Sankei Real Estate Inc.TSE: 2972

(REIT) Financial Report for the Fiscal Period Ended August 2021

Oct 15, 2021 at 6:01 AM UTC · Issued by Sankei Real Estate Inc.

			October 15, 2021
REIT Securities Issuer:	SANKEI REAL ESTATE Inc.	Listing:	Tokyo Stock Exchange
TSE Code:	2972	URL:	https://www.s-reit.co.jp/en/
Representative:	Yuichi Ota, Executive Director
Asset Management Company:	Sankei Building Asset Management Co., Ltd.
Representative:	Yuichi Ota, President and Chief Executive Officer
Contact:	Atsushi Mukai, Director and Chief Finance & IR Officer
	TEL: +81-3-5542-1316

Scheduled date of submission of semiannual securities report:		November 26, 2021
Scheduled date of commencement of distribution payment:		November 22, 2021
Preparation of supplementary financial results briefing materials:		Yes
Holding of financial results briefing session:				Yes (for institutional investors and analysts)
						(Amounts are rounded down to the nearest million yen)
1. Status of Management and Assets for the Fiscal Period Ended August 2021 (from March 1, 2021, to August 31, 2021)
(1) Results of Operations			(% figures are the rate of period-on-period increase (decrease))
	Operating revenue	Operating profit		Ordinary profit		Net profit
	million yen	%	million yen		%	million yen	%	million yen	%
Fiscal period	2,176	1.3	1,141		2.0	1,014	(0.2)	1,014	(0.2)
Ended Aug. 2021

Ended Feb. 2021	2,147	7.1	1,118		12.3	1,017	12.5	1,016	12.5

	Earnings per unit	Return on equity		Ratio of ordinary profit	Ratio of ordinary profit
		to total assets		to operating revenue

		yen			%		%		%
Fiscal period		2,841			2.7		1.3		46.6
Ended Aug. 2021

Ended Feb. 2021		2,849			2.7		1.3		47.4

(Note) Earnings per unit is calculated by dividing net profit by the daily weighted average number of investment units (fiscal period ended February 2021: 356,800 units; fiscal period ended August 2021: 356,800 units).

(2) Distribution

	Distribution	Total			Distribution	Total
	per unit	distribution	Distributions	Total	per unit	distribution		Ratio of
	(excluding	(excluding	in excess of	distribution in	(including	(including
	Payout ratio	distribution to
	distributions	distribution in	earnings per	excess of	distributions	distributions
		net assets
	in excess of	excess of	unit	earnings	in excess of	in excess of

	earnings)	earnings)			earnings)	earnings)
	yen	million yen	yen	million yen	yen	million yen	%	%
Fiscal period	2,842	1,014	20	7	2,862	1,021	100.0	2.7
Ended Aug. 2021

Ended Feb. 2021	2,849	1,016	-	-	-	-	100.0	2.7

(Note 1) The entire amount of the total distribution in excess of earnings is a refund of investment that falls under distribution reducing investment, etc. under tax law.

(Note 2) The ratio of reduced surplus through the distribution in excess of earnings (refund of investment that falls under distribution reducing investment, etc. under tax law) the fiscal period ended August 31, 2021 was 0.001.

(Note 3) The payout ratio and ratio of distribution to net assets are calculated based on figures that do not include distribution in excess of earnings.

(3) Financial Position

	Total assets	Net assets	Equity ratio	Net assets per unit
	million yen	million yen	%	yen
Fiscal period	79,848	37,555	47.0	105,255
Ended Aug. 2021

Ended Feb. 2021	79,482	37,557	47.3	105,262

(4) Cash Flows

				Cash and cash
	Cash flows from	Cash flows from	Cash flows from	equivalents
	operating activities	investing activities	financing activities	Balance at end of
				period
	million yen	million yen	million yen	million yen
Fiscal period	1,396	(60)	(1,022)	7,257
Ended Aug. 2021

Ended Feb. 2021	486	(4,100)	3,397	6,944

2. Operating Forecasts for the Fiscal Period Ending February 2022 (from September 1, 2021, to February 28, 2022) and Operating Forecasts for the Fiscal Period Ending August 2022 (from March 1, 2022, to August 31, 2022)

(% figures are the rate of period-on-period increase (decrease))

									Distribution per unit	Distributions in
									(excluding
	Operating revenue	Operating profit	Ordinary profit	Net profit		excess of earnings
		distribution in
									per unit
									excess of earnings)

	million yen	%	million yen	%	million yen	%	million yen	%	yen	yen
Fiscal period	2,775	27.6	1,526	33.7	1,382	36.2	1,381	36.3	2,958	-
Ending Feb. 2022

Ending Aug. 2022	2,808	1.2	1,419	(7.0)	1,263	(8.6)	1,262	(8.6)	2,703	-

(Reference) Forecast earnings per unit (Forecast net profit ÷ Forecast total number of investment units issued and outstanding at end of period)

Fiscal period ending February 2022: 2,957 yen Fiscal period ending August 2022: 2,703 yen

(Note) Distribution per unit (excluding distribution in excess of earnings) is calculated based on the forecast total number of investment units issued and outstanding as of the date of this document of 467,099 units.

