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Good day, and thank you for standing by. Welcome to the Goodman Group Q3 FY '21 Quarterly Operational Update Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Gregory Goodman, CEO of Goodman Group. Thank you. Please go ahead.
Yes. Thank you very much. Good morning, and welcome to our quarterly operational update. I've got Nick Vrondas with me on the call. We have produced another strong quarter as we continue to deploy capital into our growing development pipeline, particularly through multi-story projects or where we can intensify existing urban locations. This has seen our development workbook increase to $9.6 billion, which is likely to grow further by June 30. Changing consumer habits across the physical and digital space, there's fundamentally increasing demand for our property around the world, and we believe this will continue over the medium to long term. Customers are wanting more automation, higher speed to market, greater resilience in their supply chains. We're well positioned to support the structural demands we're witnessing around the world. These trends are underpinning high levels of utilization and new space requirements, delivering importantly sustainable cash flows, which is reflected in our occupancy at 98% and like-for-like rental growth of 3.3%. This strong performance is a result of our deliberate strategy of owning assets in markets where barriers to entry are high, supply is limited and demand is robust. We are very active around the world in developing sustainable, world-class assets for the long term. The volume and scale of our projects continue to increase, with approximately 60% of our development workbook now in multi-story development. We're very focused on the development of brownfield sites in urban in-fill locations. We also continue to acquire sites in line with customer demand, and we're actively working with planning authorities on the highest use of existing land and buildings held across our business to support future development growth. A significant portion of the development is expected to be retained in our partnerships. Assets under management have increased to $53 billion driven by growth in development, positive revaluations, strong cash flows and continued high occupancy. Collectively, with our customers and individually, we're working diligently towards carbon neutral buildings, and decarbonizing our development projects. We are focused on long-term sustainable approach that leads to positive economic, environmental and social outcomes for our business, our stakeholders and the world more broadly. We also believe that reducing our carbon footprint in the construction process is a critical part of this solution. This includes the impact of steel, concrete and other emissions. We're very well positioned operationally and financially with significant liquidity and low gearing. And on that basis, we can confirm -- reaffirm our earnings guidance coming into June with a FY '21 operating profit of $1.2 billion, representing earnings per share growth of 12% on the prior year. And finally, I'd like to thank all the Goodman people around the world for a really strong performance operationally in sometimes very difficult circumstances globally. So I thank them very much for their efforts. I thank you for the call, and we're now turning over to questions.
[Operator Instructions] And our first question comes from the line of Mr. Stuart McLean.
My first question was just on the yield on commencements. So on Page 30 presentation, the yields there is 6.8%. It was -- I think it was 6.3% at the half year. Just what's growing -- or so what's changed to see that yield increase? And is it sustainable at 6.8% going forward?
Yes. Good question. Look, there may be -- there's a bit of geography in that. But I think also, we're bringing on a lot of sites online that we've been working on for 4 or 5 years, and I think the 6.8% is reflective of that as well. So sites that some of them, I think, would be 5, probably even 7 years in the making, which is very much what we do. And what we're buying and doing today is probably for '24, '25. So I think it's just reflective of the nature of what we're doing in very constrained environments. Primarily the infill and the high barrier-to-entry markets drive that number.
Okay. And it's got into with the yield that you're able to achieve on double story developments. For example, are they structurally higher yields, higher returning?
Look, I think what we do is just really difficult to put it clearly. It's not a merchant developer-type approach. We're in and out of 9 months. This is years in the making. So I think that's reflective of the difficulty, the time, the expertise, the people, the infrastructure required to do it. That's what it's reflective of. So providing we keep our discipline and we keep buying in the areas we want to buy and developing through, I think you'll find that we can have some pretty good returns.
And my second question is on the duration of build, sense to elongate by an additional month. Where do you think that, that duration will land over the next 6 to 12 months? Could we be talking about 24-month build time? Or is that a little bit too long?
Yes. No, look, I think we're about where we're going to be. It might come back a little bit from where it is at the moment. But pretty much, most of the starts coming in over the next 12 months. A lot of multi-story, I talked about that today, 60%. But a lot of also refurbing old buildings into new facilities, particularly for parcel operators with a lot of van-type parking and what have you. A lot of these projects now are complex in planning as well. The -- you've got infrastructure around EV charging and things of that nature, all requires permitting planning. So in general, I think it's going to be yet the longer end, but 19 is probably at the extreme end at the moment.
