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Japan Leisure Hotels Limited

('Japan Leisure Hotels', 'JLH', or 'the Company')

Interim Results for the six month financial period ended

30 June 2008

Japan Leisure Hotels Limited (AIM: JPLH), the company established to invest in leisure hotels in Japan, announces its interim results for the financial period ending 30 June 2008.

Highlights:

• Stated strategy being executed not withstanding limited resources

• Hotel portfolio performing well;

• Implementation of further cost and efficiency controls

• EBITDA margin for hotel operations of 26.4%

• Cash remitted to JLH to date of approaching £1m

• Acquisition of Yokkaichi property increases portfolio to six properties and 242 rooms

• Company balance sheet strong with no debt

• Estimated NAV of 53.39 pence per share (using exchange rate of 196 as at 23 September 2008)

Alan Clifton, Non-Executive Chairman of Japan Leisure Hotels, commented: 

'I am pleased that our performance over these six months has validated the business model laid out in the Admission Document, in particular the strong cash generation from the portfolio.  

'The potential value from investment in the leisure hotel industry continues to increase with the distress inflicted by current market conditions.  Even larger numbers of hotels are available at below replacement cost and by taking advantage of these opportunities and executing our industry consolidation strategy significant long term gains are available for investors.'

Steve Mansfield, CEO of New Perspective, the Asset Manager, commented:

'This is an exceptional time. It is presenting us with unparalleled opportunities to invest in further properties and supplements what is already a compelling proposition: the consolidation of the leisure hotel industry in Japan.  We continue to improve the operating performance of our existing hotel portfolio and remain very confident and excited about the future.'  

 

For further information, please contact:

New Perspective (Asset Manager)
Steve Mansfield, CEO New Perspective,		+81 3 4550 1808
Shore Capital (Nomad)
Dru Danford / Stephane Auton		020 7408 4090
West Hill Corporate Finance (Financial Adviser)		020 7464 8822
Alan Richards / John Terrando
Tavistock Communications (Financial PR)		020 7920 3150
Jeremy Carey / Simon Hudson / Paul Youens		pyouens@tavistock.co.uk

Chairman's Statement

The Japanese economy has not escaped being buffeted by global economic forces, but even in these testing times Japan Leisure Hotels, which was admitted to AIM on 16 January this year, has derived significant cash flow from the initial portfolio and has succeeded in expanding its investment in the Japanese leisure hotel industry in line with its strategy detailed in the Admission Document.  

It will be no surprise that inflation in utility costs and food and beverage have pressured margins, but a great deal of this has been offset by strong management action aimed at reducing other costs. New Perspective, our portfolio Asset Manager, has also been focused on the revenue side and has implemented some price increases. The impact of these is not evident in the results for the first half year's performance but we would expect them to be reflected in the full year results. More details on these operational initiatives are provided in the Asset Manager's report. 

Demonstrating Japan Leisure Hotel's ability to execute its stated strategy, the Board is extremely pleased to have made an investment in a hotel in Yokkaichi in central Japan. In addition to meeting our stringent criteria for acquisition, the Company was able to fund the investment entirely from existing cash resources, negating the need to seek additional funding through equity or debt.  

Our strategy of remaining unhedged with respect to the Japanese Yen has led to a significant increase in the NAV of the Company when converted into Sterling due to the appreciation of the Japanese Yen. We intend to maintain our policy of not hedging any currency exposure unless the Board perceives a material risk to the value of the portfolio and should any hedging transactions be deemed appropriate these will be announced to the market prior to any transactions.  

 

Further demonstrating a key investment tenet as laid out in the Admission Document, the cash generation from the underlying investments is strong and to date Japan Leisure Hotels has received ¥178 million (£860,000) of distributions. 

Investment Strategy and Outlook 

New Perspective has reported that the current turmoil in the financial markets has impacted on a number of owners and operators in the leisure hotel industry and that they expect this to continue in the months ahead. Two recent bankruptcies of medium sized real estate companies in Japan are of particularly significant import as both of these companies have portfolios of leisure hotels that are operating well but had been overleveraged by their owners. This opens up the possibility of purchasing good quality performing assets from distressed owners. 

