Expert Advice for Independent Investors

July 2009 Investment Alert Vol. 1 No. 7

A once in a generation opportunity in UK property

By Tim du Toit

It all began a few months after the Lehman Brothers bankruptcy last year, when I started looking for an
investment vehicle to use to get into the UK property market. I wanted to hitch a ride on a once-in-a-lifetime
buying opportunity.

In the first quarter of 2009 I intensified my search as closed-end property funds, real estate investment trusts
and property companies were writing off their property values at about 15% per quarter.

Nobody wanted to touch property with a bargepole; even as property companies traded at 30% of net asset
value.

I stumbled onto an article describing how two UK property entrepreneurs, Raymond Mould and Patrick
Vaughan, who had both earned two fortunes investing in property, were planning a new venture in the
property market.

The venture was started when Mould persuaded the General Electric pension fund to take a 50% share in a
new venture. Mould, Vaughan and Price, the finance director, put up the other 50%.

When Raymond Mould was asked why he wanted to go another round after having already made a fortune
in property already, he jokingly said,

"I don't play golf, I've got a much younger wife who doesn't want to see me at home for lunch, so
what else am I going to do?".

The company is London & Stamford Property Limited (“L&S”).

Named London & Stamford because London is where management is based, and Stamford because it's the
home of the General Electric pension fund.

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Key figures
Stock Exchange London – Alternative Investment Market
(“AIM”)

Currency British Pound (“GBP”)

Current Price (29.06.2009 GBP 1.18

London AIM exchange)

Security No. (ISIN) GG00B1Z5TP40

Market Capitalisation 336.3 million

Shares in issue 285 million

Price to Earnings ratio 13.8

Dividend Yield 3.4%

Year End March

Source: Financial Times and Company annual report

Share Price Development

Source: Yahoo Finance UK

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Disclosure
I have a position in L&S, having bought shares twice; once on 22.04.2008 and again on 18.11.2008. The
company has a 3.7% weighting in my portfolio.

Company background and history

L&S was formed by Raymond Mould and Patrick Vaughan who have been in the property business since
1970. Their first venture, Arlington which was set up in 1976, was successfully sold to British Aerospace.

Their next listed vehicle, Pillar, was set up in the early 1990s when, similar to now, opportunities due to a
distressed market were plentiful. Pillar specialised in developing out-of-town retail parks, and they also set
up several off-shore property unit trusts, before being bought out by British Land in 2005. Both Arlington and
Pillar achieved average annual returns of over 20% per annum.

Given the background of the management team, the target assets of L&S are offices in the City of London
and retail warehouses; two forms of real estate where values had been severely hit.

L&S is incorporated in Guernsey and is a closed-ended investment company. It was listed on the Alternative
Investment Market of the London Stock Exchange on 7 November 2007. The company raised £285m when
it listed, and with another £20m from asset sales and a £150m loan from the Bank of Scotland, they had
over £450m of funds to invest.

L&S has no employees and is provided with investment advisory and property management services by LSI
Management LLP, a company owned by Mould and Vaughan.

L&S pays management fees to LSI Management LLP, comprising as follows:

• Basic fee of 1.75% of group net asset value
• Performance fee of 20% of the increase in net asset values, including distribution beyond a hurdle
rate of 10%
• Half of the performance fee is retained and reduced should the return in the following year be below
10%

The 1.75% basic fee looked high to me but research confirmed that it is the industry norm. Considering the
track record of management I think it is fair.

The payment of the management fee to a private company owned by the directors of L&S made me
uncomfortable and it was something I wanted to investigate further.

But:

The conflict of interest section in the is initial offering document (see page 26) very clearly determines what
is allowed and disclosed. Furthermore the interests of the directors and investors of L&S are aligned, as the
directors own 4.5% of the outstanding shares of L&S; worth a substantial GBP 15.1 million.

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Interests of the directors in L&S as at 31 March 2009
Director No. of shares Value GBP
H R Mould 5,294,130 6,247,073
P L Vaughan 5,836,130 6,886,633
H J M Price 1,176,473 1,388,238
R A R Evans 500,000 590,000
Total 12,806,733 15,111,945
There has been no change up to the date of this report.
Holdings are valued at a share price of GBP 1.18.
Source: Company Annual report

The Idea
Since its listing and capital raising in November 2007, L&S has taken its time to start investing - a factor I
think contributed to its share price decline to its all time low in September 2008.

In fact they first sold some property before starting to invest in earnest in 2009.

