There is nothing flashy about Five Oaks. But within the last five years, John Watkins and Tim Walter have taken the 92-year-old company from an asset backing of just £788,010 to £28m in 1988, and a probable £35m today.
That boils down to potential growth in assets per share of 13p to 75p, according to brokers. David Pearl’s fast-growing London Securities has just taken a 5.3% stake. Pearl praises Five Oaks’ recent £26m portfolio purchase: “It was a very good deal indeed.”
The property bull market has been kind to Five Oaks, with tolerant investors agreeing to buy extra shares to help with acquisitions. But you have to make your own luck in the property business, and it is to the credit of Watkins and Walter that the old company nickname of “Five Jokes” disappeared some time ago.
Watkins is reluctant to talk about the company’s history, preferring to concentrate on the present. Five Oaks’ roots, however, were in West Midlands housebuilding.
By the 1970s, however, it had fallen into obscurity with a corresponding decline in its fortunes. Solictor chairman Peter Southall attempted to rebuild the company until industrialist Eddie Marsland and property man John Peutherer appeared on the scene.
Peutherer’s father had been the man behind growth at Cornwall Properties until Slater Walker put Ron Shuck in charge in the early 1970s. Peutherer Junior and Peter Southall engaged in a brief struggle for control of Five Oaks in the summer of 1979; Peutherer ended up the victor.
He changed the company’s auditors from Trevor Jones & Co to Peat Marwick. They heavily qualified Five Oaks’ annual report for the year to June 1980, when the company made losses of £74,000.
Continuing the game of pass-the-parcel, Peutherer and Marsland cleaned up Five Oaks and sold control to John Brown (no relation to the former head of Peachey), who headed a private property company, City & Continental. Brown employed Watkins and Walter to help run his interests in 1979-80.
Watkins is a former agent with Hartnell Taylor & Cook. Although he takes himself and his company seriously, Watkins’ abrupt laugh reveals a good sense of humour.
In 1969, he joined food company J Lyons, spending 10 years rationalising and improving its property portfolio. “I was the person who sold 115 Lyons tea shops, when Lyons decided to get rid of them in the 1970s,” says Watkins. “After Allied took over Lyons, I worked to get rid of its Cadby Hall site in Hammersmith, but it was a difficult job because the price they wanted went up every year, along with the book cost (plus interest).”
Walter, who has a fancy for bow ties, is Five Oaks’ finance man. A more relaxed chap than Watkins, he used to work for Unilever and then a computer software company. Walter’s old boss at the computer firm was Colin Southgate, who now runs Thorn-EMI.
Brown remained in charge of Five Oaks until September 1983, when it made a loss of £156,000, against profits of £103,000 the previous year. Walter and Watkins became disillusioned with his style of management and staged a coup to oust him. City & Continental went into liquidation soon after.
A Midlands industrialist, Andrew Rodger, became caretaker chairman of Five Oaks, but eventually gave way to management consultant Murdoch Morrison. City & Continental’s 24% stake in Five Oaks was sold in December 1983, and was later thought to have passed through the hands of would-be property tycoon Michael Carlton.
Amid all these comings and goings, Walter and Watkins kept their heads down, working to improve Five Oaks’ fortunes. A chance encounter between Watkins and Ron Shuck (by then boss of the quoted Espley Trust) led to Five Oaks buying a 31,000-sq ft office building in Stockport from Shuck’s private Consult company. Five Oaks refurbished the block, and has pushed its rents from £2.75 per sq ft to £6.50 per sq ft.
In 1984, Five Oaks did well to attract computer chip company Inmos to an 11-acre development in Wales. “We put an advert in the papers,” said Watkins. “It offered an opportunity to develop a factory on the M4. It didn’t mention it was in Gwent.”
Capturing Inmos was an important coup for Wales, long before Peter Walker (ex-Slater Walker) arrived as Secretary of State to boost its fortunes still further. Five Oaks had bought the site cheaply from Newport council, which wanted to keep jobs in the area; interim finance for the scheme came from Chase Manhattan Bank. The factory was then sold to a company run by Jacob Rothschild, keen to take advantage of related Industrial Building Allowances.
