From nearly running out of cash in 2010, Sirius Real Estate is now a near £1 billion real estate company focused on Germany and the UK.
In Germany, where the London and Johannesburg-listed investor began life, the group owns 70 business parks, comprising 1.8 million square metres of lettable space. In addition, it manages one, and holds a 35% interest in seven more through its Titanium joint venture with AXA IM Alts. The value of owned property in Germany at 31 March 2023 was €1.7 billion.
In the UK the group operates 70 sites, comprising 4.2 million square feet of lettable space, generating £48.5 million of rent a year. Its UK sites operate under the BizSpace brand and were bought in November 2021. BizSpace sites comprise light industrial, workshop, studio and out of town office units offering a blend of flexible agreements and longer-term leases.
CoStar News asked chief executive Andrew Coombs about lessons learned in both countries during the past 13 years at the helm.
When you took over Sirius in 2010 the business was running out of cash, now it is valued at nearly £1 billion. What brought you to Sirius in the first place? What is the history of the company and what was the opportunity?
Sirius was formed by the Oppenheimer family in partnership with Dawnay Day in 2007 and then listed on AIM in 2008. By January 2010 the company was struggling to deliver the fundamentals of the planned business model and it was subsequently losing its customers and bleeding cash. However the concept upon which the company is based has always had huge potential, being based on under-valued high yielding secondary industrial stock on the edge of towns and cities that can be repositioned as multitenanted assets with real diversity of income.
The key was always in the execution, ie the development of a highly effective operational platform and that is the opportunity that the current management team have been able to develop and deliver. We have been tested by COVID, the war in Ukraine, the gas crisis and now increasing interest rates and the current economic turmoil and this now is a great opportunity to prove the strength of Sirius’s operating cash flows.
Talk us through what your initial job at the company needed to be. What was the financial position at the time, and the main problems?
Looking back, I got involved at a really interesting point, because the company was literally running out of cash and about to go out of business. Therefore you had to do something because if you did nothing the outcome would be terminal and strangely enough that can be quite empowering for leaders who really want to make a difference. Our cash runway was about six weeks to point of implosion, so it was quite a serious situation and the point that struck me was that out of a workforce of about 150 people less than 10% were focused on maintaining and increasing our top-line revenues.
So one of the first things we did was slim down by about a third and increase the number of people selling to existing and prospective customers from 15 to 50. As you can imagine this was an enormous change but the impact was also instantaneous and it gave the company that initial “proof of life” that not only extended the six weeks but also showed investors that active management of the portfolio could really make a difference.
By the end of 2011 we had really started to get some traction in terms of developing a cohesive and effective operational platform and this was one of the things that enabled Sirius Real Estate to invest in the internalisation of what was prior to January 2012 an external operating platform. Once we got past internalisation we were able to start recycling property and we have not really looked back since, although I must admit decision-making today is more stressful because having built something of real value the pressure is always there not to make a mistake and mess it up, whereas back in 2010 doing anything was better than doing nothing.
You have said that in a way you ended up in the role because few else wanted it at the time. Did that liberate you to be more radical?
One hundred percent. Many of our advisers used to refer to me as “unconventional” which was probably quite a polite way of expressing their view that we were extremely radical and we questioned everything. Looking back, we smashed a lot of paradigms, not because we were super smart but more because we just refused to accept the typical norms, we constantly questioned why things had to be done in a certain way. So we were the first in the industry to recover a higher percentage of our service charge costs than our occupancy, we were the first company to use the fast-track listing process to dual list on the Johannesburg Stock Exchange and we continue to be one of the few companies that maintain more than one primary listing. We refused to accept that moving to corporate debt in 2021 would mean our cost of interest must go up, we were constantly trying to do things differently and always challenging the norm and we had really good advisers who were patient and professional enough to support us in those challenges.
The first step was to prove the company was economically viable. How was this achieved?
That was all about the work we did in 2010 and 2011 to ensure the operational platform was more customer-facing and to focus people on the importance of building and growing key revenue streams. So just one small example would be car parking. In 2010 it was free, today we raise over €6.5 million from car parking, so this is a revenue stream that at one time didn’t exist and today contributes more than 5% to our funds from operations. Another good example would be forwarding customers’ post. This is our most profitable revenue stream and around €1 million of our FFO comes from providing this service.
You raised capital in 2014 and then listed in South Africa in a dual listing. What was the strategic reason for this?
