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PUBLICATIONS

On Market - Issue 2 - 2015

30/09/2015

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A comprehensive review in a magazine format with topical and informative articles from both experienced Fleurets staff and from external trade organisations, to inform and advise, including a round up of property availability nationwide, broken down by region and by sector that displays the extent and variety of opportunities on the market.

In this issue:

  • Cambridge - Examining Cambridge's local area, in reference to Fleurets' office move in early August this year.
  • Regional Hotel Activity - Looking at the regional market and highlighting a sample of single asset deals across the spectrum of hotel types to demonstrate the increasing buoyancy and diversity of the regional independent hotel property sector.
  • Wages - Looking at the effect on the hospitality sector following the Conservative government's announcement of the introduction of a compulsory national living wage
  • Regional Activity increasing - Operators migrate to the regions from London in order to seek better returns
  • Trade insight - Comments from M&C report and TruRating
  • Share index - Analysis of the share price performance of publically quoted leisure companies.

 

No leisure sector holiday as deals replace beach towels

Graeme Bunn - Managing Director

Summer is over, the buckets and spades are packed away, and soon Christmas trees will start popping up in shops up and down the country. The calendar end of 2015 may therefore appear to be fast approaching, but given the level of transactional activity witnessed over the last few weeks, there is plenty of time for more, including perhaps the odd surprise.

When historically most are on the beach, indeed as Sir Cliff Richard famously sang in Summer Holiday "no more working for a week or two", August was surprisingly active in the leisure sector where transactions saw Punch Taverns sell 158 pubs to NewRiver Retail for £53.5m, equating to £339,000 per pub and an income multiple of 7.3x. This was quickly followed by Greene King who sold 16 pubs that it had agreed to dispose of to meet regulatory concerns in the wake of its acquisition of Spirit. Heineken picked up 13 of the pubs primarily in Oxfordshire and Nottingham. Completing an active couple of days, saw Red Oak Taverns, led by Mark
Grunnell and Aaron Brown, acquire 146 pubs from the administrator of the GRS group of companies. Following the acquisition, Red Oak Taverns will own over 170 pubs across the United Kingdom. Early September led to further activity, with the sale of the 26 strong Jupiter Hotels portfolio of Mercure properties for £77.5m to a Thailand based consortium. Punch subsequently entered into an agreement to sell its 50% shareholding in Matthew Clarke for £100.7m to Conviviality Brands, which will sell Punch's joint venture partner, Hertford Cellars Ltd, also sell their 50% shareholding to Conviviality. Sold at almost twice book value, and presenting a multiple of 12.9x post tax profit for the year ending August 2015, the transaction received a generally positive response from the market.

Perennial top performer, Whitbread, continued their impressive growth with Q2 FY 15/16
Like-for-Like growth of 4.3% at Premier Inn and 4.0% at Costa. Total company sales grew by
11.1%, driven in part by the performance of London where sales grew 21.1% on the back of a
20.3% increase in rooms available. Perhaps most satisfying for their shareholders is the impressive pipeline of rooms, which has grown to over 14,000 rooms, ensuring the growth story has a few more chapters to be written.

Whilst I don't mind the seasonal return of shortening days and colder nights, I will look back
to the summer of 2015 and wish that the warmth of transaction activity in the leisure sector lingers longer than a day or two of the Indian summer we have been promised.

 

Cambridge office focus - September 2015

Simon Jackaman - Divisional Director

Introduction - Alma Mater Cantabrigia ('Bountiful Mother Cambridge')

In 1209 or thereabouts a small group of scholars fled from the already flourishing University of
Oxford and journeyed across England to Cambridge. Eight hundred and six years later, and
having been granted its City Charter in 1951, Cambridge today has a diverse economy with
strengths in sectors such as research and development, software technology, high value
engineering, creative industries, pharmaceuticals and tourism.

In 2010 Forbes, described Cambridge as one of the "most beautiful cities in the world." Anyone
who has visited can't fail to be impressed with its famous Colleges and University buildings, the
city's historical soul which attracts visitors from all over the world. In fact, tourism is reported to
generate over £350m to the city's economy.

According to the 2001 Census, the population of Cambridge was around 124,000, the city has a much higher than average proportion of people than other parts of the UK in the highest paid
professional or administrative jobs, 32.6% vs 23.5% and a much lower than average of manual
workers 27.6% vs 40.2%.

Therefore, Cambridge has, in the last 15 to 20 years, become a vibrant entertainment city, with
an extensive list of places to eat, drink and stay. Many recognisable restaurant and bar chains are established in the city along with a plethora of independent operators including Michelin Star restaurants.

East Anglia

In 2013, the Chancellor of the Exchequer George Osborne said "East Anglia is the fastest growing region in the UK and is establishing itself as a world leader in science, technology and
manufacturing." It is fair to say that Cambridge is a leading factor as to why East Anglia is having so much success.

There is a massive divergence of locations across the region, from pretty chocolate box
villages, right through to large cities and towns. It is still one of the main farming areas for the
UK, with the "fens" and Lincolnshire heavily reliant on agriculture. Felixstowe in Suffolk is
one of the world's largest container ports dealing with nearly half of the UK's containerised trade, and Stansted airport, is the fourth busiest airport after Heathrow, Gatwick and Manchester.

