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3Q FY23 OPERATIONAL UPDATE

Need To Know

• Guidance upgraded for EPS growth from 13.5% to 15%
• Like-for-Like NPI improved over the quarter
• Completions up to A$6bn vs A$3.6bn at 1H23 Result.

Goodman group came out with its 3Q23 operational update which upgraded its EPS growth guidance to ~15% due to continued development activity, high occupancy, and rental growth. 

A largely expected upgrade which puts through the strong operational momentum we have been seeing in the industrials segment of the AREITs. 

Key Highlights:

1. Like-for-like net property income (NPI) grew to 4.4% (from 4.2%).
2. Occupancy saw no change, remaining high at 99% 
3. AUM grew from A$79.5bn to A$80.7bn 
4. Completions for the quarter grew to A$6bn (A$3.6bn prev) and commencement lifted from A$3.6bn to A$4.7bn
5. Yield on Costs (YOC) on Work in progress (WIP) held steady at 6.4%.
6. EPS growth guidance was upgraded to 15% vs 13.5 previously (still below consensus at ~17.5%).

Investment View

Overall, a nice to see operations update. We have been seeing a continuation of strong operating conditions out of other industrial players, so it was largely expected that an upgrade was coming for GMG (especially given the conservative upgrade at the 1H23 result).

The main areas to focus moving toward the FY23 result would be the continuation of development projects. The YOC remaining stagnant over the period suggests that stronger rental conditions are expected to largely offset any cost headwinds. The A$13bn WIP is currently 64% committed, with the annual production rate being re-affirmed at ~A$7bn for FY23. All good signs for strong performance over the next quarter.

The balance sheet remains in a strong position. Gearing is at a low 8.4% (20.4% look-through), well within its 0-25% target range, hedging is 79% over the next 12 months at an average maturity of 4.7yrs and the group has A$3.2bn of available liquidity. 

Goodman is typically conservative on its guidance, so it’s expected to remain below where the market is forecasting. Upside risks remains for the FY23 EPS. In our view this is likely to be the case for FY24e as well, with consensus growth at ~10%. 

We expect goodman will outperform on a longer-term, given its strong industrials exposure, continued AUM growth (+1.5%) and potential for stronger-than-expected performance fee’s. Cap rates continue to be less of a headwind than the market is expecting, only increasing +0.1% to 4.3%. There is potentially more to go with cap rates expansion but given the ongoing elevated demand of industrial real estate we think it will subdued. 

With rate hikes expected to be done and bond yields trending downward. We re-affirm our Buy rating.

Figure 1: GMG balance sheet remains in a stronger position vs peers.