Sirius Real Estate Limited (SRE) Earnings Call Transcript & Summary

Welcome to the Sirius Real Estate Call. [Operator Instructions]. Just to remind you, this conference call is being recorded. I'll now hand the floor to Andrew Coombs, Chief Executive Officer. Please go ahead.

Good morning, ladies and gentlemen, and welcome to Sirius Real Estate's Trading Update for the 12 Months to 31st of March 2020. Thank you all very much indeed for taking the time to dial in this morning. My name is Andrew Coombs. I am the Chief Executive Officer for Sirius Real Estate. I'll be taking you through this morning's statement after which, there will be an opportunity to address questions to myself as well as to Alistair Marks, who is the company's Chief Financial Officer, and who will be assisting me throughout this call. As well as a trading update, this statement also serves as a further update on the company's position in the light of COVID-19. The statement this morning is being made ahead of the planned announcement of our year-end results on Monday, June 1, COVID permitting. Firstly, I'm pleased to inform you that we expect our full year audited results to be in line with market expectations. We have grown the annual rent roll from just under EUR 88 million to just over EUR 90 million in spite of the sale of the seed portfolio to the Titanium joint venture with AXA in July last year. And our like-for-like annualized rent roll has increased by 6.1%. Like-for-like occupancy has increased to 87% with an embedded rate of EUR 6.07 per square meter per month. Between our own core balance sheet and the joint venture, we have acquired nearly EUR 180 million of new property in the period. Our average cost of debt has been reduced to 1.52%. We've completed the company's first unsecured lending facility for a total of EUR 50 million. And we have increased the number of unencumbered assets to 15. So 25% of our sites, 1 in 4 of our sites, are now unencumbered with a total book value of approximately EUR 115 million. In terms of the Titanium joint venture with AXA, this has increased in value to EUR 225 million of assets. This is due to small uplifts in valuation as well as the recent acquisition of a business park in Hilden, near Düsseldorf. And it is our intention to continue to grow the joint venture further over the coming months. In terms of our financing, we estimate that we will report a year-end net LTV in the region of 35%. We have in the period, been able to reduce the company's annual interest charge despite increasing our lending and our interest cover has improved in terms of the cover from the net operating income from just over 10x to 11x. Sirius, in the period, acquired 7 new properties for its own balance sheet with an average vacancy of 27%, thereby acquiring 50,000 square meters of vacancy for the company to reposition, fill and add value to via our highly accretive organic growth program. Moving on to the COVID-19 situation. In terms of the current COVID-19 crisis, our primary focus is the health, safety and well-being of our employees, none of whom have to date been directly impacted by the virus. The Sirius team continues to operate despite the fact that 75% of the workforce are currently working from home. Over 13,000 square meters of new lettings have been completed since the 1st of March, generating EUR 1.2 million of annualized rent. We invoiced April's rents and service charge on April 1. And as at the end of last Thursday, i.e., the working day before Easter, we were 7 working days into collecting the rent and the service charge. And 75% of the invoice total had been collected and paid. This represents about 90% of the normal working pattern. As previously reported, we have a strong balance sheet with access to over EUR 100 million of unrestricted cash. Our top 50 tenants make up 44% of our revenues, and we are in close communication with all of these top 50 tenants at a senior level. A further 7% of the rent roll comes from German government agencies, including the Ministry of Finance. And an additional 7% comes from our smartspace customers, with the remainder of our tenants being made up of German SMEs who are receiving unprecedented support from the German government at this time. While it is expected that some rent payments for the next few months will be deferred, the company is using its extensive platform across Germany to manage the impact. Furthermore, it is in time such as now that the strength of our business model becomes most relevant. In particular, the diversified nature of the tenant base, together with the ability for Sirius to change and flex the mix of space within its portfolio according to demand. As an example, we are currently seeing an increase in the demand for storage space, and we have the ability within our portfolio to very quickly use smartspace products such as FlexiLager to play to that demand. However, while the lockdown in Germany continues, and there is no certainty on how or when it may end, it is simply not possible for the company to assess accurately the impact of COVID-19. And as such, I am unable to provide future financial performance guidance at this time. That said, and COVID-19 permitting, we will announce our fully audited results at the start of June, at which point, I would expect things to be much clearer, and I look forward to updating you further at that point. That concludes this statement. Alistair and I would now be very happy to try and answer any questions you may have. Thank you.

[Operator Instructions] Our first question comes from the line of Matt Saperia at Peel Hunt.

Andrew, 2 questions from me, if I may. The first one, you noted that you've made the first purchase in the Titanium joint venture. I was wondering if you could provide a bit more information about the business part that you bought. And I think you also mentioned that you expect that to grow further in the coming months. I was wondering if you could provide a bit more information on that. And secondly, I'd be interested to know, again, you mentioned the unprecedented support from the German government. And whether you have the insight into what form that support is taking, how your customers are benefiting from it and how it compares to what we're seeing in terms of government support here in the U.K.?

