Sirius Real Estate Regulatory News (SRE)

1 Dec 2008 07:00

1 December 2008

Sirius Real Estate Limited

("Sirius" or "the Group")

Interim Results

For the six months ended 30 September 2008

Financial highlights

Adjusted NAV per share 93.8c1 (95.8c as at 31 March 2008)

Property assets were revalued at €519.1m (30 September 2008). This generated a revaluation surplus of €3.9m excluding acquisition costs and capital expenditure 

Adjusted profit after tax attributable to equity holders of €3.6m2

Adjusted EPS of 1.2c2 per share

LTV across the portfolio remains modest at 53% (30 September 2008)

Dividend suspended to allow the continuation of the refurbishment programme where the Group sees strong returns, while keeping LTVs at modest levels

Operating highlights

Acquired nine properties at a net initial yield of 8% and occupancy of 91%

Signed new leases (excluding renewals) on 30,318 sqm 

Signed four new development deals adding 2,665 sqm at a return on cost of 13.3%  

Post period end, changed name to Sirius Real Estate Limited

1 Excluding related deferred tax and change in fair value on derivative financial instruments.

2 Excluding revaluation, related deferred tax and change in fair value on derivative financial instruments.

Dick Kingston, Chairman of Sirius Real Estate, said: "Whilst property companies are currently operating in very challenging market conditions, Sirius remains well positioned. Tenant demand for flexible workspace in Germany is good and the benefits of the Sirius 'transformation' of the sites into vibrant branded business parks is evidenced by the higher rental levels being achieved. The Company's financial position is comparatively robust, with an overall loan to value ratio of 53%, and the Board is focused on cashflow and preserving equity."

A copy of the presentation to investors will be available on the Group's website at www.sirius-real-estate.com.

Enquiries:

Principle Capital Sirius Real Estate Asset Management Limited

Kevin Oppenheim, CEO 020 7861 0550

JPMorgan Cazenove

Robert Fowlds 020 7588 2828

Bronson Albery

Cardew Group

Tim Robertson 020 7930 0777  

Shan Shan Willenbrock

Catherine Maitland 

Principle Capital Advisors Ltd

Anne Dalen 020 7240 3222

Chairman's statement

I am pleased to announce the Group's Interim Results for the six months ended 30 September 2008. In what has been and continues to be a period of global economic uncertainty and turbulence, demand from the SME sector in Germany for quality space at affordable rates, as provided by Sirius, remains positive. Importantly, the benefits of upgrading and transforming sites under the Sirius brand are beginning to come through in higher rental rates being achieved on new lettings at the refurbished sites. 

During the period the Group acquired nine properties plus an additional building at our Nabern site for a total consideration of €139.7m, with a blended net initial yield of 8%. Including these acquisitions the Group has now acquired 38 properties across Germany since IPO; the combined lettable area of the portfolio totals 1.1m sqm, and there is a further 80,000 sqm that can be developed into lettable space on the surplus land within the portfolio.

The Sirius management team has given careful consideration to how the Group should operate in this downturn. While Sirius is in a good position, as evidenced by the NAV performance, uplift in rents and an overall LTV of 53%, we are adopting a cautious approach to ensure we retain the strength of our financial position going forward.

Results 

Gross rental income for the period was €19.1m. Excluding property revaluations, related deferred tax and fair value adjustments for financial derivatives, profit after tax for the period was €3.6m. As at 30 September 2008, the portfolio of 38 properties had an annualised gross rent roll of €42m and total lettable area of circa 1.1m sqm. Occupancy was at 77%, leaving an estimated rental value at market rate on the vacant space of circa €14m. 

The adjusted EPS, which excludes the property revaluation deficit, deferred tax and change in fair value on derivative financial instruments was 1.2c.

NAV

The portfolio has been independently valued by DTZ Zadelhoff Tie Leung GmbH ("DTZ") as at 30 September 2008 at €519.1m, which has resulted in a revaluation deficit of €10.3m. This write down includes acquisition costs on the nine new properties of €7.5m and capital expenditure incurred in the period of €6.7m. Excluding these costs, the corresponding revaluation resulted in a surplus of €3.9m an uplift of 0.8% on the last valuation and purchase price for acquisitions. This reflects the strength of the overall portfolio and the benefit of new lettings at higher rental values which more than compensates for the yield expansion, factored in by the valuers, during the period.

The portfolio including vacant space is now valued on an average net initial yield of 6.7% off an average passing rent of €4.04 per sqm. The average capital value psm is €478 and the valuation takes no account of the surplus land.

The adjusted net asset value ("NAV") per share, which excludes deferred tax and change in fair value adjustment on financial derivative instruments, was 93.8c at 30 September 2008 (95.8c at 31 March 2008).

