First Property Regulatory News (FPO)

First Property Group plc

Interim results for the six months to 30 September 2022

First Property Group plc (AIM: FPO), the award-winning property fund manager and investor with operations in the United Kingdom and Central Europe, today announces its interim results for the six months ended 30 September 2022.

Highlights:

· Profit before tax: £2.39 million (6 months ended 30 September 2021: £6.67 million)

· Cash reserves: £5.98 million (31 March 2022: £6.42 million)

· Net debt: £23.55 million (31 March 2022: £17.24 million)

· Purchased additional 32% of Blue Tower, Warsaw, for £7.44 million increasing the Group's share in the building to 80%

· Sold a warehouse in Tureni, Romania for £3.05 million, generating a profit on disposal of £1.06 million

· Leased a further 9% of office block in Gdynia

· Third party assets under management ("AUM"): £493 million (31 March 2022: £517 million)

· Total AUM: £542 million (31 March 2022: £559 million)

· Weighted average unexpired fund management contract term at 30 September 2022: 2 years, 9 months (31 March 2022: 3 years, 3 months)

· Interim dividend: 0.25 pence per share (30 September 2021: 0.25 pence per share).

Financial Summary:

Commenting on the results, Ben Habib, Chief Executive of First Property, said:

"Economies across the World are experiencing the aftershocks of lockdowns. Employment markets and supply chains were broken, and fuel reserves were neglected. When economies eventually unlocked, the resultant demand created a spike in inflation.

"Instead of moving to relax fiscal constraints, the UK Government is raising taxes. At the same time, the Bank of England is raising interest rates.

"This has caused the price of debt to rise significantly from the lows created by loose monetary policy. A re-pricing of the property market is underway, and it is as yet unclear where this might settle.

"There is bound to be a period of weakness, but things should settle during 2023 as long as there are no other shocks to the system. In time, higher inflation should result in rents increasing across the board, though a recession may slow down this adjustment.  

"Our financial position remains strong with some £54.6 million of adjusted net assets at market value, some £6 million in cash and modest leverage, most of which is interest free."

Investor Presentation:

A briefing for analysts and investors will be held at 11.00hrs today via Investor Meet Company. To participate it is necessary to register at https://www.investormeetcompany.com/first-property-group-plc/register-investor and select to meet the Company. Those who have already registered and selected to meet the Company will be automatically invited. A copy of the accompanying investor presentation and a recording of the call will be posted on the Group's website.

For further information please contact:

Notes to Investors and Editors:

First Property Group plc is an award-winning property fund manager and investor with operations in the United Kingdom and Central Europe. Its focus is on higher yielding commercial property with sustainable cash flows. The Company is flexible and takes an active approach to asset management. Its earnings are derived from:

· Fund Management - via its FCA regulated and AIFMD approved subsidiary, First Property Asset Management Ltd ("FPAM"), which earns fees from investing for third parties in property. FPAM currently manages twelve funds which are invested across the United Kingdom, Poland and Romania.

· Group Properties - principal investments by the Group, to earn a return on its own capital, usually in partnership with third parties. Investments include six directly held properties in Poland and Romania, and non-controlling interests in ten of the twelve funds managed by FPAM.

Quoted on AIM, First Property has offices in London and Warsaw. Around one third of the shares in First Property are owned by management and their families. Further information about the Group and its properties can be found at: www.fprop.com.

CHIEF EXECUTIVE'S STATEMENT

Performance:

I am pleased to report interim results for the six months ended 30 September 2022.

Revenue earned by the Group was £4.19 million (6 months ended 30 September 2021: £4.03 million) yielding a profit before tax of £2.39 million (6 months ended 30 September 2021: £6.67 million). The profit last year was flattered by a loan restructuring which resulted in the amount owed reducing by £7.81 million. The profit in this period was mainly from property sales.

Diluted earnings per share decreased to 1.83 pence (6 months ended 30 September 2021: 5.72 pence).

