22nd March 2016

PPHE Hotel Group

Travel & Leisure 750

PPH PPHE HOTEL ORD NPV

700

2015 Final Results: Continuing to deliver

650 600 550 500 450 400 350 300 H1-2014

H2-2014

H1-2015

H2-2015

Sourc e: Fides s a

Source: Fidessa

Market data EPIC/TKR Price (p) Price (€) 12m High (p) 12m Low (p) Shares (m) Mkt Cap (£m) EV (£m) Free Float (%) Market

PPH 750.0 944.2 750 516.5 42.0 314.6 712.3 26% Main

Description PPHE owns, co-owns, leases, franchises and manages a portfolio of 4* hotels with 8,300 rooms in Europe, with a strong emphasis on Central London. Real net asset value per share is significantly higher than the share price.

Company information CEO CFO Chairman

Boris Ivesha Chen Moravsky Eli Papouchado +31207178600 www.pphe.com

PPHE, the asset-backed, London-focused hotel operator, has announced its preliminary results which have beaten our and market expectations. The company continues to deliver a strong performance from existing operations while at the same time developing its portfolio for future earnings and asset growth. The current year is set to be one of consolidation, as a number of new developments open, and we expect 2017 to see an acceleration in earnings growth and cash generation. The shares trade at a significant discount to prospective book value as adjusted for the real value of the assets. ►

Full year results were strong: The group benefited from a strong London hotel market, at least till the last weeks of the year, and from the strength of sterling vs the Euro. Neither will be as much help this year, with the Euro Sterling rate difficult to forecast but expected to be a drag on reported performance.

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Forecasts: We are assuming that the Euro and a less buoyant hotel market will mean growth will be limited this year, but as the new openings start to contribute, there should be an acceleration in earnings and cash flows into 2017. Average growth over the two years should be above peers.

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Valuation: Although we anticipate strong growth in earnings, asset values and cash flows, valuation on most metrics remains at a discount to most peers, and out of line with the past and forecast performance. The share price performance has been good, but is lagging the operational delivery.

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Risks: The main risks are the London hotel market and the balance sheet which is indebted, although the company is well within all covenants and has the ability to trade out of assets and reduce balance sheet indebtedness quickly. Management understandably prefer to retain assets, given current low rates.

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Investment summary: PPHE has an outstanding track record and a highly visible development pipeline which will further increase the real asset value. Land Securities et al are currently trading at discounts of 20-30%, but the asset values here are growing much faster thanks to the development pipeline and the stock is cheap on earnings grounds also. The shares continue to look lower rated than peers yet growing faster.

Financial summary and valuation Next event Q1 IMS

May 2016

Year end Dec (£m)

2014

2015

2016E

2017E

Sales

217.0

218.7

239.6

277.6

EBITDA Operating profit

76.1 56.5

80.1 61.0

83.6 63.3

98.6 75.6

Underlying PBT EPS (p)

26.7 64.4

30.0 72.0

31.0 73.9

43.2 101.6

19.0 -374.6

20.0 -397.7

21.0 -448.9

22.5 -421.9

4.9 11.6

5.0 10.4

5.4 10.1

4.3 7.4

EV/Sales (x) EV/EBITDA (x)

3.3 9.4

3.3 8.9

3.0 8.5

2.6 7.2

Dividend Yield (%)

2.6

2.7

2.8

3.0

DPS (p) Net (debt)/cash (£m)

Analysts Steve Clapham 020 7929 3399 [email protected] Nigel Parson 020 7929 3399 [email protected]

Net debt/EBITDA (x) P/E (x)

M

Source: Hardman & Co Research

Disclaimer: Attention of readers is drawn to important disclaimers printed at the end of this document

PPHE Hotel Group EV:Sales Prospective ►

The stock has been slightly rerated on this measure, but note that debt build-up for construction projects is not matched in the revenue line so an increase in the level of this parameter would be expected, ahead of sales coming through when the new sites are opened.

