Abacus Group (ABG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Abacus Group HY '23 Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Steven Sewell, Managing Director. Please go ahead.

Thank you, and good morning or afternoon, ladies and gentlemen. Welcome to the Half Year Results Presentation for Abacus Group. I'd like to start by acknowledging the traditional owners of the land on which we sit, Gadigal people of the Eora Nation and pay our respects to their elders, past, present and emerging. I'm joined today by Evan Goodridge, our CFO, a couple of members of the finance team; Cynthia Rouse, our Head of Corporate Communications; plus as well from our Self Storage business, Nikki Lawson, who joined us in November as Head of Strategy for Self Storage; and also Michael Tate, as some of you will know the CEO of our Storage King operating platform. We do have a reasonably detailed presentation to go through. And of course, we welcome your questions either on the call later today or when we get a chance to meet in-person in the weeks to come. The Abacus Group is a strong asset-backed trust with a sizable and quality investment portfolio in both the commercial real estate and Self Storage sectors. After a solid few years of asset transactions, raising fresh equity, fresh debt facilities and also disposal of non-core assets in the -- over the last 5 years, we've added over AUD 3 billion in gross assets. This turnover of the balance sheet and active management of our invested equity sees the group with good operating cash flows from virtually all of our investments. We're now more than 2 years since we fully acquired the Storage King operating platform. And in the context of our product creation capabilities in development of new storage locations, we see that as a key value-adding differentiator for our investments in that sector. Our balance sheet gearing remains well within our range, with several further activities planned or in train to monetize assets in our commercial portfolio over the medium to longer term, where we see a better utilization of our capital. Pleasingly, for the half year, we've been able to distribute AUD 0.09 per share from a headline funds from operating outcome of AUD 0.0911 per share in the face of the current challenging market conditions. I'll speak later in the presentation on the announcement that accompanied these results about our intention to de-staple the Self Storage business. Our highlights for the half year are a continuation of many prior periods, with consolidation of our active investment management of our mature and stable portfolios across both commercial and Self Storage, as well as strategic and complementary portfolio acquisitions of assets, again, in both the commercial real estate and Self Storage sectors. Our development pipeline in Self Storage, which really only started to get going back in 2018 is now gathering momentum. And in the period, we saw the successful delivery of several projects at Epping in Melbourne, Prestons in Sydney, and just in the last few weeks at Gregory Hills here in Sydney. With our highly motivated and capable team, most importantly, we continue to enact asset plans in our core commercial portfolio, as well as in Self Storage that underpins the strong and growing income streams we forecast from our balance sheet. In particular, for the group, our efficient and successful relocation to our new corporate office where we sit today, where we now exist in a quality Abacus-owned building is momentous. After more than 26 years in our former leased offices, we now sit within a beautiful contemporary workspace at 77 Castlereagh Street, which we'd love to showcase to you at the appropriate time. As mentioned just now, the journey we've been on is well represented in this chart. It's been a very purposeful journey with asset transactions, enhancement of business systems and processes to land where we are today with a laser-like sector-focused, specialist in self-storage, fully vertically integrated and constantly finessing where our commercial real estate investments are and how each asset is positioned. The Storage King operating platform in December 2020 was a transformative transaction for that segment of the balance sheet. As well across the period, a disposal of a number of non-core legacy investments now see almost the entire balance sheet turned over, and we believe positions us strongly today and into the future. For the half year, the headline changes on the balance sheet are not as material as they may have been in the prior periods. And obviously, this slide will amend once and if the de-stapling is approved by shareholders and implemented later in the calendar year. We're cautious and conscious of the current macro environment and factors that continue to impact particularly the market carrying yields for assets that are all adjusting for interest rates and bond yields, and we'll touch on that later. We don't have any set target for asset allocation across sectors or even within the subsectors, and we remain opportunistic where we see best long-term value and income growth opportunities. Turning to our ESG focus. And there's a lot of information on this slide. Suffice to say, we have a growing and more integrated approach to all features of ESG right across both the Self Storage and commercial real estate portfolios. Our environmental progress to date, it sees us with a complete review of our sustainability position and also an update to our policy with alignment of our neighbors ratings across the portfolio, improving governance and reporting integrity. From a social perspective, Michael will touch on shortly the myriad of local community initiatives that occur across the wider Storage King platform. And from a governance perspective, we published in FY '22, our Modern Slavery report, which includes a complete review of all our contractors in order to enhance and implement best practice across the group wherever we can. We have an aspiration to be transparent, accountable, fair and equitable in all that we do, with continued improvement and assessment of the effectiveness of our actions to identify and address any risks in modern slavery across our operations and in wider supply chains. What a difference the new office makes? We're now fully settled in over 1,200 square meters on Level 13 of 77 Castlereagh Street. At a rent level that we've negotiated, albeit with ourselves, that is additive to the valuation of the building. When you visit, you will hopefully appreciate our new fit-out -- how our new fit-out showcases what can be done in an older style building to provide a working environment that is much more aligned with industry best workplace practices. The building was incorporated by Scentre Group very cleverly above the northern end of Westfield Sydney, one of Australia's best shopping centers with direct elevator access to every retail floor, the basement car park and the 11 office levels. Our new fit-out was co-created by a cross-functional team of both, Abacus employees and our external team of designers and builders with a focus on collaboration and varied workspaces, encouraging interaction and return to work and massively enhanced digital connectivity, again, supporting the varied workspaces. A company-wide recycling initiative was implemented as part of the office move, ensuring that any obsolete items were recycled, repurposed or in some cases, donated to worthy recipients. I'll now hand over to Evan to run us through the financial metrics of the group.

