First Property Group (LSE:FPO) — Interim Results

0:01 Good morning, ladies and gentlemen, and welcome to the FIRST PROPERTY GROUP PLC Interim Results Investor Presentation. Company may not be in a position to answer every question received during the meeting itself. However, the company review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll, and your participation, I'm sure, will be greatly received by the company. I'd now

0:32 like to hand over to CEO, Ben Habib. Good morning. Good morning, everyone. Thank you very much for joining us this morning on the announcement of our interim results. I hope everyone's had a chance to have a look at the announcement that we made this morning with the results, and I think you should also have had an opportunity to look at the interim results presentation. Is that online now, Jeremy? It should be on the website. It should be on the website now. I don't propose flipping pages, but, really, I think to talk more generally about the results and then to take questions at the end. As shareholders will be aware, it's been a particularly interesting time for any business over the last three years.

1:23 You know, we had, with lockdowns, we had a complete collapse in demand. And, unknown to us at the time of lockdowns, a breakdown in supply chains taking place so that when we unlocked, we had the opposite where demand significantly exceeded exceeded supply as a result of breakdown of supply chains, inadequate access to fossil fuels, etcetera. And property's been hit by both of those significant events. So firstly, there was a an absence of demand from tenants in property and a reduction in the acquisition and investment in commercial property during lockdowns.

2:11 And now we've got effectively, you know, that dovetailing into a spike in inflation, interest rates going up, and an adjustment in market pricing for commercial property taking place as we speak, and we haven't reached the end of of that process. And, in fact, I think we're at the beginning of it. So it's been a very tumultuous three years. Notwithstanding that, we've had actually quite a good first half. We made a profit before tax of £2,400,000, mostly generated through the sales of properties either by our funds and then paying us a dividend or by our own sale of the warehouse and by our own sale of the warehouse in Tureni in Romania.

2:57 And we did flag that when we announced the finals that we would be looking to sell property. And we sold very well, you know, when you think about the market turmoil that's taking place at the moment. We've got a couple of other properties under offer for sale in Poland, which should go through in the next month or so. And that generated a profit of 2,400,000 in the first half. Our cash reserves as a result of the sales as well maintained themselves even though we were able to buy another 32% of Blue Tower, which cost us just over £7,000,000, but for which we only paid just over 1,000,000 upfront with the rest of it being deferred over a six year period payable in six installments.

3:47 We made an RNS announcement at the time of that that purchase, So the details of that purchase are laid out in that announcement. What is quite interesting, at least in Poland, is that though there's been a slowdown in the investment market brought on by rising interest rates and to some extent by the war in Ukraine next door to Poland, tenant demand has stayed reasonably robust. And we've leased up another 9% of our, office block in Kadinya, which is now leased to the tune of about three and a half, 4,000 square meters. And we've got two or 3,000 square meters more of that office block under offer to tenants, which we're seeing through at the moment. And it was this demand from tenants that gave us the confidence to buy 32% more of Blue Tower because the 32% we bought about 7,000 square meters, 5,000 odd square meters of that is vacant.

4:46 And we think that once we've, it needs a lot of refurbishment. But once we've refurbished it, brought it up standard, we should be able to lease that at reasonable rents. Of course, what's happening in The UK and in Poland is that with the spike in inflation, new development of property across the board, offices, retail, everything has basically stopped. And with that cessation and new supply of commercial property, we do expect rents to rise in due course. I think this will be particularly favorable for retail property where after an initial period of weaknesses, retail retailers find it difficult to adjust pricing because their their own buyer base, you know, are suffering under the weight of inflation. But after that initial difficulty, you know, retail retailers will pass on the higher cost of goods to their buyers.

