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

Good morning, and welcome to the PPHE Hotel Group Limited Full Year Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself, but the company can review questions submitted today and publish responses where appropriate to do so. Before we begin, I'd like to let the following poll. I'd now like to hand you to CEO, Greg Hegarty, Good morning.

Good morning, and thank you. Good morning, everyone, and welcome to our 2024 full year annual results presentation. I'm Greg Hegarty, co-CEO of PPHE Hotel Group, and I'm pleased to be joined today by Daniel Kos, our CFO; and Robert Henke, our EVP, Commercial. 2024 has been an exciting year for PPHE as we near completion of our GBP 300 million pipeline, delivering 4 new hotels across 4 European capitals. So without showing you too much, I think it will be good to -- before we dive into those numbers, I think it will be good to show you a short video of our up and coming new hotel in Rome and our investments. [Presentation]

Thank you, Alejandro, for sharing that video. As Greg said, this has been an exciting year for PPHE Hotel Group. So allow me to introduce PPHE to those who are new to the story. PPHE is a hospitality real estate company. We're FTSE-250 listed, and we curly have a portfolio of 51 properties in operation. The vast majority of those are city center hotels. We also have a number of resorts as well as 8 Campsites in Croatia. What we do as property owners, we have our properties valued annually by external valuators. So in our books at historical costs for their valued against market values, and we're currently sitting at GBP 2.2 billion. What makes PPHE unique in the hospitality real estate segment is that we own, develop and operate hotels, whereas a lot of our peers tend to focus on just development or owning assets or maybe operational sort of agreements for hotels. We manage all of this in our own group. Our vision is to not only grow the real estate side of our business by acquiring and developing properties, repositioning assets, but we also want to grow our in-house management platform, and Greg will touch on that a bit later in the presentation. So what sets us apart as sort of owners and operators of assets, there's a number of factors that differentiate us. So first of all, the business model, as I said, typically, we operate in 1 pillar, and we operate across all 3, keeping all that value within the group. So investors in PPHE have exposure to each element of the value chain, but also reap the benefits and upside that comes with that. We have a strong preference for developing assets either ground up. So we tend to buy land sites and have ground-up developments. But we've also, in our history, have bolt into offices and convert those into hotels or we acquired hotels in need of investment. So we buy a hotel with, what we call, repositioning potential. So we buy an asset, we invest and relaunch the property in a different market class, generating different returns. So that's where our shareholders benefit. Our key markets are all within Europe. So we have 8 countries that we currently have a presence in. And our most important market from a property point of view, are London and Amsterdam as well as a presence in Croatia, which is strong and then Germany, and we have seen in the video that we're about to enter Italy as our eighth marketplace. The second part that makes us unique is our capital structure. So our company went public in 2007, and we haven't diluted shareholders since despite that they bring a number of growth phases for the group. How we've been doing this for the past 35 years since our business started is by sort of constantly recycling capital. So we typically buying assets. We've taken out loans sometimes. And then after a few years. Once the property is more established and stable, we refinance, expect some of the capital and reinvest in the next opportunity or we have partners, for example, with JV partners, bringing on extra sort of capital to fund our future growth. The last part of our pillar is the unique element of our management platform. So it's a one-stop shop that we operate. So in our business, we have all disciplines in-house to develop and acquire but then also operates and commercially drive the performance of each of the assets and we'll go through a bit more detail later. From a commercial perspective, we use a lot of Radisson's brands, some of those on their exclusive agreements and some of those are very competitive durations. So we step into the different segments in the hotel market from upscale to luxury and we have the commercial brands to drive the performance. In a nutshell, this is a very dark slide, but this summarizes what we do. We buy, we build, we operate, we extract capital and invest in next cycle of growth driving the shareholder returns. In terms of the portfolio geographic spread, as I said, London and Amsterdam are our most important capital safety markets. We are currently active in 7 capitals. So London, Amsterdam, soon Rome, but we also have a presence in Berlin, in Belgrade, in Zagreb and in Budapest. So we are currently active in 16 cities altogether as well as some resort destinations in Croatia and a mountain resort in Austria. So more than 70% of our property values sit in London and Amsterdam, which are very high barrier to enter markets. So it's very difficult these days to establish a strong foothold in markets like London and Amsterdam because of planning regulations or hotel stocks. We are in a unique position that we have a strong foothold in those spaces already and more than 75% of our asset value of the GBP 2.2 billion is on a freehold basis. The remainder tends to be a long leaseholds in the form of ground rent structures, which are typically over 100 years. As I said at the beginning, our GBP 2.2 billion portfolio is in our books at historical cost minus depreciation, whereas the valuated use a DCF model, and you can see the discount rates on this slide. So typically, in city centers, the discount rate they use is 7.75 to 7.8 and going up to about 11 percentage points in the resort locations. What we'll focus on next is the management part of our business. Greg, you want to cover it?

