Is there a general rule about the returns on pub freeholds… current owners are owner operators so if we buy the freehold what return should we expect for the lease?

Damien

There is no strict guidelines on this as it will be impacted by a number of influences such as the quality of the operator; the percentage of EBITDA to gross revenue; the duration of the lease and the covenants in the lease etc.

As a rough guide though.

EBITDA should be around 20% of revenue (prefer Aly closer to 25%). The annual rent under the lease should be about 55% of EBITDA or 15% of revenue.

Assuming (for ease of numbers) the pub turns over $10,000,000 annually EBITDA should sit around $2,500,000 per annum. On that basis the annual rent under the Lease would be somewhere between $1.375M and $1.5M per annum.

If you buy the pub on a capitalization rate of say 8.5% the pub values at let's say $29.5M. In the current market and based on the example I've given this pub may be closer to 8%!

If we assume the pub was bought for $29.5M the yield on your lease would be somewhere between 4.5 and 5%. This may be acceptable if the pub is located in a great spot and there is some upside outside of simply holding the lease. If not, you want to buy the pub on a capitalization rate of 9-10% (at least) to increase your return under the lease.

There is no single answer to your question - but I hope the above helps and all makes sense.