Goodman Property Trust (GMT.NZ) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Goodman Property Trust FY '26 Half Year Results Conference Call and Webcast. [Operator Instructions] I would now like to hand the conference over to Mr. James Spence, CEO. Please go ahead.

Yes. Thank you, and welcome, everyone. I'm James Spence, CEO; and with me is Andy Eakin, our CFO. It's a pleasure to be here and reflect on the last 6 months for GMT as we continue to leverage the platform created by last year's internalization. The first half of the year reflects solid performance, combining strong underlying leasing activity, robust cash flow growth and a significant strengthening of our balance sheet following the successful launch of our inaugural fund. I'll just touch on some key themes on Page 5. Many of our customers are showing signs of resilience and cautious optimism after what's been a challenging couple of years. Property needs are stable with cost discipline and productivity remaining key themes. While we've seen some pretty big investments by customers inside our warehouses over the last couple of years, capital expenditure has often been delayed in favor of optimizing existing infrastructure as customers await a more sustained recovery. Leasing inquiry remains subdued. However, we expect that to recover alongside the economy. While many of our customers are expressing optimism about their prospects for next year, it generally takes a bit of time for businesses that have faced challenges to translate that positive sentiment into actual decisions around expansion. Consumers are increasingly focused on essentials and offshore value purchases, and this is in part driving what is -- behind what is driving the resurgence in online spending, with e-commerce penetration in New Zealand somewhere around 10% to 12% compared to 20% in Australia and 30% in the likes of the U.K. and the U.S.A. We still think there's significant growth potential as this translates to -- online adoption translates to further additional warehouse demand. Over to Page 6. Adopting a funds management model unlocks access to new sources of capital, enabling GMT to pursue its growth objectives without increasing financial risk. Looking forward, our capital management strategy will remain conservative, designed to absorb short-term volatility while positioning GMT to capitalize on opportunities as they arise. We've looked closely at a range of market opportunities. And right now, pricing often doesn't stack up against the returns we can achieve through our development pipeline or existing portfolio. So we're taking a disciplined approach, staying patient and waiting for opportunities that deliver the right risk-adjusted returns. I'll jump right down to Slide 10 on Mt Wellington. To capture future demand and take advantage of competitive construction pricing, we're continuing our targeted strategy to deliver new product into tight markets with limited supply. We previously announced plans for the redevelopment of our Mt Wellington site adjacent to Sylvia Park, and we're pleased to confirm that we're proceeding following positive tender outcomes. This prime location offers excellent connectivity to State Highway 1 and the Central Motorway network positioned within a major metropolitan hub. The site was purchased back in 2019 as part of our program to acquire infill sites with infrastructure-like characteristics. We're building into a market dominated in Mt Wellington and surrounding areas by aging facilities. Many of them are 25, 30 years old, low stud heights, outdated office space and constrained parking and yard circulation. Our new development will deliver modern, efficient buildings that address these shortcomings and meet the needs of today's occupiers. Offering flexible spaces ranging between 3,000 and 9,000 square meters, the project is scheduled for completion in the first half of 2027. We do monitor GMT's exposure to speculative development, and this remains modest under 2% of the total GMT portfolio. And with that, I'll hand over to Andy to walk us through the result.

