Invincible Investment Corporation (hereinafter "INV") focuses most of its investment on real estate and real estate backed securities (hereinafter collectively, "Real Estate Assets"), aiming to guarantee sound growth of its assets and secure stable profits over the medium and long term. INV's asset manager, Consonant Investment Management Co., Ltd. (hereinafter "CSNT"), in accordance with its Articles of Incorporation and Asset Management Services Agreement with INV and in line with the basic policy set forth under the Articles of Incorporation, has set forth internal rules in the form of asset management guidelines. It has also set forth management policies for INV's assets as follows. The asset management guidelines emphasize the pursuit of profitability and stability and clarify the requirement to comprehensively review real estate markets as well as factors such as the current situation of and trends in financial and capital markets and the general economic situation. CSNT will revise these guidelines as deemed necessary in response to changing situations, as set forth in the Articles of Incorporation and provisions of the Asset Management Services Agreement with INV.
Portfolio Construction Policy
Based on the policies set out below, CSNT aims to fulfill the goals of the basic policy above to construct an optimum portfolio, giving full consideration to ever-changing real estate market trends, regional economic trends, financial situations, capital market trends, changes in tax and legal frameworks and its own financial standing, as well as the credit rating of tenants and details of rental agreements, etc. as required, while at the same time attempting to mitigate the various risks involved in the management of its assets.
(I) Selection Policy for Investment Targets
INV will make investment in properties used primarily for residential purposes (hereinafter "Residences") or Real Estate Assets backed by such residential properties (hereinafter "Core Assets").
INV will also make investment in properties used for purposes other than residence or Real Estate Assets backed by such non-residential properties (hereinafter "Sub Assets") to diversify investment targets. As compliments to the Core Assets, being residential properties, Sub Assets refers to office buildings, commercial facilities, hotels, "special nursing homes for the elderly" and retirement villages for senior citizens (hereinafter collectively referred to as "Senior Citizens Properties")., pay-by-the-hour parking lots and properties used for other purposes or Real Estate Assets backed by those properties.
As explained above, INV seeks to expand its portfolio by diversifying investment targets to Sub Assets, while keeping the main focus on Core Assets, thereby developing a comprehensive portfolio in which risk is spread among a variety of different types of properties.
Rental demands and market rents are relatively stable for the Residences and tenant credit risk can be spread across a large number of small-scale tenants. Accordingly, we can expect a stable investment over the medium and long term and defined Residences as Core Assets.
The above investment targets are shown in the diagram below:
While steadily investing its assets, INV intends to diversify geographical risks by making investments across a number of regions.
In line with its basic policy of asset management, INV endeavors to diversify risk and achieve "steady growth of its investment assets and secure stable earnings over the medium and long term," by investing in various types of properties and across a wide geographical area.
Furthermore, the "Support (Provision of Information) Agreements on Real Estate Acquisitions, etc." concluded respectively between NISSHIN FUDOSAN Co., Ltd., YAHAGI CONSTRUCTION CO., LTD., ANABUKI KOSAN INC. and Suncity CO., LTD., all of which were the pipeline support companies, and INV and CSNT were terminated as of July 29, 2011 on the mutual consent among said parties.
In addition, the agreement concluded with GE Japan Corporation, a co-partner company, and CSNT concerning cooperation on securing human resources for CSNT as well as provision of real estate and other information and granting preferential negotiation rights to CSNT were terminated as of August 22, 2011 by mutual consent.
(II) Diversification by Property Type
A. Core Assets (Residences)
(i) Characteristics of Residences
Rental demand and market rents are relatively stable for Residences compared with properties for other uses as a large proportion of tenants are individuals and the number of potential tenants is large, while the terms of rental agreements are relatively short, being around two years. For these reasons, INV considers Residences a stable investment over the medium and long term.
In addition, INV can diversify tenant credit risk as single tenants, while large in number, individually occupy a smaller percentage of the total investment portfolio and their actions have a smaller impact on the overall investment assets of INV.
(ii) Classification of Residences
In its Residences investment, INV attempts to diversify the attributes of tenants by investing in a variety of Residences and thereby offering properties that appeal to a wide range of tenants.
