Daiwa House REIT Investment : Semi-Annual Report for the 30th Fiscal Period Ended February 2021

https://www.daiwahouse-reit.co.jp/en/

Semi-Annual Report

for the 30th Fiscal Period

From September 1, 2020 to February 28, 2021

2-4-8, Nagatacho, Chiyoda-ku, Tokyo, Japan https://www.daiwahouse-reit.co.jp/en/

Securities Code: 8984

Mid-Term Growth Strategy

Overview of the 30th Fiscal Period Ended February 28, 2021

Mid-Term Growth Strategy Aiming for Sustainable Growth of DPU

Over the 3 years after the merger	Mid-Term Growth Strategy
(from September 2016 to August 2019)	(from September 2019 onward)

Target	Asset Size	Stabilized DPU

We would like to send our heartfelt sympathy to everyone who has fallen ill with COVID-19.

We would like to report on the financial results and give an overview of operations of Daiwa House REIT Investment Corporation (hereinafter referred to as "DHR") in the 30th fiscal period ended February 28, 2021.

DHR acquired one hotel property being subleased by Daiwa House Group (acquisition price of ¥3.1 billion) in September 2020. Furthermore, in December 2020 and January 2021, DHR sold two residential properties with concerns over reduced medium- to long-term competitiveness and rising repairs and maintenance expenses (sale price of ¥2.7 billion), recording a gain on sales of ¥0.8 billion. As a result, DHR's portfolio as of the end of the current fiscal period consisted of 227 properties with an asset size of ¥820.1 billion (total acquisition price). Our occupancy rate at the end of the current fiscal period was 99.4%. In the following fiscal period, in March 2021, DHR sold one residential property (sale price of ¥3.5 billion), and in April 2021, DHR

Toshiharu Asada

Executive Director

Daiwa House REIT Investment Corporation

External growth

Selectively acquire highly competitive properties mainly in the three major metropolitan areas and core regional cities(Note 1)

Leverage pipelines and promote portfolio rebal- ancing

Utilize various acquisition schemes

Acquire properties accretive

to DPU

Internal growth

Steadily increase rent mainly at the residential properties in central Tokyo

Additional investment in LED light installation and other value enhancement measures

Conduct planned large- scale repair

Promote redevelopment (rebuilding)

Improve profitability

Finance

Equity financing attentive to NAV and growth of

DPU

Control LTV (excluding goodwill) at around 45% with an upper limit at 50%

Decrease debt financing costs

Effective use of cash on hand

Maintain financial discipline

acquired one logistics property (acquisition price of ¥5.9 billion).

In the Japanese economy today, an overall sense of uncertainty remains due to the serious effects of COVID-19. Even amid these conditions, only a portion of DHR's tenants received rent reductions, and the effects of COVID-19 were minimal. The full- period contributions of properties acquired in the previous fiscal period and the recording of gains on sales mentioned above resulted in operating revenues of ¥28,097 million, operating income of ¥12,571 million, and net income of ¥11,098 million. The total amount of distributions was ¥12,859 million (¥5,856 per unit) after the addition of an amount equivalent to amortization of goodwill of ¥1,982 million to net income and the deduction of an amount equivalent to part of the gain on sale of real estate properties.

DHR will work to continuously increase unitholder value by ensuring stable revenue and steady growth of its portfolio over the medium to long term through fully utilizing its sponsor Daiwa House Group's comprehensive strengths and knowhow regarding real-estate development.

Koichi Tsuchida

President and CEO

Daiwa House Asset Management Co., Ltd.

	ESG strategy			Improve ESG rating by third parties including GRESB and MSCI
			Increase the ratio of properties with environmental certifications to 70% or
				more by the fiscal year ending March 31, 2031(Note 2)

(Note 1) "Core regional cities" are cities outside of the three major metropolitan areas designated by government ordinance of Japan (Sapporo City, Sendai City, Niigata City, Hamamatsu City, Shizuoka City, Hiroshima City, Okayama City, Fukuoka City, Kitakyushu City, and Kumamoto City).

(Note 2) In April 2021, DHR raised the target ratio of properties with environmental certifications from 50% or more to 70% or more and announced a new target fiscal year.

