GDI Property Group (GDI) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the GDI Half Year 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 Dave Williams, our CFO. A key theme has been our leasing efforts, and with over 16,000 square meters of office space leased in the December half, we're continuing to deliver on what we said we would do. Notwithstanding a slower market of overall leasing inquiry in the December half, we were able to achieve a very good result. And leasing and inquiry deals have started calendar '25 on a very strong note. Anecdotally, CBRE put out a recent release showing 11 deals have been done this year, which compared with 42 for the whole of calendar '24. So strong outcome so far this year. We recorded a 26% increase in FFO on the PCP. Importantly, property FFO increased by some 38%, reflecting our leasing efforts and the dropping of the income. We achieved a premium to book on some car yard asset sales, which are ongoing, as is the noncore asset recycling program, and we're actively engaged on a number of assets. WS2 won a number of awards and reinforces our desire to provide boutique office space utilizing the timber and adaptive reuse method. NTA, stable at $1.19 per security, with Westralia Square and WS2 amongst the assets valued at the end of December. Co-living is providing returns in line with our 20% hurdle, and the distribution guidance of $0.05 for FY '25 is still intact. Just turning on to Page 4. With regard to core assets and strategic direction, WS2 is proving up to be a very good way to provide boutique office space. And during the period, won a global award for structural engineering. We think that it's a really important message to push, given the breakeven rent and cost advantages that arise from working with the hybrid timber, lightweight steel and building on top of core assets, while still producing income is a very important one for what we do. We've got 2 floors of unleased space remaining in WS2. And we're putting in place a high-end GDI fit out on one of the floors, which we hope to use as a test base for future projects. And at the moment, it's worth remembering we're achieving very good rents and, in some cases, premium rents within the WS2 building. There's very moderate office supply in terms of outlook for Perth over the next 4 years, which is a bit of a message from this presentation. It's well below the 20-year average. And I think that's very encouraging on a number of fronts because the provision of well-timed boutique office could work well. We're not rushing out to do it, but what's important is there's 4 or 5 years to be able to accomplish that, which is what the supply gap is looking like, which should allow for rental growth, declining vacancy and accumulation and buildup of tenant demand, if you like. So turning on to the next page and really focusing just on the Mill Green complex. It's important to report that we're able to take occupancy at 197 from 69% to 82% during the year to December. And really, it is a reflection of our targeted fit-out strategy. We were able to play off a strong interplay between some of our cluster of assets at 5 Mill, for example, where we have expanding tenants that are able to move to a bigger floor plate and accomplish that by moving to 197. 5 Mill, in turn, attracts smaller tenants at a very good price point and has proven to be a very good lease-up story. We're able to reuse the fit out a lot there. Overall, our leasing team has been very busy and outperformed the market in terms of transaction volumes. In other words, we've been able to lease a lot more than our competitors' percentage-wise. And the Mill Green site lends itself to a stage development plan over time, which would accommodate retail amenity, fuller upgrades and, longer term, a timber and adaptable reuse office boutique building. But don't worry, we wouldn't do that without an agreement for lease or working out that we had a competitive advantage. Our focus remains very much on the lease-up strategy and scoping out the future staged improvements. If we turn to the next page, just quickly on asset sales. We've been working hard on the noncore asset sales, as you know. We've now sold over $20 million worth of car yards. Importantly, to us, price is really important, and the premium to book value, which was implied on the $140.6 million worth of asset value pre sales, was really important to us. We've got ongoing sales with good inbound interest, and it tends to appeal to that market, which can be impacted by a decline in interest rates for super funds and so forth. We own 47% of the car yard funds, and we're working on a number of other asset sales across the group. If we turn across to the co-living page on Page 7. During the period, we've bedded down our third asset, which is at Newman. The repositioning has been well received, and occupancy increased since purchase and subsequent refurbishment. At Norseman, we're working with Pantoro to supply an additional 40 rooms for their future requirements. They were recapitalized during the year and are very focused on growth ambitions. We're focused very much on the operational returns and carefully targeting acquisitions. We do look a lot. We purchase very rarely. The value of the JV is about $39.9 million being GDI share, representing some 3.4% of our total assets. We're on track to deliver on our target of 20% of our initial invested capital. Turning over to the next page, I'll hand over to Dave.

