Strength in numbers

Wojciech Papierak, the former vice-president of PKO BP, has become the head of a new national monster - Grupa PHN. The Polish state treasury wants to privatise the company through a share flotation on the Warsaw stock exchange in what could be one of the ten biggest privatisations in the history of the bourse

Radosław Górecki, 'Eurobuild CEE': You said in a recent press conference that Grupa PHN would focus on managing and would not be a developer. This is quite a surprising declaration taking into consideration the fact that you announced at the same time that the group is planning to invest app. PLN 1.9 bln in building new projects.

Wojciech Papierak, president of Grupa PHN: When I said that we would not be a developer I meant that Grupa PHN would ultimately not be engaged in this activity. And even if it does, it will not be its main function.

How much time exactly will it take to finish your development projects?

We need to look at the structure of the assets we have at our disposal. There are a lot of undeveloped plots of land in attractive locations in our portfolio. It would be a sin not to use this potential. We want to increase the assets of the company by developing attractive projects. It is crucial that we do not want to build our liquidity on selling the assets. That is why the projects, the value of which will reach nearly PLN 2 bln, are meant to increase the assets of the company.

Your statements suggest that you want to develop app. 200,000 sqm. How much time will the construction of these projects take? One year, two years?

Carrying out this type of quite difficult project takes time - particularly in Warsaw.

Tricky projects in Warsaw can take forever...

This is not our target. We want to start our key projects soon.

Which are the key ones? Świętokrzyska 36...?

There is also Foksal, al. Wilanowska and the question over the future of the Kaskada
office building in Warsaw. And there is Intraco, which has one of the first tower blocks in Warsaw at its disposal. We have attractive land ready for development neighbouring this building. As you can see there is a lot of it. We also have ambitious plans for properties located outside of Warsaw. We want to build logistics centres and shopping facilities. All these projects are to be launched in the near future. We are planning to carry them out together with partners under the SPV formula.

I understand that according to your strategy the projects will contribute to and remain in the portfolio of the group? Or perhaps some of them will be offered up for sale to investment funds?

We will not sell them. The idea behind Grupa PHN is that we will eventually function under a formula similar to REITs (Real Estate Investment Trusts). So we will be a company which lives on properties: by managing them and making profits from leasing. Of course the portfolio will be run in a way that will maximise these profits. So we have not ruled out selling off some of the properties or buying attractive projects.

A skyscraper is planned at ul. Świętokrzyska 36, which could be the flagship project of Grupa PHN. You mentioned looking for a partner. What will the cooperation formula be like? When will we meet the partner and when will the construction start?

The decisions concerning the formula for carrying out this project have not been made yet. However, we have certain ideas about what form the eventual cooperation should take: we are looking to carry out the project together with a well-known developer with a lot of experience that will know how to realise the full potential of the site. Still, the most important thing at this point is to resolve the formalities and make a decision on the type of project. We will probably develop an office building. However, we are considering the option of opening a hotel as part of the project. The important thing is the fact that there is a station of the second underground line being constructed next to it. Our ambition is to connect the building directly with the underground station, creating a unique project.

You seem to be avoiding specifying any dates. I think that potential investors might not be satisfied with such declarations.

You asked me about Świętokrzyska, so I have given you the current status of the project. This is a big and difficult project. However, it is not the case that we are not providing concrete information. We also have projects on which construction work will most probably start this year or early next year. Work will be launched first on ul. Foksal in Warsaw, where we already have a building permit and we are currently at the stage of choosing the general contractor for the new office building. We are also hoping that we will start the construction of a big logistics centre outside of Warsaw. We will probably also launch a project in the TriCity.

Are the projects you have mentioned going to be developed together with partners? If so, which ones?

We will be doing a lot of the projects ourselves, but when it comes to the logistics centre we will develop it with a big partner, whose name we cannot reveal at this point. And we will start the project in Gdańsk on our own and finish it with a partner. We are determined to start the projects before listing on the stock exchange. If we are still at the declaration-stage by then we will not be credible.

Looking at the portfolio of the group it is clear to see that it is quite complicated, to put it mildly. It is of course very impressive to hear that it is worth PLN 2.3 bln. However, it does consist of a number of properties which could be the source of problems. I mean the land of the former State Agricultural Enterprises and a lot of villas. What should be done with them?

You said that it is a complicated portfolio. Perhaps. However, if it was not like that, it would not be a challenge. Our strategy is to take an individual approach to each property. At the moment we are examining the legal and technical status of particular buildings and plots very carefully. We are checking how they could be developed. We will create a plan for each property, which will contain recommendations to sell, keep, develop or recapitalise. The portfolio is not an easy one indeed and it is hard to imagine that we will function as an operator of 50 or 60 villas in the final model. Meanwhile some of our properties outside Warsaw, such as the State Agricultural Enterprises sites, are not included in local zoning plans. But how is this different from the situation in Warsaw? After all, there are also such properties in Warsaw and projects are underway. I assure you that much of the land owned by us has a lot of potential.

It seems to me that you are trying to avoid giving concrete dates. It is still not clear when the flotation of the group on the stock exchange is to take place. It is also not clear how long it will take to complete the development projects. Why all this reticence?

