First Property Group (LSE:FPO) — Preliminary Results

0:00 Good morning, and welcome to the FIRST PROPERTY GROUP PLC investor presentation. Throughout this recorded meeting, investors will be in listen only mode. Questions are encouraged and can 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, type in your question and press send. The company may not be in a position to answer every question received during the meeting itself, and the company can review all questions submitted today and publish responses where appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Ben Habib. See you. Good morning.

0:29 Good morning. So thank you very much everyone for attending results announcement, which are less than a startling set of results. And perhaps before I go through them, it would be a good idea to just give you some background on how we got to where we are. It's been a bad time for commercial property for reasons I think I set out at the interim stage. But effectively, there've been a number of impacts on the commercial property market. When we unlocked, surprisingly, I don't think many people saw it coming, inflate when we unlocked from, you know, lockdowns, inflation surged on the back of broken labor markets, and fuel markets, And interest rates rose, most notably in The US and, of course, across Europe, including Poland.

1:30 That had an effect it that had two effects. The first was to suck capital out of Central And Eastern Europe and indeed developed markets back to The United States Of America. So the carry trade where people had been borrowing in dollars or euros and investing in Poland started reversing, and access to capital for both investors and lenders in Poland, dramatically reduced. That impact continues to this day. Investment volumes in Poland are down dramatically. They're about tenth of what they typically would would be at any given point in time. And whilst banks will roll debt, they're doing so on ever increasingly tight conditions and mostly requiring a lot of free cash that comes off properties to be used to repay debt as opposed to being released to the borrower, which used to be the more normal situation.

2:37 So we've had a kind of pretty aggressive credit crunch going on, particularly in Poland, which was dependent on international capital for its property market. The other impacts that have been taking place, over the last couple of years is that the work from home syndrome, has really gripped most most markets, and so demand for offices has reduced considerably, in The UK and across Europe, and that has had an impact, obviously, on occupational markets. And that has notably impacted Gdynia, which is where we've got a which contributes the biggest hit to our results this year, to Krakow Business Park, which has similarly been impacted, and our offices fund, which is all offices, you know, where people have not been going into work. So the combination of higher interest rates, a withdrawal of capital, a withdrawal of tenant demand, has also been exacerbated by the drive to net zero, which requires commercial property to be upgraded as we head towards 2030 with a requirement for energy performance certificate ratings of c by

4:07 2027 and b by 2030. And the CapEx required is beginning to be reflected already in capital values ascribed to property. So even though we may not need to have invested the CapEx now, anything that doesn't meet those standards is already having its value impacted. And then the fourth the fourth impact that the property markets are experiencing is a withdrawal of capital from institutional investors because the capital adequacy requirements essentially for anything other than government bonds makes investing in other asset classes unattractive. And, of course, with bond yields up and access to corporate debt, you know, producing better results for pension funds and insurance companies, they too have withdrawn from the property market.

5:06 So you've got, I think, arguably, the most challenging, conditions for commercial property that I've seen in my career, particularly in Poland, which until the last couple of years has been a standout, market. You know, I perform in Western Europe Europe year in, year out, but, it has firmly hit the skids in in Poland. Interestingly, it hasn't really been the Ukraine war that impacted Poland. It's been all the all the all the things that I've just mentioned so far. And, so the results which show a loss of 4,400,000, they're principally driven by the write down in the value of the Gdynia property, which because the deferred consideration on it that was due to be paid on the June 11 this year, we didn't pay it because the property hadn't leased up in the way that we'd expected, and its value, is questionable.

6:13 You know, things in Poland at the moment, frankly, can't be sold so, easily. So it's, you know, it's questionable what the value is, and we didn't think it would be prudent to raise the capital required to pay the deferred consideration. And in order to make sure our accounts didn't overinflate the value of the property, we've written it down to the value of the debt so that there can't be any future impact on our accounts as a result of any further diminution in value of that property. We are talking to the bank, to which we owe the deferred consideration, but that is the single biggest impact on our accounts. So with that backdrop, I will now go to the our presentation and take you through the presentation starting on page six, if I May.

7:08 Statutory loss before profit, 4,410,000 versus a profit of 2,500,000 last year, and that loss is due to that noncash write off on Gdynia. Our cash resources are at £4,600,000, down from 7,650,000 last year, mostly due to the reduction mostly due to CapEx. Okay. 1,600,000 of CapEx in BlueTyre where we had new a new tenant, and we repaid the loan on our property in Romania. 800,000. £800,000. And, yes, and on offices, there was a return payment required to be made to because offices the offices fund shareholders might recall doesn't pay a fee, but we were entitled to a profit share with clawback, And there's been a clawback there which, know, required a cash payment back to the investors of about 500,000.

8:09 So that explains the reduction in cash. Net debt is up slightly. Actually, gross debt is down, but net debt is up slightly because of the reductions in cash. AUM is down what looks like quite a dramatic amount, and this is partly due to the reduction in value of the offices fund, which just to remind you again, doesn't pay a fee. So that reduction in AUM doesn't actually impact FIRST PROPERTY GROUP. A reduction in the value of the Krakow Business Park, of 45,000,000, and the sale of £62,000,000 worth of property in UK funds.

