Goodman Property Trust (GNZ) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Goodman Property Trust interim results conference call. [Operator Instructions] I would now like to hand the conference over to Mr. Keith Smith. Please go ahead.

Thank you, and good morning, everyone. And thank you for taking the time to join us today. I know you've had over other presentations this morning -- earlier this morning. But it is a pleasure to have got through the 6 months with everything else that's been going on with such a solid result. So on that note, I'll pass over to John Dakin, who will commence the presentation.

Thanks, Keith, and good morning, everybody. If I can take you all to the overview slide, Slide 4. And we'll crack straight into it. In terms of the last 6 months, occupancy has held up very strongly, close to 100%. Retention rate has been pretty solid as well. The second point there, we've continued to invest in line with our strategy with another $108 million of capital deployed. The largest of those transactions being an adjoining site at Savill Link, which we see as a future redevelopment site. We're also confirming today that one of the paused developments that we talked about in May, we are recommencing. And I'll talk a little bit about that and the summary in terms of some of the themes around that. But essentially, the industrial market looks to be in pretty sound shape. From a financial point of view, over the last 6 months, the interim revaluation of $140 million, unsurprisingly, driven by cap rate compression, which is, I guess, facilitated through the low interest rate environment that we're seeing. Our low level of gearing has maintained at 21.5%, 22.3% on a fully committed basis. So very comfortable with that as well. A lot of work has been done around the refinancing in terms of bank facilities, and also Andy has broken some new ground with an 8 and 10-year wholesale bond as well that he will take you through. In terms of the underlying assets, NTA moving to $1.824 per unit. And in terms of looking forward, the guidance, based on what we've been through in the last 6 months and what we expect in the next 6 months, we're slightly firming up our guidance from $0.062 to $0.063 for the full year, and maintaining the distributions as they were announced in May at $0.053 per unit for the year. So that's a bit of a snapshot, and I'll hand over to Andy to take you through the financial highlights.

Thanks, John, and good morning, everyone. Nice to be talking to you with a bit more positive outlook than it was 6 months ago when we last took you through our results. So we turn to Slide 6, the financial highlights. And I'll touch on a few of the key points on this slide. First of all, we're reporting a profit before tax of $186 million. That's lower than last year's first half profits driven by differences in fair value movements. Within that profit before tax, though, operating earnings of $56 million, 4.3% higher than the same period last year. So a strong outcome from that. We did a full portfolio revaluation at the end of the first half, and that's added $140 million to the reported profit and essentially brought our asset values back to pre-COVID levels. But important to note that valuers are no longer reporting on a material uncertainty basis. So that has been -- that clause has been removed from our valuation reports. Net tangible assets at $1.82 per unit increased almost $0.10, primarily from that portfolio revaluation. And cash earnings reported for the first half at $0.0311 per unit first half distributions of $0.0265 per unit, in line with the midpoint of our earlier guidance. But as John mentioned, we are increasing our cash earnings guidance for the full year. Turn over to Slide 7. Take a look at net property income. So a strong increase in NPI compared to first half last year, up 4.2%. Acquisitions and developments added close to $5 million to NPI, and the underlying portfolio showing like-for-like growth of 3.7%. So very pleasing to see that. The impact of the COVID support that we provided to our most vulnerable customers, $2.2 million to the net property income and also to our profit before tax. Had it not been for that, NPI would have been up around 7% on the same period last year. Move over to Slide 8, just take a look at -- in a bit more detail at cash earnings. As I mentioned before, operating earnings, $56 million, up 4.3% on last year. Effective tax rate for the first half sitting at around 17%. And the cost capitalized to land continue to fall, both on lower land holdings and also on the lower interest rates, and $1.2 million now becoming pretty immaterial to that cash earnings measure. Maintenance CapEx at about $1.9 million for the first half out of a total CapEx of $3.6 million and that total CapEx lower than we would have expected for the first half ordinarily as a result of the various lockdowns that we've gone through. Just to reiterate again, FY '21 cash earnings, we're now expecting those to be $0.063 per unit, up from $0.062 guided at the beginning of the year, really as a result of that more favorable outlook than we've previously seen. But distributions maintaining our guidance expected to be not less than $0.053 per unit. Move over to Slide 9 and just take a look at the net tangible asset growth. Touched on most of this already. NTA increasing almost $0.10 per unit, driven primarily by the revaluation of the portfolio. But just worth noting their developments completed through the period across the life of those developments reflecting an average margin of 23%. So a strong outcome for completed developments. On to Slide 10, looking at the investment property in some more detail. The total portfolio now valued at $3.3 billion, up from around $3.1 billion at the end of March. About half of that increase is coming from the revaluation that we've booked with the balance from developments and acquisitions, those acquisitions being MetroBox at Savill, and the Acro property adjacent to our Mt Wellington estate. Slide 11 just drills into the gearing in a little bit more detail. So back at March, we're setting just under 19% reported gearing, now at 21.5%. And taking into account the developments that were underway plus the recommitment to the spec development at M20, fully committed LVR sitting at 22.3%. We remain comfortable with this low level of leverage. It gives us good resilience within the balance sheet in these uncertain times but also the flexibility to go out and acquire properties, as you've seen us doing through the course of the first half. Turn over to Slide 13 and just take a look at the funding mix within the business. We had a pretty active start to FY '21. And as John mentioned, we completed $200 million of wholesale bond issuance. Really good to see the support that we had from local investors. That resulted in us upsizing through the issuance process, ultimately, landing at $200 million, 8 and 10-year bonds. That enabled us to prefund the maturity of the retail bond that is on the 16th of December also locked in long-term funding at record low interest rates and, at the same time, again, increases the debt diversity. It's been some time since we've been in that wholesale market. So it's great to come back to it. And then earlier this month, we extended our bank facilities. So the FY '22 maturity that we had has now been extended out to FY '25. We've retained the full $400 million of bank facilities. As of today, none of that's drawn, but when we get to the bond maturity next month, we will draw into that facility. Weighted average debt term as a result of the wholesale issuance, in particular, now extended out to 5.1 years. And if we turn over to Slide 14 and just take a look at the interest rates risk, so our hedging levels are higher than you'll have seen in recent years within GMT. And that's been a deliberate decision, retaining the wholesale bond for $200 million that we issued as fixed rate debt whereas typically we would have swapped some or all of that back to building previously. We're very happy with that decision returning pretty low under rates in the business for some time. In doing so, we've also closed out some shorter-dated swaps just to reduce the overall hedging profile. The closeout cost of that does get included in our ICR covenant measure. So that stands at 3.5x compared to a covenant requirement of greater than 2x. But if you normalize that and look at what the ongoing ICR would be, that stands at around 4.8x. Weighted average cost of debt through the first half, 4% flat compared to 5% last financial year. And for the full year FY '21, we expect that to be around 3.5%. I'll hand you over to James to take you through the portfolio.

