GDI Property Group (GDI.AX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the GDI Full Year Results Telco. [Operator Instructions] I would now like to hand the conference over to Mr. Stephen Burns, Managing Director and CEO. Please go ahead.

Good afternoon, and thanks for joining the GDI call. I'm joined by David Williams, our CFO. And I'm going to start on Page 3, which is effectively the introduction. A key theme for FY '25 has been our leasing efforts. We've been able to achieve over 32,000 square meters of leased space with over 21,000 square meters of that coming from office leasing. This is a continued theme. We're very focused on our leasing efforts and have been for the last few years. Importantly, momentum continues into FY '26, and we're very focused on leasing strategies and execution. We're delivering a robust total FFO with growth up 20%. Importantly, the property line is up 22%. Both categories have increased considerably since FY '23, in particular, as you can see on the chart, the Property FFO and again, confirming our leasing execution. Recycling, it's well underway in the funds business with the sale of IKEA and car yard assets. We've been able to maintain and marginally increase our NTA, suggesting that values bottoming. WS2 continues to be recognized for our good point of difference, which basically centers around timber and adaptive reuse, getting us better breakeven rents. And our co-living segment delivered $6.5 million to FFO, in line with our 20% return hurdle. Just turning the page. We've had a good start to FY '26 car yards. We've just exchanged a sales contract for 6 car dealerships for $74 million, representing a 50% increase over our purchase price. The 6 car yards remain after this sale. We have refinanced the syndicated facility with a limit increase of $25 million, and there's over $57 million of undrawn. We extended the term, and we've got margin compression and anticipate further rate cuts to reduce FY '26 interest expense. The leasing activity continues and the key theme in the market is the impending supply gap. We're very focused on capturing rental growth with our speculative fit-out strategy. Again, turning on to the next page. And in terms of delivering on our repositioning of the core properties, at Mill Green, we've helped 9 tenants either expand or relocate or consolidate within the precinct. Our fit-out strategy has been successful, as evidenced by our leasing results in the sub-600 square meter premises with faster and lower incentives. At 197, we did deals accounting for over 8,000 square meters of NLA, and we've taken occupancy to 88%. Basically, that was from 71% in June '23. We're relentlessly focused on the balance and working through active inquiry. We're also working through longer-term site optimization plans for the 3 assets that sit on Mill Green. The combined site is highly attractive and amenable to mixed use and a staged approach. Anything we do here will be carefully staged and funded. The focus remains very much on the successful fit-out strategy and minor amenity improvements. Turning over again. At Westralia Square and WS2, we've taken occupancy to 95% and focused on extracting target rents on the balance. With the supply gap dynamics likely to deliver rental increases in '26, '27, tenants are going to be very focused on accessing their needs beforehand. We're looking at extracting additional income from pockets of opportunity with additional NLA suitable for retail, in particular. And Level 8 at WS2 has now a show suite showing that we can do with our boutique structure and sets us up for future leasing within the building and outside of the building. We've really bulletproofed Westralia Square by effectively leasing over 18,000 square meters to the state government for over 8.6 years and leaving a staggered lease profile on the balance to access rental growth going forward. Turning over again. And just calling out our car parks, which don't often get mentioned, but their contribution increased by 15%. Cash virtually equals profit in this segment, and we are benefiting from the high city patronage. There are no work-from-home issues in Perth and the majority like to drive. Murray and Pier Street car parks are both prospective redevelopment opportunities as their precincts evolve. Murray Street sits an emerging entertainment and dining precinct as well as education. And Pier Street, also known as Wellington Street, is sandwiched between the Perth Hospital, which has come expansion, and a 30-story UniLodge student accommodation campus opening in '26. Note, we built WS2 on a 5-level car park, and it has been very successful with the car park underneath WS2 producing $2.5 million of net revenue in FY '25. Turning on to the next page. We've been very active on the fund side of the business, helping with investor liquidity, which has been a key theme we've had to address over the past 2 years. We've now sold over $250 million of assets in a very disciplined manner. People were calling out for us to sell at much lower prices, and we held back and we've delivered the investors the right outcome. We actively pursue future asset opportunities on a total return basis as well as looking to maximize existing assets across the segments. Turning over again. Our co-living business continues to progress with its operationally led strategy to improve occupancy and cash flow. FFO was $6.5 million and in line with our 20% return on initial invested capital. Going through the assets. Norseman has benefited from our intense operating approach, which is reflected in the 50% increase in value. Norseman is also traveling well with Pantoro pursuing strong production and expansion reflected in their demand for additional rooms, 34 part-time mine site rooms and 64 for a full-time expansion. And we actively review our growth opportunities in this segment very much through an operational improvement lens, but we're very careful. And we're not looking to expand GDI's balance sheet as we continue to mention, we would structure funding accordingly. Turning on to the next page. And again, delivering on strategy within the Funds Management side of the business. We're very focused on unlocking value in one of our rather more exciting assets. It's located at Broadmeadow in Newcastle. Our Fund #38 owns a 16-hectare property opposite McDonald's Stadium, home of the Knights. The property sits within a designated growth area for urban density of commercial and residential, currently industrial. The rezoning is in process and expected to be launched in FY '26. It's likely to produce a very considerable uplift in value flowing from a rezoning. In essence, it represents a very strong outcome for current investors on exit as well as up to 10 years of profit and more opportunity for GDI to facilitate the higher and better use. So we're excited about that one, and it progresses very well. Turning on now to the finance side. I'm going to hand across to David Williams.

