Goodman Group (GMG) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Goodman Group Half Year 2024 Results Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Greg Goodman, CEO. Please go ahead.

[Audio Gap] with operating profit of over $1.1 billion for the first half of FY '24, up 29% on the same time last year. We're also upgrading earnings per security growth to 11% for FY '24, which delivers an operating profit of approximately $2 billion. Customers are demanding greater efficiency and productivity from their operations. Whether they're warehouse customers implementing AI, increased mechanization or automation of their warehouses or hyperscalers and co-locators looking for the right data center to suit their requirements in the quickest time possible. It all comes down to location, intensity of use and increased productivity. We're meeting this demand by executing on our strategy, adding value for customers by delivering essential infrastructure they need with a combination of data centers and industrial property. This is also reflected in our $12.9 billion of work in progress, of which 37% is data center development. We've continued to advance our data center strategy in FY '24. We're leveraging our competitive advantage by securing power, planning and commencing infrastructure works. We continue to work with our customers on the best powered shell and turnkey solutions to suit their requirements in terms of capacity and timing on key sites around the globe. Goodman's global expertise and track record in delivering large-scale projects for customers coupled with our strong balance sheet is resulting in our increased development of high-value, high-tiered data centers in supply-constrained locations. Our global power bank has expanded to 4 gigawatts across 12 major global cities, secured power has increased to 2.1 gigawatts and a further 1.9 gigawatt of power in advanced stages of procurement. We're currently reviewing additional sites we own for potential data center use and have activated a number of data center projects around the world this half. We've marked the books across our global portfolio, resulting in a global average cap rate of 5.1%. We believe this is appropriate for our portfolio in the current global economy. The fundamental strength of our locations and active asset management approach is achieving solid rental growth and also a high occupancy. As an active manager, we are constantly reviewing our capital allocation and assets to provide the best risk-adjusted returns. The cost of capital has changed globally. So the active management of our assets and capital will be key to support sustained earnings growth over the long term. As part of this, we're reviewing all of our sites around the world for intensity of use and high-value outcomes. I'll now hand over to Nick to go through some of the results in detail.

