Abacus Property Group – Annual Financial Report 2017

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DIRECTORS’ REPORT 30 June 2017 ABACUS PROPERTY GROUP OPERATING AND FINANCIAL REVIEW (continued) CORE SEGMENT RESULTS SUMMARY (continued) During the year Abacus was able to secure two commercial properties that met our investment criteria: • 324 Queen Street, Brisbane QLD for $66 million (ABP interest 50%) • 444 Queen Street, Brisbane QLD for $23.5 million (ABP interest 67%) Abacus and its partners sold a number of properties during the year. These properties delivered some strong returns to the group and included: • 50% interest in Westpac House, Adelaide SA for $88.5 million • 31-49 Brown Road, Clayton VIC for $51.5 million • World Trade Centre, Melbourne VIC for $267.5 million As a result of changes in the portfolio from acquisitions and sales and a mixed leasing environment across regions the portfolio occupancy decreased from 91.2% at 30 June 2016 to 90.5% at 30 June 2017. Pleasingly, like for like rental growth remained strong across our existing and stabilised portfolio to deliver growth of 2.7%. This was largely as a result of the performance of the Group’s property management team and in-built annual rental increases. We believe Abacus’ portfolio is well suited to the current conditions. The office portfolio has limited exposure to full floor or multi-floor tenants, and is configured more for multi-tenanted floors. We have found the potential cost (financial and time) of relocating to another property in the same location often outweighs the benefit of a cheaper rent. Our tenants are also strongly connected to the property’s location, which is traditionally the reason they initially leased the property and results in a positive predisposition to remain. Due to the multi-tenanted floor structure we also have the ability to work proactively with our tenants to contract or expand and adjust their space requirements. Alongside the market, Abacus has also been a beneficiary of the stronger leasing environment with the strong re-leasing spreads across new and renewing leases, particularly in the Sydney CBD. Abacus’ retail portfolio is largely based around properties that are the dominant trader in their respective trade areas. They are heavily focused on non-discretionary and convenience based shopping and trade well in their respective markets. The Group typically targets assets that have been classified as non-core from institutional and high net worth owners and require some levels of refurbishment and upgrade. These assets tend to illustrate strong turnaround prospects and Abacus looks to take advantage of the capital and income improvements achievable through clever cost effective regeneration projects. Abacus remains focused on maintaining revenue and cashflows to support securityholder distributions but nevertheless being conscious of the market’s leasing requirements and competitive offerings. Contribution from Third Party Capital Abacus’ third party capital joint ventures remain an integral strategic investment platform for the Group. As previously mentioned we expanded the platform with a new joint venture with Investec Australia to acquire 324 Queen Street in Brisbane for $132 million (100% asset value). Abacus and its joint venture partner KKR sold their interests in World Trade Centre in Melbourne for $187.25 million, which valued 100% of the asset at $267.5 million. This delivered an equity IRR of over 30% to the joint venture. Abacus typically invests 25% to 50% of the required equity with our capital partners investing the balance. Management of the property remains with Abacus and as a result we are able to leverage our capital to gain greater exposure to a higher number of core plus assets. This leads to greater earnings from fees and rental income. We will focus on driving our third party strategy to expand our capital base. 8
DIRECTORS’ REPORT 30 June 2017 ABACUS PROPERTY GROUP OPERATING AND FINANCIAL REVIEW (continued) CORE SEGMENT RESULTS SUMMARY (continued) Self-storage Abacus’ self-storage portfolio delivered a segment result of $70.7 million for the year ended 30 June 2017. This represents a 5.2% decrease on the FY16’s result of $74.6 million and can be attributed to a lower level of fair value increases from the self-storage portfolio offsetting a 14% increase in self-storage EBITDA. Portfolio assets totalled $629 million across a total portfolio of 65 facilities, an overall increase of four facilities during the period, although two existing facilities operating adjacent to each other were merged into one facility during the period. Pursuant to the 2017 valuation process 24 self-storage facilities out of 65 or 36.3% by value were independently valued during the year to 30 June 2017. The remaining facilities were subject to internal review and, where appropriate, their values were adjusted. The valuation process resulted in a net full year revaluation gain of $27.3 million (2016: $36.7 million gain) or 4.6% of investment properties. The self-storage portfolio is well diversified in Australia and New Zealand. 1. Stabilised portfolio 2. WACR: Weighted Average Capitalisation Rate 3. Revenue per available square metre 4. Average over last 12 months (by area) As stated at the Group’s Annual General Meeting in November, we continue to consider investment into our selfstorage portfolio as one of our sectors of choice to deliver the Group’s returns and help fund our targeted distribution growth into the future. The last 12 months saw additional asset acquisitions, and we continue to target assets that will contribute to improving the portfolio’s metrics, particularly focusing on conversion opportunities in metropolitan areas in Australia’s Eastern Seaboard. The storage portfolio’s stabilised assets are the key contributor to underlying growth across the portfolio. They continue to deliver improved operating performances across Australian and New Zealand markets. The stabilised portfolio occupancy grew to 89.2% from 87.4% and average rental rate increased to $262m 2 from $259m 2 . The increased rental and occupancy improved portfolio RevPAM to $234m 2 from $227m 2 in 2016, a 3.1% increase assuming a stabilised New Zealand exchange rate. RevPAM measures the profitability and efficiency of your portfolio. The Group made $22 million of acquisitions during the year including two stabilised facilities for $12.2 million and $9.8 million of assets for conversion into self-storage facilities. These facilities to be converted were acquired in metropolitan areas in NSW and ACT. We remain focused on investment opportunities in metropolitan locations that will deliver higher average rental rates than the current portfolio average to drive portfolio returns. The self-storage sector has seen further interest from investors and capital partners highlighting the sector’s continued attractiveness and further evidence that it sits alongside traditional asset class of office, retail and industrial. The increased institutional recognition has driven strong pricing of assets as new and existing entrants to the sector seek assets and market share. This continues to drive strong capitalisation rate compression across the asset class. * See segment note on page 44 9
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SECURITIES REGISTER Number of Secur
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Abacus Property Group – Annual Financial Report 2017

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