Thank you for standing by, and welcome to the GDI Property Group Annual Results Teleconference. 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. Please go ahead.
Good afternoon, everybody, thanks for joining GDI Property Group's annual results, and my first. Joining me today is Dave Williams, our CFO. In terms of a quick snapshot, I joined as an interim in March and made permanent in June. Just reflecting so far on that journey, I think there's a lot of management changes underway, as is board renewal. I think, you know, effectively, we've had a very good bunch of senior managers that are fully engaged and accountable. In terms of the, you know, the people we have, I believe we've got the best development expert in the Perth market, was involved in delivering Brookfield Place, but more recently, our WS2.
We've got, I would argue, the best leasing expert in the Perth market, John Byrne, who's seen many a cycle. We've got some exciting young talent, which covers us across the government, development, cost procurement disciplines, as well as what I believe is the best CFO for an office specialist and the best property due diligence guy in John Garland. I'm here to report that a strategic, strategic turning point is, is well underway, and obviously, we're floating on a much stronger Perth market, but that's underpinning our results, which we're gonna discuss today, but also our view on, on the future. I think in terms of how's GDI positioned, we're well-placed to get, you know, additional FFO through, through leasing. That's point one. Point two. We are expecting some cap rate weakening.
As you know, there hasn't been any significant transactions of late. We are seeing increased rents, which is likely to offset some of the cap rate weakness that we're likely to anticipate. Keep in mind that we still have relatively attractive values per square meter when compared with East Coast markets. GDI is very comfortable with the level of debt and is diversifying funding sources via a combination of recycling assets and executing on, on strategy. I think it's an important point to make, that GDI won't necessarily sit here with its current debt levels for, for long. It is by our very nature, to, to recycle assets, so I don't think you draw a straight line as to where our debt levels currently are.
We maintain our objective of holding AUD 0.05 distributions through cycle for, for the coming future. I think in terms of what are the operational highlights and what's, what's been going on, we feel really comfortable with WS2 and what we've done there. It's worth just mentioning, look, it's the first timber office building in Perth. It was put in a position that has a really good location, but we're now finding that it has a really good boutique appeal. What's, what's worth noting right up front is, in terms of being able to deliver something that was conceived back in 2019, we've actually. We've absolutely killed it on the cost front, and we're able to manage that.
In part, you know, the glory for that goes to our builder in helping us lock down costs, where there's been, you know, well-publicized 30, circa 30% increases on, on costs. We were able to get away without increasing our costs and improving our profit. I think in terms of leasing, which is our number one job, we've leased nearly a third of the Perth portfolio. It's worth noting that a big chunk of that came in the last 8 months of the year. The velocity on that feels really good, and we'll go into more detail later. We're feeling good about using that momentum to carry off more leasing as we look forward. The Co-living JV is effectively a new initiative, involving the Tulla Group and over 500 rooms.
To date, that is, that is proving up to be very positive as we bed down operations and also build a pipeline of future opportunities. If we look at the financial snapshot, basically, not much move in, in the NTA. It's down AUD 0.02 from June last year, during which period, all wholly owned assets were revalued during the financial year. We had a devaluation in 197 St Georges Terrace, which has the vacancy in it, and we had Westralia Square devalued slightly with a little move up in cap rate, but we had a profit on WS2 for the first time.
The weighted average cap rate is 6.55%, includes all our other assets, which incidentally, with car parks and car yards, you know, we probably have about 20% of our assets in non-office. That's worth keeping in mind, but they're factored into that cap rate. We're sitting at about an AUD 8,000 a square meter capital value. Gearing. In terms of the gearing levels, and Dave Williams will go into a lot of detail of this later, we're feeling comfortable with the LVR levels and the ICR levels. Obviously, we're looking to do something on this front as we manage the portfolio going forward, but we're not looking to fire sale assets or do anything like that.
