First Property Group (LSE:FPO) — Preliminary results for the year ended 31 March 2020

0:03 Good morning, ladies and gentlemen, and welcome to the FIRST PROPERTY GROUP PLC preliminary results for the year ended 03/31/2020. Before I begin, we would like to submit the following poll. For your information throughout this presentation, investors will be in listen only mode. Questions can be submitted at any time via the Q and A tab situated in the right hand corner of your screen. Simply type your question for management to review 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 submitted today and publish responses where it's

0:35 appropriate to do so. These will be available via your Investor Me company dashboard. Finally, I'd like to remind you that the presentation is being recorded. I'd now like to hand you over to Ben Habib, CEO George Dignity, CFO and Jeremy Barker, Head of Business Development for FIRST PROPERTY GROUP PLC. Gentlemen?

0:55 Good morning, everyone, and thank you very much for attending the presentation on our annual results for the year to 03/31/2020. For those of you who are familiar with the proceedings that normally take place at this meeting, we have prepared a presentation, which I think you're able to see on your computers.

1:20 And that runs through the current position of the group, including the results together with some forward looking statements on the markets in which we operate. And of course, then we finish up with questions and answers. I've joined here with at this meeting by George Digby, our Finance Director. This is George's last time you'll be with us. George, you're retiring? It is indeed. I'm also joined by Jeremy Barkis, who is our Development Director. And I'm going to hand over to Jeremy to do the presentation. And then George and I will be here for questions at the end. Over to you, Jeremy. Thank you, Ben. Good morning, everybody. I think we'll start by just flipping straight to Page four, which is the group structure just to remind you of how operate.

2:21 We've got two divisions, we've got a fund management division and then we've got our own balance sheet. The fund management division as you can see had CHF567 million of third party funds under management at the March 31 and that's invested in 12 funds across The United Kingdom, Poland and Romania. We'll go into a bit more detail later. The Group Properties division has got two sides to it. There are eight properties that we own directly and then we own shares in 10 of the 12 funds that are managed by our fund management division. At the moment, the bulk of our earnings come from the group properties division, but it is our aim to grow the fund management division so that in future, the bulk of our earnings come from our fund management division, which would accelerate the process by which the company or the stock market might rate the company on a forward earnings multiple, whereas currently we're actually trading at a discount to our net assets.

3:20 So moving to the highlights, you will have seen and I'm now going to page actually I don't need to tell you what page number it is because you can see from this presentation. So the key event really for the whole year was the sale of Hamedsiego 8 or CH8 as we call it. This was our largest directly owned property. We sold it for CHF44 million releasing CHF17 million of cash. And so we are now getting into this expected recession with group cash of £23,600,000 as at yesterday. We think there will be opportunities, investment opportunities that will emerge and we'll be very well placed to take advantage of those in partnership with third party with clients.

4:12 We've had no need to draw on any of the government support measures for COVID-nineteen. We've maintained our final dividend. Fund management performance remains excellent. We're still ranked number one against the MSCI benchmark, something that we've maintained for fourteen years now. And our weighted average fund unexpired fund management contract is still around five years. Turning to the financial highlights, profit before tax was down. There are we've shown you a pro form a figure there of 250,000 last year as opposed to the statutory figure of 8,310,000 last year. The reason why we've calculated the pro form a figure which shows that our profits are down 24% roughly against the pro form a figure is that halfway through, just over halfway through last year, we sold shares in a fund that we used to be the majority shareholder of to reduce us to a 40% shareholding.

5:17 And the deconsolidation and that triggered the deconsolidation of that fund from our earnings. And so therefore, if you account for last year's earnings on a like for like basis for this year, then we earned 7,250,000 last year. But still nonetheless, our earnings were down this year by 24% odd. The main reason is the reduction in performance fees that we earned this year. But there were also various other one offs last year that were not repeated this year. And the valuations as at the March 31 after the onset of the coronavirus crisis were impacted. We had a lower tax charge in the year. They say our earnings per share was down by 11.5%, so less obviously than the profit before tax.

