GDI Property Group (GDI) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the GDI Annual Results Telco. [Operator Instructions] I'd now like to hand the conference over to Mr. Stephen Burns, Managing Director and CEO. Please go ahead.

Good afternoon, everybody, and thanks for joining the GDI call. I'm joined by David Williams, our CFO. And I'd like to start on Page 3 of the presentation for you to follow. It's been a good year. We continue to drive the FFO growth, most notably 25% overall in terms of the total FFO to $44.5 million. Strong growth in the property FFO of 14.8% and co-living the business that we see that along with our partner, has provided strong growth this year, which was facilitated by the addition of [ Marimba, ] but 46% increase on last year. I think importantly, we've delivered strong results over a 3-year period by really paying attention to executing on our strategy, and it's very important to us. So what we say we're going to do, we want to deliver on -- the NTA has had a marginal increase per security, not many assets revalued in the period. We've had strong leasing results with over 20,000 square meters of leasing achieved, which puts together 3 very solid years of leasing, noting that post balance date WS1 and WS2 moved to 100% leased. We closed over $150 million of asset sales at good prices, I'd note, in the funds business, and we're focused on continuing noncore asset sales. And just a reminder, that's at least $330 million since December '24 that we've been able to get away at good prices. The co-living business is contributing meaningful profits now and still leading our in excess of 20% return hurdle noting the big increase over last year. The business is now a really stable platform upon which we expect to seek out further growth at the operating level. Gearing at 33% with a $21 million reduction in drawn debt. Post balance date, the car yard sales completed, and we're sitting there with about $90 million of liquidity. And today, we have announced a 5% buyback. Turning to the next page and speaking of strategy. The important thing has been to lease up the core properties, which is where the bulk of the value sits both WS1 and WS2 are now 100% leased, including a recent heads of agreement for Level 10 on WS2, reflecting both an improving Perth office market, and our expert leasing team as well as utilizing our targeted spec fit-out strategy, which has been a feature of previous discussions that we've had with the market. There's no doubt that the per office market is improving, and GDI has outperformed the market in terms of overall leasing. The strength is going to continue, and it's going to be driven by supply shortages on the office side, expanding tenants and demand. We'll get to that later on, but also the improving rent dynamic. I mean, all of it is underpinned by a strong WA economy as well, which gives us further benefit. WS2 was a new build without a tenant precommit. The FY '26 FFO increased by some 42% as the property stabilized to $6.1 million. WS1 involved basically the letting of most of the building a few years back. And over the past 4 years, with government leasing half of the building and the balanced multi-let to corporates that has a 6-year WALE. And in the FY '26 year, FFO increased by 9.7% to $29.3 million. If we look at the repositioning of the core properties, which specifically relates to the 3 on the Mill Green site, -- it's been a very busy period of Mill Green, completing over 31 leasing transactions and again, utilizing our spec fit-out strategy. at 197 St Georges Terrace, we lifted the occupancy from 87% to 92% over the year. And we only have 1 full floor of office remaining plus suites. The vacancy sits mainly within retail. The FFO increased for the building from 29% to $16 million. At $5 million, we dealt with just under 3,000 square meters of NLA lifting the occupancy from 86% to 93% and as mentioned in previous reports, we're working on a master planned DA for the entire site, which encompasses or buildings. The initial stage is to focus on 197 St. George's Terrace ground level amenity. Longer term, the site will benefit from the improving dynamics of a mixed-use approach with flexibility between users. Turning the page on to the -- some of the other assets, the carparks. They've been steady, generating around $4.5 million of FFO for the year. Notwithstanding petrol prices, they like driving the work in Perth, so it's been robust. We like the carparks because cash equals profit and because they represent income paying development sites that we can build on top off, which is similar to the approach we took with WS2. The only differential would be that it's most likely to be for living -- for a living years. We're very focused on optimizing the carpark uses for prospective development or sale but also for partnering with an appropriate operator. Murray Street has benefited effectively from increased design of retail in the area, together with dining and entertainment. Wellington Street is likely to benefit from the Perth Hospital expansion which we've estimated adds an additional 920 trips per day and also the student accommodation in the precinct. If we turn the page again and just looking at the co-living JV. There's been a very strong year with FFO up 44% to $9.5 million. The Moranbah acquisition in Queensland for $18.3 million with circa 196 rooms as being bedded down, and there's more growth to accrue from that once we get that working from an operational viewpoint. The Norseman expansion. Basically, Pantoro growth has led to an additional 140 rooms for Pantoro with more to follow. And as mentioned before, we're generating in excess of our 20% return hurdle. We remain very focused on the targeted expansion at the existing villages and acquiring villages where we can get operational improvements. The purchases are to be funded within the JV or external capital, and we'll retain that discipline in terms of how much balance sheet exposure we have. We now believe we have in place a very strong platform that can deliver additional operational gains and accommodate further selective growth. Turning to the next page and reverting to our strategy, which calls for asset sales. And this year, we sold the remaining car yards and an industrial property, generating over $150 million. We delivered very strong returns to our investors in the 2 funds. And our balance sheet currently has over $100 million of noncore assets, and we're focused on continuing our sales strategy. Perth is starting to see some office sales, albeit some of the campaigns that we mentioned last results haven't come to fruition, which was probably anticipated. Subsequent to that, we've seen the sale of Work on East, the $79.4 million and Kings Square 3 for $83 million. They just actually give us the feeling that there is some liquidity in the market. The increased focus on the supply gap, the only market in Australia office market in Australia, where there's no supply for the next 3 years is adding to that story, and we feel quite comfortable that we're moving to an environment where asset sales of good office properties will become viable over the next few years. I'd like to hand over to Dave just to talk through the financial snapshot.

