The Covid-19 outbreak has presented a challenge to many commercial landlords as tenants balance rental payments with a strain on their own income. However, Sirius Real Estate (SRE) is defensively placed to ride out tougher market conditions thanks to a diversified, good-quality tenant base and robust balance sheet. Indeed, a sector-leading interest cover ratio was one factor that meant it passed all nine tests in our recent IC Alpha quality stock screen. The shares have been subject to the broader sell-off across the real estate sector in recent weeks, but we think there is opportunity to benefit from long-term value creation.
Diversified tenant base
German SME's support
Low cost of debt
High interest cover
Reduction in March and April new lettings
Final dividend unconfirmed
Sirius lets business parks, offices, self-storage space and industrial complexes across Germany to more than 5,000 tenants. The top 50 tenants account for 44 per cent of the annual rent roll, with the top tenant – automotive and aerospace engineering giant GKN – accounting for only 3 per cent. That seems to be standing the group in good stead so far, with the group collecting 75 per cent of rent in respect of the second quarter by the seventh working day due, representing 90 per cent of the historical norm.
Admittedly, small and medium-sized businesses account for a further 49 per cent of the rent roll. However, the German government has also unveiled a series of measures to provide support for the Mittelstand, including a state-backed guarantee of 100 per cent of loans made by banks of up to €500,000 for companies with a maximum of 50 employees and €800,000 for those with up to 250 staff.
In July the group created the Titanium joint venture with Axa Investment Managers by selling a 65 per cent interest in five business parks, on which it continues to earn fee income by managing the assets. As well as giving the group another source of capital, the joint venture allows the group to acquire stakes in assets that are worth more than €30m, its historical limit on transactions.
Before coronavirus hit, demand for industrial space across Germany had boosted the value of the group’s portfolio and enabled it to steadily grow the average rate at which it agrees new leases. During the first half of the year the gross yield on its portfolio dropped from 7.9 per cent to 7.4 per cent (a falling yield represents a rising property valuation), while over the full year to the end of March like-for-like net rental income rose by 6.1 per cent thanks to a 4 per cent increase in the average rental rate and growth in occupancy to 87 per cent.
The outbreak of Covid-19 has led to a decrease in enquiry levels, which management forecast could translate into a 10 per cent reduction in new lettings in March and a 35-40 per cent reduction in monthly new lettings throughout April and into May. This could lead to a reduction in underlying occupancy of around 1 per cent.
| SIRUS REAL ESTATE (SRE) | ||||
| ORD PRICE: | 65.5p | MARKET VALUE: | £681m | |
| TOUCH: | 65-66p | 12-MONTH HIGH: | 96p | LOW: 44p |
| FW DIVIDEND YIELD: | 5.1% | TRADING PROP: | €10m | |
| FW DISCOUNT TO NAV: | 17% | |||
| INVESTMENT PROP: | €1.05bn | NET DEBT: | 34%* | |
| Year to 31 Mar | Net asset value (p)** | Net operating income (€m)** | Earnings per share (p)** | Dividend per share (p)** |
| 2017 | 57.3 | 51.2 | 4.2 | 2.9 |
| 2018 | 64.1 | 52.0 | 3.9 | 3.2 |
| 2019 | 74.8 | 64.6 | 4.6 | 3.4 |
| 2020** | 84.3 | 69.7 | 5.1 | 3.5 |
| 2021** | 89.5 | 75.9 | 5.5 | 3.8 |
| % change | +6 | +9 | +8 | +9 |
| Normal market size: | 7500 | |||
| Beta: | 0.54 | |||
| *Includes lease liabilities of £21m. | ||||
| **Peel Hunt forecasts, adjusted NAV, NOI and EPS figures. £1=€1.13 | ||||
