Sustainability-RelatedDisclosures of former KDR

SUSTAINABILITY-RELATED DISCLOSURE

Product Name: Kenedix Residential Next Investment Corporation

Legal Entity Identifier: 353800CYD58GUMFQME07

Kenedix Residential Next Investment Corporation (“KDR”) promotes environmental or social characteristics, but does not have as its objective a sustainable investment within the meaning of Article 9(1) of Regulation (EU) 2019/2088 (“SFDR”). KDR does not have any employees in accordance with the prohibition on having employees under the Act on Investment Trusts and Investment Corporations of Japan, and KDR relies on Kenedix Real Estate Fund Management, Inc. (the “Asset Manager”) to manage and operate the properties in the portfolio. KDR and the Asset Manager are hereinafter referred to collectively as “we,” “us” or “our”. References to “fiscal year” are to the 12 months began or beginning April 1 of the year, unless noted otherwise.

Summary

No sustainable investment objective

The financial products offered by KDR promote environmental or social characteristics, but do not have as its objective sustainable investment.

Environmental or social characteristics of the financial product

We invest mainly in residential properties and healthcare facilities to pursue stable revenue and sustained growth based on our aim of investing in spaces where people live and stay. Through our investment and management of these properties, we contribute to the sustainable development of society by addressing environmental and social issues.

We promote environmental or social (E/S) characteristics through a host of environmental, social and governance (“ESG”) enhancement initiatives, aligned with the United Nations’ 17 Sustainability Development Goals (“SDGs”). Specifically, we implement various environmental initiatives at our properties including those against climate change (installation of energy saving equipment such as LED lighting). With respect to social characteristics, we conduct our business in a manner compatible with the needs of local communities while supporting a work environment that encourages diverse work styles and promoting the health and well-being of residents, tenants and business partners. For example, we have agreements with local governments and our venders to provide some space in our residential properties to operate bike-share stations.

We have established a sustainability policy and are promoting sustainability initiatives toward realization of sustainable society. In addition, we have a separate environmental policy that guides our real estate investment and management from the perspective of the environment. We make efforts to achieve SDGs by addressing the material ESG issues identified by Kenedix, Inc., the Asset Manager’s parent, such as reduction of energy consumption.

Consistent with the foregoing, we proactively make investments that promote E/S characteristics in healthcare facilities. These healthcare facilities include private senior homes (with nurses), private senior homes (residential), serviced senior housing and nursing and health facilities. Especially in Japan, where the population is rapidly aging, healthcare facilities that primarily serve the elderly population have significant social value, as recognized by the United Nations Sustainable Development Goals (SDGs), such as SDG2 (Zero Hunger), SDG3 (Good Health and Well-being), SDG5 (Gender Equality), SDG8 (Decent Work and Economic Growth) and SDG11 (Sustainable Cities and Communities).

The Asset Manager is a wholly owned subsidiary of Kenedix, Inc. and a member of the Kenedix Group. The members of Kenedix Group share the same sustainability approach and work together to promote sustainability in our businesses. The Kenedix Group is contributing to sustainability and working toward SDGs while realizing the full potential of the real estate its group owns and manages. We integrate sustainability into the core of our business practices, based on the following ESG principles of the Kenedix Group:

• Building businesses and investing responsibly – We embed ESG considerations into our investment and decision-making processes by considering how our activities impact material ESG factors and thereby affect our reputation, capital value and stakeholders. We focus on how we can best manage our workforce, including not only the Asset Manager’s employees but also of our tenants, contractors and suppliers, and consider how we can work with the communities where we invest and operate our businesses and how we can enhance our presence by limiting our environmental impact.
• Developing and managing sustainable assets – We consider the ESG impact of every asset we own by empowering the Asset Manager’s asset management teams to track and monitor the sustainability performance of our assets and in certain instances collaborate with our tenants, partners and communities.
• Improving efficiency and enhancing value – We are seeking to build sustainable businesses and generate attractive risk-adjusted returns to our unitholders over the long term. We are committed to increasing work efficiency and improving workers’ satisfaction levels by advancing workstyle reform, implementing human capital development strategies with respect to inclusion and diversity, and improving the customer experience. We believe these efforts will ultimately contribute to achieving sustainable society and improved governance.
• Governing with high ethics and transparency – We are committed to maintaining the highest standards of corporate governance. Ethical governance standards and practices are woven into the fabric of our business to enhance corporate performance, accountability, and our unitholder value. We continuously review and refine our processes in light of best practice, consistent with our needs and circumstances, maintain a zero-tolerance approach to bribery and corruption, and require the Asset Manager’s management team and employees to comply with our code of business conduct at all times.
• Promoting well-being – We aim to incorporate health and well-being throughout our organization and assets in support of the Asset Manager’s employees and our tenants, and the communities in which they work. We promote working-style reform, implementing human capital development training reform, implementing welfare programs such as leave programs, health management and support activities, and creating a working environment that promotes comfort, health, diversity and social life.
• Contribution to local communities – We also promote interaction with local communities and residents. For example, we have agreements with local governments and our venders to provide some space in our residential properties to operate bike share stations, have installed outlets for charging electric vehicles in the parking lot for residents in order to respond to the spread of electric vehicles and plug-in hybrid vehicles, and have participated in local summer festivals held at one of our properties. We regularly donate shoes, clothing, and stationery that are no longer needed by our employees to the Mindanao Children’s Library. We have also provided matching donations to employees who donated in response to natural disasters such as earthquakes, typhoons, and heavy rainfalls.

Investment strategy

We invest directly or indirectly through trust beneficiary interests in real estate and real estate-related assets. Therefore, due diligence review (including the assessment of good governance practices) in relation to investee companies is not applicable. Therefore, we have opted to provide information on the governance policies adopted by KDR and the Asset Manager. The investment policies as described below are related to real estate and real estate-related assets.

The Asset Manager established its sustainability policy on September 5, 2018 and, together with KDR, its environmental policy, on January 26, 2016 and revised on March 15, 2023. The Asset Manager also engages in the material ESG issues identified by Kenedix, Inc. on an ongoing basis. The review and assessment of material ESG risks and opportunities are built into our investment decision process.

• Investment research and investment decision-making. We conduct preliminary investment research to understand how our activities impact material ESG factors and how they can affect our reputation, capital value and stakeholders. Our investment research includes ESG considerations such as (i) whether we can achieve energy reduction through installation of LED lighting (ii) whether the property can receive an environmental certification, and (iii) whether we can deliver a new lifestyle to the property’s tenants and users by providing IoT technology. We also consider ESG factors throughout an asset’s lifecycle by tracking and monitoring the sustainability performance of our assets. The Asset Manager’s Asset Management Committee considers positive due diligence findings on ESG factors as plus factors along with other economic and operational considerations when making a final decision to invest in a property.
• Healthcare facilities. We invest in healthcare facilities such as private senior homes (with nurses), private senior homes (residential), serviced senior housing and nursing and health facilities in addition to real estate-related properties for residential use. We believe that investments in healthcare facilities address the high and rising demand for high-quality healthcare facilities that service Japan’s super-aging population. We select operators based on their financial strength, management effectiveness, governance and legal compliance to ensure that residents of our healthcare facilities have stable living arrangements.
  • Social finance framework. We were the first J-REIT to issue social bonds in December 2019. By offering an opportunity for investors interested in making ESG investments, we have attracted a broader range of investors and diversified fund procurement channels.
  • Use of funds. We allocate the funds procured through social finance to the acquisition of assets eligible for social finance, repayment of borrowings required for such acquisition and redemption and refinancing of investment corporation bonds. Assets eligible for social finance meet the following eligibility categories: (i) senior living facilities (such as private senior homes, serviced senior housing, apartments for the elderly, group homes for elderly with cognitive impairment, small multi-function facilities and daycare facilities) and (ii) medical facilities (such as hospitals, clinics, medical malls and nursing and health facilities).
  • Selection process of projects. The requirements of assets eligible for social finance are stipulated in the Management Guidelines of the Residential REIT Department prepared by the Asset Manager. In addition, compliance with the eligibility criteria is checked during the process of decision-making for the acquisition of assets and borrowing of funds.
  • Management of procured funds. Debt eligible for social finance is calculated by multiplying the total acquisition price of the assets eligible for social finance in our portfolio by interest bearing debt as a percentage of total assets.
  • Reporting. The following matters are disclosed annually on our website: (i) social finance metrics, (ii) allocation of funds and (iii) output, such as overviews of buildings and leases, tenants and facilities, financial performance of relevant properties, operators, and outcomes, such as the percentage of healthcare facilities in the portfolio based on acquisition price and our investment trend in healthcare facilities.