Thanks, Steven, and good afternoon. The group has increased its funds from operations to AUD 81.4 million for the period. As Steven mentioned, this equates to AUD 0.091 per security. The statutory net profit attributable to our securityholders for the half year approximates our FFO due to limited fair value portfolio gains. The past 6 months have seen many challenges for [ high rates ], including COVID, office occupancy, higher interest rates, energy and labor costs. But Abacus has weathered these headwinds well. Over the last 6 months, we have enacted a number of initiatives despite the difficult environment. The current group looks very different to the Abacus of old. We are far more derisked. Our income is more consistent and more resilient, and our assets are of a much higher quality. Legacy businesses have now been wound down. We have remained disciplined on our investment strategy of growing our 2 core sectors of Self Storage and commercial office. Turning to our segment performance. Self Storage continue to outperform, and it continue to be the group's strongest engine of growth, with the segment before overheads increasing by 16% compared to the prior corresponding period. Whilst we have noted some recent declines in occupancy, our rental yield continues to grow strongly and more than offset this increased vacancy. We have also continued executing on our Self Storage development pipeline, as well as growing this pipeline to improve future performance. For the commercial segment, we have seen our existing office occupancy staying resilient. We have seen positive contribution from the acquisition of the remaining 50% at 324 Queen Street in Brisbane, Queensland, as well as the completion of recent developments at Abbotsford and Richmond in Victoria. This has delivered a result of AUD 61 million, up 8% when compared to the half year '22 results. During the period, Abacus continued to invest for future growth in FFO. Most notably, we are growing our Self Storage footprint, with approximately 20% of the portfolio currently being or soon to be developed. Our new Head of Strategy of Self Storage, Nikki Lawson, will talk to this pipeline in more detail. The continued investment into future income has increased our gearing levels from 28.7% to 32.2%. However, this remains well within our constant levels. At a target gearing of 35%, we currently have up to AUD 238 million of acquisition capacity. Abacus continues to have significant headroom in all of its debt facilities. We continue to manage capital prudently and our strategy remains focused on limiting debt expiries in any 1 year and maintaining sufficient liquidity and financial flexibility. As part of the proposed de-stapling process, we intend to set appropriate gearing levels, positioning both vehicles to deliver on their respective growth opportunities. It is our current intention that any equity raising as part of the de-stapling will be in the form of a rights issue to existing securityholders and would be focused on the new Abacus Storage King vehicle. The group is currently 71% hedged, and the weighted average cost of debt for the period was 2.6%. In this rising interest rate environment, we anticipate the full year's weighted average cost of debt to be in the range of 2.75% to 3%. Looking at our investment portfolio. This period saw a bifurcation in value movements as cap rates remain relatively flat for metro storage locations while softening across regional areas, as well as most of our commercial assets. Despite the rising rate environment, the group still saw a small increase in its overall value, driven by Storage's strong income growth over the period. At 31 December, the group's investment portfolio had a total value of over AUD 5.4 billion and comprised 151 assets. I'll now hand over to [Technical Difficulty].

