Abacus Group (ABG) H2 2025 Earnings Call August 24, 2025 08:00 PM ET Company ParticipantsSteven Sewell - MD & DirectorEvan Goodridge - CFOKevin George - Group General Manager - Commercial & Fund ManagerHoward Penny - Director - Real Estate ResearchSolomon Zhang - Equity Research AssociateSteven SewellMorning, everybody. Welcome to the FY 'twenty five Results for Abacus Group. I'm joined here today in Sydney by Evan Goodridge, CFO for Abacus Group Kevin George, the General Manager, Commercial and Fund Manage ...

Financial Data and Key Metrics Changes - Total assets of Abacus Group are valued at $2.6 billion with a weighted average cap rate of 6.77% as of FY 2025 [1] - The group announced a distribution to investors of $0.85 per security, flat compared to FY 2024 despite a lower asset base [2] - Gearing for the group is at 34.5%, comfortably within the target range [2] - Like-for-like operating earnings rose by 7.7% for the year, with office income increasing by 9.8% [5][6] Business Line Data and Key Metrics Changes - Office operating earnings increased by 9.8% year on year, supported by like-for-like rental growth of 4.3% [3][5] - Retail operating earnings grew by 8.8%, driven by rental reviews of 3.5% [3][7] - Self-storage contributed $16.8 million in earnings and $18.1 million in management fees, with a strong return on investment [3][22] Market Data and Key Metrics Changes - The office portfolio's occupancy is stable at 91%, with positive leasing spreads [6] - Retail portfolio saw MAT growth of 2.7% on FY 2024, with a compound annual growth rate of 6.1% since 2019 [21] - Self-storage sector shows strong occupancy at 91.2% and RevPAR growth of 4.5% year on year [22] Company Strategy and Development Direction - The company aims to identify, own, and manage real estate to deliver exceptional returns, focusing on office and retail sectors [14] - Plans to realize $200 to $300 million in non-core asset sales over the next 12 to 18 months to pursue higher returning opportunities [14] - The company is consolidating operating systems to improve efficiency and scalability [14] Management's Comments on Operating Environment and Future Outlook - Management noted early signs of improving capital and leasing sentiment in the office and retail sectors [2] - The company anticipates a significant reduction in finance costs due to recent interest rate cuts [9] - Future earnings are forecasted at the top of the payout ratio range, contingent on successful leasing programs [9] Other Important Information - The group has received its first public credit rating of A+ with a stable outlook, allowing for competitive banking facilities [11] - Full-year valuations were impacted by a 27 basis point expansion in cap rates, resulting in an overall value decline of 4% [12] - The company is exploring capital partnering opportunities and is currently involved in due diligence regarding a proposal for its stake in ASK [25] Q&A Session Summary Question: Thoughts on recycling capital and reinvestment strategies - The company is primarily focused on the office and retail sectors for reinvestment, while remaining open to other opportunities [27] Question: Insights on office demand and tenant behavior - Office demand has been relatively healthy, with more companies returning employees to the workplace [28][29] Question: Medium-term potential of 201 Elizabeth Street for residential development - The highest and best use of 201 Elizabeth Street is currently seen as office, though residential potential is not discounted for the future [34][35] Question: Leasing prospects for 710 Collins Street - There are advanced discussions with interested groups, and the company is optimistic about generating income from this asset by the end of the financial year [36][37] Question: Anticipation of transactions in capital partnering for FY 2026 - The company intends to progress capital partnering transactions and hopes to provide updates in the near future [41]

Financial Data and Key Metrics Changes - The company reported core FFO of $14.7 million for the quarter, an increase of $4.3 million compared to $10.3 million in the same quarter of the previous year [15] - Core FFO per share remained consistent at $0.45 despite the increase in total core FFO, primarily due to a reduction in leverage [15] - The company ended the quarter with net debt to EBITDA of 6.9 times, an improvement from 7.5 times a year ago, but an increase from 6.3 times at the beginning of the year [14] Business Line Data and Key Metrics Changes - The company signed approximately 227,000 square feet of new leases, renewals, and extensions during the quarter, with an average cash base rent of $25.43 per square foot [4] - Year to date, the company completed 339,000 