This current opportunity in the market is fortuitous if we are able to take advantage of it as the long term investment metrics for the consolidation strategy we are pursuing remains unchanged: a highly fragmented industry, exceptionally high occupancy rates and a lack of professional management standards. By purchasing good performing assets from distressed sellers at discounted prices these returns can be further enhanced. 

Our intention is to invest in further properties. These investments would be funded through means that will not jeopardise the stability of Japan Leisure Hotels and will provide our shareholders with enhanced value.  

Alan Clifton

Chairman

Japan Leisure Hotels

23 September 2008 

Asset Manager's Report

Overview

The current economic climate has not left Japan untouched. This has created both challenges and opportunities for the hotels and for the future investment climate.  The demand for use of leisure hotels in Japan has a low correlation to the performance of the economy; furthermore the demand for leisure hotels may increase as consumers choose cheaper leisure alternatives, such as domestic travel, rather than more expensive foreign travel. This is apparent in resilient sales at the hotels under management, operated under the Bonita brand, in the period covered by this report. It is further demonstrated by a surge in sales over the summer months. However, there are worrying signs for the Japanese economy and there is a risk that further decline will lead to deeper cuts in leisure spending impacting on sales at the hotels under management.

The current economic environment also impacts the investments of Japan Leisure Hotels in other ways: commodity inflation globally has naturally led to increased energy and food costs at the hotels; the paucity of credit means greater difficulty in raising debt financing to aid the expansion of the portfolio; however, the difficulties experienced by other hotel owners in refinancing their assets means there is an increasing number of hotels available for sale at attractive prices for a buyer that has the resources.  As the asset manager for Japan Leisure Hotels, New Perspective will seek to meet the challenges and seize the opportunities to maximise the value to Japan Leisure Hotels.

Financial Results

Japan Leisure Hotels acquired the current portfolio on its Admission to AIM on 16 January 2008. New Perspective, the Asset Manager, has managed the portfolio since it was assembled in 2005 and 2006 meaning there is continuity in the management of the hotels and a history of comparable trading results by which to measure the performance of the portfolio.

Presented below are unaudited statements of EBITDA for each of the hotels for the six month period ended 30 June 2008. As can be seen from the table, EBITDA from the operation of the hotels for the period was ¥154m (£744,000). Although costs in connection with operating the listed company reduced this to ¥115m (£556,0002), cash flow for the period before costs associated with the listed company was a healthy ¥146m (£705,0002), bringing total cash at the end of the period to ¥609m. 

Even with the acquisition in Yokkaichi (see below) cash levels are comfortably sufficient to cover all currently scheduled capital expenditure. The refurbishment and rebranding of Yokkaichi is currently under planning and will be undertaken at the appropriate time.

Asset Manager's Report

Operating performance of the hotels for the 6 months ended 30 June 2008

	Bonita Komaki	Bonita Isawa	Bonita Matsusaka	Bonita Sendai	Bonita Yamagata	Total
	¥'000	¥'000	¥'000	¥'000	¥'000	¥'000
Revenue	70,516	61,612	131,775	246,890	54,293	565,086
Raw materials and consumables	-9,613	-8,699	-14,550	-18,169	-7,129	-58,160
Employee benefits costs	-19,525	-17,612	-30,383	-50,313	-14,351	-132,184
Utilities and maintenance	-9,175	-9,014	-15,807	-30,738	-6,260	-70,994
Management charges	-6,589	-6,084	-12,642	-26,194	-5,129	-56,638
Property tax, insurance and professional fees	-6,081	-5,740	-7,861	-13,152	-5,095	-37,929
Other expenses	-11,270	-7,108	-13,095	-17,974	-5,821	-55,268
Operating expenses	-62,253	-54,257	-94,338	-156,540	-43,785	-411,173
EBITDA (¥'000)	8,263	7,355	37,437	90,350	10,508	153,913
EBITDA (£'000)	40	36	181	436	51	744

EBITDA comprises earnings before interest, tax, depreciation and amortisation. The information in the table above is an extract from the unaudited IFRS results of the TK Operators. The difference between the total EBITDA above and the operating profit before exceptional item per the Consolidated Income Statement on page 14 is depreciation and amortisation of ¥105,793,000 (£511,077) and operating expenses of the Guernsey companies of ¥39,274,000 (£189,729).

