Abacus Group (ABG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Abacus Property Group HY '21 Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Steven Sewell. Please go ahead.

Good morning, ladies and gentlemen, and welcome to the first half of FY '21 results presentation for Abacus Property Group. Thanks for joining us. We're here in Sydney, on the land of the Gadigal people of the Eora nation, and I pay my respects to their elders past, present and emerging. I'm joined on the call today by Rob Baulderstone, our CFO; and Cynthia Rouse, our Head of Corporate Comms, together with a couple of members of the finance team. And with Rob's assistance, we'll run through the presentation of the half year results for FY '21 for Abacus. After which, we'll take questions on the line or on the webcast. And we also will be available in the coming days and weeks to meet and discuss the results and our investments performance with each of you. The platform metrics. The group's portfolio are predominantly well-located commercial office and self storage assets has proved extremely resilient from an income and capital value perspective. Following the accelerated entitlement offer completed in late December, the platform now stands with very solid asset backing, lower-than-average gearing and distributions covered by FFO that is derived almost entirely from quality income-producing assets. In particular, the value of our self storage assets has seen an increase, along with strong occupancy and rental levels over the period. And whilst period-on-period, our FFO is down, we have seen strong and enduring increases from our key sector investments in office and self storage, which we'll talk through later on. This has been a 3-or-so year evolution for the group, and we believe now positions us well in the current markets in which we operate. Turning to the highlights. The second half of calendar year 2020 was a period of increased activity and pleasing successes for the group. Our activity for the year, of course, centered on guiding the team, our asset base and customers in the somewhat unsettled macroeconomic environment. We were, during this period, however, successful in making several investments in keeping with our key focus areas of office and self storage. In particular, I'd like to call out a move to 100% ownership of the operating platform Storage King. As well, asset transactions continued and are continuing unabated in the storage sector, whereas we saw a slowdown in the latter half of 2020 in the office sector as owners and managers sought to deal with the various COVID impacts and confirm their tenant intentions on existing or proposed tenancies. This we'll touch on later in the presentation. And then in December, as I mentioned, our entitlement offer was extremely well supported by our existing and some new investors, with particularly our major investor, Kirsh Group, participating. Finally, just a few weeks ago, we were excited to exchange and agree terms on a development joint venture with Mr. Lang Walker and his group on our 710 Collins Street asset in Docklands in Melbourne. Looking at the balance sheet. As I mentioned at the outset, the group has been on a purposeful journey to focus our investments in quality income-producing assets in the key sectors of office and self storage, assets that we're happy to hold, own and manage over the long term. These investments have been made outright by Abacus or, in some cases, in strategic partnerships, in the case of some of our office projects, outright in the case of self storage, where we've been redeploying equity that we've realized from the noncore assets we've disposed or the newly raised equity, all the while substantially improving the asset-backed quality and consistency of earnings from the group's investments in these core sectors, setting the platform for solid long-term growth. In particular, the diversification that these 2 key sectors delivers for the group with now a fully internalized operating platform and substantial portfolio of investments in self storage as well as a good mix of CBD and main fringe market office investments, we believe, positions the group very well. Even the group's remaining much reduced retail exposure, which -- with 2 out of 3 assets anchored by the 3 national brand grocers, weathered the last year in 2020 extremely well, owing to their strong demographic locations and predominantly nondiscretionary tenant mix. I'll now turn over to Rob to talk through the financial metrics of the business at the half year.

