Goodman Group (GMG) Earnings Call Transcript & Summary

Ladies and gentleman, thank you for standing by, and welcome to the Goodman Group FY '20 Full Year Results Conference call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Greg Goodman, Chief Executive Officer of Goodman Group. Thank you, sir. Please go ahead.

Thank you very much. Good morning, and welcome, everyone, to Goodman Group's results for FY '20. I hope you are feeling safe and well. I have Nick Vrondas with me on the call. It's certainly been an extraordinary year with the global pandemic continuing to have a profound impact on the world. Through this time, we've remained focused on executing long-term strategy, leveraging the structural trends, some of them which have been accelerated by COVID-19. We have adapted quickly and efficiently, and I thank our people around the world for their flexibility, hard work and resilience. [ Pleased ] that our business has faced limited disruption and been in a position to realize opportunities to grow further. In FY '20, the group's operating earnings remained ahead of guidance. Operating profit was $1.06 billion, up 12.5% in FY '19. Operating earnings per security $0.575, up 11.4% on the previous year and statutory profit coming in at $1.5 billion. Goodman is well capitalized with available liquidity of $2.8 billion, including $1.8 billion in cash. This is in addition to the $16.3 billion available within our partnerships around the world, while gearing for the group finished the year at 7.5%. Events in the last year have resulted in fundamental shifts in how we live, work and consume. This includes an acceleration of e-commerce, a shift to remote working and a significant increase in demand for technology and big data. The location and quality of our assets means that Goodman is well positioned to leverage the opportunities in this new operating environment. Continuing strong customer demand has seen that development work in progress increased 59% on the last year to $6.5 billion and will exceed $7 billion in the first half of this year. This increased development activity is flowing through to our assets under management, which breaks through $50 billion, an increase of 12%, while our partnerships delivered returns of 16.6%, with strong income and capital growth. Now turning on to Slide 7. Our earnings from investments were up 14% to $425 million, this is as a result of high occupancy, it's 97.5%, strong like-for-like rental growth of 3%, development completions, acquisitions and increased investments and our partnerships. Development work in progress is clearly strong, with solid maintenance and pre-leasing activity. The average lease term is now the longest it's been at 15.1 years. We expect this trend for longer leases to continue as customers choose high-value infill locations and invest more in the technology in their facilities. External assets under management have grown due to development completions of $2.4 billion, valuation gains of $2.9 billion across group in partnerships. And as a consequence, Management earnings were also up 9% to $511 million and are enhanced by the positive performance of the partnerships. In this changing global landscape, we're accelerating our progress on the 2030 sustainability strategy we announced last year. We've increased our commitments, contributions and targets significantly, including moving from 100 to 400 megawatts of solar capacity installed on our rooftops around the world by 2025. Also, in the wake of the Australian bushfires and the global pandemic, in FY '20, we increased both our financial and nonfinancial support through the Goodman Foundation to $13.7 million to make a tangible difference in our communities. I'll now hand over to Nick just to run you through some more detail.

