Goodman Group (GMG) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Goodman Group Q3 FY '25 Operational Update. [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, Chief Executive Officer, Greg Goodman, CEO. Please go ahead.

Thank you, and good morning, everyone, on the call today. Goodman has had a strong quarter. Our logistics customers' increased need for productivity, automation and mechanization continues to support long-term demand in our locations around the world. However, uncertain economic and trade conditions are delaying customer decisions. In the data center space, rising demand for cloud and AI services is contributing to growing data center ecosystems in metro areas close to end users, where the majority of our sites are located. The environment, however, is producing valuable opportunities for those with patient long-term capital. We're using this time to take advantage of long-term regeneration opportunities, and our teams around the world are reviewing [ NR ] and due diligence on a number of these sites that could potentially serve as high-value logistics, data centers or dual-purpose developments in the future periods. Our recent purchase of a second land parcel in Luton in the U.K. is one such opportunity. The substantial size and scale of the brownfield sites will see us invest significantly in building world-class infrastructure, including industrial and data center complexes. And as a result of the urban locations we operate in and the limited supply in many of these markets, our occupancy remains high, and we're seeing positive rental reversion. Valuations are also positive with some cap rate tightening recorded during the quarter. Our total portfolio now stands at $86 billion. More than half of our $13.7 billion development work in progress is in data centers. And we're making steady progress against the 0.5 gigawatt of projects we expect to have underway by June 2026. These developments span 8 metro areas across North America, Continental Europe, Japan, Australia and Hong Kong. Our focus is firmly on execution, and we continue to advance detailed infrastructure works on these sites, including demolition, power connections, substation installations, procurement of long lead equipment for these projects, along with aboveground construction already underway at LAX01 and HK10. These all help to reduce time to market and provide customers certainty on delivery and importantly, timing. The secured portion of our 5-gig global power bank has increased to 2.7 gigawatts, and we have been building out the delivery team, making significant hires during the quarter, particularly in the operational space. Capital remains a key barrier to entry in this industry. However, the group's liquidity of over $6 billion provides a strong base to execute our program. Our long-term capital needs continue to evolve with our operations. We're in the process of transferring completed data center projects into data center partnerships in Continental Europe and Japan and continue to deliver and actively rotate our capital to fund sustainable earnings over time. Goodman has always worked to unlock the highest and best use of our sites around the world. We continue to optimize the long-term value of our assets through strategic planning outcomes. Regenerating sites is providing future development and growth opportunities in addition to logistics and data centers, and the group is making progress towards monetization of residential sites, primarily in Australia. Development activities are forecast to continue to provide attractive margins. We expect supply constraints in our locations to support rental growth over time and maintain high occupancy in logistics and support leasing for data centers in the near term. Hyperscaler CapEx programs are escalating and accelerating, and Goodman is well positioned to benefit from this with access to power on existing sites and a proven track record in delivering complex infrastructure developments. Substantial data center development commencements are expected to be reflected in work in progress through to June 2026. And just in closing, the Goodman team is focused on executing our significant opportunity set. We reiterate our forecast FY '25 operating EPS growth of 9%, which equates to over $2.2 billion operating profit. I thank you and now take questions.

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

Greg, you opened with a comment about uncertain economic and trade conditions delaying customer decisions. Are you seeing these uncertain economic decisions impacting capital partners' decisions as well?

Yes, Chan, look, it won't be a big surprise. Everyone has been very careful about what they do around the world until there's a clearer view on what the trade situations look like. So I think you could extrapolate from what I've said today that yes, I think customers are pausing and they're watching what they're doing and they're being very careful about what they are doing. Customers are doing things now and looking through the haze, if you will, but more quietly. What that has done, though, is developers have pulled the handbrake up pretty well everywhere in the world, which is giving us the opportunity, which I talked about in my presentation, in regard to getting some big regenerative sites that we haven't been able to sort of get at a reasonable price for a long time. So we're using that as an opportunity on that side of the equation. But I think on the capital side, we are closing partnerships in capital at the moment. But you just need to allow more time as people absorb what is going on around the world and sort of get adjusted to the new reality. How long that may be, we'll wait and see. But yes, things are taking longer, and we have adjusted our program towards that.

