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Date : 27/05/2021

Abacus Property Group

ASX :

ABP

Market Cap : $2.43 Billion

Dividend Per Share : $0.085

Dividend Yield : 5.88 %

Buy

52 Week Range : $2.28 - $3.24

Share Price : $2.98

Portfolio restructure aimed at growth, over 5% dividend yield, and $900m in funds available for acquisitions. A "Buy" from us.

Company Analysis

We first recommended Abacus Property Group (ASX: ABP) back in February, and since then, ABP shares have returned over 9% and paid a dividend of 8.5 cents. Abacus is an Aussie property manager whose asset portfolio consists of Office, Self-Storage, Retail, and Residential real estate. Their business model is straight forward, they buy real estate assets, and lease them to customers for annuity payments. As of December 2020, capital allocation shows a total of $3.6 billion in total assets in ABP’s portfolio.

There has been a boom in the demand for self-storage units across the country and Abacus has been aligning its portfolio to take advantage of this. They have positioned themselves as a strong asset backed, annuity style investment house focused on the ownership and management of Office and Self-Storage assets. In the first half of FY2021, Abacus deployed over $200 million into key sectors, funded with debt and divestment of non-core assets such as residential. Speaking of their core assets, ABP’s portfolio consists of core assets worth $3.6 billion and non-core assets worth $135 million. Further, their core assets are diversified across office, self-storage, retail, and industrial.

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Abacus has stated that their strategy is to increase its portfolio of assets in the office and self-storage segments. These investments are mainly driven by acquisitions. The growth rates of its various segments over the past 4 years – that is, FY2017 to FY2020 is as follows:

  • Office – CAGR 35%
  • Self-storage – CAGR 29%
  • Retail – CAGR -21%
  • Residential – CAGR -31%

Self-Storage Portfolio

We have witnessed a 29% growth in Self Storage net property rental income to $34.1 million. The funds from operations in the self-storage portfolio increased by 17.4% to $31.7 million from the previous corresponding period. The portfolio valuation increased by $97.5 million or 8.4%, cap rates compressed 50 basis points to 6.08%. Currently, Self-Storage portfolio is valued at $1.5 billion with the number of stores expanded to 92.

Revenue per available square meter increased by 1.8% across the Self-Storage established4 portfolio over HY21, driven by quality of locations and operating platform strength. Passing yield of 6.0% on established portfolio valued at $812 million. The Self-storage space should hold up well even during inflationary periods. This is an important consideration as well as inflation hitting Australia is only a matter of when, rather than if. Abacus will be able to pass on the effects to its tenants and protect its revenues. The strong growth in self-storage spaces and the inability of tenants to close their lease agreements due to an increase in rent rates will underpin Abacus’ ability to negate the effects of inflation.

The growth strategy is also still in motion. They have acquired the remaining 75% of Storage King for $50 million. Michael Tate, the CEO of Storage King will continue to lead the segment by joining Abacus. The Self-Storage segment has an occupancy of 89.2%. The rent collection in H1 FY2021 has remained high at 99% – indicating that the segment is not highly impacted by the effects of the pandemic. The chart below shows how the occupancy rate has fared and in comparison, to the trends seen in our previous report, there is definitely an improvement across all the states and regions that Abacus operates in.

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Source: ABP

There is a metro acquisition strategy in place for the self-storage segment. These spaces are mainly being used by:

  • Lawyers, accountants, and the like to store large amounts of paperwork for indefinite periods of time.
  • House movers and downsizers given the current residential real-estate climate.
  • Self-storage keeps capital expenditures low and thus is high demand.
  • Rising urbanisation and with people moving into cities for better employment opportunities has resulted in increased demand for self-storage property.
  • Small businesses are also seen using self-storage units for inventory management

In addition to acquisitions, there are a couple of developments also in the pipeline. Abacus reckons that there are 6,750 sqm of additional space that can be generated from expansion projects to its current portfolio. The average rent per square meter is $283 – translating to about $1.9 million. The development pipeline sits over $80 million that is estimated to deliver over 55,000 square meters.

