The global economy may be reeling, but it seems likely that Germany will emerge from the pandemic-induced recession in better shape than many other countries. That probably explains why Sirius Real Estate remains on most fund managers’ stock-pick lists despite the rand-hedge counter looking rather pricey at first glance.
The German business park owner was trading at a dividend yield of below 5% earlier this month versus the 15% average of the SA-listed property index (Sapy).
The stock, which is the JSE’s only exclusively German property company, was the best-performing real estate counter last year, with a total return of 52%. While most other property shares have been badly beaten down since the beginning of this year, despite an unexpected rebound in early June, Sirius’s share price continued its steady climb until late February, when it touched a record high of R18.36.
The stock temporarily slumped to a two-year low of about R9 three weeks later, just as the coronavirus pandemic hit the world, but has since clawed back most of its March losses. So over 12 months, Sirius is still up a respectable 40%, significantly ahead of the Sapy’s drop of about 43% over the same time.
Sirius also continues to pay a rather generous dividend — earlier this month, the company declared dividend growth of a healthy 6.3% for the year to March. That bucks the general trend as most property companies have in recent weeks either skipped or postponed dividends to help shore up stretched balance sheets.
Stanlib senior property fund manager Nesi Chetty says Sirius doesn’t have the same liquidity constraints as many of its peers and seems to have largely shrugged off the rise in rental arrears property companies across the globe have experienced following Covid-19 lockdowns. Chetty refers to Sirius’s retention of its rent collection level of close to 99% in April and May. He ascribes this to Germany emerging from Covid-19 in better shape than most other European countries following extensive government support for its business sector.
Chetty also likes management’s proactive asset management approach: its strategy is to buy mostly older, underrented industrial buildings on the outskirts of key German cities and to redevelop the properties into a mix of office, warehouse, light manufacturing and storage space.
Typically half of the company’s rentals come from secure, long-term leases with large corporations while the balance comes from so-called "smart space" products — flexible units that can easily be reconfigured to be let on short-term leases to small and medium-sized business owners.
However, Sirius won’t be completely immune to the pandemic. Sirius CEO Andrew Coombs says it’s likely that 10%-15% of tenants may ask for rent deferrals or a payment plan over the next few months now that the country has gone back to work and people have to get by without government subsidies. But he is confident that Sirius’s balance sheet is strong enough to withstand any potential drop of rental income.
Also, the vacant space in the portfolio consists mostly of "smart space", which allows management to adapt its product offering quickly to meet changing tenant demand.
Despite the share already running hard over the past 18 months, it seems it still deserves a place in property portfolios. Garreth Elston, chief investment officer of Reitway Global, says: "I believe that Sirius’s investment proposition still holds. The flexible nature of its portfolio and management’s value-add skills will be attractive to investors in a post-Covid economy."
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