Goodman Group

Good day and thank you for standing by. Welcome to the Goodman Group FY26 Half-Year Results Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Joining us today is CFO Mr. Nick Brandes. I would now like to hand the conference over to your speaker today, CEO Greg Goodman.

Thank you very much, and good morning, everybody. Goodman Group has delivered operating profit of $1.2 billion for the first half of FY26 as we continue to provide essential infrastructure in supply-constrained markets around the world. We're building into strong demand for city locations across both logistics and data centres. Large-scale logistics customers are targeting productivity and efficiency gains through increased automation and consolidation. And data centre customers require low latency, high connectivity, which they are committing to with unprecedented levels of capex spending forecast across the sector. Goodman is set to benefit from these structural shifts, given the quality and location of our sites, our power capacity and our track record of developing complex infrastructure. Power, sites and capital are critical to being able to build into demand and provide delivery certainty for our customers. Our power bank has grown from 5 to 6 gigawatts on sites we own across 16 global cities. The increase is primarily in Australia and continental Europe. And importantly, we've been advancing planning and pre-construction works on sites around the world to provide speed to market. In the quarter, we commenced 90 megawatts fully fitted project in Sydney, and we're on track to have data centre projects providing around 500 megawatts underway by June, taking work in progress to approximately $18 billion. We're also partnering with large investors to fund multi-year development programs. We established a $14 billion data center development partnership in Europe and $2 billion logistics partnership in the US, with one on the way in Australia. This is consistent with a capital partnering approach we've taken for over 30 years. Our engagement with data center customers is progressing well across multiple sites, with negotiations well underway to provide a range of deployment options. We expect commitments in 2026 as we commence construction on sites and others get closer to their ready-for-service dates. Inquiry and activity across several district markets is also increasing and we expect this to translate into development activity over the next 12 months. I pass on to Nick for a few comments.

Thank you, Greg. Let's turn to slide 18 to run through the numbers in the usual way. We'll first cover the items that relate to our cashback measure of earnings, which we define as operating profit. As usual, this excludes unrealised fair market value movements on properties, mark-to-market of hedges and the accounting fair value estimate relating to our employee long-term incentive plan. These are the items at the bottom of the table that get us to the statutory profits. Our operating profit for the half of $1.2 billion was a little higher than we had expected when we spoke to you at the September quarterly. We had early timing of development of performance income recognition in the half, which we had not expected until the full year. As you analyse these results, please keep in mind that FX movements had a $33 million negative impact on the translation of our foreign-denominated operating income before interest compared to the prior period. This was offset with a commensurate benefit in our borrowing costs. This is a result of realised costs on our debt and derivatives, which is how our hedging strategy is designed. I'll call out the impacts on the line items as we go. Looking specifically now at the movement in investment earnings. These are up by $54 million overall, and that's after a $5 million adverse FX impact. Direct property net rental income was $59 million higher. This was due mostly to the increase in assets held directly on the balance sheet following the reorganisation of our investments in the Americas. If you go back to June 2024, we had $1.4 billion of directly owned assets. It got to $5.1 billion by June 2025 with the December 24 reorganisation of our US investments. It subsequently reduced to just over $4 billion with the creation of a new industrial JV in North America. So this was a $3 billion increase in the weighted average capital employed in this segment when comparing the two periods. The bulk of our investment income, which comes through our co-investments in the partnerships, was down $5 million, mainly due to FX. The partnership reorganisation and the other capital movements reduced investment income by $10 million, which was nearly totally offset by the $9 million contribution from the like-for-like income growth. Again, if we go back to June 2024, we had $13.7 billion of co-investments, This reduced to $13 billion at December 24, following the North American reorganisation. It then grew back to $14.7 billion at December 25, mainly due to the creation of the new partnerships. Overall, it's a reduction in weighted average capital employed of around half a billion dollars compared to the December 2024 half year. Over time, we want to grow this part of the business as we continue to expand our portfolio of asset under management and our investment in it. The creation of new partnerships and the ongoing growth of the existing ones should support this. The portfolio remains 12% under-rented and we see this continuing to support MPI growth going forward. There's scope for a significant portion of the directly owned assets to create new partnering opportunities over time. This will reduce our direct investments