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Edited Transcript of ABP.AX earnings conference call or presentation 16-Aug-19 12:30am GMT

Full Year 2019 Abacus Property Group Earnings Call

Sydney, New South Wales Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Abacus Property Group earnings conference call or presentation Friday, August 16, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Robert Baulderstone

Abacus Property Group - CFO & Company Secretary

* Steven Craig Sewell

Abacus Property Group - MD & Director

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Conference Call Participants

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* Darren Leung

Macquarie Research - Analyst

* Richard Barry Jones

JP Morgan Chase & Co, Research Division - VP

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Abacus Property Group FY '19 Results Presentation Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Steven Sewell, Managing Director. Please go ahead.

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Steven Craig Sewell, Abacus Property Group - MD & Director [2]

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Good morning. Good morning, everybody, and thank you for joining us today. I realized there's a bit of traffic on the lines. We're here today to talk through the FY '19 annual results for Abacus Property Group. I'm joined today by our CFO, Rob Baulderstone, who you'll hear from shortly; as well as Cynthia Rouse, our Head of Investor Relations.

By way of summary, Abacus has had a very productive and transformative full year in fiscal 2019. We continue to manage the group's investment to deliver sustainable and growing distributions to our unitholders. Our operating stats, as you can see from the slide, are reflective of our transition from volatile trading and residential development lumpy earnings to being from -- delivered from more strong annuity-style quality asset backing. And just following the financial year-end, last month, at the end of July, we successfully raised $250 million in equity via replacement to our institutional investors as well as recently launching the share purchase plan for our retail investors, which attracted bids for many existing and some new investors, which has further strengthened our balance sheet and enabled us to more quickly move along this transition path.

As detailed in the last year results announcements, our overarching strategic direction is to focus the majority of our investments in the key sectors of commercial office and self storage. Our investments, as you can see in financial year '19 highlights, our investments in both sectors continued to perform well at or above expectations. In addition, and in keeping with our cautious stance, we proactively refinanced one and extended the other of our only 2 major debt facilities at the group, which saw us substantially extend the tenor and lock in attractive rates.

We had strong income growth from our properties, dominated by our commercial office properties, which we'll talk about, and solid growth in self storage, impacted somewhat by the residential market conditions, and recently announced a partnership with Charter Hall Group for the acquisition of a minority interest in the major CBD tower at 201 Elizabeth Street. We mentioned this in respect to the placement last month. And it's been pleasing to be able to quickly announce the acquisition of this investment, adding to our prime CBD asset exposure that we already have on Martin Place. Both precincts of the city in Sydney, being the beneficiary of the New South Wales government's infrastructure investments.

Looking at our strategic priorities and our achievements for the year, to coin a phrase, how good are the Australian commercial office and self storage sectors. A particular note is the ability of Abacus to bring forward and create our investment opportunities off-market and in tandem with some longstanding and newly initiated partnerships. Equally, we took the proactive decisions over the last 12 months to substantially reduce the equity and our operational exposure to both our residential sectors in both projects and land as well as in the retail asset class. This continues to be a work in progress as we continue to both, a, manage our legacy projects to preserve and maximize value, and b, seek to dispose and realize the sometimes long-dated equity that we have had invested.

The slide on chart -- the chart on Slide 5 details and shows our constant and steady progress on balance sheet optimization. Whilst early stages, we do note the signs of a slowing decline or even stabilization in green shoots in the land and residential subdivision sectors, most notably in the infill locations that are, again, the beneficiaries of the infrastructure investment going on across Western Sydney. This will enable us in coming years to continue to act to realize some of the land equity that we have invested, long-dated equity, in land holdings that we've had.

Our balance sheet remains strong with the investments that we've got as well as the capital that we've raised and is conservatively valued, as Rob will detail shortly.

I'd now like to turn over to Rob, who can take us through the high-level summary of our financial results.

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Robert Baulderstone, Abacus Property Group - CFO & Company Secretary [3]

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Thank you, Steven, and good morning. As Steven mentioned in his overview, the group has delivered a pleasing result with an underlying profit of $139.4 million and funds from operation profit of $129.2 million. And while that's lower than the previous year, it is consistent with the transition to a more annuity-style business.

