PPHE Hotel Group Limited (PPH) Earnings Call Transcript & Summary

Good morning, and welcome to the PPHE Hotel Group Limited Annual Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Greg Hegarty, COO. Good morning to you, sir.

Good morning, and thank you for joining the PPHE 2022 Annual Results Presentation. This morning, I am joined by Robert Henke, our Executive Vice President of Commercial; and by Daniel Kos, our Chief Financial Officer. Just before we do get into the depths of the presentation deck, we're going to show you a short video, which is going to talk to you a little bit about our completed investments on new openings and our future pipeline. So with, you can play the video. [Presentation]

Okay. Thank you for understanding the PPHE Hotel Group. Who are we? We are an international hospitality real estate company of over GBP 2 billion of assets in European key cities, urban markets and result destinations. We are an owner and developer, where we have hospitality real estate assets with a scalable hospitality management platform. To deliver this, we have best-in-class performance with scalability and a depth of real estate knowledge. We buy, build and operate with a vision of creating value for our assets and for our guests. What sets of PPHE Hotel Group apart? We have our business model. Our business model focuses on real estate. It sits at the center of our strategy and what we do. As we've already heard, we build and operate our assets for that opportunity. Number two, we focus on equity value, driving the net asset value of all of our developments. Growth through -- we focus on growth through capital recycling, through refinancing our funds with -- without diluting our shareholders. Number three, our hospitality platform is fully scalable. We have an exclusive relationship with the Radisson Hotel Group, and we are specializing in all areas of the hospitality sector with a long-term management agreements. Robert?

Thanks, Greg. So this summarizes our business model. So in essence, we are a hospitality owner, but we have an integrated operating platform in-house that manages the GBP 2 billion of assets for PPHE owners as well as third-party owners and JV partners. So summarizing what Greg said, we tend to buy assets or land. We then develop, upgrade and reposition. We operate hotels successfully. There is value extraction, and we recycle the capital generated and invest that to fund further growth, so expanding our portfolio. So looking at 2022, there are sort of 4 key highlights that sum up the year for us, starting with the trading performance to put it into context, '21 finished on a low with Omicron, a new variant emerging, impacting travel and requiring governments to impose government measures and lockdowns. So as we entered 2022, demand was quite subdued. That changed fairly quickly in the U.K., where from January and February onwards, we saw the impact of Omicron disappearing and customers feeling comfortable to travel once more. So the initial recovery in the U.K. started in Q1 with pent-up leisure demand. Holland and Germany, key operating markets for us were a bit later. Towards the end of March, early April, they started easing measures and opening up. And Croatia opened up around May time in 2022. So summarizing the year, Q1 very much impacted still with relatively low demand with the exception of the U.K. where there was momentum. Q2, we saw momentum across all of our regions. Q3 was outperformance and a strong summer season in both Croatia as well as the London market, which really was booming in the third quarter of the year, and that momentum continued into Q4. So we had a very strong Q4 as a collective and as a group and we'll touch on the 2023 trends a bit later in the presentation. The approach we've taken in '22 is to be sort of rate focused. So we're focusing rate over occupancy, which has helped us to generate very good results for the group. The other highlights of the year are 2 new openings. So we've opened a 5-star resort in Croatia, which is the Grand Hotel Brioni, which is part of the Radisson Collection, which is Radisson's finest set of hotels out of their 1,700 strong portfolio. The second hotel that we opened in December is the Art'otel London Battersea Power Station. This is a hotel that we don't own, but we manage on behalf of the owner under a long-term management agreement. So our operating platform runs the day-to-day business there, and we fully opened last week with all the facilities now available to our guests. We've also progressed our pipeline and we'll touch on that later down in the presentation. The third sort of highlight of the year is our extended partnership with Radisson and I'll expand on that in a minute. And last but not least, the fourth point on this slide is the launch of a fund. So earlier this morning, where we announced our plans to launch a European hospitality real estate fund with a potential cornerstone investor to be announced imminently. We are looking to invest alongside the cornerstone investor and will be seeking additional investors to contribute and participate up to a value of EUR 250 million, which would give us a development scope of potentially EUR 500 million, including leverage to grow and secure through JV partnerships and those assets to be managed by our operating platform. So if we move on to the Radisson partnership, which is one of the highlights of the year. For the past 20 years, we've enjoyed a very strong relationship with the Radisson Hotel Group which, in line with its ownership group, Jin Jiang is the second largest hotel group in the world. We benefit from having an exclusive license to Radisson's Park Plaza brand in Europe, Middle East and Africa. That agreement is perpetual and exclusive to us. We've enjoyed that for well over 20 years. That agreement is still in force. We haven't opened up that agreement as such, but we've been building on with new agreements. One relates to art'otel, which is our luxury lifestyle brand, which will be featured in the Radisson brand portfolio demonstrated on this slide. So that will be launched in the course of this year. Radisson also takes an active development role in art'otel in markets where we don't envision growing art'otel or investing in assets. So markets such as Asia Pacific and the Middle East, where there's a great opportunity for art’'otel lifestyle hotels, Radisson will take that development lead. We will benefit in return from increased presence, increased brand awareness, increased customer databases as well as increased income on the back of a revenue share principle agreed with the Radisson Group. The second element of this agreement is that we've been granted access at favorable terms to all of Radisson's brands. So in many markets around Europe, we can start developing Radisson branded hotels, be it Radisson RED in the upscale segment, Radisson Collection in the luxury segment where any of the other brands shown on this slide. What that means to us is that we're no longer restricted to using Park Plaza, art’'otel or any other brand, but we can now tap into Radisson's family of brands across all market segments. So the development potential for our group has widened as a result, and we could be entering new market segments. The fund we announced, I'll hand over to Greg quickly.

