Michael Foster
T R Property Investment Trust run by Touche Remnant is a kingpin among property kingmakers. To be more precise, it is a member of the charmed circle of City financiers prepared to put money behind property entrepreneurs at an early stage of their growth.
Whether the people T R Property backs are already quoted, or gain a quote in the future, it will hope to profit from a rise in the worth of its share stakes. Its muscle helps the entrepreneur to thrive, and encourages others to invest; the higher the shares rise, the higher the chances of them being used to buy solid assets.
The group was an early backer to Raymond Mould’s Arlington and Michael Slade’s Helical Bar. It is a major shareholder in two private groups, Skillion and Sibec, who should find their way to the stock market in the next 18 months.
T R Property, whose worth is now roughly £171m, is also a major shareholder in a string of leading quoted groups around the world ranging from Mitsui Real Estate of Japan to MEPC in Britain. It is expanding two of its own development and trading companies, who could also find their way to the stock market in due course.
The main questionmark surrounding its future involves all the 11 investment trusts within the Touche Remnant stable. Rumour of changes at Touche have been rife for years.
Touche is a management group, chaired by Lord Remnant, which split from Touche Ross (the accountants advising on the privatisation of the Electricity Board) around 1974, fearing conflicts of interest. Its quoted investment trusts had a mixed track record in the years which followed, and in 1982 the decision was made to shift their disciplines in specific directions. Hence, the Trust Union was turned from a general investment trust into T R Property Investment Trust. The biggest trust in the stable remains T R Industrial & General; taken together the market worth of all of them is around £2 1/2bn — approaching 10% of the entire investment trust movement.
By their very nature, investment trusts are run by people like Touche Remnant who invest in a mix of quoted and unquoted shares for a fee. Their shares normally stand at discounts to asset backing, reflecting the fact that investment trusts pay tax, as do the companies they invest in.
Touche’s investment trusts have stakes in their own management company, as well as a long lease on its head office — Mermaid House on London’s Puddledock by the River Thames, which could eventually be an exciting redevelopment prospect. If anyone takes over a Touche investment trust, the others have the right to buy its stake in the Touche Remnant management company.
In recent months, Metropolitan Life made an attempt to buy Touche, which was rebuffed. Touche has just dismissed its former managing director Peter Gray, amid some controversy, to put bright young fund manager Paul Manduca in the driving seat.
The likes of the Merchant Navy Officers Pension Fund and the British Coal pension fund have been building stakes in various Touche investment trusts, stimulating frantic bid speculation which culminated with the current £230m takeover bid for T R Pacific Basin from Thornton Management.
Leading shareholders in at least four Touche trusts — T R Pacific, T R North American, T R Australia and T R Natural Resources — appear keen to get the trusts liquidated or restructured to their mutual benefit. This has led to the suggestion that Touche’s overall supremo, Lord Remnant, will allow proposals for a defensive restructuring or unitisation of T R Pacific to spread to the other three or even right across the group.
T R Property is one of Touche’s most active trusts and should be able to resist dismemberment. Under Peter Duffy (former journalist with the Daily Telegraph and investment man at Ansbacher) and Michael McGonigle (former finance and property man with the Church of England) it has thrust its way into some of the most interesting international property situations. Other directors include Sir Jack Hughes (ex-Jones Lang Wootton) and Geoffrey Musson of the Merchant Navy Officers fund.
With the assistance of property booms around the world, T R Property’s net assets have grown from £50m ahead of the 1982 restructuring to the current £145m. That has led to a rise in assets per share from 36p to 132p. Its share price (currently 117p) has risen in tandem, though the dream of eliminating the discount on established assets has not been achieved.
The growth of revenue each year is not regarded as being as important as asset improvement for investment trusts. In T R Property’s case the rise is from £2.9m to £4.5m in the last five years. Net dividends have gone from 1p to 1.4p.
The chief investors in T R Property appear to be loyal. They are led by Abbey Life (7.5% shareholder); Prudential (6.2%); Scottish Widows (5.9%); and Sun Life (5.4%).
To satisfy shareholders, TR has aimed to get shares in as many actively managed smaller situations as possible. They have tended handsomely to outperform the larger, established, property investment companies over the last couple of years, though the latter are now back in favour, if only as interesting bid situations. T R Property is shifting its investment strategy accordingly.
