Abacus Group (ABG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Abacus Group FY '26 Results Presentation. [Operator Instructions] I would now like to hand the conference over to Steven Sewell, Managing Director. Please go ahead.

Thanks, and good morning, everybody, on a busy morning. We welcome you to the FY '26 results presentation for Abacus Group. I'm joined here today by Evan Goodridge, the group's current CFO, who's supporting both Abacus Group and Storage King Group through the '26 results period. Also Lawrence Wong, our incoming CFO of Abacus Group; Kevin George, the General Manager, Commercial and Fund Manager for the group; as well as other members of our Investor Relations and Finance team. You'll see in the result, there is a number of impacts that result from the internalization of the entire management function of Storage King Group, which took effect on the 30th of June, as we announced back in May. And you may notice on the header page, the subtle logo addition. This year, Abacus celebrates its 25th year as a listed company. In August 2026, somewhat of a watershed year with the evolution and now separation of the self-storage business, Storage King. And I just want to give thanks and acknowledge the myriad of team members, executives, Board members that have contributed to the group's long history. Turning to our financial year '26 metrics. There are a number of very positive operating highlights across the business. Commercial occupancy remained strong at 91.2%. Leasing activity was solid with almost 50,000 square meters completed during the year, and the group reported an FFO of $81.2 million, reflecting, we believe, the resilience of the portfolio of assets and our focus on execution. At 30 June 2026, the group's portfolio was valued at AUD 2.5 billion with a weighted average cap rate of 6.7%. You'll note the statutory loss and decline in NTA during the period. This was driven largely by noncash accounting adjustments associated with the now complete internalization of Storage King Group, where our ASK investment is remeasured using the listed share price at year-end, which resulted in $122 million noncash accounting loss. Importantly, these accounting adjustments do not change the underlying strength of the business, which continued to deliver stable operating performance, strong occupancy and growth in funds from operations. We were pleased during the year to declare an $0.085 per security distribution, in line with our guidance, and gearing of 36.2% at the end of the period remains well within our target range. Abacus Group going forward is positioned as a focused pure-play Commercial REIT. Our strategy is straightforward. We invest in high-quality commercial real estate sectors that can deliver sustainable long-term returns through active investment management, disciplined asset management and a strong customer focus. We believe the office sector in Australia has very sound fundamentals. The market is showing signs of stabilizing from cyclical lows. Replacement costs remain supportive of valuations and new supply remains constrained. Together, these factors provide, we believe, a supportive backdrop for medium-term rental growth. We're concentrating our investment activity in Australia's major East Coast markets, particularly Sydney and Brisbane, where we see the strongest opportunities to create value and grow income over time. Sydney remains our preferred market given its scale, liquidity and highly diversified tenant base, while Brisbane continues to benefit from strong population growth, significant infrastructure investment and favorable demand drivers. Within office, our focus remains on high-quality assets that are well-positioned to meet the needs of their customers, particularly small- to medium-sized enterprises. We will continue to actively manage and enhance our portfolio through targeted repositioning, refurbishment initiatives while maintaining a disciplined approach to operational performance. Importantly, customer outcomes remain central to our strategy. By strengthening customer relationships and using insights from our recently completed Voice of Customer program, we aim to improve occupancy outcomes, enhance overall asset performance, which will support long-term earnings growth. Following the internalization effective 30 June, our key business priorities are centered on disciplined execution, supported by a clear strategic agenda to strengthen the business today while positioning us to deliver sustainable long-term value for security holders. Our immediate focus is on simplifying the organization. We will continue to streamline our systems and processes, building a more efficient operating platform while maintaining our focus on sectors where we have proven capability. Our priority is to preserve our agile decision-making and efficient execution capability while reducing operating costs. This work is expected to support a lower management expense ratio over time and allow us to optimize our income yield. Over the near term, our attention shifts to further strengthening the balance sheet through disciplined capital recycling, continued portfolio refinement, reducing gearing and resetting to a more sustainable through-the-cycle payout ratio of 80% to 90% of FFO. Our aim is to create greater financial flexibility while ensuring capital is directed towards the highest returning opportunities. Looking further ahead, these initiatives place us in a stronger position to capitalize on attractive investment opportunities as they emerge. With a technologically savvy bespoke platform, a stronger balance sheet and continued disciplined approach to capital allocation, we believe the group will be well positioned to enhance returns and deliver sustainable earnings growth through the cycle. Turning to the highlights from financial year 2026. We delivered a solid operating performance across the portfolio while successfully completing the ASK internalization. Right across the office portfolio, we achieved leasing spread growth of 5.5%, which was reflected in broad-based growth across the portfolio and continued demand for well-located assets in our core markets. Our retail portfolio performed strongly with leasing spread growth of 8.4%, continued -- supported by the continued momentum at Oasis and the strength of its prime Broadbeach on the Gold Coast location. Platform efficiencies was a focus of '26 and will continue to be in FY '27, where we are targeting a 25% reduction in admin expenses, primarily via headcount reduction. Importantly, as I touched on earlier, FY '26 also marked the successful completion of the internalization. This represents the culmination of a multiyear strategy that began with the acquisition of the Storage King operating platform in FY '21, the de-stapling of the business in FY '23 and now the internalization of the management in FY '26. That positions Abacus Group clearly as a focused Commercial REIT moving forward. I'll now hand over to Evan to discuss the group's financial results in more detail.

