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

Good morning, ladies and gentlemen. Welcome to the First Property Group plc Annual General Meeting. [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 appropriate to do so. These will be available via our Investor Meet company dashboard. I'd also like to remind you that the presentation is being recorded. I'd now like to hand you over to Ben Habib, CEO; George Digby, CFO; Jeremy Barkes, Director of Business Development; Laura James, Group -- Interim Group Finance Director; and Jill Aubrey, Company Secretary; along with Peter Moon, NED. Ben, good morning.

Good morning. Well, ladies and gentlemen, thank you very much for joining us today at our Annual General Meeting. I'd like to welcome all shareholders who are watching this Annual General Meeting via the live presentation. My name is Ben Habib, and I am the company's Chief Executive. I shall be chairing the meeting, and I would like to introduce you to my colleagues: George Wingfield Digby, who is currently Finance Director but will be stepping down as FD at the end of this meeting; Laura James, who will be taking over as Interim Finance Director with effect from the end of this meeting; Jill Aubrey, who you've already heard is Company Secretary; and Jeremy Barkes, who is Director of Business Development. The formal matters at this meeting relate to the support -- to the report and accounts for the year ended 31st March 2020. With the consent of those shareholders present, I would like to take the notice of the meeting as set out on Pages 65 to 68 of the report and accounts as read. Thank you. The company's shareholders have been able to submit questions in advance of this meeting and also have the opportunity to submit questions during the meeting via the live presentation. All questions and answers will be dealt with at the end of the meeting once the formal business is concluded. I declare that the quorum required by the articles of association of the company is present and that the meeting is, therefore, properly constituted. Thank you. Due to the somewhat constrained nature of the proceedings at this meeting and first to ensure that shareholder intentions are accurately reflected. Each resolution put to the vote shall be decided by a way of a poll vote. Resolution #1. I now propose that the report of the directors and the audited accounts for the year ended 31st March 2020 now submitted to this meeting be approved and adopted. As indicated at the start of this meeting, proxy votes have already been collated. I, therefore, declare the poll closed. The results of the poll show 44,285,922 votes in favor, 16,500 votes against and 661,700 abstentions. I can, therefore, declare the resolution carried as an ordinary resolution. I now propose resolution #2 to declare and approve a final dividend of 1.22p per ordinary share for the financial year ending 31st March 2020. I declare the poll closed on resolution 2. The results of the poll show 44,964,122 vote in favor, no vote against and no abstention. I can, therefore, declare the resolution carried as an ordinary resolution. Resolution 3. I now propose resolution #3 that Laura James be appointed as a director of the company. I declare the poll closed on resolution #3. The results of the poll show 44,908,346 votes in favor, 3,219 votes against and 52,557 abstentions. I can, therefore, declare the resolution carried as an ordinary resolution. I now propose resolution #4 that Alasdair Locke be reappointed as a director of the company. I declare the poll closed on resolution #4. The results of the poll show 44,064,080 votes in favor, 651,719 votes against and 248,323 abstentions. I can, therefore, declare the resolution carried as an ordinary resolution. Resolution #5. I now propose resolution #5 that Haines Watts be appointed as auditors of the company to hold office from the conclusion of this meeting until the conclusion of the next Annual General Meeting of the company at which accounts are laid. I declare the poll closed on resolution #5. The results of the poll show 44,958,281 votes in favor, no votes against and 5,841 abstentions. I can, therefore, declare the resolution carried as an ordinary resolution. I now propose resolution #6 that the directors be authorized to fix the remuneration of the auditors. I declare the poll closed on resolution #6. The results of the poll show 44,315,622 votes in favor, 648,500 votes against and no abstentions. I can, therefore, declare resolution -- the resolution carried as an ordinary resolution. Resolution #7. As set out in full in the notice of this meeting is an ordinary resolution to authorize the directors to allot shares and/or grant rights to subscribe for or to convert any security into shares in the amount set out in the resolution. I now propose that the directors be authorized to allot shares and/or grant rights to subscribe for or to convert securities in accordance with the terms of resolution #7. I declare the poll closed on resolution #7. The results of the poll show 44,753,074 votes in favor, 197,848 votes against and 13,200 abstentions. I can, therefore, declare the resolution carried as an ordinary resolution. Resolution #8. As set out in full in the notice of this meeting is a special resolution to authorize the directors to disapply statutory preemption rights in respect of new allotment of shares and the sale of treasury shares in the amount set out in the resolution. I now propose that the directors be authorized in accordance with the terms of resolution #8. I declare the poll closed on resolution #8. The results of the poll show 41,033,569 votes in favor, 3,930,553 votes against and no abstention. I can, therefore, declare the resolution carried as a special resolution. Resolution #9. As set out in full on the notice of this meeting is a special resolution to authorize the directors to purchase on behalf of the company its own shares in accordance with the terms of resolution #9. I now propose that the directors be authorized in accordance with the terms of resolution #9. I declare the poll closed on resolution #9. The results of the poll show 44,890,766 votes in favor, 60,156 votes against and 13,200 abstentions. I can, therefore, declare the resolution carried as a special resolution. Ladies and gentlemen, that concludes the formal business of the Annual General Meeting, and I would like to thank those who are present for attending and those who are watching this meeting via the live presentation. I will now read a statement that will be made public by way of a regulatory news service -- sorry, it already has been made public by way of a regulatory news service, and I'll just read it to you. So it goes as follows. First Property Group plc, the property fund manager investor with operations in the United Kingdom and Central Europe, will hold its Annual General Meeting today at 12 noon. The meeting will be closed -- will be a closed meeting and will be chaired by Ben Habib, Chief Executive, who will make the following statement. I am pleased to report that the group continues to perform in accordance with management's expectations. Group cash as at 21st October -- 21st September 2020 calculated post deduction of the final dividend of GBP 1.35 million amounted to GBP 21.4 million. This equates to 19.4p per share. Third-party funds under management stood at GBP 564 million as of 31st August 2020. At 31st March 2020, that was GBP 567 million. Uninvested cash commitments to these funds amount to some GBP 80 million. Total funds under management, including Group Properties, amounted to GBP 620 million as at 31 August 2020. These were GBP 623 million as at 31st March 2019. Average rent collection rates for the 5 months from the end of March 2020, after adjusting for concessions made to tenants which requested to pay rent monthly and for deferrals agreed, are as follows: the 8 direct-owned properties in Poland, 96% and 93% in Romania; properties held in funds managed by FPAM, 94% in the U.K., 96% in Poland and 95% in Romania. These collections rate bear testimony not just to our proactive approach to asset management but also our collection -- our property selection. Interim results for the 6 months ending 30th September 2020 are scheduled to be announced on 26th November 2020. And with that, I end the formal business of the meeting. And I'm going to hand over to Jeremy Barkes, who has done a small -- who's prepared a small presentation that follows really the presentation that we gave of the results first announced back in June. And we'll take questions and answers after Jeremy has made this short presentation. Over to you, Jeremy.

