(SRE) Sirius Real Estate

Hansteen has also completed the acquisition, notarised earlier this year, of Zeppelin Park, a 160 hectare industrial park located in western Berlin, for €11.3 million. The park contains 40,134 sq m of logistics and light industrial space in 19 buildings let to 26 tenants, with a current vacancy of approximately 17%. The passing rent is €1.7 million per annum and the target rent when fully occupied will be in the order of €2 million per annum. Around €3 million of capital expenditure cost is expected to be required to achieve the target rent.

i.e. 280 euro per square metre.

In today's half-year statement issued by TCF, a Laxey-run fund, that holds a stake in Sirius, there is the following passage (http://www.iii.co.uk/investment/detail?code=cotn:TCF.L&it=le&display=news)

"At the AGM on 6th November 2012, the shareholder representatives of both Laxey Partners and Weiss were voted off the board by three of the other main shareholders. There have been disagreements about how to proceed with the restructuring of the company and this has culminated in them not being re-elected."

My reading is that Weis and Laxey want to wind the company down as soon a possible while the other shareholders perhaps see long-term value by keeping the company alive. Any other views?

Well, actually Weiss lost 1 dir – IIRC, they also originally nominated Rolf Elgeti who remains on the board (I don’t believe he has any agreement/contract with them though – he’s simply a well-respected figure in German property).

Yes, Sirius’ disclosure re recent director departures leaves a lot to be desired… I’ve had similar questions from other readers.

I haven’t checked w/ the co, as 4 dirs makes more sense to me anyway, vs. the 9 they previously had (and they internalized property management, so there’s a full layer of management below the dirs)! There may be an innocent explanation here – large shareholders/activists may just have gracefully voted 2 dirs. off simply to reduce the size of the board. The other likely explanation, I guess, is that this represents some jostling of elbows between rival shareholders & some tit-for-tat voting? Conflicting objectives between activists/large shareholders doesn’t really concern me – it tends to lead to decisive action in the end, unless management can close the valuation gap themselves in a timely fashion.

Wexboy: At the recent AGM, the directors representing Weiss and Laxey failed to get reelected. What is your reading of this situation?

...[btw The residential focus here doesn't imply a commercial property aversion. Sure, it may be more economically sensitive than residential, but many of the positive factors I've highlighted equally apply. In fact, I've only one complaint about German commercial property - my exposure to it unfortunately limits my exposure to residential property!

I track listed commercial property companies also - but not as closely, and I've no plans to write a similar series. For me, Sirius Real Estate (SRE:LN) (a 3.3% portfolio holding) stands head & shoulders above its peers in terms of its risk vs. reward proposition. Its current property valuation & yield, occupancy rate, colossal 66% discount to NAV, plus the presence of multiple activist investors on its board/register, all offer significant operational & share price upside potential. SRE does have significant debt maturing in the next year, but its latest Net LTV of 61.3% equals the peer average & doesn't appear to present any real re-financing (or other) threat to shareholders. Fresh news of property sales would quickly push Net LTV to sub-60%, highlight the current NAV discount & attract new investor attention.]...

For links above, and my entire series on German residential property, see the Wexboy blog.

Cheers,

Wexboy

Hi B_N,

I don't see any significance here. Due to circumstance, the board had ballooned to 9 bodies - far too large! I expect they're just reverting to historical levels (4-6 directors), and trimming costs. It's a pity they weren't clearer in the press release - I know director departures can often be a cause for concern (otherwise)..!

Incidentally, none of these departing directors were related to any of the significant/activist shareholders. As I've written up before, in this instance, I see the presence of these (potential) activists/directors as reassuring & offering significant upside potential on SRE.

Cheers,

Wexboy

Could someone explain the significance of this clear out of directors, shrinking the no of directors from 9 to 6?

Cheers B_N

A major sale can be another catalyst - check out Wexboy blog for a closer look, and some (current/historical) examples, including Sirius Real Estate:

'...vi) Perhaps I’ve saved the best for last: Sirius Real Estate (SRE:LN). I currently have a 4.0% stake and, Jesus, I’d buy more hand over fist if I didn’t already have large German residential property exposure. Here’s their recent results, which were treated like a damp squib by the market.

