Semi-Annual Report 8th Fiscal Period. Hoshino Resorts REIT, Inc.

Transcription

1 Semi-Annual Report 8th Fiscal Period Hoshino Resorts REIT, Inc Kyobashi, Chuo-ku, Tokyo (from November 1, 2016 to April 30, 2017)

2 I. Asset Management Report 1. Overview of asset management (1) Trend in key indicators Operating revenue Of the above, operating revenue from real estate leasing Operating expenses Of the above, operating expenses from real estate leasing Operating profit Ordinary profit Profit Total assets Fiscal period (Change from previous period) Net assets (Change from previous period) Interest-bearing liabilities Unitholders capital Total number of investment units issued and outstanding Net assets per unit (net asset value) Total distributions (millions of yen) (millions of yen) (millions of yen) (millions of yen) (millions of yen) (millions of yen) (millions of yen) (millions of yen) 4th fiscal period (From November 1, 2014 to April 30, 2015) 5th fiscal period (From May 1, 2015 to October 31, 2015) 6th fiscal period (From November 1, 2015 to April 30, 2016) 7th fiscal period (From May 1, 2016 to October 31, 2016) 8th fiscal period (From November 1, 2016 to April 30, 2017) 1,599 1,926 3,559 3,981 4,462 1,599 1,926 3,559 3,981 4, ,645 1,884 2, ,303 1,428 1, ,034 1,914 2,097 2, ,601 1,816 1, ,600 1,815 1,900 37,421 48, , , ,204 (%) (2.9) (millions of yen) 27,739 37,022 69,507 74,407 74,491 (%) (millions of yen) (millions of yen) 7,693 9,001 28,385 27,160 43,034 27,006 36,113 67,906 72,591 72,591 (units) 42,969 49,689 78,008 81, ,514 (yen) 645, , , , ,568 (millions of yen) ,600 1,815 1,900 Distributions per unit (yen) 17,075 18,289 20,520 22,209 11,621 Of the above, distributions of earnings per unit Of the above, distributions in excess of earnings per unit Ratio of ordinary profit to total assets (yen) 17,075 18,289 20,520 22,209 11,621 (yen) (Note 4) (%) (Annualized) (Note 5) (%) Return on equity (Note 4) (%) (Annualized) (Note 5) (%)

3 Fiscal period 4th fiscal period (From November 1, 2014 to April 30, 2015) 5th fiscal period (From May 1, 2015 to October 31, 2015) 6th fiscal period (From November 1, 2015 to April 30, 2016) 7th fiscal period (From May 1, 2016 to October 31, 2016) 8th fiscal period (From November 1, 2016 to April 30, 2017) Unitholders equity to total assets (Note 4) (%) (Change from previous period) (%) (8.3) 2.2 (9.9) Payout ratio (Note 4) (%) [Other Information] Number of operating days (days) Number of properties at end of period (properties) Depreciation during period Capital expenditures during period Rental NOI (Net Operating Income) FFO (Funds from Operation) (Note 4) (Note 4) (millions of yen) (millions of yen) (millions of yen) (millions of yen) ,037 2,230 1,407 1,708 2,992 3,384 3,736 1,074 1,319 2,337 2,647 2,857 FFO per unit (Note 4) (yen) 24,996 26,564 29,958 32,384 17,472 Total distributions / FFO ratio (Note 4) (%) Ratio of interest-bearing liabilities to total assets at end of period (LTV) (%) The amounts of operating revenue, etc. do not include consumption taxes. Unless otherwise stated, monetary amounts are rounded down to the nearest indicated unit and percentage figures are rounded to one decimal place in this report. A 2-for-1 split of investment units was implemented with the record date of October 31, 2016 and the effective date of November 1, Net assets per unit is calculated based on the assumption that the split of investment units was implemented at the beginning of the 6th fiscal period. (Note 4) The following formulas are used for the calculation: Ratio of ordinary profit to total assets Ordinary profit / ((Total assets at beginning of period + Total assets at end of period) /2) 100 Return on equity Profit / ((Net assets at beginning of period + Net assets at end of period) / 2) 100 Unitholders equity to total assets Net assets at end of period / Total assets at end of period 100 Payout ratio Rental NOI (Net Operating Income) FFO (Funds from Operation) FFO per unit Distributions per unit (excluding distributions in excess of earnings) / Basic earnings per unit 100 Payout ratio for the 5th fiscal period, 6th fiscal period, and 7th fiscal period is calculated by the following formula due to the issuance of new investment units: Total distributions (excluding distributions in excess of earnings) / Profit 100 Operating revenue from real estate leasing - Operating expenses from real estate leasing + Depreciation Profit + Depreciation + Loss on disposal of property and equipment - Gains (losses) from sales of properties FFO / Total number of investment units issued and outstanding Total distributions / FFO ratio Total distributions (including distribution in excess of earnings) / FFO 100 (Note 5) Annualized portion of the calculation assumes a fiscal period of 181 days for the 4th fiscal period, 184 days for the 5th fiscal period, 182 days for the 6th fiscal period, 184 days for the 7th fiscal period, and 181 days for the 8th fiscal period. 2