Thanks, Greg. Let's turn to Slide 10, please. Okay. So we'll first cover the operating profit items, and then we'll discuss the nonoperating items listed at the bottom of the table. Given the Australian dollar finished the year broadly in line with where it started, the effect on our balance sheet and derivative mark-to-market was minimal. In terms of our income, though, the dollar was on average lower over the course of the year, but we hedge FX movements. The translation effect was positive on our revenue items, which are broken down into $10 million on investments, $18 million on Management and $20 million on development. At the same time, it resulted in an $8 million increase in our operating expenses and $5 million on tax. The net effect of these was offset in our borrowing costs, which were $35 million higher than our 2% weighted average cost of debt implies. In other words, our borrowing costs will be much lower if the exchange rate remains unchanged or continues to improve. This will offset any decline in the Australian dollar translation of our foreign-denominated revenues net of expenses. We can now discuss the movements in the operating results on a constant currency basis. Starting with property investment earnings. The direct property net rental income was up $4 million. This was mainly driven by underlying rent growth as the impact of asset sales offset by the income from completed developments. The sale of the remaining U.K. assets from the balance sheet will result in a decline in NPI in FY '21, absent further investment. It's worth noting that we believe the Australian assets have significant long-term value growth potential. This may come in the form of redevelopment to more intense or higher and better uses. So in the short term, performance is not necessarily the best indicator of long-term value or of market conditions. Sometimes, for example, these assets are made intentionally vacant to facilitate their redevelopment. In such instances, like-for-like NPI growth is constrained in the short term, but the long-term benefits are far more significant. These have not been prevalent in FY '20, but it's worth highlighting it as it may occur from time to time. The more significant part of our investment segment comes from our cornerstone interest in our partnerships. Here, income grew $39 million compared to the same period last year. $12 million of this was driven by like-for-like NPI growth. The increase in the capital allocated to our cornerstone investments has also contributed accounting for $27 million of the increase. In aggregate, the partnerships have been net investors over the past 24 months. They sold $1.3 billion worth of assets in the year and $2.8 billion cumulatively over the past 24 months. More than offsetting this were the investments they made. These were principally into developments intended for long term ownership, which totaled $3.3 billion in the year and $7.7 billion cumulatively over the past 24 months. As a result, the group contributed each year of equity, which amounted to $300 million of new investment into our partnerships in the year. This was on top of the $800 million we invested last year. The average yield on this new equity was a little over 4%, which reflects the increase in the cost base due to the revaluation gains. With most of the incremental equity investment made by the partnerships going into developments, and taking into account the expected sales and other available funding sources, the growth in this line item is expected to be moderate and driven mainly by rent increases in the coming year. Even though we expect to continue to refine our portfolios over time, the overall investment should grow in the coming years, as the substantial increase in the development activity we're currently expecting will ultimately result in an increase in stabilized assets in the partnerships, generating our share of the rents. Management revenue grew by $23 million. Performance fees contributed $207 million this year, which is broadly in line with FY '19. The underlying growth in AUM, however, resulted in a $29 million increase in revenue. As we stated previously, we expect that the fee revenue on our assets under management should average around 1% over time. Given the strong performance of our partnerships, there's scope for a continuation of performance fees. The strong growth in development activity, which will more than offset the effect of the anticipated asset sales, means that growth in AUM should also continue. Overall, Management revenue should be stable in the coming year with slightly lower performance fees but higher base fees. Development income is up $47 million compared to the prior corresponding period. This came mainly through the growth in development volume. The average work in progress has increased materially over the year, so despite the longer time in production due to the higher intensity nature of the projects, our revenues have increased due to the higher annualized rate of production. A number of projects that were scheduled to complete in the June quarter will complete in the September quarter, but despite this, WIP will grow to over $7 billion in the near term. The returns we're generating from our developments are consistent with long-term targets and appropriate for their complexity and duration. In addition, an increasing number of our development activities relate to land rich transactions, such as land leases granted to customers or in sales. In these situations, the returns generated are higher-than-average, relative to the cost base, but the absolute dollars are consistent with what we should expect. The work in progress as at June 30, 2020, has an average expected duration of about 17 months. So the revenue from these projects will flow through FY '21 and FY '22. We continue to be encouraged by demand levels and our capacity to meet our customers' needs, so we expect to increase our production rate again this year. This means that development income in FY '21 is likely to be materially higher. Turning now to expenses. With respect overheads, they were up $16 million compared to last year. Nearly $10 million of this increase has come from compliance costs and charitable donations. Overall inflation was relatively low at 3%. Our aim here is to continue to keep our fixed costs relatively steady and to use variable costs to incentivize and align our people. The incentive award program remains highly skewed to equity, which underpins the alignment between employees