Abacus Group (ABG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the HY '24 Abacus Group Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Steven Sewell, Managing Director. Please go ahead.

Good morning, everyone, and welcome to the half year results for Abacus Group, ABG, as we now know, its first result as its own freestanding commercial REIT and as the fund manager of Abacus Storage King, which most of you will know, reported its half year results back on the 16th of February. I'm joined here today by Evan Goodridge, our CFO; as well as Cynthia Rouse and Chris McKegg from our Investor Relations and Corporate Comms team. Turning to the highlights. Well, what a 6 months of achievements for the group. We successfully completed the de-staple of the storage operating platform and $3 billion trust of investments, now trading as a stand-alone entity referred to as Abacus Storage King under the ASX ticker ASK. Abacus Group is now a more focused REIT with a portfolio of diverse office and retail assets, plus a near 20% stake in ASK and the management rights of ASK. Our commercial portfolio during the period continued to achieve goals and we continued our theme from recent periods of consolidation of our active investment management, disposing of 2 assets for consideration of approximately $107 million at a very competitive 4.5% discount to the June 2023 carrying values. Our commercial portfolio remained incredibly resilient during the period. FFO growth on a like-for-like basis of 4% compared to first half of '23, with highlights being the 12.5% leasing spreads on new and renewal office deals done during the period. 5.4% average rent reviews in the retail portfolio. These pleasing achievements in the current operating environment, a testament we believe, to the portfolio's diversification by market, asset grade and importantly, customer profile. The group's strategic stake in the self-storage sector also proved to be incredibly resilient to the broader macro factors, plus we believe it benefits from a number of cyclical and structural tailwinds. As a result of our investment return from our near 20% stake in ASK as well as our management of the fund and development fees, self-storage accounted for 20% of the group's earnings in the half year. With our highly motivated and capable team, we continue to enact active asset plans in both our commercial portfolio as well as in Abacus Storage King as our fund manager, underpinning our strong and growing income streams. Abacus is well positioned to drive this income growth over the short to medium term from now a curated portfolio of 19 assets post the recent divestments with limited capital expenditure forecast in the near term as all major capital projects have been completed in recent periods. Looking forward, we expect these investments to contribute very positively to FFO as lease-up is achieved. Turning to the platform metrics for the half. Abacus Group reported a HY '24 FFO of $0.0449 per security driven by the strong trust of assets with a sizable and quality investment portfolio in both commercial real estate and self-storage sectors. The dividend of $0.0425 per share reflected a payout ratio of approximately 95%. The statutory profit of minus $143.6 million was as a result of the decrease in the fair value of the commercial investment properties as cap rates across the broader market expanded, while our core earnings metric FFO was strong in the half, up 4% versus the last half on a like-for-like basis. Total FFO being $40.1 million. Post the de-staple and now divestment of our 100% interest in our little asset in Ann Street, Surry Hills as well as the remaining 50% interest in Ashfield Mall, the group's balance sheet is comfortably within the Board's target gearing limits and therefore, with ample capacity to fund the various asset management and growth initiatives that are underway with gearing at a very low and comfortable 30.2% post the settlement of those 2 transactions. In this economic environment, we remain focused and disciplined on directing capital towards assets that provide potential for enhanced income growth to generate increased total returns and create medium- to long-term value for our stakeholders. Turning to the balance sheet allocation. As I just mentioned, as you can see on a pro forma basis post the asset sales, the group continues to maintain a diversified balance sheet. Office now accounts for about 60% of total assets, down from 67% at the full year with retail and storage accounting for about 30% of total assets. Overall, Abacus Group remains a specialist commercial real estate owner and manager with a strong track record and history of investment in partnering with select groups for mutual benefit, where we see the best long-term value and income growth opportunities is where we invest. It's also important to reiterate that Abacus is still significantly exposed to the self-storage sector by way of its strategic 19.8% investment holding in ASK. Turning to the strategy. From an Abacus Group perspective, nothing has significantly changed. Our vision is to create exceptional value for our customers and stakeholders through the identification, ownership and management of a portfolio of real estate investments. The group remains a strong asset-backed annuity style business model, where capital is directed towards assets, as I said, that provide potential for enhanced income growth and ultimately create value where our people, market insight and repositioning capability as well as strategic partnering are the key enablers of our strategy. I'll now turn over -- pass over to Evan to discuss the financial metrics and capital management strategies for the group.

