Investment
Invincible Corporation

Audited Financial Statements
for the 23rd Fiscal Period(from July 1, 2014 to December 31, 2014)

INDEX TO FINANCIAL STATEMENTS
Page

Greetings················································································································································································ 1
Independent Auditor’s Report ······································································································································ 3
Balance Sheet as of December 31, 2014 ······················································································································· 4Statement of Income and Retained Earnings for the six months ended December 31, 2014························ 6Statement of Changes in Net Assets for the six months ended December 31, 2014 ······································ 7Statement of Cash Flows for the six months ended December 31, 2014 ··························································· 8Notes to Financial Statements as of and for the six months ended December 31, 2014 ································· 9Greetings from Naoki Fukuda, Executive Director of Invincible Investment
Corporation and President & CEO of Consonant Investment Management Co., Ltd.
It is my pleasure to take this opportunity to express my sincere gratitude to all investors of
Invincible Investment Corporation (“INV”) for your ongoing support.
We hereby provide you with a report on INV’s asset management and financial results forthe 23rd period (covering the period from July 1, 2014 to December 31, 2014).
First, with respect to the operation of our properties, we acquired 18 limited service hotels
through the issuance of investment units via a global public offering in July 2014 toestablish a portfolio that realizes both growth and stability in rent revenue from awell‐positioned set of hotel and residential assets.
With respect to the financial operations, we borrowed a new JPY 57.3 billion syndicatedloan at a lower interest rate than that of existing loans in order to fund the acquisition of
the new properties and prepay existing loans.
For the reporting period ended December 2014, INV achieved strong earnings growth dueto the expansion of assets and the robust performance from the acquired 20 hotels. Net
income increased by 117.1% to JPY 1,958 million from JPY 901 million in the previous
period, and DPU (distribution per unit) increased to JPY 733, 27.9% higher than theprevious period (JPY 573) and 22.2% higher than the forecast (JPY 600) announced inAugust 2014.

The market capitalization as of February 27, 2015 was JPY 142.24 billion andwe achieved our mid‐term market capitalization target of JPY 100 billion announced in
February 2014 in a short period of time.
After the implementation of the public offering, we continue to seek additional acquisitionsof limited service hotels, and acquired two hotels from the sponsor’s pipeline and one hotel
from a third‐party on February 6, 2015.

As these acquisitions were completed using

cash‐on‐hand and new loans without issuing new investment units, the annual DPU for2015 is expected to increase to JPY 1,571, a 10.5% increase from the previous forecast (JPY
1,422).
We will continue to generate external growth through the acquisition of high quality assets
with stable revenue and upside potential for rent by mainly utilizing the pipeline of the
Fortress Group, INV’s sponsor. As for internal growth, we continue to seek rent increases

1and further improvement in profitability by strengthening revenue management for hotel
assets, rent increase for residential assets and minimizing leasing costs.

As for thefinancial management, we aim to obtain an external credit rating and refinance existing
debt with unsecured loans, as well as work on the further reduction of borrowing costs,
diversifying loan durations and fixing portions of the interest expense of the loans.
We seek to continue maximizing unitholders’ value by increasing the net income per unit
and DPU, which have steadily increased since the inception of the sponsorship from the
Fortress Group, by realizing continued external and internal growth as well as further
improvements in the financial operations as stated above.
We look forward to receiving the continued support of all of our unitholders.
Naoki Fukuda
Executive Director, Invincible Investment Corporation
President and CEO, Consonant Investment Management Co. Ltd.
FixedDistributions

The 23rd fiscal period(the fiscal period ended
December 2014)

Per investment unit JPY 733

Forecast
Distributions

The 24th fiscal period(the fiscal period ending
June 2015)

Per investment unit JPY 712

Forecast
Distributions

The 25th fiscal period(the fiscal period ending
December 2015)

Per investment unit JPY 859(Note)

The forward‐looking statements, forecasts and goals mentioned above are based on available
information, assumptions and estimates as of February 25, 2015. These assumptions andestimates are unavoidably uncertain, and could be affected by various risks and factors beyond
INV’s control. Thus, no guarantee can be made regarding the realization of such futureforecasts and targets, and actual results may vary significantly.

2

3

INVINCIBLE INVESTMENT CORPORATIONBALANCE SHEETAs of December 31, 2014
As ofDecember 31,
2014

June 30,
2014

December 31,
2014(in thousands of
U.S. dollars)(in thousands of yen)

ASSETS
Current assets:
Cash and bank deposits (Notes 4, 7 and 15) ···················· ¥759,058

Cash and bank deposits in trust (Notes 4, 7 and 15) ·····

2,765,504¥

9,153,872$

4,011,521

75,93433,276

Accounts receivable ·································································

2,574

82

0

Rental receivables ······································································

71,193644,552

5,346

Prepaid expenses ······································································

120,941

233,324

1,935

Consumption taxes receivable ·············································-

1,319,253

10,943

Advances paid ···········································································

17,138--Other ······························································································

0

0

0

Allowance for doubtful accounts ········································(1,391)(1,968)(16)

Total current assets ··································································

3,735,018

15,360,637

127,421

Buildings, at cost ········································································

85,91485,914712

Buildings and accompanying facilities, at cost ···············

38,862

38,862322

Structures, at cost ·······································································

2,779

2,779

23

Land ·······························································································

711,834

711,834

5,904

Buildings in trust, at cost ·························································
Buildings and accompanying
facilities in trust, at cost ····························································

31,162,188

45,227,883

375,179

7,151,824

10,400,867

86,278Structures in trust, at cost ························································

321,317

321,799

2,669

Tools, furniture and fixtures in trust, at cost ····················

177,438

268,4762,227Land in trust ················································································

40,447,565

63,258,940

524,752

Subtotal ··························································································
Less: Accumulated depreciation ········································

80,099,725(4,736,504)

120,317,357(5,573,763)

998,070(46,236)

Total property and equipment, net ·····································

75,363,220

114,743,593

951,834

Other ······························································································

106

76

0

Total intangible assets ·····························································

106

76

0

Non-current assets:
Property and equipment (Notes 5, 6 and 7):

Intangible assets:

Investments and other assets:
Guarantee deposits ································································

10,00010,00082

Long-term prepaid expenses ················································

119,338

328,159

2,722

Other ······························································································

34,07034,765288

Total investments and other assets ····································

163,409372,924

3,093

Total non-current assets ·························································

75,526,736

115,116,594

954,928

TOTAL ASSETS ·········································································· ¥79,261,754¥

130,477,232$

1,082,349

4

As ofDecember 31,
2014

June 30,
2014

December 31,
2014(in thousands of
U.S. dollars)(in thousands of yen)

LIABILITIESCurrent liabilities:
Accounts payable ·································································¥

143,439¥

141,428$

1,173

Short-term loans payable (Notes 7, 8 and 15) ··············
Current portion of long-term loans payable(Notes 7, 8 and 15) ·································································
Current portion of long-term loans payable in trust(Notes 7, 8 and 15) ·································································

13,488,750--

17,552,100

1,200,000

9,954

-

18,167150

Accounts payable-other ······················································

32,73322,872

189

Accrued expenses ·································································

121,934

127,170

1,054

Income taxes payable ··························································

520

578

4

Consumption taxes payable ·············································

143,637--

Advances received ·······························································

357,522

371,084

3,078

Deposits received ··································································

32,92723,896

198

Total current liabilities ·······················································

31,873,567

1,905,197

15,804-

56,100,000

465,367

Non-current liabilities:
Long-term loans payable (Notes 7, 8 and 15) ··············
Long-term loans payable
in trust (Notes 7, 8 and 15)·······················································
Tenant leasehold and security deposits in trust(Note 15) ···················································································

9,960,000

9,941,832

82,4701,025,726

1,109,146

9,200

Tenant leasehold and security deposits (Note 15) ·····

28,663

28,663237

Total non-current liabilities ·············································

11,014,390

67,179,642

557,276

TOTAL LIABILITIES ·····························································

42,887,957

69,084,839

573,080

Unitholders’ capital ·······························································

29,134,389

53,096,413

440,451

Capital surplus ········································································

6,264,432

6,264,432

51,965Retained earnings ··································································

974,975

2,031,546

16,852

Total unitholders’ equity ····················································

36,373,796

61,392,392

509,269

NET ASSETS (Note 9)Unitholders’ equity:

TOTAL NET ASSETS ···························································TOTAL LIABILITIES AND NET ASSETS ·················

36,373,796¥

79,261,754

61,392,392¥

130,477,232

509,269$

1,082,349

The accompanying notes are an integral part of these financial statements.

