Fukuoka REIT : Integrated Report 2022～Growth Strategy～

CEO's Message

President and CEO

Fukuoka Realty Co., Ltd.

Zenji Koike

started to set down sustainability targets in terms of what they engage in as part of real estate development. The Company's Sustainability Promotion Office and Fukuoka Jisho's Corporate Planning Department must continue to collaborate in facing issues such as determining the degree to which specific targets must be achieved in regard to the assets of the Group. This year, we set specific KPIs and targets for materiality. And we intend to actively disclose these targets along with our results.

The Company's vision and FRC's strategy

The Company's Basic Policy is to soundly manage investment properties with a specialization in the Kyushu region, while our mission as a REIT is to distribute stable dividends over the medium to long term. And contributing to regional revitalization and to the development of attractive communities based on the policy of Act Local and Think Global is both our vision and a direction that we have no intention of changing into the future.

In other words, our position as a region-specificREIT-our primary defining characteristic-is a unique quality with which

We aim to expand business with a focus on development targeting future stable growth.

I myself have absolutely no intention of allowing the assessment of FRC to deteriorate among the J-REIT brands, which is why I naturally believe in the importance of following our Basic Policy as we actively engage in property acquisition or efforts to increase our market capitalization and our total asset value, all while prioritizing stable dividend distribution and the steady growth of NAV. Given our uncompromising stance of remaining a region-specific REIT, however, we intend to contribute to the development of cities in the Kyushu region and Okinawa, centered on Fukuoka, as our business field.

I believe that large developers in the Tokyo metropolitan area are similarly involved in contributing to urban development and local communities with their own respective intentions. As one of our sponsors, Fukuoka Jisho Co., Ltd., also aims to increase the value of real estate by making cities more interesting and by helping them grow. And as real estate liquidity increases, developers will shift to considering real estate exit strategies.

Who We Are

Growth Strategy

Looking back over the past year of ongoing dialogue with our investors, I felt the importance of taking a different perspective from developers.

Now in my second year as president of Fukuoka Realty Co., Ltd. (the Company), the asset management company for Fukuoka REIT Corporation (FRC), I have had the privilege of experiencing something different from my past involvement as a developer, which was very informative. In many cases, those of us who are involved in the REIT industry report our earnings twice a year, at which point we meet with our investors. And with each meeting, I experience firsthand the importance of dialogue with investors.

Developers engage in urban and community development under their own set of values, and undertake risk themselves as they develop and profit from properties. On the other hand, companies that employ the REIT scheme own real estate using equity capital solicited from investors and loans borrowed from financial institutions, so absolutely must achieve stable profits. Which is also why we must not act solely upon our own set of values, but must ensure investors accept the value of our actions. Although I feel the perspective of investors is primarily

perspective alone. This past year was one in which I began to see this gap.

We will work to address sustainability in unison with our sponsors.

Amid the growing emphasis on sustainability as part of investment and management, I have recently felt the importance of sincerely engaging in the question of how we should address sustainability as a REIT. Which is why I also intend to expand the scope of sustainability-related disclosures going forward. On the other hand, I have also recognized a fair amount of difference in the level of enthusiasm in terms of our investors' interest and questions regarding sustainability. I myself see sustainability initiatives in a positive light.

As one of the Company's sponsors, Fukuoka Jisho Co., Ltd., is an unlisted company, which means it is us that engages with investors and the market. And this is why

it is important for us to hold dialogues with our investors, capture the interest of the market, and involve our sponsors in our efforts. Over the past year, I have also felt that the awareness of sustainability among our sponsors, as well

I can relate very well from the standpoint of someone who was previously involved in urban development. On the other hand, I am concerned over the degree to which our investors acknowledge the value of this unique quality. The price of REIT investment units (valuation) varies depending on the assessment of growth potential (growth expectation). So, if we see valuation as the growth potential for scale, then a slow real estate acquisition pace by FRC as a region-specific REIT will result in a negative market assessment when compared to a REIT that invests in the Tokyo metropolitan area.

Given our desire to contribute to a specific region through the assets that we own, however, simply considering growth in terms of asset scale alone would not match with our vision. Although we could increase investment opportunities by expanding our investment target to the Tokyo metropolitan and Kansai areas as a means of raising the growth potential demanded of investors, this would conflict with our direction. Which is why we instead intend to invest in high-quality real estate in the region of Kyushu and Okinawa, centered on Fukuoka, and manage the REIT with a firm idea as to how we can revitalize the region and contribute in other ways through real estate asset management.

