Japan Excellent, Inc.
Semi-Annual Report
From February 20, 2006 to December 31, 2006

1st Fiscal Period

http://www.excellent-reit.co.jp/eng/

Japan Excellent, Inc.
Semi-Annual Report
From February 20, 2006 to December 31, 2006

02

Distribution

Distribution per Unit

¥13,773

Highlights
Total Revenues¥ 4,751 million

Operating Income¥ 2,369 million

Net Income¥ 1,856 million

Total Assets¥ 114,199 million

Total Unitholders’ Equity
Unitholders’ Equity per Unit

¥ 69,329 million¥ 514,317

Contents
Distribution/ Highlights

03

To our Unitholders

04

About JEI

08

Asset Management Report

22

Financial Statements

3803

To Our Unitholders

Junichi Tamura
Executive Director, Japan Excellent, Inc.
President, Japan Excellent Asset Management Co., Ltd.

On behalf of Japan Excellent, Inc. (“JEI” or the “Investment
Corporation”) and Japan Excellent Asset Management Co., Ltd.
(“JEAM” or the “Asset Management Company”), I would like tothank all of our unitholders for their steadfast support. JEI waslisted on J-REIT Section of the Tokyo Stock Exchange on June 27,
2006 and recently closed its first fiscal period. This report contains
details of JEI’s operating conditions and financial results during thefirst fiscal period, February 20, 2006 through December 31, 2006.

Performance in the First Fiscal Period
Revenues in the first fiscal period were ¥4,751 million, income before
income tax amounted to ¥1,858 million, while net income totaled to¥1,856 million. As a result, a distribution to unitholders was ¥13,773
per investment unit. We firmly believe that in addition to enhancing
unitholder value, the business of REIT management involves
providing a sense of security and safety to the society. We willcontinue to manage our business activities in this conviction and ask
for your continuous support and understanding.

04

About JEIMaximum Utilization of Collective Strengths of Sponsor Companies
JEI’s greatest hallmark is the eight sponsor companies that support the Asset Management Company.
These sponsor companies have strengths in terms of both quality and quantity, offering expertise in
their respective business domains of real estate and finance. JEI’s most fundamental business strategy
is taking full advantage of the comprehensive strengths of sponsor companies. Our second
fundamental strategy is to pursue stability and growth of revenues in a balanced manner in line with
the quality of a REIT, that is stable and medium- to long-term growth, through balanced portfolio
management focusing on office buildings in metropolitan areas, with careful consideration given tobalancing of regional, property scale and tenants.

Growth Strategies
The Investment Corporation aims to secure stable revenues through theproperties it acquires in cooperation with sponsor companies.
At the time of its public listing, JEI’s portfolio consisted of 14 properties, 13 ofwhich were acquired by utilizing its core sponsor companies, Kowa Real EstateCo., Ltd. (“Kowa Real Estate”) and The Dai-ichi Mutual Life Insurance Company(“Dai-ichi Mutual Life”) and the networks of its sponsor companies.
Anticipating future external growth, JEI entered into a pipeline support
agreement with each of Kowa Real Estate and Sekisui House, Ltd., its coresponsor companies, as well as with Mizuho Trust & Banking Co., Ltd.

Concrete Initiatives
Investment Activities
At the time of its public listing, JEI acquired 14 properties for a total acquisition price of ¥98,316
million and began its investment activities. In November 2006, JEI additionally acquired a portion ofco-ownership interest of Kawasaki Nisshincho Building, a building that it had already acquired a
portion of co-ownership interest at the time of its public listing. As a result, total acquisition price ofproperties held by JEI as of December 31, 2006 amounted to ¥98,446 million.
Following JEI’s public listing, the Asset Management Company or property management companies of
JEI’s respective assets approached major end tenants directly to deepen their understanding of theInvestment Corporation and build good relationships with them continuously. We have also worked
meticulously to meet needs of tenants and thus raise theirsatisfaction. Moreover, we are actively negotiating with tenants
whose rent rates are below market levels about the upward revisionof these rates.
We have achieved increases in revenues by raising rent rates on newlease agreements reached through aggressive tenant recruitment.
JEI conducts regular on-site surveys of the quality of building
management at its properties and make an effort to maintain andimprove that quality. We also worked to reduce maintenance and05

To Our Unitholders

management fees by taking competitive bids when selecting building management companies forcertain properties. Moreover, JEI introduced water-saving systems at some of its properties as a part ofefforts to contribute to environmental conservation. We will maintain a medium- to long-term
perspective and endeavor to enhance tenant satisfaction at all properties through such activities asregular building safety inspections. At the same time, we will take active steps to implement ecofriendly measures that contribute to cost reductions.
In and after the second fiscal period, we will continue with our investment
policy of pursuing stability and growth of revenues, focusing on officebuildings in metropolitan areas. We will work in close collaboration withsponsor companies to improve our portfolio.

Financial Activities
JEI issued 128,000 investment units at the time of its listing and 6,400
investment units in an over-allotment later to raise a total of ¥67,441 million
in the market. In order to allow JEI to procure debt financing under morefavorable conditions, the Investment Corporation received an issuer rating of A3 from Moody’s
Investors Service (Moody’s) before its listing. At the time of its listing, JEI undertook a total of ¥38,500
million of long-term debt with maturity dates of three to five years. As a result of these activities, theLTV ratio (loans-to-value ratio, or the ratio of interest-bearing debts to total assets) for the first fiscal
period was approximately 34%.
Working in the conviction that a potential of interest rate increases during 2006 was low and that,should they occur, the periods of such increases would not be prolonged, JEI followed a strategy ofhedging gradually against the risk of floating interest rates. In July 2006, JEI entered into interest rate
swap agreements to fix the interest on 19% of its debt financing balance. Furthermore, in August
2006, JEI concluded an interest rate swap agreement with a future effective date to fix the interest
from December 29, 2006, on an additional 23% of its debt financing balance. This served to hedge
against interest rate increases from December 29, 2006, enabled JEI to enjoy merits of floatinginterest rates, which remained low through the effective date. In addition, capital procurement costs
for the first fiscal period were approximately 19% lower than JEI’s initial forecast at the beginning of
the period. As of December 31, 2006, JEI’s overall ratio of debt financing with fixed rate interest,
including debt financing with fixed rate interest originally, stood at 50%.
On January 25, 2007, Moody’s announced that the Investment Corporation’s issuer rating would be
upgraded to A2. In the second fiscal period, JEI will leverage merits of this higher rating andundertake steady capital procurement activities, primarily through the Mizuho Financial Group. We
determine to invest flexibly and rationally in a manner suited to thefinancial environment.
We ask our unitholders for their continuous support and understanding.

Junichi Tamura
Executive Director, Japan Excellent, Inc.
President, Japan Excellent Asset Management Co., Ltd.

06

Unit Price
Price

TSE J-REIT Index(YEN)(POINT)

2,700

900,000
850,000
800,000
750,000
700,000

As of Jan. 31, 2007
IPO Price: JPY 520,000
Historical High: JPY 860,000 (Jan. 31, 2007)
Historical Low: JPY 540,000
The Number of Outstanding Investment: 134,800 Units
Market Capitalization : JPY 115,928 MM (Jan. 31, 2007)

2,500

2,300

2,100

650,000

1,900

600,000
1,700

550,000
500,000
Jun. 27, 06

1,500
Jul. 31, 06

Aug. 31, 06 Sep. 30, 06

Oct. 31, 06

Nov. 30, 06 Dec. 31, 06 Jan. 31, 07

Occupancy Rate
(%)

100.0

97.5

95.0

92.5
Area I
Area II

90.0

Area III
TOTAL

87.5

85.0
Jun. 30, 06

Jul. 31, 06

Aug. 31, 06

Sep. 30, 06

07

Oct. 31, 06

Nov. 30, 06

Dec. 31, 06

About JEI

Collective Strengths of Sponsor Companies
Japan Excellent Asset Management Co., Ltd. utilizes human resources,know-how and other expertise provided by several sponsor companies
specializing in real estate and financeJapan Excellent Asset Management Co., Ltd. ("JEAM" or the "Asset Management Company") is supported
by several sponsor companies. Japan Excellent, Inc.(JEI)'s sponsor companies specializing in real estate are
active in a wide range of real estate related operations, from real estate development and investment tobrokerage, management and management of lease; several of the other sponsor companies have a broad
range of expertise in the finance field. Through optimal collective and comprehensive utilization of theirstrengths in asset management, JEI is working to maximize unitholder value.
Japan Excellent, Inc.
Real Estate Market

Liabilities

Kowa Real Estate Co., Ltd.

Financial Market

AssetsUnitholders'EquitySekisui House, Ltd.
Morgan Stanley Properties
Japan K.K.
The Dai-ichi Building Co., Ltd.

The Dai-ichi Mutual Life Insurance Company

Sohgo Housing Co., Ltd

Mizuho Trust & Banking Co., Ltd

Investment
in JEAM

Mizuho Corporate Bank, Ltd.

Provision of Assistance in Provision of Provision of Provision of
Pipeline
Expertise to
Property
Warehousing Research
SupportJEAM
Acquisition*1
Function
Function*2
FunctionCore Sponsor

Kowa Real Estate Co., Ltd.
Core Sponsor

The Dai-ichi Mutual Life Insurance Company
Core Sponsor

Sekisui House, Ltd.
Morgan Stanley Properties Japan K.K.

The Dai-ichi Building Co., Ltd.

Sohgo Housing Co., Ltd.

Mizuho Corporate Bank, Ltd.

Mizuho Trust & Banking Co., Ltd.

*
indicates the areas in which sponsor companies provide support for JEI or JEAM.
*1: Property acquisition in cooperation and through utilization of the close relationship with sponsor companies*2: JEAM has entered into an agreement with each of Mizuho Research Institute (98.4% of its shares held by Mizuho Financial Group) and Urban Research Institute Corporation(100% of its shares held by Mizuho Trust & Banking Co., Ltd.) for the entrustment of research operations. The support to be provided by Mizuho Corporate Bank, Ltd. in theabove table includes, accordingly, the service to be provided by the Mizuho Research Institute. Similarly, the support to be provided by Mizuho Trust & Banking Co., Ltd. in theabove table includes that provided by Urban Research Institute Corporation.

08

Core Sponsor Companies with an Extensive Track Record in Office Building
Development, Investment and Management
JEAM considers Kowa Real Estate Co., Ltd., the Dai-ichi Mutual Life Insurance Company and Sekisui
House, Ltd. as its core sponsor companies. These companies provide expert staff to JEAM, and also
provide expertise in real estate development, management, risk control and other requisite skills
for the operations of JEAM. Greatly benefiting from their support, JEAM engages in asset
management operations with the aim of increasing the value of JEI's assets.

Real Estate Business of

Kowa Real Estate Co., Ltd.
Profile■ A real estate company with a close relationship with
Mizuho Corporate Bank, Ltd.
■ Actively involved in office building related businesses● Comprehensively engages in construction, maintenance, andmanagement operations of leading-edge office buildings in the Tokyo
metropolitan area and other regions■ Prime development projects include Shinagawa Intercity(Tokyo) and Akasaka Intercity (Tokyo)

SHINAGAWA INTERCITY*1

AKASAKA INTERCITY*1

HARUMI TRITON SQUARE*1

OMORI BELLPORT*2

Real Estate Business of

The Dai-ichi Mutual Life
Insurance Company
Profile■ Extensive experience and historical achievements in thereal estate leasing businesses■ Managing various office buildings throughout major
cities in Japan that offer customers a high level ofsatisfaction, and provides high-quality office space● Demonstrates sophisticated risk management capabilities by

longstanding asset management experience■ Prime development projects include Harumi Triton
Square (Tokyo) and Omori Bellport (Tokyo)

Real Estate Business of

Sekisui House, Ltd.
Profile■ A major home-builder in Japan with an established trackrecord in large-scale urban development■ Prime development projects include Rokko Island City
(Kobe) and Akasaka Garden City (Tokyo)

ROKKO ISLAND CITY*1*1: As of Dec. 31, 2006, JEI has not acquired this property.
*2: As of Dec. 31, 2006, JEI has acquired compartmentalized ownership of this property.

