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] Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Ben Habib. Good morning.

Good morning. Good morning, everyone, and thank you very much for attending the presentation of our interim results for the 6 months to 30th September 2025. I'm pleased to present these results, which show -- if I can just go straight to the presentation, which you should all have access to; which show on Page 3, profits before tax of GBP 1.48 million, up from GBP 1.16 million last year, quite a significant improvement in profits. This increase was due largely to the higher rent and service charge income from Blue Tower with a reduction in operating expenses to GBP 2 million in the group. We made some savings in the group in 2024, which only really came through fully in this first half. So for the period last year -- for the comparable period last year to 30 September 2024, our overheads were GBP 2.3 million. So a reduction in -- a significant reduction in costs, coupled with a significant increase in income naturally resulted in our profits going up. And what I'm very pleased about is after a long period of market turmoil, economic turmoil kicked off by lockdowns and then the subsequent unlocking of the economies, interest rates going up, capital being withdrawn from the sector, et cetera, changing working habits and so on; we've seen a good, solid increase in net assets for the group, up to GBP 47 million from GBP 45 million, equating to 31p per share as compared to -- nearly 32p per share as compared to 30.5p per share in the previous -- for the year to 31st March 2025. At market value, however, a better performance because when we mark our properties, we hold our properties in our books at the lower of market value or cost. But actually, if you mark our properties to market, our NAV on a triple net basis is GBP 56.47 million or 38p a share versus GBP 53 million at the end of last year or 35p per share. So that's a really good, solid improvement in NAV for a property company after a long period of difficulties. I'm also very pleased to say that gross debt has reduced dramatically since the year-end. It now stands at GBP 13.4 million versus GBP 24.4 million at the year-end. Group cash balance was GBP 3.29 million versus GBP 4.82 million at the year-end. But immediately after the period end on which I am now reporting, 2 properties that we own were sold, which boosted our cash by GBP 4 million, generating a sale of before tax -- a gain on sale before tax of GBP 1.2 million. That gain will come through in the second half. So we're expecting a good full year result for the group as well. So our debt is down, our NAV is up, our profits are up and our cash is up. This is a very strong position for the group to be in after, as I say, a period of significant difficulty for -- a protracted period of significant difficulty. And the weighted average unexpired fund management contract term on the funds we now manage is 4 years and 5 months. This is not as significant a figure as it used to be because as you will see on the next slide, actually, the total assets under management that we have are significantly down. I think, at our peak -- just turning over the page, at our peak, we had about 800 -- nearly GBP 800 million assets under management, which was about 2018 or 2019. But for the reasons that I touched on very briefly earlier, there's been an exodus of capital from property from -- by pension funds, insurance companies and others. And that has had a knock-on impact both on values, but obviously on our asset management business. And the group, as I've indicated at previous results presentations, is increasingly becoming a property investor in its own right rather than an asset manager. Of course, we do have some funds under management, and we will continue with that part of our model because the cost base associated with running our asset management division is actually the same cost base that does our property investments and trading, et cetera, for the group itself. There's no additional cost to have our AUM business, our asset management business. So we'll continue to do it, but it's of much less significance to the group than it was in the past. And it's our own assets and the profits we make from our own properties that are now driving the group's fortunes. There's nothing much more to pick up on that next page other than discussing AUM, which I have done. On Page 5, you can see how contribution to our profits has moved over the various years. Fund management, frankly, has never ever really been a massive contributor to our profits. We've always made about 80-odd percent of our profits from the properties we own and the investments we have in our funds. And as I say, going forward, fund management will be even less important to the group. Turning over the page to Page 6, we've included a little case study because I think it's indicative of the direction of travel of the group and where we find ourselves in the economic and market cycle at the moment. This is an office block that we completed the purchase of in August this year. We bought it very well from a seller who was fed up, trying to get rid of it, a vacant office block on a business park in Newbury, very unsexy, very unattractive, but has potential for residential conversion. We bought it, as I say, well, and we sold it. We exchanged contracts to sell it literally a month after we bought it at GBP 1.5 million. Now we won't be able to repeat this kind of deal on a wholesale basis. These are rare, these kinds of deals. But it indicates the sort of thing we're now looking at and the kind of deals that we are capable of doing in these markets. Just before moving on from that, I should just add that even if we weren't -- this is an important point. Even if we weren't to do these one-off deals, which we will continue to try to do, obviously, but even if we weren't to do it and we just stood still, the group would still make profits because our income now exceeds our cost base, just income from rent exceeds our cost base. So having made the cost savings that we made