GDI Property Group (GDI) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the GDI annual results teleconference. [Operator Instructions] I would now like to hand the conference over to Mr. Stephen Burns, Managing Director and CEO. Please go ahead.

Good afternoon, and thanks for joining the GDI call. I'm joined by David Williams, our CFO. With the presentation, I'm basically starting on the first section, 01. A key theme has been our leasing efforts with over 37,000 square meters of space leased in the financial year. We managed to capture some of the larger deals done in the Perth market for office space, and importantly, the momentum has continued through into FY '25. WS2 is officially opened. It was opened by the Deputy Premier a few weeks ago and makes the launch of Perth's first timber and adaptive re-use office building. All assets have been independently valued during the period, resulting in an NTA per security of $1.19 with our leasing efforts bolstering our property FFO and WALE during the period. Our new co-living JV performed well, delivering on our -- delivering $6.8 million in FFO for FY '24 and in excess of our 20% return on invested capital. We announced a $0.05 distribution for FY '24 and guidance of $0.05 for FY '25. Turning on to the next page. Look, a feature of FY '24 has been the strength of our core assets and a key lease deal done in the year needs to be mentioned again. So that was for WAPOL at basically WS1 and it encompassed over half the building, 16,300 odd square meters, and it pushed the renewal out for the 9 levels, and we're very comfortable with that now. We've got over 7.7 years of WALE, 98% occupancy and we're fielding competitive enquiries on the remaining 700 square meters, which is part of Level 15. On to the next, WS2. We recently held the launch and -- to welcome most of the tenants taking occupation. There's still several floors of fitout work going on at financial year-end in particular. But since balance date, we've completed the conferencing facility which has been eagerly sought by our tenants. And this boutique timber and adaptive re-use building really does give GDI a clever point of difference and a competitive model to apply to our growth opportunities, which includes the Mill Green Complex. In terms of the Mill Green concept, during the year, we made good progress on our fitout re-leasing strategy at 197. I mean, we sized the task at circa 9,500 square meters and have leased over 6,000, with good momentum on the balance. We've been very active on renewing tenants at 5 Mill, the smaller building. Quite a few of the expanding tenants have opted to take up space at 197. The bigger opportunity is really for a staged master plan across the 3 building Mill Green site. This will feature timber and adaptive re-use similar to WS2, and the longer term vision will increase property income from a variety of mixed-use contributions. In terms of the co-living, during the year, we bedded down our initial co-living assets and acquired a third asset at Newman. We now have circa 600 rooms. With our operational focus, we achieved our plus 20% return on the initial invested capital. Each asset has a different client emphasis, with Norseman largely catering to Pantoro who incidentally recapitalized by over $100 million during the year. South Hedland has an infrastructure bent and also taps into the top tier subcontractors. Newman will be upgraded and repositioned to lift the occupancy. And importantly, the core focus remains on operational returns and carefully targeted acquisitions. The value of the JV is now $39.4 million being GDI's share and representing 3.4% of our total assets. If we go to the financing front, Dave will spend more time on this, but we have converted the principal facility to a syndicated facility by introducing a second Tier 1 bank. We increased the capacity by $50 million, and we have surplus capacity, or unutilized of $50 million. The maturity was extended. The hedging profile is described there, and we're comfortable with that because it will dovetail with our recycling strategy. And I'll now hand over to Dave to give a financial snapshot.

Afternoon, everyone. I will be relatively brief. We turn to Page 9, Section 3. As Steve mentioned, all assets were independently valued during the year. We have a weighted average capitalization rate of 6.6% and average rate per square meter of NLA of just over $8,000. Our NTA decreased $0.01 from December from $1.20 to $1.19. Gearing sits at 33%. We're well within the new -- the covenants of the syndicated facility, and we have high levels of interest rate protection that are -- particularly ability to participate in any interest rate reductions, which I'll talk through in a couple of slides. FFO per security of $5.52, nice, little chart there showing that it's starting to head north again after -- but resulting from the leasing successes and the contribution from the JV. And as Steve said, paid $0.05 and the objective of holding $0.05 through cycle. Just really briefly on what drove that FFO higher. Westralia Square and WS2 contributed $23.7 million, up from just over $18 million the year before, based on contracted leases only. That is expected to continue to go north in the vicinity of $29 million for FY '25. Mill Green was $14 million, so going through that re-leasing phase. It also is anticipated to be heading north again into FY '25 on -- just on contracted rents only. Carparks performed largely in line as they did the year before, similar with the funds management business, and we've, of course, got to participate from the full year of the co-living JV. All of those ups were impacted by a significantly higher interest rate expense. Over to that was the principal facility, now the Syndicated Facility. We've got -- you can see there, we've got $49.2 million of capacity sitting in that facility. Just briefly on interest rate hedging. The bulk of that, as you can see, is protected from 94% of debt to ‘24 , 79% in drawn debt to June '25, 50% to 31, '25. The bulk of that is through interest rate caps. So that are set at -- either one is a small amount of 3%, the rest at 4.25%. So we will get the benefit from interest rate caps if they are, but we are protected from rises. Back to Steve.

