Valuation Level 3

Question 1

Tell me about the Pub Portfolio

Pub Portfolio

Answer 1

• 11 sites located across the north east of england
• Mixed tenure
• Large managed house style pubs - some with large external areas and car parks

*2 Freehold, 9 leasehold

Question 2

Tell me about your valuation of the pub portfolio.

Pub Portfolio

Answer 2

I was instructed by my client to value a portfolio of pubs located in the North East of England for Financial reporting purposes.

The valuation was completed in accordance with the Red Book Global standards where I used the profits method and reported the basis of value was Fair Value in line with IFRS 13.

Question 3

Walk me through your SWOT analysis of the pub portfolio.

Pub Portfolio

Answer 3

S = Propertys were in good condition
W = Most of the portfolio is held on short leasehold basis
O = Renegotiate the onerous lease terms
T = Impact of cost of living pub businesses are ongoing threat

Question 4

How did you factor the short leasehold tenure into the Valuation?

Pub Portfolio

Answer 4

Applied a lower multiple - 8.25X on the FH and between 0.75X and 1.75X on the LH

Question 5

How were the properties trading?

Pub Portfolio

Answer 5

• On a portfolio level the EBITDA % was 23% which is good and in line with margins seen across the sector
• However some had recovered quicker out of covid than others
• But all of the properties were profitable

Question 6

Which legal documents did you review?

Pub Portfolio

Answer 6

I reviewed any key documents available which could adversely impact upon value.

8 of the properties were held leasehold and therefore reviewing the leases was a key aspect of the due diligence.

Other legal docs included:
*Planning
*Any environmental surveys available
*Title documents

Question 7

Why did you use the Profits Method?

Pub Portfolio

Answer 7

• I used the profits method in line with VPGA 4 Valuation of trade related properties.
• I used this method as pubs are normally transacted on the basis of their trading potential.
• The essential characteristic of this type of property is that is has been designed for this specific use.
• Therefore, the lack of flexibility means the value of the property is intrinsically linked to the returns that an owner can generate form that use.

Question 8

Where would you find guidance on accounts valuations?

Any

Answer 8

• VPGA 1 Red Book Valuation Global Standards 2025 - Valuations for financial reporting

Question 9

What is IFRS 13?

Any

Answer 9

It is a standard from the International Financial Reporting Standards which defines and explains the application of Fair Value.

It is deifned as “the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement
date.”

The RICS clarifes in VPGA 1 that for most practical purposes MV and FV should produce
the same result as they are both based on the same concept of a price in a free and open
exchange between typical buyers and sellers on a given date.

Question 10

What advice did you give your client?

Pub Portfolio

Answer 10

I advised my client that there was an opportunity to buy in some of the Short leaseholds. They may not be able to sell their short leasehold interests. They had recently acquired the pub portfolio and therefore buying in the FH’s would give them more control over the properties, allowing them to improve trading and get rid of onerous lease terms.

I also advised my client of the WAULT of the portfolio, what I meant by WAULT and how it was calculated over the LH portfolio.

Question 11

What is rent cover?

Pub Portfolio

Answer 11

Rent cover is the EBITDAR divided by the level of rent. Shows the tenants ability to meet their rental obligations from their operating performance.

Question 12

For your over-rented asset, where did rent cover sit?

Pub Portfolio

Answer 12

0.9 - so my assessment of fmop of a REO was not even covering the passing rent.

Typically you would expect a rent bid of 50% as a market standard in pubs sector.

Question 13

How did you determine a market standard of 50% rent bid

Answer 13

Sector benchmarking so looking at rental evidence from open market letting and from sale and leaseback transactions, rent will typically be agreed at 50% of operating profit on new leases. This is perceived as a good level for the investor and the tenant.

Question 14

How do you calculate FMOP?

Pub Portfolio

Answer 14

By coming to a view on the level of profit a reo can derive from their fmt

Done by analysising historical and forecast accounts and having specialist knowledge of industry benchmarks of kpis and thinking about it from the point of view of this specific property.

So for the pub portfolio looking at drivers of revenue being food sales and wet sales

Then looking at typical cos which can be benchmarked on a % of revenue

Then looking at other key costs e.g staff, repairs and utlities

Question 15

Explain your advice relating to WAULT

Pub Portfolio

Answer 15

I advised my client how the WAULT is calculated across the leasehold portfolio, weighted by contracted rent. I advised that as this declines, there will come a point when it will have an effect on value.

I advised that as this declines, there will come a point when it will have an effect on value.

The rationale behind this advice is that due to the increased risk of the income in the future years, investors will take this into account in the price they are willing to pay.

Question 16

What is WAULT? How is it calculated?

Any

Answer 16

Weighted unexpired lease term

Multiply the rent by each lease term remaining

sum that column and divide by the total amount of rent

Question 17

What was the WAULT at date of Valuation?

Pub Portfolio

Answer 17

10.1 years

Question 18

What is a Turnover rent clause?

Pub Portfolio

Answer 18

A turnover rent clause in a commercial lease agreement determines rent based on the tenant’s business revenue, rather than a fixed amount. This means the rent payable fluctuates with the tenant’s sales.

Question 19

What was your advice on the Turnover rent clause?

Pub Portfolio

Answer 19

I advised my client that one of the properties is subject to a turnover clause which is an onerous lease term.

The rationale behind the advice is that the turnover clause can lead to significant uplifts in rental value if the property trades well as opposed to index linked reviews which move gradually with inflation.

