Thank you for standing by, and welcome to the Abacus Property Group FY 2022 Results Presentation. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question via the phones, you will need to press the star key followed by the number one on your telephone keypad. If you wish to ask a question via the webcast, please type your question into the ask a question box. I would now like to hand the conference over to Mr. Steven Sewell. Please go ahead.
Thank you, and good morning, ladies and gentlemen. Welcome to the Abacus Full Year 2022 Results Presentation. I'm joined today for the first time as our CFO by Evan Goodridge. Congratulations on your appointment. Also Cynthia Rouse, our GM Corporate Comms and Investor Relations, plus Kevin George from the finance team is in the room. I wanna pay my respects to the traditional owners on the land on which we gather, the Gadigal people of the Eora Nation and acknowledge their elders past, present, and emerging. For those listening that have followed the group for some time, you will appreciate the transformative journey that we've been on and how satisfying it is for the whole team to have the results and the platform positioned as we have at the end of FY 2022. A fantastic period of accomplishment for Abacus.
Now with over AUD 5.5 billion of total assets, conservatively geared, and the vast majority of our investments contributing to our strong net income underpinning. We're pleased with the performance for the year, and more importantly, for the outlook for the near to medium to longer term. As I'll touch on later in the presentation, the Storage King operating business and asset base is something that we're most proud of, and with the results, we've delivered record income growth from operating conditions, the best ever experienced. This income growth has delivered strong valuation uplift for the over 120 locations now that Abacus owns or is developing in the Storage King business across Australia and in New Zealand.
Pleasingly, too, given our balance sheet strength, we've been able to deliver strong funds from operations FFO-backed distributions for our investors and pay out a dividend at the upper end of our payout ratio at 95%. Turning to the year highlights. In a year of challenging market conditions, who can forget the 107 days of lockdown imposed on New South Wales this time last year between July and October 2021, and the COVID and associated macroeconomic and social impacts that impacted markets around Australia variously and also across in New Zealand. Across this year, the group was successful in transacting on acquisitions of assets as well as disposals, raising fresh equity in March this year, and extending and entering into new debt facilities, all to great long-term effect in line with our strategic objectives.
As I touched on, the self-storage operating conditions surprised on the upside, with all manner of tailwinds contributing, many of which we still see today. In this context, we deployed over AUD 500 million into new facilities and green or brownfield sites that will drive our development activity in this sector for years to come. Similarly, our commercial portfolio is taking shape and proved extremely resilient by virtue of the assets, location, and customer value proposition, which I'll expand on later. We transacted across the year on some superior assets as well, most notably being the 77 Castlereagh Street tower, which later this year will become the new contemporary corporate office for Abacus. Over the last four years since we took the strategic pivot back after FY 2017, we've deployed approximately AUD 3.5 billion, including over AUD 2 billion into self-storage.
We differentiate our strategy by being a high-conviction owner, manager, and operator of commercial and self-storage investments, looking to continue to optimize and diversify these investments by market, period in the life cycle, and long-term income growth potential. This, we believe, delivers Abacus Group and its investors as a long-term asset-backed income growth investment platform with a clear focus on these two sectors and the application of our quality people, capability, and systems. During FY 2022, we also continued our journey to embed our sustainability strategy into how we conduct business here at Abacus. Our people and culture are critical to us delivering on this business model, and we've progressed a number of initiatives during the year that were designed to develop our people, enhance our culture, including our first in-person whole org team off-site post-COVID.
The results from our annual pulse survey were designed to gauge team morale, motivation, and engagement, and reaffirmed our efforts with the improved score achieving our target. We've also improved diversity and inclusion at Abacus with new female hires now increasing to over 50% this year. Developing strong and positive partnerships with all our stakeholders remains a focus for us, which I'll touch on in the results as we're seeing from our commercial customer engagement strategy later in the presentation. Allied with our repurposing of asset management to focus on medium to long-term plans for each asset are our ESG strategies. From an environmental perspective, we continue to make progress, and we're on track to achieve our board set targets by 2025.
