First Property Group (LSE:FPO) — Preliminary Results

0:00 Good morning, and welcome to the FIRST PROPERTY GROUP PLC Preliminary Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the Q and A tab situated in the right hand corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions for today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll.

0:28 I'd now like to hand you over to Ben Heblett, the CEO. Good morning to you, sir. Good morning. Am I live? Yes, sir. You are. Yeah. Okay. Brilliant. Well, thank you very much, everyone, for attending our results presentation this morning. I'm going to dive straight in, and I'm going to assume, if I may, that there's a basic understanding of what the company does. And I if I can direct you to the presentation that we put together, page six, which is where the story really starts for last year. Before I talk about the numbers, I should just say, I think that it's been an extraordinarily difficult time for any business that operates in the real world. And by the real world, I mean, needs to have a physical presence in order to generate revenue.

1:21 And clearly, PROPERTY is an entirely physical business. We are mostly invested in offices to a less extent in retail, very little industrial. And offices, in many respects, have been in the crosshairs of the fallout from lockdowns. I'm I'm I'm I'm very keen not to conflate the pandemic with the policy response to the pandemic, which was lockdowns. The reason we're all suffering economically was not the pandemic. We're all suffering economically because of the policy response of the pandemic, which is lockdowns. And I think we should keep that clearly in mind as we go forward. But anyway, offices were badly affected by lockdowns.

2:06 We've got the work from home trend setting in, and we've also got a lesser demand for offices, full stop, because of the economic setback created by lockdowns. So in that context, actually, for the group to have earned a pretax profit of GBP 7,000,000 against a loss, I suppose, which was the worst time for us during the lockdown period of GBP 5,000,000 last year is pretty remarkable. The majority of that uplift comes from the fact that we were able to renegotiate the debt term secured on our property in Gdynia, where, I mean, it's a remarkable story. And I will just tell the story, actually, because we had during the course of the lockdown, we renegotiated the terms of the lease with the incumbent tenant, the lease of which was expiring in October 2020. We agreed all the terms for it and went to the bank to get their consent to that new lease. And the bank would not give its consent for fear that we may not be around to pay for the fit out of that tenant's you know, the the the tenant fit out, which is part of the lease agreement that we entered into.

3:19 And in the pursuit of bank banking consent and their failure to provide it on time, we lost the tenant. So the building went vacant. And, of course, as so as so often happens in these cases, the bank was the entity that took the hit. The residual debt at that point in time was €26,000,000. And over the next few months, we managed to negotiate that debt down to a figure of EUR16 million in return for repaying four of that EUR16 million. So that markdown in debt from EUR26 million to €16,000,000 last year was really the driver behind these profits. You'll see that actually the value of our properties didn't go up much. It was the value of our liabilities that reduced.

4:11 And and that's reflected again in the net debt level of the group, which was 17,240,000 last year. If you go back a few years, you'll see that our debt level has dropped dramatically. And in a sense, I don't know whether it's fortuitous or whether we just you know, we had the sort of view of where things were gonna go before they went there. But, you know, going into this high inflationary environment where interest rates are bound to go up and we're gonna now see second round inflationary effects taking hold and central banks are panicking, you know, it's a it's a really good position for the group to have its net debt level down at that. The gross debt is about 23,000,000. So when you deduct our cash from it, you end up with net debt of around 17,000,000. So the group is in really good shape in these troubled economic times.

5:00 We have cash reserves of GBP 6,000,000. That's down from GBP 16,000,000 last year. Most of that is as a result of investments that we've made, €4,000,000 to reduce the bank debt from 16 to 12, which I mentioned, £3,000,000 investment in UK Special Opportunities, which in turn bought shares in another one of our funds where we've been rapidly selling properties. And we sold about £31,000,000 worth of properties out of that other fund for a value of around £39,000,000 since we made that investment of 3,000,000 And it's post year end effect, but we will get the benefit of that profit and the release of that cash in the year to 03/31/2023.

