(REIT) Financial Report for Fiscal Period Ended January 31, 2018 March 16, 2018 REIT Securities Issuer: Star Asia Investment Corporation (SAR) Stock Exchange Listing: Tokyo Stock Exchange Securities Code: 3468 URL: http://starasia-reit.com Representative: Atsushi Kato, Executive Director Asset Management Company: Representative: Contact: Star Asia Investment Management Co., Ltd. (the Asset Management Company) Atsushi Kato, President and CEO Toru Sugihara, Director and CFO TEL: 03-5425-1340 Scheduled date of commencement of cash distribution payment: April 16, 2018 Scheduled date of submission of securities report: April 26, 2018 Preparation of supplementary financial results briefing materials: Holding of financial results briefing session: Yes Yes (for institutional investors and analysts) (Amounts are rounded down to the nearest million yen) 1. Status of Management and Assets for Fiscal Period Ended January 31, 2018 (from August 1, 2017 to January 31, 2018) (1) Management Status (% figures are the rate of period-on-period increase (decrease)) Fiscal period Operating revenue Operating income Ordinary income Net income million yen % million yen % million yen % million yen % Ended Jan. 2018 3,194 (0.5) 2,051 (2.2) 1,876 2.3 1,802 (1.7) Ended Jul. 2017 3,211 59.2 2,098 76.2 1,833 70.8 1,832 70.8 Fiscal period Net income Ratio of net income Ratio of ordinary income Ratio of ordinary income per unit to equity to total assets to operating revenue yen % % % Ended Jan. 2018 4,349 4.3 2.3 58.7 Ended Jul. 2017 4,697 4.8 2.4 57.1 (2) Status of Cash Distribution Fiscal period Cash distribution per unit (not including cash distribution in excess of earnings) Total cash distribution (not including cash distribution in excess of earnings) Cash distribution in excess of earnings per unit Total cash distribution in excess of earnings Cash distribution payout ratio Ratio of cash distribution to net assets yen million yen yen million yen % % Ended Jan. 2018 4,077 1,689 0 0 93.7 4.0 Ended Jul. 2017 4,423 1,832 0 0 100.0 4.4 (Note1) For the fiscal period ended July 31, 2017, cash distribution payout ratio is calculated by the following formula due to changes in the number of investment units during the period following issuance of new investment units during the period: Cash distribution payout ratio = Total cash distribution (not including cash distribution in excess of earnings) Net income 100 (Note2) For the fiscal period ended January 31, 2018, total cash distribution differs from net income due to internal reserve. (3) Financial Position Fiscal period Total assets Net assets Equity ratio Net assets per unit million yen million yen % yen Ended Jan. 2018 82,154 41,870 51.0 101,063 Ended Jul. 2017 83,609 41,892 50.1 101,116 (4) Status of Cash Flows Fiscal period Net cash Net cash Net cash Cash and cash equivalents provided by (used in) provided by (used in) provided by (used in) at end of period operating activities investing activities financing activities million yen million yen million yen million yen Ended Jan. 2018 4,220 (1,027) (3,210) 4,820 Ended Jul. 2017 4,721 (18,283) 13,900 4,837-1 -
2. Management Status Forecast for Fiscal Period Ending July 31, 2018 (from February 1, 2018 to July 31, 2018) and Fiscal Period Ending January 31, 2019 (from August 1, 2018 to January 31, 2019) (% figures are the rate of period-on-period increase (decrease)) Fiscal period Operating revenue Operating income Ordinary income Net income Cash distribution per unit (not including cash distribution in excess of earnings) Cash distribution in excess of earnings per unit million yen % million yen % million yen % million yen % yen yen Ending Jul. 2018 2,751 (13.9) 1,504 (26.7) 1,231 (34.4) 1,230 (31.7) 2,750 0 Ending Jan. 2019 2,732 (0.7) 1,497 (0.5) 1,320 7.2 1,319 7.2 2,804 0 (Reference) Forecast net income per unit (fiscal period ending July 31, 2018) 2,615 yen Forecast net income per unit (fiscal period ending January 31, 2019) 2,804 yen * Other (1) Changes in Accounting Policies, Changes in Accounting Estimates, and Retrospective Restatement 1 Changes in accounting policies accompanying amendments to accounting standards, etc.: No 2 Changes in accounting policies other than 1: No 3 Changes in accounting estimates: No 4 Retrospective restatement: No (2) Total Number of Investment Units Issued and Outstanding 1 Total number of investment units issued and outstanding (including own investment units) at end of period Fiscal period ended Jan. 31, 2018 414,300 units Fiscal period ended Jul. 31, 2017 414,300 units 2 Number of own investment units at end of period Fiscal period ended Jan. 31, 2018 0 units Fiscal period ended Jul. 31, 2017 0 units (Note) For the number of investment units serving as the basis for calculation of net income per unit, please see Notes on Per Unit Information on page 24. * Presentation of Status of Implementation of Audit Procedures At the time of disclosure of this financial report, audit procedures for financial statements pursuant to the Financial Instruments and Exchange Act have not been completed. * Explanation of Appropriate Use of Management Status Forecast, and Other Matters of Special Note The management status outlook and other forward-looking statements contained in this document are based on information that are currently available and certain assumptions that are deemed reasonable by SAR. Accordingly, the actual management status, etc. may differ materially due to various factors. In addition, the forecast figures are the current figures calculated under the assumptions described in Assumptions Underlying Operating Results Forecasts for Fiscal Period Ending July 31, 2018 and Fiscal Period Ending January 31, 2019 on pages 3-4. Accordingly, the actual operating revenue, operating income, ordinary income, net income, cash distribution per unit (not including cash distribution in excess of earnings) and cash distribution in excess of earnings per unit may vary due to acquisition/disposition of real estate, etc., trends of the real estate market, etc., fluctuations in interest rates or other changes in the circumstances surrounding SAR, etc. in the future. In addition, the forecast is not a guarantee of the amount of cash distribution. - 2 -
