Shaftesbury had one of the most desirable restaurant estates in the country, until a succession of lockdowns wiped out trade.
The West End landlord has stuck to its guns, supporting its largely independent operator base through the crisis with generous concessions, at considerable cost to the business.
The listed group raised £307m in new capital following a share placing last month, and earlier this week Shaftesbury reported a loss for the year of £699.5m.
Ahead of the recent news about London being placed into tier 3, MCA deputy editor Finn Scott-Delany spoke to Shaftesbury restaurant director Julia Wilkinson about how the group was adapting to the crisis.
How has Shaftesbury approached its relationship with its restaurant tenants during the crisis?
We’re always prided ourselves on having strong relationships with our tenants, and I think that’s only increased as a result of what’s happened. We made an early decision in March not to hide behind managing agents, but to reach out to all our tenants individually and speak to them. I look after 300 odd hospitality tenants so that was a big job for my small team. We reassured them that we were there to support them, communicate the concessions we were going to give them, and as time went on, guide them through what we were doing, in terms of getting sites back open, making sure the villages and locations were safe and welcoming. It’s been an ongoing dialogue.
At the start, there were some tenants I knew very well, who were in growth mode, who we’d been speaking to a lot. But there were other tenants we didn’t know so well, so one of the benefits has been that we’ve strengthened relationships and got to know our tenants a lot better. Every operator has different issues and different motivations, so we’ve really been able to work very closely throughout the process of that, even though sadly a lot of the conversations have been on Teams. I think that has been a positive to speak and it’s given a lot of tenants quite a lot of comfort to know they can speak directly to us.
Learning more about your 300 tenants must give you a better insight into how to move forward with the estate.
Definitely, you understand the businesses a lot better by having these conversations. A lot of them have had to pivot or diversify, so we’ve been working with them in that respect, helping to promote the new facets of their business, whether it’s deliveries, cook at home kits, retail. We’ve been able to use our PR and marketing teams on the practical side, and our managing agents to sort things like more outside seating. All of that has given us a huge insight and helps our ongoing management of the villages and our curation strategy as well. We’ve really been able to get under the skin of operators’ businesses, and understand how they work and what they need, not only to recover but in the long term.
Was it obvious that you would give concessions and support for these tenants during the crisis?
Yes. It was a painful decision to make, but it was absolutely the right decision. We’ve always taken a long-term view with our operators with the decisions that we’ve made, and so this was just another part of that.
When I look at the portfolio now compared to back in March, in respect of our long-term strategy of working with independent operators, you might think the most vulnerable would be the smaller groups and independents. But actually they’ve been able to adapt much more quickly than some of the bigger operators. They’re small but they’re founder-led, so they’ve been very agile in the way they’ve diversified the businesses and brought in new ideas. The vast majority of those tenants are still here and we’re working with them, so that’s great.
The operators who have failed are basically the bigger companies, the multiples, who have been through CVAs and administrations, who weren’t able to adapt, that have very large inefficiencies in their estates.
We’ve lost one or two of these but that has created new opportunities and we’re already seeing new operators coming through, wanting to take sites in 2021. These would have been sites that were locked away for many years to national groups. And now we can add something new to our estate that we wouldn’t have been able to before. Okay, it might be at a lower rent than before. But getting new concepts onto our stage is what we’re all about in the long run. These are still great trading locations and I think getting new creative ideas, new is great for everybody.
Shaftesbury recently raised £307m in a share placing. Does this show there are limits to your ability as a landlord to support tenants through this crisis?
The financial rights issue was the right decision for us to make, to help us Shaftesbury support our tenants and make sure we’re in a sound financial position to do that.
In terms of our tenants, you can’t lose patience with those who can’t pay, because they’re simply not producing the turnover to pay the rent, and we have full transparency with our tenants in terms of turnover. We’ve operated a turnover system in our portfolio for many years, so we have a great pool of data in terms of the figures that our operators are producing, which helps these difficult conversations we’re having. We will continue to support our tenants as long as we need to, and the rights issue helps us to be able to do that.