09

AKASAKA GARDEN CITY*1

About JEIInvestment policy
Focusing on properties primarily in Tokyo's 6 central Wards andconcentrating over 90% of its investment in office buildings
The office building market is characterized by its substantial scale and relatively high liquidity. Dueto these characteristics, increasing investment opportunities in this market can be expected, andconsidering future development projects and other positive factors, the stable supply of officebuildings is likely to continue.
Another positive aspect of the office building market is its potential to benefit from stable and midto long-term profitability in comparison with other types of real estate. Such profitability potential
can be realized by carefully and strategically selecting portfolio properties and pursuing
appropriate property management and maintenance. To maximize unitholder value by balancing
the stability and growth of revenues, we consider that office buildings are the most suitable target
of investment under our investment policy.

■ Investment Ratio by Property Type
Type*1

Investment Ratio of Total Portfolio*2

Office Buildings

90% or more

Other (Commercial Facilities,Residential Properties, and Others)

10% or less

*1: Each asset related to real estate is classified into the types in the above table by reference to the actual usage of the majority portion of
total leasable floor space for each such building. Once the type of property is determined for each such property, the total acquisition pricefor each property type is considered to fall in one category of the type in the above table.
*2: The investment ratio of total portfolio refers to the ratio of the total acquisition price of assets related to real estate by type to the totalacquisition price of the entire portfolio.

■ Target Regions of Investment
JEI prioritizes investment in Tokyo's 6 central Wards (Area I), which is characterized by thesubstantial scale of the office building market and high occupancy rate. Second priority is given to
the central areas of Osaka, Nagoya and Fukuoka Cities (Area II), which demonstrate both a highconcentration of office buildings and higher rent levels than other regional cities. Area III iscomprised of Tokyo (excluding Tokyo's 6 central Wards defined as Area I), and areas surrounding
Tokyo, namely Kanagawa, Saitama and Chiba Prefectures. JEI defines Areas I, II and III as coreregions and shall selectively make investments in properties in these areas.

■ Targeting portfolio composition of 80% or more in office buildings located incore areas; strategic planning of investment ratios within core areas
Target Regions of Investment
Core Areas

Investment Ratio of Total Portfolio*2
80% or more

Area ITokyo’s six central wards (Chiyoda, Chuo, Minato, Shinjuku, Shinagawa and Shibuya Wards)

50% or more of total core areas

Area II*1

Central Osaka City (Umeda, Dojima, Nakanoshima, Yodoyabashi, Honmachi and other areas)
Central Nagoya City (Meieki, Fushimi, Sakae and other areas)
Central Fukuoka City (Tenjin, Hakata Terminal Peripheral and other areas)

50% or less of total core areas

Area IIIArea IVTokyo excluding Tokyo’s six central wards defined as Area I, and areas surrounding Tokyo(Kanagawa, Saitama and Chiba Prefectures)

Osaka, Nagoya and Fukuoka Cities excluding districts specified in Area II, and other government-designated cities

50% or less of total core areas
20% or less

*1: • Central Osaka City comprises districts located within a 10-minute walk from Osaka Station (JR), Umeda Station (Hankyu Line, Hanshin Line and Subway), Yodoyabashi
Station (Subway) and Honmachi Station (Subway).
• Central Nagoya City indicates districts located within a 10-minute walk from Nagoya Station (JR, Subway and Meitetsu Line), Fushimi Station (Subway) and Sakae Station(Subway and Meitetsu Line).
• Central Fukuoka City indicates areas within a 10-minute walk from Hakata Station (JR and Subway), Tenjin Station (Subway) and Nishitetsu Fukuoka Station (Nishitetsu Line).
The definition of these areas, however, does not necessarily correspond to administrative districts defined by the government and municipalities.
*2: The percentage share of total portfolio is based on the total acquisition price of assets related to real estate by area to the total acquisition price for the entire portfolio.
JEI's operations are continuously affected by economic trends, real-estate market conditions and factors specific to individual properties. Consequently, the regional
breakdown of JEI's actual total portfolio may not necessarily comply with the categories prescribed in the above table.

10Developing the portfolio with a focus on regional, property scale andtenant balance
1

Re gi o n al B al an c e
JEI recognizes that Area I is the top priority for its investment activities, but will also perform
proactive investment in properties situated in Areas II and III. Through these actively conducted
initiatives, JEI expects to minimize the impact of any market fluctuations caused by changes in
economic conditions and the concentration of large-scale development projects in metropolitan
areas.

2

P rop er t y Sc al e B al an c e
JEI pursues optimal portfolio development by effectively balancing its investment in largescale buildings*, which are believed to offer advantages and competitiveness in the realestate market, and medium-sized buildings*, which are regarded as assets with highliquidity and stable rent levels.
* JEI defines buildings located in the 23 wards of Tokyo with total floor space of approximately 33,058 m2 or larger as large-scale buildings, and those with total floor space
between 3,306 m2 and 33,057 m2 as medium-sized buildings. For properties in all other areas, JEI defines buildings in such areas with total floor space of approximately
13,223 m2 or larger as large-scale buildings, and those with total floor space between 3,306 m2 and 13,222 m2 as medium-sized buildings.

3

Te na n t B al an c e
JEI aims to minimize various risks related to tenants, such as tenants vacating theproperties. To this end, JEI is endeavoring to optimize tenant mix and diversify risks byavoiding the over-concentration of the same kind of tenants or tenants from the same
industries in its portfolio.

Investment in real estate other than office buildings through stringent
selection
JEI recognizes the potential of real estate other than office buildings. Through its asset
management company, JEI examines profitability, stability, liquidity and other aspects of such othercategories of property with due consideration given to their specific usage and characteristics.
Among real estate that potentially meets its investment policies, JEI engages in investment activities
selectively in order to identify the properties equivalent to office buildings in terms of investment
value. Specifically, when making investment decisions for commercial facilities, such facilities mustbe situated at the center of a city with a population of one million or larger*. For residential units,
JEI only considers real estate in Tokyo as its primary target of investment.
* As of October 1, 2005, cities that satisfy this condition are Sapporo, Sendai, Saitama, Tokyo, Kawasaki, Yokohama, Nagoya, Kyoto, Osaka, Kobe, Hiroshima and Fukuoka.

11About JEI

Portfolio
Real Estate Portfolio

Property Building
Type
NumberName

Location

Total Floor
Space*1

Acquisition Investment
Price*2
Ratio*3(m2)(Millions of Yen)

(%)

I-1

OfficeOmori Bellport D

Minami-Oi, Shinagawa-ku, Tokyo

155,788.75

22,553

22.9

I-2

OfficeShiba 2-Chome Building

Shiba, Minato-ku, Tokyo

19,518.15

9,450

9.6

I-3

OfficeShuwa Daiichi Hamamatsucho Building

Hamamatsu-cho, Minato-ku, Tokyo

8,327.53

8,350

8.5

I-4

OfficeNo. 32 Kowa Building

Minami-Azabu, Minato-ku, Tokyo

10,110.96

5,040

5.1

I-5

OfficeNo. 36 Kowa Building

Sanbancho, Chiyoda-ku, Tokyo

8,266.55

4,000

4.1

I-6

OfficeNo. 28 Kowa Building

Nishi-Gotanda, Shinagawa-ku, Tokyo

6,282.23

2,859

2.9

II-1

OfficeNHK Nagoya Housou-Center Building

Higashi-ku, Nagoya, Aichi Prefecture

80,809.95

4,300

4.4

III-1

OfficeMusashikosugi Tower Place

Nakahara-ku, Kawasaki, Kanagawa Prefecture

53,711.13

13,890

14.1

III-2

OfficeKowa Kawasaki Higashiguchi Building

Kawasaki-ku, Kawasaki, Kanagawa Prefecture

31,009.62

10,976

11.1

III-3

OfficeHongo TS Building

Hongo, Bunkyo-ku, Tokyo

5,877.11

5,400

5.5

III-4

OfficeShuwa Iidabashi Building

Koraku, Bunkyo-ku, Tokyo

5,083.77

4,023

4.1

III-5

OfficeKawasaki Nisshincho Building

Kawasaki-ku, Kawasaki, Kanagawa Prefecture

22,141.60

3,905

4.0

III-6

OfficeNo. 44 Kowa Building*4

Higashiyama, Meguro-ku, Tokyo

3,359.55

1,150

1.2

III-7

OfficeRyogoku Dai-ichi Life Building

Ryogoku, Sumida-ku, Tokyo

5,820.56

2,550

2.6

416,107.46

98,446

100.0

T o ta l*1: Figures for "Total Floor Space" are for each entire building, including buildings in which JEI has acquired compartmentalized ownership or co-ownership.
*2: Figures for "Acquisition Price" are sales prices recorded in conditional sales agreements (excluding taxes). Amounts of less than one million yen are rounded.
*3: Figures for "Investment Ratio" show the ratio of the acquisition price for each acquired property in proportion to the total acquisition price for all acquired properties in the portfolio.
Figures are rounded to the first decimal place.
*4: The acquisition price for the No. 44 Kowa Building includes ¥115 million of money held in trust.

12Portfolio Map
Nerima-ku
Toshima-ku

Chiba Prefecture
Bunkyo-ku

Nakano-ku

Shinjuku-ku

Taito-ku

III - 3III - 4
Suginami -ku

Katsushika-ku

Arakawa-ku

Sumida-ku

III - 7

Chiyoda-ku

Edogawa-ku

I-5
Shibuya-ku

Chuo-ku
Minato-ku

I-4

Koto-ku

I-3
I-2

III - 6
Setagaya-ku

I-6
Meguro-ku
Shinagawa -ku

I-1
III - 1
Tokyo Bay

Ota-kuIII - 2

III - 5Kanagawa Prefecture

Area I
Area II
Area III

I-1

I-2

I-3

I-4

I-5

I-6

III - 2

III - 3III - 4

III - 5

III - 6

II - 1
III - 1

III - 7

II - 113

About JEI

Portfolio

C

B

D
AtriumEo

To Shinaga
wa
Daiichi Keihin Ave
.

Lin
oku

JR – JROm
ori Keihin
Sta -To–.
h

Omori Bellport D

To Yokohama

To
Yo
ko

Location: 6-26-3 Minami-Oi, Shinagawa-ku, Tokyo
Site Area : 22,294.51 m2
Floor Space : 155,788.75 m2
Structure : S,RC,SRC
Floors: B3/17F
Completed : September 24, 1996

14

ShinagawaAquarium–
Omorikaigan Sta.

hama

I-1 Omori Bellport D

To
Tok
y

e

A

Line

Daimon Sta

.

orail
Mon
To–ky –ohin Ave.
Daiichi K
ei

JR LineHamamatsucho–
Sta.

Shibako–en
Sta.

Shiba 2-Chome Building

JR Hamamatsucho– Sta.

Daimon Sta.

Toei Asakusa LineeToei Mita Lin

Shiba Park

Hibiya-dori Ave.

