First Property Group (LSE:FPO) — Interim Results for 6 months to 30 September 2020

0:02 Good morning, ladies and gentlemen, and welcome to the FIRST PROPERTY GROUP PLC Interim Results Presentation for the Six Months of 09/30/2020. 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. Simply type your question and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, company will review all questions submitted today and publish responses where it's appropriate to do so. These will be available via your Investor Me company dashboard. I'd also like to remind you this presentation is being recorded. Before we begin, we'd like to submit the following poll. I would now like to hand you over to Ben Habib, CEO Laura James, Interim Group Finance Director and Jeremy Barques, Director of Business Development. Good morning.

0:48 Good morning, And welcome to our interim results for the first half of the financial year to the 03/31/2021. Those of you who are familiar with the company will know myself and Ben, but you may not know Laura James, who is the interim finance director presently having just taken over from George Digby who retired as our group finance director in just after the AGM in September. But Laura has been with us since 2014 and is an excellent team member who is extremely efficient and we are very pleased to have her with us today.

1:38 But with further with no more ado, let's just go straight into the presentation. I'm actually not it's a long presentation. You can see a copy of it in front of you on your screens. There's over 50 pages in this presentation. I don't propose to run through all 50 pages. So if you would like to look at some of the detail that is in this presentation, a copy of the presentation is also on the homepage of our website because it's not possible to scroll using the investor me company technology. You have to we all have to look at the same page together. But if you want to be scrolling whilst we're talking, go to the homepage on our website and in one of those boxes, one of those nine boxes on the homepage, the bottom left hand one, you can download a copy of the presentation.

2:28 After I've run through the main points, I'll then hand over to Ben Habib, Chief Executive, who can expand more on the outlook for the company and then we'll take some questions and answers. So I'm hoping that my bit should take no more than fifteen minutes, which should leave plenty of time for Q and A thereafter. So I'm aware that there may be some people on this call who are not shareholders. And so it's worth dwelling, spending a little bit of time just looking at the business model of FIRST PROPERTY GROUP. So we're a co investing fund manager and we operate in The UK, Poland and Romania. And we operate via two divisions as you can see on this diagram in front of you. So taking the fund management division first, This has got some $557,000,000 in third party funds and a further 80,000,000 of committed, but as yet uninvested funds from clients.

3:34 And our clients range from the likes of investment consultants which advise occupational pension fund schemes such as Willis Towers Watson to endowment funds such as the various Oxbridge Colleges to family offices and high net worth individuals. And our track record is excellent. Our clients have had good experiences. Our strategies tend to focus on generating high income returns because income is more assured than capital gain. But we are flexible and can respond quickly to changes in market conditions. For instance, in 2013, the government passed some legislation enabling the conversion of offices into flats without the requirement to obtain formal planning consent.

4:30 And so we move very quickly to establish a new fund as almost as soon as that legislation was passed to do that. With clients of Willis Towers Watson and that fund went on to earn a 98% IRR for the investors and that's a net after the fees paid to us as a manager.

4:58 Another typically however, we invest in high yielding commercial property as I've mentioned. A good example of that is a portfolio of nine supermarkets in Romania, which we acquired in 2015, which were let to little. The vendor was a private equity fund, comes to the end of its limited life. We acquired these at a high initial yield of around 11% and added leverage in order to enjoy a high income return. But along the way, opportunities rose to sell some of these properties and the shareholders in that fund have earned a 50% IRR so far. And there's a there's still one property that 50% per annum IRR. There's still one property left in that fund. And at the more vanilla end, we set up and manage ungeared UK property funds invested in good secondary commercial property and these typically generate dividend yields of some 6% to 7% per annum.

5:56 It's worth mentioning our investment ranking. MSCI ranked us our performance in Central And Eastern Europe number one against their Central And Eastern Europe benchmark. In fact, number one over the entire fourteen years that we've been investing in Poland. We first went to Poland in 2005 when the yield gap disappeared in The UK and we had to find high yielding markets elsewhere. I'll just quickly show you some of the track record. So this chart here, this slide here shows the track record of funds that we have closed and returned money to shareholders. And then this slide here shows track record of all our existing funds.