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The absolute level of EV:Sales is acceptable for a company reporting an operating profit margin of mid-20s% and with significant sales growth ahead.

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Again a rerating on this measure is to be expected for the same reasons above i.e the debt and EV is built up ahead of new units generating any revenues and profitability.

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The absolute level is not stretched and at a discount to peers, with IHG and Marriott for example still trading at c.12x prospective, but without the same growth prospects as PPHE has, given its pipeline.

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Estimates of around 10x 2016 P/E for the group continue to look attractive against the UK market and against sector peers, particularly given growth to come through from new openings in 2016 and more significantly in 2017.

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Some of the major hotel stocks are currently trading at twice PPHE’s prospective p/e multiple, without the same eps growth pipeline.

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The share price uplift has been reflected in a declining dividend yield but the yield on offer remains attractive, with reasonably secure eps and dividend growth ahead.

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PPHE is not really an income stock, but investors are being paid to hold it, especially given current bond yields.

EV:EBITDA Prospective

P/E Prospective

Dividend Yield Prospective

Source: Company data; Hardman & Co Research

22nd March 2016

2

PPHE Hotel Group

2015 Results Overview Results overall were slightly ahead of expectations, which the trading update had hinted at, although we had not pushed up numbers. This confirms PPHE’s track record of under-promising and over-delivering, a feature which is even more creditable given the softness in the London hotel market in the final weeks of the year, post the tragic terrorist attacks in Paris. Group revenue increased by 11.8% to €302.5 million (€270.4 million), boosted by the weakness of sterling. On a constant currency basis, revenue increased by 4.4% to €282.3 million. EBITDA increased by 16.9% to €110.9m (€94.8m), but on a constant currency basis, the increase was 9.1%. The Groups' owned hotels in London and Amsterdam generated roughly 80% of revenue and EBITDA, and London will be the key driver going forward thanks to the new openings this year.

UK The UK is the largest contributor in the group, and is driven primarily by London. Revenue increased by 3.2% to £147.4 million (2014: £142.8 million), but when translated into Euro as currently reported, revenue increased by 14.5% to €203.9 million (2014: €178.0 million).

Table 1 UK Revenues 2015 Euro (€)

2014 Euro (€)

2015

2014

178.0

£ 147.4

Revenue (m)

203.9

£ 142.8

EBITDAR (m) EBITDA (m)

77.1

66.0

55.7

53.0

75.3

64.3

54.4

51.6

Occupancy

87.3%

87.5%

87.3%

87.5%

Avg Room Rate

193.1

171.6

139.6

137.7

RevPAR

168.5

150.2

121.8

120.5

Rm Revenue (m)

138.4

123.1

100.0

98.7

Source: Company, Hardman & Co

Year-on-year growth in the London market was slightly lower than previous years, owing to a less favourable events calendar and softer market conditions. The group indicated that the London market saw RevPAR increase by 1.5% to £118.3, with a 2.5% increase in the average room rate to £144.0 and an 80bps fall in occupancy to 82.2%; the occupancy decline was greater in the H2, and is partly attributable to the slowdown post the tragic Paris attacks. Growth was also impacted by construction work at Park Plaza Riverbank London, from both the group’s own hotel extension and heavy third party construction work at either side of this hotel. We visited the hotel late last year and were impressed with the high occupancy, but some of the rooms had to be sharply discounted as the view was of a construction site covering almost 180 degrees – the hotel extension will be opened this year, while the residential complex looked close to completion. The UK provinces continued to exhibit strong trends.

