Company Reports

On its own, Abacus’ fall in occupancy to 92.6% in the December 2023 half, down from 95.0% six months earlier, is concerning given a marketwide oversupply of offices. But rent increases support our confidence in the outlook for no-moat Abacus.

Abacus Group’ primary assets were historically an office portfolio of mostly secondary assets, and one of Australia’s top three portfolios of self-storage assets. The REIT split into two listed entities in mid-2023, with Abacus Storage King focused on storage, and this vehicle, Abacus Group, focused on commercial property.

The federal government’s migration review was released on Dec. 11 and it suggests high population growth remains the status quo. The review tinkers with various visa rules, but contains no major reduction in migrant numbers, suggesting high migration will persist, relative to precoronavirus levels and versus other developed countries.

Abacus Group’ primary assets were historically an office portfolio of mostly secondary assets, and one of Australia’s top three portfolios of self-storage assets. The REIT split into two listed entities in mid-2023, with Abacus Storage King focused on storage, and this vehicle, Abacus Group, focused on commercial property.

Abacus’ primary assets were historically an office portfolio of mostly secondary assets, and one of Australia’s top three portfolios of self-storage assets. The REIT split into two listed entities in mid-2023, with Abacus Storage King focused on storage, and this vehicle, Abacus Group, focused on commercial property.

We reduce our fair value estimate for no-moat Abacus Group by 8% to AUD 1.75. We’ve taken a fresh look, with the separation of its storage assets and operating platform into a separate entity, Abacus Storage King. Abacus Group retains a 20% stake in the storage entity and is remunerated as its manager, but the former's primary interest is now commercial property. Two thirds of the commercial portfolio are from 15 offices, the other third is retail and other properties.

We place our fair value estimate for Abacus Group under review following its fiscal 2023 result. We plan to perform a more detailed assessment of the group now that it has completed the separation of Abacus Storage King into a listed REIT. Abacus Group delivered funds from operations of AUD 19.8 cents per security. Distributions for the fiscal year totalled AUD 18.4 cps, up 2.2%. The REIT faces some short-term headwinds, but long-term fundamentals look reasonable.

We see risks to Australian office demand as widely overestimated, despite our expectation that work-from-home will endure post-pandemic. Several REITs remain modestly undervalued, particularly those focused on prime grade offices, with long leases, and solid balance sheets. We raise our fair value estimates for three particularly high-quality office-heavy REITs: Dexus, GPT, and Mirvac.

We maintain our fair value estimate of AUD 2.90 for no-moat Abacus, after the group’s December half results. The group delivered funds from operations, or FFO, of AUD 9.06 cents and dividends of 8.50 cents per security. We expect FFO to be similar in the second half, however, on a per security basis, we expect lower numbers due primarily to the dilution effect from an equity raising in December, the cash from which is yet to be put to work.

Abacus Property Group is raising AUD 402 million in new equity via an underwritten 1-for-4.8 non-renounceable entitlement offer, priced at AUD 2.90 per security. Funds are being raised to reduce debt and provide ammunition for acquisitions, particularly in self-storage. The retail component closes Dec. 17, 2020. We recommend not taking up entitlements as the offer is not priced at a discount to our fair value estimate.

Abacus is a REIT with its primary exposure being self-storage and office property in Australia and New Zealand. Abacus owns one of Australia's top three portfolios of self-storage facilities. Following the transition to a new chief executive in 2018, Abacus is transitioning from speculative property lending and development income to asset-backed rental income. Once the transition is complete, the higher earnings volatility that was a feature of Abacus should abate and earnings will come predominantly from stable rental receipts and property management fees, generated predominantly from office and self-storage properties. However, storage has no leases, and Abacus has meaningful upcoming expiries in its office portfolio along with weak market conditions. Some of the buildings have development potential, and Abacus will need to decide whether to re-lease the new space, redevelop the buildings, or sell them.

Abacus is a property investment and funds management REIT, with interests in property lending, joint ventures, and development, operating in Australia and New Zealand. Abacus owns one of Australia's top three portfolios of self-storage facilities. Following the transition to a new chief executive in 2018, Abacus is transitioning from a REIT with speculative property ventures to becoming more of an asset-backed annuity style business with a focus on office and self-storage properties. Earnings will be hard to predict as it divests out of noncore properties and invests in core office and self-storage. Once the transition is complete, the higher earnings volatility that was a feature of Abacus should abate and earnings will come predominantly from stable rental receipts and property management fees, generated predominantly from office and self-storage properties. However, it has meaningful upcoming lease expiries in its office portfolio against a backdrop of weakening market conditions. Some of the buildings have development potential, and Abacus will need to decide whether to re-lease the new space, redevelop the buildings, or sell them.

Abacus is a property investment and funds management REIT, with interests in property lending, joint ventures, and development, operating in Australia and New Zealand. Abacus owns one of Australia's top three portfolios of self-storage facilities. Following the transition to a new chief executive in 2018, Abacus is transitioning from a REIT with speculative property ventures to becoming more of an asset-backed annuity style business with a focus on office and self-storage properties. Earnings will be hard to predict as it divests out of noncore properties and invests in core office and self-storage. However, following this transition, which we expect will occur over the next two years, the higher earnings volatility that was a feature of Abacus should abate and earnings will come predominantly from stable rental receipts and property management fees, generated predominantly from office and self-storage properties.

