Seibu : July. 14, 2023 IR Meeting on Hotel and Leisure Business Q&A

Seibu Holdings Inc. IR Meeting on Hotel Business

Record of Questions and Answers

The following is a summary of the question and answer session from the IR Meeting on Hotel Business, held on July 14, 2023.

Q1. I understand that if you increase the number of the 87 hotels you currently operate to 250 hotels, mainly through management contracts (hereinafter, "MC"), there will be smaller downside in the event of a crisis such as the COVID-19 pandemic, but I do not understand whether they will really be profitable as a result. Also, I would like to know the sense of speed at which you will reach 250 hotels and the profit level envisioned when you reach 250 hotels.

A1. First, as to whether MC will be profitable, the answer is basically that it will be profitable. MC is a business model that has been used in the United States for about 100 years, and Marriott, Hilton, and Hyatt also started out as owner-operators, that is, they owned and operated their own properties. From there, in order to expand their networks and sustain growth, while in some cases they still owned flagship hotel properties, they switched to a business model in which they operate hotels owned by third-party owners through MCs. They have expanded their networks domestically and internationally through MCs, and further expanded their networks at an accelerated pace through franchising (hereinafter, "FC"). In response, the we have finally begun to work on this in a full-fledged approach. The main source of revenue for MCs is management fees, which are linked to sales and profits, and as the number of hotels increases, management fees naturally increase. On the other hand, all hotel operating expenses are borne by the owner, and Head Office expenses barely increase even as the number of hotels increases. This business is extremely profitable, as the operational know-how and customer organization are the products provided the Company, and Head Office expenses do not increase in proportion to the increase in the number of hotels. Although we cannot provide specific figures for the amount of profit when the number of hotels reaches 250, management fees per hotel, if they are high, may reach approximately 100 million yen per year, although it depends on the size of the hotel and its positioning as a luxury hotel or a lodging-specialized hotel. And there are almost no new costs associated with MCs. Regarding the time frame to reach 250 hotels, we are assuming about 10 to 15 years. As one of the growth drivers for profits, we will expand our network and MCs mainly from external owners, which together with existing hotels will raise GOP and increase the profitability of the Group as a whole.

Q2. So increasing the number of MCs is the driver of profit growth, is that correct?

A2. We will increase earnings by raising GOP of existing hotels owned by the Group and by expanding our network through contracting MCs from external owners.

Q3. I think it makes sense to focus on ADR rather than occupancy rates, but I feel that you could raise occupancy rates more. My impression is that occupancy rates are quite low compared to business hotels, etc., where occupancy rates reach 85% to 90%. Since you do not operate business hotels,

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I don't think we can make a general comparison. Is this a situation where you are particularly focused on raising ADR due to a lack of extra manpower, or do you think, for example, occupancy rates will rise more when MICE recovers in the future? I would like to know if there is any upside to occupancy rates.

A3. Hotels are one of the commodities that do not have a fixed price, and revenue management is employed to look ahead and vary prices on a daily and even hourly basis, depending on demand. The end result is RevPAR, which is the balance between the price and the number of rooms that customers buy. Naturally, if prices are lowered, occupancy rates will rise, and conversely, if prices are raised, occupancy rates will fall. In terms of the market as a whole, occupancy rates of lodging-specialized hotels mentioned above are at the 80-90% level, depending on the location, while occupancy rates of luxury hotels vary between 60-65%. Occupancy rates are in line with the market demand for each respective hotel segment, and it is important to find a way to maximize unit prices in this context. It is possible to prioritize occupancy if that is desired. However, various data show that even if occupancy rates of business hotels have reached 80%, unit prices have basically not increased by 20% compared to the pre-COVID level. Since we are a hotel chain with large banquet hall facilities, the return of large-scale MICE events in particular will have an impact on occupancy rates. In addition, even though inbound travelers have begun to return, Chinese travelers have not yet returned, with the exception of the affluent class. Before COVID-19, China accounted for a very large share of the Japanese hotel industry. On the positive side, the market has recovered to this extent even without the Chinese market, which was the base of the hotel business. I believe that Chinese tourists will definitely return in the future. What happens then is that the lower-priced,lodging-specialized hotels will be filled first with high- volume group travelers. Demand becomes stronger and the pressure increases, and as it does, it spills over to the upper segment. This is expected to cause not only an increase in occupancy rates but also a further rise in unit prices.