in the prior period and having paid down debt, having got our interest bill under control, having secured our income streams and boosted them, actually, the group finds itself for the first time in 4, 5 years, being able to look forward confidently that it will remain profitable with all things being equal, even if management doesn't succeed to do these one-off sexy deals. Though, as I say, we will endeavor to do those one-off sexy deals. They're very exciting. They make you get out of bed in the morning and look forward to coming to work. The -- so turning over to Page 7, Group Properties division. There are 7 directly owned properties in the group, of which 6 are classified as investment properties and 1 is a trading property. That was the property we just sold after the period end. And we have noncontrolling interests in 9 of our 11 funds managed by FPAM. And shareholders will remember that, that was our model, always to co-invest with our clients in part to give them confidence to put their money into our funds, but also in part to make sure that we get some fruits in terms of capital gain and income return on our own endeavors by investing alongside our clients. Our Fund Management division is FCA regulated and approved by the Alternative Investment Fund Management Directive of the EU. We have 11 funds under management, effectively 1 fund in the U.K. -- or 2 funds in the U.K., including Phoenix. And the rest of the funds are in Poland and special opportunities. The special opportunities is in wind down. It's not investing at the moment. And our funds are invested across the United Kingdom, Poland and Romania. On page -- on the next page, which unhelpfully isn't numbers, Page 8, there's a breakdown of the various group properties that we own alongside -- providing alongside the properties, their book value, which is effectively the cost that we pay to buy them versus their market value at the period end. And you can see that we hold our properties conservatively at GBP 38 million in our books, but they're worth, according to third-party valuations, these are not directors' valuations; GBP 48.5 million. And gross debt is very low. So the group is in a very strong position as far as its balance sheet is concerned. And I don't intend to go through the next few pages because they are pages that you can look at in your own free time and glean the details of them. So the next page that I'll just talk about is on page -- the next page I'll go to is Page 15, on outlook. Poland remains to be a strong economy. The Ukrainian war, as we kind of predicted, hasn't had a negative effect on Poland. If anything, it's had a positive effect with defense spending up and 2.5 million working Ukrainians going into the Polish economy, often bringing their capital in businesses with them. But there has been an exodus of capital from Poland, partly as a result of the Ukrainian war, but also partly as a result of interest rates recovering in Western Europe and the U.S. attracting capital back to their homes. The Polish investment market used to depend for 90% of its capital on foreigners. That has now reduced dramatically, partly because capital has left the country, but also partly because the domestic Polish investment market is developing. You used to be able to rely on selling Polish property to local Poles if the market value of the property was around EUR 3 million to EUR 5 million -- no more than EUR 3 million to EUR 5 million. Nowadays, you can -- you find quite a lot of local Polish buyers up to sort of EUR 20 million lot size. And that's very, very healthy, obviously, for the Polish market and for people who wish to invest in Poland because a domestic market is much more reliable than foreign capital, as can be seen with the way foreign capital moves in and out of various jurisdictions. And so we're pleased by that. But there is, nevertheless, a dearth of debt available to buy property in Poland. And when you are able to borrow money to buy property, it's on significantly reduced loan to value and significantly more onerous terms than we used to be able to borrow at. So investing in Poland, for us, remains a challenging prospect. Though we are seeing, because of local Polish buyers, some anecdotal, I wouldn't say it's across the board, but some anecdotal evidence of recoveries. And a couple of our properties are currently under offer. A couple of properties owned by our funds are under offer in Poland at the prices that equate to our market value -- the market value which we ascribe to those properties or higher. Actually, there's one property, which is under offer at 8% higher than the market value that we had for it and significantly higher than the book -- than the acquisition cost of that property. So we're very pleased with that anecdotal evidence. But as I say, it's not -- you can't expect that to be wholesale across the Polish market. The United Kingdom is fast turning into a banana republic as far as I can see. But we still are a deep capital market, and there is still activity in the commercial property field. Values across the board for offices are a fraction of what they were 4 years ago. And one of our funds just bought a property for GBP 5 million that had last traded in 2022 at GBP 18 million. That gives shareholders an indication of the dramatic reduction in property values that -- in commercial -- in office space, in office values that the U.K. has experienced. So from 2022, when it was GBP 18 million, we bought it this year for GBP 5 million. And I think that market has begun -- again, it's early days, but it looks like the office market after having had a blood bath is slowly bottoming out, partly because of increase in demand from tenants and partly because a lot of the stock has now been -- redundant stock has been converted to residential space under permitted development rights. But it depends really very much on which part of the country you're in and which property building you're looking at. The sector remains under huge pressure from ESG requirements, particularly reaching EPC targets by -- certain EPC targets by 2027 and 2030. Under the net zero regime, all property, whether it's residential or commercial, has to achieve EPC C rating by 2027 and EPC B rating by 2030. 