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

Good morning, ladies and gentlemen, and welcome to the First Property Group plc Interim Results Presentation for the 6 Months of 30 September 2020. [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 it's appropriate to do so. These will be available via your Investor Meet company dashboard. I'd also like to remind you, this presentation is being recorded. Before we begin, we'd like to submit the following poll. I would now like to hand you over to Ben Habib CEO; Laura James, Interim Group Finance Director; and Jeremy Barkes, Director of Business Development. Good morning.

Good morning, and welcome to our interim results for the first half of the financial year to the 31st of March 2021. And those of you who are familiar with the company will know myself and Ben, but you may not know Laura James, who is the Interim Finance Director presently, having just taken over from George Digby, who retired as our Group Finance Director in -- just after the AGM in September. But Laura has been with us since 2014 and is an excellent team member who is extremely efficient, and we are very pleased to have her with us today. But with no further -- with no more ado, let's just go straight into the presentation. I'm actually not -- it's a long presentation. You can see a copy of it in front of you on your screens. There's over 50 pages in this presentation. I don't propose to run through all 50 pages. So if you would like to look at some of the detail that is in this presentation, a copy of the presentation is also on the home page of our website because it's not possible to scroll using the Investor Meet company technology, you have -- we all have to look at the same page together. But if you want to be scrolling whilst we're talking, go to the home page on our website. And in one of those boxes, one of those 9 boxes on the home page, the bottom left-hand one, you can download a copy of the presentation. After I run through the main points, I'll then hand over to Ben Habib, Chief Executive, who can expand more on the outlook for the company. And then we'll take some questions and answers. So I'm hoping that my bit should take no more than 15 minutes, which should leave plenty of time for Q&A thereafter. So I'm aware that there may be some people on this call who are not shareholders. And so it's worth dwelling, spending a little bit of time just looking at the business model of First Property Group. So we're a co-investing fund manager, and we operate in the U.K., Poland and Romania. And we operate by 2 divisions, as you can see on this diagram in front of you. So taking the fund management division first. This has got some GBP 557 million in third-party funds and a further GBP 80 million committed but, as yet, uninvested funds from clients. And our clients range from the likes of investment consultants, which advise occupational pension fund schemes such as Willis Towers Watson; to endowment funds, such as the various Oxbridge colleges to family offices and high net worth individuals. And our track record is excellent as all our clients have had good experiences. Our strategies tend to focus on generating high income returns because income is more assured than capital gain. But we are flexible and can respond quickly to changes in market conditions. For instance, in 2013, the government passed some legislation enabling the conversion of offices into flats without the requirement to obtain formal planning consent. And so we moved very quickly to establishing new funds as almost as soon as that legislation was passed to do that. With clients at Willis Towers Watson, that fund went on to earn a 98% IRR for the investors, and that's the net after the fees paid to us as the manager. Another -- typically, however, we invest in high-yielding commercial property, as I've mentioned. A good example of that is a portfolio of 9 supermarkets in Romania, which we acquired in 2015, which were left to middle. The vendor is a private equity fund, which come to the end of its limited life. We acquired these at a high initial yield of around 11% and added leverage in order to enjoy a high income return. But along the way, opportunities arose to sell some of these properties, and the shareholders in that fund have earned a 50% IRR so far, and there's still 1 property that 50% per annum IRR. There's still 1 property left in that fund. And at the more of the middle end, we set up and manage ungeared U.K. property funds invested in good secondary commercial property, needs to generate dividend yield to some 6% to 7% per annum. It's worth mentioning our investment ranking. We -- MSCI ranked us, our performance in Central and Eastern Europe ,#1 against the Central and Eastern Europe benchmark, and in fact, #1 over the entire 14 years that we've been investing in Poland. We first went to Poland in 2005 when the yield gap disappeared in the U.K., and we had to find high-yielding markets elsewhere. And I'll just quickly show you some -- our the track record. So this chart here, this slide here shows the track record of funds that we have closed and returned money to shareholders. And then this slide here shows the track record of all our existing funds. And so the fee income, the fund management division generates -- was running at just over GBP 3 million on an annualized