6:51 And so the fee income that the fund management division generates was running at just over £3,000,000 on an annualized basis as at September 30. And that excludes any performance fees or our profit share in FPO offices, which is the one fund that we run where we don't charge a management fee, instead we charge or we share in the profits of that fund. And the fund management division contributed 22% of the profit before tax in this set of results prior to the deduction of unallocated overheads. We'd like to grow this and we are hopeful that 2021 should bring opportunities for us to do that. Now looking at the fund management division.

7:46 Sorry, the Group Properties division. So this is the return that we earn from our balance sheets. And in recent years, this division has contributed to Lions share of the group's profit before unallocated central neighborhoods. And it still does in this period, 78% of the profits before tax were generated by this division. And this division has got two parts. There are eight properties that we own directly ourselves and we also own shares in 10 of the 12 funds managed by our fund management division. So starting with the eight properties that we own directly ourselves, all of them are invested in either Poland or Romania. They're valued at CHF56 million.

8:32 They're leveraged, they've got CHF41 million of bank debt secured against them. So net equity invested is around CHF15.8 million. And in recent years, these eight properties or actually until recently nine properties because they used to be this one that we sold at the end of last financial year have been the biggest contributor to our results. And in fact, even in this period, they're the biggest contributor, contributing some two thirds of the contribution from group properties. And then the other part, as I've mentioned, the associates and investments is that shareholdings in 10 of 12 funds managed by FPOM. Our shareholdings in these funds are valued at some CHF 27,900,000 and obviously if the other side contributed two thirds of this contributed around a third of the group properties contribution in this set of results.

9:25 So moving on to the results themselves. The highlights. Well, the most important thing really is the cash. At the end of the last financial year, we sold our largest group property. So we've now got CHF 21,000,000 in cash. And this is 150% up from the prelims because that sale hadn't quite completed at the time of prelims. And this cash secures the group position and leaves extremely well placed to navigate the fallout from COVID. And it's our intention to marry this cash with client money in order to magnify its purchasing power. And our model is to co invest some 10 to 20% of the equity in any deal, which could see this 20,000,000 of equity magnified to 100,000,000 to 200,000,000.

10:25 And if we then add bank debt onto it as well, let's say 50% LTV, that could be magnified to CHF150 million or CHF300 million. And as I mentioned earlier, we do expect opportunities to emerge from the COVID pandemic next year. The next key point to mention is net debt, significantly down, down by some 70%. And again, obviously, it was to do with the repayment of the bank loan associated with the sale of Hammonds Schiego 8, that large group property that we sold at the end of the last financial year, which completed at the beginning of in this half, just in April.

11:10 So moving to the income statement. Profit before tax was down by about £900,000 from the same period last year. And the primary explanation for this was the corollary to the sale of CH8. We may have CHF21 million in cash and lower net debt, but cash doesn't earn anything. And by comparison, the contribution by CH8 in the same period last year was a profit of CHF600,000 prior to the deduction of unallocated central overheads. In the period just ended, it actually contributed a loss of 135,000 finalized when we completed the sale. So in total some 735,000 lower than the same period last year.

12:02 In addition, we had lower contributions. I'll come onto this on the next slide actually. We had lower contributions from our associates and investments and we did not earn any performance fees in our fund management division. But these were offset by cost savings elsewhere, including a lower staff bonus accrual, hence the overall difference between this period and the same period last year was a difference of 900,000.

12:35 The lower contribution by our associates and investments was actually related to three funds, as you can see in the slide we're looking at now. The loss there was a loss incurred by FPOP Phoenix. FPOP Phoenix is a holding company for an office park in Krakow, Poland called Eximius Park in which the group has a 23.4% shareholding, which is valued at £6,900,000 at market value. We bought this park in 2017 and introduced third party equity in 2018. It was half vacant when we bought it and it's a turnaround situation. And we are in the midst of turnaround. We've been investing capital in order to aid letting up the vacant parts.

