Abacus Property: Result 2013

A decent full-year result means Abacus Property Group owners may finally expect an increase in distributions next half, although they've remained unchanged this half at 8.25 cents per security (ex date already passed), bringing the annual total to 16.5 cents and putting the stock on a yield of 7.3%.

Rising distributions rely on underlying earnings – excluding property revaluations – from its $1.3bn office, retail and industrial property portfolio. These increased 9% to $84m, although underlying earnings per security fell 2% to 18.76 cents due to there being more securities on issue following the 2012 merger with the Abacus Storage Fund (see Abacus and Storage Fund to merge from 18 Jan 12 (Long Term Buy – $1.90)).

Rent from the group's commercial portfolio fell 9% for the year as cash from recent property sales sat in the bank. This was expected and, somewhat counterintuitively, welcome. Abacus, unlike most of its peers, focuses on buying unloved properties – ones that are under-rented, poorly run or have owners in financial distress – and restoring them to health. This can take time, but it’s an approach we like. For example Abacus bought 350 George Street in Sydney for $27m in 2011. It refurbished the building, splitting it into neat, small city office spaces, and has already banked $37m from selling 85% of the suites generating annualised returns of over 15%. 

So while the bigger players clamour over prime CBD buildings, Abacus continues to buy more obscure second-tier buildings, such as Bacchus Marsh Village Shopping Centre in regional Victoria and 33 Queen St in Brisbane, which enable it to generate higher returns than simply collecting current rent.

Other measures point to the portfolio’s health. Excluding the storage portfolio, like-for-like rent grew 3.4%. The storage portfolio – which is inherently lower quality than the rest of the portfolio due to short-term leases and the ease of developing new supply – has shown welcome signs of improvement, increasing occupancy by 3.4% to 83.5%, although gross rental slipped $5 per square metre to $237. Property values crept up 1% due to a slight fall in capitalisation rates as interest rates fell.

Although Abacus isn’t immune to the industry headwinds of rising vacancies and standard discounts of up to 6-12 months rent free on new leases, its active approach enables it to add value. Any property downturn would certainly, at least in the short term, knock earnings and possibly distributions. But, longer-term, Abacus may be one of the only property trusts to benefit due to its willingness to buy undervalued assets regardless of the market cycle. The security price has risen slightly since 02 Aug 13 (Buy – $2.25), BUY.