Starts Proceed Investment : 32nd Semi-Annual Report

32nd Fiscal Period

Asset Management Report

Starts Proceed Investment Corporation

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

From: May 1, 2021

To: October 31, 2021

I. To Our Unitholders

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

We would also like to express our deepest sympathies to those who have been stricken with the novel coronavirus (COVID-19) infection and their families, as well as our sincere hope for their earliest possible recovery.

Having settled the 32nd fiscal period ended October 2021 (May 1, 2021 - October 31, 2021), 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 through disposition of Proceed Motoyawata and acquisition of Proceed Shinkawa. This was conducted 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 32nd fiscal period consists of 106 properties with a total acquisition price of 88,461 million yen. SPI also worked to reduce building maintenance and management costs while striving to improve the rent levels and increase the receipt of key money and other revenue. As a result of these endeavors, SPI posted operating revenue of 3,177 million yen, ordinary income of 1,159 million yen and net income of 1,157 million yen for the 32nd fiscal period. Distribution per unit came to 4,563 yen, surpassing the forecast announced earlier.

Among other topics of the 32nd fiscal period, the long-term issuer rating outlook granted to SPI by Japan Credit Rating Agency, Ltd. was upgraded from A- (Stable) to A- (Positive), and SPI was included in the FTSE EPRA/NAREIT Global Real Estate Index, which is widely adopted by many institutional investors both in Japan and abroad as a benchmark for international real estate investment. Looking ahead, we will aim to have our credit ratings further upgraded, and endeavor to make ourselves more appealing to a wide range of investors.

With regard to ESG awareness that attracts rapidly growing attention, Starts Asset Management Co., Ltd. has established an ESG Committee, for which I (Representative Director of the Asset Management Company) serve as Chief Officer, to pursue and promote our policy, goals and measures on ESG. Starting from the small things first, we have adopted environmentally friendly materials, such as paper certified by Forest Stewardship Council (FSC), for the latest asset management report (Japanese version) and the envelopes to enclose it. As such, although step by step, we will make steady endeavors to contribute to realization of a sustainable society.

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

Chief Executive Officer

Starts Proceed Investment Corporation

President

Starts Asset Management Co., Ltd.

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II. Asset Management Report

1. Overview of Asset Management

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

		28th period	29th period	30th period	31st period	32nd period
Fiscal Period	unit	(From May 1,	(From November 1,	(From May 1,	(From November 1,	(From May 1,
2019 to October 31,	2019 to April 30,	2020 to October 31,	2020 to April 30,	2021 to October 31,
		2019)	2020)	2020)	2021)	2021)
Operating revenue	million		3,094		3,665		3,352		3,160		3,177
yen
[Of which, real estate rent	million		[3,089]		[3,116]		[3,106]		[3,113]		[3,115]
revenue]	yen
Operating expenses	million		1,730		1,790		1,769		1,797		1,806
yen
[Of which, expenses related to	million		[1,321]		[1,362]		[1,354]		[1,374]		[1,382]
real estate rent business]	yen
Operating income	million		1,364		1,874		1,582		1,362		1,370
yen
Ordinary income	million		1,154		1,685		1,394		1,163		1,159
yen
Net income (a)	million		1,152		1,683		1,392		1,183		1,157
yen
Total assets (b)	million		89,804		90,295		90,411		90,191		90,258
yen
Net assets (c)	million		42,936		43,467		43,576		43,366		43,341
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	169,188		171,282		171,711		170,886		170,785
Net income per unit (Note 3)	yen		4,541		6,635		5,487		4,662		4,562
Total distributions (e)	million		1,152		1,283		1,392		1,183		1,157
yen
Distribution per unit (e)÷(d)	yen		4,542		5,059		5,488		4,663		4,563
[Of which, distribution of	yen		[4,542]		[5,059]		[5,488]		[4,663]		[4,563]
earnings per unit]
[Of which, distribution in	yen		[-]		[-]		[-]		[-]		[-]
excess of earnings per unit]
Return on assets (Note 4)	%	1.3	[2.5]	1.9	[3.8]	1.5	[3.1]	1.3	[2.6]	1.3	[2.6]
Return on equity (Note 4)	%	2.7	[5.3]	3.9	[7.8]	3.2	[6.3]	2.7	[5.5]	2.7	[5.3]
Equity ratio (c)÷(b)	%		47.8		48.1		48.2		48.1		48.0
Distribution payout ratio (Note 4)	%		100.0		76.2		100.0		100.0		100.0
[Other Reference Information]
Number of investments	Properties		106		106		107		106		106
properties (Note 5)
Total number of leasable units	units		5,255		5,225		5,227		5,226		5,219
(Note 5)
Total leasable floor area	m2	194,608.52	193,117.03	193,846.29	192,166.37	192,143.94
Period-end occupancy rate	%		95.7		95.9		95.2		95.4		96.4
(Note 5)
Depreciation and amortization	million		619		629		650		650		647
yen
Capital expenditures	million		117		137		81		114		213
yen
Property leasing NOI	million		2,386		2,382		2,401		2,389		2,381
(Net Operating Income) (Note 4)	yen
FFO (Funds from Operations) per	yen		6,978		6,956		7,086		7,051		6,883
unit (Note 4)
FFO multiple (Note 4)	times		15.2		13.1		14.2		16.0		17.5
Debt service coverage ratio	times		11.8		15.6		13.1		12.0		11.4
(Note 4)
Earnings before interest,	million		1,936		2,471		2,211		2,000		1,979
depreciation and amortization	yen
Interest expenses	million		164		158		169		167		174
yen
Total interest-bearing liabilities	million		45,646		45,646		45,646		45,646		45,646
yen
LTV (Loan-To-Value) ratio (Note 4)	%		50.8		50.6		50.5		50.6		50.6
Number of days of management	days		184		182		184		181		184

