Governance Initiatives

Corporate Governance (HHR)

Overview of HHR

Details of the Organization

HHR shall have at least one Executive Director(s) and at least two Supervisory Directors (and at least one more Supervisory Director than the number of Executive Directors). As of the date of this document, the organization of HHR is comprised of the General Unitholders’ Meeting featuring unitholders, in addition to one Executive Director, two Supervisory Directors, the Executive Meeting, which includes all Executive Directors and Supervisory Directors, as well as the Accounting Auditor.

a. General Unitholders’ Meeting

Certain matters concerning HHR, as stipulated under the Investment Trust Act or the Articles of Incorporation, shall be resolved at a General Unitholders’ Meeting, comprised of unitholders.

b. Executive Director, Supervisory Director and Executive Meeting

In addition to undertaking the executive management of HHR, the Executive Director has the authority to take any judicial or extra-judicial acts related to the business of HHR on behalf of HHR. However, the approval of the Executive Meeting is required for certain duties stipulated in the Investment Trust Act, such as providing consent for cancelling the asset management services agreement originating from HHRAM, convening of the General Unitholders’ Meeting, entrusting administrative work to general administrative service providers, concluding asset management services agreements and asset custody entrustment agreements, and other duties. Supervisory Directors have the authority to oversee the Executive Director’s execution of duties. Executive Meeting, in addition to having the authority to approve the execution of certain duties as stated above, has the authority as stipulated in the Investment Trust Act and the Articles of Incorporation to oversee the Executive Director’s execution of duties.

c. Accounting Auditor

HHR has designated KPMG AZSA LLC as the Accounting Auditor. The Accounting Auditor shall audit HHR’s calculation documents, etc. Furthermore, the Accounting Auditor shall report to Supervisory Directors in the event a fraudulent act or material fact violating any law or the Articles of Incorporation concerning the execution of duties of the Executive Director is detected and shall execute other duties stipulated by laws.

Internal Audit and Supervision Organization by Supervisory Directors, Personnel and Procedures

The rules of the Executive Meeting of HHR indicate that the Executive Meeting shall be held at least once every three months, and in practice, these meetings are convened roughly once a month. The Executive Meeting is comprised of, in addition to one Executive Director and two Supervisory Directors, the President and Representative Director and Directors of HHRAM, and has established the internal audit structure by confirming the status of HHRAM’s asset management operations. As of the date of this document, one attorney and one certified public accountant are appointed as Supervisory Directors, and based on their operational experience and insight, they supervise the Executive Director’s execution of duties from various viewpoints.

Mutual Cooperation between Internal Audit, Supervision by Supervisory Directors and Accounting Audit

Each Supervisory Director receives reports concerning asset management and compliance from the Executive Director and HHRAM at the Executive Meeting of HHR. On the other hand, the Accounting Auditor cooperates with the Supervisory Directors by regularly hosting audit briefing sessions, etc. for the Supervisory Directors. In addition, in the execution of their tasks, if the Accounting Auditor detects a fraudulent act or material fact violating any law or the Articles of Incorporation concerning the Executive Director’s execution of duties and other duties stipulated by laws, the Accounting Auditor has the responsibility to report this to the Supervisory Directors.

1. Asset management services agreement
2. Administrative agency agreement / asset custody agreement
   / agreement on administration of unitholders'register
   / special account management agreement
3. Fiscal agency agreement
   / Fiscal, issuing and payment agency agreement
4. Information sharing-related agreement

Corporate Governance (HHRAM)

Organization of HHRAM

Asset management of HHR has been entrusted to HHRAM. HHRAM shall engage in operations relating to asset management entrusted by HHR based on the above organizational structure.
The Board of Directors of HHRAM acts as the decision-making body for important matters concerning the management of HHRAM, and in addition to making decisions regarding management policy and basic matters concerning the execution of duties, it also supervises the duties of the directors. The operations of HHRAM are assigned to the respective departments including the Corporate Planning Department, Investment Department, Asset Management Department, Financial and IR Department, Human Resources and General Affairs Department, Compliance Department, and the Internal Audit Department, and each of these departments is supervised by a Director in charge and Department or Office General Manager.
The Investment Management Committee has been established as the organization responsible for conducting deliberation and making decisions concerning asset management and management evaluation, and furthermore, the Compliance Committee has been established as the organization responsible for deliberation and decisions concerning conflict-of-interest transactions, etc., as well as consultation for matters related to compliance, etc.