Yes. Thank you. We are an award-winning hospitality management platform. At PPHE, we own, operate our properties through our own in-house hospitality platform, which provides the company with base fees and profit-based incentive fees. We actually are in full operational control, and we have direct alignment between the ownership of the asset and the management priorities. Our strategic partnership with Radisson Hotel Group allows us to leverage our global distribution, our loyalty program globally, our purchasing power, ensuring we are fit for stability and growth. Moving on to Slide 9, thanks, Robert. Our strategic and operational update. Despite the challenging macroeconomic environment and tough comparatives from 2023, which included the King's Coronation and the Champions League Final, we delivered record revenue of GBP 442.8 million, 6.8% up year-on-year and EBITDA of GBP 136.5 million, which is 5.7% of year-on-year. This was driven from revenue contributions from our newly opened hotels and solid like-for-like performance across our portfolio. Our EPRA NAV increased to 2,751, up 3%, enabling us to increase our dividend to GBP 0.38 per share for the full year. We also improved our EBITDA margins to 32.5%, which is plus 160 bps. Thanks to our supply chain consolidation, new technologies, which we've adopted on the business automation initiatives, particularly in accommodation operations. From an employee and guest experience view, employee engagement rose to 84.5%, above the sector average of 82%, helping us retain talent and drive our guest satisfaction within our properties. Our guest rating scores improved to 87.8%, which is a 1.4% year-on-year growth, reflecting strong operational execution. Moving into our strategic progress and expansion. We've seen one of the largest growth cycles in the history of PPHE, diversifying our operations across multiple brands through our Radisson partnership. Key milestones into the opening of the art’'otel Zagreb, which launched fully in May. We opened our first 2 Radisson RED properties in Belgrade and in Berlin. We completed the art'otel Rome, and I'm pleased to say that is opening fully next week. We successfully refinanced our GBP 170 million in loans at favorable interest rates and we've [ just ] opened the art'otel Hoxton of GBP 300 million investment after 3 years of development. We want to move to the next slide, please, Daniel. Looking ahead, our 4 key focus here is our leverage in Rome next week and obviously, fully completing our property here in Hoxton, stabilizing assets across multiple markets, which are expected to deliver an additional GBP 25 million of EBITDA by 2028, driving further efficiencies within the portfolio through technology and automation and advancing on our development pipeline, including the London South Bank project and our New York development site. The pipeline contribution to our long-term strategy, our recently opened hotels are still maturing with strong performance indicators so far. We expect further upside from these properties as they settle into their respective markets. Rome is a major up-and-coming milestone first, like we've already said, with strong preopening demand. Our [ land site ] portfolio, particularly in London and Croatia holds long-term value for future development and our acquisitions team continually evaluate new opportunities and growth opportunities. As we move to 2024 highlights, the hotel in Hoxton successfully opened a phased opening, overcoming multiple challenges with strong time demand and corporate bookings. We've already alluded to Radisson RED Berlin and Belgrade opening. These have been very well received with positive feedback and growing market traction. We have a planning win in the London South Bank with -- we secured approval for our 186-bedroom hotel strengthening our future pipeline. We also made our New York site development ready. We're also constantly assessing our strategic options here at this site, and we look forward to further explanation in due course. And Croatia is starting at GBP 12 million investment in Campsites upgrade, enhancing our premium offering. Thank you, Robert.

