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Edited Transcript of FPO.L earnings conference call or presentation 21-Nov-19 10:30am GMT

Half Year 2020 First Property Group PLC Earnings Call

Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of First Property Group PLC earnings conference call or presentation Thursday, November 21, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Benyamin N. Habib

First Property Group plc - Group CEO & Director

* Jeremy Barkes

First Property Group plc - Director of Business Development

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Conference Call Participants

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* Gavin Laidlaw

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Presentation

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Jeremy Barkes, First Property Group plc - Director of Business Development [1]

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Thank you for joining us. The -- I'm joined here by Ben Habib, Chief Executive of the Group; George Digby, the Group Finance Director; and it's Jeremy Barkes speaking, the Group Business Development Director.

The -- a copy of the interim results is posted on our website, and a copy of the presentation is there too if you go to the Media tab.

So starting -- so we'll go straight to the presentation, and we'll go straight to the results section. So if you go to Page 8 of the presentation, you'll see that our revenue was up by nearly 10% and our statutory profit up -- our statutory profit before tax up 8%. We've done this by -- if you recall, in the second half of last year, we deconsolidated the funds in which the Group used to be the majority shareholder and no longer is the majority of shareholder. So in order to make this set of results comparable with last year's, we calculated the income statement on a like-for-like basis by moving Fprop Opportunities, which used to be consolidated into the -- accounted for as an associate so that we've got comparable numbers. And then our earnings per share was up by 22% because of a lower deferred tax charge.

Turning to the balance sheet. The comparables -- we've got comparables both to a year ago and to 6 months ago. We've shown the potential changes according to 6 months ago, but broadly, the balance sheet is largely flat. Adjusted net assets per share are up a little bit. The net asset value is now just shy of 60p. The cash balances were down compared to last year. But actually, if you strip out the effect of the deconsolidation of FOP, they're about GBP 0.5 million up and then fractionally down -- they're about GBP 1.25 million down from the year-end, but that's normal at this time of year because of the payment of the final dividend in the first half of each financial year, and the payments have stopped flowing through.

At the -- you'll note that the properties' market values have come down. Again, that's because of the deconsolidation of FOP, but they're slightly up from the financial year-end, and the LTV is broadly unchanged at about 70%.

So turning to the third-party AUM. That's marginally down. In the U.K., we sold a property for one of our managed funds, and we split it broadly similar to where it was about a year ago.

Page 11 shows our NAV progress since the credit crunch -- or since the before the credit crunch, actually. And the orange bar represents our book value, net asset value, and the gray bit above it represents our net asset value when adjusted to market values less any...

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Unidentified Company Representative, [2]

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Properties [are adjusted to market].

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Jeremy Barkes, First Property Group plc - Director of Business Development [3]

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Yes. When the properties are adjusted to market values less any taxes due upon their sale, i.e., the actual way of calculating it. It's also worth highlighting that the net asset value of our shares, obviously, excludes any value for the fund management business.

The following Page 12 breaks down a little bit more granular detail the movement of net asset value over the last -- in particular, over the last year, actually, and it's been broadly flat over the last year.

Page 13 is our dividend graph or dividend chart, a chart we're particularly proud of. Once again, we've increased the dividend this time by 2.3%.

So going now into the segmental analysis. We've got 2 divisions that shareholders will know. We'll take the fund management division first. And you can see by looking at Page 15 that the split between the 2 divisions was 25% -- 75% fund management division contributed 25% of group profits before tax amounting to GBP 1 million, and we'll now go into the breakdown of that.

So you will recall from what I said a few minutes ago that the asset -- the growth assets are slightly down. The annualized fee income that the fund management division generates is GBP 3.56 million prior to any performance fees payable and prior to the profit share the group is entitled to from Fprop offices.

And actually, we'll skip to Page 19. It breaks down what -- how we charge fees. So in the U.K., as you would expect from a more mature market, fees are slightly lower than they are in Central Europe. And we charge typically between 60 basis points to 1% of gross assets. But except for -- in the case of Fprop offices, where we have a profit share arrangement, we entered into that arrangement because we felt that we would make more money by taking share of the profits than we would by charging a fee. And the breakdown of how those profit share -- or how that profit share is split is there on Page 19.

The -- in order to be cautious in our accounting, however, we only receive cash payments prior to the sale of properties up to the first band, i.e., 10% of total profit. And the -- there is a callback feature enabling if we do not make up to 7.5% IRR, the repayment of fees -- and that is why we do this with -- why we only take up to the first band, up to the 7.5%. So there should be -- assuming we make more money than 7.5% IRR at the end of this fund, there should be a lump sum payment towards the end. And we've got a selection of some of the clients who we run funds for on the right. They have authorized us to display their identity.

