HEIWA REAL ESTATE REIT, Inc. (8966) 34th Fiscal Period Financial Report

Transcription

1 34th Fiscal Period Financial Report (REIT) January 22, 2019 REIT Issuer: HEIWA REAL ESTATE REIT, Inc. Stock Exchange Listing: TSE Securities Code: 8966 URL: Representative: (Title) Executive Director (Name) Masaaki Higashihara Asset Management HEIWA REAL ESTATE Asset Management CO., LTD. Company: Representative: (Title) President & Representative Director (Name) Takaya Ichikawa Inquiries: (Title) General Manager, Planning & Finance Department (Name) Yoshio Ito TEL: Scheduled date of submission of periodic securities report (yuka shoken hokokusho): February 27, 2019 Scheduled date of commencement of distribution payments: February 15, 2019 Supplementary materials: Attached IR Conference: Yes (for institutional investors, securities analysts) 1. Status of Management and Assets for the 34th Fiscal Period [Amounts are rounded down to the nearest million yen] 34th Fiscal Period (34th FP): Fiscal period ended November 2018 (from June 1, 2017 to November 30, 2018) (1) Management [% figures show the period-on-period increase (decrease)] Operating revenue Operating income Ordinary income Net income 34th FP 6,215 million (29.4%) 2,942 million (44.5%) 2,487 million (48.3%) 2,487 million (48.3%) 33rd FP 8,803 million 49.7% 5,305 million 107.5% 4,815 million 135.1% 4,815 million 152.8% Net income per unit Ratio of net income Ratio of ordinary income Ratio of ordinary income to unitholders equity to total assets to operating revenue 34th FP 2, % 1.4% 40.0% 33rd FP 4, % 2.7% 54.7% (2) Distributions Distribution per unit (excluding distribution in excess of earnings) Total distributions (excluding distribution in excess of earnings) Distribution in excess of earnings per unit Total distributions in excess of earnings Payout ratio (Note 1) Ratio of distributions to net assets (Note 2) 34th FP 2,350 2,384 million 0 0 million 95.9% 2.5% 33rd FP 2,300 2,334 million 0 0 million 48.5% 2.5% (Note 1) Payout ratio shows figures that have been calculated using the following formula: Total distributions (excluding total distributions in excess of earnings) Net income 100 (Note 2) Ratio of distributions to net assets shows figures that have been calculated using the following formula: Total distributions (excluding total distributions in excess of earnings) [(Net assets at beginning of period + Net assets at end of period) 2] 100 (Note 3) The amount of total distributions ( 2,334 million) for the 33rd Fiscal Period are calculated as follows and therefore differ from the amount of net income. The reversal of the reserve for adjustment of temporary differences of 40 million ( 40 per unit) is appropriated to the balance excluding the net income provision of reserve for reduction entry of 415 million and internal reserve amount of 2, 106 million. (Note 4) The amount of total distributions ( 2,384 million) for the 34th Fiscal Period are calculated as follows and therefore differ from the amount of net income. The reversal of the reserve for adjustment of temporary differences of 40 million ( 40 per unit) is appropriated to the balance excluding the net income provision of internal reserve of 143 million, which constitutes a part of the gain on sales of real estate properties. (3) Financial Position Total assets Net assets Ratio of unitholders equity to total assets Net assets per unit 34th FP 183,199 million 95,357 million 52.1% 93,962 33rd FP 181,306 million 95,172 million 52.5% 93,780 (4) Cash Flows Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities Cash and cash equivalents at end of period 34th FP 3,868 million ( 4,059 million) ( 234 million) 16,965 million 33rd FP 12,208 million ( 2,683 million) ( 2,693 million) million 3

2 2. Management Status Forecasts for the 35th and 36th Fiscal Periods HEIWA REAL ESTATE REIT, Inc. (8966) 34th Fiscal Period Financial Report 35th Fiscal Period (35th FP): Fiscal period ending May 2019 (from December 1, 2018 to May 31, 2019) 36th Fiscal Period (36th FP): Fiscal period ending November 2019 (from June 1, 2019 to November 30, 2019) Operating revenue Operating income Ordinary income Net income [% figures show the period-on-period increase (decrease)] Distribution per unit (excluding distribution in excess of earnings) (Note) Distribution in excess of earnings per unit 35th FP 6,359 3,005 2,544 2, % 2.1% 2.3% million million million million 2.3% 2,400 36th FP 6,048 2,698 (4.9%) (10.2%) 2,234 2,234 (12.2%) million million million million (12.2%) 2,400 (Reference) Estimated net income per unit: 35th Fiscal Period: 2,507 36th Fiscal Period: 2,202 (Note) The sources of funds for paying the total distributions for the 35th Fiscal Period include the planned amount of the reversal of the reserve for the adjustment of temporary differences of 40 million ( 40 per unit), the sources of funds for paying the total distributions for the 36th Fiscal Period include the planned amount of the reversal of the reserve for the adjustment of temporary differences of 200million ( 198 per unit), and they therefore differ from the amount of net income. * Other (1) Changes in Accounting Policies, Changes in Accounting Estimates, Restatements (i) Changes in accounting policies accompanying amendments to accounting standards, etc.: (ii) Changes in accounting policies other than (i): (iii) Changes in accounting estimates: (iv) Restatements No No No No (2) Total Number of Investment Units Issued and Outstanding (i) Total number of investment units issued and outstanding at end of period (including own investment units): 34th FP: 1,014,847 units 33rd FP: 1,014,847 units (ii) Number of own investment units at end of period: 34th FP: units 33rd FP: units (Note) For the number of investment units on which the calculation of net income per unit is based, see Note on per-unit information on page 32 of the Japanese version of the 34th Fiscal Period Financial Report (REIT) for the period ended November * Statement on Status of Review Procedures Financial statement review procedures based on the Financial Instruments and Exchange Act are still ongoing at the time of disclosure of this financial report. * Explanation on the Appropriate Use of the Management Status Forecasts, and Other Matters of Special Note (Caution Concerning Forward-Looking Statements, Etc.) The management status outlook and other forward-looking statements contained in this document are based on information currently available to and certain assumptions deemed reasonable by the Investment Corporation. Accordingly, actual management status and other results may vary materially due to various factors. This forecast is not a guarantee of actual distributions paid. See the Management status forecast assumptions for 35th Fiscal Period (from December 1, 2018 to May 31, 2019) and 36th Fiscal Period (from June 1, 2019 to November 30, 2019) on page 12 for notes on assumptions used in management status forecasts and on the use of management status forecasts. 4