13:20 It now boasts a sports ground, a kindergarten, it's got its own railway station and the price that we paid for it enables us to be very competitive on the

13:30 level at which we lease out the space in the park. And if we prevail in letting up the vacant parts, then it should prove to be a very profitable fund. But like I say, at the moment, we're in the investment phase and it's a turnaround and so it contributed a loss. The other two funds where we saw a lower contribution from last year were FPOP Opportunities PLC, our largest of the associates and FPOP Galleria Corso. And the reason for that is during the first lockdown in Poland, which lasted due to the pandemic, which lasted from the March 14 until the May 4. The government as in here in The UK forcibly closed non essential shops.

14:16 But furthermore, it's absolved those shops which were forcibly closed from paying rent during the period of their closure. And so the aggregate result of that is that contribution from these two funds is 100 and our share of the contribution from these two funds was 132,000 lower than it would otherwise have been, but we very much hope that that's a one off. There is another lockdown in Poland at the moment like there has been in The UK. And but they have not mentioned whether shops or non essential shops are absorbed from paying rents. So we're hopeful that that will not come to pass. We are assuming the opposite.

15:03 But of course, being cautious people, we are assuming the opposite, yeah. Whilst we're looking at the income statement, let's have a look at our rent collection rates. These are excellent. Looking at the slide here, this is the rent collection rates in funds managed by FIRST PROPERTY GROUP and then the next slide is the rent collection rates for the eight properties that we own directly ourselves in group properties. And all of those numbers are above 90%. The first row is what the rent collection rate would have been if we had invoiced as normal. But because of COVID and because of the in Poland, the government legislation that absolve some tenants from paying rent and because other tenants asked for rent holidays and in order to keep our properties let, we have made some concessions.

15:59 You can see a different collection rate as per the new arrangements, higher collection rate as per the new arrangements on the road below. Now moving to our own eight group properties. There's minimal retail exposure in those funds and so the collection rate is actually unchanged as a result of COVID or as a result of concessions because we didn't have to go up. We've been granted very, very minimal concessions. I think these high collection rates are a testament to not only the properties that we've invested in, but also the asset management capabilities of our team. These are market leading rates.

16:55 Okay. Let's turn to the balance sheet. I think the key figures to highlight here, cash per share 19.21p and the adjusted net assets of 54.3p. Now when you look at our share price, which was 38p until this morning, you can see that over half our market cap is in cash And that represents about 30% discount to our adjusted net asset value. And it's worth pointing out that the adjusted net asset value attributes no value whatsoever to our fund management business with its to our regulated fund management business with its prestigious client list and its GBP $05,000,000,000 in AUM.

17:50 So given the extremely this is just worth looking at our NAV growth over the last since the credit crunch actually. The orange part of the column represents the book net asset value and then the gray bit represents the net asset value when adjusted to market value less any taxes that would be due. Since before the credit crunch, March 'seven. Yeah. Sorry, yes, from since the peak before the credit crunch. That's a graph you can imagine that we are extremely proud of. And this just looking at that net asset value breakdown in a little bit more detail shows you how we got from 55p at March 31 to just below 55p at September 30.

19:00 So the revaluation loss was 1.18p per share. Actually, the group properties were not revalued as at the September 30. Total amount of eight group properties, properties in the funds mostly revalued, but the eight group properties were not.

19:25 Another graph we're extremely proud of, our dividend. Given the strong financial position of the Group of Directors' resolve to maintain the interim dividend at 0.45p per share, we have never cut or missed a dividend payment since paying our first dividend in 2003 And that is a record we will do all we can to maintain. So I think at this point, I'll move on. I'll hand over to Ben, the Chief Executive. I've put up the comment that he put on the statement this morning and I'll read it to you. The sale of Harman Zsiego eight in April released some 17,000,000 of cash and has put the group in a strong position from which to navigate the economic fallout from the COVID pandemic.

20:14 As a consequence of the sale though, there has been a reduction in rental income, which is the primary reason for the reduction in earnings reported today. But this reduction should be temporary and last daily until we reinvest the cash. And we expect to do so in association with clients of the group, as I've mentioned. And as I've also mentioned, our aim is to invest some 10% to 20% of our equity of the equity in any acquisition, which when coupled with bank debt should enable us to acquire up to $300,000,000 in property. The market is in a great deal of flux though, but we do expect interesting opportunities to emerge next year. Ben, over to you. Yes, great. Well, I mean the future is nebulous to put it mildly. We have had the greatest recession The United Kingdom, I think, has had in three hundred years.