and security holders. With a strong focus on the existing markets and opportunities, we can remain concentrated in our efforts. This should enable us to continue to generate income growth without significant cost escalation. On our -- on a constant currency basis, our net borrowing costs were $10 million lower this year. The reduction in capitalized interest and interest on cash deposits was offset by the impact of the reduction in our debt costs. During the year, we repaid higher cost debt, and we had a lower floating rate of interest on the unhedged portion of our liabilities. Our net weighted average cost of debt is currently a little under 2%, and it could fall further in the coming year. As a result, we expect borrowing costs to decline substantially in FY '21. Our tax expense was down a little this year. As previously flagged, the nature and location of the transactions will have an impact on tax expenses. So again, this needs to be considered alongside our development revenues. Looking at the types and locations of the development transactions and origin of the Management earnings in the coming year, we expect the recent trends to continue. As far as the nonoperating items are concerned, we had over $620 million of revaluation gains in the year. This represents the group's share of the $2.9 billion in gains across the entire portfolio of assets under management. In light of the caution in the market at the moment, cap rate compression over this year was less than that in the prior year as valuers took pause to assess things in the second half. Rental increases have continued to drive appraisals, albeit that valuer expectations of growth have been moderated slightly in light of the lower inflationary expectations in the economy overall. Whether this turns out to be the case remains to be seen. Revaluation of development assets contributed nearly 1/3 of the overall gains, which helps drive performance of the partnerships and increases the group's NTA. Given the current strength of demand for our assets, we believe that positive valuation growth can continue in the near term. As usual, we also exclude the counting cost of the employee Long Term Incentive Plan. But we include the tested units in the denominator when calculating our operating earnings per security. The decline in the accounting expense was primarily driven by the movement in the stock price and the introduction of more onerous performance hurdles. A few remarks now regarding the balance sheet on Slide 11. The increase in wholly owned investment properties since June 2019, was driven by nearly $50 million of revaluation gains. Investment expenditure was largely offset by divestments. In the absence of new acquisitions, we expect the balance of stabilized assets to decline as we shed the remaining U.K. assets in FY '21. Our cornerstone investment in partnerships, other than those with a primary focus on development, were up by around $900 million. Nearly $600 million of this movement came through the revaluation gains, and retained earnings. The remainder relates to the equity funding of around $300 million. This volume of investment was a little lower than the usual expected run rate as the capacity generated from previous asset sales is used to partially fund the growth. We are moving towards the restoration in the average level of partnership gearing to be in the desired range of around 25%. We expect our long-term capital allocation to partnerships to grow as we fund our share of the growing volume of developments that we complete to hold. In the coming year, we expect this to be funded by a variety of sources. These include additional capital derived from some asset sales, partners' equity, the 80% payout ratio of these entities and further utilization of their existing cash and debt capacity. The group will fund each share of the partner's equity through the retention of profits consistent with the expected distribution of $0.30 per security for FY '21, which represents a little under 50% payout ratio based on the guidance we released today. In FY '20, development cash flows have been relatively balanced. As a result, our development holdings have been relatively flat compared to June 2019. In the second half of the year, in particular, we saw a reduction in working capital allocated to presold projects from the group balance sheet after a buildup in the first half. As we said before, this can vary depending on where we are in the point of the development equity program relative to the settlement process for new projects versus the older ones. Given the strong pipeline of activity, we expect a growing working capital allocation into development in the coming year. Group continues to operate at the lower end of its target range for gearing and expects to continue to be able to facilitate growth and development whilst remaining in that range. Net debt was $200 million lower compared to the same time last year. Breaking that down, our cash position has increased by around $180 million since June 2019. This came after the repayment of nearly $50 million of liabilities. As outlined earlier, we also used around $300 million of cash to invest in our partnerships and developments. More than offsetting this, we had the benefit of our retained earnings. For FY '21, the repayment of USD 170 million of bonds will result in a pro forma reduction in cash and interest-bearing liabilities. With the increased development activity and commensurate investment in partnerships, we also expect that a portion of our cash balance will be used in the coming year. But offsetting the impact of that, we see our payout ratio resulting in nearly $600 million of funds being generated to help finance our activities. That's a good point to turn to Slide 12, which highlights the capital position. As we've said before, we're operate our gearing within a range of 0% to 25% with the level to be set with reference to the mix of earnings. So we aim to maintain low leverage in the foreseeable future. In keeping with this, we have continued to review our distribution expectations relative to the upcoming capital needs. Given our desire to increase development activity and the consequential increase in our expected equity contribution to our partnerships, we've updated the target payout ratio in order to maintain a sustainable long-term funding structure. This strategy will help us continue to deliver competitive rates of EPS growth whilst maintaining appropriate gearing levels. That's all for me. Thanks, Greg.