From such perspective, INV categorizes its Residences investments by adopting the following classifications based on the floor area of each dwelling.
| Types of Residences | Characteristics |
|---|---|
| Compact Residence | <Assumed residents> Single dwellers <Important factors in location> Near train station and easy access to commercial and business districts, etc. <Standard floor plans of residence> Studio or 1 bedroom, etc. (1R, 1K, 1DK or 1LDK etc. in standard Japanese classification terms) <Rentable area per unit> Less than 35 square meters <Characteristics of properties> Demand is strong in the Tokyo metropolitan area and major regional cities where population and the number of households are growing. The rent per unit area tends to be relatively high. |
| Spacious Residence | <Assumed residents> Typical families of around two to four members <Important factors in location> Favorable living environment, in addition to easy access to business districts and nearest train station <Standard floor plans of residence> 2 bedrooms or larger (or 2DK or larger in standard Japanese classification terms) <Rentable area per unit> Equal to or larger than 35 square meters <Characteristics of properties> Demand for these types of properties is expected to remain strong as housing needs have shifted somewhat from owning to renting. In addition, there are replacement needs for corporate housing. |
(iii) Classification by Range of Rent for Residences
Although rental demands and market rents are relatively stable for Residences due to the large number of potential tenants, different ranges of rents attract different types of tenants, with a driving factor being the percentage of rent as a proportion of income.
In general, the demand for properties in the higher rent range is limited mainly to doctors, lawyers, business owners, corporate executives and so on. In contrast, salaried workers demand a range of rents and thus stable demands can be expected.
There are contrasting differences in the needs of tenants and the services individual tenants seek. There are also specific differences in the change of demand due to economic trends. Therefore, INV identifies and breaks down trends related to Residences using the following classifications based on average monthly rent for each property type. Investments will be made based on the policies set out under "III Investment Approach by Range of Rent for Residences."
| Classification | Specific ranges of rents |
|---|---|
| High-class Residence | Average monthly rent of JPY 200,000 or above |
| Standard Residence | Average monthly rent of less than JPY 200,000 |
- (Note)
- Average monthly rent means unit rent per dwelling calculated by dividing the total rent (including common service charges but excluding fees for using ancillary facilities and also excluding portions used for other than residential purposes, if any) by total number of dwellings (excluding portions used for other than residential purposes).
B. Sub Assets (Properties of other types)
INV, while taking risk factors and other characteristics into consideration, makes investments in properties other than residential properties (office buildings, commercial facilities, hotels, Senior Citizens Properties, and pay-by-the-hour parking lots, etc.) that complement the Core Assets, Residences. The specific investment targets by type of property, etc. and the respective investment policies are shown below. (Please note that these are only some of the examples and investments may be made in other types of properties, etc.)
(i) Office Buildings
INV invests in office buildings for which it judges sufficient rental demand can be expected among those properties that boast convenient or superior locations in business districts located mainly in the central districts of three major urban areas in Japan and comparable areas, after comprehensively judging various factors such as profitability, size of building, architectural and building specifications, earthquake resistance, attributes of tenants, and environment.
(ii) Commercial Facilities
INV invests in versatile multifaceted facilities located near cities and large general merchandise stores in suburbs, selecting those commercial facilities in superior locations while also taking the surrounding market conditions etc. into consideration.
(iii) Hotels
INV examines potential investment targets considering the experience, track records and creditworthiness of hotel management companies, etc.
(iv) Senior Citizens Properties
INV invests in residential facilities and accommodations for elderly people as per its targets regarding Senior Citizens Properties.
In principle, INV does not invest in elderly care facilities such as day-care facilities for the elderly, short-term accommodations for the elderly, nursing homes, special nursing homes, low-fee nursing homes, elderly welfare centers and elderly nursing support centers designated under the Act on Social Welfare Service for Elderly (Law No. 133, 1963 and subsequent amendments, hereinafter "Act for the Welfare of the Aged"), health care facilities for the elderly requiring long-term care and so called "group homes" designated under the Long-term Care Insurance Act (Law No. 123, 1997 and subsequent amendments), so called "silver housing" designated under the Act on Public Housing (Law No. 193, 1951 and subsequent amendments), or "good rental housing for senior citizens" designated under the Act on Securement of Stable Supply of Elderly Persons' Housing (Law No. 26, 2001 and subsequent amendments, hereinafter "Act for Housing the Elderly") unless they are proven to be exceptionally superior investment targets.
In the operations regarding Senior Citizens Properties, INV strives for efficiency by leveraging the expertise of operators who have track records in the operation of such properties. Given the public and socially beneficial nature of the operations of Senior Citizens Properties and to ensure the stable operations of these properties, INV, in principle, designates back-up operators to step in and take over operations in the event of the operator failing to pay rent for a specified period or entering bankruptcy. (Back-up operators may not be designated for some operators depending on considerations such as a strong track record, financial standing, or creditworthiness). With such arrangements in place, INV provides residents with stability of service.
