PPHE Hotel Group (PPHE) – A leading hotelier and developer

PPHE Hotel Group (PPHE) – A leading hotelier and developer

PPHE Hotel Group is a founder-driven business that runs hotels while also developing new hotel sites. With the main focus in central London and Amsterdam, the company is well-placed for the growth of global tourism. Expansion in Croatia also provides exposure to the beach holiday market.

The hotel sector has a mixed reputation with investors. It’s capital intensive and hotel companies tend to carry a significant amount of debt. Demand is cyclical and hotel supply often increases just before a downturn.

The UK hotel business Jarvis Hotels went into administration in 2011 in part due to a slump in regional UK demand. The UK budget hotel chain Travelodge was taken over by its creditors in 2012.

Whitbread-owned Premier Inn (WTB) has been a long-term success story and is now the mainstay of the FTSE 100 group. Intercontinental Hotels, meanwhile, has increased its return on capital by moving towards a franchise model.

Airbnb has been seen as a potential threat for the sector but cities have recently been cracking down on the booking service. Against this backdrop it clearly pays to be selective when looking at hotel companies.

Premium-listed PPHE Hotel Group is currently worth £652m and stands out for a number of reasons. The main attraction is the focus on the supply-constrained West End of London (including the South Bank).

The next most important city for the group is Amsterdam, which also draws in tourists from around the world. PPHE Hotel Group therefore offers exposure to increasing global tourism with Europe the world’s main tourist destination.

Four of PPHE Hotel Group’s properties: four star hotels

Source: PPHE Hotel Group

An additional string to PPHE’s bow has been expansion in the fast growing holiday destination Croatia. This provides the opportunity to benefit from the growth in beach holiday travel.

Looking at the profit mix in 2017 and the UK accounted for 56% of EBITDA with this principally driven by the London Hotels. Croatia generated 17% of EBITDA and the Netherlands generated 13% of EBITDA.

PPHE Hotel Group’s EBITDA profit pie in 2017

Source: PPHE Hotel Group

PPHE is now one of the largest hoteliers in London with its main brand being Park Plaza Hotels. The group currently has eight hotels in the capital and all but one of them is fully owned.

The group also has a Park Plaza hotel in Leeds and another hotel in Nottingham. In the Netherlands the group has four hotels in Amsterdam, one hotel in Eindhoven and another hotel in Utrecht.

PPHE Hotel Group’s main cities are London and Amsterdam

Source: PPHE Hotel Group

Management and ownership

I was fortunate to meet with PPHE’s management in mid-September and it is clear that CEO Boris Ivesha is a true hotelier. He brought the Park Plaza Hotels & Resorts brand to the group in 1994.

Mr Ivesha had a focus on how to create value and there is also a large shareholder. Red Sea Group owns 46.89% and its beneficial owner is the Papouchado family (Eli Papouchdo is non-exec Chairman of PPHE).

A key risk with a real estate development company is that poor investment decisions will be made. My impression was that Mr Ivesha and his team are focused on not overpaying for new developments.

PPHE’s guests appear to be satisfied

Source: PPHE Hotel Group

The property angle: £24.21 EPRA NAV per share

Accounting rules mean that you have to follow the standards of a hotel operating business or a real estate business. The two are very different and PPHE Hotel Group, as the name suggests, follows accounting standards for hotel groups.

In the latest results the group has had its assets valued for the first time to give an EPRA net asset value per share of £24.21 at June 2018. The figure had compounded at 20.7% a year from 2010 to 2017 i.e. from £6.42 to £24.02.

PPHE has clearly been successful at finding and developing hotel assets. An example is Park Plaza London Waterloo on which the group spent £125m and was valued at £250m at June 2017.

art’otel Hoxton expected to open 2022

Source: PPHE Hotel Group

The art’otel London Hoxton is currently the only fully owned hotel that the group has in development. The site was acquired in 2008 with a JV partner and in 2018 the group bought out the JV interest.

The total investment cost of the project is estimated at £150m and the completion date is expected to be 2022. Hoxton is an area of London that has seen considerable demand from the technology sector.

PPHE Hotel Group is also investing in existing sites to make them more attractive and add value. Two current projects are Park Plaza Vondelpark, Amsterdam, and Park Plaza Sherlock Holmes in London.

Investment case

With much of PPHE’s assets in development or non-yielding assets there is further scope for the NAV to grow. The shares at £15.50 currently trade at a 36% discount to the June 2018 EPRA NAV.

The EPRA net asset value should also increase as current hotel improvements reach completion. There may also be a meaningful uplift when the Hoxton hotel opens in 2022.

Croatia is performing well and is now the second largest profit generator for the group. Business in the country is seasonal but it generated a small profit for the group in the first half of 2018 versus a loss in the first half of 2017.

Two of the group’s Croatian properties

Source: Arenaturist

PPHE’s shares currently trade at around a 20X rolling P/E multiple, which appears expensive at first glance. However, a number of hotels are out of action due to redevelopment and this has also increased business costs.

The long-term track record of PPHE Hotel Group is impressive with the group successfully navigating the financial crisis. A fall in the pound due to Brexit issues should also help to attract more tourists to London.

Optional reading: PPHE’s backdrop and reviews

Turning to PPHE ’s backdrop and the company generated £61m of revenue in 2006 versus £325m in 2017. This has been driven by the completion and opening of new hotels since the group listed in July 2017.

The hotel sector is a cyclical business and PPHE saw revenue and profits decline in 2009. However, but both metrics hit record levels in 2010 and have continued to see strong momentum ever since.

PPHE’s financial backdrop

Source: PPHE Hotel Group.

Shareholders in the group were not sanguine about the potential impact of the financial crisis. Shares in PPHE started trading at close to £5 in July 2007 and fell to a low of only 14p in December 2008.

Alongside the interim results the group stated that its net bank debt leverage ratio is currently 28.9% and interest cover is 3.9X. The company stated that it has surplus cash for “refurbishing the total current development pipeline.”

PPHE Hotel Group’s share price since IPO

Source: Google finance

PPHE operates four-star hotels and is therefore a cut above the likes of Travelodge and Premier Inn. Reviews for the group’s Park Plaza hotels in London are generally positive on TripAdvisor.

Park Plaza Westminster Bridge, Park Plaza Waterloo and Park Plaza County Hall all score 4.5 out of 5 on Trip Advisor. Park Plaza Riverbank, Park Plaza Sherlock Holmes and Park Plaza Victoria all score 4 out of 5.

Source: Trip Advisor

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