Bay Street’s Quantamental Metrics and Market Timing Framework

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Bay Street’s quantamental investment framework uses a series of proprietary metrics to convert raw deal projections into a single Bay Score for decision-making. Below we outline each key metric and its relevance to timing:

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• Bay Score (0–100): A composite score aggregating all adjustments (AHA, BAS, LSD, BMRI, plus ESG, sponsor quality, FX risk) into a single “investment attractiveness” measure. This is the ultimate metric Bay Street uses to time entry/exit – a score ≥70 is typically required for Investment Committee green-light. In essence, Bay Score wraps in return potential and risks; a high score suggests favorable risk-adjusted timing.
• Adjusted Hospitality Alpha (AHA): Measures excess return above a hospitality benchmark, adjusted for illiquidity. It tells us how much alpha over the Bay Street Hospitality Index (BSHI) a deal provides after accounting for the sector’s baseline and illiquidity drag. AHA is critical for timing because it strips out “rising tide” effects – e.g. if all hotels are doing well, AHA shows if our target assets still beat the index. Purpose: ensure the roll-up generates true incremental performance beyond general market gains. In practice, Bay Street views AHA > 0% as necessary for value-add; an AHA dropping below ~2% is a warning sign that deals are barely outperforming the sector, often triggering reviews or stricter deal terms.
• Bay Adjusted Sharpe (BAS): A risk-adjusted return efficiency metric – essentially the Sharpe ratio of the deal’s excess returns. It gauges how efficiently the AHA is achieved per unit of volatility. A high AHA is only attractive if delivered with reasonable volatility. BAS helps time the roll-up pace by comparing deals’ return/risk trade-offs; low BAS signals that returns are coming with high volatility (potentially indicating frothy or risky timing). For example, Bay Street’s IC Memo engine flags deals with BAS below ~0.3 and might require adding downside protection clauses in such cases.
• Liquidity Stress Delta (LSD): A downside risk filter capturing liquidity and timing frictions. LSD quantifies the “drag” on returns from factors like FX swings, unexpected CapEx, slow ramp-up, or exit illiquidity. Essentially, LSD measures how much market timing risk (delayed exits, currency moves, etc.) could erode returns – crucial for a private roll-up in a foreign market. A low LSD (e.g. <3) indicates benign liquidity conditions; a high LSD signals elevated timing risk. Bay Street explicitly models LSD to adjust IRRs for liquidity/timing friction ignored by standard pro formas. For governance, they set hard triggers: if portfolio LSD exceeds certain levels, new deployments are paused (e.g. LSD >3.5 has been used to “flag exit review” and >4.5 would clearly signal a need to halt acquisitions). In our context, LSD will reflect the yen’s volatility, the lengthy sale timelines for ryokans, and any large renovation needs – all factors that can dilute returns if mistimed.
• Bay Macro Risk Index (BMRI): A country-level macro risk indicator composed of sovereign bond spreads, FX volatility, inbound tourism growth deviation, political risk, and capital controls. It captures Japan’s macro stability or fragility. A higher BMRI means the country’s macro conditions could undermine hospitality performance (through currency swings, weak tourism, etc.). For timing, BMRI tells us whether Japan’s environment is supportive (low BMRI) or if macro uncertainties warrant a higher return requirement. Bay Street uses BMRI after LSD to apply a country risk discount – effectively shaving returns for higher-risk markets. In practice, Japan’s BMRI is low and improving in the current cycle: solid sovereign fundamentals, a resurgent tourism sector, and stable politics keep macro risk in check. (For instance, Bay Street’s country scoring recently gave Japan a +2.1 Z-score due to FX normalization, booming tourism rebound, and regulatory clarity, a top-tier rating globally.) We will revisit BMRI after examining current tourism and FX trends.
• Illiquidity Premium (IP): Represents the yield/return premium demanded for illiquid private assets versus liquid public market equivalents. It ensures we don’t overpay for private deals by benchmarking against listed hotel REITs, etc.. The IP is essentially an adjustment to required return based on how liquid or illiquid the asset is. In Bay Street’s methodology, IP is the final filter before computing Bay Score. A high illiquidity premium today means investors require a much higher return on private hospitality deals (likely reflecting caution or limited liquidity in the market), whereas a low premium means private and public pricing are in parity (often in hot markets). We will compare the current illiquidity premium in Japan’s hospitality real estate to past cycles to gauge if today’s entry valuations are favorable.

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All these metrics funnel into the Bay Score, which Bay Street treats as the summary signal for timing decisions. Bay Score ≥ 70 indicates a deal or strategy is investment-worthy under current conditions. Scores in the 80s–90s would indicate very strong risk-adjusted returns (potentially a “buy aggressively” signal), whereas scores in the 60s or below imply suboptimal timing or deal quality (suggesting hold off or restructure). By examining each component metric under today’s Japan ryokan conditions, we can form a comprehensive timing overlay.

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Macro Environment & BMRI Recalibration – Inbound Tourism, FX, Yields, Political Risk

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Japan’s macro demand and risk factors heavily influence the BMRI and thus our timing calculus. We analyze the key inputs: inbound tourism trends, currency volatility, interest rate spreads, and political/regulatory stability. Overall, Japan’s BMRI is currently low (favorable) – the country offers stability with strong tourism tailwinds, tempered by some currency volatility:

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• Inbound Tourism Surge: Japan is experiencing an unprecedented tourism boom in the post-pandemic period. In 2024, international arrivals hit an all-time record of 36.9 million, up 47% year-on-year and even 5 million above the last pre-COVID peak (31.9M in 2019)[1]. This rapid recovery began after Japan resumed visa-free travel in late 2022 and has sustained momentum through 2023–2025. Tourists have flocked back for cherry blossom season, ski trips, hot springs and more, exceeding pre-pandemic levels by 2024. Crucially for our regional ryokan focus, travel demand is not confined to Tokyo: visitors are dispersing to seasonal and cultural destinations (e.g. ski resorts in Nagano/Hokkaido, onsen towns in Oita) in record numbers. The weak yen has been a major catalyst, making Japan a bargain destination – the yen depreciated from ~¥110 per USD in 2019 to the ¥140–160 range in 2024[2], directly boosting inbound tourism by lowering costs for foreigners. The Japanese government’s policy remains supportive: they have set an ambitious target of 60 million inbound visitors by 2030[3], indicating continued pro-tourism initiatives (marketing campaigns, visa liberalization, regional tourism promotion).

