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
Share Capital
The share capital has evolved as follows:date | with voting rights | treasury | total shares | issue price |
3/31/2012 | 317,523,176 | 10,276,824 | 327,800,000 | - |
3/31/2013 | 317,578,176 | 10,221,824 | 327,800,000 | - |
8/6/2013 | 348,530,547 | 10,221,824 | 358,752,371 | 0.21 |
9/30/2013 | 349,750,547 | 9,001,824 | 358,752,371 | - |
10/2/2013 | 351,233,640 | 7,518,731 | 358,752,371 | management remuneration |
12/9/2013 | 517,900,307 | 7,518,731 | 525,419,038 | 0.24 |
12/9/2013 | 518,900,307 | 6,518,731 | 525,419,038 | management 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:
12/9/2013 | treasury shares | 1.24% | 6,518,731 |
9/6/2013 | Taube Hodson Stonex Partners LLP | 3.63% | 19,069,100 |
1/3/2014 | Vik Sharma, F&C Asset Management plc | 4.94% | 25,946,613 |
12/4/2013 | Principle Capital Advisors Limited | 5.72% | 30,057,506 |
1/21/2014 | PREMIER FUND MANAGERS LIMITED | 6.07% | 31,912,187 |
12/9/2013 | Clearance Capital LLP Karoo Investment Fund SCA SICAV-SIF | 24.27% | 127,501,137 |
total | 100.00% | 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 facility | interest | maturity | after report date | 30.09.2013 |
Macquarie Bank Limited | 6%+Euribor | January 2017 | 32.5M | 0 |
paid down | ||||
ABN Amro (RBS) | floating | November 2013 | 0 | 41M |
Berlin Hyp AG | floating | March 2014 | 135.5M | 149M |
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 30.09.2013 | amount [M] | date |
mixed-use site Cottbus | 0.3 | early 2014 |
non-income land Düsseldorf | 4.2 | 29.11.2013 |
2 land sales | 0.4 | early 2014 |
2 non-core property, 1 land | ~10.8 | for sale |
sum | 15.7 |
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."
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.
Property
2011 | 2012 | 2013 | |
Gross annualised rent restated | 39.7 | 40.3 | 40.8 |
Average rent per sqm restated | € 4.24 | € 4.36 | € 4.44 |
Gross rent and average rent have been increasing over the past years.
core portfolio | 30.09.2013 | 31.03.2013 |
rental income annualised | 40.8 | |
property value | 434.26 | 426.21 |
gross rental yield | 9.40% | 9.70% |
value per sqm | 425 | 417 |
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 issue | 30.09.2013 | 31.03.2013 | |
1 | Borrowings | 272,209 | 272,209 | 289,390 |
1 | Financial Derivative Liabilities | 116 | 116 | 197 |
1 | minority interest book | 2 3 | 23 | 17 |
1 | Cash/Marketable Securities | 58,251 | 18,251 | 16,718 |
sum | 222,758 | 262,758 | 280,994 | |
Current/Non-Current/Property | 434,260 | 434,260 | 440,020 | |
LTV | 51.30% | 60.51% | 63.86% |
Cash/Marketable Securities | 58,251 | 18,251 | 16,718 |
Current/Non-Current/Property | 434,260 | 434,260 | 440,020 |
Borrowings | 272,209 | 272,209 | 289,390 |
Financial Derivative Liabilities | 116 | 116 | 197 |
minority interest book | 23 | 23 | 17 |
accrued interest and expenses | 8,661 | 8,661 | 8,108 |
NAV | 211,502 | 171,502 | 159,026 |
Deferred tax liabilities | 3,172 | 3,172 | 2,636 |
NAV II | 214,674 | 174,674 | 161,662 |
shares with voting rights | 518,900,307 | 349,750,547 | 317,578,176 |
NAV per share | € 0.41 | € 0.49 | € 0.50 |
NAV II per share | € 0.41 | € 0.50 | € 0.51 |
P/NAV @0.29 share price | 0.71 | ||
P/NAV II @0.29 share price | 0.70 |
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 9/30/2013 | six month 9/30/2012 | year to 3/31/2013 | |
Rental income | 23,626 | 23,886 | 46,115 |
Direct costs | -816 | -8,883 | -16,889 |
Net rental income | 15,466 | 15,003 | 29,226 |
Surplus/(deficit) on revaluation of investment properties | 5,215 | -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) | 17,065 | 3,586 | -14,846 |
Finance income | 41 | 15 | 25 |
Finance expense | -6,182 | -8,480 | -14,998 |
Change in fair value of derivative financial instruments | 81 | -660 | 350 |
Profit/(loss) before tax | 11,005 | -5,539 | -29,469 |
Taxation | -716 | -1,550 | -783 |
Profit/(loss) for the period | 10,289 | -7,089 | -30,252 |
Profit/(loss) attributable to: | |||
Owners of the Company | 10,283 | -7,082 | -30,227 |
Non-controlling interest | 6 | -7 | -25 |
Profit/(loss) for the period | 10,289 | -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 9/30/2013 | six month 9/30/2012 | year to 3/31/2013 | |
Profit/(loss) before tax | 11,005 | -5,539 | -29,469 |
Surplus/(deficit) on revaluation of investment properties | 5,215 | -7,867 | -35,776 |
Loss on disposal of properties | -336 | -719 | -1,201 |
Profit before revaluation, disposal and tax | 6,126 | 3,047 | 7,508 |
reduction in overhead | 250 | 0 | 0 |
surrender premium | 1,700 | 1,000 | 1,000 |
Change in fair value of derivative financial instruments | 81 | -660 | 350 |
normalised profit before tax | 4,595 | 2,707 | 6,158 |
annualised | 9,190 | 5,414 | 6,158 |
tax @15.825% | 1,454 | 857 | 975 |
net profit | 7,736 | 4,557 | 5,183 |
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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