semi-annualreport 7th fiscal period hoshino resorts...

Semi-Annual Report7th Fiscal Period

Hoshino Resorts REIT, Inc.3-6-18 Kyobashi, Chuo-ku, Tokyo

(from May 1, 2016 to October 31, 2016)

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I. Asset Management Report1. Overview of asset management

(1) Trend in key indicators

Fiscal period

3rd fiscal period(From May 1,

2014to October 31,

2014)

4th fiscal period(From November

1, 2014to April 30, 2015)

5th fiscal period(From May 1,

2015to October 31,

2015)


1, 2015to April 30, 2016)


2016to October 31,

2016)

Operating revenue (millions of yen) 1,563 1,599 1,926 3,559 3,981

Of the above, operating revenue from real estate leasing

(millions of yen) 1,563 1,599 1,926 3,559 3,981

Operating expenses (millions of yen) 667 780 892 1,645 1,884

Of the above, operating expenses from real estate leasing

(millions of yen) 484 531 628 1,303 1,428

Operating income (millions of yen) 895 818 1,034 1,914 2,097

Ordinary income (millions of yen) 716 734 909 1,601 1,816

Net income (millions of yen) 715 733 908 1,600 1,815

Total assets (millions of yen) 38,530 37,421 48,412 101,941 105,709

(Change from previous period) (%) 121.9 (2.9) 29.4 110.6 3.7

Net assets (millions of yen) 27,721 27,739 37,022 69,507 74,407

(Change from previous period) (%) 172.2 0.1 33.5 87.7 7.0

Interest-bearing liabilities

(millions of yen) 8,784 7,693 9,001 28,385 27,160

Unitholders’ capital (millions of yen) 27,006 27,006 36,113 67,906 72,591

Total number of investment units issuedand outstanding

(units) 42,969 42,969 49,689 78,008 81,757

Net assets per unit (net asset value) (Note 3) (yen) 645,151 645,577 745,077 445,516 455,052

Total distributions (millions of yen) 715 733 908 1,600 1,815

Distributions per unit (yen) 16,649 17,075 18,289 20,520 22,209Of the above, distributions of earnings per unit

(yen) 16,649 17,075 18,289 20,520 22,209

Of the above, distributions in excess of earnings per unit

(yen) – – – – –

Ratio of ordinary income to total assets (Note 4) (%) 2.6 1.9 2.1 2.1 1.7

(Annualized) (Note 5) (%) 5.1 3.9 4.2 4.3 3.5Return on equity (Note 4) (%) 3.8 2.6 2.8 3.0 2.5(Annualized) (Note 5) (%) 7.5 5.3 5.6 6.0 5.0

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Fiscal period

3rd fiscal period(From May 1,

2014to October 31,

2014)


1, 2014to April 30, 2015)


2015to October 31,

2015)


1, 2015to April 30, 2016)


2016to October 31,

2016)

Unitholders’ equity to total assets (Note 4) (%) 71.9 74.1 76.5 68.2 70.4

(Change from previous period) (%) 13.3 2.2 2.3 (8.3) 2.2

Payout ratio (Note 4) (%) 100.0 100.0 100.0 100.0 100.0[Other Information]Number of operating days (days) 184 181 184 182 184

Number of properties at end of period (properties) 30 30 39 46 47

Depreciation during period

(millions of yen) 338 339 410 735 831

Capital expendituresduring period

(millions of yen) 134 135 170 635 1,037

Rental NOI (Net Operating Income) (Note 4)

(millions of yen) 1,416 1,407 1,708 2,992 3,384

FFO (Funds from Operation) (Note 4)

(millions of yen) 1,054 1,074 1,319 2,337 2,647

FFO per unit (Note 4) (yen) 24,533 24,996 26,564 29,958 32,384Total distributions / FFO ratio (Note 4) (%) 67.9 68.3 68.8 68.5 68.6

Ratio of interest-bearing liabilities to total assetsat end of period (LTV)

(%) 22.8 20.6 18.6 27.8 25.7

(Note 1) The amounts of operating revenue, etc. do not include consumption taxes.(Note 2) 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.(Note 3) 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, 2016. 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 income to total assets

Ordinary income / ((Total assets at beginning of period + Total assets at end of period) /2) × 100

Return on equity Net income / ((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 Distributions per unit (excluding distributions in excess of earnings) / Net income per unit × 100Payout ratio for the 3rd fiscal period, 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) / Net income × 100

Rental NOI (Net Operating Income) Operating revenue from real estate leasing － Operating expenses from real estate leasing + Depreciation

FFO (Funds from Operation) Net income + Depreciation + Loss on disposal of property and equipment －Gains (losses) from sales of properties

FFO per unit 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 184 days for the 3rd fiscal period, 181 days for the 4th fiscal period, 184 days for the 5th fiscal period, 182 days for the 6th fiscal period, and 184 days for the 7th fiscal period.

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(2) Performance review of HRR for the fiscal period under review

i) Brief history of HRRHoshino 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 Corporations (Act No. 198 of 1951, including amendments thereto) (hereinafter the “Investment Trusts Act”) with Hoshino Resort Asset Management Co., Ltd. (hereinafter, the “Asset Management Company”) as the organizer and with investments in capital of 150 million yen (300 investment units) on March 6, 2013. An issuance of new investment units through public offering (19,000 units) was implemented with 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, 2013. HRR has been steadily expanding asset size since then, and the assets held by HRR at the end of the fiscal period under review was 47 properties (sum total of acquisition price: 93,182 million yen).

ii) Investment environment and business performanceIn the Japanese economy in the fiscal period under review, although stagnation in improvement of corporate earnings was observed due to rising uncertainty regarding the overseas economy, specifically, slowdowns in China and other Asian emerging countries and the issue of the UK leaving the EU, a mild recovery continued owing to such factors as a trend of improvement in the employment and income environments. For the tourism market, the Japanese government has set goals to increase inbound tourists number to 40 million by 2020 and inbound tourists’ spending amount to 8 trillion yen by 2020 considering tourism as one of the pillars of its growth strategies. The increase rate of the tourists has nevertheless decreased mainly due to the yen appreciation. However, 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 October 2016.

iii) Overview of fund procurementIn the fiscal period under review, in addition to procuring 4,461 million yen from the issuance of new investment units through public offering on May 2, 2016 and 223 million yen from the issuance of new investment units through third-party allotment on May 24, 2016, 2,500 million yen was procured throughdebt financing on May 2, 2016, and these were allocated to part of the funds for acquisition of “KAI Kaga”and part of the funds for repayment of loans. In August 2016, HRR secured an agreement with a syndicate of banks to release the pledges held for the balance of all outstanding loans, and on August 31, 2016, HRR’s loans payable became unsecured.

Furthermore, scheduled payment was made, resulting in balance of loans outstanding of 27,160 million yen and ratio of interest-bearing liabilities to total assets (LTV) of 25.7% as of October 31, 2016.

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, Ltd. (JCR).

iv) Overview of business performance and distributionsAs a result of the management described above, business performance in the fiscal period under review resulted in operating revenue of 3,981 million yen, operating income of 2,097 million yen, ordinary income of 1,816 million yen and net income of 1,815 million yen. Concerning distributions, to ensure application of special provisions for taxation on investment corporations (Article 67-15 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 22,209 yen.

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(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 October 31, 2016.

Date Event

Unitholders’ capital(thousands of yen)

Total number of investment units

issued and outstanding(units) Note

Increase (Decrease) Balance Increase

(Decrease) Balance

March 6, 2013 Establishment through private placement 150,000 150,000 300 300 (Note 1)

July 11, 2013 Capital increase through public offering 9,302,400 9,452,400 19,000 19,300 (Note 2)

August 12, 2013 Capital increase through third-party allotment 465,120 9,917,520 950 20,250 (Note 3)

May 1, 2014 Capital increase through public offering 16,547,762 26,465,282 22,000 42,250 (Note 4)

May 27, 2014 Capital increase through third-party allotment 540,810 27,006,092 719 42,969 (Note 5)



November 2, 2015 Capital increase through public offering 30,279,030 66,392,382 26,970 76,659 (Note 8)

November 25, 2015 Capital increase through third-party allotment 1,514,512 67,906,895 1,349 78,008 (Note 9)



(Note 1) Upon establishment of HRR, new investment units were issued at an offer price of 500,000 yen per unit.(Note 2) 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.(Note 3) 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.(Note 4) 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.(Note 5) 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.(Note 6) 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.(Note 7) 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.(Note 8) 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, 2016. Total number of investment units issued and outstanding after the split is 163,514.

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[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

3rd fiscal period(From May 1, 2014to October 31, 2014)

4th fiscal period(From November 1,

2014to April 30, 2015)

5th fiscal period(From May 1, 2015to October 31, 2015)


2015to April 30, 2016)

7th fiscal period(Note)

(Before ex rights)(From May 1, 2016to October 31, 2016)

7th fiscal period(Note)

(After ex rights)(From May 1, 2016to October 31, 2016)

Highest (Yen) 1,196,000 1,534,000 1,448,000 1,399,000 1,330,000 626,000

Lowest (Yen) 752,000 1,103,000 1,035,000 1,104,000 1,203,000 615,000

(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, 2016. Accordingly, transactions have been made at ex rights price on and after October 27, 2016.

(4) Distributions, etc.With the aim of having the maximum amount of distributable income deducted as expense pursuant to Article 67-15 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. Consequently, distributions per unit came to ¥22,209.

Fiscal period3rd fiscal period

(From May 1, 2014to October 31, 2014)


2014to April 30, 2015)

5th fiscal period(From May 1, 2015

to October 31, 2015)


2015to April 30, 2016)



Total net income(thousands of yen) 715,400 733,714 908,751 1,600,731 1,815,763

Total unappropriated retained earnings (undisposed loss)

(thousands of yen)715,409 733,732 908,788 1,600,757 1,815,796

Retained earnings brought forward(thousands of yen) 18 37 26 33 55

Total cash distributions(thousands of yen) 715,390 733,695 908,762 1,600,724 1,815,741

(Distributions per unit)(yen) 16,649 17,075 18,289 20,520 22,209

Of the above, total distributions(thousands of yen) 715,390 733,695 908,762 1,600,724 1,815,741

(Distributions of earnings per unit) 16,649 17,075 18,289 20,520 22,209Of the above, total refund of investments

(thousands of yen)– – – – –

(Refund of investments per unit) – – – – –Of total refund of investments, total distributions from reservefor temporary difference adjustments

– – – – –(Of refund of investments per unit, distributions from reservefor 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)

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(5) Future management policy

i) Future trends outlookThe Japanese economy is expected to experience a continued slower pace of economic recovery due to weak exports and production, owing to the effect of the slowdown of the emerging economies and other factors. Attention will still need to be given to the risks that may push down the Japanese economy due to the rising uncertainty surrounding the overseas economy, specifically downside performance in China and other Asian emerging countries, and resource-rich countries and the issue of the UK leaving the EU. In addition, the Japanese government has announced tourism policies aimed at enhancing the international competitiveness of the tourism business through relaxation of regulations and enhancement of the productivity of the lodging business. Such policies include relaxation of visa requirements for entry from the five countries of China, the Philippines, Vietnam, India and Russia, opening of the State Guest Houses and other public facilities for public viewing/access, and maintenance of tourist spots centering on cultural properties. 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 addressedUnder 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 in order 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 a facility is able to generate long-term and stable cash flow, proactive investments will be made.

b. Properties operated by outside operators

Similar to when investing in properties operated by the Hoshino Resorts Group, HRR believes it will be able to secure long-term and stable cash flow 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 if it decides secure, long-term and stable cash flow is possible after obtaining the necessary information by taking advantage of the sponsor support agreement with Hoshino Resorts and the Asset Management Company’s unique networks.