Status of risk management system concerning investment management

HHRAM has established basic matters concerning investment management as the asset management guidelines, including the investment policy, rules on transactions with interested parties, distribution policy, and disclosure policy, etc. based on the asset management services agreement concluded with HHR and the Articles of Incorporation of HHR. By following these Operational Guidelines, HHRAM endeavors to manage risks concerning investment management.
As for specific risk management, a basic plan for risk management shall be established each fiscal year based on the risk management rules and the risk management manual, upon understanding and analyzing risks in each department such as risks concerning acquisition and transfer of assets, risks coinciding with operation management, risks concerning funds procurement, office work risk, etc. In addition, upon making decisions concerning asset management, deliberations are held at the Investment Management Committee and Compliance Committee as necessary, and important matters are deliberated or reported to the Board of Directors. Separately from this, based on the regulations for internal auditing, the Internal Audit Department, which has the right to audit all departments, shall regularly check the management system and response status towards risks, etc., and report these results to the Board of Directors.For conflict-of-interest transactions, in addition to deliberations by the Compliance Committee, the Compliance Officer shall attend the meetings of the Investment Management Committee, confirm whether conflicts of interest exist or not, and by obtaining the agreement of the Compliance Officer on all requests for managerial decisions, endeavor to prevent conflicts of interest and violations of laws, etc. In addition, HHRAM has established the compliance manual and compliance program as basic policies for action. Based on the above, the Compliance Department conducts compliance check and education.

Asset management remuneration system

The asset management remuneration system has been established for the purpose of improving investor value. By heightening the linkage between the amount of asset management remuneration and the interest of investors, HHRAM will have an incentive to improve the quality of the portfolio.

This table can be scrolled sideways

• ※The above asset management remuneration system was approved at the 11th General Unitholders' Meeting of HHR held on August 25, 2020. Furthermore, the effective date for remuneration upon acquisition, remuneration upon transfer, and remuneration upon merger is September 1, 2020, and that for management remuneration 1 and 2 is December 1, 2020.

Decision-making structure for investment management

HHRAM establishes Regulations for Asset Management and the asset management guidelines, and sets forth basic approaches to investment management including investment policy, rules on transactions involving interested parties, and disclosure policy, etc. Furthermore, HHRAM establishes asset management plans in accordance with the asset management guidelines, and makes decisions on acquisitions and other matters concerning asset management according to the investment policy and rules on conflict-of-interest transactions set forth in the asset management guidelines.

Decision-Making Flow for Asset Management

1. Concerning decision-making on execution of duties concerning asset management, each related department shall draft a proposal on execution of duties, which is then placed on the agenda of the Investment Management Committee. If the proposal fails to obtain the approval of the Investment Management Committee, or if the Compliance Officer recognizes compliance issues within the proposal, the proposal shall be referred back to the department where the proposal originated.
2. Upon approval by the Investment Management Committee, if (i) the proposal falls under a transaction involving conflicts of interest, or if (ii) the Compliance Officer fails to determine clearly whether the details deliberated or the deliberation process of the Investment Management Committee observed the laws and the Articles of Incorporation or whether there were compliance issues, and requests deliberation, it shall be placed on the agenda of the Compliance Committee and deliberated.
3. In the case of ii. (i) above, if approved by the Compliance Committee the proposal shall be submitted to the President and Representative Director. If not approved by the Compliance Committee because compliance issues are recognized, it shall be referred back to the department where the proposal originated.
4. In the case of ii. (ii) above, the Compliance Committee shall only be regarded as an advisory organ. Upon deliberation by the Compliance Committee, all opinions of the members and observers, including minority opinions, shall be presented to the President and Representative Director and the Board of Directors.
5. Upon approval by the President and Representative Director, whether a resolution by the Board of Directors will be needed is based on the Board of Directors’ standards for placing items on the agenda, defined separately (the necessity of placing it on the agenda is also subject to decisions of compliance.). If not approved by the President and Representative Director or the Board of Directors, it shall be referred back to the department where the proposal originated.
6. In the case of ii. (i) above, if the proposal falls under an acquisition, transfer, or transaction for securities or real estate (excluding transactions under Article 245-2 of Regulation for Enforcement of the Investment Trusts Act.), the consent of HHR must be confirmed in addition to the obtainment of approval of the Executive Meeting.