3 1. Related Corporations of the REIT No disclosure necessary, since there have been no material changes from Structure of the REIT in the most recent Annual Securities Report (submitted August 30, 2018). 2. Operating Policies and Operations (1) Operating policies No disclosure is necessary since there have been no material changes to the Investment policies, Targets of investments and Distributions policy in the most recent Annual Securities Report (submitted on August 30, 2018). (2) Operations a. General situation during the 33rd Fiscal Period The REIT is striving based on its Basic Philosophy of Steady Growth of Assets Under Management and Stable Medium- to Long- Term Profits, as well as cooperation with and use of the Heiwa Real Estate Group (below, collectively referring to Heiwa Real Estate Co., Ltd. [below, Heiwa Real Estate ] and the subsidiaries of Heiwa Real Estate; the same hereinafter) to manage its assets with the purpose of maximizing investor s value. Following is a summary of our asset management during the 34th Fiscal Period. (i) Brief background of the REIT Investment units in the REIT have been listed on the Real Estate Investment Section (J-REIT Section) of the Stock Exchange (below, TSE) since March 8, 2005 (Securities Code: 8966). Subsequently, the REIT executed a capital increase through public offering and underwriting of new investment units issued through private placement on several occasions and an investment unit split and investment unit issuance through a merger with Japan Single-residence REIT Inc. on October 1, 2010 (below, this event is referred to as the merger) by the previous Fiscal Period. As a result, total investment units outstanding were 1,014,847 and unitholders' capital was 81,370 million yen as of the end of the 34th Fiscal Period (November 2018). (ii) Operating environment Although the Japanese economy temporarily stagnated due to the impact of successive natural disasters, such as large scale typhoons and the earthquakes in Hokkaido, the Japanese economy during the 34th Fiscal Period sustained a moderate recovery aided by the continued corporate earnings and increase in capital investment, which in turn reflected an increase in imports and an improvement in production activity against the backdrop of brisk overseas demand and steady personal consumption driven by sustained improvements in the employment/income environment. Looking ahead, however, factors of uncertainty can be seen such as the policies of the Trump administration, the trade friction between the U.S. and China, and the circumstances in the EU. In this environment, the TSE REIT index fluctuated around the 1,750 point line during the 34th Fiscal Period in comparison to 1, points at the end of the previous Fiscal Period (end of May 2018). In the second half of the Fiscal Period under review, the index remained steady partly due to the expectation of rent rise under the background of a fall in long-term rates and brisk real estate market conditions, recovering to 1,800 points in late November for the first time in about 14 months, and rising to 1, points at the end of the Fiscal Period under review, up 82 points compared to the end of previous Fiscal Period. (a) Office building leasing market The latest office building market data from Miki Shoji Co., Ltd. shows a substantial decline in the average office building vacancy rate in the five central wards of (Chiyoda, Chuo, Minato, Shinjuku and Shibuya) to 1.98% below the 2% level at the end of the Fiscal Period under review, down from 2.68% at the end of the previous period (May 2018). This reflected the completion of new buildings with no vacancy and a high rate of occupancy and the contracts to fill large-scale vacancies at existing office buildings due to their consolidation, increased floor areas within the buildings and relocation for expansion. The office building leasing market remains strong, driven by an increase in demand for office space backed by improved corporate economic sentiment. The average rent also remains steady, rising from 20,019 yen/tsubo at the end of the previous Fiscal Period to 20,743 yen/tsubo at the end of the Fiscal Period under review, maintaining the level above 20,000 yen/tsubo in the rent market. (b) Residential leasing market According to At Home Co., Ltd., the used condominium contract rent index in the metropolitan area for November 2018 rose 0.1 percentage points year on year, but demand for rental housing remains strong due to a continuous excess of population inflow into the metropolitan area and a growing trend of smaller households. According to the Survey Report on the Statistics of Construction Starts published in November of the same year, the number of new housing starts (rental housing) decreased for the 3th straight month from the same month last year, further to the previous Fiscal Period, the supply increase has stabilized and the demand and supply trends in the rental market for residences remained steady. For assets under management by the REIT, occupancy rates remained high through the Fiscal Period under review, and the number of properties indicative of higher rent levels rose, contributing to a steady rise in rent income. The outlook for the residential market remains stable. 5

