Goodman Group (GMGSF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Goodman Group FY '25 Full Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. Gregory Goodman, CEO. Please go ahead.

Thank you very much. Good morning, everyone. Goodman has had a strong year. Operating profit was more than $2.3 billion, while operating earnings per security grew by 9.8%. The group has 4.3% gearing, $6.6 billion of liquidity and interest rate cover of over 47x. These results reflect the success of our strategy to target major cities around the world, adding value and infrastructure to sites with high barriers to entry, and providing future growth opportunities. This global strategy is reflected in our operating earnings with approximately 70% now generated outside of Australia. Global volatility over the last 12 months, while challenging has enabled Goodman to actively pursue long-term growth opportunities to set us up for the future. We continue to make strategic site acquisitions that will provide us with the flexibility to meet growing demand for data centers and capture future growth in logistics, which will be driven by increased mechanization, software and AI to help boost productivity. We took the opportunity to fortify our capital structure for the future with a raising of $4 billion of equity in February for the group. We also expanded our partnership platform to make sure we can fund the significant data center development opportunities comfortably, the scale and potential benefit of which is significant. We're living through a profound transformation where artificial intelligence and machine learning aren't just tools to enhance productivity, but are fundamentally reshaping the way we live and the way we work. We're enabling the change with our logistics and data center properties to not only help our customers become more efficient, but also to grow. Data centers currently make up 57% of our global work in progress. This is also expected to increase significantly, and we're on target to have 500 megawatts of data center development underway by June 2026 in key global cities. Development program of this size and scope is ideally suited to co-investments through capital partnering, which we have successfully deployed at Goodman over many years. In FY '25, we established new data center partnerships in Europe and Hong Kong, and we've recently launched a data center partnership in Australia and are preparing to launch another in Europe during this half. I'll now hand over to Nick to take us through some of the results.

