EUR 850.00 For Business Accounts Only

Morningstar | Goodman Supercharges Development as Vacancy Falls and Rents Jump. FVE Unchanged at NZD 1.45

Goodman Property Trust’s first-half fiscal 2019 result was broadly in line with expectations. Cash earnings were NZD 3.61 cents per unit, or cpu, and NZD 3.21 incorporating the manager's base fee. Fiscal 2019 guidance was reaffirmed to be around NZD 7.0 cpu (before manager base fee) and our forecasts remain just above guidance at NZD 7.1 cpu. Fiscal 2019 distribution guidance of NZD 6.65 cpu was also reiterated. We marginally upgrade our medium-term rent growth assumptions and raise expectations for Goodman’s long-term development activity. Nonetheless, our fair value estimate remains at NZD 1.45. At current level, no-moat-rated Goodman screens as fairly valued.

As development increases, the firm’s risk increases, but we believe the increased risk in development is justified given the very strong market conditions in the Auckland industrial market. The other risk faced by Goodman and REITs globally is a spike in bond yields. Over the past year, yields on U.S. 10 year Treasuries--the global interest rate benchmark--have risen from 2.3% to 3.25%. Our central scenario is for yields to increase very slowly, but should they accelerate, we anticipate selling pressure across the entire global REIT sector, weighing on the share price of Goodman.

The highlight of the results presentation was the faster-than-expected acceleration in Auckland rents. Rental increases of 6.3% were recorded for the 6% of the rental roll where leases were renewed, subject to a market review or with a new tenant. As only a small percentage of leases align with current market rates, Goodman estimates that the portfolio is now 5% to 6% under-rented.

The other noteworthy point is Goodman’s far more aggressive stance on development and an increased risk appetite. At end September, Goodman had projects under development totaling 63,000 square metres, with an end value of NZD 210 million. Tenant commitments have been signed for just 50% of the NZD 210 million of projects underway, but a further 20% have agreed terms. In the six weeks since end September, Goodman announced a further NZD 86 million of developments (28,000 sqm of lettable area), where site works are to commence in January 2019.

We believe increased penetration of e-commerce will necessitate the building of significant numbers of new logistics properties and a wave of upgrades to older facilities. Goodman is particularly well-placed to benefit from this trend with a meaningful landbank, long-standing relationships with the major logistics users in Auckland and internationally, and substantial expertise in the Auckland logistics market.

Goodman is clearly becoming more bullish on the near-term outlook for the Auckland industrial market and is taking on greater risk in its development business. This is evidenced by the release today of a revision to Goodman’s "Statement of Investment Policies," such that risk management practices now stipulate a "preference for a tenant precommitment." Previously, the development risk criteria stipulated a "tenant precommitment in the majority of instances." We are supportive of the loosening of the development risk as the Auckland industrial market is the strongest it has been for the past decade. The projects Goodman is progressing are on land that was purchased far below current market rates, providing a substantial buffer should market rents unexpectedly soften during the 12-month construction phase. Further, with Auckland rents rising strongly and vacancy rates for prime industrial around 2%, we don’t foresee major issues in leasing up the space additions.