Langton Capital – 2020-07-06 – PREMIUM – Rents, reopening, Pret, Azzurri, Cineworld, Carnival etc.
Rents, reopening, Pret, Azzurri, Cineworld, Carnival etc.
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A DAY IN THE LIFE:
We try to adopt a live and let live policy when it comes to our garden.
Aided by the fact that it’s not classically pretty to start with, we’ve been able to ignore the loss of various fruits and nuts to birds and squirrels and the rabbits we leave be on the basis that they can only eat plants up to a certain height.
However, that dictum has been stretched a bit by the arrival of deer in the garden, effectively long-legged rabbits with horns, which can reach much higher than your average rabbit such that they’re now busily stripping the lower leaves and bark from our plum and apple trees and have made a start on the low-hanging fruit and I’ve seen a couple of them standing on their hind legs to reach higher still.
That I can just about live with but, if one of them ever turns up with a stepladder, I’ll have something to say. On to the news:
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SHOULD OPERATORS BE PAYING THEIR RENTS? We have written previously about the tendency to ‘have money, keep money’. Here we ask whether tenants should pay their rents. 2 July 2020:
The current situation:
• Estimates vary but perhaps something in the region of 20% of the Q3 rental bill across retail and hospitality, that was due on 24 June, has been paid.
• The estimates are higher for Q1 – where demands would have come in around the time of the lockdown, and maybe 40% to 50% has been paid
• Speaking from experience, the City of London has offered Q3 (i.e. June payment) free if tenants pay their Q2 bills. Tenants will also have to pay (hopefully reduced) service charges (for empty buildings) and insurance as normal.
• Other landlords have ranged across the entire spectrum – from something approximating the above to formal demands, threatened legal action and the unspoken threat that eviction proceedings will be commenced once it is legal to do so
• Rental contracts are enforceable legal agreements like most others.
• They are in writing, entered into freely and they are often accompanied by legal advice on both sides
• Most things are up for negotiation but there are various sanctions and they tend to be padded in the landlord’s favour. There will usually be a 3mth or a 6mth rental deposit, rents are paid in advance, there may be PGs (personal guarantees) etc. etc.
• But, at the end of the day, this is realpolitik and, if operators simply cannot pay their rents, then they will not do so
The situation on the ground:
• At that point, all kinds of moving parts need to be taken into account
• We have previously said that, whilst a tenant may 1) first ask for financial relief and then 2) not pay any money over and accompany this by threats of CVAs or straight administrations, there are other issues in play
• If an otherwise healthy company has guaranteed the rents of struggling units, then the landlord is unlikely to make concessions
• Similarly, though the landlord cannot at present take back properties due to the lease forfeiture moratorium, there is always the threat that it will do so.
• In this case a casual diner, which may have spend £600k to £1m fitting out a modestly-sized unit, will lose all of their F&E, goodwill etc. and see it handed to the next tenant for free as an inducement to move in
• The landlord will be influenced by a number of factors. Are there cross guarantees from a sister or parent company? Are there personal guarantees from the tenant? Could the unit be easily re-let? What has the tenant spent on the unit etc.
• Some landlords have been reasonable – although the definition of ‘reasonable’ could need more work
• Indeed, some landlords have gone bust themselves
• Others are playing hard ball. This may be to protect units elsewhere in their portfolio on the ‘give an inch and they take a mile’ principle.
• Landlords may claim that the £10k & £25k grants paid directly to businesses on a per-unit basis were meant to cover rents and other costs
• The Covid-19 crisis has confirmed some of the benefits of the old, pub tenancy model in that the interests of the tenant and the owner here, particularly if the property owner is a brewer, are more aligned than they are in some other leases
• Landlords may claim with some justification that, as they do not share in the upside of a business, they should not be on the hook for its downside.
• This argument may 1) collapse when faced with the reality of the situation and 2) isn’t entirely true because the rents are likely to rise and the value of the property will rise if the tenant does well
PUB & RESTAURANT NEWS:
Covid-19 reopening – general:
• Everyone and his dog has a view as to how pubs & restaurants traded over the weekend, their first period of trading in 15 weeks. Here’s our view.