4 (2) Performance review of HRR for the fiscal period under review i) Brief history of HRR Hoshino Resorts REIT, Inc. ( HRR ) invests in hotels, ryokans (Japanese-style inns) and ancillary facilities that serve at the core of the tourism industry and for which stable use is expected for the medium to long term. HRR was established under the Act on Investment Trusts and Investment s (Act No. 198 of 1951, including amendments thereto) (hereinafter the Investment Trusts Act ) with Hoshino Resort Asset Management Co., (hereinafter, the Asset Management Company ) as the organizer and with investments in capital of 150 million yen (300 investment units) on March 6, An issuance of new investment units through public offering (19,000 units) was implemented on July 11, 2013 as the payment due date, and the investment securities were listed on the Real Estate Investment Trust Securities Market of Tokyo Stock Exchange, Inc. (securities code: 3287) on July 12, HRR has been steadily expanding asset size since then; and during the fiscal period under review, HRR additionally acquired a hotel operated by an external operator in November As a result, the assets held by HRR at the end of the fiscal period under review were 48 properties (sum total of acquisition price: 109,182 million yen). ii) Investment environment and business performance The Japanese economy continued along a gradual recovery trend in the fiscal period under review, reflecting continued improvement in the employment and income environments as well as improved corporate earnings in response to the yen s depreciation and a global recovery in the manufacturing industry. In the tourism market, the Japanese government has positioned tourism as a pillar of its growth strategies and is aiming to achieve 40 million inbound tourists with inbound tourists spending amount of 8 trillion yen by While the rate of growth in inbound tourists appeared to decrease year on year, the actual number of tourists continues to increase. In the environment described above, the hotels/ryokans held by HRR were managed with a goal of securing stable earnings in the fiscal period under review, resulting in stable operational results in the fiscal period ended April iii) Overview of fund procurement In the fiscal period under review, HRR procured 16,000 million yen through debt financing on November 1, 2016, and this was allocated to part of the funds for the acquisition of Hyatt Regency Osaka. Furthermore, scheduled payment was made, resulting in balance of loans outstanding of 43,034 million yen and ratio of interest-bearing liabilities to total assets (LTV) of 34.9% as of April 30, In addition, as of the end of the fiscal period under review, HRR has been assigned a long-term issuer rating of A- (rating outlook: stable) from Japan Credit Rating Agency, (JCR). iv) Overview of business performance and distributions As a result of the management described above, business performance in the fiscal period under review resulted in operating revenue of 4,462 million yen, operating profit of 2,266 million yen, ordinary profit of 1,901 million yen and profit of 1,900 million yen. Concerning distributions, to ensure application of special provisions for taxation on investment corporations (Article of the Act on Special Measures Concerning Taxation (Act No. 26 of 1957, as amended; hereinafter, the Act on Special Measures Concerning Taxation )), the decision was made to distribute almost the entire amount of unappropriated retained earnings and distribution per investment unit was 11,621 yen. 3

5 (3) Status of capital increase, etc. The following are the changes in unitholders capital and total number of investment units issued and outstanding since the establishment of HRR through April 30, Date March 6, 2013 July 11, 2013 August 12, 2013 May 1, 2014 May 27, 2014 May 1, 2015 May 26, 2015 November 2, 2015 November 25, 2015 May 2, 2016 May 24, 2016 Event Establishment through private placement Capital increase through public offering Capital increase through third-party allotment Capital increase through public offering Capital increase through third-party allotment Capital increase through public offering Capital increase through third-party allotment Capital increase through public offering Capital increase through third-party allotment Capital increase through public offering Capital increase through third-party allotment Unitholders capital (thousands of yen) Increase (Decrease) Balance Total number of investment units issued and outstanding (units) Increase (Decrease) Balance Note 150, , ,302,400 9,452,400 19,000 19, ,120 9,917, ,250 16,547,762 26,465,282 22,000 42,250 (Note 4) 540,810 27,006, ,969 (Note 5) 8,673,580 35,679,673 6,400 49,369 (Note 6) 433,679 36,113, ,689 (Note 7) 30,279,030 66,392,382 26,970 76,659 (Note 8) 1,514,512 67,906,895 1,349 78,008 (Note 9) 4,461,050 72,367,946 3,570 81,578 (Note 10) 223,677 72,591, ,757 (Note 11) November 1, 2016 Split of investment units 72,591,623 81, ,514 (Note 12) (Note 4) (Note 5) (Note 6) (Note 7) (Note 8) Upon establishment of HRR, new investment units were issued at an offer price of 500,000 yen per unit. For the purpose of allocating funds for acquisition of specified assets and repayment of loans, new investment units were issued through public offering at an offer price of 510,000 yen (paid-in amount of 489,600 yen) per unit. For the purpose of allocating funds for acquisition of specified assets and repayment of loans, new investment units were issued through third-party allotment with paid-in amount of 489,600 yen per unit. For the purpose of allocating funds for part of the funds for acquisition of specified assets, new investment units were issued through public offering at an offer price of 780,178 yen (paid-in amount of 752,171 yen) per unit. For the purpose of allocating funds for repayment of loans, new investment units were issued through third-party allotment with paid-in amount of 752,171 yen per unit. For the purpose of allocating funds for acquisition of specified assets, new investment units were issued through public offering at an offer price of 1,404,215 yen (paid-in amount of 1,355,247 yen) per unit. For the purpose of allocating funds for part of the funds for acquisition of specified assets, new investment units were issued through third-party allotment with paid-in amount of 1,355,247 yen per unit. For the purpose of allocating funds for acquisition of specified assets, new investment units were issued through public offering at an offer price of 1,162,024 yen (paid-in amount of 1,122,693 yen) per unit. (Note 9) For the purpose of allocating funds for part of the funds for acquisition of specified assets, new investment units were issued through third-party allotment with paid-in amount of 1,122,693 yen per unit. (Note 10) For the purpose of allocating funds for part of the funds for acquisition of specified assets, new investment units were issued through public offering at an offer price of 1,294,745 yen (paid-in amount of 1,249,594 yen) per unit. (Note 11) For the purpose of allocating funds for part of the funds for acquisition of specified assets, new investment units were issued through third-party allotment with paid-in amount of 1,249,594 yen per unit. (Note 12) A 2-for-1 split of investment units was implemented with the record date of October 31, 2016 and the effective date of November 1,