Assumptions Underlying Operating Results Forecasts for Fiscal Period Ending July 31, 2018 and Fiscal Period Ending January 31, 2019 Item Calculation period Investment assets Operating revenue Operating expenses NOI (Net Operating Income) Non-operating expenses Assumptions Fiscal period ending July 31, 2018: February 1, 2018 July 31, 2018 (181 days) Fiscal period ending January 31, 2019: August 1, 2018 January 31, 2019 (184 days) SAR acquired the real estate beneficiary interests in trust for the following 6 properties (hereafter referred to as the Acquisition in these assumptions) in February 2018 and there is a change in the invested assets. As of today, SAR owns the real estate beneficiary interests in trust of 29 properties and 2 mezzanine loan debts (hereafter referred to as the Existing Assets in these assumptions; of the Existing Assets, hereafter real estate beneficiary interests in trust are referred to as the Existing Assets (real estate, etc.) and mezzanine loan debts are referred to as the Existing Assets (mezzanine) in these assumptions). It is assumed that there are no other changes (new property acquisitions, sales of the Existing Assets, etc.) in the investment assets through the end of the fiscal period ending January 31, 2019. <Acquisition> Property names: Nihonbashi Hamacho Park Building, Urban Park Ryokuchi Koen, Urban Park Koenji, Funabashi Nishiura Logistics I, Funabashi Nishiura Logistics II, Matsubushi Logistics Acquisition date: February 2, 2018 In practice, this may vary due to changes in investment assets. Rent revenues from the Existing Assets (real estate, etc.) are calculated based on the rent stated in the lease agreements that are effective as of today taking factors such as market movement into consideration. It is assumed that no rent payments will be delinquent or declined by tenants. Interest revenues or dividend revenues from the Existing Assets (mezzanine) are calculated based on outlines or trust agreements which define contents of the Existing Assets (mezzanine) that are effective as of today. It is also assumed that no interest payments or dividend payments will be declined. Among expenses related to rent business of the Existing Assets, which are the principal operating expenses, expenses excluding depreciation are calculated on the basis of historical data, reflecting variable factors of expenses. Fixed property taxes, city planning taxes and other public charges are expected to be 175 million yen for the fiscal period ending July 31, 2018 and 175 million yen for the fiscal period ending January 31, 2019. For the properties related to the Acquisition, fixed property taxes, city planning taxes and other public charges are settled on a pro rata basis based on the number of days of ownership with the sellers at the time of acquisition of the properties. However, in the case of SAR, the settled amount is included in the acquisition cost and thus not be recorded as expenses in the fiscal periods ending July 31, 2018 and ending January 31, 2019. In addition, fixed property taxes, city planning taxes and other public charges for the properties related to the Acquisition will be recorded as expenses from the fiscal period ending July 31, 2019. For the expenditures for repair and maintenance of buildings, 80 million yen is expected for the fiscal period ending July 31, 2018 and 62 million yen is expected for the fiscal period ending January 31, 2019 based on repair and maintenance plans drawn up by the Asset Management Company. However, the expenditures for repair and maintenance for the fiscal periods could differ significantly from the estimated amounts, as expenditures may arise urgently due to damage to buildings and such caused by unexpected factors, and because the variance in amounts generally tends to be significant from year to year and repair and maintenance expenses do not arise regularly. Depreciation is calculated using the straight line method, including incidental expenses and others, and is expected to be 356 million yen for the fiscal period ending July 31, 2018 and 367 million yen for the fiscal period ending January 31, 2019. The NOI of SAR s portfolio (the Existing Assets (real estate, etc.)) is expected to be 2,113 million yen for the fiscal period ending July 31, 2018 and 2,117 million yen for the fiscal period ending January 31, 2019. NOI is calculated by using the following calculation method. NOI = rent revenue rent expenses (excluding depreciation) Temporary expenses are expected to be 7 million yen for the fiscal period ending July 31, 2018 as the issuance cost of new investment units conducted in February 2018. Interest expense and other financial expenses are expected to be 266 million yen in total for the fiscal period ending July 31, 2018 and 176 million yen in total for the fiscal period ending January 31, 2019. Temporary expenses are expected to be 93 million yen for the fiscal period ending July 31, 2018 from new borrowings and refinancing as described in Debt financing below. - 3 -
Item Debt financing Investment units Cash distribution per unit (not including cash distribution in excess of earnings) Cash distribution in excess of earnings per unit Other Assumptions The total amount of interest-bearing liabilities is assumed to be 43,230 million yen as of the end of the fiscal period ending July 31, 2018, and 43,040 million yen as of the end of the fiscal period ending January 31, 2019. As of today, SAR has 43,510 million yen of outstanding borrowings. It is assumed to prepay 280 million yen during the fiscal period ending July 31, 2018 by using the payment for the issuance of the new investment units through third-party allotment conducted on February, 2018. It is assumed to prepay 190 million yen during the fiscal period ending January 31, 2019 by using consumption tax refund resulting property acquisition in February 2018 and payment of other various expenses. It is assumed that 7,300 million yen of loans payable due for repayment in the fiscal period ending July 31, 2018 will be refinanced in the same amount. Excluding the above, it is assumed that there will be no new borrowings or repayments of existing borrowings including prepayments until the end of the fiscal period ending January 31, 2019. The total number of investment units issued and