SIF Folio: Sirius Real Estate Could Be Cheap After German Lockdown

24th Mar '20 by Roland Head

8 comments 3372 reads

The carnage is continuing in the markets, but I’m starting to wonder if the FTSE 100 is building a base at around 5,000. On a monthly chart, the last time the index was this oversold was in 2009. Prior to that it was 2002.

We will see. In any case, I plan to continue buying shares for the SIF folio as long as suitable candidates are available.

Fortunately, my SIF stock screen is continuing to provide new shares for me to consider. As I discussed last week, the SIF Folio’s sizeable cash balance means that I’m able to take advantage of what I believe are attractive opportunities.

I’ll take another look at the performance of the portfolio in my usual month-end review next week. The format of this review might be slightly different to usual - watch this space.

This week I’m going to look at German commercial property landlord Sirius Real Estate. Shares in this firm have tanked after a country-wide ban came into force on Sunday, preventing social gatherings of more than two people.

Sirius Real Estate (LON: SRE)

News of Germany’s new social distancing restrictions seem to have had a big impact on German business park landlord Sirius Real Estate (LON: SRE). The FTSE 250 property firm’s share price fell by around 20% on Monday, taking its year-to-date decline to nearly 50%:

Sirius Real Estate has already been in the SIF folio on two previous occasions, in 2017 (+29%) and 2018/19 (0%). I’ve admired this group’s progress, but I did feel that its valuation had become quite rich towards the end of last year.

The stock has now made its third appearance in my screening results, so it’s time for a fresh look. Stockopedia currently ranks Sirius as a Super Stock with a StockRank of 95:

I imagine that many of Sirius’s tenants will now have suspended their operations or switched to home working. Although I believe things will return to normal, It’s not possible to know when this will happen or what the wider economic backdrop might be.

As a result, I think we…

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LongValue

24th Mar '20

The substantial fall in price since the start of the year makes Sirius an attractive stock - it’s also one that I have held in the past. Its broad strategy is to buy commercial real estate at 50% of its replacement cost and then to invest to modestly increase rents. Its focus is on light industrial rather than office space.

The one simple issue I have is this. To some degree, it’s a play on the German economy. And that is very export-orientated. To its credit, Sirius has avoided letting to the mainstream German car sector. But it’s unclear just how exposed it is to the export sector. Around that, we are living in extraordinary times and the German government may take extraordinary action that could adversely impact it.

The company appears well managed which probably goes some way to explain why AXA has gone into partnership with it. While it’s not over-geared (Stockopedia gives it an interest cover ratio of 14.55). But much depends on a return to business as usual. And that’s far from certain. Letting the dust settle before moving back into the stock is my preferred course of action.

FuzzyHaha

Does you analysis include say a 30% drop in property values in the next 12 months? I think there's a perception that come June CV-19 will be gone, but I can see this with us for the rest of the year. lockdown after lockdown... in which case Property values have only one way to go

Roland Head

LongValue,

Thanks for your comments and the extra colour on Sirius Real Estate (LON:SRE).

You may be right to take a more considered approach, I agree that the German economy isn't without risk. We are certainly living in interesting times, although in general I would expect the German government to take measures to protect the SME sector.

Regards,
Roland

Hi phillirp,

I believe the current discount to book value provides some margins of safety for Sirius Real Estate (LON:SRE) shareholders. This discount was 30% at the time of writing, although it's now a little smaller.

I recognise that the outlook for the next 6-12 months does remain uncertain. But as a value investor by nature, I prefer to buy cheap during a crash than pay more for an assured rosy outlook. We'll have to see how well this approach works for me this time round!

Regards,
Roland

Meldrew

CV-19 is likely to be rampaging a round the world for some time yet, causing more havoc with global economies. It is likely to carry on spreading until it has either run out of new hosts or it has been conquered by a vaccination. In my humble opinion, it makes the rebound this week something to be viewed with mistrust.

I am hanging onto my cash for the moment.

25th Mar '20

Update 25 March: Sirius Real Estate (LON:SRE) has now published a COVID-19 update.

https://www.stockopedia.com/sh...

It's a fairly reassuring update, in my view, although it's too soon to be certain of the impact COVID-19 will have on the group's tenants.

The update highlights the broad mix of property types operated by the group: "conventional office, flexible office, manufacturing, storage and self-storage. " This results in a correspondingly broad mix of tenants, including some public sector agencies (7% of rent roll).

Current trading has not yet been affected by missed rental payments, but there has been a 50% drop in new enquiries. This is expected to lead to a 1% reduction in underlying occupancy, assuming the disruption continues until the end of May (I think we can be certain of this, at least).

The balance sheet situation shows €90m of uncommitted cash plus nearly €50m in undrawn facilities and disposal proceeds due imminently. This looks comfortable to me for at least six months, even if rental payments are cut.

There was no mention of the dividend, suggesting that a cut is not yet seen as necessary.

I remain comfortable with this pick, based on the information available at the moment.

Roland

Disclosure: I hold Sirius Real Estate

26th Mar '20

Meldrew,

I agree that this week's rebound seems too much, too soon. It's making me nervous!

FREng

14th May '20

Very positive update today. Dividend confirmed, enquiries ahead of last year, 98% rent collected. 66p to buy. I'm adding.

SIF Folio: Sirius Real Estate could be cheap after German lockdown

Sirius Real Estate (LON: SRE)

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Roland Head

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