Message from Executive Director

Cash Distribution of ¥13,106 per Unit

For the current fiscal period (seventeenth fiscal period),TOKYU REIT posted ¥6,819 million in operating revenues and ¥2,219 million in net income.
Due to such factors as the move out of large tenants at Kojimachi Square, net income decreased by ¥22 million from the previous fiscal period. The net income figure was higher by ¥153 million than the forecast announced on September 13, 2011.

Consistent with our distribution policy, 100% of unappropriated retained earnings were allocated for a cash distribution of ¥13,106 per unit. This was ¥133, or 1.0%, less than the ¥13,239 distribution in the sixteenth fiscal period, while being ¥906, or 7.4%, above the distribution forecast announced on September 13, 2011.

Net assets (after deducting cash distribution) stood at ¥578,697 per unit. Accounting for unrealized gains (the difference between book value and period-end appraisal value), adjusted net asset value (NAV) per unit was ¥580,532, a decrease of ¥2,480 from the sixteenth fiscal period.

Leasing Performance for the Seventeenth Fiscal Period (Ended January 31, 2012)

During the seventeenth fiscal period, seven tenants moved in or increased their leased floor space, while 10 tenants vacated or decreased their leased space. Overall conditions continued to be severe.

Specifically, leasing activities were conducted for space that became vacant during the seventeenth fiscal period or that had been vacant as of the end of the previous fiscal period. As a result Lexington Aoyama became fully occupied. However, occupancy rates decreased significantly at TOKYU REIT Toranomon Building and Kojimachi Square where large tenants vacated. Furthermore, we initiated proactive activities aimed at attracting tenants including large-scale renovation work at common areas of TOKYU REIT Toranomon Building, such as in vacant spaces and the elevator hall, and held a private viewing at Kojimachi Square attracting 200 brokers and others.

Consequently, as of January 31, 2012, 18 of the 26 portfolio properties had an occupancy rate of 100% and the occupancy rate for the entire portfolio was 94.0%, or down 4.5 percentage points from the sixteenth fiscal period. Also, with regard to the tenants that did not vacate, for a total of 167 tenants there was a decrease in rent from the previous rent for 15 tenants.

Also, as we aimed to improve stability of the portfolio during the seventeenth fiscal period, we were able to extend contract periods with multiple existing tenants. Contract periods were extended with large tenants at Tokyu Ginza 2-chome Building, Tokyu Sakuragaoka-cho Building and TOKYU REIT Shibuya Udagawa-cho Square (upward rent revision as of February 2012 for TOKYU REIT Shibuya Udagawa-cho Square). As a result, the ratio of tenants with remaining contract periods of five years or more as of February 1, 2012 was 52.7%, an increase of 1.4 percentage points from July 31, 2011.

Report on Property Sales and Acquisitions

There were no acquisitions or sales of properties during the seventeenth fiscal period. Though several properties were surveyed and their acquisitions considered, we decided to hold back due to the results of preliminary surveys and bidding.

Forecasts

Cash distributions per unit for the eighteenth fiscal period (ending July 31, 2012) and the nineteenth fiscal period (ending January 31, 2013) are both forecast to be ¥11,000 per unit. Assumptions for these forecasts take into account the possibility of future rent decreases for some existing tenants. Occupancy rate forecasts do not assume new tenants for vacant space, excluding vacant space for which new lease contracts have been concluded. Also, future tenants that have already concluded contracts but are granted free-rent periods were not factored into the posted income for the concerned periods. No additional property acquisitions are expected and cash reserves are assumed to be allocated toward reducing interest-bearing liabilities. Although of course we will earnestly conduct activities relating to property acquisitions, the forecasts do not assume any new acquisitions.

Leasing Policy for the Eighteenth Fiscal Period (Ending July 31, 2012)

As we continue to bolster leasing activities in the eighteenth fiscal period, we do so with the foremost aim of inviting new tenants to vacant spaces.

The vacancy rate for TOKYU REIT was 6.0% at the end of January 2012, staying at a comparatively lower rate than the 7.6% vacancy rate for office properties in the Tokyo 23 wards and the 7.4% for office properties in the five central Tokyo wards(both according to CBRE K.K.). However, this was a decrease of 4.5 percentage points compared to 1.5% at the end of the previous fiscal period (as of the end of July 2011) and vacant space increased by 11,078.90m2 (3,351.37 tsubo). This is the main reason why the forecasts for the eighteenth and nineteenth fiscal periods have plunged from that of the seventeenth fiscal period.

Two properties which especially require our focus are Kojimachi Square and TOKYU REIT Toranomon Building. Large tenants have vacated due to the effects of budget screening of the government and such, and at the end of January 2012 their vacancy rates were 57.2% (four floors) and 71.0% (about six floors) respectively. However, in February 2012 there were positive achievements such as contracting one floor with a tenant at Kojimachi Square and two floors with a tenant at TOKYU REIT Toranomon Building. The respective vacancy rates of the properties are expected to improve to 26.7% and 47.6% and we will continue to invite potential tenants and pour our effort into improving forecasts.

