GDI Property Group (GDI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the GDI Half Year Results Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Steven Gillard. Thank you. Please go ahead.

Welcome to everyone. I'm also joined by David Williams, our CFO. Just the first half snapshot, we'll just sort of talk through briefly. The NTA increased to $1.28 per security. We had Westralia Square revalued and also Hay Street. And we've also had the profit on 50 Cavill Avenue. Obviously, that was only $7.8 million, but -- obviously, we bought that a lot cheaper, but it was revalued. There was a $7.8 million increase there. Since our last results, the FFO is higher than the previous corresponding period. And that is not withstanding the discretionary impact of the sale of 50 Cavill Avenue. We are maintaining distribution at prior year levels and intend to pay a further $3.875 for the second half. We're very happy with the sale of Cavill Avenue. We purchased it for $48.8 million in February '16, which was $49.3 million. After several adjustments, we spent approximately $18.4 million, and we sold it for $113 million or $109 million after settlement adjustments. We also, during the period, we purchased 2 absolute prime CBD car parks for $68.5 million. Those car parks are in prime locations and have further development potential. We bought them on a 5% cash yield. We've already got significant savings on running costs. We'll be -- there's very little CapEx and there's obviously very little maintenance CapEx on those. And we expect higher occupancy there. And we just -- we've worked with Wilson's car park to fine-tune the car parks. But there's also significant -- we build them basically need land value and there is development potential, particularly in the Wellington Street property, which joins the Perth Hospital. And we'll be -- we've already put a bit of a steam giver on that, maintaining some of the car park, and we can build a significant amount of office space. And we believe that the government will be looking for something in that area. So we'll be ready for that when that directive comes out. We're well on the way to building the WS2 which will be Perth's environmentally friendly premium grade office building, about 9,500 square meters. Whilst there has been supply issues worldwide and fortunately, we locked in the cost because costs are the same Perth construction, around 30% higher. We've lost in those costs, and we're very excited about that project, and we've already had significant interest from tenants there. And we're on track, on time, on budget, and it really is looking at great projects. And we're hoping to integrate it through the half. Early on, we've got some strong tenant demand there, and we believe that it will be a building, which will be in high demand. And obviously, the increased development costs and increased building costs will harness a lot of other projects coming through, which have been on the tinkering of whether they are profitable or not. During the period, we've done a couple of floors in Westralia Square. We have a strong demand for that building. We've leased level 7, which now they leased 14,600 square meters, and we've also executed the lease of Bennett + Co. We only have 5 floors remaining, and we believe on the current inquiry, we expect the building to be fully committed by calendar year 2022. There's a lot of inquiry in the Perth market, and we're confident. Now the borders are open, we're very excited that we believe that tenants will not have that as a harness to actually committing and signing heads of agreements. In relation to the WS2 building, we've delayed the leasing campaign. I think the reality is building no [ tub ], and we want to sort of see more out of the ground. We've got strong demand, we're going out with a major marketing campaign shortly. And I think now that it's coming out of the ground and people can actually see what we're doing, that we'll be able to show them and we'll be able to capitalize on that interest. It has -- in relation to the objectives of tenants in anywhere around Australia, they're looking for environmental friendly buildings. We'll be able to have very attractive outgoings. We'll be able to low the outgoings, and we'll be able to offer a new building at the current levels of premium buildings. So we're very [indiscernible] on that. Look, based on the current inquiry, we're looking to have well over 50% committed by calendar year '22. We're willing to put out -- really put our name on that now that the borders are open, and there's freeing up and we're getting back to normal levels. We've got a couple of heads of agreement in 197 and some lease renewals on a couple of other floors. We're repositioning a number of floors in there. We're negotiating with Wood Group who will probably move out, a little bit of vacancy, but I think that will be perfectly timed for the uptick in the margin in Perth. We're seeing, obviously, the CPI was about 5.11% just over December. We're seeing a lot of demand, lot of tenants to sort of ready to go, who have shown strong interest but unable to actually to be in the heads of agreement because of the uncertainty with COVID in Australia and worldwide. But now I think we've got a bit of a green light whilst Perth and WA is still building their COVID cases. But I think shortly, you'll have some green light on businesses to go forward. And we're really confident now and it really is a big relief for us because now we can see the green light and the blue sky ahead. We've done significant work on the Hay Street property. We've done the lobby. We've done the upper floor. We've got interest for the whole building part thereof. And look, there's been really -- the good thing is not only a strong interest in the CBD and the core CBD, there's now a strong interest in that Perth market. So it's working well for us. So I'll just hand you over to Dave Williams to talk about the numbers.

I'll just backtrack a little bit on what Steve said to the -- click the page on the market.

