Editing Sirius Real Estate: Update

* Sirius Real Estate, the FTSE 250 real estate investment company, has made eight material announcements since our last report on the company (on 12th April 2022).

*For us, the key highlight of the announcements is that the company has performed exceptionally well in the six months ended 30th September 2022, growing funds from operations (FFO) by 47% over the period.  

*Accordingly, we have updated our forecasts, and estimate that the expected return of an investment in Sirius Real Estate over the next 12-months is 57%. In other words, an £100,000 investment in the company is expected to return £157,000 in 12-months time.

*We note that the degree of risk associated with an investment in Sirius is relatively 'low', with the company's shares having an adjusted beta<ref name=":0">Research shows that an investment has two main types of risks: 1) non-systematic and 2) systematic. Systematic risk is the risk related to the overall market, and non-systematic risk is the risk that's specific to an individual investment. Evidence shows that taking on non-systematic risk is inefficient, and it's, therefore, best to eliminate it; and in most cases, elimination is fairy easy to do [by holding a diversified portfolio of investments (i.e. around 15 investments)]. Accordingly, when assessing the riskiness of an investment, it’s best to look at the systematic risk only (i.e. ignore the non-systematic risk). A key measure of systematic risk is beta, and a main way to determine the riskiness of an investment is to compare the beta of the investment with the beta of the market, which is 1. For example, Sirius's adjusted beta (5 years, monthly data) is 1.06, and is, accordingly, 6% above the market beta (of 1); assuming that a 'low' level of riskiness is 10% or less above the market beta, then the riskiness of investing in the company is considered to be relatively 'low' (1.6%<10%). For estimating an asset's beta, in terms of time period, and frequency of observations, the most common choice is five years of monthly data, yielding 60 observations. In terms of the benchmark, we suggest using the iShares MSCI World ETF. One study of U.S. stocks found support for five years of monthly data over alternatives. The beta value in a future period has been found to be on average closer to the mean value of 1.0, the beta of an average-systematic-risk security, than to the value of the raw beta. Because valuation is forward looking, it is logical to adjust the raw beta so it more accurately predicts a future beta.</ref> that is 1.6% above the market (1.016 vs. 1).

Net current assets increased by 22% to €67 million (H2 FY2022: €55 million), net asset value improved by 1.8% to €1,213 million (H2 FY2022: €1,191 million). Cash stood at €162 million (H2 FY2022: €151 million) and debt at €993 million (H2 FY2022: €996 million). The value of the company's investment property increased by 0.3% to €2,081.4 million (H2 FY2022: €2,074.9 million).  

{| class="wikitable"

!Year ended 31 March 2022 (€000)

!Movement (%)

|'''79.2'''

|'''49.6'''

|-

|3.5

|3.4  

|(3.7)

|(1.7)

|(2.5)

|-

|'''76.5'''

|'''49.6'''

|'''+54%'''

|(20.8)

|(10.4)  

|-

|'''55.7'''

|'''39.2'''

|'''+42%'''

|(6.9)  

|(4.5)

|-

|Current tax (excluding tax on disposals)  

|(1.7)

|-

|'''33.0'''

|Depreciation & amortisation of financing fees

|(3.3)

|(1.9)

|Add back current taxes (excluding tax on disposals)

|0.3

|1.7

|(1.9)

|(0.5)

|'''43.6'''

|'''32.3'''

|'''+35%'''

|(3.0)<ref>Adjusting items include costs relating to share awards, costs relating to the repayment of secured debt and acquisition costs relating to the acquisition of BizSpace.</ref>

|(7.0)

|-

|Surplus/Deficit on revaluation of investment properties

|27.7

|-

|-

|Gain/Loss on disposal of investment properties

|(0.3)

|Change in fair value of derivative financial instruments

|1.2

|0.2

|Share of profit in associate not included in FFO

|1.4  

|1.5

|'''75.7'''

|'''78.2'''

|'''(3)%'''

{| class="wikitable"

|+Consolidated Statement of Financial Position

!Year ended 31 March 2022 (€000)

!Year ended 31 March 2021 (€000)

!Movement (%)

|Investment properties (owned assets)

|46%

|Investment properties (leased assets)  

|Investment in associate

|71.1

|63.9

|11%

|11.3

|15%  

|Trade and other receivables

|45.0<ref>Includes €15m Right of use assets.</ref>

|100.6

|55)%

|Derivative financial instruments

|1.6

|0

| -

|Cash and cash equivalents

|162.1

|187.6

|(14)%

|Total Assets

|(77.0)

|(49.2)

|(980.4)

|(689.2)

|(68.5)

|26%

|(1,182.3)

|103.90c

|13%

== Reaffirmed Investment Rating ==

In its rating, Fitch noted that it expects Sirius's income to remain stable, due to an active focus on occupancy and low affordable rents for the company's out-of-town locations. It also highlighted the benefits of the Sirius operating platform and the resilience of its core, high-yielding portfolio. Fitch anticipates that total average portfolio occupancy levels will remain above 80%.

