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

Good morning, ladies and gentlemen, and welcome to the First Property Group plc interim results investor presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company will review your questions submitted today and publish responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll and your participation, I'm sure, will be greatly received by the company. I'd now like to hand over to CEO, Ben Habib. Good morning.

Good morning, everyone. Thank you very much for joining us this morning on the announcement of our interim results. I hope everyone's had a chance to have a look at the announcement that we made this morning with the results. And I think you should also have had an opportunity to look at the interim results presentation. Is that online, Jeremy?

It should be on the website.

It should be on the website now. I don't propose flipping pages, but really, I think, to talk more generally about the results and then to take questions at the end. Our shareholders will be aware it's been a particularly interesting time for any business over the last 3 years. We had -- with lockdowns, we had a complete collapse in demand, and unknown to us at the time of lockdowns, a breakdown in supply chains taking place. So that when we unlocked, we had the opposite where demand significantly exceeded supply as a result of breakdown of supply chains, inadequate access to fossil fuels, et cetera. And property's been hit by both of those significant events. So firstly, there was an absence of demand from tenants in property and a reduction in the acquisition and investment in commercial property during lockdowns. And now we've got effectively that dovetailing into a spike in inflation, interest rates going up and adjustment in market pricing for commercial property taking place, as we speak, and we haven't reached the end of that process. And in fact, I think we're at the beginning of it. So it's been a very tumultuous 3 years. Notwithstanding that, we've had actually quite a good first half. We made a profit before tax of GBP 2.4 million, mostly generated through the sales of properties, either by our funds and then paying us the dividend or by our own sale of the warehouse and by our own sale of the warehouse in Tureni in Romania. And we did flag that when we announced the finals that we would be looking to sell property. And we sold very well when you think about the market turmoil that's taking place at the moment. We've got a couple of other properties under offer for sale in Poland, which should go through in the next month or so. And that generated a profit of GBP 2.4 million in the first half. Our cash reserves as a result of the sales as well maintained themselves even though we were able to buy another 32% of Blue Tower, which cost us just over GBP 7 million, but for which we only paid just over GBP 1 million up-front with the rest of it being deferred over a 6-year period payable in 6 installments. We made an RNS announcement at the time of that purchase. So the details of that purchase are laid out in that announcement. What is quite interesting at Eastern Poland is that there's been a slowdown in the investment market brought on by rising interest rates, and to some extent, by the war in Ukraine next door to Poland. Tenant demand has stayed reasonably robust, and we've leased up another 9% of our office block in Gdynia, which is now leased to the tune of about 3,500 to 4,000 square meters. And we've got 2,000 or 3,000 square meters more of that office block under offer to tenants, which we're seeing through at the moment. And it was this demand from tenants that gave us the confidence to buy 32% more of Blue tower because the 32% we bought, about 7,000 square meters, 5,000-odd square meters of that is vacant. And we think that once we've -- it needs a lot of refurbishment, but once we've refurbished it, brought it up to standard, we should be able to lease that at reasonable rents. Of course, what's happening in the U.K. and in Poland is that with the spike in inflation, new development of property across the board, offices, retail, everything, has basically stopped. And with that cessation in new supply of commercial property, we do expect rents to rise in due course. I think this will be particularly favorable for retail property, where, after an initial period of weakness, retailers find it difficult to adjust pricing because their own buyer base are suffering under the weight of inflation. But after that initial difficulty, retailers will pass on the higher cost of goods to their buyers. And with that increase in turnover in shopping centers, retail warehousing and so on, you will see -- and the absence of new development, you will see rents rise. And we do expect, for similar reasons, but not precisely those ones, we do expect rent increases anyway next year under the CPI [indiscernible] rent provisions that our Polish leases typically benefit from. And I think, Paul, on our own portfolio of properties, we expect an increase of about GBP 0.5 million next year?

GBP 0.5 million.

Yes, yes. Just without management doing anything particularly clever. And if there are rental increases that come through, as I expect they will, from the absence of new supply in property, that would be on top of that GBP 0.5 million next year. So we should -- once the pain of this initial surge of inflation has subsided, we should see the benefits of inflation coming through, as you would expect, for property in due course. And I think that kind of deals with the First Property Group. We've maintained our dividend, which -- from the final to the interim, we've maintained the interim dividend at 0.25p per share, much lower than it used to be. But with all the headwinds that commercial property is facing at the moment, I think it would be imprudent to declare a bigger dividend than that at the moment. It would appear by our share price that the share -- the stock market doesn't wholly value our company anyway. I think our NAV per share is 48p a share; share price, 24p a share. That's kind of -- you might see that as a statement of no confidence in First Property Group. But I think that is actually the kind of discount that's applicable to property companies across the board at the moment. So nothing in particular there, I think, that we can address or that we should be concerned about. What it does inform us, though, is that when we are -- what it does inform us about is that when we're buying property, we have to be -- and we always are judicious, but we have to be doubly judicious because once we bought a property, if our share price continues to value at a 50% discount to the value we pay, we have to query why we'd be buying it. There's got to be very good reasons to buy a property at this juncture in the cycle. So I don't know, Jeremy or Paul, if there's anything you'd like to add to those very headline kind of description?

