Investment
Invincible Corporation

Financial Summary
for the June 2016 Fiscal Period(from January 1, 2016 to June 30, 2016)

Name
Representative
Stock Listing
Securities CodeURL
Contact

:
:
:
:
:
:

Invincible Investment Corporation
Naoki Fukuda, Executive Director
Tokyo Stock Exchange8963
http://www.invincible‐inv.co.jp/eng/
Consonant Investment Management Co., Ltd.
(Asset Manager of Invincible Investment Corporation)
Jun Komo, General Manager of Planning Department
Tel. +81‐3‐5411‐2731

Start date fordividend distribution: September 27, 2016

This English language notice is a translation of the Japanese‐language notice released on August 23, 2016 and was prepared solely for theconvenience of, and reference by, non‐Japanese investors. It is not intended as an inducement or solicitation for investment. We caution
readers to undertake investment decisions based on their own investigation and responsibility. This translation of the original
Japanese‐language notice is provided for informational purposes only, and no warranties or assurances are given regarding the accuracy orcompleteness of this English translation. Readers are advised to read the original Japanese‐language notice. In the event of any discrepancy
between this translation and the Japanese original, the latter shall prevail in all respects.

1.

(values are rounded down to the nearest JPY million)
Financial Results for the Fiscal Period ended June 30, 2016 (from January 1, 2016 to June 30, 2016)(1)

Operating Results(Percentages indicate percentage change from the preceding period)
Operating Revenues

Operating Income

Ordinary Income

JPY million%

JPY million

Fiscal period ended
June 30, 2016

8,158

18.9

5,073

16.1

4,364

Fiscal period ended
December 31, 2015

6,863

38.0

4,369

55.4

2,953

Net Income per Unit%

Net Income/Unitholders’ Equity

JPY million

Net Income%

JPY million

%

47.8

4,363

47.8

28.6

2,952

28.6

Ordinary Income/
Total Assets

Ordinary Income/Operating Revenues

JPY

%

%

%

Fiscal period ended
June 30, 2016

1,270

3.9

1.9

53.5

Fiscal period ended
December 31, 2015

937

3.8

1.8

43.0

(Note)(2)“Net Income per Unit” is calculated based on the average number of investment units during the period and is rounded to thenearest yen. Net income per unit calculated based on the number of investment units issued and outstanding at the end of the
fiscal period ended June 30, 2016 (3,675,824units) and rounded down to yen is JPY 1,187.

Distributions
Distribution(Excluding excess profit )Per Unit

Total

Excess Profit
Per Unit

Distribution

Total

Per Unit

Dividend
Payout
Ratio

Total

Distribution/ Net
AssetsJPY

JPY million

JPY

JPY million

JPY

JPY million%%

Fiscal period ended
June 30, 2016

1,125

4,135

61

224

1,186

4,359

94.8

3.5

Fiscal period ended
December 31, 2015

948

3,027

239

763

1,187

3,790

102.5

3.7

(Note 1) The amount of “Distribution per Unit (Excluding excess profit distribution per unit)” for the fiscal period ended December 31,
2015, i.e., JPY 948, is the amount calculated by adding the amount of reversal of surplus per unit, i.e., JPY 23.6, to the amount of
Net Income Per Unit, i.e., JPY924.4 (the amount calculated based on the number of investment units issued and outstanding at theend of the fiscal period ended December 31, 2015).
(Note 2) The distribution per unit in excess of profit is JPY 61, of which JPY 61 is the allowance for temporary difference adjustments.
(Note 3) The “Dividend Payout Ratio” is calculated in accordance with the following formula:
Dividend Payout Ratio=Distribution Amount (Excluding excess profit distribution) ÷ Net Income × 100“Dividend Payout Ratio” is rounded to the nearest one decimal place.
In addition, the Dividend Payout Ratio calculated with the following formula for the period ended June 30, 2016 is 99.9%:
Dividend Payout Ratio=Distribution Amount (Including excess profit distribution) ÷ Net Income × 100(Note 4) “Distribution/ Net Assets” are calculated based on the figures excluding excess profit distribution.

(3)

Financial Position
Total Assets

Net Assets

JPY million

JPY million

Fiscal period ended
June 30, 2016

284,106

Fiscal period ended
December 31, 2015

185,918(Note)Net Assets/Total

Net Assets per Unit%

JPY

130,00545.8

35,36891,75849.4

28,731“Net Assets per Unit” is calculated based on the number of investment units issued and outstanding at the end of each period, andis rounded to the nearest yen.

2

(4)

Cash Flows
Cash Flowsfrom
Operating
Activities

Cash Flowsfrom
Investment
Activities

Cash Flows
from
Financing
Activities

Closing Balance of Cashand Cash Equivalents

JPY million

JPY million

JPY million

JPY million

Fiscal period ended
June 30, 2016

5,319

(86,000)

83,626

16,764

Fiscal period ended
December 31, 2015

4,312

(43,092)

45,084

13,8182.

Forecast for the Fiscal Period ending December 31, 2016 (from July 1, 2016 to December 31, 2016)(Percentages indicate percentage change from the preceding period)

Operating
IncomeOperating
Revenues

FiscalPeriodendingDecember31, 2016

Ordinary
IncomeNet Income

JPY
million%JPY
million%JPY
million%JPY
million%10,015

22.8

6,417

26.5

5,872

34.6

5,872

34.6

Distribution
Distributionper
per
Excess Profit
Unit
Unit
Distribution (including(excludingexcess profit
per Unit
excess profit
distribution)
distribution)
JPY

JPY

JPY

1,597

0

1,597

(Reference) Estimated net income per unit for the fiscal period ending December 31, 2016 is JPY 1,597.

※

Others(1) Changes in Accounting Policies, Accounting Estimates or Restatements(a) Changes in Accounting Policies due to Revisions to
Accounting Standards and Other Regulations

None(b) Changes in Accounting Policies due to Other Reasons

None(c) Changes in Accounting Estimates

None(d) Restatements

None(2) Number of Investment Units Issued and Outstanding(a) Number of Units Issued and Outstanding as of the
End of the Fiscal Period (Including Treasury Units)

June 30, 2016

3,675,824(b) Number of Treasury Units as of the End of the Fiscal Period

June 30, 2016

0

December 31, 2015 3,193,686
December 31, 2015

(Note) Please refer to “Note concerning Information per Unit” regarding the number of investment units which is the basis for the
calculation of net income per unit.

