When Andrew Coombs took the reins as chief executive of Sirius Real Estate (SRE), he described a map of the group’s assets as similar to the shot pattern you would expect from a scatter gun. Since then, the task has been to weed out underperforming assets and to use the funds raised to buy properties with greater potential. And the disposal of non-core assets is now complete.
Attractive dividend yield
Strong rental growth
Non-core assets now sold
Discount to net asset value
High-occupancy properties becoming more expensive
Lower-occupancy properties bring delayed returns
Operating exclusively in Germany, the core business model is running business parks to provide conventional and flexible working space. Careful selection of under-used assets allows Sirius to refurbish and re-let at higher rates. A recent mixed-use business park in Fellbech bought for €12.1m (£10.9m) is a good example. The park is currently 79 per cent let to 19 tenants, and Sirius expects to increase both occupancy and rents over time.
Managing assets in this way has seen valuations steadily increase – up 11.6 per cent in the year to March 2018 on a like-for-like basis, boosting the net asset value (NAV) and leaving the shares trading at a discount.
Acquisitions were initially financed through raising fresh equity and bank loans. Funds are still raised through long-term loans at fixed rates, but more cash is now being generated by selling assets that reached maturity in terms of rental growth. So, in the year to March, three mature assets with 90 per cent occupancy were sold for €103m, and two placings raised €65m, helping to finance the purchase of 13 new assets for €163.7m with an average occupancy of just 58 per cent. Effective asset management means that like-for-like annualised rental income rose by 6.2 per cent, and new assets provide around 80,000 square metres (sqm) of vacant or under-used space, with average rents running at €5.46 per sqm.
| SIRIUS REAL ESTATE (SRE) | ||||
| ORD PRICE: | 57p | MARKET VALUE: | £575m | |
| TOUCH: | 56.8-57p | 12-MONTH HIGH: | 69p | LOW: 52p |
| FWD DIVIDEND YIELD: | 5.5% | TRADING PROPERTIES: | €17.3m | |
| DISCOUNT TO FWD NAV: | 14% | |||
| INVESTMENT PROPERTIES: | €914m | NET DEBT: | 46% | |
| Year to 31 Mar | Net asset value (¢) | Net operating income (€m) | Earnings per share (¢) | Dividend per share (¢) |
| 2016 | 53.4 | 39.7 | 3.1 | 2.2 |
| 2017 | 57.3 | 60.5 | 4.2 | 2.9 |
| 2018 | 65.3 | 63.1 | 3.9 | 3.2 |
| 2019* | 69.9 | 64.5 | 4.6 | 3.3 |
| 2020* | 73.5 | 70.9 | 5.2 | 3.5 |
| % change | +5 | +10 | +13 | +6 |
| Normal market size: | 7,500 | |||
| Beta: | 0.7 | |||
| *Peel Hunt forecasts, adjusted NAV and EPS; £1=€1.113 | ||||
Sirius is also keeping down administrative costs by taking in house the key functions of asset and property management that are more usually outsourced. This trading platform is used for a range of management processes, including lettings, debt collection and lease management.
Demand for properties remains strong in Germany, which has forced down yields and made properties with high occupancy levels more expensive. As a result, Sirius is working more towards offering increased investor returns by acquiring assets with lower occupancy rates, but these will take longer to bring to optimum performance.
There is an attractive dividend on offer, where the payout has been limited to 65 per cent of the group’s funds from operations. But to maintain a rising dividend, the ratio was increased to 75 per cent while the proceeds from disposals are reinvested.