No. I think you've covered the gist of it in terms of just -- the main thing really is the net asset value at 48p relative to the share. That's probably the key.

Yes. The key metric.

Key metric in terms of taking it...

So NAV has held up well. And we don't expect that to drop. I mean the share price is telling us effectively that, that will drop. But I can't see any immediate reason for that. Sure, interest rates have gone up. There's a repricing going on in property. But rents are also going up. And it's not clear to me necessarily that our NAV is going to drop, particularly when you think that most of our NAV is out of Poland. And Poland, again, is outperforming the United Kingdom, which we can come to in due course. So...

And worth also mentioning that our NAV excludes any value for our Fund Management business. So our Fund Management business is GBP 500 million of third-party funds under management that's regulated, AIFMD approved. So in other words, our NAV is simply the 6 properties that we own directly and the shares in 10 of the 12 funds that we manage.

Plus our cash.

And our cash, yes.

So I think we should go straight to questions and I'm sure shareholders will...

It's also worth touching on the vacancy in our 2 big -- 6 properties that we own. In other words, there is -- as we let Gdynia up, you recall, we bought Gdynia off the bank...

When we refinanced it, we already owned Gdynia. Under a finance lease structure, we took freehold ownership of it and part of that restructuring -- during that period of restructuring, we lost the main tenant in Gdynia, which was a company called Asseco for reasons that are wholly attributable to the bank's inability to deal with us in a timely manner. But we lost Asseco, we ended up with a vacant building and that was February 2021. And now it is about 25% leased, something like that.

And it will be 28% leased in the new year.

But I did mention our vacancy in that it's the robustness of the Polish economy that's given us the confidence in leasing Gdynia and buying that vacancy [ in due time ]. So I think we'll go straight to questions. Now if that's...

Sure. Let me just jump in just to give you a couple of moments. As you can see on the right-hand side, you've received a number of questions. So thank you, firstly, to everybody that submitted questions during today's presentation. But while the team just take a few moments to review those questions, I'd just like to remind you that a recording of the presentation, along with a copy of the slides, will be accessible via our Investor Meet Company dashboard immediately after today's meeting. If I may, Jeremy, just to hand back to you and Ben and if I could ask you just to read out the questions and give a response where it's appropriate to do so and I'll pick up from you at the end.