4 (c) Real estate According to the survey of land prices by prefecture as of July 1, 2018, announced in September 2018, average land prices in Japan's three major metropolitan areas showed an increasing trend to rise in both residential and commercial areas. A breakdown shows that the official prices in residential areas continued to increase amid the growth of housing demand, fueled by improved economic sentiment in the and Nagoya areas. Prices in the Osaka area showed a rise for the first time in four years after remaining at the same level. In commercial areas, the upward trend maintained its momentum this year as official land prices climbed for the sixth straight year in the, Osaka and Nagoya areas. The upward trend is attributable to the solid housing demand mainly in areas with traffic convenience and a good living environment as employment/income environments continue to improve, driven by the continued low rates supporting the demand. In commercial areas, it is attributable to factors such as the increased demand on the back of the favorable funding environment, the downward trend in the occupancy rate of office buildings in major city centers, an increase in the demand for stores and hotels arising from the growing number of foreign tourists, and increased prosperity resulting from progress of redevelopment and other projects. Meanwhile, with respect to regional areas, land prices for both residential and commercial areas continued to fall. However, official land prices in the cities designated by government ordinance in the regional areas, which the REIT considers to be investment targets, are showing growth in both residential and commercial areas. (iii) Management performance (a) External growth The REIT acquired one office building (Of-42, SOUTHERN SKY TOWER HACHIOJI [trust beneficiary rights, acquisition price: 1,600 million yen]) on June 25, 2018 and one office building (Of-41, Itopia Nihonbashi SA Building [trust beneficiary rights, acquisition price: 2,140 million yen]) on August 31, 2018, and sold one office building (50% of the quasi-co-ownership of Of-28, MITA HEIWA BUILDING (leasehold land) [trust beneficiary rights, acquisition price: 2,230 million yen]) on November 30, 2018 to increase the profitability of its portfolio and improve its quality. As a result, portfolio assets as of the end of the period were 101 properties (total acquisition price: 168,116 million, including 31 office buildings (total acquisition price of 72,786 million and 70 residential buildings (total acquisition price of 95,330 million. (b) Internal growth The REIT has consistently endeavored to increase profitability by improving and maintaining its occupancy rates. During the 34th Fiscal Period, with the aim of maintaining the high occupancy rate achieved at the end of the previous Fiscal Period, the REIT continued to be engaged in tenant leasing activities, working to shorten vacancy duration as well as systematic efforts to increase its investment value based on tenant needs and the characteristics of each individual property. Partly as a result of these initiatives to maintain and improve the competitiveness of its assets, the occupancy rate for all properties held by the REIT climbed further to 98.1% as at the end of the 34th Fiscal Period from 97.9% at the end of the previous Fiscal Period. The REIT successfully maintained high and stable occupancy throughout the period, resulting in a high average month-end occupancy rate of 97.9% for the Fiscal Period under review. (iv) Procurement of funds The REIT took out Term Loan 39 (loan amount: 2,100 million on August 31, 2018 to use for funds to acquire properties. In addition, the REIT took out Term Loan 40 (Tranche A [loan amount: 2,400 million yen], Tranche B [loan amount: 1,750 million yen]) on October 31, 2018 to repay Term Loan 25 (Tranche B [loan balance: 1,300 million yen]), Term Loan 27 (Tranche A [loan balance: 850 million yen]) and Term Loan 31 (Tranche A [loan balance: 2,000 million yen]), the principal repayment date for which was October 31, Moreover, the REIT took out Term Loan 41 (loan amount: 500 million on November 30, 2018 to repay Term Loan 35A (loan balance: 500 million, the principal repayment date for which was November 30, An overview of the loans is provided below. The loans enabled the REIT to extend its borrowing periods and diversify its maturities (average borrowing period as of the end of November: 6.8 years; average remaining period: 4.0 years) and to lower its borrowing cost (average borrowing rate as of the end of November: 0.86 %). In addition, to secure financial creditworthiness by increasing the means of flexible and stable fundraising and liquidity on hand, the REIT has established the commitment line with a maximum total limit of 6,000 million yen with Sumitomo Mitsui Banking Corporation, MUFG Bank, Ltd. and Mizuho Bank, Ltd. 6

5 [Term Loan 39] Lender Sumitomo Mitsui Banking Corporation [Term Loan 40 Tranche A] Lender Sumitomo Mitsui Banking Corporation Resona Bank, Limited MUFG Bank, Ltd. Sumitomo Mitsui Bank, Limited [Term Loan 40 Tranche B] Lender Sumitomo Mitsui Banking Corporation Resona Bank, Limited Aozora Bank, Ltd. MUFG Bank, Ltd. Mizuho & Banking Co., Ltd. Sumitomo Mitsui Bank, Limited Mizuho Bank, Ltd. The Bank of Fukuoka, Ltd. The 77 Bank, Ltd. [Term Loan 41] Lender Mizuho Bank, Ltd. Loan amount 2,100 million yen Loan amount 2,400 million yen Loan amount 1,750 million yen Loan amount 500 million yen Principal repayment date October 31, 2019 (Note) Principal repayment date October 31, 2021 (Note) Principal repayment date November 30, 2025 (Note) Principal repayment date October 31, 2019 (Note) (Note) Or the previous business day if the date shown is not a business day. Principal repayment method Lump sum repayment on the principal repayment date Principal repayment method Lump sum repayment on the principal repayment date Principal repayment method Lump sum repayment on the principal repayment date Principal repayment method Lump sum repayment on the principal repayment date Purpose Property acquisition funding, etc. Purpose Funds to repay existing loans Purpose Funds to repay existing loans Purpose Funds to repay existing loans Summary Unsecured Nonguaranteed Summary Unsecured Nonguaranteed Summary Unsecured Nonguaranteed Summary Unsecured Nonguaranteed As a result, the total -bearing liabilities amount (Note) at period end was 80,767 million yen (period end LTV (Note): 44.09%). (Note) Interest-bearing liabilities = Short-term loans + Long-term loans due within one year + Investment corporation bonds + Longterm loans Closing ratio of -bearing liabilities to total assets=closing amount of -bearing liabilities/closing amount of total assets 100 The ratings of the REIT as of the date of this document are as follows: Credit rating agency Japan Credit Rating Agency, Ltd. (JCR) (v) Performance and distributions Issuer rating Rating: A; Rating outlook: Positive The management described above led to 34th Fiscal Period results of 6,215 million yen in operating revenues, 2,942 million yen in operating income, after deducting expenses on loans, 2,487 million yen in ordinary income, and 2,487 million yen in net income. With respect to the distribution of monies ( distributions ) stipulated in Article 137 of the Act on Investment s and Investment Corporations (Act No. 198 of 1951 and subsequent amendments), distributions shall be not more than the amount of unappropriated retained earnings at the end of the Fiscal Period under review and are defined as anything in excess of 90% of the amount of distributable income stipulated in Article of the Act on Special Measures Concerning Taxation (Act No. 26 of 1957 and subsequent amendments; the Special Taxation Measures Act ) in accordance with the stipulations of Article 32, paragraph 1 of its Articles of Incorporation ( bylaws ). Based on such policy, the REIT made a decision to pay out 2,384,890,450 yen as distributions from earnings by appropriating the reversal of reserve for adjustment of temporary differences of 40,593,880 yen (40 yen per unit) to the balance, excluding internal reserve of 143,023,913 yen, which constitutes a part of the gain on sales of real estate properties from the net income of 2,487,320,483 yen. As a result, distributions per unit have come to 2,350 yen. b. Outlook for next period 7