The Group ended the period with net assets calculated under the cost basis of accounting of £44.84 million (31 March 2022: £44.14 million), equating to 40.44 pence per share (31 March 2022: 40.00 pence per share). The net assets of the Group with property values adjusted to their market value less any deferred tax liabilities (EPRA basis) was £54.62 million, or 48.34 pence per share (31 March 2022: £53.43 million, or 47.28 pence per share). The market values of Group properties are independently assessed at least once a year, on 31 March.

It is worth noting that some 17,000 square metres of the Group's two directly owned offices in Warsaw and Gdynia are vacant, which, once let, should generate in excess of €3 million per annum.

Gross debt at the period end amounted to £29.53 million (31 March 2022: £23.66 million), which was secured against five commercial properties in Poland and one in Romania. Of this, £16.77 million was non-interest bearing and represents deferred consideration payable for the purchase of two properties in Poland.

The Group's gearing ratio, calculated with its six directly owned properties at book value, was 39.71% (31 March 2022: 34.90%). Using market values for these properties the gearing ratio was 35.09% (31 March 2022: 30.69%).

The Group's six directly owned properties are held in separate non-recourse special purpose vehicles without any cross collateralisation or Group guarantees.

Group cash balances at the period end stood broadly stable at £5.98 million (31 March 2022: £6.42 million), equivalent to 5.39 pence per share (31 March 2022: 5.81 pence per share).

Major cash movements in the period included:

· expenditure of £1.07 million for the purchase of an additional 32% of Blue Tower in Warsaw;

· expenditure of £0.76 million for the purchase of additional shares in Associates; and

· receipt of £0.60 million in net cash proceeds from the sale of a warehouse in Tureni, Romania.

Dividend:

The Directors have resolved to pay an interim dividend of 0.25 pence per share (6 months ended 30 September 2021: 0.25 pence per share). It will be paid on 30 December 2022 to shareholders on the register at 9 December 2022, with an ex-dividend date of 8 December 2022.

REVIEW OF OPERATIONS

PROPERTY FUND MANAGEMENT (First Property Asset Management Ltd or FPAM)

Third party assets under management at the period end decreased by 4.6% to £493 million (31 March 2022: £517 million). The decrease was attributable to the sale of four properties, all in the United Kingdom, valued at some £25.5 million for £28.2 million. These were offset by the purchase of one property, also in the United Kingdom, for £5.8 million. In addition, there was a decrease in the value of the properties held in third party managed funds of £11.6 million offset by a £6.5 million foreign exchange gain.

64.0% of third-party assets under management were located in the UK, 34.2% in Poland and 1.8% in Romania.

Fund management fees are generally levied monthly by reference to the value of properties. In the case of Fprop Offices LP, the Group is entitled to a share of total profits in lieu of fund management fees and to receive annual payments on account equivalent to 10% of total cumulative income profits and realised capital gains. These payments are adjusted, if necessary, for any overpayments made in previous years up to a maximum of total past cumulative payments received. Cumulative payments received totalled £1.97 million as at 30 September 2022 (31 March 2022: £1.97 million).

Revenue earned by this division decreased to £1.66 million (30 September 2021: £1.91 million), resulting in profit before unallocated central overheads and tax decreasing to £0.52 million (30 September 2021: £0.83 million).

At the period end fund management fee income, excluding performance fees and the profit share from Fprop Offices LP, was being earned at an annualised rate of £2.53 million (31 March 2022: £2.66 million).

FPAM's weighted average unexpired fund management contract term at the period-end was 2 years, 9 months (31 March 2022: 3 years, 3 months).

The reconciliation of movement in third party funds under management during the period is shown below:

An overview of the value and maturity of each of the funds managed by FPAM is set out below:

* Not subject to recent revaluation.

The sub sector weightings of investments in FPAM funds is set out in the table below:

GROUP PROPERTIES DIVISION

At the period end the Group Properties division comprised six directly owned commercial properties in Poland and Romania valued at £48.67 million (31 March 2022: seven valued £42.24 million), and interests in ten of the twelve funds managed by FPAM (classified as Associates and Investments) valued at £29.83 million (31 March 2022: £30.60 million).