Its chairman, the Marquess of Tavistock, says: “T R Property is now represented in just under one half of the companies capitalised at less than £100m and is accumulating significant holdings in several of the most promising … The close contact we are developing with smaller companies provides not only a fruitful source of future direct property joint ventures but also valuable information regarding the property market.”
Such policies involve a degree of risk, but if T R Property did not run those it could have been taken over years ago.
Arlington is one company which TR backed before it came to the market at a cost of £400,000. That stake is now worth more than £2m. It did even better by being the first top City investor to buy shares in Michael Slade’s Helical Bar when the shares were way, way below the current 262p. TR retains a 5.7% stake: “I don’t expect them to get any cheaper,” says Peter Duffy. “Good chap, Peter Duffy,” says Mr Slade. “Glad he’s done so well.”
Messrs Duffy and McGonigle have combed through 150 private property companies which they can back from an early stage. Its two main unquoted situations are Skillion (where TR has 17%) and Sibec (13%). The stakes are in TR’s books at a cost of around £2 1/2m: the companies should go public by 1988, either by reversing into something or in their own right.
Skillion is a specialist in refurbishment. It has transformed a Regency vinegar works into a residential complex in South London, and competes with Local London to service London with business centres. It has formed a joint company with London & Edinburgh Trust to provide a network of mini-warehouse facilities throughout Britain.
Sibec, by contrast, is a retail developer in the UK. It has big schemes in Runcorn, Walsall, Birkenhead and Aldershot and became involved in the burgeoning out-of-town development scene.
Other big stakes in small (but quoted) companies include Five Oaks (5.8%), where Tim Walter (ex-Unilever audit manager) and John Watkins (ex-Hartnell Taylor Cook and J Lyons) are in the driving seat; City Site Estates (6.9%); Local London — now not such a small company after takeover moves by the Bourne brothers; and New Cavendish Estates (9.7%).
New Cavendish is a particularly interesting investment to have taken, following the problems which have assailed its Australian boss, Garry Carter, Down Under, as a result of his failure to take over the Humes building materials company and resulting war with the business establishment in Melbourne. Despite protestations to the contrary, Garry Carter may yet be prepared to pass control on to someone else. His number two, Dennis Vickery, recently told me he had been pestered with phone calls on that score. Perhaps T R Property will get together with a few other investors and put the little group “into play” so that a private company (like Sibec? or Skillion?) will be injected. Perhaps it will not. Either way, we can expect T R Property to take a more active stance on shell-spotting in the months ahead.
Mountview stake
A 7% stake in residential property company Mountview was inherited by T R Property shares expert Peter Duffy from his predecessor Barry Adams, and Mr Duffy has reduced it slightly. Mountview is a low-profile company based in north-London run by the Sinclair family. Its annual report is a masterpiece of economy, but the shares have been an excellent performer over the years.
On a more forward-looking view, Parkdale is one small company which Peter Duffy is intrigued by, courtesy of its new backers in the City and some shrewd deals (including asset-rich bus companies up in Yorkshire) initiated by Nick McMahon Turner. Parkdale and Helical Bar are Peter Duffy’s top two small company tips for the months ahead.
As at last March, T R Property’s holding in UK property shares was worth around £88m (64.2% of the portfolio) against £52m (54.9%) in 1986. Property shares have done well enough since then, though its sector relative to the rest of the market has fallen back and Mr Duffy has taken some profits. His largest holdings among the big companies include LET, Greycoat, MEPC, London Shop, Land Securities, Peachey, Bradford (another good residential property share), Hammerson, British Land, Chesterfield and Country & New Town (where another Aussie called Brian Johnson is moving into the saddle).
Among the big boys, he most likes the look of MEPC (whose reputation has been greatly aided by its aggressive move on Oldham Estate) and Great Portland (likewise, after its deal with Bride Hall, though stubborn brokers still see it as a top takeover candidate).
Overseas, T R Property’s biggest holdings last March were in the Pacific Basin at £18.9m (13.8%) against £13m (13.7%). Japan headed the list, with TR’s £5m holding in Mitsui Real Estate the biggest of all its investments last spring and its £4.8m stake in Mitsubishi the next biggest.
The power of these two Japanese combines makes Land Securities look humble: Mitsui in particular is aiming to expand by taking powerful positions in Downtown areas of American cities like Los Angeles.
Until a few weeks ago, property was the top buzz word in Japanese stock market circles. The local economy was in such a comparatively depressed state that investors preferred to concentrate on the worth of real estate within property companies, railway companies, shipping companies and the like. Demand for office sites in Tokyo pushed up land prices by two-thirds or more in 1986-87; the property component of the stock market outperformed the market averages and rose by half.