outstanding as of the date of this document, which is 470,624 units, is assumed. It is assumed that there will be no changes in the number of investment units issued due to additional issuance, etc. of new investment units through the end of the fiscal period ending January 31, 2019. Cash distribution per unit (not including cash distribution in excess of earnings) is calculated on the assumption described in the cash distribution policy stipulated in SAR s Articles of Incorporation. It is assumed that derivative transactions (interest rate swaps) will continue to be conducted. However, It is assumed that deferred losses on hedges, which is an item of deduction from net assets (those provided in Article 2, item 30 (b) of the Ordinance on Accountings of Investment Corporations), is nonaccrual until the end of the fiscal period ending January 31, 2019, and cash distribution per unit (not including cash distribution in excess of earnings) will not be affected by changes in items of deduction from net assets in the calculation. It is possible that the cash distribution per unit (not including cash distribution in excess of earnings) could change due to various factors, including changes in investment assets, changes in rent revenue accompanying changes in tenants, etc., or unexpected repair and maintenance, etc. In addition, cash distribution per unit (not including cash distribution in excess of earnings) may be affected by changes in items of deduction from net assets. It is expected that a reversal of reserve for reduction entry of 63 million yen will be made in the fiscal period ending July 31, 2018. It is assumed that no deferred losses on hedges will be incurred, which is an item of deduction from net assets, as described above. Of cash distribution in excess of earnings, that attributable to allowance for temporary difference adjustment is not scheduled at this point. In addition, of cash distribution in excess of earnings, that falling under the category of cash distribution accompanying decrease in capital, etc. under tax law is not scheduled at this point. Forecasts are based on the assumption that revisions that impact the above forecast figures will not be made to laws and regulations, tax systems, accounting standards, listing rules, and rules of The Investment Trusts Association, Japan etc. Forecasts are based on the assumption that there will be no major unforeseen changes to general economic trends and real estate market conditions, etc. - 4 -
3. Financial Statements (1) Balance Sheet 3rd fiscal period (As of July 31, 2017) 4th fiscal period (As of January 31, 2018) Assets Current assets Cash and deposits 1,598,847 1,667,713 Cash and deposits in trust 3,239,091 3,153,262 Operating accounts receivable 52,745 44,669 Prepaid expenses 108,945 90,216 Deferred tax assets 20 - Consumption taxes receivable 261,743 - Other - 5,354 Total current assets 5,261,393 4,961,216 Non-current assets Property, plant and equipment Buildings in trust 25,006,453 24,909,318 Accumulated depreciation (764,163) (1,055,284) Buildings in trust, net 24,242,289 23,854,033 Structures in trust 9,606 9,606 Accumulated depreciation (397) (733) Structures in trust, net 9,209 8,872 Machinery and equipment in trust 11,270 20,707 Accumulated depreciation (499) (1,240) Machinery and equipment in trust, net 10,771 19,467 Tools, furniture and fixtures in trust 9,971 20,207 Accumulated depreciation (1,228) (2,314) Tools, furniture and fixtures in trust, net 8,743 17,892 Land in trust 50,426,286 48,929,717 Total property, plant and equipment 74,697,300 72,829,984 Intangible assets Leasehold rights in trust 3,459,138 3,459,138 Total intangible assets 3,459,138 3,459,138 Investments and other assets Investment securities - 734,500 Long-term prepaid expenses 146,256 121,333 Lease and guarantee deposits 10,000 10,000 Other 35,321 38,473 Total investments and other assets 191,577 904,307 Total non-current assets 78,348,016 77,193,430 Total assets 83,609,410 82,154,646-5 -
3rd fiscal period (As of July 31, 2017) 4th fiscal period (As of January 31, 2018) Liabilities Current liabilities Operating accounts payable 227,743 292,304 Current portion of long-term loans payable 8,680,000 7,300,000 Accounts payable - other 269,194 289,696 Accrued expenses 7,030 6,054 Income taxes payable 1,023 74,345 Accrued consumption taxes 12,734 126,003 Advances received 589,678 338,283 Other 9,492 10,925 Total current liabilities 9,796,897 8,437,613 Non-current liabilities Long-term loans payable 30,050,000 30,050,000 Tenant leasehold and security deposits in trust 1,863,336 1,794,980 Other 6,635 1,507 Total non-current liabilities 31,919,971 31,846,487 Total liabilities 41,716,869 40,284,100 Net assets Unitholders equity Unitholders capital 40,031,185 40,031,185 Surplus Unappropriated retained earnings (undisposed loss) 1,832,669 1,802,393 Total surplus 1,832,669 1,802,393 Total unitholders equity 41,863,855 41,833,579 Valuation and translation adjustments Deferred gains or losses on hedges 28,686 36,966 Total valuation and translation adjustments 28,686 36,966 Total net assets *1 41,892,541 *1 41,870,546 Total liabilities and net assets 83,609,410 82,154,646-6 -
(2) Statement of Income 3rd fiscal period From: February 1, 2017 To: July 31, 2017 4th fiscal period From: August 1, 2017 To: January 31, 2018 Operating revenue Lease business revenue *1 2,146,216 *1 2,255,617 Other lease business revenue *1 166,563 *1 152,654 Gain on sales of real estate property *2 898,612 *2 771,663 Other revenue - 14,412 Total operating revenue 3,211,392 3,194,348 Operating expenses Expenses related to rent business *1 836,576 *1 841,650 Asset management fee 189,465 211,612 Asset custody and administrative service fees 16,912 19,515 Directors compensations 2,400 2,400 Other operating expenses 67,794 67,331 Total operating expenses 1,113,150 1,142,509 Operating income 2,098,241 2,051,838 Non-operating income Interest income 21 24 Interest on refund - 771 Total non-operating income 21 795 Non-operating expenses Interest expenses 82,120 92,575 Borrowing related expenses 129,149 55,587 Investment unit issuance expenses 48,461 27,928 Other 5,000 - Total non-operating expenses 264,731 176,091 Ordinary income 1,833,531 1,876,542 Income before income taxes 1,833,531 1,876,542 Income taxes - current 1,026 74,348 Income taxes - deferred (8) 20 Total income taxes 1,018 74,369 Net income 1,832,513 1,802,173 Retained earnings brought forward 155 220 Unappropriated retained earnings (undisposed loss) 1,832,669 1,802,393-7 -
