Michael Foster
Could it be third time lucky for shareholders in Hampton Trust? In the 1960s their shares soared and slumped on false hopes that fortunes would be made from their nickel mines in Western Australia. In 1980-81 they rose and fell on frustrated plans to expand into Australian oil production.
Now the shares are rising again as David Lewis, boss of high-flying Cavendish Land in the early 1970s, seeks to build it into a major property combine through the acquisition of completed property at bargain-basement prices.
Hampton Trust was formed in 1924 to search for gold over an area of 26,000 acres near the Western Australian gold boom town of Kalgoorlie. Success was limited, but from 1965 Hampton’s share price took off on hopes that Hampton could be sitting on vast nickel deposits like the world-famous discovery at nearby Kambalda.
Those were the days when Hampton’s shares were tipped in the same breath as its more famous nickel boom cousin, Poseidon. Investors piled into such stocks with little thought about how much metal their companies actually owned or where the nickel price was heading.
Because shares in nickel explorers were in short supply, small clubs of investors could buy and sell shares to each other, driving prices to ridiculous levels. Old hands still remember shares in Tasminex soaring from £6 to £40 and back to £12 in a single day. Such share-ramping exercises occur regularly in world stock markets; in the early 1980s small oil exploration vehicles, Hong Kong property shares and companies rumoured to be connected with Asil Nadir’s Polly Peck operation fell victim to them.
Hampton never found much nickel, but when the boom stopped in 1970 it had managed to refurbish its mine shaft at Mount Martin and find new gold zones while looking for the other stuff.
Things went quiet for a while; Hampton’s shares were traded at 4p in 1977. But in 1980, they shot up to 84 1/2p on hopes that Hampton could make a fortune from a stake in Australia’s Woodada oil and gas field that it wanted to buy. Cleves Investments (run by Reggie Burr of the crashed Vehicle & General insurance group) popped up as a short-term shareholder; Hampton pulled off a £830,000 rights issue by selling shares at 45p. But the deal was suspended as estimates of the size of the Woodada field fell. Hampton’s shares were back at 10p by 1982.
Losses to profits
Hampton still held some natural resource investments in the US and Australia, but from 1981 the main thrust of its activities became property under its long-serving chairman Sir Cecil Burney (a former Zambian MP), chief executive Simon Reynaud (who had his own thrills and spills at Ashbourne Investments some time before) and Spanish-based S H Shohet (a director since 1980). In the year to March 1982, Hampton went from losses to profits thanks to its new property interests.
Then Mr Shohet introduced Hampton to David Lewis and his long-standing partner Neil Davis.
Mr Lewis is a man rarely lost for words or opinions, who was appointed as Barry East’s first surveyor at Town & City Properties in 1959. In the 1960s he built up a large private portfolio of property in Britain and Australia (with the backing of bankers William Brandts).
In the late 1960s, Mr Lewis spotted that Ronnie Edwards at Westminster Property Group had won planning permission for an important development in King’s Cross. He built up a 10% stake in Westminster and attempted to get control without success. Since then, Westminster has escaped from a disastrous encounter with Portuguese property, and fallen subject to the successive ministrations of Victor Gray (whose Graylaw Group crashed in the early 1980s), controversial financier Jim Raper and (currently) Jim Raper’s old pal Terence Furey.
After failing to win Westminster, Mr Lewis moved into a much smaller shell company, which he turned into a go-go group called Cavendish Land with Trevor Chinn of the Lex Service Group (Britain’s only distributor of Volvo cars). Cavendish built up a number of development situations alongside standing property investments; at the height of the property boom its assets were worth £80m, with borrowings around half that level. Legal & General took over the company for £45m in 1973 and soon had to make writedowns on their new investment.
Mr Lewis’ lucky exit from Cavendish was swiftly followed by problems for his private property interests (owned with Mr Davis). The Australian division was sold; sheer tenacity kept the rest afloat. Mr Lewis also worked to build up the reputation of his own firm of surveyors, David Lewis & Partners.
