Firstly there is a hotel operator, running mainly PPHE owned sites, but also sites for other parties who are themselves principally interested in owning the property.
Secondly there is a property company that largely makes its money by developing or redeveloping sites to make them worth significantly more.
Whilst there are various conflicts between the two parts, eg closing a site for redevelopment, PPHE has established a history of managing these conflicts well for the mid-term. Though clearly there will be an effect on any one year’s numbers. Over the mid term both operations feed off each others success.
Whilst LFL comparisons are important it is worth considering that PPHE can grow both by moving to new markets (new development in New York), upgrading existing sites (Holmes Hotel, London), or adding new lines to parts of its operation. (glamping in Croatia).
With a decent record on moving the business forward one of the few concerns I have for PPHE is the ability to maintain growth rates. If you have 10 sites and add 1 you are 10% bigger. But if you have 50 and add 1 you are only 2% bigger. Clearly they can expand with more staff focussed on the expansion but I wonder if this will not cause them to dilute the skill base they have historically shown. That said it is nice to see a business that only has to carry on doing what it is doing to grow.
Clearly PPHE intends to grow. The build programme that is coming to an end has cost £100m. The new development programme is estimated at £300m.
A few years ago all PPHE mentioned in the accounts was that the redevelopment of sites made the sites considerably more valuable and gave an indication as to what this could be. At that point PPHE was very undervalued. Now the potential valuation is very clearly defined in the accounts using EPRA NAV. (I am not a big fan of EPRA -too many assumptions over too small a database), but with an EPRA NAV of £25.52 and a share price of £17.70 you can see there is a Margin of Safety.
On the operating side the Revenue per available room is an important metric. (This recognises that rooms are taken out of service for redevelopment, or lost as the operating license is lost for managed only sites) This went from £93.4 from £85.7, a 9% increase.
Total revenue was up 4.3% from £148.8 to £155.3m.
GAAP profitability before tax fell from £16.4m to £4.3m. However last year saw a gain of £20.3m on the Hoxton redevelopment site. This was a particularly accounting gain as it was based on buying out the JV partner and then revaluing the part held by PPHE to reflect the value paid to the partner. Stripping this out the business improved.
The ability to have the relatively steady hotel profits and growth combined with occasional exceptional property gains over and above is both one reason to be excited by PPHE and at the same time why profitability fluctuates and it gets put into the too hard pile by many.
It is also worth mentioning that over the last 18 months PPHE has been looking to position itself as more attractive for overseas shareholders. The major shareholders have sold some shares (though they do retain a large stake) and this has allowed PPHE to be given a premium listing and included in the FTSE 250 and all share indicies.
It is also worth noting that whilst quite willing, even keen to use debt to leverage growth PPHE has been clear about what it feels is appropriate and with the current low rate environment has continued to manage its debt well. On occasion refinancing to significantly improve terms. With the dividend at 17p up 6.3% from last year I believe management feel debt is well supported. (Large amounts of debt is one reason why I am not keen on PPHE using EBITDA as measure).
So a money making business, on a growth trajectory with a strong asset base, though quite a lot of debt, I currently have PPHE on a fair value of £19.50. However as with any fair value calculation this is only one number on a range of possible outcomes. With the price of £17.70 this provides only a 10% MoS. Which for me would be a concern. However with an EPRA Nav of £25.52 which is 44% above the current share price there does seem to be upside with a managed downside. My holding is already at nearly 10% of my portfolio so I will not be adding, but see no reason to reduce.
Always DYOR