First Property Group (LSE:FPO) — First Property Group plc - Interim Results

0:01 Good morning, ladies and gentlemen. Welcome to the FIRST PROPERTY GROUP PLC interim results investor presentation. Throughout this presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time via the Q and A tab situated on the right hand corner of your screen. Just click q and a, scroll to the bottom, type your question, and press send. The company may not be in a position to answer every question received during the meeting itself. Have the company review all questions submitted today and publish responses where it's appropriate to do so. These will be available via your investor meet company dashboard, and you'll be notified once they're ready for your review. I'd also like to remind you that this

0:31 presentation is being recorded. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Ben Habib, CEO Laura James, group finance director and Jeremy Barker's director of Business Development. Good morning. Good morning. Good morning, everyone. Thank you very much for joining us for the announcement of our interim results. We have prepared a presentation which we will go through. Shareholders familiar with the manner in which I conduct these presentations will remember that I basically skipped the intro and go straight to the highlights, which is the meat of what I want to talk about today. So going straight to Page five, shareholders should be pleased to note that we've made quite a resurgence from the year end back into profit.

1:19 This has been mainly driven by restructuring of the debt that was secured on our Gdynia property, which we were able to negotiate down from €26,000,000 to €16,000,000 with ING, the bank. And that, of course, has put profits up quite dramatically in this first half. Our cash reserves remained strong, slightly down from last time we reported, mainly as a result of investing in that Cadenia property. After having reduced the debt from €26,000,000 to 16,000,000 we actually paid off €4,000,000 of that debt, leaving 12 owing to ING, which for those of you who've read the interim statement will know is repayable in 2024 and does not accrue any interest. In in in a sense, it's a deferred consideration rather than a loan, but you can think of it as either.

2:20 Net debt is obviously substantially reduced again. We reduced it last year when we sold CH8, our largest property in the group, which had €26,000,000 of debt secured on it. And of course, with the debt reduction at Gdynia, net debt is down again this year. I'm pleased to say that during the period, in a very difficult period for commercial property, we were able to launch a new fund, FPOP PLC, which is a joint venture with another asset manager called Fulcrum. It's an open ended fund. We expect it to grow over a period of time to a value of around GBP 100,000,000. We can gear it, so we might be able to get that total value of assets under management as a result of that new fund up to around GBP 200,000,000.

3:06 We will earn fees at around 1% per annum to start with. And once we get over a certain threshold, that will drop. Just to note, however, that this is an open ended fund, so we could see monies going in and out of it that we expect, obviously, the principal flow of money to be in. And for any shareholders who are understandably nervous about the open ended aspect of it, we have built in fairly good and long notice periods to ensure that we're not caught short if we have to sell properties. So assets under management ended the period at marginally higher than March 2021. We've got GBP $576,000,000 worth of assets under management, 33,000,000 of which are on behalf of third parties.

3:56 Weighted average unexpired fund management contract term is three years and five months, and it was three years and eleven months last time. Typically, this figure is never more than five years because that's typically the age of a of a fund. So to be up at three years, five months is is, you know, pretty good average. The market value, this is a point we were asked by one of our shareholders to reveal. The market value less gross debt of group properties is £46,490,000, which is just marginally shy of our disclosed net assets. But the key point here is that 43,000,000 of that is in Poland and Romania.

4:46 So we are very, very largely skewed still as a company towards Poland and Romania, and and I'm pleased by that. By far, one of the strongest economies in Europe and has been ever since we started investing there is Poland. It's already grown back to pre pandemic levels, and we expect Polish growth to continue, particularly as a result of interest rates being higher in Poland than they are across Europe, attracting the continuance of this carry trade, you know, where where investors borrow in in in euros and and then deploy in higher interest higher interest delivering countries such as Poland and, to a less extent, Romania. But Poland is the group has a very significant exposure to Poland with which we're very comfortable with and pleased by.

5:39 We have, on the back of these very good results, declared an interim dividend. It's just over half of what the interim dividend was last year. As shareholders who are familiar with the group will also know, I am very, very keen. The board is very keen on paying a dividend. We're in business to make genuine profit. And if you're making genuine profit, you should pay a dividend. It was with great reluctance under pressure as a as a result of the lockdowns that we had to cut our dividend last year, and we will try to get this dividend back up to previous levels as soon as possible. But having said that, we will not do it in a manner which might compromise the group and our and our ability to sustain whatever it is we you know, we decide to declare.

6:30 So turning over the page, investment properties at book value, and remember that we hold our investments at book value at at at the lower of market value or cost. So our book value is 36,800,000. Investment properties at market value of £42,900,000 So quite a good uplift there inbuilt into our properties. Associates and other investments at book value, again, held at the lower of cost or market value at 21,630,000 and at market value GBP 28,000,000. And a very significant proportion of the group's NAV is held in cash, GBP 12,200,000, which equates to just around 11p per share.

