Sirius taps market for £145mn

Commercial real estate is a buyer's market, with values way down since interest rates shot up late last year. And one player looking to spend is Sirius Real Estate (SRE) after it tapped investors for £145mn.

The announcement came on the morning it posted a slump in pre-tax profit in its results for the six months to 30 September as last year's value gain turned into a valuation hit due to higher interest rates. This might explain why shares fell by 3 per cent on results day.

We believe this reaction is unjustified. The equity raise is a wise move when gearing is high and its discount to net asset value (NAV) is lower than many of its peers. It also presents an opportunity for growth. "A lot of property companies now, if they raised equity, couldn’t put it to profitable use," chief executive Andrew Coombs said, arguing that SRE can generate higher rental returns from buying assets than its rivals. 

Its results back this up. Net rental income is rising at a time when other commercial landlords' net rental income is not. Meanwhile, SRE's like-for-like rental income is up 7.7 per cent, and funds from operations are up 9.3 per cent, which underpins its dividend growth.

Coombs said the high churn of its SME tenants explains its superior performance. Even in a recession, which he believes is coming, Coombs said the turnover allows it to push on rents. It also means higher vacancy rates, but the results show the risk is worthwhile. Throw in its current discount to NAV and dividend yield, and you have a stock that looks oversold. Buy.

Last IC view: Buy, 87.2p, 5 Jun 2023