6:07 And given the outlook, as I've already mentioned, the directors are recommending that we maintain the final dividend at 1.22p per share. Turning to the balance sheet, the net debt that we show there is actually prior to the sale of CH8. Having repaid that bank debt, the net debt is now CHF42 million. Gearing ratio is unchanged around 50% market value. And it's our accounting policy to hold our various investments, whether they be direct properties or our shares in our funds at the lower of their market value or their book value. And so sorry. That sorry. Or or their cost.

6:54 And so that explains the difference between our net assets per share of 43p and our adjusted net assets per share, which is where you calculated at market value of 55p. Again, here we show the cash balance prior to the completion of CH8, but post the completion, as I've already mentioned, we've got 23,600,000 of cash ready to go in to or face the next few months as the coronavirus crisis unfolds. We're very proud of this next page, which shows our progressive NAV growth over the last few years and we're showing the cash there at £23,600,000 which is 21.4p per share.

7:43 This NAV bridge explains the movement in our net asset value over the last year. And the main explanation is that down with movement in the value of our properties of $5,820,000 there. And we'll go into further detail on that when we get to the group properties section. The dividend, another slide we're very proud of, maintained or increased every year since 2003. This year is no exception. So turning to the fund management division. We've got GBP $567,000,000 of third party funds under management. And as I mentioned earlier, there are 12 funds. They've got a waste average fund management contract term of five years.

8:29 The fee income from those 12 funds, excluding performance fees, is running at about 3,130,000 on an annualized basis. That is actually a couple of $100 down from the same period last year. The explanation being that we've sold two properties for clients during the year and that the March valuations upon which the fund management fees are calculated were down unsurprisingly because of the coronavirus crisis. But we've maintained our excellent track record and we are also authorized to raise funds above CHF500 million. We are now full scope AIFMD approved fund manager. As I mentioned earlier, reduction in the contribution to profits this year is mainly a result of lower performance fees.

9:24 And the performance fees, you can see in this next graph the split between the recurring fund management fees, and I've just mentioned that we're at 3,130,000 on an annualized basis at the moment. So that's the orange bit of the bar. And then the gray bit is the variable factor, which are performance fees. These come from this we have one fund which we manage, where we do not charge a fee based upon a percentage of the assets under management, but instead we charge a fee based on the profits of the fund. And that's the FPOP officers fund. It's our

10:07 biggest fund about CHF160 million of assets under management. CHF143 million, CHF143 million of assets under management. And that is I give fact, I slide, go back to slide, you can see now going forward to slide, you can see how we calculate the fees on that fund. So if the IRR is between 07.5% per annum, we're entitled to take 10% of the profits of the fund. If the IRR is above 7.5% per annum, we're entitled to take 25% of the profits of the fund up to 15% IRR, dropping to 20% of the profits of the fund if the IRR exceeds 15%.

10:57 So what we're doing is recognizing only bit between 07.5% per annum, which is up to 10% of profits. So that's how we calculate that our expected run rate in the next year is about $820,000 from that fund, as you can see in the right hand column in the slide here. This next slide shows the split of our assets. As you can see, most of our third party funds is invested in The UK. That's unsurprising given that most of our clients are UK based clients. Broadly speaking, pension fund clients are invested in The UK and family office and private clients are invested or more predisposed to invest in Poland. But not exclusively, we do have pension funds and endowments invested with us in Poland as well.

11:59 And that slide on the right shows the split between the various funds. And this is just another way of looking at the various sectors. You can see that our exposure to shopping centers is only 10% of the total.

12:20 And I've already run through how we earn our fees and then in the right hand column is a selection of our clients. Turning to the group properties section, as I mentioned earlier, there are two contributors within group properties. There's the eight properties that we own directly ourselves and then there's the shares in 10 of the 12 funds that we that are managed by our fund management division. And as I mentioned earlier, the big highlight of the year was the sale of our Minshiego eight, which generated profit of CHF1.5 million. The key thing there was the release of CHF17 million in cash, leading us extremely well placed to navigate the next the expected recession. Looking at the bar chart on this slide, you'll notice that the orange segment has disappeared in 2020.

