Sirius Real Estate: Update

Summary

• Sirius Real Estate has made eight key announcements since our last report (on ccc).

Half-Year Results

On 21st November 2022, the company announced its interim results for the period ended 30th September 2022.

• • High highlights
    • Profit and loss
      • Total revenue, which comprises rent, fee income from Titanium, other income from investment properties and service charge income, increased by 47.7% to €130.6 million (30 September 2021: €88.4 million).
      • Like-for-like annualised rent roll increased by 2.4% in Germany during the period, to €115.2 million (31 March 2022: €112.5 million), and 4.1% in the UK, to £46.5 million (31 March 2022: £44.7 million)
      • Profit before tax of €75.7 million (30 September 2021: €78.2 million) with a 78.7% uplift in underlying profit to €47.9 million (30 September 2021: €26.8 million) when adjusted for €27.8 million of property valuation gains.
      • Adjusted earnings per share, which excludes valuation movements as well as exceptional items, increased 26.6% to 3.71c per share (30 September 2021: 2.93c) reflecting the positive year on year operational development
    • Balance sheet
      • Net current assets
        • Net cash
      • Net assets
        • NAV per share increased 1.8% to 103.90c (31 March 2022: 102.04c) with adjusted NAV per share increasing by 2.0% to 110.72c (31 March 2022: 108.51c).
    • Cash flow
      • CFO
        • 47.0% growth in funds from operations¹ to €48.5 million (30 September 2021: €33.0 million)
      • CFI
        • Valuation increase of €20.3 million and £6.3 million (€7.5 million) representing a 1.8% and 2.1% like-for-like valuation growth in Germany and the UK respectively.
        • Increase in owned investment property to €2,081.4 million (31 March 2022: €2,074.9 million).
      • CFF
        • 32.4% increase in dividend per share to 2.70c (30 September 2021: 2.04c).
    • Other/outlook
      • The company said it continues to expect to trade in-line with consensus and management expectations for the full year.

Reaffirmed Investment Rating

On the 7th November 2022, the company announced that Fitch Ratings has reaffirmed the Company's BBB investment grade rating with 'Stable Outlook' (Long-Term Issuer Default Rating).

In its rating, Fitch noted that it expects 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%.

Early refinancing of next major debt expiry

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.

Acquisitions and disposals update

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:

1. 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.
2. 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.
3. 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 us to grow rental income and occupancy by leasing into markets where we see continued strong demand for our products.

The company added that it expects to slow its acquisition pipeline. We will also continue to seek to dispose of non-core or mature assets as and when we feel the timing is right.

Change of Chief Financial Officer

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.

Alistair Marks, the Chief Investment Officer and former CFO of the company, has stepped in as the interim CFO. The company has begun the search for a new CFO.

Sale of Bizspace Camberwell

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.

Key features of the asset include:

• It's located in Camberwell, London.
• It's multi-tenanted.
• It comprises approx. 34,700 sq. ft. of industrial and office space, and is 91% occupied.
• 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%.

Board changes

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

Caroline Britton was appointed to succeed James Peggie as the Senior Independent Director. Caroline has been a non-executive Director of Sirius since June 2020 and chairs the Audit Committee and is a member of the Nomination Committee of the Board.

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.

Final results

On 13th June 2022, the company announced its full year results for the year ended 31st March 2022.

• Key highlights
  • Profit and loss
    • Revenue is up by xxx% to EUR 210 million (FY2021: EUR 165 million).
    • Net profit is up more-or-less unchanged at EUR 147 million (FY 2021: EUR 147 million).
  • Balance sheet
    • Net current assets
    • Net assets
      • NAV is up by xxx% to EUR 1.19 billion (FY 2021: 0.93 billion).
  • Cash flow
    • CFO
      • Cash flows from operating activities increased by xxx to EUR 82 million (from EUR 71 million)
    • CFI
      • Cash flows used in investing activities increased by xxx% to EUR 430 million (from EUR 74 million), mainly due to the acquisition of a subsidiary and purchase of investment properties.
    • CFF
      • Cash flows from financing activities increased to EUR 431 million (from negative EUR 54 million), driven by proceeds from loans and the issue of share capital.
      • Dividend
        • Total dividend per share for the year increased by 16% to 4.41 cents (from 3.80%).
    • Other
      • Funds From Operations (FFO) increased by 22.5% to €74.6 million (2021: €60.9 million)
  • Other/outlook
    • Post year end, trading in-line with market expectations.
    • Actively assessing further opportunities for growth in both Germany and the UK.
    • The company said that it is in a strong position to continue to execute on its ambitious growth strategy in both Germany and the UK.

