The background...
Enterprise says that if a tenant elects to invoke the market-rent only (MRO) option, while its income derived from the supply of tied drinks products would be partially offset by rent increases, “it is possible that our total income would be adversely affected by this amendment”. It states: “It has become clear than an exclusively leased and tenanted operating model, while 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.”
What’s next?
The pubco worked with two consultancies to segment its estate and identify the most appropriate retail proposition for each pub. “We are already using the 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”.
Tenancy agreements
Enterprise will continue to offer tied agreements of up to five years in length, “as this model continues to attract ambitious, entrepreneurial individuals who value the opportunity to run their own business supported by Enterprise, and where we share risk and reward in pursuit of mutual success”. The agreements have six months’ notice periods.
- 850 managed pubs Enterprise expects to have by 2020
- 1,000 size of commercial property portfolio by the same year
- 2,350 size of T&L estate by that point, down from just over 5,000 at present
- £75m annual amount Enterprise expects to raise through disposals
- 600 number of tenants per year that Enterprise expects to opt for MRO
- 5 maximum length in years of available tied agreements
Managed expertise
Enterprise reckons that over time its experience in pub retailing will prove beneficial for its tenants and lessees, as it will be able to leverage its buying power to “provide additional goods, services and insights to support them”. It also expects to be able to provide off-the-shelf solutions to licensees to help them compete on pricing, product range and promotion.
Commercial agreements
The majority of its commercial portfolio is being operated as free-of-tie pubs, typically let on standard, commercial, fully repairing and insuring, long-term agreements pursuant to which rents are payable quarterly in advance, subject to indexation and upwards-only rent reviews at five yearly intervals. “When we obtain vacant possession of such properties, we will in future offer free-of-tie commercial lease agreements”.
Pub disposals
“We are conducting a comprehensive review of our estate to identify pubs on long-term tied agreements where future investment returns and letting prospects are rendered unattractive by the prospect of an MRO trigger and we are, therefore, identifying the most appropriate means of realising shareholder value from these pubs, including the potential for disposal.”
The future
Enterprise says there are many events when its publicans are able to negotiate changes to existing agreements. “We believe that the alternative operating models we have developed will provide a greater range of options for our publicans to consider at these events, and a greater opportunity for us to optimise the performance of individual pubs to the benefit of the communities they serve.”
MRO legal challenge
Chief executive Simon Townsend said: “The legislation still has some way to go, so there’s still work to be done. I wouldn’t rule anything out if there were elements that were problematic, but it’s certainly not something we are pursuing at the moment.”
Comment:
“I want to reassure our publicans that we’re absolutely committed to supporting them and helping them build a successful business. While our new strategy gives us additional flexibility to build a complementary managed and commercial property business, our core tied and leased operations will remain at the heart of Enterprise for many years to come.
“The new legislation is expected to come into effect from June 2016. We have been advised that there will be further consultation between now and then during which the finer detail of the statutory code and its various processes will be determined and then passed into secondary legislation.
“As soon as we are in a position to do so, we will be communicating with all our tenants and lessees through the usual channels, and our regional managers will be able to advise them of the options available to them under the new legislation. For now it is very much a case of business as usual.”
Simon Townsend, chief executive, Enterprise Inns