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 takes into consideration 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

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exchange risks, etc., related to investment and revenue returns. In addition to the above policy, HRR also follows a policy of investment 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 the 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 in terms of not only diversification by brand but also by geographic area of facility location and thereby reducing the risk of a significant drop in HRR’s cash flow.

(6) Significant subsequent events

i) Acquisition of assetsHRR acquired the real estate described below on November 1, 2016 (the acquisition price: 16,000 million yen). The acquisition price is the price stated in the sales and purchase agreement of the real estate, which does not include acquisition expenses, property-related taxes and consumption taxes.

Name of property Location Seller Acquisition price(millions of yen) Acquisition date

Hyatt Regency Osaka Osaka-shi, Osaka GCREF Japan I TMK 16,000 November 1, 2016

(Note) The acquisition price includes the trading value (79 million yen) of equipment, etc. acquired from GCP Hospitality Japan K.K., which was a lessee of the property. Note that GCP Hospitality Japan K.K. changed its trade name to HRO Inc. on November 1, 2016.

ii) Additional borrowingsHRR obtained bank loans on November 1, 2016 for acquisition of specified assets and related costs as stated in “(1) Acquisition of assets” above.

Floating/Fixed Lender Loan amount Interest rate Drawdown

date

Repayment due date

(Note 4)

Repayment method

Floating

The Bank of Tokyo-Mitsubishi UFJ, Ltd.Sumitomo Mitsui Banking Corporation

1.5billion yen

Base rate 1-month

Japanese Yen TIBOR (Note 1)

+ 0.400%

November 1, 2016

October 31, 2017

Lump-sum payment at maturity

The Bank of Tokyo-Mitsubishi UFJ, Ltd.Development Bank of Japan Inc.Sumitomo Mitsui Banking CorporationResona Bank, LimitedThe Bank of Fukuoka, Ltd.The Ashikaga Bank, Ltd.The Hokuriku Bank, Ltd.The Yamaguchi Bank, Ltd.The Senshu Ikeda Bank, Ltd.

2.5billion yen

Base rate 1-month

Japanese Yen TIBOR

+ 0.2375%(Note 2)

November 1, 2016 April 30, 2019


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date

Repayment due date

(Note 4)

Repayment method

Floating


2.5billion yen

Base rate 1-month

Japanese Yen TIBOR

+ 0.300%(Note 3)

November 1, 2016

October 30, 2020


Fixed

Resona Bank, LimitedThe Bank of Tokyo-Mitsubishi UFJ, Ltd.The Bank of Fukuoka, Ltd.Development Bank of Japan Inc.Sumitomo Mitsui Banking CorporationThe Ashikaga Bank, Ltd.The Hokuriku Bank, Ltd.The Yamaguchi Bank, Ltd.

2.0billion yen 0.54888% November 1,

2016 April 30, 2021Lump-sum payment at maturity

The Bank of Tokyo-Mitsubishi UFJ, Ltd.Development Bank of Japan Inc.Sumitomo Mitsui Banking Corporation


2016October 31, 2022







2016October 31, 2023


(Note 1) 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 as of two business days prior to the interest payment due date immediately preceding that interest payment due date (the drawdown date in the case of the first interest calculation period), 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. For the JBA Japanese Yen TIBOR, please check the website of JBA TIBOR Administration (http://www.jbatibor.or.jp/).

(Note 2) The interest rate is substantially fixed at 0.2785% with the effect of the interest rate swap agreements to hedge the risk ofrising interest rates.

(Note 3) The interest rate is substantially fixed at 0.356% with the effect of the interest rate swap agreements to hedge the risk of rising interest rates.

(Note 4) 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.

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iii) Split of investment unitsA 2-for-1 split of investment units was implemented with the record date of October 31, 2016 and theeffective date of November 1, 2016.

(a) Purpose of the split

The purpose is to expand the investor base and enhance the liquidity of its investment units by reducing the per unit price with the aim of providing a more investor-friendly environment after the launch of Nippon Individual Savings Accounts (NISA).

(b) Method of the split

HRR executed a 2-for-1 split of investment units owned by unitholders indicated or recorded in final unitholder registry as of October 31, 2016.

(c) Increase in investment units resulting from the split, etc.

Total number of investment units issued and outstanding of HRR before the split: 81,757 units

Increase in number of investment units by the split: 81,757 units

Total number of investment units issued and outstanding of HRR after the split: 163,514 units

For notes concerning each numerical value of per unit information that is calculated on the assumption that the split of investment units was implemented at the beginning of the 6th fiscal period, please refer to “Notes to Financial Statements,” “Per unit information.”

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2. Profile of HRR

(1) Status of unitholders’ capital

3rd fiscal period(As of October

31, 2014)

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)Total number of investment unitsauthorized (units) 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000

Total number of investment units issued and outstanding (Note)

(units)42,969 42,969 49,689 78,008 81,757

Unitholders’ capital(millions of yen) 27,006 27,006 36,113 67,906 72,591

Number of unitholders (persons) 7,029 6,841 8,639 10,001 10,278

(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, 2016. As a result, total number of investment units issued and outstanding is 163,514.

(2) Matters concerning investment unitsThe top 10 unitholders based on the ratio of units owned to total number of units issued and outstanding as of October 31, 2016 are as follows:

Name Address Number of units owned (units)

Ratio to total number of units

issued and outstanding (%)

Japan Trustee Services Bank, Ltd. (Trust account) 1-8-11 Harumi, Chuo-ku, Tokyo 15,209 18.60

Trust & Custody Services Bank, Ltd. (Securities investment trust account)

Harumi Island Triton Square Office Tower Z1-8-12 Harumi, Chuo-ku, Tokyo

10,162 12.42

The Master Trust Bank of Japan, Ltd. (Trust account)

2-11-3 Hamamatsu-cho, Minato-ku, Tokyo 7,374 9.01

The Nomura Trust and Banking Co., Ltd. (Investment trust account) 2-2-2 Otemachi, Chiyoda-ku, Tokyo 3,992 4.88

Hoshino Resorts Inc.2148 Oaza Nagakura, Karuizawa-machi, Kitasaku-gun, Nagano

3,070 3.75

JP MORGAN CHASE BANK (Standing proxy: Mizuho Bank, Ltd.)

Shinagawa Intercity Tower A2-15-1 Konan, Minato-ku, Tokyo 2,478 3.03

THE BANK OF NEW YORK, NON-TREATY JASDEC ACCOUNT (Standing proxy: The Bank of Tokyo-Mitsubishi UFJ, Ltd.)

2-7-1 Marunouchi, Chiyoda-ku, Tokyo 1,375 1.68

STATE STREET BANK AND TRUST COMPANY 505012 (Standing proxy: The Hongkong and Shanghai Banking Corporation Limited, Tokyo branch)

3-11-1 Nihonbashi, Chuo-ku, Tokyo 1,366 1.67

The Hokkoku Bank, Ltd.(Standing proxy: Trust & Custody Services Bank, Ltd.)

Harumi Island Triton Square Office Tower Z1-8-12 Harumi, Chuo-ku, Tokyo

835 1.02

EVERGREEN (Standing proxy: The Bank of Tokyo-Mitsubishi UFJ, Ltd.)

2-7-1 Marunouchi, Chiyoda-ku, Tokyo 805 0.98

Total 46,666 57.07

(Note) The ratio to total number of units issued and outstanding is rounded down to two decimal places.

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(3) Matters relating to officersThe Executive Director, Supervisory Directors and Independent Auditor for the fiscal period under review are as follows:

Title Name Major concurrent post, etc.

Total amount of compensation for each position during the fiscal period under review

(thousands of yen)Executive Director(Note 1) Kenji Akimoto President & CEO of Hoshino Resort Asset

Management Co., Ltd.–

(Note 2)

Supervisory Director(Note 1)

Hiroshi Shinagawa Attorney at law, Kinkadori Law Office 1,320

Yukiko Fujikawa Certified Public Accountant, Yukiko Fujikawa CPA Office 1,320

Independent Auditor(Note 3) Grant Thornton Taiyo LLC – 6,700

(Note 1) 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 2nd 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 Corporate Planning Department of the Asset Management Company.

(Note 2) The Executive Director does not receive compensations from HRR.(Note 3) 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 Trust 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 AdministratorsThe Asset Management Company, Asset Custodian, and General Administrators as of October 31, 2016 are as follows:

Category of entrusted operation Name

Asset Management Company Hoshino Resort Asset Management Co., Ltd.

Asset Custodian Mitsubishi UFJ Trust and Banking Corporation

General Administrator (General Administrator of unit register) Mitsubishi UFJ Trust and Banking Corporation

General Administrator (General Administrator for accounting and administrative function) Mitsubishi UFJ Trust and Banking Corporation

12

3. Status on Investment Properties

(1) Investment status

Asset type Use of asset

6th fiscal periodAs of April 30, 2016

7th fiscal periodAs of October 31, 2016

Total amount held(millions of yen)

(Note 1)

Ratio to total assets (%)

(Note 2)

Total amount held(millions of yen)

(Note 1)

Ratio to total assets (%)

(Note 2)

Real estate Hotel 73,101 71.7 73,132 69.2

Ryokan 18,043 17.7 21,466 20.3Subtotal 91,144 89.4 94,598 89.5

Deposits and other assets 10,796 10.6 11,111 10.5Total assets (Note 3) 101,941 100.0 105,709 100.0

Total liabilities (Note 3) 32,433 31.8 31,302 29.6Total net assets (Note 3) 69,507 68.2 74,407 70.4

(Note 1) “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.

(Note 2) “Ratio to total assets” is rounded to one decimal place.(Note 3) “Total assets,” “Total liabilities” and “Total net assets” are stated at the book value.