Thanks, Evan. It's great to be here to update you on the operating performance for Self Storage with our Storage King CEO, Michael Tate. The first half 2023 results on this page clearly show the next step in a very deliberate transformational journey that the business has been on over the last few years. Most notably, I'd like to focus your attention on the established portfolio. This is becoming a bigger and bigger part of the Storage story. It's increased since our last earnings update by 14 stores to 76, as the significant acquisition that we did just over 2 years ago moves from the acquisition bucket across to the established bucket. This weight that we now have in the established group of stores provides the Storage portfolio with a strong, consistent and now a sizable base of just under AUD 1.6 billion in assets, producing an annualized yield of 5.5%. Of this space, we're then able to invest in acquisitions and new developments with ramp-up of opportunity over time. You will notice a lot of the RevPAM growth in this established portfolio over the last 6 months has come, as Evan mentioned earlier, from rental rate, with some normalization of occupancy returning since the mid-COVID highs we saw over the last 18 months. Storage rental is up 18.4% since July '21 in this group of stores. And I'm going to go into more detail shortly on the regional differences and how we're balancing occupancy and rate to get the best returns. Looking now at the acquisitions bucket from which we've rolled those stores across to the established buckets. We have added 2 new stores, these being Logan Home and Capalaba, 2 more examples of our disciplined approach to investing our acquisition capital in significant urban areas. As you can see in the improvements in the metrics underpinning this group of stores, we remain confident in our ability to add value through active asset management and bringing these stores onto the Storage King platform. Moving now to the third bucket of stores in the stabilizing portfolio. Within the 33 stores, we have 14 stores that are operational and in a stabilization phase. And in addition, we have 19 development sites that can be activated in the short to medium term. This is where we anticipate our strongest growth. To put this into perspective, storage rental on the 14 operating stores for the month of December '22 was AUD 1.46 million. And once these stores reach their mature occupancy and rental yields as per our valuations, the uplift in these stores will add an additional circa AUD 5 million per year. The stores involved in this group are stores like Epping and Prestons, which still have significant upside in occupancy, but also includes 7 stores whose occupancy already sits at 80%. And we now have the opportunity to continue to grow that occupancy, but also to focus on rate. Moving forward and looking at our future growth, we still believe that Self Storage has a significant runway ahead. The territory mapping exercise that we undertook a year back has helped to prioritize locations against our strategy of securing assets in high-quality locations and focusing our resources around these investments. What's exciting for the business is that we now have capability and experience to convert these opportunities profitably in whichever way they present themselves, be it acquisitions from our Storage King managed stores, acquisitions of independent operating stores, greenfield development sites or conversions of brownfield properties. On acquisitions, after a record year last year, the first half of 2023, we have invested an additional AUD 82 million with the acquisition of 6 development sites and 2 operating stores, Capalaba and Logan Home that we mentioned earlier. We also have a further 6 sites that exchanged before the 31st of December. What is pleasing is that 86% of this spend in the first half was in the significant urban areas of Sydney, Brisbane and Melbourne. Our focus is clear. Developments have been our other key growth engine and an attractive alternative to acquisitions in a market of short supply and escalating acquisition values. I mentioned our purpose-built Epping and Preston stores opened in the first half, but we've also had Gregory Hills opened in the last month and Deagon due to open before the end of this month. This will be the biggest year of NLA contributions from development since we started our journey to grow Self Storage in 2018. Then these store expansions. With property values escalating in recent years and the economies of scale that come from an operating point of view, store expansions deliver some of our best returns. And the 2 expansions in the first half at North Wollongong and Acacia Ridge, added an additional 3,000 square meters of NLA to the business. We have a strong pipeline, 17 well-located opportunities for the business to convert in the short to medium term. And this will add almost another 100,000 square meters to the portfolio and $483 million of estimated value. Building costs have risen over the last year. And while our 4 new stores that I mentioned earlier are still projected to deliver high single-digit returns on cost, we are being pragmatic about how we approach the 17 opportunities that we still have. We'll be progressing each one on its individual merits. And to date, we've only committed to 3 projects in the pipeline. You'll notice from accounting point of view, our pipeline is backloaded, and we do feel comfortable in delivering strong, yet profitable growth on these opportunities in line with our long-term aspirations. Expansion is probably the one area where we've only scratched the surface. We have 7 projects earmarked to deliver a projected additional 18,400 square meters of NLA. And our largest project already under construction is a 3,000 square meter expansion at Burwood in Victoria. We also are actively investigating another 7 sites to take advantage of the attractive returns our expansions are delivering. Looking more closely at the dynamics driving RevPAM, and these graphs reflect the trends from our Abacus owned established stores only. You can see here the trending details by market, by month, with the stores across the Australian market having taken full advantage of the strong demand for the Storage sector to drive rental yield over the last year. This hasn't come without consequence. The 20% rate growth experienced over the last 18 months has resulted in a 2% drop in occupancy across the same period. There have been some state specifics with the standout markets over the last 18 months being Perth at 39% growth, Adelaide 31%, and in markets like ACT, which have traditionally traded at high rent averages, moving aggressively earlier and moderating more in recent months, with New Zealand, on the other hand, starting the year with tougher market conditions and seeing a resurgence more recently. You will see occupancy at the end of December was 89.5%. And while this was the lowest point we've had in the year, we realized we are not immune to the cost of living pressure. And recent consumer interest rate hikes will still play out on consumer and commercial discretionary income over the coming year. Fortunately, the one benefit of the sector is the ability of the storage business to respond quickly to market conditions. And the focus of the business will now swing back to pulling the levers at our disposal to compete for occupancy as well as maintaining rate. Another highlight has been the exceptionally strong and growing inquiry rates we continue to see. Remembering as a sector, our penetration per capita still sits at almost 1/3 of that seen in the US, and we fully expect there's upside as Storage grows in popularity with Australians. That said, we still expect an impact on our customer behavior and believe that despite the growing demand, rate growth will moderate in the year ahead. With that, I'm going to hand over to Michael Tate.