Good afternoon, everyone. I think Stephen has actually mentioned most of the headlines. But to reiterate, FFO for the year was $44.5 million. Looking back to FY '23, it was FFO $28.1 million. It's been over a 16.5% CAGR growth since that time, which we're very proud about. FFO per security of $0.0824 maintained a distribution of $0.05 and confirming FY '27 intention to pay a cash distribution of $0.05 as well. All our assets other than a small [ 1188 ] were revalued during the year, either at December or June. The the cap rate environment has been pretty stable in the lack of any transactional evidence of note other than one Stephen mentioned that they were a little bit more fringe, not the core premium grade -- prime grade stuff that we have. So no real change in [ Bell ] and there hasn't been any change in the value of our the update on our assets. In fact, actually, Australia Square were now slightly in December. With the sale of the dealerships which we co-own, we've got 47% of. We were able to reduce our debt by $21 million. And as Stephen also mentioned, that liquidity increases post balance stake with the final settlement of the 5 dealerships that has now happened. The gearing is reduced to 33%. Stephen will talk more around the leasing and the portfolio occupancy is at 90% with a 4.2 years. The contributors, Westralia Square up nearly 10%, the basis of full income now. And the carpark performance does generated quite a bit from the car park, which is noncontracted the public carpark there. Westralia Square, obviously increasing and will continue to increase not at that rate, but it is now a full occupancy, 197, were really pleasing. We've lifted that. There's very few switch lift in that. There's 1 full floor and that's not much else. Carparks were stable, and there's the opportunity continue to grow through incremental at 197 as the market improves, 5 Mill Streets still got a little bit of vacancy and obviously, tackling something like 180 Hay. The Funds Management division in FY '25 had [ ICARE ] for the full year then a big disposal fee that generated in total, over $4.3 million fees that weren't in this year. So there was a reduction in the Funds Management division FFO. FY '27 will benefit from the performance fees that will be paid on the dealerships that we just settled. And Stephen has already spoken about Co-living JV. One of the things I would like to highlight we go back a couple of pages, which we're particularly proud about. At South Hedland, we've got very strong earnings. But importantly, we've been able to put in place some take-or-pay, which is -- we haven't been there. So it's -- there's a little bit more consistency in forward-looking income in that for a chunk of those for a chunk of those rooms, which is pleasing. Turning to debt. This time last year, we had just announced an extension and increase to the facility in June, we extended tranche A from a February expiry to February '27 to February '29, expiry. And as previously said, we've reduced the -- and we've increased the undrawn by $21 million by reducing the drawn debt. Swaps and interest rates, we've got a cap and collar 3.75%, 2.65% that expires in December for $100 million. That's been replaced forward-looking for 12 months with a cap at 4.5%. And then we've got callable swaps on $175 million. If we look at the macro backdrop to office within the Perth WA region. We're feeling pretty good about it. There's obviously a strong investment, export growth, robust employment and population growth. and strong spending seems to be a bit of a characteristic to the WA statistics, but it shouldn't be underestimated. And I think WA is well placed to benefit from structural forces driving demand for commodities, particularly the latest themes of AI capital and the expenditure boom and the global electrification impacting obviously copper, aluminum, uranium, nickel and rare earth. So -- we don't think WA is going into a [ hole ] quite the contrary, all our indicators are from the growing tenants, which we're about to get to in a minute, you'll see that we're quite strong on that theme. We're feeling it very much in the micro dynamic of when we're negotiating with tenants. And we feel that the macro backdrop is very strong. Turning on to the next page and looking at some of those key office trends, I guess, it's really important to stress that the market is continuing to strengthen. This is not going to be short-lived. The supply gap is on the minds of tenants, they're trying to pull negotiations forward. It's quite common now to look at briefs in the market. And for us to say we simply don't have the space. The other thing is if they want more than 1 floor together, particularly if they start -- they're looking in premium, they're going to have a problem. There's definitely a sharp reduction in contiguous space in premium category. The leasing activity is very strong in A-grade, which accounted for nearly 49% of the activity. And overall, leasing deals are up some 96% for the half and represented just under 67,000 square meters. And that tells you that there's been a bit of a key point reached where the demand for leasing deals has gone up so quickly over that period is fairly important in terms of defining where we are. Quite often, the tenant reps are not getting their fees anymore. There's quite a bit of attention around incentives. They're still there, like the Brisbane market, but it doesn't impact Brisbane from being other sell office buildings. The tenants have been continuing to grow with over 63% of the relocating tenants expanding. And from a GDI perspective, we've been very tactical around renewals to ensure One, we optimize the rental growth in the forecast in the strong years, which will sort of be between 27% and 30% and reducing incentives and targeting higher rents. If we turn to the next page, you would have seen the supply gap chart that we've shown and reemphasizing no supply in the next 2 or 3 years. Rio has popped up again as a potential heads of agreement may have been signed for 15 the Esplanade in the 2030 year. And then on the chart, you'll see 2 bars basically reflecting the backfill space from Rio, should they decide to move -- and what will be interesting there is seeing what sort of rent Rio was able to justify or