5:47 And with that increase in turnover in shopping centers, retail warehousing, and so on, you will see and the absence of new development, you will see rents rise. And we do expect for similar reasons, but not not precisely those ones. We do expect rent increases anyway next year under the CPI, upwards only rent provisions that aren't Polish leases typically benefit from. And I think, Paul, on our own portfolio properties, we expect an increase of about 500,000. 500,000 on the Yeah. Yeah. Just without, you know, without management doing anything particularly clever. And if there are rental increases that come through, I expect they will, from the absence of new supply of property, that that would be on top of that 500,000 next year.

6:35 So we should once the pain of this initial surge in inflation has subsided, we should see the benefits of inflation coming through as you would expect for property in due course. And I think that kind of that kind of deals with the first half of FIRST PROPERTY GROUP. We've maintained our dividend, you know, from the final to the to the interim, we've maintained the interim dividend at a 0.25p per share, much lower than it used to be. But with all the headwinds that commercial property is facing at the moment, I think it would be imprudent to declare a bigger dividend than that at the moment. It would appear by our share price that the share that that the stock market doesn't wholly doesn't wholly value our company anyway. You know, I think our NAV per share is 48p a share. Share price, 24 p a share. That's a kind of you know, you might see that as a statement of no confidence in FIRST PROPERTY GROUP, but I think that is actually the kind of discount that's applicable to property companies across the board at the moment.

7:47 So nothing in particular there, I think, that we can address or that we should be, you know, concerned about. What it does inform us, though, is that when we are buy what it does inform us, about is that when we're buying property, we have to be and we always are judicious, but we have to be w judicious because, you know, once we bought a property, if our share price continues to value it at a 50% discount to the value we paid,

8:16 you know, we have to query why we'd be buying it. There's gotta be very good reasons to to to buy property at this juncture in the cycle. So I don't know, Jeremy or Paul, if there's anything you'd like to add to those very headline kind of description. No. I think you've covered the the Yeah. The gist of it. The, yeah, the gist of it, I think, in terms of just the the main thing really is the, you know, the the net asset value of at 48 p relative to the share. That's probably the key Yeah. Thing key metric. Key metric in terms of taking it up. So NAV has held up well, and we don't expect NAV to drop. I mean, the share price is telling us effectively that that will drop. Mhmm. But I can't see any immediate reason for that.

9:03 Sure. Interest rates have gone up. There's a repricing going on in property, but rents are also going up. And it's not clear to me necessarily that our NAV is going to drop, particularly when you think that most of our NAV is out of Poland. And Poland, again, on you know, is outperforming The United Kingdom, which we can come to in in due course. So I think it's worth also mentioning that our NAV excludes any value for our fund management business. And our fund management business is 500,000,000 of third party funds under management. It's regulated, AIFMD approved. So in other words, our NAV is simply the six properties that we own directly and the shares in 10 of the 12 funds that we manage plus our cash. And our cash. Yeah.

9:52 So I think I think we should go straight to questions, and I'm sure shareholders will ask. Also worth touching on the vacancy in our two big six properties that we own. In other words, there is as we let Gdynia up, you recall, we bought Gdynia off the bank Well, we refinanced it. We already owned Gdynia. We, under a finance lease structure, we took freehold ownership of it and part of that restructuring. During that period of restructuring, we lost the main tenant in Gudinia, which was a company called Asecco for reasons that are wholly attributable to the bank's inability to deal with us in a timely manner. But we lost Asecco. We ended up with a vacant building, and that was February 2021. And now it is about 25% leased, something like that. And it will be 28% leased in the new year.

10:50 But I I I did mention our vacancy in that, you know, it it's the robustness of the Polish economy that's given us the confidence in leasing Gudinia and buying that vacancy, you know, in Blue Tower. So I think I think I think we'll go straight to questions now if that's Sure. Let me let me just jump in just to give you a couple of moments. As you can see on the right hand side, you've you've received a number of questions. So thank you firstly to everybody that submitted questions during today's presentation. But just wanted the team to take a few moments to review those questions. I'd just like to remind you that a recording of the presentation, along with a copy of the slides, will be accessible via your investment company dashboard immediately after today's meeting. If I may, Jeremy, just hand back to you and and Ben. And if I could ask you just to read out the questions and give a response where it's appropriate to do so, and I'll pick up from you at the end. Okay. So we've had a a couple of presubmitted questions.