Yes. Thanks, Robert. So following on from Robert's introduction, just to give you a few more details. As we announced this morning, we're launching the hospitality fund which has a potential size of GBP 500 million, GBP 250 million equity and GBP 250 million in debt. We are close to securing our cornerstone investor up to a value of GBP 75 million, PPHE's initial commitment to the fund will be GBP 50 million. The Corner Store Investor committing at GBP 75 million. PPHE will also add the art’'otel room into the fund as its initial seed asset. Subject to receipt of regulatory approval, the remaining third-party investors will be able to commit a further GBP 125 million, taking the total equity up to GBP 250 million. This will contribute and benefit the company significantly. It will certainly accelerate PPHE's strategy of acquiring and developing attractive hotel assets through the use of nondiluted third-party capital. It will very much further enhance PPHE's management platform, which will manage and operate and fund the assets. PPHE will also benefit from enhanced management fees and the capital value upside, a minimum of 20% on fund participation and the fund investors will benefit from PPHE's proven ability to generate value for its acquisition and an active management of European hotel assets. And we are expecting to receive a 15% incremental rate of return for investors over a 7-year life. So what's ahead in our development pipeline. So following the opening of the Battersea project and Brioni in 2022, we're now looking ahead at new art’'otel openings between now and the next sort of 18 months. So the first one that comes on to the market is, at the end of Q2, early Q3 is the art’'otel in Zagra. It's 115-bedroom hotel that is currently being developed and that will open probably around some summertime. It's an upper upscale lifestyle art’'otel in the city center. The second project is the art’'otel in Rome which is opening first half of next year. So it's an existing asset that we bought 2 years ago, operated it for a little bit of time and closed it last year. We're now going through the redevelopment and that work is proceeding to plan. So early half of next year, we'll have art’'otel Rome opening. The property that is being developed in London is the art’'otel London Hoxton. It's our largest project currently. It's 357 bedrooms across 27 floors. It has nearly 6,000 square meters of office space and lots of restaurants and bars and leisure facilities. So the building structural works have been completed. Most of the cladding is in place. So we just need to finish the last 4 or 5 floors, which will be done in the next few months. And the interior fit-up has started in the basement levels. The additional development angle is we have 2 land sites currently in our position, 1 with planning and 1 without. So we're proceeding and pursuing both. So the one without planning, we are advancing our planning application and optimizing it, working closely with the local console. And that is looking promising, and we'll have an update later this year. And more longer term is our Park Royal site, where we have planning, but we are refining the scheme. So more news to follow in due course. I'm going to hand you over to Daniel now who will talk us through the financial performance in the year.

