Japan Hotel REIT Investment : Financial Report for the Fiscal Year Ended December 31, 2021 (January 1, 2021 - December 31, 2021)

This English translation is provided for information purposes only. If any discrepancy is identified between this translation and the Japanese original, the Japanese original shall prevail.

February 25, 2022

Financial Report for the Fiscal Year Ended December 31, 2021

(January 1, 2021 - December 31, 2021)

Japan Hotel REIT Investment Corporation

Listing:	Tokyo Stock Exchange
Securities code:	8985
URL:	https://www.jhrth.co.jp/en/
Representative:	Kaname Masuda, Executive Director

Asset Management Company:	Japan Hotel REIT Advisors Co., Ltd.
Representative:	Hisashi Furukawa, President & CEO
Contact:	Makoto Hanamura
	Director of the Board, Head of Finance and Planning Division
	Phone: [phone]

Scheduled date to file Securities Report: March 24, 2022

Scheduled date to start dividend payment: March 18, 2022

Preparation of supplementary material on financial report: Schedule for presentation of financial results:

Yes

Yes (Analysts and institutional investors only)

(Amounts are rounded down to the nearest million yen)

1. Status summary of operation and assets for the fiscal year ended December 31, 2021 (January 1, 2021 - December 31, 2021)

1. Operating results

(Percentages show changes from the previous year)

	Operating revenue	Operating income	Ordinary income	Net income
Fiscal year ended	JPY1M	%	JPY1M	%	JPY1M	%	JPY1M		%
December 31, 2021	13,633	(1.5)	2,959	(6.8)	1,298	(7.2)	1,296		(15.1)
December 31, 2020	13,838	(51.1)	3,176	(81.5)	1,398	(90.9)	1,527		(90.0)

		Net income per unit	Return on equity (ROE)	Ordinary income to	Ordinary income to
		total assets		operating revenue
Fiscal year ended		JPY		%			%			%
December 31, 2021		290		0.6			0.3			9.5
December 31, 2020		342		0.7			0.3		10.1
(Note)	Net income per unit is calculated based on the period-average number of investment units issued.
(2) Cash distributions
		Dividend per unit	Total dividends	Dividend per unit	Total dividends				Dividend to
		(Excess of earnings	(Excess of earnings	resulting from	from excess of		Payout ratio
			net assets
		exclusive)	exclusive)	excess of earnings	earnings
Fiscal year ended	JPY		JPY1M	JPY	JPY1M			%		%
December 31, 2021	366		1,634	－	－			126.1		0.7
December 31, 2020	410		1,829	－	－			119.8		0.8
(Note 1)	The source of dividends for the fiscal year ended December 31, 2021, is calculated by adding appropriation for dividends (¥335 million) to unappropriated
	retained earnings. For details of the appropriation for dividends, please refer to " Dividend per unit and appropriation for
	dividends" on page 15.
(Note 2)	The source of dividends for the fiscal year ended December 31, 2020, is calculated by adding appropriation for dividends (¥305 million) to unappropriated
	retained earnings. For details of the appropriation for dividends, please refer to " Dividend per unit and appropriation for
	dividends" on page 15.
(Note 3)	Payout ratio is calculated using the following formula, rounded off to one decimal place.
	Total dividends (total dividends from excess of earnings exclusive) ÷ Net income × 100

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(3) Financial position

	Total assets	Net assets	Equity ratio	Net assets per unit
Fiscal year ended	JPY1M	JPY1M	%	JPY
December 31, 2021	394,323	221,542	56.2	49,595
December 31, 2020	400,296	221,201	55.3	49,570
(Note) Net assets per unit are calculated based on the total number of investment units issued and outstanding at the end of the fiscal year.
(4) Cash flows
	Cash flows from	Cash flows from	Cash flows from	Cash and cash equivalents
	operating activities	investing activities	financing activities	at end of year
Fiscal year ended	JPY1M	JPY1M	JPY1M	JPY1M
December 31, 2021	11,682	(4,695)	(5,543)	29,996
December 31, 2020	13,747	(3,077)	(16,461)	28,553

2. Operating forecast for the fiscal year ending December 31, 2022 (January 1, 2022 - December 31, 2022)

(Percentages show changes from the previous year)

