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Japanese love hotel fund investment presentation

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					Private & Confidential

Leisure Hotel Investment Fund
MHS Capital Partners

Financial Projections

September 2003

Executive Summary
The Opportunity
• MHS Capital Partners is being established as an investment vehicle to address the undersupply of capital to the Leisure Hotel property sector and create a vehicle for investors that provides yields in Japanese yen superior to most other investment alternatives in Japan today. • “Leisure hotels” are an asset class specific to the Japanese market, which provides guests with personal privacy business, hotel amenities (bed, bath/shower /TV) and often offer peripheral entertainment such as karaoke and theme room designs. Guests are charged on flexible time, metered basis. In summary they largely address the problem of cramped living conditions and multigenerational living scenarios that characterize Japan. For the purposes of this presentation, these properties will hereinafter be referred to as leisure hotels. • Our acquisition thesis is to: 1) purchase leisure hotels at distressed prices with an appropriate amount of debt financing, 2) focus on improving operational efficiencies post-acquisition, 3) leverage marketing synergies of the property portfolio, and 4) enter into highly competitive commercial contracts with operators. • Our capital return strategy is to: 1)operate for cash, 2)dividend out quarterly profits to limited partners in order to provide recurring healthy cash-on-cash annual return of 15%+ in Japanese yen, and deliver a potential equity “return kicker” by opportunistically selling the properties for modest gain over the acquisition cost. • On that basis, MHS plans to raise and manage a five-year fund that will yield annual gross ROI to investors of 25%. Private & Confidential 2
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Executive Summary
The Opportunity (Cont’d)
•At present there are approximately 17,000 Leisure Hotel properties in Japan1. Many were built during the “bubble economy” period 15 years ago with rosy assumptions and extravagant construction budgets. The ensuing recession has left many of these properties in distress or bankruptcy. The mortgage loans secured by those properties have been traded actively in recent years. While the actual cash flow never supported the lavish initial investment in the properties, the significant cash that these properties generate can be used to create an attractive yield for investors buying at today’s distressed prices. •In the current environment, there are few buyers for Leisure Hotels. These buyers comprise either of healthy small or medium size operators looking to expand opportunistically or foreign real estate and distressed funds that focus on bulk purchases of assets or loan portfolios which include leisure hotel assets. On the financing side, the traditional lenders to this sector – the commercial banks – have been reducing their overall exposure to real estate financing as part of their effort to reduce their balance of non-performing loans. Only a few companies, including ORIX (Japan’s leading non-bank financial institution) and Sanyo Electric Credit, have begun to step-in and provide debt financing to this industry. As a result, there is a dearth of equity capital targeting this asset class in Japan and this presents an attractive commercial investment opportunity.
1In this industry most operators are also owners. Those operators who are not owners contract with property owners to manage the hotel on a

subcontract basis.

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Our Objective
Transformation of the Leisure Hotel Industry
Current Situation Disaggregated ownership Distress No institutional money Impact – Step 1

Hotel B Hotel A

Hotel C

Hotel D Hotel E

Step 1

INVESTMENT FUND

Internationally accepted structure for hotel operators Transparency

Step 2

DEBT CAPITAL MARKETS

Impact – Step 2 Investment Grade Ratings Respectability

Step 3

EQUITY CAPITAL MARKETS

Further Transparency

Impact – Step 3 Institutional Ownership

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Parallels with Consumer Finance Industry in 1990’s
In 1990’s Consumer Finance companies in the same situation • Consumer Finance Companies were the black sheep of the finance industry. Banks became reluctant to lend due to the credit crunch so growth was constrained by expensive and scarce capital. Investment Banks led Consumer finance companies to Capital Markets • The greater transparency requirements of capital markets led to changes in management and business practices in the consumer finance industry. • Public scrutiny and criticism of bad practices has transformed the consumer finance companies into better corporate citizens • Ratings benchmarked the strong cash flow of the industry as one of the most profitable industries in Japan • Overseas investors started the trend, domestic investors followed Investors comfortable with Debt Securities, listings and equity ownership follows • Takefuji, Promise, Acom, in quick order became listed companies and graduated to Tokyo Stock Exchange 1st Section board. Now, cornerstone financial sector companies, much more profitable than domestic banks Final Outcome • Consumer Finance Companies became an accepted part of corporate Japan

