Japan Leisure Hotels 2008 Annual Report by Stephen Mansfield

ANNUAL REPORT Japan Leisure Hotels Limited Annual Report and Audited Consolidated Financial Statements For the year ended 31 December 2008

The dynamics of the leisure hotel industry in Japan remain unchanged. It is a multibillion pound a year industry with no dominant players.

Contents

Chairman’s Statement

Asset Manager’s Report

Report of the Directors

Independent Auditors’ Report

Consolidated Income Statement

Consolidated Balance Sheet

Consolidated Statement of Changes in Equity

Consolidated Cash Flow Statement

Notes to the Consolidated Financial Statements

Notice of Annual General Meeting

Form of Proxy

Management and Administration

Inside back cover

Chairman’s Statement

Geographic, demographic and cultural factors combine to make the leisure hotel industry less vulnerable to the macroeconomic environment. Lack of privacy is one of the main reasons why the leisure hotel industry thrives in Japan. Introduction I am pleased to report that in 2008 Japan Leisure Hotels has continued to execute its strategy of managing and expanding its leisure hotels business, notwithstanding the steadily worsening economic conditions in Japan. Geographic, demographic and cultural factors combine to make the leisure hotel industry relatively less vulnerable to the macroeconomic environment than other areas of the economy. Japan is a densely populated country, whose people tend to live predominantly in urban areas. Combined with the high cost of living, this means that young adults tend to stay with their families comparatively longer than in other countries. The resulting lack of privacy is one of the main reasons why the leisure hotel industry thrives in Japan. Financial Performance JPLH’s investment hotels continued to enjoy high levels of occupancy with the Bonita branded portfolio enjoying occupancy rates in excess of 250%. New Perspective, the Asset Manager, continues to implement measures designed to reduce costs and thus minimise the effects of inflation which meant that, with room prices remaining stable, the overall effect was that EBITDA margin1 before asset management fees for the Bonita portfolio2 increased to 34.5% compared to 32% in 2007.

Sales for the portfolio for the full year were JP¥1.183 billion (£6.1 million). For the Bonita portfolio, which excludes Yokkaichi, sales were JP¥1.15 billion (£5.9 million). Excluding the impact of Yokkaichi which was acquired in August 2008 and has yet to be rebranded a Bonita hotel, EBITDA for 2008 was JP¥317 million (£1.6 million). The net income of JPLH has been significantly boosted by the exceptional item reflecting negative goodwill of JP¥801 million (£4.1 million). This represents the discount achieved on the purchase of the Bonita branded portfolio at the time of listing. Cash from operations in 2008 was JP¥213 million (£1.1 million) resulting in a cash position as at 31 December 2008 of approximately JP¥263 million (£2.0 million); as a result, JPLH remains free of debt and continues to generate strong cash flow from operations. JPLH’s portfolio of 6 leisure hotels was valued by Colliers International (Hong Kong) Ltd at 31 December 2008 at JP¥5,026,000,000. Combined with the cash resources at the Company’s disposal the Adjusted Net Asset Value3 as at 31 December 2008 was JP¥5,233 million (£40 million)4 or 91p per share compared the place price of 50p at the time of Admission to AIM. A significant proportion of this

1 EBITDA comprises earnings before interest, tax, depreciation and amortization and excludes the operating expenses of the Guernsey companies. EBITDA margin is EBITDA expressed as a percentage of revenue 2 The Bonita portfolio refers to the five hotels that are operating under the Bonita brand located at Sendai, Yamagata, Isawa, Komaki and Matsusaka JLH Annual Report 2009

Chairman’s Statement

“...Cash position at 31 December 2008 was approximately JP¥263 million (£2.0 million); as a result, JPLH remains free of debt and continues to generate strong cash flow from operations.”

appreciation, when stated in Sterling, is due to foreign exchange rate movements. Acquisitions There have been two significant transactions in 2008. The first was the investment in the portfolio of the five Bonita branded hotels at the time of admission to AIM. The portfolio was further expanded by investing in a hotel in Yokkaichi in central Japan in August 2008. This expansion was funded entirely from existing cash resources; planning for the refurbishment is progressing well and this hotel will be brought under the umbrella of the Bonita brand in late 2009 or early 2010. Current Trading and Outlook Trading to date in 2009 has been satisfactory. The Directors are therefore optimistic with regard to prospects for the current year, although the economic environment requires a certain degree of caution. In the longer term, the Board is confident of achieving the objectives set out at the time of the Company’s admission to AIM. The current economic environment in Japan has led to a number of distressed situations which provides an excellent opportunity to invest in additional leisure hotels on attractive terms.

reports, there are a number of hotels whose owners are in severe financial difficulties or who no longer view these assets as core to their business. In order to take advantage of these current opportunities to acquire additional leisure hotels at attractive values, the Company is exploring the possibility of raising additional capital. Dividends The Board has recommended that no dividend be paid for the year ended 31 December 2008 but currently anticipates paying a dividend for the year ended 31 December 2009. Annual Meeting We look forward to discussing our current strategy and recent performance with shareholders at the Annual General Meeting, to be announced in due course. This will be held at the registered office of the Company, Heritage Hall, Le Marchant Street, St Peter Port, Guernsey. Alan Clifton Chairman Japan Leisure Hotels Ltd 15 May 2009

The Board believes that there is currently a unique opportunity to capture a significant share of the leisure hotel market in Japan particularly, as the Asset Manager 3 Adjusted net asset value per share is based on the total assets where property and equipment have been revalued, as per the Colliers International (Hong Kong) Ltd valuation detailed in note 8, and the number of shares in issue at the end of the year 4 FX rate of 131 yen per pound Sterling at 31 December 2008

JLH Annual Report 2009

Chairman’s Statement

Asset Manager’s Report

BONITA ISAWA

“Akitan” (meaning “cheaper, closer and shorter travel”) is becoming more popular among Japanese The Japanese Economy The most recent economic statistics in Japan may not provide much encouragement to investors; in the last quarter of 2008 real GDP shrank at an annualised rate of 12.1%. Additionally, overseas demand for Japanese products has weakened, causing Japanese exports to collapse, with merchandise export revenue falling by 46% year on year in January 2009 and 49% in February 2009. As a result, Japan’s trade figures have rapidly deteriorated with an annualised trade deficit for the six months to January 2009 of JP¥4 trillion compared with a surplus of almost JP¥11 trillion a year earlier.

Japanese Yen and the fact that almost all of Japan’s energy is imported means that both businesses and consumers are benefiting from falling import prices and, more specifically, falling energy prices.

By contrast, the leisure hotel sector relies on domestic consumption as its driver and that appears to be holding up better than Japanese exports. There are many reasons for us to remain cautiously optimistic. First and foremost is the government’s determination to support the economy. Like many governments around the world the Japanese government is committed to supporting domestic spending. In order to achieve this, the Japanese government has announced three separate supplemental budgets amounting to JP¥27,000 billion (approx. £206 billion) or approximately 5% of GDP. Furthermore, unlike many Western economies, the Japanese consumer is not burdened by large levels of personal debt. Unemployment is rising modestly, mainly affecting temporary and migrant workers, with those in permanent jobs less vulnerable. One of the stated aims of the government stimulus is to create two million jobs over the next two years. More immediately, the strength of the

Leisure Hotel Industry The Japanese leisure hotel industry consists of approximately 25,000 hotels, with an average of 24 rooms per hotel. Each room is, on average, occupied more than twice each day and the average spend per guest is currently JP¥6,456 (£49), only marginally down on JP¥6,639 (£51) a year ago.

The stimulus to spending provided by the government is expected to increase both the number of jobs and the level of demand. When this is combined with a consumer base with a relatively high proportion of disposable income, it is reasonable to anticipate that spending in the leisure hotel industry will remain resilient, as it has in previous recessionary periods.

The industry has revenues in excess of JP¥4,000 billion (£31 billion) annually and yet no single operator or owner controls more than 100 hotels; in fact 90% of all owners have five or fewer hotels. It is our intention to provide the guidance and management at all levels to ensure that Japan Leisure Hotels will be a key player in the consolidation and maturation of the Japanese leisure hotel market. Many challenges remain ahead. The biggest issue facing the industry is its fragmentation.This fragmentation leads to an JLH Annual Report 2009

Asset Manager’s Report

Leisure Hotel Industry Statistics Average spend per occupancy

Number presented in real Japanese yen indexed to 2000

Revenue per room

20000 18000 16000

Japanese Yen

14000 12000 10000 8000 6000 4000 2000

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

Source: Keieisha (Manager)’s Survey 1999-2008, Leisure Hotel Quarterly, Sogo Unicom Corporation. www.e-stat.go.jp, New Perspective Analysis. Figures include consumption tax.

opaque market with few, if any, operators who have the size and financial resources to invest in the business that would result in the scale, transparency and accountability necessary to allow this industry to develop to a more mature state and one appropriate to an industry of this size. More recently we have seen a number of trends, which we have spoken about previously, accelerated by the current financial turmoil. One of Bonita’s key strengths is the high standards that we maintain at our properties that

encourage guests to return time and again. Only committed owners with a strong operating ethos and robust balance sheets are able to maintain their competitive position. Weaker owners without a strong operating framework and those that are highly geared continue to struggle. In competitive areas of Japan we have seen owners forced into liquidation and others who have merely decided to mothball their operations. This is a trend we expect to see continue and perhaps even accelerate, which will ultimately drive the consolidation process we expect to occur over the coming years.

Financial Results Presented below are statements of EBITDA, based on audited figures, for each of the hotels for the year ended 31 December 2008. Bonita Branded Hotels 2008 2007 JP¥'000 JP¥'000

Yokkaichi

Total

2008 JP¥'000

2007 JP¥'000

2008 JP¥'000

2007 JP¥'000

Revenues

1,153,491

1,177,271

34,066

–

1,187,557

1,177,271

Variable operating expenses

(608,013)

(649,750)

(30,125)

–

(638,138)

(649,750)

Fixed operating expenses

(228,065)

(186,511)

(23,380)

–

(251,445)

(186,511)

317,413

341,010

(19,439)

–

297,974

341,010

EBITDA

EBITDA: Earnings before interest, tax, depreciation and amortisation. The information in the table above is an extract from the audited Japanese GAAP financial statements of the operating companies, converted to IFRS on an unaudited basis.

