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

Good day, and welcome to the Sirius Real Estate Trading Update Conference Call. At this time, I would like to turn the conference over to Andrew Coombs. Please go ahead, sir.

Good morning, and welcome, everyone, to Sirius Real Estate's Trading Update for the 6 months to 30th of September 2021. My name is Andrew Coombs. I'm the Chief Executive Officer of Sirius Real Estate, and I'm joined on today's call by Alistair Marks, our Chief Financial Officer; and Diarmuid Kelly, who is the Group Financial Director. Sirius Real Estate is the leading owner and operator of out-of-town, branded, industrial and business parks across Germany. We are in the business of providing conventional space as well as flexible workspace around the edge of the 7 key German cities. I'm pleased to tell you that the company is trading in line with consensus and management expectations for the full year. We have in the period to September 30 seen strong organic growth as well as our first bond issuance in June of this year and good progress on the notarization of acquisitions within the period. The highlights to September 30 are as follows: a 2.5% increase in like-for-like annualized rent roll to EUR 98.9 million with a total annualized rent roll now standing at EUR 99.7 million. This has been driven in the period predominantly by a 2.6% increase in like-for-like rate per square meter, which takes the underlying price per square meter within the existing portfolio to EUR 6.33 per month. The completion late into the period of 2 newly acquired assets in Essen and Ohringen has also contributed to the increase in rent, and we will see the full effect of those acquisitions in the H2 results. Completion of EUR 400 million 5-year corporate bond in June with a coupon of 1.125% has enabled us to use EUR 170.7 million of the proceeds of that bond to pay down secured debt, which means Sirius now has 48 unencumbered properties with a gross asset value of circa EUR 1 billion. Furthermore, our weighted average cost of debt has reduced from 1.5% to 1.2%. And the weighted average term of debt has increased by 35% and is now just under 4 years. Acquisitive growth continued with 8 on-balance sheet business park assets and 1 land parcel being completed or notarized in the period amounting to just over EUR 150 million of acquisitions. And the company currently has EUR 174.5 million of unrestricted cash on its balance sheet, providing capacity for further acquisitions and investments. Our net loan to value just under 38%, and this is prior to the -- sorry, just over 38%, and this is prior to the impact of our H1 valuations, which we will publish in the announcement of our interim results on November 8. As the vaccination program continues to be successfully rolled out across Germany, trading conditions have begun to normalize and confidence is returning. Manufacturers in Germany, in particular, are now focused primarily on the reorganization of their supply chains to within European borders as well as adapting to more flexible ways of working. These challenges play to the strengths of Sirius' business model, and they will help drive demand to our out-of-town business parks where we offer a range of storage facilities, warehousing, manufacturing spaces and out-of-town offices. Therefore, we remain confident that the experience and service levels of our operating platform, the quality and affordability of our assets as well as the diversity and resilience of our tenant base will continue to underpin the company's growth. In terms of value, while the attractive yields available from our asset class have continued to drive competition in the investment markets, we are pleased with the strong progress we've made in deploying capital into new opportunities throughout the first half of the current financial year. We have, however, kept our focus firmly on acquiring assets which are either under managed and/or underutilized where we are confident our specialist asset management teams can extract value and drive net operating income. The success of our inaugural bond issuance underlies the belief capital market investors have shown in our strategy and puts us in a good position to fund further acquisitive growth. So let me finish by reminding you that Sirius will announce results for the 6 months to the 30th of September on Monday, November 8, at which time there will be a conference call for analysts and investors. I'm happy to now try and answer questions regarding this statement. However, I'm looking forward to updating you all more fully when we announce our interim results on November 8. Thank you.

[Operator Instructions] We will now take our first question from Matthew Saperia from Peel Hunt.

A quick question for me, if I may. Looking ahead into the second half and beyond, I was just interested to know what the acquisition pipeline looks like. And you mentioned the competitive position in the investment market. I was just wondering if you could give us a bit more color around that and potentially talk about how you are indeed sourcing those opportunities that you are unearthing.