Thank you, Greg. Let's turn to Slide 15. We'll first cover the items that relate to our cash back measure of earnings, which we call operating profit. As usual, this excludes unrealized fair market value movements on properties, mark-to-market of hedges and the accounting fair value estimate relating to our employee long-term incentive plan. FX movements had an immaterial impact on the translation of our foreign-denominated operating result for the year, so we can just focus on the key drivers of performance. Starting with investment earnings, which increased by 20% or $111 million over the year. The GNAP reorganization in the first half influenced the composition of our investment earnings. We had property come directly onto the balance sheet and reduced investment in the partnership. Overall, our capital allocation to direct property was up by $3 billion over the past 24 months. As a result, we had nearly $80 million more rental income from our direct properties. The bulk of our investment income comes through our current investments in the partnerships. Our net investment into the stabilized property in partnerships was only $200 million over the past 2 years. Compared to last year, cornerstone investment income increased by $31 million as a result. Like-for-like rental growth accounted for $19 million of the increase and net investments contributed less growth this year because of the capital movements I just discussed. The portfolio remains 15% under-rented, and we see this continuing to support NPI growth going forward. This takes account the recent decline in market rents in China, which have also been factored into the valuations. Over time, we want to grow the investment part of the business as we continue to expand our portfolio of assets under management and our share of it. Continued development and new investments funded jointly through creation of new partnerships and growth of existing ones should support this. Management revenue was up by $61 million. Total fee revenue as a percentage of average stabilized third-party AUM was 1.3% for the year. Performance and transactional revenues contributed $372 million this year compared to $331 million last year. Our total portfolio stood at nearly $86 billion at June. Of this, $72 billion was in external assets under management. And within that, the stabilized portion averaged $66 billion this year and that's down marginally from $67 billion last year, and that's why the growth in base management revenue was muted. In terms of the outlook for this segment, we expect our third-party stabilized AUM to grow over time. By the end of June 2025, it had already exceeded $67 billion once again, which was $4 billion above the June 2024 level. This will be further increased when we complete the new U.S. partnering arrangements for the former GNAP assets. Over the medium to long term, our strategy is continue to expand our partnership arrangements and complete the data center developments. This will also be a contributor to growth. We remain comfortable with the long-term guidance of fee revenue, representing over 0.9% of third-party stabilized AUM. Our realized development earnings are up by $62 million. Included in these results are $253 million of operating profits that relate to the reversal of prior period revaluation gains on properties that have now been sold. As a reminder, this relates to the gain on assets that have been subject to fair value movements between commencement and sale. We don't reflect these gains in operating profit until the transaction is complete. So those profits aren't double counted over time, we notionally offset them against the current period valuation results when we do our reconciliations. The movements in our development have been and will be a little idiosyncratic in the near term. That's because we paused to consider the best alternatives and uses for our properties such as multilevel logistics and data centers. We're in the process of commercializing several of the data center sites, which will tend to increase WIP over the coming years. In fact, we expect it to exceed $15 billion by the end of FY '26. Our current WIP represents an annualized production rate of over $6 billion. Again, that's down marginally, but the additional work we expect to undertake in the coming year will see this increase. Given the longer project duration, we also expect appropriate margins to compensate. At the same time, we're originating a significant volume of work on the group's balance sheet or in specific development partnering arrangements. That means a higher realization rate. In other words, a greater portion of the development income reflected in our operating results rather than a share of revaluation gains. We aim to optimize capital allocation and realize margins on developments to achieve an acceptable risk-adjusted return whilst maintaining our focus on operating EPS targets and our financial risk management objectives. The data center partnership initiatives we're embarking upon are consistent with these objectives. We're enthusiastic about the prospects for development demand overall, which bodes well for future revenue as well as growth in AUM. The increase in our operating expenses have been moderate once again. We're managing the growth in data center-related resources very carefully. We had a $52 million turnaround in our net borrowing costs which resulted in us showing net income of $34 million. This was mainly the result of the increase in interest earned on cash, which was $86 million this year compared to $39 million last year. Our directly owned development assets have increased by $1.2 billion. So capitalizing interest is also up by $53 million. These have been partly offset by the higher borrowings mainly through the new bonds issued in the first half. Our cost of borrowings on our loans is currently around 4%, but taking into account our interest rate and currency hedges, the net WACD is around 1%. As far as the nonoperating items are concerned, we had over $200 million of unrealized valuation gains net of DTLs. That represents the group's share of the $1.6 billion across the entire portfolio. From that, we deducted the realized valuation gains to get to the $41 million net result you see in the table. Cap rates declined by 9 basis points over the year to 5.1% and market rents increased by 1.4%. Another customary area of difference between operating and statutory profit is the fair value movement on hedges. The late rally in AUD was the main driver of the loss but this is more than offset by the $463 million movement in the FCTR. As usual, we exclude the LTIP accounting costs but we include the tested units in the denominator when calculating our operating EPS. The decline in the accounting cost this year was influenced by the movement in the security price on the ASX. A few remarks now regarding the balance sheet on Slide 16. Our share of the stabilized assets in the partnership were up by $1.2 billion over this year. The revaluation gains, new investments, development completions and FX translation were partly offset by the disposals. Compared to June 2024, our development holdings are up by $0.3 billion overall. With the additions, valuations and FX translation offsetting completions and sales. Given the current activity levels, our direct working capital allocation to the group's inventory and investment property under development increased by $1.2 billion. Whereas our share of development capital in partnerships decreased by $0.9 billion. This is consistent with the higher capital intensity of the new projects as well as a higher proportion originated on the balance sheet. The progression of this part of our balance sheet is in line with our expectations at this point. We have substantial remaining development working capital capacity following the raising this February. We also expect to partner some of these assets we have on the balance sheet in the coming year. This will give us further capacity to fund more activity as we move through our power bank and industrial developments. Our cash position increased materially during the year, mainly through the recent equity raising and bond issue. Overall, we generated $2.3 billion of cash earnings in operations. $1 billion of this is reported through the operating cash flow statement. However, the statutory statement of operating cash flow includes a net $200 million of expenditures for growing development inventory, which accounts for part of the difference between operating profit and operating cash flow. This is typical for a growing business like ours. There's also around $200 million of earnings arising from the sale of properties, which are included in investing activities for statutory reporting purposes. That's either because they were in investment property under development and not an inventory or that were sold from within a partnership. This is not unusual for us either. Some transactions were again settled by way of net equity. So over $200 million of earnings was shown as nil in the cash flow statement. We view these transactions as operating cash inflows and investing cash outflows because the reinvestment decisions have been made separately. This is consistent with our distribution policy and capital management planning, which is the retention of operating profit is designed to fund the growth of our investments. As a result, you see the increase in our net assets is more than $1.7 billion higher than the increase resulting from the equity raising and movements from the cash flow statement. That's even after taking into account the noncash items, such as the accounting cost of the LTIP, balance sheet effects of hedging and the unrealized valuation gains. We also have capitalized interest on development properties going through the operating cash flow statement. So the combined effect of these development-related items explains around $700 million of the difference between operating cash flow and operating profit. As usual, there's a timing difference between distributions received and income recognized in the partnerships, performance fees and incentive payments. Along with the equity-settled income and other working capital items, these collectively accounted for the remaining $650 million of the difference. What you can see, though, from Slide 17, is that -- we have significant financial capability to help manage risks and capitalize on suitable opportunities that may arise. The creation of the new partnerships or the current round of data center developments will enable us to recycle capital over and maintain balance sheet strength. That's all for me. Thanks, Greg.