5

INVINCIBLE INVESTMENT CORPORATIONSTATEMENT OF INCOME AND RETAINED EARNINGSFor the six months ended December 31, 2014
For the six months ended
June 30,
2014

December 31,
2014

December 31,
2014(in thousands of U.S.
dollars)(in thousands of yen)

Operating revenue
Rental revenue－real estate (Note 11) ································ ¥2,772,419

Gain on sales of properties (Note 13)

1,003,352¥

4,610,717-$

38,247-

Total operating revenue ··························································

3,775,772

4,610,717

38,247

1,281,791

1,586,854

13,163Operating expenses
Property related expenses (Note 11) ··································
Directors’ compensation ·························································

4,800

4,800

39

Asset management fees ··························································

125,000

125,000

1,036

Asset custody fees ·····································································

3,906

3,976

32

Administrative service fees ····················································

18,224

26,672

221

Provision of allowance for doubtful accounts ················

-

1,527

12

Other ······························································································

107,404

91,966762

Total operating expenses ························································

1,541,127

1,840,796

15,269Operating income ········································································

2,234,644

2,769,920

22,977
4

Non-operating income
Interest income ········································································

404

537

Reversal of allowance for doubtful accounts ···············

475

-

-

Other ···························································································

898

483

4

Total non-operating income ··············································

1,777

1,021

8

Interest expenses ····································································

376,514

365,480

3,031

Loan-related costs ··································································

842,043294,738

2,444

Investment unit issuance costs ··········································

115,438

152,101

1,261

Other ···························································································

5

14

0

Total non-operating expenses ···········································

1,334,001

812,334

6,738

Ordinary income ·······································································

902,420

1,958,607

16,247

Income before income taxes ·················································

902,420

1,958,607

16,2475

Non-operating expenses

Income taxes (Note 12):Current ····················································································

605

605

Deferred ··················································································

-

-

-

Total income taxes ······························································

605

605

5

Net income ··················································································

901,815

1,958,002

16,242Retained earnings brought forward ·································

73,15973,543

Unappropriated retained earnings (Note 10) ················¥

974,975¥

2,031,546

610$

16,852

The accompanying notes are an integral part of these financial statements.

6

INVINCIBLE INVESTMENT CORPORATIONSTATEMENT OF CHANGES IN NET ASSETSFor the six months ended December 31, 2014
Unitholders' equity
Unitholders'
capitalSurplusRetainedearnings

CapitalsurplusTotal
unitholders'equityTotal
surplus

Total net assets(in thousands of yen)

Balance as of December 31, 2013¥

29,134,389¥

6,264,432¥

446,003¥6,710,435¥

35,844,824¥

35,844,824

Dividends from surplus ·················································--(372,843)(372,843)(372,843)

Net income ·········································································--

901,815

901,815

901,815

901,815

Total changes during the period ··············································--

528,972

528,972

528,972

528,972

Balance as of June 30, 2014 ·························································¥

29,134,389

Changes during the period¥

6,264,432¥

974,975¥

7,239,407¥

36,373,796(372,843)¥

36,373,796

Changes during the period
Issuance of new investment units ····························

23,962,024

-

-

-

23,962,024

Dividends from surplus ·················································--(901,431)(901,431)(901,431)(901,431)

Net income ·········································································--

1,958,002

1,958,002

1,958,002

1,958,002

Total changes during the period ··············································

23,962,024

Balance as of December 31, 2014 ·············································¥

53,096,413¥

6,264,432

1,056,571¥

2,031,546

1,056,571¥

8,295,97823,962,024

25,018,595¥

61,392,392

25,018,595¥

61,392,392

Unitholders' equity
Unitholders'
capitalSurplusRetainedearnings

CapitalsurplusTotal
unitholders'equityTotal
surplus

Total net assets(in thousands of U.S. dollars)

Balance as of June 30, 2014 ·························································$

241,678$

51,965

$

8,087

$

60,053$

301,732$

301,732

Changes during the period
Issuance of new investment units ··························

198,772---

198,772

198,772

Dividends from surplus ···············································--(7,477)(7,477)(7,477)(7,477)

Net income ·······································································--

16,242

16,242

16,242

16,242

Total changes during the period ············································

198,772

-

8,764

8,764

207,537

207,537

Balance as of December 31, 2014··············································$

440,451$

51,965$

16,852$

68,817$509,269$

509,269

The accompanying notes are an integral part of these financial statements.

7

INVINCIBLE INVESTMENT CORPORATIONSTATEMENT OF CASH FLOWSFor the six months ended December 31, 2014
For the six months ended
June 30,
2014

December 31,
2014

December 31,
2014(in thousands of
U.S. dollars)(in thousands of yen)

Cash flows from operating activities:
Income before income taxes ········································································¥
Depreciation and amortization ··································································
Investment unit issuance costs ···································································
Loan-related costs ···························································································
Amortization of tenant leasehold and security deposits in trust ···Interest income ·································································································
Interest expenses ·····························································································
Changes in assets and liabilities
Increase (decrease) in allowance for doubtful accounts ····················
Decrease (increase) in rental receivables ·················································
Decrease (increase) in consumption taxes receivable ·························
Increase (decrease) in consumption taxes payable ······························
Increase (decrease) in accounts payable ··················································
Increase (decrease) in accounts payable-other ······································
Increase (decrease) in accrued expenses ·················································
Increase (decrease) in advances received ················································
Increase (decrease) in deposits received ··················································
Decrease in property and equipment , due to sale ······························
Other, net ············································································································
Subtotal ·········································································································
Interest income received ···············································································
Interest expenses paid ···················································································
Income taxes paid ···························································································(1,181)(60,244)7,419
143,637(87,869)(1,613)
18,110(28,364)
10,9094,367,451(6,762)
7,125,015
404(502,533)
(609)

577
(573,359)(1,319,253)(143,637)(673)(10,409)
2,933
13,561(9,776)
5,533
1,572,798
537(363,177)(547)

4(4,756)(10,943)(1,191)
(5)
(86)
24
112
(81)
45
13,046
4(3,012)(4)

902,420
527,945
115,438
842,043(435)(404)
376,514¥

1,958,607
837,289
152,101
294,738(378)(537)
365,480$

16,247
6,945
1,261
2,444
(3)
(4)
3,031

Net cash provided by operating activities ········································

6,622,276

1,209,610

10,034

Cash flows from investing activities:
Purchases of property and equipment in trust ····································
Repayments of tenant leasehold and security deposits ······················
Repayments of tenant leasehold and security deposits in trust ·····
Proceeds from tenant leasehold and security deposits in trust ······
Other, net ············································································································(5,618,018)(154,916)(93,087)
81,527(17,833)(40,203,087)(47,787)
131,585(694)(333,497)
(396)
1,091
(5)

Net cash used in investing activities ···················································(5,802,328)(40,119,985)(332,807)

Cash flows from financing activities:
Proceeds from short-term loans payable ··············································
Repayments of short-term loans payable ···············································
Proceeds from long-term loans payable ·················································
Repayments of long-term loans payable ················································
Repayments of long-term loans payable in trust ·································
Payments for loan-related costs ·································································
Distribution payments ··················································································
Proceeds from issuance of investment units ·········································
Payment of Investment unit issuance costs ·············································

13,500,000(11,250)(2,797,899)(11,000,000)(732,126)(342,802)(98,468)(13,488,750)
57,300,000(17,552,100)(618,099)(900,512)
23,962,024(151,356)(111,893)
475,321(145,600)(5,127)(7,470)198,772(1,255)

Net cash used in financing activities ···················································(1,482,546)

48,551,206

402,747

Net increase (decrease) in cash and cash equivalents ··························Cash and cash equivalents at beginning of period ······························(662,597)
4,187,160

9,640,831
3,524,562

79,97329,237

Cash and cash equivalents at end of period (Note 4) ··························¥

3,524,562¥

13,165,393$

109,211

The accompanying notes are an integral part of these financial statements.

8

INVINCIBLE INVESTMENT CORPORATIONNOTES TO FINANCIAL STATEMENTS
As of and for the six months ended December 31, 2014

1. Organization
Invincible Investment Corporation (the“Company”), a real estate investment corporation, was incorporated on January 18, 2002, underthe Act on Investment Trusts and Investment Corporations of Japan (the“Investment Trust Act”) with initial capital of ¥200 million.
The Company is externally managed by a registered asset management company, Consonant Investment Management Co., Ltd. (the“Asset Manager”). The Asset Manager is currently owned 100% by Calliope Godo Kaisha (Calliope). The Company was formed toinvest primarily in properties in Japan.
On May 17, 2004, the Company raised ¥3,377,250 thousand through an initial public offering of 9,000 investment units. As a“comprehensive investment REIT focusing on the Tokyo metropolitan area and on residential properties,” The Company was listed on
the Osaka Securities Exchange in May 2004.
On February 7, 2005, the Company completed its second public offering of 10,650 investment units at a price of ¥369,734 per unit inconnection with a public offering in Japan.
On July 31, 2006, the Company completed its third public offering of 25,000 investment units at a price of ¥332,045 per unit in connection
with a public offering in Japan. The Company was listed on the J-REIT market of the Tokyo Stock Exchange in August 2006 (in order tofocus trading on one securities exchange and reduce administrative tasks and costs accompanying a duplicate listing, The Company
delisted from the Osaka Securities Exchange on October 6, 2007).
Effective on February 1, 2010, the Company executed a five-to-one unit split and 215,596 investment units were issued in connection
with the unit split. Effective on the same day, the Company also merged with LCP Investment Corporation (LCP) and allocated 367,200
investment units at a ratio of 4 units (post-unit split) of the Company per one investment unit of LCP. As a result, investment units
issued and outstanding were 636,695 units as of February 1, 2010.
On July 29, 2011, the Company completed a third party allotment of 711,597 investment units at a price of ¥9,837 per unit.
On December 20, 2013, the Company completed a third party allotment of 224,887 investment units at a price of ¥13,340 per unit.
On July 17, 2014, the Company completed its fourth public offering totaling 1,040,000 new investment units at a price of ¥22,688 per unit.
527,322 of such units were issued in connection with a Domestic Public Offering, and the remaining 512,678 units were issued inconnection with an International Offering pursuant to Rule 144A and Regulation S under the U.S. Securities Act of 1933. On August 13,
2014, the Company issued an additional 55,507 investment units domestically in connection with the exercise of an over-allotment
option. Net proceeds of approximately ¥23.9 billion were used to repay the Company’s outstanding short term borrowings incurred inconnection with the acquisition of 18 properties during this fiscal period.