Thanks, Steven, and good morning. Financial year 2026 has been a year of significant transition for Abacus Group as we completed the internalization of Storage King's management platform, sharpening our focus as a pure-play Commercial REIT, while our core portfolio continued to deliver a resilient earnings result. Over half of our operating earnings again came from office with the balance collectively from retail, investment income and returns from our 19.7% ownership in what is now Storage King Group. Funds from operations for the year were $81.2 million or $0.0908 per security, down 1.9% on FY '25. Breaking this down, office earnings were $89.6 million, down 3.2% on FY '25's $92.6 million. Excluding the impact of surrender fees, office earnings were $88.7 million, up 5.3% from $84.3 million as the group has been able to lease up the majority of the surrendered space ahead of initial underwrite. Retail delivered like-for-like operating earnings growth of 4.5% to $30 million. Our equity share of Storage King's earnings prior to internalization completing was $16.1 million, down 4.2% on the prior year. Investment management and other income held steady at $27 million. Administrative expenses continued to reduce, down 5% to $32 million and net finance costs reduced to $44.2 million, down from $49.7 million in FY '25. Abacus has historically utilized carryforward revenue losses to mitigate its tax expense payable. These losses have now been exhausted in our FFO and a more normalized run rate of $0 to $2 million per annum in tax expense is expected moving forward. Our distribution for the year was $0.085 per security, representing a payout ratio of 93.6%. Looking ahead to FY '27, there are 4 important moving parts for the group. These moving parts will help simplify the business, strengthen the platform and position us for growth. First, now that we are no longer the manager of Storage King, our retained stake is held at fair value rather than equity accounted. This means that on an ongoing basis, we will only receive Storage King's distribution guided at $0.045 per security for FY '27 rather than our full equity share of earnings. Second, we will also no longer collect asset or development fees associated with Storage King's management. Third, we're continuing to simplify and recycle our own portfolio. With this in mind, we expect to deliver a number of disciplined noncore asset sales, consistent with the capital recycling priority we've set out over FY '27. Hopefully, we'll be able to update the market further later in the year. And fourth, our corporate structure will become simpler and more efficient. Since 30 June, we have reduced headcount by more than 1/3, continuing the organizational efficiencies that we're targeting as we simplify the business. The group has identified $8.4 million of annualized cost savings, primarily associated with transferring staff to Storage King and remains focused on further reducing management expense through a leaner operating model. Taking the 4 moving parts together for FY '27, we are targeting a distribution of $0.067 per security with FFO expected to deliver a payout ratio around the midpoint of our revised 80% to 90% range. This reflects a genuinely different earnings base once Storage King's contribution is removed and a portfolio and corporate structure that is still mid transition. With our FY '27 distribution levels reset, we expect that 2/3 of it will be via a fully franked dividend, and it is the group's intention to distribute our remaining $51 million of franking credits to security holders over the medium term. This guidance is subject to no material deterioration in commercial property market and current business conditions, and Steven will discuss the group's outlook and guidance in more detail shortly. Turning to the portfolio. Total group assets were $2.46 billion, down from $2.59 billion. On 30 June, we completed the internalization of Storage King's management, which required us to remeasure our retained 19.7% stake from an equity accounted investment to fair value. As we flagged to the market following Storage King's own FY '26 results release, that single noncash accounting entry reduced total assets by $122 million and is the primary driver of our reduction in assets for the year. Our exposure to core commercial sectors, office and retail, increased to 77% of total assets, up from 72%. That trend is expected to continue in FY '27. The group continues to adopt a disciplined approach to capital management. Gearing closed the year at 36.2%, up from 34.5% at FY '25 and on a covenant basis, 41.2% against a covenant of 50%. For FY '27, we expect gearing to reduce as noncore sale proceeds are applied to debt reduction. Our interest cover ratio was 2.7x against a covenant of 2x, and the group's average cost of debt for FY '26 was 4.5%, down from 5.1% in FY '25. Our hedge cover currently sits at 81%. For FY '27, we are targeting a weighted average cost of debt of approximately 5.25% as those lower cost historical hedges progressively roll off. Importantly, we have no bank debt maturing in FY '27. During the year, we extended our syndicated facility on improved tenor and pricing. We retained funding capacity of more than $150 million or approximately $450 million when we include our liquid investment in Storage King. Net tangible assets closed the year at $1.59 per security, down from $1.72. In respect to valuations, our investment property portfolio closed the year at $1.826 billion, up from $1.8 billion. That reflects an increase of $36 million of capital expenditure less fair value losses of $17 million. Our weighted average cap rate firmed slightly to 6.7% from 6.77% a year ago. I note that this is my last results presentation as CFO of Abacus Group. It has been my privilege to be able to share the group's results with you over my 15 years at Abacus, and I wish my replacement, Lawrence Wong, all the very best in the future. With that, I'll hand over to Kevin to discuss the group's operating performance.

