Monday, 10 February 2014

Sirius Real Estate

Company profile

Sirius describes itself as "the leading operator of branded business parks providing flexible workspace to the German SME market."

The company raised €327.8M in its IPO in May 2007. The proceeds were used to aquire flexible workspace in Germany. From the start assets were managed externally by Dawnay, Day Sirius Real Estate Asset Management Limited:
  • 0.5% of gross assets (0.6% 500M-1B)
  • performance fee of 20% above 10% hurdle rate
  • 4% of rental income
  • 1% of project costs of development
In January 2012 the company internalized the asset management by purchasing Sirius Facilities GmbH ("Facilities") and other assets for a total consideration of  €5.1M in shares and cash.

Share Capital 

The share capital has evolved as follows:

datewith voting rightstreasurytotal sharesissue price
3/31/2012317,523,17610,276,824327,800,000-
3/31/2013317,578,17610,221,824327,800,000-
8/6/2013348,530,54710,221,824358,752,3710.21
9/30/2013349,750,5479,001,824358,752,371-
10/2/2013351,233,6407,518,731358,752,371management remuneration
12/9/2013517,900,3077,518,731525,419,0380.24
12/9/2013518,900,3076,518,731525,419,038management remuneration

The shares issued with an discount of 6.7% to the then prevailing price in Agust, 2013 @0.21 were not being offered to Shareholders on a pre-emptive basis because the Board concluded "that it is not in the best interests of the Company to make such a pre-emptive offer due to the time and cost involved and the necessity to complete the issue of the Bond in a timely manner."

The shares of the second capital increase in Demcember, 2013 @0.24, representing a discount of 4.0% to the then prevailing share price were not being offered to Shareholders on a pre-emptive basis. "The Directors, excluding Wessel Hamman [advisor to the Karoo Investment Fund], a non-executive director of the Company, having consulted Peel Hunt [who placed 143,441,492 shares], consider the participation in the Placing by the Karoo Investment Fund to be fair and reasonable as far as shareholders are concerned." Karoo Investment Fund subscribed for 41,598,661 new shares.  The 23,225,175 new shares, not placed by Peel Hunt, "have been conditionally subscribed for pursuant to subscription agreements made directly with the Company (the "Subscription")." Management has participated in the capital increase. "Robert Sinclair, Chairman of the Company, James Peggie, a non-executive director of the Company, Andrew Coombs, CEO of Sirius Facilities and Alistair Marks, CFO of Sirius Facilities have each agreed to subscribe 333,333, 281,250, 270,000 and 62,500 New Shares respectively."

This seems to be a pattern:
On 22 March 2013, the Company issued €5M convertible Loan Notes due 2018 at par to Karoo Investment Fund S.C.A. SICAV-SIF and Karoo Investment Fund II S.C.A. SICAV-SIF, then 24.96% shareholders in Sirius. Coupon rate is 5% p.a. and conversion price is 0.24 from 21 March 2014. This wasn't offered to normal shareholders either. In my opinion the terms were quite advantageous for Karoo with guaranteed interest payments and nice optionality from rising share price. In the end this will propably add another 5/0.24=20.8M shares.

Sirius does only provide a list of major shareholders dated 26/08/2013. My best guess of the current shareholders is as follows:

12/9/2013treasury shares1.24%6,518,731
9/6/2013Taube Hodson Stonex Partners LLP3.63%19,069,100
1/3/2014Vik Sharma, F&C Asset Management plc4.94%25,946,613
12/4/2013Principle Capital Advisors Limited5.72%30,057,506
1/21/2014PREMIER FUND MANAGERS LIMITED6.07%31,912,187
12/9/2013Clearance Capital LLP
Karoo Investment Fund SCA SICAV-SIF
24.27%127,501,137

free float54.13%284,413,764

total100.00%525,419,038

Weiss has reduced its stake from 13.23% in August, 2013 to under 3%.

Debt restructuring


  
The debt has been reduced over the last reporting periods.

new debt facilityinterestmaturityafter report date30.09.2013
Macquarie Bank Limited6%+EuriborJanuary 201732.5M0
paid down



ABN Amro (RBS)floatingNovember 2013041M
Berlin Hyp AGfloatingMarch 2014135.5M149M


The Berlin Hyp facility is to be refinanced with a new 115M facility in the near future. All in all recent activities have removed uncertainty over short‑term debt maturities and will enable the company to pay a dividend in the near future.

Capital Allocation for the near future

The proceeds of the sales of non-core property and the balance of the equity fund raise not used for paying down debt or associated costs will be allocated into "accretive capital expenditure programmes as well as attractive investment opportunities". The Company expects to have approximately €17.5M for this purpose according to the latest report.

There seem to be 15-4.2=10.8M left for sale, although  assets held for sale as of 30.09.2013 had a book value of 7.7M.

sales after report 30.09.2013amount [M]date
mixed-use site Cottbus0.3early 2014
non-income land Düsseldorf4.229.11.2013
2 land sales0.4early 2014
sum4.9
2 non-core property, 1 land~10.8for sale
sum15.7

 Two further non-core properties and one land package are being actively marketed for sale. The value of the non-core properties and land packages which remain for sale and the land package sold on 29 November 2013 [4.2M] is approximately €15M.
The company will pay down debt further, dispose of the left non-core properties und reinvest in their portfolio. "Following the refinancing we are planning on increasing the capex spend to €5M per year to take advantage of highly attractive investment opportunities in the existing portfolio, as the Company has under-invested in its estate over the last few years due to capital constraints."

