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Mon 23rd Mar 2020 - Propel Opinion: Will property landlords do the right thing, plus company results

Will property landlords play their part? By Mark Wingett

It is difficult to suggest that this week the UK hospitality sector faces a key final hurdle in its ongoing fight for a future, because I expect more to appear as the impact of the coronavirus on society as a whole escalates over the coming weeks. However, for all the significant government aid it has received and welcomed, the positive progress could come to a grinding halt if it doesn’t act again before the quarterly rent payment due on Wednesday (25 March). The majority of the sector has indicated it will boycott paying rent this week to save vital funds to continue to pay staff and preserve cash, but the fear is that many landlords, despite the good intentions expressed by some, will look to repossess sites, leading to further business failures. The positivity of last Friday would be halted stone dead.

Operators now stress the need for a two-quarter moratorium on legal action by landlords to take possession of commercial premises, which would provide six months of breathing space for business until the 29 September quarter date. As Jonathan Downey points out: “This is vital for cashflow to save businesses and jobs. Without this moratorium many more jobs will be lost. If locks are changed and premises repossessed, businesses will fail and there will be no employer left to pay over the 80%. This will mean our employees will then be left with living on £94 a week.” That is the stark warning.

Many landlords have been tight lipped on the subject. Some have been helpful, offering rent free periods or rent deferment, but the majority have sat on their hands and waited for the government to make a decision for them. The British Property Forum (BPF) has urged its members to take a flexible stance. On Friday, the BPF published a statement, on behalf of the commercial property industry, urging any business in financial distress ahead of the first rent quarter day of 2020 to speak to their landlord as soon as possible. Melanie Leech, chief executive of the BPF, said: “Property owners are already working with their retail, leisure and hospitality customers to be more flexible on rent and other lease terms, understanding they have a responsibility to sustain businesses in temporary distress and the communities where they are invested. Property owners are committed to working hand in hand with its customers through this very difficult time and will balance support for their customers with their duties to investors, who represent the savings and pensions of 45 million people around the country. We urge those businesses who find themselves in financial difficulties, through no fault of their own but due to the impact of the coronavirus, to contact their landlord to discuss payment plans as soon as possible.” Some would say this call was leaving it late, many sector operators would argue that the BPF’s members, on the whole, have their investors firmly in mind and have shown not an ounce of flexibility so far.

How much flexibility has there been? One family-owned business, Golfrate, in southwest London, reportedly told tenants they would need to pay an extra 5% admin fee to compensate for the increased workload in handling monthly rather than quarterly payments. Golfrate is also understood to have asked for an increased deposit of three months, and costs to cover its legal fees. It is thought that some of the bigger London-based landlords have been equally culpable of failing to catch the current economic mood, determined to push on and ask for payment this week. As David Abramson, managing director of Cedar Dean Group, posted recently on Linkedin: “So far, the response from too many landlords has really been somewhat delusional, who won’t bend at all or who think a month’s rent is actually an olive branch. Some clearly do not really understand the gravity of what having an indefinitely closed leisure or retail unit means – basically 0% income,100% cost. Operators have had to make tough choices to stay alive over the coming weeks and who can blame them. We are forecasting turnover drops of circa 75% in the next year which means there is clearly no margin to pay rent. Six months of rent free at this time will allow UK businesses to focus on staying solvent and keeping as many employees in a job as possible.”

Equally, government intervention is required to protect landlords’ interests. As Kieran Sherlock, property director at Imbiba, the backers of Farmer J, Vagabond and Temper, says: “You can’t just say, ‘we’re not going to pay’. When you sign a lease, you are covenanting to pay rent, service charge and all the rest. It’s right and proper that tenants pay their rent. If they can’t due to no fault of their own, there has to be protection for landlords so that tenants can make it to the other side.” There is also a fear from landlords that if they help the F&B sector, some well-backed retail tenants may look to piggyback on whatever concessions they make. One said to me: “Some of us are still burnt from CVAs being used as a (rent reduction) device, and whilst we want to help our F&B tenants, we also don’t want others taking the mickey again.” Of course, many landlords will have their own liabilities, particularly banks, and so it may be that a wider solution that protects them too is required. One idea from Downey to push landlords in the right direction is the creation of a six-month debt enforcement moratorium. He says: “This would give landlords and businesses breathing space against litigation, foreclosure and other enforcement of security.”