7:21 And we expect that figure to fluctuate a bit as we move forward, both up and down. Something I can cover off in greater detail perhaps during questions and answers is that I think the the manner in which FIRST PROPERTY GROUP trades is going to change a little going forward. There's a disconnect really between the occupational markets and the investment markets at the moment with the occupational markets remaining weak following the following the lockdowns, but the investment markets being quite strong as a result of QE and other government stimulus measures. And so that does create an opportunity for the group to buy and sell properties depending on which bit of the arbitrage we want to be on. And so I think you will be seeing the group being more active in selling some of the better properties we have, the better let properties we have, and perhaps buying more vacant or more difficult properties so that we can then create a sort of saleable asset and take advantage of that disconnect between the occupational and investment markets.

8:30 Turning over a page. Figures in a sense that I've touched on already. Gross debt, quite down 30% substantially. Net debt, similarly down 33%. Gearing ratio as a result of those reductions has also dropped. Net assets at book value, 43,000,000 net assets at market value, 55,000,000, which works out at about 48 p 49 p a share. We have seen a slight increase in our share price this morning, but anyone wishing to top up their shareholding should note that we are trading at a very significant discount to NAV. And this is all achieved actually broadly with the euro versus sterling being quite stable during the period, though it did fluctuate up and down a bit during the year.

9:20 Worth also mentioning that that net asset value figure is for the investment properties and group properties only, and our cash excludes any value attributable to our fund management business, which has got over £05,000,000,000 of third party funds under management. So just looking ahead, we've obviously turned quite a big corner since we last reported, and that was our first loss. When we reported our preliminary results for the year, 03/31/2021, that was the first loss the group made since it was first established. And, you know, that was a great disappointment, but there was nothing we could do about the headwinds created by the wholesale shutdown of Western democracies. So we but we have made a a a significant comeback since then.

10:11 QE is as ever helpful for any real asset owner. And QE there's no sign of QE ending in a hurry. I know there's talk of inflationary induced interest rate increases. But I think even if interest rates rise, they're not gonna rise a lot. Governments are hugely indebted. Private sector is now hugely indebted as a result of lockdowns. And so I don't think the economy could tolerate very significant interest rate rises. So ultra loose monetary policy, whilst it may not be as ultra as it was, will remain pretty ultra. And that is obviously great for asset values, generally speaking, which is why we have this disconnect between the occupational markets and the investment markets. The next page just illustrates how NAV has moved over over the last fourteen years of our history, effectively a pretty unbroken increase over that period with the exception of the lockdown induced loss that we had last year setting back NAV. But NAV is now growing again, and we would hope to continue the kinds of growth that we had pre the lockdowns as we move forward.

11:28 Page 10 sets out what we call a NAV bridge, which just explains how we got from the NAV of 42.8p a share. Last time we announced in March through to 48.8p a share. But of course, we already know that that is largely as a result of renegotiating the debt on that property in Gdynia. Page 11 is a graph about which we used to be very proud and less proud now. It showed an ever increasing dividend through the history of the group. But of course, we had that massive setback as a result of the lockdowns where we had to cut the dividend. I'm pleased that we've been able to pay something for shareholders now, and we will be reviewing this payout continuously between now and when we announce the finals in June.

12:26 We have a lot of cash to invest. And if we can invest that cash or find homes for it or at least be confident that we found homes for it by the time we declare our final dividend, then we will up the final we we will pay a final dividend at the highest possible level as long as we as directors can be satisfied that, you know, it's a sustainable dividend, won't put the group at risk. The key for us in order to gain that confidence is to invest the cash resources we've got well. And the other key, of course, is to lease up some of the vacant properties we've got. As mentioned, the Gudinia property is now 97% vacant. That's partly why we were able to do that great restructuring with the bank.

13:13 But we've also got other vacancies, most notably in the office part that we own 10% of 23% of in Krakow, Exemius Exemius Business Park. There's quite a lot of vacancy there. Krakow is a particularly difficult market at the moment, probably the worst office market in Poland, in fact. Warsaw is pretty good. Gdynia is not bad. Krakow is bad. There's a 20% vacancy rate. So our ability to reinstate the final dividend and the extent to which we reinstate it will depend on how we lease up these properties and how we deploy the cash resources that we have at our disposal.