Thank you, Greg. Let's turn to Slide 10 to look at the income statement. We'll first cover the items that relate to our cash-back measure of earnings, which we call operating profit and then discuss the items at the bottom of the table. Operating profit excludes the unrealized fair market value adjustments on properties, mark-to-market movements on hedges and the accounting fair value estimate relating to our employee long-term incentive plan. Overall, FX movement had a $23 million positive impact on the translation of our foreign-denominated operating result for interest when compared to the prior corresponding period. This benefit was offset with a commensurate expense in our borrowing costs. This comes about as a result of movements in the realized costs on our debt and derivatives. That's how our hedging strategy is designed. Looking at the movement in investment earnings now. Direct property net rental income is lower than the same time last year. This was due to the $1 billion of net divestments over the past 18 months. That's excluding any noncash items. Over the last 6 months, in particular, we had a net reduction of $0.4 billion. We expect to see a further reduction in direct property rental income in the second half, owing to the full period effect of the sales. The bulk of our investment income comes through our co-investments in the partnerships. Compared to the same period last year, cornerstone investment income increased by $26 million. Rental growth accounted for $13 million of the increase, which is the result of the like-for-like NPI comparative. This has been supported by our high occupancy rate of 98.4% and the ongoing reversion to market rents. Net investment contributed $8 million to the growth and the remaining $5 million came from the FX translation. Over the past 18 months, we have invested a net $1.4 billion into the partnerships globally, $0.6 billion of which occurred in the past 6 months. 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. Greg also mentioned a specific drive to enhance the returns from the portfolio, too. And we expect growth in rental levels to continue given the strength of our portfolio and the reversionary potential of some 25%. Management revenue was up $96 million over the first half of FY '23 to be $361 million. This included a $6 million FX benefit. Stabilized third-party assets under management is $68 billion. That's around the same level it was last December. Valuation declines were offset by net acquisitions and the completion of developments. Performance and transactional revenues contributed $136 million this half compared to $42 million this time last year. We're expecting more performance and transactional revenue to be recognized in the second half, which will see the full year result increase materially from FY '23. This increase is the result of changes in timing-related issues that impacted FY '23 that we discussed in August. Total fee revenue for the half as a percentage of average stabilized third-party assets under management was 1.1% annualized. We remain comfortable with our long-term guidance of over 0.9% on average. Our realized development earnings for the half were $805 million, which is up by $202 million compared to the prior corresponding period. This included $17 million of FX-related benefits. Margins have held up well, and the projects realized that were originated on the group's balance sheet was also high. You'll recall that we had a significant volume of completions in FY '23. Subsequently, there were a number of crystallized sales in the current half. These included those that gave rise to the $271.5 million of operating profits that were from the reversal of prior period revaluation gains. Just as a reminder, over the past few reporting periods, we flagged the development gains on sales of assets that have been subject to fair value movements between commencement and sale. We do not reflect these gains in operating profit until the transaction is complete. So that these profits aren't double counted over time, we notionally offset them against the current period valuation results when we do our reconciliations. Development remains an important part of our business strategy and our workbook remains strong. Our work in progress dipped over the past year as we paused on project commencements to consider the alternatives such as multilevel logistics and data centers. In the December quarter, we began to commercialize a few of the data center sites, which has resulted in an increase in WIP when compared to the September quarter. We want to point out that the data center projects will, on average, being with longer than the logistics properties. The pause we took also means that there will be a resynchronization that will result in a lower volume of completion short term whilst we ramp up again. Given the increased project duration, we also expect higher-than-average margins to compensate. You'll see this in the growth in the yield on cost. At the same time, we're also originating a significant volume of work on the group's balance sheet. So we'll have the opportunity to crystallize a greater portion of the gains in operating profit. This approach will be managed in conjunction with our partners, who are themselves considering their own investment approach. This should culminate in an optimization of capital allocation and ROA on development, to achieve an acceptable risk-adjusted return whilst maintaining our focus on EPS targets. We remain enthusiastic about the prospects for development and demand from both our logistics and data center perspective, which bodes well for future revenue and growth in AUM. The increase in our underlying operating expenses have been moderate. Due to the strong operating results in the year-to-date, there has, however, been a timing difference associated with STI accruals when comparing this period to the prior corresponding period, which explains the overall increase. We expect our full year operating expenses to be a little over $400 million, and we encourage you to analyze this on a full year basis to smooth out those timing issues. Our net borrowing costs were up $17 million compared to the first half of FY '23. This was mainly the result of the $23 million FX-related borrowing expense which offset the earnings translation benefit discussed earlier. At the same time, we've had an increase in the net interest earned on cash and derivatives. Our cost of borrowings on our loans is currently 3.4%. But taking into account our interest rate and currency hedges, the net WACD is less than 1%. As far as the nonoperating items are concerned, we had $1 billion of unrealized valuation adjustments in the half, which resulted from the group share of the $3.4 billion across the entire portfolio of assets under management. This equated to a decline of around 4%. From that, we deducted the $271.5 million of now realized prior period gains to get to a $1.24 billion net result for the half. Cap rates expanded 60 basis points over the period, which all other things equal, would have resulted in a decline in values of 11%. However, growth in rents and the contribution from development dampened the impact of rising cap rates. It's worth noting that our global weighted average cap rate was last at 5.1% in June 2019. And that the cumulative revaluation gains for the total portfolio since that time are $14.6 billion. Another customary area of difference between operating and statutory profit is the fair value movements of hedges, which were up by $70 million overall. This was mainly due to the movement in the Australian dollar between the June and December balance dates. Mark-to-market derivative gains or losses are reflected in the statutory income statement because the group does not apply hedge accounting. These movements should be considered in the context of the $120 million loss reflected directly in equity through the foreign currency translation reserve. As usual, we also exclude the accounting cost of the employee LTIP, but we include the tested units in the denominator when calculating our operating EPS. That's when they actually have an impact on security holders. The accounting cost of the LTIP has increased mainly due to the valuation inputs and the increasing security price. A few remarks now regarding the balance sheet on Slide 11. Due to the sales over the half, the wholly owned stabilized asset portfolio has decreased by $0.4 billion since June 30, 2023. Our share of the stabilized assets within our cornerstone investments in partnerships, were down by $0.8 billion in the half. New investments and development completions were offset by the valuation declines. Compared to June 2023, our development holdings are up by $0.3 billion with the additions, expenditures and transfers for redevelopment offsetting completions and sales. As you can see from the balance sheet movements and cash flow statement, the increase in working capital allocation of the group's balance sheet inventory is the most significant reason for the change. This is consistent with the higher capital intensity of the new projects as well as the higher proportion originated on the balance sheet. Our current WIP is around 80% presold which gives us a degree of certainty about cash flow and earnings. Overall, we've generated $1 billion or over $1 billion of cash through operations this half. $338 million of this is reported through the operating cash flow statement. However, the statutory cash flow includes outflows associated with the investment in development inventory of around $200 million during the half. There is also nearly $300 million of earnings arising from sales of development properties, which are included in the investing cash flow for statutory accounting purposes. So the combined effect of these development activities explains [ $0.5 billion ] of the difference between operating cash flow and operating profit. Also, there's always a difference between the timing of distributions and income received from the partnerships. This was nearly $40 million this half and the timing of cash receipts for performance fees and incentive payments collectively accounted for around $250 million of differences between operating cash flow and operating profit. The cash generated from our retained earnings funds the vast majority of the investments we make, 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. As we said before, we'll operate our gearing within a range of 0 to 25% with the level to be set with reference to the mix of earnings and activity levels. So in light of the activity and development, we aim to maintain financial leverage in the lower half of the band in the near term. In addition, we continue to invest our retained earnings back into the business to generate strong returns and fund its growth sustainably. All in all, we have significant financial capacity to help manage the current market risks and to capitalize on suitable opportunities that may arise. That's all for me. Thanks, Greg.

