SANKEI REAL ESTATE : (REIT) Financial Report for the Fiscal Period Ended February 2022

(REIT) Financial Report for the Fiscal Period Ended February 2022

April 15, 2022

REIT Securities Issuer: TSE Code: Representative:SANKEI REAL ESTATE Inc. 2972

Listing: Tokyo Stock Exchange

URL:https://www.s-reit.co.jp/en/

Yuichi Ota, Executive Director

Asset Management Company: Representative:

Contact:

Sankei Building Asset Management Co., Ltd. Yuichi Ota, President and Chief Executive Officer Atsushi Mukai, Director and Chief Finance & IR Officer TEL: [phone]

Scheduled date of submission of semiannual securities report:	May 30, 2022
Scheduled date of commencement of distribution payment:	May 27, 2022
Preparation of supplementary financial results briefing materials:	Yes
Holding of financial results briefing session:	Yes (for institutional investors and analysts)
(Amounts are rounded down to the nearest million yen)

1. Status of Management and Assets for the Fiscal Period Ended February 2022 (from September 1, 2021, to February 28, 2022)

(1) Management Status

(% figures are the rate of period-on-period increase (decrease))

Operating revenue	Operating profit	Ordinary profit	Net profit
Fiscal period ended Feb. 2022 ended Aug. 2021	million yen 2,778 2,176	% 27.7 1.3	million yen 1,540 1,141	% 35.0 2.0	million yen 1,392 1,014	% 37.2 (0.2)	million yen 1,391 1,014	% 37.2 (0.2)

Earnings per unit	Return on equity	Ratio of ordinary profit to total assets	Ratio of ordinary profit to operating revenue
Fiscal period ended Feb. 2022 ended Aug. 2021	yen 2,983 2,841	% 3.1 2.7	% 1.5 1.3	% 50.1 46.6

(Note) Earnings per unit is calculated by dividing net profit by the daily weighted average number of investment units (fiscal period ended August 2021: 356,800 units; fiscal period ended February 2022: 466,286 units).

(2) Distribution

Distribution per unit (excluding distribution in excess of earnings)	Total distribution (excluding distribution in excess of earnings)	Distribution in excess of earnings per unit	Total distribution in excess of earnings	Distribution per unit (including distributions in excess of earnings)	Total distribution (including distributions in excess of earnings)	Payout ratio	Ratio of distribution to net assets
Fiscal period ended Feb. 2022 ended Aug. 2021	yen 2,979 2,842	million yen 1,391 1,014	yen - 20	million yen - 7	yen 2,979 2,862	million yen 1,391 1,021	% 100.0 100.0	% 2.8 2.7

distribution to
(Note 1)	Due to issuance of new investment units during the fiscal period resulting in change in the number of investment units during the fiscal period,
payout ratio of the fiscal period ended February 2022 is calculated by the following formula and rounded to one decimal place.
Payout ratio = Total distribution (excluding distribution in excess of earnings) / Net profit × 100
(Note 2)	The entire amount of the total distribution in excess of earnings in the fiscal period ended August 2021 is a refund of investment that falls under
distribution reducing investment, etc. under tax law.
(Note 3)	The ratio of reduced surplus through the distribution in excess of earnings (refund of investment that falls under distribution reducing investment,
etc. under tax law) for the fiscal period ended August 2021, was 0.001.
(Note 4)	The payout ratio and ratio of distribution to net assets are calculated based on figures that do not include distribution in excess of earnings.

(3) Financial Position

Total assets	Net assets	Equity ratio	Net assets per unit
Fiscal period ended Feb. 2022 ended Aug. 2021	million yen 106,523 79,848	million yen 50,827 37,555	% 47.7 47.0	yen 108,814 105,255

(4) Cash Flows

Cash flows from operating activities	Cash flows from investing activities	Cash flows from financing activities	Cash and cash equivalents at end of period
Fiscal period ended Feb. 2022 ended Aug. 2021	million yen 1,203 1,396	million yen (24,870) (60)	million yen 24,651 (1,022)	million yen 8,242 7,257

2. Operating Forecasts for the Fiscal Period Ending August 2022 (from March 1, 2022, to August 31, 2022) and

Operating Forecasts for the Fiscal Period Ending February 2023 (from September 1, 2022, to February 28, 2023)

(% figures are the rate of period-on-period increase (decrease))

Distribution per unit

(excluding

Operating revenueOperating profitOrdinary profitNet profit

distribution in

excess of

Distribution in excess of earnings per unit

earnings)

million yen	%	yen	yen
2,996	7.8	1,620	5.2	1,458	4.7	1,457	4.7	3,120	-
ending Feb. 2023	2,772	(7.5)	1,222	(24.6)	1,046	(28.3)	1,045	(28.3)	2,239	-

% million yen

% million yen

% million yen

Fiscal period ending Aug. 2022

(Reference) Forecast earnings per unit (Forecast net profit / Forecast total number of investment units issued and outstanding at endof period)

Fiscal period ending August 2022: 3,120 yen

Fiscal period ending February 2023: 2,238 yen

(Note)Distribution per unit (excluding distribution in excess of earnings) is calculated based on the total number of investment units issued and outstanding as of the date of this document of 467,099 units.

