Goodman Group (GMG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Goodman Group Half Yearly Results. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Greg Goodman. Thank you. Please go ahead, Greg.

Yes. Thank you very much. Good morning, and welcome. I have Nick Vrondas with me on the call. Goodman's global operations have delivered a strong first half result. Our operating profit was $615 million, up 16% on the prior period. And our operating earnings per share was $0.331, up 15% on the previous year. Statutory profit grew to over $1 billion for the half. Goodman adapted early to the operational challenges brought about by COVID-19. Underlying customer demand strengthened throughout the period and provided a strong platform for growth going into 2021. We have created a flexible working environment for our people around the world, which has prioritized health, safety and their wellbeing. Flexible working at Goodman is our new norm. It suits our culture and global operations. It also protects our people and improves our productivity and diversity. Market conditions remain favorable, and the business is performing well. Long-term structural trends are well established and are driving high utilization of space and strong customer demand, which provides us with positive direction around future requirements. And as a result, we're upgrading profit guidance for FY '21 to $1.2 billion, reflecting EPS growth of 12% on FY '20. The forecast distribution is maintained at $0.30 per security, in keeping with our capital management strategy. We have continued to grow the business and keep leverage at the low end of our target range, both at the group and partnership level. The group has $2.3 billion available in cash and undrawn debt, providing significant liquidity, stability and financial resources for future growth. Valuations across the group and partnerships have also grown by $1.5 billion for the half, reflecting strong demand, tight supply conditions and solid underlying rental growth. Goodman has evolved as a provider of essential infrastructure to support the digital economy. This is now driving growth across all our markets and is expected to strengthen further as we head into June. Our business is consumer-centric, and we're keeping a watchful eye on the trends that are occurring. Global online sales increased 30% in 2020, with the convenience of online shopping and consumption of digital media and services fueling enduring change in customer requirements. There is now a very direct correlation between consumer habits, customer demand and how we position our business. As a consequence of substantial demand around the world, our portfolio occupancy remains high at 98%. We leased 1.9 million square meters of space during the period. We also completed $2.2 billion of asset sales across our partnerships, primarily in Europe, where we refined our investment strategy. The group has responded to global demand, and our development work book has grown to $8.4 billion, reflective of the long-term structural changes we're seeing in our markets. Work in progress may continue to increase during the remainder of the year. Meeting customer demand for strategically located space close to consumers while making a positive contribution towards a more sustainable world has never been more important. Land is scarce in our infill markets, which makes it very valuable. This, together with the need for more sustainable development, is driving increased intensification of use. Goodman is a leader in the urban regeneration of logistic sites in our markets around the world. We believe that redeveloping existing brownfield sites will have the lowest impact to the environment by intensifying existing urban locations. This importantly requires planning authorities to be conducive to the increased utilization and regeneration of land, including multi-storey, which will offer more sustainable outcomes. Multi-storey comprises about 60% of what we're doing around the world, and we expect this trend will continue. We have accelerated the scale and timing of our sustainability targets. We're also on track to decarbonize our operations ahead of 2025, and we've increased our target for renewable power from 100 megawatts to 400 megawatts at a cost of more than $400 million for the group and our partners around the world. Our sustainability goals are real. They're aligned with our customers' aspirations. They are progressive. They're appropriate. And they reflect our obligation to take profound action on climate change. We believe anything less will risk obsolescence and future performance of our assets. Thank you. I'll hand over to Nick for a few more comments.