Thanks, Nick. And now we go to the end and the outlook. Goodman is positioned well for FY '24. We are evolving as a provider of essential infrastructure in key cities around the world. We're delivering the critical warehouses and data centers needed to power the digital economy. We're using our competitive advantage to achieve results. So in concluding, we've upgraded our growth guidance to 11% for the year, which delivers approximately $2 billion of operating profit and sets us up well for the future. I thank you, and Nick and I are happy to take questions.

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

Your guidance of 11%. I was just thinking some back of the envelope here, it implies an earnings split of like 57-43 first half, second half? Or the other way to look at it, it looks like second half will be smaller than the first half by $250 million to $260 million. Just wondering if you could just walk us through why there's such a big delta between first half and second half and some of the key moving parts.

Yes. Look, I don't know we'll walk you through that, necessarily. But I think what I will leave you with a comment, we are in a very uncertain world. We are concerned about capital flows globally and the geopolitical risks. And it's fair to say we're taking a pragmatic view. I won't say a conservative view because I don't think that's right. We're taking a pragmatic view. We had a very good first half. So I think why don't you bank that? And the second half, I think we put a pretty responsible number on the page in the world we work in. I think the other thing to be aware of that interest rates are not coming down as quickly as people would like. And I think you'll find there's a bit of a buyer strike from big pension funds around the world as well in regard to buying assets until they understand the pricing. So it's more of those elements we're building in to make sure that we are robust and boilerplate. We don't want to disappoint, and we don't want to overpromise. Nick, I don't know whether you've got anything to follow on from that, but...

No. No.

Greg, is your pragmatic view in relation to your AUM or cap rates or development margins?

Everything. There may be transactions. For example, better to do in the second half of the financial year because you might have a 50 basis point advantage. You would have seen where cap rates have gone in the U.S. I think our book has been marked to 5.8%. That's a buy for us at 5.8% with good growth in the U.S., we can get very, very good returns. And actually, we've just bought a site in Jersey City, I think we exchanged on it yesterday, which will be a very, very good, simple development in that area. So we're using the opportunity to position ourselves well for buying, but we don't want to be obviously transacting necessarily in that same market. So we're just being a bit pragmatic, careful. We think 11 is a really good number. It's $2 billion or thereabouts operating profit, and it backs up well on a first half. And as you know, Simon, when we get to the results in August, it really is then about what are we setting a sale for '25. And I think we're also very conscious that we want to make sure that we have got a good performance in '25.

Yes. I think that's the point, probably, Greg, that the inference from Simon's question is that we've peaked and a downhill from here. I wouldn't necessarily say that, that is the difference that you should draw from that.

Great. Your yield on cost on commencements 6.9%, that seems very good -- big improvement on last year. It's probably one of the best ones I've seen for a number of years. Is that -- should we expect that sort of number as a permanent feature now that you've got more DCs in there and therefore, it will be higher than the usual 6%, 6.5%? Or is this just, I guess, pure luck, et cetera? Can you give us some thoughts on that?

Simon, you make your own luck. You know that. So I don't think luck comes into it. What we're doing on industrial front, we're targeting over 7 on industrial, forgetting about data centers for the moment, that's higher. And effectively, I'll point to the block land we bought in Jersey City, the feasibilities on that are over 7 and won't get through the gate unless it has a 7 in front of it. Unless it's in Tokyo, that might be 6.5. So we're in business to make money for our shareholders. We're not in business to earn fees of 4% or 5%. We don't do development on that basis, and we've avoided being a commodity developer, and we're avoiding being commodity data center operator. And I was in the U.S. a couple of weeks ago, and there's plenty of data center developers in the U.S. and there's probably 100 of them now because they're all flipped out of being industrial developers to be data center developers. But a lot of the business over there is being done on fee-for-service and 5%, 6% and let's go and buy land, where land is a buck. The same rules apply to industrial to data centers. We're not a commodity developer, don't want to be one. We'll do it if it makes money. If it doesn't make money, why bother. And I'm far, far much rather have the conversation with our shareholders about why we're not doing something because there's no money in it rather than why we're doing something when there is no money. So I think we're super focused on a world where cap rates are still moving. Hopefully, it's stabilized, but that's, I hope, not an actual event at this point in time. Inflation is still moving around the world as well. So we need to be in the 7 data centers north of that to make it worthwhile us doing it.

Our next question comes from the line of Sholto Maconochie with Jefferies.

Good result. Just following from [indiscernible], so a line of questioning. On the performance fees, I think you were guiding to 150 previously booked 136 this period. What are you sort of guiding to in the guidance for the full year performance fees now?

Sholto, we're saying that there's more, but we're not giving a specific guide as to how much more because that will depend on obviously, the events that are scheduled for the current half, but also we have to -- when we get to June, we have to take a view on future events as well. And so we'll take that assessment at that point in time. So there will be more. I think I'm pretty confident that there will be more. Just how much more we'll update you on as we go through the year.

