Talk:Sirius Real Estate Limited

Interims

• Sirius Real Estate Limited is an owner and operator of business parks in Germany and the United Kingdom.
• The company is progressing to embed ESG into the business and strategy.

Sirius Real Estate represents a unique opportunity for investors to gain exposure, through a UK REIT, to the attractive light industrial business park and out-of-town office sectors in Germany and more recently, in the UK, managed by a growing market leading owner and operator with a strong and long track record of value creation.

Having entered the UK market in November 2021 via the acquisition of BizSpace, a leading provider of regional flexible workspace, Sirius now intends to apply its proven asset management skills to this new market, having already increased BizSpace’s like-for-like annualised rent roll by 7.5% within the first 4.5 months of ownership.

Delivering a stable and attractive return profile

• Sirius has delivered a double-digit total shareholder accounting return in excess of 13% over the last three years
• The Group’s policy of distributing 65% of FFO as dividends ensures it maintains a well-covered dividend and provides the head-room to flex pay-out ratios as required
• Full covered dividend, with consistent dividend growth over past 8 years, including throughout the Covid-19 pandemic
• Defensive gross yield of 7% with valuation gains mainly resulting from income growth generated by asset management
• Further value and income enhancement to come from a combination of asset recycling, filling vacant space in recently acquired assets, implementation and completion of accretive capex investment programmes and reductions in service charge leakage

Sirius has a well-structured, well-located portfolio…

• Sirius owns and manages a portfolio of over €2.5 billion of property assets comprising industrial, manufacturing, office and storage assets in edge of town locations
• Mixed-use assets are situated in strategic locations: in and around the “big seven” German markets and in core regional hotspot clusters across the UK
• Sirius has a well-diversified tenant base. In Germany, its top 50 tenants generate 45% of annual income. In the UK, 26% of annual income is generated by the top 100 tenants
• Future value enhancement to come from developing and letting more than 118,000 sqm of vacant space in Germany and more than 45,000 sqm of vacant space in the UK
• Sirius maintains overall group LTV at 45% or less, financing new acquisitions with up to 50% LTV using long-term, low interest debt and subsequently blending them with unencumbered assets in the portfolio

…in two highly attractive markets with strong, long-term fundamentals

• The German economy is the largest in Europe: characterised by long term GDP growth, low unemployment and high levels of investment and consumer spending, it is forecast to grow by c. 1.9% in 2022 and 2.4% in 2023. 99% of German companies are SMEs - the core customer of Sirius
• The UK’s regional flexible workspace and industrial market is characterised by chronic supply constraints, offering potential for significant rental growth and consolidation due to high levels of market fragmentation.
• Industrial assets can be acquired at attractive yields and at capital values well below replacement cost
• Sirius seeks to buy assets with the potential to create value, predominantly through the asset management process by filling vacant space and converting space to higher value uses

Operating with a proven business model and solid track record

• Sirius has proven capability in transforming assets through its capex investment programmes, which deliver returns in excess of 40% and enhance income and capital values. The Company also has a strong track record for growing its income and has delivered like-for-like rent roll growth in excess of 5% for the last eight consecutive years (within its German platform)
• Unlike its competitors, Sirius has a fully integrated operating platform incorporating in-house marketing and sales functions that targets prospective tenants directly using online and offline techniques that lower risk and increase returns
• Dedicated service charge team delivers best-in-class cost recovery by utilising advanced measurement and cost allocation techniques
• The Company is led by a team of highly experienced individuals who have been tested over the full real estate investment cycle

Platform synergies help drive value creation

• Industrial and out of town office markets in the UK and Germany share similar characteristics
• BizSpace structure and internal operating platform complements Sirius’ existing German business, allowing for meaningful operational and financial synergies to drive value creation for Sirius shareholders
• Sirius will apply its proven asset management skills to this new market and has already increased BizSpace’s like-for-like annualised rent roll by 7.5% within the first 4.5 months of ownership.

Incorporated in 2002

Sirius Real Estate Limited is a company incorporated in Guernsey and resident in the United Kingdom for tax purposes, whose shares are publicly traded on the Main Market of the London Stock Exchange and the Main Board of the Johannesburg Stock Exchange.

