Mind the gap

PPHE Hotel Group 1 May 2019 Outlook
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PPHE Hotel Group

Mind the gap

Company re-appraisal

Travel & leisure

1 May 2019

Price

1,690p

Market cap

£715m

Net bank debt (£m) at December 2018

479.6

Shares in issue

42.3m

Free float

50.4%

Code

PPH

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.4

(4.0)

45.3

Rel (local)

0.2

(9.7)

47.4

52-week high/low

1,800p

1,155p

Business description

As an international real estate hospitality company, PPHE Hotel Group is principally an integrated owner and operator of upscale and lifestyle hotels in gateway cities and regional centres as well as hotels, resorts and campsites in select resort destinations.

Next event

Interim results

September 2019

Analysts

Richard Finch

+44 (0)20 3077 5700

Milosz Papst

+44 (0)20 3077 5700

PPHE Hotel Group is a research client of Edison Investment Research Limited

In keeping with its strong record of asset development, PPHE is actively repositioning itself at the corporate level. The introduction of EPRA reporting highlights the company’s success from a property perspective (EPRA NAV per share of £24.57 at December 2018), while share liquidity and broadening of the investor base should benefit from the recent secondary placing and move to a Premium Listing. Operationally, progress is robust with resilient trading (8% gain in Q1 like-for-like RevPAR and revenue), continued material investment payoff and abundant asset-acquisition opportunities. We believe PPHE's shares offer an attractive way to access hotel property markets, particularly in London and the Netherlands, both in terms of capitalisation yield and a SOTP valuation.

Year end

Revenue (£m)

EBITDA
(£m)

Adj. EPS*
(p)

EPS**
(p)

DPS
(p)

EV/EBITDA
(x)

12/17

325.1

107.3

104.0

64.2

24.0

10.4

12/18

341.5

113.2

115.0

77.5

35.0

10.5

12/19e

350.0

118.0

114.0

74.5

40.0

10.3

12/20e

365.0

122.5

122.0

83.5

45.0

10.0

Note: *EPRA (IFRS depreciation charge replaced by maintenance capex charge of 4% of revenue), excluding exceptional items. **Normalised, excluding amortisation of acquired intangibles and exceptional items.

Favourable newsflow

PPHE has accompanied news of a ‘strong’ Q119 and a confident statement with confirmation of a £240m committed investment programme, including a joint venture for art’otel to enter the lucrative New York boutique market. In turn, the sale by three major shareholders of a total 22% holding via a placing at 1,600p should provide the free float required to qualify for inclusion in the FTSE UK series of indices. Further good news is on the cards as financial flexibility offers ample scope for value accretive expansion (18% CAGR in EPRA NAV since 2010) and management has a proven record on development and reluctance to pay up.

Positive forecasts

Our 2019 forecast is maintained in view of this good start to the year, sensible precautions about Brexit and accelerating payoff from significant investment, notably at Riverbank, Victoria Amsterdam and Croatia glamping. We expect more of the same next year as current projects come on stream. The likely positive joker in the pack is expansion.

Valuation: Narrowing the discount

EPRA reporting should enhance recognition of PPHE’s investment case by highlighting substantial hidden reserves. EPRA NAV per share of £24.57 at December 2018 means an excess of c £700m over book value. Likely investment should accentuate this materially, given the strong development record. According to our estimates the share price implies a capitalisation yield on PPHE's properties of 7%, compared with c 5% weighted average prime yield in the company’s markets. Applying a 20% discount to NAV (as typically traded now by US Hotel REITs) to our SOTP valuation gives £23.18 as PPHE’s value per share.

Investment summary

Company description: Developer, owner and operator of hotels

As an international real estate hospitality company, PPHE is principally a developer, owner and operator of upscale and lifestyle hotels in gateway cities and regional centres as well as hotels, resorts and campsites in select resort destinations. Its portfolio comprises 28 hotels (c 7,300 rooms) under the brands Park Plaza Hotels (exclusive partnership with Radisson Hotel Group in EMEA) and art’otel (owned). Its first premium boutique hotel Holmes (previously Park Plaza Sherlock Holmes) opens in May. Its subsidiary Arena Hospitality also operates nine hotels and resorts (c 1,400 rooms) and eight campsites (c 6,000 pitches and mobile homes) in Croatia. The openings pipeline (c 700 rooms by 2023) includes an owned art’otel at Hoxton, London, art’otel management contracts at other high-profile regeneration areas, Battersea Power Station, London and Hudson Yards, New York (part owned) and an owned unbranded hotel in Belgrade (subject to completion of transaction). PPHE transferred last year to a Premium Listing on the London Stock Exchange; it floated on AIM in 2007, moving to the Official List in 2011.

Valuation

According to our estimates, the current share price implies a capitalisation yield on PPHE properties of 7.0% (after adjusting for the value of Hoxton project and PPHE's hotel management business). This compares with a weighted average prime yield in the company’s markets of c 5%. Since the properties are predominantly in prime locations and well invested, we believe this suggests the market is not fully discounting the actual value of the portfolio. It is instructive to examine a sum-of-the-parts valuation, which includes PPHE’s net property value estimate provided by independent valuation (currently at £24.57 per share) based on forecast earnings at the property level, as well as our valuation of the company’s Management and Central Services division. We understand that US Hotel REITs may be currently traded at a discount to NAV of up to 20%. By applying this discount, we arrive at PPHE’s value per share of £23.18.

Sensitivities

Cyclical business and heavily dependent on the global economy.

External events such as terrorism, mitigated by recovery potential and guest mix.

Influence of controlling shareholders, albeit recently lowered. Related-party transactions, mitigated by strict governance, with a record of success.

Largely fixed cost base, tempered by effective yield management and implementation of as flexible a business model as possible.

Financing risk, mitigated by loan-to-value policy/banks’ support and successful refinancing.

Foreign exchange exposure.

Dependence on brand perception.

Reliance on relationship with Radisson Hotel Group but termination very unlikely.

Tightening labour markets partly mitigated by focus on award-winning learning and development initiatives, apprenticeships and in-sourcing.

Financials

Our estimated 2019 net debt of £508m is well within long-term bank facilities of about £700m, which mature substantially in 2026–28. With regard to expansion, PPHE has a well-established policy and track record of borrowing within a 65% loan-to-value requirement of its banks. Management is confident it can leverage on its assets for future development projects.

