Minds at Taylor Woodrow have been concentrated wonderfully by recent news that Sir Jeffrey Sterling’s P&O shipping conglomerate has lifted its stake in the company towards 10%.
Where once TW was content to be viewed as a worthy construction company with useful property interests, it is now keen to encourage the thought that it is a vibrant property and housebuilding operation with a construction division.
TW is pressing ahead with plans to unitise part of its £200m St Katharine Docks complex near the Tower of London, and wants to build one of Britain’s largest retail and residential complexes on 250 acres near Southampton. Peter Hedges, who runs TW’s property arm, is now tipped as successor to 63-year-old chairman Sir Frank Gibb.
Indeed, TW’s involvement in property has become crucial to the group. Its portfolio was valued at no less than £521m by Knight Frank & Rutley last December and its current worth must now be nearer to £700m. Pre-tax profits in 1987 were £27.1m, or 37% of the total.
TW has always resisted the temptation of spinning off these assets to form a separate company, as Laing did in the early 1980s. This stance is unlikely to change. But the company does go to great efforts to provide a separate annual report for its property division — and plenty of information on its sister St Katharine Docks operation run by Peter Drew.
St Katharine is the most valuable of TW’s property assets, representing a third of the total portfolio last December. The project covers around 30 acres next door to Tower Bridge, and pioneered efforts to redevelop London’s Docklands.
The first new office building within the complex was the 200,000-sq ft International House. TW had quite a struggle to let it at around £13 per sq ft in the early 1980s. Recent rent reviews indicate that the figure is now approaching £40 per sq ft. Banks like Barclays and Hambro and Swedish developers Svenska have moved into the area, dramatically improving its prospects.
Even the 100,000-sq ft Europe House which TW inherited with the development is now highly reversionary on a rent passing of £12 per sq ft. In July last year, TW let 77,000 sq ft of offices at neighbouring Commodity Quay to Reuters at an initial rent of £30 per sq ft.
St Katharine Docks also includes 36 flats at Ivory House on short leases, some shops, the Dickens Inn and the Thistle Tower Hotel. Early this year, Warburg Securities estimated the rent on the entire complex to be £8.45m, ahead of certain rent reviews at International House.
Another 94,000 sq ft of offices at Harrisons Wharf are coming out of the ground: “It’s a very nice building,” says Peter Hedges. “We’re in no hurry to let it.” North and East Quays at St Katharine, currently a car park, will be developed into 225 apartments.
This latter scheme is an important part of TW’s central London residential activities, which are growing in size. TW has just presold 80 luxury flats in Kensington to Hendersons, the fund management group, and hopes soon to formalise the purchase of nearby St Mary Abbots Hospital for conversion into around 360 flats. Regalian was the toughest competitor Woodrow has had to fight off at St Mary Abbots; the site for a two-phased development is unlikely to cost much under £90m.
To make capital available for projects like St Mary, TW is toying with the idea of unitising one of its properties at St Katharine through the PINCs system. TW does not exactly need the cash since its overall gearing is no more than 14%, but it is keen to refinance the complex, reducing a little of its commitment.
The lion’s share of TW’s investment portfolio is home-grown. A recent addition is Overseas House, a 163,000-sq ft office complex at Hanger Lane, W5. It took a bit longer to fill up than expected, but is now let to Amoco at around £15 per sq ft.
The company has also tackled a number of retail schemes, which have typically been funded in partnership with institutions. Peter Hedges is particularly pleased with the 275,000-sq ft Treaty Centre in Hounslow. Developed with Eagle Star, it has seen zone A rents of £80. TW also has interests in the 250,000-sq ft Churchill Square shopping complex in Brighton and a 130,000-sq ft out-of-town centre near Basingstoke.
Last December, it got the go-ahead to develop a 170,000-sq ft galleried arcade in Northwich, extending the town’s existing shopping area.
Another TW retail project, the 225,000-sq ft Cascades Centre in Portsmouth, was undertaken in partnership with veteran shopping centre developer, Sam Chippendale. He played a leading part in building the Arndale centres owned by P&O’s Town & City subsidiary.