Thank you, Steven, and good morning. As Steven mentioned in his overview, the group has delivered a funds from operation profit of $60.6 million. This is a decrease of 9.9%, which reflects the reduction in noncore income. Some of the highlights in these results were: commercial property FFO increased by 23.9% to $41.5 million; self storage FFO also increased by 17.4% to $31.7 million. The established self storage portfolio is now yielding 6% on an annualized basis. The distribution for the half was $0.085 per security. Looking at the balance sheet. At the period end, net tangible assets per security was $3.26. This was a decrease of 1.8%. As Steven mentioned earlier, we completed in December the entitlement offer of $402 million. While earlier in that period, we also increased our bank facility limit by $247 million on favorable and attractive terms. At the period end, our gearing has reduced to 18.2%, and our average cost of debt for the period was 2.2%. Now turning to the valuations. The valuation uplift was strong for the period of $93.9 million. The gain in self storage was actually $97.5 million or 8.4%. While the commercial property was down by $3.6 million, but the amount -- the percentage in terms was just 0.2%. The property portfolio is now valued at $3.3 billion, with an even weighting between our core sectors of office and self storage. I will now hand back to Steven.

Thanks, Rob. Just turning to the individual business sectors, office and storage, for their operating metrics. As mentioned, the Abacus office portfolio has withstood their COVID-related volatility quite well through a combination of the fact that we have a multitude of smaller, well-located assets with market rental levels at the lower end of the scale. As well, during the period, we've taken the opportunity to progress and fast track several assets that we now have marked -- earmarked for development, including our 464 St Kilda Road asset; 444 Queen Street up in Brisbane; the Virginia Park estate in East Bentleigh in Melbourne, where we're seeing the establishment of a high school; and in partnership with our partners at Charter Hall, the 201 Elizabeth Street property. If we look at the tracking of the major movements in occupancy, overall, a decrease of 1.4%, mainly impacted by some of these development projects, such as 201 Elizabeth Street, 33 Queen Street in Brisbane as well as our tiny asset in Southport in Queensland. Pleasingly, we've had some strong leasing success in the latter part of 2020 going into the early part of this calendar year, such as our property in Surry Hills, where we've seen the introduction and launch of a first in Australia, a salon line tenancy, which is an innovative concept of flexible workspace for the hair and beauty industries. Looking at the leasing metrics of the portfolio. We were pleased to be able to complete some transactions on major tenancies in our Martin Place property, our Allara Street in Canberra property to the federal government and as expected, with the lower-than-average rental levels on offer, the leasing spreads have held up extremely well, with incentive levels as expected moving up circa 10% in the major markets. In the early stages of 2021, as I mentioned, across our entire portfolio, we've seen a lift in leasing inquiries and a desire to transact from existing tenants. This is a logical follow-on, we believe, from the improving and stabilizing COVID public health orders in place in the various states. With our performance in Queensland, South Australia and the ACT, very strong; followed by here in New South Wales; and even recently in Victoria. The focus of our office team is now firmly on tenant engagement. The facilities, property management and standard procedures at the property as well as people and technology applications, pulling them all together to put bespoke strategies in place, asset by asset, where we can improve the customer amenity, wellness and occupational standards. And we'll have more to say about that over the year as our plans and redevelopment plans materialize. Turning to self storage. By all measures, 2020 has been a momentous year for the group's investments in the key sector of self storage. We continue to acquire well-located facilities now with our total number of facilities well over 90 properties, projects, stabilized properties, new properties. As I mentioned, we moved to 100% ownership of the expert and well-established operator, Storage King. And from a trading perspective, after a softer early in the year period, we've seen the strongest trading and operational performance in several key markets for some time. Driven by the geographic placement of our storage locations, we've seen occupancy, and more recently, rental rate growth revert to pre COVID-impacted levels, and in some cases, stronger than seen in recent history. As I mentioned, our properties in Queensland, West Australia and the ACT as well as in New Zealand have performed very strongly as the tailwinds of the housing market recovery, rebound of economic activity and confidence, e-commerce and home business is improving in penetration, and more recently, a push for households to declutter to accommodate, in some cases, more work from home accommodation, all strong supportive factors to the self storage sector. Looking state by state, by region with the ACT and New Zealand. You can see that the occupancy, in some cases, now sits well above 90%, never before seen levels in markets such as in Queensland