Afternoon, everyone. As Stephen mentioned before, NTA was stable at $1.19. We had Westralia Square complex, it's Westralia Square and WS2, and our 2 car parks revalued at December. Westralia Square, the main building's valuation went from $379 million to $395 million. That's notwithstanding an increase in its capitalization rate from 6% to 6.375%. Not unexpectedly WS2's valuation increased given the amount of leasing that's been done there. It went from $94 million to $105 million, and its cap rate tightened slightly from 6.5% also to 6.375%. There was minimal movement slightly up on both the car parks. The cap rate in Murray Street 1 remained at 6%, Wellington went out slightly from 6% to 6.25%. That means we now have a weighted average capitalization rate on the independent value of 6.7%. And then an average weight per square meter of NLA of about $8,300. The FFO, also, as Stephen mentioned, it was $0.0307. You can see the very steep increase from the December '23. Gearing is at 34%, and we're well compliant with our syndicated facility covenants on an LVR and ICR basis. And we determine the distribution of $0.025 and confirm the intent for $0.05 for the year. The big driver to the increase in FFO has been at the property business Westralia Square complex. The FFO was up $5.6 million; Mill Green, $1.1 million; and the car park is up slightly. That's as a result of past leasing efforts that they're dropping in and that continues as the leasing -- that the income continues as well as the leasing efforts continue to fill the buildings. The funds business, funds and FFO had a couple of transactional fees in it, just on the dealerships and also had full distributions in -- for the 6 months in the previous corresponding period. One of them had a cutback in the distribution. And that's on the 2 that we consolidate where we own 40%-ish stakes. No material change on the co-living. Offsetting all those gains is obviously a higher interest expense. But when you are looking period-on-period, the Dec '23 -- in Dec '23, we capitalized $1.7 million of the interest relating to WS2. Corporate and admin expenses were flat. On our syndicated facility, not much to see here, $35 million undrawn. We remain pretty happy with our hedge profile. We're very hedged till June. It's about 70% to Dec. We're paying below cash on most of it, and we've got caps on a good chunk. So if the rates do come down, we get to benefit. I'll hand back over to Stephen.