Thank you, Nick. Now turning to Slide '21. And finally, the outlook. Goodman has deliberately positioned its business, over the past 10 years, to maximize sustainability of earnings in varying market conditions. And we expect COVID-19 to continue to significantly impact why we look, work in the foreseeable future. The pandemic has reinforced the consumer need for convenience and heightened the use of technology, which have accelerated the adoption of e-commerce and increased the need for data storage globally. Notwithstanding the challenges of the pandemic, we are well positioned to take advantage of the acceleration of these trends. Customer demand for all well-located industrial properties is translating into more development activity, higher occupancy and rental growth, higher assets under management and, ultimately, strong returns across our property investment and Management businesses. Our business resilience, combined with these global macro trends is leading to a strong performance. And as a result, the group expects to deliver FY '21 operating profit of $1.165 billion, up 10% in FY '20 and operating EPS of $0.627, up 9% on the FY '20 year. Forecast distributions for FY '21 will remain at $0.30 per security. Well, thank you very much, and Nick and I are now open to questions.

[Operator Instructions] Your first question today comes from the line of Darren Leung from Macquarie.

Good result. 3 questions from me. So one was just on the performance fees. I just wanted to clarify your comments, Nick, around performance fees coming down. I assume that's FY '21 down versus FY '20. How does that -- sorry, those numbers work when you've got a high AUM base, and performance is better than your sort of -- Nick stated in his comment previously?

Yes. So do you want to ask your 3 questions, or do you want to go 1 at a time?

Let's just go one at a time.

Okay. So yes, look, I mean, it just -- it really just a little bit idiosyncratic in terms of the timing of when some of the measurement dates occur rather than performance related, and it's just the way that they fall on the time line, not a performance-driven number. But we're not talking material changes here.

If it's timing related, should we expect a bigger performance fee in FY '22 then?

'22 is a long way, Darren. We'll talk to you about that maybe later in the year.

Okay. And when you provide your guidance, what are you assuming in terms of your performance at the fund level? And then what's the hurdle that you have there?

I mean, all those numbers haven't really changed, Darren. So as previously, the hurdle rates. I mean if anything, some come down a little bit, with bond rates coming down and to take as a benchmark. So yes, really no change there. So the underlying performance doesn't need to be as high as it was this year to continue to generate performance fees, and we've got a backlog of performance fees that will come through as well.

Yes. There's a lot of embedded performance as well, I don't know, 5, 6, 7 years, some of these things are calculated. So it's a pretty smooth trajectory as we look over the next year or 2.

Sure. Well, that's a good outcome. Can you give us a rough indication as to how much performance fees you have backlog that's not recognized?

We prefer not to because that could mislead people. So, no. Sorry.

Fine. The other one was just around the dividend. And so I think what we've previously talked about the payout ratio being in the low 50s, you're pretty much there. What's the risk that we drop below the 50% mark? And I suppose, to sustain the business model, how do you think about further capital allocation towards the funds? Or are you happy [ with that ] little bit?

I think Nick said before in his address that the payout ratio will be just slightly under 50%, I think it'd be 48% for this year. So we are on the 50% anyway. Look, there's still rotation of assets around the partnerships. That's pretty clear. There's a major transaction, obviously, in Europe, we settled just recently, which reorganizes their capital stack for the next year or 2 in regard to Europe. Effectively, Goodman still has assets on balance sheet that are able to rotate as well, and some that are coming more into maturity stage or a time when we might rotate a few of those into different circumstances and things like that. So look, we've got plenty of opportunity to generate cash to meet the growing work-in-progress book, which I think is probably what you're alluding to. And certainly over the next 2 or 3 years, that's very much in our plan to rotate capital and have a payout ratio that's accommodative.

Okay. And then just a final one for me. Any thoughts around capital allocation in the Hong Kong, China. We've talked about them being longer duration projects previously. But as those projects complete, would you look to recycle our capital back into those geographies, or given the view into the medium term, whether you think about deploying that capital?

Look, I think the capital deployment in Asia is going to be pretty steady over the next 12 months, 18 months.

Sure.

But -- we're not going to allocate a lot more, but it's probably going to remain steady.

But when those projects complete, would you look to divest? I assume it's no incremental new capital. But is there, I suppose, a strategy to step out of those markets?

Step out of those -- out of China, Hong Kong and Japan? No. Darren, those assets are already in partnership. I'm not sure if you're aware of that, but they're already bundled in the partnerships.

The Hong Kong one?

Yes.

True. Yes.

Yes. And many in China as well.