In this sense, I see investment corporations and developers as inseparable. After all, REITs acquire properties developed by developers and manage these appropriately. Yet I believe that it is necessary to maintain a structure in which the Company and FRC act independently from each other. With the most recent revisions to the Asset Management Guidelines, we now have greater flexibility when investing in development properties. We made these revisions because we felt that engaging in development projects together with our sponsor companies and other developers will contribute to the growth potential of dividends. In other words, the portion equivalent to the capital gains for developers will help reduce the acquisition book value, which we expect to enable us to acquire properties with relatively high NOI.

Human resources for appropriate asset management and growth of owned real estate

The value of owned real estate varies depending on asset management after acquisition. Moreover, asset management requires a greater degree of manpower as the number of properties increases with an expanding asset scale. The

Sustainability

Data Section

focused on financial results in the form of dividends, it can be difficult to achieve such results from our own

as their sustainability initiatives, have made progress. Fukuoka Jisho's Corporate Planning Department has also

Glossary NAV

NAV is an abbreviation for Net Asset Value at an investment trust. Net assets are defined as total investment trust balance sheet assets minus liabilities, with the base price based on the number of units. For REITs, the term net assets refers to net assets plus unrealized gains or losses reflecting the difference between the book value of the property owned and the appraised value.

[Calculation method] NAV: Net assets + Unrealized gains or losses - Dividends Market net assets value per unit: NAV / Total number of units issued

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Fukuoka REIT Corporation 2022

17

Arcade

Kyunishi- Nakasu-Kawabatamachisuji

Subway Station

CEO's Message

Company believes we can effectively address this issue through human resources growth based on previously accumulated experience, human resources development through training, and optimized personnel assignments.

The Company is now approaching the 20th anniversary of our founding. We therefore intend to enhance loyalty by providing continuous service awards to those employees who have reached their 15th year of employment. In terms of training, we have conducted overseas training to put Think Global into practice, including overseas training in North America and observation with training in Shenzhen depending on the demands of each employee's duties. We also offer an extensive lineup as part of our certification acquisition support system, through which many of our employees have acquired certifications related to real estate and finance, including becoming ARES Certified Masters and real estate brokers.

As a result of our past initiatives and track record, we were certified as a "Fukuoka 'Work Style Reform' Promotion Company" in 2018, and were registered as a Fukuoka City Well-Being & SDGs Registration System "Master" this year. We are currently advancing a range of work-style reforms, including eliminating all overtime, ensuring employees take annual paid leave, and supporting a balance between child raising and work. Developing human resources and making

In terms of creating value for our stakeholders, the tenants that occupy our properties, for example, each have their own set of values regarding the ESGs. And it is necessary for us to do what we can to address those values. Moreover, if a property does not meet the prerequisites of the tenants, they will no longer choose that property in some cases, so we must have a strong awareness of the demand for sustainability. This awareness, in other words, will necessarily have an impact on the earnings of our properties.

As the basis for accepting all our clients, we must also meet the required standards. The challenges differ in each case, however, where we must question the degree to which we have addressed sustainability in properties under development, or the degree to which we can address sustainability after the fact in properties that we have already acquired. At the very least, we must indicate the value that our properties create from the perspective of environmental action to our stakeholders, and primarily our tenants.

In conclusion:"Together with Local Communities and Cities"

One thing I often say to our employees during morning assemblies is that I want them to value our "focus on the

region" and our "close ties with the region" as a means of practicing Act Local, one of our missions. Although it is fairly difficult to connect these to economic value, I feel that one of our strengths is our ability to help plan and participate in various local activities and events. In 2022, the Hakata Gion Yamakasa Kakiyama was held for the first time in three years. I was also allowed to play a part in the festival, and rode the Hachiban-yamakasa as part of the Oiyama float race on the final day of the event.

