After two hours, the conversation is careening towards its natural conclusion; there is always an arc in an interview when questions become longer and answers shorter. Pat McCann is nursing a slight cough and has just flown back from three weeks of investor briefings. Yet, it does not prevent him from talking at length about Dalata’s evolution into the biggest beast in the Irish hotel market, through rapid acquisition and a stock market flotation.  

He has talked about future growth strategy, the wider economy and his yearning to export Dalata to the continent. Throughout it all, McCann, founder and chief executive of Dalata, has been the quintessential hotelier: polite, articulate, attentive.

Now though, as the end nears, we have stumbled by chance across a subject that clearly animates McCann – the cult of foreign expertise, and the Irish habit of underestimating their own abilities.

“A load of bullshit,” says McCann as the professional polish is replaced with a slight bristle and a visible agitation.

“Honestly, an absolute load of bullshit. To my mind, we have great talent. Irish people have something unique. Being Irish of course, we don’t seem to understand that. We are a pragmatic people and we have an ability to communicate.”

“We do a bad job at selling what business does, and what value it brings to us a nation.”

McCann, whose company has a portfolio of 39 three- and four-star hotels with over 7,900 rooms, points to the Irish reaction to the banking crisis, and the desire to recruit outsiders to help repair Ireland’s economic tapestry.

“People talk about the Irish banks. But look at all the banks across Europe. Take two of the dourest banks, Danske Banks and Deutsche. They were in the horrors. It drives me mad when we, as a nation, think we need to look at what these guys are doing and for them to teach us,” he says.

“When we go abroad, we are loved. People love our ability to communicate and the Irish entrepreneurial spirit. Look at the Irish in America and the UK. They are at the very top. There is an appreciation of the intangible things that we have. It does grate at me sometimes when we think we have to bring in outsiders because we don’t know how to do it ourselves.”

McCann expands upon the point, arguing that the same mind-set halts many in business from standing up for, and defending, Irish industry.   

“Business probably gets a pretty hard rap, deservedly at times,” he says. “But if you look at any country, it is employment that gives people the most dignity. There is a reliance on companies to give people that dignity at work. I don’t want people to be down on their knees saying ‘Thanks, yes sir, no sir, three bags full sir.’ We do a bad job at selling what business does, and what value it brings to us a nation.”

If it seems like a business by a prominent business leader. Shortly after our interview, McCann was announced as president of Ibec, the country’s largest lobby group. It is a role that will give him access to policymakers and politicians alike. 

With that defence of the Irish capacity over, the hotelier returns: “Would you like another glass of water?” he asks politely.

Spotting an opportunity

The last time I interviewed Pat McCann was July 2012 for a feature on the Irish hotel industry called Heartbreak Hotel. At the time, the hotel market was calamitous; so woeful that even Nama, the agency established by the state to offload toxic assets, had not put most of its hotels on the market for fear no one would buy them.

One out of every six hotel rooms were under the direct control of a bank, and there were various reports recommending taking out between 12,300 and 15,300 from the system to balance the supply/demand matrix, a move that would have led to 200 hotel closures.

Amid the gloom, McCann was a man apart. Others were talking about retrenching; McCann was talking about expansion. It would be two years before the company would float on the stock market, but McCann was honing his pitch, explaining the need for a large group that could bring both expertise and economic scale to the market.

It was big talk for a man whose business at the time essentially consisted of managing bust hotels for banks. But, like a few other frontiersmen who bought early into Ireland’s recovery, McCann saw something others did not. Today, revenue per room, an industry metric to assess performance, is surging in Ireland, and the worry is that supply can’t match demand.

As the industry booms, Dalata is blossoming, increasing pre-tax profits in 2018 by 13 per cent to €87.3 million, with revenues increasing by 11.8 per cent to €393.7 million. Its chains, Clayton and Maldron, are market leaders in their space, and the company is fast expanding in Britain – stockbroker Davy recently said Dalata could quadruple the number of hotel rooms it has in the UK by 2026, bringing its total number of rooms to 10,000.

“People think a lot of it is based on algorithms and analysis. It is in its arse. It is about people to people. Can a fund manager in New York trust this fella with your money?”

Seven years later, I remind McCann of his early optimism. “2012 was a pivotal year for us,” he says now. “Because we had come out of the crisis and I had formed my vision for what we could do post the crisis – the acquisition of these assets. The banks had control of 300 hotels. Staggering. I said to myself that they were going to sell the hotels at well below the replacement costs and this had to be a huge opportunity.”

Did he struggle to get investor buy-in? “When we went out to raise the money, people questioned our sanity. We have short memories. The Americans loved what we were doing because they could see it. Domestically we got a lot of pushback. People felt it would never work. We took advantage of the situation. 

“When we went out to the marketplace in 2014, we initially went out to raise €150 million. In the first round, we got offered €800 million.  We were blown away by the demand. It is amazing how things you have done in your past aid or beat you to death.

