Goodman Property Trust (GNZ) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to this Annual Meeting of Unitholders. I'm Keith Smith, Independent Director and Chairman of Goodman New Zealand Limited, the Manager of Goodman Property Trust. Adopting a virtual format for this year's meeting reflects the unique times in which we are living. While our preference was to hold a physical meeting, the potential disruption from COVID-19 made a webcast the more appropriate format for this year's event. The uncertainty created by an extended lead time, the travel restrictions on our Australian-based directors and the possible health and safety risks of a public gathering into virtual meeting was the most pragmatic solution. Today's presentations will focus on the recent operating performance of the Trust and the strategy for a more challenging economic environment. The meeting will also consider one ordinary resolution relating to the reappointment of Susan Paterson as an independent director. A key difference between a virtual meeting and a physical one is in the way questions are dealt with and how voting is conducted. Now the meeting has started, you can submit questions through the webcast portal. It's a simple process. Just click on the speech bubble icon at the top of the instructions sheet -- screen. This will open a text window that will allow you to type and submit your question. While we have allocated time at the end of the presentations to answer these, I encourage you to submit your questions at any stage. Polling on the resolution has also opened. Unitholders can now vote by selecting the polling icon on the instructions screen and following the prompts. Votes can be amended up until the time the poll closes at the conclusion of this meeting. If you experience any technical issues asking questions or casting your vote, please refer to the instructions provided in the virtual annual meeting guide that accompanied the notice of meeting. If you would like to utilize a full-screen view of the presentation slides, which I do recommend, please use the icon on arrow -- and arrow at the top right of the screen to expand and reduce the frame size. I'd now like to introduce the members of the Board and executives of the Manager who are in attendance today. In addition to myself, we have Greg Goodman, Peter Simmonds, Leonie Freeman, Phil Pryke, Susan Paterson, John Dakin and Andy Eakin. The composition of the Board is unchanged from last year, and a majority of independent directors is maintained. It is an experienced and capable group who are overseeing the growth of the business and the successful repositioning of GMT as New Zealand's leading industrial space provider. As I noted last year, our Board refresh is on the governance agenda. To maintain continuity and ensure an orderly transition, the timing of director retirements and new appointments will be staggered over the next 2 to 3 years. In addition to the directors and executives present today, we also have representatives of the trustee and other advisers dialed into the meeting. Listed on the screen now, these representatives will be available to answer any question directed to them later in the meeting. I'd now like to work through some of the procedural formalities of an annual meeting. I'd firstly like it noted that in accordance [Audio Gap] of a quorum. We can now proceed to the main part of the meeting. GMT's financial year ended on the 31st of March 2020, just as COVID-19 began to disrupt the New Zealand economy. Due to the timing, the pandemic only had a limited impact on the Trust's 2020 financial results. GMT delivered another strong operating performance over the year, with significant growth in asset values, positive leasing outcomes, new development projects and strategic acquisitions all contributing to a statutory profit of $284.4 million before tax. Capital management initiatives also proved timely, with bank refinancing and the $175 million of new equity provided -- providing substantial capacity for future investment and development opportunities. While the economic environment has deteriorated from last year, our investment strategy remains focused on the Auckland industrial market. It has continued to be the country's best-performing commercial real estate sector, providing the logistics infrastructure that supports critical supply chains. As we look ahead, the quality and scale of the portfolio, together with the low level of gearing and focused investment strategy, gives the Board confidence that the Trust will continue to deliver sustainable long-term growth. Turning to the COVID-19 impacts. Firstly, the health and safety of Goodman staff, customers and contractors has been the priority of the Board and Manager since COVID-19 first began to impact New Zealand. Business continuity plans were implemented, with development sites and management offices closed in accordance with the government's alert level restrictions. As an essential business, we continued to operate throughout the lockdown period along with many of our customers. Agile work practices enabled our team of 60 to continue working remotely with only minor disruption to our normal business operations. Now 4 months into the new financial year, we have more clarity on the economic impacts of the pandemic. The Trust has performed relatively well, with distribution and logistics assets being the least affected of the various property investment classes. Income receipts have remained stable, and around 95% of the rent due over the last 4 months has been paid by customers. While this has been a reassuring result, we remain wary of the longer-term financial impacts of COVID-19. Adopting to a more uncertain operating environment while the economy recovers will ensure this Trust's stable cash flows and strong financial position are maintained. So therefore, turning to the distribution policy amendment. GMT's investment strategy has been refined in recent years to meet the increasing demand for warehouse and distribution space across Auckland. The repositioning has also included initiatives to enhance the Trust's capital structure. Asset sales and equity issuance have significantly deleveraged the balance sheet, while new debt issues have diversified the Trust's sources of debt funding and extended the term of its debt. To ensure the business can continue to grow sustainably, the Board has amended its distribution policy for the Trust. Adopting a target payout ratio of between 80% and 90% of cash earnings, on average, over time better aligns distributions with the underlying cash flows from the Trust's stabilized portfolio. It's another step in the evolution of a high-quality, low-risk property business focused on sustainable long-term growth. Under the new policy, cash distributions of at least $0.053 per unit are expected to be paid in the financial year 2021. The distribution represents around 85% of the Trust's forecast cash earnings. I'd now like to pass over to Andy Eakin, who will give a more detailed overview of the Trust's recent financial results.

