I thought this week I would have a look at Max Property as it celebrates its fifth birthday. It listed in May 2009, raising £200 million from investors, with the objective of exploiting the problems the property market found itself in as the credit bubble burst. Max boosted its firepower by securing co-investment in projects by Prestbury and Och-Ziff (a founding shareholder in Max Property).
It wasn’t easy to attract finance for anything at the time but Max probably succeeded thanks to the reputation of its fund manager – Prestbury Investments LLP, managed by Nick Leslau and Mike Brown.
No doubt it helped that they and Leslau’s long-time business partner, Nigel Wray, invested £25 million of their own money into the company. Another thing that probably endeared itself to investors was its promise to return cash from successful ventures with the aim of winding up by the autumn of 2016.
Investing in a downturn requires some nerve and Prestbury made some pretty conservative assumptions about the likely returns from the property it acquired to ensure the investment ideas stacked up; in practice including assuming rents didn’t rise, tenants left at the first chance they could and that it was unlikely that they would be able to re-let vacant space.
Leslau’s reputation came from his tenure as chief executive of Burford, where he achieved 34% compound annual returns over 10 years. Brown’s track record prior to Prestbury was established at Helical Bar and Threadneedle Property.
Their ambition for Max Property was illustrated by the design of the performance fee (which rewards them if they achieve returns in excess of 11% per annum).
The first deal they did was to buy a portfolio of multi-let industrial estates for £244 million, equivalent to a gross initial yield of 12.7%. This had been valued at circa £700 million at the top of the market.
They set to work to reduce the 20% vacancy rate in that portfolio and made progress on that front quite quickly but, notably, they also sold property for £40 million that they had paid £30 million for – they were off to a flying start.
They then acquired 21 provincial office buildings, covering 760,000 sq ft, for £39 million. At the time, they reckoned these would have cost £180 million to replace but almost half of the space was vacant. Again, they sold part of the portfolio quite quickly – getting £5.8 million for a building they had paid £4.2 million for.
They then went into a joint venture with Lloyds, paying £31.6 million for a 45% interest in four hospitals let to BMI Healthcare. This was followed by a deal with Enterprise Inns whereby Max bought 29 London pubs for £42.6 million, selling one (the Rose & Crown in Chelsea) at a 41% profit soon after. Next, it did a deal where it bought 14 nightclubs leased to Atmosphere Bars & Clubs, selling a couple of them at a decent mark-up.
Even as the UK property market started to stabilise, the pace of activity didn’t let up. In 2011 the duo bought their largest asset, St Katherine Docks (next to Tower Bridge), paying just shy of £100 million for a 60% stake in the property. In 2012, they bought nine buildings sitting on an acre of land in High Holborn for £47.7 million.
By 31 March this year they had driven the net asset value up to 164.5p (a bit ahead of the 11% compound return target) and felt ready to start handing back cash to shareholders. The first £33 million (15p per share) will come back on 23 July.
They have also said they will make no new acquisitions. They have delivered returns not just by riding the recovery in property prices since the depths of the recession, but also by working to reduce vacancies in the portfolio and refurbish tired buildings.
Not everything went to plan but it helped that they had a diversified portfolio. The best returns came from the provincial office portfolio (where they have cut the vacancy rate to 25%), closely followed by the pubs. But they didn’t do so well on the nightclubs as Atmosphere went bust.
They got the vacancy rates on the industrial estate portfolio down to 11.1% and have sold £98 million worth to date at an average 30% profit. The redevelopment of Commodity Quay, one of the largest buildings in St Katherine Docks, is about to complete and they have started to let this.
They have also been refreshing the Holborn estate, re-letting properties at significantly higher rents, and may have the chance to convert some of the space to residential use.
As Max Property begins to wind down, Prestbury has launched a new vehicle, Secure Income Reit (Sir). This fund listed on 5 June, valuing it at £293 million (Prestbury’s stake is worth £75 million).
Sir is a very different vehicle. Its aim is to provide ‘high quality, safe, inflation-protected income flows’. It started life with a portfolio of 28 freehold properties on average 25-year leases with upwards-only rent reviews.
The portfolio includes Alton Towers, Madame Tussauds, Thorpe Park and Warwick Castle and 21 UK hospitals (the two main tenants on the portfolio are Merlin Entertainments and Ramsay Health Care, an Australian private healthcare group).
The plan is to expand the fund but only when they have deals lined up, avoiding the cash drag associated with blind pools. It will take a while before it starts to throw off meaningful dividends – they say 2017.
It is quite an achievement to be able to make decent money regardless of where we are in the property cycle.
Prestbury’s switch of focus reflects their view that while there is still upside in the UK property market (sufficient to support the gradual winding down of Max’s portfolio), in time (beyond 2015?) property prices will overshoot but hopefully, by then investors will be switching their attention to secure long-term income which they intend to provide with Sir.