The long and short of it is that restaurant businesses cannot afford to pay rents across their estate whilst they are closed for business. As one property agent said: “If the landlord wants to take the unit back, then good luck, as they will then be responsible for rates (it is only the occupier who benefits from rates relief, not the landlord) and is the landlord really going to kick a credible and normally solvent tenant out of the property, not knowing how long or what type of tenant will be around to replace them. Moreover, rental values could reduce significantly.” As a landlord, would you really repossess a property with any hope that another restaurant operator would take the lease at the current passing rent right now? As another property agent pointed out: “You would have to be very brave. The only exceptions to this are the highly profitable sites in prime locations, where the tenant could be in danger of the landlord taking the property back due to them being confident of re-letting to another operator because the site is so prime, but this will apply to only a small number of sites in London.”

Hugh Osmond, serial sector investor and current backer of Coppa Club, says: “Almost regardless of government measures, one would assume a lot of operators will go bust and therefore there will be plenty of sites available, even in good locations, at rents lower than current passing rents. So any eviction risks a much lower rent than the current one, or just a vacancy and no rent. Is that a risk worth taking? And would you want to sue a leisure operator right now? If it is a good company with a future beyond the virus, what would it achieve? This situation may change if and when it becomes clear when the epidemic may relent. But I actually cannot see why a landlord would take the gamble of repossessing a property unless they had very specific plans for it (redevelopment for example). Some still seem to have failed to grasp the enormity of what is happening, so perhaps they may still be suggesting eviction, but with nearly all restaurants in London at least likely to close soon, I suspect these guys will get soon with the program.”

The BPF said in its statement on Friday that “businesses will have immediate relief measures available to them – flexibility around rents and other lease terms could include moving from quarterly to monthly rent payments and providing rent deferrals or payment holidays, depending on individual business’ financial circumstances.” Sadly, all of these levers would only postpone the inevitable. Last week, New York Governor Andrew Cuomo pointed the way for the UK, when he announced that the state would be implementing a 90-day moratorium on evictions for residential and commercial tenants. An industry veteran with 80-plus restaurants told me: “Smaller businesses without our large cash balances will fail in the next few weeks, because they cannot make the March quarter rent payments. The majority of landlords are not playing ball regarding rent relief – they see this as a window of opportunity to grab assets cheaply – but then most landlords are fools. Therefore, there will be no employers around to pay this 80% from the government to their employees. The restaurants will have folded. There needs to be forfeiture moratorium on leases like just announced by the Mayor of New York.”

Osmond’s advice to “every operator of a retail, leisure or other front-line business”, is don’t pay any rent until “you can see a real timeline to getting back to normal”. He says: “If you are earning no money from your premises, why should a landlord assume you can afford to pay any rent for it? We have no sales: no income means no outgoings. Do landlords really expect people to pay rent for premises in which they are not allowed to trade?” Another serial sector investor Luke Johnson also doubts there will be mass repossessions since landlords don’t want properties back – “they’re unlettable currently and they’d have to pay rates”. He says: “Landlord intransigence is negotiation and posturing by landlords. BPF has indicated that their members should take a flexible stance. Those who don’t should be named and shamed.”

The world will turn and of course people/businesses will not forget who did what for whom and who was found wanting. The landlord tenant relationship could this week be changed forever. Some operators will be dealing with one or two landlords, some a mixture of private and institutional ones, a few could be entering conversations with over one hundred different ones, such is the breadth of their estates All will hope either today or tomorrow, that the government will again step in to ease another burden and postpone for three, but hopefully six months, further tough decisions, allowing them to preserve cash, jobs and their businesses. A two-rent quarter moratorium is not a unilateral declaration of non-payment, but it would allow operators and landlords an opportunity to reassess/renegotiate their relationship without annihilation hanging over both parties. We are, after all, all in this together.