6 Management policy and future issues The REIT has developed and managed a high quality portfolio, primarily consisting of office and residence properties located in 23 Wards, with the aim of maximizing investor value through our Basic Philosophy of Steady Growth of Assets under Management and Stable Medium- to Long-Term Profits as well as through cooperation with and use of the Heiwa Real Estate Group. In subsequent periods, we will continue to adhere to the above philosophy, aiming to further maximize investor value through the stable management of our portfolio and pursuing a strategy of steady growth. (a) External growth The REIT attempted to increase and enhance the volume and quality of its portfolio and increase its revenues by acquiring six new properties of good quality, in addition to selling one property from the Fiscal Period under review to the next Fiscal Period. While the REIT will continue to seek expansion in the scale of its assets in the future, it will also consider the replacement of assets, strive to enhance its medium- to long-term portfolio quality and aim to maximize investor value. Given the sound financing environment and the expectations for higher property prices on the back of the expected economic recovery, competitors are maintaining a strong appetite for the acquisition of properties. As a result, the property acquisition environment is likely to remain challenging. We will endeavor to promptly obtain information on excellent properties by using our pipeline with Heiwa Real Estate and building up our unique information routes as an asset management company. As a basic strategy, we aim to increase opportunities for primarily acquiring properties owned and developed by Heiwa Real Estate, and additionally for acquiring properties owned and developed by other developers to expand our portfolio, contributing to stable profitability over the medium to long term. (b) Internal growth The REIT believes that by using the database and information network developed by the Heiwa Real Estate Group and its property management company, it can quickly detect leasing market trends and conduct precise property management, enabling it to maintain and increase occupancy rates and rent levels in assets under management. To maintain and increase rent levels, the REIT will continue actively endeavoring to revise rents to reasonable levels against the backdrop of improvement in the leasing market. Meanwhile, to maintain and increase occupancy rates, it will deal with tenants by focusing on minimizing departures and will undertake leasing management, including reducing the period of time for work for restoration to the original state, to shorten the period between the time when properties are vacated and the acquisition of new tenants. To make our properties more competitive, we continuously and actively make value-building investments in repairs and improvements of assets under management to maintain and enhance their medium- to long-term value, taking into account each property s asset age, facility level and other aspects. Through these measures, our goal is to maintain and further improve occupancy rates at high and stable levels. (c) Financial strategy The REIT is actively implementing measures in an effort to stabilize its financial foundations and achieve sustainable growth. Concerning borrowings, the REIT will continue to strive to extend its borrowing periods and diversify maturities by maintaining an appropriate loan-to-value ratio, while promoting measures to reduce risks from higher rates in the future and cut financial costs. It will also endeavor to further strengthen its bank formation by strengthening its relationships with financial institutions. The REIT will also issue investment corporation bonds, while keeping a close watch on the effect of reducing financial costs and trends in the financial market. By implementing these measures and initiatives on a continuous basis, the REIT will strive to build sound financial systems that are resilient to changes in the funding environment. (d) Promotion of more timely disclosure We practice information disclosure that is accurate, fair and timely, complying with the TSE s Securities Listing Regulations and other regulations, laws, etc. relating to timely disclosure. The REIT discloses information on its decisions on the acquisition of new properties, etc. as a rule at the time of the decision by a REIT organization such as the Board of Directors, while events such as damage to assets under management resulting from incidental occurrences are disclosed at the time they are discovered. As a rule, REIT information is disclosed through the TSE s TDnet, press releases to the TSE press club (Kabuto Club), Ministry of Land, Infrastructure, Transport and Tourism Press Club, etc., and through the REIT s website. 8

