Goodman Property Trust (GNZ) Earnings Call Transcript & Summary

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

Good morning, everyone, and thanks for joining the call. My name is James Spence, and with me today is Andy Eakin, Chief Financial Officer. Today, we are pleased to share our annual results for the year to March 2024. We'll jump over to Slide 4 to start. High levels of occupancy and sustained rental growth continues to support strong operating results for GMT. We are pleased with the performance of the portfolio with like-for-like rental growth increasing to 6.5% and rental reversion on new deals landing above 20% for this year. This performance is reflected in our operating earnings, which are up over 9% on the prior period. Adjusting for the accretive impact of the change in the treatment of building depreciation, cash earnings increased almost 5% on an underlying basis and distributions were up 5.1%. Higher interest rates have impacted investment yields leading to a 9.5% reduction in the value of our portfolio to $4.5 billion. However, GMT is a long-term investor and looking at over the last 5 years, we see net fair valuation gains of over $670 million. If we go back even further, our 10-plus years, we're looking at over $1 billion. We continue to prudently manage our capital position with over $300 million of new and extended bank facilities established, increasing our availability -- available liquidity and hedging, and it gets future volatility in the interest rate environment, which Andy will go through a bit later on. We'll jump over to Slide 6 and our development completions. The completion of almost $370 million worth of development projects has been a real highlight of the year. Situated in key infill locations across Auckland, we have delivered almost 80,000 square meters of prime industrial space. Targeting 5-star Green Star Built ratings, the workbook has achieved a yield on additional cost of around 8.5% and a vault of over 17 years and all of these buildings completed in the last year are leased. Over to Slide 7. Work continues on our development program with another 50,000 square meters of industrial space due to be completed over the course of '25. With a total project cost of just over $200 million, the workbook is set to achieve a yield on additional cost of around 8.3% to 8.4% with a yield on total cost of around 5%. These assets at the moment have a vault of almost 10 years. 89% of the work in progress is already leased. Our build-to-lease exposure with the final remaining building remains low at about 0.4% of the total portfolio. With a significant development pipeline sitting within GMT across numerous sites in Auckland, we expect development to remain a significant part of GMT's business going forward. The team is also focused on the potential data center opportunity within the existing portfolio, assessing a number of redevelopment sites for their suitability. Slide 8 just touches on the portfolio performance itself. Performance within the stabilized portfolio has been pleasing, with an average rental uplift of 21.5% achieved on new leasing activity. The average warehouse rate for new leasing on our core portfolio was $200 per square meter. The average lease term agreed was over 6 years with a minimal downtime and incentives agreed. We continue to reinvest in our portfolio to ensure our assets are best-in-class -- as Andy will elaborate on later in this presentation, we've invested almost $12 million into sustainability-related upgrades, which includes solar, LED, HVAC and sub-metering. Although the cap rate has -- softening has affected the value of the portfolio, an 8.4% increase in value assessed market rents over the period, softened the impact. Over to Slide 9 and rent reversion. Potential rent reversion to market continues to be a tailwind for GMT. As at 31 March, this equated to around 23% or about $50 million. This will be incrementally realized year-on-year with an average term to reversion of around 4.7 years with about 75% of income subject to full reversion. For the year ahead, we have just around 6% of the portfolio expiring, which gives us -- and that's quite a low number, giving us income security in a more challenging economic environment. I'll now pass over to Andy who will run through our sustainability highlights for the year.