 

On 6th October 2022, Sirius Real Estate announced that it has completed the early refinancing of the the company's next major debt expiry, a €170 million facility with Berlin Hyp AG, approximately one year in advance of the facility's due date.  

 

The refinancing comprises a new 7-year, €170 million facility at a fixed interest rate of 4.26%, which will replace and redeem the existing facility upon its expiry on 31 October 2023.

 

As of 30 September 2022, the group had a total of €993 million of outstanding debt, €750 million of which is unsecured. The remaining €243 million comprised mortgage-backed debt, of which the most significant tranche is the newly refinanced €170 million Berlin Hyp AG facility referred to above.

 

This refinancing facility extends the group's total weighted average debt expiry from 3.8 years to 5.0 years. When the new facility commences just over a year from now, the group's weighted average cost of debt will increase from 1.4% to 1.9%.

 

The company has €1.6 billion of unencumbered assets and in excess of €138 million of free cash available. Within the next 12 months, Sirius has a total of €35 million of debt expiring, which it is confident of either extending terms with the existing lenders, replacing with new lenders or paying down.

 

On 4th October 2022, Sirius Real Estate announced that it has completed three acquisitions in Germany, for €44.6 million.

 

These acquisitions were all notarised prior to the end of June and have been predominantly funded using capital recycled from three strategic disposals in Germany and the UK for a combined €33.6 million.

 

The disposals have been made at a premium to book value.

 

The three disposals were of assets that offered limited further growth opportunities due to location and/or condition, and comprised:

 

The notarisation of a €1.0 million 3,200 sqm non-income producing land plot in Heiligenhaus, Germany which had a book value of €250,000 at the time of notarisation. This asset is being sold to a supermarket chain as part of its expansion plans, with the transaction expected to complete in January 2023.

 

The three new acquisitions totalling €44.6 million currently generate a combined total of €2.3 million of rental income and €1.6 million of net operating profit annually. The three acquired assets have a combined occupancy of just 54% and offer a range of avenues for Sirius to leverage its significant value creation expertise to grow rental income. The acquired assets comprise:

 

# A €39.8 million (including costs) mixed-use property in Düsseldorf, Germany, situated 2.6 km from the city's international airport. The property comprises mainly office and warehouse/light industrial space and is 55% occupied, offering good value add potential.

# A €3.9 million (including costs) primarily warehouse asset located in a well-developed commercial area in Dreieich, Germany, that is strategically adjacent to an existing property owned by Sirius.  We intend to convert the property into a self-storage facility, adding to our existing SmartSpace Self-Storage brand that now exists in 32 locations across Germany.

# A €0.9 million (including costs) small 239 sqm vacant office building in Potsdam. The property is placed strategically at the entrance to one of the Company's existing sites and directly adjacent to the world famous Babelsberg Film Studios.

The company said that it has identified a number of asset management initiatives within the three newly acquired properties which will allow it to grow rental income and occupancy by leasing into markets where it sees continued strong demand for its products.

 

 

On the 16th August 2022, Sirius Real Estate announced that for personal reasons, Diarmuid Kelly has decided to step down as the company's Chief Financial Officer.

 

 

On 16th May 2022, Sirius Real Estate announced the sale of a business park asset for £16 million, representing a 94% premium to the valuation that the asset was initially acquired by the company in November 2021 (i.e. in less than eight months). The proceeds will be used to invest in higher yielding UK opportunities.

 

 

* It's located in Camberwell, London.

* It's multi-tenanted.

* The sale price represents a net initial yield (NIY), which is the current annualised rent, net of costs, expressed as a percentage of capital value, after adding notional purchaser's costs, of around 2.0%.

 

On 13th June 2022, the company announced two board changes.

 

 

Joanne Kenrick was appointed to succeed James Peggie as the chair of the Remuneration Committee. Joanne has been a non-executive Director of Sirius since September 2021 and is a member of the Nomination and Sustainability and Ethics Committees of the Board.

 

James Peggie will continue as a non-executive Director and a member of the Audit, Nomination and Remuneration Committees of the Board.

 

 

During the 12-month period, revenue increased by 27% to €210 million (FY2021: €165 million), and the gain on revaluation of investment properties jumped by 41% to €210 million (FY2021: €165 million); however, mainly due to an impairment charge, higher administrative expenses and interest expenses, the net profit remained more-or-less unchanged at €147 million (FY 2021: €147 million).