11:44 The first of which is the market value of the shares is much less than the net asset value of the latest accounts. Can you please indicate what plans you have for the future of the company? Okay. Well, the future of the company, basically, at the moment involves managing the assets we've got, leasing up the vacant space at Gdynia and Blue Tower, leasing up also the vacant space that we have at Exemius Park in Krakow, where the where where the company owes a 23% interest in the properties by virtue of a fund structure. And we've got about 40,000 square meters of vacant space there. Krakow is a much more difficult market. It's got 16% vacancy rates across Krakow, where Central Warsaw, for example, has a vacancy rate of around 5%. And Gdynia vacancy rate is very low as well. So Gdynia and Warsaw, good. Krakow, not so good. And it's gonna take a while for the Krakow property to lease up. And as I mentioned, we have a 23% estate there. So a key determinant factor in the growth of our profits going forward is gonna be leasing up this vacant space.

12:47 Of course, we are looking opportunistically as we always are to buying property. At the moment, there's a risk of catching a falling knife because markets are adjusting as we're speaking. I don't think they've fully adjusted to the much higher rate of cost of much higher cost of borrowing that's now prevalent in the market. And the more constrained terms, it's not just, you know, interest rates going up. It's also LTVs dropping and covenants tightening up. But we're watching that space. With any market schism comes opportunity, and we are looking at a couple of properties, but no deal is a deal until it's signed up. Have you had talks with Peter Gillenhammer or his company about this problem? Well, we're in constant Peter Gillenhammer is a significant shareholder in FIRST PROPERTY GROUP for those who don't know him. We we're in constant conversations with anyone, you know, who wishes to be in constant conversation with us. And I have talked to Peter, not in the last couple of months, but I have talked to Peter. He's fully aware of the issues that public companies face and discounts to NAV in this difficult market.

13:56 And as far as I'm aware, he's very supportive of the steps that we're taking to lease up our properties and and grow the company. Another pre submitted question was, I think it is fair to assume the asset management division has a sellable value and leave it out of the balance sheet. And leaving it out of the balance sheet lead to asset stripping. Please include a fair market value for that division. It's not for us to we can't, from an accounting perspective, put a value on it. And and notwithstanding the fact that, you know, the stock market doesn't seem to be valuing it, It's difficult to put a value on it because the people who manage the the human resource that manages our asset management division are the same people who are dealing in our investment property. You know, we're an integrated team.

14:45 So I see the asset management as an adjunct to our investment side. And I see it as a strength, by the way, that FIRST PROPERTY GROUP can move from bringing principal investor to an asset manager when you can raise third party capital and then going back to being a principal investor When the markets are closed and the markets basically are closed at the moment. The the market to raise new money, to raise debt, to raise equity is basically closed at the moment. That that doesn't mean that we won't necessarily be able to raise a loan or to be able to raise a new fund, but the markets basically are closed. We might have an exception to that. But I don't think we are we'd accounting wise, we're simply unable to put a value on it. We, you know, can't do it. It's not legally allowed. And, notionally, I don't think we can do it because we have an integrated platform.

15:35 Sam e has asked, would management consider buying back shares in the company given the share price weakness rather than paying a dividend? Well, we have about £6,000,000 of cash. We're going to need some of that cash to fit out the vacant space in Blue Tower and Gadinia. Fit out costs like other build costs have gone up quite considerably. So we do need to keep some of that cash, you know, considerable amount of that cash spare, if you like, as we lease up that property. Paradoxically, as we lease up the vacant properties, our cash levels will drop, because of that fit out cost. And so we're not looking at an immediate share buyback. But, of course, we do have cash. If we get cash that we think is surplus to purpose and we haven't got new properties in which to invest it, then we, you know, keep all options open. I we had bought shares in the past, and I think we've got about 6,500,000 shares.