Capital Expenditure

Since IPO we have invested €14.8m on upgrading the portfolio, and have achieved average cash returns on incremental cost of 12-30%, in addition to improving the quality and protecting the value of the portfolio. We believe there are excellent returns to be gained from continuing with the refurbishment programme, in order to drive rental growth and attract new tenants. Through this programme we expect to generate incremental cash returns of more than 20% as well as significantly increasing the value of the properties.

Dividend

Given the good uplift in rents being evidenced at our refurbished buildings and the potential returns available, we believe it is the right strategy to continue to upgrade the portfolio. In light of this, the Board has reviewed the dividend strategy. In order to sustain investment in the portfolio, whilst also keeping LTV at modest levels and ensuring that cash resources are preserved, the Board has decided to suspend dividend payments for the time being. We believe careful and profitable investment now while tenant demand remains positive will underpin future returns and dividends for shareholders. The Board will keep the dividend strategy under regular review.

Finance

During the period the Company has drawn down credit facilities totalling €179m with Berlin-Hannoversche Hypothekenbank AG and we are currently in discussions for a further facility. 

As at 30 September 2008 Sirius's borrowings excluding capitalised loan costs totalled €277.2m representing a relatively modest overall LTV of 53%. Our existing banking facilities are all currently compliant with their respective covenants although some could approach upper limits of the LTV covenants, if market values deteriorate further. However, the Company has €141m of uncharged assets which, if used as security, would provide indicative headroom on our main banking covenants to withstand a 30% reduction in property values from the September DTZ valuation. An ongoing priority will be for management to maintain close contact with its banks to ensure there is suitable headroom in each facility.

In January 2008 the Company commenced a share buy back programme and purchased 25.6m shares at an average price of 67c up to 9 July 2008. The Company does not intend to continue with the share buy back programme, as it is not considered an appropriate use of capital in the current market environment.

Principle Capital and Name Change

The financial difficulties experienced by Dawnay, Day Group in July 2008, resulted in all connections between Dawnay, Day Group and Sirius being terminated. A new partnership with Principle Capital Partners Limited ('Principle') has been formed and the Company, together with the Asset Manager, have been renamed to reflect the changes that have taken place. 

As announced on 22 September 2008 Principle acquired 48% of the issued share capital in Dawnay, Day Sirius Real Estate Asset Management Limited, now renamed Principle Capital Sirius Real Estate Asset Management Limited ("PCSREAM"), the Asset Manager of the Company. Brian Alan Myerson, Executive Chairman of the Principle Capital Group, was appointed to the SRE Board as a Non-Executive director. Brian has extensive property experience and an excellent long standing relationship with the Asset Management team, and is already making a valuable contribution to the Group.

Post the period end, and following shareholder approval at the EGM on 27 October 2008, the Company's name was changed to Sirius Real Estate Limited (AIM: SRE), and the Company's website at which information required by rule 26 of the AIM Rules is available, has been changed to .

We are pleased to have found such a strong partner so quickly, enabling us to maintain continuity across the business, and look forward to Principle's support in executing the business plan and further establishing Sirius as the leading owner and operator of branded business parks in Germany.

Asset Management 

The fundamentals of the Sirius business model remain positive, and tenant demand during and post the period has been good. While the transformation and upgrading process allows the Company to increase rents across the portfolio, the space remains excellent value, and quality space at affordable rates is proving to be very resilient in the current economic environment. In keeping with the growing needs of the portfolio the Asset Management team now comprises of 116 employees.

Solid progress has been made on the Sirius transformation process in the period. The branding of almost all sites is now completed, and we have invested €8.8m during the period on refurbishment and pre-let developments. Detailed plans have now been completed for 14 core sites and the transformation process is well underway at these sites.

The benefits of Sirius's unique business model of upgrading into quality, flexible workspace in Germany are starting to show at the refurbished buildings. New leases were signed with tenants on 30,318 sqm during the period with a further 4,639 sqm signed in October. As the business remains in the churn phase, this activity is not reflected in occupancy levels which, nevertheless, increased to 77% from 74% at 31 March 2008 mainly due to acquisitions. However, as we have replaced many less favourable leases at low rates (averaging €3.71 psm per month) for much improved leases at higher rental rates (averaging €4.83 psm per month) the portfolio average rate psm increased to €4.04 up from €3.84 at 31 March 2008. This is clear evidence that the business model is working effectively.

Six pre-let development deals have now been signed since IPO. Four were signed during the period, creating an additional 2,665 sqm of pre-let space at a net initial yield on cost of 13.3%. Developing on surplus land on a pre-let basis is a key facet of the Company's strategy, and we are in negotiations regarding a number of further development opportunities. The total initial additional annual income generated from all six development deals is in excess of €0.5m per annum.

