Asset management and recycling pay off for Sirius
Sirius Real Estate, leading owner and operator of industrial parks and workspace in Germany and the UK, sold two assets for €12.2m with an average net income yield of 4.1%.
The sale of the mixed-use mature business park in Wuppertal, Germany, achieved a 5.3% premium to book value. The 80%-let property offering office, warehouse, production and workshop space, was originally acquired by Sirius in 2007 and sold for €8.8m.
“This disposal demonstrates the company’s ability to crystallise returns from mature assets, which can then be recycled into investing in new opportunities within the portfolio where there is an opportunity to create value,” said CEO Andrew Coombs.
Sirius, listed on the LSE and JSE, owns 140 assets with a total book value of more than €2bn and generates a total annualised rent roll of €167.1m.
In an interview with Business Day in November, Coombs said the company embarked a few years ago on a strategy to tap into opportunities to unlock value and grow rental income through its active asset management and platform data. To capitalise on high demand for industrial and logistics assets in Germany and the UK, Sirius looks at demand and supply dynamics in various areas and how best to cater for needs.
“Changing the space category such as turning a basement area into self-storage, thereby turning the building into a high-yielding space enables Sirius to charge higher rentals,” said Coombs.
There is growing demand for storage and industrial space in Germany. Sirius can meet this demand with its flexible and adaptable spaces, he said. There is also a longer-term shift to near-shoring production, which underpins strong demand for light industrial facilities.
The UK is experiencing sustained demand for small out-oftown flexible office space, which rose 143% from before the pandemic, and 64% compared with the first half of 2021.
For the six months ended September, Sirius reported that it sold three assets at 32% premium to book value with proceeds recycled into the acquisition of three sites with big opportunity for growth.
Coombs said that in the past 12 months Sirius sold six properties, including two nonincome producing land parcels in Germany for €45.7m compared with book value of €36.7m, representing a 25% aggregate premium.
Sale proceeds were used to fund acquisition of the €44.6m worth of new sites in Germany, which generate higher revenue than income contributed by the assets disposed of earlier in 2022. Coombs said these properties add many value-accretive asset management opportunities to unlock through its platform, especially leasing up empty space to raise rental income.
“The strategic disposal of these assets at or above book value during a challenging market underpins the strength of our portfolio,” he said.
This is based on both the historically higher yields at which the portfolio is valued, relative to other parts of the sector, Coombs said. “We believe this provides us with a higher degree of insulation when real estate values come under pressure, as well as our ability to offset this further by driving inflationary income growth through our asset management platform.”
Sirius has a strong balance sheet and continues to see rental growth in its portfolio. For the six months ended September, the like-for-like annualised rent roll rose 2.4% to €115.2m in Germany, while the UK grew 4.1% to £46.5m. The underlying profit for the period rose 78.7%.
“Just over half of this came from the acquisition of BizSpace in the UK, and the rest from a mixture of organic and acquisitive growth in Germany,” said Coombs.
Total revenue rose 47.7% to €130.6m from €88.4m, while funds from operations grew 47% from €33m to €48.5m. Sirius is targeting growth of €100m. Dividend per share rose 32.4% from 2.04c to 2.70c, more than 1.5 times covered by earnings.
Exposure to the UK and European property markets, which were hit hardest by the aggressive increase in inflation and interest rates from historically low levels, led Sirius with Capital and Counties and Hammerson to lose as much as 41% and be ranked as the biggest losers in 2022 by M&G Investments.
These listed property markets experienced drastic share price declines, reflecting market expectations that property values would fall. However, Rahgib Davids, equity analyst at M&G Investments, said Sirius is one to watch in 2023 as it offers a decent euro dividend yield, good growth prospects and rerating potential if the market gains certainty over inflation and interest rates.
Since the company is not a real estate investment trust, it retains 35% of earnings to fund capex and expansions that produce returns far above their cost to capital.
By close of trade on the JSE, Sirius’ share price had gained the most in more than three weeks, up 3.98% to R17.23.