The reality was we needed money and our share price was over 50% discounted compared to our net asset value. For that reason most London institutions viewed Sirius as pretty much uninvestable. We, of course, saw ourselves as a deeply discounted recovery story and investors in South Africa really bought into that. In 2014 we listed on the JSE at just under 5 rand, today the JSE price is around 20 rand and in between times shareholders in South Africa have been rewarded with 18 consecutive increasing dividend payments, so their judgement in backing the recovery story has been proved to be right and I am delighted that South Africans have done well from Sirius.
What have been the most important transactions and moves in terms of building the German business?
Firstly the discipline of recycling capital. This is so important to the business model for so many different reasons, and of course the establishment of the Titanium Joint venture with AXA IM Alts in 2019 was a key milestone. But I often think about those first two acquisitions back in early 2015, namely Potsdam and Mahlsdorf on the edge of Berlin. We used the €40 million of capital that we raised in 2014 to finance these and even in today’s market these assets combined are valued at something approaching €100 million. At the time we knew they were good acquisitions but only in the course of time have we come to realise just how good they were.
You moved into UK markets with the acquisition of flexible industrial platform Bizspace. Talk us through this transaction.
There are so many angles and reasons why diversification into the UK made sense for Sirius. Strategically, post-Brexit a foot in both camps made a lot of sense, however the shortage of industrial space in the UK together with the increased tenant demand post Brexit – due to trade friction and difficulty of getting goods from Europe to UK, thereby further driving the demand for UK industrial – added to this. Then from a group perspective BizSpace added 20% on to the group’s FFO upon acquisition (this has since grown to 25% under ownership) and the purchase was supported by a second €300 million corporate bond in November 2021 as well as a capital raise at over 40% premium to NAV.
So not only did the UK market make sense, the transaction enabled the group to bulk up at a time when Sirius could access both debt and equity on incredibly good terms. Looking back knowing what we know now, I am so pleased that we expanded the size of the group because today, unlike prior to 2021, we are truly cash flow break even including the group’s capex spend. And that means if we needed to batten down the hatches and sit still for three years without taking on any further debt or equity we could do so and we would also be able to grow organically throughout that period. In other words, today we can operate and grow without any further capital and that is why the €100 million FFO goal was so important.
What lessons have you learned from the tough battle proving the business model that you have taken forward now and build into the company?
Firstly no plan ever survives reality. Not only do you need a primary course of action, you also need to know what you will do when that fails and then you need a third course of action. Never ever depend on one single plan because business is never that predictable. Keep going through the “what if?” scenarios. They can be your strengths if you only work them out early enough.
Important has been the financial structuring of the company. Could you explain what you have sought to do here?
Firstly make sure you have multiple different sources of capital, debt and equity; you can never have too many sources of capital. Secondly seek as much alignment as possible both internally and externally, and finally build and continue to develop a strong team of people that you can empower to execute your plans and when you find them get them to own shares in the company and work in partnership with them.
Sirius borrows in Europe to spend in the UK. Is this a financial advantage for the business?
Well, it could be and only time will tell. Personally I think we will see the UK decouple more and more from the cycles we see Europe going through and I think this will result in significantly different costs of debt in UK versus Europe, so European corporates that can access unsecured debt could be at a real advantage, but let’s see.
What are are you expecting from central banks this year and what would you like to see to help real estate markets in Europe and the UK?
I think we have been living in an unsustainable interest rate environment for the past 15 years. We are currently witnessing a return to normal, and I would guess normal is somewhere close to maybe 4% in Europe and just over 5% in the UK - I would like to see us get there as soon as possible and the quicker the banks can achieve this the better in my opinion. Businesses need to know what the cost of lending is going to look like in the future and once businesses and markets understand that we can concentrate on models for growth. Uncertainty around interest rates, whilst at times it is necessary, is very unhelpful to people trying to run businesses and help grow an economy.
What are the next steps for Sirius?
Growth. That’s why we are in business, to grow our FFO and provide increasing dividends to our shareholders. Right now the emphasis is on recycling capital, however when the market conditions are right we will look for more meaningful ways to grow. That could be through the Titanium joint venture or via other sources of capital, but our mission continues to be one of growth. We recently broke through the €100 million FFO barrier and we are now focused on the next phase of our journey to €150 million FFO, so please watch this space.