basis as at 30th of September. And that excludes any performance fees or our profit share in Fprop Offices, which is the one fund that we run where we don't charge a management fee. Instead, we charge -- or we share in the profits of that fund. And the fund management division contributed 22% of the profit before tax in this set of results prior to the deduction of unallocated overheads. We'd like to grow this, and we are hopeful that 2021 should bring opportunities for us to do that. Now looking at the Fund Management division -- just go back. Sorry, the Group Properties division. So this is the return that we earn from our balance sheet. In recent years, this division has contributed the lion's share of the group's profit before unallocated central overheads. And it still does. In this period, 78% of the profits before tax were generated by this division. And this division has got 2 parts. There are 8 properties that we own directly ourselves, and we also own shares in 10 of the 12 funds managed by our fund management division. So starting with the 8 properties that we own directly ourselves. All of them are invested in either Poland or Romania. They're valued at GBP 56 million. They're leveraged. They've got GBP 41 million of bank debt secured against them. So net equity invested is around GBP 15.8 million. And in recent years, this -- these 8 properties, or actually, until recently, 9 properties because there used to be this 1 that we sold at the end of the last financial year that have been the biggest contributor to our results. And in fact, even in this period, they're the biggest contributor, contributing some 2/3 of the contribution from group properties. And then the other part, as I've mentioned, the associates' investments is that shareholdings in 10 of the 12 funds managed by FPAM. Our shareholdings in these funds are valued at some GBP 27.9 million. And obviously, if the other side contributed 2/3, this contributed around 1/3 of the Group Properties' contribution in this set of results. So moving on to the results themselves. The highlights. Well, the most important thing really is the cash. At the end of the last financial year, we sold our largest group property. So we've now got GBP 21 million in cash. And this is 150% up from the prelims because that sale hadn't quite completed at the time of prelims. And this cash secures the group position. And these are extremely well placed to navigate a fallout from COVID. And it's our intention to marry this cash with client money in order to magnify its purchasing power. And our model is to co-invest some 10% to 20% of the equity in any deal, which could see this GBP 20 million of equity magnified to GBP 100 million to GBP 200 million. And if we then add bank debt onto it as well, let's say, 50% LTV, that could be magnified to GBP 150 million or GBP 300 million. And as I mentioned earlier, we do expect opportunities to emerge from the COVID pandemic next year. The next key point to mention is net debt, significantly down, down by some 70%. And again, obviously, it was to do with the repayment of the bank loan associated with the sale of Chalubinskiego 8, that large group property that we sold at the end of the last financial year. Sold it, which completed at the beginning of -- in this half, just in April. So moving to the income statement. Profit before tax was down. It was down by about GBP 900,000 from the same period last year. And the primary explanation for this was the corollary to the sale of CH8. We may have GBP 21 million in cash and lower net debt, but cash doesn't earn anything. And by comparison, the contribution by CH8 in the same period last year was a profit of GBP 600,000 prior to the deduction of unallocated central overheads. But in the period just ended, it actually contributed a loss of GBP 135,000 finalized when we completed the sale. So in total, some GBP 735,000 lower than the same period last year. In addition, we had lower contributions. I'll come on to this on the next slide, actually. We have no contributions from our associates and investments, and we did not earn any performance fees in our Fund Management division. But these were offset by cost savings elsewhere, including a lower staff bonus accrual. Hence, the overall difference between this period and the same period last year was a difference of GBP 900,000. The lower contribution by our associates and investments was actually related to 3 funds, as you can see in the slide we're looking at now. The loss -- there was a loss incurred by Fprop Phoenix. Fprop Phoenix is a holding company for an office park in Kraków, Poland, called Eximius Park in which the group has a 23.4% shareholding, which is valued at GBP 6.9 million at market value. We bought this park in 2017 and introduced third-party equity in 2018. It was half taken when we bought it, and it's a turnaround situation. And we are in the midst of the turnaround. We've been investing capital in order to aid letting up the vacant parts. It now boasts a sports ground, a kindergarten. It's got its own railway station. And the price that we paid for it enables us to be very competitive on the level at which we lease out the space in this -- in the park. And if we prevail in letting up the vacant parts, then it should prove to be a very profitable fund. But like I say at the moment, it's