The following key performance indicators further illustrate the growth and performance of the portfolio:

	2005	2006	2007	2008 1H
RevPAR	¥10,506	¥15,350	¥16,572	¥15,949
Occupancy	160%	239%	254%	253%
EBITDA Margin	(43.5%)	25.5%	28.7%	26.4%

RevPAR: average revenue per available room per day.

EBITDA Margin: earnings before interest, tax, depreciation and amortisation as a percentage of revenues.

Operating Performance Commentary

While the EBITDA Margin has fallen compared to the corresponding period in the previous year, this decline is due almost entirely to a change in the basis of calculating the asset management fees which occurred on the listing of Japan Leisure Hotels. 

Guest traffic has remained resilient through the first half of 2008, and is now on target to see an increase over 2007 for the full year. However, this is not translating into an increase in revenue because the additional guests are generally coming for shorter stays at some hotels at the expense of overnight guests, leading to a fall in RevPAR of more than 3%. This trend is partially driven by the increase in time we offer guests without an increase in price to remain competitive, specifically at Bonita Isawa and Bonita Yamagata. Both of these hotels are experiencing strong competition and is possibly a reflection of a decline in these local economies. 

Offsetting these trends, we introduced price increases at Bonita Sendai in May 2008, in addition to introducing some new and innovative products for the industry; these have already produced positive results. The changes at Bonita Sendai have been followed up with price and timetable changes at Bonita Komaki and Bonita Matsusaka in July and August 2008 respectively. We are continuing to use the data we collect from these changes to refine the process of setting prices and will be implementing further changes across the portfolio where we can identify opportunities. With the changes implemented for these three hotels we exceeded our revenue budget for the total portfolio in both July and August.

Energy and food costs have been a particular challenge over the first half of the year; utilities have increased by 13% on an annualised basis from 2007, but we have sought to mitigate these pressures by managing reductions in other areas; raw materials and consumables costs fell by 25% on an annualised basis from 2007 and personnel costs fell by 8% by the same comparison.  

Building on this success in cost management, we are implementing a central ordering and inventory management system. This will provide significantly greater control over purchasing decisions, better data tracking for specific items and allow more purchasing to be carried out across the portfolio rather than on a hotel by hotel basis thereby achieving greater economies of scale.

It is worth drawing attention to certain specific highlights from some of the properties within the portfolio. 

 

Bonita Matsusaka exceeded its internal forecasts for the number of guests, while expenses were in line with forecast, further cost savings are expected to flow through in the second half of this year. 

Bonita Komaki, which was the first property New Perspective took under management in 2005, underwent a modest refurbishment in the first half of 2008. During this process a number of value enhancing upgrades were implemented, all fixtures and fittings were checked and replaced as necessary and the whole property refreshed. This is an ongoing process across the portfolio and Matsusaka is scheduled to receive the same treatment in November. As part of the process the price structure was fundamentally reviewed and this is already providing positive results as noted above.

Bonita Sendai was the first property which underwent a fundamental pricing review: this was introduced in May, along with the introduction of our '24hr' stay price. Both the price changes and the introduction of 24hr stay plan have been received very favourably by our guests. This has been reinforced by the increase in the number of reservations that the hotel has received. 

New Perspective

New Perspective retains a strong focus on corporate governance and has the core objective of earning the best possible returns for investors over the life of each hotel asset.  