22nd March 2016

3

PPHE Hotel Group EBITDAR in the UK increased by 5.2% to £55.7m (£53.0m) and in Euro, by 16.7% to €77.1m (€66.0m). EBITDA increased by 5.5% to £54.4m (£51.6m) and in Euro by 17.0% to €75.3m (2014: €64.3m). Occupancy decreased by 20 bps to 87.3% (2014: 87.5%), still a very high level, while average room rate increased by 1.4% to £139.6 (£137.7). In Euro the increase was 12.5% to €193.1 (€171.6). RevPAR increased by 1.1% to £121.8 £120.5) and in Euro RevPAR was up by 12.2% to €168.5 (2014: €150.2). Room revenue increased by 1.3% to £100.0m (£98.7m) and in Euro by 12.5% to €138.4m (€123.1m). We have noted here both Euro and Sterling progress as the group is changing from reporting in Euros in 2015t to sterling reporting from now on. We have tended to show sterling data here and in our forecasts (we forecast in local currencies then convert), but have noted the Euro numbers for this division to facilitate readers’ comparison with the 2015 preliminaries/report and accounts. All the hotels produced strong performance in occupancy with Park Plaza Westminster Bridge London delivering a strong room rate, and the Riverbank obviously suffering from the construction works affecting rates. The provinces did well vs peers in RevPAR. Our impression from the analysts meeting was that management felt that after several strong years in London, growth would inevitably slow and that in spite of a weak start to the year, rates would likely be flat for the year as a whole, partly helped by a stronger events calendar in the Q4 period, where they will have the benefit from the additional new capacity. When the Park Plaza Waterloo is open, the group will be uniquely placed in being able to offer events and rooms in close proximity to cater for a 1000 strong conference in central London; this is likely to be an extremely lucrative opportunity, given the obvious attractions of a central London venue to potential delegates. Clearly a large part of the valuation upside stems from London, and management confirmed that they had received offers from two pension funds in the UK and overseas to do sale and leaseback deals. But with interest rates low, management prefer to retain the assets and refinance debt, which should afford them a 2% higher spread than selling the assets and locking in a yield above borrowing rates. We would not be surprised if we have seen the peak in London hotel values, with residential developments mushrooming and the large scale conversion of central offices to residential likely over, but we understand why management are reluctant to lock in high rental rates. We are assuming further uplift in the group’s asset value, but this is driven by the new developments which are highly accretive rather than market appreciation.

22nd March 2016

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PPHE Hotel Group

Netherlands The Dutch market had a strong year, with Amsterdam benefiting from good corporate and leisure demand and the provincial cities experiencing strong business demand. This is now the second largest profit centre for the group, with revenues of 30% of the UK and EBITDA around one quarter of the UK level. Although the operational HQ is based in Amsterdam, the nexus of the group is clearly centring on London

Netherlands Hotels Euro (€) Total revenue (m)

2015 58.5

2014 53.7

EBITDAR (m) EBITDA (m)

18.7 18.6

15.7 15.6

Occupancy Average room rate

81.9% 129.0

78.4% 118.3

RevPAR Room revenue (m)

105.7 43.1

92.8 37.8

Source: Company, Hardman & Co

The Netherlands operation benefited from these benign market conditions and reported an 8.8% increase in total revenue to €58.5m (€53.7m). Reported EBITDAR increased by 19.3% to €18.7m (€15.7m), while EBITDA increased by 19.4% to €18.6m (€15.6 million).

Germany and Hungary The company cited a mixed performance in Germany and Hungary. Berlin is a highly competitive market and reliant on leisure and government while Cologne and Budapest have a better balance of demand from leisure and corporate. Total revenue for the region increased by 6.2% to €30.2m (€28.5m). EBITDAR increased by 1.3% to €8.7m while EBITDA decreased to € (0.5) m from €0.4m positive, with the comparative benefiting from a one-off benefit related to a local authority tax settlement. Average room rate increased by 8.6% to €75.3, but occupancy decreased by 70bps to 80.4% (2014: 81.1%), while RevPAR increased by 7.7% to €60.6. Room revenue for the period increased by 7.7% to €22.8 million. The German hotels outperformed their competitive sets in occupancy, with some also doing better in RevPAR.