Thank you, Keith, and good afternoon, ladies and gentlemen. It's great that technology enables us to engage safely with our unitholders. While a virtual format is new for our annual meetings, we've always webcast these events for investors that are unable to attend. I'm pleased to report that 2020 was another successful year for GMT. Investing in the supply constrained Auckland industrial market has continued to deliver outstanding returns to unitholders. It has also positioned the Trust to benefit from the continuing growth of e-commerce. Consumers have responded to the risks of COVID-19 by embracing the convenience and safety of online sales and contactless delivery. It's another positive demand driver for industrial property, and GMT's portfolio is ideal for logistics and fulfillment businesses that want convenient access to Auckland's large population base. GMT delivered a strong operating performance last year, with sustained customer demand being reflected in positive leasing results and new development commitments. Asset sales in prior years and the recent equity raise have provided the balance sheet capacity to fund these new projects. They've also allowed the Trust to make strategic acquisitions, including the T&G Global facility in Mt Wellington. The additional income from new developments and acquisitions has offset the reduction in income from balance sheet deleveraging, with net rental income of $145.3 million being a new record for GMT. While these operating results contribute to the Trust's financial performance, it's the reevaluation of the Trust's property portfolio that's had the greatest impact, contributing $165.8 million of fair value gains to GMT's $261.9 million after-tax profit. The 5.7% increase in asset values to $3.1 billion reflects the quality of the portfolio, higher market rentals and positive investor sentiment towards Auckland industrial property. Although fair value gains are not distributed, they add to GMT's net tangible asset backing, which has increased 10% to $1.73 per unit at the 31st of March. But with the current stock price of around $2.15 per unit, the Trust is trading at a very strong 25% premium to its asset value. The strength of GMT's recent stock price performance reflects investors' support on our strategy. The inclusion of GMT in the FTSE EPRA/Nareit Global Real Estate Index in March 2020 is expected to add greater diversity and liquidity to the register, with many offshore funds now required to hold GMT stock. With the total unitholder return of 28.1% last year, the Trust significantly outperformed its listed peers. With a relative return of 39.4% above its benchmark index, a performance fee of $11.4 million was earned by Goodman as Manager of the Trust. The relative performance hurdle means the Manager only earns a performance fee when GMT outperforms its listed property peer group and provides positive total returns to investors. The Manager is also required to use the performance fee to subscribe for new units in the Trust. It's a Trust Deed requirement that ensures a close alignment of interest between Goodman as Manager and cornerstone investor and other unitholders. The total return calculation includes both the movement in GMT's stock price and the distributions paid to unitholders. Totaling almost $90 million, cash distributions of $0.0665 per unit were paid in respect of financial year 2020. As Keith noted earlier, we have amended our distribution policy and will now retain between 10% and 20% of cash earnings. For the current year, this means around $19 million will be retained for reinvestment into the portfolio, ensuring it remains a very high quality. The extensive sales program that has repositioned the Trust and deleveraged the balance sheet was concluded during the year, with the last of the asset sales being completed. More than $1.2 billion of disposals since 2014, it has been a successful strategy realizing strong profits and providing the balance sheet capacity to fund the development program. More than $800 million has been reinvested into new development projects over the same timeframe. The addition of 300,000 square meters of new industrial space has significantly improved the composition and quality of the portfolio, with GMT now New Zealand's largest listed property investor by market capitalization. New equity initiatives, raising $175 million in September and October 2019, have added further financial flexibility. The additional capital raised at $2.10 per unit has helped reduce committed gearing to just 20.6% at the 31st of March. It's a conservative level that provides substantial headroom against GMT's Trust Deed and debt facility covenants, which will include a maximum loan-to-value ratio of 50%. The refinancing of the Trust bank facilities during the year has also provided additional liquidity. Renewed on competitive terms, the total size of the facilities was increased by $100 million to $400 million. With low gearing and only partly drawn debt facilities, GMT has a very strong balance sheet. The liquidity it provides will enable the Trust to progress its development program and to take advantage of new acquisition opportunities well into the future. The low gearing also ensures that GMT has the necessary headroom to absorb any significant changes in asset values should property markets soften. A capital structure that includes a variety of funding sources adds to GMT's financial resilience. With the combination of bank borrowings, New Zealand-listed retail bonds and U.S. private placement debt notes, the Trust has a diverse debt book. At the 31st of March, 96% of drawn debt was from nonbank sources, with drawn bank borrowings of just $25 million. These facilities are also long-dated, with GMT's drawn debt having a weighted average term to expiry of around 4 years. The next maturity in our treasury program is the GMB020 bonds, which expire in December this year. While we have ample capacity to repay this $100 million bond