The company seeks to reduce the seasonality of its business by optimising its guest mix (particularly business against leisure) and its impact on profit by securing as flexible a cost base as possible (seasonal employees in Croatia may be employed in year-round operations in Germany and Hungary). It also enjoys substantial recurrent revenue through agreements with business travel agencies and large corporates for discounted room rates.

Company description: Developer, owner and operator of hotels

Gateway focus

PPHE has developed a collection of popular (typical Booking.com guest score of 8.5 out of 10), full-service, four-star, deluxe and boutique hotels with a good geographic spread and guest mix (c 50% business customers). With a focus on European cities (gateway and regional), there is particular representation in the important lodging markets of London, Amsterdam and Berlin, where the hotels are predominantly owned and operated under the Park Plaza brand. The repositioning of Riverbank close to existing company properties, headed by flagship Westminster Bridge, one of Europe’s leading conference hotels, enhances a unique ability to offer over 1,000 rooms in one area for events in central London and most advantageously on the vibrant South Bank. In turn, in Amsterdam its landmark Victoria has newly completed transformative investment. Consolidation of resort activities (hotels, self-catering apartment complexes and campsites) in Croatia in 2017 has brought material exposure to a tourism market with strong fundamentals as well as reshaping in terms of business and seasonality.

Exhibit 1: Portfolio (wholly owned and Park Plaza unless stated otherwise)

UK

Booking.com guest rating scores

Rooms

London:

(out of 10)

Westminster Bridge*

8.7

1,019

Riverbank

8.6

555

Plaza on the River

8.7

90

Waterloo (199-year finance lease)

8.7

494

Victoria

8.6

299

Holmes (unbranded premium boutique) (set to relaunch in May 2019)

8.3

118

Park Royal

8.7

212

County Hall (managed; 11% owned)

8.4

399

Total

3,186

Leeds

8.3

187

Nottingham

8.5

178

Cardiff (franchised)

8.8

129

Total

3,681

Netherlands

Amsterdam:

Victoria

8.5

298

art’otel

8.9

107

Vondelpark (set to relaunch following investment in H119)

7.9

102

Airport

7.9

342

Total

849

Utrecht (set to relaunch following investment in H119)

7.8

120

Eindhoven

8.5

104

Total

1,073

Germany and Hungary (52% owned)

Berlin:

Wallstreet Mitte (operating lease)

8.7

167

art’otel kudamm

8.2

152

art’otel mitte (joint venture)

8.9

109

Kudamm (joint venture)

8.3

133

Total

561

Nuremberg

8.9

177

Cologne art’otel

8.5

218

Budapest art’otel (operating lease)

8.8

165

Trier (franchised)

8.9

150

Total

1,271

Croatia (52% owned)

Istria (Pula and Medulin):

13 hotels and self-catering apartment complexes of which four Park Plaza (1,368 rooms; average Booking.com score 8.8)

2,775

Total

8,800

Croatia (52% owned)

Pitches and mobile homes

Istria (Pula and Medulin):

Eight campsites including Arena One 99 Glamping (199 tents)

5,903

Source: PPHE Hotel Group. Note: *Assuming continued control over units sold under 999 year leases.

Flexible model

The breadth of ownership interests and contractual arrangements in PPHE’s hotels allows the company to maximise opportunities from the varied markets in which it operates and may enter. As shown in Exhibit 1, ownership (including long-term finance leases) accounts for about 90% of room stock and almost all UK and Netherlands operations. It also applies to the company’s largest current development project, art’otel london hoxton. Although it is capital intensive, ownership offers scope for asset appreciation, especially in key gateway cities in Europe, and management has a strong record in real estate development and a self-professed entrepreneurial spirit. Operating leases (15 to 25 years) cover only two properties in Germany and Hungary (art’otel budapest was recently renewed for 20 years), while the sole management contract (County Hall, London) runs until 2033. Franchise arrangements account for barely 3% of overall room stock (two hotels); revenue comes from brand royalty or licensing fees (c 3.5% of hotel revenues), one-off fees on opening under the company’s brands and ancillary services.

Strong branding

Apart from several Croatian resort properties that use the locally known Arena brand, all hotels (except for the newly-repositioned Holmes) are branded Park Plaza (c 70% of rooms) or art’otel. While distinct in terms of target customers and property size (the former targets the business as well as leisure market and favours larger properties, ie typically 200+ rooms), both brands address the growing ‘affordable luxury’ segment (high quality at attractive rates). Outside Europe, the Middle East and Africa, where the company holds an exclusive right to use the brand in perpetuity under its agreement with Radisson Hotel Group, there are 18 Park Plaza properties (2,100 rooms) in operation and under development in Asia Pacific.

art’otel is an established ‘lifestyle’ brand, targeting those with an interest in art and culture by aspiring to be represented at key cultural hot-spots. In keeping with a new social environment and desire for differentiation, such ‘lifestyle’ hotels are increasingly seen as an attractive and strategic market by most hotel groups. For example, AccorHotels has delivered on its 2016 optimism that the segment may double within five years by developing the most comprehensive branded portfolio including 10% of global pipeline. At art’otel, contemporary architectural styling is married with art-inspired interiors (each property is dedicated to a particular artist, eg Warhol at berlin kudamm). Amsterdam, only the second development since PPHE’s acquisition of the brand in 2007, opened in 2013 to wide acclaim, with sites in London (Hoxton and Battersea Power Station) and New York due to open in 2022/23. While ownership of the brand is subject to a perpetual licence in favour of the brand founder elsewhere in Europe (France, Germany, Italy, Spain, Austria and Switzerland), there is reassurance that any such hotel will be managed by the group.

Bumper distribution

Inclusion in the reservation and distribution systems of Radisson Hotel Group, one of the largest hospitality and travel companies in the world, continues to be very positive for PPHE and is its largest hidden asset. As well as customer referrals, it provides reliance on a far larger and more sophisticated system than potentially in-house, ie in operation and under development over 220,000 rooms (1,400 hotels) in 115 countries and powerful brands, notably Radisson Blu. There should also be opportunity from Radisson Hotel Group’s recent acquisition by Jin Jiang International, a leading Chinese hospitality and travel group, such as direct access to the world’s largest and fast-growing outbound travel market and to Jin Jiang’s loyalty programme of 100m members. Together, Jin Jiang and Radisson Hotel Group form the second largest hotel group worldwide.