6 [Changes in market price of investment unit] The highest and lowest unit prices (closing price) of the investment units of HRR listed on J-REIT section of the Tokyo Stock Exchange for each period are as follows: Fiscal period Highest (Yen) Lowest (Yen) 4th fiscal period (From November 1, 2014 to April 30, 2015) 5th fiscal period (From May 1, 2015 to October 31, 2015) 6th fiscal period (From November 1, 2015 to April 30, 2016) 7th fiscal period (Note) (Before ex rights) (From May 1, 2016 to October 31, 2016) 7th fiscal period (Note) (After ex rights) (From May 1, 2016 to October 31, 2016) 8th fiscal period (From November 1, 2016 to April 30, 2017) 1,534,000 1,448,000 1,399,000 1,330, , ,000 1,103,000 1,035,000 1,104,000 1,203, , ,000 (Note) A 2-for-1 split of investment units was implemented with the record date of October 31, 2016 and the effective date of November 1, Accordingly, transactions have been made at ex rights price on and after October 27, (4) Distributions, etc. With the aim of having the maximum amount of distributable profit deducted as expense pursuant to Article of the Act on Special Measures Concerning Taxation, HRR resolved to distribute the entire amount of unappropriated retained earnings for the period, excluding fractions of distributions per unit that were less than 1 yen. Consequently, distributions per unit came to 11,621 yen. Total profit Fiscal period (thousands of yen) Total unappropriated retained earnings (undisposed loss) (thousands of yen) Retained earnings brought forward (thousands of yen) Total cash distributions (thousands of yen) (Distributions per unit) (yen) Of the above, total distributions (thousands of yen) (Distributions of earnings per unit) (yen) Of the above, total refund of investments (thousands of yen) (Refund of investments per unit) (yen) Of total refund of investments, total distributions from reserve for temporary difference adjustments (Of refund of investments per unit, distributions from reserve for temporary difference adjustments per unit) (yen) Of total refund of investments, total distributions from the unitholders capital for tax purposes (Of refund of investments per unit, distributions from the unitholders capital for tax purposes per unit) (yen) 4th fiscal period (From November 1, 2014 to April 30, 2015) 5th fiscal period (From May 1, 2015 to October 31, 2015) 6th fiscal period (From November 1, 2015 to April 30, 2016) 7th fiscal period (From May 1, 2016 to October 31, 2016) 8th fiscal period (From November 1, 2016 to April 30, 2017) 733, ,751 1,600,731 1,815,763 1,900, , ,788 1,600,757 1,815,796 1,900, , ,762 1,600,724 1,815,741 1,900,196 17,075 18,289 20,520 22,209 11, , ,762 1,600,724 1,815,741 1,900,196 17,075 18,289 20,520 22,209 11,621 5

7 (5) Future management policy i) Future trends outlook In the Japanese economy going forward, the domestic economy is expected to continue its gradual recovery, propelled by the recovery trend in the Japanese economy, the continuation of monetary easing policies by the Bank of Japan, and other factors. On the other hand, concerns remain over the downside risk to the economy mainly due to the impact of uncertainties in overseas economies and fluctuations in the financial and capital markets. As its policy on tourism the Japanese government has established new targets for promoting Japan as a tourism-oriented country, and it is expected to take steps to respond to demand of the so-called vacation rentals, whereby visitors stay in private residences, and strategic relaxation of visa requirements. In this manner, with large economic ripple effects, the tourism industry is becoming increasingly important as one of the drivers of Japan s economic growth. ii) Future management policy and challenges to be addressed Under such circumstances, HRR s basic policy is to form a portfolio with a stable revenue base centering on hotels, ryokans and ancillary facilities that can meet the travel needs of tourists. In the hotel/ryokan industry which has trended toward being commoditized in general, HRR believes facilities that are differentiated from others due to an outstanding business model, operating skills, location and such are the ones that will be able to generate stable earnings and secure steady cash flow over a long-term period. From this perspective, HRR selects investment properties from the stance of superior know-how and experience (whether the business model, brand power, etc. can be differentiated from competitors, and whether it is operated by an operator with extensive expertise) and superior equipment and facilities (whether the facility itself is superior as to its location, rarity of the building, etc.). HRR seeks to flexibly form an optimum portfolio to secure long-term and stable cash flow. After proactively obtaining information on for-sale properties operated by both the Hoshino Resorts Group and outside operators as well as overseas for-sale properties related to the Hoshino Resorts Group, HRR will examine individual properties upon their selection for investment. a. Properties operated by the Hoshino Resorts Group HRR believes the securement of stable earnings will be achieved by investing mainly in the three brands HOSHINOYA, Hoshino Resorts KAI and Hoshino Resorts RISONARE operated by the Hoshino Resorts Group. HRR intends to obtain information on facilities under the three brands and other brands of the Hoshino Resorts Group by actively utilizing the sponsor support agreement with Hoshino Resorts. As a result, if HRR decides that facilities are able to generate long-term and stable cash flow, proactive investments will be made. b. Properties operated by outside operators Similar to the case of investing in properties operated by the Hoshino Resorts Group, HRR believes it will be able to secure long-term and stable cash flow when investing in properties operated by outside operators by making appropriate investments while taking superior know-how and experience and superior equipment and facilities into consideration, based on sufficient information collection by the Asset Management Company. Taking this view, HRR will make proactive investments in hotels, ryokans and ancillary facilities operated by outside operators provided that after obtaining the necessary information by taking advantage of the sponsor support agreement with Hoshino Resorts and the Asset Management Company s unique networks, it decides secure, long-term and stable cash flow is possible. c. Overseas properties related to the Hoshino Resorts Group With regard to HRR s investment policy on the overseas properties related to the Hoshino Resorts Group, HRR makes it a policy to carry out prudent investment after (1) obtaining accurate information on the countries and regions in which the investment properties with potential are located; (2) performing a comprehensive analysis of the market to which the potential investment properties belong, including real-estate market trends, systems, and regulations in each country, which considers macro factors such as political trends, population trends, and economic growth; and (3) performing a comprehensive risk analysis of each country s legal, accounting, and tax systems, as well as foreign exchange risks, etc., related to investment and revenue returns. In addition to the above policy, HRR also follows a policy of investment 6