Thanks, Nick. Goodman is well positioned to capitalize on opportunities ahead, whether it's delivering more sophisticated logistics facilities with advanced robotics or building low latency data centers to power the digital infrastructure of modern life. Goodman's competitive advantages are clear. We have the right land power, people, projects and partners to deliver. Goodman has the planning capabilities, the skill sets and the proven ability to build complex infrastructure. Our intensive data center development program over the next year also requires a strong capital base, and we continue to expand our partnership platform to co-fund the development program alongside the group with 2 new partnerships in Australia and Europe. Our long-term focus means we continue to invest in the strategic infrastructure in the high barrier to entry markets. We're acquiring significant sites that offer future regeneration potential for high-value logistics data centers or both. Our forward planning has meant that we have secured power for our land and locations where power supply is now very constrained and the barriers to entry are only getting higher. Looking ahead to FY '26, work in progress is growing, and while industrial has been quieter, it's expected to pick up over the next 18 months. To take advantage of these opportunities, you need capital, partnerships and the ability to develop complex infrastructure. The team remains focused on execution, optimizing returns, generating sustainable long-term growth for investment partners and our security holders. The group is targeted to deliver operating EPS growth of 9% for FY '26, which equates to over $2.6 billion of operating profit. Thank you. Nick and I will now take questions.

[Operator Instructions] Your first question comes from Kane Hannan of Goldman Sachs.

Maybe just in terms of the guidance and sort of two-parter. So firstly, obviously, 9% earnings growth next year, you obviously do have a pretty tough comp from a management fee perspective this year. Just help us understand a little bit some of the moving parts going forward, sort of where you see development earnings into '26? And then sort of as a follow-up to that, just a comment in the outlook about being well placed for long-term growth. I don't think I've seen you make those sorts of statements before in your guidance slides. So just wondering if I'm reading too much into that, any reason for sort of that inclusion this year?

Yes. So well, in terms of the guidance for -- in relation to the FY '26, this early in the year, we have a lot of opportunities and options open to us. And so the composition will be determined ultimately by which opportunities we bring forward and how we bring them forward. And so we have an eye on performance fees, we have an eye on developments and starts and completions and transactions. We've been doing this for the same thing for -- I've been here for 20 years and longer. And so -- it's typical for us to manage the overall position rather than individual line items. And so we're not explicit about guidance. But what I will say is that the development side of the business has probably the most propensity for growth in the coming year given the opportunity set that we have in front of us. And we talked about our WIP growing, the establishment of new partnerships half a gig in WIP at that point in time by June next year. They're all really, really strong metrics and really good tailwinds, particularly for the development business. As far as the long term is concerned, that's really -- it's an interesting point. I mean, we kind of -- it's a little bit less -- it's a little bit unset except that if you look at, for example, the way that our remuneration is structured. It's got to be consistent growth, and it's got to be done in a way that's risk managed. And so I suppose we take it for granted and maybe we have in the past. But yes, we're structuring the business so that we can continue to deliver consistently in a risk-adjusted way over a long period of time. And that's what I think Greg is talking about here, and that's what I think shareholders should be accustomed to or -- and that's what we're trying to achieve. So yes, whether it's -- I don't know that it's new, maybe the language explicitly is new, but certainly, the trajectory and the objective is not new.