What has Mr Lewis learnt from the property crash? “Don’t overborrow,” he says. “In the euphoria of the early 1970s it was too easy to lose sight of fundamentals. The guidelines for borrowings are dictated by income flow, not capital ratios. Cash flow is real; rental income is real; capital values are just someone’s opinion.
“It is important not to borrow more than a modest percentage of one’s capital; never assume interest rates can’t go higher; always keep a high proportion of fixed-interest debt, and establish a good flow of actual rental income.”
Spicy deal
In 1979, Mr Lewis linked up with John Rosefield to run Estates & Agency, and introduced it to a spicy deal in Piccadilly which did much to boost the company’s reputation. But Messrs Rosefield and Lewis argued over who was going to take the company where and how fast. Mr Lewis sold out of E&A in 1982, and since then E&A has generally failed to hit the headlines.
By 1983-84, Mr Lewis was ready to flex his muscles at Hampton Trust. He decided to build the company by buying completed property, capable of servicing the cost of money from day one, except in special circumstances. These days that means buying property on double figure yields; property which is out of favour. Dare one say secondary?
“The word secondary is a very broad and dangerous generalisation. But we are very definitely low-tech. An awful lot of people open a window when they get hot; an awful lot close it when it gets cold. They don’t mind not having air-conditioning. They don’t need the highest possible standards. They need basic space.”
Mr Lewis is amused to note that institutions which would not touch the sort of property he buys are happy to buy Hampton’s shares.
Mr Lewis believes he is capable of building a portfolio comparable with that of many other property companies by buying in the market at realistic prices. “I find Hampton is very much an intellectual challenge.” The prices he has been paying make you wonder how realistic valuations on historic property companies’ portfolios really are.
Messrs Lewis and Davis went on Hampton’s board in early 1984, following Hampton’s purchase of some of their private property interests (partly-owned with the Shohet family) for £2.21m, in return for shares at 26p. That lifted the Lewis and Davis stake from 5% to 26%.
The purchase price fully reflected the value of the properties, as estimated by Druce & Co at £4 1/2m, less borrowings of £2 1/2m. Net rents on the property at the time of purchase imply an initial yield of 8.4%, or 11 1/2% after taking account of rent reviews by 1986. The properties are a mixed bag, ranging from some 1960s office and factory buildings in Surrey, to a district shopping centre in Yate, to a tiny Victorian property in the West End.
Around June 1984, Hampton bought some offices in Tottenham and Bracknell, let to Costain and Unilever. Hampton bought the properties for £1.5m, and Druce & Co valued them to show an immediate surplus of £325,000 (indicating an initial yield of 10.9%). Rapid revaluation is an obvious way of boosting a company’s assets, though it is a policy few choose to follow.
Using the good offices of David Lewis & Partners (as ever), Hampton next bought an interest in a district shopping centre in Egham as part of a marriage value deal. It also bought a shopping centre in Cheshire from Wingate Investments for £1.33m, and used Druce to claim another capital surplus of £130,000.
Only six months after becoming directors, Messrs Lewis and Davis could claim to have multiplied the size of Hampton’s property portfolio fourfold to £12m, with a total rent roll of £1m.
Before buying its next batch, Hampton had a bit of fun by buying a 13% stake in Dares Estates from British Land for £1m and reselling it to Dares chairman Peter Jackson (and partner) for £1.3m. Evidently Mr Jackson did not want Mr Lewis making a nuisance of himself any more than Caparo Properties (who pulled the same trick earlier in the year). As it turned out, he had to step down as chairman last year when Dares ran into major financial problems.
In November 1984, Hampton moved to New Ash Green to buy a district shopping centre for £1.15m, revalued by Churston Heard at £1.3m. The Leigh Park shopping complex in Havant fell into Hampton’s hands (from Town & City’s and Portsmouth council’s) for £2.8m.
Churston Heard estimated the value of the centre at £3.4m (to put it on a yield of 7 1/2%, or 11% by 1987).
