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First Property's strategy paying dividends - literally

First Property Group’s prelims last month revealed a period of significant progress with its strategy paying dividends – quite literally.

The firm has six wholly-owned properties in Poland and Romania..Pictured..Poland (Shutterstock)

First Property Group’s (LON:FPO) prelims last month revealed a period of significant progress with its strategy paying dividends – quite literally.

In fact the pay-out – up 27% for the second half – really underlined the confidence of management in the prospects of the business, which runs seven funds and has six wholly-owned properties in Poland and Romania.

The market is turning into FPG’s potential, with the share price up 19% in the year to date and 29% over the last 12 months.

The expiry of a major fund mandate had been a depressant on the stock before that, but as the City broker Arden Partners pointed out, it managed to turn this problem into an opportunity by acquiring six properties from the fund at “attractive valuations”.

FPG’s principles, set out on its web site, are quite simple when distilled down to their very basic essence.

It buys property for income rather than capital growth, reckoning the receipt of a good and regular rent will even out the ups and downs of the market.

It doesn’t follow fashion and fads, is flexible in what it buys and is an active manager of its property portfolio.

Following this credo it has bumped up profit before tax from £3.5mln in the year ended March 2013 to £8.08mln at the last results, published on June 11.

This is important as it directly and positively affects cash generation.

“We are looking to maintain dividend cover of two times from the cash,” chief executive Habib told Proactive Investors. “As we grow net cash we can increase the dividend.”

The dividend isn’t the only thing that is growing. Adjusted net assets jumped to 35.75p a share from 24.8p previously, boosted by those additions to the portfolio.

FPG is growing and thriving because yields in Poland and Romania are between 9-11% - well above prime London and regional rents here in the UK.

Property valuations remain at recession levels even though these Central European economies are doing well again.

At the same time loan rates are rock bottom and being kept depressed by the European Central Bank’s quantitative easing programme.

“We are borrowing fixed rates at around a quarter of a percent for five years. You have to put a bank margin on that,” explained Habib.

“But this is 2.5-3%. Yet you are investing in properties at a 9, 10, 11% yield, so the gap is significant.”

Habib and the team haven’t been afraid to leverage up. It has £109mln of debt and property worth £142mln – giving a loan-to-value ratio of 76%.

Perversely, the pension funds and institutions that flocked to fill their boots with debt ahead of the crisis have backed off following the financial meltdown, leaving the field clear for nimble operators such as FPG.

“An easy way to make money in a zero rate interest world is by leveraging” said Habib.

FPG’s operational gearing is such that the addition of properties to the portfolio or a new fund mandate will have a direct and significant impact on profitability.

The stock trades at a slight premium to net asset value, but is on a relatively modest nine times earnings and yields 3.5% - which is way, way better than keeping your cash in the best savings account.

Arden’s Chris Thomas told clients recently: “Given the attractive returns being generated from the existing portfolio and the opportunities to grow profits through further property acquisitions and fund mandate wins, we think the shares remain very attractive.”

Quick facts: First Property Group PLC

Price: 39 GBX

Market: AIM
Market Cap: £43.05 m

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