SUSTAINABILITY-RELATED DISCLOSURE

The financial products offered by HRR promotes environmental or social characteristics, but does not have as its objective sustainable investment.

Hoshino Resorts Inc., the parent company of the Asset Management Company (the “Parent Company”), opened its first Japanese-style hotel (called Ryokan in Japanese), Hoshino Onsen (“hot spring” in Japanese) Ryokan in Karuizawa, Nagano Prefecture, in 1904, and 2024 marks its 110th anniversary. Since its opening, this Ryokan has reduced its environment burden through various measures, including the installation of hydroelectric power stations. Approximately 70% of energy consumed at HOSHINOYA Karuizawa, which currently operates on the site of the former Hoshino Onsen Ryokan, is generated from energy produced on its premises through the use of on-site hydroelectric power stations, hot spring runoffs for heating, energy-efficient designs and features in the buildings, and biomass recycling. Consideration of the environment surrounding its operations has been an integral element of the Parent Company’s operations since its founding. Consistent with this philosophy, HRR established a sustainability policy in April 2020 to address environmental issues.

We have implemented various environmental initiatives including the following:

•

Energy procurement through EIMY (Energy In My Yard). “EIMY”, an acronym for “Energy In My Yard”, refers to the self-sufficient energy system used at HOSHINOYA Karuizawa that minimizes the property’s burden on Karuizawa’s rich nature. As a result of EIMY, approximately 70% of the energy consumed at HOSHINOYA Karuizawa is generated from energy produced on its premises through the use of on-site hydroelectric power stations, hot spring runoffs for heating, energy-efficient designs and features in the buildings, and biomass recycling. HRR is also actively considering the use of natural energy for properties other than HOSHINOYA Karuizawa.

•

Implementation of 3R through zero-emission activities. The Karuizawa Office, which operates HOSHINOYA Karuizawa and Karuizawa Hotel Bleston Court, established the Zero Committee in 1999 with the aim of achieving zero-emission at the hotels it operations by completely recycling and reusing waste so that no waste is incinerated or sent to landfill. In November 2011, the Parent Company, with support from HRR, became the first company in the hotel and inn industry to achieve zero emission. We have reduced food loss by adopting a menu at wedding ceremonies and receptions that allows visitors to select their meals based on their preferences, and promoting the use of returnable containers for beverages, and establishing reuse rules to convert goods no longer needed into fertilizers to be used at neighboring ranches and farms.

•

Reducing the use of plastic products. In order to reduce the use of plastic products, our hotels operated by the Parent Company have offered all shampoo and body soap in pumped bottles since 2019, rather than in individual packaging. Since then, we have achieved reductions in plastic containers by about 49 tons per year and in shampoo and soap by about 73kl per year. In addition, more than 1 million toothbrushes used by guests per year are collected and recycled. At RISONARE Nasu and many of our hotels, the Parent Company is eliminating the provision of plastic-bottled mineral water in guest rooms and installing water servers in public spaces to reduce plastic waste.

•

Conservation activities. Based on surveys and research on our nature and ecosystems surrounding Karuizawa accommodations, we are aware of the growing appeal of ecotourism. Since 1992, Picchio, a Parent Company group company, has conducted nature tours such as wild bird and flying squirrel watching, and promoted awareness of the surrounding natural environment.

•

“Green Lease” provisions in agreements. We aim to include environmental provisions, which we refer to as “Green Lease” provisions, in our lease contracts with tenants. A “Green Lease” is a voluntary agreement to reduce the environmental impact of the property, including through energy-savings efforts, and to improve the working environment. By executing a Green Lease with a tenant, we aim to contribute to our global environment while improving our profitability through reduced utility costs and other benefits from the lease.

•

Ecotourism resort activities at Iriomote Hotel. In July 2021, Iriomote Island was registered as a World Natural Heritage Site. In order to protect the island’s natural environment and create a system of sustainable tourism, both employees and guests are engaged in activities aiming to make the resort Japan’s first ecotourism resort. To achieve this, we are working to eliminate the use of plastic bottles at Iriomote Hotel by guiding all guests to bring their own amenities and bottles and no longer selling plastic bottles at the hotel. We also offer nature tours to guests to promote a greater understanding of the island’s biodiversity. To help protect Iriomote cats, an endangered species, we engage in various conservation activities, such as cutting roadside grass to improve the cats’ visibility and help prevent roadkill. Furthermore, to help eliminate micro plastics and protect the aquatic wildlife, we began beach cleanup in March 2021.