square feet of leasing, including 299,000 square feet of comparable leasing at a 27% cash rent spread [4] - The property portfolio was 93.9% leased and 90.2% occupied at the end of the quarter [6] Market Data and Key Metrics Changes - The company is experiencing strong leasing momentum in business-friendly MSAs within the Southeast and Southwest [4] - The signed not open pipeline stands at $4.6 million, representing 4.6% of in-place cash rents, which is expected to provide earnings tailwinds going into 2026 [6] Company Strategy and Development Direction - The company remains disciplined in underwriting property acquisitions and has a healthy pipeline of potential acquisitions [7] - The company is considering recycling some of its stabilized assets to fund future acquisitions [7] - The company is focused on capturing upside in its properties by addressing below-market rents and enhancing tenant quality [8][10] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about ongoing lease negotiations and the potential for additional leases to be announced [5] - The company is not concerned about lease rollover risks, viewing them as opportunities due to low embedded lease rates [36] - Management reaffirmed full-year 2025 guidance for core FFO of $1.80 to $1.86 and AFFO of $1.93 to $1.98, indicating that earnings lift from the leasing pipeline will become more noticeable in the fourth quarter [16] Other Important Information - The company fully settled its 3.875% convertible notes, resulting in an extinguishment of debt charge of approximately $20.4 million [13] - The company ended the quarter with $606.8 million of debt, with only $74 million or 12% subject to floating interest rates [14] Q&A Session Summary Question: Can you provide more details on the Fidelity office property and the State of New Mexico lease? - Management explained that Fidelity is downsizing, and the State of New Mexico is moving in due to high demand for modern space, which is expected to monetize the asset effectively [18][19] Question: Will leverage increase if the shopping center acquisition goes through? - Management indicated that leverage may increase in the near term but plans to recycle some assets to mitigate this [20] Question: Are there any dispositions included in the guidance? - Management confirmed that there are no dispositions in the current guidance [21] Question: Are the Fidelity and State of New Mexico leases second or third quarter leases? - Management clarified that the State of New Mexico lease was signed in the second quarter, while the Fidelity downsizing is still being finalized [26][27] Question: What is the status of leasing activity in the third quarter? - Management stated that they are negotiating leases for the majority of remaining vacancies and expect significant activity in the next sixty days [29] Question: What are the risks associated with the 94% turnover expected next year? - Management expressed confidence in the embedded lease rates and did not foresee significant rollover risks [36] Question: Will there be a lease termination fee from Fidelity? - Management confirmed that Fidelity will make a payment for downsizing, which will be blended into their rent [48] Question: How will the rent change with the new tenants? - Management indicated that there will not be a roll down in rent, although there may be some downtime during the transition [49] Question: Will the term loan financing be related to the shopping center acquisition? - Management noted that the timing of the term loan may not align perfectly with the acquisition but does not foresee any concerns regarding financing [51]

Financial Data and Key Metrics Changes - Core FFO per diluted share for Q1 2025 was $0.36, down from $0.39 in Q1 2024, primarily due to increased net interest expense and lower rental income from property sales and lease expirations [24][25] - AFFO generated during Q1 2025 was approximately $23.5 million, consistent with previous quarters, while CapEx returned to normalized levels [25] Business Line Data and Key Metrics Changes - The company completed approximately 363,000 square feet of total leasing in Q1 2025, with about half related to new tenant leases [6][16] - Leasing capital spend was $6.69 per square foot, slightly elevated due to law firm deals, resulting in average rental rates near $47 per square foot compared to $38 per square foot in 2023 [17] Market Data and Key Metrics Changes - The occupier market recovery is ongoing, with national employers increasing in-office mandates, leading to a demand for more space [8] - Despite a slowdown in national gross leasing volume due to macroeconomic uncertainty, net absorption improved by 60% compared to Q1 2024 [9] Company Strategy and