8:56 And we would expect further sales to take place over the next year or two in our funds. Total AUM is therefore down quite a lot, and it might concern shareholders, and it is concerning that institutions have left the market and our fund management business, has reduced, you know, AUM for our fund management business has reduced so dramatically. But I would just remind shareholders that 85 to 90% of our earnings have always come off our own properties and our own investments rather than, from third party fund management. And in many respects, fund management activities, though we've tried very hard to make them work, never really got to a scale which allowed us to make good money out of asset management.

9:51 We've always taken a very proprietary approach to what we buy for our clients, and that has prohibited us, I think, from scaling up dramatically in better times. And so even though this hit looks, you know, big, I don't think it's going to really materially affect us going forward in the future. And the challenge for us with asset management, if we ever really go back into it in a big way, will be how to make make it profitable. Because without it being at scale, frankly, particularly with the new regulatory framework getting tighter and tighter and tighter, you know, it's not that interesting to, manage other people's money.

10:37 I think it's better for us to find, opportunities in Poland which look interesting or opportunities in The UK. And if they're too big for the group itself to invest in those properties, then, you know, to marry up with a combination of people with whom we've got very good relationships, such as family offices, high net worth individuals, etcetera, in The UK. And they're still there to do deals. We just haven't got institutional money to do blind pool funds investing in thematic, know, in investment themes, like we have in the past. And not surprisingly, as our AUM has reduced, the average unexpired fund management contract term has reduced as well to one year nine months from two years nine months a year ago.

11:34 And so turning over then to page seven, statutory loss before profit, statutory loss, before tax, 4,400,000, which works out at a diluted earnings per share loss of, 4.04 p, obviously not paying a dividend, and that's off an exchange rate where the euro has slightly, weakened against the pound. Turning over to page eight, Investment properties and inventories at book value, down slightly from last year. At market value, again, slightly down from last year. Associates, down by 10%, and this is due to the reduction in value of the offices fund principally and reduction of the value of the offices fund.

12:38 And That's a hit of 1.1451 into our investment revaluation reserve. So it doesn't go through the p and l, but it's a reduction there. And also share of associates, you don't see it as much in terms of book cost because our share of the profit after tax is about a million, and it was offset by a fair value adjustment. In FPOP. Yeah. Yeah. So FPOP was down by about a million pounds as well. So that explains that 10% reduction, and then that feeds through to associates and, you know, investments at market value. Cash balances, we've been through before. Cash per share, 4.18p. Gross debt is down because we've repaid some loans and, net debt is similar is up because the cash levels have dropped. Net debt is a function of debt divided by our total assets.

13:38 Gearing ratio, pretty healthy at market value of 38%.

13:43 And that includes, obviously, the deferred considerations that we owe, you know, on on on Blue Tower as well as Gdynia. And then everything else, the numbers flow, for the reasons that I've explained already, which gives us an adjusted net asset value per share of 39p down from 46.5p last year. Page 10 gives us gives you a background on our NAV and how it's changed over the years, where it is at the moment. We've obviously been under pressure, as you can see, ever since lockdowns kicked off. And page 11 gives you a nav bridge, which shows you how nav from last year what the component movements are in nav from last year to this year.

14:38 I don't propose going through any of these. You can look at them at your leisure. And then, page 12 is the absence of a dividend, which, again, I don't propose to go through, but, you know, when earnings recover and, we are making profits, we will resume our dividend payment. And then the page 13 is basically what I've already mentioned in terms of the markets where we are and, you know, what what the future might hold. I think the next couple of years is going to be for us, it's going to be a function of keeping the ship steady, making sure where we've got refinancings coming up, we can refinance them, negotiating a new deal with the bank on the Cudinia property if we're able to do that, and, cutting our cloth in accordance with our means so that we are profitable as we go through this period. And we've obviously made cost reductions internally.

15:43 And I think one of the questions we're gonna be asked I'm gonna be asked later so I can answer it now is we are we have made cost cuts, and, I think that should see us through to profitability based on current levels of income for this year and the year after that. And the challenge for us then is to lease up Blue Tower, the vacant space in Blue Tower, get the deal done with Gdynia, and position ourselves to make new investments trading up take advantage of trading opportunities as and when they become available. And I think that kind of sets out everything for shareholders. There is more stuff in our presentation, which you can go through at your leisure, and you can answer, you know, I'm happy to answer questions now if we can move to questions.

16:30 Fantastic, Ben. Thank you very much, and thank you to the team for updating investors today. Ladies and gentlemen, do please continue to submit your questions using the Q and A tab situated just on the right hand corner of your screen. But just while the team take a few moments to review those questions we've had submitted already, I'd like to remind you the recording of the presentation, the published Q and A can be accessed via your investor dashboard. As you can see, we've received a number of questions both pre submitted and throughout today's meeting. If I may, perhaps just hand back to the management team and if and where appropriate, could you just read out the question, give you a response, and I'll pick up from you at the end. So what actions does the board plan to take to improve profitability? Well, it is, as I mentioned, it's a steady issue goes at the moment. Make sure we can refi properties where we're able to do that. We will be making some sales from various funds, which has the benefit, of course, of freeing up capital, but it, you know, has a long term impact of reducing earnings slightly.