Thanks, Steven, and good morning, everyone. During the period, Abacus Group's earnings profile significantly changed. Group now manages and holds a 20% stake in the newly listed Abacus Storage King entity. This strategic move has allowed us to diversify our income streams with over 40% of our income for the period coming from retail, management fees and investment returns from our ownership in ASK. Office remains an important part of our asset allocation. And despite the current challenging macroeconomic conditions, the group's portfolio exhibited resilience, delivering solid returns with like-for-like income up 3.7% compared to the prior period. The growth in our like-for-like office income was primarily driven by strong leasing spreads and a 40 basis point improvement in occupancy over the period. Pleasingly, we anticipate the second half to be in line with the group's first half performance. Retail income also saw an increase, up 3.5% on prior period. This was primarily attributed to CPI rental escalations on existing tenancies. With the sale of Ashfield Mall, our retail income in the second half will reduce albeit slightly. In respect to self-storage, given that de-stapling occurred in August 2023, ASK was under management for only 5 of the 6 months this reporting period. During the half, the group earned $7.1 million in fees as manager, comprising $5.2 million for funds management and $1.9 million for development services. Looking ahead, we expect continued growth in ASK's funds management and development fees. This is in addition to the increase that will follow from the full 6-month management period that will occur in the second half. Net finance costs were $19.4 million for the first half. Following the de-stapling process, the group's fixed hedge profile was more evenly distributed between the group and ASK, resulting in a first half weighted average cost of debt for the group at 4.1%. This has resulted in a 4% increase in FFO from continuing operations to $38.9 million, translating to an FFO per security of $0.045. The group continues to actively manage capital initiatives so that it can continue to deliver the best risk-adjusted and reliable returns. During the period, the group sold over $100 million worth of assets at values close to prior book values, with Ann Street, Surry Hills settling in early February and Ashfield Mall anticipated to settle in April 2024. As Steven mentioned, the sales for pro forma gearing dropped to 30%, comfortably below our maximum target of 35%. Other than our commitment to net zero emissions by 2030 and the funding of future tenant leasing incentives to drive income, we have no development commitments at this time. In terms of debt, we continue to receive strong support from our lenders. In December, the group increased and extended its banking facilities at attractive pricing with a weighted average debt maturity of 4 years and importantly, no debt expiring over the next 2 years. The group also maintained significant hedge cover over the next 5 years, providing material protection against interest rate fluctuations with our current hedge position at 76%. The de-stapling of Abacus Storage King has simplified the Abacus Group business. The group's largest investment is now its $400 million ownership in ASK. Post the sales of Ashfield Mall and Ann Street, Surry Hills, the group will own 19 properties, of which 5 of these properties make up approximately 50% of the total commercial portfolio value. Our income profile remains resilient. However, our properties are not immune to the prevailing higher interest rate environment. And as such, an appropriate 36 basis point expansion in cap rates has been applied across the investment property portfolio. This has resulted in a decrease in investment property values of 6.4%, where office decreasing 7.1%, retail 3.7% and greenfield sites at 9.1%. For context, our office portfolio has now been revalued down 17% from pre-COVID level highs. Despite this valuation decrease, our portfolio remains well diversified and in our view, is conservatively positioned with a weighted average cap rate of over 6%. I'll now hand back to Steven to talk further about the group's operations and our sustainability progress.

