Thank you for standing by. Welcome to the GDI Half-Yearly Results Telco. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Stephen Burns, Managing Director and CEO, and Mr. David Williams, Chief Financial Officer. Please go ahead.
Thank you. Thanks for joining the GDI call, everybody. I was going to do a run-through of the preso, starting with the introduction page. Just go through some of the highlights. Clearly, we've been very busy on the leasing front, which is our key imperative because that's the value equation that will help with all of our assets and also with underwriting the income that we look to earn. I think in terms of six months, there really was a big settling of the workload that we've achieved through the latter months of the year, and we were really able to push a lot of the heavy leases towards signing and heads. Obviously, one of them was fairly outsized, but it was a very important one for GDI. Of course, by that, I mean the Minister for Works or WAPOL.
It was one of the largest lease renewals done in the Perth market last year, if not the largest. I think the importance of that deal was really significant in terms of being able to underwrite the values of our two core buildings. And I think that that also gives us the momentum to be able to push forward with additional leasing that we've been able to experience across the portfolio. But importantly, some of the problem areas where we really needed to show some progress, and it's enabled us to do that. Generally, we're finding that the activity levels are high, both for split and part floors. We're able to effectively negotiate better terms on the splits and for the smaller tenants, but we're still able to achieve whole-floor letting. So I think that the undertone for us on the leasing side is very strong.
I think part of that is because we're probably positioned in the A market, which is a bigger market for tenants than just premium. We've also got quite a diverse offer, which goes from boutique to fairly standard property as well as offering differing price points. I think that we're able to gather quite a bit of experience from that and lease it up. The outlook on the leasing front still feels good. We still feel like we're able to close leases, and we've got a number of significant ones that we're working on now. During the period, obviously, we completed the refinancing. Obviously, that introduced a second major Tier 1 bank, and that's given us additional capacity. Distribution was maintained for the period, and we're not looking to drop that or change the guidance. The NTA was moved from AUD 1.25 to AUD 1.20.
And part of that was cap rate movements between -25 basis points and +75 basis points. Co-living? Co-living's doing well. We're very happy to be able to target to generate the 20% return on invested capital that we set out to do. And most of that is coming from just getting operationally smarter, improving the client base, and ensuring that we're optimizing the income at the co-living level. But turning the page, with regard to Westralia Square 1, effectively, we pushed the term out for most of the space out by six years. I think what this does is it helps the tenant effectively anchor the lower lift bank, which is nine floors. It gives them their own access. It's obviously really tactical from our viewpoint, being able to utilize the surrender of the Euroz lease and our own space and provide the government with a solution.
So we feel very good about that. It probably happened earlier than we thought we'd be able to secure that renewal, but nonetheless, we'll take it. We also introduced a couple of other tenants in Hexagon and Infosys. What that meant was we were basically able to stitch up most of that building with only 700 sq m to go, and we're feeling very good on that remaining space. In terms of WS2, look, it's proving to be a great investment. It's very much a boutique offer, and not only the unique timber helping it, but also its position. There's not many brand new smaller floor plate buildings. Most people go for the larger floor plates, and not every tenant wants a massive floor plate that resembles a paddock. Some want the tighter spaces.
We've noticed with some of ours that they look to create internal stairways and all sorts of sightlines to create a much better environment. So we're looking forward to see how the Arup fit-out goes. That's over three levels. We think it's pretty unique, the sort of features that they're looking to put in. We've got two floors to go on WS2, and we've got a very renewed and targeted strategy to attract a number of the right tenants there, and it's a very full list. I think in terms of the returns that we're looking to achieve on that building, we're basically getting premium in the top floors. So that means you're getting in the upper 800s in terms of rents for net face, which is very good for the Perth market.
We don't think the 6.5% cap rate is onerous, given the scope to contract that a little bit when it's fully let. In terms of the co-living JV, effectively, as mentioned before, we're able to revamp the offer at South Hedland. We feel very good about potentially adding some additional rooms there now that we've got the formula right. Norseman has been busy. Basically, Pantoro has been taking up a lot of the minimum rooms under its agreement. And effectively, we're not seeing any directly impacted exposure from nickel issues and indirect at this stage. We don't expect to, given that Pantoro is gold and South Hedland is an infrastructure town. But you never know how it might impact you. Just separately on that point, we're not seeing any impact on our office space either in Perth.
We feel confident on being able to deliver our targeted 20% on invested capital for the JV. The refinancing, happy to have locked that down, introducing the second bank, undrawn capacity of circa AUD 49.4 million. More on that as Dave takes us through the financial snapshot.