Thank you very much, Robert. Yes. So over to the results. We will start off with the property KPIs. Today, we reported a GBP 25.17 NAV, which is quite substantially up from GBP 22.15 we reported last year. I'll go into detail in the next slide in terms of that value increase. In terms of EPRA earnings or FFO, recurring cash flow per share, we reported 50p per share after 2 years of negative during COVID, finally back to positive territory. That, together with our optimistic outlook on 2023, we propose to reinstate our progressive dividend policy. So we have paid a 3p interim dividend last year November, and we're proposing a 12p final dividend, bringing the total dividend to 15p or about 30% of EPRA earnings. That's on the back of a GBP 3.7 million buyback that was completed yesterday. On the right side, on the operating KPIs, we reported a RevPAR of 96.2, marginally behind the RevPAR we showed in 2019. I'll go into details on the next slide on that. You'll see that we have quite a significant jump in room ranks, 25% up on 2019. However, you'll see that the occupancy is still lagging behind in the 2022 numbers. Going to the next slide, Robert. Total revenue at GBP 330 million, in line with the RevPAR behind the 2019 total revenue of GBP 357 million. And you'll see we reported an EBITDA of EUR 94.6 million. Going to the next slide, Robert, you'll see on the right table that the revenue and EBITDA progression have quite different quarters. So obviously, like Robert alluded to, in the first quarter, we were still very much in lockdowns with low occupancy and a negative EBITDA. Second quarter was predominantly ramp up for all our regions. And the third quarter was astonishing demand exceeding 2019. Pent-up demand, leisure demand but also city-wide events in London and a very strong season in Croatia. I would say the fourth quarter is a more normal quarter with still strong demand. You'll see that our EBITDA monetary amount is relatively the same as '19. However, we do need to work harder for it, which means more revenue as we are seeing a little bit of margin erosion. That's mainly due to the cost pressures we experienced, the wage cost, also food and beverage cost and we expect this will continue in 2019. We do think the monetary amount is achievable. But as I said, we need to work harder for it. In 2022, we have hedged our utilities, so that didn't affect our cost base. For 2023, it will marginally affect our cost base as we are hedged at higher levels than the current market and the current market is also trading still above 2019 product [ basis ]. If you go to the left graph -- to the left table, you see that RevPAR exceeded 2019 levels from the third quarter onwards. And the middle will show you that, that was driven mainly due to rates. So you see that every quarter, we have exceeded the 2019 room rates. However, you see the occupancy is still behind '19. The occupancy gap is narrowing, as you can see in that table, and that's also a trend that we see continuing into 2023. So together with the higher rates that we have been achieving, that's also trending an occupancy gap that is narrowing, that should have a positive effect on our RevPAR going into 2023. In terms of our cash flow, a positive cash flow of about GBP 100 million in terms of operations. You'll see a capital spend or a CapEx spend of also close to GBP 100 million. Out of this GBP 100 million, about GBP 30 million is the maintenance CapEx that we do and the remainder is expansion CapEx. And the majority of this is allocatable to our [ artisan ] development. You can also see in this cash flow, the funding that we have for that. So all of that cash flows are fully funded for. You'll see a debt service of GBP 68 million, which includes about GBP 10 million of COVID deferrals that we are paying in this year. So our regular debt service is about GBP 58 million, which is GBP 18 million in amortization and about GBP 40 million of interest. Like I said, our NAV grew quite substantially in this year. It was something that we expected. The reason is that