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

Good day, and welcome to the Sirius Real Estate Plc trading update conference call. At this time, I would like to turn the conference over to Andrew Coombs, Chief Executive Officer. Please go ahead, sir.

Good morning, everybody, and thank you very much indeed for taking the time to attend this morning's call, which is the Sirius Real Estate trading update for the year to 31st of March 2021. I'm joined this morning by Alistair Marks, our Chief Financial Officer; and our group Financial Director, Diarmuid Kelly. Maybe I can start by just going through a few highlights of the trading update, and then we'll be able to answer any questions you may have. So as you may have seen from the notes, we have grown our rent roll by 7.6% in this year that we're reporting on. In like-for-like terms, that is rent roll growth of just above 5%, 5.2% growth. This is the seventh consecutive year that the company has grown its rent roll by 5% or more. We have done that in part by increasing our pricing, our rate per square meter, by 3.5%. And we've been able to do that in part because despite the COVID crisis, we were able to increase the number of inquiries that our platform was able to generate throughout the pandemic by nearly 20%. In doing so, we were able to maintain our sales conversion. And not only has that enabled us to lift the price, it's also enabled us to increase our total occupancy from 85% to nearly 87%. Throughout this period, we have put a lot of emphasis on our ability to collect cash from customers. We have been particularly proactive in this regard. And I'm pleased to tell you that we've been able to collect 98.2% of all of the invoiced revenue, and we expect to collect the majority of the 1.8% outstanding. In the second half of the year, we returned to acquisitive growth and completed or notarized 5 assets at just under 46.5 -- sorry, just under EUR 46 million. And we also continue to grow our joint venture with AXA, the company's Titanium portfolio, with the acquisition of Augsburg at just under EUR 80 million. So despite the pandemic, we have been able to grow Sirius both organically and acquisitively. And in this period, we think we have demonstrated not only the resilience of our business model, but also the strength of the Sirius platform. And I look forward to June 7, when we announce our full year results, and I will have the opportunity to speak to you all in more detail about those audited results. Right now, all that remains for myself, Alistair and Diarmuid to do is answer any questions you may have.

[Operator Instructions] We can now take our first question from James Carswell from Peel Hunt.

Thanks for the update, very good statement. Just a quick question on the like-for-like rental growth or the rent roll growth in the period. I think I'm right saying in the first half, it was around modest decline. And I think some of that was down to a couple of large tenant move-outs. But nonetheless, it looks like H2 has been a really, really strong year or a strong period for that growth. Have you seen a step change in the tenant demand in that period? Or was it principally just use those large tenants in the first half? And then secondly, and I guess, linked to that is the kind of the more recent restrictions in Germany regarding COVID. I mean are you again seeing any kind of short-term impacts from that? And I guess part of my question is also, are tenants still utilizing the buildings in the same way they were previously when we spoke? And it sounded like Germany had much, much higher utilization of office buildings than the U.K. ever did during COVID. Is that still the case?

James, maybe I can answer the second part of your question. And Alistair, maybe I can refer to you afterwards in terms of the first part of the question, the growth in the rent roll. But if I just start with what's happening on the ground in Germany at the moment. I think I said, probably 3 months ago, that the recovery in Germany is going to be less vaccine-led and more dependent on testing. And certainly, at the moment in Germany, what we're seeing is we're seeing even greater testing than we saw in the previous waves. It's not uncommon for people to be tested literally on a daily basis. We now have certain tests whereby if somebody comes into a meeting in our offices, we can actually literally ask them to take that test before they walk into the meeting, and we can get the results. In terms of what's happening on the ground, politically, there's a lot of discussion going on in Germany. What is clear is Merkel does not have control of the 16 federal states. And what is clear is that she's coming to the end of a political term, and she's finding it quite difficult to influence those federal states. But if you actually look at what is happening on the ground, businesses are continuing to operate, we're continuing to see footfall into our sites, we're running our meeting room business again. And I think most importantly, Sirius has demonstrated that we can manage through these periods of disruption. I mean if you look at our sales for this year in question, I think we've sold 160,000 square meters of new tenanted space this year compared to roughly the same number the previous year. We are confident that we can manage through this disruption. But in answer to the question, we are seeing footfall onto our sites. The issue in Germany is as political change occurs, as we lead up to the election, Merkel does not have the decisive control to manage through this pandemic that some other European leaders do have. Alistair, could you maybe help with the first part of the question, please?

Sure, James. And you are correct in the fact that the first half was affected by those large move-outs. And I think it's important to note that those large move-outs were on recently acquired sites. So they're not just normal large move-outs in the ordinary course of the business. They are move-outs on acquisitions where we knew that the tenant was actually leaving. So that, I think, supported the numbers a bit more than what you would expect because I think we did actually have a positive like-for-like rent roll increase in the first half despite that. But if you look at the trend this year, where relatively flat in the first half and then a large increase in the second half, that's been a similar trend over the last 2 to 3 years as well. And I think this year, in particular, the reason why things are a bit more back-ended is because whilst inquiries were still fairly high in the first half, whilst we were still able to do a large number of dealings once the initial lockdown was finished, I think people will take a bit longer to sign than what they have in the past. So hence, the reason why I think more deals were done in the back half than in the first half. And also, in addition, we had a number of bigger deals that came through later in the year. And in those bigger deals, in particular, the lead time between when they actually agreed the deal and people actually signed and took a little bit longer. So I think as far as the pandemic and the lockdowns and that are concerned, as far as our business is concerned, I think the major impact has been timing rather than actually doing more deals. So we've been quite resilient. We've been able to increase like-for-likes by more than 5% again this year. It's just that the deals in order to get them signed have taken a little bit longer.