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Implication for BMRI: The “tourism growth deviation” component of BMRI is extremely positive for Japan right now – actual inbound growth is far above trend (a net plus for investment attractiveness). Rather than a negative macro risk, tourism is a macro tailwind, increasing hotel occupancies and NOI across the country. However, Bay Street’s risk model will also note that such rapid growth could normalize; we must be cautious of extrapolating unsustainable growth indefinitely. For now, though, the tourism surge lowers Japan’s effective BMRI (risk discount) because it strengthens the hospitality demand fundamentals. We will later discuss how this surge might warrant an upward revision in AHA assumptions for regional assets (i.e. raising expected performance baselines).

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• FX Volatility and Yield Spreads: The Japanese yen has been volatile and structurally weak in the current global rate environment. The Bank of Japan’s ultra-low interest rates vs. aggressive rate hikes in the US/EU led the yen to test ¥150 per USD (a cyclical low) in late 2023. This divergence in monetary policy (Japan’s 10-year JGB yield ~0.8–1.0% vs. ~4–5% US Treasury) is a double-edged sword: on one hand, yen weakness, as noted, supercharges tourism and export competitiveness (positive for hotel revenues); on the other, it introduces FX risk for international investors and signals potential future adjustments by the BoJ. Market pricing as of H2 2023 already anticipated an eventual BoJ policy normalization – Japanese 10yr yields rose to ~0.95%, reflecting expectations of an exit from negative rates. The yen’s volatility has been elevated, with rapid moves on speculation around BoJ decisions. Going forward, currency risk remains a key factor: a strengthening yen (if BoJ tightens policy) could erode foreign investor returns when repatriated, while a further weakening could boost tourism but also raise inflation in Japan. The sovereign yield spread (Japan’s low yields vs. high US/EU yields) currently discourages some foreign capital – many global investors face a high cost of capital in their home currency, making unhedged Japan investments expensive unless hedged (hedging costs have also risen with the interest differential). Notably, in 2023 foreign institutions sharply pulled back on Japan real estate acquisitions (net purchases almost nil) as their USD/EUR funding costs doubled, whereas domestic banks still offer cheap loans ~0.6% interest. This dynamic has left Japanese buyers (corporates, local funds) to drive most deals, while J-REITs also became net sellers despite low debt costs.

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Implication for BMRI: FX volatility and unsynchronized rates add some risk premium to Japan’s BMRI. However, compared to emerging markets, Japan’s currency risk is a known quantity and there are no capital controls or repatriation barriers (another BMRI factor) – capital is freely movable. Political risk is minimal: Japan is a stable democracy with consistent pro-investment policies. Thus, Japan’s BMRI remains low in absolute terms (reflecting a safe, developed market), but we account for the yen volatility by either hedging or demanding a bit higher AHA/Bay Score to compensate. Bay Street’s framework would likely apply a hedge adjustment if FX risk exceeds a threshold (e.g. if yen volatility >1.5σ, incorporate hedging costs into the score). For our timing overlay, the current state (yen at ~150, potential BoJ tightening ahead) suggests building in an FX buffer: the LSD metric will capture a lot of this (since LSD covers FX drag and capital lock-up) and we will see that our LSD is elevated but still within manageable range. In summary, Japan’s macro yield/currency situation nudges BMRI up slightly, yet overall remains far more stable than most markets – indeed Bay Street’s country rankings still put Japan firmly in a “Greenlight” zone for investment.

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• Political and Regulatory Stability: Japan scores extremely well here. There is no significant political instability affecting hospitality – government leadership changes are orderly and policy toward inbound investment/tourism is supportive. Regulatory risk is low: foreign property ownership is allowed, there are no stringent new taxes on hospitality, and if anything the government has introduced programs (like subsidies and promotions in domestic tourism) that help the sector. The only notable regulatory factors in our space might be local permitting for hotel development (generally straightforward in these regions) and potential future restrictions if overtourism becomes an issue in places like Kyoto (e.g. caps on Airbnb or tour buses – but ryokans are traditional lodging aligned with cultural tourism, so likely favored). Capital repatriation is free; Japan has a fully convertible currency and strong legal protections for investors. All these facets keep the BMRI low. Bay Street’s BMRI includes a political risk and repatriation component, and Japan’s scores are among the best globally on those measures. We do note one soft consideration: geopolitical tensions in the region (e.g. North Asia security issues) exist but are long-standing and haven’t materially affected tourism flows to Japan in recent decades. They remain a low-probability tail risk rather than a timing factor one could forecast.

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In summary, recalculating BMRI for Japan in 2025 yields a favorable outlook. Sovereign credit is solid, the yen’s weakness – while a risk – is currently an economic boon, inbound tourism growth is far above average (positive deviation), and political/regulatory conditions are very stable. Bay Street’s own macro overlay reflects this: Japan’s country investability score is strongly positive at present. We therefore apply only a modest macro risk discount in our Bay Score. The BMRI is certainly much lower than for emerging markets or even some Western markets facing recession risk. Our quantamental timing overlay treats Japan as a low-macro-risk, high-demand environment, which is a green light from the top-down perspective. We will still remain vigilant – for example, if tourism were to suddenly drop >10% YoY (e.g. due to a global recession or travel ban), Bay Street’s rules would down-rank the country for a couple of quarters, implying we might slow deployment. But absent such a shock, the macro context supports moving forward now.

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Illiquidity Premium and Historical Cycles in Japan Hospitality

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A critical part of timing is understanding the illiquidity premium (IP) – the extra return demanded for private, illiquid hospitality assets – and where it stands relative to past market cycles. Illiquidity premium is directly tied to investor sentiment and liquidity in the market: it shrinks in hot markets (when buyers are plentiful and capital is cheap) and widens in downturns (when liquidity dries up and only bargain hunters remain). We compare current conditions to prior periods to see if now is a buyer’s market or seller’s market in terms of liquidity.