JLH Annual Report 2009

Asset Manager’s Report

BONITA MATSUSAKA

The difference between the total EBITDA above and the operating profit before exceptional item per the Consolidated Income Statement on page 16 is depreciation and amortisation of JP¥217 million (£1.1 million) and operating expenses of the Guernsey companies of JP¥69 million (£370,000) and other expenses of JP¥2million (£10,700). For the Bonita portfolio the number of guests increased by 1.4% for the year, while net sales decreased by 2%. The decrease in sales was not unexpected: as hotels typically start their life cycle with increasing sales for the first two years following a major renovation before reducing to a more sustainable level, this combined with increased members’ benefits that accrue over time results in the slight decline in revenue. In sharp contrast to the slight decline in sales there has been a significant drop in the operating expenses of the Bonita portfolio. In most categories, operating expenses declined by 10% or more, reflecting improved operational efficiency, and only high energy costs prevented this reduction from

REVPAR

being greater. Overall, operating expenses, excluding asset management fees, declined by 5.7% resulting in an increase in EBITDA margin, before asset management fees, from 32% in 2007 to 34.5% in 2008. These operating figures exclude the impact of the purchase of the Yokkaichi hotel in August 2008. The operations of this hotel are discussed further below. Suffice to note here that while the hotel was loss-making overall in 2008, it was generating a positive monthly cash flow by the end of 2008. After adjusting for actual capital expenditure and movements in working capital, the cash flow from operations of the hotels in 2008 was JP¥295 million (£1.5 million). The following key performance indicators further illustrate the growth and performance of the Bonita portfolio which was acquired by Japan Leisure Hotels Limited (JPLH) in January 2008:

2005

2006

2007

2008

JP¥10,506

JP¥15,350

JP¥16,572

JP¥ 16,162

Occupancy rate

160%

239%

254%

257%

EBITDA Margin

(43.5)%

25.5%

28.7%

27.5%

1 REVPAR: Revenue per available room

JLH Annual Report 2009

Asset Manager’s Report

“Overall operating expenses declined by 5.7% resulting in an increase in EBITDA margin, before asset management fees, from 32% to 34.5% in 2008.”

Operating Commentary Overall, the hotels operating under the Bonita brand turned in a satisfactory performance in the face of a challenging operating environment. Pressure on margins was felt as a result of the high utility costs, although this eased somewhat in the first quarter of 2009 and should provide a little tailwind going forward. The hotel at Yokkaichi was acquired in August 2008. The hotel struggled initially as the effect of measures introduced by new management take time to have any material impact. Yokkaichi is one of Japan’s largest industrial cities, so is especially susceptible to negative impact from local factory layoffs and closures. Some of the cost control measures that are standard in the Bonita portfolio started to have an impact at Yokkaichi towards the end of the year and we have also seen an increase in guest numbers. Planning continues at a good speed for the renovation of Yokkaichi, and we expect to commence work towards the end of the fourth quarter of 2009 or the first quarter of 2010. Currently the plan is to finance the renovation work from internally generated cash. It is taking longer to execute this renovation than with previous hotels but there are good reasons for this; this additional time is being utilised to review fundamentally the design of the hotel with particular effort being expended on reducing energy consumption and improving operational efficiencies within the property, including a new operation and management system. We are excited about the significant steps we are taking and the benefits that will

JLH Annual Report 2009

Asset Manager’s Report

be seen initially in Yokkaichi after the renovation and the portfolio as a whole over time. Cost controls will continue to be an ongoing theme of our annual and semi-annual reports to the shareholders of JPLH. This is an area that was highlighted in JPLH’s Admission Document and one on which we intend to focus for many years to come. As our portfolio grows we are able to bring more leverage and scale not just to the purchasing process but also to inventory management, staff productivity and resource management in the hotels – many of these developments will be designed in from inception with our Yokkaichi property. We have made good progress in 2008 in improving across a wide range of costs, but we see 2009 as a critical year as we seek to introduce technology to control and track expenditures more accurately across the portfolio. This will result in less impressive cost reductions in 2009 than we have seen in 2008, but with significant improvement towards the end of 2009 as the technology becomes fully functional and staff become more familiar with it. Our marketing initiatives have helped to maintain a steady demand from our guests with occupancy rates continuing to exceed 250%. We continue to develop our membership scheme to engender customer loyalty and encourage repeat business. One of our key marketing tools is the Hotel Bonita website (www.hotel-bonita.jp) which continued to experience excellent levels of traffic; in particular we were pleased with the impact that our mobile phone website has had. We intend to build upon this success, with a view to increasing the number of people who are signed up to our e-mail marketing scheme.

Our Locations

Sendai

Yamagata No. Of Rooms

No. Of Rooms 23

Gross Revenue 2008 ¥519,800,000

Gross Revenue 2008 ¥110,100,000

Komaki No. Of Rooms

Gross Revenue 2008 ¥147,400,000

Isawa No. Of Rooms

Gross Revenue 2008 ¥122,400,000

Yokkaichi* No. Of Rooms

Gross Revenue 2008 ¥34,100,000 * Not operating as a Bonita Hotel

Matsusaka No. Of Rooms

Gross Revenue 2008 ¥263,800,000

JLH Annual Report 2009

Asset Manager’s Report

BONITA ISAWA

The Current Opportunity The initial effects of the global financial crisis may have missed the Japanese banks but it has had a substantial negative impact on the middle market of real estate companies in Japan. These secondary effects appear to be having a material impact on Japanese banking. Urban Corporation and Sebon, both midsized real estate companies, both filed for civil rehabilitation under court supervision in the second half of 2008. This was an explicit and very public example of the collapse of lending to small and medium sized real estate companies. Since then, real estate prices have fallen as companies have sought to raise cash to repay loans and avoid bankruptcy. Banks and other financial institutions are increasingly reluctant to provide finance to real estate investors and this has drastically reduced the number of property transactions. This trend is illustrated by a recent Bank of Japan survey that reported that domestic banks advanced JP¥1.5 trillion to real estate firms in the last quarter of 2008, down 36% from the prior year.

hotel industry are experiencing severe financial difficulties. Many lenders are also seeking to reduce their exposure to the leisure hotel sector, which inevitably places yet more leisure hotels on to the market. It seems likely that the pressure on both borrowers and lenders will continue to increase in the coming months, which should in turn create opportunities at ever more attractive prices. The worsening state of the Japanese economy has increased the scale of both the challenges ahead of us, and the opportunities available to us. As we have previously stated, the demand for use of leisure hotels in Japan is less impacted by the macro-economic environment than other sectors, even within the broader leisure industry. On any given day, 2% of the adult population in Japan visits a leisure hotel and this proportion is not changing significantly in the current economic climate.

Bankruptcies are inevitably rising, which is reflected in the statistic that corporate bankruptcies in March 2009 were at a six year high. More specifically, according to Teikoku Databank Limited, 54 real estate companies in Japan having debts of at least JP¥10 million (£76,400) went bankrupt in January 2009, 80% more than in January 2008. Bankruptcies also rose sharply in February 2009 and were on the upward trend in March.

However, maintaining and improving financial performance is not without its challenges. Costs of essential resources, such as electricity, gas and food, have risen and we have therefore sought to operate as efficiently as possible to minimise the impact of this. We continue to examine new systems and technologies to improve operating efficiencies still further, which should act as a buffer against continued macroeconomic pressures. We expect the renovation at our Yokkaichi property to set a new benchmark in terms of efficiencies going forward.

It should therefore come as no surprise that a large number of owners and operators in the Japanese leisure

We have to recognise, though, that our hotels will inevitably be affected by the developments in the broader

JLH Annual Report 2009

Asset Manager’s Report

“Here is a consolidation story where the winner will be leading a £31 billion a year industry.”

economy. We are working on putting plans in place so that we can react appropriately as conditions develop, focusing on cost control, marketing and maintaining high standards. As noted earlier, our marketing initiatives have produced excellent results, especially in the area of mobile web commerce. Our ability to maintain standards will be crucial in winning customers disaffected with the standards of our struggling competitors. We are continually re-evaluating all aspects of the business to seek to further improve our product offering and cost base to provide a higher quality service in the most cost effective manner. Outlook Most importantly our challenge and stated goal is to deliver the highest returns possible to JPLH and support JPLH in its goal of becoming the key player in consolidating this highly fragmented industry. We believe our management track record together with the increasing number of hotels available for sale at low prices are factors that will enable JPLH to secure the necessary finance to achieve this objective. Many hotel owners in Japan are, in several cases, in severe difficulties, and this is our opportunity.

Conclusion Opportunity presents itself when crises are at their most severe and steady analysis is applied rather than emotion or fear. Japan is the second largest economy in the world and its government’s latest package of tax cuts and government spending will provide a massive fiscal boost relative to GDP. Moreover, the leisure hotel industry has proven resilient over the last ten years as shown by the steady cash flows from JPLH’s investments. Here is a consolidation story where the winner will be leading a £31 billion a year industry. There are many challenges to face in the coming year but the events of the last 12 months have merely amplified the opportunity and further verified the whole basis for investing in JPLH. We remain very excited and confident about the future. Stephen Mansfield Director New Perspective Y.K. 15 May 2009

Robert Marshall Director New Perspective Y.K. 15 May 2009

With the debt markets effectively closed, the Board of JPLH has indicated its intent to secure the appropriate finance from equity investors to whom we can demonstrate a number of attractively priced assets, whose performance can be enhanced through rebranding under our management. JLH Annual Report 2009

Asset Manager’s Report

Our ability to drive sales is a combination of our brand and its communication, the product we deliver to the market and more aggressive pricing based on detailed analysis.