Yes, that makes sense. And then on the WIP, I think your quarterly update, your data centers at 25% or even over 37%. And I think you're saying over the near term, go to 50%. When do you expect that sort of to hit that sort of target? I know it's always moving around, but when do you expect data centers to be 50% of the WIP.

Look, I can think you can expect there's going to be some pretty significant data center starts running into the second half of this year to the beginning of calendar year '25. That will be Europe and actually potentially the U.S. debt is coming on really, really quickly and really, really well. And we just kick one off in Hong Kong as well, actually, where we've got -- we've got a shell and we just -- we're pulling every [ kick in the floor ] out of the building, and that's a redevelopment from industrial into a data center, and that's about, I think, $800 million of completion value. So look, yes, we're on our way, right? So I think it will be 50% probably as we go into the next calendar year comfortably. And I suspect you'll see margins robust. And I think you'll see the yield on cost being very acceptable in regard to the risk and the time frames we're talking about.

And then on the balance sheet, should we still expect that increased balance sheet contribution as well and then needs to be spun into a new data center funds like the Japan one? Is that how to think about it going forward?

Yes. There's a lot of origination. I think Nick touched on before going on our balance sheet. And I think that's just part of the plan and the strategy. We need to do that though with a balance sheet that's strong, which it is, where we've got plenty of liquidity, which it does have. So yes, you'd see us originate. You'll see us potentially even start building powered shells, safer data centers. And you could see a movement along the track as we're a year into it because some of these projects will be 2, 3 years in the making. We're also looking at customers' turnkeys. So we are looking at primarily the best model to build the best building in the best time frame because time in this business at the moment around data centers is optimizing that means value for Goodman but also value for the customer. Time is critical. So I think from that point of view, you'll see us doing turnkeys, mix of turnkeys, powered shells, land sales, which I think when you look at 4 gig on a blended rate, that's probably between $50 billion and $60 billion of total project value, not cost but value, effectively. So I think you'll start to see that wind through the numbers as we get into calendar year '25.

And just finally, on the WIP, WIP, obviously moves around a bit quarter-on-quarter. But if we just assume production around that $7 billion, but you got higher margin because of mix and also higher margins on balance sheet. So development will keep growing even though production is sort of stable just on the funding mix and the project mix?

Yes. I think the margins we're talking about in our business. Production is probably going to become less reliable and Nick might say something about that because some of the origination, the margins, do we do land sales on some of the stuff as well, not just data centers, we're actually doing very well on industrial as well and positioning ourselves around that. We've got a really good site coming out of the ground in L.A. at the moment and around the port L.A. port. And I think we're in the 8.5%, 9% cash on costs on that, even taking conservative rent. So there's going to be more margin, I think, the way I look at it. And don't get scared by lower numbers, big numbers because big numbers sometimes don't add to profit, and I think you guys know that. So Nick, do you have anything to add about the production?

Yes. Look, I think, yes, I mean, it's -- the focus for us is generating return on assets, appropriate margins and getting EPS growth. If we can achieve that with less production, then -- but it makes sense to do it that way, then that's what we'll do. I think for the purpose of mathematical modeling something like what you described is a good starting point. But I think what Greg is trying to say is that we're not -- it's not painting by numbers here. We're not worried about sort of that statistic. What we're worried about is returns to shareholders.

Right. Sounds like a very pragmatic guidance there.

Our next question comes from the line of Lou Pirenc with Jarden.

Nick, a quick one kind of on your earnings composition. I think, Nick, you mentioned that you wanted to grow investments more going forward. But do you or the Board have a kind of a view where over the next few years, you want that mix between investment management and development should really be?

Look, I think development is kicking around 50% of the number at the moment. As we keep what we produce, you'll find that number will increase. And what we're keeping is like I've said, 7%, 8%, 9% or higher cash on cost -- so that starts to boost the investment side of our equation pretty markedly as we go along as a proportion of earnings. And at the same time, organically, if you start to build out data center and industrial over the next 5 years, you'll see the assets under management grow very strongly. I just caution that, though, as well, we are absolutely going to sweat the assets around the world. So I think we saw during the pandemic, a lot of people got very lazy on returns because at the end of the day, the cost of capital wasn't an issue. Debt wasn't an issue. Now they are. So I think we, as a group, see actually opportunity as well now by are starting to come back to the market to actually turn over capital in the higher and better uses and more intensification. So I just caution that in regard to the growth in assets under management. You need to look at that more over 5 years. I think over the next 12 to 18 months, we'll be still very busy rotating assets, we believe into higher earning assets for the long term, which is then going to relate to a pretty high development number, I think, for the next couple of years. But we'll grow into it, Lou. And yes, the Board is very conscious of growing into it.

Yes. And sorry, just to make sure I understand it. So you're talking about asset sales. Can you quantify kind of what percentage of AUM or your balance sheet you think could be churned into a better opportunities?

