Basic management policy

In order to achieve stable income in medium-to-long-term and maintain and improve profitability of overall portfolio properties, HHR shall operate and manage its assets in accordance with the following methods in order to maintain and improve rent income and occupancy rate, maintain and improve asset value through appropriate management and repair, and optimize and reduce management cost.

1. Grasping real estate market trends
   Based on market reports on real estate, retail industries and others and information collected from tenant agent companies, HHR shall analyze trends and other aspects of rent markets, occupancy rate, and competing properties, to understand the market in which portfolio properties are located.
2. Collaboration with tenants
   HHR shall improve tenant satisfaction by close and regular collaboration with existing tenants through property management companies, and fine-tuned marketing and management that reflect consumer trends and tenant needs. HHR shall in turn attempt to increase rent income and maintain/improve occupancy rate by entering into appropriate negotiations for rent increase and suggestions for the leasing of more floor space, while promptly reacting to prevent lease cancellations. In addition, HHR shall seek to increase the satisfaction of retail tenants through planning and implementing sales promotion activities and others.
3. Attracting tenants
   With respect to activities to attract new tenants, HHR shall endeavor to collect tenant information through regular collaboration with tenant agent companies, while making and implementing plans to attract tenants. In other words, in order to secure stable income in medium-to-long-term from the portfolio properties, HHR shall closely collaborate with property management companies and tenant agent companies to make plans to attract tenants tailored to the location and characteristics of each of the portfolio properties, and search for candidates for new tenants. With respect to the specific selection of new tenants, HHR shall make a decision based on comprehensive review of consistency with management plans and policies for the portfolio property and the possibility of the continuation of a long-term and stable lease agreement through utilization of research into the candidates' creditworthiness and other factors by investigation agencies while giving due consideration to the prevention of transactions with anti-social forces. With respect to the terms and conditions of the lease agreement with each new tenant, HHR shall make a decision based on a comprehensive assessment of the tenants' business, performance, creditworthiness, and expected contribution to the vitality of the facilities. In addition, HHR shall endeavor to collect more information faster, and to attract tenants favorably by utilizing the wide network with tenants of properties owned by the Hankyu Hanshin Holdings Group and others.
4. Type of lease contract with tenant
   HHR shall mainly consider fixed-term building lease contract in order to stabilize rent income and to make facility management more flexible.
   If HHR believes that the sales-based overage rent is suitable for an increase in rent income, HHR shall consider adopting that rent system.
   With respect to the contract types, HHR may introduce the master lease method in which the existing lessor and others (master lessee) lease the space to a sublessee to maintain a smooth relationship with existing tenants and an effective operation and management of properties. In this case, HHR shall select for each facility the optimal type for the master lease, such as the pass-through type master lease in which the rent from the master lessee is always the same as one from the sublessee, or the fixed type master lease, in which the master lessee's rent is fixed.
5. Maintaining and improving the asset value of portfolio properties
   To maintain the physical and functional values of portfolio properties, HHR shall make and implement repair and renewal plans for each fiscal period.
   To improve the physical and functional values of portfolio properties, HHR shall make and implement improvement plans at appropriate times.
6. Streamlining of facility operation and management
   HHR shall review the particulars and cost of management operations, such as equipment maintenance and inspection, cleaning, security, and other administrative work every fiscal period. When necessary, HHR shall seek to optimize the costs by making changes in specifications, contracted companies and others. HHR shall take into consideration the competitiveness of the portfolio properties and the satisfaction of existing tenants in cost reduction.
7. Insurance policy
   
   • Insurance against loss or damage
     To compensate for damages to the building and other facilities and liabilities for damages to third parties caused by disasters and accidents, HHR shall purchase fire insurance and liability insurance for properties owned by HHR and properties in which HHR holds trust beneficiary interest. In addition, HHR shall purchase income protection insurance to avoid any loss of profit associated with disasters, accidents, and other causes. HHR shall also consider purchase of movable property comprehensive insurance for retail-use facilities where sales proceeds of tenants are deposited to secure accidents such as cash theft.
   • Earthquake insurance
     Based on the PML for the entire portfolio, HHR shall make a decision on whether to purchase or not an earthquake insurance by comparing and reviewing the effects of the earthquake and the cost of earthquake insurance. If the PML for an individual property exceeds 15%, HHR shall consider the individual purchase of earthquake insurance for the property.
   In purchasing any of the insurances mentioned above, HHR shall make a decision by comprehensively considering the insurance premium, deductible liability amount and cash reserve among others.

Systematic management method

HHR shall prepare management plans for the overall portfolio and each individual asset every fiscal period to systematically manage the portfolio properties.