Looking at page 18, you can see the split of where the funds under management are located. You can see that 60% is in the U.K., and nearly 70% of those funds are managed on behalf of occupational pension schemes.

Turning to our other division, the Group Properties division. Page 21 shows the split of contributions to that division. And since the deconsolidation of profit has become easier to -- or it's become simpler. So we now have 2 sources of earnings. On the one hand, we've got the 9 properties that the group owns directly, which are worth -- where the equity that the group has invested is worth GBP 28.8 million. And on the other hand, you've got the shares in the funds that we manage, and we've got shares in 10 of the 4 funds that the Fund Management division manages. And the split of equity employed between the 2 is broadly similar. And the split of profits between the 2, the 9 directly owned properties marginally outperforms the shares in the funds. But looking at that graph on Page 21, you'll see that the dark gray bit is discontinued and the reason for that being that, that used to be the contribution from FOP, and that has now been folded into the orange bit from 2018 -- well, on this -- on a pro forma basis from 2018 onwards from now, you can see 2019 now.

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Unidentified Company Representative, [4]

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As an associate.

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Jeremy Barkes, First Property Group plc - Director of Business Development [5]

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As an associate. So turning to those 2 segments in turn. Firstly, looking at the 9 directly owned Group Properties. You can see that of the 9, 3 of them make up the overwhelming majority of the value of the 9, and those are the 3 large offices in Poland. And if you go to Page 23, you can see that -- on the pie chart on the right, that those 3 offices make up nearly at what -- nearly -- I think it's that 80% roughly, the value.

And then if you turn to Page 24, you can see photographs of those 9 properties and the 3 on the left of the 3 that make up the bulk of the value. And turning to Page 25, you can see that the value of those properties -- of the 9 properties at market is nearly GBP 100 million, GBP 96.3 million, and those are valued on a very undemanding yield of 10%. And the total debt secured against them is GBP 67.7 million, hence, how we come up with our equity -- net equity invested, GBP 28.8 million.

The loans secured against those properties are in -- on noncross collateralized and they're nonrecourse SPVs to other parts of the group. And then the interest cost is a very affordable GBP 670,000 in the first half, so GBP 1.3 million over the course of the year because you can't extrapolate that.

And our weighted average borrowing cost has come down slightly, 1.84% per annum, so a very healthy difference between the price that we're paying to borrow the money and the yield that the properties are valued at.

We have fixed about 42% of our loans. And you can see there the 1% increase on the floating part would increase our interest bill by about GBP 460,000.

Page 26 shows the tenants who are in those properties. Asseco is the largest, and Asseco is the sole tenant of the property in Gdynia, which is -- and the lease to Asseco, as we'll come on to in a minute, is due to expire in about a year's time, on the 28th of October. However, Asseco has already sublet some of its space, and we've already started the process of releasing Asseco's space. And so we would hope that we will have signed up at least some of the new tenants prior to the expiry of Asseco's lease. And we would also hope that the likely reduction in income resulting from the expiry of that lease is mitigated by continued re-leasing of the balance of Chalubinskiego 8, which is the office tower we got in Warsaw and is the most valuable, the largest of our 9 Group Properties.

If you recall, this is the one where prior to the start of the last financial year, we obtained vacant possession of around half of the space that we own in that building from Citigroup, and we have since re-leased around 2/3 of that space. The building is now 80% let. But there is always a time lag between re-leasing a building and the net operating income coming through, partly because of the timing of the re-leasing and partly because of incentives that are usually granted to tenants to take leases, and those incentives are usually payable at the beginning of a lease. So hence why we say that the NOI on an annualized basis, as at the 30th of September, was GBP 1.3 million. But once it's fully let, it should rise to GBP 3.2 million, which seems like a big jump considering it is already 80% let. But that is the explanation, is to do with the runoff of incentives, and that should mitigate -- we hope that will mitigate the reduction on income that are -- that we are likely to have when it would effect 28th of October next year when we lease to Gdynia -- or the building to Asseco expires.

And then the other large group property, the smallest of the 3, is the 1 in another tower in Warsaw, which is broadly fully let and is contributing EUR 1.83 million of net income on an annualized basis.

Turning to the second part of the Group Properties income, and that is the shares that we own in the -- in tenant -- the funds that we manage. And that contributed to just over GBP 1.25 million. The group profit before tax slightly down on a pro forma basis from last year. The reason being that we had a one-off profit last year on the sale of some supermarkets in one of the associate funds that we manage, which is now sort of the result and that was the Fprop Romanian supermarkets fund.