(3) Statement of Unitholders Equity 3rd fiscal period (from February 1, 2017 to July 31, 2017) Unitholders equity Unitholders capital Capital deduction Unitholders capital Allowance for temporary difference adjustment Total capital deduction Unitholders capital, net Balance at beginning of the period 33,541,125 (26,197) (26,197) 33,514,927 Changes of items during the period Issuance of new investment units 6,490,060 6,490,060 Dividends from surplus Reversal of allowance for temporary difference adjustment 26,197 26,197 26,197 Net income Net changes of items other than unitholders equity Total changes of items during the period 6,490,060 26,197 26,197 6,516,258 Balance at end of the period *1 40,031,185 - - 40,031,185 Unitholders equity Valuation and translation adjustments Surplus Unappropriated retained earnings (undisposed loss) Total surplus Total unitholders equity Deferred gains or losses on hedges Total valuation and translation adjustments Total net assets Balance at beginning of the period Changes of items during the period Issuance of new investment units 1,099,059 1,099,059 34,613,987 60,135 60,135 34,674,123 6,490,060 6,490,060 Dividends from surplus (1,072,706) (1,072,706) (1,072,706) (1,072,706) Reversal of allowance for temporary difference adjustment (26,197) (26,197) - - Net income 1,832,513 1,832,513 1,832,513 1,832,513 Net changes of items other than unitholders equity Total changes of items during the period (31,449) (31,449) (31,449) 733,610 733,610 7,249,868 (31,449) (31,449) 7,218,418 Balance at end of the period 1,832,669 1,832,669 41,863,855 28,686 28,686 41,892,541-8 -
4th fiscal period (from August 1, 2017 to January 31, 2018) Balance at beginning of the period Changes of items during the period Unitholders capital Unitholders equity Surplus Unappropriated retained earnings (undisposed loss) Total surplus Total unitholders equity Valuation and translation adjustments Deferred gains or losses on hedges Total valuation and translation adjustments Total net assets 40,031,185 1,832,669 1,832,669 41,863,855 28,686 28,686 41,892,541 Dividends from surplus (1,832,448) (1,832,448) (1,832,448) (1,832,448) Net income 1,802,173 1,802,173 1,802,173 1,802,173 Net changes of items other than unitholders equity Total changes of items during the period 8,280 8,280 8,280 - (30,275) (30,275) (30,275) 8,280 8,280 (21,995) Balance at end of the period *1 40,031,185 1,802,393 1,802,393 41,833,579 36,966 36,966 41,870,546-9 -
(4) Statement of Cash Distributions 3rd fiscal period From: February 1, 2017 To: July 31, 2017 (Unit: yen) 4th fiscal period From: August 1, 2017 To: January 31, 2018 I. Unappropriated retained earnings 1,832,669,478 1,802,393,825 II. Cash distribution [Cash distribution per unit] Cash distribution of earnings [Cash distribution of earnings per unit] 1,832,448,900 [4,423] 1,832,448,900 [4,423] 1,689,101,100 [4,077] 1,689,101,100 [4,077] III. Retained earnings carried forward 220,578 113,292,725 Method of calculation of amount of cash distribution 3rd fiscal period (from February 1, 2017 to July 31, 2017): Pursuant to the cash distribution policy provided in Article 35, Paragraph 1 of SAR s Articles of Incorporation, SAR shall distribute in excess of the amount equivalent to 90% of the amount of distributable earnings of SAR as defined in Article 67-15 of the Act on Special Measures Concerning Taxation. In accordance with such policy, concerning cash distribution of earnings (not including cash distribution in excess of earnings), the decision was made to distribute 1,832,448,900 yen, which is the entire amount of the unappropriated retained earnings but excluding the portion where cash distribution of earnings per unit becomes a fractional amount of less than 1 yen, as cash distribution of earnings. 4th fiscal period (from August 1, 2017 to January 31, 2018): Pursuant to the cash distribution policy provided in Article 35, Paragraph 1 of SAR s Articles of Incorporation, SAR shall distribute in excess of the amount equivalent to 90% of the amount of distributable earnings of SAR as defined in Article 67-15 of the Act on Special Measures Concerning Taxation. In accordance with such policy, concerning cash distribution of earnings (not including cash distribution in excess of earnings), the decision was made considering 771,663,395 yen of gain on sales of real estate property to distribute 1,689,101,100 yen, which is the minimum multiple of the total number of issued and outstanding investment units, with amount exceeding 90% of income before income taxes and 113,072,147 yen of net income was decided to be reserved internally. - 10 -
(5) Statement of Cash Flows 3rd fiscal period From: February 1, 2017 To: July 31, 2017 4th fiscal period From: August 1, 2017 To: January 31, 2018 Cash flows from operating activities Income before income taxes 1,833,531 1,876,542 Depreciation 287,475 305,290 Investment unit issuance expenses 48,461 27,928 Interest income (21) (24) Interest expenses 82,120 92,575 Decrease (increase) in operating accounts receivable (2,655) 8,075 Decrease (increase) in consumption taxes refund receivable (261,743) 261,743 Increase (decrease) in accrued consumption taxes (63,671) 113,269 Decrease (increase) in prepaid expenses (20,666) 18,729 Decrease (increase) in long-term prepaid expenses (19,099) 24,922 Increase (decrease) in operating accounts payable 226 84,485 Increase (decrease) in accounts payable - other 59,804 14,243 Increase (decrease) in advances received 270,497 (251,394) Decrease from sales of property, plant and equipment in trust 2,579,413 1,744,836 Other, net 9,366 (5,941) Subtotal 4,803,041 4,315,282 Interest income received 21 24 Interest expenses paid (80,426) (93,627) Income taxes paid (848) (1,027) Net cash provided by (used in) operating activities 4,721,788 4,220,652 Cash flows from investing activities Purchase of property, plant and equipment in trust (18,557,651) (224,406) Repayments of tenant leasehold and security deposits in trust (208,168) (128,352) Proceeds from tenant leasehold and security deposits in trust 482,179 59,996 Purchase of investment securities - (734,500) Net cash provided by (used in) investing activities (18,283,641) (1,027,262) Cash flows from financing activities Increase in short-term loans payable 600,000 - Decrease in short-term loans payable (1,600,000) - Proceeds from long-term loans payable 9,830,000 - Repayments of long-term loans payable (300,000) (1,380,000) Proceeds from issuance of investment units 6,441,599 - Dividends paid (1,070,613) (1,830,353) Net cash provided by (used in) financing activities 13,900,986 (3,210,353) Net increase (decrease) in cash and cash equivalents 339,133 (16,962) Cash and cash equivalents at beginning of period 4,498,806 4,837,939 Cash and cash equivalents at end of period *1 4,837,939 *1 4,820,976-11 -