7 c. Significant subsequent events A. Asset Acquisitions Based on the basic policy on asset management prescribed in its bylaws, the REIT acquired the real estate trust beneficiary rights to one property (acquisition price: 3,100 million and three real estate properties (total acquisition price: 3,055 million on December 14, Property no: Of-43 Property name: HAMACHO HEIWA BUILDING Type of acquired property beneficiary rights Contract date November 27, 2018 Acquisition date December 14, 2018 Acquisition price Location (residential address) Use 3,100 million yen Completed September 30, 1993 Structure Total floor area 4, m 2 Total rentable area 2, m , Nihonbashihamacho, Chuo-ku, Office, stores for sale of goods, parking lot Property no: Re-86 Property name: HF MITA II (Note) Type of acquired property Real estate Contract date November 27, 2018 Acquisition date December 14, 2018 Acquisition price Location (residential address) Use Steel/steel reinforced concrete structure, flat-roof, 10 stories above ground and two basement level floors 1,210 million yen 5-2-2, Shiba, Minato-ku, Co-housing Completed July 8, 2006 Structure Total floor area 1, m 2 Reinforced concrete flat-roofed 11-story structure Total rentable area 1, m 2 (Note) The name of this building is Antenia Mita Keidaimae as of the date of this document; however, the name will be changed to HF MITA II on May 1, Therefore, the name after the said change is stated above. Property no: Re-87 Property name: HF MONZEN-NAKACHO (Note) Type of acquired property Real estate Contract date November 27, 2018 Acquisition date December 14, 2018 Acquisition price Location (residential address) Use 945 million yen , Botan Koto-ku, Co-housing Completed February 6, 2008 Structure Total floor area 1, m 2 Reinforced concrete flat-roofed 12-story structure Total rentable area 1, m 2 (Note) The name of this building is Antenia Monzen-nakacho as of the date of this document; however, the name will be changed to HF MONZEN-NAKACHO on May 1, Therefore, the name after the said change is stated above. Property no: Re-88 Property name: HF MINAMI-SUNAMACHI (Note) Type of acquired property Real estate Contract date November 27, 2018 Acquisition date December 14, 2018 Acquisition price Location (residential address) Use 900 million yen 7-4-9, Minamisuna, Koto-ku, Co-housing Completed August 29, 2007 Structure Reinforced concrete flat-roofed 8-story structure 9

8 Total floor area 1, m 2 Total rentable area 1, m 2 (Note) The name of this building is Antenia Minamisuna as of the date of this document; however, the name will be changed to HF MINAMI-SUNAMACHI on May 1, Therefore, the name after the said change is stated above. B. Asset Transfer Based on the basic policy on asset management prescribed in its bylaws, the REIT signed a purchase agreement for transfer of the following assets on November 27, 2018, and transferred 50% of the quasi-co-ownership of the trust beneficiary rights on December 14, Property no: Of-28 Property name: MITA HEIWA BUILDING (leasehold land) Property transferred beneficiary rights Location (residential address) Transfer price (Note 1) Book value (Note 2) , Shiba, Minato-ku, 1,455 million yen 1,134 million yen Contract date November 27, 2018 Transfer date December 14, 2018 Transferee Heiwa Real Estate Co., Ltd. (Note 1) The sale price equivalent to 50% of the quasi-co-ownership of that which will be transferred as set forth in the agreement for sale and purchase of real estate trust beneficiary rights is stated. (Note 2) The amount equivalent to 50% of the quasi-co-ownership subject to the said transfer is stated. C. Borrowing of capital The REIT took out a loan (total loan amount: 1,700 million on December 14, 2018 to use for funds to obtain one office building and three residential buildings acquired on December 14, 2018 (please refer to "B. Asset Acquisitions" below), as shown below. [Term Loan 42 (1)] Lender Mizuho Bank, Ltd. [Term Loan 42 (2)] Lender The Bank of Fukuoka, Ltd. Loan amount 1,000 million yen Loan amount 700 million yen Principal repayment date November 30, 2025 (Note) Principal repayment date November 30, 2025 (Note) (Note) Or the previous business day if the date shown is not a business day. Principal repayment method Lump sum repayment on the principal repayment date Principal repayment method Lump sum repayment on the principal repayment date Purpose Property acquisition funding, etc. Purpose Property acquisition funding, etc. Summary Unsecured Nonguaranteed Summary Unsecured Nonguaranteed 10

9 d. Outlook for the 34th and 35th Fiscal Periods Operations are forecast to be as follows during the 35th Fiscal Period (from December 1, 2018 to May 31, 2019). See Management status forecast assumptions for 35th Fiscal Period (from December 1, 2018 to May 31, 2019) and 36th Fiscal Period (from June 1, 2019 to November 30, 2019) below for assumptions used in this forecast. Operating revenues Operating income Ordinary income Net income Distributions per unit (excluding distributions in excess of earnings) Distributions in excess of earnings per unit 6,359 million yen 3,005million yen 2,544 million yen 2,544 million yen 2,400 yen yen (Note 1) Sources of funds for paying total distributions include the planned amount of the reversal of the reserve for adjustment of temporary differences of 185 million yen (183 yen per unit), and they therefore differ from the amount of net income. (Note 2) The above forecast figures were calculated using a fixed set of assumptions and are valid as of the time of this notice. Actual net income, distributions, etc., may vary due to changes in conditions. Forecast figures are not a guarantee of the amount of distributions. Operations are forecast to be as follows during the 36th Fiscal Period (from June 1, 2019 to November 30, 2019). See Management status forecast assumptions for 35th Fiscal Period (from December 1, 2018 to May 31, 2019) and 36th Fiscal Period (from June 1, 2019 to November 30, 2019) below for assumptions used in this forecast. Operating revenues Operating income Ordinary income Net income Distributions per unit (excluding distributions in excess of earnings) Distributions in excess of earnings per unit 6,048 million yen 2,698 million yen 2,234 million yen 2,234 million yen 2,400 yen yen (Note 1) Sources of funds for paying total distributions include the planned amount of the reversal of the reserve for adjustment of temporary differences of 200 million yen (198 yen per unit), and they therefore differ from the amount of net income. (Note 2) The above forecast figures were calculated using a fixed set of assumptions and are valid as of the time of this notice. Actual net income, distributions, etc., may vary due to changes in conditions. Forecast figures are not a guarantee of the amount of distributions. 11