Every property has its price. We will consider when and where that might take place. In terms of our FFO, we felt good, basically maintaining last year's level. Importantly, going forward, we believe that that will increase quite significantly if we're able to execute on strategy. AFFO, adjusting to the incentives, we feel good about that as well because it means we're leasing up. The distribution, as mentioned before, which was reset in November 2022, there's no change to that. The objective is to hold that AUD 0.05 through cycle. Now, I'm gonna hand over to Dave to take us through the contributors to the FFO.
Afternoon, everyone. Our property division FFO was up about AUD 4.5 million year-over-year. Big chunk of that was obviously Westralia Square as it's filling up. That was AUD 18.1 million of that versus AUD 12.7 million in the previous year. That continues to increase as leases commence. The Capricorn lease that we have commences at the start of next calendar year. So 2024 should be higher again. The offsetting factor, got a bit of leasing opportunity now at 197 St. Georges Terrace. The major tenant left in July. That created a bit of a hole compared to last year, so AUD 15.4 million versus AUD 19 million the year before at the Mill Green assets.
Big positive, though, from the car parks, we bought them on a 5% passing yield for AUD 16 million, which was AUD 3.4 million. Said that was below, well below the four year average. For the first six months that we held them, which was FY22, they only delivered AUD 1.3 million. They had a really strong period, AUD 4.2 million over the 12 months. Occupancies and revenues really accelerated in the second half, and that's reflective of the people coming back to the office in Perth. Co-living JV of AUD 1.1 million for the stub period that we owned it. A lot of that was just bedding down, particularly South Hedland.
Pleased to say that the July numbers are very strong in comparison to that AUD 1.1 million. Funds management revenue, pretty much like to like to last year. There weren't any transactional deals. Something that, of course, we'd like to look at is the velocity in our funds business. That interest expense offsets all of the gains from the property business, pretty much. It was a lot higher. Corporate and admin costs were approximately AUD 1 million lower. That is reflective of some one-off items. Then, as you can see, the maintenance CapEx is largely to do with money spent at 197 St Georges Terrace. You can see the big increase in incentives and leasing fees paid of AUD 11.6.
That's reflective of enormous lease, leasing successes in what is still a too high, but contracting incentive market. On debt, we have On the next page, we have tick over AUD 300 million of drawn debt. We have AUD 41 million of undrawn capacity. We, take you to the interest rate caps. In July last year, we bought AUD 150 million of caps at 3%. We have topped that up to take it to AUD 300 million for calendar year 2023, and then AUD 200 million for calendar year 2024, and another AUD 100 million through to June 2025. That gives us a lot of comfort around our forward-looking ICR and protecting from adverse rate movements to the, to the upside. We have a July 2024 expiry.
We are looking and pleased with progress on diversifying and extending our capital sources. Give back to Steve.
Look, there's probably a couple of points worth drawing out on the Perth market as a bit of a reminder. The fundamentals feel strong. That's always been probably the case in hand from afar. You know, if you stand back and look at it, the economy is projected to continue very strongly. Obviously, it's heavily resourced based, but if I point to that chart on the top of the right-hand side, you can see there's a large gap between the exploration and the CapEx spend, which might start to prove up over time, but that gives us some degree of confidence there.
Whilst we're at it, the chart below, if we look at the prime rental growth, it's nice to see a double-digit associated with Perth, so we find that very positive. Just turning to the next page, it's worth drawing out a couple of the, couple of the trends that we see on the ground. Seven quarters of positive absorption is a great thing, and you can't say that about many markets over here. You know, the leasing levels, and I would say the leasing interest, really has become quite dynamic. You know, in the Premium space, where there's only a circa 6% vacancy, there's a lot of demand outstripping supply in that segment of the market.
It flows down to the A-Grade, where it's a competitive space, there's no argument about that, but we're likely to see, once that premium is fully absorbed, or leased, that there's gonna be a lot of tenants swimming around in the A-Grade space. You know, the, the, the indicators continue there. The thing that you really notice when you go to Perth is the high office usage, which is measured about 80, 81%. I'd say also, just the activation of the foyers, the general people walking around, and the engagement within the core, and that's leading to other trends as well. People are moving in from, from the outer areas to take advantage of deals and to get proximity for their, for their employees and better amenity, but also location.