–
Toei Oedo

I-2 Shiba 2-Chome Building

Gaie

Japanese
Red Cross
Medical Center

n-nishidor
i Av
Toky
e.
oM
etro
Hibiy
aL

ine

Location: 2-6-1 Shiba, Minato-ku, Tokyo
Site Area : 3,355.00 m2
Floor Space : 19,518.15 m2
Structure : Offices: S, RC, SRC, Residences: SRC
Floors: Offices: B2/12F, Residences: 14F
Completed : March 17, 1994

No.32 Kowa Building

University of The
Sacred Heart Tokyo

Hiro-o Sta.

Arisugawanomiya
Memorial ParkI-4 No.32 Kowa Building
Location: 5-2-32 Minami-Azabu, Minato-ku, Tokyo
Site Area : 2,592.39 m2
Floor Space : 10,110.96 m2
Structure : SRC
Floors: B1/9F
Completed : March 19, 197915

About JEI

JR LineDaimon St

Hamamatsucho–
Sta.

ucho–

Sta.

a.

mama
ts

Line

JR Ha

–
Toei Oedo

Toei Asakusa
Line
Daimon St
a.

Portfolioail
To–kyo– M
onor

Daiichi Keihin

Ave.

Shuwa Daiichi Hamamatsucho Building

Shuwa Daiichi

I-3 Hamamatsucho Building
Location: 2-2-12 Hamamatsu-cho, Minato-ku, Tokyo
Site Area : 1,102.48 m2 (of which 387.85 m2 is leasehold)Floor Space : 8,327.53 m2
Structure : SRC, S
Floors: B1/8F
Completed : December 16, 1991

I-5 No.36 Kowa Building

I-6 No.28 Kowa Building

Location: 5-19 Sanbancho, Chiyoda-ku, Tokyo
Site Area : 1,988.49 m2
Floor Space : 8,266.55 m2
Structure : SRC
Floors: B1/7F
Completed : September 30, 1982

Location: 2-20-1 Nishi-Gotanda, Shinagawa-ku, Tokyo
Site Area : 925.13 m2
Floor Space : 6,282.23 m2
Structure : SRC
Floors: B1/10F
Completed : February 21, 1975

16

Line
Subway Tsurumai

Nagoya Castle

City Hall
Aichi Prefectual
Government Office

Hisaya-odori Sta.

Subway SakuradoriLine

Toshincho

NHK Nagoya Housou-Center Building
JR Nagoya Sta.

Sakae Sta.

a LineSubway Higashiyam

NHK Nagoya

II-1 Housou-Center Building
Location: 1-13-3 Higashisakura, Higashi-ku,
Nagoya, Aichi Prefecture
Site Area : 7,927.36 m2
Floor Space : 80,809.95 m2
Structure : SRC, S
Floors: B4/22F
Completed : July 3, 1991

Nippon Medical School
Second HospitalMusashikosugi Tower Place

JR Line

JR Musashikosugi Sta.

Mu
sash
ikos
Tok
ugi
yu T
Sta.
oyo
ko L
ine

Ward Office

III-1 Musashikosugi Tower Place
Location: 1-403 Kosugi-cho, Nakahara-ku,
Kawasaki, Kanagawa Prefecture
Site Area : 8,329.62 m2
Floor Space : 53,711.13 m2
Structure : S, SRC
Floors: B2/23F
Completed : July 15, 1995

17

About JEI

Portfolio

KeikyuKawasaki Sta.
.

ta

iS

e

ak

as

JR

u
iky

Ka

Ke

Li

JR

Lin

w

ne

Kowa Kawasaki Higashiguchi Building

hi
aiic

ve.
in A

Keih

D

Kowa Kawasaki

III-2 Higashiguchi Building
Location: 1-53 Nisshin-cho, Kawasaki-ku,
Kawasaki, Kanagawa Prefecture
Site Area : 1,652.89 m2
Floor Space : 31,009.62 m2
Structure : S, SRC
Floors: B3/21F
Completed : April 30, 1988

KeikyuKawasaki Sta.
.

ta

iS

e

ak

as

JR

u
iky

Ka

Ke

Li

JR

Lin

w

ne

Kawasaki Nisshincho Building
eihin

.
Ave

hi K

c
Daii

III-5 Kawasaki Nisshincho Building
Location: 7-1 Nisshincho, Kawasaki-ku,
Kawasaki, Kanagawa Prefecture
Site Area : 3,673.94 m2
Floor Space : 22,141.60 m2
Structure : S, SRC
Floors: B2/15F
Completed : April 24, 1992

18

III-6 No.44 Kowa Building

III-7 Ryogoku Dai-ichi Life Building

Location: 1-2-7 Higashiyama, Meguro-ku, Tokyo
Site Area : 699.87 m2
Floor Space : 3,359.55 m2
Structure : SRC
Floors: 9F
Completed : July 31, 1984

Location: 3-25-5 Ryogoku, Sumida-ku, Tokyo
Site Area : 968.33 m2
Floor Space : 5,820.56 m2
Structure : S, SRC
Floors: B2/11F
Completed : August 8, 1996

III-3 Hongo TS Building

III-4 Shuwa Iidabashi Building

Location: 2-38-16 Hongo, Bunkyo-ku, Tokyo
Site Area : 984.89 m2
Floor Space : 5,877.11 m2
Structure : SRC
Floors: B1/8F
Completed : February 6, 1991

Location: 2-3-19 Koraku, Bunkyo-ku, Tokyo
Site Area : 904.38 m2
Floor Space : 5,083.77 m2
Structure : SRC
Floors: B1/8F
Completed : October 31, 1988

19

I

About JEI

Profile of JEIHistory of Japan Excellent, Inc.
February 16, 2006
The founder company (Japan Excellent Asset Management Co., Ltd.) filed for establishment of JEI under Article 69 of the
Law Concerning Investment Trusts and Investment Corporations.

February 20, 2006
Japan Excellent, Inc. was established and registered under Article 166 of the Law Concerning Investment Trusts andInvestment Corporations.

February 21, 2006
Application was submitted for registration under Article 188 of the Law Concerning Investment Trusts and Investment
Corporations.

March 15, 2006
The Prime Minister of Japan approved the registration under Article 187 of the Law Concerning Investment Trusts andInvestment Corporations (Registration Number: No. 52, Head of the Kanto Local Finance Bureau).

May 10, 2006
JEI modified its Articles of Incorporation.

May 12, 2006
Application was submitted for listing on the J-REIT Section of the Tokyo Stock Exchange.

May 26, 2006
JEI was approved for listing on the J-REIT Section of the Tokyo Stock Exchange.

June 27, 2006
JEI was listed on the J-REIT Section of the Tokyo Stock Exchange (Securities Code: 8987).

Structure
Sponsor Companies Providing
Pipeline Support

Investment Corporation

A. Kowa Real Estate Co., Ltd.
B. Sekisui House, Ltd.
C. Mizuho Trust & Banking Co., Ltd.

Japan Excellent, Inc.

Unitholders’ Meeting

42Administrative Agent/Asset Custodian
Mizuho Trust & Banking Co., Ltd.

Board of Officers
Asset Management Company
Japan Excellent AssetManagement Co., Ltd

3
Think Tanks
A. Mizuho Research Institute, Ltd.
B. Urban Research Institute Corporation

1

Executive Director
Junichi Tamura
Supervisory Director
Makoto Sakagami
Supervisory Director
Tsuyoshi Nagahama

Independent Auditor
MISUZU Audit Corporation

1. Asset management agreement
2. (A.) Pipeline support agreement with Kowa Real Estate(B.) Pipeline support agreement with Sekisui House(C.) Pipeline support agreement with Mizuho Trust & Banking
3. (A.) Agreement with Mizuho Research Institute for provision of market and other information(B.) Agreement with Urban Research Institute for provision of market and other information
4. Agreement to entrust administrative duties and asset custody
5. Agreement to entrust administration of unitholders’ register

20

5Transfer Agent
Mizuho Trust & Banking Co., Ltd.

Outline of the Asset Management Company
ProfileEstablished

April 14, 2005

Capital450 Million Yen

Shareholders

Kowa Real Estate Co., Ltd.
The Dai-ichi Mutual Life Insurance Company
Sekisui House, Ltd.
The Dai-ichi Building Co., Ltd.
Sohgo Housing Co., Ltd.
Morgan Stanley Properties Japan K.K.
Mizuho Corporate Bank, Ltd.
Mizuho Trust and Banking Co., Ltd.

40.0%
20.0%
15.0%
5.0%
5.0%
5.0%
5.0%
5.0%
J u n ic h i T amura
N o b u y u k i T anabe
R y u ic h i Ya m amotoT a k a s h i Uchi da
M a s a t o s h i T amaru
Mic h ir o Ezaki

President
Director of Planning & Management
Director of Real Estate Investment
Director (Non-executive)
Auditor (Non-executive)
Compliance Officer

Officers

Organization
Shareholders' Meeting
Corporate Auditor
Board of Directors
Compliance Committee

Investment Committee

Compliance Officer
Executive Director

Real Estate Investment Division

Planning and Management Division

Real Estate Management Dept.

Real Estate Investment Dept.

Investment Planning Dept.

Business Management Dept.

Finance and Accounting Dept.

Corporate Planning Dept.

21

1. Summary of Asset Management(1) Result of operation and financial position

Total Revenues
Operating expenses(Property operating expenses)
Operating income
Income before income taxes
Net income
Total assets
Net assets
Unitholders’ capital
Total Investment Units Outstanding
Net assets per Unit
Cash Distribution
Cash distribution per Unit(Distribution of accumulated earnings per unit)(Cash distribution in excess of accumulated
earnings per unit)
ROA (Return on Assets) (Note 1)
ROE (Return on Equity) (Note 2)
Unitholders Ratio (Note 3)
Dividend Payout Ratio (Note 4)
Number of properties at the end of period
Number of tenants
Total leasable floor space
Occupancy rate at the end of period
Depreciation
Capital Expenditures
Net Operating Income (Note 5)
FFO per Unit (Note 6)
Funds from Operation ratio (Note 7)
Debt Service Coverage Ratio (Note 8)
Cost of Interest Bearing Debt
Loan-to-Value (Note 9)(JPY MM)(JPY MM)(JPY MM)(JPY MM)(JPY MM)(JPY MM)(JPY MM)(JPY MM)(JPY MM)(Units)(JPY㧕
(JPY MM)
(JPY)
(JPY)
(JPY)
(%)
(%)
(%)
(%)
(Buildings)(Tenants)(ট)(%)(JPY MM)(JPY MM)(JPY MM)(JPY)(times)(times)(JPY MM)(%)

Notes:
1. ROA = Recurring Profit/((Beginning Total Assets + Ending Total Assets)/2) × 100
Rounded to the first decimal place.
For this period, June 27, 2006 is used as the starting date.
2. ROE = Net Income/((Beginning Net Assets + Ending Net Assets)/2) × 100
Rounded to the first decimal place.
For this period, June 27, 2006 is used as the starting date.
3. Unitholders Ratio = (Ending Net Assets/Ending Total Assets) × 100
Rounded to the first decimal place.
4. Rounded down to the first decimalplace.
5. Net Operating Income = Lease Revenue – Property Operating Expenses + Depreciation
6. FFO per Unit = (Net Income + Depreciation)/Total Investment Units Outstanding22

1st fiscal period
From February 20, 2006
to December 31, 2006
4,751
2,382
1,977
2,369
1,858
1,856
114,199
69,32967,641
134,800
514,317
1,856
13,773
13,773
(–)
2.0
2.8
60.7
99.9
14
99
135,264
98.5
631
155
3,405
18,45921.1
9.938,50033.7

Rounded down to unit
7. Funds from Operation ratio = unit price/annualized FFO per Unit
Rounded down to the first decimalplace.
8. Debt Service Coverage Ratio = Net Income before Interest, Tax, Depreciation and Amortization/Interest
Rounded to the first decimal place.
9. Loan-to-Value = (Ending Debt + Ending Total Assets) × 100
Rounded to the first decimal place.
10. Calculation period is for the first term was 315 days from February 20, 2006 to December 31, 2006, but actual operatingdays was 188 days from June 27, 2006 to December 31, 2006.

