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Morning Briefing for pub, restaurant and food wervice operators

Tue 16th May 2017 - Update: Enterprise results, NewRiver lines up LT for bigger role
Enterprise Inns reports strategic evolution progressing well: Enterprise Inns, now known as Ei Group, the largest owner and operator of pubs in the UK, has reported its ‘business performed well with all operations maintaining like-for-like growth momentum and strategic evolution on track in the six months ended 31 March 2017’. It had underlying Ebitda of £140 million (H1 2016: £142 million), in line with expectations and reflecting the impact of planned disposal. Underlying profit before tax was £57 million (H1 2016: £57 million) as interest savings from reduced debt offset reduction in Ebitda. Statutory profit after tax reduced to £10 million (H1 2016: £33 million), primarily due to non-underlying finance costs of £30 million (H1 2016: £7 million) associated with, previously announced, partial refinancing of the 2018 corporate bonds which delivered smoother and extended debt maturity profile. Within its Publican Partnerships, its tied leased and tenanted business, there was continued momentum with like-for-like net income up 1.6% (H1 2016: up 1.8%) and growth delivered across all geographic regions. The company said ‘initial phases of implementation of the new Pubs Code (are) progressing in line with expectations’. Wit its commercial properties portfolio, like-for-like net income was up 1.1% (H1 2016: 6.3%) reflecting changes in estate composition, with future like-for-like net income growth expected to normalise in line with inflation. There were 304 commercial properties at 16 May 2017 at an improved average annualised rental income per property of £66,000 (H1 2016: £59,000). The company reported disposal of a package of 18 commercial properties on 16 March 2017 generating £20 million of net proceeds, representing a 15% premium to the prior year-end book value and a gross yield of 6.57%. Its directly managed house business company had 161 pubs trading within our 100% owned Managed Operations business at 16 May 2017 with 39 trading in the Bermondsey Pub Company and 122 in the Craft Union Pub. Its managed investments segments, involving partnerships with expert managed house operators, had 24 pubs at 16 May 2017, operating through trading agreements with seven managed partners. Net cash inflows from operating activities were £117 million (H1 2016: £129 million) and net proceeds from disposals were £65 million (H1 2016: £27 million). The company made total capital investment of £35 million (H1 2016: £30 million) with 57% focused on growth-driving investment schemes (H1 2016: 50%). Average pre-tax returns on all such investment of 21% (H1 2016: 19%). It repaid £38 million (H1 2016: £37 million) of securitised notes, in line with amortisation schedule. It completed a share buyback programme of £25 million in respect of the issued share capital of EIG, with 24.1 million shares purchased for cancellation. Chief executive Simon Townsend said: “We are pleased to have maintained the growth momentum in our leased and tenanted estate while making significant progress in building our commercial property portfolio and managed businesses. Our transformation of the group remains on track. Trading in the first six weeks of the second half of the year has been strong, assisted by the timing of the Easter holiday period. We expect our trading performance to reflect more challenging comparatives in June and July as we benefited from the UEFA Euro football championship last year. We are mindful of the potential for continuing economic uncertainty over the coming months, and remain vigilant regarding possible headwinds from the Pubs Code depending upon its interpretation and application. Whilst taking into account these factors, we are confident that we will continue to deliver positive like-for-like net income growth in our leased, tenanted and commercial estates for the full year, we are encouraged by the trading performance of our expanding portfolio of managed houses, and we remain committed to the successful implementation of our strategic plan to deliver long-term growth in shareholder value.” Of its managed investments, the company added: “As at 31 March 2017 we had 22 pubs and today we have a total of 24 pubs trading under our various relationships. We plan to expand this model in the coming year such that by 30 September 2017 we expect to be operating with around nine partners and trading in the region of 30-35 pubs. At 31 March 2017 we had seven pubs operating within our Managed Investments business that had traded for more than six months and these pubs are to date generating average annualised site Ebitda of £261,000, from an average site capital investment of £685,000, which delivers a ROI, excluding the minority interest, of 18%. As we evolve and grow the mix of operators within the Managed Investments business we would expect the average capital investment to be in the region of £400,000 to £500,000 with average site Ebitda to be in the range of £150,000 to £250,000, which we expect to deliver a ROI in excess of 20%.” Of its commercial properties, it stated: “Our Commercial Properties division contributed £9 million (H1 2016: £7 million) to the underlying Ebitda of the group reported in the first half of the year, with sites that traded as commercial properties throughout both this year and the prior year delivering like-for-like net income growth of 1.1%. We now have 304 commercial properties, the vast majority of which trade as pubs on a free-of-tie basis. These assets represent investment properties and are now sufficiently material to the group that we report them separately on the balance sheet. They operate under open market commercial terms which typically attract a higher valuation multiple. These properties have an annualised rental income of £20.0 million and were valued at 30 September 2016 at £228 million, resulting in a gross yield of 8.8%. Excluding 50 leasehold sites, the gross yield on commercial property freehold sites was 7.8%. In addition to free-of-tie agreements arising from the MRO process we are expanding our high quality commercial property portfolio through open market negotiations with exceptional operators. In the last two years we have entered into 154 new free-of-tie agreements, on terms that are common in the market place for commercial free-of-tie leases, at an average rent of £79,000 over an average term of 19 years. On 16 March 2017 we sold a package of 18 commercial properties to investment clients of OLIM Property which comprised 13 pubs and 5 convenience stores geographically spread across England. The transaction generated £20 million of net proceeds, representing a 15% premium to the prior year-end book value and a 6.57% yield based upon the gross rental income of £1.33 million. This package disposal demonstrates the inherent realisable value of the portfolio. Reflecting this value-led approach, and the lower than expected number of conversions to free-of-tie agreements from tied publicans exercising the MRO option, we now expect to be operating in the region of 350-375 commercial properties by 30 September 2017. This is lower than our previous estimate of 400-450. It is too early to assess whether the current MRO conversion rate will be repeated in the future and so at this point we continue to believe that our commercial property business will grow to be in the region of 1,000 assets by September 2020. In the short-term a smaller commercial property operation means a larger tied leased and tenanted business which is likely to be beneficial to group net income.”