The contribution to Group profit before tax and unallocated central overheads from the Group Properties division was £2.40 million (30 September 2021: £8.13 million), of which the six directly owned properties contributed £0.98 million (30 September 2021: £7.72 million) and the Associates and Investments contributed £1.42 million (30 September 2021: £0.41 million).

The profit earned by the six directly owned properties last year was flattered by a loan restructuring which resulted in the amount owed reducing by €9 million (£7.81 million).

The increase in profit earned by the Associates and Investments was mainly due to the Group receiving £1.20 million in distributions from its 11.1 % interest in Fprop UK Special Opportunities LP (Spec Opps), following the sale of two properties by UK Pension Property Portfolio LP, in which Spec Opps has an interest of 49.7%.

During the period the Group increased its shareholding in Blue Tower in Warsaw to 80% by the purchase of a further 32% in the building for a consideration of £7.44 million.

The Group sold a property in Romania for £3.05 million, realising a profit of £1.06 million.

The Group also leased a further 9% of its office property in Gdynia, Poland. Once this space is handed over to the tenant, anticipated in January 2023, the building will be circa 28% occupied.

1. Directly owned properties (all accounted for under the cost model):

The book value of the Group's six directly owned properties was £42.56 million. Their market value, based on their valuation at 31 March 2022, together with the price paid in August 2022 for an additional 32% of Blue Tower, was £48.67 million.

*Prior to the deduction of unallocated central overhead expenses;

**Includes €9 million (£7.81 million) debt reduction following restructuring of the finance lease at Gdynia;

The Group's acquisition of an additional 32% interest in Blue Tower (7,171 m2, of which 5,159 m2 was vacant) for £7.44 million was financed by a cash payment of £1.07 million and deferred consideration of £6.24 million. This deferred consideration, which is non-interest bearing, is payable in six instalments over six years.

The debt secured against these properties increased to £29.53 million (31 March 2022: £23.66 million), mainly as a result of this deferred consideration. The increase in debt was partially offset by the repayment of €2.52 million (£2.14 million) of the loan against the warehouse property in Tureni, Romania, which was sold during the period.

Only £12.76 million of the debt was interest bearing.

Interest costs amounted to £0.19 million in the period (30 September 2021: £0.16 million). This equates to an average borrowing cost of 1.48% per annum when expressed as a percentage of the Group debt, or 3.04% if the non-interest bearing element is excluded. A one percentage point increase in interest rates would impact the cost of the floating rate loans and would increase the Group's annual interest bill by £80,000 per annum (31 March 2022: £100,000).

All six loans are held in separate non-recourse special purpose vehicles and are not guaranteed by the Group.

The weighted average unexpired lease term (WAULT) of the six properties as at 30 September 2022 was 4 years, 3 months (31 March 2022: 5 years, 7 months).

2. Associates and Investments (A&I's)

These comprise non-controlling interests in ten of the twelve funds managed by FPAM, of which six are accounted for as "associates" under the cost model and four are accounted for as "investments in funds" and held at fair value. It is the accounting policy of the Group to carry its interests in associates at the lower of cost or market value.

The contribution to Group profit before tax and unallocated central overheads from A&Is increased to £1.42 million (30 September 2021: £0.41 million). The increase was mainly attributable to receipt of £1.20 million in distributions from Fprop UK Special Opportunities LP (Spec Opps).

The book value of the six associates was £19.83 million (31 March 2022: £19.14 million). Their market value was £24.34 million (31 March 2022: £23.15 million). The increase in the book value was mainly due to the purchase by the Group of additional shares in four associates for £0.76 million.

The value of the four investments in funds was £5.49 million (31 March 2022: £7.45 million). The decrease was mainly due to the payment of £1.20 million in distributions and the repayment of £0.77 million in shareholder loans by Spec Opps, both of which served to reduce its net asset value.

An overview of the Associates and Investments is set out in the table below: 

*In liquidation

Commercial Property Market Outlook

Poland:

GDP is forecast to grow by 4.6% in 2022, 1% in 2023 and 2% in 2024, markedly slower than in past years. The annual rate of inflation is currently around 18% but is expected to reduce to around 13% in 2023. The National Bank of Poland has led interest rate rises in Europe, with its benchmark reference rate now standing at 6.75%. It has also indicated that it is close to the end of its interest rate raising cycle and that it may start to reverse increases in interest rates by the end of 2023.