Dividend per unit

Dividend per unit

Operating revenue

Operating income

Ordinary income

Net income

(Excess of earnings

resulting from excess

exclusive)

of earnings

JPY1M

%

JPY1M

%

JPY1M

%

JPY1M

%

JPY

JPY

Midterm

-

-

-

-

-

-

-

-

-

-

Full year

-

-

-

-

-

-

-

-

-

-

(Note) It is continuously difficult to reasonably estimate the performance of hotels due to the spread of COVID-19. Because the share of variable rents and income from management contracts that are linked to the performance of hotels in JHR's earnings is large, operating forecast and forecast of dividend for the fiscal year ending December 31, 2022 (from January 1, 2022 to December 31, 2022) are left as undetermined.

* Other

1. Changes in accounting policies, changes in accounting estimates, and restatement of financial statements for prior period after error corrections
2. 1. Changes in accounting policies due to revisions to accounting standards and other regulations: No change
   2. Changes in accounting policies due to other reasons than above (a): No change
   3. Changes in accounting estimates: No change
   4. Restatement of financial statements for prior period after error corrections: No change
3. Total number of investment units issued and outstanding
4. 1. Total number of investment units issued and outstanding at the end of the fiscal year (including investment units owned by Japan Hotel REIT Investment Corporation (JHR))

As of December 31, 2021	4,467,006 units
As of December 31, 2020	4,462,347 units
(b) Number of JHR's own investment units held at the end of the fiscal year
As of December 31, 2021	0 units
As of December 31, 2020	0 units

(Note) For the number of investment units serving as the basis of computation of net income per unit, please refer to "Notes on per unit

information" on page 36.

• Financial reports are exempt from the audit by a certified public accountant or an auditing firm.
• Special items
  Forward-looking statements presented in this financial report including operating forecasts are based on information currently available to us and on certain assumptions we deem to be reasonable. As such, actual operating and other results may differ materially from these forecasts due to a number of factors.

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• Table of Contents

1. Operating results ..............................................................................................................................................................................	4
(1) Operating results .............................................................................................................................................................................	4
(2) Material events related to going concern assumption....................................................................................................................	16
2. Financial statements .......................................................................................................................................................................	17
(1)	Balance sheets ............................................................................................................................................................................	17
(2)	Statements of income .................................................................................................................................................................	19
(3)	Statements of changes in net assets ............................................................................................................................................	20
(4)	Statements of cash dividends .....................................................................................................................................................	22
(5)	Statements of cash flows ............................................................................................................................................................	23
(6)	Notes on going concern assumption...........................................................................................................................................	24
(7)	Notes on matters concerning significant accounting policies.....................................................................................................	24
(8)	Notes on change in the indication method..................................................................................................................................	25
(9)	Notes on significant accounting estimates..................................................................................................................................	25
(10) Notes to financial statements......................................................................................................................................................	26
(11) Changes in total number of investment units issued and outstanding ........................................................................................	38
3. Reference information ....................................................................................................................................................................	39
(1)	Information on values of assets under management, etc..............................................................................................................	39
(2)	Status of capital expenditures ......................................................................................................................................................	52