The principal activity of the group is the investment in, and development of, commercial and industrial property to provide conventional and flexible workspace in Germany and the United Kingdom.

Forecasts

What are the assumptions used to estimate the financial forecasts?

Key inputs

Description	Value	Commentary
Revenue
What's the estimated current size of the total addressable market?	$2,400,000,000,000	Here, the total addressable market (TAM) is defined as the global real estate rental income market, and based on a number of assumptions, it is estimated that the size of the market as of today (23rd November 2022), in terms of revenue, is $2.4 trillion.
What is the estimated company lifespan?	50 years	Research shows that the average lifespan of a large corporation is around 50 years.
What's the estimated annual growth rate of the total addressable market over the lifecycle of the company?	3%	Research shows that the growth rate of the global real estate rental income market (i.e. the total addressable market) is similar to the growth rate of global gross domestic product, which has averaged (medium) around 3% per year in the last 20 years (2001 to 2022).
What's the estimated company peak market share?	1%	Stockhub estimates that especially given the leadership of the company, the peak market share of Sirius is around 1%, and, therefore, suggests using the share amount here. As of 31st March 2022 (i.e. the most recent Sirius full-year results), Sirius's current share of the global real estate rental income market (i.e. the total addressable market) is estimated at around 0.0090% and of the Germany and United Kingdom commercial real estate rental income market is 0.24%.
Which distribution function do you want to use to estimate company revenue?	Gaussian	Research suggests that the revenue pattern of companies is similar to the pattern produced by the Gaussian distribution function (i.e. the revenue distribution is bell shaped), so Stockhub suggests using that function here.
What's the estimated standard deviation of company revenue?	5 years	Another way of asking this question is this way: within how many years either side of the mean does 68% of revenue occur? Based on Sirius' current revenue amount (i.e. $210 million) and Sirius' estimated lifespan (i.e. 50 years) and Sirius' estimated current stage of its lifecycle (i.e. growth stage), the Stockhub company suggests using five years (i.e. 68% of all sales happen within five years either side of the mean year), so that's what's used here.
Growth stages
How many main stages of growth is the company expected to go through?	4 stages	Research suggests that a company typically goes through four distinct stages of cash flow growth. Research also shows that incorporating those stages into the discounted cash flow model improves the quality of the model and, ultimately, the quality of the value estimation. In addition, research shows that a key way to determine the stage which a company is in is by examining the cash flow patterns of the company. A summary of the economic links to cash flow patterns can be found in the appendix of this report. Stockhub estimates that with Sirius operating cash flows positive (+), investing cash flows negative (-) and its financing cash flows positive (+), the company is in the second stage of growth (i.e. the 'growth' stage), and, therefore, it has a total of three main stages of growth. Note, to account for one-off events, the three-year average (median) amount was used to calculate the cash flows.
What proportion of the company lifecycle is represented by growth stage 1?	30%	Research suggests 30%.
What proportion of the company lifecycle is represented by growth stage 2?	10%	Research suggests 10%.
What proportion of the company lifecycle is represented by growth stage 3?	20%	Research suggests 20%.
What proportion of the company lifecycle is represented by growth stage 4?	40%	Research suggests 40%.
Growth stage 2
Cost of goods sold as a proportion of revenue (%)	42%	Research suggests that it's best to use a similar margin rate as the one used by peers that are in the same growth stage (i.e. growth stage 2), and the margin for its peers is 42%. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Operating expenses as a proportion of revenue (%)	19%	Research suggests that it's best to use a similar margin rate as the one used by peers that are in the same growth stage (i.e. growth stage 2), and the margin for its peers is 19%. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Tax rate (%)	12%	Research suggests that it's best to use a similar rate as the one used by peers that are in the same growth stage (i.e. growth stage 2), and the rate for its peers is 12%.
Depreciation and amortisation as a proportion of fixed capital (%)	10%	Research suggests that it's best to use a similar margin rate as the one used by peers that are in the same growth stage (i.e. growth stage 2), and the margin for its peers is 10%. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Fixed capital as a proportion of revenue (%)	10%	Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 2), and the amount for its peers is 10%. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Working capital as a proportion of revenue (%)	15%	Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 2), and the amount for its peers is 15%.
Net borrowing ($000)	Zero	Stockhub suggests that for simplicity, the net borrowing figure is zero.
Interest amount ($000)	Zero	Stockhub suggests that for simplicity, the interest amount figure is zero.
Growth stage 3
Cost of goods sold as a proportion of revenue (%)	62%	Research suggests that it's best to use a similar margin rate as the one used by peers that are in the same growth stage (i.e. growth stage 3), and the margin for its peers is 62%. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Operating expenses as a proportion of revenue (%)	13%	Research suggests that it's best to use a similar margin rate as the one used by peers that are in the same growth stage (i.e. growth stage 3), and the margin for its peers is 13%. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Tax rate (%)	14%	Research suggests that it's best to use a similar rate as the one used by peers that are in the same growth stage (i.e. growth stage 3), and the rate for its peers is 14%. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Depreciation and amortisation as a proportion of revenue (%)	4%	Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 3), and the amount for its peers is 4%. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Fixed capital as a proportion of revenue (%)	3%	Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 3), and the amount for its peers is 3%. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Working capital as a proportion of revenue (%)	10%	Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 4), and the amount for its peers is 10%. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Net borrowing ($000)	Zero	Stockhub suggests that for simplicity, the net borrowing figure is zero.
Interest amount ($000)	Zero	Stockhub suggests that for simplicity, the interest amount figure is zero.
Growth stage 4
Cost of goods sold as a proportion of revenue (%)	99%	Research suggests that it's best to use a similar margin rate as the one used by peers that are in the same growth stage (i.e. growth stage 4), and the margin for its peers is 99%. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Operating expenses as a proportion of revenue (%)	15%	Research suggests that it's best to use a similar margin rate as the one used by peers that are in the same growth stage (i.e. growth stage 4), and the margin for its peers is 15%. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Tax rate (%)	0%	Research suggests that it's best to use a similar rate as the one used by peers that are in the same growth stage (i.e. growth stage 4), and the rate for its peers is 0%. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Depreciation and amortisation as a proportion of revenue (%)	37%	Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 4), and the amount for its peers is 37%. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Fixed capital as a proportion of revenue (%)	1%	Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 4), and the amount for its peers is 1%. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Working capital as a proportion of revenue (%)	10%	Research suggests that it's best to use a similar amount as the one used by peers that are in the same growth stage (i.e. growth stage 4), and the amount for its peers is 10%. Information on the peers and the calculation of the figure used here can be found in the appendix of this report.
Net borrowing ($000)	Zero	Stockhub suggests that for simplicity, the net borrowing figure is zero.
Interest amount ($000)	Zero	Stockhub suggests that for simplicity, the interest amount figure is zero.