13:57 Why would you invest in FIRST PROPERTY GROUP PLC? Well, we're an experienced, nimble management team. I, myself, have been through one, two, three, four, five, six recessions. The group has been through two and a half recessions. We went through the 2008 credit crunch, one of the worst setbacks The United Kingdom has ever experienced. We went through that actually sailing through it. The most significant setback I've had in my career actually was as as a result of the lockdowns, and I hope that we can bounce back from that quite quickly. We're a nimble management team. We're opportunistic. The company isn't so big that we can't reposition ourselves when we have to. We're constantly reviewing the state of the economy and the markets in which we operate, and we're continuously adjusting our direction of travel in order to, you know, take into account all that's thrown at us. And we do that rather well. And as people will also know, those of you those of you who followed us for for a number of years, is that we are the highest, the best rated fund manager in Poland, I think, have been since 2005, aren't we, Jeremy? Since 2000. Yeah. You know? And that's partly well, it's partly entirely down to management decisions. And so I think shareholders can, you know, gain a lot of confidence from that.

15:23 We as I've mentioned, the challenge going forward, of course, is to lease up this vacant space and to deploy our capital well. So that's what shareholders should be looking out for, announcements from us on leasing up vacant space and announcement from announcements from us on new deals. Just turning and turning over now to the fund management division. The first new deal that we've done since the since the end of the period on which we're reporting, in fact, was the restructuring of the UK PPP fund. Now this is a fund that we set up for UK investment in 2010 when The UK was gripped in a recession. We extended the life of that fund once in 2017, and we extended it to 2022.

16:14 So it was coming up for the end of its life. And two of the investors in that fund, it had three outside investors. Two of those investors wanted to sell, and we spent the last few months restructuring that. Not a diff not an easy task, by the way, at the moment or hasn't been until recently because during the lockdowns, institutional investors were very nervous of of property. That has changed, as I mentioned, as a result of the investment markets picking up. But we have now restructured that fund. We've extended its life from February 2022 to January 2027. FIRST PROPERTY GROUP has invested another £3,000,000 in UK PPP. Some of the consideration that we paid to buy out these two exiting shareholders was deferred.

17:00 Pounds 10,750,000 was deferred. And so we are selling some of the properties in the fund in order to meet the requirement to pay for that deferred element. And because the new investors coming in own about 49% of the fund, We have to sell 22,000,000 roughly in property in order to finance the deferred consideration of 10.75. And we are well on the way with the sales of those properties. We've already sold one property for GBP 10,800,000. I think GBP 10,800,000 was the sales price, and we've got three in the market with lots of buyer interest. So pretty confident that we'll have satisfied that deferred consideration quite soon. But the big news in the asset management division, fund management division, is this new fund, which I've already talked about.

17:54 And we are also and this is something that this is a big takeaway for shareholders and something really worth noting for anyone who's interested in property is that the government's drive towards net zero is going to have a very marked effect on the property investment market. And the reason for that is that it is

18:19 it is likely that the government will require all office, retail, other commercial property to have an EPC rating of at least b by the time we get to twenty thirty. And at the moment, 80% of all existing stock in The UK is at a category of c or less. So the the climate emergency, which is being addressed by this drive to net zero, is in fact going to create a buildings emergency. And FIRST PROPERTY GROUP is moving rapidly to address that. And the way we're going to do it is to target properties in secondary locations, which, if brought up to standard, will be the defining property for that for that location, the property the go to property which tenants will have to will have to occupy.

19:14 And and so I think we're gonna be focusing a lot on the fallout of net zero and the consequences of net zero for the property sector. And to the maximum of our ability, making sure that we not just comply with our ESG obligations and the government drive towards net zero, but that we make money for our shareholders out of doing so.

19:43 And I think that really covers the asset management side of the business. And then group properties, as I've mentioned, I'm I'm not gonna dwell too much on group properties. I can take as many questions as you like. But group properties is an area that we're not really gonna focus on in a big way because we ideally would like to marry up our capital with third party money so that we can magnify the value of assets that we manage and get not just the return that we earn from the assets as we would get by investing in them, but also get the management fees that accrue through having third party money alongside our own money, a leverage return, if you like, on our on the investments we make.

20:32 And I've talked about the properties that we own already. So, I mean, I can take in questions on individual properties if you like at the end of the presentation. But the ones that we do own are all trading pretty well. Gaginha is 97% vacant for reasons I've explained. We have to lease that up. And as we move forward, I think you will see us trading out of some of these properties or perhaps repositioning them into a kind of fund structure. And that's, I think, everything from me. I'm happy to open it up to questions now. Fantastic, Ben. Thank you very much indeed. Ladies and gentlemen, do please continue to submit your questions using the q and a tab situated on the right hand corner of the screen. But just while the team take a few moments to review questions submitted already. I'd like to remind you that recording this presentation along with a copy of the slides and the published q and a can be accessed via investor dashboard on the Investor Meet company platform.

