Published Date: 2021-06-08 | Source: INCE|Community | Author: The Finance Ghost
If you are, you'll be pleased to learn that Sirius Real Estate Ltd has released solid results. You may also be disappointed to note that the share price didn't do much in response.
The company is focused on property in Germany, which gives South African investors a rare opportunity to buy pure-play exposure to that market without having to shift cash offshore, as Sirius is listed on the JSE.
The portfolio consists of business and industrial parks in and around Germany's main cities. There's a solid underpin here of eCommerce growth, which suits the type of properties that Sirius owns (e.g. light warehousing).
The management team is bullish on the company's prospects as the vaccine roll-out continues in Germany. If only we could say the same here in South Africa!
To keep your brain sharp, Sirius' results (and dividends) are disclosed in EUR (because the group operates in Germany) but the listings are in London and Johannesburg, so the share price is either quoted in GBP or ZAR. Be careful of this when working out a dividend yield or when working with the numbers in general.
Despite the pandemic, the fund managed to grow its dividend by 10% vs. the prior year which is exceptional. Like-for-like rent grew 5.2%, a strong performance compared to 6.1% in the prior year (which was not impacted by the pandemic).
Net asset value per share grew 14.2% to 88.31c, which translates to R14.56 per share. The current share price of R19.32 reflects a substantial premium to net asset value, which is unusual in the property space as the properties should be carried on the balance sheet at their fair values.
In other words, one would usually expect a small discount to NAV (to allow for management expenses etc.) rather than a large premium. This valuation is the likely reason for the share price trading sideways despite strong underlying earnings. Investors have chased Sirius so hard that the company has big expectations to meet with every results announcement.
The total dividend declared over the past 12 months is R0.62 per share if translated at current rates. That's a yield of only 3.2%, well below the levels usually seen in Real Estate Investment Trust (REIT) structures.
That's because Sirius is not a REIT. It's not bound by those rules regarding dividends and leverage. However, this also means that the tax works differently to most other property funds.
Large REITs typically trade on a yield around 7% and the smaller REITs trade on yields above 10% because the share price is usually at a discount to net asset value. For retail investors, that is a pre-tax yield and full income tax rates apply to REIT dividends, so SARS quickly eats up that return.
So, a 3.2% yield from Sirius as a non-REIT isn't as low as it first appears, as the usual dividend tax rules would apply (with a caveat in respect of Sirius' international nature) rather than income tax rates.
Sirius is clearly doing well and has withstood the pandemic brilliantly, but this is a textbook example of where investors need to carefully consider the current valuation as part of the investment decision.