First Property Group plc (FPO.L) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the First Property Group plc investor presentation for the preliminary results for the 12 months ended 31st of March 2021. [Operator Instructions] 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 appropriate to do so. These will be available via your Investor Meet company dashboard, and you'll be notified once they're ready for your review. I'd also like to remind you that this presentation is being recorded. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Ben Habib, CEO; Laura James, CFO; and Jeremy Barkes, Director of Business Development. Ben, good morning.

Good morning. Am I live?

Yes, you are, sir.

Okay. Great. Well, thank you very much, everyone, for coming to our results presentation for the year to 31st of March 2021, which has been, I think, the most extraordinary year for all of us and a particularly bad year for any businesses that have required the continued operation of a physical world in order to trade. And of course, property is a particularly physical business. And if governments keep shutting you down and neutering your ability to collect rent, you're going to have a pretty tough time. And that is what we've had. I think for over a year now, we've had varying levels of lockdown, some absolutely and others in that sort of tiered system that the government tried for a few months. And we still are not fully back on our feet and trading openly as an economy. And like every other property company, First Property Group has not been able to navigate this enormously difficult landscape without taking hits on the way. So it is very disappointing to be disclosing the results that we're disclosing this morning. But the gravity of the economic fallout is unavoidable. Funny enough, the numbers probably paint the picture worse than it is, which I'll explain as I go through them. But undoubtedly, we've taken knocks in a way that we've never taken before. People said of 2008 that it was the worst recession since 1929. Well, I can tell you from a property perspective that the effects of lockdown over the last 12 months put 2008 in the shade as far as economic and market adversity is concerned. So with that backdrop, let me just run you through the key figures. I'm going to start on Slide 5. And of course, the most headline-grabbing figure is that we've fallen into loss, a GBP 5 million loss for the year to 31st of March 2021 versus a GBP 5.5 million profit last year. So that's a GBP 10 million swing, most of which can be explained by the write-down value of a property we own in Gdynia. And anomalously, I don't think we should have really been required by our auditors to write it down. We had a long debate with the auditors. Because actually, over the course of our investment in that property, we were depreciating it by about GBP 2 million a year in order to ensure that when the occupational lease to the tenant expired, the investment value of that property in our books matched the debt level so that one canceled the other out. And we had effectively a net asset value of 0 attributed to that property in our books. But when push came to shove, and IFRS is an ever-evolving difficult accounting system, they required us to take onboard the deficit below the value of the debt, even though the debt is nonrecourse. So GBP 7 million of that swing was because of an impairment in the value of Gdynia, which is an entirely noncash item. And in fact, the impact from Gdynia is bigger than that because, as I mentioned, we were depreciating it at about GBP 2 million a year. And I think for the year to 31st of March 2021, we depreciated it by about GBP 1.33 million, didn't we?

GBP 1.33 million.