Other deals followed in Glasgow and Reigate. Five Oaks’ willingness to buy property in such far-flung locations was unusual for a company of its size but things worked out all right. By 1983-84 the company returned to profits of £152,000. The following year they were £463,000, as debts in the balance sheet turned to cash.
Then in September 1985 a new personality entered Five Oaks in the shape of David Wickins, whose British Car Auction group bought a 29.9% stake. Wickins had not only developed a taste for getting involved in small quoted situations but also harboured hopes that Five Oaks might take on some property business from BCA. Wickins became non-executive chairman in December 1985, with Andrew Rodger staying on as deputy.
The pace quickened at Five Oaks when Wickins and his estate agent pal Martin Sturgis introduced Watkins and Walter to Jack Rose of Land Investors. Rose was interested in selling his grand old property company.
“We put an enormous amount of work into that deal,” says Watkins. “But we just couldn’t get to the numbers which Jack Rose wanted.” Instead, in May 1986, David Garrard and Berish Berger were able to put together a £74m deal, with the help of mezzanine finance from Berger family interests. Not taking account of purchase costs, Berger now reckons that Land Investors (now renamed Land & Property Trust) might be worth £260m. Watkins envies Berger his luck, but is glad to see that at least someone has done all the right things with the company.
As a consolation prize, Five Oaks went on to buy three properties from Peter Goldie’s Abaco. It paid £7m for the package, which included a shop and office complex in Kingston, valued at £4.65m by Edward Erdman; two years later in 1988, the value had risen to £5.5m. With office rents in Kingston beginning to catch up with levels achieved on the M25, today the building should be worth even more.
Another Abaco property in Botolph Lane, London EC3, had planning permission for refurbishment and alteration. It was valued at nearly £2m in 1986, and Five Oaks doubled its money by selling it on. The third property, in Nuneaton, was valued at £400,000 in 1986, and £650,000 two years later.
To pay Abaco for the portfolio, Five Oaks raised £5.8m through a two-for-one rights issue and sold further shares. Both BCA and Abaco placed their shares in the company at 55p in October 1986.
A month later, Five Oaks announced a rise in profits to £639,000 and plans to presell a 16,700-sq ft office development near Cannon Street, EC4. Five Oaks had only just bought the site from the receivers to Miller Buckley for £5m and took on the project, expecting a rent of £40 per sq ft. It ultimately secured £58 per sq ft; a private investor paid £15m for the building.
In the year to June 1987, Five Oaks built its development programme to 62,000 sq ft. One outstanding deal was the forward-funding of a project at King Street, Covent Garden, WC2. The 18,500 sq ft of offices were financed by Barclays Bank pension fund on a yield of 5.75%, assuming a rent of £55 per sq ft, and the expected value of the scheme is £15m. The site runs through to Floral Street where Five Oaks is developing two shops and 10 flats.
At Chiswell Street, EC1, near Merrill Lynch’s current City headquarters, Five Oaks is building a 17,500-sq ft office scheme. On completion, this November, it is expected to be worth £12m.
Pre-tax profits jumped 241% to £2.18m in 1986-87. Five Oaks moved its headquarters to St James’s in London’s West End and strengthened its team of non-executive directors by appointing former Nat West general manager Trevor Robinson as chairman. Watkins believes strongly that any company which wants to take itself seriously needs a good team of non-executives to check on progress. He was also pleased to secure Phillips & Drew as brokers to the company, and Robert Fleming as bankers. In 1987 the company returned to the dividend list. “Five Oaks is beginning to emerge as a developer-trader with a refreshing emphasis on cash flow and balance sheet strength,” commented Morgan Grenfell Securities.
A sale push from Phillips & Drew helped to take Five Oaks’ shares to a peak of 137p during the stock market boom of 1987; two years before they had been as low as 18p. Watkins does not regret issuing high-priced paper for solid property at that time: “Unhappy shareholders might have been left behind when the market crashed,” he says.
The next key deal for Five Oaks did not take place until August 1988, when it snapped up a portfolio of 28 mainly provincial properties from a private company called Donington for £26m; to help pay for the assets, Five Oaks came up with an £11.9m rights issue at 55p; it also drew on a £20m revolving credit facility from Robert Fleming.
