This used to be the traditional model for most hotel groups but at some stage many of them split into an operating business and a property business. It makes it easier for analysts and possibly allows both businesses to achieve a more direct rating. However as separate businesses maximisation can conflict. By keeping the operations together, provided you have the skills in house the development of the whole is maximised.
The results for the year ended 31st December 2018 show decent progress in a number of areas.
Operating as it does in UK, Holland, Germany, Hungary and Croatia whilst the company as a history of ongoing operational success this is usually met by succeeding in some but not all of its countries. In 2018 there was an improved operational result from every operating region. On a total LFL basis this was only a 6% revenue improvement but this was accompanied by a general management of costs and improved operating margin. None of this was spectacular but it was generally solid and PPHE refer a number of times and in a number of countries to beating its comparator base on most metrics.
That said PPHE is spending across its portfolio to improve the quality of its sites and the facilities available in many of them at an operational level. So there is some expectation that future profits will be incurred on the basis of current expenditure.
One feature that PPHE has repeatedly referred to is staff retention and development. (All hotel groups do). However for PPHE its international spread does seem to be allowing some genuine level of development, perhaps more from the less developed operations (Croatia) seeing how the better ones (London) operate.
At the same time PPHE the real estate business is looking to both take on new sites as it is with London Hoxton and significantly upgrade existing sites as it is with London Baker Street. This is not solely a UK focus. As an example one of the camping sites it has in Croatia has been turned into a “glamping” site. The company is investing and investing across the board. There is even a mention of advanced discussions to acquire a site in New York. These development/ redevelopment activities are from their very nature much more lumpy than the day to day operational activity but they can be significant in their results (this years gain on its Hoxton site holding was over £20m) and they set the basis for future operational results. They may also be becoming less lumpy. As PPHE has grown it is capable of taking on more developments at the same time and so the routine of redevelopment becomes less a series of irregular events but more a standard feature in the annual results.
In GAAP terms if you strip out the profit made on revaluing the Hoxton site, (which had been held in a JV. PPHE bought out its partner) and some associated costs 2018 was not that exciting from a results standpoint. But it was solid.
What makes PPHE exciting is the following;
1 – A number of new sites or redevelopments are ongoing. PPHE has a history of doing these well and then feeding them into the operational mix. This is with a market cap of £755m and an EPV (8%) of £757m at current levels.
2- Sites held are carried on the books at circa £1.1bn. However in summer 2018 PPHE had them revalued (mainly by Savills) and they were valued at £1.6bn. With a market cap of £755m there is circa £500m not on the balance sheet. Most of which would be expected to be realised in the event of a sale. This significant gap has been a feature of PPHE but as the share price has risen taking the market cap up the company has redeveloped more sites that are only in the book at cost. Based on the valuations management see the EPRA share valuation as being in excess of £24. Today it is £17.85.
3- Moving to the US opens a new area for PPHE to introduce its buy low, renovate and improve model. Now the US certainly introduces a whole plethora of can you run a hotel well in New York issues. But it does also reduce the risk that shortage of opportunities might lead to overpaying for sites. I have in the past questioned whether PPHE might get overstretched in managing too many developments, but as yet there seems to be no sign of this.
4- PPHE is looking to move its shares into FTSE indexes and through that increase its shareholder base. This may require some selling down by the current major shareholders but should be price enhancing in the mid term as getting into an index will force some ETF buying and potentially some fund manager interest.
5- The real value of any business is its ability to generate cash. The dividend is being increased by 45% to a circa 2% yield. This also I believe reflects management's confidence in the future.
6- The company via its own calculations sees itself as having circa £75m of excess cash at year end. Presumably this will be used to help with the US acquisition. But it shows that management consider carefully the capital requirement.
7-What keeps many commentators from this business is that it has £680m of debt. Though it also has £200m of cash. This debt has always in my opinion been well managed to limit any risk to the group and has not been drawn so as to risk any specific site. But with the move in the US to halt rate rises and similar economic growth issues in the UK and Europe this as an issue is very much lower than it might be in a growing interest rate environment.
8- It has one of the clearest set of accounts. I like accounts that clearly set out what is being done and how and why management think it is a good idea and indeed how it can be measured and considered. The PPHE accounts do this well.
I am a holder in PPHE. It has consistently delivered and operates a reasonably simple business model very well. It is not however the most exciting of businesses and should only in my opinion be considered if you are happy to hold for a number of years. I am holding though I may have to sell a few as it is now at my maximum 10% holding in my portfolio.