Interview with AG Tony Virili, President and Chief Executive Officer Solare Hotels & Resorts : "The Japan market is still wide open for a proven domestic nationwide brand such as ours"

Born in Italy in 1952, Tony Virili was raised in Australia. He has lived and worked in Japan since 1978. He entered the hospitaliy industry by joining Accor to develop the brands Sofitel, Novotel, Mercure and Formule 1 between 1998 and 2003. He then joined Hudson Japan, Lone Star Fund’s asset management company. Since February 2004, he has held the position of President and CEO of Solare Hotels & Resorts.

Japan Pays See destination fact sheet

HTR Magazine: Is it easy to expand in Japan a US style motels brand?AG. V: As to roadside hotels, certainly not nearly as much as independent hotels without any chain affiliation. Nor our direct competition, which typically have hotels double our rooms capacity to .ll and twice the staff to payroll. In normal times, the GOP hurdle for Chisun Inns is high, typically exceeding 50% of gross revenue and therefore they are better prepared to withstand the hard times, because the revenue flow through is excellent and overheads are relatively low. Most of our resorts are in Okinawa, which remains the most popular beach resort destination in Japan. We believe it will remain popular in 2009. Solare’s customer relationship marketing program includes our Smileage membership card, which offers additional incentives to stay with us. We have over 190,000 Smileage members and growing at a rate of 6,000 new members per month. Last year they spent over $1.5M equivalent per month at Solare hotels. About 60% of our current 66 hotels (approx. 12,000 rooms) are budget to mid scale and 40% are full service city hotels or resorts. We have 6 more roadsides coming on line before the end of 3Q 2009. So I believe we have a well balanced portfolio with a nationwide presence. Since we do not have any hotels outside Japan, we do not face the distraction and added pressure of promoting outbound travel. This means our 5 national sales offices throughout Japan can focus laser-like on our domestic portfolio, in order to win a larger share of a shrinking pie for now, until the market returns. Lastly, it is a well know fact that in difficult times, a large percentage of both leisure and business travelers convert to budget lodging. We are ready to welcome them throughout JapanAG Virili: Japan is a particularly difficult market to penetrate unless you have the in house expertise to deal with local owners and real estate intermediaries, as well as enjoying local contract closing know-how. Japanese are emotionally attached to their land, which often gives rise to time consuming and complex negotiations. Land is not advertised for sale in traditional media such as newspapers or industry bulletins. Sourcing and acquiring sites mostly has been about special relationships, although this could change due to the current market downturn.HTR: Are you in competition with more traditional low budget “ryokans”?AG. V: The biggest player in the new roadside hotel segment and our largest competitor is Route Inn, with over 200 properties throughout Japan. They have been a serious player since the late 90s. But there is hardly any other significant competitor for now. The low budget traditional Japanese inns are not competitors.HTR: What is the potential development of your brand?AG. V: The potential remains very high. Of the 11,000 or so hotels and inns in Japan, no more than 15-20% are chain affiliated. We have seen that international brands have hesitated to enter the market for reasons related to inexperience, incompatible brand standards (e.g. minimum room size well in excess of market norm, requirement for facilities such as pool etc.) and the preference by Japanese hotel owners for lease over management contracts, so favoured by international chains. Also, because of their global footprint, most international brands have focused on other development priorities such as China, Europe or North America. This means the Japan market is still wide open for a proven domestic nationwide brand such as ours.HTR: What are the most attractive locations for budget hotels?AG. V: Think Etap Hotel or Holiday Inn Express in Europe; our locations for Chisun Inns in Japan are quite similar to these. Heavy traffic roadside locations with high visibility, conveniently located in or around cities with a population of 100,000 plus, not far from major freeway interchanges and close to industrial parks, manufacturing centres and sporting facilities. Sites of around 2,500m2 to accommodate between 90-100 rooms and 50-60 parking bays are favoured, particularly if located adjacent to or nearby family restaurants or convenience stores.HTR: Are all your hotels new constructions or do you have some converted hotels to the Chisun Inn brand ?AG. V: Although we have some conversions in our system dating back to 2003-04, since December 2005 we have been focusing exclusively on new constructions. 