The assets initially yielded 7%, but Five Oaks expected rapid growth in the portfolio. It has now sold one property in Hemel Hempstead to Winglaw for £6.2m; a shop in Sussex for £200,000; and offices in Brentwood for £2.65m. These prices were some 25% to 30% above cost.
It is also indulging in low-cost refurbishments to secure higher rents for selected areas of space thus helping to pull up rents in the rest of the building. There is nothing special about this method of fostering growth for a portfolio, but Watkins believes that all too many property people fail to extract maximum performance in this way. “People just don’t pay enough attention to appearances,” he says.
In Wrexham, for example, Five Oaks has refurbished the upper parts of a parade of shops to lift office rents from the historic £2.10 per sq ft to £4.50. “You just couldn’t develop new space there and justify a rent of anything under £8,” says Watkins. Work on some office leaseholds on Oxford Street could take their rents from a ridiculous £8.70 to £40, he thinks. In Solihull, Five Oaks is enclosing space to take prospective rents to £11 per sq ft from a historic £4.50. And, by accepting a surrender of space at Coventry, Five Oaks has taken zone A rents from £25 to £38.
At Stowmarket, Five Oaks is converting a Chinese restaurant into offices to turn the block which it occupies into a little financial services centre. It is also developing land to the rear of shops and offices in Exeter into 8,000 sq ft of commercial space.
All this work on comparatively small properties is labour intensive. But Five Oaks is more than happy with a potential overall lift in value for the portfolio, taking account of sales, of 20%, struck on conservative calculations.
Following the Donington deal, Five Oaks emerged as a company with £43m of property (excluding current developments), producing rents of £2.9m pa. Profits in 1987-88 were £3m, with net assets at around 60p a share, and gearing of 70%.
Just how active Five Oaks has become is demonstrated by the fourfold leap in turnover to £18.6m for the six months to end December 1988. Its interim profits were 88% up to £1.5m and brokers have pencilled in net assets per share of 75p for the year-end in June. Rents cover interest charges. The company has subsequently swapped assets in Brentwood with Barlett Land, and sold an Uxbridge development for £5.6m (a yield of 5.7%). It has also returned to its Midlands roots, taking on a site in central Birmingham suitable for 60,000 sq ft of offices with Embassy Property Group; they are expecting rents of at least £20 per sq ft.
At 71p, Five Oaks’ shares are on a prospective earnings multiple of around seven and a small discount to assets. The rating is arguably better than that of rival property companies of equivalent size. However, this may not come as any comfort to the company’s fan club, led by fund manager John Govett, which has 17.4% of the equity. It feels the rating is mean.
Five Oaks is now prepared to spend £15m to £20m on a further clutch of investment properties. Another development site would not come amiss either. Watkins does not see much point in bidding for a quoted property company at this stage. Right now, the stock market tends to extract a pretty full price from bidders, even though it is churlish on share ratings in general. Watkins thinks it is easier to extract value from larger companies or institutions who have their minds fixed on grand schemes rather than intensive property management.
The company, like Derwent Valley and Dwyer, deserves a place near the top of Britain’s league of smaller property companies. It has demonstrated its skills as a dealer, developer and manager of buildings. Watkins’ and Walter’s cautious approach is also praiseworthy, though it may prevent them from taking the risks which would be needed to catapult the company into the super-league.
London Securities’ recent decision to buy a 5.3% stake in Five Oaks is intriguing, given that David Pearl does not tend to take a passive attitude towards his investments. For example, it was his stake-building efforts at industrial property company EPIC which helped to trigger an abortive bid by Peachey, and a successful takeover by Stephan Wingate.
At £33.3m, London Securities’ market capitalisation is roughly the same as Five Oaks’ £34m. David Pearl says that he had a bit of spare cash and thought that the shares would make an “interesting investment”. With Five Oaks’ share price up to 73p, he is already showing a useful profit.
Pearl will make no comment on what his future plans might be. It is too early to guess whether or not he will make a takeover bid, though speculation on that subject is inevitable.