30ͤThe Implementation Status of Statutory Audit
At the time of this financial report, the audit procedures for the financial statements pursuant to the Financial
Instruments and Exchange Act are yet to be completed.
ͤExplanation on the Appropriate Use of the Forecast of Results and Other Matters of Special Consideration(Explanation on the Appropriate Use of the Forecast of Results)
The forward‐looking statements in this financial report are based on the information currently available to us andcertain assumptions which we believe are reasonable. Actual operating performance may differ significantly due
to factors we cannot predict as of this date, including gains or losses from the disposition of properties, repaymentof borrowings, decreases in rents and changes in operating conditions.

Further, there is no guarantee of thepayment of the forecast distribution amount.
Please refer to “Assumptions Underlying the Forecast of Financial Results and Distribution for the Fiscal Period
ending December 31, 2016 (from July 1, 2016 to December 31, 2016)”, on page 21 for assumptions used in the forecasts
and precautions regarding the use of such forecasts.
Unless otherwise specified herein, amounts less than JPY 1 are rounded down, and ratios are rounded to the nearest
one decimal place.

41. Related Companies of the Investment Corporation
Disclosure is omitted because there have been no material changes in the “Structure of the Investment
Corporation” section of the latest securities report (filed on March 31, 2016).

2. Management Policy and Operating Conditions(1)

Management Policy

Disclosure o f “Investment Policies,” “Investment Targets,” “Distribution Policies” and the “Investment
Restriction” is omitted because there have been no material changes from the relevant sections of the latest
securities report (filed on March 31, 2016)(2)

Operating Conditionsa

Overview of the Fiscal Period Ended June 2016 (“Reporting Period”)(a)Main Trends in the Investment Corporation

INV was established in January 2002 in accordance with the Investment Trust and Investment Corporation Act(Act No. 198 of 1951, as amended; the “Investment Trust Act”). In May 2004, INV was listed on the Osaka
Securities Exchange (application for delisting was made in August 2007), and in August 2006 was listed on theReal Estate Investment and Trust Securities Section of the Tokyo Stock Exchange (Ticker Code: 8963).
After the merger with LCP Investment Corporation (“LCP”) was implemented on February 1, 2010, INV issued
new investment units through a third‐party allotment on July 29, 2011 and refinanced its debt. Calliope Godo
Kaisha (“Calliope”), an affiliate of the Fortress Investment Group LLC (“FIG” and together with Calliope andother affiliates of FIG, collectively the “Fortress Group”) was the main allottee, and the sponsor changed to theFortress Group.
Ever since the commencement of sponsorship from the Fortress Group, INV has been focusing its efforts on
improving the earning power of its portfolio and establishing a revenue base in order to implement stable
distributions, and has strengthened the lender formation through new borrowings and the refinancing ofexisting bank borrowings, thereby creating a financial base for future growth. With this platform as a base, inJune 2014, Consonant Investment Management Co., Ltd., the asset manager to which INV entrusts the
management of its assets (the “Asset Manager”) revised the Investment Guidelines for INV, and positioned
hotels as a core asset class alongside residential properties with a view towards expanding investments in the
hotel sector in which demand is forecasted to rise going forward. As a result of the external growth efforts,
INVʹs portfolio at the end of the previous period ended December 2015 composed of 111 properties (37 hotels,
66 residential properties and eight others) with a total acquisition value of JPY 173,815 million, and market
capitalization at such date of JPY 224,835 million. When compared to the period as of May 22, 2014, which is thetime immediately prior to INV’s initial investment in hotels, the total acquisition value and market
capitalization increased significantly by 2.4x and 7.6x, respectively.
In the Reporting Period, INV continued its external growth efforts by completing three separate transactions to5

further increase the size of the portfolio and increase earnings. On January 22, 2016, INV acquired five hotels
and one residential property with funds raised through new loans along with a portion of the cash‐on‐handfrom the July 2015 public offering. On March 10, 2016, INV conducted a global public offering for the third
consecutive year (the ʺCapital Increaseʺ), in which it acquired four hotels and one residential property on March
31, 2016. The transaction was funded with funds raised through the Capital Increase and new loans. In addition,
INV acquired two hotels on June 15, 2016 with the cash‐on‐hand raised through the Capital Increase andthird‐party allotment conducted in relation to the Capital Increase and new loans. As a result, INVʹs portfolio
composed of 124 properties (48 hotels, 68 residential properties and eight others) with a total acquisition valueof JPY 266,619 million and market capitalization of JPY 238,193 million at the end of the Reporting Period.
With respect to financial management, INV took advantage of the negative interest rate policy adopted by the
Bank of Japan and executed interest rate swap agreements to fix the interest rate on a portion of its existing
borrowings (the total notional principal of which is JPY 99,119 million) on March 4, 2016. As a result, INV wasable to improve its financial stability by fixing the interest rate on 69.8% of outstanding debt from 0% at the endof the previous period.
In conjunction with the acquisition of properties on January 20, 2016 and March 10, 2016, INV expanded thepipeline for future growth by adding new properties to the properties subject to a Memorandum ofUnderstanding (the ʺ MOUʺ) with affiliates of Fortress Group with respect to preferential negotiating rights
regarding the acquisition of hotels and residential properties. As of the end of the Reporting Period, there are 22
hotels (6,116 rooms) and nine residential properties (743 units) in the MOU, which will continue to provide INV
with considerable opportunity for external growth.

