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Governance

Governance

Governance of the Investment Corporation (“KDO”)

In addition to the General Meeting of Unitholders, which is composed of unitholders, the organization of KDO consists of the Board of Directors, which is composed of an Executive Officer and Supervisory Directors, and an Independent Auditor. For details, please refer to “Status of Board of Directors” below. The number of supervisory directors must be the number of executive directors plus one or more.
The Board of Directors of KDO is required to meet at least once every three months. In actual operations, Board of Directors meetings are held about once a month in principle. At Board of Directors meetings, the Executive Director reports on the operational status of the Asset Management Company ("KFM") and the General Administrator., The directors and employees of KFM and the General Administrator also provide detailed reports on the status of business execution as needed. The Independent Auditor is EY Ernst & Young ShinNihon LLC.
The Executive Director is responsible for the execution of KDO's businesses and is authorized to take any judicial or out-of-court actions with respect to KDO's operations. The Supervisory Directors have the authority to supervise the execution of duties by the Executive Director.

Status of Board of Directors

Candidates for directors are elected by resolution at the General Meeting of Unitholders provided there are no causes for disqualification as stipulated in the Act on Investment Trust and Investment Corporations (the "ITA") and other laws and regulations (Articles 98 and 100 of the ITA and Article 164 of the Ordinance for Enforcement of the ITA).

Title Name M/F Tenure(Note1) Attendance at Board of
Directors meetings(Note1)
Reason of appointment
Executive
Directors
Hikaru Teramoto(Note2) M 2 months 100% (2/2) Sufficient knowledge and experience of financial industry and real estate
Supervisory
Director
Yoshihiro Morishima M 10 years 100% (17/17) Sufficient knowledge and experience as a Licensed Real Estate Appraiser; no conflicts of interest with KDO and the Asset Manger
Supervisory
Director
Takahiro Seki M 8 years and
1 month
100% (15/15) Sufficient knowledge and experience as a lawyer; no conflicts of interest with KDO and the Asset Manger
Supervisory
Director
Akiko Tokuma(Note2) F 2 months 100% (2/2) Sufficient knowledge and experience as a certified public accountant; no conflicts of interest with KDO and the Asset Manger
Note1: Tenure is as of March 31, 2022. The attendance at Board of Directors meetings of Hikaru Teramoto and Akiko Tokuma is based on the period from February to March 2020. The attendance of Yoshihiro Morishima and Takahiro Seki is based on the period from January to December 2021.
Note2: Newly appointed from February 1, 2022.

Remuneration of Board of Directors

The criteria and timing of payments of remuneration to KDO's directors are as follows.

(1)KDO shall pay monthly remuneration to executive directors at an amount decided by the Board of Directors, up to an amount equivalent to 800,000 yen per month for each executive director, no later than the last day of the relevant month.

(2)KDO shall pay monthly remuneration to supervisory directors at an amount decided by the Board of Directors, up to an amount equivalent to 500,000 yen per month for each supervisory director, no later than the last day of the relevant month.

The actual amount of remuneration is as follows.

Title Name Total amount of remuneration
(November 2020 to October 2021)
Executive Director Jiro Takeda 4.2 million yen
Supervisory Director Shiro Toba 4.2 million yen
Supervisory Director Yoshihiro Morishima 4.2 million yen
Supervisory Director Takahiro Seki 4.2 million yen
Note: The subject period for the total remuneration is the fiscal period ended April and October 2021.

Remuneration of Independent Auditor

KDO shall pay remuneration to Independent Auditor at an amount decided by the Board of Directors, up to an amount equivalent to 12 million yen for each accounting period subject to the audit, no later than the last day of the month following the month in which all audit reports required under the ITA and other laws and regulations for the relevant accounting period are received.

The actual amount of remuneration is as follows.

Name Total amount of remuneration
(November 2020 to October 2021)
Independent Auditor EY Ernst & Young ShinNihon LLC 27.8 million yen

The Independent Auditor communicates appropriately and conducts appropriate audits through discussions with KDO and the Asset Management Company ("KFM") and accounting audit reporting, which are conducted each fiscal year.

Operational structure

KDO has entrusted the management of its assets to KFM, in accordance with the provisions of the Investment Trust Act. KFM manages KDO's assets under an asset management contract with KDO.
The organizational chart of KFM is as follows.
https://www.kdo-reit.com/en/about/asset.html

Asset management fee

The management fee paid by KDO to KFM is based on the following calculations as stipulated in KDO's Articles of Incorporation. KDO aims to align the interests of unitholders and KFM by introducing an asset management fee structure linked to the amount of distributions per unit and unit performance.

