Goodman Group (GMG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Goodman Group FY '21 Results Call. [Operator Instructions] And just please be advised that today's call is being recorded. But without further ado, I'll hand the conference over to our first speaker for today, Mr. Greg Goodman. Thank you, and please go ahead, Greg.

Thank you very much, Miles. Good morning, and welcome, everybody. I hope you're keeping safe and well in these very uncertain times. Nick Vrondas is with me on the call. Throughout the year, Goodman has remained flexible and adapted to the changing conditions, enabling our business to deliver strong growth with the health and well-being of our people remaining a high priority. We have continued to build on previous years with operating profit of $1.22 billion, up 15% on last year. The result highlights strong growth in our development workbook, high demand from our customers and positive revaluation outcomes. Operating earnings per security for the year of $0.656 is up 14.1% on the previous year, and statutory profit came in at $2.3 billion when you include primarily the revaluations. Goodman is well capitalized with gearing at 6.8% and available liquidity of $1.9 billion, including $900 million in cash. Our partnerships, importantly, also have $18 billion available for future investment. Market conditions are strong in our sector. Continued growth in the digital economy is giving our customers confidence to grow. Our global portfolio is well positioned to facilitate their needs. Our development workbook increased during the year to $10.6 billion. Our global work in progress is spread across 73 projects and 12 countries. And importantly, the development program has very strong margins. The depth of demand is leading to a high level of pre-commitments with work in progress 70% leased and an average lease term of 14 years. Projects completed in FY '21 were almost 100% leased. Development undertaken on behalf of our partners remains consistent with prior periods at 81%. The activity is following through the partnership's performance and also the assets under management. Assets grew solidly through the year and now stand at $58 billion. Our partnerships delivered average returns of 18% with solid income and capital growth. With strong visibility into the development activity, we're forecasting growth in assets under management this year to an excess of $65 billion which, in turn, will be reflected in revenues in future periods. Regeneration of our existing brownfield sites is an important part of our global sustainability strategy given their lower impact on the environment. Developing brownfield sites decreases waste, preserves greenfields land and generates jobs where people live, reducing commute times and uses existing infrastructure. These sites represent more than half of our development land and will provide us with more development opportunities in future periods. One of our most important areas of focus this year has been to integrate ESG initiatives into everything we do at Goodman. We are focused on our long-term sustainable approach that leads to positive economic environment and social outcomes for our business as stakeholders and the world more broadly. This year, our global operations achieved carbon neutrality 4 years ahead of our target. And looking ahead, we're working with our contractors and customers to decarbonize our developments, a critical part of the solution to emissions reduction. We've established a framework to calculate the embodied emissions from our development projects globally, which will allow us to reduce and offset this in the future. And finally, throughout the year, Goodman Foundation continued its efforts to help its partners support their communities around the world. Now I'll pass over to Nick for a few comments.