Your next question comes from the line of Sholto Maconochie from Jefferies.

Some have been answered, but just on the distribution, I think you're saying circa 50%, perhaps it was 48%, it seems that you're retaining about $605 million, $606 million to fund developments. Is that the main reason to have it flat again this year because you've got that massive increase in WIP to keep gearing sort of constant?

So you're sharp this morning, yes. Exactly right. That's spot on, Sholto.

And then just on the WIP, obviously, a big increase year-on-year. I couldn't find the slide, normally you'd put back the WIP by region, a breakdown. Did you not put that anymore?

No. I'm looking at James, who is in the room now, that hasn't been included this time. But I don't think it's changed materially. Or if anything, I mean, it is a little bit stronger. It's a good contributor. The percentages are in there.

Okay. But usually you'd expect to buy the dollar value across completion starts and everything. Do you have do you have that WIP -- what was the big driver wherever the sort of -- obviously, you got some Hong Kong staff in that empire? Where was the big driver from that income?

Well it has been really solid all around, really, really good performance on the field, all around the world. I think Australia, obviously, there's been a couple of big projects announced here, I think a few months ago or so, around e-commerce. Hong Kong, including some data storage facility in Hong Kong. So Hong Kong is pretty strong. China, though, is growing. I think you can see in '22, that will be a pretty strong book from when we're seeing it here at the moment, that's growing very well. And Japan is consistently good. So Asia is good. Then going through the U.S. We've got some lumpier projects coming into the back end of this year and also into '22, and the U.K. is getting in the stride at the moment. We've gone through the book over the last few years. What got rid of what we didn't want, and that's now primarily gone, and we're really into some good stuff and around the M25 and up the M1. So I think you'll find that will be a bigger portion as well. And Europe is really consistent. And with the sale program we've been through in GE -- in GEP in Europe, there's just a bigger emphasis around the major markets of Germany and France and down in Spain and the Benelux. So I think you'll find there's some really good high-value stuff coming through there. So when you look at our workbook moving forward, and I think today, we said it was going to go through $7 billion in -- running into December, we go through $7 billion strongly, right? And that will be a contribution from the geographies around the world it’s not one particular thing of the project. It's just a lot of very, very good projects.

So just on the website, you got 7 -- kind of $7 billion, it seems like they're longer dated, more complex as sort of 18 months sort of in -- for those projects in -- on the pipeline. Based on your guidance, you're seeing that, obviously, development seems to be the big driver, Management sort of flat to up and NPIs, just more in line with rental growth. Obviously, the competition is moving around a lot. What's the biggest driver of the growth this year? Does this mean that development WIP coming through the AUM and the NPI line and some like-for-like in there?

I think in the short term, it's the development volume that's going to be the biggest driver. And then in the years following, as those developments complete, the other line items will grow.

Yes. I think the point here is we're going to keep -- all of the development projects we've got coming through, would be a 90% keep in our partnerships and what have you. So it's really good long-term lease stuff, it's stuff that our partners want to own the next 20 years, primarily. So from that point of view, a lot of keepers. So you see assets under management drive pretty close to $60 billion this year, and with a little bit of valuation, help probably will go through $60 billion will be around $60 billion. So assets under management are going to grow pretty strongly, which then gives you a nice effect running into, obviously, '22, which we've really focused on, right at the moment, '22 and '23.

And then just on that, on the AUM, you had a currency benefit at the quarter, in the updates, I think you went from 46.2% to -- at the [ FY'19 ] and 49.2% and 55.1%. So the AUM has come down. Is that just currency because currency was a lot here in the last quarter?

Yes.

Yes.

Okay. So it's offset that benefit in the quarterly update.

Your next question comes from the line of Simon Chan from Morgan Stanley.

Just a couple of quick ones this morning. Can you talk about how much divestments you've probably baked into your guidance for this year? I mean you sold $20 billion in the last 7 years. What have you baked in this year?

Look, it'd be around a couple of billion, probably. There's normally anywhere between 5% where we're working through our book.

Great.

A couple of dollar -- a couple of dollars we…

Okay. That's clear. I was just wondering if you guys could perhaps elaborate on the reason for the increase in WIP. In answering Sholto's question, you mentioned geography. I was just wondering, if you could perhaps split it up for us in terms of the key industries. What percentage -- data centers, e-commerce, how much of it is manufacturing or equipment assembly, like what's really driving this $7 billion?