•

Initiatives in response to climate change. We believe that it is essential to reduce the impact of climate change to corporate activities in order to conduct sustainable corporate activities in the long term. Based on such understanding, we are working to address climate change, including reducing energy consumption and greenhouse gas (“GHG”) emissions, expressing support for the Task Force on Climate-related Financial Disclosures (“TCFD”) and joining TCFD consortium, establishing “Climate Change Resilience Policy” and conducting scenario analysis to identify risks and financial impact.

We have implemented various social initiatives at HRR’s properties including the following.

•

Initiatives to develop human resources – Hiring and human resource development. We leverage the Parent Company group’s resources for our human resource development. Through our personnel exchange with the Parent Company, we believe that we have developed a unique management approach that takes advantage of our real estate management expertise and hotel management knowledge. In our hiring and development of new employees, we strive to rapidly develop our personnel through our personnel development program for newly hired Parent Company group employees, as well as our internship programs for students who may become our employees in the future.

•

Initiatives for employees – Pleasant working environment/diversity. Employee satisfaction surveys are given to all employees once a year, and we work to create a pleasant working environment by making improvements based on the survey results. Also, we have established grievance reporting and escalation procedures within the Parent Company group, which are available to all employees. Confidentiality is strictly observed so that whistleblowers are not deterred from reporting, and we work to identify and address issues at early stages.

•

Initiatives for employees – Introduction of a cumulative investment unit investment program. We have introduced a cumulative investment unit investment program that allows regular employees and contract employees to acquire HRR investment units. We believe that this program incentivizes employees to contribute to our performance and medium- to long-term growth of unitholder value.

•

Partnership agreement with Taketomijima Regional Foundation. On March 11, 2021, HOSHINOYA Taketomi Island signed a partnership agreement with Taketomijima Regional Foundation, which engages in the conservation of Taketomi Island’s natural environment. Taketomi Island is located in Southwest of Okinawa Main Island and famous for its richness of nature and a village with stone walls and one-story houses with red tile roofs. The agreement aims to conserve the island’s natural environment and preserve its culture sustainably and sets forth that HOSHINOYA Taketomi Island and the Foundation will work together in developing activities to solve issues such as marine debris and reviving traditional crops. At HOSHINOYA Taketomi Island, we installed a thermal desalination heat pump system, which desalinates seawater, generates and stores solar power and functions as a heat pump. It cuts annual CO2 emissions by 65 tons and can supply island residents with water in the event of a disaster.

•

Kumomami Soybean Restoration Project. As tourism and commerce developed on Taketomi Island, the number of people carrying on the island’s cultivation of its unique crops has declined and so too have the fields, which are integral to island life. In 2017, HOSHINOYA Taketomi Island established on its site dedicated land to help carry on the island’s unique farming practices, including for its popular millet and sweet potato varieties. In January 2019, the hotel launched a project to restore the Kumomami soybean, whose cultivation temporarily ended on the island due to the influx of cheap soybeans grown overseas.

•

Conservation of the Asian black bear. The Parent Company explores, practices, and reports on how humans and bears can co-exist. Since 1998, the Parent Company has tracked and monitored bears, repelled them with the nation’s first “bear dogs”, dogs trained to chase away bears, and developed bear-proof garbage bins. These endeavors succeeded in reducing bear sightings significantly, with the number of cases of bears raiding public trash receptacles falling from 100 in 1999 to 0 in 2009. Since then, we have been able to maintain the number of cases in the single digit.

HRR invests directly or indirectly through trust beneficiary interests in real estate. Therefore, due diligence (including the assessment of good governance practices) in relation to investee companies is not applicable.

