Ticker: LON:FPO
Market Cap: £22.9m
FDSO: 160.4m
Share Price: £0.143
Discount to NAV: 55%

Executive Summary:

FPO is a UK based property fund manager and investor with a potential 20-30% IRR over the next 4 years.

Since 2018, FPO share price is down over 65%, revenue has declined by 70% and the market cap is down 69%. The stock trades at a 55% discount to adjusted NAV.

Reform is needed with a new board, aligned management and a managed wind-down.

The CEO, Ben Habib, has taken over £7.5m in compensation, received profits from related-party transactions that should have accrued to FPO, increased his shareholding by more than 43% through a sweetheart option package and a deeply discounted capital raise.

Peter Gyllenhammar, well known activist investor owns 26% of the company. Insiders own 34% of the company. An activist would need to acquire 12.6m+ shares to have influence at a general meeting or the next AGM where Ben Habib is up for re-election.

A case for an activist investor to reform First Property Group

First Property Group plc (FPO) is a UK-based property fund manager and investor. Through First Property Asset Management (FPAM), it manages 11 real estate funds. FPO directly invests in properties and holds stakes in the funds it manages. The company owns and manages properties in the UK, Poland, and Romania.

Ben Habib is the CEO and a major shareholder. He is the key decision maker.

The board of directors:

Options:

Since June 2018:

• Share price has returned a total of -65%, including dividends.

• Adjusted NAV per share return is -40%.

• From FY18 to FY24, revenue has declined 70%.

• Profits have fallen from £6.75m to -£4.582m, a decrease of 167%.

• Market Cap has fallen from £67m to £21m, a decrease of 69%.

• Third Party AUM has fallen from £454m to £183m, a decrease of 60%.

On any metric FPO has performed incredibly poorly.

However Ben Habib has done pretty well. He has taken in over £7.5m in salary and “discretionary” bonuses while over £46m has been wiped off the market cap.

Directors have told shareholders that Ben Habib is the driving force, key to past and future success and he needs to be incentivised to stay.

Option grant

In March 2023 the board gave 11.3% of the company to Ben Habib and key employees. This was done via a 10 year option grant. Over 46% went to Ben Habib. The options were granted at the then market price of £0.235. No performance hurdles attached to these options and no vote of approval from shareholders.

When the generous grant was questioned at the FY23 AGM, the directors smothered Ben Habib with praise for how he has run the company since listing in 2000, they then said that he needed to be ”...incentivised to stay, otherwise he could go elsewhere..”.

If you look at the performance metrics above, I’d bet most outside shareholders would be pretty unhappy with how Ben Habib has run the company over the last 7 years. At the time of the grant he owned over 13% of the company. That and his generous salary and bonuses should be enough of an incentive to stay.

My opinion is that part of the reason for the grant was to increase the insiders stake in the company to ward off well known Swedish activist shareholder Peter Gyllenhammar who owns 26%.

From the huge salary and discretionary bonuses Ben Habib has taken and the way the option grant was awarded, I feel that governance practices at FPO do not align with good corporate governance standards.

Phoenix Transactions

Next is a set of transactions that took place between Ben Habib and one of the funds FPO manages, Fprop Phoenix Limited (Phoenix). FPO has a 23% stake in the fund.

Via its subsidiary, Scaup sp zoo, Phoenix owned a business park in Karkow that was purchased out of default in 2018. Over £28m of outside equity was raised to reposition, develop and upgrade the park. By August 2023 they handed the keys over to the bank with the equity in the subsidiary wiped out. The debt was non recourse to Phoenix.

Between December 2023 and February 2024 Ben Habib purchased shares from a number of shareholders of Phoenix giving him a 72% stake.

This transaction was queried at the FY24 AGM in September 2024.

Transcript from the meeting:

Unidentified person 1: "..Why didn't FPO acquire the shares? It seems to be a good investment since the CEO (Ben Habib) acquired it..."

Ben Habib: “Phoenix was held in FPO books at nil value, some of the shareholders in Phoenix wished to exit, the assessment that was made was that it had negative liabilities. The shareholders who wished to exit were important to the group. I was prepared to pay a small but meaningful sum which would have been written off to nil had the group bought the shares, so I bought the shares to keep the shareholders content.”

Unidentified person 1: "Couldn't FPO have done the same thing?"

Ben Habib: “The company was valueless”

Unidentified director: “As directors we thought it was inappropriate to invest shareholder funds in something we would immediately have to write off as a loss.”