16:30 Approximately 6,000,000. 6,000,000 shares in treasury at the moment as a result of historic buybacks. Who owns the remaining 20% of Blue Tower?

16:39 Well, 10% of it is owned by the Jewish community and 10% by the city of Warsaw. City of Warsaw have their main city offices opposite Blue Tower. And so for historic reasons, they as a result of historic reasons, they own 10% of it. They're also a large tenant in the building, and they use it as a kind of spillover space from their offices, their main offices opposite. And I think they're happy tenants and shareholders in the building. James b, are you negotiating extended terms of funds under management? Remaining terms are getting a bit short. Well, we will look at, you know, each fund in isolation. We just extended the life of fifth property trading until '20 end of twenty twenty five, Jeremy.

17:27 December 25. Yeah. So end of twenty twenty five. The other funds still got a few years left on them. So we will be negotiating their extensions, you know, as we as we get closer to their expiry. Of course, shareholders, you know, typically expect to get their money back within the term of their funds, but it will depend on what the markets are like for the sale of property at the time. How is FPOULKEN JV going? Well, it's doing very well. We sold one property at a considerable profit, which we then reinvested in another property. So it's got two properties under management. It isn't growing at the speed that we wish to it's an open ended fund, and it can take a new capital as and when that new capital is raised. But it's not growing at the speed that we perhaps would have ideally have liked when we set it up, but that's a function of nervousness in the markets. As I mentioned, the markets are basically closed at the moment for new equity and and debt. But we hope that, you know, as things settle, that will come back on tap.

18:39 What is the time scale for refurbishing the vacant parts of Blue Tower and redetting? Okay. So Blue Tower is 5,000 square meters of office space, mainly in the podium part of Blue Tower across three floors. And all of it was vacant when we bought it. All of it needs upgrading. And we're going to phase the upgrading of the space. So initially, we're going to do one floor. We're gonna do the ventilation. It's got substandard ventilation HVAC. So we're gonna upgrade the air conditioning and ventilation on that one floor. We're going to create new common space with lifts upgraded, toilets upgraded, and so on, and a show suite.

19:28 And that's our first bit of CapEx and our only bit of CapEx in Blue Tower until we find our first tenant. We will then put our first tenant in and expand. Typically, as it happens, tenants, when they like your space, want to take the show suite, you know, because they can see that it looks nice and it's immediately occupiable. So probably we'll then have to create a new show suite, which is what we will do. We will also use the the the space that we lease out as a you know, to show to other tenants who are coming in. So we will adopt that phased approach to the refurbishment and leasing out of the three podium floors at Blue Tower, and that will mitigate cash outflow. How long it will take is difficult to tell, but 50, you know, 5,500 square meters or whatever it is is 60,000 square feet. It's a lot of space. So it could take a year or two, I think, to lease up all other things being equal and a buoyant market.

20:29 Can you give me a three minute summary of the economic outlook in Poland, including the outlook for inflation, interest rates, etcetera? Okay. So inflation in Poland is about 18% per annum at the moment. It's much higher than it is in The United Kingdom. Unlike The UK, though, it's got better growth dynamics. So I think GDP is growing at around four and a half percent, though forecast to slow down next year. Interest rates have risen quite a lot, and I I I I think they're around 6% at the moment. Sixty three point Six point seven five. 6.75 at the moment. But the NBP, the National Bank of Poland, is indicating that it's reached the end of its its or reaching the end of its cyclical increase in interest rates. The zloty throughout this period has been pretty stable against the euro, which is good because our tenants pay their rents in euros, and, you know, there is a zloty euro exchange rate exposure.