Equally, what we’ve tried to do is strike a balance, and to give sustainable support to our tenants. We’re not able and not willing to have 100% rent write-offs but what we can do is give a balance of help. The packages we’re agreeing is part rent concession, but also helping and encouraging tenants to access all the other support they can, whether that’s loans and grants, so everybody’s playing their part. Our lenders have been very supportive, everybody’s involved, that’s how we’ve been able to continue.
Can you tell us a bit more about your use of turnover rents?
We’ve had turnover modelled leases for well over 10 years now. That’s new lettings that we’ve undertaken in that time, so we still have a significant proportion of the portfolio not on turnover leases. Gradually as we do new lettings or renewals, every F&B lease is on a turnover basis. That’s been great for us in terms of the extra income slice that you get. But what’s been incredibly valuable is that data, and to be able to model different concepts to see how operators are doing in comparison to others in different locations. That really helps educate our lettings strategy, and decide who’s the best operator for the different locations and units across the portfolio. Our curation strategy is very much about making sure we’ve got the right mix and, every new thing that we do needs to bring something new to the party. It’s not purely about who’s going to generate the best turnover, it’s what will bring something new and diverse to each of our villages.
Do you have to be mindful with turnover rents of not getting too closely involved in operations?
No. We have the benefits of very strong direct trading locations - well, they were. Our base rents are market rents, and the turnover we get is an extra slice on top of that. We don’t rely on it, it’s a nice to have. But we don’t meddle with our tenants’ concepts. We work with these operators because we admire them, we like their concepts and we want them to be part of our village. The partnership arrangement doesn’t go as far as us getting involved in their businesses to that level.
What’s your view of the way CVAs have been used?
We’ve been lucky that we haven’t been subjected to that many CVAs, because the majority of our portfolio is smaller groups that haven’t had to resort to that. I think one of the other benefits we’ve had, because of our close relationships with our tenants, even some of the bigger chains, is in quite a few instances we’ve been able to negotiate with and agree a deal with them.
Some operators have been able to avoid the CVA process altogether by talking to landlords directly and reaching agreements. I think that’s the best way to do it, to have a direct relationship. Equally there have been one or two across the portfolio where I think the terms that have been imposed on us are unfair. But you have to take the rough with the smooth.
David Abramson from Cedar Dean Leisure suggested the entire leasing model needs a reset, in terms of valuation, yields, capital values, etc. What are your thoughts on that?
At the moment it’s very difficult to value property in the eye of the storm. Longer term I think it will settle down. Values go up, values go down, yields change. We look at our portfolio in terms of the income that we receive, and we’ve tried to grow our incomes over time. To a certain extent the values are outside of our control. We are long term holders. We do buy but we rarely sell. These things are important, but they are less value to us than the way we run our business day to day.
How is the West End faring at the moment?
Right now, operators are doing all they can in the run up to Christmas [we spoke ahead of the recent tier 3 announcement for London]. Footfall is still at about 50% of the levels that it was this time last year, but of course that’s Christmas trade, so that’s a lot higher than it was a few months ago. Our operators are doing the best they can within the restrictions that are imposed on them. What we do need if we are to make a profit though, is no social distancing restrictions, so that’s what we’re waiting for. With the vaccine, the sooner that can be rolled out, the better. For now, operators are being very creative, they’ve all converted into takeaways, retail and all these other measures. They’ve embraced pavement dining, and we’re very fortunate that a significant proportion of our portfolio has the ability to do pavement dining. It’s been an incredibly valuable service.
How much has working from home impacted your estate?
That’s one thing we obviously do need to see in our villages, the office work coming back. I think there is a slight nervousness, and working from home has worked very well for a lot of people, but we do need to see businesses encouraging their workers to come back. For many of our tenants, office workers are the essential customer base, they’re the people that are there, five days a week buying their coffees every day, working lunches, seeing their friends in the evening. That’s something we definitely need to see.