Thanks, Greg. Let's turn directly to Slide 10 as we look at the income statement. We'll first cover the operating profit and then discuss some nonoperating items listed at the bottom of the table. Overall, FX movements have not had a material impact on the translation of our foreign income when compared to the prior corresponding half year period, so you can just focus on the key operational drivers of the results. Looking specifically now at the movement in investment earnings. The portfolio repositioning program was active again as we completed many asset sales out of our partnerships. We've also been actively working up the redevelopment of many of our assets, so we've been purposely vacating buildings to facilitate this process. As a result, the direct property net rental income is $11 million lower than the same time last year due mostly to the full period effect of sales of nearly $0.5 billion completed during FY '20. The other part of our investment income comes through our cornerstone interests in partnerships. Here, again, income fell by $6 million compared to the same period last year. Rental increases resulted in $6 million of growth, which equates to like-for-like NPI growth of 3%. This was more than offset by the impact of capital transactions, which had a $12 million adverse effect on our share of income. The completion of over $2.2 billion of asset sales this half year and $3.5 billion cumulatively over the past 18 months, combined with the utilization of debt capacity that was created, have resulted in a temporary reduction in our equity capital allocation to stabilized assets in the partnerships. Most of the incremental investment is going into future development activities in the form of CapEx or redevelopment sites. In total, the partnerships invested $3.3 billion in the half year and $6.6 billion cumulatively over the past 18 months. As a result, the group contributed its share of equity, which resulted in a net $400 million of new investment into our partnerships in the half and around $700 million in FY '20. The average yield on this new equity was around 4%. Given the timing of capital transactions and the long-dated nature of our developments, we expect overall investment income for the full year to be lower than FY '20. But with the ongoing rental growth and the income to be generated from the development assets, we expect our cornerstone earnings to grow in future periods. Management revenue was largely consistent with the first half of FY '20. Growth in volume of stabilized assets under management was impacted by the sales program, which more than offset the impact of completions and revaluation gains. Performance fees and similar transactional revenues contributed $67 million this half, which is broadly in line with this time last year. The performance and activity levels of the partnerships continues to be strong. We continue to believe that fee revenue, a percentage of AUM, will probably be a little below 1% this year, but average 1% over time. So we expect continuation of growth in management income in the long term as our AUM grows. Realized development income was nearly $400 million for the half. In addition to that, $140 million of our development income was recognized as revaluation gains that sit outside of operating profit. We want to emphasize that we create significant value through the process of land identification, achieving planning outcomes and project delivery. We have continued to execute on these core functions very well this half. Another feature of our portfolio that we have been highlighting recently is the impact of the larger scale and therefore, longer development times. This has resulted in an extension of the development period for the projects in WIP to an average of 18 months, providing enhanced visibility into our development earnings going forward. The recent growth in activity levels has outstripped the impact of the longer development periods. As a result, our average annualized production rate of WIP has increased from $4 billion to $5 billion. The confluence of these factors has meant that realized development revenues in the operating result have grown by $100 million compared to the prior corresponding period. We continue to be enthusiastic about the prospects for development demand, and we expect to maintain our strong activity levels, which bodes well for future revenue. Our operating expenses have been stable as our business continues to be focused on a narrow set of markets, which enables us to grow revenues without significant cost variations. Our aim here is to continue to keep our fixed costs relatively steady and instead to use variable costs, such as STI and LTI plans, to incentivize and align our people. Our borrowing costs were down marginally as the Australian dollar was relatively steady over the half compared to the prior corresponding period and because we've repaid some higher cost debt. Partially offsetting this is a reduction in interest earned on cash and the reduction in capitalized interest. Our net weighted average cost of debt is heading to around 1% with the strengthening Australian dollar. We expect our borrowing costs to fall significantly in the second half. Our tax expense was down marginally, as we had previously flagged. We currently expect our FY '21 tax rate to be lower than that of the last year given the nature and origin of our income. As far as the nonoperating items are concerned, we saw around $350 million of revaluation gains in the half year, which represents the group's share of $1.5 billion in gains across the entire portfolio of assets under management. Cap rate compression over the half was again prevalent as were rental increases. Development valuation gains of approximately $140 million were recognized in the half, which accounted for nearly 40% of the group's share of the total valuation result. Around half of this was the result of developments completed within the period, and the remainder was from gains emerged on investment properties under development to reflect their significant progress. With the strength of demand of our asset class and the significant contributions from development likely to continue, we expect that positive valuation growth will persist in the near term. Another customary area of difference between operating and the statutory profit is the fair value movements of hedges, which were up nearly $200 million overall. The Australian dollar rally since June has been the main contributor to this. As usual, we also exclude the accounting cost of the employee long-term incentive plan, but we do include the tested units and the denominator when calculating our operating EPS. A few remarks now regarding the balance sheet on Slide 11. Our FX impacted the balance sheet when comparing December 2020 to June 2020. The strong Australian dollar resulted in reduction in the translation of our net foreign assets and liabilities by $0.4 billion, which is reflected directly in the foreign currency's translation reserve. This is partially offset by the derivative gains flowing through the statutory income statement that we discussed earlier. The wholly owned asset portfolio has been stable overall. But this was the net effect of transfers of assets for redevelopment, net of acquisitions, expenditures and the revaluation gains. Our share of stabilized assets within our cornerstone investments in partnerships were down by around $150 million. Of this, we had an FX impact of $350 million. We also had a $100 million reduction in our proportionate share of investment properties in partnerships due to the asset sales of $2.2 billion, exceeding acquisitions and development completions. And this was partially offset by nearly $300 million of revaluation gains. Compared to June 2020, our development holdings are down by $50 million overall. We had a $200 million increase in our share of the partnerships' development capital allocation as a result of investment and expenditure of nearly $70 million and nearly $70 million of revaluation gains from projects still in the process of development. This is partially offset by the FX translation effect of $100 million. Our directly held development capital was down $150 million due to sales and completions exceeding acquisitions and development expenditure as well as the $25 million FX translation effect. As we've said before, development cash flow can vary depending on the point of the development activity program we're at, relative to the settlement process for new projects versus the older ones. This was a very strong half for cash inflows, but we're growing with -- we expect that the working capital allocation to developments will trend up in the near term. Our cash position decreased by around $500 million since June. This was mainly due to the repayment of $0.7 billion of U.S. dollar bonds in the half year, which leaves us in a position where we're down to $2 billion of interest-bearing liabilities. We also had a $100 million impact from FX on our foreign-denominated cash holdings. The cash generated from our retained earnings funded the investments into our partnerships, which is entirely consistent with the design of our long-term capital management plans and the distribution policy. FX also had a $200 million effect on our debt translation, which is all denominated in foreign currencies. As a result, our net interest-bearing liabilities, net of cash, have now reduced to around $800 million. That's a good point to turn to Slide 12. As I said before, we operate our gearing within a range of 0 to 25%, with the level to be set with reference to the mix of earnings and activity levels. In light of the growth in developments, we aim to maintain low leverage for the foreseeable future. Gearing is nearly 3% lower than June 2020. But please note that we are expecting to increase development capital allocation in the near term, and there are less asset sales from partnerships foreseen. So gearing may be a fraction higher by June, but expect it to remain below 10%. That's why our distribution per security is expected to remain at $0.30 for FY '21. And this will enable us to sustainably fund our proportionate interest in the assets we are developing for the long term. That's all for me. Thanks, Greg.