Thank you, Ben. Yes, this presentation is simply an abridged version of the preliminary results presentation, and it really focuses on what the company does. So I'm hoping to drop through it quickly. Page 4 on your screens now shows the 2 divisions of the company: the Fund Management division, which, as at 31st of March, had GBP 567 million of assets under management. But as we've just said in the AUM -- in the AGM statement now has GBP 564 million of assets, 12 funds. Fee income running at GBP 3.13 million a year, excluding the profit share that we earn from Fprop offices, which we think is going to be in the region of GBP 800,000 this year, but we'll come to that. And obviously, it's an FCA-regulated and AIFMD-approved company. And then there are the 8 properties that we own directly, of which 6 of those are in Poland, 2 are in Romania. They have a market value of GBP 56 million. And if you deduct the debt of GBP 42 million secured against them, then we've got GBP 14.3 million of the group's equity invested in those 8 properties. In addition, we hold shares in 10 of the 12 funds that we manage, and the market value of those is GBP 27 million. The highlights as at now, we still have significant cash reserves, GBP 21.4 million after deducting the final dividend, which is due to be paid on the 25th of September. And uninvested cash commitments to our funds of a further -- of GBP 80 million, meaning that we are extremely well positioned to not only weather the COVID crisis but also make judicial investments as they appear, and we are waiting for those opportunities to emerge. Third-party AUM, as already mentioned, GBP 564 million, which has a corresponding weight average unexpired Fund Management contract term of 4 years and 7 months. And the final dividend has been maintained. It's worth reiterating that since we first paid a dividend in 2003, we have never reduced it. We have only either increased it or maintained it, a record we're proud of and we expect and hope to continue. In a similar vein, we're extremely proud of the growth in our net assets. And if you look at this Slide 6, you can see that we've grown the net assets from under 10p per share to, as at 31st of March, 55p a share. I think over the last several years and that net asset excludes any value at all for our Fund Management business, which has got GBP 564 million of third-party funds under management. A bit more of a detailed breakdown of how that number is calculated or our net assets are calculated or really what the movement is from the last time. So that 55p you can see have come down from 59.65p as at 30th of September 2019. And you can see that the revaluation was the main reason for that. GBP 5.82 million of downward revaluation is essentially the principal explanation for the NAV per share coming down. I've already mentioned our dividend, and this just puts that -- puts into the picture the words I've already said. So turning first to our Fund Management business. The line shows the trajectory of our AUM growth. The slight reduction over the last year is mainly the result of the sale of some assets in the U.K. that we would hope to resume our upward trend. And the fee income that is associated with that AUM is shown in the bars below, of which the gray bit represents performance fees, and the orange bit represents the recurring contractual fund management fees, which is running at an annualized rate of GBP 3.13 million a year, if -- and we're expecting around -- or certainly we're -- sorry, at the time of our prelims, we were expecting that the contribution from Fprop offices would run in a region of about a further GBP 800,000 for the year, and that would be categorized as a performance fee because it's a variable fee based upon our share of the profits. This gives a bit of a breakdown of where our third-party funds are deployed. As you can see, the majority of it is in the U.K. And the majority of it is in 2 funds, Fprop offices and the shipbuilding industries pension scheme. And the majority of our clients are pension schemes. Just to give a bit of a breakdown of the asset split. And you can see, we've had a question actually that's come in about how much retail exposure we have. Well, there's retail, and there's retail. So you can see that in terms of retail warehousing, we've got GBP 100-odd million of retail warehousing. In our view, this is the most resilient of the retail