1. Management plan for the overall portfolio
   With respect to the overall portfolio properties owned by HHR, it shall prepare a management plan every fiscal period to systematically manage the assets.
   The management plan for the overall portfolio shall describe the following items with respect to the operation and management of the overall portfolio:
   • Measure for improvement of overall portfolio profitability
   • Income and expenditure plans for the overall portfolio
   • Items regarding the status of each asset in the portfolio
   • Items regarding property management
   • Items regarding HHR's financing and cash distribution
2. Management plan for individual portfolio
   For each individual portfolio property, HHR shall prepare a management plan every fiscal period to systematically manage the assets.
   The management plan for individual portfolio properties shall describe the following items with respect to the operation and management of individual portfolio properties:
   • Measures for maintaining and improving profitability
   • Repair and improvement plans
   • Measures for reduction of cost such as management and utilities
   • Income and expenditure plans and budget for the portfolio property
3. Verification and modification of plans
   HHR shall compare and analyze the budget and actual income and expenditure for each of the portfolio properties and the overall portfolio in principle every month. If HHR believes that the asset management plans need to be revised for example when there arises any significant discrepancy between the budget and actual figures, HHR shall prepare the revised plan during that fiscal period.
   Based on the verification described above,HHR shall prepare management plans for the overall portfolio and each of the portfolio properties for the subsequent fiscal periods.

Property management policy

1. Policy for selection of property management company
   HHR shall comprehensively consider the following items to select property management companies overseeing the operation and management of a property. As a result of such process, HHR may appoint a particular property management company for multiple portfolio properties for the purpose of streamlining operation and management.
   • Track record of management operations by use and by region
   • Management conditions, such as its financial results and financial conditions
   • Organization
     (personnel allocation including in case of emergency, information control system, and existence of qualified personnel and professional technicians)
   • Leasing activities management expertise
     (such as tenant leasing, level of market knowledge, level of network with agents, tenant management, and tenant screening)
   • Expertise for facility operation and management
   • Expertise to prepare plans for construction work and to oversee construction work
   • Expertise to prepare and implement sales promotion plans
   • Expertise to prepare and manage budget plans
   • Expertise to prepare various reports
   • Expertise to respond to other external communications
   • Level of remuneration that corresponds with the details of the property management operations
   • Avoidance of conflicts of interest
2. Selection of property management companies within the Hankyu Hanshin Holdings Group
   HHR may choose property management companies from within the Hankyu Hanshin Holdings Group if HHR believes that it is beneficial and appropriate to use the operation and management expertise of the Group in view of the information network for tenant attraction and the tenant leasing expertise. With respect to the method of setting remuneration in this case, HHR shall be able to in principle introduce a mechanism to increase unitholders' interests by combining base remuneration with profit-linked remuneration. When the selected property management company falls under the category of interested parties, criteria and procedures set forth in our Conflict of Interest Transactions Rules shall be observed.
   Hankyu Hanshin REIT Asset Management, Inc. (hereinafter the "Asset Management Company") has selected Hankyu Hanshin Properties Corp., Hankyu Hanshin Building Management Co., Ltd. as  property management companies for certain real properties. At the time of the selection, the Compliance Committee has fully reviewed these property managers' businesses, remuneration, and other factors, and the Asset Management Company has determined that the selection was appropriate. Such contracts were also reviewed by the Investment Management Committee and the Board of Directors, and were reported at the Executive Meeting of HHR.
3. Overseeing method for property management companies
   The Asset Management Company shall confirm with property management companies once a month in principle regarding income and expenditures for the previous month, the operating situation, updates on existing tenants, leasing situations, and complaints and troubles in facility management, among other items, and discuss countermeasures with the property management companies.
   The duration of property management agreements entered into with property management companies is in principle one year. The Asset Management Company shall evaluate the operation and management performance of the property management companies by the end of the contract period. The Asset Management Company shall carefully review the results of the evaluation to decide whether to renew the contract. Depending on the results, the Asset Management Company may change property management contractors. If the Asset Management Company decides to renew a contract, the company shall give appropriate instructions to the property management companies based on the results of the evaluation to improve those companies' performance levels. In addition, the company may review the particulars of contracted business and terms and conditions when necessary, to optimize fees and management costs.

Policy for sale

In principle, HHR seeks to hold properties for a long term. However, taking into account the market environment and other factors, HHR may consider selling its properties at the time of preparation of asset management plans or at any time it is deemed necessary. HHR shall make a decision to sell a property by comprehensively considering the following items in particular:

• Actual and expected increase/decrease in the asset value of the real property
• Effects on the portfolio

In case HHR is to sell a property which purchased from the Hankyu Corporation, Hanshin Electric Railway Co., Ltd., Hankyu Hanshin Properties Corp., or Hankyu Hanshin Real Estate Investment Advisors, Inc., it may have given the former owner the priority negotiation rights with respect to the sale of the property as a result of negotiation at the time of the purchase pursuant to an information sharing-related agreement.
Moreover, even if not pursuant to an information sharing-related agreement, HHR may bestow some kind of priority negotiation rights to any of the companies mentioned above or to another third party because of the situation etc. at the time the property was purchased.