Germany and Hungary Operations Euro (€) Total revenue (m) EBITDAR (m) EBITDA (m) Occupancy Average room rate RevPAR Room revenue (m)

2015 30.2 8.7 -0.5 80.4% 75.3 60.6 22.8

2014 28.5 8.5 0.4 81.1% 69.4 56.3 21.2

Source: Company, Hardman & Co

22nd March 2016

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PPHE Hotel Group

Other Management and holdings operations revenue increased by 16%, partly thanks to the strength of sterling, although after the elimination of intra-group revenue, the external revenue declined slightly, thanks to a decreased fee structure in Croatia; the group is buying out its jv partner there which means that the revenue and profit reported here will decrease going forward, but this sounds like an attractive deal, as the group is buying assets with which it is intimately familiar. The reporting of the Croatia results is slightly complicated as the management agreement which forms the bulk of the profit is reported here, while the group’s share of the profits is reported in associates; the management fee is considerably more lucrative than the share of profits, but the reporting will be simpler going forward. The group is as yet unable to share much financial information until the deal is completed, so we will likely revise our forecasts in a few weeks’ time. .

HQ Line Key Financials Euro (€) Revenue before elimination

2015 45.5

2014 39.3

Revenue within the Group

36.6

29.0

9.9

10.2

17.4

14.5

External reported revenue EBITDA

Source: Company, Hardman & Co

Net interest was broadly flat on last year, but there was a significant reduction in other income, as the group last year benefited from forfeited deposits on rescinded sales of units in the Westminster Park Plaza. The interest paid on the Westminster hotel income units was up 30%, of which just over one-third was currency and the remainder, c.20% was revenue per room, likely an illustration of the strength of the central London market and the group’s efficiency of operations. Looking at this level of year-on-year increase, it must be hard for the group to make significant further gains on these existing assets, although there will be scope for the new assets and the Riverbank (ex its construction issues and with its new rooms) to contribute positively; indeed, management hinted that the Riverbank might produce a 100% increase in revenue with the extra rooms and without the dilution in room rate from being in the middle of a construction site.

22nd March 2016

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PPHE Hotel Group

Balance Sheet and Cash Flow The group is in an investment phase with the construction of the new Waterloo hotel, the new build on the A40 site, and the extension of the Riverbank Hotel. Consequently, net debt has risen slightly in the year, as can be seen from the simplified cash flow below.

Summary Cash Flow (£m) 2014

2015

2016E

2017E

EBITDA Working Capital Operating Cash flow Interest - cash impact Tax paid Cash flow after final items

76.1 1.8 77.9 -32.1 -0.1 45.7

80.1 5.0 85.1 -32.5 -0.1 52.5

83.6 -3.0 80.6 -33.0 -0.5 47.1

98.6 -3.0 95.6 -32.5 -0.5 62.6

Capex Acquisitions Buyback of income units Total capital outflow

-37.0

-90.0

-25.0

-1.7 -38.7

-63.1 -3.3 -3.2 -69.6

-90.0

-25.0

Cash flow after capex etc. Dividends Cash flow after dividends Share issues FX/other Overall move

7.0 -7.1 -0.1 0.2 -0.3 -0.1

-17.1 -8.4 -25.5 0.6 1.9 -23.0

-42.9 -8.8 -51.6 0.5 -1.0 -52.1

37.6 -9.2 28.4 0.5 -1.0 27.9

-374.5 -374.6

-374.6 -397.7

-397.7 -449.8

-449.8 -421.9

Opening Net Debt Closing Net Debt

Source: Company, Hardman & Co

Although there is substantial debt, which looks higher than normal relative to income because of the capital Work in Progress, a number of points should be noted:

22nd March 2016

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The group has a very significant asset backing. The debt to equity on a reported basis of over 100% deducts the hotel rooms sold to private investors from equity, as they are treated as a financial liability under GAAP. Not adjusting for this, the debt to equity falls to 63% if the equity is adjusted for the market value of the properties today; note that the Waterloo development will likely add significantly to the notional revaluation surplus, so that the real debt:equity should be below 50% by end-2016, even though debt will increase in absolute terms this year.

