Small Cap Value Report (Wed 16 Sept 2020) -BOTB, LGRS, ACSO, BRCK

16th Sep '20 by Paul Scott

70 comments 9321 reads

Good morning, it's Paul here with the SCVR for Wednesday.

Timing - I'm a bit tired today, so will have a rest, then come back and do some more after lunch. Today's report is now finished.

New Look & Turnover Rents

Fashion retailer New Look seems to have survived to fight another day, with creditors agreeing to its second CVA in recent years, voted through yesterday. Apparently this involved a 3-year rent holiday on some shops, and the majority moving to turnover rents (where rent is a % of turnover, rather than a fixed amount). This will give New Look a big, and unfair, competitive advantage over its rivals that are still stuck paying excessive rents under old leases. Paradoxically, it's the weakest retailers that are able to force through improved rental terms. Thus the weakest survive, and the strongest are punished - surely the opposite of what is supposed to happen?

Quiz (LON:QUIZ) (I hold) recently announced that it has successfully moved most of its physical stores onto turnover rents, after it did a pre-pack administration. If landlords don't play ball, then they're given the keys back, and have an empty store. Quiz walked away from about a dozen stores where it couldn't agree revised terms with landlords.

I think this is now looking like an unstoppable, structural change. In order to survive and prosper, retailers need to restructure their leases onto new turnover rent arrangements, and to develop a strong online offering. There are two ways to restructure the leases - either through an insolvency process (pre-pack administration or CVA), or gradually over many years, as the leases individually come up for renewal. It's difficult to see why anyone would now sign a conventional 15-year lease on fixed rent, with 5-year upward-only rent reviews. Maybe only for prime sites, but everywhere else, rents are likely to come down a lot, and be based on turnover rents. This is likely to be extremely painful for the owners of shopping centres, but ultimately is the right way to revitalise physical retailing.

Personally, I've decided to limit my investments in physical retailers to companies which bite the bullet, and restructure. So Quiz is now one of my largest long positions. A decently profitable business should emerge over the next year, now that all the leases have been jettisoned, and replaced with shorter term, turnover rent arrangements. Also…

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Brookeda

16th Sep '20

Paul was talking about this when it was about 250 as I snapped some up myself after my own review.

The Ox 2906

SAGA plc.. Hi Paul is Mário Ferreira a new name on the shareholder list? Just popped up with 3%. He owns Seatrade Cruise Global. Seems interesting? Saga (LON:SAGA)

Paul Scott

Nice spot, thanks. Once SAGA's (I hold)2 brand new cruise ships are working again, it should transform the group finances. They're forecast to generate £40m p.a. positive EBITDA *each*. Management said several times in interims presentation, that "demand will not be a problem". The new one is already fully booked. People are itching to go cruising again. Saga ships have some key advantages, including fresh air aircon (not recirculated), and with all balcony suites, they reckon social distancing will be much more viable than older ships. All ready & waiting to resume cruising, once they're allowed to.

Interesting that another cruise line owner is buying Saga shares. I think this could be a very good turnaround, with a 2-year view.

thanks Paul, maybe he’ll take the cruise ships off their hands or partake in a break up?

Well, the base rent takes care of that. So a typical turnover rent deal we did (this was back in the 1990s, in factory outlet centres) was something like: Base Rent £60k pa. (on a unit of say 2000 sq.ft.), and turnover rent of 11% of turnover.

Each month one of my team would prepare a statement for the landlord, showing the turnover, and the turnover rent, and base rent, for the month, and year to date. We would make a balancing payment each month, to bring the YTD rent up to the correct amount.

So in quiet months like Jan & Feb, we would just send the landlord base rent, of £5k + VAT for the month. Then in busier months, turnover rent would kick in at a higher figure. It worked like a dream, as rental payments mirrored cashflow up & down.

Mind you, we were honest, and always disclosed the correct figures. Whereas I did hear rumours of some tenants having two tills - one plugged in to the EPoS system, and one not - hence taking additional turnover on the sly, and not paying rent on it.

We had to get the turnover rent statements audited at each year end, which cost about £1k in additional audit fees per shop.