Right. So whatever you were doing in the U.S., I recall, as part of the GNAP restructure, you had planned to do a few things there. I know the Norges partnership was one of them, but you had stuff on balance sheet that you're going to vend into the second fund. I assume that hasn't closed yet. And on the back of your comments today that there might be some delays there.

No. Look, we're just progressing along in a sensible fashion. We think actually in the U.S. at the moment, and we are looking at a number of site acquisitions there at the moment, exhibits very, very good value. And effectively, we're taking advantage of that on the buy side. But we're still progressing with the programs and the plans that we had 6 months ago when we did that transaction in the U.S.

Great. And just looking at the WIP commencements, et cetera, that's actually gone up quite significantly versus what you disclosed at the half year results. Can you perhaps give a little bit of color on the -- what went in and what went out? I assume that the big uplift is due to Vernon. Am I correct? And is that pretty much the reason why the yield on cost went up so significantly?

Yes. Look, you could say it's data center orientated. It's full build-outs of data centers, which we think will be a big feature over the next 12 months, and you'll see that, I think, in the full year result. You'll also see that going into the half year in December for this year. But look, certainly, from where I'm sitting at the moment, I've just been in the U.S., that we're doing -- we're going to be doing a high proportion, I think, of turnkeys. And why I say that is because we've got a lot of demand that wants to be in 1.5 years out. So you need to keep building through your program, which is what we're doing. We're staging those programs globally. We'll be kicking off, for example, [indiscernible] here shortly, which is a 5-story, pretty major piece of infrastructure. And effectively, we're making sure we get closer to the game line so we can offer our customers outcomes where they might be 1.5 years from being able to get their facilities into -- powered up and powered up form. So yes, you'll see work in progress -- they move as these projects start coming into WIP. And I think you've seen a little movement at the moment, but that obviously will be a lot greater as we go over the next 12 to 18 months.

So is LAX01 and Hong Kong 10 in there as powered shell or fully fitted at the moment?

10 is a shell. Vernon is fully fitted.

Next, we have Tom Bodor from UBS.

I was just interested in your comment. I think you just mentioned in passing there that you do expect some DC leases in the near term. Just be interested in how that's progressing with the various hyperscalers. And then also, how are you thinking about forming capital partnerships potentially to do the developments? Is leasing really a precondition to forming those capital partnerships?

Yes. Probably the opposite. Actually, the capital partners we're talking to like the development process to be clear. And I think precommitments are not a cursor to it. So what we're doing on the customer side, we're having discussions with customers all around the world. Some of those will be floors. Some of those will be 2 floors. Some of those will be buildings. Some of those might be turnkeys where they want to own at the end. Some of those might be shells that are unsold. Effectively, some of those might be site sales and all of the above. So we look at ourselves globally not as a colo or an operator. We look at ourselves and effectively are very, very focused on building excellent infrastructure. And that is for everyone that's in the industry, whether a colo, whether a hyperscaler, where they want 1 floor, half a floor. And effectively, we'll make sure we can build that high-quality infrastructure, deliver it on time, and we are building into the best markets in the world. So the top data center markets outside the U.S., which Virginia, obviously, is strong, you're talking about London, you're talking about Frankfurt, you're talking about Paris, you're talking about Tokyo, you're talking about Sydney. And we're in all those markets, and we're getting starts in all those markets over the next -- except London, over the next 12 months. So we're building in the very best markets, the most high barrier to entry markets where there is very, very good solid demand and negotiations going on in all those markets at different stages. But what we are doing to tighten up the gap in the program or the time in program is make sure we move forward on long lead items. So we are ordering a lot of generators around the world. We're putting power infrastructure in. We're going vertical on shells and 2-stage arrangements where we'll have a contract for a shell and we'll have a contract for a build through. And we'll keep closing up that time frame so then we put ourselves in the best position to negotiate outcomes.