Sendai bathroom prior to renovation

Sendai bathroom post renovation

Sendai suite room prior to renovation

JLH Annual Report 2009

Asset Managerâ&#x20AC;&#x2122;s Report

The transformations from our Sendai property and those we are planning for our Yokkaichi property illustrate our commitment to quality.

Yokkaichi prior to renovation

Yokkaichi architectural image post renovation

Sendai suite room post renovation

JLH Annual Report 2009

Asset Managerâ&#x20AC;&#x2122;s Report

Report of the Directors

The Directors present their annual report on the affairs of the Group, which comprises the Company, its wholly-owned subsidiaries and those special purpose entities (“SPEs”) which invest in hotels in Japan, together with the financial statements and Independent Auditors’ Report thereon, for the year ended 31 December 2008. Principal activities Japan Leisure Hotels Limited is a Guernsey registered closed-ended company which has been established to provide attractive returns to investors by investing into the Japanese leisure hotel industry and, through its investments, aid the consolidation of a highly fragmented industry. The Company was listed and admitted to trading on AIM, the market of that name operated by the London Stock Exchange on 16 January 2008. Business review A review of the business together with the likely future developments is contained in the Chairman’s Statement on page 1 and the Asset Manager’s Report on page 3. Results and dividend The results for the year are set out in the Consolidated Income Statement on page 16. The Directors do not recommend payment of a dividend in respect of the year to 31 December 2008 in light of the commitments of the Group to the development of its hotel portfolio, specifically the redevelopment of the Yokkaichi hotel.

JLH Annual Report 2009

Report of the Directors

Directors The Directors of the Company who served during the year and at 31 December 2008 are shown in the Management and Administration section at the end of this report. Biographies of the Directors are available on the Company’s website. All the directors have served throughout the year. At each Annual General Meeting when one or more of the Directors who are subject to retirement by rotation: (a) were last appointed or re-appointed three years or more prior to the meeting; (b) were last appointed or re-appointed at the third immediately preceding Annual General Meeting; or (c) at the time of the meeting will have served more than eight years as a non executive director of the Company; he, she or they shall retire from office. If the number of Directors required to retire at any Annual General Meeting is less than one third, additional Directors shall retire so that the total number of Directors retiring is at least equal to one third. Directors’ interests The interests of the Directors in the share capital of the Company at the date of this Report of the Directors, is as follows:

Number of Warrants

Number of Ordinary Shares

Issued Share Capital %

Alan Clifton

100,000

50,000

0.11

William Hunter

200,000

100,000

0.23

Sarah Evans

100,000

50,000

0.11

Total

400,000

200,000

0.45

Directors’ remuneration During the year the Directors received the following remuneration in the form of Directors’ fees from the Company: £

JP¥’000

Alan Clifton

30,000

5,121

William Hunter

15,000

2,668 3,555

Sarah Evans

20,000

Mark Huntley

15,000

2,617

Total

80,000

13,961

Substantial interests As of 29 April 2009 the following persons had interests in 3% or more of the issued share capital of the Company:

Goldman Sachs Securities (Nominees) Ltd

(Guernsey) Law, 2008. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Number of Warrants

Number of Ordinary Shares

Issued Share Capital%

—

36,416,501

82.58

Credit Suisse Client Nominees (UK) Ltd

—

2,202,000

4.99

OMX Securities Ltd

3,000,000

1,500,000

3.40

Total

3,000,000

40,118,501

90.97

Statement of Directors’ responsibilities The Directors are responsible for preparing financial statements for each financial period which give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period and are in accordance with applicable laws. In preparing these financial statements the Directors are required to: (a) select suitable accounting policies and then apply them consistently; (b) make judgements and estimates that are reasonable and prudent; (c) state whether applicable accounting standards have been followed subject to any material departures disclosed and explained in the financial statements; (d) prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors confirm that they have complied with the above requirements in preparing the financial statements. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company which enable them to ensure that the financial statements comply with the Companies

The Directors confirm that so far as they are aware, there is no information relevant to the audit of which the Company’s auditors are unaware. The Directors also confirm that they have taken all steps they ought to have taken as directors to make themselves aware of any information relevant to the audit and to establish that the Company’s auditors are aware of that information.

Independent auditors BDO Novus have agreed to offer themselves for re-appointment as Auditors of the Company and a resolution proposing their reappointment and authorising the Directors to determine their remuneration will be presented at the Annual General Meeting. Annual General Meeting The Annual General Meeting of the Company shall be held in due course at the registered office of the Company, Heritage Hall, Le Marchant Street, St Peter Port, Guernsey. Corporate governance As a company admitted to AIM and under the AIM rules for companies the Company is not required to comply with the new Combined Code on Corporate Governance published by the Financial Reporting Council (“Combined Code”). However, the Directors take appropriate measures to ensure that the Company complies with the Combined Code to the extent they consider to be appropriate and taking into account the size of the Company and the nature of its business. The Company complies with all provisions of the Companies (Guernsey) Law, 2008 to the extent that the same are applicable and relevant to the Company’s activities. In particular, each Director will seek to act in accordance with the “Code of Practice – Company Directors” issued by the Guernsey Financial Services Commission, whether or not the same is directly applicable to the Director in question. The Company has established an Audit Committee and a Strategy Committee, each of which has formally delegated responsibilities. Board responsibilities The Board comprises four non-executive directors. None of the Directors has a contract of service with the Company. The Board meets formally on a quarterly basis to review the performance of the Company, its subsidiaries and investments and its service providers. The Directors maintain overall control

JLH Annual Report 2009

Report of the Directors

and supervision of the Company’s affairs. The Board is responsible for the appointment and monitoring of all service providers. There may be a requirement to hold board meetings outside the scheduled quarterly meetings in order to review and consider investment opportunities and/or formal execution of documents. In between board meetings the Board maintains regular contact with the Administrator and the Asset Manager to discuss the ongoing operation of the Group. Chairman, Senior Independent Director and Chief Executive The Chairman of the Board is Alan Clifton. In considering the independence of the Chairman, the Board has taken note of the provisions of the Code relating to independence, and has determined that Mr Clifton is an Independent Director. As the Chairman is an Independent Director, no appointment of a senior Independent Director has been made. The Company has no employees and therefore there is no requirement for a chief executive. In common with many other externally managed structures of similar size and nature, the Group depends substantially on the external functions provided by Heritage International Fund Management Limited and New Perspective, amongst others in the provision of effective systems of internal controls and procedures. Heritage International Fund Management Limited and New Perspective report directly to the Board and have systems and controls in place to manage the Group’s exposure to risk. No significant failings or weaknesses have been identified by the Board in carrying out its review of the effectiveness of the risk management and internal control systems. Board meetings, Committee meetings and Directors’ attendance During the period there were seven board Board meetings, two Audit Committee meetings and two Strategy Committee meetings. The Directors’ attendance was as follows:

Board Meeting Attendances

Audit Committee Meeting Attendances

Strategy Committee Meeting Attendances

Alan Clifton

N/A

William Hunter

N/A

Sarah Evans

Mark Huntley

JLH Annual Report 2009

Report of the Directors

Audit Committee The Audit Committee comprises Sarah Evans (Chair of the committee), Alan Clifton and Mark Huntley and meets at least twice a year. The Audit Committee is responsible for ensuring that the financial performance of the Company is properly reported and monitored, including reviews of the annual and interim financial statements and related announcements, results, internal control systems and procedures and accounting policies. Strategy Committee The Strategy Committee, comprising William Hunter (Chairman of the committee), Sarah Evans and Mark Huntley, decides whether or not to invest in new opportunities and where surplus funds should be held in the Group. Directors’ dealings The Company has adopted a code similar to the Model Code, for Directors’ dealings in securities of the Company, which is appropriate for a company quoted on AIM. The Directors will also comply with Rule 21 of the AIM Rules relating to directors’ dealings. Annual review On an annual basis the Board will formally consider their strategic objectives and delivery, internal controls and risk management, procedures, prospectus and documentation content, board composition, adherence to corporate governance and its relationship with service providers. Risk assessment Taking into account the relevant provisions of the Combined Code in formulating the systems and procedures in operation in the Company, the Board will conduct a formal risk assessment on an annual basis and will report by exception on any material changes during the year. In performing such reviews, the Board will consider: 1) the nature and extent of the risks which they regard as acceptable for the Company to bear within its particular business; 2) the threat of such risks becoming reality; 3) the Company’s ability to reduce the incidence and impact on business if the risk crystallises; and 4) the costs and benefits resulting from operating relevant controls. Signed on behalf of the Board on 15 May 2009 Alan Clifton Chairman

Sarah Evans Director

Independent Auditors’ Report

To the Members of Japan Leisure Hotels Limited WE HAVE AUDITED the financial statements of Japan Leisure Hotels Limited for the year ended 31 December 2008 which include the Consolidated Income Statement, Consolidated Balance Sheet, Consolidated Statement of Changes in Equity, Consolidated Cash Flow Statement and Notes to the Financial Statements. These financial statements have been prepared under the historical cost convention and in accordance with the accounting policies set out in note 1. This report is made solely to the Company’s members, as a body, in accordance with Section 262 of the Companies (Guernsey) Law, 2008. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Basis of opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

Respective responsibilities of Directors and Auditors As described in the Statement of Directors’ Responsibilities within the Report of the Directors, the Company's directors are responsible for the preparation of the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRS).

Opinion In our opinion the financial statements: •

give a true and fair view, in accordance with IFRS, of the state of the Company's affairs as at 31 December 2008 and of its profit for the year then ended; and

Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

•

have been properly prepared in accordance with the Companies (Guernsey) Law, 2008.

We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies (Guernsey) Law, 2008. We also report to you if, in our opinion, the Report of the Directors is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law is not disclosed.