Yes. Look, a lot driving it is the work we've done over the last 5, 7 years in asset selection, right? so this is a product of the work we've done 5, 6 years ago, reorganizing, redeploying, selling secondary sites and secondary locations, bringing everyone back into the core, bringing everyone back into the urban growth environments. That's what's driving it. And effectively, the macro trend around e-commerce is strong, and it was strong going into COVID, and it's got stronger through COVID effectively. And then I think as something that parlays off that as well is, obviously, technology and data, and data is growing. Now we've been doing data centers the first 10, 12 years. So this is nothing new for us, just that, that sector is getting more voracious in expansion. You see that through some of the very large operators, and that's who we're dealing, with very large operators in the world. The reality is, they all go to the same industrial site that might be required for warehousing, data center and some residential. So we've got these competing uses converging on some of the sites we own and bought and property we own around the world. So you've got this convergence. And then that is happening in all markets we're operating in. So there's real competition for the really good sites. And I think that's what is driving, ultimately, the work in progress. And I think you'll find that we say it goes through $7 billion, and we'll go through $7 billion strongly.

I think we can comfortably say, Greg, there's not a lot of manufacturing assembly in there.

No.

Yes. So would you suggest that the $7 billion is pretty much, say, 10% data center and the rest, the Amazon-like e-commerce stuff that's signed up to you?

It's a pretty good shot. We've got a pretty good shot at it. Yes. That's about right.

Your next question comes from the line of James Druce from CLSA.

Just another question on the development pipeline. Just thinking about the completions over the next 12 months. Can you give some -- just some color around the sort of quantum of that, just noting that you've sort of done $4 billion FY'19 down to around $2.5 million, WIPs obviously gone up hugely. And just for the run rate for completions and the relationship with WIP going forward?

Yes. So like I said, I think we called this out a little while ago where as we're moving to these higher intensity projects, longer duration projects, there'll be this transitional period, which we're going through now. And the kind of completions rate is not the best indicator in the short term, which is what you're alluding to at the moment. The best way to look at things is more on the production rate, and that's why we emphasize that this time around. So historically, when projects were averaging 12 months, it was in and out, and the WIP was a good indicator of production rate at around sort of 3 -- grew $3 billion to $3.5 billion. What we're seeing now is that production rate is going to go beyond $4 billion and head towards $5 billion, if things continue at this pace. And so that's the better indicator. So the completions rate -- on a WIP balance of $7 billion, for example, on around 18 months, the production rate will be around that sort of $4 billion mark. And I think that's where we get to in a couple of years from now in terms of completions rate. And then we'll see where it goes from there. Does that make sense? You understand the dynamics?

Yes. That's really helpful. And some of the semantics. I mean you called out e-commerce working in the big data. The other sort of semantics that's been going around a little bit is sort of nearshoring, onshoring regionalization of supply chains, maybe it's a bit more U.S. centric, but can you just comment on that trend as well?

Yes. No, you did right. And I think all businesses are looking at how they have a sustainable supply chain in-country, particularly in big countries where there's a lot of population and a lot of consumers. The U.S. is a very, very good example. China is actually another really good example as well with 1.3 billion people. So that's occurring. We're doing a lot of work with grocery, basics and staples and things like that as well, making sure we get the improvements around efficiencies and costs and speed and speed to market and all those things. So yes, you're quite right. So we have a body of work, when we look out over the next couple of years, which is pretty extensive and expansive around all those things. So I think the prognosis for certainly '22 is also pretty good around the development book.

Your next question comes from the line of Grant McCasker from UBS.

Just one question for me. The 6.8% yield on commencement of $4.5 billion is very attractive. You've moved out of sort of the broad acre development and into more infill locations where you say there's less competition. But what is the appetite, or what is the -- how much competition are you seeing in that part of the market? That's the first part of the question. And then the second part, when we look at the development book going forward, what proportion will come from your existing portfolio versus actually having to buy sites?