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• Pre-2019 Boom (Low IP): In the late-2010s, Japan’s hospitality real estate was in high demand. The economy was steady, interest rates were ultra-low globally, and inbound tourism was climbing every year through 2019. This flood of capital (including many foreign investors riding the Abenomics wave) meant that private hotel assets traded at yields not far off from public market yields – illiquidity premiums were minimal. In some cases, cap rates in prime locations compressed to record lows, reflecting maybe a 1–2% illiquidity premium range (or even zero if bidding wars erupted). Bay Street’s models indicate that in highly liquid regimes, the dynamic illiquidity premium can bottom out around ~1%. Indeed, by Q1 2020 (pre-COVID), Tokyo hotel cap rates had fallen back in line with historic lows – CBRE noted expected yields for Tokyo hotels were about the same in Q1 2020 as they were in early 2023 after steady declines, implying that late 2019/early 2020 pricing was quite aggressive (low yields). At that peak, sellers had the upper hand and buyers accepted thin illiquidity spreads due to optimism about the 2020 Olympics and growth. In Bay Street terms, deals in 2019 might have had high raw IRRs but also high market expectations, resulting in only moderate AHA and Bay Scores (because the benchmark was performing strongly too).
• COVID Crash (High IP): The situation reversed sharply in 2020–2021. With tourism collapsing and hotels operating at a fraction of capacity, transactions froze – essentially an illiquid market. Any deals that did occur were distressed sales at deep discounts, meaning implied cap rates spiked (prices down, yields up). The illiquidity premium surged to the top of its possible range, perhaps 6–7% or more (Bay Street’s framework caps IP around 7.5% in extreme stress). However, with so few buyers, price discovery was sparse; J-REIT share prices plummeted, trading at large discounts to NAV in 2020. This period was an outlier – a pure buyers’ market for those with dry powder, but very few dared to step in amid the uncertainty. For context, Bay Street’s quantamental risk whitepaper highlights how volatility and illiquidity during crises are measured to avoid overvaluing deals – indeed, the Bay Score of any prospective hotel deal in mid-2020 would have been extremely low due to sky-high LSD and BMRI at the time, advising full pause.
• Current 2025 Recovery Phase (Moderate IP): Today’s environment sits between those two extremes. Hospitality fundamentals have rebounded dramatically (as discussed, revenue metrics now often exceed 2019 levels), but capital markets have not fully “heated up” to pre-2019 exuberance. Several factors contribute to a still-elevated illiquidity premium: global interest rates are high (reducing the pool of yield-driven investors), many foreign investors remain cautious or face currency hedging costs, and J-REITs – once voracious buyers – have been net sellers recently. In fact, public market signals show some lingering undervaluation: as of late 2023 the average Japan REIT traded at ~0.9× NAV with a dividend yield around 4.3%. Such a yield is significantly higher than Japan’s 10-year bond (~0.8%), indicating REIT investors are demanding a risk premium. Even hotel-specialist REITs like Japan Hotel REIT (TSE:8985) have forward yields on the order of 4.5–5% in 2024. By comparison, private market deals for similar hotel assets typically require a bit higher yield to compensate for illiquidity and asset-specific risk – for instance, smaller regional hotel transactions might underwrite cap rates in the 6%–8% range (depending on location and condition). This spread of perhaps 200–300 bps over public market yields represents the current illiquidity premium and perceived risk in the sector. It is meaningfully above the ~1–2% spreads of 2019, but below the extreme distress levels of 2020. In other words, we’re in a phase where investors who are active can still secure attractive entry pricing (higher yields) compared to the frothy pre-COVID market, provided sellers are realistic. There is evidence of a bid-ask gap on some assets – Savills and Cushman & Wakefield both note that while investor interest in hotels surged in 2023, widening bid-ask spreads suggest sellers want prices reflecting the strong recovery, whereas buyers still insist on higher yields to account for risk. This gap can slow deal volume, but it also means that a patient, well-capitalized acquirer (like our roll-up platform) could negotiate favorable prices from motivated sellers (especially aging owner-operators looking to exit). Our strategy of succession-driven acquisitions plays right into this: older ryokan owners may prioritize certainty and legacy over top-dollar pricing, allowing us to buy at a reasonable valuation that embeds a healthy illiquidity premium.

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In Bay Street’s quantitative terms, we can infer that Japan’s current IP is in a mid-range (perhaps ~4%±). This aligns with their model of a “dynamic illiquidity premium” that can range ~1% (liquid markets) up to ~7.5% (highly stressed). A mid-level IP suggests that new investments today are being priced with a solid return cushion relative to liquid benchmarks – which is a positive for entering now, as long as one believes the hospitality recovery is durable. Essentially, investors are still a bit skeptical or constrained, so they demand extra return – if our analysis shows the risk is actually manageable, we capture that excess as upside.

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From a timing perspective: Now may be a window where fundamentals are strong but competition for assets is not yet overheated. The illiquidity premium is higher than in the last peak, meaning we are potentially “overpaid” for bearing illiquidity risk if conditions normalize further. As normalization occurs (e.g. if global rates stabilize or more buyers return), we’d expect the illiquidity premium to compress, i.e. cap rates to fall – benefiting early entrants with valuation uplift. Of course, the flip side is that the higher premium now also reflects genuine risks (discussed under LSD and FX); we must manage those to actually realize the gain.

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In summary, compared to past cycles: current illiquidity conditions favor disciplined buyers. We are not at the top of the market in pricing; private hospitality assets in Japan have room to re-rate upward if current cash-flow growth continues. Our Bay Score calculation will incorporate the IP to ensure our required returns stay above what public markets offer. Right now, that condition is met – our underwriting yields can handily beat the ~4–5% public yield hurdle, giving confidence that the roll-up can achieve a solid premium over simply buying a REIT. This supports moving forward with acquisitions now, as opposed to during ultra-tight periods like 2019 when private buyers were barely getting any extra return for the risk.

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Public vs Private Market Yields – Validation of Pricing

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To further assess timing, we compare where Japan’s hospitality REITs are trading vs. implied private deal yields (Deliverable 4). This effectively cross-checks the illiquidity premium and helps ensure our return expectations are realistic. If public markets (with daily liquidity) offer a much better deal than private acquisitions, it might suggest waiting or even investing via REITs instead of direct roll-up; if private assets can be bought at higher yields, that validates the roll-up value proposition.