Just in terms of the Perth market, the positive absorption story continues with around 12,000 square meters positive in Q2. An interesting feature was really the slight decline in A Grade vacancy from around 15.6% to 13.9%. Tenants continue to expand. In many cases, they're expanding and there's also been a, what we would describe as a flight to value from just merely a flight to quality because we're seeing the premium vacancy increase marginally from 7.8% to 12.5%. The fitted out part floor space strategy is working for us, and that's really enabling us to shorten up the lease commencement dates, lower the incentives, strike better rents. And we have the advantage of being able to offer multiple price points amongst our cluster of properties. And as mentioned, the momentum continues into FY '25. I think, in terms of the Perth and the WA dynamics, they remain robust with exports from WA representing 46% of all Australian merchandise exports, representing a true producer economy. Employment and population growth are both strong. Infrastructure spend notably is $207 billion plus over the next 5 years and we remain mindful of a slowing in the commodity cycle and exposure to specific segments. We turn the page. Net absorption, graphically shown, is very strong, especially compared to markets like Sydney and Melbourne, and this is expected to continue. And there's still a lot of expected resource and government sector activity. Turning over once more and just looking at the charts, we note the Perth lease enquiry levels dipped and have rebounded, and given the lag, we expect that it will be reflected in additional leasing. The work from home factor is not as prevalent in Perth, and therefore, higher sustainable occupancies in some East Coast markets. There is not a lot of construction to add excessive space over the next 2 years and mooted construction projects will need to meet their higher breakeven rent thresholds given the increase in construction costs. Turning on to the portfolio. You'll see the table there. In summary, all assets were independently valued during the year, reflecting an average cap rate of 6.63%, a WALE of 5.3 years and an average value per square meter of around $8,000. Most cap rates moved out between 25 basis points and 75 basis points, and assets are now at a considerable discount to peak valuation, the exception being Westralia Square where the cap rate tightened on the back of the large government leasing deal and WS2, the cap rate remained still at 6.5%, but at better rents, lifting the valuation slightly. Might just quickly turn to save me raving through each property by property. We will go on to the highlights just on the funds management side. So if we go to Section 7, the funds management business, it's been very busy on the funds management front dealing with the existing assets. And the key feature has been additional leasing at our UGL portfolio at Broadmeadow, New South Wales, and also Bassendean in WA. Very focused on leasing extensions at 1 Adelaide Terrace. We've also been able to do the refinancing at 1 Adelaide Terrace to enable future funding for leasing initiatives, which are going full bore. And in terms of other situations improving by way of removing easements and use at our IKEA asset at Innaloo, we've done a lot of work there. And worth noting, it's the only IKEA asset not owned by IKEA in Australia. We've been very selective on the acquisition front and the focus remains on providing liquidity to our investors and realizing the right value. If we turn now just to -- a recap on strategy and emphasizing the point, we're very focused on having a clear strategy and then doing what we said we were targeting. We are executing on strategy. The leasing results are key and the focus is relentless. Our in-house team have done some of the biggest deals in the Perth market in FY '24 and FY '25 is off to a good start. We're very aggressive in terms of the leasing targets in front of us. We delivered on our financial targets for FY '24, but FY '25 calls for more revenue from each key segment, particularly the Property FFO. The refinancing has provided flexibility with the timing of our recycling efforts and allows for the strategically directed CapEx program and stage growth objectives. Legacy issues are in the past, and the team is very focused and accountable and senior management sign up to our agreed strategic objectives and these objectives must be completed. In terms of the Board, it's been renewed, and we're very pleased with our 2 new Directors, Patria Harris and Susan Hilliard, who are working seamlessly with our new Chairman, Giles Woodgate, and thank you to Gina if you're on the line. Another point is the co-living JV has been very pleasing, and we continue to take a measured operational approach. We're always looking for complementary acquisitions, but we're very patient and thoughtful. Recycling is underway, and we will maintain a patient approach to realize the appropriate value. We do have over a $100 million of noncore assets to consider and we're also pursuing a joint venture approach and strategy on a very selective basis. But in terms of the growth outlook and how we feel about the opportunities to add income, the timber and adaptive re-use space is an exciting area for GDI. The model is profitable and competitive, has a very good point of difference. It's well suited to our existing sites and potential sites, and it involves working with our best-in-class partners. So with that, I'd just quickly talk to our guidance. And in closing, we feel well positioned for FY '25 on the back of leasing efforts and property FFO. So we're able to provide that guidance on the distribution of $0.05. I think we're now heading to Q&A. So I'd like to thank you all for listening.

[Operator Instructions] Your first question comes from Andy MacFarlane with Bell Potter.

Maybe just starting on the asset sales, you're talking to $100 million still. Yes, just interested in a little bit of color on that and where you think that might kind of get to over the next 12 months?

Well, good question, Andy. I don't have that good a crystal ball to nominate which asset, and I wouldn't specifically state which ones they were in case there were any buyers sitting on the phone. But you have a good idea for which our noncore assets are. Another way to think about it is you can tell very simply which our core ones are. They all sit in a cluster.

