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

Sirius Real Estate released results last week, the company recently entered the U.K. market through the acquisition of BizSpace, a provider of flexible workspace. And our CEO, Andrew Coombs joined us now to talk about the prospects of Sirius Real Estate in Germany and in the U.K. and in that property market as a whole. Good afternoon, Andrew, thank you so much for joining us.

Good afternoon. Thank you for having me.

First up, you operate primarily in the U.K. and in Germany, take me through the trends that you're seeing and where property is concerned in these 2 markets?

Absolutely. So Sirius has traditionally been an operator in Germany, 75% of our revenues today come from Germany. But a year ago, we diversified and bought a business in the U.K., a business called BizSpace. And in Germany, light industrial property, which is the asset class that we're in, is an oversupply. But because we have a platform of 250 people in nearly 100 different locations across the country, we're able to use that platform to make sure that our property is high yielding. In the U.K., that's very different. In the U.K., there's an undersupply of industrial property. And one of the things we really liked about the U.K. market is the fact that when demand outstrips supply, obviously, that's good for pricing.

Absolutely, it sounds like a very interesting environment that you might have in the U.K. Let's talk about the ease of doing business post Brexit. And even now as we see the different headwinds in the United Kingdom, it's been a bit of a policy and stable environment. Are you seeing that really trickle that into your business? Or do you find that you're just able to really manage what you have to manage without really being exposed to too much of the headwinds around you?

Well, again, I go back to the undersupply of property in the light industrial class in the U.K. In a way, Brexit has kind of helped us as a business, because before Brexit, it was much, much easier to transport goods from the U.K. to Germany and vice versa. And of course, I noticed that this myself when somebody in Berlin wants to send something to one of our U.K. offices, I see how difficult it is an equally well when I'm working in London, I need to send something across to my office in Berlin. I experienced the friction going that way as well. But what that means is that more people in the U.K. are making things and distributing them locally. And what that means is they need more property, typically industrial property to do that off. So whilst it causes some issues for the U.K. economy, there are definitely opportunities for the U.K. light industrial class. If I think about Germany, and I think about what's happening there, the German government introduced in September, the EUR 200 billion defense shield, which is all about protecting businesses and consumers out to 2014 from the increase in utility principally gas prices. In the U.K., that's different. In the U.K., the government has said after March of next year, they'll be withdrawing the subsidy. So we see very, very different trends in the U.K. versus Germany.

So let's just talk about the high also inflation environment that we're seeing because we are seeing that in Germany, but maybe in the U.K. a little bit more. How is that affecting your ability to do business? Are you finding that you also have to transfer that to your -- to your customers and to your clients in order for you to also be able to meet the top lines and the bottom lines that I expected of you?

Well, in the last 6 months alone, we have increased the price in our U.K. portfolio by 8.4%. So as you can see, annualized, that's running ahead of inflation. But we see in Germany, the GBP 200 billion defense shield that begins to kick in, in December and early next year, as a way of potentially lowering inflation in Germany. However, we are concerned in the U.K. about the withdrawing of subsidies at the end of March. We see that as only increasing inflation. And therefore, we recognize the need to be able to have a pricing-led strategy in the U.K. And what that means is prioritizing our ability to capture inflation in the renewals and in the customers that we're selling to, way ahead of that cliff edge change at the end of March.

Andrew, that U.K. business is only 25% of your revenue. It makes up [ 25% ] of your business, but are you worried about doing business in the U.K. right now? Or do you feel like you just have to be smart about it, looking for different areas of opportunity and just watching out for the threats?

I think it's the latter. I mean we bought the U.K. business for a long-term view. And if you look at the light industrial asset class in the U.K. over the next 5 years, I think things bode really, really well. If you look at the next 6 to 8 months in the U.K., you're going to need to be a smart operator to be able to get through it and keep your customers. But we're not frightened of that. We've been operating for a while, and we're not frightened of working hard to make sure that we look after our tenants and we can pass on the rewards to our shareholders.

All right. Now looking beyond Germany and beyond the U.K., one of the things that you've been doing is optimizing that balance sheet. Are you looking at more acquisitions, if so, where? And any more disposals as well just to really [ tighten ] that balance sheet?

Well, we're probably in a disposals led phase at the moment rather than acquisitions led. So we always look at acquisitions, but I don't think we'll be buying for a while. We are pausing where the acquisitive strategy is concerned. We have more than enough ammunition in terms of our organic growth to be able to sustain us for the next 2 or 3 years. We will come back into the market at the right time. That could be in 6 months. It could be in 2 years. Time will tell. In the meantime, we will continue to focus on disposals. We disposed of 3 properties in the period that we're reporting on, all in excess of valuation, and we will continue to look for opportunities to dispose values above the valuation of the individual properties.

All right. Well, I do think we're out of time. Thank you so much, Andrew, for your insights today. I think you've given us some very unique insights. That was Andrew Coombs, CEO of Sirius Real Estate. On the company's performance and prospects in Germany and U.K.