Chippendale and TW, who became close in the early 1980s, have also teamed up on a 70,000-sq ft centre in Rotherham, though other grand Chippendale schemes either failed to secure TW’s backing or fell to other developers. Leicester was one place where they failed to develop a scheme as planned; Bolton was another; and Hastings a third.
TW has also developed industrial estates at the Delta Business Park, Swindon, and the Nursling Estate, Southampton. Nursling brought it into contact with a local family which has helped to provide the land for Adanac Farm, a 250-acre scheme at the junction of the M27 and M271 in Hampshire. TW wants to build 800,000 sq ft of shopping, business premises and housing here. Local opposition has been vociferous, but TW is keen enough on the project to face a public inquiry.
Peter Hedges is now energetically weeding out the investment portfolio he has built up over the years. He recently sold the Hay-market shopping centre in Leicester, developed with the ICI pension fund, to Arlington Securities. Arlington hopes to redevelop it.
Several other smaller properties are also for sale. Peter Hedges wants to prove that TW does not just develop and hold properties until the end of time. He thinks that the current boom is providing an excellent opportunity to sell unwanted assets into strength and boost TW’s profit, to boot.
To further prove itself a property expert, TW is starting to buy portfolios. Last year, for example, it paid the United Property Unit Trust £31m for 20 properties. Peter Hedges says he has sold four at “a very good profit”. Those remaining include one in Reigate with development potential.
TW has also just bought a portfolio of industrial properties from Warrington and Runcorn New Towns for £77m, beating off under-bidders London & Edinburgh Trust by quite a margin. The initial yield is around 4%, rising to 8% on fairly imminent reviews. “The portfolio is highly reversionary, with development opportunities,” notes Peter Hedges, who says he is perfectly prepared to spend £100m or more on another UK portfolio. Maybe so, but the price TW paid was scarcely a steal.
Roughly 78% of TW’s property (excluding St Katharine) is in the UK. Another 15% is in North America, where TW has just bought out its partner, the ICI pension fund, for $6m. North America contributed only a little to profits last year, and the local real estate market has not performed particularly well of late. “Rents in the office sector remain flat,” concedes Hedges. “But turnover in our shopping centres is 15% up this year, and should feed through to rents.”
TW is currently buying a 120,000-sq ft shopping mall in California, to expand to 200,000 sq ft. It owns 87 acres of land in Atlanta, Georgia, 28 acres in Tampa, Florida, and a site in San Francisco, part of which has been sold to a hotel operation to help pay for a 190,000-sq ft office project. It also holds property in Canada.
The remaining 7% of TW’s portfolio is in Australia, which contributed £1.7m to last year’s profits. It holds a retail and office complex in Perth, operates a few farms, and is involved in a major office project in Sydney.
Volume housebuilding at TW is carried out separately from the property operation, and the division has been a poor relation by the industry standard of profits growth. It sold around 1,200 units last year, competing at the lower end of the market with an average price of £53,000 per house. With the help of London schemes, TW made £20.9m (or 29% of total profits) from housing last year.
Outside London, its largest land holding (jointly owned with P&O’s Bovis) is at Maiden Bower near Crawley. This site could eventually cater for 1,250 dwellings. TW has options on 500 more acres across Britain; the poorly performing Scottish operation is being run down.
TW also has a Florida housebuilding outpost, with a major scheme at Sarasota, and an excellent operation in California where the biggest site is 500 acres near Los Angeles. The company also has a sizeable housing programme in Canada, and smaller schemes in Mallorca and Oman.
TW overall is a remarkably diverse group, but it has not always communicated well with the City. Brokers have often argued that the strength of its real estate portfolio is under-appreciated by the market. Last July Sir Jeffrey Sterling’s P&O showed its appreciation of the company by declaring a 6% share stake, bought at an average price of 400p.
P&O is currently valued at £2.1bn against TW’s £900m. Sir Jeffrey Sterling took command of the conglomerate as it was battling a take-over bid from Trafalgar House in 1983.