Thanks, Greg. Let's turn now to Slide 10 for the income statement. We'll first cover the operating profit and then discuss the nonoperating items at the bottom of the table. Overall, though, FX movements reduced the translated value of our foreign income when compared to last year. But this was collectively offset by the $58 million benefit we got in the net borrowing costs. We'll go through the individual impacts along the way but, in aggregate, it's worth noting that operating EBIT was up by nearly $140 million on a constant currency basis. Looking specifically now at the movement in investment earnings. The average volume of directly owned assets is largely unchanged over the past 2 years. So our NPI has been stable. Investment income from our cornerstone interest in partnerships on the other hand, was down of $15 million over last year. And this was exactly equal to the FX translation effect. Underlying rental increases resulted in $13 million of additional income to the group, which equates to like-for-like NPI growth of 3.2%. The majority of this growth came through fixed increases, but we expect to see ongoing support from market rental increases in the locations we operate in. This was offset by the impact of capital transactions, which resulted in a $13 million reduction in net income. Some of this was due to the positioning of assets for redevelopment, which meant that we've made them intentionally vacant. The timing of disposals relative to acquisitions and development completions was also a factor. It's worth pointing out that the disposal program has led to some return of capital to ourselves and our partners. This slows the rate of income growth because we've reduced the amount of equity invested, and what equity we are investing is mainly going into development activity. Another significant driver in recent years was that the net initial yield on the assets sold has been greater than that of the assets acquired. We continue to focus our portfolios in what we believe will be the better properties within our chosen markets, and that this will deliver rental growth and value creation opportunities to enhance total return in the long run. With ongoing investment and growth in like-for-like NPI, we expect our cornerstone investment earnings to increase over time. Management revenue was down $52 million this year, but $24 million of that was driven by the FX translation effect. And our net investments have been relatively stable. But it was the strong valuation gains over the year, especially in the second half, that was the biggest contributor to AUM growth. As a result, base management revenues grew by $20 million over the year. Performance fees and transactional revenues contributed $149 million this year, which is down by $48 million over last year. Performance and activity levels in the partnerships continue to be strong. So this reduction has just been the result of the timing of revenue recognition. We expect that fee revenue as a percentage of stabilized assets under management will average about 1% over time, which is in line with this FY '21 result. Given the prospects for growth in AUM and the ongoing performance of the partnerships, we believe that there's scope for growth in management revenue. Realized development income for the group was nearly $720 million for the year. This is up by over $140 million year-on-year or $175 million on a constant currency basis. In addition, nearly $400 million of development gains are recognized by the group as its share of revaluations. As usual, the revaluation income sits outside of the operating profit. It does, however, demonstrate that we create significant value through the process of site identification, achieving planning outcomes and project delivery and that we've continued to execute these core functions very well. Another feature of the developments that we've been highlighting recently is the impact of their larger scale and, therefore, longer time frames. This has resulted in the extension of the development period for the projects in WIP to an average of just over 19 months. That means our annualized production rate from WIP has increased from just under $4 billion a couple of years ago to $6.6 billion as at June 2021. This increase in the volume of work is what's driving the revenue growth and providing enhanced visibility into our development earnings going forward. We remain enthusiastic about the demand prospects for our developments. So we expect to maintain strong activity levels in FY '22, which bodes well for future revenue. As for share at the half year result, our borrowing costs were down $55 million on last year. The stronger Australian dollar over the course of the year gave us a $58 million benefit, which offsets the impact of the translation of the other line items we discussed earlier. This outcome is consistent with our hedging strategy that's been in place for a very long time now. In some years, it's up. And other years, it's down. In FY '20, for example, we had a $30 million cost, which offset the translation benefits relating to the other line items in that year. The other main driver of this reduction in the expense was the repayment of high-cost debt that has been occurring over the past couple of years. Partially offsetting that benefit is the reduction in interest earned from our cash on deposit and a reduction in capitalized interest. Our net weighted average cost of debt is currently around 1%. So borrowing costs will remain low in the near term, and any volatility probably come from FX movements. Our tax expense was down due to the changing nature and origin of our income. As far as the nonoperating items are concerned, we saw our share of the total revaluation gains of $5.8 billion increased to $1.3 billion this year. Cap rate compression was again prevalent as were rental increases. As you can see, development valuation gains also represented a significant portion of the total valuation result. With the strength of demand for our assets and the contributions from development likely to continue, we believe that valuation growth will persist in the near term. As usual, we exclude the accounting cost of the employee long-term incentive plan, but we include the tested units in the denominator when calculating our operating EPS. The main drivers of the movement in the share-based payments and accounting costs has been the volatility in the security price and other valuation parameters. And that's another reason why we treat this item the way we do. A few remarks now regarding the balance sheet on Slide 11. The strong Australian dollar reduced the translated value of our net foreign assets and liabilities by $0.3 billion. This was partially offset by the derivative mark-to-market gains flowing through the statutory income statement. The increase in the wholly owned assets portfolio was partially driven by valuation gain, but there has been $160 million added through net investment and transfers of assets upon completion of their development. Our share of the stabilized assets within the partnerships were up by around $860 million. Within that, our share of the valuation gain was $1.1 billion, of which about $160 million came from developments. Net investments and development completions added around $100 million. And offsetting this, we had the FX translation and mark-to-market impact of minus $300 million. Our development holdings are up by $500 million overall. This is net of disposals and completions. We continue to fund the growing workbook across the group and the partnership. Breaking this down, we added $300 million through our share of the partnerships and $100 million to our direct holdings. And then there were some noncash movements. There was a minus $100 million impact from the FX translation and around $200 million of valuation gains for properties that are still under development. Just pausing on that point, that includes $95 million associated with properties that are subject to conditional contracts for sale. You'll find the specific disclosure in the audited financial statements. It's occurred because the development process straddles more than one financial year. With the lengthening time frames of our projects, the situation is likely to become more frequent. If and when those sales are completed, we'll reallocate those valuation gains to the operating profit calculation in future periods. They'll be offset against future valuation results, so we don't double-count them. This replicates the situation that arises when properties are sold prior to their revaluation, which is what usually happens with quicker projects. Importantly, it remains consistent with the principle that operating profit is backed by cash. In terms of the direction of our working capital allocation going forward, there are 2 things to consider. Firstly, development cash flow in any given period can vary depending on the point in the program we're at relative to the settlement process for new projects versus the older ones. And secondly, in terms of trend, we expect that working capital allocation to developments will continue to move up in the near term in light of the increased activity levels. Given the confidence we have in the assets and the returns we're generating, we believe this to be a good use of funds at this time. Our cash holdings decreased by around $860 million over the year. This was mainly due to the repayment of around $700 million of loans and U.S. dollar bonds. We also utilized some of our cash to fund investments into our developments and equity in the partnerships. But in the main, they were funded by retained earnings. This is consistent with the design of our long-term capital management plans and the distribution policy. There was also a minus $100 million impact from FX on our foreign-denominated cash holdings. As far as the borrowings are concerned, FX also had a minus $100 million effect because it's all denominated in foreign currencies. This leaves us in a position where we're down to $2 billion of interest-bearing liabilities. As a result, our net interest-bearing liabilities, net of cash, sits at just over $1.1 billion. That's a good point to turn to Slide 12. Consistent with our financial risk management objectives, we'll continue to 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 development activities, we aim to maintain leverage in the bottom half of this range for the foreseeable future. Gearing is currently lower than it was this time last year. Please note that we're expecting to increase development capital allocation near term, and there are less asset sales from partnerships foreseen. So gearing is likely to be a little higher over the coming year. This is why our distribution per security is expected to remain at $0.30 for FY '22, which will enable us to sustainably fund our proportionate interest in the assets we're developing for the long term. That's all for me. Thanks, Greg.

