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

Good morning, and welcome to the First Property Group plc Investor Presentation. [Operator Instructions] Questions are encouraged and can be submitted at any time by the Q&A tab situated on the right-hand corner of your screen, just click Q&A, type in your question and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and publish responses where appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Ben Habib, CEO, and good morning.

Good morning. So thank you very much, everyone, for attending our results announcement, which are less than a startling set of results. And perhaps before I go through them, it would be a good idea to just give you some background on how we got to where we are. It's been a bad time for commercial property for reasons I think I set out at the interim stage. But effectively, there have been a number of impacts on the commercial property market. When we unlocked, surprisingly, I don't think many people saw it coming inflate, when we unlock from lockdowns, inflation surged on the back of broken labor markets and fuel markets. And interest rates rose, most notably in the U.S. and of course, across Europe, including Poland. That had an effect -- that had 2 effects. The first was to suck capital out of Central and Eastern Europe and indeed developed markets back to the United States of America. So the carry trade where people have been borrowing in dollars or euros and investing in Poland started reversing and access to capital for both investors and lenders in Poland dramatically reduced. That impact continues to this day. Investment volumes in Poland are down dramatically. They are about 1/10 of what they typically would be at any given point in time. And whilst banks will roll debt, they're doing so on ever increasingly tight conditions and mostly requiring a lot of free cash that comes off properties to be used to repay debt as opposed to being released to the borrower, which used to be the more normal situation. So we've had a kind of pretty aggressive credit crunch going on, particularly in Poland, which was dependent on the international capital for its property market. The other impacts that have been taking place over the last couple of years is that the work-from-home syndrome has really gripped most markets. And so demand for offices has reduced considerably in the U.K. and across Europe. And that has had an impact, obviously, on occupational markets, and that has notably impacted Gdynia, which is where we've got a -- which contributes the biggest hit to our results this year to Krakow Business Park, which has similarly been impacted and our offices fund, which is all offices where people have not been going into work. So the combination of higher interest rates, a withdrawal of capital, a withdrawal of tenant demand has also been exacerbated by the drive to Net Zero, which requires commercial property to be upgraded as we head towards 2030 with a requirement for Energy Performance Certificate ratings of C by 2027 and B by 2030. And the CapEx required is beginning to be reflected already in capital values ascribed to properties. So even though we may not need to have invested the CapEx now, anything that doesn't meet those standards is already having its value impacted. And then the fourth -- the fourth impact that the property markets are experiencing is the withdrawal of capital from institutional investors because the capital adequacy requirements essentially for anything other than government bonds makes investing in other asset classes unattractive. And of course, with bond yields up and access to corporate debt producing better results for pension funds and insurance companies, they too have withdrawn from the property market. So you've got, I think, arguably the most challenging conditions for commercial property that I've seen in my career, particularly in Poland, which until the last couple of years, has been a standout market outperforming Western Europe year in, year out. But it has firmly hit the skids in Poland. Interestingly, it hasn't really been the Ukraine war that impacted Poland. It's been all the things that I've just mentioned so far. And so the results, which show a loss of GBP 4.4 million. They're principally driven by the write-down in the value of the Gdynia property, which because the deferred consideration on it that was due to be paid on the 11th of June this year, we didn't pay it because the property hadn't leased up in the way that we'd expected, and its value is questionable. Things in Poland at the moment, frankly, can't be sold -- so -- easily. So it's questionable what the value is, and we didn't think it would be prudent to raise the capital required to pay the deferred consideration. And in order to make sure our accounts didn't overinflate the value of the property, we've written it down to the value of the debt, so there can't be any future impact on our accounts as a result of any further diminution in value of that property. We are talking to the bank to which we owe the deferred consideration. But that is the single biggest impact on our accounts. So with that backdrop, I will now go to our presentation and take you through the presentation starting on Page 6, if I may. Statutory loss before profit, GBP 4.41 million versus a profit of GBP 2.5 million last year. And that loss is due to that noncash write-off on Gdynia. Our cash resources are at GBP 4.6 million, down from GBP 7.65 million last year, mostly due to -- the reduction mostly due to GBP 1.6 million of CapEx in Blue Tower, where we had new -- a new tenant, and we repaid the loan on our property in Romania...

GBP 800,000.