5:48 So even though cash reserves are down, we're going to see cash come back up during the year to twenty thirty first March twenty twenty three with this cash being returned from UK special opportunities. And also, we've got a few sales in mind as we go through this year, subject, of course, to market sentiment, which at the moment is pretty poor. During the year, we also set up a new fund called FPOP PLC. It's an open ended fund largely funded by Japanese investors. And the idea was that it would ramp up to about a 100,000,000 in assets under management quite quickly. But, of course, it is suffering from the same buyer standoff that now exists, I think, across all developed markets as a result of rising interest rates and looming recession.

6:42 So we've only got about GBP 10,000,000 invested on behalf of FPOP PLC, having anticipated more money coming through than has actually come through. But in time, no doubt, that would be a profitable fund for the investors in it as well as FIRST PROPERTY GROUP. Third party assets under management, pounds $516,000,000, down £10,000,000 from the prior year. And that's a really good result when you think that we've sold 30 odd million pounds worth of property. We replaced that with a £10,000,000 investment on behalf of PLC. So we've seen about CHF 10,000,000 value increase of around CHF 10,000,000 on the rest of our portfolio. And again, just to reiterate what has been pretty difficult times. And on the back of the turnaround in the group's fortunes, we have declared a final dividend of £0.25 per share. That's much lower than pre lockdown periods, but it is at least a return to payments.

7:42 And as we lease up some of the vacant properties in our portfolio, as the economic and market environments improve, it is our committed aim, as shareholders should know, if you've invested with us for a long time, it is our committed aim to return to as fulsome a dividend payment as we can reasonably make. And just to remind shareholders, our policy pre pandemic was to have our dividend covered about 2.5 times. So as soon as we can get back to that sort of level, as soon as we can get profits back up, we will our dividend will recover based on that ratio.

8:23 Page eight of the presentation sets out some detail on investment properties that we hold. Just to remind shareholders, we hold investment properties at the lower end market value or cost, and that also applies to the vast majority of our interest in associates. There is one associate that we hold at value, which is FIRST PROPERTY OPPUTUNITIES PLC. But our basic approach to ownership of assets is to hold them at the lower of cost or value. We think that's a safer way to move forward. You don't get the kind of volatile movements that you get if you mark everything to market every year. And if you compare our market value, the market value of our investments in associates and our properties to book value, you'll see there's quite a significant difference.

9:18 And that really, I think, covers all the headline numbers. I could go on in detail, but I would just be reiterating myself. I suppose the one thing that I should drive home is that our EPRA basis of NAV, so NAV, net asset value per share adjusted to market value for properties is about 47p a share versus our share price this morning, I think, which is around 30 p a share. Yeah. So think we moved much today. Yeah. There's a we're trading at a significant discount to to NAV, which would indicate that the market thinks NAV is going down. I actually don't think NAV is going down. Things would have to go pretty badly wrong for our NAV to reduce from where we are at the moment.

10:09 And so I hope that we will see a natural recovery in our share price. It's not for me, obviously, to be directing shareholders on where our share price goes. But I think that, that discount is unwarranted. Turning to page 10. You've got a bar chart of NAV over the last you know, since the peak of the bubble, if you like, in March o seven. And you can see a trend up in NAV until you hit the pandemic, and then we have a setback. And now we're building back again from that setback. Page 11 is what's called a nav bridge, which may be helpful to some of you. I find it entirely unhelpful. But people who want to navigate our nav

10:53 from last time we reported to this time. So we had a NAV of 42p a share last time we reported in March 21. The green bit what does the green bit represent? Pretax profit. And then you've got a revaluation down of GBP 1,400,000. You've got foreign exchange benefits of GBP 100,000 and a dividend payment of GBP 200,000 leaves you with a NAV of GBP 47.3 per share.