Income statement

	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022
Fiscal Year Ends	31/03/2013	31/03/2014	31/03/2015	31/03/2016	31/03/2017	31/03/2018	31/03/2019	31/03/2020	31/03/2021	31/03/2022
Turnover	46.12	45.07	45.39	55.79	68.79	123.65	140.06	150.01	165.36	210.18
Expenses	22.32	21.54	23.64	23.06	29.74	83.25	85.02	85.95	98.67	121.30
EBITDA	-13.44	44.18	46.25	68.93	85.63	98.63	155.10	125.22	175.61	187.50
EBIT	-14.47	43.19	45.36	68.30	84.76	97.54	153.73	123.12	173.53	184.33
Operating Profit (reported)	23.80	23.52	21.76	32.73	39.05	40.40	55.04	64.06	66.69	88.88
Operating Profit (adjusted)	-	-	-	-	-	-	-	-	-	-
Investment Income	-36.98	21.05	26.70	44.17	49.86	60.95	100.50	58.00	104.62	147.20
Exceptional Items	-1.19	-1.36	-3.05	-8.54	-4.04	-3.68	-1.70	0.03	-0.50	-13.84
Net Interest	-15.10	-12.18	-12.75	-11.29	-8.44	-8.03	-9.12	-11.33	-7.16	-12.41
Pre-tax Profit	-29.47	31.03	32.65	57.08	76.44	89.65	144.71	110.77	163.66	168.93
Tax	0.78	2.10	5.65	2.39	9.50	8.29	15.99	12.62	16.10	20.94
Net Profit	-30.25	28.93	27.00	54.69	66.94	81.36	128.72	98.15	147.56	147.99
Minority Interests	-0.03	0.01	0.02	0.02	0.03	0.09	0.07	0.01	0.11	0.12
Profit For Financial Year	-30.23	28.93	26.99	54.67	66.91	81.27	128.66	98.14	147.45	147.87
Ordinary Dividends	-	-	-	-	-	-	-	-	-	-
Non Equity Dividends	-	-	-	-	-	-	-	-	-	-
Retained Profit	-30.23	28.93	26.99	54.67	66.91	81.27	128.66	98.14	147.45	147.87
Per Share Data
DPS	0.00	0.00	0.01	0.02	0.03	0.03	0.03	0.03	0.04	0.04
Normalized EPS	-0.09	0.07	0.05	0.08	0.08	0.09	0.13	0.09	0.14	0.14
Reported EPS	-0.10	0.07	0.05	0.07	0.08	0.09	0.13	0.09	0.14	0.13
Investment Ratios
Operating Margin	0.52	0.52	0.48	0.59	0.57	0.33	0.39	0.43	0.40	0.42
DPS Growth %	-	-	-	0.65	0.53	0.15	0.03	0.08	0.06	0.11
Dividend Cover x	0.00	0.00	21.32	3.86	3.26	56.50	3.22	3.82	2.26	3.93
Norm EPS Growth %	-	-	-0.30	0.59	0.02	0.08	0.43	-0.27	0.48	-0.01
Reported EPS Growth %	-	-	-0.33	0.51	0.11	0.10	0.47	-0.26	0.48	-0.05
Other
Market Cap at B/S Date	61.13	169.09	262.65	332.75	456.45	610.66	648.04	682.89	931.63	1,463.27

Balance sheet

	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022
Fiscal Year Ends	31/03/2013	31/03/2014	31/03/2015	31/03/2016	31/03/2017	31/03/2018	31/03/2019	31/03/2020	31/03/2021	31/03/2022
Assets
Non Current Assets
Intangible	3.74	3.74	3.74	3.74	3.74	3.74	3.74	5.72	6.57	4.28
Tangible	2.54	1.83	1.68	1.94	2.56	3.13	3.44	4.81	4.60	20.49
