Goodman Property Trust (GNZ) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Goodman Property Trust FY '25 Interim Results Webcast. [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. I'm James Spence, as mentioned, and with me online is Andy Eakin, our CFO. Today, we are pleased to share our results for the first half. At the beginning of the year, we successfully completed the internalization of GMT. This was following overwhelming support from the unitholders with over 99% of votes cast in favor. I'm pleased to share today that it has been a seamless transition for our customers, contractors, service providers and employees. Our business has been able to remain focused with no change to the Goodman brand or the team members responsible for delivering these services. It has also been a successful transition from a governance perspective. One of the key operational differences with the new structure is that directors and staff are now employed within the business. A remuneration framework, which links outcomes for staff with the success of the business has been adopted to ensure we attract and continue to retain the best people with the skills and knowledge to ensure GMT's ongoing success. GMT is well positioned for the next phase of its business growth. And as such, we are activating our future development pipeline with Waitomokia, which I'll talk about a bit later in this presentation. We're also focused on the potential data center opportunity for GMT. We have identified certain value-add sites within the portfolio that benefit from good connectivity to existing electricity and data networks and as such, we've been working through design and programming work for power infrastructure to these particular sites to ensure we're well positioned to capture a significant slice of the demand we're seeing globally for the sector. As investors would know, the main driver for the internalization was to provide more options around capital to fund our growth plans. And on the funds management platform, we do continue to work directly with potential capital partners with a mandate to invest in New Zealand. GMT's significant foothold in the tightly held Auckland market offers a number of different and attractive options for partnerships at different points in the investment cycle. Now over to the next page. In terms of the results themselves for the 6 months, it's been an active year for GMT with some really pleasing results coming through in the underlying fundamental business. We've completed 3 developments in the first half of the year, adding over 50,000 square meters of high-quality industrial space to the portfolio. We've also completed over 50,000 square meters of new leasing with rental reversion on new deals above 30% and like-for-like rental growth increasing to over 7%. Strong results in the investment portfolio have also translated into a positive financial result despite the increase in net interest costs and 11% increase in net property income and a 44% reduction in corporate costs have secured operating earnings tax growth of over 10%. With valuations also stabilizing across the portfolio, reflecting the market, we've also recorded an interim profit of over $45 million. Cash earnings for the half have also allowed us to reaffirm our guidance of $0.075 for the full year and dividends of $0.065 per unit are also reaffirmed representing an increase of almost 5% on the year prior. On Slide 7, you'll see an image of our development completions of late. We've completed developments at Roma Road and Savill Link, which conclude a period of intensive development for GMT. Since repositioning the portfolio to focus solely on industrial, we've developed over $1 billion of high-quality logistics assets. The assets completed this financial year have a value of over $200 million and a yield on additional costs of almost 8%. These 2 developments show the value in activating brownfield value-add sites within the portfolio. Over to Slide 8. The portfolio has continued to show resilience through a more challenging operating environment reinforcing the importance of well-located and efficient logistics facilities in the Auckland market. Across our $4.6 billion portfolio, over 98% of our sites are leased with an average lease term of 6 years. The portfolio continues to be managed prudently with arrears of just 0.1% of monthly income as at 30 September. A desktop review by independent valuers has also confirmed, as I mentioned, stable property values over the period. Over to Slide 9. Rent reversion continues to be a tailwind for GMT as new leases are agreed and reviewed to market. Comparing key stats over the last 3 years paints the picture. Like-for-like rental growth has grown from 5% to 7%, while our average core warehouse rates on new leases has grown from $139 per square meter to $219 per square meter. On the 50,000 square meters of space where new deals were completed, the average rental uplift was in excess of 30% with incentives sitting at less than 2%. With only 1.4% of portfolio income due to expire before the end of the financial year, GMT remains well positioned. Over to the next slide on Waitomokia. Looking ahead to our future development pipeline, plans for Waitomokia, which is the [indiscernible] land by the airport are progressing well. Following an extensive consultation process with mana whenua and other stakeholders, we've developed a unique master plan for the site. Waitomokia has an important cultural history and has unique natural features. To acknowledge and protect this, elements of the design have been covenanted through a notified plan change application. Approval of the precinct plan is progressing with infrastructure and enabling works planned to begin this year and through the summer with the construction of the first industrial facilities expected to commence in FY '26, i.e., calendar next year. Waitomokia is set to be a highly sustainable distribution hub. We're still expecting it to produce around 110,000 square meters of industrial and warehouse space, which is in line with our original underwriting, surrounded by substantial landscaping, public green spaces and recreational areas. I'll now pass over to Andy to run us through the financial results.

