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Bargain shares: Priced for a profitable outcome

Aim-traded UK and eastern European property fund manager and investor is lining up some smart property deals, has launched a new fund, and is attracting tenants
Bargain shares: Priced for a profitable outcome
  • First half pre-tax profit more than trebles to £6.67m
  • One new fund established, Fprop Fulcrum Property
  • UK Pension Property Portfolio fund extended to 2027
  • In talks to acquire further 32 per cent share of prime Warsaw office building

Aim-traded UK and eastern European property fund manager and investor First Property (FPO: 34p) has reported a 14 per cent rise in net asset value per share to 48.88p in the latest six month trading period. The key driver was a material debt reduction following restructuring of a finance lease on the group’s 13,500 square metre office property in Gydnia, Poland.

First Property previously had a short non-recourse €25m finance lease on the overrented property which expired in February, so had a strong hand to play with the lending bank, ING, when the tenant vacated. As part of the restructuring, the group paid ING €4m in cash and the finance lease liability was replaced by a €12m interest bearing loan (expiring in June 2024), hence a €9m debt reduction which led to a £7.8m profit being booked.

Importantly, the well-located town centre property is attracting tenants with 10 per cent of the space taken up at monthly rents between €12 to €14 per sq metre. Chief executive Ben Habib is “working on several new leases to get critical mass”, adding that at current rents the group will be looking to exit the property at a price of €23m to €24m within a year or two.

The directors have also been working on a smart deal to buy a further 32 per cent of a prime office building in Warsaw, Blue Tower. A banking tenant is vacating the space and First Property has agreed to pay 44m Zloty (€9.4m) over six years to acquire it. The Warsaw office market is strong, so the group should be able to attract new tenants to add material value to the asset. To put the potential uplift into perspective, First Property already owns 48 per cent of the tower block which generates net operating income of €1.25m and has a valuation of €18.6m.

The fact that the group has leased out 73 per cent of the 4,000 sq metres vacant space at CH8 Tower in Warsaw following the sale of its €44m stake last year highlights the strength of demand for prime office space in the city. It also means that having provided the new owner of CH8 a rental guarantee worth £1m per annum over five years, the maximum liability over the remainder of the rent guarantee period has been cut to £1.2m, and falling.

Fund extensions and launches

The extension of the group’s £65.9m UK Pension Property Portfolio (UK PPP) fund mandate to 2027 looks another shrewd bit of business. Another fund managed by the group, Fprop UK Special Opportunities, is raising £21.5m in new equity from Oxbridge colleges and First Property (£3.24m contribution), to acquire 56.6 per cent of UK PPP fund for £36.75m. The balance of the consideration will be funded from property disposals from the UK PPP fund.

Effectively, the group’s 0.85 per cent management fee income and earnings from its 12 per cent interest in the fund’s equity, mean that its total income will remain unchanged while extending the fund’s life. Also, the deal was based on valuations at 30 June 2021, since when values for “all UK commercial property” increased by 3.8 per cent in the third quarter, the fastest growth rate for 11 years. The group will earn a £269,000 fee from the selling shareholders, too.

Attracted by the positive UK investment and occupier market both in the UK and Poland, Fulcrum Asset Management has established a new fund, Fprop Fulcrum Property, with First Property. The initial equity commitment of £10m includes a £250,000 contribution from First Property, and the group will make a 2.5 per cent contribution of all commitments thereafter upto a maximum of £2.5m. First Property will earn annual fees based on the value of properties under management, and performance fees, too.

Discount to sum-of-the-parts valuations

First Property’s equity interests in 11 of the 13 funds it manages are worth £28.4m (25.6p a share). The 13 funds own 68 properties worth £533m, of which 66 per cent is located in UK, 32 per cent in Poland and 2 per cent in Romania. The fund management business is generating annual management fee income of £2.9m excluding performance fees and profit share on an office fund.

In addition, the group has £18.2m (16.4p) equity in seven directly held properties in Poland and Romania. These properties are valued at £42.9m and have £24.8m of low-interest non-recourse debt secured on them.

This means that the group’s equity interests in funds and directly held properties are worth 23 per cent more than the group’s market capitalisation of £37.5m (34p). First Property also has free balance sheet cash of £12.2m (11p) to fund its equity in new debt funded investments.

Bearing this in mind, Habib envisages the group engaging in higher trading activity over the coming year, the effect of which will be to deploy the balance of the cash realised from the CH8 disposal while at the same time making disposals into a strong investment market to recycle cash. The board are also committed to a progressive dividend aligned to free cash flow generation, declaring an interim dividend of 0.25p a share.

First Property’s share price has risen from 29.5p when I covered the annual results (‘Investors overreaction presents buying opportunity’, 24 June 2021), and I haven’t changed my positive view. In fact, I am more bullish now given the improvement in investor sentiment in the commercial property market which augurs well for First Property being able to pull off further smart deals. Buy.

Finally, I am now on annual leave until 5 January 2022.

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