Outlook 

Sirius is seeing continued demand for its product from the SME sector, and the strengths and resilience of the business model are being demonstrated by the higher rents being achieved on new lettings and renewals. Germany faces the same economic challenges as elsewhere and, in the current market environment, the Board feels strongly it is right to act conservatively, protect its financial position whilst maintaining the investment in upgrading and developing the portfolio in line with tenant demand.

The scope for Sirius to significantly increase the value of, and rents from, its portfolio remains unchanged. The Board looks forward to the benefits of the unique business model coming through strongly as the portfolio is upgraded.

Dick Kingston

Chairman

28 November 2008

Unaudited consolidated income statement

For the six months ended 30 September 2008

Unaudited consolidated balance sheet

As at 30 September 2008

Unaudited consolidated statement of changes in equity

For the six months ended 30 September 2008

Unaudited consolidated cash flow statement

For the six months ended 30 September 2008

Notes forming part of the financial statements

For the six months ended 30 September 2008

1. GENERAL INFORMATION

Sirius Real Estate Limited (the "Company") is a Company incorporated and domiciled in Guernsey whose shares are publicly traded on Alternative Investment Market ("AIM").

The Company changed its name from Dawnay, Day Sirius Limited at an EGM meeting on 27 October 2008.

The consolidated financial statements of Sirius Real Estate Limited comprise the Company and its subsidiaries (together referred to as the "Group"). 

The principal activity of the Group is investment in and development of commercial property to provide flexible workspace in Germany.

The Company acts as the investment holding company of the Group.

2. SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of preparation

The consolidated financial statements have been prepared on a historical cost basis, except for investment properties and derivative financial instruments that have been measured at fair value. The condensed financial statements are presented in Euros, the functional currency of the Group and all values are rounded to the nearest thousand (€000) except when otherwise indicated.

The annual financial statements of the Group for the period ended 31 March 2008 have been prepared in accordance with IFRSs as adopted by the EU ("Adopted IFRSs"). The interim set of financial statements included in this half-yearly report has been prepared in accordance with the recognition and measurement requirements of IFRSs as adopted by the EU. The interim set of financial statements has been prepared applying the accounting policies and presentation that were applied in the preparation of the Company's published consolidated financial statements for the period ended 31 March 2008. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group as at and for the period ended 31 March 2008.

(b) Basis of consolidation

The condensed financial statements comprise the financial statements of Sirius Real Estate Limited and its subsidiaries as at 30 September 2008. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.

A subsidiary is an entity controlled by the Group. They are consolidated under the acquisition method from the date the Group obtains control, and de-recognised when control ceases. All intra-group balances, transactions, income and expenses and profit and losses resulting from intra-group transactions that are recognised in assets, are eliminated in full on consolidation.

Minority interests represent the portion of profit or loss and net assets not held by the Group and are presented separately in the Consolidated income statement and within equity in the consolidated balance sheet, separately from parent shareholders' equity.

The accounting policies adopted are consistent with those followed on the preparation of the Group's annual consolidated financial statements for the period ended 31 March 2008. The following accounting policy has now been adopted for the first time as the Company did not have the financial instruments in the prior period.

Derivative financial instruments

The Group uses derivative financial instruments such as interest rate swaps to hedge its risks associated with interest rate fluctuations on its bank loans. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when fair value is positive and as liabilities when the fair value is negative.

While this is an economic hedge of its cash flow risk, the Group does not apply hedge accounting. Any change in the fair value of the derivatives is recognised immediately in the Income statement as a finance income or cost.

3. SEGMENTAL REPORTING

No segmental reporting is included in the accounts as the Group only holds investment properties in Germany and as such only has one geographical segment which is Germany and one business segment which is investment in commercial property. 

4. REVENUE

5. OPERATING (LOSS)/PROFIT 

The following items have been charged or (credited) in arriving at operating profit:

Direct costs

Administrative expenses

Other operating expenses

The Group has no full-time employees. 

6. FINANCE REVENUE AND EXPENSE

7. TAXATION

Consolidated income statement

Deferred income tax liability

A deferred tax asset of €814,000 was recognised at 30 September 2007. This gave a net charge in the Income statement of €596,000. This was reversed at 31 March 2008 as management thereafter decided not to recognise deferred tax assets in respect of revaluation losses as they may not be used to offset taxable profits elsewhere in the Group.

There are no income tax consequences for the Company in respect of payment of dividends in the period by the Company to its shareholders.