8 based on prudent selection of only overseas properties related to the Hoshino Resorts Group that can be expected to be used on a stable basis and to have the potential to secure long-term and stable cash flows. Moreover, HRR aims to enhance profitability through expansion of asset size, and also aims to promote portfolio diversification in order to reduce the risk of a significant drop in HRR s cash flow due to changes in tourism trends, disasters, etc. The Hoshino Resorts Group operates each facility after categorizing investment target hotels, ryokans and ancillary facilities into brands from various perspectives. HRR works to stabilize revenue by promoting portfolio diversification through investments not only in single brands of the Hoshino Resorts Group but in the three brands and other brands of the Hoshino Resorts Group as a whole, as well as in properties operated by outside operators and overseas properties related to the Hoshino Resorts Group. The facilities held by HRR vary by size, price setting and target customer base, leading to portfolio diversification effects. In addition, these facilities are diversified not only in terms of by brand but also by geographic location of facility and thereby reducing the risk of a significant drop in HRR s cash flow. (6) Significant subsequent events i) Issuance of new investment units HRR resolved at meetings of the Board of Directors held on April 7, 2017 and April 18, 2017 on the following issuance of new investment units, and payment was completed on May 1, 2017 for the new investment units through primary offering and on May 23, 2017 for the new investment units through third-party allotment. Issuance of new investment units through primary offering Number of investment units issued: 8,720 units Issue price: 559,080 yen per unit Total issue price: 4,875,177,600 yen Paid-in amount: 539,583 yen per unit Total paid-in amount: 4,705,163,760 yen Payment due date: May 1, 2017 Issuance of new investment units through third-party allotment Number of investment units issued: 436 units Paid-in amount: 539,583 yen per unit Total paid-in amount: 235,258,188 yen Payment due date: May 23, 2017 Allottee: Nomura Securities Co., Use of funds The funds procured from the primary offering were allocated to the funds for acquisition of the real estate stated in subsection a under ii) Acquisition of assets below. Moreover, the remaining funds were kept as cash on hand along with the funds procured from the third-party allotment, and 354 million yen of which have been allocated to the funds for acquisition and contract amount stated in construction contract of the real estate stated in subsection b under ii) Acquisition of assets below. ii) Acquisition of assets a HRR acquired the real estate described below on May 1, 2017 (the acquisition price: 4,160 million yen). Name of property Location Seller Acquisition price (millions of yen) (Note) Acquisition date HOSHINOYA Fuji Fujikawaguchiko-machi, Minamitsuru-gun, Yamanashi K.K. Horizon Hotels 4,160 May 1, 2017 (Note) Acquisition price indicates the sum of (a) the sales/purchase price of the property stated in the sales and purchase agreement (excluding consumption taxes, local consumption taxes and expenses such as real estate sales 7

9 commissions) and (b) 726 million yen of concession money paid to the seller-cum-land subleaseholder to establish land subleasehold, rounded down to the nearest million yen. b HRR acquired the real estate described below on July 14, 2017 (the acquisition price: 354 million yen). Name of property Location Seller Acquisition price (millions of yen) Acquisition date HOSHINOYA Kyoto Annex Kyoto-shi, Kyoto K.K. Arashiyama Onsen Rankyokan 354 July 14, 2017 Acquisition price indicates the sum of (a) 93 million yen of the sales/purchase price of the land stated in the sales and purchase agreement (excluding consumption taxes, local consumption taxes and expenses such as real estate sales commissions) and (b) 261 million yen of contract amount (excluding consumption taxes, local consumption taxes and other expenses) stated in construction contract of the new building (HOSHINOYA Kyoto Annex) as orderer of which was taken over by HRR. Seller indicates the counterparty with respect to the aforementioned acquisition and the succession of status. Floating /Fixed Floating iii) Additional borrowings HRR obtained the following bank loan on May 2, 2017 to procure funds for repayment of the principal of existing borrowings that became due for repayment. Lender Loan amount Interest rate The Ashikaga Bank, The Bank of Fukuoka, 0.7 billion yen Base rate 1-month Japanese Yen TIBOR % Drawdown date Repayment due date May 2, 2017 May 2, 2022 Repayment method payment at maturity The base rate applicable to the interest calculation period for the interest payable on an interest payment due date shall be, of the Japanese Yen TIBOR (Tokyo Interbank Offered Rate) published by JBA TIBOR Administration at a certain time of the date two business days prior to the interest payment due date immediately preceding that interest payment due date (the drawdown date for the first due date), the interest rate for the number of months corresponding to the interest calculation period. However, if there is no rate corresponding to the concerned period, then it shall be the base rate calculated based on the method provided in the contract. The interest rate is substantially fixed at 0.519% with the effect of the interest rate swap agreements to hedge the risk of rising interest rates. If the concerned date is not a business day, then it shall be the next business day. If that business day falls into the next calendar month, then it shall be the business day immediately preceding the concerned date. 8

10 2. Profile of HRR (1) Status of unitholders capital Total number of investment units authorized (units) Total number of investment units issued and outstanding (units) Unitholders capital (millions of yen) 4th fiscal period (As of April 30, 2015) 5th fiscal period (As of October 31, 2015) 6th fiscal period (As of April 30, 2016) 7th fiscal period (As of October 31, 2016) 8th fiscal period (As of April 30, 2017) 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 42,969 49,689 78,008 81, ,514 27,006 36,113 67,906 72,591 72,591 Number of unitholders (persons) 6,841 8,639 10,001 10,278 12,489 (2) Matters concerning investment units The top 10 unitholders based on the ratio of units owned to total number of units issued and outstanding as of April 30, 2017 are as follows: Name Japan Trustee Services Bank, (Trust account) Trust & Custody Services Bank, (Securities investment trust account) The Master Trust Bank of Japan, (Trust account) The Nomura Trust and Banking Co., (Investment trust account) Hoshino Resorts Inc. JP MORGAN CHASE BANK (Standing proxy: Mizuho Bank, ) STATE STREET BANK AND TRUST COMPANY (Standing proxy: The Hongkong and Shanghai Banking Limited, Tokyo branch) THE BANK OF NEW YORK, NON-TREATY JASDEC ACCOUNT (Standing proxy: The Bank of Tokyo-Mitsubishi UFJ, ) The Hokkoku Bank, (Standing proxy: Trust & Custody Services Bank, ) NOMURA BANK (LUXEMBOURG) S.A. (Standing proxy: ) Address Number of units owned (units) Ratio to total number of units issued and outstanding (%) Harumi, Chuo-ku, Tokyo 27, Harumi Island Triton Square Office Tower Z Harumi, Chuo-ku, Tokyo Hamamatsu-cho, Minato-ku, Tokyo 19, , Otemachi, Chiyoda-ku, Tokyo 7, Oaza Nagakura, Karuizawa-machi, Kitasaku-gun, Nagano Shinagawa Intercity Tower A Konan, Minato-ku, Tokyo 6, , Nihonbashi, Chuo-ku, Tokyo 2, Marunouchi, Chiyoda-ku, Tokyo 2, Harumi Island Triton Square Office Tower Z Harumi, Chuo-ku, Tokyo 1, Marunouchi, Chiyoda-ku, Tokyo 1, Total 90, (Note) The ratio to total number of units issued and outstanding is rounded down to two decimal places. 9

