Starts Proceed Investment : 33rd Semi-Annual Report

33rd Fiscal Period Semi-Annual Report

Starts Proceed Investment Corporation

3-1-8 Nihonbashi, Chuo-ku, Tokyo

From: November 1, 2021

To: April 30, 2022

I. To Our Unitholders

We express our sincere appreciation to all unitholders for your continued loyal patronage to Starts Proceed Investment Corporation ("SPI").

Having settled the 33rd fiscal period ended April 2022 (November 1, 2021 - April 30, 2022), we would like to report on the management status and performance results for the period.

During the fiscal period under review, SPI conducted asset replacement by acquiring Proceed Kinshicho 2 in April 2022, while disposing Proceed Nakanoshimbashi in the same month from the viewpoint of avoiding cost increases for major repairs, etc. required as properties age, as well as the risk of a future drop in prices due to a decline in competitiveness, etc. caused by aging facilities. Consequently, SPI's portfolio as of the end of the 33rd fiscal period consists of 106 properties with a total acquisition price of 88,359 million yen. SPI also worked to reduce building maintenance and management costs while striving to increase revenue including rents and receipt of key money. As a result of these endeavors, SPI posted operating revenue of 3,224 million yen, ordinary income of 1,199 million yen and net income of 1,197 million yen for the 33rd fiscal period. Distribution per unit came to 4,718 yen, significantly surpassing the forecast announced earlier.

Moreover, as ESG initiatives, electric power contracts for 71 of our portfolio properties were changed to 100% renewable electricity plans as an initiative contributing to "reduction of greenhouse gas emissions and energy consumption," which is one of the material issues that we have identified based on our ESG policy. Through the initiative, we achieved virtually zero CO2 emissions with respect to electricity used by the properties (in common areas) with the concerned electricity plans. In addition, we acquired the Building-HousingEnergy-Efficiency Labeling System (BELS) Certification for Proceed Sendai Kamisugi in April 2022.

Going forward, we are resolved to achieve steady growth of our assets under management and secure stable earnings from a medium- to long-term perspective by making the most of the expertise of the Starts Group, the sponsor, in an effort to further enhance unitholder value.

We ask you, our unitholders, to extend to us your continued consideration and support of our operations.

Kazuya Hiraide

Executive Director

Starts Proceed Investment Corporation

President

Starts Asset Management Co., Ltd.

2

II. Asset Management Report

1. Overview of Asset Management

(1) Management and other performance highlights of the investment corporation

		29th period	30th period	31st period	32nd period	33rd period
Fiscal period	Unit	(From November 1,	(From May 1,	(From November 1,	(From May 1,	(From November 1,
2019 to April 30,	2020 to October 31,	2020 to April 30,	2021 to October 31,	2021 to April
		2020)	2020)	2021)	2021)	30, 2022)
Operating revenue	million		3,665		3,352		3,160		3,177		3,224
yen
[Of which, real estate rent	million		[3,116]		[3,106]		[3,113]		[3,115]		[3,154]
revenue]	yen
Operating expenses	million		1,790		1,769		1,797		1,806		1,810
yen
[Of which, expenses related to	million		[1,362]		[1,354]		[1,374]		[1,382]		[1,391]
real estate rent business]	yen
Operating income	million		1,874		1,582		1,362		1,370		1,413
yen
Ordinary income	million		1,685		1,394		1,163		1,159		1,199
yen
Net income (a)	million		1,683		1,392		1,183		1,157		1,197
yen
Total assets (b)	million		90,295		90,411		90,191		90,258		90,240
yen
Net assets (c)	million		43,467		43,576		43,366		43,341		43,380
yen
Unitholders' capital (net) (Note 2)	million		41,684		41,684		41,684		41,684		41,684
yen
Total number of investment units	units		253,777		253,777		253,777		253,777		253,777
issued and outstanding (d)
Net assets per unit (c)÷(d)	yen		171,282		171,711		170,886		170,785		170,940
Net income per unit (Note 3)	yen		6,635		5,487		4,662		4,562		4,717
Total distributions (e)	million		1,283		1,392		1,183		1,157		1,197
yen
Distribution per unit (e)÷(d)	yen		5,059		5,488		4,663		4,563		4,718
[Of which, distribution of	yen		[5,059]		[5,488]		[4,663]		[4,563]		[4,718]
earnings per unit]
[Of which, distribution in	yen		[-]		[-]		[-]		[-]		[-]
excess of earnings per unit]
Return on assets (Note 4)	%	1.9	[3.8]	1.5	[3.1]	1.3	[2.6]	1.3	[2.6]	1.3	[2.7]
Return on equity (Note 4)	%	3.9	[7.8]	3.2	[6.3]	2.7	[5.5]	2.7	[5.3]	2.8	[5.6]
Equity ratio (c)÷(b)	%		48.1		48.2		48.1		48.0		48.1
Distribution payout ratio (Note 4)	%		76.2		100.0		100.0		100.0		100.0
[Other Reference Information]
Number of investments	Properties		106		107		106		106		106
properties (Note 5)
Total number of leasable units	units		5,225		5,227		5,226		5,219		5,189
(Note 5)
Total leasable floor area	m2	193,117.03	193,846.29	192,166.37	192,143.94	192,005.05
Period-end occupancy rate	%		95.9		95.2		95.4		96.4		96.3
(Note 5)
Depreciation and amortization	million		629		650		650		647		645
yen
Capital expenditures	million		137		81		114		213		217
yen
Property leasing NOI	million		2,382		2,401		2,389		2,381		2,408
(Net Operating Income) (Note 4)	yen
FFO (Funds from Operations) per	yen		6,956		7,086		7,051		6,883		7,002
unit (Note 4)
FFO multiple (Note 4)	times		13.1		14.2		16.0		17.5		16.5
Debt service coverage ratio	times		15.6		13.1		12.0		11.4		11.3
(Note 4)
Earnings before interest,	million		2,471		2,211		2,000		1,979		2,021
depreciation and amortization	yen
Interest expenses	million		158		169		167		174		178
yen
Total interest-bearing liabilities	million		45,646		45,646		45,646		45,646		45,646
yen
LTV (Loan-To-Value) ratio (Note 4)	%		50.6		50.5		50.6		50.6		50.6
Number of days of management	days		182		184		181		184		181