Thanks, Evan. Now turning to the operations of the group. At the heart of our operations, there are 3 core focus areas; customer relationship enhancement, entrepreneurial nimble and decisive investment, as well as smart responsive and responsible asset and development management. These pillars not only sustain our business but also drive our commitment to long-term value creation. To achieve our goals and maintain a competitive edge, we recognize the importance of enablers that fuel our success. Foremost amongst these are our high-performing people and culture, the driving force behind our business. The office portfolio continues to perform in line with expectations and provides a strong asset backing for the group. We have a multitude of leasing asset and investment management strategies in play across the portfolio and consistent with our commitment to direct capital towards assets delivering the best risk-adjusted returns in the near term, we divested 2 noncore assets and opportunistically acquired a very small building adjacent to our highest valued office building at 99 Walker Street in North Sydney. Valuations are being impacted, as Evan said, right across the market, and we continue to monitor market trends on comparable transactions, supply and demand drivers in the major markets, particularly Melbourne, Sydney and Brisbane. Our occupancy remains strong at over 92%, consistent with our long-term average of the group as is the WALE of 3.8 years, which reflects the small- to medium-sized enterprise weighted customer base, who generally we feel commit to leases in the 3- to 5-year range. For those of you who may be not familiar or haven't historically looked in detail, Abacus Group today has a well-diversified portfolio by market, customer and industries. Importantly, we are in the selection of assets because we see rental income growth opportunities and the opportunity to drive this income requires limited capital expenditure going forward. As a result, we believe our portfolio has a unique offering with quality predominantly A-grade buildings with relatively affordable rent levels given their prime central locations in Sydney, Melbourne and Brisbane mostly. Leasing spreads for the period was strong, with 201 Elizabeth Street particularly strong, although net of that figure, this spread still equates for about 5.6% positive across the portfolio. Despite a meaningful step-up in our average net base rents due to both portfolio composition and the increasing rents that were achieved, we do highlight the overall modest average net base rents that exist in our buildings relative to market. We believe we offer a superior occupier value proposition of location, amenity and occupancy costs and that is certainly reflected well in the discussions and the negotiations we've been able to conclude with new and existing tenant partners. The main call out from our leasing profile is the 8% of current vacancy. This largely represents recent spec fit-outs works, which have now been completed. And as you can see on the slide, the vast majority of this space has been fitted out and is now available for lease. Active leasing campaigns are currently underway. However, overall, we remain back-end loaded with about 50% of our tenants over 4 years from expiry. By virtue of the nature and location of our key assets, as detailed on our next slide, our tenant partners tend to be small to medium-sized enterprises and accordingly, approving very resilient occupiers. Turning quickly to retail. Although, a relatively minor segment of our balance sheet, it's hard not to be completely satisfied with the returns. In particular, our largest dollar value retail property, Oasis Shopping Centre in Broadbeach on the Gold Coast is a remarkable turnaround story from only a short 5 to 6 years ago. After nearly 30 years of ownership post balance date, we've disposed of our remaining interest in Ashfield Mall here in Sydney, reducing even further the retail segment's contribution. Nevertheless, it's a solid component of the commercial portfolio with our 2 retail centers and a minority investment in the Myer building in Melbourne, all performing exceptionally strongly. Rental growth year-to-date has seen a significant rent growth of 5.5%, due in part to 35% of the portfolio's rents being linked to CPI. Turning to our sustainability. As an owner and manager of commercial real estate assets, sustainable business practices, enhancements continued to be embedded in how we conduct business. Consistent with our ambition for continuous improvement, standards and activities, we're pleased to recently bring forward our commitment to achieve net zero Scope 1 and 2 emissions from our previous 2050 to 2030, we're confident that this commitment will better position the group's credentials and meet increasing expectations of investors and tenants. Pleasingly, our half year '24 emissions were 39% below the FY '19 baseline with 99 Walker Street during the period, becoming certified as a Carbon Neutral Building, testament to the progress and success that we're having across the portfolio delivered by the [ 2 ]. The group continues to improve its degree of sustainability in '24, most notably, as I said, a 39% reduction in Scope 1 and 2. And pleasingly, we've seen our NABERS Energy rating lift to 4.8 stars and a 4 star waters rating. We remain firmly of the view that a continuous improvement strategy is required to meet and exceed the industry's benchmarks of this evolving space over the medium to longer term. Turning to the outlook and guidance. Thank you for listening today. I hope you've got a good simple summary of the performance of the business. I'd like to confirm that the group's entire balance sheet of investments are all contributing well to an overall diversified growing income stream. Over the remainder of FY '24 and beyond as we expect interest rate volatility to inevitably fall, we remain confident that Abacus Group is well positioned to leverage our low gearing, our key enablers and deliver recurring income and value creation over the medium to longer term. Pleasingly, we're affirming today that we expect distributions for the full year to be at least $0.085 per share for the group and this will reflect the payout ratio in the range of 85% to 95% of FFO. That ends the formal remarks for the results. I look forward to now fielding any questions you may have or alternatively meeting with you in person in the days and weeks to come.