We, along with the Asset Management Company, have introduced the following measures to assess and enhance our governance systems:

•

Compliance-focused business management. HRR stipulates in its Rules of the Board of Directors that meetings of its Board of Directors are to be held at least once every three months. HRR’s Board of Directors meetings are attended by the Executive Director and Supervisory Directors. In the presence of the Asset Management Company, the Executive Director is to report on the status of his or her job execution as well as on the business execution status of the Asset Management Company, General Service Administrator, and Asset Custodian, thereby ensuring an internal control system in which control is exercised through the Board of Directors meeting. Reporting of the Executive Director’s job execution status and of the business execution status of the Asset Management Company, General Service Administrator and Asset Custodian is made at least once every 3 months. Currently, 1 lawyer and 1 certified accountant are appointed as HRR’s Supervisory Directors, each of whom uses their past experience and expertise to provide multifaceted supervision of the Executive Director’s job execution. The Asset Management Company considers compliance to be a key priority, and has established robust Compliance Rules, a Compliance Manual, and a Compliance Program. As a decision-making body for policies and related matters regarding the promotion of compliance, the Board of Directors and the Compliance Committee of the Asset Management Company take responsibility and supervises the proper execution of asset management. The Compliance Officer is in charge of internal audits. In addition to regular internal audits, which are generally conducted on all departments at least once a year, extraordinary internal audits may be conducted when the Compliance Officer deems it necessary, and special audits may be conducted under the special order of the President & CEO.

•

Formulation of, and compliance with, asset management guidelines and risk management rules. The Asset Management Company formulates asset management guidelines in alignment with our Articles of Incorporation and establishes investment policies, rules for transactions with stakeholders, and basic policies relating to the acquisition, sale, management, and administration of investment properties. The Asset Management Company, by abiding by the asset management guidelines, manages risks relating to investment management. In addition, the Asset Management Company, in its Risk Management Rules, stipulates the basic risk management policy, key person responsible for risk management, response in the event of discovery of serious problems, and defines major risks which should be managed by the Asset Management Company and sets forth the roles of the Board of Directors as well as the Compliance Officer who is the Asset Management Company’s key person responsible for risk, and the General Managers of each department who are responsible for risk management in each department. The Compliance Officer conducts monitoring at least semiannually or as needed, and upon evaluation and analysis, reports the results to the Compliance Committee and Board of Directors. The adequacy or efficacy of the risk management system is subject to internal audit supervised by the Compliance Officer and is audited by an outside auditor.

•

Validation by internal audit. The Compliance Officer is in charge of internal audits. In addition to regular internal audits conducted on all departments at least once annually as a general rule, extraordinary internal audits may be conducted when the Compliance Officer deems it necessary. In addition, special audits may be conducted under special order by the President & CEO. Internal audits are to include: audits on whether the operations and management of each body are in compliance with laws and regulations including the Financial Instruments and Exchange Act, Investment Trusts Act, and Real Estate Brokerage Act, rules provided by the Investment Trusts Association, Japan, and the internal rules of the Asset Management Company, and whether they are being carried out appropriately and effectively; audits to discover and prevent wrongdoing and serious negligence; audits of whether information management including personal information management and corporate information management is being performed appropriately, and audits of other necessary matters. The Compliance Officer, without delay after conducting the internal audit, will compile the results into an Internal Audit Report and submit the same to the President & CEO and the Board of Directors, as well as make recommendations or directives for improvement as necessary to the departments subjected to internal audit, and report their content to the President & CEO and the Board of Directors. The Compliance Officer, if judging the improvement plans received from the audited departments and their improvement status to be adequate, will report to the President & CEO and the Board of Directors regarding said improvement plans and improvement status. The Board of Directors, in the event of judging said improvement plans and improvement status to be inadequate, may give additional recommendations or directives for improvement to the department which received the recommendations or directives for improvement, or to the Compliance Officer. If the Board of Directors or Compliance Officer deems it necessary for verifying suitability of operational management or for other reasons, an external audit may be performed by an external expert.