Yes, GBP 1.33 million as well. So the hit on Gdynia is, when you take also into account lost income, is pushing GBP 10 million. And that's virtually the entire swing. But we've taken hits elsewhere as well. And the biggest hits have been obviously in the retail sector, where supermarkets and other essential traders have been the only things that have been allowed to trade. The shopping centers, like the one we own in Ostrowiec or the one that we've got a minority interest in in Corso, were effectively shut down. So we've taken big hits there. We had to take a write-down in value of our investment in FOP by GBP 800,000. We had to take a write-down in our investment in Corso. We've taken write-downs in values across all our U.K. properties. And it's really a story of just constant hits. And any one of these, we could have probably managed quite easily. But when you just get this accumulation of impact, there's really very little that we could have done as management. I can say, however, that the group is in still very good health. And that's primarily because we sold CH8, our largest investment, until we sold it in Warsaw last year, which we sold for EUR 44 million. And that generated GBP 17 million of cash. So we've actually come through the pandemic-induced lockdowns with a very strong balance sheet. And that has underpinned the group. And if you look at our net debt figure, which I think best reflects the result of that sale, it's dropped from GBP 57 million last year to GBP 18 million this year. Cash reserves up from GBP 7 million to GBP 16 million. And so even though we've had this profit setback, actually I think the group is now in a very good position to take advantage of deals as they arise going forward and also obviously to lease up and to put right some of the difficulties that we've experienced during the lockdown. So I think we will see a natural recovery -- I'm slightly jumping ahead of the presentation, but we will see a natural recovery in the group's earnings over the next year or 3. But it's going to be a long slog back. I don't want shareholders to think we're just going to bounce back from this instantly. I know the economy seems to be bouncing back quite strongly. I think a lot of that is a false dawn, and we're going to have greater impact on the economy when the furlough scheme ends. But certainly, the recovery for First Property Group is going to take 2 or 3 years to come back from this lockdown. And it's because of this uncertainty, because of the prolonged period of recovery that we suspect we're going to have to go through that we have canceled the final dividend. It's something we really didn't want to do, but we had no option to do it. So that more or less covers Page 5. Page 6 is our balance sheet. And I've kind of hit the big figures there already. And the takeaway is a strengthened balance sheet as a result of the sale of CH8, cash up, debt down, obviously value of investments down as well because of the sale of CH8 but also because of the write-downs that we've taken in Gdynia and our other investments in associates and so on. So we've got a NAV of 42.8p on an adjusted basis. Now as far as Gdynia is concerned, after the year-end, we did a deal with the bank, whereby the bank wrote down its debt from EUR 25 million to EUR 16 million. So that's a EUR 9 million benefit that will come back to the group in this year's numbers. So having forced us to take the hit last year, actually the profit for the year to 31st of March 2022 will benefit from that write-back of the deal we did with the bank, where it took a write-down of EUR 9 million in the value of its debt. And that takes me neatly on to Slide 7. I've explained how we've had to write down the value of Gdynia and how we're going to get a write-back as a result of the deal we've done. The other area that we've been bleeding as it were is on the guarantee that we gave the buyer of CH8 on the vacant space in that property when it was sold. That costs us about GBP 1 million a year. And we had thought that we'd be pretty much out of it by now when we entered into that guarantee. But of course, the lockdowns has made it impossible to lease up that space. It is encouraging that we've had quite a lot of demand for that space in the last couple of months, mostly from government tenants in Poland. And it's the public sector that's doing well not just in the United Kingdom but also in Europe, and Poland is no exception. And so perhaps it's not surprising that demand is from the public sector. But it is encouraging that we've got this demand. And I think if the demand were to follow through, and that's a big if, by the way, because no deal is a deal until it's signed, but if that demand follows through, then we should be able to end that ongoing GBP 1 million a year liability under the guarantee during the course of this year. But again, I'm not betting on it. Demand, as I say, is only demand, it's not actually signed up. So we travel in hope, but I can't give you any cast-iron assurances on leasing up that space during the course of this year. And then of course, we've taken a hit, as I mentioned, on our value of our investment in FOP of about GBP 800,000 as a result of various different things going on in FOP, mostly at the retail centers that it owns, which have taken hits again during the course of the pandemic. So just turning to the next page, which reflects the NAV of the group, we've had pretty much a steadily growing NAV of the company over the last few years but quite a big reduction now as a result of the impact from last year that I've already talked you through. Page 9 gives you a NAV bridge, which may assist in trying to reconcile last year's NAV of 55p a share with this year's NAV of 42.8p. It basically tracks the various steps required to get from one figure to the next. And I don't think I need to go through it. You can easily have a look and see where the various impacts have been, mostly impact one small benefit from FX gains but not a lot. FX is a bit weird because we had a stronger sterling at the end of the year, which didn't help us when it comes to valuing our euro-denominated properties. But during the course of the year, we had a weaker sterling on average. And that flattered income. But of course, income was down during the year because of the pandemic-induced lockdowns. So FX was a rather peculiar situation for the group last year. The next slide was a slide that I used to present with great pride every time I came before shareholders because it showed a steadily increasing dividend payment by the group ever since we first started paying a dividend. And I used to point to it as evidence of our management skill and our ability to navigate, in particular the last credit crunch, in difficult periods. Since sadly, that graph has now taken a very negative turn as a result of our canceling the final dividend. Our view -- I don't want to hoist the group into any kind of forecast, which it comes to regret. But I think our view will be -- rather than growing that dividend back in a steady fashion, our view will be to reinstate it at the appropriate juncture. So we are cash-rich. We should do good deals. We've got a history of doing good deals. We've got some good deals in the pipeline. We should grow back some of the earnings we've lost as a result of the pandemic-induced lockdown. And there will come a moment I think, where we, as management, will feel confident to reinstate that dividend as opposed to move it up in increments. But the future is uncertain. And I can't make any promises naturally which I then regret and can't keep. And that really covers the presentation. We are a nimble management team. We're a small company. We can reposition ourselves as we need to. Nothing, I think, could have protected any property company from the effects of these lockdowns over the last year. We've taken our hit, but we've come through it well. We've got a strong balance sheet. And now really, it depends on the speed of our ability to relet vacant space and to do new deals as the market produces opportunities and we can take advantage of them. And that's really it. And I think at this point, it would be appropriate to open up to questions.