Policy for Property Sales and Acquisitions

Concerning the acquisition of properties, we will continue to actively deliberate and aim to improve cash distribution per unit and NAV per unit. Our caution is due to our belief that the recent prices of Tokyo real estate properties are relatively low from a long-term and cyclical perspective.

We will prioritize the securing of a high level of financial soundness while keeping the appraisal LTV (loan-to-value) at no higher than 50%.

Stagnant Investment Unit Price

The investment unit price of TOKYU REIT has been stagnant since August 2011, and on November 28, 2011 the price was ¥339,500, reaching the lowest since being listed. We believe this is a cause of concern for many of our unitholders. In fact, in the questionnaire which we handed out the previous fiscal period, we received several opinions saying, “I am concerned the investment unit price is falling significantly,”“the price is too low,” and “I am hoping that it will increase.” We believe there are two sets of factors contributing to the stagnant investment unit price, namely those pertaining to TOKYU REIT itself and those stemming from the overall J-REIT market.

Factors of TOKYU REIT

Factors for TOKYU REIT include “downward revision of forecasts” and “sale of investment units by a major unitholder.”

On September 13, 2011 TOKYU REIT announced its forecasts along with the financial results for the sixteenth fiscal period (ended July 2011).While revising cash distribution per unit for the seventeenth fiscal period (ended January 2012) from ¥12,000 to ¥12,200, the forecast also set cash distribution per unit at ¥11,000 for the eighteenth fiscal period (ending July 2012). Due to the significant downward revision of the forecast for the eighteenth fiscal period from that of the seventeenth fiscal period, the investment unit price of TOKYU REIT has for a time been below the TSE REIT Index. The fact that the price was favorable in the sixteenth fiscal period at ¥13,239 is also believed to be a factor to the drop in the eighteenth fiscal period being perceived very negatively.

The major unitholder that sold its investment units was a foreign-capital life insurance company in Japan which has undergone business integration. Due in part to this, the total number of investment units held by life insurance companies in Japan decreased by more than 4,000 units from the end of the sixteenth fiscal period.

Factors of the Overall J-REIT Market

Another set of factors in addition to those pertaining to TOKYU REIT includes a deterioration of supplydemand balance that is shared by the entire J-REIT market. We believe investors’ weakened appetite for investment can be explained by three factors. The first is the flight of investors to safer assets due to the European debt crisis. The second is the termination of investment trusts targeting J-REITs. The third is the reluctant attitude of value investors.

There must have been many investors, especially foreign investors whose asset under management were damaged due to the European debt crisis, whose only options were to let go of J-REITs (assets denominated in a foreign currency) in the second half of 2011 and jump to safer assets such as cash regardless of whether or not J-REIT units were cheap, as it was not possible for them to take big risks. There also may be investors who sold J-REIT units which had unrealized gain due to the strong yen and allocated funds to losses from other operating assets.

Of the many types of products for investment trusts targeting J-REITs that had a major impact on the deterioration of supply-demand balance are those investment trusts known as currency select type trusts. This product which began selling in 2010 is a “double-decker fund” which takes in J-REIT risks as well as foreign currency risks. Because standard prices plunged due to the appreciating trend of the yen towards the end of 2011, regardless of the performance of J-REITs, it appears many investors cancelled these currency select type trusts. Consequently, individual J-REIT units were also sold and, according to our analysis, this caused a spiraling decline of investment unit prices.

Since early autumn last year, most of the J-REIT investment unit prices including that of have been below net assets per unit as well as NAV per unit reflecting unrealized profits and losses. Although J-REITs were an attractive investment target for investors seeking cheaper financial products, investment attitude especially of overseas value investors was one of reluctance. This is believed to be due to value investors thinking J-REIT investment unit prices were not necessarily cheap at that point. In other words, there is a possibility, at that point, that they saw real estate appraisal values not as reasonable but rather, taking a cautious approach, predicted that in the future Japan’s real estate prices would fall and J-REIT unit prices per NAV would come to the level of investment unit prices seen recently.

We, however, take a more positive view of the long-term real estate market of Tokyo. Shortterm improvements in the vacancy rate and new advertised rent may be difficult. However, from a long-term perspective, we believe the current level of appraisal values is below what is moderate. At properties at the level for which we actually conduct investment activities, there have been cases of transaction exceeding the appraisal values. Regrettably, under the current system J-REITs are not permitted to acquire or retire investment units,and therefore we are not able to directly appeal the relatively reasonable price of our investment units. We hope to work towards eliminating discount factors of investment unit prices through further communication with value investors including those from overseas. Also, with regard to the amendment to the Investment Trust Law scheduled for the next fiscal year, we plan to propose changes to the system to the related parties that would ease the investment policies on J-REITs, including granting the acquisition and retirement of investment units.

March 2012