 

In terms of the financial position of the company, the net current assets increased by more than 3x to €55 million (FY 2021: €17 million), and the net asset value (NAV) rose by by 28% to €1.19 billion (FY 2021: €0.93 billion).

 

Cash flows from operating activities increased by 15% to €82 million (FY2021: €71 million), and mainly due to the acquisition of a subsidiary and purchase of investment properties, cash flows used in investing activities increased by almost 6x to €430 million (FY2021: €74 million). Cash flows from financing activities swung to €431 million (FY2021: negative €54 million), driven by the proceeds of loans and the issue of share capital. The total dividend per share for the year increased by 16% to 4.41 cents (FY2021: 3.80%).

 

{| class="wikitable"

|+How do the results compare to our forecasts?

|Portfolio value (€'billion)

|2.00

|2.08

|4.00%

|FFO (€'million)

|72.0

|74.6

|3.61%

|FFO/share (€'cents)

|6.58

|6.78

|3.04%

|Dividend/share (€'cents)

|4.25

|3.76%

|Adjusted NAV/share (€'cents)

|104.4

|108.5

|3.93%

|}

 

 

|Portfolio value (€'billion)

|2.12

|2.15

|(2.71%)

|FFO (€'million)

|90.1

|97.0

|7.66%

|95.1

|FFO/share (€'cents)

|7.75

|8.25

|8.50

|4.17%

|Dividend/share (€'cents)

|5.0

|5.4

|8.00%

|5.3

|5.6

|5.66%

|Adjusted NAV/share (€'cents)

|110.9

 

As with any investment, investing in Sirius carries a level of risk. Overall, based on the company's market beta (i.e. 1.016), the degree of risk associated with an investment in Sirius is relatively 'low'. Here, to estimate the adjusted beta<ref name=":0" />, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice.

 

For us, currently, the biggest risk to the valuation of the company relates to macro-economic factors, in particular unexpected and sudden changes in inflation and interest rates movements, ultimately resulting in a reduction in the affordability and, therefore, demand of the company's assets/properties. With that said, the company has a diverse tenant base, with its top 50 tenants generating 45% of annual income in Germany, and 26% of annual income generated by the top 100 tenants in the UK. Sirius also has no material dependencies on specific industries, and a track record of buying and building high-returning investment opportunities. 

 

Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or less, the approach that is more accurate is the relative valuation approach, so that's the approach that we suggest using to determine the estimated value of the company.

 

==== What's the expected return of an investment in Sirius using the relative valuation approach? ====

Accordingly, we estimate that the expected return of an investment in Sirius Real Estate Limited over the next 12-months is 57%. In other words, an £100,000 investment in the company is expected to return £157,000 within 12-months from now. The assumptions used to estimate the return figure can be found in the table below.

 

Assuming that a suitable return level in the 12 months is 10% and Sirius Real Estate Limited achieves its expected return level (of 197%), then an investment in the company is considered to be a 'suitable' one.

 

{| class="wikitable"

|+Key inputs

|Which type of multiple do you want to use?

|P/FFO

|The FFO does not account for depreciation in properties but rather adds back the depreciation value back to the net income. Furthmore, FFO deducts any gains or losses from the sale of assets, since including the transaction would result in discrepancies in the revenues reported in each period. Accordingly, we suggest valuing the company using the Price to Funds From Operations (P/FFO) ratio.

|In regards to the P/FFO multiple, for the FFO figure, which year to you want to use?

|Twelve months ahead

|Research suggests that when using the relative valuation approach, it's best to use a time period of 12 months or less. Accordingly, for the FFO figure, we suggest using the twelve months ahead.

|In regards to the P/FFO multiple, what multiple figure do you want to use?

|18x

|According to Bloomberg, Sirius Real Estate Limited closest peers trade on a multiple of 18x.

|Which financial forecasts to use?

|Proactive Investors

|Here, we have used the forecasts of Proactive Investors.

|What's the current value of the company?

|£981.20 million

|As at 22nd November 2022, the current value of Sirius Real Estate Limited is £981.20 million.

|Which time period do you want to use to estimate the expected return?

|Between now and one year time

|Research suggests that when using the relative valuation approach, it's best to estimate the expected return of the company between now and one year time.

|}

 

 

# The twelve months ahead FFO forecast (the default forecast is €98.78 million).

 

The impact of a 10% change in those main inputs to the expected return of the Sirius Real Estate Limited investment is shown in the table below.

