Goodman Group (GMG) Earnings Call Transcript & Summary

Thank you all for standing by, and welcome to Goodman Group's First Half Results Briefing. I'd now like to hand the conference over to CEO of Goodman Group, Mr. Greg Goodman. Thank you. Please go ahead.

Yes. Thank you very much. Good morning, and welcome, everybody. I'd like to begin by acknowledging the traditional owners of the land on which I'm presenting from today, the Gadigal people of the Eora Nation, and pay my respects to elders past and present. Goodman has had a strong first half. Operating profit was up 28% on the first half of last year to $786 million, significant valuation gains of $6 billion across group, and partnerships saw the group's statutory profit exceed $2 billion. We have over $2 billion of liquidity available, and we've maintained load gearing currently at just over 7%. All areas have contributed with investment earnings up 19%, management earnings up 18% and development earnings up 42%. And as a result of the progress to date and the outlook for the remainder of the year, we're upgrading our projected FY '22 operating earnings per security growth to 20%. The volume of the development workbook remained significant at $12.7 billion, with the average value of our projects now exceeding $3,700 per square meter, reflecting the quality, location and demand for what we're developing. Development and completions for the period were 99% leased and 63% of work in progress is precommitted with an average lease term of 14.2 years. Our customers are wanting to secure locations for longer to offer then serve the opportunity of having more technology investment in their buildings and more infrastructure. Goodman has managed COVID-related disruptions to minimize impact. Despite increases in construction costs, driven by supply chain, labor and material shortages, Goodman has maintained strong margins and has a yield on cost of 6.7%. Now turning to Slide 6. Goodman continues to grow organically through development activity, and this is increasingly reflected in the investment and management business performance. Total assets under management have grown to over $68 billion, up 32% on this time last year. The $6 billion of valuation gains across the group and partnerships and strong development completions of $4.1 billion for the half have contributed to this. Partnership total returns for the year are expected to be around 20% and, combined with assets under management growth, will continue to support future growth and earnings. Property fundamentals remain strong in our markets. Scarcity of supply and higher customer utilization is supporting occupancy at 98.4% and average global NPI growth of 3.4%. We continue also to deliver on our ESG commitments. We're making strong progress on our global renewable energy target and expect to reach around 200 megawatts of solar by June this year. This is already halfway to our 2025 target. We're on track to remain carbon-neutral in our operations following Climate Active certification last year. And most importantly, we're well progressed to reduce the offset, the embodied carbon in our developments. We're working closely with our customers to help them achieve their own sustainability goals and investing in our own workspace to provide greater flexibility for our own teams. Their resilience and agility have made this result possible. So I'd like to thank our teams around the world for their hard work. I'll now hand over to Nick for some comments.