(2) Major properties ownedThe major components of assets (the 10 largest properties by book value) as of October 31, 2016 are as follows:

Name of property

Book value(millions of

yen)(Note 1)

Leasable area(m2)

(Note 2)

Leased area(m2)

(Note 3)

Occupancy rate(%)

Ratio to total operating

revenue from real estate

leasing (%)(Note 4)

Primary use

ANA Crowne Plaza Hiroshima 17,855 32,332.00 32,332.00 100.0 14.2 Hotel

ANA Crowne Plaza Fukuoka 7,674 27,372.74 27,372.74 100.0 5.9 Hotel

HOSHINOYA Karuizawa 7,640 11,723.61 11,723.61 100.0 10.0 Ryokan

ANA Crowne Plaza Kanazawa 6,712 23,835.00 23,835.00 100.0 9.4 Hotel

Asahikawa Grand Hotel 4,811 25,715.20 25,715.20 100.0 4.6 Hotel

RISONARE Yatsugatake 4,566 33,853.45 33,853.45 100.0 8.1 Hotel

RISONARE Atami 4,219 23,385.18 23,385.18 100.0 3.9 Hotel

ANA Crowne Plaza Toyama 3,987 21,600.11 21,600.11 100.0 4.6 Hotel

KAI Kaga 3,182 5,159.46 5,159.46 100.0 2.6 Ryokan

KAI Kinugawa 3,092 4,066.60 4,066.60 100.0 2.6 Ryokan

Total 63,741 209,043.35 209,043.35 100.0 65.9 –

(Note 1) “Book value” is the carrying amount (in the case of real estate, etc., 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.

(Note 2) “Leasable area” is the leasable area to tenants.(Note 3) 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.

13

(3) Summary of portfolio propertiesAn overview of assets held by HRR as of October 31, 2016 is as follows:

Name of property Location Type of ownershipLeasable

area(m2)

Book value at end of period

(millions of yen)

(Note 1)

Estimatedvalue at end

of period(millions of

yen)(Note 2)

HOSHINOYA Karuizawa Karuizawa-machi, Kitasaku-gun, Nagano

Ownership of real estate, etc. 11,723.61 7,640 11,100

HOSHINOYA Kyoto Kyoto-shi, Kyoto Ownership of real estate, etc. 2,626.15 2,943 3,760

RISONARE Yatsugatake Hokuto-shi, Yamanashi Ownership of real estate, etc. 33,853.45 4,566 6,000

RISONARE Atami Atami-shi, Shizuoka Ownership of real estate, etc. 23,385.18 4,219 4,080

KAI Matsumoto Matsumoto-shi, Nagano Ownership of real estate, etc. 4,056.12 617 783

KAI Izumo Matsue-shi, Shimane Ownership of real estate, etc. 3,909.02 706 847

KAI Ito Ito-shi, Shizuoka Ownership of real estate, etc. 7,473.91 704 923

KAI Hakone Hakone-machi, Ashigarashimo-gun, Kanagawa

Ownership of real estate, etc. 4,649.67 952 1,240

KAI Aso Kokonoe-machi, Kusu-gun, Oita

Ownership of real estate, etc. 1,543.53 628 676

KAI Kawaji Nikko-shi, Tochigi Ownership of real estate, etc. 8,190.38 1,000 1,140

KAI Kinugawa Nikko-shi, Tochigi Ownership of real estate, etc. 4,066.60 3,092 3,280

KAI Kaga Kaga-shi, Ishikawa Ownership of real estate, etc. 5,159.46 3,182 3,330

Chisun Inn Shiojiri Kita IC Shiojiri-shi, Nagano Ownership of real estate, etc. 2,100.47 688 809

Chisun Inn Sano Fujioka IC Sano-shi, Tochigi Ownership of real estate, etc. 1,968.91 757 895

Chisun Inn Suwa IC Suwa-shi, Nagano Ownership of real estate, etc. 1,944.94 675 802

Chisun Inn Toyokawa IC Toyokawa-shi, Aichi Ownership of real estate, etc. 2,040.09 612 726

Chisun Inn Tosu Tosu-shi, Saga Ownership of real estate, etc. 1,968.02 498 630

Chisun Inn Chiba Hamano R16 Chiba-shi, Chiba Ownership of real

estate, etc. 2,023.29 791 1,020

Chisun Inn Kumamoto Miyukifueda Kumamoto-shi, Kumamoto Ownership of real

estate, etc. 2,094.77 616 736

Chisun Inn Utsunomiya Kanuma Utsunomiya-shi, Tochigi Ownership of real

estate, etc. 2,094.16 712 833

Chisun Inn Fukui Fukui-shi, Fukui Ownership of real estate, etc. 2,094.01 641 767

Chisun Inn Fukushima Nishi IC Fukushima-shi, Fukushima Ownership of real

estate, etc. 2,094.01 668 773

Chisun Inn Niigata Chuo IC Niigata-shi, Niigata Ownership of real estate, etc. 2,094.16 627 747

Chisun Inn Nagasaki Airport Omura-shi, Nagasaki Ownership of real estate, etc. 1,968.02 623 752

Chisun Inn Hitachinaka Hitachinaka-shi, Ibaraki Ownership of real estate, etc. 1,968.30 727 903

14

Name of property Location Type of ownershipLeasable

area(m2)

Book value at end of period

(millions of yen)

(Note 1)

Estimatedvalue at end

of period(millions of

yen)(Note 2)

Chisun Inn Tsuchiura Ami Ami-machi, Inashiki-gun, Ibaraki Ownership of real estate, etc. 1,968.03 756 921

Chisun Inn Kofu Isawa Fuefuki-shi, Yamanashi Ownership of real estate, etc. 1,968.47 651 786

Chisun Inn Marugame Zentsuji Marugame-shi, Kagawa Ownership of real

estate, etc. 2,094.16 584 692

Chisun Inn Munakata Munakata-shi, Fukuoka Ownership of real estate, etc. 2,094.16 500 618

Chisun Inn Iwate Ichinoseki IC Ichinoseki-shi, Iwate Ownership of real

estate, etc. 1,968.02 697 773

Chisun Inn Karuizawa Karuizawa-machi, Kitasaku-gun, Nagano

Ownership of real estate, etc. 1,917.10 802 1,050

Chisun Inn Himeji Yumesakibashi Himeji-shi, Hyogo Ownership of real

estate, etc. 2,406.95 616 731

Chisun Inn Kurashiki Mizushima Kurashiki-shi, Okayama Ownership of real

estate, etc. 2,094.16 720 857

Candeo Hotels Handa Handa-shi, Aichi Ownership of real estate, etc. 2,814.05 621 693

Candeo Hotels Chino Chino-shi, Nagano Ownership of real estate, etc. 2,868.18 795 914

Candeo Hotels Fukuyama Fukuyama-shi, Hiroshima Ownership of real estate, etc. 3,985.73 1,072 1,240

Candeo Hotels Sano Sano-shi, Tochigi Ownership of real estate, etc. 2,828.71 1,256 1,460

Candeo Hotels Kameyama Kameyama-shi, Mie Ownership of real estate, etc. 3,912.03 481 532

Comfort Hotel Hakodate Hakodate-shi, Hokkaido Ownership of real estate, etc. 2,927.44 955 1,040

Comfort Hotel Tomakomai Tomakomai-shi, Hokkaido Ownership of real estate, etc. 2,721.08 980 1,070

Comfort Hotel Kure Kure-shi, Hiroshima Ownership of real estate, etc. 3,121.02 1,132 1,230

Chisun Inn Kagoshima Taniyama Kagoshima-shi, Kagoshima Ownership of real

estate, etc. 8,066.36 2,036 2,230

ANA Crowne PlazaHiroshima Hiroshima-shi, Hiroshima Ownership of real

estate, etc. 32,332.00 17,855 19,900

ANA Crowne PlazaFukuoka Fukuoka-shi, Fukuoka Ownership of real

estate, etc. 27,372.74 7,674 8,630

ANA Crowne PlazaKanazawa Kanazawa-shi, Ishikawa Ownership of real

estate, etc. 23,835.00 6,712 7,170

ANA Crowne PlazaToyama Toyama-shi, Toyama Ownership of real

estate, etc. 21,600.11 3,987 4,440

Asahikawa Grand Hotel Asahikawa-shi, Hokkaido Ownership of real estate, etc. 25,715.20 4,811 4,770

Total – – 317,700.93 94,598 109,299

(Note 1) “Book value at end of period” is the carrying amount (in the case of real estate, etc., 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.

(Note 2) Appraisal of the property is entrusted to Japan Valuers Co., Ltd., Morii Appraisal & Investment Consulting Inc. or Rich Appraisal Institute Co., Ltd. “Estimated value at end of period” is the appraisal value stated in the real estate appraisal report or investigation report with October 31, 2016 as the effective date of the valuation.

15

Lease status of real estate, etc. held by HRR is as follows:

6th fiscal period(From November 1, 2015

to April 30, 2016)



Name of property

Number of tenants at

end of period

(subleasing)

Occupancyrate [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(%)


end of period

(subleasing)


(%)

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) 100.0 383 10.8 1 (14) 100.0 396 10.0HOSHINOYA Kyoto 1 (0) 100.0 128 3.6 1 (0) 100.0 105 2.6RISONARE Yatsugatake 1 (17) 100.0 320 9.0 1 (16) 100.0 321 8.1RISONARE Atami 1 (0) 100.0 155 4.4 1 (0) 100.0 156 3.9KAI Matsumoto 1 (0) 100.0 41 1.2 1 (0) 100.0 43 1.1KAI Izumo 1 (0) 100.0 47 1.3 1 (0) 100.0 50 1.3KAI Ito 1 (0) 100.0 57 1.6 1 (0) 100.0 58 1.5KAI Hakone 1 (0) 100.0 54 1.5 1 (0) 100.0 52 1.3KAI Aso 1 (0) 100.0 28 0.8 1 (0) 100.0 29 0.7KAI Kawaji 1 (0) 100.0 53 1.5 1 (0) 100.0 54 1.4KAI Kinugawa 1 (0) 100.0 101 2.8 1 (0) 100.0 102 2.6KAI Kaga – – – – 1 (0) 100.0 102 2.6Chisun Inn Shiojiri Kita IC 1 (1) 100.0 28 0.8 1 (1) 100.0 28 0.7Chisun Inn Sano Fujioka IC 1 (0) 100.0 31 0.9 1 (0) 100.0 31 0.8Chisun Inn Suwa IC 1 (0) 100.0 29 0.8 1 (0) 100.0 30 0.8Chisun Inn Toyokawa IC 1 (0) 100.0 27 0.8 1 (0) 100.0 27 0.7Chisun Inn Tosu 1 (0) 100.0 22 0.6 1 (0) 100.0 24 0.6Chisun Inn Chiba Hamano R16 1 (0) 100.0 33 0.9 1 (0) 100.0 34 0.9Chisun Inn Kumamoto Miyukifueda 1 (0) 100.0 25 0.7 1 (0) 100.0 26 0.7