GBP 800,000. And yes, and on offices, there was a return payment required to be made to -- because offices -- the offices fund shareholders might recall, doesn't pay a fee, but we were entitled to a profit share with clawback and there's been a clawback there, which required a cash payment back to the investors of about GBP 0.5 million. So that explains the reduction in cash. Net debt is up slightly. Actually, gross debt is down, but net debt is up slightly because of the reductions in cash. AUM is down what looks like quite a dramatic amount. And this is partly due to the reduction in value of the offices fund, which just to remind you again, doesn't pay a fee. So that reduction in AUM doesn't actually impact First Property Group. A reduction in the value of the Krakow Business Park of GBP 45 million. And the sale of GBP 62 million worth of property in U.K. funds. And we would expect further sales to take place over the next year or 2 in our funds. Total AUM is therefore down quite a lot. And it might concern shareholders, and it is concerning that institutions have left the market and our fund management business has reduced, AUM for our fund management business has reduced so dramatically. But I would just remind shareholders that 85% to 90% of our earnings have always come off our own properties and our own investments. rather than from third-party fund management. And in many respects, our fund management activities, though we've tried very hard to make them work, never really got to a scale which allowed us to make good money out of asset management. We've always taken a very proprietorial approach to what we buy for our clients. And that has prohibited us, I think, from scaling up dramatically in better times. And so even though this hit looks big, I don't think it's going to really materially affect us going forward in the future. And the challenge for us with asset management, if we ever really go back into it in a big way will be hard to make it profitable. Because without it being at scale, frankly, particularly with the new regulatory framework getting tighter and tighter and tighter, it's not that interesting to manage other people's money. I think it's better for us to find opportunities in Poland, which look interesting or opportunities in the U.K. And if they're too big for the group itself to invest in those properties, then to marry up with the combination of people with whom we've got very good relationships, such as family offices, high net worth individuals, et cetera, in the U.K. And they're still there to do deals. We just haven't got institutional money to do blind pool funds, investing in thematic investment themes like we have in the past. And not surprisingly, as our AUM has reduced, the average unexpired fund management contract term has reduced as well to 1 year 9 months from 2 years 9 months a year ago. And so turning over then to Page 7. Statutory loss before profit -- statutory loss before tax, GBP 4.4 million, which works out at a diluted earnings per share loss of 4.04p, obviously, not paying a dividend, and that's off an exchange rate where the euro has slightly weakened against the pound. Turning over to Page 8. Investment properties and inventories at book value down slightly from last year, at market value, again, slightly down from last year. Associates down by 10%. And this is due to the reduction in value of the offices fund principally and the reduction of the value of the offices fund. And...

That's a hit of [ GBP 1.45 million ] into our investment revaluation reserve. So it doesn't go through the P&L, but it's a reduction there, and also share of associates. You don't see it as much in terms of book cost because our share of the profit after tax was about GBP 1 million, and it was offset by a fair value adjustment in FOP.

In FOP.

Yes.

Yes. So FOP was down by about GBP 1 million as well. So that explains that 10% reduction. And then that peaks through to our associates and investments at market value. Cash balances we've been through before, cash per share of 4.18p. Gross debt is down because we've repaid some loans and net debt is similar -- is up because the cash levels have dropped. Net debt is a function of debt divided by our total assets. Gearing ratio, pretty healthy at market value of 38%. And that includes, obviously, the deferred considerations that we owe on Blue Tower as well as Gdynia. And then everything else, the numbers flow for the reasons that I've explained already, which gives us an adjusted net asset value per share of 39p, down from 46.5p last year. Page 10 gives us -- gives you a background on that and how it's changed over the years, where it is at the moment. We've obviously been under pressure, as you can see ever since lockdowns kicked off. And Page 11 gives you a NAV bridge, which shows you how NAV from last year, what the component movements are in NAV from last year to this year. I don't propose going through any of these. You can look at them at your leisure. And then Page 12 is the absence of a dividend, which, again, I don't propose to go through. But when earnings recover, and we are making profits, we will resume our dividend payment. And then, the Page 13 is basically what I've already mentioned in terms of the markets where we are and what the future might hold. I think the next couple of years is going to be -- for us, is going to be a function of keeping the ship steady, making sure where we've got refinancings coming up, we can refinance them, negotiating a new deal with the bank on the Gdynia property if we're able to do that and cutting our cloth in accordance with our means so that we are profitable as we go through this period. And we've obviously made cost reductions internally. And I think one of the questions we're going to be asked, I'm going to be asked later, so I can answer it now, is we are -- we have made cost cuts. And I think that should see us through to profitability based on current levels of income for this year and the year after that. And the challenge for us then is to lease up Blue Tower, the vacant space in Blue Tower, get the deal done with Gdynia and position ourselves to make new investments trading up, take advantage of trading opportunities as and when they become available. And I think that kind of sets out everything for shareholders. There is more stuff in our presentation, which you can go through at your leisure, and you can answer -- I'm happy to answer questions now. If we can move to questions?

Fantastic, Ben. Thank you very much, and thank you to the team for updating investors today. Ladies and gentlemen, do you please continue to submit your questions using the Q&A tab situated just on the right-hand corner of your screen. But just while the team take a few moments to review those questions we've had submitted already, I'd like to remind you the recording of the presentation, the published Q&A can be accessed via your investor dashboard. As you can see, we've received a number of questions both pre-submitted and throughout today's meeting. If I may, perhaps just hand back to the management team, and if and where appropriate, could you just read out the question, give your response, and I'll pick up from you at the end.