Thanks, Steven, and thanks for your contribution to the group over many years. Our office portfolio comprises predominantly A-grade assets across Australia's Eastern Seaboard with a strong weighting to Sydney and Brisbane. We continue to favor these markets given their attractive long-term fundamentals. Building on Steven's earlier comments, Sydney remains Australia's largest and most diverse office market, while Brisbane continues to benefit from strong population growth, significant infrastructure investment and solid business activity. Our portfolio is well aligned to the SME sector, which represents around 60% of our customer base. SME demand has historically led the early stages of office market recovery, positioning us well as operating conditions continue to improve. Beyond the quality of our assets, a key differentiator is our focus on customer experience and engagement. During FY '26, we achieved a net promoter score of plus 35 across our managed office portfolio, up from plus 28 in FY '25, reflecting the strength of our customer relationships and service proposition. Through our Voice of Customer program, asset activation initiatives and active engagement with customers, we continue to support retention, drive leasing outcomes and enhance the performance of the portfolio. Turning to our key office portfolio metrics. Demand continues to be supported by the SME flight to value trend, digital workspace offerings and active customer engagement. The portfolio delivered 2% like-for-like rent growth in FY '26, supported by leasing spreads of 5.5% and average rent reviews of 3.2%. This was modestly below FY '25 growth, reflecting slightly lower occupancy during the year. Occupancy at 30 June was 89.2%, down from 91.1% in FY '25, primarily reflecting residual vacancy from customer surrenders recognized in the prior period. Pleasingly, leasing progress on the surrendered space has been strong with 80% of the area at 324 Queen Street already committed. And at 99 Walker Street, approximately 60% of the surrendered floors over a period of time have been re-leased. Moving to our office leasing metrics. Leasing spreads remained positive at 5.5%, underpinned by strong outcomes at 14 Martin Place and 324 Queen Street, which achieved spreads of 9.9% and 8.7%, respectively. During FY '26, we completed 71 leasing transactions across almost 50,000 square meters, up 5% on FY '25. The increase in activity was driven by strong leasing outcomes across the portfolio, including at 91 King William Street, which recorded 7,600 square meters of transactions compared with 2,800 square meters in FY '25, primarily supported by Department of Veterans' Affairs renewal and expansion. Leasing activity was well balanced with new deals representing 53% of transactions and tenants renewing 47%. Average incentives were 33% for the year, broadly in line with FY '25, slightly lower, in fact, than half year '26. While incentives on larger new transactions remained elevated, we are encouraged by the reemergence of a spread between new customer transactions and existing customers extending their tenure. Renewal incentives averaged 25% compared with 35% on new deals, a good early indicator of an improving market. We're also seeing stronger outcomes in premium locations. At 14 Martin Place, 6 of the 7 leasing transactions completed during the year were agreed at incentives below 30%, highlighting improving conditions for high-quality, well-located assets. Another sign of market improvement, we reduced average downtime on new leasing transactions to 9.5 months, down from 11 months in FY '25, reflecting improving leasing efficiency across the portfolio. Looking ahead, we expect incentives to continue moderating, particularly in Sydney and Brisbane, where vacancy is tightening and new supply remains limited. Turning now to our lease expiry profile. We remain comfortable with our vacancy position and near-term expiries. Importantly, 65% of our vacant space is fitted and customer-ready, allowing us to capture demand quickly as it emerges. Largest vacancy remains at 710 Collins Street, which is being actively marketed following government tenant departures during FY '26. Discussions with prospective tenants are ongoing. Pleasingly, we have started FY '27 well with a meaningful proportion of vacant space already under heads of agreement or in advanced negotiations. Finally, looking at our retail portfolio, performance remained strong throughout FY '26 with occupancy increasing to 97.4% and the weighted average lease expiry extending to 4.8 years. Leasing conditions at Oasis remained favorable with net face leasing spreads of 8.4% and incentives holding at a low 15% across both new and renewal deals. These metrics reflect the quality of the Oasis asset, in particular, its dominant Broadbeach, Gold Coast location, resilient retailer demand and the strength of customer engagement across the center. We also delivered strong retention outcomes during the year, supporting occupancy, reducing vacancy risk and underpinning the stability of future earnings. I'll now hand you back to Steven for the outlook and guidance.