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1. Operating results

1. Operating results

1. Overview of the fiscal year under review

1. Brief history and principal activities
   Japan Hotel REIT Investment Corporation (JHR) was established under the Act on Investment Trusts and Investment Corporations (Act No. 198 of 1951, as amended; hereinafter referred to as the "Investment Trusts Act") on November 10, 2005, and was listed on the Real Estate Investment Trust (REIT) section of the Tokyo Stock Exchange (Securities code: 8985) on June 14, 2006.
   JHR entrusts asset management to Japan Hotel REIT Advisors Co., Ltd. (hereinafter referred to as the "Asset Management Company"). Focusing on importance as social infrastructure and profitability as investment real estate of hotels, JHR primarily invests in real estate which are wholly or partially used as hotels or real estate equivalents of such real estate or related assets that are backed by such real estate or real estate equivalents (hereinafter referred to as "Real Estate for Hotels, etc.").
   JHR, the former Nippon Hotel Fund Investment Corporation, merged with Japan Hotel and Resort, Inc. with an effective date of April 1, 2012 (hereinafter referred to as the "Merger"), and changed its name to Japan Hotel REIT Investment Corporation. Since the Merger through the end of the fiscal year under review (12-month period from January 1, 2021 to December 31, 2021), JHR has carried out nine public offerings for capital increase and continuously acquired "highly competitive hotels" in mainly "strategic investment areas" where domestic and inbound leisure demand can be expected over the medium to long term.
   By implementing the aforementioned growth strategy, JHR has expanded its asset size while improving the quality of its portfolio through new property acquisitions of 26 properties amounting to ¥275,160 million (acquisition price basis) in total in the little less than ten years since the Merger through the end of the fiscal year under review. As a result, JHR had a portfolio of 41 properties with a combined acquisition price of ¥363,542 million, and the total number of investment units issued and outstanding stood at 4,467,006 units at the end of the fiscal year under review.
2. Investment performance for the fiscal year under review
   The Japanese economy in the fiscal year under review (12-month period from January 1, 2021 to December 31, 2021) was in a severe situation due to the impact of state-of-emergency declarations, stricter measure to prevent the spread of the virus, etc. implemented in line with the spread of COVID-19, but gradually showed movements of picking up in and after October when the state-of-emergency declaration was lifted with improvement in the COVID-19 situation.
   The domestic accommodation and tourism market was heavily impacted by the low number of foreign visitors to Japan (hereinafter referred to as "inbound visitors"), which was estimated to be 245,000 in 2021 (-94.0% from the previous year; -99.2% from 2019), due to travel restrictions to Japan from various countries, etc., as well as the sluggish domestic demand due to the worsening of the COVID-19 situation. Accordingly, the cumulative number of overnight guests at domestic accommodation facilities in 2021 fell by 4.8% from the previous year or fell by 47.0% from 2019 to 315 million guest nights (preliminary release).
   As to the performance of hotels owned by JHR under these circumstances, RevPAR (Note 1) of the 24 Hotels with Variable Rent, etc. (Note 2) for the fiscal year under review fell below that of the previous year by 5.4% due to the impact of the spread of COVID-19, but GOP (gross operating profit) increased from the previous year by 47.4% due to the effects of cost management measures at hotels, etc.
   Under such circumstances, JHR maintained, as it did in the previous year, close communication with the lessees and operators of its respective hotels and worked to secure hotel earnings through reduction of operating costs, etc. In particular, Hotel Management Japan Co., Ltd. (hereinafter referred to as "HMJ"), which is a group company of the Asset Management Company, and its subsidiaries (hereinafter collectively referred to as the "HMJ Group"), implemented large-scale restructuring (such as reduction of labor costs through closure of unprofitable restaurants within hotels, reduction of outsourcing costs with the switch from outsourcing to insourcing and change of specifications, and consolidation of back offices and common operations) upon conclusion of contracts to change fixed-term building lease contracts on August 25, 2020, and resulted in achieving results that were better than initially planned.

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In conjunction, JHR changed lessees and conducted rebranding during the fiscal year under review in order to improve hotel operations and increase earnings as follows. In January 2021, for Chisun Hotel Kamata (former name: Hotel Vista Kamata Tokyo), JHR changed lessees and conducted rebranding after terminating the existing lease contract. In addition, JHR changed lessees and conducted rebranding to the HMJ Group for Hotel Oriental Express Fukuoka Tenjin (former name: HOTEL ASCENT FUKUOKA) in June 2021 and for Oriental Hotel Universal City (former name: Hotel Keihan Universal City) in July 2021, and also conducted rebranding to the HMJ Group for Oriental Hotel Okinawa Resort & Spa (former name: Okinawa Marriott Resort & Spa) in October 2021. These have led to more efficient operations being promoted, such as through sharing of human resources and back offices with the HMJ Group Hotels located in the surrounding areas. Furthermore, with the improving earnings structure of hotel operations through the restructuring by HMJ Group, the amount of rent JHR will receive during the hotel market recovery period is expected to increase.