2. Summary of Significant Accounting Policies(a) Basis of Presentation
The Company maintains its accounts and records in conformity with accounting principles and practices generally accepted in Japan(“Japanese GAAP”), including provisions set forth in the Investment Trust Act, the Companies Act of Japan, the Financial Instruments
and Exchange Act of Japan, and other related regulations, which are different in certain respects from the application and disclosure
requirements of International Financial Reporting Standards or accounting principles generally accepted in the United States of America.
The financial statements are prepared based on the Japanese audited financial statements of the Company, which were prepared inaccordance with Japanese GAAP and filed with the Kanto Local Finance Bureau as required by the Financial Instruments and Exchange
Act of Japan. In preparing the accompanying financial statements, certain information in the notes has been added and certain
reclassifications have been made from the financial statements issued domestically for the convenience of the readers outside Japan.
The financial statements are not intended to present the financial position and the results of operations in accordance with accounting
principles and practices generally accepted in countries and jurisdictions other than Japan.
The Company’s fiscal period is a six-month period, which ends at the end of June and December of each year.
Amounts less than ¥1 thousand and US$ 1 thousand have been rounded down. As a result, the totals shown in the financial statements
9and notes thereto do not necessarily agree with the sum of the individual amounts.
The Company does not prepare consolidated financial statements as it has no subsidiaries.
(b) Cash and Cash Equivalents
Cash and cash equivalents consist of cash, demand deposits, and short-term investments which are highly liquid and readily convertible
to cash, have a low risk of price fluctuation, and mature within three months from the date of acquisition.
(c) Property and Equipment
Property and equipment are recorded at cost. Depreciation of property and equipment, except for land, is calculated on a straight-line
basis over the estimated useful lives of the assets as stated below:
For the six months ended
December 31, 2014

Buildings ·················································································

77 years

Buildings and accompanying facilities ························

8-24

Structures ················································································

7-18

Buildings in trust ··································································

2-66

Buildings and accompanying facilities in trust ··········

2-32

Structures in trust ·································································

4-55

Tools, furniture and fixtures in trust ······························

2-15(d) Intangible Assets
Intangible assets are amortized on a straight-line basis.
(e) Long-term Prepaid Expenses
Long-term prepaid expenses are amortized on a straight-line basis.
(f)

Investment Unit Issuance Costs

Investment unit issuance costs are recorded as expenses when incurred.
(g) Allowance for Doubtful Accounts
Allowance for doubtful accounts is provided based on past experience for normal receivables and a valuation of any receivables fromcompanies and individuals with financial difficulties.
(h) Impairment of Fixed Assets
An assessment for impairment is carried out on an asset or group of assets, such as fixed assets, intangible assets and investments,
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the asset or group of assets isdeemed to be impaired, an impairment loss is recognized for the difference between the carrying amount and the recoverable value ofthe asset or group of assets using the discounted cash flow model.
(i)

Accounting Treatment of Trust Beneficiary Interests in Real Estate Trusts

For trust beneficiary interests in real estate trusts, which are commonly utilized to obtain ownership in investment properties in Japanand through which the Company holds all of its real estate, all assets and liabilities with respect to assets in trust, as well as all income
generated and expenses incurred with respect to assets in trust, are recorded in the relevant accounts of the balance sheet and statementof income and retained earnings of the Company in proportion to the percentage that such trust beneficiary interest represents. Certain
material accounts with respect to assets and liabilities in trust are presented separately from other accounts in the balance sheets of theCompany.
(j)

Income Taxes

Deferred tax assets and liabilities are computed based on the temporary differences between the financial statement and income tax
basis of assets and liabilities using the applicable statutory tax rate.

10

(k) Consumption Taxes
Consumption taxes withheld and consumption taxes paid are not included in the statement of income and retained earnings.
Consumption taxes paid are generally offset against the balance of consumption taxes withheld. As such, the excess of payments overamounts withheld are included in current assets and the excess of amounts withheld over payments are included in current liabilities as
the case may be.
(l)Taxes on Property and Equipment

Property and equipment are subject to various taxes, such as property taxes and urban planning taxes on an annual basis. An owner of aproperty is registered in the record maintained by the local government in each jurisdiction, and such taxes are imposed on the ownerregistered in the record as of January 1 of each year based on the assessment made by the local government.
Under the above tax rules, a seller of a property at the time of disposal is liable for these taxes on the property from the date of disposal tothe end of the calendar year in which the property is disposed. The seller, however, is reimbursed by the purchaser for these accrued tax
liabilities and the amount of settlement reflects this adjustment. For the purchaser, a portion of such taxes calculated from the acquisition
date to the end of the calendar year is capitalized as a cost of the property in accordance with Japanese GAAP. In subsequent calendar
years, half of such taxes on property and equipment for each calendar year are charged as operating expenses in each fiscal period.
Taxes on property and equipment capitalized as part of the acquisition cost of properties amounted to ¥76,921 (US$638) thousand for thesix months ended December 31, 2014.

3. U.S. Dollar Amounts
The Company maintains its accounting records in Japanese yen. The U.S. dollar amounts included in the accompanying financial
statements and notes thereto represent the arithmetical result of translating Japanese yen into U.S. dollars at the rate of ¥120.55 = US$1,
the effective rate of exchange prevailing at December 31, 2014. The inclusion of such U.S. dollar amounts associated with the fiscal six
months ended December 31, 2014 is solely for the convenience of readers outside Japan. Such translations should not be construed as
representations that the Japanese yen amounts represent, or have been, or could be converted into, U.S. dollars at that or any other rate.

4. Cash and Cash Equivalents
Cash and cash equivalents shown in the statements of cash flows consist of the following balance sheet items.
As ofJune 30, 2014

December 31, 2014

December 31, 2014
(in thousands of
U.S. dollars)(in thousands of yen)

Cash and bank deposits ······································· ¥759,058

Cash and bank deposits in trust ························

2,765,504

Cash and cash equivalents ·································· ¥3,524,562¥

9,153,872$

75,934$109,211

4,011,521¥

33,276

13,165,393

5. Property and Equipment
The following tables show the summary of movement in property and equipment for the six months ended December 31, 2014.
At costBeginningbalance

Increase

Endingbalance

Decrease

Accumulated
depreciation

Depreciation forthe period

Net property andequipment(in thousands of yen)

Buildings ·····································································¥

85,914¥

Buildings and accompanying facilities ············

38,862--

38,862

18,5481,196

Structures ····································································

2,779

-

-

2,779

1,204

65

1,574

Land ·············································································

711,834--

711,834--

711,834

Buildings in trust ······················································
Buildings and accompanying facilities
in trust ··········································································

31,162,188

14,065,694-

45,227,883

3,136,903

513,499

42,090,979

7,151,824

3,249,043-

10,400,867

2,186,062

294,183

8,214,804

Structures in trust ·····················································

321,317481-

321,799

118,744

9,697

203,054

Tools, furniture and fixtures in trust ··················

177,438

91,038-268,476

103,974

18,076

164,502

Land in trust ······························································

40,447,565

22,811,374-

63,258,940--

63,258,940

Total ··············································································¥

80,099,725-¥ 120,317,357¥-

40,217,632

¥

¥

-

¥

85,914

¥

¥

8,324

5,573763

¥

¥

541

837,259¥

77,58920,314¥

114,743,593

11

At cost
Beginningbalance

Increase

Endingbalance

Decrease

Accumulated
depreciation

Depreciation forthe period

Net property andequipment(in thousands of U.S. dollars)

Buildings ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙$

712

$

‐

$

‐

Buildings and accompanying facilities ∙∙∙∙∙∙∙∙∙∙∙∙∙

322

‐

‐

322

153

9

Structures ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙

23

‐

‐

23

9

0

13

Land ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙

5,904

‐

‐

5,904

‐

‐

5,904

Buildings in trust ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙
Buildings and accompanying facilities
in trust ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙

258,500

116,679‐

375,179

26,021

4,259

349,157

59,326

26,951‐

86,27818,1342,440

68,144Structures in trust ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙

2,665

3

‐

2,669

985

80

1,684

Tools, furniture and fixtures in trust ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙

1,471

755

‐

2,227

862

149

1,364

Land in trust ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙

335,525

Total ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙$

664,452

189,227$

333,617

$

‐
$

‐

712

$

69

524,752$

998,070$‐$

46,236

4

$

168

‐
$

6,945

643

524,752$

951,834

Increases in the net book values are mainly due to the acquisition of 18 properties (¥39,938,580 thousand) as shown below and capitalized construction costs.
Property No.