Chisun Inn Utsunomiya Kanuma 1 (0) 100.0 30 0.9 1 (0) 100.0 31 0.8

Chisun Inn Fukui 1 (0) 100.0 28 0.8 1 (0) 100.0 30 0.8Chisun Inn Fukushima Nishi IC 1 (0) 100.0 31 0.9 1 (0) 100.0 32 0.8

Chisun Inn Niigata Chuo IC 1 (0) 100.0 28 0.8 1 (0) 100.0 28 0.7Chisun Inn Nagasaki Airport 1 (0) 100.0 29 0.8 1 (0) 100.0 30 0.8Chisun Inn Hitachinaka 1 (0) 100.0 30 0.9 1 (0) 100.0 29 0.8Chisun Inn Tsuchiura Ami 1 (0) 100.0 30 0.9 1 (0) 100.0 30 0.8Chisun Inn Kofu Isawa 1 (0) 100.0 29 0.8 1 (0) 100.0 29 0.7Chisun Inn Marugame Zentsuji 1 (0) 100.0 27 0.8 1 (0) 100.0 27 0.7Chisun Inn Munakata 1 (0) 100.0 26 0.7 1 (0) 100.0 24 0.6Chisun Inn Iwate Ichinoseki IC 1 (1) 100.0 25 0.7 1 (1) 100.0 27 0.7Chisun Inn Karuizawa 1 (0) 100.0 37 1.1 1 (0) 100.0 41 1.0Chisun Inn Himeji Yumesakibashi 1 (0) 100.0 29 0.8 1 (0) 100.0 29 0.7

Chisun Inn Kurashiki Mizushima 1 (0) 100.0 29 0.8 1 (0) 100.0 31 0.8

Candeo Hotels Handa 1 (0) 100.0 26 0.7 1 (0) 100.0 26 0.7Candeo Hotels Chino 1 (0) 100.0 32 0.9 1 (0) 100.0 32 0.8Candeo Hotels Fukuyama 1 (0) 100.0 39 1.1 1 (0) 100.0 39 1.0Candeo Hotels Sano 1 (0) 100.0 45 1.3 1 (0) 100.0 45 1.2Candeo Hotels Kameyama 1 (0) 100.0 20 0.6 1 (0) 100.0 20 0.5Comfort Hotel Hakodate 1 (0) 100.0 32 0.9 1 (0) 100.0 32 0.8

16

6th fiscal period(From November 1, 2015

to April 30, 2016)



Name of property


end of period

(subleasing)


(%)

Operating revenue

from real estate

leasing[During the

period](millions of

yen)

Ratio to total

operating revenue

from real estate

leasing(%)


end of period

(subleasing)


(%)

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) 100.0 33 0.9 1 (0) 100.0 33 0.8Comfort Hotel Kure 1 (0) 100.0 37 1.1 1 (0) 100.0 37 0.9Chisun Inn Kagoshima Taniyama 1 (1) 100.0 69 2.0 1 (1) 100.0 69 1.7

ANA Crowne PlazaHiroshima 1 (7) 100.0 527 14.8 1 (7) 100.0 567 14.2

ANA Crowne PlazaFukuoka 1 (6) 100.0 223 6.3 1 (6) 100.0 235 5.9

ANA Crowne PlazaKanazawa 1 (5) 100.0 299 8.4 1 (5) 100.0 374 9.4

ANA Crowne PlazaToyama 1 (6) 100.0 153 4.3 1 (6) 100.0 182 4.6

Asahikawa Grand Hotel 1 (5) 100.0 31 0.9 1 (5) 100.0 182 4.6

Total 46 (63)(Note) 100.0 3,559 100.0 47 (62)

(Note) 100.0 3,981 100.0

(Note) “Number of tenants (subleasing)” refers to sum 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 other assetsThere are no assets incorporated into the portfolio other than those listed in the aforementioned “(3) Summary of portfolio properties,” as of October 31, 2016.

(5) Status of asset holding by country and regionThere is no portfolio overseas real estate outside Japan, as of October 31, 2016.

17

4. Capital expenditures for properties held

(1) Future plan for capital expendituresThe following table summarizes the major capital expenditure plan in the fiscal period ending April 2017 in connection with scheduled renovation and others for properties held as of October 31, 2016. The estimated construction costs below include the amounts to be expensed for accounting purpose.

Name of property Location Purpose Scheduled period

Estimated construction costs(millions of yen)

Total amount

Amount paid

during the period

Total amountpaid

RISONARE Yatsugatake

Hokuto-shi, Yamanashi

Renovation of guest rooms and common-use areas

From June 2016to April 2017 1,326 40 53



Renovation of elevators

From January 2017to April 2017 47 – –

KAI HakoneHakone-machi, Ashigarashimo-gun, Kanagawa

Construction as an investment for facility maintenance such as renovation of large common bath and guestrooms, and elevators.

From December 2016to January 2017

228 – –

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 2017to May 2017 75 – –

ANA Crowne Plaza Hiroshima

Hiroshima-shi, Hiroshima

Construction to convert single rooms into double rooms and renovate twin rooms.

From January 2017to March 2017 48 – –

ANA Crowne Plaza Hiroshima

Hiroshima-shi, Hiroshima

Renovation of elevators

From June 2016to January 2017 110 – –

18

(2) Capital expenditures for the periodOf construction work falling under the category of capital expenditures conducted in the fiscal period under review for properties held as of October 31, 2016, the following are the major amounts. The fiscal period under review’s capital expenditures amounted to 1,037 million yen and repair expenses separately charged to expenses amounted to 55 million yen for a combined total of 1,092 million yen of construction work implemented.

Name of property Location Purpose Period

Construction costs(millions of yen)

Total amount

Amount paid during period

Total amount paid

RISONARE Atami Atami-shi, Shizuoka

Renovation of exterior walls, and 9F and 11F interior finishing

From May 2016to July 2016 246 240 246

ANA Crowne PlazaKanazawa

Kanazawa-shi, Ishikawa

Upgrading of banquet hall lighting control unit panel and lighting equipment

From August 2016to September 2016 58 58 58

HOSHINOYA Karuizawa

Karuizawa-machi,

Kitasaku-gun, Nagano

Setting up of “Ice Skating Rink in the Forest”

From October 2015to July 2016 338 338 338



Renovation of guest rooms and common-use areas

From June 2016to April 2017 1,326 40 53

(3) Funds reserved for long-term repair plansNot applicable.

5. Expenses and liabilities

(1) Details of expenses relating to asset management, etc.(thousands of yen)

ItemPrevious fiscal period

(From November 1, 2015to April 30, 2016)

Current fiscal period(From May 1, 2016 to October 31, 2016)

Asset management fee 249,568 342,999

Asset custody fee 2,139 3,786

Administrative service fees 10,407 15,741

Directors’ compensation 2,640 2,640

Audit fee 6,500 6,751

Other expenses 71,426 83,750

Total 342,681 455,670

19

(2) Status of borrowingsThe status of borrowings of HRR as of October 31, 2016 is as follows:

Category Lender Drawdown date

Balance at beginning of

period (millions of

yen)

Balance at end of period (millions of

yen)

Average interest

rate(Note 1)

Repayment due date

Repayment method Use Remarks

Short-term loans

payable


November2, 2015 1,100 – 0.45957% October 31,

2016Lump-sum repayment (Note 2)

Unsecured/Unguaranteed

(Note 3)

Subtotal 1,100 –

Long-term loans

payable


July 16, 2013 1,860 – 1.44478% July 16,

2016 (Note 4) (Note 2)Unsecured/

Unguaranteed(Note 3)


July 16, 2013 2,418 2,385 1.92875% July 16,




July 16, 2013 1,288 1,268 2.45886% July 16,



The Bank of Tokyo-Mitsubishi UFJ, Ltd.The Ashikaga Bank, Ltd.The Shizuoka Bank, Ltd.

May 2, 2014 700 700 1.12207% May 2,



(Note 3)


May 2, 2014 300 300 1.52063% May 2,



(Note 3)


May 2, 2014 942 928 1.99816% April 30,



Development Bank of Japan Inc.Sumitomo Mitsui Banking CorporationThe Ashikaga Bank, Ltd.The Shizuoka Bank, Ltd.The Bank of Fukuoka, Ltd.The Yamaguchi Bank, Ltd.The Bank of Kyoto, Ltd.The Hokuriku Bank, Ltd.

November 2, 2015 2,515 2,515 0.36134% April 27,



(Note 3)

The Bank of Tokyo-Mitsubishi UFJ, Ltd.

November 2, 2015 885 885 0.40000% April 27,



(Note 3)Development Bank of Japan Inc.Sumitomo Mitsui Banking CorporationThe Ashikaga Bank, Ltd.The Shizuoka Bank, Ltd.The Bank of Fukuoka, Ltd.The Yamaguchi Bank, Ltd.The Bank of Kyoto, Ltd.The Hokuriku Bank, Ltd.

November 2, 2015 2,550 2,550 0.46134% October 31,



(Note 3)


November 2, 2015 850 850 0.50000% October 31,



(Note 3)The Bank of Tokyo-Mitsubishi UFJ, Ltd.Development Bank of Japan Inc.Sumitomo Mitsui Banking Corporation

November 2, 2015 1,500 1,500 0.82080% April 30,



(Note 3)

20

Category Lender Drawdown date

Balance at beginning of

period (millions of

yen)

Balance at end of period (millions of

yen)

Average interest

rate(Note 1)

Repayment due date

Repayment method Use Remarks

Long-term loans

payable





(Note 3)


November 2, 2015 3,000 3,000 1.22788% April 28,



(Note 3)





Sumitomo Mitsui Banking Corporation

March 31, 2016 2,500 – 0.50063% April 3,



(Note 3)

Sumitomo Mitsui Banking Corporation

March 31, 2016 997 983 1.51809% March 31,



Development Bank of Japan Inc.The Hokuriku Bank, Ltd.The Bank of Fukuoka, Ltd.The Bank of Kyoto, Ltd.

May 2, 2016 – 900 0.50313% April 30,



(Note 3)


May 2, 2016 – 492 1.09313% April 28,



Development Bank of Japan Inc. May 2, 2016 – 492 1.47689% April 30,




May 2, 2016 – 591 1.66686% April 30,



The Bank of Tokyo-Mitsubishi UFJ, Ltd.Sumitomo Mitsui Banking CorporationThe Hokuriku Bank, Ltd.The Bank of Fukuoka, Ltd.

July 19, 2016 – 860 0.49695% April 30,



(Note 3)


July 19, 2016 – 1,000 0.82289% April 28,



(Note 3)Subtotal 27,285 27,160

Total 28,385 27,160

(Note 1) Average interest rates on floating rate borrowings are the weighted average rate during the period.(Note 2) All borrowings were used as the funds for acquiring real estate and paying its related costs.(Note 3) All pledges were released effective at August 31, 2016.(Note 4) Repayment of 25,000 thousand yen was due firstly on October 31, 2013 (total payment on first payment was 14,795 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 payment was/shall be the next business day. If that business day falls into the next calendar month, then payment was/shall be the business day immediately preceding the concerned date.), and repayment of the remaining principal amount of 1,860,205 thousand yen was paid in lump sum on the final repayment due date.