Thanks, James. So good morning, everyone. Look, it's great to be reporting another strong operating result for GMT today. With the Highbrook Fund settling on the 30th of September, you'll start to see some changes not only coming through in the business, but how we present that in the reporting and some of those start to show through in the interim financial statements. Turning over to Slide 13, just highlights some of the key achievements in the last half. Stable property values that we undertook of desktop assessments undertaken by our valuers flowed through to a bottom line profit after tax of $61.8 million for the half. Cash earnings were up 6.7% on the first half of last year to $0.0399 per unit, and that's in line with the guidance that we gave at the start of the year. Second quarter distribution has been declared and distributions are 5% higher than they were last year. Bush Road settled in July, Highbrook, as I mentioned, in September. And as a consequence of that, at balance date, we sat on over $0.5 billion of cash. All of the bank debt in GMT was repaid on the 30th of September, and we now have very low committed look-through gearing of just 23.4%. Turn over to Slide 14 and just briefly talk about net property income. NPI increased $8.3 million compared to the first half of last year. That's 7.5% higher. The 2 standout contributors to that growth, like-for-like rental growth of 5.2%, contributing $5 million and almost $3 million from developments that completed in the prior period. Over to Slide 15. And look, there's a lot more detail on this slide, and I'll talk through quite a bit of this. Operating earnings before tax are over 10% higher than they were for the same period last year. Two contributors into that, the NPI growth that I just mentioned and the first recognition of fee income from our funds management platform. Net interest costs were higher despite lower interest on borrowings. That's as a result of a much lower capitalization to our development program as that's tailed off its record levels that we had over the past few years and higher ground lease interest, mostly at Westney relating to ground lease renewals. Corporate costs were $800,000 higher than the same period last year. Two key contributors into that, lower staff capitalization to developments, as I mentioned, with that lower development activity and also some new roles to support the fund platform. You see a new line bringing in our share of the associated -- associate investment operating earnings, the joint venture, that's our share of the Highbrook Fund. Given it settled on 30 September, very little coming through in this period, but that will be a feature going forward. For those of you who have had a chance to look at our financial statements that we've released this morning, Note 2 gives a lot more detail around our investment in Highbrook, and that goes far beyond that, that's required by the accounting standards. The effective tax rate sat at 21% for the first half. We expect that to be consistent with the full year. Investment boost has been a topic of conversation for the last 6 months. For us, we highlighted this at the annual meeting. We don't expect it to have a significant impact in FY '26, just given our development completion profile that's either late -- into '27, sorry, but it will have some small impact, and we recognize that through operating earnings. On an after-tax basis, operating earnings is 6% up on last year. Turn over to Slide 16. So cash earnings, starting with that operating earnings after tax, up 6%. You'll see all our usual adjustments that we have in cash earnings with one new addition, and that represents an adjustment to the funds management fee that we recognized in the operating earnings. And this is to add back the proportion on an after-tax basis that effectively is being paid by GMT to itself. The net result of that is that cash earnings has been positively impacted by fee revenue from our funds management platform of around $900,000 for the first half. We're reaffirming both cash earnings and distributions for the full year. Cash earnings around $0.08 per unit, 6% higher than last year and distributions around the midpoint of our policy band, which is 80% to 90% of cash earnings, and that's 5% higher than last year. Turn over to Slide 18. And on the chart here, you see GMT's current hedging profile. Highbrook itself is a separate profile. It operates to a financial risk management policy, which is consistent with that for GMT other than the Highbrook preferred gearing at 40%. All bank debt at GMT was repaid on settlement of the Highbrook Fund. So we terminated swaps. The profile that you see is after those terminations. And just worth highlighting that a significant proportion of the swaps that we have in place sit below the current floating rate, so giving us a benefit, which has flowed through into our WACD, which sat at just 4.4% for the first half. For the full year, we expect our WACD to sit around 4.2%. As a consequence of that as well, our ICR had a strong improvement to 3.6x compared to 2.6x for the same period last year. And the covenant on our new bank facilities established on the 30th of September is just 1.75x. S&P reaffirmed our credit rating last month for GMT itself, BBB stable and for our bonds, one notch higher at BBB+. And this remains important for us as it broadens access to funding sources. Turning over to Slide 19 and look at liquidity. And again, this is a GMT-only debt profile. You'll see that we've got expiries coming up only in FY '28 and onwards, the first of those being April 2027. That's our last outstanding retail bonds in September '27, our bank debt at the GMT level and then in December, a wholesale bond maturing. With the cash on hand plus those undrawn bank facilities, we've now got $632 million of available liquidity. Our LVR covenant remains at 50%. We tested at 29% at the 30th of September, but that does exclude the benefit of the cash that we had on hand at that date. As we deploy that cash into new property assets, you'll see that covenant reporting lower. On to Slide 20 and looking at our look-through gearing, which is our preferred measure and the one that you'll hear us talk about frequently. Our preferred range remains unchanged as it has been for many years at 20% to 30%. Fully committed, as I mentioned before, sits at 23.4%, and that provides us with $400 million of investment capacity while still staying within that 20% to 30% range. But as James noted, we're patient with the deployment of that capital. Also worth highlighting that the GMT balance sheet gearing is a very low 13.9% on a fully committed basis. Finally for me, I'll turn over to Slide 22 and just look at our science-aligned targets that we announced back in May. Our embodied carbon, we're targeting a 30% intensity reduction. And to assist with that, we've established our Embodied Carbon Innovation Fund. The first project funded by that has completed a review of our structural specifications for developments. And as a result of that, we've identified some more efficient material uses using less raw materials into our developments, and we expect that to provide at least a 3% lower emissions intensity of new developments, along with some small cost savings associated. On the in-use emissions side of things, our Green Star properties are reporting in-use emissions around 50% lower on an intensity basis than our non-Green Star rated properties. We've completed our HVAC upgrade program and our LED lighting upgrade program is now 98% complete with just 2 properties to finish next year, which will take us to 100%. I'll hand you back to James.