There is substantial benefit from access to the alliance’s market-leading loyalty programmes for guests, business travel agents, meeting planners and corporates. With over 20m members, guest loyalty programme Radisson Rewards (rebranded from Club Carlson in March 2018) was an important part of previous owner Carlson’s strategic commitment to help hotels increase revenue. PPHE confirms that increased loyalty apart, room rates from members tend to be higher than from non-members.

E-commerce initiatives, boosted by this relationship, include email marketing, online advertising and building affiliate networks. The company’s social media fan base, which is well ahead of that of other hotel brands of similar size, continues to be actively managed.

Development strategy

PPHE is notably upfront about intended value creation. Key to its business model is asset ownership as it affords control over investment, quality and realisation of value, driving growth in EPRA NAV per share by 18% CAGR since 2010, based on Savills valuation. Meanwhile since 2014 there has been double-digit CAGR gain in revenue and EBITDA. Typically land and buildings with significant potential are targeted for purchase, then redeveloped and in due course refinanced to release capital for future growth. A notable example of this was the 2017 sale and finance leaseback of Waterloo, that year’s largest London hotel opening, which endorsed PPHE as developer and asset owner via an effective c 100% return in just four years, complemented by agreeing a long-term finance lease on attractive terms (low yield of 3.5%). This followed acquisition in 2013 of a redundant office building (Hercules House), which was developed by 2017 into a 494 room hotel. The total cost of the project was £125m (c £250,000 per key). The sale and leaseback saw the freehold of the property sold for £161.5m and the agreement of a 199-year lease at an initial rent of £5.6m pa. Independent valuation in 2018 of the remaining leasehold interest at £84m thereby resulted in the creation of £120m value (c £3 per share).

PPHE’s confirmed three-year openings pipeline (Exhibit 2) is headed by a project of potentially even greater stature (budgeted cost £180m). In Hoxton, the west end of Shoreditch, the company looks to emulate its success in South Bank regeneration in an area of rapid economic growth, particularly in the tech, media, fashion and other creative industries. Indeed its ‘edgy’ reputation (‘a haunt for artists, oddballs, inventors of a new paradigm of urban experience,’ per Condé Nast Traveller) suggests a venue highly suited to the UK introduction of the lifestyle art’otel concept. Development starts now on an innovative cylindrical 27-storey (32,000 sqm) mixed-use scheme. Newly improved planning consent covers a hotel (343 rooms/suites), five floors of offices and five floors for mixed use including a gym, an art gallery and event space. Opening is due in 2023.

Exhibit 2: Confirmed openings pipeline

Opening

Rooms

Cost (£m)

Owned:

London art’otel hoxton*

2023

343

180

Belgrade 88 rooms

Late 2019**

88

5

Managed:

London art’otel battersea power station

2022

160

-

New York* art’otel

2022

98

13***

Source: PPHE Hotel Group. Notes: *Mixed-use scheme. **Subject to completion. ***Pre-construction commitment to joint venture.

PPHE also has a clear aim to use its reputed brands to become a leading hotel operator in upscale and lifestyle hotel segments. Hoxton should be complemented by planned art’otel openings at similarly high-profile urban redevelopments, namely Battersea Power Station in London (160 rooms) and Hudson Yards in New York (98 rooms). At the former, restoration of the Power Station building is expected to complete late next year. Of one million square feet of commercial space available in the building, over half has been let to Apple for their new London Campus and to No18, a business members club owned by IWG. The first phase of the wider redevelopment on the 42-acre site, Circus West Village, is open with independent restaurants, shops, bars and leisure facilities, while a new zone one London Underground station on the Northern Line will provide good transport links to the rest of the capital. The year 2022 should also see the opening of art’otel in West Chelsea on Manhattan’s West Side, next to Hudson Yards, the largest private real estate development in the US (over 18m square feet of commercial and residential space). As with Hoxton, the brand is in keeping with a district reputed for art, fashion and innovation and the scheme is mixed-use (55 residential condominiums).

In line with its model of broad contractual interests, in contrast to Hoxton, both art’otels will be management contracts with capital commitment by PPHE limited to $18m pre-construction joint venture costs in the case of Hudson Yards.

The proposed move into Serbia is in line with Arena’s longstanding ambition to develop in central and south-eastern Europe. While it is not a development project, 88 Rooms in Belgrade is attractive in terms of yield both as an already successful hotel (Booking.com guest score 9.1) and its potential in a growth market like that of Croatia.

However, this is only the confirmed openings pipeline. Further significant deals are to be expected as the company is explicit about its active search for new assets in both key cities and resorts; in 2018 alone, some 145 opportunities were identified. It is equally forthright about its reluctance to pay up, specifying that proposals were submitted for barely 10%. Consolidation in London and Amsterdam is targeted but deterred by intense competition and hence unreasonable prices, while interest is admitted in new locations such as Porto, Paris and Lisbon.

Financial flexibility is evident in c £150m at December 2018 designated by the company as excess cash to fund further growth. Also, management does not regard debt as a restriction to growth as long as it can be serviced and is secured judiciously against likely appreciating assets; it has a well-established policy and track record of borrowing within a 50% to 65% loan-to-value requirement of its banks, eg 2016 refinancing of the bulk of its owned estate in London and the Netherlands. Impressively, growth since its IPO in 2007 has been funded without raising equity.

Development is also substantially by investment in existing assets. In addition to renovations there is a strong confirmed pipeline of projects that PPHE calls repositionings (Exhibit 3), namely major investment programmes involving reconfiguration and aiming for a step-change in performance:

Exhibit 3: Confirmed pipeline of repositionings

Completion

Rooms

Cost (£m)

London Holmes

May 2019

118

9

Amsterdam Park Plaza Vondelpark

H219

102

8

Utrecht Park Plaza

H219

120

5

Berlin art’otel kudamm

2020

152

5

Croatia:

Kažela Campsite

Summer 2019

1,412 pitches*

14

Verudela Beach Resort

2020

166

8

Brioni

2022**

228

22

Source: PPHE Hotel Group. Notes: *Addition of 164 mobile homes. **Planned closure in late 2020 and 2021.

2018 was notable for completion of more sizeable multi-year repositionings at Riverbank (£54m cost, including an additional 185 rooms) and Victoria Amsterdam (£20m) with targeted EBITDA growth of 40% and 25% respectively. Less expensive (£8m) but potentially with even sharper returns (aiming for EBITDA to more than double), an all-glamping offer, Arena One 99, was introduced to the former Pomer campsite in Croatia.