|The P/FFO multiple

|43%

|57%

|73%

|-

|+Peers

!Company name

!Bloomberg ticker

!Market capitalisation (GBP)

|Sirius Real Estate Ltd

|SRE LN

|979,494,700

|FastPartner AB

|FPARA SS

|Real Estate Owners & Developers

|1,170,459,785

|Cibus Nordic Real Estate AB

|CIBUS SS

|Sweden

|57,4491,440

|Shaftesbury PLC

|1,385,308,138

|33.7009

|Intershop Holding AG

|ISN SW

|Real Estate Owners & Developers

|1,011,223,384

|WCM Beteiligungs- und Grundbes

|WCMK GR

|497,815,111

|Metrovacesa SA

|MVC SM

|874,166,035

|Brack Capital Properties NV

|BCNV IT

|Italy

|TLG Immobilien AG

|TLG GR

|Germany

|1,949,040,400

|GAG Immobilien AG

|GWK3 GR

|Germany

|Gateway Real Estate AG

|GTY GR

|Multi Asset Class Own & Develop

|498,775,280

 

|Revenue

|88,352

|130,558

|Direct costs

|(38,843)

|(57,350)

|Net operating income

|49,509

|73,208

|Gain on revaluation of investment properties

|48,414

|26,812

|Gain/(loss) on disposal of properties

|(400)

|4,801

|Recoveries from prior disposals of subsidiaries

|94

|<nowiki>-</nowiki>

|Administrative expenses

|(12,311)

|(24,809)

|Share of profit of associates

|2,463

|2,597

|Operating profit

|87,769

|82,609

|Finance income

|1,596

|1,129

|Finance expense

|(11,347)

|(9,249)

|Change in fair value of derivative financial instruments

|160

|1,244

|Net finance costs

|(9,591)

|(6,876)

|Profit before tax

|78,178

|75,733

|Taxation

|(10,386)

|(5,673)

|Profit for the period after tax

|67,792

|70,060

|Profit attributable to:

|Owners of the Company

|67,738

|70,008

|Non-controlling interest

|54

|52

|

|67,792

|70,060

|Earnings per share

|

|

|Basic earnings per share

|6.44c

|6.00c

|Diluted earnings per share

|6.33c

|5.92c

|+Condensed consolidated statement of financial position

!Six months ended 30 September 2021 (€000)

!Six months ended 30 September 2022 (€000)

|Non-current assets

|Investment properties

|2,100,004

|2,105,046

|Plant and equipment

|5,492

|7,199

|Intangible assets

|4,283

|4,129

|Right of use assets

|14,996

|15,259

|Other non-current financial assets

|48,330

|48,409

|Investment in associates

|24,142

|26,739

|Total non-current assets

|2,197,247

|2,206,781

|Current assets

|

|

|Trade and other receivables

|24,571

|24,420

|Derivative financial instruments

|329

|1,573

|Cash and cash equivalents

|150,966

|162,098

|Total current assets

|175,866

|188,091

|Assets held for sale

|13,750

|1,000

|Total assets

|2,386,863

|2,395,872

|Current liabilities

|Trade and other payables

|(89,335)

|(76,993)

|Interest-bearing loans and borrowings

|(19,630)

|(37,243)

|Lease liabilities

|(1,090)

|(1,458)

|Current tax liabilities

|(10,423)

|(4,978)

|Total current liabilities

|Interest-bearing loans and borrowings

|(961,863)

|(943,176)

|Lease liabilities

|(37,571)

|(37,233)

|Deferred tax liabilities

|(75,893)

|(81,220)

|Total non-current liabilities

|(1,075,327)

|(1,061,629)

|Total liabilities

|(1,195,805)

|(1,182,301)

|Net assets

|1,191,058

|1,213,571

|Equity

|

|

|Issued share capital

|<nowiki>-</nowiki>

|<nowiki>-</nowiki>

|Other distributable reserve

|570,369

|544,419

|Own shares held

|(6,274)

|(8,329)

|Foreign currency translation reserve

|(1,701)

|(21,243)

|Retained earnings

|628,258

|698,266

|Total equity attributable to the owners of the Company

|1,190,652

|1,213,113

|Non-controlling interest

|406

|458

|Total equity

|1,191,058

|+Condensed consolidated statement of cash flow

!Six months ended 30 September 2021 (€000)

!Six months ended 30 September 2022 (€000)

|'''Operating activities'''

|

|

|Profit for the period after tax

|67,792

|70,060

|Taxation

|10,386

|5,673

|Profit for the period before tax

|78,178

|75,733

|(Gain)/loss on disposal of properties

|(309)

|Share-based payments

|1,403

|1,947

|Gain on revaluation of investment properties

|(48,414)

|(26,812)

|Change in fair value of derivative financial instruments

|(160)

|(1,244)

|Depreciation of property, plant and equipment

|349

|1,027

|Amortisation of intangible assets

|564

|629

|Depreciation of right of use assets

|260

|1,141

|Share of profit of associates

|(2,463)

|(2,597)