Thanks, Kevin, and Evan. Our commercial portfolio continues to perform. And the group, as I said before, is now focused as a specialized Commercial REIT. We're pleased to provide distribution guidance for FY '27 of $0.067 per security, reflecting a payout ratio in the range of 80% to 90% of FFO, assuming no material decline in current business conditions. As Evan mentioned, we've also increased the franking component in FY '27 and expect 67% of the distribution to be fully franked, up from 50% in FY '26. I just wanted to take a moment to mention and acknowledge some people that have contributed to Abacus over many years and have or are about to leave the group. Firstly, Evan Goodridge, who, as I said earlier, will leave at the end of the month. Evan took on the CFO role during the pandemic after working many years in finance across many different functions. We do wish Evan every success at Storage King Group. Secondly, many of you will have interacted over the years with Neil Summerfield. Neil has been with Abacus over 17 years and leaves at the end of the month. Neil was previously Head of Investor Relations, accompanying my predecessor and has been a loyal and positive contributor to the group in its various activities and major transactions. We sincerely wish Neil every success also in his exciting new chapter. And finally, Myra Salkinder retired as our Chair in June. After more than 15 years on the Board and as Chair for about 8 years, Myra devoted an enormous amount of energy and attention to the group and will be missed for her wise counsel and people-first mentality. We wish Myra every happiness and success in her retirement as she takes on more and more of her life interests, including her growing family and wonderful grandchildren. That ends the formal remarks for the presentation. I now look forward to any questions or alternatively meeting with you in person in the days and weeks to come.

