Goodman Property Trust (GNZ) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Goodman Property Trust FY '24 Interim Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. James Spence, CEO. Please go ahead.

Yes. Thank you, and hello and welcome, everybody, to the results presentation for GMT for the 6 months to September. I'm James Spence, CEO; and with me is Andy Eakin, CFO. Start over on Page 4. Our concentration in supply-constrained markets is supporting demand for our properties as customers look to improve their supply chains and increase their productivity through more efficient warehousing and distribution. With near zero vacancy, the Auckland Industrial Market continues to outperform. Supply remains tight, with speculative product under construction across Auckland amounting to less than 0.5% of total existing stock. While higher construction and financing costs continue to be a barrier to entry to commencing new developments, our value-add portfolio continues to be re-leased at competitive holding yields, while optionality for future redevelopment has been introduced, where possible. This dynamic is driving strong growth in underlying cash flows for GMT. Our robust capital position, which Andy will outline later, means we are in a well-placed position 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. With the first half operating performance meeting our expectations, we are pleased to reaffirm our full year guidance. Underlying cash earnings of $0.074 per unit are up 4% on FY '23. Full year distributions of $0.062 per unit are up 5% on last year. Over to Page 5. We have delivered a strong operational result in the first half of the year. Momentum within the portfolio is building. And after achieving like-for-like net property income increases of over 4% in FY '21 and over 5% in FY '22 and '23, I'm pleased to share that the portfolio is now producing like-for-like growth of over 6% in the current period. As well as achieving strong rental growth, we continue to enhance the portfolio through development with 3 projects totaling 60,000 square meters completing in the first half of the year. As cap rates soften in the high interest rate environment, a 4.6% reduction in the value of our assets has been booked. However, operating earnings, cash earnings and distributions are all up on the current period -- on the prior period. With substantial liquidity, high hedging levels and gearing well below covenant, GMT is well positioned to navigate uncertain times ahead. Over Page 7. GMT's urban logistics portfolio provides essential supply chain infrastructure for our customers. As pictured on the map on your screen, all of our assets are located close to key transport and distribution networks, facilitating the efficient storage and delivery of goods and materials to businesses and consumers. Our portfolio -- our property portfolio was valued at $4.7 billion with a net lettable area of 1.1 million square meters. Our core portfolio, which largely consists of modern, high-quality logistics properties accounts for approximately 15% of the total Auckland prime industrial market with occupancy at 99.6% and a weighted average lease to 6.4 years, the portfolio remains at capacity and well leased. Over to Page 8. The Goodman asset management team has produced strong leasing results in the period with over 90,000 square meters or almost 10% of space leased on new and revised terms, those leases achieved an average rental uplift of about 27% and an average new lease term of over 7 years. The combination of short lease-up periods, and low incentive levels has meant that GMT has continued to receive strong underlying cash flow growth from its assets, both within the core and value-add portfolios. Over to Slide 9. Continued market rental growth has been a key driver of operating earnings growth for GMT. The assessed potential rent reversion to market for our assets now sits at around 23%, which is around $50 million of net rent per annum. As the portfolio has re-leased year-on-year, we will continue to capture this market rental growth with 6.2% like-for-like rental growth, as I mentioned, achieved for the period. We remain confident about our expiry profile moving forward, and we expect to see continued strong renewal results. The continued strength in our operating results is reflected in the quality of our customers. Page 10 provides a deeper dive into the ownership of our customer base. As at 30 September, arrears over 30 days represented just under 2% of our monthly income. The timely payment of invoices gives us confidence in the operating performance of our customers with no distressed evidence at this time through our arrears. Over to Page 11. We just recently completed a survey of our customers to obtain insights into their future demand across Auckland. And when asked about the Auckland, Auckland warehouse requirements over the next 1 to 5 years, the medium term, more than 50% said they'll be looking to increase the Auckland warehouse footprint. Our customers through this have made it resoundingly clear that there is still significant and growing demand for Auckland industrial space, supporting our strategy to continue focusing our investment in this market. Over to Page 12. Over the first 6 months of the year, we have completed over $200 million of developments across 3 projects at Highbrook, Roma Road and Mount Roskill, and Otahuhu. Picture here is our new development at t Favona Road for Mainfreight. With the [indiscernible] of over 16 years and a yield on cost of around 5.3% and all targeting at least a 5 Green Star as built rating, these projects have added high-quality assets to the stabilized portfolio. On Page 13. Our current projects continue to track on time and on budget and at least the likes of the NZ Post and Mainfreight further building on our relationships with those strong customers. Upon completion of these projects, our development team would have produced approximately 900 million of product over 30 projects in the last 5 years. Over to Page 14. In an uncertain economic environment, where the cost to construct and finance new developments has become more challenging, it has been critical that we remain disciplined and nimble in our approach to our development sites. One of the benefits of having a last-mile brownfield portfolio of development sites has been the flexibility to release the sites and wait for the right time and the right deal to execute our redevelopment plans. Penrose Industrial Estate is a great example of this with the site highlighted on the slide. In 2020, a major occupier notified asset, they will be vacating their buildings on the estate with another customer opting to surrender their lease. This gave us the opportunity to lease the site on short-term arrangements while exploring options to redevelop. Given the challenges to commencing developments that we've already alluded to, this year, we decided to re-lease the site for a longer term while introducing optionality within the leases for future redevelopment. The rental uplift that we've received on this portion of the site, versus what that customer was paying back in 2020 is in the order of 50%. This has allowed us to lock in cash flow now while awaiting the best time to redevelop the site. Over to Page 15. While we recognize the challenges posed for redevelopment at this time, we continue to prepare our pipeline for future development to satisfy those customer needs I mentioned. We are pleased to update on the Villa Maria site, now renamed Waitomokia. In consultation with EV, master planning for the site is well progressed. Consent for a planned change has now been lodged with counsel and the first development is expected to commence in mid-2025. GMT will continue to assist developments on a case-by-case basis with capital reserves to execute on the best opportunities. With that, I will now pass on to Andy, who will run us through our financial results.