Asset Management Fee I Total assets × 0.13%
Asset Management Fee II Distribution per unit (Note 1) × 23,000
Asset Management Fee III Increase in distribution per unit (Note 2) ×Number of outstanding investment units × 10%
Acquisition Commission Acquisition price × 1.0%
Sale Commission Gain on sale × 10.0%
Merger fee Appraisal value of assets to be succeeded x 1.0% (maximum)
Note 1: When there is a loss carried forward, obtained by dividing the amount calculated by subtracting loss carried forward from income before income taxes before Asset Management Fees II and III by the number of outstanding investment units as of the end of relevant fiscal period.
Note 2: Obtained by subtracting simple average of DPU for the most recent 4 fiscal periods from DPU. If the amount subtracted does not exceed zero, Asset Management Fee III shall be zero.

Kenedix Group's investment in KDO (same boat investment)

Kenedix, Inc. holds 15,421 units in KDO as of April 8, 2022 (3.60% of the total units issued and outstanding). This aligns Kenedix Group's interest with KDO's unitholders' interest.

Compliance

Compliance is one of the highest management priorities of KFM, which is the Asset Management Company of KDO. KFM has a framework whereby compliance activities are promoted under the leadership of the Board of Directors, Compliance Officer and Compliance Committee.
As an asset manager for multiple REITs, we have a social obligation to use our business to produce value. Constant and extensive compliance activities are essential for increasing the value of our business in terms of both quality and quantity.

Board of Directors (KFM)

The Board of Directors determines the basic policy for compliance activities as well as other basic items concerning compliance. The Board of Directors can ask the Compliance Officer and Compliance Committee to submit reports as needed concerning the status of compliance activities.
The Compliance Officer submits proposals for the establishment of a compliance manual and a compliance program, as well as revisions. These proposals are first examined and approved by the Compliance Committee. The proposals then go to the Board of Directors for final approval. As a rule, a compliance program is established for every fiscal year and the Compliance Officer promptly submits progress reports to the Board of Directors. In addition, the Compliance Officer submits internal audit reports and clerical accident reports in a timely manner or periodically.
The Board of Directors makes decisions on appointments of the following important positions regarding the management of REIT assets by KFM. Individuals who are selected must have outstanding character and knowledge along with the skills needed to perform the assigned duties. In addition, the outside members of the asset management committees of each department must be certified real estate appraisers and the outside member of the Compliance Committee must be either an attorney or a certified public accountant.
(1) Outside member of the Compliance Committee
(2) Outside members of the asset management committees of each department
(3) Compliance Officer

Compliance Officer

The Compliance Officer works on the establishment of compliance system in KFM and the creation of a corporate culture that abides by laws and regulations, as well as rules.
The Compliance Officer ensures that the necessary relevant documents are prepared in conjunction with the presentation of such an agenda as the establishment/change of management guidelines and asset management plans for the respective departments and the acquisition of individual assets, and conducts preliminary examinations regarding whether there are any serious problems in terms of compliance, such as the violation of laws and regulations.
The Compliance Officer also administers matters regarding compliance in KFM as a chairperson of the Compliance Committee. Specifically, the Compliance Officer is assigned with duties such as drafting and improvement of compliance manuals and compliance programs, as well as periodical instructions and trainings to executives and employees and the inspection of compliance with laws and regulations, based on compliance programs.

Compliance Committee

The Compliance Committee, which is chaired by the Compliance Officer,examines and reaches decisions about matters involving all aspects of compliance activities.
As chairperson of this committee, the Compliance Officer supervises all items concerning compliance at KFM.
The Compliance Committee examines all other important matters involving compliance and reaches decisions, which are reported to the Board of Directors.
The compliance manual and compliance program proposals submitted by the Compliance Officer are examined and approved by the Compliance Committee. The proposals then go to the Board of Directors for final approval. As a rule, a compliance program is established for every fiscal year and the Compliance Officer promptly submits progress reports to the Board of Directors.

The decision-making process

KFM manages the assets of KDO under a discretionary asset management contract with KDO. In this role, KFM establishes asset management guidelines, investment policies, related party transaction rules, distribution policies, disclosure policies and other basic policies regarding the asset management of KDO.
For the asset management of KDO, KFM prepares an asset management plan and other documents (in addition to the asset management plan, medium-term and annual business plans) in accordance with the asset management guidelines. Based on the investment policy stipulated in the asset management guidelines and the related party transaction rules, properties to be acquired or sold are selected and the transactions are subsequently executed.
Transactions with related parties as prescribed in the Investment Trust Act and related parties as prescribed in the Related Party Transaction Rules require the approval of KDO Board of Directors and based on this resolution, the agreement of the KDO Executive Director. However, this requirement does not apply for certain types of transactions.

Note: Transactions within the scope of insignificance criteria are excluded from the decision-making process above. Such transactions are executed upon approved by the Asset Management Committee.