Afternoon, everyone. Turning the page. NTA, as Steve mentioned before, has gone from 125 to 120. All of the wholly owned assets were revalued, at 31 Dec. They actually went up slightly, increases at Westralia Square on the back of the WAPOL leasing deal and WS2. We're offset by slight decrease at Mill Green with a cap rate expanding 25 basis points above AUD 5 million and 197, and a circa AUD 8 million hit at the Wellington Street Car Park. Weighted average cap rate across the portfolio of 6.6% and an average rate per square metre on the office component of our portfolio of about AUD 8,000. Gearing of 32%.
We also quote what we call the principal facility where Westpac and the second Tier 1 bank, CBA, only have security over the wholly owned assets. That is a 38% and an ICR of 2 versus covenants of 50% and 1.5x. Importantly, we have very little interest rate exposure for calendar year 2024. We benefit from downside below 4.25%, where the bulk of our AUD 200 million has got a 4.25% cap. So we can't pay more than 4.25%, but if rates drop, then we essentially float below that. FFO of AUD 0.0245, slightly below our IVI.
In total, it was AUD 13.1 million versus December, the prior period, of AUD 14.1 million. And distribution maintained at AUD 0.025. Specifically talking around the contributors to FFO on the next page, Westralia Square contributed AUD 9.8 million. There was a drag from WS2 as we started paying outs once PC was received. With quite a lot of leasing falling into this second half, that contribution starts to accelerate. Mill Green was AUD 6.8 million versus the prior period of AUD 8.6 million. Stephen will talk about it later, but 197 has become a re-leasing story. It's going really well.
We're about 40% of the way through that campaign. There's a lot of fitted-out space, so as they're leased, people are paying rent straight away. The car parks performed pretty much like they did. They've been performing very well. Revenues are up, but outgoings and expenses are up a little bit more, particularly at Wellington Street. The funds business, how we report FFO on that, is we report the fees that we earn on the bits that we don't own and the distributions on the bits that we do own. The distributions in the two funds were slightly down from the prior period, largely because of higher interest rates in those funds.
The co-living delivered profit before tax of AUD 3.7 million, but we have taken the joint venture has taken a provision for tax in one of the entities of AUD 1 million, of which half of that is our share. South Hedland, at an operating level, pre-corporate overheads, delivered AUD 6.5 million in the half. If you recall, we paid AUD 27 million for it. It's certainly performing well when you look at what we paid. The interest expense is significantly higher in the period. It was AUD 7 million versus AUD 3.8 million 12 months ago. Talking more about interest rates, as Stephen mentioned, we extended the facility through to December 2026, introduced a second Tier 1 bank, and increased the size of it by AUD 25 million.
For the period ending 31 December 2024, if you have a look at that interest rate caps and swaps protection bit, we have AUD 50 million where we don't pay more than 3%. We have AUD 200 million where we don't pay more than 4.25%, but we float below that. And then we've got a AUD 75 million swap at 4.55%. So that gives you an all-in current, all-in interest rate cost, given that amount is basically where our drawn debt is of about 6%. I was asked that, so. I will now hand back to Stephen.
Just in terms of the Perth market overview, everybody knows about the strong nine consecutive quarters of positive absorption. We've been able to compete well with our CBD assets offering space at varying renewal points. I mean, focusing in on 197, that's the one where we've done around 40% of the task, but there's still a lot to go. We're able to offer more competitive rents to competitive product. We can basically get the space up and ready quicker and get the cash in. So we feel very comfortable about being able to complete that job. Mentioned before that the A-grade tenant base in Perth seems to be a lot deeper than the Perth premium representation, and that's being borne out in the way that we're able to attract tenants. And a lot of the statistics you'll see from the Perth market on the next few pages will reinforce that.
As mentioned, we're not feeling an impact from the commodity price decline nickel/lithium players. So that's a positive at this stage. But we're keeping an eye out for anything that would suggest that there would be an impact from either their consultants or suppliers or any part of the office market. If we turn to basically the chart on the vacancy rates, we're seeing a stabilization in that rate, which we think will probably sit between 13%-15%, noting minimal subvacancy in the Perth market. The other thing worth mentioning here is that they do reflect the PCA boundary changes, which you're probably aware of, reduces the space in the CBD from around 1.88 million sq m to about 1.7 million sq m. But keep in mind, these CBRE numbers reflect those changes. The work-from-home factor, as previously mentioned, has not been a major issue in Perth.