17:27 But we have made, some significant cost reductions in the group as a result of the reduction of properties that we're managing of around £650,000 per annum on an annualized basis. Next question. If I'm right, you have around 300,000,000 under management, but within eighteen months, there'll be a 100,000,000 left. Is there a cash flow projection that shows the effects of mounting down? Well, of course, we've got cash flow projections. We're not going to go through cash flow projections with people. You know, we're not gonna give forward looking statements here. But just to say that, as I've already mentioned, a asset management business has never been where we've made the most of our where we've made, you know, the most of our money. Most of our money has come off our own investments and our associate investments, and we'll cope quite easily with the reduction in AUM.

18:31 The challenge for us are on our vacant properties that we've got, refi ing properties that coming up for refi, you know, and and and navigating ourselves through the next twelve to twenty four months. Will there be any profit share over hurdles? Nope. Is there a possible prolongations in the funds? I mean, there might be. I wouldn't work on that presumption because the pressure on institutions is to exit property markets, not to, continue to invest. What will the cost be for going from 60 employees to a more suitable number? I'm not gonna give forward looking statements, but I have mentioned that we're reduced cost by around £650,000, per annum on an annualized basis.

19:17 What will the cost for running the business going forward? Again, I'm not going to give forward looking statements. What income will be generated from the 100,000,000?

19:24 Well, I mean, roughly, you can work it out. We we make about a percent, just under a percent on around that level on, on our funds under management so you can work out what that would be. What will the cost for running this business be in terms of percentage of AUM? Well, again, it's not a relevant question for the reasons that I've explained. What are prospects for new loans division Vector PLC already in this market. So we tried very hard to penetrate the loan making market. We thought that would be a good place to go. And notwithstanding, having reviewed, what, a billion pounds worth of opportunities, we just couldn't find anything where we felt comfortable committing capital, at the rates of return that were available.

20:14 I think the opportunity didn't last for long, did it, Jeremy? It closed. Well, not closed, but the the quality of loans that we were seeing in the pricing, it was it was just very competitive. Yeah. It was surprisingly competitive given, you know, where the markets oh, that's in The UK, of course. We weren't looking at Poland. You could do better in Poland, but enforcement in Poland is very difficult. So we didn't want to make loans in Poland. You know, you can't foreclose on assets in the same way as you can over here. What is the strategy with regards to Poland and working the situation through? So we've got some, assets that need to be leased up. That's the Gdynia property where we've also got to renegotiate terms with the bank. I'm hopeful the bank will, you know, come to an accommodation with us.

21:01 That remains to be seen. And we've got the Blue Tower property where we've got to lease up some space. By the way, they've got quite a lot of demand for the Blue Tower space. All the vacant space there, more than all the vacant space is spoken for if deals we're doing with tenants come to fruition. The Warsaw office market has actually held up relatively well, and this is pretty cheap space. So, you know, the the challenge for us and where we hope to reposition the group is by leasing up that space, doing a deal on Gudinia, refi ing properties as and when they come up for refi ing, and just navigating ourselves through with a lower cost base over the next twelve to twenty four months. Will you look to wind down the asset management division with the average contract? Well, I mean, it's kind of winding itself down is the honest answer.

21:53 What has the board cost us this year, and how many members are there before any cost saving? So the board is the same size as it's always been, and the cost of the board was roughly a million quid. That includes all cost of being listed as well as That yeah. So that's the entire PLC cost. The board directors together with our listing fees as well as our office rents Yeah. Everything. Everything. Broker. Next question. Yeah. I'm not answering questions on Peter Gillenhammer. That'd be best addressed to Peter Gillenhammer. Right. I think you've covered all all the questions we've had through, Ben. So, look, thank you very much indeed. And, of course, any further questions come through, the team will be able to review those and be able to publish responses where appropriate to do so on the investor meet company platform.

22:47 Before redirecting investors to provide you with their feedback, it's no particular point to you and the team. Ben, can I just ask you for a few closing comments, please? Yeah. So it's easy to become despondent looking at these this set of results. I'm not over the moon by them, but I'm not despondent. We are a seasoned management team. We've made the cost cuts that we need to make. There will be opportunities coming forward in the market, and we will take advantage of them. I'm not without means myself. And if net you know, I stand firmly behind the group in every respect, as I'm sure Alastair Locke and others do. And, you know, I think once we get through this difficult patch, we'll go back to business as usual.

23:37 Fantastic, Ben. Thank you and the management team for updating investors today. Could I please ask investors not to close the session? Should be automatically redirected to provide your feedback. This will only take a few moments to complete, I know it's 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 and good afternoon to you all.