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The majority of the Group's facilities are asset backed and have limited or no recourse. These debts are managed on either a single property or on a portfolio basis. These asset backed loans have two types of covenant.

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The majority of the facilities have a loan-to-value covenant (i.e. the loan cannot be higher than a certain percentage of market value) and most of the loans have an EBITDA cover covenant. There is one facility covering 9 hotels to the value of

7

PPHE Hotel Group €365m, where the loan to value is currently 50% vs a covenant of 65%. The other facilities have even greater headroom. ►

When the new hotels come into operation, EBITDA will increase significantly, further improving coverage ratios.

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Management have received firm offers for two hotels, but have decided that they prefer to own the freehold and to refinance debts as they can do this at around 4%, while if they sell, they will be locked into a lease payment of 6% of the sales value and of course they will then have no participation in any further upside in the valuations.

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The company is buying out its partner in Croatia which will add to the assets in the group, but will also mean the consolidation of the debt currently in the partner’s balance sheet. We should hear further on this in the next couple of months, but we understand that the amounts involved are eminently manageable.

There is one other point which is probably worth making here. PPHE’s balance sheet is quite complex for a relatively small company. Even the income statement’s treatment of the managed hotels in which they have an associate interest where the management fee is taken in the HQ line and the associate suffers a loss can be confusing to the new investor (the net effect is positive – PPHE makes more money from the management fee than it does through its share of the losses). The treatment of the hotel rooms (income units in the balance sheet which were sold to help finance the Westminster development during the credit crunch, an innovative solution to what was probably an intractable problem for many operators at the time) sold to investors is also, we think, confusing. The group is fully compliant with all the GAAP rules here, but the GAAP treatment is itself confusing. We intend to revisit this at some point later in the year and try to explain some of the particular treatments and perhaps show an alternative presentation. Any feedback from investors in this respect would be most welcome.

22nd March 2016

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PPHE Hotel Group

Balance Sheet As at 31 December £000s

2014

2015

25,409

21,878

Property plant & Equipment

770,863

813,026

Prepaid leasehold payments

325

293

Investment in associates

16,596

16,483

Investment in joint ventures

16,629

17,328

Other non-current financial assets

14,595

16,528

0

79

844,417

885,615

3,202

3,206

883

999

Assets Non-current assets: Intangible assets

Restricted deposits and cash Current assets: Restricted deposits and cash Inventories Other current financial assets Trade receivables Other receivables and prepayments Cash and cash equivalents Total assets

1,141 11,771

9,154

5,998

7,721

54,714

50,623

77,709

71,703

922,126

957,318

252,520

267,887

420,109

440,110

140,457

136,203

114

79

52,758

45,119

Equity and liabilities Total Equity Non-current liabilities: Bank borrowings Income Units sold to private investors: Financial liability related Deposits received Other financial liabilities Deferred income taxes