11:21 Page 12 is a graph of our historic dividend payments of which I used to be very, very proud until lockdowns, and we had to cut our dividend back to well, our final dividend back to the election. I think we paid a dividend pretty much throughout, throughout, didn't we, one way or another? There's one that we missed, and that was the final. Yeah. Yeah. Which is, you know, no doubt disappointed to shareholders as as as much as it was disappointing to us. But I hope that we can go back on that positive trend with dividends as markets and the economy improve. So the just looking ahead now, because I think the rest of it, can cover. And if you if people have got detailed questions on assets and so on, I think the more interesting bit is to look ahead.

12:08 Our fortunes are still very much tied to Poland, and I'm pleased by that because Poland is, as ever, outperforming The United Kingdom. It's not gonna go into recession, I think, in the way that The UK is. I think we're probably we may not technically be in a recession yet in The UK, but we will we're all but in a recession already. Poland is growing. The war in Ukraine has economically benefited Poland. It's had 2,400,000 refugees enter. And if you like, these are hardworking, committed members of the Polish workforce. So they are adding to the economic output of of Poland. They're also adding to the demand side, you know, in the economy, which we're lacking in The UK. We don't really have that demand driven aspect to our economy at the moment. All our our issues here are supply side problems with inflation.

13:06 And Poland has that too. Inflation is up in Poland, but the demand side is very helpful because it allows the economy to continue to grow. But the really key thing from a property perspective and the key takeaway, I think, from today's presentation is that the cost of building new property hasn't gone up by 10%. It's gone up by a 100%. We've We've seen the cost of the cost of building double over the last year or two. And that has brought new supply of offices, retail, to a lesser extent, logistics because that's a booming market, but offices and retail to a crashing halt, both in The UK and in Poland. And in The UK, that's helpful because it, you know, mitigates some of the adverse consequences of working from home in the pandemic lockdown induced reductions in demand for office space.

14:03 But in Poland, it's particularly helpful because you still got demand in the economy, and you still got a growing economy. So with an with an absence of supply of new offices and demand in the economy, we think that rents, particularly in Warsaw where vacancy rates are sub 10% and forecast to go dramatically lower, rents in Warsaw are going to rise. And we haven't had that luxury in Poland. For the last seventeen years that we've been investing in Poland, we've never really been able to make money out of rental growth. We've done it all by buying properties on reasonably high yields. And we haven't had rental growth because they've always had new supply. The economy has demanded new supply and they've built it. So Warsaw, for example, has had a quarter of a million square meters of new build and take up every year for the last ten years, and that is forecast to drop to about 50,000 square meters of new build next year.

14:58 And and you can imagine what that's going to do for rents in Warsaw. So one of the strategies that we're gonna have going forward is really buying as much Warsaw offices as we can. The same holds true to a lesser extent, but broadly true for the Tri City region of Poland. So that's Gdynia, Sopot and Gdansk. And we've got one property in Gdynia, which is leasing up quite well at the moment, the one which became vacant because the bank wouldn't budge and do its give its approval on time. The weaker markets in Poland are Krakow, where we've got significant exposure, sadly, in Exemius Park, and that may take longer for recovery because there's a vacancy rate in Krakow of 16% plus. And even though supply is going to new supply will be constrained, it's going to take a long time for that vacancy rate to be worn away.

15:51 But Poland, on the whole, still a really good place to invest. Raising bank debt is more difficult than it used to be. Investors are shyer than they used to be, and these are all challenges we will need to get over in order to buy new property. But I'm very bullish about buying property, particular office property, particularly in Warsaw. In The UK, we are also going to be targeting office property. There is a more medium term reason to be doing it, and that's because of the drive to net zero in The UK. The drive to net zero in the commercial property world is being delivered through a commitment that properties need to be energy performance certificate rated C by 2027 and energy performance certificate rated B by 2030.

16:44 And the reason that's going to drive property values is because 80%, and this is a remarkable statistic, 80% of UK commercial property stock is substandard when it comes to those EPC targets, when it comes to the EPC B target of 2030. So there is going to this this climate emergency, which is being addressed through net zero, has created a buildings emergency in The UK. It's not evident to people yet, but it will become evident as we get closer to 2027. And many properties are not going to be capable of being brought back into or or brought up to the standard required to remain in use.

