Hawthorn Leisure plans £3m investment in pub estate

By Stuart Stone contact

- Last updated on GMT

Making waves: Hawthorn Leisure is ready to invest a further £3m in its pub portfolio, according to CEO Mark Davies (left) and CFO Matthew Ward
Making waves: Hawthorn Leisure is ready to invest a further £3m in its pub portfolio, according to CEO Mark Davies (left) and CFO Matthew Ward

Related tags: Hawthorn leisure

NewRiver REIT’s pub arm, Hawthorn Leisure, is poised to ramp up investment in its pub portfolio to the tune of “at least £3m” in the next six to 12 months, according to CEO Mark Davies.

Hawthorn Leisure’s estate of 660 pubs currently represents around 22% of NewRiver REIT, with the FTSE 250 company’s pub arm the seventh largest tenanted pub operation in the UK according to Mark Davies – who replaced Gerry Carroll as Hawthorn Leisure CEO on 1 October​.

As reported by The Morning Advertiser ​(MA​), NewRiver, revealed that net property income from its pubs rose to £13.6m in the six months to 30 September – a 27% increase versus the same period in 2018 when the figure hit £10.7m.

This included net income growth from operator managed pubs of £2.6m – from £6.8m to £9.4m.

What’s more, NewRiver recorded like-for-like earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 5.5% per pub – a result its latest statement claims was delivered by “scale-based synergies” from the integration of Hawthorn Leisure and NewRiver earlier this year.

Investment in pub estate

Speaking to MA​, Davies explained that off the back of a “robust” set of half-year figures, Hawthorn is now ready to step up the level of investment in its pub estate during the second half of the current financial year, with “at least £3m” earmarked for the next six to 12-month period. As reported by MA​, Hawthorn has invested £1.4m since the start of its current financial year in March 2019.

“The sector stats are good, like-for-like sales are up 1.8% across community pubs and I would reiterate the importance of that and our ability to continue benefiting from that,” he explained.

“We are very good at extracting value from our portfolio. We've completed 26 capex projects – we've really accelerated that, particularly over the last quarter, we've invested £1.4m into our portfolio and want to do more in the second half of the year because we're getting very good return on investment overall of 24%.”

Growth of operator managed sites

According to Hawthorn’s CFO Matthew Ward, while the company started the current financial year in March with just over 40 operator managed pubs, the first six months of the current fiscal year has seen that number grow closer to 60, with more in the pipeline.

“Following the integration, we completed in January, it's great to have all the pubs under one roof and apply our multi-format strategy,” Ward explained.

“We've got our leased and tenanted businesses that currently represents about 90% of our estate, then we've got our operator managed business that currently represents around 10%. We're going to be increasing that over time and a lot of our capital expenditure is focused on conversions to our operator managed formats.

“We are very focused on operator managed sites because we're getting good returns from that part of the business,” Davies added. “That's now becoming a fairly sizeable part of our estate. We're targeting operator managed to be 15% of our portfolio in the short term and expect to be able to do that by the end of the financial year on 31 March and we're very confident about our ability to do that.

“Part of the strategy is dependent on our ability to deploy capex – hence the investments we're making in people and capital projects. We have seen other peer group companies establish very successful businesses in this part of the market historically – Craft Union would be the poster child that we've all seen; 15% is very realistic and achievable."

Potential to double pub portfolio

According to figures from chartered accountancy firm Gerald Edelman, there have been more than 180 mergers and acquisitions​ (M&A) in the UK pub sector since the start of 2018, with two of the largest pub and bar transactions announced since July 2019 – something Davies believes can work to Hawthorn’s advantage.

"There's no doubt that during the period we have experienced a revival in transactional activity in the UK pub sector,” Davies explained. “We made our first investment in UK pubs in 2013 so, as an early mover, we think we've got a competitive advantage.

“The positive market backdrop has been extremely helpful and supportive to our pub valuations. As a major pub operating platform, we see a number of attractive acquisition opportunities ahead as pub companies look to de-gear and reshape their portfolios.”

Davies added that given favourable market conditions, he feels Hawthorn’s current management platform and access to capital could see NewRiver’s pub arm double in size over the short-to-medium term.

“It's very much opportunity-led. We're not looking to scale this business up for the sake of size. Our guidance on that is that we feel with the management platform we've got we could easily run a portfolio of 1,500 to 2,000 pubs.

“We're set up, right now, to be able to do that in the future. There's no time horizon that we're working to, but do we think the opportunities are going to come our way? Absolutely we do.”

Sector wide structural change

“The pub sector in the UK has been through such structural change – going back to the late ’90s going through to the smoking ban, the recession and beyond,” Davies added.

“The UK media didn't do a particularly good job of supporting the sector and talking about it in a positive light and, naturally, it put off a lot of investors both domestic and international. The obvious question is 'what's changed?'.

“There's a recognition that the demand and supply dynamics are now positive whereas, in times gone by, there was an argument that the dynamic was negative.

“We have seen a significant reduction in the number of pubs in the UK from 60,000 in 2006 to around 46,000 today. It's a much more stable market for investors to assess and deploy capital in.

“A lot of the deals we did, I would say, were signature deals – not least NewRiver acquiring Hawthorn Leisure in May of last year – I think that gives people confidence when they see corporate transactions of that size and scale.

“Then when we saw private equity coming in in January this year when Davidson Kempner bought Tavern Propco, I think the market then started to look at this and think 'what are we missing here?'. Then we've seen recently Ei go private and Greene King being acquired by CK. Then very recently, only in the past few weeks, we saw Marston's sell a portfolio for 10 x EBITDA.

“As an early mover with a best-in-class management platform, we are so well placed to benefit from that and dare I say exploit it.”

Related topics: MA500 Business Club

Related news

Show more

Spotlight

Follow us

Pub Trade Guides

View more

The MA Lock In Podcast

Join us for a Lock In

FREE EMAIL NEWSLETTER

Subscribe to The Morning Advertiser

The definitive voice for the pub trade

Get the latest news, analysis and insights from the uk pub sector straight to your inbox!