80% of U.K. commercial property does not comply with the EPC B rating. And so properties are -- certain commercial properties are either going to become redundant by the time we get to 2030 and put out of use, torn down or converted to some other use or are going to require substantial capital expenditure to bring them back into use. And this is what I mean about turning into a bit of a banana republic. On the order of net zero, there is going to be dramatic increases in costs associated with the absence of availability of commercial property stock or if it is available, it's nevertheless going to be expensive anyway because of all the CapEx that's required to be invested in it to keep it compliant with regulations. Net zero is very, very inflationary and bad for property and indeed, the United Kingdom. But as I started off by saying, there are pockets of opportunities, and we're doing our best to avail ourselves of them. The retail market is better than the office market. It bottomed out earlier. Retail warehousing has actually been quite a sensible sector in which to invest with -- I think if you're a long-term investor in commercial property, you can largely confidently invest in retail warehousing again. Shopping centers have also, I think, bottomed out, recovered and we've been pretty much repositioned from the very difficult position that they found themselves in a few years ago. They're a shadow of their former selves, shopping centers. They don't have -- they often don't have the names that you would have traditionally expected them to have, and they've become mostly provision of discount retail goods, including perhaps a discount supermarket anchor. And high streets too have experienced the same thing. They've been hollowed out, partly as a result of out-of-time shopping centers, but -- and then also changing planning regimes, net zero obligations and so on. So it's been a really bad time in the United Kingdom. But thankfully, we do have, at least so far, continued access to capital in the U.K., which makes the investing in and the trading of commercial property possible. And that's really everything I wanted to say. Going to the future, as I touched on it -- I've touched on this already, we are profitable as an entity, even if we weren't to do deals. We are not going to be doing massive AUM asset management growth unless the markets change dramatically and the regulatory regime changes so that pension funds and insurance companies are incentivized, again, to invest in commercial property. Just to give you a flavor on that, by the way, many people listening, if not all of you listening, will know that 10, 15 years ago, pension funds would have been 80% in U.K. stocks and 5% in commercial property. Nowadays, pension schemes are virtually 80% in U.K. government bonds and about 0.5% of their funds are in U.K. commercial property, a dramatic shift in the way that they invest. And we've seen that with our own [indiscernible] changing their intentions, but also withdrawal of capital from commercial property. So we are in a very different regime, but we possess the skills and, I think, the firepower now, having repositioned the group to take advantage of opportunities when they present themselves. And I'll close there and take questions.

That's great, Ben, Laura, thank you very much indeed for your presentation. [Operator Instructions] I would like to remind you that recording of this presentation along with a copy of the slides and the published Q&A can be accessed by our investor dashboard. And Ben, Laura, if I may now hand back to you for the Q&A session, and I'll pick up from you both at the end. Thank you.

What is the desired long-term gearing level? Well, this is a question from Tom. Tom, we don't really have a desired gearing level. If we were -- in the good old days, we used to be able to borrow 75% to 80% of the price of a property when we bought it. And that made a lot of sense to us because we were using the bank's cash, assuming you had positive cash flow above the cost of borrowing, there was a yield gap. That made a lot of sense because you boosted your rate of return from the rent that you could earn on the investment. And you were effectively using third-party capital, the bank's capital to make more money as an equity investor. And that was right and proper because as an equity investor, you were taking a bigger risk than the bank. But nowadays, the loans that are offered by banks are down at 30% to 40%, 45% LTV, which basically means the banks taking close to no risk, and they are using the equity to protect themselves. I know that might sound counterintuitive. A lot of people often think that the lower the LTV, the less risk there is. Actually, the lower the LTV, the higher the risk that the bank is going to be rough with you because there's such a big equity cushion that it won't treat you tenderly in the way that we would like to be treated by banks. So we're not keen on bank debt, full stop, given the current terms on which it is offered to us. The debt that we've got in our balance sheet is effectively debt that's secured on properties we already own. And part of it is also deferred consideration that we owe on the remaining part of Blue Tower. And if we make purchases, they'll probably be 100% out of equity going forward rather than leveraging because we simply can't get the terms that we would like. Question from John W. When does the group expect to pay a dividend? Well, we had -- we were very -- I don't think I'm breaching confidence. But as I mentioned, I think, at the full year results, we debated a dividend then, we thought it was too early. We debated a dividend again at the Board meeting to approve these results, and we were much more confident and desirous to pay a divvy. The Chancellor, of course, has just put up the taxes on the payment of dividends, which makes it less attractive for shareholders to get cash dividends. But we will be looking -- I mean, it would be interesting, perhaps