Thanks, Nick. That was very comprehensive. Our consumer-centric approach is driving our growth and maintaining our relevance with our customers. Changing consumption habits across the physical and digital space is fundamentally and permanently impacting the volume and nature of demand from our customers. We have the established expertise and operational platform which we have developed over many years to facilitate this transition. And in closing, we've had a good start to the financial year, and we expect it is going to continue for the second half. Based on this, as stated earlier, we're upgrading our forecast for FY '21 operating profit to $1.2 billion, representing EPS growth of 12% on FY '20. Thank you. And Nick and I are now available for questions.

[Operator Instructions] Our first telephone question comes from the line of Simon Chan from Morgan Stanley.

My first question is probably more for Nicky V. here. Nick, I was just hoping to reconcile a few of your comments from your presentation just before, so that we're thinking about the second half properly. Firstly, I think you were saying development completions are expected to hit $5 billion per year now going forward. Is that right?

Yes. We'll call it the production rate. And the production rate average over the last half is about $5 billion. It is going to be a little bit higher going forward because the $8.4 billion that we're at, at the moment, at 18 months is a little bit north of $5 billion. So going forward, that will be the production rate. The timing of completions on a 6-monthly basis is a little bit less programmatic than that. But I think we'll keep guiding you towards that production number. Some of the completions may happen in June or July, for example, this year, and that could have an impact on the actual completions. But if you focus on production rate, I think that's a better way to look at it.

Okay. That's fair enough. And regarding disposals, you did a fair bit in the first half. I know you're always pruning your portfolio, but what have you got in your guidance there? Are we assuming another $2 billion? Or are we assuming probably a flat number?

