Energy Focus Favours Large Office Landlords, Charter Hall, Dexus, GPT, and Mirvac Best Placed

Business Strategy & Outlook

Tenants prefer energy-efficient offices, and this favours large office REITs that own modern buildings. The best-placed office names are Charter Hall, Charter Hall Long WALE REIT, Dexus, GPT and Mirvac—they screen as significantly undervalued, and their office portfolios are among the most energy-efficient in Australia. The “Urban Developer—New Workplace” conference on Sept. 29 endorsed the importance of environmental credentials. Jones Lang LaSalle Australia observed that Melbourne vacancy is in the midteens for prime offices, but is only about 7% for buildings with high (5-6 star) NABERS Energy ratings. Tenants moving offices are said to be increasing their energy ratings by an average of 0.4 stars—some are increasing by as much as 3 stars, to get into 5.5- and 6-star buildings. Among the office REITs, at the top of the NABERS Energy ratings is GPT (average of 5.8 stars), followed by Mirvac (5.3), Charter Hall Long WALE REIT (5.3), Growthpoint (5.2), Charter Hall (5.1), Cromwell (5.1), Dexus (5.0), Stockland (5.0), and Abacus (4.7). NABERS Water ratings are also good, starting with Mirvac (5.3), Growthpoint (5.1), Charter Hall Long WALE REIT (5.1), Charter Hall (4.8), Dexus (4.7), Stockland (4.7), Abacus (4.5), and Cromwell (3.9). GPT didn’t disclose an average for its portfolio, but the group’s individual buildings have very high ratings, many above 5.0 and nearly all above 4.5. The increasing focus on energy efficiency supports and it makes no change to office forecasts or valuations at this time. The fair value estimates for office names are: Mirvac (AUD 3.10), Growthpoint (AUD 3.95), Charter Hall Long WALE REIT (AUD 5.10), Charter Hall Group (AUD 15.85), Dexus (AUD 10.80), Stockland (AUD 4.30), Abacus (AUD 3.30), and Cromwell (AUD 0.95). It ascribe no moats to any of these office stocks, apart from Dexus and Charter Hall, who earn narrow moats partly due to their funds management businesses.

Financial Strengths

The Abacus balance sheet is in reasonable shape, after a circa AUD 400 million equity raise in December 2020 bolstered the group’s cash reserves. It has a low cost of debt, averaging 2% in fiscal 2022. Look-through gearing as at June 30, 2022 was 29%. Gearing was 34% as measured according to its bank covenants (net bank debt divided by total assets minus cash). Abacus’ banking covenants specify a gearing limit of 50%, implying assets could fall in value by about a third before a covenant breach (noting that the gearing calculation specified in the covenants is higher than Abacus’ own definition). The fiscal 2022 interest cover of 5 times against a covenant limit of 2 times. That’s also a large buffer, and one wouldn’t expect that to be breached even if income declined due to upcoming lease expiries. However, it is gearing to rise back toward the group’s maximum targeted gearing of 35%, given the frantic pace of storage acquisitions and development, and potential development projects in its office portfolio. One can view that as high as one can estimate storage will account for about half of group assets, a sector that has minimal leases and weaker tenants than typical in a commercial property portfolio. Abacus has no debt expiring until fiscal 2024, when AUD 66 million expires, so one doesn’t see imminent threats. However, given the group’s high debt/EBITDA ratio of more than 6 times, refinancing could be a risk if interest rates rose substantially, or economic conditions deteriorated.

Bulls Say

Storage demand should recover as economic activity improves, driving up occupancy and revenue per available square metre.
While many of Abacus’ assets are in secondary locations, this means they have greater potential upside if urban infill pushes sites to a higher and better use.
Abacus has substantial expiries looming in its office portfolio. However, it may choose to redevelop the assets, adding value, and leasing the renewed buildings amid an economy that has recovered from coronavirus.

Company Description

Abacus Property Group is a diversified property group, with interests ranging from storage, office, retail, property lending, and residential development. However, Abacus is striving for a simpler and more conservative business, primarily as an owner of self-storage and office assets. It remains an active acquirer and developer of self-storage assets. Abacus is a stapled security comprising a share in each of Abacus Group Holdings and Abacus Group Projects and a unit in each of Abacus Trust and Abacus Income Trust, which can only be traded together.

(Source: Morningstar)

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