Thanks, James. Good morning, everyone. Look, really pleasing to announce the strong result for the first half against what continues to be a fairly challenging economic backdrop. Turn to Slide 17 and just look at some of the key highlights from the result. The net property income at $100 million, 13.5% higher than the same period last year. And despite pressure from high interest rates, we've delivered a strong almost 6% increase in operating earnings before tax. Underlying cash earnings, as James mentioned, up 6.5% on the first half of last year at $0.0375 per unit, and that's consistent with the guidance that we gave at the beginning of the year. Distributions of $0.031 per unit for the half, 5% higher than last year. When we preannounced our expected valuation movement back in September, that's fed into the reduction in NTA now standing at $2.31 per unit. Turn to Slide 18 and just look in more detail of the net property income. So an almost $12 million increase on the same period last year and 2 key drivers for that. Development completions contributed $6.5 million. And as James mentioned, a 6.2% like-for-like rental growth contributed almost $5 million to that increase. You can see also the impact of the straight-line accounting adjustments for new development leases and the impact of both Savill site and the Bush Road brownfield site has been taken offline for redevelopment. Turn over to Slide 19 and look at the operating earnings. So operating earnings after tax up a strong 12%, and the strong underlying operating performance contributing into that with NPI, almost $4 million greater increase than the increase in the interest cost. And we benefited from higher tax deductions on leasing, both stabilized and developments. And as noted in our releases, we made a change to the building tax depreciation method, changing to diminishing value to maximize deductions available to the trust with the expected removal of building depreciation from next financial year. Slide 20 looks in more detail with the cash earnings and our usual cash earnings measure sees an increase of 9.5%. This period we've called out an underlying cash earnings measure of 3.75%, as we mentioned, and that excludes the benefit that we've taken from the change in the building depreciation methodology. Full year earnings guidance reaffirmed at around $0.074 per unit, again, excluding any benefit from that diminishing value depreciation change, 4% up in FY '23. And full year distribution is expected to be $0.062 per unit, 5% higher than last year. Slide 21 provides some more detail around the portfolio valuation, and we chose to complete a full valuation across all assets at September. The final position of that saw a 4.6% reduction in overall portfolio value. Although the pace of market rental growth moderated, it was still strong at 3.5% for the 6 months, and that offset some of the impact of cap rate softening across the portfolio. portfolio cap rate now stands at 5.6% from 5.2% at March. We turn over to capital management and look first at interest on Slide 23. The weighted average cost of debt now stands at 4.7%. And we still got strong protection from the higher interest rate environment with around 73% of our debt fixed for the next 12 months. Weighted average cost of debt is expected to remain below 5% for the full year. Our interest cover ratio stands at 3.1x, very comfortably compliant with the covenant requirement for that to be not less than 2 times. And back in September, S&P reaffirmed the Trust's BBB credit rating with a stable outlook, its debt on a BBB+, and we remain strongly committed to maintaining this rating. Slide 24 looks in a little bit of detail around our liquidity. We've got over $0.5 billion of available liquidity at the reporting date. Just last week, we extended 3 of our existing bilateral facilities totaling $400 million, pushing the [ mine ] by a further 12 months. And you can see on the chart, our next debt maturity is the retail bond in May 2024. Our covenant LVR stands at 29% against a limit of 50%, so very comfortably in compliance. Finally, from me, on Slide 25, just looking at gearing. Our reported gearing at 28.7% and taking account of the development spend to complete the existing work in progress over the next 12 months, takes a fully committed gearing to just over 30%. No change to the board's preferred through-cycle range of 20% to 30%. I'll hand you back to James.