Yes, that's helpful. And then just lastly, just obviously, back in the 3Q, we're talking about building out the data center delivery and ops teams. Obviously, Craig being one of the big hires there. I mean, do you think data center team from a people perspective is now complete. Has there been any sort of changes or minor changes in strategy as they've come on board and sort of seeing the Goodman portfolio and strategy. Just interested if you could to talk about that, please.

Yes. Good question. We've got the right people in place to build through. We will continually build out our operating expertise. We've got the right chiefs in place to do that. And that will be done over the pursuant years as we identify what centers we'll be operating and which ones we won't effectively. But there's about 300 people in Goodman Group out of 100 that are basically the data center team now when we look at it globally. And that is all through the discipline of getting these up and down in a way we were going to be doing it or are doing it over a number of geographies and countries. So we're well resourced. We understand what we're doing. We are doing it and effectively that team will expand, but at the operational level as we start moving through the completion stages and the operational stages.

The next question will come from Lou Pirenc of Jarden.

Few questions from me. First of all, on the partnerships, I thought you were working on one big global capital partner and now you're introducing more regional one. Is that a change? Is that just how the negotiations have gone? Can you give some more color there?

Yes, Lou, it's timing effectively right now, and we talked about Europe today, we've got a 425-megawatt program. That's really to go vertical and it's ready to go vertical in the next 6 months and some is already going vertical. So it comes down to what's expedient, what makes sense, what's doable today. And that is the way we're going because it makes sense and it's doable, and we can get it done. It's obviously a significant bank of opportunity for us. And we don't need to complicate it with any other parts of the world. I think it's also preference for investors. I think investors are working geographically. In regard to Europe, then you've got a very, very, very strong market in Japan for capital, and also down in Australia, where we've launched a partnership here, which is asset specific being the Atman asset, which is coming out of gate, new structure, new capital and that is an excess of $2 billion completion sitting by itself because the size and scale of them allow us to do it. But we've looked at the whole -- on [ Chelada ] we've looked at the whole menu, and we've decided this is the way to go, and now we're executing after spending the last 6 to 9 months working through it.

And then L.A., will that then sit in an asset-specific partnership as well or you haven't worked through it?

U.S. will have its own partnership, and there's a number of sites and a number of things we're doing in the U.S. at the moment, but there will be a specific partnership in the U.S. We've talked about the European one. U.K. will have its own separate partnership because the capital and the opportunity there is also extensive -- you look at Japan and we've got over 1 gig of opportunity at the moment, that's a $30 billion plus ticket at the end of the day. So yes, they're big. They need to be well funded, and we're into it, and we're on with it right now.

Great. And then finally for me, on the GNAP partnership or the second part of that, that also seems to be taking a bit longer than what you had maybe indicated previously. Can you talk us through progress there?

No. We've just been going at a steady pace. There's been a bit of volatility around the world, Lou and regard to tariffs and things, and we've just been taking a little bit more time and choosing the right time to finalize that, but I don't think we're too far away.

Yes. I think, Lou, the Section 899 in the OBBBA, the reduction of that potential tax kind of helps. It was a bit of a -- created a bit of noise and turbulence in the last few months. But now that's cleared, we can move forward.

Our next question today will come from Howard Penny of Citi.

I just had a question on the progress on the 500 megawatts that, that outlined to start before June '26. And also just that stabilized number being upgraded to 700 megawatts. Could you just give us a little bit more detail on how those are progressing and maybe just a little detail on the 700 as well.

Yes. Well, I think the progress, Howard, is relatively clear. We talked today about launching the Australian partnership, that's specifically for a Atman, which is over a megawatt -- 90 megs data center. Then effectively, in Europe, the series, we are funding at the moment to move forward is over 400. So we're going to be in excess of 500 comfortably by '26. And in Europe, we're already moving those developments along. And they're actually -- some are starting to coming out of the ground effectively with all the groundworks and the transformers and things that you require to keep it moving forward. So yes, we're right on target. We're talking metro, we're not doing giga centers anywhere in the world and these numbers, they're all metro. They're all prime, they're low latency, cloud orientated, good demand, and we're building into that demand, and we're getting on with it.

