Abacus Group (ABG) Earnings Call Transcript & Summary

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

Thank you very much, and hello, ladies and gentlemen. Welcome to today's presentation of the full year results for the Abacus Property Group for the year ended 30 June 2021. We gather 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 here in the room by Rob Baulderstone, our CFO; as well as Cynthia Rouse, our Head of Corporate Comms and our Investor Relations; and Reiner and Evan from our finance team. I do appreciate the challenging times that many people in Australia and around the world are facing, and I do appreciate you taking the time to listen in. Hopefully, we may provide you some light relief. At Abacus, we have a vision to create exceptional value for our customers and stakeholders as an owner and manager of real estate and operator of self-storage locations. And by any measure, the financial year '21 has been a very solid year of activity and achievement as you'll see as we go through the presentation. The platform metrics show a pro forma $4.3 billion of total assets, quality income-producing investments across our 2 key sectors of commercial real estate and self-storage, a very credible result. With gearing below the midpoint of our range and conservative valuation metrics on both the key -- both key sectors, combined, we believe, with good income growth prospects, the group is particularly well positioned. Our statutory profit and FFO outcomes for the year are pleasing, and the annual outcome came in above our most recent estimates on the back of very strong storage metrics, allowing us to pay an increased additional distribution of $0.005 per share to make a total distribution for the half of $0.09 or a full year distribution of $0.175, and we're pleased to be able to provide this distribution to shareholders in the current challenging times. When we embarked on this financial year back in July 2020, it did seem that the worst of the COVID impacts may have been behind us, but certainly, that is not how it has panned out. In this context, the group was able to maintain a high velocity of transactions in keeping with the strategy that was confirmed during the year to concentrate on the key sectors of commercial real estate and self-storage that we believe deliver long-term sustainable outcomes through active management, achieved through active investment, asset and property management as well as customer and brand management, particularly as we take on the business in Storage King. In the first half, we deployed just over $200 million. And then following our successful entitlement offer in December 2020, we were able to deploy a total of $1 billion for the whole year and acquire some assets that we expect will provide solid returns into the future, such as the stake in the Myer Melbourne store, and increased interest in our property at Oasis on the Gold Coast, following our rights into the self-storage raising earlier in the year, multiple additional self-storage locations, including 5 prime Sydney suburban stores. And importantly, we're pleased to be able to manage our tenant partners through all the COVID impacts that they've experienced in every market, and we do continue to work with them as the current outbreaks are dealt with in the various jurisdictions. What a difference a year makes. Looking at the pro forma balance sheet, we see this as a good summary slide, which details the allocation of our balance sheet between our 2 key sectors. With only a few asset exposures remaining in our legacy investments, we're now -- they now form a very minor part of our exposure and a negligible impact on our FFO. One of the highlights of our year also was our enhanced relationship with our key lending syndicates, which Rob will touch on, which has seen us extend the term and capacity of our 2 major debt facilities, allowing us to use those proceeds and deploy into these strong income-producing assets at very competitive pricing. On the next slide, you'll see we've given a detailed snapshot of the level of activity that we've undertaken over the last 3 or 4 years, all that go together to position the group to where it sits today. On the operating slide for storage, you'll notice that we've split our portfolio into stores that are established, i.e., owned for more than 24 months, and stores that either have been acquired, renovated, extended or redeveloped, which are categorized as stabilizing. Turning to the capital deployment slide, as I mentioned, the transition of the balance sheet for the group is largely complete after the last 3-plus years of activity. And the landing point in FY '22 sees us a mid-sized group with a substantial investment in 2 key sectors and a substantially derisked balance sheet. In the operating climate, as it has existed for the last 12 to 18 months, we're very much attracted to self-storage as an asset class for allocation of capital across all the major strategies, being organic, redevelopment extension and development as well as inorganic acquisition of new locations and all the various activities that go along with it, as well in commercial real estate. Through active discussions with our strategic partners, we were able in the year to identify several opportunities to invest more equity into several mixed use, land-rich assets such as the Oasis Shopping Center on the Gold Coast in Broadbeach and also the Myer Melbourne store in the CBD of Melbourne, both opportunities at attractive pricing that we believe will deliver good returns to shareholders in the medium to long term. Similarly, with our partners on our wholly owned assets, the team is active in designing, planning and executing on several redevelopment strategies, both in the commercial and the storage sectors. All of these schemes, we believe, will deliver on our strategy of providing space solutions with a compelling value proposition for our customers. I'll now hand over to Rob, who can talk us through the financial metrics of the group, the balance sheet and the valuation results.

