Sirius Real Estate

Company profile

Sirius describes itself as "the leading operator of branded business parks providing flexible workspace to the German SME market."

The company raised €327.8M in its IPO in May 2007. The proceeds were used to aquire flexible workspace in Germany. From the start assets were managed externally by Dawnay, Day Sirius Real Estate Asset Management Limited:

• 0.5% of gross assets (0.6% 500M-1B)
• performance fee of 20% above 10% hurdle rate
• 4% of rental income
• 1% of project costs of development

In January 2012 the company internalized the asset management by purchasing Sirius Facilities GmbH ("Facilities") and other assets for a total consideration of  €5.1M in shares and cash.

Share Capital 

The share capital has evolved as follows:

date	with voting rights	treasury	total shares	issue price
3/31/2012	317,523,176	10,276,824	327,800,000	-
3/31/2013	317,578,176	10,221,824	327,800,000	-
8/6/2013	348,530,547	10,221,824	358,752,371	0.21
9/30/2013	349,750,547	9,001,824	358,752,371	-
10/2/2013	351,233,640	7,518,731	358,752,371	management remuneration
12/9/2013	517,900,307	7,518,731	525,419,038	0.24
12/9/2013	518,900,307	6,518,731	525,419,038	management remuneration

The shares issued with an discount of 6.7% to the then prevailing price in Agust, 2013 @0.21 were not being offered to Shareholders on a pre-emptive basis because the Board concluded "that it is not in the best interests of the Company to make such a pre-emptive offer due to the time and cost involved and the necessity to complete the issue of the Bond in a timely manner."

The shares of the second capital increase in Demcember, 2013 @0.24, representing a discount of 4.0% to the then prevailing share price were not being offered to Shareholders on a pre-emptive basis. "The Directors, excluding Wessel Hamman [advisor to the Karoo Investment Fund], a non-executive director of the Company, having consulted Peel Hunt [who placed 143,441,492 shares], consider the participation in the Placing by the Karoo Investment Fund to be fair and reasonable as far as shareholders are concerned." Karoo Investment Fund subscribed for 41,598,661 new shares.  The 23,225,175 new shares, not placed by Peel Hunt, "have been conditionally subscribed for pursuant to subscription agreements made directly with the Company (the "Subscription")." Management has participated in the capital increase. "Robert Sinclair, Chairman of the Company, James Peggie, a non-executive director of the Company, Andrew Coombs, CEO of Sirius Facilities and Alistair Marks, CFO of Sirius Facilities have each agreed to subscribe 333,333, 281,250, 270,000 and 62,500 New Shares respectively."

This seems to be a pattern:
On 22 March 2013, the Company issued €5M convertible Loan Notes due 2018 at par to Karoo Investment Fund S.C.A. SICAV-SIF and Karoo Investment Fund II S.C.A. SICAV-SIF, then 24.96% shareholders in Sirius. Coupon rate is 5% p.a. and conversion price is 0.24 from 21 March 2014. This wasn't offered to normal shareholders either. In my opinion the terms were quite advantageous for Karoo with guaranteed interest payments and nice optionality from rising share price. In the end this will propably add another 5/0.24=20.8M shares.

Sirius does only provide a list of major shareholders dated 26/08/2013. My best guess of the current shareholders is as follows:

12/9/2013	treasury shares	1.24%	6,518,731
9/6/2013	Taube Hodson Stonex Partners LLP	3.63%	19,069,100
1/3/2014	Vik Sharma, F&C Asset Management plc	4.94%	25,946,613
12/4/2013	Principle Capital Advisors Limited	5.72%	30,057,506
1/21/2014	PREMIER FUND MANAGERS LIMITED	6.07%	31,912,187
12/9/2013	Clearance Capital LLP Karoo Investment Fund SCA SICAV-SIF	24.27%	127,501,137
	free float	54.13%	284,413,764
	total	100.00%	525,419,038

Weiss has reduced its stake from 13.23% in August, 2013 to under 3%.

