Growth Potential of the J-REIT Market Japan Securities Summit March 11, 2010, Singapore F. Imanishi Mitsubishi Corp. - UBS Realty, Inc. The opinions expressed in the materials are solely the personal opinions of Fuminori Imanishi, and do not necessarily represent the opinions of MCUBSR. 1
Introduction : Mitsubishi Corp. - UBS Realty, Inc. Asset manager of two listed J-REITs Joint venture company of Mitsubishi Corp. and UBS A.G. J-REITs under management Japan Retail Fund (JRF, TSE code:8953) Portfolio size JPY 647 bn. ( USD 7.1 bn., after merger with LaSalle Japan REIT on 1 March 2010) 53 retail & 18 non-retail properties IPO : Mar. 2002 Industrial & Infrastructure Fund (IIF, TSE code:3249) Portfolio size JPY 98 bn. ( USD 1.1 bn. ) 8 industrial & 2 infrastructure properties, IPO : Oct. 2007 2
About JRF Second largest J-REIT in asset size Locations of Retail Properties Retail sector focused (95% retail properties) Just merged with LaSalle Japan REIT Latest dividend forecast for Mar. to Aug. 10 Current yield ~ 7% (*) FFO payout ratio is around 51% Stable cash flow ~ 90% of rent is under fixed rent structure Total appraisal value JPY 647 bn. LTV ~ 59% (book value basis) Urban properties: 19 Suburban properties: 34 * : Based on the unit price on Feb. 16, 2010 3
J-REITs: slowly recovering from difficult period Prolonged property market downturn and few property transactions, but: -Very limited fire sales or bulk sales from over leveraged funds/spvs - Less affected than much of Japan s financial sector by the global crisis - Lack of potential bargain-price purchase opportunities - Listed J-REITs generally have difficulty raising equity finance without attractive acquisition targets lined up - Market concern has been focused on debt refinancing issues rather than recapitalization Growing sense of imminent market recovery, but expected to be gradual - Increasing opportunities to acquire good quality property at higher yield - Equity raising by J-REITs got started in late 2009 - Several planned mergers between J-REITs lead market reorganization 4
Potential of J-REIT market Japanese economy from macro viewpoint : Large in size, mature market? But still lots of room for J-REIT market to grow J-REITs : Market cap JPY 2.8 trillion (Oct.2009) Still small compared to private real estate fund in Japan Total Investment : J-REIT JPY 7.5 trillion (Sep.2009) Private RE fund JPY 13.2 trillion (Dec.2008) Lots of room for growth when compared to other REIT markets Source: Bank of America Merrill Lynch, ARES, Urban Research Institute 5
Potential of J-REIT market (2) Japanese commercial real estate by sector - Macro viewpoint : Mature, stable and moderate growth potential generally, but Segmented basis : Big growth opportunities <Examples> Residential --- Demand for good quality urban rental apartments in growing cities Office ---------- Need for comfortable and high-tech offices with more space per employee, more efficient operations Retail ---------- Low share of large sized shopping center sales relative to total sales Japan 20% US 58%, Australia 51% (*) Strong control of SC operations by big retailers Need for independent and professional mall owners & operators (*)Source: JCSC, UBS 6
Stability of J-REIT Very limited development risk J-REITs do not conduct big development projects Stable income flow based on high occupancy J-REITs generally buy stabilized properties, very limited holdings of vacant land etc. Low volatility in rental income Traditional old-style leases still common in many sectors Small rent changes (both upside and downside) when leases are re-signed High transparency of J-REIT disclosure (appraisals every 6 months, etc.) Example Historical DPU & FFO per unit of JRF DPU FFO 7
How can upside potential of J-REITs be realized? Deregulation and new frameworks needed -Increased variety of funding methods Rights Issues, Free allocation (domestic vs. overseas) of new units in public equity offering, Unit buybacks, Preferred equity.etc. Convertible bonds in debt financing More diversified investor base is required -More retail investors, Japanese pension funds education needed All Listed Japanese Corp. All J-REITs JRF 8 Source :Each J-REIT s financial information and TSE
How can upside potential of J-REITs be realized? (2) Key factors for further growth Asset management expertise 1) Choices of investment targets and rental operation of them Asset class or sector ---- in relatively underdeveloped sectors, quality management can add significant value Individual property selection ---- Picking up winners in cyclical market 2) Focus on longer term investment results Market volatile currently, but based on stable rental cash flow, J-REITs can provide medium to long term attractive cash flow and capital gains 3) Achieving external growth Balance between support and independence from sponsor companies in acquisition activities are ideal Good corporate governance of J-REITs 4) Flexible and dynamic growth strategy Flexible LTV control utilizing various financial methods and/or growth through M&A 9
M&A case : JRF and LJR Merger Ratio JRF LJR 1 : 0.295 before 4-for-1 unit split 1 : 1.18 after unit split Unit split : Concurrent with the merger, JRF s units were split 4-for-1 Effective Date of Merger and Unit Split : March 1, 2010 Nippon Building Fund JRF (After Merger) Japan Real Estate JRF (Before Merger) Nomura Real Estate Office Japan Prime Realty Orix Real Estate DA Office Nippon Comm -ercial Kenedix Realty United Urban 10
M&A case : JRF and LJR~ Primary Effects Improved income stability Increased equity market cap/ liquidity Negative goodwill to allow flexible FFO payout ratio, smooth dividend growth Synergies of the Merger Efficient asset management Cash management Reduction of overhead costs Dividend per Unit NAV per Unit NOI Yield (book) +5.52% Latest Forecast for 2010/8 Period (After Merger) 14,095 Yen After 4-for-1 unit split : 3,523 Yen +2.23% 569,797 Yen After 4-for-1 unit split : 142,449 Yen +0.15% 5.48% Previous Forecast for 2010/8 Period 13,358 Yen 557,364 Yen 5.33% 11
Disclaimer The contents of this document, including summary notes, quotes, data and other information, are provided solely for informational purposes and not intended for the purpose of soliciting investment in, or as a recommendation to purchase or sell, any specific products. Please be aware that matters described herein may change or cease to exist without prior notice of any kind. This document contains forward-looking statements and anticipations of future results, based on current assumptions and beliefs in light of currently available information and resources. Risks and uncertainties, both known and unknown, including those relating to the future performance of the retail market in Japan, interest rate fluctuations, competitive scenarios, and changing regulations or taxations, may cause performance to be materially different from those explicitly or implicitly expressed in this document. With respect to any and all terms herein, including without limitation, this document, the information provided is intended to be thorough. However, no absolute assurance or warranties are given with respect to the accuracy or completeness thereof. Unless otherwise specified, this document was created based on Japanese accounting system. Neither JRF nor Mitsubishi Corp.-UBS Realty Inc. (MCUBSR) shall be liable for any errors, inaccuracies, loss or damage, or for any actions taken in reliance thereon, or undertake any obligation to publicly update the information contained in this document after the date of this document. Asset Management Company: Mitsubishi Corp.-UBS Realty Inc. (Financial Instrument Firm under License No. 403 of the Director of Kanto Local Finance Bureau ) 12