Some of the highlights of this year's results were: an 8% increase in net property income to $114.8 million, and this reflects the group's focus on increasing property income; a 6.7% yield on the established self storage portfolio; and continued growth of the distribution by 2.8%, and this was at the upper end of our forecast guidance.

Turning now to the balance sheet. Net tangible assets per security increased by 4.7% to $3.33. This reflects the increase in the fair value of the group's properties and the current year's performance. During the year, as Steven mentioned, we refinanced over $1 billion of banking facilities, extending the debt duration by 1.5 years to 5.3 years, with our longest dating facilities now being over 6 years in maturity. Following the institutional placement, which raised over $250 million, we have acquisition capacity of over $900 million. While our gearing increased slightly during the year to 24.1%, following the placement, it has now reduced down to 15.2%.

Looking at our valuations during the year, the valuation uplift for the year was $69.6 million or 3.5%. The majority of the uplift came from self storage, with an increase of 6.5%. At the year-end, the property portfolio was valued at $2.3 billion with a strong weighting to office and self storage.

I'll now hand back to Steven.

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Steven Craig Sewell, Abacus Property Group - MD & Director [4]

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Thanks, Rob. If I just turn to the key sectors of our focus, being commercial office and self storage as well as some comments on the retail sector. In commercial office, Abacus has had a longstanding exposure to all the major CBD markets in Australia, excluding Perth, as well as some selected fringe markets, notably in Brisbane in Fortitude Valley; Sydney in Surry Hills, Alexandria and Potts Point; and then in Melbourne in St Kilda Road, Richmond, Abbotsford and Port Melbourne.

In the ever-increasing value-conscious commercial office segment, our average rental levels are attractive, and this is where we see an opportunity. As the amenity, accessibility and the built form improved, most notably with the infrastructure investments in most of these precincts, we like to be invested in areas where we see a clear path to income and rental rate growth. Our investment criteria over the last 6 to 12 months has been well refined to focus on certain size assets and assets with attributes in select markets that support our long-term high conviction investor view.

Our publicized investment into Australian Unity Office Fund, which comprises a portfolio of 9 office assets that fit this investment criteria, is an initiative that we've joined with Charter Hall Group and are using the complementary skills and track records of both teams to bring to the market.

Turning to capital transactions, as we flagged in our placement presentation 3 weeks ago, and we're pleasingly being able to deliver in just the last few weeks, we're excited at our investment in 201 Elizabeth Street, Sydney. Occupying a commanding location at the gateway to the midtown region of Sydney CBD, the tower sits immediately opposite the soon-to-be constructed Pitt Street metro station and on Hyde Park, with panoramic views of the harbor and the entire city. In line with our investment criteria, at this asset, we see a clear path with, obviously, a lot of hard work and resources applied to lift the average rental levels in place at 99% occupied as we improve the amenity and the trip facilities, public transport linkages and potentially expand the lettable area on the lower levels of the tower. Again, we're pleased to be able to expand our partnership and joint activities with the major office owner, Charter Hall Group, in this endeavor.

Turning to self storage. As most of you all know, Abacus has been a long-term investor in self storage, dating back 14 or 15 years. It is absolutely a key sector focus for us and we've materially lifted our intensity in growing this exposure through a combination of activities: acquisition of existing, either branded Storage King or externally branded; upgrading existing facilities or expanding existing facilities, where the commercial return is suitable; as well as working with our operating partners at Storage King to enhance the overall value proposition of the Storage King brand.

The Abacus approach to storage -- self storage sees a myriad of growth opportunities: the organic growth opportunities; maximizing occupancy at a yield; again, looking at those acquisitions of either existing Storage King locations that aren't owned by Abacus or other outlets owned under different brands; development and extension; actively seeking to maximize operational efficiencies at our stores with solar panels; capital expenditure; augmentation of the retail offer; as well as exploring any opportunities we can to joint venture with like-minded groups that have capability and/or operational expertise in the self storage sector, all the time adopting an incredibly disciplined investment approach with a very metropolitan focus.

