Sirius Real Estate: Record growth and resilient performance
Sirius Real Estate, the leading owner and operator of branded business and industrial parks providing conventional space and flexible workspace in Germany and the UK, has made two noteworthy announcements since our last report on the company (on 25th April 2023). For the year ended 31 March 2023, the company witnessed robust growth in several key metrics, including a 36.9% increase in funds from operations (FFO) and a 7.7% increase in group annualised like-for-like rent roll. In light of the announcements, we've updated the inputs in our model and now estimate that the expected return on an investment in the company over the next five years is 100% (from 99%), which equates to an annual return of 15%. The shares continue to be bolstered by an attractive dividend yield of 6.5%.
Summary
Earnings
The company's FFO exceeded its five-year €100 million target set in 2018, reaching €102.1 million, a 36.9% increase from the previous year (2022: €74.6 million). This growth was driven by strong occupier demand in both Germany and the UK. Moreover, the company reported a 28.9% increase in FFO per share, which rose to 8.74c (2022: 6.78c).
Sirius also reported a 24.5% increase in adjusted profit before tax, amounting to €96.0 million (2022: €77.1 million). However, profit before tax decreased by 48.5% to €87.0 million (2022: €168.9 million), primarily due to a €7.7 million valuation deficit in 2023, compared to a €140.9 million surplus in the previous year.
Dividends
Sirius has continued to reward shareholders with its ninth consecutive year of dividend increase. The H2 dividend increased by 25.7% to 2.98c per share (2022: 2.37c per share), resulting in a 28.8% uplift in the total dividend for the financial year to 5.68c (2022: 4.41c). The company maintained its pay-out ratio at 65% of FFO.
Balance sheet and asset management
Sirius reported a 1.1% increase in its investment property book value to €2,123.0 million (2022: €2,100.1 million), driven by strong income growth and investment offsetting yield expansion. Gross yield in Germany was 7.3% (2022: 6.9%), and the net yield in the UK was 9.3% (2022: 8.0%).
The company performed €90 million of asset recycling, with disposals achieved at a 25% combined aggregate premium to book value. It completed €44.6 million of acquisitions across three new sites in Germany, with annualised NOI of €1.6 million and 54% occupancy. In contrast, €45.8 million of disposals with annualised NOI of €1.8 million were completed across six transactions, achieving a combined 25% aggregate premium to the last book value prior to each sale.
Full-year results
Year end Mar 31 · 2020 · 2021 · 2022 · 2023
Portfolio value, €-bn · 1.19 · 1.36 · 2.08 · 2.10
FFO, €-mln · 55.7 · 60.9 · 74.6 · 102.1
FFO/Shr, €-cents · 5.41 · 5.84 · 6.78 · 8.74
Div/Shr, €-cents · 3.57 · 3.80 · 4.41 · 5.68
Adj. NAV/shr €-cents · 80.6 · 93.8 · 108.5 · 109.2
The company's total cash balance stood at €124.3 million, of which €99.2 million was unrestricted, providing capacity for further acquisitions and investments. The company maintained a net Loan-to-Value (LTV) ratio of 41.6% and a Net Debt to EBITDA ratio of 7.7x. The Group has also refinanced its facilities with Berlin Hyp AG and Deutsche Pfandbriefbank, extending the Group weighted debt expiry to 5.0 years and increasing the weighted cost of debt to 2.1% (from 1.4% at 31 March 2022). Further information about the refinancing can be found below.
Operational Performance
Sirius continues to show resilience in its operational performance. The like-for-like rent roll increased by 7.7% to €175.9 million (2022: €163.3 million) driven by strong occupier demand in Germany and the UK. The company's EPRA NTA per share increased by 0.8% to 108.11c (2022: 107.28c), and its adjusted NAV per share increased by 0.6% to 109.21c (2022: 108.51c).
The company has €1.6 billion of unencumbered assets, providing it with flexibility for further growth and investment opportunities.
Outlook
The new financial year has started well, with continued strong occupier demand in both markets. In Germany, stable occupancy rates and the easing of energy price pressures continue to offset wider macroeconomic concerns. Sirius continues to assess further growth options in both Germany and the U.K. on an opportunistic basis, including recycling of mature assets and reinvesting in value-add opportunities. Organic growth opportunities remain strong, particularly with further investment into the portfolio as well as taking advantage of the high inflationary environment.
Andrew Coombs, chief executive of Sirius Real Estate, commented on the results, stating that Sirius has delivered another positive set of annual results, with seizable rental growth underpinned by continued occupier demand. The company will continue to pursue an opportunistic asset recycling programme where they see opportunities to crystallise returns and drive value.
In conclusion, Sirius Real Estate has demonstrated strong operational and financial performance in the year ended 31 March 2023. Looking ahead, the company's outlook remains positive, with a strong balance sheet, cash reserves of €124 million, and around 95% of the Group's debt secured at fixed interest rates for at least the next three years. While remaining alert to the potential impact of ongoing global macroeconomic uncertainty, Sirius is well-placed to continue to deliver attractive returns for shareholders.
On 30th May 2023, Sirius Real Estate announced that it had successfully completed the early refinancing of its next major debt expiration, a €58.3 million facility with Deutsche Pfandbriefbank. This transaction was completed seven months ahead of the facility's due date, reinforcing the company's proactive and strategic financial management.
The refinancing involves a new 7-year, €58.3 million facility with an all-in fixed interest rate of 4.25%. This new facility will replace and redeem the existing facility upon its expiration on 31st December 2023 and will continue to serve the company until December 2030.
Debt Refinancing
As of 31st March 2023, Sirius Real Estate has a total of €975.1 million in outstanding debt, with €735.0 million of this being unsecured. The remaining €240.1 million comprises mortgage-backed debt. The most significant portions of this debt are the refinanced €170 million Berlin Hyp AG facility announced in October 2022, more than a year ahead of its maturity on 31st October 2023, and the aforementioned €58.3 million facility.
This new refinancing arrangement extends the group's total weighted average debt expiry from 3.3 years to 5.0 years. Additionally, when the new facility commences on 1st January 2024, the group's weighted average cost of debt will increase from 1.4% to 2.1%.
It is important to note that the company has €1.6 billion of unencumbered assets and over €124 million of free cash available, including customer deposits as of 31st March 2023. Within the next 12 months, Sirius has a total of €20 million of debt expiring, which it confidently anticipates either extending terms with existing lenders or replacing with new lenders. The company has a total of €49.3 million of debt expiring within the next three years.
Valuation Implications
In light of the announcement, we've updated the inputs in our valuation model, increasing the current free cash flow amount to €65 million (from €58 million), the current share price to 86.2p (from 80.8p), the FX rate to 1.17 (from 1.13) and the shares in issue to 1,177 million (from 1,176 million). We have maintained a constant growth rate in free cash flow (at 7.50%) and the required return on equity (at 12.01%).
Accordingly, we estimate that the expected return on an investment in the company over the next five years is 100% (from 99%), which equates to an annual return of 15%. In other words, a £100,000 investment in the company is expected to return £200,000 in five years' time. Assuming that a suitable return level over five years is 10% per year, then an investment in the company is a 'suitable' one.
The key factors underpinning our model inputs remain unchanged. Sirius Real Estate operates in a substantial market, its management has a proven track record of effectively operating and managing real estate, and it consistently delivers strong shareholder returns. The company's value proposition is unique, and its shares continue to be bolstered by an attractive dividend yield of 6.5%.