UKCPT forward-funds £32m Dalata hotel project in Newcastle

The FTSE 250 firm said the development, which includes an ancillary retail unit, has been pre-let on a long lease to the Dalata Hotel Group, and is expected to deliver a yield on cost of 5.4%.

It said the deal was structured through an initial upfront payment and interim funding, which attracted finance interest at 5% during the construction period, followed by a balancing payment on completion.

Dalata, Ireland's largest hotel operator and an “attractive” tenant covenant according to the trust’s board, agreed to a 35 year lease with five-yearly, annually-compounded, RPI-linked upward-only rent reviews, with a cap and collar of 0.5% to 3.5% and no break options.

The hotel, Dalata's ninth in the UK, would operate under its flagship Maldron brand and was due to complete in the first quarter of 2019, generating an initial passing rent of £1.59m per annum.

UKCPT said the total scheme, including the retail unit, was expected to generate an initial passing rent of £1.74m.

As a result of the acquisition, the proportion of RPI-linked and long-dated income in UKCPT's portfolio would increase from 13.3% to 15.2% of income.

In addition to that , the portfolio's weighted average lease length would extend to 8.7 years, up from 8.3 years.

The hotel, which would also include a conference centre, business meeting rooms and restaurant space, was strategically positioned in the “heart” of Newcastle city centre, UKCPT explained.

It said it would be located opposite the popular Eldon Square shopping centre, and a five minute walk from the central train station, forming part of a mixed use scheme being developed by McAleer & Rushe.

UKCPT also announced that it has disposed of one of its smallest assets, a 25,802 square foot office in Aberdeen, for £6.5m, representing a premium to book value.

“These transactions demonstrate our continued efforts to increase the portfolio's exposure to high quality assets with the potential for income and capital growth,” said Will Fulton, fund manager at Standard Life investments, which advises UKCPT.

“As one strand of this strategy we have been assessing opportunities in the alternative sectors as a means to enhance longer-term income and dividend cover.”

Fulton said Dalata and its flagship Maldron brand were an “exciting”, well managed, high quality, competitive hotelier with good board-level experience of operating in the UK hotel market.

“Its business plan is strong and I believe this hotel will compete well in the Newcastle market - home to leading universities and a thriving business community - whilst providing a high quality long and increasing income stream at an attractive yield on cost.”