Australian property company, Goodman Group (ASX:GMG), specialises in industrial sites that cater to the digital economy. And, perhaps predictably – given the past 18 months of retail lockdowns – its share price has done well. The company’s recent trading update was extremely upbeat, announcing higher levels of profitability and expectations for increased earnings for the year ahead.
During the depths of the pandemic it became clear to many that consumer spending would ‘find a way’. Thanks to government largesse and plenty of spare time, spending online boomed. We have written much about the beneficial impact on revenues and earnings for many retailers. Slightly less obvious, but no less beneficial, was the impact on those businesses supplying the infrastructure to the online retail boom. Logistics real estate is in particularly hot demand and valuations are reflecting the new appreciation of industrial real estate’s strategic place in a digital future.
Goodman Group is an Australian integrated commercial and industrial property group that owns, develops and manages warehouses, large scale logistics facilities, and business and office parks across the globe, from Australia, Japan, Hong Kong and Mainland China to L.A., New York, Brazil and Europe. The company receives annual rents from these properties exceeding A$560 million.
As lockdowns give way to re-openings, the return of consumers to shopping centres ahead of Christmas and beyond necessitates a restocking of stores ensuring continuing robust demand for industrial property strategically located close to the consumer. Higher utilisation of space as businesses seek to improve and diversify supply chains also appears to be assured.
GMG recently provided a trading update revealing a strong start to FY22 amid significant customer demand and an “intensification” of use of sites. Of particular interest to the market was the upgrade to earnings guidance in FY22 increased with operating EPS growth expected to be in excess of 15 per cent. The company had previously guided 10 per cent growth and the market was expecting 12 to 13 per cent.
CEO Greg Goodman summarised it best noting: “The results of the deliberate positioning of our portfolio over the last decade to adapt to and leverage the changes in the digital economy, are now being realised. Customer demand for high-quality properties close to consumers has never been greater. This is resulting in rental growth, increased development activity, stronger than expected performance from our Partnerships and generally higher levels of profitability, leading to upgraded earnings guidance for FY22.”
Following the company’s annual results – announced back on 12 August – investors reacted negatively to the disappointing guidance. The share price fell from a closing high of $23.80 to a low of $20.60 despite the compositionally high-quality result.
Goodman Group also reported significant growth in Assets Under Management (AUM) of 20 per cent driven by asset revaluations and rental increases.
Further, the company’s development pipeline and activity has accelerated. Work in progress (WIP) was $12.7 billion at 30 September 2021, with an annual Production Rate for the year expected to average approximately $6.8 billion. The $12.7 billion of WIP in September is already up 19 per cent since June 2021 and is over three times pre-pandemic June 2019 WIP. WIP includes 81 projects with a forecast yield on cost of 6.8 per cent.
As at 30 September, 12 month rolling like-for-like net property income was up 3.2 per cent – the result of largely fixed escalators over leases.
While we are delighted the trends validate our investment thesis, the surprise is the timing of the upgrade which is unusual for GMG who usually wait until the half-year result.
That leads us to currently believe, when GMG say they now expect AUM to be $70 billion by year-end, they are undercooking their prospects. Global peers such as US-based Prologis (NYSE: PLD) have disclosed escalations of more than 25 per cent and UK-based Segro (LON:SGRO) 18 per cent in their latest trading updates. GMG noted their rental growth run rate is greater than the 3.2 per cent reported at the end of September.
This suggests asset values have runway to grow on mark-to-market, and beyond that from reductions in capitalisation rates.
According to the company it’s “Not hard to see AUM to be circa $80 billion by 2023.” This number is currently $62 billion.
We expect the company to provide more clarity at the half-year result early next year – but one thing to note is GMG had approximately $100 million of unrecognised development profit at year end, which could double by year end.
Given the quality, clarity and robustness of the earnings growth we believe it is hard to see GMG underperform relative to the market over the next 12 months.
The Montgomery Funds owns shares in Goodman Group. This article was prepared 05 November 2021 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Goodman Group you should seek financial advice.