our valuators are using a discounted cash flow to value our assets. And last year, we were in Omicron really when they were estimating our recovery. Our recovery was estimating that will be in 2024, 2025, and we actually achieve that right now. So the majority of the value uplift that you will see is due to the fact that cash flow -- positive cash flows have been brought forward. So you see that in terms of the total portfolio, we reported an 8% increase on last year and a 4.8% increase in 2019. You can also see that the cap rates stayed relatively stable. So valuators are using a discount rate for the first 10-year cash flows, which is typically 2.5% higher than the cap rate and they're using a cap rate for a year, then cash flow. The cap rates stayed relatively stable. Last year, they were influenced by the uncertainty. So they were a bit higher because of the uncertainty in the cash flows. That is way now. However, the interest rate environment is offsetting that decline. So overall, relatively stable. And it's good to see that our portfolio valuation is supported currently by the transactions that we're seeing in the market. So we are seeing secondary transaction levels picking up here in London. We saw a transaction close to our Rome hotel and also to our Amsterdam hotels. And it's very comfortable to see those per key prices under confirming really where our valuations sit as well. So as I said, most of the NAV growth, GBP 2.43 per share was down to the revaluation of our assets that we done in 2022. So as part of our strategy, we unlock capital on the back of our assets, and we do that in many different ways. So we do that by raising debt, but we're also doing that through raising equity in different forms of partnerships. And this funding strategy gives us access to our capital [ growth ] on the back of the fair value of our assets. So on the back of this GBP 25 NAV that we just show. But it also gives us the ability to balance liquidity and market risks attached to this capital structure. So given the reason volatile moves in inflation and interest, we thought it makes sense to reiterate our balance sheet strength and the relative resilience we have to the market moves at the moment. So out of the 2.4 million gross assets, 63% of that is funded by equity or equity-like structure. So these are our shareholders, the PPHE shareholders. These are our minority shareholders, our partners, and these are the people that hold units in the Park Plaza Westminster Bridge and that entitles them to the exact profit of the room in the Park Plaza Westminster Bridge. Then we also use long-term ground brands. This is where we sell the land under a hotel and lease that back for a period for over 100 years. This is -- this is linked to CPI often. However, this is capped to a 4% to 5% level. There is no recourse to the corporate and there's no confidence. And as these are 100-year plus, there is little or no liquidity risk. And in terms of net bank debt, with 29% out of the growth balance sheet is our net bank debt. You can see that we have an average interest rate of 3.4% currently one-off -- 3.4% up currently, and 97% of that debt is either fixed rate or hedged at the moment. And also there, there is no recourse to the corporate entity. Detailing a little bit our bank debt, the liquidity profile, you see that first, as part of our bank debt, we are amortizing annually as part of our usual cash flow, which reduces the refinance nominal obviously. And then you see the first big refinance round is coming up in 2026, which is about EUR 200 million and about GBP 200 million. Earlier in 2022, we've already entered into forward hedges for these refinances on 50% of the refinance at significantly lower interest rates than the current market trails out. And just to give you an indication, the loans that are refinancing in 2026, they currently trail on 43% loan-to-value. And the multicurrency, the euro and sterling debt profile is also benefiting -- we're benefiting from the interest rate differences between SONIA and EURIBOR.