Just on the stabilized, that's the completion in Hong Kong, which went into stabilized this quarter.

Yes.

And just unpacking that 2.7 gigawatt the secured power number, do you have any guidance on expected time lines for bringing that into the eventual construction and work at any time.

Yes. I think let's get on with our plus 500. We've got a big program. There are different stages. In Australia, we've started one. There's a number of opportunities in this country as well. So I think we'll just get on with our plus 500. Capital and customers is the big focus for this year. I want everyone to think about that. So you need the capital. The barriers to entry on this data center program around the world for everyone, the barriers to entry are getting higher. Things are more expensive. They're taking longer. And effectively, if you don't have it well capitalized, you can't proceed to move forward. On the customer side, you need to be building, you need to be advancing. You need to be giving the customer a date of '27 today. Otherwise, you might as well pack up your bag and go somewhere else. This is becoming a very, very big -- and you'll see it through the numbers coming from other participants. This is a very, very big capital exercise and Goodman Group is super focused on the capital side of it. currently, and the customer side of it is all in hand and under negotiation.

Our next question will come from Simon Chan of Morgan Stanley.

Greg, just wondering if you could give us a bit more color on Europe and Australia, the partnerships you have launched and you're preparing to launch. In Australia, just wondering, you said you've recently launched a data center partnership. So is that just a launch or have you actually gotten capital partners in already. And with Europe, just, yes, give us some color on the proposed...

Thanks. Our definition of launches mean we've put it to the market. We've got an IM out effectively being an information memorandum and we're qualifying investors and taking it through. You'd be aware that the data center in Atman is owned by 1 of Goodman's partnerships. And it would be fair to say that a number of the partners in that partnership are pretty interested in participating, but we're going to participate outside the industrial partnership. So it's specific, very similar to what we've done in Hong Kong. And when we did talk about Hong Kong, we made it clear that was going to be the approach we take. So we don't mix the industrial risk and reward and the data center. It's a specific piece of infrastructure. So that's what we're doing there. And in the European context, what we're saying today, we are going to launch, which means we are going to launch which means we haven't launched yet. Yes. But we don't launch unless we are obviously very confident that the capital who we know very well and have been in many instances been working with for 20 years are not there. The terms have got to be right. And effectively, yes, we're doing it with confidence, not a thumb in the air if you take analogy.

So does your FY '26 guidance include -- will include the assumption that these partnerships will be launched and therefore, potentially generate -- will potentially contribute to the EBITDA just like the Hong Kong partnership contributed to EBITDA in '25?

Yes, look, it's a very big business across the world. As you know, 70% of the earnings come from overseas. There's many opportunities, I think, as Nick pointed out in his presentation to make sensible long-term decisions that will keep the Goodman Group growth profile going on a nice steady trajectory. But with an eye to capital, and I can't overemphasize it enough that data center infrastructure is capital intensive and the people with the capital will do very well, but the ones that don't -- can't play. So just to make that very, very clear. You're talking about a $1 billion a throw or $1.5 billion throw in regard to cost. So capital is critical. Otherwise, everything else becomes a little bit irrelevant.

And how is customers negotiations going, Greg? I mean, I noticed that you talked about how a lot of your data centers and WIP that you have kicked off or will be kicking off are fully fitted. So I'd assume that you would have made that decision after some discussions with potential customers, right? So how is that sort of things going?

Yes. Customer side is good. I think, I don't have to tell you, you can read the newspaper and everything else. The growth in the industry is there. The customers are there. What you've got to do is give them a tangible opportunity to give them a date when they can plug in to be quite frank. And that's where -- we were the customers at the moment. We're working with them on dates. We're making plug in and go. And effectively, that means you need to be starting them and you need to be shortening up the time frames to delivery, and that might be delivering a floor of a building, it might be delivering half a floor, it might be delivering the whole thing. What we don't have in the plus 500 number we're talking today, what we don't have in it is any of the powered shell type operations that we may be doing some of those around the world, but they will be basically pre-let effectively, they may not be the centers that we decide to hold long term, either because metro is what you want to own, in my opinion, metros and stuff that is really hard to get and metro is the example of an Atman or the example of LAX01 or the example of a Paris, right? So when we talk about what we're building, that is what we're building. You might see in addition to what we're talking about, some AI factories in different parts of the world. We will handle that a little differently, but that's not what we're talking about today.

