Copyright: David Lawson - Property Week Feb 2001
Roger Carey knows only too well. Jack Petchey arrived in 1998 to help transform Saville Gordon from a backwoods tiddler into a cutting-edge industrial property manager. Carey had not been there long himself. Elbowed out as group MD of Slough Estates, he was looking for a new way of running industrial property. After a short stint with Rutland Group, SG invited him in as chief executive.
Slough chairman Nigel Mobbs, clearly exasperated by media criticism about not choosing Carey as chief executive, blurted out that he might have spent too much time building a public profile rather than developing the portfolio. But a high profile is critical when you have big plans and need to go begging to the City for money, according to Carey.
He moved back into the limelight after a meeting of minds with David Saville, managing director of what was then J Saville Gordon, a Midlands-based family company dragging itself out of metal-bashing and into property. Carey was invited in as chief executive, bringing a dowry of £50m worth of property. He quickly stamped his authority by taking on former Slough colleagues John Keogan and Nick Clive to help rejig the portfolio away from legacy holdings like shopping and into industrial estates. Ironically, the very changes he was brought in to make led to a cooling of the relationship and Saville left just over a year ago because of ‘management style’ differences. ‘He had become dissatisfied with his role in the company. He was always more deal-oriented,’ says Carey, who sees very little of his former sponsor nowadays.
Saville retained control of the 7.5% family shareholding, however, and this would come back to haunt his appointee just as another dark cloud was emerging. Jack Petchey had taken a 10% share stake in exchange for a £137m portfolio - an expansion crucial to provide critical mass for Carey’s grand plan to introduce ideas like flexible leases. But the veteran investor had not stopped there. He accumulated a near-30% holding, raising fears that he would sell out to a rival developer and cut short Carey’s plans.
‘We went to all sorts of lengths to ensure he did not sell his shareholding too quickly. But we never considered for a nano-second preventing him accumulating shares,’ says Carey.
He admits being nudged into talks with potential suitors like Ashtenne, but nothing happened because Petchey’s asking price of 80p a share appeared steep when they languished at less than 70p. David Saville re-emerged in gossip that he was about to regain control in partnership with the predator.
Carey remains diplomatic but admits ‘the rumours were not without foundation’. He also admits that the new team explored the chances of doing their own management buyout early last year when the shares were around 65p, even though this went against the whole thrust of developing a high-profile listed company. ‘We could not get it to work because only venture capital was available and the short-term nature does not suite the company,’ he says.
The uncertainty was depressing. ‘We were always looking over our shoulder,’ says Carey. Recruitment was difficult because no-one was sure we would survive.’ Bemused horror is now a fading memory, however. As the sector recovered and share rose, SG was able to borrow just over £53m to buy itself Petchey’s stake as a Christmas preent. Surprisingly, Carey holds no grudges. ‘I love the guy,’ he says, without a trace of embarrassment. ‘He is dead straight. His attitude is bite or be bitten.’ All dealing was done face-to-face with the notoriously publicity-shy corporate raider and Carey made regular trips from SG’s Leamington HQ to the veteran’s Essex home, where he was given plenty of advice.
Now the aim is to resume an almost evangelic campaign to change the way industrial property is managed. Carey has long been a critic of the sector. ‘When I was at Slough I saw how well secondary industrial performed during the recession compared with the company’s trophy buildings. But it is not well run in this country.There are not many Slough Estates. Lots are too small, which means it is not cared for and becomes run down.’
While president of the British Property Federation in the early Nineties, he led an ultimately futile battle for real estate investment trusts, securitisation and user-friendly leases. Moving to Rutland Group was the chance to turn theory into practice, buying chunks of property and packaging it as investment trusts. But he realised it required more than a small private vehicle to do this.
What about all the hastle he has suffered, first when Slough was forced into a shakeup by the City and then the long, slow death waltz with Petchey ? ‘I must admit looking back with envy sometimes at the way we got a Rutland rights issue away at a 5% discount to net assets,’ he says. That compares with an SG share price that has struggled at a 60% discount before the recent recovery.
He does not dwell on the past long, though. The future is far too interesting. SG is looking more attractive with a share price stabilising at around 87p but this still leaves a discount of around 36% to net assets. The deal also boosted gearing to 156%. SG is attacking that by preparing to sell assets but will still maintain his grand plan by using joint ventures, where the intensive management philosophy will be retained. Finance director Ian Melia has already arranged begun testing the securitisation market through a £100m loan backed by rents from two subsidiaries – the first time industrial property has financed this way in the UK. Pooled offshore trusts are next on the agenda.
Around 15% of the £575m portfolio will be moved into managed funds, releasing capital for the next stage of expansion. One benefit from the Petchey partnership is that his former property is run via the Isle of Man. A £95m portfolio bought from Resolution Property last September is also owned by Jersey subsidiaries. That gives a solid base for creating off-shore unit trusts in partnership with institutions and other property companies. Carey has probably spent more time than anyone looking at limited partnerships but prefers the better liquidity and ease in which investors can join and leave. Flexileasing is also central to the agenda.
It has been a long journey from the days of banging on ministers’ tables about the need for new property vehicles, a journey all the harder because of serious diversions into Petcheymania. But at last, Carey is getting the chance to practice what he has preached.Many have condemned the fraught relationship between landlord and tenant: few have delivered much more than fine words. Saville Gordon aims to break the mould. ‘Long leases no longer suite the needs of tenants,’ says chief executive Roger Carey – a message he has been preaching for more than a decade. But the firm’s new ‘flexilet’ system is not based on charity. More than 50 tenants signed in just under a year are paying rents averaging around 18% more than ERV.
Six-year leases revert to three-month notice periods after a year and involve a 15% fixed rent uplift after three years. Charges like dilapidations are included make overhead costs clear for small businesses and the paperwork has been honed to a few pages in simple English. While small units of 1500 sq ft and down are the obvious target, there is no set upper limit, so the benefits may spread across SG’s 15m sq ft portfolio. Other advances like procurement of bulk services are also being considered,. Rents have already risen from an average £2.65/sq ft to £3.20/sq ft in 18 months. If the 80p average premium for shorter lettings was widened, it could make a significant impact on the £44m annual rent roll.
Half year to 31 Oct 2000 (pre-buyback of 29.7% share stake)
HQ Leamington Spa
Pre-tax profits £7.8m
Net assets £270m
NAV 120.4p (136.7p*)
Net gearing 104% (*156%)
Stock 14.9m sq ft
Vacancy rate 6.6%
Rental income £44.2m
Forecast 2001 annual increase £0.43m (+7%)
Half-year increase £0.23m (11.6% above ERV)
Chairman David Probert
Property director John Keogan
Salary £228,000 (yr to April 2000)
Interests Golf, tennis
Passions vintage Aston Martins
MEPC 1969-83 - senior executive
Slough Estates 1983-96 – group MD from 1992
Rutland Group 1996-97 – joint chief executive
Other past-president British Property Federation