Sirius Real Estate - resilience and growth
Sirius Real Estate recently released a trading update (April 12) for the year ended March 31, 2021, which confirmed the robust performance of the business. The company reported occupancy of 87.0% (2020: 85.3%) and cash collection of rent remaining strong at 98.2%. Encouragingly the company also reported the annualised rent roll grew by 7.6% (5.2% like-for-like) despite COVID. This reflects the company’s flexible internal operating platform, which has allowed Sirius to react quickly to changing occupier demands. Rental income growth is also used as a determinant for valuation uplifts and we expect this to be reflected in the year-end portfolio valuation, to be released alongside full-year results on June 7.
Sirius has been a stand-out performer within the UK listed commercial real estate sector over the last three years, delivering a total shareholder return of 98%. In our detailed initiation report “Great returns, solid foundations – Jan 20, 2021” we offer a detailed analysis of some of the drivers and the commercial property market in Germany (100% of Sirius’s portfolio). That report is available on the Proactive website. Some key attributes of Sirius as an investment include:
- A steadily growing dividend, currently offering a yield of 3.3%
- A strong record of capital gains on its property investments, driven by a property improvement strategy that continues to deliver results
- Sufficient balance sheet resources to sustain ongoing growth
We argue that Sirius has delivered a robust performance during the full-year (FY) March 2021 and is well-positioned for continued growth in earnings and dividends in the coming years.
Resilient performance through to year-end March 2021
Included within the April 12 trading update was news that five property acquisitions were completed or notarised during the year to March 2021, for a total value of €45.9mln and with a net initial rental yield of 6.9%. Furthermore, the company completed the acquisition of a business park for €79.9mln through its Titanium joint venture with AXA IM Alts, which has become a growing earnings stream for the company.
One of the major drivers of Sirius’s share price outperformance has been its active portfolio management across its chosen segments of the German commercial property market — industrial, office, and storage. This in turn supports the company’s medium-term target to achieve funds from operations (FFO) of €80mln and the ambition to extend this to €100mln.
On p2 we provide a brief overview of the share price outperformance and the composition of the property portfolio. We argue that Sirius remains well positioned to maintain earnings and dividend growth ahead of the sector peer group, and we maintain our forecast for 7.5% annual growth in earnings per share and dividends through to 2023e.
Ability to sustain growth
Year end Mar 31 · Current · 2021 · 2022 · 2023
Portfolio value, €-bn · 1.19 · 1.30 · 1.44 · 1.59
FFO, €-mln · 55.7 · 59.9 · 65.7 · 71.0
FFO/Shr, €-cents · 5.41 · 5.77 · 6.27 · 6.75
Div/Shr, €-cents · 3.57 · 3.72 · 4.07 · 4.39
Adj. NAV/shr €-cents · 80.6 · 88.0 · 93.9 · 100.6
In terms of shareholder returns, Sirius Real Estate has been an outlier (upside) compared with the UK-listed commercial real estate sector over the last one, five or 10 years. The following graph compares Sirius’s total shareholder returns (dividend plus capital) against the FTSE 350 and the UK REIT (real estate investment trust) sector. Sirius itself does not operate under a REIT structure, which would impose a statutory dividend obligation. The company maintains a 65% semi-annual dividend payout from FFO, which allows the company to maintain strong dividend cover, and inherent flexibility. Nonetheless, we consider the REIT index to be the closest peer group as an asset class.
Investment summary
Historic performance - Total Shareholder Returns
Source: LSE Data
We believe that the outperformance has been driven by active management of the property portfolio. The following charts summarise the property holdings.
Property portfolio
Source: Sirius Real Estate