10,057

8,028

623,495

629,539

9,937

10,472

Other payables and accruals

23,728

38,045

Bank borrowings

12,446

11,375

46,111

59,892

669,606

689,431

922,126

957,318

Current liabilities: Trade payables

Total liabilities Total equity and liabilities

Source: Company, Hardman & Co

22nd March 2016

9

PPHE Hotel Group

New Developments and Renovations The current year will see an extraordinary level of new activity in the group, and it sounds like management will be stretched to capacity to deliver the new openings, which will only contribute a full year in 2017. Their agenda is a full one, with new openings in London, Amsterdam and Germany. Construction work on the two new London hotels progressed in 2016 and both hotels are expected to open in 2016. Park Plaza Riverbank London had a major refurbishment, with all major structural work now completed. Once completed, the number of rooms is expected to increase by 40%, from 461 to 645 rooms, with the addition of six new floors and the reconfiguration of the existing hotel. We anticipate that this will open in May, allowing a full summer season, as well as the busy September-December convention period. The new London Waterloo hotel, expected to open in September, 2016, will offer 494 rooms, reinforcing the strong hotel portfolio on London's South Bank, and giving the group the scope to accommodate a 1000 strong convention in the centre of London. We believe this will be a major earner. The new build Park Plaza London Park Royal will have 212 rooms (up from 168 previously planned) and it occupies a highly visible location om the A40, leading into central London, providing an excellent base for coach parties which cannot afford central London prices, attendees of events at the nearby Wembley Stadium, and more budget conscious corporate travellers. Interestingly, industrial rents at the nearby Park Royal industrial estate are soaring, making it one of the most expensive logistic hubs in the greater London area, with rents now exceeding Heathrow levels – this is down to the exodus of industrial warehousing from Battersea, to make room for residential developments. This only reinforces the value of the asset. Room renovation programmes commenced at Park Plaza Nottingham and Park Plaza Victoria and these works are expected to be completed in 2016. The renovation works for Park Plaza Sherlock Holmes London in Marylebone are now expected to commence in 2017. The two art'otel projects are at the planning stage, with construction in Hoxton expected to start in 2016, for completion in 2019, while the art'otel London Battersea power station is also expected to open in 2019, but this is purely a management contract with none of the group’s capital at stake. Significant renovation plans for the extensive renovation of Park Plaza Victoria Amsterdam, Park Plaza Vondelpark Amsterdam and Park Plaza Utrecht have been deferred to 2016, because of the sheer work involved, and possibly also because of the other programmes being undertaken. We are reassured that management is taking a phased approach, concentrating on the highest value projects first. Construction of Park Plaza Nuremberg started late 2014 and this is expected to open this year. During 2015, the group completed most of the room renovations at art'otel berlin mitte, with the public areas being renovated in early 2016. The former art'otel berlin kudamm was rebranded to Park Plaza Berlin Kudamm, after a room renovation programme was completed, while the former art'otel berlin city center west was subsequently renamed to art'otel berlin kudamm, in order to highlight the proximity to the shopping street of the same name. Renovation works at art'otel cologne and art'otel budapest were also completed in 2015.

22nd March 2016

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PPHE Hotel Group In March 2016, the Company announced that it had entered into an agreement to acquire the 80% of shares in Bora that it does not already own for €51m. Bora’s principal asset is a 74.15% shareholding in Arenaturist d.d., the operation in Croatia that the group already manages and knows intimately – more financial details should be available on completion in April/May.

22nd March 2016

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PPHE Hotel Group

Outlook and Forecasts The outlook is of limited growth in the current year, which will be one of consolidation, as a number of the new projects are brought to market. The London market has had a string of strong years and the current year has started flat to down, depending on the operator. PPHE feels that a decent result would be a flat year for room rates, and we have therefore been quite conservative in our forecasts. It’s difficult to gauge precisely the impact of the new Waterloo opening, with significant opening costs etc., while the Riverbank should benefit significantly from relief at the lack of construction works and from the extra floors.

UK Hotels Key Parameters (£m) Occupancy Average Room Rate RevPAR % change Room revenue Other revenue Total revenue

FY14 87.5% 137.7 120.5

FY15E 87.3% 139.6 121.9 1.1%

FY16E 87.0% 141.0 122.7 0.7%

FY17E 86.2% 142.4 122.8 0.1%

98.7 44.1 142.8

100.0 47.4 147.4

113.1 52.4 165.5

136.9 60.2 197.1

1.3% 7.5% 3.2%

13.1% 10.6% 12.3%

21.1% 14.9% 19.1%

37.8% 36.9% 55.7 (1.3) 54.4

36.4% 35.6% 60.2 (1.4) 58.8

36.7% 36.0% 72.4 (1.4) 71.0

% change Room revenue Other revenue Total revenue EBITDAR mgn EBITDA mgn EBITDAR Rental EBITDA