The narrative here is that the Self-Storage segment is growing due to a rise in demand. Abacus is restructuring its portfolio to accommodate for the demand. With respect to inflation, the must-have nature of these spaces mean that Abacus will be able to pass on the effects to their customers and remain relatively unaffected in the long-term. The occupancy rates underpin the theory, and the trends support the rising occupancy.

Commercial Portfolio

The other commercial assets consist of office, retail, and industrial, of which, the office is the largest. They are grouped together given the operating environment across all of these segments. While self-storage is booming, the other commercials are expected to remain flat across Australia and New Zealand.

During the recent half year, funds from operations contribution from the commercial portfolio increased by 23.9% to $41.5 million compared to the previous corresponding period. The flat nature of all of these segments resulted in the valuation of Abacus’ portfolio declining marginally by 0.2%, or by $3.6 million. Therefore, the current valuation comes in at $1.8 billion. The net property income from office segment grew by 33.9% to $34.6 million, and the net property income from the retail segment grew by 13.1% to $4.8 million. Rent collection has remained resilient during the pandemic with 96% of office rents collected and 87% of retail rents collected. However, there were waivers provided – with $1.1 million and $0.7 million to office and retail portfolios, respectively.

Acquisitions, collaboration, and active asset management have supported resilient HY21 trading performance in the office segment. Over 33,000 square meters of leasing has been completed during the period. The leasing metrics in the office segment has been favourable for Abacus, especially during Covid19’s effects. 82% of the leases are renewals and only 18% are new – indicating that ABP did not have to sought new customers during a very uncertain period. The office segment also has a 90% occupancy rate with its weighted average lease expiry sitting at 4.1 years – meaning that in the short-term, Abacus is protected. 93% of the lease rent is fixed and 7% is covered for inflation. This means that when inflation rises, Abacus will be protected for inflation in its largest segment.

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Source: ABP

While the retail segment is small, it is rather stable. Abacus holds two assets – one in Sydney and the other in Brisbane. The assets are leases to Coles, Aldi, Woolworths, and Kmart. Abacus owns 50% of the assets and they have a 97.5% occupancy rate.

The narrative from the commercial segment is that the office assets are highly weighted compared to retail. Abacus has also restructured its assets around office spaces just as they did with self-storage. Their lease expiry profile suggests that there is no short-term risk of Abacus losing out on its tenants. The rent payments are also partially covered for inflation, which is always a good sign in the current market climate. From a growth stand-point, the firm have not made any suggestions on projects in the pipeline. Given their recent history of transactions, Abacus will continue to focus on self-storage segment, rather than the lagging office, retail, and industrials.

Acquisitions & Sales

On the 30th of April, Abacus announced that they have acquired 4 established self-storage facilities to their portfolio. The total cost is estimated to be $44.2 million. Three of the four were sourced via the Storage King relationship with one facility sourced off market, bringing the portfolio to a total of 96 locations, valued at approximately $1.3 billion. The acquisitions are located in Adelaide and Sydney and have an aggregated occupancy of 91.5%, which is in line with the overall occupancy of the self-storage segment.

Abacus has also acquired the remaining 60% of The Oasis Centre, located in Broadbeach, Gold Coast for $103.5 million. The property yields a net income of 7.3% and Abacus was able to wrap-up the deal at its current book value. The asset is known to have a diversified income stream, a high occupancy rate of 96%, and a weighted average lease expiry of 5.2 years.

Non-core assets continued to be sold during FY2021. So far, Abacus has six small scale Industrial and Office assets for a total of $63.1 million with settlements expected to occur between April 2021 and April 2022.