With a team of nine, New Perspective has a vast array of experience, both of the leisure hotel industry and investment activities in Japan. At present, a key role for the team is ensuring that investment continues to be made in the control and management systems for the hotels in order to tightly manage costs. In turn, New Perspective seeks to convert this into improved returns to investors. 

Investment activity

It is gratifying to have managed the first investment by Japan Leisure Hotels since it joined AIM increasing the portfolio to six hotels accounting for a total of 242 rooms. The acquired property, located in Yokkaichi in central Japan, was purchased for a consideration of ¥410 million (approximately £2 million) excluding costs associated with the transaction and was funded entirely by Japan Leisure Hotels.

The property was built in 1987 and is located within 5 kilometres of the city centre of Yokkaichi in Mie-ken. It is easily accessible by road and rail and very visible from a major highway. During the 12 months to May 2008 the 47 room hotel generated EBITDA of approximately ¥38 million (£169,6434) from a turnover of approximately ¥162 million (£723,2144). 

This property has a great deal of potential.  In order to maximise that potential we are intent on ensuring that we incorporate all the knowledge we have acquired from managing the other five hotels. This will result in a longer and more detailed planning process so we expect to be operating the property in its current condition for longer than has been our practice in the past. 

The last few months have been an interesting time to be a buyer of leisure hotels in Japan. As we remarked in the annual report there has been an unprecedented number of hotels available for sale and this theme has continued with New Perspective being able to review some exceptional properties.  

August brought some clarity to the situation and provided some explanation for the plethora of opportunities. Within a week of each other Urban Corporation and Sebon, both medium sized real estate companies and owners of reasonably sized leisure hotel portfolios, filed for court protection from their creditors. Vanilla, which is a subsidiary of Sebon and the main operating entity of its leisure hotels also filed for court protection at the same time. New Perspective is familiar with the hotels that form each of these portfolios and knows that they include some quality properties. These are examples of quality assets now becoming available from distressed sellers - an excellent opportunity.

In contrast to many in the market our portfolio of hotels remains debt free. This is something we are willing to change provided that by leveraging the portfolio we will increase value to Japan Leisure Hotels. Clearly this is a difficult task in the current environment but we are in discussions with a number of potential lenders and hope to have a positive update in the not too distant future.

Outlook

This is an exceptional time, it is presenting us with unparalleled opportunities to invest in further properties and, even without the current market opportunity, investment in the consolidation of the leisure hotel industry in Japan remains a compelling proposition. The challenge for the portfolio is the one facing many businesses around the world: how to access capital.

As the portfolio is performing well, our need is not capital to survive, but capital to grow and that is what we are intent on achieving.  We continue to pursue opportunities to leverage the portfolio so that we may seize some of the opportunities presenting themselves. We continue to work with less distressed sellers to seek to invest in hotels through share transactions and we continue to speak with equity investors about the current opportunities. 

We are focussed on capitalising on the exceptional opportunities that are presenting themselves and remain very confident and excited about the future. 

Stephen Mansfield	Robert Marshall
Director	Director
New Perspective Y.K.	New Perspective Y.K.
23 September 2008	23 September 2008

Independent Review Report

to the Members of Japanese Leisure Fund Limited

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2008 which comprises the Consolidated Income Statement, the Consolidated Balance Sheet, the Consolidated Statement of Changes In Equity, Consolidated Statement of Cash Flows and related Condensed Notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. As disclosed in note 1, the annual financial statements of the group are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union.

Our Responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Our report has been prepared in accordance with the terms of our engagement to assist the company in meeting its responsibilities in respect to half-yearly financial reporting in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2008 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union. 