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Current data indicate: Japan hotel REITs trade at moderate yields and slight discounts, while private ryokan assets can be acquired at higher yields (but with more effort and risk). For example, Japan Hotel REIT (the largest hospitality REIT in Japan) yields around 4.5–5.0% annually at the current share price. Smaller hotel REITs (like Hoshino Resorts REIT or Ichigo Hotel) similarly yield in the mid-single-digits and often trade below their net asset values. In aggregate, as noted, the J-REIT sector yields ~4.3% and is at ~91% of NAV. Meanwhile, private hotel transactions in regional Japan often require higher cap rates to attract buyers. Ryokan assets, being niche and operationally intensive, are typically priced at even higher yields than, say, a prime Tokyo hotel. Depending on location and condition, we might underwrite unlevered cap rates around 6–8% for these acquisitions. Even after accounting for operating costs and any repositioning, the project IRRs could land in the mid-teens%, which translates to an Adjusted Hospitality Alpha comfortably above zero. In other words, our deals aim to outperform the public benchmarks by several percentage points, which is what AHA is designed to measure.

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It’s important to note that public market pricing tends to be forward-looking and can signal turns in sentiment. The fact that hotel REIT yields are still elevated (and prices a bit depressed) signals that public investors remain cautious on the sector – perhaps due to uncertainties like how sustainable the tourism boom is or concerns about cost pressures (labor shortages, inflation in operations). Our strategy should heed this signal: it implies we should demand a return premium (which we are, via higher cap rates) and not assume a zero-risk environment. Conversely, it also suggests there’s upside if we prove those concerns are overstated – if we can run the assets efficiently and tourism holds up, private valuations may rise (or we could exit via selling to a REIT once their prices recover).

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One more angle: Liquidity and exit options. Investing privately now locks up capital, whereas buying a REIT is liquid and can be sold any day. This liquidity difference is exactly why IP exists. Our plan likely involves creating a scaled platform that could itself go public or be sold to a larger investor once stabilized. If current REIT valuations are somewhat low, one might wait for them to improve before an IPO exit – but as an entry point, low public comps could actually help us acquire cheaply (we don’t have to bid against overpriced public market valuations). Over the holding period, if REIT prices recover (e.g. yield compression from 5% to 4%), that will make an eventual public exit of our portfolio more attractive.

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In sum, the private-public yield comparison currently favors the patient private buyer. We’re seeing a scenario where we can buy at a 200–300 bps yield spread over public markets, and we have levers to add further value (branding, operational improvement) that public REITs typically can’t exploit on individual assets. This justifies the roll-up as a strategy to capture alpha. We just need to ensure that spread doesn’t vanish unexpectedly (which would happen if, say, a flood of new entrants started bidding up ryokan prices, or if interest rates in Japan shot up rapidly compressing the differential). We will manage that risk through the Bay Score’s ongoing monitoring (Bay Score will drift down if our return spread erodes). At present, however, the metrics suggest private market entry valuations are favorable relative to the public market – a point in favor of proceeding now.

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Tourism Growth Delta and AHA Re-Rating for Regional Ryokans

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A key question (Deliverable 5) is whether the exceptional growth in tourism and hotel performance in Japan right now warrants a “re-rating” of our Adjusted Hospitality Alpha (AHA) for the ryokan portfolio. In other words, should we revise upward how much excess return we expect these regional assets to deliver, given the demand boom? Or is the growth already “baked in” to baseline expectations (meaning no change in AHA)?

We examine the issue in two parts: (1) Baseline performance vs. forecast and (2) Ability of our assets to exceed that baseline.

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1. Baseline Hospitality Performance Surge: The Japanese hospitality sector as a whole is experiencing performance figures that were unthinkable a few years ago. Nationally, RevPAR (revenue per available room) and occupancy have rebounded sharply. In many submarkets, RevPAR is now above 2019 by a significant margin – for instance, major hotel REITs reported RevPAR in late 2023 that was ~11% above 2019 levels. This broad uptick means that any investment today benefits from much higher cash flow fundamentals than an investment made during the doldrums of 2020–21. Naturally, this raises the baseline. The Bay Street Hospitality Index (BSHI), which tracks a composite of hotel performance metrics, has likely been revised upward to reflect the strong recovery. If BSHI’s projected returns for Japan are, say, 8% now versus 5% a few years ago (hypothetically), then simply riding the market could yield higher IRRs. AHA, by definition, measures returns above this benchmark. So if everyone’s doing better, one must do even better to have a high AHA. This is a cautionary point: we cannot call something “alpha” if it’s merely the rising tide. Therefore, our underwriting must identify specific advantages that let our ryokan portfolio outperform the average Japanese hotel investment. We believe those advantages exist (due to the roll-up strategy), but it’s important to acknowledge that current tourism growth largely resets the baseline upward, rather than automatically translating to alpha. Bay Street would thus recalibrate AHA calculations to ensure we aren’t double-counting an easy environment as our skill. The firm might use the latest STR and CoStar forecasts, which now predict higher occupancy growth in these regions, in the underwriting model for AHA.
2. Outperformance Potential of Regional Ryokans: We posit that our strategy can generate alpha on top of the market boom, for several reasons:
3. Mispriced Assets / Operational Upside: Many ryokans in secondary regions have been under-managed and are trading at succession-driven discounts. By acquiring these at reasonable prices and then improving operations (professional management, online distribution, refurbishments), we can boost NOI well above what the previous owner achieved. For example, a family-run inn may have 50% occupancy; under a branded platform targeting international tourists, it could reach 70% occupancy. That delta is our alpha relative to the index (which might assume a more modest improvement for similar assets).
4. Diversification and Synergies: A portfolio across multiple tourist regions (alpine resorts, hot springs, cultural hubs) allows us to even out seasonality and share marketing channels. While the average single ryokan might have very lumpy earnings (lower Sharpe, lower AHA persistence), our portfolio can achieve more stable overall performance, effectively improving our BAS (Sharpe) and potentially allowing slightly higher leverage or growth at the same risk. This synergy isn’t captured by the broad market index, so it contributes to alpha.
5. Re-rating via Professional Branding: If we rebrand or affiliate these ryokans with known luxury or boutique brands, we could see a valuation multiple expansion. AHA would capture this because it’s essentially value created beyond normal market appreciation. For instance, if a ryokan under local management was valued at a 8% cap rate, but after joining our platform and demonstrating improved profitability it could attract buyers at a 6% cap rate (closer to typical hospitality assets), that cap rate compression is an outsized return for us, not for the index. Bay Street’s methodology specifically notes scoring adjustments for operator/brand value-add (this would show up in Bay Score sub-components).
6. Regional Tourism Initiatives: The Japanese government and prefectural authorities are actively promoting spread of tourism to regional areas (to ease crowding in Kyoto/Tokyo and economically uplift rural areas). There are subsidies for upgrading accommodations, campaigns highlighting local attractions, and improved transport links. These initiatives could cause tourist growth in some of our target prefectures to outpace the national average. If Nagano or Oita sees, say, 20% YoY tourism growth versus 10% nationally for a few years (due to a new Shinkansen line or successful promotions), our assets there would outperform the national benchmark, contributing to AHA. We should research each target region’s inbound trends: e.g., Kyoto is already very popular (likely at or above pre-COVID tourism levels), Hokkaido and Nagano benefitted from resurgent ski travel and nature tourism, Oita (Beppu) is seeing new interest as one of Japan’s renowned onsen areas, and Gifu (Takayama, etc.) is drawing more foreign visitors seeking authentic experiences. These micro-trends bolster the case for a higher AHA assumption on regional assets compared to if we were buying a generic Tokyo hotel.

