Abacus Group (ABG.AX) Earnings Call Transcript & Summary

And good morning, everybody. Welcome to the FY '25 results for Abacus Group. I'm joined here today in Sydney by Evan Goodridge, CFO for Abacus Group; Kevin George, the General Manager, Commercial and Fund Manager for the group; as well as Cynthia and Chris from the Investor Relations team and some of our other financial team members. Abacus Group remains a diversified commercial REIT with investment exposure across the portfolio of office and retail assets as well as self-storage through our management and strategic stake in the Abacus Storage King business. Total assets of the group are valued at $2.6 billion as at the end of FY '25 with a weighted average cap rate of 6.77%. We were very pleased to announce for the year a distribution to investors of $0.085 per security, flat on the distribution for FY '24 despite the lower asset base. Gearing for the group sits comfortably at 34.5% within our target range and at a level we think that is appropriate for this point in the asset valuation cycle. From an office and retail sector perspective, we're seeing early signs of both capital and leasing sentiment improving with a large volume of leasing transactions undertaken in the year. Turning to the highlights for FY '25. As I said, leasing momentum is the key positive for the period, delivering a strong performance in our portfolio of commercial office assets. Office operating earnings were up 9.8% year-on-year with earnings supported by like-for-like rental growth of 4.3%, strong positive leasing spreads, positive rent reviews and higher-than-normal surrender fees for this period. Our investments in one retail center and our CBD retail flagship store in Melbourne also performed very well with like-for-like operating earnings growth of 8.8% up on FY '24, supported by rental reviews of 3.5%. And our ASK, Abacus Storage King self-storage return on investment earnings and management fees represent 2 of our major income sources for the group. We're encouraged by the strong results that ASK delivered on the 14th of August as a result that was underpinned by an irreplaceable portfolio of land-rich assets in prime suburban locations with the several structural tailwinds in the sector. Our investment management earnings from commercial fees as well as our ASK fees grew by 14% compared to the prior period, reflecting an increase in the asset values for ASK as well as the full 12 months of ASK management compared to the 11 months in FY '24 due to the timing of the destaple in August 2023. We continue to explore investment management initiatives, which Kevin will touch on later. I'll now turn over to Evan to talk about the financial metrics and capital management of the group.

