PPHE and Dalata poised

Owner operators Dalata and PPHE are poised for an asset-backed relaunch, as the pair prepare for the reopening of the UK market, where both have a substantial presence.  

Despite both posting substantial losses for full year 2020, they are looking forward to reopening and pushing forward with strong growth pipelines.  

“We’re impatient for the recovery to restart,” said Dermot Crowley, newly announced as Dalata’s group CEO, as longstanding leader Pat McCann announced his retirement.  

“The biggest thing we focused on, has been protecting our cash,” said Crowley of 2020, a year when the Anglo-Irish hotel group declared a pretax loss of EUR111.5m on revenues down 68.1% to EUR136.8m. An equity raising, sale and leaseback of one Dublin hotel, and renegotiation of debt facilities has left the group with ample liquidity. 

Yet despite the need to preserve cash, the company has tried to maintain its properties open and active. “All our hotels are open, and we’ve established some new lines of business as a result.” In Ireland, that has included computer giant Apple quarantining staff in Dalata’s Cork hotel. 

“We’ve retained 95% of our core teams, and we’ve retained people we were developing, too,” added Crowley. “That has cost us money – but it’s going to give us a huge advantage.” 

During their enforced quiet period, Dalata has accelerated investment in tech, taking advantage of the low levels of business to migrate to new systems. It integrated payroll to one central office, and as a result of new systems now has a far better understanding of the group’s f&b business.  

Crowley said the pipeline will continue at pace. Openings are scheduled for Glasgow in July, and another site in Dublin in October; while the group’s new hotel in Brighton, to be developed by Topland, recently received planning approval.  

“We have had some initial conversations” around new opportunities, “but we won’t take over old hotels” The only short term cloud on the horizon, is development finance, said Crowley:  

“The one thing that’s taking a while is funding,” an issue that has hit a couple of the UK pipeline projects, as backers look to clear other projects before spending on more. “There’s loads of money out there – but what’s missing is confidence.” Once developers are able to convince funders, he sees the situation easing.  

“Critically for us, we’ve very strong relationships with the funders – and we’ve never threatened not to pay our rent.” 

The group stands ready to react, as markets open up once more. “The reality is, people don’t book long in advance,” said Crowley. “Ireland’s very dependent on international tourism,” he warned, but on the flip side, with travel restrictions in place, “we’ve seen an increase in regional Ireland bookings.” 

At PPHE, revenues were GBP101.8m, down 71.5% on the previous year, and the group swung to an ebitda loss of GBP9.1m. Occupancy for the year averaged 28%, against the 80.6% achieved in 2019. The company finished the year with GBP197.6m of cash available.  

“We remain excited about the long-term future of the business,” said CEO Boris Ivesha. “After the UK government’s recovery roadmap announcement, we have seen an encouraging early uplift in customer demand. We are optimistic that this positive trend will continue, supported by a calendar of cultural and sport events taking place in the UK during the second half of the year.” 

PPHE also largely maintained its development programme, coming to market largely via directly invested new projects. In London, work continues on an art’otel in Hoxton, with construction finance secured in April 2020, and permission has been granted for a new 465 room hotel in Park Royal. In eastern Europe, PPHE added to its portfolio with acquisitions in Pula and Belgrade, and with the signing of a leased hotel in Zagreb. It also completed investments on Arena projects in Medulin and Pula. One casualty of the pandemic has been a plan to take the art’otel brand to New York, where a site had already been secured, but work has been paused.  

The group has recently hired former Jon Colley, formerly head of UK and Ireland development at IHG, to head its acquisitions and development activity. Said Ivesha: “I am optimistic on future development opportunities for PPHE and believe we are strongly placed for when Covid restrictions begin to ease.” 

HA Perspective [by Chris Bown]: The owner-operator model looks rather attractive, viewed through the lens of the pandemic. With plenty of property assets, this pair have been able to maintain their borrowings while looking ahead of covid to the market opportunities beyond.  

Both are also small enough to have taken the view that there’s value in staying in the game. While government support has substantially helped, they have committed to keeping hotels open, holding teams together where possible, and sharpening up the operation ahead of a revival.  

PPHE, with its strong presence in London, and Dalata with its dominance in Dublin, will both be hoping that city centre markets, and business travel at large, pick up sooner rather than later.  

Additional comment [by Andrew Sangster]: It takes guts to be a contrarian but, as perhaps the greatest contrarian investor Warren Buffett has shown, it can lead to outsized rewards.  

Both Dalata and PPHE have taken a contrarian view to the owner operator model. And while the rewards are not yet outsized they look set to come out of the pandemic in much better health than anyone who follows the conventional narrative would expect. 

There is clearly still a place for owner-operators with Whitbread being the UK’s lead example. But it can also be true that the majority push into vertical disintegration works. Separating out property, operator and brand can also be a sensible route. F Scott Fitzgerald’s famous quote applies: “The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.” 

There are nuanced differences between the two businesses in the story above. Dalata is increasingly more leased and PPHE has teamed up with a global brand to access superior technology and an effective rewards scheme. 

Buffett would most likely say that these businesses should take the most pragmatic way forward, the choices that work best for their particular circumstances.  

On paper, for example, the geographic split at PPHE does not make a lot of sense. The synergies between the UK and Croatia are hardly obvious. But opportunities do not always fit comfortably in a chosen strategy. 

Similarly, Dalata’s refusal to work with a global brand looks odd. If it is able to compete effectively without the benefit of such branding then it this will drive a superior bottom line even if the top line is slightly below market leaders. 

And Dalata’s willingness to sign fixed leases – even as it explores other options such as turnover-related rents – is an anomaly in a market place where the biggest brands prefer management or franchises. 

What both Dalata and PPHE look set to do now is exploit market opportunities as the recovery kicks in. Their ability to execute on this will be the measure of their success, not their conforming to orthodox views of how the industry operates. 

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