

properties with the aim of increasing rents and occupancy

new units.

rates. We have moved to reduce operating costs by

NAF will make maximum use of the comprehensive

concluding a comprehensive property management

strengths of the Mitsui Fudosan Group and will promotearrangement with a master property management

the most appropriate management, operation and brandcompany. NAF is also working to further enhance tenant

strategies to raise competitiveness and add outstanding

satisfaction by providing customer service that responds to

new properties to its portfolio. Our objectives are stabletenant needs.

revenues and steady growth in assets under management.

NAF’s financial strategy emphasizes the continued useof long-term, fixed-rate loans to counter the risk of future
increases in interest rates and refinancing risk. Moreover,

April 2007

we will work to diversify and increase the flexibility ofaccess to funding.
In addition, we intend to earn the trust of unitholders
and other stakeholders. We will therefore assiduously
maintain compliance and management transparency whilefurther strengthening our corporate governance and risk

Nobuyuki Nakai

management systems.

Executive Director of Nippon Accommodations Fund Inc.

As a result of these efforts, NAF projects operating
revenues of ¥3,498 million, net income of ¥1,400 million

President and CEO of Mitsui Fudosan Accommodations
Fund Management Co., Ltd.

NAF Report April 2006 – February 20075

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)
900
800
700
600
500
400
300
200
100
0
1989 1991 1993

Aggregate total
Individual
Corporate
Public entity

1995

1997

1999

2001

2003

2005

Source: “Housing Construction Statistics,” Ministry of Land, Infrastructure and Transport

6

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
1,000
800
600
400
200
0

High-Quality Rental Apartments
Generate Highly Stable Earnings
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.

Company housing(private and public)
Rental (private)
Rental (other)
Rental (public)
Owned and occupied〜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
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 April 2006 – February 2007

7

NAF Growth Strategies

External Growth
NAF uses the pipeline it shares with the Mitsui Fudosan Group and its own information network toacquire highly competitive properties for steady external growth.

New Acquisitions(As of April 2007)

Park Axis Meguro Honcho
The quiet, convenient location of Park Axis Meguro
Honcho is near central Tokyo, with easy access to main
business and commercial districts.
Acquisition date:

April 19, 2007

Acquisition price:¥ 1,810 million

Rentable area:

1,884.77 m2

Address:

Meguro-ku, Tokyo

Units:

60

Completed:

July 2006

Park Axis Shin Itabashi
Park Axis Shin Itabashi is a 2-minute walk from a
subway station that provides a direct link to central
Tokyo.
Acquisition date:

April 19, 2007

Acquisition price:¥ 3,430 million

Rentable area:

2,145.66 m2 (East)
2,250.33 m2 (West)

Address:

Itabashi-ku, Tokyo

Units:

152

Completed:February 2007

Park Cube Ikebukuro Kanamecho
Three minutes from the nearest subway and withinwalking distance of Ikebukuro, Park Cube Ikebukuro
Kanamecho is near Rikkyo University and otherschools.

8

Acquisition date:

March 23, 2007

Acquisition price:¥ 1,608 million

Rentable area:

1,886.82 m2

Address:

Toshima-ku, Tokyo

Units:

65

Completed:

March 2007

Nippon Accommodations Fund Inc.

Internal Growth
NAF works to improve property competitiveness and tenant satisfaction in order to raise rents andoccupancy rates for steady internal growth.

Renovations
Investing in strategic renovations
helps to improve the market competitiveness of our operating assets. In the 2nd
Period, we worked to maintain andimprove the asset value of the Okawabata
Apartment Communities by renovating
tenant spaces, including upgrades tobaths and kitchens, repairing flooring andrenewing color schemes.

Bathrooms

New flooring finishes

Exterior
Maintenance

Enhanced
Security

Common Area
Improvements

River Point Tower

Elevator monitor display

New furniture and Christmas tree

Investment in repairs reduces project time and cuts property maintenance and management costs. During
the 2nd Period, NAF made improvements to exterior wall tiling and paintwork at the Okawabata Apartment
Communities. (Scheduled project
period: August 2006 to October 2007)

NAF makes capital investments insecurity to meet tenant needs andincrease property competitiveness.
During the 2nd Period, NAF strengthened security by installing elevator
monitors in buildings that did nothave them.

NAF provides high-value-added
services that meet tenant needs toincrease their satisfaction. Measures in
the 2nd Period to improve amenities in
NAF accommodations included providing lobby furniture and Christmas decorations at certain properties.

NAF Report April 2006 – February 2007

9

Portfolio Map(As of February 28, 2007. Numbers in red for each property refer to the Portfolio Summary on pages 16-17.)

Adachi-ku
Itabashi-ku

Kita-ku

Nerima-ku

Katsushika-ku

Arakawa-ku

10
Bunkyo-ku 15

Taito-ku

8

Sumida-ku

Chiyoda-ku

3

Imperial
Palace22
Shibuya-ku

16

17

Chuo-ku

4 12

13

Koto-ku1
95 Minato-ku 14
Setagaya-ku

Edogawa-ku

19

10.0 k m

21

5.0 k m6
Shinjuku-ku

Suginami-ku

24 23

18

20

2.5 k mNakano-ku

7.5 k mToshima-ku

11

2

7

Meguro-ku

Tokyo Bay

Shinagawa-ku

Investment Criteria➤ Area• Tokyo 23 Wards (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)

10

Nippon Accommodations Fund Inc.

Ota-kuTokyo

Okawabata (River Point Tower)
Okawabata (Park Side Wings)
Okawabata (Pier West House)

Regional Allocation
Greater Tokyo: 2%

Park Axis Gakugei Daigaku
Park Axis Ichigaya
Park Axis Shibuya Jinnan
Park Axis Aoyama Kotto DoriTokyo Wards
Other than
3 Central
Wards: 38%

Portfolio by Acquisition Price

Portfolio by Property Age

Less than ¥2 billion:
15% (11 properties)

Less than 1 year: 2%

Other Major Cities: 2%

23 Wards ofTokyo: 96%

3 Central
Wards
of Tokyo: 58%

More than¥10 billion:29%(1 property)

More than
5 years: 29%
Less than
2 years: 48%¥2 – ¥5 billion:
34% (12 properties)
Less than
3 years:
16%¥5 – ¥10 billion:
22% (3 properties)

Park Axis Kagurazaka Stage
Park Axis Shirokanedai
Park Axis Bunkyo Stage
Park Axis Tsukishima
Park Axis Otsuka

Less than 5 years: 5%

96% of portfolio is locatedin the 23 wards of Tokyo

Average ¥3.75 billion
per property

Average 6.7 years

Portfolio by Monthly Rent

Portfolio by Unit Area

Park Axis Minami Azabu
Park Axis Shibuya
Park Axis Nihonbashi Stage
Park Axis Hamamatsucho

Portfolio by Category

More than¥500,000: 2%¥300,000 –¥500,000: 10%

Large: 8%

Park Axis Hongo no Mori

Less than¥100,000: 6%

More than80m2: 10%Park Axis Tameike Sanno
Park Axis Roppongi Hinokicho Koen

Family: 19%

Single: 32%

Park Axis Ochanomizu Stage
Park Axis Okachimachi

Compact: 41%

Park Cube Hongo¥200,000 –¥300,000: 27%¥100,000 –¥150,000: 33%

60m2 –
80m2: 17%

Less than
30m2: 21%¥150,000 –¥200,000: 22%30m2 –
50m2 –
40m2: 22%60m2: 13%2
40m –50m2: 17%

Average ¥197,000 per unit

Average 49m2 per unit

Park Cube Kanda
Park Cube Ichigaya
Park Cube Asakusa Tawaramachi

Percentage of single andcompact: 73%

Park Cube Ueno
Park Cube Keio Hachioji
Park Cube Keio Hachioji II
Park Axis Meieki Minami

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 Property Area are unit-based, excluding retail units.

NAF Report April 2006 – February 200711

Property Brand Strategy
NAF aims to maintain and improve the long-term competitiveness and value of its assets. The Park Axis series
and the Park Cube series are central to the structure of NAF’s portfolio.