“But a lot of the investors who came in at the beginning were actually guys who had got out of Jurys Doyle [a company McCann was previously the chief executive of] at a fine price and were very comfortable with the way we ran the business. 

“People think a lot of it is based on algorithms and analysis. It is in its arse. It is about people to people. Can a fund manager in New York trust this fella with your money?”

“Even during the very tough years, Ireland had two economies – the banking and domestic economy and its international market. The international market, by and large, continued to perform. We could see that.”

I ask McCann about the juxtaposition of belief between willing foreign backers and a sceptical domestic market.  

“When you think of guys like Franklin Templeton and Kennedy Wilson, they were already in the market. Could I have gone sooner? The reality is, in my sector, we would not have got the money. We hit it at the perfect point,” he says.

We were also clear about the assets we wanted to acquire. We had a series of target hotels and groups that we knew would make a difference if we could get them. We looked at their strengths and weaknesses, and where they were positioned and their ownership structures. We knew what we were going to buy and what we were going to spend money on. That was a huge advantage.”

Another advantage that McCann concedes is that they were buying high quality assets at bargain prices. “The average age of our hotels is 15 years. In our business, that is very young. There is little to be done in terms of the deep stuff like the roof or the lifts. All of that is in relatively good shape.

“We spend 4 per cent of our revenue on maintenance and capex, and we get great bang for our buck. It goes on everything the customer sees. It does not go on things that the customer does not see. Targeting the young portfolio was important. It is lovely to have trophy assets, but it is not for the faint-hearted.”

But did he anticipate the scale and strength of the market recovery? “One of the things that people misunderstood was demand. Everybody tends to look at supply. We look at demand. What is happening in the city? What is happening with our FDI? Fundamentally, Dublin had absolutely massively changed since 2007. People forgot the Convention Centre Dublin got built. Terminal 2,” he says.

“We got a sense of the opening up of the North Atlantic. You could see the way flights were beginning to kick in. When we floated in 2014, there were five cities connected. Today it is 25. For us it was all about the demand. 

“Even during the very tough years, Ireland had two economies – the banking and domestic economy and its international market. The international market, by and large, continued to perform. We could see that. The way we envisaged it happening, and we under called it. We thought RevPars would rise. Did we think it would rise to the level today? No we did not. That would be wrong to say that.”

Pat McCann on being a better CEO

“Jim Culleton, a former CEO of CRH, was a great mentor to me. He one of the finest businesspeople I ever came across. He taught me about vision; being ahead of the game. He taught me things that have stood to me to this day as a chief executive, the way you behave, the way you need to give yourself space to think. If you are in and you are constantly firefighting, you are not thinking about the business. If you are not thinking about the medium to long term, there is nobody doing it. I might come in here and have zero in the diary. I will do a few things internally but by and large I am making notes for myself. I give myself that space. It is invaluable. The last six weeks I have not given myself enough space. The next few weeks I have that space.”

How to keep investors happy

In total, there have been three hotel companies that have listed on the Irish stock exchange: Ryan Hotels, Jurys Doyle and Dalata. McCann worked for the first of those, was chief executive of the second and founded the third. As such, there is little about the stock market that phases him; in fact, he admits it is the only real way he knows to conduct business. When setting up Dalata as a private company, he insisted it have all the governance structure of a quoted entity.   

“The final decision to float was made in November 2013. We were listed on March 19, 2014, less than four months. The problem for most companies is the way they set themselves up in the beginning hampers their ability to get the float. They end up having to go back and restate accounts and things like that. We did not have to do that. It was there. We had the structure well in place and it was embedded in the business,” he says.

“To be honest, if we had tried to do what we did outside of the public markets, we would not have got there. It just would not have happened.”

“I did investor relations at that point as there were a lot of private investors involved. Every year, I would do a briefing for our shareholders. It was second nature to me. I would have had the same relationship with our banks, so they were all in the picture from day one.”

What prompted the decision to go the public markets? Could Dalata have found the funds elsewhere? “At the time we were doing it, what was happening was that the banks were selling hotels at well below replacement cost. Most of those were being sold out of receivership. The problem with looking at things like private equity, they could not cope with this. They needed warranties and all that good stuff for them to execute a deal,” he says. 

“When you are doing it with public equity, you had the cash, you had the plan and you executed. So, you were not dependent on somebody responding to you at very short notice. You were in control of that. The only way I could have done what I did was by having a float of shares.

“To be honest, if we had tried to do what we did outside of the public markets, we would not have got there. It just would not have happened.”

Dalata raised €245 million on its initial public offering in 2014, ultimately leveraging the war chest up to €800 million to fund growth through new build hotels and bolt on acquisitions. Now, much of his time is spent meeting both existing and potential investors.  It is a gruelling schedule, with McCann essentially on the road in March and September, plus various mid-year investment conferences.

For McCann, it is just part of the job. “If you want to be in the public markets, you have to nurture it. It is of no value to you just to get the money and don’t take care of the investors, the people who gave you money.