As per Phoenix FY23 accounts. In August 2023 the subsidiaries owned by Scaup sp zoo were placed into administration and the subsequent loss of control resulted in the entities being deconsolidated from the group.

The parent company had positive net equity of £2.24m as at 31 December 2023. The accounts suggest this equity stems from an investment into newly created subsidiaries that acquired land and cable from Scaup sp zoo.

I asked the company to explain what appears to be a discrepancy between Ben Habibs and the directors AGM comments and the published accounts. It appears to me that the parent company did not have negative value. As of writing I have not had a reply.

During 2024, Phoenix went on to buy properties from a “third party client of FPAM” and then sell them. In the FY25 half year FPO recognised a profit from its 23% shareholding of £0.941m. Ben Habibs 72% stake in Phoenix gave him personally a profit of over £2.9m.

If my analysis is correct, this raises serious questions about how the share and subsequent transactions were approved by the board.

Ben Habib has made it clear that as the FPAM business is in wind-down, the future of FPO is in buying and trading on its own balance sheet.

So why was the Phoenix vehicle used to trade the properties which would allow Ben Habib to take a large share of profits for himself instead of FPO?

This event is another example of how FPO appears to be run for the benefit of insider shareholders and not outside shareholders. It further brings serious questions around corporate governance and how the directors approved this related party transaction.

Deeply discounted capital raise

It gets worse. At the top of the property cycle in 2021 and 2022, FPO leveraged up and purchased an office tower in Gdynia and increased their stake in the Blue Tower office building in Warsaw. 86% of the acquired space was vacant.

As you would know, this was peak “everything bubble”. Property yields and interest rates were at historical lows.

In September 2024 a deeply discounted capital raising was done to raise £2.92m at £0.08. The offer was underwritten by Ben Habib and Alistar Locke.

Proceeds from the raising were used to pay a year of deferred consideration due on Blue Tower and capex for tenant incentives. The €4m of equity in Gdynia has been wiped out and they are in talks with the lender on restructuring the debt.

The £0.08 raising price was shocking. A 52% discount to the then market price, a 80% discount on FY24 adjusted NAV and a 86% discount on the highs reached in June 2018. However, it was a great result for Ben Habib and director Alistar Locke who were able to increase their stakes in the company by 53% and 68% respectively.

I further believe this was a convenient way for Ben Habib and insiders to increase their shareholdings cheaply to ward off Peter Gyllenhammar.

The Gdynia and Blue Tower transactions are pretty clear examples of very poor capital allocation and misjudgement. As the key decision maker, and as the directors have told us, responsible for the success of FPO, Ben Habib needs to own these disastrous transactions.

How does someone with that much property experience lever up while yields are rock bottom at the top of the “everything bubble”? Maybe he was distracted?

First Property Group Assets

FPO directly owns 7 properties shown below.

There is an 18% vacancy rate across the portfolio, mostly relating to Gydnia office tower. The WAULT is 4 years and 8 months.

The group's leverage profile is below. All debt is non recourse to the group.

Associates & Investments

FPO has stakes in 9 of the 11 funds it manages. 5 are accounted for as an associate and are held at cost. 4 are accounted for as investments and held at fair value. Below you can see the £941k share of profit received from Phoenix (FPL).

An overview of the AUM and maturity of each of the funds managed by FPAM.

FPOs main exposure is in Poland through its directly owned properties and the stakes in the funds it manages.

The Polish real estate market is a much less liquid market than the UK and access to debt is tight.

However, the Polish economy is strong with GDP forecast to grow 2.9% in 2024 and unemployment is 5%. The National Bank of Poland's key policy interest rate is 5.75%.

Over the next 4 years the property cycle should continue to recover and liquidity will come back into the market.

Financial Situation

During H1-25 a new lease was signed on vacant space in Blue Tower boosting the group's annualised operating cash flow to c£1m p.a. Central unallocated overheads are c£1pm p.a with £410k of this Ben Habibs salary. As at H1-25 cash on hand was £5.9m and net debt £18.65m. All group debt is non recourse to the group.

A bank loan of £5.27m matures this year on Blue Tower. With vacancy at 12% and c£1.2m in NOI this should get refinanced.

The 71% vacant Gdynia office tower has £9.98m in deferred payments in default. With £92k in NOI and without a large increase in occupancy and restructuring the debt, they will have to hand this property back to the bank.

