the 5% fee effectively cuts into the APR right off the bat

It cuts into the APR if you use the conversion operation, but in practice you can buy from the market and not pay the fee (or even buy at <$1 which is effectively a negative fee). We have no experience seeing sustained market conditions where the price remains at or even near 1.05, so it would be rare for anyone to be paying the fee. The only time it happens is if and when the price of HBD goes above 1.05, in which case you can make an immediate profit by selling it (clearly worth paying the fee).

There is already an inherent risk that the conversion will result in receiving less HBD per hive due to the 3.5-day delay in completing the operation

I guess it's a risk strictly speaking, but you can also receive more.

if the conversion operation uses the lowest price from the feed as initially proposed by @blocktrades (instead of the median)

It uses the median. The lowest price is only used to determine the excess collateral needed for the 3.5 day loan (it is a loan because the HBD is delivered immediately even though the rate is determined and the actual conversion can be said to occur after 3.5 days).