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Tue 12th May 2015 - Enterprise Inns plans 850 managed pubs by 2020
Enterprise Inns plans 850 managed pubs by 2020: Enterprise Inns has reported it is planning as many as 850 managed pubs by 2020, with Geronimo Inns founder Rupert Clevely operating selected sites on a managed basis in the first of a number of partnerships. Enterprise is diversifying away from tenanted and leased agreements over time to a managed estate plus commercial property business, with only five-year tied agreements on offer. Reporting the results of a strategic review, the company stated: “We are announcing the outcome of a strategic review which we commenced in April 2014 that aims to optimise the returns from every asset within our property portfolio. In order to achieve this we are increasing our operational flexibility which means we will: continue to reinvigorate our tied tenancy business; expand our managed business; build a high quality commercial property portfolio; and make disposals where appropriate to optimise returns. Whilst recognising that this will be a dynamic process we are planning that by September 2020 our managed pub business should be operating in the region of 750-850 pubs and we expect to have a commercial property business with around 900-1,000 property assets.” Of its new strategy, it stated:

Continued reinvigoration of our tied tenancy business:
We continue to believe that the optimum level of income that can be generated from a significant proportion of our pubs is through the tied tenancy model, where we work alongside great publicans, and where we can utilise our scale to secure margin from drinks suppliers that is unavailable to such sites on an individual free-of-tie basis. We will therefore continue to offer tied agreements of up to five years in length, as this model continues to attract ambitious, entrepreneurial individuals who value the opportunity to run their own business supported by Enterprise, and where we share risk and reward in pursuit of mutual success. These agreements enable tenants to give six months’ notice of their intention to leave at any time during the term of the agreement. We are receiving over 80 enquiries per week from individuals who are attracted by this model and as a business our primary focus remains on ensuring the continuing success of our publicans. The commercial terms of tied agreements will undoubtedly evolve with the value of discounts offered likely to continue to rise as a means of securing greater beer volume. Our willingness to invest in tied pubs and our provision of a wide range of support measures will remain a critical differentiator in favour of tied agreements for many publicans. However, our strategic objective is to diversify away from a predominantly leased and tenanted business over time. This strategy is focused upon increasing the number of directly managed operations and commercial property agreements across our estate to build a portfolio which provides greater flexibility with which to adapt to market changes.

Expanded managed business:
We are operating sixteen pubs as managed houses, and have a pipeline of planned conversions which is likely to result in 30 managed houses being operational by September 2015. We have learnt a great deal from these conversions, and are now better able to determine the success criteria against which every site’s potential can be assessed. This has enabled us to identify the retail offer where our developing retail capability is most likely to be effectively executed, where the customer proposition is not overly complicated, and as a result where our current and future estate of managed houses will be operated. Over time, we will be able to share our experiences in managed pub retailing with our lessees and tenants, leveraging our scale and resources in order to provide additional goods, services and insights to support them. Furthermore, we expect to be able to provide proven off-the-shelf solutions to our publicans to help them compete more effectively in such areas as pricing, promotion and product range. As we develop our retailing capability and infrastructure, we will also be able to step into failing leased and tenanted businesses in order to restore the customer offer and improve the prospects for future letting. With managed operations often comes complexity and increased costs. It is important that we recognise where our managed operations can best create value whilst mitigating the risks and costs associated with this method of operation. Therefore we have developed an innovative and flexible approach in the way in which we propose to run our managed business through three managed house models:

Managed expert:
We have a partnership model whereby we can work with expert managed house operators in order to utilise their retailing flair and capability in pubs with exceptional profit potential, thereby optimising the value of such sites. In this model, the operational resource and expertise is provided by our retail partners. In the first of such partnerships, we are delighted to have agreed terms with Rupert Clevely, founder of Geronimo Inns, who will operate selected sites with us on a managed basis. We have already identified a number of sites which have the potential to be extremely successful under the guidance of Rupert and his team, and we expect to have the first site operational during the second half of this financial year. We believe this model will be very attractive to other parties whose interests, ambition and geographic coverage are complementary to our own and hope to be able to establish similar ventures with which to expand our managed house estate in partnership with some of the UK’s most successful pub retailers. Based on the profile of our estate, and the likely availability of suitable sites, we have the potential to extend this model by 15-25 sites per year over time, with an average initial capital investment of £400,000 per pub.

Bermondsey Pub Company:
Ten of our current managed house estate are operated by our Bermondsey Pub Company. We have recruited and resourced our own team and are using our segmentation work to identify those pubs into which we can most effectively install a managed operating model utilising one of two preferred choices of retail proposition. As demonstrated by our experience in the existing sites this managed model is best suited to a mainstream offer which has a balanced mix of food and wet sales. Based on the further development of our evolving infrastructure and capability, and the pipeline of sites likely to become available in the foreseeable future, we will ultimately be able to convert 35-50 sites to managed operations per year at an average initial capital investment of £200,000 per pub. Only when we are clearly demonstrating that this model provides the greatest value to shareholders will we build our resources to further accelerate the pace of conversions.