Hampton is embarking on a rolling refurbishment programme at Havant, and on several other of its properties (leaving tenants in situ wherever possible). If everything goes as Mr Lewis plans, he will be sitting on a 20% return on all his costs; the shopping centre comprises five stores, 56 shops, a pub, 38 flats, a leisure centre, 1,000 sq ft of offices and garages, on a rent of £305,000 following additions to it last December.
In July 1985, Hampton bought an interest in Edmonton Green Shopping Centre, London N9 (with marriage value potential), for £1.7m, taking the worth of Hampton’s portfolio to £18.7m (with a rent roll of £1.7m). But the next step was much greater, involving Hampton’s purchase of another private portfolio of property from Mr Lewis and friends for £12.3m; the price paid by Hampton was close to an estimate of the properties’ worth by Druce & Co. The initial yield on the assets was 7.2%, though estimates made by Hampton ranging right out to 1990 indicate an eventual 9 1/2%.
The new assets included the lofty Archway Tower in Highgate (with 71,500 sq ft), whose roof may soon be used for cellular radio transmission; the Westway Centre in Oxford; the Venezuelan consulate in Knightsbridge; and a magistrates’ court. Shares were issued at 31p to help pay for the purchase, which made Hampton’s portfolio worth £35.3m.
Year’s profits
Hampton’s profits for the year to March, released at the same time, were £676,862 (£119,130) with all interest charges written off against profits; borrowings of just over £7m were 60% of shareholders’ funds (before taking account of the new acquisition. Assets growth was significant).
In October 1985 Mr Lewis issued a line of fixed-interest borrowings through £10m of debenture stock at 11%. Properties valued as security for the debenture by Jones Lang Wootton have generally improved or held in value since purchase. Around the same time, Hampton announced the purchase from St Martins Property Corporation of the 83,000-sq ft Tintagel House on the Albert Embankment (let to the police at £875,000 a year) and the 62,000-sq ft Hamlyn House, Highgate (let to Drake & Scull for £237,000). The buildings were bought for £8.7m, and the vendors suffered the usual indignity of seeing Hampton’s valuers putting a higher worth on them (£9 1/2m).
The final major property deal planned by Hampton last year was the purchase of 20 Albert Embankment from MEPC for £7.4m. The offices of 126,000 sq ft are let to the Government until the end of the century; the initial yield on the purchase is 14 1/2% — and a classic Hampton Trust, no frills, rolling refurbishment programme is planned. The end of the year saw the book worth of Hampton’s properties at £53m (enjoying a net income of £5.2m) by December.
Mr Lewis has firmly established Hampton Trust as a property company in the eyes of investors; only £100,000 of gross revenue of £1.1m (£488,000) for the half year to September came from natural resources; total pre-tax profits were around £200,000 (£175,000) in the half year to September.
Gold-mining interests
A half-share in Hampton’s gold-mining interests was spun off on the Australian stock market as Mount Martin Gold Mines in 1984, and various drilling and prospecting operations are in progress. An excellent prospect in Mount Martin is being operated with the shrewd Newmont organisation. Hampton retains an interest in 19 oil and gas wells in Ohio. It has agreed to participate in an oil venture capital operation in Australia called HT Exploration Trust.
A recent pro forma balance sheet indicates that Hampton’s book assets of £20m are slightly below its market worth. Borrowings are now roughly equal to shareholders’ funds (before the MEPC deal). But Mr Lewis has so far managed to keep interest charges covered by rental income without resorting to dealing profits. Hampton’s historic dividend yield is 2 1/2% on a 39p share price.
Estimates of Hampton’s real asset backing could well be over its current share price, bearing in mind refurbishment prospects, rent reviews in the pipeline and recent rises in the value of secondary shops. Mr Lewis says there is no conflict of interest with his private property interests because they have no need for the Hampton style of active management.
In a year or two, fresh outside revaluations of Hampton’s portfolio may prove the success of Mr Lewis’ policies. New acquisitions, or takeovers, will be paid for by borrowings, the issue of shares and debentures plus strategic sales from Hampton’s existing properties.
The late 1980s will be eventful times for shareholders. But they are probably used to them.