Thank you, Matt. So obviously, we benefit from the competitiveness in the investment market. We own on our own balance sheet circa EUR 1.4 billion of property. But clearly, when it comes to acquisitions, those same conditions increase the challenge. And that is one of the reasons why over the last week -- sorry, over the last few weeks, we have had our acquisitions team conduct over a dozen separate broker events to make sure that we increase the number of exposés we see, and we have stepped up other activities where we source opportunities off market. And I'm pleased to tell you that our pipeline is very strong. I'm also pleased to tell you that for the first time, I think ever, we are now seeing Sirius take opportunities off of its top 2 or 3 competitors. If you look at the history of where we come from, we started buying in the unloved space of sub EUR 20 million, sub EUR 10 million assets. Since the joint venture with AXA, we've been successful in operating in the plus EUR 40 million space. But now for the first time, what you're seeing is you're seeing Sirius take market share from competitors by displacing acquisitions that have already gone into either legals or exclusivity with vendors. And I can tell you in this period, there have been 2 cases that we are now either at notarization or heading towards completion, whereby the assets were originally agreed to be sold to our competitors. And what we've been able to do is not only displace that, but we've also been able to do so at slightly lower prices than the competitors we're going to buy out. And we've been doing that because of our access to capital. We've been doing that because of the speed at which we can move. And we've been doing it because of our reputation in the market. And we believe that we can continue that momentum into the second half. Does that answer the question, Matt?

Yes, that's perfect, Andrew. Great.

[Operator Instructions] We will now take our next question from Romney Fox from Aberdeen Standard.

A question for Alistair, please, I think. You've obviously got lots of cash, which is fantastic. And I know it feels like a long time ago, but obviously, it's in the period you did that remarkable bond issuance, so well done on that. But look, I assume you can't just go and spend all the cash. So I was wondering if you could remind us some guide rails around how you feel about balance sheet prudence in terms of that net LTV? Or maybe an ICR ratio that we could sell back to in terms of thinking about your firepower because clearly, access to cash is not the limit at the moment?

Yes. Sure, I can take that. Yes, obviously, we've got a stated ambition to keep our -- the LTV under the 40% mark. But obviously, the gross LTV with the bond is obviously a bit higher. And the more we actually spend, you are right, the net LTV will actually increase. We are at around about 38%, I believe, at the moment. And we'll report maybe a little bit less than that when we get our valuation results coming through. However, we think that comfortably we can probably spend about EUR 208 million is what we've worked out on acquisitions this year, of which we've either completed or notarized about EUR 150 million of that. So there's still a little bit of buffer there. And that will keep around about EUR 60 million of free cash -- EUR 50 million to EUR 60 million of free cash on the balance sheet. If we did all of that without any changes in the valuations, then the net LTV will increase slightly above the 40%. But we believe with valuation increases and the asset management, we will actually get that back below quite quickly. So that's kind of the parameters that we're actually working within. And I think if we do execute, particularly with the assets that we have in our sites, we think that that will be quite accretive to our FFO growth, the FFO per share. And even if we did tick slightly above the 40%, the fact that we've got more than EUR 1 billion of unencumbered assets on the balance sheet and we are predominantly unsecured these days, we think that more than offsets any negativity by if we were to go over 40%. But the target is to run the business at an LTV of below 40%.

[Operator Instructions] As there are no further questions at this time, I would like to turn the call back -- sorry, apologies, we have one more question. Marcus Phayre-Mudge from BMO.

Could you just -- apologies, if I missed it right at the beginning of the call, whether you talked about rent collection rates and recovery. If you could just -- recovery of arrears, et cetera, if you'd just comment on that, please?

Thanks, Marcus. Diarmuid, are you able to comment on that?

Maybe Diarmuid is on mute.

Yes, possibly.

No problem. I can take that. We will -- for the 6 months this year, I think we're going to end up at around about 97.2%, and we believe that we will collect most of that in due course, and there's going to be very little written off. But I think the average since the start of COVID, we are in excess of 98%. So there hasn't been any material deviation from the numbers that we've reported in the past and we're still confident, even with what's in arrears, of getting that ultimately. So it's pretty similar to what we've reported in the last couple of reporting periods.

Okay. Marcus, [indiscernible] quote in a statement, a 12-month trailing cash collection of 98.2%.

[Operator Instructions] As there are no further questions at this time, I'd like to turn the call back to your speakers for any additional or closing remarks.

Thank you very much all for your time and attention this morning. We look forward to updating you further on November 8 when we publish the interim results. Thanks.

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.