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

My first one is just around some of the office leasing metrics. So, leasing spread is still quite strong there at 12.5%. Incentives remaining at about that circa 30% level. Are you able to provide any color on an effective basis, maybe what those spreads were and where the portfolio is compared to the market, please?

I think what we've tried to identify and highlight, Caleb, is that the leasing -- the expiries and the vacancies that we have in the portfolio such as a 201 Elizabeth Street and what we'll see, for example, here 77 Castlereagh Street is actually the lease-up of space that has been held at historically quite low levels. We've seen it at 201 Elizabeth Street with the sort of numbers, where we're now delivering effective rents, net rents in the range of $1,200 to $1,300 a meter base for the upper levels. And that's well in excess of the original underwriting for that building. Similarly, here at 77 Castlereagh, as we spoken about previously, when we acquired the building, average net rents in the building were between $700 and $800 a meter. And we're firmly of the view that with the upgrade to public space, we've just opened a new end-of-trip facility on the upper level of the building, the market rent for this space is around $1,000 a meter net. So we see that opportunity to lease up that vacancy. And that's certainly the reaction that we're getting from the market is that people are able to and happy to take the space at those levels because of the location and the quality of the space.

Caleb, probably I may add to that, that the incentive level that we've got on new deals or renewal deals are about the same. And our incentive level has been the same last period compared to this period. So, from [ phase ] rents or an effective rent basis, you're probably going to see the same leasing spread growth.

And maybe just a follow-up to that on the upcoming expiries, you flag on Slide 16, particularly 710 Collins Street and 324 Queen Street. Any thoughts on potential renewal or re-leasing of that space over the next year?

Which were the 2 buildings that you mentioned, Caleb. 324 Queen...

Yes, across the major expiries more broadly.

I think the major expiries here, we've got 2.5 floors now vacant in 77 Castlereagh. And I think that's -- we've fitted out half the floor spec fit out. We've upgraded the public space and the amenities for the other 2 floors and now open just in the last week, the end of trip facility for the building. So we've seen a very positive reaction to the market now that the space can be viewed in its new format rather than tired old format as it was historically. In Melbourne, 710 Collins Street, you'll be aware with the publicity that that's the subject of an application by the Walker Group, who's our partner on that building for a major office redevelopment. That has not been approved and has -- there's not a clear time line as to when that might be approved. In discussions with Walker, we believe that the market cycle for that is not anywhere near in the near term. So, we think that's a sort of 5- to 10-year horizon for that project, if that was to be built. So the strategy there is that we'll be going back into that building, the Goods Shed on the southern side of the Goods Shed opposite Collins Square and re-leasing that space, either to existing tenants or new tenants. It's quite funky space at a quite competitive rate compared to other offerings in the Docklands precinct. And then 324 Queen, we've had a very good, strong success in that building with leasing up the space to multiple tenants. It's a very well-performing building and we find that whenever sort of whole floors or half floors become vacant, they tend to lease up pretty quickly simply because of its location as well as the quality of the offering at the rent. So, they are the -- they are the sort of 2 or 3 main expiries that we're focusing in on.

And then just one final one for me. So, there's been a little bit of capital REIT recycling sort of through the de-stapling process and obviously some more divestments announced in January. Just keen to hear what you're seeing in terms of market liquidity for those sorts of assets. But any further ambitions to continue to see some divestments across the balance sheet portfolio?

We were positively surprised with the quality of the bids for the assets, the 2; one, in conjunction with ISPT, Ashfield that went to a private player there at a strong price. And then also our North -- Ann Street, Sydney, Surry Hills building, again, very strongly bid by a private investor. I think from our perspective, we do a routine and regular review of the returns against each of the properties. Again, it's all focused in on where we see this opportunity for income growth. And we have no current plans to divest further assets but as each 6 months goes past, we continually refresh the assumptions, understand what's going on in the market and see where properties are not delivering on that income growth that we expect. So, at the sort of gearing levels of 30% with very strong support from our lenders, we're in a very strong balance sheet position and we don't see the need to divest further assets and we take advantage of opportunities to invest if we saw deep value.

I guess in terms of -- if you're comfortable that 30%, is there anything on the more value-add side that you might look to deploy potentially? I know you don't have any active developments or any considerations on deployment? Or is it really just about maintaining balance sheet at the moment?