Other
1. Changes in accounting policies, changes in accounting estimates, and retrospective restatements

i.	Changes in accounting policies accompanying amendments to accounting standards, etc.:	None
ii.	Changes in accounting policies other than i:	None
iii.	Changes in accounting estimates:	None
iv.	Retrospective restatements:	None

(2) Total number of investment units issued and outstanding
i.	Total number of investment units issued and	Fiscal period		Fiscal period
	outstanding (including treasury investment units)	356,800 units	356,800 units
	ended Aug. 2021	ended Feb. 2021
	at end of period
ii.	Number of treasury investment units at end of	Fiscal period	0 units	Fiscal period	0 units
	period	ended Aug. 2021	ended Feb. 2021

(Note) For the number of investment units serving as the basis for calculation of earnings per unit, please refer to "Notes on Per Unit Information" on page 24.

Financial reports are exempt from audits by certified public accountants or audit corporations.
Matters of special note
The operating forecasts and other forward-looking statements contained in this document are based on information currently available to and certain assumptions deemed reasonable by SANKEI REAL ESTATE. Accordingly, the actual results of operations, etc. may differ materially due to various factors. In addition, the forecasts are not a guarantee of the amount of distribution. For the assumptions underlying the operating forecasts, matters of note in the use of the operating forecasts, etc., please refer to "Assumptions Underlying the Operating Forecasts for the Fiscal Period Ending February 2022 (from September 1, 2021, to February 28, 2022) and Fiscal Period Ending August 2022 (from March 1, 2022, to August 31, 2022)" on pages 7 and 8.

		SANKEI REAL ESTATE Inc. (2972) Financial Report for the Fiscal Period Ended August 2021
Table of Contents
1.	Management Status......................................................................................................................................................................	2
	(1)	Management Status...............................................................................................................................................................	2
	(2)	Investment Risks ....................................................................................................................................................................	8
2.	Financial Statements.....................................................................................................................................................................	9
	(1)	Balance Sheet ........................................................................................................................................................................	9
	(2)	Statement of Income ...........................................................................................................................................................	11
	(3)	Statement of Unitholders' Equity ........................................................................................................................................	12
	(4)	Statement of Cash Distribution............................................................................................................................................	13
	(5)	Statement of Cash Flows......................................................................................................................................................	14
	(6)	Notes on the Going Concern Assumption............................................................................................................................	15
	(7)	Notes on Matters Concerning Significant Accounting Policies.............................................................................................	15
	(8)	Notes to the Financial Statements.......................................................................................................................................	16
	(9)	Changes in Total Number of Investment Units Issued and Outstanding ..............................................................................	25
3.	Reference Information ................................................................................................................................................................	26
	(1)	Information on Price of Assets Under Management, Etc.....................................................................................................	26
	(2)	Capital Expenditures ............................................................................................................................................................	30

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SANKEI REAL ESTATE Inc. (2972) Financial Report for the Fiscal Period Ended August 2021

1. Management Status

(1) Management Status

(Overview of the Fiscal Period under Review)

