Enterprise reveals new 'premium tenancy' agreement
In an update to the market ahead of its Capital Markets event today, the company said like-for-like net income had grown 1.5% in the leased and tenanted estate in the 25 weeks to 19 March 2016.
Enterprise also updated on its portfolio, which currently includes 60 managed pubs and 245 commercial properties with an annualised average rental income of £58,000 per site.
The company said its Enterprise Premium Tenancy, which will reduce property obligations and enhance capital investment, will be launched imminently.
It is also initiating a new share buyback programme of up to £25m (circa 6%) of the issued share capital.
The company said after a successful first partnership with Rupert Clevely’s Hippo Inns, the company’s second partner would be Mash Inns – a new venture with the Gavin George-led Laine Pub Company. Laine will also provide “support and advice on the next stage of development of our Craft Union Pub Company”.
Enterprise said it aimed to announce further partnerships in the second half of the year and expects to have at least 10 pubs trading under its various relationships by 30 September 2016.
Laine Pub Company Chairman Gary Pettet said “Laine’s is delighted to have been given the opportunity to work with the UK’s biggest pub owner on a venture that provides significant benefits to both parties. Enterprise has excellent pubs located in our Brighton heartland and in the London locations where we have been expanding our estate. Laine’s has the skills to help run the pubs under management and aims to apply its format to six of them a year, with a target estate size of 20”
Although the pubs will be operated by Mash Inns, support will be provided directly from the team at Laine Pub Company. “We hope to seamlessly integrate the support for the Mash sites into our existing operational setup” said Laine’s chief executive, Gavin George. “As existing Enterprise lessees, we are aware of the quality of the sites in their estate, so we are very excited about the depth of possibilities that this partnership presents.” Commenting on the name of the joint venture he said “When we created the original incarnation of the Laine’s business twenty years ago, the first site we opened was the Mash Tun in Brighton. Held on an Enterprise lease, the pub was an overnight success and a springboard for our growth. It seems fitting to recognise the importance of our first pub and the support we have received from Enterprise over the years by connecting the name of this latest venture to both.”
The company unveiled a new trading name for its tied leased and tenanted business - Enterprise Publican Partnerships . As at 19 March 2016, the company had 4,688 pubs trading within the leased and tenanted estate.
Chief executive Simon Townsend said: “It is close to a year since we announced our new strategic plan for the business and we are making good progress. Our leased and tenanted business, Enterprise Publican Partnerships, continues to deliver like-for-like net income growth and the expansion of our managed operations and commercial property portfolio is on track.
“We are confident that the delivery of our strategy will provide a clear path to maximising shareholder value and are today outlining a returns-based approach to the allocation of available capital. The announcement of a share buyback programme demonstrates our approach and underlines our confidence. We remain on track to meet our expectations for the full financial year and look forward to outlining the progress we have made in more detail later today.”
Enterprise said it expected to expand its currently 42-strong Craft Union business to around 70 sites by September.
It said: ”This business predominantly operates in the north of England but is beginning to expand south and we expect its offer to appeal nationally. Currently, its offer is wet-led with quality beers, at affordable prices, served in local, well-invested, community pubs. The simplicity of the offer mitigates the execution risk and also limits the required capital investment.
“We have 32 pubs operating within Craft Union that have traded for more than one month and these pubs are generating annualised site EBITDA of £82,000, from an average capital investment of £115,000, which delivers pre-tax returns of 27%. As we enhance our offer and accelerate the rollout programme we would expect these pubs, on average, to generate site EBITDA in the range of £80,000 to £100,000, whilst gradually reducing the required investment to be in a range of £75,000 to £100,000.”
Bermondsey Pub Company currently has 16 sites with plans to expand to 25-30 pubs bythe end of the financial year.
The company said: “These Bermondsey pubs operate under two retail propositions. We have 11 sites operating successfully in our “Meeting House” format, an upper mid-market, mixed food and drink offer. We also have five sites operating under our “Friends and Family” format which is in the value-led segment of mixed food and drink offer. At this stage these five sites are not achieving the desired level of returns for the Group and we are reviewing whether this highly competitive retail segment is a priority for further capital investment or whether we would be better redirecting capital to other more value enhancing retail segments.
“We have nine pubs operating under the Meeting House retail proposition within Bermondsey that have traded for more than three months. The average capital investment in these conversions has been £203,000 and they are now generating annualised site EBITDA of £124,000 providing pre-tax returns of 21%. As we expand and enhance our offers within Bermondsey we would expect the average capital investment to remain in the region of £200,000 with average site EBITDA expected to be in the range of £125,000 to £175,000.”
On the premium tenancy agreement, the company said: “The new regulatory regime arising from the Small Business, Enterprise and Employment Act is expected to come into effect on 26 May 2016. We will work constructively with the newly appointed adjudicator to embed the new requirements of this legislation. In advance of this new operating environment, we will be launching a new deal for publicans in the form of an Enterprise Premium Tenancy. It will continue to offer many of the benefits of existing tenancy agreements but will be enhanced through reducing property obligations for publicans and a commitment that, where appropriate, we will match the value of capital investment made by our publicans."
On its commercial property portfolio, it said: “We are rapidly expanding our high quality commercial property portfolio operated within Enterprise Commercial Properties. We had 245 commercial properties as at 19 March 2016, the vast majority of which trade as pubs on a free-of-tie basis. These properties have an annualised rental income of £14.3 million (average rent of £58,000) and were valued at 30 September 2015 at £167 million, resulting in a gross yield of 8.5%. The like-for-like net income from this portfolio has grown by 6.3% in the 25 weeks to 19 March 2016.
“We expect to be operating in excess of 300 commercial properties by 30 September 2016 although scale in itself is not our primary objective as we will constantly assess opportunities to crystallise and capture value from this estate.”
On its capital restructure, the company said: “We recently announced that the bondholders of the Unique securitisation have voted in favour of proposals to amend certain aspects of the documentation to permit the increased operation of managed houses within the securitisation. With these amendments due to be implemented formally in the coming days, we believe the capital structure can fully accommodate the delivery of our strategic plans.
“Having established a clear operational strategy, and having amended aspects of the capital structure to enable the delivery of that strategy, we have now developed a clear framework with which to determine the appropriate capital allocation to deliver maximum shareholder value.
On its capital allocation framework, it said: “ETI generates significant cash flows from trading activities supplemented by disposals of non-performing assets. We plan to implement a returns-based approach to the utilisation of our future cash flows which seeks to continue our debt reduction programme and provide a balance between additional value enhancing investment opportunities and more immediate returns to shareholders.
“The capital allocation framework will firstly ensure that all priority calls upon cash flows are satisfied, including corporation tax, interest, scheduled debt amortisation and costs associated with debt refinancing, together with on-going investment in our business. We are committed to steadily reduce our leverage levels over the medium term and assuming we are on track to satisfy this objective then any “excess” cash flow can be assessed for alternative use such as, in particular, investing further in the estate or returning capital to shareholders.
“Based upon current trading and the good progress the Group is making against our strategic objectives, the Board expects the business to generate £25 million of excess cash flow in the current financial year. Applying the capital allocation framework, the Board intends to use this excess cash to fund a share buyback of ETI shares for cancellation.”