The Abacus portfolio of almost 70 locations, several of them, a small number being development sites, is dominated with 5 markets, Melbourne, Sydney, Brisbane, Canberra and Auckland that dominate that account for over 80% of the portfolio by value. Through our history in this business, what's self-evident is the direct linkage between core volumes and business inquiries in the self storage market with residential market conditions, which, of course, is driven by people moving in and out of houses, settlements of houses and so on. And as I mentioned earlier, while there are signs of moderating conditions, they have come from substantially a negative point. And we note that in the fiscal '19, year-on-year, the number of settlements in the Melbourne market, for example, was down 27%, whilst in the Sydney market, that statistic year-on-year shows nearly a 22% decline in the number of settlements. And this flows directly across the year, starting at almost November, December last year and continuing up until the end of June to self storage demand.

However, by virtue of the quality of the locations that we're invested in, majorly exposed to established suburban or inner urban locations, we remain positive on the outlook for rental growth, albeit at probably a lower level from that, that we've seen registered over the last few years. Having said that, occupancy remains very solid, and is one of those key drivers that we do manage.

In our portfolio, we saw particularly strong performance in our Canberra properties, which fared the best, followed by Queensland and New South Wales. We saw a marginally negative result in Victoria that was impacted by substantial additional competition, and our assets in New Zealand remained positive, although in low single-digit positive rental rate growth numbers.

As we mentioned, we are very focused on evaluating the myriad of opportunities that are occurring to us to increase our exposure to self storage. It's early days, but we do expect the strong momentum that we were -- enabled us to invest in FY '19 to continue across in FY '20. Developments or refurbishments of our existing locations will always be an activity for us. However, we do have a preference, as we do in commercial office, to partner with groups that do have on the ground capability and resources in our target markets.

Turning to the retail sector. Again, this is one that we're incredibly cautious on for all the well-documented and reasons and factors. Abacus' exposure in retail now is reflected in 3 assets alone. Our 2 50% interests in Ashfield in Sydney and Lutwyche in Brisbane and our minority interest, 40% interest in the Oasis Shopping Centre up on the Gold Coast. At both Ashfield and Oasis, we're very pleased with our anchor tenant performance, with supermarkets growing, plus 3.9% at Ashfield, 8.8% at Oasis, and particularly, the specialty leasing spreads of 3.1% at Ashfield and 2.5% at Oasis, which we believe clearly reflects the level of increase in customer traffic and also the affordable rent levels that exist at both these outlets.

For obvious reasons, in the current market conditions, we continue to work hard to increase our non-retail income streams at all locations. Whether it be eat-in or takeaway food, the tab-in operators such as we have at Oasis, our carpark operations, office and service users, all of which benefit from the established public transport connections, the accessibility to large volumes of carparks, and also, the local community hub attributes that exist in each of the 3 locations. We were able to complete during the course of fiscal '19, the disposal and reduction of our interest in retail. And certainly, this is a sector that we remain as a watching brief.

Turning to the realizations of non-core assets. As we flagged, we're working hard to substantially reduce our exposure to the residential market sector. We remain with only a very small exposure to one project in Melbourne, which is expected to complete in fiscal year '20 and a small tail of less than 20 low-value units remaining in the Merivale project up in Brisbane, a great result in this context of the market conditions that have occurred since that project, completed in January 2018. We were successful during the course of the year in setting a transition to exit from the active projects in residential in the second half of fiscal 2019.

And also in the land and in -- at land and in -- land and mortgages segment, we continue to work with a number of transactions and placing where we look to realize some of our equity exposures, as well as looking at some of our higher value, the most valuable parcels being at Riverlands in Milperra, Camellia, and also at Lane Cove, all of which we forecast to be marketed and realized in the medium to longer term. And you'll see on that slide the details of the realizations that we undertook, selling out of Liverpool and Bacchus Marsh, as well as our 50% partnerships on Ashfield and Lutwyche.