Yes. Look, I think around the competition element, Grant, look, good sites are always competitive. There may not be right at the moment, 10 people turning up for a good site, but there's 4 or 5 and the 4 or 5 that have got capability intent and capital. So I think you'll find that good development sites, and we're talking the ones that are $70 million to $150 million, which is basically the range we work in, in the mine, some a little bigger, you'll find that there's good demand because I think the bigger players in this industry understand the dynamic and the drive that's coming through from the customer. So people are turning up. So competition is still there, but that's nothing new to us. A couple of sites we've bought just recently around the world, a few hundred million we've done off market. That's great. Another couple we're doing off market. That's been so good. So we're just in the market all the time looking at where we want to position ourselves, and it's incremental. So coming down to your second question around buying, we don't have a Friday, where we say we've got to go shopping. We have to look constantly, that's our job, 24 hours a day, primarily around the world because it's a 24-hour business. That's what people are looking for, that site that's got something a little bit special. Maybe it's got a -- we can power it up, so it works for data center or maybe it's got some additional buildings, which we can reconvert to something else or maybe there's a site in 5 years time, 10 years time, [ could even be a renewal play ]. So those things are incremental, and you've got to be in the DNA of the business. And that's certainly the way we've positioned the business over the last 5 to 7 years, in particular, to have that foresight and drive to make sure that's incremental. So we don't need nothing this scenario that if we pop out $7 billion, $8 billion of work in progress, we're running around scramming around the sites, where we don't have to. In the current $50-odd billion portfolio, yes, there's a lot of property in that as this cycle continues that come into that [ sear ]. For example, a land value down in South Sydney to build multistory, which we're planning a few down into South Sydney, a few years ago, you might have been looking at making it work at $1,500 a meter, now you can probably make it work at $2,000 a meter because we're the REITs and we're the demanders. So some of those sites we head down in South Sydney are now going, well, we can bring that forward a little because of the demand factors. So I think longer term, you are what you eat in this business. If you've got really good real estate and good locations, I think you'll find that the regeneration, particularly around industrial when the stuff on top of the ground is less expensive to build effectively from a shopping center or something or an office building, effectively, you can regenerate, and we have a lot of that around the world. And we've been particularly buying that type of product in the U.S. So we're buying it at the end of its life cycle, might have another year or 2 to go. But then we can wind it into something better and bigger and more robust that suits the market today. And that's the stuff that we really, really like, and that gets us up in the morning with a spring in our step, if we can find stuff like that.

Okay. So the -- this -- I'm bringing that back to the development yield at 6.8%. So do you think you can maintain that in FY '21 for the commencement?

Yes.

So just to be clear, the $7 billion sort of projection. That's all, like, stuff that is in the ownership now. It's not…

Sure. No I get that.

The next question comes from the line of Richard Jones from JPMorgan.

Just further to James' question from earlier. So can you just run through -- if I look at completions, down circa 40% earnings for development up 13%. I know you you're talking about production being more important. But I would imagine the bulk of the profit in development is recognized on completion, given that's when you're testing the return versus hurdle. Can you just kind of work us through how that works, Nick? And I guess, with visibility, you're saying that the production rate is kind of north of $4 billion. What does that number look like relative to 2020?

Well, I think, I mean, Rich, if you go back maybe -- maybe this year is not the best year. If you go back, say, to FY '19, and before that, you might recall, we did a lot of this -- we explained it all sort of back then and how it worked. And the sort of mix of earnings and the composition of earnings based on the 80-20 ratio on balance sheet to -- in partnerships and then our fee portion relative to the profits we make on the asset sales, sort of blended out to a revenue return in the low teens. And so that is still consistent, right? There's some timing issues. You're right. I mean, for example, development performance fees will get calculated upon completion. But that means that projects that completed sort of at the end of last financial year FY '19 would have revenue coming into this year as well. So that's why we're going through this period where the completions number isn't really the best indicator. It's really that run rate number that's going to be the best indicator for you. So if you think about $4 billion type run rate number of work completed. And if you think about sort of that low teens sort of revenue take, that will help instruct you as to what kind of composition of earnings will look like and how it will be derived in the coming year. And I think that's a better indicator for going forward.

Okay. And is the mix on -- versus off-balance sheet likely to be different in '21 versus '20?

Not materially. Nothing, sorry.