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(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
	expenses 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. (currently Tokyo Stock Exchange, Inc. JASDAQ Market) (Securities Code: 8979) the next day. After three capital increases through public offering and other developments since listing on the JASDAQ Market, 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 the JASDAQ Market on August 10, 2010, and the delisting from the JASDAQ Market 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 (32nd fiscal period: from May 1, 2021 to October 31, 2021), the total number of investment units issued and outstanding is 253,777 units, total assets amount to 90,258 million yen, and unitholders' capital (net) amounts to 41,684 million yen.

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ii) Investment environment and management performance

In the 32nd fiscal period, the Japanese economy had continued to experience a harsh situation with a drop in consumer spending due to the impact of the re-spread of COVID-19 and the declaration of state of emergency caused by it, along with sluggish exports and capital investments. In September, however, the number of COVID-19 cases decreased and the state of emergency was lifted, and the economy showed a recovery trend with the resumption of economic activities. 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 investment appetite continued to be seen among listed REITs, private REITs and other investors in Japan and abroad 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 32nd fiscal period, SPI conducted asset replacement through disposition of (C-40) Proceed Motoyawata (disposition price: 336 million yen) on July 1, 2021, and acquisition of (C-86) Proceed Shinkawa (acquisition price: 500 million yen) on July 2, 2021, 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 32nd fiscal period consists of 106 properties with acquisition prices totaling 88,461 million yen and a total leasable floor area of 192,143.94 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 improve the rent levels and increase 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 95.0%, the target level, throughout the period and resulted in a period-average occupancy rate of 95.8% and period-end occupancy rate of 96.4%.

As the most recent ESG initiative, SPI acquired the Building-HousingEnergy-Efficiency Labeling System (BELS) Certification for two properties ((C-83) Proceed Monzennakacho and (C-84) Proceed Maihama) in June 2021. In addition, SPI established the "Green Finance Framework" with an aim to strengthen the funding platform by expanding the investor base interested in ESG investment and lending, along with promoting sustainability initiatives, by procuring funds through green financing. As a third-party assessment of the Framework, SPI has been assigned "Green 1 (F)," the highest evaluation grade in the "JCR Green Finance Framework Evaluation," by Japan Credit Rating Agency, Ltd. (JCR).

iii) Overview of financing

In the 32nd fiscal period, SPI borrowed a long-term loan of 2,159 million yen (term: 2 years) and a long-term loan of 2,161

million yen (term: 3 years) to repay a long-term loan of 4,320 million yen due for repayment on May 24, 2021.

As a result, the period-end balance of interest-bearing liabilities totaled 45,646 million yen, comprising 10,093 million yen in current portion of long-term loans payable, 33,552 million yen in long-term loans payable and 2,000 million yen in investment corporation bonds as of the end of the 32nd fiscal period, with the period-end LTV ratio standing at 50.6%.

As of the date of this document, SPI has acquired the following credit ratings.

Credit rating agency		Credit rating
Japan Credit Rating Agency, Ltd.	Long-term issuer rating		Bond rating
(JCR)	A- (Positive)		A-

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