Okay. And a final question, just on underlying rental growth. I think for the owned portfolio went from 3% to 3.3%. And what's driving that? But also, can you give an idea of rental growth that you are seeing in your infill locations globally?
Yes. Look, it -- bear in mind, we've got a global portfolio. So our range is anywhere from 1% in Japan to 5% in the U.S. and anywhere in the middle. So I think 3.3% is a good representation of the 50-odd billion around the world we own. But it's in that parameter. So it depends on where the weighting of assets are primarily, but we're seeing good growth in the infill markets, in the markets we're developing. We're seeing short supply with demand that is pretty robust. Once again, it's going to the structural change on the digitalization we're seeing around the world. That is not reducing. It's actually increasing significantly. And over the last probably quarter, I would have had 30 customer calls with all our big customers around the world. And all of them need solutions, and without a word of doubt, all of them are growing and growing their footprint. But they want more efficiency, they want to be faster to market, they want more automation. And importantly, also they want sustainable features in the building. And that's why today, we're talking about going to carbon neutral builds. That means carbon neutral steel and concrete, and we're doing some at the moment. And in the future periods, they will be the standard for Goodman.
And your next question comes from the line of Sholto Maconochie from Jefferies.
Just to follow-up some of Stu's questions. On the WIP, it went off across all read, the mix was broadly unchanged as a percentage of split. Where is that demand? Is it coming from all the existing customers that you talked about already? Is there any incremental demand from different types of customers that you could elaborate on?
Yes. Look, it's fair to say probably no surprise in the last half. There's been a big pharma increase. So pharmaceutical companies, these, I suspect that they need more infrastructure for the long term because I think everyone is going to be building redundancies into their supply chains, particularly in that sector. But generally speaking, across the board and very, very good growth, but it is all about speed to market and convenience and how you do it more cheaply. Also, runs conscious of emissions coming out of trucks as well. Transport effectively. That's a big problem for all our big customers around the world as we take sustainability, obviously, very, very seriously, and they have their own targets and goals. That's an important thing to try and resolve for them as well how we get transport times, get it into EVs quicker, more effectively. And that's a big body of work we're doing with most of our big customers around the world, which is then leading to -- you'll find some pretty robust development programs for us with our customers.
And then just sticking on the development side, you said we expect to increase again in June. Do you have a sort of a level where you think it'll go to? I think you were saying over $10 billion recently the losses are where that's going to land at June.
Yes. We'll land over $10 billion, yes. I think in '22, it gives you a good insight into '22. Clearly, our development book is going to be strong, and developed margins are good. So I think that gives you a lead into '22.
So just on that, if you've got $6 billion of production you sort of annualize this year, if you're doing $6 billion, circa $10 billion and it goes back down to 18 months, that sort of implies around an annual production of $6.6 billion. Is it -- so we sort of for earnings recognition targets of $6 billion to $7 billion as a circa production run rate on the next sort of 12, 18 months?
Look, I think we've indicated $6 billion is a good number. So margins are good. I think that's -- $6 billion is probably a fair number.
Yes. I think with the $10 billion, Sholto, it -- the time in production doesn't go down immediately. It'll stay around that level. It'll take a bit longer for it to go down back to 18 months already.
Okay, okay. And then just switching gears on the AUM. You mentioned in the release that there was a lot of existing regeneration and refurb of your existing book. Out of your total AUM, how much would you say is its future development potential as a percentage of your book currently?
Yes. I'll give you a good example and while -- we'll use one closer to home because that's probably -- will be easier for you to sort of identify. In Australia we've got assets knocking around June, about $20 billion. There's about another $10 billion of development in Australia over the next probably 5, 6 years that will take it to around $30 billion. That is primarily -- a big portion of that is actually redeveloping what we've already owned, particularly where I'm sitting here in South Sydney and Rosebery. We have 4 billion assets within 5 minutes, 10 minutes of the office. That's another reason why we're down here, quite frankly. We put ourselves amongst our ships, which we think is a good place to be. But primarily, Australia is a really good example. Some of that is in land and sites we've got in due diligence at the moment in buying, but a lot of that $10 billion is in the regeneration and the reworking, remodeling of what we've got. And even on the front of the release today, we've got a multi-story. That's actually in Euston Road. We'll be kicking off planning through place. We've got one down the road as well, multi-story, we'll be kicking off. So I think if you extrapolate that around the world, there's a similar thematic in regard to what we do. And we are buying older buildings. We bought a few in the U.K. last year and beginning of this year that are probably good for redevelopment in 5, 6, 7 years' time, give us cash in between. So it's sort of part of what we do and very much a part of the operating platform and the strategy of Goodman specifically.