Yes. There a couple of bigger projects, Rich, on balance sheet that will work off. And I think in July, we actually had a pretty strong completions in July as well. So it didn't fall in June, fell into July. So I think Nick's right, it's going to be -- it's going to be a pretty big number going forward of production. And I think there's plenty of opportunity there for the group to do well over.

Okay. So expect a strong development number in the first half for earnings, again? Is that…

Yes. I think that's -- yes.

Yes.

A fair assessment. I think we've put out $1.165 billion number, which is 9% on top of 11.4%. So yes, it's going to be a strong result. Absolutely.

Yes.

Your next question comes from the line of Suraj Nebhani from Citigroup.

So just on the asset under management number. I wanted to clarify, Greg, did you say it would be $60 billion by the end of the year?

Look, I said we'll probably go pretty close depending on valuations. Yes.

Okay. And that would assume that $4 billion of completion coming through and maybe some acquisitions as well, right?

Yes, there'll be completions come through. Hopefully, there'll be some valuation growth. The indications at the moment are, industrial cap rates are probably firming from what we've seen around the world. So I think that will probably be a bit of a feature for the year. But look, it's uncertain time. So you've got to look at cap rate compression and things like that with a degree of uncertainty. But at the moment, anyway, it looks like, certainly, the wall of capital wanting to get in industrial is actually pretty voracious, pretty large. So yes, I think cap rates are fair. I think they are, at the moment, actually, I think with some of the transactions that have been going on around the world. So I think, you put all that together, yes, it will be a pretty strong growth in assets under management.

Sure. So just trying to add that up with the comments that Nick was making earlier about values holding CapEx steady for COVID. Is that -- like, do you see that changing over the next 6 to 12 months?

Yes. Look, I think if I would call it now, I'd say it's coming 25 basis points probably over the last 4 weeks, to be quite honest. But yes -- no, I think cap rates -- we're getting some unsolicited bids even in the U.K. on assets that got a 3 in front of it now. So yes, I think industrial, as things remain the way they are, and that's uncertain because we don't know. That's the reality. Cap rates are probably going to tighten, would be the call I'd make right at the moment. But that call next week could be very different depending on the way the world goes.

Sure. That makes sense. And just on the development again, are these large Australian projects that are signed at Amazon over the last few months, are they included in with -- now or not yet?

Some of it is, yes.

Yes.

Yes. Okay. And can you just say how much development -- like how much product can then land? Like the land that you have across the portfolio, how much product can you build based on that before you have to go out and restock?

Look, it's multiples of what we're doing at the moment with what we own around the world because a lot of what we own, that you might call as an old style building on a block of land, is actually -- as the demand builds, those actually come forward, they don't go back. Because the land value passes through basically the land and building value. So yes, there's more coming into production because of the demand and where the rents are going. So look, we're well catered for. And like I said, incrementally, I think it would be in the last week, we have bought about $140 million, 2 sites in this part of the world. There's another probably couple hundred million dollars we've just bought, probably about 3 weeks ago in Europe. So -- in the U.K. specifically. So I think from that point of view, it is incremental, and this is something we do just all the time. It's not something, like I said, we -- it's a super Friday and we go out and buy some stuff because we need some. This is -- well, we look for it all the time. And it's a sort of thing that I think makes our business really interesting, looking at a site -- looking at the possibilities and what could it be and how can we work it and what planning can we get and [ can we up rate it ] on an EPS basis, can we go multi. Things like that. I was looking at one with Anthony the other day, Rozic in the U.S., the multi -- first multi we're looking at. I don't think we're necessarily going to do that one. But we're looking at it all the time.

Okay. Fair enough. And just finally, on the guidance. Just trying to add up the comments that you're making on the various segments and like the cost of debt. Obviously, you expect it to fall as well back as I think Nick was saying that it would be a pretty similar trends for this year. So I'm just wondering what's weighing down on FY '21 guidance?

We're getting 9%. It's pretty good view and a pretty good number. So obviously, we're in very uncertain times. We're -- we've got an analysis of prudence in that number. We're not trying to be overly conservative or overly optimistic. We're trying to be realistic. So some things will go our way, some things mightn't. So we made sure we put a number out there we feel confident in. I think it's the best way to describe it.

[Operator Instructions]

I think we're all good. Thanks a lot, everybody. And like I said earlier, stay safe and take care.

Thanks, operator.

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect.