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

Andrew, what do today's results tell us about the company's performance?

Well, I think the performance has been stable, but generally flat both in terms of P&L and also cash collection level. But given the challenges of the last few months, I think what they really demonstrate is not only the resilience of the business model, but also the strength of the operating platform in Germany. As your listeners and viewers will know, Sirius has got an operating platform of 260 people in over 60 different locations throughout Germany. And it's because of this strong operating platform and the business model in Germany, that we are able to maintain the kind of performance and the kind of resilience that we've seen over the last 6 months. And let's not forget, Sirius' business has got a lot of diversity built into that business model. For example, if you look at the type of customer that we deal with, we deal with everyone from large blue chips that provide 44% of our income right away across 2 small 1-man bands as well as nearly 50% of our customers coming from the German Mittelstand, the German SMEs. But the type of space that we provide, it's not 1 category of space. We provide factories. We provide light manufacturing, we provide storage, and we provide out-of-town offices. And if you think about the locations that, that's spread across, Germany has 7 different autonomous regions. Unlike the U.K., we don't have a disproportionate amount of industry concentrated in the south of England. Germany is, as an economy, far well, far much better spread geographically. And Sirius' footprint of sites represents that. And furthermore, we have got no single industry that dominates our tenant base. We have no industry sector that gives us more than 3% exposure as a company. So Sirius is an extremely well-diversified business in various different ways. And that is why we are able to be so resilient in the face of this pandemic.

So how has the COVID pandemic impacted on the company's business and operations?

Well, obviously, we've had to employ COVID-specific tactics. And I guess, 2 that spring to mind, in particular. One is to do with our marketing function. So we, over preceding years, have always tried to operate on the 50th centile where inquiries are concerned. And what that means is that in the past, we have employed all our marketing tactics to 100% of their capability, understood how many inquiries we can attract in a month and then try to take 50% of that as our basis of normality. And the reason that we've done that is so that if we are confident in an upturn that we are basically attracting half of the inquiries that we're capable of attracting; then we're also confident that in a downturn, whilst we might have to increase our marketing spend, whilst we might have to turn up our marketing tactics, we can still maintain that 50th centile even though we might end up operating on the 90th centile. And actually, what we've seen in the COVID pandemic is that by turning up the tactics, we have actually managed to experience an increase in inquiry flow. So we have attracted in the last 6 months, more inquiries than we normally would have done. But what we have had to do is we've had to operate way beyond the 50th centile in order to do that. But that was always part of the plan. And the last few months has been a really, really good opportunity to test that plan and to prove that it does actually work. And then the second point is tenant communication. So back in March, we realized this was going to be key. We identified that half of our 5,000 tenants were the most vulnerable. And what we did is we devoted 1/3 of our workforce to regularly on a weekly basis, putting structured calls into those tenants. And those calls were all about making sure that those tenants knew how to access government support. They knew how to prioritize their cash flow and move to cash accounting. And that they were aware that the landlord was open to discussions about downsizing space or talking about things within the lease that might need to be discussed. I'm delighted to tell you some 4, 5 months later that 97% of those tenants have paid their rents in full, that we've had very few conversations about downsizing space. And that the outcome for both Sirius and its tenants as a result of that support and communication has been good for both parties.

And do you think that the pandemic will have a long-term impact on your portfolio, and in particular, the office space?

Well, I think the first thing that I would mention is that our portfolio is about 30% office. And all of the office is out of town rather than the inside of town. So we are not a predominantly office-focused organization. But we do have offices in our portfolio. They are on industrial estates, and they are on the edge of town. And clearly, there's been a big debate going on over the last few months in terms of, are offices dead? I don't think the office market or the market in the center of town for people occupying offices is dead. I think the type of space that people occupy will change. And I think the location will vary. So whereas the most popular locations have normally been in the center of town, I think you'll see that change. I think the center will still be popular, but I think the edge of town is going to become more popular for some people than it has been in the past. I think the fashion of 35-story buildings in the center of town versus industrial buildings that are typically no more than 3 or 4 stories high on the edge of town, I think the industrial buildings will give the buildings in the CBD district far more of a run for their money in the future. And if you think about it, if you can drive to the edge of town and park close to a building on industrial estate. And if you are able to enter that building through a very large industrial lift and only travel a couple of floors up to space whereby you've got very large windows that can be open to let in fresh air in rooms with high ceiling heights on a site that's got lots of green space where you can work outside and take calls outside, I mean you can see what I'm saying. I think the fashion of spending a lot of time in tall high-rise buildings in the center of cities, I think that will lessen. There will still be demand for that, but there'll be less demand for that. And more of that demand will shift away from the central business districts and into the edge of town. And when it does, industrial buildings are particularly well placed to be able to absorb that demand for some of the reasons I've already mentioned.

What's the business sentiment like in Germany? And how is the government there managing the pandemic?