We ensure the investment strategy is implemented on a continuous basis by incorporating review and assessment of material ESG-related risks and opportunities into our investment decision process.

As discussed in detail above, we consider ESG-related due diligence review before investing in properties.

While there is no third-party rating used for assessment of our governance practices, we have introduced the following measures to assess and enhance our governance systems:

• Adoption of EPU (Earnings per Unit)-linked and performance-linked asset management fees. We pay EPU-linked fees as well as performance-linked fees to the Asset Manager to align the interest of our unitholders and the interest of the Asset Manager.
• Related-party transactions. We are generally not allowed to carry out related-party transactions without the prior approval of our Board of Directors and the agreement of our Executive Director.
• Transparent and appropriate information disclosure. We make press releases and other disclosures in both Japanese and English simultaneously in a timely and appropriate manner.

Proportion of investments

KDR offers financial products which promote environmental or social characteristics, but does not have sustainable investments as its objective. As of March 31, 2023, 81.2% of the properties in our portfolio were Energy-inefficient Assets (defined below) and 18.8% were not (of such 18.8%, 16.3% had obtained DBJ Certification (defined below), 0.5% had obtained BELS Certification (defined below) and 11.1% had obtained CASBEE Certification) (defined below), in each case based on floor area. We define our properties other than properties that have received any of environmental certifications, such as DBJ Certification (defined below), CASBEE Certification and BELS Certification, as “Energy-inefficient Assets.”

Monitoring of environmental or social characteristics

In order to periodically monitor and track our performance on E/S initiatives, we utilize certain environmental and social certifications for the properties in our portfolio, receive certain sustainability performance assessments annually, operate an environmental management system, and gather and report certain ESG data (e.g., greenhouse gas (GHG) emission amounts) of the properties in our portfolio. The followings are our key performance indicators to measure the attainment of the environmental and social characteristics we promote.

• GRESB Real Estate Assessment. GRESB is an annual benchmark that measures ESG performance in the real estate sector. To assess the overall ESG performance of our portfolio, we participate in the annual GRESB review. KDR aims to maintain or improve our current three-star (out of five stars) GRESB rating.
• Other environmental certifications. We use various environmental certifications issued by third-party organizations to monitor and track the ESG performance at the building level.
  • DBJ Green Building Certification. The Green Building Certification Program of the Development Bank of Japan (the “DBJ”) evaluates and certifies properties based on their relationships with society and the economy, by providing comprehensive assessment based on factors that range from environmental features to communication with stakeholders (“DBJ Certification”).
  • BELS Certification. The Building-Housing Energy-efficiency Labeling System (“BELS Certification”) is a third-party certification system to rate houses and buildings in accordance with requirements to label energy saving performance under the Act on Improving Energy Consumption Performance for Architectural Structures of Japan.
  •   CASBEE Certification. The Comprehensive Assessment System for Built Environment Efficiency (“CASBEE Certification”) is an evaluation system that rates the environmental performance of buildings, developed under the guidance of the Ministry of Land, Infrastructure, Transport and Tourism of Japan.
• Signatory to the PFA 21. The Principles for Financial Action for the 21st Century, or PFA21, establish guidelines for financial institutions to fulfill their responsibilities and roles required to achieve sustainable society. Signatory financial institutions, including the Asset Manager, are required to implement initiatives based on the seven principles to the extent possible. By implementing these initiatives, the Asset Manager is better able to assess its attainment of E/S characteristics.
• Environmental initiatives. We aim to reduce energy consumption and GHG emissions by an annual average rate of 1% (5% over five years) and to prevent any increases in water use for our properties each year. In the medium- and long-term, we aim to reduce GHG emissions by 40% in total amount in fiscal year 2030 as compared to fiscal year 2015 and achieve net-zero by 2050. We monitor these efforts and disclose our annual performance on our website.
• Installation of LED light bulbs in common areas. We have implemented a variety of initiatives to conserve energy and reduce cost of operations for our residential properties. For example, we have replaced lighting fixtures in common areas with LED light bulbs.
• Green lease agreement. A green lease is an agreement requiring the property owner and tenant to cooperate on reducing the environmental impact of the property. We have entered into a green lease agreement with one of our tenants, the healthcare facility TEN. Pursuant to that green lease agreement, we installed LED lighting and achieved a decrease in the tenant’s electricity expenses and an increase in rent under the lease agreement that requires the tenant to return to us a portion of the savings captured from LED lighting. We will continue to explore opportunities to enter into green lease agreements with other tenants.
• Cooperation with property managers. The Asset Manager has required certain property managers to observe our philosophy of contributing to a sustainable society, including our sustainability policy. We require our property managers, for example, to encourage tenants to cooperate with us in energy conservation efforts. We have shared our sustainability policy with property managers at regular meetings, and asked them to encourage tenants to enter into lease agreements, which stipulate tenants’ effort to reduce the burden of their activities on the environment.