For Abacus, sustainability means considering environmental, social and governance risks and opportunities in our business operations from our investment decision-making process to active asset management and development activities and our realizations. We embarked across the year on a substantial solar panel storage installation at our self storage facilities as well as a refresh of our Non-executive Board.

At this point, I'd like to take some time to recognize the almost 20 years of tireless service of our soon to be retired Chairman, Mr. John Thame. He steps down at the end of the month, an amazing performance of leading and guiding the organization from its early days as an unlisted group through listing through the financial crisis, and most recently, with the transition from my predecessor. The whole organization joins with me to thank John for his tireless service. And as well, we welcome the appointment of Myra Salkinder, who assumes the role of Chair from the 1st of September, having been on the Board for almost 9 years.

Turning to the outlook. In conclusion, we're pleased with our achievements for the year and positive for the outlook for the sectors in which we're focused. Abacus continues and will build on its long, hard-earned track record and capability of investing in fundamental quality investments with high conviction into assets that we want to own through the next cycle and for the long term. We continue to apply rigor and resources into our quality people, technology and business processes to grow the platform into an investment house that will prosper in the ever-changing macro conditions that exist. We'll continue to strive to deliver consistent and quality distributions for our investors from a strong asset-backed balance sheet over the medium to longer term.

And at this point, I'd like to thank the whole team at Abacus, both management and our directors, our key business partners, the vast array of investors, and particularly, our major investor, the Kirsh Group, for their support and encouragement across the year. It is very much valued and appreciated.

I'll now turn back to the operator and take any questions on the results.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Richard Jones from JPMorgan.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [2]

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Just in relation to your accounts, [97] suggests you've got a $47 million investment in listed securities. Can you clarify what that is?

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Steven Craig Sewell, Abacus Property Group - MD & Director [3]

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Richard, as you'd be aware, we're in joint venture with Charter Hall on the Australian Unity piece. We have the investment in the platform for Storage King. And over the course of the last 12 months, we have considered a small investment into another listed group.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [4]

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Okay. You're not clarifying who that is. Okay. Fair enough. The storage RevPAM declined in the second half. Can you just kind of give some color as -- a bit more color as to what and where is driving that?

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Steven Craig Sewell, Abacus Property Group - MD & Director [5]

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I think the major factors we saw was the softness in the Melbourne and New South Wales markets. So when we looked across the year, we've had a negative RevPAM growth in New South Wales -- sorry, marginally positive in New South Wales, negative in Victoria. That's quite unusual for the portfolio, and that's what led us to the investigation of residential market conditions, which we got the CoreLogic stats that I quoted. So it is -- it's reflective of core volume into the business and moves in -- move-ins and outs.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [6]

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Okay. And then just in terms of -- sorry, just in terms of the stake you took in Storage King, 25%. Can you just refresh our memories around the opportunity [if you have] one or the process in terms of lifting that stake?

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Steven Craig Sewell, Abacus Property Group - MD & Director [7]

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It's a conditional contract that we have. The terms are confidential between ourselves and the private operators, and it's linked to performance of the business and how we track with the operational aspects of the business. And mainly, the reason I'm sort of hesitating around that is that it is a different business to what a REIT would typically operate in. So this is a consumer-facing financial services type business, which at the moment is experiencing considerable disruption through technology. And I think it's something that we have an option into the future in negotiations with our joint venture partners who own the 75%, who remain the 75% and majority owner, who are 2 private individuals.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [8]

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Yes. Okay. Just in terms of the office portfolio. Can you tell us what -- where that sits relative to market if you mark-to-market that today?

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Steven Craig Sewell, Abacus Property Group - MD & Director [9]

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We have had -- I would consider other than substantial further interest rate increases or decreases, I would say that we sit at market value today. I think...

