The eurozone may appear to be in the doldrums, but economic activity in Germany is relatively brisk. Small and medium-sized companies have access to cheap finance, which has pushed up demand for quality office space and storage facilities, both of which Sirius Real Estate (SRE) specialises in.
- Operates in growing German economy
- Big savings from debt restructuring
- Dividend payments to accelerate
- Shares at big discount to net asset value
- Occupancy rates relatively low
- Early debt repayment costs
Sirius owns a number of branded business parks, providing conventional and flexible workspace. It has been pursuing a two-pronged strategy to make the most of the solid conditions in its end markets by buying underutilised assets where it can boost rents and occupancy while at the same time using the buoyant debt markets to bring its borrowing costs down sharply.
Last month's placing, acquisitions and refinancing provide a great illustration of the approach. Sirius raised around €50m (£35.42m) through a private placement to fund the acquisition of five mixed-use business parks for €58.2m, generating a net initial yield of 8.1 per cent. There should be plenty of opportunities to boost income, too, given a vacancy rate of 16.4 per cent.
At the same time as the placing and acquisition Sirius took advantage of the low interest rates in Germany to repay two expensive loans from Macquarie of €56m (plus early-repayment charges) and replaced them with a 10-year fixed-rate loan at less than 2.5 per cent. The annual interest bill will be reduced by at least €2.4m and €2m of cash flows linked to the debt will be unlocked. What's more, two non-core assets with a value of €25m can be marketed for sale unencumbered of any debt. Any sale should assist plans to reduce the loan-to-value ratioto 40 per cent from 46 per cent at the end of March.
A combination of the placing, acquisitions and refinancing is expected to add around 16 per cent to the annual dividend per share, although the dilutive effect of the new shares will reduce net asset value (NAV) per share by around 2.5 per cent.
| SIRIUS REAL ESTATE (SRE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 45.25¢ | MARKET VALUE: | €338m | |
| TOUCH: | 44.5-46¢ | 12-MONTH HIGH: | 50.25¢ | LOW: 28.75¢ |
| FORWARD DIVIDEND YIELD: | 5.3% | TRADING PROPERTIES: | nil | |
| DISCOUNT TO FORWARD NAV: | 18% | |||
| INVESTMENT PROPERTIES: | €546m | NET DEBT: | 81% | |
| Year to 31 Mar | Net asset value (¢ )* | Net operating income (€m) | Earnings per share (¢)* | Dividend per share (¢) |
|---|---|---|---|---|
| 2013 | 48.4 | 29.3 | 2.7 | nil |
| 2014 | 44.0 | 28.4 | 2.3 | 0.3 |
| 2015 | 48.0 | 30.3 | 2.1 | 1.6 |
| 2016* | 50.0 | 37.3 | 2.9 | 2.1 |
| 2017* | 55.0 | 42.1 | 3.4 | 2.4 |
| % change | +10 | +13 | +17 | +14 |
Normal market size: 20,000 Matched bargain trading Beta: 0.43 *Peel Hunt forecasts, adjusted NAV and EPS figures | ||||
Importantly, the underlying business is doing well. In the year to March 2015 the property portfolio benefited from a 6.4 per cent valuation uplift, equating to €28m. Rental income is rising thanks to a capital investment programme in the group's vacant space, which has created new revenue. In the same period the like-for-like annualised rent roll grew by 5.6 per cent to €43.6m. Strong demand for office space has also pushed average rents up from €4.46 per square metre to €4.58. And average occupancy rose from 76 per cent to 78 per cent, which still leaves plenty of room for further improvement.
Management is distributing 65 per cent of funds from operations as dividends, which should ensure good dividend growth in the future and that growth, coupled with a 4.6 per cent perspective yield this year, make the shares look attractive.