NewRiver Retail lines up LT Management to run expanded pub portfolio: Property company NewRiver Retail has lined up outsourced management company LT Management to run an expanded portfolio of pubs across its 344 strong estate. The company stated: “In October 2013, we acquired a portfolio of 202 pubs from Marston’s. Each pub in the portfolio was handpicked by management for its high roadside visibility, high passing footfall and prominent location, with the intention of converting a significant number of them for retail/residential use. The pubs in the portfolio traded strongly, with high occupancy and strong income returns, and consequently in August 2015 we acquired a second portfolio of 158 pubs from Punch Taverns. We have since sold nine pubs, many of which were to existing tenants, and closed seven for convenience store conversion meaning we now have 344 pubs remaining in our portfolio. At the time of the Marston’s portfolio acquisition, we signed a four year leaseback agreement with Marston’s, which comes to an end at the end of the year. We have been active in negotiating the transfer of a number of pubs in advance of the deadline, with 35 pubs transferred to NewRiver with existing tenancies in place and nine pubs transferred to be operated by LT Management, the specialist pub management company that already manages the Punch portfolio on our behalf. Further to these transfers, in December 2016 we secured contracted income on 22 pubs by surrendering the leaseback arrangement 13 months early and agreeing new 15 year RPI linked leases with Marston’s. We have in place a structured programme to transfer the remaining 123 Trent pubs to the management of NewRiver and LT Management, and through a detailed estate review, involving all relevant stakeholders, we have split the transfer into small batches in order to manage the programme effectively. The first tranche of pubs will be transferred in May with the last batch transferring by the end of the agreement. Throughout the programme our team will be visiting each site and working with the publicans to ensure a smooth transition. We are confident that the majority of publicans will remain in their pubs during the transfer and our operations managers and instructed solicitors will ensure that new leases and tenancies are implemented seamlessly. For the minority of pubs where the publican intends to vacate, we will implement our tried and tested lettings programme to recruit high quality publicans who will continue to grow the business. Throughout the transfer programme we are working closely with Marston’s to ensure that the process is as smooth as possible.” Of NewRiver’s performance more broadly in its full financial year, chief executive David Lockhart said: “Our convenience-led, community-focused retail and leisure portfolio has proved well-positioned, despite the prevailing macro-economic uncertainty in the UK, and we have continued to deliver growing and sustainable cash returns to our shareholders. We have increased our full year ordinary dividend by over 8% to 20 pence per share, and today we have announced an additional 3 pence special dividend linked to our retail warehouse acquisition in Sheffield, meaning our fully covered dividend has increased by 24% in total. Looking ahead, we believe that with our convenience and community focus, affordable rents, active approach to asset management and in-built risk-controlled development pipeline we are well-placed to continue to deliver growing and sustainable cash returns to our shareholders. Reflecting the confidence we have in the strength of our underlying business, we have today announced that the ordinary dividend for the first quarter of the new financial year will increase by 5% to 5.25 pence per share.”

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