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Morningstar | Goodman Pulls Harder on the Development Lever Following Asset Sales. FVE Unchanged at NZD 1.45

Our fair value estimate for no-moat-rated Goodman Property Trust is unchanged at NZD 1.45, with Goodman screening as broadly fairly valued, currently trading at NZD 1.54. Over the past four months, Goodman has settled or agreed to the sale of two major office assets, leaving one immaterial asset representing less than 1% of the property portfolio to sell. We are supportive of the disposals as the firm sold its 51% stake in the Wynyard Precinct Holdings joint venture for NZD 324 million, well above carrying value and disposed of the sprawling Greenlane office complex for NZD 209 million in suburban Auckland where leasing conditions were challenging. Post the disposal of these two major assets, the pro forma loan/value ratio of the portfolio is around 14%, providing substantial investment capacity.

Capital released from the sales will be initially used for debt reduction then redeployed over the next two to three years via acquisitions, new industrial development opportunities and smaller value-add opportunities. Good progress is being made on redeploying the surplus capital, with Goodman acquiring a warehouse on a large 13 hectare site in Mt Roskill, Auckland for NZD 93 million in September. The combination of the office sales and the Mt Roskill purchase will be earnings dilutive in the medium term as the site was acquired on a passing yield around 5% while sold assets had a passing yield around 6.5%. Mt Roskill is leased until 2021 to Foodstuffs, a major New Zealand grocery business. Earnings accretion is likely in outer years as, following lease expiry, Goodman plans to refurbish the existing facilities and build additional storage capacity on the underutilised site, where the site coverage ratio is less than 30%.

The bulk of Goodman’s current investment capacity is expected to be deployed to building new warehouses on existing land banks. Development margins are likely to be very strong for the coming two to three years as development land (most of it at Highbrook, Auckland) was acquired in 2005 and 2012 when land prices were much lower. Highbrook has approximately 18 hectares of land left for development and at the current rate we foresee this being exhausted in three to four years. Beyond this, we foresee development profitability declining as more land will have to be acquired around current high prices.