C O N T E N T S

Mid-TermGrowth Strategy • • • • • • • • • • • • • • • • • • • • • • • •	• • • • •	• • • 2	Financial Status • • • • • • • • • • • • •	•	•	• • • • • • • • • • • • • •	• • • • • • • • • • • 14
Overview of the 30th Fiscal Period Ended February 28, 2021 • • • 3	I.	Asset Management Report		•	• • • • • • • • • • • • • •	• • • • • • • • • • • 16
Financial Highlights for the Fiscal Period Ended February 28, 2021 • • • 4	II.	Balance Sheets • • • • • • • • • •	•	•	• • • • • • • • • • • • • •	• • • • • • • • • • • 54
External Growth	• • • • • • • •	• • • • • • • • • • • • • • • • • • • • • • • • •	• • • • •	• • • 6	III. Statements of Income and Retained Earnings	• • • • • • • • • • 56
ESG Initiatives •	• • • • • • • • •	• • • • • • • • • • • • • • • • • • • • • • • • •	• • • • •	• • • 7	IV. Statements of Changes in Net Assets • • • • • •	• • • • • • • • • • • 57
Internal Growth Initiatives	• • • • • • • • • • • • • • • • • • • • • • • •	• • • • •	• • 10	V.	Statements of Cash Flows • •	•	• • • • • • • • • • • • • •	• • • • • • • • • • • 59
Portfolio Highlights • • • • •	• • • • • • • • • • • • • • • • • • • • • • • • •	• • • • •	• • 11	VI. Notes to Financial Statements	• • • • • • • • • • • • •	• • • • • • • • • • • 60
VII. Independent Auditor's Report			• • • • • • • • • • • 84
Major Portfolio Properties			• • 12		• • • • • • • • • • • • • •
• • • • • • • • • • • • • • • • • • • • • • • •	• • • • •		Investor Information • • • • • •	•	•	• • • • • • • • • • • • • •	• • • • • • • • • • • 88
Portfolio Map •				• • 13
• • • • • • • • •	• • • • • • • • • • • • • • • • • • • • • • • • •	• • • • •

2

In closing, we ask for the continued support of our unitholders and the investment community as we move forward.

Distributions Per Unit(Note 1)

30th Fiscal Period5,856

(From September 1, 2020 to February 28, 2021) ¥ *Distribution payments start date is May 10, 2021.

Forecast distributions per unit(Note 2)

(From March 1, 2021 to August 31, 2021)	¥6,050 (From September 1, 2021 to February 28, 2022) ¥5,500
31st Fiscal Period	32nd Fiscal Period

(Note 1) Distributions per unit for the 30th fiscal period include distributions in excess of earnings of ¥755 (which do not apply to return of capital).

(Note 2) Forecast distributions per unit refer to the forecast as of April 20, 2021, and actual distributions per unit may vary from this figure. These forecasts also do not guarantee the amount of distributions. Furthermore, forecast distributions per unit include distributions in excess of earnings, and we forecast distributions in excess of earnings per unit of ¥807 (which do not apply to return of capital) for the fiscal period ending August 31, 2021 and ¥902 (including return of capital of ¥73) for the fiscal period ending February 28, 2022.

3

Financial Highlights for the Fiscal Period Ended February 28, 2021

Statements of Income (Summary)

(Yen in millions)

					Fiscal period	Fiscal period
					ended August	ended February		Change
				31, 2020		28, 2021
					(29th period)	(30th period)
	Operating revenues	26,613		28,097	1,483
		Rental revenues	26,613		27,260	646
		Gain on sale of real estate properties		-	836	836
	Operating expenses	15,039		15,525	486
		Rental expenses	10,737		11,179	442
			Rental expenses	5,562		5,908	345
			(excluding depreciation)
			Depreciation	5,174		5,271	97
		Other operating expenses	4,302		4,346	43
			Amortization of goodwill	1,982		1,982		-
	Operating income	11,574		12,571	997
	Non-operating income	15		18	3
	Non-operating expenses	1,652		1,490	(162)
		Interest expenses and borrowing	1,491		1,488	(2)
		related expenses
	Ordinary income	9,936		11,099	1,162
	Net income	9,936		11,098	1,162
	Retained earnings brought forward		-	779	779
	Reversal of voluntary reserve	2,710		-	(2,710)
	Distributions in excess of earnings
	(allowance for temporary difference	50		1,657	1,607
	adjustments)
	Total distributions	11,917		12,859	942
	Retained earnings carried forward	779		676	(103)
	Distributions per unit	¥5,427		¥5,856	¥429

