Abacus Group (ABG) Earnings Call Transcript

Good morning, and welcome to the 2020 Abacus Property Group Annual General Meeting. My name is Myra Salkinder, and I am in the Chair of the group. On behalf of the Board, I'd like to acknowledge the Gadigal people of the Eora Nation, who are the traditional owners of the land on which we meet today. We pay our respects to their elders, past, present and emerging. Let me introduce my fellow directors here at the meeting. Steven Sewell, our Managing Director; Mark Haberlin; Holly Kramer; Jingmin Qian; and Trent Alston. Also present into audience are members of the Abacus management team and the group's auditor, Anthony Ewan from EY. As it is past the point of time of 10:00 a.m., I declare the meeting open. This meeting comprises the annual general meetings of the members of Abacus Property Holdings Limited; Abacus Group Holdings Limited; Abacus Group Projects Limited; Abacus Storage Operations Limited, in conjunction with the meetings of the members of Abacus Trust, Abacus Income Trust and Abacus Storage Property Trust. Turning to the order of business. I'll start with a summary of Abacus Property Group's performance and then hand over to Steven for some comments on the execution of our strategy and operating conditions. After Steven has spoken, we will move to the formal business of the meeting, including your questions. During the year, Abacus continued to execute on its stated strategy to invest capital in real estate opportunities to deliver superior long-term returns and maximize security holder value. Steven and the whole Abacus team have successfully transformed the Abacus platform to a strong asset-backed, annuity-style investment house, where capital is directed towards assets that provide potential for enhanced income growth and ultimately create value. They have successfully transitioned the balance sheet with 87% of total assets now invested in our key sectors of office and self-storage. This has been achieved following a series of transactions and deployment of over $800 million of capital together with the significant reduction in exposure to the noncore legacy investments, particularly in residential and retail sectors. Post balance sheet date, we have acquired the balance of our self-storage operating platform, Storage King. This accelerated acquisition creates a fully internalized self-storage business for Abacus. And we are excited about its future prospects. With the onset of the COVID-19 pandemic, the primary focus for the team at Abacus was on providing safe and healthy environments and supporting our people and customers. The prompt establishment of a centralized COVID support team facilitated direct and timely communication with our customers. In order to maintain our liquidity position, in early May, the team negotiated and agreed terms to extend banking facilities, putting us in a position with no debt expiring in FY '21 and the majority of debt expiring from FY '24 onwards. Abacus has not applied for or received any funds from the Australian government's JobKeeper scheme. As we continue to navigate this evolving COVID-19 situation in collaboration with our asset and operating partners and customers, I would like to thank all our stakeholders for their ongoing cooperation. Turning now to our FY '20 results that were delivered to the market in August. Abacus Property Group delivered group statutory profit of $84.7 million, down 58% from FY '19. FFO, funds from operations, of AUD 124.6 million, down 3.6% from FY '19. And NTA, net tangible assets, per stapled security of $3.32, down 0.3% on FY '19. We were pleased with the relative resilience of the result in a COVID-19 context and the progress made as the business transitioned to a strong asset-backed, annuity-style business model. Steven will elaborate on this performance shortly. The group's balance sheet remains in a strong position and the Board is satisfied with the levels of liquidity and gearing. As at the end of financial year, gearing stood at 26.5%. The Board and team at Abacus are proud of our commitment to sustainability. Sustainable practices and enhancements continue to be embedded into how we conduct business. As part of our strategic repositioning, Abacus has made a considerable reinvestment in people, culture, processes and systems. We actively explored business improvements throughout FY '20 and continue to implement a range of new initiatives, including COVIDsafe work practices, ongoing solar feasibility assessments, evolution@abacus, process improvement and financial systems upgrades, flexible working for all roles, formalization of Abacus' values and the promotion of diversity and inclusion in our work practices. Some FY '20 sustainability achievements worth highlighting include: an increase in office portfolio NABERS energy and water ratings; development of office and retail energy, water and waste improvement pathways and targets; satisfaction of our target of 30% female new hires to the group. The Abacus Board refresh is now complete with the appointment of Trent Alston during the year. The Abacus Board is proud to have gender equality with 50% female representation, together with a diverse range of skills, expertise and backgrounds represented by our non-executive Director cohort. The Abacus Board remains focused on ensuring the group delivers long-term value to security holders. The Board and I believe we have a focused and capable executive team in place to take advantage of the opportunities the business has, and I would like to thank them for their dedication as we transitioned the business. In closing, I would like to thank all security holders for their continued support. I'll now ask Steven to give you an update on the group's strategy and operating conditions before we then move to the business of the meeting. At the conclusion of the business of the meeting, I will open the meeting to general questions.