That combined with expanding tenants and also tenants moving in from regional areas into the core to get better amenities seems to be a very positive trend for the Perth market. We're not expecting to see that change anytime soon. We're not seeing indications that it'll change anytime soon. That's a good outlook on that front. In terms of the inquiry levels on the next page there, obviously, we're seeing good levels or robust transactions, both at renewal and new tenant level. As mentioned, the tenants have been expanding. We expect that to continue. If we turn over again, capturing some of the stats on the expanded tenants, we've benefited from that ourselves. We can rattle off any number of expanding tenants, but WAPOL and the Minister for Works is a clear example of that.
A number of our tenants in 5 Mill Street seem to expand quite rapidly. We've noticed that as well. If we concentrate for a moment on two other factors, one being the supply pipeline, it sort of looks like 2% a year for the next couple of years, so totaling circa of 4%. There's not much stock scheduled to drop into the market. There are a couple of potential outliers from 2027 onwards, but basically, the supply equation appears relatively below average. In terms of the transaction volumes, I guess like the rest of the country, volumes are muted. Of course, there's been a few attempted sales or people looking to consider a sale, including ourselves. The best way I would characterize it is there's a lot of opportunistic buyers.
The vendors are at the point where they decide that they either have to take the sale or are interested in the pricing. We'll probably see that tested over the next year. If we look at the portfolio of GDI assets, as mentioned, all our wholly owned assets were revalued at December. We've basically got 91% of our office portfolio in two key sites, representing five buildings. We've got around 20% of the total portfolio would be non-office, the car parks and the car yards. And we'd have around 9% in non-core assets that we could look to divest over time. In addition, we've got the AUD 33 million, which is now a AUD 37 million investment in the co-living JV after that six-month profit is incorporated in there. We still feel that the cap values are around about 1/3 of Sydney.
The yields, historically, 200 basis points higher than Sydney, historical average of around 150 basis points differential. We still think that the Perth market is well placed on a comparable basis, and it's at a different stage of the cycle as evidenced by all the leasing inquiry. That's the property portfolio. In terms of the individual assets, I've probably covered enough of the individual assets, but I might just highlight one or two things. Obviously, the limited vacancy in Westralia Square means that we've got a fairly small task there. WS2, there's two floors to go. 197, that's our focus. And basically, we've eroded about 40% of that problem, but it's still a lot of work in hand there to get that completed.
5 Mill Street, virtually full, turning over the page, 1 Mill Street is really a prospective focus for another build should we be lucky enough to get an agreement for lease with a target tenant. And that really covers off on the assets there. If we turn over the page into the funds management business, Dave covered off there. There wasn't really much to mention. There are a number of promote fees to bring home in some of those vehicles, particularly the ones that are non-office. If we go to the co-living JV, just reminding, we've got over 500 rooms there. We feel quite positive about this. We are looking at a number of prospective opportunities to acquire. Anything there would be funded within the JV and with a syndication down the track.
But we're very careful about the way we spend the money on the co-living JV, and most of it tends to be around operational improvements and things that we can control. Just one last bit to go through, which is really, again, highlighting our business model and the way that we think about business. We think it's really important to come back to this page. If you want to mark us on our strategy and the execution, I'll turn you to the next page. And really, we feel like we've been able to execute on a lot of the issues. What does that leave us? Obviously, it leaves the positioning for growth. But first of all, we'll need to do some recycling. We have identified a number of assets that we'll be looking to transact when the environment is slightly more favorable.
In terms of positioning for growth, it's clearly around being able to do a few more of our timber and reuse building opportunities, taking advantage of the market this timing, and effectively to concentrate very much on getting the leasing done. So guidance is the next point. Just in terms of the DPUs, we're comfortable with the AUD 0.05 forecast for the full year. And we're obviously looking at a much better property FFO outlook for 2025, given the timing of the income dropping from all the leasing that we've achieved. So thanks for listening, and we'd be happy to turn to the Q&A.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask a question. Your first question comes from Andy MacFarlane with Bell Potter. Please go ahead.
Hi, Stephen and David. Thank you for your time. Just a couple for me. Just in terms of the moving parts for earnings for 2H 2024, just wondering on how that kind of builds on. First off, obviously, a bit of leasing gone on, but just wondering if you can talk about the components of earnings ahead.