Brief History of the Investment Corporation
SANKEI REAL ESTATE was incorporated under the Act on Investment Trusts and Investment Corporations (Act No. 198 of 1951, as amended; hereinafter, the "Investment Trusts Act") with Sankei Building Asset Management Co., Ltd. (hereinafter, the "Asset Management Company") as the organizer and investments in capital of 100 million yen (1,000 units) on November 19, 2018, and completed the registration with the Kanto Local Finance Bureau pursuant to Article 187 of the Investment Trusts Act on December 17, 2018 (Registration No. 140 with the Director-General of the Kanto Local Finance Bureau). Later, SANKEI REAL ESTATE listed on the Real Estate Investment Trust Securities Market of Tokyo Stock Exchange, Inc. on March 12, 2019 (TSE code: 2972).
As of the last day of the fiscal period under review (August 31, 2021), the total number of investment units issued and outstanding was 356,800 units, and unitholders' capital was 36,540 million yen.
Management Environment
In the fiscal period under review (fiscal period ended August 2021), amid difficult conditions due to the impact of COVID- 19, the Japanese economy showed movements of picking up due to advances made with vaccination. However, the spread of infection caused by variant strains of the virus led to a rapid increase in the number of cases even during the state of emergency and area-focused intensive measures for prevention of the spread of infection based on the Act on Special Measures for Pandemic Influenza and New Infectious Diseases Preparedness and Responses (Act No. 31 of 2012, as amended). This, among other factors, made it an environment in which economic developments continued to require attention. Overseas, while the economy continued to pick up, it was a situation in which attention should be given to the risk of the COVID-19 spreading again.
Under such economic circumstances, in terms of the office building market, which SANKEI REAL ESTATE sets as the primary investment target, there were movements to cancel lease agreements due to factors such as the consolidation of locations, and the vacancy rate continued to rise while rents declined slightly or remained the same in Tokyo and Osaka where SANKEI REAL ESTATE's portfolio assets are located. As for the hotel market, in which SANKEI REAL ESTATE invests as sub-assets, the total number of guests and occupancy rate improved year on year in almost all months during the fiscal period under review according to the Overnight Travel Statistics Survey by the Japan Tourism Agency, but the number of foreign tourists continued to decrease significantly due to restrictions on entry into Japan taken as a preventitive measure against with the spread of COVID-19. Furthermore, the situation did not improve significantly due to factors such as the Tokyo Olympic and Paralympic Games being held without spectators during the state of emergency.
Management Performance
SANKEI REAL ESTATE did not acquire or sell any assets in the fiscal period under review. The portfolio of SANKEI REAL ESTATE as of the end of the fiscal period under review consisted of 12 properties with an asset size (total acquisition price) of 71,525 million yen, the same as that in the preceding fiscal period.
As a result, the occupancy rate (Note) of the 12 portfolio properties as of the last day of the fiscal period under review remained high at 98.2%, and operating revenue from real estate leasing was 2,176 million yen, 1.3% higher than that at the end of the previous fiscal period. The appraisal value as of the last day of the fiscal period under review was 79,326 million yen.
SANKEI REAL ESTATE has sought to improve satisfaction through reinforcement and enhancement of the relationship with existing tenants, aiming at expansion of revenue and stable growth of earnings from assets under management as in the previous fiscal period. For existing tenants approaching contract renewal, an effort was made to limit reductions in rent as much as possible and renew contracts with upward revision or no change in rent through careful efforts based on the condition of the COVID-19 pandemic and trends of the rental market. In addition, repairs and capital expenditures were narrowed down to those that contribute to maintenance and improvement of the competitiveness of the assets under management. On the other hand, there are movements of consolidation of bases, mainly among companies based in several locations, and notices of contract cancellation and such associated with consolidation of bases have been received from some tenants even at the assets under management of SANKEI REAL ESTATE in the previous fiscal year, but there is little impact on management performance in the fiscal period under review.
The number of requests for rent decrease, deferment of rent payment, etc. due to the spread of COVID-19 from some tenants, mainly retail tenants occupying portions of office buildings that are assets under management was very low in the fiscal period under review compared to the previous fiscal period, and the impact on management performance in the fiscal period under review is minimal because the assets under management are mainly office buildings. In addition, although the two hotel properties held by SANKEI REAL ESTATE saw impact associated with the spread of COVID-19, fixed rent based on the current contract has been secured as usual for leasing business revenue in the fiscal period under review. SANKEI REAL ESTATE, along with the Asset Management Company, intends to conduct management with consideration for ESG, meaning the Environment, Social and Governance, for the purpose of sustainability of society and increasing the medium- to long-term investor value.
The Asset Management Company established a new "Sustainability Policy" in the Asset Management Company's management guidelines in March 2021 for the purpose of strengthening sustainability initiatives, and has established a variety of rules for its implementation.

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SANKEI REAL ESTATE Inc. (2972) Financial Report for the Fiscal Period Ended August 2021

In July 2021, SANKEI REAL ESTATE applied to participate in the GRESB Real Estate Assessment that is a global investment benchmark established as a tool for use in selection of and dialogue with investment destinations by measuring ESG considerations in individual companies and funds in the real estate sector, and acquired 3 Star and Green Star ratings in October 2021.

(Note) "Occupancy rate" is the ratio of total leased area to total leasable area, rounded to one decimal place. Moreover, for total leasable area and total leased area, each total is calculated based on the area corresponding to SANKEI REAL ESTATE's ownership interest in each portfolio property.