BDO Novus Limited

Chartered Accountants

Elizabeth House, St Peter Port, Guernsey

23 September 2008

Consolidated Income Statement (Unaudited)

For the period 1 January 2008 to 30 June 2008

		Note	01.01.2008 to 30.06.2008		17.10.2007 to 31.12.2007
			(Unaudited)		(Audited)
			¥'000		¥'000
Revenue			563,641		-
Total revenue			563,641		-
Raw materials and consumables			(58,644)
Personnel costs			(132,184)
Depreciation and amortisation			(105,793)
Other expenses			(258,174)		(5,027)
Total expenses			(554,795)		(5,027)
Operating profit before exceptional item			8,846		(5,027)
Exceptional item
Negative goodwill		5	156,663		-
					-
Profit/(loss) on operations			165,509		(5,027)
Interest income			8,607		-
Net foreign currency loss			(4,473)		-
			4,134		-
Profit/(loss) before taxation			169,643		(5,027)
Corporate tax expense			(82)		-
Profit/(loss) for the period			169,561		(5,027)
Attributable to:
Equity shareholders			168,237		(5,027)
Minority interest			1,324		-
			169,561		(5,027)
Earnings per share - basic (Yen)		6	4.16		(2,513)
Earnings per share - diluted (Yen)		6	3.18		-
Adjusted earnings per share - basic (Yen)		6	0.29		-
Adjusted earnings per share - diluted (Yen)		6	0.22		-

All items in the above statement are derived from continuing operations

 

Consolidated Balance Sheet (Unaudited)

As at 30 June 2008

	Note		30.06.2008		31.12.2007
			(Unaudited))		(Audited)
			¥'000		¥'000
ASSETS:
Non-current assets
Intangible assets	7		1,224		-
Property, plant and equipment	8		4,717,686		-
Deposits with suppliers			3,220		-
Total non-current assets			4,722,130		-
Current assets
Inventory	9		22,467
Trade and other receivables	10		36,825		-
Cash and cash equivalents	11		609,399		-
Total current assets			668,691		-
TOTAL ASSETS			5,390,821		-
Current liabilities
Trade and other payables Current	12		(106,428)		(5,027)
Total current liabilities			(106,428)		(5,027)
TOTAL LIABILITIES			(106,428)		(5,027)
TOTAL NET ASSETS			5,284,393		(5,027)
Share capital	13		94,757		-
Distributable reserve			4,365,514		-
Foreign currency translation reserve			(8,978)		-
Retained earnings			163,210		(5,027)
EQUITY ATTRIBUTABLE TO SHAREHOLDERS			4,614,503		(5,027)
Minority interest			669,890		-
TOTAL EQUITY			5,284,393		(5,027)

 

The consolidated financial statements were approved by the Board of Directors and signed on its behalf by:

Alan Clifton	Sarah Evans
Chairman	Director
Japan Leisure Hotels Ltd	Japan Leisure Hotels Ltd
23 September 2008	23 September 2008

 

Consolidated Statement of Changes in Equity (Unaudited)

For the period from 1 January 2008 to 30 June 2008

	Share Capital	Share Premium	Distributable Reserve	Foreign Currency Translation Reserve	Retained Earnings	Total Shareholders Equity	Minority Interest	Total Equity
	¥'000	¥'000	¥'000	¥'000	¥'000	¥'000	¥'000	¥'000
As at 1 January 2008	-	-	-	-	(5,027)	(5,027)	-	(5,027)
Issue of Ordinary Share capital	94,757	4,643,102	-	-	-	4,737,859	-	4,737,859
Share issue costs	-	(277,588)	-	-	-	(277,588)	-	(277,588)
Conversion of share premium account	-	(4,365,514)	4,365,514	-	-	-	-	-
Profit for the period	-	-	-	-	168,237	168,237	1,324	169,561
Foreign currency translation differences	-	-	-	(8,978)	-	(8,978)	-	(8,978)
Minority interest in pre-acquisition reserves	-	-	-	-	-	-	668,566	668,566
As at 30 June 2008	94,757	-	4,365,514	(8,978)	163,210	4,614,503	669,890	5,284,393

For the period from 17 October 2007 to 31 December 2007 (Audited)

