GDI Property Group (GDI) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the GDI Half Yearly Results Teleconference. [Operator Instructions]. I would now like to hand the conference to Mr. Steven Gillard, Managing Director. Please go ahead.

Welcome, everyone, to our half yearly results. I'm also with David Williams, our CFO. Well, it's nice to sort of have some good news and a bit of a nice turnaround for us this half. I'll talk about the WS2 project, which has been a little bit delayed because of finding staff, inclement weather. However, the practical completion is due around about first quarter of this year. We've already signed 2 heads of agreement for 5 floors, and we have significant interest in the remaining. Yes, so the building has been -- look, 6 months ago, there wasn't too much about sort of carbon neutrality. But in the last few months, tenants are really wanting an environmentally friendly building. Both of the tenants we've signed are going to sign up a green power, and it looks like we could even have the building at 100% carbon neutral without sort of planting trees in Rwanda, by buying things in Australia and doing it properly. So the building is probably up there the most efficient, environmentally friendly building in Australia, and it's becoming very popular.

Can I -- I'll just add to Steve. We are buying base green power for the building, and we are putting it into leases that the tenants will buy green power. And as you said, that's over 70% of the mission. So the balance of it, we are looking at carbon offsets, and the tenants are very willing and wanting to do that we have in place at the moment.

Yes. The building will have very low -- well below market outgoings, and we'll be able to achieve that quite nicely. It's also got solar panels on the roof as well. So we had a great 6 months. After COVID, there was lots of inquiry but didn't translate into leasing transactions. However, since June 30, we have signed leases and heads of agreement for over 20,000 square meters of our portfolio. Over 10,000 square meters of that was done from mid-December. Examples of that, 5 Mill Street floors that were vacant for a couple of years, we had 3 and 4 tenants vying for those properties. And we -- so certainly, the inquiry rate is -- it was a little bit slower in sort of mid-January, but I was over there for 10 days and got back on Friday, and that inquiry rate is picking up quite nicely now as well. Now I'll talk about our co-living joint venture. We're very excited with this. We've intended to do a joint venture with the Tulla Group of the Maloney Family. Now they were previously involved in the listed MAC Services Group, which started off small and they got taken over for around about $750 million. We've got 2 seed assets. It's mining accommodation. The first asset is South Hedland motel, which is smack in the middle of South Hedland, opposite of Charter Hall Shopping Center. We've bought it at around about $9.5 million of net income, and we believe we can substantially increase that by over 25%. There's significant demand in that Hedland region. And with iron ore and various things happening and growth to mines, and these mines are long-term mines. We're specifically targeting areas for this mining accommodation where there's long-term longevity in workforce. If you go to somewhere like Karratha, where they build the LNG trains. Once they build them, the place becomes -- they all move out of there because they only need a few people to operate. So places like Newman. We're also buying the Norseman asset, which we're very excited to buy, which is with the Pantoro big raising and there's significantly longevity in that mine. It also has a number of other tricks up a sleeve, other resources there as well. So we're going to create diversity in this portfolio. GDI are only committing $35 million into it. And we'll be looking to -- those properties into trust for our investors and the group -- the joint venture group would take long-term leases over those properties. So we're certainly looking for more acquisitions, and we believe we'll be able to certainly grow our funds management business on that. Now the whole thing is a 50/50 joint venture, a 50% joint venture in the funds management and a 50% joint venture in the operating company. And we believe it will lead significantly to our cash flow. And by having us as a partner, the Tulla Group we can see strong growth in acquisitions of these type of properties. We talk about the -- I'll hand you over to Dave for the financial snapshot.

There's detailed P&L and balance sheet in the appendix, but I'm happy to take some questions on any of that, if anyone has. But the snapshot is an NTA of $1.25. It's a slight decrease from $1.27 at June. Everything that we wholly own got revalued. Steve will talk through the outcome of those valuations. Importantly, though, there's absolutely no valuation upside for WS2. As Steve said, it's basically complete. And if that were complete today and was in the valuation according to the valuer's draft numbers on that, is it adds between $0.04 and $0.05 to our NTA. Our FFO was 2.64 cents per security. And obviously, at our AGM in November, we reduced our distribution down to 2.5 cents for the half, which was less than our FFO. And our balance sheet is still rock solid at 27% gearing. And like the NTA, there's not that upside in WS2 in that gearing number. Our principal facility is currently drawn to $260.3 million, leaving about $53 million of undrawn facilities to complete the minor. It's hardly anything left on WS2, and obviously, just a capacity to do things like buybacks, CapEx as needed, fit outs and obviously, incentives. We -- in the 6 months, and we mentioned this in the -- when we were talking in August, we had some in the money interest rate swaps, which we terminated and bought caps instead. So we've got interest rate protection to 3% for BBSY on $150 million to the end of this calendar year and then another $50 million to the end of next calendar year. The BBSY has obviously pushed through that 3% number now. We bought back 3.3 million more securities during the period, that's about $13.2 million or just under half of the program that we started when COVID first hit in 2020. And there is an intent to extend the program for another 12 months. We originally had it in mid-March, so we'll look to extend it in mid-March. And that is the debt and interest rate positions.