Yes. Look, I can probably handle that one. Most of the $2 billion was a reset in regard to what we want to do in Europe. And to put that in context, we've now got a European partnership that is very, very close to 100% occupied, with some really high-quality development coming through and being offered and also done in partnership as well. So what we did was made a call on the market we're in and made a call on certain markets we didn't want to be in, in Europe, particularly in the light of where I think the world goes over the next year or 2, where you want to just be in the very strongest markets where you can get the strongest rental growth. So the work in Europe, we believe now, is primarily done. There will be some sales as per normal, where we look at the portfolio globally and we'll go -- we're a dynamic business. We're dynamic in the way we look at things. And if we see demand shifts or locations that might be less favorable or there's big premiums to replacement costs being paid, things like that, we'll obviously evaluate that. But I think that was quite a large number, and we wouldn't see that as the going forward to the second half. I think the second half will be more around that inside $1 billion, I would have thought.

Great. And the performance fees, correct me if I'm wrong, but that's traditionally second half-biased, isn't it?

Yes. I'd just say, in regard to the performance of the partnerships, and a lot of this is timing on performance fees obviously, we're in the mid-teens. We were in the mid-teens last year. So there's a lot of accumulated performance that's accumulating in those partnerships this half, but also running into '22. So I think you need to look at performance on a very, yes, medium-term basis. The next '22 and '23 are looking pretty good.

And the other tailwinds you have coming up, Nick, just to confirm, tax rate will come down and borrowing costs, you're expecting to fall materially. Is that right?

Correct.

Yes. I think just for that in context, too. Net debt is -- it's under $1 billion. So that's a number I'm particularly proud of. I think to have a business like ours that has got a development book that's growing, so $8.4 billion, as I indicated, will be increasing into June. To have a net debt position of $1 billion, which is pretty much 1 year's operating earnings, is a very, very strong position with the construct of our business at this point in time.

That's all fantastic, guys. So putting all of that together, I'm just struggling to understand how your guidance is implying a weaker second half relative to first half then. I mean you did $0.33 in the first half, and your guidance is implying $0.64 for the full year. I'm just struggling to reconcile your comments there, Greg.

I think when you get to June, you need to look at '22 as well. I think you need to take everything in context. Yes, we're -- our business is in really strong shape. The second half is going to be strong in regard to activity levels. But with the longer-term nature of our developments and things of that -- the structural changes in the business and the customers means that we've got a lot more opportunity over 2 or 3 years to be looking at visibility on profitability. We think 12% is a really good number. And we think '22 is what we're really focused on now to make sure that we have a good '22.

Our next telephone question comes from Sholto from Jefferies.

Channy got all the good ones in. But look, just a few follow-ups there. So I think you said less than $1 billion of asset sales in the second half. Is that correct?

Yes.

And then just to clarify a few things. On the $140 million of development, noncash revals in the development earnings, what was the PCP sort of equivalent in 1 half '20?

I'll come back to you, Sholto. I don't have that number at my fingertips right at the minute. I think it was lower, but I don't have the exact number. We might come back to you on this.

Yes. That's fine. And then just to be clear, on the -- on your share of the revals of $350 million, that doesn't include the $140 million. That's just in stabilized properties on the $350 million, isn't it, on the below the line?

No, no, it doesn't -- no, no, it does include. So $350 million is all inclusive. Yes.

Okay. Yes. Okay. Sweet. And then just on -- just to clarify Channy's question there. Obviously, you had a very strong development earnings, which is going to be elevated. And the asset sales, obviously, you get the full year effect. To clarify that second half lower number, it's really just an investment line because you get the full year effect of those asset sales from '20 and the first half '21. Would that be a fair comment?

Sholto, I've got to be honest. I was actually just...

I -- no, no. I've got this one, Nick.

Yes.