It's a pretty strong feeling to the market on the leasing front, underpinned by the resources and the government segments. You know, in terms of the dynamics, we're seeing a lot of interest at ready-made spec space, particularly at the smaller or part four. Part of the strategies that have been successful on buildings out there, does involve that strategy of designing up and having fit out three, where people can come in straight away and it improves your terms. It's a lot more active than the than the whole four tenant letting initiatives. You know, part of that is, is driven around, you know, activity levels, so the employees coming down and using the amenities of the buildings, which lends itself to meetings and so forth.
The new end of trip now involves conference facilities, something that we've spent or spending a lot of time on WS2, to ensure that we've got a really good conference facility, which we can use in the precinct, to attract tenants. It is, it's working a treat. I think in terms of the, in terms of the multiple building choice for, for A-Grade, which is 197, we have to come up with a very specific offer to ensure that we catch more than our fair share, and I'm confident that we can do that based on our leasing results achieved this year. You know, another feature of the Perth market that isn't so prevalent on the East Coast is there's virtually no sublease market over there.
If we talk through the next page, another little factor that we've recognized in the Perth market is that WA does very well post shocks. It seems to deliver growth on a, you know, sort of plus 5-year basis, so that is a positive outcome for us to, to think about. You know, producing states versus services states, is a, is a pretty positive theme for us. The level of, you know, development space coming onto the market is minimal in the, in the Perth market, which does contrast quite heavily with other markets over here. Supply is not a major issue. Then, basically, the, the absorption story, which I've discussed, is very strong for Perth. We also find that transactional evidence, which there hasn't been much of, is basically supportive of our, of our valuations.
You know, on the buyer front, you are still seeing Perth families that are that are looking to take out value equations, some of the value buyers and also syndicators, as evidenced by some of those, those sales, has been quite positive. In terms of, you know, the way we think about the Perth market and where, you know, the opportunity is, you've just got to remember that it's, it's government and resources, and there is a lot of opportunity on that front and a lot of movement at the moment. GDI can play into this a little bit with, you know, developments like at WS2, and of course, we have a number of prospective development sites either with or in the process of gaining additional DA space to meet that demand.
You know, as mentioned, the tenants are moving from outer regions into the CBD core to get better access and, and amenity for their employees. If we roll through to the next page, the ESG trends, I mean, this train has well and truly left the station in Perth, and part of it is to do with resources economy, as well, you know, the companies wanting to, I guess, compensate for the work that they do and to gain their credits where they can, which includes the sort of space and responsibility around the, the, the, the tenancies that they will have.
One, one point that we think is really important and part of the GDI culture is to understand the brown to green trend, which can be a very expensive trend indeed, when you're looking at prospective buildings to procure, procure for new tenants. You know, the, the new technology has got to be priced into the way that we execute on the real estate. I think in terms of the, the, the, the property portfolio on the next page. It, it's worth, you know, keeping in mind that over 20% of our assets are in car parks and car yards, and in addition to that, there's the, there's the new co-living JV. Dave, did you have any points on the, on the portfolio there?
Just looking at the next page, which really just gives you a bit of a portfolio leasing outlook. The low to medium, short term, sort of, risk is evident from 2024 through to 2026, and the current vacancy is really our led-up opportunity, which we're gonna be, you know, vigorously attacking. For an overall occupancy of around 80-82.5%, and a 5.2 WALE, an average CAP at 6.6%, with only an AUD 8,000 a meter value, we're feeling pretty comfortable. Individual portfolio assets, just a couple of points on each one, but it'll give you a feel for how we're tracking. If we look at WS1, there's really only 2 floors left, and they happen to be the upper floors.
We have interest on those on those remaining floors. We do actually have the benefit of a bit of tension in demand, and we think we're well placed to be able to execute on the WS1 vacancy. WS2, really, it's, it's the new the new kid on the block. It's performing very well. We've basically got four floors left to lease, but that doesn't tell the full story because we're we're entertaining a lot of interest with multiple tenants across those floors, and there's a quite a bit of duplication. We do have strong demand on being able to let those boutique floors up, and we're feeling pretty good about that at the moment. The next building, that's our problem child, 197 St Georges Terrace.