Thanks, James, and good morning, everyone. I'll start on Slide 12 and just touch on some of these key points. But look, just to reiterate what James has talked about, it has been really pleasing to see the very strong operational results coming from the portfolio in the first half of this financial year. That's particularly evident in the net property income, up more than 11% on the same period last year, and I'll delve into that in a moment just a little bit further. As James said, profit after tax of $45 million, pleasing to report a profit again this period after the fair value losses that we've recorded over the last few periods, valuation stabilizing and as a result, that profit being reported. Both cash earnings and distributions were in line with our guidance from the start of the year. Cash earnings reported at $0.0347 per unit and distributions for the half at $0.0325 per unit, up 4.8% on the same period last year. You see also on that slide that our NTA stable compared to 31st of March at $2.012 per unit. Move over to Slide 13. And this breaks down the net property income movement, as I mentioned before, up 11% from $100 million to $111 million. The 2 real drivers from that very strong like-for-like rental growth of 7.3% contributing over $6 million and the development completions contributing $5 million. Those were principally at Roma Road, Bush Road and Favona Road. We turn over to Slide 14. And this is some new information that we've added in relating to the corporate costs just to help understand and explain the change in corporate costs following the internalization at the end of last financial year. As you'll see from the table on the left-hand side, the key changes really are the replacement of the fees that were charged by the management previously with salaries and also directors' fees, which are now incurred directly within the trust. We did put out a comprehensive document in September, outlining the board's approach to remuneration. If you haven't seen that yet, I recommend taking a read and there's a link on that slide to help you find that. One thing worth noting again is that neither John nor Greg have elected to take their directors' fees for this year, and we expect that to continue. Turn over to Slide 15, and this summarizes the profit and loss statement. That strong operational performance that we've mentioned, really evident here in the 10% increase in operating profit before tax. As James mentioned, interest costs have increased. That's from a higher weighted average cost of debt sitting at 5% flat and less interest being capitalized to developments as we run through the tail end of that record level of development activity that we've had. You'll also see a very significant step-up in the tax expense, the 2 things driving that principally. First of all, the removal of the building depreciation that was effective from the beginning of this financial year and also the higher operating profit flowing through to higher income tax. Despite all of that, we've still grown the after-tax operational earnings in absolute dollar terms at $61 million last year and just over $62 million for the first half of this year. Turn over to Slide 16, and we'll look in some detail just at the preferred cash earnings measure that we use. First thing I want to note in case you haven't picked up that we've restated the prior period to remove the building depreciation benefits so that there's good comparability between first half last year and first half this year, where we don't get the benefit of building depreciation anymore. With Waitomokia now in active development as well, interest capitalized to land has reduced. You can see that the capitalized borrowing cost of land for the first half this year, just under $0.5 million. So on a like-for-like basis, as I mentioned before, cash earnings $0.0374 per unit. So that's up 2.5% on last year, and we are reaffirming our full year guidance at $0.075 per unit, that's 4.5% higher than last year. We turn over to capital management and first to Slide 18. So we discussed at year-end -- with the March results back in May when we released that, that the maturity of $100 million retail bond and also repayment of our U.S. private placement notes as a result of the internalization absorbed over $250 million of the liquidity that we were holding back at March. Early October, so just after our half year balance, we returned to the wholesale bond market and really pleased with the level of interest that, that generated and our ability to issue a 5-year $150 million of green wholesale bonds at an issue margin of just 145 basis points. With that being a green wholesale bond, that now takes our total green bonds and green loans to $600 million. After we completed that wholesale issuance, we canceled early a short-dated bank facility, and that leaves us today with liquidity of almost $400 million. Slide 19 shows you what our interest hedging profile is, and we did leave our bonds fixed. We didn't swap that back to floating when we issued it. And that's lifted our overall hedge position to around 80% of our drawn debt at fixed rates for the next 12 months. As I mentioned before, the weighted average cost of debt rose a touch to 5% for the half, but we do expect that to drop again across the second half and our full year expectation is 4.7%. Despite the higher interest costs, the strong income growth that we recorded in the first half has meant that our ICR has improved slightly to 2.6x, and that compares very favorably with a covenant of not less than 2x. Then finally from me on Slide 20, just a look at gearing. Our reported LVR at the end of the first half has increased by less than 1 percentage point to 32.4%, having now completed our record levels of development. We've got $20 million of commitments at Waitomokia and the Highbrook Crossing Town Center, and that results in a fully committed gearing of 32.7%. So with that, I'll pass you back to James.

