Sirius Real Estate - How to win in Europe
Sirius Real Estate is a real-estate investment company listed in the UK but owning a portfolio of assets located 100% in Germany, primarily business park properties close to the major German cities.
Following the company’s full-year results release (7 June) Sirius completed a €400mln bond issue. This leads to a reduced cost of financing and also provides clear visibility on the company’s ability to execute on its pipeline of property acquisition opportunities. These two factors together have led us to review our forecasts for funds from operations (FFO) per share. Funds from operations is a key measure of cash income from rents, and provides the basis for Sirius’s dividend payment, with a policy of paying a dividend that is 65% of FFO. We are raising our FFO/share forecast by 1.1% and 7.4% for fiscal years (FY) March 2022e and 2023e respectively, and adding a forecast for 2024e. We are raising our dividend forecasts by 2.0% and 8.2% for 2022e and 2023e respectively.
The bond issue:
Sirius announced a €400mln bond issue in two tranches on 16 June and 17 June. The bond carries an effective interest rate of 1.125%, versus a 1.5% average cost of debt for the company disclosed in its FY Mar 2021 results presentation.
Our forecasts assume that Sirius uses €175mln of the bond proceeds to retire more expensive debt, with the remaining €225mln available for financing acquisitions. We note that debt financed property acquisitions are likely to be materially accretive to FFO/share, and that the additional investment will still keep Sirius within its targeted 40% maximum loan-to-value ratio (portfolio leverage).
Raising our forecasts
Sirius has been a stand-out performer within the UK listed commercial real estate sector over the last three years, delivering a total shareholder return of 98%. On p2 we provide a brief overview of the share price outperformance and the composition of the property portfolio.
Based on our new forecasts, we have Sirius exceeding 5 €-cents per share of dividend by FY March 2024e, and delivering average annual growth of 10.7% in FFO/share over the three years. We believe that these financial metrics could drive further strong total shareholder returns over the next 1-2 years notwithstanding the outperformance that Sirius shares have already delivered year to date.
Investment conclusion
Year end Mar 31 · 2021 · Current · 2023 · 2024
Portfolio value, €-bn · 1.36 · 1.51 · 1.66 · 1.76
FFO, €-mln · 60.9 · 66.9 · 76.8 · 84.4
FFO/Shr, €-cents · 5.84 · 6.34 · 7.25 · 7.92
Div/Shr, €-cents · 3.80 · 4.15 · 4.75 · 5.20
Adj. NAV/shr €-cents · 93.8 · 99.3 · 105.6 · 112.0
In terms of shareholder returns, Sirius Real Estate has been an outlier (upside) compared with the UK-listed commercial real estate sector over the last 1, 5 or 10 years. The following graph compares Sirius’s total shareholder returns (dividend plus capital) against the FTSE 350 and the UK REIT (Real Estate Investment Trust) sector. Sirius itself does not operate under a REIT structure, as this would impose a statutory dividend obligation. The company maintains a 65% semi-annual dividend payout from FFO, which allows the company to maintain strong dividend cover, and inherent flexibility.
Company overview
Historic performance - Total Shareholder Returns
Source: LSE Data
We believe that the outperformance has been driven by active management of the property portfolio and also by holding a portfolio that is well positioned to maintain strong rental yields. The company holds a portfolio that has proved resilient through COVID-19 and is also well-aligned to tenant demand in the post-COVID world. The following charts summarise the property holdings. Nonetheless, we consider the REIT index to be the closest peer group.
Property portfolio
Source: Sirius Real Estate