Sirius Real Estate: Raising our forecasts
Sirius Real Estate is a UK-listed real-estate investment company owning a portfolio of assets in Germany, primarily business park properties close to the major German cities.
The company recently released results for H1 ended September 30. The company reported revenues of €88.4mln, which was +11.5% versus H1 2021. Funds from operations (FFO, a measure of cash profit) were €33.0mln, up 13.4% versus H1 2021. The dividend per share of 2.04c (+12.1% vs H1 2021) was in line with our expectations.
In addition, Sirius announced the proposed acquisition of BizSpace Group, a UK based provider of regional flexible workspace, for a cash consideration of c.£245mln. The deal represents Sirius’ first entry into the UK market, and provides a new avenue for growth for the company. Furthermore, the acquisition is immediately enhancing Sirius’ financial metrics. We are raising our forecasts for FFO per share and dividend per share by 11% for FY March 2023e, and we present details of our forecast changes on p2.
In our previous research report (July 12) we raised our earnings and dividend forecasts for Sirius to reflect a €400mln bond issue which the company completed in June which allowed the company to (a) lower its cost of debt and (b) provide firepower for property acquisitions, which are usually earnings accretive. The deployment of that additional capital remains on track with €153mln committed to eight German property purchases year-to-date, in addition to the BizSpace deal. Furthermore, Sirius continues to report positive like-for-like rent increases on the existing portfolio. Overall, the results show that Sirius is delivering continued growth in its existing business, with the BizSpace deal providing further upside.
Interim results and BizSpace acquisition
Sirius has been a strong outperformer within the commercial real estate sector, delivering a total shareholder return of 134% over the last three years. We believe that this reflects the positioning of the company’s portfolio as well as the success of the property enhancement strategy and flexible rentals platform.
Based on our new forecasts, we are expecting a dividend exceeding 5c per share by FY March 2023e, and that the company will deliver average annual growth of 14.5% 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 YTD.
Investment conclusion
Year end Mar 31 · 2021 · 2022 · 2023 · 2024
Portfolio value, €-bn · 1.36 · 2.00 · 2.12 · 2.21
FFO, €-mln · 60.9 · 72.0 · 90.1 · 95.1
FFO/Shr, €-cents · 5.84 · 6.58 · 7.75 · 8.16
Div/Shr, €-cents · 3.80 · 4.25 · 5.00 · 5.30
Adj. NAV/shr €-cents · 93.8 · 104.4 · 110.9 · 118.0
In a separate release alongside the interim results, Sirius announced the proposed acquisition of BizSpace Group for a cash consideration of c£245mln to be partly funded by a capital raise of around £135mln. The total enterprise value of the BizSpace acquisition is £380mln, with Sirius absorbing £146mln of gross debt upon completion of the deal.
BizSpace owns a portfolio of assets offering flexible workspace in regional locations across the UK. The deal represents Sirius’ first entry into the UK market. The sectoral breakdown of the property portfolio, by floor space, consists of 74% light industrial and 26% out-of-town offices.
The deal has a number of strategic benefits for Sirius:
- Provides the company exposure to an underserved segment of the UK commercial real estate market, and a new avenue for growth for the company going forward.
- The BizSpace flexible working platform closely parallels Sirius’ own model, presenting an opportunity for merger synergies including cost synergies.
- Potential for organic growth in rental pricing within the BizSpace portfolio.
- A strong management team at BizSpace, remaining in place after the deal.
Equally importantly the acquisition is enhancing for Sirius’ financial metrics from day one. We are raising our forecasts for adjusted NAV/Share, and FFO/Share. The FFO (Funds From Operations) metric is the measure of cash profit that Sirius uses as the basis for its dividend per share (at a payout of 65%), and we are therefor also raising our forecast dividend per share. The following table summarises:
BizSpace acquisition
Impact of the BizSpace acquisition on our forecasts for Sirius
Source: Proactive Research
These figures are based on the initial deal mathematics, and do not allow for additional earnings upside that may be achieved in future years from operational enhancements and post-deal cost savings.
Overall we argue that the BizSpace acquisition offers additional upside for the Sirius shareholder based on the enhanced financial metrics and future growth potential.