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They’re Called TIED Leases for a Reason

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Twenty years ago when we all drank ourselves silly a few times per week the local licensee could make a living as could the Pub Co landlord and it was more or less happy days.

Since then times have changed, less people drink socially, the majority of us drink less and many people prefer to go out for a meal and a drink, in this scenario wine and soft drinks have replaced beer as the drink of choice and the Pub Co makes less profit.

So why oh why do the Pub Co’s act as though nothing has changed?  The short answer is they are accountable to shareholders who expect increased dividends year after year; this increased dividend can prop up the share price as the return on investment is maintained.

As a result of returning monies to shareholders the Pub Co’s seldom invest in their assets.  Next time you pass a pub take a look at the roof, gutters and the windows, if they’re in a poor state of repair you can more or less guarantee that the pub is leased out by a Pub Co, not a managed house or Freehold site.  Gutters and downpipes are often overgrown and blocked leading to damp ingress.  If the Pub Co can’t be bothered to look after the fabric of the building what chance does the tenant stand when the buildings are often damp and poorly maintained.  Heating systems are always underinvested in and I could take you to pubs where boilers should be condemned and are grossly inefficient.

closed pubSo what is the answer?  I feel that the PubCo’s need to simplify the whole model, you could either charge a market rent on the building and let the landlord go free of tie so they are free to buy their stock from anywhere or at least charge a fair rent, give decent discounts and allow the landlord to make a living.  It’s awful to say but if you cut out the Area Managers whose main job is to ensure the tie is being adhered too and fight fires when tenants hand back keys you could make savings and have sites which are profitable in the long term where tenants make a living.

The value of the portfolio in a Pub Co’s estate has fallen dramatically and they may not wish to recognise this in their accounts as the share price would fall; they may also be unwilling to sell the sites for less than their book value as this would affect profitability.

Example of a PubCo’s Level of Return

Site Valued at 400k
Typical Rent:                          36k
Pubco Beer Profit:                 34k
Soft Drink & Spirit Profit:      4k
Machine Income:                     6k
Therefore Pubco Income:     80k

As a return on Investment:     20%

In my opinion this level of profit is not sustainable and leaves the tenant without a long term income.  A CGA survey published June 2013 forecast that 7700 pubs will close over the next 5 years!

I strongly suspect that some tenants manipulate profits due to the fact that higher profits result in a rent increase.  Put simply this is avoidance of VAT on sales and tax on profits.  If they were free from the shackles of the PubCo they would run their business in a decent way, showing decent profits, with decent profits they had an asset they could sell on, they are caught in a catch 22.  Until then most leased pubs will have revolving doors with tenants going in and out as the reality of the difficulty of running a pub become evident.

 

 

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About the Author:

Richard is the owner of RCM Stocktaking Solutions Ltd which provide Stock Auditing services to the licensed / restaurant / hospitality sector.