* Other

(1) Changes in accounting policies, changes in accounting estimates, and retrospective restatements (Note) For details, see "(8) Notes on Changes in Accounting Policies" on page 15.

i.	Changes in accounting policies accompanying amendments to accounting standards, etc.:	Yes
ii.	Changes in accounting policies other than i:	None
iii.	Changes in accounting estimates:	None
iv.	Retrospective restatements:	None

(2) Total number of investment units issued and outstanding

• i. Total number of investment units issued and outstanding (including treasury investment units) at end of period

• ii. Number of treasury investment units at end of period

Fiscal period ended Feb. 2022	467,099 units	Fiscal period ended Aug. 2021	356,800 units
Fiscal period ended Feb. 2022	0 units	Fiscal period ended Aug. 2021	0 units

(Note) For the number of investment units serving as the basis for calculation of earnings per unit, please refer to "Notes on Per

Unit Information" on page 22.

• * Financial reports are exempt from audits by certified public accountants or audit corporations.

• * Matters of special note

  The operating forecasts and other forward-looking statements contained in this document are based on information currently available to and certain assumptions deemed reasonable by SANKEI REAL ESTATE. Accordingly, the actual results of operations, etc. may differ materially due to various factors. In addition, the forecasts are not a guarantee of the amount of distribution. For the assumptions underlying the operating forecasts, matters of note in the use of the operating forecasts, etc., please refer to "Assumptions Underlying the Operating Forecasts for the Fiscal Period Ending August 2022 (from March 1, 2022, to August 31, 2022) and Fiscal Period Ending February 2023 (from September 1, 2022, to February 28, 2023)" on pages 6 and 7.

Table of Contents

1. Management Status......................................................................................................................................................................2

(1)Management Status...............................................................................................................................................................2

(2) Investment Risks .................................................................................................................................................................... 7

• 2. Financial Statements ..................................................................................................................................................................... 8

  • (1) Balance Sheet ........................................................................................................................................................................ 8

  • (2) Statement of Income ........................................................................................................................................................... 10

  • (3) Statement of Unitholders' Equity ........................................................................................................................................ 11

  • (4) Statement of Cash Distribution ............................................................................................................................................ 12

  • (5) Statement of Cash Flows ...................................................................................................................................................... 13

  • (6) Notes on the Going Concern Assumption ............................................................................................................................ 14

  • (7) Notes on Matters Concerning Significant Accounting Policies ............................................................................................. 14

  • (8) Notes on Changes in Accounting Policies ............................................................................................................................. 15

  • (9) Notes to the Financial Statements ....................................................................................................................................... 15

  • (10) Changes in Total Number of Investment Units Issued and Outstanding .............................................................................. 23

• 3. Reference Information ................................................................................................................................................................ 24

  • (1) Information on Price of Assets Under Management, Etc. .................................................................................................... 24

  • (2) Capital Expenditures ............................................................................................................................................................ 29

1.

Management Status

(1) Management Status

(Overview of the Fiscal Period under Review)

i. Brief History of the Investment Corporation

SANKEI REAL ESTATE was incorporated under the Act on Investment Trusts and Investment Corporations (Act No. 198 of 1951, as amended; hereinafter, the "Investment Trust Act") with Sankei Building Asset Management Co., Ltd. (hereinafter, the "Asset Management Company") as the organizer and investments in capital of 100 million yen (1,000 units) on November 19, 2018, and completed the registration with the Kanto Local Finance Bureau pursuant to Article 187 of the Investment Trust Act on December 17, 2018 (Registration No. 140 with the Director-General of the Kanto Local Finance Bureau). Later, SANKEI REAL ESTATE was listed on the Real Estate Investment Trust Securities Market of Tokyo Stock Exchange, Inc. on March 12, 2019 (TSE code: 2972).