Development Direction - The company has decided to suspend its dividend to fund long-term growth and retain earnings for capital expenditures and leasing commissions [12][13] - Piedmont aims to leverage its modernized properties and is experiencing record levels of tenant interest, with a strong leasing pipeline of approximately 750,000 square feet executed or in legal stages [11][21] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism about leasing prospects, with a strong pipeline and proposals exceeding 3 million square feet [21][33] - The company anticipates achieving its 2025 leasing goals, with potential upward revisions in guidance depending on market conditions [31][32] Other Important Information - The company completed refinancing activities, including paying off a $250 million term loan and extending a $600 million line of credit, with no final debt maturities until 2028 [8][25] - The company is focused on internal growth and maintaining a strong balance sheet, with a commitment to remain investment grade [46][47] Q&A Session Summary Question: Inquiry about leasing pipeline and guidance - Management confirmed a strong leasing pipeline of approximately $750,000 square feet, with good momentum and potential for upward revisions in guidance depending on market conditions [30][31] Question: Clarification on the historical spread between lease percentage and economic lease percentage - Management indicated that the suspension of the dividend would provide additional cash flow for internal growth, with a focus on leasing momentum and potential for excess retained earnings to pay down debt in the future [36][37] Question: Discussion on the dividend suspension and its implications - Management explained that the decision to suspend the dividend was influenced by the need to fund leasing momentum and maintain a strong balance sheet, with a focus on internal growth rather than relying on external financing [40][44]

Financial Data and Key Metrics Changes - Core FFO per diluted share for Q1 2025 was $0.36, down from $0.39 in Q1 2024, primarily due to increased net interest expense and lower rental income from property sales and lease expirations [23][24] - AFFO generated during Q1 2025 was approximately $23.5 million, consistent with previous quarters, while CapEx returned to normalized levels [24] Business Line Data and Key Metrics Changes - The company completed approximately 363,000 square feet of total leasing in Q1 2025, with about half related to new tenant leases [6][16] - Lease economics showed a 10.19% increase in rents on both cash and accrual bases for the quarter [17] Market Data and Key Metrics Changes - The occupier market recovery is ongoing, with national employers increasing in-office mandates, leading to a demand for more space [8] - National gross leasing volume slowed moderately in Q1 2025 after reaching post-pandemic highs in late 2024, with net absorption turning negative due to federal lease terminations [9] Company Strategy and Development Direction - The company has decided to suspend its dividend to fund long-term growth and retain earnings for capital expenditures related to tenant improvements and leasing commissions [12][13] - The focus remains on leasing and managing high-quality work environments, with a strong emphasis on capital deployment for leasing momentum [26] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism regarding leasing prospects, with a strong pipeline of approximately 750,000 square feet executed or in legal stages [21] - The company anticipates achieving its year-end lease percentage guidance of 89% to 90% if the economic environment remains stable [22] Other Important Information - The company completed its refinancing activities, including paying off a $250 million term loan and extending a $600 million line of credit [8] - The backlog of annualized revenue from leases yet to commence increased from $46 million to $67 million [11] Q&A Session Summary Question: Inquiry about leasing pipeline and guidance maintenance - Management noted a strong leasing pipeline of approximately $750,000 square feet, with $275,000 executed in April, but maintained guidance due to macroeconomic uncertainties [29][30] Question: Clarification on the historical spread between lease percentage and economic lease percentage - Management indicated that the suspension of the dividend would provide additional cash flow for internal growth, with a focus on leasing momentum [35][36] Question: Discussion on the dividend suspension and its implications - Management explained that the decision was influenced by the need to fund leasing momentum and maintain investment-grade credit ratings, with retained earnings earmarked for leasing capital [39][40][46]