GDI Property Group (GDI) Earnings Call Transcript & Summary

Well, welcome, everybody, to GDI Property Group's annual results. I'm Steve Gillard, and I have David Williams, our CFO, here with me. If you have -- we really would wanting to execute on strategy. And we believe we've had a very, very positive year. We've got the DA approved and we got construction commenced. We're very sure we'll commenced. We've signed the building contract in relation to WS2, which is the building next to Westralia Square, and completion will be in late 2022. Already, we've had strong leasing activity there. But we feel that once we start to build, there'll be significant interest in that building. 1 Mill Street we've had the DA approved. We're seeking tenant precommitment and/or project partners to potentially build that building. There is, again, strong interest with good solid inquiry out there. And we've done a lot of work in relation to lease expiries in the Perth market, and a lot of them would come exactly when the completion of these buildings would be there. 50 Cavill Avenue, we've exchanged contracts to settle on or about the 31st of August. It was sold at $8 million above the last independent valuation. And I'll just run again, with Westralia Square, we've leased Levels 1 to 12. Level 7 has been taken up by WAPOL. And we've got some good solid interest for some other floors in there. CapEx program. They're all but complete and the building looks in great condition. The real success story has been 5 Mill Street. We've increased the occupancy there from about 60% to 86%. We've done about 14 [ wind fields ] in that building Leasing activity is the strongest I've seen probably for 5 years in Perth, particularly in that sort of range from sort of 100 to 500 square meters. But now, we're finding a lot of the bigger inquiry coming out. Our CapEx program is well underway on 180 Hay Street. We've already had a small uplift there. We've got numerous inspections, and we feel that we'll -- there is some activity there in relation to trying to lease that building up. So we're quite confident on that one. Just to talk about 50 Cavill Avenue. We purchased that inclusive of cost for about $49.2 million. The building was ideal for us. When we bought it, it was only about 54% occupied. Net income of $2.6 million. We spent $18.4 million including incentives on new lifts, air conditioning, lobby upgrades and it's now 97% occupied. Before we start, NABERs rating would probably go to 5 in the next assessment, and we've exchanged contracts at a price -- net sale price of about $109 million. So it's been a very successful outcome in relation to 50 Cavill Avenue. And whilst reluctant to sell it, we feel that we've added our significant value to that building, and it was time to let it go. Annual return since listing 13.3%. We -- look, we're very happy the way we are. We're basically -- out of all of our East Coast property, we're still in Townsville, which is a -- the syndicate. We've done a couple of leasing deals there, but we're really focused on Perth and we've got some significant added value to come in that market. And we couldn't be happy with where we are and where we're structured at the moment. We see significant upside in Westralia Square with the leasing -- the development of WS2. There's significant profit there, also significant upside in Mill Green and Hay Street. We also see significant upside in the car yards that we purchased. Recent sales over there, there's been 4 or 5 recent sales around 4% to 4.25% cap rate, which would add significant value to that portfolio and then virtually double or more investors return. So we'll be looking to probably sell a couple of those car yards and/or give them revalued, but we feel they would have strong interest in the current market. Our LDR on the sale of Cavill Avenue when it settles would be approximately 10%. And we've got a significant firepower to purchase assets. We have been looking, but we feel the market, particularly East Coast is a bit overpriced for us and way above replacement cost. But we've got a lot of upside in our existing portfolio and we can see the day when we see opportunities that are very attractive to us. We're continuing our forecast distribution of $0.0775 per security. We've got a small team. We've just acquired David Ockenden, who is outstanding. We think we've got a very, very specialized team, and we're ready to go and add value to our assets and look to the future. [indiscernible] fill of touch. I'll pass you over now to David Williams to talk through the financials.