So we talk about the Perth office market. Good, solid net absorption again this quarter. If you look at the table of the pages on Page 8, economy projected to grow 25%, up huge population growth, $186 billion of infrastructure spending over the next 4 years. And we see significant population growth and immigration into Perth which -- and also a number of these projects have sort of been delayed and held off. But the first quarter of this year, we're seeing a lot of those getting off the ground, which will mean more white collar workers for the CBD. If you look at the vacancy rates, the premium rate went up a little bit, and that was just -- there was actually -- that was already leased, that space. So we could see that premium rate going down and the A-grade rate certainly falling quite sharply. However, there's a fair bit of vacancy in C and D-grade properties, which we believe with the 0.5% vacancy in residential, they'll be snapped up by residential developers in time. So -- which will again be significant withdrawals. If you look at the Westralia, the portfolio, we're basically -- we're just about to sign a lease for a further 2 floors in that property, which will mean that we'll only have Level 16 and 19 and a small part of Level 18 available. We have strong interest in Level 16 as well. We've got a couple of parties looking at that. And that building is going along quite nicely. So hopefully, in the short term, we'll only have the top floor available in that building, which the view is sensational and we believe that will lease fairly quickly. The valuation increased to $382 million. However, as Dave said, there's no valuation in there for WS2, and that is be ready for occupation in the next couple of weeks. And once we get a full [ sale ] and that's finished, that will add to our NTA as well. So there's strong demand from tenants and quality tenants as well in that Westralia building. Dave?

I'll just add on that valuation number. The previous value that was done in December '21 included about 9.25 million of land value of WS2. So that is not in its valuation. So essentially, you've gone from a value of $262 million to $382 million. There's been no change in cap rates. So I've chatted to the valuer and we possibly might have tightened it if we had it done it in June. So if it was 6 in December, it might have been 575 and it's listed at 6 in December 12 months later. The valuation increases is largely around the growth in market rents and higher occupancy and less to spend.

Exactly. At 197, look, we've got caught a bit of vacancy there. With AMEC and Jacobs moving out. However, we have signed heads of agreement and done leasing for about 7,000 square meters. There is a bit of vacancy in that building. However, the space left is beautifully fitted out. And it's a perfect -- we're getting a lot of inquiry and demand for that due to its prime location and the quality of fit outs there. And that's a lot of -- that's a nice demand for those tenants, sort of from 200 meters to 800 meters who are growing on the back of all these $180 billion of infrastructure projects happening. At 5 Mill Street, strong demand there. The vacancy has gone up now to 92%, and we've got interest in the rest of that building. So that's...

Hot off the press. So late last week, another 1 of those 3 suites is now under heads of 200 square meters.

Yes. And I think that's a conservative capitalization laid on that, and we haven't -- you look at our -- all of our cap rates and various things, they are all fairly conservative. 1 Mill Street, we had to change around. As we spoke last time, we've changed around the development from a concrete structure now to the steel and timber structure, the environmentally friendly structure. That DA has been approved, and we'll be going out marketing, looking for precommitments on that property. There's a number of tenants who would fit the bill for that building. And obviously, we won't do anything until we get a precommitment on that property. But the good thing is that the timber and steel structure building on top of the building saves significant costs and time as well. So any 1 building in Perth at the moment who's doing excavation and that building costs are up around about 32%. So we can keep it around the same levels that we had previously. The 2 car parks increased value by $5.75 million. They're both prime CBD car parks. In fact, they're performing outstandingly. We have, however, submitted a DA for the Wellington Street carpark, which would be right -- it forms part of the Perth hospital. There were 2 big government inquiries coming out in the next few weeks. We believe this building would be ideal for that. One is -- you've got 2, health and mining and energy. And also, we are converting the carpark into 51 apartments or student accommodation or short-term stay, which will be -- the hospital is certainly looking for that type of space there. 180 Hay Street. Look, we didn't have that much inquiry on that for a while. However, now we've got an owner-occupier and 2 strong tenant inquiries on that property and we're hoping to lease it up very shortly. The valuation went up from $18.4 million to $20.5 million. The car yards are performing very strong with the benefit now that you're able to import cars from Japan. They found it very hard to get stocked. But certainly, they're performing very well in prime locations. Hot off the press in Stanley Street, Townsville. We've signed a heads of agreement with a major government department for 3,021 square meters, leaving around about 1,000 square meters of vacancy and we've got inquiry on that. And once we get all that put together, we'll put that property on the market this year. Dave, for the guidance?