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Leisure Hotel Industry

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Leisure Hotel Industry
Key Points: The biggest tax paying industry in Japan The best performing part of the Japanese economy The best returning sector in the real estate industry No institutional investor exposure to the sector

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Leisure Hotel Industry
Key Data Points: - continued
• Number of Properties
Over 17,000 properties (1)

• Operational Statistics
Avg. No. of Stays: Avg. Sales: Avg. Revenue per Stay: Avg. Occupancy rate: 78.8 stays per room/month (2) JPY 530,323 per room/month (2) JPY 6,614 (2) 258%, 2.58 stays per day (2)

• Leading Operators
Aine Group (150 properties) Sankei Kanko (25 properties, Kabukicho, Atsugi, Yokohama) Showa Kanko (25 properties, Osaka) City Kanko (Nagoya) Kato Pleasure Group (Osaka) • Sources (1) Zaidan Hojin Nihon Fudosan Kenkyusho – Jan. 2001 (2) Leisure Hotel No. 58 – Aug. 2002

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Leisure Hotel Industry
Leisure Hotel Demand and Supply: :
Demand by end-user
• Broad based and consistent level of usage by cross section of Japanese society with particular frequency of use by 18-25 segment. • People are changing their perceptions of Leisure Hotels. No longer are they considered merely convenient spots for couples looking for some privacy. In fact, recently leisure hotels have added a number of amenities such as karaoke, video games, pool tables etc. and are attracting a whole new class of consumer. Leisure Hotels have capitalized on this trend by developing extremely flexible pricing plans to undercut rival city business hotels.

Operator Demand
• Many operators who are property owners are in financial difficulty. As a result, many are looking aggressively to liquidate their real estate and to continue in the business pursuant to management contracts. However, only a few non-bank financial institutions, such as Orix, are providing financing to this industry, and these players only provide debt. Consequently there is a pressing demand for equity financing.

Leisure Hotel Supply
• Increasingly restrictive zoning and building regulation in Japan means that the supply of new Leisure Hotels will be limited in the future. • However, many of the Leisure Hotel properties built during the bubble era are in distress and consequently, there is a steady flow of properties coming onto the market. Private & Confidential 9
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Leisure Hotel Industry
Leisure Hotel Segmentation: :
Location
• Downtown area: • Interchange: • Resort area:   Mostly walk-in patrons, with few parking spots. The land plots are usually small. Night time occupancy is high, but daytime occupancy is highly variable. Mostly drive-in patrons, with parking spaces equal to number of rooms. Land plots are generally large. Usually located at interchanges in suburbs. High volume day usage. Near recreational facilities, resort areas or temples. Occupancy is easily influenced by events at nearby attractions. Heavy economic activity is a positive for hotels in these areas.

Leisure Hotel Construction Cost1
• Building Cost:  JPY 25-30m per room Cost breakdown per room (room construction JPY 20-23m; furnishings JPY4-5m; electronic equipment JPY4-5m)

1Interviews with leisure hotel operators

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Leisure Hotel Industry
Illustrative Leisure Hotel Economics
Gross Profit Per Room Sales1: COGS: JPY 600,000 JPY 330,000
Beverage Costs Salaries: Water/Electricity: Linen: Disposable supplies: Fixed Asset Taxes: Misc.: Other:

55% 7% 20% 8% 4% 4% 3% 3% 6% 45%

EBITDAR:

JPY 270,000

* EBITDAR: Earnings before interest, tax, depreciation, amortization and rent
1 Room and amenities charge

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Investment Rationale and Investment Strategy

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Investment Rationale
Legacy of the “Bubble” economy
! Banks financed buyers indiscriminately ! Collateral was valued based on unrealistic property price appreciation assumptions Leisure Hotels became grossly overpriced (Per room construction costs of JPY 100mm became justified)

Actual cash flow cannot support excessive debt service Many owners default on their mortgage loans

Current Situation: Disposal of non-performing loans
! Limited liquidity (few healthy operators, few interested individual investors) ! Few capital sources (few debt providers i.e.only Orix, Sanyo Electric Credit) ! Banks lowering their exposure to real estate sector Leisure Hotels are undervalued (Overhanging concern about potential collapse in Japanese real estate market)