Park Axis Series

Park Cube Series➤ Residential rental apartments planned /developed by Mitsui Fudosan➤ Planned / developed by third parties other thanthe Mitsui Fudosan Group➤ Leverages Mitsui Fudosan’s expertise in thecondominium business➤ Meets NAF’s own construction and design
standards➤ Features design, facilities and specifications to
fit urban lifestyles

ResidenceManagement➤ Basic specifications for durability and sound insulation➤ Space designs that appeal to residents➤ Appropriate long-term maintenance and improvement
plan and common area management menu

➤ Fixtures and finishes that consider aesthetics, livability,
advanced features and convenience➤ Securing high-quality tenants through strong leasing
capabilities and rigorous screening➤ Security measures to provide safe urban living

Quality

Location➤ Basic specifications for durability and sound insulation➤ Area setup that was quick to note“migration back to central Tokyo”➤ Fixtures and finishes that consider functionality, advanced
features and convenience➤ Areas offered are popular in rental market,
can expect stable demand in future➤ Security that provides safe and secure residential spaces

Management➤ Appropriate long-term maintenance and improvement
plan and common area management menu
➤ Securing high-quality tenants through strong leasing
capabilities and rigorous screening

Brand value enhanced by total quality management
Portfolio with potential for sustainable asset value
growth over the long term
12

Nippon Accommodations Fund Inc.

Five features differentiate NAF: development plans that respond to diversifying needs; designs that address
both form and function; support services for resident convenience; services to ensure safety and comfort;
and an advanced information and communications environment for superior quality, safety and security.
function and aesthetics in everything from the façade(exterior), entrance and corridor to the doorway of each
unit. In cooperation with architects and/or interior
designers, additional differentiation is sought to offer adesign suitable to its surrounding environment andcustomer attributes.
For example, Ryoichi Misawa, President of Misawa
Associates, has been selected to cooperate on Park Axis
Nihonbashi Stage, and Masuo Fujiwara, President of We &F, is cooperating on Park Axis Aoyama Kotto Dori and Park
Axis Tameike Sanno.

Development Plans
That Meet Diversifying Needs
Taking advantage of the Mitsui Fudosan Group’s
marketing expertise, the Park Axis series is designed with adetailed targeting strategy considering location andsurrounding environment. Apartments are developed
according to those plans (floor plan, facilities, etc.) to meet
specific target demands in response to a wide range oflifestyles and lifestages.

Designs That Address Both
Form and Function
For the Park Axis series to maintain its appeal for along period of time, Mitsui Fudosan’s designs combine

Reception (Park Axis Nihonbashi Stage)

Customer support center

Support Services for Convenience,
Safety and Security
Services available to tenants include a concierge,
apartment cleaning, furniture/home appliance leasing,catering and hospital/school transportation. Initial deposit
and key money payments can be made via the Internet.
For tenant safety and comfort, the toll-free C-Desk
deals around the clock with lease renewal, parking spacecertification and apartment troubleshooting. Tenants also
receive a guidebook to assist them from moving in to
moving out, including explanations of procedures forpaying utility bills. The Park Axis series is designed andconstructed under total quality management based on
Mitsui Fudosan’s expertise in condominiums.

Tenant guidebooks

The above is a summary of services/support provided at some buildings in NAF’s portfolio. These services are not necessarily available at all buildings. NAF is willing to improveand provide these services/support to more buildings.

NAF Report April 2006 – February 200713

Representative Accommodation Assets(Numbers in red for each property refer to the Portfolio Summary on pages 16-17.)

Okawabata Apartment Communities
Part of the large-scale Okawabata River City 21
development, Okawabata Apartment
Communities offers an on-site 24-hourmanagement system. River Point Tower was thefirst high-rise rental apartment complex in Tokyo① River Point Tower② Park Side Wings

Skylight Tower Pier West Square(Condominium building) (Commercial complex)

City Front Tower③ Pier West House

Acquisition price:¥29,696 million

Appraisal value:¥29,700 million

PML:① 4.9%② 9.9%③ 8.9%

Address:

Chuo-ku, Tokyo

Units:

544

Acquisition date:November 30, 2005

Site area:

30,291.75m2

Land ownershipright:① Land use rights 23.19%② Land use rights 8.60%③ Common ownership 1.62%

Floor areaof building:① 42,177.83m2② 15,737.63m2③ 847.27m2

Completed:① March 30, 1989
② July 19, 1988

(Condominium building)Pier West House(Managed building forrental apartments)
Acquired asset

River Point Tower(Rental apartments)
Acquired asset

Park Side Wings(Rental apartments)
Acquired asset(Building expansion on March 30, 1989)

Channel Mark Club
(Sports facility/restaurant)
Sumida River
Okawabata Area Map③ April 4, 1988

Park Axis Aoyama Kotto DoriPark Axis Shirokanedai

Located near sophisticated clothingboutiques and cafes, Park Axis
Aoyama Kotto Dori is in an
exclusive residential area.

Trendy cafes and restaurants andthe Institute for Nature Study
opposite enhance the fashionable
residential area around Park Axis
Shirokanedai.

Acquisition price: ¥1,730 million

Acquisition price: ¥5,140 million

Appraisal value:¥1,730 million

Appraisal value:¥5,140 million

PML:

9.2%

PML:

12.0%

Address:

Minato-ku, Tokyo

Address:

Minato-ku, Tokyo

Units:

40

Units:

99

Acquisition date: November 30, 2005

Acquisition date: April 12, 2006

Site area:

502.76m2

Site area:

1,063.80m2

Floor areaof building:

1,939.54m2

Floor areaof building:

5,992.92m2

Completed:

August 31, 2005

Completed:

September 9, 2005

Notes: 1. Appraisal values are as of November 30, 2005 for properties 1 through 5; February 28, 2006 for property 6; March 31, 2006 for properties 7 through 10; and April 30, 2006 for properties 11 through 27.
Notes: 2. PML = Probable maximum loss

14

Nippon Accommodations Fund Inc.

Park Axis Minami Azabu

Park Axis Nihonbashi Stage
Located near the famous Azabu
Juban shopping area, Minami Azabu
has been popular for many years as
an excellent neighborhood to live in.

Park Axis Nihonbashi Stage is aneighborhood landmark andprovides dedicated concierge,delivery and catering services forresidents.

Acquisition price: ¥3,939 million

Acquisition price: ¥7,557 million

Appraisal value:¥3,960 million

Appraisal value:¥7,570 million

PML:

9.2%

PML:

11.3%

Address:

Minato-ku, Tokyo

Address:

Chuo-ku, Tokyo

Units:

64

Units:

184 Residential; 1 Retail

Acquisition date: August 7, 2006

Acquisition date: August 7, 2006

Site area:

956.12m2

Site area:

1,443.06m2

Floor areaof building:Floor areaof building:

12,488.08m2

5,060.75m2

Completed:February 28, 2003

Completed:

August 31, 2004

Park Axis Meieki Minami(includes 49.35m2 parking area)

Park Cube Kanda

Park Axis Meieki Minami is locatedin a convenient, comfortable area,
and an 11-minute walk from Nagoya
Station on the Shinkansen Line.

Adjacent to Nihonbashi, Otemachi
and Akihabara, Park Cube Kanda
has an attractive design and isconvenient for commuting.

Acquisition price:¥2,440 million

Acquisition price:

Appraisal value:¥2,440 million

Appraisal value:¥2,480 million

PML:

5.8%

PML:

10.9%

Address:Nakamura-ku, Nagoya

Address:

Chiyoda-ku, Tokyo

Units:

169

Units:

95

Acquisition date:August 7, 2006

Acquisition date:August 7, 2006

Site area:

1,223.73m2

Site area:

506.93m2

Floor areaof building:

6,919.04m2

Floor areaof building:

4,000.74m2

Completed:February 8, 2006

Completed:

October 1, 2005

¥2,454 million

NAF Report April 2006 – February 200715

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
Tokyo 23 Wards Total
Park Cube Keio Hachioji
Park Cube Keio Hachioji II
Greater Tokyo Total (Note 3)
Park Axis Meieki 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
Hachioji-shi, Tokyo
Hachioji-shi, Tokyo
Nagoya-shi, Aichi

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.
Notes: 2. PML = Probable maximum loss

16

Nippon Accommodations Fund Inc.