Afternoon, everyone. Stephen's already mentioned a lot of these, but I'll just go over them in a little bit more detail, Page 11. NTA is now $1.20, up from $1.19 last year and December. All balance sheet assets were valued in the year. Cap rates on average expanded a little bit out to 6.7%, but values went up notwithstanding and the average rate per square meter of our portfolio is a bit under $8,500, which is well below replacement. FFO per security is $0.0662. It's up from nearly over $0.01 from 12 months ago. Gearing has been steady at 34%. The LVR, which is measured as the drawn debt on the Syndicated Facility over the assets of which they have security, which is the wholly owned assets, is also steady at 41% and the ICR is comfortably away from its covenant at 2.1x versus a covenant of 1.5x. Maintained the distribution of $0.05 per security for the year and have an intent to do the same next year. Breaking down that FFO in a little bit more detail on the next page, Page 12. Stephen already mentioned the 22% increase in the Property Division FFO. The big drivers of that were Westralia Square, which is reflecting the full year contribution as the building has been filled the top of it. There's only 500 square meters to go in that building. WS2, again, reflecting stabilized occupancy. There's only 2 floors to go. That is not a full year's contribution from every tenant. They came in during FY 2024. So '25 will be up again. 197 is obviously benefiting from the fit-out strategy and driving that occupancy up over the last 2 years from 71% to 87%. And the car parks had an outstanding year, just high average occupancy driven by great locations and high occupancy in the Perth office market. The Funds Management FFO was also up. That was due to -- predominantly due to the one-offs in the transaction fees for the sale of the dealerships and IKEA. Co-living was flat. Net interest expense was considerably higher, but the previous year included $2.9 million of capitalized interest. We do expect, as Stephen mentioned, through some margin compression and our hedging structure, which I'll talk about, we should be able to see that reduce through FY '26. Corporate and admin expenses were largely flat. The prior year had $400,000 reversal of previous year's expenses from corporate performance rights. Turning over to Page 13. We're very pleased to have the support of our syndicate banks. They extended the -- increased the facility by another $25 million. That just goes straight to undrawn debt. So today, it's $57.2 million. We extended 50% of it through to February 28. The other 50% is February 27. The swaps, we have an awful 4.55% swap that expires at 31 Dec. We'll be glad to see the end of that for $75 million. More interesting thing, we've got -- we had a zero-cost cap and collar structure where we pay between 3.75% and 2.65%. So we're floating there for $100 million, and we've got $175 million of callables at 3.43% average. So come January, we'll have a cost of debt with BBSY fixed rate on 3.43% on $175 million and the rest is floating with that underlying that cap and collar structure. Back to Stephen.

