Goodman Property Trust (GNZ) Earnings Call Transcript & Summary

Welcome, everyone, and thank you all for joining this call this morning. In the room today with me, I'm joined by David Gibson, Deputy Chairman of Goodman New Zealand; James Spence, Chief Executive Officer; and Andy Eakin, Chief Financial Officer. Today represents a very exciting strategic shift for GMT as we outlined plans to form a fully integrated property entity with a very clear strategy for growth. James will outline the key elements of this strategy as we develop the funds management platform and introduce substantial financial flexibility to take advantage of growth opportunities in the Auckland industrial market. A very important component of the strategic evolution is the proposed internalization of the management functions of GMT. And this initiative has been very capably led by David and his capacity as Deputy Chair. David will talk through the considerations and decision-making process followed by the Independent Directors Committee reporting. On behalf of the Board, I can confidently say that this is a truly unique transaction in the New Zealand market. The proposed internalization combined with the ongoing support of Goodman Group, both from a financial and capability perspective provides strong underlying support to the strategic shift we are discussing today. The Board has a very clear plan around growth objectives and opportunities in this market and strongly believe we have the management capability to execute on those plans. I would now like to hand over to James.

Yes. Thanks, John. Good morning, all. I will turn over to Page 3. So we've got 2 things to announce today, the internalization of GMT and the establishment of a fund management platform. The benefits of this change for GMT are all about growth and opportunity. It provides integrated development, management and investment operations within GMT similar to what Goodman Group does. Evolving the business and putting in place a contemporary structure will allow us to establish a fund management business, opening up GMT for more investment and enabling our future growth. Over to slide 4. GMT has been a very active business and internalizing will provide us with an alternative options around capital. It will allow us to move away from the reliance solely on debt and listed equity to accessing funds by teaming up directly with capital partners to access opportunities. The realization of this plan will allow GMT to produce superior returns quite in excess of the traditional REIT model as access to third-party capital not only provides a source of funding for growth, it brings about the ability to diversify income streams through associated management revenue. Effectively consolidating property ownership and management, there will be strong alignment between the business, the people and all the unitholders to drive returns from the platform for all. Page 5. GMT is in a strong position to grow our funds management platform at scale. Importantly, our property investment strategy will not change. We will continue to focus our investment in our preferred Auckland industrial market, a market which remains well positioned to produce superior returns. The quality asset base that makes up GMT provides a number of different and attractive options for partnerships at different points in the investment cycle and this includes a significant $1 billion-plus development pipeline within GMT. Also importantly, the link with Goodman will remain both in name and in substance. The continued Goodman association will provide additional value and credibility with enhanced access to potential capital partners. Slide 6. We are today announcing our intention to launch a fund to invest in the Auckland industrial market with the flexibility to acquire assets on market and directly from our existing portfolio, and with an initial investment of $200 million from Goodman Group, GMT's fund management platform is targeting to grow to approximately $2 billion within 3 to 5 years. The funds management platform will provide greater funding flexibility allowing GMT to participate in new and attractive growth opportunities using alternatives to our own balance sheet. We will be focused on opportunities with the highest risk-adjusted returns within the Auckland industrial market, those where we can apply our expertise to unlock value. Partnering with capital and transacting within a fund platform provides GMT with the best use of its capital while accessing fund management fee revenue and in all cases, maximizing GMT's returns. Disposals of GMT assets under the fund platform enables GMT to be more capital efficient whilst maintaining exposure to GMT's quality assets through our cornerstone shareholding and management. It's got to be at the right price and the right point, however. Over to Slide 7. The implementation of a funds management model unlocks access to new capital and provides the opportunity for GMT to finance its growth objectives without increasing financial risk. Our capital management strategy going forward will be conservative and built around enabling GMT to absorb short-term volatility and take advantage of opportunities as they arise. I'll now hand over to David to talk through the proposal and the process to date and moving forward.

