Strong German organic growth with extra BizSpace spice for Sirius Real Estate
In an in-line update, Sirius Real Estate Limited (LSE:SRE, JSE:SRE, OTC:SRRLF) (LON: SRE) said that the total annualised rent roll for the period ending 31 March rose by 73% to €167.1mln, including four-and-a-half months from BizSpace, the UK flexible workspace provider that was acquired in November, and provided the group with an entry into the UK market The acquisition of BizSpace will allow the group to accelerate the achievement of its €100mln funds from operations (FFO) ambition. Also, the group invested more than €200mln into assets for the first time. Hence, it is evidencing an acceleration in its platform deployment while continuing to maintain discipline around its acquisition process.
Following the acquisition of BizSpace the group now has a strong position in the flexible workspace area — 100% of its UK business and broadly half of its German portfolio — and management says that customers are increasingly willing to pay a premium for that flexibility. Flexible workspace is a property rented on short-term leases, fully kitted, and this provides customers with the opportunity to scale up or down their requirements as needed. Consequently, pricing is set at significantly higher levels. The demand for flexible workspace has been growing strongly and received a further boost by the uncertainty created by the pandemic and the shift to working from home. In Germany, the annualised rent roll increased by 17.2% to €113.7mln, reflecting the strong 6.4% (or €6.2mln) organic growth along with €11.0mln from the net impact of acquisitions. The organic growth reflected a 5.3% increase in the like-for-like average rate per square metre to €6.50 along with improved occupancy levels. The total occupancy levels slipped slightly due to the vacancy levels within assets acquired in the year. Sirius intentionally acquires sites with vacancy which it can then use its internal operating platform to selectively invest into and let up, and this provides scope for improvement in future periods.
In the UK, BizSpace experienced a 7.5% like-for-like growth over the four-and-a-half months of ownership, which reflected a 6.5% increase in like-for-like average rate per square foot to £11.69 along with improved occupancy levels.The group has an active acquisition strategy, with its own internal acquisition team looking at around 1,000 properties annually, of which around 1% are transacted upon. During the last fiscal year, the group invested in or committed to ten acquisitions in the German market.
BizSpace saw 7.5% like for like growth over four-and-a half months
Sirius has been a strong performer within the commercial real estate sector, delivering an annualised capital return of 18% over five years along with attractive dividends. We believe that this reflects the group's entrepreneurial approach, including managing processes in-house, as well as the success of the property enhancement strategy and flexible rentals platform.
We review our maintained forecasts following the final results on 13 June.
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
Sirius Real Estate has reported that group trading for the period ending 31 March is expected to be in line with market expectations. Total annualised rent roll rose by 73% to €167.1mln, including four-and-a-half months from BizSpace, the UK flexible workspace provider, that was acquired in November 2021 for a £380mln enterprise value.
In Germany, the annualised rent roll increased by 17.2% to €113.7mln, reflecting 6.4% (or €6.2mln) organic growth — the eighth consecutive year that organic growth has exceeded 5%. There was also an €11.0mln increase from the net impact of acquisitions. The organic growth reflected a 5.3% increase in the like-for-like average rate per square metre to €6.50 (2021: €6.17) as like-for-like occupancy increased to 87.4% (March 2021: 86.6%); however, total occupancy in Germany reduced to 84.2% (March 2021: 86.6%) due to the effect of acquisitions.
Interestingly, the group hedged its gas exposure in Germany up to April 2024. This was the result of management reassessment of geopolitical risks after Angela Merkel left power. The group supplies gas to nearly all of its customers and the hedging could boost the bottom line by around €2-3mln over each of the next two years if gas prices remain at current levels.
In the UK, BizSpace experienced a 7.5% like-for-like growth over the four-and-a-half months of ownership, which reflected a 6.5% increase in the like-for-like average rate per square foot to £11.69 (15 November 2021: £10.98) along with improved occupancy levels. Management believes there is scope for further price increases. BizSpace has converted to a UK real estate investment trust (REIT) this month.
Cash collection exceeded 98% and the group had a free cash balance of about €126.0mln at the end of March. The group issued two bonds during the period, totalling €700mln. The bond issuance, and related secured debt repayments, reduced the group's average cost of debt from 1.5% to 1.4%. Consequently, the group has a total debt of €994.5mln of which €750mln or 75% is unsecured (2021: 11%).
Sirius has an active acquisition strategy, with its own specialist internal acquisition team looking at around 1,000 properties annually, of which around 1% are transacted upon. During the last fiscal year, a total of €201.9mln was invested into or committed to ten acquisitions in Germany. These fully-owned assets are expected to contribute a total of €8.8mln of net operating income at 62% occupancy, representing an EPRA [industry body] net initial yield of 4.4%. They provide the opportunity to grow income through increasing occupancy, with more than 118,000 square metres of vacant space and significant scope for selective investment into unused or underused space. In due course, the plan is for the team to also monitor the UK market for acquisitions.
Trading update