Thanks, Andy. Just to wrap up, despite a more challenging operating environment, we have continued to refine our business, progress new investment and development initiatives and continue to see underlying market fundamentals support positive financial outcomes for the business. We will continue to remain prudent with our capital management decisions, focusing on the delivery of our core property services while preparing to take the business forward into the fund management and data center space. The resilience of the portfolio has given us confidence to reaffirm our guidance with cash earnings of $0.075 per unit for the full year, which is pleasing. As I mentioned, distributions are also reaffirmed a $0.065 per unit, up 5% on last year. So with that, I'm happy to take any questions.

[Operator Instructions] Your first question comes from Nicholas Hill from Craigs Investment Partners.

On your slide on gearing, you've commented your gearing range is dependent on future activity, in particular, the establishment of a property funds management business. Would this largely be the result of after moving assets into a property fund, your directly held balance sheet is smaller and so a given development will increase gearing to a greater degree?

I'll get Andy to answer that question.

Nick, yes, so look, we do expect that there'll be assets that will move across from GMT into the fund. And with the result of the cash coming back into GMT, you'll see debt paid off and gearing levels come down. We think it's likely that GMT will become a more active business. There will be fund management. There will be development on GMT balance sheet. We've talked about the potential data center opportunity. So as GMT itself becomes more active, we think lower levels of gearing will be appropriate within GMT itself. Where that will sit, we haven't yet determined and that will give some more color on that as we work through the establishment of the funds management business.

Okay. And then just on the funds management business and progressing with capital partners. I guess, since the beginning of October, the New Zealand, Australian and U.S. long-term bond yields have materially increased, which is largely being attributed to the U.S. election and expectations of tariffs and wider U.S. fiscal deficit. No one really knows to what extent and when these may occur. But compared to previously, I guess it's fair to say markets expect both higher interest rates and higher long-term bond yield volatility. Is this backdrop starting to be reflected in discussions with potential capital partners?

Yes. Good question. Nick, I think that space is moving, obviously, quite a bit. I think we're going to go back to what this whole business plan does for us. We internalize basically to give us more options around capital, and that's what it does. But it is important that when we do put this in place that we do it at the right transaction, at the right time, at the right price and also with the right capital partner. GMT has an asset base that's been built up over 20 years. It's assets that are really hard to replicate. So we have to throw all of those big elements and decisions into the pot when making a decision. And one of them, of course, is the outlook for interest rates and the impact on GMT. So we'll be monitoring that, Nick, but it's something we think about on a daily basis.

I mean all else equal, it would sort of like moderate the expected ramp-up profile of the funds management business, right? I mean if I'm a capital partner, I may be more reluctant to sign a deal if I've less conviction or my WACC assumptions due to higher long-term interest rate volatility.

Well, there's lots of conversations going on, Nick, in that space with capital partners. We've got to pair the right return profile and assets that work for GMT and work for a capital partner at the right time.