37.1% 36.1% 53.0 (1.4) 51.6

Source: Hardman & Co

The table flags that we are looking to margins being slightly down in the UK on softer underlying room rates in 2016 and also into 2017. We are assuming at this stage that the cycle is somewhat softer offset by the higher volume of rooms and the stronger concentration on central London which will obviously be very positive for the group. This leaves us looking at a somewhat flat picture for 2016 and a very sharp increase in 2017. This is probably slightly conservative, but there are quite a number of moving parts. We have made no assumptions about the impending Croatia deal, which sounds as if it will be quite accretive, but as we do not yet have any substantial financial details, it seems sensible to wait 6 weeks or so, and simply for now assume no change in profits this year. The summary of our profit forecasts is shown in the table.

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PPHE Hotel Group

Summary P&L £m

2014

2015

2016E

2017E

UK Sales European Sales

142.8 74.2

147.4 71.3

165.5 74.1

197.1 80.4

Total Revenue

217.0

218.7

239.6

277.6

UK EBITDA European EBITDA

51.6 24.5

54.4 25.7

58.8 24.8

71.0 27.7

Total EBITDA

76.1

80.1

83.6

98.6

Depreciation and amortisation

19.6

19.1

20.3

23.0

EBIT Associates

56.5 -2.3

61.0 -1.9

63.3 -1.9

75.6 -1.9

Other income Income units liability payments

2.6 -9.9

1.6 -11.6

1.6 -11.8

1.2 -12

-20.4

-19.4

-20.5

-20

Profit before tax (adjusted) Tax

26.5 0

29.7 0.1

30.7 0

42.9 -0.5

Profit after tax

26.5

29.8

30.7

42.4

EPS (pence) DPS

63.8 19.0

71.4 20.0

73.4 21.0

101.0 22.5

Shares in issue

41.5

41.8

41.9

42.0

Interest

Source: Company, Hardman & Co

A number of trends appear to be developing in the global hotel industry, which is experiencing quite an exciting period; as we went to press, Starwood announced that they had received an offer from a consortium; we suspect that there could be Chinese involvement, although this is pure speculation on our part. These trends could simply reflect a desire to achieve greater efficiency or may be a response to a perceived growing threat from Airbnb. PPHE management at the analysts' meeting were relaxed about the impact of Airbnb as they do not perceive a significantly greater threat to their business, suggesting that it is in part a repackaging of existing available supply. In the US, we saw this commentary from hotel operator Pebblebrook, a $2bn US midcap, "“So if you look at business around marathons as an example, where we used to have really intense compression and an ability to price that maybe what the customer would describe as sort of gouging rates. I’d say we’ve lost a lot of that ability at this point within the major markets where these events take place.” More broadly, we perceive several structural trends in the global hotel industry: 1 a move to greater concentration. 2 the separation of asset ownership from hotel management.

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PPHE Hotel Group 3

ongoing desire for trophy assets, notably now from Chinese operators (eg Anbang acquiring Waldorf Astoria and now Strategic Hotels Group).

4

increasing concern among smaller and mid-sized operators at the capture of distribution by on-line travel operators such as Priceline, Expedia and now TripAdvisor. These have been commanding substantial commissions, impacting operators’ profitability, but they in turn could come under pressure from the launch of the new Google Destinations service.

These trends overall look to be positive, rather than negative, for PPHE. As trophy assets in central London are further revalued up, the mid-tier assets look even cheaper; as the business grows, it offers mid-sized operators an opportunity to bulk up; and the deeper the market for hotel real estate, the greater the liquidity and the better financing is available. Meanwhile, PPHE can piggyback on the Carlsson linkup and punch above its weight in distribution. Hence we see these trends as being positive for PPHE shareholders.

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PPHE Hotel Group

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