	Share Capital	Share Premium	Distributable Reserve	Foreign Currency Translation Reserve	Retained Earnings	Total Shareholders Equity	Minority Interest	Total Equity
	¥'000	¥'000	¥'000	¥'000	¥'000	¥'000	¥'000	¥'000
Issue of Ordinary Share capital	-	-	-	-	-	-	-	-
Loss for the period	-	-	-	-	(5,027)	(5,027)	-	(5,027)
At 31 December 2007	-	-	-	-	(5,027)	(5,027)	-	(5,027)

Consolidated Cash Flow Statement 

For the period 1 January 2008 to 30 June 2008

	Note	01.01.2008 to 30.06.2008		17.10.2007 to 31.12.2007
		(Unaudited)		(Audited)
		¥'000		¥'000
Cash flows from operating activities
Profit/(loss) before taxation		169,561		(5,027)
Adjustments for:
Depreciation and amortisation	3	105,793		-
Interest income		(8,607)		-
Foreign currency translation differences		(8,978)		-
Negative goodwill	5	(156,663)		-
Changes in working capital		(2,259)		(5,027)
Cash inflows/(outflows) from operations		98,847		-
Interest received		8,385		-
Net cash inflows/(outflows) from operating		107,232		-
activities
Cash flows from investing activities
Purchase of furniture and fittings		(22,889)		-
Cash acquired on acquisition		91,730		-
Net cash generated from investing activities		68,841		-
Cash flows from financing activities
Share proceeds	13	655,350		-
Share issue costs	13	(222,024)		-
Net cash generated from financing activities		433,326		-
Net increase/(decrease) in cash
and cash equivalents		609,399		-
Cash and cash equivalents at the beginning
of period		-		-
Cash and cash equivalents at the end
of period		609,399		-

Condensed Notes to the Unaudited Consolidated Financial Statements

For the period from 1 January 2008 to 30 June 2008

General Information

Japan Leisure Hotels Limited is a company incorporated and registered in Guernsey under the Companies (Guernsey) Law, 1994. The address of the registered office is given in the Management and Administration section. 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 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.

These hotels are owned 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.

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 annual financial statements of Japan Leisure Hotels Limited are prepared in accordance with IFRS. The set of condensed financial statements included in this interim financial report has been prepared in accordance with International Accounting Standards 34 'Interim Financial Reporting'. 

The same accounting policies, presentation and methods of computation are followed in this set of condensed financial statements as applied in the Company's latest annual audited financial statements for the period ended 31 December 2007. The interim report should be read in conjunction with the financial statements for the period ended 31 December 2007. Additional policies and disclosures are provided below for items not covered in the latest annual audited financial statements.

Basis of consolidation

The consolidated interim financial statements incorporate the financial statements of the Company, its subsidiaries and special purpose entities ('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 through which property, plant and equipment is held.

Exceptional item

Exceptional items refer to those items considered by the Directors to be significant items which are unusual and non-recurring in nature and therefore requiring separate disclosure.

Goodwill

Negative goodwill arising on acquisition of the TK Interests is credited to the Consolidated Income Statement in the period.

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 income.

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	15-30 years
Fixtures and fittings	3-10 years
Land	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 incidental to ownership are retained by the lessor (an 'operating lease'), 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. 

Revenue recognition

Revenue is recognised at the time that customers check out of their room. Revenue comprises room rental income, service charges and other revenues from customers of the hotels.

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.

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 employees and no employee benefits have been recognised in the financial statements. All hotel staff are employed by hotel operators and all related costs (including wages, social security and employee taxes) are charged by the hotel operators to the TK Operators.

Foreign currency translation

Functional and presentation currency

Items included in the financial statements of the Company and its Subsidiaries are measured using Sterling which is the currency of the primary economic environment in which each Subsidiary operates (the 'functional currency'). This is the currency in which shares were issued and dividends will be paid. 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. 

Foreign currency translation

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. Foreign currency translation differences arising from the translation of foreign currency balances into Japanese Yen are recognised as a separate component of equity.

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.

Share capital

Ordinary shares are classified as equity where there is no obligation to transfer cash or other assets.