Decision-making flow

Compliance

Basic policies concerning compliance（excerpted from the original text）

Hankyu Hanshin REIT, Inc. (hereafter "HHR") and Hankyu Hanshin REIT Asset Management, Inc. (hereafter"HHRAM"), the asset management company that HHR has selected to manage its assets, strive to contribute to social and economic development through engagement with business partners, those using our properties, local communities and such considering the public nature of real estate investment trusts, while responding to the expectations of unitholders by complying with laws and regulations and sincerely acting in accordance with corporate ethics. In order to achieve this goal, HHR and HHRAM have prepared the following compliance arrangements as the most important business agenda.

(1)HHR

HHR is aware of the importance of comprehensive compliance and regularly conducts discussions concerning compliance issues at its Executive Meetings. At these meetings, which are held roughly once a month, in addition to deliberating matters for resolution, we receive detailed reports on the operations of HHR and HHRAM (defined in (2) below). We also receive reports on the deliberation process for matters deliberated and determined by the Compliance Committee of HHRAM. Through these reporting procedures, we ensure that the Supervisory Directors are able to obtain information appropriately and confirm the status of business execution by the Executive Director. In addition, we have prepared a decision-making letter for matters to be decided exclusively by the Executive Director to make the decision-making process more visible and facilitate ex-post verification. Furthermore, two experts from outside the company who are not considered interested parties of the sponsor company have been appointed as Supervisory Directors for the purpose of improving HHR's supervisory and check functions.

(2)HHRAM

HHRAM, for the purpose of ensuring legitimate and fair management of overall operations and to prevent fraudulent practices, and toward robust growth of HHRAM and HHR and the drastic protection of unitholders, the Compliance Department has been formed independently from the execution of duties division as an organization that fulfills the check function. The Compliance Department formulates a compliance manual and compliance program as a basic action guideline, ensures awareness of compliance requirements in accordance with the compliance program implementation plan, verifies the status of compliance and cultivates awareness in a systematic manner.

Additionally, as the organization responsible for compliance issues concerning asset management, it has established a Compliance Committee for the purpose of determining the propriety of transactions involving conflicts of interest in accordance with applicable rules and regulations. The Compliance Committee appoints invited experts, and at present comprises one attorney and one certified public accountant that are not considered interested parties of HHRAM or the sponsor company. These two outside experts and the Compliance Officers attend the Compliance Committee meetings, and on the condition that no less than threefourths of all the committee members including the committee chair are present, deliberation and decisions concerning conflict of interest issues are made with approval of all attendees. Furthermore, in addition to Auditors and part-time Directors, observers with the endorsement of the committee chair and the approval of the committee may be present at the Compliance Committee meetings and offer opinions (the observer is not permitted to participate in resolutions).

The Investment Management Committee exists as the organization responsible for deliberation and decisions concerning asset management and operational evaluation, and the participation of a member of the Compliance Department appointed by a Compliance Officer or Compliance Committee in the Investment Management Committee is required (the member must be the assistant to the General Manager of the Compliance Department), and this person is responsible for confirming that there are no compliance issues concerning matters for resolution or the resolution process. Additionally, the content of a request for decision concerning execution of duties, which serves as a letter of intent, is closely inspected under required consensual decision making by Compliance Officers prior to a final determination.

Establishment of a structure for the elimination of anti-social forces

HHRAM has formulated a compliance manual to serve as the basic policies to which all executives and employees are required to adhere, and ensuring practice in accordance with the compliance manual is one of the key responsibilities of HHRAM. The code of behavior in the Compliance Manual stipulates "Resolute confrontation of anti-social forces and associations" and sets forth HHRAM's basic stance concerning the elimination of anti-social forces.

Compliance and internal audit systems of HHRAM

• ※Any conflict-of-interest transactions which meet certain standards shall be approved at an Executive Meeting of HHR.

Compliance training

HHRAM invites outside lecturers to conduct training targeting all of its officers and employees with the purpose of having them observe compliance and developing an awareness. In addition, training for managers and transferees is also provided by in-house lecturers in a timely manner.

Major themes provided by outside lecturers

• Customer-oriented business conduct
• Conflict-of-interest transactions
• Insider trading regulations

Declaration of fiduciary duty

HHRAM has established the basic policy for customer-oriented business conduct (hereafter “the Basic Policy) in order to further implement the customer-oriented business conduct considering the importance of stable asset formation for investors.

Announcement and Smooth Promotion of Basic Policy regarding Customer-Oriented Business Conduct

HHRAM will announce the Basic Policy on its website and work for smooth promotion of the policy while periodically confirming the progress. In addition, the implementation status will be verified through internal audit by an external third party as needed, and any issues identified will be corrected without delay.

