GDI feeling the strain of Perth Vacancy23 February 2021
GDI Property Group’s released their results for the 6 months to December 2020 unable to gain ground despite some strong leasing results.
GDI hold a portfolio of 8 directly held office assets, predominantly in Perth and regional QLD, and also manage 29 assets across 7 funds on behalf of its wholesale clients.
The Perth office market is continuing to face challenges from the recent mining downturn and from the impacts of COVID. Whilst vacancies remain high at 20% and leasing incentives are also extremely high, GDI has experienced an improvement in leasing activity into 2020 and are heartened by the number of inspections and enquiries at the start of 2021.
GDI’s earnings from its direct holdings are down -39% due almost entirely to the departure from Westralia Square of UGL and the Dept. of Justice. GDI signed the Minister for Works to two new leases commencing 1 February 2021, a five‐year lease to the Western Australia Police Force (12,689sqm) and a six‐year lease to Births, Deaths and Marriages (1,833sqm). During the period GDI also concluded lease negotiations with Cash Converters Pty Limited for a new 10‐year lease (level 11, 1,807sqm) commencing 1 October 2021 and post balance date have executed a heads of agreement for all of level 12 (1,807sqm) for a new 6.5 year lease commencing early 2022.
The re-leasing takes the building to 63% leased with leasing interest in level 12 and 7.
GDI acquired Westralia Square in 2017 for $216m (well below replacement cost) for its significant re-positioning potential. At the time it was 93% occupied with the State Government its primary tenant but with the expectations of having to replace the State Government tenancies. GDI has since also obtained a DA for the construction of a second office building of 9,000sqm on the site which has lifted the valuation to $345m.
Construction of the second building is anticipated to commence around June 2021 with total forecast costs of $63million, including precinct works but excluding incentives and finance costs.
GDI also lodged plans for a new 45,000sqm office tower on 1 Mill Street, Perth and are in discussions with a number of potential tenants to pre‐commit to the development and are hopeful that significant progress will be made in 2021.
GDI also had leasing successes at 197 St Georges Terrace, with occupancy increasing to 89%. Leasing interest has also improved at 5 Mill Street, Perth and 50 Cavill Avenue, Surfers Paradise.
GDI recently settled the acquisition of 180 Hay Street, Perth. The building was constructed in 1999 and comprises 4,925sqm of office space over four floors of over 1,000sqm each and a mezzanine level. The property was purchased with vacant possession in early 2020. GDI gained early access in June 2020 and commenced a refurbishment programme including upgrading all the floors, a new end of trip facility and a chiller upgrade. Despite the re-positioning, GDI have not concluded any leasing transactions yet, however have reported that the level of inspections is high and GDI remain confident that leasing successes will come in 2021.
The funds management business accounts for just 5% of the REIT income and has grown +24% over the period as new Trusts were established.
GDI’s FFO per security for the period was 2.632 cents (31 December 2019: 4.397 cents), with the decrease (-35%) from the prior corresponding period predominantly a result of the expiries of the Minister of Works and UGL’s leases at Westralia Square during 2020, and the transition of the Western Australia Police Force from the upper to the lower floors at the same building.
Notwithstanding the lower reduction in FFO, GDI was pleased to be able to maintain its level of cash distribution for the period ended 31 December 2020 of 3.875 cents per security.
GDI has drawn debt on its Principal Facility of $152.8 million and undrawn debt of $52.2 million. The increase in debt on the Principal Facility from 30 June 2020 was used to fund the acquisition of 180 Hay Street, Perth ($12.8 million) and working capital purposes ($20.0 million). GDI remains well within its Principal Facility covenants, with a Covenant Loan to Value ratio of 19.5% (Covenant of 50%) and a Covenant Interest Cover ratio of 7.9X (Covenant of 2X).
The Group obtained independent valuations for a number of assets including Westralia Square, which was revalued to $345.0 million (from $327.5 million) with the valuer now ascribing some value to the excess land, given the DA Approval.
The combined assets at Mill Green were valued lower at $326.0 million (from $343.0 million), with a slight increase in the valuation of 1 Mill Street offset by decreases in the value of 5 Mill Street ($56.0 million vs $58.5 million at 31 December 2019) and 197 St Georges Terrace ($230.0 million vs $251.0 million at 31 December 2019).
5 Mill Street’s valuation was impacted by the increased vacancy, and 197 St Georges Terrace’s valuation by the impending lease expiries of Amec (FY23) and Jacobs (FY22).
Stanley Place was also revalued at $51.5, down from $53.5 million at 30 June 2019, with the decrease due to the increased vacancy following the ATO’s departure in August 2020.
The IDOM portfolio was also revalued, with the portfolio’s value increasing to $105.9 million (from $98.0 million).
The combined impact of these revaluations, together with the fact that AFFO per security was substantially lower than the distribution per security, has meant that GDI’s NTA per security has reduced by 3 cents to $1.27 per security.
GDI confirmed it’s intention to pay a cash distribution of 7.75 cents per security for FY21, regardless of the level of FFO, noting that the cash distribution for the six‐month period ended 31 December 2020 was 3.875 cents per security. As with the period ended 31 December 2020, GDI will meet its distribution by utilising capital if necessary.
GDI are trading at a -14.7% discount to NTA and are offering a distribution yield of 7.1% which is distorted by the inclusion of capital funds in the distribution.
The distribution yield based on the 6 months of earnings is equivalent at the current price of $1.09 equates to 4.8%, which is low in comparison to other REITs. Growth in earnings is expected to see the yield improve sufficiently to support the forecast distribution yield, however it may be some time before the underlying earnings recover.
GDI are not on our recommend list, however further signs of recovery in the Perth market may present an interesting opportunity.