Thanks, Greg. Let's turn to Slide 10 to look at the income statement. As we go through the results, we'll discuss each of the line items and why we're feeling comfortable with the outlook. We'll first cover the items related to our cash-back measure of earnings, which we call operating profit, and then discuss the items at the bottom of the table. We've used the same cash-back measure consistently for over 15 years, and we continue to believe that it best represents performance on realized profits. It excludes the fair market value gains on properties that are unrealized. It also excludes mark-to-market movements on our hedges and the accounting fair value estimate relating to our employee long-term incentive plan. 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 we can just focus on the key operational drivers of the results. That said, we are substantially hedged against movements in currencies and interest rates. So whilst they may change the shape of the results on an individual line item basis, they do not have a material effect on the bottom line operating profit. Looking specifically now at the movement in investment earnings. We're on track to see over 15% growth from this segment in FY '22. Direct property net rental income is $20 million higher than the same time last year. This was due mostly to the impact of the additional $1.2 billion of assets added over the past 18 months through some acquisitions but mainly through development completions, a significant portion of which you will see classified as inventory in the statutory financial statements. I'll talk more about that in a moment. There's been -- this more than offset the impact of the sales of around $800 million over the same period. The CapEx and acquisitions that added to inventories is the largest driver of the difference between operating profit and operating cash flow for the period. With the growth in the workbook in the past couple of years, the capital needs for development have increased. This was expected and flagged. The timing of development cash flows also has an impact. For example, you can see that in the prior corresponding period, the operating cash flow was substantially higher than operating profit. Given the nature of these assets, some of them will come out of the portfolio. So we don't expect this part of the income statement growing over the next few years. The other part of our investment income comes through our cornerstone interest in the partnerships. Over time, we want to grow this part of the business as we continue to expand our portfolio of assets under management and our investment in it. We also expect growth in rental levels to add to our income. Compared to the same period last year, cornerstone investment income increased by $18 million. Rental growth accounted for $6 million of the increase, which is the result of the like-for-like NPI comparative. The net impact of acquisitions, disposals and development completions contributed $12 million to the growth in our share of investment income. Over the past 18 months, we have invested a net $1.2 billion into the partnerships globally, $700 million of which occurred in the past 6 months. Around 75% of these investments have been made for the purpose of acquiring development sites and funding development CapEx. The remainder has related to acquisitions of income-producing assets that are either for future value-add or redevelopment or the acquisition of completed assets from the group. The average income return on our capital contributions to the partnerships has been relatively consistent at around 4%, with the low initial yield on their acquisitions being offset by development completions at a higher yield. The benefit of our strategy shows up in the long-term income potential and total return of the partnerships. Management revenue was up $39 million over the first half of FY '21. The volume of stabilized assets under management has grown by $13.7 billion over the past 18 months to $56.9 billion. This has been driven by strong revaluation gains, net acquisitions and the ongoing completion of developments. As a result, ongoing management fees have increased by $32 million or 18% since the first half of the last financial year. Performance and transactional revenues contributed $74 million this half compared to $67 million this time last year. The performance and activity levels of the partnerships continues to be strong. So the full year transactional and performance fee revenue is now expected to be over $170 million. Overall, the full year management revenue is expected to be up by nearly 20% over FY '21. Fee revenue as a percentage of average stabilized assets under management will be around 1% this year, which is within the range of what we expect over time. So we believe that scope exists for the continuation of growth in management income over the long term. Development remains an important part of our business strategy. We create significant value throughout the development and asset management processes. It comes from the identification of assets and the construction of the portfolio, achieving planning outcomes, project delivery and then affecting the leasing outcomes. We've continued to execute on these core functions very well despite the challenges the world is facing. So our margins have been sustained. Strong risk management, cost control and rental increases have primarily supported these outcomes. Over the past few years, strong growth in development volumes has also been a significant driver of this segment. Our work in progress has nearly doubled since June 2020. The development period for the projects has increased from 18 months to 22 months. So our average annualized production rate has increased from around $5 billion in first half of FY '21 to nearly $7 billion this half. As you would expect, our income has grown strong -- has also grown strongly. Moreover, the lengthening time frames for developments and the pipeline of projects we control continues to provide good visibility into our earnings going forward. We see FY '23 shaping up to be another good year. Realized development income was $563 million in the half compared to $397 million for the first half of FY '21. This comparison has been somewhat influenced by timing issues that are coincidental. The first half is likely to be slightly higher than the second half, but we expect the full year-over-year growth rate to be over 30%. I also want to point out that in addition to the realized cash income, over $300 million of our development income is recognized as revaluation gains that sit outside of operating profit. Of this, nearly $145 million has resulted from properties that are subject to conditional contracts for sale. With the $96 million we had as at June 21, it brings the cumulative tally to around $240 million, which we expect to close over the next 18 months. If and when those sales complete, we will reflect these gains in our measure of cash-back operating profit at that time. We remain enthusiastic about the prospects for development demand and we expect to maintain our strong activity levels, which bodes well for future revenue as well as growth in AUM. Growth in our underlying operating expenses has been moderate as our business continues to be focused on a narrow set of markets, which enables us to grow revenues without significant cost variations. Our employee base has not grown substantially, and wage inflation has remained moderate whilst recognizing current market conditions. We've had an increase in some of our compliance costs, IT expenses. We have scaled up our charitable contributions, again, too. There's also been a timing issue associated with the accrual of our short-term incentive in operating expenses. This half, given that we are already above target levels and the full year projections are significantly higher than initially expected, this drove over $45 million of the increase compared to the prior corresponding period. We expect our full year operating expenses to be in the order of $350 million. We encourage you to analyze this on a full year basis to smooth out the timing issues. Our aim here is continue to keep our fixed costs relatively steady and instead to use at-risk 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 and because we remain -- repaid some higher-cost debt last year. Partially offsetting this is a reduction in interest earned on our cash and the reduction in capitalized interest. Our weighted average cost of debt is substantially hedged against interest rate movements given the high volume of fixed rate debt and hedges we hold. So we expect our borrowing costs to remain steady absent any material movements in the Australian dollar exchange rates. Our tax expense was up given the growth in profitability, and we expect this to continue in the second half of the year. As far as the nonoperating items are concerned, we had over $1.5 billion of revaluation gains in the half, which represents the group's share of the $6 billion in gains across the entire portfolio of assets under management. Cap rate compression over this half was again prevalent as were rental increases. Development valuation gains also continued to contribute to the total valuation result, with $1.1 billion of the $6 billion recorded over the half. Around $0.3 billion 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. Another customary area of difference between operating and statutory profit is the fair value movement of hedges, which were down by $120 million overall. Mark-to-market derivative gains or losses are reflected in the income statement because the group does not apply hedge accounting. These movements should be considered in the context of the $133 million gain reflected directly in equity through the foreign currency translation reserve. The FCTR gain represents the translation of the foreign-denominated net assets for which the group holds derivatives to hedge against exchange rate movements. In the prior corresponding period, the group had a mark-to-market gain of $215 million reflected in the income statement and a $415 million loss in the FCTR. The net result of these movements is reflected in the statement of comprehensive income but excluded from operated profit calculations. As usual, we also 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 when they actually have an impact on security holders. The accounting cost has continued to increase, mainly due to the valuation inputs and the rising security price. A few remarks now regarding the balance sheet on Slide 11. Again, the FX impact on the balance sheet when comparing December '21 to June '21 was not material. Despite the sales over the half year, the wholly owned asset portfolio has increased in size. This was primarily the result of over $500 million of assets being transferred in from development, around $350 million of acquisitions and revaluation gains of over $90 million. Our share of the stabilized assets within our cornerstone investments in partnerships were up by $2 billion over the half year, around $1.3 billion, but this was the result of the valuations and the remainder was due to net investments and completion of developments. Compared to June 2021, our development holdings are up by nearly $150 million overall. We had a $300 million increase in our share of the partnership development capital allocation. And the investments, expenditures and revaluation gains from projects still in process exceeded the volume of assets completed over the half. Our directly held development capital was down by $150 million due to sales and completions exceeding acquisitions and development expenditures, noting again that some $500 million of inventory was classified as stabilized property post completion. Our cash position decreased by around $200 million since June. The cash generated from our retained earnings funded the vast majority of the investment we've made, which is consistent with the design of our long-term capital management plans and the distribution policy. That's a good point to turn to Slide 12. And as we said before, we'll operate our gearing within a range of 0 to 25% with a level to be set with reference to the mix of earnings and activity levels. In light of the continued growth in developments, we aim to maintain low financial leverage for the foreseeable future. In addition, we continue to invest in the business to generate strong returns and fund its growth sustainably. That's why our distribution per security is expected to remain at $0.30 for FY '22. The Board will consider distribution for FY '23 in the coming year once we have concluded our annual budgeting process. That's all from me. Thanks. Greg?