(6) Notes on the Going Concern Assumption Not applicable. (7) Notes on Matters Concerning Significant Accounting Policies 1. Evaluation standards and methods of valuation of securities 2. Method of depreciation of non-current assets 3. Accounting for deferred assets 4. Standards for revenue and expense recognition 5. Method of hedge accounting 6. Scope of funds in the statement of cash flows (cash and cash equivalents) 7. Other significant matters serving as the basis for preparation of financial statements Other securities: Those with fair value Fair value method or market value method (Variances are directly included in net assets.) Property, plant and equipment (including trust assets) The straight-line method is adopted. The useful life of primary property, plant and equipment is as follows: Buildings 5-69 years Structures 10-15 years Machinery and equipment 10 years Tools, furniture and fixtures 3-6 years Investment unit issuance expenses The entire amount is expensed as incurred. Accounting for fixed property tax, etc. Accounting for fixed property tax, city planning tax, depreciable asset tax, etc. ( fixed property tax, etc. ) on real estate or beneficiary interest in trust for real estate held is that, of the tax amount assessed and determined, the amount corresponding to the concerned calculation period is expensed as expenses related to rent business. The amount equivalent to fixed property tax, etc. in the initial fiscal year borne by SAR upon acquisition of real estate or beneficiary interest in trust for real estate is not recognized as expenses but included in the cost of acquisition of the concerned real estate, etc. In the fiscal period under review, there was no amount equivalent to fixed property tax, etc. included in the cost of acquisition of real estate, etc. (1) Hedge accounting approach Deferral hedge accounting is adopted. (2) Hedging instruments and hedged items Hedging instruments: Interest rate swap transaction Hedged items: Interest on loans (3) Hedging policy SAR conducts derivative transactions for the purpose of hedging the risks provided in its Articles of Incorporation pursuant to rules and regulations. (4) Method of assessing the effectiveness of hedging The effectiveness of hedging is assessed by comparing the cumulative change in cash flows of the hedging instruments with the cumulative change in cash flows of the hedged items and verifying the ratio of the amount of change in the two. The funds (cash and cash equivalents) in the statement of cash flows comprise cash on hand and cash in trust, demand deposits and deposits in trust, and short-term investments with a maturity of three months or less from the date of acquisition that are readily convertible to cash and that are subject to an insignificant risk of changes in value. (1) Accounting for beneficiary interest in trust for real estate, etc. Concerning beneficiary interest in trust for real estate, etc. held, all accounts of assets and liabilities within trust assets as well as all accounts of revenue and expenses from the trust assets are recognized in the relevant account item of the balance sheet and the statement of income. The following material items of the trust assets recognized in the relevant account item are separately listed on the balance sheet. 1 Cash and deposits in trust 2 Buildings in trust; Structures in trust; Machinery and equipment in trust; Tools, furniture and fixtures in trust; Land in trust 3 Leasehold rights in trust 4 Tenant leasehold and security deposits in trust (2) Accounting for consumption tax, etc. The accounting for consumption tax and local consumption tax is the taxes are excluded from the transaction amounts. Non-deductible consumption tax on acquisition of assets is included in the acquisition cost of each asset. - 12 -
(8) Notes to the Financial Statements [Notes to the Balance Sheet] *1 Minimum net assets as provided in Article 67, Paragraph 4 of the Act on Investment Trusts and Investment Corporations 3rd fiscal period (As of July 31, 2017) 4th fiscal period (As of January 31, 2018) 50,000 50,000 2 Allowance for temporary difference adjustment 3rd fiscal period (From: February 1, 2017 To: July 31, 2017) 1. Reason for the difference or reversal items and amount Item Deferred gains or losses on hedges 2. Method of reversal Reason for the difference Deferred gains or losses on hedges Initial amount Balance at beginning of the period Allowance Reversal Balance at end of the period - - 26,197-26,197 - Reversal will be made due to changes of fair value. Reason for the reversal Changes of fair value 4th fiscal period (From: August 1, 2017 To: January 31, 2018) Not applicable - 13 -