Okay. And then just a last one for me. After enabling works are completed for Waitomokia, what is the approach for commencing the first stage, will you be seeking a tenant's commitment or will be done on a spec build basis?

Yes. So Waitomokia is about 110,000 square meters of space. It's probably 1/4 of the size of Highbrook. I think the look and feel and actually the size profile of what you see at Highbrook, you've got smaller facilities right from 300 square meters right up to 30,000 square meters, a lot of different offerings has worked for us. It enables the park itself to be a sort of fostering ground for new customers as well. And a lot of those were spec, a lot of them were design build. And I think we've got flexibility in both. Generally, we would spec smaller space in units and generally, the larger buildings are design build. I think the same model that you saw us use at Highbrook will come out at Waitomokia, and that allows us to balance risk as well within GMT. We can really control how much spec exposure we have at any one time.

Your next question comes from Arie Dekker from Jarden.

Yes, well down on the re-leasing through the period. Just a couple of follow-up questions just on a couple of points Nick touched on. So just on Waitomokia, firstly, have you got an idea yet on how many square meters you're likely to sort of kick off with? And also, can you just talk a little bit about what you're seeing in the catchment in terms of demand for new build?

Yes. So 110,000 square meters, Arie, if you look back over 10 to 15 years of development for us, we generally built within our portfolio anywhere between 30,000, 40,000 square meters a year. Obviously, that ramped up in the last few years when our pipeline sort of -- our work in progress ballooned up to about 110,000 square meters. I think an appropriate time line to be thinking about for Waitomokia is probably around about 5 to 7 years with a relatively smooth profile, but that's dependent upon lumpier design build assets, what happens in that period. But I think that's not a bad sort of time line to be using.

Yes. And what are you seeing currently in terms of demand and the catchment for new build? Just a bit of color on that.

Yes. I think in general, demand has definitely moderated through the middle of this year, and I think that might extend into the new year too. But what we are seeing, and we're actually seeing this globally through the balance of Goodman Group is, there are a number of conversations happening with customers who are looking to get set for '26 and beyond. Despite what's happening in a more challenging economic environment, there's still that growing need for warehouse space close to the end consumer, that's still there. So we've had, for instance, a couple of big inquiries lately that are more medium-term dated, '26, '27, and they need to be thinking about those now. So that's starting to come through a bit, Arie. But demand, for sure, through the middle of this year has moderated.

That's helpful. And then just on the logistics fund. I mean I think what you were sort of reiterating there is that you will be patient and a whole bunch of things need to clearly align so that it's accretive. Can you just sort of, I guess, give an indication of whether -- because you guys are obviously living this day-to-day, just on whether you think there's a possibility that you might announce something within the FY '25 year or whether you think the time frame is now may be longer? And then also just any comment on what we might expect in terms of GMT's commitment? I think it was a $200 million commitment, whether that will be brought forward in terms of the kickoff. Just any color around that?

Yes. I mean Goodman group's commitment that they made as part of the internalization hasn't changed. That's still there. I think as you'll appreciate, it's really important that we don't drip feed information into the space. We've got to tell you when we've got more concrete plans and announcements to make. I'd say we are making progress in the space. We're happy with where we're at. We've got a lot of options in front of us. We've just got to make sure we pair that transaction for what we need and what a partner needs at the right price, at the right time, Arie. And I wouldn't want to put a time frame on that because it's more important that we do the right deal with the right partner.

Sure. And then just turning to data centers briefly. Firstly, just sort of what sort of investment levels are going to be required for the enabling infrastructure works and when that might be timed? And then anything you can sort of say in terms of -- are you actively engaging with potential partners and customers yet?

Yes. Again, I think we'll just sort of update you when we've got more concrete plans. But what I can say is there is a -- as you would know, Arie, and investors would know, there are a vast number of requirements to get a data center up and running. It's not just the power. It's the zoning, it's the geotech, with power being the most crucial, we've looked at our 50 hectares of brownfield. We are focused on 1 or 2 sites in particular in the Central South Auckland, Penrose and Mount Wellington area, given their attributes and particularly their proximity to GXPs. So at the moment, particularly on those 1 or 2 sites, we're designing up, okay, what does actual power infrastructure look to and within that site. It's the power piece. And we expect to be doing that over the next 3 or 6 months, in particular. At the back end of that, we have more concrete plans as to actually what that power cost time frame and actual capacity looks like. And then I expect to be able to give you more concrete plans. But it's really design [indiscernible] and it's quite marginal in terms of cost. It's less than $1 million, put it that way.