Moreover, JHR decided that it is appropriate to partly realize unrealized gain of owned assets to record it as gain on sales of real estate properties and enhance the liquidity on hand. Accordingly, JHR sold ibis Tokyo Shinjuku on December 15, 2021, recording ¥3,258 million as gain on sales of real estate properties. On the other hand, on July 30, 2021, In addition, JHR acquired land that is part of the site of Oriental Hotel Universal City upon the expiration of the ground lease contract with the City of Osaka. Through this, the hotel is now real estate under full ownership and there is no need to pay ground rent of ¥21 million a year.

Moreover, JHR made a drastic review of its capital expenditures, including postponement of large-scale renovation work planned for the fiscal year under review, and also worked to reduce costs under such cost items as real estate operating costs and general and administrative expenses through discussions with related parties and other measures. For further details of sales, GOP (gross operating profit) and other management indicators for the 24 Hotels with Variable Rent, etc., please refer to " Hotel operation indexes, sales and GOP (gross operating profit)" on page 14.

(Note 1) RevPAR represents Revenue Per Available Room, which is calculated by dividing total rooms revenue for a certain period (including service charges) by the total number of rooms available for sale during the period. The same shall apply hereinafter in this document.

(Note 2) The hotel group combining the hotels which JHR leases to HMJ (Kobe Meriken Park Oriental Hotel, Oriental Hotel tokyo bay, Namba Oriental Hotel, Hotel Nikko Alivila and Oriental Hotel Hiroshima (hereinafter referred to as the "Five HMJ Hotels")), with the hotels which JHR leases to HMJ subsidiaries (Oriental Hotel Okinawa Resort & Spa, Sheraton Grand Hiroshima Hotel (main facility of ACTIVE-INTER CITY HIROSHIMA), Oriental Hotel Fukuoka Hakata Station, Holiday Inn Osaka Namba, Hilton Tokyo Narita Airport, International Garden Hotel Narita, Hotel Nikko Nara, Hotel Oriental Express Osaka Shinsaibashi, and Hilton Tokyo Odaiba), totaling 14 hotels, are referred to as the HMJ Group Hotels. Although the lessee of Hotel Oriental Express Fukuoka Tenjin was changed on June 18, 2021, and the lessee of Oriental Hotel Universal City was changed on July 1, 2021, to HMJ subsidiaries, these are not included in the HMJ Group Hotels in the fiscal year under review. The 24 Hotels with Variable Rent, etc. refers to the HMJ Group Hotels plus ibis Tokyo Shinjuku (completed its transfer on December 15, 2021), ibis Styles Kyoto Station, ibis Styles Sapporo, Mercure Sapporo, Mercure Okinawa Naha, Mercure Yokosuka, the b suidobashi, the b ikebukuro, the b hachioji and the b hakata, totaling 24 hotels. The same shall apply hereinafter in this document.

1. Funding status
   In the fiscal year under review (12-month period from January 1, 2021 to December 31, 2021), JHR procured ¥300 million through third-party allotment with the sponsor group as the allottee in March 2021, and took out loans of ¥6,800 million in total to refinance existing borrowings that were due for repayment in the same month. In addition, JHR took out loans of ¥935 million in total in June 2021 and ¥15,847 million in total in September 2021 to similarly refinance existing borrowings that were due for repayment. Moreover, JHR redeemed the fourth unsecured investment corporation bonds of ¥1,500 million due for redemption in December 2021 by taking out loans in the same amount mainly with main banks. JHR also used part of the funds from the sale of ibis Tokyo Shinjuku, which was sold in the same month, for partial early repayment of existing borrowings, reducing the ratio of interest-bearing debt to total assets by 0.9 points in an effort to strengthen financial soundness.
   Consequently, as of the end of the fiscal year under review, the balance of interest-bearing debt totaled ¥164,754 million, including short-term loans payable of ¥24,002 million, current portion of long-term loans payable of ¥8,434 million, long- term loans payable of ¥92,218 million, current portion of investment corporation bonds of ¥6,000 million and investment corporation bonds of ¥34,100 million, and the ratio of interest-bearing debt to total assets (Note) at the end of the fiscal year under review stood at 41.8%. The ratio of fixed interest rate to total interest-bearing debt at the end of the fiscal year under review was at 85.3%.
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