Thanks, Andy. I'll just make some final comments. We've delivered a strong financial performance that speaks to the resilience of our warehouse and logistics portfolio and our operating model. Low gearing and substantial liquidity, GMT is in an exceptionally strong financial position. Our balance sheet gives us the capacity to pursue a range of new investment opportunities as they arise. Finally, we're positioning the business to capture opportunities from the rapid technological shift driven by AI, cloud computing and other digital services. These trends are reshaping demand for industrial space, and we are ready to respond. I would also like to make a quick thank you to Jonathan Simpson, who is retiring as our Head of Corporate Affairs and who has organized and sat through these calls for the last 20 years, and he is sitting beside me now. Thanks for everything, mate. We wish you all the best.

Thanks, James.

Happy to take any questions.

[Operator Instructions] Your first question is a phone question from Nicholas Hill from Craigs Investment Partners.

Congratulations on the solid operating performance. Just a couple of questions from me. You've indicated part of Waitomokia will be leased as a yard. I'm just wondering what was behind this change in the plan. And is this a long-term use case for the land? Or say, are the lease structures in a way that you have the option to redevelop into a built form in the latter part of the 5- to 7-year project time line?

Yes. Yes, I mean it's a big site. It's probably $0.5 billion, the whole of Waitomokia. It will take us 5 to 7 years. So this is really about parking some of that site away and getting income off it. Still plans in the future can involve developing that site, but I think that's -- it's good to get income off a slice of that site as we develop through the balance of it.

No, that makes sense. And then going into some of the details. On your lease liabilities, there's been quite a large step-up this calendar year. And I believe a lot of these liabilities pertain to the Westney Industrial Park. I think 2 properties had rent reviews in January this year. I was just wondering if you have any guidance in terms of like whether there's any more reviews coming up soon and how large the increase in lease payments is likely to be for the full year?

Yes, I'll maybe make some comments first about that and then Andy can talk about the lease liabilities. We're working through it, which we're doing over the next few years. We've now agreed 3 of the leases at appropriate and fair rates. That will take time, but it's just standard course of business stuff. Andy, if you want to comment about that?

Yes. So you're right, Nick, there was a large one which renewed tail end of last financial year. We had another one reasonably big, but not quite -- not the same size, which was right on the balance debt that we've just reported, so it came through on the liability. That will add to the interest expense that you see coming through second half. And then some of the renewals that we have agreed actually haven't reached the renewal point yet. So they don't have an impact coming through the financial statements until we hit the renewal.

Your next question comes from Bianca Murphy from UBS.

