Talk:Sirius Real Estate Limited

Questions

1. Is the total addressable market 1) global, Europe, Germany and United Kingdom, or something else and/or commercial property or something else?
2. No financial forecasts, because that's what has been requested by selecting the Proactive package that you selected.

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

REIT status

Real Estate Investment Trust (“REIT”) information

Investing in property through a UK taxable corporate investment vehicle has the disadvantage that, in comparison to a direct investment in property assets, some categories of shareholders may effectively bear tax twice on the same income: first, indirectly, when the corporate investment vehicle pays corporation tax on its profits, and secondly, directly when the shareholder receives a dividend. UK non-tax paying entities, such as UK pension funds, could bear tax indirectly when investing through a taxable closed-ended corporate vehicle that is not a REIT, which they would not suffer if they were to invest directly in the property assets.

A UK REIT is a listed company which (together with its subsidiaries) enjoys a special tax status in relation to UK property investment activities. Despite the name, a REIT is – and functions as – a normal company rather than a trust.

The REIT regime changes the UK direct tax treatment of (1) ongoing UK property rental income and (2) gains on disposal of properties within a UK REIT group. It does not affect the value-added tax or stamp taxes treatment of the property investment.

The key feature is that under the REIT regime, UK property rental income should be exempt from corporation tax, but instead the nominated REIT company should be required to make Property Income Distributions (“PIDs”), which are subject to withholding tax (please refer to the distribution requirements section).

Distribution requirements

A REIT must follow certain rules relating to the amount it distributes to shareholders, and how those distributions are taxed. There is a requirement for a UK REIT to distribute at least 90% of its exempt rental profits (being rental income after deducting finance costs, overheads and tax depreciation) as a Property Income Distribution (“PID”). There is no requirement to distribute exempt gains. A UK REIT may also distribute taxed income from its other activities, though this is not a requirement of the REIT regime.

Under the REIT regime, UK property investment income, gains on UK property and gains on UK property rich entities are exempt from UK corporation tax. A REIT is still subject to UK corporation tax on any non-property rental business income (“residual” income”). Residual income may include profits on trading activities (such as properties developed with a view to a sale), capital gains on UK property assets or companies sold within three years of completion of a development, and non-UK property assets.

The distribution requirement may be met using stock dividends (also known as scrip dividends), as well as cash dividends.

Tax on distributions

Shareholders should note that the tax treatment of PID and non-PID dividends differs. PIDs are taxable as property rental income in the hands of shareholders and therefore shareholders are taxed on the PID according to their own tax status and which varies from shareholder to shareholder. This gives shareholders a similar tax outcome to owning property directly.

Profits distributed as PIDs are paid out of tax-exempt profits and therefore are potentially fully taxable in shareholders’ hands as property rental income. Distributions out of exempt rental income and exempt gains (if distributed) by a UK REIT are generally subject to a withholding tax of 20%. There are certain categories of shareholders who are entitled to receive PIDs without suffering withholding tax. Examples of such classes are:

• UK corporates
• UK pension funds
• Charities
• Local authorities
• Managers of PEPs, ISAs and Child Trust Funds

Should you qualify to receive your PID without deduction of withholding tax, you should make the company registrar aware by completing either the intermediary form or the beneficial owner form that are set out on the Sirius website, below this document. Please send the completed form to Link Group. 10th Floor, Central Square, 29 Wellington Street, Leeds LS1 4DL.

Most shareholders, including all individuals and all non-UK residents, do not qualify for gross payment. However, most UK double tax treaties provide for a reduced withholding tax rate for distributions to non-UK tax resident investors.

Filing obligations - UK resident shareholders

For UK resident individuals who file UK tax returns, the PID from a UK REIT is included on the tax return as "Other Income" as follows (online returns):

• In the section "Other UK Income" tick the bottom box "Any other income".
• On the next page enter the total amount of the PID received (including tax) in "Other taxable income – before expenses and tax taken off".
• Enter the tax deducted in "Tax taken off" and in the box for description of other taxable income state who the PID was received from.

The non-PID element of any dividends received should be treated in exactly the same way as dividends received from other UK non-REIT companies.

Filing obligations - non-UK resident shareholders

Non-UK resident shareholders may, after payment of the PID element of the dividend, apply to HM Revenue & Customs for a refund of the difference between the 20% UK withholding tax and the reduced double taxation treaty rate.

Sale of REIT shares by UK and non-UK resident shareholders

From 6 April 2019, the gain on sale of shares of a UK property rich company will generally be within the charge to UK tax for all shareholders, whether UK resident or non-UK resident, subject to possible tax treaty relief for non-UK residents or any exemption for tax exempt investors.

A company is considered to be UK property rich if 75% or more of its gross asset value is derived from UK land. Although there is generally a 25% ownership threshold for a disposal of such an indirect interest in UK land, this is disapplied in the case of certain Collective Investment Vehicles including REITs. For this reason, we advise shareholders to take professional tax advice in establishing whether a disposal of shares would be subject to these rules.

Gains realised by non-UK resident individuals must generally be reported to HM Revenue & Customs within 30 days of the disposal.

Gains realised by UK residents should be reported on the tax return in the usual way.

Other

CONVERSION TO REIT ON 1 APRIL 2022

Following entry by its UK business into the Real Estate Investment Trust (“REIT”) regime with effect from 1 April 2022, the Company must pay at least 90 per cent. of its UK tax-exempt profits to shareholders as Property Income Distributions (“PIDs”), which can be paid as cash dividends or via the Scrip dividend alternative. This dividend, relating to the six months ended 31 March 2022 preceded the conversion to REIT and will be entirely non-PID and future dividends will be PIDs. Further information relating to PIDs and SCRIP PIDs will be published on the Company's website at www.sirius-real-estate.com.

FOR SHAREHOLDERS OUTSIDE THE UNITED KINGDOM/SOUTH AFRICA/GUERNSEY

Legal requirements in jurisdictions outside the United Kingdom, South Africa and Guernsey can impose onerous and costly obligations on the Company. Consequently, the right to participate in the Scrip Dividend Alternative is not available to any person in the United States of America, Canada, Japan or Australia or their respective territories or possessions (subject to applicable exemptions). The right to participate is also not available to any person in any other jurisdiction outside the United Kingdom, South Africa or Guernsey where such an offer requires compliance by the Company with any governmental or regulatory procedures or any similar formalities. Your attention is drawn to paragraph 2 of the terms and conditions.