In an era when many hotels are pushing an asset-light business model and targeting regional expansion, London-focused hotel owner operator PPHE Hotel (PPH) looks like an anomaly.

The Park Plaza and art’otel operator has a portfolio of 38 hotels, of which 12 are wholly owned and 16 are part-owned. This is a capital-intensive business model but Moravsky says PPHE is small enough for the strategy to work.

‘Owning hotels gives us the flexibility to deal with downturns in the market. We can refinance, dispose and control the product and ensure all the interests are aligned when we develop a hotel. It makes a lot of sense from an operational point of view, and from an investment point of view our costs are significantly lower,’ he says.

Lean and mean

Owning and developing hotels means a company can’t expand as fast as one that operates via a franchised model but Moravsky doesn’t have ambitions to be the next InterContinental Hotels (IHG).

‘We’re not looking to put pins on maps. We are still lean and mean in the way we operate. We have clusters of hotels so we are efficient in the way we manage them. We don’t need large machines and a big head office,’ he states.

Moravsky admits a franchise model has limited risks and ensures a steady stream of fees but he says in many cases it’s not sustainable. ‘For the large hotel operators it is their model and worldwide they will lose some and win some, and it works as long as there are more winners than losers. But there can be conflicts between the owner and the operator. The operator needs to ensure the brand standards are met and will look at introducing new concepts, whereas the owner looks for returns. If we’re not in a good place in the market cycle there can be a clash between the interests and something needs to give.’

New projects

PPHE has four managed and franchised hotels and Moravsky says they are part of the group’s growth strategy but it isn’t actively selling contracts. The key focus for the group at the moment is its four new hotel projects, three of which are in London and one in Nuremburg, Germany. They are all expected to open in the second quarter of 2016. ‘This is a record opening in such a short period,’ says Moravsky.

The expansion in London seems at odds with other hotel operators who are concentrating on growing in the regions, where there is more limited supply. Moravsky admits that the London hotel market is slowing down a bit but says people need to put this into perspective.

‘The slowdown is something that was inevitable - you can’t keep getting 12% to 15% growth year-on-year. It’s almost healthy for the markets to cool down.

‘But this is London and we’ve experienced a fantastic second half. The Rugby World Cup helped and there were a few major conferences in London which boosted demand. We also won some lucrative business on the event side,’ he says.

The £285 million cap’s latest trading update (4 November) revealed a 12.4% increase in revenue per available room (RevPAR) to €148.40 in the nine months to 30 September, led by a 10.5% rise in the average room rate and a 1.5% increase in the occupancy rate to 85%.

Shareholders should brace themselves for a performance hit next year as PPHE is about to embark on extensive renovations at several hotels which will cause temporary room closures. ‘There will be some disruptions to operations but as a long-term operator it’s the right thing to do; 2016 will be a transitional year for us due to the significant amount of hotel openings and renovation work,’ says Moravsky.

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Expansion

PPHE’s only UK exposure outside of London is in Leeds, Nottingham and Cardiff. Moravsky says these regions have seen a pick-up in demand and the group might consider expanding to Manchester and Edinburgh, which also have a good match between supply and demand.

‘We always take a long-term view on growth - we look at anywhere where we see a long-term potential to generate returns. There are some cities where if you look at the supply and demand it makes sense to have a presence,’ he adds.

At the moment PPHE is only focusing on expanding in Europe - Moravsky doesn’t see the need to open hotels in Asia. He would like to establish a presence in Barcelona, Madrid and Paris and would also look at New York. ‘New York might be the city that’s the odd one out for us due to its links with London and Amsterdam. There could be cross-selling opportunities,’ says Moravsky.

Brand appeal

When PPHE does expand it looks at whether the Park Plaza or art’otel brand would be a better fit for the neighbourhood. Park Plaza is a four star luxury hotel brand that appeals to business and leisure travellers, whereas art’otel has more of a hipster feel. There are seven art’otel sites in Germany, The Netherlands and Budapest and they all showcase the work of a local artist.

PPHE is developing an art’otel in London’s art and entertainment district Hoxton and it recently won a contract to manage an art’otel at Battersea Power Station which will open in 2019. Moravsky says PPHE’s lean structure - whereby all its capabilities are in-house and spearheaded by a small team - is a key reason why it beat larger rivals to win the agreement.

‘All the big operators worldwide were competing for the contract and the fact we were chosen after a lengthy, detailed and professional process acknowledges the relevancy and uniqueness of the art’otel brand. Our small team can develop, design and sometimes get involved in the construction of a new hotel, which means there is no gap in interests and no leakage of knowledge,’ says Moravsky.

PPHE is currently sticking with two brands, but Moravsky says it’s possible a third one could be introduced in the future. ‘Businesses have been very successful in the midscale market so I’m sure the time will come when we introduce a third brand or a sub-brand targeted at this market. But there is still a lot to do with our two brands and everywhere we introduce them they deliver,’ he adds.

BIOGRAPHY

Chen Moravsky,

deputy chief executive & chief financial officer

Chen Moravsky has been the chief financial officer of PPHE Hotel since 2005. He was promoted to deputy chief executive officer in August 2014. He was previously the financial director of the Red Sea Group, which he joined in 2001 and gained his expertise in the hotel/leisure business and real estate investment market.

PPHE Hotel (PPH) 606p

SUMMARY

PPHE has an exciting pipeline of new hotel openings which will increase its presence in London and build its art’otel brand. Renovations could have a short-term negative impact on its performance but should be beneficial in the long run.

Bull case

• Expands into new cities

• Renovations benefit longer-term trading

• Builds art’otel brand

Bear case

• Slowdown in London hotel market

• Opening/renovation costs are higher than expected

• art’otel brand doesn’t take off

Market value: £285 million

Prospective PE Dec 16: 9.9

Prospective dividend yield: 3.2%