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Date : 04/04/2022

Abacus Property Group

ASX :

ABP

Market Cap : $2.95 Billion

Dividend Per Share : $0.178

Dividend Yield : 5.39 %

Buy

52 Week Range : $2.79 - $3.92

Share Price : $3.30

Top quality company that is operating in the high growth self-storage segment. We recommend a "Buy" with growth and dividends on offer!

Company Analysis

Abacus Property Group (ASX: ABP) is an Aussie property manager whose asset portfolio consists of Office, Self-Storage, Retail, and Residential real estate. Their business model is straightforward; they buy real estate assets and lease them to customers for annuity payments.

We have recommended ABP twice before, both in 2021. Since then, Abacus has grown in strength and stature. As of December 2020, capital allocation showed a total of $3.5 billion in total assets in ABP’s portfolio. As of December 2021, ABP has $5.2 billion in total assets across its portfolio. In line with its strategy, Abacus has increased its exposure to the Self-Storage real estate segment – one of Australia’s fastest growing real estate segments.


Source: Tradingview.com

The result of an increase in portfolio size and Abacus continuing with its portfolio restructuring strategy has been a consistent increase in its share price. Since our initial recommendation, ABP has returned 21% – a market-beating return. Additionally, ABP has also delivered $0.263 per share in dividends. Currently, ABP shares trade with a dividend yield of over 5% – making it a top-quality blue-chip company with sustainable dividends and a market-beating share price return.

Abacus is positioned as a strong asset-backed business with key investment sectors – commercial and self-storage. Abacus invests its capital in assets with value-add opportunities that are forecasted to drive long term total returns and maximise shareholder value. The Group’s investment objective is to provide its investors with reliable and increasing returns. Abacus looks for property assets that can provide strong and stable cash-backed distributions from a portfolio that provides a genuine potential for enhanced capital and income growth. Abacus does this through the acquisition, development and diligent active management of property assets. In particular:

  • Use of specialised knowledge, track record and market positioning.
  • Continuing to invest in property investments that are expected to yield an appropriate risk-adjusted return over time.
  • Driving value through active management of the asset portfolio.

Abacus has a successful track record of acquiring property-based assets and actively managing those assets to enhance income and capital growth. This track record has facilitated joint ventures with several sophisticated local and global third-party capital providers. Most of the Group’s investment success is from assets mainly in major city centres or suburban areas, typically on the eastern seaboard of Australia.

Experience has shown that strict adherence to the Group’s fundamental investment criteria enables it to buy assets well and provide opportunities for outperformance while minimising downside risk to equity. The Board monitors a range of financial information and operating performance indicators to measure performance over time. Funds from operations (“FFO”) is the key measure that Abacus uses to monitor the financial success of its overall strategy.


Source: ABP

FY21 was all about Abacus continuing its strategy

During the year, Abacus continued to focus its investment capital on acquisitions across the commercial and self-storage sectors in line with its capital allocation strategy. In Abacus’s view, these sectors represented the best risk-adjusted returns over the investment period. This strategy is focused on growing the contribution to recurring earnings. In the FY ended June 30th 2021, Abacus’ net property income increased by 27.4% to $164.6 million (2020: $129.2 million).

Abacus continued to expand its commercial portfolio investment thematic that focuses on CBD and select fringe markets. During the year, Abacus acquired a further 8% interest in 201 Elizabeth Street, Sydney NSW, for $50.4 million and the remaining 60% interest in the Oasis JV Unit Trust to obtain full control of The Oasis at Broadbeach QLD for $103.5 million. In June 2021, Abacus further exchanged contracts to acquire a 33.3% interest in the Myer building in Melbourne VIC for $135.2 million excluding transaction costs that settled in July 2021.

Abacus also expanded its self-storage portfolio investment thematic with acquisitions sourced from on the market as well as off-market transactions via the Storage King relationship. During the year, Abacus acquired and committed to investments of $291.6 million across the self-storage sector which further cemented its standing as a high conviction investor in the self-storage property market. The investment amount comprised $135.0 million of acquisitions across 15 properties in Australia and contracts or options exchanged for three properties for $27.0 million. Further, in November 2020, Abacus acquired the remaining 75% interest in the self-storage management business of Storage King Corporate Holdings Pty Limited for $50.6m for full control of the business. The balance of $79.0 million was invested in National Storage REIT during the year.

Company Updates – Stellar FY21

The firm’s FY21 results reverberated the strategy that we just discussed. This underpinned the share price performance of the firm.

