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Morningstar | Auckland Industrial Market to Firm Further, Benefiting Goodman. FVE Increases 9% to NZD 1.70

Goodman Property Trust reported fiscal 2019 operating earnings before tax and performance fees of NZD 110.2 million, down on the NZD 119.1 million in the prior year. The NZD 9 million drop in earnings is inconsequential arising from the loss of rental income following the sale of Goodman’s interest in the Viaduct precinct and other smaller assets. Distributions for the year of NZD 6.65 cents per unit represented 95% of cash earnings of NZD 6.95 cpu. However, distributions were 107% of adjusted cash earnings, when we incorporate the manager base fee taken in Goodman securities rather than cash. Going forward, we expect distributions and adjusted cash earnings will be within 5% of each other.

Goodman’s statutory earnings for fiscal 2019 were NZD 335 million, boosted by very material valuation gains, noncash development gains and disposal gains of NZD 202 million. These gains resulted in a material decline in group leverage, with the loan/value ratio falling to 19.7% from 25% a year prior. Gearing will edge higher to approximately 24% over the next 12 months as Goodman redeploys approximately NZD 140 million into new site acquisitions and development capital expenditure.

Our fiscal 2020 forecasts align with management guidance for cash earnings similar to fiscal 2019 despite significant degearing. Guidance is for distributions to be maintained at NZD 6.65 cpu.

We’ve raised medium-term rental growth expectations to capture the benefit of market rates growing above current contracted rents. We’ve also slightly cut the firm's weighted average cost of capital to 7.4% from 7.6% to reflect a decline in development as a proportion of group earnings and invested capital. Following these revisions, our fair value estimate for no-moat-rated Goodman increases to NZD 1.70 from NZD 1.55, with the securities screening as broadly fairly valued at NZD 1.79.

Industrial landlords have benefited from extremely favourable tailwinds over the past few years, and we don’t see these easing substantially. The only earnings and valuation driver we expect to ease is the boost to property values triggered by falling bond yields. Otherwise we still see multiple earnings catalysts ahead for the firm, the most compelling of which is organic rental growth given the portfolio was under-rented by 5%-6% at November 2018. Management advised there is negligible difference in per square metre rents for inner-city and city fringe warehouses in Auckland. Compared with other global cities, this is anomalous and should correct in outer years as online retail grows in Auckland and tenants pay significant rental premiums to operate from strategically advantaged inner-city sites. Goodman is well positioned to benefit as the portfolio is heavily weighted to inner Auckland sites close to major roads.