East Anglia is well known for its stunning coastline and has everything from beach
holidays, rural escapes and cultural experiences all within easy reach. The coastline is endless
and unique, from the breathtaking sands of north Norfolk to quaint Suffolk pebbled beaches and the family fun of Essex's coastal towns. East Anglia tourism includes an array of historic cities, towns and villages to explore, numerous attractions, stately homes and gardens.

 

New East Anglia Office - Cambridge

All of these factors were one of the main reasons why the Fleurets Board back in early
2014, decided to move from its established location of Sudbury, where it had been based
since the late 1970's to a new office and location. The only plausible place to locate and
suitable for our company's growth was Cambridge. In August 2015, we moved into
modern offices which provide us with a good road network in order to best serve our client's
and being based in Cambridge is a fantastic strategic location for us.

The relocation and expansion of the Fleurets East Anglia office has also created new positions
within the company. Bob Whittle, Simon Jackaman and Gareth Hatton will be based in
Cambridge supported by Sue Pope and Jackie Dellar, handling sales and acquisitions of leisure
properties across, Cambridgeshire, Norfolk, Suffolk, Essex, Lincolnshire, Hertfordshire, Bedfordshire and Northamptonshire.

Bob Whittle has been a director with the Company since incorporation in 1995 and
previously a partner having joined Fleurets in 1979. Bob has been involved with leisure
property for over 40 years and now primarily deals with agency matters. His sector of work is
hotels, sites and redevelopment, public houses, restaurants, wine bars and most other
types of leisure property.

Simon Jackaman is responsible for the management of the office. He is one of the most
experienced agents in the region having been at the forefront of leisure property sales and acquisitions for nearly 30 years. His primary focus is public houses, restaurants, hotels and
most other types of leisure property.

Recently, the office has been further complemented with the arrival of Gareth Hatton, Gareth
joins Fleurets following a successful career in all aspects of the leisure sector across East Anglia and London and has overseen a number of freehold and leasehold transactions for pubs, restaurants and hotels across the UK, so he is well versed in the processes
of leisure property disposal and acquisition.

 

Notable Sales in 2015

So far, 2015 has been a positive year. The market is gradually finding confidence and more
transactional sales are being completed. Some notable sales in the region were the sale of the
Westcliff Hotel, near to Southend, an elegant fully licensed 3 star hotel in South Essex with
superb views across the Thames Estuary. The property was acquired for an undisclosed sum off an asking price of £1.8m by MGM Muthu Hotels part of M.G Muthu Group from India. The
company also has interests in other sectors including logistics, mining, construction and
restaurants. Muthu Hotels, a Global Hotels group operates a total of 15 other properties
in Portugal, Spain, India, Singapore, UK and the Caribbean. Another deal of some note was the
disposal of The Grand Hotel in Leigh on Sea to the "TOWIE" star and Sugar Hut boss
Michael Norcross.

Amongst some other high profile disposals, the East Anglia office is currently involved with, is the sale of a distinctive group of established dining pubs and inns located around the stunning North Norfolk coast and the Norfolk Broads National Park. The properties are being offered for sale on the instructions of Joint Administrators all are currently under offer with completions expected soon.

In Conclusion

We are experiencing the ongoing recovery of the leisure property market in East Anglia and from our new offices we are ideally located to service the recovery and growth.

 

Regional hotel activity

Will Thomas - Associate

With sector headlines dominated by news of transactions in central London and the corporate
arena, we have taken the opportunity to look at the regional market and highlight a sample
of single asset deals across the spectrum of hotel types to demonstrate the increasing
buoyancy and diversity of the regional independent hotel property sector.

The strengthening economy, continuing low interest rates, growing availability of funding,
rising residential property prices and, perhaps most notably, rapidly improving hotel trading
performance are just a handful of key attractions to the dominant buyers in this area of the market. Typical buyers, mirrored by the transactions referenced on the following page, include new sector entrants, relocating existing hoteliers, family partnerships, lifestyle buyers and
expanding small multiple hotel operating companies, both domestic and overseas. A key determinant to activity in this sector is a buyer's ability to fund a purchase, be it through
alternative asset sale, equity release or borrowed funds. With hotel values aligned to
trading performance, confidence in trade sustainability and growth prospects are critical
considerations.

The table above details hotel key performance statistics reported by STR Global, Ltd, on a
regional basis. Whilst, as would be expected, Greater London hotels achieved by far the
strongest occupancy and highest ADR's and, in turn, the greatest RevPar, this is not a fair
representation of the recent regional success, which is evident from the further analysis reflected in the chart right. The chart shows the approximate combined two year change for each key performance statistic, ranked regionally according to the overall change in RevPar.

What is immediately evident is that regional hotels are seeing the greatest rate of
performance growth across all measures. All regions (with the exception of Greater London) achieved over 10% RevPar gain, indeed, 7 out of 11 regions achieved in excess of 20%.

The upsurge in purchaser appetite for regional hotels that we are currently experiencing should, therefore, be of no surprise. Improved performance is supporting increasing values,
confidence in asset security is growing, both for buyers and lenders, the result of which is
improving asset fluidity. We are also experiencing a return of the leased market, a number of the transactions referred to involving either the sale of existing leases or the grant of new leases at market rents, ingoing operators investing heavily to refurbish and redirect the businesses. The regional hotel market is certainly buoyant, both trading and market conditions being the best that they have been since the credit crunch in 2007.