11 (3) Matters relating to officers The Executive Director, Supervisory Directors and Independent Auditor for the fiscal period under review are as follows: Executive Director Title Name Major concurrent post, etc. Supervisory Director Independent Auditor Kenji Akimoto President & CEO of Hoshino Resort Asset Management Co., Total amount of compensation for each position during the fiscal period under review (thousands of yen) Hiroshi Shinagawa Attorney at law, Kinkadori Law Office 1,320 Yukiko Fujikawa Certified Public Accountant, Yukiko Fujikawa CPA Office 1,320 Grant Thornton Taiyo LLC 8,200 The Executive Director and Supervisory Directors do not hold investment units of HRR under their own or another person s name. Although the Supervisory Directors may be officers in corporations other than the ones indicated above, there is no conflict of interest between HRR and such corporations, including those indicated above. In preparation for a situation where the Executive Director is absent or the number of officers is below the number of officers required by laws and regulations, a resolution was passed at the 3rd General Meeting of Unitholders to appoint Tetsuro Takashi as the Substitute Executive Director. As of the release of this report, Tetsuro Takashi is serving concurrently as Director & CFO, General Manager of Finance & Administrative Department of the Asset Management Company. The Executive Director does not receive compensations from HRR. Dismissal or non-reappointment of the Independent Auditor is subject to consideration at the HRR s Board of Directors, pursuant to the provisions of the Investment Trusts Act in the case of dismissal, or in light of a comprehensive consideration of various circumstances in the case of non-reappointment. (4) Asset Management Company, Asset Custodian and General Administrators The Asset Management Company, Asset Custodian, and General Administrators as of April 30, 2017 are as follows: Category of entrusted operation Asset Management Company Asset Custodian General Administrator (General Administrator of unit register) General Administrator (General Administrator for accounting and administrative function) Name Hoshino Resort Asset Management Co., Mitsubishi UFJ Trust and Banking Mitsubishi UFJ Trust and Banking Mitsubishi UFJ Trust and Banking 10

12 3. Status on Investment Properties (1) Investment status Asset type Real estate Use of asset 7th fiscal period As of October 31, 2016 Total amount held (millions of yen) Ratio to total assets (%) 8th fiscal period As of April 30, 2017 Total amount held (millions of yen) Ratio to total assets (%) Hotel 73, , Ryokan 21, , Subtotal 94, , Deposits and other assets 11, , Total assets 105, , Total liabilities 31, , Total net assets 74, , Total amount held is the carrying amount (in the case of real estate, the depreciated book value). The book value of real estate is including machinery and equipment, structures, and leasehold right, but excluding tools, furniture and fixtures, software, and construction in progress. Ratio to total assets is rounded to one decimal place. Total assets, Total liabilities and Total net assets are stated at the book value. (2) Major properties owned The major components of assets (the 10 largest properties by book value) as of April 30, 2017 are as follows: Name of property Book value (millions of yen) Leasable area (m 2 ) Leased area (m 2 ) Occupancy rate (%) Ratio to total operating revenue from real estate leasing (%) (Note 4) Primary use ANA Crowne Plaza Hiroshima 17,970 32, , Hotel Hyatt Regency Osaka 16,590 80, , Hotel ANA Crowne Plaza Fukuoka 7,679 27, , Hotel HOSHINOYA Karuizawa 7,569 11, , Ryokan ANA Crowne Plaza Kanazawa 6,727 23, , Hotel RISONARE Yatsugatake 5,881 33, , Hotel Asahikawa Grand Hotel 4,787 25, , Hotel RISONARE Atami 4,224 23, , Hotel ANA Crowne Plaza Toyama 3,955 21, , Hotel KAI Kaga 3,158 5, , Ryokan Total 78, , , Book value is the carrying amount (in the case of real, the depreciated book value). The book value of real estate is including machinery and equipment, structures, and leasehold right, but excluding tools, furniture and fixtures, software, and construction in progress. Leasable area is the leasable area to tenants. In principle, Leased area is the leased area under the lease agreement with tenants. (Note 4) Ratio to total operating revenue from real estate leasing represents the ratio to total real estate operating revenue, rounded to one decimal place. 11

13 (3) Summary of portfolio properties An overview of assets held by HRR as of April 30, 2017 is as follows: Name of property Location Type of ownership HOSHINOYA Karuizawa HOSHINOYA Kyoto RISONARE Yatsugatake RISONARE Atami KAI Matsumoto KAI Izumo KAI Ito KAI Hakone KAI Aso KAI Kawaji KAI Kinugawa KAI Kaga Chisun Inn Shiojiri Kita IC Chisun Inn Sano Fujioka IC Chisun Inn Suwa IC Chisun Inn Toyokawa IC Chisun Inn Tosu Chisun Inn Chiba Hamano R16 Chisun Inn Kumamoto Miyukifueda Chisun Inn Utsunomiya Kanuma Chisun Inn Fukui Chisun Inn Fukushima Nishi IC Chisun Inn Niigata Chuo IC Chisun Inn Nagasaki Airport Chisun Inn Hitachinaka Karuizawa-machi, Kitasaku-gun, Nagano Kyoto-shi, Kyoto Hokuto-shi, Yamanashi Atami-shi, Shizuoka Matsumoto-shi, Nagano Matsue-shi, Shimane Ito-shi, Shizuoka Hakone-machi, Ashigarashimo-gun, Kanagawa Kokonoe-machi, Kusu-gun, Oita Nikko-shi, Tochigi Nikko-shi, Tochigi Kaga-shi, Ishikawa Shiojiri-shi, Nagano Sano-shi, Tochigi Suwa-shi, Nagano Toyokawa-shi, Aichi Tosu-shi, Saga Chiba-shi, Chiba Kumamoto-shi, Kumamoto Utsunomiya-shi, Tochigi Fukui-shi, Fukui Fukushima-shi, Fukushima Niigata-shi, Niigata Omura-shi, Nagasaki Hitachinaka-shi, Ibaraki Leasable area (m 2 ) Book value at end of period (millions of yen) Estimated value at end of period (millions of yen) 11, ,569 11,300 2, ,937 3,830 33, ,881 6,480 23, ,224 4,150 4, , , , ,176 1,240 1, , ,140 4, ,080 3,280 5, ,158 3,330 2, , , , , , ,020 2, , , , , , ,