Acquisition cost(in thousands of yen)

Property name6,024,460

Acquisition cost(in thousands of U.S. dollars)
49,974

D3

Hotel MyStays Kyoto‐Shijo

D4

MyStays Shin‐Urayasu Conference Center

4,930,200

40,897

D5

Hotel MyStays Maihama

4,870,312

40,400D6

Hotel Vista Premio Dojima

3,845,400

31,898

D7

Hotel MyStays Nagoya‐Sakae

2,958,000

24,537

D8

Hotel MyStays Sakaisuji‐Honmachi

2,514,820

21,064

D9

Hotel MyStays Yokohama

2,119,900

17,585

D10

Hotel MyStays Nippori

1,898,540

15,748

D11

Hotel MyStays Fukuoka‐Tenjin‐Minami

1,570,520

13,027

D12

Flexstay Inn Iidabashi

1,381,660

11,461

D13

Hotel MyStays Ueno Inaricho

1,331,960

11,049

D14

Flexstay Inn Shinagawa

1,242,500

10,306

D15

Flexstay Inn Tokiwadai

1,242,500

10,306

D16

Flexstay Inn Sugamo

1,192,800

9,894
9,894

D17

Hotel MyStays Otemae

1,192,800

D18

Flexstay Inn Kiyosumi Shirakawa

749,476

6,217

D19

Flexstay Inn Nakanobu P1

589,442

4,889

D20

Flexstay Inn Nakanobu P2

283,290

2,349

6. Fair Value of Investment and Rental Properties
The following tables show the net book value and the fair value of the investment and rental properties in the aggregate for the six
months ended June 30, 2014 and December 31, 2014.
Residential
As of / For the six months ended
June 30, 2014

December 31, 2014

December 31, 2014
(in thousands of
U.S. dollars)(in thousands of yen)

Net book value
Balance at the beginning of period ∙∙∙∙∙∙∙∙∙∙∙∙∙∙¥

56,192,804

Net increase (decrease) during period ∙∙∙∙∙∙∙(318,340)¥(304,706)(2,527)

Balance at the end of period ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙

55,874,464

55,569,758

460,968

Fair value ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙¥

58,865,000¥

55,874,464

60,775,000$$

463,496504,147

12

Office
As of / For the six months ended
June 30, 2014

December 31, 2014

(in thousands of yen)

December 31, 2014
(in thousands of
U.S. dollars)

Net book value
Balance at the beginning of period ··············¥

8,585,639

Net increase (decrease) during period ·······(5,687)¥(28,342)(235)

Balance at the end of period ··························

8,579,951

8,551,609

70,938Fair value ···································································¥

7,288,000¥

8,579,951

7,227,000$$

71,173

59,950Retail facilities
As of / For the six months ended
June 30, 2014

December 31, 2014

(in thousands of yen)

December 31, 2014
(in thousands of
U.S. dollars)

5,318,657$

Net book value
Balance at the beginning of period ··············¥¥

5,275,638

43,763

Net increase (decrease) during period ·······(43,018)(50,243)(416)

Balance at the end of period ··························

5,275,638

5,225,394

43,346

Fair value ···································································¥

5,520,000¥

5,690,000$

47,200Parking lots
As of / For the six months ended
June 30, 2014

December 31, 2014

(in thousands of yen)

December 31, 2014
(in thousands of
U.S. dollars)

Net book value
Balance at the beginning of period ··············¥

100,838

Net increase (decrease) during period ·······

(13)

¥

100,825(1)(0)

Balance at the end of period ··························

100,825

100,823836

Fair value ···································································¥

105,000¥

107,000

$

$

836

887

Senior Living
As of / For the six months ended
June 30, 2014

December 31, 2014

(in thousands of yen)

December 31, 2014
(in thousands of
U.S. dollars)

Net book value
Balance at the beginning of period ··············¥

4,385,522

Net increase (decrease) during period ·······(4,385,522)

Balance at the end of period ··························-

Fair value ···································································¥

-

¥

-

$

¥

-

-

$

-

Hotel
As of / For the six months ended
June 30, 2014

December 31, 2014

(in thousands of yen)

December 31, 2014
(in thousands of
U.S. dollars)

Net book value
Balance at the beginning of period ··············¥-Net increase (decrease) during period ·······

5,532,341

Balance at the end of period ··························

5,532,341

Fair value ···································································¥

5,490,000¥

5,532,341$

39,763,665
45,296,007¥

52,759,000

45,892329,852
375,744$437,652

Notes:
Fair value has been determined based on the appraisals or research provided by independent real estate appraisers.
For rental revenues and expenses for the six months ended June 30, 2014 and December 31, 2014, please refer to “Note 11: Rent Revenues－Real Estate and Expenses Related toProperty Rental Business“137. Collateral
The following table shows the assets pledged as collateral to secure short-term loans payable, long-term loans payable and long-termloans payable in trust.
As ofJune 30, 2014

December 31, 2014

December 31, 2014
(in thousands of
U.S. dollars)(in thousands of yen)

Cash and bank deposits ·····························································¥

153,187

Cash and bank deposits in trust ··············································

2,765,504

4,262,187
4,011,521

33,276

Buildings ··························································································

78,131

77,589643

Buildings and accompanying facilities ·································

21,51020,314

168

Structures ·························································································

1,640

1,574

13

Land ··································································································

711,834

711,834

5,904

Buildings in trust ···········································································

28,538,783

42,090,979

349,157

Buildings and accompanying facilities in trust ··················

5,259,944

8,214,804

68,144Structures in trust ··········································································

212,270203,054

1,684

Tools, furniture and fixtures in trust ·······································

91,540164,502

1,364

Land in trust ···················································································

40,447,565

63,258,940

524,752

Total ···································································································¥

78,281,912¥

123,017,302¥

35,356$$

1,020,467

The following table shows the loans payable secured by collateral.
As ofJune 30, 2014

December 31, 2014

December 31, 2014
(in thousands of
U.S. dollars)(in thousands of yen)

Short-term loans payable ···························································¥

13,488,750

Current portion of long-term loans payable ·······················

17,552,100-

Current portion of long-term loans payable in trust···········-

18,167150

Long-term loans payable······························································
Long-term loans payable in trust ············································

9,960,000

56,100,000
9,941,832

465,367
82,470Total ···································································································¥

41,000,850

¥

-

$

1,200,000

67,260,000

¥

9,954

557,942$

8. Loans Payable
The following table shows the details of loans payable for the six months ended December 31, 2014.
For the six months ended December 31, 2014
Beginning
Increase
Classification

EndingBeginningbalancebalance

Decreasebalance

Increase

EndingAveragebalanceinterest

Maturityrate (%)

date

Decrease

Name of lender

Use of proceeds(in thousands of yen)(in thousands of U.S. dollars)

Remarks(1)

Sumitomo Mitsui
Banking

3,497,083－

3,497,083－

29,009－29,009－0.946

3,497,083－

3,497,083－

29,009－29,009－0.946

3,497,083－

3,497,083－

29,009－29,009－0.946

2,997,500－

2,997,500－

24,865－24,865－0.946

13,488,750－

13,488,750－

111,893－

111,893－－

4,743,811－

4,743,811－

39,351－39,351－

1.646

Corporation(4)Short-termloanspayableThe Bank ofTokyo-Mitsubishi
UFJ, Ltd. (4)Mizuho Bank Ltd.(4)May 22,
2015

Secured and(2)

unguaranteed

Sumitomo Mitsui
Trust Bank,
Limited(4)Total Short-term loans
payableLong-term
loans
payable (7)Sumitomo Mitsui
Banking
Corporation (4)－December20, 2016－－

Secured and(2)

unguaranteed

14

The Bank ofTokyo-Mitsubishi

4,743,811－

4,743,811－

39,351－39,351－

1.646

3,450,044－

3,450,044－

28,619－28,619－1.646

1,725,022－

1,725,022－

14,309－14,309－1.646

1,725,022－

1,725,022－

14,309－14,309－1.646

1,164.,389－

1,164,389

－

9,658

－

9,658

－

1.646

－

12,400,000－

12,400,000－

102,861－

102,861

0.951－

12,400,000－

12,400,000－

102,861－

102,861

0.951－

12,400,000－

12,400,000－

102,861－

102,861

0.951

UFJ, Ltd. (4)Shinsei Bank, Limited (4)Citibank Japan Ltd. (4)Shinsei Trust & Banking
Co., Ltd.(4)Aozora Bank , Ltd.(4)Sumitomo Mitsui
Banking
Corporation (5)The Bank ofTokyo-Mitsubishi
UFJ, Ltd. (5)Mizuho Bank, Ltd. (5)Shinsei Bank, Limited (5)6,500,000－
Citibank Japan Ltd. (5)6,500,000－
Sumitomo Mitsui Trust