2…NEW STANDARDS AND INTERPRETATIONS NOT APPLIED

There are a few new standards, interpretations and amendments to existing standards that are effective for periods subsequent to 2008. However, management believes that these are not relevant to the Company's operations at this period and will have no material impact on the Company's recognition and measurement policies.

3…PROFIT / (LOSS) ON OPERATIONS

	01.01.2008 to 30.06.2008		17.10.2007 to 31.12.2007
	¥'000		¥'000
	(Unaudited)		(Audited)
Depreciation	105,361		-
Amortisation of intangible assets	432		-
Operating lease payments	2,659		-
Net foreign currency loss	4,473		-
Inventory recognised as an expense	58,644		-
Utilities	52,416		-
Property tax	11,374		-
Hotel operator fees	23,180		-
Asset manager fees	33,457		-
Professional services	28,460		-
Auditors' remuneration - audit services	6,037		1,346
Administration fees	8,856		-
Directors' fees	8,644		3,681

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.

Japanese taxation

The reasons for the difference between actual tax charge for the year and the standard rate of tax in Japan applied to the results of the TK Operators for the year are as follows:

	01.01.2008 to 30.06.2008		17.10.2007 to 31.12.2007
	(Unaudited)		(Audited)
	¥'000		¥'000
Profit before taxation of the Japanese entities	44,231		-
Expected tax charge based on Japanese tax of 42%	18,578		-
Other items assessable/(deductible) for tax purposes	(21,097)		-
Accelerated depreciation	3,601		-
Delayed recognition of expenses	(1,247)		-
Expenses not deductible for tax purposes	504		-
Taxable income /(loss) before carried forward tax losses	338
Tax charge	(82)		-

5…EXCEPTIONAL ITEM

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 cannot be recognised as a liability on the balance sheet and should be recognised in the income statement as it arises. The negative goodwill of ¥156,663,000 arising on the acquisition of the TK Interests has been credited to the Consolidated Income Statement in the period.

6…EARNINGS PER SHARE

	01.01.2008 to 30.06.2008		17.10.2007 to 31.12.2007
	(Unaudited)		(Audited)
	Number		Number
Weighted average number of Ordinary Shares	40,465,385		2
Dilutive potential Ordinary Shares	12,420,500		-
	52,885,885		2
	¥'000		¥'000
Profit attributable to equity shareholders	168,237		(5,027)
Profit attributable to equity shareholders before exceptional item	11,574		-
Basic earnings per share (Yen)	4.16		(2,513)
Diluted earnings per share (Yen)	3.18		-
Adjusted basic earnings per share - before exceptional item and after tax (Yen)	0.29		-
Adjusted diluted earnings per share - before exceptional item and after tax (Yen)	0.22		-

Basic earnings per share

Basic earnings per share is based on the profit attributable to equity shareholders per weighted average Ordinary Share.

Diluted earnings per share

Diluted earnings per share is based on the profit attributable to equity shareholders per weighted average Ordinary Share and also taking into account the effect of the potential ordinary shares which would arise in the event of the warrants being exercised.

Adjusted basic earnings per share - before exceptional item and after tax

Adjusted basic earnings per share - before exceptional item and after tax is based on the profit attributable to equity shareholders before exceptional item and after tax per weighted average Ordinary Share.

Adjusted diluted earnings per share - before exceptional item and after tax

Adjusted diluted earnings per share - before exceptional item and after tax is based on the profit attributable to equity shareholders before exceptional item and after tax per weighted average Ordinary Share and also taking into account the effect of the potential ordinary shares which would arise in the event of the warrants being exercised.

