Goodman Property Trust ($GNZ)

Thank you for standing by, and welcome to the Goodman NZ FY '26 Full Year Results Conference Call webcast. [Operator Instructions] I would now like to hand the conference over to Mr. James Spence, Chief Executive Officer. Please go ahead.

Yes. Thanks very much. Welcome, everyone. With me here is Andy Eakin, our CFO. I'll just roll through the slide pack starting on Page 4. We'll do a presentation and overview and go to Q&A. This has been a year of significant progress for the business, combining strong underlying leasing activity and robust cash flow growth with a meaningful strengthening of our balance sheet following the successful launch of our inaugural fund. Further to the establishment of the Highbrook partnership, we purchased Felix Street for $53.5 million, progressed development at Mount Wellington and Waitomokia and initiated an on-market buyback program. We also completed the transition to a corporatized and stapled structure, receiving both unitholder and bondholder approval in March. On the portfolio, occupancy sits at around 97% with a WALT of 4.9 years. Leasing produced rental uplifts in excess of 20% being a significant driver of our like-for-like rental growth of a touch over 5%. Financially, operating earnings before tax increased 3.6% to $159.8 million. Cash earnings grew by 5.7% to $0.098 per share. Our balance sheet is in excellent shape following $700 million of capital recycling, resulting in look-through gearing of just 19.8%. We'll jump over to Slide 5. Our strategy is built around 3 pillars, which complement each other, investment, development and funds management. Our conviction on the Auckland industrial market remains strong. As New Zealand's key gateway city, infill markets are tightly held and land constrained, making our portfolio increasingly difficult to replicate. And with significant under-renting following 30% market rental growth over the last 5 years, the focus remains on future-proofing assets to meet the evolving requirements of customers with those unable to support automation and modern warehousing to be recycled through disposal or redevelopment. Our in-house development team brings deep expertise across planning, design and delivery with a pipeline in excess of $1 billion that is increasingly shifting towards infrastructure, supporting growing power needs of automated warehousing, AI and potential data center users. We are also expanding into the development and sale of land parcel and turnkey assets to meet demand in markets where opportunities for direct investment are limited. The successful establishment of the Highbrook partnership has created a scalable platform that diversifies revenue and unlocks access to third-party capital. And with equity capital becoming more selective, our partnership and debt capital programs have enhanced liquidity and funding to support our high conviction value-add strategy with disciplined capital rotation remaining central to optimizing outcomes for Goodman and our partners. Go to Slide 6 on capital management. Adopting a funds management model has enabled GNZ to pursue its growth objectives without increasing financial risk particularly important in an environment of increasing capital scarcity. We have approximately $350 million in funding capacity on top of our current commitments before reaching look-through gearing of 30%, giving us the ability to fund our in-built development pipeline, progress develop to sell activities, target on-balance sheet acquisitions and execute things like the buyback program. On the buyback, purchasing GNZ shares at current prices presents an attractive risk-adjusted return for the business and is accretive both to NTA and cash earnings per share. We launched this program in February, purchasing around $16 million worth of shares so far at an 8.3% discount to NTA. This program is strongly aligned with our investment strategy, and we will seek shareholder approval for the continuation of the buyback at our Annual Shareholder Meeting. This will include a proposal to ensure that the buyback does not result in any shareholder being forced to sell as a result of the takeovers code. I'll jump over to Slide 8. Leasing momentum was building at the start of the year following what was a pretty quiet 2025. And while we're still fielding inquiry from some quite significant footprints, decision time lines for expansion and relocation have extended since the beginning of the conflict in the Middle East. That said, industrial market fundamentals remain strong and the long-term outlook is positive. While speculative development has picked up, total new supply remains below recent years. Our pipeline is deliberately concentrated in constrained submarkets close to end consumers consistent with the global trend towards last mile warehousing. The other global trend is a focus, of course, on more advanced automation and operational technology within warehouse spaces. And while we're a bit behind in New Zealand, we're definitely seeing more customers commit substantial capital to their own facilities. On Slide 9 and our portfolio performance. We leased 132,000 square meters of space. That represents about 11% of the total portfolio. We achieved a rental uplift of 22% on new leases and an average warehouse rate of $220 per square meter on the core portfolio, and that reflects a range of about $205 to $206 -- sorry, $265 per square meter with the variations within that largely driven by size. Vacancy took on average 2.3 months to lease. And while incentives are creeping up with a bit more spec competition, when you break out our renewals and simply look at new leasing on the stabilized portfolio, incentives were still around that sort of 4.5% mark. Average occupancy for the year was 97.7%. Underlying like-for-like net property income growth was 5.3%, representing $10 million. Pleasingly, arrears remain well controlled at just over 0.7% of average gross monthly income over 30 days. Page 10 and looking at the embedded growth within the portfolio. 9.5% of portfolio income expires in FY '27 with the portfolio weighted term to market review or expiry sitting at around 4.3 years. The potential rent reversion to market, we've given a bit more color here than we have in the past, is about 16.2% or 19.5% when you include vacancy, and that's a like-for-like of the stats we've done previously. In dollar terms, that's about $41.5 million. This is a meaningful tailwind that will continue to support earnings growth over the coming years. On Page 11. We are completing settlement on Felix Street later this week. Development planning is progressing on the 5 hectare site, featuring a combination of multiunit buildings and stand-alone facilities targeting a 5 Green Star rating with construction planned to commence in the second half of FY '27. Development is expected to remain a significant component of GNZ's business as we expand into the development and sale of land parcel and turnkey assets to meet demand in markets where investment and owner-occupier opportunities are limited. Felix Street is a really good example of this. A measured allocation of invested capital to develop to-sell opportunities introduces more active income streams while remaining modest relative to the scale of GNZ's core business. We've got the ingredients to make this work. Our development activity is to be consistent with our existing experience and capabilities. Our preferred investment locations and building characteristics are not changing. And on top of that, GNZ has an in-book development pipeline of over $1 billion, underpinning the opportunity while still enabling GNZ to grow. At Mount Wellington, the first stage of regeneration is well underway with demolition and enabling works complete. This multiunit development being undertaken on a build-to-lease basis will provide around 22,000 square meters of high-quality Green Star-rated warehouse space. Construction has commenced and the project remains on schedule for completion in the first half of 2027. Finally, for me on Page 12, on power and infrastructure. This is an area of growing strategic importance for us. At Waitomokia, earthworks are progressing with the first development site ready for above-ground construction in the second half of FY '27. That site, as you can see on the map there, is around 3.5 hectares and supports NLA of around 20,000 square meters. At Penrose, contracting for a works agreement on a power connection is imminent, and we expect 32 MPA of on-site power to be live in the first half of 2028. It's not that far away. With around $20 million committed to preliminary design and infrastructure works, our focus remains on having a development-ready site with the power and design flexibility to maintain optionality to meet the requirements for future data center customers. And with that, I'll hand over to Andy.

