Goodman Property Trust (GNZ) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Goodman Property Trust FY '23 Full Year Results Webcast. [Operator Instructions] I would now like to hand the conference over to Mr. James Spence, Chief Executive Officer. Please go ahead.

Thank you very much. Good morning, and welcome, everyone. I have Andy Eakin, CFO on the call with me. We'll start over on Page 4. The Auckland industrial market in which GMT is focused remains at capacity. Customer demand, while cautious and considered continues to come from those customers with sophisticated warehousing requirements, looking to build resilience, productivity and efficiency into their networks. Barriers to entry for new development remain high, and in fact, speculative product currently being built into the market equates to less than 1% of the total Auckland stock, which is likely to result in a relatively tight condition going forward. Our robust capital position, which Andy will outline means we are well placed in an uncertain environment to capitalize on the best opportunities. We will continue to selectively consider tightly held strategic large-scale sites that display infrastructure-like characteristics or value-add opportunities. Turn over to Page 5. Growth in underlying cash flows from new leasing, rent reviews, our full portfolio and development completions has led to a strong operating result with cash earnings per unit up nearly 7% for the year. This, alongside the maintenance of a prudent distribution policy aligned to underlying cash earnings -- our cash flows has resulted in a distribution of $0.059 per unit, which is a 7.3% increase on last year. The same factors driving cash flow growth have also gone a long way to offsetting the impact of interest rates -- increasing interest rates on the value of the portfolio. which, despite an increase of 100 basis points on the cap rate to 5.2%, resulted in a valuation movement of less than 5% for the year. The Trust is well positioned to continue to produce growing cash flows with the under-renting for GMT growing to 25% on the back of significant market rental growth, something Goodman has seen in its markets all over the world, which have similar barriers to entry. Jump over to Page 7. Our development program continues to produce high-quality irreplaceable assets for the Trust. The program has resulted in over 400,000 square meters of space across 76 projects during the last 10 years. The 4 projects that have completed this year are all leased with an average 15.9-year lease term and are to names that you all know, including NZ Blood, Stanley Black & Decker, Garmin and NZ Post. As with all developments currently under construction, we're targeting at least a 5-star Green Star rating. Pleasingly, 2 of our developments have achieved a step higher being 6-star. These are the first 2 industrial buildings in the country to achieve a 6-star design rating. Over to Slide 8 and Roma Road. Investors will know we purchased the 13-hectare Roma Road site back in 2018. On the expectation, customers would be attracted to the site, which is unrivaled in terms of the location for distribution to the central and western parts of Auckland. We're well underway with our Roma Road development with the first 17,000 square meter building, having recently completed for NZ Post. Construction on the balance of the 3 buildings is underway, with one going to Cotton On, the large one there at the back and a third building being leased to a premium -- for a premium rental to an international business. This means the estate is now around 90% leased, 10 months out from completion. I'll jump a couple of slides over to Page 10. The team completed over 200,000 square meters of leasing on a stabilized portfolio over the period, reflecting a core portfolio retention rate of 78%. This consisted of 58 leasing deals producing rental reversion of 23% on those deals with an average incentive of just over 2.5%. The average agreed warehouse rental rate for the core portfolio during the period increased to $186 per square meter, which compares to $139 per square meter a year earlier. Page 11. With the valuer's assessment of market rents across the GMT portfolio having increased by 19% over the last 12 months, the portfolio is now approximately 25% under-rented. The benefit of this under-renting position will come through over time, supporting the continued growth in underlying cash flows for GMT. Given this is a significant number, we've broken down the review profile for FY '24 to give investors more insight into the leasing events that are to take place over the next 12 months on the existing portfolio. Reversion to market generally occurs upon expiry or market rent review with cash flow increases also coming through from fixed and CPI rent reviews. Due to the scale of the under-renting, where there is a rental cap on reversion, the cap has been hit in most cases. Where this is a renewal option, while it means some of the reversion to market may be delayed, it also results in the customer being much more likely to stay, resulting in even higher retention rates and less overall downtime keeping the portfolio full. On the next page, Page 12. We continue to do more development work with our existing customer base and in particular, our largest customers NZ Post and Mainfreight. In fact, 86% of our current development workbook is for customers already within the GMT portfolio. Having a significant customer base of over 230 customers has always been a real feeder of demand for our development book as we stay close to their needs and expect this to continue going forward. I'll jump over to Page 14. Following the recent completion of the 4 developments highlighted earlier, our work-in-progress has reduced to 112,000 square meters across 6 projects. We do continue to limit our exposure to speculative development, which is currently just the one remaining building at Roma Road. While construction pricing remains at elevated levels, there are signs input pricing in some areas is softening for some material items. However, labor inputs remain high, and we expect this to maintain construction pricing at relatively high levels. On the next page, as I mentioned earlier, over 90% of our current development WIP is on brownfield sites. The majority of GMT's future development pipeline is also classified as value-add sites with generally older existing income-producing improvements. While we do expect these sites to be redeveloped over time, it remains expensive to do so. So, having assets that are well occupied and providing GMT with a growing cash flow in their own right is a real benefit for the trust from the development pipeline. Forward inquiry has moderated given the general economic climate and weak business confidence, the exception is probably for those larger customers with inquiry generally coming from customers looking to consolidate into larger facilities, getting more efficiency and better locations. With that, I'll hand over to Andy.

