Following Ei Group’s H1 trading update yesterday, MCA spoke to chief executive Simon Townsend. He discussed what the group’s revised growth prospects mean for the long-term goal of converting to a REIT. He also spoke about the where growth would come from in the managed estate, timetabling eventual exits from the Managed Investment partnerships and the first new site for its joint venture with PubLove. On the tenanted and leased estate, he said that while the Midlands and the north of England had slipped into negative like-for-likes, the long-term recovery of these areas remains on track.
The H1 announcement set out revised growth expectations for the commercial property portfolio, due to the lower than expected uptake of the Market Rent Only (MRO) option, introduced by the Pubs Code. The group has halved its 2020 target and now expects to have c500 commercial free-of-tie assets by that point.
Asked what this meant for an eventual plan of attaining REIT (Real Estate Investment Trust) status, Townsend said: “We have always been clear that the opportunity to convert a chunk of the business to something like a REIT would require scale to make it economically viable.
“What we have set out in this announcement is a slowing of the rate of growth in the lead-up to 2020. That doesn’t mean that the long-term potential for that side of the business is any different and that opportunity remains open to us if the conditions are right for it.”
“The rate of growth in our managed business over this period has been pretty much where we expected it to be”, said Townsend. “We have got to a level where we are converting about 120 properties per annum and that feels like it’s about the right rate going forward. The measures we use to gauge the success of the conversion, such as ROI and like-for-like sales are all going in the right direction so for now we feel we have hit on the right pace for us.
“Going forward, Craft Union will continue to be significant driver of managed pub expansion and we have Bermondsey there to deploy where it is appropriate. I think the target of 100 sites for Managed Investments is about right. That will probably include some additional partners but the focus is very much on maximising what we have.”
He insisted there were no immediate plans to add in a third operating model into the managed estate but said “we are continually looking and trialling new ideas and evaluating the results”. In response to the evident over-supply of casual dining, Ei Group has already exited the more food-led ‘Friends and Family’ section of Bermondsey.
The group is in the process of combining the managed operations of Bermondsey and Craft Union as part of a wider drive to rationalise the organisation and avoid duplication.
In relation to the Managed Investment partnerships, the interim results referred to a goal of growing the enhancing the quality of the existing estate with “the strategic intention of monetising their value at the appropriate time”.
Townsend told MCA: “It has always been our view that the best way to optimise the value of these partnerships was to create an OpCo and for that OpCo to be sold at the right time. We are not at the stage yet where we can talk about timeframes for that but it is clear that we are building some very attractive businesses.”
These include the partnership with Ben Stackhouse of PubLove, the five-strong London pub operator. Townsend confirmed that the group is eyeing its first opening since Ei Group acquired a stake in April of last year – at the Library, Islington.
Ei Group officially announced its tenth partnership yesterday, confirming MCA’s story from earlier this year that it was linking up with Dave Ford (Director at Field to Fork) and Bernard O’Neill (Director at Productivity Mentor), both formerly of Mitchells & Butlers, to form Old Spot Pub Company. The first site for The Old Spot Pub Company is The Anchor Inn in Wyre Piddle, Worcestershire. The pub has recently been refurbished and opened just before Easter. The Kings Head in Little Marlow and the Leopard in Bishops Tachbrook will be added in due course.
The tenanted & leased estate ended the first half with 3,856 pubs trading. Like-for-like net income growth of 0.6% was driven by the 2,024 pubs in the South of England, while the Midlands (773 pubs) declined 0.4% and the North (1,059 pubs) saw a drop of 0.5%. Townsend said the dip was predominantly down to the weather and that he expected the return to like-for-like net income growth that the North division saw in 2016 to continue going forward.
At the end of last year EiPP introduced two new ten-year tied leases. Townsend said that while it was still too early to fully assess their impact, they had both proved popular with entrepreneurial operators keen to invest in sites.
He said that complexities remained in the Pubs Code structure but that the ultimate goal of offering publican a greater choice was broadly being achieved.
He pointed to the fact that of 990 potential triggers for MRO, 781 were still operated by the same publican on either a tied or new free-of-tie lease and that these pubs had seen a like-for-like net income decline of 0.8% compared to growth of 0.6% for the wider estate.