(2) Status of Assets Under Management for the Fiscal Period Ended December 31, 2006
1) Major Changes in the Investment Corporation
Under the Law Concerning Investment Trusts and Investment Corporations (the “Investment Trust Law”), theInvestment Corporation was established by Japan Excellent Asset Management Co., Ltd. as a promoter on February 20,
2006. On March 15, 2006, the Investment Corporation registered with the Kanto Local Finance Bureau (Registration No.
52 of the Head of the Kanto Local Finance Bureau) and was listed on J-REIT Section of the Tokyo Stock Exchange(Securities Code: 8987) on June 27, 2006.
2) Asset Management Environment and Results
In the office rental market, steady demand, including for office floor space, continues, supported by brisk corporate
performance, and vacancy rates throughout the nation declined while such demand remains strong. Owing to a shortageof large office buildings, rents with regard to both new and existing tenants show a rising trend continuously inmetropolitan areas, particularly in central Tokyo, Osaka City and Nagoya City.
In the real estate investment market, the down slide in land prices is clearly slowing, and in metropolitan areas
including Tokyo, there are remarkable increases of growing trend toward higher land prices. Moreover, reflecting strong
rental office demand, investments in real estates through private funds, real estate investment trusts (J-REITs) and other
instruments has increased. As a result, competition for prime real estate remains intense, and real estate prices are risingand the expected rate of return is declining.
Under such conditions, immediately after its June 2006 listing on the Tokyo Stock Exchange, JEI acquired, throughthe cooperation of and by taking advantage of its close relationship with its asset management company’s sponsor
companies, a total of 14 properties for a total acquisition price of ¥98,316 million and commenced its asset management.
In November 2006, JEI additionally acquired a portion of co-ownership interest of Kawasaki Nisshincho Building of
which it had previously acquired a portion of co-ownership interest. Accordingly, the total cost of JEI acquisitions (realestate and beneficiary interests in real estate, the “Portfolio under the First Fiscal Period”) amounted to ¥98,446 million
as of the end of the first period.
JEI invests in office properties, primarily office buildings located in metropolitan area, in accordance with a basic
investment policy of pursuing stability and growth of revenues in a balanced manner in line with the quality of a REIT,
that is stable and medium- to long-term growth.
During the period under review, we interviewed all of our major end tenants through the Asset Management
Company and property management companies to improve tenants’ understanding of the Investment Corporation andbuild better relations with them. Those thorough and meticulous responses to needs of tenants enhance their satisfaction.
Meanwhile, we are taking the initiative to negotiate with tenants about revising rents upward to reflect market trends.
Furthermore, as a result of our aggressive tenant recruitment activities, including searching for new tenants to fillvacancies and for new tenants after the expiration or cancellation of lease agreements, an occupancy rate amounted to98.5% as of December 31, 2006.
At the same time, we took steps to reduce costs by putting maintenance contracts up for bid on some properties andworked to protect the environment through the introduction of such measures as water-saving systems.
Note: Sponsor companies are the eight companies that are shareholders of the Asset Management Company, i.e. Kowa Real
Estate Co., Ltd., The Dai-ichi Mutual Life Insurance Company, Sekisui House, Ltd., Morgan Stanley Properties Japan
K.K., The Dai-ichi Building Co., Ltd., Sohgo Housing Co., Ltd., Mizuho Corporate Bank, Ltd. and Mizuho Trust &Banking Co., Ltd.

23

3) Financing Overview
In addition to the 128,000 investment units issued through the primary offering of June 26, 2006, 6,400 investment units
were issued and allocated to Mizuho Securities Co., Ltd. (lead underwriter for the primary offering) through its exercisingof a greenshoe option (third-party allotment) on July 21, 2006. As a result, JEI was able to raise funds totaling
approximately ¥67,441 million.
Furthermore, on June 29, 2006, JEI borrowed a total of ¥38,500 million from nine financial institutions. Theseborrowings represent long-term debts, of which ¥3,000 million was procured at a fixed rate interest. JEI applied theproceeds of those loans to the acquisition of 14 properties on June 27 and June 29, 2006. Moreover, of the borrowed
funds that have no fixed rate interest, interest on ¥16,250 million has been converted to fixed rate interest throughinterest rate swap transactions. Consequently, as of December 31, 2006, the ratio of JEI’s debt financing with fixed rateinterest stood at 50%.
Prior to its public listing, JEI received the following issuer rating.
Rating Agency

RatingMoody’s Investors Service

Issuer Rating: A3 (stable)

Furthermore, as described below, Moody’s Investors Service announced the upgrade of the above-mentioned rating to
A2 on January 25, 2007.
Before Change

After Change

Issuer Rating

A3

A2

Rating Outlook(Under review for upgrade)

Stable4) Performance and Cash Distribution Overview
As a result of the actions stated above, revenues were ¥4,751 million, operating income totaled to ¥2,369 million,
ordinary income amounted to ¥1,858 million, and net income was ¥1,856 million.
With respect to distributions, JEI plans to deduct an amount equivalent to the profit distribution from its taxable
income amounts through the application of a special exception with regard to corporate taxes (Article 27-15 of theSpecial Taxation Measures Law). Accordingly, JEI decides to distribute the full amount of retained earnings for theperiod to its unitholders, excluding fractional amounts of less than ¥1 of distribution per unit, and the distribution perunit is ¥13,773.

(3) Capital Increase
Outstanding investment units and changes in unitholders’ capital are as follows.
Issue Date

Event

February 20, 2006

Private offering

June 26, 2006

Public offering
Allocation of newunits to third parties

July 21, 2006

Outstanding Investment
Units

Unitholders’ Capital(Millions of yen)

ChangeBalance

ChangeBalance

400

400

200

200

(Note 1)

128,000

128,400

64,23064,430(Note 2)6,400

134,800

3,211

67,641(Note 3)

Remarks

Notes:
1. JEI was incorporated upon issue of units at an offering price of ¥500,000 per unit.
2. To raise funds to purchase properties at the time of listing, JEI issued new investment units through a public offering at anoffering price of ¥520,000 (issue price: ¥501,800) per unit.
3. JEI issued new investment units (at an issue price of ¥501,800 per unit) through third party allotment for the purpose ofcovering a portion of the financing of new property acquisitions.

24

[Changes in Stock Market Prices for Investment Units]
The highest and lowest closing prices for JEI investment units by period in the J-REIT Section of the Tokyo Stock
Exchange on which JEI investment units are listed are as follows:
Highest/Lowest Investment Unit Priceby Period (the first fiscal period)

By PeriodFirst Fiscal Period

Highest¥815,000

Lowest¥548,000

Notes:
1. The investment units were listed on the J-REIT Section of the Tokyo Stock Exchange on June 27, 2006.
2. The highest and lowest investment unit prices by period depend on the trading price in the J-REIT Section of the Tokyo
Stock Exchange.

(4) Distributions
The distribution for the first fiscal period is ¥13,773 per unit. JEI plans to deduct an amount equivalent to the profit
distribution from JEI’s taxable income through the application of special exception with regard to corporate taxes(Article 27-15 of Special Taxation Measures Law). We will distribute, excluding fractional amounts of less than ¥1 of
distribution per unit, the full amount of retained earnings for the period.
PeriodAccounting Period

First Period
from February 20, 2006 to December 31, 2006

Retained Earnings¥1,856,675,000

Accumulated Earnings¥75,000

Total Cash Distribution¥1,856,600,000(Distribution Per Unit)(¥13,773)

Total Profit Distribution¥1,856,600,000(Profit Distribution Per Unit)(¥13,773)

Total Capital Reimbursement–(Reimbursement Per Unit)(–)(5) Future Management Policies and Challenges
1) Investment Environment Outlook
The office rental market for metropolitan areas, including central Tokyo, is on a strong recovery track and vacancies areshowing a notable decline. On the other hand, discrepancies in the relative merits of such tangible factors as location,building and furnishing grade and such intangible factors as tenant services become clear. JEI recognizes that future rent
levels for properties that boast a competitive edge with regard to such factors will rise and that the gap between these andless-competitive properties will continue to grow.
Moreover, because the real estate investment market is reflecting the recovery trend in the office rental market,
demand for real estate investment through such instruments as private funds and J-REITs still shows no sign ofdiminishing. Continued stiff competition for the acquisition of prime properties in metropolitan areas is expected.
2) Future Management Policies and Challenges
With respect to investment in new properties, JEI will maintain a policy of expanding its asset value over the medium- tolong-term and steadily achieving external growth in a continuous difficult acquisition environment. JEI will acquire newproperties based on the cooperative relationship with our sponsor companies.
Although the office rental market is in the midst of a full-scale recovery trend, we recognize that there is growing
disparity between rates of recovery as a result of competition for space in the areas in which the aforementioned
properties are located and for the properties themselves. With regard to tangible factors, in addition to providing proper
maintenance for and improving the function and grade of buildings and furnishings to reflect tenant demand, it is25becoming increasingly important to improve tenant satisfaction in the areas of property administration and management.
Therefore, while we continually work to raise rents and reduce costs, we consider that it is our greatest mission to beevaluated by tenants that rent levels at each of our properties is appropriate for those buildings, and we further recognize
the need to take the following actions.
a. Raise Existing Rent Levels
The occupancy rate of JEI’s building portfolio as of period-end stood at 98.5%, nearly full occupancy. We recognizethat the maintenance of high occupancy rates and the further raising of rents based on market prices and thecompetitiveness of the individual properties are immediate challenges. The majority of our lease agreements withexisting tenants are two-year renewable leasehold agreements (as of the end of this period, of all our tenants, only one
had a fixed leasehold agreement). In the future, for contracts in which we believe rents are not in line with current
market levels, we will continue renewal negotiations with tenants with the intention of amending said contracts toreflect market conditions. Furthermore, in the course of these negotiations, we will present comprehensive proposals
to tenants that take into account not only the level of rent, but also the time periods of the contracts, type of contract
and other factors. This will allow us to gain a better understanding of each other and build good relations.
b. Maintain and Improve Management Quality and Lower Costs
JEI’s property management companies are intimately involved with their respective properties and manage eachbuilding so as to maintain mutual understanding with tenants. JEI is always working to preserve and improve
management quality by conducting routine on-site reviews and developing case studies of actions taken at various
properties. With respect to costs for janitorial and other outsourcing expenses, we are taking a number of steps tolower unit costs without reducing management quality while striking a balance between service qualities andoutsourcing costs. In future, we will still continue to implement these measures as well as those targeting energy
conservation through the reduction of utilities expenses, including, for example, the introduction of water-saving
systems for restrooms.
c. Effective Additional Investments (Renovation Work)
Over the medium- to long-term, JEI will take steps to further improve customer satisfaction and systematically makeadditional investments as needed (for example, renovation work). And also, JEI will strive to maintain up-to-date andaccurate knowledge of the state of its properties and properly maintain them. In the period under review, immediately
after listing, JEI carried out inspections of hazardous building areas and ensured building safety by renovatingproblem areas. In addition, measures were taken to improve tenant comfort and convenience by, for example,
installing bidet-type toilet fixtures and automatic doors on side entrances. As in this period, JEI will continue to makeeffective additional investments (renovation work).

(6) Important Events Subsequent to the First Fiscal Period
No relevant facts to report.