(As of February 28, 2007)

Acquisition Price (Note 1)

Portfolio Share

Rentable Area

(Yen in millions)(%)(sq. m.)29,69629.3

43,812.41

1,760
2,570
3,230
1,730
1,400
5,140
4,440
930
1,655
3,939
1,282
7,557
2,025
2,910
2,860
2,170
9,710
1,070
1,760
2,454
1,794
2,508
2,233
96,824
991
1,130
2,121
2,440
2,440
101,385

1.7
2.5
3.2
1.7
1.4
5.1
4.4
0.9
1.6
3.9
1.3
7.5
2.0
2.9
2.8
2.1
9.6
1.1
1.7
2.4
1.8
2.5
2.2
95.5
1.0
1.1
2.1
2.4
2.4
100.002,437.66
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
124,282.88
2,814.32
3,082.32
5,896.64
5,565.13
5,565.13
135,744.65

Rentable Units

PML (Note 2)

Developer

(%)

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
2,490 Residential, 2 Retail52
47 Residential, 1 Retail
99 Residential, 1 Retail169
Residential 169
2,758 Residential, 3 Retail

Mitsui Fudosan
4.9
9.9
8.9
9.7
8.5
8.7
9.2
8.4
12.0
7.2
10.1
7.4
9.2
10.7
11.3
9.4
11.2
9.8
9.5
10.0
10.3
10.1
10.9
9.1
9.1
10.8

Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Mitsui Fudosan
Other Party
Other Party
Other Party
Other Party
Other Party

9.6
9.5

Other Party
Other Party

5.8

Mitsui Fudosan

5.1

3. Greater Tokyo includes Tokyo (other than the 23 wards), Kanagawa, Chiba and Saitama.

NAF Report April 2006 – February 2007

17

The Mitsui Fudosan Group’s Value Chain
The companies of the Mitsui Fudosan Group form a comprehensive operating system for rental properties
that spans from market research, site selection and acquisition, planning and development to leasing,management and operation, in which the Group functions as a single organic value chain.

■ Understanding of supply/demand trends in the market

through the analysis of statistical information/data on
housing for sale and rental apartments, occupancy surveysof new properties and fixed property observationand needs
based on a long track record (experience) in case studies
of potential properties/development project areas, housing
to real estate brokers, rent/occupancy historical data

MarketResearch /Analysis■ Examination of micro market characteristics■ Understanding of tenant needs, feedback for reinvestment

and development

Feedbackto Planning /Development

Comprehensive
systemthe Mitsui

Management /Operation■ Renewal/renovation (reinvestment) based on appropriate

investment return analysis■ Value-added services that take advantage of scale

Leasing■ Individual plan evaluation, discussions on living environ-ment, competitive landscape and other conditions, andsetting of rent details■ Construction of framework to convey product appeal(use of leasing specialist)■ Control/use of leasing agency network

Residential Building
Maintenance18

Nippon Accommodations Fund Inc.

Operation, Planning /Development of Accommodation Business■ Development of site acquisition strategy based on macro

market and potential demand trends■ Large collection of site information supported by property

Site Acquisition

development capabilities of all types from small buildings
to complex development/large development projects■ Detailed development of target customers and property

operatingconducted by
Fudosan Group

Planning and
Designconcepts according to purpose, number of residents, family structure and lifestyle■ Planning of strategic plan variations, specifications,

grades and tastes suitable for established target and concept■ Strategic plan design discussed from the viewpoints ofdesign, safety, functionality, management/operation, running cost and maintenance/renewal

Construction
Management /Supervision■ Acquisition of approval, cost control, scheduling,

design/construction management (use of real estatedevelopment expertise gained from tenant feedback)■ Quality control(Use of rental apartments construction/design checklist
covering approx. 1,300 inquiries)■ On-site meetings/checks by respective professionals inconstruction, structure and facilities

Property
Management

Initial Leasing
Tenant Brokerage

NAF Report April 2006 – February 2007

19

Mitsui Fudosan’s Accommodation Asset Development Capabilities
Condominium Development
Understanding of residential land/development information based on considerable condominium
development experience in major cities nationwide
Condominium Units Sold by Mitsui Fudosan
Mitsui Fudosan Ranking
1Units Sold
8,000
7,000

3
5
7
9

6,000

Ranking
Other Cities
Greater Tokyo

5,000
4,000

11

3,000

13

2,000

15

1,000

17

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06*

0* From October 2006, Mitsui Fudosan’s condominium sales are handled by its wholly owned subsidiary Mitsui Fudosan Residential Co., Ltd.

Apartment Development
During 1988 and 1989, Mitsui Fudosan developed 544 rental housing units at the Okawabata River
City 21 complex in Chuo-ku, Tokyo. Since 1999, Mitsui Fudosan has been developing and supplying
numerous rental housing units within the Park Axis series.
Park Axis Series Units Supplied by Mitsui Fudosan(Units)3,000

4,759 units completed (cumulative total as of April 2007)
Scheduled
Actual

2,493
483

2,000

2,010
1,231

1,000
667
472
0

31

127

28

2000

2001

2002

194
2003

2004

2005

2006

2007*

Source: Mitsui Fudosan Co., Ltd. * Included Shibaura Island Project (with stores and joint venture portion).

■ Large Apartment Development Projects
Park Axis Aoyama 1-chome Tower (Note)(JV among Mitsui Fudosan, Tokyo Metro Government, ITOCHU and Taisei)■■

Completed in March 2007
Total units: 383
Shibaura Island Project A1 Block(Air Tower), A3 Block (Note)(JV among Mitsui Fudosan, Ken, Orix Real Estate,
Nippon Steel City Produce and Daiwa House* )Completed in March 2007 (Air Tower)
To be completed in 2008 (A3 Block)■ Total units: 1,900■* Daiwa House in JV for A3 block only.
Note: Acquisition of these buildings is not planned as of April 2007.

20

Nippon Accommodations Fund Inc.

As of April 2007, NAF has acquired
Okawabata Apartment Communities(544 units) and 21 buildings of thePark Axis series (1,956 units).

Management/Operation Capabilities Leveraging Mitsui Fudosan Group Expertise
Property Management
Sustain asset value growth over the long term to maintain and improve rent and occupancy■

Unified property/tenant management data■

Promotes efficient and sure operation

Mitsui Fudosan Housing Lease will manage/operate all of NAF’s assets
Initial Leasing/Tenant Brokerage■

Efficient leasing enabled by direct sales from a Mitsui Fudosan Group
company with deep understanding of the property■

Able to obtain direct customer feedback for use in development,
management/operation and acquisition of assets

Residential Building Maintenance■

Extensive experience mainly in condominiums sold by Mitsui Fudosan

Example: Okawabata Apartment Communities
Okawabata Apartment Communities have maintained the rent/occupancy shown below
even 18-19 years after completion.
Taking advantage of Group companies’ engineering capabilities andaccumulated expertise in condominiums
Efficient capital expenditures from a long-term perspective:
Repair of external wall (1999)
Renewal of home security system (2000 – 2003)
Renewal of residential air conditioning ahead of schedule (2000 – )Improvements to exterior wall tiling and paintwork (2006 – ), etc.
Rent and Occupancy of Okawabata Apartment Communities
150

Rent per tsubo (renewal rent per tsubo in 98/1H = 100)

Occupancy (%)

140
130
120
110

100
95

Occupancy
New Rent
Total Avg. Rent
Chuo-ku Avg. Market Rent

90
85

(10-yr-old building)

80

100

75

90

70

80

65
98/1H 2H 99/1H 2H 00/1H 2H 01/1H 2H 02/1H 2H 03/1H 2H 04/1H 2H 05/1H 2H 06/1H 2H

NAF Report April 2006 – February 200721

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 anassets to secure stable earnings and steadily increase

investment corporation established with the objective ofassets under management. These guidelines may change ininvesting in assets, primarily Designated Assets as defined

the future in response to changes in the externalby the Investment Trust and Investment Corporation Act ofinvestment environment and the status of NAF’s assets

Japan. NAF was established on October 12, 2005, with

under management.

