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Goodman 31 December 2013 Half Year Results

Friday, 14 February 2014

GMG Half Year Results Presentation

Goodman Industrial Trust Half Year Accounts

GMP Appendix 4D - Half Year Accounts

Goodman Group (Goodman or Group) today announced its results for the half year ended 31 December 2013, delivering an operating profit of $296 million. Key financial and operational highlights for the period are:

Financial highlights

    +  Operating profit of $296 million, an 11% increase on same period last year

    +  Statutory profit of $160 million (including $216 million of unrealised derivative and foreign exchange mark to market adjustments, offset by $262 million of foreign currency translations recognised on the balance sheet but not through the income statement)

    +  Operating earnings per security (EPS) of 17.16 cents, up 6% on 1HFY1

    +  Distribution of 10.35 cents per stapled security, up 7% on 1HFY1, in line with forecast full year FY14 distribution of 20.7 cents

    +  Strong financial position maintained – balance sheet gearing maintained at 19.5%3 and interest coverage ratio (ICR) of 5.9x

    +  Group's liquidity at $1.9 billion, with weighted average debt maturity of 5.6 years

    +  On track to deliver full year FY14 operating EPS of 34.3 cents (up 6% on FY13)

Operational highlights

  +  Total assets under management of $26 billion, up 11% on FY13, reflecting investor demand for Goodman's specialist industrial product offering

  +  Robust property fundamentals across core investment portfolio, with occupancy maintained at a high 96%, and weighted average lease expiry of 4.9 years

  +  Development work in progress at $2.6 billion across 63 projects, 71% pre-committed and 88% matched to third party capital

  +  $2 billion of new committed third party equity raised, endorsing Goodman's contemporary fund management and independent governance structures

  +  Established new investment partnership with Malaysia's Employees Provident Fund in Germany with €500 million initial combined equity commitment

  +  $5.2 billion of uncalled equity and debt available for Funds to participate in development opportunities from the Group and broader market

Goodman's Group Chief Executive Officer, Mr Greg Goodman said, "Goodman continues to deliver on its strategy of being an Australian listed, leading specialist provider of prime quality industrial property and business space globally. The Group performed well in the first half of FY14 and we are pleased to present an operating profit of $296 million, which represents an increase of 11% on the same period last year, equating to 6% growth in operating earnings per security.

"The strong result demonstrates the quality and diversity of our operating earnings, combined with accelerating development activity levels across all parts of our business. This positions us well to achieve our forecast full year FY14 operating earnings per security of 34.3 cents, up 6% on FY13." Mr Goodman added.

The Group's statutory profit of $160 million has been adversely impacted by $216 million of derivative and custom mark to market movements. Significantly, this was offset by $262 million of favourable foreign currency translation differences from Goodman's international operations reported through the Group's balance sheet and not recognised as part of its statutory profit.

This situation arises because the Group's policy is to hedge its foreign exchange risks. Where the Group invests in foreign assets, it will borrow in that currency or enter into derivatives to create a similar liability. In so doing, it minimises its net asset and income exposure to those currencies. The unrealised mark to market movement of the derivatives (up or down) flows through the income statement each year, however the net investment that is being hedged flows through the balance sheet, predominantly appearing in the balance sheet translation and the reserves, and showing that the adverse derivative movements have been offset. This indicates that the strategy is effective.

"The strong underlying performance from our operations in the first half is attributable to the global diversification of Goodman's operating platform, capital partner and customer relationships, quality product offering, and the consistent and reliable execution of our operational activities around the world. This provides us with a significant competitive advantage and has enabled Goodman to access a broad range of quality opportunities, particularly across our development and management businesses." Mr Goodman said.

The Group's offshore businesses contributed 53% of operating earnings in the first half, highlighting the global reach of the Group's operating platform and its capacity to meet the diverse needs of its customers, while selectively securing quality investment opportunities for its capital partners. Goodman experienced solid property fundamentals across its portfolio, with strong underlying momentum in the Group's development activities being maintained or growing. In particular, China is experiencing increased volumes, while in Japan and the United Kingdom, strengthening customer demand is driving activity. As a result of the robust development demand, Goodman's workbook has increased to $2.6 billion.

During the first half, Goodman also announced that its 50:50 joint venture in Brazil, WTGoodman, is conducting exclusive due diligence for the potential acquisition of a portfolio of 34 Brazilian industrial assets. Global capital is available to partner in such new markets and an announcement will be made in due course, following the completion of due diligence.

Goodman is committed to delivering consistent and sustainable growth, while maintaining its strong balance sheet position. Highlighting this, a number of initiatives were completed in the first half, including raising $2.0 billion of new third party equity to help fund future growth, and the recycling of $746 million of property assets which were redeployed into new opportunities. Accordingly, Goodman's gearing has been maintained at 19.5%, with available liquidity of $1.9 billion.