assets. Typically, rents are low, GBP 10 to GBP 12 per square foot typically for the properties that we own. And they're good for selling bulky goods. They are less likely to be disintermediated by the Internet and other forms of retailing. Supermarkets, obviously, food retailing, everybody has got to eat, and we've got a GBP 72 million in that category or 13%. And then shopping centers, which is perhaps where this question is focused on, we have 10% of our third-party AUM in shopping centers. And then our rent collection rate at the bottom, which has already been mentioned in the AGM statement, 94% in the U.K., 96% in Poland and 95% in Romania, a record that we're proud of. And then just finally, selection of our clients, Willis Towers Watson, Oxford and Cambridge colleges and a couple of family offices. And typically, our management fees are typically 1% of gross assets. We typically charge a 20% performance fee over an IRR of 15%. The exception is Fprop Phoenix, which has a fixed management fee of GBP 360,000 per annum. Moving on to the other side of our business, the Group Properties. There are -- this graph -- the bar chart on the left shows the 2 contributors to Group Properties. On the one hand, we have the 8 direct -- 8 properties that we own directly, represented by the purple bar. And then on the other hand, we have the shares in 10 of the 12 funds that we manage, represented by the gray bar. And on the right-hand side, you can see a pie chart, which shows the corresponding equity that we have invested to generate those returns. This next slide shows you the split of just the 8 properties that we own directly, which makes up GBP 14.3 million of equity owned by the group. So it's all in Poland or Romania, but mostly in Poland, 88% in Poland. And actually, as you can see from the pie chart on the right, it's mostly, 45% and 32%, respectively, in 2 office buildings in Poland. This was the contribution that those properties -- those 8 properties contributed in the year ended 31st of March, GBP 5.7 million. We've since sold CH8. And so if you were to exclude CH8 from these numbers, the top row would not read GBP 5.1 million. It would read GBP 4 million. And our rent collection here is also high at 96% and 93%, respectively, in Poland and Romania. There's a picture of our 2 largest properties, the 2 offices in Virginia and 1 in Warsaw, and then the picture of the other 6 properties that make up 22% by value of our 8 Group Properties. And these are the top 10 tenants associated with those 8 properties. And then finally, these are the shareholdings that we have in 10 of the 12 funds managed by FPAM, which have a current market value of GBP 27 million as at 31st of March. So that's a very quick drop-through. A copy of this presentation will be saved in the Investor Meet company log-in, so you can peruse it at your leisure. But a reminder of why we think it's a good investment, it's an extremely experienced and nimble management team with a fantastic track record, 22.7% growth in net assets, including dividends paid per annum over the last 10 years. Their earnings are reliable. They are diversified from income streams in both the U.K. and Poland and Romania. The cash generation is strong. We've got a progressive dividend policy. We've only ever increased it or maintained the dividend. We've got a natural growth in net assets from the high return on equity from the 8 directly owned Group Properties. But we should also be able to grow our Fund Management business because all of our clients have had good experiences. And we've got GBP 20 million of cash on the balance sheet, coupled with GBP 80 million committed but as yet uninvested client funds with which to make new investments. We're operationally geared. We've got plenty of capacity to grow the business. And finally, we are a diversified, as I've already mentioned, business with operations in the U.K., Poland and Romania. All 3, well, certainly, Poland and Romania, in particular, are performing well economically. Poland and Romania are both expected to resume levels of economic growth -- 2019 levels of economic growth, Poland by end of 2021 and Romania very shortly thereafter. So that mix of jurisdictions provides a natural hedge. As I mentioned, we've got quite a full appendix, which is basically the other slides from the prelims presentation put into the back. But if anyone has got any questions, please do ask them.