Okay. So we've had a couple of pre-submitted questions. The first of which is the market value of the shares is much less than the net asset value of related accounts. Can you please indicate what plans you have for the future of the company. Okay. Well, the future of the company basically at the moment involves managing the assets we've got, leasing up the vacant space at Gdynia and Blue Tower, leasing up also the vacant space that we have at Eximius Park in Krakow, where the company owes a 23% interest in the properties by virtue of a fund structure. And we've got about 40,000 square meters of vacant space there. Krakow is a much more difficult market. It's got 16% vacancy rates across Krakow where Central Warsaw, for example, has a vacancy rate of around 5%. And Gdynia vacancy rate is very low as well. So Gdynia and Warsaw, good; Krakow, not so good and it's going to take a while for the Krakow property to lease up. And as I mentioned, we have a 23% stake there. So a key determinant factor in the growth of our profits going forward is going to be leasing up this vacant space. Of course, we are looking opportunistically, as we always are, to buying property. At the moment, there's a risk of catching a falling knife because markets are adjusting as we're speaking. I don't think they're fully adjusted to the much higher rate of cost of -- much higher cost of borrowing that's now prevalent in the market and the more constrained terms. It's not just interest rates going up, it's also LTVs dropping and covenants tightening up. But we're watching that space. With any market schism comes opportunity, and we are looking at a couple of properties. But no deal is a deal until it's signed up. Have you had talks with Peter Gyllenhammar or his company about this problem? Well, we're in constant -- Peter Gyllenhammar is a significant shareholder in First Property Group for those who don't know him. We're in constant conversations with anyone who wishes to be in constant conversation with us. And I have talked to Peter, not in the last couple of months, but I have talked to Peter. He's fully aware of the issues that public companies face and discounts to NAV in this difficult market. And as far as I'm aware, he's very supportive of the steps that we're taking to lease up our properties and grow the company. Another pre-submitted question was, I think it is fair to assume that asset management division has a saleable value and leave it out of the balance sheet -- and leaving it out of the balance sheet [ would lead ] to asset stripping. Please include a fair market value for that division. It's not for us to -- we can't, from an accounting perspective, put a value on it. And notwithstanding the fact that the stock market doesn't seem to be valuing it, it's difficult to put a value on it because the people who manage -- the human resource that manages our asset management division are the same people who are dealing in our investment property. We're an integrated team. So I see the asset management as an adjunct to our investment side. And I see it as a strength, by the way, that First Property Group can move from bringing principal investor to an asset manager when you can raise third-party capital and then going back to being a principal investor when the markets are closed. And the markets basically are closed at the moment. The market to raise new money, to raise debt, to raise equity is basically closed at the moment. That doesn't mean that we won't necessarily be able to raise a loan or to be able to raise a new fund, but the markets basically are closed. We might have an exception to that. But I don't think we are -- accounting-wise, we're simply unable to put a value on it. We can't do it. It's not legally allowed. And notionally, I don't think we can do it because we have an integrated platform. Sam E has asked, would management consider buying back shares in the company given the share price weakness rather than paying a dividend? Well, we have about GBP 6 million of cash. We're going to need some of that cash to fit out the vacant space in Blue Tower and Gdynia. Fit-out costs like other build costs have gone up quite considerably. So we do need to keep some of that cash -- a considerable amount of that cash spare, if you like, as we lease up that property. Paradoxically, as we lease up the vacant properties, our cash levels will drop because of that fit-out costs. And so we're not looking at an immediate share buyback. But of course, we do have cash and if we get cash that we think is surplus to purpose and we haven't got new properties in which to invest it, then we keep all options open. We have bought shares in the past. And I think we've bought back about 6.5 million shares.

Approximately 6 million.

6 million shares in treasury at the moment as a result of historic buybacks. Who owes the remaining 20% of Blue Tower? Well, 10% of it is owned by the Jewish community and 10% by the City of Warsaw. City of Warsaw have their main city offices opposite Blue Tower. And so for historic reasons, they -- as a result of historic reasons, they earn 10% of it. They're also a large tenants in the building and they use it as a kind of spillover space from their offices, their main offices, opposite. And I think they're happy tenants and shareholders in the building. James B. Are you negotiating extended terms of funds under management? Remaining terms are getting a bit short. Well, we will look at each fund in isolation. We just extended the life of 5th Property Trading until end of 2025, Jeremy.

December '25.

Yes. So end of 2025. The other funds still got a few years left on them. So we will be negotiating their extensions as we get closer to their expiry. Of course, shareholders typically expect to get their money back within the term of their funds. But it will depend on what the markets are like for the sale of property at the time. How is [indiscernible] JV going? Well, it's doing very well. We sold one property at a considerable profit, which we then reinvested in another property. So it's got 2 properties under management. It isn't growing at the speed that we wished -- it's an open-ended fund and it can take a new capital as and when that new capital is raised. But it's not growing at the speed that we perhaps would have ideally of like when we set it up, but that's a function of nervousness in the market. As I mentioned, the markets are basically closed at the moment for new equity and debt. But we hope that as things settle, that will come back on tap. What is the time scale for refurbishing the vacant parts of Blue Tower and reletting? Okay. So Blue Tower is 5,000 square meters of office space, mainly in the podium part of Blue Tower across 3 floors. And all of it was vacant when we bought it, all of it needs upgrading. And we're going to phase the upgrading of the space. So initially, we're going to do one floor. We're going to do the ventilation, it's got top standard ventilation HVAC. So we're going to upgrade the air-conditioning and ventilation on that one floor. We're going to create new common space with lifts upgraded, toilets upgraded and so on and the show suite. And that's our first bit of CapEx and our only bit of CapEx in Blue Tower until we find our first tenant. We will then put our first tenant in and expand. Typically, as it happens, tenants, when they like your space, want to take the show suite because they can see that it looks like and it's immediately occupiable . So probably we'll then have to create a new show suite, which is what we will do. We will also use the space that we leased out as -- to show to other tenants who are coming in. So we will adopt that phased approach to the refurbishment and leasing out of the 3 podium floors at Blue Tower and that will mitigate cash outflow. How long it will take is difficult to tell, but 5,500 square meters or whatever it is, is 60,000 square feet. It's a lot of space. So it could take a year or 2, I think, to lease up, all other things being equal and a buoyant market. Can you give me a 3-minute summary of the economic outlook in Poland including the outlook for inflation, interest rates, et cetera? Okay. So inflation in Poland is about 18% per annum at the moment. It's much higher than it is in the United Kingdom. Unlike the U.K., though, it's got better growth dynamics. So I think GDP is growing at around 4.5%, but forecasts to slow down next year. Interest rates have risen quite a lot, and I think they're around 6% at the moment.

6.75%.

6.75% at the moment. But the NBP, the National Bank of Poland, is indicating that it's reached the end of it. It's -- or reaching the end of it, some cyclical increase in interest rates. The zloty throughout this period has been pretty stable against the euro, which is good because our tenants pay their rents in euros. And there is a zloty-euro exchange rate exposure and you wouldn't want the zloty to be weakening with these high rates of inflation. So good strong response from the NBP increasing interest rates. Zloty stable. Growth relatively good compared to the rest of Europe and the United Kingdom. And I mean what's interesting, I'm going to just digress for a second. What's interesting about this interest rate increase cycle and a lot of people, they may disagree with me. But the inflation has been borne out of a rise in the cost of staple products and fuel. And actually increasing interest rates doesn't address the cost of fuel increasing in price or food increasing in price or fertilizers increasing in price or raw materials going into factories increasing in price. Those price increases were going to happen with or without interest rates going up. Interest rates going up hit investment markets, militate against people buying new homes, incentivize people to save. So it's been quite interesting to me to watch central banks, and for me anyway, central banks across the globe increasing interest rates in the face of what is something that is typically -- not typically, it's not addressable by the increase in interest rates. And I am of the view, and many will no doubt disagree, I'm of the view that this inflation was going to burn itself out with or without interest rate increases. And actually, what the interest rate increases has done is push economies towards recession. It's that demand from the rest of the economy when demand was already weak. And a lot of people will say, Ben, you're wrong. There is a massive printing of money that took place during lockdowns, and that's caused the inflation. And I beg to differ on that. I don't think that created a massive excess demand. I think a lot of that money was actually used just to survive. But we're now going to see recessions across the developed economies, and Poland is forecast to avoid a recession but a marked slowdown in growth. And I think what we're going to see, famous last words, is several banks cutting interest rates again sooner than we think because inflation burns itself out. We're in a recessionary environment and they've got to prop up growth. We'll see where that goes. But we could end up with this inflationary environment reversing quite suddenly and interest rates back down again. And that's a comment really across developed economies, not just Poland. But Poland, I think, will do well relative to the United Kingdom and the rest of Western Europe as it has done our entire time that we've been there since 2005. I think it's set much better than we are for growth.

That's great. Ben, Paul. And Jeremy, thank you very much indeed for your time this morning. You've updated investors. You've taken all the questions from investors. So once again, thank you for your engagement and your time in responding. Ben, I'll shortly redirect the investors on the call to provide you with their feedback, which I know is important to you and to the rest of the Board. But before doing so, if I may, just ask you just for a few closing comments just to wrap up with and then we'll redirect investors for their feedback.

Yes. So I mean, I think, as ever, First Property Group presents a solid little company with experienced management that has seen through 3 years a very difficult economic and market times. I suspect there's more volatility out there. We will navigate it as best we can. We've got good prospects in the leasing up of the vacant space. I think Poland is a good place to be operating. We've got the cash resources to see ourselves through to it. And we just keep navigating our way through this maze of macroeconomic and market instability.

That's great, Ben.

There's another question. Do you want me to answer it or...

If you would like to, so yes, a question from Rory.

We have a question, this is from Rory B, which I think is Buchanan. If we do have a recession, as you suggest, do you feel Fprop is well positioned to handle opportunities that arise at knockdown prices. The global financial crisis was great for Fprop. That's right. I mean the difficulty of -- that's right. And I think we will take advantage of opportunities as they arise. We've got the ability to raise money and we've got cash on our balance sheet. So if equity markets open up and clients are prepared to put money behind us, I think we're well positioned as anyone to take advantage of. And then I think our clients are more disposed to give us capital. Of course, some of our clients themselves may not have access to capital. So they may not be able to give us cash when we want it. But I think we're well positioned for it. You're quite right, we did very well after the GFC. Some of that was permitted development rights, which came in, in 2013, 2014. So we did really well in that period. But Rory, we've always got our antenna up, as you know, and we will continue to look and do the best we can in this difficult environment.

That's great. Ben, Jeremy, Paul, thank you once again for your time this morning and for updating investors. Could I please ask investors on the call not to close this session as we'll now automatically redirect you for the opportunity to provide your feedback in order the management team could better understand your views and expectations. So take a few moments 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, I would like to thank you for attending today's presentation. Good morning to you all.