Some of the more substantial leases that have been announced that commence in the second half, Andy. Capricorn, which is top two floors of Westralia Square, their lease has commenced. Hexagon, who took the fourth floor at Westralia Square, their 1 January commencement. So Capricorn was a February. And Infosys, which we also announced is due for a March start, but we have to do some separation there because they're not taking the full plate. So it wouldn't surprise me if they came back and pushed for an extra month before lease commencement. And then at WS2, Arup with the three floors, they start in February 2024. Navitas, that's also been announced, is April 2024. So they're the lumpy ones that drop in beyond where we were.
Thank you. Just on your valuations, obviously, 5 basis points of movement over the half. Just wondering on where you based on what you're kind of seeing in the market and out there, where you have a sense of that getting to for the full year.
Asset valuations?
Yeah. Thanks.
I think, Andy, look, like most markets, you probably need a sale to prop for anyone to really believe them. There's been a number of properties in Perth that people look to test the market with. Nothing went through. At some point, that'll give. I think the way I look at our assets, if I primarily take the view that Westralia 1 and Westralia 2, approaching that mature phase as we lease them up and with the long WALE outcomes that we're getting on those properties, they're a good indicator for how we feel about the top end of our portfolio. And we feel pretty comfortable having just had them revalued, the cap rate of 6% for Westralia 1 with over an eight-year WALE and government tenant in there for a third of the building.
Half the building.
Half the building, sorry. Then for WS2, we feel really good given we've got two floors to get. But what people aren't fully seeing is the rent that we're achieving. So we think that that story will be able to help underpin that value as well, as I mentioned, with a little bit of scope for that cap rate to improve. So I mean, we don't think that a 6.5% and 6% cap rate is onerous, and particularly if we look across the comp set, given our WALE, given the caliber of the covenant, we don't think that's onerous at all. In fact, we would argue that it's fine.
If you have an overall, if someone drops a property into the market and it has a higher cap rate, well, then you just need to be able to justify why that has happened and whether that property has benefits or negatives relative to our assets. But we feel pretty good about where the assets are given we've got them all valued.
And then the other major assets, of course, the Mill Green that not that long ago, 197 was on a 6.75% cap. It's now a 7.25% cap. 5 Mill Street's also expanded. 5 Mill Street has always been well let, always going to have a short WALE . Small tenants either renew, they grow, and go to a different suite there, potentially across to 197. But it's always going to have a pretty short WALE. And it's a great location, very good asset. So I feel really comfortable about those two at 7.25%.
Yeah. I think the thing to think about, Andy, in terms of our assets and where we sit is if you look at WS1 and WS2, we're not going for the massive towers. It's not like we're holding billions of dollars of property in one asset. We're much better placed to be able to tap the deeper end of the market, which really is the upper A-grade market in Perth. That's probably the place to be. And we feel that we've got the right sort of assets that meet that. When it comes to things like Mill Green, etc., they're a bigger player. At the moment, it's a reletting story, but it's completely underutilized site. So there's a bigger story to catch a value there, although it could take time to be able to do that. That's the way we think about it.
Good segue. May I just kind of get your sense on what the strategy is for Mill Green? I know you've been talking to longer-term development plans, but has anything changed there in the half or how are you thinking about that still going forwards?
Yeah. Absolutely, Andy. If you had to pick one number to sum up what you've got to do for a development, it's break-even rents. And you've got to be really competitive on being able to achieve that. I think the thought process we have is at first, you've got to be able to attract a tenant and have them pay what is going to be a high rent because it's going to be underpinning a development. In our case, obviously, we wouldn't have to go into the ground necessarily. In fact, we've got schemes up that permit that that does not happen. We've got a fairly good flex on how we would put a timber building up there. The size of tenancy that we would look to would be fairly locked down as well because we wouldn't do a thing.
The question is, would an economic rent for a development be achievable in our view? I don't think we're far from it. Ultimately, you have to have a tenant that would agree to it, Andy. It's chicken and egg. I don't think that the rental levels required are much higher than we're achieving now.
Yeah. That makes sense. Just in terms of having some detail back from the values and probably your own sense, given you're pretty close to things there. We've heard different views so far reporting season from different companies. Do you have a sense of the overall under-renting on your portfolio, and does your sense of it differ to the value of sense?
I'll answer that. We're pretty much at market now. If you think about how much leasing we've done in the last 12 months, Westralia Square 1 is relatively new leasing. Some of the leases that were done eight or eight months ago are a bit below. WS2's, it's hard to say that it's below market. Maybe the first tenant in, maybe Arup got a good deal, but they did take the lower floors. And then at 197, we've done a lot of leasing. It's relatively short WALE, so we are capturing it. So we're not feeling like we're under-rented. What we are seeing, though, is both you are seeing, and we debated it's an asset-by-asset level. You'll hear market quotes about this as what forecast rental growth is. But we are certainly seeing pretty decent rental growth.
