Goodman Group (GMG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Goodman Group Fiscal Year 2023 Full Year Results. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. Greg Goodman, CEO. Please go ahead, sir.

Thank you very much, and good morning, everyone, and welcome. I have Nick Vrondas with me on the call here this morning. I'd like to begin by acknowledging the traditional owners of the land on which I am presenting from today, the Gadigal people of the Eora nation and pay my respects to elders, past and present. Goodman delivered strong results for FY '23 with an operating profit of nearly $1.8 billion, up 17% on last year. Operating earnings per security $0.943, up 16% on the same time last year. The quality, location of our sites are underpinning rental growth, property values and development activity. Despite the economic uncertainty, the structural forces in our markets remain intact. I continue to be driven by the need for more productivity, the growth of AI and the digital economy. Against this backdrop, there remains limited supply in our markets around the world. Our strategy is also providing value-add opportunities as we see increased competition for industrial sites from other users such as data centers and even potential for rezoning primarily in the Australian market to residential. We've been developing data centers since 2010, and over that time, we have grown to become a meaningful part of our business, in line with the rise of the digital economy. Approximately 30% of our $13 billion development work in progress is currently in data centers. And importantly, we have a potential pipeline of over 3 gigawatts of power, which will create significant value over time. Also, with the lack of available housing in Australia, the next phase in the cycle of urban renewal is ticking up, particularly in the new build-to-rent space, providing us with opportunities for rezoning parts of our portfolio to residential. Pressure on limited industrial land supply in our markets is therefore increasing, and is supporting underlying property fundamentals for our existing assets and our development program, where completions were 99% leased. Goodman's development earnings were up strongly, 35% on FY '22, increasing to $1.3 billion. Our execution has been consistent, and we've continued to manage the rising cost environment. Yield on cost on work in progress remains at 6.6%. Also, assets under management have grown 11% to $81 billion, driven primarily by $6.9 billion in development completions in addition to acquisitions and revaluations across the group and our Partnerships. Partnerships delivered a total return of 7.3% and expanded the investment management platform with the establishment of 4 new Partnerships and $1 billion in new capital commitments. We continue to experience high occupancy at 99% across our stabilized portfolio, while like-for-like net property income growth was 4.7% revision to market also remained significant. This will and should support growth in cash flows over the next few years as well as our valuations. Guided by our 2030 sustainable strategy, we continue to integrate ESG into our business. Our focus throughout FY '23 remained on incorporating sustainable design features into our developments and reducing carbon emissions in line with our targets, validated by the Science-based Targets initiative. Highlights include reaching 75% of our 2025 solar PV target and contributing $10.8 million to community causes out of the Goodman Foundation. We continue our disciplined approach to capital and have maintained a strong balance sheet. The group's gearing remains low at 8.3% while having $3.1 billion of available liquidity. The Partnerships have an additional $17.6 billion of capacity, which provides financial flexibility for the future. I'll now hand over to Nick to take us through some more detail.

