Goodman Group (GMG) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Q3 FY '24 Operational Update Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, to the CEO, Greg Goodman. Please go ahead.

Yes. Thank you. Good morning, everyone, and I have Nick Vrondas with me here on the call. Goodman Group has performed strongly this quarter, and the business is well positioned into financial year '25. The location and quality of our properties enables customers to increase productivity through improved supply chain efficiency and automation. Customers are integrating physical technology with AI-backed logistics and supply chain software and are looking to reduce their carbon footprint, driving demand for sustainable energy-efficient properties close to consumers. We continue to deliver large-scale, high-value data centers and expand our global power bank to address growing data center demand as AI usage and cloud computing expands. Demand is strong, certainly over the medium to long term, and data centers under construction now account for 40% of our $12.9 billion global development work in progress. We are active managers focused on optimizing returns for our investors as we deliver essential infrastructure for the expanding digital economy. During the quarter, we internalized the management of NZX-listed Goodman Property Trust to drive growth and higher return on capital. Our total portfolio increased by $1.5 billion over the quarter with our assets now worth over $80 billion. We expect continued volatility in real estate markets globally. However, the group and partnerships have strong balance sheets. The group has low leverage, no drawn debt maturities until late 2025. Our significant liquidity has been boosted following recent bond market activity. We are well placed to adapt to the macro environment, including the higher global cost of capital, allowing us to actively pursue opportunities for growth. Like-for-like rental growth of 4.9% and continued high occupancy at 98% demonstrates quality and location and provide future cash flow growth. The average expected upward rent reversion to market across the global portfolio is approximately 25%. We have maintained strong development margins, and yield on cost is increasing on our development workbook with 7% on commencements. We're doing more on balance sheet and increasing the weighting of data center activity, all designed to optimize returns. Our data center power bank continues to grow. It now sits at 4.3 gigawatts across 12 major international cities. Of this, 2.1 gigawatts of power is secured, and we have increased the power we have in advanced stages of procurement by 0.3 gigawatts to 2.2 gigawatts. As we progress our opportunities in data centers, we are likely to deliver a large range of products from powered sites, powered shells or turnkey solutions, providing options for our customers. Our active asset management approach continues to focus on growth and opportunity, and we constantly look for innovative ways to drive both for our investors. We're reviewing capital structures and allocations around the world. We expect to recycle assets to further enhance returns on equity. We're progressing our sustainability strategy and continuing our focus on building more sustainable buildings. A few key examples you can see in your presentation. Now turning to the outlook. The group continues to execute its strategy successfully amid an uncertain environment. In the near term, logistics demand is likely to moderate. However, not in all markets. Scarcity of high-quality sustainable assets in key locations should support rental growth and high occupancy of our portfolio. Competition for land in our markets from a wide range of alternate uses is continuing to provide opportunities for the group, data center demand in particular. Our competitive advantage is access to secured power on our sites and proven track record in development and program delivery to meet the growing demand. We're increasing our power bank, working on planning and infrastructure and progressing our work with customers and capital partners to maximize this opportunity with strong demand expected over the next 5 years. We're also upgrading our forecast FY '24 operating EPS growth to 13% and a full year distribution of $0.30 per share. Thank you very much, and Nick and I are now open for questions.

[Operator Instructions] And I show our first question comes from the line of James Druce from CLSA.

Congratulations on that another strong result. Maybe just touch on guidance first, upgrading to 13%. You had a really strong first half, but I suppose what gave you the confidence to push higher for the full year? What were the key drivers there?

James, it's Nick. Look, I think, obviously, development was very strong in the first half. I think we foreshadowed that at the end of last financial year that the realignment or resynchronization of performance fees would happen this year. And so management income, very strong in the second half, and we're in very good shape now. We're in a position where we can be quite precise about where it's going to land for 30 June given where we are. And so yes, we feel it's the appropriate time to update the market.

Just following up on that, I mean, how precise can you be today on that number?

The number that we've given you.

Performance fee -- okay. Just the range.

Well, let me answer it this way. I think in the past, we've said the average take on MER on stabilized assets under management would average around 1. This year, it's going to be between 1.1 and 1.2.

Okay. That's good. And another one, if I may. Just on the development starts. Can you just talk to -- it looks like a sort of more of a subdued quarter this quarter. I think it was marginally about $0.7 billion started in 3Q. Can you talk about the visibility that you have over the next 6 months or next quarter?