"Total assets under management have increased to $26 billion in the first half of FY14 and we continue to experience strong third party equity inflows, reflecting the demand for our product and the ongoing support of our capital partners. Our managed funds have significant capacity to participate in development opportunities from both the Group and broader market, with $5.2 billion of uncalled equity and debt available. During the half, we also secured $1.2 billion of new development commitments, with 76% either pre-sold or pre-funded by our managed funds or third parties, ensuring we are well positioned to continue funding our development activities." Mr Goodman added.

Strategy

Goodman is committed to building on its position as an Australian listed, leading global industrial property group and fund manager through the focused and disciplined execution of its prudent business strategy. The Group has a strong competitive advantage provided by its expertise and proven capability, diversity and stability of its global operating platform, and quality customer and capital partner relationships. This enables Goodman to realise initiatives to drive the long-term growth of its business in a measured and sustainable manner.

Goodman's customer focused approach ensures that its quality portfolio is managed and maintained to a high standard, and is reflected in the high occupancy and retention rates achieved. Its active asset management capability ensures that opportunities to reposition assets are continually assessed, with Goodman seeking to generate additional value by identifying higher and better use opportunities for its assets, including the trend to urbanisation and property renewal in its key markets.

"We continue to work hard on the execution of our enunciated strategy and to ensure that Goodman delivers a consistent, reliable and high quality product for our customers and investors. The completion of a range of corporate and capital management initiatives in the first half and the focused execution of our day to day operational activities has ensured that Goodman is uniquely positioned to capitalise on the high level of customer and investor demand for prime industrial space in our key operating markets and the structural changes taking place across the industrial sector globally." Mr Goodman said.

Operations

The Group's operations achieved an operating EBIT of $318 million4, or a 4% increase compared with the same period last year, with earnings driven by organic growth and increased scale from existing markets. Continued strong growth in the Group's development and management businesses contributed a combined 46% of operating EBIT, and reflects the earnings composition, which was in line with expectations. Investments contributed 54% of operating EBIT, with Goodman's development activities and management services contributing 16% and 30% respectively.

Investments

Underlying property fundamentals were robust during the year, with overall occupancy maintained at 96%, consistent with the same period last year. The weighted average lease expiry across the investment portfolio was 4.9 years.

Investment earnings reflect the completion of a number of opportunities to recycle property assets and co-investments to capitalise on the market demand for industrial property and redeploy the capital into future growth opportunities.

Mr Goodman commented, "Significant leasing activity was undertaken in the first half, with 1.4 million sqm of industrial and business space being leased across our portfolio. We maintained our high occupancy and retention rates and achieved like-for-like net property income growth of 2.2%. This result reflects the solid underlying property fundamentals experienced, and highlights Goodman's quality product and service offering, and our strong customer relationships."

Developments

The Group's work in progress as at 31 December 2013 was $2.6 billion, generating a yield on cost of 8.4%, and equating to 1.9 million sqm of new space.

During the first half, the Group secured $1.2 billion of new development commitments across 30 projects, ensuring Goodman continues to be one of the largest industrial real estate developers globally. An overall leasing pre-commitment of 69% was achieved on new projects, with an average lease term of 6.6 years. Development demand remains strong, particularly across our Asian business, with robust market conditions and an undersupply of well located, modern logistics space driving a number of development opportunities in the region. Goodman also progressed its urban renewal strategy in the first half, with a further opportunity being realised in Australia from the $73 million sale of a second Sydney property suitable for rezoning.

"We continued to experience robust activity across our operating platform in the first half and capitalise on the significant customer and investor demand for our development product. Additional capital was allocated to a number of our key markets, including North America, Japan, China and Brazil, reflecting the growth in our development workbook to $2.6 billion. The competitive advantage provided by our diversified operating platform, specialist expertise and capability, and available capital, ensures Goodman remains well positioned to pursue high quality opportunities generated by the undersupply of prime quality industrial space globally and capitalise on the structural changes taking place across our sector globally." Mr Goodman said.

Consistent with the Group's low risk approach, 92% of completed developments are either pre- sold to, or pre-funded by, Goodman's managed funds or third parties. The ability to finance and attract capital for Goodman's development activities is a key point of differentiation for customers.

Management

Third party assets under management increased to $21.6 billion over the half year, which is a 11% increase compared to 30 June 2013. The growth in assets under management achieved through development completions and a number of fund initiatives undertaken during the first half, have been key drivers of Management earnings, contributing 16% of operating EBIT.

Goodman completed a number of major initiatives across its managed fund platform for the half year ended 31 December 2013, raising $2.0 billion of new third party equity capital:

+ Goodman European Logistics Fund (GELF) completed a €550 million equity raising, with the Group selling an additional €110 million of its cornerstone investment to meet excess investor demand.

+ Canada Pension Plan Investment Board and Goodman committing a further US$500 million of equity to the Goodman China Logistics Holding (GCLH) partnership, increasing the total equity for GCLH to US$1.5 billion.