Fortunately, Mr Duffy has taken some big profits since March. The Japanese stock market has become more jittery, and attention has switched back on to industrial growth situations. Plans to extend Tokyo on to land reclaimed from the sea (on which Olympia & York could advise) adds a little long-term uncertainty to the scenario.
T R Property also took some profits on Japanese shares before March (missing out on the final speculative surge) to put extra cash into Hong Kong, which rose 90% during that year (a half better than the rest of the market). Its biggest Hong Kong stake last March was in New World Developments (£2m); its next biggest was Sun Hung Kai (£1.2m). Mr Duffy remains quite keen on the market, although he thinks the recent rise in rents could level off; he much prefers it to the rival Singapore market.
Down Under
Down in Australia, T R Property took some profits in smaller development situations during 1986-87, though the value of its holdings rose to £5.9m (4.4% of the portfolio) as sentiment improved courtesy of rising Downtown office rents and relaxation of FIRB foreign investment regulations. The biggest of its holdings were in major companies Westfield (£2.3m) and Lend Lease (£1.9m). TR will continue to hold on to its foothold in Australia, even though recent stock market speculation by people like the Japanese is beginning to make it look the second most over-valued market in the world after Tokyo.
Continental Europe is not of much interest to T R Property at the moment. Its share markets tend to be underdeveloped. But Mr Duffy has built up an intriguing little portfolio of Norwegian and Swedish shares in companies whose strength is conservatively stated in their accounts. “We’ll crack Germany at some point too.”
The USA is a much more important focus for action. Of the TR portfolio £10.1m (7.4% of the whole) was based out there last March, with shopping centre developer Rouse Corporation top of the pile (£2.1m). President Reagan’s tax reforms, eliminating shelter on property development, eased one cause of oversupply during the year: TR has tended to concentrate on retail situations which suffer less voids, and has bought into a number of REITs. Mr Duffy’s hot tips for the US investment scene are asset-rich Santa Fe, Burlington Northern and New Plan Realty, while the recent surge on Wall Street is doubtless doing his portfolio a power of good.
Outside the world of direct property shares, T R Property has looked at and dabbled in asset-rich companies like Associated British Ports (which recently took over Grosvenor Square Properties and put its chairman Paul Marber in the property hot seat): housebuilders like Westbury and Persimmon, and estate agents like Baker Harris Saunders. This “property-related” part of the quoted portfolio will probably grow.
On the direct property front, Mr McGonigle is building up a portfolio which, with the unquoted share portfolio, could be worth a fifth of T R Property’s assets one day. Part of the slimdown on the UK property share front results from T R Property’s decision to pump cash into Mr McGonigle’s activities. Part of it is a result of T R Property’s concern that Britain’s merchant developers could be hit by space oversupply in sectors like City of London offices; hi-tech parks; and, possibly, out-of-town retail. “Direct investments provide for the astute purchaser both good yields and interesting opportunities to add value,” says TR. It wants to pick its own sectors and areas carefully.
T R Property last dabbled with real estate in the mid-1980s when it built Van Buren House at 7-8 Stratford Place, London W1; let it at £18 per sq ft and sold it on for a price which looked wonderful then, but may not look so wonderful now.
This time Mr McGonigle wants to build two subsidiaries. One of them would be directed towards development, the other towards investment trading. In the long term, they could be floated on the stock market, though right now their expansion is only just beginning.
One asset recently bought is a string of industrial buildings in Eastleigh covering around 60,000 sq ft, on a yield of 10%; another is a little scheme in Guildford. TR aims to get involved in the joint-development field, perhaps with its present or future unquoted friends.
Working hard
T R Property is working hard to close that discount between its share price and underlying asset backing; progress on that front will necessarily be slow, though speculation about the potential worth of its unquoted and directly owned property should speed the process. Do not forget that a potentially valuable 7.1% stake in Touche Remant, together with T R Property’s slug of the long lease on Mermaid House (down in the books at just £1m), and Touche bid speculation.
Such factors help to explain why T R Property has been a reasonable performer compared with most other investment trusts in recent times, though its tiny rival on the property investment trust front, Trust of Property Shares (with its offshoot TOPS Estates), has done better, and Matthew Oakeshott’s little Value & Income Trust has also done well.