Thanks, Greg. Let's turn to Slide 10, and I'll talk at the income statement. As usual, we'll cover the items that relate to our cash-backed measure of earnings, which we've consistently called operating profit, we'll then discuss the items at the bottom of the table. Operating profit excludes the unrealized fair market value gains on properties, the hedge mark-to-market movements and the accounting fair value estimate relating to our employee long-term incentive plan. FX movements only had a minor impact on the translation of our foreign income when compared to the prior period so can just talk about the operational drivers of the results. Looking specifically now at the movement in investment earnings. Direct property net rental income was down compared to last year. This was due to the net divestments over the past 24 months. After taking these into account, as well as the transfers to and from developments, but excluding the valuation gains, we had a net reduction in assets of $0.5 billion this year. We've also conditionally contracted to divestment properties that have been previously stabilized and generated rental income. Furthermore, we're expecting some of the existing assets to go into development in the coming years which will reduce their rental income contribution as we prepare them for the redevelopment and during their development phase. The bulk of our investment income, however, comes through our co-investments in Partnerships. Over time, we intend to continue to grow this part of the business as we 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 last year, cornerstone investment income increased by $53 million. Like-for-like rent growth accounted for $24 million of the increase. And the net impact of capital movements contributed the remainder. Over the last 2 years, we've been a net investor of over $2 billion into the Partnerships, $0.9 billion of which occurred in the past 12 months. The investments we've made alongside our partners have been toward development activities, ranging from land, income-producing property with future development potential, CapEx on existing sites and acquisitions of completed assets from the group. The relatively low initial yield on the acquisitions is being offset by development completions at a higher yield and rent growth. This balance strategy in the Partnership is designed to achieve superior returns for ourselves and our partners over the long term. With these ongoing investment and development activities, we expect to continue to contribute equity into Partnerships, which will result in further growth in our investment income. Management revenue was down $108 million over FY '22, and that's because we've recognized no performance fees in the second half. In light of market conditions, we've taken a more cautious approach to recognition of performance fees, resulting in no accrual for those that are scheduled to be calculated in the coming period. This has the effect of pushing the revenue assessment back to line up with the calculation date and our invoicing. On the other hand, ongoing management fees increased by $58 million or 15% over the -- year-over-year because total stabilized AUM in the Partnerships has grown to $68.8 billion. That's $8 billion higher than June 2022 and $21 billion higher than June 2021. Revaluation gains, net acquisitions and the completion of developments have all contributed to this growth. Therefore, total revenue as a percentage of average stabilized AUM was around 0.8% for the year, and we continue to expect it to average 0.9% over time. Development remains an important part of our business strategy. We create significant value throughout the development and asset management processes. We've continued to execute on these core functions very well despite the challenges the world is facing, so our margins have been sustained. This has been supported by our risk management and cost controls. These strong outcomes have also been the result of rental increases driven by the quality of our locations and assets. Over the past few years, growth in development volume has been a significant driver of this segment. Our average annualized production rate has progressively increased from around $5 billion in the first half of fiscal '21 to around $7 billion this year. Due to the variety of methods in which we can track developments, our earnings are a function of the interaction between margin, volume, timing and the proportion originated on balance sheet and within the Partnerships. So realized development income was $1.3 billion this year compared to $960 million in fiscal '22. In addition to the realized cash income, over $0.5 billion of development uplifts were recognized as valuation gains. That's our share of the revaluation gains that have accrued to our Partnerships as a result of work they undertake. Given the increased portion of development activity initiated on the group balance sheet this period, the mix of income that was realized compared to the unrealized gain has changed. The outcome over the coming periods will be dependent on the opportunity set that we commercialize, but we continue to have a wide range of options. A significant portion of these are currently on the group's balance sheet. As a reminder, we note the gains on sales of assets that have been subject to prior fair value movements as a result of repositioning activities. These arise given the long-dated nature of the developments and the need to reflect their fair value of our assets, where we have begun activity but have not completed the sale. We do not reflect these gains in operating profit until the transaction is complete. So in the financial statements, you'll see fair value gains that are higher than that reflected in the operating result reconciliation in the attached appendices. This is the result of the attribution of prior period fair value gains to operating profit in this period now that the settlements have occurred so that those profits aren't double counted and can be reconciled over time, we notionally offset them against the current period valuation gains. There have been $512 million of such gains reflected in the operating profit in fiscal '23 and notionally deducted from the valuation results. The current balance of contracted items is over $270 million, which is the net result of the completed transactions and new additions to the list. We remain enthusiastic about the prospects for our development business, which bodes well for both future revenue in this segment as well as growth in AUM. Growth in our operating expenses have been moderate as our business continues to focus on a narrow set of markets, which enable us to grow revenues without significant cost variations. Our aim here is to continue to keep our fixed costs relatively steady and instead use at-risk variable costs such as STI and LTI plans to incentivize and align our people. Our net borrowing costs were down $26 million compared to fiscal '22. Capitalized interest was up $18 million compared to the prior period, given the higher average balance of development assets over the period and a slightly higher weighted average cost of debt. We've also had a significant increase in the interest earned on our cash and derivatives. This more than offset the impact of FX hedging, the increase in our net debt and the rising interest rates on the relatively small floating rate exposure we have. Our net WACD is currently around 3% and is substantially hedged against interest rate movements given the high volume of fixed rate debt and hedges we hold. As far as the nonoperating items are concerned, we had $0.8 billion of revaluation gains in the year, which represents the group's share of the gains across the entire portfolio of assets under management. From this, we deducted the $0.5 billion of now realized prior gains to get to a $0.3 billion net result. Cap rate expansion over this year was 0.5%, but in aggregate, this was more than offset by the impact of rental increases and development completions within the Partnerships. Development valuation gains were $0.5 billion this year. Another customary area of difference between operating profit and statutory profit is the fair market value movement of hedges, which were down by more than $200 million. Mark-to-market derivative gains or losses are reflected in the income statement because the group does not apply hedge accounting. These movements however should be considered in the context of the $360 million gain reflected directly in equity through the foreign currency translation reserve, which is the currency impact on translation of our net foreign denominated assets. As usual, we also exclude the noncash accounting cost of the employee LTIP, but we include the tested units in the denominator when calculating our operating EPS because this is when they actually have an impact on security holders. A few remarks now regarding the balance sheet on Slide 11. The FX impact on our balance sheet when comparing June '23 to June '22 was not material as is evident by the relatively small FCTR movement. Due to the sales over the year, exceeding the valuation gains, the direct stabilized asset portfolio has decreased by $0.3 billion since June 2022. Our share of the stabilized assets within our partnership investments, on the other hand, were up by $2.4 billion over the year. This was mainly due to new investment in the completion of developments. Compared to June '22, our development holdings are up by $0.1 billion with the additions and expenditures offsetting the completions in sales. You'll note, though, that the mix of direct developments and those in the Partnerships has changed. The balance of directly-owned developments has increased by $0.6 billion whilst our share of the Partnerships has declined by $0.5 billion. The statutory operating cash flow was up by nearly $0.5 billion this year. Our operating cash flow statement shows $1.3 billion this year, which is net of the $0.6 billion invested back into inventory assets on the group balance sheet. We expect this inventory investment to generate profit in the coming years. The sale of development properties, which are required to be included in the investing cash flow for statutory reporting purposes, also generated $0.6 billion. We did, however, spend $0.4 billion over the year. Timing of partnership distributions cash received last year for fees that have been recognized in the income statement this year, along with other working capital items and their classification between financing and operating cash flow, accounted for over $0.1 billion of differences between operating cash flow and operating profit. Our net investment in Partnerships was $0.9 billion this year, which is $0.3 billion lower than last year. The cash generated from our retained earnings funds most of the investments, which is consistent with the design of our long-term capital management plans and the distribution policy. As a result, our net debt position increased by $0.3 billion over the year on a constant currency basis. The ratio of asset growth to changes in net debt meant that gearing was down marginally over the year. Now it's a good point to turn to Slide 12. 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. So in light of the activity and developments, we aim to maintain financial leverage in the lower half of the band in the near term. In addition, we continue to invest in the business to generate strong returns and fund our growth sustainably. Our access to financial resources places us a very strong position in the market at this point in time. That's all for me. Thanks. Greg?