Ben, thank you very much indeed for the presentation. [Operator Instructions] Ben, may I ask just if you can just click on the Q&A tab just to the right of the screen, you'll see those questions coming through from investors, if I may just ask you to read those out where appropriate to do so and respond?

I can't actually see any questions on my screen.

If you could just click to the -- just click to the right and just if you can go up to the top, if you could just read out the question, Ben, where appropriate to do so and then please respond, that would be great.

I was quite surprised by the change of tone between the interim and these preliminary full year results. Do you feel you should have given investors more of a warning of the difficult circumstances in the last results in the company presentation. It was very, very difficult. When we announced our interim results, at the time, we had signed -- we were close to signing up Asseco on 6,000 square meters of space in the Gdynia property. -- that would have allowed us to elegantly go through the Gdynia repositioning with the majority of the space in that building leased up before the lease expired. And what happened there was the bank dragged its heels. It was being difficult with Asseco. And because Asseco was working from home, it enabled the management to just rip up the agreement that they had reached with us, they hadn't signed it, but the agreement that we were about to sign. It was all documented. And so there was a marked change as a result of that one event in the group's position. And then we had this insistent -- insistence by the auditors to recognize a liability actually below the value of the nonrecourse debt, which made no sense to me and still makes no sense to me, by the way. But there's a lot about IFRS. Maybe that's one of the things we can change now that we've left the European Union. We can ditch IFRS and go to U.K. GAAP or something. But that was naturally a big setback. But we've had -- since we announced the interims, we've had another 4 months of lockdown. And there's a limit to how much you can circumnavigate that kind of event. And if you look at the results of British Land, for example, they posted a GBP 2 billion loss. That is a very significant loss. And in a sense, they're the bellwether, aren't they, of the property market. So we've done really well versus some of our peer group, not that I would put British Land in, I wouldn't deign to put myself in such an esteemed category. But they've done much worse than we have. Are you seeing opportunities to deploy funds? Or do you think the timing is not yet right? We are seeing opportunities to deploy money. And we're working on a number of deals. Funny enough, QE, the QE, I think, together with the benefit of the furlough scheme, is allowing perhaps a false dawn, particularly in the U.K. market. We're seeing asset values now recovering. Anecdotally, we're seeing asset values recovering in the U.K. And I think it's coming probably a little too early because the impact -- there's still 4 million people on furlough. And when that scheme ends, unless the government replaces it with something else, we're going to see a rise in unemployment. We're going to see quite a lot of distress. Now in all likelihood, the government will replace it with something else. They'll call it some other scheme and unemployment figures only pick up people who are looking for jobs. And so that figure, too, may be fudged. And it might be that QE just buoys asset values through, irrespective of what happens to income levels. But we are seeing deals. We are working on a couple in Poland. And as I say, we should have a natural recovery anyway as we lease up vacant space in Gdynia, we lease up space in Kraków Business Park, we lease up some of the vacant space that we've got in our shopping centers and when we see a recovery in rent in our shopping centers as well because we've had to give concessions to tenants to get them through the lockdown. So we should see a natural recovery as well as new deals. All right. Next question, directors' remuneration for year ended 31st of March 2020 was GBP 1.657 million, considerable likely. Has this been reduced for the current year to reflect adverse conditions affecting the company? Yes, it has. It's been cut back dramatically. Is there plans to adapt the remuneration for the difficult times you believe are coming? Well, we already have adapted our remuneration. There were no bonuses paid in the group last year for the year to 31st of March 2021. And bonuses, which have always been linked to performance, will be linked to performance. And if we have another bad year, there'll be no bonuses again. We live and breathe the capitalist system. Have you had to put cash into Gdynia post year-end? Yes. As I said in the results, we have put cash into Gdynia. So the write-down for the bank was EUR 25 million down to EUR 16 million. We paid EUR 4 million towards that EUR 16 million. So the net debt remaining to be paid back to the bank is EUR 12 million, which is due in June 2024. That is interest-free and it is not being amortized. So it's EUR 12 million -- it's effectively a deferred payment of EUR 12 million due in June 2024. And during the time between now and 2024, we need to lease it up, refinance it and either exit the position or extract our cash. That's the plan with Gdynia. Can you say a bit more about current void levels in group properties and the levels of interest in the space, prospects for reducing these? Well, the big areas of voids are in Gdynia, where we've got about 13,000 square meters vacant. And the other big area is in Kraków Business Park, where we've got about 25,000 square meters vacant. And both properties have been, as I've mentioned, adversely impacted by the lockdown. We've also got 4,000 square meters of vacant space at CH8, for which we're still responsible under the