we could do a little poll of the people who are watching, given the increase in tax rates on dividends, is it something shareholders still want? Do they want divvies? Or would they prefer the cash to remain in the business and be used to do the kind of deals that we're doing at the moment? That is certainly a debate that we're going to have as a Board. And if shareholders would like to assist us in sending an indication, that would be great. But we are in a much stronger position to pay dividends now. Another question from Tom. What are you seeing in terms of pricing of new opportunities? Is there finally bid-ask convergence in your target markets? Yes. So there isn't a buyer, seller standoff like there used to be. There isn't a buyer-seller sort of standoff and mismatch as there used to be. Sellers are now, I think, emotionally, and it is an emotional journey; come to terms with the reduction in the value of their properties. And as I evidenced by that property we bought in Newbury, we are able to buy well now. Can you say a little more about NAV per share, please? I'm not sure what you'd like me to say. Is there anything you'd like to add to NAV per share, Laura? I mean it's basically our properties are cash divided by the weighted average number of shares in issue -- the number of shares in issue because it's at the period end. Yes, it's not an EPS, yes. It's at the period end. It's a solid figure. I think when we were in lockdown, we didn't really have a handle on where values were going. When we emerged from lockdown and interest rates shot up and working habits changed and so on, I don't think anyone really knew where values were for commercial property. But I think it's a much more certain position now. We can be more confident that our valuers actually are coming out with valuations that can be implemented if we decided to sell. So we can be more confident in NAV. I think it's a more solid figure than it perhaps was 2 or 3 years ago. Question from Martin Hansen. What happened in Gdynia? Well, what happened in Gdynia was effectively a story of the office market that I've mentioned before. We got the property. It was completely vacant in 2020. We succeeded in leasing about 40% of it. It was very nearly breaking even, but there was EUR 12 million of debt effectively on the property, which was deferred consideration that we owed to the bank. When the debt became due, the bank insisted that if it were to roll the position, it would want us to pay interest on the debt. The debt interest on EUR 12 million would have been the thick end of EUR 1 million per annum. The property was valued at about EUR 4 million or EUR 5 million by CBRE, we asked them to have a look at the value. And if we had put in GBP 1 million a year in interest payments to the bank, we would have had to write that off because the property value simply wasn't there to justify the payment of that GBP 1 million. First of all, we would have had to write everything down from GBP 12 million to GBP 5 million, and we would have then had to write off all the interest that we pay each year just to hold the property. I think it would have been the daftest decision any director could make. And any sane individual would have done what we did, which was allowed the bank to take possession of the property. Second question from Martin Hansen. Can you lower your cost when AUM is going down? That is the challenge, Martin, because as I've mentioned during this presentation, our cost base does our property investment for our own book as well as our asset management business, et cetera. But we have reduced the cost base of the group. And naturally, we won't keep Deadwood if Deadwood is created. We will be prudent and correct and desirous to eject any cost that we can, which we don't need. Are there any other questions?

Ben, Laura, if I may just jump back in then, I believe you have addressed all those questions from investors today. And of course, the company can review all questions submitted today, and we'll publish those responses on the Investor Meet Company platform. But Ben, before I redirect investors to provide you with their feedback, which is particularly important to the company, could I please just ask you for a few closing comments?

I think I've said everything I want to say. The only -- I don't like commenting on the share price because I don't believe it's a Chief Executive or a Board's remit, frankly, to second guess what the markets are up to. I have some sympathy with the markets having hit property stocks pretty hard over the last 3 or 4 years as these headwinds have unfolded. And just to go through them again, it was rising interest rates, increasing cost of capital, increase in the terms of availability of capital, the reduction of both debt capital as well as equity capital, changing working habits, reducing, therefore, the rental levels that we could achieve on property and of course, the net zero drive, making a lot of property extremely expensive to hold because of CapEx required to keep it viable from a regulations perspective. Those headwinds, I think, have now manifested themselves. But while they were manifesting themselves, I have sympathy, obviously, with the markets being hard on property share prices. I don't think the argument now for very, very large discounts to NAV, in my own mind, it doesn't hold because we've kind of troughed out. Of course, Rachel Reeves must not be underestimated in her ability to do damage, and we will see how the damage that she did yesterday is going to play out in the British economy. But even with all the awfulness that she was up to, at least for the near to medium term, I think we should continue to see activity and positive development in the commercial property field. And on that note, I think what I'm trying to say is that the share price looks a bit cheap to me. On that note, I will end the presentation.

That's great, Ben, Laura. Thank you once again for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations? This will only take a few moments to complete, and I'm sure 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.