No. It's totally opportunistic, and we're seeing people coming to the market at the moment. We're seeing it in Australia actually as well. And we want assets that can grow at 4%, 5%, 6%, 7% a year, right, to suit the global profile. They don't have those sort of growth rates. And they have a 5% in front of them or 4.5%, yes, we'll probably be up.

Lou, so this is why we're not trying to be evasive. I think we're trying to be pragmatic and give you an insight into kind of what we're thinking. And that's the problem with having hard AUM targets and KPIs and hard sort of pie chart targets, you end up doing things that probably aren't commercially the right thing to do. And so what Greg is trying to say is that, yes, long term, there is a plan, and there's a road map to seeing more contribution from investment, but we're not going to let that get in the way of making decisions in the short term that the right thing to do for the assets in the portfolio and improve the overall return.

Yes. No, that makes sense. And then I guess I'm going to get a fairly similar answer. But in terms of 12 months ago, you flagged that you wanted to do more developments on balance sheet was going to help your margins. Are we kind of largely done with that percentage rise? Or do you think that we should expect you to take more development risk on your own balance sheet versus doing things in the funds?

Yes. Look, look, I don't think we're going to be -- a lot of the, for example, data center sites, those sites are already where they are effectively in regard to balance sheet or partnerships and then depending on what percentage of the partnerships we own. So I think that's already set. The site we just bought a New Jersey on our own balance sheet. For example, there's probably 2 or 3 others we're in negotiation around the world, which are really big parks over time and will be a combination of actually data centers and logistics combined. It will probably be balance sheet. But the drawdown basis of capital over years, not months. So I think you'll find Lou, we'll manage the risk carefully, once again, very, very pragmatically. There's plenty of big partners that want to do things with us around the world, which is great. Even today, where capital is subdued. We have big partners that want to do things with us. And we are looking at simplifying our fund management structures around the world where our big partners now are going, guys, yes, we like development. That's been great. But if you can give me an 8% to 9% total return on an asset unlevered because we just buy it well in LA, why don't I buy that, and we're going, you should buy that. So I think you'll find that the way the capital flows are going around the world is what was really cool doing a lot of development for a lot of the big -- our big partners is actually what guys, if you can get us an 8 or 9, wow, that's pretty good. And we don't have to take the risk. So I think you're going to find that part of our business and why we're not too concerned about the growth in the AUM, there's a lot of capital channeling to core investment, 2 things they want to buy globally and 2 things only: industrial, and data centers. They are the 2 hot topics around the world.

And can I add, Greg, just the corollary of that, Lou, is that when you look at the overall capital allocation to development, you might not see that in the partnerships growing. And so fortunately, both to the assets under management and our total balance sheet to look through consolidated -- fortunately consolidated exposure might not move as materially as the direct ownership, and that's part of the risk mitigation. And that's what I meant when I said, we'll manage this in conjunction with our capital partners.

Our next question comes from the line of Grant McCasker with UBS.

Are you able to just elaborate sort of how the discussions have evolved with your major counterparties in the data center space, I guess the hyperscalers and also capital over the last 6 to 12 months. And just sort of considering that operating risk, construction costs, our development margins getting better. Can you just sort of just elaborate -- just give a little bit more information there, please?

Yes. Good question, Grant. Look, it's fair to say the hyperscalers around the world -- want a full program and complete product as quickly as they can get it. And you know well, and I think you've done a lot of good work on it actually in regard to the demand. The demand is unsuppliable at the moment. So there's not enough supply. And the locations where we are powered and planning and building, talk Frankfurt, talk Paris, talk London, talk Japan, Tier 1 markets, which are not suppliable at the moment. But what everyone is after and what we're after with our customers is a better build process. We don't want to end up with a scenario where we build 1/3 of a building, let's say, 1/3 of the building is the powered shell and then have a clunky time timely type of fit after powered shell. Different contractors and different processes and what have you. So I think the game very definitely is build a better product in a better time frame at a better cost, right? Now who owns what? Let's just park that for the moment because Goodman will own what's financially expedient for us to own. And we don't have to own all of it, right? Because if we did 4 gig builds out to $80 billion, right? That's the bill if you do turnkey on the whole portfolio. So I don't think that's what we're doing, and that's why we talk about $50 billion is somewhere in between where I think you -- some of it, you'll do a full bill. Some of it you'll do in partnership with hyperscalers and partition co-locators, where they'll actually put in some of the improvements, and they've already got generators and other equipment they've already got on order. So that will work. I think what ultimately occurs is Goodman has to look at risk/reward. And we then look at the capital we're putting in and how do we get our returns which will then be our gauge. The other thing that I'd be very careful about in the sector, and we certainly are, there's certain parts of the assets that will need to be depreciated and you need cash flow to depreciate them and then you need to return on that cash flow that's out, right? So sometimes that's ignored -- that is not ignored by us in regard to the way we're going to structure this, right? So we -- if we're amortizing specialized improvements over 10 years, we need an amortization rate that goes to 0, and we need to get a return, right? So that is the way we're looking at it. I don't think that anyone sees Goodman's competitive advantage as being an operator, our competitive advantages land, power and program. And that competitive advantage for us is where the money is. So the is the way we're applying it. I spent a fair bit of time in the last 6, 9 months with GCs, customers, our teams about our approach, and that's where we seem to be. We see the sweet spot. But we haven't allocated the capital at the moment. So the specialized improvements in the -- in the shell. What we're saying, we think it will be about $50 billion over a period of time say 5 years for the 4 gig program that might run out to 7 years. And that 4 gig, we're adding to that, you'll find some roll off, then some more roll on. So I think that will be a power bank which is formidable globally and in my view, very, very valuable and not to be underestimated in regard to demand right at the moment.