Just a follow-up firstly on leases and portfolio vacancies. So your vacancies are creeping up a bit. And I was just wondering if you're seeing any early evidence in terms of an improvement there in the second half or what you are expecting for the full year?

Yes. Bianca, it's -- we're probably now a couple of years into what's been pretty challenging times for many of our customers, as you can imagine. I think we probably need to just look at the stat a bit more broadly. Auckland still remains a pretty tight market, which is kind of why we invest there. It's been the supply side that's held up this market. The completions for '24 and '25 really, really low. And if you look at Auckland as a market compared to other markets which are class as tight, say, Sydney or Brisbane, Auckland is tighter than that. So I don't think we can read too much into it. We are potentially and hopefully at the end of what has been a pretty challenging time and to have occupancy nearing 98% I would have thought if we take a global context on it, it's pretty positive.

Okay. And then just on the fund. So yes, very pleasing, of course, the hybrid partnerships. In terms of interest from other parties, for external partnerships, can you talk about what you're seeing there? Yes, can we sort of expect more near-term fund growth? Or do you expect it to be more of a medium-term story at this stage?

Good question. I mean it's really a capital allocation decision for us. We've got many different options within GMT to do different types of funds, which we can see from our balance sheet or we can acquire on market. We're sitting as at today, as Andy went through, our balance sheet is really, really strong. And I think there's probably 2 things to mention in terms of where we go from here. We'll pair our next step with what are our capital deployment options and also what works in terms of for our partners and for GMT, right? What risk return type dynamics do they look for and what do we look for. So it's ongoing. We think about it every day, but those are the 2 things that we're factoring into those decisions.

Your next question comes from Arie Dekker from Jarden.

Yes. So just following up from Bianca's question and that framework that you outlined obviously makes sense. I mean can you just confirm whether you've got any sort of active discussions sort of underway to progress the platform at the moment or whether you're not particularly active at the moment given those considerations, including a lot of cash on the balance sheet?

Yes. Probably not, Arie. To be fair, we try not to drip feed this information and get ourselves caught out. But we've started it. As you've seen, we've done a slice of Highbrook already. We've got conversations with many partners, potential partners that have been happening over the last 18 months since we internalized. And when we've got something to announce, yes, we'll announce it.

Okay. Just on Waitomokia, an update on your thinking about the timing with which you might commit to the first warehouse space there.

Yes. Yes. So good question. We're doing the infrastructure works largely through this summer and into next year. We mentioned here that the first building platform will be ready at the end of next year. I think like we always do, we've just got to monitor what the market looks like at that time. We'll have a development resite whether we push play on a warehouse in terms of a spec build or a design build, we'll have to monitor that at that time, and it's still over a year away. So I think you have to stay tuned on that, Arie.

No, that's good. And presumably factoring into that consideration, particularly where you to go with the spec build will be your progress at Mt Wellington and leasing that up. So could you just perhaps comment briefly on what you've sort of seen in terms of momentum in leasing inquiry over the last few months there?

Yes. Not only -- just to your point, not only Mt Wellington, but how the balance of the portfolio is looking. We look at the whole thing as a full picture, and we'll have to be on our toes next year. Expiries that we've got through next year, as they always do, present a risk, but also an opportunity with the portfolio being so under-rented, often that's the time we can capture that, but really looking for the economy to start picking up into next year to get that phone ring. As I mentioned, things start turning around, and you would have seen some of our big customers talking publicly recently about how things are improving. That doesn't mean the next day they're picking up the phone and asking for a warehouse. It takes some time. So we expect it to build into next year and that put us in a pretty good position. I would have thought to kick off Waitomokia here, but we -- I think we just have to really remain flexible and have our ears to the ground on that.

Great. And then just, Andy, last question. Just with the fund established now through the half, we saw the fee income there. Could you just give a guide to what we should expect in terms of second half gross fee income with Highbrook Fund assuming steady state through that period?