[Notes to the Statement of Income] *1 Breakdown of operating income (loss) from real estate leasing 3rd fiscal period From: February 1, 2017 To: July 31, 2017 4th fiscal period From: August 1, 2017 To: January 31, 2018 A. Operating revenue from real estate leasing Lease business revenue Rental revenue Common area maintenance revenue Parking revenue Facility use revenue Other rental revenue Other lease business revenue Utilities reimbursement Other revenue 1,895,917 181,193 58,706 8,344 2,054 2,146,216 122,615 43,948 166,563 1,997,374 187,680 60,958 7,738 1,865 2,255,617 134,400 18,254 152,654 Total operating revenue from real estate leasing 2,312,779 2,408,272 B. Operating expenses from real estate leasing Expenses related to rent business Management fee Utilities expenses Taxes and dues Repair expenses Trust fee Insurance premium Depreciation Other expenses 124,462 126,591 156,208 62,667 8,724 3,635 287,475 66,810 121,151 137,730 139,112 59,548 10,740 3,772 305,290 64,304 Total operating expenses from real estate leasing 836,576 841,650 C. Operating income (loss) from real estate leasing [A-B] 1,476,202 1,566,622 *2 Breakdown of gain on sales of real estate property 3rd fiscal period (From: February 1, 2017 To: July 31, 2017) Urban Park Yoyogikoen Real Estate Sale Income 1,100,000 Real Estate Sale Cost 902,696 Other Real Estate Sale Expenses 44,860 Gain on Real Estate Sale 152,443 Oak Minami Azabu (49% of quasi co ownership interest) Real Estate Sale Income 2,459,800 Real Estate Sale Cost 1,676,717 Other Real Estate Sale Expenses 36,913 Gain on Real Estate Sale 746,168-14 -
4th fiscal period (From: August 1, 2017 To: January 31, 2018) Oak Minami Azabu (51% of quasi co ownership interest) Real Estate Sale Income 2,560,200 Real Estate Sale Cost 1,744,836 Other Real Estate Sale Expenses 43,699 Gain on Real Estate Sale 771,663 [Notes to the Statement of Unitholders Equity] *1 Total number of investment units authorized and total number of investment units issued and outstanding 3rd fiscal period From: February 1, 2017 To: July 31, 2017 4th fiscal period From: August 1, 2017 To: January 31, 2018 Total number of investment units authorized 10,000,000 units 10,000,000 units Total number of investment units issued and outstanding 414,300 units 414,300 units [Notes to the Statement of Cash Flows] *1 Reconciliation of cash and cash equivalents at end of period to the amount of balance sheet items 3rd fiscal period From: February 1, 2017 To: July 31, 2017 4th fiscal period From: August 1, 2017 To: January 31, 2018 Cash and deposits 1,598,847 1,667,713 Cash and deposits in trust 3,239,091 3,153,262 Cash and cash equivalents 4,837,939 4,820,976 [Notes on Lease Transactions] Operating leases (as lessor) Future minimum lease payments 3rd fiscal period As of July 31, 2017 4th fiscal period As of Jan. 31, 2018 Not later than 1 year 1,807,841 1,597,468 Later than 1 year 3,858,017 3,175,890 Total 5,665,859 4,773,358-15 -
[Notes on Financial Instruments] 1. Matters concerning status of financial instruments (1) Policy for handling financial instruments SAR shall procure funds to allocate to acquisition of real estate related assets, repayment of interest bearing liabilities, etc. through mainly issuance of investment units, borrowing from financial institutions, issuance of investment corporation bonds, etc. Upon procuring funds through interest bearing liabilities, due consideration shall be given to fund procurement agility and financial stability. (2) Description of financial instruments and associated risks, and risk management system The funds procured through loans, which shall be for the purpose of mainly acquisition of assets, are exposed to liquidity risk until the repayment date, but the concerned risks are managed by taking such measures as lengthening the procurement periods and staggering the maturities. In addition, loans with floating interest rates are exposed to interest rate fluctuation risk, but derivative transactions (interest rate swap transactions) are utilized as hedging instruments to, in effect, convert interest rates to fixed rates in order to mitigate that risk. For the hedge accounting approach, hedging instruments, hedged items, hedging policy and method of assessing the effectiveness of hedging, please refer to 5. Method of hedge accounting described under Notes on Matters Concerning Significant Accounting Policies earlier in this document. (3) Supplementary explanation to matters concerning fair value, etc. of financial instruments Not applicable. 2. Matters concerning fair value, etc. of financial instruments The carrying amount and fair value as of July 31, 2017, and the amount of difference between these, are as follows: Carrying amount Fair value Amount of difference (1) Cash and deposits 1,598,847 1,598,847 - (2) Cash and deposits in trust 3,239,091 3,239,091 - (3) Investment securities - - - Assets total 4,837,939 4,837,939 - (4) Current portion of long-term loans payable 8,680,000 8,680,000 - (5) Long-term loans payable 30,050,000 30,050,000 - Liabilities total 38,730,000 38,730,000 - (6) Derivative transactions (*) 28,686 28,686 - The carrying amount and fair value as of January 31, 2018, and the amount of difference between these, are as follows: Carrying amount Fair value Amount of difference (1) Cash and deposits 1,667,713 1,667,713 - (2) Cash and deposits in trust 3,153,262 3,153,262 - (3) Investment securities 734,500 734,500 - Assets total 5,555,476 5,555,476 - (4) Current portion of long-term loans payable 7,300,000 7,300,000 - (5) Long-term loans payable 30,050,000 30,050,000 - Liabilities total 37,350,000 37,350,000 - (6) Derivative transactions (*) 36,966 36,966 - (*) Assets and liabilities arising from derivative transactions are offset and presented in the net amount, with the balance shown in parentheses ( ) when in a net liability position. - 16 -
(Note 1) Method of calculation of the fair value of financial instruments (1) Cash and deposits; (2) Cash and deposits in trust; (4) Current portion of long-term loans payable Because these are settled in a short period of time, the fair value is approximately the same as the book value and thus stated at that book value. (3) Investment securities Because interest income etc. from mezzanine loan debt are based on floating interest rates, the fair value is approximately the same as the book value and thus stated at that book value. (5) Long-term loans payables Because long-term loans payable are all with floating interest rates under terms and conditions that interest rates be reviewed every set period of time, the fair value is approximately the same as the book value and thus stated at that book value. (6) Derivative transactions Please refer to Notes on Derivative Transactions later in this document. (Note 2) Financial instruments for which estimation of fair value is recognized to be difficult Category 3rd fiscal period As of July 31, 2017 4th fiscal period As of January 31, 2018 Tenant leasehold and security deposits in trust 1,863,336 1,794,980 Tenant