Developers in large cities likely struggle when trying to delve deeply into a region from the stance of management once a property is developed. As the entity that manages properties after development, FRC and the Company consider our contributions to the local community together with those developers who work with real estate here in Fukuoka and Kyushu, which means we serve as landlords with deep roots in the community. This, I believe, is a strength of region-specific REITs. And I feel that this aspect is particularly important. In essence, real estate should be considered as a series of stages, beginning with thinking about why land needs to be developed and what kind of value can be offered through development, and ending

Column "What is Hakata Gion Yamakasa?"

with thinking about what needs to be done in terms of asset management afterward to realize that value, and ultimately how to enhance that value. And I feel that being loved by the community and the city residents as a result of this approach will have a major impact on real estate development and post-development management.

FRC and the Company constantly think about this value and focus our energies on managing real estate that is loved by the region. I therefore humbly ask for your continued support.

Zenji Koike President and CEO Fukuoka Realty Co., Ltd.

Place of birth: Fukuoka City Hobbies: Running, golf

Profile

1988 Joined Fukuoka SOGO Bank (currently THE NISHI-NIPPON CITY BANK, LTD.)

1991 Joined Fukuoka Jisho Co., Ltd.

2013 Appointed as Chairman of Canal Entertainment Works Co., Ltd. (currently FJ. Entertainment Works Ltd.)

2017 Appointed as Senior Executive Officer of Fukuoka Jisho Co., Ltd. Appointed as Chairman of Sunlife Co., Ltd.

2021 Joined Fukuoka Realty Co., Ltd.

Appointed as President and CEO of Fukuoka Realty Co., Ltd. (current position)

2022 Appointed as Executive Director of FRC in May (current position)

Who We Are

Growth Strategy

various considerations will continue to be important. And because we hope to expand the areas in which we do business going forward, we will strive to capture business opportunities for growth by strengthening our human resources and assigning personnel appropriately.

Setting sustainability targets and managing owned properties

Making sustainability-related disclosures is an urgent challenge. Looking back over the past year, we have established a data platform as the prerequisite for achieving the materiality related numerical targets for the properties we currently manage. Going forward, we will work together with our sponsors, and cooperate with each company in the Fukuoka Jisho Group as we shift in a direction that will allow us to store and manage data. In April 2021, we raised the targets of reducing CO2 emissions by 35%, recycling 75% of waste, and achieving a Green Building Certification rate of 85% or higher, all by 2030. Moreover, in September 2022 we both publicly endorsed the Task Force on Climate- related Financial Disclosures (TCFD) recommendations and joined the TCFD Consortium, an association of companies in Japan that has endorsed the recommendations.

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Riding on top of a float (President Zenji Koike at far right) in the Oiyama float event of the Hakata Gion Yamakasa Festival on July 15, 2022

Hakata Gion Yamakasa began when Shoichikokushi rode a segakidana and sprinkled perfumed holy water (honeydew water) to remove a pestilence from the city in 1241, which led to the Gion Faith for warding off calamities and ultimately developed into a yamakasa ritual. With its roots dating back to 1241, Hakata Gion Yamakasa was registered as a UNESCO Intangible

Cultural Heritage in 2016, thereby bringing the festival worldwide
recognition. This year, the festival was held for the 782nd time.
There are two types of yamakasa portable shrines, kazariyama
ornamental floats and Kakiyama floats. Kazariyama ornamental
floats are not carried, but are instead
displayed at specific locations in
Fukuoka city every year during the		Hakata
festival from July 1 to July 15. The	Elementary
	School
different Kakiyama float events
begin on July 9 and culminate in the		Avenue
Oiyama float race as the climax of	Showa
the Hakata Gion Yamakasa.
Turning
The Kakiyama float race was	point
held for the first time in three years		Kawabata
during 2022 due to COVID-19.		Kushida
	Hakata Shopping
Some of the yamakasa are called			Shrine
	River
the seven "Nagare," each of which
is carried and compete for time
during Kushida-iri* and over the		Canal City
	Hakata
Oiyama float race course. The first
yama to start the race is called
Oiyama Float Race Course Map

Ichiban-yama, and is the only yamakasa granted the privilege of singing the Hakata Iwaiuta (Iwaimedeta) during Kushida- iri, so each year the order changes. The Hakata Iwaimedeta overpowers as it reverberates throughout Kushida Shrine.

The race starts with the dedication of Ichiban-yamakasa upon beginning Kushida-iri at 4:59 in the morning, from which time all eight yamakasa perform Kushida-iri in succession before racing off into the city of Hakata in the dim morning light.

• Kushida-iri refers to the act of carrying a yamakasa onto the grounds of Kushida Shrine, circling a flag on the grounds, and leaving the grounds again.