17:30 And we see opportunities there. So we will be looking in The UK to buy properties which are very well located in secondary locations where building new simply can't be justified because of the cost of building new and the

17:45 massive rents that that would require. And there and there won't be demand from tenants, you know, at that at those rent levels. So we're gonna be looking to buy the best in class, if you like, secondary properties and secondary good secondary locations and then upgrade them to make sure that they comply with the EPC C and EPC B targets by 2030. And those properties should go up in value virtually automatically. So those are our two strategies, I think, coming out of lockdown and how we're going to be developing the group. And I think that's a good time, frankly, to go to questions, if that's alright. Ben, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions using the q and a tab situated in the right hand corner of your screen. But just while the company take a few minutes to review those questions submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published q and a can be accessed via investor dashboard.

18:44 As you can see, we received a number of questions throughout today's presentation, and thank you to all the investors for submitting those. Could I just ask you to read out the questions and keep responses where it's appropriate to do so, then I'll pick up from you at the end. So the first one is from Nick B. I'm Jeremy Barkis, by the way, Business Development Director. How do you see opportunity arising in the current markets?

19:05 With hard assets benefiting from inflation, do you expect to sell mature assets to redeploy into new opportunities? To some extent, I've answered that question already. And the answer broadly is yes. We are selling mature assets in our portfolio. So we're exiting Romania, where we tried very hard to grow our activities, but the market is too thin and it's terribly difficult to find the kind of scale of investment that we would need to justify having people on the ground. So we're selling our Romanian assets. We should sell them, touch wood, for, you know, good value, significantly higher than book value. And then we will redeploy that cash into the kinds of offices office investments that I described. We're also selling some supermarkets in Poland, which we've owned for a long time. And again, until at least two or three weeks ago, demand for that asset class was high.

20:03 Things are changing quite rapidly in the investment market as interest rates rise, but I don't think Poland will be as badly affected as United Kingdom. So I hope to sell the Romanian prop we hope to sell the Romanian properties, sell these in supermarkets in Poland, and then recycle the cash into leveraged office deals. How does the board view share buybacks? Well, we've done we've done share buybacks in the past. And, I mean, one of the problems we have is being a very small company. And the criticism we get from, you know, big institutions who who who we pitch from time to time to buy shares in the company is that we're too small for them. And the problem with share buybacks is you just get smaller. And, actually, we do need our cash at the moment as well for the deals that I've just been describing.

20:51 I do think there's gonna be some fantastic opportunities coming out of Warsaw, Tri City region, and even to a lesser extent perhaps, but even in The UK as we head towards net zero. So we don't want to give up our cash, buying back shares, becoming a smaller, less significant company and giving up the opportunity to make these good returns. What can you say about vacancies in place? I assume by vacancies, you mean vacancy rates in property. And as I mentioned, Warsaw has a very low vacancy rate, sub 10% and forecast to go dramatically dramatically lower. Tri City region, the same. Krakow has a vacancy rate of 16% plus and is a more problematic market for us.

21:41 Vacancy rates in The UK, obviously, differ depending on where you are. But you know, the the trend here is that vacancy, with or without working from home, is going to drop because new new supply has basically stopped. It's unaffordable. And and that's where that's how inflation works. Inflation doesn't work because, you know, inflation goes up, so we all raise rents. Inflation works because it brings new supply to a halt. It brings economic activity to a halt in the first instance. And and so when there's tenant demand, they thought you know, that that's what forces rents up. So in The UK, as we see properties fall out of use in this drive towards net zero, we will also see, you know, rents go up, And that is going to happen. And of course, what will happen then, of course, we all know for those of us who've been around a few years, several banks will raise interest rates even more. And I think what's happening with the RMT and I think Mersey Trains yesterday in London Underground, Docklands Light Railway and Eurostar agreed yesterday 8% increases in wages. So that is the beginning of second round inflationary effects.