Thank you, Steven, and good morning. As Steven mentioned in his overview, the group has delivered an increased funds from operation profit of $136.4 million. Some of the highlights in these results were: The commercial property portfolio FFO increased by 23.9% to $86.9 million; the Self Storage FFO increased by 15.5% and to $69.6 million. The increases largely reflect the delivery of the group's strategy to concentrate on these asset classes. The distribution for the year, including the additional distribution announced this morning is $0.175 per security. Turning now to the balance sheet. The net tangible assets per security increased by 3.3% to $3.43. Our gearing at the balance date of 30 June was 22.5%. And following the completion of the post-balance date purchases of additional properties, the gearing has now increased to 28.3%. The average cost of debt for the year was 2%. During the year, we were active and refinanced over $1.3 billion of banking facilities, extending the debt duration by 1.7 years to 4.8 years, and our longest dated facilities are now over 6 years in maturity. Since the year-end, we have increased our bank facility limit by $500 million to $1.86 billion with no increase in pricing. Valuations. The valuation uplift for the year was $237.4 million or 7.6%. The majority of the uplift was in Self Storage, which had a 19% increase. These results demonstrate the attractiveness of Self Storage as an investment class for the group. The property portfolio is now valued at over $3.8 billion. I will now hand back to Steven.

Thanks, Rob. And turning to the operational results, just a couple of overarching comments. I do want to continue to highlight the challenges that COVID impacts on our small- to medium-sized enterprises and tenant business partners, which is compounded by the constant impediments to the free movement of people in the state. We stand ready to work with our tenant partners, as we did in 2020 calendar year, to do what we can to help support them through this most challenging time. On top of the heightened level of acquisitions and disposals that I've already touched on, our focus is keenly on asset and development management strategies where we can retain tenants, grow income and drive capital growth prospects across all our assets. Looking at the self storage sector. Our investment in that sector has had a transformative year by any calculations with the move to full ownership of the Storage King operating platform, which took effect from the 1st of December 2020. We welcomed Michael Tate as the CEO of Storage King to our executive leadership team and the whole Storage King operating team, both at the head office over in Crows Nest, the support center down in Dandenong in Melbourne and the whole team in place at the various storage locations across Australia and New Zealand, and we look forward to working -- continuing to work with them to develop and deliver on some of the exciting growth plans that we have for that business. As you can see from the summary stats above, storage is proving a most resilient sector, and our multipronged growth strategy is delivering and is expected to continue to deliver for our investors going forward. The year to the end of June 2021 saw a myriad of local operating challenges and also elevated demand for the storage solutions from consumers. The border closures, lockdowns and the prolonged work-from-home, stay-at-home orders only serve to support storage in its objectives of being the kings of moving storage and more, providing space and storage solutions for homes, businesses and in fact, all consumers. In the results, as I mentioned, we've split the assets into established on for 24 months and stabilizing, whether either be newly acquired, extended, redeveloped or newly developed, and the results are quite pleasing. In particular, our lease-up momentum in nearly all states is as good as we've ever seen it, with newly built and renovated or expanded stores getting to 60-plus percent between 11 and 22 months after opening. The standout being our Robina store, a superior product in the buoyant Gold Coast market with arguably the least COVID lockdowns, et cetera, impacting and the highest level of net in-state migration from the southern states. Looking at the occupancy across the portfolio on a like-for-like basis, so a subset of 52 of the 95 stores, you can see that we're well back to pre-pandemic levels and above in almost every area. The standout markets for the portfolio are WA, which is not on the chart because we've mostly acquired the assets within the last 24 months, New Zealand, closely followed by Queensland and the ACT. And we fully expect, once the freedom of movement is established back in New South Wales and Victoria, we'll see those very strong areas revert, with New South Wales already being on a very strong trajectory leading up to the mid-June 2021 outbreak period. Operationally, the pandemic has provided a multitude of challenges, and I must applaud the teams at Storage King across the country and in the various locations for their amazing diligence and resilience. Consumer-facing businesses in this environment are extraordinarily tough, and with COVID plans, contingencies, the dedication of the team, the business has continued to drive and improve and go from strength to strength. Our marketing and positioning is subtly different to some of our competitors, to be linked directly to people's housing, living and workplace as well as accommodation decisions with decluttering, moving, upsizing or downsizing, all activities where we offer friendly value-for-money solutions in well-located and contemporary fitted stores. The tailwinds continue for the storage sector as does the competition for the consumer, and we believe the team at Storage King are particularly well placed on both fronts of the battle. The growth of the scale of Abacus' storage investments has been very substantial in the last 2 to 3 years. We continue to improve existing stores through our retail merchandise upgrades, signage upgrades, extensions where it's commercially sensible to do so. And this is a key part of the work for the asset team here at Abacus, all of which delivers new state-of-the-art, proud-to-own facilities. During the year, we completed 8 extensions totaling over 7,000 square meters, as well as the new build at Robina in