Actually, thinking about it, I do now remember that shops which failed to generate decent revenues, would be turfed out of the centre by the landlord. So there must have been a break clause in the leases to allow the landlord to break the lease, if shops significantly under-performed, you've jogged my memory on that point!

Regards, Paul.

dealtn

In line with my thinking, which makes the transfer to IFRS 16 even more of a mockery than previously (and more reason to strip it out). To be fair I suppose those in charge couldn't have predicted the Covid pandemic and the resulting acceleration towards these types of lease for retailers.

JohnEustace

Seatrade Cruise Global seems to be an event manager rather than a cruise line.

https://www.seatradecruiseglob...

Mario Ferreira runs a different cruise business. Perhaps he would like to buy Saga's cruise ships?

https://www.seatrade-cruise.co...

Silver Moon

I applied, their robot refused me, can't think why except that it was a robot. I had never been refused before, even her indoors took me on.

Silver

Tommy H

Was the fundraising earlier this year not at £3.25 so I guess there are a number of people out there sitting on a loss and just looking to exit hence an overhang around that number.

Cheers

Tommy

No chance. With the founder's son back as Chairman, and having just put in £60m of fresh equity at 27p (double current price), and more at 12p, then nobody will be taking over Saga or breaking it up, because the new Chairman has close to a blocking stake, the way I see it.

hawkipa

Interesting thoughts on Redrow (LON:RDW), thanks for sharing. It's hard to get away from the operational excellence on display at Persimmon (LON:PSN) & Berkeley Group (LON:BKG) for me, along with by far the best balance sheets. If the early signs from H2 are maintained there could be better than expected FY numbers, but admittedly the road is long and dominated by the end of Furlough & Brexit to drive consumer confidence.

Ah yes, CJ.

I didn't realise he did so many of them! My favourite is "I didn't get where I am today by thinking!"

Lincoln Green

Yes Paul, very good.

A good end to the day. ' I didn't get where I am today without laugh out loud stuff.'

Gromley

Also, landlords seem to be keen to keep turnover rent lease terms quite short, I've heard 2-3 years are typical for new turnover rents. The idea being that if town centres recover, then the landlord can kick out the tenant on a turnover rent, and re-let it on a higher, conventional lease.

It would be interesting to see how these turnover rents deals are structured.

Unless there is a cap on them, there must be a level of turnover at which the landlord receives more than they would under a conventional lease.

It seems like a great concept to me as the Landlord is incentivised to work with the retailer to improve their turnover. Although equally there probably comes a point where the retailer considers chasing margin rather than turnover.

I might do some sleuthing on this as I have some indirect access to insight into my local town centre retail lease market. My interest was already piqued by the fact that one of my local retailers has just started a "closing down" sale on a store with 2 years left on its lease that I know to be profitable after rent. They moved only in the last couple of years from a higher cost landlord to a slightly lower cost one - and in my view got a site with much better passing footfall. I think the "closing down sale" is bargaining chip for a rent review, but I am watching with interest to see what unfolds.

Dave_17

Hi Paul

Great article as always. Appreciate you will not have the answer but it would be interesting to see how they account for internet sales. At face value this concept seems heavily in favour of the retailer while they transition online. Sort of legitimate way of bypassing EPOS - in store pickup, online discount, etc. I sure they'll have that covered but interested in seeing how. Massive issue for retail based REITs.

Blimey that reminds me I loved the rise and fall of Reginald Perrin (although it also reminds me how irritating over-used canned laughter was - some of the CJ quotes are drowned out before he even finishes them).

It looks like all 21 episodes are available on youtube - so I might not be around too much in the next week or so ;-0

Harry Hindsight

Remember turning 50 and Saga doubled my car insurance. Never touched any product ever since. How do you turn Reggie off.

JJB1

This time next year Rodney...

yes sorry my fault, he owns Mystic Cruises which sold a chunk of shares to Certares a US fund last year for $250m last year. This is interesting too:

https://www.google.co.uk/amp/s...

Yes, that implies they could be a supportive holder - or perhaps waiting for opportunities to take a larger stake. Reassuring in any case that they see value here.

Small Cap Value Report (Wed 16 Sept 2020) -BOTB, LGRS, ACSO, BRCK

New Look & Turnover Rents

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Paul Scott

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