Mitsui Fudosan Accommodations Fund Management Co.,

In addition, the REIT Management Company has

Ltd. (the “REIT Management Company”) as its asset

concluded contracts with the Mitsui Fudosan Group to

management company.

promote smooth, effective management of NAF’s assets. A

NAF has entrusted management of all of its assets toReal Estate Information and Advisory Service Agreement

the REIT Management Company, which is the asset

with Mitsui Fudosan Co., Ltd. provides information

management company required by the Investment Trust

regarding real estate owned or developed by Mitsui

and Investment Corporation Act of Japan. Operating in

Fudosan Accommodations Business Division, and otheraccordance with the asset management contract concluded

management advisory information. A Memorandum on

on October 13, 2005, the REIT Management Company

Provision of Real Estate Brokerage Information with Mitsui

manages NAF’s assets according to NAF’s asset

Fudosan Real Estate Sales Co., Ltd. provides access to real

management and administration policies and the asset

estate brokerage information. A Basic Agreement on

management guidelines embodied in the internal

Property Management with Mitsui Fudosan Housing Lease

regulations of the REIT Management Company. The asset

Co., Ltd., the master property management company tomanagement guidelines take current investment conditions

which NAF has entrusted all its properties, is fundamental

into account and follow NAF’s basic operating principle ofto NAF’s policy of outsourcing the property managementtaking a medium-to-long-term perspective in managing

services required in managing real estate.

Asset Custodian

Accounting Auditor

The Chuo Mitsui Trust andBanking Company, Limited

KPMG AZSA & Co.
Asset Custody
Agreement
General Administrative Agent(Taxation)

Transfer Agent

The Chuo Mitsui Trust andBanking Company, Limited

Transfer Agency
Service Agreement

General Administrative Agent(Accounting)

HEISEIKAIKEISHA TAX Co.

REIT
Nippon Accommodations
Fund Inc.

REIT Management Agreement andGeneral Administrative Service Agreement

Property Information Provider

REIT Management Company

Mitsui Real Estate
Sales Co., Ltd.

Mitsui Fudosan
Accommodations FundManagement Co., Ltd.

Memorandum on
Provision of Real
Estate Brokerage
Information

Master Property Manager
Basic Agreement
on Property
Management

Agreement on Provision ofReal Estate Information/Advisory Service

Mitsui Fudosan Co., Ltd.

Nippon Accommodations Fund Inc.

Zeirishi-Hojin
PricewaterhouseCoopers(TSE 3226)
General Administrative
Service Agreement(Accounting)

Real Estate Information/Advisory

22

General Administrative
Service Agreement(Taxation)

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

executive directors plus at least one additional supervisory

In accordance with the current Articles of Incorporation,

director). As of February 28, 2007, NAF had two executive

the General Meeting of Unitholders is held within the 23

directors and three supervisory directors. NAF’s accounting

wards of Tokyo. In accordance with the Investment Trust

auditor is KPMG AZSA & Co.

and Investment Corporation Act of Japan and NAF’s Articles

NAF’s executive directors are responsible for businessof Incorporation, NAF convenes a General Meeting ofexecution. In addition, they have authority for all judicial

Unitholders. The General Meeting of Unitholders adopts orand extrajudicial proceedings related to the operations

vetoes resolutions on the basis of a simple majority of theof NAF.

voting rights of unitholders in attendance. Decisions on
substantive resolutions such as changes in the Articles ofSupervisory directors are responsible for supervisingbusiness execution by the executive directors.

Incorporation require the attendance of unitholders that

The Board of Directors acts in accordance with thecontrol a simple majority of total units issued andInvestment Trust and Investment Corporation Act of Japan

outstanding, and a two-thirds majority of the voting rights

and NAF’s Articles of Incorporation and other internal rulesof such unitholders. The asset management policies andin exercising their responsibility to supervise thestandards are stipulated by NAF’s Articles of Incorporation.

performance of the executive directors. In accordance withthe current Articles of Incorporation, the Board of Directors

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

passes or vetoes resolutions on the basis of a simple
majority of executive and supervisory directors on the Board

NAF’s Articles of Incorporation stipulate that NAF must

who are in attendance and are able to vote. Executive andhave one or more executive directors, and two or more

supervisory directors with a vested interest in a resolution

supervisory directors (but always equal to the number ofare prohibited from participating in related decisions.

NAF Report April 2006 – February 2007

23

The accounting auditor is selected by the Generalmaterial violations of laws, regulations or NAF’s Articles of

Meeting of Unitholders. It audits documents including

Incorporation that executive directors may commit in the

NAF’s financial statements. In addition, it is charged withcourse of their duties. The accounting auditor also

reporting to supervisory directors any unlawful acts or

performs other duties as required by laws and regulations.

Compliance Initiatives

Corporate Governance Structure
General Meeting of Unitholders

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

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

Compliance Officer (CCO) has been appointed to supervise
compliance with laws, regulations and internal rules on the

Compliance Committee

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 to participate as needed ininternal audits, based on the recommendations of the CCO.
NAF’s entire organization and all personnel within it

Financial
Division

Investment
Division
CIO

CFO

are subject to internal audits. As a rule, internal audits are
conducted on a regular basis in accordance with thecompliance program, but the CEO may initiate

Investment,
Research &Strategy Team

Asset
Management
Team

FinancialTeam

Corporate
OperationTeamextraordinary audits.

Investment Strategy and the Process for Acquiring and Selling Properties
The REIT Management Company acts in accordancewith the asset management guidelines.

with NAF’s Articles of Incorporation in formulating andA diagram of the investment policies of the asset

amending the asset management guidelines that determine

management guidelines and the process for acquiring

fundamental investment policies and internal rules. In

and selling specific assets under management follows on

addition, it makes decisions regarding the acquisition andpage 48.

sale of specific assets under management in accordance

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

24

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

and related laws and regulations in managing risks. In

NAF’s Board of Directors convenes as needed more

addition, the REIT Management Company has establishedthan once every three months, and resolves important

appropriate internal rules. In conjunction with appropriate

matters 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 Governancethe Board of Directors. Independent supervisory directors

Management Co., Ltd.

supervise business execution. Moreover, supervisory

The REIT Management Company formulates anddirectors can obtain as needed reports on operations andrevises an annual management plan that is the blueprint

financial condition from the REIT Management Company

for management and administration policies that comply

and from NAF’s asset custodian, The Chuo Mitsui Trustwith the asset management guidelines. This annual planand Banking Company, Limited. They can also conductand compliance with the asset management guidelines

required research. Of note, one of NAF’s executive

serve to eliminate or minimize risk. In addition, the REIT

directors has obtained approval in accordance with theManagement Company has established internal risk

Investment Trust and Investment Corporation Act of Japan

management regulations and a department that focuses on

to serve concurrently as the president and chief executive

managing each type of risk appropriately.

officer of Mitsui Fudosan Accommodations Fund

Restrictions on Related-Party Transactions
Laws and regulations prohibit the REIT Management
Company from conducting specified transactions withother entities specified by the Investment Trust andInvestment Corporation Act of Japan and its ordinances.

related parties. In the case of a transaction with aWith the objective of enhancing returns for NAF’s

potential conflict of interest between an entity specified

unitholders, the REIT Management Company’s internal

under the Investment Trust and Investment Corporation

regulations specify rules for handling related-party

Act of Japan and its ordinances and its asset managementtransactions. The REIT Management Company hascompany, in principle the REIT Management Company

established standards and procedures for related-party

must prepare a brief describing the transaction and delivertransactions and executes appropriate asset management

it to NAF, other related asset management companies andfor NAF by eliminating conflicts of interest.

NAF Report April 2006 – February 200725

Management‘s Discussion and Analysis

Summary of Selected Financial Data
Yen in millions

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

2nd Period

1st Period

2nd Period

April 1, 2006 to
February 28, 2007

October 12, 2005 to
March 31, 2006

April 1, 2006 to
February 28, 2007

924
849
75
458
378
377

$ 42,823
40,7802,043
19,976
17,13917,123

2,873
4,131
2,028
850
301

507
734
377
130
26

24,25734,87817,123
7,177
2,541

Total assets (c)Interest-bearing debt
Total net assets (d)108,097
42,50063,00743,64421,00021,617

912,673
358,831531,974

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)

113,480555,223
17,871
25,35942,480508,871
8,871
11,936

4,687.80
150.89214.11Return 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

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

1.7%(3.7%)
3.5%(7.4%)
48.1%
49.5%
100.0%
171

Number of investment properties (Note 6)
Total rentable area (m2)
Average occupancy rate at end of period (Note 6)27
135,74497.2%

756,91996.1%

Total revenue (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¥ 5,072
4,830
242
2,366
2,030
2,028

¥

Notes 1. U.S. dollar amounts are translated from yen, for convenience only, at the rate of ¥118.44=U.S. $1.00, the approximate exchange rate on February 28, 2007.
2. Total revenue does not include consumption tax.
3. Net operating income from property leasing activities: (Revenue from property leasing – Rental expenses) + Depreciation and amortization
Funds from operations: Net income + Depreciation and amortization – Gain on sale of investment properties
Funds from operations per unit: (Net income + Depreciation and amortization) ÷ Total number of units issued and outstanding at end of period
Loan-to-value: 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 unitholders’ equity + Unitholders’ equity 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 28, 2007: Amount for the period ÷ Actual days in the period (334) x 365 days
Annual equivalent amount for the period ended March 31, 2006: Amount for the period ÷ Actual days in the period (171) 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 office building. Occupancy rate is the ratio of gross leased area to total rentable area at the end of
the period.