(b)Operational Environment and Performance

In the hotel segment, the Japanese government’s promotion of tourism initiatives such as airport capacity
expansion, the entry of LCC’s into the Japanese market, and the relaxation of visa requirements for some
Asian countries, coupled with macro structural changes such as a sharp increase in the number ofcross‐border travelers due to the global rise of the middle‐income bracket, has led to a continued increase in
the number of international visitors to Japan from China and Southeast Asian countries such as Thailand,
Malaysia, the Philippines, Indonesia and Vietnam. This robust combination helped Japan log a record high of
19.737 million visitors in 2015 (47.1% increase from the 13.413 million visitors of the previous year), and thenumber of foreigners entering Japan exceeded the number of Japanese departing for the first time in 45 years.
In the Reporting Period, regardless of the effect of the Kumamoto Earthquake and the development of yen
appreciation, the number of foreigners entering Japan during the period from January to July of 2016 loggeda record high of 14.010 million (+26.7% compared to the same period for the previous year), and demand inforeigners for accommodations continued to increase.
Regarding INV’s hotels, in addition to the abovementioned external factors, the hotel operators adeptly
captured inbound demand through strong revenue management techniques. 39 of the hotels owned by INV(Note 1) recorded ADR (Note 2) of JPY 9,148, RevPAR (Note 3) of JPY 8,213, and an occupancy rate (Note 4)of 89.8%. Among the 35 hotels (Note 5) in which a comparison can be made to the same period in theprevious year, ADR was JPY 8,874 (+8.5%), RevPAR was JPY 7,896 (+6.9%) (Note 6), with an occupancy rate6

of 89.0% (‐1.3 points). The ratio of overseas sales (Note7) at the 35 hotels (Note 8) increased to 34.2% (+ 5.2
points compared to the same period for the previous year).
With respect to the residential portfolio, market rent trends for small‐type city‐center properties continue toimprove. Under the positive circumstances in the macro environment, INV implemented a rent increaseprogram for new leases and renewals as well as an initiative to reduce residential leasing costs based on amarket analysis of each unit and property in 2014. As a result, in the Reporting Period, INV realized a rent
increase for 49.0% of the new residential lease contracts or an average rent increase of 1.1% compared to theprevious rent, and a rent increase for 42.4% of contract renewals or an average rent increase of 1.4%
compared to the previous rent, while maintaining a high contract renewal rate of 83.6%. The averageoccupancy rate for the Reporting Period achieved a stable 95.7% (the average of 66 properties, excluding two
properties acquired during the Reporting Period; the average occupancy rate including such two properties
was 96.3%), and the average occupancy rate of 63 properties that can be compared to the same period for theprevious year (Note 9) increased 1.8%. The NOI (Note 10) for the 63 properties (Note 9) in which previous
year comparisons can be made increased 5.1% compared to the same period for the previous year.
As a result, INV maintained a high average occupancy rate of 98.3% across the entire portfolio, and the NOI
increased by 19.7% from the previous period to JPY 7,136 million.
As a result of the internal growth and the external growth through the acquisition of properties for theReporting Period, the trends in the real estate investment and rental market, as well as the strong
performance of the hotels, the total appraisal value at the end of the Reporting Period was JPY 323,291
million, an increase of JPY 108,339 million (+50.4%) over the previous period. The appraisal value of 111
properties held at the end of the previous period increased from JPY 214,952 million to 229,296 million(+6.7%), and in particular, the appraisal value of the 37 hotels increased by JPY 13,718 million (+10.3%)
year‐on‐year, significantly enhancing the overall portfolio asset value. The portfolio has an unrealized gain of
JPY 61,819 million (Note 11) and an unrealized gain ratio of 23.6% (Note 11) were achieved.

(Note 1) Of the 48 acquired hotels, the following hotels on fixed rents are excluded: Super Hotel
Shinbashi‐Karasumoriguchi, Comfort Hotel Toyama, Super Hotel Tokyo JR Tachikawa Kitaguchi,
Super Hotel JR Ueno‐Iriyaguchi, Comfort Hotel Kurosaki, Comfort Hotel Maebashi, Comfort Hotel
Tsubame‐Sanjo, Comfort Hotel Kitami and Takamatsu Tokyu REI Hotel.
(Note 2) “ADR” means average daily rate, and is calculated by dividing total room sales (excluding service fees)
for a certain period by the total number of days per room for which each room was occupied during
the same period.
(Note 3) “RevPar” means revenue per available room per day, and is calculated by dividing total room sales fora certain period by total number of rooms available (number of rooms x number of days) during thesame period, and is the same as the figure obtained by multiplying ADR by occupancy rates.
(Note 4) “Occupancy rates” are calculated in accordance with the following formula:
Occupancy rates = total number of occupied rooms during a certain period ÷total number of rooms
available during the same period (number of rooms x number of days)(Note 5) Hotel Mystays Haneda and Hotel Mystays Kanazawa, for which there are no performance figures inand prior to 2014, Hotel Mystays Shinsaibashi, which was not operated for a certain period due to7

renovation in 2015 (renovation period: from January 25 2015 through March 31, 2015), and Hotel
Mystays Gotanda Station, which was not operated for a certain period due to renovation in 2015
(renovation period: from March 1, 2015 through November 24, 2015) are excluded, in addition to theproperties excluded per Note 1.
(Note 6) The 34 properties excluded per Note 5 and Hotel Mystays Kanda, which underwent renovation for theperiod from May 20, 2016 through August 22, 2016, recorded an occupancy rate of 89.1% (‐1.1 points
compared to the same period for the previous year), ADR of JPY 8,876 (+8.7% compared to the same
period for the previous year), and RevPAR of JPY 7,911 (+7.5% compared to the same period for theprevious year).
(Note 7) Of the 48 acquired hotels, APA Hotel Yokohama‐Kannai, Hotel Nets Hakodate, Super Hotel
Shinbashi‐Karasumoriguchi, Comfort Hotel Toyama, Super Hotel Tokyo JR Tachikawa Kitaguchi,
Super Hotel JR Ueno‐Iriyaguchi, Comfort Hotel Kurosaki, Comfort Hotel Maebashi, Comfort Hotel
Tsubame‐Sanjo, Comfort Hotel Kitami and Takamatsu Tokyu REI Hotel, the tenants of which do notdisclose the ratio of overseas sales; Hotel Mystays Gotanda Station, the prior operator of which did not
calculate the ratio of overseas sales; and Hotel Epinard Nasu, the ratio of overseas sales of which has
not been calculated for the period in and prior to May 2015, are excluded.
(Note 8) “Overseas sales ratio” is the ratio of sales amount through overseas web agents to revenues.
(Note 9) Of the 68 acquired residential properties, City Court Kitaichijo, Lieto Court Mukojima, Lieto Court
Nishi‐Ojima, Royal Parks Momozaka and Royal Parks Shinden, which were not held by INV in thesame period in the previous year, are excluded.
(Note 10) For the comparison of NOI of the 63 properties, insurance payment as the temporary revenue andrepair expenses and other expenses that correspond to the insurance payment are excluded.
(Note 11) The unrealized gain is calculated using the following formula: the appraisal value as of the end of theReporting Period ‐ book value as of the end of the Reporting Period
The unrealized gain ratio is calculated using the following formula: the unrealized gain ÷ book value asof the end of the Reporting Period(c)Overview of Fund Raising(i) Equity Finance
INV executed (i) a global public offering of investment units that closed on March 30, 2016 (number of
new investment units issued: 459,512; total issue value: JPY 36,123 million) and (ii) a third‐party
allotment in conjunction with the global offering that closed on April 27, 2016, (number of new
investment units issued: 22,626; total issue value: JPY 1,778 million), in order to procure part of thefunds for the acquisition of four hotels and one residential property.

