Property Weekeditor Liz Hamson recalls a rare interview from 2001 given by one of the property industry’s best-known figures, Raymond Mould.
The then chairman of Pillar told Liz about his formidable double act with Patrick Vaughan, four years before selling the companyto British Land for £811m.
Mould retired in 2013 to become a successful racehorse owner but passed away in his sleep on September 13 last year at the age of 74 after a short battle with cancer.
In the old days people used to say: “He’s doing an Arlington.” Now it’s: “He’s doing a Pillar.”
William Grosvenor’s homage to the pioneering instincts of his former Arlington bosses Raymond Mould and Patrick Vaughan is no PR puff.
For 20 years, this entrepreneurial partnership has led the way in redefining the structure of the property plc and, over the past two years, has arguably become the sector’s most aggressive exponents of offshore trusts.
The retail park and City office specialist recently sold the nine-storey Vintners Place in the City to the Blackstone Group for £106m and also revealed its hugely ambitious £3bn joint venture with Railtrack to develop Cricklewood in north-west London. Only weeks later, it ignored warnings of a recession and the investment inertia of the institutions and unveiled plans to double the size of its £670m retail park trust, Hercules. The ambitious strategy, which would take the company’s funds under management soaring to more than £2bn, has earned glowing praise from the analysts.
Schroder Salomon Smith Barney analyst Alan Carter, who was at Credit Suisse First Boston when it advised Pillar on the Wates takeover last December says: “What they’re saying to the property industry is that you don’t have to be big to be successful. It is the way many should be going. They are forcing change.”
Against the grain
Analysts now predict that Mould and Vaughan will confound received wisdom that bigger is better and downsize Pillar’s equity base.
So what is their gameplan? Raymond Mould, reputedly the shyer half of the partnership, responds to market speculation that Pillar is planning a corporate sell-off. The former tax lawyer reveals for the first time how he got into property, why his partnership with Vaughan has endured and how it pulled off stunts like negotiating a £278m exit fee from Arlington when the market was on the brink of collapse.
The first question I want to ask him, though, as I’m led into the wood-panelled meeting room at the company’s Lansdowne House in Berkeley Square, is why he pulled out of our meeting at less than 12 hours’ notice the previous week.
“I was in the South of France,” he says. “On business?”
“No, just looking for a cottage there for holidays and weekends. I saw one, but it was in the wrong place,” he sighs. Apparently, there are not many old farmhouses with 20 acres of land, six miles inland from Cannes.
Fortunately, Mould’s hunt for commercial opportunities has been rather more fruitful. Since pulling off the Wates acquisition – a move Carter describes as “perfectly timed” – Pillar has been planning the next step in its strategy to shift the bulk of its assets into offshore trusts – a structure that limits the tax burden and improves liquidity in one fell swoop.
Mould reveals that there are three deals lined up worth £100m a piece, but he won’t disclose any details. What he does confirm is that Pillar is planning to transfer its three remaining retail parks – Deepdale Park in Preston, Fort Kinnaird in Scotland and Broughton Park in Chester – to its Hercules fund, currently run in a joint venture with Equitable Life.
Advisors at Merill Lynch are looking to raise a further £500m, which, says Mould, is “all on course, hopefully for end of September”.
Responding to suggestions that the timing might be a little optimistic given the level of caution among institutional investors at the moment, he says: “We don’t have that much direct contact with the institutions, because we’re not really selling kit to them.
“We believe that this vehicle, which is highly focused and specialised with our management attached to it, will be an attractive means for investors, especially for smaller funds to get access to the retail warehouse market – which otherwise they wouldn’t be able to do.”
He reels off the statistics: “There are 200 pension funds in the UK with a property portfolio of £200m or less. Obviously they couldn’t buy an Edinburgh fort, for example, but they could put £5m or £10m into equities.”
There have been suggestions that that, with just two strings to its bow, Pillar would be vulnerable in a recession. Is he worried? Raising an eyebrow, he says defiantly: “There are no signs [of a recession] – quite the reverse. We’re getting more tenants for our parks, particularly for the fashion and retail parks.”
At Deepdale Park in Preston, six tenants are competing for a single unit, he says, adding that the recent 0.5% interest rate cut has been “good from a consumer’s point of view”.
However, he reveals that the company does plan to diversify into new areas. “We have got two leisure investments that we are in the process of developing at the moment, one in Fulham Broadway and one in Omni Park, Greenside Place in Edinburgh. A logical extension of that is for us to transfer those assets into a leisure fund.” Mould will not speculate on the end size of the fund. “it is just an early thought,” he says, but predicts that the two schemes, along with a third, will give it a launch value of around £200m.
Open to ideas
Mould might be staunchly anti-euro, but that has not stopped Pillar tentatively looking at retail park markets on the continent, so far without any luck. “We looked at a 500,000 sq ft retail park in Vitorio, Spain. But it was too much of a risk.”
One of Mould and Vaughan’s talents has been to maximise the financial upside in opportunities like this that no one else has spotted. “They are both very financially aware and have a good legal understanding,” says one former colleague. “Patrick is the legal eagle and very good at creating new financial ideas as to how to deal with property, and Raymond’s background was tax law, hence the offshore trusts.”
