But if people had actually read the RNS, the "dilution" is actually for fresh investment in additional assets where SRE knows there is demand for their products: they're not planning just to chuck the money in a hole in the ground or have a company Away Day to the gaming tables of Nice and Cannes. SRE believes its business model can support growth up to 1.2 billion euros, and it is just seeking to do more of what it already does. With much of its rental income already given out in dividends, it's arguably more efficient to raise the capital needed via a share placement rather than, say, take on debt from a bank.
...or is it that the market fears the dilutional effect of the new shares on the SP and is doubtful of them being able to spend the money on value-enhancing properties. [Or fears they want to boost management payout?!]
I have been a SRE holder for around 12 months and I like the target market and dividend. I bought it expecting it to be a fairly boring share. However, it has been quite volatile and it has me concerned about how it is being managed. I am concerned about this new placing that is being sold to 'invited' investors and which appears to have knocked 10% off the price today.
Does anyone have any information that might alleviate my concerns?
Agree, I think it will be a buying opportunity. As well as some pulling out, could the reasons for drop be as simple as?--
limited market for this stock, liquidity issues;
there have been comments in Germany, not least from the financial authorities, that there could be a property bubble there;
property funds are held as an income play and the European Bank is scaling back on QE.
As a medium/longer term play I think this one will come right.
A few holders are selling. However, I don't see any fundamental reason for the sell-off. On the contrary, I have been buying today. SRE is doing well, investing in enhancing its properties, and all the relevant indicators are going in the right way. Macro-environment in Germany is also helping. So, on the whole this is a buying opportunity.
People holding these shares are probably already aware, but the company is delisting from AIM and joining the Main Market in London on 12 March 2017. It will also be listed in pounds sterling rather than euros.
Read finnCap's note on SIRIUS REAL ESTATE, out this morning, by visiting https://www.research-tree.com/company/GG00B1W3VF54
"Trading Well. The groups last newsflow highlighted the income potential from rental growth, refinancing and additional asset purchases which bodes well for dividend growth, based on a 65% pay-out ratio of FFO. Progress remains inline for 2016 but good progress for 2016/2017 could result in a stronger outcome than originally anticipated ..."
I am still bullish on this despite the slightly cheeky placement that was carried out at below NAV. The benefits from the refinancing should compensate for dilution however, and the macro-environment in Germany continues to be extremely positive despite the current Greek wobbles. The company appears to make intelligent investment choices which will allow it to rent out more of its space at higher prices.
This is my biggest single investment and I think it has further to run on the restructuring story. As you say, both the rising rental values per sqm and renting out vacant space provide for considerable upside, with the downside being cushioned by its still reasonable valuation (at least compared to the company's UK-focused counterparts).
I bought in here a little while ago on the same basis. A lot of refinancing IERE and TEIF has lead me to believe that property is coming back (commercial) - which has been backed up by the valuation increases here.
They have said the property improvements they are doing is from free cash which they can do and they have property to bring on line with 75% occupancy. What also is good is rental amounts are increasing ( I realise that there is scope for this number to be manipulated) .
All in all the discount together with positive news flow in an asset class that has found its feet again has made me invest
When I was writing my last comment, the share price was at 22.50c while today it is at 34.00c. The company has managed to do better on some counts than expected and has restarted dividend payments. Its blended interest rate is below 5%, and the rental values are still going up as the company continues to renew leases. Costs are still falling, and the company is investing capital in upgrading its vacant properties. Obviously, the low finance costs were facilitated by equity raisings which result in some dilution.
However, the share price is still considerably below NAV whereby the properties are valued at a yield of just above 9%. Net rent is now at least 26 for a property portfolio worth 450m. Interest cost are 11m, and admin costs are about 5-6m. This provides a good basis for operational profitability, in addition to the expected gains from capital investment. This would leave around 9m of revenue profit before tax, corresponding to 2.25c per share. Additional income from any of the currently vacant properties (24% of the portfolio) has the potential to boost this income considerably.
All in all, given the economic background in Germany, I would say these shares have further to run.