Yes. No, no, that's really helpful. And then last one, just for Andy. What was the CapEx on the stabilized portfolio in the half?

Yes. Arie, we haven't disclosed that. We expect that there's better information that we can give you full year because it's quite skewed between first half and second half. I appreciate that we have been giving that, but we'll come back with that information for the full year.

And just in terms of, I guess, for the full year expectations, it has been more elevated in '23, '24. Is that sort of -- should we expect it will be down a bit in 2025?

It will be pretty similar this year. We've still got quite a lot of the sustainability upgrades that we're working through. A lot of those come to conclusion during calendar '25. So you'll still see some of that coming through in this financial year. But we'll give you some more detail on the full year result.

Your next question comes from Nick Mar from Macquarie.

Just on the average core warehouse rates that you're seeing on new leasing over the first half, was there anything in there around mix that might have driven that circa 10% increase. It's obviously quite a jump in a period where most commentators haven't seen any lift in market rent.

Yes. Yes, good question. I mean, it is an interesting market. I think we see some outliers every now and then where because demand has moderated a bit, you'll see some landlords that actually put out some lower rates. But in the main, actually, rents have actually been pretty strong. Market rents have been up, I think, 45% in the period between March '21 and '24. Our blended core market rate across GMT from the valuers is about $200. And you'll see the leasing that we've done in the last 6 months is actually stronger than that. The new build market, to me, where we are pitching our sites on redevelopment of value-add sites, we can be anywhere from $220 to $250 a meter. So there's still pressure there. And that's even with construction costs coming down a bit in our view. So if you combine that with -- actually, there's probably only about 0.5% of the market being spec'ed at the moment. In the main, rents are holding up. I think maybe they're taking a bit of a breath at the moment and stabilizing, but they're holding out. What we are seeing -- I know I mentioned there that incentives for the last 6 months in the stabilized portfolio, less than 2%. We are seeing in the development space incentives creep up a touch. They've been 4% for a long time. I see them averaging out at the moment at about 6% to entice people to move in what is a more challenging environment.

Okay. That's really helpful. And then in terms of the occupancy, you called out sort of the Franklin 1, you've got that Roma Road space. Is there anything else that sort of popped up in the portfolio to bring you down to the 98.1%.

No. Within that, you've got 10,000 square meters of vacancy and value-add space at one of our sites in Wiri. One of the challenges there is we're lining that up for development in 2 years. So we're sort of balancing off leasing flexibility with wanting to develop that site. We have signed a heads of agreement now on the final building at Roma Road, but that's conditional, still a ways to go on that. But that's in line with our original underwriting when it comes to rents and incentives in line with what we talked about. So nothing major, Nick. Those are the 2 biggest...

Okay. That's great. And then just one for Andy. Can you just talk through the swap closeouts during the half?

Yes, we closed the cross-currency interest rate swaps that were associated with the U.S. private placement notes when those note holders elected for repayment following the internalization.

Okay. Right. So this wasn't to do with interest rate hedging.

No, no. It was just the close of the cross currency [indiscernible].

[Operator Instructions] Your next question comes from Rohan Koreman-Smit from Forsyth Barr.

Just on Villa Maria, sorry for using the old name, I'm not good at pronouncing the other name. What was the trigger for that going into development. You haven't really put any -- from what I can see, you're talking about enabling work starting in the second half. So kind of why is it in development now? And then on the back of that, you talked to it being kind of scale. I think it was about 1/3 the size from memory of Highbrook. In Highbrook, I guess you used to still treat the land as capitalized and remove that from cash earnings once that development was underway. I was wondering if once the Villa Maria land is prepped, how you'll be treating the land kind of going forward, given you have a very long build-out, 5 to 7 years. And there'll obviously be a cash holding cost associated with that land?