BDO Novus Limited CHARTERED ACCOUNTANTS Place du Pré Rue du Pré St Peter Port Guernsey

We read the other information accompanying the financial statements and consider whether it is consistent with the audited financial statements. This other information comprises the Chairman’s Statement, Asset Manager’s Report and the Report of the Directors. We consider the implications for our report if we become aware of any apparent mis-statements within it or material inconsistencies within the financial statements. Our responsibilities do not extend to any other information.

JLH Annual Report 2009

Independent Auditors’ Report

Financial Statements

Consolidated Income Statement For the year ended 31 December 2008 01.01.2008 to 31.12.2008 JP¥’000

17.10.2007 to 31.12.2007 JP¥’000

Revenue

1,183,950

—

Total revenue

1,183,950

—

Raw materials and consumables

(124,648)

—

Personnel costs

(276,242)

—

Depreciation and amortisation

(217,141)

—

Note

Other expenses

Total expenses Operating profit/(loss) before exceptional item

(556,306)

(5,027)

(1,174,337)

(5,027)

9,613

(5,027)

Exceptional items Negative goodwill

801,250

—

810,863

(5,027)

Interest income

11,487

—

Cost of warrants

(2,364)

—

Net loss on sale of tangible assets

(3,068)

—

Net foreign currency loss

(36,410)

—

(30,355)

—

Profit/(loss) before taxation

780,508

(5,027)

Profit/(loss) on operations

Taxation

Profit/(loss) for the year/period

(1,711)

—

778,797

(5,027)

776,555

(5,027)

Attributable to: Equity shareholders Minority interest

2,242

—

778,797

(5,027)

Earnings per share – basic

JP¥18.36

JP¥(2,513)

Earnings per share – diluted

JP¥14.19

—

Adjusted earnings per share – basic

JP¥(0.58)

—

Adjusted earnings per share – diluted

JP¥(0.45)

—

All items in the above statement, apart from the exceptional item, are derived from continuing operations

The notes on pages 20 to 32 form an integral part of these consolidated financial statements.

JLH Annual Report 2009

Financials

Consolidated Balance Sheet As at 31 December 2008 Note

31.12.2008 JP¥’000

31.12.2007 JP¥’000

ASSETS: Non-current assets Intangible assets

3,872

—

Property, plant and equipment

5,055,240

—

3,420

—

5,062,532

—

Rental deposits Total non-current assets Current assets Inventory

18,354

—

Trade and other receivables

62,805

—

Cash and cash equivalents

Total current assets TOTAL ASSETS

263,369

—

344,528

—

5,407,060

—

Current liabilities Trade and other payables

(145,260)

(5,027)

Total current liabilities

(145,260)

(5,027)

TOTAL LIABILITIES

(145,260)

(5,027)

TOTAL NET ASSETS

5,261,800

(5,027)

Share capital

Distributable reserve Retained earnings EQUITY ATTRIBUTABLE TO SHAREHOLDERS Minority interest TOTAL EQUITY NET ASSET VALUE PER SHARE

97,121

—

4,365,514

—

771,528

(5,027)

5,234,163

(5,027)

27,637

—

5,261,800

(5,027)

JP¥ 119.32

JP¥(2,513.50)

The consolidated financial statements were approved by the Board of Directors and authorised for issue on 15 May 2009: Alan Clifton Chairman

Sarah Evans Director

The notes on pages 20 to 32 form an integral part of these consolidated financial statements.

JLH Annual Report 2009

Financials

Consolidated Statement of Changes in Equity For the year ended 31 December 2008

Note

As at 1 January 2008

Share Capital JP¥’000

Share Distributable Premium Reserve JP¥’000 JP¥’000

—

Total Retained Shareholders Earnings Equity JP¥’000 JP¥’000

(5,027)

Minority Interest JP¥’000

Total Equity JP¥’000

—

(5,027)

Issue of share capital

94,757

4,643,102

—

4,737,859

—

4,737,859

Share issue expenses

—

(277,588)

—

(277,588)

—

(277,588)

Conversion of share premium account

—

(4,365,514)

4,365,514

—

776,555

2,242

778,797

Profit for the year Cost of warrants Minority interest in pre-acquisition reserves As at 31 December 2008

2,364

—

2,364

—

2,364

—

25,395

97,121

—

4,365,514

771,528

5,234,163

27,637

5,261,800

Total Retained Shareholders Earnings Equity JP¥’000 JP¥’000

Minority Interest JP¥’000

Total Equity JP¥’000

—

For the period from 17 October 2007 to 31 December 2007 Share Capital JP¥’000

Issue of share capital

—

Share Distributable Premium Reserve JP¥’000 JP¥’000

—

Loss for the period

—

(5,027)

—

(5,027)

At 31 December 2007

—

(5,027)

—

(5,027)

The notes on pages 20 to 32 form an integral part of these consolidated financial statements.

—

JLH Annual Report 2009

Financials

Consolidated Cash Flow Statement For the year ended 31 December 2008

Note

01.01.2008 to 31.12.2008 JP¥’000

17.10.2007 to 31.12.2007 JP¥’000

778,797

(5,027)

Cash flows from operating activities Profit/(loss) before taxation Adjustments for: Depreciation and amortisation

217,141

—

Interest income

(11,487)

—

Loss on disposal of assets

3,068

—

Cost of warrants

2,364

—

Taxation

1,711

—

Increase in deferred income

6,561

—

Negative goodwill

Changes in working capital Cash inflows from operations

(801,250)

—

4,523

(5,027)

201,428

—

11,546

—

Tax paid

(189)

—

Cost on disposal of assets

(100)

—

212,685

—

Interest received

Net cash inflows from operating Cash flows from investing activities Purchase of plant, property and fittings Increase in rental deposits Cash acquired on acquisition Net cash generated from investing activities

(474,172)

—

(200)

—

91,730

—

(382,642)

— —

Cash flows from financing activities Share proceeds

655,350

Share issue costs

(222,024)

—

Net cash generated from financing activities

433,326

—

Net increase in cash and cash equivalents

263,369

—

263,369

—

Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year

The notes on pages 20 to 32 form an integral part of these consolidated financial statements.

JLH Annual Report 2009

Financials

Notes to the Consolidated Financial Statements For the year ended 31 December 2008 General Information Japan Leisure Hotels Limited is a company incorporated and registered in Guernsey under the Companies (Guernsey) Law, 1994. This law was replaced by the Companies (Guernsey) Law, 2008 on the 1 July 2008. The address of the registered office is given in the Management and Administration section at the end of this report. The Company has been established to derive cashflow and capital gains by investing in Japanese leisure hotels. The Company was listed and admitted to trading on AIM, the market of that name operated by the London Stock Exchange, on 16 January 2008. On admission 44,100,000 shares were issued at £0.50 per share resulting in gross proceeds of £22,050,000. Group Structure The Group comprises the Company, its wholly-owned subsidiaries and those special purpose entities which invest in hotels in Japan. The funds raised in the placing have been invested through wholly owned subsidiary companies of the Company, which are also Guernsey registered companies: JLH 1 Limited and JLH 2 Limited (the “Subsidiaries”). These companies are responsible for investing in properties in the Japanese leisure hotel sector. The hotels are owned by Special Purpose Entities (“SPEs”) and operated in Japan by Yugen Kaishas (“YK”), a form of Japanese corporation. The Company, through its wholly owned subsidiaries, has invested in YKs by entering into Tokumei Kumiai agreements (“TK Agreements”). A TK Agreement is a contractual relationship whereby one party, the “TK Investor”, agrees to contribute capital to the other party, the “TK Operator”, to undertake an agreed business and receives a share of the economic benefits of investment in that business. The TK Investor’s investment is referred to herein as its “TK Interest”. Further information regarding the group structure is available on the Company’s website www.japanleisurehotels.com. 1. SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied throughout the current period, unless otherwise stated. Basis of accounting The financial statements of the Group have been prepared in accordance with IFRS, which comprise standards and interpretations issued by the International Accounting Standards Board (“IASB”) and the International Financial Reporting Interpretations Committee (“IFRIC”) approved by the International Accounting Standards Committee (“IASC”) that

JLH Annual Report 2009

Notes to the Financials

remain in effect, to the extent that they have been adopted by the European Union. IFRS requires management to make judgments, estimates and assumptions that affect the application of the reported amounts in these financial statements. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Basis of consolidation The consolidated interim financial statements incorporate the financial statements of the Company, its subsidiaries and SPEs meeting the requirements of SIC-12 Consolidation – Special Purpose Entities to be treated as subsidiaries. The Company through its subsidiaries is party to TK Agreements with SPEs that hold and operate property, plant and equipment. Segmental reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those segments operating in other economic environments. The Directors are of the opinion that the Group is engaged in a single segment of business, being investment in the purchase and operation of leisure hotels and related business and a single geographical area, namely Japan. Therefore, no segmental information has been presented. Financial instruments Financial assets Trade receivables and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as “trade and other receivables”. Trade and other receivables are measured at cost. Financial liabilities Financial liabilities are classified as “trade and other payables” and are measured initially at fair value, net of transaction costs and subsequently measured at cost. Exceptional item Exceptional items refer to those items considered by the Directors to be significant items which are unusual and nonrecurring in nature and therefore requiring separate disclosure.

