Abacus Group (ABG) Earnings Call Transcript

Thank you for standing by, and welcome to the Abacus Half Year '20 Results Presentation Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Steven Sewell, Managing Director. Please go ahead.

Thank you very much, and thanks, everybody, for dialing in. I understand it's a busy day. I'm joined here today with Rob Baulderstone, our CFO; as well as Evan and Reiner from our finance team; and Cynthia Rouse, our Head of Corporate Comms and Investor Relations. And we really do appreciate you taking some time to listen in. The 6 months to 31 December, as you can see from the result, has been busy and overall a very satisfying period for the group. The results we've achieved, the assets acquired have cemented Abacus' position in the A-REIT sector, we believe, as a specialist owner and manager of quality Commercial Office and Self Storage properties. Pleasingly, our key metric, funds from operations, or FFO, grew just on 3% for the half. And with the capital raising and proceeds utilized from the sale of our noncore legacy investments, we've transacted on over $600 million of quality office and storage assets in the 6-month period alone. We declared a dividend for the half which was over 2% higher than the previous period. And even after the acquisition transactions, we remain conservatively geared at just over 25%. Turning to the highlights. We kicked off the year back in July 2019 with a very successful placement of $250 million to many existing and a number of new institutional investors. Our strategic priorities detailed at the time were clear: investing into strong, quality income-producing assets in the key sectors of Commercial Office and Self Storage. In large part, the half year saw us deliver on these priorities with only one small exception or substitution. The owned or like-for-like portfolio, albeit taking shape with every reporting period, delivered unexpected income growth with Office continuing its positive trajectory, especially down the Eastern seaboard markets; and Self Storage turning back to solid growth, in line with the closely correlated residential sales and settlement markets. Pleasingly, our transaction teams have been active, completing a number of additions to the portfolio along with our very focused continued efforts to realize some long-held investments in the residential mortgages and retail segments. The combined effect of all of this effort, we believe, positions the group extremely well into the future. So we are now positioned as a strong asset-backed specialist investment house. Our unique diversification of Commercial Office and Self Storage sees our balance sheet now with over 90% of our equity invested in strong, income-producing assets that we believe will underpin future growth of earnings. Following the placement in July, we've worked tirelessly to deploy into assets in these key sectors. Of particular note is our continued increasing run rate of acquisitions in our Self Storage business with over $150 million settled or exchanged in the half year alone. We have a simple strategic investment criteria platform. And with the exception of the AOF transaction, we're very pleased with our achievements. With our partners, working collaboratively, we've tried it. We tried every angle with AOF but fell short of the requisite 75%, so have moved on. And by any measure, the opportunity to invest into the superior CBD assets like Elizabeth Street here in the Sydney CBD and 99 Walker Street in the North Sydney CBD, we believe, more than make up for it. Our balance sheet allocation shows that we now have over AUD 1 billion invested in hard assets and the operating platform in self storage. What a milestone. If I could just take a moment as a nod to our dear predecessor, Frank, who set that as a target for the group back in 2016, I'm pretty sure he would be smiling right about now. More than 90%, as I said, now of our equity is invested in quality, income-producing assets, many with embedded growth opportunities. Our determination persists to monetize our equity invested historically in resi mortgages and noncore retail, heightened with the market conditions continuing to deteriorate, especially in the retail sector. We're extremely comfortable with our portfolio balance sheet allocation now and see the quality of recurring and growing income from those key sectors. We also said the long-term value will be derived from our last investments in land, such as at Camellia, and our 2 resilient retail assets we hold in partnership with ISPT. Put another way, as you can see on the slide, the trajectory of the balance sheet allocation is shown on Slide #6. And pleasingly, the FFO metric derived from the majority of the balance sheet is also forecast to drive positively and underpin earnings in the medium to long term. I'll now hand over to Rob, who will step us through the results, our balance sheet and valuation metrics.

Thank you, Steven, and good morning. As Steven mentioned in his overview, the group has delivered a pleasing result with funds from operation profit of $67.3 million, an increase of 3%. Some of the highlights in these results were Self Storage FFO increased by 14% to $26.9 million. The established Self Storage portfolio is now yielding 6.4% on an annualized basis. Continued growth of distribution, in this half, has increased by 2.2% to $0.0945 per security. Cash flow for the period was strong at $98.3 million. Looking at the balance sheet. Net tangible assets per security increased by 2.4% to $3.41. This reflects the increase in the fair value of the investment properties, the group's performance in the period and the capital raising in July. Our gearing at 31 December was 16.2%, which was unusually low. Following the purchase of 99 Walker Street and the additional storage facilities in January, gearing has returned to more traditional levels at 26.8%. While the average cost of debt for the period was 4%, we expect this rate will decrease to around 3.5% for the full year. The valuation uplift for the period, excluding acquisition costs and straight-lining was $38.9 million, and the majority of this uplift was in the self storage sector. The Property portfolio, including the January purchases, is valued at $2.8 billion with a strong weighting to Office and Self Storage. I'll now hand it back to Steven.