A large number of portfolio initiatives, including gas and energy procurement, a platform, Buildings Alive platform established in early this year that drives continuous improvement for this energy efficiency with daily performance analysis that facilities management managers can use to implement changes, revised sustainability KPIs across the asset management team and our outsourced partners, Knight Frank and JLL, solar farm investigations on the vast array of roofs we have in our Storage King portfolio that can offset the rest of the portfolio's carbon emissions, as well as procurement strategies across waste and waste diversion, a tender that's underway. At specific assets, we have LED installations as well as solar across many of the commercial assets and also water meter installation and monitoring in our retail assets.
The acquisitions and realizations that we've achieved over the last four years have seen a qualitative and quantitative transformation of the commercial portfolio since FY18. Shown here on the screen are some of our biggest and most notable investments. Starting top left and working down the page, the new jointly owned asset at Industry Lanes in Richmond in Melbourne, a tower we part own at 201 Elizabeth Street in Sydney. Our most recent addition, 77 Castlereagh Street, which I said will be the new corporate office for the group by the end of the year. In the middle of the page there, the newly renovated and reconfigured Yarra Falls building in Abbotsford in Melbourne. Bottom left, one of our largest and longest owned assets, jointly owned assets at 14 Martin Place.
In the middle at the bottom, the 324 Queen Street Tower, which we've now moved to outright ownership. Finally, bottom right, our wholly owned North Sydney exposure at 99 Walker Street. These seven towers alone account for almost two-thirds of our entire commercial portfolio value, and each have a story and long-term strategic rationale. Importantly, in this climate, the customer profile and value proposition has seen a strong and growing income contribution from our commercial segment. As I mentioned during the half, we announced the retirement of our long-serving CFO, Rob Baulderstone, after just shy of 20 years with the group. Rob's achievements across the years as a key support to both my predecessor and to myself were immeasurably valuable.
With his trusted expert commercial support, especially in recent years as we planned and then implemented such a material transformation of the business, Rob being one of the most positive and proactive culture carriers across the entire business. In particular, I wanna recognize the people leadership and mentoring qualities of Rob across many of people in the finance team, including Raina Lowe, who's now a head of finance across at Storage King, and Evan, our recently appointed CFO, along with many others in the Abacus finance team. It is truly a testament to Rob's dedication and focus that these internal promotions were possible and the group now benefits from two extremely talented, directly experienced finance executives in key roles. On that note, I'll now turn over to Evan, no pressure, to talk us through the financial metrics of the business.
Thanks, Steven, and good morning. As Steven mentioned, the group has delivered an increased funds from operations of AUD 160.9 million. This equates to AUD 0.19 per security. The two key drivers of the increase in FFO were the deployment of capital into accretive acquisitions and the strong performance of our established self-storage portfolio. The self-storage performance is noteworthy, and FY 2022's performance represented the first full year that we have owned the storage operating business of Storage King. The EBIT contribution of self-storage increased by 57.5% for the year to AUD 110 million. Our commercial portfolio also remained resilient throughout the period with an increase in EBIT of 10%, equating to AUD 96 million.
The group sits in a strong capital position, and our capital management strategy remains focused on limiting debt expiries in any one year and maintaining sufficient liquidity to provide the financial flexibility to pursue growth. Capital management highlights include increasing our debt limits by AUD 700 million, raising equity via a AUD 200 million placement in March 2022, maintaining adequate liquidity levels, and establishing new debt relationships to complement the existing strong relationships that we have already in place. During the year, we refinanced over AUD 2 billion in debt facilities, resulting in a 4.7-year weighted average maturity without significant expiry until FY 2026. Again, this supports the group's solid and stable balance sheet position. Our gearing at balance date was 28.7%.