Investment demand for commercial property has abated but continued economic growth and an influx of refugees and businesses from Ukraine should sustain occupational demand. Meanwhile, the effects of inflation, in particular in the cost of building materials and labour (which far exceeds the general rate of inflation), should curtail new supply of properties, forcing rents to rise in due course.

Rental values in Poland are contractually mostly linked to inflation, which offers some protection from inflation as long as the economy remains buoyant and tenants can afford to pay the increase.

Prime commercial yields generally range from 5-6% but are increasing.

The vacancy rate for offices in central Warsaw has fallen to around 5%. The pace of new office development in Warsaw has all but ground to a halt but the economy is still growing, as is demand for office space.

United Kingdom:

The Bank of England has predicted a protracted recession. Inflation is running at over 11% per annum but forecast to moderate to 5-6% in 2023 and further reduce in 2024. The Bank of England's base rate of interest is at 3.0% and expected to peak at around 4.5% in 2023.

Commercial property values are falling across all sectors in response to interest rate increases, exacerbated by an increase in the number of redemption requests made of open ended property funds.

 Current Trading and Prospects

Economies across the World are experiencing the aftershocks of lockdowns. Employment markets and supply chains were broken and fuel reserves were neglected. When economies eventually unlocked, the resultant demand created a spike in inflation.

Instead of moving to relax fiscal constraints, the UK government is raising taxes. At the same time the Bank of England is raising interest rates.

This has caused the price of debt to rise significantly from the lows created by loose monetary policy. A re-pricing of the property market is underway and it is as yet unclear where this might settle.

There is bound to be a period of weakness but things should settle during the course of 2023, as long as there are no other shocks to the system. In time, higher inflation should result in rents increasing across the board, though a recession may slow down this adjustment.

Our financial position remains strong with some £54.6 million of adjusted net assets at market value, some £6 million in cash and modest leverage, most of which is interest free.

Ben Habib

Chief Executive

CONSOLIDATED INCOME STATEMENT

for the six months to 30 September 2022

All operations are continuing.

CONSOLIDATED STATEMENT OF

COMPREHENSIVE INCOME

for the six months to 30 September 2022

All operations are continuing.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

as at 30 September 2022

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the six months to 30 September 2022

CONSOLIDATED CASH FLOW STATEMENT

for the six months to 30 September 2022

NOTES TO THE ACCOUNTS

for the six months ended 30 September 2022

1. Basis of Preparation

· These interim consolidated financial statements for the six months ended 30 September 2022 have not been audited or reviewed and do not constitute statutory accounts within the meaning of section 435 of the Companies Act 2006. They have been prepared in accordance with the Group's accounting policies as set out in the Group's latest annual financial statements for the year ended 31 March 2022 and are in compliance with IAS 34 "Interim Financial Reporting". These accounting policies are drawn up in accordance with UK-adopted International Accounting Standards.

· The comparative figures for the financial year ended 31 March 2022 are not the full statutory accounts for the financial year but are abridged from those accounts prepared under IFRS which have been reported on by the Group's auditors and delivered to the Registrar of Companies. The report of the auditors was unqualified, did not include references to any matter to which the auditors drew attention by way of emphasis without qualifying their report and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

· These interim financial statements were approved by a committee of the Board on 28 November 2022.

2. Segmental Analysis 

Segment reporting for the six months to 30 September 2022

Revenue for the six months to 30 September 2022 from continuing operations consists of revenue arising in the United Kingdom 27% (30 September 2021: 29%) and Central and Eastern Europe 73% (30 September 2021: 71%) and all relates solely to the Group's principal activities.

Direct costs incurred by First Property Group plc relating to the cost of the Board and the related share listing costs are shown separately under unallocated central costs.

Segment reporting for the six months to 30 September 2021

Segment reporting for the year to 31 March 2022