Resilient German gem
It’s not too late to buy Sirius shares, as its six-year winning run is expected to continue — come rain, shine or Covid
ý Sirius Real Estate’s remarkable growth story offers a welcome reprieve from the barrage of bad news dished out by the listed property sector of late.
The JSE’s only purely German property company is among the few real estate stocks whose performances have been virtually uninterrupted by Covid with regard to earnings, dividends and capital growth.
Sirius’s share price dipped briefly below R10 when the pandemic hit the world in March last year but within two weeks it had bounced back to levels of about R16.
By December the share had already breached pre-Covid levels of R17-R18, and last month it was testing a new record high of R20. That’s up from R6 when the company was listed on the JSE in December 2014 with a market cap of less than R5bn.
Today its market cap sits at R20bn, which makes Sirius one of the JSE’s six largest property counters.
It also trades among the London FTSE index’s top 250 companies.
So what has made it so bulletproof?
The company owns more than 60 business parks across Germany, mostly older industrial and office buildings on the outskirts of major cities that it buys at discounted prices and redevelops into a mix of office, factory, warehouse, showroom and storage spaces.
It rents a portion of its space to large corporates and manufacturers such as Daimler and Siemens, while its “smart space” products are smaller, flexible units let on short-term leases to entrepreneurs and small and medium-sized companies.
Apart from its resilient share price, Sirius continues to reward shareholders with steady income.
Analysts expect the company to declare a slightly higher dividend per share for the 12 months to the end of March 2021 than it did for the previous financial year — 3.7c a share is forecast, versus last year’s 3.6c. That’s in contrast with most other property counters, which have either declared a sharp drop in dividends or withheld payouts altogether.
Keillen Ndlovu, head of listed property funds at Stanlib, says: “Even though some counters retained a 100% payout ratio, dividends for the sector as a whole dropped by an average 36% in 2020. And it’s still tough out there, so we’re not expecting to see any overall growth this year either.”
Ndlovu is forecasting dividend growth to slide by an average 5% in 2021. The sector is expected to return to positive dividend growth territory in 2022, albeit from a very low base.
The fact that Sirius is bucking the trend raises the question of whether the stock is looking expensive. It may be an easy deduction to make — especially if compared with the 50%-70% discounts to NAV that some other counters are trading at. However, analysts say Sirius’s premium of roughly 16% to NAV is entirely justified. In fact, local analysts still have a strong buy recommendation on the company, a consensus forecast by technology firm Iress shows.
UK analysts are equally bullish about the company’s outlook.
In a recent research note, investment brokerage Peel Hunt says Sirius’s total shareholder return of an average 28% a year over the past
six years is “nothing short of stellar”.
The note reads:
“The disciplined use of equity, a best-in-class operating platform, a lucrative capital expenditure programme and high income-yielding assets have all played their part.” And there’s plenty more to come, which Peel Hunt says is why Sirius remains one of its top growth picks for 2021. “We don’t believe the story ends here: investors have much to look forward to.”
Peel Hunt cites management’s ambitious target of a near doubling of funds from operations (FFO) from last year’s €56m to €100m in the medium term as a key driver of future performance.
FFO is the main metric used by European property companies to measure their cash-generation ability, and forms the basis on which dividend decisions are made.
Peel Hunt says Sirius has already impressed by growing FFO fourfold over the past six years, and the investment brokerage expects Sirius to hit at least €80m of its €100m FFO target within three years.
That should push the current dividend yield of about 3.6% closer to 5, based on a payout ratio of 65% of FFO.
“We believe Sirius remains an attractive investment proposition for both new and existing shareholders,” Peel Hunt says. It commends the company’s business model, strong income underpin and ambitious growth strategy.
Sirius CEO Andrew Coombs tells the FM the company has in recent months recorded a steady increase in demand for its “smart space” products.
He says it appears that a lot of mature workers are considering leaving corporate employment post-pandemic to work as consultants or run their own small businesses.
“We are the beneficiary of this trend, as the demand is typically for small offices of 10m²20m². These tenants like our products because they don’t want to tie themselves to a fixed long-term lease.”
Coombs says there’s also demand for smaller work spaces from knowledge workers who are fed-up with working from home but not quite ready to go back to a high-rise corporate head office in a congested CBD.
Demand for storage units, too, has gone “off the Richter scale”, a trend Coombs ascribes to Covid- and Brexit-induced disruptions to supply chains, which have caused German manufacturers to need more space to stockpile surplus goods.
In Berlin, for instance, Sirius recently opened a new storage facility by stashing 100 shipping containers on its vacant land holdings. The facility is fully let.
German companies have increased their manufacturing capacity to be less reliant on imports, which has supported demand for factory, warehouse and distribution space, says Coombs.
As a result, rents are up and vacancies are down. Sirius’s total rent roll grew by 7.6% to €97.2m for the year to March 31, while the likefor-like rental rate per square metre was up 3.5% to €6.17 over the same period, according to a trading update released by Sirius earlier this week. Total vacancy decreased to 13%, down from 14.7% a year earlier. Full-year results will be released in early June.
The company returned to acquisitive growth last year and bought five properties totalling €45.9m. Its Titanium venture with alternative investments firm AXA IM Alts was boosted with the acquisition of a business park in Augsburg for €79.9m. That brings total assets under management to about €1.75bn. Coombs ascribes Sirius’s success to management not swaying from its strategy of buying “unloved properties that most others won’t touch” and converting them, to unlock strong rental and capital growth. “We’re also not afraid to sell our assets and start the process all over again to optimise returns for shareholders.”
Coombs expects the German economy to bounce back quicker after the pandemic than those of the UK and other European countries, thanks partly to a still low unemployment rate. Unlike many others whose unemployment rate doubled last year, that of Germany increased only slightly from 4.7% pre-Covid to the current 5.1%.