26

2. About JEI(1) Summary of unitholders’ contributions
1st fiscal period
As of December 31, 2006
Total number of investment units authorized

2,000,000

units

Total number of outstanding investment units

134,800

units

Unitholders’ Capital

67,641

million Yen

Number of unitholders

2,529

holders(2) Details Regarding Investment Unit
The following table sets forth our major unitholders’ information as of December 31, 2006.
Name of Unitholder

Location

Number ofInvestment
Units Held
(Units)Ratio in total
number ofoutstanding
investment
units (%)

Kowa Real Estate Co., Ltd.

1-15-5 Minami-Aoyama, Minato-ku, Tokyo

14,312

10.62

Japan Trustee Services Bank, Ltd䋮(Trust account)

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

11,376

8.44

NikkoCiti Trust and Banking Corporation(Trust account)

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

10,007

7.42

The Master Trust Bank of Japan , Ltd. (Trust account) 2-11-3 Hamamatsu-cho, Minato-ku,Tokyo

8,600

6.38

Trust & Custody Services Bank, Ltd.
(Trust account)

Harumi Island Triton Square Office Tower-Z 1-8-12
Harumi, Chuo-ku, Tokyo

7,380

5.47

The Hiroshima Bank, Ltd.

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

4,955

3.68

The Dai-ichi Mutual Life Insurance Company

1-13-1 Yurakucho, Chiyoda-ku, Tokyo

4,132

3.07

North Pacific Bank, Ltd.

3-11 Odori-nishi, Chuo-ku, Sapporo, Hokkaido

3,839

2.85

The Joyo Bank, Ltd.

2-5-5 Minami-machi, Mito, Ibaraki

2,785

2.07

The Nomura Trust and Banking Co., Ltd.
(Trust account)

2-2-2 Otemachi, Chiyoda-ku, Tokyo

2,749

2.04

70,135

52.03

Total

Note: The ratio in total number of outstanding investment units is rounded to the second decimal place.

27

(3) Directors and Auditor
1) Names of Executives and Independent Auditor
Name or Name of
Title
Primary Positions
Company
Executive
President and Representative Director, Japan
Junichi Tamura
Director
Excellent Asset Management Co., Ltd.
Supervisory
CPA, Makoto Sakagami Accounting Office
Makoto Sakagami
Director
Supervisory
Partner, Anderson Mori & Tomotsune
Tsuyoshi Nagahama
Director
Supervisory
Vice President, Dexia Crédit Local, Tokyo
Yasuyuki Maeba1
Director
BranchIndependent
MISUZU Audit
㧙
AuditorCorporation

Total Remuneration During the
Fiscal Period Under Review
㧙¥11,858,000¥4,500,000

Notes:
1. Yasuyuki Maeba, a supervisory director, retired from office as of January 31, 2007.
2. The executive director and supervisory directors do not own JEI investment units. Supervisory directors may hold executive
positions at corporations other than those listed above. However, no conflicts of interest exist between JEI and any ofthese corporations, including those mentioned above.

2) Payments to the Independent Auditor for Non-Auditing Services
JEI has paid remuneration to the independent auditor, to for the following non-auditing services other than the services
defined under Article 2, Paragraph 1 of the Certified Public Accountant Law (Law No. 103 of 1948).
Description of Non-Auditing Service

Payment

Remuneration for support in public listing¥11,000,000

Total¥11,000,000(4) Asset Management Company, Asset Custodian and Administrative Agent
As of December 31, 2006, the Asset Management Company, the Asset Custodian and the Administrative Agent were as
follows.
Entrusted Service

Name or Company Name

Asset Management Company

Japan Excellent Asset Management Co., Ltd.

Asset Custodian
Administrative Agent(tasks concerning the register of unitholders (Transfer Agent),tasks concerning the management of JEI’s organs)

Mizuho Trust & Banking Co., Ltd.

28

Mizuho Trust & Banking Co., Ltd.

3. Portfolio(1) Portfolio summary

Asset type

Type

Area

Real Estate (Note 3)

1st fiscal period
As of December 31, 2006
Total amount
Percentage of total assets(Millions of yen)(%)
(Note 1)
(Note 2)

Area II (Note 4)

4,340

3.8

Area I(Note 4)52,747

46.2

Area III (Note 4)

41,834

36.6

Total
Deposits and Other assets

98,921

86.6

15,277

13.4

Total assets

114,199

100.0

OfficeBeneficiary Interest in
Real Estate (Note 3)

Notes:
1. Total amount is taken from the balance sheets at the end of the period. (Real Estate and Beneficiary Interest in Real Estate
represent the total book value after deprecation.)
2. Percentage of total assets is rounded to the first decimal place.
3. The leasehold rights with the building was added the building up and mentioned in the column “Real Estate” or“Beneficiary Interest in Real Estate”
4. Following shows target area.
Area I : Tokyo’s 6 central Wards (Chiyoda, Chuo, Minato, Shinjuku, Shinagawa and Shibuya Wards)
Area II : Central Osaka (Umeda, Dojima, Nakanoshima, Yodoyabashi, Honmachi areas), Nagoya (Meieki, Fushimi, Sakae
areas) and Fukuoka (Tenjin, Hakata Station areas)
Area III : Tokyo 23 Wards and surrounding areas (Kanagawa, Saitama and Chiba) other than Area I(2) Major properties held
The major components of assets (the 10 largest properties by book value as of December 31, 2006) are as follows.
Leased Area(ট)

Occupancy
Rate(%)

Percentage in total
rentalrevenue fromproperty(%)

PrimaryUse

25,828.29

25,133.58

97.3

21.6

office13,91425,275.07

25,275.07

100.0

17.2

officeKowa Kawasaki Higashiguchi Building

10,972

18,612.72

18,612.72

100.0

11.9

officeShiba 2-Chome Building

9,499

11,749.30

11,559.68

98.4

7.4

officeShuwa Daiichi Hamamatsucho Building

8,372

6,411.26

5,748.15

89.7

5.9

officeHongo TS Building

5,390

4,078.37

4,078.37

100.0

3.8

officeNo. 32 Kowa Building

5,058

5,363.07

5,363.07

100.0

5.0

officeNHK Nagoya Housou-Center Building

4,340

8,974.96

8,762.83

97.6

7.5

officeNo. 36 Kowa Building

4,062

5,720.34

5,720.34

100.0

4.3

officeShuwa Iidabashi Building

4,023

3,821.76

3,821.76

100.0

3.2

office88,517

115,835.14

114,075.57

98.5

87.9

Book value(Millions ofyen)

Total leasable
floor space(ট)

Omori Bellport D

22,882

Musashikosugi Tower PlaceName of Property

Total

29

(3) Details of Portfolio
Details of real estate (real estate or trust beneficiary interests in real estate) owned by JEI as of December 31, 2006 are as(Millions of yen)follows:
Property
Number

I-1

I-2

I-3

I-4

I-5

I-6

II-1

III-1

III-2

III-3

III-4

III-5

III-6

III-7

Property Name
Omori
D

Bellport

Location(Address)

Type ofOwnership

6-26-3 Minami-Oi,
Shinagawa-ku,
Tokyo

Trust
beneficiaryinterest in realestateTrustbeneficiaryinterest in realestateTrustbeneficiaryinterest in realestateTrustbeneficiaryinterest in realestateTrustbeneficiaryinterest in realestateTrustbeneficiaryinterest in realestateShiba 2-Chome
Building

2-6-1 Shiba,
Minato-ku, Tokyo

Shuwa Daiichi
Hamamatsucho
Building

2-2-12
Hamamatsu-cho,Minato-ku,
Tokyo
5-2-32
Minami-Azabu,
Minato-ku,
Tokyo
3-5-19 Sanbancho,
Chiyoda-ku,Tokyo

No. 32 Kowa
Building
No. 36 Kowa
Building
No. 28 Kowa
Building
Area INHK
NagoyaHousou-Center
Building
Area II
Musashikosugi
Tower Place

2-20-1
Nishi-Gotanda,
Shinagawa -ku,Tokyo
1-13-3 Higashi-ku,
Nagoya, Aichi

Real estate

Kowa Kawasaki
Higashiguchi
Building

1-403
Nakaraha-ku,
Kawasaki,Kanagawa
1-53 Kawasaki-ku,
Kawasaki,Kanagawa

Hongo TS
Building

2-38-16 Hongo,
Bunkyo-ku, Tokyo

Shuwa Iidabashi
Building

2-3-19 Koraku,
Bunkyo-ku, Tokyo

KawasakiNisshincho
Building

7-1 Kawasaki-ku,
Kawasaki,Kanagawa

No. 44 Kowa
Building

1-2-7
Higashiyama,
Meguro-ku,
Tokyo
3-25-5 Ryogoku,
Sumida-ku, Tokyo

Trust
beneficiaryinterest in realestateTrustbeneficiaryinterest in realestateTrustbeneficiaryinterest in realestateTrustbeneficiaryinterest in realestateTrustbeneficiaryinterest in realestateTrustbeneficiaryinterest in realestateTrustbeneficiaryinterest in realestateRyogoku Dai-ichi
Life Building

Period-End
Appraisal
Value at theEnd of Period

Tenants

Occupancy
Rate

RentalRevenues
During
PeriodRatio in
Total
RentalRevenues

Book
Value

23,230

1

97.3㧑

1,028

21.6㧑

22,882

11,700

2

98.4㧑

351

7.4㧑

9,499

8,910

1

89.7㧑

281

5.9㧑

8,372

5,251

17

100.0㧑

238

5.0㧑

5,058

4,189

1

100.0㧑

203

4.3㧑

4,062

3,050

1

100.0㧑

158

3.3㧑

2,871

56,330

23

97.4㧑

2,260

47.6㧑

52,747

5,230

39

97.6㧑

358

7.5㧑

4,340

5,230

39

97.6㧑

358

7.5㧑

4,340

16,70031

100.0㧑

815

17.2㧑

13,914

11,0601

100.0㧑

563

11.9㧑

10,9725,470

1100.0㧑

182

3.8㧑

5,390

4,190

1

100.0㧑

152

3.2㧑

4,023

4,830

1

100.0㧑

209

4.4㧑

3,945

1,350

1

100.0㧑

94

2.0㧑

1,036

2,572

1

94.5㧑

115

2.4㧑

2,550

46,172
107,732

37
99

99.7㧑
98.5㧑

2,132
4,751

44.9㧑
100.0㧑

41,834
98,921

Area III
Total

Note: Appraisal values at the end of the period are based upon rules stipulated by JEI’s Articles of Incorporation and theInvestment Trusts Association, Japan. Appraisal values at the end of the period shown are values described in real estateappraisal reports prepared by real estate appraisers (i.e. the Japan Real Estate Institute, Chuo Real Estate Appraisal Co.,
Ltd. or HIRO & REAS network, Inc.) and the appraisal date of those appraisal values is December 31, 2006.

30

(4) Status of Other Assets
1) Stocks and Investment Units
Purchase Price
Number(Thousands of Yen)
Companyof Stocks
Price per
Total
Stock
AmountNHK Nagoya
Build Systems
64
168
10,768Co., Ltd.

Valuation(Thousands of Yen)
Price per
Total
Stock
Amount168

Valuation Gain
(Loss)

10,768Remarks

Note㧙Note: The purchase price is used for the valuation amount of the non-listed stock listed above.

2) Outstanding Amount and Market Value of Specified Transactions
Category

Type

Transaction other Interest rate swap
than market
transactions:transaction
Floating ratereceivable and fixed
rate payable

Contract Amount (Thousands of Yen)
Longer than One Year
(Note 1)
(Note 1)
16,250,000

16,250,000

Notes:
1. The indicated balance of the swap transactions is based upon the notional principal amount.
2. Evaluated at the price provided by the counterparty based on the prevailing market rate.