10 Management status forecast assumptions for 35th Fiscal Period (from December 1, 2018 to May 31, 2019) and 36th Fiscal Period (from June 1, 2019 to November 30, 2019) Item Assumptions 35th Fiscal Period: from December 1, 2018 to May 31, 2019 (182 days) Management period 36th Fiscal Period: from June 1, 2019 to November 30, 2019 (183 days) Assets under management Total number of investment units issued and outstanding Operating revenues Operating expenses Non-operating expenses Interest-bearing liabilities The assumption is 104 properties consisting of 101 properties owned by the REIT at the end of the fiscal period ended November 30, 2018 and HAMACHO HEIWA BUILDING, HF MITA II, HF MONZEN-NAKACHO " and HF MINAMI-SUNAMACHI, acquired on December 14, 2018, excluding MITA HEIWA BUILDING (leasehold land) transferred on December 14, The actual number of properties owned may vary if properties are newly acquired, transferred, etc. The assumption is 1,014,847 units as the total number of investment units issued and outstanding at the end of the fiscal period ended November Operating revenues are calculated based on the assumption of the above assets under management. It is expected that 301 million yen will be assessed as gains on the transfer of real estate of the assets to be transferred in the fiscal period ended May Operating revenues are calculated taking into account such factors as cancellation notices currently received and the future market environment, using the history of acquired assets as our standard. Operating expenses are calculated based on the assumption of the above assets under management. Assumptions concerning major operating expenses are as follows: 35th Fiscal Period (from December 1, 2018 to May 31, 2019) Public charges and taxes (fixed property tax, city planning tax, etc.): 371 million yen Maintenance and repair fees: 224 million yen Management commissions: 650 million yen Depreciation: 960 million yen 36th Fiscal Period (from June 1, 2019 to November 30, 2019) Public charges and taxes (fixed property tax, city planning tax, etc.): 397 million yen Maintenance and repair fees: 220 million yen Management commissions: 635 million yen Depreciation: 946 million yen Fixed property tax, city planning tax, etc. associated with properties held are accounted for as expenses related to the lending business by posting the amounts corresponding to the relevant calculation period from the amount of tax determined to be due. Although fixed property tax, city planning tax, etc., on the buying and selling of real estate properties is generally calculated on a pro-rata basis with former owners and settled at the time of acquisition, the amount equivalent to the settlement money is not expensed, as it is included in the acquisition cost. For maintenance and repair fees, an amount deemed necessary during the period based on the maintenance and repair plans for the properties is posted. Emergency costs may arise as a result of unforeseeable factors, and actual operating expenses may therefore vary significantly from the forecast. The REIT assumes 458 million yen and 461 million yen as expenses (including expenses on investment corporation bonds) and borrowing-related expenses for the fiscal period ending May 2019 and the fiscal period ending November 2019 respectively. Moreover, the REIT assumes 2 million yen and 3 million yen as amortization of investment corporation bond issuance expenses for the fiscal period ending May 2019 and the fiscal period ending November 2019, respectively. Interest-bearing liabilities at the end of the fiscal period ended November 2018 are 80,767 million yen. We intend to procure new loans totaling 1,700 million yen as part of the fund for the assets acquired in December 2018, and we assume that the total loan debts will be 82,467 million yen at the end of the fiscal period ending May 2019 and 82,467 million yen at the end of the fiscal period ending November We assume that the loans maturing in May 2019 and October 2019 will be fully refinanced. 12

11 Item Distributions per unit (excluding distributions in excess of earnings) Distributions in excess of earnings per unit Other (3) Investment risk Assumptions Distributions per unit (excluding distributions in excess of earnings) are calculated based on the cash distribution policy stipulated in the REIT s bylaws. For the fiscal period ending May 2019, we assume that a total of 2,435 million yen (2,400 yen per unit) will be distributed after allocating the planned amount of the reversal of the reserves for adjustment of temporary differences of 40 million yen (40 yen per unit) to the estimated net income of 2,544 million yen. For the fiscal period ending November 2019, we also assume that a total of 2,435 million yen (2,400 yen per unit) will be distributed after allocating the planned amount of the reversal of the reserve for adjustment of temporary differences of 200 million yen (198 yen per unit) to the estimated net income of 2,234 million yen. Distributions per unit (excluding distributions in excess of earnings) may change because of various factors, including changes in leasing income attributable to changes of assets under management or changes in tenants or to unexpected maintenance and repair work. We do not expect any distributions in excess of earnings at this time. We assume no amendments to laws, the tax system, accounting standards, TSE rules, or The Investment s Association, Japan rules, etc., that would affect the above forecast figures. We assume that no major unforeseen changes will occur in the general economic trends, real estate market conditions, etc. No disclosure necessary, since there have been no material changes from Investment risk in the most recent Annual Securities Report (submitted August 30, 2018). 13