Are there any other trends you’ve noticed and been moving towards during this crisis?
Trends right now are obviously very dependent on the extraordinary situation that we find ourselves in. It’s interesting, because a lot of our sites are relatively small, and typically operators have had very narrowly focused concepts with quite small menus. Obviously now that’s been a lot more challenging and they’ve introduced delivery where they didn’t have it before, they’ve expanded their operation. I think that diversity is something that will continue. I don’t think when this is all over, operators will refocus back to where they were, I think all these new aspects will carry on. They see that it’s useful to have these extra strings to their bow.
In terms of new concepts coming through, as always there are all sorts of great ideas, but there are no trends in terms of cuisines particularly that I can pinpoint right now. I think we need to wait until life starts returning to normal and see what happens.
Will Shaftesbury’s approach, in terms of curation and diverse approach to F&B remain the same?
Absolutely. That’s the bedrock of what we do. I think it will be particularly important in the recovery phase, because restaurants have suffered so much through the drop in footfall. There’s a lack of office workers at the moment, we are waiting for the tourists to come back. We need to continue to be best in class in terms of the hospitality offer in the West End. It’s down to us to make sure that we’re still bringing in these great concepts, offering the most exciting experience we possibly can, to make sure that when tourists start coming back, they’ve got new reasons to come to London. We’ve actually got to try even harder than before to create that elevated experience. I can see us pushing ourselves even harder going forward then we have in the past.
Is there anything else you’re doing to maintain the vitality and value of your estate?
We don’t want to encourage big events, we don’t want to encourage lots of people to be there at the same time, so there’s no switch on this year. But we have put beautiful Christmas lights throughout Carnaby and Seven Dials, and some lovely NHS inspired lanterns in Chinatown. There’s lots of smaller installations. Throughout our villages, the aim is obviously to encourage visitors to come back to spend time in the areas, walk around, and hopefully to eat. But to do it in their own time and to do it safely, and still to have that great experience.
We look forward to being able to host events again when the time is right. We’re lucky to have these large areas and pedestrianisation, and actually been able to shift quite effectively to doing other things which people can enjoy safely at their own leisure, but still get that great experience.
How are you feeling going into 2021 as a business? Are you optimistic about the recovery and the vaccine in the spring?
The vaccine is so important to give people the confidence to get out there and start leading normal lives. We would like to see local government level support in terms of planning and licencing, to help operators have a little bit of extra flexibility as they start to build their businesses up again.
In terms of central government, we are very nervous about operational costs. Clearly as a landlord we’re doing our best in terms of concessions, but we’re very nervous about what happens at the end of the current rates holiday, and the VAT concessions. These are areas that need continued support financially, you can’t just cut it off, there has to be a tapering.
If there’s a third lockdown in January, that won’t be great. But hopefully that’ll be the end of it, and the vaccine will come into play and we can really start motoring on with the recovery process. We’re ready for it and we know there are operators out there that will want to take new sites and grow. Our existing operator base have got through the hardest part of it now we hope, and now we can work together to start to rebuild their businesses and the restaurant sector as a whole. We’re quietly optimistic.
THE BIG INTERVIEW
Shaftesbury’s Julia Wilkinson: ‘We’ve always taken a long term view’
Shaftesbury had one of the most desirable restaurant estates in the country, until a succession of lockdowns wiped out trade in the capital. Yet the West End landlord has stuck to its guns, supporting its largely independent operator base through the crisis with generous concessions, at considerable cost to the business. The listed group raised £307m in new capital following a share placing last month, and earlier this week it reported a loss for the year of £699.5m. Ahead of the recent news about London being placed into tier 3, MCA deputy editor Finn Scott-Delany spoke to Shaftesbury restaurant director Julia Wilkinson about how the group has been adapting to the crisis.