In the fiscal period under review, new investment units (105,047 units) were issued through a public offering with September 1, 2021, as the payment due date, and new investment units (5,252 units) were issued through third-party allotment accompanying the capital increase through public offering with September 29, 2021, as the payment due date. A cash distribution of a sum exceeding profit of 20 yen per unit (contribution refund that falls under distribution through reduction in unitholders' capital for tax purposes) as the cash distribution for the 5th fiscal period (ended August 2021) resolved at SANKEI REAL ESTATE's board of directors' meeting held on October 15, 2021, and payment of the distribution commenced on November 22, 2021. As a result, as of the last day of the fiscal period under review (February 28, 2022), the total number of investment units issued and outstanding was 467,099 units, and unitholders' capital (net) was 49,435 million yen.

• ii. Management Environment

  In the fiscal period under review (fiscal period ended February 2022), although the Japanese economy continued to showed movements of picking up, some weakness was seen amid difficult conditions due to the impact of COVID-19, and pre-emergency measures for COVID-19 based on the Act on Special Measures for Pandemic Influenza and New Infectious Diseases Preparedness and Responses (Act No. 31 of 2012, as amended) were implemented due to the spread of infection caused by Omicron variant. This, among other factors, made it an environment in which economic developments continued to require attention. Overseas, while the economy continued to pick up from the difficult situation caused by COVID-19, attention should be given to the impact of Russia's invasion of Ukraine in February 2022 on the global economy. Under such economic circumstances, in terms of the office building market, which SANKEI REAL ESTATE sets as the primary investment target, movements to cancel lease agreements continued due to factors such as the consolidation of locations and the reduction of fixed expenses (rent payments, etc.), and the vacancy rate remained the same or continued to rise while rents declined slightly or remained the same in Tokyo, Osaka and Fukuoka where SANKEI REAL ESTATE's portfolio assets are located. As for the hotel market, in which SANKEI REAL ESTATE invests as sub-assets, the total number of guests and occupancy rate generally remained at the same level as the previous year according to the Overnight Travel Statistics Survey by the Japan Tourism Agency, but the number of foreign tourists continued to decrease significantly due to restrictions on entry into Japan taken as a preventative measure against with the spread of COVID-19, and further relaxation of border measures are expected in future.

• iii. Management Performance

  SANKEI REAL ESTATE executed fund procurement of 12,287 million yen through a capital increase through public offering, and acquired four properties on September 2, 2021 (two of which were additional acquisitions) for a total acquisition price (Note 1) of 25,100 million yen with the procured funds and borrowings. As a result, the portfolio of SANKEI REAL ESTATE as of the last day of the fiscal period under review consisted of 14 properties with an asset size (total acquisition price) of 96,625 million yen.

  As a result, the occupancy rate (Note 2) of the 14 portfolio properties as of the last day of the fiscal period under review remained high at 99.1%, and operating revenue from real estate leasing was 2,778 million yen, 27.7% higher than that at the end of the previous fiscal period. The appraisal value as of the last day of the fiscal period under review was 105,713 million yen.

  SANKEI REAL ESTATE has sought to improve satisfaction through reinforcement and enhancement of the relationship with existing tenants, aiming at expansion of revenue and stable growth of earnings from assets under management as in the previous fiscal period. For existing tenants approaching contract renewal, an effort was made to limit reductions in rent as much as possible and prevent the occurrence of vacancies through careful efforts based on the condition of the COVID-19 pandemic and trends of the rental market. In addition, active efforts were made in leasing activities, and the filling of vacancies that occurred in some assets under management was almost completed during the period under review. At the same time, repairs and capital expenditures were narrowed down to those that contribute to maintenance and improvement of the competitiveness of the assets under management.

  The number of requests for rent decrease, deferment of rent payment, etc. due to the spread of COVID-19 from some tenants occupying office buildings that are assets under management decreased in the fiscal period under review compared to when the first state of emergency was declared in April 2020, and the impact on management performance in the fiscal period under review is minimal because the assets under management mainly have office tenants. In addition, although the two hotel properties held by SANKEI REAL ESTATE (Hotel Intergate Tokyo Kyobashi, Hotel Intergate Hiroshima) saw impact associated with the spread of COVID-19, fixed rent based on the current contract has been secured as usual for leasing business revenue in the fiscal period under review.

SANKEI REAL ESTATE, along with the Asset Management Company, intends to continue to conduct management with consideration for ESG, meaning the Environment, Social and Governance, for the purpose of sustainability of society and increasing the medium- to long-term unitholder value based on the "Sustainability Policy" in the Asset Management Company's management guidelines.

SANKEI REAL ESTATE acquired 3 Star and Green Star ratings in October 2021 in the GRESB Real Estate Assessment that is a global investment benchmark established as a tool for use in selection of and dialogue with investment destinations by measuring ESG considerations in individual companies and funds in the real estate sector. In addition, two of the hotels owned obtained evaluations under the Building-Housing Energy-efficiency Labelling System (BELS) in December 2021.