One thing that Steve didn't mention is we have sold a small -- one of the [ 17 ] assets. It's exchanged, that was held by GDI No. 46, the dealerships, went through one of the Burgess Rawson auctions. There was plenty of bidders and they've got a 2.3% premium to book. So that's expected to settle in November.

Maybe on the capital partnering side of things, you've kind of talked about looking towards achieving kind of going forward. Just wondering if there's any kind of color you can give in terms of the direction on that and time.

The direction is based on someone liking the asset and then wanting to invest with us going forward, and I wouldn't be able to identify a name even if I had one, Andy, on a call.

Yes, no worries. I was just thinking more broadly just in terms of capital partnering that somebody kind of still exploring and trying to do.

Of course, we are.

Just on other JV side of things, just wondering how the joint venture is kind of going in terms of expanding out on the co-living side of thing? It sounds like just tracking ahead of where you're expecting it to be, at this point, looks good. Just wondering what you're kind of thinking there in terms of expanding that relationship.

Yes, measured. We've -- As stipulated, we're not just going to rush the balance sheet out and enlarge that exposure. We do get good cash flow out of that JV. So that gives us an ability to also gear up and to spend without expanding the balance sheet, but increasing the assets within the JV. So that's one approach. The other approach, Andy, is really if we have something meaningful, we will look at external capital. And we do have a number of those opportunities to look at.

Just one last one for me, a specific one, but just wondering what the weighted average cost of debt at the end of the year, David, and what are the expectations for that for '25?

You can see what our hedging profile is, that’s we're largely hedged minded, so for the next 6 months, [indiscernible] above 4.25%, there's an interest rate swap of 4.55% and 2 callable swaps for the below 4% in first half next year. So we're largely protecting. We're not sitting here banking interest rate caps, but we do get the benefit if they come.

Your next question comes from Edward Day with MA Financial.

Just want to talk about the leasing you've done at 197 St. Georges Terrace. And I guess, yes, if you can provide a bit more detail on how many floors you have left and whether we can kind of expect that velocity of leasing to persist in FY '25?

Yes. We're hopeful, Ed. I think in terms of the specifics, there's -- I'd have to actually go to a -- floor by floor. I'd probably do that separately, Ed, because there's also part floors and whatever. But simply speaking, remember, we had a task of around 9,500 square meters, and we've done about 6,000. There has been some leasing coming on that we had to renew, which increases that number a little bit, but we're probably halfway. And this was a circa 2-year program. So we're feeling pretty good about where we have got to. But it's the same philosophy. We've got a number of floors that we're actually working on as we speak, which are being fitted out. And some are being split 3 ways, some are being 4 ways, some in half. So I'd have to go through that in detail with you to make any sense, and it's probably too long for the call.

Okay. And then just on that asset sale that you did through the Burgess Rawson auction, given the outcome there, yes, is it fair to say you might give away some smaller -- put some similar transactions?

Well, point one, we've got inbound for more. But from our perspective, it's really around the value. We're not inclined to offer a discount on such a good cash flow asset and such a rare asset. So we like the fact that we've got a few additional buyers wanting to bid for them, and we'll probably look to take advantage of that.

And sorry, just one more if I may. Just on the vacancy at WS2, yes, can you give a feel for progress on leasing there?

Yes, sure. We've got 2 floors, Level 8 and Level 10. Level 8, we've decided we want to do a GDI style fitout on it, which at the end of the day means putting in something fairly similar to what we've got on Level 1. We'll probably go for a dominant=sided tenant with a small amount cut off for a small office. And in doing that, what we want to do is to really showcase the timber and take advantage of the natural qualities that we have within the building. And in doing that, we think that we'll be able to achieve really good rents on it, keeping in mind that we're getting in the high 800s, which is better than premium in parts of the building. So we've lifted the profile overall well in excess of our breakeven rent that was set for the development. And we're just finding that it's a very attractive space, and we do have some expanding tenants already within the building. Level 10, we probably won't fit that out without enquiries, so we'll see how that goes. But I'm thinking that the Level 8 fitout will probably lead us to wanting to do that for someone on Level 10, but we'll just see how that goes.

So in terms of enquiry on Level 10, do I take it that there's active but not advanced discussions on that...?

We're not working with -- we're very rent-sensitive on that. So, if people don't want to pay, we don't talk to them. We're a price setter on this product.

[Operator Instructions] Your next question comes from John Gouldson with DP Wealth Advisory.

With the No. 33 in Brisbane, I noticed in the note there that pretty well the strata has been sold now. We got any idea of time frame there when wind up will be achieved?

John, that is correct. They're all under contract and if they -- settle on them into, it should be this year -- calendar year.

Great. Well done. And of course, no more refurbishments required there. So...

So some of them -- some of the harder, we still need to position some of the suites. So they've been contracted, but we still have to do some work. So that's all in play.

But we didn't anticipate that predominantly the -- will be return of capital rather than spending on the loan. The loan is paid out there, wasn't it?

Loan is paid out. Yes. The unit price that we disclosed is after all costs of getting to the finish line.

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

Thank you very much for joining the call and look forward to catching up individually or in small groups as appropriate. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.