Can you elaborate?

What was that, mate?

So then just following on that 4-gig power bank has picked up slightly. Can you discuss sort of the size of potential opportunities you're evaluating at this point within the existing portfolio?

I've been above 4 gig, well, here we go. You put another gig on it at the moment, right? So that's why the next couple of years as some of these rolls off our view, providing demand is maintained and AI and everyone is using digital processing the way we think they are going to be using it. Effectively, some will roll off and some will roll on. So I think that 4 gig could be a pretty constant number over the next few years, even though some is put in production as well. So look, it's a formidable power bank. I think the problems we see in the industry at the moment is the funding of some of these programs around the world. And even in the U.S., where you might have the merchant developers now jumping into the game, they need precommits. They need fundamentally financing before they start then they're probably building in Virginia where we wouldn't go. Funding of some of these things is not going to be easy. So when you're talking to the big hyperscalers and the big use of the space -- users of the space. They need to know you can do it financially, right? And you don't want to underestimate that either. It's not infinity in regard to capital for data centers. So I think Goodman will take an organic, once again, pragmatic approach, we've used that word a few times today, and sensible approach over time, we'll roll out of assets, roll into other assets that are higher returns. And the data centers we want to keep are the ones we call our critical essential infrastructure. We're not going to keep more, but there'll be certain data center parts and programs around the world we go, that is irreplaceable. We want to keep that one. That's great for the next 20 years.

Our next question comes from the line of Richard Jones with JPMorgan.

Just interested if you could go back to discussing development revenue growth. Nick, I don't know whether you can work through some of the component parts that we need to be aware of. I mean if we look at this result versus the prior result, revenue is up 34%. But if you look at the contributing parts, you've got WIP production levels, yield on costs are all flat. The exit yields are higher, completions were down. And obviously, you've picked up in work being done on balance sheet, I think, from 19% to 23%. So it just seems -- it's just hard to reconcile that growth based on the -- maybe you can just discuss that a little bit.

Yes. So you think you've touched on all the various parameters that will be adjusted and modified. The other one is time of recognition, which is contract dependent. So the -- the short answer is it's going to be a combination of all of those, and it's going to be site by site, transaction by transaction. So there's really no easy formula I can give you other than what I said earlier that for the purpose of mathematical modeling, you can assume production rate around this level margins maybe improving and a proportionate share of what's originated on balance sheet remaining high and possibly increasing a little further. And that's what's going to drive the earnings growth. That's what we're managing towards is getting earnings growth. How we get there, frankly speaking, is going to be a combination of all those factors. It's what we're managing.

Okay. Can you maybe discuss the timing around development profit realization for the data centers and how that might differentiate with traditional industrial developments?

It will be -- I'll make one comment and will pass over to Nick. The margins are bigger, and the time frames are longer and they will manifest them in ways which could be sales. It could be joint ventures, and that could be with hyperscalers. And then there will be partnerships with our own investor base. It will manifest itself in a number of ways. And if you have a big power bank and a big site, location, which we might go, greater data centers, but we're not there in 20 years' time. We don't want to own it. The margin on something like that could be very, very good and the amount of capital you're putting out is very, very, very small. So I think the -- what Nick described in regard to the way these things will manifest will not necessarily be linear and necessarily that easy for you to calculate.

Yes. We'll have to just keep you updated as to how it's going. But the actual accounting for them is no different to the logistics developments we're doing in the sense that the timing of recognition is going to be contract dependent and in accordance with the standards. And that's no different to what we've been doing in the past. It's just the how do we contract each transaction, and that will vary depending on the situation and what's optimal at that point in time and what the situation is at that point in time. And the only other thing Greg I'd add to what you said is that it will also manifest in performance fee generation as well because when it's being delivered by a partnership or originated from within the partnership, the gains will come essentially below the line, but eventually, that turns into performance fees for a proportionate share of that as well. So it's going to come through in a variety of different ways over a number of periods.

Okay. One more quick one. Just, Greg, you called out that there are a lot of industrial developers transferring into data center developers yet you seem to be able to source opportunities that still look to the very high yields on cost. Do you think those opportunities are going to be competitive way? Or why do you think you've still been able to access those very high yielding projects like you talked about the L.A. port project?