Investments	-	-	-	-	-	-	0.00	12.31	17.20	24.14
Other	-	-	-	-	-	-	974.68	1,232.93	1,407.15	2,148.33
Total	416.77	446.66	551.04	693.32	733.84	923.27	981.86	1,255.77	1,435.52	2,197.25
Current Assets
Stock	-	-	-	-	-	-	-	-	-	-
Debtors	9.44	11.38	9.12	6.68	7.31	7.67	9.43	13.90	17.66	19.93
Cash and Securities	7.72	7.01	10.06	9.02	48.70	64.41	15.95	96.58	49.31	127.29
Total	26.65	27.37	29.66	31.83	62.99	122.92	47.42	136.40	84.48	175.87
Held for Disposal	27.66	2.63	-	0.00	96.00	17.33	164.64	10.10	0.00	13.75
Total Assets	471.08	476.67	580.70	725.15	892.82	1,063.51	1,193.91	1,402.27	1,520.00	2,386.86
Liabilities and Equity
Liabilities
Current	286.17	23.92	30.15	36.07	41.50	51.87	112.13	95.56	67.98	120.48
Non-Current	33.88	226.44	262.28	301.97	356.05	386.01	355.74	504.90	525.20	1,075.33
Total	320.05	250.36	292.44	338.04	397.55	437.88	467.87	600.46	593.17	1,195.81
Equity
Share Capital	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
Reserves	151.01	226.28	288.22	387.05	495.19	625.46	725.81	803.09	929.44	1,196.93
Shareholders Funds	151.01	226.28	288.22	387.05	495.19	625.46	725.81	801.57	926.53	1,190.65
Minorities	0.02	0.02	0.04	0.02	0.03	0.17	0.24	0.25	0.29	0.41
Total	151.03	226.30	288.26	387.11	495.27	625.63	726.05	801.82	926.83	1,191.06
Total Liabilities and Equity	471.08	476.67	580.70	725.15	892.82	1,063.51	1,193.91	1,402.27	1,520.00	2,386.86
Net Borrowings	281.67	217.87	244.72	284.97	293.10	302.66	315.51	402.80	433.74	892.87
Investment Ratios
Net Tangible Asset Value Per Share	46.75	26.48	27.41	37.67	43.62	49.46	56.84	67.15	68.26	71.02
ROCE	-7.83	9.54	8.24	9.91	9.96	9.64	14.21	9.42	11.95	8.13
ROE	-18.20	15.33	10.49	16.19	15.17	14.51	19.04	12.85	17.07	13.97
Gross Gearing	191.63	99.38	88.40	75.96	69.02	58.69	45.67	62.30	52.13	85.68
Cash	5.11	3.10	3.49	2.33	9.83	10.30	2.20	12.05	5.32	10.69
Interest Cover x	-0.97	3.55	3.57	6.09	10.18	12.36	17.05	9.96	17.58	11.97
Quick Ratio r	0.06	0.77	0.64	0.44	1.35	1.39	0.23	1.16	0.99	1.22
Current Ratio r	0.19	1.25	0.98	0.88	3.83	2.70	1.89	1.53	1.24	1.57
Borrowings
Total Borrowings	289.39	224.88	254.78	293.99	341.79	367.08	331.46	499.38	483.04	1,020.15
Due < 1 Yr	258.15	2.81	3.30	5.64	7.07	7.84	7.41	37.59	14.97	20.72
Due 1-2 Yrs	-	-	-	-	-	-	-	10.72	75.98	-
Due 2-5 Yrs	-	-	-	-	-	-	-	8.44	3.38	8.16
Due > 5 Yrs	31.24	222.07	251.48	288.35	334.72	359.23	324.05	442.63	388.72	991.28

