Japan Hotel REIT Investment : Midterm Financial Report for the Fiscal Year Ending December 31, 2022 (January 1, 2022-June 30, 2022)

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.

August 24, 2022

Midterm Financial Report for the Fiscal Year Ending December 31, 2022

(January 1, 2022 - June 30, 2022)

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 midterm Securities Report:	September 21, 2022

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

Yes

Yes (Institutional investors and analysts only)

(Amounts are rounded down to the nearest million yen)

1. Status summary of operation and assets for the midterm of the fiscal year ending December 31, 2022 (January 1, 2022 - June 30, 2022)

(1) Operating results

(Percentages: full year-changes from the previous year, midterm period-changes from the previous midterm period)

	Operating revenue	Operating income	Ordinary income		Net income (loss)
Midterm period ended	JPY1M	%	JPY1M	%	JPY1M		%	JPY1M	%
June 30, 2022	5,431	18.3	323	-	(470)		-	(471)	-
June 30, 2021	4,589	(17.1)	(699)	-	(1,488)		-	(1,488)	-
Fiscal year ended
December 31, 2021	13,633	(1.5)	2,959	(6.8)	1,298		(7.2)	1,296	(15.1)
	Net income for current
	midterm period per unit
Midterm period ended		JPY
June 30, 2022		(105)
June 30, 2021		(333)
Fiscal year ended		290
December 31, 2021

(Note) Net income for current midterm period per unit is calculated based on the period-average number of investment units issued.

(2) Financial position

	Total assets	Net assets	Equity ratio	Net assets per unit
Midterm period ended	JPY1M	JPY1M	%	JPY
June 30, 2022	391,483	219,914	56.2	49,230
June 30, 2021	395,554	218,306	55.2	48,870
Fiscal year ended	394,323	221,542	56.2	49,595
December 31, 2021

(Note) Net assets per unit are calculated based on the total number of investment units issued and outstanding at the end of the midterm period / full year.

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(3) 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
Midterm period ended	JPY1M	JPY1M	JPY1M	JPY1M
June 30, 2022	1,208	(3,304)	(1,633)	26,267
June 30, 2021	(760)	(1,025)	(1,541)	25,225
Fiscal year ended	11,682	(4,695)	(5,543)	29,996
December 31, 2021

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
Full year	13,337	(2.2)	2,827	(4.5)	1,159	(10.6)	1,158	(10.7)	333	-

(Reference) Estimated net income per unit for the fiscal year ending December 31, 2022 (full year) ¥259 (Calculated based on the estimate of period-average number of investment units of 4,467,006.)

(Note) The source of the dividend payment is planned to be the total amount of net income, plus the reversed amount of the reserve for temporary difference adjustment (¥332 million).

* 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: Yes
   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

(Note) For details, please refer to "Notes on changes in accounting policies" on page 26.

1. Total number of investment units issued and outstanding
2. 1. Total number of investment units issued and outstanding at the end of the fiscal year/period (including investment units owned by Japan Hotel REIT Investment Corporation (JHR))

As of June 30, 2022	4,467,006 units
As of June 30, 2021	4,467,006 units
As of December 31, 2021	4,467,006 units
(b) Number of JHR's own investment units held at the end of the fiscal year
As of June 30, 2022	0 units
As of June 30, 2021	0 units
As of December 31, 2021	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 33.

• Status of midterm audit procedures
  Midterm financial report is not subject to interim audit procedures by accountants.
• 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. Furthermore, we do not intend to guarantee any dividend amount by this forecast. For the assumptions of the operating forecast and notes for the use of operating forecast, please refer to "1. Operating results; (1) Operating results; (B) Outlook for the second half of the fiscal year" on page 6 and "Assumptions of the operating forecast for the full year of the fiscal year ending December 2022 (23rd period)" on page 11

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• Table of Contents

1. Operating results ..............................................................................................................................................................................	4
(1)	Operating results ..........................................................................................................................................................................	4
(2)	Material events related to going concern assumption.................................................................................................................	18
2. Semi-annual financial statements ...................................................................................................................................................	19
(1)	Semi-annual balance sheets........................................................................................................................................................	19
(2)	Semi-annual statements of income.............................................................................................................................................	21
(3)	Semi-annual statements of changes in net assets........................................................................................................................	22
(4)	Semi-annual statements of cash flows........................................................................................................................................	24
(5)	Notes on going concern assumption...........................................................................................................................................	25
(6)	Notes on matters concerning significant accounting policies.....................................................................................................	25
(7)	Notes on changes in accounting policies....................................................................................................................................	26
(8)	Notes to semi-annual financial statements .................................................................................................................................	27
(9)	Changes in total number of investment units issued and outstanding ........................................................................................	34
3. Reference information ....................................................................................................................................................................	35
(1)	Information on values of assets under management, etc..............................................................................................................	35
(2)	Status of capital expenditures ......................................................................................................................................................	48