Sir Jeffrey’s reputation as one of the best brains and communicators in corporate circles helped to persuade Trafalgar to give up the fight. It did not take long for Sir Jeffrey to inject his Sterling Guarantee Trust (Town & City as was) into P&O.
Sir Jeffrey demonstrated a continuing love affair with property by taking over Stock Conversion in 1986, and then European Ferries, whose US real estate assets had fallen on hard times.
His decision to stake out TW marked Sir Jeffrey’s return to a stock market foray after a remarkably long absence. Before Sir Jeffrey declared his stake in TW he took care to communicate his interest with Sir Frank Gibb. Sir Frank publicly welcomed P&O as a shareholder, and Sir Jeffrey talked of his excellent relationship with TW.
But, under the surface, things were not so calm. P&O lifted its stake towards 10%; TW came out with a sparky set of results for the half year to June, showing a rise in pre-tax profits to £34m (£21.2m). Sir Frank prepared for the succession by appointing three joint managing directors: Walter Hogbin, managing director of Taylor Woodrow International; Tony Palmer of the construction end; and Peter Hedges.
Hedges plays a very, very straight bat when people suggest that he is chairman-elect. “I don’t know about that,” he says. “I’m just glad I was appointed a joint managing director.” The timing of P&O’s move, in the middle of a property bull market, does, however, put Hedges in a strong position.
Sir Jeffrey is presumed to have suggested an agreed merger with TW, whose property side would fit with Town & City and whose construction and housing divisions would dovetail neatly into Bovis. Sir Frank is presumed to have told Sir Jeffrey to get knotted.
TW’s share price has now spiralled to 590p. On forecast earnings of £100m, this puts them on an earnings multiple of 14 around 14; net assets per share are estimated to be 430p. The company has appointed J Schroder Wagg & Co as its merchant bank advisers on “future corporate strategy”, saying that it intends to keep its relationship with Hambro Bank “whose advice and loyalty has always been valued highly”. It so happens that Hambro is also one of P&O’s two financial advisers, and chairman Charles Hambro sits on the board of both companies.
For his part, Sir Jeffrey has spent recent weeks in reminding City editors that he does not have a history of making hostile bids. But, as he surely guessed before he took his stake, the City would prefer to believe that one is imminent.
TAYLOR WOODROW’S TEAM
Founded in 1921 by Blackpool housebuilder Frank Taylor (now Lord Taylor of Hadfield and Taylor Woodrow’s life president), the company went on to specialise in low-priced housing for the North West. It came south in 1930 through the purchase of a site for 1,200 houses at Grange Park, Hayes.
TW went public in 1935 and soon after moved into heavy construction and housebuilding in the USA. During the second world war it built military camps, airfields, and the floating concrete caissons used during the Allied invasion of Normandy.
Come peacetime, TW became a managing agent for Britain’s prefabricated homes programme. It also went overseas to West Africa to help with massive projects: stores, banks, schools, hospitals, breweries, roads, textiles, mills, dams, hotels and power stations.
At home, TW provided major chunks of Britain’s infastructure. In 1950, it started what became a long-standing association with Heathrow Airport by winning a contract to build its main access tunnel; in 1953 it built Britain’s first nuclear power station. The company has since worked on another seven in the UK, but ecologists will be pleased to hear that it built power-generating windmills in the Orkneys last year. TW can also claim responsibility for the Aston Expressway in Birmingham and the Staples Corner interchange in north London.
In 1955, TW fleshed out its construction skills with the purchase of Myton, which later helped to convert London’s old Covent Garden fruit and vegetable market into a speciality shopping centre. During this decade, TW began to put more emphasis on property activities in the UK, starting with a shopping development in Northwich, Cheshire, which now yields roughly 100% on cost.
The hike in oil prices in the mid-1970s meant that contractors turned to the Middle East for business. TW forged a particularly close relationship with Oman, and joined up with Costain to build a massive dry dock in Dubai.
Construction companies tend to dislike Labour governments because of their threats to nationalise the industry. TW is still one of Britain’s biggest contributors to Tory party funds, donating £78,300 last year. But high public spending during the Wilson and Callaghan eras kept TW busy building hospitals and a controversial aluminium smelter in Ivergordon, Scotland. By the end of the 1970s, TW was sitting pretty on turnover of £440m and pre-tax profits of £25m.
