Enterprise Inns has announced that by 2020 it expects to have a managed estate of 750-850 pubs and a commercial property business with around 900-1,000 assets.
The move is part of its strategic review to mitigate the effects of the pubs code and in particular the inclusion of the market rent only option.
It said that in 2016 it expects 200 potential MRO events and 600 such events per year thereafter.
The company currently run 16 managed pubs and has a pipeline of planned conversions which is likely to result in 30 managed houses being operational by September 2015.
The projection is that by September 2016 the company will operating 100 managed pubs with 300 commercial properties. By the same month in 2018 it expects the figures to be 400-500 and 600-700 respectively.
It said it has “learnt a great deal” from the conversions and now intends to run its managed estate through three model, including a partnership model known as ‘managed expert’. It has already started working on this model with Geronimo Inns founder Rupert Clevely, who will operate selected sites on a managed basis. It anticipates extending this model by c15-25 sites a year with average initial capital investment of £400k per pub.
The other two models are the company’s currently ten-strong Bermondsey Pub Company, which is likely to grow by 35-50 sites a year and community pub model Craft Union Pub Company, which it believes could eventually grow by 100-125 sites per annum. It said the latter offer has been developed over the past two years through experience gained from the Beacon model.
Enterprise said it currently had a portfolio of 185 properties, of which 162 are being operated as free-of-tie pubs and 23 as retail units.
It said there were an increasing number of properties in the estate being run as food-led pubs with Enterprise’s income coming primarily from rent. It said in such circumstances it was willing to release the tie unilaterally and negotiate rent-only terms, which could include a turnover-related element. When vacant possession is obtained in future Enterprise said it would generally offer free-of-tie commercial lease agreements.
It said: “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.”
The company is set establish partneships with developers to take advantage of ”under-utilised land, outbuildings and upper floors”.
It insisted that the tenanted and leased model remained at the heart of its business and said it would continue to offer tied agreements but only up to five years in length.
Enterprise said that alongside the changes to its operating models it would continue with its disposal strategy, which saw 133 pubs sold in the first half of the year, generating net sale proceeds of £34m. The company said it had already identified pubs that were unlikely to deliver acceptable returns on capital in the medium-term. It said it expected to reduce its estate to around 4,200 pubs by 2020 with cash proceeds from disposals expected to be approximately £75m a year.
The company said total capital investment requirements for the first stage of the strategy would be £70m for this financial year and £80m in the following year. It said this would be self-funded by proceeds of planned asset disposals.
It added: “In future years, whilst the evolution of our business model will change the mix of capital expenditure, we do not envisage a material change in the annual level of investment and we are maintaining our current target hurdle rates for returns on investment.”
The announcement was made as Enterprise revealed its interim results for the six months ended 31 March, which showed like-for-like net income growth, up 0.6% (H1 2014: 1.1% growth). EBITDA before exceptional items was £144m (H1 2014: £147m), in line with expectations and reflecting the impact of planned disposals.
Profit before tax and exceptional items increased to £57m (H1 2014: £55m) as interest savings from reduced debt offsets reduction in EBITDA. Profit after tax was £4m (H1 2014: £37 million), which the company said was largely due to exceptional costs of £26m in respect of partial refinancing of 2018 corporate bonds and property charges of £21m (H1 2014: £6m)
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.”
On the need for a fundamental reshaping of its business, Enterprise said: ”As we and our publicans have responded to the multiple business challenges of the last few years and constantly evolving consumer demands, it has become clear that an exclusively leased and tenanted operating model, whilst relatively simple in execution and requiring only modest central overheads, does not provide us with sufficient optionality with which to optimise the returns generated from every asset in our pub estate and deliver greater value for shareholders.
”Therefore during 2014 we started developing the necessary operational flexibility and capability to enable us to: use alternative models to operate the pubs in our estate; better apply consumer insights to inform our decision-making; optimise our scale and leverage to the benefit of our publicans; access the growing importance of food sales; and seek to attract the very best retailers in the UK.”
In June 2014 Enterprise started working with LEK Consulting and Deloitte to “develop an approach to the segmentation of the estate which uses geographic location, amenity, competitor analysis and the socio-demographic profile of the local population to assess the supply and demand dynamics of the marketplace in which each of our pubs is located and to determine the appropriate retail proposition which is most likely to fully exploit the trading opportunity presented by each individual site”.
It said: “We have defined a number of retail propositions into which the majority of the sites in our estate may be categorised, allowing us to identify those sites where the gap to optimum trading is greatest, or where the repositioning of the consumer offer is likely to maximise the performance and profitability of individual pubs. We are already using this information to inform our decision-making in relation to investment and choice of publican, and we are establishing a “plan for every pub” which will identify the desired retail proposition and most appropriate operating model for every asset within our portfolio. We expect to have established a plan for every pub well ahead of the introduction of the MRO option in order that we can proactively manage the implications of the new legislation.”