(Note 1) "Acquisition price" is the sale and purchase price of each trust beneficiary right stated in the sale and purchase agreement for each acquisition asset, rounded down to the nearest million yen. The sale and purchase prices do not include consumption tax, local consumption tax and the various expenses required for the acquisition. The same shall apply hereinafter.

(Note 2) "Occupancy rate" is the ratio of total leased area to total leasable area, rounded to one decimal place. Moreover, for total leasable area and total leased area, each total is calculated based on the area corresponding to SANKEI REAL ESTATE's ownership interest in each portfolio property.

iv.

Overview of Fund Procurement (Equity Financing)

In the fiscal period under review, 12,287 million yen was procured by issuing new investment units (105,047 units) through public offering with September 1, 2021, as the payment due date. In addition, 614 million yen was procured by issuing new investment units (5,252 units) though third-party allotment accompanying the capital increase through public offering with September 29, 2021, as the payment due date.

(Debt Financing)

In the fiscal period under review, 13,400 million yen was borrowed from Mizuho Bank, Ltd., Sumitomo Mitsui Banking Corporation, Development Bank of Japan Inc., Mizuho Trust & Banking Co., Ltd., Sumitomo Mitsui Trust Bank, Limited, Shinsei Bank, Limited, Resona Bank, Limited., Aozora Bank, Ltd., The Nishi-Nippon City Bank, Ltd., Kansai Mirai Bank, Limited and The Chiba Bank, Ltd. through a loan syndicate with Mizuho Bank, Ltd. and Sumitomo Mitsui Banking Corporation as the arrangers on September 2, 2021, to coincide with the acquisition of properties.

Of the above borrowings, 600 million yen was repaid early on November 2, 2021, using the proceeds from the above capital increase through third-party allotment.

In addition, 4,300 million yen was borrowed from Mizuho Bank, Ltd., Sumitomo Mitsui Banking Corporation, Development Bank of Japan Inc., Mizuho Trust & Banking Co., Ltd., Sumitomo Mitsui Trust Bank, Limited, Shinsei Bank, Limited, Resona Bank, Limited and Aozora Bank, Ltd. through a loan syndicate with Mizuho Bank, Ltd. and Sumitomo Mitsui Banking Corporation as the arrangers on October 1, 2021, to repay 4,300 million yen of long-term borrowings due for repayment on the same day.

As a result, as of the last day of the fiscal period under review, the balance of borrowings outstanding was 50,600 million yen and the ratio of interest-bearing liabilities to total assets (hereinafter, "LTV ratio") was 47.5%.

v. Overview of Business Performance and Distribution

As a result of the management described above, business performance in the fiscal period under review was operating revenue of 2,778 million yen, operating profit of 1,540 million yen, ordinary profit of 1,392 million yen, and net profit of 1,391 million yen.

Concerning distribution, in accordance with SANKEI REAL ESTATE's cash distribution policy (Article 36 of the articles of incorporation), SANKEI REAL ESTATE intends to have the maximum amount of distribution of earnings included in deductible expenses by application of special provisions for taxation on investment corporations (Article 67-15 of the Act on Special Measures Concerning Taxation (Act No. 26 of 1957, as amended)). For the fiscal period under review, the decision was made to distribute 1,391,487,921 yen, which is the entire amount of unappropriated retained earnings, excluding fractions of distribution per unit of less than 1 yen. This resulted in distribution per unit of 2,979 yen.

(Outlook for the Next Fiscal Period)

i.

General Management Outlook

Although the impact of COVID-19 on social and economic activities in Japan and abroad is expected to be alleviated due to factors such as progress in vaccinations and approval of new drugs ahead, the environment will likely continue to be one in which downside risks to the Japanese and overseas economies being affected by movements in Russia's invasion of Ukraine, the impact on fluctuations in the financial and capital markets, etc. warrant close attention.

In the office building market, vacancy rates have risen and rents have continued to decrease or remain the same. While social and economic activities are expected to recover with rising vaccination rates, but it is necessary to monitor future trends in office demand including potential risks such as changes in work styles and moves to reduce fixed expenses (rent payments, etc.) accompanying downside risk to economies. SANKEI REAL ESTATE has concerns that the consolidation of locations and reduction of office space will progress due to the impact of increased telecommuting such as working from home and intentions to reduce fixed expenses (rent payments, etc.), and due to plans for a large volume of new supply especially in central Tokyo in 2023, it is believed that the occurrence of vacancies and a drop in rents due to the relocation of tenants will progress. We will further reinforce the relationship with tenants and continue consultations and responses as required, while closely monitoring tenants' business performance, trends, etc.