In the 1980s, TW found the going tougher. Public expenditure in the UK was being squeezed by Margaret Thatcher’s government, and industry was in recession. Much of the third world was nearly bankrupt, thanks partly to big borrowings taken on to fund mega-projects, built by the likes of TW. A fall in the price of oil meant that Middle Eastern countries became much more careful with their money.
TW kept on winning building contracts, notably the £200m one for a new Terminal 4 at Heathrow Airport. But the balance of political power within the group began to swing towards property and housebuilding as margins in contracting thinned.
In 1981, for example, property contributed nearly £5m towards pre-tax profits; housebuilding chipped in £5.85m and contracting made £12m. That took the total, including smaller interests, to £24.88m.
In the year to last December, contracting profits had risen to £20m, but their contribution to the total was just 27%. By comparison, contracting turnover was £570.4m, or 63% of the total — a graphic illustration of just how small contracting margins tend to be. But the high turnover from this division also helps to explain why the construction end is still so powerful within the group.
With Britain now enjoying the biggest construction boom in its history, margins for contractors are rising much faster than they have for years — as most active property developers have found to their horror. TW’s current contracting workload is something over £1bn.
The jewel in TW’s contracting crown is its role as lead member of the team building the Channel Tunnel, which brings it £350m worth of work. TW is also helping to build Canary Wharf, Olympia & York’s mega-project in London’s Docklands. It is working on a £135m contract to install the new computer-controlled ticketing system for the London Underground, and has recently completed some £250m of civil engineering work for a nuclear plant at Heysham.
Power station work will remain important for TW in the years ahead. The company has formed a consortium with rival BICC and the merchant bank Schroders to look for such projects before the privatisation of the electricity industry. They already hope to build a £500m gas-fired power station at Barking, the first private sector project of this sort since the industry was nationalised.
Roads are less important to TW, though it has just finished an extension to the A406. It is much more interested in property and hospital contracts. Specialist ends of the business have tackled covered tennis courts at Wimbledon and conveyor belts at Tate & Lyle.
TW has a big international building division, though its profits probably were not much more than £1.5m last year.
More than 30 projects are in hand, including the reconstruction of clothing factories in the Soviet Union, a leisure resort in Turkey, a food processing plant in Saudi Arabia, work on the Trans-Gabon railway, an irrigation project in Ghana and an airfield in Egypt.
The company looks for projects where UK government finance and political lobbying is to the fore; the outlook is brightest in the Far East and the USA where an embryo operation has won work at Tampa airport, Florida, and in Georgia and California.
TW works extremely hard to see a return on its massive investment in contracting, especially overseas. But even the £10m potential profit on a prestige project like the Channel Tunnel can seem small and long term by comparison with some of the profits being made by property dealers in the UK these days.
Competition from Far Eastern contractors is not likely to make the going any easier for TW’s construction end in the years ahead. However, the company should enjoy a recovery in its domestic turnover and margins very soon.
TW’s contracting experience has tempted it into a wide spread of activities which make use of engineering expertise. For example, it has gone directly into the energy business by building up open-cast coal mining in Britain and the USA, though these activities are much smaller in scale than Costain’s.
Taylor Woodrow Energy is a small loss-making business started in 1984 with interests in onshore fields in Yorkshire and Humberside which sell gas to a northern brickworks. Seaforth Marine is another loss-making offshoot, partly owned with James Finlay, which provides off-shore supply vessels to the oil industry. Sister company Taylor Woodrow Offshore supplies engineering expertise to oil and gas projects world-wide.
Other non-mainstream companies which TW has picked up over the years include a sand and gravel operation called Greenham; a Ford car dealer called A & S Andrews and an insurance broker called E & D Taylor which does a fair amount of work for group companies.
It is questionable whether any of these businesses with the exception of Greenham are large or profitable enough to deserve being part of a company which is otherwise well-focused. The City would welcome disposal of at least some of them.