12 3. Financial Statements (1) Balance Sheet Assets Current assets 33rd Fiscal Period (As of May 31, 2018) (Unit: 1,000 34th Fiscal Period (As of November 30, 2018) Cash and deposits 17,116,926 16,729,073 Cash and deposits in trust 3,504,078 3,461,125 Operating accounts receivable 67,577 60,844 Prepaid expenses 145, ,493 Consumption taxes receivable, etc. 246,521 Other 5,618 8,550 Allowance for doubtful accounts (869) (991) Total current assets 20,838,858 20,659,618 Noncurrent assets Property, plant and equipment Buildings 11,082,873 11,122,450 Accumulated depreciation (3,041,731) (3,201,893) Buildings, net 8,041,141 7,920,556 Structures 57,434 57,662 Accumulated depreciation (29,887) (31,466) Structures, net 27,547 26,195 Machinery and equipment 222, ,157 Accumulated depreciation (143,958) (150,689) Machinery and equipment, net 78,918 75,468 Tools, furniture and fixture 146, ,515 Accumulated depreciation (102,227) (108,529) Tools, furniture and fixtures, net 44,208 45,985 Land 22,223,632 22,231,000 Buildings in trust 48,479,067 49,520,754 Accumulated depreciation (10,222,487) (10,894,695) Buildings in trust, net 38,256,579 38,626,059 Structures in trust 278, ,550 Accumulated depreciation (83,748) (89,537) Structures in trust, net 194, ,013 Machinery and equipment in trust 611, ,884 Accumulated depreciation (268,621) (292,428) Machinery and equipment in trust, net 342, ,455 Tools, furniture and fixtures in trust 927, ,228 Accumulated depreciation (576,203) (623,251) Tools, furniture and fixtures in trust, net 351, ,976 Land in trust 85,718,064 87,516,611 Total property, plant and equipment 155,278, ,344,323 Intangible assets Leasehold right 1,193,875 1,193,875 Leasehold rights in trust 3,315,665 3,315,665 Software - 6,316 Other Total intangible assets 4,509,782 4,516,098 14

13 33rd Fiscal Period (As of May 31, 2018) (Unit: 1,000 34th Fiscal Period (As of November 30, 2018) Investment and other assets Guarantee deposits 14,633 14,617 Long-term prepaid expenses 269, ,085 Derivatives 54,109 24,768 Other 303, ,367 Total investments and other assets 641, ,839 Total noncurrent assets 160,429, ,510,261 Deferred assets Investment unit issuance 6,169 Investment corporation bond issuance costs 31,713 29,618 Total deferred assets 37,882 29,618 Total assets 181,306, ,199,498 Liabilities Current liabilities Operating accounts payable 498, ,975 Short-term loans payable 500, ,000 Current portion of long-term loans payable 9,681,000 13,631,000 Accrued expenses 823, ,205 Income taxes payable Accrued consumption tax, etc. 366,320 Advances received 948,253 1,000,905 Other 13,305 10,700 Total current liabilities 12,831,725 16,263,012 Noncurrent liabilities Investment corporation bonds 3,800,000 3,800,000 Long-term loans payable 64,686,200 62,836,200 Tenant leasehold and security deposits 615, ,432 Tenant leasehold and security deposits in trust 3,931,771 4,077,557 Derivative liabilities 268, ,392 Total noncurrent liabilities 73,301,904 71,578,582 Total liabilities 86,133,629 87,841,594 Net Assets Unitholders equity Unitholders capital 81,370,715 81,370,715 Surplus Investment surplus 7,406,652 7,406,652 Voluntary retained earnings Reserve for reduction entry 415,683 Reserve for temporary differences, etc. *3 1,906,972 *3 1,866,378 Total voluntary retained earnings 1,906,972 2,282,061 Unappropriated retained earnings (undisposed loss) 4,815,238 4,593,321 Total surplus 14,128,862 14,282,034 Total unitholders equity 95,499,577 95,652,750 Valuation and translation adjustments Deferred hedge gain or loss (326,875) (294,846) Total valuation and translation adjustments (326,875) (294,846) Total net assets *2 95,172,702 *2 95,357,903 Total liabilities and net assets 181,306, ,199,498 15

14 (2) Profit and Loss Statement Operating Revenues 33rd Fiscal Period (December 1, 2017 May 31, 2018) (Unit: 1,000 34th Fiscal Period (June 1, 2018 November 30, 2018) Rent revenue-real estate *1 5,458,663 *1 5,481,791 Other lease business revenue *1 516,457 *1 431,579 Gain on sales of real estate properties *2, *3 2,828,671 *2, *3 302,003 Total operating revenue 8,803,792 6,215,374 Operating expenses Expenses related to rent business *1, *3 2,613,023 *1, *3 2,513,989 Asset management fee 668, ,443 Asset custody fee 19,778 15,318 Administrative service fees 43,777 40,397 Directors compensation 7,965 7,963 Audit fee 9,660 9,660 Other operating expenses 135, ,105 Total operating expenses 3,498,079 3,272,877 Operating income 5,305,713 2,942,497 Non-operating income Interest income 1,263 1,289 Reversal of dividends payable Insurance income 3,270 3,835 Refunds of fixed property tax, etc. 1,760 Other 130 3,043 Total non-operating income 7,074 8,805 Non-operating expenses Interest expenses 390, ,418 Borrowing related expenses 84,627 62,012 Interest expenses on investment corporation bonds 7,811 10,850 Amortization of investment corporation bond issuance costs 1,589 2,094 Amortization of investment unit issuance expenses 6,169 6,169 Other 5,749 9,832 Total non-operating expenses 496, ,377 Ordinary income 4,815,843 2,487,925 Income before income taxes 4,815,843 2,487,925 Income taxes-current Total income taxes Net income 4,815,238 2,487,320 Retained earnings brought forward 2,106,000 Unappropriated retained earnings (undisposed loss) 4,815,238 4,593,321 16