 

Wages, it's all gone tips up!

Rosie Hallam - Senior Surveyor

Wages in the hospitality sector have been very much at the top of the agenda for the last few
months. There has been the recent uncomfortable PR over a number of the main
restaurant brands withholding a percentage of staff tips to cover administration costs but
perhaps the most surprising news was the Conservative government announcement of
the introduction of a compulsory national Living Wage at the last budget statement.
This will no longer be optional and whilst the merits or otherwise can be debated, it will
inevitably have a financial impact on businesses.

There is already an 'optional' living wage of £7.85 per hour (£9.50 per hour in London). Come April 2016 though the Living Wage will become compulsory, albeit the level will be lower, starting at £7.20 per hour with a target of reaching around £9.00 per hour in 2020. This compares with the current national minimum wage of £6.50 per hour which must be paid to employees aged 21 and over, rising to £6.70 per hour in October 2015.

As with all legislation, there are winners and losers. Employees stand to be the biggest
winners, but it should be borne in mind that the Living Wage will only apply to those aged 25 and over. With the hospitality sector renowned for employing a large number of students and young people, a considerable number of people will not see any benefit and the impact on business may not be as great as feared.

The backlash from the hospitality and retail sectors however has been quick, with concerns
voiced that it is the consumers who will inevitably pay the additional cost through price increases in the coming years. Surprisingly Tim Martin of JD Wetherspoon, one of the industry higher payers, went further and was quoted as saying that it will put "unstainable pressure on many pubs in our industry, especially in smaller towns and less affluent areas".

Whether it will have the effect of perhaps pushing some marginal business over the edge is
perhaps over stating the issue but for some smaller independent operators it will certainly
add further to the pressures they face in their day to day existence.

Ultimately, no one likes price rises, but is this all such bad news for the industry?

Having worked as a manager in two very different major restaurant chains, I have seen
first-hand the difficulties faced with hiring the 'right' employees and most of all, trying to
manage staff retention and turnover. With quality of service from waiting staff being one
of the most common complaints received from guests, ensuring quality of staff is key to any successful operation.

Restaurant companies have committed to investing in their staff. Gaucho for instance, have
for many years run a training academy and Côte are soon to follow. The aim is to ensure that no member of the front-of-house or back-of-house teams set foot in the restaurant before they have been fully trained and educated and have a full understanding of the ethos of the brand. The cost of putting a new employee through the training academy is not cheap.

So, if companies are prepared to invest in their staff, and customers expect the levels of service that they do, then shouldn't we be looking to address their financial needs as well?

I can't help but think that if restaurant companies were prepared to pay their staff more they would go some way to improving the perception of the restaurant industry as a career and help it to be seen as a more long term career and less of an interim job. Intrinsically linked to this will be the knock on effect of helping their employees achieve a better work-life balance. With happier employees, committed to their jobs, customers will receive better service and the benefit to the company is invaluable.

And whilst restaurant companies are blanching at the expectation of an increased wage bill,
this must surely be mitigated by the potential reduction in costs associated with continually
hiring, training and equipping new employees;the higher the levels of staff turnover, the higher
the cost to the company.

 

Regional activity increasing as operators seek better ROI

Simon Hall - Director & Head of Agency

The capital has long since been considered a safe haven for long term investment but the world wide economic uncertainty has accelerated demand in most areas. This has driven prices to a point that many operators are seeing the prices being paid, eating into their profits, and reducing their Return On Investment (ROI). As a result they are now moving out of London to seek better returns from regional locations.

Here we take at a look at a snap shot of activity across the UK as summarised by our network of
regional offices.

 

London

  • Demand for better quality investment acquisitions driving some yields below 3%.
  • West end rents reaching record levels as operators seek flagship London representation.
  • Substantial premiums being paid for new lettings as well as assignments.
  • Take up of smaller units as operators squeeze costs to maximise returns.
  • Off market activity common place as purchasers seek to secure sites and avoid
    abortive costs.

Demand for leasehold premises is at record levels which is fuelling the premiums being paid.
The leasehold assignment of Rileys in Chelsea saw 38 viewings within two weeks of marketing
and it achieved 16 offers with the sale price being almost three times the guide price!

We are seeing a similar trend in more suburban areas of London and the home counties as the
gentrification in traditionally lower value areas continues at a pace.

 

South

  • Significant lack of supply of freehold units is frustrating many purchasers.
  • Record premiums being paid for prime leasehold operations.
  • Tied leasehold assignments are becoming more common as freeholds and free of tie
    leases aren't coming to the market and pub companies revert to mainly tenancy deals.
  • Investment demand high pushing out to off-prime locations.
  • Reduction in sales for development and alternative use.

There is very little available in the city of Brighton. Free of tie leases and freeholds are
like gold dust. A lot is happening off market and confidentially.

When the Setting Sun, a partially tied Punch leasehold pub was marketed, we had lots of
interest straight away, the assignment was all completed within six weeks.

It is becoming increasingly attractive for individuals and small multiple operators to take on partially tied leases to expand their exposure to the market and achieve the growth they
require.

 

Midlands

  • Corporate operator demand increasing in several major cities but focused on A3 and A4 units in Birmingham. Examples include - Tapas Revolution, Square Pie & Pho.
  • Freehold prices increasing at all levels, tracking the residential market.
  • Landlords triggering more rent reviews as rent levels increase.
  • Premiums being paid for the best leasehold sites.
  • Bottom end freeholds being snapped up as demand exceeds supply.