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Considering the above, does the tourism growth delta justify re-rating AHA? Yes – we would adjust our expectations upward in absolute terms (higher cash flows), but we must also be mindful that the benchmark has risen. Concretely, if pre-COVID we might have underwritten a ryokan deal at 12% IRR with a 5% BSHI benchmark, yielding AHA = 7%. Now we might see a 16% IRR but with an 8% benchmark (due to the buoyant market), yielding AHA = 8%. So AHA improves slightly – it is justified to the extent we have unique value creation. Bay Street would likely re-rate the AHA upward for deals that demonstrably capture the regional tourism boom above trend. For example, if tourism growth in our locations is, say, +15% YoY versus a long-term trend of +5%, we may credit some portion of that to our advantage. The key is not to overestimate: some of that growth will level off as post-COVID normalization. But given the government’s 60M visitors goal (nearly double 2019 levels)[3], there is a secular growth story that can be incorporated into forward-looking underwriting.

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In practical terms, we might raise our pro forma occupancy and rate assumptions for the next 2–3 years relative to what we’d have assumed with slower growth, and we might lower the exit cap rate a bit if we believe the market will reward stabilized assets amid high tourism. These changes increase projected IRRs, but we then run them through the Bay Street filters (LSD, BMRI, etc.) to ensure risk-adjusted sense. The outcome should be a higher Bay Score now than the same strategy would have achieved a few years ago, because AHA is higher and BMRI is lower. This suggests now is a better time to deploy than, say, 2018 or 2019, when AHA for such regional deals might have been lower (fewer foreign tourists venturing outside main cities, more subdued growth).

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Finally, one must temper enthusiasm with execution realities: the Reuters report on 2023 tourism noted that a severe labor shortage in Japan’s hospitality sector is limiting the ability to fully capitalize on demand. This is relevant to our AHA – if we acquire many ryokans but struggle to staff them or maintain service quality, we might underperform expectations despite strong demand. Thus, part of achieving the anticipated alpha is investing in staffing, training, and possibly leveraging technology to mitigate labor shortfalls. Addressing this operational risk is part of ensuring the promised AHA translates to real results (this could be seen as improving our execution, thereby not losing points in Bay Score for sponsor quality or operational risk).

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Bottom line: The current tourism growth in itself doesn’t automatically give us alpha, but it creates a fertile environment in which a well-executed roll-up can outperform significantly. We will calibrate our Bay Street metrics accordingly – optimistic on top-line growth, but still requiring that our active management beat the rising benchmark. The net effect is a positive bias in Bay Score/AHA right now for regional hospitality assets, supporting an active investment stance.

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Bay Score Outlook and Composite Timing Signal

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Bringing the pieces together, we estimate where the Bay Score for the Japan ryokan roll-up stands under current conditions. While we don’t have the exact proprietary formula outputs, qualitatively:

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• AHA: likely positive and healthy (our underwriting excess return, after adjustments, is above the BSHI baseline, given acquisition discounts and value-add). Let’s say AHA in our model is on the order of +3–5% (meaning our deals beat the index by a few hundred basis points). This exceeds Bay Street’s caution threshold (AHA > 0% and comfortably above 2%), indicating the strategy adds genuine alpha.
• BAS: the risk-adjusted efficiency of those returns should be moderate. These are operational assets with some volatility (seasonality, etc.), so we might not have an extremely high Sharpe. However, by diversifying across regions and managing professionally, we can likely achieve a BAS in a reasonable range (e.g. 0.7–1.0). For context, Bay Street flags very low BAS (<0.3) as needing mitigation – we are well above that. A BAS near 1 would mean our return per unit risk is on par with or better than typical core real estate deals, which is plausible if the tourism upswing continues. This contributes positively to Bay Score, as the firm’s composite favors deals that deliver alpha efficiently.
• LSD: this is one area to watch. Given FX volatility, potential ramp-up for any greenfield projects, and the illiquid nature of ryokans (limited buyer pool on exit), our Liquidity Stress Delta is elevated. We estimate LSD for the portfolio might be in the 3.0–4.0 range on Bay Street’s scale. (For perspective, an ultra-core deal in the US might have LSD ~1–2, while an emerging-market development could be >5). Our LSD is moderate-high due to: currency risk (the yen could swing, though hedging can reduce this), exit timing risk (we may need to assemble the portfolio and wait for an opportune exit – possibly via IPO or sale to a REIT, which could take years), and CapEx needs (some properties will require renovation, meaning cash outflows and downtime). Bay Street’s framework already highlighted that hospitality investments are highly sensitive to timing/exit, and LSD quantifies those risks that IRR alone ignores. With LSD perhaps ~3.5, we are below the critical “red flag” zone but above what they consider benign. Recall, the Control Tower triggers an exit review at LSD >3.5 and internal guidance has even shown recommendations to defer deployments when LSD rose from ~2.3 to 3.9 in certain regions. Our plan’s LSD being in the mid-3s suggests caution – we need to actively manage liquidity risk (e.g. use debt financing in yen to naturally hedge part of FX exposure, stagger our renovations, and have contingency plans for slower exits if needed). It doesn’t tell us “don’t invest”, but it means we must require a higher IRR to compensate, which we are doing via the illiquidity premium. LSD will feed into Bay Score as a deduction; the question is whether other scores outweigh it. Right now, LSD is acceptable but close to Bay Street’s threshold for careful monitoring. If something pushed LSD higher (say a spike in yen volatility or if we launched too many developments at once), the Bay Score could deteriorate rapidly. We will address this in our trigger map.
• BMRI: as argued, Japan’s BMRI input is low and likely improving. We’d score strongly here – low sovereign risk, high tourism momentum. So BMRI would add to Bay Score (or rather, not subtract much). If we had a BMRI scale of 0–100, Japan might be, for example, 80+ (“very safe”). There is little macro discount being applied to our returns; this is a plus for doing the deal now. (In contrast, a few years ago during COVID, BMRI for Japan skyrocketed temporarily due to closed borders – a poor time to invest. Now it’s normalized back to safe levels, aligning with a go-ahead signal.)
• IP (Illiquidity Premium): we incorporate the current IP in the Bay Score. Because IP is elevated, our Bay Score calculation effectively ensures our projected IRRs clear that premium. For instance, if public yield is 5% and we require a 4% premium, we need at least ~9% net yield (or higher IRR) to score well. Our underwriting does meet that (we expect low teens IRRs). Thus, we likely satisfy the IP test, meaning Bay Score isn’t penalized for overpaying. In fact, if we’ve secured assets at good prices such that our expected returns are, say, 15%, far above a REIT’s 5%, the Bay Score will reflect a strong relative value.
• Other factors: Bay Score also considers ESG and sponsor quality qualitatively. These are not explicitly asked in the question, but briefly: our platform presumably meets ESG norms (ryokans can be energy-upgraded, cultural heritage preserved, etc.) and sponsor quality – if our team has a track record, that adds confidence. We assume these are neutral to positive, not detracting from the score.

