Langton Capital – 2020-06-23 – PREMIUM – Landlords, 2m rule, pub cleaning, Intu, cruise lines, G4M etc.:
Landlords, 2m rule, pub cleaning, Intu, cruise lines, G4M etc.:
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A DAY IN THE LIFE:
Bit busy this morning so will have to move on to the news:
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STRUGGLING WITH YOUR LANDLORD? Bad stuff rolls downhill, landlords are an easy target but they have their own problems. 23 June 2020:
• Landlords, as the name suggests, own property.
• They do not, as a rule, take operational risks.
• Of course, their entire business is one large operational risk – and when they build a retail park, mixed office & residential complex or leisure park, they are taking a view on the market over the longer term.
• But they do not, usually, take risks on individual businesses.
The current situation:
• Operators may argue that, if they are successful operationally, the landlord benefits because rents go up
• This will usually occur at the five year review
• If a development is unsuccessful, on the other hand, rents can only usually go down at the end of the leases or when a tenant goes out of business
• In the current situation, many tenants are asking for relief
• Landlords may say that 1) tenants agreed to the terms of their leases, 2) if the tenants had a windfall, say if there was an influx of tourists for some reason, there would not be anything in it for the landlords and 3) they have their own issues with debt etc.
• And all of this is true, of course. But economic reality does have a habit of forcing people’s hands and, if tenants simply cannot pay their Q3 rents – which are due tomorrow – then they will not do so
Calls for relief:
• The government has extended the moratorium on evictions for another three months
• This is a positive – but it is a two-edged sword as operators are running up more debts to their landlords and the legal position as to whether or not they will have to pay this debt in the end, is no closer to resolution
• London Union’s Jonathan Downey is calling for a further extension and for the government to impose turnover-based rents on the industry
• These can work, often to the advantage of both the landlord and the tenant. They are in use often at travel hubs
• For the tenant, a greater proportion of their costs becomes variable. Risk is therefore reduced.
• For the landlord, they will want to impose minima but, above that level, turnover rents ensure that they share some of the upside
• However, they are harder to police and, arguably, when the landlord themselves goes to the bank to source debt, its income will be viewed as less reliable and thus of a lower quality
• This could impact both the amount that the landlord can borrow and the rate at which they can do so. Both negatively.
What’s happening now?
• Some operators have suggested that landlords are not replying to requests for relief as a deliberate action
• They may, on this argument, be simply waiting for various enforcement moratoriums to run out after which they will be legally entitled to seize sites, many of which may contain hundreds of thousands of pounds worth of stock, fixtures, fittings etc.
• Some landlords, though a minority, have granted rent holidays. Some others have allowed a move to one-month in advance payments rather than three and a deferral of some rent (which will still need to be paid at some point)
• Landlords have been reluctant, as a rule, to move to turnover-based solutions
• The government seems to be willing to give guidance but it hasn’t seen fit to impose mandatory Codes of Conduct on those involved.
• The latter can take substantial parliamentary time to draft, check with interested parties and introduce. Emergency measures could be enacted more rapidly – but there does not seem to be much appetite for this at present
• Covid-19 is a major event and, as such, the nature of leases could evolve as a result of the various trauma
• Tenants may want more frequent break clauses. They may be less willing to invest in sites, they may push for lower deposits, for one-month rental payments and for turnover-based rents
• Landlords may, on the other hand, want the opposite of all of the above
• It feels as though the market will remain soft post Covid-19 (or during Covid-19 as it is not going to go away simply because the pubs are open)
• With CGA saying that a third of restaurateurs will not reopen all of their sites and a further third are still considering their position, tenants may have a once in a generation opportunity to push lease terms in their favour
• However, as happens in the property market, this may only be for new rather than existing leases though, with many vacant properties to come, there are a lot of new leases on the horizon
OPENING UP. This is it, excuses being peeled away. 23 June 2020:
As we stand:
• There is no doubt that Covid-19 will remain a valid excuse for poor trading for some time to come.
• But, whilst the lockdown has been in place, operators have rightly been able to point the finger at the national emergency rather than their own actions as the reason for low, or in this case zero, revenues
From 4 July:
• There are many valid and obvious reasons as to why trade after 4 July will not be like that before 23 March
• But the fact that operators have simply not been able to open their doors will not be one of them.
• With that in mind, the field will surely start to spread out?
• Because, at present, most people are at minus 100% (certainly for sit-down) but, after 4 July, some will be nearly level, some down 20%, perhaps a lot down 40% to 50%, some down 80% and others will still be shut
• And, in that environment, questions as to management (rather than government or viral) actions will begin to be questioned
• Interesting but challenging times.