Thanks, James, and good morning, everyone. So moving on to Slide 14. Look, another really strong result for us this year. It's been very pleasing to be able to talk about that today. As James said, it's been a year of very significant transformation for the business, first with the hybrid fund settling at the interim balance date on the 30th of September and then following with investor approval for corporatization and stapling on the 31st of March, right on our full year balance date. You'll see changes in how the result is made up. The financials, probably the best way to describe it will be noisy for a couple of years as we roll through those changes, but we will give you as much detail as we can to help unpack that. Some great stats on this slide, really reflecting the strong year and that transformation, and I'll cover them in detail in the next few slides. Turn over to Slide 15. So with this bridge from net property income to net operating income in FY '26, you can really see the significant change that comes through in how the result gets presented with Highbrook exiting the portfolio, the directly held portfolio at the midyear and our share of the associated operating earnings coming through in the second half, $22.3 million. You can see also $10.8 million of fee income earned from the funds management platform. We do, however, only recognize 29% of this being the share earned from partners. So that's $3.1 million before tax that flows through to cash earnings. As James mentioned before, a really pleasing 5.3% like-for-like rental growth across the whole portfolio. Move on to Slide 16 and drop down to the net interest cost line, 38% lower, driven principally by repayment of all of our bank debt at GNZ in September on settlement of the hybrid fund. We still have substantial cash balances and interest earned on those deposits contributes also to that lower net interest cost. And we have seen an increase in the interest relating to leasehold land as we roll through ground rent reviews at the Westney holding. Corporate costs I'll cover in the next slide in detail and share-based payment expense, $4.2 million. This relates to the new long-term incentive plan that was established on the internalization of the old Goodman Property Trust. A second grant under that scheme was made in FY '26. Lower development activities contributed to a slightly higher effective tax rate sitting at around 20%. And for FY '27, the year that we're now in, we expect that to be about 19%, benefiting from some investment boost. Revaluations on a look-through basis were $111.2 million, and that's the key driver in the 126% increase in profit after tax to $248 million for the year. Turning over to look at corporate costs in a bit of detail. So while net corporate costs increased by 26%, importantly, gross corporate costs were up by less than 6% for the year. Contributing to that increase in net corporate costs, we recognized less within property expenses. But on the other hand, we earned fees, which offset that. There was lower capitalization to developments as the levels of activity were slightly lower than the prior year, and we categorized less into nonrecurring transaction costs than we had in the prior year. We did add some roles to the business, but principally supporting the funds management platform. Turn over to cash earnings. And the approach that we've taken is consistent with prior years with the exception that there is one new adjustment, and that's, as I mentioned before, to ensure that we only recognize the 29% of fee income that's generated by third-party ownership at Highbrook. With the buyback that was started in February, you can see a small impact on the weighted shares on issue for the year. Cash earnings of $0.0798 per share, that was 5.7% higher than last year, right in line with the guidance that we gave at the beginning of the year. Dividends were $0.06825 per share for the full year. That sits right in the middle of our policy band of 80% to 90% of cash earnings being distributed. Guidance for FY '27 that we're now into, we expect cash earnings to be around 5% higher than we've reported for FY '26 and dividends to be 5% higher at $0.0717 per share, with all of those dividends expected to be paid from the pie side of the stable from Goodman New Zealand Limited. Turn over to Slide 20 now and just look at interest and liquidity. You can see in the chart that GNZ is very highly hedged over the next 12 months and even out into the second year at around 80% Highbrook similarly has high levels of its debt fixed. And this is giving us good protection from rising interest rate environment that we're into now. But obviously, those interest rates rising benefit us on the deposit side. Our weighted average cost of debt was lower this year at 4.2% in GNZ, and we expect that to be lower again in FY '27 at around 3.8%. Weighted average cost of debt within the Highbrook business was fairly similar. Our interest covenant is now a requirement that ICR is no less than 1.75x. That's very comfortably achieved for the full year of 4.2x. With $485 million of cash plus undrawn bank facility, our total liquidity is almost $600 million at balance date. Turning over to Slide 21 and a reminder that we now focus on look-through gearing as our key gearing measure, and that picks up our 71% share of Highbrook. With the business becoming more active, we've lowered the bottom of our preferred range to 15% from the previous 20%, but importantly, maintaining the upper level at 30%. At balance date, look-through gearing was 19.8% and on a fully committed basis, taking into account the development of Mount Wellington, Waitomokia and Penrose, that sits at 24%. Turn on to Slide 23 and just touch on some sustainability highlights. So we have initiated Green Star performance ratings across our properties. And this is proving up their efficiency, which importantly for the occupiers, our customers, lowers their OpEx costs in those properties. Our LED upgrade program is almost complete, and our submetering program across the core portfolio is making really good progress. Across the whole of the core portfolio, 84% of our properties have now had upgrades that lead to lower emissions and lower operating costs for the occupiers. And finally for me, on Slide 24, our new science aligned targets that we announced at the beginning of the financial year. These are 2030 targets. The efficiency upgrades that I mentioned before across the portfolio will help drive the in-use target. And we've completed the first project under our embodied carbon Innovation Fund. This was reviewing the use of structural steel in our developments. We're seeing some benefits flow through into the design at Mount Wellington as a result of that. And we have a second project underway looking at the global warming potential of our precast concrete slabs. So I hand you back to James.

