Sirius Real Estate’s star continues to shine
Sirius appears to offer further upside as Germany entrenches its safe-haven status
SA investors who bought shares in German business park owner Sirius Real Estate when it made its debut on the JSE four years ago would have virtually doubled their money — and earned a decent 5%-a-year euro-based dividend yield to boot. Is it too late to buy the share if you don’t own it already?
It doesn’t seem so, as Sirius still appears high on a number of fund managers’ stock pick lists — no easy feat, considering that JSE investors nowadays have about 20 purely rand hedge property counters to choose from. In addition, at least 15 SA-focused counters offer investors partial exposure to foreign real estate markets.
The sector’s offshore exposure is spread among 25 countries, including the UK, France, Australia, Switzerland, Romania, Poland, Serbia, Spain, the US and Mauritius.
But the fact that Sirius is the only counter among the JSE’s 55-odd real estate stocks that provides SA investors with 100% exposure to the German economy is no doubt a major drawcard. Germany is, after all, widely regarded as the strongest and most stable economy in Europe.
It also helps that the Sirius management team, led by highly regarded duo Andrew Coombs (CEO) and Alistair Marks (CFO), continues to deliver on its growth promises.
The company released a solid set of results for the six months to September last week, with profit before tax up 43%, coupled with 4.5% growth in dividend payouts.
Management also continues to boost the portfolio, whose value recently breached the €1bn mark, up from €428m at listing in December 2014.
The company’s strategy is to buy mostly older, under-rented industrial and office parks on the outskirts of major cities that offer significant potential for rental and value unlock through redevelopments and upgrades.
A portion of the company’s income is secured by long-term leases with large corporations such as Siemens‚ Daimler and GKN Aerospace, while the balance consists of mixed-use, flexible workspaces aimed at SMEs.
"The latest set of results has confirmed our positive view of Sirius Real Estate. The solid operational results with a favourable outlook make for attractive euro-denominated returns," says Investec Asset Management portfolio manager Peter Clark.
He says management has again proved its skill in extracting value from its assets. "The ability of management to purchase underutilised properties at attractive valuations and convert them into unique offerings, predominantly for small businesses, has created significant returns for investors."
Referring to Sirius’s historically high loan-to-value ratio relative to its SA peers, which was a concern in the past, Clark says this has normalised and now lies closer to the sector average, at around 33%.
And though the Sirius business model is operationally intensive, he says the flexible approach to accommodate the changing needs of tenants should result in Sirius remaining resilient through much of the current European political and economic uncertainty.
Brendon Hubbard, portfolio manager at ClucasGray, agrees that the operating platform that allows the company to reconfigure space into a mix of office, light industrial and storage facilities is what sets Sirius apart.
He says the strategy of buying underutilised or empty buildings for redevelopment and refurbishment has proved hugely successful. "Conventional property companies typically shy away from these type of buildings."
Hubbard adds that the relatively low debt levels and retained earnings will allow Sirius to continue to grow its portfolio where most other European property companies remain stuck in a low-earnings-growth and inflationary environment.
Sirius pays out only 65% of its funds from operations in the form of a dividend, unlike real estate investment trusts, which are obliged to pay out at least 75% of earnings.
Coombs told the FM last week that the German economy is in good shape, with record low unemployment figures. "Vacancies across all sectors of the real estate markets are also at record lows. Occupier demand for industrial assets and secondary offices in Germany has never been greater," he said. There is in fact a shortage of supply, with office vacancies in most important German cities now at below 1%, he said.
"Demand from the SME sector is particularly strong, and this is a big market for Sirius. There has also been a surge in money flow from other European countries to German real estate this year, which will support further rental and value uplifts in our portfolio. People see the country increasingly as a safe haven."
Asked why SA investors should hold Sirius shares in their real estate portfolios, he said: "Sirius is a well-run company with feet on the ground in Germany. We have established a record of delivering consistently good results since listing four years ago. And our share price is now trading at a discount to NAV of around 5% — so there’s still value to be had."