We already own them and have. If you send me out tomorrow to buy data center site, there's already -- that's got power written all over it. Yes, good luck, we won't even get close, we'll be 1/3 of the bid price. So what we're mining out of data centers, quite frankly, is what we own embedded in our businesses. And it's just this phase of intensification of use. We've done it with residential. There may be another opportunity with the residential here in Sydney, actually as well with a lot of our South Sydney sites. But it's stuff we actually own. And when we talk about 4 gig and there's another gig probably working on, we actually own those sites, many of them were on for 20 years, 25 years in the U.S. maybe some of it's 3 or 4 years old. We haven't bought a data center site as long as I've ever been here. We've never bought a data center site. We've just bought really good real estate that gives back to you because it's in a great location, right? So good real estate gives back to you over time, bad real estate takes away from you over time. And that's a very simple rule that we live by at Goodman.

Our next question comes from the line of James Druce with CLSA.

I just want to clarify something. It sounds like you're quite comfortable now ramping up turnkey data center development. So are you sort of saying that you're comfortable you've got your head around the risks and you got the capital in [ tie now ]?

Yes. Look, I think - I don't think you ever get comfortable about developing anything to be quite honest. I think you need to be on edge and you need to be focused. I think it comes down to the GCs, the general contractors. So for example, I was interviewing some general contractors in the U.S. recently, they give you a lot of confidence because they're building billions of dollars of this kit on an annual basis, whereas, yes, we're a little more edgy and concerned in other markets where GCs are not doing the same volumes and doing the same full turnkey scenarios. Japan is another very good market with the U.S. as well. With Europe, you've got to be -- and we're very, very careful what we're doing in Europe as we will be in Australia because the market is not as well tested as the U.S. or as Japan. So yes, we're comfortable. We know what's going in it. There's no big mystery. There's no sort of like secret sauce that's going in there. It's -- we want to have data centers that primarily air cooled, water cooled, can do both primarily, adapt to AI as you need to, things like that. So water is actually really important as well as power. So I think that's just fun to watch as you move forward. But no, we're just super focused on doing it well, and we're very happy to do one at a time. We've got a global team of engineers we've been building around data centers, who are actually working across borders and across country. We're using best practices. We're using the best technologies we see. And we're obviously working with our customers to make sure we deliver what they want.

All right, that's clear. And just the capital for turnkey, that doesn't sound like something that you uncomfortable with [ data ]?

Let's make sure we get the right return. If we don't, we won't be doing the specialized pieces because I go back to my earlier comment. I think -- in the U.S., someone was telling me that if you have a powered shell, that's a sixth cap rate, growing at 2. And if you have a full turnkey that's 6.5, and that's growing at 2, that doesn't make any sense. When the 6.5 is cost of building that is 3x more than the powered shell and there doesn't seem to be any depreciation in there, and if there is it's not enough. So let's just be honest about the cash flows, and understand what we're doing here. There's real estate components and there's real infrastructure components, but you need to evaluate it financially, honestly. And make sure the cash flows meet the objectives of the returns. And I think Nick and I are all over that. [ Nicolas ]?

Certainly hope so. Yes.

All right. And one more, if I may. Do you guys have a rule of thumb for how long you expect generally the data centers to being with for? Is it 3 years? Is it 4 years? Or is there anything like that you can talk to at the moment?

Yes. Look, the powered shell you'll be through in 2 years, 18 months, right? So you get to powered shell and then you may have some revenue coming off of powered shell. The balance will depend on the customers' drawdown and takedown, which could be a couple of years, could be 4 years, depending on how many megawatts and where they want it and how they want to take it down. So there's elements of the second stage, which could be longer, but the first stage, it can be cash flow positive at that point is the way we're looking at it.

All right. And for turnkey enough powered shell. Or is that the extra 2 years you're talking about?

Yes. There's different components to it, and it depends on where the where you want to spend your capital and where the return is. And then who are you dealing with? Because on the other side of these transactions are $2 trillion companies that actually have a lot of cash. So there -- as we've found in warehouses, in some instances, we've had big customers that actually almost build our warehouse for us. So there's going to be big capital contributions we believe moving forward in our model also from the hyperscalers was their cost of the amount of cash they have and the amount of capital and free cash flow they have is obviously enormous. So there'll be a combination of ways and methods and depending on who it is, the co-locator, it could be totally different.

Our next question comes from the line of Ben Brayshaw with Barrenjoey.

I just have a couple of quick questions. Greg, I was wondering if you could expand on what visibility you might have on the procurement of the additional 2 gig of power that you mentioned. Just what stage you're at in terms of discussions with local authorities around having that, I guess, documentation put in place? And second, can I just clarify your comments as well. You're talking to $50 billion in value. I think you mentioned over 5 to 7 years at the September quarterly update. You mentioned that delivery of the data center pipeline would likely take 7 to 10 years. So just trying to reconcile or understand how you're thinking about the time frame of the delivery of the approximate 4 gig in power?