Thanks, James. Good morning, everyone. I thought I'd start on sustainability today because for those of you who have looked at the annual report, you'll notice that we haven't included our normal sustainability information within that. That's because we'll produce an enhanced sustainability report incorporating our climate-related disclosures in July of this year. If you turn to Slide 11, we'll just look at some of the key highlights for the last 12 months. And first of all, for the second year running, we've achieved an A- CDP climate score. That's the highest that's been awarded to a New Zealand business, and we share that accolade with two others. Operational emissions are now reduced over 40% on our FY '20 base year, and we've once again been certified net carbonzero by Toitu. On our Green Star development program, the embodied carbon is around 15% lower than equivalent reference buildings. And when you see our sustainability report in July, we'll provide a lot more information relating to that. If we turn over to Slide 12. This highlights a recent development that we're particularly proud of. It's New Zealand's first industrial 6 Green Star development at Tawharau Lane at Highbrook. And you can see on this slide, the list of sustainability features that are now standard across all of our developments, including this one. Followed [indiscernible] was New Zealand Blood, also a Highbrook, and that achieved a 6 Green Star Design rating. While, it's great that we've now got two 6 star developments in the portfolio. Our commitment remains to 5 star for all of our developments. Turn over to Slide 13, and this illustrates the progress that we've made against our sustainability commitments. All properties have achieved or are expected to achieve that 5 Green Star rating. We've already exceeded our 2025 solar target generating over 2.2-gigawatt hours of electricity last year. LED lighting, that's doing double duty for our occupiers of our buildings, lowers emissions for them and saves them money. We estimate that around $800,000 of OpEx has been saved for those customers across the upgraded properties. The refrigerant and sub-metering projects are both on track for completion in FY in 2025 and 2026, respectively. And worth calling out just one benefit that we've seen for a customer in relation to the sub-metering, where we identified high electricity usage, and we're able to narrow that down to an after ours HVAC running and be able to reset that for them. We turn over to Slide 15. Now this slide has got some of the highlights of the financial results just reported. But as James mentioned, FY '24 has been another very strong operational year for the Trust. I'll talk through the highlights in more detail on the next slides. So first of all, on Slide 16, net property income. -- that's increased $26 million, which is 15% from $177 million in FY '23 to $203 million in FY '24. Very strong like-for-like rental growth of 6.5% contributed $10.6 million of that increase and development completions at Highbrook Favona Road and Roma Road contributed $14 million. The underrenting of around 23% across the portfolio provides strong ongoing support for NPI growth. Turn over to Slide 17 and look in a bit more detail of the financial performance. And despite higher interest cost in this elevated interest rate environment, the strength in NPI growth has resulted in pretax operating earnings, 7.2% higher than last year. With building depreciation being removed from FY '25 onwards, we took advantage of maximizing depreciation deductions during FY '24 switch to diminishing value rather than straight line as we had been using and that resulted in an effective tax rate of 10.5%. Outside the operating earnings, 2 drivers of the statutory loss, the one-off internalization costs of $275 million. And as James mentioned, the portfolio valuation decrease of $478 million. Turn over to Slide 18 and look at cash earnings. So headline cash earnings, which includes the diminishing value depreciation benefits stand at $0.076 per unit. That was 7% up from last year. But we're looking more at underlying cash earnings, which backside that extra depreciation benefit that we took in FY '24. And a like-for-like increase, therefore, cash earnings of 4.8% to a reported $0.0744 per unit. Distributions are over 5% up in FY '23 at $0.062 per unit, and that represents 83% of the underlying cash earnings. We've reaffirmed the FY '25 guidance that we issued back in late February, expecting cash earnings to be around $0.075 per unit. That's after incorporating no depreciation on buildings. If we restate FY '24, that gives us an equivalent like-for-like 4% growth in cash earnings. FY '25 distributions are expected to be around $0.065 per unit, a further increase of 4.8% on the 5% that we've just recorded this year. And that $0.065 per unit represents 87% of cash earnings. Move over to Slide 20 and just look at interest rates. So you can see in the chart that we're reasonably well hedged at between 60% and 70% of our debt fixed for the next 3 years. And this persistently high interest rate environment, that provides us with pretty good ongoing cover. Weighted average cost of debt for the year came out at 4.8%, and we expect that to be similar in FY '25. And our ICR measure at 2.5x, comfortably compliant with the covenant of not less than 2x. That does include some one-off internalization costs. And excluding those one-offs, ICR covenant we've tested at 2.7x. Turning over to Slide 21. And James mentioned before the new and extended bank facilities those that were put in place in March. And we've got a continuing very supportive group of 6 banks and put in place another $310 million of facilities across both our syndicated facility and some of the bilateral facilities. Liquidity advanced at $760 million. That will get some good use this week. First of all, in relation to a retail bond that matures at the end of the week, $100 million. And through June on the repayment of our U.S. private placement notes, our noteholders had the option as a result of the change of manager of GMT to elect for early repayments, importantly, with no [ mec ] hold payable and we expect those notes to be fully repaid next month. You'll note that the debt mix is both shorter and geared more towards banks than would typically be the case for GMT. This is with an eye on potential inflows from fund setup if GMT assets are sold into a fund. Last point to note on this slide, our LVR covenant tested at 32.1% compared to a 50% limit. And finally, for me, on Slide 22, just looking at gearing in a bit more detail. Our reported gearing off the balance sheet at 31.5%, fully committed gearing just a touch over 32% as developments completed in the first half of FY '25. Now, that is outside our preferred range of 20% to 30%. But like liquidity, we've got an eye to the fund establishment and potential inflows into GMT if assets were sold into a new fund. And consequently, we remain comfortable at this level. I'll hand you back to James.