guarantee that I described. And letting up all this space will make a dramatic difference to the earnings of the group. If we were to let it all up in the way that we expect, we would see group profits float back to around GBP 3 million a year without doing any new deals. But that won't happen within a year. That is going to take more than a year, given where we are. But that's the nature of what we're looking at. I believe I have missed the details, but can you explain a bit more around the loan write-off the bank took post year-end? Is that reflected in the account? Okay. Just to reiterate, so it's a loan write-down on Gdynia from EUR 25 million to EUR 16 million. We paid EUR 4 million towards the EUR 16 million, so the net debt is EUR 12 million. All this happened after the end of the year. And so it's not reflected in the figures for the year to 31st of March 2021. But that write-down, that benefit of EUR 9 million write-down, will come back into the group's accounts for the year to 31st of March 2022. Why did the bank agree to this write-down? Well, for the same reasons that we have been impacted by the pandemic lockdowns, the value of the property has fallen and they had to take that onboard. You had very good rental collections during the period. Could you comment on that, please? We have had very good rental collections. We've done incredibly well versus the market. Actually, the market, I think, Jeremy, is around 60% overall. And retail property collections in the U.K. on average are down at 40%. And we have been up north of 90% rent collections. And that is really a testimony, I think, to the complexion of properties we own, the resilience of the retail properties we own and our management team. But even a 5% to 10% hit in income is a very significant impact on the leverage property portfolio. And anyone listening who is a property investor will know what I mean. You don't -- it may not sound like a big hit, collection rate of 90%-plus sounds fantastic. But actually, that's a big hit for a property company to take in its stride. And remember, government didn't just lock us down as an industry, they actually prevented us from collecting rent. They suspended our ability to take action against tenants. So we've been sitting here with the government having overwritten the terms of our contract. And a key component of the capitalist system is people living by the terms of contractual obligations. And the government has shut that down. So really, the fact that we've got more than 90% is quite remarkable. In terms of the government interest in letting Gdynia, please could you comment on the rental level versus the previous rent? Okay. Just to clarify, the government interest, the government tenant interest, is in CH8 as a property, not in Gdynia. Gdynia is more likely to attract interest from small-, medium-sized businesses. And that's the kind of interest we're getting in Gdynia. In terms of deals in the pipeline, which geographies and sectors are you looking at? Well, we are completely agnostic as to which geographies and sectors we look at. We're deal-orientated. But as ever, we're seeing more opportunity in Poland than we are in the U.K. We are looking more in the U.K. now at properties that have taken hits during the pandemic, where vacancies have opened up. So we want to go if we can -- and this might sound counterintuitive, but we want to go to the eye of the storm. We want to go to where the impact has been biggest by the lockdowns. And so we're looking at properties that have become vacant, stress development situations and so on in the U.K. And it's too early really to talk about specific deals. Which kind of properties and where do you see as being most attractive? Well, I think I've just answered that question. You made clear the huge challenges you faced during the pandemic. Given your cash resources, could you provide some color on roughly when and where you see opportunities? And have you changed any of your strategies to avoid similar force majeure in the future? Well, I think I'll give you some color on where we see opportunities. We see them more in the office sector in Poland. Some of them are in [indiscernible] and Kraków Business Park and Gdynia. But we are looking at buying other stuff in Poland. We are also looking at the retail sector in the United Kingdom, particularly where there's multiple-use classes possible with the properties of converting retail to residential, for example. Residential markets are doing very well. What strategies have we got to avoid a similar force majeure in the future? Well, as I said, that is a really difficult thing to provide for. It's -- I wouldn't want to say that it's impossible to provide against lockdowns, but it's virtually impossible. If the government shuts you down for business, there's not much force majeure stuff you can do. Shareholders are better placed, I think, to mitigate against any potential government action like that by shorting stock. But as management of a property company, there's not much we can do. What I can say about our office blocks is that most of them are actually not as densely occupied and densely built as typical office blocks. So we are more easily able to accommodate tenants with greater areas per head, with greater distancing, with better shielding because we put PERSPEX up now in between desks and all that sort of thing. But the only way out of this -- I don't want to get drawn into a discussion on pandemic. But the only way out of this is for people to get used to coronavirus being part of being endemic in our population. And the NHS is actually doing its job. Right. Ben Maitland here. My question, regarding property rental income across the portfolio, how much of the decline year-on-year has come concessions? And how much is accounted for due to rents going to 0, tenants going out of business? Thank you. Would you want to answer that?