Yes. So sort of 40%, 50% or thereabouts based on that $10 billion, depending on the level. And then on the -- just finally on the revals, could you break out the change in the AUM? What was from asset sales like-for-like growth and the asset sales and acquisitions? And any FX impact for the quarter?
Is that -- sorry, Sholto, was that on the AUM growth?
Yes. What was the change to the asset sales positions and FX on that and like-for-like sales? Yes.
Yes, yes, yes. Okay. So FX is about $300 million negative. Vals was about around $300 million positive, and then sort of net acquisition at $1 billion.
That helps, yes.
Yes. And then acquisitions was minus $100 million. Sorry, just wanted to clarify. Sorry, just -- and now the big was the developments, which added $500 million. So just to round out that question. Sorry, continue.
And your next question comes from the line of Grant McCasker from UBS.
Just one question. If we look at the web or even the Goodman share that it's essentially gone from $1 billion to $2 billion over the last 12 months, is there anything different you need to do to maintain gearing levels? Or should we expect gearing to increase going forward? Or the other option, are there sort of incrementally new development partnerships that you'll be looking trying to take around the world?
Yes. Look, I think we've set the distribution policy very deliberately and very carefully, and we've set that a number of years ago to cater for what we would see we were doing in regard to strategy around development and development starts. So we read it probably nicking 4 or 5 years ago, and that's when we started moving to more retention. And I think you'll find that the retention of the earnings, the rotation of assets, some on the balance sheet, we've got $1.8 billion on balance sheet, you'll see some of those rotators that come through their value-add phases into partnerships that you'll find that -- that will cater for our needs around capital. And effectively, gearing will be within the range that we've stated. So you won't see it uptick in gearing. And we don't see a company like Goodman with a big development book that is growing clearly that levering up would make any sense at all.
Yes. I think, Grant, we did say, I think, at the half year and I think probably every reporting period that there are interim gyrations of working capital requirements between half years, where sometimes we're building up the WIP fundings more -- funding more of the WIP through to completion, particularly on presold projects. But that's not structural change in gearing, that's kind of more come and go capital. I think Greg has called out that the structural element is the distribution policy. The $2 billion number that you're talking about, I'm not exactly sure where you get that from. But if you're extrapolating on a $6 billion production rate, you got to remember that the $6 billion is in value, not the cash cost, so the capital needs are $2 billion.
And your next question comes from the line of James Druce from CLSA.
Greg, just interested in some of your comments around multi-story in Sydney. You've got a stat in quarterly talking about 60% of current WIP is multi-story. How do we sort of think about that share over the medium term?
Look, I think with Asia is, obviously, multi-story is the discipline that's used certainly in China, certainly in Hong Kong, certainly in Japan. So -- and that's a big market for us, a very, very vibrant market and very -- one that's going very successfully. We have a good team over there. So I think if you extrapolate that through the numbers, and I think they are close to around 50% of the development book, currently, multi-story will be a big number. It might be 50% some years, but it's certainly going to be up there. You will see more intensive use in places like Sydney, potentially in Melbourne, where land is moving in value. So a block of land in South Sydney now is probably $4,000 a meter if you want to knock a building off it. There's no fundamental brand-new buildings coming out of the ground in south Sydney, no new space effectively. And we just put a very good customer of ours into a reworked, old-style warehouse parcels and what have you. So we need some contemporary space. The way you can make the economics work is through multi-story. Some compromises. Obviously, everyone likes to have a single-story, but multi-story works where you don't have an opportunity or an option, and that's why it happens. In China, for example, Shanghai, Beijing, we don't have a choice. We have to build multi-story in around Beijing and Shanghai and certainly down in Shenzhen. So you don't have a choice. So I think that where land is intense, customers are wanting contemporary space. And effectively, the barriers to entry for this sort of starts high because it takes a long period of time and a lot of capital. So it's got all the attributes we really like about it. And I think you'll find that it will be a big portion of what we do, continuing as it has been over the last 10 years. We've been doing multi-stories for 12, 14 years.
And your next question comes from the line of Simon Chan from Morgan Stanley.
I just got a follow-up to a previous question about valuation uplift, et cetera. Can you confirm whether or not you WACC through any cap rate compression to get that $1 billion uplift in valuation this quarter? Or are you saving that for the June quarter?