Yes. Thanks, Andy, and good morning, all. I will turn over to Page 16. This slide provides an overview of the location of Trust's properties at $3.3 billion portfolio across 11 estates covering over 250 hectares of land and buildings. It's a high-quality portfolio focused on urban logistics, which will ensure the trust will continue to benefit from the structural trends that are driving demand for distribution facilities close to end consumers. Slide 17 provides an overview of our portfolio metrics as at 30 September. Occupancy, as John mentioned, at the half, was 99.7%, which is up slightly from 99.4% back in March. And GMT's weighted average lease term was steady at around 5.5 years. Slide 18 provides an overview of leasing. The portfolio for the half saw almost 95,000 square meters of leasing for the 6 months, equivalent to around 9% of the portfolio. The vast majority of this leasing was with existing customers. Expiries falling in the balance of FY '21 now total around 37,000 square meters of space or 3.4% of portfolio income. And this has fallen from 7.6% 6 months ago. One of the most significant leases completed in the half was the recommitment by CourierPost to Highbrook, renewing their 20,000 square meter warehouse for a further 6 years. Over to Slide 19. GMT's 10 largest customers account for around 1/3 of portfolio income and are generally focused on storage and distribution. We've also provided for more information on our customer industries further breaking down the categories to add a building products and materials sector. Customers in this sector total 23, account for around 14% of portfolio income, and include the likes of Fletchers, Steel & Tube, Plytick and CSR building products. Over to Page 20. It's no surprise that the original level for lockdown caused by far the most significant impact to GMT's customers with around 60%, by number, having to close their doors back in March. As Andy mentioned before, Alert Level 4 restrictions triggered a number of requests for short-term rent relief. Our response to those requests took a number of different forms with our support focused on those sort of 35 to 40 customers in our portfolio that are the most vulnerable and are generally linked with hospitality and/or amenity within our estates. Recent conversations with our logistics customers around their business performance have been relatively positive. And while a number of customers are currently hesitant of CapEx for relocation in the short term, there has been increased inquiry locally for larger and more efficient design-build warehouse and logistics space to cater for the acceleration in online retail. Over to Page 21. With just 8.9 hectares of greenfield land remaining in GMT, we've been targeting new investment opportunities that provide a future development pipeline for GMT. The acquisition of 2 properties neighboring the Trust, Savill Link and Mt Wellington estates, during the last 6 months, are examples of this strategy. With a combined purchase price of $83 million, the acquisitions have a total site area of 14.5 hectares. Currently leased with tiling improvements providing steady holding income, the new sites offer a range of longer-term redevelopment options that will contribute to GMT's future growth. Over to Slide 22. We completed full revaluations at the half, which provided for a half year uplift of $140.2 million or 4.5%. The cap rate movement was the largest driver of the increase, falling from 5.4% to 5.2% over 6 months, which reflects a number of strong investment transactions that have recently occurred in the Auckland market. The tightest cap rate for an individual building in the portfolio was 4.5%. There was no movement in market rents for the portfolio for the last 6 months. We go over to Slide 24 on our development program. We completed 2 developments in the last 6 months, a 7,400 square meter warehouse expansion for OfficeMax, which came alongside a 15-year new lease over the balance in their building at Highbrook, and we also completed 3 units at Savill Link. These units were built on a speculative basis. And we are pleased to confirm that the project is 100% leased. This now means we have built nearly 30 buildings on a speculative basis since 2015, producing over 130,000 square meters of warehouse space for the Trust. The 2 projects completed in the period produced around $8.5 million of development profit over 2 halves for the Trust, reflecting a margin of over 20%. On to Page 25, and our current developments. Earlier in the year, with the uncertainty surrounding COVID, we decided to pause 2 of these speculative developments. We are today announcing that for reasons described earlier around where we see customer demand we are recommencing the 9,000 square meter development at M20 business park in Wiri. This means we have 6 projects currently ongoing across Highbrook, Westney and M20 business parks. Our exposure to this speculative development remains low across the portfolio and sits at just 1.7% when compared to the balance of our assets. And slide 26 just provide some visuals of our development program with the render of the recommenced M20 9,000 development in the bottom left of your picture for reference. Back to you, John.