21:28 We also like to remind you that your feedback is important to the company. And immediately after the presentation has ended, you'll be redirected for the opportunity to provide your feedback in order that the team can better understand your views and expectations. If I may just hand back to you, Jeremy, just to click on the Q and A tab. Where appropriate to do so, if you could read out any questions you wish to respond to and give your response, that's fantastic. Thank you. We've got a question from Michael Dean, which says, which areas and locations are you seeing the most attractive opportunities for the group? And how is the office market looking? Well, the office market, from an occupational perspective, is still under pressure. I know Great Portland Estates announced results recently saying that actually there's quite a lot of demand in in London, and that may be the case. But we're not experiencing that in the regions.

22:15 Warsaw is pretty good. Gdynia is not bad. Krakow is awful. So I think you have to look at the microlocations quite carefully, but this whole thing about work from home hasn't fully played out yet. I suspect over time, the drive to work from home will diminish, and we'll find people, you know, flowing back into their offices. But it's gonna be slow, particularly if governments continue to put the frighteners on us about COVID, and there seems to be no relenting in that. But in terms of which markets we're looking at, we're opportunistic. We look everywhere. We do prefer Poland to The United Kingdom because it's a higher growth economy, you know, for all the reasons we've been investing there for the last sixteen years.

23:02 But we're agnostic, and we'll just follow the deal. You know, if we see a good deal, we'll we'll do it.

23:12 So next question is from James b. Are you disappointed that the cash from the big sale two years ago has not been invested? Well, some of it has been invested. We've invested 4,000,004 million euros in the in the Cadenia property. We've invested another £3,000,000 just now in UK PPP, and we've got other other properties that we're looking at at the moment in which to invest it, including including new funds. Have you been too busy firefighting to have been any opportunities? Not at all. I mean, firefighting firefighting is an opportunity in itself. And as you can see through the Goudinia Goudinia financing renegotiation, we made, you know, a pretty cool €10,000,000 profit on the back of reducing that debt.

24:00 So I don't see firefighting as anything other more other than part of management's management's day to day business in making money. And there's always a silver lining no matter you know, wherever there's volatility, wherever there are headwinds, there are difficulties, but there are also opportunities. And that's how we approach the world, and I think we will be finding more and more opportunities as we go forward. We've got a number in the pipeline too, which I can't disclose for obvious reasons, but we're we're looking at a few. Can you update on timelines to deploy your capital from NDM? It's difficult because of the nature of our approach, which is to be opportunistic. But we are looking at buying more of Blue Tower, which is our prime located Warsaw office tower where we own 48% at the moment.

24:56 That will soak up some capital. We're looking to do a fund to take take to take advantage of the building's emergency. You know, anyone wishing to genuinely make an impact socially as well as environmentally in The United Kingdom should be looking at upgrading secondary buildings. By the way, to build a new building, to build an all singing, all dancing, brand new building that ticks all the ESG boxes requires the sort of carbon emissions that an existing building would produce some of somewhere between twenty five and fifty years. So building new buildings that tick boxes is not the way to go forward in order to address this climate emergency. The way to address the climate emergency is to retrofit existing buildings and prevent the building's emergency that the net zero drive is creating.

25:48 And so that is what we're going to be doing. So in terms of opportunities going forward, we'll be looking very carefully at opportunities to buy existing stock, which is obsolete at the moment from a net zero perspective, but bringing it back into operation much more cost effectively and with a much greater benefit to the climate climate emergency than institutional shareholders who typically just go off and buy the shiniest, biggest, brightest thing in the city or the West End. That's fantastic. Ben, thank you very much indeed for addressing those questions. Of course, any further questions do come through from investors today. The team will be able to review those, and we'll publish responses where appropriate to do so. Ben, if I may, just before we redirect investors to give you some feedback, just perhaps a few closing comments to conclude, please.

26:42 For me? Yes, please. That'd be wonderful. So, I mean, I think the group has turned a big corner since our preliminary results. We continue to have a strong balance sheet. We've made some good investments since the preliminary results. And, really, the areas that the the shareholders should be watching is leasing up our vacant space. So look out for announcements announcements on on our our vacant space being let up and and new deals that we do, particularly, you know, as a result of this building's emergency that is emerging. Fantastic. Thank you all for updating investors today. Can I please ask investors not to close this session? It should be automatically redirected for the opportunity to provide your feedback in order that the management team can better understand your views and expectations.

27:28 This will only take a few moments to complete and is greatly valued by the company. On behalf of the management team of FIRST PROPERTY GROUP PLC, we'd like to thank you for attending today's presentation. That concludes today's session. Thank you, and good morning.