13:16 And the reason for that, as I mentioned earlier, in the last financial year, we sold down our shares or some of our shares in FPOP opportunities that turned us from being a majority shareholder and under accounting rules, majority shareholders are required to consolidate the fund as if they own the whole fund to a minority shareholder, a 40% shareholder, enabling us to account for those shares as an associate. As a result, our revenue has dropped because we're no longer accounted for all the rent as if it's our own rent and we're literally just accounting for the profits. And the pie chart on the right shows you the capital employed to generate those returns.

14:02 Although, however, that is a balance sheet that's as at now whereas on the left is obviously backwards looking. So we have more capital employed in the past in the directly owned properties because we have nine, not eight to generate those returns.

14:24 So this is the property that we sold in Warsaw. I've mentioned that everything there, it was a fantastic investment. We bought it in December 2014 and we've earned a 63% IRR from it over that period.

14:47 So this shows you the split of our remaining eight properties. And of the 78% of them are in the two office properties in Poland. One in Gdynia, which is up on the Baltic Coast, Old Gdansk or near Gdansk, City area. And another one is Blue Tower in Warsaw. And again, you can see that our exposure to retail is limited 11%. And actually of that 11%, it would be more accurate to describe it as supermarkets. So very resilient retail. So there's the two office buildings, 78 by value of our eight group properties. And these are the other six buildings, 22% by value.

15:39 Our tenant top 10 tenants associated with those eight properties is on this page. As you can see, Asiko is the largest and I'll come to that. Asiko is the tenant in the building in Gdynia. So the eight group properties are valued at 47 or have got a book value of 47,000,000. Our independent third party value has valued them at 56,000,000. They've got 42,000,000 of debt secured against them giving an LTV of market value of around 75%, a level that we're very comfortable with given the very high rates of cash generation coming off those and very low interest rates paid.

16:21 To give you an idea, finance costs in 2020 were GBP 1,340,000 actually going forwards because obviously that included CH8. In 2021, finance costs are expected to be just over GBP 700,000.

16:38 And we hedge our exposure to rising interest rates by interest by the use of interest rate caps and fixes and 47% of our interest rates was fixed at the year end. As you can see, we've got a very low borrowing cost of 1.83%.

16:56 The property in Gdynia, which makes up 70% of our tenant exposure and 45% the eight by value of the eight properties has got a lease due to expire later this year. This is something that we've been preparing for some time, hence our depreciation by EUR 1,800,000 or €2,000,000 over the last several years. Per annum. Per annum. Yeah. And we are in discussions with a SECO and other prospective tenants about releasing that building. And obviously, we're also in discussion with the bank about renewing the loan.

17:44 CHA sorry, not CHA. Blue Tower is our other our next largest property 32% by value of the eight properties, around CHF20 million generating about just shy of CHF2 million a year in net operating income. So you can see very high yielding property.

18:03 Turning to our associates and investments, I mentioned that we have shares in 10 of the 12 funds that we manage. Seven of these are accounted for as associates, which are the ones in the first segment of that column and the balance are accounted for as investments, the differentiating factor being to qualify for an associate you need sort of knocking on the door of 20% of the shares to be accounted for as an associate.

18:30 The contribution was slightly down in the associates section and the reason for that is mainly related to an FPOP Phoenix Limited, which is the business park in Krakow that we bought from the administrator a couple of years ago, where there is ongoing litigation. The same period last year benefited from an exceptional item of the resolution of some litigation resulting in the write back of about 1,000,000 of or the reversal of a provision that we've made in case we lost that litigation.

19:19 So the contribution from Phoenix last year was about 1,000,000 whereas this year fell into a slight loss due to the non repeat of that. That property is still in the turnaround phase. We're still investing in it, but we expect to make good returns in due course. They're probably not in the current year. This year, we're still midway through our turnaround efforts there. And this slide just goes into a bit more detail

19:57 of that. The other reason for the reduction in contribution from the associates this year was that last year when we deconsolidated from the group accounts our shareholding in FPOP opportunities, We were required to bring our shareholding into the accounts at its market value which resulted last year in quite a large write up into the accounts. Compensated for last year by some extra depreciation in the Gdynia property taking it down to its current value at around €28,800,000

20:43 So but this year, given that FPO opportunities fund has got two shopping centers accounting for about 40% of the value of the fund.