Responding to anti-social forces

KFM has prepared a Manual for Responding to Anti-social Forces and the Prevention of Transfers of Criminal Proceeds. To reject relationships of any kind with anti-social forces, KFM has a resolute stance for refusing to deal with criminal and other anti-social forces.
KFM confirms that buyers and sellers of properties, tenants, business partners, and other transaction counterparties are not anti-social forces. In addition, KFM requires all contracts to include provisions for refusing to deal with anti-social forces and performing confirmations in accordance with the Act on Prevention of Transfer of Criminal Proceeds when conducting transactions. Consequently, KFM is taking concrete actions for the purpose of preventing relationships with anti-social forces.

Measures against money laundering and terrorist financing

KFM has prepared a Manual for Responding to Anti-social Forces and the Prevention of Transfers of Criminal Proceeds and properly performs confirmations in accordance with the Act on Prevention of Transfer of Criminal Proceeds when conducting transactions. These activities are used to confirm the identities of transaction counterparties as well as their attributes, business activities and purpose of the transaction. Risk identification, evaluation and reduction measures are implemented from the perspective of the risk-based approach specified in the Guidelines Concerning Money Laundering and Financing of Terrorism of the Financial Services Agency.

Ethics and anti-corruption measure

The Employment Regulations and Compliance Manual of KFM state that KFM will not tolerate money laundering, embezzling, fraud, theft or other criminal activity. In addition, KFM strictly prohibits the acceptance of bribes or other improper activities, directly or involving a third party, by the staff of KFM in connection with their duties. If any activity of this type is discovered, disciplinary action will be taken based on the Employment Regulations.
Furthermore, KFM has established rules concerning entertainment outside the company, whether an employee received or provides this hospitality, for the purpose of preventing hospitality that goes beyond normal social standards. To prevent improper activities, employees are required to receive approval before providing meals or other hospitality to others. The implementation of these guidelines is subject to internal audits. The most recent internal audit concerning entertainment and other hospitality took place in fiscal 2020.

Whistle-blowing system

Employees of KFM are obliged to submit reports as prescribed in Rules Concerning the Internal Reporting System in the event of a violation or suspicion of a violation of a law or regulation (including a violation of the Code of Conduct of KFM) and when it is impossible or extremely difficult to remedy a violation through conventional business practices. Individuals who submit reports, cooperate with the submission of reports or participate significantly in examinations of reports are protected by laws and regulations and the internal reporting system. Any negative consequences for individuals involved with internal reports are strictly prohibited. In addition, the whistle-blowing system stipulates that KFM must maintain confidentiality with respect to the information reported, and that information such as the name of the whistleblower must not be disclosed unless consented by the whistleblower.

Internal audits

The Head of the Internal Audit Department of KFM prepares an internal audit plan, which complies with the Internal Audit Rules, as a person in charge of internal audits. After the plan is approved by the Board of Directors, audits are performed in accordance with the plan. Internal audit reports accurately reflecting issues found and raised during audits are prepared. The person in charge of internal audits shares such an internal audit report with the President & CEO and the Board of Directors without delay. Departments that were audited establish a plan for making improvements without delay, factoring in the significance of issues raised, and take the necessary actions. The person in charge of internal audits appropriately oversees progress with improvements at departments that were audited, confirms that improvements have been completed and reflects these activities in the subsequent internal audit plan. To confirm the suitability of the business processes of KFM or for some other reason as needed, the Board of Directors or the person in charge of internal audits can, at their discretion, ask for an external audit by outside experts.

Compliance training

To ensure that everyone is aware of the importance of compliance, KFM provides compliance training for new employees when they first join the company as well as for all executives and employees, including temporary employees.

Compliance training held in 2021

Training content Date of training
Cases of internal audit findings related to conflicts of interests control and acquisition and sale March 2021
Fiduciary duty, financial regulations, etc. June 2021
Prevention of fraud and harassment August 2021
Compliance for property management December 2021

Policy for Customer-Oriented Business Conduct

KFM is firmly committed to the asset management of KDO with the objective of maximizing value for investors. As part of these activities, KFM has adopted the Principles for Customer-Oriented Business Conduct announced on March 30,2017 by the Financial Services Agency and has established policies for activities that comply with these principles.
For details, please visit the following website:
https://kenedix-fm.com/en/kokyaku.html

Managing conflicts of interests

Managing conflicts of interest is one of our material issues. The Compliance Manual and other internal rules, etc. has specific policies for the prevention of these conflicts and protection of the company's assets. Compliance and other training programs give employees a thorough understanding of conflicts of interest and how to prevent them. In addition, we have Related Party Transaction Rules that include processes for making decisions, basic views concerning these transactions and other guidelines. The objective is to prevent transactions with related parties (executives, major shareholders and others) and between these related parties from being detrimental to shareholder value.

