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Damian W.
Damian W.
Hamilton, NSW
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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?

7 years ago

Responses

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.

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