Sirius Real Estate raises targets for sustainability, including of returns

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As it laid out the next steps towards its aim of becoming a net-zero emissions business, Sirius Real Estate Limited (LSE:SRE, JSE:SRE, OTC:SRRLF) also set out a new target to grow and sustain shareholder returns by increasing funds from operations (FFO).

During the past year the industrial parks and flexible workspace group not only expanded from its German base into the UK, but also started to implement the core elements of its new sustainability programme, as identified through an ESG assessment exercise completed in early 2022.

Having provided 100% certified green energy to over 94% of the portfolio for some years and rolling out a biodiversity strategy across the green spaces of the German portfolio that sees trees and wildflower meadows planted to encourage bees and other wildlife, this year Sirius has “started on our journey to become a net zero emissions business,” said chairman Daniel Kitchen.

The £1.3bn property company, which is a constituent of the FTSE 250 index, said it will produce its first standalone ESG (environmental, social and governance) report later in 2022.

Becoming net zero will also include expanding its implementation of the Task Force on Climate-Related Financial Disclosures (TCFD) to include additional climate change scenario analysis and portfolio physical risk assessment.

All ESG decisions will be “grounded in economic viability”, said Kitchen, with a detailed structural and emissions assessment of the portfolio currently underway to give management “the necessary information to make informed operational and financial decisions towards taking the business forward on its net zero emissions pathway”.

While emissions are heading downward, FFO is stepping up, with the expanded portfolio and rent roll in the past year to 31 March helping FFO increase 22.5% to €74.6mln.

Designed to be a more accurate figure than cashflow for real estate investment companies, FFO measures the net amount of cash and equivalents generated from regular, ongoing business activities.

With Sirius keeping the same pay-out ratio of 65% of FFO as the previous year, this jump in FFO fed through to a final dividend that was increased 19.7% to 2.37 euro cents per share, while the total dividend of 4.41c was up 16.1% year-on-year.

A new “medium/long-term” target has now been set out to double FFO to €150mln.

A previously communicated ambition to reach €100mln of FFO is already “within sight”, given the current year should see the benefit of €12mln from the acquisitions of BizSpace in the UK and €5.4mln in Germany, plus other boosts from capex investment, letting vacant space and pricing.

From there, an increase to €120mln is seen as a short hop through the execution of existing initiatives, including €4.6mln more from capex investment programmes in Germany, a €1.2mln contribution from letting vacant space in Germany, €10.7mln split fairly evenly between German and UK pricing initiatives, and €3mln from other asset management initiatives.

House broker Berenberg said with earnings momentum expected to continue, “the company’s financial profile remains defensive with an average debt maturity of 4.3 years and an average cost of debt of 1.4%, and no large expiries in the short term”.

It raised its price target to 150p from 142p and maintained a ‘buy rating.