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Risks
Premier Investment Corporation (PIC) is exposed to potential risks such as those listed below (but not limited to this list). PIC is determined to do its utmost to avoid the generation of these risks, and to overcome the risks if they actually occur.
1. Table of Potential Risks
2. Briefing on Major Risks
3. Measures for Risk Management
1. Table of Potential Risks
| General risks concerning: |
1) | Legal, tax and other systems involving investment corporations |
|---|---|---|
| 2) | Transactions of investment units on the market | |
| 3) | Price fluctuations of investment units and corporate bonds | |
| 4) | Dilution of per-unit value through additional issuance of investment units | |
| 5) | Distribution of monies | |
| Risks related to product design and related parties concerning: |
1) | Characteristics of investment units |
| 2) | Fluctuations of revenues, expenses and cash flows | |
| 3) | LTV (loan-to-value) ratio | |
| 4) | Borrowings and corporate bonds | |
| 5) | Bankruptcy of the investment corporation | |
| 6) | Possible cancellation of PIC's registration | |
| 7) | Dependence on related parties external to PIC | |
| 8) | Job performance by directors | |
| 9) | Lack of regulations on insider trading | |
| 10) | The asset manager | |
| 11) | Property managers | |
| 12) | Conflicts of interest among corporations involved in PIC's operations | |
| Risks particular to trust beneficiary interests concerning: |
1) | Risks inherent to trust beneficiaries |
| 2) | Liquidity of trust beneficiary interests | |
| 3) | Trustees | |
| 4) | Co-ownership or other forms of ownership of trust beneficiary interests | |
| Risks related to real estate concerning: |
1) | Liquidity, transaction costs and forward commitment of real estate |
| 2) | Competition over property acquisitions | |
| 3) | Defects and failures of real estate | |
| 4) | Complexity of rights involving real estate and discrepancy between real estate registration and titles | |
| 5) | Co-owned properties | |
| 6) | Compartmentalized properties | |
| 7) | Properties on leased lands | |
| 8) | Properties under development | |
| 9) | Appraisal value and appraisal on property status | |
| 10) | Decrease in rental revenues | |
| 11) | Master leases | |
| 12) | Real estate lease agreements in Japan | |
| 13) | Forms of use of buildings by tenants | |
| 14) | Increase in operational expenses of properties | |
| 15) | Unpredictable accidents by chance or due to natural disasters | |
| 16) | Disproportionate dispersion of real estate | |
| 17) | Concentration of tenants | |
| 18) | Responsibilities inherent to ownership of real estate | |
| 19) | Changes in laws and regulations | |
| 20) | Hazardous materials | |
| Risks related to taxation, etc. concerning: |
1) | General risks concerning application of special measures on taxations in terms of recording dividends from profits as losses, etc. |
| 2) | Failure to satisfy the requirement for paying dividends that account for over 90% of profits due to the excessive tax burden | |
| 3) | Accrual of additional taxes or failure to satisfy requirement of paying dividends that account for over 90% of profits due to correction orders as a result of taxation investigations, etc. | |
| 4) | Classification as family company | |
| 5) | Failure to acquire application of tax reduction measures in accordance with property acquisitions | |
| 6) | Changes in tax systems | |
| 7) | Failure to control unitholders who owns PIC's investment units | |
| 8) | Application of impairment accounting | |
| 9) | Failure to pay dividends from profits due to inadequate funds | |
| 10) | Accrual of tax in arrears due to delays of tax payments | |
| Other risks concerning: |
1) | Failure to incorporate properties planned for acquisition to PIC's portfolio |
| 2) | Impact of bankruptcies and other events on the part of sellers | |
| 3) | Risks related to key events, etc. |
2. Briefing on Major Risks
1) Dilution of per-unit value through additional issuance of investment units
| Risk | Countermeasure |
|---|---|
| PIC will issue investment units when necessary in order to raise funds required for acquiring properties, conducting renovation and repairs of properties, repaying loans and other purposes. When new investment units are issued, there is a possibility that the proportion of investment units owned by existing unitholders against the total number of PIC's investment units will be diluted. | When deciding to issue new investment units, given favorable market conditions, PIC will do its utmost to avoid dilution in the form of a reduction in dividend per unit by using the obtained funds in the most effective way for increasing revenues as well as conducting other measures. |
2) LTV (loan-to-value) ratio
| Risk | Countermeasure |
|---|---|
| When the loan-to-value (LTV) ratio rises, the distributable amount of funds tends to become more vulnerable to changes in interest rates. If there is a sudden change in interest rates, unitholders may receive reduced dividends. | PIC has set the ceiling of its LTV ratio at around 60% as a target, and works to control and keep the LTV at a lower level through its prudent financial strategies. |
