GDI Property Group (GDI) Earnings Call Transcript & Summary

Good day and welcome to the GDI Annual Results Teleconference. Today's conference is being recorded. At this time, I would like to turn the conference over to Steven Gillard. Please go ahead, sir.

Welcome, everybody, to GDI's annual results. I'm just going to start off with the leasing market in Perth. [ So ] we're not as progressive as we'd like to be, but however, the borders only opened in late March. And we've -- since then, we've done over 8,000 square meters of leasing deals. And we have significant amount of proposals [ out, and we're ] on short lists. And we're certainly seeing significant levels of inquiry from the larger tenants and remain very confident in the short- to medium-term outlook of that Perth office market and with the significant amount of projects and growth. We've -- since the borders have opened, we have done significant leasing. And we're very confident in that market in the short term -- short to medium term. Operational highlights. Our WS2 building is progressing very, very well. There's been a fair bit of rain and whatever, so it's probably a little bit delayed a month or 2. However, we have done a lot of work in relation to the environmental benefits of this building. It basically only -- it's only at 20% of the normal carbon of any building built. It's of a steel and timber construction. We've got numerous inquiry from full-building and multi-floor and single-floor tenants. And we're very confident that this building will virtually be carbon neutral when it's finished and tenants are in there, so I'm very excited about that. And it's very popular. And it's very [ sensitive thing ] in the market at the moment and tenants are [ guiding ] towards these type of buildings in the future. We settled on Cavill Avenue. We purchased that for $48 million in '16, and it was sold for $113.5 million. And that was a good -- certainly a good acquisition and sale. We've purchased 2 car parks in Perth, prime CBD car parks. We bought them below their average trading levels. And they were trading well, but then we hit COVID over there and they decreased the occupancy. However, the June and July numbers have been very, very good. And when I was over there last week, the car parks were virtually 80% occupancy, so we'll see some significant rise in those. They're very -- they're in great locations. I will hand you over to Dave Williams to talk about the financials.

Afternoon, all. I hope -- we've heard [ there's a few people ] had a bit of trouble getting on. [ Obviously everyone on the line did ]. NTA, up $0.02 on the year. It started on 1 July '21 at $1.25. It was $1.28 in December, so it's gone down $0.01 since December. We only revalued in June the dealerships that we owned 47% of. They were up over $30 million in total. And we revalued Mill Green. We didn't revalue Westralia Square. We have to do that on practical completion, which will be in the next -- this 6 months, and we anticipate quite a big uplift from both WS1 and WS2 on that. FFO for the period was $0.0529. It's basically the same as it was in '21. We had obviously the dilutionary impact of selling Cavill. It generated over $7 million worth of FFO for us. And we only held it for 2 months in this -- the FY '22. Offsetting that was higher occupancy and therefore [ a lot ] higher rent coming from Westralia Square; and also the car parks, which we owned for 6 months. The distribution of $0.0775 will be paid at the end of the month, the second half of it. [ When we looked at ] -- when we look at our business. We've generated a 13% total return [indiscernible] opening NTA when we IPO-ed of $0.91 plus the distributions, so that's a per annum return which we're actually -- we're pretty proud of really. Our LVR is 26% on our Westpac facility only. We -- in the nominator, we have the costs of the debt that we've used to construct WS2, but none of the value was in the denominator yet, so here we are. That's sort of [ over and placing ], and it will come down as we revalue the asset on practical completion and get something into the denominator. Our gearing is 23%, which is including the consolidated funds. On debt and swaps. We -- during the year, we shuffled our debt around a bit. We obviously settled Cavill, repaid a bit of debt, put a facility in place to construct WS2 and then subsequently bought the car parks, so where it sits now: On the principal facility, the main one, we've got $318.5 million facility. [ It's drawn ] to $206 million, so there's $106 million of undrawn debt. Obviously there's a chunk of that still to go with WS2, but we still have quite a bit of capacity. The big thing that we did post balance sheet. We had 2 swaps, 2 $25 million swaps that we put on in May 2020. One of them was a 3 year expiring in May next year, and the other one was a 5 year expiring in May '25. They had a value of $2.5 million, which we terminated and bought essentially $150 million of cap protection at 3% BBSY. So that's $100 million till 31 Dec '23 and then another $50 million all the way through to 31 Dec '24. So we are 100% floating now, but we have that $150 million cap at 3% BBSY. I'd just like to touch, as Steve talked about before, on the -- what we call carbon strategy. We can go on about E, S or G, but this is really about E and looking at the E side of it only. We feel as though we've been short selling ourselves on what we do. We've been very reliant on NABERS. I know a lot of investors are asking for ESG reports. With our annual report that we'll release at the end of September, we are releasing our third ESG report, but just really focusing on the E element, more attention is being paid to embodied carbon. Look. Our traditional business is by well-located buildings for below replacement. We upgrade services. We upgrade [indiscernible] HVAC, LED lighting. We make them as efficient as they can be to reduce -- basically reduce outgoings so we can substantiate more net rent, but it also has an enormous environmental benefit of reducing the actual emissions of the building to -- it's we take them as far as they can go and we're conserving the carbon that's sitting there. And I don't think enough focus has been on the fact that we're not knocking down these things to build new ones. We're investing in old buildings to make them hum as well as they can. We are talking to our tenants about buying green power. Green power is about 70% of the emissions. And some of our tenants, particularly at WS2, will buy green power. And we will discuss whether they want to eliminate scope 1 and 3 emissions through carbon credits, but on our assets like WS1 and 197, some of the more multi-tenanted ones, the tenants are encouraging -- looking -- are talking to us about green power, so we can move towards that, closer to a net zero across some of our assets. The thing that Steve mentioned with WS2, it's being built on a concrete structure, so you're conserving the concrete there. We -- there's no concrete in it. It's steel and timber, so it's 80% more efficient on an embodied carbon basis. You're, of course, putting in new technologies, so it's also going to operate more efficiently than an older product. So we're pretty excited about that. We think that this strategy is unique and we think we're doing a very good job of it and haven't been selling ourselves enough [indiscernible]. And back to Steve.