Cash flow

	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022
Fiscal Year Ends	31/03/2013	31/03/2014	31/03/2015	31/03/2016	31/03/2017	31/03/2018	31/03/2019	31/03/2020	31/03/2021	31/03/2022
Operating Cash Flow	22.96	18.72	29.97	37.68	49.95	43.83	54.91	72.80	71.63	85.42
Taxation	-0.59	-0.19	-0.55	0.17	-0.02	-0.76	-1.81	-1.46	-0.63	-3.67
Investing Activities	16.81	10.22	-75.70	-100.03	-93.65	-74.07	-67.81	-122.24	-73.53	-429.51
Net Outflow/Inflow	39.18	28.75	-46.29	-62.18	-43.72	-31.00	-14.71	-50.90	-2.54	-347.76
Financing	-31.61	-31.72	52.68	61.92	72.54	61.91	-24.62	131.88	-53.05	431.75
Net Change in Cash	7.57	-2.97	6.39	-0.26	28.82	30.91	-39.32	80.98	-55.59	83.99
Foreign Exchange Adjustments	-	-	-	-	-	-	-	-	0.00	1.30
Opening Balance	9.15	16.72	13.75	20.14	19.87	48.70	79.61	40.28	121.26	65.67
Closing Balance	16.72	13.75	20.14	19.87	48.70	79.61	40.28	121.26	65.67	150.97
Investment Ratios
Cash Flow Per Share	0.07	0.04	0.05	0.05	0.06	0.05	0.05	0.07	0.07	0.07
CAPEX PS	0.00	0.00	0.00	-0.02	-0.02	-0.02	-0.03	-0.03	-0.03	-0.03