3) Borrowings and corporate bonds
| Risk | Countermeasure |
|---|---|
| When PIC wishes to receive new loans, issue corporate bonds or conduct refinancing of existing loans, there is no guarantee that PIC can implement these financial arrangements at the times and conditions it desires. Moreover, depending on interest rates and other financial factors, PIC may be forced to sell its assets in order to repay borrowings or redeem corporate bonds. | PIC works to secure fund procurement by maintaining good relationships with financial institutions and by enriching its formation of lenders by starting business with new banks, or other ways. PIC also diversifies repayment dates when conducting new borrowings and refinancing to avoid financial risk, and operates in a manner that increases cash on hand in consideration of the redemption dates of corporate bonds. |
4) Lack of regulations on insider trading
| Risk | Countermeasure |
|---|---|
| Unlike listed shares, investment units of listed J-REITs are not subject to regulations on insider trading. Accordingly, it is not against the law even if parties related to PIC learn important facts due to their positions and conduct trading of PIC's investment units before such important facts are announced to the public. However, such an event may damage investors' trust in PIC and may have a negative impact on its investment units. | PIC's asset manager has established regulations and a compliance manual to ban its officers and employees from trading PIC's investment units and corporate bonds. |
5) Conflicts of interest among corporations involved in PIC's operations
| Risk | Countermeasure |
|---|---|
| Interested parties, such as the company to which PIC entrusts its general administration services, the shareholders of PIC's asset manager and the companies that have seconded employees to the asset manager, could take advantage of their positions to act in the interest of their own party or that of third parties. | The Law Concerning Investment Trusts and Investment Corporations requires such general administration service operators and asset managers to conduct their assignments with the care of a good manager. PIC has also concluded agreements with these parties, in which they are required to conduct fiduciary duties and the duty of care. |
6) Unpredictable accidents by chance or due to natural disasters
| Risk | Countermeasure |
|---|---|
| PIC's properties may be lost, deteriorated or damaged, leading to lower values, by fire, earthquake, accidents or other natural disasters. | PIC has covered all of its properties by insurance against fire. PIC will cover properties to be acquired in the future by fire insurance and, if necessary, by earthquake insurance. |
3. Measures for Risk Management
PIC and its asset manager have taken measures to secure compliance with the Law Concerning Investment Trusts and Investment Corporations, the Financial Instruments and Exchange Law and other related laws and regulations, including the establishment of various internal rules and management systems, the assignment of personnel, and the implementation of training and education of their officers and employees.
[Measures by Asset Manager]
| Rules and Procedures | Content |
|---|---|
| Asset management guidelines | The Guidelines define portfolio management standards (standards for property use, geographical area, asset size, due diligence and investment amounts as well as policies for selling owned properties) and real estate administration policies. |
| Regulations on transactions with interested parties | The regulations establish policies on transactions between parties that may constitute conflicts of interest. |
| Regulations on preventing transactions by insiders | The regulations prevent the asset manager's officers and employees from becoming involved in insider trading and similar transactions. |
| Portfolio Committee | The Portfolio Committee, headed by the CEO, meets once every month in principle to discuss and determine policies on management, property acquisitions and transfers, repair plans, etc. in order to continuously grasp possible risks. |
| Compliance regulations, compliance management regulations and compliance manual | These regulations establish basic policies on corporate ethics and compliance standards as a code of conduct for the officers and employees. The compliance manual is used to deepen understanding and to ensure the implementation of the basic policies and compliance standards. |
| Compliance Committee | The Compliance Committee, headed by the CEO receives reports on the status of compliance and discusses risk management. |
[Measures by PIC]
PIC holds its Board of Directors meeting at least once a month, and the Executive Director reports on the status of execution to the Board at least once every three months.
In addition, the Executive Director listens to reports and comments from the asset manager concerning the status of asset management, and reviews and supervises related documents as necessary. This is to examine the possibility of transactions that would constitute conflicts of interest, and to manage risks involving conflicts of interest.