“When you go out to the marketplace, people assume that the guys who buy in at the beginning are going to be long-term holders. That is never going to happen.  There is always a churn. When you are in on those investor road trips, you are meeting your existing shareholders to keep them happy and give them the story.

“They want to talk to the people who are making the decisions. They want to look into the whites of your eyes. They want to talk to you about your strategy and your business and how it is shaping up.”

“But you are also meeting potential investors, because you need a level of demand so that when the guys have their redemptions, that there is a market for the shares. If you don’t have that, your share price will continue to fall and fall and fall. Being in the public markets is intensive and it needs a lot of loving care and attention.”

For McCann, it is about building a network. An investor will never buy shares after one or two meetings. It is, he says, about developing a long-term relationship.

“You have to meet him – and it is a he, the vast bulk of fund managers are a he – and he builds a profile of you. They watch what you said and what you were going to do in terms of delivery. If they like the story, they buy in. if they don’t like the story, they won’t,” according to McCann.

“That is the way the market works. If you think you can just do it and then forget about it, you are going to be in a bad place. The other thing that is important to remember is that you can have your investor relations team. By and large, that is okay for updates.

“But if the CEO and the CFO are not facing these guys, they will lose interest in you very quickly. They want to talk to the people who are making the decisions. They want to look into the whites of your eyes. They want to talk to you about your strategy and your business and how it is shaping up. They want to know everything. It is fundamentally a relationship business.”

Futureproofing the model

The corporate headquarters of Dalata is a rather nondescript looking building in Sandyford, just off the M50, in an office shared with NTR, the Irish infrastructure group. The downstairs lobby is unmanned, and the Dalata offices are functional rather than fancy.

Yet from here, McCann is plotting a course to take his company further, and in a slightly different way. The strength of its balance sheet and the probity of its brand mean that it no longer has to raise debt or finance to build or buy hotels. Now, institutional funds are looking to build hotels for Dalata, renting them out to the Irish operator on generational leases. This means Dalata can scale without the spend.   

DekaBank, for example, bought the Burlington Hotel in Dublin, before asking Dalata to lease it for 25 years. “Out of that spawned people like M&G, Prudential, Aberdeen Standard, Aviva, Union Bank, all wanting to be our landlord. Why? On the basis that we kept our balance sheet in good stead,” McCann says.

“If you look at our balance sheet today, it has €1.3 billion of assets. Net debt to EBITDA of below three. They are the two things if you can tick those two boxes, these funders will back you. 

“I have six hotels coming out of the ground in the UK on this basis – two in Glasgow, two in Manchester, one in Bristol, one in Birmingham. I have two here in Dublin, one which we will own the Tara Towers and the other by Johnny Ronan and Colony Capital. We have been clever to leverage our balance sheet from where it is now to give us this buying power with the fixed come guys.”

I ask McCann to explain further the model, particularly about the potential exposure under this lease model if there are booms or busts in the market.

“We are very attractive to the fixed income guys. Essentially, they put a yield valuation on our balance sheet of about 4.5 per cent. That means, for us, that we get into the yield cycle. If you take some place like Newcastle, our rent there when the hotel opened in November, is less than the initial rent that I had in 2004 for Jury’s Inn. Because yields in those days were six for seven per cent. Yields now are 4.5 per cent. That means that our starting rent are very low,” he says.

“The other thing we do is that, because you have five-year rent reviews, what could happen if inflation ticks up in the UK, you could have an unnaturally high rent review that would go badly against you. The structure we have is called a capital collar. We have agreed deals with a landlord of typically between a half and three per cent; a minimum of a half a per cent and a max of three per cent. We are well protected in the way we have structured it.”

In the absence of a debt requirement to fund growth, could McCann simply take the company private?  “I would struggle to do that at this moment. What typically would happen is that I would have to use private equity, and then they clean out the balance sheet and leverage it highly. You milk it for all its worth,” he says.

“I look at the way private equity has dealt with hotels in the UK. No investment in either property or upgrades. They do the cash sweeps. They will limit your capital investment. That is actually what has created the opportunity for us in the UK, where a lot are owned by private equity and there has been no investment for a long time. That is where the advantage for us is.”

For now, the strategy is expansion in Britain, and also on the continent, where McCann has a team scouring for opportunities. The vision, he says, is to create a pan-European hotel group.

“If you look at the way we have done the business, we have built a strong base here. We are doing next door. We will then look at mainland Europe. We are already doing that by the way. We are out looking. I have a team working on Germany as we speak. The other fatal mistake people make is to assume that all marketplaces are the same. They are not. Even the difference between Ireland and the UK. Is very different,” he says.

And given McCann is nearing in on retirement age, will he be there to take it into Europe? “I am a sad bastard. I love this business and it has been a great business for me. One of the things I have not done well is that I have not got the good balance. I work, and my work is my hobby. That can’t be right. All my friends are off in Portugal this week playing golf. What am I doing here? But that’s nice. I should have a better balance, but it is not in my DNA.”