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

Good morning, and welcome to the First Property Group plc Interim Results Investor Presentation. [Operator Instructions] Questions are encouraged and they can be submitted at any time using the Q&A tab situated on the right-hand corner of your screen. Simply type in your questions 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 it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to CEO, Ben Habib. Good morning to you sir.

Hello.

Over to you, Ben.

Yes. Thank you. Good morning, everyone. Thank you very much for joining this morning to hear our interim results for the 6 months to 30 September 2024. As people would have surmised, it's been a marginally better half than it has in recent years. And certainly last year, we made a profit before tax of just over GBP 1 million, having made a loss of GBP 650-odd thousand in the comparable period last year. The big transaction, I suppose, that the Group had during the first half of the year was the placing of 36.96 million shares, raising GBP 2.96 million before expenses. That translated into about GBP 2.77 million after expenses. And the gratifying thing about that placing was that 83% of shares were taken up by shareholders. So only a very small number didn't subscribe. Those who didn't subscribe had their shares bought in equal proportions by Alasdair Locke, the Chairman of the company and myself. And so between Alasdair and myself, we've made a -- and, myself, a bigger one, considerable investment in the group during the year, which sends its own message, I hope, to shareholders. The other big transaction in the group was the continued progress that we made in leasing up Blue Tower, where we signed a new lease to a company called TV República, the Polish equivalent of GB News for about 3,100 square meters in Blue Tower, which should contribute once it starts paying -- once that lease starts producing rent, GBP 800,000 per annum to our profit before tax. So that's a really good step in the fortunes of that property in Poland. We do have another 2,500 square meters or so to lease at that property. And we've got interest in that area. In fact, we've got more interest in the building than we have space to lease at the moment. Of course, that may not translate into leases, but it does mean that the office that we, First Property Group occupy in our own building will probably need to be vacated by us, and we're going to hopefully convert what at the moment is gas space not really suitable for third-party tenants into a space for ourselves so that we can, in fact, increase the overall leasable area in the building by doing that. And so with a bit of a fair wind, we should see some good progress again with Blue Tower. The group ended the period with GBP 5.89 million of cash. Obviously, a good infusion from the placing that we did up until the placing, cash was constrained. But I think we're cashed up now for the foreseeable to the extent that we can see the foreseeable for all the needs that we see. Net debt at the end of the period was GBP 18.65 million versus GBP 22.99 million at 31st March 2024. So net debt was down. Assets under management, and I'll come back to this when I talk about prospects. Assets under management were down. A number of funds have been selling properties. There are still property valuation -- pressures on property valuation. And the big challenge for the group is how it repositions itself in the new regulatory environment at least as far as large investors in property are concerned because the asset management model doesn't really work in the way that it has done previously. Total assets under management, so that includes the properties that we own ourselves, was GBP 237 million at the end of the period versus GBP 274 million at 31st March 2024. The weighted average unexpired fund management contract term, which, of course, becomes less important as our AUM reduces was 3 years, 2 months versus 1 year, 9 months at the end of 31st March 2024. And I think that the reason for that increase is because the weighting that goes towards contracts that were coming up -- the weighting that goes towards contracts that are coming up to their conclusion and the sale of those properties, combined with the extension of the life of Fprop Opportunities plc to 2030 has meant that our weighted average unexpired lease -- unexpired management contract term has gone up. And that really covers the P&L and key operational highlights. The next page, I suppose we should just quickly look at in the presentation is Page 8, which sets out the value of our properties at 30th September, both versus what they were at 31st March versus what -- their book values versus what they're worth in the market. So it's 30 September 2024, the book value was GBP 45 million versus just over GBP 45 million at 31st March. And the market value of the properties was GBP 50.5 million versus GBP 52 million at 31st March. Associates and investment at book value, where we have a considerable investment, as you can see, was valued at GBP 20.66 million versus GBP 19.9 million and associates at investment market value was GBP 20.9 million versus GBP 20.26 million. So not much difference between book value and market values there. I think largely driven by the fact that we have to mark Fprop Opportunities plc to market in our books as well as obviously pursuant to this calculation. Cash balances, as I mentioned, are up for the reasons described. Cash per share is down because obviously, we issued new shares when we raised the cash. Page 9 sets out our debt, which I've already touched on. And the net assets at book value, which were GBP 43 million versus GBP 39 million at 31st March, obviously gone up again because we've raised cash. Net assets at market value, GBP 47 million versus GBP 45 million at 31st March 2024. Adjusted net assets per share down because of the new issue of shares principally at 32p a share versus 39p a share at 31st March. And we had some slight