21:01 There was a hit to the values at March 31 and so that is why there is a $659 reduction in the value of our shareholding. So turning to the markets and looking ahead. Poland went into this crisis with very low government debt as a percentage of its GDP. It's about 48% or 49% of GDP, which meant that the supportive measures that are introduced to combat the crisis are easily affordable. And it's predicted by the World Bank and the EU Commission to be one of only four countries in the EU block of 27 member states that will have regained 2019 levels of economic productivity by the end of twenty twenty one.

22:06 It's very difficult to make comments on the commercial property market at the moment. Prior to heading into the crisis, turnover in the commercial property market was at an all time high at around €7,000,000,000 in 2019.

22:29 But they shut but in Poland as part of their efforts to combat the coronavirus, they shut shopping centers between the March 14 and the May 4 during which period tenants were not required to pay rent. And if following the resumption of trading on the May 4, those tenants extended their leases by the period of the closure plus six months, then they are not liable to pay that rent. So the owners of shopping centers in Poland are taking a hit for that period, partially compensated for by longer leases. We expect that Poland will be the jurisdiction in which we find the most attractive opportunities going forwards.

23:23 Romania's similar low government debt as a percentage of GDP. And similarly, it's expected to be a quick or to recover quicker than most other EU countries. Its GDP have been growing at about 4% per annum prior to the crisis in Poland or even 5% actually, I think in 2018, Poland have been growing at 3% or 4%.

23:50 We would like to invest more in Romania. It's difficult to find the right quality products at the right price. It's a much smaller market, but the annual turnover is only around about EUR1 billion a year compared to EUR7 billion in Poland.

24:07 One thing that both countries suffer from is because their economies have been growing so fast for so long, there is a lot of commercial property development going on so that there is and broadly speaking, or new supply is meeting new demand. And that's something that one always has to be careful of when navigating in those markets. But one thing that we've something that we've been very successful in navigating by making sure the price at which we go in compensates for

24:41 subsequent rents or the absence of rental growth. Both countries have not exhibited rental growth over the last few years because of this constant increase in supply. However, at some the cost of construction is going up and it would make sense at some point for the gap, which has been growing between GDP and the cost of construction to narrow sorry, GDP and the cost of commercial property to

25:09 narrow and maybe the increase in cost of construction will push it up. Turning to The UK, The UK is expected to be one of the most affected countries by the coronavirus. That figure there of the economy shrinking by around 14%, I think, is actually old data now. There's new data emerging all the time. But interest rates are likely to remain low for a very long time, which should be supportive to capital values generally. And finally, turning to the outlook, why invest in FIRST PROPERTY GROUP PLC? Well, there's a multitude of reasons that we can think of. It's an experienced nimble management team. You can tell that by our excellent track record.

25:55 Shareholders will have benefited from a 22.7% growth in the adjusted net assets, including dividends paid over the past ten years. We retained our number one ranking against the MSCI benchmark in Central Europe over the last fourteen years. But basically ever since we've been there, we've got very reliable earnings from management contracts of five years unexpired and the contracted rental income from the eight group properties that we own and shares in our funds. We're a cash generative business. We've got a progressive dividend policy. We've only ever increased it or maintained it since 2003, it's well covered 2.7 times at the moment.

26:40 As far as growth is concerned, well, the leverage in the eight group properties that we own and the Polish and Romanian funds mean that the reduction in debt have resulted basically in in built net asset growth as we move capital repayments of the debt. All our clients have had good fund management experiences. We've got over £20,000,000 of cash available as I've already mentioned on several occasions to fund future deals. We should because the clients have had good experiences, they are well disposed to us. We do expect to be able to partner with clients to leverage that 20,000,000 of cash into multiple of that.

27:28 We're operationally geared, we've got plenty of capacity to grow the business without needing to take on significant new staff. And we're we offer a good hedge operations in The UK, Poland, and Romania. Poland and Romania in particular growing well. All countries are performing fine. And this mix of jurisdictions provides a good hedge. I think I'll leave you to scroll through the appendix. The copy of this should be on our website. Let's turn it over to questions. Thank you, Jeremy. Please continue to submit your questions using the Q and A tab situated on the top right hand corner of your screen. Just while the company take a few moments to review those investor questions submitted, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q and A, will be accessible via your Investor Meet company dashboard on the platform.