Thanks, Nick. And now let's move to Slide 20. Our strategy is to provide essential infrastructure for the digital economy is delivering around the world. Strong demand from our customers is expected to continue as the structural changes in the way we live, work and shop are being entrenched, driving the need for more efficient and timely supply chain solutions. While the pandemic caused an acceleration of the structural shift to online, e-commerce continues to grow and is forecast to account for almost 1/4 of all retail sales globally by 2026. This is up from 18% from last year. This impacts supply chains across industries and shall continue to sustain broad-based demand and drive positive property fundamentals for our business. We remain focused on a development-led strategy, which is providing access to well-located assets for customers, the group and our partners. It should contribute stronger management and investment earnings growth into the future. With $12.7 billion in work in progress, the outlook for developments remains strong into FY '23, given the depth of demand and the volume of work we have in hand. So our business is performing strongly across all segments, reflecting our disciplined strategy, which has been over many, many years. COVID-related disruption so far in FY '22 have had less impact on the full year projection than we had initially assumed. And consequently, we're upgrading our market guidance for FY '22 and operating EPS growth projected to be 20%. Thank you, and we will now go to questions.

[Operator Instructions] Our first question comes from Grant McCasker at UBS.

Just one question this morning. You've talked about the capital intensity of the business stepping up, but it's a big step-up this period. And how long do you see it elevated for? And then also, if you look at sort of the acquisition run rate is also a big step-up. Is this the new run rate for the business so you can sort of maintain the current levels of development and WIP over the medium term?

Yes. Look, I'll kick it off and then Nick will follow on with a couple of comments. We've got a really bit of structure, which is primarily our people around the world and their ability to seek out and their ability to find value. And that's take many, many years to build and some very, very good people. And we have a particular way of doing things in Goodman, which we believe is a little bit of our IP [ regarding ] what we're looking at and what we're doing. And in the last, I think, 6 months -- I think in 6 months, we would have picked up $3 billion worth of really good infill, redevelopment-type stock, value-added stock that comes into production probably '25, '26 and some in '24. And that's in an environment where you pushed on values. It's competitive, but we have a way of seeking out what we need and what we want and effectively understanding really well where the customers are hitting. So when you look around the world at the moment and you look at the inability to get one building in L.A., there's hardly any space around New York. There's -- we're full up in Sydney. We're full up in our major markets in Europe, where there's just -- I think our European partnership is 100% leased. You sort of see the opportunity with the customers. Our job is to find them what they want, where they want it. And that's where we're spending our time. So it's a big world. That is all -- that is our main focus. So managing our assets, but also then finding opportunities for our customers. It's what we do. It's what we focus on. It's what I spend every day of the week on. And every week, we have an investment committee meeting. It's exactly what we go through and exactly what we look at. So I think we're -- consist around that area is a product of how we operate and what we do and what we focus on. So we're not looking for -- we're not chasing property that's on the market. It's well bid. There's 15 buyers. There's portfolios, there's M&A activity. We're not even focused on any of that stuff. It doesn't get pass muster. So it's just tremendously focused. And I think if we stay that way and we put one foot near in front of the other and we stay humble and we stay sensible, we don't get excited, we absorb the costs and the changes in the -- the changes we're seeing around interest rates potentially and that might lead to value and how you approach that. We just keep our feet on the ground and focus on what we do well and what everyone has been trained to do in the last 20-odd years and particularly in the last 10 years. Yes, we can do more. And I think you'll find the business will be very capable of maintaining current levels because the customers need it, right? So you've got to bring it back to the customer. Do they need it? The answer is yes. Can we create it and find it? And the answer is yes.