The £600m refurbishment of New Street Station includes 20 new cafés and restaurants, of which at least three have been let to operators venturing out of the South East for the first time.
Cosy Club and The Botanist have both opened in the city centre this year and the award winning Lasan Group have opened Nosh & Quaff adjacent to the Council House.

There's more than 800,000 sq ft of new office space under development at Arena Central and
Paradise Circus, which will include new leisure units and a number of new hotel developments
including the 4 Star Park Regis at Five Ways Island. Birmingham is buzzing!

 

North

  • Supply of freehold pubs greatly reduced as the big sell off continues to ease.
  • High street rents increasing in key locations as operators fight for the best pitches.
  • Wet led community leasehold pubs still under appreciated and under valued.
  • Demand up in selected areas as confidence starts to return and performance improves
  • Tied lease assignments still difficult to achieve due to supply of existing high quality new
    lease/tenancy opportunities.

The best sites are seeing increased demand in the major cities. Bar Room Bar in the Calls areas of Leeds experienced competitive bidding, as did Deep Blue on Wellington Street this time on a free of tie lease.

The Eye on the Tyne in Newcastle generated strong interest when the free of tie lease was placed on the market.

The Ingram Arms went under offer at the asking price leaving several disappointed buyers.

 

North West

  • Continued high demand for cheaper freehold pubs - one had 18 viewings and was under offer in three weeks.
  • High levels of interest for sites with alternative use potential - recent deals agreed for
    conversion to residential, funeral directors and children's private pool/activity centre.
  • Market becoming more active - of 17 instructions received from one administrator,
    eight were under offer after only six weeks.
  • We are starting to see more private vendors being prepared to sell where accounts are
    becoming increasingly important.

We were instructed by Alix Partners to market a portfolio of pubs.

This included the Stockwell Mount, a large suburban community pub in Liverpool, with three
traditional trading areas and extensive upper floors.

We placed the property under offer after being on the market for only a few weeks, which is an
example of the strong demand for cheaper freehold pubs in the region.

 

West

  • High levels of demand particularly evident in key cities such as Oxford, Bristol and Bath.
  • Increasing numbers of "off market" transactions, with premiums in excess of £200,000 being paid.
  • Aggressive bidding for prime pitches. Both Riverside House and Flavour Sensation in
    Bristol under offer within two weeks of marketing.
  • Resurgence in the free of tie leasehold market due to increased market confidence, lack of freehold opportunities and innovative concepts, such as Craft Beer. Corporate activity is significant in the west, as established concepts battle emerging brands for
    opportunities, fuelled by greater ROI in the region and the need for representation in key towns and cities.
  • Off market activity is high, with operators such as Stable (part owned by Fullers) increasing their presence in the region, with Fleurets facilitating two recent acquisitions in Cheltenham and Bath, coupled with the disposal of the existing Bath site to an emerging multiple operator.

 

East Anglia

  • Growth in population higher than the national average means there is plenty of optimism for the future.
  • Dearth of bank funding for licensed property continues to hold back property values
  • Increasing number of freehold pub, hotel and restaurant owners delaying decision to sell in the hope that property prices will increase further.
  • Many owners are letting their businesses instead of selling.
  • The demand for leasehold businesses is strong.

The 16th Century Limes Hotel in the centre of Needham Market, has been let to a husband and
wife team on a new 10 year free of tie lease. This property of character has 11 recently
refurbished en-suite letting bedrooms, two bars, restaurant, dining room and a large function
room; Turnover last year was £728,000 ex VAT.

The Station Hotel, Norwich a family run bed and breakfast business operated under the same
ownership for over 28 years has been sold off a freehold asking price of £495,000 to a local
businessman.

Queens Head Public House in Long Stratton, Norfolk was an investment opportunity sold off
an asking price of £250,000. It provided the buyer with a very good investment return on
capital, well in excess of 10% per annum as well as a longer term investment in property.

 

No time for just a casual approach

Mark Wingett - Editor, M&C Report

The UK Restaurant market, including casual restaurants, fast food and pubs, is expected to
grow by 1.5% to reach £53.5bn in 2015, according to M&C Allegra Foodservice's 2015
UK Restaurant Market report. The branded restaurant market is out-performing, with
expected growth of 5.6% to generate turnover of nigh on £20bn. However that growth is not
being distributed equally and a new order is emerging which means there can be no casual
approach to casual dining.

According to M&C Allegra Foodservice's report, which includes 2,000 in-depth online interviews
with a nationally representative sample of UK restaurant goers and their eating out habits, plus
18,000 online surveys with M&C Allegra's UK Eating Out Panellists and over 100 in-depth
interviews with key industry decision makers, branded casual restaurants are a key driver in the
segment's growth, with annual turnover expected to grow by 6.8%, to £4.9bn. Managed & branded pubs will achieve growth of 5.1% to £9.5bn, and branded traditional fast food will increase turnover by 4.8% to £5bn. Brands are winning over independents in delivering a more reliable and consistent eating out experience, which enduringly value-conscious consumers,
who are still refraining from any significant trading-up, appreciate. Consumers are visiting more often, but spending is subdued. UK consumers are getting an increasing taste for eating out, with rising participation and visit frequencies driving overall restaurant market growth, particularly among brands. However, the report finds that growth is not being
distributed equally, with out-performance strongest amongst more youthful, convenienceled
brands better aligned with all-day trading, more adventurous cuisines and
favourable overall value perceptions.

