Pphe Hotel Group (LSE:PPH) — Interim Results

0:01 Good morning, and welcome to the PPHE HOTEL GROUP LIMITED interim results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the q and a tab. Sit check-in the right hand corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question received during the meeting itself. However, company will review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll. And I'd now like to hand you over to Daniel Koss,

0:31 CFO. Good morning to you. Thank you very much, Alessandro. Welcome this morning. Good morning. I'm Daniel Koss, CFO of PPH HOTEL. Next to me is Robert Minken, executive vice president corporate affairs. We wanna take you through a few slides today. We'll start with a short recap of PPHE and its strategy. Rob will then take over and discuss a few operational and strategic highlights of the six months. I will then take over and discuss the results and the current trading and the outlook and then followed by a session for questions and answers. So if we can go to the slide five, Alexandra.

1:22 One back. Sorry. There we go. Yeah. So we're a hospitality real estate group, a little bit different than others in a way that we focus on developing, owning, and operating the assets, and we have our own management platform to do so. There's a few things that set us apart in the industry. One is that our founders are still heavily involved in the company and management, but also as shareholders, they have 43% of public shares, which makes them supersterovian of capital. So their intergenerational DNA is fully embraced by our executive team, which have an average tenure of over ten years.

2:09 Our business model will give investors exposure and returns across the entire value chain of hospitality real estate. And in this business model, we typically grow without diluting shareholders with a very strong capital recycling approach. And different to many hospitality REITs and real estate owners, we have our own platform to do so, which is an opportunity on its own. And our focus is always on driving equity value. We do that by developing, redeveloping, and repositioning assets. And this approach gives us the opportunity to focus drive value increases compared to the acquisition price. And we have a very disciplined capital approach in in doing this.

2:53 And this strategy has provided us quite strong track record showing the strong shareholder returns even after a two year COVID period. So real estate really sits at the heart of our strategy. Being a fully integrated developer, owner, and operator, we like to have full control over every aspect of the value chain, and we have a very strong preference for assets within development potential. Our portfolio is quite diversified in two distinct segments. One is the key city center hotels, and the second is the leisure and outdoor segment, which is focusing predominantly on Europe, which is the largest world's largest growth market. We have a unique approach to our capital structure, which all our growth since IPO have been self funded, and we do that by so called capital recycling.

3:48 We have non dilutive shareholders of PPHE. So we do that by raising capital on the asset basis rather than on the shareholder basis. So we raise debt on the assets, but we also raise equity on the assets by partnering with other shareholders. And what's special about the group is that we have a fully scalable management platform that has an exclusive relationship with Retisnell Telegroup. And this management platform is managing our own real estate, but it also manages the estate of our partners and of third party asset owners. This platform has long term management agreements, which typically provide a fee based income, which had an upside, so which is based on revenues and have an upside based on the profit of hotels.

4:38 So this circle really summarized in a nutshell how our value creation works. We try to find land sites, office blocks, tiger hotels. We develop and redevelop these. We rent them. We operate them ourselves, and typically that will give us value gains that we tend to take out and recycle back into the business to do this again. Robert, over to you for the strategic update. Thank you. We we finished 2021 with Omnicon, which obviously led to slowdown in base bookings and in some of our operating markets with the lockdowns, which means that when we started the year, it was very slow. So The UK was actually the first market to start gaining momentum from the middle of January with The UK and Netherlands starting to reopen and drop the the measures from March onwards.

5:34 Croatia, we opened around Easter, most of the properties, which is what we normally do pre COVID. So that was the first time that we're able to do this. It's fair to say that we didn't see really any movement in in those markets from sort of May onwards. So q one was soft. Q two, on the other hand, was very, very strong across across The UK in particular, already hitting very solid performance numbers. And how how do we deliver this? First of all, we had a rate focused strategy. So we we we try to really generate as much revenue as possible by by driving the the rate of the rooms and the products. The teams delivering the daily service to our customers, we've been building up and rebuilding already in the course of '21, but continue to do so for 2022.

6:25 And we benefited from some of these strategic initiatives that we initiated in in '20, in '21, and even even before COVID, such as the insourcing of housekeeping. So we have our own housekeeping company in the London market, which gives us a niche and an edge over our peers because we have more flexibility in allocating the the team members across the properties. We've also opened our own sort of career center. So we have a walk in hospitality career center in Central London near the adjacent to the Victoria Hotel where everyone can just walk in and understand and talk to us about job opportunities in the London market space. In The Netherlands and in Croatia, we provide housing to team members that would join us from other countries.