7…INTANGIBLE ASSETS

	01.01.2008 to 30.06.2008		17.10.2007 to 31.12.2007
	(Unaudited)		Audited
Software	¥'000		¥'000
Cost
As at 1 January 2008	-
Additions	1,656		-
As at 30 June 2008	1,656		-
Amortisation
At beginning of the year	-		-
Provided for in the year	(432)
As at 30 June 2008 / 31 December 2007	(432)		-
Net book value as at 30 June 2008 / 31 December 2007	1,224		-

8...PROPERTY, PLANT AND EQUIPMENT

	Land	Buildings and structures	Fixtures and fittings	Total
	¥'000	¥'000	¥'000	¥'000
Cost
As at 1 January 2008	-	-	-	-
Additions	990,316	3,250,237	582,494	4,823,047
As at 30 June 2008	990,316	3,250,237	582,494	4,823,047
Depreciation
As at 1 January 2008	-	-	-
Provided for in the year	-	(66,702)	(38,659)	(105,361)
As at 30 June 2008	-	(66,702) 51,576)	(38,659)	(105,361)
Net book value
As at 30 June 2008	990,316	3,183,535	543,835	4,717,686
As at 1 January 2008	-	-	-	-

The net book value of land and buildings may be analysed as:

	30.06.2008		31.12.2007
	(Unaudited)		(Audited)
	¥'000		¥'000
Freehold	4,173,851		-

There are no significant commitments to expenditure in future accounting periods.

9…INVENTORY

	30.06.2008		31.12.2007
	(Unaudited)		(Audited)
	¥'000		¥'000
Goods held for resale	22,467		-

10... TRADE AND OTHER RECEIVABLES

	30.06.2008		31.12.2007
	(Unaudited)		(Audited)
	¥'000		¥'000
Trade receivables	4,774		-
Other receivables	32,051		-
	36,825		-

11…CASH AND CASH EQUIVALENTS

	30.06.2008		31.12.2007
	(Unaudited)		(Audited)
	¥'000		¥'000
Cash held at hotels	42,186
Cash at banks	567,213		-
	609,399		-

12...TRADE AND OTHER PAYABLES

	30.06.2008		31.12.2007
	(Unaudited)		Audited
	¥'000		¥'000
Trade payables	57,401		5,027
Other payables	49,027		-
	106,428		5,027

13...SHARE CAPITAL

The authorised share capital of the Company is 160 million Ordinary shares of £0.01 each.

The issued share capital of the Company is comprised as follows: 

	30.06.2008		31.12.2007
	Number	¥'000	Number	¥'000
Allotted, called up and fully paid
Ordinary Shares of £0.01 each	44,100,002	94,757	2	477

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 ¥655 million (£3.05 million)  

Share issue expenses

Share issue expenses incurred in the initial launch of the Company amounted to ¥277.6 million (£1,291,898). They have been treated as a deduction from equity and written off against the share premium account. ¥55.6 million (£258,595) 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 ¥222 million (£1,033,303). 

Share premium account

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 Group 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.

Warrants

For every Ordinary Share subscribed in the placing, the Company issued 2 Warrants. Accordingly, 12.2 million Warrants have been issued to subscribers. A further 220,500 Warrants have been issued to Shore Capital in part payment of its fees in connection with the placing. Each Warrant entitles the holder to subscribe for one new Ordinary Share at £0.45. The Warrants will be exercisable from 31 January 2009 until 31 January 2013.

14…COMMITMENTS UNDER OPERATING LEASES

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

	30.06.2008		31.12.2007
	¥'000		¥'000
Not later than one year	4,620		-
Later than one year and not later than five years	18,480		-
Later than five years	62,170		-

 

15…RELATED PARTIES

Mark Huntley, director of the Company, is also a director of the Company's administrator, Heritage International Fund Managers Limited. During the period Mr Huntley earned ¥1,536,909 by way of a director's fee of which ¥794,323 was outstanding at the period end. Heritage International Fund Managers Limited earned ¥7,431,774 in administration fees of which ¥3,971,616 was outstanding at the period end.

16…POST BALANCE SHEET EVENTS

On 4 August 2008 the Company purchased loan notes from JLH 2 Limited. The funds received by JLH 2 Limited were subsequently transferred to Y.K Chubu Revitalisation via a TK Agreement. On 25 August 2008 Chubu Revitalisation acquired Kukku no Omocha Hotel for a consideration of ¥410 million plus taxes and expenses.

ENDIR KXLFLVKBZBBF