Mitsubishi UFJ Trust andBanking Corporation (6)Long-term

Mitsubishi UFJ Trust andloans

Banking Corporation (6)payable in

Mitsubishi UFJ Trust andtrust (8)Banking Corporation (6)Mitsubishi UFJ Trust andBanking Corporation (6)Total long-term loans
payable in trust

Total loans payable

6,500,000－－

53,91953,919－－53,91953,919

0.951

0.951

5,000,000－

5,000,000－

41,476－

41,4760.951－

2,100,000－

2,100,000－

17,420－17,4200.951

17,552,100

57,300,000

17,552,100

57,300,000

145,600

475,321

145,600

475,321－2,700,000－－

2,700,000

22,397－－22,3971.900

2,860,000－－

2,860,000

23,724－－23,724

1.900

Resona Bank , Limited. (5)payable－6,500,000－

Bank, Limited. (5)Total long-term loans－

December20, 2016
December20, 2016
December20, 2016
December20, 2016
December20, 2016
July 14,2017

July 14,2017
July 14,2017
July 14,

Secured and(3)

unguaranteed2017
July 14,2017
July 14,2017
July 14,
2017
－

－

－

March 31,2018
March 31,2019
March 31,

Secured and(3)

unguaranteed

1,830,000－－

1,830,000

15,180－－15,1801.900

2,570,000－－

2,570,000

21,318－－21,3181.900

9,960,000－－

9,960,000

82,621－－

82,621－－－－

41,000,850

57,300,000

31,040,850

67,260,000

340,114475,321257,493557,942

－

－

－

－

2020
March 31,2019

Notes:(1)

The average interest rate indicates a weighted average interest rate for each six month period, rounded to three decimal places.

(2)

Used for repayment of loans payable.

(3)

The funds are mainly used to acquire real estate properties or properties in trust.

(4)

The principal was repaid in full on July 17, 2014.

(5)

The principal is to be repaid in full on the principal maturity date.

(6)

The Company will repay the amount of ¥2,700 million on the principal maturity date. As for the amounts of ¥2,860 million and ¥1,830 million, the Company will start to repay
principal on every interest due date (every 3 months) after 5 years from the borrowing date. Each repayment is calculated on the assumption that the remaining balance isrepaid in equal installments over 30 years (120 payments in total). The remaining balance after the above repayments will be paid fully on the principal maturity date. As for theamount of ¥2,570 million, the Company will start to repay principal on every interests due date (every 3 months) after 3 years from the borrowing date. Each repayment iscalculated on the assumption that the remaining balance is repaid in equal installments over 27 years (108 repayments in total). The balance after the above payments will be
repaid fully on the principal maturity date. Mitsubishi UFJ Trust and Banking Corporation (“Mitsubishi UFJ Trust”), the trustee of real estate held in trust for which the15Company is the beneficiary, borrows money from Prudential Mortgage Asset Holdings 1 Japan Investment Business Limited Partnership, a part of the Prudential Financial, Inc.
as of September 28, 2012. The Company will receive the borrowed funds (after deducting reserves and other proceeds) from Mitsubishi UFJ Trust as payment of the trust
principal for the real estate in trust on the same day.
(7)

Long-term loans payable include current portion.

Repayment schedule of long-term loans payable (except for the current portion) for the next five years after each balance sheet dateare as follows:
As of
December 31,
2014

December 31,
2014(in thousandsof yen)(in thousands of
U.S. dollars)

1-2 years ········································································· ¥2-3 years ·········································································

-

$

-

56,100,000

465,367

3-4 years ·········································································--

4-5 years ·········································································

-

-

(8)

Long-term loans payable in trust include current portion.

Repayment schedule of long-term loans payable in trust (except for the current portion) for the next five years after each balance
sheet date are as follows:
As of
December 31,
2014

December 31,
2014(in thousandsof yen)(in thousands of
U.S. dollars)

1-2 years ········································································· ¥73,807$612

2-3 years ·········································································

104,256864

3-4 years ·········································································

2,894,530

24,0114-5 years ·········································································

5,143,274

42,665

9. Net Assets
The Company issues only non-par value units in accordance with the Investment Trust Act, and the entire amount of the issue price of
new investment units is allocated to unitholders’ capital within net assets. The Company is required to maintain net assets of at least¥50,000 thousand (US$ 414 thousand) as required by Article 67-4 of the Investment Trust Act.
The number of investment units authorized were 10,000,000 units as of June 30, 2014 and December 31, 2014.
The number of investment units issued and outstanding were 1,573,179 and 2,668,686 units as of June 30, 2014 and December 31, 2014
respectively.

10. Appropriation of Retained Earnings
In accordance with the distribution policy in Article 17, Paragraph 1, of the Company’s articles of incorporation which stipulates making
distributions in excess of 90% of distributable profit as defined in Article 67-15, Paragraph 1 of the Special Taxation Measures Act of Japanfor the fiscal period.
The following table shows the appropriation of retained earnings for the six months ended June 30, 2014 and December 31, 2014.
For the six months ended
June 30, 2014

December 31, 2014

December 31, 2014

(in thousands of yen)(in thousands of
U.S. dollars)

Unappropriated retained earnings ··············· ¥974,975$

Cash distribution declared ·······························(901,431)

Retained earnings carried forward. ·············· ¥73,543¥2,031,546(1,956,146)¥

75,39916,852(16,226)$625

A dividend in respect of the six months ended December 31, 2014 of ¥733 (US$6.0) per investment unit, amounting to a total dividend of¥1,956,146 thousand (US$16,226 thousand) was proposed and approved at the Board of Directors meeting on February 25, 2015. These
financial statements do not reflect this dividend payable.
16

Cash distributions per investment unit were ¥573 and ¥733 (US$6.0) for the six months ended June 30, 2014, and December 31, 2014,
respectively.

11. Rent Revenues － Real Estate and Expenses Related to Property Rental Business
Rent revenue – real estate and expenses related to property rental business for the six months ended June 30, 2014 and December 31,
2014 consist of the following:
For the six months ended
June 30, 2014

December 31, 2014

December 31, 2014
(in thousands of
U.S. dollars)(in thousands of yen)

Rental revenue – real estate:
Rental revenue and common
area charges ························································· ¥Other ······································································

2,555,746
216,673¥

4,408,874
201,843$

36,572
1,674

Total rental revenue – real estate························· ¥2,772,419¥

4,610,717$

38,247

Expenses related to property rental business:
Facility management fees ······························· ¥Property related taxes ······································
Insurance expense ··········································
Other ······································································
Depreciation ························································

446,688
174,451
4,952
127,784
527,914¥460,196
163,789
6,084
119,524
837,259

$

3,817
1,358
50
991
6,945

1,281,791¥

1,586,854$

13,163

1,490,627¥

3,023,863$

25,083

Total expenses related to property
rental business. ························································ ¥Operating income from property
leasing activities ······················································ ¥12. Income Taxes
The Company is subject to corporate income taxes in Japan. The Company may deduct from its taxable income the amounts distributed
to its unitholders, provided the requirements are met under the Special Taxation Measures Act of Japan. Under this act, the Company
must meet a number of tax requirements, including a requirement to distribute in excess of 90% of distributable profit for the fiscal
period in order to be able to deduct such amounts. If the Company does not satisfy all of the requirements, the entire taxable income of
the Company will be subject to regular corporate income taxes in Japan.
The Company has a policy of making distributions in excess of 90% of its distributable profit for the fiscal period to qualify for conditions
set forth in the Special Taxation Measures Act of Japan to achieve a deduction of distributions for income tax purpose and it distributes
approximately 100% of distributable profit. Hence, the Company has treated the distributions as a tax allowable deduction as defined in
the Special Taxation Measures Act of Japan.
(a) Reconciliations of the Company’s effective tax rates and statutory tax rates are as follows:
For the six months ended
June 30, 2014

December 31, 2014
(Rate)

Statutory tax rates ··········································································

36.59 %

Deductible cash distributions ····················································―

34.16 %

Increase (decrease) in valuation allowance ···························(34.98)(0.46)

Other ··································································································(1.54)(0.13)

Effective tax rates ············································································

0.07 %

0.03 %(33.54)17

(b) Deferred tax assets consist of the following:
As ofJune 30, 2014

December 31, 2014

December 31, 2014
(in thousands of
U.S. dollars)(in thousands of yen)

Deferred tax assets:
Current:
Enterprise tax payable ················································¥

517

Rental receivables (merger) ······································

197

¥

197

-

$

1

-

Allowance for doubtful accounts ···························

475

672

5

Total ···················································································

1,190

870

7

Non-current::
Buildings and other (merger) ································

812,820801,025

6,644

Land (merger) ·····························································

2,251,597

2,251,597

18,677Net loss carried forward ············································

7,746,144

7,749,271

64,282

Subtotal ············································································

10,810,561

10,801,895

89,605

Valuation allowance ···············································(10,811,751)(10,802,765)(89,612)

Total ···················································································

－

－

－

Net deferred tax assets ····················································¥

－

(c)

¥

$

－

－

Revision of the amount of deferred tax assets and liabilities by the change of income tax rate

With the Local Corporation Tax Act (Act No. 11 of 2014) and the Act for Partial Amendment to Local Tax Law, Etc. (Act No. 4 of 2014)
promulgated on March 31, 2014, the local corporation tax has been established and part of the special local corporation tax has been
restored to corporate enterprise tax, effective from fiscal year beginning on or after October 1, 2014. Accordingly, the effective tax rateused to calculate deferred tax assets and deferred tax liabilities concerning temporary differences, etc. expected to be resolved inaccounting periods beginning on or after January 1, 2015 will be changed to 34.16%.
As a result of this change, there are no effect on net deferred tax assets and income taxes.