26

Nippon Accommodations Fund Inc.

Investment Environment and Operating Performance
During the period from April 1, 2006 to February 28, 2007 (the “2nd Period”), the Japanese economy continued a moderate growthtrend. Improved corporate performance supported a continued stable increase in capital investment, which in turn enhanced the employment environment.
Demand was stable in the rental housing market, particularly in the 23 wards of Tokyo because of the population influx from other areas
and the increase in one- and two-person households. On the supply side, new properties increased as a result of aggressive growth in investment in rental housing among private funds, Japanese real estate investment trusts (J-REITs) and others. However, there was still only a limited number of properties out of the overall housing market that offer superior location, property management and facilities. Among theseproperties, occupancy rates were strong and rents increased moderately.
In the real estate market, land prices increased markedly, particularly in central Tokyo, and competition to acquire income-producing properties continued to intensify.
Given these conditions, during the 2nd Period NAF selectively acquired properties that are highly competitive because of the quality of theirlocation, facilities, specifications and other features. We managed our assets based on a portfolio structure policy of limiting investment toproperties in the Greater Tokyo area and other major cities. NAF acquired four properties in April 2006 valued at a total of ¥12,165 million on
an acquisition price basis, and seventeen properties in August 2006 valued at a total of ¥48,834 million on an acquisition price basis. We soldone property in June 2006. As a result of these activities, NAF’s portfolio as of February 28, 2007 consisted of 27 properties valued at¥101,385 million on an acquisition price basis with total rentable area of approximately 136,000m2.
At the same time, NAF raised the competitiveness of its properties with the goal of increasing rents and occupancy rates. Our efforts
included reviewing operating costs and conducting surveys to understand tenant needs in order to provide customer services to meet them.
Moreover, we also implemented measures to maintain or improve asset value, including large-scale exterior renovation of the residential areasof Okawabata Apartment Communities. As a result of these activities, the average occupancy rate for NAF’s portfolio remained at a high levelof 97.2 percent as of February 28, 2007.

Overview of Results
NAF listed on the Tokyo Stock Exchange during the 2nd Period. Based on Article 33 of NAF’s Articles of Incorporation, the 1st and 2nd
fiscal periods varied compared to the normal six-month fiscal periods for an investment trust. The 1st Period began on October 12, 2005
and ended on March 31, 2006, a total of 171 days. 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.
During the 2nd Period, operating revenues totaled ¥5,072 million and operating income totaled ¥2,706 million.

NAF Report April 2006 – February 200727

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 2nd Period, cash distributions totaled ¥2,028,001,080,
or ¥17,871 per unit.
Yen in thousands, except per unit amounts

2nd Period

1st Period

April 1, 2006
to February 28, 2007

October 12, 2005
to March 31, 2006

Net income available for distribution
Undistributed net income¥2,028,037
36¥376,848
8

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

2,028,001
17,871
2,028,001
17,871——

376,840
8,871
376,840
8,871——

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 28, 2007 increased ¥64,452 million from March 31, 2006 to ¥108,097 million.
Current assets increased ¥2,766 million from March 31, 2006 to ¥4,462 million. Investment properties increased ¥61,679 million fromMarch 31, 2006 to ¥103,605 million as a result of the acquisition of new properties and other factors. Compared to March 31, 2006, land
including land held in trust increased ¥41,209 million and buildings including buildings held in trust increased ¥20,370 million.

Liabilities
Current liabilities increased ¥10,422 million from March 31, 2006 to ¥13,823 million. Short-term loans increased ¥9,500 million fromMarch 31, 2006 to ¥12,500 million due to the acquisition of properties.
Long-term loans increased ¥12,000 million from March 31, 2006 to ¥30,000 million because NAF used long-term debt to acquire
properties. Security deposits increased ¥641 million from March 31, 2006 to ¥1,267 million.
Consequently, interest-bearing debt as of February 28, 2007 increased ¥21,500 million from March 31, 2006 to ¥42,500 million. The
ratio of long-term, fixed-rate debt to total interest-bearing debt was 70.6 percent, compared to 85.7 percent as of March 31, 2006. The
loan-to-value ratio, calculated as interest-bearing debt divided by total assets at the end of the period, decreased to 39.3 percent from
48.1 percent as of March 31, 2006.

Net Assets
Net assets totaled ¥63,007 million as of February 28, 2007. Unitholders’ capital increased to ¥60,979 million due to factors including
an additional issue of investment units.

28

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 28, 2007, 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 notcontain any provision for the issue of more than one class of units, NAF’s investment units comprise the sole class of units authorized
and issued 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 4Use of
funds

Notes

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:
2nd Period
April 1, 2006 to
February 28, 2007
(Yen)

High

¥1,000,000

Low

583,000

Borrowings
Borrowings by financial institution as of February 28, 2007 are shown below.
Short-term debt
LenderThe Bank ofTokyo-Mitsubishi UFJ, Ltd.
The Sumitomo Trust &Banking Co., Ltd.
The Hachijuni Bank, Ltd.
Mizuho Corporate Bank, Ltd.
The Chugoku Bank, Ltd.
Mitsubishi UFJ Trust andBanking Corporation
Total short-term debt

(Yen in millions)

Balance

Interest rate
(Note 1)

Date of maturity(Note 2)

¥ 3,000

0.8%

May 7, 2007

3,000

0.8%

April 12, 2007

1,000
3,500
1,000

0.8%
0.8%
0.8%

April 12, 2007
May 7, 2007
March 12, 2007

1,000

0.7%

April 27, 2007

Repayment
methodBulletpayment(Note 3)

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

¥12,500

NAF Report April 2006 – February 200729

Long-term debt
Balance

Interest 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

The Hachijuni Bank, Ltd.

2,000
3,000
3,000
3,000
5,000
1,000

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

February 26, 2010
February 28, 2011
April 11, 2012
April 11, 2013
August 6, 2013
April 12, 2010

Total long-term debt
Total borrowings¥30,000¥42,500

Lender(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 Japan

Repayment
methodUse offunds

Bulletpayment

Notes

Unsecured/unguaranteed/pari passu(Note 4)(Note 3)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 theoutstanding 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)

1 to 2 years

2 to 3 years

3 to 4 years

4 to 5 years¥ —¥4,000¥12,000¥—

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

Objective

Estimated duration

Total amounts

Payment for thecurrent period(from April 1, 2006

Cumulative
amount paid

to February 28, 2007)(Yen in millions)Okawabata Apartment
Communities

30

Nippon Accommodations Fund Inc.

Renovation of air
conditioning equipment,water cisterns for
fire-fighting, etc.

From March 2007 to
July 2007

¥ 61

—

—

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

From March 2007 to
October 2007

241

—

—

Repairs and renovationof outer walls, etc.
(Construction area 3)

From July 2007 to
February 2008

191

—

—

Inside stairway
interior improvement

From October 2007
to December 2007

44

—

—

Management‘s Discussion and Analysis

2. Capital Expenditures for the Current Period
The following table sets forth the capital expenditures for the current period. NAF posted ¥301 million in capital expenditures together
with ¥104 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 1)

From August 2006
to February 2007

¥232

Renovation of plumbing construction, renewal
construction in rentable areas, etc.

From April 2006
to February 2007

53

Security improvements, provision of amenities
to tenants, etc.

From April 2006
to February 2007

15

Total

¥301

3. Cash Reserve for Capital Improvements
NAF accumulates cash reserves 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 28, 2007

As of March 31, 2006

¥523
191
300
¥413

¥ —
523
—
¥523

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

Item

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

2nd Period

1st Period

April 1, 2006
to February 28, 2007

October 12, 2005
to March 31, 2006

¥377
6
26
18
12
141

¥ 69
1
6
10
2
49

¥580

¥137

NAF Report April 2006 – February 200731

Management‘s Discussion and Analysis

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

Total price (A)(Yen in millions)

Acquisition price of real estate andreal estate held in trust

Paid to / received fromAmount ofpayment (B)

B/A(Yen in millions)(Note 2)¥60,999

Mitsui Fudosan Co., Ltd.