7:11 So we've opened up our sort of international network to really cope with the the labor pressures that are currently present in the market. I have to conclude that we are in a much better place now than than where we were at the beginning of the year. We are now shifting our efforts from recruitment to training, upscaling, and productivity for the teams. We've also been joining some of the ESG initiatives, including our partnership with zero carbon forum forum. They will help us to achieve net zero savings by no later than 2050. So it's a first for our business to partner with zero carbon for we've also committed investments in making hotels more energy efficient. That is both on the the sort of the soft side where we engage our teams, our operating teams for them to start making a change in saving energy.

8:03 And at the same time, we are investing in new heating and cooling systems and solar panels, taking it off the the gas supply in the next few months to two years. So that applies to Victoria London, but also our project in Rome And, also, the the new architecture that we're developing in Oxford, London is going to be off gas with the exception of some kitchen elements. We've also started to reengage, obviously, and and recommence some shareholder returns. So we reinstated over we we actually started a share buyback program. At the end of June, we started buying back some of the shares in the market. Let's say, a value of up to £1,700,000, and we declared a dividend this morning of 3p per share, which equates to a value of 1,300,000,000.

8:54 We have some strategic progress on the corporate side when it comes to our commercial brands that we utilize on the assets. So we'll touch on that on the the next slide because it's quite extensive, but it relates to the brands and partnership that we've enjoyed for for a lot of twenty years. Pipeline project progress is notable. So we have two projects launching this year. The the flagship is the the Breoni development, which was a fifth a five star hotel in the seventies. It was a a two star operation when we closed it down two and a half years ago. We spent £30,000,000 and transformed it into a premium luxury hotel. So back to its five star rating, and we launched this a collection hotel.

9:40 The second investment is in a rental site,

9:43 which is the third campsite that we've invested in as a business. We have a a number of eight with eight campsites in Croatia. This is the third investment for us, and we upgraded the entire sort of product, repositioned it, and have introduced 75 sort of luxury mobile homes or lodges, all sea facing in the in this location. We'll touch on the progress on the pipeline shortly. Moving on to sort of the Radisson agreement that we're to link to. For twenty years, we've enjoyed an exclusive license for the Park Plaza brand in Europe, Middle East, and Africa. Our objective was to leave that intact because we've seen the benefits of this arrangement.

10:29 So that is still enforced. It's a perpetual exclusive license to us to develop and operate Paracasa in EMEA. But over and above, the new agreements give us a few benefits. So we've entered into agreements with Radisson on ART hotel, which is a brand that we own, but Radisson will take a development interest. So we don't allow franchising, but Radisson will be allowed to develop and manage and lead smart hotels in markets around the world, which for us will lead to greater brand awareness, a greater footprint for the brand, more customer awareness, and ultimately, the fee based income for the group. So there is a fee mechanism in place of any artist or the brands who will will manage the lease, we will have a share of fees collected.

11:22 In addition, we've also secured favorable commercial terms to start using some of the other brands in the in the portfolio. So we had the first hotel where we applied this in the form of Brioge in Croatia, which was originally supposed to open as an independent hotel. We felt it was appropriate to look for some greater awareness, recognition, brand equity, and enter into a an agreement to partner with Radisson Collection, which is the best brand in the Radisson's stable. So Breoni sits alongside some of Radisson's most premium products. We are also interested in pursuing other opportunities currently in the future with potentially other rights and brands if and where we see it makes sense to do so.

12:10 On the the management side, this is a it's probably an under highlighted part of our our business from time to time. We are asset heavy asset holder, but all of our assets as well as those owned by third parties or co owned are also serviced by our internal team. So we have our our internal management company where we believe there is a lot of growth opportunity moving forward. And a good example is the development here in in London, which we're about to open. That hotel, when it opens, will be serviced by our management company, but it's not a hotel we own. It's third party owned. We have we don't have to scale up a team. We typically employ a hotel team that runs the day to day operations for all of the central and back of house functions are provided through the platform, including all the commercial benefits derived from the relationship, such as the reservation system, but also buying power, purchasing power with for FF and E, but also for OTAs and short agent commissions.