Thank you, Nikki. Further, on that trend slide, as you can see, performance of the Abacus portfolio of Storage King stores has been very buoyant, obviously, across all regions over the last 2 years. And this is very similar story for all stores throughout the whole Storage King network regardless of their ownership structure. You'll note that occupancy has been consistently high, and we've been able to drive rental rates in the order of sort of 25% over those 2 years. These are quite record-breaking numbers in terms of the industry's history. This was largely driven by a well-known lift in demand for Storage over the pandemic, with customers emanating from work-from-home requirements, making space at home, renovating a booming residential property moving market and an increase in online retailers storing with us from the increased shopping -- online shopping habits. WA shows the most significant revenue growth percentage-wise, but in fairness, it was coming off a lower rental base. We expect these trends to level off in the next 6 months to 12 months, especially as rental increases achieved in each of the stores over the COVID years were abnormal in a historical sense. Cost of living pressures and a slowdown in the residential property moving market will moderate our ability to drive both occupancy and rental yield in unison. The next slide refers to the geographical positioning of the Storage King Abacus stores, and it just shows how vast our reach of the customer is. I draw your attention in particular to the Abacus stated strategy of focusing on assets in the more highly populous urban areas of Sydney, Melbourne and Brisbane. Whilst these metro areas have a high barrier to entry due to a comparative acquisition costs of real estate, we believe the best and most consistent returns are delivered from them. From a whole of Storage King brand perspective, we now have 195 trading stores, 108 of which are Abacus owned company stores and 87 of the stores owned externally and licensed, and managed under the Storage King brand. The Storage King brand continues to be a juggernaut in terms of brand recognition. And despite not holding the largest store footprint in Australia and New Zealand, commands the most attention from potential customers of Storage. This doesn't just happen, and it is a terrific illustration of the time, care and investment into targeted marketing campaigns undertaken by our head office team. We are very active in both digital and traditional marketing channels, both locally and countrywide and have enjoyed the benefits of a recent brand refresh, as well as upping the advertising spend as more stores come on board to the brand. Additionally, as Steven has referred to, SK is a highly active local community contributor with various charities and initiatives with local communities and sporting organizations. Over 80,000 storage units are now filled by our happy customers, where we think they're mostly pretty happy. And that number continues to grow each month. We see every customer has an enormous opportunity to become advocates for our brand based on the tireless efforts of our operations team to provide them the best possible experience in what can often be quite a stressful time in that customer's life. Back to you, Steven.