¥33,325

54.6%

672

Mitsui Fudosan Co., Ltd.

672

100.0%

Sales price of real estate(2) Fees Paid for the Period from April 1, 2006 to February 28, 2007
Description of transactions with related parties (Note 1)
Category

Total fees paid (A)(Yen in millions)

Paid toAmount ofpayment (B)

B/A(Yen in millions)(Note 2)

Brokerage fees

¥171

Mitsui Fudosan Investment Advisors Inc.

¥171

100.0%

Property management fees

331

Mitsui Fudosan Housing Lease Co., Ltd.

331

100.0%

Building management fees

175

Mitsui Fudosan Housing Lease Co., Ltd.

175

100.0%

Resident First Co., Ltd.

18

26.1%

Mitsui Rehouse Tokyo Co., Ltd.

1

1.2%

Mitsui Home Estate Co., Ltd.

1

1.1%

Leasing related service fees68(3) Other Payments to Related Parties
Paid toMitsui Fudosan Housing Service Co., Ltd.
Mitsui Home Remodeling Co., Ltd.

Amount of payment(Yen in millions)

Item

¥17

Repair and maintenance costs

6

Repair and maintenance costs

Notes: 1. “Related parties” means parties defined in Article 20 of 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 prices.

32

Nippon Accommodations Fund Inc.

Financial Statements

Balance Sheets
Nippon Accommodations Fund Inc.
As of February 28, 2007 and March 31, 2006

U.S. dollars in thousands
Yen in millions

AssetsCurrent assets:
Cash and cash equivalents
Rent receivables
Consumption tax receivables and other current assets
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
Liabilities
Current liabilities:
Short-term loans (Note 4)
Accounts payable
Rent received in advanceAccrued expenses and other liabilities
Total current liabilities
Long-term loans (Note 4)
Tenant security deposit
Other liabilities
Total Liabilities
Net Assets
Unitholders’ capital (Note 5)
Retained earnings
Total Net Assets
Total Liabilities and Net Assets(Note 1)

2nd Period

1st Period (Unaudited)

2nd Period

As of February 28, 2007

As of March 31, 2006

As of February 28, 2007

¥ 3,917
459
84
4,462

¥ 1,475
191
30
1,696

$ 33,072
3,875
709
37,67371,872

30,663606,822

32,709(976)
103,60530¥108,097

11,393(130)
41,92622¥43,644

276,165(8,240)874,747
253$912,673¥ 12,500
688
519
115
13,82230,0001,267—
45,090¥ 3,000
114
216
71
3,401
18,000626
122,028$105,539
5,809
4,382
971
116,700
253,293
10,697—
380,699

60,9792,028
63,007¥108,097

21,240377
21,617¥43,644514,851
17,123531,974$912,673

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

NAF Report April 2006 – February 2007

33

Statements of Income
Nippon Accommodations Fund Inc.
October 12, 2005 to March 31, 2006 and April 1, 2006 to February 28, 2007

U.S. dollars in thousands
Yen in millions

Revenue (Notes 6 and 7):
RentalOther revenue related to property leasing
Gain on sale of investment properties
Total Revenue
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
Founding costs
New investment unit issue costs
New investment unit publication costs
Other expenses
Income Before Income Taxes
Current and deferred income taxes (Note 8)
Net Income
The accompanying notes to financial statements are an integral part of these statements.

34

Nippon Accommodations Fund Inc.

(Note 1)

2nd Period

1st Period (Unaudited)

2nd Period

April 1, 2006 to
February 28, 2007

October 12, 2005 to
March 31, 2006

April 1, 2006 to
February 28, 2007

¥4,830
238
5
5,072

¥849
75
—
924

$40,780
2,009
42
42,823

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

114
3
32
42
130
69
69
458
466
4
(76)
(9)
(7)
—
(2)
378
1
¥377

4,509
1,182
878
1,334
7,177
3,183
1,714
19,976
22,84717(4,162)—(1,005)(549)(8)
17,13917$17,123

Statements of Changes in Unitholders’ Equity
Nippon Accommodations Fund Inc.
For the period from April 1, 2006 to February 28, 2007

Yen in millions
Number of
Units

Unitholders’CapitalRetained
Earnings

Total

Balance as of March 31, 2006

42,480¥21,240¥ 377¥21,617

Cash distribution declared—
67,200—37,612

(377)
—

(377)
37,612

3,800
—

2,127
—

—
2,028

2,127
2,028

113,480¥60,979¥ 2,028¥63,007

Number of
Units

Unitholders’CapitalRetained
Earnings

Total

Balance as of March 31, 2006

42,480$179,331$ 3,183$182,514

Cash distribution declared—
67,200—317,562(3,183)—(3,183)
317,562

3,800—

17,958——17,123

17,95817,123

113,480$514,851$17,123$531,974

Issuance 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

U.S. dollars in thousands (Note 1)

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

NAF Report April 2006 – February 2007

35

Statements of Cash Flows
Nippon Accommodations Fund Inc.
October 12, 2005 to March 31, 2006 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
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 sale
Cash 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 of investment 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
Payment of distribution
Net Cash Provided by Financing Activities
Net Change in Cash and Cash Equivalents
Cash and Cash Equivalents at the Beginning of the Period
Cash and Cash Equivalents at the End of the Period
The accompanying notes to financial statements are an integral part of these statements.

36

Nippon Accommodations Fund Inc.

(Note 1)

2nd Period

1st Period (Unaudited)

2nd Period

April 1, 2006 to
February 28, 2007

October 12, 2005 to
March 31, 2006

April 1, 2006 to
February 28, 2007

¥ 2,030
850
119
493
(269)
585
303
667
(458)
(51)
(8)
4,260

¥

378
130
7
76
(191)
114
216
—
(6)
(13)
(27)
683

$ 17,139
7,177
1,005
4,162
(2,271)
4,939
2,558
5,632
(3,867)(431)(68)
35,968(63,196)
853
(212)
(5)
(62,560)(42,056)
692
(65)
(11)
(41,441)(533,570)
7,202(1,790)(42)(528,200)

52,000(42,500)
12,00039,619(377)
60,7432,442
1,475¥ 3,917

9,000(6,000)18,00021,233—42,233
1,475—¥ 1,475

439,041(358,831)
101,317334,507(3,183)512,859
20,61812,454$ 33,072

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

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 and Investment Corporation Act of Japan with Mitsui Fudosan Accommodations Fund Management Co., Ltd. (hereinafter“MFAFM”) acting as sponsors. 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 28, 2007, NAF had ownership or beneficiary interests in 27 properties containing approximately 135,744 square metersof rentable space. As of February 28, 2007, NAF had leased approximately 132,007 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 Securities
and Exchange Law. Some supplementary information included in the statutory Japanese language financial statements, but not required forfair 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 28, 2007, which was ¥118.44 to U.S.$1. The convenience translation should not be construed as
representation that the Japanese yen amounts have been, could have been, or could in the 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

2-13 years

NAF Report April 2006 – February 200737

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.

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 theseller. The Company pays the seller the corresponding tax amounts for the period from the property’s transfer date to December 31 of
the previous 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 28, 2007 amounted to ¥36 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.

Accounting Standards for Presentation of Net Assets in the Balance Sheet
Effective for the year ended February 28, 2007, NAF adopted accounting standards “Accounting Standard for Presentation of Net
Assets in the Balance Sheet (Statement No. 5 issued by the Accounting Standards Board of Japan on December 9, 2005), and the implementation guidance for the accounting standard for presentation of net assets in the balance sheet (the Financial Accounting Standard
Implementation Guidance No. 8 issued by the Accounting Standards Board of Japan on December 9, 2005).
Unitholders’ equity calculated using the former standard would have been ¥63,007 million for the period ended February 28, 2007.

38

Nippon Accommodations Fund Inc.