16 new roadside Chisun Inns are open and we have 6 under construction. We also have one highly successful new inner city Chisun Inn which opened in downtown Kagoshima last year.HTR: Will your development strategy focus on ownership, management or franchise?AG. V: Since current financial markets preclude bank financing, we will change our focus for the time being on franchises. Few if any financial institutions are prepared to bankroll new hotel projects for now. Because the market will remain illiquid for some time, we will concentrate on growth through franchising and in some special cases, leases of our other brands (Loisir Hotel, Loisir Resort and Chisun Hotel, Chisun Grand Hotel and Chisun Resort).HTR: What is the potential of the budget segment in Japan?AG. V: The budget market is well developed in Japanese cities but not so at roadside locations; two-star hotels typically are 2030 years old, breakfast-only single room product of 12-14m2 rooms, located close to railway stations in downtown locations, in the price range of between 6,000-9,000 yen (40 à 70 euros).HTR: Do you think that international players like Accor or Wyndham will probably one day enter this attractive market?AG. V: Accor tested the market with direct investment in two Formule 1 hotels back in 2000-2002. It is said both Wyndham and Accor have been evaluating the market in recent years without any visible progress, however I believe it is due to other geographical priorities rather than a negative assessment of the Japanese budget market which have kept them inactive. Timing is Money. Japan remains the second largest economy in the world, with medium to small scale industry accounting for the overwhelming majority of Japan’s GDP. Rail travel remains ex-pensive and inconvenient outside major cities. In rural areas, the average number of cars per household exceed 2. Therefore, there is a need for budget accommodation catering to travelers utilizing vehicular transportation. The national government is about to significantly reduce highway toll fees on weekends to stimulate leisure travel. In addition, inbound groups from neighbouring Korea and China increasingly are using our Chisun Inns, thanks to the novel twin + bunk bed room configuration we offer.HTR: In regards to the real estate price, is it possible to develop budget hotels in city centers in Japan?AG. V: Right now, anything is possible if you have capital and can secure finance. Cap rates have eased back to a surprising degree, even in major city centres. In addition, construction costs are on the decline. But I would say for now, acquisition and conversion of existing real estate is a more attractive and fast way to enter the market.HTR: What kind of clientele do you attract in your hotels?AG. V: Typically we compete with other budget hotels for the domestic corporate market on weekdays. It is quite intense. However, because of our unique twin or double bed + bunk bed rooms (approx. 50% of our inventory), we can sleep up to 3 persons per room in our Chisun Inns. There is virtually no-body else in the roadside market who can offer this on a chain wide basis. And so Chisun Inns are winning considerable family guests (kids under 12 stay for free) school and affinity sports groups from the domestic market, as well as international leisure groups from neighboring countries such as Korea and increasingly China. Golfing demand remains strong here and our Chisun Inns located in close proximity to golf courses are benefiting, particularly from senior players who elect to stay the night before an early bird tee off at golf courses nearby.HTR: Are you satisfied with the performance of your budget hotels in terms of OR and ADR?AG. V: Not completely, but then again we have started from scratch and rolled out our roadsides with considerable speed and agility. While our roadside inn portfolio blended occupancy take up in the first year typically has been slower than our initial expectation (50-55% vs. 65%), our achieved ADR consistently has been higher than our budget (closer to 6,000 yen vs. 5,500 yen), meaning our RevPAR has been satisfactory. We are now very focused on costs control.HTR: Do you think your group will suffer from the current economic crisis?AG. V: As to roadside hotels, certainly not nearly as much as independent hotels without any chain affiliation. Nor our direct competition, which typically have hotels double our rooms capacity to .ll and twice the staff to payroll. In normal times, the GOP hurdle for Chisun Inns is high, typically exceeding 50% of gross revenue and therefore they are better prepared to withstand the hard times, because the revenue flow through is excellent and overheads are relatively low. Most of our resorts are in Okinawa, which remains the most popular beach resort destination in Japan. We believe it will remain popular in 2009. Solare’s customer relationship marketing program includes our Smileage membership card, which offers additional incentives to stay with us. We have over 190,000 Smileage members and growing at a rate of 6,000 new members per month. Last year they spent over $1.5M equivalent per month at Solare hotels. About 60% of our current 66 hotels (approx. 12,000 rooms) are budget to mid scale and 40% are full service city hotels or resorts. We have 6 more roadsides coming on line before the end of 3Q 2009. So I believe we have a well balanced portfolio with a nationwide presence. Since we do not have any hotels outside Japan, we do not face the distraction and added pressure of promoting outbound travel. This means our 5 national sales offices throughout Japan can focus laser-like on our domestic portfolio, in order to win a larger share of a shrinking pie for now, until the market returns. Lastly, it is a well know fact that in difficult times, a large percentage of both leisure and business travelers convert to budget lodging. We are ready to welcome them throughout Japan