For those following the presentation, I'm on Page 7. The NTA went from $1.27 in December to $1.25 at June. We didn't get anything revalued at December -- at June, sorry. All of the assets were all revalued in December. We will look at that valuation cycle seen in December of this year. The balance sheet does include the $8 million upside from the sale 50 Cavill Avenue. The drop of the NTAs as a result of maintaining the distribution in excess of cash flows because of the releasing program principally at Westralia Square, which I'll talk about later. FFO, $0.0537, less than last year, again, because of the re-leasing program but importantly, in excess quite significantly of where we gave guidance this time last year and where internally we thought we'd get to. And that's largely on the back of the very successful leasing at particularly 50 Cavill Avenue with maintenance with a lot of the tenants that were expiring and new tenants going in there; and 5 Mill Street, which contributed more than we thought they would this time last year. The distribution of $0.0775 and we're very pleased, as we said earlier, we should maintain that again into FY '22. Looking at the contributors to our FFO in the Property business, basically 50 Cavill Avenue and Mill Green contributed what they did in FY '20 and the big drop in difference has been Westralia Square as it's going through its re-leasing cycle. We made the comment that FY '21 will be the low point of Westralia group contribution. So we're back one the upward trend now. The slip from to 1 to 12 and the interest in FFO. So I'd like to talk around that leasing interest right now. The Funds Management division obviously enjoys the very strong distribution we receive from the dealerships and also from GDI No. 42. There's a lot of upside in 42. That's the panel assets as and when that gets leased up. Corporate and administration expenses have been largely flat and then jump around a little bit. So it increased slightly because of things like insurance costs this year, which has gone up. Certainly, the one item now on our business is going up a lot more than inflation. Interest expense is higher. We did have more recurring debt, and we did refinance our facilities in May 20 at a slightly higher margin than it was previously. And the incentive to spread across all the assets issue -- for those that own us last year, there was a very big incentive line with the WAPOL deal in FY '20. This year, it spread far more evenly across our asset base. If you look at the balance sheet on Page 9. The -- obviously, the noncurrent assets held for sale, is 50 Cavill. There is a small stripes in the building next door that is $1.24 million of that. We're talking to the buyer of 50 Cavill and others about that. But it's still held for sale and I don't think it will be there by December. The investment properties weren't revalued in June. They were in December. The investment property does include about $5 million now for money spent to date on the delivery of Westralia Square 2. If you go through the details of the accounts that we make and have a little bit and see how that part out here. Not really much help there. The debt number has gone up and that's slightly gone up because of buying 180 Hay Street and also the magic of the distribution. Page 10, we announced we signed on just prior to -- at the end of last week, the debt facility to build Westralia Square 2, extend the whole facility out 3 years. And give us a lot more firepower again on settlement for 50 Cavill Avenue. So that is explained in the pro forma of what it was like in 31 August. We'll have about $85 million of just general working capital to spend plus the $85 million to build Westralia Square 2. So it gives us plenty of opportunity to kick down on the asset management initiatives and capital management initiatives and one of the main capital management initiatives will be management distribution again.

Yes. So remember, I mean, that Westralia Square 2 cost about the -- we need to build it, but that's including all incentives and everything there. But also that $60-odd million includes revitalizing the whole area around Westralia: Westralia Square and Westralia Square 2. Talking about the Perth market. You saw that the vacancy rates came down to about 16-odd-percent Look, there's strong leasing interest over there. We're still affected a bit by the COVID situation in the East Coast. A number of bigger deals, we believe, have been sort of delayed probably more because of the current staff. It's very hard for projects to start and just to get moving without staff. And the border closures have affected that. However, we've seen strong net absorption in that market. We've seen the labor force and we'll see -- we've seen population growth, but we'll see some strong population growth coming up. If you look at the infrastructure projects, WS is right there just below New South Wales. And I believe there'll be some more projects that have announced in the shorter term, sort of the medium term. We just look at all the individual properties there. You'll see that we haven't pushed the valuation, you see the cap rates and a quite, quite conservative on the basis of particularly a number of other sales, which have gone ahead. So we see significant upside in all of our assets and we'll be looking to revalue at the end of this year. You'll note that we've got an average cap rate of 7.24, but that's on our -- in relation to the card yard portfolio but that's ongoing rent. But comparable sales of recent sales in the fall to 4.25% and we will be looking to maximize the value of that portfolio. 180 Hay Street, we've have had a few inspections, nothing as yet. But we feel that, that will have strong interest. Magnificent the renovation of it now and with the card yard, with the car parks and the location overlooking, it's just a great building, and there's plenty of upside there. [indiscernible] harness by border closures. The federal government basically said they'll want to take the space. They just kind of get people up there, et cetera. We've done a smaller leasing deal in there in recent times. But once we've seen clarity and some freedom in the borders, we'll hopefully lease that up strip there. We've got a strong development pipeline. We've got Dave Ockenden on Board. He was the ex-head Development Lead Lease and Multiplex, which -- and we've got a building in WS2, which is a fairly simple construction, with timber, it's going to be 5 to 6 NABERs rating. It's ideal. It will be the first of its kind in Perth, It's in the premier location, overlooking the Swan River in Brookfield Place, right next to Westralia Square, which is now classed as a premium building. So we're very excited about that project. And you'll note that Texas paid 16,600 odometer for the 45% share of Woodside, and we feel that we certainly get valuations in that range once we get the strong tenant above. We've got a number of tenants looking at it but we're going full steam ahead, and we think build it and that will come. And it's just -- we believe it's going to be very client demand at rents which lower or around what 30-year-old buildings are in Perth. And the same could be said for 1 Mill Street, we are looking to really push ahead with that and do some demolition shortly and look for partners to go ahead and build that property. We've got some strong interest. We've got -- will hope -- even if we get some precommitment, we'll probably go ahead with that because we feel that we can build it at way below what previous sales compared to Woodside and the Chevron building. And also the rents would be at or below or around what 30-year-old building -- premium buildings out there. The Funds Management business, we didn't add anything. We just haven't seen daily. We bid on a number of things, but they're just getting a bit hot at the moment. There's significant inflow in performance fees. We've got IT who are -- we've done some work for them. They're building a click and collect, paid it for themselves. So we're hopefully confident they'll stay, and we believe it's in the top 5 stores in the world, profitability. The one which we really want to get lease is GDI 36. We've done an additional bit of additional leasing there and we've got some strong interest in some lower floors. But -- and we believe there's some tenants coming out to the market, which this would be ideal for. So look, there's upside. We've worked on the ITL portfolio, GDI 38, to resigning that broadband property. And when you think -- so there's got a huge upside and also in relation to property in Perth, I think it's valued in the 7s. And there's been recent industrial sales over there between 4% and 4.25%. So I'll leave to David about the profit and loss. I think we can all read that through. We are rolling our sleeves up. We've got a great team in Perth. [indiscernible] over there, but we're speaking daily and more than that with teams meeting various things. But we've achieved our goals in relation to getting WS2 up and running, selling Capital Avenue, doing a huge amount of some deals over there. And we could see that we've got a very exciting year ahead of us and award lease on our balance sheet for any opportunities that come up. So I think it's opportune time for questions. If there's any questions, please, we'd be delighted to answer and discuss anything. So I'll open that up that now please.

