update Sirius Real Estate

Sirius has posted results for the the year ended 31 March 2014 on 18/06/2014. The results were good.

Dividend

Sirius intends to recommence the payment of a regular dividend, starting with a final dividend of 0.30c per share for the period. Whilst only a modest payment at this stage, the 0.30c dividend represents 65% of the recurring profits after tax for the March 2014 quarter, following the capital raising completed in December. The Board has set a policy to pay a dividend equal to 65% of the recurring profits after tax in respect of each financial year of the Group.  It is intended that dividends will be paid on a semi-annual basis and offered to shareholders in cash or scrip form. 

Recurring profits are profits after tax and before property revaluation, change in fair value of derivative financial instruments and non-recurring costs.

Putting dividend into perspective:
Earnings Per Share amounted to 7.31c (2013: -9.52c) while Adjusted Earnings Per Share excluding property revaluation, change in fair value of derivative financial instruments and non-recurring costs amounted to 2.73c (2013: 2.66c). 

implied yield at share price of 34c:

2.73x65%/34=5.2%

Despite the dilutive equity issuance last year Sirius Real Estate is able to offer a good forward yield in this yield starving environment. My initial thesis regarding the dividend has played out as expected. But if yield seeking investors pour in after one year of semi-anual dividends I am inclined to sell. This yield has to be taken with a grain of salt because management has used a weighted average number of ordinary share. As shown in the P&L analysis and before savings for 2014 from refinancing loans I would use 1.84c as adjusted earnings: 1.84x65%/34=3.5% is a realistic yield without factoring in the favourable operational upside of Sirius.

NAV

Opening adjusted net asset value per share 48.4c
Impact of equity capital raisings and issues during the year (10.1)c
Impact of valuations/disposals 3.8c
Impact of retained profits 2.2c
Closing adjusted net asset value per share 44.3c

My personal calculations of NAV differs slightly with a NAV of 43.9c:

	31.03.2013	31.03.2014
Cash/Marketable Securities	16,718	13,747
Current/Non-Current/Property	440,020	443,720
Derivative financial instruments	0	678
Borrowings	(289,390)	(224,884)
Financial Derivative Liabilities	(197)	(174)
minority interest book	(17)	(22)
accrued interest and expenses	(8,108)	(7,690)
NAV	159,026	224,697
Deferred tax liabilities	2,636	4,200
Epra NAV	161,662	228,897
shares with voting rights	317,578,176	512,238,576
NAV per share	€ 0.50	€ 0.44
Epra NAV per share	€ 0.51	€ 0.45
P/NAV @0.34	67.90%	77.51%
P/Epra NAV @0.34	66.79%	76.09%

The equity issue was dilutive. It is difficult to follow the logic of raising equity in order to pay out this cash as a dividend to shareholders in the future. Debt is cheap like never before. At least the NAV would have increased without the effect of the equity issue.

LTV

The lower LTV has enabled Sirius to refinance at competitive financing rates.

	31.03.2013	31.03.2014
Borrowings	289,390	224,884
Financial Derivative Liabilities	197	174
minority interest book	17	22
accrued interest and expenses	8,108	7,690
Cash/Marketable Securities	(16,718)	(13,747)
Derivative Financial Assets	0	(678)
sum loan	280,994	219,023
Current/Non-Current/Property	440,020	443,720
LTV	63.86%	49.36%

  

P&L 

	year to 3/31/2013	year to 3/31/2014
Rental income	46,115	45,065
Direct costs	-16,889	-16,519
Net rental income	29,226	28,546
Surplus/(deficit) on revaluation of investment properties	-35,776	22,735
Loss on disposal of properties	-1,201	-1,687
Administrative expenses	-4,684	-4,043
Other operating expenses	-2,411	-2,298
Operating profit/(loss)	-14,846	43,253
Finance income	25	64
Finance expense	-14,998	-12,155
Change in fair value of derivative financial instruments	350	-128
Profit/(loss) before tax	-29,469	31,034
Taxation	-783	-2,102
Profit/(loss) for the period	-30,252	28,932
Profit/(loss) attributable to:
Owners of the Company	-30,227	28,927
Non-controlling interest	-25	5
Profit/(loss) for the period	-30,252	28,932
shares with voting rights	317,578,176	512,238,576
Profit/(loss) per share cents	-9.53	5.65
	year to 3/31/2013	year to 3/31/2014
Profit/(loss) before tax	-29,469	31,034
Surplus/(deficit) on revaluation of investment properties	-35,776	22,735
Loss on disposal of properties	-1,201	-1,687
Profit before revaluation, disposal and tax	7,508	9,986
Non-recurring costs	1,537	1,235
surrender premium	1,000	1,700
Change in fair value of derivative financial instruments	350	-128
tax effect of revaluations	564	1,564
normalised profit before tax	8,259	11,213
tax @15.825%	1,307	1,774
normalised net profit	6,952	9,439
shares with voting rights	317,578,176	512,238,576
normalised Profit/(loss) per share cents	2.19	1.84
Weighted average number of ordinary shares for the purpose of adjusted earnings per share	317,559,843	395,758,526
	2.19	2.38

Non‑recurring costs relate primarily to loan extension fees associated with the debt facility with ABN Amro Bank N.V. and early payment penalties associated with the refinancing of the debt facility with Berlin Hannoversche Hypothekenbank AG.