I think it's a prudent time to maintain strength of balance sheet. We've got small activities underway. As you'd be aware, we've sold a small segment of the Virginia Park business park down in Melbourne. So, we do have some active investment management strategies going on at various assets. But our focus really is on leasing, tenant incentives, attracting tenants to our buildings and improving the amenity in the public space of our buildings such that they position best for the current competitive market that we see ourselves.

Your next question comes from Steven Tjia from Barrenjoey.

Steven, just kind of following up on the prior questions around your thinking around 201 Elizabeth Street and potential growth initiatives there, occupancy at 50% now?

Yes. It's -- the history there you'll realize has been one that the building for many years after our purchase back in 2018-'19 was basically to hold the lower levels without re-leasing because we had a plan at that point to extend -- to develop and extend the building. That plan about 12 months ago was shelved indefinitely. And with our co-owners managed by Charter Hall, we've undertaken a very active re-leasing program. And we've been exceptionally surprised and pleased with the performance of that re-leasing program and the re-leasing strategies that Charter Hall are putting in place. So, we're constantly working through all the levels of that building that had either vacancy or near-term lease expiries, looking wherever we can to capture what is effectively the uplift in rent that we think exists in that location. We've got strategies to improve and upgrade the public space on the ground floor, it's a double level lift lobby. And that's basically delivering us an enormous upside in FFO period-on-period. So, we see that opportunity to get that building back up into the 90s, potentially higher 90s in vacancy or occupancy rather, as just strong cash flow and we'll continue to drive that.

And just on capital management and gearing, obviously, you're at the lower end of your target range now. Would you and the team consider a share buyback given the potential earnings accretion there?

I think for us, I mean, share buyback is an opportunity. That's a capital management initiative that's available to us. I think where we sit, we sit in the middle of our range, Steve, not the bottom end of it. Our range is 25% to 35%. And we think it's a prudent time to sit with a strong balance sheet as we are at the moment. Capital market and share buybacks work at some point in the cycle, we think that this time is better to sit with strong liquidity, strong balance sheet and drive the income growth of our assets, particularly through those leasing initiatives and spending money with leasing incentives to lease up, particularly this vacancy that we've got in the current and the next year.

Your next question comes from Larry Gandler from Shaw and Partners.

Follow-up from that last question. Just in terms of your recently development affected properties, I guess, that would be Church Street, Johnston Street and Elizabeth Street. I think you referred to the occupancy for Elizabeth Street, but can you sort of provide an update on those properties where the occupancy is and what's left to be let, maybe things like average rents and where they might be heading in sort of rent rate metrics?

So just to get the easy one out of the way first. The Church Street building is 100% leased, Larry. That's a brand-new completed asset. And I think that -- that was a very successful development we did with the Salta Group. That's been very strongly leased. It was launched during COVID -- leased during COVID. And we're very pleased there. With gross rents just under $800 a meter, we overachieved on our original feasibility. Abbotsford is a property that we have developed and that was something that we very consciously downsized Computershare's tenancy because they were 100% of the building. What that meant was that we basically shrunk them to 50% of the building and then have started to re-lease the surplus space. We're up to about 83%, 84% occupied at that building. Rents are a bit lower than Church Street there. It's at about $700 a meter gross. And we're working through that. We've got some flexible workplace there, some project space and some interest in the new suites, but the building has been completely transformed with a massive light shaft built down through the middle of it. The last building is 201 Elizabeth Street. And as I was just touching on the previous questioning, we're sitting at around 50% to 60% occupied there. But we've had enormous steps in the last 6 months since we've had clarity on this development that we've now deferred indefinitely. And the rents there, average gross rent is about $1,200 to $1,300 a meter, that actually is way in excess of what we originally anticipated when we bought the building back with Charter Hall back in 2018. So, we've been very pleased there. And certainly now with a very clear strategy on leasing up those lower levels, meeting the market in that 30% to 35% incentive level. What was particularly pleasing during the half as well was that of the 23,000 square meters that we leased up in about 50 transactions, about 18,000 square meters of that space was new leases. So, these are new tenants coming to our portfolio and only 5,000 were renewal of existing tenants. And that's quite a change from the previous period -- reporting period, where the majority of the leases done or deals done were on renewals. So, we think that's symptomatic of a leasing market that's starting to turn and tenants willing to commit to space because, obviously, they've got more certainty about their own business and particularly work from home and their office utilization metrics.

