Investing in special situations can often present unique opportunities for investors to uncover hidden value.
One such opportunity lies in the imminent spin-off of Abacus Group’s self-storage division, Storage King (to be listed as ASK). This strategic move aims to unlock the potential of Storage King’s $3 billion portfolio by separating it into a separately listed entity. In this blog, we will explore the value proposition of this trade and analyse the factors contributing to its potential success.
De-Stapling
We have taken a position in Abacus Property Group REIT (ASX: ABP) due to the impending de-stapling of their two property portfolios into two separately traded securities. A de-stapling event is straightforward, as two securities that are contractually bound together (or stapled) are split from each other to trade as separate entities.
For context, the ABP REIT has a $2.6bn office and retail property portfolio and a $3bn self-storage portfolio, branded as the well-known Storage King. A shareholder meeting is scheduled on the 27th of July to approve the deal, which is just a formality as the largest shareholder will be voting in favour of the transaction. The standalone REITs are expected to start trading on the ASX on the 1st of August.
Source: ABP half-year FY23 result presentation
Firstly, let’s discuss the two portfolios.
Storage King (ASK) Portfolio
Storage King has 135 properties nationally, with 90% in metro areas. We compare this to the listed competitor National Storage REIT (NSR), which has 217 centres nationally.
Storage King has an impressive occupancy rate of 92% and higher revenue per available square meter (RevPAM) compared to its competitor, National Storage REIT, making it an attractive investment. The portfolio’s focus on high-density areas, with 85% located in capital cities, including key locations like Sydney and Melbourne, provides strong occupancy demand and potential revenue uplift. Furthermore, the surge in e-commerce and the increasing demand for storage solutions from both retail and commercial clients are providing tailwinds for the self-storage sector.
ABP performed a capital raise in June for the Storage King portfolio, with the capital being used to pay down debt owed to Abacus and reduce gearing for the new portfolio. The raise was completed at a price of $1.41 for the storage portfolio, which implies a 10% discount to the net tangible assets (NTA) post-transaction.
We expect that the Storage King price will move closer to net tangible assets (NTA) post the transaction. This is based on the fact that National Storage, trades at a 6% discount to its net tangible assets. Until recently, National Storage was trading at the value of its net tangible assets, with the fall in price coinciding with the fall in the broader property index in June. With Storage King having a higher occupancy rate and better revenue per available square metre, we believe it should trade in line with or above what NSR trades.
Abacus Group (ABG) Commercial Portfolio
Abacus Group’s commercial portfolio comprises office properties and retail shopping centres. With 18 commercial office assets boasting a 95% occupancy rate, Abacus Group focuses on prime CBD locations, primarily in Sydney, Melbourne, and Brisbane. Additionally, the retail portfolio features three shopping centres anchored by renowned tenants such as Woolworths, Aldi, and Coles. The portfolio also includes the Myer building in Bourke Street, Melbourne. The portfolio’s strong occupancy rates and solid lease expiries provide stability to the portfolio’s income.
For the Abacus Group commercial portfolio, the implied discount to net tangible assets is significant at 47%. However, considering that office REITs in the sector are trading at an average of 31% discount to net tangible assets, there is potential for this gap to reduce. The portfolio’s focus on CBD locations and quality tenants in the retail segment could contribute to narrowing the discount.
Why The Split?
Currently, Abacus Group’s stock is trading at a discount to its net tangible assets of 30%. However, self-storage as an asset class trades close to its book value. By de-stapling the storage portfolio, management has attempted to close the gap to net tangible assets. This has worked in management’s favour because, as mentioned above, the offer price for Storage King (ASK) set at $1.41, represents a 10% discount to net tangible assets. So, we have already seen part of the gap close. Oracle still believes there is value in this trade.
There are two significant factors expected to drive returns in this transaction from here. Firstly, the Storage King price is likely to move closer to its net tangible assets. Drawing on the comparison to National Storage REIT, which trades at a 6% discount to net tangible assets, there is a strong possibility that Storage King will trade higher. Especially considering its superior occupancy rate of 92% and higher revenue per available square meter. Secondly, the discount to net tangible assets for the Abacus Group commercial portfolio is currently at 47%, while REITs in the office sector trade an average of 31% discount to net tangible assets. This suggests that the discount for Abacus Group will likely narrow post-transaction, presenting an opportunity for investors. If the Abacus Group portfolio trades at the average office REIT discount of 31%, there is a 16% return available to investors.
*ASX release: ABP Transaction Booklet 19/6/2023
^ Oracle Investment Management estimate
Summing up
The spin-off of Storage King from Abacus Group presents an intriguing special situation trade for investors. With the potential for both portfolios to narrow the discounts to their respective net tangible assets, there is an opportunity to earn attractive returns.
There are, however, certain investment risks to consider, such as market sentiment towards property and the market’s response to the deal. Nevertheless, if the discounts on net tangible assets for both portfolios decrease as expected, there is a potential upside for investors. The thesis suggests earning a return between 15-20% over 1-2 months as the discounts to net tangible assets reduce post-transaction. This will make for attractive returns over a short period, and we believe the potential downside to this trade is low, considering the large discount to net tangible assets implied for the commercial portfolio.
Written by Jack Magann
Emerging Companies Portfolio Manager
Oracle Investment Management
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