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

Good day, and welcome to the Sirius Real Estate's Trading Update Presentation. I will now hand you over to CEO, Andrew Coombs. Please go ahead, sir.

Hello. My name is Andrew Coombs. I'm the Chief Executive Officer for the Sirius Real Estate Group, and I'm joined this morning by the group's Chief Financial Officer, Diarmuid Kelly. We're here today to take you through the company's trading for the year ending March 31, 2022. And please note that the company is due to announce its full year audited results for the period to 31st of March on June 13 of this year. At which time, there will be a conference call for analysts and investors. So if you'd like to hear more detail regarding the company's full year performance, please do attend our call on June 13. Firstly, I'm delighted to tell you that the group trading for the period is expected to be in line with market expectations. We have a total annualized rent roll of EUR 167.1 million. In Germany, the annualized rent roll grew by EUR 17.2 million to represent EUR 113.7 million of the previously mentioned EUR 167 million. EUR 6.2 million of that relates to organic growth in Germany, with the remaining EUR 11 million relating to the net effect of acquisitions that completed in the period. Furthermore, in Germany, we saw a 5.3% increase in the like-for-like average rate per square meter, taking the underlying rate in the German portfolio from EUR 6.17 per square meter per month to EUR 6.50 per square meter per month over the last 12 months. The company's Titanium venture with AXA in Germany also grew acquisitively through the completion of the Augsburg asset at EUR 79.9 million. This new Titanium acquisition is expected to add approximately EUR 1.5 million annually, fees and profit share coming from the Titanium joint venture. As I think everybody knows, late last year, the company entered the U.K. market through the acquisition of BizSpace that was completed in November of 2021. In the 4 months since then, when the BizSpace acquisition completed, we've seen a 7.5% like-for-like increase in the BizSpace rent roll. And we're seeing most of this come the 6.5% increase in like-for-like average rate per square foot in the BizSpace portfolio. That rate has increased in that 4.5-month period from EUR 10.98 per square foot to EUR 11.69 per square foot. Furthermore, the group has converted BizSpace in the U.K. into U.K. Real Estate Investment Trust, or REIT, with effect from the 1st of April of this year. Finally, if we look at the group as a whole, we have a cash collection rate for the year in excess of 98%, and we have successfully executed 2 transformative corporate bond issuances, totaling EUR 700 million and reducing our average cost of debt to 1.4%. Our free cash balance is currently standing in excess of EUR 125 million. And as previously explained, the company is due to announce its full year results for the year to 31st of March 2022 on the 13th of June this year, at which time there will be a conference call for analysts and investors. And if you'd like to hear more detail about our end-of-year results, please do attend that call on June 13. Thank you very much indeed for your time. If you have any questions at this stage, Diarmuid and I would be happy to try and answer them.

[Operator Instructions] We will now take our first question from Edward [ V. D. ] from [ Finkle ].

Congratulations on a good update, guys. And my question is about the like-for-like average rates per square meter. Nice increases, both in the U.K. -- or particularly in the U.K. just since November, and also, in Germany. And I'm trying to think about sort of what is the trend of sort of rent inflation for your types of property versus what has come through you managing to upgrade tenants and that sort of thing so that your part of the increase might be bearing the fruits of improvements that are made to the property or reconfigurations. I guess, investors will be hoping the answer is a bit of both, that is a sort of good environment, plus the benefits of actions taken. But I wonder if you could give us a bit more color on what's driven those and what sort of trends we might, therefore, see in the next year or so.

Yes, absolutely. Before I answer that, maybe, I can talk about affordability, because affordability is particularly important. It's particularly important right now in terms of where we are at this stage in the economic cycle. And if I tell you, if I look at this space as an example, the average tenant is spending less on renting the property than they are employing a member of staff. And that's really, really important. It's not a dissimilar picture when we look at our core SMEs and our Smartspace customers in Germany. The reason it's really important is as you head into high inflation and what's being signaled going forward in both economies, where you really need to be is not highly priced as a 5-star brand, you need to be in the right place on that affordability curve. Otherwise, your pricing is going to come under pressure. And for years, I've banged on about Sirius being at a discount to the next best alternative and it's not optimizing our pricing so we make loads of profit in good times and then have to reduce our prices in the bad times. This now is where that strategy really pays dividends, because we have controlled our pricing throughout the cycle so that as things tighten in the economy, we don't have to start reducing our prices because of where we are versus the next alternative and where we are on the affordability scale to our tenants is such that we can continue to pack value and maintain our price numbers. If I switch specifically to the U.K., I think one of the things that we identified is that pre-COVID, BizSpace hadn't increased their prices for quite a long time. So I think it's fair to say that what we've done with the BizSpace management team in the portfolio is we have really accelerated the pricing initiatives. And I think some of what you're seeing is the fact that, that business in the U.K. could maybe not been as aggressive with their pricing as they possibly could be as well as the dynamic techniques that are used within the -- both BizSpace and Sirius platform to be able to move price quite quickly by actually engaging with customers and being able to move contracts forward in a way whereby you don't have to talk to agents who use intermediaries to do so. So the first point is affordability is really important. Second point is the platform can be used to make price move far more quickly than it would do if you were dealing with a business whereby they'd have to go and talk to agents and intermediaries to engage with their clients to move price. Does that answer your question?