Steven, it sounds like you're quite confident in terms of the lease-up of the remaining space in 452 Johnston Street and Elizabeth Street. Do you think you'll have that fully leased or near 95% in the next 6 months? Or does that take longer than that?

I think it's been probably within the 6 months, we'd be hopeful but by calendar year-end, we'd be hopeful with both buildings that we will have broken the back of that. 201 is a much bigger exercise. And we're working with our partners there. Charter Hall are our lead partners and manager of that process. And we're very happy with the performance and the resources being applied there. So, it is -- they're very different assets you've drawn attention to there. But your first comment is exactly right. We are very confident with the lease-up of the assets that we have and that's why we own the assets. And that gets to our process around review and understanding what assets we don't want to own are assets where we're not confident about that leased-up capability.

Your next question comes from Richard Jones from JPMorgan.

Just wanting to discuss, it's obviously been a pretty underwhelming response sort of de-stapling in terms of where ABG is trading. Just interested if you could kind of shed some light to the market in terms of discussions either at senior level or Board level that you've had around what the strategy is to try and close the gap between where the stock is trading and where I imagine you believe fundamental value is.

I think that's a subjective view, Richard, that it's been underwhelming. I think from our perspective, we're fully cognizant of the fact that we have a 50% investor in the vehicle. We're also as a result of the split from $5.7 billion of assets to create now 2 vehicles, one, with over $3 billion of assets and now Abacus Group with $2.5 billion of assets. We've come out of the ASX 200 Index and sit comfortably in the ASX 300 Index. But what's clear with the performance and the results and the focus that we've had since is that the ASX 300 doesn't get a lot of tender loving care from the sell side and from research. So, what we've found is that we've been able to market to a different customer and investor base to great effect. So, our position is always the vehicle Storage King has only been on the stock market now just over 6 months. And we think that as every 6 months goes by, we'll deliver results that hopefully, investors and hopefully, the sell side eventually realizes makes this vehicle as well as our other vehicle, good investments. But we're very focused on the lease-up. And I think delivering on the lease-up and growing income, asset-backing the vehicle is the best way to close the gap, and that's what we're very focused on delivering.

Has there been any discussion about a more aggressive sale of assets to potentially reduce the level of debt in the vehicle and potentially do a somewhat aggressive buyback? Because obviously, the stock is trading at, I don't know, 45% discount to asset backing, which has no value attributed to the management platform. It's had asset impairments that you said of 17%. So, just interested whether you and the Board are interested or focused on a more aggressive approach to try and crystallize or close that gap.

I think what we're focused on, Richard, is an aggressive approach to lease up and drive the income of the assets. I think we're very comfortable with the level of gearing at 30%. We don't have long-term near-term capital commitments for development. And we believe the application of resources, both dollars and people, to lease up and fill the space, drive the income of the assets more than confirms the asset backing of the company and the group. And we set as something of a differentiated rate in the Australian market as the owner of assets. We're not a fund manager. We've managed the fund called Storage King because we've been investing in properties in storage for 18 years. And we've set that vehicle in its current structure because it was the best outcome for Abacus Storage King. We also happen to be one of their biggest investors along with our major investor calculator. So, we're constantly in dialogue with our Board. We're constantly in dialogue on the review of the outputs and the returns that are going to be delivered by every single asset. And we have quite a discrete portfolio. It's quite a well-curated portfolio exposed to what we believe are the best markets in Australia and we're comfortable with this strategy that we've got going forward.

Your next question comes from Edward Day from Moelis Australia.

Just following up on 201 Elizabeth, can you just give an idea of the CapEx that you've put into that and the remaining CapEx that you think will be required to lease that building up?

I think since -- and I'll talk 100% values here, would be in the range of $60 million to $70 million to date. And I think the current strategy for the balance since we deferred the -- deferred the development is about between $50 million and $60 million for the building on a 100% basis and that's over the next 2- or 3-year period. I think for the next year for '24, we've got about a $10 million to $15 million capital commitment if we were able to lease up all the tenancies that we were looking to lease up. But it's quite a targeted strategy and it's quite capital-light I would go so far as to say.