Thanks, Michael. And I will just acknowledge, I believe there is some technical difficulties on the video link. I think I believe the audio link is still coming through loud and clear. We may have just gone back up again. So just bear with us, and we do apologize for the inconvenience. Just turning to the commercial portfolio. The Abacus commercial portfolio continues to perform in line with expectations, and provide a strong asset backing and growing income stream for the business. Our corporate office building, now only 12 months since settlement, we see increasing leasing momentum and inquiry for that asset, plus as well our other larger, better quality assets at 99 Walker Street, 14 Martin Place and 201 Elizabeth Street, and they will drive returns in coming years. I'll touch on some of the operating metrics later in the presentation. Suffice to say, we have a multitude of leasing, asset and investment management strategies in play right across the portfolio. As I mentioned in the highlights, the completion of our new build in Church Street in Melbourne, plus the repositioning and massive upgrade to our Abbotsford property also in that in a Eastern fringe corridor of Melbourne, particular highlights that we're proud of. Our valuations are relatively conservative, and we continue to monitor the market trends on comparable transactions, supply and demand drivers in particularly the major markets where we're invested; Melbourne, Sydney and Brisbane. Pleasingly, for the half and continuing momentum into this calendar year 2023, we are seeing growing momentum and willingness and in some cases, eagerness from tenants to commit on their workplace requirements. With the sway of new leasing across most markets, economically, we saw good sustainable rent levels with, however, incentives remaining stable, albeit quite different in some markets across the country. As in prior periods, we highlight the overall modest average net face rents that exist in our buildings, with what we believe is a superior occupier value proposition of location, amenity and occupancy costs. And that's certainly reflected in the discussions and the negotiations we're able to conclude with new and existing tenants. Leasing profile for the group has shifted considerably in the last year or 2, with the completion of developments and now the addition of the larger 77 Castlereagh Street asset. There's nothing in particular to highlight other than in the next financial year '24, we have 2 lumpy 3,000-meter tenants in each of 77 and 11 Bowden Street to relet, as well as some further tenancies over at 99 Walker Street. In Melbourne, as part of our joint venture with Walker Group, you'll see on the chart in FY '25, the majority of our mostly government tenants in the -- good shed property in the Docklands are up for renewal, and this building is part of a major redevelopment the Walker Group has planned, and we'll provide more data on that in the years to come. By virtue of the nature and location of our key assets, as detailed on the previous slide, our tenant partners tend to be small to medium-sized enterprises and accordingly, are proving very resilient occupiers. As per previous results, we truly believe as part of the transition of contemporary workplaces, one has to provide an element -- or sorry, to accommodate a fully flexible and mobile workforce, it's incumbent on owners to provide in appropriately located buildings a component of flexible workplace. We have 2 fully functional Abacus Flex locations, one in Martin Place, one at 99 Walker Street, both trading well over 80% occupancy. And we are working and implementing several new locations as we speak. Some of the tangible benefits and feedback we have from our Flex business is an increased customer awareness, [ a feeder ] to traditional leasing in the building. It supports existing customers and tenants through their business growth, adaptions, as well as flexibility and as well allows us to implement multiple different leasing structures, which again increases the customer pool and industry diversification for the buildings. Turning to retail. It's a minor but active and solid component of our commercial portfolio, are our 3 retail centers, as well as our minority investment in the Myer department store building in the CBD in Melbourne. We remain cautious and particularly active in remixing and working with our customer tenants on the appropriate size and configurations that best suit their businesses. I will note that the grocery anchors are all trading extremely positively. And in particular, our Oasis Center on the Gold Coast is having its most buoyant and I will say, incident-free trading period almost in its existence, with tourism now lifting materially, boosting the food and beverage offer, plus also the attractiveness for tenants for the service and workplace offer on the upper levels. Commercial developments. As I touched on, we're very excited about the quality and the nature and the location of our recently completed projects in the inner Eastern fringe of Melbourne in Richmond, in Church Street and Johnson Street in Abbotsford. You'll see there both buildings are in the latter stages of their lease-up. We have strong rental inquiry for the vacant space. And in particular, we're excited about the sustainability initiatives that have been built into the Church Street building, and we're looking to implement at the Abbotsford Street building. The only other developments that we have on the book at the moment is our share in the 201 Elizabeth Street building here in Sydney, where we're a 32% owner currently in the project. And we note that Charter Hall has recently had development approval for approximately 9,000 meters of additional space, office and retail space that connects to the existing tower. We're in discussions and feasibility review on that building as far as cost to complete, as well as tenant demand for that space prior to committing to that project. Turning to the de-staple announcement. Today marks a further step along the path of the evolution of Abacus. As you will have seen from the announcement, we intend to de-staple the combined assets, investments and Storage King operations from the Abacus Group to form a new listed pure-play Self Storage REIT called Abacus Storage King, ASK. After the last 5 years of transactions that I mentioned and a massive effort from the team, particularly in Self Storage, which encompasses the acquisitions of new stores, the design, construction and opening of 9 new format large contemporary stores, the renovation extension and upgrade of many of our older existing stores, as well as the expansion and enhancement of the Storage King operating platform via various systems and processes implementations. So I can just take a moment. I want to acknowledge a former employee and major contributor to this business, Phil Peterson, who left the group at the end of 2022. And obviously, in the 20-odd years that he existed and was employed by Abacus, had a large part to play in the successful position we find ourselves in today. We believe the time is right to make the change and create this pure-play Self Storage REIT. And if approved by shareholders, it will provide investors the chance to get direct investment exposure to one of Australia's largest and, we believe, strongest Self Storage brand, a brand that has existed in the Australian and New Zealand market since the late 1990s. Importantly, if and once the de-stapling is completed, there will be very little in the way of day-to-day management of the Abacus and Storage King business as it applies, will actually alter with the exception, of course, of the newly installed majority Independent Board of Directors and associated governance regime. There are a lot of details yet to be finalized. We have an enormous team across both Abacus Storage King, as well as external advisers working on this, and we do look forward to sharing and updating more details on the proposal in advance of scheduling a Unitholder Meeting that should be no later than the third quarter of 2023. If I look at what the value and investment proposition is for each of the components, that will be available for investors subject to the completion of the de-stapling and the market conditions at the time. We intend to provide investors a lot more detail for each of the 2 component parts, both commercial and Self Storage. We strongly believe that the operating performance of both sectors, commercial and Self Storage provides a differentiated and strong future outlook for investors, in particular, for Storage King, combining the massive asset backing that Abacus has accumulated with the operating platform in its own listed entity is a major positive opportunity for the group to grow and capitalize on the opportunities that we feel will inevitably arise. The efforts and resources the group has applied now to incorporate its development pipeline of approximately 20 new format large, well-located stores and constantly look to curate these assets, we believe will position the new ASK REIT with a bright future ahead. And as well, from a commercial portfolio sense, the work that the team has done to almost completely turn over the balance sheet of commercial and importantly, the strategic partnerships that we've embarked on in recent years, similarly, we believe provides an exciting outlook and future growth prospects. Turning to the outlook and the balance of the year FY '23. Notwithstanding our announcement and intention to de-staple the Self Storage business, we remain focused and cautiously optimistic given the prevailing macroeconomic and inflationary environment as we see it impacting both the Self Storage and commercial portfolios. Our strategies being enacted in both are well known, and have been consistent for prior periods for some time. In each sector, we have income and occupancy optimization strategies across the stable of portfolio -- sorry, portfolio of stable investments. As well in storage, the product curation and creation with the development pipeline is now in full swing and we believe as this lifts materially the Storage King footprint, again, in superior locations. We're seeing, as Michael touched on, varying levels of occupancy as well as rental rate occurring in different markets at different stages. However, what we do see is that we are seeing more normal operating conditions than have been prevalent for the last 24 months. Pleasingly, we are affirming today that we expect distributions for the full year to be at least AUD 0.184 per share. That ends the formal remarks for the results. And I look forward now to taking any questions you may have or otherwise meeting with you in-person in the weeks to come.