Overview of Fund Procurement
In the fiscal period under review, 4,800 million yen was borrowed from Mizuho Bank, Ltd., Sumitomo Mitsui Banking Corporation, Development Bank of Japan Inc., Mizuho Trust & Banking Co., Ltd., Sumitomo Mitsui Trust Bank, Limited, Shinsei Bank, Limited, and Resona Bank, Limited. through a loan syndicate with Mizuho Bank, Ltd. and Sumitomo Mitsui Banking Corporation as the arrangers on March 12, 2021, to repay 4,800 million yen of long-term borrowings due for repayment on March 12, 2021. The borrowing was made with a borrowing period of 4 years and fixed interest rate, thereby promoting extension of the average time to maturity, improvement in the ratio of fixed-rate debt, and staggering of maturities of interest-bearing liabilities.
As a result, as of the last day of the fiscal period under review, the balance of borrowings outstanding was 37,800 million yen and the ratio of interest-bearing liabilities to total assets (hereinafter, "LTV ratio") was 47.3%.
Overview of Business Performance and Distribution
As a result of the management described above, business performance in the fiscal period under review was operating revenue of 2,176 million yen, operating profit of 1,141 million yen, ordinary profit of 1,014 million yen, and net profit of 1,014 million yen.
Concerning distribution, in accordance with SANKEI REAL ESTATE's distribution policy (Article 36 of the articles of incorporation), SANKEI REAL ESTATE intends to have the maximum amount of distribution of earnings included in deductible expenses by application of special provisions for taxation on investment corporations (Article 67-15 of the Act on Special Measures Concerning Taxation (Act No. 26 of 1957, as amended)). For the fiscal period under review, the decision was made to distribute 1,014,025,600 yen, which is the entire amount of unappropriated retained earnings, excluding fractions of distribution per unit of less than 1 yen. This resulted in distribution per unit of 2,842 yen (however, excluding distributions in excess of earnings). Furthermore, pursuant to the policy on the distribution of cash in excess of earnings provided in Article 36, Paragraph 2 of SANKEI REAL ESTATE's articles of incorporation, due to net profit decreasing in the fiscal period under review as a result of recording temporary borrowing related expenses associated with borrowing for the acquisition of real estate trust beneficiary rights of 4 properties on September 2, 2021, 7,136,000 yen was distributed as a refund of investment that falls under distribution reducing investment, etc. under tax law, and distribution in excess of earnings per unit was 20 yen. As a result, the distribution per unit was 2,862 yen in the fiscal period under review.

(Outlook for the Next Fiscal Period)

General Management Outlook
Although the impact of COVID-19 on social and economic activities in Japan and abroad is expected to be alleviated due to factors such as progress in vaccinations ahead, there is no guarantee that it will lead to containment. As such, the environment will likely continue to be one in which downside risks to the Japanese and overseas economies, the impact on fluctuations in the financial and capital markets, etc. warrant close attention.
In the office building market, vacancy rates have risen and rents have continued to decrease or remain the same. Social and economic activities are expected to recover with rising vaccination rates, but it is necessary to monitor trends in office demand such as changes in work styles and moves to reduce fixed expenses (rent payments, etc.). At SANKEI REAL ESTATE, too, progress in consolidation of bases and reduction of office space due to the expansion of remote working such as working from home and the intention to reduce fixed expenses (rent payments, etc.) could lead to lease contract cancellations arising. We will further reinforce the relationship with tenants and continue consultations and responses as required, while closely monitoring tenants' business performance, etc.
In terms of the hotel market, while a recovery in the number of international visitors to Japan looking unlikely, domestic travelers and business travelers are expected to increase with the recovery in social and economic activities, but the severe situation is still expected to continue. A severe operating environment is foreseen for also the two hotel properties held by SANKEI REAL ESTATE, but no impact on SANKEI REAL ESTATE is expected as GRANVISTA Hotels & Resorts Co., Ltd., which is a tenant of the two properties and a wholly owned subsidiary of SANKEI REAL ESTATE's sponsor, The Sankei Building Co., Ltd. (hereinafter, "Sankei Building" or "Sponsor"), continues to pay fixed rent based on the fixed-term building lease agreement.
1. External Growth Strategy
  While carefully assessing the economic impact of the spread of COVID-19, the real estate investment market conditions, and other factors, SANKEI REAL ESTATE will continue to maintain external growth through acquisition of Sankei Building's portfolio properties as well as properties held by third parties by leveraging the sourcing capabilities of Sankei Building through full utilization of sponsorship support.
  In external growth, we will conduct diversified investment conscious of the balance of the portfolio matrix such as area and yield, and strive to improve the profitability and stability of the portfolio.

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