And then Page 31 lists the noncontrolling interests that we own. I'd like to say there are 10 of them in the 12 funds that First Property Group manages for third parties.

As for the market, the Polish economic -- great story continues. GDP has been growing at 3%, 4% or 5% every year for years and years with a brief blip in 2013 when it drops to about 1.5% or so. One of the drawbacks of this fantastic economic growth story is that the commercial property market has experienced a lot of speculative development, and that has kept a lid on capital values and on rent levels. But there are signs in some subsectors that the pricing power is changing in favor of landlords. One of the reasons for that could be that there has been inflation creeping into the Polish economy over the last year and a bit or so, and the price of labor has gone up. And so the cost of development for developers has, therefore, gone up.

But investor demand remains high. Volumes for this year are expected to match last year, roughly about EUR 7 billion a year. And prime yields remain sort of sub-6% per annum. That's not the market that we operate in. We operate -- we are income investors, so we require higher yields in order to make this sort of attractive to invest. And there is a 2-tier market, really, over there, and we are able to find attractively priced property, but it's harder, at the moment, to find attractively priced properties as we are working on some deals at the moment. It's got a very -- which may or may not come to fruition.

The debt market works very well over there with margins similar to over here and [Thanksgiving for them].

Romania has been another economic success story over the last few years. In fact, GDP grew at about 7% a couple of years ago. It's slowing down now, but it's still growing. And like in Poland, if this economic growth has been accompanied by commercial property development on a speculative basis, which has kept a lid on capital values and on rental growth. Investor demand is smaller in Poland. It's about EUR 1 billion that trades each year. But interestingly, investors are moving out into secondary cities. They've always been looking at secondary cities or investing in the secondary cities for the retail property but also for office property and Cluj-Napoca, where, if you recall, we invested, we bought an office building a couple of years ago, is probably the front of the pack there in terms of attractive destination for commercial property investors.

And the banking market is improving in Romania. A couple of years ago, loans had a 4.5% margin. They have now come into the 3.5% or so over EURIBOR. And so this, in turn, should also increase liquidity in the commercial property market.

As for the U.K., the commercial property market has been rather gridlocked over the last couple of years, really, not helped by all political uncertainty. The market for secondary offices has performed well as the availability and supply of secondary offices has reduced as many of these are being converted to residential use and the ability of developers to build new office space at the same sort of rent levels as the existing commercial space is not possible because of building regulations, and so, therefore, rents are rising in secondary offices in the U.K. So as everybody knows, the retail sector is what's been dragging down total returns in the U.K. commercial property space, and so total returns in the year-to-date of only 1.9% is basically explained by capital value and rental reductions in the retail sector. But within the retail sector, there are some segments performing better and worse than others, and so high street retail is, obviously, leading the charge of the poor performance and fashion-led retail. But the retail warehousing is doing okay broadly.

And that summarizes this set of results. It's an extremely repeatable set of results given the visibility that we have with our fund management fee income and the rental income that we earn from the commercial properties that we own and the shares in the funds that we own.

So there's good visibility, cash generative, [mainly] all our profits of a recurring nature, and the markets in which we operate, are performing fine.

Let's turn it over to the audience for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question.

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Gavin Laidlaw, [2]

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It's Gavin Laidlaw, Stockwatch. I just wanted to pick you up on something you were talking about working on deals. I mean you've owned quite a lot of your properties for a while. So I'm wondering, are you inclined to sort of throw a couple of things up in the air, and you go off somewhere else, and have -- otherwise, have you got another source of funding?

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Jeremy Barkes, First Property Group plc - Director of Business Development [3]

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I think it's probably best if Ben answers the deals.

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Benyamin N. Habib, First Property Group plc - Group CEO & Director [4]

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Well, we -- we've got 2 ways of growing. The first is by deals in Central and Eastern Europe, which is principally Poland. And as I have said, we're kind of deal oriented, so we find a deal. We like it. We do our due diligence on it. We raise the equity and debt required for it and then we buy it. And we've got about 3 of those in the pipeline at the moment. Not all of them will come to fruition, but hopefully, 1 or 2 of them will.

And then in the U.K., we typically look for themes in which to invest. And then the U.K. has been a really drab market for the last year as there's a kind of -- the retail market has been in the doldrums and office market quite pricey. But we are looking closely at the retail market just in case it bottoms out, in which case, we would go off and raise the funds for the retail market. And that's really it at the moment.