There's an 8- 9 floor opportunity. It does sit right in the commoditized end of the space, the bubble of space, which is effectively A-Grade in Perth. We're looking to attack that by having a multi-floor approach to the way that we do things. We'll divide up some floors, we'll pitch whole floors on some, but effectively, we've got the opportunity to really boost the space that's occupied there, and that's a key initiative for our strategy to lease that up. Just on five Mill, it's a good little building.
It, it doesn't seem to ever stay vacant for long because the tenants are really using that as an alternative to Brookfield Place, but it's cheaper and has a really good location and amenities. We're quite happy with the positioning of that property. Nonetheless, we've got to lease up a few suites there, so to complete the job. If we're turning onto the next page, you'll see one Mill Street. one Mill Street is basically a development opportunity. It has a current DA. We're pretty excited about the flexibility that gives us. This is not a spec tenant opportunity. This would be a designated tenant opportunity. That is not something that we would take risk on, rather, we'd price it and, and pre-sell the leasing. 180 Hay Street. This presents well as a building.
It's a, it's a tricky location, and we'd like to fill that with a single tenant, and we have inquiry. The car parks, both the car parks, as Dave mentioned, have been performing well, taking the FFO from AUD 1.3 million for the half year in FY22 to AUD 4.3 million in FY2023. Effectively, they're income-paying development sites, if you'd like to think of them that way. And we have opportunities with respect to these car parks to, to deliver over time, in the same way that we're able to take advantage of the Westralia Square car park and put WS2 on top of it. You know, the, the next page really deals with some of the assets in the funds management business, and I put it there really as an emphasis that we're not just office buildings.
We do have 17 car yards around Perth, which are very good assets, and, you know, they, they present with lower yields because you're not utilizing all the sites. That's worth keeping that in mind. We've got Townsville, where we have an office building. That building is something that we'd be happy to let go of at the right price. You know, turning over into the next page on the funds businesses, it just gives it a bit of a flavor, but we have one of the best trading IKEA businesses in Australia, located on one of our properties near Innaloo. We have also a portfolio of assets that we had from the UGL portfolio, including a prospective development site in Broadmeadow/Newcastle, that sits right outside the McDonald Stadium, as well as an asset in WA Investment Day.
That's really a quick snapshot on the property portfolio, and I thought it would be worthwhile giving an update on the strategy. GDI, from a critical perspective, look, I, I think, you know, it's been static for a while, but a lot of things are happening now. The clear points-... that, that have been a criticism, can turn to an advantage. Being overweight Perth, I think at the moment is, is probably a good thing. As, as the opportunity arises, we can look to change the mix of assets. I mean, we'd rather own 10, $100 million buildings than two in Perth. You know, GDI doesn't have to hold office towers. We don't have to be slave to the tenants.
We'd rather procure space and maximize returns, and keeping in mind that at GDI, small amounts of money will make a big difference to the FFO. We feel pretty comfortable about being able to change the mix and enhance our, our profitability. Holding properties through multiple CapEx cycles is not a good thing for a total return specialist to do, so we won't be doing that. Vacancy, that's our opportunity. We run towards vacant buildings, and that's to get the FFO or the income increase. The funding source, as mentioned, through, through debt, but also contemplation of JVs and asset sales will be the way that we will be taking the business. I don't think it's tied anymore. We've obviously got quite a bit of change that we've undergone at the management level.
The syndicates, we've got to speed up the velocity there. That means, you know, fund profitability, as well as making the investors' money there by getting some money back to them before we offer up new opportunities, and that's well in train. I think in terms of the strategic initiatives, it's very much about, you know, lease up, but we will make sure that we take advantage of any East Coast weakness, which we think has a fair way to go. So we look at that as a transformational opportunity for GDI.