Thanks, Steven, and good morning. Financial year 2025 has once again been a year of solid operational delivery for Abacus Group with diversified income streams continuing to underpin a resilient earnings profile. Over half of our operating earnings came from office with the balance collectively from retail management fees and investment returns from our 19.8% ownership in Abacus Storage King. Like-for-like operating earnings rose by 7.7% for the year with growth achieved across all segments, office, retail, self-storage and investment management. Breaking this down, office income increased by 9.8%, driven by strong leasing outcomes, particularly in our Sydney CBD holdings at 201 Elizabeth Street and 77 Castlereagh Street. The portfolio's leasing spreads remain positive and occupancy is broadly stable at 91%. Throughout the period, the group received $8.3 million in early surrender fees as 2 of our larger non-SME tenants centralized their operations. Excluding these surrender fees, period-on-period, office operating earnings still increased, up 2.8%. An important swing factor for next year's earnings will be the pace at which we lease up existing and vacant space across the portfolio, which Kevin will update you on shortly. Pleasingly, we do enter the year with solid inquiry levels and active negotiations already underway. Retail delivered like-for-like income growth of 8.8%, underpinned by CPI-linked rental growth at Myer in Melbourne and improved leasing momentum at the Oasis Shopping Center in BroadBeach. Self-storage contributed strongly with ASK delivering $16.8 million in earnings to Abacus, plus a further $18.1 million in storage-related management fees. $13 million from funds management and $5.1 million through development fees. We were also pleased to deliver a full year admin expense saving of $1 million compared to the prior period. Importantly, we have now implemented a simpler, more scalable finance system, positioning the group for annual savings of around $0.5 million from FY '26 onwards. The group's average cost of debt for FY '25 was 5.1%. With the recent RBA interest rate cuts, Abacus' finance costs appear to have peaked, and we anticipate a significant reduction in the year ahead. The group's tax expense once again remained low for the period at $1.3 million. Abacus has historically utilized carryforward revenue losses to mitigate its tax expense payable. However, these losses are now almost entirely exhausted and a more normalized run rate of $6 million to $8 million per annum in tax expense is expected moving forward. Due to this anticipated increase in tax expense, we are forecasting next year's earnings at the top of our payout ratio range. The forecast provided is subject to the continued success of our re-leasing program as well as no material deterioration in current business conditions, including the management of and our 19.8% interest in Abacus Storage King. Steven will further discuss the group's outlook and guidance later in the presentation. At year-end, our $1.5 billion office portfolio remains weighted towards A-grade assets with over 50% exposure strategically located in Sydney within close proximity to transport nodes and strong amenity offerings. Our $460 million investment in ASK remains our single largest holding, representing 18% of group assets. The group also has 16% allocated to our 2 remaining retail properties, being the Myer Building and Oasis Shopping Center as during the year, we completed the $60 million sale of Market Central at Lutwyche. We continue to adopt a disciplined approach to capital management. The group has acquisition capacity of over $230 million, and our gearing sits at 34.5%, comfortably below our target gearing ceiling of 40%. The group would need to see cap rates soften by more than 280 basis points before approaching its existing covenant limits. Abacus has recently received its first ever public credit rating, receiving an A+ rating with stable outlook from the Japan credit rating agency. With this rating, we were able to extend our existing banking facilities on competitive terms, meaning that we have no near-term refinancing requirements and remain well supported by our lenders. The external rating also provides the group the potential to access additional debt capital markets going forward. Our limited short-term capital requirements with no committed developments also provide us significant capacity. Our hedge cover sits at 80%, and we are forecasting an all-in cost of debt over the next 12 months of 4.5%. Full year valuations have been impacted by a 27 basis point expansion in cap rates, partially offset by solid income growth, resulting in an overall value decline of 4%. Since pre-COVID, our office values have now reduced by around 30% in value with our weighted average cap rate now sitting at 6.77%. While the market remains selective, leasing activity has improved, and we believe values are stabilizing. Our focus remains on delivering sustainable and diversified returns supported by a strong balance sheet and disciplined capital allocation. With that, I'll hand over to Kevin to discuss the group's operating performance and operational priorities.

