Sirius: why price / NAV matters
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For those who bought shares in Sirius Real Estate towards the end of 2021, it’s an excellent example of bad multiples happening to good people. When it comes to property funds, you need to tread carefully whenever the share price is at a premium to the net asset value (NAV) per share.
This year, Sirius has lost over 31% of its value. It’s worth showing a chart of what happens when the market gets carried away:
What goes up, sometimes comes down.
This isn’t a reflection of the underlying business, which achieved an accounting return in the year ended March 2022 of 20%. This is a great follow-on performance after achieving 19.5% in FY21. A primarily logistics and industrial property strategy has been lucrative during the pandemic, especially as retail and especially office properties faltered in comparison.
The issue for investors is that the share price ran too far ahead of the underlying assets. The reason why NAV per share should be your anchor for a property fund is that the properties are usually carried on the balance sheet at fair value, not historical cost. The NAV per share is a reasonable indication of what the outcome for shareholders would be if all the properties were sold and all the debts were settled.
Note: this isn’t the case for US property funds that report based on US GAAP, as we examined in Simon Property Group when we analysed it in Magic Markets Premium. For funds that report under IFRS though, NAV per share is important.
Sirius clearly achieves returns that are ahead of the market average, or the level that investors could reasonably expect from a property fund. This helps to justify a premium to NAV. The issue is the extent of the premium and the price action in the chart above clearly tells the story.
Stepping away from the share price and focusing on the core business reveals that Sirius made some big moves in this period. The fund committed €200 million for acquisitions in Germany and splashed out £380 million for the acquisition of BizSpace in the UK.
Sirius issued corporate bonds of €700 million and brought down the weighted average cost of debt to 1.4%. Tread carefully though, as the loan-to-value (LTV) has jumped from 31.4% to 41.6% which is on the high side.
There’s strong like-for-like growth in rent in Germany and UK, which investors will hope can continue. This has supported a juicy increase of 16.1% in the dividend this year to €0.0441 per share. This works out to around R0.75 per share, a trailing yield of 3.6%.
Investors should note that the fund’s policy is to pay 65% of Funds From Operations as a dividend.
The NAV per share increased by 15.5% to €1.0204, or R17.13 at the exchange rate at time of writing. After closing at R20.78 the share is still trading at a premium of over 21% to the NAV.
This is a far more reasonable premium than we saw in 2021. Still, a dividend yield of 3.6% is low (which means the share price is high) and Sirius is still trading at a demanding valuation. I don’t hold a position in this stock.