Yes. Thanks, Andy. We'll jump over to Slide 24. As we continue to navigate a more challenging economic environment, we're pleased to see consistency in our operating results, demonstrating GMT's resilience as a business. Although demand has moderated for -- after some pretty outstanding years following the pandemic, supply looking forward continues to be constrained with high levels of precommitment on new developments and low vacancy on existing stock. This supply-demand dynamic continues to support our investment strategy, exclusively focused on the Auckland industrial market, a market with high barriers to entry. Our customers are maintaining a cautious approach given the macro uncertainty. And while rents have increased significantly, they are looking to extract more out of their warehouses through storage product movement and locational efficiencies. Our program of sustainablility upgrades, as Andy mentioned, is also enabling businesses to reduce and get more control of a number of the other operational costs. A significant part of this year has been about setting up the business to enable its future growth. internalizing the management of GMT was a significant milestone in the evolution of our business, and it was great to see more than 99% of unitholders voting and support. The new structure will allow GMT to pursue wider business opportunities, including the establishment of a funds management platform, providing us with alternative options around capital. As part of the internalization completed [ 8 ] weeks ago, we announced our intention to launch a fund to invest in the Auckland industrial market with the flexibility to acquire assets on markets and directly from GMT's existing portfolio and with an initial investment of $200 million from the Goodman Group, GMT is in a strong position to grow our funds management platform of scale. With the ability to leverage Goodman Group's existing relationships with third-party capital, we are now actively working towards setup of this new fund, and we'll update investors at the right time. The realization of this plan will allow GMT to produce superior returns quite in excess of a traditional REIT model as access to third-party capital not only provides a source of funding for growth but brings about the ability to diversify income streams through associated management revenue. With quality assets, committed people, a contemporary business structure and an investment in the market we believe in, GMT is well positioned to execute on the best opportunities as and when they arise. The successful execution of our strategy is expected to support further cash earnings growth in the years ahead and deliver positive outcomes. Guidance for FY '25 includes reaffirming cash earnings of around $0.075 per unit, which is almost 5% on a like-for-like basis up on last year, with a further 5% increase in cash distributions to around $0.065 per unit. Thanks, everyone. That's it for the presentation. I will now welcome any questions.

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

Just on the reversions, sort of come in a little bit below where underrenting has been sitting through the year. Just talk to the factors [indiscernible] there. Just how much of its debt versus any sort of other deals you're doing on maybe not [ go ] through the full [indiscernible] rental growth?

Sorry mate. It was a bit hard to hear you, breaking up. Can you repeat the gist of the question?

Sure. It's sort of just on the reversions coming in a little bit low where underrenting was sitting across the portfolio. Can you just talk to what's seen that come in a bit low, whether it's the caps that you started to call out or whether it's any other deals you've done to not fully put through the extent of market rental growth?

Yes. I think it's a mix of all the above. We put out our rent reversion number this year and last year, which is across the whole portfolio. Obviously, only a certain set of the market reverts to market each year, and that's on expiry or market rent review. There's not many stand-alone market rent reviews. The balance is fixed. We've given you a pretty good picture as to what the next 12 months looks like on Slide 9. And yes, I think it's just a mix of things, Nick, as you mentioned.

No, that's good. And sort of how are you finding things on the tenant side? Is there any increased level of stress that you're observing or any conversations you're having on that front at the moment?

Yes. Demand is definitely moderated. We had a pretty stellar few years coming out of the back of the pandemic as people realized what e-commerce meant for their business. We still are seeing inquiry come through, but it's definitely moderated a bit from those -- the peaks of the last few years. I think what's good about GMT is the large portion of our development land bank that's income-producing. So that's meant attacking a little bit and releasing some of our value-add space instead of redeveloping them at this moment.

That's good. And then I noticed that in the accounts in the [ priso ] you are no longer disclosing individual asset valuations rather than just core and value add, is this just a hit of capital partnerships to not sort of disclose what you're carrying stock at?

Yes. Nick, look, you'll have noticed if you look through the accounts, there's a lot of new disclosures in there following the internalization. So we rationalized a little bit, and that was one thing where we thought we'd take some of the detail out of the accounts. Everything about the values as disclosed in the annual report. There's a big table in there. But yes, your assumption around why the value has gone is fair.

Your next question comes from Bianca Fledderus from UBS.

James and Andy. First question for me was just on Villa Maria. Would you be able to just provide a bit of an update on that? Is that still expected to commence in mid-2025? And when will you look for pre-leasing for that?