from bank debt, we're considering further new nonbank debt issuance, possibly via a new retail bond offering. Doing so will help retain liquidity within our bank facilities and provide the Trust with significant operational flexibility. Standard & Poor's reaffirmed their BBB credit rating of GMT earlier this month, a rating that has remained stable since it was first issued in 2009. All of GMT's existing debt, including its retail bonds are secured over the Trust's property portfolio and is therefore rated 1 notch higher at BBB+. The investment-grade credit rating reflects the strength of GMT's balance sheet and the ongoing success of our investment strategy. While the emergence of a global pandemic couldn't have been foreseen when we started our business planning earlier this year, we're pleased with the resilience of the Trust over the last 4 months. GMT has demonstrated it is a substantial and mature property business able to withstand market disruptions. By continuing to act prudently and limiting new investment to the most compelling opportunities, we will ensure it remains a well-capitalized and robust business. I'll now hand you over to John, who will continue with the operational review.

Thanks, Andy, and good afternoon to everyone participating in our virtual event today. With COVID-19 significantly disrupting the global economy, it has certainly been a very turbulent start to the new financial year. The initial impacts have been acute, and while New Zealand has fared relatively well, we remained cautious about the outlook. As you've heard from Keith and Andy, our business remained strong, and we're adapting to the more challenging operating environment. In my presentation today, I want to focus principally on the investment strategy of the Trust and our response to the pandemic. I'll also highlight some new sustainability initiatives and refinements to our corporate reporting. The Alert Level restrictions have highlighted the important role a secure and efficient supply chain plays in the orderly functioning of a modern economy. Warehouse and distribution facilities provide companies with the physical infrastructure to manage inventory, while established transport routes link these businesses with suppliers, customers, and importantly, end consumers. The continued urbanization of cities and the rise of e-commerce are having a significant impact on demand for warehouse and logistics space in many markets around the world. A well-organized supply chain that can quickly distribute goods and materials is critical for our cities to function and grow. An investment strategy focused on urban logistics space has positioned GMT to take advantage of these key trends. Auckland is the preferred investment market, that is the gateway to the country, its commercial-center, and importantly, largest consumer market. GMT's substantial property portfolio provides over 1 million square meters of high-quality industrial space. The map currently on screen shows the location of the 11 estates that make up the portfolio. You'll see that these properties are strategically located in the established industrial suburbs of East Tamaki, Mangere, Mt Roskill, Mt Wellington, Otahuhu, Penrose and Wiri. Central to Auckland's large consumer population, each state provides customers with specific locational advantages, including direct motorway access, proximity to airport and port facilities and even dedicated rail sidings. Our estates include around 150 individual buildings, leased to over 200 businesses. It's these companies that provide the strong rental cash flows that underpin the Trust's operating results. It is a diverse group of businesses representing the automotive, building products, freight and logistics, retail, warehousing and distribution sectors. While a large proportion of these customers were classified as essential and were able to operate through the lockdown levels, a number have sought rent relief as they manage the combined impacts of trading restrictions and a sharp recession. Our support has been directed at the most vulnerable businesses in the portfolio, those with limited financial capability. We've been balancing the needs of these customers with our obligations to our unitholders, and where possible, linking any rental concessions to mutually beneficial leasing outcomes. The type of support we have provided has included rental abatements, rent deferrals and rent freezes, together with lease restructures and marketing support. We have made allowances in our financial year '21 guidance to cover both the cost of this support and also incorporated more prudent leasing assumptions. With forecast cash earnings of $0.062 per unit, we are expecting to deliver an operating result consistent with last year. We are assisting other businesses, too, accelerating invoice payments to suppliers and increasing the frequency of progress payments to our construction partners. These are ongoing practices that are expected to help restore business confidence as economic activity resumes. Significant progress has been made in the Trust development program, with 11 projects completed over the last 12 months and a further $100 million of work currently in progress. The completed projects included several customer expansions, along with new design-build and build-to-lease facilities. The following images show some examples. You'll see all the new development projects are high-quality and operationally efficient. They are also flexible enough to meet the requirements of many different businesses. They incorporate sustainable design elements and are constructed using materials and building processes that minimize waste and other environmental impacts. Energy saving technologies and low flow water fittings also reduce operating costs for our customers. Specialist packaging supplier NCI is a new customer at Savill Link in Otahuhu and an example of a business utilizing automated technology to improve efficiency. The 14,000 square