Thanks, Nick, and we're now turning to the outlook. Goodman has positioned well for FY '24. Competition for land from a wide range of uses is constraining the availability of space in our markets and creating new opportunities for Goodman. These opportunities include intensification to create multilevel industrial, data center development, where we have secured or identified greater than 3 gigawatts of potential power within our existing portfolio and the next phase of the urban renewal cycle, where we potentially have significant opportunities to realize value within our Australian portfolio. We expect to see further opportunities to add value through acquisition and redevelopment and have continued to maintain a strong balance sheet which, combined with retained income provides significant liquidity, stability and financial resources to enabilize this. Our capital partners are prudent but continue to support the Goodman investment partnership platform. We believe Goodman can continue to deliver growth despite the risks associated with the current market volatility. We expect FY '24 operating EPS growth to be 9%. I thank you, and we will now take questions.

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

Greg and Nick, I just want to talk a bit about performance fee. I guess a couple of questions here. One, does the change in the performance fee recognition imply anything about your view as to how fund performance is, how it impacts the previous $1.2 billion number you've thrown out there in relation to Leighton, but unbooked performance fee? And I guess the second part of my question, I noticed that the fund performance this year was 7% or so. If that continues, does that impact the performance fee outlook?

Yes. Look, I'll handle the last one, then Nick can go through the recognition. 7.5% is a really good return for the year, and it's certainly not negative. It's at least at par, and the long-term performance accumulation across the Partnerships is still intact. But Nick, why don't you go through the recognition?

Yes, yes. So Simon, I think the way to look at it is push all pullback 6 to 12 months. The backlog of unrecognized performance fees is currently at $1.3 billion. So that's not been affected. It's really just a more prudent view. I mean you need to form a view on the certainty of recognition, and we think it's appropriate right now to take a more conservative view on that because you need to be virtually certain. And so we thought it was appropriate to step it back to line up with the calculation dates.

Yes. Nick, because I remember 6 months ago, you talked on the same conference call about how second half performance fee was probably going to be about $100 million after $42 million in the first half. So this change in methodology has nothing to do with that $100 million now being $50 million or anything like that? Is that -- was that correct?

No. No, it's just timing. Exactly. Exactly.

Okay. Great. And just my second question. If I just take a step back and be really, really simple about things. Development margins, have they gone up or are they coming down?

Yes, good question. Projects that we're agreeing today and doing are going up. And the returns we're looking for because cost of capital has changed going up, which shouldn't be a surprise. We're being very, very focused on just the very, very best locations. I think you will see in the presentation -- I think it's the first time we've talked about the data center and the total pipeline, which is around that in excess of 3 gigawatts of power. Now that's a lot, right, to be clear, and tens of billions of dollars of development that we've also got embedded in the business what we own. And we've spent the last 5 to 7 years on the infrastructure, the planning and the power, and I think we've been talking about it over the years. But we're getting to a point as well that this is now becoming material and significant. As we put in the presentation, it's 30% of the work in progress and could be higher in future periods. So look, we've got many drivers of development, which are helping maintain good margins. But anything we are originating. We're looking at new today, we're making sure that we maintain those margins or, in fact, increase them.

So is it fair to share this 6.6% yield on cost that you disclosed today, probably had some more upside potential rather than downside risk?

Yes, when we're looking at projects today unless the north of 7, we're not playing, to be clear.

And our next question comes from the line of Sholto Maconochie from Jefferies.

Greg and team, good result. Just on the data center is down 30% of the WIP and how much of the fund? And is there any update on the data center fund that I understand you guys walking in.

Yes. Look, the data center, the amount of gigawatts we've got is quite frankly, the size of a data center company. So think of Goodman with the data center company side of it and a large one is the way you want to start to think about it. Data centers can be real estate and they can be infrastructure, as you guys know. And we're in the process where we're developing some real estate currently, but future periods and future years, we might be actually developing infrastructure. And that is because our customers primarily the hyperscalers or the big end of town is pushing us further and further down the track in regard to how much they want us to deliver. So we're in the scenario and this very happy scenario where we've got real estate that is work in progress but that may move into over time infrastructure as well, which is going to give us, like I said, a data center business inside Goodman effectively.