leasehold and security deposits in trust are not subject to valuation at fair value, because a reasonable estimation of cash flows is recognized to be extremely difficult due to there being no market price and difficulty of calculating the actual deposit period from when lessees move in to when they move out. (Note 3) Amount of redemption of monetary claims scheduled to be due after the date of settlement of accounts (July 31, 2017) Not later than 1 year Later than 1 year and not later than 2 years Later than 2 years and not later than 3 years Later than 3 years and not later than 4 years Later than 4 years and not later than 5 years Later than 5 years Cash and deposits 1,598,847 - - - - - Cash and deposits in trust 3,239,091 - - - - - Investment securities - - - - - - Total 4,837,939 - - - - - (January 31, 2018) Not later than 1 year Later than 1 year and not later than 2 years Later than 2 years and not later than 3 years Later than 3 years and not later than 4 years Later than 4 years and not later than 5 years Later than 5 years Cash and deposits 1,667,713 - - - - - Cash and deposits in trust 3,153,262 - - - - - Investment securities - - - - - 734,500 Total 4,820,976 - - - - 734,500 (Note 4) Amount of repayment of loans scheduled to be due after the date of settlement of accounts (July 31, 2017) Not later than 1 year Later than 1 year and not later than 2 years Later than 2 years and not later than 3 years Later than 3 years and not later than 4 years Later than 4 years and not later than 5 years Later than 5 years Long-term loans payable 8,680,000 7,300,000 7,300,000 11,300,000 4,150,000 - Total 8,680,000 7,300,000 7,300,000 11,300,000 4,150,000 - (January 31, 2018) Not later than 1 year Later than 1 year and not later than 2 years Later than 2 years and not later than 3 years Later than 3 years and not later than 4 years Later than 4 years and not later than 5 years Later than 5 years Long-term loans payable 7,300,000 7,300,000 11,300,000 7,300,000 4,150,000 - Total 7,300,000 7,300,000 11,300,000 7,300,000 4,150,000 - - 17 -
[Notes on Securities] Other securities 3rd fiscal period (as of July 31, 2017) Not applicable. 4th fiscal period (as of January 31, 2018) (Unit: Thousand yen) Category Book value Acquisition cost Difference (1)Stock - - - Book value greater than acquisition cost (2)Bond 1Government bond, municipal - - - bond, etc. 2Corporate bond - - - 3Other - - - (3)Other - - - Subtotal - - - (1)Stock - - - (2)Bond Book value less than or equal to acquisition cost 1Government bond, municipal - - - bond, etc. 2Corporate bond 400,000 400,000-3Other - - - (3)Other 334,500 334,500 - Subtotal 734,500 734,500 - Total 734,500 734,500 - [Notes on Derivative Transactions] 3rd fiscal period (as of July 31, 2017) 1. Derivative transactions to which hedge accounting is not applied Not applicable. 2. Derivative transactions to which hedge accounting is applied The following is the contract amount or the amount equivalent to the principal provided in the contract as of the date of settlement of accounts for each hedge accounting approach. Hedge accounting approach Principle accounting Type, etc. of derivative transaction Interest rate swap transaction (floating receivable; fixed payable) (Note 1) Contract amount, etc. is based on notional principal. Main hedged item Long-term loans payable (Note 2) Fair value is calculated based on the price quoted by lending financial institutions, etc. Contract amount, etc. (Note 1) Of which, later than 1 year Fair value (Note 2) 30,050,000 30,050,000 28,686-18 -
4th fiscal period (as of January 31, 2018) 1. Derivative transactions to which hedge accounting is not applied Not applicable. 2. Derivative transactions to which hedge accounting is applied The following is the contract amount or the amount equivalent to the principal provided in the contract as of the date of settlement of accounts for each hedge accounting approach. Hedge accounting approach Principle accounting Type, etc. of derivative transaction Interest rate swap transaction (floating receivable; fixed payable) (Note 1) Contract amount, etc. is based on notional principal. Main hedged item Long-term loans payable (Note 2) Fair value is calculated based on the price quoted by lending financial institutions, etc. Contract amount, etc. (Note 1) Of which, later than 1 year Fair value (Note 2) 30,050,000 30,050,000 36,966 [Notes on Retirement Benefits] 3rd fiscal period (as of July 31, 2017) Not applicable. 4th fiscal period (as of January 31, 2018) Not applicable. [Notes on Tax-Effect Accounting] 1. Breakdown of main causes for occurrence of deferred tax assets and deferred tax liabilities 3rd fiscal period As of July 31, 2017 4th fiscal period As of January 31, 2018 Deferred tax assets Non-deductible accrued enterprise tax 20 6,119 Acquisition cost of securities - 1,364 Subtotal 20 7,484 Valuation allowance - (7,484) Total 20 - Deferred tax assets, net 20-2. Breakdown of major components that caused any significant differences between the statutory tax rate and the effective income tax rate after application of tax-effect accounting (Unit: %) 3rd fiscal period As of July 31, 2017 4th fiscal period As of January 31, 2018 Statutory tax rate 31.74 31.74 [Adjustments] Deductible distributions payable (31.72) (28.57) Other 0.04 0.79 Effective income tax rate after application of tax-effect accounting 0.06 3.96-19 -
[Notes on Share of Profit (Loss) of Entities Accounted for Using Equity Method, etc.] 3rd fiscal period (as of July 31, 2017) Not applicable. 4th fiscal period (as of January 31, 2018) Not applicable. [Notes on Related-Party Transactions] 1. Parent company, major corporate unitholder, etc. 3rd fiscal period (from February 1, 2017 to July 31, 2017) Not applicable. 4th fiscal period (from August 1, 2017 to January 31, 2018) Not applicable. 2. Affiliated company, etc. 3rd fiscal period (from February 1, 2017 to July 31, 2017) Not applicable. 4th fiscal period (from August 1, 2017 to January 31, 2018) Not applicable. 3. Fellow subsidiary, etc. 3rd fiscal period (from February 1, 2017 to July 31, 2017) Not applicable. 4th fiscal period (from August 1, 2017 to January 31, 2018) Not applicable. - 20 -