meter design-build warehouse accommodates the manufacturing plant required for the production and labeling of cans used in the packaging of food, drink, milk powder and paint. The manufacturing process can produce up to 300 large cans per minute and also includes sophisticated robotics, a trend that we are seeing around the world. With a combined value of almost $160 million, the 11 new facilities contributed $22.5 million of fair value gains to this year's profit result. They are now 100% leased and have an average weighted lease term of more than 10 years. With around 80% of the portfolio built since 2004, GMT's development capability has been a critical factor in the growth of the business. Maintaining a development pipeline is essential if the Trust is to meet the future property requirements of its customers. New investment opportunities that provide redevelopment potential are being targeted to replenish our land bank. The recent acquisition of 2 neighboring Mt Wellington properties in separate transactions is a good example of the strategy. Acquired on a sale and leaseback basis, the existing facilities provide steady holding income, while future amalgamation of the 2 properties into a single 7-hectare site offers future development opportunity. In the geographic center of Auckland with access to more than 800,000 consumers within a 20-minute delivery drive, the properties are ideally located for fulfillment and logistics businesses. The acceleration in e-commerce, online sales and contactless delivery are established trends that are continuing to drive customer demand for the Trust's well-located warehouse and distribution facilities. On the topic of sustainability, OfficeMax is an existing customer at Highbrook that has recently had its premises expanded to accommodate business growth. As part of the 7,350 square meter warehouse extension, the office product and business consumable reseller is incorporating an 880-panel solar array. The northern orientation and extensive roof area make the building ideal for solar technology. And it is expected that the new system will provide over 20% of the customers' total electricity. With over 400,000 kilowatts of capacity, the system is expected to generate enough electricity to power the equivalent of 57 New Zealand homes for a year. Using solar as an energy source will also offset 39 tonnes of greenhouse gas emissions every year. Sustainability is certainly an increasing area of focus for all our stakeholders, and there are other initiatives underway across the business that will enhance our corporate performance. GMT has been a regular contributor to the Carbon Disclosure Project since 2009, and we have just completed a comprehensive emissions inventory ahead of this year's annual survey. The global initiative encourages companies, cities and states to monitor greenhouse gas emissions and implement strategies to minimize climate change impacts. With a continued reduction in our carbon emissions and independent audit assurance of this, we are expecting to approve on -- improve on last year's rating of B-. We have also set targets for the future with the aim of having carbon neutral operations in New Zealand by 2025. Our recent annual report includes more detail on these initiatives, and I will encourage you to read the document to learn more about our sustainability program. This report also includes an overview of the Goodman Foundation. The foundation is an initiative of the Manager that supports the work of local community groups. The aim is to help the vulnerable and improve the social outcomes in the locations where we invest. KiwiHarvest is the largest of our partnerships. The food rescue organization operates a distribution facility from Highbrook Business Park, collecting and redistributing perishable foods that would otherwise be consigned to landfill. Last year, the organization rescued and redirected over 1,250 tonnes of food from businesses across New Zealand. Equivalent to 3.6 million meals, it included surplus produce, protein, mislabeled goods and grocery items approaching expiry. Demand from social agencies for food parcels has escalated rapidly as a consequence of COVID-19, with the volume of food being collected and distributed by KiwiHarvest more than doubling during lockdown. To help meet the growing need and address the waste that occurs in food production and distribution, we have helped facilitate the establishment of a new national food rescue network. With government support, the New Zealand Food Network is now also operating from a new 1,000 square meter facility at Highbrook, next to KiwiHarvest. Having the 2 organizations side-by-side will create synergies and efficiencies that will help address the issue of food poverty, not only in Auckland but across the country. Finally, on the business outlook before I pass back to Keith, creating a business that delivers sustainable long-term total returns for investors and positive outcomes for other stakeholders has always underpinned our investment strategy. Maintaining a low leverage capital structure has been a deliberate part of the strategy. That has ensured -- as Andy mentioned, the GMT is a resilient and robust business with the financial reserves to withstand market corrections and economic cycles. Our expectations are that the impacts of COVID-19 are likely to be ongoing, constraining economic activity for the next 18 to 24 months, at least. However, with a high-quality portfolio focused on urban logistics, GMT is uniquely placed to benefit from the growing demand for distribution facilities close to consumers. The pandemic is accelerating this trend, with businesses responding to the challenges and opportunities of a growing online marketplace. While we're certainly cautious about the year ahead, we're confident we have the best assets and the right strategy for a more challenging operating environment. Thank you, everyone. And I'd now like to hand back to Keith for questions.