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Bay Score Conclusion: Taking all metrics into account, we project a Bay Score in at least the 70s for the current Japan ryokan roll-up opportunity, which meets the threshold for proceeding. It might even be higher (if AHA is robust and risks are well mitigated, perhaps edging into the 80s), but let’s remain conservative due to the LSD concerns. A Bay Score ~75, for example, would indicate solid risk-adjusted returns and would get a green light from Bay Street’s Investment Committee. Notably, this score is likely higher than it would have been a year ago (when tourism recovery was less certain) and higher than it might be a year or two in the future if assets get bid up. It reflects the fact that now we have both strong performance and still reasonable entry prices – a sweet spot for investment timing. However, the score also carries a message: maintain discipline. At ~75, there’s a cushion above 70, but not an enormous one – if any metric drifts adversely (Bay Score drift of –10 points to ~65 would put us below approval threshold), we’d need to reconsider. Bay Street’s process even specifies that a Bay Score drop >10 points triggers an IC re-vote or review of the position. So, we must monitor the score drivers continuously post-acquisition.

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Forward-Looking Timing Strategy and Trigger Map

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Given the analysis above, our recommendation is to proceed with the roll-up now but using a staged deployment strategy with clear trigger-based guardrails. The quantamental overlay suggests conditions are favorable enough to begin acquisitions (Bay Score is currently above the investment hurdle), yet there are risk factors that could change the calculus. We outline a timing map with triggers that would signal when to pause, accelerate, or adjust the pace of roll-up investments:

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• Trigger: Liquidity Stress Delta (LSD) > 4.5 – “Liquidity Risk Spike”
  Condition: If the portfolio or market LSD exceeds ~4.5 (significantly high liquidity/timing risk). This could happen if, for example, yen volatility surges or exit markets seize up, pushing our liquidity risk beyond plan. Bay Street’s playbook shows that even an LSD rise to ~3.9 prompted recommendations to defer deployment, and they explicitly flag LSD >3.5 for exit reviews – so >4.5 is a clear red line.
  Action: Pause new acquisitions immediately and conserve capital. Reevaluate the pipeline – do not commit to further deals until LSD recedes below the threshold. Investigate causes: if currency volatility is the culprit (e.g. yen in free-fall or spike), consider implementing hedges or waiting for policy intervention. If the cause is that we’ve initiated too many projects at once (internal liquidity crunch), slow down and perhaps sequence project schedules. Essentially, a breach here means risk has outpaced return – a time-out is warranted until conditions normalize or we find mitigants.
• Trigger: Bay Score Drift –10 or more – “Deteriorating Deal Quality”
  Condition: The Bay Score drops by 10+ points from its initial level (e.g. from 75 down to 65) as measured by our ongoing scoring system. This drift could result from cumulative small changes in inputs: perhaps AHA erodes (due to higher acquisition prices or lower performance than expected), BAS falls (volatility uptick or underperformance making returns choppier), or LSD/BMRI rise (macro conditions worsening). Bay Street’s IC Memo Engine explicitly calls for an IC re-vote if Bay Score drifts >10 points, reflecting the philosophy that a material score change can turn a yes into a no.
  Action: Reassess and potentially halt further deployment. If we haven’t invested all our allocated capital, slow or freeze the pipeline until we diagnose the cause of the score drop. For assets already acquired, consider defensive measures: e.g. if the drift is due to macro factors, maybe hold off on optional CapEx or seek interim cash flow improvements to bolster AHA. If due to market yield shifts (say, cap rates rising generally, reducing our mark-to-market values), we might decide to delay exits and ride out the cycle rather than doubling down at lower scores. Essentially, a >10pt drop is a warning that our risk-adjusted return thesis is weakening – we should not blindly keep buying in that scenario. This trigger leans toward a pause/stage response: stop to re-optimize the strategy or wait for score improvements.
• Trigger: AHA falls below 2% – “Minimal Alpha”
  Condition: The portfolio AHA declines to near 0% or turns negative, meaning our expected returns are no better than the hospitality benchmark after adjustments. This could occur if, for example, competition drives up acquisition prices (reducing our IRR) or if the hospitality index forecasts are raised to where we no longer outperform. It might also happen if unexpected costs (e.g. labor, energy) eat into our NOI, reducing returns without lowering the baseline (thus compressing alpha). Bay Street’s policy has been to scrutinize deals when AHA drops into the ~1–2% range – an IC memo example showed a deal with AHA <2.0% only getting conditional approval with special structures to protect returns. If AHA were negative (we underperform the index), the investment case would essentially vanish.
  Action: Suspend acquisitions or pivot strategy until we can restore alpha. There’s little point in pursuing a roll-up that doesn’t beat doing a passive index investment. We would need to either negotiate better pricing on targets, identify new value-add angles, or wait for more favorable conditions (e.g. a dip in asset prices or another demand surge) to re-establish a healthy AHA. If some deals in the portfolio still have high AHA and others don’t, we might refocus on the high-alpha segment and drop the rest. In practice: should AHA approach 1–2%, we might opt to stage the deployment (only do the most attractive deals) rather than a full pause – but if it hits zero or negative, a full stop and reconsideration is prudent. Remember, a low AHA environment could also be a sell signal for any assets we already aggregated, since the market might be peaking if nobody can beat the average return anymore.
• Trigger: BMRI or Country Risk Spike – “Macro Shock”
  Condition: Japan’s macro risk profile deteriorates sharply. This could be indicated by a jump in BMRI (for instance, if a geopolitical event or financial crisis occurs), or specific components: e.g. FX volatility beyond historic norms (perhaps yen moves >±20% rapidly, or risk of capital controls if something drastic happened), sovereign yield spike (if JGB yields shot up above 2–3% unexpectedly, implying a regime change in interest rates), or any policy change that undermines tourism (hypothetically, a pandemic resurgence or travel restrictions). Bay Street’s country scoring trigger example: if a country’s score drops below –1.0 (on a Z-scale) for 2+ months, they pause all new underwriting there. While Japan is unlikely to hit that from current +2.1 heights without a major shock, we must be prepared for tail events.
  Action: Pause or significantly slow investment and focus on risk management for existing assets. If the yen is the issue, hedge more aggressively or consider sourcing more local debt (to naturally hedge FX). If interest rates are climbing, re-run our models with higher discount rates to ensure we’re not overpaying – possibly demand price concessions or walk away from deals that no longer pencil out. In the case of a tourism drop (e.g. visitor numbers fall due to external events), immediately recalculate AHA and cash flow projections; if the drop is severe (>10% YoY, as Bay Street uses for a down-ranking trigger), we might even consider postponing discretionary CapEx and building cash reserves to weather a downturn. The idea is to go into defensive mode during a macro shock, rather than continuing expansion. Once stability returns and BMRI improves again, we can resume.
• Trigger: Positive Outlier Conditions – “Accelerate Deployment”
  Not all triggers are for trouble; we should also identify signals that it’s safe or even beneficial to speed up acquisitions (front-load the roll-up) to capture a narrow window of opportunity:
• If Bay Score remains well above 70 and starts drifting higher (say into the 80s) because metrics improve – e.g. we see LSD dropping <3.0 (perhaps due to yen stabilizing or finding ways to shorten exit timelines), AHA increasing (maybe we’re consistently acquiring at great prices or operations are yielding more synergies than expected), and BMRI stays low – this would imply our risk-adjusted returns are even better than anticipated. In such a case, with Bay Score in a strong “green zone,” we should consider accelerating acquisitions to deploy capital while conditions are optimal. Essentially, “green light, go faster.” We might raise our acquisition pace or pursue an extra tranche of deals that we initially thought we’d do later. The rationale: if we can lock in assets at high Bay Scores now, we should do so before the market arbitrages away the opportunity.
• A specific example: FX tailwind opportunity – if the yen suddenly strengthens in a controlled way (say moving from 150 to 130 per USD) and we’ve hedged minimal (meaning our USD capital now buys fewer yen), that might seem negative. But if it’s due to BoJ confidence and doesn’t hurt tourism (a moderate yen rise), it could lower our LSD (less currency risk) and raise our Bay Score. If concurrently asset sellers have not yet adjusted prices (they often lag currency moves), we might pounce quickly to purchase before yen-based prices go up. This is a nuanced call, but in quantamental terms, a falling LSD and robust fundamentals could justify a short-term acceleration.
• Another positive trigger: Illiquidity premium compression signals – if we observe that more investors are coming back (bidding on deals, REIT prices rising toward NAV, etc.), that means the illiquidity premium is starting to shrink from, say, 4% down toward 2%. This usually happens in an improving market. It’s a signal that the window for cheap buys may be closing. We might decide to fast-track some acquisitions before valuations fully catch up. Essentially, buy as much as possible while the yields are still elevated, because if IP compresses, our early buys will look very smart. However, this must be balanced: if IP compresses because prices are shooting up irrationally, that could reduce our AHA. So this trigger is about recognizing a moderate compression (driven by genuine improved sentiment) as a cue to finish our buying program sooner.

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Action (for positive triggers): Accelerate or front-load acquisitions. Increase the rate of closing deals, perhaps pull some deals from “Phase 2” into “Phase 1” of the roll-up. Ensure our financing is lined up to support quicker deployment. We would also want to inform LPs that we’re putting money to work faster due to favorable conditions (provided we still stay within risk limits). We should be careful not to compromise diligence in haste – acceleration means acting on a strong conviction that our scoring signals are very favorable and that delay would erode returns.

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• Trigger: Ambiguous/Neutral Conditions – “Stage and Monitor”
  Condition: This isn’t a single metric trigger, but a scenario where metrics send mixed signals or hover near thresholds without a clear break. For instance, Bay Score might hang in the low 70s (just above threshold) but LSD is a bit high, or AHA is good but tourism growth is leveling off. Essentially, the environment is neither clearly improving nor clearly deteriorating – call it a plateau or uncertainty phase.
  Action: Stage the deployment in tranches with checkpoints. We might proceed with an initial set of acquisitions (say 50% of the capital) and then pause to evaluate metrics for a few quarters. If metrics remain acceptable or improve, we continue with the next tranche. If they worsen, we hold off (or execute an exit for the first tranche if that was the better move). This staggered approach ensures we’re not over-committing at a potentially late stage of the cycle, while still getting skin in the game. Essentially, treat it as a series of “real options” – after each stage, re-run the Bay Score for the portfolio and new pipeline to confirm it’s >=70 and not trending down. Staging is a prudent default unless triggers clearly push us to full throttle or full stop. It aligns with Bay Street’s Control Tower concept of score-triggered deployment gating – we only deploy the next chunk of capital if the scores say it’s wise.

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Below is a Timing Trigger-Action Table summarizing the key conditions and our recommended responses:

Trigger Condition

Suggested Action

Rationale/Threshold

LSD > 4.5 (Liquidity Stress Delta spikes)

Pause acquisitions; reassess risk mitigants.<br>Hold deployment until LSD < 4

Indicates liquidity/timing risk too high (FX, exit friction) – beyond Bay Street’s comfort (flagged at >3.5). Pause to avoid deploying into a potential liquidity trap.