13:17 The pipeline update is as follows. So we completed this year. We also had a slight or a light refurbishment of the architect on Budapest. Phase one was completed over the course of summer, which all is the public areas and meeting spaces, and we created a wellness facility area. Phase two is planned for later this year where we will renovate all of the bedrooms. Bigger projects are the about to see development, which is at its final stages. The last two months, we've announced the signature artist, which is a core part of our architectural brand positioning. So we announced the signature artist, the interior designer, as well as the executive chef. This will be an amazing hotel when it opens and is a management agreement for us. Our biggest investment as a real estate owner is the.

14:09 We've reached the highest point of the building. And as a reminder, this is a 27 story building in the heart of Shoreditch, offering just up to 350 bedrooms as well as some extensive office space, various restaurants, bars, and wellness. We started sealing the building, so the cladding is now in place up until Floor 8 with the rest of the follow-up in the next few months to come. We have two longer term land site developments in London, one adjacent to Park Royal and one near Waterloo, adjacent to our Waterloo hotel. These are longer term projects. So we'll continue to refine the plans, go through planning in one of the the two instances the other has planning. So it's more of a longer term project for us. Zagreb is more imminent. So in Zagreb, we are converting an office into a hotel. This hotel will open in the first half of next year as a as a premium lifestyle hotel in the city center of Zagre.

15:09 Shortly followed by Rome, this is a hotel that we acquired in November last year, kept operating as an independent. We we closed it again in June. City center hotel that we we own in that market. From an ESG perspective, I touched on some of the investments we're making. We're committing £2,000,000 into Victoria London to take drastic action to change the energy, heating, and cooling systems in that hotel, taking in all gas as well. But we are equally committed to this in in Rome, in Hodgson, and we have additional projects on on the radar.

15:59 And there's more detail on here, which I'll leave with you to to review. That, I will talk through the sort of the performance, financial performance of the first six months. So on the financial performance, these six months have a very clear division in the first quarter and the second quarter. Obviously, I mean, I don't want to talk already, but the first quarter, we were pretty much shut. So in in Germany and The Netherlands and in Croatia, all our hotels were shut. The UK was open, but government advises work from home, stay at home, so a very slow business. And the second quarter really is where we saw the traction. Germany and The Netherlands needed a bit of time, so I would say around May onwards, they started to track up. The UK was much sooner because we never we never closed it. And that's also very visible in our results today.

16:54 So I'll start off with the key property KPIs.

16:57 We we've reported an asset per share of £21.88, which is slightly down from the year end. This is just purely because of the loss that we had in the first half or or really the first quarter. We do evaluations annual. So external valuations are done annually in December. So also this December, we will do an annual external valuation and update the NAV. Then looking at the earnings per share, cash flow per share, we reported what the first time positive since the start of COVID. We're also looking at our current trading, we have some more confidence to reinstate shareholder returns, starting with a 1,700,000 buyback and now complemented with a 1,300,000 dividend.

17:50 Three p dividend is quite modest still, but with the cash flow progressing, we hope that our dividend will also progress upwards again. If we look at the operating KPIs, we report the RevPAR of 68. If we compare that to '19, which is kind of the last normal year, we are at 7073% of '19. If I exclude q one, so just looking at q two stand alone, that is at 19% of '19. And what you'll see in the current trading, which we'll tap on later, is that we are currently at 19 level RevPAR wise. You do see that RevPAR is very strongly driven by room rates. So we reported room rates up 16% compared to 2019.

18:41 In in q two, they were up 18 compared to '19, and that's across all territories. We see that trend. So total revenue increased to a 130,000,000 in line with RevPAR, actually. If we look at the EBITDA, it's 17,000,000. If we divide that between the two quarters, it's 5,000,000 negative in the first quarter, and it's 22,000,000 positive in the second quarter.

19:36 So if we just translate the second quarter into EBITDA margins, we're looking at the margin of 27%, and that's versus a q two two thousand nineteen margin of 36%. So we're still about 9% behind the margins, and there's, I would say, two reasons for this. One is, obviously, The Netherlands and Germany only got traction in May, so there was still one and a half distort of months on those two territories. And secondly, it's the different demographic that we are dealing with currently in The UK. So in The UK, after Brexit, we can only recruit domestic, which we are. But we do see in the demographic a lot of younger people and a lot of people that are new to the industry in its entirety.

20:28 So productivity is really something we're focused on. And over the summer months, July and August, we already saw margins normalizing. And and. These are the biggest one in here. You'll see a debt service of £30,000,000, which is 26,000,000 ongoing debt service, and 4,000,000 is the catch up of COVID. So, basically, Just wanted to reiterate that 86% of our debt is fixed rate debt.