When we launched the WS2 and hit the go button, we had a feasibility that assumed an average net face rent of AUD 725, and every tenant is paying above that. There's one that's high eight. That's essentially what's happened in the market over the last two and a half years.
Yeah, Andy. And it's worth thinking about 197, where we lost the big tenant a few years back called AMEC and then a number of others since then. That's where you had that compression of rents from premium down to A-grade, so tenants could walk across to the available premium space, particularly to a better offer. So what we've been able to do at 197 is really focus in on the type of tenants that we should be working with and the type of fit-outs. And to be quite honest, we do offer a cheaper rent than some of the comparable space because that's the way we want to roll.
And we actually think until we do more spend on some of the areas in the building, which aren't income-producing, that those rent levels will stay the same. We're not going to try and push them too hard. We'd rather fill the building.
Thank you, guys. I'll leave it there for now. Thank you.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Edward Day with MA Financial. Please go ahead.
Hi, Stephen and Dave. Yes, just further on 197, you're 41% through the leasing sorry, you're 40% of the way through the leasing. Can you just articulate how many floors are left and the rents and incentives you are achieving?
Sure. Sure, sure, sure. Of course, it's a mixed bag, Ed. But if you think typically around the higher levels, you'll achieve in the high 600s. These are net face rents. At the moment, we've probably got about six complete floors that we could lease. Some of those have we taken off because we'll probably do strategic fit-outs on two of them, definitely one, but potentially two. And then we're left with a lot of suites that vary. Now, our rents, Ed, on the lower levels, basically, they can vary between the 400s, but a lot of them typically would be in the 500s, higher 500s. And we've also got very competitive outgoings there at about AUD 179. So I think where the competitiveness comes in, if you look at some of the comps, they're charging more, and also the outgoings are higher.
The incentive levels, what tends to happen if we're doing a fit-out, the incentive levels could be much lower, down to AUD 25-AUD 35. If they're doing a whole floor, you tend to be in the AUD 40s. And that's probably the average between the two.
Oh, that's with net, remember?
Net face rent, not gross rent.
Yeah. Yeah. Okay. So I guess in terms of your expectations around timing for having that vacancy resolved, is that still a sort of 12-18-month proposition?
Absolutely. It gets a lot of attention, Ed. That's probably the key focus, is getting more of that away.
Yeah. Okay. And then just at 5 Mill Street, I know it's always a short WALE building, but you've got 40%-odd expiring FY 2025. Can you just talk to the composition of that expiry?
It's multiple tenants on various sizes. We know some are looking to expand, so we know we might lose one or two of them. And obviously, we're trying to capture them into 197. So a lot of ongoing discussions. But it's the nature of that building, short WALE tenants either renewing or expanding.
They're pretty active in there, Ed. And it doesn't seem to be a difficult one to be able to we moved in there ourselves, actually, to facilitate the WAPOL lease. But it's a bit of a breeding ground. A lot of the tenants there expand. And as Dave just mentioned, quite a few of them want to pop across to 197 and take out a bigger tenancy.
I mean, it's a good little building. I like to talk about it. When Accenture first went to Perth, that's where they made their home. And then they doubled and went to Exchange. So we couldn't accommodate them, but they were very happy there. It's a good building.
Okay. Thanks. And just one more. Can you just talk through the valuation decline at Wellington Street, please?
A couple of things. Revenue from when it was last done is flat. OpEx is up. OpEx through some of the main number being the levies that we're paying. So increased levies without increased revenue from the last valuation. You've had a cap rate expansion of 75 basis points from 5.25%- 6%. And you've also got there is a 1,400 m office tenancy in the bottom of it, and that comes up next year. So there is that expiry cost, theoretical expiry cost of downtime and reletting assumptions that have now been captured.
At that value, Ed, as we discussed, it's basically at land value. If you have a look at what the site next door traded, they're putting student accom . And on an NLA basis, it's at AUD 24 million. It's land. And that was a recent sale. To me, it feels a little bit light, but it's not an environment to have too deep arguments or discussions with the values.
Yeah. Okay. Thanks very much.
Thank you. There are no further questions at this time. I'll now hand it back for closing remarks.
Well, thank you very much for joining today. If you have any other questions, please reach out. We'll be doing the rounds. Hopefully, we get to catch up with you all. Thank you very much.
It does conclude our conference for today. Thank you for participating. You may now disconnect.