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

Hello, and welcome to the Sirius Real Estate Trading Update Call. My name is Laura, and I will be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions] I will now hand you over to your host, Andrew Coombs to begin today's conference. Thank you.

Good morning, everyone, and thank you, Laura, and thank you to everyone for taking the time this morning to listen to Sirius' trading update for the year ending March 2023. My name is Andrew Coombs. I'm the Chief Executive Officer for the Sirius Group, and I'm joined this morning by Alistair Marks, who is the group's interim CFO, and as well as Tariq Khader, who is the Financial Director for BizSpace in the U.K. Maybe I can start by explaining that the group expects to deliver results in terms of our funds from operations that are in line with market expectations. One of the reasons for this is the fact that we've increased the group's rent roll for the period by more than 8%. Our balance sheet remains strong, bolstered by over EUR 120 million of cash. We have locked down around 90% of our lending for at least the next 3 years, and we're currently working on a further 6% of outstanding debt which we intend to agree terms on in the near future. During the period in question, we have executed EUR 90 million of disposals and acquisitions disposing of selected assets at a blended premium of 25% above their book value. So in summary, we are growing our revenues, our balance sheet is strong, we have our lending under control, and we continue to demonstrate that we are able to sell assets in excess of valuation. The group is due to announce its audited accounts on Monday, the 5th of June, at which point we'll be able to present a lot more detail in depth. However, for now, Alistair, Tariq and I are happy to try and answer whichever questions we can at this point. Thank you.

[Operator Instructions] We'll take our first question from James Carswell at Peel Hunt.

Just a quick question on the U.K. I mean, you've obviously rotated some of the tenant mix and improved the tenant mix in order to really push that rates on. I just want to know how far through that process are we? Do you think most of that kind of rotation attendance is now done? And then when we look over the kind of medium term in terms of that U.K. portfolio, how many -- are you still finding lots of really good opportunities in terms of reconfiguring the buildings and doing more things or most of the kind of the easy wins, so to speak now, now kind of being done?

I think if I think around the U.K., there's sort of really 4 things that we would aim to do, 4 things that we had in mind when we purchased the business. If I think of 2 of those very specifically, 2 of them were to establish a very strong sales and marketing area that effectively mirrors the operation that we have in Germany. Now it takes years to evolve that properly. But I think in the last year, in particular, we have established a really good basis where that sales and marketing piece lie. So for example, we are now attracting over 1,000 inquiries for new tenants in the U.K. We have doubled the sales conversion. We have business as usual now more than 300 viewings per month. And we are recruiting over EUR 1 million -- sorry, GBP 1 million of new tenants each month. Whereas, 18 months ago, the business was recruiting about GBP 250,000 of new tenants. So we have begun to really get the sales and marketing platform in the U.K. moving. Now the reason that's so important is because of the 2 things I mentioned, the second 1 was price. But you see you can only really lift your price if you've got a very, very strong sales and marketing area. Unless you're going to literally just follow the market, you can only sustain the lifting of your price by having a very strong sales and marketing area. So those 2 things have been working in unison over the last 12 months. And whilst we still think there is more to go, we think we are beginning to close the gap between where the market is in the U.K. and where BizSpace is sort of trailed behind. So I would say we're over 50% of the way through getting the benefits of that specific piece. In terms of the portfolio itself, in terms of selling assets and buying assets, we demonstrated with Camberwell in the sale of that property at 2% but it was substantially undervalued within the portfolio. And there are other assets that would fall into that category. So going forward, there needs to be more recycling of assets in the U.K. business in order to get that portfolio where we really want that. And don't forget, we're still yet to reinvest the proceeds of places like Camberwell into the acquisition of new sites. So we're really just waiting for the right point in the market to actually do that. But I mean, I think the answer to your question is we still think that there are a couple of years of progress that we have yet to make in terms of taking -- I don't want to say low-hanging fruit, but the low-hanging fruit out of the U.K. business. So we are, by no means, 100% of the way through the journey. But if we look specifically sales, marketing and pricing, I would say we're over halfway through the journey in terms of catch-up where that's concerned. Hopefully, that gives you a bit of color, James.