Following the recent acquisitions of the remaining interest in 324 Queen Street, Brisbane and a further AUD 47 million in self-storage sites, the group's gearing has now increased to 30.5%. This gearing remains at moderate levels and is below our maximum target of 35%. Post these transactions, Abacus still has approximately AUD 375 million in acquisition capacity to provide the group both financial headroom and flexibility. The group's cost of debt for the year was 2.1%. With the changing interest rate environment in mind, we have prudently increased our interest rate hedging levels to over three-quarters hedged in FY 2023, with a weighted average hedge maturity of 2.9 years.
The group is therefore somewhat insulated from rising rates compared to our peers, and as such, we see our cost of debt increasing to only around 2.75% for FY 2023. The valuation uplift for the year was AUD 345.5 million, or 8.3%, taking the investment portfolio to AUD 5.1 billion. The majority of the uplift was in self-storage with a 15.8% increase. These results are the realization of the disciplined commitment to capital management and the strategy given to growing self-storage as an investment class. This sector continues to outperform and continues to be the group's best engine of growth. I'll now hand back to Steven.
Thanks, Evan. Just turning to the operating performance in more detail across the two businesses, self-storage and commercial segments. By most measures, the self-storage operating conditions were some of the best on record during the year, with occupancy and rental yield delivering a record result. Combined with our acquired stores, properties that we've added in the last 24 months, we now total 91 properties of almost 500,000 square meters net lettable area with strong occupancy and rental outcomes. In addition, as you see on the chart, our stabilizing bucket comprises 33 stores, 15 of which have either been recently developed or expanded, plus a future pipeline of 18 locations that will underpin our growth in years to come. I'm extremely proud of our achievements in this sector. We have long-dated exposure.
We have a predominantly suburban and inner urban quality located portfolio, and most importantly, we have the operational expertise and a scalable platform, all fundamental attributes that point to long-term gains. Looking across the country and in specific markets, you can see here the market performance across the last 24 months. Barely a wrinkle from the most extraordinary harsh COVID lockdowns seen in Victoria, New Zealand, and last year, as I mentioned in New South Wales. All proves our thesis that if you focus on strong demographic markets, income and populations, design, build, or install the right-sized product and apply operational expertise under a trusted national brand, the self-storage asset class will continue to prove to be one of the most superior on a total return basis.
Our Storage King operating platform, now over 25 years young, is benefiting from being wholly owned by the group with our enhanced focus on people, systems and processes. Including investment into financial management and performance reporting systems, further support through our multi-site operational management and disciplines, upgrading our online user interface, and importantly, as you see in the image, our national advertising and brand awareness tactical programs. In addition, applying active asset management to the physical locations, which includes upgrading the curb appeal, retail merchandise offer, accessibility for customers and also prominent signage and generally facility amenity. All of which delivers new generation self-storage assets, which are designed in urban and inner suburban location, close to the customers, and providing a superior value proposition, which translates directly into economic return.
The FY 22 year saw us complete on a vast array of growth levers in this area. Acquisitions of new stores, acquisitions of existing Storage King stores, completion of large-scale developments, particularly in New South Wales and Victoria, at Woonona and Rowville down in Melbourne, plus optimizing the footprint on offer at existing locations, such as some of the major projects we undertook at Pymble and Adamstown. In addition, across the entire portfolio, we have a retail refresh program, which has been rolling now for over three years, which has seen a step change in the look, feel, use, and customer amenity of our stores, something that's not finished yet. The most notable and most lucrative and long-term beneficial of all our multi-pronged growth strategy in self-storage is where we can create and deliver new product.
According to our own concept designs, look and feel in the best urban and inner suburban locations. We have a positive skew towards this activity with now more than 18 stores at various stages from early planning, design, tendering, and we're constantly on the lookout for sites that exist in a targeted list of priority locations we have, in predominantly in Brisbane, Sydney and Melbourne suburban areas, all where we have deduced will deliver superior long-term and growing returns. While each project is relatively small in nature, we do, however, note the current escalating inflationary effect on build costs. In some areas, delivering around 10, 20-30% increases, and we're monitoring the resulting impact this will have on our returns. Turning to commercial.
