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

Good morning to you all, and thank you for taking the time to participate in this morning's call. My name is Andrew Coombs. I'm the Group Chief Executive Officer for Sirius Real Estate. And I'm joined today by Alistair Marks in his capacity as the group's Interim CFO. We're here today to talk you through our half year trading update, covering the period from April 1 to September 30 of this year. The information in the trading statement has not yet been reviewed by the company's auditors. That review will take place in the coming weeks, and that will lead to the official announcement of Sirius Real Estate's half year interim results on Monday, November 21. Can I start today by confirming that the company continues to trade in line with expectations? And given a number of issues affecting property companies at present, we are relatively pleased with progress in the first half of the year, and we remain cautiously confident in our plans to deliver full year's earnings growth over the coming months. Maybe I can start before I get into the statement by addressing the energy crisis, specifically in Germany. In its statement on the 30th of September, the German federal agency responsible for the coordination of the supply of gas throughout Germany confirmed German gas reserves are now at more than 90% capacity, and gas continues to be supplied from a range of sources other than the Nord Stream pipeline. Furthermore, the German Chancellor, Olaf Scholz, confirmed that the government will establish a defense shield with a volume of up to EUR 200 billion of cash to cushion the impact of expensive energy on both citizens and businesses until the end of 2024. And as previously communicated, Sirius secured gas supplies for its customers at fixed rates back in 2020. And those fixed-rate agreements do not expire until the end of 2023. So in summary, the gas supply issues in Germany are much less of a risk for this winter than they were back in February and March of this year. And the real issue for Germany is all about the supply of energy not this winter but in the winter of '23, '24. Let me now go back to the period that we're talking about, the first half of this financial year. As you can see, both in the U.K. and Germany, we are delivering solid rent roll growth. In addition, we have disposed of the Camberwell asset for GBP 16 million in London. And in Germany, we have sold an asset in Magdeburg for around EUR 14 million. Both those assets are sales at significantly above valuation. We have also recently refinanced or agreed the refinancing of the EUR 170 million Berlin Hyp loan, and we refinanced it with a 7-year facility that will last until the end of October in 2030. However, most importantly, these new arrangements will not commence until November of next year. And they will have the effect of increasing the group's weighted average cost of debt from 1.4% to 1.9% whilst extending its weighted average debt expiry from 3.8 years to 5 years. We have a healthy balance sheet position of cash reserves of around EUR 162 million, of which EUR 138 million of cash is unrestricted. Our inquiry flows remain high. Our cash collections are good. And let's not forget, the company now has EUR 1.6 billion of unencumbered assets. The portfolios both in Germany and the U.K. were last valued in March '22. And comparative to the rest of the sector, they are valued at relatively high gross yields, nearly 7% in Germany and nearly 12% in the U.K. We continue to increase and improve our funds from operations, and we do this because of continued rental growth. In addition, we have lower quarterly debt repayments as a result of the EUR 700 million of corporate bonds that we financed last year. And I'm pleased to tell you the group has the strongest operational cash flows that we have ever enjoyed since the formation of this company. We are confident that we can continue to grow our dividend. We have deliberately held back on acquisitive growth in the last 6 months. And in doing so, we further improved our balance sheet. We've done this so that we can be on the front foot once we feel it is appropriate to continue reinvesting. And at the moment, we are relatively cautious about when that might be. I look forward to updating you all further on this and other points on November 21 when we announce our half year interim results. In the meantime, Alistair and I would be happy to help with any questions you may have at this point.

[Operator Instructions] We will take our first question from Miranda Cockburn.

Can you hear me?

I can Miranda. Thank you.

Yes. Just a quick question on the vacancy. Is it possible to sort of split where you're seeing the vacancy in the U.K. and Germany? And also just to talk a little bit around some of the tenants you saw exiting as expected during this first half and your thoughts for the second half?

Yes, certainly. I mean, firstly, what I would say is that there's been sort of just under 1% change in the group's occupancy. And as you know, we like to operate in a sort of a 5% corridor of occupancy versus vacancy. We're not a business where we continually build occupancy. We're a business where we build occupancy in an increased rate, which reduces occupancy, and then we build occupancy again. And that's the sort of virtuous circle that we go through. And typically, I don't know why it happens like this, but typically, we always see the sort of vacancy being created in the first half. And then we, in the second half, tend to fill it and improve the run rate. And that's exactly what you are seeing here without any shadow of doubt. We do signal large move-outs, and they often happen in the first half. And what I can tell you is there is nobody leaving our portfolio that we didn't [Audio Gap] months ago. So nobody of any material size, none of our top 100 customers are surprising us, that they are going for various different reasons that we've known about for some while, and we're absolutely confident of being able to replace them in due course. Alistair, I don't know if you want to come in here and add anything. But is there anything you want to say about any specific customer or any specific area of space or vacancy or indeed the shape of what we anticipate in the second half?

Yes. I think we haven't refilled the spaces, although we have got a lot of inquiries for the space. So the 2 biggies, which are close to EUR 1 million between them, are in assets that are close to Frankfurt. So one is in our Maintal site, of which the bulk of the space was a pure office building, of which, I think 80% of the space they moved out at was in that space. And we've actually got 2 inquiries, one of them quite hot to actually replace them on a like-for-like basis, i.e., a tenant taking that whole building. So I'm pretty hopeful that, that one will probably come through before the end of the year, and we can replace that tenant predominantly on a like-for-like basis, i.e., with another single tenant. Similarly, the one in Friedrichsdorf, there's a couple of big tenants that have left there. We've got large inquiries to replace them, probably with about 2 or 3 tenants rather than a single tenant. But again, pretty confident that we will replace them, i.e., this financial year or at least to H1 in the next financial year. So we haven't seen the benefit of that coming through. So all of the increase in the first half is coming from other sites. But I expect us to replace those tenants fairly soon.

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