Deferred payments on Blue Tower are £1.2m per year for the next 4 years. Debt principal payments are c£900k per year across the 7 directly owned properties. In the short term operating cash flow and cash on hand will cover these payments.

The company is trading at a 55% discount to adjusted NAV per share of £0.32.

If you put a 20% discount on current NAV and assume FPO can sell assets at this figure, then over a 4 year period you get a 20%+ IRR from the current share price.

Under a scenario where NAV stabilizes then you would get a 30% IRR from current prices over 4 years in a managed wind down.

The company needs to continue to lease vacant space and reduce operating expenses, with Ben Habibs salary being the major expense.

The way forward

As the title of this piece suggests, First Property Group needs reform.

If you follow UK politics you would have seen that Ben Habib has been very active over the last decade. Last year he unsuccessfully ran to be a member of parliament. He has since been removed as Deputy Leader of Reform UK, and then decided to go on a crusade about how Reform UK is being run “undemocratically”.

Given how bad the corporate governance at FPO appears to be and how it looks like it’s being run for the benefit of Ben Habib, I find this most ironic and if not such a serious issue, quite amusing.

Are Ben Habib political ambitions distracting him from running FPO? I think so.

I’m calling for Ben Habib to resign as CEO and director. My evaluation of the poor performance of FPO over the last 7 years, corporate governance and disregard for outside shareholders means he is unfit for the role. He seems to be distracted by his political ambitions and I do not see how he can do both at the same time.

Given Peter Moon's 15-year tenure, I would question whether he still qualifies as an independent director. He has approved the shocking transactions and doesn't seem to be able to represent outside shareholders.

Concurrently, FPO needs to begin a managed wind-down over the next 4 years. This will allow the majority of the FPAM managed funds to expire. It will give time for FPO to lease up vacant space while the Polish real estate market continues to recover. The realisation of properties will be done in an orderly manner and not a fire sale.

A CEO who has experience in managed real estate wind downs should be hired and incentivised to get the best outcome for all shareholders.

There should be two new independent directors and a director representing largest shareholder Peter Gyllenhammar.

An activist investor should get involved

The generous share option grant and the deeply discounted capital raising has allowed Ben Habib and other insiders to increase their shareholdings on very generous terms over the last few years.

67% of the options will have vested by 31 March 2025. If the options are exercised, insiders will own approximately 52.5m shares (34%).

Other substantial holders- Peter Gyllenhammar, owns 39.9m (26%). Whitehall Associated SA, 7.7m (5%) and Bjorn Saven 4.6m (3%).

Ben Habib and Peter Moon are up for reelection at the FY25 AGM later this year. This would be a good opportunity to vote against their reelection.

An activist would need at least 12.6m+ shares to influence the result of an ordinary resolution at a general meeting.

A shareholder with at least 5% of the voting rights could call a general meeting before the AGM via section 303 of the Corporations Act. I believe this to be a favourable option as the value destruction at FPO cannot continue.

FPO shares are traded on the AIM market and are very illiquid. If I was an incoming activist I would look to buy shares via block trades and an off market tender offer to buy out smaller shareholders.

Risks

With such a large discount to NAV there is a margin of safety that should offer some downside protection. However the risk that NAV is not realised increases the longer current management and board members are in control.

Other risks are a slow recovery in the property cycle, caused by a recession or rising bond yields that make property a less attractive asset class.

These are risks to keep an eye on and could prolong any managed wind down.

Conclusion

As outlined in my article, my view is that FPO is a poorly performing company with poor governance. The small amount of value that has been created appears to have accrued to Ben Habib. Given his active political involvement, I would question whether his focus remains fully on FPO.

The board needs a refresh with new independent directors who will ensure all shareholders are treated the same.

If the company can be managed properly there is a potential 20-30% IRR over the next 4 years.

An activist would need to acquire 12.6m+ shares via block trades and an off market tender offer to buy outside shareholders.

Disclaimer: This article is intended to provide a critical analysis based on publicly available information. All statements are made in good faith and reflect the author’s honest opinion. Any inaccuracies or misunderstandings are unintentional. This article is not intended to malign any individual or company. Any claims made are based on factual information available at the time of writing.

Disclaimer: The content in this write-up is for informational purposes only and should not be construed as financial or investment advice All opinions expressed are my own. Please do your own research or consult with a professional before making any investment decisions.

Disclosure: I, or members of my family, could potentially hold shares in any of the mentioned companies in the future.