(Note 5) 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.

(Note 6) 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.

(Note 7) 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.

(Note 8) 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.

(Note 9) 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

21

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.




(3) Investment corporation bondsNot applicable.

(4) Short-term investment corporation bondsNot applicable.

(5) Subscription rights to new investment unitsNot applicable.

6. Acquisitions and sales

(1) Status of acquisitions and sales of real estate, asset-backed securities, infrastructure assets and infrastructure-related assets

Name ofproperty

Acquisition Sale

Acquisition dateAcquisition price(millions of yen)

(Note)Sale date Sale price

(millions of yen)Book value

(millions of yen)Gain (loss) on sale(millions of yen)

KAI Kaga May 2, 2016 3,160 – – – –

Total – 3,160 – – – –

(Note) “Acquisition price” represents the property purchase price stated on the sale and purchase agreement (excluding consumption taxes and other acquisition related costs) rounded down to the nearest million yen.

(2) Status of acquisitions and sales of other assetsNot applicable. Main other assets except the abovementioned properties mostly consist of bank deposits.

(3) Appraisal values of specified assets

i) Real estate

Acquisition / Sale

Name ofproperty

Transaction date

Type of assets

Acquisition price / Sale price

(millions of yen)

Appraisal value(millions of yen)

Appraiser(Note 1)

Appraisaldate

Acquisition KAI Kaga May 2, 2016 Real estate, etc. 3,160 3,300 M February 29,

2016

Total 3,160 3,300

(Note 1) “Appraiser” is described as the initials in the table above. The initial used for the appraiser is as follows:M: Morii Appraisal & Investment Consulting Inc.

(Note 2) With regard to transactions that require the appraisal value for real estate related to specified assets as prescribed by Article 201, paragraph 1 of the Investment Trust Act, Morii Appraisal & Investment Consulting Inc. conducts the

22

appraisal pursuant to the “Real Estate Appraisal Standard, Chapter 3, Appraisal on Value of Real Estate Subject to Securitization” and HRR received the report on the appraisal.

(Note 3) Real Estate Appraisal Report presents judgment and opinion of the appraiser at a certain time of period, and does not guarantee the validity and accuracy of the contents or possibility of transactions and such with the appraisal value. In addition, there is no special vested interest between Morii Appraisal & Investment Consulting Inc. and HRR or the Asset Management Company.

(Note 4) Acquisition price and sale price do not include other acquisition and sale related costs such as direct expenses for acquisition and sale, property-related taxes and consumption taxes.

ii) Other

Of the transactions performed by HRR, there are no transactions other than transactions stated in “i) Real estate” above that require a price survey, etc. pursuant to Article 201 of the Investment Trust Act.

(4) Transactions with interested parties

i) Purchase and sale transactions with interested parties

CategoryPurchase or sale price (millions of yen)

Purchase price Sale priceTotal 3,160 –

Breakdown of transactions with interested parties

K.K. Horizon Hotels 3,160 (100.0%) –

Total 3,160 (100.0%) –

(Note) The term “interested parties” refers to interested parties as prescribed under Article 26, Paragraph 1, Item 27 of the Regulations for Asset Investment Reports of Investment Trusts and Investment Corporations issued by the Investment Trusts Association, Japan. The same shall apply hereinafter.

ii) Leasing to interested parties

Name of lessee Name of property Annual fixed rent(millions of yen) (Note)

Hoshino Resorts Inc.HOSHINOYA Karuizawa 600

KAI Kinugawa 204

K.K. Horizon Hotels

RISONARE Yatsugatake 525RISONARE Atami 313ANA Crowne Plaza Hiroshima 606

ANA Crowne Plaza Fukuoka 288ANA Crowne Plaza Kanazawa 546ANA Crowne Plaza Toyama 240

K.K. Arashiyama Onsen RankyokanHOSHINOYA Kyoto 187KAI Kaga 206

Hoshino Resort Management Co., Ltd.

KAI Matsumoto 75

KAI Izumo 75KAI Ito 80KAI Hakone 95KAI Aso 42

KAI Kawaji 99Asahikawa Grand Hotel Co., Ltd. Asahikawa Grand Hotel 364

(Note) In the lease agreement with each lessee above, rent comprises fixed rent and floating rent, but the entry under “Annual fixed rent” is the amount arrived at when the fixed rent (monthly amount) provided in the lease agreement on the building is annualized by multiplying by 12. The floating rent is calculated by multiplying sales or profit of the hotels, ryokans and ancillary facilities by a certain rate that is decided in the lease agreement. However, with the agreement reached for each of RISONARE Atami and KAI Kinugawa to have a premium for a limited period from November 2, 2015 to October 31, 2018, KAI Kaga to have a premium for a limited period from May 2, 2016 to April 30, 2019 and Asahikawa Grand Hotel to have a premium for a limited period from March 31, 2016 to October 31, 2019, the

23

annualized fixed rent is calculated based on the rent with the premium mentioned above, as of October 31, 2016.Accordingly, the calculated amount may not be equivalent to the actual annual fixed rent. Fixed rent after the lapse of the premium period shall be less than the amount stated in the table above. Furthermore, in the event that sales or profit of hotels, ryokans and ancillary facilities is below a certain amount, floating rent shall not apply. In addition, the lease agreement with each lessee above provides that the initial date of reckoning floating rent for RISONARE Atami and KAI Kinugawa is November 1, 2018 (12th fiscal period), KAI Kaga is May 1, 2019 (13th fiscal period) and Asahikawa Grand Hotel is November 1, 2019 (14th fiscal period). Accordingly, floating rent shall not apply to the period before the concerned date, regardless of the amount of sales or profit of hotels, ryokans and ancillary facilities.

iii) Leasing from interested parties

Name of lessor Name of property Monthly rent (yen)

Hoshino Resorts Inc. HOSHINOYA Karuizawa (Note 1) 1,068,171 (Note 2)

(Note 1) HRR borrows the above-mentioned property from the above-mentioned lessor.(Note 2) The monthly rent shown above is applied from the period July 26, 2016 to April 30, 2017. The monthly rent applied

from the period May 1, 2016 to July 25, 2016 was 1,040,582 yen.

iv) Amount of other fees paidNot applicable.

(5) Transactions with Asset Management Company pertaining to its business other than asset managementNot applicable.

7. Financial information

(1) Status of assets, liabilities, principal, and income and lossPlease refer to the “Balance Sheets,” “Statements of Income,” “Statements of Changes in Net Assets,” “Notes to Financial Statements” and “Statements of Cash Distributions” presented later in this report.

(2) Change in the calculation method of depreciationNot applicable.

(3) Change in the valuation method of real estate and infrastructure assets

Not applicable.

8. Beneficiary certificates of investment trusts established by HRRNot applicable.

9. Disclosure regarding investments in real estate holding companies in foreign countriesNot applicable.

10. Disclosure regarding properties held by above mentioned real estate holding companies in foreign countries

Not applicable.

24

11. Other

(1) NoticeNot applicable.

(2) Treatment of fractions in amounts and ratios

Unless otherwise stated, monetary amounts have been rounded down and ratios have been rounded to the nearest specified unit in this report.

25

II. Balance Sheets(Unit: thousands of yen)

6th fiscal period(Reference)

(As of April 30, 2016)

7th fiscal period(As of October 31, 2016)

AssetsCurrent assets

Cash and deposits 8,243,199 9,514,280Operating accounts receivable 40,416 39,832Prepaid expenses 129,450 182,643Consumption taxes receivable 1,205,689 67,952Deferred tax assets 13 14Total current assets 9,618,770 9,804,723

Non-current assetsProperty, plant and equipment

Buildings 51,692,917 55,399,273Accumulated depreciation (1,984,232) (2,729,273)Buildings, net *1 49,708,684 52,670,000

Structures 1,311,237 1,569,735Accumulated depreciation (58,106) (80,642)Structures, net *1 1,253,131 1,489,093

Machinery and equipment 83,801 83,801Accumulated depreciation (20,498) (24,115)Machinery and equipment, net *1 63,303 59,685

Tools, furniture and fixtures 458,598 475,715Accumulated depreciation (50,718) (109,170)Tools, furniture and fixtures, net *1 407,879 366,545

Land *1 39,116,980 39,351,315Construction in progress 70,114 201,094Total property, plant and equipment 90,620,094 94,137,734

Intangible assetsLeasehold right 1,002,287 1,028,324Software 11,786 13,504Total intangible assets 1,014,073 1,041,829

Investments and other assetsLong-term prepaid expenses 375,334 412,650Guarantee deposits 10,000 10,000Other 302,890 302,890Total investments and other assets 688,224 725,540

Total non-current assets 92,322,392 95,905,104Total assets 101,941,162 105,709,827

26

Balance Sheets(Unit: thousands of yen)


(As of April 30, 2016)

7th fiscal period(As of October 31, 2016)

LiabilitiesCurrent liabilities

Operating accounts payable 104,560 94,787Short-term loans payable *1 1,100,000 –Current portion of long-term loans payable *1 4,565,213 950,724Accounts payable - other 563,476 561,547Income taxes payable 789 889Accrued expenses 2,715 –Advances received 658,034 695,672Total current liabilities 6,994,789 2,303,620

Non-current liabilitiesLong-term loans payable *1 22,720,410 26,209,332Tenant leasehold and security deposits 2,718,309 2,789,454Total non-current liabilities 25,438,719 28,998,786

Total liabilities 32,433,509 31,302,406Net assets

Unitholders’ equityUnitholders’ capital 67,906,895 72,591,623Surplus

Unappropriated retained earnings 1,600,757 1,815,796Total surplus 1,600,757 1,815,796

Total unitholders’ equity 69,507,653 74,407,420Total net assets *2 69,507,653 *2 74,407,420

Total liabilities and net assets 101,941,162 105,709,827

27

III. Statements of Income(Unit: thousands of yen)





Operating revenueLease business revenue *1 3,559,947 *1 3,981,640Total operating revenue 3,559,947 3,981,640

Operating expensesExpenses related to rent business *1 1,303,096 *1 1,428,747Asset management fee 249,568 342,999Asset custody fee 2,139 3,786Administrative service fees 10,407 15,741Directors’ compensation 2,640 2,640Audit fee 6,500 6,751Other operating expenses 71,426 83,750Total operating expenses 1,645,777 1,884,418

Operating income 1,914,169 2,097,222Non-operating income

Interest income 702 47Insurance income – 1,559Interest on refund 602 –Miscellaneous income 17 18Total non-operating income 1,322 1,625

Non-operating expensesInterest expenses 144,948 156,288Borrowing related expenses 100,279 90,394Investment unit issuance expenses 68,634 35,506Total non-operating expenses 313,863 282,188