No, no. I'll talk about that. Sorry, I apologize for that. You have 2 side of pages. Look, we've had the vacancy levels fall to 15%, and I think it was clear and stated in writing by Jones Lang that about 4% of the market is unleasable. So the vacancy levels at a very good level for us. Our premiums around about 4% or 5%. There's a fair bit of A and B grade available, but I think our buildings in prime locations are the ones that tenants want. So you've had about 50,000 square meters of demand in the last 12 to 6 months. And we're confident we're going to get some nice net effective rental growth. And there's a lot of tenants just sort of standing on the outside who are ready to pounce once the green light and once we get back to normal conditions. And Dave, do you want to add anything on that Perth market?

All the things like sublease vacancies as low as they've been in 10 years. Leasing inquiry levels, you talk to any of the agents. And all on the line, please, if you know any of the leasing agents in Perth, they're all...

Yes, for example, we had a tenant local who renewed their lease and talked about 2,000 square meters less. We've already taken that space back and they're now looking for more space. So I think conditions and things are happening over there, which is great. And look, we're not starting blocks. So we've been ready to go for a long time, but we're in the pole position, we believe. But now we've got the green light. I think now the borders are open and now we've got the ability for major tenants to make decisions on big leasing where they see that we're getting sort of back to normal, getting back to normal, which is a great sign for us. And David, maybe you can just talk about the numbers first, please.

Yes. so over to Page 8 for those following the presentation. For those that -- now it's -- we realize we're not really a consistent FFO stock. We buy empty buildings and then therefore, we sold them. So it's hard to compare FFO from one period to the next. But we do, notwithstanding the decretive impact of selling capital and only holding it for 2 months, FFO was up compared to the previous period. That's largely because of higher leasing and up -- higher leasing at Westralia Square and higher average occupancy at Mill Green. Mill Green was quite a large contributor compared to the prior period. . We've always said that we would have gone close to cash covering the distribution from FFO if we had held capital for the year. And you can see that our operating earnings were over $15 million without [indiscernible] and our DB is 20. So we would have done cost for that 6-month period. The Funds Management FFO was steady. We didn't do any transactional deals in the funds business for the 6 months. A big contributor of that is the distributions we received on the 2 co-investment stakes. Our interest expense was lower and that's because of the reduced debt for most of the period following COVID. The debt level is coincidentally almost back to where it was following the acquisition of the 2 car parks. And our corporate expenses ticked up for the 6 months. There are some permanent like insurance, which is out of control. We employed a head of development, given the activities in Perth. That came with a few just new employment costs as a one-off. Dave Ockenden, who's been with us for a long time as consultant, who became an employee once we signed the built contract. It's better to have him in the house than semi in the house. And the costs include an accrual for bonuses for FY '22. The balance sheet is still rock solid gearing of 20% on the principal facility, which is the Westpac one. So I'll swing over to Page 10 to talk about that. Strong debt of $166.7 million and undrawn debt of $146 million. That's in 2 tranches. There's sort of essentially a working capital tranche of $70 million, and there's another $75 million to fund the completion of Westralia Square 2, and that includes potential incentives. So we're well and truly, we've got a lot of working capital there. The debt for the Townsville building, that office fund comes up in July, it's only geared to 20%. So there's not going to be any renewal issues there. We do have 2 swaps, it's the first time that we've had swaps that they're actually in the money. We haven't got swaps right a lot, but they're now an asset as opposed to a liability. One comes up in May '23 and the other, May '25. The rest of our debt, we roll monthly. And at the moment, that is costing us less than 10 basis points per annum on a monthly basis. So just quickly flip through to the property portfolio, and I'll get Steve to talk around these a bit more. We'll take some Q&A on any of them. But we did get, as Steve said, 2 assets revalued, Westralia Square and 180 Hay. The cap rates on them didn't change. Westralia Square valuation on Page 12, you can see it's a combination of Westralia Square 1 and the land that Westralia Square 2 sits on and the costs spent to date on Westralia Square 2 from a valuers' point of view. So that's $385.2 million. He's carrying the land at about $9 million, and we've spent -- we paid bill to that 12 . Same cap rate at 12 months ago, we think that's pretty conservative. And we will likely -- with the leasing demand that's there, if a couple of those come off, we'll probably get that done again in June.

