Sirius in black despite valuation hit

Sirius Real Estate’s (SRE) pre-tax profits halved in its full-year results due to a slight drop in the value of its portfolio compared with a gain the year before. However, unlike many of its property peers, the European business parks owner avoided a loss. Considering the nine months the rest of the real estate market has had since the “mini” Budget sent interest rates shooting up, investors should see that as a win.

Its portfolio has long had a high property yield, which is its rent roll as a percentage of the value of its assets. As such, when interest rates caused gilt yields to increase, Sirius' properties were not as heavily devalued. By contrast, the rush to buy warehouse assets on long leases last year drove up values and pushed down property yields for that asset class so much that, when interest rates rose, warehouse yields were lower than gilt yields. The result was a bruising devaluation of warehouse assets.

Put another way, the value of Sirius assets is low relative to the net rent they generate because it runs a tight ship. By running its assets and directly marketing them, Sirius creates the bulk of its value rather than the buildings themselves. It has increased its dividends nine years running because of its ability to keep growing its net rental income, which this year leapt a further 25 per cent.

Part of this is down to the strength and depth of the demand for workspace – both office space and light industrial space – for SMEs in Germany and the UK. A recession could change that demand, but the company says its direct marketing strategy means it can easily find new tenants - even in a recession.

Running the good ship Sirius costs money, though, and this is harder when debt is more expensive. Sirius’ net debt to net asset ratio is higher than many of its Reit peers, but Sirius prefers to point investors to its net debt to Ebitda ratio. At 7.7 times, it's in better shape than many of its Reit peers. Once again, it is on the operational side of the business, rather than the valuation side, that Sirius outperforms its rivals. As such, investors should not see SRE as an investment in the assets but in the company that runs those assets. We reiterate our call on that basis. Buy.

Last IC view: Buy, 82.2p, 21 Nov 2022