Methodologies

The Asset Manager has established the Sustainability Committee to effectively promote the initiatives for sustainability and ESG-related matters in our business practice. On an ongoing basis, the Sustainability Committee generally holds meetings every three months and collects, analyzes, and examines the policies, targets, activity plans, initiatives, risk management and other important matters related to sustainability and ESG for KDR and the Asset Manager, and shares the results thereof with related parties of the Asset Manager. Based on the results of the above process, the Sustainability Office in the Asset Manager prepares ESG-related reports and considers the details of disclosure materials related to sustainability and ESG. The Sustainability Committee uses the following methodologies to track and measure our sustainability-related performance indicators and targets.

• GRESB Real Estate Assessment. To assess KDR’s attainment of social or environmental characteristics, KDR participates in the GRESB Real Estate Assessment, which generally covers a broader scope of evaluation items related to sustainability and ESG than the evaluation items used for due diligence conducted at the time of investment. Based on the benchmark report, the public disclosure report and other reports regarding GRESB Real Estate Assessment issued by the GRESB secretariat, the Asset Manager analyzes the details of scores, evaluates any room for future upgrade and other data with the assistance of a consulting firm and prepares an action plan for progressing sustainability and ESG goals. KDR’s GRESB rating is reported to the Sustainability Committee and disclosed on our website and financial results-related documents.
• Other environmental certifications. To assess each property’s attainment of social or environmental characteristics, we use environmental certifications, which are issued by third-party organizations and generally cover the broader evaluation items related to sustainability and ESG than the evaluation items for due diligence conducted at the time of investment. For the properties that have not acquired an environmental certification, the Asset Manager considers potential measures to meet the standards for obtaining an environmental certification. The status of environmental certifications held by properties in our portfolio are reported to the Sustainability Committee and disclosed on our website and financial results-related documents. This status is also used as a factor to evaluate KDR’s GRESB rating.
• Signatory to the PFA 21. As a signatory to the PFA 21, the Asset Manager assesses its attainment of social or environmental characteristics by implement initiatives based on the seven principles. The Asset Manager collects the status of implementation of initiatives by J-REITs managed by the Asset Manager including KDR and reports the status internally. This status is reported to the secretarial of the PFA 21 annually.
•  Environmental initiatives. We track the progress of energy consumption, GHG emissions and water use, and prepare an action plan for each property to achieve the targets mentioned above. The Asset Manager collects and compiles data related to energy consumption, GHG emissions and water use internally. This data is disclosed on our website and financial results-related documents.
• Installation of LED light bulbs in common areas. The property managers report to the Asset Manager on the status of installation of LED lighting at the property level. The Asset Manager compiles the status at the portfolio level internally. Based on the status, the Asset Manager tracks progress and prepares individual budget and action plans for each property for installing LED lighting. The status of installation of LED lighting is disclosed on our website and financial results-related documents, and also used as a factor to evaluate KDR’s GRESB rating.
• Green lease agreement. We track the cooperation of a tenant on reducing the environmental impact of the one property that we have entered into a green lease agreement with respect to and prepare action plans for each property with the goal of increasing the number of tenants who enter into green lease agreements in the future. The Asset Manager internally collects and compiles data related to the one green lease agreement we have executed. The status of such green lease agreement is disclosed on our website and financial results-related document, and also used as a factor to evaluate KDR’s GRESB rating.
• Cooperation with property managers. We monitor and cooperate with property managers on initiatives for tenants to conserve energy and reduce the burden of their activities on the environment by maintaining close contact with property managers. The Asset Manager can use the tracked information obtained during monitoring and cooperation as reference information to encourage other property managers to work together on sustainability-related initiatives.