Mark Wingett is Propel insights editor
 

McDonald’s to close all UK sites today: McDonald’s will close all 1,270 of its restaurants in the UK by the end of Monday, as fears over the spread of coronavirus escalate. Previously, the company had closed its seating areas but had continued to offer takeaway and drive-through services. McDonald’s said it wanted to protect the wellbeing of staff and customers. McDonald’s employs around 135,000 people in the UK, the majority of which are on zero-hours contracts. The company said staff employed directly by the company would receive full pay for their scheduled hours until 5 April. By that time it expects the government’s financial aid package, announced on Friday, to have kicked in, with staff paid 80% of their wages. A spokeswoman told the BBC she expected McDonald’s franchises, which decide their own pay policies, to follow suit. McDonald’s UK boss, Paul Pomroy, said: “Over the last 24 hours, it has become clear that maintaining safe social distancing whilst operating busy takeaway and Drive Thru restaurants is increasingly difficult and therefore we have taken the decision to close every restaurant in the UK and Ireland by 7pm on Monday 23 March. I have been clear throughout this that we would only continue to operate whilst it was safe for our people and together with our franchisees, we feel now is the time to make this decision.” At the same time, Nando’s and Byron have also decided to temporarily close their entire estates, after initially changing, in parts, to a delivery and takeout model. Both said they had made the decision to protect the health and safety of their teams and customers. In an internal note to staff, Byron chief executive Simon Wilkinson said: “The number one priority for everyone connected with our business is their well-being and health, business quite rightly takes a back seat at these times which is why today I have decided that we should shut down our operations completely, even Deliveroo. I do not expect our employees to put their health at risk by travelling on public transport to work or inter facing with drivers who may be coming into contact with many people. This disease takes no prisoners so we all need to minimise our contact with everyone outside of our own personal domestic circle. From tonight we close Deliveroo. Any perishable food should be given away to the homeless, local charities or the NHS and emergency workers, please decide the correct and safe course of action with your ops manager on an individual basis, thank you.”

Fulham Shore – some sites remain open: Franco Manca operator Fulham Shore has reported some sites remain open where they can offer delivery. In a market update, it stated: “Until recently we were on target to meet or slightly exceed market expectations for the current financial year. Due to decelerating trading in February and March from the impact of covid-19, we now anticipate that we will marginally undershoot those expectations. The majority of our Franco Manca and The Real Greek restaurants were closed temporarily as of Friday 20 March 2020. This was a result of a direct instruction from the UK government. Some of our sites remain open, continuing to serve our customers through our delivery, take away and click and collect services. Above all, throughout this period we continue to work hard to ensure the health and safety of our team members, our customers and our partners. We are following the UK government’s and health authorities’ guidelines. Our dine-in restaurants will remain closed until the UK government advises otherwise. We are therefore in the unhappy position of having to reduce all of our costs to a minimum. These include, amongst others, property and staffing costs. We are likely, however, to benefit from the business rates holiday and the assistance to be provided by the Coronavirus Job Retention Scheme for the employees of our closed restaurants. We have also taken the decision to halt all but our basic capital expenditure in order to better manage our cash flow. We are working with our many partners, landlords, HM Revenue and Customs and our staff to reduce our outgoings to the basic minimum as we note much of the UK government’s business support plans will not pay out for some weeks yet. Our lenders are supportive and we have sufficient undrawn facilities available to manage the business through any anticipated period of closure. The situation is evolving rapidly with new guidelines being introduced by the UK government every day. There is currently little certainty around the duration of the impact on the group. Our two popular restaurant businesses offer delicious food at great prices. Despite the impact of the current situation, we remain confident that the two businesses will thrive once the market returns to normal.”

