Profile: Steve Jones, FD of Rugby Estates

Steves Jones, hot on property

Steve Jones never entertained the prospect of being an accountant ­ the profession held little attraction for a man more concerned with dictating the overarching financial direction of a business.

Even now, he sees his role as an accountant as secondary to that of finance director, with accountancy merely serving as a tool used in crafting a more tactical path.

For Jones, it’s about information management and comprehending numbers in terms of the here and now, but also how he prepares a business for the future.

‘I’ve always been more focused on playing an important role in the running of a business. I’ve never liked numbers for numbers sake ­ it’s not just where you’ve been but also where you’re going,’ he says.

After university he took on a role at BTR, the forerunner to Invensys, a manufacturing company producing everything from oil rigs to conveyor belts.

His two year tenure was in a financial analyst role, but his departure came on the assertion that ‘the company’s view of cost control failed to translate to my view of salary’.

Not content with settling for a career as a ‘factory accountant’, and craving diversity and responsibility, an offer at Wiggins Group plc facilitated both of these.

He quickly learned the basic infrastructure and accounting function to be a ‘complete shambles’, but concedes the opportunity to restore some financial health to the business was a task to be savoured. ‘I got down to the grunt work of actually building financial reporting teams and structure and policies. I’d literally be sitting at home on a Sunday night writing up the cash box. It was hands on…I saw it as something I could get my teeth into,’ he says.

After four years with Wiggins, Jones left as group financial controller after he struggled to accept where the group was heading strategically.

Enter Rugby Securities, then part of a larger parent called Hillsdown Holdings plc and member of the FTSE 100, way back in 1986. Rugby Securities was a property dealing subsidiary run autonomously to Hillsdown, and as Jones recalls, the independence allowed him scope to develop
a finance function on his own terms.

‘As long as I sent my numbers in each month that was about it…they just provided the finance,’ he says.

Rugby Securities employed about a dozen people at the start of Jones’ appointment, turning over between £1m and £2m a year profit. Soon it gathered pace amid the late 1980s boom, taking on close to 30 employees and recording annual profits in excess of £20m.

His Wiggins term inadvertently acted as an overture to what unfolded in the recession of the early 1990s and as co-founding director of Rugby Securities Limited ­ - now just Rugby Estates ­ - Jones is ostensibly well-placed to cope with the current crisis.

According to Jones, the overarching philosophy adopted by Rugby Estates lies in purchasing property where they can add value, and despite being outbid by more risk-laden buyers on a number of occasions, the business has maintained its approach to the market, largely because he’s set to lose more than most. ‘It’s our own money tied up in the business,’ he says.

Having lived through the recession of the early 90s, he’s confident he can navigate the business through the chaos but is reticent on how much further there is to fall. ‘We’re actually in a strong position, although there are no transactions . . . as we are in the middle of peak uncertainty,’ explains Jones.

While in the midst of the downturn and ‘peak uncertainty’, he’s afforded the time to look at opportunities beyond the storm, which he says, lies in third party businesses.
Corporate value in the property sector has fallen significantly, about 20% in commercial property from the peak of 2007.

Business buffer

After years of debt-fuelled buying by investors, one consolation for Jones and Co is the fact the business was not geared too highly and they instead built it on plain, vanilla-type deals at approximately 70% of a property’s value. In part, its prudence provides a buffer to the business in stymieing further impacts from the unprecedented fallout in global markets.

‘There was too much lending going on, on too high terms.’

As an investment vehicle, Rugby Estates plc was established by David Tye and David Wilson, along with Jones, and was designed as an offshoot to Rugby Securities.

In 1994 they floated on the London Stock Exchange; a time when interest rates dropped to 8% and property yields followed suit.

The trio used the prevailing boom period as an opportunity to shy away from the parent company and emerge as a fully-independent public company. ‘It was a natural consequence. In the early 1990s Hillsdown had a lot of demergers and there wasn’t an obvious logical place for us,’ he says.

Readily conceding transactions are at a premium for most players in the space, Jones won’t be drawn on the degree of downsizing, if any, that has occurred in the past 12 months.

The commitment to a property development transaction is the ultimate judgment in a business of this nature, and companies across the board are settling for conservatism and reining in risk, however minor.

The structure of the business’ property investment vehicles is three-dimensional, including the ING Covent Garden Limited Partnership, established in 2002 and comprising a £200m portfolio, and OTwelve Estates Limited, which was set up in 2006.

The latter vehicle has now built up a £250m portfolio of properties in the east of London which are set to benefit from infrastructure improvements in the lead up to the 2012 London Olympic Games.

Soon after London won the bid, Jones and the team set upon investing in income-developing East London property development.

The third and final vehicle is the Rugby Estates Investment, built on the concept of a Real Estate Investment Trust which provides favourable tax treatment to the investor.

Rugby Estates buys private companies which, says Jones, come with a ‘ready made exit’, and have recorded three REIT acquisitions since the UK government effectively adopted the regime last year.

While the likelihood of generating such a deal now is slim, Jones is confident the concept is a potentially lucrative option and is keen to revisit prospective sales once the market lifts.

Core to securing a REIT deal is sourcing companies of interest, and he’s using this cooling off period to locate and contact suitable prospects. Leads are often generated by legal firms, property surveyors and contacts within the accountancy profession.

Transaction might not take place right now, but good contacts could secure deals when the market picks up.

‘We need to meet more people…now is not the time [for deals], but maybe in one or two years...’

The REIT state of play

Rugby Estates plc has joined a growing list of companies to adopt REIT status as a viable investment vehicle.

While the concept launched in the US in 1970, it took the much longer for the UK government to be convinced of its merits.

After decades of lobbying, UK-based businesses have only been able to take advantage of REITs since becoming effective in 2007, when the government recognised they could generate tax from this type of vehicle. It was enacted in the Finance Act of 2006.

There’s an upfront tax payment on the behalf of the investor – 2% of the value of a property goes into the REIT regime. Historically, capital gains tax would be extinguished and the Treasury wouldn’t see any of the tax until the property sold. Because the regime was legislated at the peak of the market, the government is thought to have gained substantially from its offering.

UK REITs are required to distribute 90% of their income and can be classified as equity, mortgage or hybrid. They also have the capacity to be publicly or privately held.

More recently, Enterprise Inns has reportedly deferred adopting REIT status because of unforgiving economic conditions. The pub owner’s banks have agreed in principal to fund the REIT conversion. It’s believed to be a syndicate of 10 to 12 institutions remaining largely unaffected by the credit crunch.