[Operator Instructions] We can now take our next question from Kai Klose of Berenberg.

First, 2 quick questions, if I may. The first one, could you indicate what was the contribution from indexation to the like-for-like occupancy was? And then the second question regarding the requests for lettings. Could you indicate to which type of space this was referring to particularly? And also kind of the -- if there was a change in the size of the space requested?

Kai, I'm not sure you shot us very incisive set of questions. Alistair, could you maybe do indexation, if I talk about segment size. So Kai, as you know, we've got 3 categories that we deal with in our portfolio, namely out-of-town offices. So is everybody getting that echo that I'm getting only on the line?

Yes.

Great. Somebody's just changed something on the screen, which has caused an echo. Okay. That's much better. So the 3 categories of space are out-of-town offices, their manufacturing and their storage. And if you look at the manufacturing segment, that has been relatively unchanged with the exception of manufacturers requesting more storage space. If you look at what's happened with storage, storage demand has increased, both on the commercial and the domestic level. And if you look at offices, you can split the office segment down into people who have an office on our business park because they manufacture on our business park and people who have stand-alone offices. And if you look specifically at people at the stand-alone offices and people who occupy those larger offices, which is less than 10% of our total rent roll, that segment specifically has slowed down. It slowed down as much as there are less people in that segment moving out, and there are less people moving in. It has stagnated. So the people that we would have expected to have gone have stayed for longer. And the people who we would have expected to have signed, instead of signing are taking longer to make a decision. But that has been more than compensated for by the increase in the demand for storage. And this is where you see the strength of the business model. What you see is you see as 1 category stagnates, another category increases, and you can lay one-off against the other. And when you look at specifically the office segment, you see that the office segment is made up of different subsegments. So for us, about 1/3 of it is people that just take a big office on a serious business park. But about half of it is people that manufacture on the site anyway so they can't give their offices up and relocate anywhere else. And the remainder is our small space offices, which is people choosing offices for 1 or 2 people. And the demand there has increased exponentially. And what we are sensing is these are people who already have offices close to the center of town. They generally don't know whether they're going to keep those offices, but they're coming to us to rent something on the edge of town because they want to split the groups of people that are working their office up. They genuinely don't know whether they're going to keep that space for a year, 2 years or give it up in 6 months' time. But what we are definitely seeing is demand on the edge of town from people who already have offices in the center of town. It remains to be seen how -- the longevity of that demand, whether it's a short-term hit or whether it's a longer-term trend. Alistair, do you want to talk about the indexation on the rent roll?

Sure. The indexation is going to be fairly similar to what it has been in the past. I think it's just north of about 1.5% of the 5%, but that is a combination of both contractual increases which we apply within contracts as well as uplifting tenants upon renewal. So it's a combination of the two. So it was quite positive to see that we were still getting uplifts on renewal even, I guess, during the COVID period.

It appears there are no further questions at this time. [Operator Instructions] So we can now take our next question from Romney Fox from ASI.

You've announced a couple of acquisitions in the latter part of the year, obviously, sort of H1, understandably, given the pandemic or [ acquired ]. Just wondering if is it sort of back to normal on that front? Would love to get a bit of color on the transaction market in Germany at the moment, please?

Yes. We think it is, Romney. And we want to continue our momentum of acquisitive growth. The challenge is, of course, values because you might have expected a year ago to see valuations come under pressure in this sector in Germany. That's not what we've seen at all. So whilst we do intend to continue the acquisitive momentum, the point that I would make is that values are certainly going up, not down in this sector. But that said, as you know, we buy at a different price point within the Titanium joint venture and the price point that we buy for our own balance sheet. So I suspect it's more a question of the balance of acquisitions, whether it's led by Titanium or alternatively whether we lead it with our own balance sheet. But I would definitely say that our intention is to continue the acquisitive momentum.

So it appears there are no further questions at this time. [Operator Instructions] And we can now take our next question from Kirstin Govindasamy from Marriott Investment Management.

I'd like to find out what the NAV is post the acquisitions that were completed? If you can just give us an indication of that? And if there were any write-downs in property valuations or uplifts during the period?

I'm not sure I can give you guidance on the NAV because we're in a close period. But certainly, we will be able to give you good guidance on that on the 7th of June, when we announce our audited results. But I think the guidance I would give you is what the statement does say is that we've increased the rent roll like-for-like by over 5%. And you can see that, that increase in revenue is likely to result in an increase in net operating income, which you would expect, all things being equal, to lead to an increase in values and therefore NAV. But I think that's about as far as I can go given the fact that we are auditing accounts at the moment. Alistair, do you agree with that? Or is there any other color we could give?

No, that's about it, I think. Obviously, the valuers have gone through the valuations and that we've got preliminary numbers, but none of that is public at the moment. So we can't really say too much on that.

Okay. But please listen to our call, come to our presentation on the 7th of June. We're going to be very, very happy to slice and dice that and go into lots of detail once the accounts have been audited and signed off. Ladies and gentlemen, thank you very much indeed for your time this morning. Thank you for listening to what we have to say. Please do mark in your diaries the 7th of June, when we announce our results. I'm going to turn back over to the operator now to close the call. But thank you once again.

This concludes today's call. Thank you for your participation. You may now disconnect.