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Industry Update - Public House Sector 2012


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We are pleased to present our annual review of the public house sector.
Today, we find ourselves in a much more positive environment than we have experienced for over five years. Instead of daily reports of doom and gloom and the cynic's death knell for the industry, we now have daily reports of positive performance, new companies, prize winning
licensees and growing markets within the sector, such as traditional real ales.
We reported our optimism in the sector back in 2008, and each year since, despite the doom mongers. We are pleased that our faith in the sector and predictions have been proven correct. The pub industry is part of our DNA. We believe in it, we promote it, we enjoy it.
Let us hope that the few remaining negative issues get resolved soon and that in 2013 we see even more positive news of a UK business sector that employs tens of thousands and contributes millions of pounds to the UK GDP.

Then we can all say Cheers!

Martin Willis, Managing Director

The bad news is behind us
We have all heard the bad news about the licensed trade almost ad nausea for the past five years.

  • The smoking ban
  • The duty escalator raising taxes above inflation
  • Wages and power costs rising above inflation
  • The general recession inhibiting spending power
  • Off sales undercutting the price of on sales

But well run pub companies have coped with this and have been announcing increased like-for-likes in the managed sector and less bad like-for-likes in the tenanted/leased sectors.

So what are the positives for 2013?

  • Pubcos have outperformed the FTSE 100 (see Leisure Index)
  • The ALMR announced that small owner/run companies increased like-for-like sales by 4.9%The ALMR announced that the running costs of a public house
  • stabilised in 2012
  • Bar & Restaurant insolvencies fell in mid 2012
  • Less pubs are closing (down from 40 to 12 per week)
  • The elimination of unviable pubs improves the potential of those that are left
  • 71% of public house tenants said they were happy with their landlord
  • Regional breweries and smaller pubcos have benefited from the sales by the larger pubcos
  • The larger pubcos are getting their debts down to more manageable levels

Public House Sector Breakdown

In simple terms, the public house sector encompasses traditional public houses, bars and pub/restaurants. Increasingly there is a crossover between these formerly distinct subsectors. This trend is evident in the growth of food sales with now 80% of all traditional public houses offering food. This trend has also seen growth in the sales of wines and soft drinks, which has partially offset the decline in beer sales, which have fallen 28.4% since 2006.

The three sub sectors of the public house market can be broadly identified as;

  • Predominantly wet driven local inns, often run by ownermanagers under a lease or tenancy agreement (traditional public houses)
  • Town centre venues, mostly occupying converted shop, office or bank premises and often branded e.g. Yates's (bars)
  • Large destination food venues, again often branded and catering for families e.g. Harvester (pub/restaurants)

The market is further complicated by the operational format with managed, tenanted or leased outlets. Typically traditional public houses occupy largely suburban, village or rural locations. Pub/restaurants in the managed sector tend to occupy the better and more prominent mainroad or suburban locations or within retail/leisure parks. Some private sector pub restaurants have more remote destination locations and are heavily reliant upon established reputation. Each market and sub sector has demonstrated distinct variations to the effects of recession.

Managed House Sector

The managed house sector continues to drive the wider pub market. Trading performance and transactional activity have recovered strongly. Trading statements from both National and Regional managed operators show well managed, well invested pubs are generating positive like-for-like (LfL) sales growth. London is said to have done particularly well over the past couple of years.

The growth of food sales has also been a significant driver of total sales
growth with food sales now accounting for almost half of all sales at Mitchells & Butlers. Whilst food sales at other major pub operators remain lower, the trend is consistent.

Competition for sites suitable for operation under management is thus strong, with existing operators and private equity investors, all seeking sites, with prices demonstrating continued growth, well ahead of the rest of the market.

Tenanted/Leased Sector

Whilst the managed sector performs well, the tenanted/leased sector continues to suffer the greatest from the effects of the economic recession, decline in consumer spending and the over supply of 'bottom end' traditional public houses. Rental levels, particularly within tied leases, also remain under downward pressure.

Large tenanted Pub Co's, such as Punch, Enterprise & Admiral, have tackled their large debt levels by the disposal of significant numbers of poorer quality sites, where future trading potential as a public house is seen as limited. The recent economic pressures on the trade have resulted in high volumes of property disposals by the tenant pub companies whose estates have fallen sharply in size over the last 3 years. Indications are that this trend is likely to continue for the next 12 months at least.

As a result of the supply of 'bottom end' public houses, the alternative use market has remained buoyant with the number of sites sold for alternative use accounting for 54% of freehold properties sold by Fleurets during 2011 (up from 50% in 2010). Residential development is the dominant alternative use, accounting for 47% of transactions (down from 50%), followed by retail developments, which accounted for 26% (up from 14%).

OCTOBER - 2011
Punch Taverns reported full year results to 20 August 2011, the first time that it has reported since the demerger of its managed business.

Punch announced the first increase in average net income per pub (including the impact of bottom-end disposals) for three years. The core estate (the group's better pubs) are
nonetheless down by 2.1% over the year. 398 pubs were sold during the period.