• Springboard says that high street footfall in general was up 19.7% on the week before. Footfall in the evening, not surprisingly given that pubs & restaurants were open for the first time in weeks, was up by an even more impressive 29.4% in regional cities but by a lesser 26% in central London and by 21.9% in historic towns.
• Springboard says that total high street visits in England were still down by 56% year on year. There were down by a greater 68% in Scotland, where more restrictions remain in place.
Covid-19 reopening – customer behaviour & volumes:
• Matt Hancock has declared victory. The police have said social distancing fell to bits in some outside areas. Overall, there was little trouble and A&E departments were not worked off their feet.
• The curtain twitchers will have been out with their camera-phones and there will undoubtedly have been some isolated incidents of excess.
• The police refer to a period of ‘decompression’. They may be letting some things slide in the very short term.
• Volumes of customers were good, perhaps three quarters to 100% of pre-Covid levels in some suburban locations. Food did less well than drink. Pre-booking levels helped to drive sales. The weather was mixed. City centres were less busy than previously – although they benefited from a higher level of pre-bookings, walk-in trade was not strong. Some ‘intentionally-crowded’ units did only a third of their normal business whilst others have not yet been allowed to open. The atmosphere, will nearly all customers seated, was ‘not quite normal’.
• The buoyant revenues of some units could have been helped by the delayed opening of competitor units. This may not last.
• Arc Inspirations reported ahead of the official reopening that ‘the majority of its sites are fully booked’ albeit on a reduced capacity. Arc has 17 bars branded as Banyan Bar & Kitchen, BOX and Manahatta. All of its sites reopened on Saturday. The group says that it is also fully booked for Saturday 11 July. CEO Martin Wolstencroft says ‘we’re thrilled at these booking numbers which are a reflection of the reputation we’ve worked hard to achieve over the past 20 years running bars. We know that this is the first step back on the road to recovery but confident that the business will bounce back better than ever.’
• Post reopening, Arc Inspirations has said that sales on Saturday were 76% of last year’s level with suburban sites in growth and city centres a little more reticent. CEO Martin Wolstencroft says ‘it was great to see customers back in our sites enjoying themselves and all respecting safe distancing which was brilliant.’
• Elton Mouna, MD of the 15-strong Remarkable Pubs chain, said ‘Saturday 4th July saw sales in three pubs decline with 12 pubs growing their sales on the same Saturday last year. Mouna said ‘hearing the gentle happy hubbub of people enjoying themselves was a wonderful thing.’
• There are some concerns that trading levels could tail off from levels seen this weekend.
• The operators’ experience is likely to be coloured by the performance of their units. They may have a large number in town centres or in London or, on the other hand, they may have a number of suburban units.
• James Horler has tweeted the ‘reality is that the weekend didn’t happen. Super Saturday was Soft Saturday. We all need to work really hard to give our customers confidence that it is safe to come out and visit us…’
Covid-19 reopening – pricing:
• As pubs & restaurants will not be allowed to fill their venues to capacity, discounts have disappeared.
• Additionally, prices have risen across a large number of outlets as operators have been testing the ‘price elasticity’ of their reduced customer base. There may be some adjustments to this made over coming weeks.
• The Express reports that JD Wetherspoon ‘is increasing beers, wines and spirits by 10 pence as it reopens the bulk of its 900 pubs’ and says that it will add 20p to the price of meals. JDW says ‘all we can say in this area is that we try to keep prices as competitive as possible. From time to time there will be price rises but we always try and minimise them.’
• Sam Smiths is reported to be adding £1.00 to the price of a pint of bitter or lager. Prices hitherto had been unbelievably low.
• CAMRA says ‘we do understand that pubs are facing increased overheads and reduced income due to restricted customer numbers, and may have to consider raising prices to make ends meet.’
• It adds ‘many people have been drinking cheap supermarket beer during lockdown, and price rises won’t help to persuade people to return to the pub.’ This isn’t an issue when numbers are being restricted, though it could become an issue further down the line.
• The Express quotes M&B as saying ‘to help cover some of the costs of operating under Government safety guidelines we are considering small price increases on a limited number of items across our pubs, bars and restaurants. We would like to reassure guests our products are competitively priced compared to the wider market and we continue to offer value.’