Question 20

What is FMOP?

Pub Portfolio

Answer 20

As stated in VPGA 4 of the Red Book: Fair Maintainable Operating Profit

This is the level of profit, stated prior to depreciation and finance costs relating to the
asset itself (and rent if leasehold), that the reasonably efficient operator (REO) would expect
to derive from the fair maintainable turnover (FMT).

Question 21

What was Fair Value of portfolio?

Pub Portfolio

Answer 21

£8.8m

Question 22

What multiplier was applied?

Pub Portfolio

Answer 22

8.25x on the FH’s

and ranging from 0.75x - 1.50x on the LH assets

Question 23

Tell me about your valuation of Pub, London

Pub, London

Answer 23

I was instructed by my client to provide a red book valuation of a Freehold pub in Central London for accounts purposes.

I carried out the valuation in accordance with the red book, using the investment method to calculate Fair Value

Question 24

Talk me through the hierarchy of comparable evidence

Pub, London

Answer 24

A= Direct comparables e.g comps of similiar assets / under offer

B= General market data e.g published sources, commerical databases

C= Other sources e.g interest rates, stock market movements

Question 25

Describe the property | Pub, London

Answer 25

* Pub is of 3 storey brick construction with Georgian sash windows throughout * Situated just off of Oxford Street in Central London * Trading pub on ground and first, with kitchen and office space on second and 3rd floor * Underwent full refurb in 2022 * C.3,500 sq ft

Question 26

Why did you use the Investment Method? | Pub, London

Answer 26

* In line with VPS 3 of the Red Book, I had regard to the nature of the asset as well as the purpose of the valuation when selecting the appropriate method. * I deemed the investment method appropriate as there was an income stream to value in the form of the rent and there is a market of comparable evidence where I could analyse investment comps.

Question 27

How did you verify your comparable evidence? | Pub, London

Answer 27

* I mainly got my comparable evidence from internal / external databases so to verify this information * I called the agents involved in the deals and confirmed that I had accurate information.

Question 28

What made it a prime asset? | Pub, London

Answer 28

* The asset was located in Central London just off of Oxford St, one of the busiest leisure destinations in Europe. * From my inspection, I noted the property was in good condition for its age with no major issues identified.

Question 29

What yield did you choose and why? | Pub, London

Answer 29

* I collected comparable investment evidence in Central London which indicated that prime yields had shifted outwards. We had previously valued the property at 4.50% whereas current investment was showing that the market had changed. * There was also limited evidence of this kind of stock trading and therefore there is a supressed buyer market. * Roebuck in Chiswick sold at 5.2% that year

Question 30

Why was there reduced demand for the covenant? | Pub, London

Answer 30

* The tenant was completing a significant refinancing and part of this will see many of their pubs split into a SPV and sold off down the years. * This created uncertainty around the financial strength of the company

Question 31

Talk me through a D&B report

Answer 31

Assessment of creditworthiness of business Financial Strength Indicator - size of companies net worth e.g 5A = 50m dollars + Risk Indicator - level of risk associated with business (1-4) e.g 1

Question 32

How can you assess covenant strength? | Pub, London

Answer 32

* You can do the profits test and use third party financial reporting services including S&P and Dun & Bradstreet reports

Question 33

How did you assess market rent? | Pub, London

Answer 33

* Rental values for pubs are also based on trading potential so there is not a direct comparison for those assets where we do not have visibility on trading performance. * The pub had a rent review in 2020 which was recently awarded at arbitration (2023) with an Open Market Rent of £165,250. I adopted this as MR.

Question 34

What was FV and NIY, ERV? | Pub, London

Answer 34

* FV = £3.5m * NIY% = 4.75% * ERV = £165,000 (£42.50 psf)

Question 35

How did the WAULT on the london pub valuation of 21 years impact your valuation? | Pub, London

Answer 35

* I didn't account for voids or tenant incentives due to the long lease length * This is because an investor in the market would look to hold a property for maybe 10 years? they wont need to factor that in to their income cash flow * Its valuer judgement but maybe between 5-10 years i would consider them on this asset type

Question 36

What yield did you apply? why? | Pub, London

Answer 36

I applied a Net Initial Yield of 4.75% Comparables were all NIY Rack rented property

Question 37

When would you use an equivalent yield? | Pub, London

Answer 37

If I was using the term and reversion investment method i would show the equiv yield to show the weighted average between term and reversion - based on time to uplift We can show this on an equiv yield but as rack rented it is still 4.75%

Question 38

What was your advice to the client? | Pub, London

Answer 38

I advised my client of the decrease from the previous valuation was being driven by the NIY moving outwards 50 basis points. i spoke to them around general sentiment in the market and some recent comparable evidence.

Question 39

What were the rent reviews?

Answer 39

Open market RR 5 yearly - next one is in Feb 2025 - Last one was in 2020 but settled in arbitration in Jan 2023 at 165,250 (42.50 psf)

Question 40

What was some comparable evidence that justified the yield movement

Answer 40

Roebuck in Chiswick sold a few months before at 5.2% NIY Camden Assembly sold in Dec 2022 for a 6.25% yield

Question 41

Who was the pub let to?

Answer 41

Ei Group, the largest tenanted pub company in the world - they were acquired by Stonegate in 2020 Stonegate refi happened in Dec 2023 600m - hasn't filled the market with cofidence around their covenant. They have a 8x debt to ebitda