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TWST: Let’s start with an introduction and overview of Pillar Property PLC (London: PLL.L)?

Mr. Vaughan: Pillar was originally incorporated in 1992, which was at a time when the UK commercial property market was very soft with high interest rates. So you had a very high cost of capital and income streams on commercial property were below the cost of capital so values were very flaky. We felt that was a transitive opportunity. Pillar was formed by a consortium of Arlington Securities, which was a property company owned by British Aerospace, the pension fund of GE in the States, and an investment trust in the UK called Electra Investment Trust who between them put up £75 million as an equity base for what you could fairly describe as a vulture fund. The fund was invested over 1992, 1993 and early 1994 at which time British Aerospace sold its holding to a combination of the company’s management, GE and Electra, who became the sole shareholders. In the summer of 1994 the company was floated on the London Stock Exchange at a price of £1.50 a share, which represented about double the money over two years for the original backers. It has been a public company on the London Stock Exchange since. It raised a small amount of fresh capital through a rights issue in 1995 and 1996 -- about £40 million in total. It returned to shareholders in 2000 and 2002 a total of £1.50 a share capital. So it has currently virtually given back all the money it received at listing. The current share price is around £3.50 (now £4.15), which represents the original shareholder’s gain in the period. The net asset value last published in March ’02 was £4.32. The analysts estimate was that will be about £4.90 at the publication of this year’s accounts. These were announced on 22nd May with an NAV of £5.20. The company was initially invested in a wide spread of commercial property, principally offices with some retail and other property classes at the outset. It is now very highly focused on out-of-town retailing, which accounts for about 80% of the portfolio, and the City of London office market, which accounts for about 12% of the portfolio. In the process, Pillar has become a manager of indirect properties through an out-of-town retail fund called Hercules Unit Trust, which is the largest specialist property unit trust in the UK. Hercules has about £2 billion of gross assets. It has traded in about £180 million worth of unit shares this year, so is rather more liquid than most property company shares. Pillar is a major shareholder in that fund and generates significant management income from that activity in addition to its own business. Pillar also has a fund in the City of London with a similar profile, but much smaller.

TWST: What is it about out-of-town retail property that attracts you and warrants the focus?

Mr. Vaughan: The main reason we focus on this sector is that in the UK -- and this is also applicable to most of Continental Europe but not in the States -- the supply side of that type of property is nailed pretty much shut. There is very, very strong Government pressure to resist any new planning applications and consents and, therefore, the supply side is virtually cut off. The costs of occupation are significantly less than occupational costs in town centers and shopping centers.

TWST: The Greenfield mandate?

Mr. Vaughan: Exactly. New development for retailing is expected to take place in town and city centers not on the edge of town and out-of-town and therefore the stock of new development is pretty much non-existent. Conversely, the convenience of good road access and excellent cheap and mostly free parking makes it a very easy retailing experience. So that sector has been drawing a greater share of the UK consumer cake, whilst the supply of new space has been extremely limited. Therefore, even with low and poor retail figures in the nineties and at the beginning of the decade, the growing share of the cake continued to provide very good rental growth in that sector. So long as the planning process continues to be very tight, we think that is a continuing process and so we’ve continued to focus on it.