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Sirius Real Estate Limited
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=== WACC and Cost of Equity === As at 30th September, the company's cost of debt is 1.3% (and average debt maturity is 3.8 years). With total debt of β¬992.86 million and total equity of β¬1,213.57 million, the company's debt-to-equity ratio is 81.8%. In other words, 55% of the company's finance comes from equity financing and 45% from debt financing. Accordingly, the company's weighted average cost of capital (WACC) is 7.31%. We note that when the company's new debt finance agreement comes into place on 1st November 2023, the company's cost of debt will increase to 1.9% (from 1.3%) and average debt maturity will increase to 5.0 years (from 3.8 years). Consequently, the cost of capital will increase by 28 basis points to 7.59% (from 7.31%). The company's debt has been rated by Fitch Ratings, one of the three nationally recognized statistical rating organizations (NRSRO) in the United States, as 'BBB', which is considered as investment grade. {| class="wikitable" |+Cost of equity (%) !Input !Input value !Additional information |- |Risk-free rate (%) |3.779 |Here, the risk free rate is the US 30 year treasury bond, and is calculated as at GMT 12:25 on 10th February 2023. Research suggests that for the risk-free rate, it's best to use one that has the same or similar maturity to the estimated remaining lifespan of the company. Here, we have assumed that the estimated lifespan of the company is 50 years, so we have used the longest maturity, which is 30 years. |- |Beta |1.06 |Here, to estimate the adjusted beta, 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. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more/most accurately predicts a future beta. |- |Equity risk premium (%) |7.98 |Research suggests that for the region of equity risk premium, it's best to use one that is the same or similar to the region of the beta market portfolio. Here, the region of the beta market portfolio is the world/global, so we have used the world/global region for the equity risk premium, and is calculated as at 5th January 2023. |- |Cost of equity (%) |12.24 |Cost of equity = Risk-free rate + Beta x Equity risk premium. |} {| class="wikitable" |+Weighted average cost of capital calculation !Type of capital !Cost (%) !Proportion !Weight |- |Equity |12.24% |55.00% |0.58% |- |Debt |1.30% |45.00% |6.73% |- |Total |N/A |100.00% |7.31% |} {| class="wikitable" |+Adjusted Funds From Operations calculation !Item !2021 !2022 !2023E !2024E !2025E !2026E !2027E |- |Funds From Operations (β¬'million) |60.9 |74.6 |97.0 |102.0 |108.8 | | |- |Capital expenditure (β¬'million) |31.1 |23.8 |24.0 |24.0 |24.0 | | |- |Adjusted Funds From Operations (β¬'million) |29.8 |50.8 |76.0 | | | | |}
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