Aim-traded UK and eastern European property fund manager and investor First Property (FPO:53p) pulled off what I considered to be the property deal of the year in the summer (‘Profit from the deal of the year’, 14 Jun 2018). I wasn’t exaggerating as First Property’s EPRA net asset value (NAV) increased by 12.5 per cent to £70.9m, a sum worth 62.2p a share, in the six months to the end of September 2018. I expect further uplifts in the future, too.
Having acquired control of the companies that own the majority of the buildings in Krakow Business Park, since renamed Eximius, located 15 minutes from the centre of Poland’s second-largest city, when the €47m (£42m) debt secured on the buildings was in default, the company first restructured the loans (effective interest rate payable of only 1.85 per cent), and then secured commitments from third-party investors to invest €33m (£29.2m) in Eximius in return for a 76.6 per cent equity interest. First Property still retains an equity stake of 23.4 per cent, which is in the books for £10.5m, or more than 11 times the £936,000 it paid to take control of Eximius only a year ago.
The four office buildings comprise 50,000 sq metres of office space which generate an annual net operating income of €2.6m (£2.3m) from blue-chip companies including investment bank UBS, and logistics group UPN. However, they are only half let, so the underinvested vacant office space is being upgraded by First Property in order to attract new tenants. To date, €5m has been invested, all of which has come from new investors as First Property has a free carry on its investment. The company is also earning an annual management fee of €360,000. Once fully let Eximus has tje potential to produce annual net operating income of €7.5m to support a valuation north of €100m, compared with current book value of €72m, thus providing a further kicker for First Property’s equity stake.
It’s not the only smart deal the company has pulled off. First Property directly owns five properties in Poland and Romania which are worth just shy of £100m, the largest of which is a half share in the CH8 Tower in Warsaw which is in the books for €36m. Half the 20,000 sq metre of office space had previously been let to investment bank Citi at a rent of €300 per sq metre. First Property has now refurbished the vacant 10,000 sq metre space at a cost of €300 per sq metre and signed leases on 30 per cent of it at rents 50 per cent higher than Citi was paying and is in advanced negotiations over a further 5,000 sq metres of space. The company also manages and/or has investments in a further £80m of high-yielding properties in Poland.
The income stream generated from third-party assets under management (AUM) is on the rise too, up by 44 per cent to £551m in the 12 months to the end of September 2018. This was driven by new mandate wins including Fprop Offices LP, a £181m fund launched in the summer of 2017 to invest in office blocks and business parks across England. That fund is now £146m invested with the properties purchased on an initial yield of 7 per cent. It has potential to gear up, too, thus enabling the purchase of up to £90m of additional properties. First Property has opted for a profit share, in lieu of an annual management fee, which chief executive Ben Habib expects to be around £700,000 in the 12 months to the end of March 2019.
True, the deconsolidation of its shareholding in Fprop Opportunities, a company that holds five high-yielding properties in Poland worth £74.5m, means that investment will now be treated as an associate. This explains why Arden Partners trimmed its full-year pre-tax profit estimate from £7.7m to £6.8m. However, the forecast doesn’t include the anticipated £700,000 contribution from Fprop Offices, so I still expect First Property to more or less hit Arden’s previous earnings per share (EPS) estimate of 4.8p, an outcome supporting a 6 per cent hike in the payout to 1.7p a share.
I first recommended buying First Property’s shares at 18.5p in my 2011 Bargain Shares Portfolio, since when the board has paid out cash dividends of 10p a share to produce a 240 per cent return, and even higher still if you had reinvested the dividends. NAV per share has grown from 14p to 62p in the same period, highlighting the significant shareholder value created from First Property’s shrewd investment activities, a trend I fully expect to continue no matter which way Brexit pans out. That’s because a hard Brexit would lead to currency weakness and increase the value of the company’s overseas properties, while a soft Brexit would be a positive for the UK funds which account for £423m of First Property’s total AUM of £730m.
First Property’s share price rallied by a third in value post my last article to an all-time high of 67p, and then drifted back on profit taking. Trading on a 15 per cent discount to book value, offering a prospective dividend yield of 3.2 per cent and priced on 11 times likely EPS for the full year, this is a repeat buying opportunity worth exploiting. Buy.
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