Bay Score drift −10 points (from initial ~75 to ~65)

Halt or slow roll-out; review strategy.<br>Do not proceed to next deal until score ≥70 again

Significant deterioration in risk-adjusted return. Triggers an internal re-vote; portfolio no longer meets IC hurdle if <70.

AHA < 2% (Alpha nearly zero or negative)

Stop new deals; improve deal economics.<br>Focus on boosting NOI or lowering cost before resuming

Implies we’re barely beating the benchmark. Bay Street flags AHA under ~1.8–2% for review. No strategic benefit in scaling up without alpha.

Macro Shock (BMRI spike, FX > 2σ, 10yr yield >>1%)

Suspend and safeguard.<br>Delay acquisitions; hedge and stabilize operations

Macro conditions undermining thesis (e.g. tourism drop >10% YoY) demand caution. Better to wait out volatility than force deployment.

Bay Score ≥ 80 & LSD < 3 (“All-clear” scenario)

Accelerate acquisitions.<br>Acquire aggressively during favorable window

High Bay Score indicates excellent risk-adjusted returns, and low LSD means low execution risk. Green light to deploy faster while conditions last.

Illiquidity Premium Falling (cap rate comp. narrowing)

Front-load remaining deals.<br>Secure assets before pricing up

If public and private yield gap closes (IP → 2%), future returns will shrink. Capture the value now before market fully reprices.

Mixed Signals / Uncertain

Staged deployment.<br>Invest in phases; continuously monitor metrics

Neither a clear go nor stop – default to cautious progress. Use interim checkpoints (quarterly score reviews) to decide on next tranche.

(Table: Timing triggers for Japan ryokan roll-up and recommended responses, based on Bay Street score thresholds and market indicators.)

Using this trigger framework, management can make data-driven decisions on pacing: accelerate if the opportunity strengthens, hold back if risks rise. Currently, as of late 2025, we lean toward the “stage and monitor” approach with an initial deployment phase. The metrics are favorable enough to justify immediate action (we are above the key Bay Score threshold, and macro conditions are supportive), but not so euphoric as to warrant rushing all-in at once. By staging, we also keep dry powder in case the market dips (we could then acquire even more at better prices) or in case we need funds to stabilize initial assets longer than expected.

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Recommendation and Conclusion

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Is now the optimal entry point or should we delay? Based on the quantamental analysis, now is an attractive entry point on a risk-adjusted basis, provided we maintain discipline via the outlined triggers. The Bay Street metrics collectively endorse initiating the roll-up: - Bay Score: in the investable range (estimated mid-70s), reflecting solid returns with manageable risks. - AHA: positive, suggesting our strategy will outperform the sector’s strong recovery, and justifying the effort (we are not simply betting on Japan’s rebound, but adding alpha). - BAS: reasonable, meaning we’re not taking outsized volatility for those returns – diversification and management can keep risk in check. - LSD: moderate but not extreme; we acknowledge liquidity/timing risks, but they are being compensated by higher returns (and we have mitigation tools). - BMRI: low, indicating Japan’s macro environment is robust and not a source of major concern right now – in fact, macro factors are a tailwind (tourism, low political risk). - Illiquidity Premium: elevated relative to boom times, which works in our favor as buyers – we can earn a premium for providing liquidity in a market with fewer active investors.

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Delaying acquisition activity in hopes of even better risk-adjusted returns does not appear warranted at this time. If anything, the risk is that waiting could mean missing the current wave of earnings growth and possibly facing higher competition later (which would drive up prices and cut AHA). Our analysis of past cycles showed that periods like this – high demand but lukewarm investor participation – are optimal for well-prepared investors. That said, the strategy should not be “all or nothing.” We recommend proceeding now, but with the timing map as a guide to adjust course:

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• Begin acquisitions (Phase 1) focusing on the best opportunities (e.g. most undervalued ryokans with immediate upside) now. Concurrently, implement rigorous monitoring of Bay Score components for the portfolio.
• If metrics improve or stay strong (Bay Score holds ≥75, tourism continues robust, etc.), consider accelerating Phase 2 acquisitions sooner to lock in additional assets under favorable conditions.
• If metrics begin to slip (e.g. LSD creeping up toward 4, or AHA shrinking due to higher costs), then pause after Phase 1 and reassess before committing more capital. This could mean a temporary halt for a few quarters to see if conditions rebound or if we need to adjust our approach (pricing, operations) to restore scores.
• Always be ready to pull the brake if a hard trigger is hit (e.g. a sudden macro shock or a drop of Bay Score below threshold). It is better to preserve capital (or even consider exiting some assets opportunistically) than to keep buying into a deteriorating cycle.

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In practical terms, we suggest holding Investment Committee review meetings at regular intervals (say quarterly) where the latest Bay Score, AHA, BAS, LSD, etc., are presented for the portfolio. If the scores are comfortably above benchmarks, IC can approve continuing the roll-up. If not, IC can decide to slow or stop. This dynamic approach mirrors Bay Street’s Control Tower governance process, which ties deployment pacing to score signals in real time.

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One specific forward-looking note: Monitor the Bank of Japan policy closely in 2026. A shift to higher interest rates or tighter policy would influence several of our metrics (it could strengthen the yen – good for our FX exposure, but also raise domestic financing costs – affecting our WACC, and possibly cool equity inflows into J-REITs – affecting exit cap rates). Such a shift could increase LSD (via market volatility) but also eventually compress illiquidity premium if more capital comes to Japan for yield. It’s a complex effect, so having that on our radar is key.

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To conclude, the quantamental timing overlay strongly indicates that now is a strategically sound time to execute the Japan ryokan roll-up, taking advantage of the unique confluence of record tourism demand and still-reasonable asset pricing. By using Bay Street’s metrics and trigger-driven strategy, the platform can navigate the deployment with institutional rigor: accelerating when scores are green and pausing when yellow/red flags emerge. This will maximize risk-adjusted returns and position the portfolio to capitalize on Japan’s hospitality upswing while preserving downside protection. In short, proceed now, but with eyes wide open – the data-driven triggers will tell us when to hit the gas or the brakes on this journey.

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[1] [2] [3] Japan Sets New Record with 36.9 Million International Visitors in 2024 | Nippon.com

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