Thanks, Rob. If I can just turn to the operating performance of the 2 key segments: Office and Self Storage. The Abacus Office portfolio, as I mentioned, is really now starting to take shape with larger, better-quality assets held for longer periods and, importantly, actively managed for the long term, maximizing income growth and tenant attractiveness with every period that we manage. A nice diverse plan exists in the portfolio of CBD and near-CBD fringe assets mostly benefiting from some very substantial infrastructure investments and local area gentrification. Fortitude Valley in Brisbane, as an example, with the photograph on the slide, as well as St Kilda Road and Church Street in Melbourne, just to name a few. The Eastern seaboard, Sydney and Melbourne, in particular, were the standout performers for our portfolio, offset only by a small degree by the smaller relative investments we have in Adelaide as well as a very small investment in Canberra. We remain on the lookout in these key markets for opportunities to invest our capital in assets that will continue to underpin and drive income and capital growth over the long term, existing stable assets and assets that can be repositioned and, with some of our expert, capable partners, product creation, like we've now got underway with Salta in Church Street, Richmond, one of the country's hottest markets right now. As discussed, our large, quality office acquisition at 201 Elizabeth Street and 99 Walker Street are just starting to deliver for us. 201 Elizabeth was only settled in November 2019 in partnership with the Charter Hall Group managed fund. And already, our leasing results there are meeting and exceeding our underwriting assumptions with much more to come, we believe, given that we're still several years away from the opening of the metro station exactly over the road. Similarly, 99 Walker Street only settled in mid-January, and we're now just in the process of integrating this large asset into our business. The market, for those of you who haven't been to the Sydney -- North Sydney CBD recently, you need to see the material change and improvements with the brand-new assets under construction or shortly to be completed, the new metro station being built and the general lift of amenity in the North Sydney area, all of which is leading tenants to seek to reap the benefits of materially lower rental costs for the great proximity to the CBD that North Sydney provides. We've already seen some substantial corporates elect to relocate their offices immediately opposite the 99 Walker Street building, including Zurich and Channel 9, and we've got a high conviction that 99 Walker Street will be an asset that contributes to Abacus' growth over the long term. On the next slide, we've included just some detail of the infrastructure investments completed or underway in both Sydney and North Sydney CBDs, in progress and gradually changing the way the tenants, the public and tourists are traveling around to and from these city areas. Allied to this infrastructure investment and upgrades, we can see the opportunity for a substantial lift in investment volumes and, particularly, tenants' attractiveness to these locations with much more to come. The portfolio -- Office portfolio diversification is nicely concentrated in the best markets of Australia, notably Melbourne and Sydney. We're not the super, super premium end of the asset sector, but assets each with their own clear market positioning and opportunities for rental growth. Turning to Self Storage. Certainly, a topical asset class now attracting, we believe, material international attention. Abacus has been a long-term owner and manager of self-storage locations across Australia and New Zealand. And as you can see, on the next slide, after about 18 months, we've seen the operating metrics of our storage business click back to be positive and signs of a definite pickup, led by the markets in the ACT as well as over in New Zealand, which have both been historically very strong for the Storage King portfolio, followed by the Victoria, New South Wales and Queensland markets. We've only just recently acquired our first stores in WA and hold high hopes in those areas, owing to the superior location, design and customer amenity of the stores that we've acquired. Looking at the operating metrics, as I mentioned, we strongly believe that the June quarter, even with the softer market conditions, we're seeing positive tick-up in our rental rate growth closely correlated with the residential market conditions. However, across the portfolio, given the strength of the locations and the experience and capable Storage King operating partner, we've seen occupancy rental rate deliver great outcomes. We continue to be focused on actively sourcing new storage property assets to buy, both from the established Storage King network and externally, and we believe this will continue unabated. The period also saw us complete the biggest ever greenfield development that we've undertaken at Brookvale and also finish and commence some other upgrades and expansions of existing stores, all being great uses of our capital and setting the platform up for underpinning long-term income and capital growth over the medium to long term. Turning to retail, a tough place and, we believe, getting tougher. We have 2 mainstay assets in partnership with ISPT, and they both benefit from being in close proximity to CBD locations, one in Sydney, one in Brisbane. Both have the 3 national brand grocery stores, now fully trading in newly fitted-out tenancies, a complementary adjacent tenancy mix that offers strong services, good connections to public transport with extensive parking facilities and, in the case of Lutwyche up in Brisbane, a refurbished upper level of childcare and suburban office tenancies of Chalk Street, all features that we believe will help navigate the structurally changing retail marketplace with -- which sees us having to do constant work and vigilance as consumer trends evolve. As I've mentioned, we remain focused on the noncore legacy investments that we still have. We are virtually complete now from investing in delivering residential development projects. We have only 1 or 2 small units to sell in our luxury owner-occupied Melbourne project, and that will bring to an end the chapter of residential development for Abacus. In our land and mortgages segment, we now can count on virtually one hand the investments where we have exposure, the largest being the long-held 7-hectare Camellia site, and along with the others, all of which are in various stages of planning, because that will -- local and state government planning processes that we continue to work with to drive to maximize the value, however, on unknown time frames. In time, our clear aim is to repatriate every dollar of equity from this segment to deliver back into the balance sheet where we can invest into our core sectors. However, we will be patient. As we turn our focus to our platform and business capability, we've embedded sustainable practice in all we do. For Abacus, sustainability means considering environmental, social and governance risks and opportunities in our business operation, from our investment decision-making process, to our asset and development management capabilities and activities and as well asset realizations. We also have an eye to industry and process disruptions, and we'll keep open and flexible in our work style to take advantage over the longer term where we see benefit. This means committing resources in our innovation@Abacus strategy into people, smart uses of technology and any future of work implications on design, access and form. In summary and turning to the outlook. Abacus sits neatly within the A-REIT sector, with a clear differentiated positioning. We own and manage a diverse range of assets with focus principally in commercial office and self storage sectors. We manage our precious capital for best long-term advantage: being nimble, entrepreneurial and responsible. We're extremely optimistic with the outlook for the group, and we appreciate not only our major investors' support but all our investors' support as well as our corporate business partners. It's never taken for granted and well treasured. Happy now to take any questions on the line on the result.