21:03 We're not out of it yet. I think some of the figures put forward by the OBR yesterday are fanciful, particularly the unemployment figure, which doesn't pick up. It only picks up those people who are actively looking for work. It doesn't pick up a whole sway that people who are currently sitting on furlough. And I think they're likely to lose their jobs. I see ourselves in a kind of phony economic war at the moment with the real effects of the recession dulled by this phenomenal socialist package of spending that the government has undertaken over the last few months and will continue to undertake until March next year. That together with QE, I think, dulls any market movement in the value of properties.

21:51 So what we've seen is a reduction in turnover in the markets, but we haven't seen any material price adjustments in the market. We have seen value reductions in our own portfolio as valuers get ahead of the curve knowing what's in store. But as I say, I I don't think there's much happening in the markets at the moment. We are looking very carefully at all the markets. But until I think some of this government spending abates, we're not going to see the kind of opportunities that we would wish to see in order to jump in completely. The kinds of assets I think that we would favor buying at the moment are what you might regard as being in the eye of the storm. So we would be looking to buy vacant office blocks which are in need of being repositioned, retail warehousing perhaps if we can price adjust the acquisition to reflect the likelihood of reductions in rental levels.

22:58 In Poland sorry, that's The UK. And in Poland, we will be looking at any class of asset because it's so far been a a better investment environment. The polls have altogether navigated this this this pandemic better than The UK. They are much more prepared as a nation to take personal risk. The complaints I get from Polish people are not really of how awful the pandemic is, but how awful it is to have to stay at home. You know, they wanna get out. They wanna work. They're expensive. The government is expensive. And I think the Brits have slightly swapped their stiff upper lip for a lower quivering one is what I see from the last few months. And that is peculiar statement as you might regard that to be from a CEO of a public company.

23:53 It does actually guide the way the economic recovery is likely to take place over the forthcoming months and years. So we see Poland as a better environment. But for both environments, we think that we need to wait really before we're gonna get proper opportunities to buy. That's roughly how I see the outlook. I don't think, by the way, that British government debt is starting to worry about even though we've had this extraordinary spending spree. The magic tree of quantitative easing actually leaves British government finances, I think, in a reasonably healthy place. You can't go on harvesting the magic money tree, but what we desperately need in The UK are pro growth policies from our government and not policies that are going to stifle a recovery.

24:50 Not sure we really saw that from Rishi Sunak yesterday. Anyway, I'm kind of digressing. But coming back to the property investment climate, really, I doubt we'll be making any investments this year. We might make some in the first quarter of next year. But I think once the furlough ends and those other kind of supporting measures are brought to a close, then I think we will see more interesting opportunities in the market. And that's when I expect we will be spending. I had thought that when the furlough would first end on October 31, we'd be in a better position to see more clearly now. But as we all know, it's been extended all until the end of March. So I think that's basically how I see the outlook. It's all very nebulous. And I will just take questions now that we've had online.

25:39 How did USS manage to have a negative return? Was this due to trustee mismanagement? Well, wouldn't be so bold as to blame the trustees of USS for the negative return, but it is absolutely true, Carol, that the USS management team decided that they wanted to bring the mandate what we had with them to a close earlier than was earlier than the contractual end date, is 2015. And they wanted to sell something like £270,000,000 worth of property, secondary property,

26:13 pretty much all at the same time that depressed values and caused some issues for USS. If they had actually just stood still and allowed the very high rate of return that that portfolio was returning for them to continue to return that income, they would have been in a much better total return position. So that kind of explains it. They made a policy change. They dumped a lot of property in a market which is quite illiquid and they effectively gave up the opportunity of high returns that would have seen them right eventually.