21:40 The other 14, the majority of that is the option development debt, which is variable rate until opening April 2026. But most of our debt is fixed rate. The average maturity of our debt still has five years to go, and we report a net bank debt leverage of 35%, slightly up from last year because of the development debt of auction, and auction is shown in cost in our in our books. So, obviously, the interest rates are increasing currently in the market, so we decided to already start forward hedging our interest rate exposure. So one forward starting we did is on the development debt, which in April 24 turns into a into a normal debt for six years.

22:34 So we swapped and fixed the interest rate on that loan for 1.5% swap rate. We also started in entering into four starting hedges for loans that will refinance in 2026. We started entering four hedges for five years following 2026, around 1.9% swap rate. So then on outlook, we had quite strong months in July and August, both months trading above 2019 same period. July was particularly strong in The UK with double digit RevPAR increases compared to '19.

23:19 And Croatia recorded a record season in in both July and and and August. These two months, I have to say, are typically leisure driven, which is a segment that we feel has been fully recovered since COVID. So the forward booking page also looks solid. We see a growing number of forward bookings and requests for MLE space, but September is a very important month for us to see how far that's back. So September is usually the month that leisure transitions into corporate. So the first weeks of September will be quite important for us to see how far corporate bookings are back. Then on the industry wide inflationary pressures, they will definitely not pass us.

24:09 We are particularly concerned about the energy prices that we're seeing currently, which we feel will lead into margin headwinds into 2023. It's quite difficult at this point to give an exact assessment of the impact as but we are still working on quite substantial initiatives. So CapEx initiatives, but also there's low hanging fruit in terms of saving initiatives So we would like to wait until the end of q three in October, but we will update the market again, and that's where we can assess the impact a bit more.

24:57 We're looking currently this year, we're fully hedged. So this year and we already hedged last year. So this year, we won't feel the increase as much. But next year, the current prices are already trading around 500% of the assets that we have in place this year. We did saw our margins increase with normalized levels again.

25:47 That was it for the presentation. I'm happy to take take questions. I'll I'll go through the questions that are submitted in in the on-site. Let me start first with what happened to the New York development. The New York development is still on pause. Just to just to reiterate, we bought a site in New York actually a few months before the pandemic. We intended to build a a hotel there. The pandemic caused the Europe the New York market With the so with the market recovering as such a discount to EPURA valuation, What do you see as the catalyst to narrowing the gap?

27:11 We've consistently traded below our EPRA NAV. And and, you know, one of the reasons that we started providing this to to the market back in 2018 was to show that our business model is is very much real estate and and operations. It's not purely operations. What closes the gap? I mean, that's probably market dynamics on which we're not in control. We feel that the the gap is too big. We feel that the that that we're giving to the market is quite conservative. It's a that based on going concern. It's not an ad of selling assets. So we feel it's a a fair reflection of of what our assets are worth. How would the gap will close?

27:58 I I don't know. That's down to market dynamics. So what balance do you see between rate and occupancy growth and initiatives to drive towards the occupancy of circa 70% pre pandemic? Strategically, currently, we are highly focused on rate driven because there is a lot of demand out there. So, strategically, we are we have a rate driven strategy right now. The reason also for that is that gives us kind of a cushion for the inflationary pressures that we experience currently. Obviously, year. I will say they are stabilizing, but still on productivity, like I said before, we're still we still need we still have some work to do. So driving race versus occupancy enables us to get the same revenues in.

29:18 I don't know. It depends really on the market. Rescor wise, we we we aim to be back at 19, predominantly driven by room rates currently. Thank you for that, Daniel and Robert. I think you've addressed those questions from investors. And, of course, the company will review all for all questions submitted today, and we'll publish those responses on the investor me company platform. But just before redirecting, investors provide you with their feedback, which I know is particularly important to you both. Daniel, could I just ask you for a few closing comments? Yeah. Thank you very much for your attendance today. Exciting times ahead, I would say. We all don't know what's coming at us, but it is definitely exciting times. And I really look forward to seeing you at the end. Thank you very much.

30:07 Thank you. And you'll Robert, thanks once again for updating investors today. Could I please ask investors not to close the session? As you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of PPHE HOTEL GROUP LIMITED, we'd like to thank you for attending today's presentation, and good morning to you all.