8. EARNINGS PER SHARE

The calculation of the basic, diluted and adjusted earnings per share is based on the following data:

The number of shares has been adjusted for the 8,086,824 shares held by the Group as Treasury Shares as at 31 March 2008 and the 25,576,824 shares held as at 30 September 2008.

The Directors have chosen to disclose adjusted EPS in order to provide a better indication of the Group's underlying business performance accordingly it excludes the effect of the revaluation deficit, deferred tax and the change in fair value of derivative instruments.

As there are no share options in issue, the diluted earnings per share is identical to the basic EPS.

9. NET ASSETS PER SHARE

The number of shares has been adjusted for the 8,086,824 shares held by the Group as Treasury Shares as at 31 March 2008 and the 25,576,824 shares held as at 30 September 2008.

10. INVESTMENT PROPERTIES

The fair value of the Group's investment properties at 30 September 2008 has been arrived at on the basis of a valuation carried out at that date by DTZ Zadelhoff Tie Leung GmbH, an independent valuer.

The value of each of the properties has been assessed in accordance with the RICS Valuation Standards on the basis of market value

11. CASH AND CASH EQUIVALENTS

As at 30 September 2008, €5,486,548 of cash is held in escrow accounts. Of this €5,071,286 is under control of lenders who release this to the Group upon request to be used for capital expenditure on properties. The remainder relates to deposits received from tenants totalling €415,262. Most tenant deposits are taken by way of bank guarantee.

12. INTEREST-BEARING LOANS AND BORROWINGS

The Group has pledged 28 investment properties to secure related interest-bearing debt facilities granted to the Group. The 28 properties had a combined valuation of €378,600,000.

ABN AMRO Bank N.V.

This facility had €100,951,940 drawn down, of which €1,142,503 has been amortised to date, resulting in a liability of €99,809,437 as at 30 September 2008. The facility is split into two portfolios. The interest is fixed at a weighted average interest rate of 5.53% per annum. The final repayment date of the latest drawdown is 15 October 2012. This loan is secured over 16 property assets and is subject to various covenants with which the Group has complied.

Helaba Bank

On 27 May 2008 the Group repaid both of the drawn down facilities of €23,741,123 with Helaba Bank.

Berlin-Hannoversche Hypothekenbank AG

This facility had €179,000,000 drawn down, of which €1,657,424 has been amortised to date, resulting in a net liability of €177,342,576 as 30 September 2008. The facility is split into two portfolio's; Portfolio II has an interest rate of 1.08 margin over 3 months EURIBOR fixed by a SWAP at 5.6%; and. Portfolio I is split with either an interest rate of 1.18 margin over 3 months EURIBOR fixed by a SWAP at 5.6% or a fixed rate of 5.46%. This loan is secured over twelve property assets and is subject to various covenants with which the Group has complied.

13. Financial Instruments

FAIR VALUES

Set out below is a comparison by category of carrying amounts and fair values of all the Group's financial instruments that are carried in the financial statements

At 10 June 2008 the Group entered into interest rate swap contracts designed as hedges of expected cash flows under €127,200,000 of borrowing for the Group's variable rate facility with Berlin-Hannoversche Hypothekenbank AG. The swap contracts mature at the same time as the loans in March and June 2013. These hedges were assessed to be highly effective at 30 September 2008.

The fair value of the swap has been disclosed as €42,713 as a current liability and €2,108,333 as a non current liability.

14. ISSUED SHARE CAPITAL

On 15 January 2008, the Group commenced a share buy back programme. As at 30 September 2008 the Company has bought back 25,576,824 ordinary shares with a total nominal value of nil, at a weighted average price of €0.67 per share. These shares were held as Treasury Shares

15. DIVIDENDS

The Board has proposed to temporarily suspend dividend payments to allow the continuation of the refurbishment programme where strong returns are achieved.

16. CAPITAL COMMITMENTS

As at 30 September 2008 the Group had contracted capital expenditure on existing properties of €4,770,300. These were committed but not yet provided for.

17. CONTINGENCIES

Marba Holland B.V, has a right to a carried interest. In any year Marba Holland B.V. is not entitled to any carried interest unless the Group's net asset value total return per ordinary share has increased by an amount equal to the performance hurdle applicable to that financial period. 

The performance hurdle for this period is the higher of the initial net asset value per ordinary share increased 10% per annum or 10% above the net asset value per ordinary share at 31 March 2008.

If the hurdle is achieved then Marba Holland BV will be entitled to 20% of the amount by which the performance hurdle is exceeded by the Group in respect of that financial period. The carried interest will also be payable on the occurrence of certain other events such as a take-over or liquidation of the Group.

No amount has been provided as at 30 September 2008 as the minimum hurdle rate required has not been achieved