Data sources and processing

• GRESB Real Estate Assessment. Before KDR submits the responses to the survey of the GRESB Real Estate Assessment, a consulting firm reviews the ESG-related data and supporting materials used for the responses. The consulting firm also assists the Asset Manager in evaluating any room for future improvement. Therefore, engaging established consulting firm helps to ensure the data quality. Also, the Asset Manager obtains the assurance report regarding energy consumption, GHG emissions, and water use, which are used for data in GRESB Real Estate Assessment, from an independent third-party organization.
• Other environmental certifications. The Asset Management Division of the Residential REIT Department of the Asset Manager submits the relevant data provided by the property managers to the established third-party organizations that issue environmental certifications for the properties in our portfolio. Obtaining the environmental certifications issued by the established third-party organizations helps to ensure the data quality. The Asset Management Division of the Residential REIT Department of the Asset Manager calculate and track the properties which hold environmental certifications based on the reports from the property managers.
• Signatory to the PFA 21. The Sustainability Office of Strategic Planning Department of the Asset Manager collects and compiles the relevant data while confirming with the Residential REIT Department. The Asset Manager can confirm the accuracy of the compiled data by referencing raw data.
• Environmental initiatives. At the property level, The Asset Management Division of the Residential REIT Department of the Asset Manager collects the relevant data from the property managers. At the portfolio level, the Asset Manager compiles relevant data. To ensure data quality, the Asset Manager obtains an assurance report regarding energy consumption, GHG emissions, and water use from an independent third-party organization each year.
• Installation of LED light bulbs in common areas. At the property level, the Asset Manager obtains relevant data from the property managers. At the portfolio level, the Asset Management Division of the Residential REIT Department of the Asset Manager compiles relevant data internally as needed basis. The quality of data is ensured by engaging established property managers to provide it.
• Green lease agreement. The property manager of the one property for which a green lease agreement has been executed calculates the relevant data. At the portfolio level, the Asset Management Division of the Residential REIT Department of the Asset Manager internally compiles relevant data received from the property manager. The Asset Manager can confirm the accuracy of the compiled data by referencing the raw data.
• Cooperation with property managers. The Asset Management Division of the Residential REIT Department of the Asset Manager calculates the relevant data for each property manager through close contact with property manager at regular meetings and other opportunities. The Asset Manager can confirm the accuracy of the tracked data by referencing the raw data.

Limitations to methodologies and data

The primary limitation to methodologies and data is the necessity of reliance on tenants and property managers for data at the property level. Like many other real estate investment corporations and asset managers, we rely on data provided by the tenants, and independent verification of accuracy of such data provided by the tenants and property managers presents challenges. In addition, data at the property level provided by the tenants and property managers is generally updated on an annual basis. Accordingly, property-specific data will therefore not always be fully up-to-date.

Data at the property level is compiled internally by the Asset Manager and, except for energy consumption, GHG emissions, and water use data, there is no third-party quality assurance or verification for the property-level data.

Limitations to the methodologies and data are not expected to affect the attainment of the environmental or social characteristics promoted by KDR in any material way.