Yes. Thanks, Nick. Now in closing, after a robust year in FY '21, we expect current development activity and strong returns to continue for the group. We anticipate the impact of COVID to be with us during FY '22 year, and our adaptability and agility is going to be important. We've adjusted to this environment very well, and it gives us confidence moving into this new financial year that we've already adjusted to the climate. The group is forecasting to deliver FY '22 operating profit of approximately $1.360 billion, up 11% on FY '21 and operating EPS of $0.72, up 10% on F '21 year. Forecast distributions for F '22, as Nick pointed out, remain at $0.30 per security. And just in closing, I'd like to thank you for attending this meeting, but also I'd like to thank the Goodman people around the world for delivering on this result in very, very unusual times for us all as a global community. So thank you very much, and we are now moving to questions. Miles?

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

First question, just on -- how much of the disposals did you guys factor in for FY '22 in your guidance? Because I noticed you guys sold about $3 billion or maybe a bit more last year. Just what should we be expecting next year?

Look, I think in the next 12 months, it's going to be minimal. I think we've done, Simon, what we wanted to do in the last 4 or 5 years, we've repositioned the portfolio globally. We've then positioned that capital back into the infill sites, which we wanted to do around the world. Those infill sites are now starting to crank into production through '22, '23 and '24. So most of where we want to position the portfolio for growth is done. So it will be relatively minor in the scheme of $65 billion to $67 billion of assets will be pretty minor.

Great. Very clear. And then on your production rate of $6.5 billion or $6.6 billion, can you us just give us a feel for when will that actually translate through to completions, if at all. I mean I'm just trying to reconcile that this production rate from $4 billion to $5 billion, it's now $6.6 billion, yet your annual completions only gone from $1.5 billion to $2.5 billion. And I acknowledge that stuff takes, you were saying, 19 months to complete. So are we close to the point, perhaps back end of FY '22, when we should see a pretty noticeable uplift in completions in AUM?

Yes. Look, good question, Simon. I'll just make one comment. We're carrying a lot of work through this June '21 and '22. So we're starting '22 very strongly, but I'll just pass over to Nick for a few other comments.

Yes, that's spot on, Greg. So yes, Simon, so I think we flagged this a year ago that we'll go through this transition process because we're dropping off a lot of shorter-dated projects and picking up a lot of longer-dated ones. And so until that normalizes, it will take a bit of time. But FY '22, we expect that there will be another step-up and then FY '23 another step-up again. That's the program.

Sorry, when you say another step-up, a step-up in what?

In completions.

If the production rate remains around this 6%, 6.5% level, over time, the completion rate should get pretty close to that. But it will take a couple of years for us to get to that normalized level. It won't all happen in 1 year.

Yes. Okay. Fair enough. Fair enough. Putting that together then, I'm just struggling to see how your EPS growth expectations are only 10% for next year, right? I mean Greg said you're not going to be selling a material amount of assets. Your completions is going to go up, you're throwing a little bit of reval. Is there something else I'm missing in putting all that together?