Andy, I'll get you to answer that, please?

Yes. So yes, Rohan. Look, you're right, the commencement of the site preparation works, which will roll into infrastructure works for us, was the trigger to treat that whole site as an active development, and that will continue to be the case while we work through that. Similarly, you're also right that at Highbrook, when we had fully serviced land after we've done those infrastructure works, we were treating that as land and therefore, the interest that we capitalized, we made a decision to add that back or to deduct that within the cash earnings calculation. If we end up in that similar situation with Waitomokia, you can expect that, that's the same sort of treatment that we would have. How much of that and when that happens will depend very much on the pace of development activity of new buildings on that site, but there shouldn't be any difference to the accounting treatment of that to what we had with Highbrook.

Perfect. And then just on the capital partnering, I think it's been quite well covered off so far, but I think you said core stabilized logistics fund when you internalized was the target. Just given the fall in short-term rates and the rise in long-term rates, it's probably more dilutive to sell stabilized assets, say, in the next 12 months than it would have been when you initially started this process. Has the strategy changed? Like are we going to see more development type assets like the DC opportunity versus a stabilized logistics fund as this was initially pitched?

Yes. Actually, at the time of the internalization, Rohan, we said all options were on the table that we hadn't chosen a path at that time. Where we go on that path is exactly, as I mentioned before, teaming up the right opportunity at the right time, with the right partner. And I think the good thing about GMT is it's got all those different options. We are talking to partners about specific opportunities, but I'm not going to get into more detail at the moment about what they are. I'm really cognizant of drip feeding information.

Yes. All good. And then just on economic rents, you talked at $220 to $250 a meter in terms of what your new builds kind of sit at. There's quite a bit of vacancy now back in the industrial market, especially when you include subleasing. And development costs are obviously coming down. When you look at potentially stabilized or maybe even lower cap rates depending on what interest rates do, do you see that economic rent side of things continue to drift higher? Or do you think there's downward pressure as the cost to develop comes off?

I actually think we need to think a bit more macro about the vacancy rates. Vacancy rates of 1%, 2% or 3% in a market is actually really low. And that's on a global context, Rohan, like in an environment where vacancy a sub-5% in the past, we've seen still seen very strong rental growth. And in a market where there's 1%, 2% vacancy, actually, there's not a lot of options for customers because you've got specific size requirements within that as well. So I think while vacancies ticked up a bit, it's actually from a global context, really slow. And if you pair that with land supply dynamics in Auckland with anywhere, I hear sort of 10 years of greenfield land supply at current run rates, live zoned within the Auckland area. The product you've got already is going to become more and more scarce and therefore, more and more valuable, I think. So I think the dynamics there for strong rents remains.

And then maybe this is one for Andy. Just trying to kind of square away how your weighted average interest cost falls so much in the second half. You were issuing debt at 5.1%, you're 80% hedged. How does the second half interest costs come down 60 basis points given that dynamic? Is there something else kind of going on here, like the closeout of the USPP and cross currency that's working in your favor?

Yes, very much. So that's worked in our favor. We get a full half benefit of that in the second half. And also just expectation of lower interest rates through that half, which we all hope will come to pass.

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

Yes. Thank you. I've just had a look through the 3 or 4 questions we've had online. I think we've covered most of them off. There's a question about customer risk and customer demand. I'll point to sort of -- it's been a moderate sort of customer risk at the moment. We go through our standard process for risk, vetting customers on their way into the portfolio and monitoring them on the way through. I think in the past, we've given some good context as to the security that we have on our customers. So in the main, if it's a private business or not a government or a multinational, we have 12-month bank guarantees. And for the small number of customers we had, unfortunately, get into financial trouble in the first half. I think all of them had some form of security that we could use, including the largest final. So we'll keep monitoring that. The balance regarding incentives, I think we've covered off. So thank you all for joining the call, and we're available for one-on-ones in the next couple of days. Thank you very much.

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