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.
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.
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.
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.
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.
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.