Enterprise Inns raised £23.85 million from the sale and leaseback of a portfolio of 17 freehold pubs to Hermes Property Unit Trust (HPUT). The initial rent roll is £1.635m per annum. Deal equates to a net initial yield of 6.48%.

Red Oak Partners, headed by Aaron Brown and Mark Grunnell, ex R20, purchased 32 tenanted pubs for £6m, equating to £187,500 per property. The properties were held on a variety of tied lease and tenancy agreements, with a number currently closed. The properties were sold by PWC, the Administrators on behalf of Retail & Licensed
Properties No 6.

Royal Bank of Scotland (RBS) sold a 918 public house portfolio known as the Galaxy estate, to Scottish & Newcastle Pub Company (S&NPC), a subsidiary of Heineken. The portfolio was sold for a reported £422m, the largest deal in the tenanted pub sector for eight years.

JANUARY - 2012
Orchid Group, the c.300-strong managed pub operator, was set to announce a refinancing that would see Deutsche Bank's real estate arm become its sole backer.

Fuller Smith & Turner agreed to pay £22.9m to acquire 15 freehold tenanted pubs spread across the West and South East of England from Enterprise Inns.

MAY - 2012
Piedmont, Joe Lewis's investment vehicle, took its shareholding in Mitchells & Butlers to 28.34%.

Fuller's reported full year numbers to 31 March 2012 with turnover up by 5% and Adjusted EBITDA 3% higher (18.9%). 30 pubs were acquired during the year. Managed pubs
reported like-for-like sales up by 4.2%.

Young's reported for the year to 2 April 2012. Revenue rose 25.5% following the purchase of Geronimo, while adjusted pre-tax profit increased 17.4%. The company said that its estate was revalued last autumn at £497.4m, a net uplift of £174m to book value.

MAY - 2012
Marston's reported a 7.6% rise in revenues in the 26 weeks to 31 March 2012. Underlying pre-tax profit increased 14.7%. In the managed arm, like-for-like sales increased 3.6%. Marston's said it's on track to open a further 25 new builds this financial year, and 20 - 25 sites each year after that.

Enterprise Inns reported a 5% rise in pre-tax profit in the six months to 31 March 2012. Like-for-like net income across the total estate fell 1.6%. But in the substantive estate, representing 94% of net income, like-for-like income was up 1.5%. Average income per pub increased by 3.2%.

Enterprise made £89m from disposals in the period, 78 pubs were disposed of for £16m. A sale and leaseback of 17 sites generated £24m, while 36 'exceptional' properties were sold for
£49m at an average multiple of 14 times income and at a profit of £9m over book value.

Wear Inns, the NE England based pub operator agreed to acquire nine strong pubs from TCG.

JUNE - 2012
Greene King reported turnover up 9.4% and pre-tax profit rising 8.6% for the year to 29 April 2012. The managed division saw like-for-like growth of 4%, including food sales growth of 17%.
Overall operating profit was up 6.4% (20.7% of turnover).

JULY - 2012
The Restaurant Group acquired the freehold of four of the pubs it operates under its Brunning & Price and Home Counties pub divisions from Enterprise Inns for a sum believed to be in excess of £5 million.

Shepherd Neame reported full year revenue up by 9.6%, operating profit before exceptional items was up by 3.7% and volumes were up by 5.6%.

J D Wetherspoon reported for the 53 weeks to 29 July 2012. Revenues were up 9.3% excluding the impact of the 53rd week.

Wellington Pub Company reported annualised annual rental income of £27.4m in year to the end of June 2012. The average level of rental uplift achieved at review in the year was 8.8 per cent.

Brakspear acquired two more sites from Enterprise Inns, reporting a 52% rise in pre-tax profit to £2.6 million.

OCTOBER - 2012
Spirit Pub Company has reported full year numbers. Group revenues were up 3.5% and group EBITDA was up 5% to £146m (excluding exceptional items).

Transactional Activity

Group transactional activity has slowed down in the past 12 months, however there are rumours of larger deals in the offering and these are likely to surface in 2013.

In the current economic climate a key driver to achievable price and required marketing period, is the availability of funding to prospective purchasers. The likely category of purchaser is of prime importance. The established corporate operators continue to have readily available funds. Contrary to this, privately owned companies and individuals are presently less able to secure financial backing. A number of traditional lenders have become increasingly cautious of the sector and are reluctant to support new ventures or customers. Leasehold interests held on rack rental terms have experienced very significant declines in value and are now considered by many lenders to be unacceptable security for loans.

Whilst freehold properties continue to be traded in mixed market conditions, many transactions relate to distressed assets where sales may be adversely affected by the absence of trading information, operation under temporary management or restricted timescales. Prospective
vendors not obliged to sell, are more inclined to put off sale decisions and await better market conditions. As demonstrated by the market over the last 3 years, we anticipate a steady stream of distressed sale properties coming to the market in 2012/2013.

Fleurets expect to report our 2011/2012 price survey shortly, but early indications are that the pubcos have been selling higher value units than before, especially in the South East whereas the volume of sales have been declining in the North of England.

Click here to open the pdf directly.