Impressive growth at the likes of Bill's, Byron, Five Guys, Giggling Squid, Itsu, Leon, Loungers, Red's True Barbecue, Tortilla and Wahaca is intensifying competitive pressures on more
established restaurant brands. This is not least those in the mass market Italian and traditional fast food segments where some brand fatigue has been evident. More focus on menu offers, trading formats and brand revitalisation is essential and already in train at the likes of ASK, PizzaExpress and Strada. There is a growing appetite for more adventurous cuisines, with
South East Asian cuisine, and Thai in particular, is set to see the strongest growth in the
branded restaurant market segment. Industry executives cited consistent food quality, friendly service and innovative & exciting menus as the three key business success factors.

Successful operators must also deliver on dinner and social gatherings. Breakfast has grown in
importance but is still a minor daypart for casual restaurants. The best performing operators will have a strong focus on dinner, as three fifths of occasions are at this crucial daypart.
The channel's share of total visits at dinner is more than twice the size of its share at lunch and more than five times its share at breakfast. The findings show that there is still all to play for.

 

The 'ratings revolution'

Christian Nelson - Chief Operating Officer, truRating Ltd

Linking happy customers to business success

In August, truRating, the new point of payment customer feedback service, collected its
500,000th rating from UK customers - having only gone live earlier this year. truRating asks
each customer just one quick question which means any consumer facing business can
collect large volumes of insight. And by using the payment terminal it links these ratings to
validated customers and their spending behaviours (ATV).

It means that just a few months after launch truRating is already highlighting industry wide
trends about the link between sentiment and factors like day of the week, time of day, the use
of promotions or the performance of staff. It also helps individual businesses understand the
issues that are most relevant to them when looking to increase customer satisfaction -
and ultimately spend.

The simple truRating application, which can be installed onto your payment terminal or
e-commerce site, asks each customer a question around payment. The question could be 'Please rate the service from 0-9' or maybe 'Please rate the value from 0-9'. The speed and anonymity of rating means customers are happy to participate
- 88% have provided a rating when asked so far.

The intuitive truRating dashboard means businesses can view their performance over time,
compare ratings against their peers and see how changes or events impact on sentiment and
spend. For businesses with 'till integration' the application can also collect and link-in basket data and see how promotions, staff members, loyalty membership and even payment method can impact on ratings and spend.

Businesses can also take advantage of a free business profile page on truRating.com, which
will help consumers to find great shops, restaurants, hotels or pubs based on trusted ratings from millions of people.

Here's a sneak peek at some of the hospitality sector insights uncovered by truRating so far...

  • Fans (those who rate an 8 or 9) on average spend £9 more than disappointed customers (who rate 5 or lower) - happy customers really do spend more!
  • Customers are at their happiest in bars and restaurants when they have just finished work - ratings are consistently highest between 7pm and 9pm.
  • But late nights can help to loosen up the purse strings...Customers spend the most
    between 10pm and 12am - 18% more than at other times.
  • Customers volumes and spend are highest on Saturdays - when almost 20% of our
    ratings are collected...
  • ... But busy businesses don't necessarily mean satisfied customers - ratings are lower on Saturdays than Sundays when it's quieter
  • Fans give tips that on average are 8% higher than disappointed customers - so there is
    value for the whole team in ensuring happy customers.

How businesses can use truRating

One popular restaurant chain has been using truRating to review which areas (such as service,
food and atmosphere) were having the biggest impact on sentiment and ATV and used this
insight to develop a new promotion across its venues and measure its impact. Comparing
performance before and after and benchmarking against a set of sector competitors, the brand
tracked improvements in every truRating Metric and ATV vs. the competition. The increase
in ATV and transaction volumes across the two time periods means that total spend has increased by almost 10% following introduction of the promotion. The business is now using the dashboard tools to identify other opportunities to improve ratings and therefore increase spend.

With its big brand launch coming to the high street soon (not to mention imminent launches in Australia and North America) if you haven't 'truRated' yet, you no doubt will have soon!

For more information visit www.trurating.com

 

Fleurets Share Price Index

Martin Willis - Chairman

For almost five years we have been tracking the share prices of the various breweries and pubco, restaurant, hotel and other leisure companies that are listed on the Stock Exchange and AIM (Alternative Investment Market). Each week we report in our Newswire how the overall
prices of each sector have changed as a percentage compared to the previous week and also compared to the same week a year previously. Although the week-on-week changes have been generally fairly minor it is perhaps surprising what the cumulative effect has been.

We felt it would be a useful exercise for our readers to have a look at how the share prices
have fared over the last five years, not only between the various sectors but also in
comparison to the FTSE 100 and FTSE All Shares Indices.

In order to accomplish this, we took our start date of 10 May 2010 and set all figures to 100.
Over time some new stocks have entered the market e.g. Easy Hotels, while others, such as Spirit (in this case due to being taken over by Greene King), have been delisted. This has been
allowed for in our indices by making an appropriate pro rata adjustment.

Looking at all seven Indices we have compiled the graph below.