Thanks, James. Good morning, everybody. So, if you turn to Slide 17, I'll start with a snapshot of some of the key highlights from the results released today. A strong net property income and operating earnings growth, and I'll talk about both of those shortly. Cash earnings, as James mentioned, $0.071 per unit was nearly 7% higher than the prior period and that was 3% higher than the guidance that we gave at the start of the year. Distributions at $0.059 per unit, 7.3% higher than the prior period. And we have reported a statutory loss this year of $135 million, principally driven by the decline in value of the portfolio, less than 5%, as James said, that was $238 million. NTA stands at $2.45 per unit now. And following the establishment of our sustainable finance framework let in FY '22, we've issued a new green bond at the beginning of the year and 2 green loans in December. Turn to Slide 18 and just looking in a bit more detail at NPI. So, $20 million increase on last year, that's almost 13% higher. The chart shows the main drivers of that. You'll see redevelopments caused a slight reduction compared to the prior year, Favona Road and Roma Road, both offline. Development completions in FY '22 and '23 at M20, Highbrook and Westney contributing $3 million to the increase. Significant number of acquisitions contributing $7 million to the increase, so that's OG, Sky, Bush Road and Sleepyhead. And then really pleasingly, the like-for-like rental growth, 5.3% contributing over $7 million to that NPI increase. If you move across to the right-hand side, you'll see straight-line rent adjustments, $2.6 million, new long-term fixed increase leases contributing to that. And you'll recall that we adjust this back in cash earnings. Slide 19 looks at operating earnings and that is very similar story to NPI. Really strong growth, an increase of $12 million. That's 12% up on the prior year. In the chart, we just talked through NPI, but you'll see the net interest costs are almost $10 million higher. And that's a combination of both higher debt as a result of the acquisitions and developments and the higher interest rate environment that we've been experiencing. Our weighted average cost of debt for the year is at 4%. There is a small increase in the base fee through the course of the year. And you'll see tax compared to the prior year, lower $3.6 million, and that benefits from the redevelopments that we've undertaken, the strong leasing and also the depreciation of new developments that have completed. Moving on to Slide 20 to look at cash earnings. This is our preferred measure. As I said before, $0.071 per unit and distributions of $0.059 per unit. You see on the narrative there, total CapEx for the year to $24.5 million and this is elevated as we undertake sustainability upgrades, which add value to the portfolio. Within that $24.5 million, there was $4.2 million of pure maintenance CapEx. Looking forward into FY '24, we do expect to see cash earnings growth continue. We're forecasting an increase of around 4% to like $0.074 per unit. Allied with that, we're expecting distributions to grow by a further 5% on top of the 7% this year, taking them to $0.062 per unit. Turn over to Slide 21. And look, the result released today confirms the provisional valuation release that we made back in March, a 4.7% decline in the portfolio value, as I mentioned before, $238 million. As James said, cap rates softened 100 basis points through the year, but that was very significantly mitigated by the 19% increase in market rents. Developments that were fair value, that's both completed development and some in-progress developments showed an almost $40 million increase in value. You see at the bottom of the table that land at $87 million represents around 2% of the portfolio today. Slide 22, look, I will not dwell on this one, but just note the $60 million of acquisitions in the period, the final part of the Villa Maria site and the Sleepyhead site that I mentioned before. If we turn on to Slide 24 and look a little bit at the interest rates. As you'd imagine, interest cost is an area of particular focus for us in the current environment. We've increased our hedging levels through the course of the year, now 84% fixed, up from 