Yes. I think, Grant, and I think we've spoken about sort of our capital management probably on every call, which is good, and we should. And so I just want to stress we don't go out with acquisition volume targets or anything like that. There's no prescriptive plan that we have to buy X billion worth of real estate in a quarter in a month or in a year or whatever. It's really more about what opportunities present themselves that we feel comfortable and then having this efficient sort of capital resources to finance those in a sensible way. It's the way we look at it. And so we've had an active period, but that's not to say that there's going to be a run rate that's consistent. It could be more, but it could be less. It could be substantially less if the opportunities aren't there and aren't right as well. So it's really just looking at our capital management plans and how we finance ourselves. And so specifically looking at what's happened this half and what's happening this year and what we've been saying is that with the ramp-up in activity levels, there will be an increase in working capital allocation to development. And we flagged that, I think, some time ago. And I think this year will be a period where that step-up occurs. So in the second half, there's more inventory accumulation that you'll see as we're getting our inventory levels up to the production rate, but then that will start to turn over. A lot of that inventory that I talked about a little while ago, around the $500 million, for example, that's on the balance sheet as now called -- is generating investment income, but that won't be there long term. And that would liberate $0.5 billion of cash to be back -- reinvested back in the business. And so the working capital for development will step up to a level that is consistent with the current production rate. And then depending on where the production rate goes from there but if it stays steady, that working capital should be relatively steady within bounds. But it does move around period to period depending on the timing of the cash flows and sales. The real long-term structural driver of our investment is the equity interest in the partnerships. So those developments, when they're built and completed, we want to hold a long-term interest in that, in that income-producing property. And that's where the ongoing financing needs come from, and that's why our distribution policy is set where it is because that generates a significant amount of free cash flow over time that matches -- broadly matches with our investment needs to fund the -- our share of the completed product. And what that also does is as the portfolio of investment properties or our share of investment properties in the partnership grows, it adds capacity for a little bit of leverage to increase as well. So when we talk about the mix of earnings, as we see our stabilized portfolio growing, we can add a bit more leverage because it's got more investment property in the mix. So that means that we have -- we continue to believe we have a strong, sustainable funding plan and our settings are approximately right. We always tweak things but approximately right, and we're comfortable with how we're set at the moment. But yes, look, if the situation changed, Grant, obviously, we will review it at the time. But at the moment, we're comfortable with it.

Our next question comes from Suraj Nebhani at Citigroup.

Maybe just a couple of questions from me. Nick, you were just talking about the demand from equity investors still being there and you still want to hold a lot of product. I think in the past, you have mentioned how there is like the allocations across the investor base have been pretty low. Can you talk about how the allocations are to industrial and you know where investors want that to get to?

Yes. Look, just from Greg here. Just from my point of view, I think we've stated in the presentation, there's about $17 billion of undrawn equity and leverage in the partnerships. So effectively, over the next few years, we're located for with investors. And in fact, there's a few capital raises going on around the world or planned in our partnerships as well on top of that. So I think we are really strongly followed as far as the private equity is concerned. And I think bringing you back to what we do and how we do it, bear in mind, 89% of our development is actually for this half in the partnerships. We're really creating a track record of performance in those partnerships, which is very, very, very important in attracting capital. And effectively, that means there's people knocking on our door wanting to participate with Goodman because of the way we do things, the way we invest our own capital in the partnerships as well extensively. And we -- as we sit here at the moment, on average around the world, [indiscernible] total return for the half. So that is why we're very confident to make the statement the [ funds ] in totality will be about 20% for the year. And the business plans for '23, which we've been going through in budgets for all the partnership is good, and a lot of that is coming from the next 12 months around real rental growth in the markets that we've selected, and that's why we've selected them anywhere between 4% and 10% rental growth in the half around a lot of our markets. So I think being a fund manager, it's about performance. We know that [indiscernible] you are what you eat. So you are what you own. So Goodman owns good assets around the world and, let's say, comparatively right at the top end of the managers in the world in regard to what we own. And I think that's not an arrogant statement. It's just truthful one, that our closing on $70 billion of assets around the world are really, really good, and there's hardly one I wouldn't keep. If you look at that, you could then imagine why we're attractive particularly with the returns. And most of our partnerships have been off the top in their sector. They're very, very close in whatever country they might be domiciled. So yes, strong demand, and we've still got $17 billion in our partnerships to go, and we are raising some incrementally around the world as well.

Just one follow-up on that. It's -- obviously, there's -- longer-term interest rates are now supposed to rise and depending on what the view is, people are talking about 2023 or 2024 or whatever the rate rise. I'm just wondering what -- how much scope do you think industrial cap rates have to go down from here if rates are about to rise? And what does that mean from a medium-term business growth perspective?

