Airport developer has no time for glamour

Copyright: David Lawson 1996

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The chauffered car is sumptuous. The chairman has a private jet. A showbiz personality is chatting  in the  head office foyer. It all reeks of a company spending heavily to promote its hotshot image. But appearances can be deceptive.  The car is a company workhorse, its  driver taking half an hour  off  selling buildings. The jet belongs to the chairman's brother and pays it way by being hired out. The famous face is Gareth Edwards, a rugby legend and long-time friend of  the company. And the headquarters sits on a provincial business park.

  TBI has no time for  glitz and glamour. In fact, it relies on the exact opposite; tight running costs and a tough attitude to earnings that asks hard questions about whether the company should even be involved in property. It has just, for instance, bought an airport, and sees this sector as far more exciting than mere bricks and mortar.

  'We don't see the location as a problem,' says TBI chief executive Keith Brooks. 'In fact, fund mangers like coming here. They scamper off to look at our buildings.'

 If you can get that elite band  to not only find South Wales but then scamper around a fringe estate, you know you are doing well. And there is plenty of evidence that  TBI is on a roll. In less than three years it has soared from relative obscurity as a Cardiff-based developer to one of the hottest stocks in the property sector.

  The market first took notice with the surprise reverse takeover of Markheath in 1994 by Thomas Bailey Investments - a private Welsh company headed by Stanley Thomas, who is still chairman and the major shareholder. Last year Molyneux  joined the band in a £43m takeover and the group has also acquired three portfolios of trading assets worth a total of £46m.

  Gross assets have been almost tripled to £275m. Profits were  above £4m in 1995 and  could double this year and redouble by 1998. The shares have gone from a float price of 33p to 68p, well outperforming the market, and are running at a premium of more than 40% to net assets. In fact, this premium has fed most of the activity by enabling the group to buy with paper and raise new capital through rights issues.

 That has led to a fever pitch of anticipation that TBI could swallow more companies, helping rationalise a sector overburdened with moribund tiddlers. Brokers Credit Lyonnais estimates the firm has up to £90m for further acquisitions based on its current 61% gearing, half the  self-imposed ceiling.

 But investors hoping for more bids could be disappointed. 'We want to expand but are not looking for simple property companies,' says Brooks. They need to be property-backed, but also  strong cash generators.

 That is where Cardiff International Airport came in. A year ago TBI snatched it from under the noses of some powerful bidders in a £37m deal with local authorities. The reaction has been so promising that he now wants more. 'And if we can't get them in the UK, we will go abroad,' he says.

   Operating profits rose 40% to £4.23m in the six months to September - twice the estimates by analysts. And they will keep soaring with 10% annual passenger growth and a £500,000 upgrade to the main terminal, including a BAA-style retail mall. The place had been sorely neglected for years by its former  owners. For instance, the councils  allowed only single retailer franchises. Now names like  Allders are scrambling for space in what is becoming a miniature version of BAA schemes at Gatwick and Heathrow.

  In fact, Brooks holds up BAA as a template, aiming to reverse  Cardiff's earnings from a ratio of 70% landing fees and 30% retail earnings and to the major airports' 30:70 split.

 Property still plays a role, particularly through potential development around the airport's 540acres - which will be expanded if Brooks has his way. But this concentration on cash generation reflects  a view on how to spend money that  could help companies like TBI regenerate a sector which appears to have lost its way since the death of inflation-led capital growth.

  It reflects the background of TBI's managers. Brooks and finance director Caroline Price have both come in  from high-flying  corporate finance posts at Price Waterhouse since the company went public. They still think like accountants, which is why the company eschews frills and frippery like chauffeurs and glossy headquarters. Accountants  are no more impressed with property returns nowadays.

  'We arrived without the emotional baggage that goes with property,' he says. 'We can look at it objectively.'

 In simple terms, property just does not make enough to justify sticking in one groove. 'Returns of 11% to 13% are OK if you have nothing better to do with your money. But we are looking at 15% to 20%,' he says.

  That does not mean TBI is getting out of the market. In fact, it will remain a major player, with schemes inherited from Markheath such as 22 acres at Stevenage and a couple of acres at Brentford with permission for 10,405m2 (112,000 sq ft) of offices. The £43m Molyneux deal brought in development plans surrounding the 37,175m2 (400,000 sq ft) Overgate shopping centre in Dundee.

 'We are sitting on gross assets of £250m to £300m and would aim for £500m in the medium term,' says Brooks. Cash-generative holdings like airports would be the main thrust but property could form between a third and half of the firm's base.

  But it will have to compete for capital and justify cash-generation targets. Bricks and mortar are not that different to any other asset, according to Price. 'People are finally starting to realise that property must be judged by the cash flow,' she says.

  A similarly eclectic approach has redirected  several of the company's major assets. Markheath founder Geoff Springer, now TBI property director, took another look at  his proposed Stevenage  office site and transformed it into a  leisure park more fitting for the times. It has already been pre-let. Credit Lyonnais analyst Selwyn Jones expects it to generate a £5m surplus.

 The company has looked at a similar approach to the Brentford site but hit a brick wall with planners. TBI could yet appeal, but Brooks has not ruled out an office scheme.

 'We would not want to get involved in speculative development, but if there was ever a case for exemption to this golden rule it is here,' he says enigmatically.

  Stanmore Hall, Harrow, perfectly valid as 3,345m2 (36,000 sq ft) of offices, was judged to have even more potential if converted to 28 flats. The Prudential Building in Cardiff is even thought to have had tenants lined up for almost 8,000m2 (86,000sq ft) of offices but is now letting up as a leisure scheme and attracting the interest of SegaWorld for its second indoor theme park in the UK after London's Trocadero.

 Molyneux brought another valid development with the £4m renovation of its Overgate shopping centre. But the accountants' slide rules thought otherwise. Work has stopped pending a  more radical scheme involving a major anchor store and a covered mall.

  Such inventiveness is helping keep the shares rising, but will leisure and airports lead to the kind of City confusion which led Burford to demerge its Trocadero venture?

  'I don't think so,' says Brooks. 'Burford was perceived as an established  property company going in new directions. We are a new company which has not had time to be pigeon-holed. And out institutional shareholders judge us on earnings capacity rather than comparing net asset value performance with other property firms.'  That alone could be a breath of fresh air for the sector.