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

Welcome to the Sirius Real Estate half year trading update call. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present Andrew Coombs, Chief Executive Officer of Sirius Real Estate; and Diarmuid Kelly, Finance Director of Sirius Facilities. Please go ahead with your meeting.

Good morning, everyone, and welcome to the trading update for Sirius Real Estate. My name is Andrew Coombs. I'm the Group Chief Executive Officer of Sirius Real Estate. And I'm joined this morning by Diarmuid Kelly, who is the Financial Director of Sirius Facilities, which is the group's operating company and wholly owned subsidiary based in Germany. This trading update covers the 6-month period ending 30th of September. The information within the statement has not yet been reviewed by the company's external auditors. However, the company is due to announce its audited interim results on November 23. Maybe I can start this morning with some of the highlights from our statement and then Diarmuid and I can take some questions from you guys. Firstly, I'm pleased to tell you that the company is trading in line with full year expectations as set out in the June consensus published on our company website. Cash collection remains strong, and we've been able to increase the year-on-year inquiry volume from new tenants. Sales conversion has been very much a story of 2 halves. At the height of the pandemic in Germany, due to sales conversion dipping below 10%, we saw a 19% reduction in sales volume. This has since reduced to 5% for the period from July to September as sales conversion has improved. The rent roll in the last 6 months has reduced by EUR 1.1 million, partly due to the disposal of Weilimdorf, an asset we purchased for just over EUR 5 million and subsequently sold for EUR 10 million, and partly due to the reduction in sales volume. However, the rent roll remains 13.6% higher than the same period last year. Our meeting room and conferencing business closed at the height of the crisis. And since reopening, I'm pleased to inform you that the year-on-year revenues are up by just over 50%. Our balance sheet remains strong with over EUR 110 million of unrestricted cash and an LTV of 33%. And I'm pleased to inform you that we have a strong pipeline of in excess of EUR 100 million of acquisitions. The first 10% of which was notarized last month and the remainder of which is either subject to formal binding sole exclusivity or has exclusivity verbally agreed and is shortly expected to move into fully binding sole exclusivity. In summary, we think Sirius has shown the resilience of its business model over the last 6 months. We will continue to be measured in our approach. However, over the next 6 months, the mission is to build on that resilience and get back to both organic and acquisitive growth. And I look forward to updating all of you on our progress on that as well as our interim results on November 23. Now maybe Diarm and I can answer whatever questions you may have. Thank you.

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

A quick question for me. Andrew, you talked about the EUR 100 million plus of acquisitions. Could you just give us an idea of what type of assets are within that pipeline? And whether they're going to be on the balance sheet or in the Titanium joint venture, please?

Yes, certainly. Thank you, Matt. We will see the majority of these acquisitions going into the joint venture. So I would see probably just over 2/3 being joint venture, 1/3 being Sirius' own balance sheet. We would see these assets as being more light industrial than we would office. So that's not to say that they might not have an office component within them, but whereas in the past, we have sometimes gone out and purchased things that are more out of town office than they are light industrial. I think you'll see more of the theme within that EUR 100 million of proper light industrial, certainly over the next few months.

And the next question comes from the line of Keith Mclachlan from AlphaWealth.

Can you just touch on the growing demand for self-storage? I mean you guys do speak about it a little bit in the update, and it still seems to be strong. Can you venture a guess as to what's driving that demand? How sustainable it is?

Yes, certainly. And I would say that it's not just self-storage. It is storage per se. But let me address your point specifically on self-storage. We saw 2 things happening at the beginning of the pandemic. One was people started to clear space in their homes. So sometimes that was because they set up a home office. Sometimes that was because they moved a relative into their home with them. That was one thing. The other thing that we saw was a lot of the self-storage providers actually closed shop during the pandemic. Sirius didn't. So what we saw at the beginning was a natural increase in demand together with a shortening of supply. Now we've seen a lot of that sort of normalize now. But what we are still experiencing is outside of self-storage, and specifically in commercial storage, there seems to be a desire to shorten supply chains, localize things. In some cases, people have started producing and there's a glut in terms of the timing of distribution. All of this is adding up to people needing more space to store. And that does seem to be continuing. That does seem to have a lot more legs left in it. So I would say the self-storage piece was strong in the beginning and has normalized. I would say the commercial storage area is still very much an area of increased demand.

And the next question comes from the line of [ Ed Lauser ] from Berenberg.

I just have a quick question on the increase in vacancy rates, which you reported today. Could you elaborate a bit more on that? And is it likely to expect that this is to decrease in the second half as we saw in previous years as well?

I think the answer to that is, yes, it is likely to decrease in the second half. As we explained, a lot of this is to do with timing. The reality is that we did see our sales conversion dip in the first half of the pandemic. It's got pretty close to normalization at the moment. What that does mean is that we have recruited a slightly smaller volume of new square meter occupying tenants, and that has impacted on the occupancy. However, given the strong sales over the last 2 or 3 months, we would see that ironing itself out certainly in the second half.

[Operator Instructions] Our next question comes from the line of Glen Baker from Anchor Capital.

Perhaps on the theme of the first question on the pipeline, Andrew. Have the last couple of months seen any alteration in pricing? Were you in a bit -- is it a bit more of a buyer's market? And what's happening to property yields in your space?

Thank you for that. I wish I could tell you that there were fantastic bargains out there. And we've sat patiently, and we're about to start in a month. I'm afraid the reverse is true. We have not seen yields expand or prices go down in Germany, it's all far from it. We've seen them tighten in some areas. That said, we have been extremely selective in our pipeline, and we're confident of being able to purchase that EUR 100 million asset -- of assets at slightly below market rates. But this is not a case where we're seeing distress in this asset class all over Germany and prices falling. There are a couple of examples that are now notarized, but not completed. Not serious transactions, but transactions in the space that demonstrate that yields, would you believe it, over this period have actually tightened rather than expanded. So hopefully, that gives you some color, Glen. But unfortunately, I haven't got any particularly good news there in terms of our acquisitions.

And the next question comes from the line of Andre von Rohr from B&I Capital.

Question on sort of tenant health. I mean, cash collection has been good, but also supported by government support. Do you see a risk if some of those -- if this support runs out that we see more problems on the tenant side in terms of cash collection going forward?

So firstly, as I think everybody knows, the German government have announced a few weeks ago that they will be extending the government's support until at least December '21. So unlike some geographies, Germany has been pretty clear in terms of the minimum longevity of the support. That said, businesses are experiencing difficulty. And out of our customer base of 2,500, we've identified about 2,400 customers. So just under half of them that we have been and will continue to liaise far more closely with going forward than we have in the past. And that's why we're able to collect that cash. Because what we've learned in this crisis is there is a section of our customer base that is well experienced in terms of managing through crises. But there's just under half of the customer base who are very good at providing the service they provide to their customers and have no experience whatsoever of managing a business through a crises. And those are the businesses that we need to stick close to. And those are the businesses that we have been sticking close to. And by doing that, we have been able to not just help them, not just help ourselves, but we've been able to collect the cash efficiently. So we will continue to stick very, very close to those businesses, but we are comforted by the fact that the German government will offer that support until at least December 2021.

And the next question comes from the line of [ Neelima Sheila ] from [ Niche ].

My question has already been asked.

And as there are no further questions, I'll hand it back to the speakers for closing remarks.

Thank you very much indeed for your time and interest this morning. And for those of you who are shareholders, thank you very much indeed for your support. I look forward to updating you all further on the 23rd of November. Thank you.

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.