Yes, a really good question. One, obviously, that everyone around the world is looking at the moment, how do you price assets moving forward. I think it's pretty simple from Goodman point of view. We look at the growth and the cash flow. And so when we look at our investment, whatever it might be, whatever country it might be, we look at the growth in cash flow. And I think if you're growing your cash flows, let's say 3%, 4%, 5% plus, I think the returns and where the valuations are makes sense. I think where the problem is moving forward in our sector and probably other sectors as well, property sectors in particular. But it can apply to equities and technology and anything you want to choose. If you don't have cash -- growth in cash flow, valuations are going to be challenged, I suspect, in a rising bond market as total returns need to be higher. So that's why we've selected what we selected around the world. That's why we're doing what we're doing around the world. That's why we have low leverage so it doesn't have a big impact on the total return. And that's why we have a lot of hedging on our long-term debt, effectively giving us a number of years to adjust. But it really comes down to the growth in the cash flow. So if you got a 4 cap and you're growing at 4% or 5%, investors are going to be happy. If you go to 3.5 cap rate, it's growing at 1% to 2%, you're probably in a bit of trouble. So I think it's going to start to bifurcate markets. I think you're going to see quality assets in whatever sector around the world perform on average way better than the not-so-good assets around the world. Once again, it can be in any sector. And that's what the world is turning their minds to, and that's why we have volatility in the equity markets. And ultimately, that will spill over into the property markets. And I think you'll get rewarded for the quality of what you own and what you have, but it's going to come back to the growth in that cash flow, which is -- as we all know, have been around long enough. That's the holy grail.

I think that makes sense. I'll leave it there.

Our next question comes from Richard Jones of JPMorgan.

Just it looks like in the half, you've had a more balanced contribution in terms of development starts across the 4 regions, with Europe and U.S. kicking up a bit. Just interested in where you see development trending over the next 18 months and maybe with particular reference to growth or slowing in those 4 regions?

Yes. Look, good question. We believe work in progress will be pretty consistent, firstly, certainly running into '23 and into '24. I think you'll find the markets like Australia, we've got a lot of forward-looking opportunities, which we're clicking into this half and that will then carry through into '23. We have a number of really, really good sites. We've been buying in the last year or 2 in Europe, particularly around the U.K. but most notably around the major cities or the major ports in Europe. So I think you'll find there will be some -- actually some more inventory on balance sheet around some of those big sites at the moment as well and going functionally in multistory. I think Asia will be pretty consistent, but some of the big projects in Hong Kong will clearly wind off, big data center project as well. But we've got a very good workbook and long workbook in Japan. So that's probably going to click up a little bit. And China is doing actually really well around Shanghai, Beijing, down in Shenzhen, where I think the work in progress will be approaching a couple of billion dollars as well. So a little bit down on Hong Kong. A lot of that Asian WIP though and very different to WIP versus where the profits are originated from a cash basis. So the Asian piece of it is generating certainly not 40%, 50% of the development profit. Way less than that would be half that amount. But it is primarily done -- all done effectively in China or Hong Kong in the partnerships where there's a lot of valuation increment and uptick, which is generating then real performance and long-term performance fees. That's where the big development profits have actually been emerging in Hong Kong and actually China, is inside those partnerships, which then means we've got some -- hopefully some good rewards in the future with some really good performance because of those.

Okay. And just a follow-on question. Just in terms of your investment stake in the development partnerships, you've obviously got much higher stakes in the U.S. and the U.K. Just interested, as those workbooks are ramping up, is there any thought on lowering that exposure?

Look, I think the U.S., we're still getting what we would see overall in capital allocation terms. We're still not where we want to be in regard to ownership. So there's no near-term change there. In -- certainly in the U.K., it's around 33 and 1/3. So there's 3 of us and we have 1/3 each. So I think that will remain around those levels. And in Continental Europe as well, we do quite a bit of joint venture development with our partnerships, so 50-50, 50 on ours, 50 on the partnership. And like I said before, there's some really exciting sites we've been buying in the last 12, 18 months, which will bring through to production as well in Europe. So no, look, I think the settings are about right where we are at the moment. I think 89% in the partnerships for the half is probably in the partnerships or what's committed to third parties. It's one of the highest numbers we've had.

I think it is...

Yes, which is pretty reflective of the way we're looking at the business, trying to make sure that we allocate our capital and rotate our capital and get ahead of whatever might be out there as well. So if there is a change in the markets, we want to make sure that we are ahead of the game, and I think that's why you'll see that number probably pretty high in the second half as well that will -- a lot of pre-selling going on at the moment. So no, look, I think the settings will be around where they are for the next year or 2 anyway.

Our next question comes from Stuart McLean at Macquarie.

First question is just on the $3 billion of acquisitions. Is it possible to provide an end value that you'd expect there coming from acquisitions? And is it -- are those 1x, 2x? Just to get a bit of an idea of what acquisitions today means for WIP in out-years.

