Goodman well placed despite Softer Cap Rates

4 November 2022

Goodman has delivered a strong operational result in the first quarter, despite the volatile economic environment, with the long-term structural drivers of demand for well-located industrial real estate remaining intact.

Goodman remain cautious about the outlook given market volatility, geopolitical risks and a slowing global economy and has confirmed their previous forecast for FY23 operating EPS growth of 11% , and a full year distribution of 30cps.

Greg Goodman, Group CEO said, “The Group’s solid operational performance this quarter is a result of the consistent execution of our strategy to deliver high quality sustainable properties in strategic locations around the world. We are in a strong position to withstand and respond to the impacts of a slowing economy in different parts of the world. This is due to the demand for our strategic locations, quality of our assets, strength of our development book, growth in cash flows, and our low leverage and strong capital position.”

KEY HIGHLIGHTS

  • $13.8 billion of development work in progress (WIP) across 85 projects
  • 100% occupancy on completed development projects
  • 4.0% like-for-like net property income (NPI) growth on properties in our Partnerships
  • 99% occupancy across the Partnerships
  • $77.8 billion total assets under management (AUM)
  • Forecast FY23 operating EPS growth of 11%.

Customer demand for Goodman properties continues, with e-commerce, supply chain optimisation, and ongoing growth in data storage requirements the key drivers of leasing activity. Tight supply conditions remain in across logistics markets and Goodman continue to see strong growth in rents. Reversion of current passing rents to those achievable in the market has continued to increase, in particular in North America, Australia / NZ, and UK/Europe, where reversion now ranges from 20%-60%. This should continue to support cashflow growth in future periods.

Development returns are under pressure due to construction cost inflation despite the scarcity of available space drive take-up and rents. Customers are however seeking to maximise supply chain efficiency and are looking for sustainable, versatile properties that are close to consumers and optimised to house their investments in automation and technology. Demand is supporting work in progress of $13.8 billion at 30 September 2022

  • Pre-commitments remain high across the workbook with completions 100% committed and WIP 68% committed
  • Yield on cost (YOC) on WIP is 6.4% (down from 6.7% in FY21)
  • The production rate for WIP is approximately $7 billion
  • Completions for the quarter were $1.9 billion and 100% occupied
  • We continue to mitigate risk through a globally diversified workbook and investment partnering, with 85% of the WIP either pre-sold or being built for third parties or our Partnerships and 80% of new starts being pre-leased.

Total assets under management increased to $77.8 billion as at 30 September 2022, reflecting acquisitions, revaluations and FX gains. The Goodman Partnerships continue to focus on organic growth through development, and a strategy to allocate capital prudently into select strategic investment opportunities.

Cap rates across our portfolio have softened by up to 40bps in some markets but the impact on values has been more than offset by rental growth. Whilst cap rates may expand further, Goodman believe the mitigating impact of portfolio under-renting, high occupancy and cash flow growth, combined with revaluation gains on developments within the Partnerships, will continue to be a feature through the year and it is expected that AUM will continue to grow.

Commenting on the outlook, Greg Goodman said, “Goodman’s execution of its long-term strategy and its geographic diversity provides operational flexibility and resilience to adapt to the current market volatility. As a result of concentrating our portfolio in supply constrained markets, we continue to experience high occupancy and positive rental growth.

Customer demand for space continues to be supported by structural drivers, including e-commerce growth and increasing productivity through supply chain optimisation and investment in automation and technology. We remain focused on providing opportunities in key locations for our customers to establish this critical infrastructure for their businesses and offset higher costs. In addition, ongoing growth in data storage requirements globally is increasingly creating competition for space in our markets. Given this demand we expect WIP to remain strong in FY23.

While the economic outlook appears uncertain, the Group is in a strong position operationally and financially through the disciplined execution of our strategy. We have significant liquidity, low gearing and extensive hedging. The Partnerships are also in a robust financial position. We are actively considering strategic opportunities around the world that are aligned with our strategy – those that are in select locations and positioned for long-term growth. However, we remain patient and cautious, looking to only implement opportunities that provide deep value”.