Management's comment in the preliminary year end results 31 March 2008 explained it as follows:

“We are conscious of perhaps giving the impression of inaction, but we have no intention of
investing shareholders’ funds in property transactions at the wrong time and at the wrong price. In
other words, we will not become forced buyers. In the meantime, we have been very careful in
the management of our cash resources to ensure that the risk is minimised and returns are
maximised. Our investment strategy remains to invest in appropriate properties as and when we
believe adequate returns can be achieved.”

I find management statements like this very positive. I would rather pay for periods of inactivity than have
management make foolish investments just to show activity.

Here is a short time line of their activities taken from company regulatory news filings:

November 2007
• At an offering price of GBP 1.00 L&S raised GBP 247.5 million in capital, which along with existing
capital gave it a market value of GBP 285 million.
• L&S sold its Belgium portfolio of warehouses for GBP 21.4 million. Proceeds used to pay off debt.

April 2008
• L&S announced a seven year joint venture with Cavendish Ltd., a wholly owned subsidiary of an
Abu Dhabi sovereign wealth fund that will co-invest equity of up to GBP 200 million with L&S.

June 2008 - Results for the year to 31st March 2008:

• Initial £150m debt facility arranged, of which £22.8m was drawn
• Net asset value per shares 97.5p
• Cash on hand GBP 243.6 million

November 2008 - Interim results for the six months to 30th September 2008:
• Net asset value per share 95.2p
• Cash on hand GBP 240.5 million

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 Management comment:

“Although our property advisor has scrutinised in excess of 200 possible deals, none
has yet met our requirements and this explains why we have not made new acquisitions
since the IPO.”

January 2009
• Acquired One Fleet Place for £74m, 170,000 sq ft prime City of London office building
• Mainly let to the law firm Denton Wilde Sapte LLP until 2025
• Indicative yield of around 7.75%, according to an analysts at JP Morgan

February 2009
• Together with its joint venture partner L&S acquired a 50% interest in the freehold of Meadowhall
Shopping Centre, the UK's biggest and most successful shopping centre
• The valuation reflects a net initial yield of 6.75%
• L&S's share of the cash payment was £38.6 million on completion and a deferred cash payment of
£14.7 million
• Effective 16% ownership

May 2009
• Purchased No 1 Whitehall Riverside, Leeds for £37.62m
• Prime office building is multi let to seven tenants
• The average weighted unexpired lease term is 15.5 years
• The property was let to blue chip tenants and has an initial yield of 8.2%

June 2009
• Purchased Somerfield Distribution Unit, Park Farm Industrial Estate, Wellingborough for £19.6m
• The 341,320 sq ft distribution unit is let to Somerfield Stores Ltd with Somerfield Ltd as guarantor
• Let for 18.4 years at a rent of £1.79m per annum, yielding 9.1%

• Purchased Racecourse Retail Park, Aintree for £60.928m

• The 291,471 sq ft dominant, part open retail park is let to 13 blue chip tenants
• Weighted average unexpired lease term of approximately 13 years
• The property generates £5,481,579 per annum which reflects a yield of 8.9%

June 2009 - Results for the year to 31st March 2009:

• Increase in NAV of 5% to 102.3p (2008-97.5p)
• Dividend for the year equal to 4p
• Possible move to the main board of the London stock exchange and to convert to a Real Estate
Investment Trust
• Management comment:

“There is much debate in the market that property values may continue to fall. We believe that
values may well weaken where, or because, they are exposed to tenant risk, lease expiry or default.
In common with most commentators, we feel that risk is still growing. Our own due diligence on
purchases bears this out very strongly. We also believe that the high point in yields may already
have been reached where income is seen as secure and sustainable. As a result of this, in the last
months we have seen increasing signs of competition for this type of investment product,
indicating an increasing stability in the market.”

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Summary of purchases to date and their returns:

Date Property Price (GBP mil) Yield ROE*

01/01/09 One Fleet Place 74.00 7.8% 13.4%
01/02/09 Meadowhall Shopping Centre 53.30 6.8% 13.8%
01/05/09 No 1 Whitehall Riverside 37.62 8.2% 12.2%
01/06/09 Somerfield Distribution Unit 19.60 9.1% 12.9%
01/06/09 Racecourse Retail Park 60.93 8.9% 13.5%
Total 245.45
Cash on equity returns as per the annual report 31 March 2008
Source: Company regulatory news filings

Valuation
At the current price of 118p L&S is trading at a 15% premium to its net asset value. I think the premium is
fair based on the calibre of management and the attractive yields on new investments as shown in the
above table.

The next valuation of the property portfolio will most likely increase the net asset value of the company to
the current price based on the yields at which the latest acquisitions were made.