NewRiver’s – we are confident we can comply with our covenants: Community pub business, Hawthorn Leisure, has closed all its sites with immediate effect. In a market update, the company stated: “The company had anticipated pub closures at some stage soon and was therefore well prepared for this outcome. The company improved its financial position further at the end of last week to £75m of unrestricted cash balances and £45m of committed undrawn credit facilities, providing £120m of available liquidity. The company has already undertaken extensive scenario testing, factoring in the loss of income from its pub portfolio, which confirms that NewRiver has significant covenant headroom and a capital structure that is well placed to absorb a prolonged period of uncertainty. One such scenario in our testing is that the company does not receive any pub income for the next six months, and a reduced income beyond this, whilst the pub business rebuilds. It also assumes that there is a significant reduction in the company’s retail portfolio income for the next 12 months. In this scenario, the company’s analysis shows that it will have in excess of £50 million of cash and £45 million of undrawn credit facilities after 12 months. Based on this analysis, the company is confident that it will remain compliant with its financial covenants for the next 12 months. The company has no bank or refinancing events until August 2023. The company was pleased to note the recent announcements by the UK government aimed at providing financial assistance to businesses impacted by covid-19: The UK government’s business rates holiday will apply to the entire pub portfolio, which will save the company and its tenants an estimated £5 million in cash flow over the next 12 months; We are supporting our pub partners and tenants who employ staff to enable them to apply for the Coronavirus Job Retention Scheme, whereby 80% of the wage costs of employees who are unable to fulfil their role due to covid-19 will be borne by the UK government; NewRiver – To protect against the possibility that market conditions remain challenging for the next 18 months or more the company is working with its advisors to apply for the Covid Corporate Financing Facility programme using its Investment Grade credit rating.”

Wildwood operator Tasty offering takeaway and delivery: Wildwood operator Tasty has closed all of its 56 restaurants for in-store dining for the foreseeable future. It added: “The restaurants will remain closed until the company receives guidance from the UK government to the effect that restaurants are permitted to re-open. In the meantime, the company is offering takeaway and delivery services, where available, until such time as the government announces that it is prohibited from doing so or the company decides that it is not viable to continue the services. In addition, free takeaway meals are currently being offered by the company to NHS and emergency services staff. The company will seek to mitigate the revenue loss by implementing cost-cutting measures such as cessation of capital expenditure and seeking preferential terms from landlords and suppliers as well as relying on government support for employees’ pay and VAT and business rate holidays. Concurrently, the company is taking measures to ensure staff retention where possible. Given the company’s existing cash position with no debt, the Directors confirm that during the period of shutdown and assuming it is successful in implementing the cost cutting and cash preservation measures referred to above, it has sufficient financial resources for the foreseeable future.”

Fuller’s – these are unprecedented times: Fuller’s temporarily closed its entire managed and tenanted pub estate from the close of business on Friday 20 March. The company stated: “Given the uncertainty as to when our estate will re-open, we are not in a position to give guidance on the financial impact of covid-19 on our business at this juncture, except to say that we anticipate a material reduction in our trading performance. Clearly the quantum of this will depend upon the duration of the temporary closure of the group’s pubs and hotels and any subsequent measures imposed by the government. Fuller’s is in a strong financial position. We have an excellent relationship and open dialogue with our lending banks, and the company is well financed with a healthy balance sheet and significant liquidity headroom. Furthermore, the group has a high- quality asset base of premium pubs and hotels, which is 89% freehold by book value. First and foremost, Fuller’s is a people business and we are focused on protecting the 5,000 incredible team members who work within our estate and in supporting office roles, while also suspending commercial rents for our tenants to support them at this difficult time. We thank the government for the measures it has taken, both for the business and our team members, which will provide some alleviation of the financial impact. The group is taking a prudent approach and pre-emptive action, where possible, to further preserve cash and reduce overhead costs through a range of measures including delaying the start of larger capital expenditure projects. In addition, we will also be carefully considering our dividend policy in due course.” Chief executive Simon Emeny added: “These are unprecedented times. The impact of covid-19 on the hospitality sector, and indeed the nation, cannot be underestimated. However, Fuller’s is a long-term business, established on extremely sound foundations, which equips it well to navigate testing times such as these. This will end and, when it does, we will be ready to welcome our customers into our wonderful pubs and hotels and provide the fantastic food, drink and exceptional service that we have been delivering for nearly two centuries.” 

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