Ordinary income 1,601,628 1,816,659Income before income taxes 1,601,628 1,816,659Income taxes - current 897 896Income taxes - deferred 0 0Total income taxes 897 896Net income 1,600,731 1,815,763Retained earnings brought forward 26 33Unappropriated retained earnings 1,600,757 1,815,796

28

IV. Statements of Changes in Net Assets 6th fiscal period (from November 1, 2015 to April 30, 2016) (Reference)

(Unit: thousands of yen)Unitholders’ equity

Total net assetsUnitholders’

capital

SurplusTotal

unitholders’ equityUnappropriated retained earnings

Total surplus

Balance at beginning of period 36,113,352 908,788 908,788 37,022,141 37,022,141

Changes of items during periodIssuance of new investment units 31,793,543 – – 31,793,543 31,793,543

Dividends of surplus – (908,762) (908,762) (908,762) (908,762)Net income – 1,600,731 1,600,731 1,600,731 1,600,731

Total changes of items during period 31,793,543 691,969 691,969 32,485,512 32,485,512

Balance at end of period *1 67,906,895 1,600,757 1,600,757 69,507,653 69,507,653

7th fiscal period (from May 1, 2016 to October 31, 2016)(Unit: thousands of yen)

Unitholders’ equityTotal

net assetsUnitholders’ capital

Surplus Total unitholders’ equityUnappropriated

retained earningsTotal

surplusBalance at beginning of period 67,906,895 1,600,757 1,600,757 69,507,653 69,507,653

Changes of items during periodIssuance of new investment units 4,684,727 – – 4,684,727 4,684,727

Dividends of surplus – (1,600,724 ) (1,600,724) (1,600,724) (1,600,724)Net income – 1,815,763 1,815,763 1,815,763 1,815,763

Total changes of items during period 4,684,727 215,039 215,039 4,899,766 4,899,766

Balance at end of period *1 72,591,623 1,815,796 1,815,796 74,407,420 74,407,420

29

V. Notes to Financial StatementsSummary of significant accounting policies

Item 6th fiscal period (Reference)(from November 1, 2015 to April 30, 2016)

7th fiscal period (from May 1, 2016 to October 31, 2016)

1. Method of depreciation and amortization of non-current assets

i) Property, plant and equipment

Depreciation is calculated using the straight-line method.

The useful lives of principal property, plant and equipment are as follows:

Buildings 14–57 yearsStructures 4–60 yearsMachinery and equipment 6–15 yearsTools, furniture and fixtures 2–20 years

ii) Intangible assets

Amortization is calculated using the straight-line method.

The useful lives are as follows:

Intangible assets 2–5 years

iii) Long-term prepaid expenses


i) Property, plant and equipment

Depreciation is calculated using the straight-line method.

The useful lives of principal property, plant and equipment are as follows:

Buildings 3–57 yearsStructures 3–60 yearsMachinery and equipment 6–15 yearsTools, furniture and fixtures 2–20 years

ii) Intangible assets


The useful lives are as follows:

Intangible assets 2–5 years

iii) Long-term prepaid expenses


2. Standards for revenue and expense recognition

Accounting for property-related taxes

With respect to property tax, city planning tax, depreciable asset tax, etc. on real estate etc. held, of the tax amount assessed and determined, the amount corresponding to the relevant accounting period isaccounted as expenses related to rent business.

Of the amounts paid for the acquisition of real estate, the amounts equivalent to property-related taxes are capitalized as part of the acquisition cost of the relevant real estate instead of being charged as expenses.

Accounting for property-related taxes

With respect to property tax, city planning tax, depreciable asset tax, etc. on real estate etc. held, of the tax amount assessed and determined, the amount corresponding to the relevant accounting period isaccounted as expenses related to rent business.

Of the amounts paid for the acquisition of real estate, the amounts equivalent to property-related taxes are capitalized as part of the acquisition cost of the relevant real estate instead of being charged as expenses.

3. Other significant matters serving as the basis for preparation of financial statements

Accounting for consumption taxes

Consumption tax and local consumption tax are excluded from the corresponding transaction amounts.

Accounting for consumption taxes

Consumption tax and local consumption tax are excluded from the corresponding transaction amounts.

30

Notes to Balance Sheets6th fiscal period (Reference)

(As of April 30, 2016)7th fiscal period

(As of October 31, 2016)*1. Assets pledged as collateral and liabilities secured by

pledged assets are as follows:– (Note)

(Unit: thousands of yen)Buildings 28,853,728

Structures 635,959Machinery and equipment 63,303Land 28,566,414

Total 58,119,405Liabilities secured by pledged assets are as follows:

Short-term loans payable 1,100,000Current portion of long-term loans payable 4,565,213Long-term loans payable 22,720,410

Total 28,385,623

*2. Minimum net assets as provided in Article 67, Paragraph 4 of the Investment Trust Act

*2. Minimum net assets as provided in Article 67, Paragraph 4 of the Investment Trust Act

¥50,000 thousand ¥50,000 thousand

(Note) All pledges were released effective at August 31, 2016.

Notes to Statements of Income6th fiscal period (Reference)



*1. Components of income (loss) from real estate lease business

*1. Components of income (loss) from real estate lease business

(Unit: thousands of yen) (Unit: thousands of yen)A. Operating revenue from real estate

leasingA. Operating revenue from real estate

leasingLease business revenue Lease business revenue

Rental revenue 3,559,947 Rental revenue 3,981,640Total operating revenue from real estate leasing 3,559,947

Total operating revenue from real estate leasing 3,981,640

B. Operating expenses from real estate leasing

B. Operating expenses from real estate leasing

Expenses related to rent business Expenses related to rent businessInsurance expenses 13,194 Insurance expenses 14,266Repair expenses 96,943 Repair expenses 55,088Land rent 33,824 Land rent 33,994Depreciation 735,681 Depreciation 831,174Taxes and dues 216,260 Taxes and dues 287,204

Other expenses 207,191 Other expenses 207,019Total operating expenses from real estate leasing 1,303,096

Total operating expenses from real estate leasing 1,428,747

C. Operating income from real estate leasing [A－B] 2,256,851

C. Operating income from real estate leasing [A－B] 2,552,892

31

Notes to Statements of Changes in Net Assets6th fiscal period (Reference)



*1. Total number of investment units authorized and total number of investment units issued and outstanding

*1. Total number of investment units authorized and total number of investment units issued and outstanding

Total number of investment units authorized 2,000,000 units Total number of investment

units authorized 2,000,000 units

Total number of investment units issued and outstanding 78,008 units Total number of investment

units issued and outstanding 81,757 units

Income taxes6th fiscal period (Reference)



*1. Breakdown of deferred tax assets and deferred tax liabilities by major causes

*1. Breakdown of deferred tax assets and deferred tax liabilities by major causes

(Unit: thousands of yen) (Unit: thousands of yen)

Deferred tax assets Deferred tax assets

Enterprise tax payable excluded from deductible expenses 13

Enterprise tax payable excluded from deductible expenses 14

Total deferred tax assets 13 Total deferred tax assets 14

Net deferred tax assets 13 Net deferred tax assets 14*2. Breakdown by major items that caused significant differences

between the statutory tax rate and the effective income tax rate after application of tax-effect accounting

*2. Breakdown by major items that caused significant differences between the statutory tax rate and the effective income tax rate after application of tax-effect accounting

(Unit: %) (Unit: %)

Statutory tax rate 32.31 Statutory tax rate 31.74

[Adjustments] [Adjustments]

Distributions deductible for tax purposes (32.29) Distributions deductible for tax purposes (31.72)Other 0.04 Other 0.03

Effective income tax rate after application of tax-effect accounting 0.06 Effective income tax rate

after application of tax-effect accounting 0.05

*3. Change in tax rate for income taxes

The “Act Partially Amending the Income Tax Act, etc.” (Act No. 15 of 2016) and the “Act Partially Amending, etc. the Local Tax Act, etc.” (Act No. 13 of 2016) were enacted in the Diet session on March 29, 2016, changing the income tax rate, etc., starting from calculation periods beginning on or after April 1, 2016. This changed the statutory tax rate used in the calculation of deferred tax assets and deferred tax liabilities to 31.74% for the temporary differences expected to reverse in the fiscal period ended October 2016 (7th fiscal period) or subsequent fiscal periods. The impact of this change was minimal.

-

32

Financial instruments

6th fiscal period (from November 1, 2015 to April 30, 2016) (Reference)

(1) Status of financial instruments

i) Policy for financial instrumentsHRR procures funds mainly through issuance of new investment units, loans from financial institutions, issuance of investment corporation bonds, for acquisition of new assets.

HRR enters into derivative transactions solely for the purpose of hedging the risk of fluctuations in interest rates on loans and other risks.

ii) Description of financial instruments and associated risks, and risk management systemThe funds procured through loans are mainly used for acquisition of assets and repayment of loans. Concerning the liquidity risk and the risk of fluctuations in interest rates associated with such fund procurement, HRR manages and limits the concerned risks by diversifying fund procurement sources, and also by considering and implementing diversified fund procurement, including effective use of surplus funds and procurement of funds from the capital market through issuance of investment units.

In addition, loans with floating interest rates are exposed to the risk of rising interest rates, but HRR mitigates such risk by maintaining the LTV (ratio of interest-bearing liabilities to total assets) at a low level and maintaining the ratio of long-term and fixed-rate loans at a high level. Moreover, derivative transactions (interest rate swap transactions, etc.) are executed as hedging instruments in order to mitigate the risk of rising interest rates and stabilize its financial costs.

Deposits, which are used for investment of HRR’s surplus funds, are exposed to credit risk, such as bankruptcy of the depository financial institution, but HRR exercises prudence by limiting the deposit period to short term, taking into consideration security and liquidity and fully taking into account the market environment and status of cash flows.

iii) Supplementary explanation concerning fair values of financial instrumentsThe fair value of financial instruments is based on the quoted market price, if available. When there is no available quoted market price, the fair value is reasonably estimated. Certain assumptions are used for the estimation of fair value. Accordingly, the result of such estimation may change if different assumptions are adopted.

(2) Fair values of financial instruments

Carrying amounts, fair values and the difference between the values as of April 30, 2016 are as follows:(Unit: thousands of yen)

Carrying amount(Note 1)

Fair value(Note 1) (Note 2) Difference

(1) Cash and deposits 8,243,199 8,243,199 –

(2) Short-term loans payable (1,100,000) (1,100,000) –(3) Current portion of long-term loans payable (4,565,213) (4,567,924) 2,711

(4) Long-term loans payable (22,720,410) (22,973,913) 253,503

(Note 1) Items that are liabilities are shown in parentheses.(Note 2) Method of calculation of the fair value of financial instruments

(1) Cash and deposits; (2) Short-term loans payableBecause these are settled in a short period of time, the fair value is approximately the same as the book value and is thus stated at that book value.