Simon, I think we're looking at the world pretty realistically. We've got a world which is difficult. You've got supply chains that are challenged. So we're just being -- we're just taking a sensible look at the world and putting a sensible number out, which we think $1.36 billion is a good number. It's cash. It's operating profit. We would expect valuations to be also strong. So we think it's just a prudent sensible number at this point of the year.

Can I just pick up on the point you made there, Greg, supply chain has been challenging. Is that increasing your manufacturing costs of your sheds, et cetera? Is that something we're not [ in line ] for?

Yes. Look, good question. Out of the $10.6 billion, there's about $3.5 billion in concrete, steel and construction. So it's actually not as volatile, even cost increases at the top line. So land and profit and risk is 65% to 70% of the equation at the moment. So look, not from a profitability point of view, I think from a timing point of view, you've got to be realistic this year that things with everyone dealing with the Delta strain slowed down in, certainly, in the construction process in parts of the world. The good news for us of having a global portfolio and a global business, we can sort of work with those cycles as we actually have been in the last 18 months. So I think 10% is a good number. It's a big number. It's a sensible number at this time of the year.

Okay. We have another question in queue. So I'll next go to Lou Pirenc from Jarden.

A few questions for me, if I may. First of all, on your dividend payout, I mean you flagged quite well that you wanted to bring that down. Do you have a number in mind, Greg or Nick, where you kind of want that payout to be? Or should we just expect $0.30 for the next few years?

Yes. Look, it will sit around 40% is the reality, Lou. There's a lot of money going into our development pipeline around the world. There is probably an uptick on work in progress of $10.6 billion, even closing in around $11 billion during the year as well. So there's just some really good opportunities for us globally that are big, they're infill, a lot of multistory. So we think 40% for us, bear in mind the growth we're experiencing and the demand we're experiencing from our customers, is where it will sit.

Great. And then as you say, the majority of that retained earnings will go into development, but you did increase your stake into GMT. So I just wanted to kind of see if there's more -- if you're kind of seeing opportunities to take more stakes into your existing or future funds?

Yes. Look, as the assets under management, Lou, grow over time, and I've said they'll grow through $65 billion this year pretty strongly that, yes, there will be more investment in the partnerships as we go as well. Just remember, Goodman holds about $1.8 billion of assets on our balance sheet as well, which are rotating. Some of those are being -- getting ready for development. They will be developed, and then that will free up additional cash for investment as well. So it's a combination of the 2 items, certainly, assets on the balance sheet that are rotating plus the retention of the cash flows.

Okay. Your next question in queue comes from Sholto from Jefferies.

Just touching on some of the points made. If you look at the production, $10.6 billion of WIP, averaging $6.6 billion in production based on the 19 months, it's not hard to see your development earnings being $900 million to $1 billion with a 15% all-in margin. So just sort of trying to understand how you get to that guidance. Obviously, it just seems to be conservative based on what you're saying around COVID and the timing and things of that. Can you sort of elaborate on that sort of the development of WIP and how you see that translate to earnings?

Yes. Look, good question. And I expect this will be a question that we get. Look, we think 10% is a good number because it's a strong number backing up on a very good result this year. It's cash flow and operating profit are very much aligned this year, very, very close, for '22 will be the same. We think 10% is a good number. If during the year, we feel more inclined, we're doing a little better, we'll let you and everyone else know. But we just think it's a good number. Is it conservative? I think it's sensible for all the reasons I've outlined. But are we confident? Yes, we are very confident in the numbers we're putting forward to you today.

Okay. And then just on the payout. You flagged your gearing did tick up a little bit from December about 200 basis points, but you had net debt broadly unchanged. But the -- a lot of it -- was that -- and the revals were quite strong. So was that just the FX impact that made that at the translation at the end that made that gearing a bit higher?

Nick, do you want to jump on that one?

Yes. Yes, FX did affect it because it did tick down throughout the end of the financial year. And then the rest was just the net cash flow movements.

And then just, I guess, it's a good signal when you've kept the dividend flat for several years now, you're saying obviously the WIP going to smash through $11 billion so that -- and you flag in an increase in gearing. So I guess you're pretty confident that you're going to keep investing more into the partnership developments, hence, why the payout ratio remains low so can keep growing your share of that pipeline. So you're comfortable leaving the dividend flat for a couple of years until you grow into -- while that investment is elevated?