Thanks, James. And so if we can just move to Slide 28 in terms of outlook. Clearly, the last 6 months has sort of tipped the world upside down in terms of the global landscape and the changes in the way that we live, work and consume. I think the recent events certainly highlighted for us the importance of a secure and efficient supply chain and effectively, industrial property is very much part of the infrastructure of the economy as we saw through that Level 4 lockdown period where 70% of our businesses were still operational. So I think we've got a really, really strong core portfolio. And we're also, as James mentioned -- and we're seeing this around the world with Goodman -- consumer behavior, it continues to change. Our consumers are looking for more and more convenience. And the structural changes that already existed prior to cohort around online retail and the digitization in the whole retail space has just accelerated through that period. I think what we are looking for in terms of our strategy, I mean, clearly, we're very comfortable with the strategy and the strategic path we've been on in terms of owning high-quality sites and infill locations close to consumers. I think we -- from here, we'll be looking to make sure we've got a sufficient development pipeline and sufficient sites and looking to restock that where that's appropriate. And the acquisitions that we've made in the last 6 months, evidence of that. So I think we clearly got a very strong portfolio, as I mentioned. We've got low leverage, which gives us the flexibility to take advantage of opportunities, and we think the themes that have been driving this business and the strength of it in recent times are likely to accelerate. And as James mentioned, we are seeing more requests for new development as we see retailers respond also to the changes that are occurring in today's world. So I think that gives hopefully everyone a good summary of the half year. As Andy mentioned, we are slightly increasing our guidance for the balance of the year. And things probably look a little bit more positive now than they did back in May. So that's the formal part of the presentation. I'll hand back to the operator at this stage to take some questions.

[Operator Instructions] Your first question comes from Nick Mar from Macquarie.

Just quickly on the rental levels. Usually, at the half, you guys do an internal assessment of the region. Could you give us an update on where you think that's sitting?

Yes, Nick. it's James here. That's right. We normally do. I think it's -- we haven't done it this half. I've commented on the valuation sort of movement on market rents for the last 6 months being flat. But I think it's probably a little bit too early, to be honest, to be benchmarking the whole portfolio against the rents. This is similar way to play out. So probably do it again at the year-end.

Do you think the kind of 9-odd big uplift you got on the kind of market is indicative of the overall portfolio? Is there anything specific on that?

Yes -- I mean, that was driven by a couple of specific leases like we leased a vacancy for -- in M20 10,000 square meters that had some good uplift. That was vacant earlier on the year. That was -- so it's quite a strong number, I would say. Now that number has sort of been 7% or 8% quite commonly. Oh, we got some background noise there.

Yes. Sorry about that. Sorry, I got sorted. And then in terms of kind of upcoming expiries, how are you going working through some of those?

Yes. We don't normally comment on individual expiries. But if you look at -- if you look out to FY '22, so about 15% of the portfolio is expiring in that year. And we have given the breakdown between value-add and core for that year. And at 15%, that's not an abnormal amount to have within a 12-month period. So we're pretty comfortable.

Okay. Any kind of comments you can make on how Roma Road is going? It's obviously one of the larger ones.

