Here we provide answers to frequently asked questions.
Japan Prime Realty Investment Corporation (JPR)
Q1What type of company is JPR, and how is it characterized?OPEN
Q2What is JPR's target portfolio in terms of asset class and geography?OPEN
Q3Does JPR have plans to start investing in residential properties and/or hotels?OPEN
A.Except for residential properties attached to office properties, JPR has no plan to invest in residential properties or hotels.
The reasons are as follows:
- In general, residential properties are small in asset size per building (several hundreds of million yen) and do not match the pace assumed for expanding JPR's asset size
- Unless incorporating a substantial number of residential properties into the portfolio, the management costs JPR has to bear are too large
- Although residential properties can generate stable earnings, they have limited room for internal growth
- Adding hotels to the portfolio would require us to have proprietary management capabilities including the hotel operation business, rather than simple leasing business.
- In general, hotels are prone to be impacted by seasons, business cycles and other factors, which does not match JPR's policy in terms of stability.
Other than the above, such properties as logistics and industrial facilities (including warehouses) and healthcare facilities have lower tenant replacement capabilities compared with office properties and retail properties, and their market size is rather limited. Moreover, special management capabilities are required to operate them. Because of these, JPR does not position them as its investment target.
Q4What is JPR's position on property transactions?OPEN
A.Acquisition: With a focus on stability of earnings, JPR conducts vigorously selective investment in the three metropolitan areas (including Osaka and Nagoya) and other major cities, with the first priority placed on the Tokyo metropolitan area.
Sale: JPR makes judgment in a comprehensive manner, taking into account analyses of the present status, forecasts of future potential and the asset composition of the entire portfolio.
Details are as follows:
For details, please refer to the "External Growth Strategy."
With regard to properties subject to sale, JPR makes judgment in a comprehensive manner, taking into account their present status, forecasts of increase or decrease in future earnings and asset value, etc. and the asset composition of the entire portfolio, among other factors.
Moreover, JPR conducts asset assessment at each settlement of accounts and, if the estimated value of a property falls 20% below its book value, considers selling it.
As to the decision-making process for property acquisition and sale, please refer to the "Corporate Governance."
Q5What does "external growth" mean?OPEN
A.External growth means expanding the asset size by additionally acquiring properties and achieving growth through the added revenues from such properties.
Additional acquisition of properties has three growth factors, which increase cash flows.
Cost reductions from expansion of asset size (economies of scale)
As the standard for its asset management fees, the asset management company (TRIM) has adopted the scheme in which the expense ratio diminishes in accordance with the expansion of the asset size (which means expansion of revenues).
*For details, please refer to "Q14. Is TRIM's compensation strategy in the interest of unitholders?"
Additional acquisition of properties through debt financing (leverage effect)
Acquiring properties through debt financing does not require issuance of additional investment units. The lower the interest rate of such debt financing becomes, the more the leverage effect is enhanced, leading to an expanded profit per unit.
Enhancement of profitability through property replacement in the portfolio
JPR will acquire blue-chip properties that are anticipated to help maintain and expand stable earnings and lead to enhanced quality of the portfolio, while selling properties that are less competitive in terms of location and building specifications.
Q6What does "internal growth" mean?OPEN
A.For details, please refer to the "Internal Growth Strategy."
Q7What is JPR Brand Strategy?OPEN
A.The JPR Brand Strategy is a strategy that aims to enhance JPR's earnings and asset value by improving tenant satisfaction.
Concept is "A/3S"
The Strategy is designed to achieve the ultimate in "Amenity" (optimal space) by focusing on the three S's of "Service," "Safety" and "Save Energy" (environment), and to realize higher occupancy rates and increased rent revenues.
|Service||Renovation of common space (entrance lobbies, restrooms, etc.), seasonal events at the entrance halls, change of building names, prominent placement of JPR's corporate symbol on buildings and other measures|
*For more details, please refer to "SafetyImplementation of the JPR Brand Strategy - Service."
|Safety||Installation of security cameras, renovations to improve earthquake-resistance, installation of equipment to improve parking safety and other measures|
*For more details, please refer to "Implementation of the JPR Brand Strategy - Safety."
|Save Energy||Replacement of air-conditioning equipment, installation of water-saving devices in restrooms, "greening" of rooftops and other measures|
*For more details, please refer to "Implementation of the JPR Brand Strategy - Safety."