Debt restructuring

  
The debt has been reduced over the last reporting periods.

new debt facility	interest	maturity	after report date	30.09.2013
Macquarie Bank Limited	6%+Euribor	January 2017	32.5M	0
paid down
ABN Amro (RBS)	floating	November 2013	0	41M
Berlin Hyp AG	floating	March 2014	135.5M	149M

The Berlin Hyp facility is to be refinanced with a new 115M facility in the near future. All in all recent activities have removed uncertainty over short‑term debt maturities and will enable the company to pay a dividend in the near future.

Capital Allocation for the near future

The proceeds of the sales of non-core property and the balance of the equity fund raise not used for paying down debt or associated costs will be allocated into "accretive capital expenditure programmes as well as attractive investment opportunities". The Company expects to have approximately €17.5M for this purpose according to the latest report.

There seem to be 15-4.2=10.8M left for sale, although  assets held for sale as of 30.09.2013 had a book value of 7.7M.

sales after report 30.09.2013	amount [M]	date
mixed-use site Cottbus	0.3	early 2014
non-income land Düsseldorf	4.2	29.11.2013
2 land sales	0.4	early 2014
sum	4.9
2 non-core property, 1 land	~10.8	for sale
sum	15.7

 Two further non-core properties and one land package are being actively marketed for sale. The value of the non-core properties and land packages which remain for sale and the land package sold on 29 November 2013 [4.2M] is approximately €15M.

The company will pay down debt further, dispose of the left non-core properties und reinvest in their portfolio. "Following the refinancing we are planning on increasing the capex spend to €5M per year to take advantage of highly attractive investment opportunities in the existing portfolio, as the Company has under-invested in its estate over the last few years due to capital constraints."

Property

	2011	2012	2013
Gross annualised rent restated	39.7	40.3	40.8
Average rent per sqm restated	€ 4.24	€ 4.36	€ 4.44

Gross rent and average rent have been increasing over the past years.

core portfolio	30.09.2013	31.03.2013
rental income annualised	40.8
property value	434.26	426.21
gross rental yield	9.40%	9.70%
value per sqm	425	417

The gross rental yield has fallen due to a revaluation uplift of the portfolio. 9.4% seems high at the first glance, but properties are not situated in prime locations.

The investment portfolio's value has decreased due to disposals and revaluation. The downward revaluation trend seems to have stopped. The average rent per sqm for new lettings was €5.08 whereas average rent of moveouts was €4.46. Occupancy has been kept steady near over the last years near 75% as of September, 2013.

Valuation

weight		after equity issue	30.09.2013	31.03.2013
1	Borrowings	272,209	272,209	289,390
1	Financial Derivative Liabilities	116	116	197
1	minority interest book	2 3	23	17
1	accrued interest and expenses	8,661	8,661	8,108
1	Cash/Marketable Securities	58,251	18,251	16,718
sum		222,758	262,758	280,994
	Current/Non-Current/Property	434,260	434,260	440,020
	LTV	51.30%	60.51%	63.86%

After the latest equity issue LTV looks sustainable at 51%, but was this dilutive equity issue really necessary to further reduce LTV from 60.5%?

Cash/Marketable Securities	58,251	18,251	16,718
Current/Non-Current/Property	434,260	434,260	440,020
Borrowings	272,209	272,209	289,390
Financial Derivative Liabilities	116	116	197
minority interest book	23	23	17
accrued interest and expenses	8,661	8,661	8,108
NAV	211,502	171,502	159,026
Deferred tax liabilities	3,172	3,172	2,636
NAV II	214,674	174,674	161,662
shares with voting rights	518,900,307	349,750,547	317,578,176
NAV per share	€ 0.41	€ 0.49	€ 0.50
NAV II per share	€ 0.41	€ 0.50	€ 0.51
P/NAV @0.29 share price	0.71
P/NAV II @0.29 share price	0.70

Equity issues have decreased NAV. The property value is supported by a healthy gross yield of 9.4%. Due to rising share price the discount to NAV has narrowed:

 Mcap at the most current share price of 0.285 is just 148M and liquidity is low.