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1. Operating results

1. Operating results

1. Overview of the midterm period 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 midterm period under review (6 months period from January 1, 2022 to June 30, 2022), 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 little over ten years since the Merger through the end of the midterm period 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 midterm period under review.
2. Investment performance for midterm period under review
   During the midterm period under review (six months period from January 1, 2022 to June 30, 2022), while a sixth wave of the spread of infections occurred from the beginning of the year due to the epidemic of COVID-19 variants, movement restrictions have been eased as strict measures to prevent the spread of the virus were lifted nationwide in March and efforts towards the recovery of social and economic activities have been gradually made.
   The number of foreign visitors to Japan (hereinafter referred to as "inbound visitors") was estimated to be 507,000 in the first half of 2022 (minus 96.9% from that of 2019), although the maximum number of foreigners allowed to enter Japan from various countries was gradually increased. On the other hand, the cumulative number of overnight guests at domestic accommodation facilities in the first half of 2022 rose by 51.7% year on year or fell by 33.4% from that of 2019 to 190 million guest nights (preliminary release). The figure showed a significant year-on-year increase despite the continuous impact of COVID-19 and a recovery in accommodation demand from Japanese guests was seen.
   As to the performance of hotels owned by JHR under these circumstances, RevPAR (Note 1) of The 25 Hotels with Variable Rent, etc. (Note 2) for the midterm period under review increased significantly year on year by 91.4%, and GOP (gross operating profit) turned from a deficit of ¥96 million in the previous midterm period to a surplus of ¥1,819 million supported by the successful cost management measures at hotels.
   Under such circumstances, JHR practiced 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 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) from 2020, and the results of cost reduction exceeded those initially anticipated. Despite such achievement, we are working to further promote the above measures.
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In addition, at the same time as these efforts, we are also focusing on measures to improve earnings towards the full-fledged recovery period of accommodation demand. Particularly, for hotels that have changed the lessee to the HMJ Group and conducted rebranding in the previous year, we are promoting measures for the realization of effective operation and improvement of earnings.

On the other hand, as a countermeasure against downside risks under the impact of COVID-19, JHR took measures to adopt full variable rent from February 2020 to the end of 2021 in lease contracts of The 14 HMJ Hotels, and has also concluded a memorandum on February 25, 2022, to change the entire rent of The 14 HMJ Hotels to variable rent in 2022.

For further details of sales, GOP (gross operating profit) and other management indicators for The 25 Hotels with Variable Rent, etc., please refer to " Hotel operation indexes, sales and GOP (gross operating profit)" on page 17.

(Note 1) The Five HMJ hotels refers to following five 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. The same shall apply hereinafter.

The 14 HMJ hotels refers to The Five HMJ Hotels plus following 9 hotels which JHR leases to subsidiaries of HMJ. 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, Hilton Tokyo Odaiba. The same shall apply hereinafter

The Two HMJ Rebranded hotels refers to following two hotels. Hotel Oriental Express Fukuoka Tenjin and Oriental Hotel Universal City. The same shall apply hereinafter in this document.

The 16 HMJ Hotels refers to The 14 HMJ Hotels plus The Two HMJ Rebranded Hotels. The same shall apply hereinafter.

The Accor Group Hotels refers to following 5 hotels. ibis Styles Kyoto Station, ibis Styles Sapporo, Mercure Sapporo, Mercure Okinawa Naha, Mercure Yokosuka. The same shall apply hereinafter.

The Ishin Group Hotels refers to following 4 hotels. the b suidobashi, the b ikebukuro, the b hachioji and the b hakata, The same shall apply hereinafter.

The 25 Hotels with Variable Rent, etc. refers to The 16 HMJ Hotels plus The Accor Group Hotels plus The Ishin Group Hotels. The same shall apply hereinafter.

(Note 2) 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.

1. Funding status
   In the midterm period under review, JHR took out loans of ¥15,234 million in total to refinance existing loans that were due for repayment in January, March and June.
   Consequently, as of the end of the midterm period under review, the balance of interest-bearing debt totaled ¥164,754 million, including short-term loans payable of ¥32,436 million, current portion of long-term loans payable of ¥11,172 million, long- term loans payable of ¥81,046 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 end of the midterm period under review stood at 42.1%. The ratio of fixed interest rate to total interest-bearing debt at the end of the midterm period

was at 78.5%.

(Note)	Ratio of interest-bearing debt to total assets at end of the midterm period under review = Balance of interest-bearing debt at end of the
	midterm period under review ÷ Total assets at end of the midterm period under review × 100

As of the end of the midterm period under review, JHR's issuer ratings were as follows.

Rating agency		Rating
Japan Credit Rating Agency, Ltd. (JCR)	A+		(Negative)
Rating and Investment Information, Inc. (R&I)	A		(Negative)

1. Financial results
   As a result of the abovementioned asset management, operating revenue, operating income and ordinary loss were ¥5,431 million, ¥323 million and ¥470 million, respectively, for the midterm period under review (six months period from January 1, 2022 to June 30, 2022). Net loss for the midterm period under review was ¥471 million. Variable rent received from hotels under variable rent contract and recognized as operating revenue include the amount of ¥1,384 million received from the hotels leased to the HMJ Group. However, this amount is calculated based on the GOP of The 16 HMJ Hotels for the midterm period under review. The variable rent to be ultimately received from The 16 HMJ Hotels will be determined by the full-year GOP (12 months period) of each hotel of The 16 HMJ Hotels.

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