The fact that I do not provide concrete dates results from the fact that I do not want to make promises which are not going to be kept. We have finished the formal consolidation stage of the group and we are at the beginning of the integration phase. We are dealing with a number of business entities - each with its own structures, its own corporate culture, habits and IT systems. We are facing the task of operational integration, which we want to implement in the next few months. We have to take a look at the functioning of each of the companies and create a consistent decision tree that will enable us to manage the integrated companies smoothly. After all, we cannot debut on the stock exchange offering something which is not in order. That is why we avoid saying what it will be like. We want to show concrete facts. But we need time for this. There is another factor - the question about the situation on the market. I think this needs no comment. There is also the issue resulting from the practicalities of the market. The floating of a company on the stock exchange is usually carried out by mid-Q4 or only after Q1.

I understand that in the case of Grupa PHN we should expect the listing to take place after Q1 next year.

We are thinking about the privatisation taking place within the next few months.

Looking at how much work there is to do it seems impossible for the debut to take place within this year.

That is your assessment. [He laughs]

So I will ask you directly: is the flotation of Grupa PHN going to be possible this year?

Certain processes necessarily take time. We cannot fight against reality. Our aim is to launch the privatisation process as soon as possible. We are determined to act quickly but we have to operate rationally. So my answer is: time is not the most important thing here.

Grupa PHN currently employs 560 people. Is this a lot in your opinion? How many people might lose their jobs?

Today we do not know whether this is a lot or a few. The formal merger of the companies took place only a few weeks ago. These were separate enterprises and each of them had its own services. The employment rate in the group cannot be directly compared to companies dealing with property management. Please remember that we also develop projects. To a large extent we carry out certain types of work internally. Other companies contract external companies to do them. Which method is better? All this has to be calculated precisely. We are constantly in touch with the trade unions, which have been assured by us that we will not surprise anybody and will inform them about everything on a regular basis. That is why I ask you if I could please refrain from answering the question about whether the employment rate in Grupa PHN today is high or low.

The treasury has announced that it is considering the sale of 100 pct of the group's shares. So there is the possibility that a new owner will completely change the strategy which is being prepared for the company.

Of course this is possible. However, our aim is to create such a strategy that will convince investors. The participants in this type of process are banks and investment funds, which can analyse what they are being offered. I am convinced that potential buyers will opt for an investment that suits the plan which we will develop. I do not believe that anyone who decides to participate in the privatisation process will change our strategy radically.

What kind of revenue is being generated by the properties currently managed by Grupa PHN?

This amounts to over PLN 200 mln per year. It is revenue from the lease and sale of the properties which do not fit within the portfolio.

There are legal claims with regard to some of the properties. What is the scale of the problem?

I am not able to evaluate how much these claims are likely to cost.

Why?

Because our evaluation of our portfolio assumes that the properties affected by these claims have zero value for us. This is done in order to shield future investors from any nasty surprises. I know there have been accusations that the valuation of our portfolio is too cautious.

There have been such opinions voiced in the press. The accusations came from a number of trade union members.

I will say this: both myself and the management board members are aware of the legal responsibility entailed by managing the company's business. It is not our intent to lower the value of the assets - quite the contrary. That is why the speculation that someone is trying to lower the value of Grupa PHN is completely groundless.

To sum up: the treasury wants a quick privatisation. It has announced that this is possible sometime this year. Meanwhile, your statements suggest that there is still a lot of work to be done with the assessment of particular properties. The operational integration system also needs to be finished while the construction of a number of new projects is to start at the same time. And it would appear that there are no grounds to believe that the privatisation will take place this year.

First of all - completing our operational integration is undoubtedly our priority. However, in my experience it is possible to prepare the privatisation process within a few months. If it is not possible to finish it then all the processes can surely be started and it will be possible to say when they finish. Secondly - the development activities. All the projects which I have mentioned are advanced enough not to worry about them failing to be launched. We are talking about what will happen by mid-Q4 this year. The initial public offer decision is made together with the owner. As part of the preparation work for Grupa PHN's flotation, the treasury has already carried out a number of negotiations with potential investors, who were presented with its idea of how the process is to be implemented. The results of the negotiations have given us much optimism.

 

What is Grupa PHN?
Grupa PHN is a Polish state company which was created as the result of merging the following state companies: Intraco, Polski Holding Nieruchomości and Budexpo. Before the group was formed, Polski Holding Nieruchomości was itself created as a result of the integration of Dipservice, Towarzystwo Obrotu Nieruchomościami ?Agro', Składnica Księgarska, Kaskada and Cobo. Grupa PHN holds app. 180 properties in its portfolio - app. 200,000 sqm in buildings and plots with a combined area of 1,300 ha and a total value of PLN 2.3 bln. The treasury is currenty looking to privatise Grupa PHN via a flotation on the Warsaw Stock Exchange. It is still not clear how many shares will be issued and when they will be made available to investors. It is not out of the question that the company will be fully sold. According to unofficial information, the stock exchange debut could take place next year. Eventually the company will focus on the management of office, retail and logistics properties. It is additionally planning development projects which are to be carried out together with experienced partners in the sector. The value of the planned projects (with a total area of 200,000 sqm) is estimated at PLN 1.9 bln. Wojciech Papierak, the former vice-president of PKO BP, now heads Grupa PHN.