Japan Leisure Hotels Semi Annual report to 30 June 2008

2008 INTERIM REpoRTJapan Leisure Hotels Limited Interim Report and Unaudited Condensed Consolidated Financial Statements

For the period 1 January 2008 to 30 June 2008

Color

Monochrome Type

Contents

Management and Administration 1

Chairman’s Statement 2

Asset Manager’s Report 3

Independent Review Report 8

Consolidated Income Statement (Unaudited) 10

Consolidated Balance Sheet (Unaudited) 11

Consolidated Statement of Changes in Equity (Unaudited) 12

Consolidated Statement of Cash Flows (Unaudited) 14

Condensed Notes to the Unaudited Consolidated Financial Statements 15

JLH Interim Report 2008 1

DirectorsAlan Clifton (Chairman)Sarah EvansWilliam HunterMark Huntley

Registered Offi ceHeritage HallLe Marchant StreetSt. Peter PortGuernsey GY1 4HY

Administrator and SecretaryHeritage International Fund Managers LimitedHeritage HallLe Marchant StreetSt. Peter PortGuernsey GY1 4HY

Nominated AdviserShore Capital and Corporate LimitedBond Street House14 Cliff ord StreetLondon W1S 4JU

BrokerShore Capital Stockbrokers LimitedBond Street House14 Cliff ord StreetLondon W1S 4JU

Financial AdviserWest Hill Corporate Finance Limited60 Lombard StreetLondon EC3V 9EA

Independent AuditorBDO Novus LimitedElizabeth HouseSt Peter PortGuernsey GY1 3LL

Financial PRTavistock Communications131 Finsbury PavementLondon EC2A 1NT

Legal Advisers to the Company

As to English Law

Ashurst LLPBroadwalk House5 Appold StreetLondon EC2A 2HA

As to Japanese Law

Ashurst Tokyo Law Offi ceShiroyama Trust Tower30th Floor4-3-1 ToranomonMinato-KuTokyo 105-6030Japan

As to Guernsey Law

Ogier Ogier HouseSt Julian’s AvenueSt Peter PortGuernseyGY1 1WA

RegistrarsCapita Registrars (Guernsey) Limited2nd FloorNo.1 Le TruchotSt Peter PortGuernsey GY1 4AE

Websiteswww.japanleisurehotels.comwww.japanleisurehotels.gg

Management and Administration

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2

The Japanese economy has not escaped being buff eted 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 signifi cant cash fl ow 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 infl ation in utility costs and food and beverage have pressured margins, but a great deal of this has been off set 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 fi rst half year’s performance but we expect them to be refl ected 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 signifi cant 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. 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 (based on an average exchange rate for the period of ¥207/£).

Investment Strategy and Outlook

New Perspective has reported that the current turmoil in the fi nancial markets has impacted 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 signifi cant 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 CliftonChairmanJapan Leisure Hotels23 September 2008

Chairman’s Statement

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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 infl ation globally has naturally led to increased energy and food costs at the hotels; and the paucity of credit means greater diffi culty in raising debt fi nancing to aid the expansion of the portfolio.

However, the diffi culties experienced by other hotel owners in refi nancing 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 on the next page 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 (£744,0001). Although costs in connection with operating the listed company reduced this to ¥115m (£556,0001), cash fl ow for the period before costs associated with the listed company was a healthy ¥146m (£705,0001), bringing total cash at the end of the period to ¥609m.

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

1 Based on average exchange rate for the period of ¥207/£

Asset Manager’s Report


4

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 benefi ts 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 diff erence between the total EBITDA above and the operating profi t before exceptional item per the Consolidated Income Statement on page 10 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

Asset Manager’s Report (continued)


JLH Interim Report 5

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 traffi c has remained resilient through the fi rst 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 off er guests without an increase in price to remain competitive, specifi cally at Bonita Isawa and Bonita Yamagata. Both of these hotels are experiencing strong competition and this is possibly a refl ection of a decline in these local economies.

Off setting 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 refi ne 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 fi rst 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 signifi cantly greater control over purchasing decisions, better data tracking for specifi c 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 specifi c 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 fl ow through in the second half of this year.

Bonita Komaki, which was the fi rst property New Perspective took under management in 2005, underwent a modest refurbishment in the fi rst half of 2008. During this process a number of value enhancing upgrades were implemented, all fi xtures and fi ttings 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.


6

Asset Manager’s Report (continued)

Bonita Sendai was the fi rst 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 fi rst 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 million2) excluding costs associated with the transaction and was funded entirely by Japan Leisure Hotels.

2 Based on exchange rate on 25/08/08 of ¥204/£

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 (£169,6432) from a turnover of approximately ¥162 million (£723,2143).

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 fi ve 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, fi led for court protection from their creditors. Vanilla, which is a subsidiary of Sebon and the main operating entity of its leisure hotels also fi led 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.