Q9Has JPR earned a credit rating?OPEN
Q10How does JPR view the leasing market of office properties and retail properties?OPEN
A.The leasing markets of office properties and retail properties are as follows.
Office Property Leasing Market:
The supply and demand balance in the office property leasing market of the 23 wards of Tokyo further improved due to expansion in new demand for such positive development as setting up new offices, expanding the office spaces and moving to better locations. Given this situation, the upward trend of the rent levels for new contracts has been strengthened for Class S and Class A buildings, and the positive impact is increasingly spreading through the entire market including Class B buildings, such as the rent-free periods granted to new tenants being reduced.
Retail Property Leasing Market:
There had been concerns about negative impacts of the consumption tax increase particularly on retail properties. However, such impacts that had been worried about were hardly found for urban retail properties in which JPR targets to invest, as tenant's needs to open stores remained strong. The vacancies in urban retail properties in good locations, such as Ginza and Omotesando, have almost vanished, with rents having taken an upward turn and increasing.
Q11How does JPR view the for-sale real estate market?OPEN
A.The transaction volume expanded, including deals of large-scale projects, as new listings and public offerings by REITs took place one after another against the backdrop of a favorable fund procurement environment.
However, with a distinct trend of acquisitions of properties by REITs being made from their sponsors, the supply and demand situation in the for-sale real estate market is becoming increasingly tighter, mainly for quality properties.
Moreover, transactions in the market include increasingly notable property acquisitions by foreign investors as well as private placement REITs. Because of the decreased cap rates, combined with expectations for recovery of rental revenues, the transaction price of real estate is being formed at an even higher level, and there is an expanding tendency to invest in projects located in regional cities.
Asset Management Company and Conflict of Interest
Q12How would you characterize the asset management company (TRIM)?OPEN
A.JPR's asset management company is Tokyo Realty Investment Management (TRIM) invested in by five Fuyo Group companies centering on Tokyo Tatemono Co., Ltd., etc.
TRIM obtained license as asset management agent for investment corporations under the Investment Trusts Act in 2001, and is currently specialized in the asset management of JPR.
In addition, TRIM is sponsored by the five companies of Tokyo Tatemono Co., Ltd., Yasuda Real Estate Co., Ltd.,Taisei Corporation, Sompo Japan Nipponkoa Insurance Inc. and Meiji Yasuda Insurance Company. By utilizing the multi-faceted and abundant know-how and information owned by these sponsors in such fields as real estate, construction and finance, TRIM endeavors to maximize unitholder value while working to expand the asset size and reduce risks for JPR.
Q13Are there rules for avoiding conflicts of interest?OPEN
A.In addition to being subject to certain restrictions under the Investment Trusts Act for transactions with related parties, TRIM has established its own rules for transactions with interested parties originally defined by TRIM.
The related parties and interested parties are as follows.
|Related parties, etc.||Majority shareholders of TRIM, their subsidiary companies, and all other parties closely related with TRIM as defined under the Enforcement Order of the Investment Trusts Act||Tokyo Tatemono Co., Ltd.|
|Interested parties||Interested parties are those that fall under any of the following items.
a. Parties that have equity interest in TRIM, dispatch officers to TRIM, or second employees to TRIM
b. Parent companies, subsidiary companies and affiliated companies of the parties that fall under the category of a. above.
c. Special purpose companies (including Tokutei Mokuteki Kaisha (TMK), limited liability companies and joint-stock companies), associations and other funds on which the parties falling under either one of the two preceding items can make a material impact due to having majority equity interests, etc.
d. Parties that can be practically treated like those listed in each of the preceeding items.
Tokyo Tatemono Co., Ltd.
The following rules have been established for transactions with related parties and interested parties.
- Acquisition of Properties and Assets from Interested Parties
a) Real estate and trust beneficiary interests in real estate may be acquired with the prior approval of JPR's Board of Directors
b) Other specific assets may be acquired at market value if applicable, and may be acquired pursuant to a) above if not applicable.
- Sale of Properties and Assets to Interested Parties
a) Real estate and trust beneficiary interests in real estate
The sales price per property (not including taxes and sales commissions) shall be greater than the appraised value. Prior approval from JPR's Board of Directors is also required.
b) Other specific assets
Other specific assets shall be sold at market value, if applicable, and shall be sold pursuant to a) above if not applicable.
- Property Leasing to Interested Parties
Properties may be leased to Interested Parties under appropriate leasing terms after comprehensively considering the overall market prices and standard leasing terms for similar properties. Prior approval from JPR's Board of Directors is also required.