So from a capital partners perspective, is the desire to not come in, not necessarily require a lease more a function of wanting to leave leasing as long as possible to maximize potential revenue?

Look, I think with the -- to be quite frank, the partners we're talking to around the world are varied. So I mentioned in my presentation, there's a few data centers that have actually transferred through to capital partners their completed product in Japan and also up in Europe, and I mentioned that in the presentation. So what you'll see over the years and many years is a combination of built form that going into partners. You'll see a combination of capital coming in at the development phase, so we can share the risk because our program around the world of 5 gigs is over $100 billion of in value. And we're not sitting here today pretending we're going to fund the whole lot. So effectively, we do want to share the risk on the developments as we go through because we'll have a number on over the next 2 or 3 years, and that would make economic sense, but also share risk. But big capital partners of Goodman's and big capital partners globally like the development process, like the thematic that's running behind the development process. The demand and the -- you'll see the big CapEx numbers still coming through from the hyperscalers in regard to spends on data centers. A lot of that is in the metro locations that we're in. So it will be many and varied, and we'll be managing capital and risk and return.

It sounds like leasing is less of a constraint, though, at least at this point in time.

Next, we have Ben Brayshaw from Barrenjoey.

I was wondering if you could provide a situation update on the establishment of a second partnership in the U.S. to sell down the surplus assets acquired from GNAP.

Look, I mentioned that a little earlier. As we were -- I think the last time we chatted, we're working through that. We're working through that currently. But I will say, and I said it a bit earlier, that capital is taking its time. People are being sensible and cautious and so are we. But we are using this opportunity to actually pick up some pretty good sites around the world, which we are doing in most markets. So I think there's an opportunity on one side, but you've got to be realistic to adjust your programs, particularly around capital where people want to be a bit more cautious with what's going on around the world and see a little bit more settlement in regard to certainly what's happening with trade and things of that nature. But the U.S., we think, is compelling buying at the moment.

And just in relation to LAX01 and Hong Kong 10, are you able just to, I guess, step through your expectations on the composition of the customer base for those 2 assets? Are they likely to be, for example, single-customer buildings or you're expecting that there will be a variety of customers that you'll introduce into those projects? And secondly, could you just talk through when you think that the -- I guess, the income stream from both of those is likely to stabilize, noting that your comments around completion is the priority. But just curious as to what your expectations are on the yield on cost in terms of that stabilizing post completion.

Yes. Look, in Hong Kong, it's pretty clear. Both programs there are shells. So you expect in the shell, you're going to have a single customer, whether it's a colo that we have in Hong Kong. We've got a number of colos in our portfolio there. You expect them to be a hyperscaler colo, single operator leasing the shell because that's the configuration we're working on at the moment. If that changes, I'm sure we'll let you know in the work in progress number. And I think the yields on cost and things are pretty consistent with what you're seeing in the market. And I think the market is looking at anywhere between 9s and 10s, a little bit lower in some of the Asian countries like Japan on shells running through to full MEP fit-outs. But the program in Hong Kong at the moment, as was the first couple of hundred megs we did in Tsuen Wan West, is around a shell program.

And just, Greg, any comments you could provide on Vernon given that your comments earlier are that it's likely to be a fully fitted facility?

Yes. I think it's just the location, we think, is really good. The amount of power available in some of the key markets in the U.S. is difficult. Lead times on a lot of these products is blowing out to years, not months. So there's real opportunity there. We want to be in a position where you could do floor by floor if we think that's appropriate. There is colo interest in taking the whole building as well. So we're just setting ourselves up to give ourselves the maximum flexibility in regard to the negotiations we're having actually right now. We will have an operating model around it because if you're doing floor by floor, you'll need to operate it. There's some hyperscalers that want us to operate. There's some that want to operate themselves. So we'll play that out as we see it. But we're making sure that we're ordering everything we need and we're going vertical so that we are closing up the delivery time. So then we have real power with real delivery dates and real certainty, which is critical in the data center program.

Our next question comes from Lou Pirenc from Jarden.

A quick question. You talked about the trade uncertainty impacting customers. Can you talk about what it means for construction in terms of cost, supply chain, just getting generators and whatnot, so how it's impacting the timing of development?