Yes, because these sites are valuable and they range from Queens through to Hamburg, through to Paris, through to infill in Tokyo, through to infill in Sydney, through to infill in New Zealand, you would assume that the land values are high because of the location. So $3 billion would convert to probably $6 billion to $7 billion effectively and completed value with the land value being a high portion of it because of that is what we do. And when I said to you a bit earlier about $3,700 per meter on development value, you want to reflect on that a little bit. And when you overlay that in Goodman Group's portfolio globally, and I think James running around at about $3,300 per meter is our average value of our buildings around the world on a per meter basis, which when you look at the locations and the guide where we are, China is less, obviously, would not be simple and Australia is relatively high. Places like the U.K. now are at the extreme end of that number as well. So when you look at the quality of what we've got and the value of what we've got over 3,000 meters, I think you'll find -- it's one of the highest in the industry as many large portfolio globally. So I just want to reflect on that a little bit, too, because that goes down to land value and location. Now in the last probably 5 years, because of our sales program of about $30 billion where we've been selling at the lower valued on a per meter basis and the reorientation of infill and what we're developing at the moment, I think you'll find that number is reflective of land value, and that's reflective of what we're doing moving forward as well.

Great. Second question is on the management fees. And I was just wondering the sustainability of performance fee as a percentage of AUM on a go-forward basis given we're likely to come towards the end of the cap rate compression story. Just what does that mean in terms of sustainability of performance fees as a percentage of AUM?

Yes. The good news is for Goodman partners around the world, and I've touched on this a bit earlier, because we're doing so much of our book and so much of our work and we are buying and we own really, in my view, some of the best industrial in the world. Without being arrogant about it, it's a really good portfolio. So the embedded performance now in that portfolio, because there's development properties that are going in there, there's rental growth in some locations of even 10%, 15% for the half, probably just picking a market like L.A., you can imagine there's some really good embedded performance. And that embedded performance, all being -- things being equal, will -- it looks out 5, 6 years. So in the current market, with the current performance and the current strategy, we feel very confident that, that performance will carry forward into the future. And the performance that has been generated and that is embedded now in those partnerships. And in many instances actually booked through their -- or provisioned through their balance sheet and provisioning will emanate over the next number of periods. And that could be at 3, 4, 5 years.

Great. And my third question is just on those the development profits that are being taken below the line in this period and recognized above the line in outer-years -- or out of period, I should say. How do we think about the evolution of that going forward? Is it a couple of key projects that are going to sort of the drivers of this and we shouldn't expect to see similar amounts below the line going forward? Or is there still opportunity to do that? If we just get an idea of the evolution of that number, please, going forward.

Yes. So look, it's not something we try to forecast, to be honest with you, because it's just an outworking of the contracts and it's peculiar to individual transactions. And so we don't have a budget for that sort of thing or anything like that. But having said that, by June this year, I think we've said before, we expect it to be at least $250 million just based on the transactions that we have in front of us. So we're pretty close to that now. And then if there's a couple of other transactions that come through, that number could grow by $50 million to $100 million on top of that. But it just depends on the timing of when those contracts are executed, what their position is in terms of completion or not at period end. So look, my view is that it will be a more prevalent item in the future just because of the nature of the transactions that we have and the long duration of the asset, the development cycle. Could it be substantially higher? Yes, I can see a scenario where it could be $100 million to $200 million higher at a point in time, could be up $450 million, for example. But it could also be 0 at a point in time. It just -- it doesn't mean anything other than it's just the timing of the project contracts and completion. So I encourage you just to really just focus on, I suppose, the end sort of operating profit and below-the-line gains that we're generating out of our development overall. And then the timing of recognition is really a function of the contractual terms rather than anything else. So I know that's not a direct answer, but it's the best answer I can give you at the moment.

No, that's fine. That's really helpful. And if I kind of look at the guidance then of about $1 billion of development revenue and if I add back that $250 million, let's call it, so [ times ] $1.25 billion and production is $7 billion. I'm talking about 18% of production in terms of EBIT coming from development. That back of the envelope maths is broadly correct. Traditional guides about 14%. How sustainable is that 18% number on a go forward?

I would exclude the $240 million from that because it's not in the sort of numbers for this year. So I would stick to the $1 billion, and that's around 15%. So 15%, if you look at where we've been historically, I think it's been in the last couple of years around 14%, 15%. And if you look at the pipeline and look at the profitability we've got embedded within the book at the moment, certainly for the foreseeable future, like into FY '23, that is a reasonable assumption. So what Greg was talking about activity levels, we expect to remain pretty constant. So read into that a production rate that's relatively constant. And a 15% share of the margin is a really good estimate at the moment. It could be a bit higher, but that will be more timing related than changes in project performance. A lot of it is now pretty well locked in, in terms of the expected outcomes.

Our next question comes from James Druce at CLSA.

Just interested in -- if you could provide some comments on just the -- what's really surprised you sort of every 3 months to upgrade from 10% in August to 20% now. Is it just some conservatism from the get go? Or is it the pace of cap rate compression? Or what within the businesses continue to surprise you so much?