Does it make sense to look to sell to once you've completed the leasing, just given your minority stake?

We're a 32% interest with 2 other parties as well as Charter Hall with a minority -- with a small piece. We're extremely comfortable with the exposure to that asset. It's an irreplaceable piece of real estate on a 4,000-plus island site that fronts 3 of the major access points to Sydney CBD. So, you don't get the opportunity to own real estate like that too often, Ed. And we've done the hard yards with the building, having suffered at the income levels over the last 3 or 4 years. So, we're actually enjoying this moment in the sun with this building and I think our partners would be as well. Now that's not to say next year will be a different -- once we get it leased to the point we want it to be, we'll be in dialogue with our partners. But from an Abacus perspective, we're extremely comfortable with owning this asset. We actually like the exposure that it gives us to that part of the CBD of Sydney.

Just the last one. Just on Slide 15, you've got your average net base rate of $743. Can you just, I guess, compare this to the number at June, which was $835 per square meter? Just kind of counterintuitive, given where your leasing spreads have gone.

I think you'll find it's due to the composition of the portfolio. I think why don't we come back to you separately on that, Ed.

Ed, my guess, it's not apples with apples. My guess is that our analysis is that our net base rent is up compared to June. So, my guess is that we're included other companies or something in the June number. It's not apples with apples.

There are no further phone questions at this time. Pardon me, we do have a question from Ben Brayshaw from Barrenjoey.

Just wanted to clarify, with the additions to investment properties, the last 6 months of $62 million. Just could you just break that up, please, between additions by way of acquisition for the property at Walker Street in North Sydney and what's being spent on the underlying portfolio in terms of CapEx and incentives, please?

So Ben, about $12 million of it is the acquisition of the Walker Street in North Sydney. So, the vast bulk of it is capital expenditure, whether it's both leasing incentives as well as, as Steven mentioned, the end of trip facilities and other public communities in our buildings.

Yes, no, I understand. That's good. But is there anything this period below of CapEx and incentives that's been a one-time number that's contributed to the remaining $50 million?

Yes and no. So, once we do the end of trip facilities, obviously, we're not going to go back and do them any time in the short term. I think you can feel safe that the 31% leasing incentive, the majority of that is still going to be for fit out. We made some effort in the presentation to show you that 77% of our vacant space has already been fitted out so that you can help with your modeling about how much it's going to be CapEx going forward.

Your next question comes from Alex Prineas from Morningstar.

Just quickly on the energy ratings that are increasing and you were commenting that you look at doing incremental improvements to push those ratings up further across the portfolio. How high do you think you can get the energy rating without, say, doing a knockdown and rebuild? Where does it sort of cap out if you're just talking about doing incremental improvements?

I think one of the bigger changes, and you'll see in that chart that maps the change over the last 4 or 5 years, Alex, is actually the occupancy of the buildings. You might be aware that COVID was very good for NABERS ratings for buildings because lack of tenants drives energy efficiency and water efficiency. So, I think what we've seen is that with the strategies we've got around the building management systems, in particular, plant and equipment and gradually phasing out inefficient plants and equipment rather than a sort of meteoric or revolutionary effect. It's all part of the sort of long -- medium, longer to medium -- medium to longer-term planning for when we do replace plant that's inefficient. So, on the bigger buildings, such as 77, and we have worked on that recently, 99, we've done a lot of work on, we sort of feel pretty comfortable that we have broken the back of where we can make step change. So, it is really enhancement. It's not -- there's nothing massive that we can actually achieve and it's certainly not through lack of trying. So, we constantly go back through the portfolio, particularly as it relates to plant, chillers and gas fired, the Martin Place asset, for example, 14 Martin Place, has some older plant there that is getting to the end of its life cycle and that will be replaced. So, there is some changes and improvements that we can make as well as you'll see dropping Ashfield more off the portfolio and Ann Street off the portfolio, which are lower than average rating will help our overall portfolio rating.

There are no further phone questions at this time. I'll now pass back for webcast questions.

Thanks. And I don't think there's anything on the webcast that we haven't already covered. So, I appreciate everybody dialing in and enjoy the rest of your day. Thank you.

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