Notes to Financial Statements

Note 3 — Schedule of Investment Properties
Investment properties as of February 28, 2007 and March 31, 2006 consisted of the following:
Yen in millions

Land
Land in trust
Land including trust total

As of February 28, 2007
AccumuAcquisition
latedBook Value
Costs
Depreciation

As of March 31, 2006
AccumuAcquisition
latedBook Value
Costs
Depreciation¥ 28,451
43,421¥ ——¥ 28,451
43,421¥ 6,584
24,079¥ ——¥ 6,584
24,07971,872—

71,872

30,663—30,663

Buildings and improvements
Buildings and improvements in trust

14,342
16,463

(349)
(513)

13,993
15,951

3,092
7,344

(25)
(93)

3,067
7,251

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 in trust

30,806
306
71
250
873
120
264
20

(862)
(16)
(3)
(28)
(32)
(5)
(29)
—

29,944
289
68
222
841
115
235
20

10,436
89
14
37
770
13
18
16

(118)
(2)
(0)
(1)
(8)
(0)
(1)
—

10,318
88
14
36
762
13
16
16

Other investment properties total
Total

1,904

(114)

1,790

957

(12)

945

¥104,581¥(976)¥103,605¥42,056¥(130)¥41,926

Note 4 — Short-Term Loans 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 floating rates and on February 28, 2007 and March 31, 2006 ranged from 0.72% to 0.86% and from 0.31% to 0.39%, respectively.
Long-term loans are at fixed rates and consist of the following:
Yen in millions

As of February 28, 2007

As of March 31, 2006

¥30,000¥18,000

Unsecured loans due 2009 to 2018 principally from banks and insurancecompanies with interest rates mainly ranging from 1.6% to 2.2%
The annual maturities of long-term loans as of February 28, 2007 were as follows:

Yen in millions

2009
2010
2011
2012
Thereafter¥ 2,000
11,000
3,000
6,000
8,000

NAF Report April 2006 – February 200739

Note 5 — Unitholders’ Equity

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

As of February 28, 2007

As of March 31, 2006

2,000,000
113,480

2,000,000
42,480

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 28, 2007 and March 31, 2006 were as follows:
Yen in millions

2nd Period

1st Period

April 1, 2006
to February 28, 2007

October 12, 2005
to March 31, 2006

Revenue from Property Leasing:
Rental:Rental revenues
Facility charge¥4,720
110

¥834
14

Subtotal

4,830

849

200
37

46
29

238

75

Total revenues from property leasing

5,068

924

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

534
104
131
12
50
10
850
68
28

114
32
0
2
10
3
130
18
12

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

Total rental expenses
Operating Income from Property Leasing Activities

40

Nippon Accommodations Fund Inc.

1,787

320

¥3,281¥603

Notes to Financial Statements

Note 7 — Breakdown of Gain on Sale of Investment Properties
On June 12, 2006 NAF sold the property set forth below:
Yen in millions

Park Axis Monzen Nakacho Frame
Revenue from sale of investment properties
Cost of investment properties
Other sales expenses

¥672
667
0

Gain on sale of investment properties¥ 5

Note 8 — Income Taxes
NAF is subject to income taxes in Japan. The statutory tax rate on NAF’s income based on applicable Japanese tax law was 39.39% for
the periods ended February 28, 2007 and March 31, 2006. The following table summarizes the significant differences between the statutory
tax rates and NAF’s effective tax rates for financial statement purposes.

Statutory tax rate
Deductible dividends paid
Others
Effective tax rate

2nd Period

1st Period

April 1, 2006
to February 28, 2007

October 12, 2005
to March 31, 2006

39.39%(39.35)0.05

39.39%(39.30)
0.13

0.09%

0.22%

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 total amount of dividends paid in calculating its
taxable income under Japanese tax regulations.

Note 9 — Per Unit Information
Information about earnings per unit for the periods ended February 28, 2007 and March 31, 2006 and net assets per unit as of February
28, 2007 and March 31, 2006 was as follows.
The computation of earnings per unit is based on the weighted average number of common units outstanding during the period. The
computation of net assets per unit is based on the number of common investment units outstanding at each period end.
Diluted net income per unit has not been presented since no warrants or convertible bonds were outstanding during the period.
Yen

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

Net Assets per Unit

2nd Period

1st Period

April 1, 2006
to February 28, 2007

October 12, 2005
to March 31, 2006

¥ 23,375
86,757¥ 12,310
30,612February 28, 2007

March 31, 2006

¥555,223¥508,871

NAF Report April 2006 – February 200741

Note 10 — Transactions with Related Parties(April 1, 2006 – February 28, 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)¥820(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)¥392

¥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 ¥443 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(October 12, 2005 – March 31, 2006)(1) Parent Company and Major Corporate Unitholders
Classification

Name

Mitsui FudosanCo., Ltd.
Mitsui Fudosan
Accommodations Fund
Major corporate Management Co., Ltd.
unitholders, etc.
Mitsui Fudosan
Investment
Advisors, Inc.
Mitsui Fudosan
Housing Lease
Co., Ltd.

42

Nippon Accommodations Fund Inc.

Amount oftransaction

Balance at endof period

Principal businessor occupation

Nature oftransaction

Buying and selling,
and lease ofreal estate

Acquisition of realestate and real estate
held in trust¥11,340——

Asset managementof investment
corporation

Payment of asset
management fees

¥422

Accounts
payable¥72

Investment
advisory

Payment ofbrokerage fees

¥119

—

—

Lease ofreal estate

Payment of property
management fees andbuilding management fees

¥108

—

—

Account(Yen in millions)(Yen in millions)Notes to Financial Statements(2) Directors and Major Individual Unitholders
Classification

Director and/or
close relative

Name

Nobuyuki Nakai

Principal businessor occupation

Nature oftransaction

Executive Director of
NAF and President &CEO of MFAFM

Payment of asset
management fees to
MFAFM (Note 1)

Amount oftransaction

Account(Yen in millions)¥422(Note 2)

Balance at endof period(Yen in millions)

Accounts
payable¥72(Note 2)

Notes: 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. 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

Note 11 — Significant 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 Cube Ikebukuro Kanamecho
Date of Acquisition

March 23, 2007

Acquisition Price (Note)¥1,608,000,000

Location (Residence Indication)

27-9, Nishii Ikebukuro 5-chome, Toshima-ku, Tokyo

Building

Completion Date

March 23, 2007

Structure/Number of Floors

RC 14F

Rentable Area

1,886.82m2

Park Axis Meguro Honcho
Date of Acquisition

April 19, 2007

Acquisition Price (Note)¥1,810,000,000

Location (Residence Indication)
Building

14-21, Meguro Honcho 2-chome, Meguro-ku, Tokyo
Completion Date

July 14, 2006

Structure/Number of Floors

RC 5F

Rentable Area

1,884.77m2

Park Axis Shin Itabashi
Date of Acquisition

April 19, 2007

Acquisition Price (Note)¥3,430,000,000

Location (Residence Indication)

East: 1-1, Itabashi 4-chome, Itabashi-ku, Tokyo
West: 1-2, Itabashi 4-chome, Itabashi-ku, Tokyo

Building

Completion Date

February 20, 2007

Structure/Number of Floors

RC B1F/14F

Rentable Area

East: 2,145.66m2
West: 2,250.33m2

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

NAF Report April 2006 – February 200743

Notes to Financial Statements

2. Borrowing Funds
To repay existing debt, along with part of funds to purchase the assets mentioned above and related incidental expenses, NAF has borrowed funds as shown below.

LenderBalance

Interest rate

(Yen in millions)(Note1)

Date of loan

Date of maturity

Mitsubishi UFJ Trust andBanking Corporation

1,000

0.9%

March 23, 2007

September 25, 2007

1,000

0.8%

April 19, 2007

July 19, 2007

The Chugoku Bank, Ltd.

2,000

1.6%

April 19, 2007

April 19, 2011

Mizuho Corporate Bank, Ltd.

1,000

1.6%

April 19, 2007

April 19, 2011

Repayment
methodBulletrepayment

Notes

Unsecured/
unguaranteed,/pari passu(Note 2)The Sumitomo Trust &Banking, Co., Ltd.

Shinsei Bank, Limited

1,000

0.9%

April 19, 2007

July 19, 2007

1,000

0.9%

April 19, 2007

July 19, 2007

1,000

1.6%

April 19, 2007

April 19, 2011

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.