Let me talk about [ the portfolio slide ], the Perth market. Look. Significant -- things are being harnessed. We sort of thought we were [ in the box seat ] February sort of 2020. We've sort of lost 2 years with closures, with border closures and various things with COVID; and now the green light is there. The forecast, GDP growth -- forecast very strong population growth, there's probably about 60 billion to 70 billion of new hydrogen projects being announced. There's about 150 million -- or 140 million of other projects which is gas, the scope of gas project; numerous other, lithium, iron ore; various expansions over there. And they need a huge amount of additional employment. And the state government has put a big emphasis on that to bring people to WA to fill those positions, which will add to huge population growth and, we believe, office growth as well. And it's already happening with the inquiry rate we've got. We feel the net absorption will pick up this -- certainly this half now the borders are open. And already we hear that the -- we've done a number of leasing deals. And in the market, there's a number of leasing deals there. We've got strong inquiry. And again, the vacancy will fall. Therefore, net effective rent, we believe, will grow. At Westralia Square, where we've got 4 floors remaining, the 4 top floors. And we've got strong inquiry for those floors, and we are hoping to have that fully leased in the very short term. The 197. We've got a little bit of vacancy there from Wood Group coming out. Already we believe we're close to a heads of agreement for 2,000 square meters of that. The space is well fitted out ideally in the Perth market and we've got strong inquiry. We've actually done a leasing deal to a school on the ground floor which, will have its own separate entrance. So that's the first school [ done ] in Perth in the CBD. And we believe there will be significant inquiry for educational type of tenants in the future, probably not our buildings but other buildings, which will take up a fair bit of vacant space with the -- there's the Edith Cowan University, 2,500 students; as well as English schools; and various things there. 5 Mill Street. Look. It's been very popular. We've got one full floor which hasn't been subdivided. And we've got some inquiry on that and we hope to have that virtually fully leased shortly. 1 Mill Street, where we've kept it vacant. Now we had a -- with construction costs increased by about 30-odd percent in Australia and certainly in Perth in WA, we've reconfigured the DA, which will be launched in about a week, to put again the wood and steel structure above the existing building, which will significantly reduce the building costs with no demolition. And the building has the capacity to support that building, and we believe we'll be able to have about the same construction cost even with the huge uplift in construction costs in Perth. And remember these construction costs have taken a lot of other potential sites out of the market because you're going to have to -- for pre-commitments and various things have to have about $150 a square meter of additional rent, whereas we can keep around the same rent that we had before. And again the popularity of these environmentally friendly buildings is certainly coming in the market. The 180 Hay Street. We've got a couple of big government inquiries on that. Although, we've decided to pop it on the market to see -- for an owner-occupier. And we -- that will hit the market, and we hope to make a profit on that building. The dealerships. We've had a nice uplift in valuation to $136 million. They're trading [ their heads off ] over there. They're in fantastic locations, suburban locations. And we're very happy with that acquisition and the uplift on those and believe that will continue in the future. Stanley Street. Again with COVID and people going up there, we've got strong government inquiry for the vacancy, but that's -- it's just taking time to run through. And with the vacancy we've got, we hope to fill that building within the next 12 months. Our funds business. IKEA have exercised their option, which is great news. And that's trading very well. GDI 38, we're looking to rezone that -- the Broadmeadow building. We've been working with GDL (sic) [ UGL ] to expand their facility in the Perth facility and, we believe, significant uplift for our investors there. 1 Adelaide Terrace has been vacant. However, we've got strong inquiry now for the 2 top floors and hope to wrap that up shortly and pop it on the market. And we've leased over 2,000 square meters in that building and we're re-leasing and various things there, so with the inquiry we've got, we're feeling very encouraged in relation to that building. Dave? I'll hand you over to Dave Williams.