Yes. Thanks, Andy. I'll just jump on to the moving forward slide, Page 27. While global markets remain uncertain, the structural trends in the Auckland industrial market remains sound. The quality of our customers continues to underwrite strong operating performance and in the short- to medium-term, this space requirements are likely to continue increasing. Interest rates, geopolitical activity and inflation remain key drivers of uncertainty in the real estate sector. Volatility is set to continue impacting on cap rates and asset pricing. However, our approach has provided us with significant resources and liquidity to manage through uncertain economic environments and take advantage of future investment opportunities. Disciplined capital management will continue to underpin our investment strategy and enable GMT to execute on the best opportunities as and when they arise. So just to reconfirm, we are pleased to reaffirm our guidance of underlying cash earnings growth of around 4% and distributions of $0.62. Namahee, we are now available to answer any questions.

[Operator Instructions] Your first phone question comes from Bianca Fledderus with UBS.

James and Andy, just 2 questions for me, please. So first of all, in terms of the 23% under renting, could you give an indication of how many years it would take to fully capture that?

Yes. Bianca, I think if you look back at the May result, we provided quite a bit more color on that. The under renting will come through upon market rent reviews and expiries, and it really depends on how those 2 things evolve. Back in May, we gave an average time frame of around 4 to 5 years, and that hasn't changed.

Okay. Great. And then secondly, just on your maintenance CapEx, so as a percentage of your asset value, it's quite low. In the long term, what do you sort of see as a more stable percentage there? Or do you think this is a sort of longer-term number as well?

Bianca, Andy here. Look, we think that's pretty much where we'd expect it to be. Industrial buildings typically require compared to other assets, very low levels of maintenance. Leasers also typically have customers paying sort of normal ongoing maintenance on the buildings. So as a result, you can see that, that is a low cost to the Trust itself. And that's about the level that we would expect to see that continue.

Your next question comes from Arie Dekker with Jarden.

Firstly, just on the Villa side, it signaling sort of mid-25 development commencement. Can you sort of just give better than, I guess, still very early guidance as to sort of what you're sort of planning there in the early stages? And what sort of time frame you'd envisage the site being developed over?

Yes. Thanks, Arie. Look, it's been a really constructive and open process for what is an important piece of land. We took our time to ensure we've built something worthy of the site. The plans haven't, overall, in terms of the quantum, really changed. We're still looking Arie, at an industrial development of a similar quality of Highbrook that's probably 100,000 to 120,000 square meters of warehouse space. We plan to kick off the first building in a couple of years' time at the other end of that consenting process. And we're not giving an exact build-out time frame or for how long that will take. But I think you could use our run rates across the likes of Highbrook to extrapolate that.

Yes. No, that's understandable. Just on hedging, Andy, is that profile as at end of September? And if it does, have you put any hedging in place since?

Yes. That is at the end of September, and we have put a small amount of additional hedging in place since that debt. It doesn't materially change the percentage. I think it left us to about 75%, 76% for the next 12 months.

Yes, that's cool. And then just with regards to the change in building depreciation. Can you just give an update on what the FY '24 run rate will be that has been potentially at risk in FY '25, should those changes go through?

Yes. The changes go through our estimate in '25 from our previous straight-line methodology. So what we were using up until this year was about a $4 million hit to our cash tax payment.

And that goes up a little bit now. I mean in terms of the...

Yes. The delta becomes bigger, but yes, correct. The delta becomes bigger. That was running off kind of assumption of straight line.

Yes. So the delta now will be about $5 million from the $25 million...

Yes, around that, yes.

Your next question comes from Nick Mar with Macquarie.

Sort of a couple of different questions. This customer survey sort of interesting and a lot of customers want to grow. How do you guys accommodate for that in your portfolio if customers are looking to sort of upsize [indiscernible] and your development options are more limited on that.

Yes, there's a couple of things. Obviously, we've still got a big pipeline, Nick. A big part of our pipeline will be Villa but we've also Waitomokia. We've obviously got 50 hectares of brownfield sites throughout Auckland that we can offer really high-quality last mile facilities for those customers but also assisting them to get more out of the existing warehouse facilities that they have. There's a lot of investment, and it doesn't have to be full scale of automation but just making things more efficient within your warehouse stacking products more effectively, more efficiently, getting more out of the assets they've got is a big part of our program, too.

No, that's great. And for Penrose, was that completed an uplift sort of release? And if it was, what was the sort of valuation uplift from executing that?

Yes, we don't sort of give individual side by side on the value-added valuations. But it's fair to say those valuation rates that the buildings were re-leased at, the re-leasing rates were quite aligned with value-added rentals of late, which have also had a bit of a re-rate. So in the mid to late 100s, Nick.