I think that's clear. And then just on performance that is being touched on. Is there any slowdown in demand from other traditional users of the space? I know you've got very good locations, but have you seen a slowdown in leasing from your consumer-facing businesses at all in the last quarter or 6 months?

Yes. Good question. I think everyone's been hands in pockets the last 6 months. I think European summer, U.S. summer is pretty slow to be fair, but the conversations that we're having with our customers is all about productivity and location. And we've got a number of big customers, some of the biggest we've got that are all working with us on getting more productivity out of new locations. And we've said this for a while. We've created a business that's not a commodity. We don't have commodity real estate. We don't believe in it. We don't think it delivers the long-term value and the growth in the cash flows that we require to drive our business. So effectively, what we're focused on is assets that are special, assets where land is constrained, but where we can help customers drive productivity into some of the biggest consumer markets in the world, like New York, like L.A, like Sydney, like Tokyo, like London. So when you go and you look at it top down, there is over around the world in general, you'll find there's a slowdown in activity from customers. There's also the handbrake going on, as I described, commodity development in most locations. So big sheds, basically in secondary locations. Why are you going to build them, no one is going to occupy them. Rents will come down. Cap rates are going up. If you look at the assets, for example, in South Sydney, where we're hitting now $500 a meter and there's not enough buildings to supply the demand, very different story. So look at the micro locations, look at the big cities of the world and then take a line in the sand in regard to what Goodman is doing and where we own it, but it's a very different story if you own commodity. We do not own commodity real estate.

Okay. And then just finally, the, if you look at the -- you put out $0.9 billion, almost $1 billion into Partnerships this year, what do you expect them to in '24.

Look, it's fair to say we don't actually have a great requirement for capital in the Partnerships. What that capital was actually was a number of actually new partnerships. And I think you would have seen there was about 4 created during the period. Some of that was actually for data center over a series of 4 buildings and raised the capital for the entire program over the next year or so. A little bit of that was a new Partnership created in Australia from one of our big partners around the world, once again, pretty bespoke. And I think you might find a bit more of that from Goodman as we actually tailor programs for particular partners that require particular returns. One thing I will say though that when you now have a mark on a valuation of 5% in a good location, let's assume you get 3% or 4% growth, that total return on a levered basis is around the 8% to 9% mark, that's very attractive. If you can demonstrate you can keep the cash flow and you can keep the cash flow flowing for 10 years. So I think we're coming into a cycle where Goodman will be -- there'll be more money going into actually core. And that's why I think Nick talked to you a bit earlier about we'll be originating a little bit more development as well. Development has been used by a lot of partners as a top-up when total return on core was 6. Total returns on core in the Goodman world is between 8 and 9, and that's attractive globally. And we're working with a lot of big customers on -- and partners on particular programs tailored to what they want, and that's hitting the market at the moment.

And our next question comes from the line of Grant McCasker from UBS.

Greg and Nick, the business continually evolves, but can -- you've highlighted on the really interesting, historically hasn't Goodman been a developer of powered shells essentially. And you're now saying you're going down the path of a data center operator. Can I just sort of clarify the level of investment you will be doing in the infrastructure going forward. And what it means the broader group? Is that balance sheet? Or will you do that alongside capital partners?

Yes. Look, good question. I think we've given you a sense the size and scale of it with the power and the work we've been doing. We're not saying we're going down the track of infrastructure, which is effectively the business around operating the data center. We're not saying that at this point in time, but that is an option that is on the table. But as we are being asked by the big users of space around the world, and they're the hyperscalers globally, how we -- can we complete their program and give them more efficient program of building, completions, technology and know-how. As we go further down that track, and we're building and have built the expertise, to be able to do that, it is a consideration. It is not a reality at this point in time. I think it's just to make that very clear. But if we did go down that track, it would be called infrastructure, and there's plenty of examples you could talk to your people internally at UBS about infrastructure and what's required, and I think you get a line in the sand on it. In regard to who owns it and who has got it, it's across the board, but Goodman with balance sheet and 50%-50% ownership would be half of it. So a lot of it is controlled directly. Then there's other programs inside Partnerships. And if it was infrastructure, those partnerships probably would not be participating in that activity. So think of it in that way. It's a journey, not a -- we're not at the end of the journey, but we are being asked by the big hyperscalers in the world to complete the program because what's proved we're one of the most efficient in building these end-to-end and effectively, the planning and the demand, as you would know, has gone vertical, driven by AI and the need for programs in '27, '28 and '29. We're even talking to hyperscalers about deliveries in 2030 right now, such as the demand for space today, but importantly, over the next 6 to 7 years to meet their aspirations with the products that they're producing and where they determine the demand is going to be. So 3 gigawatts, which will be closer to 4 gigawatts probably in the next 12 months is significant. And it's actually a bigger platform than a lot of the data center operators are operating today or even have in their pipelines. So it's significant.

Just following off of that, can I get some guidance on that 3, we're now looking 4 of what's in Partnerships versus the balance sheet?

The balance sheet would be -- 50-50 in Partnerships and balance sheet would be very close to 50% of it.