Thanks, Myra, and good morning, and welcome, everyone. I'd also like to add my acknowledgment of the traditional owners of the land on which we gather there and pay my respects to their elders past, present and emerging. And I think it would be remiss of me not to mention the global pandemic and also acknowledge anybody directly or indirectly impacted by that event. In actual fact, the reason we're in this room is part of that. So we were booked to be at the Sofitel, as we have done for a number of years. And only last month, they advised us that they'd extended their quarantine contract and so Shaws, and I acknowledge Shaws and all their assistance, were able to accommodate us at the last minute in a fantastic facility. As Myra mentioned, we've been executing on our strategy. And with the continuing review of the market conditions as volatile as they are, the status of our projects and outlook, we constantly refine our strategic direction, giving prominence to the sectors where we believe we have a clear competitive advantage. Our capital allocation framework focuses heavily on increasing our exposure to commercial office as well as our self-storage markets, while reducing those exposures we have to retail assets as well as the residential loans, mortgages and land exposures. Our deliberate allocations to these asset classes has facilitated Abacus' transition to being a strong asset-backed, annuity-style business model, and we believe positions us well for the long term. During FY '20, we executed on the stated strategy to direct that capital, where we believe we can deliver enhanced income growth and, ultimately, value. Our people, the team at Abacus, our insight into markets as well as repositioning capability, together with strategic partnering, are the key enablers of our strategy. A combination of established and new collaborative partnerships have created enduring investment opportunities and continue to facilitate that capital recycling program. We're very excited at the progress we've made and opportunities we see in the medium to long term in the self-storage sector, including: acquiring over 19 locations worth over $190 million of new stores and land for future development; we invested over $117 million at very attractive pricing into a listed self-storage REIT in Australia; and post balance date, as Myra mentioned, we were excited to be able to agree terms to acquire the balance of our operating platform, Storage King, for $50 million from the private owners of that group. Adding to the asset quality backing of the group, in the commercial office sector, we also made several very substantial investments, 2 in Sydney, 1 in North Sydney: at 99 Walker Street and 1 here in the CBD of 201 Elizabeth Street, our interest there with a Charter Hall led consortium; down in Melbourne, equally, building a brand-new building, in the Church Street Precinct, Richmond in conjunction with our partners, Salta Properties. And we funded all these transactions through the very successful placement. Shaws assisted us with last year in July $250 million as well as realizing equity from some of those legacy investments we had, particularly in retail, residential land and mortgages, whilst, at all times, maintaining a very conservative gearing position and levels on our existing facilities. So in aggregate, these now see the balance sheet positioned well with about 94%, if you include our retail assets, in strong income-producing assets in office, self-storage and small-scale retail. Just turning to self-storage. Abacus has invested in the self-storage sector, predominantly in the properties since way back in 2005. And over that time, up until now, have accumulated a portfolio of about 81 locations with an asset valuation well over AUD 1 billion, each of these locations managed by Storage King. And post balance date, as I mentioned, we've moved from 25% -- or we will move at the end of this month from 25% to 100% ownership of the operating platform. This acquisition was identified several years ago as a key strategic imperative for the group. As we move through more than 40% of our balance sheet dedicated to self-storage, a more integrated management is critical to driving the success of our self-storage investments and enhancing those returns. As well, we believe this transaction will facilitate Abacus to constantly invest and drive the operations, technological advancement and customer value proposition of the Storage King business, both for ourselves as well as the third-party owners of the Storage King locations. And despite being very minorly impacted by the COVID pandemic, trading conditions in our self-storage portfolio have proved remarkably resilient. The rebound in occupancy following COVID-19's impact back in April and May and the related declines continued through, where in the September quarter, our established occupancy portfolio -- established portfolio occupancy levels increased back to pre-pandemic conditions of 89.7%. The requirement for promotions in those early periods, April, early May, to stimulate demand has now moderated, and we're starting to see rental yield revert to pre-COVID conditions. At 30 September, the established portfolio rent for available square meterage was $251 per square meter, with average rent at over $283, both marginally up compared to 30 June 2020. In line with this and what we see going forward in conjunction with our operating platform, we believe the outlook for self-storage in Australia is very strong, and as a result, remain very focused on a multipronged growth strategy in this asset class, including acquisitions of stores, development of new stores, expansion of existing stores and, where we can, optimizing the existing portfolio. Turning to commercial office. As I said, following a number of the major acquisitions, our portfolio is now valued with an asset aggregate value of over AUD 1.5 billion at a conservative cap rate of 5.5%. Active leasing and asset management for the year to 30 June saw rental growth on a like-for-like basis of 2.3%. Fourth quarter rental growth was impacted by COVID, with 90% of rents collected and about $1.7 million of waivers provided, noting that the acquisitions made during FY '20 have substantially altered the portfolio composition on a like-for-like basis. And we expect the metrics of occupancy, weighted average lease expiry to continue to improve as we apply asset management strategies. Investments, I mentioned earlier, have well and truly enhanced portfolio quality, and long term, are expected to underpin the stability of the income. As a group, we remain committed to substantially realizing and repatriating equity that had been historically invested in residential and the retail sectors. And we continue to make solid progress, both during FY '20 and most recently. We're increasingly cautious as macro factors continue to negatively impact on market conditions. And these have seen some acceleration, particularly in the apartment and high-density residential dwelling areas as a result of the COVID pandemic. We have made significant progress during FY '20 with $200 million of disposals or refinancings, and we seek to continue to repatriate capital, particularly from the residential land and mortgages business. Although, where appropriate with those last remaining assets and it's only less than 5 individual projects, we continue to undertake value-enhancement activity such as Gazettal, planning approvals, subdivision and also aim for optimal market conditions in which to realize. In light of the uncertainties with COVID and market conditions and the transaction -- with the transactional nature of disposing of these noncore assets and the volatility of the earnings that provides, we remain withdrawn from our distribution guidance. Although we do expect that the distribution for the current year will be -- will reflect a payout ratio of between 85% and 95% funds from operation, with the higher payout ratio expected to be supported by the increased average asset quality and more consistent startup earnings. So in conclusion, following the successful execution of the repositioning of the trajectory for the group, we are now a strong asset-backed owner and manager of real estate with a key differentiated focus on commercial office and self-storage. Acknowledging the uncertainty, we remain extremely positive on the market differentiated positioning. We expect that active asset and development management, together with responsive customer communication, will deliver risk-adjusted returns for our stakeholders that are attractive over the medium to long term. I'd like to thank this -- take this opportunity to thank all the Abacus team for their continued hard work and commitment, thank my fellow directors for their expertise and guidance and, of course, all our security holders for your continued and valued investment in Abacus as well as the substantial and enduring support we receive from our major investor, the Kirsh Group. I'll now hand back to Myra.