Our commercial portfolio has recorded a very pleasing set of results for the year, driven in large part by the actions taken over the last 3-4 years to focus our capital on better quality, better-located assets with long-term income growth potential. It goes without saying that we're in volatile market conditions, which partly existed prior to COVID and have been seen to accelerate during and now, if I can be so bold as to suggest that we are post-COVID. Our commercial exposure, as we depicted at the outset of the presentation, is a superior mix and quality to the group has ever invested in. Combined with the active asset management and leasing with refurbishment and facilities and operational efficiencies, you can see there the like-for-like income growth of over 8% is very strong.
Year on year, we've had success in delivering on leasing strategies, micro-leasing strategies, and more holistically across various properties. We do acknowledge that our portfolio is bespoke, and we feel that our experience and quality of investment decisions is what differentiates us, driving the number and type of tenants, plus location, amenity, and building appeal. To that end, across the year, the team delivered a strong leasing result, with above-average leasing spreads underpinning that like-for-like income growth of over 8%. In keeping with market practice and usual terms, the reviews linked to CPI are not prevalent currently in the commercial portfolio. However, we believe, where possible, they will be introduced where it is possible to negotiate.
Clearly, the investment to upgrade, fit out, and enhance many buildings has paid dividends in the success of the leasing campaigns as our tenant customers effectively vote with their feet in wanting to remain and often extend in our buildings. Abacus Flex is our flexible working offer, which presently operates at both 14 Martin Place and 99 Walker Street. Since launching in the early days of 2020, we now see strong uptake, and more importantly, see this business as being an incubator of small to medium-sized enterprise tenants that try Flex for a period and often graduate to direct leases within the buildings. As a result of this positive momentum, we are now installing Flex into other locations, including our shopping center, mixed-use asset on the Gold Coast at Oasis, and at Abbotsford, our newly developed building in the fringe markets in Melbourne.
On this slide, you can see a pictorial composition of the portfolio as it stands now compared to back at the end of FY 2017, before any of the transformational steps had been taken. As you can see, a much higher proportion of core long-term hold assets, only a few of which were held historically, and also a similar quantum, albeit different mix, of four mixed-use assets that we now hold. To constantly validate our portfolio's long-term standing, we now have initiated a process of return projections and constant review of the risk-adjusted returns that exist at each asset, all the while aiming to have the most optimal risk-adjusted returns derived from every investment, be they stable, active, or development projects into the future.
Our only two proposed developments at the moment are those that we have in partnership at 201 Elizabeth Street, as well as 710 Collins Street with our respective partners, Charter Hall and Walker Corporation. Now that we've completed our projects in Melbourne at 459 Church Street with Salta and 452 Johnston Street in Abbotsford, which we own outright. On the next slide, we've shown some detail of the thinking as well as planning and actions that we have underway across, with a significant focus on our office asset management capability.
Projects that have been tackled and completed to great effect, including our small property in Surry Hills here in Sydney, following the renovation and leasing with a 42% rental income uplift, and the major reconfiguration we planned and have completed at our Johnston Street asset down in Abbotsford, which has seen a 24% rental income uplift and importantly sets that building with a long lease profile and new contemporary amenity and features. Here in the city in Sydney, at 14 Martin Place, an active re-leasing program and introduction of the flex component has seen us with approximately 22% increase in the gross passing income of the building since June 2018, with an increase in occupancy to now being fully let.
Incredibly pleasing and strong validation of our investment space, investment thesis into quality buildings in great locations that offer a superior value proposition for our tenant partners. Looking at our mixed-use retail assets. Our exposure here is quite limited and not at all homogeneous, given the asset mix and nature of the assets. Three of the centers, as you'll realize, have been owned and managed for many years. None of the assets are development-affected and variously have weathered the COVID impacts of the last couple of years differently. We didn't see a dramatic fall in sales levels even through COVID, given the predominantly non-discretionary and services offering installed at the centers. We don't have dramatic year-on-year increases. For the first time, our leasing spreads have turned marginally negative, only just.