Sirius financial forecasts

€	FY 2022 Act	FY 2023 Est		FY 2024 Est		FY 2025 Est		FY 2026 Est
12 Months Ending	03/31/2022	03/31/2023	#	03/31/2024	#	03/31/2025	#	03/31/2026	#
FFO Per Share		0.0815	2	0.0875	2	0.09	1
Revenue	210,182,000	158,333,333.3	3	163,666,666.7	3	169,000,000	3	311,000,000	1
Operating Profit	181,224,000	120,500,000	4	125,500,000	4	130,000,000	4	147,000,000	1
EPS, Adj+	0.1329	0.0806	5	0.0838	5	0.0845	4	0.097	1
EPS, GAAP	0.1348	0.07	2	0.067666667	3	0.066	1
EBIT	188,164,000	120,500,000	4	125,500,000	4	130,000,000	4	147,000,000	1
EBITDA	190,495,000	92,000,000	3	114,333,333.3	3	129,333,333.3	3	147,000,000	1
Pre-Tax Profit	168,927,000	94,475,000	4	98,575,000	4	101,000,000	3	132,000,000	1
Net Income Adj+	147,873,000	107,325,000	4	121,350,000	4	126,625,000	4	115,000,000	1
Net Income, GAAP	147,873,000	95,500,000	2	97,950,000	2	120,000,000	2
Net Debt	869,188,000	829,000,000	2	293,333,333.3	3	276,333,333.3	3	935,000,000	1
BPS	1.015775144	1.09	2	1.075	2	1.07	2	1.15	1
CPS	0.077237606	0.064	3	0.065	3	0.065333333	3	0.088	1
DPS	0.0441	0.0538	5	0.0546	5	0.0596	5	0.057	1
Return on Equity (%)	13.96883125	6.99	2	7.88	2	8.02	2	7.56	1
Return on Assets (%)	7.569913544	3.52	1	4.37	1	4.44	1	4.22	1
Depreciation	1164000	4900000	1	4900000	1	4900000	1
Free Cash Flow		54,504,432.62	2	56,568,264.38	2	60,140,167.07	2	63,425,148.26	1
CAPEX		-51,450,000	2	-50,250,000	2	-15,555,000	2	-26,000,000	1
Net Asset Value		109,000,000	2	113,500,000	2	121,500,000	2
LTG %		10.1	1

Current multiples

	Last 2 Semis Act	FY 2023	FY 2024	FY 2025
Price/EPS, Adj+		11.93	11.5	11.36
Price/Book	0.95	0.89	0.9	0.9
Price/Cash Flow	12.55	15.09	14.86	14.86
Price/FFO		11.78	10.98	10.73
EV/Revenue	9.53	12.66	12.24	11.86
EV/EBITDA	8.89	21.78	17.53	15.5
EV/EBIT	11.06	16.63	15.97	15.42
EV/OPP	11.06	16.63	15.97	15.42
Dividend Yield		5.59	5.69	6.21

Risks

As with any investment, investing in Sirius carries a level of risk. Overall, based on the Sirius' market beta (i.e. 1.06), the degree of risk associated with an investment in Sirius is 'medium'.

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. In addition, here, we have assumed that for an investment to be considered 'medium' risk, it must have a beta value of between 0.5 and 1.5. Further information about the beta ratings can be found in the appendix section of this report.

The key risks that could affect the group's medium-term performance can be found in the table below.

Risk area	Principal risk(s)
Financing	Availability and pricing of debt
	Compliance with loan facility covenants
	Availability and pricing of equity capital
	Reputational risk
Valuation	Property inherently difficult to value
	Susceptibility of property market to change in value
Markets	Participation within two geographically diverse markets
	Reliance on specific industries and the SME market
	Reduction in occupancy
Acquisitive growth	Decrease in number of acquisition opportunities coming to market
	Failure to acquire suitable properties with desired returns
Organic growth	Failure to deliver capex investment programmes
	Failure to refuel capex investment programmes
	Failure to achieve targeted returns from investments
Customer	Decline in demand for space
	Significant tenant move-outs or insolvencies
	Exposure to tenants' inability to meet rental and other lease commitments
	Tenant affordability
Regulatory and tax	Non-compliance with tax or regulatory obligations
People	Inability to recruit and retain people with the appropriate skillset to deliver the Group strategy
Systems and data	System failures and loss of data
	Security breaches
	Data protection
Macro-economic	Impact of the Covid-19 pandemic
	Inflationary pressure leading to increased costs
	Interest rate movements impacting the commercial real estate market
	Delays in cash collection and tenant insolvencies
	Energy supply shortages caused by a variety of economic and geopolitical factors
ESG	Unforeseen costs relating to physical and transition risks associated with climate change
	Reputational risk
	Failure to meet shareholder and societal requirements or expectations
	Restricted access to financing market due to higher requirements ("green financing")
Foreign currency	Financial impact of uncontrollable foreign currency fluctuation on earnings and net asset value

Valuation

What's the expected return of an investment in the company?