(3) Current portion of long-term loans payable; (4) Long-term loans payableWith respect to long-term loans payable as of April 30, 2016, because those with floating interest rates reflect market interest rates in a short period of time, the fair value is deemed to resemble the book value and is thus stated at that book value. In the case of those with fixed interest rates, the fair value is measured by discounting the total principal and interest amount at the current rates that are reasonably estimated to be applicable if HRR enters into new similar loans.

33

(Note 3) Financial instruments for which the fair value is difficult to estimateTenant leasehold and security deposits are not subject to valuation at fair value, because a reasonable estimation of cash flows is recognized to be extremely difficult due to there being no market price and the difficulty of calculating the actual deposit period from when lessees move in to when they move out.

(Unit: thousands of yen)Carrying amount

Tenant leasehold and security deposits 2,718,309

(Note 4) Redemption schedule for monetary claims after the closing date (April 30, 2016)(Unit: thousands of yen)

Due within one yearCash and deposits 8,243,199

(Note 5) Redemption schedule for loans payable after the closing date (April 30, 2016)(Unit: thousands of yen)

Due within one year

Due after one to two years

Due after two to three years

Due after three to four years

Due after four to five years

Due after five years

Short-term loans payable 1,100,000 – – – – –

Long-term loans payable 4,565,213 4,305,008 2,428,274 5,340,008 2,028,137 8,618,983

7th fiscal period (from May 1, 2016 to October 31, 2016)

(1) Status of financial instruments

i) Policy for financial instrumentsHRR procures funds mainly through issuance of new investment units, loans from financial institutions, issuance of investment corporation bonds, for acquisition of new assets.

HRR enters into derivative transactions solely for the purpose of hedging the risk of fluctuations in interest rates on loans and other risks.

ii) Description of financial instruments and associated risks, and risk management systemThe funds procured through loans are mainly used for acquisition of assets and repayment of loans. Concerning the liquidity risk and the risk of fluctuations in interest rates associated with such fund procurement, HRR manages and limits the concerned risks by diversifying fund procurement sources, and also by considering and implementing diversified fund procurement, including effective use of surplus funds and procurement of funds from the capital market through issuance of investment units.

In addition, loans with floating interest rates are exposed to the risk of rising interest rates, but HRR mitigates such risk by maintaining the LTV (ratio of interest-bearing liabilities to total assets) at a low level and maintaining the ratio of long-term and fixed-rate loans at a high level. Moreover, derivative transactions (interest rate swap transactions, etc.) are executed as hedging instruments in order to mitigate the risk of rising interest rates and stabilize its financial costs.

Deposits, which are used for investment of HRR’s surplus funds, are exposed to credit risk, such as bankruptcy of the depository financial institution, but HRR exercises prudence by limiting the deposit period to short term, taking into consideration security and liquidity and fully taking into account the market environment and status of cash flows.

iii) Supplementary explanation concerning fair values of financial instrumentsThe fair value of financial instruments is based on the quoted market price, if available. When there is no available quoted market price, the fair value is reasonably estimated. Certain assumptions are used for the estimation of fair value. Accordingly, the result of such estimation may change if different assumptions are adopted.

34

(2) Fair values of financial instruments

Carrying amounts, fair values and the difference between the values as of October 31, 2016 are as follows:(Unit: thousands of yen)

Carrying amount(Note 1)

Fair value(Note 1) (Note 2) Difference

(1) Cash and deposits 9,514,280 9,514,280 –

(2) Short-term loans payable – – –(3) Current portion of long-term loans payable (950,724) (952,478) 1,754

(4) Long-term loans payable (26,209,332) (26,544,657) 335,325

(Note 1) Items that are liabilities are shown in parentheses.(Note 2) Method of calculation of the fair value of financial instruments

(1) Cash and deposits; (2) Short-term loans payableBecause these are settled in a short period of time, the fair value is approximately the same as the book value and is thus stated at that book value.(3) Current portion of long-term loans payable; (4) Long-term loans payableWith respect to long-term loans payable as of October 31, 2016, because those with floating interest rates reflect market interest rates in a short period of time, the fair value is deemed to resemble the book value and is thus stated at that book value. In the case of those with fixed interest rates, the fair value is measured by discounting the total principal and interest amount at the current rates that are reasonably estimated to be applicable if HRR enters into new similar loans.

(Note 3) Financial instruments for which the fair value is difficult to estimateTenant leasehold and security deposits are not subject to valuation at fair value, because a reasonable estimation of cash flows is recognized to be extremely difficult due to there being no market price and the difficulty of calculating the actual deposit period from when lessees move in to when they move out.

(Unit: thousands of yen)

Carrying amount

Tenant leasehold and security deposits 2,789,454

(Note 4) Redemption schedule for monetary claims after the closing date (October 31, 2016)(Unit: thousands of yen)

Due within one yearCash and deposits 9,514,280

(Note 5) Redemption schedule for loans after the closing date (October 31, 2016)(Unit: thousands of yen)

Due within one year

Due after one to two years

Due after two to three years

Due after three to four years

Due after four to five years

Due after five years

Short-term loans payable – – – – – –

Long-term loans payable 950,724 5,906,490 3,885,724 3,693,872 5,291,417 7,431,829

35

Investment and rental properties

6th fiscal period (From November 1, 2015 to April 30, 2016) (Reference)

HRR owns rental properties for hotels and ryokans in Nagano Prefecture and other areas. The following table summarized the carrying amount, including the change during the period, and the fair value of these rental properties.


Fair value at end of periodBalance at beginning of period Change during period Balance at end of period

43,274,331 47,940,170 91,214,502 104,483,000

(Note 1) “Carrying amount” is the book value at acquisition cost less accumulated depreciation.(Note 2) The change during the period primarily consisted of the increase due to acquisition of seven properties

(48,210,932 thousand yen) including ANA Crowne Plaza Hiroshima and the decrease due to depreciation (684,396 thousand yen).

(Note 3) “Fair value at end of period” is the appraisal or survey values provided by an independent real estate appraiser.

The operating income and expenses from investment and rental properties for the fiscal period ended April 30, 2016 are presented in “Notes to Statements of Income.”

7th fiscal period (From May 1, 2016 to October 31, 2016)

HRR owns rental properties for hotels and ryokans in Nagano Prefecture and other areas. The following table summarized the carrying amount, including the change during the period, and the fair value of these rental properties.


Fair value at end of periodBalance at beginning of period Change during period Balance at end of period

91,214,502 3,585,011 94,799,513 109,299,000

(Note 1) “Carrying amount” is the book value at acquisition cost less accumulated depreciation.(Note 2) The change during the period primarily consisted of the increase due to acquisition of KAI Kaga (3,209,143

thousand yen) and the decrease due to depreciation (771,194 thousand yen).(Note 3) “Fair value at end of period” is the appraisal or survey values provided by an independent real estate appraiser.

The operating income and expenses from investment and rental properties for the fiscal period ended October 31, 2016 are presented in “Notes to Statements of Income.”

36

Transactions with related parties


Type Name

Description of business

or occupation

Voting rights

holding ratio (%)

Relationship

Description of transaction

Amount of transaction (Thousands

of yen)(Note 2)

Account item

Balance at end of period

(Thousands of yen)

(Note 2)

Inter-locking officers

etc.

Business relation-

ship

Parentetc. of Asset Manage-ment Company

Hoshino Resorts Inc.

Hotels and ryokans business

3.9 –Real estate leasing

Purchase of real estate 3,080,000 – –

Real estate leasing 484,562

Operating accounts receivable

14,963

Advances received 72,360

Tenant leasehold and security deposits

364,800

Parentetc. of Asset Manage-ment Company

K.K. Horizon Hotels


– –Real estate leasing


Real estate leasing 1,680,396


10,467



1,074,100

(Note 1) The terms and conditions of these transactions are determined based on the same terms and conditions as those applied to general business transactions in view of the prevailing market price.

(Note 2) Consumption taxes are not included in the transaction amounts but included in the related balances at the end of the period.

37


Type Name

Description of business

or occupation

Voting rights

holding ratio (%)

Relationship

Description of transaction

Amount of transaction (Thousands

of yen)(Note 2)

Account item

Balance at end of period

(Thousands of yen)

(Note 2)

Inter-locking officers

etc.

Business relation-

ship

Parent etc. of Asset Manage-ment Company

Hoshino Resorts Inc.


3.8 –Real estate leasing

Real estate leasing 498,509


17,371



379,800

Parent etc. of Asset Manage-ment Company

K.K. Horizon Hotels


– –Real estate leasing


Real estate leasing 1,838,547


10,662



1,074,100

(Note 1) The terms and conditions of these transactions are determined based on the same terms and conditions as those applied to general business transactions in view of the prevailing market price.

(Note 2) Consumption taxes are not included in the transaction amounts but included in the related balances at the end of the period.

Per unit information

(Unit: yen)6th fiscal period (Reference)

(From November 1, 2015 to April 30, 2016)7th fiscal period

(From May 1, 2016 to October 31, 2016)

Net assets per unit 891,032 Net assets per unit 455,052

Net income per unit 20,606 Net income per unit 11,110

(Note 1) Net income per unit is calculated by dividing net income by the daily weighted average number of investment units. In addition, diluted net income per unit is not stated because there are no dilutive investment units.

(Note 2) 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, 2016. Net assets per unit and net income per unit for the 7th fiscal period in the above table are calculated under the assumption that the split was conducted at the beginning of the 7th fiscal period. Calculated under the assumption that the split had been conducted at the beginning of the 6th fiscal period, net assets per unit and net income per unit for the 6th fiscal period would be 445,516 yen and 10,303 yen, respectively.

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(Note 3) The following is the basis for calculation of net income per unit.(Unit: thousands of yen)

6th fiscal period (Reference)(From November 1, 2015 to April 30, 2016)

7th fiscal period(From May 1, 2016 to October 31, 2016)

Net income 1,600,731 Net income 1,815,763Amount not attributable to common unitholders – Amount not attributable to common

unitholders –

Net income attributable to common investment units 1,600,731 Net income attributable to common

investment units 1,815,763

Average number of investment units during period (units) 77,681 Average number of investment units

during period (units) 163,430

Significant subsequent events


(1) Issuance of New Investment Units

HRR resolved at meetings of the Board of Directors held on April 8, 2016 and April 19, 2016 on the following issuance of new investment units, and payment was completed on May 2, 2016 for the new investment units through primary offering, and on May 24, 2016 for the new investment units through third-party allotment.

Issuance of new investment units through primary offering

Number of investment units issued: 3,570 unitsIssue price: 1,294,745 yen per unitTotal issue price: 4,622,239,650 yenPaid-in amount: 1,249,594 yen per unitTotal paid-in amount: 4,461,050,580 yenPayment due date: May 2, 2016

Issuance of new investment units through third-party allotment

Number of investment units issued: 179 unitsPaid-in amount: 1,249,594 yen per unitTotal paid-in amount: 223,677,326 yenPayment due date: May 24, 2016Allottee: Nomura Securities Co., Ltd.