and in New Zealand. I'll just note that on this chart -- on this slide, the various states and territories have a different x-axis, left-hand axis. So you just have to take into account where that sits to see, but it does paint a very rosy picture. And now with strong occupancy delivered in so many markets around the country and in New Zealand, we're forecasting a steady return to rental rate growth in coming periods. subject, of course, to no unforeseen future COVID-related lockdowns or market dislocations. Looking at the Storage King platform. In a transformative deal, December 2020 saw us move to full ownership of the platform. And most pleasingly, Michael Tate, the founder, co-founder and widely acknowledged industry expert, has joined the Abacus executive team to continue to drive the operational performance and enhancement across all the managed stores, be they owned by Abacus or other third-party owners. The entire business comprises over 170 stores located across Australia and in New Zealand, totaling more than 800,000 square meters of net lettable area, more than 50,000 domestic and corporate customers across the stores. And this expanded Storage King team, headquartered over in Crows Nest, comprises about 400 individuals, And the wider team now at Abacus is excited at the prospects that this transaction provides with complete alignment of the asset owning and operating business. We believe this sets us up in the longer term to drive superior asset operational performance and, therefore, support for asset valuations and income growth going forward. 2020 and into 2021 has seen us continue to accelerate not only the new store locations, but also the refurbishments in green and brownfield developments of new stores. Our ownership of the platform is a key source of those acquisition transactions for us to increase our penetration in key markets. And also, we continue to engage more broadly with the various multitude of private owners and operators of stores across Australia, targeting, in particular, strong suburban and interurban locations as we deem them complementary to our existing network. As well, we're proud of our development pipeline and the transactions and projects that we've been able to complete as well as instigate in the last 6 to 12 months. With the recent completions at Robina in Queensland, Stafford in Queensland and Brookvale here in New South Wales just on 12 months ago, all properties now well and truly in lease-up mode. Turning to retail and the noncore investments. Retail, as I said, has seen a buffering in respect to the various COVID lockdowns and border restrictions. But in spite of this, our properties, Ashfield and Lutwyche, in partnership, have, in particular, fared relatively well given their nondiscretionary nature and strong grocery offer. The services and office areas in Lutwyche, in particular, although the project completed just prior to the initial lockdown, has also seen a resurgence with a shift to some of the more suburban locations. At Oasis up on the Gold Coast, the center is now positioned as very much a mixed-use destination with substantial office services, parking, alongside the grocery, tavern and restaurant fast food offers, with most of these uses seeing strong traffic growth as the Gold Coast starts to benefit from a lift in domestic visitations. And subject to Queensland keeping its borders open, we fully expect the center to continue to evolve and dominate in its catchment. We continue to work with all our JV owners across all these investments on each asset with each of our tenant partners at each center to orientate the offer and customer proposal to best effect. Turning to sustainability. A key initiative for the property team during 2020 was to seek a business partner to provide consistent property and facilities management services across the country. We've selected Knight Frank and are in the process of mobilizing to leverage their capability and pursue a multitude of sustainable practices more and more across the country across our portfolio, including reductions of energy, emissions, water and waste and cost savings through efficient management of building services. We continue to evolve and transition each and every asset across the spectrum in respect of these energy emissions, water and waste, and look forward to working with Knight Frank and their team on the various strategies and initiatives. Turning to our outlook. Abacus Property Group is now well placed. We have a market differentiated strategy focused on the key attractive sectors of office and self storage. With a strong balance sheet, conservatively geared and a market-leading competitive cost of debt at around 2.2% to 2.5%, utilizing the existing asset portfolio in each of these 2 sectors, we've got a number of self-help initiatives, be they asset management, property management, facilities management enhancement, the application -- judicious application of technology, redevelopment and expansionary capital projects as well as the strong mutually beneficial partnerships we have right across the portfolio. All aim to deliver long-term quality, risk-adjusted returns for all of our stakeholders. I'd like to take this opportunity to thank all the Abacus team and our business -- valued business partners for their support and encouragement and look forward to meeting the years, challenges and opportunities head on. We'll now turn the call over to questions, and happy to take any questions. Thank you.