3

(Note 1) All amounts less than the specified unit are rounded down, and percentage figures and multiples are rounded off to the first decimal place except for distribution payout ratio, which is rounded down to the first decimal place.

(Note 2) Unitholders' capital (net) is the amount obtained by subtracting deduction from unitholders' capital from unitholders' capital.

(Note 3) Net income per unit is calculated by dividing net income by the daily weighted average number of investment units issued and outstanding.

(Note 4) The indicators presented are calculated as follows.

For return on assets and return on equity, figures that are annualized by the number of days of management are also shown in brackets.

Return on assets	Ordinary income ÷ Average total assets
Average total assets = (Total assets at beginning of period + Total assets at end of period) ÷ 2
Return on equity	Net income ÷ Average net assets
Average net assets = (Net assets at beginning of period + Net assets at end of period) ÷ 2
Distribution payout ratio	Distribution per unit ÷ Net income per unit
Property leasing NOI	Profit from real estate rent business (Real estate rent revenue − Expenses related to real estate rent
business) + Depreciation and amortization
FFO per unit	(Net income + Depreciation and amortization + Other depreciation and amortization − Gain (loss) on
sales of real estate properties + other sales expenses) ÷ Total number of investment units issued and
	outstanding
FFO multiple	Investment unit price at end of period ÷ Annualized FFO per unit
Debt service coverage ratio	Earnings before interest, depreciation and amortization ÷ Interest expenses (including interest expens-
	es on investment corporation bonds)
LTV ratio	Total interest-bearing liabilities ÷ Total assets

(Note 5) The number of investment properties are indicated in units that are generally accepted to be one. In addition, the total number of leasable units is the number of units that are leasable for residential, office, retail and other uses, and the period-end occupancy rate is the leased area expressed as a percentage of total leasable floor area as of the closing of accounts.

(Note 6) Fiscal period is a six-month period that ends on April 30 and October 31 of each year.

(2) Development in management of assets in the fiscal period under review

1. Brief background of the investment corporation

Starts Proceed Investment Corporation ("SPI") was established on May 2, 2005, with 150 million yen in capital (750 units) based on the Act on Investment Trusts and Investment Corporations (Act No. 198 of 1951; including amendments thereto) (the "Investment Trusts Act"), completed registration with the Kanto Local Finance Bureau based on Article 187 of the Investment Trusts Act on June 15, 2005 (Registration No. 37 issued by the Director-General of the Kanto Local Finance Bureau), implemented additional issuance of investment units through public offering (21,600 units) on November 29, 2005, and listed on Jasdaq Securities Exchange, Inc. ("Jasdaq") (Securities Code: 8979) the next day. After three capital increases through public offering and other developments since listing on Jasdaq, SPI listed on the Tokyo Stock Exchange, Inc. Real Estate Investment Trust Securities Market (Securities Code: 8979) on July 27, 2010, and this was accompanied by an application for delisting being filed with Jasdaq on August 10, 2010, and the delisting from Jasdaq taking effect on October 1, 2010.