Financials Metrics

The non-core sectors have been underperforming. The long-term headwinds are increasing for these segments as well, and we are witnessing Abacus drive to restructure their portfolio. This strategy is in line with the broader consensus when it comes to the real-estate market. With urbanisation set to increase, Abacus is going with a strategy that will closely mimic the sector as a whole.

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Source: Tradingview.com

While the stock price took a plunging during February due to Bond yields rising, the half-year performance acted as a catalyst and sent the stock back in a positive trend. The Group earned a statutory net profit of $151.8 million for the half-year ended 31 December 2020. However, given the low contribution from non-core sectors, the Funds from Operations (FFO) was down 9.9% to $60.6 million compared to HY20. The positive here has been the increased Funds from Operations contribution from Self-Storage and Commercial portfolios. The increased contribution, however, was not enough to offset the non-core segments dragging the FFO down. Following successful restructuring in the coming years, this should stabilise and FFO should see an increasing trend as Self-Storage will be at the heart of Abacus’ portfolio.

FFO is the basis on which dividends are paid, The FFO per security has been calculated to be 9.06 cents, down 14% given the capital raise in December 2020. The equity raise of $402 million was fully underwritten and is to be used to repay debt and increase capital allocation for acquisitions. Abacus, however, paid out dividends of 8.5 cents a share, representing a 94% payout of its funds from operations. As of the half-year, Abacus now has $900 million of acquisition capacity.

Over the course of HY21, Abacus has successfully deployed $205 million of capital into key sectors of Office and Self-Storage. This was achieved through a series of acquisitions and joint ventures and funded with a combination of debt and the divestment of non-core assets. In addition, the Group achieved repayment of $48 million of residential land and mortgages during the period. Abacus continues to reduce exposure to its non-core legacy investments, particularly in the Residential Land and Mortgages sector. In aggregate, these transactions have continued the transformation of the balance sheet, with 89% of total assets now deployed in our key sectors of Office and Self-Storage. Bank facilities have also been upgraded by $247 million with the cost of debt anticipated to be around 2.5%. The chart below shows that in the short-term, Abacus is secure with plenty of funds available in case of adversity.

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Source: ABP

Valuation

The revaluation process for Abacus resulted in a net increase in investment property values for HY21 of $93.9 million.

  • Gain of $97.5 million or 8.4% across the Self-Storage portfolio
  • Loss of $3.6 million or 0.2% across the Commercial portfolio

The investment property portfolio’s overall weighted average capitalisation rate tightened 22 basis points from 6% to 5.78%. The investment is now valued at over $3.31 billion including $1.81 billion of commercial properties across 30 assets and $1.50 billion of self-storage facilities across assets.

ABP’s valuation is relatively modest compared to its peers. We have compared Abacus Property Group to Goodman Group (ASX: GMG), Mirvac Group (ASX: MGR), and GPT Group (ASX: GPT).

ABP is currently trading at a reasonable multiple and based on our forecast it is poised to grow further relative to its competitors. FY20 EV/EBITDA was just 14.9x with a P/E ratio and a Price to Book value in line with the industry. On a 3-year basis projection, ABP is outperforming its peers in the majority of the valuation metrics. ABP’s P/E is estimated to increase by 13.53% CAGR compared to the industry median of 8.35%. Looking at ABP’s market capitalisation relative to its industry, we believe with a 14.9 times EV/EBITDA, the company is slightly undervalued contrasted to an average industry EV/EBITDA of 17.6 times. Furthermore, ABP estimated EV/EBITDA growth is projected to be 5.27% CAGR which is largely above the industry median of 2.42% CAGR.

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Our initial report can be accessed by clicking here.

Recommendation

ABP’s portfolio restructure is going well. They are positioning the firm to take advantage of the booming self-storage property market. With $900 million in funds available solely for acquisitions, there is plenty of potential to grow in addition to the already healthy dividends. With a high payout ratio of about 80% of Funds from operations, and an annual yield of over 5%, we recommend long-term investors to “Buy”.

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