[Operator Instructions] Your first question comes from Stuart McLean with Macquarie. .

I was wondering if you could provide an update on the acquisition pipeline, is it equity raised? It was mentioned potential to acquire $130 million of assets with a time frame of 3Q '21. Just wondering if you could provide an update on that -- on those assets, please?

We're still in discussions, Stuart. And what we've been pleased, as a result of the equity raise, we have seen an acceleration and increase in inquiries and opportunities for us to invest. So we're still on track. They are under negotiation. Whether they hit the end of the first -- third quarter, as you mentioned, which is 6 weeks away, is probably a little bit ambitious. But we've certainly got a number of discussions at the advanced stages.

Okay. And then just on the guidance as well, the equity raise or the comment that 2 half FFO would be above 1 half. So that sentence wasn't in the presentation today. Does that comment still stand? Or is there a delay in these acquisitions being slightly less confident today? Can you just provide a bit of color, please?

We stand by the statement that was made in December. As you say, the deployment of the equity does have an impact. However, we're being very judicious. And I think we are disciplined in where we spend our capital for the best long-term effect, but we do not -- have no change from what we announced to the market in the first week of December.

Okay, great. And then just a final one. Just on the self storage book. You mentioned that occupancy now towards that 90% type mark is getting towards the stabilized level. What does that mean for rent on a per square meter basis? What sort of growth could we expect over the next 6 to 12 months there?

So as you'd appreciate, if you look back over 3 or 4 years, this portfolio delivered strong rental rate growth at the store level. Going into COVID, and really, probably about 12 months before, we saw occupancy start to drop. And we were purposeful in reducing our push for rental growth. We think now that we've got such strong demand at the stores, not homogenous across the country, and I will temper the remarks by saying that New South Wales is in the early stages of that upswing. Victoria is just starting to get its head above water. So we're seeing strong growth in markets where we have less representations such as Queensland and Western Australia. But I think we would see good, low single-digit growth in rental rate as where we end up. Now whether that's within 12 months, 24 months, again, subject to the market conditions. But it's pleasing that we've got so many tailwinds supporting the sector.

[Operator Instructions] Your next question comes from Richard Jones with JPMorgan.

Steve, I have to admit, I was a little puzzled by the size of the raising in early December. We're now sort of 2.5 months down the track and none the wiser on deployment of that capital. Just wondering if you can kind of walk us through the rationale. Because I imagine -- I assume there would have been something big in the pipeline, given the large deal you -- of the large amount of capital you raised. Just trying to work out the strategy behind that.

I think, Richard, as we mentioned at the raise, there was a combination of factors, most importantly, the investment opportunity we see into our existing portfolio of assets. Be that development of properties such as 201 Elizabeth Street, 464 St Kilda Road, our project with Salta and Church Street, a number of other properties where we see the ability for us to invest into the assets as they stand for great long-term benefit. Computershare's headquarters is down in Melbourne. We're investing in that -- reconfiguring that property as we speak. So -- and that's something we haven't quantified to the market, but we do know that there are a multitude of plans coming together. So that was one of the key drivers on top of what we saw as an accelerated opportunity set in the self storage space as we moved on the 30th of November to 100% ownership of the Storage King platform. So what we were at going to -- wanted to be at great pains to do is to bring the level of gearing for the group below our range in order that we can be 100% confident of having available liquidity to take advantage of those opportunities as and when we deem appropriate. So it was somewhat conservative. We think it was quite judicious and sets the platform for growth over the medium to longer term. But we do take the point that it was large-ish, the raise, and it was not specifically targeted at any one particular transaction.

Okay. On the operating margin in the storage business, that's had a spike. Just wondering if you can kind of walk us through what drove the big increase.