Proper information management among the Kenedix Group

The Kenedix Group provides asset management services for a large number of investment corporations and funds on behalf of investors. Kenedix Inc. (“Kenedix”) has signed a memorandum with KFM and KDO managed by KFM and with Kenedix Investment Partners, Inc. concerning the provision of real estate and other information by Kenedix. The proper provision of information by Kenedix and group companies along with the determination of the types of support supplied by the Kenedix Group (and disclosure of this information) ensures the transparency and suitability of the operations of funds and other similar entities.

Rule concerning conflicts of interest among REITs

Since KFM manages three J-REITs and a private REIT, it has established a pipeline committee, that is chaired by the Compliance Officer, and adopted internal guidelines in order to prevent the improper allocation of acquisition opportunities as well as prohibition of concurrent serve as several general managers of REIT management departments, and thus, managing conflicts of interests among the REITs.
By managing these rules appropriately and smoothly, it strives to implement appropriate measures for conflicts of interest, such as preventing arbitrary distribution of real estate sales information and preventing conflicts of interest among the investment corporations managed by KFM.

Risk Management

Risk management is one of our material issues. There are many activities for the proper oversight and control of risk factors.

Risk management system

KFM stipulates risk management policies, risk management divisions, risk management methods, etc. in its "Risk Management Rules" for the purpose of ensuring sound management and appropriate risk management as an investment management company.

The main risks are defined as investment management risk, real estate management risk, financial risk, legal compliance risk, administrative risk, system risk, and business continuity risk, and a separate management department is designated for each risk.

Each risk management department continuously monitors the status of each risk and, in the event that a significant risk has materialized or is likely to materialize, promptly submits a proposal to the Board of Directors regarding the nature of the risk and the policy for dealing with it.

Each risk management department reviews the items, contents, and response policies of each risk approximately once every two years. The Board of Directors, fully aware of the location and nature of these risks, will oversee the formulation of risk management policies and the development of an appropriate risk management system considering the strategic objectives.

The Board of Directors shall fully recognize the importance of the risk management department and shall take appropriate measures to ensure that the risk management policy is well known within KFM. The Board of Directors will also hold discussions on the risk management system as necessary. The Compliance Officer will oversee the practical management of each risk and support the role of the Board of Directors.

Crisis and disaster response system

Kenedix has Crisis Management Rules and Disaster Response Rules for natural disasters, incidents, accidents and other problems that have a major impact on business activities or society overall and are detrimental to corporate value. The General Administration and Human Resources Department is responsible for crisis management and disaster response activities. This department establishes an emergency response headquarters to take actions as needed when problem occurs.
In accordance with the Kenedix Group Business Continuity Plan, disaster response drills are held periodically, there are measures in place to resume business operations quickly following a disaster or other problem, and other measures to be prepared for a crisis. We periodically reexamine this plan and make revisions as needed.
We also use the following measures to be prepared for a disaster.

1. Storage of disaster response kits with food, water and other supplies for executives and employees at business sites

2. A safety confirmation system for quickly determining the status of executives and employees after a disaster

3. Back-up servers in several locations to protect data

Information securit

KFM has established "Information Protection Rules" and strives for proper information management and protection of information in KFM by stipulating management methods, management systems, etc. for information handled on business.
For information security management, the Compliance Officer is designated as the "Chief Information Officer" to oversee KFM's information.

In addition, the information manager in each department is the head of the department, who is responsible for the management of information in each department and ensures that directors and employees of the department in charge are informed of and comply with the information management system.

Protection of personal information

The Compliance Manual contains specific standards for the handling of personal information and other internal information. KFM also conducts compliance and other training programs for employees to be certain that everyone has a strong commitment to protecting personal information.

Commitment to Responsible Investments

A commitment to responsible investments is one of the KFM's material issues. We are committed to building a stronger infrastructure for achieving both sustained growth and social responsibility.

Signing on to the PRI

The PRI is a set of principles established for the financial industry in 2006 under the leadership of the United Nations Secretary-General of the time, Kofi Annan. PRI comprises six principles.
The PRI encourages the incorporation of ESG issues (Environment, Social and Governance) into investment decision-making processes, with the aim to help companies enhance long-term investment performance and better fulfill their fiduciary duty.
Kenedix, the parent company of KFM, has signed on to the PRI and is ambitious to become a real estate asset management company that commit responsible investment through the practice of PRI.

Signing on to the PFA21

The PFA21 (Principles for Financial Action for the 21st Century) has been established by drafting committee with participation of various financial institutions in October 2011 as the action guidelines of financial institutions who seek to fulfill their responsibilities and roles required for the formation of a sustainable society. Signing financial institutions will implement initiatives based on the seven principles as much as possible based on their own businesses. It has been positioned as a starting point to collaborate without being restricted by business categories, scale or region.
Kenedix and KFM have signed on to the PFA 21 and are ambitious to become a real estate asset management company that commits to responsible investment through the practice of the PFA21.