Yes. Thanks, Andy. Yes, we're happy to take any questions. We're also available over the next couple of days for one-on-ones.

[Operator Instructions] Your first question is a phone question from Nicholas Hill from Craigs Investment Partners.

Another solid operating result. You've touched on the impacts of the conflict in the Middle East. However, I was wondering if you could talk a bit more about this, especially with regards to your current development pipeline. You're undertaking earthworks at Waitomokia. So would you be able to give an indication how much spend is left and what is fixed? And would I be correct in saying the language on the first development site means it's aboveground construction isn't currently committed?

Yes, that's correct, Nick, on that last point. Waitomokia, [ first pad ] will be ready within this financial year. That's enough to build 20,000 square meters. In terms of inquiry and how it's changed over the last few months, we definitely noticed an uptick in January, February, March across our business. Quite a bit of smaller inquiry as SMEs sort of could turn things on the dial pretty quickly. There were a few bigger inquiries bubbling away. I think the hallmark of what's changed over the last couple of months as I mentioned, fuel is 20% to 30% of a lot of our customers' costs. Even though they can pass it on, they are still there inquiring, but it's just taking a long time to get deals across the line. And we've got a couple of inquiries at the moment actually, which are very significant that we're working on, which are probably 2 of the biggest inquiries we've had in a long time. So it's still there, but they're definitely taking longer with a lot of people looking for resolution of what's happening overseas to actually make final decisions. And I think that's in the lease space and also in the purchasing space of our build-to-sell product.

And then just in terms of the earthworks to do or remaining at Waitomokia, is that all pretty much under fixed contract? Or are there some variable costs to that?

Yes. Yes. When we do infrastructure works like Waitomokia, it's over a number of years. We break it into very small lot sizes. So we haven't committed to all of the infrastructure works there. We do it on a smaller piecemeal basis. So the amount of committed work there is actually quite small. And we'll do a fixed cost basis, but we haven't committed to all the spend that happens on a sort of piecemeal basis.