Good morning. It's David Gibson. We're on Slide 8. I led the transaction on behalf of the Independent Directors of GMT. I'll provide you with some more details on the conditional agreement that has been reached with Goodman Group and also cover the process that was followed. In respect to the terms agreed, GMT will pay GMG $272.4 million for the internalization of the management rights and a further $17.6 million for a, some properties co-owned with GMG and B, payment for any performance fee that would be payable in FY '24. That makes a total payment of $290 million. A couple of other important commercial terms. The existing LTIP liability of $41.4 million will be retained by GMG. Also, GMT will have no obligation to pay any performance fees for historic outperformance which has a value of $42.7 million, excluding the $14.7 million included in the transaction amount. The total consideration of $290 million will be used to subscribe for new units in GMT at a value of $2.14 per unit, which was the 5-day VWAP ending on 20 February. The stock closed on Friday up to [ 11:05 ]. And if approved by GMG shareholding, it will increase from 25.2% to 31.8%. On the metrics, we have a binding ruling that the internalization payment is tax deductible. And so the net cost of the internalization payment is $199.3 million and this represents a 9.1% savings multiple of normalized FY '24 savings of $22 million. Deloitte has completed an independent appraisal report on the internalization invalid the internalization of $268 million to $315 million. And so the $272.4 agreed value is at the bottom end of their range. Most importantly, the independent directors are excited about the strategy, the opportunity to transform GMT and propel it to its next phase of growth. Its key point of difference is the establishment of a funds management platform that puts us on a higher growth track. We have a unique set of assets, scale, capability and capital partners to make the new funds management model happen. And as you've heard, GMG is committing $200 million of fresh capital to seed the new Auckland Logistics Fund. On the next slide, Slide 9. In respect of process, GMG put an internalization proposal to GMT in the fourth quarter of calendar '23. A separate independent Board committee, IBC and governance protocols were established and the IBC negotiated the purchase price for GMG. The IBC was advised by multiple advisers, including Macquarie and UBS. As mentioned, the IBC engaged Deloitte to assess the proposal to assist nonassociated unitholders to form their own opinion with the devote favor of the proposal. The proposal requires approval of unitholders at a meeting scheduled for 26 March. There are 2 ordinary resolutions and 1 extraordinary resolution required to be passed at this meeting, and all 3 need to be passed in order for the proposal [indiscernible]. The independent directors unanimously recommend unitholders to vote in favor of the proposal.

Yes. Thanks, David. We'll jump over to Slide 10. Containing all the benefits of the Goodman brand I'm confident we've got the team, property portfolio, customer relationships and market expertise to scale up our business and deliver an investment strategy focused on sustainable value creation and growth. And internalizes GMT will have the ability to recycle capital while earning fee revenue and will reduce the reliance on listed equity debt. There is also the continued performance of the underlying property portfolio, which is producing strong underlying cash flow growth in itself. These elements are combining to provide an accelerated earnings profile of 5% to 7% per year in the next 3 to 5 years. So thank you all, and we're now available to answer any questions.

[Operator Instructions] Your first phone question comes from Rohan Koreman-Smit with Forsyth Barr.

Thanks for putting on a call to go through this. Firstly, you talked to capability and financial support from GMG Group. Are there any ongoing fees, brand licensing that sort of thing that kind of still carries on despite the internalization? And how does any capability support get paid for?

Rohan, it's Andy here. Yes, look, wrapped up and that $272 million is an arrangement for brand licensing and for the ongoing support typical consistency with what we've had to date. So it's included within that.

So if you start a development and GMG is involved, do they still get paid 5%?

No.

No?

No further fees. So all of the fees payable to GMG get terminated as a result of this internalization.

Even if they are helping out on any developments or...

Yes. If we can start with them around their expertise, we get the benefit of that, but there's no further payment beyond the $272 million.

And then maybe you can answer the second one, Andy. Just in this guidance for '25. I see you've put down -- it assumes the transaction completes, et cetera. But can you give us some color on the tax and the management fees? I guess the management fees is -- are there going to be no tax paid given the deduction for the internalization and the management fee now internal costs, I guess. Where does that kind of sit within that '25 guidance with [ $21 million to $23 million ] as a guide?

Yes. We get a deduction for the internalization payment. It's not the full amount of it. There's a number of components in there, but substantially all of that $272 million is tax deductible. That deduction, assuming unitholders support the transaction will become available to us in the current financial year. So we don't expect to pay any tax in respect of FY '24. There's probably 3 years or so, depending on how quickly the funds management business ramps up, but there's probably 3 or so years that we don't pay any cash income tax. So that has been factored into our guidance, but we're not the -- the cash earnings assumes that there's a normalized tax charge within that. So when we give you guidance that's comparable to last year's.

Okay. And then on the management fee component?

Yes. So GPS, if you read through the materials, GPS, which employs our people get sold across to GMT becomes the new manager of GMT. We need to maintain that manager structure. GPS will operate on a cost recovery basis. And the cost that we've outlined in the schedule at the back of the presentation and incorporate all of our expected costs of running the business both the existing GMT costs and what will come across as part of GPS. But no management fee...

Yes, but some of those...

Yes, nothing goes back to...

Some of those get capitalized. So what would be in the P&L?

Yes, some of those costs get capitalized. So as we've noted at the bottom of that schedule as a portion get capitalized and there's a portion get recovered from customers.

Rohan, John here. Look, I think [ I understood ] a bit of detail on that, which Andy is happy to go through with you and James later on. But the reality is that if anyone is going to be paying any 1 fees, it's Goodman is going to be paying GMT fees as the irony of the situation. So -- but yes, like I say, very happy to go through that detail with you one-on-one.