Right. So despite not having any formal agreement for lease, do you have any LOIs in any of your projects at the moment?

We have a number of negotiations going on in a number of places, and I won't prejudice any of them by making any further comments. .

The next question will come from Ben Brayshaw of Barrenjoey.

Just had a quick question on the fully fitted assets that you're putting into production. How are you thinking about the time period to stabilization in terms of achieving the forecast development yield from the point at which you reached practical completion. .

Yes. You're talking about '28, '29 and '30s.

Yes. So it could be 1 or 2 years post delivery?

No, you're building out the mechanical electrical and the plumbing fit-outs effectively, you're in these things for a few years and then you're delivering them over a period of stages. So yes, the good thing about this business, as you'll find work in progress grows, and I think Nick indicated it will be plus $15 billion this year. And let's see how much plus that is. But effectively, you start to build a very, very big WIP book over a number of years, and we're going to be basically looking at the program of sales stabilization at different stages. For example, if one's pre-let, early to a major hyperscaler, you can actually have that sold on out of the development partnership really early on if you wanted to do so, or you're doing it floor by floor over a period of time, maybe an asset we're operating and that could be longer on WIP. So it's going to be a portfolio effect of all the above, but it's going to get big, it's is going to get capital intensive. And I'll go back to my earlier comment, is capital and customers is the focus for FY '26.

Your next question today will come from Richard Jones of JPMorgan.

Just two quick questions. Is Atman a Q1 start, Greg? And if so, does that make the pro forma with about $15 billion today?

Well, it's plus $2 billion, and it's not in WIP at the moment, and it's starting imminently.

Okay. And just in terms of the U.S. assets, there's $3.6 billion on balance sheet. Can you just provide a bit more color what is development assets, what's core plus, what's stabilized? And how much you envisage go into the new core-plus partnership you're flagging and what will stay on balance sheet?

Yes, Rich, you can see -- actually, if you look at our balance sheet, the assets held for sale is a pretty good guide as to what's going to form the new partnership and that's a combination. Of that, it's about 2/3 stabilized and 1/3 value add, although I would argue that, that whole portfolio is eventually value add given the reversionary capacity, redevelopment potential and so on. But in the short term, that's the mix. In terms of the rest of the assets I would say, I think it's about 80% stabilized and 20% development. And so the development stuff, we're happy to keep working through really good developments and happy to continue with those. The stabilized portion, good assets, happy to hold them, great reversion in there. And so we'll look to bring partners in over time if it's appropriate and recycle that capital as well. We have plans for that. And certainly, the developments great opportunities as well.

Our next question will come from Tom Bodor of UBS.

And Nick, I'd just be interested in the U.K. You bought some land in Luton, and I think it's got a data center component to it. Could you talk to how much that particular part of the Luton site could add to the pipeline? .

Yes. Look, it's -- we bought it as industrial. I think that's important. The second Luton site. The first Luton site, we're in a power process at the moment. Look, it could add to it depending on how much power we get, it could be helpful and piping it down the road. Best guess at the moment, it will be industrial and data center mix on that site. Yes. But look, good site bought well. We're in the power process in the U.K., which is -- yes, it's a U.K. process, which is pretty -- you're going to be very patient effectively. But yes, there's a big power feed 2 great sites and would work very well. So we're just in that process. .

Okay. So in terms of gigawatts in the U.K. and your 5, is there a number that you've got in the 5 today absent that?

No. We've got different power applications, some confirm, some not. We're just working through them all. Europe is the big announcement today. That's where we're going vertical U.K. will follow. And I think we'll be talking about that in the '27 year, not the '26 financial year. So I think focus on Europe, that's a big one. Australia is big and U.S., as you know, where LAX01, we're going vertical, and that's looking very good.

Great. And then the other question I had was talk of the CSR site near Western Sydney Airport in the press today that you're looking to possibly buy that land, which is more fringe, -- just be interested in the thinking behind that given it's less of that infill focus you typically have?