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

My first question was just around the proposed Self Storage REIT. Just keen to hear if you're able to provide any additional commentary around the catalysts to announce de-stapling today. Just keen to hear how you think about in the context of, obviously, current listed equity market conditions and fundamentals underpinning Self Storage in the long term, please?

I think for us, it is an evolution of the scale and the size of the platform. And I think what we see going forward is that focus on expansion, investment opportunities in development at continued aggregation of some other non-Storage King managed stores. And we just feel that it's an appropriate time to make the break and set the REIT such that investors are able to invest in a pure play, which, obviously, there is only one comparable investment in the Australian market. So we've had strong feedback from investors in the last year or so. And certainly, that has played a large part in formulating this proposal.

And just as a follow-up to that. I'd be keen to hear -- [ I don't know if you had ]any comments around what this means for the Abacus Group moving forward. Obviously, shifting more towards a manager, particularly this materially large Self Storage REIT if it does come through. Is there any signal of future ambitions to Abacus moving forward in terms of maybe the assets on balance sheet or other asset management opportunities as we look into the longer term as well?

I wouldn't read too much into that, Caleb. But I think you're taking 1 or 2 data points and trying to make a thesis. I think for us, we have a balance sheet of investments. We are going to retain ownership for the large part of those investments. And we've got strategies at each of them. We have active strategies with our partners, both in Melbourne with Walker's as well as 201 Elizabeth Street with Charter Hall. We've got a management team with strong asset management and investment management capability. And we just think that the strategic transformation of the portfolio from where it was 5 years ago to where it sits today allied with the minor investment that we retain in the storage REIT, allied with the management of the storage REIT positions the commercial portfolio in a terrific position going forward.

Steven, that's clear. And just one final question from me, just around guidance. I think you've previously spoken to paying out in FY '23 85% to 95% of FFO. Just wondering if that was still relevant as we go into the second half of '23. Any comments around what's going to be the key earnings drivers from your perspective going into '23, if you are expecting a recovery to come through there, please?

Yes. So I think we're heading into a destapling, a major balance sheet event, which I think will make a significant and material change to the business. We don't believe for the half year through to June, which by the end of June we would hope the destapling takes effect, we don't believe an FFO payout ratio will be relevant at that stage. We're happy to affirm, and we believe the cash flows from the existing operations will more than cover the AUD 0.184 per share. And what we intend to do in the course of the next few months as we lead up to issuing documents to investors, both for the destapling and potentially an associated rights issue is providing more color on that forecast, both for the balance of the FY '23 year as well as how the 2 businesses sit for the FY '24 and beyond.

Your next question comes from Richard Jones from JPMorgan.

Can I just clarify, is it 75% unitholder approval that will be required for the destapling?

Yes. There are some general resolutions, common resolutions that are 50% threshold, but the major one, the most significant one is 75%.

And can you clarify whether Kirsh will be able to vote their stake and whether you've had discussions with them and what their feedback is on the destapling proposal?