8

(ii) Debt Finance
INV implemented the borrowing of Term Loan (B) (amount borrowed: JPY 8,998 million; interest rate:variable interest rate of one‐month JPY TIBOR plus 0.40%, 0.60% and 0.20%) from Sumitomo Mitsui
Trust Bank, Limited. and Mitsubishi UFJ Trust and Banking Corporation on January 22, 2016 for use asa portion of the funds and related expenses to acquire five hotels and one residential property.
In addition, INV introduced Development Bank of Japan Inc., etc. as new lenders and implemented theborrowing of New Syndicate Loan (F) (amount borrowed: JPY 34,418 million; interest rate: variableinterest rate of one‐month JPY TIBOR (Note 1) plus 0.40%, 0.50%, 0.60% and 0.20%) on March 31, 2016,
with Mizuho Bank, Ltd., The Bank of Tokyo‐Mitsubishi UFJ, Ltd. and Sumitomo Mitsui Trust Bank,
Limited. as arrangers, for use as portion of the funds and related expenses to acquire four hotels andone residential property, together with the equity finance described in (i) above.
On April 28, 2016, INV repaid the portion of New Syndicate Loan (E) in the amount of JPY 1,080 million
that corresponds to the borrowings equivalent to the expected consumption tax refund (Note 2), using
the consumption tax refunds from the 11 hotels acquired on July 16, 2015.
Furthermore, INV implemented the borrowing of Term Loan (C) (amount borrowed: JPY 3,882 million;interest rate: variable interest rate of one‐month JPY TIBOR (Note 1) plus 0.40%, 0.50%, 0.60% and0.20%) from Citibank Japan Ltd. on June 15, 2016 for use as a portion of the funds and related expenses
to acquire two hotels.

Additionally, INV implemented the borrowing of Term Loan (D) (amountborrowed: JPY 4,000 million; interest rate: one‐month JPY TIBOR plus 0.40% and 0.60%) from
Development Bank of Japan Inc. and AEON Bank, Ltd.
INV also fixed interest rates by executing the interest rate swap agreements with regard to its existing
borrowing totaling JPY 99,119 million under New Syndicate Loan (E), Term Loan (A) and a part ofTerm Loan (B), on March 4, 2016, in order to prepare for future rises in interest rates.

Accordingly,

INV pursued the improvement of the financial stability as the ratio of fixed interest rates for the total
amount of interest‐bearing liabilities of INV became 69.8%.
As a result of the above measures, INV’s interest‐bearing debt outstanding balance was JPY 141,917
million and the Interest‐Bearing Debt ratio was 48.7% (Note 3) as of the end of the Reporting Period and,the average interest rate was 0.50% (Note 4).

(Note 1) With respect only to the first interest calculation period, the two‐month JPY TIBOR.
(Note 2) Borrowings corresponding to the expected consumption tax refund mean the borrowings
which will be prepaid in the amount equivalent to the refund of consumption tax and local
tax, which were paid in relation to the acquisition of the trust beneficiary interests acquiredby the borrowings executed at the same time, in the case where the above‐mentioned
consumption tax refunds are received. The same shall apply hereinafter.
(Note 3) The calculation for the Interest‐Bearing Debt ratio uses the calculation formula below:
Interest‐Bearing Debt ratio = amount of interest‐bearing debt (excluding JPY 3,498 million
borrowings corresponding to the expected consumption tax refund) ÷ amount of total assets
at end of the Reporting Period x 100

9(Note 4) The average borrowing interest rate (annual rate) is calculated by the weighted average basedon the outstanding balance of borrowings, excluding borrowings corresponding to the
expected consumption tax refund. In addition, the said rate is rounded to two decimal places.
(d)

Overview of Acquisition of Assets
The overview of five hotels and one residential property acquired on January 22, 2016 is as follows:

Use

Property

Property

Number

Name

D38

D39

Hotel

D40

D41

D42

Residential

A103

Location

Hotel Mystays

Osaka‐shi,

Shinsaibashi

Osaka

Comfort Hotel

Kitakyushu‐shi,

KurosakiFukuoka

Comfort Hotel

Maebashi‐shi,

Maebashi

Gunma

Comfort Hotel

Sanjo‐shi,Tsubame‐Sanjo

NigataComfortKitami‐shi,Hotel Kitami

Hokkaido

Royal Parks

Osaka‐shi,Momozaka

Osaka

Total

Acquisition

Appraisal

Price (JPY

Value (JPY

million)million)(Note 1)

(Note 2)

3,160

3,190

1,148

1,160

1,128

1,140

1,010

1,020

851

860

2,910

2,940

10,207

10,310Category
SellerofSpecified
AssetsAki Tokutei
Mokuteki Kaisha
Navaro Tokutei
Mokuteki Kaisha
Navaro Tokutei
Mokuteki Kaisha
Navaro Tokutei
Mokuteki Kaisha

Trust
BenefitInterest

Navaro Tokutei
Mokuteki Kaisha
Momo Tokutei
Mokuteki Kaisha(Note 1)Acquisition price does not include adjustments for property taxes, city planning taxes, national or
local consumption taxes; hereinafter the same.
(Note 2)The appraisal value is based on that as of November 20, 2015 by reports of the Japan Real Estate
Institute, Daiwa Real Estate Appraisal Co., Ltd. and Morii Appraisal & Investment Consulting, Inc.