• Many other operators, likely most, have told us they are ‘taking price’.
Covid-19 reopening – changes to business practises:
• No standing at the bar, table ordering where possible, a lot of pre-booking with minimum spend levels and payment by plastic rather than cash.
• Menus are in many cases disposable, choice has been restricted and communal items, such as sauce bottles, have been removed from tables often to be replaced by individual portions.
• These moves have price implications but, as noted above, prices tend to have risen.
• Names and contact details are being taken. Again, this has cost implications.
• The BBC reports that Yo! Sushi is ‘adapting’ its conveyor belt system.
Covid-19 reopening – potential dead spots:
• For chains with a spread of units, the rough can be taken with the smooth. For smaller operators, they may be fortunate to have a preponderance of units in buoyant areas (residential, wet-led) or they may have more than their fair share of what might now and suddenly be problem units.
• Office-heavy locations may struggle. The weekend was not the time to judge them but, will fewer people commuting into work, such units may suffer from a reduced footfall for some time.
• London as a whole may take some time to recover. The ‘London market’, however, is in reality a large number of separate markets. The ‘London villages’ are likely to outperform the City, Docklands and the West End.
• Theatre land remains a ghost town.
Covid-19 reopening – trade bodies comments:
• UK Hospitality has called upon customers to do their bit. It says ‘our customers also have a huge role to play – success depends on cooperation. Everything must run as smoothly as possible in order to ensure that everyone is kept safe and any further potential closures, which nobody wants and could be terminal for some of our favourite venues, are avoided.’
• The BBPA has ‘welcomed Prime Minister Boris Johnson’s call for pub goers to be responsible and follow measures put in place in pubs to ensure their safety.’ It calls upon pub goers ‘to act responsibly, follow the measures in place and help pub landlords and staff to open in the best way possible.’
Covid-19 – other news:
• There is still some consternation as to why the first day of opening was not a Monday rather than a Saturday.
• Around 120 hospitality industry bosses have written to PM Boris Johnson calling upon him to announce support for the hospitality sector. The leaders would like to see VAT reduced, tax bills further deferred and some rent debt covered through grants. The letter says ‘hospitality businesses operate with very high fixed costs and labour costs are the only flexible point to absorb this suppressed demand.’ It says ‘many parts of the late night and leisure economy, as well as activities such as events and conferencing in our hotels, have no provisional date for reopening and this is impacting confidence and undermining job security.’
• The Telegraph reports that high street retailers have already cut more than 24,000 jobs this year. The Centre for Retail Research says this could be ‘the tip of the iceberg’.
• Data company Tenzo suggested that the ‘UK restaurant industry looks like it will take in £109 million on what many had optimistically deemed ‘Super Saturday’, 53% below what the industry made on the same day last year.’
• This is better than it sounds as Tenzo points out that ‘only 63% of locations have reopened.’ We believe the number of reopened sites on Saturday could have been materially below that level as not all companies will reopen at all and, those that do, may be staggering the opening of their units (see Fuller’s below).
CVAs, administrations, pre-packs, disposals etc.:
• The CVA game (or pre-pack administration, straight administration) remains one of the main plays in town. Worth remembering:
• Companies that have come to some sort of conclusion, for better or worse include Carluccio (administration and sale of some units to Boparan), Casual Dining Group (administration and partial closure with a potential sale of the rest), Restaurant Group (administration of Chiquito’s & Food & Fuel, CVA of the Leisure Division), Le Pain Quotidien (sale of UK business).
• Companies where we are awaiting news (where advisors have been appointed, where negotiations with landlords are underway etc.):
o Azzurri (ASK & Zizzi), Busaba, Byron, Gourmet Burger Kitchen, Pizza Express, Pret (talks with landlords), Prezz, Wasabi and there may be others.
• Fuller, Smith & Turner, which on Friday delayed its full year numbers for the second time, has said it is ‘undertaking a phased, gradual reopening across the estate. On 4 July 2020, 27 pubs will open, with further pubs opening in groups over the following weeks. By the end of July, over 80% of our Managed Pubs and Hotels will be open.’ FSTA says ‘we expect the majority of our Tenanted Inns to also reopen during July.’