Just reflecting on the Perth market and the WA economy, the dynamics appear very robust to us. State final demand of over 3.6% year-on-year. Strong business investment, still up 8.7%. The strongest unemployment trend, which is up 3.5% and 32% below the decade average level. So unemployment is not a concern in WA. We've got the strongest population growth of over 2.4%. And interestingly, the retail spending is very strong at over 11%, and it's 11% above the decade average. So it feels robust on the economic side. In terms of the office market trends on the next page, we're seeing good lease inquiry levels. And the major theme is the supply gap, which is emerging. Most people have got it at 4 years of virtually no space coming through. The market rents need to rise in the order of 40% to justify construction. We're probably entering the lowest supply gap in 25 years if this is -- if these numbers prove correct and we don't get supply. Year 2030 looks like the earliest supply period. And tenants, as mentioned before, are likely to focus on not being exposed to the large rental increases, which are most likely to start coming through in late '26 and early '27. It's an issue for the tenants because they're still expanding. They're still getting moves to the CBD. Our speculative fit-out strategy helps us capture tenants that are very budget sensitive because not all the landlords are doing fit-out, but it suits us with our buildings. On the sales front, there are 5 to 6 campaigns that have been running, noting interest from high net worth domestic and international syndicates and a few instos. The depth of interest has increased. But as you can see, minimal transactions have completed. At some point, this will turn. I just say that reduced rates helps the equation and the stronger leasing plus the supply gap should help final demand. Just turning the page. If we look at, again, the charts, they're suggesting that Perth has the strongest 3-year absorption stats in the market nationally. And we've also got a new peak in Perth occupancy by area, again, confirming it's not affected by the work from home issues. If we turn over again, there's the supply gap that can be seen there with only little bits of space. Most of that is backfill before you get to the big column on the right, which is only mooted at this point. I'll be very interested to see where the site comes from for such an expansion. I don't think it's easy to be able to produce 60,000 square meters out of nowhere. Turning on to the Property portfolio. Noting our investment portfolio includes exposure to the car yards and the car parks, representing [ 18% ] of value and importantly, very cash generative, minimal CapEx as we like to highlight, very important to GDI whilst we've been in lease-up phase. I think in terms of our valuation, it's resulted in independent valuations effectively for Mill Green, the carrying value is up in the order of $36 million due largely to the income growth at 197 St. Georges Terrace. 180 was marginally down. The car parks were marginally up. They're at carrying value, so no independent there, but the income numbers support our view of keeping that static. They'll be valued again at the end of the year. And we've basically experienced good income growth across the asset. So we feel that the values underpin somewhat the portfolio. Turning on to the next page, and it's really just a key stats page showing the occupancy and the WALE and the weighted cap. Again, the market implied price suggests something in the order of 6,000 per square meter, which is in Sydney, less than people probably spend on fit-outs. So we don't think that the values are terribly high as implied by the market value, significantly ignoring any income growth that we expect to see accrue from the supply gap, replacement cost as well as basically the theme in the market, which seems positive on the whole and the bottoming out of office values. If I turn now just quickly to the last page, which is Page 24. Just really wanting to highlight that in terms of strategy, we are very focused on doing what we say we will do and nothing will change there. It's very important to the way that we operate. And we are executing on that strategy as evidenced, one, by our leasing results, and we remain relentlessly focused on additional lease-up and speculative fit-out strategy. On the financial front, we want to be very transparent. We're driven by strong strategic goals to grow FFO, balance our liquidity requirements and deliver a $0.05 distribution. We have recycled assets with over $250 million sold. We won't stop there, very focused on bringing the performance fee outcomes to account, utilizing our adaptive reuse and boutique timber office building skills and carefully managing strategic growth plans at both the property and a business level. We're always looking at the opportunity to optimize shareholder value with friendly actions and narrowing the value gap. We believe we are well placed for FY '26. And I'd like to thank you and hand back for Q&A.

[Operator Instructions] Your first question comes from Andy MacFarlane with Bell Potter.

First question just around leasing. Just interested a little bit on what you have in terms of heads of agreement on foot at the moment. Just some color, I guess, around the expiry coming at 5 Mill and when that hits in '26 and maybe just a little bit of color on 197 St. Georges as well, if that's right.

Yes, happy to -- I mean, in terms of 5 Mill, look, there's only -- there's less than 900 square meters there, but we tend to have a real crack at reutilizing the old suites there. It's just really a question of the best terms we can extract and who the tenant might be. We're very actively ahead of the curve on that sort of stuff in 5 Mill because we find if the tenants are expanding, then we can offer them space while it still exists in 197. So we feel that we're pretty happy with that. What was the other? Dave, did you want to...

Just the amount of heads, it's not that material because it's all relating to 197 spec fit-out. So that basically the gap from heads to lease is pretty short.