As would be expected, the FTSE 100 and FTSE All Shares Indices have taken virtually identical paths increasing by about 30% over the five years.

What is of note, however, is the extent to which the leisure sector as a whole has outperformed the market. Apart from pure leisure shares, which generally underperformed until early 2015 onwards, all other sectors in the leisure industry outperformed the FT Indices, the pub sector
increasing by some 80%, while both hotel and restaurant shares almost tripled in value, increasing from a base of 100 to the latest level of approximately 280.

So, what are the reasons for the superior performance of the leisure sector shares?

After the collapse in the world economy in 2008, all types of shares suffered, particularly the
leisure industry which had previously undergone a period of expansion based on soaring consumer demand and cheap finance. All the problems surfaced as over-leveraged companies found that finance had to be re-negotiated at a higher rate of interest at the same time as consumer demand and confidence were on the wane.

Gradually, matters stabilised and confidence slowly returned, as is shown in the graph below.
In late 2011 all shares declined, or at best, maintained their existing levels and in 2012 as
more confidence returned to the market so shares, especially in hotels and restaurants, rose.

Pubs

Pub shares rose at a lower rate because of the changes that have taken place in the pub industry. The smoking ban had exacerbated changing consumer habits and the percentage of alcohol on-sales has declined. In 2009 the total beer sold in the country was 30,214,000 barrels, of which some 54% was sold in the on-trade; for 2014 the respective figures are 27,444,000 and 50% (interestingly in 2000, the figures were 34,572,000 and 68%, showing just how much the on-trade has declined) (British Beer & Pub Association, 2015).

The nightclub sector has not enjoyed a particularly successful time; in the last ten years
the number of such clubs has declined by 45% from 3,144 to 1,733, partly due to changing
tastes but also, according to the Association of Licensed Multiple Retailers, 'overly-restrictive
planning laws and tax levies' (Anderson, 2015).

Hotels

Hotels, too, are benefiting from the increased confidence of both their business and private
customers. Nationwide the RevPAR increased from £51.57 in 2009 to £63.82 in 2014 (Statista
The Statistics Portal, 2015), an increase of just under 24%. Likewise the overall occupancy rate
rose from 69% to 77% (Statista The Statistics Portal, 2015).

Restaurants

Eating out has become far more common a habit for the British public, due to both increased
consumerism and time constraints on families and individuals. Visits to casual dining restaurants rose to 5.9 billion for the year ending June 2014, up 11.6% on the figure for 2009 (The Caterer and EY, September 2014). The pub industry, too, has realised the change in trends and catering forms a far larger percentage of turnover than in former times. Taking as a typical example the managed house side of Greene King, the percentage of sales derived from food increased from 35% in 2009 to 41% in 2014 (Greene King plc, 2014).

For many of the British, going out for a meal is no longer restricted to special occasions but
is far more an option adopted to avoid the perceived time and effort of preparing a meal
at home.

Other Leisure

Pure leisure, such as bingo or fitness, has not enjoyed the same growth as the rest of the
overall leisure industry. Because of their socio-economic customer profile, bingo clubs suffered particularly from the 2007 smoking ban and the recession; proliferation of on-line gambling websites also exacerbated the industry's problems. In May this year, however, Rank reported that it had halted the decline in like-for-like revenues at its Mecca clubs (Martin, 2015 ). The government also cut the bingo duty in 2014 from 20% to 10%.

At the time of writing (August 2015), if the government is to be believed, the British economy appears to be in good health which should bode well for all sectors of the leisure industry, dependent as it is on consumer optimism. Whether the leisure industry can continue to outperform the FTSE 100 over the next 12 months will be interesting.

 

The most important thing

Over the past few weeks, I have been asked by fellow licensees, journalists and our customers, what was the most significant factor in winning the BII Licensee of the Year.

To be honest only the judges would know the real answer but the question has forced me to think about our experience over the last eight years at the Prince.

One thing didn't really hit home until the actual award ceremony itself. This was a splendid four hour marathon lunch at the Honourable Artillery Company in London. The lunch itself was rather tense, as we and the five other finalists didn't know who had won until the last ten minutes.

Whilst Diane and me sat on the edge of our seats, we were treated to a piece of absolute licence trade genius from an unlikely source.

Sir Clive Woodward, the man behind England's World Cup rugby triumph, was the guest speaker and he was brilliant. His presentation was full of great anecdotes and insights. But the real nugget was his one phrase when he urged us all to "seek out the sponge".

Rugby players are either rocks or sponges - so are your own management teams. The rock, Sir Clive pointed out, may be good, but you cannot train them. They have a fixed view of life; they are not open to new ideas, new knowledge and they will resist change.

A sponge on the other hand, hoovers up new ideas, collects new ways of thinking and has an open and receptive approach to work and life in general.

If we analyse what has made the Prince so successful, it's because we are massive sponges.

We spend our time "working on the business, not in the business". If you want to succeed in this
business, first and foremost you need to be a sponge. Then make sure your top guys are too.

Get out in the trade and spend a day a week visiting competitors and new openings to see what is going on. Take your team on evenings out in places known for new ideas. Yes go to London's finest and check out Dalston, East Dulwich and Shoreditch. But if you are not London based, temper the exuberance of the capital with an evening in Leeds, Nottingham or Bristol.

