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Sirius Real Estate: a recovery play

Property counter shrugs off historically staid growth as investments in Germany’s property market are a boon.

Investors love a comeback story and it appears that rand hedge Sirius Real Estate is showing signs of momentum.

Sirius, which owns business parks in German towns such as Berlin, Munich, Frankfurt, and Bonn, has no doubt piqued the interest of investors.  

Though its share price on the JSE’s AltX has been down by nearly 3% over the past six months, it has rallied by nearly 9% in the past week. It has traded in similar trajectory in London, where it is listed on the AIM.

The rally was in part due to expectations of Sirius growing its dividend payout for the year to March 2016 to about 2.7 cents. For the year to March 2015, patient investors were rewarded a dividend per share of 1.61 cents.

Sirius’ focus is to convert old buildings into mixed-used business parks providing flexible workspace to the German small business market, offering space on short-term leases. It also offers long-term leases (typically ten years) and some of its blue-chip tenants include GKN Aerospace and Siemens.

CEO Andrew Coombs tells Moneyweb: “Tenant demand in Germany is strong and if you look at the top seven cities in Germany, we see the lowest vacancy rates in a decade. These factors play well in terms of the market and what Sirius does”.

Given its recent acquisitions and property refurbishment, management is upbeat about the company’s prospects as it expects its annualised rental income to exceed €60 million (R1 billion) for the first time.

Another positive for the company, with a market capitalisation of R6.2 billion, is that it’s in advanced stages of negotiating more favourable terms on its largest bank facility of €111 million (R1.9 billion) which expires in three years. It’s also looking to secure further funding of about €137 million (R2.3 billion) to fund new acquisitions.

“The German economy is strong and we continue to capitalise on the low-interest rate environment to reduce our cost of debt significantly, diversify our lenders and extend the weighted average expiry of our funding,” says Coombs.

In recent months, Sirius has been active on the deal-making front, as part of its capital investment programme.  It concluded two acquisitions – a multi-let business park located in Aachen and a site in Cologne.  

These two deals add a further €1.9 million (R32.4 million) to its net operating income on an annualised basis. In late March, Sirius completed a further acquisition of a business park in the town of Mainz for €25.1 million (R428 million).

Two more acquisitions – made up of new business parks in Krefeld and Markgröningen – are pending and expected to be concluded in May. Once completed, this will boost the number of business parks in its portfolio from 35 to 42, consisting of over 450 buildings likely to be worth nearly €700 million (R12 billion).

Six years ago Sirius was reeling after debt restructuring issues led to a shareholder revolt and resulted in a profit warning. Occupancy rates dwindled across its property portfolio in 2010.

Part of its turnaround was to refinance its bank agreements, internalise the management of its assets and dispose of several properties. Its efforts have paid off, with occupancy rates on its properties being well over 70%, the company’s debt expiry profile is sitting at 5.8 years and its loan to value declined from 65% to about 47%. It also reinstated a dividend policy for every six months, representing 65% of its profit after tax.

Courting SA investors

Since listing on the JSE in 2014, South African investors have been more than willing to back Sirius. Already more than 46% of the shares are held by domestic investors – among them boutique asset management firms ClucasGray and Anchor Capital.

As South Africa’s economy grows at a glacial pace with high interest rates and a looming downgrade of the country’s credit rating, property punters have been hitching their wagons to offshore property markets. In fact, offshore property stocks have outperformed their domestic counterparts over the past three years. Figures from Cape-based Catalyst Fund Managers show that Sirius notched up a capital return of 47% in 2015, well above the 8% posted by the FTSE/JSE SA Listed Property Index.

At current levels, Adrian Jardine, an equity analyst at Avior Capital Markets favours Sirius for “management’s astute execution of its growth strategy in the attractive German property market”.

 Momentum Asset Management head of property Nesi Chetty is inclined to agree. He favours the German market – where quality office and retail properties with good yields and growth prospects can be found.

Sirius shares were up 1.37% to R8.15 on Tuesday.

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