This is symptomatic, I believe, to the volatile and challenging inflationary and cost of living pressures being experienced across the country. Clearly, impacts that are not done yet. We note, however, at the Myer department store in Melbourne, we do have a CPI-linked rent reviews, and we monitor all our leasing progress and outcomes going forward. As I've touched on, it was something of a year for capital recycling, culminating after the prior 2-3-year period where we transformed and focused our investments, selling a number of our smaller investments and recycling the proceeds into quality larger and higher occupancy buildings such as 77 Castlereagh Street, and increasing our share just in the last couple of weeks at 324 Queen Street from 50 up to 100%.
The photo you can see there on the slide is our brand new Industry Lanes property in Church Street in Richmond, which we've proudly developed in conjunction with Salta Properties. Over 60% leased with a number of leasing transactions on foot. This is a superb quality property that we are very proud to own. Similarly, down the road at Abbotsford, not far from Richmond, again, a spectacular end product that sets the building with a good, strong tenant profile, and more importantly, contemporary amenity and building features. We look forward to showcasing these two buildings with you soon. As I mentioned, the only other two projects we have at the moment are DA schemes that have been submitted on both 201 Elizabeth Street and 710 Collins Street, with details expected to be delivered across the next six months.
Turning to the summary and the outlook for the year in progress. In summary, the team has delivered on our transformation in spades. Abacus, we believe, is positioned well with a clear purpose and a positive trajectory in both our commercial and self-storage segment investments. Both businesses have performed well in the year completed June 2022, and we are confident they have each long-term income and capital growth prospects. To quote the famous old proverb, we live in interesting times. Already, interest rates have lifted from the record low rates of the previous few years, and our assumption is that they will go higher. Inflation is inexorably rising, and this will increase pressure across all inputs to the economy, cost of goods, cost of wages, et cetera.
This results in our cautious, and we believe a watchful and cautious stance with constant vigilance on the demand levels that we're seeing across both the occupier markets in commercial and also in self-storage. We are well-positioned, our balance sheet is in pristine conditions, and our sectors position us well and attractive over the medium to longer term. We thank you for your attention, and we are open to questions on the line.
Thank you. If you wish to ask a question via the phones, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then two. If you wish to ask a question via the webcast, please type your question into the Ask a Question box. The first phone question today comes from Caleb Wheatley from Macquarie Group. Please go ahead.
Good morning, Steven and team. Thanks very much for your time this morning. My first question is just following up on what you've concluded there, Steven, on your cautious outlook. You've obviously provided, I guess your expected cost of debt, throughout FY 2023. Can you speak to what you might be expecting in terms of underlying growth across the commercial and self-storage portfolios given that more cautious outlook?
I think what we've seen, even just in the July statistics, is that the impact of the rising rates has clearly crimped consumer confidence. It's resulting in delays or extended periods for leasing transactions in commercial, and also a change in customer behavior in our self-storage business. We would expect that we will moderate to much more normal levels in our self-storage business, around 5%, 6%, 7% type growth. And inflation-linked largely growth, income growth across our commercial portfolio, given that we'll start to see the benefits of some of those investment programs that we've been able to conclude during the year.
That's clear. Thank you very much. Second question is just around the hedging profile. So it seems as though you've been able to put on a significant amount of hedging over the past six months. Doesn't seem like the fixed rate, particularly, the next couple of years, has changed a huge amount. Yeah, just maybe to provide some additional color on how you've been able to achieve the increase in hedging and maintain fixed rates at such a low level.
Yeah. I think we took some actions back in the first period around April, May. I think what we've been able to do to quite strong effect is be able to lock in some rates that are quite attractive from that sort of longer period. We originally had advice as to the movement of interest rates in the years one and two, the next 24 months, and then potentially declining in the last three, four and five-year period. I think what we're able to do proactively is address our hedging profile in sync with that and also project that potentially that drop off in rates would occur at a later stage. That enabled us to put in place those swaps for the years three, four and five of our program.
