Sirius Real Estate prepares for further €100m investments

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Long time readers of REFIRE will know that we have been bullish for several years now on Sirius Real Estate, which operates branded business parks and flexible workspaces throughout Germany. The company operates very much in a specialist niche, which gives it a certain protection in warding off intruders into its space, but also provides it with a knowledge base which can be scalable upwards, and not easy for predators to replicate.

The company, which is listed on the London main board and on the Johannesburg exchange, has been good to its shareholders since resolving old financing issues in the years after the onset of the financial crisis. It has been steadily growing its revenue and profit figures, and paying out a tidy dividend (currently 4.7%), while wrapping up a big capex investment programme started just over three years ago.

REFIRE spent some time recently on the occasion of the EPRA annual gathering in Berlin to talk with Sirius’ top management about the business model, and to visit both the company’s headquarters in Berlin and one of Sirius’s business parks on the outskirts of the city.

Since then the company has completed three major lettings as it continues to deploy €100m it has available for acquisitions. Of this it has already committed €39.4m in buys with a further €59.7m being readied for deals that are in the late stages of negotiation.

According to CEO Andrew Coombs, "These lettings demonstrate the effectiveness of our asset management approach, which focuses on the mix of long-term stable income alongside high-yielding flexible income. We have secured some very well covenanted blue-chip and government tenants on long-term leases, which are expected to be earnings accretive for those business parks."

In lettings, a German government entity signed a 10-year lease at the Sirius Business Park in Berlin Tempelhof on 2,200 sqm of refurbished office space at a rent of €14.35 per sqm. Sirius bought the 7,600 sqm building in a run-down state and has upgraded it into high-quality office space.

Another new tenant, Care Deutschland-Luxembourg, part of the global humanitarian charity, has taken a ten-year lease on 1,950 sqm of offices at the Sirius Business Park in Bonn-Siemensstrasse.

Sirius also announced it is at an advanced stage of negotiations with Daimler, the owner of Mercedes-Benz, for a five-year extension to its lease on 40,000 sqm of office, production and storage space at Sirius Technologiepark Kirchheim.

About 50% of the company’s income is secured by long-term leases with large corporations such as Siemens‚ Daimler and GKN Aerospace. The balance comes from its so-called smart space products — mixed-use units that are typically let on 12-month leases to small and medium-sized business owners.

Last year Sirius posted full-year results that saw FFO rise by 4% to €38.4m. The group said its profit before tax rose 17% to €89.6m during the period, while its portfolio book value increased by €126.1m to €967.3m. Like-for-like annualised rental income rose by 6.2% to €79.5m, while earnings climbed by 22% to €81.4m, thanks partly to valuation effects.

CEO Coombs said that Sirius would continue to grow while recycling mature and non-core assets into new business parks with much greater potential for income and capital growth into the future. “The company has a healthy pipeline of opportunities located in our target areas around Germany's big seven cities, where we have extensive market knowledge and expertise,” Coombs said.

REFIRE: In Sirius’s line of business, one aspect of success is obviously spotting the potential of an undervalued asset or under-performing business park, and repositioning it for local market needs. For Sirius, this nearly always takes place on the edge of larger cities (in the case of the business park which REFIRE visited, at the very last station outwards on Berlin’s extensive S-Bahn public transport network, heading towards Poland). Filling these units with light industrial, self-storage, flexible office or whatever the customer needs is an ongoing battle with other local facilities, and local brokers hustling among their contacts to find tenants and suitable spaces for their businesses.

It was eye-opening to view up-close the sophistication of Sirius’s marketing team, their customer service operation, their billing and invoicing functions, and other support roles that ensure the company makes money at the margins. This involves in-depth capabilities in areas like search engine optimization, social media marketing and dozens of other resources that keep the company totally competitive in the business of renting out its space profitably. The company runs its German operations centrally from Berlin, with strong local presences around the country. We were impressed with the levels of skill and modern internet and social marketing competence running throughout the company, a critical part of its business.

CEO Coombs and CFO Alistair Marks have created a solidly functioning business, and have their eye well on the ball in a tricky business segment, in our view. Coombs is still bullish on growth prospects in the sector. "We typically aim to double our equity on new acquisitions in three to five years, which we manage to do because we don’t pay for vacancies and are able to turn empty space into high-yielding, flexible-use products", he said.

By recycling assets that have been improved, the company has so far had sufficient resources to buy new projects continually, with €103m of disposals planned for this year. "We do not collect assets and sit on them. We continuously recycle our portfolio and reinvest the proceeds to create higher-yielding assets", said Coombs.

The company has so far been able to raise funds based on the individual assets targeted for acquisition. Further down the line, Sirius might find new opportunities to raise fresh funds via bond issues or fresh capital raising which could help the company build on the solid growth of the past five years.