15 (3) Statements of Changes in Net Assets (Unitholders Equity) 33rd Fiscal Period (December 1, 2017 May 31, 2018) Balance at the beginning of the period Changes of items during the period Reversal of reserve for adjustment of temporary differences Unitholders capital / Total capital HEIWA REAL ESTATE REIT, Inc. (8966) 34th Fiscal Period Financial Report Investment surplus Unitholders equity Surplus Voluntary retained earnings Reserve for temporary differences, etc. Total voluntary retained earnings (Unit: 1,000 Unappropriated retained earnings (or undisposed loss) 81,370,715 7,406,652 2,085,761 2,085,761 1,905,706 (178,788) (178,788) 178,788 Dividends from surplus (2,084,495) Net income 4,815,238 Net changes of items other than unitholders equity Total changes of items during the period (178,788) (178,788) 2,909,531 Balance at the end of the period *1 81,370,715 7,406,652 1,906,972 1,906,972 4,815,238 Balance at the beginning of the period Changes of items during the period Reversal of reserve for adjustment of temporary differences Unitholders equity Surplus Total surplus Total unitholders equity Valuation and translation adjustments Deferred hedge gain or loss Total valuation and translation adjustments Total net assets 11,398,120 92,768,835 (357,896) (357,896) 92,410,938 Dividends from surplus (2,084,495) (2,084,495) (2,084,495) Net income 4,815,238 4,815,238 4,815,238 Net changes of items other than unitholders equity Total changes of items during the period 31,021 31,021 31,021 2,730,742 2,730,742 31,021 31,021 2,761,764 Balance at the end of the period 14,128,862 95,499,577 (326,875) (326,875) 95,172,702 17

16 34th Fiscal Period (June 1, 2018 November 30, 2018) Balance at the beginning of the period Changes of items during the period Accumulation of reserve for reduction entry Reversal of reserve for adjustment of temporary differences Dividends from surplus Net income Net changes of items other than unitholders equity Total changes of items during the period Unitholders capital / Total capital HEIWA REAL ESTATE REIT, Inc. (8966) 34th Fiscal Period Financial Report Investment surplus Unitholders equity Reserve for reduction entry Surplus Voluntary retained earnings Reserve for temporary differences, etc. (Unit: 1,000 Total voluntary retained earnings 81,370,715 7,406,652 1,906,972 1,906, , ,683 (40,593) (40,593) 415,683 (40,593) 375,089 Balance at the end of the period *1 81,370,715 7,406, ,683 1,866,378 2,282,061 Balance at the beginning of the period Changes of items during the period Accumulation of reserve for reduction entry Reversal of reserve for adjustment of temporary differences Unappropriated retained earnings (undisposed loss) Surplus Unitholders equity Total surplus Total unitholders equity Valuation and translation adjustments Deferred hedge gain or loss Total valuation and translation adjustments 4,815,238 14,128,862 95,499,577 (326,875) (326,875) (415,683) 40,593 Dividends from surplus (2,334,148) (2,334,148) (2,334,148) Net income 2,487,320 2,487,320 2,487,320 Net changes of items other than unitholders equity Total changes of items during the period 32,028 32,028 (221,916) 153, ,172 32,028 32,028 Balance at the end of the period 4,593,321 14,282,034 95,652,750 (294,846) (294,846) 18

17 Balance at the beginning of the period Changes of items during the period Accumulation of reserve for reduction entry Reversal of reserve for adjustment of temporary differences Total net assets 95,172,702 Dividends from surplus (2,334,148) Net income 2,487,320 Net changes of items other than unitholders equity Total changes of items during the period 32, ,200 Balance at the end of the period 95,357,903 19

18 (4) Statements of Cash Dividend Distributions HEIWA REAL ESTATE REIT, Inc. (8966) 34th Fiscal Period Financial Report 33rd Fiscal Period (December 1, 2017 May 31, 2018) (Unit: 34th Fiscal Period (June 1, 2018 November 30, 2018) I. Unappropriated retained earnings 4,815,238,034 4,593,321,131 II. Reversal of voluntary retained earnings Reversal of reserve for adjustment of temporary differences *1 40,593,880 *1 40,593,880 III. Distributions 2,334,148,100 2,384,890,450 Distributions per unit (excluding distributions in excess of earnings) IV. Voluntary retained earnings Provision of reserve for reduction entry (2,300) (2,350) 415,683,166 V. Retained earnings brought forward 2,106,000,648 2,249,024,561 How distributions were calculated Following the policy prescribed in Article 32, paragraph 1 of the REIT s bylaws, distributions shall be not more than the amount of unappropriated retained earnings at the end of the Fiscal Period under review and are defined as anything in excess of 90% of the amount of distributable income stipulated in Article of the Act on Special Measures Concerning Taxation. However, taxable income is not generated due to the deduction of losses carried forward for the Fiscal Period under review even without application of the provision of Article of the Act on Special Measures Concerning Taxation. In this case, according to Article 32, paragraph 1 of the REIT s bylaws, distributions shall be the amount rationally determined by the REIT. Based on this policy, the REIT made a decision to pay out 2,334,148,100 yen as distributions from earnings by appropriating the reversal of reserve for adjustment of temporary differences of 40,593,880 yen (40 yen per unit) to the balance excluding the provision of reserve for reduction entry under the application of the Special Provisions for Taxation in the case of Advanced Acquisition of Land, etc. in 2009 and 2010 of Article 66-2 of the Act on Special Measures Concerning Taxation of 415,683,166 yen and the internal reserve of 2,106,000,648 yen from the net income of 4,815,238,034 yen for the Fiscal Period under review. The REIT does not distribute monies in excess of income as prescribed in Article 32, paragraph 2 of its bylaws. Following the policy prescribed in Article 32, paragraph 1 of the REIT s bylaws, distributions shall be not more than the amount of unappropriated retained earnings at the end of the Fiscal Period under review and are defined as anything in excess of 90% of the amount of distributable income stipulated in Article of the Act on Special Measures Concerning Taxation. Based on this policy, the REIT made a decision to pay out 2,384,890,450 yen as distributions from earnings by appropriating the reversal of reserve for adjustment of temporary differences of 40,593,880 yen (40 yen per unit) to the balance excluding the internal reserve of 143,023,913 yen, which constitutes a part of the gain on sales of real estate properties from the net income of 2,487,320,483 yen for the Fiscal Period under review. The REIT does not distribute monies in excess of income as prescribed in Article 32, paragraph 2 of its bylaws. 20