Yes. No, that's brilliant. And then maybe just another question on -- in Germany in the investment market. I mean, obviously, you've been fairly active in the market this year. I mean what are you seeing on the ground today? I mean are you seeing activity happening? Or is it very much things are on hold at the moment?

Well, what I would say to you is the transactional volumes are probably about 25% of what we would expect them to be at this point in a normal calendar year. But it is quite difficult to really track because whereas 2 years ago, if anybody so much has leased a piece of land, they wanted to tell the whole world about it. Now if you're buying or selling, people tend to keep their cards quite close to their chest, because people are still not sure whether the market is going to bottom out or continue to fall. So not only is there a lack of transaction, there is more secrecy in the market than there normally would be. My sense is that, that is bottoming out now. And I would be surprised if looking forward, we didn't see some of that volume coming back. But there isn't any specific evidence of that at this point in time.

We'll now move on to our next question from Charlotte Adolpho at Panmure Gordon.

Just a quick question. You mentioned kind of quoted that the German occupancy was stable than in the U.K. occupancy. As you've just discussed, you're kind of happy to take some of that back in order to move pricing. But I just wondered if you could give an indication of what the occupancy levels are in each country. And then secondly, just on your leverage levels, note the comment that kind of you're comfortable with where you're at pretty much in terms of beneficial for returns, but whether you expect further capital recycling to kind of reduce that level down going forward?

Yes. Thank you, Charlotte. Tariq, maybe I can come to you in a second around the occupancy levels in the U.K., but maybe I can take the question on leverage first. So yes, we would expect more asset recycling. That is very much part of our model. We're not an aggregator of assets who wants to sit on them forever. We believe that there are a number of different benefits in terms of recycling, 1 of which, of course, is proving the values, we think that's very, very important, particularly at this point in the cycle. In terms of our leverage, it is a little bit higher on an LTV basis than we'd really like to see. But with over 70% of our debt being corporate debt, it's actually the net debt-to-EBITDA ratio that we are particularly focused on. And I'm delighted to tell you that we've improved that from around 8% at the beginning of the year to somewhere around a ratio of about 7.5% now. So we are conscious of LTV. We do want to bring it down. But with 70% of our debt being corporate debt and with the corporate debt markets focusing on that net debt-to-EBITDA ratio, we understand that, that is really, really important. And we've made quite substantial progress where that's concerned. And of course, some of that progress has come from us being able to grow the EBITDA through raising the rental by over 8%. What I would say around occupancy levels in Germany is they're relatively stable. They might be plus/minus 1%. And of course, the ability to drive price is much, much higher than that. There is more fluctuation in occupancy levels in the U.K. Tariq, maybe at this point, I can hand over to you to give a little bit of color on that.

Sure. Good morning, everyone. Occupancy levels in the U.K. at March '22 were 90.5%. That dropped to 87% at the half year and has dropped slightly further to 86.5% in at March '23. So we saw a bigger drop in occupancy in the first half of the year and a smaller drop in the second half of the year. And part of that lowering in the second half of the year was probably what Andrew said earlier about the sales and marketing machine, improving our sales conversion, viewing numbers and driving more traffic through the business for lettings. So in Q1 this year, we've had our strongest-ever quarter of sales, with approximately $3 million of new tenants coming in and signing up during that period of the year.

And Tariq, can you just remind me, whilst we've moved backwards on the occupancy for the year. What have we increased the average rate per square foot that our customers are paying?

The average rate per square foot has gone up by about 14% across the year.

So we've achieved 14% in price and lost about 4% in occupancy and net-net, are about 10% better off.

Yes. That's correct.

Right. Okay. Charlotte, does that give you enough update?

Yes, that's really helpful.

[Operator Instructions] We'll now move on to our next question from Kai Klose at Berenberg.

I've got a quick question on the 5% -- 5% like-for-like for new growth in Germany. Could you indicate how much was coming from improving leases for existing tenants and from new lettings. So what was the spread between moving -- move in and move out trends?

I'm not 100% sure we can give that detail in this period, but Alistair, is there any way you can articulate that?