remove. If, in fact, it does, our view is still that construction rents are some way off. If we use a breakeven construction rent of around $1,260, we need growth of around 43% from where they currently sit. But it's worth keeping in mind that in 2004 to 2009, the last 5-year supply gap, the rents grew by about 290%. So there is a tendency to under [indiscernible] and it's worth noting to the Perth rent they pushed through the $1,000 a square meter mark, not that we're calling for 290% increase, but it does give you some context. And most will remember the tailwinds that Sydney office got from withdrawals caused by the Metro. Perth really is the only national market with 0 new supply on the horizon in years '27, '28 and '29, and they're starting to use that word withdrawal in Perth as well. So Interesting times, we believe very positive times. If we turn on to the next page, there's good leasing activity, which is obviously a precursor to demand. The tenants are expanding. We're seeing the likes of the defense sector with moved inquiries, circa 15,000 square meters in the market. We're seeing inbound suburban tenants. 1 mode to be taking 4,000 square meters in Q Bay 1. Q Bay 1 was the building that basically had half the premium vacancy, which is now being reduced to only a few thousand. So that has come right in. The lithium players are coming back, particularly in West Perth and large active briefs in the market ranging between 4,000 to 6,000. There's at least half a dozen of those at the moment. So it's getting harder to find the contiguous space, particularly in the premium and the A+ space. And still, we're seeing that the demand for fitted space is important and involving around 74% of deals, which plays right into our hands. And incentives are tightening, albeit that's a varied discussion because it depends on whether the space is refurbed or whether it's a spec fit out or whether it's an existing or a new generation fit out. But basically, the trend is the same. It's in the right direction for our economics. If we turn to the next page, and we look at the market, there's several large deals that occurred in the first half of '26 that are tightening the market. We basically saw Western Perth, which was 20,000 square meters, Allen for 3,200 [indiscernible] for 4.5 and Lavan, which is a legal firm for just under 5,000, all representing a flight to quality. And then, of course, if the precommitment by Rio for 57,000 square meters come through, which is currently believed to be ahead of arrangement for head of agreement for Lot 5 and that represents a consolidation. One of the things we look at and it's referred to on this page, we look at a CBRE vacancy tracker, which points to a lot of vacancy than the PCA numbers. The second quarter of 2026 showed a sharp reduction, circa 21% for the total market over the first quarter. So that's quite marked. And most of the movement or reduction is in the premium and the A-grade space as you'll see in the table there. If we turn on to the next page, it's really just looking at the impact of the absorption scenarios and not shown on this chart, but we are going to remind you that the commodity prices look robust across most of the areas that impact WA. If we turn on to the property page, which is Page 19, there's 1 noticeable difference between this and prior results. And that is that the -- we've got 7.6% exposure to carparks apart from office, having sold the car yards. So there's no more car yards in the portfolio. The valuations that we had to the half related to 197 St. George's tariffs came in at $234 million, 7% and it's up $8 million, same cap rate reflects the increased growth and leasing. Now at least, as you've seen, over 92%, and the Wales moved out to 3.3 years, which sits very well with our thesis on the market because we'd love those tenants when they expire in 3 years to be paying the higher rents. So that's good from our perspective. $55 million came in at $54 million. The cap rate basically the same at 7.25%, and the value was up $1.5 million the vacancy there is around 93% in the WALE 2.3 again, giving us access to the market growth when it hits its most desperate phase. The reality is that we're more focused probably on divesting than acquiring in terms of the balance sheet positioning, particularly our noncore, as we've emphasized, or joint venturing good assets with the right parties. Of course, we're always looking for assets, particularly for the Funds Management business. And that's not necessarily in the unlisted syndicate side. There's other forms of investment, particularly with institutions and not just in office. And we're very cognizant of the fact that we need to invest in our existing assets very carefully. Turning on to our strategy page, which is basically Page 25. I really want to emphasize that we're focused on doing what we say we will do and executing in line with strategy. It's very important to us. And I think we've demonstrated that over 3 years. I think, as Dave mentioned earlier, we've increased the FFO over the past 3 years from $44.5 million from $28.1 million up some 58%. We're very focused on the lease-up and positioning for rent increases with the strengthening market, and we do believe we have the best leasing team in the Perth market. Balance our liquidity needs with -- between growth and investment in the portfolio and improving returns for shareholders. Targeted asset sales and partnering, noting that $330 million has been achieved since December '24. And and we have in excess of $100 million of noncore assets to deal with. Our businesses are in good shape, have a solid liquidity and the outlook is very strong in our minds. We turn on to the next page, which relates to our additional focus. It's very much around the Property division long-term returns evolving the funds management product, moving away from the unlisted syndicate star, which doesn't set office funding requirements. We're targeting operationally led growth improvements in the co-living business and meeting our 20% return hurdle, maintaining the 5% distribution per security is really important and as mentioned today, executing a 5% buyback that we've announced. That's basically -- that's it from me, operator, if you'd like. I'd hand it back for Q&A, if that's all right.