Look, I think when we set up a year and we look at the year and we look at our people around the world, and you realize how hard they've been working. They've been locked up in COVID and there's -- you don't quite know how the year is going to go. So I expect when we started the process this year, which is well before it would have been 8 months ago, 9 months ago before we got to this point, you've just got to take a bit of the human element as well. You're not too sure how that's going to work out, how the supply chains, borders and all these sort of things. So look, I think to be fair, we had a pretty conservative look at it. When we look at it, it hasn't quite been disruptive as we thought. Our guys have done a great -- people around the world have done a great job in procurement, development, timing, cost. And then we're in those locations that have really kicked pretty well, and the rental growth kicked as well. So yes, a combination of things, but we're looking at it would have been 8 or 9 months ago, wouldn't it?

Yes, yes, June last year. So...

Yes. So yes, we were clearly being pretty circumspect and pretty careful.

Yes. I think, James, had we been -- had it panned out differently and the cost disruptions and time disruptions had an impact, we wouldn't have been here at plus 20%. And so there would have been no reward coming out with an aggressive forecast and then not being able to hit it because of the COVID excuse. We'd rather be conservative and appropriate in our guidance and then update as we go, which is what we did. I mean, as Greg said, I think the timing issues have been well managed and the cost issues have been well managed. And I think that's the bulk of the reason for the upgrade. I mean you can see the performance fees we talked about -- was it in the quarterly? And I think in August, we were guiding to around 150. That's looking more like 170 plus. That's all driven by the relative performance on the developments, but also there's been a more cap rate compression. So that's had a bit of an impact too. But the bulk of it is really the timing and the cost pressures on the developments that we're trying to have some sort of buffer for.

Okay, that makes sense. And maybe can you talk a little bit about what you're seeing in terms of cost inflation in the development book? And I'm just trying to get a sense of the sensitivity of interest rates to your development yields given the generally quite long lead time that you have?

Yes. Look, the biggest sensitivity you want to run is rental growth right at the moment, to be honest. And there's some really good stuff coming out of other operators around the world but also a lot of the major agencies around the world that have good analyst teams. And in some of these key locations, the key locations where in around the world, there really is not a sheet available. And I'm not exaggerating. So the rent is the one you don't want to underestimate. Now we've got to be careful and we've got to try and add value with our customers and what have you. That's why our customers are recognizing it as well, and they're actually going well, guys, how do we put more in the building, how do we invest more in the building? How do we get more out of it? Because I know we've got to pay $200 a meter for it because that's the game and there's only one available. So I think you'll find that, that is the biggest thing that's occurring in the prime locations. As far as costs are concerned, we think they'll probably start to flatten out in the next 12 months, but it's been anywhere between 10% and 15% in the last 12 months depending on where you are, but that's where we've kept it. We have then probably put another couple of percent on that being -- building carbon-neutral buildings. So we've been offsetting carbon. That's about 1%, 1.5% cost to construction but the right thing to do and customers appreciate it. And you know what? You're going to end up with a more valuable building in the long term. So if you think long term, you'll do it in a heartbeat because it's the right thing to do. And then we're putting solar on everything. We've got all the tricky things in regard to making sure we've got the water articulations right, measuring systems. We're making sure we've got the right amenities for our customers so they've got better experiences and health and safety issues and all the things that go into it. So I think you'll find our buildings anyway as -- from a standard building, we probably added 3% to it, carbon-neutral plus all the other things we're adding to it. And we'd like to think we built one of the best around. Once again, I'm not trying to be arrogant. It's just a fact because we think about these things over the next 10 years. So that's the way we see it. But look at the rent. Look at the rent around the locations we're in. And I think you'll come to the conclusion that the returns and the growth and the asset values around those is -- the cash flow is going to drive it certainly in the next year or 2.

All right, fantastic. That's it for me. Congratulations on another fine result.

Our next question comes from Alex Prineas at Morningstar.

I was just interested in the -- in terms of performance fees on new partnerships and new projects versus older ones that you've had in place for some time. Is there any trend up or down in terms of either the -- what the hurdle level is to reach the performance fee? Or -- and secondly, assuming you do reach the hurdle, the amount of fee that you retain, so yes, just interested in, I guess, new fee structures, what the trend is there.

Well, in the last that we had in Sydney the last few years. But look, generally speaking, as you probably you'd see in your own business as well, the hurdle rates have been coming down over the last few years. So if you were doing anything a year ago or even the last 6 months, the hurdle rate would be coming down and the performance will be kicking in earlier. That's been the general trend because investors are accepting lower returns in a low -- very, very, very low interest rate environment. Most of ours are not set in, necessarily in the last 12 or 18 months, but a lot of them actually work off floating arrangements as well in regard to floating benchmarks and things like that or market benchmarks in some areas. But no, look, we're pretty well set with the benchmarks globally. And we haven't had a lot of pressure on -- I think, if anything, the pressure of the money coming in has given managers, in general, the opportunity of setting live benchmarks. I don't know whether we've been pushing that hard on that. I think we're always with the risk/reward type scenario, more development, what have you. We tend to be up a little bit from where a lot of others are, just basically static stable portfolios as well. But you can imagine in the last few years, the hurdles have probably been coming down, not going up because of just the tight return everyone has been willing to accept less. Now I think that's probably changing probably as we sit here today. But yes...

We probably don't have too many data points for you to draw conclusions on. I think it even really set things recently. So...