and MPI but increase our co-investment income from partnerships and our management income. At the same time, it will provide cash to fund our expansion. Management income was $137 million lower than the prior corresponding half. Of that, a $5 million adverse FX impact was the main driver, but the main driver was the recognition of transactional and performance-based revenues following the exceptionally strong prior corresponding period. They were down $160 million to $79 million. I encourage you to look at the annual averages as a proportion of stabilised third-party AUM. Our total portfolio stood at $87.4 billion at the end of December. Of this, $75 billion was in external assets under management, and of that, Stabilised third-party AUM averaged $69 billion in the period. That's up over $4 billion from the prior corresponding half year. As a result, base management income was $26 million higher on a constant currency basis. Total fee revenue for the period as a percentage of average stabilised third-party AUM was just over 0.9% this half. which is broadly in line with our expected average over the long term. In terms of the outlook for this segment, we expect our third-party stabilised AM to grow over time as we complete more developments and make new acquisitions, net of divestments and the value of the portfolio grows. Our realised development earnings for the half year were down $36 million on the PCP. FX rates had a $26 million adverse impact. So aside from that, The result was largely in line with the prior period. Several things are moving around, but we're managing activity to maintain our profit and return targets. On the one hand, development volumes have been lower. The average annualised production rate was around $6.3 billion this half, compared to $6.6 billion in the PCP. At the same time, a larger portion of activity has been initiated directly on the group's balance sheet. That means a greater portion of the development gains can be reflected in our operating results rather than a share of revaluation gains. Yields on costs on the new projects are also increasing. This is commensurate with a longer date of periods to stabilisation of data centres. Moving forward, we'll be progressing more data centre developments and are now on what should be an upward trend in activity levels. These projects will, on average, be whipped longer than our historic projects So the impact on production rate will not be linear, but should still be positive. The pause we took also means that there is a re-synchronisation happening that is resulting in a lower volume of completions in the short term. All other things equal, this should correct over time. Given the increased project duration and the leasing timeframes, we also expect higher than average margins to compensate. At the same time, we expect to continue to originate a significant volume of work on the group's balance sheet, so we'll have the opportunity to crystallise a greater portion of the gains in operating profit. The expected yield on costs on our WIP has increased to over 8%, which is now more than 70% data centres. These estimates are based on our current expectation of commencing data centre projects on a fully fitted basis. These projects are largely uncommitted from a lease perspective, so the expected yields are forward projections based on the fit-out funding and commensurate lease type. The current level of pre-leasing is reflective of the stage we are at in the data centre expansion and the long lead times to completion. It also reflects the group's desire to optimise the timing of contracting with prospective customers. We are compensating for this by retaining low financial leverage. We did, however, have $2.5 billion developments completed this half, 87% of which are already leased. Demand from logistics users for quality buildings in strong locations is also picking up, which we expect to start to contribute to growth in WIPP in the future years. The diversion to data centres as a better use of our sites is, however, occupying a greater portion of our opportunity set now and expected to continue to do so in the near future. So over the course of the full year, rising activity level is expected to result in an increase in income from this segment on a sequential half-over-half basis. We remain enthusiastic about the prospects for development demand overall, which bodes well for future revenue as well as growth in AUM. There's been a moderate increase in our underlying operating expenses, but that was offset by higher capitalisation due to the rising activity levels on balance sheet. Capitalised costs are part of the cost basis of the assets when we calculate our operating profit. There was also a slight FX benefit. Net interest income increased by $63 million compared to the PCP. Gross interest paid on our loans was $14 million higher due to rising interest rates and the impact of the refinancing of our bonds, which resulted in a slightly higher WACD than the PCP. There were, however, a range of other items that more than offset this. There was a $33 million benefit on the FX hedge to earnings that I mentioned earlier. We also earned $48 million more interest on the cash and derivatives due to the higher interest rates and cash holdings. Our directly owned development assets have increased, so capitalised interest is up by $31 million. The cost of borrowings on our loads is currently around 4%, but considering our interest rate and currency hedges, the net WACD is around 1%. As far as the non-operating items are concerned, we had over $250 million of unrealised valuation gains in the half. which represents the group share of