Gofukumachi

Subway Station

Kyuhigashi-
	machisuji	Shofukuji Temple
			Myorakuji Temple
			Tochoji	Shotenji Temple
			Temple	Shotenji Temple
Start
			Gion	Hakata
			Sennennomon
			Subway	Gate
			Station	Taihaku-
	Mangyoji	dori
Hakata	Avenue
Temple
	Ekimae	Street

A Kazariyama ornamental float is dedicated to Canal

City Hakata every year.

Fukuoka REIT Corporation 2022

Sustainability

Data Section

19

External Environment (Initiatives of Fukuoka City)

Fukuoka City's Standing: From Regional City to an Asian Economic Metropolis

Redevelopment Project

Beijing

Seoul

Busan Osaka Tokyo

Shanghai Fukuoka

Blessed with a history and culture nurtured by the sea, an abundant natural environment, extensive urban functions, diverse human resources, and various other assets, Fukuoka City is recognized around the world as a livable city.

Under the "Fukuoka City Comprehensive Plan," the basic strategy for city management focuses on creating a virtuous cycle of "urban growth" and "greater quality of life." In aiming to become a "leading Asian city in which people, the environment, and urban vitality are harmonized," Fukuoka City is advancing urban planning that recognizes its presence within Asia as a compact, sustainable

④

⑤ ②③

Nanakuma Subway

Line Extension

(scheduled to start

operation on March 27, 2023)

Kushida Shrine

Station

⑬

JR Hakata Station

Who We Are

city that balances economic growth with a safe, secure, high quality of life.

⑧	① ⑦	⑥
Nishitetsu Fukuoka

(Tenjin) Station

Canal City Hakata

⑨

⑩ ⑪

⑫

Initiatives Aimed at Attracting Companies

• Attracting International Financial Functions, TEAM FUKUOKA

Note: Focus areas

Tenjin Big Bang		Hakata Connected

Growth Strategy

Photo provided by Fukuoka City	Photo provided by Fukuoka City
With the aim of attracting international financial functions to	M-DAQ, a globally expanding and Unicorn-class Singapore FinTech
Fukuoka, TEAM FUKUOKA was launched to conduct promotional	company offering financial services using foreign exchange, and
activities and create an environment that will generate momentum	E.SUN Bank, a leading financial institution in Taiwan that holds the
for the city as a whole by leveraging the characteristics of industrial,	largest share in financing for SMEs, have decided to open offices
academic, and government partners (in September 2020).	in Fukuoka City (in September 2022).

• Redevelopment Projects

	Name	Completion month
①	Sumitomo Life Fukuoka Building/Nishi-dori Business	May 2025
	Center Reconstruction Project (provisional name)	(scheduled)
②	Tenjin Business Center	September 2021
③	Fukuoka City Hall's Former North Annex Utilization	November 2025
	Project	(scheduled)
④	Tenjin 1-chome North 14th Block Building	March 2025
	(provisional name)	(scheduled)
⑤	New Fukuoka Building (provisional name)	December 2024
(scheduled)
⑥	Tenjin1-7 plan (provisional name)	March 2026
(scheduled)
⑦	Hulic Fukuoka Building Rebuilding Project	December 2024
	(provisional name)	(scheduled)

• Redevelopment Projects

	Name	Completion month
⑨	The Nishi-Nippon City Bank Head Office Main	February 2025
	Building Construction site	(scheduled)
⑩	Fukuoka Higashi General Prefectural	March 2024
	Office Building Site Utilization Project	(scheduled)
⑪	Hakata East Terrace	August 2022
⑫	Hakata Fukami Park Building	February 2021

Sustainability

Change in the Number of Companies with Headquarters Functions/ in Growth Area Established in Fukuoka City

• Strong Demand for Creative-Related Industries and Call Centers

Fukuoka City Tops List of Business Opening Rate in Japan for Three Consecutive Years

Business	1st
Opening Rate 7.2％

⑧	Fukuoka Daimyo Garden City	December 2022
(scheduled)

Source: Created by Fukuoka Realty based on each company's press release.

■ Main Deregulation in the Tenjin Big Bang Area

⑬	The Nishi-Nippon City Bank Administrative	September 2028
	Head Office Building	(scheduled)

Source: Created by Fukuoka Realty based on each company's press release.