[Operator Instructions] We have the first question from the line of Carlos from Renaissance Asset Management.

Just on Page 5, you talked about the increased inquiry in the market for leasing. I was just wondering whether you could characterize the strength in inquiry. I think you mentioned, Steve, it's been very strong tenants between 1 and 500 meters, but larger tenants are now starting to move. I was just wondering whether you could tell us or give us a bit more color on the types of industries? Is it just mining? Or is it a lot broader than that? If you could shed some light on.

We've got federal government for about 2,500, 3,000 square meters. We've got state government that GDI inquires right around 20,000 to 25,000 square meters. We've got a number of lawyers. We've got a number of engineering firms. Look, I think you're finding that a lot of companies are expanding in WA and getting themselves over there because of the stabilization of COVID, et cetera. And -- so look, there's a bigger inquiries coming. We just sort of just shot -- the green shoots are there. We've -- there's been a lot of implied from 100 to sort of 500 meters. We've done sort of 15, 16, 17 leasing deals there. We had a tenant who reduce space in 1 Adelaide Terrace. But they've just taken an additional 1,500 square meters, that was an engineering company with some projects. So they were there. They reduced the another taken it back up. We've got WAPOL expanding with the lease. So look, the bigger inquiries coming. There's a big -- huge mining companies are looking to expand a bit as well. And there's been a lot of insurance companies. We've had insurance companies expanding, coming to the market. And we've spent a lot of time -- I spent a lot of money looking at all of the registered leases and various things there. We think we've got a database second to none in Perth and we feel that there's going to be strong interest, particularly in our newer buildings. And with Westralia Square, it really is now a premium building, and it's -- there's certainly strong interest in. And what we've done again, like we did with 66 Goulburn Street, was lease them bottom up. So we've leased all the floors up to 12. We've got a couple running on Level 13 and 14. But we would have liked to have a bit more done, but we think we've had a very good year in relation to leasing. We've achieved the sale of Cavill and also stop those DAs and started construction on WS2.

My second question, some on the car yards. You mentioned that you may sell a couple of the car yards. So any gains on those flow through the fund and eventually into our P&L for your own -- your part ownership?

Yes. Look, we've brought them from about $498 million, we hold 47%. We think that we could probably in the vicinity of doubling in value. Those have been a fanatic investment for us. And there is strong demand. There's a couple on the market. There's some CV dealerships around that 90. Well, you see what they do. We just -- but we've had approaches to buy the lot, but we may put a couple up on the market or do that and realize the gains. They're just great investments, the land in great locations and prominent metropolitan areas. But certainly, we're in the business of achieving results and we believe that with a long while, it would be an ideal time, it just hits the sweet spot in the market at the moment.

We have our next question from the line of Shane Solly from Harbor Asset Management.