Yep, sure. Just to be clear, there was no sort of capital outlay to lock in any of that hedging?
In the first two-year period, there was, and that was contracts we took earlier in the year. What we've been able to deliver is actually contracts that from a mark-to-market perspective would have cost us a lot more if we had have done it in the last couple of weeks. We think that we've been able to position the book pretty well.
Yeah. What sort of capital outlay was associated with the hedging in years one and two?
We're around AUD 14 million-AUD 15 million a year for that 24-month period.
Sure. Thanks very much. The final one from me was just on the outlook for development returns. You flagged potentially up to 30% cost inflation coming through on the self-storage development pipeline. I think you've previously spoken to a yield on cost of 7%+ coming through that pipeline. Be able to maybe just discuss what's happened to the yield on cost, given some of those inflationary concerns coming through, particularly if rental growth at this stage is enough to offset and where you're sort of seeing that yield on cost moving forward.
Yeah, we do see the rental yield lifting and most of the projects that we're doing are in higher rental markets or where we see the potential for higher rental. We do, however, predict that those development returns will drop probably between 50 and 100 basis points down to a sort of 6.5%, up to 7%. They're still quite healthy given the valuation and long-term income growth for the properties. We do just notice that movement in those construction costs.
Yeah. Is there anything that Abacus can do in terms of fixed price contracts? I imagine it's a bit more difficult with the sort of smaller parcel size developments in self-storage. Is there anything you can do to mitigate potentially some of those downside risks from construction cost inflation?
Not really. Although, you know, what I would point to is that this is a robust development pipeline that is entirely at our discretion. Of course, if there was to be meteoric rises in those construction costs in the years ahead, then we always have the potential to delay those projects. We don't see it in that realm at the moment, certainly the increases.
That's.
Thank you. The next question comes from Rich Jones from J.P. Morgan. Please go ahead.
Oh, hi, Steve. Just a couple of questions. Just why do you pay money to put in below-market hedges when that looks like it's gonna create an earnings headwind for you in year three, given the step up from, you know, circa 1% to north of 3%? I'm just wondering why, what's the rationale for doing that?
Well, it was all about the forecast movement of rates, Richard, and the advice we had, strong advice we had and certainly accorded with most of the market participants and where the swap curve was heading, was that we were facing a period of quite substantial rate rises. We believe for long-term stability, it is in the best interest to enter into those contracts.
I understand entering into hedges, but just not quite understanding why you pay money out to enter into a below-market hedge that becomes an earnings headwind moving forward.
Well, it's a point in the cycle, and I think what we see today is that actually those hedges that were entered into are in the money. They're actually an asset on the balance sheet because of the mark-to-market today.
Okay. Just bigger picture, Steve. Clearly, the storage business has been going phenomenally well. You know, we look at rates around the world and compare how storage and office rates trade. There is a massive spread between the two of them. You seem to be trading, I guess, more like an office rate rather than a storage rate. Just wondering if there's anything you're thinking about that, you know, maybe it's on the corporate side that could increase the weighting to storage and perhaps try and get, you know, a more storage-based share price rather than, you know, as I said, what looks to be more an office-based price at the moment.
Yeah. It is something that obviously we monitor and take advice on, Richard. I think, you know, your back-of-the-envelope analysis does accord with ours that we do seem to track in line with office rates rather than there's only one storage rate. We are strongly of the view that our operating performance and balance sheet concentration in storage deserves more focus because of the results and what we believe is, you know, good, strong, long-term delivery. I suppose, you know, we're conscious that we can drive the income of the assets and prove up the balance sheet backing, and we believe we've done that on both sides of the balance sheet, both segments of the balance sheet. Effectively, you know, investors at the end of the day make their value assumptions.