3 Based on an average exchange rate for the 12 months to May 2008 of ¥224/£


JLH Interim Report 7

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 diffi cult 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 confi dent and excited about the future.

Stephen Mansfi eld Robert MarshallDirector DirectorNew Perspective Y.K. New Perspective Y.K.23 September 2008 23 September 2008


8

Introduction

We have been engaged by the Company to review the condensed set of fi nancial statements in the half-yearly fi nancial 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 fi nancial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of fi nancial statements.

Directors’ Responsibilities

The half-yearly fi nancial report is the responsibility of, and has been approved by, the directors.

As disclosed in note 1, the annual fi nancial statements of the group are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The condensed set of fi nancial statements included in this half-yearly fi nancial 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 fi nancial statements in the half-yearly fi nancial 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 fi nancial 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 fi nancial information consists of making enquiries, primarily of persons responsible for fi nancial 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 signifi cant matters that might be identifi ed in an audit. Accordingly, we do not express an audit opinion.

to the Members of Japanese Leisure Fund Limited

Independent Review Report



Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of fi nancial statements in the half-yearly fi nancial 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 LimitedChartered AccountantsElizabeth House, St Peter Port, Guernsey23 September 2008


10

Consolidated Income Statement (Unaudited)

Note 01.01.2008 to 30.06.2008

17.10.2007 to31.12.2007

(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 profi t before exceptional item 8,846 (5,027)

Exceptional item

Negative goodwill 5 156,663 -

-

Profi t/(loss) on operations 165,509 (5,027)

Interest income 8,607 -

Net foreign exchange loss (4,473) -

4,134 -

Profi t/(loss) before taxation 169,643 (5,027)

Corporate tax expense (82) -

Profi t/(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.The condensed notes on pages 15-24 form an integral part of these consolidated fi nancial statements.

For the period 1 January 2008 to 30 June 2008



Consolidated Balance Sheet (Unaudited)

Note 30.06.2008 31.12.2007


¥’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 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 condensed notes on pages 15-24 form an integral part of these consolidated fi nancial statements.The consolidated fi nancial statements were approved by the Board of Directors and signed on its behalf by:

Alan Clifton Sarah EvansChairman DirectorJapan Leisure Hotels Ltd Japan Leisure Hotels Ltd23 September 2008 23 September 2008

As at 30 June 2008


12

ShareCapital

SharePremium

Distributable Reserve

¥’000 ¥’000 ¥’000

As at 1 January 2008 - - -

Issue of Ordinary Share capital 94,757 4,643,102 -

Share issue costs - (277,588) -

Conversion of share premium account - (4,365,514) 4,365,514

Profi t for the period - - -

Foreign currency translation diff erences - - -

Minority interest in pre-acquisition reserves - - -

As at 30 June 2008 94,757 - 4,365,514

Consolidated Statement of Changes in Equity (Unaudited)For the period 1 January 2008 to 30 June 2008

Consolidated Statement of Changes in Equity (Audited)For the period from 17 October 2007 to 31 December 2007

ShareCapital

SharePremium

Distributable Reserve

¥’000 ¥’000 ¥’000

Issue of Ordinary Share capital - - -

Loss for the period - - -

At 31 December 2007 - - -

The condensed notes on pages 15-24 form an integral part of these consolidated fi nancial statements.



Foreign Currency Translation

Reserve

RetainedEarnings

TotalShareholders

Equity

MinorityInterest

TotalEquity

¥’000 ¥’000 ¥’000 ¥’000 ¥’000

- (5,027) (5,027) - (5,027)

- - 4,737,859 - 4,737,859

- - (277,588) - (277,588)

- - - - -

- 168,237 168,237 1,324 169,561

(8,978) - (8,978) - (8,978)

- - - 668,566 668,566

(8,978) 163,210 4,614,503 669,890 5,284,393

Foreign Currency Translation

Reserve

RetainedEarnings

TotalShareholders

Equity

MinorityInterest

TotalEquity

¥’000 ¥’000 ¥’000 ¥’000 ¥’000

- - - - -

- (5,027) (5,027) - (5,027)

- (5,027) (5,027) - (5,027)


14

Note 01.01.2008 to 30.06.2008

17.10.2007 to 31.12.2007


¥’000 ¥’000

Cash fl ows from operating activities

Profi t/(loss) before taxation 169,561 (5,027)

Adjustments for:

Depreciation and amortisation 3 105,793 -

Interest income (8,607) -

Foreign currency translation diff erences (8,978) -

Negative goodwill 5 (156,663) -

Changes in working capital (2,259) (5,027)

Cash infl ows/(outfl ows) from operations 98,847 -

Interest received 8,385 -

Net cash infl ows/(outfl ows) from operating activities 107,232 -

Cash fl ows from investing activities

Purchase of furniture and fi ttings (22,889) -

Cash acquired on acquisition 91,730

Net cash generated from investing activities 68,841 -

Cash fl ows from fi nancing activities

Share proceeds 13 655,350 -

Share issue costs 13 (222,024) -

Net cash generated from fi nancing 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 -

The condensed notes on pages 15-24 form an integral part of these consolidated fi nancial statements.

