Japan Logistics Fund : Semi Annual Report for the six-month period ended July 31, 2021 (The 32nd Period)

Japan Logistics Fund Inc.

Semi Annual Report

For the six-month period ended January 31, 2022

June, 2022

Management Discussion and Analysis

Background of JLF

Japan Logistics Fund, Inc. (JLF) is Japan’s first dedicated logistics REIT, founded with the aim of contributing to the Japan ese economy by converging the flow of money (finance) with the flow of goods (logistics), which is the lifeblood of the economy. To that end, we leverage the history and experience of Mitsui & Co., Ltd., which as a general trading company has worked in logistics operations for long time globally.

Based on the Act on Investment Trusts and Investment Corporations of Japan (Act No. 198 of 1951; including revisions enforced thereafter) (AITIC), JLF was founded on February 22, 2005 by Mitsui & Co., Logistics Partners Ltd. (MLP) as the asset manager, and was listed on the REIT section of the Tokyo Stock Exchange on May 9 of the same year (security code: 8967).

Since JLF’s initial public offering, we have applied a discerning eye for logistics sites, building specifications, tenant needs and other factors to investment decisions that are tied to real demand. In the process, we have built a portfolio that can be expected to deliver solid earnings over the mid- to long-term. As Japan’s first dedicated logistics REIT entering a market of REITs invested mainly in office and residential assets, JLF became a pioneer and has since demonstrated to the market a track record of the logistics sector’s ability to deliver solid cash distributions to its investors.

Basic Policy

As the pioneer of J-REIT dedicated to logistics properties, we aspire to provide “stability” and “growth” of dividends in the mid-to-long-term by leveraging its unparalleled experience and expertise in logistics business and in financial markets. Logistics is a series of economic activities, such as transportation, storage, loading/unloading, packaging, labeling, sorting, or information integration, which connect manufacturers and consumers directly. We believe logistics is a vital function supporting the foundations of industry and people’s life in Japan. As a consequence, demand for logistics properties is likely to be solid i n the long term. These days, supply chain management which optimizes the entire logistics process is becoming widespread. It is imperative to construct logistics system that can be flexibly adjusted based on consumers’ various needs. Therefore, logistics business providers now actively seek highly versatile logistics facilities in order to build elastic logistics systems. Furthermore, consolidation of logistics functions to improve efficiency, as well as separation of ownership and use of logistics facilities to reinforce balance sheets, are growing trends in the logistics business. Given the current environment, we see great investment opportunities in this area.

Investment Policy

Acquisition of new properties

Compared with other asset types, logistics properties tend to have less liquidity in the acquisition market. We believe, therefore, that collecting a broad range of information and making precise investment decisions based on the information gathered is the only way to achieve high quality property acquisitions. In order to avoid unnecessary price competition, we strive to gain early access to property information and promote negotiated transactions by leveraging our extensive networks of sponsors and the information sourcing channels of MLP. When acquiring properties, we make investment decisions focusing on the location and versatility of properties, which are essential factors in pursuing long-term stability in managing logistics properties. As a general rule, we avoid acquiring properties with unique structural features that suit only certain types of tenants in certain industries. Instead, we prefer properties with specifications that meet broad logistical demand. To minimize fluctuations in revenue arising

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from factors such as rent reduction request from tenants or unexpected tenants’ departure, we acquire properties that will help reduce the risk of over-concentration of tenants by avoiding excessive dependency on a single tenant or industry, and will help diversify lease period expirations.

Portfolio Management

In renewing existing lease contracts, we prefer the way to ensure generating solid revenue flow, such as urging the existing tenant to renew the lease with longer term. In case that a tenant decides to move out, we conduct leasing activities based on this policy so that leases are maintained without any discontinuity and that revenues are secured, by leveraging our sponsor network, intermediary companies well versed in logistics properties and tenant information, and the network of the asset manager.