Rental revenues

Revenue contributions for the full period of the properties acquired in the fiscal period ended August 31, 2020 +¥594 million

Revenue contributions of the properties acquired in the fiscal period ended February 28, 2021 +¥87 million

Revenue decreases of the properties sold in the fiscal period ended February 28, 2021

-¥19 million

Gain on sale of real estate properties

Recording of gain on sale of real estate properties in the sales of two residential properties

Rental expenses

Increase in repairs and maintenance expenses due to early implementation of planned repairs +¥158 million

Non-operating expenses

Investment unit issuance expenses recorded in the fiscal period ended August 31, 2020

Distributions in excess of earnings

With the completion of the reversal of voluntary reserve, we implemented distribution accounted as an allowance for temporary difference adjustments to ensure that the total amount of distributions is not affected by the amortization of goodwill.

Balance Sheets (Summary)

			(Yen in millions)
As of August	As of February
31, 2020		28, 2021	Change
(29th period)	(30th period)

Total assets	899,579	901,386	1,806			Investment properties
												Increase due to properties acquired
	Current assets	43,538	49,565	6,026
			¥3,162 million
												Decrease due to properties sold
	Non-current assets	855,902	851,674	(4,228)			-¥1,840 million
			Capital expenditures
		Investment properties	780,843	778,754	(2,088)			¥1,734 million
				Depreciation
												-¥5,271 million
		Intangible assets	69,278	67,375	(1,903)
			Goodwill	63,431	61,449	(1,982)
Total liabilities	408,277	410,800	2,522			Interest-bearing debt
												New loans
	Current liabilities	26,722	38,810	12,087
			¥2,000 million
												Refinance
		Interest-bearing debt	19,000	30,358	11,358
				¥3,500 million
												Refinance of investment
	Non-current liabilities	381,554	371,989	(9,564)			corporation bonds
												¥3,000 million
		Interest-bearing debt	357,558	348,200	(9,358)			Reclassification of long-term
												loans and investment corporation
Net assets	491,302	490,586	(715)			bonds to current liabilities
												¥17,858 million
	Unitholders' capital	231,766	231,766		-
	Capital surplus, net	247,667	247,617	(50)			Capital surplus
												Recording of an allowance for
	Voluntary reserve	2,710		-	(2,710)
				temporary difference adjustments
LTV (excluding goodwill)	45.0%	45.1%		0.1 points
			Voluntary reserve
LTV (including goodwill)	41.9%	42.0%		0.1 points			Completion of the reversal of
												voluntary reserve
Number of investment units issued		2,196,000 units		2,196,000 units		- units
Net assets per unit	¥223,725	¥223,400	¥(325)

Operating revenues (Yen in millions)

	26,613	28,097
24,877	25,018
23,127

Feb. 2019 Aug. 2019 Feb. 2020 Aug. 2020	Feb. 2021
(26th period) (27th period) (28th period) (29th period)	(30th period)

Operating income (Yen in millions)

	12,571
10,702	11,574
10,559
9,960

Feb. 2019 Aug. 2019 Feb. 2020 Aug. 2020	Feb. 2021
(26th period) (27th period) (28th period) (29th period)	(30th period)

Net income	(Yen in millions)

		11,098
	9,166	9,936
8,597	9,125

Feb. 2019 Aug. 2019 Feb. 2020 Aug. 2020 Feb. 2021 (26th period) (27th period) (28th period) (29th period) (30th period)

Distributions per unit	(Yen)
5,773	6,040	5,856
5,427		5,427

Feb. 2019 Aug. 2019 Feb. 2020 Aug. 2020 Feb. 2021 (26th period) (27th period) (28th period) (29th period) (30th period)

Total assets	(Yen in millions)

	899,579	901,386
841,236	839,931
777,727

Feb. 2019 Aug. 2019 Feb. 2020 Aug. 2020 Feb. 2021 (26th period) (27th period) (28th period) (29th period) (30th period)