Thanks, Evan, and good morning, everyone. The Abacus Group strategy continues. That is identifying, owning and managing real estate to deliver both exceptional returns for our investors and value for our customers. Moving forward, we'll continue to be a principal investor, prioritizing the office and retail sectors, where we have embedded capability, but also look to leverage our platform to invest with like-minded capital partners in those sectors. To deliver the strategy, ABG is focused on some key priorities to improve and grow earnings sustainably through the cycle. Firstly, the composition of the portfolio will continually be reviewed to ensure we are invested in assets that can outperform their peer set. As Evan mentioned earlier, we settled during the year on the sale of Market Central Lutwyche for $60 million. We remain committed to realizing a further $200 million to $300 million of noncore asset sales over the next 12 to 18 months in order to provide capacity to pursue higher returning opportunities in both office and retail as they arise. Finally, we have embarked upon several platform initiatives to improve our efficiency moving forward and increase our ability to scale profitably. The most significant being the recent consolidation of 14 operating systems to 4 with the primary platform being Yardi, which was successfully introduced throughout the business last month, and the team is transitioning well to the new ways of working. The group's office assets performed well in the period with like-for-like rent growth of 4.3%, driven by net base leasing spreads of 5.8% and average rent reviews of 3.7%. Our weighted average lease expiry of 3.6 years reflects our customer profile skew to SMEs, 60% of tenants by account who generally commit to leases in the 3-year to 5-year range. We've made a solid start to FY '26 leasing with over 50% of the current vacancy already leased or in advanced negotiations and over 60% of FY '26 expiries also in advanced negotiations or under heads of agreement. The group leased nearly 45,000 square meters of space in the period. As I mentioned previously, the strong leasing spreads of 5.8% included spreads of 7.9% on new deals. The 10% step-up in leasing in the period was driven by the reintroduction of 11 floors at 201 Elizabeth Street in the first half. These floors were previously being held for development. Incentives were higher in the period skewed by 201 Elizabeth Street with average incentives of 42% versus the balance of the portfolio, which averaged 30% on new deals. We expect incentives to moderate moving forward, particularly in Sydney and Brisbane, where vacancy rates in prime grade assets continue to tighten, and we expect that to filter through to A grade, where Abacus' Eastern Seaboard portfolio is focused. When we look at our top 5 office assets by value, we've progressed several asset strategies designed to enhance short and medium-term returns. The flex space at 99 Walker Street continues to perform well with conventional tenants utilizing it as a shared amenity. A new whole floor spec fit-out on Level 14 was completed in December '24, and we have heads of agreement on this space. Period-end occupancy for 99 Walker Street was 86.1% and will increase to over 90% with the Level 14 lease. Recent spec fit-outs and the completion of end of trip facilities have supported leasing momentum at 77 Castlereagh Street with Motorola securing the final vacancy of 658 square meters on a 6-year lease. 77 Castlereagh Street is now fully occupied. The new end of trip facility at 14 Martin Place has supported leasing momentum with flex by Abacus on Level 7 nearing 90% occupancy and all retail tenancies now committed. Period-end occupancy for 14 Martin Place was 90.1%. The recently completed lobby refresh and end of trip upgrades at 201 Elizabeth Street have also driven strong leasing outcomes at the asset with occupancy now 82.5%, up from 54.6% in FY '24. And finally, recent leasing activity at 324 Queen Street has driven high occupancy with the asset now close to fully occupied. Incentives have continued to reduce, now sitting below 30% for new deals. Turning now to our lease expiry profile. Of the 9% current vacancy, you can see on the slide, 1/3 of that is attributable to 710 Collins Street in Melbourne. The Good Sheds North, as it is known, was vacated by 2 separate Victorian government departments during the period, leasing 6,400 square meters and 3,900 square meters of space, respectively. We are well progressed on our leasing campaign for the building on an existing refurbished basis. There are a number of potentially suitable parties for the space, and we hope to report further leasing at the half year result. In our noncore portfolio, we're actively managing lease exposed to protect value and supporting our support repositioning. At 51 Allara Street Canberra, we're planning for major government lease transitions, including a short-term extension for the Department of Foreign Affairs and Trade and DQ's departure in mid-2026. At 11 Bowden Street, we're targeting lease-up of the remaining vacancy and replacing some [ ACP cladding ]. And at Camellia, we are pursuing a DA for logistics facilities and are currently preparing the site to lease its hard spend to generate short-term rental income. The retail portfolio continues to perform well. The growth in our retail operating earnings was driven by a strong step-up in rent paying occupancy during the period as well as strong turnover rent growth at Oasis. Solid rent reviews are also supporting operating earnings. Oasis highlights from the period include MAT growth of 2.7% on FY '24. And pleasingly, MAT has grown at a compound annual growth rate of 6.1% since 2019. And we continue to benefit from our 4% per annum reviews at Myer Melbourne on Bourke Street, an iconic Melbourne asset with a 6.5-year WALE and is 100% occupied. Our allocation to the self-storage sector through our 19.8% stake in ASK provides the portfolio with a very stable income stream with low CapEx and a strong earnings outlook. The group's return on investment earnings of $16.8 million in FY '25 were driven by ASK's established portfolio RevPAM growth of 4.5% year-on-year with average rents of $373 per square meter, up 4.1% on FY '24 and strong occupancy of 91.2%. In addition, as the fund manager of the $3.6 billion vehicle, Abacus earned a further $18.1 million in ASK fees, and we continue to view the self-storage sector favorably with the group enacting multiple growth initiatives throughout the year, ranging from real estate development and acquisitions to platform enhancements. Thank you. I'll now hand you back to Steven for the concluding remarks.