Management

PPHE’s senior management (see below) is based at the company’s head offices in Amsterdam and London and backed by highly experienced local management.

Boris Ivesha has been president and CEO since 1991. He has over 50 years’ experience in the hotel industry, including at landmark properties Royal Horseguards Hotel, London and Carlton Hotel, Tel Aviv, where he was respectively general manager and managing director. In 1994 he brought the Park Plaza Hotels & Resorts brand to the company in partnership with chairman Eli Papouchado and the Red Sea Group, an international real estate business.

CFO Daniel Kos joined PPHE in 2011 after senior positions within audit and finance, including 11 years at Mazars, the international accountancy and advisory firm. He became CFO in 2018.

Eli Papouchado has been chairman since the company’s formation in 1989 and is founder and major shareholder of Red Sea Group. Regarded as a pioneer in Israel’s hotel industry, he has been actively involved in the development, financing, acquisition and management of PPHE’s leading hotels and the development of shopping malls and large residential projects in the US, Eastern Europe and the Middle East.

Sensitivities

The hotel industry is highly cyclical and dependent on the global economy. PPHE competes for a share of disposable consumer income, which may be eroded by economic downturn.

Geopolitical events and natural disasters can have a significant impact on profitability. The company maintains a diverse guest nationality mix to minimise this risk. Consolidation of Croatian interests has brought a reshaping of business and seasonality.

Although the chairman and chief executive have material influence over the company (c 43% holding), a strategic goal of broadening the investor base has been effected by the move to a stock exchange Premium Listing and enhanced free float of over 50%, which qualifies for inclusion in the FTSE UK series of indices.

PPHE is significantly reliant on its relationship with Radisson Hotel Group. However, termination of its territorial licence by Radisson Hotel Group is possible only in very limited circumstances and in any case the relationship remains strong.

Much of the company’s cost base is fixed. This risk can be mitigated by effective yield management and the development of as flexible a business model as possible.

An active development programme may tie up balance sheet capacity and lead to asset write-downs if they fail. Growth depends on the availability of suitable sites and access to funding.

There is exchange rate exposure. There is also a debt financing and interest rate risk. A guaranteed yield to owners of units at Westminster Bridge may not be covered by net income from those units, although its proven trading strength suggests this is unlikely.

Tightening labour markets partly mitigated by focus on award-winning learning and development initiatives, apprenticeships and in-sourcing.

Valuation: UK/Netherlands portfolio at attractive yield

PPHE’s current share price is markedly below its last reported EPRA NAV per share of £24.57. We have thus analysed whether this discount to NAV is justified by the location of PPHE's assets and the fact that the company is not a pure-play property investor as it manages hotels and operates some under operating lease agreements. From a valuation perspective, we believe it is instructive to examine the average capitalisation yield on PPHE’s property portfolio implied by the current share price. This is an important parameter for investors as it measures the attractiveness of PPHE’s current market valuation from the perspective of hotel earnings afforded by the company. Our first step is to estimate hotel net operating income (NOI), based on reported 2018 group EBITDAR excluding earnings from the management and central services division. We adjust as follows:

add back the earnings lost due to renovations and subsequent ramp up in 2018 (eg with regard to Sherlock Holmes and several other properties in the UK, Netherlands and Germany);

subtract earnings attributable to the 48% minority stake in Arena;

eliminate EBITDA of hotels under operating leases (although we estimate not material) but note the minor benefit from termination of the loss-making lease for art’otel dresden from July 2018;

apply a furniture, fixture and equipment (FF&E) reserve in line with industry standards (and PPHE’s assumptions) at 4% of hotel revenues; and

subtract financial lease expenses (the company leases certain land and properties in London under agreements longer than 100 years) as well as expenses related to the income units in Westminster Bridge, arriving at adjusted NOI of c £66m (see Exhibit 4).

Exhibit 4: PPHE’s FY18 NOI calculations (£m unless otherwise stated)

EBITDAR by region 2018

 

UK

66.8

Netherlands

14.2

Germany and Hungary

9.0

Croatia

19.7

Group EBITDAR 2018 (ex management and central services)

109.7

Adjustments for:

 

Refurbishments / ramp up

2.2

Assets under operating lease

0.1

Arena minorities

(14.1)

Adjusted 2018 group EBITDAR

97.9

FF&E reserve

(10.6)

as % of total adjusted 2018 group revenue

4%

Financial lease expenses

(8.7)

Expenses related to units in Westminster Bridge

(12.3)

Share in result of joint ventures

0.1

Net operating income

66.4

Source: Edison Investment Research, PPHE accounts

Our next step is to divide NOI by the implied value of PPHE’s hotel properties based on the current share price. To arrive at the latter, we take the market cap and add the last-reported net debt figure (at December 2018) after excluding the proportion attributable to Arena minority shareholders. We have also excluded PPHE’s non-real estate assets and liabilities (net working capital items in particular) and the value of the Hoxton project (£82.5m according to the recent valuation by Savills).

To conclude, we have estimated the value of PPHE’s hotel management business to isolate the value of its hotel properties. These activities are represented by the management and central services division, which generated £42m revenue (before eliminations) and £10.3m EBITDA in 2018. We have valued the business using a DCF method based on a WACC (calculated separately for each year) of 7.3–7.8% and a terminal growth rate of 1.5%, arriving at a fair value of £161m. We have allowed for art’otel hoxton but not for the two new art’otel management contracts. This clearly illustrates that the management business represents incremental value on top of the NAV of PPHE’s properties.

As a sense check to our DCF valuation of management and central services, we have conducted a comparative valuation based on global peers with relatively asset-light models, including Wyndham Hotels & Resorts, IHG, AccorHotels, Marriott and Hilton. Our estimated average EV/EBITDAR ratio adjusted for capitalised operating lease liabilities for this peer group is 14.4x for 2018 (used in the absence of available EBITDAR consensus). When applying this multiple to PPHE’s management and central services division’s 2018 EBITDA (adjusted for refurbishments and asset ramp up), we arrive at a fair value of £152m. We acknowledge that our selected peers possess a much stronger brand and market presence than PPHE. However, as our DCF-derived fair value also captures growth prospects associated with the new management contracts, we include the average for both methods in our yield calculations at £156.2m (360p per PPHE share, see Exhibit 5).