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [10]

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Just rents (inaudible)

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Steven Craig Sewell, Abacus Property Group - MD & Director [11]

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Rents. We've got rents that range from low $200 up to our Martin Place asset, which sits at rents of about $1,000 a meter. So that's where we see the opportunity in most of the investments that we've made is where we have low in-place rentals, which average across the entire portfolio of just under $500 when you average across the fringe in the CBD investments. And in every asset, whether it's a reconfiguration and capital works project or simply upgrade of existing public space and amenity, we do see rental rate growth. But certainly, the Martin Place asset, 14 Martin Place is one that has experienced considerable growth of over 10% rental growth in the last 2 years, and is probably getting close to the top of that cycle. But it's a bright man to predict where the office market cycle is going, I think, at the moment.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [12]

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Yes. And just in terms of the vacancy, just a final question, sorry. In terms of the vacancy within the office portfolio. I'd like to understand where -- can you call out a couple of the bigger vacancies and opportunities, I guess?

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Steven Craig Sewell, Abacus Property Group - MD & Director [13]

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Yes. So we are sort of 5% vacant at Westpac House, the little building up in Brisbane -- sorry, in Adelaide. We've got substantial vacancy at a little building in Canberra. Our heritage building and tower at 33 Queen is still only 2/3 occupied. So the majority of our occupancy is in the majority of the value -- valuable assets. So most of the occupancy that is lower than average is at the lower value, lesser quality assets.

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Operator [14]

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(Operator Instructions) Your next question comes from Darren Leung from Macquarie Group.

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Darren Leung, Macquarie Research - Analyst [15]

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Just a quick one on 201 Elizabeth Street. There was, obviously, a proposal that Dexus had considered previously in relation to residential or hotel change in use. Is that something that's still available to you guys? Is that something you'll pursue?

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Steven Craig Sewell, Abacus Property Group - MD & Director [16]

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So Charter Hall will take the lead on the development and asset management of the building. But no, the reason for us excited about investing is the repositioning of the building as a commercial office location.

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Darren Leung, Macquarie Research - Analyst [17]

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I just noticed in the equity raising presentation, there's $220 million for your share, but now $202 million, what is the variance there, please?

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Steven Craig Sewell, Abacus Property Group - MD & Director [18]

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Excluding costs. So the total value including cost is around $660 million, and we're a 33% owner.

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Darren Leung, Macquarie Research - Analyst [19]

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And then can you please provide any color around IOF and what financial structure could look like for that vehicle?

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Steven Craig Sewell, Abacus Property Group - MD & Director [20]

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It's a work in progress, Darren, we -- our due diligence period is expired, and we're just continuing to get the last remnants of the information. And then between ourselves and Charter Hall, we will -- we're in discussions with both the investment -- independent Board Committee of Australian Unity as well as Australian Unity as the manager. So work in progress, and you'll see constant updates from both ourselves and Charter Hall as well as IOF on that.

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Darren Leung, Macquarie Research - Analyst [21]

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Great. And just the final one from me, perhaps just on the self storage side. So obviously, RevPAM is, I suppose, under pressure from the resi conditions that you've called out. I just noticed the margins have come off to 63% versus 67% a year ago. If I think about this, is it because there's more sort of incentives being provided, not captured in the revenue side? Spending drivers around this, please?

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Steven Craig Sewell, Abacus Property Group - MD & Director [22]

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It's really at the margin, Darren, I have to say. I think what we're seeing as well with the investment into the platform is, and as you'll see with the next-generation of storage facilities that are being built, the need to invest in facilities, the need to upgrade the retail merchandise presentation, the curve appeal, if you like, of the outlets, more and more is impacting on the profitability, but it's still coming from a very strong and solid base. I think the RevPAM softness that we've seen, and certainly confirming with some of the other major self storage operators, it's typically closely correlated to that residential market conditions. And whilst in no way am I calling market -- residential market conditions, we're starting to see the signs of more movements as people are buying and moving into more apartments and houses, and that is showing signs of increasing core volume. So we're not alarmed by it. It's happened historically, and it's certainly something that's quite cyclical.

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Operator [23]

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There are no further questions at this time. I'll now hand back to Mr. Sewell for closing remarks.

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Steven Craig Sewell, Abacus Property Group - MD & Director [24]

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Thanks everybody for dialing in, and enjoy the rest of the day. Thank you.

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Operator [25]

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That does conclude our conference for today. Thank you for participating. You may now disconnect.