26:52 Stephen G has asked, do you think it's better to invest in new properties at the moment or share buybacks? I definitely don't think it's better to invest in share buybacks. Yes, there's a big discount between NAV and the share price. But actually, if you look back at our record from the peak of March 'seven until now, we have earned something north of a 20% rate of return per annum on our NAV. And that far exceeds any return, I think, that people can get on cash. So it is our absolute aim to maintain the dividend, but not to do share buybacks and to accelerate repayment of capital to shareholders and to use the cash that we've got to make new investments and continue to drive returns for the group at that sort of level.

27:50 Nick Jay has asked, with a very healthy balance sheet, are you looking to actively seek opportunities now or do you think there will be better ones to come in time? Well, I think I've kind of answered that. There will be better ones to come in time once all the monetary stimulus and so on is eased off. Neil S. Has asked, are you still Sorry, Nick J. Asked the second question, which locations are you seeing opening up to provide the best returns going forward? Well, think in The UK, we will be looking at empty office blocks in retail warehousing. And in Poland we will look agnostically across all the asset classes and pick up opportunities where we see them. Neil S has asked, are you still finding PDR opportunities or are they thin on the ground? They are thin on the ground. They have basically been exhausted.

28:38 What we do look for, however, when we buy vacant office blocks or or office blocks of any nature is the possibility of a conversion to residential because that's always, you know, an exit route. Typically nowadays though, the value of an office subject to leases is higher than the value of it of its potential to convert to resi. So that arbitrage doesn't exist in the way that it did exist seven six or seven years ago. Keith F has asked, what do you see as the key future opportunities where you can profitably deploy the cash you now have plus client investments. Well, I think I've kind of answered that Keith already.

29:23 So office vacant office blocks in The UK, retail warehousing and opportunistic purchases in Poland. Alison W, what is your view on the future of offices? What is the lasting impact of COVID? Does this mean a lower absolute quantum demand in the market over the long term? Well, I think it swings and roundabouts. I've been in property since 1994 and I've heard people forecast the end of offices a number of times for various different reasons. It's never happened and I don't think it's going to happen this time either. I think we may see a rebalancing of activity away from London towards more regional centers. But even that, I think, made me in doubt.

30:13 You know, once people get over the fear of the pandemic and get back to work, I think we'll likely see, you know, quite a pickup in people going back to what was the old normal rather than some kind of new reset that the Davos jet set might be pressing on us. I think life will return largely to normal. And so I see offices is actually quite a good investment. And I don't see any reason why that asset class shouldn't resurge. Alastair S, you referred to the market being nebulous. Do you see any dust clouds starting to coalesce in terms of sectoral themes that may guide your spending moves when you see opportunities.

31:04 Well, again, as vacant offices and retail warehousing is where we concentrate in The UK. In Poland, when much more agnostic, we look right across all the property classes depending on rent level, location, yield, etcetera. So I hope that answers that. Can you please update us on your discussions with the Gadinia tenant? Well, we're in advanced negotiations with the Gadinia tenant. Whether or not we're able to sign them up for a new lease remains to be seen, But we've made very good progress with them. We've had some setbacks naturally with the as a result of pandemic and their own fear that they may not need all the space.

31:52 We're also talking to the bank. I don't want to go into detail on the deal that we may or may not do with both the tenant and the bank because it's up in the air and, you know, nothing is done until it's signed. But the the Gudinia property effect is effectively in our books at a close to nil NAV. And, you know, we always knew that this day of reckoning was going to come on Gudinia, which is why we've been depreciating the property each year. And we just need to see how the next month and a half pan out in our dual negotiations to resolve that one. Lester Peers asked, with the blood on the retail high street and the pent up demand to go to physical shopping, do you see any opportunity in retail parks in The UK?

32:44 Well, warehousing is, yeah, I do. I mean, that's why we're kind of looking at retail warehousing. I think there's likely to be rent reductions in retail warehousing. So you've got to be quite careful what price you pay for them. But they're quite good assets to you know, typically with lower rent levels, simpler properties to manage and quite a lot of surplus space. You know, if retail warehousing should cease to be attractive for for tenants and shoppers and so on, you know, you can reposition them with redevelopment. So we are looking at that. But, you know, again, it's slightly difficult to jump into the market ahead of knowing what the full adverse effect of this economic setback is.