Go talk on the funds.

Yes, I'll just talk a couple of the fund's assets. And then I'll leave Dave to talk about. We talked about Townsville. If we go through GDI #36, 1 Adelaide Terrace, look, we've -- we thought that property would be leased. We had some very strong inquiry for 2 floors. That has just been taking so long. We've got another inquiry for another floor, and we have to lease that shortly and put that on the market as soon as possible. The GDI 38 is with all the government been resigning all of that land to residential. So we're hoping to get a resigning for about 1,100 units on that land and significant upside for investors there. We've talked about Townsville. IKEA, IKEA have exercised their option and they've actually spent a lot of money on the building themselves, and it's one of their most profitable stores in the world. And then we talked about the car yards there. So I'll hand you over to Dave Williams to talk a bit about the financials.

Actually, sorry to jump around a bit, but if we turn to Page 20, we'll just talk about the makeup of the contribution of AFFO. Obviously, Westralia Square's contribution goes up as occupancy goes up. That's going to continue to accelerate. And a full contribution from Westralia Square 1, is sort of in the $26 million, $27 million mark for the full year. So there's a lot of upside there. As Steve said, there's interest in 16 and that leaves us basically only Level 19 left. The The Mill Green's contribution was obviously, it got hit around a bit as the vacancies come up. But as that refills, that jumps back up. And that's all around 197. The 5 Mill with now basically full, it will be contributing a bit more. And some of the other -- the leads that look like we might be able to return them right around, so things like 180 Hay, which is costing us a couple of hundred thousand dollars every 6 months to hold it empty, and then obviously, the rent contribution is quite a lot -- quite a lot of the big swing factors. So we -- but feeling really good about what the next 18 months looks like from an AFFO point of view. On net interest expense, we essentially unhedged except we've got that 3% cap. So it has gone up a lot in the last 6 months. We are currently capitalizing the interest expense on WS2. That will be expensed through the P&L once we get practical completion. And our corporate and admin expenses have barely changed in the last 4 or 5 years. What does that mean for the guidance? Look, we had the very difficult situation where we have been maintaining our -- had been maintaining our FFO at $0.0775 for the year. But given the vacancy that we had and the rising interest rates, we took a very conservative approach to it and said we're only going to pay $0.025 for the 6 months. That's obviously being confirmed. And we're now saying no more than -- not less than, I should say, $0.05 for FY '23.

Yes, so obviously, all those leases we've signed a significant cash flow in FY '24 coming through. So I think we might just ask for questions now. If anyone has any questions, we'd be delighted to answer them.

[Operator Instructions] Your first question comes from Edward Day with MA Financial.

Steve, Dave, just wondering if you can give some color to the rent that you're getting in WS2.

The 2 heads of agreements, averaging probably over about $750 a meter net. One was done at the lower floors at about $725 -- no, $735, but levels 5 and 6 have done at $800 a meter.

And then just on the balance sheet, Dave, I know you've got a bit of 50-odd million undrawn capacity. How are you thinking about the balance sheet given the 35-odd million commitment as part of the JV?

There are in-discussions about getting that separately funded by our existing financier. So an increase and a slight extension.

However, we will be looking at some asset sales as well.

As you know, we are...

[Operator Instructions] The next question comes from [ Andrew Hector ], a private investor.

Just thought I'd actually follow on from the last question with regards to incentives on WS2. Where you're currently at around incentives, please?

The range for sort of beefy degrade buildings up around that 45% to 50%. But for premium, they ran about from 35% to 40-odd percent, 45%. That's on net, not on gross.

And obviously, the larger the tenant, the more power they have, the smaller the tenant, they're getting -- they're really shrinking quite quickly.

There are no further questions at this time. I'll now hand back for closing remarks.

Well, thank you all for your support. We're very excited about the future. We've had a great 6 months. And we thank you all for your support. So we'll close this off now. Thank you.