70% last year, and this has mitigated the sharp rise in floating rates. As I said before, weighted average cost of debt was 4% for the year and that was up from 3.2% last year. Looking forward into FY '24, we expect that to be around 4.6%. Interest cover ratio, we've got a covenant that, that is required to be not less than 2x, sitting very comfortable at 3.6x for the year. Slide 25 shows the makeup of our debt book. And look, once again, it's been a very active year for us for debt funding. Our first green bond back in April, $150 million, paying a coupon of 4.74%. And in December, we extended our bank facilities quite significantly. We've got 2 new green loans totaling $300 million provided by BNZ and Westpac, a new bilateral loan with CBA, and we've extended our syndicated facilities with ANZ returning to the Syndicate and ICBC joining as a new lender. At balance debt, we had almost $750 million of available liquidity. That covers all of our development commitments that we've made, debt maturities over the next 18 months and leaves us headroom to spur beyond that. Slide 26, looking at our gearing. So LVR reported at balance debt was 25.9%. If you roll forward the remaining spend on our development commitments as much takes about 18 months, that takes us to 29% on a fully committed basis. We retained very significant headroom to our covenants, which are all aligned at 50%. There's no change to our preferred through-cycle range for gearing of 20% to 30%. Some of you will recall that we sat below that for a period and opportunities or circumstances may mean that we sit above it for a period of time. We change tack now and move to Slide 28 and look a little at sustainability. We're getting a very clear message from our customers that they're as focused on sustainability as we are. Our well-located and more efficient properties help customers reduce their emissions from both occupation and transport. And at the same time, we're reducing the emissions intensity of our new developments. Slide 29 touches on some of the key sustainability highlights for the year. Really pleasingly our CDP climate change score increased to an A- for the year. That was the top score in New Zealand shared with 3 others. We're once again Toitu Carbonzero certified for our operations and we have been since 2021. But our greenhouse gas emissions for the operations have seen a 38% reduction since our FY '20 base year. At the same time, we set a new 2030 target, which is aligned with the Paris Accord to limit global warming to no more than 1.5 degrees. Solar energy systems across the portfolio now around 1 megawatt installed and we've got another 1.4 megawatts in progress. Turn over to Slide 30, just looking at our developments. So, New Zealand Green Building Council estimates that construction contributes around 10% of emissions to New Zealand. We've been working with our contractors and their suppliers to try and reduce the embodied carbon within our developments. Current work-in-progress, the book has got a 12% lower carbon intensity than reference buildings and this fits really well with our Green Star commitment, which over time requires progressive reduction in embodied carbon. James mentioned, we've achieved 2 6-star design ratings that represents world excellence and we're really pleased with that. But we remain very focused on targeting 5-star built rating for all of our developments irrespective of their size. Slide 31 is looking at a major project that we've got underway to benchmark energy usage across the portfolio. This is going to help our customers to be more efficient in the usage of our properties and 50% of them so far have agreed to share data from 2019 onwards. This also helps us assess our downstream Scope 3 emissions. Metering project that's underway that's going to give us more granular data and enable those customers, again, to be more granular with their energy usage. And we expect that project to be complete by 2026. By 2025, the whole of the core portfolio will be switched over to smart LED lighting and this results in lower operating costs for the occupiers and lower maintenance costs for us. Again, by FY '25, we'll have replaced all of the R22 refrigerants and our HVAC systems. I'll hand you back to James.

