• Dalata sticks to leases

Irish hotel group Dalata has raised EUR94m to support further growth, as it eyes opportunities arising from the coronavirus fallout.
The share placing grew the group’s issued capital by 20%, with institutional shareholders happy to take up the offering. Dalata made the move as it announced first half results, which saw a EUR71m loss as revenues tumbled 60% to EUR80.8m.
Delivering the numbers, CEO Pat McCann commented: “I remain excited about Dalata’s opportunities for growth. In 2014, we identified a unique opportunity to assemble a portfolio of outstanding hotel assets in the early stages of recovery following the global financial crisis. The impact of the current crisis is likely to present fresh opportunities for us in the coming year.”
Average occupancy across the portfolio improved from 30% in July to 40% in August, while deputy chief executive Dermot Crowley told Hotel Analyst that properties in regional Ireland recently saw 70% occupancy.
Crowley said a small amount of the newly raised funds would help fund the construction pipeline, but “the balance of the funds is to strengthen the balance sheet further”. This would support the signing of new leases, either of new developments or for taking over hotels where current lessees are in distress. “We think there’s going to be opportunities.”
Dalata is still setting its sights on building a UK-wide presence, but the covid lockdown has shifted strategy a little. “Before covid, we were starting to look at London more,” said Crowley, “and it has moved up now to be our number one target.”
The company also announced it has signed lease agreements for two new Maldron hotels, in Brighton and Manchester. The Brighton deal will see hotel landlord Topland develop a new 221 room property adjacent to its existing Metropole hotel, with the latter in line for a major refurbishment. In Manchester, Central and Urban will develop a 186-room hotel for Dalata in Chapel Street, joining its existing hotel at the city’s airport and a pipeline property in development in Charles Street.
Crowley said these properties will be operated on traditional leases, using a structure that Dalata is comfortable with. It will only sign deals with a 1.85 times minimum rental cover, based on expected hotel performance. “We are starting to look at different options,” he confirmed, but currently is in no rush to shift from the institutional standard agreement.
Part of the reason to stay with fixed leases, is the option it gives for sale and leaseback deals. The group recently sold its Clayton Hotel Charlemont in Dublin to German investor Deka, releasing EUR65m, in a deal that was not blown off course by coronavirus. “It actually shows the benefit of a long-term relationship,” said Crowley, as Deka now owns five Dalata properties.
Crowley said the appeal of London is based on fundamentals: “The reality is, on the leisure side, London is the place everyone wants to visit. The leisure recovery in London will be relatively quick,” he predicted, noting that business travel too will return “as people are getting really tired of Zoom”. In addition, he said that Airbnb’s inventory losses, with hosts turning to longer term residential rental, would help hotel markets in key cities.
Currently, Dalata is breaking even, covering rents and costs, but he acknowledged the benefits of government schemes including relief on business rates, and support for bringing staff back to work, which are helping reduce overheads as occupancy builds once more. While it is building, predicting how the graph will be shaped is tough: “Everything is very late – and it’s all transient.”
But the group’s summer experience in regional Ireland leads Crowley to predict “when international travel is allowed more freely, it will pick up.”
Also reporting revenues a near-identical 60.2% down was London specialist and owner-operator PPHE. Ebitda swung to a GBP3.3m loss for the half year, with occupancy down to just 10.7% in the second quarter.
CEO Boris Ivesha said the rebound in business was evident, with 84% of the portfolio open and a strategy to grow demand, by offering flexible pricing: “I am encouraged by the strong leisure demand and resulting market outperformance we have seen in our flagship properties in London and Amsterdam.”
“Looking ahead, we are focused on maintaining this positive momentum and ensuring that the group is well-positioned to navigate the ever-evolving trading environment and to capitalise on future opportunities in line with our growth strategy.”
PPHE remains confident, with GBP137m of cash available, and further funds within reach if required. In London, it has started construction on art’otel London Hoxton, which will not open until 2024.
In eastern Europe, PPHE’s subsidiary Arena has postponed completion of the acquisition of a hotel in Belgrade, but in June agreed to buy a property it has operated for many years, the Guest House Riviera in Pula.

HA Perspective [by Chris Bown]: While plenty of people are revisiting leases, and many now following the lead of those who champion the flexible model, such as Pandox, Dalata seems happy with the route it knows. And, having had the resources to pay its rents in full through the lockdown, the group is ready for more.
Crowley was first to admit that the various government support schemes have had a major impact on the survival of the business, in particular the Irish furlough scheme that encouraged employers to bring staff back into work as early as possible. His team is already plotting what happens next, as other subsidies are withdrawn over coming months.
And Dalata is looking long term, with a development pipeline that continues to build, plus a belief that London will return to its status as a buzzing global city – with plenty of visitors wanting somewhere to stay.

Additional comment [by Andrew Sangster]: How can fixed leases make sense in a market as ruptured as the current one? Somehow, Dalata is making it work. And having continued to pay rent in the downturn, it is likely to find investors willing to take a bet on its covenant as the market recovers.
There is no question that many institutional investors are now switching tactics to move towards flexible leases and even more operational exposure. But there are funds that struggle to accept anything other than a fixed lease and even those institutions prepared to take on operational risk are likely keen to balance out their portfolios with more traditional opportunities.
Signing leases in the current environment is certainly going to position Dalata well for the upturn, particularly if the recovery is stronger than anticipated. There will be a problem, however, after a few years as real estate owners look for sharper yields. So Dalata is smart to be looking at structures that share more of the operational risk. The devil, however, is going to be in the timing of the switch into these new agreements.

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