So going over to the results. As Greg already alluded to in the earlier side of this presentation, we had another record year of performance with total revenue up 6.8% to GBP 443 million. This number includes the newly opened art'otels that we have in London and Zagreb. So if we look at it on a like-for-like basis, revenues increased to GBP 428 million up 3.3 percentage points. In all territories, we have strong growth in occupancy, which were particularly strong in Germany. Room rates, on the other hand, moderated as we anticipated earlier in the year already and is also negatively impacted by a stronger sterling-euro exchange rate. As a result of this, the like-for-like record for the group was up 1% at GBP 122. Going to EBITDA. Like-for-like EBITDA is up 8.7% to GBP 139.3 million. That's up from GBP 128 million last year. The reported EBITDA was slightly lower, coming in at GBP 136.5 million, which is negatively impacted by the typical opening losses we have of the hotels that recently opened. So in terms of margins, I'm very pleased to say that we reported a like-for-like margin increase. It increased with 160 basis points to a margin -- an EBITDA margin of 32.5%. And I'm very pleased with this margin increase because these were negatively impacted in the year by double-digit minimum wage increases in all our territories, and that was offset by lower utility costs and ongoing [indiscernible] implementation, which increased our labor efficiency. So going on to EPRA earnings. We reported an adjusted EPRA earnings per share of GBP 1.25 which is up 5.9% versus last year when we reported GBP 1.18 per share. And this increased EPRA earnings is also the basis for our progressive dividend policy, which we typically pay 30% of adjusted EPRA earnings. So also for this year, we're proposing an increased final dividend of GBP 0.21 per share, which together with the interim dividend brings the total dividend over 2024 to GBP 0.38 per share. This is 5.6% higher than last year. Can you move on to the next slide, Robert. In this slide, we reported the EPRA earnings, and we reported GBP 53.3 million of adjusted EPRA earnings, which increased 6.4% versus a GBP 50.1 million reported in 2023. So as I alluded to, on a per share basis, this comes down to GBP 1.25 per share. But as you can see in the first waterfall chart, the EPRA earnings were positively impacted by a GBP 7.4 million net income growth to translate this to a per share amount of GBP 0.17 per share, but they were negatively impacted by the opening losses of new hotels in 2024. And that -- if you reflect that in the per share amount that's GBP 0.10 per share. So on a like-for-like basis, EPRA earnings went up to GBP 1.35. These losses will likely turn into profits, obviously, in the near future when the properties are stabilizing trading. And with that increase EPRA earnings, we are also likely to increase our dividends. So as you can see in the lower bar chart is that adjusted EPRA earnings are driven mainly by our share in the EBITDA of the properties that we own. And our share of the GBP 25 million of growth expected for all our new openings is about 51% is PPHE share as these assets are jointly owned with a partner. Moving on to the next slide, thank you. Our cash flow -- strong cash flow was positively impacted, obviously, by our GBP 137 million EBITDA, but negatively impacted by working capital payments around the construction projects that we have in this year for GBP 12 million. We had another year of substantial capital expenditure, of which the vast majority reflects expansion CapEx. You can see that GBP 63 million out of the GBP 79 million was the expansion in the CapEx. And I'll detail that a bit later on the next slide. And that CapEx is partly funded by new bank facilities. Given the completion of our significant pipeline, CapEx is expected to decrease in the running year. So we expect another GBP 15 million, 1-5, for the sale of the current pipeline and in terms of new committed expansion CapEx, we intend to invest around GBP 10 million, EUR 12 million in the [ camps ] in Croatia. And on top of that, we will have our regular maintenance CapEx, which we typically model around 4% of total revenues. You can see that we paid around GBP 95 million in debt service, ground rents and unitholder payments. Out of the GBP 4.95 billion, GBP 41 million relates to regular bank loan repayments and about GBP 30 million to the variable profits that we paid to unitholders in Park Plaza Westminster Bridge. The regular bank loan payments are completely in line with our debt strategy, and I'll detail that -- and it will go down in the future, which I'll detail later on. Go to the next slide. You can see on the slide here, and unfortunately, in the years dropped off. But you can see on this slide, which is the CapEx cycle that we have over the last decade. So you can see that as I alluded to earlier in the presentation, we had a significant expansion cycle, with most hotels that were under construction in the last years are now opening. So this chart shows you our historic expansion cycles and the consequential EBITDA growth following those cycles. So also after this cycle, we expect EBITDA growth during a period of stabilization of trading. And communicated earlier, stabilizing is expected within 3 years and at least GBP 25 million of EBITDA. Moving on to the next slide. We reported NAV per share of GBP 27.51 which is slightly up from last year and externally valued in December 2024. The valuations increased slightly and are based on a discounted cash flow approach. And the discount rates used in these dilutions remains largely unchanged from last year, which as Robert already alluded to in city center locations such as Amsterdam and London sit between 7.75% and 8.25%. These valuations also include art'otel Hoxton for the first time, which has been measured at cost over the construction period. And as you can see here, net debt stayed relatively stable and that's even considering the substantial expansion CapEx that we had in the period. Going to the next slide, zooming into our debt position. We have around GBP 890 million of gross debt. Of this, around GBP 200 million relates to the hotels that we are opening -- that we have opened and are opening in this year. GBP 590 million of this debt is sterling denominated and EUR 300 million -- and [ EUR 300 denominated ]. And we had an average interest rate of 3.8% and nearly all of the debt at a fixed rate. So if you look at the net debt, we have around GBP 750 million of net debt. And if you translate that to a loan to value with the assets at fair value, we get to a conservative 33.1% loan to value. As Greg already mentioned in the year, we have successfully refinanced EUR 160 million facility, which was due to mature in 2026. We have already [indiscernible] this facility back in 2022 against lower interest rates and we have now also pushed the maturity out to 2031. Again, this loan will have a fixed rate of interest. The bar chart in the middle shows a maturity profile of the remaining facilities. And for the upcoming GBP 200 million of refinance in 2026, we have already 3 hedged the interest until 2031, Again, those hedges would take an early 2022 at significantly lower interest rates compared to the current market and the other 100 million loan refinancing is helped together with our 49% partner and as such, the impact on earnings on the higher interest is shared with that partner. And as you can see in the maturity tables, maturing loans have a relatively low LTV, so we expect no issues and refinance in this term. We'll give the outlook for you, Greg?