Okay. And then the second point, so more on development on balance sheet means less development profits for the funds, how then should we think of that more medium and longer-term performance fees? Because obviously, development profits ultimately came through performance fees over a medium and longer term perspective. But then secondly, what does that mean for some of the sort of existing funds that may not get as much development product? Do you need to sort of evolve or restructure funds with existing capital partners?

Look, I think over time, good question again, Grant, you're right on it today. Effectively, partners will be restructured over time. Things will change. Participants will change. It's a bit like I said earlier, we've got some multibillion-dollar programs going at the moment, which are really bespoke to certain partners that are really big and they want to have a 50-50 relationship with Goodman or 70-30, and they want a particularly sort of product. But what we've seen in the last 6 months in particular, Grant, is that there's a real desire to go, well, look, if we're now buying at 5, 5.5 in a good location, and we have good growth, and we can get an 8 to 9, that's great. And the way they look at development as well as development is maybe leasing an empty building. Effectively, where development when Goodman looks at development, it's actually land planning, years, hard work, planning, more planning. And infrastructure is the way we look at development. A lot of our partners look at it as, wow, if I've got a building and I can get a bit of the upside by taking the risk on the leasing part of it is clear. So we'll be doing more of the -- and we have been over the years anyway, more of the origination on balance sheet, which is at 3 years before you get product out of the ground. That time frame, Grant, is getting longer. The infrastructure is getting hotter. And in certain markets around the year -- around the world, we're years behind, the market is years behind where the demand needs to be to meet the supply. Western Sydney, a really good example that there's not enough space in Western Sydney. Infrastructure and programs are years behind and customers basically have nowhere to go. So we do that piece, but there's a lot of development that may be described in the Partnerships, which is really a little bit more simple, standing, building up and then leasing it, which can get an additional kick in the return, but it's not taking that 3 years upfront.

And our next question comes from the line of Lou Pirenc from Jarden.

Greg and Nick, just following up on your last comment there, Greg, about changing demands from your funds partners, you've been very disciplined in the last decade of selling assets when you feel that there are kind of there's not much growth left. How should we see that in this changing environment going forward?

Yes. Well, look, good question. I think today is not the day you want to be selling any way, but there will be no change in the way we operate around rotation of capital getting the best returns and driving performance. We've seen -- I think we're starting to see unfold around the world in our sector and other sectors, what asset collection models look like, high levered asset collection models. Looks good when cost of capital was very low. It doesn't look so good today. And I think a big, big trap. And we're seeing those in a number of those things unwind. So look, the discipline is there, we're not going to change the approach. We're looking for deep value. We're looking for stuff that is going to promote performance -- outperformance. Obviously, we do well in regard to performance fees, but we're not going to collect things to drive assets under management. What we want to do is drive quality, and we want to make our partners and all our stakeholders -- we want to make them money, that's what we're employed to do.

I think, Lou, just to add to that, and I think what you might be sort of trying to flush out is do we see more opportunity on the buy side and sort of turn sort of more net acquisitions. And I think it's fair to say that the parameters that Greg described earlier if we're able to find quality real estate that exhibits those kind of return parameters, there's a market there for that we think makes sense. And so yes, that opportunity could emerge.

Okay. Can I ask last though, 3 or 6 months ago, you kind of hopefully walk for each of your markets and just talk about leasing spreads or maybe kind of where you feel your rents are compared to market. Can you give an update there? And has that changed much or any markets that you're concerned about?

No, it hasn't changed actually much. I think in the presentation, U.S. is still being L.A., New Jersey, to be clear, we're in the market 66%. Australia is in the 40%. Most of that Sydney. Sydney is over 50% and the rest of Brisbane and Melbourne probably late teens, early 20%, but Sydney is massive. Hong Kong is only starting to recover the China pandemic, but we are starting to see 5%, 6% increases so it's moving. Japan is a low-growth market. Anyway, that hasn't changed. And Europe is about that 17%, 18%. Mark, London is a little higher, but I'm talking about London, not too far north of London, probably get to the Midlands not too much north of that, where there's a lot of, believe it or not, developers still building spec sheds. So that would put pressure on rents, but around London, we're very, very tight. And we've got to say as well around London, there are sites. We've got 3 big sites in London that were all powering up at the moment. So in fact, they probably won't go industrial though data center over time. So in our markets that we operate in, there's actually sites that are coming out of the market that are not going to be used as industrial they'll be used to something else.

And our next question comes from the line of James Druce from CLSA.

Greg and Nick, a bit of a bread and butter question for you. Just looking at the passive revals for the second half just for the investment portfolio and the outlook for cap rates over the next 12 months, should we expect further expansion offset by rental growth?

Yes. I think that's the way to look at it. Certainly, cash rates around the world are still settling, bond rates are still settling. We believe the cap rates will move out over time, but we also believe we've got some really, really good assets with a lot of built-in growth in the cash flows and very, very high occupancy. So yes, I think that's the right way to look at it.

Is there much of a buffer between the rents and the valves versus market rent left?

Yes. Yes. Yes, I think in the valuations, it's probably picking up half where the market sitting. Nick, I think....

Yes, that's right. I think we're printing evidence now and doing deals that then the values can use in the coming 6 and 12 months. And yes, I think it's fair to say that the rent levels that are actually happening in the market are higher than kind of where the evidence -- historic evidence is pointing.