31

Market Value(Thousands of Yen)
(Note 2)

(168,610)

4. Capital Expenditures(1) Planned Capital Expenditures
Major capital expenditure plans, as of December 31, 2006, for renovation of properties held by the Investment
Corporation as at the end of the first fiscal period are as follows. Estimated cost of works includes the amount to beclassified into expenses for accounting purposes.
Estimated Cost (Millions of yen)
Property Name

Location

Shuwa Daiichi
Hamamatsucho
Building
Omori BellportD

Minato-ku,
TokyoShinagawa-ku,
Tokyo

PurposeSchedule

New restroom
facilities on
the first floor
Restroomrenovations

from December 2006
toJanuary 2007
from February 2007
toJune 2007

Total

Paid in the
Fiscal Period
Under Review

Paid before
the Fiscal
Period Under
Review

15

–

–

62

–

–

(2) Capital Expenditures During the First Fiscal Period
JEI undertook the following major capital expenditures during the first fiscal period for works of the renovation ofproperties held by it as at the end of the first fiscal period. During the first fiscal period, the Investment Corporation
completed works at a cost totaling ¥275 million. This total comprised of ¥155 million of capital expenditures and ¥120
million of expenses related to repairs and maintenance expenses.
Amount of
Property Name
Location
PurposeSchedule
Expenditure(Millions of yen)
Kawasaki
Kawasaki-ku,
Renewal of air conditioning from April 2006
Nisshincho
Kawasaki,
fan coils and plumbing (first to
December 200632
Building
Kanagawa
fiscal period)
No. 36 Kowa
Chiyoda-ku,
Renewal of air conditioning from November 200631
BuildingTokyo
toDecember 2006
Shuwa Daiichi
Minato-ku,
Upgrade of restroom
from November 2006
HamamatsuchoTokyofacilities, renovations of first to
December 2006
16
Building
floor entrance hall
76
Other construction work
㧙
155
Total

(3) Reserve for Repairs and Maintenance Expenses(Millions of yen)First Fiscal Period
February 20, 2006 – December 31, 2006
㧙

Item
Reserve balance at the end of the previous period
Reserve for the fiscal period under review

164

Reversal of reserve for the fiscal period under review

㧙Reserve carried forward to the next period

164

32

5. Expenses and Debts(1) Expenses related to asset management(Thousand of yen)

1st fiscal period
from February 20, 2006
to December 31, 2006
306,290(a) Asset management fees(b) Custodian fees

8,975(c) Administrative service fees

18,014(d) Compensation for directors

11,858(e) Accounting Auditors’ fees

4,500(f) Other

54,513
Total

404,152(2) Status of Borrowings
The status of debt from the financial institutions as of December 31, 2006 is as follows.

LenderAozora Bank, Ltd.
The Chuo Mitsui Trust and Banking
Company, Limited
Mizuho Trust & Banking Co., Ltd.
Sumitomo Mitsui Banking Corporation
Mizuho Corporate Bank, Ltd.
Mitsubishi UFJ Trust and Banking
The Norinchukin Bank
Mizuho Corporate Bank, Ltd.
Long-Term Mitsubishi UFJ Trust and Banking
Debt
Aozora Bank, Ltd.
Mizuho Corporate Bank, Ltd.
Mitsubishi UFJ Trust and Banking
Resona Bank, Ltd.
The Dai-ichi Mutual Life Insurance
Company
Total

Drawdown
Date

Balance at
beginningof year(Millions of
yen)
ȥ
ȥ

June 29,
2006

June 29,
2006

June 29,
2006

June 29,
2006

Outstanding
as at the Endof 1st period(Millions of
yen)
3,000
3,000

Average
Interest
Rate (%)(Note 1)

Date of
Repayment

Method of
Repayment

0.96370

June 29,2009(Principal
Repayment
in Full on
Maturity)

1.02857

June 29,2010(Principal
Repayment
in Full on
Maturity)

0.96834

June 29,2011(Principal
Repayment
in Full on
Maturity)

June 29,2011(Principal
Repayment
in Full on
Maturity)

ȥ
ȥ
ȥ
ȥ
ȥ
ȥ
ȥ
ȥ
ȥ
ȥ

3,000

ȥ

1,000

ȥ

3,000

1.96625(Note 2)

ȥ38,500

㧙

2,000
1,000
1,000
5,000
3,000
3,000
2,000
5,000
3,500

㧙

Use ofBorrowings

Note

To purchasepropertyrelated assets

Unsecured/
Uninsured㧙㧙

Notes:
1. Average interest rate is weighted average interest rate during the period, and rounded to the fifth decimal place. As for the
borrowings, which were hedged by interest rate swaps for the purpose of avoiding interest rate fluctuation risk, theswapped interest rates are used to calculate the weighted average of interest.
2. It is borrowed by fixed interest.
3. Following table shows the total amounts of long-term debt to be repaid for each year.

33

Long-term debt

Due within one year
㧔Millions of yen㧕Due after one year
to two years
㧔Millions of yen㧕Due after two years
to three years(Millions of yen)㧙㧙

13,000(3) Status of corporation bonds
Not applicable.

34

Due after three years
to four years(Millions of yen)
13,000Due after four years
to five years(Millions of yen)
12,5006. Acquisitions and Sales During the First Fiscal Period(1) Acquisitions and Sales of Real Estate and Securities Backed by Real Estate(Millions of yen)Type of
Property

Trust
Beneficial
Interest in
Real Estate

Property Name

Acquisitions
Date of
Acquisition
Acquisition
Price1

Omori BellportD

June 29, 2006

22,553

Shiba 2-Chome
Building

June 29, 2006

9,450

Shuwa Daiichi
Hamamatsucho
Building

June 29, 2006

8,350

No. 32 Kowa
Building

June 27, 2006

5,040

No. 36 Kowa
Building

June 27, 2006

4,000

No. 28 Kowa
Building

June 27, 2006

2,859

Musashikosugi
Tower Place

June 27, 2006

13,890Kowa Kawasaki
Higashiguchi
Building

June 27, 2006

10,976

Hongo TS
Building

June 29, 2006

5,400

Shuwa Iidabashi
Building

June 29, 2006

4,023

KawasakiNisshincho
Building

June 27, 2006

3,775

November30, 2006

130

No. 44 Kowa
Building2

June 27, 2006

1,150

Ryogoku
Dai-ichi Life
Building

June 27, 2006

2,550

Subtotal

94,146

Sales
Date of Sale

Sale PriceBook Value

Gain (Loss)

㧙

㧙

㧙

㧙

㧙

㧙

㧙

NHK Nagoya
Housou-Center
June 27, 2006
4,300
㧙
㧙
㧙
㧙
Real Estate
Building
4,300
㧙
㧙
㧙
Subtotal
98,446㧙㧙㧙
Total
Notes:
1. Acquisition prices indicate the purchase prices for real estates as recorded in trust beneficiary interest sales agreements anddo not include acquisition expenses (brokerage fees and property and other taxes).
2. The acquisition price for the No. 44 Kowa Building includes ¥115 million of money held in trust.

35

(2) Acquisitions and Sales of Other Assets
Acquisitions
Type of Asset

Sales

Price
(Thousands of yen)

NumberPeriod-End Balance

Price(Thousands of yen)

NumberPrice(Thousands of yen)

Number

Stocks64

10,368㧙㧙

64

10,768

Total

64

10,368㧙㧙

64

10,768

Note: The price shown for acquisitions and sales does not include such fees as purchase and sales commissions.

(3) Surveys of Prices for Specified Assets
1) Real Estates
Acquisition or Sale

Acquisitions

Property Name

Type of Asset

Omori Bellport D

Trust beneficiaryinterest in real estate
Trust beneficiaryinterest in real estate

Shiba 2-Chome
Building
Shuwa Daiichi
Hamamatsucho
Building
No. 32 Kowa
Building
No. 36 Kowa
Building
No. 28 Kowa
Building
NHK Nagoya
Housou-Center
Building
Musashikosugi
Tower Place
Kowa Kawasaki
Higashiguchi
Building
Hongo TS Building
Shuwa Iidabashi
Building
KawasakiNisshincho Building
No. 44 Kowa
Building4
Ryogoku Dai-ichi
Life Building

Trust beneficiaryinterest in real estate
Trust beneficiaryinterest in real estate
Trust beneficiaryinterest in real estate
Trust beneficiaryinterest in real estate
Real estate

Acquisition Date
June 29, 2006
June 29, 2006
June 29, 2006
June 27, 2006
June 27, 2006
June 27, 2006
June 27, 2006

Trust beneficiaryinterest in real estate
Trust beneficiaryinterest in real estate

June 27, 2006

Trust beneficiaryinterest in real estate
Trust beneficiaryinterest in real estate

June 29, 2006

Trust beneficiaryinterest in real estate
Trust beneficiaryinterest in real estate
Trust beneficiaryinterest in real estate

June 27, 2006

June 29, 2006
June 27, 2006
November 30, 20063
June 27, 2006
June 27, 2006

Total

Acquisition Price2(Millions of yen)

Survey Price ofSpecified Assets(Millions of yen)

22,553

22,610

9,450

9,480

8,350

8,410

5,040

5,045

4,000

4,065

2,859

2,870

4,300

4,580

13,89014,10010,976

11,020

5,400

5,440

4,023

4,030

3,775
130

3,790
130

1,150

1,240

2,550

2,551

98,44699,361

Notes:
1. The surveys of prices for specified assets detailed above were conducted by MISUZU Audit Corporation at the time ofproperty acquisitions based upon the Japanese Institute of Certified Public Accountants (JICPA) Industry Audit Committee
Report No. 23, “Examination of Prices for Specified Assets held by Investment Trusts and Investment Corporations.” In
addition to the above price surveys, JEI receives survey reports on locations, lots and other items needed to define the realestate in question.
2. Acquisition prices indicate the purchase prices for real estates as recorded in trust beneficiary interest sales agreements anddo not include acquisition expenses (brokerage fees and property and other taxes).
3. JEI additionally acquired ownership interest on November 30, 2006.
4. The acquisition price for the No. 44 Kowa Building includes ¥115 million of money held in trust.

362) Other
JEI entrusts MISUZU Audit Corporation with performing surveys of transactions, other than those recorded above in“Real Estates,” that require surveys of prices and other items in accordance with Article 34-4 of the Law Concerning
Investment Trusts and Investment Corporations.
Six interest rate swap transactions were subject to such surveys during the period from February 20, 2006 to
December 31, 2006, and JEI has received reports from MISUZU Audit Corporations regarding the examination of thesetransactions.
In the event that such surveys are required, JEI entrusts the investigation of the name of the other party involved,
currency denomination used, contracted interest rates, the period in which the interest rate swap transactions took placeand other details pertaining to the transactions.

(4) Transactions with Related Parties and Major Shareholders
1) Details of Transactions
Purchase and Sales Amounts
Purchase Amount (Millions of yen)
Sales Amount (Millions of yen)
98,446㧙
Total
Amount of Purchases from Related Parties
Amount of Sales to Related Parties andand Major Shareholders
Major Shareholders
Breakdown of Transactions with Related Parties and Major Shareholders
Kowa Real Estate Co.,
22,875 (23.2%)– (– %)Ltd.
The Dai-ichi MutualLife Insurance
15,370 (15.6%)– (– %)
Company
Higashisakura Special
9,450 (9.6%)– (– %)
Purpose Company
Total
47,695 (48.4%)– (– %)
2) Fees
Transactions with Related Parties and Major
Shareholders
Name of Related
Amount Paid
Parties and Major(Thousands of yen)
Shareholders(B)
Kowa Real Estate
716,235 Co., Ltd.
235,308

Total Fees Paid
(Thousands of yen)(A)
Property
Management Costs
and Fees2
Total

716,235

235,308

B/A

32.9㧑
32.9㧑

Notes:
1. The above tables show the related parties, as defined under Article 20 of the Enforcement Order of the Law Concerning
Investment Trusts and Investment Corporations, and the major shareholders, as defined under Article 9, Paragraph 3 of the
Law Concerning Investment Trusts and Investment Corporations, of the Asset Management Company with which JEI
concluded asset management agreement during the first fiscal period. As indicated, these were Kowa Real Estate Co., Ltd.,
Dai-ichi Mutual Life Insurance Company and Higashizakura Special Purpose Company.
2. Property management costs and fees include property management fees and construction management fees, the latter ofwhich have been recorded as assets rather than expenses.
3. Figures in the above tables do not include consumption taxes.