In terms of the market snippets, the positive absorption story continues in Perth with over 25,000 square meters achieved in the 6-month period ending January '25. Overall, the vacancy of 15.1% is down marginally from 15.5% in July '24. The tenants are very focused on the value side of the equation and definitely have a preference to fitted out space. Most tenants are still expanding. So there's a good mix of tenant demand for greater space. Our spec fit-out strategy is definitely working well for us, and it's helping to deliver on the better economics. I did mention that CBRE picked up on the increased activity so far this year. A lot of that has been centered around the smaller segment, 150 to 600 square meters in terms of tenant requirements. And our team is very focused on hitting as much of that inquiry as best possible, and they're definitely achieving that. Turning on to the next page. The Perth and WA macro dynamics remain robust. Exports still representing a very healthy chunk of circa 44%. We've got very strong population and employment growth figures. And also, on the downside, we're actively managing any tenants impacted by changes in the commodity cycle. And there are pockets. And we just make sure that with the leasing term, we get on to them very early. There's good examples across our portfolio where we've helped to manage tenants. And I think it's a very important part of what we actually do to ensure that we hit any potential problems beforehand and help the tenants out. And that's been done on a profitable basis from our perspective, but also a very meaningful basis from a number of those tenants. So we don't have much exposure to those difficult segments, but we're always a weight to it within our portfolio. If we turn on to the next page, Perth, strongest market for 2 years based on the net absorption figures. And we continue to experience very good inquiry for leasing, particularly the core assets. The 2 co-located clusters provide very good price points and variation, and the leasing turns are very focused on targeting any inquiry or movement in and amongst those 2 clusters. If we look at headline vacancy, it's obviously declined. The tenants are still expanding. We've got a very high work-from-office stats, if you like, in Perth. That maintains the same. There's no change to that. Office occupancy, in terms of square meter terms, is actually establishing a new peak in terms of the number of people occupying space back in the city. So it's a healthy environment in Perth. And combined with that sort of supply gap that's emerging, it's a very interesting dynamic. JLL and a number of the agents are predicting quite strong real growth. We'll leave that aside. We're just making sure we can get as much of it as we can and fill our buildings. And this supply gap, it looks like 4 years in duration. The -- if you look at the chart on Page 15, you'll see that the additional supply in those intervening 4 years is well below the levels of the average, the 20-year average. The cost of construction is still very high. There's a lot fewer major tenant moves, and there's hardly any in the 4-year period. So Perth has been defined by a couple of well-known names moving around. There's not many of them. You can see on the chart, there's potentially one out there in 2030. But at the moment, it looks pretty meager on the large front. And apart from that, 4 to 5 years should allow for rents to get to required breakeven levels to justify construction, assuming that supply stays quarterly. The next chart really focuses more on the reduced vacancy and just give a couple of scenarios. So if you start assuming that historical average of 20,000 square meters, you end up with some very good occupancy figures or low vacancy numbers. It should be pointed out, it would be very difficult to deliver buildings of scale inside of 3 to 4 years realistically. Some can say they'll do it. It's very, very difficult to do. By the time you press the button and achieve the DA, the build times, the pre-leases, et cetera, it's highly unlikely to deliver building of traditional scale of 60,000 square meters and so forth. But yes, 4 years would be very difficult to achieve. So I guess the message in all that is that the supply side to Perth core office real estate looks pretty favorable from our viewpoint. If we turn to the portfolio, there were basically 4 assets valued at December, which accounted for about 54% of the value of investment properties. The portfolio reflects an average cap rate at 6.7%, as mentioned by Dave, a WALE of 5.2 years, and an average value of circa $8,300. Dave mentioned the movement in the Westralia Square cap rate, which was out by 37.5 bps. And we've experienced or we're anticipating about a 25 basis point move across the year in terms of cap rates. We're feeling like the lower end of the portfolio, things are bottoming out, and that with the advent of interest rates, some sales and just the general activity in the market, that we can't be too far from the bottom. So value should start to rebound or at least hold. I think in terms of 197, the important thing there was boosting that occupancy from 69% to 82%, showing that it can be done. If we look at this table, our core assets, effectively, Westralia 1, Westralia 2 and then effectively the Mill Green complex, which is the sort of the top 5 assets there, they're in good health. And we'd expect that when the Mill Green complex is valued up at June, there shouldn't be too much movement. I think we might have seen the bottom in that to date. And a reminder that we're sitting at about 82% office assets with the car yards and the car parks making up the balance of 18.4%. So that's really it on the table there. The next page, Page 18, summary of the overall stats. Again, emphasizing the lack of supply coming onto the market. We can actively deal with our vacancies and push quite hard. The fit-out strategy is the way to go, particularly on the Mill Green properties. Then going to turn quickly through to Page 22, which reflects a fund business highlight page, and we've been very active on the funds management front, working with existing assets. We've had lease extensions at 1 Adelaide Terrace. And together with refinancings and tenant amenity improvements, there's been a lot of work going on at 1 Adelaide Terrace. We've been working through right of use and title issues for IKEA against the backdrop of a number of retail or large retail asset transactions. So we've been working very hard on the IKEA asset and feel good about that one. Progressively selling some targeted car yard assets. And what's been surprising there is the amount of inbound interest, if you like. We've been achieving premiums to book value for the car yards. And we've been utilizing auction and direct sale method as applicable. We're focused on providing effectively liquidity to our unlisted investors, our syndicate investors and realizing the right values, and we're very, very selective on the acquisition front, but we're always looking. If we turn to the update on strategy and guidance, it's really a reiteration of what we try to do, which we're very focused on having a clear strategy and doing what we said we will do. We are executing on strategy. Leasing is key. And we have a very active in-house team that has done more than GDI share in the Perth market, and we expect to maintain that focus. FY '25 has started strongly, but that means we need to be even more aggressive as competitors start to work out what's going on. We want to ensure that we're very true to our fit-out strategy and optimizing our terms with tenants, but also looking after them and servicing any problems they may have. Our finances have been boosted by the strong increase in property FFO in line with the leasing strategy. Recycling is underway. And the bottoming out sentiment for the offices market is encouraging. I think we're working on a number of growth initiatives, which we look forward to fund with recycling proceeds and third-party capital when appropriate. If we turn now just on to Page 25, which is the strategy and guidance page. I'd like to say in closing that we might maintain our DPU guidance of $0.05 for FY '25. We're well positioned for FY '25 and onwards, more generally. And the property FFO increasing on the back of leasing efforts is key to that, and we're very focused, as I've said, on executing on strategy and delivering for our investors. Thanks very much and speak to you at Q&A time.