Yes. And just on 24 guidance, you're sort of guiding to 90 basis points for the management division in medium term, but it sounds like you've got a bit more coming through next year. Can you provide a bit more color on where you think that will land?

Yes. Look, I think if you think about just, say, shifting everything out 6 or 12 months, then what -- it's going to be around that level. Now things could happen, things could change. And we've got to take a view on things every balance date but just work on 90 points for the moment. I think that's the best way to look at it is the best guidance we can give you at this time.

Okay. And one more, if I may. You talked about, sorry, the urban renewal stream. Is there anything sort of realizable near term that we should be thinking about?

Yes. I think Australia needs -- it doesn't have near term, but that doesn't seem to be going to be the case. Look, we're meeting with all the planning bodies to be clear, particularly in New South Wales. We actually have a portfolio, particularly in Central West running into South Sydney closer into the train station and the amenities and also up in North Ryde, which goes into thousands and thousands and thousands of apartments. So I think these 20,000-odd, 25,000 now on our big page, probably a little more than that actually. And we're having discussions with the planning bodies right through the government in regard to what we can help do in regard to getting some high-density housing into, let's say, Sydney. Melbourne, we've got great sites around Port Melbourne. Look, I think it's a 10-year quest Unfortunately, it needs to be sooner, but the infrastructure, the time, the red tape, the differences in regard to councils and programs, you only have to listen to trigger off to understand the frustrations in regard to planning and timing. But look, big opportunity for people to help accelerate it, and we have sites and land that primarily is really, really good for residential and our value add as far as our partners and ourselves concerned. Our build-to-rent is important. We're working on some stuff. Nearer-term -- let's say, near term is probably 2 years in this sort of conversation. North Ryde is a dead setter for us for actually data center and build-to-rent.

Are there any more questions? Seems our operator has gone missing. Are there any more questions, operator? No? Maybe there are no more questions. Sorry, we're just pinging the operator.

You just wait with us for 30 seconds. I think our operator is dialing back in, and we'll pick up the tallying of questions.

Hello. Apologies. Are you hearing me okay?

Yes. We're just getting to see if there's any other questions at the moment.

Sorry. Lost Internet connection for just a moment. I am back. And our next question comes from the line of Ben Brayshaw from Barrenjoey.

Greg, Nick, I just had a couple of quick questions on CapEx for Asia. Just in relation to China at 5.3%, it hasn't moved the rest of the world to reprice. So I was just wondering if you could comment on that, please. And Hong Kong up to 4.1% from 3.8%. I guess, just the question there, is that being informed by transaction evidence? Or is that just an independent value taking a view? Any color on that would be appreciated.

Yes. So China is pretty straightforward. Interest rates are coming down in China and stimulation. We're just in the process of partnering up some pretty -- actually major portfolios in China at those sort of rates and those sort of levels with Chinese capital. So from that point of view, there's transactional evidence around that. I think in Hong Kong, not a lot of transactional evidence in Hong Kong. So that is very much a valuer's view and opinion. I think what will happen, though, there with what we're seeing in regard to buildings being taken out of the market and we are just taking another one out of the market actually for data center as well with that. And we've just given customers notice that for vacation primarily. So in Hong Kong, you've got buildings coming out of the market and effectively, very hard to buy any investment property. So I think it's -- a value is best attempt to putting a, what they think a building made clear in the market. So I think it's a pretty safe number. As we're now seeing rent growth of around the 5%, 6% coming into the market, and we're 99% occupied. So we think that's a pretty safe number.

Yes. I think the other thing, Ben, is that the evidence -- there is some evidence on land and replacement cost. And so that's giving the ability of values to get some form of triangulation on where the value is as well. So it's not a, I suppose, a complete step in the dark.

No.

Fantastic. And Nick, can you just comment on development production times where the portfolio is currently, I think you were saying 6 months ago, it was 20, 21 months on average. Is it still around that level?

Yes, that's right. The production rates around $7 billion at the moment, and that's consistent $13 billion of WIP at around those sort of timing production.

Our next question comes from the line of David Pobucky from Macquarie Group.

Can you hear me okay?

Yes.

Congrats on the result. Just again on the composition of your guidance, please. And just to clarify on performance fees, for FY '24 and what's in guidance. Is it the $100 million that was previously expected in the second half and maybe anything else you might be able to disclose competition, please?

Yes. It good one to you, Nick.

Yes. So if you just back out the 90 points on a full year basis, it's $150-plus million of performance fees. Does that answers your question?

Yes. I appreciate that. That's clear. Again, just talking about the implications around bringing development on to balance sheet. You touched on it a little bit there. But what are the implications seen in terms of margin and capital intensity and what that might mean for FY '24 earnings, please?

Yes. Look, I think development to '24 earnings, a lot of that's already baked as you would expect, as we're coming into -- we're into August, sort of moving in September. So we've got a really, really good start on that as well. A lot of what we're doing now, though, is '25, '26, '27, in particular, currently. So anything that we're originating on balance sheet won't be a '24 story. It will be a '25, '26, maybe '27 story as well is the way it goes. And we've got the balance sheet and the runway and the rotation of capital because there are deals being done around the world, the markets are open and industrial, things are trading as well. So I think from that point of view, there is a marketplace, but we do see more opportunity over the next 6, 12 months than we did in the last 12 months. In the last 2 years, where money was obviously way too cheap, and there is every player in town. Now we see real opportunity to get real value. And yes, we're being pretty active.