Okay. That's great. And at the half year, I believe you noted construction pricing was below peak, which supported the decision to proceed with Mount Wellington. Has that cost environment held so far? Or are you starting to see upward pressure from the global supply chain? And I guess, how does that sort of impact how you think about whether to progress with the new development in terms of the feasibility...

Yes. I think that there's going to -- we're going to know a bit more about that when we price projects like Felix Street, which we'll be doing in the next couple of months. Anecdotally, it feels like prices are probably up 5% compared to the start of this year. But combined with that will be probably a little bit less work going on. So there might be a bit more competition. So somewhere, I think, between 0% and 5% would be my guess, up on where we were.

And then just one last one for me before I let someone else have a go. What are the key swing factors for your guidance that could support a potential upgrade, for example, leasing the current vacancy at [ St Lincoln ] elsewhere, securing a tenant for Mount Wellington or say above capturing above or capturing above expectation uplift on the 9.5% income due to expire over the year.

Nic, it's Andy here. Look, I think all of those things that you've commented on could be upsides for us. We're actively working on everything at the same time. And look, if we feel that there's a need to upgrade our guidance, we'll do that at the appropriate time. But I'd expect it's probably more likely at the half year that we'll give you an update on progress.

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

Just looking at the guidance number. Can you kind of split out what's the underlying portfolio versus the kind of the other things that kind of go in there? For example, you've got this buyback, which you say is accretive, which will obviously be helping kind of growth. I'm just trying to work out when you initially internalized, you talked to 5% to 7% growth going forward. When you look at what you're doing, you've got a buyback, you've got Felix Street, so you're moving up the risk curve there on development with build to sell. I don't think that's things you would have envisaged were in that 5% to 7% when you first set it. So I'm just trying to figure out, has that slipped to kind of 3% to 5% or 4% to 6% and then you're doing these other things to kind of get yourself up to that 5% mark?

I think the first couple of years post internalization, I think we did 5.3 the first year, 5.7, the second. We're calling out 5 here. You can imagine probably the edge has been taken off a little bit with leasing inquiry and things taking a bit longer at the moment. And I think that's what Andy mentioned that we'd like to do more than that. I think 5 is a good number in this environment. Things like develop to sell, that's something that we think is going to be sustainable and repeatable. Obviously, we're going to build into that. Those things take time. So that's not in that guidance for this year. That's something that we released over the next few years in our view. But as we mentioned at the time, things like this, more active earnings were all sort of on the table, all options were on the table when we internalize. And I think we've got a structure now with the internalization, with the fund set up with corporatization and stapling that we can be more active and accelerate those earnings. And I think we're in a pretty good position to do so.

And then when you look at the market, you've got higher vacancy than market bringing portfolio in the markets underperforming the market, so to speak. Can you just talk us through that, the competition at Mount Wellington and Waitomokia from [indiscernible] Road. Obviously, there's a decent amount of development going on out there and kind of how you see that kind of evolving over the next 6 to 12 months. There must be some pressure on market rents, but is there any benefit around retention rates?

There's a few things in there. I think it's important to step back and look at a market and what's driving the market. As I mentioned, we're more focused on development -- total development volumes. The sort of design build market has really been there and the overall development quantum, including both spec and design build is actually quite a bit smaller in '25 -- sorry, '25 and '26 than it has been over the last few years. I think that's really important to look at. So while yes, there is a bit more spec and definitely, we'll be monitoring incentive levels. They have increased, but not to -- not significantly as yet, but that's something we'll monitor.

Okay. I mean your peers are talking 12% incentive on new spec builds. So, I just wonder if that's kind of where you see things heading to? Or is that -- you still think you kind of achieve the 5% level that you talked about currently?

I think you can look at different submarkets. A lot of that spec is concentrated in particular markets. A lot of our core products in our portfolio is in -- well, the vast majority of it is in pretty tightly held markets through Central and South Auckland. We're pretty confident in our product, and I think you can see it coming through in the results.

And just last one for me. Felix Street, you're talking about development earnings. How will you account for those? Is that on settlement of the sell-down? Or will you do percentage of completion if you have a presale? Like can you just give us some idea how that will flow through to your cash earnings measure?

Yes, Rohan, so the profits will flow through to cash earnings. Generally, that I would expect that will come through on settlement, but there can be circumstances depending on how it's contracted and the particular situation around the detail of that contracting where you could recognize on the way through. But our expectation is that for the most part, it would be on settlement.

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

There was one webcast question relating to the look-through revaluation gain of $111 million that I mentioned. To calculate that, you take the revaluation of the face of the GNZ P&L and also 71% of the revaluation that's disclosed in Note 2.1 relating to Highbrook. That will give you the $111 million total.

All right. Well, no further questions. So thank you, everybody, for joining. And as I mentioned, we're available for one-on-ones. Thank you. Bye.

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