Financials

Revenue

Consolidated income statement

	Year ended 31 March 2021 (€000)	Year ended 31 March 2022 (€000)	Year ended 31 March 2023 (€000)	Year ended 31 March 2024 (€000)
Revenue	165,361	210,182
Direct costs	(71,541)	(87,689)
Net operating income	93,820	122,493
Gain on revaluation of investment properties	99,585	140,884
(Loss)/gain on disposal of properties	54	(623)
Recoveries from prior disposals of subsidiaries	65	94
Administrative expenses	(27,823)	(40,718)
Goodwill impairment	-	(40,906)
Share of profit of associates	4,977	6,940
Operating profit	170,678	188,164
Finance income	2,712	2,986
Finance expense	(9,869)	(23,219)
Change in fair value of derivative financial instruments	136	996
Net finance costs	(7,021)	(19,237)
Profit before tax	163,657	168,927
Taxation	(16,097)	(20,935)
Profit for the year after tax	147,560	147,992
Profit attributable to:
Owners of the Company	147,451	147,873
Non-controlling interest	109	119
	147,560	147,992
Earnings per share
Basic earnings per share	14.16c	13.48c
Diluted earnings per share	13.96c	13.29c

Consolidated statement of financial position

	Year ended 31 March 2021 (€000)	Year ended 31 March 2022 (€000)
Non-current assets
Investment properties	1,362,192	2,100,004
Plant and equipment	2,682	5,492
Intangible assets	6,568	4,283
Right of use assets	1,919	14,996
Other non-current financial assets	44,960	48,330
Investment in associates	17,202	24,142
Total non-current assets	1,435,523	2,197,247
Current assets
Trade and other receivables	18,731	24,571
Derivative financial instruments	70	329
Cash and cash equivalents	65,674	150,966
Total current assets	84,475	175,866
Assets held for sale	-	13,750
Total assets	1,519,998	2,386,863
Current liabilities
Trade and other payables	(50,527)	(89,335)
Interest-bearing loans and borrowings	(9,114)	(19,630)
Lease liabilities	(5,857)	(1,090)
Current tax liabilities	(2,063)	(10,423)
Derivative financial instruments	(414)	-
Total current liabilities	(67,975)	(120,478)
Non-current liabilities
Interest-bearing loans and borrowings	(458,940)	(961,863)
Lease liabilities	(9,130)	(37,571)
Derivative financial instruments	(797)	-
Deferred tax liabilities	(56,331)	(75,893)
Total non-current liabilities	(525,198)	(1,075,327)
Total liabilities	(593,173)	(1,195,805)
Net assets	926,825	1,191,058
Equity
Issued share capital	-	-
Other distributable reserve	449,051	570,369
Own shares held	(2,903)	(6,274)
Foreign currency translation reserve	-	(1,701)
Retained earnings	480,385	628,258
Total equity attributable to the owners of the Company	926,533	1,190,652
Non-controlling interest	292	406
Total equity	926,825	1,191,058