I think in terms of your question around capital intensity, just look at what happened this year, effectively, we kept it pretty much flat. If you constant currency basis, the overall allocation was pretty well flat, total assets grew. So proportionate allocation to development capital is actually down, but that means we've probably got a bit of capacity to take on a bit more if we want to. That will come down to when we contract to sell, how we contract to sell, who's funding through to completion because those, all those different permutations can have impacts on working capital, but there's different risk associated with those. And over the years, you've seen that capital allocation swing around, as a result of the timing of when and how we're contracting. But the message to take away is we've got a heap capacity to move around through that development cycle for the assets without disproportionately impacting on capital management and risk.

And maybe just one more, if I can sneak one in, please. Where do you see the greatest risks going into the next 12 months potentially around the slowing macro environment, et cetera?

Yes. Look, it's around demand and primary global recessions is sort of where we've got to be careful. So we have good spec programs around the world. We've got some buildings coming out of the ground in L.A. at the moment because there's nothing else available. We've got some stuff coming out of the ground around Tokyo. So we're just going to be careful around how we flex that, where we do it. And once again, it's not everywhere. It's very micro. So we've just got to watch demand equation. I think we've got the balance sheet built to withstand a very, very sticky inflation and interest rate climate. We are not predicting interest rates coming down anytime soon, and they're going to be higher for longer or longer than people would like. We think is going to be the outcome. So we've got the balance sheet to handle it all. It's just making sure we manage off that risk around demand and make sure we stay close to our customers in regard to what their requirements are.

I think just on interest rates, Greg, interesting point for people to note. We did a sensitivity analysis in terms of our net borrowing costs. If interest rates were 100 basis points higher, our net borrowing costs would be $1.4 million lower because we're a net receiver of floating rates at the moment with our cash and derivatives.

And our next question comes from the line of Suraj Nebhani from Citi.

Just a quick one again on the performance fees. I just wanted to clarify something from previous periods. My understanding was that overall revenue as a percentage of AUM was expected to be between 90 to 100 basis points historically. And I think, Nick, you called out 90 basis points that you expect over time? I'm just wondering, has that come down? Or has something changed there?

I'm just trying to be conservative. I think it's 90 plus is probably a fair assessment just being our conservative self.

Fair enough. Okay. And I think the other thing was on the development gains. You called out the $500 million of gains recognized on prior to sales this period. Can you talk to what the balance of these gains are currently? And when might they be realized?

Yes. So the balance is now -- so those that have not yet settled. It's just over $270 million. And we expect those to settle in the coming financial year FY '24. But I think, it's -- I think it's important that people don't overread that statistic. It's -- we call it out so that you can reconcile our profit and the attribution of the fair value gains, but frankly, it's no real indicator of future performance or margins or anything like that because there could well be substantial gains contracted or conditionally contracted but there's been no fair value uplift recognized yet just because of where we are in the development cycle for those assets. There could be inventory assets which are not subject to fair value gains that could be contracted or conditionally contracted at a point in time with substantial embedded profits and margins that are not being brought to account, but we don't call them out because no fair value adjustment on those. So I really wouldn't get overly sort of analytical about it other than it's a way for you to reconcile the profit -- the operating profit reconciliations over time.

Okay. All right. And just one final one on just a question around the residential side that James asked earlier. I'm just interested in what Goodman is looking at in the build-to-rent space. I guess what sort of model are you approaching with it? Is that more taking the asset on balance sheet? Or is it just the development of the asset and you set it off, like what's I guess the model that you are looking for out there.

Yes, I think it's really -- yes, I think we'll leave that business to the people that are really good at it. And there's a number like Greystar and that do it globally and really, really good. So our job is to get the planning done, maybe with bulldozing the buildings effectively and reading the site, get the planning, make sure the infrastructure, then pass it on to the experts, and we don't prefers to be an expert and build-to-rent.

And our next comes from the line of Peter Davidson from Pendal.

Greg, you called out 3 gig available power for the DC expansion. Can you just sort of, I'll ask you a series of questions and you can sort of encapsulated all-in-one answer. What will the center share be on a go-forward basis? It is currently 30% of the work book. What's the heuristic around it? What's the sort of predicted yield on cost? What kind of lease deals they're using are using land-only warm shell, cold shell for kit deals? What kind of -- can you just put some parameters around all of that?

Look -- yes. Thanks, Pete. What would -- there's another one.

No. That's it.