  • Group statutory profit of $369.4 million in FY21, up 336% from $84.7 million in FY20
  • Abacus Funds from Operations (FFO) of $136.4 million, up 9.5% from $124.6 million in FY20
  • FFO per security of 18.4 cents, down 5.1% from 19.4 cents in FY20
  • Second half distribution increased by 5.9% to 9.0 cents, following strong operating performance from the Self-Storage sector
  • Full-year distribution per security (DPS) of 17.5 cents1, down 5.4% on FY20
  • The distribution payout ratio was 95% of FFO
  • Proforma gearing at 28.3%, up 180 basis points on FY203
  • Net tangible assets (NTA) per stapled security of $3.43, up 3.3% from $3.32 in FY20

Diligent deployment of over $2.3 billion into key sectors since FY17 has transformed Abacus into a strong asset-backed, annuity-style investment house.


Source: ABP

Throughout FY21 and including some post balance date transactions, Abacus has successfully deployed $1 billion of capital into its key sectors of Commercial and Self-Storage. This was achieved through a series of acquisitions and joint ventures, funded by a combination of non-core disposals, debt and December 2020
Equity raising. These investments include:

AcquIsitions

  • $271 million of store acquisitions and other Self-Storage investments, including the remaining 75% of our storage operator, Storage King.
  • The Oasis Centre, Broadbeach QLD – acquired the remaining 60% portion for $103.5 million, which now takes Abacus to full ownership of the asset– 241 Adelaide Street, Brisbane QLD – acquired a 50% interest for $31.8 million
  • 710 Collins Street, Melbourne VIC – entered into a development JV with Walker Corporation to jointly plan development and own the asset where Walker acquired a 50% interest for $56 million.
  • Sydney Self-Storage Portfolio – acquired a portfolio of five assets located in the premium inner Sydney Significant Urban Area4 for $160 million
  • Myer Melbourne, Melbourne VIC – acquired a 33.3% interest in 314-336 Bourke Street, Melbourne VIC, for $135.2 million.

Self-Storage Portfolio

Owing to a strong operational performance and the pace of Abacus’ acquisitions, its Self-Storage portfolio delivered 46% growth in net property income. It contributed $69.6 million of FFO, a 15.5% increase on FY20.

Despite the overall impact of the COVID-19 pandemic, trading conditions in our Self-Storage Portfolio have proved resilient. The rebound in occupancy during FY21, following the COVID-19 related declines, has continued throughout the September quarter, with Established Portfolio occupancy levels increasing to an all-time high of 92.4%.

Again, looking at ABP’s Established Portfolio, Average Rent per square metre and RevPAM grew to $306 and $283, up from $285 and $260, respectively, the full year, as trading conditions continue to strengthen nationally.

The outlook for the Self-Storage sector in Australia remains strong. As a result, Abacus remains focused on a multi-pronged growth strategy, including acquisition, development, expansion, and optimising its existing portfolio.

Highlights of the Self-Storage Portfolio were:

  • FFO contribution increased 15.5% on FY20 to $69.6 million.
  • Portfolio valuation increased by $227.9 million or 19.0%, cap rates compressed 84 basis points to 5.74%.
  • The self-Storage portfolio is valued at $2.0 billion, with the number of stores expanding to 1006.
  • RevPAM increased by 6.3% across the established7 portfolio over FY21, driven by the quality of locations and operating platform strength.
  • Passing yield of 5.8% on established portfolio valued at $874 million.

Commercial Portfolio

Abacus’ commercial portfolio delivered a segment result of a $96.6 million profit for the year ended June 30th 2021 (2020: $4.0 million loss). The loss in the prior period was mainly due to a fair value loss on the revaluation of investment properties of $69.1 million, whereas in the current year, there was a fair value gain of $9.6 million. The commercial portfolio consisted of 29 assets (2020: 30 assets) and had a total value of $2.0 billion at year-end (2020: $1.7 billion).

Abacus divested two non-core small properties during the year. As a result of changes in the portfolio from acquisitions and divestments and a mixed leasing environment across regions, the portfolio occupancy increased from 92.6% on June 30th 2020 to 94.7% on June 30th 2021. Like for like, rental growth remained stable for the existing portfolio.

Highlights from the Commercial Portfolio were:

  • FFO contribution increased 23.9% in FY20 to $86.9 million.
  • Portfolio valuation increased by $9.5 million or 0.5%, cap rates compressed 11 basis points to 5.50%.
  • The commercial portfolio is valued at $2.1 billion.
  • Active leasing and asset management strategies delivered:
    – Office net property income growth of 16% to $69.2 million, and
    – Retail net property income growth of 26% to $11.0 million8.
  • Rent collection is resilient in the COVID-19 context, with 98% of office and 97% of retail rents collected in FY21. The office and retail portfolios provided $1.2 million and $0.8 million of waivers, respectively.