22:54 That is the confirming of inflation. The government didn't move fast enough, actually did nothing to curb, you know, the supply side inflationary spike that we've experienced in the last six months. And now we're going to see this inflation get embedded into The UK economy through salary increases. And that too, I suppose, eventually, will be beneficial for property because there'll be more money, you know, swimming around in the economy. I don't think it's helpful for The United Kingdom as a whole, but it should help, you know, our prospects. Right. What shall we look out for in the next six months? Well, the next six months, look out for sales of our property in Romania, sales sales of our supermarkets in Poland, the purchase of more of Bluetower because we're in advanced negotiations to buy more of Bluetower in Warsaw, and the purchase of additional properties in Warsaw as well as the leasing up of our largely vacant building in Gdynia. These are the KPIs, if you like, for the next six months.

24:00 And we our new brokers, Allenby, tell us that it's good to put out RNSs. So whenever we do something, I'm sure Jeremy will be putting out an RNS to keep everyone abreast of our of our activities. Would you look to expand your capital base to take advantage of market opportunities and attract new investors? The answer to that is yes. Even though we're trading at a significant discount now, if there's a mouthwatering deal out there, which I think is gonna shoot the shoot the lights out or we think is gonna shoot the lights out, absolutely, you know, we'll come back and we'll find a way to raise the money for it. We'll try and do it without dilution. We'll try and do it through third party funds, leverage, mezzanine financing. I know there's at least one banker listening to this presentation. You know, we try and tap banks up for whatever we can get from them.

24:49 I'm a believer. We're a believer in the leveraged purchasing of property. Property works best when it's leveraged. So we will do whatever we can to raise the money, including, if necessary, if the opportunity is mouthwatering the issuing of new shares. Speculation. How much increase in value will we see if if Warsaw was rented out? Do you mean if Warsaw gets full occupant? If you if anything below a 5% vacancy rate means rents are gonna go up. And given where building costs are right now, which is twice what they were two or three years ago, you could see prime Warsaw rents double from about €24 a square meter to €48 a square meter.

25:35 And assuming yields stay where they are, that's a doubling in value. I I think that answers that question. That's the the final question. That's the final question. So any other questions? Do you want to give people a moment or two for a further question? Yeah. We can certainly give people a moment or two to submit further questions. So we'll just wait for those to come in for for a minute or two. Any bankers who wanna ask questions of what we're up to? Investors? Okay. I don't think there are any other questions. So should we bring the presentation to a close? Yes, Ben. Thank you very much for that. I think you've addressed all those questions from investors. And, of course, the company will review all questions day and will publish those responses on the Investor Meet company platform.

26:33 But just before redirecting investors to provide you with their feedback, which you know is particularly important to the company, Ben, can I just ask you for a few closing comments? Well, I mean, I haven't got anything particularly to say beyond what I've already said. But other than, you know, the company is a secure little company. We've now managed this company through at least three significant economic setbacks. We keep going. We're well managed. We're nimble. We can change direction when we have to. We've got very good people across the board in Poland and The United Kingdom. And you could do a lot worse than buy shares in FIRST PROPERTY GROUP at, I don't know, what is the discount now, sort of 40 It's 40%.

27:18 40%. Yeah. So there you go. Net asset value of 47p excludes any value whatsoever for the fund management business, which has got 500,000,000 of third party funds under management, FCA regulated, with a good track record. Clients have had good experiences. There's no reason why we can't grow that fund management business as well. Easy money. So embedded opportunities, Ben's already mentioned about the capital value growth that will come from letting up the property in Gudinia. That property in Gudinia has not been revalued this year. We're still carrying it in the final results here at £16,000,000 the price it was marked down to last year when we agreed that The value at which the debt was marked down.

28:04 At which the debt was marked down. And since then, we've let 20% of that building as per RNS last September. And as Ben mentioned, that market in Gdynia for offices is improving because the vacancy rate is low, the economy is still growing, GDP in Poland is about 4% this year. Ben, Jeremy, thank you very much for that and thank you very much for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few minutes 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, and good morning to you all.