10

The overview of four hotels and one residential property acquired on March 31, 2016 is as follows:

Property

Use

NumberD43

Acquisition
Property Name

LocationPrice (JPY
million)Hotel Mystays

Shinagawa‐ku,

Gotanda Station

Tokyo

Appraisal
Value (JPY
million)Category
Seller(Note 1)ofSpecified
AssetsTsuki Tokutei
24,67424,800

Mokuteki
KaishaSeptentrio
Tokutei
Mokuteki
KaishaSeptentrio 2

D44

Hotel Epinard

Nasu‐gun,Nasu

Tochigi

20,981

21,300Tokutei
Mokuteki
KaishaHotel

Septentrio 3
Tokutei
Mokuteki
KaishaD45

D46

Residential

A104

Hotel MyStays

Fukuoka‐shi,

Fukuoka Tenjin

Fukuoka

Hotel MyStays

Minato‐ku,

Hamamatsucho

Tokyo

Royal Parks

Adachi‐ku,

Shinden

Tokyo

Trust
BenefitInterest

Navaro Tokutei
8,059

8,100

Mokuteki
KaishaNavaro Tokutei

7,959

8,000

Mokuteki
KaishaMomo Tokutei

5,024

5,100

Mokuteki
KaishaTotal

66,69767,300(Note 1) The appraisal value is based on that as of November 20, 2015, January 1, 2016 and January 31, 2016
by reports of Morii Appraisal & Investment Consulting, Inc.

11

The overview of two hotels acquired on June 15, 2016 is as follows:

Use

Property

Property

Number

Name

Hotel
D47

MystaysKanazawa

Acquisition
LocationPrice (JPY
million)Appraisal
Value (JPY
million)

D48

Tokyu
REI Hotel

Seller(Note 1)ofSpecified
AssetsGinga
Kanazawa‐shi,Ishikawa

13,761

13,900Tokutei
Mokuteki
KaishaHotel
Takamatsu

Category

WakuseiTakamatsu‐shi,Kagawa

2,139

2,160

Tokutei

Trust
Beneficial
Interest

Mokuteki
KaishaTotal

15,90016,060(Note 1) The appraisal value is based on that as of May 31, 2016 by reports of Morii Appraisal & Investment
Consulting, Inc. and Daiwa Real Estate Appraisal Co., Ltd.

(e)

Overview of Results of Operations and Distributions

As a result of the operations mentioned above, operating revenues for the Reporting Period increased by
JPY 1,294 million from the previous period (+18.9%) to JPY 8,158 million, and net income increased by JPY
1,410 million from the previous period (+47.8%) to JPY 4,363 million. DPU for the Reporting Period was JPY
1,186, a decrease of JPY 1 (‐0.1%) compared to the same period for the previous year.
With respect to distributions, INV includes profit distributions in deductible expenses in accordance with
Section 1 of Article 67‐15 of the Act on Special Taxation Measures Law. Profit distributions (not including
distributions in excess of profit) declared for the six months ended June 30, 2016 were ¥4,135,302,000 whichwere all profit as defined in Article 136, Paragraph 1 of the Investment Trust Act, except for fractional
distribution per unit less than JPY 1. In addition, INV makes distributions in excess of profit considering theeffect of items deducted from net assets and distributions in excess of profit for the six months ended June30, 2016 were ¥224,225,264, which corresponds to ¥227,532,553 of deferred losses on hedges at the end ofReporting Period divided by the number of outstanding units (except for fractional distribution per unit inexcess of profit less than JPY 1). All of the distributions in excess of profit for the six months ended June 30,
2016 amounting to ¥224,225,264 consist only of allowance for temporary difference adjustments. As a result,the distribution per unit for the Reporting Period is JPY 1,186.
In addition, INV has decided not to conduct the excess profit distribution via return of capital for theReporting Period, which was announced in the release “Notice concerning Revision of Forecast of Financial
Results and Distribution for the 26th Notice concerning Revision of Forecast of Financial Results andDistribution for the 26th” on March 10, 2016, since the sum of adjustment accounts has no discrepancy
between tax and accounting profits which can incur taxation.

12b

Outlook for the Fiscal Period Ending December 31, 2016(a)

Future operational policy and issues to be addressed

Since July 2011, INV has enhanced unitholder value by significantly increasing DPU with the FortressGroup as its sponsor. Going forward, INV will implement various strategies to maintain further growth,
including the following measures.
•

Continuous acquisition of properties from sponsor and third parties•

Further internal growth at hotel properties•

Obtain credit rating•

Diversification of financing measures, including the issuance of invest corporation bonds

Details of the future growth strategy are as follows.

(i)

External growth strategy
New Property Acquisitions
As its basic strategy, INV will move forward with the acquisition of new properties focusing on hotels,
where continued growth in portfolio revenues is anticipated. INV will also acquire a certain proportionof residential properties and hotels using fixed rent schemes, which contribute to stable revenue. Thisacquisition strategy will enable INV to build a portfolio with a good balance between growth andstability.
In regards to hotels, INV will take into consideration the trends in foreign travelers visiting Japan,
demands of business and leisure customers, the competitive hotel environment, and leasing contract
types when making investment decisions, with the aim of acquiring properties where growth andstability of gross operating profit (GOP) and rental revenue are forecasted to increase.
In regards to residential properties, INV will analyze occupancy rates, rental market trends, the presenceof competing properties and other factors, and consider acquiring mainly small‐type properties in large
cities with strong competitiveness. In addition, INV will consider acquiring family‐type properties in thecase where it is determined by INV to be beneficial to portfolio diversification regarding residential
properties.

In recent years, the property acquisition environment has become increasingly severe, however, INV, as
shown below, has continued to achieve steady external growth from the pipeline of the sponsor, theFortress Group.

