Under the Spotlight AUS: Goodman Group (GMG)
From checkout to having an online order arrive at your doorstep, a lot goes on behind the scenes to make the logistics possible. Much of it happens in large facilities like warehouses. This week we put industrial property giant Goodman Group Under the Spotlight.
There are many reasons for a tree or sea change, but it’s difficult to ignore the economic pull of major cities. They generate over 80% of global GDP and could be home to almost 70% of the world’s population by 2050. With Australia being one of the most urbanised countries on the planet, it’s not surprising that CEO Greg Goodman saw an opportunity in a Sydney warehouse.
From starting with one property in Erskineville in 1989, the Goodman Group ($GMG) has built up $77.8b assets across 14 countries by November 2022. The company owns, develops and manages various types of industrial properties – logistics and distribution centres, warehouses, business parks and data centres – in major global cities.
Their clients cover a range of industries, including logistics, automotive, e-retail and retail. Goodman usually offers an end-to-end service, from building designs to long-term management. They’ve worked with Volkswagen ($VWAGY) to design a specific supply centre for their cars in Germany, and helped food and beverage firm Metcash ($MTS) consolidate their Sydney operations from five facilities into one.
Goodman extends its specialist knowledge of the sector with a dedicated investment management arm. This segment of the business partners with institutional investors, such as super funds, to fund four property partnerships in Australia.
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Outside the box
The investment arm is integral to managing risk for the business. Goodman usually purchases land for a tenant and charges fees for managing the project from construction. Keeping a small stake in many projects generates ongoing income from fees and rents. It also aligns strategy with investment management clients. This side normally provides funds for the initial investment and Goodman eventually owns the assets through the partnerships. Goodman then charges them fees in return for managing the sites.
Companies operating in the Real Estate Investment Trust (REIT) space are known for regularly providing dividends to investors, which are enabled by consistent rental incomes. However, keeping current shareholders satisfied can take away from spending on innovation for longer-term growth. Goodman has paid out the equivalent of 37% of operating profits in dividends and distributions of $0.30 per share in FY22, but saw a 26.42% decline in share price over the past year.
Nonetheless, Goodman has been well positioned in the past few years. Facing the pandemic, they had very limited exposure to office space and were ready to take advantage of the online shopping boom. They’ve fostered a successful relationship with Amazon ($AMZN): their largest client by rent, accounting for 8.1% of total in FY22. Goodman is looking to the rising consumer class in Asia for the future. The region was responsible for 31% of assets at the end of FY22 and 46% of works in progress.
A major challenge is that clients want large areas of land close to urban centres, with good links to transport, easy access to workers and consumers. Unsurprisingly these opportunities are in short supply. This is particularly true of delivery platforms, which prioritise reducing transport costs and times. The future is likely to see more regenerations of existing sites and optimising space by building multi-storey facilities. Goodman’s pipeline of projects is worth $13.8b.
More than 50% of Goodman’s global developments in progress are on sites with some type of previous use. With many searching for modern assets that meet high industry standards and have strong green credentials, their portfolio had occupancy rates of 98% in FY22. With $29.8b worth of assets across Australia and New Zealand, the business also benefited from Australia having the world’s lowest industrial and logistics vacancy rates of 0.6% by the end of 2022.
The key question is whether Goodman can continue to earn enough from rents and fees to cover debts. Their business model requires a lot of capital to regularly be put into new investments upfront. The team’s managed to stay ahead so far. During FY22 they increased operating profits by 25.3% to $1.52b. Payments on borrowings and other financial instruments amounted to $789.3m for the same period.
Goodman takes a relatively conservative approach to their debt levels. The value of their loans compared to equity remaining below 10% for the past five years. Although this measure has insulated them against the shock of rapidly rising interest rates, the falling share price reflects investor concerns about future performance. The industry also faces headwinds from general inflation, a slowing global economy and higher energy costs.
These could all test whether the company has really put solid foundations in place. CEO Greg Goodman has remained at the helm over for 30 years and is ready to build the next level.
This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.