First, a 15 mio share issuance (at market) diluted NAV – however, I’d already adjusted for this. What I didn’t expect was a lower property valuation from DTZ. What the hell?! Sirius hinted at their displeasure/disagreement, and I’d concur: Just look at bund yields, the market flight to safety, and stable/rising NAVs elsewhere in the sector… Somehow, DTZ lowered valuation to EUR 421 per sqm, based on average rent of EUR 4.21 per sqm per mth – a gross yield of 12% on rented space. This also wilfully ignores new lettings at an avg. EUR 5.24 per sqm, a full 24% higher than the in-place rent! In fact, post year-end, new lettings were at an even higher EUR 5.95 per sqm. This, and the high (but steadily reducing) vacancy rate of 22%, really highlights the huge embedded potential in SRE’s portfolio.

There’s two catalysts in play here: The first catalyst is the presence of a veritable orgy of activist investors on the register. They haven’t been publicly vocal to date – there’s no need, the 3 principal activists own 50% of SRE and now have 4 board seats! The second’s a potential major sale catalyst. This is an intended disposal programme for non-core and mature assets, and could possibly lead to a sale of a fifth or more of the portfolio. Whether this proves to be a significant step towards a full sale/liquidation remains to be seen.

At the current EUR 0.23 price, I’m mystified at SRE’s colossal 61% discount to its current (average) EUR 0.596 NAV. With listed German property companies mostly rallying across the board, Sirius’ performance has been an outlier. I’d hazard that investors abandoned SRE after getting so burnt on over-leveraged London listed German property companies (v few of which still exist). But SRE’s not over-leveraged! I peg net LTV at 61.0%. Yes, I’d avoid LTVs that exceed 55-65% at a maximum – but this is German property we’re talking about, one of the safest asset classes in Europe (or even globally) as far as I’m concerned. It’s also bang in line with the sector – last I checked, the average net LTV was 61.5%.

Sales to date (admittedly small, at EUR 10 mio odd) have been at book value, or better. If I assume Sirius can do EUR 90 mio of sales in the next year or so (even factoring in a 10% discount to book), this would produce a 52-54% net LTV with just a 0-5% dilution in NAV. This major sale, if completed, is just the catalyst the market needs to really sit up & notice Sirius’ leverage is a non-issue, and that the scale of the NAV discount is completely unwarranted. Couple this with the underlying investment exposure, and I’m happy to peg Fair Value at a 1.0 Price/Book ultimately, which offers a 159% Upside Potential vs. the current market price. And if management are slow to deliver, for any reason, you can be sure the activists will become more impatient/aggressive..!'

Thanks Wexboy. Useful analyses, and I agree being in bed with a load of sharks is strangely comforting. Cheers BN

Hi folks,

I've included a fresh look at Sirius Real Estate (complete with v exciting new development!) in my latest Catalyst article, where I look at 4 interesting companies/situations with activist investor(s) on board:

http://wexboy.wordpress.com/2012/02/16/how-about-another-catalyst-part-vii/

Cheers,

Wexboy

Sirius Real Estate - Potential re-rating ahead
Click for report
http://bit.ly/sS0Lpb
Fri, Dec 16, 2011 at 8:39 AM

Sirius Real Estate - Solid trading Click for report
Mon, Oct 24, 2011 at 10:46 AM
http://www.edisoninvestmentresearch.co.uk/researchreports/siriusrealestate241011update.pdf

The group’s first-half trading update, ahead of full interims due on 5 December, confirmed that trading in the first half was broadly in line with expectations. The core focus on increasing portfolio occupancy delivered results, with further growth to 77% by the period end, ahead of both September 2010 (73%) and end FY11 (76%). During the first half Sirius secured new tenants for 65,000 square metres (sqm) of portfolio space, a net 28,000sqm gain (ie, less 37,000sqm of tenant move outs). The equivalent figure for the first half of last year was a 13,000sqm net gain.

Sirius Real Estate holds a portfolio of large, mixed-use commercial property in Germany, which it has progressively upgraded to provide flexible workspace, small to medium-sized offices, light industrial, logistics, distribution and storage space.
Year
End Revenue
(€m) PBT
(€m) NAV/
share
(c) Disc.
to NAV
(%) EPS
(c) DPS
(c)
03/10 44.0
0.7
73.8
66
0.54
0.0
03/11 45.6
(1.0)
72.9
66
(0.61)
0.0
03/12e 46.5
2.5
73.6
66
0.74
0.0
03/13e 47.5
3.9
76.0
67
1.17
0.0
Sirius Real Estate is a research client of Edison Investment Research.