Intangible assets Intangible assets, which comprise software, are stated at cost and are amortised on the straightline method over their estimated useful lives. All intangible assets are held for the purpose of running the business of the TK Operators. The estimated useful life of intangible assets is 3 years and amortisation is charged to operating expenses. Impairment of assets Assets, other than inventories, trade and other receivables and certain financial assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount (being the higher of its fair value less cost to sell and its value in use), an impairment loss is recognised in the Consolidated Income Statement. Property, plant and equipment Property plant and equipment are stated at cost and are depreciated on the straight line method over their estimated useful lives. All property has been held for the purpose of running the business of the TK Operators. No land or building is held for the sole purpose of earning rentals or for capital appreciation. Apart from certain immaterial exceptions, the estimated useful lives of depreciable assets are as follows: Buildings and structures Fixtures and fittings Land

15-30 years 3-10 years Not depreciated

Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Operating leases Where substantially all of the risks and rewards of ownership are retained by the lessor (an â&#x20AC;&#x153;operating leaseâ&#x20AC;?), the total rentals payable under the lease are charged to the income statement on a straightline basis over the lease term. Inventory In accordance with IAS 2 inventories have been stated at the lower of purchase cost or net realisable value. The Group uses the first-in-first-out cost method. Revenue recognition Revenue comprises room rental income, service charges and other revenues from customers of the hotels. Revenue is recognised at the time that customers check out of their room. Revenue arising from the sale of assets is recognised when the significant risks and returns have been transferred to the buyer. In the case of sales of properties, this is generally on unconditional exchange except where payment or completion is expected to occur significantly later than exchange. For conditional exchanges, sales are recognised when all of the conditions are satisfied. Sales of investment and other fixed asset properties, which are not included in revenue, are recognised on the same basis.

JLH Annual Report 2009

Notes to the Financials

The TK Operators operate a membership programme which allows members to accumulate points on hotel visits and receive exclusive offers and other special benefits. The Group has elected to adopt early IFRIC 13 “Customer Loyalty Programmes”. Assumptions are made, based on general customer behaviour, regarding the likelihood of a customer redeeming points. The revenue attributable to the points in issue, and likely to be redeemed, is deferred and recognised as revenue on redemption of the points by the customers. The incremental cost of providing free goods is recognised when the points are redeemed. Personnel costs The Group has no direct employees and no such employee benefits have been recognised in the financial statements. All hotel staff are employed by the Hotel Operators and all related costs (including wages, social security and employee taxes) are recharged by the Hotel Operators to the TK Operators. Foreign currency translation Functional and presentation currency Items included in the financial statements of the Group are measured using Japanese Yen which is the currency of the primary economic environment in which the Group operates (the “functional currency”). The consolidated financial statements are presented in Japanese Yen. The Directors have chosen Japanese Yen as the presentation currency as this is the currency of the underlying TK Interests. Transactions and balances Assets and liabilities denominated in currencies other than Japanese Yen are translated to Japanese Yen at the rate prevailing on the balance sheet date. Income and expenses denominated in currencies other than Japanese Yen are translated to Japanese Yen at the rate prevailing at the date of the transaction. Foreign currency non-monetary items are translated at the rate prevailing at the date of the transaction. Share issue costs The preliminary expenses of the Company directly attributable to the issue and listing of shares are charged to the share premium account as a deduction from the proceeds of issue. Acquisitions and business combinations Where properties are acquired through corporate acquisition and there are no significant assets or liabilities other than property, the acquisition is treated as an asset acquisition. In all other cases the acquisition is accounted for as a business combination, in which case, the assets and liabilities of a subsidiary or joint venture are measured at their estimated fair value at the date of acquisition. The cost of acquisition is measured as the fair vale of the consideration given together with any liabilities incurred or

JLH Annual Report 2009

Notes to the Financials

assumed at the date of acquisition, plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. Negative goodwill, being the excess of the value of the net assets acquired in a business acquisition over the price paid by the acquiring entity, arising on acquisition of the TK Interests is credited to the Consolidated Income Statement in the year in which it arises. By virtue of the TK structure entered into during the year, the Company is a passive investor. The Group’s investments have been made solely in leisure hotel assets in Japan. 2. NEW STANDARDS AND INTERPRETATIONS NOT APPLIED The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and International Financial Reporting Interpretations Committee (“IFRIC”), interpretations as endorsed by the European Union (“EU”) and with those parts of The Companies (Guernsey) Law, 2008 applicable to companies reporting under IFRS. The Financial Statements have been prepared in Japanese Yen and rounded to the nearest thousand, which is the presentational currency of the Group. The Financial Statements have been prepared in accordance with IAS 1 (revised) “Presentation of Financial Statements”. Application of IAS 1 (revised) did not impact on the Net Assets or Income for year ended 31 December 2007. Apart from formatting and the titles of primary statements there have been no other changes. Note 1 sets out a description of the significant accounting policies of the Group. The accounting policies are consistent with those applied in the year ended 31 December 2007, and amended to reflect the adoption of the new standards, amendments to standards or interpretations which are mandatory for the first time for the financial year ended 31 December 2008. The preparation of Financial Statements in conformity with IFRS requires the use of estimates and assumptions for certain categories of assets and liabilities that affect the reported amounts at the date of the Financial Statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates.

BONITA SENDAI

JLH Annual Report 2009

Notes to the Financials

(a) Standards, interpretations and amendments to published standards effective in 2008 but which are not relevant to the Group The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after 1 January 2008 but are currently not relevant to the Group's operations: – Amendments to IAS 39 and IFRS 7: Reclassification of Financial Instruments (effective for accounting periods beginning on or after 1 July 2008). – IFRIC 7, Applying the restatement approach under IAS 29, Financial Reporting in Hyperinflationary Economies (effective for accounting periods beginning on or after 1 March 2006). – IFRIC 11, IFRS 2 - Group and Treasury Share Transactions (effective for accounting periods beginning on or after 1 March 2007). – IFRIC 12, Service Concession Arrangements (effective for accounting periods beginning on or after 1 January 2008). (b) Standards, amendments and interpretations to published standards not yet effective Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group's accounting periods beginning after 1 January 2008 or later periods and which the Group has decided not to adopt early. The following is a brief description of those standards, amendments and interpretations, not yet effective, that the Group believes are relevant and whose impact it is currently assessing: – IAS 27, Consolidated and Separate Financial Statements (effective for accounting periods beginning on or after 1 July 2009). This amendment relates in particular to acquisitions of subsidiaries achieved in stages and disposals of interests, with significant differences in the accounting depending on whether control is gained or not, or a transaction simply results in a change in the percentage of the controlling interest. The amendment does not require the restatement of previous transactions. The amendment to IAS 27 must be adopted at the same time as IFRS 3 (revised). The Group is currently assessing the impact of IAS 27 on the Financial Statements. – IFRIC 13, Customer Loyalty Programmes (effective for accounting periods beginning on or after 1 July 2008). IFRIC 13 is still to be endorsed by the EU. IFRIC 13 addresses sales transactions in which the entities grant their customers award credits that, subject to meeting any further

JLH Annual Report 2009

Notes to the Financials

qualifying conditions, the customers can redeem in the future for free or discounted goods or services. The Group is currently assessing the impact of IFRIC 13 on the Financial Statements. – IFRIC 15, Agreements for the Construction of Real Estate (effective for accounting periods beginning on or after 1 January 2009). This interpretation clarifies the definition of a construction contract, the interaction between IAS 11 and IAS 18 and provides guidance on how to account for revenue when the agreement for the construction of real estate falls within the scope of IAS 18. For some entities, the interpretation may give rise to a shift from the recognition of revenue using the percentage of completion method to the recognition of revenue at a single time (e.g. at completion, upon or after delivery). The Group is currently assessing the impact of IFRIC 15 on the Financial Statements. – Amendment to IFRS 2, Share-based payments: vesting conditions and cancellations (effective for accounting periods beginning on or after 1 January 2009). This amendment is still to be endorsed by the EU. The amendment to IFRS 2 is of particular relevance to companies that operate employee share save schemes because it results in an immediate acceleration of the IFRS 2 expense that would otherwise have been recognised in future periods should an employee decide to stop contributing to the savings plan. The Group is currently assessing the impact of IFRS 2 on the Financial Statements. – Revised IFRS 3, Business Combinations and complementary Amendments to IAS 27, ‘Consolidated and separate financial statements (both effective for accounting periods beginning on or after 1 July 2009). This revised standard and the amendments are still to be endorsed by the EU. The revised IFRS 3 and amendments to IAS 27 arise from a joint project with the Financial Accounting Standards Board (“FASB”), the US standards setter, and result in IFRS being largely converged with the related, recently issued, US requirements. The Group is currently assessing the impact of IFRS 3 on the Financial Statements. – IFRS 8, Operating Segments (effective for accounting periods beginning on or after 1 January 2009). This standard requires an entity to adopt the ‘management approach’ to reporting on the financial performance of its operating segments. Generally, the information to be reported would be what management uses internally for evaluating segment performance and deciding how to allocate resources to operating segments. Such information may be different from what is used to prepare the income statement and balance sheet. The standard also requires explanations of the basis on which the segment information

is prepared and reconciliations to the amounts recognised in the Consolidated Statements of Comprehensive Income and Consolidated Statements of Financial Position. The Group is currently assessing the impact of IFRS 8 on the Financial Statements. – Improvements to IFRSs (April 2009) (effective for accounting periods beginning on or after 1 January 2010). On 16 April 2009, the International Accounting Standards Board (“IASB”) issued Improvements to IFRSs 2009 – incorporating amendments to 12 International Financial Reporting Standards (IFRSs). This collection of amendments issued under the annual improvements process, which is designed to make necessary, but non-urgent, amendments to IFRSs. The Group is currently assessing the impact of the Improvements to IFRSs (April 2009) on the Financial Statements. The following is a list of those standards, amendments and interpretations, not yet effective, that the Group believes are not relevant to it: – IAS 32 and IAS 1, Puttable Financial Instruments and Obligations Arising on Acquisition (effective for accounting periods beginning on or after 1 January 2009). – IAS 23, Borrowing Costs (revised) (effective for accounting periods beginning on or after 1 January 2009).