PUB & RESTAURANT NEWS:
Covid-19 issues – 2m rule:
• 2m looks likely to be cut to 1m later today. Sky, the BBC, the Press, everyone seems to have been told or heavily hinted to this happening. Some have suggested that the politicians are overruling the scientists as has surely happened in many other countries. Just a few observations.
• It may or may not be on the statute book but it’s virtually unenforceable in either case. Distancing depends on the goodwill of customers, operators etc. lavatories can’t function (doorways are too narrow) so there may be a touch of the Dominic Cummings about it, use your initiative.
• The distancing is more likely to influence the confidence of consumers than it is to be taken at face value, that is as a legal requirement.
• There is no chance of the police getting involved. You know as a parent you shouldn’t impose rules on a child that you can’t enforce. If you’ve ever been busted by a four-year-old, you’ll know what we mean.
• Mitigating actions are going to be mentioned. This is sensible but may work better on paper than in practice. There may be upward of three dozen of them. That’s just a guess although there have been leaks.
• Taking names, addresses and contact numbers is a good idea on paper. But it will be costly in terms of time and will cut spontaneity if would-be customers have to queue up to leave their names.
• And whose (potentially dirty, coughed on) pen do you use?
• Longer term, registering names could help pubs & restaurants with their marketing campaigns further down the line.
• The opening will be a cathartic moment in some ways – but it will be a potentially worrying time for most. It will open the way for the government to gradually remove state aid.
• Pub reopening. Cleaning pipes remains vital. Pubs have not been shut for this period of time during the lifetimes of anybody involved in the industry. Cask Marque and others have issued guidance. Illness and diseases such as Legionnaire’s disease are a risk if this is not handled properly.
• Cask Marque has partnered with Visit Britain to create a Covid-19 compliance accreditation scheme for its 9,500 pubs and the 1,700 pubs listed on the Stay in a Pub website.
• The accreditation idea should ensure that pubs are aware of their responsibilities and should reassure consumers as to the safety of venues. Paul Nunny, Director of Cask Marque said “There is a concern that the Government’s ‘Stay at Home’ campaign has been so successful that consumers will initially be unwilling to go to public places.’
• This is a critically important point. See our various comments on ‘where’s the off-switch for lockdown’ etc.
• Shopping centre operator Intu has updated on its discussions with its lenders saying that it ‘has been in discussions with key stakeholders to progress this standstill strategy ahead of the revolving credit facility covenant waiver deadline of 26 June 2020.’ It says all the terms remain ‘subject to further negotiations, with no certainty as to whether intu will achieve a standstill, or on what terms or for what duration.’
• Time is getting rather tight. Intu says ‘further announcements will be made as appropriate.’ The company says it ‘has also appointed KPMG to contingency plan for administration. In the event that intu properties plc is unable to reach a standstill, it is likely it and certain other central entities will fall into administration. In this situation, all property companies would be required to pre-fund the administrator to provide central services to the shopping centres. If the administrator is not pre-funded then there is a risk that centres may have to close for a period.’
• The BBC references a video from Pret a Manger CEO Pano Christou in which he tells staff that there will be an announcement about the “job situation” on 8 July. Christou says that sales are running at 15% of normal levels.
• Counting backwards from when staff have to be partially paid for (i.e. when the furlough scheme begins to taper), companies may have to start consulting with their workers about redundancies (if they don’t wish to partially pay them under CJRS II) in the coming few days.
• Pret in particular has seen its stores, which are allowed to open without seating, badly hit due to many office workers currently working from home.
• The company may feel that former customers, who have been saving money on sandwiches, coffees, commuting and after-office beers whilst at home, could spend a little less even when they do return to the office.
• As we mentioned in the premium email yesterday, Pret is one of a number of operators that currently have advisors it to help them assess their options. Pret says ‘at the end of May we appointed advisers to help Pret develop a comprehensive transformation plan to adapt to the new retail environment.’ It says ‘transparency is very important in our business and we will make sure that Pret’s team members are the first to hear about any changes. We will update our team members in early July once the plan has been finalised.’
• Pret indicated that it would need sales to rise to around 60% of former levels in order to hit break even.
• Naked Wines has said that it will not be releasing full year numbers today as previously announced. The company says ‘the date was subject to completion of the final accounts preparation and routine audit procedures. In common with the wider market, these were taking additional time due to COVID-19 restrictions and abnormal working arrangements and therefore the announcement date remained subject to change.’
• It says ‘the audit process continues to progress well, with no material issues identified, but additional time is required to complete the final routine procedures and accordingly, while Naked Wines still expects to announce its Full Year Results this week, final confirmation of timing will be provided the day prior to announcement.’
• Amazon has gained approval to deliver alcohol in West Bengal.
• Morrison’s is to offer hot food to go in all of its 402 of its cafés nationwide.