Exhibit 5: PPHE’s implied real estate value calculations (£m unless otherwise stated)

Implied real estate value calculations

 

PPHE share price (p)

1,690

Diluted number of shares (m)

42.86

Market cap

724.3

Net debt (adjusted for minorities) at December 2018

472.1

Adjustments for:

 

Hoxton development project

(82.5)

Net non-real estate (assets)/liabilities

1.4

Management and central services valuation

(156.2)

Implied real estate value

951.7

Implied capitalisation yield (%)

7.0

Source: Edison Investment Research, PPHE accounts

Therefore we obtain an implied capitalisation yield of 7.0%. We estimate the prevailing weighted average prime capitalisation yield in the property markets where the company operates is c 5% and thus visibly below PPHE’s implied capitalisation yield, suggesting the market is not fully reflecting the value of the company’s properties.

Given the lack of European listed hotel REITs, we also compare PPHE’s implied yield to the average levels for US hotel REITs focused on upscale and upper scale segments. Our calculations (summarised in Exhibit 6) indicate these peers trade at an average implied capitalisation yield of 8.0%, which is slightly higher than our estimate for PPHE.

Exhibit 6: Implied capitalisation yield for selected US hotel REITs

 

Share price
(US$)

NOI *
(US$000s)

Implied real estate value** (US$000s)

Implied
cap yield

Ashford Hospitality Trust

4.9

408,811

4,728,686

8.6%

Apple Hospitality REIT

16.6

423,609

5,112,279

8.3%

Condor Hospitality Trust

9.1

25,036

248,284

10.1%

Chesapeake Lodging Trust

28.4

166,705

2,422,534

6.9%

DiamondRock Hospitality Company

10.9

245,490

3,245,380

7.6%

Hersha Hospitality Trust

17.3

136,789

2,119,715

6.5%

Summit Hotel Properties

11.6

183,250

2,364,725

7.7%

RLJ Lodging Trust

17.9

487,960

5,399,332

9.0%

Sunstone Hotel Investors

14.6

293,174

3,880,148

7.6%

Average

-

-

-

8.0%

Source: Company filings, Edison Investment Research. Note: *Estimated based on FY18 hotel EBITDA and an FF&E reserved calculated as 4% of FY18 hotel revenue. **Based on market capitalisation at 4 April 2019 and net debt, preferred equity and net working capital at December 2018.

However, we note there are considerable differences in market yields between London (about two-thirds of PPHE’s portfolio value at end 2018) and major central business district locations in the US. The average national-level capitalisation rate in full service segments stood at 7.68% in H218, according to a recent capitalisation rate survey conducted by CBRE. This compares with a prime yield of 4.05% for London according to GVA’s UK Hotel Market Outlook in autumn 2018.

An alternative way to look at PPHE’s valuation is to examine its return on EPRA NAV of £24.57 per share as implied by the company’s EPRA EPS, which was just 4.6% at end 2018. However, we note that PPHE’s EPRA NAV includes the Hoxton project, which has yet to generate profit. Moreover, PPHE has a high cash balance while looking for projects for acquisition. The company estimates that after adjusting for these, the return on EPRA NAV is 5.6%. We also note that PPHE’s 2018 figure was affected by renovations. Based on our EPRA EPS forecasts and assuming a flat EPRA NAV, the return increases to 6.0% in 2020 and 6.7% in 2021. Indeed, since the current share price is below EPRA NAV per share, we have also calculated the implied return on the market cap (based on the company’s adjustments for excess cash and Hoxton project), which stands at 9.1% based on 2018 earnings. This confirms our conclusions from implied capitalisation yield analysis.

Based on the above calculations as well as Savills/Zagreb Nekretnine’s EPRA NAV estimate, we may conduct a sum-of-the-parts valuation (see Exhibit 7). After adjusting for net debt, minorities and non-real estate assets, we obtain a value of 2,807p per share. Importantly, these calculations are based on the assumption that the market is applying no discount to the NAV valuation of the properties. However, we acknowledge that US hotel REITs are trading now at a discount to NAV of around 5–20%. Therefore, if we were conservatively to apply a 20% discount to PPHE’s net property value, we would arrive at 2,318p, which still provides material upside to the share price.

Exhibit 7: PPHE’s SOTP valuation (£m, unless otherwise stated)

Savills/Zagreb Nekretnine’s valuation (at end 2018)

1,670.1

Net debt adjustment

(479.6)

Minorities adjustment

(142.2)

Management and central services division value (Edison estimate)

156.2

Net non-real estate assets/(liabilities)

(1.4)

PPHE valuation

1,203.2

Number of shares

42.86

PPHE value per share (£) – assuming no discount

28.07

PPHE value per share (£) – @ 20% discount

23.18

Source: Company accounts, Savills, Zagreb Nekretnine, Edison Investment Research

Finally, we have applied a propco-opco method to analyse PPHE’s value by conducting a hypothetical split into a pure property investor (propco) and an entity operating the hotels under a lease agreement (opco). We have assumed the propco value is in line with PPHE’s last reported EPRA NAV at £24.57, while the opco value was derived from a DCF model on the following assumptions: 1) average rental rate across the property portfolio of 5.5%; 2) asset value at £1,670.1m (in line with Savills/Zagreb Nekretnine’s last valuation); 3) no capex at the opco level; 4) no debt at the opco level, in line with the current status (all debt at property level); 5) WACC equal to cost of equity at 6.6–7.2%; and 6) a terminal growth rate of 1.5%. Therefore we obtain a positive opco value of £1.86 per share, which with the property value translates into a total valuation of £26.43 per share. We believe our rental rate assumption is prudent, with recent fixed income investment deals in the UK property market completed at a yield of 3.3–5.0%. For our sensitivity analysis, we have estimated the rental rate translating into the opco value at null is c 5.8%.

In summary, our implied capitalisation yield analysis and the SOTP valuation indicate that PPHE’s discount to EPRA NAV is not justified by its management business (which we believe to be a clear value contributor), while activities on operating leases are negligible in terms of valuation. This is confirmed by our propco-opco analysis, which suggests the valuation of a standalone hotel operator (which does not own the properties but uses under operating leases) would still be positive.