•

Stakeholder transaction rules. In the event that property acquisition, transfer, leasing, entrustment of operations such as property management, entrustment of brokerage of purchase, sale, or lease, or issuing of order for construction is to be carried out with Stakeholders, such transactions will comply with the provisions in the Financial Instruments and Exchange Act, Investment Trusts Act, Order for Enforcement of Investment Trusts Act, and Stakeholder Transaction Rules, and in accordance with the Rules on the Segregation of Operational Duties be evaluated in advance by the Compliance Officer in regard to any compliance issues in light of laws and regulations, government ordinances, rules, Articles of Incorporation, and the Asset Management Company’s internal rules.

•

Insider trading rules. The Asset Management Company has established Insider Trading Rules to prevent insider trading by the Asset Management Company’s officers and employees. According to these rules, the Asset Management Company’s officers and employees and their relatives in the same household are prohibited from purchasing or selling HRR’s investment units and investment corporation bonds (other than through HRR’s cumulative investment unit investment program), and these rules apply to officers of the Asset Management Company for one year after they cease to be officers.

We consider properties which do not have environmental certifications to be energy-inefficient. As of October 31, 2025, 48.6% of HRR’s properties did not have environmental certifications, on a property-count basis. As described in more detail above, we implement as appropriate measures to reduce the environmental impact of these properties, including by obtaining environmental certifications.

We use the following indicators to measure the attainment of the E/S characteristics we promote:

•

Environmental certification of individual properties: To track the environmental performance of HRR’s properties, we rely on certifications issued by third-party organizations such as the Comprehensive Assessment System for Built Environment Efficiency (“CASBEE”) certification, Building Energy-efficiency Labeling System (“BELS”) certification and other equivalent certifications.

•

External sustainability evaluation. GRESB is an annual benchmarking assessment to measure ESG integration of real estate companies and funds, as well as the name of organization which runs the assessment. It was founded by a group of major European pension funds who played leading roles in launching Principles for Responsible Investment (PRI). It is utilized by major institutional investors in Japan and overseas when selecting targets for investment. In the 2022 GRESB Real Estate Assessment, HRR received for the second consecutive year 3 out of 5 Stars in GRESB Rating, which is based on GRESB Overall Score and its quintile position relative to global participants. It also won the “Green Star” designation for the third consecutive year by achieving high performance both in the management component, which evaluates policies and organizational structure for ESG promotion, and in the performance component, which assesses environmental performance and tenant engagement. In 2022, HRR also received for the second consecutive year the highest “A Level” for GRESB Public Disclosure, which assesses the breadth of ESG disclosure, exceeding the “B Level” it received in the 2020.

•

Tracking of environmental performance. The Asset Management Company tracks and monitors energy consumption including gas/fuel consumption and electricity consumption, greenhouse gas (GHG) emissions, water consumption, and waste generated. We aim to achieve an average annual reduction of 1% over the medium to long term (five years) for each environmental performance indicator tracked and monitored.

•

Social initiatives – tenants. We conduct tenant satisfaction surveys periodically to understand the needs of the tenants at HRR’s properties. We will continue to maximize our real estate value thorough investment to improve comfort and productivity of all tenants and their employees.

•

Social initiatives – employees. Employee satisfaction surveys are given to all employees once a year, and we work to create a pleasant working environment by making improvements based on the results. An evaluator meets with each employee twice a year to provide feedback on how the employee is performing against their goals and how they can achieve those goals, and we support individual growth and mid- to long-term career development.

Projects that meet the eligibility criteria for the use of funds procured through green financing are selected by the Chief Sustainability Officer (“CSO”), who is appointed as the head of the Sustainability Promotion Office. The CSO is responsible for formulation and management of policies, strategies, plans, and measures related to ESG promotion; formulation and monitoring of ESG-related initiatives; acquisition and maintenance of ESG-related certification; ESG-related initiatives and information disclosure; and other related tasks. After selection by the CSO, the projects are evaluated and discussed by the ESG Committee, which is composed of the President & CEO of the Asset Management Company, the Chief Investment Officer, the CFO, the General Manager of Corporate Planning & Administration Department, the Compliance Officer, and the CSO. Following these evaluations and discussions, projects are decided on by the Board of Directors of the Asset Management Company and reported to the Board of Directors of HRR.