37

(5) Transactions with the Asset Management Company for Services other than AssetManagement Service for JEIThe Asset Management Company (Japan Excellent Asset Management Co., Ltd.) does not perform services related tosecurities, the building lots and building transaction business or the specified joint real estate business. Accordingly, there
were no transactions which fall under this category during the first fiscal period.

7. Accounting(1) Assets, Liabilities, Unitholders’ Equity and Profit and Losses
For details regarding assets, liabilities, unitholders’ equity and profit and losses, please refer to the “Balance Sheets,”“Statements of Income,” “Statements of Change in Unitholders’ Equity” and “Notes to Financial Statements” below.

(2) Changes in Method of Calculating Depreciation AmountNot applicable.

(3) Changes in Method of Appraising Real Estate
Not applicable.

8. Other(1) Notices
The following is a summary of the major agreements or changes to agreements approved by JEI’s Board of Directors
during the first fiscal period.
Date Approved
Item
Summary
February 20, 2006

June 19, 2006

• Conclusion of asset managementagreement

JEI entrusted asset management operations to Japan
Excellent Asset Management Co., Ltd.

• Investment unit transfer agency
agreement

JEI entrusted transfer agency operations to Mizuho
Trust & Banking Co., Ltd.

• Asset custody agreement

JEI entrusted asset custody services and administrative
services related to accounting to Mizuho Trust &Banking Co., Ltd.

• Administrative agency agreement

JEI entrusted administrative agency operations to
Mizuho Trust & Banking Co., Ltd.

• Underwriting agreement

JEI reached agreements for underwriting newinvestment units with Japan Excellent AssetManagement Co., Ltd., Mizuho Securities Co., Ltd.,
Morgan Stanley Japan Securities Co., Ltd. and Shinko
Securities Co., Ltd.

• Agreements for purchase of new
investment units related to thegreen shoe option

JEI reached agreements for the purchase of new
investment units with Japan Excellent AssetManagement Co., Ltd. and Mizuho Securities Co., Ltd.

(2) OtherIn this report, except where indicated otherwise, monetary amounts below unit are rounded down and ratios rounded to
the nearest decimal place.

38

39

Japan Excellent, Inc.
Balance sheets as of December 31, 2006
AssetsThousands of yen

U.S. dollars

Current Assets
㪳Cash and cash equivalents
Rental receivables
Consumption taxes refundable
Other current assets

㪳

Total current assets

13,119,877$ 110,140,005

195,683

1,642,739

1,765,147

14,818,222

32,671

274,273

15,113,378$ 126,875,239

37,307,372

313,191,500

315,648

2,649,834

Property and Equipment (Note5)
Buildings and Building improvements including trust accounts
Machinery and equipment including trust accounts
Furniture and fixtures including trust accounts
Land for trust accounts
Construction in progress
Less: accumulated depreciation㪳

Total property and equipment

2,147

18,02153,363,405

447,980,233

6,396

53,697(631,656)(5,302,688)

90,363,312$ 758,590,597

8,565,062

71,902,801

10,76890,396

Investments and other assets
Leasehold rights including trust accounts
Investment in securities (Note4)
Security deposit

15,182

127,449

Long-term prepaid expenses

131,521

1,104,105

Other assets576
㪳Total investments and other assets
Total Assets

8,723,109

4,840$

73,229,591

㪳 114,199,799$ 958,695,427

㪳$Liabilities
Current Liabilities
Accounts payable - trade472,372

3,965,512

Accounts payable - others

299,964

2,518,169

Other current liabilities

26,636

223,604㪳

Total current liabilities

798,972$

6,707,285

Long-term liabilities
Long-term debt (Note6)

38,500,000

323,203,492

Security deposits from tenants including trust accounts

5,402,232

45,351,175

Derivative liabilities
Total long-term liabilities
Total Liabilities

168,610

1,415,468

㪳44,070,842$ 369,970,135

㪳

44,869,814$ 376,677,420

㪳

67,641,920$ 567,846,877

1,856,675

15,586,598

Unitholders' Equity (Note7)
Unitholders' capital
Authorized 2,000,000 units
Issued and outstanding 134,800 units
Retained earnings
Revaluation and translation adjustment
Loss on deferred hedges(168,610)(1,415,468)(168,610)(1,415,468)

Total Unitholders' equity

㪳

69,329,985$ 582,018,007

Total Liabilities and Unitholders' equity

㪳 114,199,799$ 958,695,427

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

40

Japan Excellent, Inc.
Statements of Income For the period from February 20, 2006 to December 31, 2006
Thousands of yen

U.S. dollars

Revenues㪳

Rental revenues (Note10)

4,335,709$

36,397,828

Others (Note10)

416,137

3,493,429

Total revenues

4,751,846

39,891,257

1,977,987

16,604,995

306,291

2,571,280

8,975

75,347Administrative service fees

18,014

151,230

Compensation for directors

11,85899,547

Operating Expenses
Property operating expenses (Note10)
Asset management fees
Custodian fees

Other operating expenses

59,014495,415

Total operating expenses

2,382,139

19,997,814

2,369,707

19,893,443

5,017

42,119Interest expenses

208,919

1,753,852

Loan arrangement fees

85,468717,500

Operating income
Other Income
Interest income
Other Expenses

New unit issuance costs

62,916528,171

IPO Expenses

104,727

879,174

Organization costs

54,305455,882

Other
Income before income taxes

1

6

1,858,388

15,600,977

1,750

14,690

(37)

(311)

1,856,675

15,586,598

Income taxes-current (Note9)
Income taxes-deferred
Net Income
Retained earnings at beginning of period㪳Retained earnings at end of period

1,856,675$

15,586,598

Statements of Change in untholders' equity

Thousands of yen

Balance as of February 20, 2006
Changes during the period
Issuance of new units
Net income
Differed hedge losses
Balance as of December 31, 2006

Number of Unitholders'units issued
capital-Retainedearnings-

134,800

67,641,920

134,800

67,641,920

1,856,675
1,856,675

Number ofunits issued

Unitholders'
capitalRetainedearnings--

Revaluation and translation adjustment

Total

67,641,920
1,856,675
69,498,595

Loss onTotal revaluation anddeferred hedges translation adjustments

Total unitholders'equity

-

-

-

-

-

(168,610)(168,610)(168,610)(168,610)

67,641,920
1,856,675(168,610)
69,329,985

U.S. dollars

Balance as of February 20, 2006
Changes during the period
Issuance of new units
Net income
Differed hedge losses
Balance as of December 31, 2006

134,800 567,846,877
134,800 567,846,877

Revaluation and translation adjustment

Total

567,846,877
15,586,598 15,586,598
15,586,598 583,433,475

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

41

Loss onTotal revaluation anddeferred hedges translation adjustments--

Total unitholders'equity-567,846,877
15,586,598(1,415,468) (1,415,468)(1,415,468)(1,415,468) (1,415,468) 582,018,007--

Japan Excellent, Inc.
Statement of Cash Flows for the period from February 20, 2006 to December 31, 2006

Thousands of yen

U.S. dollars

Income before income taxes

1,858,388

15,600,977

䇭䇭䇭Depreciation and amortization

631,7155,303,178

䇭䇭䇭Amortization of new units issuance costs

62,916528,171

䇭䇭䇭IPO expenses

104,727

879,174

䇭䇭䇭Interest income(5,017)(42,119)

䇭䇭䇭Interest expenses

208,919

1,753,852

䇭䇭䇭Increase in rental receivables(195,683)(1,642,739)(1,765,147)(14,818,222)

䇭䇭䇭(Increase) in prepaid expenses(30,387)(255,095)䇭䇭䇭(Increase) in long-term prepaid expenses(131,521)(1,104,105)

䇭䇭䇭Increase in accounts payable-trade279,758

2,348,537

䇭䇭䇭Increase in accounts payable-other245,719

2,062,787

䇭䇭䇭Increase in advance received

17,649148,165

䇭䇭䇭Other-net

16,454

138,1291,298,490

10,900,690

3,806

31,953(204,649)(1,718,011)

Cash flows from operating activities

䇭䇭䇭(Increase) in consumption tax refundable

䇭䇭䇭 Subtotal
䇭䇭䇭Interest received
䇭䇭䇭Interest paid
䇭䇭䇭Income taxes paid䇭䇭䇭䇭䇭Net cash provided by operating activities(761)(6,391)

1,096,886

9,208,241

Cash flows from investing activities
䇭䇭䇭Purchase of investment in securities(10,768)(90,396)

䇭䇭䇭Purchases of property and equipment including trust accounts(90,826,203)(762,476,520)

䇭䇭䇭Purchases of intangible assets including trust accounts(8,565,580)(71,907,156)

䇭䇭䇭Payments for security deposits(15,182)(127,449)

䇭䇭䇭Proceeds from security deposits from tenants including trust accounts

5,551,409

46,603,499

䇭䇭䇭Payments of security deposits from tenants including trust accounts(85,122)(714,587)(93,951,446)(788,712,609)

Proceeds from long-term debt
䇭䇭䇭Issuance of units
䇭䇭䇭Payments for new unit issuance costs
䇭䇭䇭Payments for IPO expenses

38,500,000
67,641,920(62,916)(104,567)

323,203,492
567,846,877(528,171)(877,825)䇭䇭䇭䇭䇭Net cash provided by financing activities

105,974,437

889,644,373

Net increase in cash and cash equivalents

13,119,877

䇭䇭䇭䇭䇭Net cash used in investing activities
Cash flows from financing activities

Cash and cash equivalents at beginning of period

110,140,005-

Cash and cash equivalents at end of period

13,119,877

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

42

110,140,005

Japan Excellent, Inc.
Notes to financial statements
1. Organizations
Japan Excellent, Inc. (hereinafter “JEI”), established on February 20, 2006 under the Law Concerning
Investment Trusts and Investment Corporations of Japan(“Investment Trust Law”), is a real estate
investment corporation which mainly invest in office buildings.
Japan Excellent Asset Management (“JEAM”), entrusted asset management from JEI, is owned 40% by
Kowa Real Estate Co., Ltd., 20% by The Dai-ichi Mutual Life Insurance Company, 15% by Sekisui House,
Ltd. and 25% by other corporations.
JEI listed on the Tokyo Stock Exchange on June 27, 2006. As of December 31, 2006, JEI holds 14 properties
with 135,264 square meters of the total leasable space and leases to 99 tenants excluding residential
tenants.
2. Basis of presentation
JEI maintains its accounting records and prepares its financial statements in accordance with accounting
principles generally accepted in Japan (“Japanese GAAP”), including provision set forth in the Investment
Trust Law, Corporate Law, the Securities and Exchange Law of Japan and related regulations, which are
different in certain respect as to the application and disclosure requirements of International Financial
Reporting Standards.
The accompanying financial statements are a translation of the financial statements of JEI, which wereprepared in accordance with Japanese GAAP and were presented in the Securities Report of JEI filed with
the Kanto Local Financial Bureau. In preparing the accompanying financial statements, certain
reclassification and modifications have been made for the convenience of readers outside Japan. In addition,
the notes to financial statements include information that might not be required under Japanese GAAP but
is presented herein as additional information. Amounts have been rounded to the nearest thousand of Yen
in the accompanying financial statements and their notes whereas amounts have been truncated in theJapanese financial statements prepared in accordance with Japanese GAAP. Amounts in U.S. dollars areincluded solely for the convenience of readers outside Japan. The rate of ¥119.12=US$1.00, the foreignexchange rate on December 31, 2006, has been used for translation. The inclusion of such amounts is notintended to imply that Japanese yen has been or could be readily converted, realized or settled into U.S.
dollars at that rate or any other rate.