And we're pretty -- Andy, on that front, we don't -- we're pretty conservative when it comes to heads because we don't like them ever falling over, and they really do. And yes, I mean, we've got some good active inquiry both on whole floor and part floor, keeping in mind that there's only -- look, there's only 2 floors at 197, 2 floors at WS2, a part floor at Westralia Square. And as I mentioned before, the equivalent of 1 floor on 5 Mill. So we're right across the whole floor. But importantly, before we split the floor, we want to make sure we've exhausted the opportunity. So we're looking at saving every dollar we can on the fit-out strategy.

Makes sense. Just on [ WSE ], you just mentioned still a little bit of vacancy, but 2 floors by the end of it. Just wondering how the leasing is kind of progressing there?

Good, 197. Good. Yes, we've got active inquiry. In fact, we'll be -- if we keep going the way we're going there, we'll be running out of office space. That doesn't mean we deserve a medal, part of it is the terms we strike. And as buildings age, you've got to put more into them. But we feel pretty confident with our active team that we're going to make good inroads in that. But it's nowhere near the sort of problem it was 2 years ago.

Sorry, just around WS2 in new...

Yes, WS2 -- yes, we're more -- Andy, we're more focused on extracting the right rent there. This gap, this supply gap will have people jockeying for quality space because there's probably not going to be as much of it around. So we will -- we're not rushing to put that space out the door. We'd rather get the rents right.

Yes. Maybe just on Mill Green, you talked a little bit about in your presentation just in terms of plans and you've articulated a little bit in the past, but just wondering what the lay of land is at the moment just in terms of development and options available to you there?

Yes. It's very much around the research phase at the moment where our research has uncovered a few interesting things. But basically, with the whole Mill Green concept, it's about trying to optimize the site. In other words, the value for the 3 buildings. And to do that, you've got to look at it in total. And the obvious thing that comes up is that there's a lot of work to do at the base level. Basically, there's a whole retail amenity that can be improved. And we simply put it, you've got to earn the right to go up. So before you start doing any towers or mixed use or whatever it is, you've got to get that ground plan right. So we've got a fair bit of work going into the F&B side and the retail side and our research indicates that there's a real shortage of the offer. So we would -- before we did anything, we'd be sizing up the funding us and doing it separately. It's not like we're just going to put that on investors. So they don't need to worry. But that's where our intuition and our research takes us. The other thing that's obviously interesting from a whole of site perspective is what you can put there. Perth are very pro putting living into the city. So that opens up a lot of options for higher and best use. So we take a very flexible approach to that. It's very much going to be based around the returns and the timing of when we can do it. If we did anything off us, we'd be looking at obviously getting an agreement for lease first and all that sort of stuff. In terms of where breakeven rents need to get, they've got to get 40% above where they are now, not necessarily for our buildings, but just in general. Some of our buildings, WS2, the rents there they're getting pretty close to breakeven rents that you would require. But to do it for a whole building is a whole other thing, right? So we'd be very careful about that, and we'd be rightsizing it and thinking about it and underwriting with the right cap rate, et cetera. And it would be a very careful process, and it's not something that's going to happen tomorrow.

Understood. Co-living, again, you called out in your remarks just in terms of things going well so far in '26. Just wondering how are things going so far? And I guess, broad plans for the Co-living JV over '26 onwards?

Basically, operationally, we're feeling good about it, and we're still looking all the time at acquisitions, but we're very disciplined. Dave's got a good line of sight into the current occupancy, et cetera. So I'll let him take over.

Right. Just -- we spoke about the expansion at Norseman. Pantoro, the counterparty there, is looking for us to put 64 more rooms in. We're working through that planning approval process. We had excess rooms that were sitting in [ McEvoy ] that have been moved and refurbed. We've also got another 36 sitting on the mine site temporarily. And so that Norseman asset is going very well. Newman since we bought it, Steve mentioned that we did -- the team did an outstanding job last year, drove revenue well beyond our acquisition assumptions and had a value for the first time at $9.4 million. That was 45% more than what we paid for it. Hedland, look, Hedland was a bit softer in '25 than it was in '24, but we're still talking plus or minus $9 million of [ EBITDA ] on a $27 million acquisition price. So the swing factor was $400,000 between the 2 years. It had a real benefit in the first half of FY '24 of a high-yielding contract for 5 months. Occupancy has been really good up there for the first month and a bit. So it's going well at the moment.

Last one for me, if I may. Just on Trust # 38, you talked about as well. Just interested in the thoughts on timing to realize value there and if all well, what that might mean for performance fees in '26, '27 or years onwards, if so?