13. Breakdown of Gain on Sales of Properties
For the six months ended June 30, 2014Bon Sejour Chitose
Funabashi

Bon Sejour Yotsugi

Bon Sejour Hino

Bon SejourMusashi-Shinjo(in thousands of yen)

Revenue from sales of properties ··············¥

832,153 ¥

777,256 ¥

730,459 ¥

587,138

Cost of properties sold ···································

657,193622,386

551,565

468,167

Other sales-related costs ································

6,623

5,450

5,414

4,363

Gain on sales of properties ······················¥

168,337 ¥

149,419 ¥

173,480 ¥

114,607

Bon Sejour Komaki

Bon Sejour Hadano
Shibusawa

Bon Sejour Itami(in thousands of yen)

Revenue from sales of properties ··············¥

1,280,824 ¥

735,268 ¥472,718

Cost of properties sold ···································

984,869

633,486

449,783

Other sales-related costs ································

12,563

6,243

4,357

Gain on sales of properties ······················¥

283,391 ¥

95,539 ¥18,57718

14. Leases(a) Lease rental revenues
The future minimum rental revenues pursuant to existing rental contracts as of June 30, 2014 and December 31, 2014 scheduled to bereceived are summarized as follows:
As ofJune 30, 2014

December 31, 2014

December 31, 2014

(in thousands of yen)(in thousands of
U.S. dollars)

Due within one year ····················¥

507,089$

Due over one year ·························

4,342,958

Total ···················································¥

4,850,048¥

1,843,409
15,485,197¥

17,328,607

15,291
128,454$

143,746(b) Lease rental expenses
The future minimum rental expenses pursuant to existing rental contracts as of June 30, 2014 and December 31, 2014 scheduled to be
paid are summarized as follows:
As ofJune 30, 2014

December 31, 2014

(in thousands of
U.S. dollars)(in thousands of yen)

Due within one year ····················¥

112,249

Due over one year ·························

2,280,288

Total ···················································¥

2,392,537¥

December 31, 2014

112,249$

2,224,164¥

2,336,413

931
18,450$19,381

15. Financial Instruments(a) Qualitative information for financial instrumentsi.

Policy for financial instrument transactions

The Company raises funds through loans payable and the issuance of investment units to acquire real estate properties, pay
property maintenance expenses and/or repay existing loans payable. Surplus funds are managed carefully through investments
in financial instruments taking into account liquidity and safety in light of the current financial market conditions. Derivative
instruments are used only for hedging purposes and not for speculation. The Company did not enter into any derivativetransactions for the six months ended June 30, 2014 and December 31, 2014.
ii.

Nature and extent of risks arising from financial instruments and risk management

The funds raised through loans payable are mainly used to acquire real estate properties or properties in trust and for the
repayment of existing loans payable. Liquidity risks relating to loans payable are managed by the finance department of theAsset Manager by preparing monthly plans for funds, and monitoring the covenants defined in loan agreements.
iii.

Supplemental information for financial instruments

The fair value of financial instruments is based on quoted market prices if available. When quoted market prices are notavailable, fair value is estimated using valuation techniques which contain various assumptions. If other valuation models orassumptions were used, the estimated value may differ.

19

(b) Quantitative information for financial instruments
The following table shows the carrying amounts, fair values and valuation differences of financial instruments for which fairvalue is available as of June 30, 2014 and December 31, 2014.

As ofJune 30, 2014
Carrying
amounts

December 31, 2014

Fair value

Carrying
amounts

Difference

December 31, 2014

Fair value

Carrying
amounts

Difference(in thousands of yen)

Fair value

Difference(in thousands of U.S. dollars)

Assets:Current:(1) Cash and bank deposits ······················¥

759,058(2) Cash and bank deposits in trust. ·····

2,765,504¥

759,058¥¥

Total assets ·················································¥

3,524,562¥

3,524,562¥－¥

13,165,393¥

13,165,393

¥

－

$

109,211$109,211$－(3) Short-term loans payable. ··················¥(4)Current portion of long-termloans payable ············································

13,488,750¥

13,488,750

¥

－

¥

－

¥

－

¥

－

$

－

$

－

$

－

17,552,100

17,552,100－

1,200,000

1,200,000

－

9,954

9,954

－

(5) Long-term loans payable ···················(6) Current portion of long-term loans
payable in trust. ······································

－

－

－

56,100,000

56,100,000－

465,367

465,367

－

－

－

－

18,167

18,251

84

150

151

0

(7) Long-term loans payable in trust. ···9,960,000

10,122,527

162,527

9,941,832

10,156,234

214,401

82,47084,249

1,778

Total liabilities ···········································¥

41,000,850－

2,765,504

9,153,872¥

9,153,872

4,011,521－¥－

4,011,521$

75,934$33,276－75,934$－33,276－

Liabilities:¥

41,163,378¥

162,527¥

67,260,000¥

67,474,486¥

214,486$

557,942$559,721

$

1,779

Notes
i.

The methods and assumptions used to estimate fair value are as follows:(1)

Cash and bank deposits and (2) Cash and bank deposits in trust
Because of their short maturities, the carrying amounts approximate their fair value.

(3)

Short-term loans payable
Because of their short maturities and floating interest rates reflecting changes in market rates within a short term period, the carrying amounts of short-term loans payable
approximate their fair values.

(4)

Current portion of long-term loans payable, (5) Long-term loans payable, (6) Current portion of long-term loans payable in trust and (7) Long-term loans payable
in trust
The fair values of long-term loans payable with fixed interest rates are determined based on the present value of contractual cash flows discounted at current market interest
rates which would be applicable to new loans payable under the same conditions and terms. Long-term loans payable with floating interest rates reflecting changes inmarket rates within a short term period are stated at their carrying amounts as their carrying amounts approximate their fair values.

ii.

Financial instruments for which fair value is difficult to determine are as follows:
As ofJune 30, 2014

December 31, 2014

December 31, 2014
(in thousands of
U.S. dollars)(in thousands of yen)

Tenant leasehold and security deposits ···························¥

28,663Tenant leasehold and security deposits in trust ············

1,025,726¥

28,663$

1,109,146

237
9,200

Tenant leasehold and security deposits are not publicly traded, and it is difficult to determine their fair value based on estimated future cash flows because the repayment datesof those deposits are not certain. Therefore, these financial instruments are not included in the above quantitative information.
iii.

Cash flow schedule of financial assets after the balance sheet dateWithin 1 year

1-2 years

2-3 years

3-4 years

4-5 years

Over 5 years(in thousands of yen)

As of June 30, 2014:
Cash and bank deposits ·························································¥

759,058

Cash and bank deposits in trust ··········································

2,765,504¥-¥

Total ·······························································································¥

3,524,562

¥

-

¥

-

¥

-

¥

Cash and bank deposits ·························································¥

9,153,872

¥

-

¥

-

¥

-

¥

Cash and bank deposits in trust ··········································

4,011,521

Total ·······························································································¥

13,165,393

-

-

¥

-

-

¥

-

-

¥

-

-

-

-

¥

-

¥

-

As of December 31, 2014:
¥

-

¥

-

¥

-

-

¥

-

¥

-

20

Within 1 year

1-2 years

2-3 years

3-4 years

4-5 years

Over 5 years(in thousands of U.S. dollars)
As of December 31, 2014:
Cash and bank deposits ·························································$

75,934

Cash and bank deposits in trust ··········································

33,276

Total ·······························································································$

109,211

iv.