Q4. The data presented for this past April and May showed a considerable increase in ADR compared to FY2018, especially for domestic individual travelers (P7 of the briefing material). The concern is that the rise is due to the impact of the government measures to support national travel, and that it may drop again once that program is no longer in place, is that concern correct?

A4. To supplement the information on P7 of the briefing material, the situation is that the way reservations are being made is totally different between 2018 and 2023. We are working on a form of lead-time revenue management, in which we focus on stronger segments while looking ahead at bookings. We used to look 3 months ahead, but from last year we started looking 12 months ahead. In 2018, our strategy was to build a base in the non-yieldable segments outside of the blue and orange areas of the graph, and then raise ADR by capturing domestic individuals at the last minute. This time, when inbound travel had not returned to the market, we decided that inbound individuals would surely be the first to move, so we made thorough efforts to publish rates on the official inbound website and global OTAs for the next year and a half, and also appealed to moving markets quite aggressively through advertising and other means. While we

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were working on these initiatives, this segment of inbound individuals (the orange area in the graph) resumed around February to March of this year. This means that this segment became the base. The implication was that we did not need to engage in unit price competition to capture the domestic individual segment at the last minute, and we were largely able to capture this volume without overreacting. Although the travel support may have had some effect, there are months when inbound demand is strong and months when it is weak, as seen for example in the difference in the share of the inbound segment between April and May, so we do not need to worry too much as long as we conduct flexible revenue management accordingly. In addition, non-yieldable segments have been able to accept an overall price increase through rate negotiations, and I believe that we will be able to conduct revenue management in a good way by using this becoming a base in the future.

Q5. Please explain how StayWell will come into play in the strategy of acquiring MCs for 250 hotels.

A5. We acquired StayWell in 2017. Since that time, we had been considering expanding our network through MCs, and acquired the company. StayWell is not a large company in terms of size, but it already has experience in hotel management through MCs and FCs, and it has a solid infrastructure, including presentations to potential owners when acquiring new projects, knowhow in preparing income and expenditure plans, and SOP (Standard Operating Procedures) manuals, etc. The biggest benefit is that we have been able to absorb StayWell's know-how into our infrastructure and incorporate things that owner-operators have not been able to do until now. What we are considering now for the future is not to separate the domestic and international brands, but to reorganize them a little and expand them as Seibu Prince Hotels Worldwide, a single hotel chain, further leveraging the strengths of the Group.

Q6. Do you think that MICE is likely to be profitable in the future? What is your strategy, including the ripple effect on the accommodation division?

A6. For MICE, in particular the larger they become, the more profitable they will be. The owner of the Grand Prince Hotel Osaka Bay, which was a rebranding project, highly evaluated Prince Hotel's MICE operational know-how. A large banquet hall in a hotel is a facility that can accommodate various needs in various forms, such as meetings and dining, and is different from a conference room. Recently, many large hotels are complexes integrated with commercial retail facilities and offices, and large banquet halls are rare, so hotels with large banquet halls have a competitive advantage. In fact, the banquet division's profit margin is quite high. This fiscal year, the banquet division is expected to recover 80% of the FY2018 level, but given the current strong performance, there is a possibility that it will grow even more. There will also be international MICE in the future, which will naturally have a ripple effect on lodging.

As for hotels, those lodging-specialized may be the easiest to enter from different sectors, and their number may increase in the future. There are not many hotel operators, including foreign- affiliated companies in Japan, that have expertise in operating large-scale MICE and banquet hall facilities. Therefore, if demand for MICE grows, we will be able to further demonstrate our

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strength. We have a good chance to prevail here.

Q7. I understand the direction of your efforts to build the industry's No. 1 quality hotel chain, but I would like to know more about what you actually need to do to achieve this goal. In the form of RevPAR, which can only be seen from the outside as an indicator, I would like to ask specifically what will bring it out.

A7. What we are working on is to further enhance our loyalty program and expand our customer base at the customer organization level in order to increase sales. In terms of income and expenditure management, we will ensure that income and expenditure are managed by division using a unified method called the Uniform System of Accounts for the Lodging Industry (USALI). The next step is human capital development.