Demand for new equity capital providers to the sector
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Investment Strategy
Leisure Hotel Valuation: :
• • There are no official figures for how many leisure hotels are in distress in Japan, but it is safe to assume that most properties built during the bubble are in that category. Standard M&A metrics for the industry are as follows: Monthly Sales X 25-30; Usually under JPY 15mm per room valuation

Investment Strategy of MHS Property Investment I:
1) 2) 3) 4) 5) 6) Acquire distressed Leisure Hotels. Finance deals with mix of equity (40%) and debt (60%) Select most suitable operator team from pool of preferred operators Negotiate to have operating team to invest in the property as well (i.e “have skin in the game.”) Increase the asset value of hotels with hands-on management by repositioning, cost cutting, streamlining, etc. Look for exit opportunity after Year Three. Target highest bidder (amongst other operators and wealthy private investors) with a reserve price of 125% of acquisition cost. Offer first right of refusal to existing operating team.

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Investment and Monitoring Process

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Investment Objectives
• MHS Property Investment I plans to invest in properties that fall within the following parameters:
" At least 15% pro forma ROI (Annual rent/investment cost) " Property value range of JPY 200-400mm " Capital expenditure of JPY 20-30MM per property, but no more than JPY 50MM (negotiate to have portion funded by operator). " 60% leverage " 20-25 rooms: minimum 15 rooms; maximum 40 rooms " Less than 15% of fund invested in any single property " Properties built in last 15 years

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Deal Origination
Distressed Properties

Investment Banks NPL Investors

Properties pruned from operators’ portfolios

MHS Capital Partners
Operator-identified acquisition targets

Operators

Restructuring of operator loans

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Illustrative Deal Structure
MHS Property Investment I (“MHS”) will retain operating and ownership rights of each property while subcontracting the operating task to a third party vendor

Payment

Mortgage Lender

Sale or cancellation of operating rights Rights sale

MHS Property Investment I

Mortgage Right

Property Owners
Property rights

Operational Contract

Right of First Refusal

New Operator
New CAPEX (including maintenance) and operations

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Due Diligence
-Financial analysis

Property found

Invest. Parameter DD

Analysis

-Local market check -RE records -Debt financing analysis

Due Diligence Report
Items requiring follow-up Need approval of 2 out of three parties

Further DD

1st Invest. Committee

Sale Execution Acquisition Completion Report

Invest. Comm. Report Seller Negotiation

2nd Invest. Committee
Need approval of 2 out of three parties

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Monitoring
Fund Management Reports and Meetings
An MHS team member will be assigned to each property. That individual will be responsible for daily monitoring and reporting. • Semi-annually issued investor material 1. Property performance report 2. Fund Performance report • LP meeting annually to discuss fund performance

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Operator Terms

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Operator Terms
• • • • 5 year term Predominantly Fixed Rent (revenue sharing may also be considered) Targeting minimum annual equity returns of 15-20% Operator responsibilities – Contribution to initial refurbishment CAPEX (to be negotiated) – Operation of hotel based on management contract with MHS – Maintenance and upkeep – Payment for all necessary insurance – Conformity with all legal requirements pertaining to hotel operation The fund will seek to maximize sale values upon exit, but will provide existing operators with a first right of refusal. The fund maintains the right to cancel the contract with operators at any time, in event of default. For example: – Operator engages in illegal activity, doesn’t pay rent, is negligent on upkeep/maintenance or doesn’t pay for proper insurance coverage. – Operator bankruptcy or distress

• •

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MHS Property Investment I

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MHS Property Investment I
Terms GP: Target raise: Min raise: Minimum LP: investment: Capital Commitment: Fees: MHS Capital Partners (BVI or Caymans Head Office) 1.0 billion yen 200 million yen 10 million yen 100% on establishment of fund; drawndown based on property acquisition schedule 2% Annual Management Fee on committed capital and 2% Placement fee: 15% GP Carry 6 Years (1 year acquisition period; 5 year fund) Semi-annual property and fund updates, annual LP mtg. Quarterly Leisure Hotels (15-40 rooms);Distress Properties focus; constructed within Up to 15 year old properties. Minimum 15% ROI No single property representing more than 50% of fund. 10-15 Properties, 150-250 rooms

Life: Reporting: LP Distributions: Target Investment: Invest Target Deal Size: Number of Properties:

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Fund Structure
Charitable Trust