Property



201120122013
Gross annualised rent restated 39.740.340.8
Average rent per sqm restated€ 4.24€ 4.36€ 4.44

Gross rent and average rent have been increasing over the past years.


core portfolio30.09.201331.03.2013
rental income annualised40.8
property value434.26426.21
gross rental yield9.40%9.70%
value per sqm425417

The gross rental yield has fallen due to a revaluation uplift of the portfolio. 9.4% seems high at the first glance, but properties are not situated in prime locations.


The investment portfolio's value has decreased due to disposals and revaluation. The downward revaluation trend seems to have stopped. The average rent per sqm for new lettings was €5.08 whereas average rent of moveouts was €4.46. Occupancy has been kept steady near over the last years near 75% as of September, 2013.

Valuation

weight
after equity issue30.09.201331.03.2013
1Borrowings272,209272,209289,390
1Financial Derivative Liabilities116116197
1minority interest book2


3
2317
1accrued interest and expenses8,6618,6618,108
1Cash/Marketable Securities58,25118,25116,718
sum
222,758262,758280,994

Current/Non-Current/Property434,260434,260440,020

LTV51.30%60.51%63.86%
After the latest equity issue LTV looks sustainable at 51%, but was this dilutive equity issue really necessary to further reduce LTV from 60.5%?


Cash/Marketable Securities58,25118,25116,718
Current/Non-Current/Property434,260434,260440,020
Borrowings272,209272,209289,390
Financial Derivative Liabilities116116197
minority interest book232317
accrued interest and expenses8,6618,6618,108
NAV211,502171,502159,026
Deferred tax liabilities3,1723,1722,636
NAV II214,674174,674161,662
shares with voting rights518,900,307349,750,547317,578,176
NAV per share€ 0.41€ 0.49€ 0.50
NAV II per share€ 0.41€ 0.50€ 0.51
P/NAV @0.29 share price0.71

P/NAV II @0.29 share price0.70


Equity issues have decreased NAV. The property value is supported by a healthy gross yield of 9.4%. Due to rising share price the discount to NAV has narrowed:

 Mcap at the most current share price of 0.285 is just 148M and liquidity is low.

The P&L looks as follows:

six month 9/30/2013six month 9/30/2012year to 3/31/2013
Rental income23,62623,88646,115
Direct costs-816-8,883-16,889
Net rental income15,46615,00329,226
Surplus/(deficit) on revaluation of investment properties5,215-7,867-35,776
Loss on disposal of properties-336-719-1,201
Administrative expenses-2,222-1,641-4,684
Other operating expenses-1,058-119-2,411
Operating profit/(loss)17,0653,586-14,846
Finance income411525
Finance expense-6,182-8,480-14,998
Change in fair value of derivative financial instruments81-660350
Profit/(loss) before tax11,005-5,539-29,469
Taxation-716-1,550-783
Profit/(loss) for the period10,289-7,089-30,252
Profit/(loss) attributable to:


Owners of the Company10,283-7,082-30,227
Non-controlling interest6-7-25
Profit/(loss) for the period10,289-7,089-30,252

Management expects to see a further reduction in overheads for the full year to 31 March 2014 of €0.5M compared to the previous year, as the overhead cost base is optimised further.


six month 9/30/2013six month 9/30/2012year to 3/31/2013
Profit/(loss) before tax11,005-5,539-29,469
Surplus/(deficit) on revaluation of investment properties5,215-7,867-35,776
Loss on disposal of properties-336-719-1,201
Profit before revaluation, disposal and tax6,1263,0477,508
reduction in overhead25000
surrender premium1,7001,0001,000
Change in fair value of derivative financial instruments81-660350
normalised profit before tax4,5952,7076,158
annualised9,1905,4146,158
tax @15.825%1,454857975
net profit7,7364,5575,183

In contrast to management's opinion, I don't think the surrender premium is recurring, which could make my estimate too conservative. The profitablity of the company has improved and the newly issued 40M of equity did not have an effect yet. If you substract 40M from the mcap of 148M one gets 108M. Divided by the normalised PBT of 9.2M results in 11.7 times PBT or a PE of 14 ex new cash.  Factoring in the positive trend, this is not expensive at all. Some qualitative remarks:

  • Management's attention can now be focused on the operation after completion of refinancing, asset rotations and equity issues.
  • Uncertainty regarding short maturity of debt is mostly resolved.
  • The Groups asset management for external parties with currently three contracts may provide some upside with minimal capital outlay.
  • Moveouts were relett at higher rates on short notice, showing healthy demand.
  • Management claims to have completed some new projects successfully in the last period with initial income returns significantly in excessof 20%, which bodes well for future capex.

Conclusion

Sirius Real Estate is not extraordinarily cheap compared to current numbers. I think Sirius trades around its steady state value in a going concern scenario. Too expensive on PE, but too cheap on P/NAV. If it were to liquidate orderly some value could be realised from current 0.7 P/NAV, but there is no intention to do so.
On the other hand trajectory of operations point to some upside in the future. Although I think it was stupid to raise equity to gain the ability to pay a dividend in the future, as stated by management. As long as intrinsic value is growing, I don't need a dividend. NAV has fallen and shareholders haven been diluted, but I think Sirius is at an inflection point.  I will hold on to my shares for now, but I have to admit my cost basis is lower than current prices. [Author is long Sirius Real Estate].

Disclaimer: This real estate companies are not in my portfolio to outperform the market, but to provide a positive and attractive total return. Alltogether they are under 10% of the total portfolio.

Links
http://www.sirius-real-estate.com
Wexboy blog

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