Yes. I think you -- with the bigger projects being data centers as we move through and as they are actually a larger portion of the work in progress and they'll be in work in progress longer, I think you'll find that the quarter-by-quarter starts is not going to be really the number you're going to look at. You're going to have to look on a 6-monthly annual basis. I would have thought Nick will be the better way to look at it because some of these projects, as you know, are $1 billion per project or more. So effectively, you'll see that start to come through as you roll through into June and into the new calendar year. And I wouldn't get too concerned about quarter-by-quarter to be quite honest, but there will be some pretty strong work in progress numbers, and it will be in work in progress longer is the feature moving forward.

And I show our next question comes from the line of Simon Chan from Morgan Stanley.

You guys have been talking about being in active discussions with customers on delivery and leasing models for powered shell and infra fit-out turnkey solutions, et cetera. You've had that blurb in there for about the last 3 quarters now. Just wondering, have you guys worked out the ideal model? Have you made your mind, I guess, to whether or not you will engage in installation of DC operating equipment in any material sense? Or I guess more importantly, guys, like have you worked out how to price it?

Yes. No, no, we have priced it. We're negotiating some of those outcomes as well. Powered shell is a very proven model for us. And as you know, we've done a number of those, and we'll continually do a number of those. And you need to do the powered shell anyway to drop the fit-out inside. So that's going to continue. And effectively, powered shell is what is in the work in progress number at the moment. So look, we think moving forward, it will be a combination of the 2 and where it makes sense for the customer and where it makes sense for ourselves. But yes, we have power pricing, and we are very much involved in those discussions as we've talked about over the last few quarters.

Can you give us some insights as to how you priced the MEP? Because for the powered shell, I get the yield on cost, 7%, 10%, whatever it may be. But the MEP part, like how do you ensure that investors, as in your shareholders, are getting appropriate returns given the finite life of some of the equipment in there?

Yes. Well, that's a matter of pricing it properly, pricing cost of capital properly, depreciating, amortizing appropriately and ending up then with a return on capital [ letters, recompenses ] you for the risk you're taking is the way you look at it unequivocally.

And is that return on capital, would that be similar in percentage terms as powered shell?

Dollars we put out the door in development need a return on capital and return on capital hurdle. And effectively, yes, you need that return after you've been through the depreciation and the amortization in an appropriate manner.

Very clear. Just got a question on China. I think the occupancy has dropped to 93%, which is quite low by Goodman standards. Can you give me some insight as to what's going on in that fund?

Look, just China generally, as you know, from the economy is pretty weak. There's been a fair bit of overexuberance in regard to development generally in China, being a lot of products that is primarily not leased in a number of markets, mainly the Western China markets to be quite frank. We're very Beijing, Shanghai, Shenzhen centric. That's most of it, and it's holding up pretty well, but it's holding up in a market that is pretty soft.

And I show our next question comes from the line of David Pobucky from Macquarie Group.

Maybe just back to performance fees. I think previously, you're talking to the performance fees potentially coming in somewhere above $150 million for the year. I mean is there any update to that, that you'd be able to provide today?

Yes. Well, it's going to be materially higher than that, David. So we've still got to finalize some calculations. But yes, I think we're guiding towards something materially higher than that.

Thanks, Nick. And just on commencements of $0.7 billion, are you still delaying some traditional industrial commencements as you assess alternative uses being data centers?

Yes. I think we're just watching the markets very closely around the world in regard to where we think there's going to be a shortage in the next year or 2. So there are certain markets we're moving on. We certainly have got a pretty robust book, for example, in Sydney at the moment in regards to development. There are other markets, for example, China, where we're not doing very much at all. So we're just -- we'll watch what we're doing around the world. We'll go where we think there's an opportunity in the locations we're in, and we'll pull back in the areas we think where there could be some softness and weakness. So we'll just play that very carefully.

Yes. And David, also, you're right. I think we talked about this with the full year result as well. You're absolutely right. There are some sites that we take our time and get it right. And we're not in a rush. It's about optimizing the outcome. And so some sites that were previously earmarked for industrial use are being reconsidered, reconfigured and going to be repointed towards data center. And that is having effect as well in the short term, but that will normalize over the coming years.