Thank you, Daniel. So despite the recent macroeconomic and geopolitical uncertainties, we remain well positioned for future growth in 2025. Revenue and EBITDA is expected to grow, supported 5 newly opened hotels within the portfolio, including Rome, which is due to open next week. Q1 was a little soft, predominantly driven from the low domestic U.K. demand from [indiscernible]. However, future booking momentum improved in Q2, and we remain optimistic. The Board remains confident in delivering the results in line with market expectations for 2025 and beyond. Thank you. That concludes the presentation. We'll now move into Q&A.

A number of questions have come in already. [Operator Instructions] I'll start with sort of the forward-looking development pipeline, Greg. What regions are the company's priorities for expansion and why?

Yes. So we look at it in 2 ways. Usually, when we have a geographical presence. So obviously, London is an area of development forward, usually where we already have a management presence and scale. So for example, in London, Amsterdam, Germany, Croatia, are easy areas for us to grow. However, Italy is the new territory for us, it's the first time we've moved into a new territory like this. So usually where we have an asset, we would like to grow around it. So Italy is a target market as well as all of the other usual suspects around Italy such as, for example, Milan, et cetera, and Florence.

So key cities in Italy is what the focus is, most of this. There's a question here on occupancy, which I'll take. So occupancy rates increased to 74.5 percentage points in 2024. How does this compare to industry averages and what strategies do you have in place to sustain or improve occupancy ratio going forward. It's a good question. I think when we look at the history of our business, we've achieved higher occupancies, but you have to break it down in each market. So in our presentation in the appendix, we show you the like-for-like occupancy by region. And what you'll see is that the U.K. [indiscernible] London and Amsterdam are at very high occupancy levels already. So they're typically mid-80s. So if you take into account that [ Sunday ] night in our industries are very low, it means that we are pretty much full all the week, so there is a limited scope in the Dutch and U.K. regions to drive further occupancy. So our view is to try to maintain occupancy and start building rate a little bit as much as we can, so applying balance between the two. Where we see more room for occupancy growth, it is in the newly opened hotels. So when you look at our reported numbers, you can see that they are a bit softer, and that is really the impact of the newly opened hotels. So they need to mature and stabilize into growth in the respective marketplaces. And there's a little bit more room for growth in occupancy in Germany and in Croatia. Again, I have to do with investments that we've done and the maturing of the assets there. In terms of our business model, it is always quite balance occupancy and growth.