Okay. Thank you. So current trading and outlook, 2022 is currently better than expected and momentum is currently continuing. Our room rate strategy is delivering with average room rates in all regions exceeding prepandemic levels. The occupancy gap with 2019 is starting to narrow more. Industry-wide inflation pressures likely to carry on to continue, margin headwinds for the full year -- with margin headwinds in full year 2023, partially offset by our rate led strategy and evolving the revenue mix. The management platform, as we've already alluded to, with the new fund has continued to grow and as evidenced. Forward booking pace continues to be solid with no indication of consumer price resistance cooling or that cooling having an impact on leisure demand currently. So we are happy to answer any questions. I'll hand back to Alessandro to do some introduction and then we can go forward from there.

[Operator Instructions] I'd like to remind you that recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your investor dashboard. As you can see, we received a number of questions throughout today's presentation. And if I could just hand back to you to read out the questions and give responses where it's appropriate to do so. I'll pick company at the end.

Thank you. So one of the questions that come in is probably for Daniel, how much of the EUR 250 million [indiscernible] fund does your contribution of the art’'otel Rome represent?

So out of the EUR 250 million equity, EUR 50 million will be committed by PPHE and the Rome is about EUR 25 million of that commitment currently.

Thank you. Another question that's come in is, are there any plans for further partnerships like the one you have with Radisson? I'll take that one. We are independent owner/operator. So we will consider and look at the right brand options for our properties. However, in the last 20 years, we've really enjoyed a strong partnership with Radisson. We know their strengths and we know their systems, and we've been able to drive a lot of value out of it. So it's definitely a cornerstone of our road map moving forward to continue our work with Radisson. But we would not rule out any other brands and partnerships in the future. So if we do come across assets that we believe are better suited for other brands, we would always consider it from a property point of view and a longer-term investment. There's a question for -- maybe you want to take this, Greg. For Hoxton. Hoxton shortage is a large development. It's a new area, a new part of town for you. The individual asking the question, is not familiar with many hotels in the area. How confident are you with the sort of the returns, the rate aspirations, the occupancy in that area and what analysis have you done yet to do...

Okay. Well, listen, this site is in an outstanding position in Hoxton. It's absolutely the gateway position of this property. We actually feel that this property will have the same impact of the company is what Westminster Bridge have did for Park Plaza. We actually feel like the art’'otel brand in Hoxton is going to be widely anticipated. In terms of market research, Hoxton has a lot of lifestyle properties, actually mid-scale lifestyle and upper upscale lifestyle which is where the art’'otel sits and at the moment, if you're looking at the competitors in that market, they are achieving good levels of occupancy. We use a company called Smith Travel Research, which takes all of the data for that area [ and specifically ] as it does many others. However, we have a targeted competitors that we look at for our art’'otel in Hoxton, and it has a lot of the high-end lifestyle properties in. And I'm pleased to say that actually, their occupancy ADR and RevPAR deliveries are actually slightly below some of our forecasted revenues for 2024 when we open the property. So a considerable amount of research goes in and how we position that. And at the moment, we're comfortable with actually how we're seeing the market in that Hoxton area at the moment, especially on rate delivery.

Thank you. There's a question around customers and how they have responded to increased pricing across the portfolio. I think from our perspective, we have continued to see strong demand across all of our business segments, be it the individual traveler for leisure, for business, meeting and events. I think there's a general acceptance in the marketplace that costs have increased. We've had 2.5 years of COVID, where we would have had normal sort of inflation in that period of time. There are widely reported pressures due to the increase in cost of utilities, cost of food, cost of housing. So like many other industries, our prices are higher than they were before. But generally, we don't see any sort of impact in terms of demand, no negative impact. So there's -- initially, there was pent-up demand that returned to the hotels, but it's now becoming the, I would say, it was the new normal. And I think we should always remind ourselves that before COVID, we had just completed a GBP 100 million investment be in all the assets in the London market, especially and the hotels are in an excellent condition. So we offered [ premium products ] to, I guess, and we've maintained our service levels throughout.

And I must say, customer expectations, Robert, have also risen. So what we are seeing where we have our customers and guests paying more for their rooms. They are absolutely expecting in terms of quality and product offering at a higher level.

Next question, what role will technology play in your growth? And can you expand at all on what the rollout looks like?