Consolidated Cash Flow Statement (Unaudited)For the period 1 January 2008 to 30 June 2008



General InformationJapan Leisure Hotels Limited is a company incorporated and registered in Guernsey under the Companies (Guernsey) Law, 1994. The address of the registered offi ce is given on page 1. The Company has been established to derive cashfl ow 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 StructureThe 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 benefi ts of investment in that business.

1. SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these fi nancial statements are set out below. These policies have been consistently applied throughout the current period, unless otherwise stated.

Basis of accountingThe annual fi nancial statements of Japan Leisure Hotels Limited are prepared in accordance with IFRS. The set of condensed fi nancial statements included in this interim fi nancial report has been prepared in accordance with International Accounting Standard 34 ‘Interim Financial Reporting’.

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

Basis of consolidationThe consolidated interim fi nancial statements incorporate the fi nancial 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.

Condensed Notes to the Unaudited Consolidated Financial StatementsFor the period from 1 January 2008 to 30 June 2008


16

Condensed Notes (continued)

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

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

Intangible assetsIntangible 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 assetsAssets, other than inventories, trade and other receivables and certain fi nancial 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 equipmentProperty 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 yearsFixtures and fi ttings 3-10 yearsLand Not depreciated

LeasesLeases are classifi ed as fi nance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classifi ed as operating leases.

Operating leasesWhere 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.



InventoryIn accordance with IAS 2 inventories have been stated at the lower of purchase cost or net realisable value.

Revenue recognitionRevenue 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 signifi cant 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 signifi cantly later than exchange. For conditional exchanges, sales are recognised when all of the conditions are satisfi ed. Sales of investment and other fi xed 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 off ers and other special benefi ts. 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 costsThe Group has no employees and no employee benefi ts have been recognised in the fi nancial 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 translationFunctional and presentation currencyItems included in the fi nancial 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 fi nancial 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 balancesAssets 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 diff erences arising from the translation of foreign currency balances into Japanese Yen are recognised as a separate component of equity.


18


Share issue costsThe 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 capitalOrdinary shares are classifi ed 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 eff ective for periods subsequent to the Company’s period end. 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

This is arrived at after charging:

01.01.2008 to 30.06.2008

17.10.2007 to 31.12.2007

¥’000 ¥’000


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 taxationThe 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 taxationThe reasons for the diff erence 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


¥’000 ¥’000

Profi t before taxation of the Japanese entities 44,231 -

Expected tax charge based on Japanese tax of 42% 18,577 -

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 goodwillNegative 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.


20


6. EARNINGS PER SHARE

01.01.2008 to 30.06.2008

17.10.2007 to 31.12.2007


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

Profi t attributable to equity shareholders 168,237 (5,027)

Profi t attributable to equity shareholders before exceptional item and after tax 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 shareBasic earnings per share is based on the profi t attributable to equity shareholders per weighted average Ordinary Share.

Diluted earnings per shareDiluted earnings per share is based on the profi t attributable to equity shareholders per weighted average Ordinary Share and also taking into account the eff ect 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 taxAdjusted basic earnings per share – before exceptional item and after tax is based on the profi t 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 taxAdjusted diluted earnings per share – before exceptional item and after tax is based on the profi t attributable to equity shareholders before exceptional item and after tax per weighted average Ordinary Share and also taking into account the eff ect 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 to31.12.2007

(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

LandBuildings and

StructuresFixtures and

fi ttingsTotal

¥’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) (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 - - - -


22


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

30.06.2008 31.12.2007


¥’000 ¥’000

Freehold 4,173,851 -

There are no signifi cant commitments to expenditure in future accounting periods.

9. INVENTORY

30.06.2008 31.12.2007


¥’000 ¥’000

Goods held for resale 22,467 -

10. TRADE AND OTHER RECEIVABLES

30.06.2008 31.12.2007


¥’000 ¥’000

Trade receivables 4,774 -

Other receivables 32,051 -

36,825 -

11. CASH AND CASH EQUIVALENTS

30.06.2008 31.12.2007


¥’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

14. SHARE CAPITAL

Authorised share capital of the Company consists of 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 -

Share capitalOn 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 expensesShare 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 fl ow relating to share issue expenses in the period was ¥222 million (£1,033,303).

Share premium accountBy 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.


24


WarrantsFor 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 fi ve years 18,480 -

Later than fi ve 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 directors fee of which ¥794,323 was outstanding at the period end. Heritage International Fund Managers 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.


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Japan Leisure Hotels Semi Annual report to 30 June 2008

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