Okay. No, that's great. And if you were to sort of redevelop that and create an economic return on investment, what kind of rent do you think you need on that side?

Yes. So not specifically to that site but I can just comment on where we see. If you're trying to develop a piece of land with $800 to $1,000 a square meter land value going into your [indiscernible]. Then to be honest, you're needing a rental rate in the mid-200s, right? So not every customer right now is wanting to commit to that unless they can really get the efficiencies out of that building in that location. So that's a pretty high rental rate compared to where things were 12, 24 months ago but that's reality, so sort of mid-200s.

Does that get you to 7% or 6.5% or?

Yes. I think if you're looking at developments now, you've got to be thinking 7% plus for it to stack up with cap rates sitting at around 5% to 5.5%.

Yes, that's good. Last question. What's your thoughts on sort of raising equity at the moment? It wouldn't be particularly dilutive and would sort of reload the sort of [ war chest ] things do come to market and to sort of fund same like Villa.

No. I think we're pretty comfortable with the capital position as it stands today. The Board has that preferred range of 20% to 30% through cycle. But as we've indicated over the last couple of results calls in the right circumstances for the right returns, we're happy to go beyond that. And we've got plenty capacity on the balance sheet and plenty on liquidity.

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

Congratulations on a tidy result. Just the first one, on the tax depreciation thing you're doing. I know it's a one-off because of the changes coming up. But how often can you change it? And what sort of pushback do you get from the IRD from just switching because it's advantageous to bank a couple of million dollars tax benefit before the tax changes come in?

Yes, it's a good question. The tax depreciation rules allow you to choose your depreciation methodology on an asset-by-asset basis each year. And we chose when it came back in, we made a decision what was that about 3 years ago that we would choose the straight-line methodology. Previously, we've done it on a diminishing value. And we did that at that time because it had been indicated it was a permanent reintroduction and it made sense to a consistent deduction from that each year. Obviously, with the changes coming now, which came as a bit of a surprise to everybody. It makes sense for us to maximize the deduction. It's entirely within the rules.

Perfect. And then just back to the kind of the balance sheet question. If you look at Villa Maria and just reloading feasibility, it's probably going to cost you something like $300 million or more to develop that site in terms of additional cost. If you start putting that in, plus some likely further devaluations given interest rates that at the long end staying higher on the current portfolio. You probably end up closer to 40% than you do to 30% pretty quickly. I know you're saying you've got spare capital but how far away from the top end of the range do you feel comfortable?

We haven't got a view around how far away from the top end of the range. But what I would say is a very long time period to develop that Waitomokia site in full. So I think you've taken a pretty pessimistic view if you think that valuations continue to fall and stay down through the full life cycle of that development. There's a lot of options that we have in that time frame.

Okay. Cool. And then one final one, just question around rents. And I know you're talking to kind of mid-200s to get stuff developed and tenants, we need to get pretty bullish on their own kind of operations to get there. But if you did your survey again and ask tenants at what rental level they'd be prepared to expand their footprint, what kind of answers do you think you'd get?

[indiscernible] asked that question. Yes, difficult to know Rohan , case-by-case, right? For customers as to whether they can remain in their existing location and just make improvements or whether they get real efficiencies from moving to a new facility, right? It's -- as you know, rent is a small part of their costs. So if they can get gains elsewhere by being in a more efficient, high-quality building, a great location that reduces the balance of their cost, then of course, they can afford to pay more rent. So I don't think it's as straightforward as that. It's a case by case.

Okay. Maybe answering it a different way. When you're doing your negotiations on re-leasing, I guess, how strong is the pushback now given the economy is slower versus, say, 6 to 12 months ago from tenants?

Well, I think that's the same dynamic, right? If the customer is looking around for new space or coming up for an expiry and they're looking at their options. Well, the development options as opposed to the stay put options are often more expensive. So staying in your existing warehouse with us, and that probably goes to why the portfolio remains full, is often the most cost effective on a rent per square meter basis for them. So it's not a -- it's not an unexpected conversation. Nobody likes a straightforward increase in rent but it's not a surprise, Rohan.

There are no further phone questions at this time. And I'll hand back for the webcast questions and closing remarks.

There is 1 question from Shane Solly at Harbour Asset Management, which relates to the interest cost that has been assumed in guidance.

Yes, as I mentioned we expect weighted average cost of debt to increase a little beyond where it is now but to still be below 5% for the full year, and that's what we've incorporated into that guidance.

There are no further questions on the online portal. Well, thank you all for joining. We're available post this call, and if anybody wants to chat. But have a good day.

That concludes our conference for today. Thank you for participating. You may now disconnect.