4. Director, major individual unitholder, etc. 3rd fiscal period (from February 1, 2017 to July 31, 2017) Type Name of company, etc. or person Address Capital stock or investments in capital Description of business or occupation Percentage of voting rights, etc. held by (in) SAR Description of transaction Transaction amount (thousand yen) Account item Balance at end of period (thousand yen) Executive Payment of Director, or close relative of director Atsushi Kato - - Director of SAR, and President and CEO of the Asset Management 0.01% asset management fee to the Asset Management Company 321,598 (Note 2) (Note 3) Accounts payable - other 204,623 (Note 2) Company (Note 1) 4th fiscal period (from August 1, 2017 to January 31, 2018) Type Name of company, etc. or person Address Capital stock or investments in capital Description of business or occupation Percentage of voting rights, etc. held by (in) SAR Description of transaction Transaction amount (thousand yen) Account item Balance at end of period (thousand yen) Director, or close relative of director (Note 1) (Note 2) (Note 3) Executive Payment of Director of asset SAR, and management 237,214 Accounts Atsushi President fee to the 220,609 - - 0.01% (Note 2) payable - Kato and CEO of Asset (Note 2) (Note 3) other the Asset Management Management Company Company (Note 1) The transaction is one that was conducted by Atsushi Kato as President and CEO of a third party (the Asset Management Company), and the transaction amount is based on the terms and conditions provided in the Articles of Incorporation of SAR. Of the amounts above, the transaction amount does not include consumption tax, while the balance at the end of the period includes consumption tax. Asset management fee of 3rd fiscal period includes the property acquisition incentive portion included in the book value of individual real estate, etc. in the amount of 96,535 thousand yen and the property transfer incentive portion in the amount of 35,598 thousand yen. Asset management fee of 4th fiscal period includes the property transfer incentive portion in the amount of 25,602 thousand yen. [Notes on Asset Retirement Obligations] 3rd fiscal period (as of July 31, 2017) Not applicable. 4th fiscal period (as of January 31, 2018) Not applicable. - 21 -
[Notes on Investment and Rental Properties] SAR owns rental real estate, etc. for the purpose of earning revenue from leasing. The carrying amount, amount of increase (decrease) during the period and fair value of these investment and rental properties are as follows: 3rd fiscal period From: February 1, 2017 To: July 31, 2017 4th fiscal period From: August 1, 2017 To: January 31, 2018 Carrying amount Balance at beginning of period 62,518,247 78,156,438 Amount of increase (decrease) during period 15,638,191 (1,867,315) Balance at end of period 78,156,438 76,289,122 Fair value at end of period 84,450,200 82,680,000 (Note 1) Carrying amount is the amount of the cost of acquisition, less accumulated depreciation. (Note 2) Of the amount of increase (decrease) in investment and rental properties during 3rd period, the amount of increase are mainly attributable to acquisition of real estate beneficiary interest in trust of 7 properties (18,314,960 thousand yen) and capital expenditure (190,119 thousand yen), while the amount of decrease is mainly attributable to disposition of 2 properties (one of those is 49% of quasi co-ownership) (2,579,413 thousand yen) and depreciation (287,475 thousand yen). Of the amount of increase (decrease) in investment and rental properties during 4th period, the amount of increase is mainly attributable to capital expenditure (182,811 thousand yen), while the amount of decrease is mainly attributable to disposition of 1 property (51% of quasi co-ownership)(1,744,836 thousand yen) and depreciation (305,290 thousand yen). (Note 3) Fair value at the end of the period is the appraisal value by an outside real estate appraiser. Of the fair value at the end 3rd period, that of Oak Minami-Azabu (51% of quasi co-ownership) is based of transfer price (2,560,200 thousand yen) stated in the contract dated Feb. 28, 2017. The income (loss) concerning investment and rental properties are as stated in Notes to the Statement of Income earlier in this document. - 22 -
[Notes on Segment Information] 1. Segment information Segment information is omitted because SAR operates a single segment, which is the real estate leasing business. 2. Related information 3rd fiscal period (from February 1, 2017 to July 31, 2017) (1) Information about products and services Information about products and services is omitted because net sales to external customers for a single products and services category are in excess of 90% of operating revenue on the statement of income. (2) Information about geographic areas 1 Net sales Information about net sales is omitted because net sales to external customers in Japan are in excess of 90% of operating revenue on the statement of income. 2 Property, plant and equipment Information about property, plant and equipment is omitted because the amount of property, plant and equipment located in Japan is in excess of 90% of the amount of property, plant and equipment on the balance sheet. (3) Information about major customers (Unit: Thousand yen) Customer name Operating revenue Segment Kanden Realty & Development Co., Ltd. 746,168 Real estate leasing business. 4th fiscal period (from August 1, 2017 to January 31, 2018) (1) Information about products and services Information about products and services is omitted because net sales to external customers for a single products and services category are in excess of 90% of operating revenue on the statement of income. (2) Information about geographic areas 1 Net sales Information about net sales is omitted because net sales to external customers in Japan are in excess of 90% of operating revenue on the statement of income. 2 Property, plant and equipment Information about property, plant and equipment is omitted because the amount of property, plant and equipment located in Japan is in excess of 90% of the amount of property, plant and equipment on the balance sheet. (3) Information about major customers (Unit: Thousand yen) Customer name Operating revenue Segment Kanden Realty & Development Co., Ltd. 771,663 Real estate leasing business. - 23 -