We're not negative at all on our commercial portfolio. In fact, you know, we're seeing very strong growth at some of the assets, as well as good long-term opportunities to invest in those assets. Equally, you know, we continue to see, at some of the targeted locations in storage, the ability to grow, materially grow our exposure in self-storage organically by creating that brand-new product, which we've proven in the last couple of years, delivers an economic return that is far in excess of buying existing product. We do, as I said in the presentation, have a skew towards creating that new product. We see that it, in the right locations with the right fundamentals, the economic return is materially higher, and we'll continue to deliver that. It's certainly something that we monitor and watch. Richard?
Okay. Thanks, Steven. Just one final question. Just can you clarify what the average for the move-in rate versus move-out rate is for the storage portfolio at the moment?
We've seen, just as I mentioned, in July, for the first time for many months, the move-out rate slightly exceeded the move-in rate. It literally is at the margin. You know, you're talking very small numbers in excess of move-ins. It is a turn in the market which we have identified.
Okay. Thanks, Steven.
Thank you once again. To ask a question via the phones, please press star one on your telephone. For the webcast viewers, please type your question into the ask a question box. The next phone question comes from Suraj Nebhani from Citi. Please go ahead.
Oh, hi. Morning. Thanks for the opportunity. Steven, one question on the hedging, capital outlay. Is it fair to assume that, you know, that AUD 14 million-AUD 15 million per annum will be below the FFO line rather than above?
It's included in the FFO calculation.
Okay.
Suraj?
So-
Yeah.
Okay. The 2.75% number, I just wanted to clarify that that includes the AUD 15 million impact from the hedging.
That's right.
Right. I mean, that seems like a very small increase in weighted average cost of debt. I'm just trying to make sense of that. Is it because you've been able to agree a below-market hedge rate? Is that right?
We had some longer dated contracts for this year, Suraj, that were at very attractive rates below 1%. That allied with where rates sit today and the margin on the overall facility is what gets us to that 2.75 number.
Okay. All right. That makes sense. Thanks a lot. Maybe one more question, Steve, on just trying to understand the strategy a bit more, you know, in terms of the investment decisions over the last six to eight months. Can you? I mean, clearly storage seems to be the area where there is a heap of opportunity. I'm just trying to understand the decision behind investing in certain office assets at this point in the cycle.
Yeah. As I mentioned, you know, it's about long-term returns, medium to long-term returns, Suraj. I think, you know, what we identified with the 77 Castlereagh Street asset is a building that had the ability with active asset management to crystallize. As we've already seen in the two floors that we have been able to re-lease, one to ourselves and one to the market, we've already seen material uplift in the rental of that building. We believe once we refit our floor, that will showcase the building as a contemporary office location in a fantastic location above Westfield. We see the market clearly is differentiating on all amenity and quantitative factors, exactly what is the value proposition.
I think, you know, that's what we constantly will review for each of our assets in commercial, as to whether they have a weakness, or something that we aren't able to address and reposition. We are believers in office in the right location with the right structural features. In respect of storage, I think, you know, what we've got is a strategic market position now with an internalized operating platform. The ability to work with the operations team on marketing programs, customer relationship engagement, as well as, you know, the broader design and installation of the physical facilities. That gives us, I think, a competitive edge, and that's why we ask you directly, more directly towards those redevelopment and building, creating new product.
We assess from a strategic point of view, what are the priorities, you know, almost on a monthly if not six monthly basis, where we see value. That changes, and clearly in volatile market conditions, it can change quite dramatically. I think, you know, that's the way the business is run. We're an investor. We invest for the medium to long term, and we believe it is prudent investment, strategic investment. Suraj, your question also has been raised by several people online. I think, you know, that fundamental question about being a diversified, and having those two segments, active segments, we believe that it is what differentiates, Abacus, and also provides very attractive medium to long-term returns.
Thanks. Thank you for that, Steven. That does seem to be a talking point for investors as well, so I'm not surprised it's a public question. I guess just one more to finish up, and I'll let you go to the other questions. Obviously gearing has reduced after the equity raising, you know, in the second half. Can you talk about deployment opportunities near term? Are we primarily looking at development of both storage and commercial as deployment, or there may be more opportunities from an acquisition perspective as well?