Yes. So if you look at the rent roll in Germany, it's roughly stayed at about 84% for the whole year. And you'll see our rate per square meter has increased from about 6.3% at the start of the year. We got to just above 6.5% at the interim, and I think we'll end at just over 6.8%. So a big chunk of that is actually coming from contractual increases and capturing the inflation. So I would roughly say we haven't done the full analysis, but I would say roughly half of the 8% is coming from contractual increases and uplifts on renewals and the other half is coming from tenant churn and just letting up spaces at higher rates than what they moved out at. But that is just a bit of a rough guess at this stage. We will obviously give full color on that in our year-end presentation.

And very last 1 from my side. Could you maybe indicate from a kind of tenant segment or which industry -- from which industry you see a little bit more or less demand in terms of space in U.K. and in Germany?

We don't have a dependency on any single industry sector of more than 3%. When I joined Sirius over 10 years ago, we had 35% dependency on 1 customer, Siemens, you don't want to know how many percentage points of dependency we had on certain vertical segments. And what we've sought to do over the last decade is diversify in every sense of the world, including the tenant base. And what that means is that we've resisted the temptation of becoming too dependent on automotive as many of our competitors have got dependency of double digits on sectors like that. We have actively sold to make sure that we have sub-3.5% dependency on any single sector. So I could talk to you more confidently about whether we're getting demand from top 50, whether it's Mittelstand core SME or whether it's micro SME, all I can tell you about vertical sectors is we make sure that we don't overly trade into any of them.

We have no questions in the queue currently. [Operator Instructions].

Folks in the absence of any other questions, could I again thank you all for attending the call this morning and just remind you that we will be announcing detailed audited results on Monday, June 5. And I'd be delighted to talk to you all further together with Alistair and Tariq and give you more detail and color on these results. But I think what you can see is that we are trading in line with expectations. We feel that we've had reasonable progress over the last 6 months as well as the full year. And I look forward to talking to you all again on Monday, June 5.

Right. We have 1 last question over here from Romney Fox at Aberdeen.

Andrew, sorry to interrupt. Can you hear me all right?

I can. Thank you, Romney.

Sorry, I did press the button before you gave your closing speech. So apologies for interrupting. It looks to me that there's been an acceleration, which is great in rent like-for-like in Germany. H1, you talked about a 6 months like-for-like growth of sort of just over 2, it was 2.4%. And now if you're talking about 8%, then that's normally annualized 2.4%. Is that right? Has something materially changed? Or is that just indexation benefits? What's going on?

Well, first thing is that we're presenting those figures on a constant currency basis. So at the beginning of the year, the exchange rate was $1.18, but the exit is $1.14. So 1 of the reasons why you see bracketed that 7.7% is because the group comes down from 8.1% to 7.7% on a constant currency basis. If you then look at the mix of that, there is a difference between Germany and the U.K. The growth in terms of rates has been stronger in the U.K. than it has in Germany. But it is still being strong in Germany. It is still more than doubled in the second half. And the reason for that is, I think it probably took us about 6 months, either first half of the year to really start to get our processes right in terms of using the platform to more effectively capture inflation. I say capture inflation because we don't talk to our tenants about inflation. We sell in a different way. But changing the way we sell probably took about 6 months to bet itself in. So you're only just now beginning to see the real effect and the real power of the platform in terms of the pricing power within the market that we can really extract. And whilst I'm very cautious of what happens as inflation comes off, because everyone is worried about inflation kicking in. My biggest fear is when inflation starts to come down aggressively, how you deal with customers at that point. But if things continue as they are at the moment, I think you will see that momentum to continue for some time.

Fantastic. Well done. And this might seem a little odd to say this on a public forum. Just to say, I have no interest in you and Sirius, [indiscernible] or anyone else, anything less [indiscernible] for anyone who's listening that I have no reason to think you are doing that, but I'm obviously referencing what's happened elsewhere in the market that were well done and looking forward to more good things from Sirius in the years to come.

And Romney, can I just follow up on that? Because as a buyer of Sirius shares in November '21 at $1.41 not only do I have a personal interest in making sure this vehicle continues to go on and to, how can I put it, recoup the value that it had back in '21. But I also look forward to many years of producing these kind of results and returning double digits back to shareholders.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. Stay safe. You may now disconnect.