• Hakata Connected Bonus

No. of companies established

No. of employees

(People)				(Number of companies)
4,000					64	70
	58	57	57
3,500	53		60
				50
3,000					50
				2,600
2,500	2,989					40
2,000						30
1,500		1,041	1,334	1,058		20
				665
1,000					10
500						0

	21 major
(FY2020)	urban areas

Source: Prepared by Fukuoka Realty based on data from "The general condition of the Fukuoka City Economy, March 2022" by the Fukuoka City Economy, Tourism & Culture Bureau.

Fukuoka City Special Zone for Global Start-Ups & Job Creation (National Strategic Special Zone)

(National Strategic Special Zone)

• Special permission to relax Civil Aeronautics Act-related building height regulations

● Around		● Tenjin Meiji-dori district
Fukuoka		(west of the center of Watanabe-dori)
City Hall		approx. 115m (26 floors)
approx. 67m		● Tenjin Meiji-dori district
(15 floors)

Expand the system to relax the floor area ratio requirement (measure to facilitate renewal of city center functions)

Increase the floor area ratio (up to 50%) for buildings contributing to expand the bustle, such as creation of open spaces that generate connections and expanse.

Data Section

(mainof which,fields and functions )
FY2016	FY2017	FY2018	FY2019	FY2020	FY2021
Creative-related industries	28	40	38	38	30	41
Foreign/foreign-affiliated	18	13	14	15	12	15
Call center	12	9	7	2	8	8
Headquarters functions, etc.	3	1	7	6	0	7
International finance	-	-	-	-	-	6

Source: Prepared by Fukuoka Realty based on data from "Headquarters functions/in growth area" by the Fukuoka City Economy, Tourism & Culture Bureau.

Initiatives to support start-ups

• Tax Reduction for start-ups (municipal tax, national tax)
• Startup Visa
• Startup Café
• Fukuoka Growth Next
• Global Startup Center

Source: Prepared by Fukuoka Realty based on the section of Fukuoka City's official site featuring "National Strategic Special Zone for Global Start-Ups & Job Creation."

(east of the center of Watanabe-dori)

approx. 76m (17 floors) ～ approx. 100m (22 floors)

• • Tenjin 1-chome district
    approx. 80m (18 floors) ～ approx. 96m (21 floors)
• Deregulation of floor space ratios (Fukuoka City original)

● Tenjin 1-chome south block

800％→1,400％ (maximum)

• Tenjin 2-chome south block (along Meiji-dori Ave.) 700％→1,300％ (maximum)

● Tenjin 1-chome north block (14th Block)	600％→1,250％ (maximum)
● Tenjin 1-chome district north area	800％→1,400％ (maximum)

Existing system to				New incentive
			Floor area	50％
relax floor area ratio
		ratio of up to

• High-quality,high-value-added buildings
• Provide floors for tenant relocation

Note: The projects are designed to solve problems specific to the area around Hakata Station (limited to the period of Hakata Connected)

20

Fukuoka REIT Corporation 2022

21

Risks and Opportunities

To achieve sustainable growth, FRC keeps close track of highly significant risks and opportunities while extracting significant risks and assessing their impact on the investment corporation and its stakeholders.

● Measures to Address Risks ● Opportunities

Significant risks

Risks from Natural Disasters

• Response to climate change

Related Materiality

• Reduction of environmental load

Impact on stakeholders

• Buildings might be lost, suffer deterioration or damage due to the occurrence of natural disasters, such as earthquakes, storms, and floods, or severe weather due to climate change, and their value could be affected, with a decrease in rent due to the non-operation of properties

Respond to risks and opportunities

● Consider that it is possible to purchase insurance at a

relatively low cost compared to other areas; arrange

earthquake insurance coverage for all properties

● Improve resilience (e.g., ability to respond to disasters) by

engaging in a variety of activities; this includes conducting

disaster drills at each property, stockpiling emergency

food supplies, strengthening flood countermeasures, and

formulating a business continuity plan (BCP)

See p.34

● Work to maintain and improve environmental performance

through renovation opportunities for properties owned;