Industry Analysis

Commercial real estate is estimated to grow as logistical and industrial assets demand has rebounded. Getting CBDs back on track will be a priority for the Australian government. Interest rates have remained low the past few years – helping increase investments. Despite the projected hikes in interest rates, we are not forecasting a decrease in investments in the self-storage or commercial real estate segments in Australia. This is because the demand is strong for both segments. This can be seen in the chart below – showing the occupancy rates across states in the self-storage segment. All states in Australia and New Zealand have seen a substantial increase in demand and occupancy rates.

This increase is despite the growing rents in the segment. The average rents across all states in Australia and New Zealand have increased by 9.3%.


Source: ABP

The self-storage real estate market is expected to expand as urbanisation increases in the next few years. Offshore groups investing in Australian commercial properties are also expected to gain traction in 2021. Off all the segments in commercial property space, self-storage looks to have the least risk.

  • Rising urbanisation and people moving into cities for better employment opportunities have resulted in increased demand for self-storage property.
  • Small businesses are also seen using self-storage units for inventory management.
  • Self-storage keeps capital expenditures low and thus in high demand.
  • Revenues are forecasted to grow at 2% over the next 5 years to over $2.5 billion in Australia.
  • The environment attracts strong competition, which may bring competitive pricing for leases.

Investment Thesis

For Abacus, FY22 began just how FY21 ended – with significant momentum. In the half-year results that were announced last month, Abacus reported:

  • Group statutory profit of $314.8 million in HY22, up 107.4% from $151.8 million in HY21
  • Funds from Operations (FFO) of $81.1 million, up 33.7% from $60.6 million in HY21
  • FFO per security of 9.8 cents, up 8.2% from 9.06 cents in HY21
  • Distribution per security (DPS) of 8.75 cents, up 2.9% from 8.5 cents in HY21
  • The distribution payout ratio was 89% of FFO
  • HY22 gearing at 29.4%, up 690 basis points on FY21. Proforma1 gearing at 33.3%
  • HY22 net tangible assets (NTA) per stapled security of $3.73, up 8.7% on FY21

Abacus has invested over $1 billion of capital into their key sectors of Office and Self-Storage during FY22 year as of December 31st 2021. This was achieved through a series of acquisitions and joint ventures and funded with a combination of debt and proceeds from the divestment of non-core assets. Notably, these investments included:

Self-Storage – acquisition of 28 stores and development sites for $483 million

  • 77 Castlereagh Street, Sydney NSW – 100% interest acquired for $250 million, due to settle in March 2022
  • Myer Bourke Street, Melbourne VIC – 33.3% acquired for $135.2 million, settled July 2021

Exiting legacy Residential loan positions

In January 2022, the Group exited its remaining residential loan positions. In July 2021, settled on a development JV with Walker Corporation at 710 Collins Street, Melbourne VIC, where Walker acquired a 50% interest for $56 million.

In a post balance date transaction, the Group has exited its remaining Residential development and mortgage legacy loan positions by exchanging conditional contracts to acquire a 100% freehold interest in the remaining land at Riverlands and Camellia, converting Abacus’ interest from lender to the owner and refinance the final remaining loan at Doonside NSW.

These transactions bring to a close this non-core business activity. The two properties at Riverlands and Camellia will now be managed internally, focusing on realising the medium-term development potential in these two-infill suburban Sydney land parcels.

Portfolio Valuation Hiked

The revaluation process for Abacus resulted in a net increase in investment property values for HY22 of $175.2 million. There was a gain of $140.8 million or 7.5% across the Self-Storage portfolio, with 60% of existing portfolio valuation gains derived from income growth. In the Commercial portfolio, there was a gain of $34.4 million or 1.8%.


Source: ABP

Self-Storage Portfolio

  • FFO contribution increased 67.2% on HY21 to $53.0 million
  • Portfolio valuation increased by $140.8 million or 7.5%, cap rates compressed 27 basis points to 5.47% during the half-year
  • Proforma Self-Storage portfolio is valued at $2.5 billion, with the number of stores expanded to 121, including 15 new development sites
  • RevPAM increased by 11.7% across the established portfolio over HY22, driven by the quality of locations and operating platform strength
  • Passing yield of 5.7% on the established portfolio valued at $1.2 billion
  • Multi-pronged growth strategy with over $430 million of acquisitions settled during HY22 and a flexible medium-term development pipeline

Storage King Store Growth Driving Revenue

Storage sector is benefitting from tail winds of work from home, decluttering, e-commerce and housing market activity. As of HY22, Storage King manages 189 stores (104 Abacus and 85 licensee stores), with 8 stores added during the half-year. The Brand refresh program is being rolled out with 10 stores completed during HY22.

Ancillary merchandise income for the established portfolio is up 7.7% on the previous corresponding period, driven by the website/e-commerce platform. Digital marketing strategies – continue to focus heavily on improving digital platforms (Storage King website, Google AdWords, and YouTube).

