Ei Group has reported like-for-like net income up 0.6% across its leased and tenanted estate for the six months to 31 March.
In its now 276-strong managed house estate, like-for-like sales grew 6.6%.
Underlying EBITDA for the first half fell £1m to £139m, reflecting the impact of planned disposals.
The company said it was maintaining growth momentum and that its 2020 strategy for Publican Partnerships and Managed Pubs was on track. It said that, due to a lower than expected take-up of the Market Rent Only (MRO) option among tenants, the growth of its commercial properties portfolio has been limited and that it now expects to have c500 commercial free-of-tie assets by September 2020, rather than the 1,000 originally estimated.
The managed division is set to grow to 365 by the end of this financial year with on-going expansion of c125 pubs per annum.
During the year disposal proceeds were £34m, which largely funded capital investment of £42m.
The company said that trading so far in the second half of the year was in line with expectations.
Divisional performance
In the leased and tenanted estate, average annualised net income per pub was up 4.3% to £80,900.. The group said that the improvement in trading performance had been achieved by a strong performance in the South of our estate. In the North and Midlands the impact of significant weather-related disruption to the business in March meant that like-for-like net income was marginally down in the first half of the year. It estimates that the snow in March reduced like-for-like net income growth in the first half by approximately 0.3 percentage points.
Within Managed Operations, which takes in Bermondsey Pub Cop and Craft Union, pubs generated average annualised site EBITDA of £99,000, from an average capital investment of £157,000, which delivered a ROI of 21%. As the estate matures the group said it would expect Managed Operations sites to generate average site EBITDA in the range of £100,000 to £110,000. After an average capital investment in the region of £150,000, it expects to deliver a ROI in excess of 20%.
In the Managed Investments business, EiG currently has 43 pubs trading with ten partners, with an expectation that this will rise to 55 by September. The group said that it expects to selectively grow the number of partners the primary focus is to grow the scale of existing partners, and enhance the quality of trading operations with the “strategic intention of monetising their value at the appropriate time”.
Of the 21 pubs operating within Managed Investments business that had been invested in and traded for more than six months at the period end generated average annualised site EBITDA was £198,000, from an average site capital investment of £431,000, which delivered a ROI, excluding the relevant partner’s minority interest, of 16%. As it evolves and grows the Managed Investments business EiG expectd the average capital investment to be in the region of £400,000 to £500,000 with average site EBITDA to be in the range of £175,000 to £225,000, which is expected to deliver a ROI in excess of 20%.
Efficiencies
On its strategy for driving efficiency within the changing nature of the estate, the group said: “We have always been mindful that the evolution of our business model could bring with it greater operational complexity and potential extra cost. As such, we have challenged ourselves to drive efficiency within our support infrastructure and to rationalise the organisation to avoid unnecessary duplication. Taking this into account, as we move to 2020 and beyond, we will continue to operate and invest in our two primary and complementary businesses, leased and tenanted pubs and our wholly-owned managed operations. We are adding significant operational value to these two businesses by optimising the returns achievable from our asset base. Where we have limited opportunity to add operational value, such as with commercial property ownership, we continue to examine options that may lead to the monetisation of these assets for the benefit of shareholders. “
MRO
On the implications of the Pubs Code, the group said there had to date been 990 rent review or agreement renewal events which could potentially have triggered an MRO request. A total of 256 MRO offers were issued in response to requests by publicans of which 141 have been concluded by way of mutually agreed tied deals and 15 have resulted in new mutually agreed free-of-tie terms. In addition, two pubs have been sold, 11 leases have been repurchased from the occupational tenant and three claims have been cancelled by the tenant, with the balance of 84 not yet concluded. Of these, 49 have been referred to the Pubs Code Adjudicator for determination.
For the 990 pubs referred to above there are 781 which are still operated by the same publican on either tied or new free-of-tie agreements and in the six months to 31 March 2018 these pubs delivered like-for-like net income decline of 0.8% compared to the prior period.
EiG has reduced the number of longer-term leases and increased the proportion of tied business operating under shorter-term tenancy agreements of up to five years in length. Since the concept of MRO agreements was first announced in November 2014 it has reduced the number of long-term agreements from 3,035 to 1,942.
“Growth momentum”
Chief executive, Simon Townsend, said: “We set out our strategic plan in 2015, and we have made strong progress. As we look to 2020 and beyond, our strategy continues to evolve, reflecting our successes to date, changes in the marketplace and our continuing drive to unlock embedded value within our estate. However, the core tenets of our strategy remain unchanged in that we aim to optimise the returns delivered from each of our assets by ensuring they trade in their optimal format and operating model.
“We are pleased to have maintained the growth momentum in our leased and tenanted estate during the first half of the year. This is despite challenging trading conditions for the sector as a whole, with inflationary pressures and some fragility in consumer spending compounded by particularly poor weather towards the end of the period. To have achieved overall growth in net income despite these headwinds underlines the benefits of our flexible business model and gives us confidence that we are on track to deliver positive like-for-like net income growth in our leased and tenanted business for the full year.
“Our managed operations continue to trade well, with good returns achieved upon conversion and we expect the financial contribution from such conversions to increase in the coming years, delivering long-term incremental value to the Group. Our managed investments and commercial properties businesses are successfully building the value-enhancing characteristics of portfolio quality and scale, consistent with our objective to monetise their value over time.
“The continued positive trading momentum and cash generation of the business enabled us to complete a £20 million share buyback programme during the first half of the year, demonstrating our commitment to deliver returns to shareholders when appropriate and to drive long-term growth in shareholder value.”
