GDI Property Group (GDI) Earnings Call Transcript & Summary

Good afternoon, everybody. Thank you for dialing into our conference. Steve Gillard here, Managing Director of GDI Property Group. Look, we've had some good progress this year. Obviously, there's been -- things have been delayed a little bit with COVID, et cetera, but we're very -- we're in the right spot at the right time in the cycle. So we're very happy where we are. But our progress has probably been a little bit hamstrung in relation to COVID. We looked, and a few people have not made decisions. But we've done significant leasing. Obviously, with -- fortunately, we did the WAPOL, the police deal in Westralia Square, and de-risked that building. We purchased 180 Hay Street. We put that on the balance sheet at total $12.6 million. It's valued at $15 million, but the reality is we got it at $2,500 per square meter. It's only a small one, but there's significant profit upside on that. And we've got a couple of tenants already having a look at that. We bought the GDI 46 Property Trust, which was the 17 car yards in metropolitan Perth. During COVID, we gave them a little bit of rent relief. However, they will pay that back at the end of year 1. But they had a bad month in May -- April but significantly higher turnover year-on-year in May, June and July. So they're performing extremely well, those car yards. And we bought them at a snip. Obviously, we didn't raise the money, but we're happy to take -- keep that remaining co-investment on the balance sheet as it was 8% yield. And we think that if you put any of them on the market, they'd trade significantly lower on a cap rate there. We're just about -- we've obviously progressed a lot really to launch the DA in relation to Westralia 2, the new building next to Westralia. We've increased the size to 9,130 square meters. It's a building which we don't have to excavate, we can build on top, and we can build it very cheaply. And there's significant profit there. We're just waiting for a couple of things to happen in regards to the adjoining owners to agree. They are being a little bit slow and delayed, and we've got some legal representation there to try and expedite that. But we believe in our advisers that we have very, very -- we'll be able to launch that DA very shortly. We wanted to get that practical completion before the Chevron builds Elizabeth Quay. There is a minimal supply in that first area in the first CBD. There's another building being built in Capital Square, which is -- Woodside have taken the majority of. HBO Accounting have taken a fair bit, but there's only a couple of floors there. But obviously, there's a couple of other developments moving, but we want to get in there and have this built. So it's a very quick construction and a very cheap construction that we can get in there. And we'll be going full steam ahead to develop that. In relation to our year, we have -- our NTA fell a little bit. It was on the back of due to spending a fair bit of CapEx, writing off of stamp duty on 46. The revaluation of Westralia Square did not capture the CapEx, but there's 0 valuation on the development side but next time [ moving ] values that we believe there will be significant upside. FFO of $0.0822; distribution of $0.0775; an absolute return of 9.3% this year but since listing 14.9%. We have stated that we intend to pay our distribution for the full year in this year at $0.0775 and as we stated in our announcement. We've got gearing principal facility of about 16% of the LVR, and so it gives us a war chest and flexibility to capitalize on any of the markets which perpetuate or fall. And we're ready to go to buy assets at good prices. The -- we're very confident in the medium-term outlook for Perth. We've had -- in the last couple of weeks, we've had 6 leasing deals, which have gone into heads of agreement. There's green shoots coming over there, that the market of under about 300 square meters was nonexistent there for a while because the smaller companies, which -- where the principals own them, were reluctant to sign leases because of COVID. But now obviously, with the iron ore price and mining, you've seen some of these mining companies have significantly added value in their market caps. And the strong demand for -- is significant for iron ore, lithium, copper, et cetera, et cetera. The oil and gas market isn't there yet and a couple of the projects that may be stalled there. But a number of those will be, we believe, back on track with the -- if the oil price gets above a certain level. And so we've got some -- we've got very, very -- these are very good figures in relation to the housing market in Perth of recent times. There's been strong retail sales. We've got our reports from Jones Lang saying we'll have the highest net effective rent growth over the next few years, highest population growth, so we're in the right spot at the right time. So we need to really do some re-leasing to deliver the upside. In Westralia Square, in Hay Street, Mill Green, 1 Adelaide Terrace. And we've got some good interest in Westralia Square; some reasonable interest in 180 Hay Street. Mill Green, the vacancy has gone down to about [ 8.5% ], but we've just done a couple of deals in there, which is now where we believe that building will always have a strong occupancy. In Townsville, we've got very -- we've just signed a lease today with the government for additional space. And we've got a very strong inquiry for the remainder of the building, and we're hoping to sort it out by the end of calendar year this year. So I'll let Dave have a bit of a talk about the -- our financial results. Dave Williams, our CFO.