– IFRS 1 and IAS 27, Cost of an Investment in a subsidiary, jointly-controlled entity or associate (effective for accounting periods beginning on or after 1 January 2009). – IAS 39, Financial Instruments: Recognition and Measurement: Eligible Hedged Items (effective for accounting periods beginning on or after 1 July 2009). – IFRIC 14, IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for accounting periods beginning on or after 1 January 2008). – IFRIC 16, Hedges of a Net Investment in a Foreign Operation (effective for accounting periods beginning on or after 1 October 2008). – IFRIC 17, Distributions of Non-cash Assets to Owners (effective for accounting periods beginning on or after 1 July 2009). – IFRIC 18, Transfer of Assets from Customers (effective for accounting periods beginning on or after 1 July 2009). – IAS 40, Investment Property (effective for accounting periods beginning on or after 1 January 2009). – IAS 41, Agriculture (effective for accounting periods beginning on or after 1 January 2009).

JLH Annual Report 2009

Notes to the Financials

3. OTHER EXPENSES

5. EXCEPTIONAL ITEM 01.01.2008 to 31.12.2008 JP¥’000

Operating lease payments

17.10.2007 to 31.12.2007 JP¥’000

5,673

—

108,381

—

Property tax

24,566

—

Cleaning

39,182

—

Marketing

23,110

—

Utilities

37,733

—

Hotel operators’ fees

Repairs and maintenance

50,073

—

Asset Manager’s fees

86,925

—

Due diligence

6,654

—

Professional services

55,732

—

Auditors’ remuneration – audit services

11,616

1,346

Administrator’s fees

15,587

—

Directors’ fees

16,931

3,681

Other expenses

74,143

—

556,306

5,027

4. TAXATION Guernsey taxation The Company is exempt from taxation in Guernsey under the provisions of the Income Tax (Exempt Bodies) (Guernsey) Ordinances, 1989 to 1992, and is charged an annual exemption fee of £600 (JP¥ 78,513). The Company is a Collective Investment Scheme and has applied for and been granted exempt status under the revised company income tax regime that came into effect in 1 January 2008. Japanese taxation The reasons for the difference between actual tax charge for the year and the standard rate of tax in Japan for the year are as follows: 01.01.2008 to 31.12.2008 Tax effect Gross at 42% JP¥’000 JP¥’000 Profit before taxation

780,508

17.10.2007 to 31.12.2007 Tax effect Gross at 42% JP¥’000 JP¥’000

327,813

Income not subject to tax (812,737) Other items deductible for tax purposes (79,455) Accelerated depreciation 10,653 Expenses not deductible for tax purposes 112,592 Taxable income before brought forward tax losses

11,561

—

— — — 4,856

—

Net taxable income 3,671 Minimum tax charge on SPE’s with nil taxable income

1,542

—

169

—

Tax charge

1,711

—

JLH Annual Report 2009

6. EARNINGS PER SHARE 01.01.2008 to 31.12.2008 Number of Shares

17.10.2007 to 31.12.2007 Number of Shares

Weighted average number of shares in issue during the year/period

42,292,623

Dilutive potential shares

12,420,500

—

54,713,123

Basic earnings per share Basic earnings per share is based on the profit attributable to equity shareholders and on the weighted average number of shares in issue during the year/period. Diluted earnings per share Diluted earnings per share is based on the profit attributable to equity shareholders and on the weighted average number of shares in issue during the year/period and also taking into account the effect of the potential shares which would arise in the event of the warrants being exercised. Adjusted basic earnings per share – before exceptional items and after tax Adjusted basic earnings per share – before exceptional items and after tax is based on the profit attributable to equity shareholders before exceptional items and after tax and on the weighted average number of shares in issue during the year/period.

—

Tax losses brought forward (7,890)

—

Negative goodwill Negative goodwill arises when the net assets acquired in a business acquisition exceed the price paid by the acquiring entity. Under IFRS 3, negative goodwill should be recognised in the Consolidated Income Statement as it arises. The negative goodwill of JP¥801,250,000 arising on the acquisition of the TK Interests has been credited to the Consolidated Income Statement in the year; this reflects the difference between the net asset value in the books of the SPEs acquired and the value of the shares issued in exchange for the TK Interests.

—

Notes to the Financials

—

Adjusted diluted earnings per share – before exceptional items and after tax Adjusted diluted earnings per share – before exceptional items and after tax is based on the profit attributable to equity shareholders before exceptional items and after tax and on the weighted average number of shares in issue during the year/period and also taking into account the effect of the potential shares which would arise in the event of the warrants being exercised.

BONITA YAMAGATA

7. INTANGIBLE ASSETS

8. PROPERTY, PLANT AND EQUIPMENT 01.01.2008 to 31.12.2008 JP¥’000

17.10.2007 to 31.12.2007 JP¥’000

Freehold Land JP¥’000

Software Cost At beginning of the year/period

Freehold Equipment Buildings Fixtures and and Structures Fittings JP¥’000 JP¥’000

Total JP¥’000

Cost

—

Additions

4,765

—

At beginning of the year/period

—

At end of the year/period

4,765

—

Additions

1,162,699

3,114,065

997,692

5,274,456

Disposals

—

(3,241)

At beginning of the year/period

—

Provided for in the year/period

(893)

At end of the year/period

1,162,699

3,114,065

994,451

5,271,215

As at 31 December 2008/31 December 2007

(893)

—

Depreciation

Net book value as at 31 December 2008/ 31 December 2007

3,872

—

At beginning of the year/period

—

Provided for in the year

—

(105,651)

(110,597)

(216,248)

Disposals

—

273

At end of the year/period

—

(105,651)

(110,324)

(215,975)

As at 31 December 2008 1,162,699

3,008,414

884,127

5,055,240

—

Amortisation

Net book value As at 31 December 2007

—

As stated above, the Group’s property, plant and equipment are stated at cost and are depreciated on the straight line method over their estimated useful lives.

JLH Annual Report 2009

Notes to the Financials

In compliance with the AIM admission document a valuation has been prepared by Colliers International (Hong Kong) Ltd, an independent valuer, in accordance with RICS standards. Colliers International (Hong Kong) Ltd estimated the value of the Group’s property plant and equipment at 31 December 2008 to be JP¥5,026 million, which is JP¥29,240 lower than the net book value above. 9. INVENTORY 31.12.2008 JP¥’000

31.12.2007 JP¥’000

18,354

—

Goods held for re-sale

10. TRADE AND OTHER RECEIVABLES 31.12.2008 JP¥’000 Trade receivables

31.12.2007 JP¥’000

6,083

—

Prepayments

41,426

—

Consumption tax refund

13,112

—

Other receivables

2,184

—

62,805

—

11. CASH AND CASH EQUIVALENTS 30.06.2008 JP¥’000 Cash held at hotels

31.12.2007 JP¥’000

32,963

—

230,406

—

263,369

—

31.12.2008 JP¥’000

31.12.2007 JP¥’000

Trade payables

62,374

5,027

Accrued expenses

39,546

—

Accrued consumption tax

21,666

—

Deferred income

14,237

—

Accounts payable fixed assets

3,140

—

Current tax liabilities

1,662

—

Other payables

2,635

—

145,260

5,027

Cash at banks

The issued share capital of the Company is comprised as follows: 31.12.2008 Number JP¥’000 Allotted, called up and fully paid Ordinary Shares of £0.01 each 44,100,002

97,121

31.12.2007 Number JP¥’000

0.5

Share capital On 16 January 2008 the Company issued 44.1 million Ordinary Shares at £0.50 per share. 38 million of these were in exchange for the TK Interests. Therefore the resulting cash proceeds of the issue, before share issue expenses, amounted to JP¥655 million (£3.05 million). Share issue expenses Share issue expenses incurred in the initial launch of the Company amounted to JP¥277.6 million (£1.3 million). They have been treated as a deduction from equity and written off against the share premium account. JP¥55.6 million (£0.3 million) of share issue expenses were paid by the TK Operators prior to the acquisition therefore the cash flow relating to share issue expenses in the period was JP¥222 million (£1.0 million). Share premium account & distributable reserve By way of a special resolution passed on 7 January 2008, it was resolved that the amount standing to the credit of the share premium account of the Company following completion of the issue (net of formation and initial expenses set off against the share premium account) be cancelled and the amount so cancelled be credited as a distributable reserve. This resolution was approved by the Royal Court of Guernsey on 14 March 2008.

12. TRADE AND OTHER PAYABLES

13. SHARE CAPITAL All authorised and allotted shares are Ordinary Shares. The authorised share capital of the Company is 160 million shares of £0.01 each.

JLH Annual Report 2009

Notes to the Financials

Warrants For every share subscribed in the placing, the Company issued 2 warrants. Accordingly, 12.2 million warrants have been issued to subscribers. Each warrant entitles the holder to subscribe for one new share at £0.45. The warrants will be exercisable from 31 January 2009 until 31 January 2013. A further 220,500 Warrants have been issued to Shore Capital in part payment of its fees in connection with the placing. The fair value of the issued Warrants to Shore Capital as payment for services is estimated to be JP¥2.3 million (£11,025) and was recognised as an expense of the Company at the time of the placing.

14. NET ASSET VALUE PER SHARE Net asset value per share is based on net asset values and the number of shares in issue at the end of the year.

Net asset value per Consolidated Balance Sheet

31.12.2008 JP¥’000

31.12.2007 JP¥’000

5,261,800

(5,027)

Difference between the net book value and the independent valuation of plant, property and equipment as shown in note 8

(29,240)

Adjusted net asset value, incorporating plant, property and equipment in note 8

5,232,560

(5,027)

Net asset value per share

JP¥119.32

JP¥ (2,513.50)

Net asset value per share

£0.91

£(11.21)

Adjusted net asset value per share

JP¥118.65

JP¥ (2,513.50)

Adjusted net asset value per share

£0.91

£(11.21)

15. COMMITMENTS UNDER OPERATING LEASES Although the TK Operators hold freehold title to most of the properties, there are some parcels of land used for car parking that are rented. The total future minimum lease payments are due as follows:

Not later than one year

extent of the risks and the Group’s objectives and procedures for managing these risks are disclosed below. Financial risk management objectives The Group’s objectives in managing these risks are to: •

safeguard the financial assets of the Group;

•

minimise the potential impact of market rate movements on the value and earning potential of financial assets and liabilities of the Group;

•

ensure the Group has sufficient liquid resources to satisfy its financial liabilities.