Pursuit of the Investors’ Best Interest

HHRAM will maintain a high level of expertise and professional ethics as an asset management company of a J-REIT, and conduct its business in an honest and fair manner for its investors in order to pursue their best interest. HHRAM will endeavor to establish such an attitude towards business operations as its corporate culture.

Appropriate Management of Conflicts of Interest

To prevent unjustly damaging the interest of investors, HHRAM will accurately grasp potential conflicts of interest with the sponsor group, etc. If there is a potential conflict of interest with regards to transactions, HHRAM will appropriately manage such conflict of interest by having the Compliance Department verify the transaction prior to execution pursuant to laws and regulations as well as internal rules, and, when necessary, having the Compliance Committee that includes outside experts deliberate in advance while also obtaining prior approval at HHR’s Executive Meeting.

Clarification of Management Fees

HHRAM will work to disclose detailed information on management fees, etc. paid to HHRAM by HHR, including description of the services for which such fees are incurred, in an easy-to-understand manner for investors.

Provision of Important Information that is Easily Understandable

HHRAM will, as an asset management company of a J-REIT, strive to provide important information regarding HHR and the asset management carried out by HHRAM, in a timely and easily understandable manner for investors.

Provision of Services Suitable for Investors

HHRAM will make efforts to grasp the investors’ requirements for HHR and strive to provide services suitable for such requirements.

• ※HHRAM does not directly recommend or sell financial instruments and services to investors.

Establishment of Framework for Appropriately Motivating its Employees

HHRAM will periodically and continuously provide training programs on compliance, etc. to all employees for the sound development of the real estate securitization market, to make constant improvements. Furthermore, HHRAM will properly evaluate the efforts of each employee on compliance and work to further raise awareness. HHRAM will develop a framework to provide a compliance program every year in accordance with the compliance manual in order to steadily implement measures for customer-oriented business conduct and compliance with the Basic Policy, and strive to establish appropriate structures for governance and execution of business. The details of the governance structure, basic policy, management policy (growth policy, financial policy, distribution policy, etc.) and such of HHR, which entrusts management of its assets to HHRAM, are available on HHR’s website, etc.

• ※HHRAM conducts solely the investment management business for HHR, and does not fall under the category of financial service providers engaged in the sale of financial products or their origination.

Efforts to prevent corrupt practices

HHRAM has been working to prevent corruption based upon the Anti-Corruption Policy stipulated by Hankyu Hanshin Holdings, Inc., our parent company. (The below is excerpted from the website of Hankyu Hanshin Holdings, Inc.)

Anti-Corruption Policy

1. Preventing Bribery and Other Corrupt Practices

All officers and employees of Hankyu Hanshin Holdings Group shall comply with all applicable laws in force in the countries where they operate and shall work to prevent corrupt practices. As used here, “corrupt practices” means practices in which officers or employees abuse the power entrusted to them to gain an illicit advantage or to commit an act that is contrary to law or ethical standards. Examples of corrupt practices include bribery, unfair trade practices (including abusing a superior bargaining position to exploit a weaker party), and insider trading. Officers and employees of Hankyu Hanshin Holdings Group shall observe the following anti-bribery rules:

1. All officers and employees of Hankyu Hanshin Holdings Group shall on no account give, offer, or promise any money, privilege, hospitality, objects of value, or any other benefit or advantage to public officials, whether directly or indirectly. As used here, “public officials” includes persons who serve a role analogous to that of a public official. Additionally, officers and employees shall on no account accept any privilege, hospitality, objects of value, or any other benefit or advantage beyond that which can be justified as business practice or within social norms.
2. Whenever officers or employees of Hankyu Hanshin Holdings Group pay money to public officials, they shall accurately record the payment and properly manage the record.

2. Organizational Support for Combatting Corrupt Practices

Hankyu Hanshin Holdings Group shall provide training to ensure that its officers and employees fully understand this policy. Member organizations of the Hankyu Hanshin Holdings Group shall provide anticorruption guidelines that are relevant to their business profile.

3. Organizational Response to Corrupt Practices

Hankyu Hanshin Holdings Group shall provide information about, and facilitate the use of, the Corporate Ethics Consultation Desk, a means by which any of the Group’s officers or employees, or any trading partners or other interested parties, can swiftly report any violations or suspected violations. The Group shall address any reports swiftly and effectively.

Effective March 1, 2022
Hankyu Hanshin Holdings, Inc.

Risk Management

Risk monitoring

HHRAM strives to enable accurate prevention activities for various risks surrounding business and appropriate response activities for crises when risks become apparent based on the risk management regulations and risk management manuals established by HHRAM.