headwinds as far as marking our properties at the period end in sterling because sterling strengthened against the euro. And obviously, we've got many more euro-denominated properties as far as the group is concerned than we have sterling-denominated properties. Though I don't think that makes -- the movement wasn't of a material nature as far as we're concerned. Page 10 of our presentation sets out NAV per share over a protracted period since just before the credit crunch in March 2007 and shows our progress through that period. And obviously, we've been under pressure as interest rates went up after the end of lockdowns, property values fell. We -- our NAV has been under pressure. And then the significant drop in NAV per share at September 2024 was really not a function of pressures on property valued, but pressure -- but a result of the new issue of shares, which I've already mentioned. Page 11 gives you what they call an adjusted NAV bridge shows you how our NAV moved and what were the principal drivers of the change in NAV between March 2024 and September 2024, and I'll let you just have a look at that in your own time. Dividend, sadly, we used to be very proud of our dividend history. We had a progressive approach to the payment of dividend. But with the difficulties we've been facing over the last couple of years, we've had to cut our dividend, and we won't be paying a dividend until we can get sustainable profits up to a point where we feel comfortable that the group is back on the rise. So whilst I'm delighted by our swing back into profit, it's come from the trading of a few properties. It's not what you might say visible income that's going to repeat itself. I suspect that is going to be the mode of the group, more of a mode of the group than it has been in the past because there's been a dramatic withdrawal of institutional investors from the commercial property market, partly to do with regulations and partly to do with what's obviously been going on in the property market. But the regulatory environment has been bad for property investment pension funds that used to invest 70% to 80% of their funds in U.K. shares with about 5% to 10% in property, now principally invested in corporate and government bonds with investment in shares down on average to 5% to 10% at most or even lower. And property is a rounding error, frankly, nowadays in pension funds. And the same applies to insurance companies. So we're not expecting large mandates from pension schemes like we had in the past because of that change in attitude from pension investors who were our large clients. So to the extent that we do deals, to the extent that we do deals going forward -- get new mandates in our Asset Management division, that's going to come, I think, by finding special property situations and then presenting those property situations to investors with whom we do business, mostly high net worth individuals and family offices, I think, going forward, investing our own cash alongside them. And we're looking at some interesting deals in the U.K., I think I can't say for the first time, but it feels like for the first time in a long time, the market is beginning to look interesting. The debt market in the U.K. is still rubbish as it is in Poland. I think for many years, the Polish debt market was better than the U.K. one and shareholders who've held shares for a long time will recall me having said that for many years that we could get better loan terms in Poland than we could in the U.K. And the Polish banks did incredibly well after the credit crunch in 2008 because they had been insulated from it. But this time around, the rise in interest rates in the U.S. which doesn't -- look I know interest rates have come down a bit, but the basic pull for capital back into the United States of America because of this higher interest rate -- that pull was dramatic for Polish and indeed, I think all developing economies in the world. There was a withdrawal of capital, a withdrawal of bank appetite to lend against commercial property, together with all the other pressures that are on banks anyway in the developed and developing world. So Polish banks really not keen on lending. We've been able to refinance our positions in Poland when refinancings come up when loans mature, we've been able to hold our positions. But the holding of our position is really literally just a holding pattern. The banks don't really want to be in commercial property. They're rolling their positions because it's a sensible thing to do. And even though our LTVs, our loan to values are quite low, the combination of higher interest rates, higher margins and higher debt amortization rates mean that it's very difficult to generate free cash of Polish investments and the ones that we own. So Poland, I think, still has a way to go compared to the U.K. Though interestingly, and it's hot off the press, and it's entirely anecdotal, and I would not rely on it, but I'm going to mention it anyway. We're beginning to see -- I saw some extraordinarily cheaply priced property in prime Warsaw last week, and I was pinching myself when I was looking at the pricing because even without debt, given the quality of the assets that I was looking at, one would need to consider whether we can raise equity entirely to invest in those assets. So I'm going to be looking -- I'm off to Warsaw next week, and I'm going to be looking very closely at what kind of deals are available in Poland again. I'm hoping -- and I've been hoping for a while, but I'm hoping that as interest rates in the U.S. reduce and in Europe reduce, you see a resurgence of interest in investing in property in Poland. But we're traveling on the assumption that, that doesn't happen, and we're making our investment decisions on that basis. So I think that broadly covers the market and covers where we are as a company. So I think we'll go straight to questions, which is probably more interesting, I think, for shareholders in hearing me [ranting] on.