Yes. Look, we've given some insight previously that on a steady state, you should expect to see fee income between 50 and 100 basis points per annum of assets under management, third-party assets under management. For the higher end of that, that assumes that there's a performance fee in there as well. So look, through the second half, it is quite activity driven. If there are leasing deals that we're successfully getting away in the second half, then that will flow through. So we've incorporated our assumptions into our guidance, but we'll give you more detail when we get to the end of the year.

Your next question comes from Nick Mar from Macquarie.

Just further on the vacancy. Is that sort of later in the period when that's popped up? It's not a material drag within that other category on the net rental income bridge.

To be fair, there's probably 2 main vacancies in there, Nick, that have now been vacant largely from the start of this financial year. They've probably been vacant 3, 4 months. Yes, it had an impact on the first half.

Okay. And when you're looking out in terms of what's sort of coming back to you, do you think on a net basis over the next sort of 6 to 12 months, you'll see occupancy improve? Or is there still risk to the downside?

Yes. I really think that, as I mentioned, that depends on positive sentiment continuing into next year and people picking up the phone and asking for warehouse space. We've -- retention probably runs in our portfolio around 60% to 80%, and we are constantly faced with that kind of stat with obviously backfilling many tens of thousands of square meters of space every year, relies on expansions, movement. And our portfolio really does follow the Auckland economy and people buying goods. So yes, we'll -- our expectation is that's going to come into next year. And -- but it's not a challenge that we're not faced with on an annual basis.

Your next question comes from Rohan Koreman-Smit from Forsyth Barr.

Just firstly, the under-renting hasn't moved. Is that like-for-like versus the last time you reported in terms of is that ex-Highbrook? Or is that including the whole group of assets under management? And is there any particular reason? I know vacancy has gone up and you include that in your under-renting number. But has there been a lack of reversions in the half? Or what's kind of the key function there? Because I don't think market rents have gone up.

No. I mean that is across our whole portfolio, including Highbrook, Rohan, and it's done in the same methodology. It's done on our passing rents versus what the value is put on each component. It's not a management stat.

Okay. And then just on that, you've got some developments you're progressing on a speculative basis. Where do the kind of rents on those sit versus what you've currently got offering because you've got a couple of big assets currently vacant and there's a few more expiries over the next 6 to 12 months. Where do the rents sit on newbuilds versus what you've kind of got vacant or coming to market?

Yes, good question. So Mt Wellington, we see that as probably one of the best locations in Auckland. I think if you step back and look at it, it's right next to Sylvia Park, it's dead center in Auckland. So it's pretty quality product. We -- rents will be in the $230 to $245-ish sort of range, Rohan, which are not too dissimilar from what's been asked for similar newbuild products. I think that's one of the things that's held up rents though through a more challenging time is that if you're replacing or building into this market, your economic rents are still probably higher than what a valuer would put on existing stock. And that's even after construction costs have come down, as we mentioned, Cap rates have gone from what were they 3.5%, 3.75% to now over 5%. So if you're building into this market and you want an appropriate return, as we've seen with our competitors, too, you still need appropriate rent.

And then do you think you've got much competition? There's a bunch of people building speculatively in the private market at the moment in terms of competing for tenants and retaining tenants, do you think that newbuilds are competing with you on that front?

Yes. Yes, it's something we're keeping an eye on. As I mentioned, completions have been really low. But you're right, even though development -- the development forecast into the next 2, 3 years is for similar levels of completions that we've seen over the last 10, 15, there is a higher proportion of spec. So somewhere -- it's hard to get the perfect numbers on this because it depends on whether some of these projects will actually kick off, but somewhere between 30% to 50% of developments that will complete in the next couple of years are on a speculative nature. We're still confident to do something like Mt Wellington because we see it as a bit of a different location to where a lot of the other specs happening. So a more central location in that area, there's not a lot of land available. We'll be targeting customers that are in that area already that are in less efficient products. So yes, you're right, more speculative supply coming to the market, but the overall development volumes look pretty similar from what we can see.