33:34 Alison W, you've mentioned that you see attractive opportunities in some UK sectors in Poland. Is Romania somewhere you would look to deploy further capital? Yes, we would look at Romania. We are looking at Romania. It's really difficult finding assets in Romania. It's a very thin market to the extent that assets trade, they tend to be sort of Class A properties in prime locations, which is not what we're about. And just finding that little gem is not easy. And to put it all into context, Romania has an annual turnover of about EUR1 billion in commercial property. Poland has about EUR5 billion to EUR7 billion a year and The UK has somewhere between EUR18 billion and EUR100 billion. So The UK is a much more liquid market. Poland, much less than UK, but again a hell of a lot more than Romania. So Romania is just challenging given the thinness of that market.

34:27 Keith F, what business related issues, if any, keep you awake at night? Very few business related issues keep me awake at night. And I hope that doesn't give the impression that I don't I'm not concerned about what's going on with the pandemic and the effect it might have on our assets and so on. But there's only, you know, so much you can do. And actually, as Jeremy touched on, you know, we've had a really good rent collection rate and that is a that's a result of both kinds of assets we own, but also our asset management approach and how we've dealt with tenants and we've worked our way through this setback. I think so far extremely well. Who knows how it's gonna pan out going forward.

35:13 But there's no point lying in bed at night worrying about stuff that you can't deal with. You know, to the extent that we've got we've had problems. We've we've met them head on. We've negotiated with tenants. We've given tenants rent abatements where they where we have assessed that they genuinely need them. And we've refused to give tenants rent abatements where we think they've been trying it on. And we have been tough where we can be tough. Our ability to be tough has been slightly muted by the fact that government has removed the normal channels that we as landlord would be able to use to pursue tenants until the end of this calendar year. But we've been tough where we can be tough and those tenants who we think can pay but haven't paid, we will pursue once our legal rights are reinstituted come the New Year. So we should see some of those rent collection rates pop up with the benefit of our ability to pursue tenants.

36:15 And we don't see if anyone is thinking egregious landlord holding poor tenants to account over their great job a making And if a tenant can pay, it should pay. And the government has put in place measures to allow tenants to do that, you know, bounce back loans and that sort of thing. And so I don't buy into the mantra that landlords should be taking this hit. I think it's the hit to the extent the hit needs to be taken, needs to be taken only by those people who can't sustain themselves through the cycle. I think that's pretty much covered it off. Ben, thank you very much for being very generous with your time. I think you've addressed all the questions you can from investors. And of course, the company will review all questions submitted there if there's any furthermore questions that do come through, and they will be published, those answered, on the Investor Meets Company platform.

37:22 Ben, perhaps I could just ask you for a few closing words just to wrap up before I redirect investors to give you some feedback. Well, I think Jeremy has said it, but I'll just reiterate. The company itself is going through a transition, having sold its largest property and turned that into cash. And the asset question really, I think, from shareholders and indeed from the management of the group of its own self is how will we redeploy that cash and drive earnings going forward over the next eighteen months to two years. And actually, I think we will do a good job. I say that not because I've got any clarity on the future. As I said, the future looks nebulous, but we have a history of being able to eke out interesting opportunities when the going gets rough and the going and rough going suits our company.

38:21 You know, we did very well coming through the last setback in two thousand and eight, twelve. And I think touch wood, we should do well coming through this one. So I'm really excited about the fact we've got CHF 21,000,000. I'm really excited about getting invested and we are fully on our front foot. Fantastic, Ben. That's a great wrap up. Thank you. Thank you very much to the FIRST PROPERTY team for updating investors today, especially on the day of your results. Very generous of your time. Can I ask investors not to close this session? You will be automatically redirected to the opportunity to provide your feedback. If you've accessed the meeting from the website directly, the feedback page will appear in front of you. If you've accessed the meeting via the link in the email sent to you, you'll be asked to log in to provide your feedback. It only takes a couple of seconds, so do please do so.

39:11 On behalf of FIRST PROPERTY GROUP PLC, we'd like to thank you for attending today's presentation. That concludes today's event. Good morning.