Thank you, John and Andy. Before we do move to the formal business of the meeting, I'd like to reiterate a few key points from today's presentations. GMT is a well-capitalized and resilient property trust, exclusively invested in the Auckland industrial market. The business has responded to the challenges of COVID-19 and has continued to perform well over the first 4 months of the new financial year. Customer inquiry for new and existing space remained strong, portfolio occupancy has been maintained and year-to-date rental cash flows are in line with our expectations. Although the operating environment is more uncertain, GMT's investment strategy remains unchanged. The focus on urban logistics in New Zealand's largest consumer market means the Trust is uniquely positioned to take advantage of any new customer requirements created by the accelerating growth of e-commerce. As we look ahead, the quality and scale of the portfolio, together with the low level of gearing and focused investment strategy, gives the Board confidence that the Trust will continue to deliver sustainable long-term growth. That concludes the presentations, ladies and gentlemen. I now encourage you to finalize any questions you would like addressed and to submit these now. As I mentioned earlier, questions need to be entered in through the webcast portal. To do so, please click on the speech bubble icon at the top of the instructions screen and follow the prompts. Whilst you're getting your questions ready, I thought it would be appropriate to ask Greg Goodman, the Global CEO of Goodman Group, to provide a brief update on what he's seeing as current trends in the offshore markets, in particular as a response to the COVID-19 pandemic around the world. So Greg, I'll pass over to you. Thank you.

Yes. Thank you, Keith, and I will be brief. And good afternoon to everyone. Certainly, what John has talked about today, and I think Keith as well around the structural changes and trends, overwhelmingly are in favor of e-commerce and the growth of e-commerce around the world. And we've seen that in regard to the $50 billion of assets we own and manage around the world, in Asia, Europe, U.S.A., Australia and also, obviously, in New Zealand. We're seeing the infill sites we own in those big marketplaces in -- strongly in demand where we're building more warehouses today than we were pre-COVID-19. That is primarily assisting customers with more technology, better efficiencies, ultimately trying to get costs out of their business, but also creating a new way of doing things, a new way of doing things in COVID-19, which is all about more convenience, where a location of your warehouse is obviously really, really important. And that convenience leads to the warehouse becoming the retail front. We actually have about $5 billion-plus of development all around the world at the moment. That's about $1.5 billion more than it was this time last year. 70% of that is in line with those accelerated structural trends I'm talking about. So I think you'll find that New Zealand -- our strategy is consistent with the rest of the world. The rest of the world, we're seeing a real acceleration in regard to those structural trends around e-commerce. I think then in regard to customers, Goodman's been very aware globally of the tough times going on in many businesses and many operations. And what we have tried to do and what we try to be is sympathetic, patient, but also working with our customers to be finding ways of new innovation, new ways of doing things, where they can actually try and be more efficient or get more efficiencies in their business or pivot to a different way of operation, including the e-commerce platform. So look, the trends you're seeing in New Zealand are consistent with the rest of the world. But they're more magnified in places like Asia, Europe and the U.S., where they have more maturity in regard to what's going on in regard to e-commerce. And also they have obviously more problems in regard to COVID-19 than New Zealand has currently. So well done to New Zealand around that. You've done a phenomenal job in addressing and meeting the issues. And I've got to say, sitting here in Australia, I love watching the Super Rugby on a Saturday and a Sunday and everyone there enjoying themselves. So thank you, Keith. And happy for any other questions, obviously, during the course of the meeting.

Thank you, Greg. That was -- I thought was appropriate for the shareholders and unitholders, sorry, to just get a bit of an understanding of what's going on around the world. So I appreciate that.

Ladies and gentlemen, we now move to questions. So I only have one at the moment. So if you do have questions, please, please go onto that bubble. The first one is -- and I'll pass it to John to answer it. The question is, "In the current financial year, how negative will the portfolio revaluation be?"