LTV(%)

excluding goodwill including goodwill

45.4	45.1	45.0	45.0	45.1
41.3	41.5	41.5	41.9	42.0

Feb. 2019 Aug. 2019 Feb. 2020 Aug. 2020 Feb. 2021 (26th period) (27th period) (28th period) (29th period) (30th period)

4						5

External Growth

DHR acquired one property of ¥3.1 billion in September 2020 using loans and funds in hand, and one property of ¥5.9 billion in April 2021 using funds in hand. Furthermore, we sold a total of three properties, one each in December 2020, January 2021 and March 2021.

Acquisition of New Properties

HO-005 Candeo Hotels Nagasaki Shinchi Chinatown (acquired in September 2020) Hotel Daiwa House Group Sublease

ESG Initiatives

DHR Participated in the CDP Climate Change Program for the First Time and Achieved an "A-" Score of the Highest Leadership Level

CDP is an international non-profit organization mainly engaged in requesting information disclosure from companies and governments on their environmental policies, such as climate-change policies, safeguarding water resources, and protecting forests, based on demand from global institutional investors and major corporate buyers with strong interests in environmental issues, and encouraging those policies through information disclosure. CDP is one of the information disclosure platforms to provide information on environmental issues. In 2020, over 9,600 global companies disclosed environmental data through CDP.

Stay-only hotel attractive both for leisure and business customers

Property located a three-minute walk from Shinchi Chinatown Station on the Nagasaki Electric Tramway

Bus stop of the Nagasaki Airport limousine in the vicinity also offers an excellent accessibility Occupied by Candeo Hotels Nagasaki Shinchi Chinatown on the 1st to 12th floors with 207 guest rooms and a drugstore on the 1st floor

LM-005 DPL Shin-Narashino (acquired in April 2021)

Nagasaki Sta.	Nagasaki Sta.
	34
202
		Nakashima
		River
	Shinchi	Kazagashira Park
	Chinatown
	Sta.

Dejima	Nagasaki Electric
Nagasaki	Tramway
Seaside Park

Nagasaki Prefectural	Nagasaki Shinchi
Chinatown
Art Museum
Nagasaki Airport Limousine
	Nagasaki Shinchi Terminal Bus Stop
Glover Garden	324
499 Oura Catholic Church

Acquisition date	September 30, 2020
Location	Nagasaki City, Nagasaki
Date of construction	January 24, 2020
Acquisition price	¥3,140 million
Leasable area	6,770.65 m2
Lessee	Daiwa House

Logistics (multi-tenant type)

The CDP Climate Change Program assessment assesses companies across four consecutive levels which are broken down into eight-tier score bands. The levels are: Leadership level (A and A-), Management level (B and B-), Awareness level (C and C-) and Disclosure level (D and D-).

DHR participated in CDP Climate Change Program for the first time in 2020 and achieved an "A-" score of the highest Leadership level, as DHR was recognized by CDP for its leadership role in climate change initiatives and information disclosure.

DHR was the First Listed J-REIT to Be Named on the Supplier Engagement Leaderboard in the CDP Supplier Engagement Rating

The CDP Supplier Engagement Rating is determined through responses from companies engaged in corporate initiatives against climate change throughout their value chain in the four areas of "supplier engagement," "governance," "scope 3 emissions" and "targets," as well as their overall CDP Climate Change Program score. In 2020, CDP listed approximately 400 companies, including approximately 80 Japanese companies, on the Supplier Engagement Leaderboard out of approximately 5,800 companies subject to evaluation, as recognition of the particularly excellent initiatives of those companies.

DHR made it onto the Supplier Engagement Leaderboard as the first listed J-REIT to be named.

	Tokyo-Gaikan
	Expressway
14
Keiyo JCT	Keiyo
Ichikawa IC	296
		8

Metropolitan	Keiyo Road
357	Hanawa IC
Expressway	Koya JCT
Route 7
Komatsugawa	Yatsu-FunabashiIC	14
Line
	Shin-Narashino Sta.