Significant risks	Impact on stakeholders	Respond to risks and opportunities
		● Consider extending lease agreement terms, fixing of such
Risks from Changes in		items as rent, according to property characteristics
• Vacancy rate increases associated with	● Appropriate occupancy screening when tenants move in
Business Conditions
as well as monitoring of operating status and thorough
worsening real estate market conditions;
	credit management during the lease period
• Increase in vacancy rates	decrease in dividends due to rent
● Deposits and security deposits against items including
• Decrease in rent	decreases
	rent delinquency; collateral by such means as guarantor
	• Rent reduction, rent nonpayment, and
Related Materiality	companies
vacating risks due to deterioration of a
● Treat deterioration in the real estate market as an
• Creation of pleasant workplaces	lessee's financial situation
(tenants)		opportunity to acquire excellent properties and execute
		strategic investments through appropriate financial
		management utilizing information-gathering capabilities

Who We Are

Environment-

Related Risks

• Reduction of environmental load
• Soil pollution and toxic substances

Related Materiality

• Reduction of environmental load
• Maintenance and enhancement of environmental and construction performance

• Increase in property management costs due to more stringent environmental laws and regulations, such as the strengthening of the Building Energy Conservation Law
• Risk of damage to the health of building users due to the presence of toxic substances in the soil or in building materials, and other items, of properties owned; risk of bearing the cost of compensation for damage to health or for removal of toxic substances

acquire Green Building and other certifications to obtain

the results of environmental/social initiatives in visual form

and improve property competitiveness

See p.35

● Aim to reduce vacancy rates by pursuing healthful

and comfortable conditions in properties owned and

by increasing leasing demand for properties with high

environmental performance

● Conduct thorough physical investigations at the time of

property acquisition; acquire properties after confirming

the presence or absence of toxic substances and taking

appropriate measures

	• Risk of increase in interest payment due to
Market-Related Risks	increase in interest rates caused by market
trends at the time of borrowing	● Long-term fixing of interest-bearing debt and repayment
• Increase in interest rates	• Risk that FRC's investment unit price	period limit diversification
• Fluctuations in the investment unit	might fluctuate due to factors that include	● Conservative interest-bearing debt management and
price	unitholder supply and demand, interest rate	commitment lines to ensure flexibility and agility in
conditions, economic conditions, and real
	funding
	estate market conditions
Related Materiality	● Conduct proactive IR activities
• Information disclosure and dialogue	• Risk of not being able to acquire planned
See p.27
with stakeholders	assets because additional units cannot be
	issued at the desired time and under desired
	conditions due to fluctuations in unit price

Growth Strategy

Human Resource

Related Risks

• Deterioration in the caliber of human resources
• Dependence on human resources

Related Materiality

• Creation of pleasant workplaces (asset management company)

• Risk of deterioration in the organizational strength of Fukuoka Realty Co., Ltd. (asset management company), due to a failure to maintain the human resources base, in terms of such factors as ability, experience, and know-how of the asset management company for smooth business operations
• Heavy reliance on FRC's directors and auditors as well as on the human resources of the asset management company;
  the risk that the outflow of these human resources could have an adverse effect on operations

● Improve organizational strength and increase employee

loyalty by hiring and fostering excellent human resources

● Improve employee motivation by realizing a work-life

balance and the stabilization of work through health

management

See p.36

Risks from Property			● Maintain/improve property competitiveness through
Degradation, Deterioration	• Increase in expenses required for such		appropriate maintenance and repair work, value-up
	investment, and extending the number of service life
	items as large-scale repairs, due to the
• Increase in repair and maintenance		years
deterioration of properties, and large capital
expenses		● Based on an understanding of conditions including real
expenditures could reduce cash flows
• Decline in property competitiveness	• Possibility of tenants vacating and a		estate market trends and the capital market environment,
		if the strategic holding of a property becomes less
Related Materiality	reduction in rent due to a loss of property
	significant from the perspective of property performance,
competitiveness resulting from changes in
• Maintenance and enhancement		competitiveness, and future profitability, consider
the surrounding environment
of environmental and construction		replacement of that property if it is determined that selling
performance			it is in the interest of unitholders
	• Possibility of a limitation on rights with

Sustainability

Infectious Disease, Epidemic, and Other Related Risks

• Pandemic

Related Materiality

• Maintenance and enhancement of environmental and construction performance
• Creation of pleasant workplaces (asset management company)
• Creation of pleasant workplaces (tenants)