As the refinancing is finished I am inclined to accept this related costs as non-recurring. I did not add them back in the original write-up.

Management uses Weighted average number of ordinary shares for the purpose of adjusted earnings per share, but I think it is more accurate to use the actual number of shares, although the raised equity did not work for the whole period already. The cost savings from repaying and refinancing borrowings would raise the adjusted EPS from 1.84c abviously.

Conclusion

Sirius Real Estate still offers a yield above 5% base on my conservative normalized earnings of 1.84c per share. This is not bad for German Real Estate. Additionally Sirius Real Estate is on an upward trajectory operationally. They will add new sights and have enough cashflow to invest in their - according to management high ROI projects. Nevertheless I will start to sell my position at these prices around €0.35 and reinvest into Dream Global REIT.

Quick look at spin-off: BUWOG

 Research has pointed to spin-offs as being well worth resarching in the pursuit of alpha. I have not added new holdings to my portfolio in the recent past, although adding to IMW Immobilien (blogposts), when it fell under 3€. This is just a preliminary look at BUWOG.

"BUWOG AG has successfully completed its spin-off from IMMOFINANZ AG. The BUWOG share (ISIN: AT00BUWOG001) has been listed in the Prime Standard of the Frankfurt Stock Exchange (main listing) and the Prime Market of the Vienna Stock Exchange for the first time today. Trading with BUWOG shares opened at EUR 13.00 in Frankfurt, which represents a market capitalisation of approximately EUR 1.3 billion based on this initial price.  In connection with the spin-off, IMMOFINANZ shareholders received one BUWOG share per every 20 IMMOFINANZ shares in their portfolios. At the present time, 51% of BUWOG’s 99,613,479 bearer shares are held in free float. IMMOFINANZ currently holds 49% of BUWOG’s share capital, but plans call for the reduction of this holding over the medium-term. [immofinanz]"

The plan of Immofinanz to reduce their 49% holding could lead to an overhang of shares in the medium-term, which may results in an attractive entry point. There is a 90 days lock-up period for IMMOFINANZ. BUWOG has posted a presentation on their website.

Business model

BUWOG main business is Asset Management complemented by Property Development and Property Sales and they are active in the residential markets of Autria and Germany. Results from Property Development and Property Sales are more lumpy and less predictable than asset management, which is why my portfolio holdings in the real estate market focus on asset management.

The company expects a payout ratio of 60-65% and an amount of about 4% of EPRA NAV. My first feeling is

The portfolio is located in major cities. You can easily see why the company focuses asset sales on Austria and unit purchases on Germany. The rental yields are simply higher. The reason is a regulated rental market in Austria which makes it very hard to increase rents even when market rents are way higher. This makes an immediate sale ofter a units gets vacated highly value adding, although selling does not necessary increase NAV. If you are not allowed to charge  market rent you have to sell at the market price to realize value.

At first sight it's astonoshing to see this rent increases in their Autrian portfolio in the past despite the restrictions, but the footnote explains it is not like‐for‐like, i.e. disposals and development affect these numbers. The vacancy is low with 2.9% for Germany and 5.5% for Austria, where the vacated units are marketed for sale. I wouldn't worry about the vacany in Austria as reletting would be faster than selling. Selling the Austrian units is the right choice for shareholders.

The development segment is focused on Berlin and Vienna exclusively which makes the company more exposed to these markets than the current portfolio implies.

The maturity profile is long-term. Average interest rate of 2.6% is low and 90% is fixed rate or hedged. Subsidized loans (for development) make up 36% and bank financing 54%. The problem with bank financing is that it is actually short-term if problems arise due to covenants. Covenants are not on the presentation slides.

For a market cap around €1.3 billion the FFO generation is unimpressive. Recurring FFO for 2012/2013 of 79.3 over the market cap of 1.3billion is ca. 6.1%. The figures are available because BUWOG has been operating as a stand-alone company under ownership by IMMOFINANZ.

The company trades at a 14% discount to book and 22% discount to EPRA NAV. If the dividend really comes in at 4% of EPRA NAV dividend yield would be 5.1%. At a payout of 60-65% recurring FFO had to be €102m - €111m.

The improvement of FFO would be unrealisitc where it not for a recent purchase and the definition of recurring FFO by the company, which includes unit sales.

Conclusion

The price is not attractive enough for me to purchase shares. If the price falls significantly due to Immofinanz selling, I would take a closer look. At the moment the small real-estate companies in the portfolio are priced more attractively.
The lack of attractive portfolio additions is also the reason why there are so few posts in the recent past. Maybe it is more rewarding to search for holdings in the portfolio to sell than to look for new portfolio candidates.

Links Dundee

Mike Arnold has written an update about Dundee International Reit on seeking alpha.

It is based on Dundee International Reit's numbers for the last quarter ended December, 2013.
Webcast of the conference call is available, too.

WertArt Capital has written a post about the mother company Dundee corp.

 [long Dundee International Reit]

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:

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
	free float	54.13%	284,413,764
	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
sum	4.9
2 non-core property, 1 land	~10.8	for sale
sum	15.7

 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

	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	accrued interest and expenses	8,661	8,661	8,108
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%

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 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