• The Times reports that the Covid-19 crisis has pushed Pret a Manger ‘to the brink’. It says ‘the fast-food chain is fighting for survival and may have to close one in 10 of its 410 UK stores as it grapples with plunging sales. It will tell its 8,000 UK staff this week about the scale of the job cuts in the months ahead.’
• Pret, which often serves the office market, has found itself in a tough spot. The Times reports that ‘sales at Pret’s café in Paternoster Square near St Paul’s Cathedral are down by 90%.’ The company expects sales to ‘creep up to no more than 60% of normal levels in the coming months’. The business will not be able to operate as it has with such a reduced sales figure.
• Tasty to make 32% of workforce redundant.
• Tasty has updated on trading saying ‘given the anticipated drop in footfall due to the continuing restrictions imposed as a result of COVID-19, the Board has come to the difficult decision that staff numbers need to be reduced accordingly. Consequently, some 284 staff members (representing approximately 32 per cent. of the total workforce) have been made redundant across our restaurants and Head Office.’ The company says ‘this decision has been very difficult for everyone involved and throughout this process our priority has been to support those that have been affected.’
• Tasty adds ‘the board of directors is exploring ways to minimise costs and to strengthen the balance sheet including investigating the possibility of new debt and / or equity capital and also discussing terms with landlords and trade creditors. Further announcements will be made as and when appropriate.’
• The Azzurri Group could be sold to Towerbrook Capital Partners according to reports. The Times reports that the ASK & Zizzi operator has ‘attracted bids from five private equity and investment firms, and has yet to progress to exclusive discussions.’
• It is not clear at this stage whether a disposal would also include an administration, effectively a pre-pack, in order to allow the new owner to leave unwanted units with their landlords. The Times does report a source as saying ‘a pre-pack is one of the options under consideration.’ To acquire the chain otherwise would involve a lot of work for the buyer.
• Marston’s chairman William Rucker has purchased 100,000 shares in the company at 53.9p per share.
• Constellation Brands is to acquire wine brand and direct-to-consumer platform, Empathy Wines.
• BigDish, which operates a yield management platform for restaurants, has updated on trading saying that ‘the pandemic has also accelerated certain consumer trends and as such has been proactively upgrading its technology platform in order to address the wider needs of restaurants and consumers.’ Aidan Bishop, Founding Director, commented ‘I firmly believe that the restaurant industry will survive albeit the landscape will look rather different.’ He says ‘the restaurant of the future will have to cater for both on and off premise dining and the pace of technology adoption will continue to rise which in turn will accelerate innovation. BigDish is building a technology platform in readiness for the restaurant of the future.’
HOLIDAYS & LEISURE TRAVEL:
• Carnival’s Costa Cruises has announced that it will extend the pause in its operations until at least 15 August.
• BVA BDRC research has suggested that there has been a pick up in demand for summer holidays with 18% of adults intending to take an overseas holiday by the end of the summer, a further 11% by the end of September and 23% intending to take a holiday by December. Some 66% said they intended to take an overseas holiday by next April.
• The trade has reacted with some relief to the government’s publication of the list of ‘safe’ destinations for UK citizens to travel to without quarantine restrictions on their return. Germany, France, Spain and Italy are on the list but Portugal is not and nor is the USA.
• Portugal is unsurprisingly up in arms regarding its exclusion from a list of countries to which UK citizens can travel freely.
• Galicia in north west Spain has seen 70,000 of its citizens put under renewed lockdown. This follows similar moves in Catalonia.
• UK holiday company Parkdean Resorts has hired 1,500 new members of staff ahead of what it expects will be a record late summer, September and October. The operator expects to be at 100% capacity in July.
• Pan Express Business Travel, which owns Ahoy Cruises, is reported to have ceased trading.
• Cineworld, a win for the lawyers?
• CINE has confirmed that Cineplex has ‘initiated proceedings against Cineworld in relation to Cineworld’s termination on 12 June 2020 of the Arrangement Agreement relating to its proposed acquisition of Cineplex.’