Yes. Okay. I will [ connect with you ] after. But sorry, final question, and it is for you, John. Given your a GMG employee. Can you just give us some color as to why GMG's reason this year is to be a manager of industrial funds? Why internalize this and then invest in it rather than manage it?

Sure. Look, I think the -- I mean, clearly, the world has changed, the cost of capital has changed, the availability of capital has become more scarce. So you've got to look at the future of these kind of vehicles in the public markets and -- which we've done in great depth, and we believe establishing this sort of platform is the right way to pursue additional growth and opportunity. And if you look at it from a Goodman point of view, and you're going to be able to speed with what Goodman is doing and what its earnings ambitions are for its company globally. The expectation from Goodman as this model delivers those sorts of returns that are acceptable to Goodman. And clearly, by reinvesting the proceeds of the internalization plus the fund, that's $0.5 billion it's putting into this business. So that should give you a lot of confidence around how Goodman views New Zealand and this business and the Auckland market.

[Operator Instructions] Your next phone question comes from Arie Dekker with Jordan.

Just 2 questions for me. First one, just in relation to sort of what's implied in the FY '25 guidance. I mean, I guess, given the dilutionary impact of the internalization and obviously only a certain amount of benefit going to cash earnings, it does seem like there is an assumption that there will be a reasonable start to the funds management from year 1. Can you just give any color in terms of how active we might expect to see you being and establishing the platform in FY '25? And if that's -- if my conclusion is right, just from that back of the envelope there is an assumption that will kick off pretty quickly?

Yes. Thanks, Arie. It's James here. We don't go into detail about our guidance, but what I can say is we absolutely plan to hit the ground running. We're kicking off this fund and announcing that today with every intention that we'll be utilizing that vehicle and transacting with that vehicle in the next 12 months. So I'd say it's safe to assume that we'll be doing that.

Yes, sure. And then second question, just in terms of development, I mean coming to the end of a very long run on the [ commuter ] development front, but that sort of is drying up, will -- in terms of this move that you're making and also sort of in terms of, I guess, guidance outlook, which is more medium term, 3 to 5 years, 5% to 7% growth. Will this change to the internalized vehicle and funds management platform? Does it -- do you see yourself being more active on the development front than you might have been on the status quo arrangements? And how might that look?

Yes. I think this is about -- the underlying property strategy hasn't changed, Arie. You'll see us doing the similar types of products, high-quality logistics in Auckland. This is all about having alternatives to fund that. So we'll look at developments on a case-by-case basis. We've got $1 billion-plus development quite many of those assets were picked up in the last 4 or 5 years. So looking at each opportunity on a case-by-case basis, we'll continue to do -- we'll be building the same type of products that we've been doing for at least for a little while.

Your next question comes from Nick Mar with Macquarie.

Just following on from that. Could you talk about how you might look at making a decision whether on a potential acquisition or development is within GMT or fund?

Yes. Nick, it's James. We'll look at opportunities on a case-by-case basis to determine the best source of funding. The introduction of the funds management platform is to complement and not replace GMT's ability to leverage its own balance sheet and drive returns. But I think it's safe to say that transacting within the fund platform will give us the most efficient use of our capital. So we'll constantly review that capital allocation and assess those opportunities on a risk-adjusted basis.

Are there any assets currently on the balance sheet that most logically fit within that fund that could, I guess, accelerate the uptake providing the additional capital to the fund?

One thing we can say, I think, and you'll know this Nick is -- what investors are looking for all around the world. There's industrial assets, and data centers and our portfolio has got value-add, core development aspects to it. So I think we expect it to be pretty attractive as an opportunity and a source of assets to see our funds, we won't go into specifics or which ones right now.

No, that's great. And then just lastly on the Goodman Group Holding. Is there any lockup on that proposed scrip and on the stake of general in terms of do they have to stay here longer in order to keep relationship going? Is there any detail there?

No. That's the to answer that.

We are showing no further questions on the phones at the moment. I'll hand back over for online questions.

Thank you. Any other questions?

Yes, Mr. Chairman, 1 question from Brent [ Malibu ] at Business Desk. The question reads, can you explain in more detail the anticipated savings of the internalization proposal?

Brent, it's Andy Eakin here. So look, we've given some outline around the savings in the back of the presentation. We don't typically go into more detail around these sorts of things in terms of bringing it down any further but we've certainly taken a conservative view around what we expect the costs of the business on a go-forward basis to be.

No further questions, Mr. Chairman.

Right. So there's no further questions. Thanks, everybody, for joining us. And as I say, the management team are available for one-on-one. So I look forward to catching up with you, and thanks for joining at a relatively short notice. Thank you.