In terms of group properties, we felt a hit of about just over GBP 200,000 to the P&L. In terms of share of associates, where we're exposed to retailers, it was about GBP 0.5 million. That's our share of share of associates in over 2 areas.

Yes. But the biggest impact is obviously the vacancy at Gdynia, the continued vacancy at CH8 and the vacancy at Kraków Business Park. And remember, Ben, that impact on income isn't an isolated event. -- impact on income, and this is why I say even a 90% collection rate is not that great, is because the impact on income has a material impact on value. So you get a double hit as a property investor. Not only do you fail to collect the income, but your values of your properties drop as well. Are you seeing any distress in the market that could lead to some interesting acquisition opportunities? We are trying to find that distress and that -- I mean, the most notable areas of distress is where there is no income. Where there is income, QE is driving up values because investors are naturally income-hungry. So we don't want to be going to where investors are naturally going. We want to go to the other side of the spectrum. So we are looking. But buyer beware, it's a very difficult time at the moment. And we are looking -- we are seeing interesting deals. And hopefully, we'll be announcing some in the next few months. But what I don't want to do is build up a false expectation that there's lots of low-hanging fruit out there that we can now just pick up because of the adversity that the group has -- that the economy has suffered. What do you think the lasting effect of the pandemic will be on the property sector? Do you expect it to drive structural change? Well, that's a $64 million question. The answer -- I don't really have a definite answer. I suspect for the next 2 or 3 years, we're going to see less footfall in shopping centers. We're going to see less occupation in office buildings. There will be a move towards lower densities. And the office sector will have to get used to that. But there is an upside in that because actually employers are going to have to take more space for a given number of employees. And so you may see some balancing impact coming from the need for greater space per employee. But it's all conjecture. We don't really know. I did hear that the number of commuters now coming into London is up to 90% of what it was in January 2020. So there seems to be quite a recovery of commuters coming into London, which is very encouraging. And naturally, as a property man, I hope that continues. Did the Polish and Romanian governments stop landlord action against tenants for nonpayment of rent? Well, the Polish government went even further as did the Romanian one. They actually suspended the obligation of payment of rent. The British government didn't do that. They just suspended our ability to collect it. But during the lockdown, for those tenants that were prohibited from trading, they were forgiven their rent. There were some concessions made to landlords. So for example, for a given period of rent concession, we got longer -- we got a 6-month extension to the lease plus a month for every -- what was the detail, Jeremy? It was a month for...

Period of the lockdown.

Yes. 6 months plus the period of the lockdown. So we got a 6-month extension plus a lease extension for the period of the lockdown. So we got something at the back end of the lease. But of course, that doesn't make up for the hard impact of lost income. I seem to have lost all other questions. I don't see...

You've actually been very gracious, Ben, because you've answered them all. So thank you very much indeed for that. And of course, investors, if they do submit any further questions, you will be able to review those post event. And we'll publish all those questions that are answered on the Investor Meet company platform. And Ben, perhaps I could just ask you just for a few final words to wrap up before I redirect investors to give you some feedback, please.

Yes. I mean, I think the key takeaway from today is that the group is in a very strong position. We're cashed-up. And we have a history of doing good deals. And this is an environment in which good deals should come forward, even if we haven't seen anything particularly fantastic yet. We are working, as I mentioned, on a couple of deals, which we need to land. And also, there is a natural recovery in our earnings. As we come out of this pandemic-induced set of lockdowns, there will be demand for space, economies will begin to recover. And we will see a natural uptick in our earnings and therefore the value of our properties. So the impact of what we've experienced for the year to 31st of March 2021 should naturally reverse. And we should have the ability to deploy our capital well. But it will take more than a year -- And that's the message I think I want to drive home. It will take more than a year. I don't want to build false expectations. I'd be delighted if I'm sitting here next year saying I was too prudent last year. But what I don't want you to do is think within a year, we're going to be back on our feet and trading normally. Also, I must caution that governments may go weak at the knees again and lock us down. It's remarkable that we've had such a fantastic vaccination program in the U.K. that we're ahead of the European Union. And yet the government is taking a very timid approach to opening up. We were told repeatedly that once we were vaccinated, we could go back to life. But we're not, we're not being allowed to go back to normal. And we need that to happen. That's really it for me, I think.

Fantastic Ben, Laura, Jeremy. Thank you very much indeed for updating investors today. Could I please ask investors not to close the session as you will be automatically redirected for the opportunity to provide your feedback in order that the management can better understand your views and expectations? This will only take a few moments to complete and will 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. That concludes today's session.