We're having legal advice on their entitlement to vote. We believe that is something that is possible. What I would say as far as engagement with the shareholder is that you'll notice that the release is authorized unanimously by the Abacus Board. And Richard, you'll be aware that both our Chair and Mark Bloom are both representatives of the Kirsh Group, our major investor with over 51% of the shares. So we take unanimous approval of the Board, particularly with 2 major investor representatives, as being support for the transaction.

Okay. That's clear. Just interested also just [ thinking ] of which group was to be used as the base? Just wondering why perhaps Storage wasn't used as the base REIT and your commercial assets spun out as the external managed REIT. Can you just clarify, I guess, your thinking on the structure you chose as opposed to the structure I just outlined?

I think you might be reading a bit more complications into the way we've been thinking. In essence, we are a 6 stapled, you'd be aware, Richard, if you see from the stat accounts. 4 of the stapled entities are commercially asset-oriented and 2 of them, Abacus Storage Property Trust, Abacus Storage Operations, a trust and a company, are both Storage related. So that's almost as much as the complexity of why the 2 entities and how we've destapled what we have. And we think that, that step of retaining a minority interest as well as the management rights of the Storage King REIT is the perfect alignment for the manager at this stage in its growth.

Sorry, just to clarify. I guess what I was asking is why Storage King REIT isn't being used as the co-owner of Abacus and the RE of the office assets.

Because that's not where it's owned today, Richard. So the RE for both the Storage business and the Commercial business is owned by Abacus Group. All the assets and investments are owned by Storage King Property Trust. Storage King operating platform is owned by Storage King Operating Limited, the company, as are the 480 employees that exist across the business.

Okay. [indiscernible].

It's a simple destapling. We can take you through the detailed steps, but I think you'll appreciate how simple and straightforward it is.

Okay. I think it should be well received as the share price reaction suggests it has been.

Your next question comes from Lou Pirenc from Jarden.

Yes. Just on the ongoing business. So in terms of the acquisitions that you've announced for the first half. And I think you mentioned that the 80-something-million for the first half, only 2 of them were established assets. So the rest is just non-income-producing, or is there some income linked to that CapEx?

Commercial or self-storage?

Self-storage.

Self-storage. I think we've got a number of income-producing -- 2 income producing and the balance are development sites.

Can you provide a yield on some of those income producing?

[ 1.06% ].

[ 1.06% ]. Great. And in terms of the development assets that you talked through, the development pipeline, what is it, AUD 483 million, what's the timing of that roughly? And what yield on cost are you targeting at the moment for development?

So it's an up to 5-year program of developments [ float ]. And it is quite back ended, as Nikki touched on. We typically aim at 6% to 8% yield on cost for the developments. But with -- as each project rolls off, and this has obviously been buffeted a bit by the cost pressures and inflationary pressures of the last 12 or 24 months, we've actually seen double-digit returns on those developments. So we're very optimistic. And I think it goes to the heart of that integrated operating platform with the developments. That hand-in-glove designing and then opening and managing stores in new locations, when you have a team of market experts as we do, who've been doing this for 25, 26 years, really is paying dividends in the creation of this new product. And that's what gives us -- and it's really in the last 12 or so months has given us enormous confidence to press ahead, as Nikki mentioned, on our tactical investment in certain geographic locations because of that analysis we've done on our competition on the catchment, where we believe the market demographics would best be suited to the sort of storage investment that we're now making.

Right. A few more, if I may. Overheads, you explained the increase in overheads in the first half. Should we expect that the first half is a good lead for -- and I know that it's all a bit [ moot ] because of the proposed transaction. But let's assume that it's growing concern for now that overheads will remain similar to first half, or is there more to come in terms of increase?

Yes. It's a fair measure, Lou. I think that the overarching comment is that most of the overhead increase is because of, as Nikki mentioned, we've added the most material uplift in NOI and locations in big stores across the portfolio, the operating platform in Storage King. So with that increased footprint comes necessary increased overheads. But it's a good run rate.

Okay. And then just following up with some of the earlier questions, and I appreciate that you're still working through this. But the Storage King operating platform will be part of the new REIT, right?

Yes.

Yes. So what will the responsible entity do given that all the assets are mentioned by -- managed by Storage King, so it's kind of an internally managed...

Funds management and investment management, acquisitions, redevelopments, acquisitions of development sites, and then some centralized functions such as treasury, legal, people and culture, risk management, insurance, we see great efficiencies in having those services provided across the Abacus Group for both businesses. So it's a deep and very detailed management agreement that is being drafted. And it's also why, at this stage in the scale that we've got the storage platform, that we think the external manager model is appropriate. And obviously, as each year goes by, as the scale of the platform continues to grow, complexity and, obviously, capability, that external manager will always be reviewed by that independent Board of the Storage King REIT.