We're, we're very focused on ensuring that we have through-cycle funding, because to be a total return player like that, like we are, it gives us opportunity, but it also means we have a fair bit of flexibility in how we deliver returns, so we just want to ensure we've got the funding. The, the, the management changes, board renewal, it's all on the table and underway, but with a particular emphasis on senior management accountability. The, the strategy is to ensure that we say we're going to do something, and basically, we don't talk about it till we execute. It's basically a, a deliver strategy on communication and the optimization plans on each asset, et cetera, is well underway, as well as targets.
Look, I will just take a sec to point out what we believe is a strong advantage for GDI, involving timber and reuse, because it is something that we do, and we think that we can use, not only with the number of the existing sites we have, but also when we look to take advantage of other market opportunities that might exist on the East Coast. Evidence that we're executing, we feel good about leasing up a good chunk of the portfolio, but we're not resting on that. Have to get rid of the 197 St Georges Terrace vacancy, and a number of the other properties that we have, such as One Adelaide Terrace, which have been a, you know, an issue for us in terms of leasing, but we're confronting them, them front on.
I think we've been able to consummate the Co-living JV with the Tulla Group, which has a really good feel about it to date as we bed down the operations, and we get a better feel for the sorts of assets and the price tiering and the occupants or customers for that business. We're feeling like we have a good path forward to, to earn extra returns with requisite risk. In terms of the, you know, the, the, I, you know, partnering with, with best-in-class, which is a sign of how well the business is going, we think we've been able to do well partnering with the likes of a Built and an Arup in the execution of WS2.
We see that as really important going forward to have those sorts of relationships and be able to execute with the best parties in, in their particular area. Sorry, on the next page, I, I've just, you know, we've put a, an in-depth business model to give more description as to what we, you know, what we want to do and how we're going to execute on that strategy. It'd be fair to say that we think we have quite considerable points of difference, which, which we've listed there, to ensure that we can exploit opportunities. That really defines the, the, the GDI proposition, which is to be the, you know, the best total return specialist in the office space.
As mentioned, we have other strings to our bow with some of those other businesses in car yards and car parking, which also add to that profitability. Turning on from there, look, we've been at the forefront of upgrading buildings for NABERS ratings. The whole ESG tilt now takes on a far more technical tilt, because to get that brown to green costing right, you've got to be very, very careful. It's an area where we think that a lot of the market will misprice assets when they look at them as upgrade opportunities. We want to make sure that we're best in class, and we maintain some advantage there.
The, the learnings from the, from the timber and steel approach were can be exploited in, in other markets, and so we're very keen to ensure we can, we can deliver that. We don't need to own office towers, so we don't need to give away a third of the building to tenants and pre-leasing initiatives and so forth. You know, we'd be, we'd be happy to take GDI would be happy to take space in a, in a, a Sydney office building, a premium office building at a really low rent. You know, keep that in mind, but we don't have to own those sorts of buildings. The embodied carbon story, you know, we believe there is something behind that, because if you're preserving carbon by not having to put up a concrete structure, it is a real advantage.
We think that, you know, obviously, our Wellington and Murray and Mill Street car parks can be better utilized with, with the appropriate structure on top as well. We're looking towards taking advantage of that attribute. Opportunities, there they are. It's really just looking through potential opportunities involving those assets that I just mentioned. We do have a DA for Mill. It's got quite a bit of variable usage. It does incorporate some bonus ratios, and we think that we've got some really good flexible space in a great position to be able to take advantage of. Doesn't mean we're going to run out there and take on development risk, far from it. That applies to both Wellington and One Mill.
Just talking about the FFO opportunities, we've put a slide in there, really, to give an indication of where we can extract that FFO growth. Clearly, there's a leasing story which, you know, is tabled there with the assets, looking at the fully let income versus the as-is income. There's asset optimization through the developments, which obviously, like WS2, can add considerably to the profit numbers. Co-living. Co-living, as Dave mentioned, we've only just had a start, so there's some pretty good upside or returns available there to GDI. Funds management, same thing. There's a whole array of potential fees there, and as we increase the velocity, there's the scope to earn additional fees there.
