In my most recent blog post I reflected on our latest strong set of results for the financial year ended 31 March 2022 – in which I highlighted some of the numbers that showcase our performance.
In this blog, I want to spend some time diving deeper into our approach to value creation. When we look at creating value, we start by understanding the unlevered return - in simple terms the money we can make by investing the company’s existing capital. We then consider enhancing the return on that capital by mixing the amount of capital we invest with some lending (leverage). We measure this via a metric called Loan to Value (LTV). Put simply, LTV means the ratio of debt we hold versus the value of our portfolio, and it can be used to increase the return we get on the capital we employ in a transaction.
LTV is a metric we monitor closely; we do this because at any point in the property cycle if values drop then LTV will increase, and this presents risk to the capital employed into an asset. While leverage is a great way of enhancing returns, therefore, it needs to be carefully managed because it also increases risk.
It also goes without saying that against a backdrop of ongoing macro-economic uncertainty, closely managing LTV is one of the ways we engineer resilience into the Sirius business model throughout the property cycle.
Creating value
Enhancing the value of our portfolio is something we constantly work on here at Sirius, and it’s achieved through a variety of means. Fundamental to our approach is the transformation of the sites we acquire into higher-quality assets through investment and intensive asset management. This is achieved through enhancing the existing spaces to make them more fit for tenant needs, including investments in energy efficiency, upgraded infrastructure, and more.
We look closely at the tenant mix, occupancy levels and rents at each of our sites on an ongoing basis, and the flexibility inherent to our model means we can tweak each of these with regularity to ensure we maximise value across the portfolio.
There’s more to this process than can fit within one blog, but the proof is in the numbers – we have achieved consistent rental roll growth in our German portfolio of over 5% for the past eight years during which time we have experienced a sub 2% inflationary environment, which is testament to the value we’re able to create on an ongoing basis.
Enhancing our financial profile
Another part of the puzzle is the type of debt and what taking on different types of debt allows us to achieve.
Firstly, it’s worth pointing out that the borrowing we have undertaken has been at highly favourable terms: Sirius has an average cost of debt of 1.4%, and has lengthened its weighted average term of debt to 4.3 years, which provides us a great deal of flexibility. Against the backdrop of a rapidly changing world, and although 70% of our debt is fixed for circa 5 years, we are also currently working to fix the remainder of our debt for more than 5 years and blend the total of our debt to an overall average cost of circa 2%.
This debt is, of course, highly purposeful and allows us to drive towards growth at a faster rate than would otherwise be possible, particularly in the case of corporate unsecured debt which gives us the flexibility to buy and sell assets without consulting our lender, unlike asset-backed mortgage debt that requires the lender’s permission – empowering us to acquire new sites and entire businesses, in the case of our acquisition of BizSpace in November 2021.
This acquisition is a prime example of the opportunities we can access through taking on this favourable corporate debt, as BizSpace is performing well as part of the wider Sirius group and is benefiting from its integration and from a strengthened management team.
Selective disposals
The flexibility of our debt means we’re also able to realise value across the portfolio through selective disposals, a great example of which is our recent disposal of a BizSpace site in Camberwell, London for £16m. This represented a 94% premium to the valuation at the time of Sirius’ acquisition of BizSpace, and provides us with the opportunity to recycle some of this cash into new assets with greater opportunity and still leave some of the premium to valuation as cash on the balance sheet, thereby helping to lower the net LTV.
We continuously assess assets across our entire portfolio, and will continue to seize opportunities where the disposal of assets presents the option to deploy the Sirius approach into higher-value opportunities.
Closing thoughts
We’re currently working to reduce our net LTV to below 40% and given the state of the world today we will continue to manage down net LTVs.
Overall, Sirius remains defensively positioned with a diverse mix of spaces, tenants, sites and low average rents, as well as a good number of inflation-indexed contracts, and our focus on ongoing value creation means we’re well placed to operate against a challenging macro backdrop and work with our tenants to deliver increased value throughout the current period of uncertainty.