Queensland, which I mentioned, over 6,200 square meters in that single location. In the last couple of months, we've completed 2 new sites at Rowville in Melbourne and Woonona here in Wollongong in Sydney with a further 8 stores at varying stages of development. And along with an array of new additions to the portfolio, we were excited just in the last few weeks to announce the acquisition of 5 superior-located stores in and around Sydney. All flagship locations of which we continue to work on multiple angles to continue to supplement the portfolio. In commercial real estate, similarly, it's been a very covered compacted impacted period to varying stages around the portfolio up and down the Eastern Seaboard with negligible exposure in the West Australian market, very little in Adelaide and Canberra. Our properties are somewhat insulated in that there are very few multi-floor large space user tenants and also with rents -- average rents that we believe being quite affordable for the location and amenity offered. As expected, the focus of our energy and attention on our tenants, working with them to ensure their space requirements are met and offered as safe and secure as possible. And whilst leasing momentum had been impacted negatively differently at various times of the year, we do still see a volume of transactions being done, be they predominantly renewals or reconfigurations and, to a lesser extent, new leases. We continue to work on redevelopment and reconfiguration plans at various assets such as our recently completed project at Ann Street in Surry Hills, as well as the refurbishment and reconfiguration of our Abbotsford building down in Melbourne and the new build that we're undertaking with our partners, Salta Group in Church Street in Richmond. As I said, leasing has been a tough period, but deals are being done. Leasing incentives are edging up in most markets. However, we do sense that the amenity, location and contemporary look and feel and features of our assets is an overriding factor that drives decisions to remain or expand or relocate. Average rents across the portfolio are holding, albeit at elevated incentive levels, and we continue to work with the teams in Melbourne, Canberra and Sydney as the current lockdown periods prevail. In an active period that we've had on our own, all with our partners, we've been able to deploy substantial equity into several well-located and substantial yielding investments, as I mentioned, moving to 100% ownership of Oasis at Broadbeach on the Gold Coast and acquiring the Brisbane Club freehold and leasehold interest in conjunction with Charter Hall and a 1/3 interest in the Myer Melbourne store in the CBD of Melbourne. We only have 2 commercial developments in progress, the reconfiguration at Abbotsford and the new build in Melbourne in Church Street in Melbourne, and both are progressing well, even in spite of the current outbreak dilemmas. Looking at retail, our major investment at Oasis on the Gold Coast continues to see tenant demand from service, nondiscretionary retail as well as office, medical and health and beauty users on the upper levels. Across the 3 assets that we have, the principal activity for the year has been engaging and attract -- engaging with our existing tenants to ensure their happiness as well as attracting several new tenants to the buildings where we've been able to undertake 26 leasing deals accounting for over 5,300 meters. The Lutwyche property in Brisbane is excluded from the stable portfolio given it undertook a very major redevelopment, which only concluded just prior to the first pandemic impacts in early 2020. So therefore, that asset is still requiring further stabilization and support of the tenant base. Sustainability, embedded in how we conduct our business. At Abacus, we believe in values of being entrepreneurial, delivering innovative and informed commercial insights and solutions; responsible, always doing the right thing and making a positive difference; and accountable, always being answerable for our actions and our decisions. Across the entire group, we have numerous work streams in both commercial and Self Storage that will lessen our impact on the environment, our resource utilization and also deliver NABERS ratings for energy and water at benchmark levels in the commercial portfolio, upgrading building systems, meters and a myriad of new technologies where appropriate. Turning to the summary and outlook. Our strategy is clear. We have a differentiated position of being a high conviction owner and manager of commercial and self storage locations. And with the balance sheet in place, our Abacus is well placed. We will continue to manage the business with a conservative balance sheet tilt, maintaining elevated liquidity levels. Our preference is to acquire quality income-producing assets in superior locations that will endure in all market conditions. This may also see us continue to review the prospects of some of our existing assets perhaps that are more mature and also some in the markets where we see the ability to have them enhanced, redeveloped or extended. We value the support and the strong collaborative relationships we have with all our partners, from the asset-owning strategic partners, through our management service providers, to our storage owning partners, the expert advisory groups that we have as well as our key lending syndicate. And in particular, we value the incredible strong support an endorsement of our major investor, the Kirsh Group, and look forward to continuing and expanding that strong partnership. For the FY '22 year, we believe it prudent to continue to guide that our distributions for the year will reflect the payout ratio broadly in line with a target range of 85% to 95% of FFO, as we continue to explore opportunities to diversify and optimize the quality and nature of all of our investments. That ends the formal part of the presentation, and I now welcome any questions that you may have.

[Operator Instructions] Your first question comes from Caleb Wheatley with Macquarie Group.

Just a couple of questions from me, if I could. First, just on the FY '22, no quantitative guidance there on FFO or the divi. Just wondering if you could provide maybe some color around why the number was provided. Is this sort of COVID impact or are there other things at play here potentially?