We understand that PPHE’s EPRA NAV (£24.57, which forms the basis of our valuation analysis) estimated by Savills and Zagreb Nekretnine is based on future cash flows generated by the respective properties and thus captures the prospective increase in hotel operating income following the recent refurbishments. As a result, if we exclude the impact of the Hoxton project ramp up and acquisitions of new projects, PPHE’s EPRA NAV should remain broadly stable or grow at a low rate (implied purely by the time value of money) over the next few years. Having said that, we believe that the market is not fully capturing the existing value of PPHE’s properties (as discussed in our valuation analysis), which implies solid upside to the current share price.

Asset quality review

We have further decided to examine if PPHE’s property portfolio may be considered ‘prime’ in terms of location and asset quality. This would confirm our statement that its current implied capitalisation yield of 7.2% seems high relative to prevailing prime yields in the market. This in turn would suggest that PPHE’s property value implied by the current share price is below its actual market value as estimated by Savills and Zagreb Nekretnine.

The company’s upscale portfolio consists of eight hotels in London (Plaza on the River and Riverbank treated separately despite the same address), of which two (Waterloo and Park Royal) are recent openings (2017) and one (Riverbank) has been substantially extended and repositioned. In addition, the repositioning of Sherlock Holmes should complete in May 2019. While Park Royal is more characteristic of a busy UK regional hotel than a central site, it is especially well located next to the largest industrial and business estate in the UK (2,000+ businesses) and close to Wembley Stadium, SSE Arena and Westfield London, the biggest shopping centre in Europe. Exposure to UK regional UK (Leeds and Nottingham) is modest (c 4% of group hotel rooms). In the Netherlands PPHE owns four hotels in Amsterdam, including landmark Victoria, newly repositioned, and Vondelpark, transformative refurbishment almost complete. Repositioning is also underway at Utrecht. Significant ownership interests in Germany include three hotels in Berlin (one earmarked for major renovation), Nuremberg (2016) and Cologne.

By contrast, operations in Croatia are in leading tourist region, Istria. Properties are a mix of hotels, holiday apartment complexes and campsites and trading is highly seasonal. Hotel classification varies from upscale Histria to budget-friendly Brioni (heritage site, to reposition by 2022), while accelerating development of campsites is highlighted by the introduction of glamping.

As most properties are in prime locations and well invested, we believe PPHE constitutes a good entry point for exposure to the London and Netherlands property market at an attractive yield level.


Financials

Exhibit 8: Analysis of revenue and profit

Y/E December (£m)

H117

H217

FY17

H118

H218

FY18

2019e

2020e

Revenue

London

RevPAR

£132

£152

£142

£130

£159

£145

£146

£148

Change

+10%

Flat

+4%

-1%

+5%

+2%

+1%

+2%

Available rooms

2 020

2 020*

2 020*

2 040*

2 050*

2 045*

2 050*

2 080

Room revenue

48.2

56.5

104.7

48.0

60.0

108.0

109.5

112.5

Non-room revenue

22.5

22.8

45.3

22.2

23.0

45.2

46.5

47.5

Existing revenue

70.7

79.3

150.0

70.2

83.0

153.2

156.0

160.0

Waterloo + Park Royal**

9.8

14.2

24.0

14.0

15.6

29.6

31.5

32.3

Total London revenue

80.5

93.5

174.0

84.2

98.6

182.8

187.5

192.3

Leeds and Nottingham

5.1

6.7

11.8

5.4

6.9

12.3

12.5

12.7

UK

85.6

100.2

185.8

89.6

105.5

195.1

200.0

205.0

Netherlands (€m)

28.9

25.2

54.1

28.2

27.8

56.0

61.6

68.4

Exchange rate

1.16

1.12

1.14

1.14

1.12

1.13

1.13

1.13

Netherlands

24.9

22.4

47.3

24.8

24.8

49.6

54.5

60.5

Croatia (HRKm)

125.2

354.6

479.8

137.3

366.5

503.8

525.0

550.0

Exchange rate

8.64

8.40

8.52

8.42

8.35

8.37

8.60

8.60

Croatia**

14.5

41.8

56.3

16.3

43.9

60.2

61.0

64.0

Germany and Hungary***

14.4

16.3

30.7

15.9

15.5

31.4

28.5

31.0

Owned & leased hotels

139.4

180.7

320.1

146.6

189.7

336.3

344.0

360.5

Management and Central Services

2.4

2.6

5.0

2.2

3.0

5.2

6.0

6.5

TOTAL

141.8

183.3

325.1

148.8

192.7

341.5

350.0

367.0

EBITDA

London

Existing

23.4

29.1

52.5

22.5

30.0

52.5

51.6

52.5

Margin (%)

33

36

35

32

36

34

33

33

Waterloo + Park Royal**

1.8

4.2

6.0

4.5

5.9

10.4

11.3

11.6

Total London EBITDA

25.2

33.3

58.5

27.0

35.9

62.9

62.9

63.8

Leeds and Nottingham

0.8

1.2

2.0

0.9

1.2

2.1

2.1

2.2

UK

26.0

34.5

60.5

27.9

37.1

65.0

65.0

66.0

Netherlands (€m)

8.8

6.4

15.2

8.1

7.8

15.9

18.6

20.3

Exchange rate

1.16

1.12

1.14

1.14

1.12

1.13

1.13

1.13

Netherlands

7.5

5.8

13.3

7.1

7.0

14.1

16.5

18.0

Croatia (HRKm)

Neg.

159.1

159.1

0.8

154.5

155.3

172.0

181.5

Exchange rate

8.64

8.40

8.52

8.42

8.32

8.37

8.60

8.60

Croatia**

Neg.

18.7

18.7

0.1

18.5

18.6

20.0

21.0

Germany and Hungary**

1.7

2.6

4.3

2.1

3.1

5.2

5.5

5.7

Owned & leased hotels

35.2

61.6

96.8

37.2

65.7

102.9

107.0

111.0

Management and Central Services

4.7

5.8

10.5

3.4

6.9

10.3

11.0

11.5

TOTAL

39.9

67.4

107.3

40.6

72.6

113.2

118.0

122.5

Source: Edison Investment Research. Note: *Phased extension of Riverbank in 2017 and H118 offset by rooms off at Sherlock Holmes (est. 30). **Waterloo (494 rooms) + 4.17 Park Royal (212 rooms). ***Rooms off in Amsterdam (Victoria H217 and H118, Vondelpark H218 and H119) and Utrecht (H218 and H119). ****Excludes campsites. *****8.18 Termination of Dresden lease (174 rooms).