- Consignment of Property Management to Interested Parties
Property management may be consigned based on the property-related business administration policies*. Prior approval is also required from JPR's Board of Directors.
(*) For the property-related business administration policies, please refer to (c) of b. Investment Attitudes, (1) Investment Policies, 2. Investment Policies in the securities report (Japanese).
- Brokerage Fees for Buying, Selling and Leasing for Interested Parties
a) Buying and Selling
Brokerage fees shall be limited to 3% of the transaction price plus 60,000 yen, excluding consumption tax and other costs, and need the prior approval of JPR's Board of Directors.
Brokerage fees shall be up to the contract rent for one month.
- Placement of Construction Orders with Interested Parties
For construction in excess of 10 million yen, orders shall be placed with the prior approval of JPR's Board of Directors, after making comparisons with third-party cost estimates and terms, etc.
- Borrowing from Interested Parties
Borrowings shall be made based on prevailing market conditions. JPR's Board of Directors must also approve beforehand the financial plans (indicating plans for managing and procuring funds on a quarterly basis) including the said borrowings.
Q14Is TRIM's compensation strategy in the interest of unitholders?OPEN
A.TRIM adopts a highly transparent remuneration system that aims to align with the unitholders' interest.
The table below shows the compensations paid to TRIM. It is a compensation system designed to be easy to understand and align with the unitholders' interest.
|Type of Compensation||Calculation Method of Compensation||Alignment with Unitholders' Interest|
|Fixed Fee||\12.5 million per month||Easy-to-understand compensation scheme|
|Incentive Fee 1||2% of total revenues (*1) of each fiscal period
*1.5% for amounts in excess of \8 billion
|Aims to realize economies of scale associated with expansion of asset size (=increased revenues) by setting standards for decreasing the rate.|
|Incentive Fee 2||3% of income before income taxes of each fiscal period
(prior to the deduction of the Incentive Fee 2)
|The compensation scheme is linked to profits, and aims to be easy-to-understand and align with the unitholders' interest.
* When selling properties, TRIM does not receive property sale fees. Instead, the fee is based on the gains or losses from the sale.
|Incentive Fee 3||When acquiring properties, 0.25% of the acquisition price of the properties (*2)||The fee is designed to align the interests of the unitholders in terms of risk diversification through expansion of the asset size and of TRIM in terms of increased revenues in association with property acquisitions. As the fee is capitalized in the acquisition cost of properties, it has minimam impact on JPR's earnings.|
(*1) Total revenue represents the sum total of the following.
1. Rental revenues, common charges, parking revenues, incidental income, facility use fees, facility installation charges, delay damages, cancellation penalty associated with cancellation of lease contracts and similar types of income
2. Income from other leasing operations, interest and dividend income and similar types of income
(*2) Properties are defined as the subject assets of JPR's investment such as real estate and asset-backed securities that have real estate as their primary investment target. Acquisition price does not include national and local consumption taxes and acquisition-related expenses.
Q15What are the major risks involved in investing in J-REITs?OPEN
A.As there are risks of incurring losses, it is important to check the risk factors. The following table shows the major risk factors.
|Risk regarding price fluctuations||As J-REITs are traded on the stock exchange, the investment unit price fluctuates and the principal is not guaranteed.
The price fluctuates due to the supply and demand balance in the stock exchange as well as the impact of the interest rate situation, political and economic conditions, real estate market conditions and various other factors surrounding the market.
|Risk regarding fluctuations in earnings||There are risks that the balance of revenues and expenses worsens due to a decrease in rent revenues through a drop in the occupancy rate of properties, damages to the buildings due to earthquakes and other natural disasters, expenses for owning real estate and losses on sale of properties, among other factors. This may cause cash distributions to decrease.|
|Risk regarding fluctuations in interest rates||REITs procure funds not only by soliciting investors for equity investment but also by borrowings from financial institutions. Accordingly, a rise in interest rate increases the burden of expenses, which causes earnings to decrease.|
|Risk regarding transactions on the market||REITs may be delisted if they violate the delisting standards designated by stock exchanges, such as a decrease in total assets and a decrease in trade volume. If REITs are delisted, they may have to sell properties at extremely low prices and find it hard to sell properties.|
|Risk regarding changes to legal systems, etc.||Changes to the legal systems related to REITs or real estate may cause earnings to worsen or the value of assets and investment principal to decrease.|
*The table above does not cover all risks involved in investment, and there are risks other than those stated above.