Stockhub estimates that the expected return of an investment in the company over the next five years is negative xxx%. In other words, an £1,000 investment in the company is expected to return £xxx in five years 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 negative xxx%), then an investment in the company is considered to be an 'xxx' one.

What are the assumptions used to estimate the return?

Key inputs

Description	Value	Commentary
Which valuation model do you want to use?	Discounted cash flow	Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more accurate is the discounted cash flow approach, so that's the approach that we suggest to use here; nevertheless, for completeness purposes, separately, the valuation of the company is also estimated using the using the relative valuation approach (the valuation based on the relative approach can be found in the appendix of this report).
Which type of DCF model do you want to use?	Free cash flow	While Sirius has paid a dividend every year since its public listing (in ccc), at the moment, the growth rate of the dividend varies materially; accordingly, we suggest valuing the business using the free cash flow valuation method (rather than the dividend discount model). Nevertheless, for completeness purposes, separately, the valuation of the company is also estimated using the dividend discount model (the valuation based on the dividend discount model can be found in the appendix of this report).
Which financial forecasts to use?	Stockhub	The only available long-term forecasts (i.e. >15 years) are the ones that are supplied by the Stockhub company (the forecasts can be found in the financials section of this report), so Stockhub suggests using those.
Growth stage 2
Discount rate (%)	15%	There are two key risk parameters for a firm that need to be estimated: its cost of equity and its cost of debt. A key way to estimate the cost of equity is by looking at the beta (or betas) of the company in question, the cost of debt from a measure of default risk (an actual or synthetic rating) and apply the market value weights for debt and equity to come up with the cost of capital.
Probability of success (%)	90%	Research suggests that a suitable rate for a company in this growth stage (i.e. stage 2) is 90%.
Growth stage 3
Discount rate (%)	10%	There are two key risk parameters for a firm that need to be estimated: its cost of equity and its cost of debt. A key way to estimate the cost of equity is by looking at the beta (or betas) of the company in question, the cost of debt from a measure of default risk (an actual or synthetic rating) and apply the market value weights for debt and equity to come up with the cost of capital.
Probability of success (%)	100%	Research suggests that a suitable rate for a company in this growth stage (i.e. stage 3) is 100%.
Growth stage 4
Discount rate (%)	10%	There are two key risk parameters for a firm that need to be estimated: its cost of equity and its cost of debt. A key way to estimate the cost of equity is by looking at the beta (or betas) of the company in question, the cost of debt from a measure of default risk (an actual or synthetic rating) and apply the market value weights for debt and equity to come up with the cost of capital.
Probability of success (%)	100%	Research suggests that a suitable rate for a company in this growth stage (i.e. stage 4) is 100%.
Other key inputs
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 five years time	Research suggests that following a market crash, the average amount of time it takes for the price of a stock market to return to its pre-crash level (i.e. the recovery period) is at least three years. Accordingly, Stockhub suggests that to account for general market cyclicity, it's best to estimate the expected return of the company between now and five years time.

Sensitivity analysis

The 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 size of the total addressable market (the default size is $xxx trillion);
2. Sirius Real Estate Limited peak market share (the default share is xxx%); and
3. The discount rate (the default time-weighted average rate is xxx%).

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 size of the total addressable market
Sirius Real Estate Limited peak market share
The discount rate

Appendix

Absolute valuation approach

DCF

Stockhub estimates that the expected return of an investment in the company over the next five years is negative xxx%. In other words, an £1,000 investment in the company is expected to return £xxx in five years time. The assumptions used to estimate the return figure can be found in the table below.