SPI entrusts asset management to Starts Asset Management Co., Ltd. (the "Asset Management Company") and sets the focus of management on investment in real estate of which the principal use is use as rental housing ("rental housing") as well as specified assets (the meaning provided in Article 2, Paragraph 1 of the Investment Trusts Act; the same hereinafter) backed mainly by rental housing. SPI also invests in monthly rental apartments, serviced apartments, hotels, residential facilities for the elderly (collectively referred to as "rental housing, etc." together with "rental housing"), which are assets related to rental housing, and real estate from which income can be expected due to other leasing revenue or specified assets backed by such real estate. As it invests in rental housing, etc., SPI adopts the basic policy of setting rental housing for average-income households in particular, the demand for which SPI believes to be the most stable, as the primary investment target. In addition, SPI takes measures, such as leveraging the capabilities of the Starts Group, to enhance asset management efficiency, with an aim to secure steady growth of assets under management and stable earnings over the medium to long term.

As of the end of the fiscal period under review (33rd fiscal period: from November 1, 2021 to April 30, 2022), the total number of investment units issued and outstanding is 253,777 units, total assets amount to 90,240 million yen, and unitholders' capital (net) amounts to 41,684 million yen.

4

ii) Investment environment and management performance

In the 33rd fiscal period, the Japanese economy had continued to be in a strong sense of stagnation due in part to the impact of priority measures to prevent the spread of infection being issued with the resurgence of COVID-19 (variants), but dining out, travel and other consumer spending did show signs of gradually picking up after the measures were lifted. On the other hand, financial and economic sanctions on Russia for its invasion of Ukraine, soaring energy and food prices, the U.S. monetary tightening and other factors are making global economic trends extremely uncertain. Even under the COVID-19 pandemic, its impact on SPI, such as a decrease in rent revenue, found to date has been extremely limited as SPI is a REIT specializing in housing. As such, SPI does not foresee any concern of its operations being affected by the pandemic in the short term.

Under such circumstances, demand trends in the rental housing market in which SPI invests have continued to be stable in the Tokyo metropolitan area, Osaka, Nagoya, Fukuoka, Sendai, and other major metropolitan areas, and rental apartments owned by listed REITs specializing in housing have also maintained high occupancy rates.

In the secondary real estate market, a robust property acquisition appetite continued to be seen among investors amid the ongoing favorable fund procurement environment. This, combined with limited supply of quality properties, has kept competition in property acquisition overheated, leaving transaction prices at a high level.

In the 33rd fiscal period, SPI conducted asset replacement through acquisition of (C-87) Proceed Kinshicho 2 (acquisition price: 537 million yen) on April 1, 2022, and disposition of (C-30) Proceed Nakanoshimbashi (disposition price: 760 million yen) on April 28, 2022, to avoid increase in costs for major repairs, etc. seen as necessary as properties age in addition to risk of a future drop in prices due to a decline in competitiveness, etc. caused by aging facilities. As a result, SPI's portfolio as of the end of the 33rd fiscal period consists of 106 properties with acquisition prices totaling 88,359 million yen and a total leasable floor area of 192,005.05 m2.

In close collaboration with the property management company Starts Amenity Corporation, the Asset Management Company made efforts to reduce building maintenance and management costs while striving to increase rent, the receipt of key money and other revenue. The Asset Management Company also promoted leasing activities in coordination with leasing agents by setting finely tuned leasing conditions based on deeper understanding of regional characteristics and advantages of individual properties as well as thorough comparative analyses of nearby competing properties. Moreover, ongoing efforts were made to put vacant space into service quickly with an aim of maintaining the high occupancy rate. These measures worked to maintain the occupancy rate of the entire portfolio at a stable level of over 96% throughout the period and resulted in a period-average occupancy rate of 96.5% and period-end occupancy rate of 96.3%.

As ESG initiatives, electric power contracts for 71 of the portfolio properties were changed to 100% renewable electricity plans as an initiative contributing to "reduction of greenhouse gas emissions and energy consumption," which is one of the material issues that SPI has identified based on its ESG policy. Through the initiative, virtually zero CO2 emissions were achieved with respect to electricity used by the properties (at common areas) with the concerned electricity plans. In addition, SPI acquired the Building-HousingEnergy-Efficiency Labeling System (BELS) Certification for one property ((G-34) Proceed Sendai Kamisugi) in April 2022.

iii) Overview of financing

In the 33rd fiscal period, SPI issued the Third Series Unsecured Investment Corporation Bond of 1,500 million yen as shown below and borrowed a long-term loan of 2,820 million yen (term: 5.5 years) to repay a long-term loan of 4,320 million yen due for repayment on November 24, 2021.

Name:	Starts Proceed Third Series Unsecured Investment Corporation Bond (with pari passu
	conditions among specified investment corporation bonds) (Green Bonds)
Issue amount:	1,500 million yen
Interest rate:	0.800% per annum
Issue date:	November 18, 2021
Redemption date:	November 18, 2031
Security and guarantee:	Unsecured and unguaranteed

5