Our fair value estimate for no-moat Abacus Property Group remains at AUD 3.90 per security following the REIT’s first-half fiscal 2020 results. Abacus made major in-roads in its transition to becoming a long-term specialist owner and manager of quality office and self-storage properties in the first half of fiscal 2020. However, we think a key market development is the increasing international institutional interest in Australian self-storage properties since the start of 2020. Abacus’s major listed competitor, National Storage, which is the largest self-storage owner-operator in Australia, has received multiple take-over bids by international institutions. These bids value National Storage’s assets at a higher level than Abacus’s similar assets are currently valued, but reinforce our fair value estimate, which sits at a 14% premium to Abacus’s net tangible asset per security of AUD 3.41 as at Dec. 31, 2019. Securities currently trade near our estimated valuation, suggesting our outlook is shared by the market.

No-moat Abacus Property Group’s fair value estimate falls to AUD 3.90 per share from AUD 4.05 following the breakdown of its proposed acquisition of Australian Unity Office Fund, or AOF, via a 50% joint venture with Charter Hall Group. AOF unitholders did not pass all resolutions with the requisite majorities at the Nov. 18, 2019 Scheme meeting to allow the acquisition to proceed. The acquisition formed part of Abacus’ strategy to becoming an asset-backed annuity style business with a key focus on office and self-storage properties. On an annualised basis, we expected AOF’s portfolio of offices to have contributed about AUD 14 million recurring fund flows from operations, or FFO--just over 10% of Abacus’ FFO.

No-moat Abacus Property Group’s fair value estimate is unchanged at AUD 4.05 per security following in line fiscal 2019 results. Underlying net profit aftertax of AUD 0.24 per security and funds from operations, or FFO, of AUD 0.22 per security was in line with the July update. The fiscal 2019 distribution of AUD 0.185 per security was also consistent with guidance and our forecast. At our fair value estimate, the security has a fiscal 2020 distribution yield of 4.7%, a P/FFO of 20.5 times, and screens as fairly valued.

No-moat Abacus Property Group’s fair value estimate increases to AUD 4.05 per stapled security, from AUD 3.85 as management accelerates its strategy to become a more annuity-style business. Abacus is in the process of acquiring and developing in excess of AUD 710 million worth of properties. These are primarily office and self-storage assets which will generate recurring rental income streams. The proposed investments will be partly funded by an AUD 275 million equity raising. Existing retail shareholders can acquire up to AUD 15,000 worth of new securities via a nonunderwritten share purchase plan, or SPP, at a price of AUD 3.95 per security. The SPP is expected to raise AUD 25 million and follows a placement of AUD 250 million worth of new securities (63.3 million) issued to institutional clients at the same price.

We maintain no-moat Abacus Property Group’s fair value estimate at AUD 3.85 per security following transfer of coverage to a new analyst and Abacus and Charter Hall Group’s joint proposal to acquire all the units of Australian Unity Office Fund, or AOF. AOF is an ASX-listed REIT with a portfolio consisting of nine office properties located across Sydney, Adelaide, Melbourne, Brisbane, and Canberra. At this early stage, we don’t have enough confidence the proposed takeover will complete in its present form to warrant accounting for it in our model and Abacus’ current AOF stake is not material enough to move its fair value estimate. Abacus’ current circa AUD 48 million interest in AOF represents less than 2% of Abacus’ total assets. Furthermore, while this investment is consistent with Abacus’ focus on office properties and generating recurring revenue streams, we expect this initial investment will contribute less than 2% of fiscal 2020’s underlying net profit after tax.

We have upgraded our fair value estimate for no-moat-rated Abacus Property Group to AUD 3.85 from AUD 3.70. The increase in our fair value is primarily due to raised assumptions for the amount of capital allocated to acquiring and developing more attractive self-storage assets. Abacus is in the early stages of exiting its higher-risk residential development activities and redeploying the capital to lower-risk self-storage assets. Relative to other commercial property assets, self-storage is high yielding, with the weighted average capitalisation rate of Abacus’ portfolio 7% at December 2018. Investment in new developments and expansions will typically generate yields above 8.5% and 15%, respectively. We have also factored in a reduction in Abacus’ corporate overheads as the firm reduces exposure to property ventures. Abacus currently screens as moderately undervalued, currently trading at AUD 3.65.

Abacus Property Group reported first-half fiscal 2019 earnings on a funds from operations, or FFO, basis of AUD 11.3 cents per security, or cps, down 18% on the previous corresponding period, or pcp. The decline in FFO is of little consequence as the pcp was buoyed by high and nonrecurring transaction profits. The first-half dividend of AUD 9.25 cps remains conservative, representing 82% of FFO. Fiscal 2019 earnings guidance was not provided, other than a reiteration of a distribution target of AUD 18.5 cps. We’ve revised our forecasts, and now assume nearly all capital released from asset sales in other parts of the business is used to acquire mature self-storage assets or redevelop existing self-storage assets. The higher weighting to self-storage positively impacts Abacus’ long-term earnings growth outlook. We’ve also pushed back the expected date for Abacus to realise its investment in the regeneration site of Camellia from 2020 to until 2024. Our fair value estimate is increased to AUD 3.70 from AUD 3.55, with no-moat-rated Abacus screening as fairly valued at current levels.