14 Name of property Location Type of ownership Chisun Inn Tsuchiura Ami Chisun Inn Kofu Isawa Chisun Inn Marugame Zentsuji Chisun Inn Munakata Chisun Inn Iwate Ichinoseki IC Chisun Inn Karuizawa Chisun Inn Himeji Yumesakibashi Chisun Inn Kurashiki Mizushima Candeo Hotels Handa Candeo Hotels Chino Candeo Hotels Fukuyama Candeo Hotels Sano Candeo Hotels Kameyama Comfort Hotel Hakodate Comfort Hotel Tomakomai Comfort Hotel Kure Chisun Inn Kagoshima Taniyama ANA Crowne Plaza Hiroshima ANA Crowne Plaza Fukuoka ANA Crowne Plaza Kanazawa ANA Crowne Plaza Toyama Asahikawa Grand Hotel Hyatt Regency Osaka Ami-machi, Inashiki-gun, Ibaraki Fuefuki-shi, Yamanashi Marugame-shi, Kagawa Munakata-shi, Fukuoka Ichinoseki-shi, Iwate Karuizawa-machi, Kitasaku-gun, Nagano Himeji-shi, Hyogo Kurashiki-shi, Okayama Handa-shi, Aichi Chino-shi, Nagano Fukuyama-shi, Hiroshima Sano-shi, Tochigi Kameyama-shi, Mie Hakodate-shi, Hokkaido Tomakomai-shi, Hokkaido Kure-shi, Hiroshima Kagoshima-shi, Kagoshima Hiroshima-shi, Hiroshima Fukuoka-shi, Fukuoka Kanazawa-shi, Ishikawa Toyama-shi, Toyama Asahikawa-shi, Hokkaido Osaka-shi, Osaka Leasable area (m 2 ) Book value at end of period (millions of yen) Estimated value at end of period (millions of yen) 1, , , , , , ,080 2, , , , , ,062 1,240 2, ,250 1,460 3, , ,040 2, ,070 3, ,127 1,230 8, ,019 2,290 32, ,970 19,900 27, ,679 8,700 23, ,727 7,170 21, ,955 4,440 25, ,787 4,770 80, ,590 16,600 Total 397, , ,965 Book value at end of period is the carrying amount (in the case of real, the depreciated book value). The book value of real estate is including machinery and equipment, structures, and leasehold right, but excluding tools, furniture and fixtures, software, and construction in progress. Appraisal of the property is entrusted to Japan Valuers Co.,, Morii Appraisal & Investment Consulting Inc. or Rich Appraisal Institute Co., Estimated value at end of period is the appraisal value stated in the real estate appraisal report or investigation report with April 30, 2017 as the effective date of the valuation. 13

15 Lease status of real held by HRR is as follows: Name of property Number of tenants at end of period (subleasing) 7th fiscal period (From May 1, 2016 to October 31, 2016) Occupancy rate [At end of period] (%) Operating revenue from real estate leasing [During the period] (millions of yen) 14 Ratio to total operating revenue from real estate leasing (%) Number of tenants at end of period (subleasing) 8th fiscal period (From November 1, 2016 to April 30, 2017) Occupancy rate [At end of period] (%) Operating revenue from real estate leasing [During the period] (millions of yen) Ratio to total operating revenue from real estate leasing (%) HOSHINOYA Karuizawa 1 (14) (14) HOSHINOYA Kyoto 1 (0) (0) RISONARE Yatsugatake 1 (16) (18) RISONARE Atami 1 (0) (0) KAI Matsumoto 1 (0) (0) KAI Izumo 1 (0) (0) KAI Ito 1 (0) (0) KAI Hakone 1 (0) (0) KAI Aso 1 (0) (0) KAI Kawaji 1 (0) (0) KAI Kinugawa 1 (0) (0) KAI Kaga 1 (0) (0) Chisun Inn Shiojiri Kita IC 1 (1) (1) Chisun Inn Sano Fujioka IC 1 (0) (0) Chisun Inn Suwa IC 1 (0) (0) Chisun Inn Toyokawa IC 1 (0) (0) Chisun Inn Tosu 1 (0) (0) Chisun Inn Chiba Hamano R16 1 (0) (0) Chisun Inn Kumamoto Miyukifueda 1 (0) (0) Chisun Inn Utsunomiya Kanuma 1 (0) (0) Chisun Inn Fukui 1 (0) (0) Chisun Inn Fukushima Nishi IC 1 (0) (0) Chisun Inn Niigata Chuo IC 1 (0) (0) Chisun Inn Nagasaki Airport 1 (0) (0) Chisun Inn Hitachinaka 1 (0) (0) Chisun Inn Tsuchiura Ami 1 (0) (0) Chisun Inn Kofu Isawa 1 (0) (0) Chisun Inn Marugame Zentsuji 1 (0) (0) Chisun Inn Munakata 1 (0) (0) Chisun Inn Iwate Ichinoseki IC 1 (1) (1) Chisun Inn Karuizawa 1 (0) (0) Chisun Inn Himeji Yumesakibashi Chisun Inn Kurashiki Mizushima 1 (0) (0) (0) (0) Candeo Hotels Handa 1 (0) (0) Candeo Hotels Chino 1 (0) (0) Candeo Hotels Fukuyama 1 (0) (0) Candeo Hotels Sano 1 (0) (0) Candeo Hotels Kameyama 1 (0) (0) Comfort Hotel Hakodate 1 (0) (0)