13

Properties Acquired from affiliates of the Fortress Group
Date

Properties acquired

Total acquisition price

September 201224 residential properties

JPY 14,043 million

May 2014

Two hotels

JPY 5,435 million

July 201418 hotels

JPY 39,938 million

February 2015

Two hotels

JPY 4,911 million

July 2015
August 2015
January 2016
March 2016

11 hotels andthree residential properties
One hotel
Five hotels andone residential property
Four hotels andone residential property

JPY 35,258 million
JPY 5,069 million
JPY 10,207 million
JPY 66,697 million

June 2016

Two hotels

JPY 15,900 million

74 properties

JPY 197,458 million

Total(of which 29 are residential and(of which residential: JPY 27,076

45 are hotels)

million; hotels: JPY 170,382 million)

The Fortress Group manages four dedicated Japanese real estate funds, including the Fortress Japan
Opportunity Funds I and II. The Fortress Group’s committed equity is over JPY 300 billion and thenumber of properties that the Fortress Group is invested in exceeds 1,400. In order to ensure future
growth options for the portfolio, INV entered into an updated MOU with the Fortress Group thatprovides preferential negotiation rights with respect to the acquisition of 22 hotels and nine residential
properties (see the table below) (Note 1). As a result of the acquisition of two properties as of June 15,
2016, the properties with preferential negotiation rights as of the date of this document are as set forth
below.
In addition, by utilizing the property transaction information available through the Fortress Group and
INV’s own network, INV will continuously consider and implement the acquisition of properties fromthird parties that will contribute to stability and growth in revenue and cash flow and an increase in
DPU.

14

No.

Asset Name

Asset Type (Note 6)

Location

No. of Rooms

1 Hotel MyStays Premier Akasaka

Limited Service Hotel

Minato‐ku,Tokyo

327

Limited Service Hotel

Yokohama‐shi, Kanagawa

166

Full Service Hotel

Kyoto‐shi, Kyoto

489

4 Narita Excel Hotel Tokyu

Full Service Hotel

Narita‐shi, Chiba

706

5 Art Hotels Sapporo

Full Service Hotel

Sapporo‐shi, Hokkaido

418

Limited Service Hotel

Sapporo‐shi, Hokkaido

242

7 Best Western Hotel Fino Oita

Limited Service Hotel

Oita‐shi, Oita

145

8 Hotel Naqua City Hirosaki

Full Service Hotel

Hirosaki‐shi, Aomori

134

Resort Hotel

Beppu‐shi, Oita

322

Resort Hotel

Ishigaki‐shi, Okinawa

195

Full Service Hotel

Urayasu‐shi, Chiba

1,016

Limited Service Hotel

Osaka‐shi, Osaka

397

Full Service Hotel

Asahikawa‐shi, Hokkaido

265

Limited Service Hotel

Kanazawa‐shi, Ishikawa

206

15 Hotel JAL City Matsuyama

Full Service Hotel

Matsuyama‐shi, Ehime161

16 Hotel MyStays Ueno East

Limited Service Hotel

Taito‐ku, Tokyo

150

Limited Service Hotel

Osaka‐shi, Osaka

120

Limited Service Hotel

Sapporo‐shi, Hokkaido

86

Limited Service Hotel

Yokohama‐shi, Kanagawa

70

Limited Service Hotel

Taito‐ku, Tokyo

161

21 Art Hotels Hamamatsucho

Limited Service Hotel

Minato‐ku, Tokyo120

22 Art Hotels Ohmori

Limited Service Hotel

Shinagawa‐ku, Tokyo

220

2
3

6

Hotel MyStays
Yokohama‐Kannai (Note 2)
Rihga Royal Hotel Kyoto (Note3)

Best Western Hotel Fino
Sapporo9 Beppu Kamenoi Hotel
10
11
12

Fusaki Resort Village
Ishigaki‐jima
Sheraton Grande Tokyo Bay
Hotel (Note 4)
Hotel MyStays Shin‐Osaka
Conference Center

13 Art Hotels Asahikawa
14 Hotel MyStays Kanazawa Castle(Provisional Name) Hotel
17 MyStays Hommachi 3‐chome(Osaka) (Note 5)
18

Hotel MyStays Sapporo
Nakajima Park

19 Flexstay Inn Sakuragicho
20

MyCUBE by MYSTAYS
Asakusa Kuramae

Hotel Subtotal

6,116

23 Gran Charm Hiroo

Residential/Small TypeShibuya‐ku, Tokyo

121

24 Plestay Win Kinshicho

Residential/Small Type

Sumida‐ku, Tokyo92

25 Gran Charm Kichijoji

Residential/Small TypeMusashino‐shi, Tokyo

28

26 Green Patio Noda

Residential/Small TypeNoda‐shi, Chiba

240

27 Dainichi F‐45

Residential/Small Type

Urayasu‐shi, Chiba

54

28 Gran Charm Urayasu

Residential/Small Type

Urayasu‐shi, Chiba

54

29 Gran Charm Urayasu 5

Residential/Small Type

Urayasu‐shi, Chiba

54

30 Gran Charm Minami Gyotoku I

Residential/Small Type

Ichikawa‐shi, Chiba

52

31 Gran Charm Minami Gyotoku II

Residential/Small Type

Ichikawa‐shi, Chiba

48

Residential Property Subtotal

15

743

(Note 1)

The term of validity of the MOU is from March 10, 2016, the date of execution of the new MOU, toMarch 9, 2017. Regarding the 31 properties listed above, there is no guarantee that INV will be
granted an opportunity for considering acquisition of the properties or be able to acquire theproperties.

(Note 2)

Hotel MyStays Yokohama –Kannai is scheduled to be completed in September 2016, and isscheduled to open in October 2016.

(Note 3)

Rihga Royal Hotel Kyoto is scheduled to partially reopen on September 8, 2016 after renewal andfully reopen on November 1, 2016.

(Note 4)

Extension work regarding the Annex site of Sheraton Grande Tokyo Bay Hotel is now underway
and is scheduled to be completed in December 2016.

(Note 5)

(Provisional Name) Hotel MyStays Hommachi 3‐chome (Osaka) is scheduled to be completed in
October 2017, and is scheduled to open in December 2017.

(Note 6)

Each “Asset Type” above is as follows:“Limited Service Hotel” refers to a hotel focusing on revenues from room stay and offer limited
service regarding foods and beverages, banquet, spa or gymnasium facilities.
“Full Service Hotel” refers to a hotel having sections of stay, foods and beverages, and banquet.
“Resort Hotel” refers to a hotel located at tourist destinations or recreational lots, having sections ofstay, foods and beverages, and incidental facilities.
“Small Type” refers to a residential property in which the majority of dwelling units are less than
30 m2.