[Operator Instructions] I'd like to remind you recording of this presentation along with a copy of the slides and the published Q&A can be accessed via investor dashboards. And you can see, we have received a number of questions throughout today's presentation. And Ben, if I could just hand over to you to read through those questions.

Yes. So the first question is, I'll just read it out. The IRR of anyone investing in FPO over the last 10 years is bound to be negative and the share price is now at a large discount to NAV. If the directors don't have a radical plan to bring matters to a conclusion, would this support a vote at an EGM or AGM to seek a means of liquidating the company's assets and making a distribution to shareholders? If we thought that it made sense to liquidate the assets and we could do so at values that were close to -- and we could do so pretty instantly, and we could do so close to the values at which we hold these assets, given that we would be putting a for sale sign on all our properties. We would have seriously considered it. But the reality of it is that given that we own properties, the significant exposure that Fprop has, even though AUM may be in the U.K., the exposure that we have in terms of our ownership of properties is in Poland. And given that, that market is so illiquid at the moment, it would be commercial suicide for us to basically put a for sale sign on ourselves and to exit the properties, particularly with the kind of vacancy that we have in Blue Tower and Gdynia at the moment, which we're still trying to work through. So I don't see that as a viable option for the company at the moment. We wouldn't need shareholders to call an EGM or AGM. If we thought that was a sensible way to go, we would have done it ourselves. The sensible way to go is for us to tread water, hold our positions, make sure we're leasing up as best we can. And the real Polish economy is not that bad. As you would have seen in the presentation, GDP growth is -- this year should be 2.9%. Unemployment is pretty low. Inflation is always a threat. But that should see through our ability to hold properties. And the sensible approach is to tread water until the capital markets recover. And when the capital markets recover, then hopefully, the gap between NAV and our share price will narrow anyway and profits will increase and free cash will become easier to get out of our properties in Poland because lending terms will become less onerous. And things will improve generally. At that point, I don't suppose we'll get questions like the one we just had about winding up the company. But -- so that's my answer to that question. Currently, First Property is a very poor investment for me with very substantial losses compared to historic share prices. I think the MD's remuneration, I imagine, CEO, that's me, should reflect the poor performance of the company. I ask Ben Habib to explain when he will reduce his salary to reflect the poor stakes the company's governance? Well, you may have picked up in the RNS statement that we made earlier in the year that we've reduced costs by GBP 650,000 a year. A significant proportion of that reduction was me, volunteering a salary reduction, which are 15% salary reductions, which I've taken. I've also, as I mentioned, invested significantly in the group as a result of the placing. And I think that shows a commitment from me to the group. How much of the funds value is owned by First Property? Well, that's all set out in our interim announcement. The precise proportions that are owned by First Property Group are all set out in our interim announcement. Sorry, there a few questions coming in. Yes, that's -- I've explained, yes, that's that one. What is the central cost per square meter? I'll have to get back to you on that. I don't have that immediately in my head. What is the forecast for central costs going forward? I assume you mean overhead cost of the group. Well, that's a forward-looking statement. We would need to consider whether we're able to answer that. The new lease is a 15-year lease to TV República in Warsaw. Sorry, the question is, can you provide more details on the new lease in Warsaw? It's a 15-year lease. And it aligns perfectly with our strategy, which is to lease up property as fast as possible. Next question. With no dividend declared, what is the company's approach to shareholder returns in the short to medium term? Well, the best we can do for shareholder return is to build the company's earnings streams up and for the share price to recognize that our earnings streams are recovering, that value is recovering and for that -- so that then benefit shareholders. As the share price goes up, hopefully, shareholders will be pleased. I think that's all the questions.

Yes, Ben, thank you very much for answering those questions. Of course, the company can review all the questions today, and they will publish the responses on the Investor Meet Company platform. Just before redirecting investors to provide you their feedback, which is particularly important to the company, Ben, can I just ask you for a few closing comments.

Well, thank you very much, everyone, for listening in. I do think things are bottoming out from the awful few years we've had. We are fully committed to rebuilding the value of the company. I think we have the skill set to do it. Of course, we need a fair win. Alpha can never make up completely for beta. Beta has been against us, but we are using as much alpha as we possibly can to get back to where we were, and we will continue to strive for the benefit of shareholders. Thank you very much, everyone.

Thank you once again for updating investors today. Could I please ask investors not to close this session as you now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This may take a few moments to complete. I'm sure it 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, and good morning to you all.