Ive completely disposed of my remaining Sirius Real Estate (SRE:LN) holding. [I previously noted a small sale in August, reducing my portfolio stake to 2.8%]. This is a rare event in the past year, my sellings been mostly limited to top-slicing as certain stocks neared/exceeded my price target(s). Crikey, I must sound like a buy & hold investor!? Rarer still, I think its only my second disposal of an investment that clearly hasnt been working out. [Cresud (CRESY:US) was the first - a v different macro decision. Fortunately, the right decision...the stock's down nearly 25% since!]
I actually managed to avoid a loss in both instances not what youd expect from stocks that havent worked out..! Obviously, there was plenty of luck involved but Id definitely credit a good entry price as a key saving grace. Having the discipline to demand an adequate margin of safety for each purchase isnt just about increasing your potential upside it can also save your bacon when things go wrong. Lets take a closer look (using my original Sirius post for reference) & see if theres anything to learn here:
Investment Opportunity & Crisis Hedge: My investment thesis identified German property as a secular investment opportunity its cheap in absolute terms, the German economys perhaps the most resilient in Europe, and Bund yields remain incredibly supportive. I continue to believe this thesis is correct, but actual property & share price gains to date have been mostly enjoyed by the residential sector. [Check out my German property series: Parts I to V]. I also suggested German property might be a good hedge against any further unraveling of the European sovereign debt crisis. Fortunately, sentiments improved dramatically this year its interesting to see German residential share prices peak & then trade sideways/lower for much of the year, as investors migrated back into higher risk European exposure.
Diversification: I also noted I had a 4.2% portfolio stake in Deutsche Wohnen (DWNI:GR) at the time putting my total German property allocation at 8.3%. Since then, Ive sold DWNI & basically exchanged it for a larger 6.4% portfolio holding in KWG Kommunale Wohnen (BIW:GR). Ive also become that much less risk-averse (in line with the market) so now Id prefer to limit (or even marginally reduce) my overall German property exposure, in favour of other opportunities. In turn, that caused me an increasing level of discomfort with the size of my SRE holding.
Leverage: With any property company, the very first & sometimes only thing you should focus on is leverage. We all lost our heads a little pre-financial crisis, but since then I limit myself to companies with a maximum Net LTV of 60-65%. And thats an absolute limit (which I think is quite appropriate for German property) depending on the country, level of development exposure, management & so on, I might actually restrict myself to significantly lower leverage. At the time, Sirius enjoyed a 57.6% Net LTV.
Unfortunately, as of end-March, Sirius was reporting an LTV of 65.4% due to continued (negative) property revaluations, and a disappointingly small & slow level of (non-core) property sales. Admittedly, theres been some mitigation since, via subsequent property sales (see Note 12) & a recent equity & bond issuance but I certainly didnt expect SREs leverage to march steadily higher!? Quite the contrary in fact, at one stage, I anticipated ending up with a significantly larger SRE holding, predicated on the company achieving key Net LTV milestones.
Property Fundamentals: The current valuation for the core portfolio is EUR 416 per sqm. With average in-place rent at EUR 4.44 per sqm, and a current occupancy rate of 77%, that puts the portfolio on an average gross yield of 9.9%. Granted, were talking about secondary assets (edge of town/converted light industrial) here, but that valuation still seems extraordi
I have been wondering how profitable Sirius will be after all the refinancing. It has EUR 25m net rental income; expenses can be estimated to be 5m, and there will be 13m in financing costs at a blended rate of 5%, or 15.6m if one assumes 6 % (always assuming a LTV of 65%). This leaves 7m or 4.4m respectively for shareholders, or .02p respectively 0.012p per share. The good news is that the company will be in any case sustainable, but also that the company is probably adequately valued as this point.
Among the risks is their relatively short-term lease profile. However, there is considerable potential for upside:
- German property market values are going up
- SRE' rental values have been going up consistently, meaning any new leases will be bringing in more rent
- Vacancy of 23% leaves upside for additional rental income and/or property sales. This and the rising rental values may result in a net rent of perhaps 28m in a year or two, giving us revenue profit of 10m in the optimistic 5% interest rate scenario, or 2.8p per share.
- Insiders are buying shares and convertible debt in the company (but note they are getting them at a moderate discount)
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