Yes, Bianca, so plans are definitely progressing there. We've taken our time to get views on the development from a number of different stakeholders because it's a pretty special site as you would know. The overall plans haven't changed. We're looking to put our logistics estate, which has got some real quality to it and some real presentation to it. We're looking -- we're still in the consenting phase. Over the next 12 months, you'll see us commence, the earthworks will be my expectation in the first buildings and kicking off in about a year's time.

And so when will you start looking for pre-leasing for that, by the way, I guess that.

Yes. We'll start -- I would imagine the back half of this calendar year, Bianca, we'll be talking to customers about occupying the site.

Okay. And then your FY '25 effective tax rate, could you provide some guidance on that?

Yes. There's a reasonable step up into FY '25. We got higher operating earnings coming through and they're taxed at 28% on each dollar. There's no building depreciation and a little bit less leasing activity, both straight leasing and also developments completing. So we see the effective tax rate somewhere around 18% in FY '25.

There are no further phone questions at this time. I'll now hand the conference back to your speakers to address your webcast questions.

The first question comes from Shane Solly at Harbour Asset Management. The question is, what does GMT need to do to achieve the 5% medium-term earnings boost from internalization?

Yes. Thanks, Shane. As you know, internalization is not simply a cost-cutting exercise. We absolutely plan to use the vehicle. It's the best way to access capital and fund our development pipeline going forward and put us on a bit the earnings track, and that medium-term earnings guidance of 5% to 7% that we put out involves building a fund platform over the next 3 to 5 years of around $2 billion plus.

The second question also comes from Shane Solly at Harbour Asset Management. In what areas are you seeing customer demand slow? And how are you managing the risk?

Yes. I think customer demand, because it's a general economy thing, it's slow across the board. When I say slow, it's slow compared to what we saw coming out of pandemic. Is probably moderated to more normal levels. And what we're doing about it, as I mentioned before, we're taking our development pipeline, which a significant chunk of it has got buildings on it that we can re-lease. So we're doing that. We're limiting our speculative exposure. We've only got exposure to less than 0.5% of our entire portfolio at the moment. So it's one thing we're doing. And then I think the overall strategy of continuing to invest in the Auckland industrial market, which has got high barriers to entry. And at a time like this, where demand is a bit slower than it has been, we're still seeing low vacancy and rental growth is exactly what we've been doing.

There are no further online questions.

Any more questions? Or we are done?

We do have another phone question from Rohan Koreman-Smit from Forsyth Barr.

When you say you're actively working towards a setup of the fund, can you give us some color, I guess, on how far discussions have progressed? And also, I think you've talked to this being a core logistics fund. Is that still the case? Are we shipping in stabilized assets here?

Yes. We're working through that process. GMT's portfolio has an opportunity set that gives many, many different options. We've got to assess what works well for both GMT and potential capital partners and those conversations are happening. I think beyond that, we'll update yourselves at the appropriate time as to what that might look like.

Perfect. And I guess just with a decent number of industrial assets completing yourselves and others coming to the end of development pipelines, are you starting to see, I guess, backfill being an issue with a number of tenants kind of giving up historical assets to move into the new build? I know it's something you guys talked about a lot in office, but it seems to be a bit missed in industrial.

Yes. Good question. Looking through the expiries that we had for this year, so I think we had 40 expiries and about 27 of those customers remained. That meant we had about 13 buildings go vacant during the year, and that's for exactly what you mentioned. Moving on dropping space after taking some through the pandemic. I think every one of those has been leased, and that's why we've got such strong occupancy of around 9%, 9.5%. So that is happening, but the market is so tight. It's generally been soaked up by others.

Maybe just a comment on this data center opportunity within the existing portfolio. I guess you've got a quite a low hurdle rate for industrial assets in terms of yield on cost targets. I think it's about 7% and the data centers potentially produce higher. But we've had a number of majors exit New Zealand recently, and you've got a pretty active competitor set in NXDC and CDC. What would be your competitive advantage in that space other than just a kind of lower hurdle rate because you're going to a data center versus an industrial [ share ].

Yes. Obviously, data centers has been a big part of what Goodman Group has done all around the world. It's a big part of their work in progress on pipeline. So a lot of expertise we can lean on in that space. We're looking at whether it's an opportunity for GMT. Our opportunity is basically around the land bank and the assets that we've already got right. We own 50 hectares of a brownfield industrial zoned sites within Auckland. It's close to power, it's close to people. And that is our opportunity because as we all know, it's hard to get a big chunk of Auckland. So that's what we're working on. It's early days. But that's our focus, Rohan.

There are no further questions at this time. I'll now hand back to Mr. Spence for closing remarks.

Thanks all for joining the call. Andy and I are available over the next couple of days, if you want to come and see us. Thanks very much for joining.

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