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

You're very detailed in terms of the market backdrop. Just interested in terms of what you're seeing regarding incentives and what you're kind of seeing the trend was across the market?

Yes. I think the best thing, you've got to be a little selective and very individual on selectives because -- on incentives because I can name big numbers. I know, for example, our valuer used a lot higher numbers than we're achieving, which is, in part, why we got comfortable, Andy, with some of the assets not being valued at December we had achieved on rents, on incentives, on lease time, on CapEx. So basically, I think incentives have been, in some cases, increasing. But where you provide the fit-out space, you have a lot more control over that outcome. And we've been in a position to say no to potential inquiry where they've just demanded higher market incentives. So I think it's a mixed bag. I'd say on the whole, we've been able to hold the line on incentives for the better space. And in fact, for shorter term, and remember the fit-out strategy we've got, Andy, which really helps here, is, if we provide a fit out, we expect to give a whole lower incentives. So in some cases, we can get well below market, in some cases, market, but a lot of the time we're achieving, and that's part of the benefit of having our own team. We can actually get quite aggressive on that front.

Helpful. Just in terms of the value. As you mentioned comments just around -- and you saw some cap rate expansion. What are the valuers kind of saying at the moment just in terms of your expectations? Is that taking through what they really think is -- gets it all done? Or are they still expecting that we might see some expansion over the next 12 months or so?

Look, I don't think they know, first of all. I think like everybody across Australia, they're looking for a bottoming of the office asset cycle. So I think the real pressure -- there was real pressure last year, fair to say, probably around June. With the expectation of an interest rate cut, things started to improve, but then it didn't happen. But now you've had the interest rate cut. It starts to just help sentiment a little bit. I think in terms of what we saw across our assets, we've probably hit the bottom intuitively across a number of the assets. What was interesting, we're seeing effectively Westralia Square, it hit 6 and then it bounced up a bit. But because of the amount of income flowing in, the overall valuation went up. So I think you've got to look at it as a mixed bag. As much as valuers like to target cap rates, I think you've got to blend the 2 dynamics together, to be fair. Dave, did you want to...

I'll just add that, remember, Perth didn't have the same -- anywhere near the same level of cap rate tightening because when cap rates really started to run on the East Coast, Perth's occupancy market was quite weak. So it was pretty stagnant. So we wouldn't anticipate -- sort of it didn't come down. It won't go out as much. JLL quoted a 25% widening last year. That was reflected in essentially our assets other than something like WS2, which you would anticipate given the occupancy and the rent and the quality of the leases. It would have had to have tightened from 6.5 to 6.375. But I wouldn't have thought there would be much of a widening, particularly in the backdrop of potential interest rate cuts.

