The number of sites run by Mornington Pub Company, the operator set up by Wellington Pub Company to run a small number of its outlets, is expected to grow to 20 by next April, according to a note from ratings agency Fitch.
Mornington was set up in June and currently manages five pubs, all owned by Wellington, let on short-term agreements.
Fitch said: “While the ultimate goal remains to find external tenants for Wellington pubs, having ‘in-house’ capacity to take over the management of pubs is viewed as positive as it adds operational flexibility and avoids the respective pubs becoming vacant if a tenant cannot be replaced at short notice.”
Fitch maintained its negative outlook for Wellington.
“The rating actions mainly reflect the agency’s view that Wellington’s performance remains challenged by macroeconomic factors such as the uncertainty about the jobs’ market, the on-going change in consumer behaviour, especially affecting wet-led pubs (estimated at approximately 80% of the portfolio), further exposure to alcohol taxation, the continued strength of the off-trade, all coinciding with a large number of leases coming up for renewal in 2013/2014,” the note says,
“The prolonged deterioration in performance of the estate in light of the difficult trading conditions is, however, cushioned somewhat by higher cash reserves after recent property disposals.”
Fitch said Wellington’s debt-service coverage ratios will be constrained by modest declines in EBITDA, “mainly due to a portion of lease expiries that are assumed not to be renewed immediately on long leases, rental value declines and repossessions (including associated void costs)”.
“Free cash flow is forecast to decline more than EBITDA as Fitch understands that Wellington is expected to resume corporate income tax payments from FY14 onwards after group loss carry forwards have been exhausted. However, the transaction benefits from a flat, annuity debt profile for class A and even a downward sloping profile for class B.”
Fitch said Wellington’s revenues declined only mildly by 1.1%, 12-monthly (TTM) EBITDA dropped by 15% due to materially higher operating costs in Q4FY12/13 (March 2013).
“However, the issuer confirmed that the rise in operating costs was attributable to higher bad debt write-offs and provisions at financial year end when a detailed analysis of the position of the debtors was undertaken. Despite a reported EBITDA DSCR of 0.61x in March 2013 no cash reserves had to be drawn down in that quarter given the non-cash nature of the bad debt adjustments. Without that impact Fitch estimates that TTM EBITDA would have declined by about 5% compared to the previous 12 months period.
“Another area of concern is the state of repair of the portfolio. All substantive agreements are on full repairing and insuring (FRI) leases, placing the obligation to maintain the properties on the tenant. However, with tenants struggling to pay their rent (as indicated by the high delinquencies and bad debt provisions) the asset manager estimates that about 60% of the portfolio is suffering from noticeable deferred maintenance (at least £5,000 per pub) with more than 10% experiencing underinvestment of more than £20,000 per pub. Wellington tends to spend comparatively small amounts of capex on currently vacant properties.”
Fitch said recent property disposals resulted in an increase of the reported cash deposits to approximately £15m which includes approximately £10m on the Permitted Release Account and approximately £5m on the Transaction Account. “As the landlord only receives a dry rent, there is limited visibility of the pubs’ trading performance. Consequently, Wellington is less able to estimate the affordability of the tenants’ rental payment and has no influence in the publicans’ offering (e.g. encouraging stronger focus on food, etc.).”