Sign up to Propel, read PMA and Innapub. Read the analysts' reports that cover the sector's PLCs. Go to conferences and events and soak up what successful operators say in their presentations. It's always useful but sometimes it can be inspirational.

Finally sign up to Fleurets Email newsletter and get the details of the sites they are selling in your inbox. You are not going to buy every site that pops up but you always learn something. Look for the intelligence or the ideas that can transform your business.

Be a sponge. Believe me, although it's obvious, it really works.

Cheers, Keith Marsden. BII Licensee of the Year.

 

Hotels - Big deals

Paul Hardwick Director & Head of Hotels

Earlier in this publication we commented on the regional single asset market, however, it is difficult not to acknowledge the seemingly relentless corporate activity dominating the headlines. A handful of reported transactions that have characterised 2015 so far are summarised below.

These transactions alone involve deals worth in excess of £1.9bn and relate almost exclusively to regionally located hotels. This activity is a clear reflection of strong operator/investor appetite, supported by the ready availability of funds from cash rich investment vehicles seeking to deploy capital, alongside the strong capital appreciation and income generating prospects that regional hotels are perceived to offer against the backdrop of improving trading performance.

By comparison, recent transactional activity involving central London hotels has been
relatively subdued, perhaps an indication of the slight softening in trading performance
in this area and a growing nervousness of high asset pricing driven by the high volume of cash
ready buyers chasing a shortage of available stock.

With a number of significant hotel assets and groups already available in the marketplace,
and further hotels expected to hit the market imminently, Q4 2015 looks set to be a busy
conclusion to the year.

 

Restaurants - Corporate scrum

Graham Campbell - Head of Restaurants

2015 has picked up where 2014 left off with M&A activity continuing to be a key feature of the
restaurant landscape.

The year began with the sale of the Prezzo brand, headed by Jonathan Kaye, to TPG Capital
for £303.7m and was quickly followed by other smaller scale acquisitions, including Fulham
Shore's purchase of the 10-strong Franco Manca brand for £27.5m in April and Azzurri Group's
acquisition of the 6-strong Coco di Mama business in July.

Whilst this latter acquisition was perhaps not significant in financial terms, it does however
represent an important diversification for the business and underpins an ongoing trend where, either through diversification or brand stretching, the lines between previously defined sectors of the market are becoming increasingly blurred.

The acquisition of the Coco Di Mama, fast casual brand which operate out of A1 retail units, is
a case in point and whilst it will no doubt fit comfortably within the Azzurri Group, it will be interesting to watch the development of the brand over the next few years. Whilst they have
the financial muscle of Bridgepoint behind them, they will be moving into an existing, relatively
crowded market place and taking on some established players in the sector; not least of which is Pret-a-Manger, who themselves announced only this year that they will be expanding their core offer, to include the sale of alcohol in a number of existing sites. The continued diversification of established operators into new sectors has been further underscored by Pizza
Express with their proposed entry into the formal home delivery market. Whilst they already offer an on-site take home service, the shift in consumer demand for greater convenience means they are looking to develop a bespoke chain, which will now be directly competing with the major players in the sector, including the likes of Dominos, Pizza Hut and Papa Johns.

Arguably, however the biggest story of the year to date, has been the ongoing transformation of Tragus. Having divested themselves in 2014 of Strada and entered into Company Voluntary Arrangements on their Café Rouge and Bella Italia businesses, this year has seen the company rebranded to the Casual Dining Group (CDG) and it has now moved forward aggressively to shake off the turbulent past of recent years. The first step, was the acquisition of the 41-strong Las Iguanas brand in July for circa £85m, closely followed by the acquisition of the 41-strong La Tasca brand for £26m. CDG now own a good stable of well known and established restaurant brands. It will be interesting to watch the development of the company, in particular what the future has in store for La Tasca, a brand which has been languishing somewhat of late and this looks to have been reflected in the price that has been paid. The sale price equates to an average of circa £500k per restaurant, a considerable difference to the circa £3.8m per site paid by BC Partners' acquisition of Côte in July.

Whether they will look to revive La Tasca, and whether it will survive in the longer term, is questionable. I suspect we are more likely to witness a rationalising and rebranding of the majority of the remaining properties into CDG's other core branded operations over the
coming months.

With the restaurant market still buoyant and with the ongoing expansion of the branded sector in particular, I think we can fully expect further similar activity in the next 12 months ahead.

 

Pubs - All change please

Market movement as demand continues to exceed supply and the major six prepare for MRO legislation

James Davies - Director

The Pub property market has enjoyed a bumper few months with London continuing to lead the way in demand completely out weighing supply for individual acquisitions leading to record
values. But, it is not just London making the headlines anymore; we are seeing growth across the country as more multiple operators target better value outside of the capital.

We are in yet another period of change in the sector with the major national companies
adapting their strategies to align with the latest legislation. The main protagonist for the current
evolvement can be attributed to the "Small Business, Enterprise and Employment Bill" which received royal assent earlier in 2015 and the Pubs Code which has to be in place by the end of May 2016. The Pubs Code will include the introduction of the 'MRO', (market rent only) which will allow pub company tenants to request negotiations for a new free of tie rent at certain times.