In order to satisfy these objectives, the Asset Manager provides advice to the TK Operators and the Administrator provides advice to the Company which allows the Group to monitor and manage financial risks relating to its operations through internal risk reports which analyse exposures by degree and magnitude of risks. The Asset Manager and the Administrator report to the Directors on a quarterly basis regarding the nature and degree of financial risks.

31.12.2008 JP¥’000

31.12.2007 JP¥’000

The risks relating to the Group’s operations include the following: Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group.

6,237

—

Later than one year and not later than five years

24,949

—

Later than five years

31,186

—

16. RELATED PARTIES & MATERIAL CONTRACTS Mark Huntley, Director of the Company, is also a director of the Company’s administrator, Heritage International Fund Managers Limited. During the year Mr Huntley earned JP¥2,616,995 by way of a Director’s fee of which JP¥490,709 was outstanding at the year end. Heritage International Fund Managers Limited earned JP¥13,189,930 in administration fees of which JP¥2,453,546 was outstanding at the year end. New Perspective, the Group’s Asset Manager, earned JP¥86,925,267 by way of asset management fees and JP¥11,379,343 for accounting and other services during 2008. Of these fees there was JP¥6,947,403 outstanding at the year end.

Financial assets held by the Group consist of cash and cash equivalents and trade and other receivables. The table below shows the cash balances held at the balance sheet date and the relevant credit rating for the counter party.

Counterparty Bank of Tokyo-Mitsubishi UFJ Ltd

Japan

131,304

—

77 Bank

Japan

504

—

Yamagata Bank

Japan

A+

450

—

Yamanashi Chuo Bank

Japan

A+

148

—

AA-

98,000

—

Barclays Bank plc

17. FINANCIAL INSTRUMENTS The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes or to hedge its exposure to risks. However, in the course of its operations the Group acquires financial assets and liabilities that expose it to various risks including credit risk, liquidity risk and market risk, specifically with respect to foreign exchange and interest rates. The nature of these risks, the

Location

Carrying amount 31.12.2008 31.12.2007 Rating JP¥’000 JP¥’000

Liquidity risk The Group’s financial liabilities consist of trade and other payables which are all due within one year. The Group adopts a prudent approach to liquidity management and maintains sufficient cash reserves to meet its obligations.

JLH Annual Report 2009

Notes to the Financials

JLH Annual Report 2009

Notes to the Financials

The following table details the Group’s expected maturity for its payables and receivables. The tables below have been drawn up based on the undiscounted contractual maturities of the financial assets (excluding interest earned). 2008 JP¥’000

Yen. Other than Yen the Group has only Sterling assets or liabilities as shown in the following table:

Financial assets – current 62,805

—

Cash and cash equivalents – maturity less than 1 year

263,369

—

326,174

—

145,260

(5,027)

Financial liabilities – current Trade and other payables – maturity less than 1 year

MARKET RISK The Group is exposed to market risk through its holding of cash and cash equivalents. Specifically, the Group is subject to interest rate risk through its interest bearing deposits with bank and foreign exchange risk due to a portion of these holdings being denominated in foreign currencies. These are discussed in more detail below. Foreign currency exchange rate risk Foreign currency exchange rate risk arises in financial instruments that are denominated in a currency other than the functional currency in which they are measured (“foreign currency”). Therefore, the Group will be exposed to risk of movement in the rate of exchange for financial instruments that are denominated in a currency other than Japanese Yen. Foreign currency exchange rate risk does not arise from financial instruments that are nonmonetary items or from financial instruments denominated in the functional currency, Japanese Yen. Cash and cash equivalents held in a foreign currency are held on a short term basis in order to meet obligations with respect to operating and administering the Group. Broadly, only sufficient cash is held in foreign currencies that is expected to be required to meet those obligations that are denominated in that foreign currency and therefore it is the opinion of management that the Group is not exposed to any significant risk of loss from currency exchange rate fluctuations. The table below summarises the Group’s exposure to foreign currency risk. The Group’s assets and liabilities are included in the table, categorised by their currency at their carrying amount in

31.12.2007 JP¥’000

Cash and cash equivalents

16,966

—

Trade and other receivables

1,479

—

(3,566)

(5,027)

Financial assets

2007 JP¥’000

Trade and other receivables – maturity less than 1 year

31.12.2008 JP¥’000

Financial liabilities

Foreign currency exchange rate sensitivity analysis The sensitivity analysis below has been determined based on the exposure to foreign exchange rates of financial instruments at the balance sheet date. For foreign currency denominated financial assets and financial liabilities, the analysis has been prepared assuming the amount of asset or liability outstanding at the balance sheet date was outstanding for the whole year. Management believes that a 40% increase or decrease is a reasonably possible change in foreign exchange rates. If Sterling had strengthened/weakened by 40% against Japanese Yen and all other variables held constant, the annual charge in the Group’s Consolidated Income Statement based on the year-end balances of assets and liabilities in foreign currency would be as follows: •

profit for the year would have been JP¥5,952,000 higher/lower;

•

there would be no impact on other equity reserves.

Cash flow interest rate risk The Group’s exposure to interest rate risk on financial assets is affected by general economic conditions which may affect the level and volatility of interest rates and the extent and timing of investor participation in the asset markets. Unexpected volatility or illiquidity in the markets in which the Group holds positions can impair the its ability to conduct its business or cause it to incur losses. The Group’s interest rate risk is managed by the Manager in accordance with policies and procedures in place. The Group’s overall positions and exposures are monitored on a quarterly basis by the Board of Directors. Interest rate sensitivity analysis The sensitivity analysis below has been determined based on the exposure to interest rates for financial assets at the balance sheet

JLH Annual Report 2009

Notes to the Financials

date. For floating rate financial assets, the analysis has been prepared assuming the amount of asset outstanding at the balance sheet date was outstanding for the whole year. In the opinion of management a 1.5% increase or decrease is a reasonably possible change in interest rates. An increase of 1.5% in interest rates as at the reporting date would have increased the net assets attributable to the Company’s equity-holders and changes in net assets by JP¥172,305 (2007: JP¥ nil). A decrease of 1.5% would have had an equal but opposite effect. Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns to shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group has no borrowings and accordingly the Group has a nil gearing ratio. The Group is not subject to any capital requirements.

JLH Annual Report 2009

Notes to the Financials

18. POST BALANCE SHEET EVENTS Subsequent to the end of the fiscal year covered by these accounts, the Group entered into the following contracts: to purchase land adjacent to its hotel in Yokkaichi for the amount of JP¥12,000,000; and to purchase the Bonita trademark from Bonita Services Limited for JP¥15,000,000. Apart from the above, there have been no significant events subsequent to the balance sheet date.

Notice of Annual General Meeting

Japan Leisure Hotels Limited

the average of the middle market quotations for a Share as derived from the AIM for the five business days immediately preceding the day on which that Share is purchased;

(Incorporated in Guernsey with registered number 47899) (the “Company”) 2009 ANNUAL GENERAL MEETING OF THE COMPANY NOTICE is hereby given that the Second Annual General Meeting of Japan Leisure Hotels Limited is to be held at the Registered Office of the Company, Heritage Hall, Le Marchant Street, St Peter Port, Guernsey, on 24th June 2009 at 2.00 p.m. for the transaction of the following business: ORDINARY RESOLUTIONS 1. To receive and adopt the audited accounts, the Directors’ report, and the Auditors’ report for the period ended 31st December 2008. 2. To re-appoint Mrs Sarah Evans to the Board of Directors in accordance with Article 81(b) 3. To approve the Directors’ remuneration for the period ended 31st December 2008. 4. To re-appoint BDO Novus Limited who have indicated their willingness to continue in office, as Auditors of the Company to hold office until the next Annual General Meeting. 5. To authorise the Directors to determine the remuneration of BDO Novus Limited. 6. To consider and approve the Company’s Investment Policy and Investment Policy and Strategy as defined in the Admission Document dated 10 January 2008, in accordance with the AIM Rules and Article 49(E) of the Company’s Articles of Association (the “Articles”). 7. To consider, as special business which will be proposed as an Ordinary Resolution, THAT the Company be authorised in accordance with section 315 of The Companies (Guernsey) Law, 2008 (the “Law”) to make market purchases (as defined in section 316 of the Law) of ordinary shares of £0.01 in the capital of the Company (the “Shares”) either for retention as treasury shares, or cancellation, provided that:i.

the maximum number of Shares authorised to be purchased is the number representing 14.99 per cent. of the Shares in issue;

ii.

the minimum price which may be paid for each Share is £0.01;

iv. subject to paragraph (v), such authority shall expire at the conclusion of the Annual General Meeting of the Company in 2010 unless such authority is varied, revoked or renewed prior to such date by an Ordinary Resolution of the Company in general meeting; v.

notwithstanding paragraph (iv), the Company may make a contract to purchase Shares under such authority prior to its expiry which will or may be executed wholly or partly after its expiration and the Company may make a purchase of Shares pursuant to any such contract.