Thank you, Steven. This now brings us to the formal part of the meeting. Turning now to the business of the meeting, I propose to identify each resolution and then open the item for discussion. You are entitled to ask a question or speak to a resolution if you are a security holder or the representative of a security holder. If you are, you should bring -- you should be holding a blue or yellow voting card. If you want to ask a question or make a statement, would you please raise your card? I will put up on the screen, the proxy votes on the resolutions. All valid open proxies directed to the chair will be voted in favor of the resolution. Voting on all resolutions will be conducted by a poll at the end of the meeting once we have discussed all resolutions. I will explain the poll voting mechanism at that time. Turning to the minutes of the previous meeting. The last meeting of Abacus Property Group was held on the 15th of November 2019. The minutes of that meeting were approved by the Board and signed by the Chairman of that meeting in accordance with the provisions of Section 251A of the Corporations Act. The original minutes are tabled, and there are copies of those minutes available for inspection should any member want to see them. Would anyone like to speak to this item? The Notice of Meeting dated 6th October 2020, setting out the business for today's meeting, was sent to all security holders. Unless there is an objection, I suggest we take the Notice of Meetings as read. Thank you. The first item of notified business is to consider the 2020 annual financial report and other reports. Would anyone like to speak to this item? We have our auditors present to answer any questions relating to the content of the audit and the preparation of the audit report. Okay. Turning to Resolution 2, adoption of remuneration report. Resolution 2 is to adopt the remuneration report, which is set out on Pages 13 to 28 of our 2020 annual financial report. The remuneration report explains the Board's policy in relation to the nature and amount of remuneration paid to the directors and executives and the link between remuneration and performance conditions. We have continued to seek feedback and update the report where possible. I now put the motion that the remuneration report for FY '20 be adopted. Here are the proxies received in respect of this resolution. While the vote on this item is advisory only and not binding, it does present an opportunity for you to ask questions about or make comments on the remuneration report. If anyone would like to ask a question or make a statement, please raise your blue or yellow card. We will leave the voting until we have discussed all resolutions. The next resolution concerns my reelection. I'll hand the chair to our Lead Independent Director, Mark Haberlin.