16 Name of property Number of tenants at end of period (subleasing) 7th fiscal period (From May 1, 2016 to October 31, 2016) Occupancy rate [At end of period] (%) Operating revenue from real estate leasing [During the period] (millions of yen) Ratio to total operating revenue from real estate leasing (%) Number of tenants at end of period (subleasing) 8th fiscal period (From November 1, 2016 to April 30, 2017) Occupancy rate [At end of period] (%) Operating revenue from real estate leasing [During the period] (millions of yen) Ratio to total operating revenue from real estate leasing (%) Comfort Hotel Tomakomai 1 (0) (0) Comfort Hotel Kure 1 (0) (0) Chisun Inn Kagoshima Taniyama 1 (1) (1) ANA Crowne Plaza Hiroshima ANA Crowne Plaza Fukuoka ANA Crowne Plaza Kanazawa ANA Crowne Plaza Toyama 1 (7) (6) (6) (5) (5) (5) (6) (7) Asahikawa Grand Hotel 1 (5) (5) Hyatt Regency Osaka 1 (8) Total 47 (62) (Note) , (71) (Note) , (Note) Number of tenants (subleasing) refers to total of the number of tenants, with the number of parties subleasing from the parties leasing the property from HRR shown in parentheses. (4) Status of specified transaction contract amount and fair value Category OTC (over-the-counter) Type of derivative transaction Interest rate swap transaction Receipt: floating interest rate Payment: fixed interest rate Contract amount (thousands of yen) Fair value Of which, due after one year 5,000,000 5,000,000 Total 5,000,000 5,000,000 The contract amount for the interest rate swap transaction is based on the notional principal amount. The fair value is omitted as the transaction satisfies the requirements for special accounting treatment based on the Accounting Standard for Financial Instruments. (5) Status of other assets There are no assets incorporated into the portfolio other than those listed in the aforementioned (3) Summary of portfolio properties, as of April 30, (6) Status of asset holding by country and region There is no portfolio overseas real estate outside Japan, as of April 30,

17 4. Capital expenditures for properties held (1) Future plan for capital expenditures The following table summarizes the major estimated amounts of capital expenditure in the fiscal period ending October 2017 for renovation etc. scheduled for properties held as of April 30, The estimated construction costs below include the amounts to be expensed for accounting purpose. Name of property Location Purpose Scheduled period RISONARE Atami Atami-shi, Shizuoka Renovation of all guest rooms and corridor of building B and construction to increase guest rooms in building B. From January 2017 to May 2017 Total amount Estimated construction costs (millions of yen) Amount paid during the period Total amount paid ANA Crowne Plaza Toyama Toyama-shi, Toyama Boiler renewal work From February 2017 to May Hyatt Regency Osaka Osaka-shi, Osaka Renovation of guest rooms From October 2017 to October ANA Crowne Plaza Kanazawa Kanazawa-shi, Ishikawa Renovation of elevators From February 2017 to July (2) Capital expenditures for the period Of construction works falling under the category of capital expenditures conducted in the fiscal period under review for properties held as of April 30, 2017, the following are the major works conducted. The fiscal period under review s capital expenditures amounted to 2,230 million yen and repair expenses separately charged to expenses amounted to 83 million yen for a combined total of 2,314 million yen of construction work implemented. Name of property Location Purpose Period Construction costs (millions of yen) RISONARE Yatsugatake Hokuto-shi, Yamanashi Renovation of guest rooms and common-use areas From June 2016 to April ,307 KAI Hakone Hakone-machi, Ashigarashimo-gun, Kanagawa Construction as an investment for facility maintenance such as renovation of large common bath and guest rooms, and elevators. From December 2016 to February ANA Crowne Plaza Hiroshima Hiroshima-shi, Hiroshima Renovation of elevators From May 2016 to January ANA Crowne Plaza Hiroshima Hiroshima-shi, Hiroshima Construction to convert single rooms into double rooms and renovate twin rooms. From November 2016 to February RISONARE Yatsugatake Hokuto-shi, Yamanashi Renovation of elevators From February 2017 to March

18 (3) Funds reserved for long-term repair plans Not applicable. 5. Expenses and liabilities (1) Details of expenses relating to asset management, etc. (thousands of yen) Item Previous fiscal period (From May 1, 2016 to October 31, 2016) Current fiscal period (From November 1, 2016 to April 30, 2017) Asset management fee 342, ,006 Asset custody fee 3,786 3,823 Administrative service fees 15,741 18,317 Directors compensation 2,640 2,640 Audit fee 6,751 8,200 Other expenses 83, ,298 Total 455, ,286 17

19 (2) Status of borrowings The status of borrowings of HRR as of April 30, 2017 is as follows: Category Short-term loans payable Long-term loans payable Lender Drawdown date November 1, 2016 Balance at beginning of period (millions of yen) Balance at end of period (millions of yen) Average interest rate 1, % Subtotal 1,500 The Ashikaga Bank, The Shizuoka Bank, The Ashikaga Bank, The Shizuoka Bank, The Bank of Fukuoka, The Yamaguchi Bank, The Bank of Kyoto, The Hokuriku Bank, The Ashikaga Bank, The Shizuoka Bank, The Bank of Fukuoka, The Yamaguchi Bank, The Bank of Kyoto, The Hokuriku Bank, July 16, 2013 July 16, 2013 May 2, 2014 May 2, 2014 May 2, 2014 November 2, 2015 November 2, 2015 November 2, 2015 November 2, 2015 November 2, ,385 2, % 1,268 1, % % % % 2,515 2, % % 2,550 2, % % 1,500 1, % Repayment due date October 31, 2017 July 16, 2018 July 16, 2020 May 2, 2017 May 2, 2019 April 30, 2021 April 27, 2018 April 27, 2018 October 31, 2019 October 31, 2019 April 30, 2020 Repayment method repayment Use (Note 4) (Note 5) repayment repayment (Note 6) repayment repayment repayment repayment repayment Remarks 18