That's it. Yes. Look, at the moment, it's, we've powered shell. We have actually just sold land and done those sorts of things as well. But the stage where powered shell and their 20-year leases, 3.5, 4 bumps, the margins in the parameters we're talking about probably north of the parameters we're talking about being 7% for us to get excited about something to be north of that. The infrastructure piece is something that we are looking at very, very clearly. But if you go infrastructure, let's say, the program around 3 gigawatts would be close to $30 billion of development and put a number on it, if you go down the infrastructure, it is probably $60 billion, so we're -- look, and that's a different set of investors at a different investment and there's a business element in that as well. So effectively, what we've got at the moment, Pete, in the work in progress is clearly real estate, 20-year leases, good bumps, exit cap rates, let's say, 1%, north of 7% cash. So it's good, developed margins moving forward. When you go to the infrastructure model as your infrastructure people and tell you internally, it's a different model, it's a business model. There's a different set of investors. And then the returns need to be higher in cash terms because you've got amortizations and depreciations and things of that nature. So look, it's the thing to note about, Pete, is demand is vertical, right, we have got inbound calls from all the big operators -- users, not operators, the users in the world, we've got all big calls coming through. This market is red hot and will remain so over the next 5 years, particularly in Asia Pac and particularly in Europe. U.S. is in a slightly different position in regard to size and scale. And I think they've got half the gigawatts of the world actually sitting in the U.S. A lot of that data is actually migrating from the U.S. through now as Europe and Asia Pac gets more capacity. A lot of that data is progressing through to where the data is actually being generated and used in getting closer connectivity with the users, but AI and Generative AI, it's going to a totally different level. And that's why certainly in the last 12 to 18 months, we've got big players around the world that want us to go further, and -- but to be clear, at the moment, work in progress is real estate with real estate effectively leases. And the next stage is what we're looking at, at the moment.

And Greg, if it was infrastructure, would you do a partnership for that and keep that infrastructure as one of your funds? Or...

Pete, that would be an option. And the more we've talked to the infrastructure investors around the world. We understand what they want. They want the business, they want the operations. So what we've got today is real estate. And it's basically owned with our real estate partners. That's pretty straightforward. You take it to the next level, then it's a different platform, absolutely.

And our next question comes from the line of Alex Prineas from Morningstar.

Just can you comment on construction both in terms of at what pace they're accelerating at or what pace they're moving at, at the moment? And also, are they becoming a bit more predictable [indiscernible] narrower scenarios into feasibility studies?

Alex, we can't hear you. You might -- I don't know if you're speaking into a mic or into a phone. We can't hear your question.

Can you hear me a bit better now?

Much better. Thank you.

Just a question on construction costs. Can you comment on the pace of them in terms of the pace of increase. Has that changed much? And secondly, are they becoming a bit more predictable, perhaps enabling you to factor in a narrower range of scenarios into feasibility studies? Or are you still having to factor in a wide range of uncertainty there?

Yes. Look, currently moderated around the world. And effectively, we can predict them. We are, though, looking at more contingency. So if you were carrying 5%, if you were carrying 10% as an example of contingency. But moderating, the other thing we're doing in the main is trying to keep things pretty simple. We were looking at a 3-storey building the other day, multi-storey, in a certain location, we actually dropped it to 2 because it was going to be easier to build more predictable in regard to cost and a better return. So I key things simple, and I think we'll be okay and costs are moderating but not going down, I think, importantly.

And our final question for today comes from the line of Richard Jones from JPMorgan.

Greg and Nick, just a quick question. Just on the development work on balance sheet. I think you know it's gone from 15% to 9%, 10% in the last 12 months. Starts at 20%. Is that kind of a guide as to where we should be expecting the contribution in FY '24?

Yes. Nick, you got that one.

Yes. So as we said before, Jones, is that statistic that you're seeing is the point in time. And with more origination on balance sheet, that trend will be in that direction. So yes, I would expect that most likely it will be trending up. But not necessarily like if we pre-contract and prefund then that will switch into a third-party arrangement or a fund arrangement at a point in time, but the propensity will be in that direction. And if you think about what that means in terms of the proportion of income and the spread of proportion of income between fee based versus above-the-line operating profit, we've said in the past that, that is heading into the 50s, so that will give you a bit of a sense of kind of what's actually being generated in terms of profit share versus funding share, if you like. And that's why that -- you'll have that gap between 50 -- let's say, in the 50s profit share, but the funding share will be somewhere in the 70s. Does that make sense, Jones, I think that's what you're asking, yes?

Yes, yes. I think that's clear. It's good. And just one more -- I know in your account, you're saying that the Australian adoption of Pillar II solution will have an impact on your tax. Just wondering if that is capturing guidance and if that has much of an impact.

Well, I think, we haven't quantified it because we can't at the moment. The rules and the application of those rules have not been determined yet, so we actually have no legislation or accounting basis to make an estimate. So anything we say is probably going to be wrong. So the real answer is we don't know at the moment. I don't think -- high level, I don't think it's going to be necessarily a big impact for us. But until we actually see the legislation and the application of it in the context of Australian stapled security structure with the Hong Kong entity and given our structure, I think it's fair to say that the -- and how each country will apply the legislation, I struggle to see how we can actually get an estimate. I actually struggle to see how the amended to be honest. But assuming they do, they like to look at it at the time, and we'll update you if it is a material impact on guidance.

And what was your tax rate this year?

It was a little under 10 this year. And obviously, because the performance fee recognition was down, the effective tax rate was down.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Greg Goodman for any further remarks.

Yes. Thank you very much, and thank you, everyone, on the line and have a good day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.