Use of funds

The funds procured from the primary offering were allocated to part of the funds for acquisition of the real estate stated in (2) below and part of the funds for repayment of the loan stated in (4) below. Furthermore, the funds procured from the third-party allotment, which were set aside as funds on hand, are scheduled to be allocated to part of the funds for acquisition of specified assets or part of the funds for repayment of loans in the future.

(2) Acquisition of assetsHRR acquired the real estate described below on May 2, 2016 (the acquisition price: 3,160 million yen). The acquisition price is the price stated in the sales and purchase agreement of the real estate which does not include acquisition expenses, property-related taxes and consumption taxes.

Name of property Location SellerAcquisition price(millions of yen)

Acquisition date

KAI Kaga Kaga-shi, Ishikawa K.K. Horizon Hotels 3,160 May 2, 2016

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(3) Additional borrowingsHRR obtained bank loans on May 2, 2016 for acquisition of specified assets and related costs as stated in “(2) Acquisition of assets” above and for repayment of loans before maturity.

(Note 1) Amounts are rounded down to the nearest specified unit.(Note 2) 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.

(4) Repayment of Loan

HRR implemented early repayment of the following loan on May 2, 2016.

Floating/Fixed Lender Loan

amount Interest rate Drawdown date

Final repayment due date(Note 2)

Repayment method

Floating Sumitomo Mitsui Banking Corporation

2.5billion yen

Base rate(JBA

1-month Japanese

Yen TIBOR)

(Note 1) + 0.425%

March 31, 2016

April 3, 2017


(Note 1) 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 as of two business days prior to the interest payment due date immediately preceding that interest payment due date (the drawdown date in the case of the first interest calculation period), the interest rate for the number of months corresponding to the interest calculation period. However, if there is no rate corresponding to the

Floating/Fixed Lender Loan

amount Interest rate Drawdowndate

Repayment due date(Note 2)

Repayment method

Fixed

Development Bank of Japan Inc.The Hokuriku Bank, Ltd.The Bank of Fukuoka, Ltd.The Bank of Kyoto, Ltd.

0.9billion yen 0.50313% May 2,

2016April 30,

2020 Lump-sum payment at maturity



2016April 28,

2023

Repayment of 7,143,000 yen shall be due firstly on October 31, 2016 and subsequently on the last day of April and October of every year thereafter (Note 2), and repayment of the remaining amount of 407,141,000 yen shall be due in lump sum on the final repayment due date

Development Bank of Japan Inc.


2016April 30,

2025




2016April 30,

2026


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concerned period, then it shall be the base rate calculated based on the method provided in the contract. For the JBA Japanese Yen TIBOR, please check the website of JBA TIBOR Administration (http://www.jbatibor.or.jp/).



(1) Acquisition of assets

HRR acquired the real estate described below on November 1, 2016 (the acquisition price: 16,000 million yen).The acquisition price is the price stated in the sales and purchase agreement of the real estate which does not include acquisition expenses, property-related taxes and consumption taxes.

Name of property Location SellerAcquisition price(millions of yen)

Acquisition date

Hyatt Regency Osaka Osaka-shi, Osaka GCREF Japan I TMK 16,000 November 1, 2016

(Note) The acquisition price includes the trading value (79 million yen) of equipment, etc. acquired from GCP Hospitality Japan K.K., which was a lessee of the property. Note that GCP Hospitality Japan K.K. changed its trade name to HRO Inc. on November 1, 2016.

(2) Additional borrowings

HRR obtained bank loans on November 1, 2016 for acquisition of specified assets and related costs as stated in “(1) Acquisition of assets” above and for repayment of loans before maturity.


date

Repayment due date

(Note 4)

Repayment method

Floating


1.5billion yen

Base rate 1-month Japanese

Yen TIBOR (Note 1)

+ 0.400%

November 1, 2016 October 31, 2017



2.5billion yen


Yen TIBOR + 0.2375%

(Note 2)

November 1, 2016 April 30, 2019



2.5billion yen


Yen TIBOR + 0.300%

(Note 3)

November 1, 2016 October 30, 2020


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date

Repayment due date

(Note 4)

Repayment method

Fixed

Resona Bank, LimitedThe Bank of Tokyo-Mitsubishi UFJ, Ltd.The Bank of Fukuoka, Ltd.Development Bank of Japan Inc.Sumitomo Mitsui Banking CorporationThe Ashikaga Bank, Ltd.The Hokuriku Bank, Ltd.The Yamaguchi Bank, Ltd.





2016 October 31, 2022Lump-sum payment at maturity






2016 October 31, 2023Lump-sum payment at maturity

(Note 1) 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 as of two business days prior to the interest payment due date immediately preceding that interest payment due date (the drawdown date in the case of the first interest calculation period), 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. For the JBA Japanese Yen TIBOR, please check the website of JBA TIBOR Administration (http://www.jbatibor.or.jp/).




(3) Split of investment units

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, 2016.

i) Purpose of the splitThe purpose is to expand the investor base and enhance the liquidity of its investment units by reducing the per unit price with the aim of providing a more investor-friendly environment after the launch of Nippon Individual Savings Accounts (NISA).

ii) Method of the split

A 2-for-1 split of investment units was implemented with the record date of October 31, 2016.

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iii) Increase in investment units resulting from the split, etc.Total number of investment units issued and outstanding of HRR before the split: 81,757 units

Increase in number of investment units by the split: 81,757 units

Total number of investment units issued and outstanding of HRR after the split: 163,514 units

See “Per unit information” for the per unit information assuming that the split of investment units had been made at the beginning of the 6th fiscal period.

Other note

Since the 7th fiscal period, the “Implementation Guidance on Recoverability of Deferred Tax Assets” (Accounting Standards Board of Japan (ASBJ) Guidance No. 26, March 28, 2016) has been adopted.

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VI. Statements of Cash Distributions

(Unit: yen)6th fiscal period

(Reference)(From November 1, 2015

to April 30, 2016)



I. Unappropriated retained earnings 1,600,757,757 1,815,796,809II. Amount of distributions 1,600,724,160 1,815,741,213

[Amount of distribution per investment unit] [20,520] [22,209]III. Retained earnings brought forward 33,597 55,596

Method of calculating distribution amount

In accordance with the policy described in Article 37, Paragraph 1 of the Articles of Incorporation of Hoshino Resorts REIT, Inc. (HRR) that “distributions shall be in excess of the amount equivalent to 90% of the amount of earnings available for distribution of HRR provided in Article 67-15 of the Act on Special Measures Concerning Taxation,” the decision was made to distribute 1,600,724,160 yen, which is almost the entire amount of unappropriated retained earnings, as distributions of earnings. Furthermore, the distribution of cash in excess of earnings provided in Article 37, Paragraph 2 of the Articles of Incorporation will not be conducted.

In accordance with the policy described in Article 37, Paragraph 1 of the Articles of Incorporation of Hoshino Resorts REIT, Inc. (HRR) that “distributions shall be in excess of the amount equivalent to 90% of the amount of earnings available for distribution of HRR provided in Article 67-15 of the Act on Special Measures Concerning Taxation,” the decision was made to distribute 1,815,741,213 yen, which is almost the entire amount of unappropriated retained earnings, as distributions of earnings. Furthermore, the distribution of cash in excess of earnings provided in Article 37, Paragraph 2 of the Articles of Incorporation will not be conducted.

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VIII. Statements of Cash Flows（Reference Information）(Unit: thousands of yen)

6th fiscal period (Reference)(From November 1, 2015

to April 30, 2016)


to October 31, 2016)Cash flows from operating activities

Income before income taxes 1,601,628 1,816,659Depreciation and amortization 736,281 831,907Interest income (702) (47)Interest expense 144,948 156,288Borrowing related expenses 100,279 90,394Investment unit issuance expenses 68,634 35,506(Increase) decrease in operating accounts receivable (9,069) 584Increase in prepaid expenses (59,837) (53,192)(Increase) decrease in consumption taxes refund receivable (641,941) 1,137,736Increase (decrease) in operating accounts payable 17,040 (8,801)Increase in accounts payable - other 56,992 154,070Increase in advances received 326,698 37,638Increase in long-term prepaid expenses (239,206) (37,316)Other, net (100,104) (90,394)Subtotal 2,001,643 4,071,032Interest income received 702 47Interest expenses paid (142,646) (159,003)Income taxes paid (894) (797)Net cash provided by operating activities 1,858,804 3,911,278

Cash flows from investing activitiesPurchase of property, plant and equipment (48,054,566) (4,508,815)Purchase of intangible assets (798,587) (29,509)Proceeds from tenant leasehold and security deposits 1,013,808 71,145Payments for lease and guarantee deposits (300,000) -Net cash used in investing activities (48,139,346) (4,467,179)

Cash flows from financing activitiesProceeds from short-term loans payable 1,100,000 -Repayments of short-term loans payable (1,400,000) (1,100,000)Proceeds from long-term loans payable 19,800,000 4,360,000Repayments of long-term loans payable (115,645) (4,485,567)Proceeds from issuance of investment units 31,793,543 4,684,727Payments for investment unit issuance expenses (68,634) (35,506)Dividends paid (906,265) (1,596,672)Net cash provided by financing activities 50,202,997 1,826,982

Net increase in cash and cash equivalents 3,922,455 1,271,080Cash and cash equivalents at beginning of period 4,320,744 8,243,199Cash and cash equivalents at end of period *1 8,243,199 *1 9,514,280

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Summary of significant accounting policies (Reference information)

Item6th fiscal period (Reference)




Scope of funds in the statements of cash flows

The funds (cash and cash equivalents) in the statements of cash flows comprise cash on hand, demand deposits, and short-term investments with a maturity of three months or less from the date of acquisition that are readily convertible to cash and are subject to an insignificant risk of changes in value.

The funds (cash and cash equivalents) in the statements of cash flows comprise cash on hand, demand deposits, and short-term investments with a maturity of three months or less from the date of acquisition that are readily convertible to cash and are subject to an insignificant risk of changes in value.

Notes to Statements of Cash Flows（Reference Information）

6th fiscal period (Reference)(From November 1, 2015 to April 30, 2016)

7th fiscal period(From May 1, 2016 to October 31, 2016)

*1. Reconciliation of cash and cash equivalents at end of the period to the corresponding Balance sheet item

(As of April 30, 2016)(Unit: thousands of yen)

*1. Reconciliation of cash and cash equivalents at end of the period to the corresponding Balance sheet item

(As of October 31, 2016)(Unit: thousands of yen)

Cash and deposits 8,243,199 Cash and deposits 9,514,280Cash and cash equivalents 8,243,199 Cash and cash equivalents 9,514,280

semi-annualreport 7th fiscal period hoshino resorts...

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