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

Cash flow schedule of financial liabilities after the balance sheet dateWithin 1 year

1-2 years

2-3 years

3-4 years

4-5 years

Over 5 years(in thousands of yen)
As of June 30, 2014:
Current portion of long-term loans payable ···················¥

17,552,100

Long-term loans payable ·······················································

-

¥

-

¥

-

Current portion of long-term loans payable in trust ····

-

-

-

-

-

-

Long-term loans payable in trust ········································-

54,894

74,6392,863,679

5,217,347

1,749,439

Total ·······························································································¥

17,552,100¥

54,894¥Current portion of long-term loans payable ···················¥

1,200,000¥-¥

Long-term loans payable ·······················································-

Current portion of long-term loans payable in trust ····

18,167

-

-

-

-

-

Long-term loans payable in trust ········································-

73,807104,256

2,894,530

5,143,274

1,725,963

Total ·······························································································¥

1,218,167

-

¥

-

-

¥

-

-

¥

-

-

-

74,639¥2,863,679¥

5,217,347

¥

-

¥

-

¥

-

¥

1,749,439

As of December 31, 2014:-¥

Within 1 year

73,807

56,100,000¥

1-2 years

56,204,256-¥

2-3 years

2,894,530--¥

3-4 years

5,143,274-¥

4-5 years

1,725,963

Over 5 years(in thousands of U.S. dollars)
As of December 31, 2014:
Current portion of long-term loans payable······················$

9,954

Long-term loans payable ·······················································

-

$

-

$

Current portion of long-term loans payable in trust ····

150

-

-

-

-

-

Long-term loans payable in trust ········································

-

612

864

24,011

42,665

14,317

Total ·······························································································$

10,105

-

$

612

-

$

-

465,367$

466,231$-$

24,011

-

$

-

-

$

42,665-$

14,317

16. Segment Information
Effective from the six months ended June 30, 2011, the Company adopted “Accounting Standard for Disclosures about Segments of anEnterprise and Related Information” (ASBJ Statement No. 17, revised on March 27, 2009), and “Guidance on Accounting Standard forDisclosures about Segments of an Enterprise and Related Information” (ASBJ Guidance No. 20, issued on March 21, 2008).
Segment information for the six months ended June 30, 2014 and December 31, 2014 is as follows:(a) Operating Segment Information
Disclosure is omitted as the Company is comprised of a single reportable segment engaged in the property rental business.
(b) Enterprise-wide Disclosures(i) Information about Products and Services
Disclosure is not required as revenues from external customers for the single segment are in excess of 90% of total revenues.
(ii) Information about Geographic Areas
Revenues from Overseas Customers:
Disclosure is not required as revenues from external customers located in Japan are in excess of 90% of total revenues.
Tangible Fixed Assets:
Disclosure is not required as tangible fixed assets located in Japan are in excess of 90% of total tangible fixed assets.
21

(c) Information about Major Customers
Information about major clients for the six-month periods ended June 30, 2014 and December 31, 2014 were as follows:
For the six months ended June 30, 2014

Disclosure is omitted as net sales to a single external customer account for less than 10% of the operating revenue on thestatement of operations and retained earnings.
For the six months ended December 31, 2014
Operating Revenues

Name of client

Revenues(in thousands of U.S. dollars)(in thousands of yen)

Mystays Hotel Management Co.,Ltd.

¥1,722,789

Related segment＄14,291

Real estate investing business17. Related-Party Transactions(a) Parent Company and Major Corporate Unitholders
For the six months ended June 30, 2014
Share capital

Transactions for the period
VotingType ofAmounts (1)Relationship with theCompany nameLocation

Businessrelated-party

interest in the
Company(in millions of yen)Interested party

Zephyrus

Minato-ku

Investmentof theAsset

TMK(3)

Tokyo

management

Manager¥Company

0.1―

Minato-ku,

Investment

Tokyomanagement

Amounts (1)Balance sheet

Type of transactions(in thousands of yen)Seller of real estate

Acquisition of real estate

trust beneficiary rights

trust beneficiarybusiness
Nishi TMK(3)Balance at the end of period

account(in thousands of yen)

$ 2,851,000――$ 2,584,000――

rights,(2)(5)
¥

0.1

―

Seller ofreal estate

Acquisition of real estate

trust beneficiary rights

trust beneficiarybusinessrights,(2)(5)

Notes:(1)

Consumption taxes are not included in the transaction amount, but are included in the balance at the end of period.

(2)

Terms and conditions are decided pursuant to the Asset Manager’s Regulations on Transactions with Sponsor-related Persons and the Management Manual regarding
Transactions with Sponsor-related Persons.

(3)

The seller, Zephyrus TMK and Nishi TMK, has no relationship to be stated, but they receives investment through funds that are managed by FIG, an affiliate of Calliope.
Accordingly, we treat Zephyrus TMK and Nishi TMK as a related party.

(4)

Calliope holds 609,942 units (holding ratio: 38.77%) of the issued investment units of the Company.

(5)

Sale price and acquisition price exclude adjusted amount of real property tax and city planning tax, as well as consumption tax and local consumption tax.
Acquisition of real estate trust beneficiary rights are relating to below
Property No.

Property nameAcquisition cost(in thousands of yen)

D1

Hotel MyStays Kanda

2,880,000

D2Hotel MyStays Asakusa

2,610,000

22

For the six months ended December 31, 2014
Share capital

Type ofCompany

related-party

nameLocation

Business

Balance at the end of period

Transactions for the period
Voting(in(inmillions

thousanof yen)ds of U.S.

Amounts (1)Relationship within thethe Company
Compadollars)

Amounts(1)interest

Type of transactions(in thousands(inof yen)thousands of U.S.

ny

Balancesheet(in thousands(inof yen)thousandaccounts of U.S.

dollars)
Zephyrus

Minato-ku

Investment

TMK(3)

Tokyo

manageme

Nishi TMK(3)Minato-ku,

Investment

Tokyo

¥

0.1

$

0

―

nt business

Acquisition of realtrust beneficiary

estate trust beneficiaryrightsrights,(2)(5)Seller ofreal estate

Acquisition of real

managemetrust beneficiary

estate trust beneficiarynt businessrightsrights,(2)(5)Seller ofreal estate

beneficiary

trust beneficiaryrights,(2)(5)Shijodori

Minato-ku,

Investment

holding TMK(3)Tokyo

manageme

Interested party

DanubeMinato-ku,

Investmentof theAsset

TMK(3)

Tokyo

¥

¥

0.1

279

$

$

0

2

―

―

nt business

ManagerSeller of real estate

Acquisition of real

managemetrust beneficiary

estate trust beneficiarynt businessrightsrights,(2)(5)¥Seller ofreal estate

Acquisition of realtrust beneficiary

estate trust beneficiaryrightsrights,(2)(5)Seller ofreal estate

Acquisition of real

¥

0.1

82

$

$

0

0

―

Nagahoribashi

Minato-ku,

Investment

holding TMK(3)Tokyo

manageme

Aki TMK(3)Minato-ku,

Investment

Tokyomanagemetrust beneficiary

estate trust beneficiarynt businessrightsrights,(2)(5)

Lease holder andRental Revenues.

―

nt business

Minato-ku,

HotelManagement,.

Tokyo

manageme

Co.Ltd(3)¥ 14,878,412$ 123,421―――¥ 4,473,000$ 37,104―――¥ 7,594,980$ 63,002―――¥ 3,845,400$ 31,898―――¥ 2,514,820$ 20,861―――¥ 6,631,968$ 55,014―――¥ 1,722,789$ 14,291

Rental540,064

4,480

rightsSeller ofreal estate

Mystays Hoteldollars)

¥

¥

0.1

100

$

$

0

0

―

―

operator of hotel

receivabl

nt businesses

Notes:(1)

Consumption taxes are not included in the transaction amount, but are included in the balance at the end of period.

(2)

Terms and conditions are decided pursuant to the Asset Manager’s Regulations on Transactions with Sponsor-related Persons and the Management Manual regarding
Transactions with Sponsor-related Persons.

(3)

The seller, Zephyrus TMK,Nishi TMK,Shijodori holding TMK,Danube TMK,Nagahoribashi holding TMK,Aki TMK and Mystays Hotel Management.,Co.Ltd has no
relationship to be stated, but they receives investment through funds that are managed by FIG, an affiliate of Calliope. Accordingly, we treat Zephyrus TMK ,Nishi
TMK,Shijodori holding TMK,Danube TMK,Nagahoribashi holding TMK,Aki TMK and Mystays Hotel Management.,Co.Ltd as a related party.

(4)
(5)

Calliope holds 609,942 units (holding ratio: 22.85%) of the issued investment units of the Company.
Sale price and acquisition price exclude adjusted amount of real property tax and city planning tax, as well as consumption tax and local consumption tax.
Acquisition of real estate trust beneficiary rights are relating to below
Property nameSellerD3

Hotel MyStays Kyoto-Shijo

Shijodori holding TMK

6,024,460

Acquisition cost(in thousands ofU.S. dollars)
49,974

D4

MyStays Shin-Urayasu Conference Center

Zephyrus TMK

4,930,200

40,897

D5

Hotel MyStays Maihama

Zephyrus TMK

4,870,312

40,400D6

Hotel Vista Premio Dojima

Danube TMK

3,845,400

31,898

D7

Hotel MyStays Nagoya-Sakae

Zephyrus TMK

2,958,000

Hotel MyStays Sakaisuji-Honmachi

Nagahoribashi holding
TMK

D9

Hotel MyStays Yokohama

Zephyrus TMK

2,119,900

17,585

D10

Hotel MyStays Nippori

Nishi TMK

1,898,540

15,748

D11

Hotel MyStays Fukuoka-Tenjin-Minami

Shijodori holding TMK

1,570,520

13,027

D12

Flexstay Inn Iidabashi

Aki TMK

1,381,660

11,461

D13

Hotel MyStays Ueno Inaricho

Nishi TMK

1,331,960

11,049

D14

Flexstay Inn Shinagawa

Nishi TMK

1,242,500

10,306

D15

Flexstay Inn Tokiwadai

Aki TMK

1,242,500

10,306

D16

Flexstay Inn Sugamo

Aki TMK

1,192,800

9,894

D17

Hotel MyStays Otemae

Aki TMK

1,192,800

9,894

Property No.