Investors
100% Investment MHS Capital Partners (BVI) Mgmt Contract MHS Property Investment I (BVI) SPC Tokyo Br. 100% Investment MHS Capital Partners Tokyo Branch Advisory Contract Investment Agreement Loan 100% Investment SPC-A2 Yugen Kaisha Hold Asset Operation Mgmt Subordinate loan Tokumei Kumiai Contract (Investment Agreement) Investment Bond SPC Head Office (BVI) Inter-company Loan

SPC-A (BVI) 100% Investment SPC-A Tokyo Br.  (Asset Management)

Mgmt Contract

LENDER

Yugen Kaisha (License holding company)

Leisure Hotel

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MHS Capital Partners Description

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MHS Capital Partners
• The management company for MHS Property Investment Fund I, MHS Capital Partners, has been formed by the principal of ibizcube and parties experienced in the industry. ibizcube Ibizcube was founded in in January 2000 by Miro Mijatovic (an Australian lawyer who is a 12 year veteran in Japan) and Kazuo Otsuka (a qualified US CPA) as a multi-disciplinary financial, legal & tax and marketing solutions provider in Japan. Utilizing our extensive Japanese and international network and know-how, our multi-cultural and internationally experienced team deliver customized business oriented solutions for our clients in our business areas of Financial Services, Legal & Tax consulting and Marketing services. Ibizcube is the premier professional consultants to the Japanese leisure industry, including leisure hotel operators and pachinko operators and has substantial experience with the structures of those industries and the financial issues facing operators in those industries. The partners of ibizcube have published many articles in relation to the leisure industry and ibizcube has published a comprehensive book on the valuation of Japanese real estate. In addition to their leisure industry clients, ibizcube’s other major clients include:listed Japanese companies such as TEPCO and Nippon Steel Trading, foreign financial institutions such as a major European commercial bank and securities firm, US investment banks and various investment funds; and foreign government entities such as the Australian Tourism Commission and the Croatian National Tourism Board.

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Management Team

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Management Team
Miro Mijatovic
Principal and founder of ibizcube Japan Ltd. Miro is a Japan veteran with over 13 years of experience in Japan, and holds a double degree in law and accounting. As principal of ibizcube, Miro has acted as a financial and restructuring adviser to a number of leisure industry (pachinko and love hotel) operators and has substantial experience in the industry. Prior to founding ibizcube Japan, Miro was Senior Projects Officer with Nippon Steel Trading for 6 years where he was responsible for all of Nippon Steel Trading’s investment and lending business around the World. During his time as Nippon Steel Trading, Miro arranged and structured over US$2 billion of asset based and cash based project finance for clients in emerging markets such as Venezuela, Brazil, Russia, Vietnam, Indonesia, Thailand and New Caledonia. These loans had a 100% recovery rate. Miro has built a substantial personal property portfolio in Australia and Japan.

Hamish Ross
Hamish is a long term Tokyo resident qualified with a double degree of Commerce and Arts. He has spent most of the past 15 years in Japan is a specialist in Japanese equity products, from bank research in his first position with Security Pacific Hoare Govett in 1987 to equity derivative structuring and trading at Merrill Lynch Japan in 1993. Hamish led Indosuez WI Carr into electronic brokerage in 1996, rising to the level of branch manager in 1998 as he restructured and repositioned the brokerage business for the coming onslaught of margin shrinkage from increasing electronic productivity. While at his most recent post as Head of Trading at Instinet Japan, Hamish was a frequent speaker on Nikkei CNBC on the Japanese economy and stock market. Hamish also has considerable expertise in setting up and running businesses in Tokyo through his participation in Occidental K.K. the foreign resident focused auto dealership. Hamish is also a director of Hikari Hosho K.K. a consumer finance credit guarantee company based in Tokyo.

Scott Delany
Scott started learning the securities business from literally the ground floor, beginning his career with Drexel Burnham on the floor of the American Stock Exchange. From there, he became an original founding member of TIR (Tiedemann International Research), the first global soft dollar broker. As the Head of Trading for the New York office, he developed the infrastructure and grew revenues from zero to over $20 million for that office. TIR was acquired by E*Trade Group in August of 2000 for $125 million. In 1997, Scott took the opportunity to have TIR move him over to Tokyo in the same position. Here he has continued to expand his knowledge of the global finance markets while also greatly expanding the width and depth of his industry relationships.