Hello, everyone. I'll just talk through Page 8. Our Property division FFO was down about $5 million. The largest reason for that was Westralia Square. We lost UGL in January. So we had 2 floors and now paying $1,400 a meter net. And the lease extensions that we did with the Minister of Works to enable the police to move to the lower floors and the department of gas system move out. We've done it on an effective rent basis, not a face basis. The Mill Green is slightly lower and reflecting of slightly lower occupancy, largely in 5 Mill Street. Cavill was up a little bit. Occupancy has been pretty stable over the period. The -- it's gone up largely because we're able to drive increases on lease renewals and on new leases both on a face and effective basis. And the Property division doesn't include any of the earnings from the 2 managed funds that we now consolidate. It used to be only Townsville. Now we also consolidate the dealerships. Because of the dealership fund, our Funds Management revenue went up through both distributions and the transactional fees involved in establishing that. Our interest expense went down even though our interest went -- our loan went up. We have subsequently hedged $50 million of debt. We would've been unhedged for the last 2 years but took a couple of hedges out in May. And corporate and admin are down about $400,000, and that's largely a reflection of lower bonus payments to the executive team. You see the AFFO numbers are pretty frightening if you take distributions off of AFFO, which we don't because we believe that when we buy buildings that need -- that come with leasing opportunities, that the incentives are part of the CapEx program. But the largest incentive we paid was the 2 Minister for Works leases -- sorry, 2 Minister of Works leases in Perth, which is commencing February next year. And we paid them $4.5 million, which they are reinvesting into Westralia Square, which is great. That was a 29% on police and 32% on Births, Deaths and Marriages. The topic on most people's hit list is what's the impact of COVID on GDI. For those that I've spoken to, we said that we've got very well-located buildings. We've got a lot of government or large mining or financial service style tenants. We did get our fair share number of requests or rather pushback on a lot of them. And where we ended up as of 30 June, we have waived $518,000 of rent, and we have written that off. So let's see the people that we just agreed to not collect. And for example, F&B, food and beverage operators at the bottom of Mill Green, they only paid outgoings in April, May and June. Others were dealt with in accordance with the code, where we were forced to waive 50% of what relief we provided. The deferred rent was either by agreement or through waiver, I mean, or in accordance with the code. We're quite pleased with the amount that we were able to get new lease extensions for. A good example of that was Regus in the Gold Coast. They had a lease expiring in 12 months' time, and we got a 7-year new lease out of them on commercial terms that we would have done with or without COVID, so less than 20% incentive. And they're taking that as rent-free during that COVID lockdown period of April to June. So that's a good outcome. And 2 of our larger tenants actually approached us. They had rebates running through the term of their lease and asked to take -- to accelerate some of those rebates into April, May, June and take lower rebates at the back end. So again, if you ignore a discount rate, that doesn't hurt us at all. We haven't agreed $500,000 worth. And the largest one of that is Mantra. They don't qualify under the code. We're in negotiations with them, and that might take a while. So the total rent we did not collect because of COVID was about $1.5 million. Nearly all of them we've got outgoings, collected those, so we're very keen to get our outgoings collected. In addition, we did provide some rent relief into some of the managed funds, the largest of which was the dealership fund they're consolidating into the accounts. So if you're actually digging deep into the accounts and trying to work it out, No.46 is in the accounts. The -- in the table, it's just the wholly owned assets.

And remember that process. It was released, but they are paying that back.

Yes.

So it's like the boomerang, it will be coming back. And remember that we've added value to the buildings by increasing leases and bringing forward their incentives. So we've increased the WALE on a number of buildings during COVID. And the only figure we've really written off is $518,000.

We -- across the board, we jumped onto it very early, and we've done a lot of deals before the COVID. They have been mentioned. The COVID actually pushed us back a little bit, I think. And we say this now that the time of release as, i.e., today, the amount of rent that's to be waived in FY '21 will be substantial versus in FY '20. There are some deals that are carrying on through into FY '21, but there's not a lot of rent that we're looking at being waived at the moment.

So $518,000 as a percentage of our total [ rental ] is about 100%, so we had minimal effect really with COVID. But we have been working very well with the tenants and understanding their issues. And we've had some very good feedback from our tenants.