Certainly, Matt, thank you very much indeed. So firstly, the business park in Hilden near Düsseldorf, which is the park for just under EUR 60 million which we have purchased into the joint venture. You'll remember that when we set the joint venture up, we explained that the joint venture was really there to buy assets that were less opportune and much drier than the kind of assets that Sirius would put onto its balance sheet. And to work with AXA and their capital to buy much higher ticket acquisitions, typically more than EUR 50 million, the kind of thing that up until now, Sirius has found difficult to buy on its own. And Hilden ticks all of those boxes. It is a dry asset. It is an asset that is much bigger in size in terms of its value than Sirius would normally take on on its own. We are responsible for managing the assets and we do attract fees as a result of doing that. So we're delighted with the purchase in Hilden as are AXA. I think it's at a time like this that the joint venture really comes into its own because I would put it to you that buyers are going to find it very difficult over the coming months to finance assets and to be able to make acquisitions with bank lending, you really do need to be a cash buyer right now. And obviously, the returns that we are targeting with AXA through the joint venture are different from the returns that we're targeting on our own core balance sheet. And I would see us potentially being slightly more active in the joint venture over the next 6 months than we are on our core balance sheet. But I would then probably see that switching, maybe 6 months from now, once the distress really starts to emerge, and we have more understanding of where this market is going to level out. That's when I would see us using our own core balance sheet. So what I would say is where the JV is concerned, we will be focusing on that over the next 6 months or so. In terms of the support that the German authorities are offering, again, it's at a time like this that you really begin to understand some of the advantages of the German structure. So Germany, as you know, is made up of 16 federal states. And when the German government say they're going to support businesses, you're not talking about 1 agency trying to push money through the system. You're talking about 16 separate states with 16 different systems that go into action. So if I use Berlin as a really simple example. Last Monday, Berlin distributed EUR 1.2 billion. They didn't sign it off. They didn't pledge it. They didn't say it was going to happen. They transferred EUR 1.2 billion into people's bank accounts. And anecdotally, what we are coming across in contrast to what I'm hearing in the headlines in the U.K. is anecdotally, what we're coming across is people on the ground are receiving money at very high speed. In fact, the speed is so high that if you look at North Rhine-Westphalia, which is where the initial coronavirus broke out in Germany, the authorities there on Thursday of last week, announced that they may be releasing lockdown more quickly than the rest of Germany. But the authorities went to pains to explain that any company that takes North Rhine-Westphalia money after Easter, may be required to pay it back at some point. You can sense that the authorities are now switching to how quickly they can stop the flow of money because there is definitely a sense that the 16 federal states have been extremely quick to be able to distribute the funding to people on the ground. And I guess it's no surprise given the structure and given the history. Don't forget, these people have reissued their currency a lot more times over the last 60, 70 years than most countries have been required to do. So I think Germany is a very different picture from the picture that I'm reading about and listening to in the headlines in the U.K. Matt, does that give you some idea?

Yes. Perfect.

We have one further question in the queue so far. [Operator Instructions] The next question comes from the line of Kai Klose of Berenberg.

Kai from Berenberg. I've got 3 quick questions, if I may. The first one is on the letting volumes. I saw in the release that you published about 162,000 square meters of lettings in the last year and 13,000 by March -- last April. Could you indicate what was the net letting volume for the full year and for the short period? Second question, could you indicate how much rent -- the request for rent deferrals in portion -- in percentage of the monthly rent you have received so far? And the last question would be, could you indicate how much you spend in CapEx for the -- into the portfolio, particularly for the smartspace?

Alistair?

Yes?

Could you maybe address Kai's question on the CapEx? And are you able to work out the net lettings picture?

Yes. So the net lettings, we've increased occupancy by about -- just over 2% on the like-for-like portfolio. So that's net increase move-ins over move-outs of about 20,000 to 30,000. So we're talking about 140,000 -- 130,000, 140,000 of move-outs in the year, of which we reported quite a few of those in the first half with the exceptional large ones that we talked about. So that's the net lettings. Do you want me to deal with the CapEx now?

Please, if you could.

Yes. The CapEx we spend probably around about EUR 25 million last year. As far as exactly how much of that has gone into smartspace, I don't know off the top of my head, but it would have been a few million euros, I would say. And as far as the CapEx plan going forward is concerned, we've still got around about 80,000 square meters of space in our postal vacancy, which we're looking to develop over the next few years. So I would suspect that we will continue on a similar sort of vein as what we've done over the last couple of years. But we're looking and prioritizing the more important investments over the ones that are less important at this stage.

Kai, your question in terms of request for deferrals. So we have about 8% of the total monthly rent and service charge number that have requested rental deferrals. Now not all of those people have requested 100% deferral. Some have requested 50% deferral. We haven't directly dealt with any of those yet. What our position is, is we're saying, look, pay the rent at the moment, which clearly not everybody is doing, but that's what we're saying is pay the rent at the moment. Let's look at what happens over the next couple of weeks, and let's have a sensible discussion over rental deferrals when we can see what is going to happen over the coming months. What we're saying is now, it's too early to engage in that conversation. What we are saying is when we do engage in that conversation, we want information from you, the tenant, we want to understand what have you received from the government. We want to understand the state of your business. We want this to be a 2-way thing, not a one-way thing. Of course, we are willing to be flexible in terms of timing of payment, but what we need to understand is, what is the situation of your business, and what help have you already had. And that is one of the reasons why we are deliberately not trying to close those cases off right now. Because we want to see the documentary evidence from businesses of how they are being assisted before we as the landlord, enter into agreements with them. Of course, we're quite fortunate because with 260 people across Germany, we have the resource to be able to really get into that. And as you guys know, within our platform, we do have a specialist collection and recovery team. We've expanded that team, and we're bringing that team -- or we will be bringing that team to bear over the next couple of weeks. But I would say that the reality is we've got about 8% of initial requests. This is a gut feeling rather than an incisive prescriptive answer, but it would feel to me that there's probably a threat to about 4% or 5% of that rental figure. And I would suspect that with the right kind of engagement and the right kind of discussion, then the threat can be managed and mitigated down to a number that is much lower than 5%.

[Operator Instructions] There seems to be no further questions coming through at this point, so I'll hand back to our speakers for the closing comments.

Alistair, is there anything you'd like to say as closing comments?

No, I think we've pretty much covered everything, Andrew. So -- and there was no further questions. So I'm happy.

Ladies and gentlemen, thank you once again for taking the time to listen to this call this morning.