Britain left the EU after a last-minute trade deal agreed on Christmas Eve that was enacted just a few days ago.
Politically, this was a major landmark – even if clawing back of control from Europe may have untold ramifications.
Yet as an investor, turning one’s back on the world’s largest trading bloc lacks pragmatism. If portfolio diversity is important then exposure to mainland Europe is key.
In the property sector, access to the single market is provided by Sirius Real Estate Limited (LON:SRE), the FTSE 250 company focused on Germany.
It has a portfolio of more than 60 out-of-town storage facilities, industrial units and offices spread across the country’s main regions. It serves the Mittelstand, the small- and medium-sized businesses that form the backbone of German industry and commerce.
Sirius chief executive Andrew Coombs points to three themes that have emerged or are emerging that play to the company’s strengths.
All three are the result of the coronavirus (and its impact on the way business is now done) but they also speak to German caution and pragmatism.
Storage space has become key as manufacturers, through necessity, have moved from just-in-time supply to warehousing vital components, Coombs says.
Longer-term, bosses are looking to “mitigate their risks” by bringing back onshore production formerly outsourced to the likes of China, India and Africa.
This brings us to the second big theme – the knock-on increase in demand for industrial capacity.
“German manufacturers no longer have the confidence in an intercontinental supply chain,” the Sirius CEO observes.
The third structural factor at play that could underpin the success of property companies such as Sirius is the growing clamour for low-rise, edge-of-town properties – a trend common to many developed economies.
Conscious that in the new world post-Covid, businesses will start to invest in offices that avoid packing in employees or piling them high.
Interest is now focused on bases that are likely to be able to accommodate the practicalities of work after the pandemic, most important of which is space.
“What we’re seeing is that these customers haven’t cancelled the leases in the centre of town; what they’ve simply done is taken additional offices on the edge of town,” says Coombs.
Solid financial performance
The last set of results – the interims to the end of September (published in the late November) – reveal Sirius as a company bucking the trend for the sector.
Funds from operations (FFO) rose 7.4% to €29.1mln, while cash collection was 97.3% for one of the most challenging periods in living memory for the world economy.
Not only that, enquiries were up 17.4%, reflecting proactive work done by the business development team, but also mirroring the trends outlined above.
The net asset value grew by 5.2%, though Coombs and his team don’t share the market’s obsession with this benchmark.
“Our mission is all about income and cash,” the Sirius CEO says at the end of an eloquent deconstruction of the investors’ and analysts’ pre-occupation with the NAV.
The plan over the medium-term is to grow FFO to €100mln.
This will be partially achieved by utilising Sirius’ asset management platform of over 250 people throughout Germany. They will help to realise modest rent increases, uplifts from the transformation of vacated properties, investment programmes and asset management initiatives.
Sirius also has €70mln of “acquisition firepower” which will help boost the bottom line. Further property purchases could be funded from debt and “a little bit of equity on top”, says Coombs.
Quietly simmering in the background is the company’s 35%-owned joint venture with the French financial giant AXA.
“What we’re targeting are properties that are worth more than €45mln that when bought that are typically about 90%-plus occupied,” explains Coombs.
“This is different from what we do on our own core balance sheet, where we would typically be targeting properties of about €20mln that are still 25% vacant.”
As at the last results, just over €235mln of property assets were held in the Titanium JV with AXA. That figure will be over €300mln by April 2021, says Coombs, and by the end of the year should be getting on towards €400mln he adds.
Sirius is not a real estate investment trust (REIT). If it were it would be forced to pay out 90% of its income as a dividend.
Sirius has opted, instead, to remain a traditional, ‘old school’ property company and in doing so is able to take a more considered approach by distributing 65% of funds from operation (FFO) as a dividend, thereby enabling the company to re-invest the remaining 35% into growing the portfolio.
“Sirius has for several years achieved more than 20% return on investment in terms of the 35% of FFO that the company reinvests, but it also meant the divi was more conservatively covered than its rivals,” says Coombs.
This conservatism has ensured the firm has been able to meet its obligation to investors in 2020 where many of the sector’s great and good have been forced to cut payments or cancel them altogether.
“Twelve months ago, investors who would have said, ‘I’m really sorry but our criteria is you have to pay a five or six per cent dividend yield’. Well, today a four per cent dividend yield that is certain is preferable,” says Coombs. “Security and dependability of dividend is now really important to investors.”
The robustness of the Sirius dividend combined with the significant potential uplift in FFO should mark Sirius out as a rarity in the property sector as it stands today – a resilient growth story with dependable income potential.
The company currently owns assets worth €1.2bn, not counting the equity value of the Titanium JV with AXA.
According to Coombs, the next staging post is €100 million of FFO before getting to €2bn of assets. In doing so it is not about diminishing returns it’s about enhancing them.
“We accept that there will come a point in the evolution of the company that we get to a size where returns will diminish, but the journey from €1bn to €2bn is not that point,” he adds.