•

Environmental certification of individual properties. The Finance Department, the Asset Management Department, and the Sustainability Promotion Office of the Asset Management Company select candidate properties for acquisition of environmental certification. Once a candidate property is selected, the Sustainability Promotion Office requests the Asset Management Department to collect relevant data of the candidate property, and conducts a preliminary evaluation of environmental certification based on the collected data by engaging an external consulting firm. Based on the results of the preliminary evaluation, the Finance Department selects the final candidate properties for acquisition of environmental certification, and submits the application and relevant data to the issuing organizations of environmental certifications.

•

External sustainability evaluation. GRESB is a portfolio-level assessment and is conducted by GRESB through annual submission of our responses and relevant data to GRESB’s questionnaires on ESG matters. The Corporate Planning Division, the Compliance Department, the Asset Management Department and the Sustainability Promotion Office will collaborate in preparing responses. We engage an external consulting firm to review our responses and relevant data before submission to GRESB. The assessment results of GRESB are reviewed internally to discuss and formulate action plans to improve our results in the next year’s assessment.

•

Tracking of environmental performance. At the request of the Asset Management Department of the Asset Management Company, an external consulting firm collects the property-level environmental performance data such as energy consumption, GHG emissions, water consumption, and waste generated from the tenants (i.e., hotel operators) on an annual basis. The external consulting firm reviews and compiles the collected data first and prepares a portfolio-level data base for the fiscal year. The collected data and portfolio-level data base are also internally double-checked for accuracy by the Asset Management Department before they are disclosed on our website and other publicly available documents.

•

Social initiatives – tenants. The Sustainability Promotion Office of the Asset Management Company conducts an annual tenant satisfaction survey in order to improve the comfort and labor productivity of the tenants’ employees. The results of the survey are annually reported to the ESG Committee and the Asset Management Department, as well as to the tenants’ operation and/or management departments and general managers. Based on the results of this survey, capital investment in staff-only spaces and other facilities is carried out in consultation with the tenants on an ongoing basis.

•

Social initiatives – employees. The Corporate Planning Division of the Asset Management Company conducts an annual employee satisfaction survey. The results of the survey are shared with the managers of all departments and reported to the President of the Asset Management Company. Based on the results of this survey, the personnel policies are discussed on an ongoing basis.

We use the following data sources:

•

Environmental certification of individual properties. As described above, the property-level data required for obtaining an environmental certification is collected by the Asset Management Department and the data will be initially evaluated by an external consulting firm to conduct a preliminary evaluation under the applicable environmental certification’s criteria.

•

External sustainability evaluation. GRESB provides assessment questionnaires and announces results of its assessment and rankings thereof annually. As described above, the Human Resources & General Affairs Department, the Compliance Department, the Asset Management Department and the Sustainability Promotion Office collaborate and collect relevant data and supporting documents to prepare our responses to the GRESB questionnaires. Our response and relevant data are reviewed by an external consulting firm before submission to GRESB.

•

Tracking of environmental performance. As described above, the property-level raw data for environmental performance is collected from HRR’s tenants (i.e. hotel operators) on an annual basis by an external consulting firm, which first reviews the collected data for accuracy and compiled them into a portfolio-level data based. The data collected and compiled is also reviewed and double-checked for accuracy by the Asset Management Department before they are disclosed on our website and other publicly available documents.

•

Social initiatives – tenants. The Sustainability Promotion Office of the Asset Management Company conducts an annual tenant satisfaction survey and compiles the responses.

•

Social initiatives – employees. The Corporate Planning Division of the Asset Management Company conducts an employee satisfaction survey and compiles the responses.

The primary limitation to methodologies and data is the necessity of reliance on the tenants (i.e., hotel operators) for raw data at the property level. Like many other real estate investment corporations and asset managers, we rely on raw data provided by the tenants. While we engage an external consulting firm to collect and compile the raw data provided by the tenants, independent verification of accuracy of such raw data provided by the tenants presents challenges. In addition, data at the property level provided by the tenants is generally updated on an annual basis. Accordingly, property-specific data will therefore not always be fully up-to-date.