Sirius Real Estate (LON:SRE) - Realising value in FY12
Thursday, Jul 07 2011 by Edison Investment Research
http://www.stockopedia.co.uk/research/realising-value-in-fy12-58056/

http://www.edisoninvestmentresearch.co.uk/?ACT=18&ID=5336

Jul 07th 2011 - Edison Investment Research today published a report on Sirius Real Estate (SRE.L, LSE:SRE, LON:SRE) entitled "Realising Value In FY12". In summary, the report says:

FY11 was a strong year operationally, with better portfolio occupancy, revenue scale and visibility. Underlying margins also improved as a result of cost control and better recovery of site expenses from tenants. The group now moves into the third phase of its strategy; portfolio assembly and initial upgrade is complete, occupancy rates are approaching 80%, so the emphasis shifts to disposals of more mature assets to generate cash for new acquisitions and dividends. Two main issues remain for FY12. These are the refinancing of the RBS facility, which matures in October 2012, and renegotiation of the management contract, and discussions are underway on both. There is potential for SRE to prove the efficacy of its growth model this year, assisted.

Weiss asset Management have requested a further EGM, almost on the anniversary of their first EGM. The objective is the same - to oust the chairman and one other director, and replace with Weiss nominees. Can we assume they believe they have a better chance of success this time? I hope so, as the last EGM cost us about £300k. Laxey, another activist, is still a major shareholder, and I guess would support Weiss.
I will vote for the change. 18 months ago this company was torpid, and only when it came under external pressure from activist investors, did it discover a series of pretty obvious initiatives which are now bearing fruit. Previously annual reports were a collection of anecdote and boasts about the number of enquiries without change to the bottom line.
It must be reassuring that a savvy investor such as Weiss see value in the company. It is certainly true that our discount to NAV is still high. Their interest may go some way to explain SP rise in last months. Other companies in the European property field are seeing initiatives to restore NAV value to shareholders. MERE's SP has risen since the board announced that it will sell off the portfolio over 30 months.

Cheers
B_N

I don't think Edison Investment Research is a broker. I believe it often receives a fee from a listed company to cover its stock, and declares this on its research notes.
The comments in the note more or less echo the SRE RNS.

All that said SRE does now seem to be moving in the right direction, and is now more inclined to quote targets and admit to whether these are being achieved, than crow about an increase in the number of enquiries and tell a story or two about it has built a garage in the grounds of one of its properties. Increase in occupancy 30 Nov 2010 to 32 March only 1% at 76% but the trend remains upwards and they do state they believe this will rise to 80% by Sept 2010. So, probably still a buy for the patient.

Cheers B_N

Sirius Real Estate (LON:SRE) - Positive FY11 update

Tuesday, Apr 05 2011 by Edison Investment Research 0 comments


Apr 05th 2011 - Edison Investment Research

today published a report on Sirius Real Estate (SRE.L, LSE:SRE, LON:SRE) entitled "Positive FY11 Update". In summary, the report says:

Sirius confirmed that the full year result should be in line with expectations.

Portfolio occupancy was 76% at end March 2011, vs 73% six months earlier, and operating margins will have benefited from the progress of initiatives to cut costs and improve recovery of expenses from tenants.

The group’s broadly diversified – by geography and type – portfolio of business space is ideally placed to benefit from Germany’s economic recovery, which has been maintained in 2011.

http://www.stockopedia.co.uk/research/positive-fy11-update-55497/

http://www.edisoninvestmentresearch.co.uk/

Mmmmmmm .............. sounds like you know what I suspect !

Definetlly heading in the right direction - especially with all that massive II injection last week !

Elastic Band on the SP being pulled back - be ready for the "twang" !!!

Yes i am here! And with you on being in this. Got great potential and new management very well respected.

.............. if not ..... you should be !

Up 25% since 1st Sept. Pleasing to see after so long in the doldrums, but why without any news? Except for the failed attempt at boardroom changes which sounded sensible to me.

Cheers

B_N