43

3. Summary of significant accounting policies

Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, deposits with bank and short-term investments which
are highly liquid, readily convertible to cash and with insignificant risk of price fluctuation, with original
maturity of three months or less.

Investment in security
Non-marketable security classified as other security is carried at cost. Cost of security sold is determined by
the moving average method.

Property and equipment
Depreciation is computed based on a straight-line method over the estimated useful lives of the assets asfollows;
Buildings 2-55 years
Building improvements 4-56 years
Machinery and Equipments 7-16years
Furniture and fixtures 4-10years
Amortization of intangible assets is computed using the straight-line method over the 5 years.

Organization costs and units issuance costs
Organization costs and new units issuance costs are changed to income as incurred.

Income Taxes
Income taxes are accounted for on the basis of income for financial statement purpose. The asset andliability approach is used to recognize deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities.

Consumption taxes
Consumption taxes received and paid are not included in the statement of income.

Property related taxes
Principally, property related taxes including property taxes, urban planning taxes and depreciable property
taxes are imposed on calendar year and are expensed accrued as rental expenses.
For the period, JEI capitalized the property related taxes allocated by the sellers at the time of acquisition of44

properties including trust accounts.
The capitalized amount for the period was ¥339,095 thousand.

Revenue recognition
Rental revenues are generally recognized on an accrual basis over the life of each lease.

Hedge account
JEI has entered into interest rate swap contracts to hedge variable rate for the long-term debt obligations.
The interest hedge is accounted for by the deferred hedge method.

Accounting for properties in trust accounts
All the assets and liabilities held in trust, to which the real estate in possession of JEI were entrusted, andall the earnings and expenses incurred from the trust are properly reflected on the balance sheets andstatements of income.
4. Investment in security
Thousands of Yen

U.S dollars

As of December 31, 2006 
Non-listed stock

10,76890,396

5. Schedule of property and equipment
Property and equipment at December 31, 2006 consisted of the following

Thousands of yen
As of December 31, 2006
Building and structures including trust accounts
Machinery and equipment including trust accounts
Furniture and fixtures including trust accounts
Land for trust accounts
Construction in progress TotalU.S. dollars
As of December 31, 2006

Acquisition cost

Accumulated
depreciation

Net book value

Acquisition cost

Accumulated
depreciation

37,307,372
315,648
2,147
53,363,405
6,396
90,994,968(619,226) 36,688,146(12,372)
303,276(58)
2,089- 53,363,405
6,396(631,656) 90,363,312

313,191,500
2,649,834
18,021
447,980,233
53,697
763,893,285(5,198,335) 307,993,165(103,861) 2,545,973(492)
17,529- 447,980,233
53,697(5,302,688) 758,590,597

45

Net book value6. Long-term Debt
Long-term debt as of December 31, 2006 consisted of the following
 

 

Loans from Banks due on June 29, 2009

As of December 31, 2006
AmountAmountWeighted(Thousands (U.S. dollars) averageof Yen)interest rate
13,000,000 109,133,647 0.96370%

Loans from Banks due on June 29, 2010

13,000,000 109,133,647

1.02857%

Loans from Banks due on June 29, 2011

9,500,000

79,751,511

0.96834%

Loans from Insurance Company due on June 29, 2011

3,000,000

25,184,687

1.96625%

Total

38,500,000 323,203,492

7. Unitholders’ Equity
JEI issues only non-par value investment units in accordance with the Investment Trust Law.
JEI is required to maintain net assets of at least ¥50 million by the Investment Trust Law.
8. Per unit information
Net asset value per unit was ¥514,317 as of December 31, 2006 and net income per unit was ¥13,858 for theperiod ended December 31, 2006 which are computed based on weighted average number of units
outstanding from June 27, 2006 to December 31, 2006.
9. Income taxes
JEI is subject to income taxes in Japan.
JEI’s policy is to make dividend distributions in excess of 90% of taxable income for each fiscal period inorder to meet the condition set forth in the Special Taxation Measures Law of Japan concerning thedeductibility of cash dividends paid for income tax purpose.
The reconciliation of tax rate difference between the adjusted statutory tax rate and effective tax rate forthe period ended December 31, 2006 were as follows.
For the period
from February 20, 2006
to December 31, 2006

Statutory income tax rate
(Reconciliation)
Deductible distributions paid
OthersIncome tax rate per statements of income

39.39%(39.35)
0.05
0.09%

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10. Breakdown of real estate rental revenues and expenses

Rental Revenue
Rental Income
Other
Property operating expenses
Property management costs and fees
Utilities
Insurance
Repairs and maintenance
Depreciation
Other
Profits

Thousands of yen

U.S. dollars

For the period
ended
December 31, 2006

For the period
ended
December 31, 2006

4,751,846
4,335,709
416,137
1,977,987
712,749
406,340
13,790120,178
631,656
93,274
2,773,859

47

39,891,257
36,397,828
3,493,429
16,604,995
5,983,452
3,411,180
115,769
1,008,885
5,302,688
783,021
23,286,262

11. Related party transactions
JEI has entered into the real estate lease agreement and purchase agreement of investment assets withKowa real estate Co., Ltd.

who owns 10% of the outstanding units of JEI.

Also JEI has entered into asset management agreement and other transaction with Junichi Tamura who isthe president of JEAM and Executive Director of JEI.
(1) Major unitholders
Company
nameDescription oftransaction
Acquisition of realestateKowa realestateCo., Ltd.

Property Leasing
Payment of Property
management costs
and feesAmountAmount㧔Thousandsof yen㧕

㧔U.S dollars㧕

22,875,000

192, 033,243

1,364,656

232,973

11,456,146

1,955,788

Account㧙Advancereceived
Security
depositAccounts
payabletrade

Balance atthe end of
periodBalance atthe end of
period㧔Thousands ofyen㧕

㧔U.S dollars㧕

㧙

㧙
147

1,237

1,533,889

12,876,844

40,739342,005(2) Directors and Major individual unitholders

Name

JunichiTamuraDescription oftransaction

Amount㧔Thousandsof yen㧕Amount㧔U.S dollars㧕

Account

Payment of asset
management fee to
JEAM

306,290

2,571,279

Accounts
payablePayment ofFoundation
arrangement fee to
JEAM

50,000419,744㧙

48

Balance atthe end of
periodBalance atthe end of
period㧔Thousands ofyen㧕

㧔U.S dollars㧕

184,7081,550,605

㧙㧙

12. Significant subsequent events
1) Cash distribution
On February 21, 2007, the Board of Directors decided to make a cash distribution of ¥13,773 per unit
aggregating ¥1,856 million unitholders at the record date of December 31, 2006.
2) Acquisition of investment properties
On March 16, 2007, JEI decided to acquire three properties set forth below.
(Akasaka Garden City)
Address:
Use:

Akasaka, 4-15-1, Minato-ku, Tokyo

Office / Retail premises / parking

Acquisition price:

23,300,000 thousand yen

Acquisition date:

March 28, 2007

Type of specified asset:
Trustee:

Trust beneficiary in real estateMizuho Trust & Banking Co., Ltd.

Contract term of trust:From March 28, 2007 to March 31, 2017

(Nishi-honmachi Mitsui Building)
Address:Use:

1-3-15 Awaza, Nishi-ku, Osaka

Office / parking

Acquisition price:

6,673,500 thousand yen

Acquisition date:

March 28, 2007

Type of specified asset:
Trustee:

Trust beneficiary in real estate

Mitsubishi UFJ Trust and Banking Corporation

Contract term of trust:From March 28, 2007 to March 31, 2017

(Ebina Prime Tower)
Address:Use:

2-9-50 Chuo-ku, Ebina-shi, Kanagawa

Office / Hotel / Hall / Shops / Fitness center

Acquisition price:

6,470,000 thousand yen

Acquisition date:

March 29, 2007

Type of specified asset:
Trustee:

Trust beneficiary in real estateMizuho Trust & Banking Co., Ltd.

Contract term of trust:From March 29, 2007 to March 31, 201749

Unitholder Information
1 Address Change Procedures
JEI uses a storage transfer system that requires certain information. If you do not have your investment
certificates in your immediate possession, please contact your brokerage firm directly to change your name,address or other account-related information. If you do have your investment certificates in your immediate
possession, please contact the Securities Transfer Department of Mizuho Trust & Banking Co., Ltd.

2 Distributions
Distributions can be received by submitting your “Postal Money Transfer Payment Notification” at your nearest
post office. If the period for receiving distributions has past, please write on the reverse of the notification theform in which you would prefer to receive payment and mail the notification to the Securities Transfer
Department of the Mizuho Trust & Banking Co., Ltd. Alternatively, you may submit the notification at a teller
window at the main or any of the branch offices of the Mizuho Trust & Banking Co., Ltd., or Mizuho Investors
Securities to receive payment. (Note: Due to procedural requirements, it may take several days before the
distribution can be paid at some bank locations.) Unitholders who wish to receive future distributions by banktransfer should contact the Securities Transfer Department of the Mizuho Trust & Banking Co, Ltd.

3 Unitholder Notes
Fiscal Periods:
Six-month fiscal periods ending on June 30 and December 31 of each year
Unitholders’ Meeting:
Held at least once every two years
Unitholder Voting Date:
Date to be announced in advanceDistribution Payment Date:
June 30 and December 31 of each year.
Listed Stock Exchange:
Tokyo Stock Exchange (securities code: 8987)
Announcements:
Announcements shall be published in the Nihon Keizai Shimbun (Nikkei)
Transfer Agent:Mizuho Trust & Banking Co., Ltd., 2-1, Yaesu 1-chome, Chuo-ku, Tokyo, Japan
Business Office of the Transfer Agent:Mizuho Trust & Banking Co., Ltd., 2-1, Yaesu 1-chome, Chuo-ku, Tokyo, Japan
Mailing Address
17-7, Saga 1-chome, Koto-ku, Tokyo 135-8722
Securities Transfer Department: Mizuho Trust & Banking Co., Ltd.
All nationwide branches of Mizuho Trust & Banking Co., Ltd.
Mizuho Investors Securities
Main office and branch offices nationwide

4 Yearly Schedule

June

Closing of fiscal period
ending June 30

August• Release of Semiannual Reports• Begin payment of distributions

March
February

Information
disclosed on
Company
Web siteAnnouncement of results

Closing of fiscal period
ending December 31

December50

Announcement of results

September• Release of Semiannual Reports• Begin payment of distributions

Web Site Information
Press releases, financial statements, property information and a variety of other content are posted on the Japan
Excellent Investment Corporation’s Web site in order to ensure swift and accurate information disclosure.
JEI will continue to offer more content and promptly disseminate information.

Websitehttp://www.excellent-reit.co.jp/eng/

Top Page
What’s New provides the most recent information about
the Investment Corporation.

IR Information: Press Release
Contains information announced in the media

Portfolio

IR Information: Documents for Disclosure
Contains semiannual reports, results briefing
materials, and other related information

Detailed information regarding JEI's building portfolio
and most recent performance data51