Polarised performances, pre-packs and propcos

2009 was a year of recession in the wider economy. The PMA Team looks at the key themes that emerged in the pub sector

The paradoxes of recession:​ The recession this year created a wide, varied and sometimes paradoxical set of outcomes. Some companies processed through pre-pack adminstration cleansing themselves of their worst sites to emerge as far more profitable entities run by the same management.

Other companies had to struggle on with the pre-pack companies' worst sites that reverted to them weighing down their performance. Management of companies put into administration emerged with an enlarged equity stake in their companies.

The "flight-to-value" by consumers in the face of recession forced managed companies to sharpen their value-for-money profiles. Some of the operators of managed estates ended up putting more pressure on their own tenanted divisions, limited in their ability to compete on the value front, as a direct result.

Tenanted pub companies ended up paying operators, at very substantial cost, to keep pubs open. Some of the people paid to run pubs for tenanted operators were losing money at other tenanted sites.

As tenanted pubcos waded in with special help for distressed tenants, other tenants keeping their head just above water and not receiving special help wondered about the fairness of throwing competitor pub lifelines.

The banks:​ Bankers woke up in 2009 to discover that they'd been gripped by a collective madness in the heady days of boom and cheap money. They'd lined up to lend all the money some pub investors had wanted in the good years (four banks competed to take part in Admiral Taverns' re-finance in 2007).

Now they found that the decline in earnings at a number of hybrid tenanted companies (bottom-end pubs bought from the big pub companies) meant they faced massive writedowns.

The only sensible solution was to take their medicine - and swap their debt for equity. This recessionary year, the banks chose sensibly not to throw their pub assets on the market, knowing from experiece that this would merely depress prices further and increase their write-downs.

Banks were lending to the sector in 2009 but based on old-fashioned, sensible criteria and only to sensible companies with traditional, old-fashioned business models.

Managed multiple operators who could show solid, organic trading success were able to buy the freeholds of pubs they leased.

Regional family brewers that had sat on their hands during the property boom could borrow to buy high-quality pubs. But in line with sensible, time-honoured lending principles, loan-to-value ratios were at 50 to 60% generally.

Buyers stay indoors:​ Tenanted pub companies needed to sell pubs to reduce debt found a number of historic buyers had gone missing. Property entrepreneurs such as Robert Tchenguiz and others were mostly licking their wounds after mis-judging the market horribly (although it was their banks who mostly felt the real pain).

Companies such as Admiral Taverns, London Town, aAim and Pubfolio that had bought the big pub companies cast-offs had stopped buying after finding they'd bought far too many duds - and re-sale values had fallen through the floor.

This left three main buyers: the multiple managed companies and the regional brewers mentioned above, alternative use buyers (also substantially depressed in number) and, oh yes, licensees themselves.

Giving licensees the chance to buy their pubs was the route favoured by Punch. It's a long, slow process compared to selling hundreds of pubs to one buyer. It's also a public relations doubled-edged sword, producing some disgruntled licensees as well as delighted ones. Active corporate focused on quality - central London freehold managed pub and top quartile tenancies

Tenanted versus managed divergence:​ The recession served to polarise performance between good and bad pubs. The major problem it that the tenanted sector, by definition, contains the vast majority of bad pubs.

Value-led managed operators have enjoyed robust trading through 2009, with some seeing performance accelaration.

JD Wetherspoon tends to thrive in a recession and accelerate away afterwards - no other managed company is likely to open anywhere near its planned 250 new pubs in the next five years. (Nearest new-start rival Barracuda is currently in stabilisation and go-back-to-basics mode).

The big managed operators, Mitchells & Butlers, Greene King and Marston's have performed well this year. Punch's managed division has begun to see performance improvement but is grappling with multiple issues (not least is how to plug portfolio gaps in a relatively short time).

This year came as profound body-shock to tenanted pub companies. Running tenanted pub companies seemed like the easiest game in the world during the good times, with the in-built growth of RPI rents and wholesale beer price increases.

Nobody seemed to model what would happen if beer volumes decline and costs (including those directly attributable to the pubco itself) rose. At one extreme, Scottish & Newcastle (now Heineken UK) found itself unpaid for its beer supply and pub management services having agreed to allowing bondholders to receive payments ahead of itself in the event of covenant breach at Globe Pub Company.

There's been no option in the absence of sizeable buyers of pubs. Tenanted pub companies have had to get imaginative, flexible and pragmatic - and share the pain with their tenants to avoid scary numbers of empty pubs.

Culture shift:​ The world of tenanted pubs became highly politicised after a committee of MPs decided in May that the major tenanted pubcos were guilty of multiple failings in their dealings with their licensees. Absolutely first in the firing line were Punch Taverns and Enterprise Inns.

The former, Punch, was ahead of the game and super-fast to acknowledge that it needed to listen, become more transparent and customer-focused. The industry as a whole has accepted the changes at Punch are sincere and well-meant although bedevilled by legacy issues. Enterprise, which has traditionally been belligerant in the face of criticism, has seen the stirrings of cultural reform.

But it has a sizeable public relations exercise to perform in the face of a widespread perception of arrogance and tricksiness. For the big batalion companies 2009 made it clear that consumer-focus and customer-focus was at a relatively rudimentary stage and much more imagination could and absolutely should be applied.

The two large tenanted battations amount to an experiment in large-scale pub ownership underpinned by cheap debt and ever-larger valuation multiples. The market is driving a reduction in the scale of pub numbers. For smaller Punch and Enterprise estates, the challenge is to embrace and drive through a culture change around the tenets of straight-forwardness, sustainability and entrepreneurial spirit.

The death of the operating company/property company model:​ Failed pub investor Robert Thchenquiz had this to say this in the June 2008 edition of Property Week: "For an operating business to own real estate is a very high capital-employed strategy and very low-return strategy.

"For management teams focused on return on capital employed, which is the premier benchmark, then you don't want real estate, Owning real estate is legacy-oriented." Mitchells & Butlers, the industry's biggest single resource of retail expertise, was keen to adopt a strategy in 2007 that was in line with Tchenguiz's view.

It was saved by a matter of weeks from following through but still had to fork out almost £500m of shareholders money to close out the hedge-swaps it needed to insure against the plan.

The last lump of money was wasted closing out associated hedge swaps in May this year and cost its highly-regarded boss Tim Clarke his job. In the sober context of recessionary 2009, hardly anyone believes that separating an operating company from its freehold property owners