At the point of introduction the 'MRO' will only affect the larger national pub companies and
brewers with 500+ units which affects the six largest companies being Admiral Taverns, Enterprise Inns, Greene King, Heineken (Star Pubs), Marston's and Punch Taverns. The earliest date that the 'MRO' will be in place will be from when the pubs code is introduced in 2016.

Amongst some there has been a great deal of celebration with the news being greeted as a
victory for the tenants but a new free of tie agreement won't necessarily signal the best
solution for every tenant currently with a tied agreement.

Heavily wet led businesses are most likely to benefit the most from becoming free of tie but it is not always going to be the case e.g. a heavily discounted tied agreement receiving significant Pub Co support and/or in need of a refurbishment could mean that the operator would be best advised to stay within the tied structure?

What we are seeing is a fundamental shift in strategy, for example Enterprise Inns will
continue to sell a number of their smaller wet led public houses and instead create a managed
house estates within the next 5 years. Enterprise Inns aim to become a diverse and attractive
estate of managed houses, commercial leases and a better quality tied estate.

Similarly Punch Taverns, which alongside Enterprise Inns are the most likely companies to
feel the impact of the regulatory changes are undergoing a review of new managed and
franchise operating formats together with commercial free of tie leases and will unveil its
future strategy in November.


Generally speaking, new tied leases have been reduced in favour of tied tenancy agreements which are often contracted out of L&T protection.

Whether directly related or not to the Pubs Code, 2015 has also seen a continuation of the
return of the M&A markets with a number of high profile deals taking place in recent months.
New River retail completed the acquisition of 158 Punch Taverns non core estate, quickly
followed by Red Oak Taverns acquiring the 146 strong GRS estate. The headline deal was
the acquisition by Greene King of Spirit Pub Company which not only increases Greene King's
total estate to well over 3,000 public houses; it also emerged into the largest managed house
company in the UK.

We work in a fascinating and unbelievably resilient industry which constantly overcomes
challenges. Only time will tell if the number of winners will significantly outweigh the losers
when the 'MRO' is finally introduced at some point next year. What is clear however is that
change is here to stay for the foreseeable future and we have exciting times ahead!

 

Leisure - Market activity heats up

Graeme Bunn - Managing Director

The old adage of "Selling in May and going away", doesn't appear to have been heeded by many this year, as a number of disposals in the leisure sector were witnessed over the summer
months. Mega deals saw Center Parcs sold by Blackstone to the Toronto based Canadian
investor, Brookfield Property Partners in June, for a rumoured £2.4bn. The deal comprised the
five UK holiday venues which are expected to welcome 2m guests this year. Center Parcs
Europe will remain a separate business.

Another impressive transaction in May witnessed the sale of an 80% stake in Virgin Active to the South African investment firm Brait in a transaction which valued the business around
£1.3bn. Brait acquired a 80% holding in the company which was founded in 1999 by Richard Branson. The Virgin Group will retain a 20% holding. The gym chain has 267 clubs worldwide, including a number of clubs in South Africa.

The summer also saw the conclusion of the battle for the LA Fitness chain of gyms as Pure Gym beat off competition from Mike Ashley to land the group for a reported £75m. The
deal, which values each of the 43 leasehold LA Fitness clubs, at £1.75m, will see Pure Gym
operate 141 clubs. The clubs will be rebranded to Pure Gym, with existing members reported to
benefit from reduced monthly membership fees and the removal of any contracts - a clear sign
that the fitness club market in the UK is becoming increasingly competitive, with all sectors of the market, from super-budget to premium, fighting to increase membership.

Other activity saw Peter Sedgwick, a Blackpool business man, acquire two Blackpool piers to add to his ownership of the towns North pier which he purchased in 2011. The Central and South piers, marketed off a guide price of £8.1m on behalf of Crown Entertainment
Centres, have been added to the pier portfolio owned by Mr Sedgwick who now owns all three Blackpool piers. Proof perhaps, that even in 2015, leisure entertainment venues built then Queen Victoria was alive remain an enticing investment and enjoyable visitor attraction.

 

Investments - The Bull is running

Ed Sandall - Divisional Director

The investment market has gathered pace over the last 12-18 months across all sectors with
a wall of capital, both foreign and domestic competing for finite opportunities.

The leisure sector is continuing to attract keen interest due to the longer than average lease
length, relatively strong covenants and the ability to secure large well located sites with utility value for alternative use in the event of tenant default.

The demand profile for this asset class is strong with the perfect storm of private investors,
property companies and funds (if delivered as a package). A more interesting layer of demand is passive capital from other pub companies seeking to hold the asset to expiry before taking
occupation and the existing tenant seeking to 'buy-in' their investments. We have witnessed this
market first hand acquiring eight investments for JD Wetherspoon Plc and one for the Spirit Group.

The pub companies are enjoying good trading conditions, together with an all time low cost of
funds, resulting in a fairly simple arbitrage calculation. With the scarcity of good quality freehold opportunities with vacant possession, we consider this will be an ongoing trend.

There has been an encouraging level of portfolio activity in the same time period. Fleurets were
involved with a number of the transactions acting on behalf of the acquiring party as agent or
providing valuation support. One of the key selling points of each portfolio was the fixed rental growth provided in the leases. The transaction pricing shows the premium value attached to London postcodes despite the robust covenants offered.

The big question is will this trend continue into 2016, with the fairly major caveat in respect of
interest rates, we consider that demand will continue to outstrip supply and asset pricing will remain firm.