Yes. Thanks, Andy. We'll jump down to Slide 33 on the summary and outlook. Look, we're cognizant that the economic outlook remains uncertain and carries a lot of volatility. But we are well positioned with an increasing rents, market rents, sustained high occupancy and developments, producing significant growth in our underlying cash flows and we expect those same factors to drive the business going forward. But we are absolutely focused on the execution of orders in front of us. We're seeing opportunities around our markets, but we remain very patient and selective as we grow the business moving forward. We will continue to look for scarce, long-term opportunities. Barriers to entry for these opportunities are only on the up, all adding time and cost to the process. However, these challenges are all elements that are contributing to the strong rent growth and long-term value of the portfolio that we already own within Auckland. So, just to reiterate guidance for FY '24 is a further 4% increase in cash earnings and a 5% increase in cash distributions to around $0.062 per unit. And with that, happy to take any questions.

[Operator Instructions] Your first question on the phone line is from Arie Dekker with Jarden.

Well done, sort really strong result and outlook. Just 2 things from me. Just to the extent you can, just a little bit of color on how close you might be or otherwise to committing to new development in FY '24?

Arie, good question. The bulk of our development pipeline is brownfield sites. We've obviously got the Villa Maria land, which is still a couple of years away. But those brownfield sites, in order to redevelop those sites at the moment, you're looking at very significant rentals, $250 a meter plus, let's say. And I think that's an pretty expensive rent for a customer to pay. That might happen. Obviously, with efficiencies and larger warehouses, we might get customers wanting to go in that location -- those locations over the next 12 months. But from GMT's perspective, actually just waiting and growing rents on the existing assets that we've got is -- a really strong alternative. So, there's no pressure for us to redevelop those sites.

And just on that inquiry that you commented on coming from the larger customers to consolidate. I mean, are there a lot of -- have you got a lot of active discussions at the moment or just reflecting that broader uncertainty that kind of weighting as well?

Yes, there is a lot of inquiry largely from the bigger customers who are looking to potentially consolidate a number of smaller warehouses, but when they go to market and they ask around what the options are, it's such a tight market with limited availability, construction costs are still high, that the rents that they would need to pay are pretty significant and that's probably putting a little bit of hesitation into some customers when it comes to making the final decision. So, still lots of inquiry. It's probably a bit of a -- it's a bit of a stalemate at the moment between customers and developments, I guess.

And then just last one and just thinking on the pipeline side of things. Obviously, you've got a very strong balance sheet and you're willing to take a long view and capacity to do that. So, just on land -- adding to the value-add land bank side of things, either out of necessity, releasing capital or just vendors becoming a bit more realistic on expectations, what sort of happened and what have you observed in the last sort of 6, 12 months on what you're seeing there to add to the value-add bank?

There hasn't been a lot Arie. I'd say probably in the last couple of months we've seen some more bigger strategic opportunities get put in front of us. And some of them have had our eye on for a while. But again, there has to be price rise. And we'll only do if it really makes sense for GMT.

Your next question comes from Bianca Fledderus with UBS. Apologies. Your next question will come from Nick Mar with Macquarie.

I guess just on hedging, could you just talk through what you've done there to sort of lift the hedge rate up to 84%.

We entered into some new fixed rate swaps through the course of the year.

And they seem to be at relatively attractive rates given the 4.6% guidance. Is there any sort of magic going on in there? Or is it just sort of you hedged well?

It's very, vanilla. Yes, I'd like to think that we've hedged well. And yes, you're right, 4.6% for next year. There's a high degree of protection in that. Of course, we're in the interesting situation right now that if you enter into fixed rate swap, you're actually lowering your interest costs over the next 12 months, but there's no magic to it. I wish I could say there was.

And then just in terms of the reversion profile, you've talked about that $48.4 million number. You've obviously got the lease expiry portfolio, which is really helpful. Can you give us sort of a ballpark of how long it would take to sort of cycle all of those to catch that $48.4 million based on sort of the stuff in place around cats and when the market access comes up?

We have given a bit more color on Slide 11 because the number is pretty significant, being almost $50 million. So, I don't know if you've seen Slide 11, Nick, we do give more color than we have in the past. We give a portfolio weighted term to market review or expiry of around 4 years and we give some color on the caps as well. So, that will come through over time. But there's a lot of information there that should be able to give you an idea as to how long it will take.

So, the full year number is that sort of, on average, 50% of the portfolio will be done by 4 years? Or is it 100% will be cycled in 4 years?

No, that's an average.

Some are less than 4 years and some are more than 4 years?