Dalata has agreed a lease on a new 300-room hotel in Manchester, to open in 2020, as it looks to add around 7,000 rooms in the UK.
The company told us that it was beating out the competition for key city-centre sites by using its balance sheet, but that finding suitable properties remained challenging.
Dermot Crowley, deputy CEO, told us that, when competing for sites: “We see Premier Inn and Motel One – which also has a huge balance sheet – we also see StayCity. But the competition quite often is alternative use.
“We see an opportunity to build new assets, to take on the existing three and four star assets. There are very few opportunities in the centre of the big cities. We are not interested in buying other assets – it’s similar to what Premier Inn are doing in the budget sector, but in the four star sector. The thing that’s holding us back is the key cities – Premier Inn can get away with not being in the centre, but we can’t. But the more you build, the more you get recognition.
“It is the institutions which like our covenant – it just doesn’t exist elsewhere in the UK. Hotels in the UK are now franchises, you have no security or tenure and the fees are very competitive, that’s leaving an opportunity for someone who is well invested. We are invested in our people and in our brands.”
During the half year the group completed the purchase of Hotel La Tour, Birmingham, for EUR34.9m in July and subsequently executed the sale and leaseback of the property with Deka Immoboilien in August for EUR31m. Commenting on the disparity, Crowley said: “We were buying an existing business, which we saw as having a huge benefit. We saw effectively paying GBP1m for it as making good sense.”
The company has signed an agreement to lease a Clayton Hotel, to be built in Manchester. The company has agreed 35-year operating lease with the company’s standard 1.85x rental cover, paying a rent of GBP8,500 per room. Crowley said that the deal with Deka had helped bring the company to developer Property Alliance Group’s attention, aided by Dalata’s “strong covenant and balance sheet”.
The group has also signed an agreement to lease a Maldron Hotel, to be built in Newcastle. On completion of construction (expected completion Q4 2018), Dalata will commence operations in the hotel with a 35-year operating lease with an initial annual rent of GBP1.59m.
Having offered management contracts early in the company’s history, it is now committed to leases as it expands the Clayton and Maldron brands in the UK. The company has a pipeline of over 1,280 new rooms on target to open in 2018 and continues to see strong performance, with revpar up 9.8% and revenue climbing by 24.9% on the year to EUR161.8m. The group’s net debt to Ebitda ratio was 1.91x.
Looking ahead, CEO Pat McCann said: “The second half of 2017 will be a busy period for the group. We will continue to explore the exciting opportunities which exist in the UK and Irish hotels markets and will continue to work on our development projects and extensions. We will strive to further increase our service and quality levels whilst also converting strongly additional revenue to the Ebitdar line.
“We are monitoring the reduction in UK visitors to Ireland since the Brexit vote in 2016. To date, overall visitor numbers remain robust due to growth in other markets. Our strategy of retaining substantial volumes of corporate and tour group business in our hotels makes us less reliant on the UK transient visitor.”
Crowley added: “When I look at Brexit I don’t know how to plan for it, I don’t think anyone knows what it will look like. There’s no doubt that Sterling is having an impact on London,. In the provincial UK we’re seeing an uptick in leisure business at the weekends, how long that’s going to last, I just don’t know.” Crowley added that, when assessing rental cover “we assume no growth in revpar. But it’s strong, which is surprising”.
HA Perspective [by Katherine Doggrell]: As we note elsewhere in Hotel Analyst this week, the institutional investors are taking an ever-closer look at the UK, as the short-term bargains of Brexit are coming to an end now that Sterling seems to have stabilised around the feeble mark.
These investors want what Dalata can offer, with an element of shared risk which is appealing to owners and sorely lacking in the current vogue of eminently-breakable franchises. Although the Clayton and Maldron brands have yet to make inroads on the consumers’ consciousness, they have the potential for greater longevity than the flags on neighbouring hotels.
The issue now for Dalata, as Crowley said, was finding the required city-centre sites. With the interest of bringing in institutional investors after a sale and leaseback, developers can see a clear path which may make hotels that bit more appealing to build. Now they just need to address that other like impact of Brexit – a shortage of people to build them.