28:25 Lastly, before I hand back to the FIRST PROPERTY team, I'd like to remind you that your feedback is important to the company. Immediately after the presentation has ended, you'll be redirected for the opportunity to provide feedback in order that the company can better understand your views and expectations. Guys, I know I haven't given you a great deal of time to review some of the questions that we've had come in and also the pre submitted questions that we've had. Those that you can run through, if you could please read out the questions just before giving your answers, that'd be great. If I could hand back to you, please. Jeremy, if I could just hand back for the Q and A, please. Are you handing back to us? Yes, I do apologize. Sorry, Ben. I know I haven't given you a huge amount of time to review those that have come in, but obviously we've had But some submitted as if you wouldn't mind just reading them out for investors answer where So the first question we've got is do we expect spread sales during this investment climate? The answer is yes.

29:30 I think that we're going to have material adverse economic impact from the virus, particularly in The United Kingdom to a lesser extent in Poland. And that will present a buying opportunity. I suspect the buying opportunity won't be that bigger window because all the QE and monetary stimulus is going to buoy asset prices. So there's going to be a kind of point in the cycle, which I suspect, I mean, who knows, but I suspect will be in the fourth quarter this year, first quarter next year when some buying opportunities will come up. And we are, of course, looking at all markets to make sure that we're aware of them as when they do come up. Second question is what was the rent we received from a SECO during this period? Well, during the year, we received the full rent from a SECO, which is about GBP 4,800,000 worth of rent, but we depreciate property by £1,750,000,000 in a year. So the net effect of a SECO in our results is about 3,000,000 contribution roughly, which we collect in cash. So the return from a SECO is a cash return, if you like.

30:44 But just to finish up on a SECO, you haven't asked the question, but the key thing to appreciate there is that the value of property will match the value of the debt by the time we get to the end of the financing on it. So there will be nil equity of the groups tied up in a SECO giving us very good negotiating hand with the bank where we need to renegotiate the position. Next question was given the balance sheet strength, will the company commit to a longer term dividend policy? Well, I think if you look back at the history of our dividend payment, we've paid dividends throughout the credit crunch. We never cut a dividend. We never had to go to shareholders to raise money. And going into this pandemic, we haven't had to borrow any money from the bank. We haven't had to furlough any staff.

31:33 We've kept going forward fulfilling not just our duty to our shareholders, but our civic obligation by the country and the economic contribution we make to it. And I can see no circumstances given our twenty three point five million pounds cash holding that we would cut our dividend. We expect to maintain it. Something dramatic would have to go wrong for us to cut it. I think those are all the questions so far. I think you had a couple of pre submitted questions. I don't know if there's any of those or would you want to address those? Yeah. Yeah. Yeah. So what some pre submitted quick questions. The investments you've made in Exynius Park are impressive. Prior to COVID-nineteen, have you seen an increase in interest from potential tenants?

32:23 Well, we've been going through a position a period of repositioning that property. We've had lots of inquiries from tenants. But frankly, whatever happened pre COVID is irrelevant now. What really matters is what happens to Poland and Krakow in particular as far as this property is concerned post COVID. I think actually our Business Park should benefit from the pandemic because it offers up much more spacious accommodation and therefore accommodation with social distancing can more easily take place than the more crowded and very dense office developments in the center of Krakow. So I'm hopeful that it's in this part will benefit from the pandemic, but there are far too many variables in play for anyone to be able to make any kind of definitive forecast.

33:16 Another pre submitted question was Romania appears to be a very small part of your portfolio. Is your longer term ambition to grow your exposure to that market or could you see yourself exiting the country? Well, we wish to increase our investments in Romania. The market should offer up good opportunities, but it's a very small market, only about EUR 1,000,000,000 of property trade each year there compared to EUR 7,000,000,000 a year in Poland and compared to 100,000,000,000 a year in The United Kingdom. So it gives you a feel for how small that market is and finding properties is difficult. If we end up selling all our properties there, I wouldn't be surprised. But if we end up buying stuff, wouldn't be surprised. And that's partly a function of the fact that we're opportunistic buyers and sellers of property.