Yes. And maybe, just in terms of then, what's sort of left in the tank, I guess, particularly in BizSpace in terms of is there still more to go in terms of reviewing some of that pricing and pushing things up further from here?

Well, I think there is. And I think the thing we need to be careful of in BizSpace is we're doing one thing at the moment, putting the price up. We're in catch-up. And what we've got to develop towards that is giving the customer more value in return for us receiving more money. And that's what we've done very successfully in Sirius, and that's why we have now, for 8 years, moved the rent roll by more than 5%. So one of the things that we're looking at very, very closely with the team at BizSpace is not only how we put price up, but how we pack additional value for the customer into that price. That is the key to sustaining this.

We will now take our next question from Miranda Cockburn from Panmure.

Just sort of following up a little bit on that. Can you just give us an indication in BizSpace whether or not the growth is being seen across all types of space, so both sort of office and industrial? And just also, is there any difference in terms of locations? And then the other question was just in terms of future opportunities. Where are you seeing the most opportunities, sort of U.K. versus Germany? And what kind of balance in acquisitions can we expect through to the next 12 months?

Thank you, Miranda. Well, look, firstly, if we go back to November, the wonderful problem that really concerned me was the growth in office pricing was exceeding that of industrial. Now, that was a really nice problem for us to have because clearly, we are industrial specialists. I think the reason for it was, remember, the way in which Sirius got involved back in July last year, in terms of buying this business is originally they were selling their industrial property. And we effectively got involved in looking at that portfolio and then converted that interest into interest for the business as a whole. But I guess what I'm saying is, a year ago, BizSpace's plan was to sell off industrial. So it's not surprising that they had been putting more emphasis on the long-term nature of office than they had industrial. Hence, why when we got our hands on it, we could see industrial lagging a little bit and office accelerating away. Needless to say, we have refocused on the industrial. And I can say that certainly, in this calendar year, the growth has been both in industrial and in office. And we see opportunities in both going forward. In terms of the acquisition point, I just look at it as an allocation of capital point. I don't sort of look at BizSpace and think BizSpace has its own capital and Sirius has its own capital. I kind of look across the group. And what I look at is, where are the opportunities? Let's look at them one by one. Let's understand which opportunities give the best returns. And let's allocate the capital to those opportunities. And what I can say is at the moment, the weight of opportunity that we're seeing is in Germany. But it's early days with BizSpace. I'll give you a silly example. We launched, a couple of weeks ago, an initiative called, "Buy your neighbor campaign," where we've asked everybody to go and find local properties in the neighborhood that we could go and buy. We're now looking at -- when I say looking at, we have a database of 150 opportunities, the first 2 offers go out this morning. They're speculative offers. And when I say it's early days, this is the stuff that we do in Germany as bread and butter. We look at over 1,000 opportunities in Germany a year. But it will take a few months to get that momentum going and for us to be able to start looking at 10 or 12 opportunities in the U.K. and sort of opportunities in Germany at the same time and weighing out where the capital is going to get the best return. So I'm sorry, Miranda, I can't give you a conclusive answer there. What I'm trying to do is show you the way we think about things and the mentality that we're applying to that issue.

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

Two quick questions for me, if I may. The first one is on inflationary pressures that you and your customers are seeing, and is there anything that you are able to do to mitigate those? And the second one is with regards to the reconversion of BizSpace. Obviously, that provides a nice tax savings on an ongoing basis. Does it also provide you with the potential to use that status to make acquisitions going forward?

Diarmuid, maybe I can take the first question. Perhaps, you might like to take the second. Matt, if I think about inflationary pressures, I mean, the biggest inflationary pressure that we have mitigated is Sirius locking in its gas prices in Germany for 3 years. We did that a year ago. The reason we did that a year ago is because in calls like this, our investors were constantly asking me a really good question, which is what keeps you awake at night? And my answer was geopolitical risk, particularly in the Merkel transition from power. And that made us assess a lot of scenarios and a lot of different risks. And one of those risks was the risk to the gas supply, which is why a year ago, we locked that pricing in until, I think it's April 2024. Now there are other things we've done, but the biggest ticket item that makes the biggest difference is our thinking way before where we are today around what could go wrong and how do we mitigate that risk. And don't forget, we supply gas to nearly all of our customers, so it's a big-ticket item to Sirius. And I'm delighted that we've locked those prices in, given sort of current events. Diarmuid, would you like to talk about the REIT status?

Certainly, yes. So with the REIT, as you know, we elected, with the U.K. REIT regime effective April 1. And we would probably think about it in kind of 2 ways. I guess the kind of first way is in terms of ongoing U.K. tax and that's obviously -- that's reduced to effectively nil, so that's the economic and financial driver. But I think also, in terms of optionality moving forward as we seek to grow the organization within the U.K., recycle assets, too, I think the REIT gives us quite a lot more enhanced options in terms of how we actually do those deals, as well as the fundamental economics around them. So I think it's quite a positive thing, not just in terms of kind of ongoing earnings side, but also, in terms of growing the organization, too.

[Operator Instructions] There appears to be no further questions. I'd like to turn the conference back to the host for any additional or closing remarks.

So I'd really just like to finish by reminding everybody that 13th of June is when we announce our audited results, and we will, of course, be holding the call then. In the meantime, I'd just like to thank everybody for their interest and their time this morning and look forward to speaking to you all in June. Thank you.

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