Management and Governance Risks

Unitholders have limited control over changes in our investment policies

Amendment of the investment policies set forth in our articles of incorporation requires a vote of our unitholders. However, subject only to these broad policies, the manner in which we implement our investment objective may be determined by our board of directors or delegated by our board of directors to our asset manager without a vote of our unitholders. Because of this broad authority, strategies for implementing our investment objective may be changed without the vote of our unitholders in a way that could have a material adverse effect on our business, financial condition and results of operations, thereby decreasing the market price of our units and the amounts available for distributions.

Our success depends on the performance of service providers to which we are required to assign various key functions

Under the Investment Trust Law, we are not permitted to have employees and must outsource substantially all of our activities to third parties. The activities that need to be outsourced include our investment and financing activities, the management and custody of our assets, and certain administrative functions. As a result, our business success depends on the performance of the service providers we engage to perform these functions and our ability to maintain our relationships with these parties.

In particular, we rely on our asset manager to achieve our business objectives. Our asset manager has broad discretion in carrying out its activities and is the party primarily responsible for the formation and implementation of our business strategy, which includes our acquisition and financing activities, as well as the oversight of our day-to-day operations. Our asset manager manages our assets, oversees property management for each property and directs numerous programs to be implemented by the property managers.

In addition, we and our asset manager will rely on various property managers for on-site property management to support us and our asset manager in coordinating the management of the properties in our portfolio. Our asset manager has discretion in carrying out property management and leasing activities, including the selection of property managers and tenants.

Our reliance on third parties to conduct our business activities exposes us to potential risks. Our asset manager, property managers, building maintenance companies, custodian and general administrator, transfer agent or other third-party service providers may not provide adequate services or may not remain in business. The termination provisions in our agreements with our asset manager and with the custodian and administrator permit us to terminate their services only under limited circumstances. Also, as our portfolio continues to grow, our asset manager may face human resource constraints in managing our portfolio effectively. Even if a third party's performance is favorable, that party may seek to terminate its agreement with us or may not renew its agreement with us at the end of its term. In such a case, we may not be able to appoint appropriate replacements on terms satisfactory to us in a timely manner or at all.

Our relationship with Mitsubishi Corporation does not guarantee that we will be able to purchase desirable properties at competitive prices or at all

One of our growth strategies is to acquire desirable properties by partnering with Mitsubishi Corporation. For example, Mitsubishi Corporation may support us by creating acquisition, development and management plans, and it may also share the risks involved in acquiring certain properties that have low operating ratios or are currently under development. It may also acquire and hold properties for us that have long-term investment potential but that we are unable to acquire at the time they become available. However, we have not entered into any contractual relationship that provides us with any rights or that requires Mitsubishi Corporation to support us in obtaining property information or in acquiring any property. Mitsubishi Corporation thus has not guaranteed that we will be able to acquire properties from it. Rather, our relationship with Mitsubishi Corporation is dependent on the relationship between it and our asset manager, which is characterized as a non-exclusive capital and personnel relationship. Therefore, if our relationship with Mitsubishi Corporation deteriorates or if Mitsubishi Corporation otherwise ceases to provide support to us, our business, financial condition and results of operations may be materially adversely affected, thereby decreasing the market price of our units and the amounts available for distributions.

The past performance of our asset manager is not indicative of future results

Our asset manager will have day-to-day responsibility for our management and, while employees of our asset manager have experience in the real estate industry, we cannot assure you that the past experience of our asset manager and its employees, including its experience serving as the asset manager for Japan Retail Fund, will be sufficient to manage our assets successfully or maintain our status as a listed J-REIT. Furthermore, the past performance of Japan Retail Fund does not imply or guarantee any level of our future performance.

Our asset manager will manage us separately from Japan Retail Fund by forming two separate divisions that will operate independently. Moreover, our performance will be dependent on future events and market conditions that may be different from or inconsistent with those faced by Japan Retail Fund in its business, including different local and economic circumstances, different factors affecting the supply and demand in our respective property markets, varying degrees of competition and varying circumstances pertaining to capital markets in general. Failure to manage us effectively or maintain our status as a listed J-REIT would have an adverse effect on the market price of our units and the amounts available for distributions.

Our performance will depend on the efforts of key personnel of our asset manager

Our performance will be dependent on the efforts of key personnel of our asset manager to make appropriate judgments and decisions regarding the operation of our business, including the formulation of strategies for implementing our business goals and the acquisition, management and disposal of properties. We will rely on our asset manager to retain directors and employees with relevant professional experience and knowledge in real estate and finance in order to continue to grow our business. However, competition for such highly skilled business personnel exists not only from other real estate companies, including J-REITs and other real estate investment funds, but also from investment and commercial banks. There can be no assurance that our asset manager will be successful in retaining sufficient numbers of appropriately qualified personnel to help manage and grow our business. Moreover, our asset manager has not entered into written employment contracts with any of its key personnel, and seconded employees may return to their former posts. The loss of their services could have a material adverse effect on our business, financial condition and results of operations, thereby decreasing the market price of our units and the amounts available for distributions.

Our asset manager may have potential conflicts of interest in managing our portfolio and that of Japan Retail Fund

Consistent with best practice in our industry, our asset manager has implemented arrangements, policies and procedures for the effective management of conflicts of interest. For example, internal rules that address potential conflicts of interest that may arise from the dual management of Japan Retail Fund and our portfolio have been adopted. These rules provide a clear policy for the identification of potential conflicts and establish procedures for managing such conflicts if they arise. We believe these rules, combined with both an ethical wall and physical separation between our operations and those of Japan Retail Fund within our asset manager, should be sufficient to address adequately any conflicts of interest that may arise. However, despite vigilant monitoring, conflicts may still arise. For example, while the procedure for monitoring and managing conflicts at the transactional level is clear, there is no separation at the middle or back office level with respect to each J-REIT. In addition, the simultaneous management of Japan Retail Fund and our portfolio by our asset manager carries a reputational risk to us in the event that our asset manager were to fail to meet its legal and regulatory obligations to Japan Retail Fund. If any conflict of interest resulting in favorable treatment of Japan Retail Fund over our interests were to arise, or if we were to incur any reputational losses, our business, financial condition, and results of operations may be materially adversely affected.

We have potential conflicts of interest with Mitsubishi Corporation and UBS AG

Our asset manager, which is 51% owned by Mitsubishi Corporation and 49% owned by UBS AG, currently owns 100% of our units. In addition, several of our asset manager's executive officers have been seconded from Mitsubishi Corporation, UBS Global Asset Management and other affiliates of UBS AG. Although our asset manager has internal rules that address potential conflicts of interest, conflicts may nevertheless arise if the interests of Mitsubishi Corporation and UBS AG differ from ours or those of our other unitholders. In particular, Mitsubishi Corporation, UBS AG or any of their affiliates may attempt to use its influence over our asset manager and us in negotiating the terms and conditions of acquisitions of properties we acquire from Mitsubishi Corporation, UBS AG or any of their affiliates as well as in other transactions that we may conduct with Mitsubishi Corporation. We may also compete, directly or indirectly, with Mitsubishi Corporation, UBS AG or their affiliates in property acquisitions, operation and development. In such cases, our business, financial condition and results of operations could be materially adversely affected.