Yeah, smaller scale acquisitions in storage, predominantly development and storage. Although the dollar values are much lower than, you know, than typically would apply across most asset classes. You know, looking at about AUD 50+ million per year development spend, and that's just constantly rolling and those projects come on and off, and we can sort of go faster, go slower. In the office, in the commercial portfolio, predominantly it is development spend. It's redevelopment, it's enhancement, CapEx, be it the lobbies or end-of-trip facilities, some of the features that we identified on the slides. As we sit here today, we do not have an office asset under investigation for acquisition. And that's certainly. That's how we see the spend for the foreseeable future will be, as you say, predominantly in that development and redevelopment arena.
Okay. That makes sense. Thanks, Steven.
Thank you. The next phone question comes from Lou Pirenc from Jarden. Please go ahead.
Hey, good morning. Just a quick follow-up on that one. Does your guidance include any further acquisitions, or does it just include the developments as well?
We've stuck to the similar guidance of about AUD 100 million per six months capital utilization, Lou, and that's that can, you know, It can fit into a number of buckets. As I pointed to, there will be a small number of acquisitions in storage, and we've done post-balance date about AUD 47 million in storage acquisitions. You know, as I said, across the year, we expect that capital will predominantly be spent in development.
Great. Then just on the storage acquisitions, I mean, that has been a big part of your growth strategy. Just because you've kind of bought everything within the Storage King platform that you want to buy, or is it just gonna take longer from here onwards?
Predominantly, Lou, but I think as well, you know, while we did accumulate a lot of stores over the last 2 or 3 years. As I pointed to, we've done some detailed demographic analysis across the last 12 months and now have a targeted hit list of geographic locations that we want to invest in. Rather than just buying for the sake of buying, we do buy strategically to better fill our portfolio and strategically position our portfolio, given the large number of assets that we now do own across the country.
Great. Final question from me. Just, I mean, you remain cautious, as you say in your opening statement. Do you expect cap rates to go up over the next 6-12 months?
Hard be it for me to predict where cap rates are going, Lou. I think what we directly control is the driving of our income. As I said, predominantly the value uplift we had for the year was through our income growth. You know, I think it'd be a brave man to put a peg on cap rates across the next.
Mm-hmm.
12 or 24 months.
With your gearing where it is, isn't that part of your capital management strategy in terms of how much you want to spend, if you want to spend AUD 200 million on growth opportunities this year?
Yeah. I mean, we have a internal view, and it is informed, you know, monthly, quarterly, and six monthly. It does change obviously dramatically across the period as the debt movements and markets generally are moving, Lou.
Okay. Thank you.
Thank you. At this time, we're showing no further questions on the phone. I'll hand the conference back to Mr. Sewell for any webcast questions.
Thank you. Just one further question we did have come through on the line is in respect of debt costs for FY 2024. Given the hedge position and our current expectation of rates, we're expecting that debt cost in FY 2024 to be in a sort of range of 3%-3.5%. That might help, some people who are modeling and looking at what the near term or medium term projection is. The only other question that came through is in respect of incentive levels on office portfolio, and we are seeing, you know, there have been elevated incentive levels, particularly in the Brisbane market. They're persisting. Sydney has moderated down towards 30%, low 30%.
Melbourne, probably a little bit of an inflection, and we don't really have CBD Melbourne to comment on that. That's obviously something that we are monitoring, along with those sort of face rent movements. I think looking at these other questions, they were the major other questions that we had. COVID impacts. Not guiding to normalize with no further material COVID impacts. I suppose the main thing I'm pointing to there is just in respect of the government-mandated rental deferrals and waivers that were put in place, particularly Melbourne, New South Wales. They obviously did have a major impact on the rent performance and receipts. I think that ends the questions. I thank you all for your time and your support across the year, and look forward to catching up in more detail.
Thank you.
Thank you. That does conclude our conference for today. Thanks for participating. You may now disconnect.