21:24 And you wouldn't want the the zloty to be weakening with these high rates of inflation. So, good strong response from the NBP increasing interest rates, zloty stable, growth relatively good compared to the rest of Europe and The United Kingdom. And, I mean, what's interesting I'm gonna just digress for a second. What's interesting about this interest rate increase cycle, and a lot of people out there may disagree with me, but inflation has been born out of a rise in the cost of staple products and fuel. And, actually, increasing interest rates doesn't address the cost of fuel increasing in price or food increasing in price or fertilizing fertilizers increasing price or raw materials going into factories increasing in price. Those those price increases were gonna happen with or without interest rates going up. Interest rates going up, hit investment markets, militate against people buying new homes, incentivize people to save. So it's been quite interesting to me to watch central banks, for me anyway, central banks across the globe increasing interest rates in the face of what is something that is typically not typically, is not addressable by the increase in interest rates. And I'm of the view, and many will no doubt disagree, I'm of the view that this inflation was gonna burn itself out with

22:56 or without interest rate increases. And, actually, what the interest rate increases has done is push economies towards recession. It sap demand from the rest of the economy when when demand was already weak. And a lot of people will say, Ben, you're wrong. There was a massive printing of money that took place during lockdowns, and that's caused the inflation. And I and I beg to differ on that. I don't think that created a massive excess demand. I think a lot of that money was actually used just to survive. But we're now going to see recessions across the developed economies, and Poland is forecast to avoid a recession, but, you know, marked slowdown in growth. And I think what we're gonna see, famous last words, is central banks cutting interest rates again sooner than we think because inflation burns itself out when a recessionary environment, and they've got a they've got a prop up growth.

23:57 We'll see where that goes. But we could end up with this inflationary environment, you know, reversing quite suddenly and interest rates back down again. And that's a comment really across developed economies, not just Poland. But Poland, I think, will do well relative to The United Kingdom and the rest of Western Europe as it has done our entire time that we've been there since 2005. I think it's it's set much better than than we are for growth. That's great. Ben, Paul, and Jeremy, thank you very much indeed for time your this morning. You've updated investors. You've taken all the questions from investors. So once again, you for your engagement and your time in responding. Ben, I'll shortly redirect the investors on the call to provide you with their feedback, which I know is important to you and to the rest of the Board. But before doing so, if I may, just ask you just for a few closing comments just to wrap up with, and then we'll redirect investors for their feedback.

24:59 Yeah. So, I mean, I think, as ever, FIRST PROPERTY GROUP presents a solid little company with experienced management that has seen through three years of very difficult economic and market times. I suspect there's more volatility out there. We will navigate it as best we can. We've got good, prospects in the leasing up of the vacant space. I think Poland is a good place to be operating. We've got the cash resources to see ourselves through to it. And, you know, we just keep navigating our way through, you know, this maze of, of of macroeconomic and market instability.

25:45 That's great. Ben Another question. Do you want me to answer it? Or Oh, if you if you would like to, sir. Yeah. That that that's a question from Rory. Session. This is from Rory B, which I take is Buchanan. If we do have a recession, as you suggest, do you feel FPOP is well positioned pans on opportunities that arise at knockdown prices? The global financial crisis is a great offer. I that's right. I mean, the the difficulty of I mean, that's right. And I think we will take advantage of opportunities as they arise. We've got the ability to raise money, and we've got cash on our balance sheet. So if equity markets open up and clients are prepared to to to to put money behind us, I think we're as well positioned as anyone to take advantage of it. And I think our clients are more disposed to give us capital. Of course, some of our clients themselves may not have access to capital. So they may not be able to, you know, give us cash when we want it, but I think we you know, we're well positioned for it. You're quite right. We did very well after the GFC.

26:42 Some of that was, you know, permitted development rights, which came in in 2013, 2014. So we did really well in that period. And but, Rory, we've always got our antenna up, as you know, and we will continue to look and do the best we can, you know, in this difficult environment. That's great. Ben, Jeremy, Paul, thank you once again for your time this morning and for updating investors. Could I please ask investors on the call not to close this session as we're now automatically redirect you for the opportunity to provide your feedback in order the management team could better understand your views and expectations. So it'll take a few moments to complete, but I'm sure it'll be 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. Good morning to you all.