Strong end to 2018

Disclosure of 5% like-for-like RevPAR growth for 2018 suggests c 8% improvement in the final quarter, which is impressive as it was boosted by neither currency nor Croatia (Q4 is its low season). Therefore, in the absence of detailed regional breakdown, we may infer pronounced buoyancy in largest profit source, London (market RevPAR up 10%, per STR – Exhibit 9) as well as a benefit from significantly higher rates at newly repositioned Victoria Amsterdam. We estimate (Exhibit 8) that, allied with a ‘solid’ Q3, this spurred a broad reversal in H2 of first-half EBITDA shortfalls at core London properties and in Amsterdam. These had been attributed respectively to a demanding comparative (market RevPAR down 1% against recovery-led +10% buoyancy in H117) and renovations (estimated 7% rooms off with associated disruption). The overall rise in second-half EBITDA was driven, as in H1, by maturing Waterloo and Park Royal in their first full year.

Exhibit 9: Annual and half-yearly % changes in London market RevPAR

Source: STR

Croatia arguably disappointed with a slight dip in H2 profit against our growth expectation but a bumper 2017 summer was a hard act to follow (Exhibit 10) and unhelpful weather (prolonged heatwave in northern Europe) delayed holiday decisions across most European markets but in particular campsite custom, which tends to be last minute. Also the new glamping offer, while well received, opened too late to contribute materially. Encouragingly, the region moved marginally into profit in H1 (usually lossmaking) thanks to a favourable calendar, improved shoulder season trading and investment in artificial football pitches at sports-oriented year-round Belvedere Medulin.

Exhibit 10: Annual % growth in Croatia tourism (peak trading June-Sept foreign tourist nights)

Source: Croatian Bureau of Statistics

On a smaller scale, Germany and Hungary grew H2 EBITDA by c 20% owing to the maturing (both leisure and business) of 2016 opening Nuremberg, weather-led city break demand and termination of its loss-making lease for art’otel dresden.

2019 resilience

As evident in a ‘strong’ Q1 (like-for-like RevPAR and revenue up 8%), the current period should see continued material payoff from recent transformative investment in London and Amsterdam, offset in part by repositioning Sherlock Holmes London into premium boutique Holmes (reopening late May) and Vondelpark Amsterdam (completion by H2). In particular, while Waterloo and Park Royal are approaching maturity (we still expect near double-digit EBITDA gain), the benefit of a full year of repositioned Riverbank suggests our core London assumption of +1% RevPAR may be cautious. Security and Brexit uncertainty are concerns, but the London hotel market has shown admirable resilience (Q1 RevPAR up almost 4% and 6%, for STR and AccorHotels respectively) and would gain from increased tourism on sterling weakness. PPHE is cheered that its in-sourcing of housekeeping services across the UK is meeting key staffing challenges. Greater measurable worries are room supply, which is above its long-term trend, slower economic growth and rising operating costs. GL, London's largest hotel owner/operator, has newly reiterated that it continues to ‘maintain a cautious outlook’, while, per PwC, 2019 market RevPAR gain may be marginal.

There is justifiable confidence about the Netherlands in view of both strong fundamentals and investment payoff. The Netherlands Board of Tourism and Conventions forecast c60% rise in national inbound tourism by 2030, the ‘hotels freeze’ (halt to city-centre development), infrastructure improvements and a possible ‘Brexit dividend’ have contributed to Amsterdam continuing to be regarded as the most attractive destination in Europe for hotel investment, according to Deloitte. Company-specific positives are a first full year of enhanced Victoria and second-half return of Vondelpark and Utrecht. We look for an 8% increase in RevPAR and for EBITDA to rise by at least double that rate.

Further growth is expected in Croatia, boosted by expansion of operations at Pula airport and the maturing of the £8m Arena One 99 luxury glamping development (awarded best tourist product of 2018 by Istria Tourism Board). There should also be initial returns from repositioning of Kažela campsite with new infrastructure, facilities and premium mobile homes.

The joker in the pack remains expansion, which is being actively examined, even if management is understandably reluctant to pay up, viz. the recent London Grange deal (1,300 rooms) at c £750,000 per key.

More of the same in 2020

Solid core trading and investment payoff should again favour next year, hence our forecast of a further mid single-digit rise in EBITDA. Costs may be expected still to be an issue (not only in London, as well known, but in Croatia, as recently highlighted by Arena). A profit catalyst would be expansion although returns from a development project would necessarily take time to accrue.

Cash flow

The sharp rise in net bank debt in 2018 (£480m up from £408m) reflects in particular buying in its Hoxton joint venture (£35m) and sustained high capex (£67m). However, this is well within long-term bank facilities of c £700m, which have an average term to maturity of almost eight years, interest cover of 4x and average cost of 3%. Acquisition apart, we envisage only a small increase in current-year debt thanks to similarly high capex and pre-construction costs for art’otel new york (£14m). As discussed, with regard to expansion, PPHE has a well-established policy and track record of borrowing within a 65% loan-to-value requirement of its banks. Management is confident it can leverage on its assets by opening similar facilities for future projects.

Exhibit 11: EPRA earnings adjustment

Y/E December (£m)

2017

2018

2019e

2020e

Attributable FRS3

24.3

38.1

29.3

33.0

Adding back:

Depreciation

34.3

35.9

38.0

38.0

Excluding minorities

(4.6)

(6.1)

(8.1)

(8.1)

Charging:

Maintenance capex

(13.0)

(13.6)

(14.0)

(14.7)

Excluding minorities

2.5

2.9

3.0

3.1

Exceptionals

0.4

(8.7)

-

-

Attributable EPRA

43.9

48.5

48.2

51.5

Average number of shares (basic)

42.2

42.3

42.3

42.3

EPRA EPS (p)

104

115

114

122

Source: Edison Investment Research

Exhibit 12: Financial summary

£000s

2017

2018

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

325,100

341,500

350,000

365,000

EBITDA

 

 

107,300

113,200

118,000

122,500

Operating Profit (before amort and except)

 

 

75,400

79,800

82,500

87,000

Intangible Amortisation

(2,400)

(2,500)

(2,500)

(2,500)

Operating Profit

73,000

77,300

80,000

84,500

Net Interest

(40,600)

(39,700)

(41,100)

(41,100)

Associates

(300)