around $900 million of gains across the entire portfolio at the 100% share. That's before the $335 million deduction for the now realised prior period valuation gains. We treated these the same way as previous periods, so don't propose to repeat that methodology here because I think everyone's across it by now. So after the deduction for the prior period gains and accrued costs, the net result is a deduction from profits of $112 million, which is what you see in the table that reconciles to OPAT. The weighted average cap rate is currently 5.03% on the stabilised assets in the portfolio, and we're very comfortable with that. Another customary area of difference between operating and statutory profit is the fair value movement of hedges. The currency strength in December gave rise to $150 million increase in the value of FX hedges, but you can see a $325 million decrease in the FCTR. More than offsetting this was a decline in the value of our interest rate hedges, which came about because we have a large volume of fixed receiver swaps to partly fix the income on cash deposits and FX hedges. That's why we end up with a net loss of $48 million in the reconciling table. As usual, we exclude the LTIP accounting costs but we include the tested units in the denominator when calculating our operating EPS. That's when they actually impact on security holders. A few remarks now regarding the balance sheet on slide 19. Wholly owned stabilised assets have decreased since June 2025 for the reasons discussed earlier. On the other hand, even after accounting for the debt funding portion of the acquisitions by the partnerships, our share of the stabilised assets within them were up on a constant currency basis. Compared to June, our development holdings are up from 5.6 to 6.5 billion, which represents our share of the developments in partnerships as well as the wholly owned properties. This is consistent with the higher capital intensity of the new projects as well as the higher portion originated on the balance sheet. The directly owned portion was up by around $100 million to $4.2 billion. This was a result of $200 million of net investment, partly offset by the FX translation. This incorporates the impact of the movement of some of the European data centre properties from the group to the new development JV, but also demonstrates the amount of investment we're undertaking on the balance sheet. The share of development capital in partnerships was up by $1.4 billion, from $1.4 billion, sorry, to $2.2 billion, which was largely influenced by the European DC Development JV formation. This is progressing as expected at the time we raised equity last year. Our aim continues to be to initiate more projects to give us an opportunity to have meaningful discussions with both customers and investors alike. We aim to continue to bring partners into the developments at the appropriate time to manage risk, capital and returns. Just looking at the other major movements now. Overall, we generated around 1.2 billion of cash-backed earnings through our operations this half. Nearly 600 of this is reported through the statutory operating cash flow statement, which is up by around 200 million from the PCP. As usual, however, the statutory statement of operating cash flow includes outflows associated with the expenditures on development inventories. A portion of our earnings also arise from transactions that are included in the investing cash flow for statutory reporting purposes. That's either because they are in our investment property under development and not in inventory, or they were sold from within a partnership. This is not unusual for us either. So the combined effect of these development activities accounts for over $200 million of the difference between operating cash flow and operating profit. There's always a difference between the timing of distributions and fees received and income or expenses recognised in the partnerships, and that was around $100 million this half. Capitalised costs and other working capital movements created another $100 million difference. And the usual impact of the incentive payments was $200 million. Over the full year, timing difference can be smoothed out, but the issue of the investment back into the business is symptomatic of a growing enterprise. The classification of certain transactions in investing cash flows is also a source of permanent differences. Our retained earnings are designed to contribute to funding such investments, which is consistent with the design of our long-term capital management plans and the distribution policy. That's a good point to turn to slide 20. Gearing is 4.1%, which is slightly lower than it was in June, and we have $5.2 billion of liquidity, including cash and undrawn lines. That's after we funded acquisitions and CapEx, and we repaid €300 million on the maturity of one of our corporate bonds. As we said before, we'll operate our gearing within a range of 0% to 25% with a level to be set with reference to the mix of earnings and activity. We're very comfortable with where we stand at this time. In fact, we have capacity to increase gearing and remain within the bounds of our FRM policy objectives. This is consistent with the strategy we laid out a year ago with the aim to build out more data centres and fund the growth in WIP whilst maintaining a strong balance sheet. As we continue to partner with investors, it will enable us to recycle capital to bring forward development capacity more rapidly. Over time, we expect to hover around the midpoint of the gearing range once we get further into the data centre construction activity. That's all for me. Thanks, Greg.