Sirius Real Estate: A model that works differently
The company is starting to look expensive, but there still seems to be potential for rental and capital growth
Rand hedge property counter Sirius Real Estate has had an impressive run since its December 2014 listing on the JSE.
Investors who bought shares in the then little-known German business-park owner have since doubled their capital and have also pocketed a decent euro-based dividend payout of about 5%/year.
For those who haven’t yet claimed their stake in Sirius, the question is whether the share price has run out of steam.
The counter seems expensive at first glance, particularly as it notched up a hefty 45% gain last year. That made Sirius one of the JSE’s top-performing real estate stocks for 2017.
The share price was down about 20% in the first two months of 2018 – no doubt on the back of a stronger rand – but Sirius has since regained most of those losses. That’s in contrast to a number of other rand hedge property counters that have extended their early 2018 declines in recent months. For instance, MAS Real Estate (focused on the UK, Germany and Eastern Europe) is down 25% in the year to date, while UK mall owner Intu Properties and Investec Australia Property Fund have shed 18% and 14% respectively since January 2.
Central and East European mall owner Nepi Rockcastle has shown a 40% drop in its share price in the year to date, though its woes probably relate more to its association with SA’s Resilient group — one of its major shareholders — which has been accused of insider-related trading.
ClucasGray portfolio manager Brendon Hubbard says given the sell-down of a number of rand hedge stocks this year, some of these counters may appear more attractively priced than Sirius, but he argues that this may be deceptive. He says investors need to understand how Sirius’s underlying business model differs from those of most other JSE-listed offshore property stocks.
Sirius’s strong growth record is thanks mainly to its strategy of buying older, under-rented industrial parks on the outskirts of major cities and unlocking rental and value growth through redevelopments.
About 50% of the company’s income is secured by long-term leases with large corporations such as Siemens‚ Daimler and GKN Aerospace. The balance comes from its so-called smart space products — mixed-use units that are typically let on 12-month leases to small and medium-sized business owners.
Hubbard says the flexible nature of this product means that Sirius can achieve much higher rentals than it would have on conventional space rented to large companies on long-term leases. For the year ending March, Sirius achieved average rental growth of 6.2% on its portfolio (7.5% if properties held for sale are excluded), which is well ahead of the German inflation rate of just under 2%.
Also, unlike many of its West European peers, Sirius is not structured as a real estate investment trust and is therefore not legally required to pay out at least 75% of its income in the form of a dividend.
Hubbard says Sirius typically has a 65% payout ratio, which allows the company to reinvest a fairly large portion of its income on capital expenditure programmes. "So while Sirius pays an attractive dividend, investors need to look at it more as a capital growth play."
Sirius trades at a dividend yield of 4.7%, and declared dividend growth of 8.2% for the year ending March. Hubbard believes there is further dividend and share price growth potential in the offing, as the value that was unlocked by recent acquisitions still needs to filter through.
Sirius CEO Andrew Coombs echoed a similar sentiment on a visit to Johannesburg last week. After the release of the company’s latest annual results, he said Sirius had had a record year in terms of transactional volumes. It bought 13 properties valued at €163.7m in the year ending March. That brings the value of its total portfolio to just under €1bn.
Coombs says management will spend about €120m over the next three to five years to unlock further value from its portfolio through redevelopment, refurbishment and the conversion of vacant space. "So there’s a lot more gas in the tank," he says.
He also plans to dispose of €103m of assets this year. "We do not collect assets and sit on them. We continuously recycle our portfolio and reinvest the proceeds to create higher-yielding assets."
Referring to the 13 new acquisitions, Coombs says these properties were acquired with an average vacancy of 42%. "Some were bought because they have a vacancy as high as 76%. For most landlords, these vacancy figures would equal risk. But for us it means an opportunity to grow our rent roll."
Coombs estimates Sirius can extract an additional rental income of €10m/year from the conversion of vacancies acquired through its latest acquisitions. "We typically aim to double our equity on new acquisitions in three to five years, which we manage to do because we don’t pay for vacancies and are able to turn empty space into high-yielding, flexible-use products."
Coombs clearly puts his money where his mouth is — last week he bought Sirius shares worth R5.8m.