GDI reported is annual results for FY20 revealing a -9.5% drop in income from its property holdings contributed to -7.8% drop in FFO.
The Groups cash position (reported as AFFO) was -34% lower than FY19 and due predominantly to incentives and leasing fees paid on Westralia Square. To date, the Group has used proceeds of asset sales or debt to top up any cash shortfalls caused by Incentives in order to maintain distributions and has flagged that this will be necessary again in FY21 as leasing incentives are expected to remain high.
GDI aim to deliver a consistent 12.0+%p.a. total return, measured by NTA growth + distributions both annually and on a three year rolling basis. Over the 12 months to 30th June, NTA rose by $0.04 per security to $1.30 per security (3.1%) with distributions of 7.75 cents per security (+6.1% on FY19 NTA), providing an absolute total return of 9.3% for FY20 and a 3 year rolling average of approx 11.4%.
Since early 2017, GDI have been intentionally shifted away from the East coast markets to Perth in a traditional counter cyclical play. Perth has limited new prime grade office supply until the end of 2023, and although the headline vacancy rate is the highest of the Australian CBDs, GDI believe the vacancy is concentrated in secondary grade assets, not the prime grade assets.
GDI are strong believes that resource centric CBDs, like Perth, will be beneficiaries of the probable global response of governments investing into new projects to stimulate their economies and that as a consequence effective rents in Perth will grow strongly.
COVID19
GDI have $1.5m in outstanding rent due to COVID, of which $518k has been waived, $500k with no agreement in place and the balance subject to deferment or rebate agreements. GDI expect that total relief to be provided in FY21 to be less than FY20.
Leasing
The highlight from a leasing perspective was the Minister of Works executing two new leases for 14,522sqm at Westralia Square. The Western Australia Police Force (WAPOL) has leased 12,689sqm over levels 1‐5, 8 and 9 for a period of five years commencing 1 February 2021, and Births Deaths and Marriages (BDM) has entered in to a new six‐year lease for 1,833sqm over level 10, also commencing on 1 February 2021. The previous leases over 25,664sqm to the Minister of Works were varied, largely to facilitate WAPOL’s relocation within Westralia Square from the upper levels to the lower levels, and the departure of the Department of Justice.
Securing WAPOL has meant that all the lower levels at Westralia Square, excluding the fitted‐out show floor, level 7, are now leased and we anticipate releasing the upper levels into an improving Perth market as they become available during FY21.
Funds Management division
The highlight for the Funds Management division was securing a $98.0 million portfolio of 17 metropolitan Perth properties (Portfolio) occupied by high profile car dealerships and service centres located on major arterial roads. The Portfolio is fully leased for a term of approximately 10.4 years, with the tenant having 5 x 5‐year options. The leases have annual CPI + 1% rental increases, with market reviews in 2023 and 2028. The acquisition was funded by the establishment of a new unlisted unregistered managed investment scheme, GDI No. 46 Property Trust (the Trust). GDI holds approximately 47% of the 75.7 million units on issue.
Development opportunities
GDI has two exciting development opportunities in the core of the Perth CBD. At Westralia Square, we have increased the size and scale of the proposed development of the excess land (WS2) to approximately 9,130sqm of lettable area over 11 floors. At 1 Mill Street, we are continuing to discuss the opportunity with several major occupiers.
Capital markets
Although only a small acquisition, we are very pleased to have now settled the acquisition of 180 Hay Street, Perth, for $12.59 million, with the property having an independent valuation of $15.0 million. Constructed in 1999, 180 Hay Street comprises 4,925sqm of well‐presented office space over four floors of over 1,000sqm each and a mezzanine level. The property was 100% vacant on settlement.
Valuations
As at 30 June 2020, GDI's wholly owned portfolio was independently valued at $771.5 million, with each of Mill Green (+$13.0 million to $343.0 million), Westralia Square (+$42.5.0 million to $327.5 million) and 50 Cavill Avenue (+$1.0 million to $101.0 million) revalued at least once during the year.
Outlook
Given the significant value of lease expiries in FY21, particularly at Westralia Square, there is a higher degree of uncertainty than usual in estimating GDI’s FY21 FFO on an existing business basis. That said, in the absence of any acquisitions GDI believes that FY21 FFO will be materially lower than its FY20 FFO.
The Group have previously stated that in the absence of any asset sale(s) GDI is unlikely to pay distributions materially in excess of FFO but that it intends to pay a cash distribution of 7.75 cents per security for FY21, with a proportion paid out of capital if necessary.
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