Sirius Real Estate eyes UK deal

Over the past decade, few if any UK-listed property companies have performed as brightly as Sirius Real Estate (SRE). Recent market sentiment reflects this. Ahead of half-year numbers, shares in the Germany-focused mixed-use landlord hit a record high of £1.40, or an 85 per cent premium to the company’s last audited net asset value (NAV) from March.

Since then, the company has continued to benefit from the forces and attributes which made it so resilient in 2020, despite like-for-like occupancy levels holding at just 86 per cent. In fact, total occupancy dipped to 85 per cent by September after the purchase of 23,000 square metres (sq m) of vacant space.

Offsetting this have been consistently strong cash collection rates, and a 2.6 per cent average increase in like-for-like rental quotes to €6.33 (£5.42) per sq m. The job of upgrading the portfolio – or “intensive asset management and selective capex investment”, as Sirius puts it – also creates a virtuous cycle, as occupancy rates and mature asset valuations rise.  

With €851m of the group’s book value tied up in so-called “value-add” assets – equal to 60 per cent of book value – there is plenty of reversionary potential in the portfolio. Average capital values of €895 per sq m are also “well below” replacement cost, says Sirius, thereby locking in tenants for the long term and raising the prospect of rental growth in the coming years.

Supplementing these Goldilocks-like operating conditions has been access to super cheap euro debt, which on a weighted basis now sits at 1.2 per cent after June’s oversubscribed sale of a €400m five-year bond. Such is the advantage of access to Europe’s investment-grade credit markets.

But against this familiar bullish story, investors now have a new scheme to digest: the acquisition of BizSpace – a UK-wide operator of 72 flexible, light-industrial workspace sites – for £245m in cash, of which £135m is being raised through the sale of new shares. Given Sirius’s secondary listing in Johannesburg, directors cannot participate in the offer, although the company said chief executive Andrew Coombs intends to purchase £1m-worth of shares in the market after the share sale.

FactSet-compiled consensus forecasts are for EPRA NAV to hit 100¢ a share by March 2022, and 109¢ and 117¢ for FY2023 and FY2024, respectively.

Those estimates are below the five-year track record, and arguably downplay Sirius’s focus on operational management, expansion and IFRS earnings growth. The deal for BizSpace – which equates to a 7 per cent yield and adds assets that could soon be highly sought after – looks positive. Buy.

Last IC View: Buy, 101p, 7 Jun 2021