Another skill has been deploying strong arm tactics to keep deals on track, as Castlemore chairman Grahame Whateley discovered to his cost when he reportedly tried to back out from his agreement to fund Beckton Retail Park.
Rumour has it that Whateley, who had been working on the deal with Pillar for two years, got a better offer from Scottish Widows, but was forced to return to Pillar when it threatened court action.
It was the pair’s financial savvy as lawyers back in the 1970s that got them into the property game in the first place and sparked their interest in offshore funds. Mould, who had trained as a solicitor in Newcastle, had met Vaughan in 1967.
“Patrick was engaged to a very old friend of mine,” he recalls. “He was working for Singer & Friedlander, got married in 1969 and joined the firm [tax specialist, Askew Cunningham] in the same year.
“We ended up in tax avoidance practice with about 60% of our clients in the property industry. The principal one was Felix Fenstone, who wasn’t very keen on paying fees and, increasingly, for doing the tax deal, so he gave us equity in property deals. More and more, we got involved not only in the taxation side, but also in raising the finance for them.”
In 1976, the case of Ransom v Higgs (1976) effectively put an end to all forms of artificial tax planning, so the two decided that they would get into property. They kicked off with Arlington Securities. Over the next 15 years it built up an impressive portfolio of 10 business parks, but it moved into retail towards the end of the period.
Mould admits that it was not just the threat of recession that prompted their eventual exit from Arlington. “We identified a site which British Airways had at Bracknell, BAe Dynamics. We told Roland Smith [the then chairman] we’d like to do a joint venture to develop the site. He said: ‘I don’t want to do a joint venture, I want to take you over’ and that was literally how it came about. It was a bit of luck and a bit of good judgement. We definitely wanted to get out as well, there was no doubt of that.”
While still at Arlington, plans for Pillar were already being hatched, and again Smith was involved. “I went with Patrick in 1990 to see him and said: ‘The property market is bombed out and that presents a buying option’. So Smith, who was also chairman of Equitable Life at that time, said: ‘If you can find a couple of partners, we’ll go for it’. So we went to GE and Electra, who were the first institutional investors in Arlington.”
Initially launched as a vulture fund, Pillar was soon establishing an impressive track record.
The deal that still evokes gasps of admiration nearly a decade on was Pillar’s purchase of Capability Green in Luton. Mould and Vaughan lived in Brussels at the time for tax purposes.
“That was an interesting one,” says Mould. “Robert Maxted was running Pillar and the opportunity arose to buy investment properties at Capability Green, which we did. We put in an offer on Friday night and signed whole deal in three days and we followed up by approaching the banks and bought the development land.”
Last year saw yet another coup: the acquisition of Wates. Mould confirms that most of Pillar’s deals – around 80% – are generated through his contacts, 20% through Vaughan’s. In this case, it was Vaughan’s friendship with the Wates family that clinched the deal.
“It involved talks at dinner parties or shooting or wherever these things happen,” he says. “They got together with Schroders and the Quebec government pension fund said: ‘Let’s set up a City of London PUT’. The ideal vehicle to kick it off was Wates. That’s how it evolved.”
Mould and Vaughan now want to beef up the City of London Office Unit Trust (CLOUT). Jones Lang Lasalle is aiming to raise around £30m-£50m from investors and, says Mould, it is looking for a new product to inject into the fund.
So what else does the former Territorial Army lieutenant have lined up? Mould is excited about the Cricklewood development.
“It’s 12 million sq ft,” he says as if he can hardly believe it himself. “And it satisfies every single stated government planning criteria,” he adds, citing the transport infrastructure and social housing planned. He would like to meet London mayor Ken Livingstone to discuss the plans but will not be drawn on which partners are in the running, except to say that Pillar has worked with them before.
Are there plans for any further corporate acquisitions? “We could look at opportunities if they arose but we have nothing in mind at the moment,” says Mould. He reacts cagily to suggestions that Pillar has been in discussions with Grantchester, the retail warehouse specialist, but does admit it could be a good fit.
As for the ASDA portfolio after the collapse of the British Landbid, he says: “Certainly, we would be very interested in their retail portfolio, but not the rest.”
One thing that is not on the cards, assures Mould, is doing another Arlington and selling off Pillar. Instead, Pillar plans to reduce its equity base. “We’ll have a minimum of 25% each in both Hercules and CLOUT – but we’d be generating fixed management fees and performance related fees.” He predicts it will achieve fees of £15m in the current financial year, up on last year’s £12.2m.
But, he says, shrinking the equity base to £50m-£75m, as suggested by analysts, is not feasible. “Bear in mind that the stakes in Hercules and CLOUT alone would be would be £200m. Then there are the other properties, which Pillar itself owns, and we’ve got our development programmes in Edinburgh and Fulham.”
Why 25%? Mould says that any less would worry the institutions. “They would want to see the manager have a significant stake in both the funds and that’s the level that we feel that incoming investors would be comfortable with. We’ve got serious money on the table, we’re not just sitting there taking fees.”
Keeping up the pace
Once it has reduced its current stakes, it will release a lot of cash, though. How does Pillar plan to spend it? Mould’s response is that it will look for new development opportunities and corporate acquisitions, but in their absence, return money to the shareholders. “Either that or a share buyback,” he says.
After arguably its best year, Pillar and Mould clearly have no plans to ease up.