In Germany, a new partnership, KWASA Goodman Germany (KGG) was established with Malaysia's Employees Provident Fund (EPF) on a 70:30 basis, with EPF holding the larger share, and an initial equity commitment of €500 million. KGG was launched with the acquisition of a €213 million portfolio of German assets sourced from the Group and GELF.

The Goodman Japan Core Fund (GJCF) $100 million capital raising, to fund the acquisition of Goodman Sakai, closed oversubscribed. Excess investor demand will be allocated to a further capital raising to fund the acquisition of future opportunities currently under development in the Goodman Japan Development Partnership (GJDP).

Post 31 December, Goodman and ADIC to expand GJDP equity allocation to US$800 million.

Global investor groups continue to focus on core, stable, and high yielding assets, with strong support for Goodman's specialist product offering. This is reflected in the broad range of initiatives undertaken across Goodman's managed fund platform during the half year period. Goodman's proven ability to attract third party capital into its managed fund platform and the alignment of investors' interests through the contemporary fund management structures, which underpin its partnering approach, have been key drivers of its success.

"Our managed funds achieved significant capital inflows in the first half and we are very pleased with the continued strong support of our capital partners. We have strong momentum across our funds, with $5.2 billion of uncalled equity and debt, ensuring they continue to be well positioned and have significant investment capacity to participate in opportunities from the Group and broader market." Mr Goodman said.

Capital Management

Goodman is committed to maintaining a sound financial position and retained its strong balance sheet during the first half of FY14. This was actively demonstrated with the completion of balance sheet recycling opportunities and Goodman's selective approach to pre-committed and pre-sold developments. As a result, gearing was maintained at 19.5% compared with 21% for the same period last year. Interest cover remains high at 5.9 times.

Available liquidity is currently $1.9 billion and the Group has a weighted average debt maturity profile of 5.6 years, with debt maturities fully covered to the 2018 calendar year.

Goodman has continued to deliver on its stated strategy of diversifying its debt funding sources, with $2.4 billion of debt facilities with an average term of 5.0 years procured during the half year across the Group and managed funds.

Furthermore, the Group activated its Distribution Reinvestment Plan and raised $42 million from the 31 December 2013 distribution.

Outlook

Goodman has maintained its strong competitive position as one of the most diversified and largest global industrial property specialists, delivering a consistent, high quality product for its customers and investors. The Group continues to benefit from its recognised global brand and reputation, proven development and management capability and significant capital partner and customer relationships.

The robust property fundamentals, growing contribution from Goodman's development and management activities, and the strength and diversity of its global operating platform are key advantages for the Group. Combined with the consistent and reliable execution of its operational activities, Goodman is well positioned and has an appropriate capital structure to execute on its business strategy, drive solid earnings in the second half of FY14, and deliver sustainable long- term growth.

Accordingly, Goodman reaffirms its FY14 full year forecast for an operating earnings per security of 34.3 cents, up 6% on FY13 and a forecast distribution of 20.7 cents per security, up 7%.

- Ends -

For further information, please contact; 
Greg Goodman
Group Chief Executive Officer
Tel: + 612 9230 7400

About Goodman

Goodman Group is an integrated property group with operations throughout Australia, New Zealand, Asia, Europe, the United Kingdom, North America and Brazil. Goodman Group, comprised of the stapled entities Goodman Limited, Goodman Industrial Trust and Goodman Logistics (HK) Limited, is the largest industrial property group listed on the Australian Securities Exchange and one of the largest listed specialist fund managers of industrial property and business space globally.

Goodman's global property expertise, integrated own+develop+manage customer service offering and significant fund management platform ensures it creates innovative property solutions that meet the individual requirements of its customers, while seeking to deliver long- term returns for investors.

1 Operating profit and operating EPS comprise profit attributable to Securityholders, adjusted for property valuations, derivative and foreign currency mark to market and other non-cash or non-recurring items. Operating profit is used to present a clear view of the underlying profit from operations. It is used consistently and without bias year on year for comparability. A reconciliation to statutory profit is provided in summary on page 10 of the ASX Results Presentation and in detail on page 3 of the Directors’ Report as announced on ASX and available from the Investor Centre at http://www.goodman.com/ 
2 Calculated based on weighted average diluted securities of 1,725 million, including 8.1 million LTIP securities which have achieved the required performance hurdles and will vest in September 2014 and September 2015. 
3 Calculated as total interest bearing liabilities over total assets, both net of cash and fair values of cross currency swaps used to hedge liabilities denominated in currencies other than those to which the proceeds are applied equating to $35.3 million – refer to Note 6 of the Financial Statements.
4 Operating EBIT comprises statutory profit before interest and tax of $399.2 million adjusted for property valuations and other non-cash or non-recurring items. A reconciliation to statutory profit before interest and tax is provided in Note 4 of the Financial Statements.