Soho House feels strain of its appetite for growth

When members of Soho House attended the opening of a new eaterie at the private club’s West Hollywood hang-out, they got a typically Soho House surprise: Coldplay frontman Chris Martin and chat show host James Corden treated those present to a duet of Dolly Parton’s “Islands in The Stream”.

An impromptu serenade by A-listers is the kind of thing Soho House members have come to expect. Since its launch in London’s Soho in 1995, the company has developed into a luxury brand synonymous with style and celebrity. It now has 15 clubs across the globe dedicated to hosting the elite creative classes, offering fine dining, glitzy bars and somewhere to work, sleep and relax.

Other recent additions include a vast new London base on Soho’s Dean Street and a farmhouse set in 100 acres of Oxfordshire countryside, where facilities include stables, a cinema and a boathouse with outdoor and indoor heated pools.

But expansion has come at a cost. Soho House’s finances are increasingly under strain as revenue — though rising fast — struggles to match the cost of its ambitious capital expenditure plans.

The business itself is thriving. It has 56,000 paying members, up by a third from 2014, with a further 33,000 on the waiting list. Attrition rates remain extremely low, while revenue is expected to have risen more than a third to £280m for 2015.

“The company is growing, and growing at a decent clip. As opportunities present themselves we have to be ready to take advantage”, says Peter McPhee, who joined as chief financial officer in February. “But the company is really focused in terms of capital discipline and capital allocation.”

This year Barcelona, Mumbai, Malibu and New York’s Lower East side are all set to join the Soho House network, with Amsterdam and a new Los Angeles venue planned for 2017. The aim is to open four or five houses a year. But with costly new locations typically taking three years to reach maturity, margins are under pressure.

Already Soho House has come close to tapping out its revolving credit facility and analysts warn it is running low on cash, while the ratio of debt to earnings before interest, tax, depreciation and amortisation has risen above 14 times, according to rating agency Standard & Poor’s.

The aggressive expansion is not just geographic. Soon members will be able to recreate that Soho House feel in their own homes by buying a replica of their favourite club sofa or bedspread, part of a new homeware line. The group is also expanding its restaurant business (membership not required) and its office spaces, which include workshops for those keen to whittle their own furniture rather than buy it.

The revenue growth is incredible. The issue is that [financially] things have gotten tight already. There is a substantial risk that things may not go to plan

Concerns over the finances were heightened by a failed attempt in December to tap the bond market. The company blamed market conditions for the pulled £200m issue, but investors spoke of more specific concerns around debt levels at Soho House.

Some even suggested an element of schadenfreude, with the financial community exacting revenge for the club’s perceived aversion to suited bankers. Five years earlier, it culled hundreds of members from its New York club for fear of it becoming dominated by “too many corporate types”, as founder Nick Jones put it at the time. Soho House, however, insists it is not anti-finance, and merely requires members to have a “creative soul”, regardless of their profession.

Two months after the pulled bond, S&P downgraded its rating for the group’s outstanding debt to CCC from B-, warning that the capital structure had become “unsustainable”. Moody’s also has Soho House on review for a downgrade, and says it is consuming more cash than it generates.

“The business is doing very well. The revenue growth is incredible,” said Raam Ratnam, retail sector analyst at S&P. “The issue is that [financially] things have gotten tight already. There is a substantial risk that things may not go to plan.”

Soho House management hopes that these concerns will be alleviated by an two-stage equity infusion from its shareholders, expected to begin early this month.

Yucaipa, the private equity vehicle of US billionaire Ron Burkle, owns 60 per cent of Soho House, while British entrepreneur Richard Caring owns a further 30 per cent. The remaining tenth belongs to Mr Jones, Soho House’s founder and chief executive.

“Yucaipa has actively pushed an accelerated international growth strategy at Soho House,” said a spokesman for the investor, adding that it would continue to support the business. Mr Caring did not respond to a request for comment.

Facts and figures — 2015

• Global membership of 56,000
• Added 13,000 members
• 40% increase in annual turnover
• Added 3 “houses” and 13 restaurants
• Property portfolio market value reached £333m
• Served more than 4.1m meals
• 216,000 staying guests

The shareholders will inject £30m into the company, considerably more than the £20m required to increase its revolving credit facility. Analysts remain sceptical, expecting any new funds to go straight into capex.

“We assume that any equity injection would be utilised to pay down the [revolving credit facility] and subsequently redrawn to fund the company’s ambitious expansion plans,” said Moody’s in a report.

Part of the plan to boost margins involves taking a greater share of the physical property in which it operates, says the group. Though it requires more capital outlay at the start of a project, the aim is to gain exposure to any asset appreciation caused by the opening of a Soho House. It will own outright its Miami location, and have freehold interest in others, such as Barcelona and LA.

Soho House has a few other options to improve the bottom line, say analysts, beyond some of the basic cost-cutting already under way. It could monetise its lengthy waiting list, slow its expansion or bring outside investment into new developments. But the quickest way to bring in extra cash, they say, is also the simplest: increase the cost of membership.