I don't remember we were saving anything. I think the reality is with the activities that are going on in the market, there would be an expectation if you look at where our valuations are that June will be a very, very strong part for us. So a lot of assets we've got are going into a rotational phase to valuations, and I think that's because of market evidence and other things in Australia and other parts of the world. So look, expect a reasonably robust valuation uplift coming through June, which I think would be expected. And effectively, it's growth in cash flow as well as, I think, pure cap rate compression. We will focus on the growth in cash flow, to be honest, but the hard reality is that there's more capital wanting to own industrial than there is industrial for sale. So that is pushing, obviously, a tightening cap rate regime. I think the other thing that's pushing it is the resilience that industrial shot up around the world in the last 12 months during the pandemic. It's really been a strong performer globally in regard to, once again, occupancy and cash flow. So you could imagine a lot of investors are going a pretty safe place to park your money at the moment with a future that looks very good.
Great. And just looking at your list of projects there. I think, Greg, in the past, you've mentioned that you don't want to grow for the sake of growing. You want to work within yourself, don't want to stretch yourself. In FY '20, you had 46 projects going on. Today, you said you've got 64 projects going on. Can you handle it?
Look, I think we've been building towards it over the last, as I said earlier, 5 years. This is not a surprise for Goodman. So we've been putting in Basel -- particularly around the production area to cater. And because these projects are ones that goes through planning and take a lot of lead time, you build into it to make sure you got the right resources. So yes, we can handle it. We can actually handle substantially more with the teams around the world. So I think from that point of view, we're in a pretty good spot.
Actually, Simon, just -- it's a good observation. One thing I'll call out is that some of those projects that just came on are programmatic, so they've come on through a particular customer program with almost pre-agreed pro forma terms and conditions in place. So we're able to roll that out quite efficiently for both parties. So we've been allocated for it that way. And obviously, I mean we knew it was coming as well. So we're well resourced there.
Okay. Great. And I trust you guys are enjoying the new office down there.
Yes, it's good. It's good to be back. I think we started down here 30 years ago. So it's good to be back home.
And your next question comes from the line of Suraj Nebhani from Citigroup.
A couple of questions have been answered. Just 2 quick ones. So on the increase in WIP, can you say which particular regions will be driving this? Or is this across the board?
Yes. Look, Australia has got a rising couple of billion in WIP. U.S. will add another $1 billion in July. A couple of projects, we've just got them planning and we're finalizing. Europe is incredibly strong. And as you know, we've rebased our business back into the major markets of Europe. U.K. has got a couple of really, really good projects in around in '25. China, I think we've got about a couple of million meters of space coming out. That's probably twice what we were doing 3 or 4 years ago. Japan has got a couple of big projects coming out, one to be in the data center space as well. So look, it is all over, and I think we feel very comfortable moving into '22 and to '23 that we're going to have some very, very good projects. But the important thing is the projects we're producing, 90% thereof, they're not available for sale on the market. So to retain those within your own body of investors, many of them already sitting in the partnerships now, obviously, is giving us the benefit then of very good product for our own investment partners, but also importantly, performance. And all our partnerships around the world this year will be in the -- effectively in the mid-teens on average and certainly in a few locations in the 20s again this year. So very, very good performance, but it comes back to the quality of what you're owning. And when you look at that development portfolio, which is -- it's a medium-sized property company every year effectively. That's highly desirable but unattainable if you want to buy it on the market.
Okay. And just another one on volumes. Greg, is there any change in views from the investor base around the recent move in volumes? Or is that not really a concern at this point?
Yes. Look, I reckon there was really big conversations had probably around the half year around bond yields, where they're going to go. I think on the other side of the equation, though, there's an understanding and realization that if you own real estate in good locations and bond yields are moving because the world is a happier place, that's a good thing. So I think there's a plus and minus on that one, and we're pretty comfortable on that front. We're really focused not on the last 35 points on the 50 points on the cap rate. What we're really focused on is grunt and growth in cash flow. And we've talked about it 2 or 3 times, talked about it in the speech. Let's forget about the cap rate just for a moment and think about what's going to drive value, and it doesn't matter whether you're an industrial or you're in technology, you're in any other sector in the world, it's going to be the growth in cash flow that hits the bottom line that's going to basically determine value. So we keep reiterating it because with what we're doing and what we're looking at around the world, we are really trying to look at those pockets of growth and expansion in growth -- in cash flow, and we think the valuations in the main will look after themselves. And if bond rates tip up because global growth is better, well, we might get a little bit more growth out of the cash flow. So just being the demand -- areas of demand and make sure you're buildings are relevant, and I think that's the way we look at it and our process as well, quite frankly. Yes.