The Craft Union Pub Company:
The Craft Union Pub Company has developed a community pub offer which will be operated in predominantly urban and neighbourhood locations. This value orientated offer delivers a local experience, in a well-invested environment designed to meet the needs of the local community. The Craft Union management team has developed this offer utilising experiences gained from the operation of our Beacon pubs over the last two years. This model will allow us to attract the entrepreneurial flair of great managers, who seek the opportunity to enjoy the support and protection of our managed business, whilst retaining some freedom to co-evolve our retail offer in order to best meet the needs of their local communities. In addition to the ten managed sites operated by the Bermondsey Pub Company we are currently operating six managed sites within Craft Union and we believe that this model will provide publicans with an attractive alternative to sit alongside our tied agreement model. We are therefore developing the capability and infrastructure to potentially convert 100-125 sites per annum to this model at an average initial capital investment of £75,000 per pub. This infrastructure is currently being outsourced and we do not anticipate significant organisational implications in the near term.

High quality commercial property portfolio:
Our commercial property team already manages a small, but growing, portfolio which now includes 185 properties, of which 162 are being operated as free-of-tie pubs and 23 as retail units. Operationally, our commercial property function incurs minimal overhead cost and requires only a small amount of capital expenditure. These properties are typically let on standard, commercial, fully repairing and insuring, long-term agreements pursuant to which rents are payable quarterly in advance, subject to indexation and upwards-only rent reviews at five yearly intervals. In some instances this rent can include an incremental element based on a percentage of the total turnover of the tenant’s business. Commercial lease terms such as these differ markedly from the traditional tied lease or tenancy, where the balance between the fixed costs of lower rent and the variable costs of beer supply ensure that the operational gearing of the business varies according to levels of trade. A recent assessment of the freehold assets within our current commercial property portfolio, by Colliers International, has confirmed the attractiveness of this portfolio to property investors, highlighting the diversity of occupation and retail usage, the fact that 98% of the portfolio are let on long-term agreements with an average 13 years unexpired term and that over 90% of the assets are in primary or secondary locations. The average annual rent receivable in the portfolio is currently £53,000. There are an increasing number of high quality properties in our estate which are operated as food-led pubs, where our income is already predominantly rent and our income from the supply of tied drinks is less significant. In such circumstances, we are prepared to release the tie unilaterally and negotiate rent-only terms which may include a turnover-related element. When we obtain vacant possession of such properties, we will in future generally offer free-of-tie commercial lease agreements. Our expectation is that many of these properties will be assessed as high quality commercial properties. We expect to grow the commercial property portfolio significantly in the future and it is our intention to operate these assets in such a way as to enable us to take advantage of the status of a Real Estate Investment Trust, were the Board to determine that such a structure delivers greatest value to shareholders. Our commercial property business is also developing the capability to seek out property development opportunities from our estate, in particular taking advantage of under-utilised land, outbuildings and upper floors. Whilst we do not envisage establishing our own property development business we do see value in partnership arrangements with skilled experts in this market. We are likely to be able to provide a healthy pipeline of development opportunities where we could create significant value working with development partners.

Disposals where appropriate to optimise returns:
With changing consumer behaviours and changes to local markets there will be pubs that become economically unviable and there will be pubs where a special purchaser may attribute enhanced economic value to an asset. In such circumstances we will dispose of the assets to optimise returns. This capital recycling is not a new strategy as we have effectively sold underperforming assets and re-invested the proceeds into the retained estate for many years. Crystallising value through disposal will remain a key component of our strategy. We concur with the Government’s own conclusions that the forthcoming legislative changes will lead to some pubs becoming unviable and others being unlikely to deliver the required returns to warrant further investment. We are conducting a comprehensive review of our entire estate to identify those pubs on long-term tied agreements where future investment returns and letting prospects are rendered unattractive by the prospect of an MRO trigger and we are therefore identifying the most appropriate means of realising shareholder value from these pubs, including the potential for disposal. We have already identified pubs which are unlikely to deliver acceptable returns on capital employed in the medium-term and have revised our expectations of cash proceeds from disposals to be approximately £75 million in each of this financial year and the next. Thereafter we will continue our programme of capital recycling and expect the total estate to reduce to around 4,200 pubs by 2020.

Current trading: 
The company reported like-for-like net income growth up 0.6%. Chief executive Simon Townsend, said: “We are pleased to report like-for-like net income growth for the first half of the financial year. At the start of last year we delivered net income growth for the first time in many years and to have built upon that momentum is particularly satisfying. To have achieved this performance against a backdrop of legislative uncertainty reflects the professional approach of our teams and the strength of relationships we have with the vast majority of our hard working publicans. We are now implementing our new strategy which provides a clear path to maximise returns from each of our assets. We are building upon our core capability of operating leased and tenanted pubs by extending our operational flexibility into the direct management of pubs and increasing the scale of our commercial property business. This new strategic direction will ensure that we generate the greatest value from each of our assets, and will also accommodate the requirements of the new legislation. This is a sustainable strategy for our business which embraces different operating models to best serve our publicans and their communities whilst delivering greater value to our shareholders.”

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