Property Sales
While INV places priority on increasing unitholders’ value through external growth by taking into accountthe increased level of activity in the real estate trading market, it also plans to consider the possibility ofproperty sale and replacement upon consideration of the portfolio sector composition, geographic
distribution and competitiveness of each property, as appropriate.
(ii)

Strategy for internal growth(Hotels)
Of the 48 hotels owned by INV as at the end of the Reporting Period, 39 hotels use a variable rent
scheme. In the variable rent scheme, in principle, INV receives gross operating profit (GOP) after
deducting management fees for the hotel operator, and INV’s variable rent scheme is set up so that INV
can directly enjoy the hotel revenue upside. For 33 hotels, MYSTAYS HOTEL MANAGEMENT Co., Ltd.,a hotel operator in the sponsor group, has implemented strict revenue management seeking to maximize
revenue. INV will continue to accurately ascertain and analyze operating conditions of its hotels, theconditions of nearby hotels, market trends and other factors through operation meetings and othercontact with hotel operators and will focus on operations that maximize rent income.

16

(Residential properties and others)
INV will continue to strengthen its collaborative ties with Property Management (PM) companies andbrokers to further boost occupancy rates and earning capabilities of its properties. With respect to INV’s
residential properties, while keeping in mind the off‐season in the residential rental market that occurs
during the fiscal period ending December 2016, INV will focus on increasing an occupancy rate, rent for
new lease contracts as well as for lease renewals for each of its properties as well as formulating net
leasing management policies in order to continue maximizing profits.
Further, the implementation of appropriate maintenance and repair plans is of the utmost importance inmaintaining and enhancing the competitiveness and market value of the properties as well as ensuring
stable operations and high tenant satisfaction. Therefore, INV will continue to monitor current strategicplans with flexible implementation as it sees fit.
(iii) Financial strategy
INV has strengthened its lender formation via the new borrowings in conjunction with the public
offering implemented in March 2016 and the new borrowings implemented in January 2016 and June
2016, to further stabilize its financial base. Going forward, INV will work on diversifying financing
measures, including issuing investment corporation bonds, as well as obtaining a future credit rating.
Also, INV seeks to maximize unitholders’ value by way of lengthening and diversification of borrowing
terms, further reduction of borrowing costs, solicitation of new financial institutions and strengtheningof its lender formation.
(iv) Compliance risk management
While the executive officer of INV concurrently serves as the representative director at the Asset Manager,
two supervisory directors (an attorney and a certified public account) oversee the execution of the executive
officer’s duties via the Board of Directors of INV. In addition, the compliance officer of the Asset Manager
attends each meeting of the Board of Directors in the capacity of an observer.
The Asset Manager has a compliance officer who is responsible for compliance with laws, regulations andother relevant matters as well as overall management of transactions with sponsor related parties.
Moreover, it has in place a compliance committee which, chaired by such compliance officer, is in charge ofdeliberating on compliance with laws, regulations and other relevant matters as well as transactions withsponsor related parties. Compliance committee meetings are attended by an outside expert (an attorney)
who, sitting in as a compliance committee member, conducts rigorous deliberations on the existence of
conflicts of interest in transactions with sponsor related parties as well as strict examinations with respect to
INV’s compliance with laws and regulations.
INV intends to continually take steps to strengthen its compliance structure.

17

cSignificant Subsequent Events

Borrowing of Funds
INV implemented the new borrowings described in the following table on July 20, 2016 for use as a portionof the fund and related expenses to acquire properties described in “a. Overview of the Reporting Period(d) Overview of Acquisition of Assets” above.
Term Loan (E)Lender

The Tokyo Star Bank, Limited

Borrowing
Date

BorrowingAmount(JPY million)

July 20,
2016

700

Variable interest rate
July 20, 2019
(Note 1)

Unsecured /non guarantee

July 20,
2016

1,600

Variable interest rate
July 20, 2020
(Note 2)

Unsecured /non guarantee

July 20,
2016

1,700

Variable interest rate
July 20, 2021
(Note 3)

Unsecured /non guarantee

Total

Interest Rate(per annum)

Principal
Maturity
Date

Borrowing
Method4,000(Note 1)

One‐month JPY TIBOR (Base Rate) + spread (0.4%)(Note 2)

One‐month JPY TIBOR (Base Rate) + spread (0.5%)(Note 3)One‐month JPY TIBOR (Base Rate) + spread (0.6%)(Reference Information)
Loan Transfer with respect to Existing LoansINV decided on July 15, 2016 to consent to the transfer of a portion of its existing loans from Mizuho
Bank, Ltd. as follows.
(i)

Financial institution transferring INV’s loan:
Mizuho Bank, Ltd.

(ii) Financial institution to which INV’s loan is transferred to:Japan Post Bank Co., Ltd.
(iii) Loan to be transferred:
A total amount of JPY 4,000 million of the New Syndicate Loan (F) as announced in the release“Notice concerning Debt Financing” on March 10, 2016, which is the sum of (a) JPY 2,000 million of
the loan held by Mizuho Bank, Ltd. (original principal amount: JPY 4,465 million), out of thethree‐year loan amounting JPY 11,434 million and (b) JPY 2,000 million of the loan held by Mizuho
Bank, Ltd. (original principal amount: JPY 4,465 million), out of the four‐year loan amounting JPY
10,433 million(iv) Date of loan transfer agreement:
July 15, 2016(iv) Date of transfer:
July 15, 201618

In addition, INV decided on July 27, 2016 to consent to the partial transfer of its existing loans from
Mizuho Bank, Ltd. as follows.
(1) Financial institution transferring INV’s loans:
Mizuho Bank, Ltd.
(2) Financial institutions to which INV’s loans are transferred to:
The Kagawa Bank, Ltd., The Shizuoka Bank, Ltd., The Hyakugo Bank, Ltd., and The Bank ofFukuoka, Ltd.
(3) Loans to be transferred:
A total amount of JPY 4,000 million of the New Syndicate Loan (F) as announced in the release“Notice concerning Debt Financing” on March 10, 2016. The breakdown of loans is as follows.
(i)

The Kagawa Bank, Ltd.
The sum of (a) JPY 500 million of the loan held by Mizuho Bank, Ltd. (principal amount: JPY
2,465 million), out of the four‐year loan amounting JPY 10,433 million and (b) JPY 500 millionof the loan held by Mizuho Bank, Ltd. (principal amount: JPY 4,465 million), out of the
five‐year loan amounting JPY 10,433 million(ii)