Thanks, Kevin and Evan for the information. It's been an exciting and transformative few years for Abacus. And looking ahead, we're confident that we're now well positioned to leverage our platform and key enablers to deliver recurring income and value creation over the medium to longer term. Our commercial portfolio continues to perform well, and the group also has a scalable platform. As Kevin mentioned, we're exploring further opportunities, including capital partnering. We remain interested as the capital market activity plays out and are busy with a host of positive growth strategies as well as our ongoing management of the ASK business. We're pleased to provide investors distribution guidance for the FY '26 year of $0.085 per security, which will be a payout ratio in the range of 85% to 95% of FFO, assuming no material decline in the current business conditions and also the management and 19.8% ownership of ASK. Many of you will be aware of the recent capital market activity regarding an offer by a major investor in consortium with one of the world's largest self-storage REITs to acquire ASK. Abacus Group is currently a 19.8% security holder of ASK and also the fund manager. Most recently, after receiving the revised proposal of $1.65 per security, the ASK Independent Board Committee elected to grant the consortium due diligence for a period of 6 weeks, which is ongoing. At this stage, we have no further information to update the market with, but we'll do so as and when new information becomes available. That ends the formal remarks of the presentation today. I now look forward with Evan and -- Kevin and the team in taking any questions that you may have or alternatively meeting with you in person in the weeks to come. I'll now hand back to the operator.

[Operator Instructions] And the first question from the audio side will come from Howard Penny with Citi.

Just a question on recycling of capital. So there's a few assets that are marked for potential recycling as well as potentially some -- the proceeds from ASK. Just looking ahead and thinking strategically on where you could reinvest that capital, are you able to share any ideas or thoughts on how you would see that being redeployed?

Yes. Thanks, Howard. The -- as I said in my piece, our focus at the moment is the office and retail sector, and that's where we're primarily looking at the moment with partners to deploy. We're open to other opportunities if we think we can -- and other sectors, if we think we can develop sufficient scale, and we are progressing some conversations on some of those as we speak. But yes, I think primary focus is office and retail in the space we're already in.

And maybe just one extra question. Just on Office insights. So we've seen that the incentives seems stable and occupancy increasing and improving. What's -- are you seeing a change from tenants at the moment into your portfolio? And any new sort of developments in the market that you're seeing in your portfolio in the office segment?

I think our general observation is that office demand has been relatively healthy. I think the work-from-home phenomena is somewhat sort of losing headlines from what's happening on the ground perspective. There's lots of headlines in Victoria about legislation on work-from-home. But I think the experience generally in the market is that I think more companies are returning more of their people more regularly. So that sort of conversation now is shifting more to the workplace growth, efficiency, productivity. And I think our view for a long time has been here that if we provide a really good cost-effective real estate infrastructure for the businesses that we're seeking to attract, that should, over time, generate good rental growth and good returns for our investors. So we're just looking to create really good value propositions in the assets we own. And the SME market, particularly, which has been relatively strong, is supporting our assets, and you've seen that in the numbers we've put up to date.

I think as well, Howard, we'd add that particularly here in Sydney, the opening of the metro stations, which is opposite 201 Elizabeth Street, short walk away from 77 Castlereagh at Martin Place and over in North Sydney have had a very positive effect on the leasing momentum at those locations, which again supports the thesis that Kevin just outlined as far as proximity to transport infrastructure is part of the value proposition that very much is driving behaviors for tenants.

Your next question will come from Solomon Zhang with JPMorgan.