D8Acquisition cost(in thousands of yen)

24,53721,0642,514,820

23

Property No.

Property nameSellerAcquisition cost(in thousands of yen)

D18

Flexstay Inn Kiyosumi Shirakawa

Aki TMK

749,476

Acquisition cost(in thousands ofU.S. dollars)
6,217

D19

Flexstay Inn Nakanobu P1

Aki TMK

589,442

4,889

D20

Flexstay Inn Nakanobu P2

Aki TMK

283,2902,349(b) Board of Directors and Major Individual Unitholders
For the six months ended June 30, 2014
Type of

Name

Business / Occupation

related-party

VotingTransactions for the periodinterest intheAmounts(3)Type of transactions

Company

Balance sheet(in thousands

accountof yen)Directors andNaoki

Executive officer of the Company

close relatives

Fukudaand management director offee to Consonant Investment

Consonant Investment

Management Co., Ltd.(1)Management Co., Ltd.

Payment of institution management―

Balance at the end of period

Payment of the assets management

Amounts(3)(in thousandsof yen)¥126,083

Accrued expenses¥

68,670¥600

Accrued expenses¥

324

fee to Consonant Investment
Management Co., Ltd.(2)Notes:(1)

Naoki Fukuda serves as a representative of the Asset Manager and the asset management fee is established in the Articles of Incorporation of the Company.

(2)

Naoki Fukuda serves as a representative of Asset Manager and the fee is established in the “Administrative Agency Agreement for Organizational Management” which wasagreed between the Asset Manager and the Company.

(3)

Consumption taxes are not included in the transaction amount, but are included in the balance at the end of period.

For the six months ended December 31, 2014
Transactions for the period
VotingType ofrelated-party

Name

Business / Occupation

Balance at the end of period
Amounts (3)Amounts (3)interest intheBalance
Type of transactions(in thousands

Companyof U.S.

of yen)Directors andNaoki

Executive officer of the Company

close relatives

Fukudaand management director offee to Consonant Investment

Consonant Investment

Management Co., Ltd.(1)Management Co., Ltd.

Payment of institution management―(in thousands

Payment of the assets management¥

128,993

sheet
account

thousands

dollars)
$

(in

(in

of yen)1,070

Accruedthousandsof U.S.
dollars)¥

67,500

$

559

¥

864

$

7

expenses¥

1,100

fee to Consonant Investment$

9

Accruedexpenses

Management Co., Ltd.(2)Notes:(1)

Naoki Fukuda serves as a representative of the Asset Manager and the asset management fee is established in the Articles of Incorporation of the Company.

(2)

Naoki Fukuda serves as a representative of Asset Manager and the fee is established in the “Administrative Agency Agreement for Organizational Management” which wasagreed between the Asset Manager and the Company.

(3)

Consumption taxes are not included in the transaction amount, but are included in the balance at the end of period.

2418. Per Unit Information
The following table shows net asset value per unit as of June 30, 2014 and December 31, 2014, and net income per unit for the six months
then ended. Net income per unit is calculated by dividing the net income attributable to unitholders by the weighted average number ofunits outstanding during the six-month period. The Company has no potentially dilutive units.
June 30,2014

As of / For the six months ended
December 31,
December 31,
2014
2014
(Yen)

(U.S. dollars)

Net asset value per unit ·········································¥

23,121¥

23,005$190

Net income per unit ················································

573

762

6

Weighted average number of units ···················

1,573,179

2,570,932－

19． Subsequent Events(a) New borrowing
The Company entered into a new loan agreement on February 6, 2015 to fund a portion of the acquisition of 3 Hotel properties.
New Syndicate Loan (D)(i) Lender:

Sumitomo Mitsui Banking Corporation
The Bank of Tokyo-Mitsubishi UFJ, Ltd.
Mizuho Bank, Ltd.
Citibank Japan Ltd.
Shinsei Bank, Limited
Sumitomo Mitsui Trust Bank, Limited
Resona Bank, Limited(ii) Borrowing Amount:JPY 6,241 million (US$ 51 million)(iii) Interest Rate:

One-month JPY TIBOR + spread (0.8%)(iv) Interest payment date:

Last business day of each month from borrowing date through principal maturity date,with the first interest payment date set on February 27, 2015.

(v) Method of principal repayment:

To be repaid in full on the principal maturity date(vi) Borrowing Method:

Secured (Note 1) / with no guarantee(vii) BorrowingDate:

February 6, 2015(viii) Principal Maturity Date:

February 6, 2018

(Note 1) First priority pledges over the real estate trust beneficiary interests for 3 properties: APA HotelYokohama-Kannai, Hotel Nets Hakodate, Flexstay Inn Shirogane and 65
properties: NisshinPalacestage Daitabashi, Nisshin Palacestage Higashi-Nagasaki, Growth Maison Gotanda, GrowthMaison Kameido, Emerald House, Harmonie Ochanomizu,
Suncrest Shakujii Koen, Growth MaisonShin-Yokohama, Belle Face Ueno Okachimachi, Grand Rire Kameido, Growth Maison Ikebukuro,Growth Maison Yoga, Route Tachikawa,
Shibuya Honmachi Mansion, City Heights Kinuta, AcseedsTower Kawaguchi Namiki, Capital Heights Kagurazaka, College Square Machida, Belair Meguro,Wacore Tsunashima I,
Foros Nakamurabashi, Growth Maison Kaijin, College Square Machiya, CityHouse Tokyo Shinbashi, Winbell Kagurazaka, Nishiwaseda Crescent Mansion, Lexington
SquareAkebonobashi, Casa Eremitaggio, Towa City Coop Shinotsuka II, Bichsel Musashiseki, Lexel MansionUeno Matsugaya, Towa City Coop Sengencho, Royal Park Omachi,
Lexington Square Haginomachi,Visconti Kakuozan, Lexington Square Daitabashi, Lexington Square Honjo Azumabashi, AMS TOWERMinami 6-Jo, Spacia Ebisu, Kindai
Kagakusha Building, Lexington Plaza Nishigotanda, Cross SquareNAKANO, Ohki Aoba Building, Lexington Plaza Hachiman, AEON TOWN Sukagawa, Hotel MyStaysKanda,
Hotel MyStays Asakusa, Hotel MyStays Kyoto-Shijo, MyStays Shin Urayasu Conference Center,Hotel MyStays Maihama, Hotel Vista Premio Dojima, Hotel MyStays Nagoya-Sakae,
Hotel MyStaysSakaisuji-Honmachi, Hotel MyStays Yokohama, Hotel MyStays Nippori, Hotel MyStaysFukuoka-Tenjin-Minami, Flexstay Inn Iidabashi, Hotel MyStays Ueno
Inaricho, Flexstay Inn Shinagawa,Flexstay Inn Tokiwadai, Flexstay Inn Sugamo, Hotel MyStays Otemae, Flexstay Inn KiyosumiShirakawa, Flexstay Inn Nakanobu P1 and Flexstay
Inn Nakanobu P2. First priority mortgages over 2properties: Shinjuku Island and Times Kanda-Sudacho 4th.

25

(b) Acquisition of Assets
The Company acquired 3 Hotels, which exhibit stable revenue and have a high potential to achieve further revenue growth, on
February 6, 2015.
The overview of the 3 Hotels is as follows,

Use

Hotel

Property
Number

Property Name

D21

Apa Hotel Yokohama Kannai

D22

Hotel Nets Hakodate

D23

Flexstay Inn Shirogane(Note 1)

Total
(Note 1)

Location

Acquisition
Price

Yokohama-shi,

JPY 8,350 million

Kanagawa(US$ 69 million)

Hakodate-shi,

JPY 2,792 million

Hokkaido(US$ 23 million)

Minato-ku, Tokyo

JPY 2,119 million(US$ 17 million)
JPY 13,261 million(US$ 110 million)

Total rentablearea

6,568.51 ㎡

7,961.26 ㎡

1,754.06 ㎡

SellerCategory ofSpecified Assets

AYK Tokutei Mokuteki

Trust Beneficial

KaishaInterest

Zephyrus Tokutei

Trust Beneficial

Mokuteki Kaisha

Interest

Nishi Tokutei Mokuteki

Trust Beneficial

KaishaInterest

16,283.83 ㎡

Acquisition prices do not include adjustments for property taxes or city planning taxes, or national or local consumption taxes; hereinafter the same.

26