Yes, I can answer that. Yes. So I think technology nowadays is expected, my guess. So whereas we all check in on our phones and find it very normal that you walk up to the plane without any disruptions. And that's not so the case in hotels as yet. So we have been rolling out over the last 1.5 years, a complete online check-in environment with also digital keys on your phone. So to have like a seamless experience and not having to pass the reception if you don't like to -- that is now -- I don't think you've seen it in a lot of hotels. So now especially when we do expect this will be the standard in the hotel industry. So that is crucial to the rollout of our new hotels. But then guests obviously expect a perfect WiFi. You expect to stream your devices. So all of that, we have a separate dedicated team to look at that and roll it out overall, our property. So it is an absolute crucial role to the guest experience, I would say.

I would add an additional few sort of comments to that. Through our partnership with Radisson, during the COVID period, they have developed and built out a new reservation system which all of our hotels benefit from. So this is a bespoke platform that's been built to service the 1,700 hotels in the Radisson family of brands. So that unlocks a lot of commercial opportunities for us because it's connected to and driving all of the websites. So we see mobile apps taking a real -- a big role today in terms of the booking journey and reservation process for customers and rewards. So that's all secured and in place through the Radisson partnership. And back of house, we are introducing AI for our revenue teams to really optimize the revenue performance of each of the assets and we're bringing in new technologies to help our housekeeping and front office teams manage the guest journey and stay. Greg, maybe on expansion on the geographic markets that we would be looking to target or enter into.

Yes. So at the moment, as you can see, we've got a property in Rome. We are not really represented in Italy, like we would as we are in the U.K. or Holland or Germany or Croatia, for example. So we do see that as a geographical region, obviously, that we want to target. We do look at Southern European cities such as Portugal and some parts of Spain, for example, in Barcelona. However, one thing we are very prudent in the assets we go after. So it's really going to be a key asset in a key location. And we want to make sure, obviously, we can reposition that asset. So yes, so more Southern European at the moment in terms of where we're looking at to grow our brand.

Thank you. There's a question around business mix in terms of source of markets. Do you have the mix of U.S. versus European versus U.K. travelers with the occupancy increasing? We don't typically disclose that in a lot of detail. What we can give is that in the U.K., our core market is the domestic market, and that has really helped throughout COVID. What we have seen in the course of 2022, particularly the second half, is that there was a lot more international demand coming into the U.K. So we are now going back to where we were in '19 with lots of different international markets feeding into the U.K. market with the U.S. definitely back to strong levels. In Netherlands, that's a market that has more of an international profile. We have seen the U.S. and U.K. both return strongly, particularly coming out of the COVID period. And in the other markets, Croatia and Germany, again, very much more internationally focused back to '19 sort of trading performances when it comes to the mix. So we're definitely getting back to normality when it comes to the international view of our offering.

Greg, Daniel, Robert. Thank you very much. I think you've actually managed to address all of the questions from investors. And of course, the company will review all the questions submitted today, and we'll publish those responses on the Investor Meet Company platform. But just before redirecting investors to provide you with their feedback, which I know is particularly important to yourselves, Greg, could I just ask you for a few closing comments.

Yes. Thanks very much. So listen, I think, obviously, the company has recovered incredibly well after COVID. We're incredibly proud of the strategic achievements we've done in 2022. I think the Radisson partnership is actually a significant game-changer for the PPHE because it allows us to really target assets, which were in our Pacific class before. So we are now able to target assets in select service, luxury rather than just offer upscale. So that's great news. And now with the evolution now of the Hospitality Fund that really gives an excellent opportunity for growth in 2023 and '24. And we're especially excited about the art’'otel's opening towards the end of this year and also into next year. So the art’'otel being upper upscale lifestyle brand is a significant strategic objective for us. And it will contribute to the growth of the company significantly also.

Greg, Daniel, Robert, thank you once again for updating investors today. I please ask investors not to close the session as you now will be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This only take a few moments to complete, but I'm sure be greatly valued by the company. On behalf of the management team with PPHE Hotel Group Limited, we'd like to thank you for attending today's presentation, and good morning to you all.