The Shizuoka Bank, Ltd.
JPY 1,000 million of the loan held by Mizuho Bank, Ltd. (principal amount: JPY 2,465 million),out of the three‐year loan amounting JPY 11,434 million(iii) The Hyakugo Bank, Ltd.
JPY 1,000 million of the loan held by Mizuho Bank, Ltd. (principal amount: JPY 2,465 million),out of the four‐year loan amounting JPY 10,433 million(iv) The Bank of Fukuoka, Ltd.
JPY 1,000 million of the loan held by Mizuho Bank, Ltd. (principal amount: JPY 4,465 million),out of the five‐year loan amounting JPY 10,433 million(4) Date of loan transfer agreements:
July 27, 2016
(5) Date of transfer:
July 29, 2016
There is no change to the content of the loan agreements, including the loan terms and conditions due tothe loan transfer.
As a result, the number of lenders has increased from 15 to 17 after the loan transfer above, and INV’slender formation has been further strengthened.

19

dOperational Outlook
The following forecast is made for the fiscal period ending December 31, 2016.
Fiscal Period ending December 31, 2016 (from July 1, 2016 to December 31, 2016)
Operating Revenues

JPY 10,015million

Operating Income

JPY 6,417 million

Ordinary Income

JPY 5,872 million

Net Income

JPY 5,872 million

Earnings per Unit

JPY 1,597

Reversal of Surplus per Unit‐

Distribution per Unit (Excluding excess profit distribution per unit)
Excess Profit Distribution per Unit

JPY 1,597‐

Distribution per Unit (Including excess profit distribution per unit)

JPY 1,597

For the assumptions underlying the operational outlook for the fiscal period ending December 31, 2016,
please see “Assumptions Underlying the Forecast of Financial Results and Distribution for the Fiscal
Period ending December 31, 2016 (from July 1, 2016 to December 31, 2016)”.
(Cautionary Note regarding Forward Looking Statements)
Forward looking statements such as the forecasts set forth herein are based on information currently
available and certain assumptions that are deemed reasonable. Actual operating performance may varysignificantly due to factors not foreseen at the time of this present notice, such as the occurrence of gains
and losses associated with the sale of properties, repayment of borrowings and a decrease in rent received.
Also, this forecast is not a guarantee of distribution amounts.

20

<Assumptions Underlying the Forecast of Financial Results and Distribution for the Fiscal Period ending December
31, 2016 (from July 1, 2016 to December 31, 2016)>

Item
Fiscal period

Assumptions
The December 2016 Fiscal Period: from July 1, 2016 to December 31, 2016 (184 days)
Properties held as of the end of the December 2016 Fiscal Period: 124 properties

The assets under management are based on the 124 properties held by INV as of today
Assets under management and INV assumes that there will be no change such as acquisition of new properties ordisposal of properties held by INV through the end of the fiscal period ending December
2016.

As of the end of the December 2016 Fiscal Period: 3,675,824 units
The total number of units
outstanding
INV assumes that there will be no additional issuance of units through the end of the
fiscal period ending December 2016.

Balance as of the end of the December 2016 Fiscal Period: JPY 142,419 million (Note)

Interest‐bearing liabilities(Note) Out of JPY 145,917 million of the interest‐bearing liabilities as of today, JPY 3,498
million of consumption tax loan is assumed to have been repaid during the fiscal
period ending December 2016.
INV assumes that there will be no other borrowings or prepayments through the end of
the fiscal period ending December 2016.

INV expects to record rental revenues as follows:
The December 2016 Fiscal Period

Operating revenues

・Rental revenues

JPY 10,015 million(of these, hotel rents)(JPY 6,844 million)(of these, hotel fixed rents)(JPY 3,232 million)(of these, hotel variable rents)(JPY 3,611 million)

Rental revenues in the fiscal period ending December 2016 are calculated based on
estimates as of today from July 2016 to December 2016. In addition, INV assumes there
will be no delinquencies or non‐payment of rent by tenants.

21

Item

Assumptions
INV expects to incur property related expenses as follows:
The December 2016 Fiscal Period

Operating expenses

・Facility management fees

JPY 613 million(of these, repair costs)(JPY 33 million)

・Taxes and other public charges

JPY 349 million

・Insurance expenses

JPY 11 million

・Depreciation expenses

JPY 2,060 million

・Other expenses

JPY 168 million

Total property related expenses

JPY 3,203 million

INV expects to incur other operating expenses than the property related expenses asfollows:
The December 2016 Fiscal Period
・Other operating expenses(of these, asset management
fees)

JPY 394 million(JPY 250 million)

The December 2016 Fiscal Period・NOI
Net Operating Income

JPY 8,872 million(of these, hotel NOI)(JPY 6,554 million)

NOI is calculated based on the formula as follows.
NOI = rental revenues ‐ property related expenses + depreciation expenses

INV expects to incur non‐operating expenses:
The December 2016 Fiscal Period
Non‐operating expenses

・Interest expense

JPY 362 million

・Finance related costs

JPY 181 million

Total Non‐operating expenses

JPY 544 million

The distribution per unit is calculated in accordance with the cash distribution policy as
set forth in INV’s Articles of Incorporation.

Distribution per unit

For the fiscal period ending December 31, 2016, INV expects to record deferred loss/gain
on hedge of the interest rate swap as the valuation and conversion adjustments, etc. of
JPY 227 million, which is equal to the amount for the fiscal period ended June 30, 2016.
The distribution per unit is calculated based on the assumption that fluctuation of themarket value of the interest rate swap does not affect the distribution per unit.
Distribution per unit may vary due to various factors, including changes of the assets
under management, fluctuation of rent income associated with reasons such as changeof tenants and occurrences of unexpected repairs.

22

Item

Excess profit distribution
per unit

Other

Assumptions
INV expects to make no excess profit distribution as allowance for temporary
difference adjustments for the fiscal period ending December 2016 because excess profit
distribution is calculated based on the assumption that there is no fluctuation in themarket value of the interest rate swap.
INV assumes there will be no amendments to applicable laws and regulations, thetaxation system, accounting standards and other regulations that would affect theforegoing forecasts.
In addition, INV assumes there will be no unforeseen material changes in general
economic trends, real estate market conditions and other trends and conditions.

23