• Risk that such external factors as infectious diseases and epidemics in Japan and
  overseas could interfere with the normal operation and management of FRC's properties
• Decrease in rental income from real estate due to such factors as a downturn in visitors, which might have an adverse effect on, for example, earnings

● In addition to physical infectious disease

countermeasures, expand the COVID-19 workplace

vaccination program scope to cover retail facility tenant

employees as a means of promoting a safe and secure

facility environment for asset management company

employees, tenants, and consumers

See p.36

● Set up satellite offices at the asset management

company and introduce a telework system with a view to

ensuring business continuity

Regulatory Risks	respect to properties owned and an		● In addition to receiving information from such sources as
• New laws and regulations
increase in property management expenses		Fukuoka Realty's affiliated organizations, tax accountants,
• Changes in the tax system	and other items, due to newly established,		and law firms, participate in external training, obtain
Related Materiality	revised, or abolished laws and regulations		information, and take measures to reduce any impact
• Possibility of an increased burden from		from an early stage
• Compliance/Risk management	taxes and fees due to tax reform
IT-Related Risks			● Strengthen confidential information management systems
		by introducing two-factor authentication for software
	• Risk of leakage of personal and confidential
• Information leaks		as well as applications and by conducting training on
information due to delays in strengthening
		cybersecurity and information management
Related Materiality	cybersecurity
	● Enable property differentiation by introducing advanced

Data Section

Property Concentration Risks

• Region (Fukuoka/Kyushu)
• Retail facilities

Related Materiality

• Co-creationwith the local community
• Contributions to boosting the attractiveness and revitalization of Fukuoka and Kyushu

• As FRC's properties owned are concentrated in Fukuoka and Kyushu, the vacancy rate might increase due to a worsening economic situation in that region, and profitability could deteriorate due to a decrease in rent
• Possibility of adverse effects on profits due to overall consumer consumption as well as other overall trends in the retail industry that reflect the nature of retail facilities as a main investment target

● Invest in various types of properties to reduce the risk of

portfolio fluctuation by diversifying rental market cycles

and tenant industries

See pp.12-13

See pp.42-43

• In retail facilities, such as Canal City Hakata/Canal City Hakata・B, operate bustling facilities by replacing tenants and providing new experiences and other value, thereby reducing the risk of profit fluctuation by dispersing tenants
• Revitalize the entire region and connect this growth to the growth of properties owned

• Compliance/Risk management				technologies into properties owned
Compliance Risks	• If Fukuoka Realty Co., Ltd. (asset			● Prevent violations including those of laws and regulations
management company), violates its duty of
• Violations of organizational laws and	care as a good manager (duty of care) and		as well as transactions involving conflicts of interest,
its duty to faithfully perform tasks for FRC		through deliberations and audits by the Compliance
regulations
(duty of fidelity) under the law or specified		Assessment Committee
• Conflicts of interest
contracts, the possibility exists that this could		● Improve employee awareness of compliance by
Related Materiality	adversely affect FRC's survival and profitability		conducting regular compliance trainings
• Potential conflict of interest issues with
• Compliance/Risk management		See p.39
sponsor
Glossary Commitment lines		Conflicts of interest
This refers to the upper loan limit a borrower can receive at any time without	In general, this refers to when an act is in one's own interest, while at the same time
going through a defined review, within a range agreed upon in advance with	disadvantageous to the interests of another. For a J-REIT, this often refers to a conflict between
the bank. Commitment in this case indicates a contracted promise. The	a unitholder and the interests of the investment corporation or asset management company.

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borrower can secure stable working capital regardless of business conditions.	Fukuoka REIT Corporation 2022

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Investment Strategy

Investment

Department

Executive Director and

General Manager of the

Investment Department

Hideya Kanno

Management Strategy

Real Estate

Management

Department

General Manager of the Real Estate

Management Department

Kuniaki Mishima

Who We Are

Growth Strategy

The Investment Department leverages its capabilities in information gathering, relationship building with local communities, and property observation that are unique to a region-specific REIT to acquire excellent properties that generate stable cash flow over the medium to long term, a goal that cannot be realized with investment from outside the region.

The real estate market in the Kyushu area remains brisk on the back of rising land prices and construction costs, solid rental demand, and robust investment demand. In Fukuoka City, real estate values continue to rise amid positive macroeconomic indicators. Against this backdrop, it is becoming increasingly difficult each year to acquire investment properties with an emphasis on yield. We are therefore striving to secure investment opportunities for premium real estate by swiftly attaining useful information through community-based management and our community ties so we can make informed decisions on investment potential.