• CINE says Cineplex is claiming ‘damages of up to C$2.18 billion less the value of Cineplex shares retained by Cineplex shareholders.’ CINE says it ‘did not breach these (or any) obligations or duties and will vigorously defend this claim.’ It says it ‘terminated the Arrangement Agreement because Cineplex breached a number of its covenants under the Arrangement Agreement. Cineplex did not remedy these breaches when given the opportunity to do so. Cineworld is entitled to recover from Cineplex all damages and losses that it has suffered as a result of Cineplex’s breaches and the Acquisition not proceeding, including its financing costs, advisory fees and other costs incurred.’ It says ‘Cineworld intends to counter-claim against Cineplex for these damages and losses.’
• Facebook is to shut down its TikTok competitor app Lasso.
• Lisa Nandy, MP for Wigan, has called for government intervention after the town’s football club was put into administration. The call follows allegations that the club may have been put in administration because of a bet.
• Chancellor Rishi Sunak has announced a £1.5bn boost to the UK’s struggling theatres, music venues and museums.
FINANCE & ECONOMICS:
• The Composite PMI for the UK in June has bounced back to 47.7 from 30.0 in May. IHS Markit says ‘this was the highest reading for four months, although still below the neutral 50.0 mark.’ IHS Markit says ‘June data highlights that the worst phase of the service sector downturn has passed as more businesses start to reopen and adapt their operations to meet social distancing requirements.’ The Service Sector PMI came in at 47.1, up from 29.0 in May.
• The Bank of France governor has said that the French economy is pulling out of the Covid-19 slump slightly faster than earlier anticipated.
• Sterling up vs dollar at $1.2494 but down vs Euro at €1.1071. Oil higher at $43.08. UK 10yr gilt yield unchanged at 0.19%. UK & Europe down on Friday but other markets higher since and UK set to open up around 100pts in Monday trade.
• The IMF has said that the UK may have to increase support to newly-unemployed people in order to help them to get back into work.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
• Today’s News: Boohoo has hit back at the damaging allegations in the Sunday Times with a statement saying that it is “determined to drive up standards” in its UK suppliers and flagging that the Leicester sweat-shop Jaswal Fashions, highlighted in the Sunday Times undercover investigation, is not a declared supplier and that Boohoo is launching an immediate inquiry into how the factory came to be involved in the supply chain. And Supermarket Income REIT (the property company that does what it says on the tin) has announced the acquisition of the freeholds of six relatively large supermarkets from Waitrose for c£74m (a net initial yield of only 4.4%).
• News Flow This Week: The delayed finals from both JD Sports and Halfords come out tomorrow, the Chancellor’s major economic policy statement is on Wednesday lunchtime and the Pets at Home and Land Secs AGM’s are on Thursday. Thursday may also bring a pre-close update from DFS and it will bring the Walgreen Boots Q2 out in the US.
• Saturday’s Press and News (1): The headlines on the front pages of the Saturday papers were generally about “Super Saturday” in England (with pubs, restaurants, hotels, cinemas and hairdressers allowed to re-open post-lockdown), with the Times leading with the Chancellor’s plea for consumers to help struggling pubs and restaurants by spending money (“”Eat out to help out””), whilst the Guardian led with the PM’s advice not to do over-do things (“Let’s not blow it now, urges Prime Minister”) and the Daily Mail went with the warning from the Health Secretary: “We’ll lock up Super Saturday hooligans”…
• Saturday’s Press and News (2): In terms of Retailing stories, the M&S AGM on Friday was a big feature in the Times, as it flagged that Chairman Archie Norman admitted that Ocado is already operating at full capacity and that it won’t have room to take on new business for M&S shareholders in September (“M&S admits that Ocado will deliver, but slowly”), whilst the Business editorial in the Telegraph praised M&S for having the courage to have a live interactive AGM, so that it could be held to account by shareholders. However, the decision by the property group Land Secs to restore its dividend (as highlighted by the FT) attracted criticism from the Business editorial in the Telegraph (“Land Secs’ optimism looks built on sand”), whilst the Business editorial in the Times noted that the dividend move by Land Secs could be counter-productive (“Tenants will have more moral