Yes. I'll take the last question first, and then we'll get back to the 2 gig we're working on at the moment. Look, I think it's because we're refining when we can get the cash flow. And I think we get to cash flow at powered shell effectively. And then I think, as I said before, it's in 2 stages. So I think we can bring forward cash flow and probably bring forward some of the development profit, Nick, with powered shelves. And if you're doing work with co-locators, maybe the powered shell is the way to go because their credit is very different in due respect to them to, say, a hyperscaler. So we'll handle it differently as we go along in our time frames, I think we can pull in. And the other thing is the 2 gigawatt we're talking about is mission-critical to get timing and get them up as fast as we can. So we're looking at ways we can accelerate, build infrastructure early. We're actually scraping sites right now, knocking buildings over as we are actually planning these things. So I think we're going to actually get some time advantage. Time is critical right at the moment. The 2 gig you talked about. A lot of that is actually in advance negotiation discussion. And effectively, about 600 of it is actually our right. We haven't put in the 2 gig number. It's our right to pull it down. We just need to negotiate the final outcome. But we've got as of right position. The other thing, too, to remember that there's money going into the front end of this program. So as you're pulling down power, and you're committing to it, you're actually committing capital to it as well, and you're pulling it down and spending money. So it's economic for us to be sort of like locking down financially a couple of gig. The 600 I was talking about before, right at the moment, we don't have to. So we don't need to lock it down because that then means maybe there's another $100 million goes out the door in regard to securing different things we need to secure, which might be transformers and things of that nature. So yes, we're monitoring that very carefully, but it's not a hopeful number. It's a very secure number. And 2 is locked down. We're working on it, and we're actually spending money on a lot of those sites to get them going vertical second half of the year, beginning of '25.

And just on my second question on delivery timeframe for the DC pipeline. You mentioned 5 to 7 years. Previously, you talked 7 to 10 years. I was wondering if you could just comment on that, please.

Yes. It's sort of what I said earlier, because we're doing powered shells, we're pulling them forward and we're probably getting those cash flow earlier. And that's the work we've done on the last 6 months about how we're going to build a bit of mousetrap effectively. We think we can pull that forward earlier.

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

Congrats on the strong results. If I can just go back to guidance and ask it in a slightly different way, please. What items are doing better than your expectations when you're guiding for 9%?

The development and the performance fee lines.

And in terms of occupancy, it's down slightly. Are there any drivers to call out for that? And any read-through on tenant demand, please?

Yes, we'll get an industrial question. That's good. No demand is very good. The locations are tight. And I think there's no real reason around that. I think what to watch, though, moving forward, is economies could weaken off a little bit. At the moment, they're actually pretty resilient, and that's why inflation is still hanging around, particularly in the U.S. And even in Australia, I think it's still pretty strong. But no, look, no major indicators. A lot of renewals going on. The thing that is helping industrial globally is because of the cost of capital argument, a lot of projects have been pulled up. So there's a bit of residual product that needs to be filled, but there's not a lot behind it. So we're building in at the moment that we're pulling something out of the ground, we're building into '25 sort of completions in '26. We're pretty comfortable about '25 and '26.

And just last one for me around gearing increasing. Are there any other movements there to consider apart from devaluations?

Yes. I think it's just the net investment into the development side. I mean -- I think we talked about this before, working capital allocation, development depending on where we are in the sales program and CapEx program can impact, that's transient capital in a way -- and what is sort of permanent capital is our co-investment in the partnerships or tends to be stickier. And so that's where we're sort of long-term focus. So -- that short-term working capital movements, I mean, I think we were up at 9.9% gearing or something this time last year. So it's up since June, but down since a December -- there's kind of gyrations and then the structural bid is we don't pay out 100% of our operating profits, and we reinvest that back into the long-term holdings, and that's what keeps the gearing structurally in check.

Our next question comes from the line of Alex Prineas with Morningstar.

Just interested in your comments around how difficult it is to -- if you want -- if someone wants to go out and acquire a data center powered sites at the moment, it's very difficult. Just sort of interested based on current land bank that you've got, if you were developing at your current run rate, how long will the current land make last on the data center side?

Look, good question. If we add -- we'll add another gig. We think over the next 12 to 18 months, to be quite honest. I thought we were -- yes, I'll be 70-odd I expect by the time we get there. And that's a good 10, 12 years' time.

I was going to say, Greg, that's 40 years from now.

Yes. Yes. Look, it's got a long tail. I think more importantly, look at the demand side of it, I think that's more the point in question and look, talk to Microsoft and Google about that. But if you look at the demand side, and I like taking things in 5-year chunks, I think we're going to be very, very busy on this for the next 5, and then we'll look at it after that, but very busy in the next 5. And we've got plenty of opportunity. Going back to what I said earlier, we own it, it's there, it's available, and we're just mining it and finding it effectively is what we're going to do. So good systems, good processes, good development processes is our big competitive advantage.

And I'm showing no further questions at this time. I would now like to turn the conference back to Greg Goodman for closing remarks.

I'd just like to thank everyone for this morning, and good day.

This concludes today's conference call. Thank you all for participating. You may now disconnect.