A property investor managing to grow its assets

European property investor and fund manager First Property (FPO:27p) managed to post a small rise in its NAV to £52.5mn last year, one of the few property companies to do so in the face of a downturn in commercial property valuations and more challenging macroeconomic conditions.

Furthermore, the decline in full-year pre-tax profit masks a credible underlying performance. That’s because the prior year’s bumper profit was bolstered by the restructuring of the loan secured on its directly held 13,400 sq metre office property in Gdynia, Poland’s second-largest seaport after Gdansk. I covered this complex transaction in last year’s results (‘On the hunt for high yielding undervalued property’, 23 June 2023). The loan restructuring resulted in a £7.1mn credit in the 2022 accounts, whereas the 2023 accounts benefited from a much smaller £1.8mn profit on the sale of three properties: a warehouse in Tureni, Romania and two supermarkets in Poland.

Reductions in voids supportive of valuations

Importantly, First Property has managed to reduce voids on the Gdynia property from 98 per cent at the time of purchase to 72 per cent following recent lettings, narrowing the annualised net operating loss on the building to €70,000. The property is forecast to generate net operating income (NOI) of €2.1mn (£1.8mn) once fully let, an income stream suggesting material upside to the asset’s £14.5mn carrying value.  

Bearing this in mind, First Property’s chief executive, Ben Habib, notes that occupational demand remains good, helped in part by reduced development of new buildings and an influx of businesses from Ukraine, revealing that “several new tenants [at Gdynia] are lined up”. The same dynamics are at work in an undersupplied Warsaw, a key reason why First Property purchased 7,171 square metres of mainly vacant office space 10 months ago in a prime office building, Blue Tower, to take its interest to 17,937 sq metres (80.3 per cent). The asset generates NOI of €0.83mn and has a vacancy rate of 31 per cent. Habib expects to announce a “sizeable lease deal shortly”.

The Gdynia and Warsaw properties account for 72 per cent of the £54mn market value of the group’s seven directly held properties in Eastern Europe. In addition, First Property also holds interests worth £25.3mn in nine of the 12 funds it manages. Although third-party assets under management fell from £516mn to £400mn in the 12-month period, £63mn of the decline reflected net property disposals. The fund management business still earns £2.5mn of annual revenue and would have made an underlying profit of £0.7mn but for the £0.59mn claw-back of a profit share (now fully expensed) on one of the group’s funds.

Solid balance sheet and unwarranted discount to NAV

Reassuringly, First Property retains a healthy balance sheet. The group holds £7.7mn of cash and has debt liabilities of £29.7mn. However, £17mn of borrowings relate to the deferred non-interest-bearing consideration on the two properties in Gdynia and Warsaw. The group's £12.7mn bank debt is non-recourse and incurred an average interest rate of 1.8 per cent in the financial year.

Interestingly, First Property sees an opportunity to exploit tighter conditions in the property lending market by establishing a platform for the provision of secured high-interest commercial property loans. The group would earn an annual 1 per cent fee on the value of the loans arranged, sourcing capital from third-parties including high-net-worth individuals, and earn 20 per cent of any capital upside when the fixed-interest loans are sold on. It is a highly scalable product, the potential upside from which is not factored into First Property’s current valuation.

Priced on a 42 per cent share price discount to book value, and with a reduction in vacancy rates supporting valuations at the group’s directly held high-yielding properties, the shares remain attractively priced. Buy.

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