• Saturday’s Press and News (3): The FT had a couple of interesting feature articles: one, with a US focus, was about how retailers are exploring blends of Online and physical models as they size up the potential shape of the market (“Hunt begins for retailers’ perfect fit”). The other was about the problems of UK supermarkets in growing profits as well as sales through the pandemic (“Supermarkets expect flat profits despite rise in sales”). The main Business story in the Daily Mail was that the big supermarkets are gearing up for “a massive price war”, given the likely impact of the imminent surge in unemployment. The Daily Mail also had an Investment feature on the possible bargains amongst the listed UK shopping centre companies, noting, inter alia, that New River Retail has much better prospects than Hammerson. The stockmarket reports, eg in the FT and the Times, flagged that Next
• Saturday’s Press and News (4): The Times had a big two-page spread on the increase in the use of iniquitous “pre-pack” deals by struggling High Street retailers to shuffle off their rental commitments (“High Street turmoil revives “Frankenstein” deals”) and the Times also noted that the embattled fashion chain New Look is looking at yet another CVA to cut its rents, having only reopened 380 of its stores so far. The Guardian highlighted that nearly 9000 jobs were lost by retail and restaurant chains last week and that the discount chain Poundstretcher is the latest straggler to be looking at widespread store closures. On a brighter note, the Guardian also flagged the surge in subscription delivery services for gin, cheese and coffee etc during the pandemic, whilst we noticed in the Economist magazine on Friday an article about the boom in model soldier painting etc during the lockdown,
• Sunday’s Press and News (1): There were some mixed headlines on the front pages of the Sunday papers: the Sunday Times actually led with the news that an investigation is to be launched by the Home Secretary into a factory which supplies clothes to Boohoo, after an undercover reporter discovered that workers are being underpaid (“Fashion giant faces “slavery” investigation”)…On a different tack, the Observer went with the news that leaders in the NHS have accused the Chancellor Rishi Sunak of refusing a £10 billion cash injection (“NHS fury over broken pledge of extra cash to fight virus”), whilst the Sunday Telegraph flagged that the Prime Minister is to phase out the use of Huawei’s technology in the rollout of 5G and the Mail on Sunday trumpeted that “Super Saturday” was “The day Britain smiled again!”.
• Sunday’s Press and News (2): In terms of Retail stories, on top of the Sunday Times “Insight” investigation into the poor working practices in Boohoo’s clothing factories in Leicester (the detailed report on the News pages quoted a factory foreman as saying “They only exploit us. They make huge profits and pay us peanuts”), the Sunday Times Business section also had a big feature article about the rise of Boohoo and its management team, although it was more sympathetic than the headline “Boohoo on the rack over £50m bonus”. The Sunday Times also gave a roasting to the scavenger fund Torque Brands (which is backed by retail grandee Allan Leighton) for the way it raided the menswear retailer TM Lewin (“Creditors and staff lose shirts in TM Lewin makeover”). And the Sunday Times’ list of “Villains” of the lockdown was headed by the beleaguered Philip Green…
• Sunday’s Press and News (3): In other news, the Sunday Times also listed the Winners and Losers from the lockdown (“winners” included Games Workshop and Bike shops and “losers” included Pret A Manger and Primark). The Sunday Times also looked at “Who’ll survive the shopping mall meltdown?”, arguing that the likes of Westfield, Bull Ring and Meadowhall should remain retail fixtures. The Sunday Times had a front page Business snippet about the news that Tesco is demanding up to 50% discounts from suppliers, whilst the Mail on Sunday flagged that the embattled New Look has agreed a new bank loan deal, to provide some breathing space in its battle with landlords.
• Sunday’s Press and News (4): In terms of all the Economics columns in the Sunday papers previewing the mini-Budget on Wednesday, we would highlight the column by the Sunday Times Economics correspondent David Smith (“Sunak has to spend now, and he will have to spend later”), in which he argued that the Chancellor has to work now to preserve jobs and also keep something in reserve, as well as the column by the veteran commentator Hamish McRae in the Mail on Sunday (“It’s time to box clever, Rishi”), in which he argued that it makes little sense to have a temporary cut in the rate of VAT. The Sunday Telegraph had a big feature on the difficult job the Office of Budgetary Responsibility (the OBR) has in coming up with its latest economic forecasts on July 14th (“Don’t bank on a V-shaped bounce, the scourge of Chancellors warns”). Finally, the News pages of the Sunday Times flagged