Just a final one for me. Just specific, but you just mentioned there in the deck, just in terms of -- for the outlook, just a proportion of distribution potentially to be paid out in capital. Just wondering if you could give a little bit more color on that? And also just what you're assuming into kind of FY '25 for the weighted average cost of debt?

Just the answer on out of capital is very tax driven. Because we are front-running tenants and putting in spec fit outs, we do have quite a big tax depreciation charge. So if you have a look at the half year distribution, from a tax point of view, it is all out of capital. And the way we look at it is -- and we have various methods of funding everything we do. Rent being the predominant one, fees from managing the funds, and distributions and dividends out of the co-living, they all go into the mix. Then going out the other side is interest, a few op costs, distribution and CapEx. And we balance that. So you can call whichever item you want CapEx, but from a tax -- I mean, capital. From a tax point of view, the depreciation charges, meaning that there's not a lot of income from a tax point of view. Weighted average cost, you can see, we've basically got $175 million with a 3.6-ish percent rate. And then we've got a $75 million swap at 4.55%. And we've got a -- until June, we've got a $100 million cap at 4.25. And besides that, the rest of it is floating. So not a lot of floating now except we've got the cap at 4.25. And then from June, that cap falls away.

Your next question comes from Edward Day at MA Financial.

Just interested in your comments around asset sales. You've clearly made some good progress with some of the car dealerships. Just wondering if you can provide some color around active campaigns that you have at the moment or are planning? And what that might equate to from a dollar value this half?

We've definitely got more car yards that we will sell. We're active on a number of them. We've got some non-office assets that we're active on. As we speak, Ed, in terms of JV-ing core assets or selling a chunky noncore office asset, there's nothing imminent. And I think part of that is we haven't wanted to throw stuff out at the wrong prices, and we will die in a ditch over that because we don't have to. And we're going to be very price sensitive to what we believe is the right value. And that's the strategy we're taking. We do have our belief that there's going to be a more balanced hand in negotiations from a landlord perspective, particularly as that market starts to tighten. We think that we'll start to see some decent interest and have some proper conversations very soon.

Okay. And just one more. On your, I guess, your fit-out strategy, so that's really coming through 197 St Georges and WS2. Can you just talk to the capital requirement still to outlay there?

We tend to use a number of 10 to 15. That's for -- basically for a nonsignificant project that we haven't announced.

And that's a sort of 12-month time frame, is it?

Yes.

[Operator Instructions] Your next question comes from Selwyn Chong at Core Properties. We are currently not getting any audio from Mr. Chong's line. We do have...

My question has already been answered.

Thank you.

Your next question comes from Peter Davidson at Pendal.

Just a query. Would you not consider selling one of these major buildings and just significantly buying back stock? I mean you're trying to get a huge discount to what appears to be a reasonably robust NTA, you've tested it. So I'm just wondering whether you could have executed a major sale and buy back quite a chunk of stock?

Dave, I'll do it tomorrow. You got a bid for us? Like, I mean, it's just a matter of getting someone interested to buy that volume of property. As you've seen, there's been a dearth of sales in Perth. They're hoping it turn soon. But it's just on -- you haven't been able to transact, but we'd love to see a real bid.

Okay. So it's good to know the lines are open, are they, [indiscernible]?

Absolutely, mate. While the market is improving, what we can do is make the assets look better by increasing the occupancy and the WALE, which is what we're doing, making it more attractive.

Very good. Well, we look forward to progress.

Thanks, David.

Thank you. We are showing no further questions at this time. So I will hand the call back for closing remarks.

Thank you very much, everybody, for joining the call, and good luck with the rest of the reporting, too. Thank you.

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