I'll let you peruse the balance sheet at your own leisure. Our debt has increased substantially from June last year. We increased the facility to $210 million. That includes a $5 million guarantee supporting our AFSL, so it's $205 million. We currently drawn to $120 million. I think 12 months ago, it was $70 million, might have been $60 million. The increase was largely the CapEx including those incentives that we've talked about at Westralia Square and buying stake in the GDR No. 46, which we are very happy to hold and at this stage are not a seller of that. So as I said, we extended the facility that was [ funding those ] that was happening in the middle of COVID. We've nearly completed that at the end of February, ended up getting it done by the end of May. Slightly higher margin, not materially. And basically, the other terms are the same. And as I have mentioned before, we have taken out a couple of $25 million swaps, which we haven't been hedged for a while.

Which we think it's like -- we generally don't like hedging. But remember when 10-year bonds were 16%, we've got 5-year swaps at 0.5% and 0.4%. I think that's -- let's look a bit in at these levels. And -- but we haven't booked that anyway. So we talk about a bit of the portfolio. Valuation on Westralia Square up from last year to $327 million. Remember, that's on a cap rate of 6.75%. And if you look at the comparable buildings, which are not as great location, are on significantly lower cap rates, but we've got extensive leasing-up periods, et cetera. So once we -- there's a number of tenants there. We're in there. We've stripped out 17 and 18. At level 11, we've got heads of agreement on now. It brings way above what the valuation was set. And we're -- it's sort of good for Australia because Perth was just about ready to roll, and it sort of put us back a bit. But look, you wouldn't want to be in any other state from that point of view because it's just about back to business as usual other than flying out and flying in. We've -- at 197 St Georges Terrace, we've got -- remember, if you have a look, we've got a little bit of lease expiry coming up '22, '23, but we're pretty confident they're going to stay, and we've done a few leasings obviously there. 5 Mill Street, we had a whole floor department, which was like the [ Scentre Group ].

[ They got all ].

Which was [ ARMs ]. And remember [ Scentre Group ], why wouldn't they go and have their office above one of the shopping centers. But we've done a few deals in there in the region that last 2 weeks, which is very encouraging because that smaller market was nonexistent as private owners were reluctant to do anything because -- signing guarantees, et cetera, on leases. 1 Mill Street, we've progressed. We're just about ready to launch the DA. We've got -- we've had good talks with a number of tenants. It's -- unfortunately, the COVID has sort of put us back a little bit in relation to talking with them from pre-commitment. But the reality is it's a building which we're very happy and very confident with. 50 Cavill Avenue, we had -- it's probably the building that we had the most rent re-lease in. But we've done 3 or 4 deals here in the last couple of weeks at rents above what we had before. And look, I wouldn't be surprised if we get that building 100% occupied. There's strong demand for Cavill Avenue. I think we've got a number of the Brisbane tenants saying, well, I've been in Brisbane, we need to get to 50 Cavill Avenue, which has the built-in [ shops ] and you can go for a certain lifestyle. So that building came extremely well. The sale we had, we had a sale agreed. Obviously, COVID put that back a bit, but we're very confident of getting at least a valuation or more on that building. It's a great building, and we also have the minister look -- we've -- hopefully, we've got the WALE right up now with Regus and other themes. And we see that as a building which will be high in demand, and we believe we could have a sale this year. Townsville, we had the Tax Office moved out. Actually, it just moved out. We've leased the floor to another government department. We've had indications from a tenant to take the rest of the space and which would make that building very, very attractive. Obviously, things have been a little bit delayed, but we're very confident of the prospects of Townsville and that whole area. The car yards will look better with [ prodigy ] purchase. I mean at 8% net, basically, we've been paying a lot of the maintenance, et cetera. We've got -- you've seen a number of the sales and service stations in country areas at 4% to 5%. These things got 11-year WALE, and they're virtually land value and their trading revenue has been outstanding. So look, we gave them a bit of rent relief which they'll pay back at the end. And their performance and their sales are way above last year, so we're very happy with those and very confident. And we've looked at a couple of them, we marked it on the market later this year, and I think we'll get significantly lower cap rates for those if we did put them on the market. And there should be some upside there. So look, if there's any questions, please ask them, but we've got -- we think we're in the right spot. Unfortunately, COVID has put us back a little bit. There's very limited supply in that Perth office market, where you see the other Eastern -- East Coast markets with significant supply. And we just need -- already we're seeing significant green shoots in that market. And unfortunately, it's frustrating, it's put us back a little bit, we thought we'd be a bit further ahead, but we think we're very well placed for the upside. So questions, please.

[Operator Instructions]

Well, it looks like we don't have any questions there, do we? We would like to thank you all for your attendance. And everyone, keep safe and healthy, and thank you so much for supporting GDI. There are no questions, is that correct?

There are no further questions on queue, sir.

No further questions. Thank you so much, everyone, and be happy and safe. Thank you. Bye-bye.