So guidance. We haven't provided any. We have an ambition of paying a distribution of at least $0.0775, which as I've shown in the chart there we've been -- managed to do even though [ we've gone by ] buildings like 180 Hay that are empty. We fund them through asset recycling through a very conservative balance sheet and through -- and free cash. We would like to continue to do so. We need to see strong leasing and/or capital transactions, all of which are the plan for FY '23.

Okay, we'll talk now to the -- in relation to the funds business. Look. We haven't launched any new funds. There's significant [ in-build ] performance fees and various fees in the funds that we have. And we're -- well, [indiscernible]. I'll just talk to you about the Wellington Street car park also. We're looking to put a DA on that to put an additional 25,000 square meters on top and convert the car park into 60 residential units. We have significant uplift in value. We've -- we believe there's a couple of big government inquiries which hit the market, and unfortunately, with the construction costs going up, the -- they couldn't be filled. However, we believe that we have a solution with this. We've got a cheaper type of building. We'll be able to offer the right rents. And again, the government is certainly looking for environmental style of buildings. So look. With everything that's happened over there, we finally got the green light and the barriers removed. And we're -- we've done significant amount of leasing deals and are really excited with the future with the current inquiries. So I'll open it up now for questions...

Just there's a schematic of what the development above the Wellington Street car park looks like on Page 5 of the presentation.

And we can convert the car park into the residential units by just putting walls around and putting kitchen and bathrooms [ in at sort of ] minimal costs. They would have a [indiscernible] and storage right in the heart of the city; and not far from the Edith Cowan University, where there's going to be over 2,000 students there. And we think it would be an ideal location. So we'll look now for questions, please. Excuse me, operator. Could you just inform and help anyone that would like to ask a question and the procedure on doing that, please?

[Operator Instructions] We will take our first question.

Steve, it's Edward Day from MA Financial. Just on your development proposal for 1 Mill, what's your estimated construction cost per square meter for that type of steel and timber finish?

Look. The [ QS ] is working on it. We've just got a couple of fine points. But around the same construction costs as what the previous concrete building was even with the 30% uplift in construction costs. So it will be about the same construction costs as the previous DA that we had, but the previous DA, you'd get precommitment for around $730, $720 a square meter. Now you would have to do it at about $830 or so for to -- for the same profit. So we believe that the timber and steel construction will be able to come out at the same -- around the same construction costs as the previous concrete, which would be the concrete one will be 30% higher, so it does give us an edge in the market. And there's numerous sites there which are [ land-based sites ] which don't have the benefits of building on top which would be the -- sort of blown out of the market for precommitments.

Ed, Dave again. They're also quicker to get up.

Yes, much quicker, yes.