Of course, recycling, which comes down to the assets that you're working with, but that can be very transformational and put our assets into alternative places for higher returns. That's a bit of a snapshot from GDI on the results, and thanks for listening. I'll now open it up for questions.
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 your question. Your first question comes from Edward Day with MA Financial. Please go ahead.
Hi, Steven and, and Dave. Just, one question for you. With 197 St Georges Terrace on the eight vacant floors, could you just, perhaps explain or illustrate how far through you are, with regards to, you know, I guess, the spec fit outs or the suites and, you know, in turn, expectations around how long that will take to let up?
Yeah, sure, Ed. Sure, sure, sure. Look, we've probably got between eight and nine floors that we can target there. At the moment, there's about four whole floor propositions being discussed at the moment, and then we've got about two part floor discussions going on there. The problem with those part floor discussions is that they, they like to discuss alternative floors, so there's probably another couple sitting within that realm. Basically, we're looking at being able to anchor a strategy that says, "Right, we'll put four floors of fitted out spec space up." The reason for that is that we can basically target, be it AUD 800 a square meter, we can target our returns, and we can measure the return we get on that CapEx a lot more effectively, and the start date of those rents.
We're still seeing, incentives, you know, 40%, 30%, but they reduce if you can have that space ready. So the real art in being able to target, you know, the, the 2-4 floors of spec fit outs space that we want to actually get ready is, you know, is, is that we're able to determine, largely our own destiny, destiny. The, the, the whole floor stuff is a bit harder because the lead times to getting that fit out and so forth. And there's, there, there's no, you know, coincidence in the fact that the, the whole floors have been a bit harder to, to get out the door. Because this, you know, for the Grade A space, where you have, you know, quite an abundance of comparable space, i- is a difficult space, you know, space for the landlords to, to let up.
You know, the spec stuff, and we've had a lot of studies done on this, one, particularly by CBRE, where we can enhance the returns a lot through doing the, the spec fit-out and having it ready for the, for the tenants to come straight in. We're actually seeing that play out with 5 Mill, you know, the little building next door. The reason that that actually gets let really quickly is because it's a part four environment, and it's, it's cheaper. Obviously, it's cheaper than 197, but very competitive. We think that we can actually do 197 by spending, you know, anywhere up to AUD 25 million. We won't start just earmarking AUD 25 million. We'll look to go, "Can we spend AUD 4 million and manage that?" We think that we'll probably come out somewhere in the middle.
We might have to spend up to AUD 10 over the next, sort of 14 months, but we'll target that and bring it in as the income comes in.
Thanks, Steven. That's all.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. We'll now pause a short moment to allow questions to be registered. Your next question comes from Louise Joseph with Algona. Please go ahead.
Good day, guys. I just want a quick question on capital management. I just find it a little difficult to comprehend, sort of investing in the co-living JV at effectively 0.100 on the dollar, where by implementing a buyback, you could be buying assets you own, understand, already operate at sort of 40%-45% discount to NTA. Is buyback sort of back on the agenda, especially you talk about, like, the dividend reinvestment option as being a cost-effective, but option for shareholders to reinvest, but it's tax inefficient also? I just want to quiz on the buyback there. Thanks.
Well, absent any transformational sale, we're not going to be doing a big chunk of buyback because they've got to be funded. That's point one. You know, point two, would we pick the, you know, like to buy the stock if we had limitless funding? Yeah, sure, we'd do it today, but we don't. Our balance sheets, our assets are a function of our funding, and we need to manage it appropriately. If we did something transformational, we'd, we'd think about it at that point. As for the Co-living JV, I, I think in terms of the returns we're seeing there, they're, they're very good returns. It was made quite clear that if we think about the JV in terms of what it does for GDI in the short term, it, it brings a lot of cash in.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Stephen Burns and Mr. David Williams for closing remarks.
Well, thank you very much for for attending the GDI Property Group final results, and we look forward to catching up with you all later. Cheers.
That does conclude our conference for today. Thank you for participating. You may now disconnect.