Yes. Look, we've leased that building bottom-up. You'll note that we've increased the term of the lease on WAPOL to FY '29. So -- and we've got all the upper floors, which are the best floors to lease. And we're getting -- we've got solid demand for those floors. Also, Westralia 2, the value is valued at -- I mean the land value. So look, we think they're quite conservative, but look, it's not time to sort of push the envelope. Also, we need to really now walk the talk and get some leasing done now that the borders are opened and occupiers can actually make the commitment. In relation to 197. We've got some solid leasing demand. Yes, we've got a bit of vacancy. But I think in relation to the vacancy falling in Perth and the demand, we believe, will come in the next 6 months from now -- everyone freeing up, we think it's a perfectly placed to capitalize on strong tenant demand. 5 Mill Street is 83% occupied and tenants are really wanting to go into that location. And we're doing very strong leasing deals, and we'll get that Mill Green building revalued as of 30 June. In relation to 1 Mill Street, look, we said to everyone we'll look for a partner and looking to kick that off. It's very hard to market something where people can't actually access and get into Perth. Now that the borders are free, we'll be marketing that and looking for a -- certainly results in that regard. We've had strong interest. But obviously, you can't sell something, you can't do something unless people can actually visit the site. Hay Street, we've got significant interest from government, from private, the whole buildings, holding tenants, there's going to be strong demand from education and various things. We're very confident of leasing that building. It really has come up really well, and it's a great building with plenty of car parking. The car park portfolio is trading is head on, where obviously, we bought that building at 8% net yield. We've got a long WALE. If you look at all comparables, the service stations or various things and the tie up portfolio, we believe there will be significant upside in the valuation of 30 June as well. In relation to Stanley Place we've now, with the borders opening at Queensland, we've got a strong federal government inquiry to take the majority of the building other than a bit of a half floor and we're working through that as well. So now, look, really, we've got a bit of green light, and there's some -- certainly looking forward, where first thing, as soon as the borders open, we're heading to Perth. We've got 92% of our assets in Perth and haven't been able to get there, and we'll be able to really push and meet with government, meet with major tenants and do things and really add significant value to our portfolio by actually bringing a cost there. And actually, East Coast businesses and various things to visit their operations in Perth. There's a couple of the smaller funds management business properties, which are sort of going along. In relation to 36, we've got -- we've leased all the level 1, the lower floors, and we've got strong interest in both level 6 and 7 there. In regards to the 38 Diversified Trust, we've got potentially significant expansion potential for 1 tenant, which could add significant value to tenants -- to investors and the Broadmeadow property is really traveling along quite nicely. I talked about the Townsville property, the IP of property, it's trading its head of, and we're confident them as a minimum exercising their option. But we've put some other thoughts to them about expanding the store and doing some other things there to add value to our investors. We're -- it's -- look -- we're and I spoke about the [indiscernible] but really, they've been a tremendous acquisition, and we've got 40-odd percent on the balance sheet, and we see significant uplift there. And Dave, can you just talk us through the profit and loss?

Really, there's not that much to say about the P&L. The valuation gain and the value on interest rate swaps below the line stuff that's not included in NLA. It's quite lumpy for us, of course, plays around what the P&L looks like. $40.1 million for the year. That does include the outside equity interest. So it's $37.8 million of income for the 6 months versus only $5.8 million in the prior corresponding period. Why don't we hand it over for any questions?

Any questions? Yes, we'll be delighted to hear from everyone for some questions.

[Operator Instructions] The first question comes from the line of Edward Day from MA Financial.

Just wondering If you can drill into the inquiry you're getting, particularly for Westralia Square. I think you said that given the inquiry you've got at the moment, that would see Westralia Square fully committed by the end of the year. Do you see them going as full floors, the remaining 5 floors? And also just what works still remaining in terms of sort of base free out works on those floors?

Look, all the floors have been fully renovated to base build. We may put in a demonstration suite, but look, we've got an inquiry to take a lot. We've got a couple of inquiries to take whole floors. If we get 2 or 3 before the whole floors, we may split floor maybe at a top level or something. But on the current inquiry, we're very confident. Look, it's a premium-grade building in a great location. And I think what you're going to find is that inquiry is really going to peak up a bit now that the borders are open and now people can actually do things. So we've looked -- we've spent a lot of time on the expiry profile about the tenants around the markets. And -- but we'll be -- not only with the current inquiry, but future inquiries. We're very confident on both that and WS2. But the building now is fully renovated. The only works to be spent on Westralia Square is the building of Westralia 2 and a bit of the surrounding areas with canopies, et cetera. So we're ready to go, ready to go, and we're in a great position there.

[Operator Instructions]

If everyone's a bit shy in asking a question, maybe we can -- you can call us over, David Williams and myself directly, I'm very happy to answer and talk through our results and where we're going from here. And well, look, thank you so much, unless there's any other questions. We appreciate you all joining the call and look forward to some really good times ahead for GDI.

Thank you. That concludes your conference for today. Thank you for your participation. You may all disconnect your lines now. Thank you.

Thank you so much.