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

Steve, a couple of questions, if I may. Just interested in you walking us through the Walker Street acquisition. Obviously, it's a significant exposure. I think it's over 10% of your Commercial portfolio. So just wondering, was this -- were you considering doing this in JV? Or will you consider selling down a stake in that over time? Or are you happy to hold the circa $300 million -- what was it -- $311 million, I think, investment, 100% on balance sheet?

Yes. So the attraction of the building was -- and we spent a lot of time researching and analyzing the North Sydney market with another opportunity we were looking at being built on Mount Street. And with the tenant demand for the location, along with the infrastructure and amenity investments, it's really what triggered in our mind the opportunity that exists with 99 Walker. It's quite a unique building in that location given the size of its car park as well as the basement-level Coles metro supermarket offering. So at the level of rent that exists in the building, we believe, for that grade of real estate in that area, there is good, strong growth potential over the medium to long term. As far as the ownership, we own at 100% on balance sheet. We're comfortable to own it 100% on balance sheet, and we didn't consider, at that time, partnering. It was -- as I said, it was quite a good opportunity for us to utilize capital that we had historically earmarked for the AOF transaction to be able to deploy it so quickly and neatly into such a high-quality investment.

Okay. Then just on, I think, last result, you disclosed your investment in NSR, can you clarify whether you still are a shareholder?

Just to pick you up on a point there, Richard, at the last result, our accountant disclosed that we had a share in a REIT. And if you look at that part of the financial statement, you can see we no longer own shares in any REIT.

Okay. So was there a gain booked in the half? Was there?

There was a minor gain booked in the half. You'll see that in the financials.

Okay. And I know you've obviously got an industrial joint venture with GAW Capital. So just interested if you've had discussions with them on the storage business.

And again, sorry to pick you up on a technicality, Richard. We no longer have a joint venture with GAW Capital. We had a very small token investment with them on 2 assets at Maidstone in Melbourne and Chullora in Sydney, and we no longer own those 2 investments. And the second part of your question is no.

Okay. And then just on Riverlands, can you just kind of talk us through what happens to the RCL equity and loan positions as the $92 million of proceeds comes in? And will you recognize profit? Or will it all come when you realize Camellia?

So we've got a staged payment for the first stage of the transaction that we've undertaken on the Riverlands piece. It's a minority -- it's a minor part of the overall landholding, although we readily admit it's the most valuable and will yield the most number of house and land units. In respect of the other investments, we have an arrangement with our -- a documented arrangement with our partner there to umbrella all the investments in what you'd call the RCL loan, and the only slight technicality is that Camellia is obviously held differently to a loan. So effectively, what we've done is, as I think I have been consistent over the last 12 or 18 months, is treat this sector or this segment as one exposure with a number of investments. And as I said, our key priority is to realize every dollar that we have invested in this segment. So we're continuing to work where we can to realize value, maximize value of Camellia, and in time, realize it as we will in time, in cooperation with our partner at Riverlands, look to realize on those surplus lands at Riverlands.

So the $92 million of staged payments, that will come straight off the RCL loan, will it?