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Private & Confidential

Appendix レジャーホテル市場データ

Source: Leisure Hotel No. 58 (August 2002 Issue) 出所: レジャーホテル誌 No.58 (平成14年8月発刊)

Appendix: Japanese Leisure Hotel Market Data

地域別内訳/Breakdown of Hotels by Area 北海道/Hokkaido 東北/Tohoku 北信越/Hokushinetsu 東京/Tokyo 千葉、埼玉、神奈川/Chiba, Saitama, Kanagawa その他関東/Other Kanto Areas 東海/Tokai 近畿/Kinki 中国、四 九州、沖縄/Kyushu, Okinawa

3.8% 11.8% 7.6% 13.9% 16.4% 8.4% 10.1% 8.4% 10.9% 8.8%

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Appendix: Japanese Leisure Hotel Market Data
立 地 / Bre ak do w n o f Ho te ls by lo c a tio n

4.2% 12.8% 19.3%

繁華街/Downtown 郊外/Suburbs インターチェンジ/Highway Interchange 無回答/No response

63.8%

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Appendix: Japanese Leisure Hotel Market Data
施 設 の 平 均 客 室 数 / Nu m be r o f Ro o m s

0%

5%

10%

15%

20%

25%

30%

10室以下/Less than 10

12.7%

11 to <15

24.2%

16 to <20

23.3%

21 to <25

13.1%

26 to <30

12.3%

31 to <35

5.9%

36 to <40

5.1%

平均/Average: 20.7室(rooms)
41室以上/over 41 3.4%

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Appendix: Japanese Leisure Hotel Market Data
月 室 売 上 / O n e M o n th S ale s f o r O n e Ro o m

0.0% 30万円未満/Less than 300,000 300,000 to <400,000 400,000 to <500,000 500,000 to <600,000 600,000 to <700,000 700,000 to <800,000 800,000 to <900,000 900,000 to <1,000,000 100万円以上/Over 1,000,000 2.2%

5.0%

10.0% 12.4%

15.0%

20.0%

25.0%

14.2% 18.2% 20.4% 13.3% 6.7% 8.4%

平均/Average: 530,323円(Yen)
4.0%

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経年実績推移/ Y e ar o n Y e ar Pe rf o rman c e Ave rage s 売上(室/月) 組数(室/月) 客単価Aver Sales / Room Customers / Room / Consumption per / Month Month Customer 年度/Year 2001 530,323 78.8 6,614 2000 503,597 75.3 6,408 1999 402,263 74.2 6,652 1998 550,821 77.7 6,758 1997 534,965 77.9 6,777 1996 576,107 79.4 7,096

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Appendix: Japanese Leisure Hotel Market Data
売 上 増 に 向 け た実 施 対 策 / C a u s e s o f S a le s I n c re a s e s

0.0% リニューアル(全面)/Renewal (Overall) リニューアル(内外装)/Renewal (Ext/Int) リニューアル(設備機器)/Renewal (equipment) 従業員教育/Employee Education 飲食メニューの充実/Food Menu Enhancement 集客イ ベン ト/Promotion Event 広告・宣伝/Advertising サービ スタイ ム導入/Introduction of Service Time 会員システム導入/Membership Program 料金値上げ/Price Increase Others

10.0% 11.1%

20.0%

30.0%

40.0%

35.6% 23.3% 32.2% 22.2% 28.9% 24.4% 15.6% 15.6% 14.4% 8.9%

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Appendix: Japanese Leisure Hotel Market Data
1 室 当 たりリニ ュ ー アル コ スト / Re n e w al C o sts pe r Ro o m

0.0% 100万円未満/Less than 1,000,000 1,000,000 to <2,000,000 2,000,000 to <3,000,000 3,000,000 to <4,000,000 4,000,000 to <5,000,000 5,000,000 to <6,000,000 6,000,000 to <7,000,000 7,000,000 to <8,000,000 8,000,000 to <9,000,000 0.0% 9,000,000 to <10,000,000 1000万円以上/More than 10,000,000 1.7%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0% 31.0%

35.0%

13.8% 10.3% 3.4% 8.6% 3.4% 5.2% 8.6%

平均/Average:6,657,000円(Yen)

13.8%

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Description: Japan leisure hotel investment fund presentation