And your next question comes from the line of Richard Jones from JPMorgan.
Greg, just a completion run rate. Would you expect a much higher level of completions in Q4? It's obviously tracking significantly below your commitment levels. Or is it more a kind of '22, '23 story that you're kind of guiding to?
Yes. It's more of '22, '23. I think you'll find the development number in June from a profitability point of view is robust, from a P&L point of view. And I think there'll be a lot completing the first half of '22 and into the second half of '22. So yes, that completion rate will lift. But yes, I think you're looking at it the right way, yes.
Okay. And then we've obviously seen a couple of significant transactions within Australia that's kind of repriced the market. Is that Australia playing catch-up? Or are you seeing kind of cap rates had even firmer in the other major markets you're in?
Yes. No, good question, James. Look, U.S. prime starts with a 3. Europe prime starts with a 3, it's probably mid 3 to be fair, 3.750. I think it's a bit of catch-up. It sort of has demonstrated over the last 12 months resilience of the sector. And it's fair to say that, I said $0.50 in every dollar, I think, last time I talked to you guys, was going towards industrial, probably a little higher than that at the moment. So yes, I think you'd expect whether you're in New Zealand or Australia or through parts of Asia and Europe and the U.S. that is 3. It's knocking around 3.750s. To be fair, though, if we've got a 3.750 in L.A., it's growing at 4 or 5. I think 3.750 and 4s is sustainable if rents are going to go backwards. And not all industrial is treated equally, and we've said that before. So I think we're just going to be careful that we don't just look at valuations generically. We look at them specifically. And I think in good locations in strong growth corridors, we are genuinely getting sort of 3% to 4% growth, 0 vacancy. We can see the rationale for a 4 and 4.25 cap rate. We can't see the rationale for 4 and 4.25 cap rates in markets where land is plentiful, easy to build and you're buying a big premium to replacement cost. So that's not what we're about. We're about the earlier line, keep it straight, keep the direction in the high-growth markets. And I think the cap rates will be around that 4, 4.25 mark, but the growth will be there as well.
And our last question comes from the line of Ian Randall from Goldman Sachs.
Look, just going back to the rec you gave, Nick, on the fund growth. I think that was [ free ] for internal fund. Do you have those numbers just for external fund?
The movement about the same. There hasn't been much change in the directly owned. So that's pretty much the rec for the external.
All right. And so I suppose just touching back on Richard's comment about completions. It looks as if development only added around $500 million to fund, I would have thought there'd be some fund growth through work done rather than just completions. Is there -- it looks as if the throughput rate is also running a little bit below what would be implied by the weekly duration. Is there something there over the quarter that sort of was anomalous?
The development number that I gave is the throughput number, not just completions. Yes. Remember, that's cash flow, right? So that's CapEx cash flow essentially because net acquisitions were minus $100 million. So we are adding but we're also funding a lot of that -- we fund a lot of that through divestment over the quarter as well. So that's why it's a little bit anomalous. And look, looking at it on a quarterly basis, you probably need to sort of take an annualized view, is probably a better way to look at it, Ian, I think.
Yes. Look, it's fair to say, look, the assets under management will be owned [James ] is around $57-ish billion in June. Then we go through $60 billion, strong $60 billion in the '22 year. And that's just the stuff being run off the book, and we're keeping 90% of what the earnings keeping. So if you extrapolate out $10 billion plus change, most of it we're keeping. And probably that $10 billion, if you actually put the contemporary cap rate on it today, is higher, right, because a lot of these feasibilities are 12 only months in the making, and we don't tend to change those numbers on the way through. So I think you'll find that running into '22 we'll be through $60 billion strongly.
And I think we answered the question on completions earlier, I think Greg called it out. I mean there's -- we flagged that as we're going through this period of transition, where the longer-dated projects are coming in, some short-dated projects. There was always going to be this period of transition, which will normalize. I mean a lot of projects -- frankly, a lot of projects will complete in July, not June as well. So you got to -- as I said, you've got to look at it, I suppose, on an annualized basis as well.
There are no further questions at this time. I will now hand back over to our speaker, Mr. Gregory Goodman. Thank you. Please go ahead.
Thank you very much, and thank you very much, everyone, on the line. Stay safe. Let's not get complacent about COVID because it's still around in the communities around the world and let's feel for all our mankind. We certainly feel for all our people around the world who media are in a lot more difficult circumstances than we are here in Australia. So thank you very much.
Thanks.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.