Description	Value	Commentary
Which valuation model do you want to use?	Discounted cash flow	Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more/most accurate is the absolute valuation approach, so that's the approach that we suggest using to determine the estimated value of the company.
Which type of discounted cash flow model do you want to use?	Dividend discount model	The policy of Sirius to pay out 65% or more of funds from operations (FFO) as dividends. Accordingly, we suggest using the dividend discount model (DDM), which is one of the most common discounted cash flow models.
How many distinct stage of growth do you want to use?	Two stages	For simplicity, we have used two stages here.
What is the transition between the two growth stages?	Smooth	We suggest a smooth transition, and, therefore, we suggest using the H-Model.
What is the expected lifespan of the business?	Perpetual	Again, for simplicity, we have assumed that the business continues forever.
What is the expected initial growth rate of dividends?	36%
What is the expected constant growth rate in dividends?	3%	We note that the gross domestic product (GDP) growth rate in the last 20 years (2001 to 2022) is around 3% per year for the global economy, and around 2.25% for the United Kingdom. Since the company's inception (i.e. eight years ago), the median dividend of the company is 1.57%. Further information about the company's dividend pay-outs can be found in the appendix section of this report.
What is the half life of the initial dividend growth rate?	7.5 years	We suggest using 7.5 years.
Which financial forecasts to use?	Proactive Investors	Here, we have used the forecasts of Proactive Investors.
What is the required return on equity?	9.479%	For estimating the required return on equity, we used the Capital Asset Pricing Model (CAPM), which provides an economically grounded and relatively objective procedure for required return estimation, and, therefore, it has been widely used in valuation. The calculation of the required return on equity (and the reasons behind the calculation) can be found in the table below.
What's the current value of the company?	88.10 pence per share	As at 16th February 2023, the current value of Sirius is 88.10p per share.
Which time period do you want to use to estimate the expected return?	Between now and five years time	Research suggests that following a market crash, the average amount of time it takes for the price of a stock market to return to its pre-crash level (i.e. the recovery period) is at least three years. Accordingly, we suggest that to account for general market cyclicity, it's best to estimate the expected return of the company between now and five years time.

Sensitivity analysis

The 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 size of the total addressable market (the default size is $xxx trillion);
2. Sirius Real Estate Limited peak market share (the default share is xxx%); and
3. The discount rate (the default time-weighted average rate is xxx%).

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 size of the total addressable market
Sirius Real Estate Limited peak market share
The discount rate

Other

The average cap rate for commercial properties can vary widely depending on the location, property type, and market conditions. In the United Kingdom and Germany, the average cap rate for commercial properties is typically in the range of 5-7%, according to ChatGPT.

In the United Kingdom, the average cap rate for commercial properties in prime locations, such as central London, is typically lower, in the range of 3-5%, due to the high demand for real estate in these areas. In secondary markets, the average cap rate may be higher, in the range of 7-9%.

In Germany, the average cap rate for commercial properties, with prime locations such as central Berlin or Munich having lower cap rates, in the range of 4-6%. In other regions, the average cap rate may be higher, in the range of 6-8%.

We note that the current cap rate of Sirius is 6.8%, which is on the high-end of the for commercial properties in the United Kingdom and Germany (5-7%).

In the company's most recent full-year results (i.e. the 12-month period ended 31st March 2022), net operating income (NOI) is €122.5 million. In the company's most half-year results (i.e. the 6-month period ended 30th September 2022), net operating income is €73.2 million, which, based on the most recent cap rate (i.e. 6.8%) and portfolio value (i.e. €2,032 million), equates to an annual income of €137.9 million.

We note that a €5 million improvement in NOI (from €137.9 million to €142.9 million) equates to a €74 million improvement in the valuation of the portfolio, all other things being equal. Similarly, a half a percentage point reduction in the cap rate (from 6.8% to 6.3%) equates to a €162 million improvement in the valuation of the portfolio, again, ceteris paribus.

Net yield against net operating income

	5.50%	6.00%	6.50%	7.00%	7.50%	8.00%
125.0	2,273	2,083	1,923	1,786	1,667	1,563
130.0	2,364	2,167	2,000	1,857	1,733	1,625
135.0	2,455	2,250	2,077	1,929	1,800	1,688
140.0	2,545	2,333	2,154	2,000	1,867	1,750
145.0	2,636	2,417	2,231	2,071	1,933	1,813
150.0	2,727	2,500	2,308	2,143	2,000	1,875