going in the investment phase and it's at turnaround and so it contributed a loss. The other 2 funds where we saw a lower contribution from last year were Fprop Opportunities plc, our largest of associates; and Fprop Galeria Corso. And the reason for that is during the first lockdown in Poland, which lasted -- due to the pandemic, which lasted from the 14th of March until the 4th of May, the government, as in here in the U.K., forcibly closed nonessential shops. But furthermore, it absolved those shops, which were forcibly closed, from paying rent during the period of their closure. And so the aggregate result of that is that the contribution from these 2 funds is -- and our share of the contribution from these 2 funds was GBP 132,000 lower than it would otherwise have been, but we very much hope that, that's a one-off. There is another lockdown in Poland at the moment, like there has been in the U.K. and -- that they had not mentioned whether shops or nonessential shops are absolved from paying rent. So we're hopeful that, that will not come to pass. We are assuming the opposite. But of course, being cautious people, we are assuming the opposite here. Whilst we're looking at the income statement, let's have a look at our rent collection rates. These are excellent. These -- looking at the slide here, this is the rent collection rates in funds managed by First Property Group. And then the next slide is the rent collection rates for the 8 properties that we own directly ourselves in Group Properties. And all of those numbers are above 90%. The first row is what the rent collection rate would have been if we had invoiced it as normal. But because of COVID and because of the -- in Poland, government legislation that absolved some tenants from paying rent and because other tenants asked for rent holidays in order to keep our properties let, we have made some concessions, you can see a different collection rate as per the new arrangements, higher collection rate as per the new arrangements on the row below. Now moving to our own 8 Group Properties. There's minimal retail exposure in those funds. And so the collection rate is actually unchanged as a result of COVID or as a result of concessions because we didn't have to go. We've been granted very, very minimal concessions. I think these high collection rates are a testament to, not only the properties that we've invested in, but also the asset management capabilities of our team. These are market-leading rates. Okay. Turning to the balance sheet. I think the key figures to highlight here. Cash per share, 0.1921p and adjusted net assets of 0.543p. Now when you look at our share price, which was 0.38p until this morning, you can see that over half of our market cap is represent -- is in cash. And that represents about a 30% discount to our adjusted net asset value. And it's worth pointing out that the adjusted net asset value attributes no value whatsoever to our fund management business with its -- to our regulated Fund Management business with its prestigious client list and its GBP 0.5 billion in AUM. So given the extremely -- this looked -- it's worth looking at our NAV growth over the last -- since the credit crunch, actually. The orange part of the column represents the book net asset value, and then the gray bit represents the net asset value when adjusted to market value, less any taxes that would be due. Since before the credit crunch, March '07. Yes. Sorry, yes from -- since the peak before the credit crunch. That's a graph, you can imagine, that we are extremely proud of. And this, just looking at that net asset value breakdown in a little bit more detail, shows you how we got from 0.55p at 31st of March to just below 0.55p at 30th of September. So the revaluation loss was 0.118p per share. Actually, the Group Properties were not revalued as at the 30th of September. The -- talking about the 8 Group Properties. The properties in the funds are mostly revalued, but the properties -- the 8 Group Properties were not. Another graph, we're extremely proud, of our dividend. Given the strong financial position of the group, Directors resolved to maintain the interim dividend at 0.45p per share. We have never cut or missed a dividend payment since paying our first dividend in 2003, and that is a record we will do all we can to maintain. So I think at this point, I'll move on. I'll hand over to Ben, the Chief Executive. I've put up the comment that he put on the statement this morning, and we've achieved the sale of Chalubinskiego 8 in April, released some GBP 17 million of cash and has put the group in a strong position from which to navigate the economic fallout from the COVID pandemic. As a consequence of the sale of 8, there has been a reduction in rental income, which is the primary reason for the reduction in earnings reporting today. But this reduction should be temporary and lost mainly until we reinvest the cash. And we expect to do so in association with clients as a group, as I've mentioned. And as I've also mentioned, our aim is to invest some 10% to 20% of our equity or of the equity in any acquisition, which when coupled with [ Bacha ], should enable us to acquire up to GBP 300 million in property. The market is in a great deal of flux there, but we do expect interesting opportunities to emerge next year. Ben, over to you.