Yes. So what actions does the Board plan to take to improve profitability? Well, it is, as I mentioned, it's a steady as she goes at the moment, make sure we can refi properties where we're able to do that. We will be making some sales from various funds, which has the benefit, of course, of freeing up capital, but it has a long-term impact of reducing earnings slightly. But we have made some significant cost reductions in the group as a result of the reduction of properties that we're managing of around GBP 650,000 per annum on an annualized basis. Next question. If I'm right, you have around GBP 300 million under management, but within 18 months, there will be GBP 100 million left. Is there a cash flow projection that shows the effects of mounting down? Well, of course, we've got cash flow projections. We're not going to go through cash flow projections with people. We're not going to give forward-looking statements here. But just to say that, as I've already mentioned, asset management business has never been where we made the most of our -- where we made the most of our money. Most of our money has come off our own investments and our associate investments. And we'll cope quite easily with the reduction in AUM. The challenge for us are on our vacant properties that we've got [ refing ] properties that coming up for refi and navigating ourselves through the next 12 months to 24 months. Will there be any profit share over hurdles? No. Is there a possible prolongations in the funds? I mean, there might be. I wouldn't work on that presumption because the pressure on institutions is to exit property markets not to continue to invest. What will the cost be for going from 60 employees to a more suitable number? I'm not going to give forward-looking statements, but I have mentioned that we've reduced cost by around GBP 650,000 per annum on an annualized basis. What will the cost for running the business going forward? Again, I'm not going to give forward-looking statements. What income will be generated from the GBP 100 million? Well, I mean roughly you can work it out. We make about 1%, just under 1% on -- around that level on our funds under management. so you can work out what that would be. What will the cost of running this business be in terms of percentage of AUM? Well, again, it's not a relevant question for the reasons that I've explained. What are prospects for new loans division, Vector Plc already in this market. So we tried very hard to penetrate the loan-making market. We thought that would be a good place to go. And notwithstanding having reviewed, what, GBP 1 billion worth of opportunities, we just couldn't find anything where we felt comfortable committing capital at the rates of return that were available. I think the opportunity didn't last for long. Did it, Jeremy?

It closed -- well, not closed, but the quality of loans that we were seeing in the pricing, it was just very competitive.

Yes. It was surprisingly competitive given where the markets -- that's in the U.K., of course, we weren't looking at Poland. You could do better in Poland, but enforcement in Poland is very difficult. So we didn't want to make loans in Poland. You can't foreclose on assets in the same way as you can over here. What is the strategy with regards to Poland and working the situation through? So we've got some assets that need to be leased up. That's the Gdynia property, where we've also got to renegotiate terms of the bank. I'm hopeful the bank will come to an accommodation with us. That remains to be seen. And we've got the Blue Tower property, where we've got to lease up some space. By the way, we've got quite a lot of demand for the Blue Tower space, all the vacant space there, more than all the vacant space is spoken for, if deals we're doing with tenants come to fruition. The Warsaw office market has actually held up relatively well, and this is pretty cheap space. So the challenge for us and where we hope to reposition the group is by leasing up that space, doing a deal on Gdynia, [ refing ] properties as and when they come up for [ refing ] and just navigating ourselves through with a lower cost base over the next 12 months to 24 months. Will you look to wind down the asset management division with the average contract? Well, I mean, it's kind of winding itself down is the honest answer. What has the Board cost us this year? And how many members are there before any cost saving? So the Board is the same size as it's always been, and the cost of the Board was roughly GBP 1 million.

That includes all costs of being listed as well as...

Yes. So that's the entire plc cost, the Board Directors together with our listing fees as well as our office rents, everything.

Yes. Everything, broker, everything, yes.

Yes. Next question. Yes. I'm not answering questions on Peter Gyllenhammar. That'd be best addressed to Peter Gyllenhammar. Right.

I think you've covered all the questions we've had through, Ben. So look, thank you very much indeed. And of course, any further questions come through, the team will be able to review those and be able to publish responses where appropriate to do so on the Investor Meet Company platform. And before redirecting investors to provide you their feedback, it's not particularly important to you and the team. Ben, can I just ask you for a few closing comments, please?

Yes. So it's easy to become despondent looking at this set of results. I'm not over the moon by them, but I'm not despondent. We are a seasoned management team. We've made the cost cuts that we need to make. There will be opportunities coming forward in the market and we will take advantage of them. I'm not without means myself. And if -- I stand firmly behind the group in every respect, as I'm sure Alasdair Locke and others do. And I think once we get through this difficult patch, we'll go back to business as usual.

Fantastic, Ben, thank you, and the management team for updating investors today. Can I please ask investors not to close the session? It should be automatically redirected to provide your feedback. It's going to take a few moments to complete and that is greatly valued by the company. On behalf of the management team of First Property Group plc, we would like to thank you for attending today's presentation, and good afternoon to you all.