In terms of network expansion, there are surprisingly few major hotel chains in Japan that are capable of multi-brand development. The fact that we have a lineup that ranges from luxury to lodging-specialized and MICE services means that we can meet the needs of various owners, and this is one of our strengths in securing contracts. In addition, looking at the global hotel industry overseas, Western supermajors such as Marriott and Hilton hold a significant market share. On the other hand, looking at the luxury segment, Asian hotel chains such as Mandarin Oriental, Peninsula, and Shangri-La are achieving the same or better RevPAR results as the supermajors. As for our strategy, we will also focus on acquiring luxury and upper upscale hotels for the time being. In fact, we will operate hotels in major cities around the world, including London opened in FY2019, New York scheduled to be opened this fiscal year, in addition to Tokyo. We are in the process of strengthening our strategy for network expansion, including its ripple effects, and existing functions such as the marketing, operations, and human capital divisions as the infrastructure for operating the network.

In terms of "indicators," we are strengthening control by the Head Office now, and we are changing our style to specifically look at everything in terms of KPIs.

For example, for lodging, we are trying to compare how the next 12 months are going for all hotels compared to prior to COVID, and how each segment is doing in terms of recovery rate. All of these conditions can be seen in BI, and are monitored by the Head Office once a week. In terms of raising ADR, there are two key points: one is how much we can raise ADR on days when demand is particularly strong, and the other is how much we can raise contract rates in non- yieldable segments. Each of these indicators is placed and tracked on a weekly basis. In terms of strengthening the membership structure, the most important point at any rate is the best rate guarantee. This is also being thoroughly implemented by looking at the non-compliance ratio of the best rate on a weekly basis, to the point where the non-compliance ratio is now less than 1%. The same is true for banquets, where KPIs are the number of visits by salespeople, the number of projects won, the percentage of decisions made from tentative reservations to confirmed reservations, the unit price, and a multiplier of these factors. The same applies to weddings. We are building a system to manage all of these with a sales support system.

It was difficult to get this system to penetrate, but taking advantage of asset light as an opportunity

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to do so, it penetrated rapidly as the GM of each hotel had to explain all of these figures when reporting to the owner.

Outside of the sales aspect, B to C marketing uses website unique users and conversion rates as KPIs, as well as having each business location's website screen evaluated externally as a content score. Also for operations, in addition to CS scores and other data being checked on a daily basis, an external brand audit has been introduced compiled into an index, which has been converted to a system where each business location formulates an action plan to raise that index.

We believe that these initiatives will bring us closer to global operators, and we are currently advancing the initiatives.

Q8. I assume that you are going to do what Marriott and other global leaders are doing, but with such global leaders increasing the number of locations of all grades in Japan, how will you compete with them?

A8. The fundamental goal is to increase RevPAR by having customers stay at our hotels, but it is important to establish an infrastructure with global standards that are important for competing with foreign companies, and how to appeal to owners about Prince Hotel's competitive advantage in order to win contracts. From my work experience overseas, owners expect support from the Head Office for operators in improving both sales and GOP, but the backup from the Head Office in sales & marketing, etc., and the connection with Japanese corporate customers are points that foreign competitors do not have. This is because foreign competitors cannot physically locate their head office in Japan. This point will be an appealing point in acquiring new projects. In addition, Prince Hotel's strength lies in its operations at resorts. Since hotel management methods differ at resorts and in the city, we will have to see how successful foreign competitors that are expanding into the resort market are. Amid the shortage of personnel expected to continue, Prince Hotels can set up a support system at summer and winter resorts. For the G7 Hiroshima Summit, the Grand Prince Hotel Hiroshima was chosen as the venue, and in addition to 250 local employees, about 100 people from various offices were dispatched. This type of flexible use of human capital is also something that foreign competitors are likely unable to do easily. We believe that we have a chance to prevail over foreign competitors by expanding our customer organization base and growing at an accelerated pace as we increase the number of hotels we operate going forward.

We are aware that Marriott and other foreign competitors have a strong ability for guest referrals, and we cannot win in that area. However, we also know that there are areas where they are and are not strong. Also, not all inbound travelers from Europe and the U.S. have the budget to stay at a hotel that costs 100,000 yen per night. We believe that we can compete with them by making comprehensive use of our multi-brand hotels in a wide range of price ranges and various channels.

Q9. P3 of the briefing materials shows the current state of recovery in the accommodation and banquet divisions, but when viewed in terms of profits, I believe that costs have risen from the pre-COVID level. In order to return profits to the pre-COVID level, to what level should sales be raised in the

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