Additionally the attractive yields, on the newly purchased properties, will increase the income of the
company substantially, possibly leading to an increase in the current 3.4% dividend yield.

Negative arguments:
• Management fees are high and may become a factor should rental income fall because of a loss of
tenants
• The weak UK economy may lead to further property market declines as tenants fail and new rentals
are signed for lower rents due to overcapacity
• L&S may be buying too early in the property revaluation cycle

Positive arguments:
• Top-rated management whose skills can be purchased at a price slightly above net asset value
• Good way to invest in the property recovery without any overvalued legacy assets
• Only UK listed real estate company to have added shareholder value in the year to 31 March 2009
• Attractive dividend compared with cash, that may be increased
• Good risk management with interest rates fixed at the current low levels

Summary and Conclusion

L&S is an excellent vehicle to participate in probably the largest property price correction in our lifetime with
a company where the management has an outstanding track record.

The company is well structured with low debt levels and no legacy assets or liabilities, thus leaving it
optimally positioned to profit from the deflation of the property bubble.

Tim du Toit
Analyst

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Action
Maximum purchase price: GBP 1.20

Suggested portfolio Weighting 3%

Stop Loss* 20%

Stop loss value means the percentage loss when the share should be sold from your portfolio to limit losses

Further Reading
London & Stamford investor relations website
London & Stamford Share listing document
London & Stamford Last Annual report – March 2009
London & Stamford preliminary results for the year to 31 March 2009
London & Stamford regulatory filings
London & Stamford - Business week company summary
London & Stamford - Google finance summary

Portfolio Update

Investment Exchange ISIN Added Buy Price Return Advice Notes

Price 29.07.09
Deutsche Telekom Germany DE0005 06/09 8.24 8.44 2.50% Buy Stable high dividend payer
557508
London & Stamford London AIM GG00B1 07/09 118p Buy UK property recovery
Z5TP40

Notes:
The EuroShareLab Alert Portfolio is an equally-weighted strategy and does not include dealing charges to purchase or sell securities, if
any. Taxes are not included in total return calculations. “Return” includes gains from price appreciation, dividend payments, interest
payments, and stock splits. For securities not quoted in EUR the total return also includes any change in the value of the underlying
currency. Stop-losses: The EuroShareLab Alert Portfolio maintains a 20% stop-loss on every stock, ETF and bond recommendation;
stop-losses are not exercised for mutual funds unless otherwise noted. Sources for price data: Yahoo! Finance (finance.yahoo.com),
Financial Times Portfolio Service (www.ft.com), TradeNet (www.trade-net.ch/EN) and websites maintained by securities issuers.

The Eurosharelab Investment Alert is published by Serendipity Ventures (UG) haftungsbeschränkt a limited
liability company incorporated in Germany. Our address is Von-Eicken-Str. 13A, 22529, Hamburg, Germany.
Email: tdutoit@eurosharelab.com

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Disclaimer

General Note

This newsletter and its content are provided to you for informational purposes only and any
discussion of past performance of any security, other investment or investment strategy should not be
considered as being indicative or a guarantee of future performance.

It does not constitute personalised financial advice nor an endorsement or solicitation to make any
investment.

Please do your own due diligence or hire a financial advisor before making any investment decisions. It’s
your money and your responsibility. The information herein is not intended to be personal legal or
investment advice and may not be appropriate or applicable for all readers. If personal advice is needed, the
services of a qualified legal, investment or tax professional should be sought.

The price and value of securities referred to in this newsletter will fluctuate. Loss of all of the original
capital invested in a securities discussed in this newsletter may occur.

Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial
risk and are not suitable for all investors.

You acknowledge that you understand that, due to many factors over which neither we, actual and
subsequent events, performances and/or outcomes may differ substantially from any estimates, projections
or predictions that might have been made in this newsletter.

This research is, to the best of our knowledge, based on generally accessible sources which are reliable and
accurate. However, no liability can be accepted for any errors or inaccuracies in information derived from
these sources. The information in this publication has not been checked for accuracies or relevance to
current events. Consequently, no liability can be assumed for the completeness and accuracy of this report.

EuroShareLab has a subscription and advertising based revenue model and it or the analyst will not receive
any compensation for providing specific information, data, opinions, estimates and projections as well as
recommendations in this report.

The author received no compensation and is not affiliated with the company reviewed in this report with the
possible exception of being a shareholder.

Company Specific Disclosures

This publication constitutes research of a non-binding nature on the market situation and the investment
instruments cited here at the time of this publication on 29.06.2009.

Indicated time horizon of investment recommendation is 24 months

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