Your next question comes from Edward Day from MA Financial.

Steven, just to clarify the timing on the destapling. I note the presentation says an AGM will be held in the third quarter of this calendar year. Can you just confirm your expectation around timing?

Yes. So that's the plan. No later than the third quarter. We would be hopeful that we can have it done towards the end of this fiscal year. But given the raft of regulatory documentation, due diligence, independent expert, preparation of documents, distribution of documents in advance of this unitholder vote, we're just giving ourselves some flex to make sure that we can deliver on the time line we say.

Right. Okay. And then just on your development assets, can you just talk to whether you're seeing any change in the speed of let-up?

I think there is, and as Michael touched on, and certainly in the operating trends by various markets, historically, new stores have taken 3 to 4 years to lease up. I think with the accelerated activity and heightened level of activity during COVID, that was compressed to probably more 2 to 3 years. But certainly, a track record now and the recent completions at Epping, Gregory Hills just recently, we're seeing more normalized operating conditions. I think that's fair to say, Michael.

Yes. I think we could safely say that the last 2 years ramp-up or let-up speed was fairly unprecedented, and that we expect in the next few years that more normalized condition like it was pre-COVID.

And just the last one. Just interested in what your move-in rates and how they compare to your move-out rates.

Over what period. Just recently you mean?

Through the half year. What you're seeing now, but on average through the half as well?

Yes. Well, there's definitely some indications that the move-out numbers of individual customers is increasing slightly as the economic pressures hit. But as Nikki touched on, inquiry levels from storage customers are still very strong. So I think the issue will be more just getting the balance of [ believers ] right with the pricing and the occupancy.

Your next question comes from Alex Prineas from Morningstar.

Just wondering in terms of the structure of the destapling, if hypothetically down the track if there was a third-party interested in the storage asset or the storage business. As a separate REIT, presumably, that makes it easier for somebody to acquire those assets or the business. But on the other hand, with the internal services that you talked about, that would be still with the Abacus Group like the HR and the treasury and investment management, and so on. That might still make that situation more complicated as far as if there was a buyer down the track. Is that part of your -- was that aspect given consideration? And am I wrong in characterizing it that way?

I think there's probably a slight wrinkle in your logic, Alex. And that is the destaple is a true destaple of separately listed entities today. So as a consolidated group of the 6 staples, each of the entities has its own set of accounts and is technically a listed entity. Obviously, market participants can't invest in the underlying staples because you invest in the group. So a product of the destaple is that the beneficial owners of the group today end up with a ticket in both Abacus and the ticket in Abacus Storage King. So if you consider we have a major investor, our major investor, incredibly positive and supportive of the business, will end up with effectively a circa 50% interest in both businesses. In addition, as a result of the staple, it's our intention that the group will retain, as in Abacus Group will retain a minority position potentially up to 20% and in the Storage King REIT as well. So I think you will have a situation where it is concentrated in a few hands. And therefore, we believe it probably will attract premium pricing. But I think that's something for the market participants to determine. But at the end of the day, the structure is plain simple. And you'll see in months to come as the documentation is produced, just how the assets and unit holdings flow.

Okay. And just another quick question on the office occupancy of 94.8%. It excludes development-affected assets. Does that mean it also excludes assets that have been recently developed and are completed that are still being leased off?

Yes, that's right. With Johnston Street as well as Church Street excluded, the only other 2 assets are the business park at Virginia Park and our interest in 201 Elizabeth Street. If you exclude all those assets, you're down around 91%.

There are no further phone questions at this time. I'll now hand to Mr. Sewell for the webcast questions. Please go ahead.

Thank you. I'll just touch on a couple of questions that have come through on the webcast, and in particular, questions around the headroom, the acquisition capacity, the liquidity of over AUD 220 million. I think from where we sit, we have about AUD 30 million or AUD 40 million of ongoing run rate in maintenance CapEx in commercial and a similar number, perhaps up to 50-odd-million dollars per year in the development spend on the number of projects that we have rolling in storage. So we see that we have ample capacity on the debt facilities today. As far as the gearing levels, and we've made the comment in the release that as part of the destapling, the gearing levels will be set for what's appropriate. It's fair to say, we have a 25% to 35% range in Abacus, and it sounds like that would be best and appropriate for Abacus Storage King. And to give it ample capacity, I would hazard a guess that it's going to be somewhere in the 25% to 30% range. And just I think everybody will be asking what happens to our stake in the self-storage REIT that we own. That is owned by the Abacus Storage Property Trust and will remain owned by the Abacus Storage Property Trust as part of Abacus Storage King REIT. So that was the end of the questions online. We appreciate you taking the time. We appreciate the busyness of today, and look forward to speaking to you in coming weeks. Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.