Metropolitan		15
Expressway
Bayshore		Higashi-Kanto
Route
Keiyo Line	Expressway

DHR Received "4 Stars" in the GRESB Real Estate Assessment and an "A" Rating, the Highest Rating Level Given in the GRESB Public Disclosure Level Evaluation Scheme for Two Consecutive Years

GRESB is an annual benchmarking assessment to measure Environmental, Social and Governance (ESG) integration of real estate companies and funds, as well as the name of the organization which runs the assessment. It was founded in 2009 by a group of major European pension funds who played leading roles in launching Principles for Responsible Investment (PRI).

Frozen and refrigerated logistics property with excellent access to the greater Tokyo metropolitan region

Located approx. 0.6 km from the Yatsu-Funabashi IC on the Higashi-Kanto Expressway, approx. 1.6 km from the Hanawa IC on the Keiyo Road, and close to the Tokyo Bay Road (National Route 357), a major arterial road to metropolitan Tokyo, the property offers excellent access to arterial roads and expressways.

With four floors of frozen and refrigerated storage, the property is used by a food company and a food supermarket.

Acquisition date	April 1, 2021
Location	Narashino City, Chiba
Date of construction	November 15, 2018
Acquisition price	¥5,930 million
Leasable area	12,686.32 m2
Lessee	Not disclosed

DHR began participating in the GRESB real estate assessment in 2017. DHR received GRESB "4 Stars" on a 5-star scale evaluation of the overall score relative to global participants in the 2020 assessment. Furthermore, DHR has received a "Green Star" assessment for three consecutive years as a top-level participant in both the "Management Component," which evaluates policies and organizational structures to promote ESG, and in the "Performance Component," which evaluates the environmental performance of properties and initiatives with tenants.

DHR also received an "A" rating, the highest rating given on a 5-grade scale in the GRESB Public Disclosure Level evaluation scheme for two consecutive years based on its proactive information disclosure practices related to ESG initiatives.

The Asset Manager Signing on to UN-Supported Principles for

Sale of Properties

We sold three residential properties for which declining profitability is forecasted at well above their appraisal prices.

In addition to returning gain on sale to unitholders through distributions over two fiscal periods, we applied part of the proceeds from sales to fund the acquisition of a logistics property.

	Residential properties
		Castalia Maruyama Urasando	(sold in December 2020)
		Castalia Maruyama Omotesando	(sold in January 2021)
		Big Tower Minami Sanjo	(sold in March 2021)

Responsible Investment (PRI)

The "Principles for Responsible Investment (PRI)" is an international network of institutional investors working to realize six principles. The PRI are promoted by the United Nations Environment Programme Finance Initiatives (UNEP FI) and the United National Global Compact (UN Global Compact).

The PRI encourages the incorporation of environmental, social and governance issues into investment decisions, and by including these perspectives in the investment decision-making process, aims to help the beneficiaries enhance long- term investment performance and the signatories better fulfill their fiduciary duty.

The Asset Manager agreed with the basic approach of the PRI and confirmed as a signatory in February 2021.

6						7

ESG Initiatives

Materiality Identification Process

In 2021, DHR identified ESG-related materiality through the following process.

Step 1Extracting sustainability issues

Sustainability issues related to investment corporations were extracted using various global ESG assessments, sustainability disclosure standards, and the SDGs.

Step 2Setting priority rankings

We set priority rankings from the extracted issues by verifying the state of DHR's disclosure and response and through interviews

Environmental Certifications

To increase the objectivity and reliability of DHR's initiatives in reducing the environmental burden of properties it owns, DHR intends to increase medium- to long-term asset value and pursue the acquisition of third-party external certifications and evaluations. DHR's acquisition ratio of environmental certifications is as follows.

DHR plans to increase the environmental certification acquisition ratio (gross floor area basis) for its properties to 70% or more by the fiscal year ending March 31, 2031.

with management.

Step 3Confirming validity

To ensure objectivity, CSR Design Green Investment Advisory Co., Ltd. reviewed our "selection process" and "identified materiality."

Step 4Discussions and approval by management

Discussions were held and approval was made by the Sustainability Committee.

The items below are deemed important by DHR in terms of DHR's asset characteristics and management policy, and do not signify importance as social issues.