Yes. No, look, it's not too bad on the construction side. I've got to say though, I think data center construction in the last 12 months or so is up certainly over 10% in most places in regard to cost. So the costs are climbing on some of those aspects. That's got nothing to do with the trade tariffs we've got on at the moment. And I think in regard to industrial, we've probably got a bit of a pullback in cost on some of those because over the last 12 months, the handbrake has been pulled up by a lot of developers that actually in some markets don't have the funding to progress and the demand with precommitments is less robust. So I think from that point of view, it's coming into equilibrium pretty quickly, which is giving us an advantage on the cost side. At Goodman, we want to build into '26, beginning of '27, mid-'27. So our program at the moment, as you'll see, we'll start kicking some starts off for that late '26-'27 program, particularly in the U.S. and also through Australia and some also probably in Japan, where we think there's going to be a bit of a shortage. So industrial pulling back a little bit, data centers a little more expensive. And the amount of contractors globally for data centers is smaller than people would like. So in many markets, you've got 1 or 2 choices, effectively. And that's just because of the demand and also a lot of subcontractors -- the ability of subcontractors is getting strained and difficult. We've even heard that in residentially here in Sydney, subs are difficult to get for residential because they're actually working on data center projects. So yes, watching all that pretty closely.

But it sounds like, given that you're still talking about 8% to 10% yield on cost on sales, that the higher cost is offset by higher income. Is that fair?

Look, I think the demand is still very good, but particularly in the metro locations we're developing in. And we're going to go vertical in [indiscernible] shortly. That's a big 5-story, pretty complex build. Effectively, you've seen what's happening around North Ryde. Barriers to entry are going to be difficult. Planning is not going to be easy. It makes projects like that even more compelling, right? So you can imagine we're relatively comfortable where the economics sit.

All right. Finally, on the -- you mentioned the yield on cost expectations for shells. For the fully fitted projects, you're still expecting kind of mid-teens?

If you're looking at development IRRs, you'd be mid to late teens. In regard to cash on cost, pretty raw, you're going to be looking for, I think, mid-9 through to early 10 -- early double digits. So where it sits -- depending on where it is, obviously. That's a big difference if it's in Paris to locations in the U.S.

Yes, even for fully fitted, so similar to what you said about shells.

Yes. Shell is a little tighter in regard to cash on cost. So they're probably low 9s to 10. The fully fitted can be 10 plus, sort of where we're aiming in.

Our next question comes from James Druce from CLSA.

You touched on [indiscernible] just before, Greg. I was just wondering if there's any other DC starts, which are sort of imminent over the next quarter that you're thinking about.

Yes, there are. Tokyo is obviously an important market for us. We're ready to go. I think we talked about that probably a quarter ago. In Europe, we're building transformers and putting -- ordering all the long lead items. I've ordered -- we have ordered, not me personally, but we at Goodman Group have ordered more Caterpillars and MPUs, and we've been making decisions around generators. So yes -- no, we're into it, no doubt about it. We're closing up the gap on delivery, and that's what we want to do. And we're in some of the -- we're not in some of the best markets in the world. We are in the best markets of the world. And I think you go and do the global map of data centers and where the demand is and where the barriers to entry and the difficulty to get power, we're in those markets, and we're up and down. So yes, a lot of time, a lot of intensity of work, and there's not many holidays over at this joint at the moment.

Yes. Okay. Are there any precommitment thresholds for the whole WIP that we should be thinking about when you're trying to manage risk as you roll out this DC pipeline?

Look, I think look for capital -- and we'll make some comments about capital as we go forward during the year. But look for capital, big partners. The data center program around the world is $100 million -- $100 billion rolls off the tongue pretty quickly, doesn't it? But the amount of capital to get there is big. The risks are not underestimated. The barriers to entry are getting higher, not lower. The complexity around power is extreme in different parts of the world. This is a game where you need a lot of money and you need a lot of long-term capital, and that's what we're doing right at the moment.