Recently, FRC signed an agreement with Fukuoka City to acquire a site on Island City, an artificial island in Hakata Bay, Fukuoka City, that has benefits from a logistics perspective, jointly with Fukuoka Jisho Co., Ltd., one of our sponsors. The project will enable us to avoid excessive competition and secure investment opportunities in the Fukuoka market, where we forecast ongoing competition in the investment property sector. This is expected to contribute to the stable external growth of FRC. It is also anticipated that the project will help improve logistics operations in the Fukuoka metropolitan area and facilitate the distribution of goods while also providing new employment opportunities and thus revitalizing the region.

FRC revised the methods for acquiring investments within our management guidelines in 2022 to ensure adequate diversification. As a result, even as a REIT, FRC can now consider certain other development projects in addition to the acquisition of buildings that have been completed, premised on defined risk management and collaboration with business partners. Diversifying property acquisition methods in this way is expected to lead to further investment opportunities. FRC plans to increase the proportion of projects that allow involvement from the development stage to around 10% of all acquired properties.

We are also targeting other regions in Kyushu to invest in based on a careful analysis of conditions and changes in the business environment in each region. The local government is currently implementing policies to attract companies to the Kyushu area, and there has been a marked uptick in activity by companies that have entered as well as by businesses associated with them. FRC intends to take advantage of this trend to enhance our portfolio, diversify risk, and drive continued internal growth, pursuant to our investment criteria. We also recognize sustainability as a key factor that needs to be considered when acquiring property. Although recently constructed properties have few issues in this regard, it can be relatively difficult to obtain environmental certification for older properties, and this might not be sufficiently reflected in the CAP rate.

Even though the real estate market is mildly overheated at present, we remain committed to realizing stable growth for our unitholders over the medium to long term and contributing to the revitalization of regional economies through our investments and operations.

The Real Estate Management Department draws up plans for asset management with the aim of ensuring long-term and stable expansion in profits from the assets held by FRC. The Fukuoka metropolitan area, our primary destination

for investing, manifests potential for growth due to a rising population and an increasing number of companies locating operations there. Accordingly, as a comprehensive REIT, we are investing in the region in a diverse range of asset types. REITs consist of two types of growth: external growth in which we aim to increase dividends through investment, and internal growth in which we strive to enhance the profitability of the assets in our portfolio. The Real Estate Management Department seeks to maximize the value of our property portfolio over the long term through renovations and other innovative operational initiatives that enhance the appeal of our assets.

Although the business environment remained extremely difficult for a portion of our portfolio in 2022 due to the lingering effects of the COVID-19 pandemic, we implemented various measures to maintain and improve the long-term value of all the properties we own.

At Park Place Oita, we overhauled the outdoor environment with Shangri-la, a playground for children that stimulates their curiosity for play and introduced large new stores to enhance our ability to attract customers. At Canal City Hakata, we signed an agreement with a major new retail tenant and embarked on a plan to systematically overhaul the premises based on a medium- to long-term business strategy drafted with a view to co-creation with the local community. At Konoha Mall Hashimoto, we endeavored to ensure that tenants and visitors can utilize our facilities with peace of mind by continuing to take measures to prevent the spread of COVID-19 infections and providing a safe and hygienic environment throughout.

Efforts included upgrading the food court, introducing a large new store (GU), and replacing certain drinking and eating establishments with Komeda's Coffee and other stores.

In terms of office building tenants, we are making steady progress in planned backfilling in line with the closure of certain large-scale tenants. We are also striving to maintain and improve environmental and construction performance, not only in commercial facilities but also in hotels, office buildings, and other assets to maintain their competitiveness. We are upgrading critical facilities such as water supply, drainage, and air conditioning as well as gradually shifting to LED lighting. Other efforts are focused on ensuring a safe and hygienic environment and pursuing energy conservation.

We will strive to effectively identify greenhouse gas and waste emissions and implement measures to reduce these to further emphasize our stance toward sustainability and promote environmental preservation in the real estate sector. We also intend to take steps to enhance the work and business environments for tenants and employees.

Ceremony to mark the renewal of Park Place Oita

April 2022

Sustainability

Data Section

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Fukuoka REIT Corporation 2022

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