Charity: Stability is the name of the tenanted game

The tenanted and leased universe stands at around 35,000 pubs.

Just six companies dominate the sector with more than 23,000 pubs between them. They are: Enterprise (7,635 pubs), Punch Taverns (7,626 pubs) Admiral Taverns (2,600 pubs), Scottish & Newcastle Pub Enterprises (2,200 pubs), Marston's (1,737 pubs) and Greene King (1,447 pubs).

Although the size of their estates vary, the major companies share a fairly similar strategy: keep the pubs that offer sustainably rising earnings while selling those that do not. Interestingly, though, there's been a flow of pubs from Punch, Enterprise, Marston's and Greene King towards Admiral and S&NPE with the latter two companies having a different take on how sustainabilty can be achieved at particular sites.

Punch, Enterprise, Greene King and Marston's have been focused on preparing their tenanted estates for the start of last year's smoking ban. Each has made significant disposals involving those wet-led pubs likely to be excessively hit by the ban. These disposals have tended to include those pubs where earnings for pubco and tenant are already fairly low.

Punch sold 869 tenanted pubs to Admiral Taverns a couple of months before the smoke ban began. The company has been boosting the overall quality of its tenanted estate by converting the bottom end of its Spirit managed division to leased - 637 have been moved across. Average licensee profitability now stands at £39,000 including the live-in benefit of £8,000, a rise of 9% (with the Spirit conversions) compared to a year before, with the underlying figure standing at 2%.

The strategic approach​

The emphasis on improving the overall quality of Punch's tenanted estate means it has boosted ebitda per outlet by 11% to £61,000 in the past year. Chief executive Giles Thorley has stressed how important running a managed division is in terms of providing the next generation of tenanted pubs, with under-performing managed sites able to be turned into high-quality leased pubs.

Enterprise's strategic approach provides a contrast with that of Punch. The company is convinced that it's not possible to buy packages of pubs of the right quality. Like Punch, it has been jettisoning pubs from the bottom-end of its estate; it sold 769 pubs to Admiral Taverns in September 2006 and sold the entirety of its Scottish estate - 137 pubs - to Iranian tycoon Robert Tchenguiz in December 2006.

Enterprise has ramped up its acquisition of high quality individual pubs, with a doubling of the number acquired this way to over 100 in its latest financial year compared to 48 the year before. The company is still buying pubs at around the £500,000 mark but average spend has jumped to £730,000 per pub, with as much as £2m splashed out in some cases. Enterprise argues it has the best quality tenanted pubs in the sector, with licensees earnings around £47,000 (with the £10,000 live-in benefit).

Greene King and Marston's have both been doing the same kind of pruning as their larger rivals. The former sold 155 pubs to Admiral Taverns towards the end of 2006 and Marston's sold 279 to newcomer aAIM in May last year - S&NPE is running them. Greene King has not lost an appetite for buying medium/high quality tenanted pubs, acquiring the 48-strong estate of New Century Inns for £32m in November 2007. Marston's has snapped up Eldridge Pope, and Rutland Pub Company in the past year, the latter an unusual group of food-led destination pubs run by a former Mitchells & Butlers executive.

Acquisitions across the major tenanted companies have tended to feature a higher proportion of accommodation and food income than in the past, providing more income streams for tenants than previously. Admiral Taverns, privately owned by seasoned property investors, now has a much higher earnings per site than might be expected from quoted company cast-offs.

Selling the bottom end​

Aggressive churn by Admiral has seen its bottom end sold off, often for alternative use (the rumour is that the average sale price has been a highly respectable £300,000 per pub). Many of the remainder have seen sensible investment (circa £50,000 per pub) and provide earnings of £40,000 per annum for Admiral.

Nevertheless, this is a part of the tenanted sector particularly subject to volume decline in the smoke-ban era. Boss Gary Landesberg forecast around 7% and the company has been willing to offer rent concessions to tenants particularly badly affected.

S&NPE is the most unusual of the big six, a pub management company owned by a brewer, Scottish & Newcastle. Its pubs, largely owned by property magnate Robert Tchenguiz and Royal Bank of Scotland, have high barrelage (360 per annum on average) and S&NPE operates an unusual franchise model that offers more support than is the norm. Parts of S&NPE, the Globe estate owned by Robert Tchenguiz, for example, were markedly hit by the poor summer with a 14% drop in beer volumes. S&NPE has launched an offshoot called Discovery to run the former Marston's pubs bought by aAIM. Lease agreements offer more barrelage discount to incentivise licensees and the bottom 40 or so pubs are being sold to boost the average quality.

Four or five main strategies are apparent across the sector to ensure growth. There's been heavy investment in exterior smoking solutions in an attempt to keep heavy-spending smokers going to the pub. A number of companies have focused on survival rates in the first year when cash-flow issues can spell a speedy end for tenants - Greene King has led the way with "open-book" accounting that has increased survival rates seven-fold.

Efforts have been re-doubled to guide tenants towards starting or improving their food offer. Admiral has a head of food and a development chef while Punch has doubled the number of food executives it employs to eight.

Tenanted operators with managed divisions - Punch and Greene King - have been leveraging the discounts available to their managed pubs in an effort to boost margins. Some companies have actively sought new sources of income - Greene King is trialling a cheque-cashing service while Punch has launched an online casino that pays a share to tenants whose customers use the service.

And there's an effort to introduce a little more flexibility into lease agreements to encourage multiple lessees who tend to be better quality retailers - Marston's has introduced a turnover rent that rewards tenants when they boost turnover. Although the issues facing the tenanted sector have been changing, it's worth bearing one thing in mind; from the point of view of pub companies, tenanted pubs' earnings are remarkably stable - not a single quoted operator has ever issued a profits warning.

Six things to bear in mind​ by Geof Collyer, analyst at Deutsche Bank

1. Average profitability for tenants of quoted stock is between a quarter and two thirds greater than that of the national average wage, including the benefits of living over and out of the business. We would argue that most people living on the national average wage would probably take home less than £20,000 in cash each year and end up with a small overdraft/credit-cards debt or a small savings pot. Out of this they have to fund all their living expenses without any of the tax breaks available to the self-employed.

2. Around 40% of the rent payable is turnover related (wet rent, machine income), which means that the landlord does bear some of the pain on the downside.

3. As most licensees live "on the job", not only are they more flexible in terms of costs and expenditure, but also will tend to work harder and longer if it means holding on to the family home.

4. Since the introduction of the lease (really a feature of the past decade or so), the average licensee is now more qualified and generally a better business person than during the downturns of the past.

5. There are many examples of poorly-performing licensees being able to sell on their goodwill. Thi