Our final question comes from Sholto Maconochie at Jefferies.

Just a few quick ones from me. Just on the production, I think it was $6.8 billion at -- you said it would be averaging $6.8 billion at the quarterly recently and WIP flat. What's driving the extra $200 million given WIP is still flat? Just mix and timing?

Yes, timing, yes.

Yes. And then if you look at it from the quarter, it looks like Asia was down a little bit in Americas. So the growth is in U.K. and Australia and New Zealand. Does the next 12 months, do we see Asia sort of really come down as Hong Kong rolls off any increases in -- across the board in U.K., Europe and Australia? Is that the way to think about it?

Yes, yes. I think that's reasonable. Bear in mind, we are actually looking at some stuff in Asia at the moment. So not necessarily going to be the case. But yes, I think that's not a bad way of looking at it.

All right. And then just on the leasing for like-for-like went up a little bit. Can you talk about what you're sort of seeing in your core markets on the spreads given you talk about rental growth?

Yes. Well, you've probably seen it around with a lot of the other results. Obviously, our big U.S. friends, that's a pretty good benchmark for what's happening, I think, were the quarterly as well. In the good markets around the world, rents are moving. They're moving quickly, and that is just demand supply -- there's no supply in new core markets around the world. And to get them up and down, build them, it's not a 9-month transaction. It's a 2-, 3-year transaction in the markets we're in around the world primarily. So they take a long time and you've got the scenario at the moment where I think there's only 1 or 2 buildings in L.A. at the moment available and we're building them. I think that's the truth of it.

Of any size, yes.

Of any size, yes. So and knocking around certainly, it's the same you hit out west now. There's land that can be developed. People are paying well out of the sales and meter for it. So they actually need a decent rent to make it actually work and not have a 2 in front of it. So effectively as well -- and the infrastructure is taking longer and there's more green belts and things you've got to be taken care of. There's more environmental issues. So everything is taking longer. Demand is there now and it can't be fulfilled. So rents are moving in those markets around the world, which are hard to supply, which are the markets we're in and why we like them because the barriers to entry are high. And you're going to see 4s, 5s at the low end. And you're seeing -- in the last 6 months, we've seen 10s, 15s and even 20s in some parts of the world. So yes, U.K. has, I think, gone a little too far. I think there's people running around with 30% type growth rates in the next -- or for the last 12 months in rents. Some of those coming off very, very low historic rents. But yes, there's some big moves. So I want to be a little cautious about as well because you've got to have the eye on the customer and what can you do for the customer to make the building work for them? What can you do for them to get more out of it? And that's where we spend our time with our customers is -- right, the building is 200. So how do we get more in it? How do we get it out quicker? How do we make the transport better? Do we throw drains on the roof? Whatever it is, we'll work on it and try and make it work better for them. And I think that's the game now. And I've said it before, I think most customers -- and one of our big customers, I think, was talking the other day about their real estate spend. I think you'll find that customers are going to go, who's a good manager? Who's a good partner? How do we get more out of my building? How do I have -- we don't pay more rent. How do I get more out of it to make my business more productive? And that's what we work on. And that's technology. It's additional floors and buildings. It's better systems for cars and electric vans and trucks and things and make it easy. Better amenities is a huge, huge thing as well. There's gymnasiums going in some of our buildings now for the people that work in them and things like that.

And then just finally, if you look at the -- you get that reversion because you got to sort of circa 5 year WALE on the stabilized WIP has got a 14-year WALE. The lease terms have sort of reviews every 5 years in those longer leases or to capture any reversion to market in the WIP?

Yes. Well, the reason why our like-for-like, I think, is 3.4% because it underlies the structure of the rental arrangements. When the market on that is probably more like double that would be 6. So yes, your -- some of your big customers, you're doing fixed reviews for, let's say, 10 years. Now they might have been 2 75s a year or so ago. They probably 4s today. So you can actually get a bit more. But yes, the structure of our rents, which gives you security of cash flow and gives them security cash of flow, a lot of them won't get to market to lend. Bear in mind that globally, we have probably 25% of our rents -- 20% of our rents come up every year to market. So we're capturing some of that every year, and that will probably push that like-for-like up on average over the next year or 2, I would have thought. But overall, Goodman Group is under rented relatively significantly now around the world.

Yes. Looking at the valuations.

And then that goes into the valuations, yes.

Just one final question from Ben Brayshaw at Barrenjoey.

I was just wondering if you could clarify whether the WIP has been revalued this period just given the compression in the global cap rate to 4%.

No, nothing in hand. I think it's primarily working on feasibilities, and it's probably...

It's only marginal, pretty marginal.

Yes. I think it's -- it will be around 4 3, something like that. The exits on that, which like is modest where we sit today, maybe it's right in 12 months. I don't know, depending on where cap rates go, but it's around that sort of number. So no, not in any great extent. But it's on the conservative side of where value sits today. I think the quality of that book could quite be a 3 in front of it, but we haven't done that.

We have no further questions. Greg, I'll hand back to you for closing comments.

Right. Well, thank you very much for your time today, and have a good one.