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

First question, if I may, just on the HLA you've signed at the U.S. 2. Just interested in a little bit of color on rents achieve when it comes online there.

Yes. WS2 it's ahead. So we've got to be a bit careful there, Andy. But I would say [ Hay heights ] 5 years and an incentive about a low incentive .

[indiscernible] comes online [indiscernible]

Well, when we've completed the fit out, which is probably in January.

In terms of your view, you mentioned in your remarks just in terms of eating out similar game to guess at the operating level just some color on kind of what you're thinking there?

Really just business as usual on that front. We pick up assets like a Newman village or a Norseman and look to increase the occupancy, which is what we've done, increase the occupancy, reducing the cost, improving the profitability. It's really that sort of a focus, not just to pick up and switch it out. We're really looking to gain additional income out of the assets by improving them and bringing in the operational methodology, which is based around branding, ensuring that we can look after the start of the resource companies in remote places and get the right satisfaction. It's not easy to do. You need remote staff and you need proper teamwork, but that's the model. And in all cases, that's improved the earnings of the villages that we've acquired. So that's really the model. If we find it down an outer that's not too big, we'll have a stab at doing that. But before we did, we'd make sure we've got a very good plan. I mean, with the benefit of our partners, we get to see all the assets that come up. We would look at so many, it's ridiculous, but we only land on a few that we believe with our strategy.

Okay. Just a final one. You talked about construction costs, I guess, in terms of meaning there's not much coming from the pipeline broadly for the office market. I guess just looking at [indiscernible] a little bit slightly different, but I'm just wondering if there's any timing kind of thinking around submitting plans and what you're kind of thinking there at the moment? .

Yes. We're master DA. We're going to -- we're looking to put 1 in fairly soon. And noting there's already been 2 on the site, right? So it's nothing new to put a DA in. But what we're particularly looking at is something where we have the flexibility to do things in stages, right? And we've mentioned before the first stage would be an extension of our spec fit-out strategy with regard to 197. We've also mentioned that we would look to do an improvement on the retail component and target the available market there, and that particularly impacts 5 Mill. And then the dream or the option value really relates to 1 Mill, which is, in fact, putting a mixed-use structure up on top of that, which, if you were able to get it right, a hotel, it's very attractive office, it's becoming increasingly attractive. It wouldn't work at the moment. So it has to be -- it's a future forecasting component, but being able to flex between what is the best economic use is really key to it. So if you think in terms of timing, we'd like to be available to deliver something into that strong market, say, 31 is most likely the target date we'd use to something on 1 Mill, but that's way off yet. And keep in mind that for something like that, it has to rely on improved building technology and breakeven rents that give us some sort of a cost advantage and as we demonstrated with WS2. So it's not something we'll rush into. But through a planning process, we can forecast and look out and if you have the right flexibility, you don't even have to build off as if it turns out not to be right. So that's the approach we're taking.