44

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 28, 2007 and the related statements of income, changes in unitholders’equity and cash flows for the period 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 to independently
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 28, 2007 and the results of its operations and its
cash flows for the period 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 11 to the financial statement, 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
28, 2007 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 28, 2007

NAF Report April 2006 – February 200745

Appendix

Major Interested Parties
Mitsui Fudosan Accommodations Fund Management Co., Ltd. (Asset Management Company and Administrative Agent
regarding the Management of Institutions, herein “MFAFM”)
MFAFM, as Asset 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 28, 2007, MFAFM has
been entrusted as an asset 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 an AssetManagement Entrustment Agreement based on an entrustment
from NAF in accordance with the Articles of Incorporation of
NAF and the Investment Objects and Policies set forth therein.
Undertakes management of the general affairs of the general
meeting of unitholders and the Board of Directors as
Administrative Agent regarding the Management of Institutions
based on an entrustment from NAF and pursuant to an
Agreement for General Administration Regarding theManagement of Institutions.

■ Fees for the Asset Management Operation
NAF pays asset management fees to MFAFM, in accordancewith the REIT management agreement concluded with MFAFM.
These fees are comprised of items 1 to 4 below, with the methodof 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(provided, however, that revenues from the sale of Real Estate,etc. and other Managed Assets will be excluded) 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. (however, excluding consumption tax, local consumption tax, and acquisition costs) will be payable. Management Fees
3 are paid at or before the end of the next month after the monthof the acquisition 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. (however,excluding consumption tax, local consumption tax) will bepayable. Management Fees 4 are paid at or before the end of thenext month after the month of the sales date.

46

Nippon Accommodations Fund Inc.

■ History of MFAFM■ Directors and Staff

MFAFM is an Asset Management Company which 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 28, 2007, the directors and corporate auditorsof MFAFM are as follows.

January 4, 2005

EstablishedMarch 4, 2005

Obtained 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)Takeshi Kariya

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 directors andauditors 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 an Asset Management
Company 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

The staff other than those mentioned above is comprised of 12
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, 2006

(Yen in thousands)

Total Assets
Total Liabilities
Unitholders’ Equity¥611,213
164,569
446,644

Profit and loss for the most recent fiscal year:
First Fiscal Year
(October 12, 2005 – March 31, 2006)

Operating Income
Ordinary Profit
Net Income(Yen in thousands)¥421,104
261,984
147,826

NAF Report April 2006 – February 2007

47

Portfolio Policy

Portfolio Structure Policies
The portfolio structure policies and investment standards forindividual properties for the REIT Management Company and its
internal regulations that serve as asset management guidelines
are presented below.

When considering individual investments, NAF studies
regional characteristics and tenant needs. NAF then deploys thisinformation to invest in properties with suitable residential plans
and characteristics.

1. Investment Areas

2. Investment Standards

NAF emphasizes Greater Tokyo and other major cities ininvesting in accommodation assets. By region, approximately 80
percent of NAF’s assets are in the 23 wards of Tokyo.

The REIT Management Company identifies potential
investments and decides whether or not to invest in assets on thebasis 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
that do not meet this criterion upon consideration of relevant matters including property characteristics
and earning potential.

Ownership rights

In principle, NAF shall hold ownership rights of a whole property. However, NAF may invest in comparted
ownership upon consideration of the specific property. NAF may also invest in leaseholds, including fixedterm leaseholds, on the basis of consideration of earning potential, the stability of the leasehold rights
and other relevant matters.

Structure

Structures shall be reinforced concrete (RC) or steel reinforced concrete (SRC). Earthquake resistance shallconform to or substantially satisfy the New Earthquake Resistance Standards (in compliance with the1981 revision of the Building Standards Law (Law No. 201 of 1950), including subsequent revisions;
hereafter, the “Building Standards Law”).

Properties for development

In principle, NAF shall acquire properties that are already producing stable rental income at the time ofacquisition, and shall not invest in property development that entails NAF acquiring sites andconstructing buildings on them. However, NAF may consider contracts to acquire uncompleted buildings
that, although incomplete, are expected to carry minimum risk in respect to completion, delivery andsubsequent 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
studies48

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 not exceed 15 percent. For buildings for which PML exceeds 20 percent,consideration of additional antiseismic reinforcing work, additional earthquake insurance and other relevant
matters must be considered.

Environmental,
soil and otherissues

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

Rights andrelated issues

1. Issues regarding ownership rights 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 April 2006 – February 200749

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

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 resolution.
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.

50

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 or claims for compensatory damages from third parties
due to disasters such as fires and accidents. Asset characteristics
determine such coverage.
NAF comprehensively determines earthquake insurance
coverage according to the effectiveness of insurance and the
projected impact of an earthquake on each building and on theportfolio as a whole. When earthquake PML for specificbuildings is projected at over 20 percent or when the acquisitionof such property 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 definedby Article 2-3-1 of the Securities and Exchange Law of Japan.
In addition, NAF may not take on loans or issue bonds thatexceed ¥1 trillion, respectively, nor may the total of loans andbonds 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 trust,and has a disclosure policy for public awareness. Moreover, NAF
works to maintain an environment that encourages timely andaccurate disclosure of unbiased information to all investors. In
keeping with its name, NAF’s fundamental policy is toaccommodate investors in disclosing information.

NAF discloses information in accordance with theInvestment Trust and Investment Corporation Act of Japan, theSecurities 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 April 2006 – February 200751

Corporate Data and Investor Information(As of February 28, 2007)■ 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 28, 2007)

Unitholders

4,009

Transfer agent

The Chuo Mitsui Trust and Banking Co., Ltd.
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 Co., Ltd.
8-4, Izumi 2-chome, Suginami-ku, Tokyo 168-0063, Japan

Accounting 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 June 29, 2007 pursuant to the Securities Exchange Law ofJapan, and the financial statements and the Performance Information
Report for the period from April 1, 2006 to February 28, 2007, of
Nippon Accommodations Fund Inc. prepared pursuant to theInvestment Trust and Investment Corporation Act of Japan. This
document should not be deemed a summary of the above mentioned
Securities Report and the Financial Statements and the Performance
Information Report.
The contents of this document do not constitute an offer to sellor solicitation of an offer to buy or sell any security 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. With respect to any and all terms
herein including, without limitation, financials statements, if there
exist any discrepancies in the meaning or interpretation thereof
between the original Japanese documents and English statements
contained herein, the original Japanese documents will always govern
the meaning and interpretation. None of Nippon Accommodations
Fund Inc., Mitsui Fudosan Accommodations Fund Management Co.,

52

Nippon Accommodations Fund Inc.

Ltd. or any of their respective directors, officers, employees, partners,
unitholders, agents 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 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 28, 2007)

Distribution per unit

¥17,871 (As of February 28, 2007)

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 28, 2007)

Number of Units Held

Percentage of Total

Japan Trustee Services Bank, Ltd. (Trust Account)

12,38310.91%The Master Trust Bank of Japan, Ltd. (Trust Account)

9,626

8.48%

Nikko Cititrust and Banking Co., Ltd. (Investment Account)

7,558

6.66%

Mitsui Fudosan Co., Ltd.

6,600

5.81%

Nomura Securities Co., Ltd. (Investment Account)

5,240

4.61%

Name

Morgan Stanley & Co. International Limited

4,572

4.02%

The Norinchukin Bank

4,000

3.52%

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

3,963

3.49%

The Chuo Mitsui Trust and Banking Company, Limited

3,600

3.17%

The Hiroshima Bank, Ltd.

3,126

2.75%

Unitholders
Other domestic corporations
65 (1.62%)

Overseas corporations and individuals
55 (1.37%)

Other domestic corporations
8,892 (7.83%)

Financial institutions
90 (2.25%)

Securities companies
16 (0.40%)

Individuals and others
9,154 (8.07%)

Overseas corporations
and individuals
15,189 (13.38%)

Individuals and others
3,783 (94.36%)

Number of unitholders
Total 4,009

Securities companies
2,288 (2.02%)

Financial
institutions
77,957
Individuals andothers(68.70%)2,288 (2.01%)

Number of units held
Total 113,480

Unit Price Range and Trading Volume(Yen)
1,200,000(Units)
30,000End-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

0

Aug.
2006

Sept.

Oct.

Nov.

Dec.

Jan.
2007

Feb.

0

NAF Report April 2006 – February 2007

53

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

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

Printed in Japan on recycled paper with soy-based vegetable ink.