Yes. So I think that's about right. The development earnings, they're going to be strong, but you've got to have the look-through into '22 as well because a lot of projects will go through. And work in progress, guys, is probably going to move through $9 billion during this half and next, where we'd probably be right at the moment, at this point in time. So we're going to be looking really good in '22 on development volume, and you guys can work out the margins from what we've given you. And the margins are good. And in that work in progress number, that is not a full mark-to-market in regard to exit cap rates, too. So there's some flex in that as well. So development is going to be strong in '22. You've got growing assets under management because of that $8.5 billion to $9 billion, 90% of that we're keeping. And if you look at the duration and the length on the lease terms, very, very good, so the stuff we're develop, in the main, we're keeping. You add that to assets under management, with $19 billion of undrawn debt and equity around all our partnerships, we can grow organically very well over the next year or 2. So I think you want to look at it -- you want to look through, obviously, this year into 2022 because a lot of these development projects are going to be into '22 as well.

Yes. Good visibility of earnings there. And then just on the asset sales, you said it was mainly Europe. Are you looking at trimming the portfolio anywhere else? Or is it just mainly that European stuff?

Yes, it was mainly the European stuff. We did have a bias to sell fully developed assets in North Ryde. So I don't think you'll see us holding a lot of suburban office assets unless they've got redevelopment potential. So there was probably $500 million in that area. So we've done most of that and got some very good prices. So I think we are just refining what we're doing. We are watching the -- and I mentioned it earlier, we're watching the consumer at the moment very, very closely. We're trying to understand what our customers are seeing in regard to how the consumer's going to live, what are they going to do, where they're going to spend the money, are they buying more electric cars. Jaguar in the U.K. now is going all-electric by 2025. These things are major moves, guys. And these moves are creating opportunity, but also creating a time to pause and think about do you want to be there or do you want to shift your strategy. So you need to be dynamic. And I think the last 12 months has taught probably everyone around the world, expect the unexpected and make sure you're match fit every day you go out on the park. So I think we're really focused on just getting the best growth, the best locations where we don't feel vulnerable. And I think the other couple of questions about sustainability and obsolescence, right? If we don't get with it and we don't have offerings to our customers that include the renewable plans around buildings, they will not go into your buildings in the future without it. So people are going to be retrofitting these buildings in the future to comply with what our big customers are asking for today. And everyone's on that plane. So there's a lot of areas you need to look at, and you need to be refining what you're doing all the time. And that's what we intend to continue to do.

And then just on the performance fee, Greg, I think you had about $207 million last year. The first half looks like it's in line. You said about 1% of AUM external. What do you expect the performance fees to be this year. Are they broadly similar than last year?

We flagged -- I think we flagged, Sholto, that it will be slightly lower. So that's what we're running with.

Okay. And then just finally on the WIP, very strong demand, clearly. It looks like it went up a bit in Asia in the half. Where is the incremental demand coming from in this half?

I think you'll find U.S. is well over -- yes, U.S. is well over $1 billion in planning right at the moment. Now, planning is not an exact science. And we've got basically demand behind that, and it's probably over $1 billion in the Americas in total. We've actually got 3 or 4 buildings coming out of the ground -- actually, 4 buildings coming out of the ground. In Brazil, 2, by the way. There's 250,000 meters coming out of the ground this half. So there's a bigger contribution to the Americas -- from the Americas. And I've got to say, coming back from Christmas and talking to the team here in Australia as well, we've had a really busy January. As everyone's been thinking about what they need to do during '20, COVID, obviously, was a massive shake for the world to understand that these things can happen. And a lot of our customers, big customers in Australia, have sort of gone, wow, we need to move and make sure that we've got facilities and protections for the future. So a lot of what will happen this year will be around managing a COVID situation that is going to be more enduring than just, a snap, 12 months. So a lot of strategies have changed. And I think you'll find that will come through in our work around the world in '21 and '22.

Yes. And then just finally on the development WIP. Your margin's $6.6 billion and the stabilized cut, $4.7 billion. So that's implying about a sort of 40% margin. So you're getting -- confirm you're getting above 35% on your development sort of if you do that math?

Now look, I think you've done the math. We're in very, very good shape. But once again, we're in good shape over the next few years in development, clearly, and we'll be adding to it incrementally. And that's what we do. We bought -- I think I mentioned at the quarter, we bought $1 billion of additional sites in the last 4 or 5 months. Those sites would have a buildout value of probably close to $3 billion and good margins. But they will be in production in '23 and '24 and '25. Everything we're doing is looking 5, 6 years out in development. Very, very rarely, very rarely are we buying something that's ready to go today. That would be the exception, not the rule.