Analysis: Enterprise prepares for an MRO future

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.

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.”