If I can ask you, Robert, in 2019. It's a long time ago, but pre-COVID, we reported an occupancy of near 81%. So as you can see in the occupancies reported, we still have some room for further growth.

Greg, one on sort of competition from Airbnb? How do you ensure that we as a business sort of differentiate ourselves and not from Airbnb? Or is it not competitive in your view?

Well, this is anything which delivers supply for a market is a competitor. Usually, where we've been competing against Airbnb, we actually managed to have a lot more augmented services. So people who actually traditionally using proper hotels do come to hotels, for example. We differentiate ourselves versus other hotels, which is the main competitive factor here for PPHE is we drive leisure. We have swimming pools. We have spas. We have destination restaurants and bars. So we offer a great deal of augmented services, but a predominant to set back our company versus the likes of a Airbnb, our hotels are located in amazing locations. So usually, people like to come and stay in our properties versus directly on the South Bank on the [indiscernible] or in the center of Amsterdam, so you don't actually have any burden of commuting in and out of an Airbnb for example.

In addition to this, one of our core markets is at Amsterdam where the local city Council has really been reducing the number of Airbnb properties within the city center so it is no longer allowed and even on the outage -- outskirts it is completely controlled and regulated with a number of times a year that we can rent out Airbnb so as a new market entrant, their presence in -- certainly in Amsterdam has really been reduced heavily. Daniel, over to you for a question on New York. So the question is, if you can expand a bit more what the company's vision is for the site and what we envision using our balance sheet or equity to invest in. I know it's always heavily premature, but if you could give the historic context.

Yes. just to start with the historic context, we won a site in New York back in 2019, together with a partner. The strategic idea was to grow the art'otel brand in key cities like New York, London, Paris, Berlin, Amsterdam, so that was the original idea. We bought our partner out in January 2020. And unfortunately, two months later, we were severely affected by COVID. That went for the New York. The New York market, specifically 2 things. One is that development costs substantially increased since then. And secondly, the legislation around unions changed significantly. So it completely changed our business base, building something in New York. At this moment, I think it's unlikely that we will build a hotel in New York. So we are sitting on the land side, which last year, we prepared to make it development ready. We demolished the existing structures on the property. We're looking to extend the footprint to buy more [indiscernible] next year and then we are looking to dispose. Disposal can be in a one-off sale, but it can also be to develop it with a partner with a view to exit in that way. We are not in a hurry. So if the price that we're getting are not right, we will likely keep the land in our books for a longer period of time.

Which is not uncommon in our [indiscernible].

Absolutely.

We're in fact here speaking from our Hoxton hotel. This is a property we bought in -- or a piece of land we bought in 2008 and we actually, over that time, assess the market, looked at what the market needed in terms of property, where we saw best position our shareholder funds to develop the asset. So therefore, it's not uncommon for us to set on a land bank until we know it's the best time to strike. And it's a superb location in New York. So we'll keep -- its value -- the valuable site for us and someone else.

Absolutely.

Excellent. There's a question here, which is about very practical nature, whether we offer a loyalty scheme for shareholders. Currently we don't have that in place and we don't really do that in the short term because of the complexity of managing such a database, understanding who's a shareholder who is not. Obviously that change by the minute. So we don't have shareholder hotel benefits at this point in time. That brings us to the end of the presentation because I think there are no further questions that have been added to the Q&A.

Perfect. I'd just like to thank you for answering those questions from investors. Of course, the company can review the questions for today. And we will publish out the response on the Investor Meet Company platform. Just before redirecting investors, I'd like to feedback because it's particularly important to the company. Greg, I'll ask you for a few closing comments.

Yes, I'll just like to say thank you for tuning in this morning. Thank you for your time. I really just want to say we are very excited about the opportunities ahead, and we look forward to delivering continued value to all of our shareholders, especially now our GBP 300 million pipeline is nearing completion. So with that in mind, thank you very much, and I appreciate you tuning in.

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