(properties)				(%)
50			63.1	70
40		53.9	47	60
		35		50
	38.8
30			40
27.2	22			30
20
13				20
10				10

Status of environmental certifications (as of March 31, 2021)

5 properties	11 properties	7 properties
10 properties	4 properties	5 properties
10 properties	3 properties
5 properties	14 properties

strong Extremely

Stakeholder

Local contribution activities

Transparent, sound governance

Improvement in the health, safety, and comfort of tenants

Ensuring compliance

(appropriate transactions with stakeholders)

Response to climate change (Energy saving/renewable energy, improvement in resilience)

Promotion of human resource development (training and career development)

Promotion of diversity

0		0

End of Mar.	End of Mar.	End of Mar.	End of Mar.
2018	2019	2020	2021
	Number of properties (LHS)					Certified ratio (RHS)

(Note 1) The ratio is listed on a gross floor area basis (area listed on the inspection certificate of each property).

(Note 2) Excludes land properties.

		4 properties
Number of certified	30 properties	36 properties	12 properties
properties
Certified rate	49.7%	50.0%	27.6%
(gross floor area basis)
Certified rate
compared with the end	+5.0 points	+15.4 points	+13.6 points
of March 2020

Concluding Green Lease Agreement

expectations

Reduction of water usage

Reduction of waste

Protection of biodiversity

Improvement in the health, safety, and comfort of employees

Supply chain management

Community revitalization, redevelopment

Cooperation with tenants

(promotion of Green Leases)

Acquiring and improving Green Building

certification and ESG assessments

A i m i n g t o i n c re a s e t h e e n v i ro n m e n t a l performance of our properties through cooperation with tenants, DHR is introducing Green Leases(Note 3). The ratio of properties with green lease agreements concluded is shown to the right.

(Note 3) Green Leases refer to voluntary agreements formed in cooperation with building owners and tenants in which contracts and MOUs are concluded to reduce the environmental burden through energy saving, etc., and to improve the working environments of real estate, and the implementation of the contents of those agreements.

(properties)
250		88.2
200		195
150		55.9
100
		25.0
50		56
	28
	4.7

(%)

100

90

80

70 (Note 4) The ratio refers to the gross floor area

60	of properties with
50	G r e e n L e a s e s
concluded divided

40by the gross floor area of our entire

30portfolio (excluding land properties)

20 (Note 5) Gross floor area is

10	based on the area
l i s t e d o n t h e

Strong	Extremely strong
	Impact on own business

0		2

End of Mar.	End of Mar.	End of Mar.	End of Mar.
2018	2019	2020	2021

0inspection certificate of each property.

Environmental

Social

Governance

Number of properties (LHS)				Certified ratio (RHS)

Identified Materiality

	Materiality	Goals related to the main SDGs	Goals indirectly related to the SDGs
EEnvironmental	Climate change
	Energy efficiency (energy saving)
	Reduction of greenhouse gas emissions (renewable energy)
	Improvement of building resilience
	Cooperation with tenants (promotion of Green Leases)
Social	Employees and tenants
Promotion of human resource development (training and
	career development)
	Promotion of diversity
S	Improvement in the health, safety, and comfort of tenants
Cooperation with tenants (promotion of Green Leases)
Governance	Employees and tenants
	Ensuring compliance
	(appropriate transactions with stakeholders)
G	Acquiring and improving Green Building certification and
ESG assessments

Initiatives to Increase

Tenant Satisfaction

DHR believes that improved tenant satisfaction leads to stable and improved property management performance, and we conduct questionnaires to gauge our tenants' needs and satisfaction levels. The questionnaire results are shared with property management companies and used to improve building and facility specifications and services.

In a questionnaire given to the residents of 109 residential properties (6,946 units) in February 2021, around 80% of tenants said that they were "highly satisfied" or "satisfied" with the property overall, and in response to whether they would recommend the property to others, around 81% of tenants said that they would "definitely recommend" or "recommend" it.

Initiatives Aimed at

Social Contributions

DHR supports refugee relief activities. FOLEO Otsu Ichiriyama,

1. mall-typecommercial facility owned by DHR, supports refugee relief activities by continuously providing at no cost a space for UN refugee supporter applications and fundraising activities. In December 2020, FOLEO Otsu Ichiriyam received a letter of thanks from Japan for UNHCR.

8						9