Thank you, Myra, and good morning, everyone. My name is Mark Haberlin, and I am the Lead Independent Director. The next item of notified business concerns the reelection of a Director to the Boards of Abacus Group Holdings Limited, Abacus Group Projects Limited and Abacus Storage Operations Limited. Resolution 3 is to reelect Myra Salkinder as a director of those companies. Myra retires by rotation in accordance with the constitutions of the companies and being eligible, offers herself for reelection. Myra joined the Board in 2011 and was appointed Chair in September 2019. Myra is a senior executive of the Kirsh Group. She's been integrally involved over many years with the continued expansion of that group's property and other investments. She was born in South Africa and has worked in South Africa, Australia and internationally. She is a director of various companies associated with the Kirsh Group worldwide. Here are the proxies received in respect of this resolution. This resolution is open for discussion. If anyone would like to ask a question or make a statement, please raise your card. If there's no questions, I'll hand back to Myra.

Resolution 4 seeks security holder approval to allocate to the Managing Director of Abacus Property Group, Steven Sewell, deferred variable remuneration in the form of deferred security acquisition rights under the group's remuneration plan. Details of the plan were provided in the explanatory memorandum that accompanied the Notice of Meetings. I'll now put the motion that 290,475 deferred security acquisition rights be granted to the Managing Director. Here are the proxies received in respect of this resolution. The resolution is open for discussion. If anyone would like to ask a question or make a statement, please raise your card. Now that we have discussed all the resolutions, we will move to the voting. The proxy votes are displayed on the screen above. If you are holding a voting card, you'll find a list of all the resolutions printed on the reverse of the card. I have appointed [ Andy Mark ], representative of our registry, as the Returning Officer. You should have been given a voting card upon registration. If you do not have it or need an additional card, please raise your hand and a representative of the registry will assist you. The voting cards are collected once completed, and the count will be undertaken by the Returning Officer. Calculation of the votes can take a little while. Once the results have been completed, they will be announced on the ASX. You will also find the results of the voting on the Abacus Property Group website later today. We will now continue the rest of the meeting. This concludes the notified business of the meeting. I will now open the meeting for a period of general questions. Please raise your hand if you wish to ask a question.

Well, I hope that I have been able to deliver.

Just need these collected.

Okay. Is there any other business which may be lawfully brought forward to this meeting? Do you need to collect the cards?

Yes, ma'am.

Okay. You didn't -- you did not notify us. If you would just say, let's collect the cards. I'm sorry, that's my...