We -- in terms of the properties we've owned for a long time, all our properties up for sale all the time as long as we get the right price, and we might sell a property or 2 in the next year and that would, obviously, free up more cash to go and do new deals.

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Gavin Laidlaw, [5]

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So picking up on the -- your thinking about the possibility of setting up a retail fund, have you found a few [retail assets] ?

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Benyamin N. Habib, First Property Group plc - Group CEO & Director [6]

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Yes. We need to be confident that we've reached the -- or like at least close to the bottom of the retail cycle in the U.K. Retail, as you know, has been caught in a perfect storm with business rates, minimum wage, the Internet, all hitting the retail sector. The government, I think, is (inaudible)...

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Gavin Laidlaw, [7]

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So we're talking high street rather than the retail -- new river type of stuff?

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Benyamin N. Habib, First Property Group plc - Group CEO & Director [8]

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Yes. Well, the entire retail sector has been hit in terms of valuation. You're right to draw a distinction between the 2 because I think that the impact on values in retail, across the board, has been wrong. It should really only have impacted those areas where rents have been particularly vulnerable, which is the high street and shopping centers. And the stuff that we own is actually retail warehousing. So we're just waiting to see when values look like they might be bottoming out, and then we might jump in and buy a few assets.

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Gavin Laidlaw, [9]

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[Until this year]. And is the -- are you buying those by specifically raising money for it, but if some -- once one of your properties, you might do it another way?

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Benyamin N. Habib, First Property Group plc - Group CEO & Director [10]

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Yes. I mean we'll -- if it looks like there's a theme developing and requiring GBP 100 million or something, then we'll go out and raise the fund. But if it's 1 or 2 deals, we can probably speak to our existing investors and their existing funds and maybe just get a bit of extra cash or deploy some uninvested cash that's sitting there into the new deals.

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Operator [11]

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We'll take our next question.

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Benyamin N. Habib, First Property Group plc - Group CEO & Director [12]

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Any other questions?

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Operator [13]

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We don't have any other questions in the queue for now, but the line just got dropped. Okay, we have a line in the queue.

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Unidentified Analyst, [14]

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It's [Chris Thomas]. Can you -- one for Ben, really. Can you just say a bit about what's going on at the Phoenix Park? And give us an update on sort of the progress in turning that around?

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Benyamin N. Habib, First Property Group plc - Group CEO & Director [15]

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Yes. So the park looks amazing. We've got a new -- we've literally got a park within the park, a playground, a sort of barbecue area, gym, outside -- outdoor gym, the train lines have all been upgraded, trains are running more frequently now. The station has been upgraded. We've got 3 bus service to and from the park. We've refurbished the receptions across each of the buildings. We've done some of the CapEx that was required to fix leaks in the basement that we inherited when we bought the properties. We are in the process of building additional car parking on a nearby plot that we bought. And really, the park now is a first class. It is absolutely a first-class office park and arguably the best office park in Poland.

And the only thing we've got to do now is the long process of letting up the vacant space. We've got tenant interest. We've got about 25,000 square meters we need to lease. And tenant interest is coming in at levels of around sort of 300 square meters to 500 square meters with the odd demand at 1,000 to 2,000 square meters. So it's going to be a long haul, [Chris], but we should get there in the next 3 to 5 years, which is always the plan.

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Unidentified Analyst, [16]

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What's the occupancy at the moment?

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Benyamin N. Habib, First Property Group plc - Group CEO & Director [17]

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It's about 50%.

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Unidentified Analyst, [18]

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5-0, 50%, yes.

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Benyamin N. Habib, First Property Group plc - Group CEO & Director [19]

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5-0, yes.

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Unidentified Analyst, [20]

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Yes. So a long way to go, but as these -- I mean obviously makes a big difference to the economics of that.

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Benyamin N. Habib, First Property Group plc - Group CEO & Director [21]

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Yes. It's breaking even roughly on its 50% position. And we've just got to get tenants in. Just the bulk standard property management business. All the heavy lifting has been done.

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Operator [22]

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(Operator Instructions) Sir, we do not have any further questions in the queue. Would you like to add any additional remarks?

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Benyamin N. Habib, First Property Group plc - Group CEO & Director [23]

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No. I think unless there are any other questions, I think we can bring the conference call to a close.

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Operator [24]

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Okay, sir.

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Benyamin N. Habib, First Property Group plc - Group CEO & Director [25]

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Thank you very much, everyone.

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Operator [26]

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This concludes today's call. Thank you for your participation. You may now disconnect.