100

100

100

Exceptionals

(400)

8,700

0

0

Profit Before Tax (norm)

 

 

34,500

40,200

41,500

46,000

Profit Before Tax (FRS 3)

 

 

31,700

46,400

39,000

43,500

Tax

(1,700)

(2,900)

(3,900)

(4,400)

Profit After Tax (norm)

32,800

37,300

37,600

41,600

Profit After Tax (FRS 3)

30,000

43,500

35,100

39,100

Average Number of Shares Outstanding (m)

42.2

42.3

42.3

42.3

EPS - normalised (p)

 

 

64.2

77.5

74.5

83.5

EPS - normalised fully diluted (p)

 

 

64.2

77.5

74.5

83.5

EPS - (IFRS) (p)

 

 

57.6

90.1

69.3

78.0

Dividend per share (p)

24.0

35.0

40.0

45.0

EBITDA Margin (%)

33.0

33.1

33.7

33.6

Operating Margin (before GW and except.) (%)

23.2

23.4

23.6

23.8

BALANCE SHEET

Fixed Assets

 

 

1,220,200

1,316,600

1,383,000

1,429,000

Intangible Assets

23,600

21,400

22,000

22,000

Tangible Assets

1,037,200

1,151,600

1,220,000

1,270,000

Income units sold to private investors

121,200

119,200

115,000

112,000

Investments

38,200

24,400

26,000

25,000

Current Assets

 

 

319,800

245,600

220,800

209,500

Restricted deposits

25,500

3,700

10,000

10,000

Stocks

2,700

2,500

3,000

3,500

Debtors

13,400

15,300

13,800

14,000

Cash

265,700

212,100

180,000

168,000

Other

12,500

12,000

14,000

14,000

Current Liabilities

 

 

(93,100)

(68,900)

(74,000)

(74,500)

Creditors

(60,200)

(53,600)

(54,000)

(54,500)

Deposits from unit holders

0

0

0

0

Short term borrowings

(32,900)

(15,300)

(20,000)

(20,000)

Long Term Liabilities

 

 

(1,006,000)

(1,014,800)

(1,008,000)

(1,009,000)

Long term borrowings

(666,900)

(682,000)

(680,000)

(680,000)

Financial liability to unit holders

(131,600)

(129,200)

(128,000)

(126,000)

Other long term liabilities

(207,500)

(203,600)

(200,000)

(203,000)

Net Assets

 

 

440,900

478,500

521,800

555,000

CASH FLOW

Operating Cash Flow

 

 

114,000

107,000

118,000

122,500

Net Interest

(43,100)

(41,400)

(42,000)

(41,800)

Tax

(700)

(4,200)

(4,700)

(4,900)

Capex

(107,000)

(67,300)

(70,000)

(70,000)

Acquisitions/disposals

152,400

(34,500)

(14,000)

0

Exchange rate

(9,000)

0

0

0

Dividends

(9,300)

(12,300)

(15,700)

(17,800)

Other

79,500

(18,800)

0

0

Net Cash Flow

176,800

(71,500)

(28,400)

(12,000)

Opening net debt/(cash)

 

 

584,900

408,100

479,600

508,000

HP finance leases initiated

0

0

0

0

Other

0

0

0

0

Closing net debt/(cash)

 

 

408,100

479,600

508,000

520,000

Source: Company accounts, Edison Investment Research

Contact details

Revenue by geography

Vinoly Tower, 5th floor

Claude Debussylaan 14

1082 MD Amsterdam

The Netherlands

+31 207178600
www.pphe.com

Contact details

Vinoly Tower, 5th floor

Claude Debussylaan 14

1082 MD Amsterdam

The Netherlands

+31 207178600
www.pphe.com

Revenue by geography

Management team

President and CEO: Boris Ivesha

Non-executive chairman: Eli Papouchado

Boris Ivesha has been president and CEO since 1991. He has over 50 years’ experience in the hotel industry, including at landmark properties Royal Horseguards Hotel, London and Carlton Hotel, Tel Aviv, where he was respectively general manager and managing director. In 1994 he brought the Park Plaza Hotels & Resorts brand to the company in partnership with chairman Eli Papouchado and the Red Sea Group, an international real estate business.

Eli Papouchado has been chairman since the company’s formation in 1989 and is founder and major shareholder of Red Sea Group. Regarded as a pioneer in Israel’s hotel industry, he has been actively involved in the development, financing, acquisition and management of PPHE’s leading hotels and the development of shopping malls and large residential projects in the US, Eastern Europe and the Middle East.

CFO: Daniel Kos

Daniel Kos joined PPHE in 2011 after senior positions within audit and finance, including 11 years at Mazars, the international accountancy and advisory firm. He became CFO in 2018.

Management team

President and CEO: Boris Ivesha

Boris Ivesha has been president and CEO since 1991. He has over 50 years’ experience in the hotel industry, including at landmark properties Royal Horseguards Hotel, London and Carlton Hotel, Tel Aviv, where he was respectively general manager and managing director. In 1994 he brought the Park Plaza Hotels & Resorts brand to the company in partnership with chairman Eli Papouchado and the Red Sea Group, an international real estate business.

Non-executive chairman: Eli Papouchado

Eli Papouchado has been chairman since the company’s formation in 1989 and is founder and major shareholder of Red Sea Group. Regarded as a pioneer in Israel’s hotel industry, he has been actively involved in the development, financing, acquisition and management of PPHE’s leading hotels and the development of shopping malls and large residential projects in the US, Eastern Europe and the Middle East.

CFO: Daniel Kos

Daniel Kos joined PPHE in 2011 after senior positions within audit and finance, including 11 years at Mazars, the international accountancy and advisory firm. He became CFO in 2018.

Principal shareholders

(%)

Eli Papouchado

32.5

Boris Ivesha

11.0

Aroundtown Property Holdings

6.2

Companies named in this report

Wyndham Hotels & Resorts, IHG, AccorHotels, Marriott, Hilton Worldwide, Ashford Hospitality Trust, Apple Hospitality REIT, Condor Hospitality Trust, Chesapeake Lodging Trust, DiamondRock Hospitality Company, Hersha Hospitality Trust, Summit Hotel Properties, RLJ Lodging Trust and Sunstone Hotel Investors.


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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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This report has been commissioned by PPHE Hotel Group and prepared and issued by Edison, in consideration of a fee payable by PPHE Hotel Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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