20 Category Lender Drawdown date Balance at beginning of period (millions of yen) Balance at end of period (millions of yen) Average interest rate Repayment due date Repayment method Use Remarks November 2, ,500 3, % October 29, 2021 repayment November 2, ,000 3, % April 28, 2022 repayment November 2, ,457 1, % October 31, 2022 (Note 7) Long-term loans payable The Hokuriku Bank, The Bank of Fukuoka, The Bank of Kyoto, The Hokuriku Bank, The Bank of Fukuoka, Resona Bank, Limited The Bank of Fukuoka, The Ashikaga Bank, The Hokuriku Bank, The Yamaguchi Bank, The Senshu Ikeda Bank, Resona Bank, Limited The Bank of Fukuoka, The Ashikaga Bank, The Hokuriku Bank, The Yamaguchi Bank, The Senshu Ikeda Bank, Resona Bank, Limited The Bank of Fukuoka, The Ashikaga Bank, The Hokuriku Bank, The Yamaguchi Bank, March 31, 2016 May 2, 2016 May 2, 2016 May 2, 2016 May 2, 2016 July 19, 2016 July 19, 2016 November 1, 2016 November 1, 2016 November 1, 2016 November 1, % % % % % % 1,000 1, % 2,500 2, % % 2, % 2, % March 31, 2025 April 30, 2020 April 28, 2023 April 30, 2025 April 30, 2026 April 30, 2021 April 28, 2023 April 30, 2019 October 30, 2020 April 30, 2021 October 31, 2022 (Note 8) repayment (Note 9) (Note 10) (Note 11) repayment repayment repayment repayment repayment repayment 19

21 Category (Note 4) (Note 5) (Note 6) (Note 7) (Note 8) Lender Drawdown date November 1, 2016 November 1, 2016 Balance at beginning of period (millions of yen) Balance at end of period (millions of yen) Average interest rate 2, % 2, % Subtotal 27,160 41,534 Total 27,160 43,034 Average interest rates on floating rate borrowings are the weighted average rate during the period. Repayment due date April 28, 2023 October 31, 2023 Repayment method repayment repayment Use Remarks HRR concludes interest rate swap agreements to hedge against the risk of interest rate increase. The interest rates presented for loans subject to interest rate swap transactions take into account the effect of the interest rate swap. All borrowings were used as funds for acquiring real estate, paying its related costs, and repayment of loans. Repayment of 32,500 thousand yen shall be due firstly on October 31, 2013 (total payment on first payment was 19,234 thousand yen) and subsequently on the last day of April and October of every year thereafter (If the concerned date is not a business day, then it shall be the next business day. If that business day falls into the next calendar month, then it shall be the business day immediately preceding the concerned date.), and repayment of the remaining principal amount of 2,288,266 thousand yen shall be due in lump sum on the final repayment due date. Repayment of 20,001 thousand yen shall be due firstly on October 31, 2013 (total payment on first payment was 11,838 thousand yen) and subsequently on the last day of April and October of every year thereafter (If the concerned date is not a business day, then it shall be the next business day. If that business day falls into the next calendar month, then it shall be the business day immediately preceding the concerned date.), and repayment of the remaining principal amount of 1,128,149 thousand yen shall be due in lump sum on the final repayment due date. Repayment of 14,287 thousand yen shall be due firstly on October 31, 2014 and subsequently on the last day of April and October of every year thereafter (If the concerned date is not a business day, then it shall be the next business day. If that business day falls into the next calendar month, then it shall be the business day immediately preceding the concerned date.), and repayment of the remaining principal amount of 814,269 thousand yen shall be due in lump sum on the final repayment due date. Repayment of 21,430 thousand yen shall be due firstly on April 28, 2016 and subsequently on the last day of April and October of every year thereafter (If the concerned date is not a business day, then it shall be the next business day. If that business day falls into the next calendar month, then it shall be the business day immediately preceding the concerned date.), and repayment of the remaining principal amount of 1,221,410 thousand yen shall be due in lump sum on the final repayment due date. Repayment of 14,286 thousand yen shall be due firstly on April 28, 2016 (total payment on first payment was 2,427 thousand yen) and subsequently on the last day of April and October of every year thereafter (If the concerned date is not a business day, then it shall be the next business day. If that business day falls into the next calendar month, then it shall be the business day immediately preceding the concerned date.), and repayment of the remaining principal amount of 754,711 thousand yen shall be due in lump sum on the final repayment due date. (Note 9) Repayment of 7,143 thousand yen shall be due firstly on October 31, 2016 and subsequently on the last day of April and October of every year thereafter (If the concerned date is not a business day, then it shall be the next business day. If that business day falls into the next calendar month, then it shall be the business day immediately preceding the concerned date.), and repayment of the remaining principal amount of 407,141 thousand yen shall be due in lump sum on the final repayment due date. (Note 10) Repayment of 7,143 thousand yen shall be due firstly on October 31, 2016 and subsequently on the last day of April and October of every year thereafter (If the concerned date is not a business day, then it shall be the next business day. If that business day falls into the next calendar month, then it shall be the business day immediately preceding the concerned date.), and repayment of the remaining principal amount of 378,569 thousand yen shall be due in lump sum on the final repayment due date. (Note 11) Repayment of 8,572 thousand yen shall be due firstly on October 31, 2016 and subsequently on the last day of April and October of every year thereafter (If the concerned date is not a business day, then it shall be the next business day. If that business day falls into the next calendar month, then it shall be the business day immediately preceding the concerned date.), and repayment of the remaining principal amount of 437,132 thousand yen shall be due in lump sum on the final repayment due date. (3) Investment corporation bonds Not applicable. (4) Short-term investment corporation bonds Not applicable. (5) Subscription rights to new investment units Not applicable. 20