The definitions and characteristics of "fee-based home for the elderly" and retirement villages that fall into the category of Senior Citizens Properties are shown below.
| Type | Definitions and Characteristics |
|---|---|
| Special Nursing Home for the Elderly | "Special nursing home for the elderly" means a fee-based home for the elderly as defined under Article 29 of the Welfare Law for the Aged. These are facilities that provide accommodation and nursing care services related to bathing, eating and toileting, as well as meals and other forms of daily assistance to elderly people, as specified by the ministerial orders of the Ministry of Health, Labour and Welfare. Excluded from this category are elderly care facilities and residential facilities that provide long-term care services for dementia patients in communal living provided under the same Law and other facilities specified by the ministerial orders of the Ministry of Health, Labour and Welfare. "Special nursing home for the elderly" is qualified to provide nursing care services to elderly people who require it. Special nursing homes for the elderly are required to register with the government of the prefecture in which they are located and are placed under the supervision of local authorities. |
| Retirement Village for Senior Citizens | "Retirement village for senior citizens" mean facilities that are certified as a "retirement village for senior citizens" by the Foundation for Senior Citizens' Housing, which is designated by the Minister of Land, Infrastructure and Transport as an elderly person's residence support center under the Act for Housing the Elderly. To receive certification as a retirement village for senior citizens, the following criteria must be met. - Adoption of specifications and provision of facilities suited to the lifestyles of elderly people - Provision of services to assist elderly people in their daily lives - Adoption of payment method appropriate to the situation of elderly people |
(v) Pay-by-the-hour parking lot
INV examines investment targets in the category of pay-by-the-hour parking lots in consideration of the experience, track record and creditworthiness of parking lot operators. It selects parking lots with a superior location after comprehensively examining various factors such as ground surface connection to road, signboard installation, regional characteristics and distance from the nearest train station.
The primary reasons for acquiring pay-by-the-hour parking lots are as follows.
We can expect solid demand for pay-by-the-hour parking, given the reinforced traffic regulations and crack down on illegal parking, etc., and thus a certain level of revenue can be expected. In addition, these properties can be acquired with INV's own funds as, with the exception of some large-scale parking lots, they are generally small in size. Also, the management costs are low as tenants are responsible for parking lot facilities and management. Furthermore, conversion into other use is relatively easy since many are located in commercial districts.
C. Portfolio Allocation by Property Type
Based on the perspectives set out in the above, INV invests its funds using an investment ratio by property type deemed optimum to guarantee sound growth of investment assets and secure stable profits, as shown in the table below.
In the process of acquiring assets while guaranteeing sound growth of investment assets and securing stable profits, the investment ratio may sometimes temporarily deviate from the ratio shown in the table below.
| Type of the Real Estate Assets | Allocation ratio (based on acquisition value) |
|---|---|
| Residences (R) | 50% or above |
| Properties of other types (office buildings, commercial facilities, hotels, Senior Citizens Properties, and pay-by-the-hour parking lot, etc. (T) |
Less than 50% |
(III) Investment Approach by Range of Rent for Residences
While rental demand and market rents are relatively stable for Residences, demand for properties in the high price range (luxury properties) is limited. Rents for these properties may significantly increase at times, but they also have the potential to plunge during a recession. Luxury properties are therefore susceptible to economic fluctuations.
For that reason, INV focuses its investments on properties that command an average monthly rent of less than JPY 200,000 (standard properties) and enjoy solid demand not subject to economic fluctuations. In doing so, it seeks the stability that is characteristic of Residences. At the same time, INV invests in luxury properties with superior locations and amenities, to ensure the profitability of its investment activities.
(IV) Portfolio Allocation by Geography
INV's target regions for investment are chiefly the greater Tokyo area (Tokyo and Kanagawa, Chiba, and Saitama prefectures) and cities designated as such by government ordinance. It further includes major cities and surrounding areas nationwide to ensure flexibility in the pursuit of investment opportunities.
For the purpose of ensuring sound growth of investment assets and secure stable profits over the medium and long term, INV aims to construct a geographically diverse portfolio of investment assets by avoiding the risk of economic fluctuations in certain regions as well as avoiding concentrated investment in certain areas to spread earthquake-related risks, etc.
In accordance with the above approach, in regards to the geographical investment distribution for managing Real Estate Assets, INV adopts the investment ratio shown in the table below.
In the process of acquiring investment assets needed for portfolio construction while guaranteeing sound growth of investment assets and securing stable profits, the investment ratio may sometimes temporarily deviate from the ratio shown in the table below.
| Area | Specific Area | Allocation Ratio (based on acquisition value) |
|---|---|---|
| Greater Tokyo Area | Tokyo and Kanagawa, Chiba and Saitama Prefectures in Japan | 70% or above |
| Major Regional Cities | Areas surrounding the greater Tokyo area and major cities nationwide including cities designated as such by government ordinance in Japan | Less than 30% Value of investment per one region: 15% or less |