Principally COVID impacted, Caleb, where obviously the major markets, Melbourne, Sydney and Canberra impacted today with an unknown end date. And I just think it's prudent in that current environment.

If things were to stabilize from here, would you potentially look to provide something like that?

Well, I think the next period will be half year in February next year, which hopefully, we're clear of some of this restraint. So that's another opportunity for us to consider.

Great. Just the second one on the Self Storage portfolio. So you mentioned things are trending quite well. in the initial sort of lockdown period? Can you give an update on where occupancy and RevPAM are kind of trending, I guess, as an exit rate in July or even sort of through August to date?

Yes. So we had an elevated level of activity and business activity in the early part of 2021 calendar year, which really came off the back of a flat period when the -- corresponding period in the previous year. So whilst we were heading with a very strong trajectory in Melbourne and Sydney, we are cautious that the lockdowns that are impacting today and particularly the period where we had a very harsh lockdown in New South Wales with the construction sites closed, we did see the momentum slow. So we're not projecting that we will see the same level of growth trajectory going forward for the full 12 months, but we are heartened by the fact that we now have extraordinarily high occupancy across our stabilized portfolio at over 90%, edging up towards 95% in some markets. And as well, as I mentioned, the newly acquired stores or renovated stores, a couple of the newly developed stores, are tracking very nicely in respective lease-up. So where we have 50, 60-plus percent type occupancy, we're seeing a growth in those -- that rent roll that is somewhat much stronger than those stabilizing assets. Hence, if you look at the chart, where you see on the operating stats for storage, we've given the -- split the occupancy and rent growth for each of those 2 buckets of assets. And you can see the 75% for the stabilizing, which we believe will quickly get to what the average across the portfolio is at over 90%. And that's a very strong growth driver, we believe, going forward. So even if the established portfolio was to stabilize or flatten out, which majority of that portfolio is in Melbourne and Sydney, we still think that the drivers of both will come through from those newly acquired stores and newly extended renovated stores.

Sure. But just so if you were around for the 91% occupancy in those stabilized assets at June, would you say that that's stable kind of where we are today, looking from last year with...

Has increased -- will have increased because of the contribution from West Australia -- sorry, in the stabilized you said? Yes. No, it would be reasonably flat.

Okay. And just one final one for me, please. Just on the development EBIT line, it looks like this is about $4 million in the first half and then back up to $16 million as at the full year. Could you just maybe provide a bit of color around what drove the half-on-half increase there and how we should think about this line item going forward?

I'm just -- where did you see $4 million to $16 million? Hello? Can you just point us to that? What slide do you want to see that? Obviously, don't know. Is that the 15 in property development, the finance income? That's the loans and mortgages, the roll-off of those as well as the total year result, which had an adjustment in the first half. Why don't we talk separately about that, Caleb. We'll talk you through that.

Your next question comes from Lou Pirenc with Jarden.

Two questions for me. First of all, just I mean, very busy year with acquisitions. Can you just talk about capacity and ability to kind of keep going with acquisitions? Or is '22 going to be more a year of just settling down the assets that you have acquired?

Liquidity, so with the increased debt facilities at about 28% pro forma gearing, our liquidity still remains at just over $400 million. In fact, just under $450 million before we hit the upper level of our target gearing range of 35%, and that is on the basis of no further uplift in portfolio valuations. Now are we going to continue at the same clip? I suppose the caution is in respect of COVID and the impacts. And on the flip side, I would say that we're seeing an elevated level of interest and acquisition opportunities in the self storage space, both individual stores, small groups of stores and a couple of larger transactions. So we maintain our discipline as to locations that we want to invest in, assets that we believe drive above-average rent returns, occupancy growth. So we're excited at the prospects, but we're obviously very cautious about how that COVID impact does play out. It's probably more of an impact in the commercial real estate space with tenant demand, both retail and office tenants. And -- but we're still seeing a lot of activity and opportunities for us to invest.

Right. Yes, I was more curious about the capacity of just the team. I imagine it's taking quite a bit of time to integrate some of those big assets into the portfolio. But it sounds like...

Well, most of the bigger investments are actually done in partnership, so with Charter Hall, for example, with Brisbane Club and the Myer store, which, obviously, is a single tenant triple net lease-type arrangement. In the storage portfolio, the Storage King business does undertake a lot of that asset management on a store-by-store basis. So we think that we've got quite a strong capacity going forward to enable us to add more and more locations to the business, whether they be from other Storage King operators or from external market participants. So there's no issue there on capacity of the team, but it's more just the volume of transactions we've been able to negotiate and finalize those transactions.

Your next question comes from Suraj Nebhani with Citigroup.

Can I just check the COVID-related impacts for July month? I guess how is rent collection tracking across the commercial portfolio for July?