Commercial portfolio

  • FFO contribution increased 13.5% on HY21 to $47.1 million
  • Portfolio valuation increased by $34.4 million or 1.8%, cap rates compressed 15 basis points to 5.35% during HY22
  • Proforma Commercial’s portfolio is valued at $2.5 billion
  • Active Office leasing of over 25,000 sqm with positive spreads together with the increased asset base delivered 15% growth in Commercial net property rental income on HY21 to $47.8 million
  • Rent collection is resilient in the COVID-19 context, with 96% of office and 93% of Retail rents collected. The Office and Retail portfolios provided $0.9 million and $0.4 million of waivers, respectively.

With recent investments, ABP’s portfolio has reached over the $5 billion mark as of 1H22.


Source: ABP

Robust Outlook

Abacus has consistently rebalanced its asset portfolio – increasing its weight on office and self-storage segments and reducing its weight on retail and residential segments. This strategy aligns with the broader consensus regarding the real estate market. With urbanisation set to increase, Abacus is going with a strategy that will closely mimic the sector as a whole.

In ABP’s growth story, there are 2 variables – sustainability of current leases and the addition of new properties and lease contracts. Current lease agreements look secure, given much of ABP’s clientele are large businesses in the office segment. The percentage of leases that are due to expire has been reduced in the short term, and as a result, they have increased in the long term. This is a positive sign and shows that Abacus’s sustainability of current leases is in line with expectations.

The strategic focus for ABP is on key sectors of Self-Storage and Commercial real estate. The Group’s portfolio’s size, nature, and market positioning across key sectors deliver recurring income and value creation over the medium to long term. Abacus continues to explore opportunities to optimise its investments’ diversity, quality, and nature.

The FY22 distribution guidance is at least 18.0 cents per security for FY22, reflecting a payout ratio in the range of 85-95% of FFO. Abacus’ FY22 guidance is predicated on business conditions continuing to normalise in the second half and no further COVID-19 disruptions.

Out forecasts suggest a consistent but considerable year-on-year growth in revenues in EBITDA. Abacus EBITDA margins will be at the 63% mark. While most firms see their EBITDA margins decline when making aggressive growth investments, Abacus will see its healthy margins continue.

This profitability underpins their rather high dividend distribution strategy, especially for a company that continues to grow every year.

Equity Raise to drive Growth

On March 17th, Abacus announced a fully underwritten $200 million institutional placement and a non-underwritten security purchase plan (SPP or Security Purchase Plan) to eligible security holders in Australia and New Zealand to raise up to $15 million. The offer price per new stapled security has been set at $3.38.

The placement positions Abacus to continue its strong momentum upgrading portfolio quality via development, expansions, and acquisitions. The strong Self-Storage income growth in HY22 has been strongly supported by macro tailwinds, with an established portfolio RevPAM growth of 11.7%.

Abacus has an identified development and expansion pipeline of $266 million (cost to complete) that is expected to boost portfolio quality and future income. Development projects are expected to deliver c.90,000 sqm of NLA across 135 stores, and the expansion of 21 stores in high-demand markets will provide c.35,000 sqm of additional area.

The acquisition opportunities have the potential to further improve portfolio diversification, including great Self-Storage acquisition momentum with a robust pipeline of opportunities. Abacus also has a strong record of acquiring high-quality, accretive CBD Commercial assets. Following settlement of post balance date transactions and the Placement, Abacus will have greater than $320 million of capacity to fund its acquisition and development pipeline and take advantage of further acquisition opportunities.

The material increase in free-float market capitalisation from the Placement is expected to improve Abacus’ index rankings and liquidity. The Placement structure facilitates the introduction of new institutional security holders to the Abacus register.

Abacus continues to have a very healthy balance sheet. Following the settlement of post balance date transactions and the Placement, Abacus’ gearing will be 30.9%. On completion of the Placement, Abacus’ pro forma NTA per stapled security is expected to be $3.70.

SPP Eligibility

In addition to the Placement, Abacus is looking to raise $15 million through a Share Purchase Plan. The SPP gives security holders a cost-effective way to acquire Abacus shares up to a value of $30,000 without incurring brokerage costs, commission or other transaction costs. The issue price of each new security issued under the SPP will be $3.38 per security, being the same price paid by institutional investors under the Placement. The timetable for SPP is as below:


Source: ABP

Recommendation

Abacus is growing consistently and considerably year on year. The firm has gone from $3.1 billion in assets to $5.1 billion in a year. During this time, the firm’s growth strategy has translated into growth in both – cashflows and thus dividends and share price performance – delivering a return of over 20% since our first recommendation. The growth strategy continues in FY22 and beyond, and Abacus has just raised capital to support it. Abacus ticks a lot of boxes for a quality blue-chip company with healthy dividends. We recommend investors to “Buy” and eligible members to ‘participate‘ in the Share Purchase Plan that is currently open.

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