Abacus falls following the REIT’s warning on office outlook

Abacus Property (ASX: ABP) was down over -1% at noon after the REIT’s CEO Myra Salkinder warned shareholders at today’s AGM that prevailing economic conditions continue to weigh on the REIT’s key office markets.

First quarter occupancy was down -170 basis points to 93.0% while weighted average lease expiry (WALE) was down marginally to 3.7 years.

“Face rents are holding but incentives remain historically high, and we are seeing a trend where tenants are renewing on shorter terms given the economic outlook,” Salkinder noted.

While the REIT reaffirmed its distribution guidance of at least 18.4c per security for FY23, management reminded investors that FY23 guidance is subject to business conditions continuing to normalise.

What does Abacus do?

The REIT’s $5.5bn of assets are allocated equally between two key sectors of commercial and self-storage.

The REIT’s $2.6bn self-storage portfolio consists of 124 assets including 18 development sites.

Then there’s the REIT’s $2.6bn commercial portfolio, comprising 18 office assets, and a $0.5bn Retail Portfolio.

What happened at the full year FY22

Largely driven by the deployment of capital into accretive acquisitions and strong value uplift in the storage portfolio, the REIT achieved a statutory profit of $517.2m, up 40% on FY21.

During FY22 the REIT deployed over $1.2bn of capital into its commercial and self-storage asset classes.

The REIT also undertook a fully underwritten $200m institutional placement to replenish investment capacity for continued deployment into acquisitions and developments.

Other highlights are FY22 included:

• Group’s Funds From Operation (FFO) was $160.9m, up18% increase on FY21.

• Full year distribution of 18 cents, up 2.9% on FY21.

• NTA per stapled security was $3.85, up 12.2% on FY21.

• Net increase in investment property values for FY22 of $345.5m.

• Weighted average cap rate of 5.39% across both the Commercial and Self-Storage portfolios.

• Gearing was at 28.7% and sitting within the REIT’s target range of up to 35%.

Outlook

Despite being cautious on the outlook given various inflationary pressures, management remain positive on the REIT’s differentiated positioning in the commercial and self-storage sectors.

“... [we] expect active investment and asset management together with responsive customer and brand management will deliver long-term sustainable outcomes,” Salkinder also noted.

After an active year in the growth and development of its self-storage portfolio, management believes the ongoing growth strategy, inclusive of a $435m medium term development pipeline positions the platform for continued growth in FY23.

“With proforma total assets reaching $5.5 billion, split evenly across our commercial and self-storage portfolio we are well placed for growth in the year ahead,” the REIT noted.

What brokers think

The REIT’s share price is down -25% over 12 months but has been trending higher since late October.

Consensus is Moderate Buy.

Based on Morningstar’s fair value of $3.37 the stock appears to be undervalued.

Late last week Ord Minnett upgraded the REIT to Accumulate from Hold after lifting its cost of capital used for valuation models for the third time in 2022.

This takes the risk-free rate up by a further 25 basis points to 3.75% after starting the calendar year at 3.0%.

The broker’s price target falls to $3.10 from $3.30.

A few days earlier Macquarie downgraded the REIT to Neutral from Outperform after reviewing the broader REIT sector and seeing downside risk to demand in self-storage and office.

The broker’s price target price falls -25% to $2.64 from $3.53.

Abacus Property Group share price over 12 months.