It seems increasingly likely that German business park owner Sirius Real Estate will end 2020 at the top of the JSE’s property league for the second year running.
And not just as the best of a bad bunch, either.
The SA listed property index is down 65% since it peaked at the end of 2017.
There has since been a growing divergence in the share price performance of individual counters, with a sharp reversal in fortune in many of the sector’s former market darlings.
For instance, 2017/2018 winners such as Hyprop Investments and Fortress Reit (B), UK mall owners Intu Properties and Hammerson, and Polish company EPP now count among the sector’s biggest losers.
The share prices of these stocks have shed a staggering 60%-80% in the year to date alone.
Sirius is a notable exception.
The stock, which is the JSE’s only purely German-focused property counter, was up 46% last year and continued its steady climb until late February, when it touched a record high of R18.26.
Though it slumped to a two-year low of about R9 three weeks later, just as the pandemic hit, it has since clawed back most of the March losses. That places the company as the only JSE-listed property counter, besides UK-focused Atlantic Leaf Properties, that has notched up a gain (of 4%) in the year to date.
Atlantic Leaf has risen 7.5% in the year so far, albeit seemingly on the back of a proposed buyout offer.
Sirius’s strategy is to buy mostly older, underrented industrial buildings on the outskirts of key German cities such as Munich, Berlin and Stuttgart 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 such as Siemens‚ Daimler and GKN Aerospace, while the balance comes from so-called smart space products — flexible units that offer above-market rental growth potential as they can be easily reconfigured to be let on short-term leases to small and medium-sized businesses.
Earlier this week, Sirius, under the helm of CEO Andrew Coombs and CFO Alistair Marks, announced a strong set of results.
Funds from operations (the key performance measure used by property companies in the UK and Europe) and like-for-like rental income generated by the company’s 65 business parks increased by 15.1% and 6.1% respectively for the year ended March.
Management has also made headway in further cutting its debt costs, from an average 2% to 1.5%, while dividend payouts increased by 6.3% year on year.
That bucks the general trend, as most JSE-listed property companies (local and offshore) have already cut or postponed dividends.
Sirius also appears to have shrugged off the negative impact that Covid-19 lockdowns have had on property rental collection levels across the globe. More than 98% of the company’s tenants continued to pay rent in April and May.
Coombs ascribes the still high rental collection levels to Germany emerging from Covid-19 in better shape than most other European countries.
The German government has also supported the entire business sector with three-month subsidies. "So no-one has had cash-flow issues yet," Coombs says.
He believes Germany is still the most resilient economy in Europe. "Unlike in the case of the UK and other European countries, we’re not hearing any noise on the ground about Germans worrying about losing their jobs."
However, he doesn’t expect Sirius to be completely immune from the pandemic. "Tenants may take more convincing to continue paying their rent over the next three months as the country goes back to work and has to adjust to get by without government support," he says.
He estimates that 10%-15% of tenants may ask for a payment plan of sorts within the next three months. But by year-end only 1.5%-2% of the company’s total annual rent roll is likely to have been subject to deferral, he says.
Even if this estimate turns out to be too positive, Sirius has a strong enough balance sheet with plenty of cash on hand (€100m) to withstand any potential drop in rental income.
What’s more, the €120m of additional assets that Sirius bought over the past year in key German cities has a 27% vacancy rate. These properties can be adapted and kitted out quickly to meet changing tenant demand in a post-pandemic era.
Coombs is already seeing less interest in large offices and more demand for storage and smaller, flexi office space.
Though Sirius is not cheap if one compares its dividend yield of less than 5% with the SA listed property income index’s average of 17%, the company still appears on fund managers’ stock pick lists. Stanlib senior property fund manager Nesi Chetty and Reitway Global chief investment officer Garreth Elston agree that Sirius’s investment proposition remains intact despite the stock appearing expensive at first glance. "We continue to see good value in Sirius. The stock offers investors unique rand hedge qualities and the portfolio is well diversified across geographies and tenants," says Chetty.
Elston believes Sirius still offers "solid" value at current levels of close to R17, given management’s value-add skills and dividend growth track record.
Though it’s too early to say what shifts there may be in office and industrial demand in a post-Covid economy, Elston says Sirius stands to capitalise on the potential of German corporates downscaling to cheaper offerings over the coming months.
Anas Madhi, director of Meago Asset Managers, says Sirius is a good defensive buy for SA investors concerned about the global economic recovery amid much uncertainty.
"Sirius is well placed to withstand shifts in tenant demand as Europe heads into a recession, given its wide range of products and flexible space solutions," says Madhi.
"In addition, a robust business model, coupled with a strong balance sheet and prudent cash flow management, allows for further expansion as distressed opportunities become available."
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