Sirius Real Estate: Niche property still shines bright

When Sirius Real Estate quietly made its debut on the JSE just more than five years ago, the then little-known German business park owner hardly featured on institutional investor radars.

At the time, the JSE real estate sector was having something of a listings boom and property punters were spoilt for choice with about 20 other rand hedge counters to pick from.

But those that backed Sirius from the outset — mostly smaller boutique asset managers and retail investors — have been handsomely rewarded with a capital return of about 200% since December 5 2014. That’s on top of a fairly decent 5% annual euro-based dividend yield.

Of course, in more recent times Sirius’s spectacular performance has become increasingly hard to ignore. The company has started to appear more regularly on fund managers’ stock pick lists over the past 12 to 18 months. In fact, demand for Sirius shares was so strong last year that it ended 2019 as the JSE’s top-performing property stock with a stellar 52.2% total return. That compares with the SA listed property index’s dismal 2% total return over the same time.

Sirius’s share price rally continues to defy gravity. Year to date (to February 11) the counter is up another 11%. The key question for investors who don’t yet own Sirius shares is whether they have missed the boat. Or is the stock still worth buying at its current levels of about R17.50-R18.00?

Peter Clark, portfolio manager at Investec Asset Management, says Sirius certainly doesn’t look cheap relative to many SA-focused stocks on a dividend yield basis. Sirius is trading at a yield of less than 4% while most SA companies are offering between 10% and 15%.

However, Clark believes that there is still considerable potential for Sirius to notch up further share price gains, because of its large international shareholder base, which tends to compare the company with the universe of other German property offerings, most of which are more expensive than Sirius. He says that’s particularly true when comparing German real estate stocks on a funds from operations multiple basis. This is a key financial reporting metric used in Europe to measure the strength of property companies’ cash flow.

"The market has rewarded Sirius for its superior asset management and operating skills, significantly above-average earnings growth, stable income and strong balance sheet," says Clark.

Though there may have been concerns about the company’s historically high debt levels relative to its SA peers, he notes that management has made good headway to strengthen the balance sheet and reduce the company’s loan-to-value ratio to well below 40%.

Clark says SA investors like Sirius because it’s the JSE’s only pure German property play, and Germany is still widely regarded as Europe’s largest and most defensive economy. Sirius also provides a unique entry point to a niche sector of the European real estate market.

The company’s strategy is to buy mostly older, under-rented industrial and office parks on the outskirts of cities such as Berlin, Frankfurt, Stuttgart and Munich that offer significant potential for rental and value unlock through redevelopments and upgrades. In addition, the Sirius management team, led by the highly regarded duo of Andrew Coombs (CEO) and Alistair Marks (CFO), have delivered on their growth promises. They have more than doubled the value of the portfolio over the past five years — from €428m at listing in December 2014 to €1.064bn now.

The portfolio comprises 64 business parks, which typically offers a mixture of office, storage and production space. While a portion of its income is secured by long-term leases to large corporations such as Siemens‚ Daimler and GKN Aerospace, the balance consists of so-called flexible workspaces that are typically leased for shorter periods to small and medium-sized enterprises.

Garreth Elston, chief investment officer at Reitway Global, agrees that it’s not too late to buy Sirius shares. "The superb management team, scalable business model and strong German economic fundamentals have driven the company for years. And, in my opinion, should continue to do so into the future."

Elston concedes that the German economy may be slowing, which is a potential concern. "However, the federal government can pull many economic levers to stimulate the economy if it chooses to."

He believes the Sirius management team will continue to unlock value for shareholders. The company’s flexible dividend payout policy will also stand it in good stead should earnings growth slow: Sirius is not a real estate investment trust (Reit) and therefore is not compelled to pay out at more than 75% of its cash flow. Historically, the company has paid out on average 65%-75% of its funds from operations, which means it has the ability to increase its dividend payout ratios if needed. Most of the JSE’s other rand hedge property counters already pay out 100% of their earnings as dividends (or distributions). So, unlike Sirius, these counters have little room to top up payouts.

Keillen Ndlovu, head of listed property funds at Stanlib, has a less bullish outlook on Sirius. Though he believes offshore property stocks will continue to outperform their local counterparts over the next 12 to 24 months, he sees better value among other JSE-listed rand hedge counters. "In our view, the positives are fully reflected in the Sirius share price."

Ndlovu refers to the growing divergence in the dividend yields on offer from different offshore property stocks. For instance, Poland-focused EPP is now trading at a historic yield of more than 11% versus Sirius’s 3% (see graph). Similarly, Central and Eastern European mall owners Nepi Rockcastle and MAS Real Estate both offer a euro-based yield of just more than 7%.

However, Ndlovu says it’s important to again highlight Sirius’s lower payout ratio compared to its offshore peers, which allows the company to increase its dividend payouts if it wanted or needed to.

Investors should also consider each company’s dividend growth prospects.

Sirius has a stronger growth outlook than a number of its offshore peers. Anchor Stockbrokers estimate that Sirius’s dividend per share will increase by 3.1% a year over the next two years. That compares to a growth estimate of 2% or less a year for EPP, Investec Australia Property Fund, UK mall owner Hammerson and British-focused RDI Reit over the same time. MAS and Nepi Rockcastle, however, still offer a markedly higher growth outlook than most offshore counters, with annual dividend growth estimated at 8% and 5.3% respectively over the next two years.

Coombs tells IM that though the business park and flexible space sector in Germany has become more competitive, there’s no-one in that country that offers tenants the same "breadth" of products and services as Sirius.

He says the power of their business model is that they can still buy older, under-rented buildings at yields of about 8%-8.5%, redevelop and reconfigure the space and sell them at yields of 6.25%. Asked why SA investors should own Sirius shares, Coombs says the company’s track record speaks for itself. "We have delivered a total return of more than 15% a year for the past five years. So that’s the type of reliability SA investors are getting. Besides, there is still plenty of opportunity to grow the company’s portfolio." He refers to Sirius’ cash pile of €170m, which he hopes to deploy within the next six months. "So there’s still a lot of gas left in the tank."