We promote the improvement of the overall satisfaction level of tenants by maintaining close contact with them. Specifically, we respond to tenants’ needs with respect to expanding rental space, making functional improvements in line with tenant and industry needs, and implementing renewal of the properties. We conduct repairs and renovations of properties by keeping related costs below a certain level. In addition, we strive to maintain an optimal level of maintenance management for the properties by selecting appropriate property management companies that can provide efficient management in line with the characteristics of each property, by improving the quality of the property management control at the asset manager, and by standardizing various procedures. Furthermore, we will make additional investments in properties with locational advantage in term of leasing and properties with OBR (Own Book Redevelopment) potential, taking into consideration tenant requests, the leasing needs of facilities, floor area ratios and other factors.

Financial strategy

We set the highest priority on stability and growth of dividends while maintaining relatively conservative LTV (Loan to Value) in financing. When pursuing debt financing, we diversify funding sources and repayment due dates. In addition, with regard to tenant leasehold and security deposits, we may use such deposits to partially fund property acquisitions for efficient cash management purpose.

Strategic and Financial Review of the six-month period January 31, 2022(The 33rd Period from August 1,

2021 to January 31, 2022)

During the period under review, the Japanese economy showed recovery momentum, despite the harsh circumstances that prevail inside and outside Japan due to the impact from COVID-19. Overseas, despite some variance by country or region, in general, economies are recovering. That should lead to a continued increase in exports and industrial production for the Japanese economy. Moreover, corporate earnings and sentiment are improving in general, and capital expenditures are recovering despite weakness in some industries. Meanwhile, the pandemic continues to weaken the labor and income environment. Nevertheless, downward pressure on service industries such as dining and lodging is easing as a recovery in personal consumption emerges. In the logistics leasing market, vacancy rates declined further as stay-at-home consumption led to continued demand for space from e-commerce players and manufacturers and retailers recognized the need to bolster inventories and expand logistics networks to counter supply chain disruptions triggered by the pandemic. Amid this environment, JLF’s portfolio has maintained favorable operations, with an occupancy rate of 100.0{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5} as of the end of the period under review. Moreover, portfolio management has focused on stability of long-term cash flows through a strategy of “ACTIVE Asset Management”, which aims to achieve stability and sustainable growth in distributions per unit and NAV per unit.

Moreover, portfolio management has focused on stability of long-term cash flows through a strategy of ACTIVE Asset

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Recognition of the Environment

Looking at the economic environment in Japan, although there is still a sense of caution about the COVID-19 infection for the time being, the economy is expected to improve at a moderate pace as the effects of the infection gradually abate, thanks to the recovery of foreign demand, an accommodative financial environment, and the effects of the government’s economic measures. However, there is a high degree of uncertainty regarding the timing of the convergence of the COVID-19 infection and the impact it will have on the domestic and overseas economies, so we need to keep a close watch on the situation.

In the logistics real estate leasing market, demand continues to be strong as e-commerce increases penetration and manufacturers, retailers and other clients increase inventories and expand logistics networks. In 2022 and beyond, a high level of new supply is planned mainly in the Tokyo Metropolitan Area. However, vacancy rates continue to track at low levels in the Tokyo and Osaka metropolitan areas. Given the fact that buildings are making solid progress in pre-leasing space in advance of construction completion, the probability of disruptions to the balance between supply and demand is low, and rents are expected to show stability. In the market for the sale and purchase of logistics real estate, funds continue to flow into the real estate market in Japan, where interest rates remain low from a global perspective despite recent upward movement in rates. Demand from many investors who focus on the defensive nature of cash flows from logistics properties is expected to continue to drive appreciation in prices for logistics properties. Therefore, expectations are that transaction yields will stay low, and the acquisition environment will remain harsh.

Under this environment, in February 2022, JLF executed a follow-on offering that is accretive to both distributions per unit and NAV per unit, bringing within reach our run-rate DPU target of 5,000 yen, demonstrating the full effect of our ACTIVE Asset Management approach.

Moving forward, JLF will continue to pursue stability and sustainable growth in distributions per unit and NAV per unit by managing operations in a way that is resilient against changes in the environment of the real estate and financial markets and seek opportunities to acquire properties through off-market transaction.

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