Yes. Look, Nick, John here. Maybe rather than talk about specific sites, I think with what we're seeing in terms of the RFPs that are coming out from larger customers, you would expect to see redevelopment opportunities, I think, over the next sort of 1 to 2 years. And I think our sense is that the -- a site like Roma Road or a Turners maybe redeveloped in shorter time frames than possibly we originally thought. So -- but -- well, let's see how that plays out. I think at the moment for Roma Road, as with all our sites, we look at all the options as -- on a constant basis, including obviously, re-leasing and/or redevelopment. So we'll continue to just look at the economics of both.

Your next question comes from Jeremy Kincaid from UBS.

First question from me is just on developments that are still on -- that are still paused. What will you be looking for in the market before you turn those back on again?

The -- well, I think we'll be monitoring our customer conversations really closely, Jeremy, is the first thing. And I know James has been talking to the customers and there's some information there in terms of some anecdotes of our -- what they're seeing at the moment and with growth. So I think really, that's the key. The main speculative development that we've continued to keep on pause is at Highbrook, which is a 10,000 square meter facility, and we just think at the moment that there's some quite good pre-leasing opportunities. So we'd just like to see how those play out.

Okay. Are you also able to provide some comments around -- you sort of talked about the structural change and more demand for logistics and warehousing. Can you put some numbers around how much growth there has been or structural shift there has been from pre-COVID levels to now? Avoiding impacts of lockdown, so i.e. what demand was like pre-COVID and what demand is currently like in Alert Level 1 now?

Sorry, you mean demand, particularly in an e-commerce sense or...

Yes. In terms of potential throughput that your tenants are seeing?

Yes. Jeremy, yes, I think that the comment there is our conversations often go to how difficult online has been to fulfill people's current operations. So while they're not looking in the next 1, 2 months to move because they are still a little bit hesitant about where things are at, they're going, "Well, I need to get my distribution and my logistics sorted for the medium term. So 2, 3 years out, if I get back to those e-commerce online sales that I had back in March during that first lockdown -- sorry, in the second lockdown, Level 3, where numbers are really, really strong, it's going to get back there again. So I need to get myself sorted out for that sort of 2, 3-year away sort of time frame," and that's a really common conversation we're having with our customers, maybe not right now, but in the short to medium term, we need to get ourselves sorted.

Okay. So they're not saying they're all x percent up relative to pre-COVID levels and Level 1 now?

No. I mean it's a mix, right? I mean I don't think you can put of blanket across all of the industries and customers that we have in our portfolio, but it's anecdotal, and we're definitely getting those bigger inquiries coming through.

Okay. Sure. Understood. And then just finally, on gearing, where would you be guiding the market to in terms of a long-term normalized gearing number?

Yes. So our preferred range, medium term, so 25% to 35%, we've been at that articulated level for some time now. That hasn't changed. So as you've seen over the last 12 months, in particular, post the equity raise last year, gearing has continued to step up both through the developments and the acquisitions. So we're not changing that as a range that we're comfortable in. But in saying that, today, right here, right now, we're pretty comfortable being below that.

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

John, Andy and James, just one question for me. Just circling back to the comment you made around those Roma Road and kind of Penrose sites that you'd circled for future development, potentially further down the track. You said that there would be potential opportunities near term. I guess the investment case that it always hinged on much higher rentals than we are now, but your market rents are flat. What's the key change that means you think you can develop those near term? Is it just the fact that development profits are higher because we've got cap rate compression?

There's probably a couple of things, Rohan. Clearly, the -- what's happening with cap rates continues to happen is making that equation look better. I think the other thing we're seeing through the -- certainly through the Goodman network internationally is a very, very strong demand for some of those sites. And the reality is for some of these sites that are critically located close to consumers, you are getting users that are prepared to pay up for those sites. So I think it's a combination of those 2 things that we're looking at. And like I said earlier, we're just constantly running those numbers, and there'll be a tipping point that will come that will mean 1 or 2 or a number of those sites ready for redevelopment. And -- but on top of that, I think we'll continue to look at other opportunities as well to restock the pipeline. And the advantage, I think, of some of these brownfield sites too is you can obviously take some cash flow off them in the short term. But I think at a high level, the point for the redevelopment of those sites, I think, has been accelerated through COVID from -- because we're seeing an increase in demand driven by the changes in the -- particularly in online. We're seeing a compression in the cap rates. And if you sort of combine those 2 things, you then get closer to the redevelopment point.

Just another one. Have you seen any movement in construction costs yet? I mean, I don't know if you've issued many tenders, but just wondering if you had a view on that.

Well, yes, our sense is that I think if you tendered something probably back in June, you probably would have got some pretty good cost savings. But it looks like across the supply chain, particularly with the level of residential activity that I think price's sensors are probably going to be pretty similar to what they were just prior to COVID.