[Operator Instructions] The first phone question today comes from Larry Gandler from Shaw and Partners.

Welcome, Lawrence, and good luck, Evan, over at ASK. Just quickly, Steven, can you maybe give us your thoughts on what you're thinking about the ASK stake? Just maybe some comments around that.

I think, Larry, as you'd appreciate, given we no longer are the manager of that group and have any involvement with the group, it's no longer considered a strategic investment. It is held as a current asset. And like every investment we have on the balance sheet is constantly reviewed for its long-term returns to the group. So that's about as much as we can say at the moment.

Is it meeting any sort of financial metrics that would warrant it being retained?

Well, given the group is a commercially focused REIT, I would say, there's a fair chance that it's not strategic to hold an investment in a storage -- self storage listed entity. So I think that's about as much as we can say, Larry.

The next question comes from Callum Bramah from Macquarie.

Just wondered if you can give a little bit more color around the expectations for '27 in the guidance, particularly around retail and office? I know there was quite a few comments around the expiry profile, but -- just wondered if you can particularly reference any known outcomes in that short-term or '27 expiries bucket that we need to think about and just your expectations on growth coming out of the retail component as well?

I think the overarching message, Callum, is that we're seeing some really strong green shoots coming through, particularly in Sydney and Brisbane in office leasing. As Kevin mentioned, incentives starting to moderate and particularly with our retention and renewal transactions. I think that's probably the most pleasing outcome. And certainly, as Kevin mentioned, is one of those sort of leading indicators of a recovering market. We think that obviously, the supply constraints in the various markets is assisting for well-located, well-capitalized and actively managed assets, and that's a big part of our customer proposition. So when we look across our portfolio, the building we're in here, 77 Castlereagh, 100% leased. We've been able to shift 201 Elizabeth Street up to the sort of mid-80s. We think there's more to go there. And obviously, with our partners at Charter Hall, we're working hard on that building, continuing to churn assets and other tenants rather at our assets such as 324 Queen Street with positive results, 99 Walker Street in North Sydney with positive results. So it is a constant work in progress, but we are seeing that turning of the market. And we think that tenants are willing to commit. They're committing to positive deals, renewals, in-place tenants are wanting to stay on. Our only retail asset, that property continues to perform almost above our underwrite and above our expectations. It's anchored by a very strongly performing supermarket, but it does sit really at the commercial hub of Broadbeach. And it does give us a lot of confidence to continually look to optimize the tenant mix. It is spread over 3 levels. It does have a very big restaurant precinct and also car park, a very profitable car park activity. So it's a terrific property in a great location and the retail sector is running pretty hot, as you'd understand. So we are very positive and upbeat about the performance of that asset.

Does guidance include or have an expectation of an improvement in occupancy for office by the end or during '27?

I think there'd be a marginal uptick. I think we're looking at a couple of percent uptick in 201, some of the re-leasing. We've got some floors coming back at properties like 14 Martin Place, 99 Walker, 324 Queen. Kevin touched on 91 King William over in Adelaide. That's -- we've had a floor handed back there from an existing tenant, but we're very -- in strong discussions with tenants. So it's not a dramatic movement in overall occupancy, but quite good re-leasing and with those positive spreads that we're seeing come through. So...

And Callum, I think the assets where we're not going to see any material movement or income from major vacancies, Allara Street, Canberra and the Goods Shed, both Allara Street needs to go through a refurbishment before that's ready to lease post government. Goods Shed, we're in active conversations with a number of tenants, but timing for those is later, which would see income beyond the current year. So -- but yes, as Steven mentioned, broad-based opportunity across the rest of the core portfolio.