Consolidated statement of cash flows

	Year ended 31 March 2021 (€000)	Year ended 31 March 2022 (€000)
Operating activities
Profit for the year after tax	147,560	147,992
Taxation	16,097	20,935
Profit for the year before tax	163,657	168,927
Loss/(gain) on disposal of properties	(54)	623
Recoveries from prior disposals of subsidiaries	(65)	(94)
Net exchange differences	-	(1,975)
Share-based payments	3,148	4,173
Gain on revaluation of investment properties	(99,585)	(140,884)
Change in fair value of derivative financial instruments	(136)	(996)
Depreciation of property, plant and equipment	669	1,167
Amortisation of intangible assets	897	1,164
Depreciation of right of use assets	521	843
Goodwill impairment	-	40,906
Share of profit of associates	(4,977)	(6,940)
Finance income	(2,712)	(2,986)
Finance expense	9,869	23,219
Changes in working capital
Increase in trade and other receivables	(2,518)	(5,196)
Increase in trade and other payables	2,913	3,470
Taxation paid	(632)	(3,671)
Cash flows from operating activities	70,995	81,750
Investing activities
Purchase of investment properties	(35,484)	(162,844)
Prepayments relating to new acquisitions	-	(1,860)
Proceeds from loss on control of subsidiaries (net of cash disposed)	65	94
Capital expenditure on investment properties	(31,104)	(23,786)
Purchase of plant and equipment and intangible assets	(2,718)	(3,540)
Acquisition of a subsidiary (net of cash acquired)	-	(254,730)
Proceeds on disposal of properties (including held for sale)	30	15,297
Increase in loans receivable due from associates	(5,950)	(1,124)
Interest received	1,627	2,986
Cash flows used in investing activities	(73,534)	(429,507)
Financing activities
Proceeds from issue of share capital	-	159,926
Transaction costs on issue of shares	-	(6,219)
Shares purchased	(1,613)	(5,545)
Payment relating to exercise of share options	-	(3,519)
Dividends paid to owners of the Company	(24,248)	(30,815)
Dividends paid to non-controlling interest	(63)	(5)
Proceeds from loans	20,000	750,000
Repayment of loans	(33,753)	(399,431)
Payment of principal portion of lease liabilities	(5,681)	(5,871)
Exit fees/prepayment of financing penalties	-	(5,335)
Capitalised loan issue cost	(134)	(14,369)
Finance charges paid	(7,558)	(7,067)
Cash flows from/(used in) financing activities	(53,050)	431,750
Increase/(decrease) in cash and cash equivalents	(55,589)	83,993
Net exchange difference	-	1,299
Cash and cash equivalents as at the beginning of the year	121,263	65,674
Cash and cash equivalents as at the year end	65,674	150,966

Valuation

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, Stockhub estimates that the expected return of an investment in Sirius Real Estate Limited over the next 12-months is 197%. In other words, an £100,000 investment in the company is expected to return £196,841 in 12-months time. The assumptions used to estimate the return figure can be found in the table below.

Assuming that a suitable return level over five years is 10% per year 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.

What are the assumptions used to estimate the return figure?

Key inputs

Description	Value	Commentary
Which type of multiple do you want to use?	P/FFO	The value of real estate typically appreciates, rather than depreciates; furthermore, REIT property sales and capital expenditure tends to result in material differences in the profitable of the REIT across its lifespan. Accordingly, Stockhub suggests valuing the company using the Price to Adjusted Funds From Operations (P/AFFO) ratio, which is calculated by adding amortization and depreciation to the net income and then deducting the gains on the sale of properties and capital expenditure.
In regards to the P/FFO multiple, for the FFO figure, which year to you want to use?	Year 1	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 Year 1.
In regards to the P/FFO multiple, what multiple figure do you want to use?	18x	In Stockhub's view, Sirius Real Estate Limited closest peer is xxx. xxx trades on a multiple of 18x.
Which financial forecasts to use?	Consensus	Here, we have used the consensus forecasts.
What's the current value of the Stockhub company?	£981.20 million	As at 22nd November 2022, the current value of its company at £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.

Sensitive analysis

The two main inputs that result in the greatest change in the expected return of the Sirius Real Estate Limited investment are, in order of importance (from highest to lowest):

1. The P/FFO multiple (the default multiple is 18x); and
2. The year-one FFO forecast (the default forecast is $xxx million); and

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.

Sirius investment expected return sensitive analysis

Main input	10% worse	Unchanged	10% better
The P/FFO multiple
The year-one FFO forecast

Appendix

Peers

Company name	Bloomberg ticker	Market capitalisation (GBP)	BF P/FFO
Sirius Real Estate Ltd	SRE LN	979,494,700	11.5111
FastPartner AB	FPARA SS	1,170,459,785	--
Cibus Nordic Real Estate AB	CIBUS SS	57,4491,440	--
Shaftesbury PLC	SHB LN	1,385,308,138	33.7009
Intershop Holding AG	ISN SW	1,011,223,384	--
WCM Beteiligungs- und Grundbes	WCMK GR	497,815,111	--
Metrovacesa SA	MVC SM	874,166,035	25.1504
Brack Capital Properties NV	BCNV IT	601,880,806	--
TLG Immobilien AG	TLG GR	1,949,040,400	23.0976
GAG Immobilien AG	GWK3 GR	1,097,732,888	--
Gateway Real Estate AG	GTY GR	498,775,280	--