Yes. Great. Well, I mean, the future is nebulous, to put it mildly. We have had the greatest recession in the United Kingdom, I think, has had in 300 years. We're not out of it yet. I think some of the figures put forward by the OBR yesterday are fanciful, particularly the unemployment figure, which doesn't pick up. It only picks up those people who are actively looking for work. It doesn't pick up a whole swathe of people who are currently sitting on furlough and I think are likely to lose their jobs. I see ourselves in the kind of phony economic war at the moment with the real effects of the recession dulled by this phenomenal socialist package of spending that the government has undertaken over the last few months, and will continue to undertake until March next year. That, together with QE, I think, dulls any market movement in the value of property. So what we've seen is a reduction in turnover in the market, but we haven't seen any material price adjustments in the market. We have seen value reductions in our own portfolio as valuers get ahead of the curve, knowing what's in store. But as I say, I don't think there's much happening in the market at the moment. We are looking very carefully at all the markets, but until, I think, some of this government spending abates, we're not going to see the kind of opportunities that we would wish to see in order to jump in completely the kinds of assets, I think, that we would favor buying at the moment or what you might regard as being the eye of the storm so that we would be looking to buy vacant office blocks, which are in need of being repositioned; retail warehousing, perhaps, if we can price adjust the acquisition to reflect the likelihood of reductions in rental levels. And in Poland -- sorry, that's the U.K. And in Poland, we will be looking at any class of asset because it's, so far, been a better investment environment. The Poles have, altogether, navigated this pandemic better than the U.K. They are much more prepared as a nation to take personal risk. The complaints I get from Polish people are not really of how awful the pandemic is, but how awful it is to have to stay at home. They want to get out, they want to work. They're expansive. The government is expansive. And I think the Brits have slightly swapped their stiff upper lip for a lower quivering one is what I see from the last few months. And that is peculiar statement as you might regard that to be from a CEO of a public company. It does actually guide the way the economic recovery is likely to take place over the forthcoming months and years. So we see Poland as that environment. But for both environments, we think that we need to wait, really, before we're going to get proper opportunities to buy. That's roughly how I see the outlook. I don't think, by the way, that British government debt is something to worry about, even though we've had this extraordinary spending spree. The magic tree of quantitative easing, actually these British government finances, I think, in a reasonably healthy place. You can't go on harvesting the magic money tree, but what we desperately need in the U.K. are pro-growth policies from our government and not policies that are going to stifle a recovery. Not sure we really saw that from Rishi Sunak yesterday. Anyway, I'm kind of digressing. But coming back to the property Investment climate really, I doubt we'll be making any investments this year. We might make some in the first quarter of next year. But I think once the furlough ends and those other kind of supporting measures are brought to a close, then I think we will see more interesting opportunities in the market. And that's when I expect we will be spending. I had thought that when the furlough would first end on 31st October, we'd be in a better position to see more clearly now. But as we all know, it's been extended all until the end of March.

So I think that's basically how I see the outlook at all, very nebulous. And I will just take questions now that we've had online. How did USS managed to have a negative return? Was this due to trustee mismanagement? Well, I wouldn't be so bold as to blame the trustees of USS for the negative returns, but it is absolutely true, Carol, that the USS management team decided that they wanted to bring the mandate that we had with them to a close earlier than was -- earlier than the contractual end date, which is 2015, and they wanted to sell something like GBP 270 million worth of property, secondary property, pretty much all at the same time. That depressed values and caused some issues for USS. If they had actually just stood still, and allowed very high rate of return that, that portfolio was returning for them to continue to return that income, they would have been in a much better total return position. So that kind of explains it. They made a policy change. They dumped a lot of property in a market which is quite illiquid, and they effectively gave up the opportunity of high returns that would have seen them ride eventually. [ Stephen G. ] has asked, do you think it's better to invest in new properties at the moment or share buybacks? I definitely don't think it's better to invest in share buybacks. Yes, there's a big discount between NAV and the share price. But actually, if you look back at our record from the peak of March '07 until now, we have earned something north of a 20% rate of return per annum on our NAV. And that far exceeds any return, I think, that people can get on cash. So it is our absolute aim to maintain the dividend but not to do share buybacks and to accelerate repayment of capital to shareholders and to use the cash that we've got to make new investments and continue to drive returns for the group at that sort of level. [ Nick J. ] has asked, with a very healthy balance sheet, are you looking to actively seek opportunities now? Or do you think there will be better ones to come in time? Well, I think I've kind of answered that. There will be better ones to come in time once all the monetary stimulus and so on is eased off. [ Neil S. ] has asked, are you still...

[ Nick J. ]