Data at the portfolio level is compiled internally at the Asset Management Company. To ensure the accuracy of compiled data at the portfolio level, we have engaged an independent third-party consulting firm which reviews the accuracy and quality of the compiled annual data at the portfolio level in accordance with our own criteria and methodologies. However, the review does not provide independent verification of accuracy of raw data at the property level and the challenges associated with our reliance on the tenants for raw data at the property level remain.

Limitations to the methodologies and data are not expected to affect the attainment of the environmental or social characteristics promoted by HRR in any material way.

The Asset Management Company’s investment decision-making process involves assessment of material ESG related-risks and opportunities to ensure that HRR’s sustainable investment strategy is implemented on a continuous basis. We retain third party experts to investigate the status of compliance with various related laws and regulations, and we investigate the presence of harmful substances, the history of past land usages and the environment of the soil when investing in properties. We also maintain the probable maximum loss (PML) of HRR’s portfolio in Japan at 20% or less, and we consider purchasing earthquake insurance on any property with a PML of more than 20%.

We have established the ESG Committee, which meets periodically in order to discuss the implementation of green and sustainable investment objectives. At these meetings, the Chief Sustainability Officer (CSO), who is in charge of the Sustainability Promotion Office, which promotes activities related to sustainability, makes proposals on specific steps for implementing and achieving ESG goals. These proposals are approved by a majority vote of the members of the ESG Committee present.

HRR has no benchmark index designated as a reference benchmark to meet the environmental or social characteristics promoted by HRR.

The Asset Management Company has a remuneration policy in place which aims to support its strategy, values and long-term interest, including its interest in sustainability. The Asset Management Company’s remuneration policy is consistent with the integration of sustainability risks, as follows:

•

Remuneration for employees of the Asset Management Company (payment period, payment method, pay raises, promotions, etc.) is stipulated in its pay regulations and an evaluation and compensation system rulebook, and determined upon evaluation of objective factors as well as the employees’ achievements that take into account the overall corporate performance.

•

Annual remuneration is composed of base annual pay, premiums (e.g., late-night allowance), and other allowances. Base annual pay is composed of job-based annual pay and performance-based annual pay. The job-based annual pay is determined each year at the compensation committee, and the performance-based annual pay is determined based on annual evaluation. One twelfth of base annual pay is paid to employees as monthly remuneration.

•

The annual goals of each department must incorporate ESG strategies, and the evaluation of managers includes quality and execution of ESG strategies, which are reflected in their compensation.

•

An evaluator meets with each employee twice a year to provide feedback on how the employee is performing against their goals and how they can achieve those goals, which may include departmental goals with respect to ESG.

Projects that meet the eligibility criteria for the use of funds procured through green financing are selected by the Chief Sustainability Officer (“CSO”) and are evaluated and discussed by the ESG Committee, which is composed of the President & CEO of the Asset Management Company, the Chief Investment Officer, the CFO, the General Manager of Corporate Planning & Administration Department, the Compliance Officer, and the CSO. Following these evaluations and discussions, projects are decided on by the Board of Directors of the Asset Management Company and reported to the Board of Directors of HRR.

We have established the ESG Committee, which meets periodically in order to discuss the implementation of green and sustainable investment objectives. At these meetings, the CSO, who is in charge of the Sustainability Promotion Office, which promotes activities related to sustainability, makes proposals on specific steps for implementing and achieving ESG goals. These proposals are approved by a majority vote of the members of the ESG Committee present.

In order to realize sustainability in our asset management while maximizing HRR’s portfolio value, we consider ESG factors in our investment and asset management processes. In particular, the Asset Management Company has established a green finance framework to expand our financing options and promote the development of green finance, including green bonds.

As stated above, we have instituted a number of initiatives, at both the portfolio level and the property level, to promote E/S characteristics. Such initiatives include energy-saving initiatives and waste management initiatives.

While sustainability issues will severely impact our business activities, we believe that such issues may also become potential business opportunities to create new value for sustainable growth. Accordingly, we position our commitment to sustainability as a top priority in our management strategies. We also believe that integrating sustainability factors alongside traditional financial and operational metrics in our investment decision process helps us make a more holistic assessment of a property’s risks and opportunities and is commensurate with the pursuit of superior risk-adjusted returns.