Yes. Well, look, we're talking about this year, so why don't we just deal with this year? We're comfortable at $0.30 because we think that then provides the capital to grow the business. In saying that, we are seeing really, really strong customer demand. And the longer the world has disrupted, the stronger that demand will get. And effectively, we're seeing that in all our regions around the world. We've got demand that's 2 or 3 deep per project effectively. So you will see us -- that demand's strong. You'll see us putting product into the market to make sure we cater for very, very good customers in the portfolio. And in doing so, we're pulling forward sites that we thought we might develop in a year or 2's time. I think they're going to be activated earlier as well. A lot of that is infill as well. So we're in a pretty robust environment for Goodman around that development business. We just need to manage, obviously, the capital going into it and making sure that we're managing the balance sheet conservatively, which is where we wanted to be, bearing in mind we have a lot of active earnings in the P&L.

Yes. And then just on the P&L, I noticed you flagged the management earnings part from asset sales and currency but also the timing of performance fees. So would some get pushed into FY '22 in the first half today? Is that -- and what were the number of performance fees? I think you said on the call $149 million this year, so $48 million down on last year, yes.

Yes, yes, yes. Yes, that was the number. I think you want to look at primarily, we gave you a number for the average performance of the partnerships. So I think it was 18%. We believe this year will be another very, very strong year as was the last 2 years with mid-teens performance. I think extrapolate that out, and you could imagine that we are pretty strong in regard to aggregate performance moving forward, certainly if the conditions prevail. So the business is performing well, the partnerships are performing well and there's a big buildup of performance in all those partnerships primarily all around the world.

Yes. And just finally, how much was this made -- for Nick, was the undevelopment profit of $718 million, how much was noncash again that was -- I may have misheard that on the call, which is obviously a timing issue before they complete?

Nick, you can settle that?

Yes. So the number you're referring to, Sholto, that's in relation to the conditionally contracted properties, whether we have the revaluation. Yes, it's $95 million.

Okay. And what was the one last year? What was it last year given the PCP number?

There wasn't last year. It was the year before, it was about $19 million. So in FY -- at the end of FY '19, we had $19 million that was conditionally contracted that then got treated the way we [ treated it ] consistently in FY '20. In FY '21, there was no reversal but we've got the $95 million so that, over the next couple of years, that will come out in the operating profit.

Yes. But to be clear, there was no $95 million and $700 million of development operating profit.

That's not in that number. Okay. Okay. All right.

Okay. And so we'll next go to James Druce from CLSA.

My first question is actually pretty basic. Just wanted to get some color on the distribution of the WIP. So how much of the $10 billion or so would be in the top 5 assets, say?

Look, it will be well spread. It's well spread around the world. I think there's 73 projects, but the projects are just getting bigger. So on average, a project is $120 million, $130 million now.

Okay. And then as a follow-up, just talking to some of the buckets of demand, is there anything to call out across pharma, e-commerce and fresh food over the period?

Yes, all of the above. Pharma, obviously, is, for all sorts of reasons, including vaccine storage and things of that nature. But look, I think you're going to find health care and things like that as a big sector, and we're seeing that grow pretty strongly. We're -- the longer this pandemic goes, the more entrenched the way we're living, also means that we're spending more online, and we think we'll do so. So that's accelerating the trends. And I think the world will be at 40% online sales through retail sooner than was forecast 12, 18 months ago. So we're seeing big, big moves and getting supply chains ready for that, getting supply chains really so they're not vulnerable. So we're seeing a tremendous amount of work going on in e-com, and we're seeing it now in fresh as well, which I think there's a lot of articles and a lot of talk about fresh. And that's happening globally. But pharma has been, probably in the last 6, 9 months, a big move on pharma, yes.

Okay. And then finally, just a question around data centers. How do you describe what you're sort of doing in that space at the moment? Is it like an intentional adjacency or a mere product of good real estate? And can you sort of talk to the customer set in data centers, which is a potential customer for Goodman Group?

Yes. Look, these are big guys around the world. So the biggest data center operators are the Microsofts, the Amazons and people of that ilk, the Equinixes and so. So it's an ilk. What we tend to do and do in most cases, if we're going to own the asset long term, we'll build a pretty generic building that stores data. And if it's not storing data, it can be storing goods. And I think we've done that pretty effectively over the last 12 years when we've been operating in the sector. So we're not pulling it out as a special sector for Goodman. It's storage, a lot of boxes, but of data racks. And we build, primarily if we're going to own them long term, generic buildings from time to time. If the buildings are bit specialized, we might sell the land or we might do a land lease for 25, 30 years to the customer, and then they can build what they want to build. So we handle it in different ways, but we're not building specialized buildings for the data center. What we are doing is building buildings that are generic which stores data, which can convert to something else in the future is the way we approach it from an investment point of view.