Okay. So the more capital you bring in, the less you're sort of not as worried about precommitments, I suppose, is the idea.

Well, you're not running around trying to finance developments and things like that with banks. You bring in real money real time to give yourselves the time to be able to build them out without financial risk. And I think the financial risk around data centers and other development as well, where you're building into programs where there is less capital available as well, you'll find there's going to be some things that don't work out terribly well for people. So we are steering away from leverage, which we have been for the last, I think, 15, 20 years. Nick Vrondas is actually here. You can ask him a question if you like. We're steering away from obviously leverage, and we're partnering with people with real money that are happy to stand there hand in hand and be able to do this with us.

Yes. Okay. And maybe just on the logistics pipeline. If we think about that in absolute terms, you sort of mentioned that demand is sort of a little bit difficult in that space at the moment, which is not hugely surprising. But given that you've completed a lot, should we expect that portion of the WIP in absolute terms to actually tail off a bit over the next half? Or do you think you can hold that?

Look, there's some actually big projects we're working on at the moment. So effectively, it might tail off a little bit. But longer term, the trend is going to be strong. Because the parks we're doing is sort of like $1 billion a park now. And we're buying actually bigger sites than we were 5, 6 years ago. And there's land with infrastructure transactions we're doing around the world at the moment, which $500 million gets you a start, I'm talking Aussie dollars, and it could be in the thinking of $900 million to $1 billion of land and infrastructure. We're putting more infrastructure in the bigger sites and bigger programs. So I wouldn't underestimate it is where I'm at. And because developers have pulled back around the world and they can't fund because maybe they need banks to do it, banks are not doing it. That comes back to the opportunity I spoke about it earlier, where we are getting access to some really good regeneration sites that maybe a year or 2 ago, there was -- everyone was doing it. Now they're not. So we see that as an opportunity moving forward. So maybe in the short term, long term, it's going to be pretty solid. The other thing we're a big fan of is the mechanization, the automation. And I think you'll find fundamentally inside 10 years, there won't be anyone in our warehouses. It will be dark and there will be -- it's all robotics with a bunch of engineers. So you want to set yourself up for those big sites where you can put in big power infrastructure because you need more effectively to drive these things. So yes, we're making sure we don't end up with stranded assets in the future, where if you don't have the power and you don't have the infrastructure around them, you could be -- you could have a stranded asset.

Okay. One more easy one, if I may. Just the yield on cost for industrial at the moment, is that still in the 6s? Or can you get a 7 in front of it for what you're kicking off?

Yes, we're 7 to 8s, except Tokyo.

Our next question comes from Richard Jones from JPMorgan.

Greg, can you just clarify the structure of the data center joint ventures you've got in Europe and Japan and whether other partnerships that you're working on will be different from that?

Yes. The 2 specifically mentioned today are buying -- participating in shells that were built primarily in Frankfurt and in Tokyo. Tokyo, we had a program of 4. We're through 3, and we've got another one still to go. So yes, that's in product. I think on the development side, moving forward -- bear in mind, we have, I think, globally, one of the biggest development programs in the sector. We're looking for -- and we have already development partners. We've got a development partner, as you know, in Japan, where the development partners are on full risk, but they are big financial institutions with big amounts of capital that rely on our expertise to make sure that we keep them safe. And there's obviously big returns at play as well.

Okay. And just the Goodman equity ownership in the end product structures and the development products that you're working on?

Yes, development will be 50-50 in products or anywhere between 20s to 50s. So pretty consistent with what we've done around industrial. But any development partnerships will be 50-50 and then with the requisite arrangement Goodman makes over development services and other things like that.

Okay. And then the 8 identified development starts that you outlined at the capital raise, should we expect that you have land sale profits out of the balance sheet and the managed funds into these new development partnerships and then all the construction will be done in those partnerships?

Look, I think you'll find there will be many and varied ways. But I think -- I saw your note recently, and I think it was relatively clear what you said. I don't take any issue with your view on how we might do it.

I see no further questions at this time. I will now turn the conference back to Greg for closing remarks.

I'd just like to thank everyone very much, and good day.

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