That's fantastic. Ben, Jeremy, thank you very much. Their folks are going through the AGM and providing investors the opportunity to attend virtually and also running through the presentation. [Operator Instructions] I'd like to remind you, the recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via our investor dashboard on the Investor Meet company platform post this presentation. But lastly, of course, before I hand back to the First Property team, I'd like to remind you that your feedback is important to the company. Do please take a couple of minutes to complete that. Immediately after the presentation has ended, you'll be redirected to the opportunity to provide your feedback in order that the company can better understand your views and expectations. As soon as the webinar finishes, just wait a couple of seconds, and it will be in front of you. Ben, Jeremy, and I guess the rest of the team, before we look at some of the questions that have come in during the event, I wanted to pose a couple that we had pre-submitted by investors today. Perhaps, I can address these to both of you. The first one we've had, you have touched on it slightly. You have a considerable cash reserve. Will you be holding on to it during the current uncertainties? Or are you looking to invest now?

Okay. So I will take the questions, if I may. We've got considerable cash reserves. We are going to hold on to them, not because we need them for any particular reason other than we think we can invest them extremely well in what is bound to be a volatile environment over the next few months. So we will be holding on to that cash. We won't we doing any special dividend, and we should be seeking to invest it in property. I've got another question here that was pre-submitted, which was, what are you seeing in the retail sector? How much exposure do we have? Well, Jeremy has just been through what we have in the retail sector. Most of it is retail warehousing and supermarkets. So where -- I mean supermarkets have actually done quite well in the recent pandemic. Retail warehousing sector hasn't been that badly affected. Shopping centers and high-street retail are really in the eye of the storm. And funny enough, our shopping centers have done all right as well. We have a yardstick of buying what we call kind of lowest common denominator properties, so low end per square foot, low M&E, simple M&E, not complex buildings, cost-effective to run, simple to operate, keeping the cost of tenants down. And so we've been -- and we've been doing this for many years. The Internet is not a new threat to our business. The pandemic has kind of put that into stark relief. But we've been aware of it, and we've been catering for the ever-increasing, inexorable sort of move towards online retailing from physical retailing. So we've done all right. And that's evident in the collection rates that Jeremy mentioned and I mentioned earlier on as well. Turning to questions. There's one from [ Marwin ], which is, working from home becomes the new normal. How much adversely affected will that brought be in the U.K.? Well, it remains to be determined to what extent, if any, working from home becomes the new normal. I don't like the word new normal. It suggests that we've been stuck in a status for the last God knows how many years. There's no such thing as normal. Life keeps changing. We had a massive credit crunch in 2008. We managed to navigate that. We've had massive changes to the way people do business because of the Internet. We managed to circumnavigate that. We've obviously had the vote for Brexit, which put quite a large proportion of the population into a bit of a tizz. There's the people who didn't have faith in the United Kingdom. We circumnavigated that, and we've made profit out of it. We have full faith in the U.K. going forward. And whatever happens in the property market, I'm pretty confident we'll circumnavigate what's in straight at us. Nothing is ever wholly bleak. There are always opportunities in bleakness, and we will seek to find them out. The next question is with regards to Fund Management, what trends are you seeing inflow/outflow funds. Well, all our funds are close-ended funds. We raised them for specified periods. They're not open-ended, so we don't have flows in the traditional sense. We have published the various expiry dates of our funds. And the first kind of major expiry that comes up is UK PPP, which is in February 2022. And we are taking steps already to reposition that fund either to extend its life with the new complexion of shareholders or, if we're unable to do that, to sell the properties during the course of 2021. But I suspect we'll restructure that fund and we'll go on producing what has been a fantastic income stream for its shareholders ever since we set it up in 2010. We have this question from [ Stephen G ]. Do you think the U.K. government will allow planning changes for office blocks? Well, the U.K. government has already brought in permitted development rights, as I'm sure [ Stephen ] is aware, and they've expanded those now to include the knockdown of existing buildings and to include adding 2 stories to existing buildings. Some of the conditions associated with the new regulations are not ideal in that they take you almost back to a kind of planning application position. But the pressure is clearly on for development. We need development now not just to house people, but we need development now to keep the economy going. And I think it's not lost on the government that the best way to get the economy going is for construction to be on its front foot. And the best way to achieve that is not to have a ridiculously tight planning system, which, by the way, was a much more sensible planning permission in the early '90s and got progressively more turgid under Tony Blair. In fact, I think if there's any government -- if there was a kind of trend in government policies that would see the United Kingdom right, what they need to do is just to review everything Tony Blair did and reverse it, including all his moves on planning regulations. I've got one from [ David P ]. Good afternoon. The share price has been on the downward trajectory since early 2018. This is not just a result of Brexit or COVID-19, so why do you think the market is assigning such a low valuation to the company's future prospects? I'm not aware of it having been on the down since early 2018. It probably peaked at about 64p then. Did it, Jeremy?

It did in -- after the announcement of the purchase of Kraków Business Park or Eximius, which was July 2018.

'17.

'17 -- and then we've restructured it and brought in everybody and shareholders in July 2018.