SPECIAL RESOLUTION 8. To consider, as special business which will be proposed as a Special Resolution, THAT the Company be and hereby is generally and unconditionally authorised pursuant to Article 39(H) of the Articles to issue and allot up to 100 per cent. of the issued share capital of the Company on the date the Shares are first admitted to trading on AIM for cash, as if Articles 39 (A) to 39 (G) of the Articles did not apply to any such allotments, provided that no Shares will be issued for cash on a non-pre-emptive basis at a discount of more than 5 per cent. of the average middle market closing price of the Shares on the five business days preceding issue, unless shareholder approval by Ordinary Resolution is obtained. This authority shall expire at the conclusion of the Annual General Meeting of the Company to be held in 2010 or following the passing of a Special Resolution to that effect, whichever is the earlier, (save that the Company may before such expiry make any offer or agreement which would or might require Shares to be allotted after such expiry and the Directors may allot Shares in pursuance of any such offer or agreement as if the authority conferred hereby had not expired). Heritage International Fund Managers Limited Company Secretary 29th May 2009 Heritage Hall Le Marchant Street St Peter Port Guernsey

iii. the maximum price which may be paid for each Share is an amount equal to the higher of 105 per cent of JLH Annual Report 2009

Notice of AGM

Notes to the Notice of the Annual General Meeting: 1. A member is entitled to attend and vote at the meeting provided that all calls due from him in respect of his shares have been paid. A member is also entitled to appoint one or more proxies to attend and, on a poll, vote instead of him. The proxy need not be a member of the Company.

5. The quorum for the Meeting is at least two members present in person or by proxy. A simple majority is required for the passing of any Ordinary Resolution. The majority required for the passing of the Special Resolution is 75 per cent. or more of the total number of votes cast for and against such resolution.

2. A form of proxy is enclosed with this notice. To be effective, the instrument appointing a proxy (together with any power of attorney or other authority under which it is executed or a duly certified copy of such power) must be sent to the Company’s Registrar, c/o Capita Registrars Limited, 34 Beckenham Road, Beckenham, Kent, BR3 4TU, England, not less than 48 hours before the time for holding the Meeting or adjourned meeting as the case may be. A corporation may execute a proxy under its common seal or by the hand of a duly authorised officer or other agent. Completion and return of the form of proxy will not preclude members from attending and voting in person at the Meeting.

6. In accordance with the Regulation 41 of the Uncertificated Securities Regulations 2001 and Article 46(F) of the Articles, only those members entered in the Register of Members of the Company at close of business on 22nd June 2009 shall be entitled to attend or vote at the Meeting in respect of the number of shares registered in their name at that time. Changes to entries on the Register of Members after that time shall be disregarded in determining the rights of any person to attend or vote at that meeting

3. To appoint a proxy or to give or amend an instruction to a previously appointed proxy via the CREST system, the CREST message must be received by the Issuer’s agent RA10 by 2pm on 22nd June 2009. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which the Issuer’s agent is able to retrieve the message. After this time any change of instructions to a proxy appointed through CREST should be communicated to the proxy by other means. CREST Personal Members or other CREST sponsored members, and those CREST Members who have appointed voting service provider(s) should contact their CREST sponsor or voting service provider(s) for assistance with appointing proxies via CREST. For further information on CREST procedures, limitations and system timings please refer to the CREST Manual. We may treat as invalid a proxy appointment sent by CREST in the circumstances set out in Regulation 35(5) (a) of the Uncertificated Securities Regulations 2001. In any case your proxy form must be received by the Company’s Registrars no later than 2pm on 22nd June 2009. 4. A shareholder may appoint more than one proxy in relation to the Annual General Meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by him. To appoint more than one proxy you may photocopy this form. Please indicate the proxy holder’s name and the number of shares in relation to which they are authorised to act as your proxy (which, in aggregate, should not exceed the number of shares held by you). Please also indicate if the proxy instruction is one of multiple instructions being given. All forms must be signed and should be returned together in the same envelope. A failure to specify the number of shares each proxy appointment relates to or specifying a number in excess of those held by you may result in the appointment being invalid.

JLH Annual Report 2009

Notice of AGM

7. The Register of Directors’ Interests kept by the Company shall be available for inspection by any member between the hours of 10am and 12noon during business hours at the registered office of the Company for a period of 14 days before and ending 3 days after the Annual General Meeting. The Register of Directors’ Interests shall be produced at the commencement of the Annual General Meeting and shall remain open and accessible during the continuance of the Annual General Meeting to any person attending such meeting. Explanatory note Directors’ Remuneration Report – resolution 2 The Directors’ Remuneration Report Regulations 2002 (“the Regulations”) came into force on 1st August 2002 and it is a requirement of the Regulations that all quoted companies produce a board-approved report on directors’ remuneration for financial years ending on or after 31st December 2002. This report is set out in the Annual Report and Accounts. It is a further requirement of the Regulations that at the general meeting of the Company before which the Company’s annual accounts for the financial year relate, an Ordinary Resolution be put to shareholders seeking approval of the remuneration report. For further information, please contact: New Perspective Robert Marshall +813 4550 1808 Stephen Mansfield +813 4550 1808 Heritage International Fund Managers Limited, Secretary Mark Huntley +44 (0)1481 716000 Nathalie Pike +44 (0)1481 716000

JAPAN LEISURE HOTELS LIMITED

Form of Proxy

(THE “COMPANY”) The Second Annual General Meeting of the Company is to be held at the Registered Office of the Company, Heritage Hall, Le Marchant Street, St Peter Port, Guernsey, on 24th June 2009 at 2 p.m. I/We (BLOCK CAPITALS PLEASE) of being (a) member(s) of the Company here by appoint the Chairman of the meeting or

to be my/our proxy to attend and, on a poll, vote on my/our behalf at the Second Annual General Meeting of the Company to be held on 24th June 2009 at 2 p.m. or at any adjournment thereof. I/we request my/our proxy to vote in the manner indicated below: Ordinary Resolutions

For

Against

Withheld Discretionary

1. To approve and adopt the Report and Accounts 2. To re-appoint Mrs Sarah Evans to the Board of Directors 3. To approve the Directors’ remuneration for the period ended 31st December 2008 4. To re-appoint BDO Novus Limited as Auditors. 5. To authorise the Directors to determine the remuneration of the Auditors 6. To approve the Company’s Investment Policy and Investment Policy and Strategy. 7. Authority in accordance with section 315 of The Companies (Guernsey) Law, 2008 to repurchase shares of the Company. Special Resolution 8. Authorize the Directors pursuant to Article 39(H) of the Articles to disapply pre-emption rights in relation to the allotment of equity securities for cash. Date:

Signature:

Notes 1.

Only holders of Ordinary Shares, or their duly appointed representatives, are entitled to attend and vote at the Meeting provided that all calls due from him/her in respect of his/her shares have been paid. A member so entitled may appoint one or more proxies to attend and, on a poll, vote instead of him. The proxy need not be a member of the Company.

2. Shares held in uncertified form (i.e. in CREST) may be voted through the CREST Proxy Voting Service in accordance with the procedures set out in the CREST manual. 3. If you wish to appoint someone other than the Chairman of the Meeting as your proxy, please insert his/her name and delete “the Chairman of the meeting or”. 4. Please indicate with an “X” in the boxes how you wish your vote to be cast. Unless otherwise instructed, the person appointed as a proxy will exercise his/her discretion as to how he/she votes or whether he/she abstains from voting on any particular resolution and on any other business (including amendments to resolutions and procedural business) which may come before the Meeting. 5. The “Withheld” option on the Form of Proxy is provided to enable you to abstain on any particular resolution. However, a vote withheld is not a vote in law and will not be counted in the calculation of the proportion of votes “For” and “Against” a resolution. 6. A corporation must seal the Form of Proxy or have it signed by an officer or attorney or any other person authorised to sign on its behalf.

In the case of joint holders, only one need sign this Form of Proxy, but the vote of the senior who tenders a vote, whether in person or by proxy, will be accepted to the exclusion of the votes of the other joint holders. For this purpose, seniority shall be determined by the order in which the names stand in the Register of Members in respect of the joint holding.

8. A shareholder may appoint more than one proxy in relation to the Annual General Meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by him. To appoint more than one proxy you may photocopy this form. Please indicate the proxy holder’s name and the number of shares in relation to which they are authorised to act as your proxy (which, in aggregate, should not exceed the number of shares held by you). Please also indicate if the proxy instruction is one of multiple instructions being given. All forms must be signed and should be returned together in the same envelope. A failure to specify the number of shares each proxy appointment relates to or specifying a number in excess of those held by you may result in the appointment being invalid. 9. To be valid this Form of Proxy must reach the Company’s Registrar, Capita Registrars Limited, by no later than 2 pm on 22nd June 2009. Lodgement of a Form of Proxy does not prevent a member from attending the Meeting in person. Please return this Form of Proxy to the following address: Capita Registrars, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU, England

JLH Annual Report 2009

Form of Proxy

Second fold

Business Reply Licence Number MB 122

First fold

Capita Registrars The Registry 34 Beckenham Road BECKENHAM Kent BR3 4TU ENGLAND

Third fold and tuck in

Management and Administration Directors Alan Clifton (Chairman) Sarah Evans William Hunter Mark Huntley

Independent Auditors BDO Novus Limited Place du Pré Rue du Pré St Peter Port Guernsey GY1 3LL

Registered Office Heritage Hall Le Marchant Street St Peter Port Guernsey GY1 4HY

Asset Manager* New Perspective 7F Fukuyoshicho Bldg 2-2-6 Roppongi Minato-ku, Tokyo 106-0032

Administrator and Secretary Heritage International Fund Managers Limited Heritage Hall PO Box 225 Le Marchant Street St Peter Port Guernsey GY1 4HY

Legal Advisers to the Company

As to English Law Ashurst LLP Broadwalk House 5 Appold Street London EC2A 2HA As to Japanese Law Ashurst Tokyo Law Office Shiroyama Trust Tower 30th Floor 4-3-1 Toranomon Minato-Ku Tokyo 105-6030 Japan

Registrars Capita Registrars (Guernsey) Limited 2nd Floor No.1 Le Truchot St Peter Port Guernsey GY1 4AE

Nominated Adviser Websites Shore Capital and Corporate Limited Bond Street House 14 Clifford Street London W1S 4JU

www.japanleisurehotels.com www.japanleisurehotels.gg

Broker Shore Capital Stockbrokers Limited Bond Street House 14 Clifford Street London W1S 4JU

* New Perspective is the Asset Manager to the underlying Special Purpose Entities (“SPEs”)

The paper in this report is produced from sustainable forests