Due diligence

Prior to our investment in a property, the Asset Manager conducts due diligence on the property including ESG due diligence. Our ESG due diligence on a property considers the following ESG factors: (i) use of hazardous or toxic chemicals (asbestos and PCB); (ii) generation and discharge of air pollutant emissions (chlorofluorocarbon) and air quality; and (iii) susceptibility to earthquakes (including the probable maximum loss (“PML”) analysis) in the property. For our regulatory environmental due diligence, the Asset Manager retains reliable experts to conduct surveys including soil contamination surveys in accordance with the Soils Contamination Countermeasure Act of Japan and obtains an engineering report and a PML analysis report. In addition, as a part of the due diligence review, we consider whether we can achieve energy reduction through installation of LED lighting. Upon the review of environmental issues discovered through due diligence review, the Acquisition Department of the Asset Manager reports such issues to the Asset Management Committee, and the Committee decides whether we acquire the property or not considering the potential for improvement in environmental performance and comfort level of properties.

Engagement policies

We do not generally consider investing in properties that do not meet the thresholds for soil contamination and other environmental contamination in accordance with the Soils Contamination Countermeasure Act of Japan and other environmental laws and ordinances.

When investing in properties under our green finance framework, the Asset Management Committee is required to select assets for investment meeting the eligibility criteria described above.

Also, we do not invest in real estate assets involved in the extraction, storage, transport or manufacture of fossil fuels.

Designated reference benchmark

KDR has no benchmark index designated as a reference benchmark to meet the environmental or social characteristics promoted by KDR.

REMUNERATION AND SUSTAINABILITY RISKS
(SFDR ARTICLE 5 DISCLOSURE)

The Asset Manager has a remuneration policy in place which aims to support its strategy, values and long-term interest, including its interest in sustainability. The Asset Manager’s remuneration policy is consistent with the integration of sustainability risks as follows.

• Employees of the Asset Manager receive remuneration based on their experiences, expertise and responsibilities. Monthly remuneration is composed of job-based pay and adjustments.
• The process and procedures on methods of calculation, payment schedule are prescribed in the compensation rules following the local labor related laws.
• Monthly remuneration is reviewed annually. Employees are assessed by their individual evaluation, contribution, position, corporate performance, and other circumstances, including compliance requirements.
• The Asset Manager provides bonuses which are calculated based on corporate performance, target achievement and individual evaluation which includes sustainability efforts and compliance requirements.

INTEGRATION OF SUSTAINABILITY RISKS IN THE INVESTMENT DECISIONS,
AND THE IMPACT OF SUCH RISKS ON THE RETURNS OF KDR
(SFDR ARTICLE 6 DISCLOSURE)

The Asset Manager has established the Sustainability Committee, which is composed of the key management members of the Asset Manager, such as the President & CEO and the full-time Directors. The Sustainability Committee generally holds meetings every three months to collect, analyze, and review sustainability and ESG-related matters. Such matters include sustainability or ESG policies, objectives, activity plans, initiatives, risk management and other important matters related to sustainability or ESG of the Asset Manager and the J-REITs that the Asset Manager manages. The Sustainability Committee also promotes sustainability and ESG-related efforts by sharing such information with other parties in the Asset Manager. The results of the information gathering, analyses and considerations made by the Sustainability Committee are reported and proposed to each J-REIT, and implementation of sustainability or ESG measures for each J-REIT is decided by the department of the Asset Manager in charge of the management of the relevant J-REIT.

As described above, we have instituted a number of initiatives, at the corporate level, the portfolio level and the property level, to promote E/S characteristics. Such initiatives include climate change initiatives, initiatives for saving/reducing energy consumption, local community initiatives, and initiatives for employees and tenants.

Since sustainability issues will severely impact our business activities, we regard such issues as material business challenges. We also believe that integrating sustainability factors alongside traditional financial and operational metrics in our investment decision process helps us make a more holistic assessment of a property’s risks and opportunities and is commensurate with the pursuit of superior risk-adjusted returns. Therefore, we will continue to analyze the sustainability on our business and improve our investment decision-making process so that we can consider more thoroughly how sustainability factors could impact returns on our investment units. In addition, we will analyze the impact of environmental risks such as flood and landslide disasters on returns on our investment units as a part of analysis of sustainability risks.

The assets in which KDR invests are exposed to physical and transition risks, such as the following.

The above risks are those that we are aware of at this time, and may be revised in the future due to changes in circumstances or progress in consideration.