34:05 But we're looking and if we can find the right thing, we will buy it. Can you please comment on the current property dynamics in respect of each of Poland and Romania? Well, I think everything is up in the air because of this pandemic. I think Poland and Romania, as Jeremy explained, should do better than The UK. They have done better than The UK, by the way, for the last, I think, fifteen years. And I think they will continue to do better than The UK. I don't want to get into the handling of the economy and the crisis by our government, but I'm happy to take questions on that if anyone particularly wants my view. But I the Polish and the remaining governments have handled it better than the UK government has. Can you please comment on how COVID has impacted the macroeconomic backdrop in Egypt, Poland and Romania?

34:55 Well, I think we've answered this question already. Can you please comment on how you manage FX risk? Well, we do not manage FX risk. We take the view that the costs of management and the risks associated with hedging it actually outweigh the benefit. And we have a natural hedge anyway in that we have all our euro denominated assets leveraged in euro denominated debt. So it's only the equity element that bulbs up and down. And the rate of return we get on our equity investment is so high that actually the minor FX movements don't really make a huge impact to our annual profits generated from rent. They may impact values that we carry the properties at in our books to a greater extent.

35:46 But just to remind you, we hold properties at the lower of cost or value. So we tend not to have to make big adjustments for FX movements anyway. So the answer is we don't hedge our FX risk. We sweep surplus cash back. Yes. And to the extent that we earn profits there, we convert it to sterling and move it back to The UK as soon as practicably possible. Is there any scope to amalgamate funds? And if so, would that result in meaningful administrative cost savings? There are two reasons we don't or there are a number of reasons actually we don't amalgamate funds. The first is they have different investment aims. The second is they have different shareholders. And the third is that often there are large costs particularly tax costs associated with merging them. We have looked at merging the odd fund in the past where some of those conflicting issues haven't been as big a problem, but invariably the tax implications have come to bring the process to a halt.

36:49 Next question, your ownership interest across your associates and other investments appears to run from 1% up to 41%, if I understand this correctly. Given the choice, would you preference to be to use capital to increase your stake in these funds? Well, I think or such new ones. I think that going forward, where we'd like to be is a shareholding of around 20 to 25% in any given fund, and that's what we'll be targeting. We may or may not increase our percentage interest in existing funds. It depends on what other investors in those funds wish to do if some for example, if someone to stay at the expiry of the life of a fund and others don't, then we may step in and buy out the others that don't want to remain invested.

37:36 But that's again, like everything we do is based on the opportunity at the time. So we'll just keep an eye on that. But one thing that is worth mentioning is that the CHF23 million that we've got in cash, I think we would be very comfortable investing up to about CHF20 million of that in commercial property. And given our target of owning 20% of each fund that would allow us to buy GBP100 million worth of equity investments, but we do borrow when we buy properties. So with GBP100 million of equity, could probably buy about GBP300 million of assets. So the the the the 23,000,000 of free cash we've got actually does give us the ability to dramatically increase the the the value of assets that the group manages and owns.

38:29 At the time of writing, your shares are trading at a material discount to NAV. Have you given any consideration to further share buybacks given how accretive to NAV and EPS this will be? Well, we have bought shares in the past. We will consider buying shares again in the future if the opportunity arises. But what we will not do is set out our stall in advance and tell everyone what it is our share buyback process is because in doing so, we would obviate our ability to buy shares cost effectively. Actually, don't understand why any management team sets out in advance their approach to buying in their shares. It seems to me quite a dark thing to do. So those are the questions that were put in, in advance. Further questions on the screen, would you consider share buybacks given just answer that one.

39:19 Another question from Sebastian, will you be buying shares in again this year given the discount from now? Well, I kind of answered that too. If the share price slips, we will look at it. Ben, can I say thank you very much for going into such great detail for those questions, and thank you for everybody who has submitted them? Thank you, Jeremy. Thank you, Ben. Thank you, George, for updating investors today as part of your roadshow. Could I ask investors not to close the session as you will now be automatically redirected for your opportunity to provide feedback. If you access the meeting through our website, the feedback page will appear. If you've accessed via the link we sent you in an email, simply just log in and submit your feedback there. Many thanks again for attending today's presentation. That concludes today's event. Thank you all.

40:17 One hour. One hour. It's quite noisy. It wasn't. That's forty minutes.