The P&L looks as follows:

	six month 9/30/2013	six month 9/30/2012	year to 3/31/2013
Rental income	23,626	23,886	46,115
Direct costs	-816	-8,883	-16,889
Net rental income	15,466	15,003	29,226
Surplus/(deficit) on revaluation of investment properties	5,215	-7,867	-35,776
Loss on disposal of properties	-336	-719	-1,201
Administrative expenses	-2,222	-1,641	-4,684
Other operating expenses	-1,058	-119	-2,411
Operating profit/(loss)	17,065	3,586	-14,846
Finance income	41	15	25
Finance expense	-6,182	-8,480	-14,998
Change in fair value of derivative financial instruments	81	-660	350
Profit/(loss) before tax	11,005	-5,539	-29,469
Taxation	-716	-1,550	-783
Profit/(loss) for the period	10,289	-7,089	-30,252
Profit/(loss) attributable to:
Owners of the Company	10,283	-7,082	-30,227
Non-controlling interest	6	-7	-25
Profit/(loss) for the period	10,289	-7,089	-30,252

Management expects to see a further reduction in overheads for the full year to 31 March 2014 of €0.5M compared to the previous year, as the overhead cost base is optimised further.

	six month 9/30/2013	six month 9/30/2012	year to 3/31/2013
Profit/(loss) before tax	11,005	-5,539	-29,469
Surplus/(deficit) on revaluation of investment properties	5,215	-7,867	-35,776
Loss on disposal of properties	-336	-719	-1,201
Profit before revaluation, disposal and tax	6,126	3,047	7,508
reduction in overhead	250	0	0
surrender premium	1,700	1,000	1,000
Change in fair value of derivative financial instruments	81	-660	350
normalised profit before tax	4,595	2,707	6,158
annualised	9,190	5,414	6,158
tax @15.825%	1,454	857	975
net profit	7,736	4,557	5,183

In contrast to management's opinion, I don't think the surrender premium is recurring, which could make my estimate too conservative. The profitablity of the company has improved and the newly issued 40M of equity did not have an effect yet. If you substract 40M from the mcap of 148M one gets 108M. Divided by the normalised PBT of 9.2M results in 11.7 times PBT or a PE of 14 ex new cash.  Factoring in the positive trend, this is not expensive at all. Some qualitative remarks:

• Management's attention can now be focused on the operation after completion of refinancing, asset rotations and equity issues.
• Uncertainty regarding short maturity of debt is mostly resolved.
• The Groups asset management for external parties with currently three contracts may provide some upside with minimal capital outlay.
• Moveouts were relett at higher rates on short notice, showing healthy demand.
• Management claims to have completed some new projects successfully in the last period with initial income returns significantly in excessof 20%, which bodes well for future capex.

Conclusion

Sirius Real Estate is not extraordinarily cheap compared to current numbers. I think Sirius trades around its steady state value in a going concern scenario. Too expensive on PE, but too cheap on P/NAV. If it were to liquidate orderly some value could be realised from current 0.7 P/NAV, but there is no intention to do so.
On the other hand trajectory of operations point to some upside in the future. Although I think it was stupid to raise equity to gain the ability to pay a dividend in the future, as stated by management. As long as intrinsic value is growing, I don't need a dividend. NAV has fallen and shareholders haven been diluted, but I think Sirius is at an inflection point.  I will hold on to my shares for now, but I have to admit my cost basis is lower than current prices. [Author is long Sirius Real Estate].

Disclaimer: This real estate companies are not in my portfolio to outperform the market, but to provide a positive and attractive total return. Alltogether they are under 10% of the total portfolio.

Links
http://www.sirius-real-estate.com
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