• Asahi yesterday launched ‘Beer Pronto’, a new online and next day delivery service for beer and cider nationwide. Asahi UK says supermarket online delivery slots are hard to come by and adds ‘we wanted to ensure fans of our most popular brands weren’t kept waiting and could still enjoy their favourite premium lager and cider, at home, delivered with speed.’
• The Rick Stein Group has announced that two of its restaurants, its units in Marlborough, Wiltshire, and in Porthleven, Cornwall, will not reopen post lockdown.
• Shoe retailer Hotter is preparing to launch a CVA. It proposes keeping only 15 of its current 80 stores.
• Hog Back Brewery is to launch East Coast IPA, available in keg and 330ml cans.
• Camden Town Brewery is to brew a double dry-hopped American Pale Ale to be named To The Pub. It will give away 260,000 pints to the on-trade when it is in a position to reopen.
• Industry analyst Peter Martin says that Covid-19 closures and now the reopening processes, have put operators at a crossroads not of their own making. Some operators, such as le Caprice, have taken the decision to close their existing site and seek to locate elsewhere.
• The various CVAs (either enacted or proposed) are the result of similar decision making processes – though often driven by the need to change rather than the desire to undertake it.
• Certainly Covid-19, for better though usually for worse, is a natural pivot point.
• The government is reported to have dropped plans to change Sunday opening hours after a backbench rebellion.
HOLIDAYS & LEISURE TRAVEL:
• Carnival Cruise Line yesterday confirmed that it has extended its operational pause in North America through Sept. 30, 2020. It says ‘during this unprecedented pause in our business, we have continued to assess the operating environment and confer with public health, government and industry officials.’
• The UNWTO says there will be between 850m and 1.1bn fewer international trips globally this year.
• TUI is to begin reopening its UK shops on 6 July.
• Pierre & Vacances has opened most of its 165 French holiday destinations.
• Disneyland Paris is to commence reopening from July 15.
• Hope for staycations. The FT, for example, says that hotel bookings in Blackpool were up 200 per cent week on week in the first week of June.
• Fred Olsen Cruise Lines is reported to have confirmed that it has begun consulting about job losses at its head office
• STR reports that the hotel industry in the UK ‘lags the rest of Europe in large part because it is slower in reopening from the COVID-19 shutdown.’ STR reports that UK hotels are still running down between 81% and 89% in REVPAR terms against the same period last year.
• Teeside International airport has resumed flights.
• RCL has confirmed that its 49% stake in Pullmantur, the Spanish cruise line, has been written down in its Q1 impairment charge. RCL says ‘the headwinds caused by the pandemic are too strong for Pullmantur to overcome without a reorganization.’
• G4M looking like a rare winner.
• Gear 4 Music has reported full year numbers to end-March saying that revenues rose by 2% to £120.3m with EBITDA of £7.8m versus £2.3m last year. The group achieved a net profit of £2.6m against a loss of £0.2m in the prior year.
• CEO Andrew Wass says that profits for the year are ahead of the board’s expectations. He says ‘as previously announced, the commitment and hard work of our employees has enabled us to continue operating safely, whilst successfully serving our customers throughout the COVID-19 crisis.’
• G4M says ‘positive sales trends with improved margins have continued into June, and we have also incurred lower marketing costs than we would typically expect. The improvements we have made during FY20, and the exceptionally strong trading we have experienced during the lockdown period, mean we are financially stronger and better placed than ever to make the most of future growth opportunities within our market.’
• G4M concludes ‘therefore, whilst still early in the current financial year, the Board is confident of continued financial improvements during FY21 and look forward to the year ahead with optimism.’
FINANCE & ECONOMICS:
• The CBI has reported that UK industrial output registered its largest quarterly fall on record in Q2 this year.
• The UK car industry says it might have to cut one in six jobs.
• VAT may be cut and former Chancellor, Sajid Javid, is saying cut National Insurance. Most agree that taxes will need to go up shortly.
• Sterling up at $1.2466 and €1.1069. Oil higher at $43.01. UK 10yr gilt yield down 5bps at 0.19%. World markets. UK & Europe down yesterday but US up and Far East higher in Tuesday trade. London set to open up around 25 pts.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
• Today’s News: We were expecting the Naked Wines finals (for y/e March) today, but the company announced yesterday afternoon that, although “the audit process continues to progress well, with no material issues identified”, it needed a bit more time to finalise things. Shoe Zone has, however, announced its interim results (for the six months to April 4th), which bear the scars of a poor March. There is no trading update for the post-lockdown period, although the company highlights a boom in Online sales driven by an aggressive “BOGOF” deal. And the embattled shopping centre business Intu Properties has confirmed that if it cannot soon agree a standstill with its creditors it will appoint KPMG as administrators and that the centres may have to close. The latest monthly Kantar/Nielsen grocery sales figures should be out at c8am today.